Brian Feroldi, Financial Educator, 'The undeniable long-term trend is that buy and hold investing works', Episode 60

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Peter Higgins 00:17

Hello and welcome to the Investing Matters Podcast.

My name is Peter Higgins and I would like to welcome you to this Investing Matters episode, which I have the huge privilege of speaking with Brian Feroldi, Financial Educator, YouTuber, and author.

Brian has written over 3,000 articles on stocks, investing, and personal finance and Motley Fool and is also as I just said, the author of the best-selling book Why does the stock market go up? Everything you should have been taught about investing at school, but weren't, which was published in 2022.

Brian, thank you ever so much for joining me, please tell our audience first whereabouts are you in America today, please?

Brian Feroldi 01:03

Well, thank you for having me, Peter. It is a pleasure to be here. I call Rhode Island home, which is a part of Southern New England. So in the northeastern part of United States.

Peter Higgins 01:15

Excellent. So we're in England, so we're always talking about the weather. So what sort of weather you having right now over there?

Brian Feroldi 01:21

Cold, on the border between rainy and snowy, I prefer snowy, but it has to be cold enough for it to get there. But typical New England weather cold and miserable, if you're not into that kind of thing. I happen to like, the cold weather that we see in the wintertime, but I understand why many people don't.

Peter Higgins 01:45

I appreciate that. What I like is about when I watch the American football, and I see them taking the snow off the pitch to actually go on there to play and it does look better there.

Okay, Brian, I'm going to jump straight in if we if we can regarding this interview, because we were going to be pressed for time to get all the numerous questions I've got for you.

What was your first exposure to investing? And can you follow that by just telling us about your first exposure to the Dow Jones index, as well as a young man?

Brian Feroldi 02:16

Sure.

Like many people, I had a vague idea, or I had heard of the stock market growing up, but I was never taught anything about what it is or how it worked.

And to me the stock market was just the boring part of the newspaper that was in the way of the comics.

But I had my father was he was an accountant.

He rose to become a CFO at a publicly traded company.

So he was he dabbled in in stock market.

He wasn't super well versed in analysing businesses or knowing how to really invest the right way.

But he did dabble a little bit in the stock market and he would occasionally interact with us and show us about stocks that he was he was buying.

I remember one time he showed us a stock that was worth like $20 a share and he said hey, if this gets to $25 a share, I'll buy you guys dirt bikes.

So we would check that stock price like every day, it never got to $25 a share.

So we never got our dirt bikes, but that was the first time that I was looking at stock prices and like hoping that they would go in a certain direction.

But I can tell you my first time my first exposure to the Dow Jones Industrial Average happened when I was a caddy at a prestigious golf course.

So I was carrying around at a at a golf tournament and at the turn.

So after the ninth hole, a couple of the golfers went in, got some got some lunch and came out.

And one of the golfers said to the other he says you're not going to believe this.

The Dow Jones is up 300 points today and the other golfers were like, you know, high fiving each other they were like really excited.

I had no clue what the Dow Jones was I had no clue what going up or down meant, but I could tell that they were excited about it.

And I was like, well, this probably increases my chances of getting a good tip at the end of this.

But I think that that's a fairly common experience that a lot of people have.

They hear terms like Dow Jones Industrial Average or S&P 500 or FTSE and they've heard those terms many times but I can pretty much guarantee that the majority of people that have heard those terms have no clue what those things are.

Peter Higgins 04:44

Absolutely and before we go any further Did you get a good tip that day when you were caddying?

Brian Feroldi 04:48

Yes I did. I think I made about $40 or something like that which we know in the mid-90s was much more money than it is today.

Peter Higgins 04:57

Absolutely, no pleased that you did. So what was your first exposure to penny stocks Brian or Cent stocks would you say?

Brian Feroldi 05:05

Yeah, so penny stocks.

So when I first became I'm interested investing was 2004, this was post me graduating from college.

And despite the fact that I graduated with a degree in business, I was still completely ignorant about what the stock market was, what a stock was, how compounding works, how to make money is investing.

So all of that was completely foreign to me.

And again, I say that as someone that studied business, in college, so my dad was cold called by penny stock brokers, when he was making investments and he was attracted to the idea of low dollar priced stocks, naturally, because he was a beginning investor.

So when I graduated from college in 2004, and I finally had a little bit of money to put into the market, you know, just a few $100 at the time, not a lot of money in absolute terms, but it was a lot of money to me at the time, I thought that the way that you made money in the stock market was by buying a stock for $1 per share, and selling it a day later for $1.50 per share.

That to me was what investing was because the stock market just seemed like a random number generator that just went up and down every single day.

And I naturally thought that the best quote unquote investors out there didn't buy stocks, like Coca Cola, or Microsoft, or Apple.

