Investing Unscripted Podcast 83: December Mailbag and Market Vibes

Moats, Taxes, and Vibes

Investing Unscripted Podcast 83: December Mailbag and Market Vibes

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Jason Hall: [00:00:00] Hey everybody. Welcome back to Investing Unscripted. I'm Jason Hall, joined by my good dear friend, Jeff Santoro, the voice of the people. Hey Jeff. 

Jeff Santoro: Hey, how are you friend? 

Jason Hall: I'm good, man. Got in a good nappypoo before the see, I've, I'm saying that twice 'cause Jeff keeps telling me not to, and he is gonna edit it out. 

Jeff Santoro: If anybody wants to stop listening now, because Jason said nappypoo, I fully support that. 

If this, what is this? If this is what ends our podcast, I'm fine with it.It's a decision that I'll be happy with. 

Jason Hall: I'm actually okay with that too. I'm only saying it because it annoys Jeff. But no, I did, I got a little nap. I don't usually nap, Jeff. I'm not a napper. I'm not good at napping. I can't do it. But I got in a, like a 20 minute nap today and I feel really good.

Got some Diet Mountain Dew now. I'm ready to do our mailbag. 

Jeff Santoro: So if you listen on Spotify, there's a little poll question thing at the end on the app. Let us know if you think Jason's energy level was what you're used to, or lacking. We'll get a little listener feedback. 

All right. It is a mailbag episode.

Before we dive into said [00:01:00] mailbag, a couple of quick reminders. We have new contact information now that we changed the name of the podcast on Twitter. We are  InvestingPod, which I still can't believe was available for us. Our email is [email protected] . You can also subscribe to our newsletter, which you can get on our social media accounts, anywhere that you have our information, you'll find a link to that.

Or you can just do InvestingUnscripted.com. We have that domain. You can check out our YouTube channel for video versions of these podcasts, but also short videos that Jason and I do, and Jason also does with last week's guest, Tyler Crowe. 

And don't forget, please give us a rating, giving, give us a review.

We got another Apple podcast review this week from someone. So thank you very much for that. That's really going to help people find the show. So if you're liking what you're hearing, do us a solid. Hit that rating button, give us a review and help people find us. 

Jason Hall: I want to make another pitch for our other socials too, because it feels like Twitter's kind of dying a little bit.

Jeff Santoro: Oh God, I hope so. 

Jason Hall: Yeah. I mean, I'm not going to argue that too, but we're on [00:02:00] Threads, we're on TikTok, we're on Instagram, we're on Facebook, all of our, with the exception of Twitter, everything else is InvestingUnscripted. So it's really easy to remember and it's easy to find us. We'd love to get more engagement from our listeners in all of those other platforms.

So please find us, please follow us. Please share. 

Tell your mom about us, too. I don't mean that in a weird way. Just like, we want to help your mom make money. 

I don't mean that in a weird way either. We want to help your mom be a better investor. 

Jeff Santoro: Alright, we're going to move on to the first mailbag question before this gets even weirder.

So the first question we got was from a YouTube viewer named jamiekul, I guess is how we say it. And here's the question. So I'll, I'll read it, Jason. You can give your, your thoughts first. 

" I have an interesting question for you guys. There are some companies that I really like as an investment that I can't really say have a decided moat, or maybe they do, and I just don't see it. Some companies that come to mind are Lululemon, Celsius Holdings and Starbucks. Maybe their moat is in their brand or quality of their brand. Network effect and [00:03:00] footprint, but it's not a moat as easy to point to like ASML for example." 

So maybe let's talk about what these companies are and do real quick before we dive into answering the question.

Lululemon, athletic fashion brand Celsius Holdings is- 

Jason Hall: Athleisure. 

Jeff Santoro: Athleisure? 

Jason Hall: Yeah. 

Jeff Santoro: Celsius Holdings is a energy drink company. I think everyone knows what Starbucks is And ASML- 

Jason Hall: They sell mermaids, right? 

Jeff Santoro: Absolutely. Okay. Yeah. And ASML is, they make the machines you need to do ultra ultraviolet lithography to make semiconductors. So just a real quick rundown on what those are. 

So Jason, what are your thoughts on this? Basically, how do you think about companies that you really like, but you're not sure if they have a moat? 

Jason Hall: Yeah. This is really good and this is like a great toolbox question. Because I think valuation and understanding moats are probably the two things that investors do the least amount of work on and are probably the most two most important things that are going to determine your long term [00:04:00] return.

So we'll focus on, competitive advantage and moat here.

Competitive advantage, moat, same thing. You've heard Warren Buffett's use the term durable competitive advantage. I think that's extremely important. So the way I think about this is it's some tangible or intangible thing about the business that can stand the test of time that can pass the any idiot management test and hold up. And the durability is the first part of it. 

So here are things that are not, I'm going to invert this. I'm going to Charlie Munger this and invert this a little bit. Here are things that are not durable, competitive advantages that are not moats. Balance sheets, management teams. 

Those are things that can be advantageous for a period of time. But there are no promise, right? An idiot can blow up a balance sheet pretty fast. A company that seems like it has a pretty good balance sheet could roll into a massive change in the interest rate environment. All of a sudden that balance sheet becomes a liability. 

Look at every heavy, heavily leveraged [00:05:00] company that's going to have to refinance debt, that's built their business on the back of cheap debt over the past 10 years, as an example. Right. That's not durable. 

Jeff Santoro: I think all of, I think those things can be competitive advantages, but not durable competitive advantages. Yes. I think that's the distinction.

Jason Hall: Right. Exactly. And that's the thing that when you say moats, to me it has to be a durable competitive advantage. 

For, I'll use Coca Cola just because it's an easy one. And it's definitely the brand, right? And you think about, and this is one that a lot of people don't really understand about a lot of powerful brands. I think Lululemon, it's the same way. the brand power, Apple is another one. 

