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1:32

right, folks, welcome to Investing for Beginners

1:34

podcast. Today we are going to do

1:36

one of our Back to the Basics

1:39

episodes. These are episodes that we're doing

1:41

every Thursday. So please come back every

1:43

Thursday to hear another episode of Back

1:45

to the Basics and learn a little

1:47

foundational stuff about investing. Today's

1:49

topic is going to be opportunity costs. We're

1:51

going to talk about how they can impact

1:53

your returns and maybe an

1:56

idea or two of how you could help

1:58

decide whether this opportunity is better than the

2:00

other. So I guess with that, Andrew, why

2:02

don't we dive right in and talk about

2:04

what is opportunity cost? When we weren't for

2:07

that, what are we referring to? Are

2:10

we gonna dive deep in the cost of equity and

2:12

just get all in the money? I

2:15

think if we want people to stay and listen to

2:17

us, probably not. Okay. Fair

2:19

enough. Well, that is something

2:21

to consider though. When you're

2:24

investing, not only do you have the risk

2:26

of potentially losing the money you invest, but

2:29

there's also the risk and

2:31

air quotes of the opportunity

2:33

costs that you are giving up. In

2:36

other words, what else could I have put

2:38

the money in that could

2:40

have made me a better return, maybe with even

2:42

less risk than whatever bad

2:44

investment I ended up making? So

2:47

an easy example, I think. And

2:50

sometimes people can take this too far to

2:52

the extreme, raising my hand because I do

2:54

it too, but you can always

2:56

compare to the S&P 500 and you say, man,

3:03

if I would have just bought index

3:06

fund shares of the S&P 500 instead

3:08

of bought this stock, I

3:10

might've had a much better return than

3:12

whatever I ended up doing. And

3:15

so that's an opportunity cost that's kind of always

3:17

there and something that's in the back

3:19

of my mind as a stock

3:21

picker and can sometimes

3:23

make things hard because it's

3:25

a bad feeling when you

3:27

look at your opportunity costs

3:29

and you did

3:32

not outperform those opportunity costs,

3:35

but the flip side is nobody

3:37

can outperform opportunity costs every single time.

3:40

So there's definitely a balance to it, but I

3:42

think it is something that's worth considering because

3:45

every investment has its trade-offs

3:47

and some are better

3:50

than others. Yeah,

3:53

that's so true. And I think

3:55

one of the things that I like to think

3:57

about when I'm thinking about opportunity costs is think

3:59

about, when you go out for coffee and you

4:01

go to Starbucks and you get your favorite coffee,

4:03

are you offsetting

4:06

that opportunity cost by

4:08

maybe potentially saving that money or

4:11

would it be

4:13

better served to save the money and maybe get

4:15

a glass of wine with dinner? That's

4:19

a simple way to think of

4:21

an opportunity cost, but it definitely

4:23

can impact the returns you

4:26

get in the stock market. I

4:29

think it's something that doesn't

4:32

get discussed enough. Maybe

4:35

we could touch on that a little bit. Why do you think it

4:37

doesn't get a lot of airtime,

4:39

if you will? I have no idea. If

4:44

I had to hazard a guess, I

4:46

think it's because the concept is hard

4:48

to think about and

4:50

sometimes it means that

4:53

you have to maybe take a step or two

4:55

beyond the not easy task, but

4:57

the task of

5:01

picking a company to invest in. And

5:04

then if you're waffling on whether you

5:07

want to sell it or not, you

5:09

have to take that extra step of

5:11

finding another opportunity to buy. And

5:15

sometimes you can get so focused on PayPal

5:17

that you want to sell it that you

5:19

don't think about what's the opportunity cost. What

5:22

am I giving up by holding this company

5:24

versus buying that company? If you

5:26

don't know the other company, then

5:28

it's really easy to just kind

5:30

of fixate on what you're currently

5:32

owning and not thinking about

5:34

this company as they're performing. I don't

5:37

think it's going to perform. My thesis

5:39

is busted, but

5:41

I don't want to give it up because the grass

5:43

is not always greener on the other side. And so

5:45

sometimes the ego can come into

5:47

play too. I think some of

5:49

those things can play a

5:51

part in why it doesn't get a

5:54

lot of love or a lot of airtime because

5:56

it's certainly not sexy, but it's

5:58

hard to judge. There's no particular metric that

6:00

you can look to and say, oh, you

6:02

look at the opportunity cost ratio versus CapEx.

