The Smattering Podcast 72: September Mailbag

Note: Transcripts are lightly edited. We may earn commissions from some links. Thanks for the scratch.

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Jason Hall: So I just mentioned the Lawnmower 4. 0 trimmer. You see it right here on the screen if you're watching on our YouTube channel, you're also going to get, Jeff, you want to hold up the Weed Whacker ear and nose hair trimmer there.

You also get the Crop Preserver ball deodorant. I got to say, I love the fun names they have with their products. You get the Crop Reviver toner, some really comfortable performance boxer briefs, and a travel bag. It's a nice travel bag. It really is.

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Jason Hall: Hey everybody. Welcome back to The Smattering where we ask the important questions about investing. I'm Jason Hall joined by the voice of the people, Jeff Santoro. [00:04:00] That is his name. That is what I'm calling him. How are you, Jeff?

Jeff Santoro: Hey, I'm doing well. Good to see you.

Jason Hall: You too. You too. You know, we've mentioned a couple of times back to the regular routine of the kids in school and work is normal. It's been really nice. I feel really productive and the timing is really good for us to do a mailbag question because we got a bunch of questions that we're going to answer today, Jeff.

Jeff Santoro: Yeah, this has been one of our better mailbag responses when we've reached out and asked for people to send us questions.

So thank you to everyone who sent them. Please remember that we do this around once a month. So if you think of anything throughout the time that you're listening to the podcast, don't hesitate to email or DM us because we'll keep a running list of those questions and we'll ask them next time around.

Before we jump into the mailbag, Jason, some quick housekeeping notes for everyone. First of all, thank you to the almost dozen of you that gave us ratings on either the podcast, the Spotify or the Apple podcast app, or maybe both over the last couple of weeks. We've been [00:05:00] reminding everyone each time we do an episode to please help us out.

Give us a rating, uh, give us a review if you can, and we've gotten a bunch more. In fact, we got a new Apple podcast review from SlyGuy007 a couple of days ago. So thank you SlyGuy. Uh, if you want to get a shout out on the podcast, leave us a review, uh, it has to be a positive one or we're not going to read it.

All kidding aside, thank you for those that have been doing that. Please help us out. If you haven't yet, give us a star rating, give us a review. And another reminder that we have a newsletter that we put out twice a week. On Saturday, you get a transcript of the show. On Sunday, you get Random Thoughts by Jason and I.

So if you're enjoying the podcast, you want a little extra content, go ahead and subscribe to that. Uh, then we have you on our list. And if anything, if we add any additional content and moving forward, that'll be the place to find it. So, all right, that's the housekeeping.

So Jason, we got podcast mailbag questions to answer here. Why don't we dive into the first one? I will read it to you and I'll give you first shot at it. And then I'll add my thoughts.

So this [00:06:00] is from Bonnelly and it came via email. And Bonnelly writes, "all things unchanged, I don't see a reason for an investor in quotes to hold cash for long term in a high yield money market account. One would be paying taxes annually on the gains at your current tax bracket, diminishing the compounding effect. I'd be better off investing or holding fill in the blank offering a fill in the blank offering a four to five percent yield and not paying taxes until retirement requires me to cash in. What are your thoughts?"

Jason Hall: Yeah. So I have a lot of thoughts about this. I think it's really, it's a really good question because we have talked more about cash lately. Um, going back to even the spring, um, on the YouTube channel, Tyler and I did a video, I think when we saw money market yields, which are basically T bills, right? It's treasury rates is really what it is, go like over four, four and a half percent. We started talking about it more.

And I think the key thing is thinking about this from the perspective, when you're talking about taxes and tax efficiency and inefficiency, it's, I [00:07:00] agree. I don't think people should hold cash for the longterm. And if you think about a money market it's essentially it's it's a it's a cash equivalent thing, right? Because money markets these 30 day t bills that generally are these short term treasuries, it's as safe as cash, right? And they're very very liquid.

But I agree in general unless you're talking about short term needs where a cash like thing makes the most sense, you know, and that's for most people is within the next year, right, within the next few years, you know, you want to have some sort of a cash equivalent thing. Your kid's about to graduate from high school and you're going to be paying college the next three to five years. You know, having a cash equivalent makes sense. And you want that generally, it's probably going to be in a taxable brokerage, uh, or taxable account, unless you have like a 529 or a Coverdell or something where you still get some tax shielding.

And that's the thing that I wanted to address is, uh, Bonnelly was talking about the yield four or 5 percent yield on a dividend on a, from a stock versus earning the four and a half to [00:08:00] five and a quarter percent yield you can get on a treasury right now. The instrument doesn't matter. It's where you hold it because if you own Coca Cola, you're, you're still going to pay divi- taxes on that dividend if you own it in a taxable account. And you don't need to have a money market account to own money markets.

For example, if I use Fidelity, right, that's my brokerage. I have it set up in my account that if I have cash. It's invested in SPAXX, I think is what the, S P A X X, it's a fund, it's a money market fund. I get over a 5 percent yield right now, but it's inside my retirement account, so it's not taxed.

So, But: So, I think two things. Number one, think about where you're holding it to create the tax advantage situation makes a ton of sense. I agree with Bonnelly's main point. Holding cash for the long term doesn't make sense.

I'm less concerned about the tax efficiency than the return efficiency, the bottom line is people are falling in love with a 5 percent yield for long [00:09:00] term financial needs, right? It doesn't make sense to go to all cash ever, unless you're, you're going to be spending that cash in the next few years.