They bought stocks that traded for 50 cents and then they got a 50% return in a matter of days by selling it later for 60 cents or 75 cents.

And that's what I first started to do. As you can imagine, I had no clue what I was doing. I had no clue how to do research, I had no clue why there was any connection between the company and its stock price.

So my results were absolutely abysmal, just about everything that I bought, went down, I lost money far more far more often than I made money.

And my natural inclination was to just view the stock market as a big gambling machine, and which to be fair, if you were investing and I put that in air quotes, investing the way that I was, when I first started, it basically was a giant legal gambling machine.

Peter Higgins 07:37

I love that response Brian and appreciate your candour with that.

So and you've already touched in already, just tell us the nuances of the major lessons that you learned that you thought going in, I know what the market is about and then during that early period, where you came out and went duh, this is actually what it is about!

Brian Feroldi 07:59

I've learned so many lessons the hard way to me, there's no better way to learn a financial lesson than to lose a bunch of money in a short period of time.

Because those lessons that I learned when I first started, they only cost me probably a few $1,000 in absolute terms, but they forever seared hard lessons hard won lessons into my, into my brain.

So thankfully, one thing that I'm proud of myself that I did was while I was losing money and having bad results, that did not dampen down my desire to learn about what the stock market was.

So I immediately started to read and educate myself in any way that I could about what investing was.

So at the time, the primary way to really learn that kind of stuff was by reading books.

So I started to check out and buy books that were buy and about Warren Buffett, The Motley Fool, some personal finance books, I read books about real estate, I looked into owning and operating a laundry and storage facilities, I basically looked for any way that I could figure out how can I take the money that I have, and grow my net worth over time, as I studied what the stock market was, I of course, came across Peter Lynch, and that studying Peter Lynch was the first time that I actually started to understand, oh, there's actually a connection between the company that is behind the stock and its stock price.

And I want to actually buy companies that make products and services that I know about.

And those companies make profits and if those profits increase over time, so too will the stock price.

So many of those things that I learned the hard way are completely counter intuitive to you just looking at the stock or putting up a stock price on your phone for the very first time.

It's only really after zooming out and studying businesses and their stock prices that you can really start to draw some conclusions about the right way to invest, but the wrong way to invest.

I learned very quickly, you have to do more research than just knowing the stock price, you have to understand how to read financial statements.

You have to understand how to dig into SEC filings have to understand what business competitive advantages, I didn't understand the risks that are going on.

I mean, all of those lessons that are obvious to me today, I had to learn the slow, painful, hard way.

Peter Higgins 10:32

Ah mate brilliant, brilliant reply, I love that.

And I think that the beauty of what you just said, to encompass it all, is the fact that we learn twice as much from the mistakes than we do from our successes.

And, you know, this is why you're here now.

You know why you've got a best-selling book or the lessons that you've learned.

And now you're paying it forward.

So thank you for sharing that.

Now, you also, I know, we're investing throughout the dotcom boom, and crash, Brian and you always, I think spoken very, very candidly about some of the mistakes that have occurred whilst you've been investing and your lessons from that.

What is the one mistake that you made very, very, very early on, that you can say to yourself you'd never made since?

Brian Feroldi 11:22

Well, I would love to tell myself that I've never since made it since.

But I can tell you the one mistake that I made early on that I still kicked myself to this day.

So I have made so many mistakes, investing.

And I think that I am a dramatically better investor today than I was previously.

And I've bought stocks that have gone down 99%, I've used leverage to buy stocks that then went down drastically.

I have gone for income stocks, I've gone for a high-growth stocks, I've gone for stocks that were doing out stock-based compensation, I've gone for money losing company.

So I've been I've tried tonnes of different investing things the most and the biggest investing mistake that I've ever made, that has impacted my net worth negatively the most by far is selling a great company, early, period, full stop, end of story.

Because you can make lots of investments that go down 80% or 90% and you can lose thousands of dollars on doing that.

But I have personally sold stocks that then went then went on to go up 10, 20 or 50 fold.

And by selling those stocks early, I lost out on tremendous amounts of long-term wealth because I was in a rush to take a profit.

A real quick example. I owned Microsoft at $20 per share. Microsoft like big, boring, stable, profitable, dominant Microsoft.

And when it hit $24 per share, I sold all of it and took a profit.

So I earned a 20% return in a matter of months. And last I checked Microsoft was at $400 per share.

So I missed out on a 20x return on Microsoft on Microsoft simply because I was in a rush to take a profit.

Now that is a stark example or a reminder to me that the biggest mistake, the biggest investing mistake that you can make is to sell a future winner early because you're in a rush to take a profit.

So now I have an extreme aversion to selling when I buy a stock, I have an extreme aversion and my natural bias is to hold even when I think that holding is a mistake.

What I've learned is that if I hold 10 companies that I think I should sell, or they want to sell, if I'm right, nine times out of 10 but that 10th time I sell Microsoft early or I sell Dexcom early or I sell Google was early.

