The Truth About Investing: Back to Basics
The Truth About Investing: Back to Basics
Security Analysis
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Security Analysis? What is it? Why do we need it?
We start to dive deeper into the final layer of performing base level analysis. How it works, how it helps you, and what the pros use.
Because that’s what we are. The pros…
Well, at least Sean is.
This is the truth about investing back to basics podcast. We want to help you take control of your personal finance and long term investments. If you're looking for a way to learn the why and how of investing then you found the right place. Thank you for taking the time to learn how to better yourselves. I wanted to share Southern phrase idioms because I'm wanting to learn more as I think they're
Sean Cooper:oh boy
Chris Holling:I want to have more of these available like his cornbread ain't done in the middle
Sean Cooper:Yep
Chris Holling:oh yeah we totally did go through some of these That's right. Having a come to Jesus meeting I still do that. I still say that well butter my butt and call me a biscuit I need to slide that in somewhere this week the phrase not the butter
Sean Cooper:Yeah, I was like that follow up comment was
Chris Holling:sorry I realized after afterward I this is this is not that kind of show Oh, the ever so classic bless your heart
Sean Cooper:yes which can mean oh so many things
Chris Holling:yes but mostly bad
Sean Cooper:Yes,
Chris Holling:mostly bad there's there's nothing quite worse than like hey, can you can you tell me what the the answer to two plus two is? Seven Oh, honey bless your heart
Sean Cooper:yeah
Chris Holling:that that it cuts you real deal is what it does my actually one of my personal favorites just because I think it's a good visual is the like a bull in a china shop. I work with a lot of people that are like bulls and a china shop
Sean Cooper:probably works to their advantage in your line of work
Chris Holling:you know sometimes it does just like you go go go do stuff and then they go in there and things crash and then things get better and you go huh Good job.
Sean Cooper:Well when you start out with a place that's on fire I mean
Chris Holling:yeah, I that's actually kind of the beauty of it is that there's not a lot you can do to make it you know, worse like the pretty much the only way you can make it worse is by not doing anything is kind of
Sean Cooper:right
Chris Holling:I've starting to find so yeah, don't
Sean Cooper:don't throw any more fuel on it I suppose. But
Chris Holling:right. Go do stuff. Okay. You didn't do enough stuff. Go do more stuff. I ain't seen you in a month of Sundays. God how long is that? That's like, like if it was a bunch of Sundays
Sean Cooper:Be 30 months?
Chris Holling:Well, I mean, I guess it's a month like it's not like the whole you know, what's what's heavier?
Sean Cooper:A month of Sunday's would be, you have to divide by four
Chris Holling:A pound of feathers or a pound of? Hmm.
Sean Cooper:You got to divide by four so it'd be seven and a half months, well ish
Chris Holling:seven
Sean Cooper:Not perfect. But yeah
Chris Holling:A month of Sundays is approximately seven and a half months. Okay. Okay, maybe you should start doing that we're like somebody
Sean Cooper:Probably closer to seven
Chris Holling:somebody talks to you about like, Hey, we we're going to reevaluate your portfolio here and approximately a month of Sundays like a but what oh, it's about seven and a half months it's it's a good solid investing amount. You know, a month of Sundays. Should I still talk to this guy?
Sean Cooper:That's like, fortnight just number you know.
Chris Holling:Oh,
Sean Cooper:Time frames that people are not familiar with anymore? Y
Chris Holling:eah, absolutely. I should use the term fortnight instead. Like
Sean Cooper:You should
Chris Holling:we. We get paid once a fortnight
Sean Cooper:You would
Chris Holling:full as a tick on a hound dog. hanging in there like hair in a biscuit.
Sean Cooper:Ah,
Chris Holling:oh, you know what? Actually, I heard one the other day that was real good. They're more more confused than a fart and a fan factory. Let's see. Oh, you know what? This is a good one. Okay, now I'm trying to figure out how to how to tie this in there. Welcome back, ladies and gentlemen, to I've got a plan here. Just stick with me. All right.
Sean Cooper:Okay,
Chris Holling:welcome back, ladies and gentlemen to another episode of the truth about investing back to basics where common sense isn't a flower that grows in everyone's garden
Sean Cooper:Jeez
Chris Holling:And here we, we like to grow those flowers and have that green thumb available
Sean Cooper:Cultivate those flowers
Chris Holling:Like to water. Water that lawn. Welcome back. My name is Chris Holloing
Sean Cooper:And I'm Sean Cooper and I'm wondering what we're supposed to be doing here today.