6:05

Well, no, that doesn't really exist. So that

6:08

I think can make it harder

6:10

to, I guess, quantify as well.

6:12

I think for beginners too, that's

6:14

one of the misconceptions. When

6:17

I'm selling a stock or maybe Warren Buffett

6:20

at Berkshire Hathaway is selling the stock or

6:22

maybe you're selling the stock, Dave, it's

6:25

not always because we think

6:27

the business is bad or we

6:30

think that the investment won't make money

6:32

very well can be the case, but

6:34

not always. Sometimes it is an opportunity

6:37

cost kind of concept where

6:40

maybe I don't think that this company

6:42

can beat the market anymore, even though

6:45

it has over the last five to

6:47

10 years. And

6:49

to be able, especially if you're playing

6:51

the game that I'm trying to play,

6:53

which is I want to try

6:56

to buy something and hold it for as long as I can.

6:58

And ideally, that company is

7:00

just going to continue to compound and I'm not going to have

7:02

to do much and I can just reap

7:05

the rewards. But reality

7:07

is sometimes companies slow down

7:09

that compounding and sometimes

7:11

it slows down so much and

7:14

now you're losing to the opportunity costs.

7:17

You have a big pile of money that's not

7:19

going to beat the market because the

7:22

business might be compounding or it might

7:24

still be growing, but it's not at

7:26

a rate that's enough to get you

7:28

to where you want

7:30

to go if that's trying to beat the market, for

7:32

example. So I think it's something

7:34

when I first started, I kind of didn't

7:37

really think far enough to respect the

7:39

opportunity costs, but you do want to

7:41

consider that. And maybe it

7:44

makes you a little more cautious too when you

7:46

see a stock being sold

7:48

off a lot. Maybe

7:50

it's not that these people think the business

7:52

is bad, but because they see the opportunity

7:54

costs of maybe the next five,

7:56

10 years for this business really are going to be a

7:59

lot harder. than they were in the past for that

8:01

business. Could be a lot of

8:03

things. Yeah, exactly. One of the things that I

8:06

see a lot in the personal finance space, and

8:08

I think at least it makes it tangible to

8:10

me, is the example

8:12

of looking at if you put money

8:14

in a savings account at, let's say,

8:16

a brick and mortar bank, and

8:18

they're offering you a savings rate of 0.5%, which

8:23

is pitiful. And

8:25

then you look at another, maybe

8:27

an online bank, that is

8:29

offering 4%. Like

8:32

Ally Bank is right now, four, four and a half,

8:34

somewhere in that range. If you compare those two, like

8:36

if you graph out the returns that you would get,

8:38

put $100,000 in the brick and mortar bank, and

8:42

$100,000 in Ally Bank, and

8:44

you look over a 10-year period,

8:46

that's a very tangible discernment of

8:49

what the actual opportunity

8:52

cost is, because it's staring you right in the face.

8:54

The Wells Fargo bank savings account, you've

8:57

made $200, for example, I'm

9:00

not saying the numbers are right here. And then you look at

9:02

the Ally Bank account, 10 years down the road,

9:04

and you've made $2,000. That's

9:07

an opportunity cost that you've missed by

9:10

keeping that money in that bank versus the other one,

9:12

and it's a very tangible way to me

9:15

to look at that, and that's

9:17

why this can be such a powerful concept,

9:19

because we've talked in the past about the

9:22

power of compounding, and that's

9:24

really, that example with the bank

9:26

accounts really illustrates in a very

9:28

stark way, the differences of investing in

9:30

this versus this, and how much that can

9:33

really impact you down the road. You may

9:35

not see it next Tuesday, but

9:37

you'll certainly see it in 10 years if you

9:39

keep the money in the account, and that's why

9:41

these decisions can have such a big impact on

9:43

our returns, and the stock market is the same

9:45

way. Oh yeah, totally. So

9:48

what are some ways, obviously a

9:51

low-good question incoming, what

9:53

are some ways to

9:55

identify if a stock that you

9:57

hold, maybe we could start there.