Those other nine good decisions don't matter, because selling that one mega winner will cost me so much wealth that I now have a straight extreme aversion to selling any stock that I own.

Peter Higgins 14:30

Brilliant reply, thank you ever so much.

Now, I know from looking at your records as well though, Brian, you've got a fantastic record for hitting those significant multibagger stocks and you've got several within your own portfolio as we speak, that have returned in excess of 15-100%. So 15x your returns, please can you tell us some of those stocks and the characteristics that you initially identified that enabled you to have those winning stocks?

Brian Feroldi 14:59

So I own yeah, I've been lucky enough to get about 10 stocks I've bought I bought over 100 stocks in my life and 10 of them have really delivered the lion's share of my investing gains over time.

I've had plenty of base hits and doubles to use a baseball analogy, but it's really a handful of stocks that have been 10, 20 or 50 baggers that have driven the lion's share of my gains over time.

So currently my number one holding as of right now, and this does change day to day based on prices is a company called Mercado Libre, the ticker symbol there is MELI, I first came across this stock more than 10 years ago, when it was profiled in a Motley Fool newsletter that I was subscribed to. It was a founder led company. And at the time, it was essentially the eBay of Latin America.

So you could go to this site, and you could buy and sell goods.

Now a nice feature about a site like eBay is there's something called network effects built right in, buyers actually want to go to the platform that has the most sellers, sellers, and actually want to go to the platform that has the most buyers.

And that dynamic kind of takes a winner take all dynamic in that marketplace. Now, I liked that the company was in a fast growing market, the number of internet users in Latin America was small on a percentage basis, but growing rapidly, the area was quickly developing and per capital income was quickly rising.

The company was founded by someone that was trained at Stanford, and had a huge ownership percentage, the company had great margins, it was free cash flow positive.

And the biggest plus of all, was that they were rolling out adjacent businesses to complemented their core offering.

So when I bought them, they were essentially, eBay and they had a small little business that was very much like PayPal.

So it was a way to pay for buyers and sellers to pay each other, that business has grown at a hyper growth rate, and now is actually the dominant position, or the dominant way that investors have made money off of that stock, they've added in advertising capabilities, they've added in shipping capabilities, they've added business services to there.

So it was a company that a lot like Amazon started out doing one thing, and has since spawned off many businesses that have opened up revenue opportunities for the business over time.

And for that reason, it's grown tremendously since I bought it and now it's my number one holding.

So the things that I look for there would be dominant market position or strong a moat, founder led leadership, good economics, and optionality or the ability for a company to roll out new products and new services that open up new revenue opportunities.

When I look at my list of biggest winners of all time, almost without exclusion, those companies that have those traits built in.

Peter Higgins 18:38

Brilliant, thank you for that reply and you've written extensively about this on the over 3,000 articles that you've written for Motley Fool and you've also spoken about on your own YouTube channel, Brian, in 2015, you weren't writing and then you then went into Motley Fool as a novice, and then 3,000 articles later, and YouTube channel later, you're a best-selling author who hadn't written before.

So for those that are listening, just tell us about that journey in that transition and the nervousness because I know selling to me you're a very humble guy that was going, I don't think I can do that, but somebody somewhere or two people in particular said, Brian go, you can write that book. Go on. Tell us about that?

Brian Feroldi 18:58

Sure, so prior to becoming a full-time writer, at The Motley Fool in 2015, I was just someone that was extremely passionate about investing, I kind of discovered that passion for investing, I would say in about 2007/2008, which was when I was really starting to dive deep into the market.

At the time, I had a medical sales job and one side benefit of that job was that I was in my car for about 30 hours per week.

A lot of people would use that time to listen to like, the radio or music or whatever. I used every bit of that time to listen to audiobooks and podcasts and really teach myself everything that I could learn about money and investing in finance.

So I would listen to company conference calls when I was in the road, I was in audio books, and I would take the knowledge that I had.

And I would go on the Motley Fool's discussion boards, which are housed by thousands of investors from around the world.

And I would share what I was learning about companies and I would read what other people were saying about companies and it was really by sharing what I learned on those discussion boards for years for free, by the way that I really honed my skills as both an investor and a writer in 2015, when I approached them about starting to work for them, I had a relationship with the Motley Fool for years at that point, so I wasn't someone that was completely new, just trying to throw my name into the ring and saying, hey, will you give me a chance they had seen that I was writing on their discussion boards for years prior to that, and that's why they were willing to give me a chance.

But you're right, when you go from managing your own portfolio and writing for a discussion boards to trying to create articles that are going to be read by the general public, it's a complete change, because suddenly your grammar matters that you spell thing rights matters, the formatting matters.

