How to Research Stocks with Patrick Kenneally

(upbeat music) - Hey everybody, welcome to Listen Money Matters. I'm not a profit, but I'm here to profit. My name is Matt, and I'm here, as always, with Andrew, and Drew, how are you? - I am very well. - How are you? - Very well. You have a different, now that I've ordered it, now that I called you out, that you were always awesome. Now you have a different comeback every time. - Well, all right, after well, and good, I'm gonna have to start looking at the sorrows or something. - Yeah, like peachy, I'm peachy. - Mmm, damn, now I can't use that one. Thanks, I just just rattle off everyone I can think of right now, just to jam you up. What are you drinking? - I am drinking Shiner White Wing. - Shiner? - It is a Belgian white, yes. - Texas beer. - Belgian style wheat, ale brood, with coriander, and orange peel, and it was very tasty. - I'm actually drinking a French wine, called Aboujale, that's one of my favorites. Louis Jadot, I believe, is the name of the winery, and it's very good. And that's all I am drinking, and I'm almost done it, so I may have to run upstairs and get some more, but guys, before we get started today, if you have a question about personal finance, shoot us an email with your question to listen money [email protected]. Also, we want your submissions for catchphrases at the beginning of the show, and you can send them via Twitter at Money Mattersman. That's our Twitter account. And today's catchphrase is I'm not a prophet, but I'm here to profit, which is a song by the band Fun, and it was brought to us by our guest today, Patrick Cannelli, he's a listener, and we're gonna talk about how to research investments. So excited, you don't think, is that false excitement? My hands are literally raised to the ceiling right now. You can't see me, but I promise you they are. Patrick, how are you, sir? - I'm fantastic, how are you guys doing? - Very good, very good. Glad to have you on, man. - Oh, thanks for having me on. - You keep up with us on Facebook, you keep up with us through email, and you actually know a thing or two about personal finance. - Yeah, I'm a regular listen money matter stalker. - Wow. Hey, we love stalkers, we love stalkers, and especially someone who knows what the hell they're talking about. - Well, I wouldn't go that far. - Well, more than me, you could say. So, all right, it's all of our listeners by now. (laughing) - Okay, rag on me. - I can't, I can't, not shots, man, I just can't help myself. - No, feel free. So, all right, you had mentioned in an email that you had some things to talk about, you work for a company, I think, that you've been doing this for a while. - Oh, yeah, yeah, I guess my first experience with it, when I was in grad school back in like 2009, some kid got up at one of the classes, and he pitched this group called the 360 Huntington Fund, that was a student-run mutual fund that Northeastern University had. And when I first heard that, I'm a bit familiar with those ideas, like they'll allow you to have full money and trade it against the real market. You get to see how you're doing, but I heard it, and I was like, "Oh, yeah, that's just stupid." So, I'm talking to the kid afterward, and he's like, "No, no, no, no, we trade "a portion of the school's endowment." So, we had in our conference, anywhere from like three to 500 grand that we were actively trading in the stock market. - Wait, they were trading the school's money? - Oh, yeah, like people would donate money to the school, and we were allowed to trade a portion of that. - That was so cool. - Yeah, what school was this? - Northeastern University in Boston. - And all right, so is that a private or public school? - It's a private school. - Okay. Interesting. - Yeah, so it makes it a little bit more legal. - And so, who came out with the 360 Huntington Fund? - Well, Northeastern University is located on Huntington Ave. - Okay. - And the address is 360 for the main building. - So, that's where they came out with it. - Yeah, rings in with that, and then you know, 360, the whole idea of like turning in a complete circle. So, it's catchy. - And you went to school for finance? - Yeah, yeah, so I was going back to school for my MBA at the time, and yeah, I thought it was a great idea I wound up getting in with that group. And the really cool thing was, as I'm going to those meetings, you know, night after night, I was able to attack on credit for my degree. So, I didn't have to take other classes. - That's cool. - You know, that's getting like, yeah, yeah, it's real life experience. - Extra curricular activities that apply to credits. - Absolutely. So, would you learn? - Yeah, so we did a number of things for evaluation. And I won't bore your listeners with like the nitty gritty. Like if they want to, they can look up things like a free cash flow, and you know, how to do, like a Dupont calculation. But one of the big items for stock evaluation is really just kind of understanding the company. And you want to act like you're investing in a company or buying an actual company. Because when it comes right down to it, you are buying a piece of a company. And there are a number of easy ways that just, you know, average Joe can do that. So, one of the sites that I always direct people to, like before they buy any stock is to, if you Google like SEC and in Edgar, then that's where all of the 10Ks and 10Qs are loaded. So, any company that's on the stock market, in order to be public, they have to file paperwork every quarter, which is a 10Q or a 10K at the end of a year. So, you can, you have the right to look at a company's income statement, their balance sheet, their