Why I’m Buying MORE Stocks

Mindy:
As of the time of recording, the stock market is down, and this is either bad news because maybe there’s a recession coming or it’s good news because stocks are on sale. It’s time to stock up. Today’s guest is Ricky Mulvey, host of the Motley Fool Money Podcast, and he’s joining us to talk about ways to still find great investments even in this current market. Hello, hello, hello and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen, and with me as always is my still investing in the stock market co-host Scott Trench.

Scott:
Thanks, Mindy. Great to be here. Dow you doing, oh God, whatever. We’ll try again later. BiggerPockets is a goal of creating 1 million millionaires. You’re in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone no matter when or where you’re starting or even if you are one of those stock picking types today, we could not be more excited to have Ricky Moy from the Motley Fool here on BiggerPockets money to talk about stocks in a general sense and things that you can look for as you attempt to find great value in the stock market. Ricky, welcome to BiggerPockets Money.

Ricky:
Thanks for having me. What a time to talk about stock investing.

Scott:
Yeah, maybe we start there and just get your reaction at a high level to how you feel about the pullback we’ve had here of 10 ish percent as of March 11th from the peak in February, and most major indexes.

Ricky:
I don’t want to give you too much credit, Scott, but this is something I know you were worried about on the show for a little bit now, even in February when you’re looking at, what was it, the forward PE of the broader market at 29, stock market corrections are a good and healthy thing, and in fact is someone who is investing for decades and trying to make a lifetime out of this. This is something that I’m excited for and in a weird way also rooting for,

Mindy:
Oh, explain how you’re rooting for this

Ricky:
Because it’s like if you go to the store and you see your favorite shoes on sale for 20%, you get a little bit happier to buy them. There are companies that I’ve been looking at that I’ve had on a watch list that have become from a metric sense more affordable is people become increasingly pessimistic about the economic outlook for the next we’ll say, we’ll say year with the trade war that’s going on. People are worried about a recession, but I’m in this game for decades, and so as a younger investor, this is something I’ve become increasingly excited for when I think about that long time horizon.

Mindy:
Okay. Two things. I love that you said I’m in this for decades. Yes, absolutely. If you are investing for decades long returns, this is going to be a drop in the bucket. I truly believe, of course, past performance is not a ticket of a future gain and I cannot guarantee that the stock market is ever going to go up again, but I have faith that it will. Second Ricky, you mentioned that Scott was looking at the forward projections of the stock market and that’s why he sold. Would you categorize these recent market drops as PE related?

Ricky:
Not entirely, and I also want to be, I mean Scott, I know you were buying a rental, so it wasn’t just your feelings about the market. You don’t want to say, oh, the market’s too hot, too cold, I’m in and I’m out. But I think that it’s a combination of things. You look at a brewing tariff war, which is becoming increasingly in reality. We’re recording this on March 11th, but this is something that economists have warned about. If you shut down global commerce through more taxes or I shouldn’t say shut down, but rather impede global commerce through 25% ish taxes, that slows down the economy. And then the other thing is that I think you had investors when things get priced up like that, they look for reasons to sell. And when you give a strong bear case like that, which I don’t want to dismiss the reality of it, it leads crowds to head for the exits.

Scott:
I kind of summarized it as, and I think you have to incorporate the political element into it at this point, even though we love to stay away entirely from it. But I think the way to phrase the political element is I think hundreds of millions of Americans are asking themselves, am I comfortable leaving the majority of my financial portfolio in US stocks given the activity side of the Trump administration and for a large and potentially growing percentage of those people? The answer that is no. I think that’s the best way to frame the problem without really getting into the politics of the situation too deeply. Do you agree with that?

Ricky:
I think that’s fair. There used to be this, I have a background, I worked for a financial advisor on there radio show before I got started at the Motley Fool. This was widespread among the financial advising industry is people would bring out a chart where they’d prove basically that the stock market returns have basically no correlation to who’s in office, but I think it’s increasingly difficult to make that case. And what I would say now is a lot of this does seem to be self-inflicted and I would also consider the fact that this is a more violent market, good and bad. I think there’s going to be stronger ups and downs is things change based on a headline, a new tariff, a response to the tariff, all of that kind of thing.

Scott:
Just a couple of clarifying points on my position from a few weeks ago, which I think is largely unchanged despite the pullback here. One is I was just uncomfortable with the Schiller PE ratio rather than the forward PE ratio. The forward PE issue or change in a heartbeat as we saw in 2008 in terms of things I was afraid is the word I would use of the fact that price to earnings in real terms over the last 10 years adjusted for inflation in real terms for the s and p 500 and other US index funds were priced at close to their 1999 levels. And that was my primary fear. And then on top of that I was like, the market that’s priced that way needs a lot of things to go right and anything that goes wrong could potentially put that and create a problem.
It’s like kindling and any spark connect, ignite a fire. That was my thesis. I didn’t have much more to it than that and I’m like, I just can’t, can’t handle the heat I’m getting out of the kitchen and I’m putting it into real estate, which I’m more comfortable with and feel like even if there’s a massive general downturn, I will lose less badly than I would with equities in terms with a paid off property and in the event that things and I’ll also be able to refinance even at a lower value at that point and use those dollars for something else. And if things go well and I’m completely off my rocker with this, I’ll still earn a six 7% cap rate and some appreciation on the property, which is not going to be too far off the index long-term average. So that was more my thought process just for the record there. In addition, do you see the same risks that I’m talking about in there and what is your reaction to that play as a stock market guy?