You know, if you're talking five, 10, 20 year plus returns, yeah, it doesn't make sense to be cash because again, even at 5%, it's, it's well below the market's historical returns for stocks.

So again, think less about the, think about the asset for what is it, what does it do? What is its job? Right? And T bills and cash are short term hedges with some yield. Equities are long term growth, potentially with yield as part of that growth. And then the account is where you put it based on getting the most tax efficiency over the long term, whatever the goal is for that money.

Did I say that well?

Jeff Santoro: Yeah, no, that's exactly what I was thinking too. It is those two things. It's where do you keep it? And, and also what is the purpose?

I know, like, so for example, and I think you, you said this, but just the one thing that I wanted to reiterate is keeping cash for short term needs is now way less painful. [00:10:00] Because in the short term, yes, you're going to pay taxes on the, on the interest, but you're actually going to get a yield on your, on your cash.

Like, so for example. I have a kid in high school, uh, who's a sophomore. So I need to, I'm very close to be, to paying for college. You know, I have my 529. I have more cash in a high yield savings account than I used to because I wanted it out of the market because I wanted it safe. The market tanks when he's a senior and I was planning on that money to pay for college, now I'm in a bad spot.

So I wanted a little extra money in cash. It's just sitting on the side getting whatever I'm getting, 4. 5 percent in my high yield savings account. And it's going to be there to help pay for college. So I think the nice thing now is you're no longer disincentivized to keep cash for those short term needs, three to five years.

Alright, so, we got two questions from Dan via email. One directed at you, Jason, and one directed at me, so I'll read the [00:11:00] one that he directed at you. Um, it's long, so I'm gonna paraphrase it a little bit here, Dan, just for the sake of listeners.

So, Dan says, "Jason, I was wondering if you'd ever taken a close look at Nu Holdings, ticker symbol NU. Given your positions in SoFi and MercadoLibre, I thought it might be one that's in your wheelhouse. If you have looked into it, your perspectives would be an interesting topic of conversation. I recently put it on my watchlist. And for me, some green flags include..."

And there's a bunch of green flags here, so I'm just going to choose a couple, strong growth rates around 60 percent year over year, high net promoter score, high glass door ratings, uh, Dan really likes the mission statement, which is "fight complexity to empower people in their daily lives by reinventing financial services."

There's a bunch more. Then there's some potential red flags he lists as well. Inability to hit growth rates in Columbia and mexico, potential saturation in Brazil. Political risk, regulatory risk, economic risk. So basically all the risks you'd see in that part of the world. [00:12:00] 

So that being said, those green flags, those red flags, Jason, what are your thoughts on, uh, on Nu?

Jason Hall: Yeah. So I'm, I'm familiar with new bank and you know, I've, I've read one or two of their earnings presentations in the past, but I have never taken a deep dive.

And I guess one way to paraphrase it is, Jeff, you remember when we had Bill Mann on a couple weeks ago and he talked about how with MercadoLibre these different countries that it operates in. Talked about the risk of those countries, but how MercadoLibre is less risky than those, investing in those countries, because of the way it's businesses diversified and what they've established and that kind of thing.

So when I bought MercadoLibre, I mean, the FinTech aspect of it was I'm sure somebody was talking about it, right? I'm sure even back then they were trying to figure out some way to grease the skids and make it easier for people to spend on a digital platform in these cash based economies. [00:13:00] Um, but I trust MercadoLibre now, um, their payments business and their lending business and the things that they do because of their track record, right? And because it's not their pure play. It's a part of what they do, and they're not trying to be a bank, right? Exactly in the same way that when we say SoFi or Bank of America or whatever, right, we think of banks.

So thinking about Nu Bank versus SoFi, I understand the U. S. bank regulatory environment. I understand the U. S. banking system. I understand U. S. banks. It's very different when you move outside of the U. S. and Europe, there's some similarities between Europe and the U. S. and Canada. Canada's banking system is extremely regulated, even far more regulated than, than banks are in the U. S.

Um, the lack of regular regulation in a lot of Latin America, I don't want to say it concerns me, but it's, it's just, it's kind of in my too hard pile, I guess, is the way to put it. I've never taken the time to look there.

Again, SoFi, I would have to think is just infinitely safer than [00:14:00] many banks are that operate in other parts of like Latin America, just because there's a regime in place to protect depositors, um, that may not be as strong in other, in other places. So with that said, going back to Bill Mann, Bill Mann and another colleague of ours, a friend who knows international markets very, very well. Also Mexico, top of his list. Companies that have exposure to some of those markets that really could explode over the next 10 years as the U S becomes less Asia centric and Europe becomes less Asia centric with things like supply chain, I feel like I do need to be more exposed to the future of those economies.

So at some point, I'm going to give Nu a look, just, I don't have enough belief in my own ability to really evaluate (Latin American) banks, because I get too optimistic with companies. I really do Jeff. And I know that about myself. And sometimes when you're talking about something like a bank, which can be amazing until it just absolutely explodes [00:15:00] spectacularly, right?

Sometimes it's best for me just to not even, not even fish in those waters.

Jeff Santoro: So I don't know this company at all, other than I've heard the ticker a few times, but there's a couple of things that I was thinking about when I read the question, but also with what you said.

What I think is great about this from Dan is that he's got a very specific lists of green flags and red flags that he's identified. So what I would, what I would do, Dan, if it were me and I had those lists. Keep them written down somewhere, and every time there's news that you get from the company, a quarterly filing, the annual report, a press release, whatever, read it.