cash flow statement. And if you know what you're looking at, that can help you make an educated decision on whether or not you're going to purchase that company. And this is a site run by the SEC. Yeah, yeah, so the security is an exchange commission. At the end of every year, every public company needs to have their financial statements audited by an external third party auditing firm. And then those financial statements are sent to the SEC. They're loaded up in the public records so that any citizen can pull them from a website before they decide to invest into the company. It's just a part of due diligence. So, I know we have some financial nerds who listen, like you and some other people wrote in. And a lot of people are pretty passive. What kind of stuff specifically should they look for in this document? Or like, why would they even care to open this document? - All right, well, to my point earlier, like you're really, if you were gonna buy a company, then you would never just say, oh, hey, I'll give you like $1,000 of this company. You would want to know, well, what is the company bring in for money? What's your revenue? What are your average expenses every year? You know, how much money do you have in your bank account today? How much debt do you have today? So, you need to know all of those things in order to value a company. And it's your right to look at any public company and pull that information down. Like if you just, like, Andrew, I know you're a big guy with Tesla, like you wouldn't just invest in Tesla because you think things are going to turn out fantastic in the future. And just this kind of, this pie in the sky idea, my help. Maybe Tesla took out like $10 million in loans and they're not generating enough revenue in order to meet the payments on those loans. So all of that information would be available in their 10K at the end of the year. They would have to detail it out. - So let me ask you, Patrick, because say Tesla made a profit of $5 million, which they didn't, but you know, you have the $5 million from Tesla and then McDonald's also made $5 million, you know, profit. These $5 million are not made equal. So how do you put something like profit and perspective for a specific company? - Well, first you need to know the industry that you're looking at. I mean, obviously Tesla here, you're looking at clean tech or automotive, or as McDonald's is more like retail food industry. So you're gonna have different values for it. As you mentioned, they're revenue, their costs in any given month will be different. They could have different inventories, I'd assume. You're not buying the same thing if you work at McDonald's versus Tesla. You know, you've got parts for cars versus hamburger buns. And it's just a good idea to look at those numbers and do some quick ratios. Like the SEC site, that's a way to pull up. the actual 10K that gets filed. But if you were to go to Google and type in investing in business week, that will bring up a website that it has all of the 10Ks available and it gives you the financial statements as well as some ratio calculations for you. So this is a site that I always go to before I purchase any share of stock. So I've definitely been on this site before and then I personally love PE because it's easy. But what other core ratios might you look at? Yeah. And how can you tell if the ratio is good or bad? A PE, for example, of 13, like could be meaningless without some kind of context. Yeah. Yeah. Right, right. Yeah. So one of the one of the neat things about the the investing business week site is it gives you other companies down towards the bottom of it. So it tells you other competitors that you would want to look at while looking at Tesla or at McDonald's and it will give you say a PE calculation and it will tell you what the industry average is for that. So it makes it a little easier for you to kind of base that decision on are these guys? Are they doing good or are they doing bad? Like a quick calc that I always do is just to calculate working capital of any company which is very basic. It's just taking the current assets on the balance sheet and subtracting the current liabilities. And that's just letting you know like your assets are their goods that you have on hand whether it's like cash or investments and current being it's it will be transferred over into cash or it could be within 12 months. So you take those current assets and you subtract the current liabilities which are debts that are due over the next 12 months. And that will give you either a positive or a negative number. So if it's positive then you can feel pretty comfortable that the company can at least meet the short-term debts that it has coming up in the future. I have to ask an idiot question. Oh go right ahead. If you don't mind. So I'm looking at I just went on to the investing businessweek.com website you sent us and we'll put these in the show notes of course. And I because we're talking about Tesla and I'm somewhat familiar with it. I'm looking at the snapshot the overall view and I'm looking at is it is it the number that I want to look at is p/e tm it says. Yeah let me hop into that site. It has a blank line. Does that mean I can only view it while the market is open? It hasn't been around long enough for there to be a PE ratio yet. So with PE it is specifically price earnings. So it takes the price of Tesla and it divides it by the earnings. So if your earnings are negative or zero then it shows nothing. It shows nothing. Okay so I'm just I'm looking at this snapshot for Tesla. I want to know as a moron investor what numbers I should be looking at to indicate I mean obviously