Chris Holling:I don't know anymore. It's it's, there's there's certainly not enough butter in my biscuit or is that what it was? Dang it butter? No,
Sean Cooper:no it was
Chris Holling:butter my butt and call me a biscuit all right
Sean Cooper:cornbread it had to do with the cornbread not being baked all the way or something
Chris Holling:there's just so many I know I'm gonna confuse those where it's gonna be like, you know, Piece of undone cornbread doesn't grow in everyone's garden you know what
Sean Cooper:Are you the biscuit farmer
Chris Holling:Or like the like with boondock Saints or whatever the you know, because what they say people in glasses houses, glass houses sink ships, like a penny saved is worth two in the bush, you know?
Sean Cooper:Yeah.
Chris Holling:Whatever. Yeah, well, welcome back. Everybody
Sean Cooper:I should watch that show this weekend.
Chris Holling:Oh, yeah. That's you should
Sean Cooper:I like that movie.
Chris Holling:It's a great movie.
Sean Cooper:Yeah.
Chris Holling:We today we are talking about security analysis. Right, right.
Sean Cooper:Yes, indeed.
Chris Holling:Whoo. Good. Okay, I guessed that without even having to pull up the lesson plan. Look at me go. So today we're going to go over security analysis. And I, I've kind of guessed what security analysis was in the last episode, the the security analysi, sort of, kind of, but if I'm recalling correctly, security analysis is, is when you have a bouncer that looks at a line of people and analyzes the situation. And that's, that's when they get in that that big ol crossed arms thing. And they do. Yeah. You, no, not you not, you no, you sit over there That's a Yeah, you. And that's, that's Yeah, that's about right. Let's, let's let's do that. That's, that's that's security analysis, right.
Sean Cooper:Sure.
Chris Holling:Okay.
Sean Cooper:Yeah, you got it.
Chris Holling:And then No, I, I remember that we were kind of trying to talk about it. And it took forever to sort through my, my thoughts on it, whatever, on the on the second episode, so how about you tell us what we're doing today, rather than me really confusing everybody.
Sean Cooper:So security analysis is really just a continuation of the topics that we've been discussing up to this point. So we talked about fundamental and technical analysis, those are aspects of security analysis, we also talked about portfolio analysis, that would be analyzing the overall mix of the portfolio, whereas here, we're delving into each individual holding, which is why the technical and the fundamental can apply. It largely depends on your investment timeframe, and what you're investing in, how you're investing in it, things of that nature, and then your overall methodology.
Chris Holling:Okay. Okay, that sounds good. And so how do we, how do we get started with it? Or we're just
Sean Cooper:Well, we, we mentioned previously that there for fundamental analysis, you often look at ratios to help analyze a company so we can jump into those in a little bit more detail, or at least list them out so that people have an idea of what they might be looking for and how they might be used. We can also talk a little bit more about some of the methodologies that I tend to prefer and then there's some other ancillary options that we can discuss that may be of use depending again on your investment timeframe and what you're trying to achieve with your investments.
Chris Holling:Okay, well explain it to me like I'm five I'll you know what, I'll take eight I'll do eight
Sean Cooper:Yeah, let's go a little older because I don't know too many five year olds that would get a lot out of this
Chris Holling:like a really smart eight. I'll go with that.
Sean Cooper:Okay.
Chris Holling:But like you know, sometimes gaps and then you realize that, you know, while I'm interested I might want to bag a gushers or something like that. That's the level. That's that's where we need to go.
Sean Cooper:Okay, well, so as we talked about the fundamental Analysis relies on the financial statements and then ratios from numbers on those financial statements. So one set of financial or ratios that we could evaluate would be liquidity ratio. So how much liquidity does the company have? Do they have the cash flow or the assets to be able to generate the income, they need to pay off liabilities and things of that nature nature. So you've got the current ratio, which is your current assets divided by current liabilities, you have the acid test ratio, which is your current assets minus inventories divided by current liabilities, and they subtract out inventories there to kind of account for the fact that the inventories aren't necessarily as liquid as the rest of your current assets. The cash ratio, which is cash and cash equivalents divided by current liabilities. So that would be a very, very stringent view of your cash on hand to actually cover those short term liabilities. And then the one that I've talked about previously, which is operating cash flow ratio, which is your operating cash flow, divided by your current liabilities,
Chris Holling:and you do this, when you're comparing these amounts, it's, it's to every single asset right? Or are you? Are you comparing these within like an asset class? Do you keep them separate? As you're comparing these? Or is it like we are looking at
Sean Cooper:It wouldn't necessarily, it wouldn't necessarily be an asset class so much as a sector of companies. So for example, you wouldn't necessarily compare the liquidity ratios of a oil and gas company to even a utility company, for example.