And here's the thing about it. There's a ton of work that happens over a long period of time to build that brand, to make it into that moat, right? And there are little basic things you have to do to continue to support it.

So like Coca Cola, for example. The brand became powerful because of a good product that people enjoyed that they became loyal to over time, right? You can take that[00:06:00] Coke and you can put it next to the store brand, next to a Pepsi and do the blind taste test and you could basically flip a coin to what their preference is actually going to be.

But you could put Pepsi in a Coke cup and Coke in a Pepsi cup and their preference is going to be the brand they prefer that's on the packaging, not what's inside the thing, right?

It's this powerful, powerful thing that we develop. And where it becomes an advantage for a company like Coca Cola, Starbucks benefits from this too, Lululemon benefits from this too, is you get pricing power. .

Because Coke sells more than the, more than the store brand. And it's the sort of thing that even during poor economic times, people are still going to buy Coke, right? They're less likely to go cheap and buy the store brand on something like that. So that's where- 

Jeff Santoro: Things that are on the lower end of the dollar spectrum, I think tend to be more people tend to tilt towards the brand more. 

Jason Hall: Yes. 

Jeff Santoro: You know, like if it's a dollar 50 or a dollar 30. [00:07:00] For the Coke, you're gonna, and the Coke's 1. 50, you're gonna buy the Coke, which is different than like, this car costs $25,000 or this car costs $35,000. 

Jason Hall: Yeah, exactly. It's the reason why Coca Cola's not cyclical and F-150 sales are cyclical, right? That guy's still gonna buy an F-150, but he's gonna wait another year or two before he buys it during a recession, right? During a weak economic period. So that's a really key point. 

Now, the other thing that I think is really important for a company like Starbucks and Celsius too, they're, they, the brand power is a big part of their thing. And they're starting to get some scale advantages, which can drive something that Starbucks has in spades. And that's cost advantages.

So pricing power, Jeff, that's something that you have when you have a strong brand. You get the pricing power mode that comes along with it. You can raise prices. You can hold your prices pretty well.

Starbucks has proven like there've been periods where like traffic growth in their stores has been stagnant. They're not getting more people in, but they're just charging more and people are still showing [00:08:00] up every day to get their Starbucks. So that pricing power is really important on the, like the brand facing side.

But on the other end of it, the scale side is cost advantages. When you're the largest coffee buyer on the planet not only can you sell your Starbucks for a premium price, what you're paying for your coffee can be really advantageous, right? 

Jeff Santoro: Yeah. And to use Celsius as an example, I think this maybe is a variation on a theme of that, which is they just signed a distribution deal with Pepsi. Yeah. So rather than working through-

Jason Hall: So they're building cost advantages.

Jeff Santoro: Right. That's giving them a cost advantage or building towards one that they didn't have before when they were just operating through a network of fragmented distribution operators or distribution companies. So yeah, I agree with that too. 

I think ASML has a moat for a completely different reason. And that's the listener here pointed out that he called that a easy to point to moat in the sense that they are the only company in the world that makes a specific machine that you need to make the bleeding edge [00:09:00] chips. So for as long as that remains the case, that's a massive competitive advantage for them.

And this is different than someone starting another coffee chain, or someone making another energy drink, or someone making more different athleisure clothing. Like, it's an enormous undertaking to build these lithography machines. So you could call it a little bit- 

Jason Hall: They have the intellectual property, right? They have patents in place. 

Jeff Santoro: It's not unassailable. There are other companies doing not the same thing, but trying to get to the same result through a different method. So I don't know how, if it'll be a rock solid moat forever. But I believe it is one for them now. So I think this is.

I have two thoughts on this question.

One is I think about this a lot because you can trick yourself into thinking a moat is more real than it actually is. I'll give a quick example. We recorded an episode of the Investing for Beginners Podcast about a month ago and it just got released this week. 

So we're recording this on December 12th.It got released yesterday. So when you guys listen to this,[00:10:00] sometime after this Saturday, it'll be about a week old. 

And one of the stories I relayed was they asked us about mistakes we made earlier in our investing careers. And not that mine's that long ago, but I made some moat mistakes with things I invested in because I conflated or I confused moat with " all my friends are using it," like confirmation bias instead of- 

Jason Hall: Anecdata. 

Jeff Santoro: Yeah. Anecdata. Like the example I used was Peloton. Or no, I didn't even use Peloton. That's a good example though. The one I actually use was Stitch Fix, something I owned very early in my investing life. And it was simply because a lot of people I knew used it, and I confused that with moat, which is not the same thing at all.

So, familiarity and anecdata is not a moat. It can be a entryway into a good idea, but it is not a moat. 

Jason Hall: Well, you said something before you bring up the other thing I want to stay on this one for a second, Jeff, is confirmation bias, right? Because you were looking for things to confirm what you wanted to believe. Not trying to disprove the thesis. 

Jeff Santoro: Yeah.[00:11:00] I mentioned Peloton too, and I think that's another good example. Still to this day, tons of my friends and my wife's friends regularly ride their Pelotons. And I, for a long time mistook that as a moat as well.

And I think to some degree it is. I think they have a little bit of brand power, but I don't know. You can get a different brand bike and use the app on your phone. So it's not, yeah, I guess you're still using their app, but not exactly the same thing. 

So the only thing I, the other thing I wanted to mention was there's actually a decent book that covers a lot of this that if this listener doesn't know about, I would recommend it's called The Little Book That Builds Wealth by Pat Dorsey.

And he basically lays out the four types of business advantages you can have. Intangible assets, switching costs, network effects, and cost advantages, which is we've been touching on some of these as we've had this conversation. 

So, our listener here who sent the question or anyone else, that would be a good resource to just to read more about it.