I see the scale goes up I mean that you can see the graph and it goes up then it goes down then it goes up then it goes down but what what number should I be focusing on here. So I would let's do a quick I'll do a quick easy calculation based on the data. Yeah because I'm you know what you sent me that I went to the SEC website and I just I'd right right it'll blow your head up. Yeah it's placed over and I'm like well it's government run. That's true. So the one of the things that I always like to do I'll take the I'll take them like number of shares the outstanding shares so you can see for Tesla. Yeah you've got like 124 million. Yes. So take that number and multiply it by the say that the price right now the current share price of Tesla. So it's the times that by that? Yeah multiply by that. So that would give you like a rough number of if I were going to purchase the company I would this is what I would have to pay in order to buy the whole thing because the shares outstanding aren't the total number of shares in the market. Oh it's 124 million shares. Yes. Oh well I did the calculation. I was like only $23,000 for Tesla. See this is how like stupid I am. So let's see. I'm looking at 124 million shares and I times that by the price which has the last price was $190. I'm rounding by the way. Times 190 equals holy crap. I have billions here. Oh yeah. Okay. I have $23 billion. Yeah so if so this will give you a rough number. Ideally you would then take that number and you'd add on any debt that the company has any liabilities where you can't find that here you have to find that. You can if you you'll see a financials number. Uh-huh. Financials tab. Right. So you tap click on the financials tab. Got it. And then it will give you a bunch of financial statements. Sure. And you'll see income statement balance sheet cash flow. Yep. So you'll get the debt in the balance sheet. So if you click on the balance sheet another it will reload and then you'll see a little further down like yeah total liability. So your total liabilities those are that's debt that you owe other people. So you take that billion dollar number that you have uh-huh. Add in these liabilities since you would also need to pay this if you bought Tesla. Oh I see. And then you subtract any cash that Tesla currently has on hand. Since if you bought Tesla you would also own that cash. Now what I'm looking at I'm seeing uh for December 2010 it's 179.0 is that in the millions in the thousands. 179 yeah I should say that's in millions. Oh. Okay so that number drastically changes then. Right. And that's the true worth of the company. Yeah that's the if you were to buy this company outright you would expect to pay that much. And then if you think here's the clincher right you take that number so the market times the shares add on the debt subtract the cash take that total number that you come up with and divide that by the the stockholders equity or in um in this balance sheet you'll see a number for a total total equity. So the equity is really like who owns the company and how much how much the company is deemed to be to be worth on paper like a book value. Got it. So this will give you it should be a number around like a single digit number ideally right. So if that number is less than one then that means that the company is selling below the book value. So if that company is selling below its book value then it's definitely undervalued right but if you get a higher number then that means the price in the market is worth more than the book value. So what's the better number like should I be looking at numbers that are over one or above one or under one or above one. So if you're looking for an obvious deal. Yeah. Then you'd want something below one. Oh okay. Like a lot of value investors they won't even look at companies that have a number higher than two because that means that remember that first calculation was the we used the market price and we multiplied it by the outstanding shares. So if it's over two then that means the top number is really big. So it's assuming that the market price of that stock is pretty high or higher than the financial statements would justify. So that would mean that the stock could potentially go up because there's room for improvement. If it's below one. Yes. Oh yeah. If it's below one it means it most likely will go up because any company at the very least needs to be worth what their financial statements say. Like any stock it trades on two fundamental principles that just the company's financial value like what is it worth you know you take the assets and the liabilities and you figure out the like how much cash it has on hand. So just a mathematical calculation and then the emotion of it. Andrew gave a great example of this a couple episodes ago where there's some sort of fires for Tesla and the price just plunged. If you think about it the financial statements of Tesla they created a certain value the day before those fires. and you can almost bet that they didn't change very much the day after the fires. So what would have driven that price down? And it's just the emotion that runs in the market. So I want to go a little further on that, because we're talking about balance sheets. Yahoo owns a significant portion of this company, Ali Baba, which is like the Amazon of China. And as it turns out, if you subtract Yahoo's holdings of Ali Baba, which is a significant portion of like the value of Yahoo, it actually turns out the Yahoo's, the valuation of Yahoo's business is negative. And Yahoo as a company does make money. So how might you explain that? Well, I'm not too familiar with Ali Baba. Is that for, um, so