Chris Holling:Okay,
Sean Cooper:you want to necessarily compare he or you would likely compare like Google to Apple? or Bing, or Microsoft? You know, depending on what level you're investing in I realize one's owned by the other, but you get my point
Chris Holling:fight fight.
Sean Cooper:Yeah. But you wouldn't compare, you wouldn't to be likely to compare a tech company to a, you know, hard asset company,
Chris Holling:right? That makes sense,
Sean Cooper:okay, their ratios are completely different the the way their balance sheets or income statements or statement of cash flows are structured, and where they have let employ leverage and things of that nature, from one industry to another is can be very, very different. So you end up with what looks very good in one industry might actually be really bad in another industry.
Chris Holling:Gotcha. Okay.
Sean Cooper:So yes, you can compare them across the board. That's the advantage of the ratios, but the Compareability of them gets very loose as you span different industries.
Chris Holling:Okay. Okay.
Sean Cooper:So another set would be your leverage financial ratios, see how much leverage the company is employing? That's one of the things I just talked about, you know, how is this company heavily reliant on debt? Or are they operating off of their own income sources or their financing ability via, like IPOs, and things of that nature. So debt ratio is your total liabilities divided by total assets. debt to equity ratio would be total liabilities divided by shareholders' equity. interest coverage ratio would be your operating income divided by interest expenses. And then debt service coverage ratio is operating income divided by total debt service. So just different ways of looking at some of the same information, sometimes you're boiling it down, like I was talking about before the as you weeded out inventories from current assets and then jump down to cash and cash equivalents for the cash ratio, etc. divided by the current liabilities, you're weeding out different aspects that you might not want to include in the ratio that might be skewing what you're really trying to look at.
Chris Holling:Okay,
Sean Cooper:efficiency ratios, those are going to be how effective the company is at turning their inventory into actual cash, basically doing their day to day operations to actually generate revenue and things of that nature. So, asset turnover ratio is net sales divided by average total assets. inventory turnover ratio is Cost of Goods Sold divided by average inventory. receivables turnover ratio is net credit sales divided by average accounts receivable. And then days sales in inventory ratio is just 365 days divided by inventory turnover ratio, you can Adjust that for a leap year if you really want but
Chris Holling:and so just just to address a couple things and I and I hope that this isn't backpedaling too far But the purpose of doing these evaluations is to establish without without being too direct the security and the how stable these investments these assets that you're evaluating are Is that right?
Sean Cooper:Potentially not always really it's more just for comparing them so yes, you can use them to establish like we were talking about the liquidity earlier the efficient era the the leverage ratios those often have to do with security. Same with the liquidity ratios those have to do with security efficiency is not necessarily related to security. Same with you know, profitability, kind of market value, same thing not necessarily directly related to security, a lot of these are used for comparison purposes. So comparing one company to another
Chris Holling:Okay, so kind of like you were addressing earlier with, with this as pairing along with your fundamental analysis because it is it is tools that you utilize in the process, it's, it's, it's part of
Sean Cooper:currect
Chris Holling:Part of that, okay,
Sean Cooper:yeah, so you know, oftentimes an analyst is they're typically going to be monitoring a particular industry or a sector and so their job is to pull out which company in the their industry that they're assigned to is going to outperform and so they're comparing lots of different companies and they use these ratios as one of their starting points for that that comparison purposes
Chris Holling:okay.
Sean Cooper:So when I look at like the cash flow ratio, I'll look at a bunch of different companies at the same time and compare them to each other to say Okay, which one has the better operating cash flow relative to their current liabilities
Chris Holling:fair enough and then while you're while you're doing these and you are you are evaluating these these different formulas that I mean they make sense but you know, again, we have the struggle here of of just having an auditory description and that's it when you're looking at these formulas and the different possibilities and I get that there are certain circumstances that you want to use different ones are you able to track down these different types of formulas like a like a, I don't know if there's a list per se but within investopedia that it goes These are some of the formulas you may want to consider using when doing a security analysis or something.
Sean Cooper:I think investopedia does have a list of them
Chris Holling:okay.