And, read it with the critical eye of how does this align with or go against my green flags and my red flags? Am I seeing evidence of the things I'm worried that are risks manifesting themselves. Or am I seeing some of the things I had identified as green flags starting to erode? And then so you're sort of thinking critically every time there's [00:16:00] information. Not Twitter hype, not someone's opinion. But information from the company that helps you verify those green flags and red flags.

And the second thing I was thinking was, this is where having some sort of thought process around position sizing can be really helpful. So maybe you are interested enough that you take a small position and that you define what that means for you, whether it's a dollar amount, a percentage of your overall portfolio, and you add as you build conviction. So maybe the next quarterly report comes out and the green flags look greener, the red flags look less red. And you buy a little more.

Or vice versa. You see some more concern, you see some risks manifesting themselves and you either hold or sell. So that's just another way, uh, how I would approach it if I was interested in a company that I was just learning about and had those specific green flags and red flags already sort of figured out.

Jason Hall: Jeff, before I ask you Dan's question that he had for you, there's one other thing I want to mention here is Berkshire owned, they made about a billion dollar investment in Nu Bank super early. I don't, I [00:17:00] think they were after the IPO, they bought shares on the market. They may have been a pre IPO investor.

Anyway, they have a stake here and sometimes that's the kind of thing that can cause people to say, Oh, this is fine. This is safe. I could, this is a, and I think that's a really false trail, can be really dangerous to go down. And it's, there's another thing too, that's important.

Berkshire Hathaway has a really big advantage in a place like Brazil. There's a, there's a hedge fund called 3G Capital that they've done a lot of deals with. They have, they know, they know the operators there. They know the investors at, at 3G Capital pretty well. And sometimes you just know somebody that knows a lot and maybe there's, I don't want to say borrowed conviction, but that's insights Warren Buffett can have based on experts in the region, in the market that you've done deals with that you trust that could have played a role in that decision, right?

So all of a sudden that's like fourth hand conviction. So just be careful [00:18:00] about, because somebody else did it, it makes sense to do.

Okay, so Dan's question for you, he says, "Jeff, I'm interested to know if you found it difficult to keep conviction during a bear market so early in your individual stock investing journey. Did you struggle to add to your positions on the way down and trust a long term process for which you hadn't yet seen decades of success, uh, to fall back on?"

And then, Dan goes on to kind of explain some of the things he dealt with, like being swayed by media opinions when trying to find that extra conviction, trying to time the market, you know, instead of just regularly putting cash to work. It's something you and I've talked about a lot with your process.

So, Dan says he'd really be keen to hear your experience, lessons learned, and what tools you added to your toolbox to help during those tough conditions. And what would you do same or differently the next time? Cause there's always the next time.

Jeff Santoro: So this is a great question, Dan. And the first thing I thought of when I read it was I have felt every single one of the things you wrote in this [00:19:00] email. I think what helped me not make too many bad decisions, and I say too many, cause I certainly did make bad decisions, was a couple of things.

I started with very small amounts of money. I mean, comically small amounts of money. So in the very early days, nothing was really going to kill me. My entire, my entire portfolio of stocks probably could have gone to zero and it would have sucked, but not like completely altered my future.

The, but I think the biggest thing that I, that I think is important to add it for context is I, even though I'm only a stock picker for three years, I've been through a lot of this stuff before because I'm 44. I remember what it was like to see my retirement account crater in the Great Financial Crisis and take several years to come back. You know, so I was always sort of cognizant of what was happening in, in the world and, and I was, and I'm old enough to know that there's times when the market does poorly and there's times when the market does great.

So [00:20:00] I, I think that helped as a, as a base. Now I'm just lucky that I was a little bit older when I did this. If I were a new investor in individual stocks, when the, when we went through all the last couple of years, I don't know, I might not have been able to handle it as, as well as I think I did.

I also remember very specifically during the crazy run up after the pandemic, thinking to myself, this cannot be right. Because every single day, everything went up. And I, and I just was like, this is, it, it's one of those, if it's too good to be true, it probably is things. And I just, so that was my thought, the whole bull market.

And then I also remember thinking, man, if I only knew what I do now, when the market crashed in March of 2020, I would have bought so much more.

So it's like you're, I was constantly building experience and using it to sort of steel myself against the next thing. So that when we finally did hit the, the bear market, I was [00:21:00] actually, in addition to feeling a lot of the feelings you wrote here, Dan, I was actually also kind of excited, because I felt like it was my chance to capitalize on great companies that we're now trading for much lower prices.

And I think the last thing, and this is just the way I am, I'm a, I'm pretty skeptical and cynical and contrarian by nature. So that I believe helps me a little bit to not get pulled into hype, generally. And that helps on both ends of the market. That helps when it's going up and it actually helps when it's going down because I think it keeps me more even keeled.

So I think the last thing I would say is, I also found a very good network of friends and investing and also podcasts to listen to and sources of information that I trusted to be trustworthy. And that also helps a lot. So, talking to people, if our podcast can help people keep a level head [00:22:00] during rougher times, I think that's also a really valuable tool. You just have to be careful and you know, what you listen to, what you read, to try to find sources that are not trying to sell you something or not trying to convince you that something's going to the moon or that the market's going to crash.

Just even keeled advice. And there's a lot of good mindset stuff out there now that I think can really help investors.

Jason Hall: None of them better than The Smattering.

Jeff Santoro: Correct. I mean, this is, this is number one, but there's some other ones too.

Jason Hall: A couple, they're, they're, they're mediocre, but they're, they're around.