Jason Hall: Jeff, I want to, before we move on, just because I think this is a, such a fun topic and it's such an [00:12:00] important tool set for investors to build, learn how to use and to keep sharp. What is a company that It took you a while to realize the strength of one of their competitive advantages, specifically, like if you have one for, we've talked about intangible assets with brand power, right? We've talked about that a ton. 

But like switching costs and network effect. I would love to hear you talk about maybe a stock. I've got a couple of mine for both of these, but if you want me to go first, I can go first. But I just think that it's so important to understand how powerful these can be. 

Jeff Santoro: I want to think about it. So you go first and I'll have one by the time you're done and-

Jason Hall: I'm springing this on Jeff live here as we're making this by the way. 

Jeff Santoro: So this is a good thought. I'm glad you asked me live because I want to force myself to think about it. But you go first. Buy me some time. 

Jason Hall: So I'm going to go with network effect first, because it's a lot of times the companies that have network effect are companies that nobody likes. Everybody uses and they don't have a choice, right? And it's not that they don't have a choice. And you think that this would be [00:13:00] switching costs and it is switching costs with certain extent, but it's also its network effect that has this. 

You think about Visa and MasterCard. I'm going to bundle these two together as like the duopoly, even though there's tons of others. There's Discover and there's American Express, with all the, the PayPals and other things that have popped up like Venmo and CashApp that are kind of part of that ecosystem now.

But really it's still Visa and MasterCard's world. Everybody else is just living in it. And their network effects are so incredibly powerful, because everybody uses it to buy stuff. And if everybody uses it to buy stuff, if you're a merchant, guess what? You gotta take it. If you're a bank, you gotta offer it. So the network effect is so incredibly, incredibly powerful.

But if I'm a bodega, or if I've got a little convenience store or a gas station, I hate these guys, because half my operating margin goes to pay the fees. I absolutely hate them. But the network effect is so incredibly powerful.

Jeff Santoro: Yeah. So I have two, [00:14:00] two network effect ones, and they kind of go together and it's Airbnb and Etsy. And the reason I put them together is they're both two sided marketplaces, right? They both have buyers and sellers that they need to attract. 

Jason Hall: And it's a true platform where Etsy and Airbnb, they're not competing against with either one of their partners. They have a platform and they connect buyers and sellers. 

Jeff Santoro: Right. And the more of one that come to the platform, the more it drives the others. So if you're looking, , there's like, I'll give an example for Airbnb. Like there's another, there's other places you can go to find places to stay.

Even VRBO or Vrbo, whatever they go by, does the exact same thing. It's not like you're competing with hotels, but if more, if you go to one and the other and there's more people on, if there's more people on Airbnb in the area you want to go to, you're like, oh, I'm going to go there. And then more people go there and then more, more hosts decide to put their homes on there. So it's like the self fulfilling prophecy. Some people call it the flywheel effect of just building on itself. 

And I think Etsy is the same thing. If you're looking for [00:15:00] handmade bespoke gifts to give to people. That's the place to go. And if you're the kind of person that makes those gifts and you know that's where the buyers are, then that's the place to go.

And it just builds on itself. I had a hard time thinking about switching costs, but I don't have necessarily a specific company. Well, I do, but I'll use it as an example, because I don't know enough about the industry to say that this is a rock solid moat.

I think when software platforms that companies use become very entrenched across a lot of different workers that actually can be a pretty high switching cost. So like a company I use in my, I own in my portfolio that's done really well as an investment for me is ServiceNow, which I don't think is a super well known company, but they do essentially software to help businesses be more productive.

And I'm just using them as an example. But if you're, if you have a 6, 000 employee company and they're all using ServiceNow, let's just use it as an example for everything, for HR, for the IT department, for onboarding new [00:16:00] employees, for payroll, for all the different things companies like that can do. Can you switch? Absolutely. But you think about like, Oh man, all these people have to be retrained on this new system. And the people in this department are super cranky and I don't feel like dealing with them. And every time we do anything new, they complain. There's this. And then you're like, all right, it's worth the, it's worth the extra 10 percent I'm paying just to keep with who I have.

Yeah. So I think any kind of software company that, and I think this is where people get tripped up because it's easy to look at the new shiny software company and say, Oh, switching costs, , but I don't know that it's that easy, right? It's gotta be something that's like entrenched and deep into a company and not something where like, Oh, only 12 people at the company actually use this. So it's easy to switch out. 

So that's one example I could think of off the top of my head. 

Jason Hall: I've got a switching costs one, and this is just, this, there is no business on the planet that has more powerful switching costs than banks. Think about Bank of America. Bank of America. This is through-

Jeff Santoro: Okay. Yeah. All [00:17:00] right. I'm going to argue with you a little bit, but I see where you're coming from. 

Jason Hall: So this is through, this is through June. I don't, I don't have their latest quarter pulled up in front of me, but as of the end of their June quarter, they had one point just under $1.9 trillion in total deposits.

Now wait for it. $ 751 billion of that, Jeff, is non interest bearing. There's 751 billion dollars sitting at Bank of America right now not earning any interest when you can get 5 percent in an online savings account. 

Jeff Santoro: So I'm gonna push back at you with that one because I actually did think about that. Here's what I would say.

I think it's a competitive advantage. I don't know that it's a durable competitive advantage because in a world where interest rates stay high, and I mean, I'm gonna use high as in like what they are now, if not a little bit higher.

Let's just say we have 5%. You can get 5% on a high yield savings account for the next five years. I don't think that number's what it is now in five years. I think if enough time goes by and more people are saying to [00:18:00] their friends, Hey, I moved all my money into this high yield savings account, I'm getting 5 percent blah, blah, blah.

I think over time that will erode, and one or one of two things is going to happen. People are going to leave Bank of America or Bank of America is going to start paying more interest. And maybe they don't need to pay 5%. And maybe they can pay 2. 5 percent and that's enough for the lazy people not to switch their money.