Sean Cooper:That you could utilize corporate finance Institute has a list I think if you go with a lot of the different designations so like the CFA they're going to have a list they probably have an even more extensive list than any of the others it's going to most likely it'll be enough to bog most people down but
Chris Holling:sure I just wanted to make sure that as we're going over this because I I don't have the memory capacity to catch all of these and then retain them and just go Oh yeah, of course you got to do this formula while we're while we're evaluating that I need a reference point if I'm going to start doing some of those evaluations myself on how to do those rather than
Sean Cooper:Where's your legal pad Chris Come on.
Chris Holling:Don't I can't I can't write or read. I didn't know how to break it to you I I'm illegitimate.
Sean Cooper:Illegitimate
Chris Holling:Sorry. Anyways, I wanted to make sure that it was like a, hey, you know, this is a lot of stuff. You've never done any of these formulas before. Hey, remember these formulas? What do you mean you don't remember those formulas? Okay, like here's a spot that you can go look and grab these formulas if you're going to do those evaluations, which are those spots that you just listed? That's that's what I was what I was getting at.
Sean Cooper:Yeah, just do a quick search whatever search engine you use of financial ratios, shall I run through the rest of the ratios and then we can move on
Chris Holling:Yep sure should
Sean Cooper:Okay, so profitability ratios? I don't think I need to explain that per se. Okay, gross margin ratio is the gross profit divided by net sales operating margin ratio is operating income divided by net sales. return on asset ratio equals net income divided by total assets. And return on equity ratio is net income divided by shareholders' equity. You'll notice a lot of these have like shareholders equity built in and that's because as a shareholder, you want to know how much they're actually generating from your standpoint.
Chris Holling:Okay,
Sean Cooper:market value ratios. So these are different ways of valuing the company if you will. book value per share ratio is shareholders equity minus preferred equity. And then all of that divided by total common shares outstanding. dividend yield ratio is your dividend per share divided by the share price. That one's very common one for people to utilize, they want to know what their earning rate is from a dividend standpoint. earnings per share ratio is net earnings divided by total shares outstanding. And then price earnings ratio is the share price divided by the earnings per share. So, those are examples of some of the big ones that you might see and might want to consider as you're evaluating different securities.
Chris Holling:Okay. Fair enough. And again, you can get those at
Sean Cooper:Oh, you can Yeah, I'd just do a quick search of financial ratios on whatever your preferred search engine is, but investopedia will have them, corporate finance Institute will have them. CFA, Chartered Financial Analysts.
Chris Holling:I prefer to use Netscape as a as an internet browser.
Sean Cooper:I was referring to the search engine, not the browser.
Chris Holling:That's even worse. I prefer Netscape 's search engine on its browser. I was trying to make a joke. Dammit, Sean,
Sean Cooper:I know I just ruined it. Because I took it too literal
Chris Holling:this, is our whole relationship
Sean Cooper:you should use to that by now You should be used to that by Now,
Chris Holling:I'm, not.
Sean Cooper:I don't know what to tell you that that's, that's on you.
Chris Holling:Okay.
Sean Cooper:Okay. So as I think we've talked a little bit before, some of the big ones that I look for are that the operating cash flow? I care a lot about that, when I'm analyzing for. So let me backtrack a little bit.
Chris Holling:Okay.
Sean Cooper:As I've mentioned, it really depends on what you're choosing to invest in what you're trying to focus on. So I don't claim to be an expert on stock analysis, or bond analysis for every single industry, every single sector every you know, international, emerging. frontier markets, what have you, there are far too many companies to evaluate if you go that route. Now, screeners can certainly help you narrow things down. But it just becomes cumbersome to try to stay on top of absolutely everything. So it's best to determine what you're going to focus on what you want to not necessarily be an expert on. But what you want to try to excel at, if you will. So for for myself, if I'm getting down to individual security analysis for stock selection, I'm doing it for large cap domestic equities. I'm not doing it for international, I'm not doing it for micro cap stocks. So large cap domestic equities, which gives me an easy screen, I can start with just the s&p 500, the 500 largest companies in the US by market capitalization, that narrows things down very, very significantly. For me to view my my pool of investable companies. The things I look at from there are actually based on research I've done in the past. So I look at Believe it or not just the stock price. I've run I don't know how many different multiple regression analysis is analyses looking
Chris Holling:Analysi
Sean Cooper:Yeah, sure. The the performance of stocks over say a 10 year window. So I'm looking at 10 years plus I'm not interested in shorter term. So again, that has to do with what you want to focus on. Are you a day trader? Are you just looking for a quick return on investment? Or are you a long term investor? So I'm looking at 10 years plus, and over that timeframe, one of the biggest factors in determining your return on investment is actually the initial purchase price. It's that simple. It's really silly, but that is one of the biggest factors. And that has to do with mathematics. If you make $5 on$100 stock, that's a 5% return on investment. If you make $5 on a $10 stock, that's a 50% return on investment.