I'll, I'll add one thing to that, Jeff. I think one of the things that was kind of impressive for me is with, with you is building a process, right? And figuring out what about that process work that helped support healthy decision making, right? And, and staying and kind of seeing the process through, I want to say trust the process. That's way too sports driven kind of thing, but you kind of did, right? And I think that's, that's impressive. And it helps you find, like the [00:23:00] balance. I think that was really good.

I want, I want to add a little thing here too. That's I'm, I'm borrowing some experience from somebody else who's, you know, same, kind of same as you, you know, I was going through the Financial Crisis that's really when I first started investing, um, particularly as an individual investor, I had kind of aggressively started putting in my 401k starting in probably '06, probably around '05, '06. But really buying stocks, picking stocks was like '08, '09, which was very, very good timing. I got pretty lucky with that.

And then going through this, you know, the 2020 drop was very much licking my chops, right? I was, this is one of those, you know, once every 10 year, 20 year kind of opportunities, so.

But talking to a common friend of ours, whose name I'm not going to share, shared his experience in going through the 2020 crash. And he said in a lot of ways, it was so much more difficult because when he went through [00:24:00] the crash back during the Global Financial Crisis, he was younger, did not have kids. Had the, the work he did actually created more income opportunities for him. Uh, some legal work that he did in M&A, that created more opportunities.

And when the pandemic happened, had two young kids, and had moved into a kind of a semi retired status, living partly off of investments and then doing some other freelance work kind of on the side while his wife was the primary earner working for a nonprofit, right?

And it was terrifying, absolutely terrifying being in that. Because the effects of the market, but also everything that's happening in the real world, right? And I think sometimes and with a lot of the mindset stuff, with the stock stuff, everybody's really good about looking at a chart and showing you a picture of a chart in an article, showing you March [00:25:00] 9th, 2009, and saying, this was the best day and, you know, or from this date, this stock has gone up, whatever.

And it's like, yeah, March, 2009, you weren't going to buy that bank stock because guess what? All the banks were failing, right? Or who was going to be buying a consumer goods company back then? Who was buying Apple back then? You know, it was. There's, there's what the stock did and then there's the, what it was actually like in that environment.

So it's always going to feel different and your life situation is going to play a big role in a lot of how it feels to you. So like Jeff's process, I want to circle it back to that Jeff, having that process is one of the things that helps a lot. And you have to evolve your process over time to account for changes in your life.

Jeff Santoro: Yeah. The, my process helped me a lot because, but I'm a process person, so that's partially a personality thing, but I also,

Jason Hall: It's so annoying I mean it's great!.

Jeff Santoro: But I also was, it was also, I wasn't stuck in it either. And that's another thing we talk a lot about, right? Frameworks not rules. So I was open to tweaking and I have tweaked it. I've talked about it on [00:26:00] this podcast for the past year plus.

You know, the last thing I'll say, and then I'll read the next question is we, we have another mutual friend, John Rotonti, who has been on the pod and he says this all the time on Twitter. You know, basically your biggest investing superpower is completely having no FOMO, right?

Like having no FOMO is one of the best strategies you can have as an investor because it really, it keeps the emotions out of it and it keeps you from doing dumb things.

Next question, this comes from Ken on Twitter. "Should I even be messing around in cyclicals? Not asking for advice, but I own STLD and W I R E, and ATL."

I don't know, ATI, sorry, ATI.

"All solidly in the green since last summer/fall. I like the businesses and know enough to understand that I'm playing in a game that I do not understand well enough. There are plenty of ways to make money and I don't have to make it in these stocks. Each of these companies has performed well, [00:27:00] but I don't know how long it will continue or how strong tailwinds from infrastructure building and electrification can take their respective sectors.

Small positions, I could take gains and distribute into something that's a pure long term holding. Assuming I have time to follow closely, what advice or mindset would you give me? Obviously not advice on positioning, just the way of thinking and risks, etc."

Jason Hall: Yeah, cyclicals are, are interesting, right?

Because it's really, cyclical stocks, you almost have to buy them counter cyclically. Um, Tyler and I did a video looking at, some lithium stocks. And lithium is, lithium market prices are way down. There's a ton of excess in inventory that got built up. It was kind of, just everything slowed down in China. So it's, that's weighing on, on the sector.

But then you think about lithium and like everything that's happening with electrification and like, it is a massive demographic trend. It is a massive long term tailwind. So, there's the [00:28:00] cyclical realities and then there's the longterm tailwinds, right? So you have to kind of be mindful of that with these companies because you can fall into value traps pretty easy.

STLD, that's Steel Dynamics, is an example. This is, I think it's basically the newest steel company founded in the U. S. in the past, like, 50 years. Um, they have a really interesting process that works well and their ability to grow and take market share, I think is really, really good. So it's a little bit of a growth story there.

But then if you look at the stock and haven't, you know, haven't looked at it in a few weeks, I know at one point recently it was pretty close to all time highs, but then you look at it on a multiple, like on a valuation and it looks really cheap.

And if we're near the, like the peak of the steel cycle right now, that's a, it's a false value. It's a value trap, right? Because you're going to end up, you, what looks like a cheap valuation is actually an expensive stock if steel demand does kind of fall or still pricing falls.

So I think with these steel companies and other [00:29:00] cyclicals, you very much want to be very, very mindful of when you're, when you're buying. And you certainly want to buy when the market has capitulated, right? And the stocks have fallen and everybody's kind of given up.

And sometimes you do kind of have to sell and be disciplined as a seller too. I have a very small amount of Steel Dynamics that I've not been able to talk myself into selling, even though the valuation has concerned me because of, of those reasons.