Jason Hall: I think that's the key. I think that's the key. And again, it's, there's a difference between-

Jeff Santoro: Like, they're going to do that. Like, I, they're, I'm sure they're watching this and they're looking for attrition and they're thinking, okay, what's the point at which we sweeten the deal to keep people? But they're just not there yet.

I mean, interest rates have been high for what, a year? Yeah. Right. I mean, a long time. 

Jason Hall: Well, and it's, again, there's a difference between a durable competitive advantage and an impenetrable competitive advantage. Eventually, Bank of America is going to have to raise rates, but the durability is going to be that they will always be able to, I firmly believe this, because the same with J. P. Morgan. Same at Wells Fargo

They're gonna be able to, same way at U. S. Bank, they're gonna be able to be below the market, right? I really think they're gonna be able to stay below the market. 

Jeff Santoro: Yeah, I would agree. I also [00:19:00] think, too, the amount of money you have in the bank is part of the reason you decide to stay or go.

So if I was, if I had maybe like just a couple thousand in my checking account because that's how I pay my bills and I had very little savings, there's less incentive. Like 5 percent on a small amount of money might not be enough to, but if I have $200, 000 in cash in my savings account, maybe I'm thinking about it differently.

That's, that's a lot of money, you know, so, yeah, I would agree with you. It's probably somewhere in between. It's not an impenetrable moat. It's probably not just simply an advantage. I don't know.

I did think about banks, but I, I do feel like over time, maybe not as much, but anyway, we can, we can move on. I think that was a good. A good wrap up for that question. 

All right, second question we got here was from Colin, loyal listener and our friend from the North. He asked us, "at what point do you say screw it or just recommend people say, other people say screw it and just index and buy diversified ETFs.

After four years of individual stock picking, I pulled the plug on [00:20:00] most of my stock picking. I was behind the market or matching the market most of the time now, the vast majority of my money is on SCHD. and COWZ". which I believe are Canadian based ETFs. 

He said 95 percent of his money is there, 95 percent of his equivalent of the 401k in Canada was all an individual stock. So he decided after four years, if you can't beat the index, join it. So, what are your thoughts about Colin's question here? 

Jason Hall: So Colin and I actually messaged back and forth a little bit when he sent this question. And Jeff, you and I have actually talked a little bit about this and this one might turn into a full episode at some point- 

Jeff Santoro: Because he told me he was following your stock picks and that's why he decided to just start indexing.

Jason Hall: Yeah, there you go. That's probably true. But no, it's, this is such an important consideration to have because it really is hard to consistently outperform the market. It really is very, very difficult to do. 

Because there are thousands and thousands and thousands of stocks.[00:21:00] Most of them suck. And if you look over the past decade, It's been a handful of winners that have resulted in the vast majority of the market's outperformance versus its historical long term averages, right?

And there's a good chance that a lot of the people out there that are buying individual stocks, maybe they have a value bent or they don't want to buy the biggest companies. And guess what? If you've been focused on value or avoiding the biggest companies. You've underperformed the market most likely, right?

It's, you've raised the degree of difficulty. When you think about the magnificent seven and all of that cohort of stocks, it's done so incredibly well. 

So with that said, here's how I think about it. Number one, and again, back in the toolbox here, but if you're buying individual stocks, you need to be doing it for a reason, right?

You need to be doing it because there's something you're trying to accomplish. Either you're trying to beat an index and you think you can beat an index, whether you're a member of a [00:22:00] stock picking newsletter, and you're using that to jump off your research to try to find the outperformers. And then you're, maybe you're following it exactly, or you're using that for research, and then you're picking your own and you're looking for alpha, right? Like we talked about with Tyler on the episode with him. 

Or maybe you've reached a point in your investing career where you're focused on income and you really want to own income stocks that are generating dividends and you want to use the dividends for income. You don't want to have to be picking stocks to sell, to generate income and you just want to just cash out those checks from the dividend payments, and that's going to be your cashflow or you want to have. 

You still want equities because you want to outperform bonds, but you want less volatility. So you're focused on low beta stocks. So the lows are, when there are periods of the market going down, the market's down 25%, maybe your portfolio is only down 15%. . So there can be a lot of different things you're trying to solve for that you're trying to do. And not all of those things equal outperforming the S&P [00:23:00] 500.

So number one, I think you need to have a goal, have it really clearly defined, what you're trying to do. And if you're not able to accomplish that goal over some extended period of time, I appreciate that Colin's talking about that here, he's talking about a four year period of time, then you have to kind of reassess and make some decisions. Is this the best use of your time? 

And this is the last one for me, Jeff, that I think is really important. If you're not doing as well, but you're close enough, but you're having a hell of a lot of fun, and it's scratching an intellectual itch, or whatever purpose it's fulfilling, and it gives you some fulfillment, maybe you do still keep doing it, right?

But if it makes you miserable, index up. 

Jeff Santoro: The longer I buy individual stocks, the more humility I have. And then the more I tell other people, you probably should just buy an index. Because, let's use you and me as an example, right? You again, just to quickly call back to the Investing for Beginners Pod that we just recorded a few weeks ago, you said something to them where you said, you have a cheat code in the [00:24:00] sense that you get to spend 40 hours a week thinking about buying individual stocks.

It's your job. I barely have that cheat code. I devote pretty much all my free time to investing because I'm interested in it. I like it. I get up early before work and I do stuff with it. I come home from work-

Jason Hall: Jeff, your son's texted me. They miss you. 

Jeff Santoro: I'm sorry, sons? 

Jason Hall: Your son's texted me. They miss you. So there's these two little boys that live in your house? Those kids. Yeah. They're yours. 

Jeff Santoro: But I mean, I, so even with that, even with me using all my free time for that, I barely think I have enough time to keep up with being an active stock picker.

And I've even thought like, screw it, I should just index. So I get it. I get where Colin's coming from.

I guess the other thing I would say is, this might be the right move for Colin right now and it might be the right move for Colin forever. But it also doesn't have to be forever, too.