Chris Holling:Okay, yeah.
Sean Cooper:So it's simple mathematics.
Chris Holling:Math checks out.
Sean Cooper:Yeah. Now the flip side of that, the flip side of that is, if you're buying cheap stocks, you could be investing in a company that is struggling, there's a reason it's not expensive. So you want to make sure that there are other finances financials that you can evaluate to ensure that the company is not just going to go bust. That math works really well for penny stocks. But penny stocks are also very, very risky, that 50 cent stock, there's you know, a reason that it's 50 cents, you have to uncover what that reason is,
Chris Holling:gotcha.
Sean Cooper:It might be a non issue. But it also could be that the company is going to go bankrupt, and you're gonna lose your entire investment, whatever that may be. So another thing that I look for is that cash flow, the operating cash flow, that cash flow ratio, I should say, and that's operating cash flows divided by current liabilities, it's a very strong indicator of how well the company is going to fare in the near term future. Are they actually in significant trouble? Are they generating all of their cash flow from financing, as opposed to actually what they're supposed to be in business doing? Are they going going to continue as an ongoing concern in the future. I also focus on dividend investing. So the the price kind of lends itself towards value. However, I blend that with dividend investing, because I don't want to be entirely reliant on my returns being from the the appreciation of the stock price, the appreciation of the value of the company, I like to have a steady dividend to help bolster returns in bull markets and try to add some cushion in bear markets, the dividend of the company can also be a strong indicator of the stability of that company. If it's paying a nice steady dividend, hopefully, one that's growing slightly to offset inflation, that tends to be a fairly strong sign. Now, if some of the other factors are not aligning, and they're still paying a dividend. So they're, they're not generating operating cash flow, but they're still paying a dividend that's not sustainable, that that is going to be a red flag. Similarly, if they're paying an extremely high dividend relative to their value, you know, you have a dividend yield, that was one of the other ratios we talked about, that's in excess of 10%. That's something you want to dig into more you want to find out what's actually going on? Why are they paying such a high dividend, relative to the stock price, and you want to start comparing that to their earnings and where they're generating their income from, especially relative to their different liabilities and things of that nature. So these are pieces that could either look positive, or raise red flags that you need to delve into more. And these are just some of the ones that I tend to focus on personally, from my experience. So
Chris Holling:and then when you're, I don't really know how to ask this when you're evaluating these things. And you're, you're paying attention to a certain price of something and you do this evaluation. I imagine this is pretty subjective, and it's just a case by case basis, but do you? Do you tend to look at the valuation then then go, Oh, well, this, this isn't working out, right? So I'm, I'm just gonna stop paying attention to it. Or, or maybe you do this evaluation, then you go this is this is something that could change in the future. So I'll come back, or is,
Sean Cooper:how do you mean,
Chris Holling:I guess,
Sean Cooper:When you say it's not working out, right?
Chris Holling:I'm not really asking the question very well, I guess I'm saying when you're doing these evaluations, is this to help establish whether or not to even pay attention to the purchase price of something in general? Or is it? Is it to evaluate if you're still going to remain involved in the in like, is this is this something to continue to check the status of something you're currently invested in? Or is it to help consider whether or not you're going to make the purchase? Maybe that's what I'm trying to ask.
Sean Cooper:Yeah, so for me this is to help decide if I'm going to buy into a security
Chris Holling:okay.
Sean Cooper:Yeah,
Chris Holling:okay.
Sean Cooper:Yeah. Now, you can also use it to decide, okay, is this time to get out? Like, is the company starting to flounder or, you know, have they already peaked and I need to pull my profits while I can? Yeah, you can evaluate any aspect of it. You can also use it to just say is this a company that I want to continue to monitor you know, maybe they've got things, some things coming down the pipeline that will put them on a good track. And but I want to see how that pans out first.
Chris Holling:Cool. So those those are all the opportunities that you could use it for you personally, most commonly use it for a consideration as to whether or not you're going to purchase at all
Sean Cooper:correct.
Chris Holling:Okay, cool. I think that's what I was trying to ask without being able to actually speak English. So I appreciate that.