And it can be extremely nerve wracking when you create content that goes out to the world, because you get feedback on that content, especially when you have a publisher like the Motley Fool behind you that has the resources and the readership that attracts millions to their site.

So it was a very steep learning curve to go from not creating content to being a content creator. But I knew that I loved the subject matter.

And I knew that I would improve over time, just purely through repetition. But if you were to tell me when I was like in college or graduate in high school, that I would have written a book like I would have laughed in your face, because I was a substandard.

When it came to, to English classes. I was a substandard writer, I didn't particularly enjoy reading, there was nothing about me that says, oh, this person loves like English, not at all. So the fact that I actually end up writing a book later in life shows that I was far more passionate about the subject than the actual act of writing.

Peter Higgins 22:14

Fantastic, well, kudos to you mate and you've achieved it, so very, very well done.

Now, while those articles you've written and the recurring questions that come back to you, Brian, what do you find? Or what did you find that you're writing about the most? And the recurring questions you were given, you know, you think straight off the top of your head, I used to always get asked this from investors?

Brian Feroldi 22:36

So when I was first hired, I was assigned an industry.

So my background was in the medical device world, and I specifically was an expert in the disease, state diabetes.

So I knew every basically everything you can know about diabetes and when I was hired by the Motley Fool, they basically said, okay, great, take that expertise and write articles that go into biotechnology, into medical devices into insurance companies.

So that was my initial area of focus and it was because of my background, and it's because that's what they needed.

Over time, I was given more freedom to write about things that I saw in the market that I actually wanted to write about.

And I also would read comments from readers to see what they were reacting to.

And from there, I gradually shifted to writing more about technology companies, I had a particular penchant for writing about companies that were healthcare companies and technology companies at the same at the same at the same time.

But when it came to actually writing articles, we would see the statistics about what readers were reading on the Motley Fool.com and that gave us a strong pension for what they actually wanted us to write about.

So that gradually drives me to shift towards writing about a big technology companies, I mixed in some general personal finance topics in there such as about what is social security? What is Medicare?

Those are, those are things that are very specific to U.S. readers and then I graduated from there to writing about just general market terms in general market sentiment, like what is the S&P 500? What is the Dow Jones Industrial Average? and it was those articles that really performed well, which is one reason why I just had to write a book about it.

Peter Higgins 24:31

Brilliant. Now, just gone straight into my link there and just tell me about the connection with Morgan Housel and you writing the book?

Brian Feroldi 24:41

So I met Morgan Housel, more than 15 years ago, I first learned about him because he was a writer at The Motley Fool several years before I was and he quickly became my favourite writer at The Motley Fool.

So whenever I would go to in person meetups, I would always seek him out and so I've been aware of Morgan's writing skills for 15 years now, and it's really no surprise to me that he's become the investing writing giant that he has become at the time.

However, while I was a heavy consumer of financial books, and I read, you know, read and loved books by about Warren Buffett by Peter Lynch, many of those books said the same thing.

They said buy and hold the stock market, buy and hold invest in the S&P 500.

Over time, the S&P 500 goes up the market returns about 10% per year annualised and if you just buy and hold it, you'll do fabulously well, as an investor, I never learned while reading books, though, or a key question that I had when I was reading those books was okay, I see that the market has gone up 10% per year for the last 200 years.

But why has it gone up over those last 200 years? What is the reason that the S&P 500 continually hits new highs over a period of decades?

And why does the market always seem to recover from these crashes that happened. That was never explained to me.

And that was the most confusing thing or the confusing question that I had about investing.

When I first started, it almost seemed like everyone was saying, oh, just take it on a leap of faith that the market will come back, it's always coming back. That just didn't make sense.

To the logical part of my brain, it would be like someone saying to me, oh, jump on a plane, a plane will go up in the air, and it'll land safely. Why?

Because it always does.

And I'm the type of person that says, well, why does that happen? Why does this piece of metal float in the sky? And it's only when you understand Newton's laws and Bernoulli’s principles that you can actually for me understand, oh, okay, that's why a plane goes up into into the sky.

So that was a missing piece of my own education that I had about the market.

And I was talking to Morgan one day about, I would love it, if somebody wrote a book that explained why the stock market went up over time. And he said, Well, maybe you should be the person that writes that book.

Again, I never fancied myself as an author. I had been writing for The Motley Fool for several years at that time. So I begrudgingly decided, well, I guess I'm the person that's supposed to write this book.

Peter Higgins 27:34

Fantastic reply.

Now, maybe you should care to share with us why do the markets go up? Despite the crashes? And all the interest rates and all the unemployment and all the shenanigans that go on? Go for it!

Brian Feroldi 27:50

Yeah.

So before we could talk about why the markets go up, let's actually talk about what the markets are.

So stock market is a term that lots of people throw around, but let's break those down into their individual components.

So what is a stock? Or what is a share? A stock is simply fractional ownership of a corporation.