10:00

a stock that you already have, you bought it, it

10:02

did pretty well for you. But

10:04

what are some ways you can start to identify

10:07

maybe continuing to hold this

10:09

stock for the next five years is

10:12

not gonna be good for me on an opportunity

10:14

cost basis. Well,

10:16

I think, loaded question, some

10:18

of the ways that I would try to look at it is

10:22

you have more of the qualitative idea

10:24

where has the thesis started

10:26

to change? Is there something changing

10:28

about the business, the industry they're

10:30

in, maybe the economy, it's

10:33

a cyclical business and that cycle is

10:35

turning. Those could be some more, I

10:37

guess, soft skill ways of looking at

10:39

it. Some more harder, back-based

10:42

ideas would be to see things like

10:44

if you start to see revenue growth

10:47

slip, or instead, maybe

10:49

it was growing at 10% a year for

10:52

the last eight to 10 years, and now

10:54

all of a sudden it started to slip to eight, and

10:57

then seven, and then six. And

10:59

it's not horrible growth, but it's not

11:01

what it was before. Or

11:04

maybe the margins are contracting

11:06

because there's a lot more

11:08

pressure from competitors. Maybe there's

11:10

pressure from inflation or the

11:12

product that they make the

11:15

main ingredient, let's say silicon, for

11:17

example, for a semiconductor. Maybe the

11:19

price of that is skyrocketed. And

11:21

so that's putting a lot of

11:23

pressure on the profitability of

11:26

the company. And so those things, and

11:28

I'm not talking like a one-time thing,

11:30

it's more of a gradual burn, if

11:32

you will. And so it's, a

11:35

lot of times it'll be things that you'll

11:37

start to see gradually over a period of

11:39

time. You don't go broke all of a

11:41

sudden. Suddenly, a little bit at a

11:43

time, and then suddenly. It can't happen like that, but I

11:45

think it's usually it's more of a gradual burn, and

11:48

it'll be something that you would see. At least

11:50

that's the way I've observed it

11:52

in some of the companies that I've owned is

11:55

you start to see that thesis slip, if

11:57

you will. And that can be

11:59

born out in some. of the numbers too. What

12:01

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I agree with all of that. I mean, kind of

14:28

go into the idea of if your costs go up

14:32

and some industries and some

14:34

businesses are able to pass those costs

14:36

on to their customers so they

14:38

don't lose profits like

14:41

other companies and other industries where maybe

14:43

they are not able to pass those

14:46

cost increases as price increases. And

14:49

so to your point, the margins

14:51

start contracting and now you have a

14:54

structurally less profitable company

14:56

or industry than you

14:59

had before. And

15:01

that can definitely slow down the

15:03

compounding of the growth of that

15:05

business. And if it just

15:07

gets worse and worse and worse than you

15:10

do get that kind of slow burn thing. Just

15:14

kind of throw in a couple more ideas out

15:16

there or at least one. If

15:18

you see a couple of

15:21

disruptors or maybe one disruptor who's taking

15:23

a ton of market share and

15:25

it looks like that's

15:27

not going to slow down anytime soon and

15:30

they're probably going to take a

15:32

big chunk from the incumbent. I

15:34

think that can be a pretty good sign. I know I've sold

15:36

a stock because of that

15:38

because I saw that starting to unravel. So

15:41

a lot of those questions kind of come down

15:43

to like, is the moat

15:45

weakening? Are the competitive advantages

15:47

for a company weakening? And

15:50

if they weaken to a certain extent, they might not

15:52

be able to keep up with the economy and

15:55

that can be a problem to hold

15:57

as an investment. Yeah, for

15:59

sure. Funny, I just, I literally read

16:01

this quote from Charlie Munger today that

16:04

was talking similar about that idea. And

16:06

what he was talking about was Walmart

16:09

and how Sam Walton, when they first

16:11

started, you know, today it's,

16:13

you know, one of the largest retailer, if not

16:16

the largest retailer in the world. And,

16:18

you know, has a dominant presence all

16:20

over the United States for sure. But

16:23

when they started, they didn't go after

16:26

the big competitors like Hamart or Sears

16:28

in particular. They didn't go after those

16:30

people. They went after the small mom and

16:32

pops in a little towns and

16:35

they basically build up their, not warehouse,

16:37

but they build up their base, I

16:39

guess. And then they started

16:41

kind of disrupting the Sears and

16:43

the Kmart's and those kinds of big

16:46

retailers at the time after

16:48

they had established a strong foothold

16:51

in more rural areas. And

16:54

you don't think of Walmart as a disruptor. You think

16:56

of it kind of a very solid,

16:59

not boring, but, you know, I guess, essential

17:02

business, if you will, from the COVID times.