Ricky:
Two things. One, I think you did something incredibly wise. You moved to your circle of competence way more about the real estate market than I do, and you saw an opportunity there where you said, this is a better use of my capital. The thing that I would be a little more cautious about is anytime you’re getting in and out of the market, you have to be right twice, it’s very easy to say that the market is overheated. What becomes increasingly difficult is deciding when to get back in. I remember stories of investors where they saw 2008 coming and they pulled out their money, but when do you decide that you have an all clear signal to get back into the market? And there’s research from JP Morgan that I’ll bring up basically seven of the stock markets, 10 best days occurred within 15 days of one of the market’s worst days. So I think it’s incredibly difficult to be right twice.

Scott:
I completely agree. That’s why I’m not saying, oh, I’m going to go back in. I’m saying I permanently reallocated to real estate and if I see a generational opportunity, maybe I’ll refinance, but it’s more mostly just this is a paid off property that I’d be happy to hold for 20, 30 years on this run. I just have that option. Should I ever want to refinance it? It’s kind of more the way I think about it.

Ricky:
There are still pockets of the market that are cheaper than the broader market that I think are worth looking at. And there’s also parts too with interest rates being a little higher for someone like you Scott, if you look at broad baskets of corporate debt, there’s one ETF I’m thinking of in particular that has more than a 7% yield on it. So you don’t get the appreciation you may get from a rental property, but you trade that off with not doing a whole heck of a lot of work. I’ll pay the fine folks at BlackRock to do the diversification for me and I’ll take the 7% checks on that ticker, USHY. So high yield corporate bonds.

Scott:
Well love it. So what is your kind of thesis? Where are you looking as an expert in the stock market and analyst for Alpha for value in today’s world?

Ricky:
The thing I’m really looking at right now more than I think I have before is insider buying activity. So I’m trying to look for companies that have good three to five year holds for them. And then also I like seeing insiders buying gobs of stock with their own money because to me that’s an indication that they believe that their company is undervalued.

Scott:
How do I even begin? Let’s say I like that idea. How do I even begin to do research to see which insiders are buying stock? And what are some interesting observations you’ve had recently that you’re exploring whether or not you’re actually going to pull the trigger and invest?

Ricky:
I’ll talk about a stock that I own, but there’s a couple, there’s sources on one account I like is called insider radar that basically tells people when there’s large purchases of insider stock, but also when insiders in companies go to purchase shares or sell, they report it with the SEC. So when you’re looking at a company, one of the filters I do is to see what insiders have been doing with their own personal stakes in the company. And that’s a form you can find on the NASDAQ website. They have to report it if they sell or buy shares.

Scott:
Yeah, shout out to Randy Trench, my father who has said to me in the past, there’s a lot of reasons people will sell stock. You want to buy a house, pay for college, all those kinds of things, but there’s only one reason you buy stock

Ricky:
And especially on the open market, these are people that know how to value their company and if they think the market is wrong, let ’em put their money where their mouth is.

Scott:
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Mindy:
Welcome back to the show.

Scott:
Love it. Okay, so you look at those things and then what are some of the firms that you’re interested in that are where you’re seeing that?

Ricky:
One stock I’ve been buying lately is it’s TKO holdings, ticker, TKO, and this is one just kind of started making a profit. This is the parent company of the UFC. The WWE professional bull riding and soon a boxing league. And I’m actually, I’m glad to be here. I’m happy to talk about combat sports for as long as you’d like me to. But there’s something interesting going on with this, which is that the CEO Aria Emanuel has set up a automatic buying program for his company’s stock. And usually when you see company leaders, they set up automatic selling programs. So the market doesn’t take it as an indication. Oh, the CEO EO just sold a lot of stock. They want to diversify away, do the thousands of things that Randy trench referred to. But in this case you see a lot of insider buying and I think the company also has a couple of key catalysts that make it for me an attractive stock to purchase and one that I’ve been in my personal account over the past few weeks, months.

Scott:
So your thought is in the current environment it’s kind of wacky out there, but insiders are buy-in. What intrigues me? How do you then do the next level of diligence or thought process on an investment like A TKO?