So one of the things I I talk about a lot, but I probably don't give enough thought to is, I spend all of my time worrying about 10 percent of my [00:25:00] portfolio because the rest of it is in index funds. But it's only because I had a 20 year -ish head start on building up the index funds before I even got into stock investing.

So one thing I have said to other people who are interested in investing is I think it's perfectly appropriate to start with index funds and maybe even build an index fund base to your portfolio and then slowly, with smaller amounts of money, try buying some individual stocks. See if you like it, see if it's interesting to you, see if you have the time to devote to it.

Colin clearly has the interest, right? He listens, he interacts with us. I think he's, he has a mind for it. You know, we're all busy. We all have lives and families and stuff like that. So. Maybe 10, 15 years down the road, if he's got a nice big chunk of change sitting in index funds in his account, maybe he takes some percentage of his future contributions and gets back into the game.

Maybe he has more time when his kids are older or whatever the situation is. 

So I get it. [00:26:00] I think it's, I think, Oh, who was it? Buffett or Munger said, you know, most people should index. And I don't know that it's an insult. It's just like, who has the time? 

I think the mistake is thinking with no research or time spent, just with natural gifts, that you can beat the market. I think a lot of people think that about themselves. And I think that's where you get into trouble, because they'll beat it over a short amount of time and then think, Oh- 

Jason Hall: The market will lie to you in a short period of time. Right? It really, it really will. 

And it's the, I think it's the intellectual equivalent, Jeff, of thinking you can just show up on a basketball court and beat, like, even the worst NBA player. Like, let me put it a different way. Even the worst scholarship player on the worst college basketball team.

Jeff Santoro: Right. I mean, let's be honest. Most people would lose a pickup game to like a good high school kid. Yeah. 

Jason Hall: It's like, yeah. No, it's true. But it's easy to overestimate our own ability. And I think men are a little more susceptible to that, that the [00:27:00] psychological data kind of backs that up. We always overestimate our capabilities. And the problem is that with stocks, it's so easy to do it. That we don't realize how hard it is to do it well, you know?

Jeff Santoro: I mean, look, I was guilty of this. Thought I was much better than I was in 2021 because everything I did went up. 

Jason Hall: You and everybody else, buddy. You and everybody else. 

Jeff Santoro: So we got one more question here, and it's from a listener named Jeff Santoro, and he wrote in. And asked, the end of the year is coming and I keep hearing people talk about tax loss harvesting. What is this? And should I be considering it? 

So obviously I wrote this question, Jason, I don't, I don't know if you picked up on that. I actually think it'd be a good thing to talk about at this time of year. I have obviously do know what it is, but let's talk a few minutes about not only what tax loss harvesting is, but I'm curious. 

How you think of it? What do you do it? If so, how if so, when? And then I'll share my thoughts on it, too. 

Jason Hall: So first I have a question. A follow up question that question.[00:28:00] So you're saying we don't have a listener named Jeff Santoro?

Jeff Santoro: I've never once listened to this godforsaken podcast. 

Jason Hall: Okay Alright, I listen to it three times every week before anybody else does. 

So tax loss harvesting. This is definitely, it's definitely timely. This is gonna come out and they're still gonna be a couple of weeks left in the trading year.

And the short version version is, the idea is, if you have one of two things, either typically realized investing gains, especially short term investing gains, because those are taxed at your marginal tax rate, they're basically the last dollars you earn. So they're taxed at the highest rate, the short term gains. 

You want to be able to try to offset those with some, with losses, realized losses. 

So a lot of time, a lot of people, a lot of investors this time of year, again, this is all inside taxable accounts. So this is nothing in your retirement accounts cause all that's tax [00:29:00] shielded. Looking for stocks that are down that you can sell before the end of the year, realize that loss to offset some gain that you've made somewhere else.

And there's limits to how much you can offset. I'm not going to quote all those. I want people to go out there and actually do a little bit of research on their own to find it out. You go on Investopedia, Motley Fool, Seeking Alpha, they all have articles talking about this kind of thing. 

Here's another cool thing about it, Jeff, is you can actually offset a small amount of your regular income as well. Which is kind of nice. So even if you haven't sold any stocks and gains, but you're holding some losses and you've been thinking about selling them, you can offset a few thousand dollars of actual taxable income too right?

Jeff Santoro: Right? Yeah. So just to put it in layman's terms, if you sold stock X and it made you $100 in profit and you sold stock Y at a hundred dollars worth of a loss it you it should equal out, right? There should be no impact on there's essentially no capital gain. 

Jason Hall: It offsets the taxable [00:30:00] gain So you won't pay taxes on that gain. 

Jeff Santoro: A couple things I want to make clear at least how I think of this. 

So don't think tax loss harvesting should be a time to go sell companies that are losing that just for the sake of tax loss harvesting. At least not, that's how, that's my opinion, right? This is not investing advice. So I'm going to build on that. 

Jason Hall: I have some thoughts so keep going. 

Jeff Santoro: So I, , if I have a stock that I still really believe in, like this was a big thing last year. Not so much now cause we've had such a good market year, but I remember thinking 2022 when basically everything in my portfolio was in the red kind of challenging myself and thinking, okay, I'm thinking of selling this stock. Am I really selling it because I truly no longer believe in this company? The thesis has changed. I don't want to own it, whatever. And it's convenient time to take the tax loss? Or am I looking for a reason to sell it because it's down?

So I think that's the sort of mental check you sort of have to have to make you know, I, I would hate to sell something just because it happens to be down in [00:31:00] December because I'm trying to defer some taxes or whatever. And then all of a sudden, two years later, it's up, it doubles and I've sold it.

So, and also I, just one more thing, and then I want to hear what you have to say too. You don't have to sell all of a stock to realize some tax loss harvesting. 

