In episode #2 of The Big Bo $how, Big Bo (a.k.a. Jason Blumstein, CFA®) provides context on the current #FOMO investing trend, and contrasts it the Moneyball concept in sports. Topics Discussed:
- #FOMO vs. ROE based wealth creation
- Warren Buffett's thoughts from 1998 Berkshire Annual Meeting
- It's OK to make mistakes, as long as we learn from them
- NFL Playoff round-up and how Matt Stafford's journey relates to upgrading to quality
Hope you enjoy the $how!
Episode 2 Key Takeaways:
Welcome we're live in the second ever Big Bo $how. I'm your host, Jason Blumstein, also known as Big Bo here to help people empower themselves to live their best financial lives while creating an ecosystem of integrity, knowledge and passion. You can find out more at www.juliuswealthadvisors.com, that’s www.juliuswealthadvisors.com. I’m also the CEO and founder of that company. On our second ever Big Bo $how, we want to talk about some recent market activity, whether it be the FOMO investing crowd and how we think about that and introduce a concept that we relate to sports in the Moneyball concept of investing, then wrap things up by talking about the NFL playoffs that were one of the best NFL playoffs in my mind in recent memory.
First, let's talk about some recent market activity. And we don't like to get people stuck in the present. But a lot of times the present is built up from a series of events that happened in the past, and what are we going to do when we react to these? It's always good to learn and, and take note, that's one of our founding principles within integrity and knowledge. The second one, knowledge, you always want to try to learn from things. So with the recent market activity, we've seen pullbacks in a lot of names, the S&P 500 is down, call it roughly 8% year to date, it corrected to 10% earlier in the year, the tech heavy NASDAQ is down. I'll call it about 13% year to date. And a lot of the investments that have gotten hit have been in what I call the FOMO or the fear of missing out crowd whether that be meme stocks or or some some cryptocurrencies or NFTs. And I'm not, I'm not here to tell you, you know whether these were good or bad investments. What I'm here to tell you is, you know, just to understand what you own, and to sort of think through this. And for me, the biggest thing that comes to my mind when inevitably I've always got the question from people is "oh, what do you think of crypto? What do you think of NFTs? You know, the biggest thing that comes to my mind, I've done some homework on space.
And I'm not here to tell you that the entire space is bogus. What I'm here to tell you is to try to to understand it. And there are some compelling aspects of Web 3.0 And the biggest parallel that I take into consideration is when Web 1.0 came about, and you know, I was young back then this is the end of the late 90s. So I was 16-17 years old at the time. And again, I've always been investing since the age of 10. And I remember similarly when the first internet came out, everyone was buying a lot of things not necessarily doing their homework, but buying companies. And inevitably, we all saw what happened during the tech bubble. I'm not trying to say that's what's going on here. That's not what I'm saying at all. I'm just drawing the parallel to some things that I heard then that eventually did come to fruition, but it was just 15-20 years later, and not necessarily the companies that were around then were the ones that came that brought things to production as things actually came about. And I was going through this with a new client of mine, who's also decently younger and the biggest parallels that I think about I remember, in the late 90s, the Internet came out and people were saying, you know, well, Jason people never, they'll never go to malls again. We're going to do all our shopping from home, you'll never have to leave your house, you're eventually going to be able to stream movies to your house. That's one of the reasons why, when I was younger, they said AOL bought Time Warner, and this was in the late 90s. And when you sit there in the late 90s, and a lot of these things sounded, sounded silly back then, you know, going to the mall was the place that a lot of people, teenagers would go and hang out, spend some time with their friends, people love going to movies, as well spend some time with a friend.