Ricky:
Everything comes down to what are the earnings this company can do and what is the sentiment going to be because that’s what the market values. What are your earnings and then you put a multiplier on that in order to create a value, you’re doing an equation. So for with TKO, I’m thinking of a few things. One, I think they have a pretty tremendous value driver and I got to credit my colleagues Nick Sippel and Jim Gilley’s in their work on this, but this year they are the only company with a major media rights deal that’s coming up, so that’s the UFC. And if you look at a few moves that ESPN has been making lately, they’ve been getting rid of baseball, they ended their contract with professional baseball and this has been something that I think they’re basically creating room to invest in a big media rights deal for the UFC also, you have the wwe, which just premiered on Netflix in the United States and also Netflix has the international broadcast rights for the WWE E.
So I think they can significantly grow their global audience for that. And the third factor you have in this is the money from Saudi Arabia. So the UFC is going to start basically a boxing league and this is being done in conjunction with the fine folks in Saudi Arabia to compete with the current system in boxing. The other thing I would consider for a value driver is there is a political element, right? Dana White is the CEO of the UFC, not the organization. He has a long and deep loyal relationship with President Donald Trump. So you have to think if this guy wants to get a deal done, he’s going to have less resistance than he would’ve had in the past four years. I think that’s just kind of icing on the cake. So those are the value drivers that I’m really thinking of a growing sport audience, money coming in from the outside and then you look at the valuation, it’s at about 34 times forward earnings when I checked Y charts this morning. To me that’s not bad for something that’s essentially a monopoly in two areas already in professional wrestling and in mixed martial arts.

Scott:
Awesome. So I love that. So there’s not a value play. It’s not like this has a great price to earnings multiple or super strong balance sheet. This is a growth story and you’re looking for companies that are going big in the current context and have potential major strategic needle movers here. And there’s a very rational argument for why this company could really dramatically expand and has really huge tailwinds behind it,

Ricky:
Has tailwinds and has a moat.

Scott:
Yeah, moat’s perfect. So

Mindy:
I like this insider buying thing. I never even thought to look at that, although that has definitely been something that I have thought was a good thing when I was interested in a stock and then, oh, the CEO of the company is buying oodles and oodles of this stock. Oh, that makes me feel even better about my choice.

Ricky:
Yeah, you want to find CEOs and co-founders that have basically themselves tied to the mast of this ship. And the second level of this is it’s not just the insider buying activity, but it’s also good to see what insider stakes that they have in the company. Does this CEO own a lot of stock? Because if this is 90, 95% of their personal portfolio, even if they think the stock’s going to go up, they may not be buying on the open market for diversification reasons. But I think this is a pretty important check for me when I’m looking at buying a stock, especially right now.

Scott:
So let’s go into that because I think that the same thing is true in the syndication space. We have these guys who raise money to buy an apartment building and they put nothing into the deal. It’s what I call a free spin on it. They can go up on around there and look, I think there’s going to be a weak correlation frankly for some of these things. I think that the math would prove that out of our history, there is a correlation between insider buying and better returns over time, but it’s fairly weak. Is that right Ricky?

Ricky:
I don’t have the data on it. I would say look for strong insider buying and that’s up to you as an investor what’s strong to you. So two examples that I think of in the past. One is just a few months ago, Calvin McDonald, she’s the CEO of Lululemon stock got crushed. He bought a million dollars worth of stock for the CEO of Lululemon. Is a million dollars significant? It’s kind of hard to tell. For me it was significant enough and the stock’s done okay since then. We’re having a cool down in sort of apparel sales, but that was something that was important to me. And then the other one that I found significant was Ted Sarandos. He’s the former CEO of Netflix co-founder of Netflix. A few years back in 2022 when the stock was just absolutely getting hammered when everybody was pessimistic about the future of Netflix because they had lost subscribers on an earnings call, he went out and with more than a million dollars of his own money, went and bought Netflix stock on the open market. I think it was below 200. And since then the stock has beaten the market since then. To me that a strong indication and it’s one I look for, not just the head fake, not just a few thousand dollars, but once we’re getting into supercar money, that’s when I start to get excited is a lower stock investor. Scott,

Scott:
When I think about good alignment with the executive of the chief executive of a company or one of these syndicators, it’s somewhere reasonably close to half of their personal wealth is in that investment and great if they’re taking additional dollars to buy into that. But that to me is what meaningful really looks like. Now many people won’t do that. A quarter is still good, less than 5% of the individual’s wealth in the asset that they’re running in terms of what the capital they have at risk. That would be a concern to me on it and that’s what framework you’re getting at here is you have to guess in order to understand strong insider buying, it sounds like you have to kind of guess at what the personal wealth of some of these individuals is external to the company and make sure that the company is their number one or very close to their number one, the most meaningful single placement that they’ve got in their personal portfolio.

Ricky:
There are other important things when you’re looking at a mature company, does this company, does it produce positive earnings? Does it produce positive cash flow? What is it doing with that cashflow? What is the market’s price tag and expectations that it puts onto this company? Those are also very key and important that I want to make sure I’m not brushing aside as we have this conversation.