you're saying Yahoo's? They basically they bought this company way back when they first started and they're turning out to be like, they're IPO-ing, it's going to be like 160 billion Amazon competitor, but they're based in China. Right. Okay. So you're saying that the value of Ali Baba is negative, not the value of Yahoo. Ah, so okay. So sorry, I was maybe like a confusing example, but I guess like Yahoo owns a stake in Ali Baba, and Yahoo is worth X. But when you remove the stake in Ali Baba from Yahoo, like these, these, um, their profits law, I'm sorry, their assets, their liabilities, uh, the valuation of it is, is like below one, right? So it's below book value. Yeah, so the company itself, yeah, the company itself is below book value, but because Yahoo's in it, it's inflating it. Okay. Is that what you're saying? Yeah. Like they basically people are valuing Yahoo's business as less than zero. Mm hmm. All right. So that, uh, if, if the book value, well, if you're removing that number from like the outstanding shares, so you're dropping the numerator, which would bring it closer to the, the book value, I think that's what you're saying. Then if it means that Yahoo is a number less than one, then Yahoo, Yahoo's stock price has room to increase that's what that would mean. Mm hmm. Yeah, it would, it doesn't mean that it will, like that's the weird thing. Like when I was in the 360 hunting to find, there were a lot of kids that were a hell of a lot more intelligent than I am, and they would do calculations based on financial statements based on like just high level numbers, discounted cash flow, and they'd get a number that meant the stock price would increase and help three months later, six months later, it didn't. So it doesn't always do that. Like that's why investing in a single stock is risky, but it's even more risky to just say, oh, hey, well, I like this company, so I'm, I'm going to invest in them because I like them, like you deserve it, like to yourself just to do some sort of due diligence. And like Andrew always says, you should only invest in companies that you understand, like you should be able to just shoot the shit with someone like, hey, here's why I'm investing in this company. You know, they create this. I like this idea. They're long term strategy for, you know, whether it be electric cars or the way they make hamburgers is really going to help. Like you should be able to have that conversation with someone. So like Andrew does with Tesla, but not like he does with Alibaba. Right. Like I, Andrew, you don't know anything about Alibaba as a company. It's in China, right? Yeah. I know very little about them. Yeah. So this, this, these calculations that we just walked through that you, is this something that like is there a calculator online that already like determines this number or is this something you're going to have to do every time? It's, well, it's something that I would, I would try to do every time. So it doesn't already exist as a number that's printed on a snapshot. So the site that we were looking at the investing.businessweek.com. Yes. So if you, uh, if you're still in that financials tab, you'll see our ratios. Yes. Tab underneath that. So this will give you a lot of, a lot of those different numbers. I it'll tell you return on assets and you'll see, you'll see one like little hashtag in there in each section. And then you'll see another for like the industry average. And this kind of tells you where the company is in relation to its competitors. Yeah. It's like super small. Yeah. Yeah. So it, so by this, it means that the company is, it's keeping up with its competitors. Oh, so if it's, so if the, uh, if the company you're looking up as close to the industry average, that's a good thing. Oh, yeah. Cool. Yeah. You're, I mean, I admit that I am completely clueless about this stuff. So I'm just trying to understand the num, like the numbers that I'm looking at because this is like already overwhelming for me. And, uh, I would, like, I wish there was a big fat number, big fat green number that said invest in this stock or big red number that said don't invest in this stock. Right. You know, after, of course, you ask yourself, is this a company I really want to invest in? So for instance, if it's, uh, like a company like Apple, who I love, I use all their products. I'm very familiar with their company. I read all the news that comes out of that company. But if I went on to look at them up on this website, if I typed in their stock ticker number or their stock ticker, you know, whatever they call it, the short code symbol, you know, I'm going to look at the spreadsheet and not know what the, you know, what the fuck I'm looking at. And that's, uh, so all of these ratios, these are just, you know, their quantitative numbers. Uh-huh. Like there's, there's a tab for, uh, for news up here and it, like, and, uh, there's there's people. So it talks about like who's, who's in the company. Like I really love the news section because that that'll help you drive kind of the emotional aspect of it. So when you buy stocks, individual stocks are talking about here, which, you know, we, we know it's risky. Yeah. Right. So first you have to ask yourself, and I'm, and I'm going to, like, I'm, I'm walking myself through this because this is how I would approach it. So let's say I want to buy a stock in something. I just don't know yet. And so I have to sit down and ask myself, okay, what do I use every single day or what am I very, very familiar with with company? Do I, do I follow immensely that are publicly traded? And I guess in this example, I will use Apple. So I decide, okay, I would like to