So why would anybody want to stream a movie to their home? It sounded kind of silly, in that context, but inevitably, it did happen, right? I can't remember the last time I went to the mall, actually, I think I took my kids to the mall, maybe maybe like five, six months ago, but it wasn't to go to the mall, it was to go to a indoor golf putt-putt place in the mall, not necessarily for the mall itself. And I actually first went to my first movie in two years, a lot of that was to do to COVID. But again, it's a lot more convenient to watch a movie with my kids and my wife at my home versus schlepping to the movie theater. The only issue was that the companies that were saying they're going to bring this whole new world, if you will, to the people in the late 90s weren't the ones that did it today. Right? If you think about it, Amazon, which started off just as a silly concept of who was going to buy books online. And instead of going to Barnes and Noble, well, they took over the book space. And now they're the ones that instead of going to the mall, you just go to Amazon. However, this took about 15-20 years to play out and to get into the minds of the American people and the global people. Now that AOL Time Warner, are they the ones that brought streaming to the home? No, they’re not. Netflix did that. So I'm not here to tell you when you talk about some of these, some of these investments that that, that everyone's saying, oh, this is the future. This is the future. You know, they could be right about this in the future. A lot of times, we'll all the time, that's the definition of the future, no one really knows what's going to happen in the future.
What I'm saying is that sometimes it's not necessarily those companies that are telling you about the future today, that are actually going to bring you the future because things typically take more time, than one realizes, also, when when you think about a business, and this is as we get into the whole Moneyball concept, when you think about a business, which is what you inevitably own if you're investing in the quote unquote, stock market, right? I try to talk to people and tell people about when they talk about the stock market, or it's an intangible being we'll make it tangible, make it tangible, in the sense that what you actually own is an equity ownership piece of a business. And like it or not, you know, America is a capitalist country. And if you're in a capitalist country, the businesses need to make profits at the end of the day to stay in business. Right? So if you own a company, and they don't necessarily make profits now, or they're promising profits, 10 years from now, 15 years from now, what have you, well not only will things take time, but they might not have the time if they're not making profits.
And this is the whole Moneyball concept If you think back I know I talk about food football and finance on this show. But as I mentioned earlier on in my first show, I am a big sports fan as well. And I grew up playing two sports and both football and baseball and, and I am a huge baseball fan as well. And in baseball, I remember growing up watching the Oakland A's and Billy Beane, created this whole concept of Moneyball. And he came up with this concept because he just grew frustrated with the Oakland A's doing decently well. But then when their star players like Jason Giambi or Johnny Damon, their big contracts came up the bigger market teams, whether it be the Red Sox, or the Yankees would offer them big money to take their highlight reel type statistics, and the A's couldn't really compete. So he started looking at different statistics of what actually makes a good ballplayer a good ballplayer, and they weren't necessarily the highlight reel statistics that other people were utilizing, like, like home runs, which, yes, sells tickets, but not necessarily is going to win you the championship.
And that, in my mind, as I relate this to investing, and finance, I think of a lot of these sorts of FOMO, or fear of missing out investments as, quote, unquote, home run type of investments. And everyone loves hitting the home run right when I was little, again, baseball player, big guy, I remember, always being the biggest kid on the team and batting either third or fourth in the lineup. Every time I'd stepped to the plate, someone in the stands would inevitably say, Bo, why don’t you hit one over the fence. hit a homerun. The fans love seeing that. But that's not always what the team necessarily needed. And I remember, my coaches, mainly my dad, at the time would tell me to just focus and hit a single up the middle. Right? Single up the middle, puts the defense in motion, puts a pressure on the defense, get people on base, move them over getting on base. Moving people over over time as the as the Billy Beane concept put out, is what you need to do to score runs, you score runs, you score more runs in your opponent, you win the baseball game, and that's the end of the game, you can hit four solo home runs, which doesn't necessarily win you the game versus a team that that just gets on base, move them over and scores five runs to win the game. Yeah, those four solo home runs look great. And I'm sure one of them will make the Sports Center highlight reel, but you're still lost. And investing that's how I kind of think about what inevitably is the goal, the goal is to win the championship for yourself, for your family, whatever your goal may be, your goal is to win the championship. Just like sports teams, you might win a few games, you might have the most catches, the most steals, but your team doesn't win the championship, most of the time, you're you as the individual are not necessarily remembered. It's the team that gets remembered.