But I think there's plenty of other cyclicals that are just kind of low growth, no growth ones that you can make money almost kind of in a trade. Where you buy when the market has turned and all of the negative sentiment is there. But whatever the underlying product is and the end markets that it serves, you know, there's growth and you know, there's things are going to return. You can ride that wave back up for a few years and then you sell and capitalize.

Are you going to time the market perfect and get the bottom and the top and all that stuff? No. But again, it gets back to Jeff. We've talked about like getting, uh, uh, the, what was the rate of return? What was the, just [00:30:00] an acceptable rate of return. You kind of, you're doing the same thing, right?

This is very much not the long term mindset buy and hold. Some cyclicals are great long term buy and holds, right? Like Nucor, you could have bought it back in the eighties and, you know, thousands and thousands of percent gains.

But generally with most of these cyclicals, you have to buy them cheap, ride the wave back up, and then you sell when everybody else is excited about them and you do whatever you want to do with that capital to reallocate it in other ways.

It's, it's kind of somewhere in between trading and long term buy and hold. Cyclicals are kind of their own thing. You need to understand the industries, you need to understand the dynamics at play, and you need to figure out how to really appropriately evaluate and value the companies.

Jeff Santoro: Yeah, I, I avoid them entirely because they just seem like an exhaustingly, it's just a lot of work.

Jason Hall: Yeah, you, that's a perfectly reasonable approach too. You don't have to, like Lou, Lou Whiteman, the show that he came on and did with [00:31:00] us talked about, you don't, it's not like. You're not the Giants where you have to play every team on your schedule, right?

You get to choose what you put on your schedule and do.

Jeff Santoro: To me, to me I think you'd have to either- I'll speak for myself- for me to be interested in buying cyclicals, two things would have to be true. I would have to really understand the industry in which I'm buying that cyclical stock. Like steel the Steel Dynamics one, I'd have to really understand the steel industry. And I would have to really be interested in it because in my mind, it's going to take a lot of mental energy to be staying up on the quarterly reports, having the specific things I'm looking for. And I think the third thing is it, you really have to have an iron constitution, a steel constitution, to sell when everyone's excited about it and buy when everyone hates it.

And I think that's, you're just, you're asking for a lot of work and you're asking to, you're asking yourself to do what's hard to do, which is go against the grain, consistently [00:32:00] over many years to, to make any profits.

And I just feel like I'd rather put that money in a stock that I can not have to spend that much time thinking about. But to each his own, but that's how I think about it.

Jason Hall: I agree. Most people shouldn't do it. I agree with you a hundred percent.

Chris, all right. Chris got some good questions here for us.

Jeff Santoro: Yeah. All right. We got two from Chris on Twitter and they're related, so I'll just read them right off the bat and see what you think about them, Jason.

Question one, which three current positions do you own that you believe could generate the strongest returns by the end of 2024? And the second question, which industry or sector do you believe has the greatest potential for shareholder returns by the end of 2024?

Jason Hall: So I'm going to piss Chris off because I'm immediately going to give a non answer answer. Anybody that tells you what they expect, which sectors or which stocks can give the best return over the next, 15 months. I think we're talking about this point, yeah, they're guessing. They're just telling you because they were asked, Chris. So that's the caveat. I'm answering this because you asked it not because I really, I really [00:33:00] know.

I'm going to answer it backwards too. And I'm going to say that I think one area that did that video with, with Tyler, I think that lithium stocks are one of those kind of situations where there's opportunity. Some of the best stocks and they're good companies are down 30, 40, 50 percent from their highs.

Lithium is really beaten down. There's a ton of negative sentiment. I think a year from now that probably will have started to turn some. And, and those kinds of stocks are probably going to do pretty well. But if you were to ask me that about Apple or any of the mega cap stocks, I don't, I don't necessarily know that that's, that's going to be the case.

So you know what that's going to mean, Jeff? The mega caps are going to do incredibly well over the next 15 months and lithium is going to go sideways, right?

Jeff Santoro: Yeah. Yeah. Yeah, I, so I don't have a good answer to either of these only because the only time I've ever thought in that short of a timeframe was when we started the portfolio [00:34:00] contest in December 'cause we were specifically picking stocks for a year's contest.

And I'll be honest, my thought process during that would be the same I would apply here. Which is I would find companies I own that I still have a lot of conviction in that are still just really beaten down. Cause that's really all I did when I picked my three for the portfolio contest.

I picked Amazon because it was stupid cheap compared to where it has been and it was just, we were just talking a few minutes ago about in cyclicals, you have to buy when everyone's against it and it felt in December of 2022 that everyone was sort of counting Amazon out and pointing to you know, operating losses and how much money it was burning and fix, you know, trying to fix all of the invest- over-investment in, that they had to make during the pandemic and everyone's just kind of soured on the business.

And I was like, well, I think Amazon is still Amazon and it's cheap right now, so I added it to my portfolio. Not a super sophisticated thing. It was basically playing the market, you [00:35:00] know, and I think in the short term, that's what you're doing. Like you said, it's a guess. So if you're going to guess, guess a good company that's beat up. Because, you know, just, you know, in that short timeframe, you probably have a, just as good of a chance, if not better than anything else to have a good year.

But it also might not work. I never would have guessed Meta or Tesla, the two stocks I picked for our UnPortfolio. I picked them because I didn't like them, but I also picked them because I honestly didn't think they were going to have great years and there was reasons I gave for that back in December. And I was a thousand percent wrong.

I never, I thought, Meta's year of efficiency was nonsense coming out of Zuckerberg's mouth, and he ended up actually making the business more efficient. So yeah, I don't know. I don't have a better answer than that.