invest in Apple stock. So I go on to, now this, I, these like snapshots and stuff, I've seen these on multiple websites. And then I've been on share builder. I've been on E trade. It's, I guess they're all kind of the same, right? Yeah. All right. So I, so I go and look at it. Now, uh, let's say I don't really have that much money. Let's say I have like a thousand dollars to invest. Besides the, uh, the calculations that, and we're going to put these calculations in this, in this equation in the show notes, because I need to know what this is. And you should probably have it like on your desk, if you're interested in this sort of stuff, this, this calculation, right? Is that, would that be a good idea? Uh, yeah. I run through a couple calculations that you're comfortable with, whether they be the, so the one that we just talked about, that was the, uh, the price to book ratio. And, you know, using the market cap and dividing it by the, by the book value. Yeah. And so whether it's that, uh, whether it, it's like a simple working capital calculation, you should do something that you're, that you're comfortable with and you understand what it means. I say, so, so I do these calculations and then I buy it. Yeah. Well, if, and if it's, uh, well, if the calculations come out to the numbers that are in, in, in, that are good, which I like, and I said, like, I'm, I don't even remember what you, what you, the, the equation that you said. So I'm going to have to write it down and I will put it out there. So that way, I can reference it and then start to slowly understand what it means. You know, I understand like, what you, what that number, like, all right. So we, we come out with a number that's what, it goes from negative to positive. So it's, uh, negative one to say negative two, or positive two. Yeah. So it would, how long does that number go? Does it go like all the way down to negative 400, or is it ever, you, it shouldn't be like a negative number. At most, it will be, it will be less than one. Okay. Okay. If a stock price is very, very high in comparison to the book value of the company, then you might get like, uh, like a 10. Okay. And as that now, that's probably a, a sign that, that, that, that stock price is inflated for some other reason. Exactly. So it's, it, my, a company like Tesla, it may be it's inflated because people just believe the shit out of it. They think that it's going to grow. And they're saying, you know, there's no way, I don't believe in fossil fuels. We can't keep doing this. Now, maybe they think that, hey, oil companies are just like in bed with car companies. And they think at some point, this company's going to be worth a lot more. So them, purchasing it will drive the market price up. But the book value of Tesla may not be indicative of that market price. And if it's fine if you want to buy that, but you need to understand the story, you need to be able to explain to people, well, this is why I think it's worth this. Not just to say, well, yeah, I like cars and electricity. What company can I invest in if I like these two things? Right. Anytime you invest in a single stock, it's always, it's inherently more risky than putting your money into a mutual fund that tracks the index. And if you're uncomfortable with doing that, yeah, I would just hop on to a site like Betterment. You guys are always talking about, I mean, I use the shit out of that. I just rolled over an IRA into Betterment. Oh, how easy was that to do? Oh, like, it's crazy easy. Okay, can my brother want to do that? So it's the only crap thing is you can't do a director rollover. So you have to do an indirect, which means you take your current IRA, you completely cash it out, they'll send you a check for that money. You deposit the check into your account and then you call Betterment and they'll pull that check from your account. And there are no, there are no taxable locations. No, like, yeah, no penalties. If you tell your current IRA company that you're doing an indirect IRA rollover, they will not take any taxes out and they'll, they won't hold the penalty back, they won't hold the taxes. But here's the kicker. You need to roll that money over within 60 days. So whenever that your current investment company cuts that check, you have 60 days to get it into Betterment. If you don't do that, the government's going to come after your ass big time. That would not be good. No, not at all. Like, 60 days, like, I cashed my notes, jeez, on like the sixth of a month, and I had the check before the 15th. So it was like, six days. So at that point, you've got, you know, you've got like 54 days to make a move. How do you, you mentioned mutual funds or just mutual funds are not the same as ETFs, right? No, no, no. So ETFs are generally, they're traded more like stocks, like the ETF is just an exchange traded fund. So it's kind of like a mutual fund that is traded, it's traded in the stock market. So it's constantly, the price of it is constantly rising and falling throughout the market day. So how do you research mutual funds? So mutual fund is, it should just be a collection of different stocks that are added together. So yeah, typically you, like, you'll, you'll be in a mutual fund and that mutual fund will be investing in a number of different stocks. I see. Okay. I was going to just say, like, how do you research that? Like, which one do you want to get into? Oh, well, there's a, I usually, I'll do that on Morningstar. Okay. Like for, I guess if you were going to buy different, different funds at Vanguard or Fidelity. So Morningstar has a, I think if you Google, like Morningstar Compare Tool, there's a, it will tell you not