Sean Cooper:Right. Yeah. So a day trader, they're probably not going to care about that cash flow that I was talking about. There, they're not going to care about most of those ratios that we discussed, because those, they are pictures in time. But they're, they're typically used for longer term investing, they care more about those, the technical analysis that we talked about that visual, they might care about, you know, the current stock price, because that that percentage that I talked about, really does impact their rate of return, you know, if you can buy something that's quite a bit cheaper than a few bucks on a percentage basis, goes a lot farther.
Chris Holling:Yeah, absolutely. Makes sense.
Sean Cooper:So another aspect that we haven't talked about, and because we've talked a little bit about the timeframes, and you know why you're choosing to invest. But another area that you might use to evaluate individual securities. And this, I would argue, is not necessarily an evaluation of the security itself. But it is an evaluation of the market, the market's response to a security and that there's an entire branch of finance called behavioral finance. And it has nothing to do with actual valuations, it's not even a visual thing. It has everything to do with psychology, it has to do with what how investors are going to respond.
Chris Holling:Okay,
Sean Cooper:and that is a very legitimate investment methodology. I don't personally use it, but I can see where it would fit. And how it could be very useful, especially in today's market where there is so much information. So what the behavioral finance person might look at, these are just some examples, they might look at today's news, and there was, you know, some positive news on a company, they might view that as a buying opportunity. However, and this is where it gets very convoluted. They might look at it and go, okay, the positive news is out there, the company's already gone up, I'm going to invest as a contrarian and say, that was overblown, people have bought in, it's gone up more than it should have based on that news, eventually, the it'll blow over and drop back down. So I'm actually going to sell and wait for it to drop back in so I can buy,
Chris Holling:like political science investing.
Sean Cooper:Kind of, kind of, yeah, and so the same thing might be true On the flip side, so really bad news comes out about a company and so if you get in early, you sell out right off the bat, you can take advantage of that negative news and ride the downtrend or more likely, you know, you already missed the the dip that happened. And so you're going to take advantage of the fact that it's likely to have dropped more than it really should have, which when things when news comes out, that is what tends to happen is it tends to swing more widely than what is actually founded based on that information. So people will often buy or sell expecting the rebound, if you will.
Chris Holling:Yeah, that that makes sense. Actually, I I think it's we're, we're far enough away from it, that I can reference it I saw that happen specifically with Boeing, once we had the very first initial COVID dip. And every you know, everything came to a big hard stop for travel. And there was a big, big dip just in general because people weren't flying anymore at all
Sean Cooper:right.
Chris Holling:And I think something else happened on Boeing's side that was kind of, I don't want to say political but kind of PR based, I think it was like discussions about the possibility of bankruptcy or, or something along those lines. But I, I remember watching it, dip and dip and dip and dip and I personally felt like I knew that it was going to come back. And then I had all my capital tied up in other things. So I should have done something about it. But it if you go back and have a look at it, I'd have to pull up the exact numbers, but it had a significant dip and the return came back relatively quickly in the matter of a couple of weeks to a month and it was just specific to what you're talking about where it was, it was conversational. It was specific to current events that happened and it was In my opinion blown out of proportion via the media, which made it a good opportunity to, to buy, and I see what you're saying about like, basing it solely on that for every investment doesn't make sense to me. But you know, opportunities like that do happen and you know
Sean Cooper:absolutely
Chris Holling:to its is absolutely important.
Sean Cooper:Yeah. GameStop same thing except
Chris Holling:Oh, yeah,
Sean Cooper:on the reverse side. So yeah. Yeah, it strictly has to do with the psychology of it. And mostly it's psychology of investors and the masses kind of trading something well out of proportion of what the actual valuation is, or should be
Chris Holling:sure. What did you call it again?
Sean Cooper:What do you mean,
Chris Holling:the Wasn't there a title of
Sean Cooper:behavioral finance,
Chris Holling:behavioral finance?