17:04

You think of it as a large, massive

17:06

retailer that has always been around, but they

17:08

weren't. And that's

17:11

how they disrupted that industry.

17:14

And they're two big competitors and no longer,

17:16

Kmart and Sears, because to your point, both

17:19

of those companies were dominant businesses

17:21

in the United States and their

17:23

moats started to erode and

17:26

you could see that kind of

17:28

coming from what Walmart was doing,

17:30

you know, with their large warehouses

17:33

and lots and lots of

17:35

skews and low, low prices and

17:38

just an aggressiveness on that front

17:41

allowed them to really undercut

17:43

their competitors. And

17:46

Sears and Kmart couldn't keep up.

17:48

They got caught flat-footed and eventually

17:50

it destroyed their moats

17:53

and they ended up going out of business. And

17:55

I think it's an interesting study in how that

17:58

plays out. I know you've done a lot of work on that. on

18:00

KPIs for your own portfolio for the

18:02

value spotlight. Do you feel like that's

18:04

a way that you can kind of

18:06

measure moats

18:08

or competitive advantages for companies and

18:10

can give you an edge in

18:14

not only determining whether Visa is continuing

18:16

to have a moat or

18:18

whether there's an opportunity cost because

18:21

that's slipping? Yeah, that's the goal.

18:24

Yeah, right? It was hard. We've had

18:26

discussions, you and I, off the air

18:29

about which KPI works for

18:31

which business and that's not always

18:33

cut and dry. But

18:36

if you can have things like that, quick

18:38

things that you can check, it

18:41

frees up the time so you

18:43

can continue to find new ideas and

18:45

not have to be just constantly turning through

18:48

your portfolio worried that the shoe's about to

18:50

drop because things can change so fast. And

18:53

so having those KPIs, I think, general

18:55

things like you mentioned, revenue growth, watching

18:58

the trends in revenue growth, I like

19:00

to watch ROIC, Return on Invested Capital,

19:03

try to see if that starts to slip. And

19:06

then kind of like the big yellow

19:09

slash red flags, like all of

19:11

a sudden we have negative earnings or

19:13

all of a sudden debt has quadrupled,

19:15

things like that. Those can

19:17

be things to watch out for. And then to

19:20

your point about the KPIs, is

19:23

Visa continuing to have more

19:26

card holders this year than

19:28

they did last year? Is American Express have more

19:30

card holders this year than they did last year?

19:33

Is that growth slowing or is it kind of

19:35

steady eddy with what they've seen? Is

19:39

Costco continuing to have

19:41

high renewal rates or are those renewal rates

19:43

dipping and then is it going lower and

19:45

lower and lower? You won't

19:47

get a perfect KPI for every company,

19:50

but I think sometimes having one or two of

19:52

those that you can just check

19:55

the earnings release, run

19:57

it into a little spreadsheet or

19:59

a few. prefer notebook, wherever you're

20:02

recording things. And then within

20:04

a couple minutes, you can see if, all

20:07

right, things seem to be steady as she

20:09

goes, or maybe I need to spend some time into

20:11

this. So that's one of the ways I

20:13

try to save time and try to preemptive

20:16

strike on this idea of a

20:19

company losing this footing and

20:21

maybe becoming a drag on the portfolio

20:23

returns rather than a solid

20:25

contributor. What about you? Do you

20:27

have anything that you like to look for when

20:29

kind of monitoring that kind of stuff? I

20:32

think all those KPIs that you were talking about,

20:34

I think knowing your company

20:36

well enough to be able to identify a

20:39

few things that you want to kind of

20:41

keep track of. And as

20:43

Andrew said, it can be as low tech

20:45

as a piece of paper. It can be,

20:47

you know, maybe less low tech, but still

20:49

lower tech and, you know, having a spreadsheet

20:52

that you do it. You can also use

20:54

a company, an aggregator like a FinChat IO

20:56

to track a lot of these things as

20:58

well and they track KPIs for almost

21:01

every company that you can find.

21:04

And so that's an easy way to do it.

21:06

Another way that I kind of like to

21:08

do it too is subscribing

21:10

to the company's 8Ks and

21:13

having them send me messages. And

21:15

the reason why I like the

21:17

8Ks is because that's where they

21:19

announce anything that's pertinent to shareholders

21:22

for the company. And so if

21:24

the company is going to cut their

21:26

dividend, for example, it would be a

21:28

red flag. Or if the

21:30

CEO suddenly is weaving, that could be

21:33

a red flag. Those are things you'll

21:35

find out from the company

21:37

through an 8K because they'll announce those things. And

21:39

so that could be a great way to kind

21:41

of A, stay on top of what's going on

21:44

with your company. Sometimes they're going to send you

21:46

stuff that maybe not be necessarily

21:48

pertinent, but a lot of times it

21:50

would be a good early indicator for

21:52

you that something may be a miss

21:54

or something could be a ri.