Scott:
Oh, absolutely. I just love that this is the starting point and this is a great, we cannot spend hours and hours going through all these different things. That’s what you do full time at the Motley Fool. You have such a body of wealth and information on there over long period. I just love the insight into this, Hey, this is the first thing I look for. It’s the first thing that gets me piqued, my interest piqued about doing more research. Is it? Awesome.

Mindy:
So Ricky, let’s look at your personal holdings. How would you categorize your split between index funds and individual stocks in a percentage basis?

Ricky:
I lean toward individual stocks if we’re counting, so we’ll count my 401k in that I’m probably, I’m probably 60 40 index funds to individual stocks.

Mindy:
And do you have any bonds or any other non-stock holdings?

Ricky:
I hold a bond fund USHY that I mentioned previously. It’s not super major position, but it’s to me a little bit of a cushion and I’ll take 7% for sitting here and playing on the computer with y’all.

Mindy:
I like 7%, I like 15% better.

Ricky:
Yeah, nothing wrong

Mindy:
With that

Scott:
15% being the index fund return for the last couple of years, right? Is that’s what you’re referring

Mindy:
To? Actually I’m guessing at my returns for the last couple of years, I haven’t really looked at that. I haven’t, what a terrible thing to say. I haven’t really looked at it but I haven’t. I mean Carl looks at it every day so I don’t have to. Ricky do you a that has changed the makeup of your portfolio like you picked a winner or you picked a non winner?

Ricky:
My best ideas and my worst ideas, let’s get into it because if we’re talking about a winner, I also want to talk about times that I’ve been absolutely fundamentally wrong and lost money.

Scott:
Chinese fruit juice company,

Ricky:
That’s Scott. The two that have been big winners for me have been meta platforms in Spotify by a dollar basis. Those have driven a lot of returns from my portfolio and that was a time where both of those I think were times where I saw long-term trends where the bears were hammering down on very pessimistic points where I was able to go, I think you all may be wrong about this, we can start with meta. So meta back in 2022 ish, we’ll say it was no longer Facebook. We’re a metaverse company now and we’re going to spend lots of money on reality labs and everybody’s going to go around wearing these goggles to play video games to meet online and to watch movies. And the investors at the time were very concerned about the amount of spending that was going on and in my view, they kind of missed the fact that this is still a platform with billions of people spending their time and attention on it, an incredible ad platform. And so I took a stake in the company and that has been a good winner for me. The flip side of that I’ll also say is that’s also one where I sold too early where I sold some of my shares because I’m like, okay, good. I’ve made a good game gain, let’s reallocate this elsewhere. I price anchored and I made a mistake.

Scott:
Love it. I remember that time period and I don’t participate in this, but I remember the back of my mind, I was thinking about Man meta’s in this and there was some Reddit post or something that was to the effect of, man, look how much better grand theft Auto Fives virtual world is from five years before the billion dollar spent by meta on this, the META’S 3D virtual reality world. And that was tanking their stock. I remember that. And that’s when you bought that was a smart buy because it’s like okay, we’re going to get up on that and go back to our core business of dominating the world and from social media perspective and the traditional business and that’s exactly what they did.

Ricky:
They did. And there’s a couple of things that, one thing you said there is you had an observation about that and I know you don’t like individual stocks as much, but the thing that I want to communicate is that you as a retail investor, you as a regular investor, you actually have tremendous, you have some tremendous advantages over institutional investors if you’re a long-term buy and hold investor and there’s a famous investor named Peter Lynch and one of his ideas is that the observations that you have about the world aren’t always valuable but can be valuable. And this is especially true for people who live between the coasts that are able to see some economic trends that may not be as visible outside of places like New York City.

Scott:
Yeah, it’s funny because his book one Up on Wall Street is a wonderful read for folks. I always tell folks who are, they don’t really know they’re just getting started, especially in high school or college, it’s really hard to convince someone in that area just index fund for the next 50 years for it. So I tell ’em to read both the simple Path to wealth and a book like One up on Wall Street to get kind of the different perspectives of those and make their own decisions and let ’em know I chose the index fund approach there. But I will say over the years, there have been a couple of times when I’ve been like, this is an absurd situation. I really want bet on it and I haven’t, don’t know what my record would be. I have to go back and actually write ’em down in the future and kind of look at one of the ones that is most memorable for me on this is Kodak.
So Kodak is a company, obviously a camera company, declining for a very long period of time, less than half a billion dollars in market cap now. And in 2020 they came out with Kodak coin, their crypto for photographers and their market capitalization increased from 250 million to 750 million overnight. And I remember thinking, I have never been so sure in my life that this company’s going to come crashing right back down. And sure enough, within a few weeks they did that and I just regret to this day I never bought a put option with is a small amount of money on that one it it’s like Warren, there’s 10 times in your life when the market will hand you something just so extraordinarily absurd that you got to act on it in there. I dunno, is that kind what you’re referring to in

Ricky:
These situations? I’m generally a long only investor. I’ve tried shorting stocks before. You said put option, which is good because that can bite you a lot less than shorting a stock. But I’m a long-term optimist and there a part of, there are times I’ve wanted to short stocks. I don’t love rooting for companies to go down in flames. The case of Kodak is a special example. Anytime you start seeing a coin that’s associated with the company, something that just seems weird and off that gets your spidey senses up. Yeah, I think you made a good observation on it and I wish you made a profit.