So in the United States, for example, if I want to buy a house, how do we tell who owns the house?

What is the record keeping mechanism that we have for who owns what pieces of property, while in the United States, we call those deeds.

They're a piece of paper that says in an official record book, this person owns this piece of property.

Well, the exact same principle applies to corporations, instead of there being one deed to one piece of property, you can have thousands, or millions of deeds that claim ownership of a corporation.

And we call those deeds that claim ownership of a corporation, shares or stock.

So that's all a stock is it's fractional ownership of a corporation. All right, how about that second word market? What is the word market mean? Well, a market is simply a place where buyers and sellers come together to exchange goods.

If you've ever been to a farmers’ market, that's where food buyers go to meet with food sellers, and they just exchange money for food. Well, a stock market is the exact same thing. But instead of exchanging money for food, we exchange money for ownership in businesses.

So that's what a stock market is and stock markets have existed for hundreds of years.

Over hundred years ago, in 1896, the way that people got information about what stocks were worth was by reading newspapers.

In the United States, the most popular newspaper for talking about stocks and businesses prices was the Wall Street Journal.

And there was an editor at The Wall Street Journal in 1896, that would just print these tables every day, showing the name of the stock and what the price did, did it go up or down?

The editors name was Charles Dow and he wanted a way that he could take that table of information and explain to his readers what happened in the stock market that day, that week, that month, and that year.

So Charles Dow got together with his business partner whose name was Edward Jones, and they devise a solution, or what they did was they added up the share price of the 12 largest, most profitable companies of the day.

We which were all industrial companies and they added up their share price, and then divided the number by 12.

Now, when you add up a bunch of numbers, and then divide by the numbers that you add it up, that's called averaging them.

So they gave birth to the Dow Jones Industrial Average.

And they have been reporting that number to their readers everyday sense.

And the Dow quickly caught on with investors, because now they can look at a single number.

And they could get a sense for what was the mood of the markets of the stock markets on that particular day?

And how did that mood change over a week, over a month, over a year, over a decade, and we can now measure returns of the stock market in general.

So that is that was the birth of the first stock market index and since lots of other indexes have spawned up, including the S&P 500, including the FTSE including the NASDAQ, and hundreds more.

Peter Higgins 31:53

Fantastic reply Brian, thank you.

So why should ordinary individuals that are not interested in the stock market, be interested in the movement of markets?

Brian Feroldi 32:04

It's a great question, the interes in the movement of markets is probably something that they shouldn't care about. But the interest in the stock market is something that they should, there's no better way I found to get people interested in the stock market than by showing them a powerful, simple example that shows why they should.

So in my book, I make up a fictional character. I call him Aaron in and I say that Aaron's career kicks off in 1981.

In the United States, Aaron is a completely typical American, he earns exactly the average salary that an American earns, and he's also not great with money. He spends every single dollar that he earns, however, Aaron made one good financial decision in his life.

When his career started, he signed up for this brand new thing, which was called a 41k, which is a tax advantaged savings investment vehicle account in the United States that helps people pay for their retirements.

So Aaron put $400 per month into the US stock market starting in 1981. And then he forgot about it, he never thought about it, or looked at the statements or paid attention to the stock market ever again.

Now, fast forward 40 years, Aaron works a successful career, he continues to invest that $400 per month into the market.

That is it. Now he goes to retire in 2020 and he looks at his statement for the very first time.

And the total balance that Aaron has accumulated over his 40 year career is $3.013 million dollars.

So Aaron's $400 per month investment turned into $3 million during his working career, even though he knew nothing about the stock market and didn't pay attention to it at all. Now for quick math, Aaron put into his investing accounts 192,000.

Now that's a lot of money, but that's nowhere close to $3 million. So the delta between those two numbers is the stock market is the power of the stock market. So that is why ordinary people should care about the stock market, because it empowers ordinary people with ordinary incomes to build extraordinary wealth.

Peter Higgins 34:33

Fantastic, thank you, Brian.

Now, one of the things you've touched on there with Aaron, was the fact that he just bought into the market, compounded his returns, and just ignored it essentially forty years.

And then we came back to a lottery win, essentially, we've got a situation unfortunately, where we're going back to the 1940s, and individuals were holding shares for 7.1 years in the 70s was 5.3 years, 2000s 1.3 years.

And the recent research I've seen is down to now 5.5 months, how do we get individuals to just step away from the noise and invest like Aaron in your book or like you and I and just hold a stock longer term and therefore increase our chances of better returns?

Brian Feroldi 35:20

Yeah, investors today are extremely spoiled.

It has never been easier for us to buy and sell and make investments you can literally do so for $0 today, when I first started investing, and that was only 20 years ago, I had to pay $10 per trade, which at the time was the lowest it had ever been.