Another example would be, let's say you bought, I don't know, I'll say Starbucks cause we already talked about it in this episode. Let's say you bought Starbucks in 2003 and that purchase is up a lot and you bought Starbucks in 2021 again and that purchase is down a lot. You can sell just the one from 2021 and keep all your shares that are earlier, right? They should be in your brokerage in the tax lots that you bought them in. 

So that's just another thing to consider. You can choose which purchases of a stock if you've bought it multiple times that you sell. That's another way to sort of go about it. 

Jason Hall: Yeah. You need to check with your- different brokers treat that differently. So you need to make sure like before you hit the sell button, how, what your broker is going to default to, are they going to sell your newest tax lots first, your oldest, make sure you understand all that.

[00:32:00] So I want to push back a little bit on the selling stocks you like as part of a tax strategy, because there are ways you can go about it. You just have to be mindful of the repercussions.

But before I get to that, there's a really important aspect of tax loss, harvesting, that's important to understand, and that's you have short term and long term gains, and then on the losses, they're looked at in that same short term and long term too. And basically, the definition is anything that you've owned a year or more is a long term. Anything you've owned a year or less, or less than a year, is short term. 

And typically, you're only, you can only offset long term gains with long term losses, short term gains, and short term losses up to a certain amount. And again, it's becomes a bit of a gray area. So again, don't just look at, you know, a stock that you bought three months ago, that's doubled and you've made a thousand dollars and a stock that you've owned for a year.

That's down a thousand dollars and think you can just offset it. Make sure to talk to a tax professional. There's plenty of stuff on the internet you can read up about it to make sure- 

Jeff Santoro: Not tax advice. 

Jason Hall: Yeah, this is not [00:33:00] tax advice. This is directionally useful information to point you towards finding a good, correct answer for yourself.

So again, make sure you understand like short term and long term and like the implications for offsetting gains if you do want to do some harvesting. 

But I will say that even for, this is the tiny little bit of pushback. Because directionally, I agree with you, but I do think that is, it is, can still be a strategy you can use where you can sell a stock that's down to offset that you've lost some money on, that you want to continue to own. But there's some rules about, and you can think maybe you just want to buy it back. There's some rules around that, right? 

So there's the wash rule. So you can't buy it back for at least 30 days. So you can't like buy it in another account and then sell it tomorrow. Like that's all, that's 30 days before 30 days after. There's the, the IRS, they've got some smart people Jeff. Like they know, know all the loopholes around this kind of stuff. You can't buy it in your Roth and then sell it in your taxable account. That cancels, it washes it out.

That's why it's called the wash rule, right? 

Jeff Santoro: So, [00:34:00] I mean, but after 30 days, I mean, again, not tax advice, but my understanding is if you sell it on December 30th and then you buy it back on, let's just say February 1st, right? Just to really get past 30 days. Right. Yeah, you can, you're fine. And you- 

Jason Hall: Absolutely. And that is a legitimate, that is a legitimate strategy. The implications and the repercussions is that you may sell it on December 30th for a hundred dollars. . And you may have to buy it back for 120 or, whatever the market bears, you have to- 

Jeff Santoro: Or it could be 80. 

Jason Hall: Or it could be 80, right? And you could feel really brilliant that you tax, you harvested the tax loss and you got a better cost basis.

So I've used this strategy before, and here's what I do. This is one of the rare times that Jeff, I actually hold myself to a rule. I specifically record the dollars that I realized when I made that sell. So I sell that stock at a loss and I realize a thousand dollars. That's what I get. 31 days later or whenever I'm going to do it, I will invest a thousand dollars in that stock no matter where the price, now, obviously if the stock price is doubled and it's [00:35:00] like way out of my normal valuation range or something weird has happened, I'll revisit. But within some range of standard deviation, like I fully commit to rebuying it, whatever the market price is so, I don't try to outsmart myself, right? 

That's the caveat. That's kind of how I think about it. 

Jeff Santoro: Yeah. I've traditionally not been, I've tried not to be too cute about it in the past. Now again, this is not, I'm not talking huge sums of money here. 

The only thing I've done is, tiny amounts of money around the tiny stocks I own. I've never sold a huge position for something like this. I honestly don't even, I don't even go back and look to see, oh, how many gains have I, or how much have I realized in gains from things I've sold, or how much do I want to offset my income? I don't even go down that road.

I really do just think, if this is something I'm on the fence about, if this is something I've been thinking about, it's the end of the year, it might be a tiebreaker kind of thing in my brain. And I've not yet done what you just said, which is sell it, keep track of what I did, revisit after 31 days just to [00:36:00] see, so that's another way too.

I'm glad you mentioned that, that's another way to actually do it strategically and not necessarily bail on the stock that you do want to hold for the long term.

Jason Hall: Well, and you hit on the key reason why it's a strategy that I've, that I do use and I've been using for maybe four or five years now. And we've talked about it before Jeff. 90 percent of your invested wealth is in retirement accounts. You've only recently begun buying individual stocks. And with exposure to taxable brokerages, I've been investing in some taxable accounts for a lot longer.

So it's just, it's larger sums of money and it's meaningful enough that it's a strategy that can make a material difference and be useful for me. 

Jeff Santoro: Yeah, for sure. We're going to do a quick break here and when we come back, we're going to have a little conversation about the way the market has felt. We have a market vibes check in coming at you after this short break.

Jason Hall: Hey Jeff. 

Jeff Santoro: Yes, sir.

Jason Hall: How's your vibes, bro? 

Jeff Santoro: I don't know if market vibes is like the right thing to call this, but it really is just what I wanted to talk about. 

So let's, let's give it some [00:37:00] numbers. Jason, what has the market done? And we'll use the S&P 500 as a proxy for the market. What has it done since it's October 2023 low point?

Jason Hall: So this is for the S&P 500. I think it was October 27th was the 2023. 

Jeff Santoro: Lowest point. 