21:57

Or it could be news that's positive

21:59

too. It cuts both ways,

22:01

but that's, to me,

22:03

I found a good way to kind of stay on top

22:05

of the companies. If you don't

22:07

have time to read every single

22:09

quarterly report or the 10K you

22:11

should read, but if

22:14

you want to shortcut those things, that's a

22:16

way that you could probably try to do

22:18

that is by having an 8K and that's

22:20

something that I've certainly done. I read all

22:22

the reports too. I'm just a nerd that

22:24

way, but I think that

22:26

that to me is an easy way to

22:28

kind of stay on top of a company

22:30

because sometimes there are companies that just don't

22:33

move much. There isn't a lot

22:35

of change. It's, to your point, it's

22:37

steady Eddie. It just keeps doing what it

22:39

does. And there's not a lot

22:42

of activity or whatnot. And so an 8K could be

22:44

a great sign for, hey, the CEO has been there

22:46

for the last 25 years and

22:48

now he's retiring. It may or may not

22:50

be a bad thing, but it's certainly something you'd want to

22:52

know. Perfect example

22:54

is I'm going to blank on his name, but

22:56

the CEO for Watsco, he

22:59

founded the company, he's been there for 50 plus years.

23:02

His son is being groomed to take

23:04

over, but once Albert, right? Alfred, one of

23:06

those two, but when he leaves,

23:09

that's going to be big news. Doesn't mean the

23:11

company's going bad, but it certainly could be something

23:13

for you to pay attention, start paying a little

23:15

closer attention to. Yeah. So

23:17

how about like the dangers of

23:19

taking the whole opportunity costs to

23:21

an extreme? Sometimes the grass is

23:24

greener, but a lot of times

23:26

the grass is not greener. And

23:28

you can take this

23:30

opportunity costs idea way

23:32

too far and start the

23:34

kind of picture I like to think of

23:36

as being at the grocery store and

23:38

you're like changing lanes and

23:40

each time you change lane, that gets longer and longer. So

23:43

how can investors minimize

23:46

ways to get

23:48

caught in that trap of constantly

23:51

jumping in and out and

23:53

worrying too much about opportunity costs? What's

23:56

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dreams. I

25:54

think the two easiest ways that I can

25:56

think of, number one is to notate. somewhere

26:00

why you bought the company. Whether

26:03

it's a spreadsheet or whether

26:05

it's a Word document or whether it's

26:07

writing something down, sending

26:10

yourself an email, something along the lines that

26:12

you can track, why did I buy this

26:14

company? And so when you

26:16

start to think about, hey, is this

26:18

slipping? Do I need to start looking

26:21

around for another opportunity? It's

26:23

an easy way to remind ourselves, this

26:26

is why I bought Costco. Because we

26:28

think we have perfect memories and

26:30

we think we remember all those things, but we

26:32

really don't. And if

26:35

you ever doubt that, write something down

26:37

and come back to it just even a year later.

26:40

And think of this story that you write out

26:42

and then think about what the story is and

26:44

then go back and reread what you actually wrote

26:46

down. A lot of times it's gonna be a lot

26:48

more different than you think it is. Just

26:50

because we have memory creep or

26:53

memory slippage. And so I think

26:56

notating somewhere why you bought a company I

27:01

think it really help ground us

27:03

in when we're starting to think

27:05

that maybe we need to move on. And

27:09

I think a lot of times too, the other way to think

27:11

about it too is activity for

27:13

activity's sake is not necessarily gonna put

27:15

you in a better place. And

27:18

I think a lot of times people in the

27:20

market think that they have to trade a lot

27:22

or they have to move from this company to

27:25

that company because they see this one's growing faster

27:27

than this one. But just because

27:29

it's growing faster now doesn't

27:31

mean it will grow faster over the next 10

27:33

years. It could be

27:35

super cyclical. And so this

27:37

is something that's very hot or popular

27:40

now and then doesn't happen.