Mindy:
We have to take one final ad break, but we will be back with more with Ricky MoVI right after this.

Scott:
Thanks for sticking with us.

Mindy:
Let’s talk about holding periods because Ricky, you said I sold meta too early. My favorite best friend Warren Buffet has said my favorite holding period is forever. What is your typical holding period?

Ricky:
Yeah, Warren Buffet says that in their stocks that he has owned for fabulously long period of times, but anytime you look at Berkshire’s 13 f, you see some buys and sell in there. He gets, he could sometimes get a little traity with it.

Scott:
I agree. There’s a big difference between what he says and what he does. Frankly in a lot of areas right now he’s got 300 billion in cash. He exited every huge chunks of the portfolio in the last couple of months. So I agree that there’s a lot of people quote him and there’s a big difference between the two.

Ricky:
You could find a Warren Buffett quote that suits what you want to do sometimes. The thing I would also say to Berkshire, they’re an entirely different investing category than us folks here and listening. They have to shoot with an elephant gun. This is one of the largest companies on the open market. They’re not even able to buy small cap companies. They have to look at stakes in very large cap companies. You just talked about how a lot of large cap companies were overvalued so they’re not able to play in the parts of the market that someone on the retail side is as well. Now to actually answer Mindy’s question, what’s my holding period? I think three to five years is a proper one. I like to find companies though that think in terms of generations when possible, not all of them do. They’re a couple that come to mind, but I think three to five years is a good amount of time to test the thesis and that also puts you ahead of the pack in a lot of ways. I found according to the New York Stock Exchange as this was in 2020, the average holding period of shares was five and a half months, which is a decrease of a late 1950s peak of eight years. So investing is a very strange thing. If you’re willing to sit on your hands and do nothing, I think that can give you a large advantage over a lot of the crowd.

Mindy:
Okay, that’s really interesting because my favorite holding period is a really long time, I’m not going to say forever, but I’ve been in, I think Apple iPhone was introduced in 2003 and I’ve been in Apple since then. I got into Google on their IPO in I want to say 1998. I’ve been in Tesla since 2012. I hold for a really long term and I might sell a little bit. I did a full disclosure. I just sold a hundred thousand dollars in V, what did I sell a hundred thousand dollars in VGT because, not because I think the market is bad, but because I’m building a house and I needed some extra cash, but for the most part I hold for a really, really, really long time. And Ricky, you said you are investing for decades. Why are you only holding for half a decade?

Scott:
Also, I want to pile along with that question with a part two to Mindy’s question here, which is tax drag. So if I have a hundred thousand dollars invested today, and let’s say I have a gain of a hundred thousand dollars and I realized that gain and let’s say it’s close to the marginal tax bracket, right? That could be very little, but it could be at a high tax bracket, 15% for long-term capital gain in one bracket or up to 20% plus we live in Colorado, all three of us, so there’s a four point a half percent state tax on both long-term capital gains, short-term capital gains and income here. So let’s say that we sell a hundred thousand dollars in stock now we have roughly $75,000 rounding to 25% that we invest and we put it right back in the market. Well, it’s not like after tax in 30 years we’re left with the same amount. Well actually have materially less after tax wealth when we go to sell portfolio B that’s invested a lower after tax basis than the previous one. So how you think through that concept of tax drag on the returns of your portfolio with that three to five year hold period? It’s a fair criticism of my decision recently as well. I will go through that and that’s the first time I’ve ever sold stocks.

Ricky:
Oh, you real estate investors with your tax thoughts, how could you, so to be clear, the three to five years, that’s the amount of time you want a thesis to play out. If a stock is performing well, you want to continue to hold it as long as possible. The three to five years is when I’m basically signing up to buy shares. That’s what I get in my head. These are the fundamentals that I’m thinking about and I want to see this play out over three to five years, so I’m not itching to sell. With that said, there can be thesis altering events. You want to be careful about recognizing those and making a decision based on that happening. But that’s when I’m buying a stock, I’m thinking, okay, this is my three to five year sort of thesis on this and then after that you can revisit it and you can continue to hold. I’m not looking to necessarily sell in three to five years, but those are the sort of amount of time chunks that I’m thinking in. And then I do a lot of my investing within Roth accounts, so I’m taking after tax money, no gains on sales, that kind of thing. Yeah, we love the Roth account.