Sean Cooper:Yeah, I talked about it in chapter or two. In the book, and looking at periods like 2008, where the market has Well, 2007 2008, where what you see is people start to invest, and they do well, and they tell their friends how well they're doing, and they want to part of that. So they jump in, and it becomes kind of this euphoric thing of, let's, we're all just making money, and there's no actual basis in reality in terms of the valuations of the investments, it's just everybody's getting in. And then when that starts to topple, you know, as, as people start to take their profits, it starts to slow and then turn. And then people tend to be in denial initially of, well, you know, this is just temporary, look how well it's been doing. And then more people start to get out. And as it continues, more and more people start to panic, the media latches on to it and spreads the panic. So more people are informed and they panic, and they start selling. So it starts this kind of spiral effect, whether it's up or down. Of what you end up with is panic selling. And part of what happened in like 2008, is you also had some different technology that kicked in that was your algorithms that trigger trading, that that hit and once you surpassed a certain point of losses, they automatically sold regardless, and that spurred more selling, but it fed into the overall psychology of it. And what I'm getting at is, if you look at periods like 2008, there were companies that did perfectly fine. They had no issues, they did really well, their stock still suffered just because everybody sold everything, they weren't rationally deciding, oh, well, this is a good investment. Still, this is a bad investment at this point, you know, the tech bubble, okay? You got out of tech, but that doesn't necessarily mean that this manufacturer of tractors was suffering for any particular reason.
Chris Holling:Sure.
Sean Cooper:You see what I mean, and so, but everybody just blankets, their selling process, and the media makes things infinitely worse. So it's a very irrational period, that has nothing to do with actual valuations for the most part. So that all falls under behavioral finance as well.
Chris Holling:Okay, no, those are those really good points.
Sean Cooper:Alright, so those would be a number of different ways of evaluating a particular company. So an individual security and you can use that for evaluating their stock or their bonds, the the general process is the same. It's about what you're investing in, what your timeframe is, and what you want to focus on. So again, I talked about my strategy is long term, large cap domestic equities tends to be a value and dividend focus, you might be investing in growth companies, you might want to invest in international. So what you utilize for each piece can vary quite a bit. And you might want to be investing in preferred stocks as opposed to common stocks, or, you know, the bonds, you might alter a little bit or you might want to do convertible bonds instead of traditional bonds. So each of those valuations can vary to a certain degree, what you're focusing on, and which type of analyses you're going to be completing. One of the things I wanted to cover though, was how you might want to evaluate like, if you're if you're not investing in individual securities, but you're, you want to evaluate, say, a mutual fund or an exchange traded fund, so that you can get broad diversification but you're not having to pick each of the individual the underlying assets. To evaluate those. There's a couple of different things that you can look at if it whether it's a mutual fund or an ETF. You want to make First and foremost that that particular mutual fund or ETF is going to fit the particular sector, the asset class that you are trying to target, they might say that they are, but you want to look at some of the underlying holdings to make sure that that is the case, if you're buying into a large cap fund, and they have 10 20% invested in small caps, that really doesn't fit the bill. You know, whether it's international domestic, you want to make sure that they're actually following what they say they're supposed to be targeting, because otherwise it's going to throw your portfolio out of whack.
Chris Holling:Right.
Sean Cooper:Another thing that we've talked about is the expenses. expense is the biggest thing that you can control when investing mutual funds tend to be more expensive than exchange traded funds, individual securities, the advantage, there is the only you're getting hit with trading costs, most likely, but there are no internal expenses associated with buying individual stocks. Whereas the ETFs, and mutual funds have internal expenses that have to do with their, you know, cost of trading their their companies, their managers, all of that. So the cost is something to focus on. And then another aspect that you want to focus on is the manager, especially if it's a mutual fund, you want to look at who the manager is, what their tenure is, and if there's style drift. So that goes back to that first comment that I made about whether they're investing in the asset class that you want. But as far as the manager is concerned, if you're looking at a mutual fund, for example, that's done, you know, pretty well over the last 10 years, it's a viable investment option that has, you know, low costs, if it's all the, you know, all the checkmarks that you want, but they just brought in a brand brand new manager, so the manager that all that those last 10 years is based on is no longer relevant, they just if they traded out all of their analysts, their manager, everything's been flipped, that that historical info is largely irrelevant. So things like that are what you want to look at.
Chris Holling:Okay? So you're saying that when you're when you're doing the evaluations for these formulas, and you're, you're looking at these things to just just to, you know, put a bow on it, like I like to, then you're also addressing the the costs that are behind it, and itself, and the people that are running it, because even if the formulas and the purchase for what you're looking at is good, then then underlying things might need to take, you might need to take those into consideration
Sean Cooper:specifically for mutual funds and ETFs. If you're doing individual stocks, then this this is not what you're looking at.
Chris Holling:Okay, yeah
Sean Cooper:there is no manager associated with individual stocks, there is no, you know, now you might look at the CEO of the individual company. You know, you might look at their board of directors, if there's been lots of changes there that that could impact your investment decisions. Absolutely. You know, looking into the annual reports, and seeing what's changed and what they're looking for in the future. So yeah, absolutely.