27:42

And all you have to do is look

27:44

back at the pandemic. You look at a

27:46

company like Zoom who obviously benefited hugely from

27:49

us all being locked down and

27:52

businesses still needed to go. So it was an

27:54

obvious opportunity for them but they haven't been able

27:57

to capitalize it. It doesn't mean it's a bad

27:59

investment now. But if you look at

28:01

the company then you think everything else

28:03

is going to be trash that Google and you

28:05

know Microsoft for example are you know, why would

28:08

I invest in those when I can invest in

28:10

zoom and So

28:12

I think I think you have to keep

28:14

those things in mind to you at least that's how I would try to look

28:16

at it What about you? Yeah,

28:19

I would also try to keep in mind that not

28:22

only cyclical forces, but just the nature

28:24

of business and

28:28

the dynamics between businesses and Even

28:31

just the story of our lives like not

28:33

everything is up and to the right We

28:36

like to talk baseball, right? But how many

28:38

times you see the best hitters have enough

28:40

here, you know, does that mean they should

28:42

have traded my trout or something? so

28:45

in the similar vein,

28:47

you know if Costco grows EPS at 15%

28:50

a year and and For

28:52

three four years. It's only growing at 7% a year.

28:54

Is that? Terrible

28:57

well if the

28:59

moat is weakening Yeah, maybe but

29:01

if it's just kind of one of these natural

29:04

advent flows, that's also something to keep

29:06

in mind Going back

29:08

to the pandemic examples. You had a lot of

29:11

Stocks that got crushed anything

29:13

in travel anything. I mean, I guess

29:15

you can argue Hotels

29:18

might still be under some of that pressure

29:20

The airlines are still under some of that

29:23

pressure but a lot of that stuffs

29:25

also come back a lot of stuff that was shut down

29:27

has come back. I know the Airbnb

29:29

and what's the other one? Not Expedia.

29:31

I'm blanking on the booking booking holdings

29:34

Yep, all those came roaring back and they

29:36

had their kind of If

29:39

you ask the founder of Airbnb, they had

29:41

their dark moment, right? so every

29:43

great business is gonna have moments where they're

29:46

off and We

29:48

have to keep that in mind and make sure we're not Jumping

29:52

in and out too much and jumping off

29:54

what we think is a permanently falling chip

29:57

and it's not an easy thing It

29:59

really is isn't. But I wonder if it

30:01

takes a little bit maybe of imagination and

30:04

then a little bit of just

30:07

a gut check. I like that idea of

30:09

checking why did I buy this. If

30:12

that's still intact, but growth has slowed from 15

30:14

to 7. 7

30:17

is pretty good and it can get back

30:19

up to 10, especially if there's something in

30:22

the industry that's making things off.