Jason Hall: Low point, right? The decline from the kind of, the bear market rally we saw, and then the market declined a pretty good bit. And the S&P 500 is up 12.8, just basically 12.8%. Now that doesn't include, that doesn't include dividends. That's just a level change just to keep it easy. But basically 13%. 

Jeff Santoro: Okay. Here's my next question. And what is it up for the whole year? Year to date as of December 12th. 

Jason Hall: S&P 500 is up 21 percent Jeff. 

Jeff Santoro: This is, this is my question. And I don't know if you have this data in front of you, but this is what I was thinking.

I've had these market vibes feelings at certain points in the year, right? So the whole first half of the year was surprisingly good. I think we, we both talked about that, especially as we did the portfolio updates. We were kind of [00:38:00] surprised to see how quickly out of the shoot the market went up in January and then kind of did well for most of the year.

And then I remember feeling in October, I think we even might, might've done a market vibes. B block on an episode sometime in the fall about how it felt totally different. 

But really since then, it's felt very frothy again. You know, the fear and greed needle has in my mind pointed squarely towards greed just in the last couple of months here.

So that's why I wanted to put some numbers on it. So it's really turned, it's really turned around since that October low. 

So the thing I'm wondering though is the talk for the first like half of the year was yes, the market's up. In the teens, but it's completely been driven by the Magnificent Seven, right? Those big tech companies that are the majority of the S&P 500. 

I'm curious, do you know this? And if not, maybe we can take a second to find it. Has that also been the case since that October low? Like has the Magnificent Seven companies driven this more recent [00:39:00] run or has that been a little bit more widespread? 

Jason Hall: So Alphabet, one of the magnificent seven is up 8. 4%. 

Jeff Santoro: Okay. So they're lagging the market since that market bottom. 

Jason Hall: It's a very short period of time, right? But lagging the market by pretty substantial amount. It is the only one of the, only one of the magnificent seven that's lagging the market by a significant amount.

Microsoft's up 13 and a half percent, and then going up to NVIDIA is up 17 percent. Then you have 15 percent or better for basically all of the rest of them. They're all, they're all doing really, really well. 

Jeff Santoro: I'm trying to think what's a good proxy for the rest of the market. Probably the Russell 2000. So how's that done since the October low? 

Jason Hall: Do you want to, do you want to guess? 

Jeff Santoro: All right, just based on the way the rest of my portfolio is performing, I'm going to say that the Russell 2000 has done close to what the overall market has done. And if not, definitely better than it did from like January 1st through that low point.

Jason Hall: It's up 15%. [00:40:00] Wow. It's up 15%. 

Jeff Santoro: What? All right, real quick. What was it up from January 1st through October 27th? 

Jason Hall: I'll tell you, January 1st through Okay. I can give that to you. Give me a second. I can tell you this. It's only up 7 percent year to date. 

Jeff Santoro: So it's really been a more recent thing. Well, cause that's, that's sort of, it was down 7%.

That's why I was wondering. 

Jason Hall: It was down 7%. 

Jeff Santoro: Here's why I was thinking this whole- 

Jason Hall: This is a full market rally, I think is the point, right? 

Jeff Santoro: And it just using my small stock portfolio as a proxy. This is what I was wondering, because I remember being, feeling very disconnected between what my portfolio was doing and what the market was doing for most of this year.

Cause , I'm like, I can't believe the market's up this much. Like my portfolio is not, it's still suffering like it wasn't 2022 over the last month or two. I've felt completely different about it. Stocks that were middling, stocks that were really kind of stuck at the bottom are starting to rise up and the market's still doing well.

So I was just [00:41:00] curious, like, so it really does feel like the rest of the S&P 393 is catching up, I guess is another way to think of it. 

Jason Hall: Yeah. So the Russell, the Russell 3000 is what I meant, the Russell 2000 is the small cap index, the Russell 3000 is the small and mid cap. 

Jeff Santoro: Okay, what's that done? Yeah, same. 

Jason Hall: Rounding, round figures, it's done basically the same. But again, the point is that we're actually seeing a full market, even as the Magnificent Seven continue to do really well, the rest of the market's coming up. Here's, what's changed. I mean, I know what it is.

Jeff Santoro: I don't know. I, so I don't know what it is other than I'm happy about it. I'm, I'm, what do you think it is? 

Jason Hall: It's, I mean, it's sentiment. Obviously it's- I mean, that's sounds like a lazy answer, but if, here's what it is. 

The economic numbers have generally been good, but also the economic numbers have been softer, right? Inflation is softened a little bit. Consumer spending is softened a little bit, but the jobs [00:42:00] numbers have continued to be incredibly good. So you put those things together and it's like the best case scenario of what the fed has been trying to do, which is tamp down demand, but not tank the economy.

And that, I mean, that bodes well because it tells investors that the economy is going to continue to remain strong because people are going to continue to working. GDP is going to move up. Companies are going to be profitable. Rising interest rates aren't going to kill business. 

Jeff Santoro: Yeah, I would agree. But here's, and maybe this is still sentiment, but I also think it's that it feels like, again, this is sort of anecdotal slash me watching my own portfolio, but it feels like most companies did better in their Q4, one and two. Well, I guess Q one, two and three, like reports that happened during this year, I guess Q four, one, two and three, right?

We got, we get all those in 2023. It just feels like there, if there was any bad stuff that was going to flow through that came from interest rates being higher, and all that kind of stuff maybe hasn't hit yet. 

So I think, and [00:43:00] that's tied to sentiment, I think to some degree, but I think the business performance has been maybe better than people thought. And that's where I think the sentiment is coming in. 

And I also, I am curious. If this is just a delay of some pain for some companies that we're still going to see it in 2024, maybe that's a different conversation, but do you think so? I guess this is why I wanted to bring it up, right? I wanted to bring it back to the toolbox and what people can take away from it.

Do you invest differently based on the market vibes? 