only what the return is, but what the expense ratio is for mutual funds, which is, I'd say that's more important. So like a lot of times, the reason I went to Betterment is I was in a mutual fund at Fidelity that was professionally managed and they were hitting me with a fee every quarter that was well over 1% and I was just like, this is ridiculous. Like, I know what I'm doing. Why in the hell am I paying these people to do it for me? And really, if you're in Betterment, you don't even have to know what you're doing for you. Yeah, and it's super cheap. Yeah. So you, you had actually sentenced this awesome email before you came on and you included two companies, one of which I had heard of Robinhood, hoping to get early access soon. And another one is Loyal 3. Could you tell us a little about these? Because they're pretty awesome and I think they're going to be disrupting the investment space. Yeah, I certainly hope you're right about that Andrew. So Robinhood is, as you mentioned, it's, I think that's a, that's a site where you, it's just like zero commission trading and I don't know that it's even live yet, but it's supposed to just be straight like trading on the, on the NASDAQ or New York Stock Exchange for no commission. For Loyal 3 is a little different where they, you don't get to choose the, the market price during the day. It's, it's meant just to like help beginners get, get involved with the stock market. So if there's a first off, not all companies are available on Loyal 3. And what you do is you, you'll put up like $10, $50, maybe $100 in just say, oh, I really like this company. Buy me a couple shares or a fraction of some of the shares here. And then you'll, they will stay on Loyal 3 and it will show as it slowly grows. But that's all you pay for. There's no, there's no commission when you make the trade. So when Robinhood goes live, it should cover everything of Loyal 3 and more. I guess. Yo, yeah, yeah, hopefully, hopefully it will. And just my personally, one of the things that I've always hated is, you buy stocks and, you know, I'm not trading at huge volumes. So if I buy like 10 shares or something, you know, there's, there's at least a $5 charge applied to that. And then when I, when I sell them thinking that there's a profit, I'm paying another $5. So if I haven't at least made $10 on that trade, then it's a net zero. So I'm losing money anyways. Yeah. I mean, I remember when I was researching Robinhood. It's awesome that they're providing no fees. And I was curious, you know, like, how could they possibly provide no fees? Like, what's the catch? And actually turns out they're, uh, they're funded by Google's investment arm. So they don't even have to make a profit yet. Yeah. Yeah. That's, that's beautiful. I mean, a company like that, if it were to go live, like, the investment banks would just be completely bullshit. Yeah. You know what's weird is, is Robinhood going to single-handedly stop high-frequency trading? It's completely, like, separate, like related. So if you think of it like this, like, we pay $10 for each trade because we're trading such small amounts of money. But, uh, like Goldman has a direct link with the exchanges. And the only cost that they pay is the cost to run all of their massive hardware to actually make the trades. So when we trade through someone like Goldman, um, we pay them like a fee, like a, like a toll, like over a bridge, you know. Yeah. It's ridiculous. I like the idea of Robinhood. The name itself is freaking excellent. Yeah. Yeah. Isn't it? That's awesome. Yeah. Stil from the rich give to the people who want to become rich. Right? So, uh, Andrew, I don't, you know, this is, uh, eye-opening and also overwhelming. Yeah. I mean, digging into the numbers is, is tough. I think, uh, what, uh, Pat kind of pointed us to on the investment piece of Bloomberg business week is, uh, like you can go to the financials of a specific company and then the ratios. She don't necessarily have to go crazy and calculate everything. And I don't think that you need to be completely knowledgeable. The full 10k, but you could make judgment calls based on that comparison to other companies in the sector. You know, if you look at Apple and Tesla, two different sector companies, uh, but you could also compare the profitability and stuff like that and kind of get an idea. And I think, uh, going through some of them, like the motions, like what Pat described is important is because, uh, it's important because you need to, like he said, uh, understand more than just the fluffy high level this company is good type thing. Is there like a chart? Is there a chart available online or somewhere that are, here are the things you, here are the data points that you should look at. And here's the, all right. I'm, I mean, I'm going to try to give a weird example of what I'm, what I'm trying to describe. So not everyone's going to understand this, but it'll help me. So when I test pool water, I, I use a dip strip and it has a color and you compare that color to this color range. So in the case of pH, you have those litmus strips that you dip into the, uh, to the water and you compare the color to the thing. So a light color might be, uh, a yellow and a dark color might be red. And that's the spectrum of where you measure it. And depending on what color your litmus strip is, it determines how good or low your pH is and then there's a middle ground where you want to be. Is there some sort of, like, chart or visual display that says, like, this company is in the red area and not do So well and maybe you want to hold off of investing and then this company is in the green and maybe you now you love