Jason Hall: I'm going to give here, based on, based on that formula, based on that framework, I'm going to offer up two Jeff, and I'll be interested to hear your thoughts on it here.

So the same idea, starting with the good business part. I think they have a good business. They have a good product, good [00:36:00] execution, potential for great execution, potentially for a very large market share. The stock happens to be beaten down right now. Outset Medical and Upstart, you know, I think are two.

So, I'll let you talk about Outset and why you think that might be the case. I think you wrote about it in your last week's, uh, Words on our newsletter. They came out, went out this last Sunday.

But Upstart, I'll give as an example. We've seen them be profitable. They've shown they can be profitable when volume is there, right? When, when lenders are actually lending unsecured loans and it's executing, then they can make a ton of money on the fees for that sort of thing.

So a year from now, concerns about the economy and have kind of gone to the wayside. And maybe we've gone through a recession and things are coming through it, right? And everything's looking, looking good for a year plus from now, and lenders are using the platform more. And like, whatever's going on with interest rates, people have just kind of, like, we have some, like, there's still a lot of uncertainty about it, interest rates.

Like there's a camp that still believes they're going to fall and a larger, [00:37:00] larger and larger cohort saying, no, they're not, they're not. They're going to be where they are for an extended period of time. All those things could be good, good known quantity things for Upstart. And this is a stock that's still down like 63 percent from its all time, from its all time high, could do really, really well, you know, in a, in a more normal environment where banks are just using their platform.

Outset is kind of an execution story at this point.

Jeff Santoro: Yeah. I wrote about it in the newsletter that went out just this past Sunday, because it's one of the ones I worry about 'cause I, I love it so much. And I've, I really do think that it's early and as long as they keep selling their machines, they're going to be okay, but I could be wrong.

So that's why it's always, you know, and the market's down on it. I feel like every day this past week, I've been getting an alert that it's at a new 52 week low.

Um, there's been two times in the past 15 months where pauses or stops of selling certain things for extra FDA approvals have really chopped the stock down. But in one, in one case, it [00:38:00] was just several weeks and then it was right back out and they're in the middle of one of those right now. They even stopped selling a certain part of the machine, even though they didn't have to, just to cross all the T's and dot all the I's with the FDA.

So, in my mind, those are blips in the road of a young company, and if it ends up being a super successful winner two decades from now, no one, no one's going to look back and remember these two little blips on the radar back in 2022 and 2023.

So, you know, again, that's an early stage medical device company that already has FDA approval. It has the market, has a product on the market. So it's just a execution game at this point. How many people can they get to use their device and can they get economies of scale and turn profitable?

Does that happen by the end of 2024? No idea. That's not why I own it. If I were trying to pick a short timeframe, I would look for those sorts of things.

Jason Hall: So, Austin has two questions that are kind of in my alley. Just combine them together, Jeff, they're [00:39:00] basically one question. Yeah.

Jeff Santoro: So, the two from Austin are, "with a dividend yield of nearly 7%, what do you think of NextEra Energy Partners for a long term investment? If you had to pick three financial metrics to assess the investment thesis or health of this company, what would they be?"

And then the next question is, "is NextEra Energy, NEE, or NextEra Energy Partners, NEP, a better buy? What are some of the pros and cons of each investment? What metrics would you use to assess the investment thesis of each company?"

Jason Hall: It's, it's funny. I've, I've mentioned some of the videos on our, our YouTube video, the short term, the short, short form videos we do, that I've done a ton with Tyler lately. I've mentioned them a ton on this, on this episode, Jeff.

And Austin, we actually recorded a video specifically about this. And we also talked about Brookfield Renewable as well. And I think it's really important to understand the, to answer your question, what is NextEra Energy Partners?

And it's really like a finance vehicle is the best way to think about it. So you've got NextEra Energy, which [00:40:00] is the parent company, which is a utility, right? And one of the things that utility companies do to some degree, some do is they have like these master limited partnerships that they use as ways to finance more deals and like to bolster their own balance sheet, right?

So if you're NextEra Energy, you've got your regulated business, Florida Power and Light. You have your unregulated business, which is a lot of utilities and some other things where you're producing power and selling it to other utilities and to large power users, right? So it's, that's the difference between regulated and unregulated.

And the way they've been, one of the ways they've been able to grow their unregulated utility business is with NextEra Energy Partners. What they do is they'll, they'll build these renewable energy assets and then they drop them down to NextEra Energy Partners. And what that means is they sell it to NextEra Energy Partners, NextEra Energy Partners.

NextEra Energy, they own a controlling stake. So they get the same dividend as investors do, right? So they get that [00:41:00] yield. They still have control of the asset. So it's a way for them to kind of deleverage the parent company's balance sheet while still pursuing growth, right, in this unregulated business.

Here's the problem. A higher yield is a problem is, is it actually undermines the thesis and the usefulness of NextEra Energy Partners, um, as a finance tool.

Because if you're going to acquire one of these assets from the parent company, you're either going to use cash, which they don't keep much cash on the books. They turn the cash over pretty quickly. You're going to take on, take on debt, or you're going to issue stock, right?

And basically what, with a 7 percent yield, they pretty much have to take on debt. And there's just not much meat left on the bone. Because you look at the rates of return on most of these assets, they're mid to high single digit rates of return. So if you're issuing stock at a 7 percent yield, to, to acquire an asset [00:42:00] that's going to generate a five or six or 7 percent yield, the math doesn't work, right? It just, it doesn't work.