Jason Hall: I mean, sort of. Because I'm pretty valuation focused and I have been for a long time, right? And depending on the vibes, the stocks that I'm interested in, maybe more or less overvalued and that's going to affect where I'm going to deploy my capital.

And the other part of it too, and I want to say this too, I think part of like the vibes aspect and the forward looking and the sentiment part, is I think the market so broadly, has this, and I believe it's misguided, expectation that interest rates are going to start getting lowered. There's just no evidence to support that happening, barring a recession, right?

You don't get, you don't get [00:44:00] both. You don't get both. 

Jeff Santoro: Yeah, they'll go lower when we hit another huge crash. 

Jason Hall: Think about, here's how the fed works, and think about the feds toolbox. The feds toolbox is largely making interest rates go up or down to get the economy to dance how it wants it to right there.

They're holding the, what do they call those? 

Jeff Santoro: Marionette strings? 

Jason Hall: Marionette. They're holding the Waldo's, right? That's what it is. Yeah, they're, they're okay. Yeah. They're called Waldo's. Yeah. So they're, they're, they're the ones holding and it's interest rates, right? Up and down and up and down.

And it's, it's, it would be mind numbingly stupid if I'm the Fed to lower interest rates in a perfectly healthy economic environment because I'm taking tools out of my toolbox and leaving them back in the workshop, and then I'm driving to the job site, right? 

Because if you're the Fed, you want to save that ability to lower- every 50 basis, 25 basis points you have is an opportunity to affect the economy in a way that you want to affect it. Right?

Jeff Santoro: Yeah. No, I agree. And I think [00:45:00] I, I'm the same as you. Like I, I would say I do change how I invest based on vibes because vibes is really sentiment and sentiment drives price and price drives valuation. But I probably am the opposite of what most people are in the sense that when it gets to feel like it does, at least to me right now. I'm more likely to not buy a lot.

 And when there's like blood in the streets and it's dropped, 10 percent in two weeks, that's when I'm more likely to start buying things. Cause I, that's the, that if I learned any lesson in my almost four years of stock investing, it is when everyone's excited, don't buy, and when everyone's freaked out, buy. So I think it does impact me, but in the opposite way, the hopefully good way.

Jason Hall: Yeah, I can, I can appreciate that. 

I just, I'm keep, I keep waiting for the next shoe to drop. But not one of those old man yells at clouds, all of the nonsense we've heard over the past 10 years about, I'm not even going to get into the details, but it definitely, like, the cost of capital [00:46:00] environment has changed in a durable- there's that word- durable way. Sustainable way, that is going to be very different over the next 10 years than it was over the prior 12 years, right? And I don't think people understand the repercussions of that enough. 

I want to offer one example of that, and that's NextEra Energy Partners. Tyler and I've done a bunch of videos about it before they pulled the rug out from underneath themselves on their growth plans. 

We recorded a video saying, Hey, this is going to be a problem. We recorded that on a Wednesday. And on Friday, they did a presentation that said, Hey, this is going to be a problem, talking about interest rates. And then just this week, we saw like the first signs of that when they rolled over 10 percent of their debt and the interest expense went up 70%, right? And they're going to roll over like two thirds of their debt over the next two and a half years.

There's a lot of companies out there, they're going to face with that. And that's the, we haven't, like you said, we haven't seen the full impact of rising rates on businesses. And I think investors have just got to be really mindful of that [00:47:00] reality. 

Jeff Santoro: And here's what I worry about. My concern is that this becomes a slow and drawn out, underperforming market. So if the market dropped 30 percent in a week, everyone would freak out, stop buying stocks and it would be like every other crash we've seen. But if it just drops, if like the returns aren't good for 18 months, but there's no like sharp, precipitous crash, I do worry that people are going to still have the mindset of this unprofitable, growthy SaaS company can't stop. it's unstoppable and I'm going to put a whole bunch of money into it.

That's my worry for investors is that in the absence of like a sharp, super noticeable crash. The pain's gonna be a lot more sneaky.

Do you know what I mean? Does that make any sense? 

Jason Hall: Yeah. Yeah, I do. And like the, I think a perfect example of that is the 1970s. S&P 500 gained 16% in the decade, and interest rates were [00:48:00] substantially higher for a big portion of that. 

Jeff Santoro: So I just wonder when and if people will notice. Or do they just look back on a decade and go, Oh man.

Jason Hall: I mean, it happened in the two thousands, in the aughts. We went through that too.

So yeah. Just keep buying though. Just keep buying. It's not where it starts. It's not where the market was when you started and where it was when you ended. It's where it went along the way and taking advantage of those opportunities. And I think there will be plenty of those opportunities.

Jeff Santoro: Yeah, I agree. Well, I would say one caveat, unless you're at the very end of your investing journey, looking to retire, looking to use that money, that might be a different calculation. But for people who still have a decent amount of time, yeah, you just got to kind of keep buying good businesses and let time do its thing.

Jason Hall: Yep. That's it. Use the right tools for the job. It's one thing if you're still earning income and contributing regularly, and it's another thing if you're in retirement. Use the right tools. 

You can do it. I believe in you. Oh, I don't say that yet though, do I? I said it too soon. 

Jeff Santoro: Speaking of tools, why don't you wrap up the show, Jason?

Jason Hall: Well [00:49:00] done. Well done, Jeff. 

Yeah, this has been a lot of fun. Thanks for getting the questions into us. Please continue to send questions to us. You don't have to wait for a call out for them. You can DM us questions. You can email us questions. You can tweet them to us. You can comment on any of our posts on social media.

Anytime you have a question, we keep them. So get those to us and we will give our answers to these hard and questions about investing and finance. But, as always, it's up to you to find your answers. Maybe our answers will help inform your answers, but it is up to you to figure out those answers on your own.

You can do it. I believe in you. All right, Jeff. We'll see you 

next time, pal. 

Jeff Santoro: See you next time.

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