And this is why I love the parallels to sports. So if you think about what relates to hitting singles and doubles, is focusing on the fact that you actually own a business and what does a business need to do they need to make profits to exist? And how do you value a business? You value a business typically on the profits and the cash flow that one can expect over time from the business. And you want to look for businesses that are highly profitable. And that's a measure of return on equity. So you give your equity which is your dollars to start a business. What type of returns are you gonna get on your equity? The higher the returns on equity typically tells you that there's a moat or a barrier to entry around those businesses. And it's much harder to destroy those businesses. And a lot of them that's not necessarily very FOMO-like if you will, but they get you to the plate to eventually win the championship. And this isn't just me speaking, this is something that Warren Buffett and Charlie Munger have been doing throughout their careers. And with this said, I'm going to play you a short clip of the 1998 Berkshire Hathaway annual meeting, when someone asked Buffett a question, and he answered it as such. Please, please listen.
“My name is Warren Hayes, Chicago, Illinois. I understand from various publications like Outstanding Investor Digest, that many of the best value investors are buying high-quality multinational Japanese companies that are trading below net-net working capital value. Do you agree that these values exist in Japan? And would you consider the purchase of some of them?”
“Henry Emerson, who publishes the Outstanding Investor Digest is here. So I will, I will give it a tout, I read the Outstanding Investor Digest and it's a very good publication. And I have read some of those commentary about Japanese securities. We've looked at securities in all major markets, and we certainly looked at them and Japan, particularly in recent years, when the Nikkei has underperformed the S&P here. We’re quite a bit less enthused about those stocks as being any kind of obvious bargains than the people that you read about in OID. The returns on equity in most areas of Japanese business, returns on equity are very, very low. And it's extremely difficult to get rich by holding by being the owner of a business that earns a low return on equity. We always look at what a business does, in terms of what it earns on capital. We want to be in good businesses, what we really want to be is in businesses that are going to be better businesses 10 years from now, and we want to buy them at a reasonable price. But many years ago, we gave up what I label the cigar-butt approach to investing which is where you try and find a really kind of pathetic company, but it's so so cheap that you think there's one good free puff left. And we used to pick up a lot of soggy cigar butts, you know, I mean, I had a portfolio full of them. And they were free, busting them. I mean, I made money out of that. But it doesn't work with big money anyway. And B, we don't find many cigar butts around that we would be attracted to. But those are the companies that have low returns on equity. And if you have a business that’s returning 5% or 6% on equity, and you hold it for a long time, you are not going to do well in investing even if you buy it cheap to start with. Time is the enemy of the poor business and it's the friend of the great business. I mean, if you have a business, it's serving 20% or 25% on equity, and does that for a long time, time is your friend. But time is your enemy if you have your money in a low return business, and you may be lucky enough to pick the exact moment when it gets taken over by someone else. But we like to think when we buy a stock, we're gonna own it for a very long time and therefore we have to stay away from businesses that have low returns on equity.”
“Yeah, it's not that much fun to buy a business where you really hope this sucker liquidates before it goes broke.”
Okay, so hope you enjoyed that clip. Now, let's sort of dissect that and some of the things that I thought were interesting from that clip that Mr. Buffett, and Mr. Munger discussed. The first thing that jumps out to me is when they talk about that time as the friend of a great business and the enemy of a poor business. And they look at the friend of a great business through the measure of return on equity. That is what a company returns on its capital and as a measure of quality. And why is that the friend of the good of a good business and the enemy of a bad business, because you aren't getting cash flows and return from your business. You're eventually over time going to erode your business and be forced to either sell your business or potentially go We're out of business. As Munger joked at the end, yeah, you can try to hold on and, and hope that a company buys a poor business. But at the end of the day as I joke around with people a fair amount is hope. Hope isn't a strategy. Hope is not a strategy, my friends. And the one other thing that I want people to take out of this meeting, sorry, take out of the meeting with Buffett and Munger of what they said. Very interesting is that they mentioned that they used to make the same mistakes themselves. And a lot of people don't realize that Berkshire Hathaway was one of those mistakes. Berkshire Hathaway was actually a company that they bought that went out of business. And they rode it out to get out of business. And that's an interesting line there. Because it's okay to make mistakes in life, you can make mistakes. And a lot of times people learn from mistakes. And that's how we grow. And that's how we get better.