So that's the issue. So I'm not even really going to get into metrics besides looking at the yield right now. And as much as that's attractive to somebody looking to buy a dividend stock, and I know Austin, you love these yieldcos. That high yield for, for, for NextEra Energy Partners is bad. It's not conducive to the reason that it exists as a finance tool.

Now, it's different for Brookfield Renewable. Now, first of all, it has a lower yield, which is good, but Brookfield Renewable is not a drop down mechanism because its parent company, Brookfield Corporation, is not a utility. And its partner with a lot of its deals, Brookfield Asset Management, again, also not a utility. It's a co investment vehicle, right?

So it exists to participate in the investment in these assets. You may have, Brookfield Asset Management may have a fund that invests in a renewable energy asset. And then Brookfield [00:43:00] Renewable may also buy a stake in it. And then Brookfield Renewable can also be the operator, right?

So, so, It's not exactly the same reason that it exists. So, it's the same way with Clearway Energy, which is, I think Global Investment Partners is the parent company. It's an investment fund. It's not a utility. And you've got Atlantica Sustainable Infrastructure, which, is the parent company is a utility.

So again, you have to think about them differently in terms of who control- controls it and what they're using it for. And, and I'm just, I'm optimistic everything's going to be fine. But I think there is some risk that NextEra Energy just rolls it up. They just, they, they reacquire it and roll it up because you can't use it as a finance vehicle. The price is discounted. It's more attractive to just buy it back, right?

So I wouldn't be in a hurry there. If I was buying a Yieldco right now, I'd, I'd be buying Brookfield Renewable.

All right. So that's it for the questions, Jeff, everybody that sent questions to us, much appreciated. Thank you very [00:44:00] much. Let's take a break. I need a break and then we'll be back for second part of the show.

Hey everybody. Welcome back to The Smattering for the second part of our show, where I ask Jeff the question, how are your market vibes, bro?

Jeff Santoro: Yes. This, the segment we're calling, How Are Your Market Vibes Bro? Well, no, I, this is why I wanted to talk about this. '

Cause we have been on a pretty nice run from what I, what would we say? Like March-ish, April-ish of, I'm sorry. No, no. Since, since October 22, right? That's when the low, the low was, we've been on a pretty nice run from then up into about August. And then since then, it's kind of been heading back down, not in a straight line.

But, so we've been on this really nice run and everything's been feeling good. But the last couple of months, it's just really, it's felt bear market-ish again, at least in my portfolio. So I just wanted to talk about it. I wanted to see how your head's been in the last couple of days. I've been a little bit rougher. I know today the market is up. We're recording this on the 25th while the market's still [00:45:00] open. But it's interesting because I buy every week, I noticed things like, Oh my, this, this ,my brokerage account is now down this amount and two weeks ago it was up that amount. Like I'm very cognizant of these like short term shifts. I'm not worried about them because as we've said a bazillion times, we're both doing this for the long term. But I do notice it because I buy weekly and so I'm looking at it all the time.

I know you buy very much infrequently, so you might not be as sensitive to it.

Jason Hall: I can't remember. It's weird. I can't remember the last time I bought, but I've talked about on the show a lot. It's like, you know, I'm optimistic about people and businesses and companies, but I'm terribly pessimistic about the economy.

Like I, I'm, pretty much ask me anytime, and what I think about a recession and I'll say, yes, there's going to be one and probably within a year. And, but I don't invest that way because it's proven wrong. But that's, that's, it's funny because that exactly what you're talking about surprised me.

So here's the numbers, right? The actual numbers. On [00:46:00] January 4th, 2022, that was the all time high for the S&P. And then it was, like I said, October was the bottom when we got to, with, I think it was June, we dropped below 20 percent and then had a pretty good month or two. Then it fell again. The market, I think, bottomed almost down 25 percent before it started really, really running up.

And then, yeah, since August, I think we're down about 5%. So it's starting to feel kind of bearish again, I guess.

Jeff Santoro: The other place I noticed it that our listeners might notice it, is, go look at the Smatterfolio. Go look at the, click on the link in our, in our show notes. And just a few weeks ago we, I was teasing you, cause I was finally had inched up a, you know, I got above you for a couple of days and we were both up 30 something ish percent and now both of us are down from there.

And we've been saying every time we've done a-

Jason Hall: Yeah, so who's ahead?

Jeff Santoro: Uh, you are probably ahead right now. I'm not looking at it, but-

Jason Hall: Can you say that again?

Jeff Santoro: No, I'm sorry. You're [00:47:00] breaking up. But I think it's funny because we've been saying all through the year, this has been a good year and it was like January or this has been a good year. And it was March.

So I, I'm just curious. Like, I wonder if the second half of the year might be trending down. I don't know. Again, I don't really change the way I invest because of those things, but these are things I wonder about. So I was just curious where your head was about it.

Jason Hall: Yeah. Kind of the same vibes, which for me is not normal. Well, so here's one thing that I am doing that's certainly playing a role in this, is my wife changed employers and we're rolling her 401k from a former employer. We're consolidating it into a single brokerage that we're going to use for, to manage all of our stuff. Just, it'll just be easier.

And her existing- her prior, I should say, um, investment manager who will not be named because their lawyers are better than our lawyers, Jeff, [00:48:00] is terrible when it comes to this kind of thing. Like they just make it really hard, unnecessarily hard. Like they actually mail checks and they send them to you instead of to your new brokerage and it's just dumb. And it's going to take two weeks to get the, to get the checks. And then we got to go to the brokerage and like, it's just, it's dumb.