So in the 1990s it used to cost 50 or $100 just to make one transaction just to buy or sell a security.

Now we can do that for free from our phones 20-30 years ago, it was really hard to get information about investments.

You weren't sent SEC filings, there wasn't a way to quickly look them up. You couldn't get on investor conference calls, let alone get transcripts for those calls.

And it was really hard to keep up with the news about about companies. Now we can get all that information for free, instantaneously sorted for us on our phone. So that's the upside, it's never been easier to invest.

The downside to what's happened to investors is the friction that existed before to investing is now gone.

And it is easier than ever to look down at your phone and make an emotional decision and to trade.

And we have seen as Commission's has gone down as the news has gotten quicker.

And as investors have more information that people are trading far more often than at any time in history.

So the way that you as an investor can kind of rise above that, and really take advantage of the long- term compounding effect as an investor is to do what Aaron did just set something up a buy and hold a long-term investing strategy, and then pay as little attention to it as you possibly can.

That is one way that is one way to avoid the temptation to trade. The other way to avoid the temptation to trade is to study markets and study market history.

If you study market history, the undeniable long-term trend is that buy and hold investing works, period, full stop, end of story.

However, there have been plenty of periods in US stock market history and global stock market history when you went years, when buy and hold was not rewarded.

For years, valuations came down, prices held steady. I mean, in the United States, for example, I think the stock market between 2000-2009 was essentially flat.

So you had a 10 year period of volatility, but you as an investor made next to no money that assumes that you bought everything in 2000 and held everything to 2009.

Now, if you bought continuously you dollar cost average, you did earn a positive return.

But there's no doubt that there have been periods when the returns that you earn from the market are very low, you have to know that and be aware of that going in that the market, if you pay attention to it will test your resolve and test your patience, like nothing else you've ever done.

So the only way that I know of to kind of combat that is to study market history, understand that volatility and low returns over periods of time are completely normal, but to have faith that over the long-term buy and hold does work because it has worked for centuries.

Peter Higgins 39:10

Thank you for the reply, really appreciate what you've just said that I think, essentially for me, is that going back to what you've said, so many times in your interviews and articles in your YouTube channel, Brian, about managing the emotional side of it.

You've got to have your investing strategies got to override your emotions, you know, and I saw a quote you put together from your good friend, Tom Engel.

And he's basically saying one thing that has always been present over my investing lifetime, is the overabundance of noise.

So you've covered it there. But what is the best advice for people just to tune out and just, you know, not be reacting to the market, that frantic trading that we're seeing, you know, as a recurring, distracting effect to people's wealth?

Brian Feroldi 39:59

The only answer I know there would be to know yourself, study your own investing behaviour.

If you were investing prior to 2020, how did you behave during March of 2020, when markets around the world were crashing as COVID went from this fringe thing that was happening in a faraway land to oh my god, this is changing the world.

What was your behaviour during that period of economic and emotional stress? If you were able to tune out the noise, continue buying and hey, if you got excited by the idea of investing because stocks were plunging, that is a great sign that you have the emotional makeup to be an investor.

On the flip side, if you're looking at that, if you sold your portfolio if you were scared if you weren't willing to make an investments that should tell you that you need to set up systems to prevent you from yourself.

Thankfully, it's never been easier to do that. This is why investing in 41k through your employer or setting up simple dollar cost averaging plans work so well is it because it removes your decision making, and it removes your emotions from the process.

So study your own investment behaviour, how you actually acted during those periods.

And if you acted emotionally, then the odds are extremely high that you will act very emotionally the next time we face a financial crisis.

And I can guarantee you, I guarantee you, we will face another crisis or the markets plunge at some point in the future.

So the time to prepare and the time to protect yourself from your cell from your future self from those emotions is before you experience them.

And again, dollar cost averaging into index funds is just such a no brainer, easy, free way to do just that.

Peter Higgins 42:04

I think you might have just covered this question, but I would have asked it anyway.

Now Brian, out of the many, in your view, potential million-dollar mistakes, which are the ones that we should almost easily avoid?

Brian Feroldi 42:17

Well, the biggest mistake, I guess I should say, that I didn't cover before, the biggest mistake is not investing period.

This is something that so many people put off, especially those that are young, because they have so many demands for their time and their money.

And they're often not making a lot of money, when they're when they're right out of college, they want to start a family they want to they want to get married, or they want to go on vacation, or they want to buy a house, all of those things cost quite a bit of money.

So it can be a big financial stress for them to voluntarily give up a portion of their income today for the whole for the promise that they'll grow their wealth significantly over time.

So the number one biggest mistake that most investors or most people make when it comes to investing is simply not starting investing. But I promise you, once you go through that semi painful step of just getting that ball rolling, starting to put money into the market, your lifestyle will instantaneously adjust to your slightly lower income rate and you will all but forget that you're making those investments and your future self will really thank you that you did that.