Chris Holling:Yeah, that that makes a lot of sense. I think those are, those are good points. I always I always find myself going through these and then at the end of it going, Oh, yeah, I wouldn't have thought of that. Thanks Sean
Sean Cooper:that's the goal.
Chris Holling:Like I was like I was talking about with you earlier, I feel like I feel like investing. I'm just I'm just this is Pitbull and you just you're just like controlling me, and then you like point me a direction or go. I feel like, I feel like that's that's pretty accurate.
Sean Cooper:Yeah, we should have been recording that earlier. good conversation.
Chris Holling:It, it, you know, it was a good conversation, but I get the feeling there would have been a lot more bleeps and blanks in that conversation that that I wasn't particularly interested in doing. So.
Sean Cooper:That's fair.
Chris Holling:Okay, great. Well, are we missing anything? Are we? We looking pretty good. Is that a good? Good bow on it all
Sean Cooper:No, I think that's a good, good wrap up. So probably opens up a bunch more questions. And like I said, I've said before, if somebody wants more info on a particular area, let us know. We'll do a podcast dedicated to that particular subject.
Chris Holling:Yes. Always, always open to all of those things. And I'd have to go back and look at the lesson plan to figure out what we're doing in the future here but well, you know, we'll figure it out. What are you guys gonna do you know, control what I do? Or the the master editor? I think not. Yeah, we've got stuff planned. So come back for the next one, whatever blank thing is, but thank you, again for taking time to listen to us and taking the time to want to better yourselves. Here on the truth about investing back to basics. My name is Chris Holling.
Sean Cooper:And I'm Sean Cooper.
Chris Holling:And we will catch you next time. podcast disclaimer, disclaimer. The disclaimer following this disclaimer is the disclaimer that is required for this podcast to be up and running and fully functioning and moving forward. This is going to be the same disclaimer that you will hear in each one of our episodes. We hope you enjoy it just as much as we enjoyed making it. All content on this podcast and accompanying transcript is for informational purposes only. opinions expressed here in by Sean Cooper are solely those of fit financial consulting LLC, unless otherwise specifically cited. Chris Holling is not affiliated with fit financial consulting, LLC, nor do the views expressed by Chris Holling represent the views of fit financial consulting, LLC. This podcast is intended to be used in its entirety. Any other use beyond its author's intent, distribution or copying of the contents of this podcast is strictly prohibited. Nothing in this podcast is intended as legal accounting or tax advice is for informational purposes only. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. This podcast may reference links to websites for the convenience of our users. Our firm has no control over the accuracy or content of these other websites. advisory services offered through fit financial consulting, LLC, an investment advisor firm registered in the states of Washington and Colorado. The presence of this podcast on the internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons from another jurisdiction unless otherwise permitted by statute. Follow up or individualized responses to consumers in a particular state by our firm in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements, or pursuant an applicable state exemption. For information concerning the status or disciplinary history of a broker dealer, investment advisor or their representatives, a consumer should contact their state securities administrator. This has been a test of the emergency disclosures system. Don't Don't let the good the Oh, don't let the screen door hit you where the good Lord split you.
Sean Cooper:Yep.
Chris Holling:If, brains were leather, you wouldn't have enough to saddle a Junebug.
Sean Cooper:I Like that one You'll get quite a few different
Sean's Phone:Let me out, I'm stuck in your pocket
Chris Holling:I'm starting to think you're doing that on purpose. I might start leaving them into the podcast.
Sean's Phone:Let me out, I'm stuck in your pocket.
Chris Holling:Cuz you know, the fact
Sean Cooper:You have left them in. you left them in last time.
Chris Holling:I probably did. But like, you know, so that the beauty of editing is I can take a block and just remove it and then people are like, how, how do they have such great formulated thoughts? They never have a moment of spacing out or being confused or anything happened because because the magic of editing just allows that to happen. And I might just I might just leave them in there. You know, maybe, maybe just Oh, did you did you guys know that Sean's not perfect? I didn't know that. But here's here's an example of Sean not being there's plenty of evidence for them knowing I'm not perfect.
Sean's Phone:Let me out, I'm stuck in your pocket.
Chris Holling:It's now it's I'm it's on purpose. At this point. I'm Yep. This Welcome. Welcome to the to the Sean's not perfect show.
Sean Cooper:All right.