So I have been actually paying a little more attention recently, because of that. And I can tell you... so I had to sell everything in the brokerage and move it to cash. I felt really smart, because you know, all of this stuff has happened with the market coming down. It's down like three or 4 percent since we liquidated those things.

And we're mostly going to roll it back over into the same stuff. And I'm hoping I get really lucky and the market just continues to fall. I feel like a really horrible human being for saying that because a lot of people are going to be affected now in negative ways, for us to benefit in a very tiny potential way.

So here's my question, Jeff, I'm going to ask you for an [00:49:00] actual prediction. So we've talked about our vibes a little bit. What do you think is going to happen?

Again, we're down 5 percent roughly from the recent high. We're down closing in, it's the 25th, by the way, September 25th. So it's by the time you hear this, it'll be a whole market week. So who knows what could happen? We're almost 10 percent down again from the all time high.

What's going to happen? What do you think? What is your prediction? Like actual prediction. You've given your vibes. What are you, what is your prediction?

Jeff Santoro: I don't like making predictions. I will say two things. One is that on our reckless prediction show that we did back in December, I did say that there would be, uh, that, uh, inflation would improve and that we would not have a recession in 2023. That was my reckless prediction. So I'm sticking with both of those things because if I'm right, I'll, I'll be able to brag a little bit.

So I'm going to say that. I don't, if it gets, if it goes further down from here over the last three [00:50:00] months of the, of the year, I don't know that it will go drastically down. It's also difficult too, because there's, and there's a ton of statistics or data to back this up. The market does poorly in September, historically, for whatever reason. So that, that's also maybe playing into my vibes. You know, we're now-

Jason Hall: I'm going to blame the children.

Jeff Santoro: -almost through. We're going to blame children, children in schools is the reason that-

Jason Hall: There you go.

Jeff Santoro: But I will say this. So I always feel bad saying this because I understand if you're about to retire, you don't want to hear these words, but I kind of want it to go down more. You know, Warren Buffett says the same thing. Basically, if, if you, if you are a long term stockholder, you should want the market to go down and present you with better buying opportunities.

And I want it to go up really strongly in the last couple of years before I retire and everyone else you're on your own.

But there are, cause you know, it, it, I, I mentioned this earlier when we answered one of the mailbag questions, but I [00:51:00] never, I don't, I have this, I, a little bit of hindsight bias where I wish I had bought a little more when the market was down more. You know, hindsight's 20/20. So there's always part of me that sort of wants another crack at that opportunity.

Um, I haven't answered your question. I'm going to say that from here. So we're down.

Jason Hall: I was going to point that out if you didn't.

Jeff Santoro: Okay. I'm going to say that from here, September 25th to the end of the year, we will be no better or worse than we are now in terms of total return for the S& P 500 than 3 percent in either direction.

So I think we're going to be kind of middling along. That's my prediction.

Jason Hall: Jason Hall: That is a chickenshit answer.

Jeff Santoro: That's my prediction. That, that is a prediction. Well, all right. All right, tough guy. What's your prediction? And we'll, we'll, we'll go back to this tape.

Jason Hall: I'm going to predict that the market is going to go sideways.

Jeff Santoro: That's what I just predicted.

Jason Hall: No more- within three [00:52:00] percent up or 3 percent point-

Jeff Santoro: 2. 5 percent up or down.

Jason Hall: No, Jeff, seriously. I mean, I think that's a reasonable prediction. It really, really is.

But I guess, I guess what we're going to find, because I do, I do tend to kind of agree with you, but I think what we're going to find is number one, like what is the strength of the consumer economy? Because we're going to get into the holiday shopping season. And that's so important for so many different kinds of businesses.

And we're not going to learn much about the housing market because this is like not a great part of the housing market anyway, right, in terms of new construction or people listing homes, right? So we're not going to get that answer.

But I think that's one of the things the Fed wants to see is like, how strong is the consumer really? As we get into this really backloaded, heavily consumer spending driven part of the year. And that could answer some questions about what the Fed decides that it really does, does need to do.

And then I think investors are going to overreact one way or the other based on [00:53:00] whatever, whatever that is.

Jeff Santoro: Well here's another thing that I think might've been contributing to the down market we've had over the last couple of weeks or a couple of months is, it really did seem like, and I've heard other people say this, this is not my analysis, that the market was pricing in some rate cuts. You know, even though there was really no evidence that there was going to be rate cuts.

And this last announcement last week, I think sent the message that nope, maybe we'll hold steady, but there won't be any cuts anytime soon. And right after that, the market sold off pretty significantly.

So now where, I don't know if that's true, if that, if we shook out that belief from the market, I don't know if we are now equilibralized, if that's a word, and it'll be kind of here on out, or if there's still more of that to come out. But I do think that that's something that the market does seem to go higher or lower based on what it thinks will happen in the future with rate cuts, and if the market no longer believes cuts are in our [00:54:00] immediate future, maybe all the sell off is over and we're kind of here now.

I don't know. Just another thing I've heard other people, other smart people say.

Jason Hall: Good vibes, bro. Good vibes.

Jeff Santoro: Well, however I feel about the market, Jason, I want you to know that I have good vibes about you and our podcast. How about that? We'll end on a positive note.

Jason Hall: Same. I appreciate that. I appreciate you.

I also appreciate our listeners, and I want to remind our listeners that Jeff and I, oh man, do we love giving our answers to these hard questions about investing, but it remains up to you to give your answers. You can do it. I believe in you.

Jeff Santoro: All right, Jeff, we'll see you next time. See you next time.