this company Maybe you should invest in it or they're doing really well. There are things like that available online that are for free Am I even it might even sin making any sense it's a so you're making sense and I think that it's not such an absolute Okay, like thing like there's so many variables with the pH the the water is either gonna be very acidic Yeah, it's gonna be a very basic basic. Yes, yeah, yeah, so With stock like and these numbers it's more how things compare in relation to other companies because If we're talking about in December of 2008 Everything's gonna be super cheap because everyone is so fearful that the world is gonna end However, if we were talking about October or you know April of 2008 Everyone was the stock market can only go up You know everything is beautiful same thing in 2000 before the crash so It's hard to know an absolute value and I think if you compare companies. So for example If you look at the PE ratio the price to earnings so the cost of the stock based on how much Erning is the company makes like you if you can consider, you know, you'd get a share of their earnings Hypothetically, right if you look at Microsoft their PE is 15.09 I don't find them to be a very inspiring company and I don't really find them to be growing them But it's 1509 a good number now if you compare to Apple which I think is a pretty ridiculously awesome company It's the most profitable on the planet that that I am aware of. I don't think there's another one They're innovating all this stuff their PE is 14.19 so let's shoot. Yeah, so two companies that are both deep tech They are their competitors in many areas Apple is actually cheaper than Microsoft so not to say like oh my god Everyone by Apple, but you know when you do comparisons like that it gives you food for thought to kind of Help you decide, you know, if it's if it's a good decision to buy that company Yeah, like a PE really tells you kind of what What investors are willing to pay for a stock? So a high PE would be indicative that investors think there's going to be a future growth I say Which is if Tesla had a PE I think it would be really high because it's probably an overbought stock Interesting like if you look at Amazon. I think it's AMZN is their stock ticker so Amazon is They're PE. They're very profitable. I mean actually I'm sorry. They're not a very profitable company because they keep their margins razor thin Yeah, they're super low. So their price to earnings ratio is 466 So if you're talking about buying into earnings They'd be an enormously expensive company especially in comparison Apple But people buy them because they expect a certain level of growth Yeah, like valuation is really it's more of an art form than a financial calculation Okay, that's why I say like find a couple things that you're comfortable with and And just research the hell out of that like you don't have to You don't have to run through the the 10k to get familiar with it like this this business week site makes it pretty easy But the like the 10k will detail out what the company's been doing what they what they're expecting in the future Most people who invest that they're not looking at that stuff and if I were going to give someone my money I would want to know that right and to further past point like I'm sorry. I keep calling it patcher It's a further Patrick's point Like most people don't know this information and I would go so far as to say is many Professionals who who buy and sell and and are you know behind the scenes and in the large mutual funds Don't necessarily look at all these things or or even know how to Make the right decision most people don't beat the average the market average so It's it's very risky going into an individual company very yeah, and I like the idea of When you choose a stock that you want to buy act as if you're buying the actual company I like like that thought process to me that makes sense to me and I actually had an analogy in my head that and this may be Bad or good. I don't know but when you let's say you took a look at marriage and you and marriage was a business decision Which I know I'm gonna eventually look it at that way and Then you may never then it never happened Maybe not maybe not but how but I mean how interesting would it be if you were deciding that you wanted to marry this person And you took a look at all their financial statements and you said, okay, well, you have a lot of debt And you don't make that much money and therefore when I marry you I'm gonna inherit your debt and you're not gonna be able to help me pay stuff. So financially it would be a Not a wise decision to marry this person And we're putting love aside by the way. No, I think that's a fantastic question to ask and that's something that My wife and I ask each other and it wasn't just a well, hey, if this person's financial history shitty I'm gonna cut them loose more of you know, why do you think this way and That was actually one of the things I just wanted to mention like the idea of you guys, you know, I know it's You know, listen money matters is your own side. You've got this podcast out there I think it's fantastic when when I was in grad school. I was in this entrepreneurial class and We we developed this product to help teach millennials about money Oh, and we we did this like really invasive survey just to find out if there was any sort of market demand for it And we found like there were two facts that really rang true with us number one was People between the ages like 18 to 30 they really wanted to know about this stuff So you guys just talking about it is to like average guys, you know, one of them Understands the