30:25

Companies can make mistakes and

30:27

then fix them and learn

30:30

from it. Those things

30:32

can all happen. I don't have

30:34

an all-encompassing answer, but I will say one

30:36

thing I do try to do, this is

30:39

very much a framework and not a hard

30:41

and fast rule, but I like

30:43

to look at my portfolio turnover in any

30:47

given year. Ideally, I

30:49

would like to have 10

30:53

to 20 percent portfolio turnover,

30:56

which equates to a 5 to

30:58

10 year holding period. So

31:00

I look at my portfolio and if

31:02

I've sold out of 5% of my

31:04

whole portfolio in a year or

31:06

10%, or now maybe

31:09

if I'm closer to 20%, then

31:11

I start to think, okay, the higher that number gets

31:14

towards that upper range, maybe

31:16

the more I'm getting in this

31:19

opportunity cost mindset and maybe

31:21

the more I need to take

31:24

a breath, relax, and maybe just

31:26

be happy with what I have. Now,

31:29

if you have crazy markets

31:31

or things that are extraordinary and Microsoft's

31:33

on sale for a 10 PE or

31:36

something, sure, we make exceptions to the

31:38

rule. But in any given year, to

31:42

me personally, having that framework where I can

31:44

gauge how much activity

31:46

I've done and then try to gauge

31:49

my own personal emotions in that way, take

31:51

my own temperature, that's one way I try

31:53

to combat it. Do

31:56

you have any other ways? The idea of the write

31:58

stuff down is really, really good. Is there anything else

32:00

that pops to your head? That's a good question. I

32:02

think the last thing that maybe I think a little

32:04

bit about and try to, again,

32:07

this is more of a check

32:09

idea. I kind of like that idea

32:12

is thinking about how some of

32:15

my mentors behave

32:18

and trying to model some of that

32:20

behavior based on their behaviors

32:23

or activities. I

32:26

always go back to Uncle Warren and

32:28

he does have turnover

32:31

in his portfolio, but

32:33

he also has a very, I wouldn't say

32:35

large, but he has a pretty

32:38

good selection of companies that don't

32:40

move at all. He may

32:42

sell off little bits and pieces of them,

32:44

but by and large, his

32:47

biggest positions don't change much. It's

32:50

more of the smaller ones that seem to

32:52

have a lot more turnover,

32:54

if you will. I

32:56

think to me, when I think about that,

32:58

that kind of comes back to this whole

33:00

idea of understanding what it is

33:03

I bought, what the mode is, what the

33:05

KPIs are, and kind of encompassing all the

33:07

things we talked about into looking

33:09

at those biggest positions because those

33:11

are the ones that are really

33:13

driving the returns for the

33:16

portfolio. A company that I own 0.5% of, yes, I want

33:18

to hold it. Ideally,

33:23

it'd be great to hold it for a long time, but

33:25

if it's not a big part of conviction

33:27

of the company, then that

33:30

to me is not as important if I'm

33:32

turning that over, whereas if I'm turning over

33:34

Berkshire Hathaway, which is 11%, 12% of my

33:36

portfolio, that is a bigger consequence

33:40

and that has a bigger impact on my return.

33:43

I think I need to think a lot more

33:45

deeply about that decision before I pull the trigger

33:47

on that. I'm

33:50

not saying that Warren has ever come out and

33:52

said that specifically, but that's what I'm inferring on

33:54

how he behaves with his portfolio. That's

33:57

one of the ways that I try to, I

33:59

guess, change the portfolio. check myself with the whole

34:01

opportunity cost idea, because it can be really easy

34:04

to get attracted to the

34:06

next shiny object. I mean, we're all human.

34:08

And so it's real easy to look at

34:10

a company like Nvidia that we've talked about

34:13

a fair amount that neither one of

34:15

us own. And it's really easy to get the foam off.

34:17

It can hit you pretty hard, especially when you go on

34:19

social media and see all these people doing victory laps about,

34:22

because they own the company and you're like,

34:24

but I try to check myself with that

34:26

by kind of thinking about what is, how

34:29

does Warren behave with this in this situation?