But the key, like they stated, and what I'm a believer in, as well, is to learn from your mistakes, to always get better, to try to try your hardest, you're going to fall, but you gotta get back up, and you got to learn from your mistakes. It's a genuine life lesson. But it's also a great lesson as you talk about investing and creating sustainable wealth. And like I said, on my first podcast, a lot of times you have to know what you know. And it's also more important to know, in my opinion, what you don't know and for things that you don't know, it's typically a good idea to ask for help.
So when it comes to investing and creating wealth, think about the Moneyball concept. Maybe you want to go watch the movie or read the book over the weekend. But getting singles, doubles, maybe a triple and as I've always been told, growing up playing baseball, if you hit a home run, that's inevitably a mistake. Home runs should be a mistake. And if you hit singles, doubles, triples, get them over, score more runs, win the game, win the championship, that's what's going to create the sustainable wealth that you deserve. And that goes into the NFL playoffs. We are a couple of days past the Super Bowl here, which was a great Super Bowl and probably one of the best again in my opinion playoffs that I've seen since being alive. Interesting stat here, the final seven games of the playoffs are all decided by seven points or less. Even the Pro Bowl which I wasn't included in those seven games, but even the Pro Bowl was decided by less than seven points. You had arguably the best divisional round of all time which was punctuated by the miraculous Bills and Chiefs game.
Actually, I missed all four of those games I was away with with my family and did not have access to watch any of those games. But it was all good had you always have to spend time with family and family comes before the NFL playoffs as they say and it's an interesting parallel to if you think about the Rams who won the Super Bowl. And just to keep myself honest here. If you listen to the first podcast, I picked the Titans to win the Super Bowl and the Titans to play the Buccaneers which did not happen and this is probably a lesson for me and for other people. If you listen to the first podcast I set , the Cincinnati Bengals were my dark horse to go to the Super Bowl. Maybe I should have gone with my instincts on that one there.
But if you draw the parallel let's bring it back to the parallel of the Rams winning it and I want to focus on Matthew Stafford and his journey. He is the quarterback of the LA Rams. And before this, he played his entire career previously with the Detroit Lions. And if we bring that back to the lessons of Moneyball and the lessons of focusing on quality, right Matt Stafford before this year, not many people considered him as a Hall of Fame quarterback, now you're talking about him potentially. That was our debate, should Matt Stafford be in the Hall of Fame? He's had good statistics. But he never really people always said oh, he's a good quarterback, can't win a big game. That was always the knock on Matt Stafford. And you saw that he did go in the big game. So was it Matt Stafford, or was it the Detroit Lions? And not to totally diss the Detroit Lions, just statistics, they're not the best franchise out there, folks. So you might say that the Lions have a low ROE or return on equity team. Right? So you had a player that was in a bad environment and a low return on equity environment, and went to a higher quality franchise in the Rams, and so and surrounded himself with quality players, and a quality coach and a winning franchise. I'm sure you can say that Matt Stafford upgraded the quality within his team and got a different result. Which is similar to what we're talking about when it comes to trying to create wealth. It's not always about you or what you or what you're entrapped within, it's about upgrading the quality and sort of breaking those bad habits. And we all have the power to do that. So I want to congratulate the LA Rams for winning the Super Bowl. It was a great game, a hard fought game, and a really compelling NFL season. I enjoyed the halftime show with Dr. Dre and Eminem and Snoop Dogg and really brought me back to my childhood.
So with this said, this concludes the second second Big Bo $how. I hope you enjoyed it. Again, this is Jason Blumstein, also known as Big Bo, CEO and founder of Julius Wealth Advisors. You can find us at www.juliuswealthadvisors.com. Also you can email me at Jason@juliuswealth.com or firstname.lastname@example.org. So in the end, I leave you to always live a life of integrity, live a life of trying to gain and obtain as much knowledge as you can, always live a life of your passions, and do stuff that you're passionate about. And the wealth should come to you living a wealthy life. All the best. Until next time.
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