So if you haven't started investing, please just get the ball rolling start, even if it's with a small amount of money.

Peter Higgins 43:38

Fantastic. Now I'm going to throw this question in straightaway now, because you've just said that you recently wrote about the ultimate luxury, please can share with us and our listeners what that is, please?

Brian Feroldi 42:51

So when I first started investing, the thing that I was after was the same thing that many other people are after, I used to believe that the reason that you want to get rich was that you could have a big house, a really fancy car, you could take vacations, you could have Butler's waiting on you, and you could just afford all the luxuries of life, I can tell you that I have since come to realise that the real luxury that money affords you is complete control over your calendar, the thing that you really want is the ability to wake up every day and say, I can work on whatever I want for as long as I want with whoever I want.

And we do so on my terms and if I don't like the terms, or I don't like what I'm working on, or I don't like the people that I'm working with, I can at any time choose to end that relationship and work on something completely else.

So what you essentially really actually want isn't fancy things, you what you really are after or should be after is financial freedom.

And the only expression of financial freedom that I know is a gives complete control over every aspect of your calendar.

Peter Higgins 45:10

Fantastic reply, Thank you, Brian.

So in order to get to that ultimate luxury, we need to be able to identify some of those potential significant winners early.

Now you've often spoken about counter positioning in some of the conversations that you've had previously. I'm talking now about Netflix versus blockbuster, Amazon versus Barnes & Noble.

Tesla versus Ford and Nvidia versus Intel.

How do we as ordinary investors go about identifying those individual companies that could create significant wealth by counter positioning doing something slightly different than eating the incumbents’ lunch effectively?

Brian Feroldi 45:49

Sure.

So this this comes from Warren Buffett, you know, Warren Buffett has a quote, which I'm going to butcher because I don't have it in front of me.

But it's essentially, when you're analysing a business, the thing that isn't matter is how much it's going to change the world or how much it's going to grow.

The thing that actually matters is the competitive advantage and the durability of that competitive advantage. It's essentially his moat metaphor.

It's what can one company do that other companies can't?

There are several different sources that a company can have as a moat.

We talked about the network effect previously, it could be a brand, it could be low-cost production, it could be switching costs, there's several categories, one that I've recently discovered or have been made aware of, is a concept called counter positioning.

And this is when one company adopts a differentiated business model, or a different way of charging customers for prices or services when compared to the incumbents.

And if a company can adopt a new business model, that itself becomes a competitive advantage.

Let's talk about a simple one that we talked that you just mentioned was Blockbuster versus Netflix, at the start Blockbuster and Netflix both did the exact same thing.

They bought DVDs, and they rented them to customers, except for they had completely different business models, Blockbusters’ successful business model for years, was to build these stores was to have a big selection of movies.

And Blockbuster actually made the majority of its profits off of late fees.

So it was customers take being inactive, coming into the store late and getting charged extra penalties for having a late rental return.

Netflix took that business model and completely flipped it on its head.

So while it was renting out DVDs to customers, rather than doing it with physical stores, it did them through the mail, which dramatically lowered its cost.

The other thing that it did was it charged customers a monthly subscription fee.

And they could watch as many DVDs as they wanted to.

So same business customers get the same end product.

But the business models were completely different.

This blew a hole in Blockbusters’ business model, because Netflix came along and they promised lower prices to consumers, and the exact same product or service.

So for Blockbuster, to compete with Netflix, they would have had to say our business model is outdated.

We're closing down all of our stores, and we're going to shift completely into the DVD buy rental business, which would have completely eliminated the advantage that they had built up over a period of decades.

Now, could they have made that decision? Yes, but that would be an extremely, extremely painful tdecision for the managers of those companies to make.

So when you see a small company that is approaching a same industry with a differentiated business model, they're not protected by brand, they're not protected by switching costs.

They're not protected by low-cost production, but one that they way that they can protect themselves from another is through counter positioning, which essentially means a differentiated business model that would cause incumbents to give up profits in order to successfully compete.

Peter Higgins 49:27

Thank you. I love that response and I think if I remember rightly as well, that Blockbusters were they given the opportunity to buy Netflix at the very, very early stage?

Brian Feroldi 49:39

Yes, they were I believe that there's lots of stories like that, like Yahoo was given the opportunity to buy Google for like a million dollars, and they decided not to, Blockbuster was given opportunity to buy Netflix for a few million dollars, they decided not to, so looking backwards, looking backwards, it of course, seems obvious that that was a massive missed opportunity.

But if you were there at the time, Blockbuster had, you know, billions of sales, billions of profits.

And Netflix was this tiny little thorn with an interesting business model.

So it would have taken actually a lot of foresight by the management team to make that move.