34:32

And he's not going out and buying it. And

34:34

so if he's not, then that means that, the

34:37

opportunity cost of holding onto Berkshire Hathaway, I'm gonna

34:39

do better for me in the long

34:41

run, just by holding onto that, than trying to

34:43

just chase the latest shiny object. Yeah, I think

34:45

that's a wonderful way to look at it. You

34:48

talk about like, people don't really talk

34:50

about opportunity cost and people

34:52

don't even more talk about position

34:55

sizing. Like, oh, I bought this and

34:57

I sold this. All

34:59

right, a bunch of people are gonna have an

35:01

opinion on, you buying

35:04

that and you selling that. But then there's no discussion

35:06

on, oh, I sold this at 0.5% of my portfolio,

35:11

or, oh, I sold this at 10% of

35:13

my portfolio. To your point on

35:15

Buffett, if he makes a 10% position

35:18

size move, or

35:20

20%, that's a big deal. But

35:23

if he sells those small little pieces of

35:25

his portfolio, he

35:27

doesn't tell me much about his conviction on the

35:29

company. And it would be nice

35:31

to see discussions on

35:33

the internet, including

35:35

portfolios, decisions

35:37

in there. But of course, we're talking about

35:40

the internet, so shouldn't be surprised. Yeah,

35:43

then Twit is not ripe with

35:45

those kinds of conversations, more about

35:48

whether this company is better than that company. And

35:50

it kind of comes down to that argument of,

35:53

who's better, Kobe or LeBron, right? It's like,

35:55

who's the better Laker, Kobe or LeBron? And

35:58

it's obviously Kobe, but. But

36:00

it also kind of illustrates that a lot

36:03

of that is just based on opinion. And

36:06

when you're just talking about

36:08

it in abstracts, you can't

36:11

really quantify the impact

36:13

it has on a particular person's portfolio, to

36:15

your point. If you're arguing about

36:17

two companies and one person sold it at 10%

36:20

of their portfolio and another one bought it at

36:22

0.5, then obviously the conviction

36:24

is vastly different in those

36:26

two exchanges. But just the

36:28

overall, hey, I sold this and hey,

36:31

I bought this, you're an idiot for

36:33

selling it, you're an idiot for buying

36:35

it kind of thing. It doesn't really

36:37

take into the equation how much

36:40

conviction or how much of the portfolio did

36:42

it have and what did they do with

36:44

that 10% that they sold? And they sold

36:46

it and they went out and bought something

36:49

that arguably could be better. Okay, but if

36:51

they didn't and they're just

36:53

sitting on cash, then it just leads to all

36:55

kinds of questions. And every time

36:57

you make a decision like that, it

36:59

has an opportunity cost and you have

37:01

to weigh that as part of the

37:03

decision, which is what Warren does with

37:06

his portfolio. He's sitting on close to

37:08

200 billion in cash. He can buy

37:10

outright a lot of companies in the

37:12

S&P 500. I think I saw

37:14

some crazy stat like, I know

37:16

maybe it's like the bottom third or so of

37:18

the S&P 500. He could literally buy

37:20

today and still have cash leftover kind of

37:22

thing, which is kind of nuts to think

37:25

about. But people ask him that all the

37:27

time. And right now he's saying, to me,

37:30

the opportunity cost of not deploying that cash I'm

37:32

okay with because I can get 5% on bonds

37:34

right now. And so for him, he feels like

37:36

that's a pretty

37:39

good return based on what

37:41

he thinks the risk tolerance or the riskiness

37:44

of investing in the market right now. That's

37:46

kind of how he balances that opportunity cost

37:48

is looking at the cost of what do

37:50

I have now versus what could I get?

37:53

And I'd rather sit on what I have

37:55

now. That's very nuanced, but I think a

37:57

big part if you can get to that.

38:00

level as an investor where you can

38:02

get comfortable with those decisions. There

38:04

are decisions we're all making. It's just

38:07

very implicit and we're not always explicit

38:09

about it. So you mentioned the treasury is

38:11

at 5%. I

38:13

look at a stock like

38:15

Nvidia and yeah, just like everybody

38:17

else, I get a little feeling

38:20

sorry for myself every once in a while like,

38:22

oh man, I missed all that hype. But

38:24

then you counteract that

38:26

with, okay, well, I just bought a stock

38:28

that I think is going to hit

38:31

my 11% annual

38:33

return that I'm looking for. And

38:36

it has a much higher probability of

38:38

that than A, B or

38:40

C stock that everybody says is going to go

38:42

to the moon, but has a pretty good possibility

38:45

that it's going to crash down to the earth. So

38:48

you take that goal

38:51

of what you're trying to achieve if you know

38:53

it's much more achievable than shooting

38:55

for something that's basically a

38:57

lottery ticket. And that

38:59

can help you with the emotions

39:02

of opportunity cost is if

39:04

you know, going all the way back to the

39:06

first episode of the series

39:08

or back to the basics, redo here,

39:10

if you know why you're doing

39:12

what you're doing, what you're trying to achieve, and

39:16

that can help you decide on I'm okay

39:18

with taking these opportunity costs because I'm still going to

39:21

get to where I'm trying to go. And

39:23

I still have a really good chance of getting there. And

39:26

those are good trade offs to take if your

39:28

goals are aligned with that. But you

39:30

have to decide for yourself if that's really what you want

39:32

or if you do want to kind of hitch

39:35

a rocket to the moon and see where that ride

39:37

takes you. If you want to, you know, by all

39:39

means go for it. But there are lots of different

39:41

ways to think about it. And I think that's one

39:43

good way too. Yep, I

39:45

agree. All right. Well, with that,

39:48

folks, we will go ahead and wrap up

39:50

our conversation on opportunity costs. I

39:52

wanted to thank you guys for joining us for

39:54

another Back to the Basics episodes. Again, these are

39:57

something we're going to do every Thursday for

39:59

a little bit. And we have

40:01

one coming for you next week. So please

40:03

come back and tune into a back to

40:05

the basics and learn some more foundational investing

40:08

strategies. So with that, we'll go ahead and sign

40:10

us off. You guys go out there and invest with the margin of

40:12

safety. Emsys on safety. Have a great

40:14

week and we'll talk to you all next week. We

40:16

hope you enjoyed this content. Seven

40:19

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40:21

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40:28

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40:38

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40:42

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40:44

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40:46

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40:48

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40:50

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40:53

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