Scott:
Perfect. Awesome. So we do that in the retirement account. You don’t have this problem out there to a large degree either. It can be tax deferred or the post tax account in the Roth. What about does that change for a specific companies? So for example, I imagine that meta, you had a clear several year thesis in that particular example, but I imagine if I was looking at the market as a layman, I would not imagine that would apply to say Costco, right? Costco, my belief is they should just keep doing what they’re doing in perpetuity with few changes because I want to continue going there to fund a modestly luxurious lifestyle on the cheap for many decades to come. But does that change for you with any specific plays like a Costco?

Ricky:
I don’t own Costco stock. I wish I owned Costco stock. Perhaps I should go out and buy some. That’s something I’m a customer of and that’s the type of thing where you’re seeing the thesis play out every time you visit, you go to a Costco, maybe the thesis changes and you go and you realize, you know what, maybe they’ve just hiked my membership a lot. Maybe I feel like I’m not getting quite the value on Costco steaks that I once did or those, I forget what they’re called exactly, those figi bars. I have ’em as a snack once a day. Every time I go to Costco I get them. Maybe I’m noticing that the stores are a little bit dirtier that the freezers are out of stock. So you’re saying that as long as Costco keeps doing what they’re doing, if you own shares in Costco, you would be an intensely active observer in how the company is doing. And it is the type of company where I think about what would it take for me to stop shopping at Costco. It’s a lot. Every time I go there, you spend a few hundred dollars and you feel like you just got a great deal,

Scott:
But then it comes down to what’s the price to earnings ratio? And I looked it up and Costco’s trading at 54 times price to earnings. And so okay, a lot has to go right to meet those expectations and that’s where this all gets really complex again.

Ricky:
Yeah, you’re not the first person to realize that Costco is a great place to go buy goods and a good place to work. The way that I might consider reframing that though is you’re talking about Costco, like a store, like it’s a store. What if I told you it was a real estate company with a subscription component attached to it? Because a lot of the ways that it makes money is that subscription revenue and as long as they keep people happy, that’s what I think the street is saying is that that’s pretty safe. Additionally, right now, given the market uncertainty that we talked about at the top of the show, you’re seeing a lot of investors that say, I want to go to something that seems safe and what seems safer than Costco.

Scott:
Yeah, that makes perfect sense. Although I pushed back on the real estate piece, you wonder what else could possibly go into the Costco building in the event that they had to liquidate the real estate at some future date,

Ricky:
They could put an Amazon warehouse there. The part with that is they own a lot of their real estate where you see a lot of stores that are leasing their space. So they are a real estate owner is I guess more of the point that I was trying to make rather than them being a reit.

Scott:
Let’s wrap up with a couple of more tidbits here. So you start your approach with, hey, the market pullback is an opportunity that presents at least a little better buying chance than maybe it was than there was a few weeks ago. In some areas you then look for insider buying in particular to start your story. Go ahead. You’re about to say something. So react to these.

Ricky:
Yeah, that’s one component. I think more broadly the thing that I would encourage that I do that I would encourage folks to think about, where are you spending your time and your money? And that can be a good place to start looking for stocks as well. What do you see that’s becoming popular with your friends? And then you use that as an opportunity to research more. If we use the time, the time and attention thing, you’d be looking at companies like Facebook, Costco, maybe Visa, MasterCard. You look at some of the big tech stocks that enable the internet to happen. You could look for worse places than that, but one of the things I try to look for what’s happening in the world around me and then I use that as an investigation to look into the company. Sometimes I end up buying shares in the company and then sometimes I don’t.

Scott:
Got it. And that’s very much aligned with the Peter Lynch one up on Wall Street approach. So if that is appealing to you or even worth considering, would you agree that people should definitely pick up a copy of that book to get something that’s fairly close to the starting point that you use to investigate opportunities?

Ricky:
Yeah, I think it’s a great way to see how people have historically beaten the market. It was written years ago, so there are a few things you’ll look at that seem a little dated. There’s no cost of trading anymore. I think the market is a bit more violent than it used to be. I think the ups and downs are significantly larger, but I think it’s a great starting point and also is good to give you the confidence that you think of a lot of games in professions and activities where the professionals have a tremendous advantage over you. And I think one up on Wall Street is a good antidote to that to say no, you actually have tremendous advantages is an individual investor who’s able to be patient and also move freely.

Scott:
Okay, so we have that as the starting point. Zooming back out, the market pullback is at least an incrementally better opportunity to go hunting for bargains. We start with where are we spending our time and attention here and what are our friends doing? What are things that we’re starting to notice that we on the ground can see as individual investors? Then we look for insider buying. And those are kind the very beginning points of how you at least begin the thought process of looking for investment opportunities after that. There’s a large amount, I’m sure, of due diligence and research that you do on these companies that would take us much longer. But are there any kind of key additional points that you’d say are downstream, they’re like, Hey, we like the insider buying. I’m starting to spend a lot of time and attention to all my friends are watching MMA fights. What would be a gotcha, what would’ve been something that could come up in diligence but didn’t that would’ve scared you away from it?