But you've seen this that same story play out again and again and again, in industries where a small upstart with less resources than a big incumbent succeeds in part because of this differentiated business model. So if you find that happening in an industry, pay attention to it.

Peter Higgins 50:41

That goes seamlessly to my next question.

You spoke about characteristics traits of all the significant winners that you've had historically, Brian,

I'm trying to just pull something out of you here to help our readers with regards to any sort of recent stock or purchase you've made in the past six months or year that have got characteristics that you think long-term.

Now, this company is counter positioning regarding what other companies are doing, and therefore could be a significant long-term winner or long-term in your portfolio as a potential winner.

Do you have one that you could share with us please?

Brian Feroldi 51:13

I haven't made any purchases in the last six months that I think would match that counter positioning criteria, so nothing is coming to mind there for me.

I've actually been fairly inactive with my stock purchases over the last couple of months.

So I built my portfolio up over a period of 10 plus years, I've made a significant amount of investments.

And at this point, the gains that I have on I'm a mega winners, dwarf the amount of capital that I'm putting into my portfolio to buy a new, new position.

So it's possible that the stocks that I've bought in the last couple of years could grow to become major positions for me in time.

But remember, at the top of the show, I basically said that I have a very strong bias against selling against selling because I don't want to miss out, I don't want to sell a future mega winner early.

For that reason, my portfolio is a lot like a cruise ship at this point where I can kind of steer it.

But any steering that I do will take a long time for it to actually impact the position of my portfolio, I do have my eyes on some up and coming companies that I haven't bought yet.

But that could be there.

One that I'm particularly interested in, is a company called Clear Secure, the ticker symbol there is YOU, I think they trade on the NASDAQ.

For those that are unfamiliar, if you've ever been to an airport, when you're going through security check this company called Clear Secure, you basically go to them, and they will verify your identity the same way that a driver's licence or a passport does in the United States.

So they have these terminals that you go through and you can breeze through airport security at a much faster rate by signing up with this company.

One reason why I'm attracted to this business is I don't see the ability for many of these companies to exist, if for no other reason than think about airport security, like how much physical space is there at an airport security for these companies to take up space, there's not a lot.

So there could maybe be one or perhaps two players in this market.

And I don't even see a second player in this market over time.

Moreover, because they're getting into the identity market, they have plans to take this technology and use it in airports to use it in stadiums and security.

They have plans to use it in businesses they use in hotels, so any place that you go, we're having your identity of verified could be a potential market for this business.

So this is one that I have not purchased yet, but I am certainly watching with a close eye.

Peter Higgins 54:09

Thank you very much Brian, that sounds like a very, very interesting stock to actually research for our listeners, Brian, thank you.

Now I've got one final question for you, so I'm conscious of the time and you've covered this, but I want you to just give us an overview because it's in your book, and people need to go out and buy the book as well.

What are your main rules, Brian, for successful long-term investing?

Brian Feroldi 54:33

Oh, there's a lot of them.

Because again, the rules that I have in my book are mostly about reminders to myself to avoid mistakes that I have made in the past.

But a few of them that come to mind, as I said before, is first off, get started, the way that wealth has been built by many successful families by many successful people is by starting off with a small investment, carefully selecting what you put that money into, and then consistently adding to that investment and growing it over time.

So no matter your net worth, no matter your financial position, start investing, even if it's with a very tiny thing.

Rule number two would be educate yourself, educate yourself, it's never been easier or cheaper than it is today to educate yourself about investing what the stock market is.

And you can do so for free on basically any platform that you want.

You can get good investing information and education on YouTube, you can get an on TikTok, you can get it on podcasts, you can get it on blogs.

So whatever medium you are currently using to consume content, seek out on that medium high-quality information about investing. And then third, and finally, I would say the most important thing that you can do with investing is develop a long-term investing horizon a long-term mindset.

Anything can and will happen in the stock market in a short period of time.

Wealth is truly built when you buy and hold for long periods of time. So measure your results and measure your returns over the appropriate time period in the stock market that is measured in decades. It's not measured in days.

Peter Higgins 56:29

Fantastic. Love that response, Brian, thank you so much. That's my final question to you, other than asking you to tell our listeners where they can find you, Brian, YouTube, your website, blogs, etc, please?

Brian Feroldi 56:42

Yep, you can find me on most of the major platforms. I'm most active on X, aka Twitter, LinkedIn, I'm Brian Feroldi there and I post videos on YouTube as well and that is that is my name. Brian Feroldi, is the name of the channel.

Peter Higgins 56:59

Thank you so much, ladies and gents. That was Brian Feroldi, the financial educator, YouTuber and best-selling author of the book. Why does the stock market go up?

Brian, thank you so much for being with me on the Investing Matters Podcast and I look forward to speaking to you soon. Take care and God bless you Sir.

Brian Feroldi 57:15

Thank you very much for having me Peter it was great.

London South East 57:18

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