market the other ones just asking basic questions kids want to know this, you know Or it helped really we're talking about adults if you're up to 30 people want to hear this stuff and the other thing was Parents of people between the ages of like 40 up to 60 They didn't feel comfortable teaching this information to their kids In fact, they felt more embarrassed about talking about money than they did about sex with their kids Wow, yeah, but what does that tell you about today's you know kids growing up and coming out of college That's very scary. Oh, it's it's a scary as hell and you need to have you know things like missing listen money matters The fact that you're around. I think it just it's doing a tremendous good. Yeah, and I think Pat Patrick, thank you so much for that. Yeah, absolutely. Yeah, I mean, I couldn't we couldn't pay for a better review And I and the fact that you did the research and and know that it's such a big problem I mean, we're just two nerds who happened to have microphones, you know, well, you're a nerd That's okay. No, I mean no seriously. Thank you. And I think we I hope that what we're Talking about and and and the way we deliver the information is Easily digestible to millennials and people who are not millennials anybody really I Wish I had this if I mean I wish I had an entertaining podcast listen to about money when I was trying to become better with money You know, so yeah, no, I really appreciate it seriously. Oh, yeah, absolutely like the best that we had when we were younger was you know You listen to NPR they're rattling off like stock prices like everyone knows what the hell they're talking about Yeah, and that's why I had to like when I you know when you were talking some you know a lot of the things you're talking about I need to understand it, you know, I need to kind of lay it out in a format that like my brain can process Yeah, so I apologize to all your listeners if I confused anyone No, you know what though? I think the most confusing part was my question No, I think I got it like I think it makes way like I like the idea again that When you look at buying a stock you're buying it as if you're buying the entire company like would you would you want this This and you know would you want this burden or would you not want this burden depending on how much you love the company and Respect what they're doing and you know and you're buying Tesla for me Tesla is a company that I like highly respect But yeah, I do want to go in and look and see if they're actually making money or if they're just making cool cars Eventually, they're gonna you know fizzle out and you know kind of they're not or their business You know, maybe they're their visions great, but their financial guy behind the scenes is like a friggin idiot You know and I want to know that before Purchasing the entire company for myself become the new Elon Musk. Oh, yeah A lot of times that when I was in the 360 fund like the Kids would get up to a presentation and then they'd just be pummeled with questions from from everyone else You know, like I was just company make money or you know how old is the the CEO that was always one like out of left field Because yeah, if it's like some oil company that's just raking in money Or one of these new like the gas gas shale companies that - Yeah. - Drills through the shale, makes crazy profit. - Oh, the fracking futures, yeah. - Exactly, exactly, like who's running it? What happens if this yield retires in the next five years? Or next year, what's gonna happen to the value? So those are all things that you just, you wanna get comfortable with and be able to answer before you put your hard-earned money into a stock. - That's good advice. That's real good advice. Patrick, thank you for being on. - Oh, thanks for having me. - Thank you for listening to the show. Thank you for reaching out to us via email. And thank you for coming on and being very well-spoken on a podcast. - Absolutely, you keep putting it out. I'll be there. - Excellent. Guys, thank you to everybody who hung out with us today and remember if you have any questions you'd like us to answer. Please email us, [email protected]. Who knows, you may be on the show if you want to. - You'll definitely get an email from me. - At the very least. - At the very least. - And if you like the show, please leave us a review on iTunes or Stitcher or Revealus in the reviews. You have no idea how much the reviews help us. They rocket us to the top of the investment category in iTunes and new listeners can come and learn and have fun with us and join our little community of people trying to learn about personal finance without being stuffy and without being the 1%. So we always talk about a money management tool called Mint. Patrick, do you use Mint? - I absolutely do. - Excellent. We highly recommend it 'cause it's free and it helps you manage your entire financial portfolio in one sweet looking app. And we have a book that we wrote and it's called Mastering Mint, which you can download at MasteringMint.com. If you enter the promo code podcast, you will get $5 off. That is our gift to you, $5 off, $29 to $24. Last but not least, if you want to learn more about personal finance and money management, we're always writing new stuff and posting up new episodes of this show at listedmoneymatters.com. And you can also find us at listedmoneymatters.com/show if you want to get just the podcast and see our two giant black and white faces. So that's it. Thanks again for hanging out with us. Patrick, thank you again for being on. Thank you. And we look forward to the next episode later, guys. Later, man. (upbeat music) (upbeat music)