Ricky:
From TKO specifically?

Scott:
Yes.

Ricky:
What would come up that I really wouldn’t have liked there if I saw no path for them to be able to make a profit. So from there, you want to look at, I like looking at operating profit because there’s sort of nowhere that’s basically fewer places for a company to hide. If you can’t make an operating profit, you have some splaining to do. Maybe you’re a young company with a big growth story and you can set that aside. But from there I’m looking at what are these companies pathways basically pathway or pathways to being profitable? And if I thought that, so for instance, with TKO, if I saw a ton of dilution, that’s something that would give me pause If I didn’t see insiders taking stakes in the company or if I were seeing things like people suddenly becoming disinterested in mixed martial arts in the WE or if they were getting way outside of their circle of competence.
So one of the things is that they’re making a play on the boxing side that makes sense for a combat sports organization. Sometimes you’ll see companies that get a little too expansive for themselves. Maybe they want to go buy an online marketplace or an energy drink. I would start asking questions about why they’re doing that. But after you go through that, you say, what is the market assuming about this company? And then what has to be true for this to be right? What has to be true for it to be wrong? And then I’m thinking about the fundamental value drivers that could increase earnings or change sentiment about the company.

Scott:
I would love talking about this stuff. I read the books too early and not too early, but I read the books early on about how you can’t beat the market and stayed away completely from this. But you can tell I always have a little part of me that wants to go into this. And I know Mindy and Carl talk about index funds and then our bajillionaire because of their Tesla and Google investments,

Mindy:
But we have moved into index funds. We had never heard of them until, I don’t know, when did Jail Collins write that book?

Ricky:
Most truths I think are somewhere in the middle for people who are focused on stock investing. I think index funds are wonderful and can make a lot of sense. I own a lot of them myself. For those who are interested in investing, I think investing in stocks and companies is a great way to make hypotheses about the world, to be a curious participant in society and also have a scorecard of how right you are or how wrong you are. And this is, yeah, it’s something I personally enjoy. And I’m not just saying that as an employee of the Motley Fool,

Mindy:
Ricky, where can people find you online

Ricky:
At Twitter? On Rick, at Rick, so slick or it’s X now at Rick, so slick on X. That’s two S’s between the K and the O. And also if you’re interested in stock investing, we have a podcast, it’s called Motley Fool Money. I host it. We put out six shows a week. It’s a fun time. I’d invite you to check it out.

Scott:
Yeah, you do a great job over there. And you have a couple of different hosts on that show as well that have the expertise in different areas, right?

Ricky:
Yeah, I’m one of three. So I co-hosted along with Dylan Lewis and Mary Long. We also are very lucky to be assisted by a wonderful roster of Motley Fool analysts who are even more of an experts or even more of experts in the stock market than I am just a lowly host of the Motley Fool Money podcast. But yeah, there’s a ton of folks on it and we try our best with it.

Scott:
Awesome. And I just want to say we’ve had a wonderful experience in the overlap that we’ve had with everyone from the Motley Fool over the years, including what was supposed to be very bloody battle between real estate and stocks with two experts from Moley Fool on the BiggerPockets Real Estate podcast. Mary has been wonderful to work with, you’ve been wonderful to work with, and we look forward to meeting Dylan someday as well. So thank you for all you guys do over there and the free sharing of your expertise here on BiggerPockets.

Ricky:
My pleasure. And I’ve enjoyed basically every interaction. Not basically, I can say every interaction I’ve had with an employee of BiggerPockets has been pleasant, and I’ve always been impressed by everyone I’ve talked to has just seemed competent, which has always impressed me and I’ve been grateful for in my experiences with BiggerPockets.

Scott:
I would love talking about this stuff. I read the books too early and not too early, but I read the books early on about how you can’t beat the market and stayed away completely from this. But you can tell I always have a little part of me that wants to go into this. And I know Mindy and Carl talk about index funds and then our bajillionaire because of their Tesla and Google investments,

Mindy:
But we have moved into index funds. We had never heard of them until, I don’t know, when did Jail Collins write that book?

Ricky:
Most truths I think are somewhere in the middle for people who are focused on stock investing. I think index funds are wonderful and can make a lot of sense. I own a lot of them myself. For those who are interested in investing, I think investing in stocks and companies is a great way to make hypotheses about the world, to be a curious participant in society, and also have a scorecard of how right you are or how wrong you are. And this is, yeah, it’s something I personally enjoy. And I’m not just saying that as an employee of the Motley Fool,

Scott:
Well, we can tell you’re passionate about it. Thank you so much for sharing your wisdom here with us. We really appreciate it. Thanks for everything that you guys all do at the Motley Fool. We look forward to learning more from you over the years here. And best of luck this year

Ricky:
With TKO. My pleasure. Thanks for letting me on the show.

Mindy:
Thank you, Ricky. This is a lot of fun, and we’ll talk to you soon. Alright, Scott, that was Ricky Mulvey and that was a really, really fun conversation. What did you think?

Scott:
You can tell I love this stuff and I’ve had to force myself to not do any stock picking essentially for the last 10 years because I’ve read the research and that suggests that passively manage index funds tend to overwhelmingly outperform active investing. And yet the Motley Fool and that community, there are plenty of exceptions to that that are out there that have clearly outperformed the market over time and plenty of people who try it and do it honestly and to the best of their abilities and believe that, and Ricky is one of those people out there, and you can tell it’s just so, it’s fun. It’s fun to talk about these things and to place these ideas out there. So I think that hopefully that conversation, what it does for Full is it says, look, we are not changing our core beliefs and index funds.
And Ricky, even at Motley Fool Guy is in 60% of his stock marketing positions are an index funds out there. There’s a best practice component to that, and it shouldn’t be a taboo thing in a general sense to spend some time doing this if that’s something that you’re interested in, a general sense, maybe not with the majority of your portfolio, but it’s, it’s not like you’re breaking with a religious doctrine here to invest in individual stocks from time to time. And it’s something that a lot of people have done and been very successful with. And there’s also good research to say that the index fund tends to be a little better for the average, if not the majority of investors out there.

Mindy:
I would say if you are thinking about investing in individual stocks, you should have a reason, not just, oh, my best brother’s girlfriend told me about this one stock, so I should totally put money into it. No, if you don’t want to do the research to figure it out, or if you’ve heard of a stock and you’re like, oh, that sounds great. I’m totally going to put my money in there. You would be better off with index funds. But if you want to do the research, if you have an unfair advantage, if you have insider information, and I don’t mean that in a illegal sense. I mean, your brother works at GM and he keeps talking about this car and how it’s doing great things with test audiences or whatever. Clearly, I dunno what I’m talking about there, but if you know somebody who is really excited about a product and can tell you more about it, and then you start doing your own research and you dive down that little rabbit hole and you’re like, oh, you know what?
This seems like a great idea. I would definitely not suggest putting all of your money into it. Definitely don’t get a mortgage on your house. Oh my goodness. The meme stocks, when people were taking out mortgages on their house so that they could put money in meme stocks that ultimately did not perform the way that they thought they would, that’s not a good idea. If you’re going to invest in individual stocks, you should have a reason. But if you have a reason, dabble Scott, I would love to see you buy Costco stock. It’s like $800 a share an hour at $900 a share.

Scott:
I can’t buy. But here’s the thing, if I’m going to dabble, I’m going to dabble. But coming out of today’s conversation, I would be more inclined to begin my research with Peloton than with Costco because of that value dynamic. I can love Costco all I want and then say, in order for Costco, I need to do more research. Of course, I don’t really know what I’m talking about, but the 54 times price to earnings ratio scares the heck out of me for Costco versus the very low revenue to price ratio, to enterprise value ratio for Peloton, for example, is really interesting. And so I could not do the TKO style investment that’s predicated on these big deals and relationship with Trump and those types of things. My mind doesn’t work that way. Oh, there is clear value to be produced in this area and we can scale up from there. In this particular business, I would be totally, I would approach him from a totally different angle than even than Ricky does here. That’s just the way I’m wired.

Mindy:
I like that point of view though, Scott, Ricky invests in one way because of his experiences and his knowledge base, and you invest in a different way because of your experiences and your knowledge base. And if somebody’s investment strategy makes you feel uncomfortable, then don’t use it. There are so many other different investment strategies out there. I would hope that nobody is listening to this show and saying, oh, well Mindy does this, therefore I’m going to do that too. Or Scott did that, so therefore I’m going to do that too. No, have a reason for what you’re doing. Do your research.

Scott:
And again, I probably won’t do any particular individual stock investing, or if I do, it’ll be, well, less than 1% of my position because I’m an index funder, right? If I’m an index funder, even though I’m out because of the current market as I put more into index funds or into stock market, it’ll almost certainly be via passively managed low cost index funds over the most of my life. If there’s ever a sharp break, I reserve the right to make that and go into a different direction at some point in the future. I’ll let everybody know.

Mindy:
Okay, great. Well, that’s awesome, Scott. And that wraps up this episode of the BiggerPockets Money podcast. But before we go, I want to let you know that we have a newsletter that you can subscribe to. We can deliver it directly to your inbox, nothing for you to do except go to biggerpockets.com/money newsletter and subscribe today. You will hear information from me, information from Scott. Scott had his very own column called Scott’s Thoughts, so we would love to have you subscribe. We would love to share our information with you. So again, biggerpockets.com/money newsletter. And with that, he is Scott Trench. I am Eddie Jensen saying, do caribou.