TMBA592: An Entrepreneurial Approach to Investing

Dan: Happy Thursday morning. Welcome back to the pod, I got some awesome feedback from you guys from last week’s show, Noah Kagan dropping by the show and dropping some knowledge bombs. Today’s episode is a burner as well. One of our earliest community members here at the TMBA drops by to share his worldview about …let me just describe it like this .. it’s basically an entrepreneur approach to investing or the fractional and passive ownership of profitable companies run by experienced executives. What if your knowledge as an entrepreneur could benefit you greatly as an investor, something that people don’t often say, they say they’re two very, very different things. We’re going to share a fresh perspective today.

Just three news items before we jump into the conversation. The first thing we did – more sales at Dynamite Jobs dot com in quarter one of this year than in 2020 combined. So sincere thanks to everyone listening here, who dropped by the site and gave our services a shot and gave us much needed feedback on how we can improve. It’s absolutely awesome.

Speaking of improving, it’s been kind of like an undercurrent of the show that those of you interested in landing pages and copywriting have been picking apart my sales copy, because, yes, I’m doing it at Dynamite Jobs dot com. I think it’s freakin awesome. It’s super cool how some of us nerd out on this stuff and swap tips. And that’s been really fun. I appreciate that. And speaking of that. This morning, I received our first confirmed third party sale from our directory of expert services over at Dynamite Jobs, which is a very, very new thing. So I wanted to bring it up because, hopefully, we’ll advance this somewhat in the coming weeks and months on the show. But we do have a services directory at Dynamite Jobs for customers of ours who might not have the time to hire and they just want to go directly to an expert service provider or a small agency that can solve their particular problem. Well first confirmed sale today. Hopefully, we can talk about some of the stories behind those services and how those sales come about in the coming weeks. I just wanted to flag that up. Because it’s so cool, helping other people make money. So that’s the news with the business, we will continue to keep you updated about the progress of our business portfolio throughout the year.

Let’s jump into today’s conversation, which honestly had an enormous resonance for me. If I’m being honest, I just don’t know a lot about stocks, bonds. I kind of grew up in this entrepreneurial world that’s a bit suspicious of the stock market. And also, really, I put all my personal capital back into my business and into weird things like Bitcoin. And my perspective on that is starting to change because I continue to bump into my contemporaries, not people that are like a generation older than me, but my contemporaries, who are doing really well with this stuff, and who are encouraging me to think differently.

So today’s guest is someone we’ve known the whole way back since the TMBA villa in Bali, if you can remember that. He’s an incredibly smart guy. And he takes this entrepreneurial worldview to the world of investing. And he thinks that’s an asset, which is a perspective that not everyone has. His Twitter handle, by the way, is SSStock, which is a great follow. His name is Simon Stock. And we got to say what we’re going to share today is not advice, it’s just a conversation.

I think today’s conversation is really thought provoking stuff for people that have a general idea of the stock market or might own some index funds, but are looking for a little bit more sophistication in their perspective. Hope to offer that for you today. And for me, it very much resonated, something that I want to do more with in the coming year.

Simon’s approaches that he uses the stock market primarily as just another way of getting that magical grail of cash flow, or just finding good deals like that’s what we do as entrepreneurs, find good deals and buy them,really not unlike the businesses we talked about on the show all the time. So that was eye opening for me. So I hope you enjoy this one as much as I did. Let’s just get right into it.

Simon: My name is Simon Stock. And I guess you could say I’m a full time investor.

Dan: How much money does one need to be a full time investor?

Simon: I would say around a million. If you’re doing real estate that gets you about $70,000 a year, stocks to get you about the same, but then you’re going to get paid out probably half that .So $35K to $40K a year. But you’re going to get growth that way. So it really just depends on what you’re looking for.

Dan: Could you walk us through some of the math that gets you to this idea that you’re really not in the investor category until you have a million dollars liquid cash?

Simon: Yes. So I’m talking if you’re looking at like a cap rate of like 7%, right, so an average ..

Dan: What’s a cap rate?

Simon: Capitalization rate. So basically, a yield. So 7% yield. So a million’s gonna yield 70,000. In real estate, right? You can depreciate a lot of that income, so you basically, you’re going to get all that cash to use, right? And in stocks, you’re also going to get normally a 6-7% yield. But what trips people up is they just look at the dividend. So you may see a dividend yield of 3%. But you’re really getting B or 7%.

Dan: Talk to me, what’s the difference between a dividend yield and the overall yield of a stock?

Simon: The yield is basically net earnings per share. So if you look at like a Johnson and Johnson and you see a 3% dividend, right, but that’s only what they pay out, they keep about half. So usually, you can just double that. So that would be a 6% yield. So that would be a million would be 60, you would be generating $60,000.

Dan: So the math, the way you’re getting there is you’re basically saying like you can generate a livable income for yourself from that million dollars.

Simon Exactly. And that was always my goal

Dan: Yeah, and what I want to dig into like those details, I just wanted to lay out that figure at the top. But I want to cycle back and talk a little bit about your journey and how you got to the point where you could have that million dollars and much more, I’m sure, in the first place. So let us know just a little bit of your history as an entrepreneur.

Simon: I had started drop shipping. I think we were down there in Bali when I first met you guys.

Dan: So that was in 2012 about?

Simon: Yeah.

Dan: And you had a surfboard rack dropship store, right?

Simon: Yeah, and at the time, most of these guys weren’t even doing drop shipping, I had to convince a lot of them to actually dropship for me. I was just like, this is so cool. Because you don’t need a lot of capital to get started. You can basically use a distributor’s capital and sell the products. And then I just kept expanding and expanding. Then we got into all sorts of stuff: furniture, supplements. And then I started putting this stuff on Amazon. Because at the time, there weren’t a lot of people selling these specific products on Amazon.

Dan: That’s crazy. The world changes so fast.

Simon: It does. And now everywhere I hear, it’s just Amazon, Amazon, Amazon, and I was just like, man, you know, when I was doing it, people thought I was crazy, because I think we talked about this and they’re like, ‘But Amazon takes 15%, and I was like, ‘But it’s a huge marketplace, it’s worth that 15%’. Then we started doing a lot of the FBA, so I actually started buying inventory and sending it into Amazon. But I just was reading about this the other day, someone was talking about this – once you get to like making 1, 2 million, 3 million in revenue a year. You need to start hiring people before you can grow, it becomes very difficult to do on your own. So I was just doing this with me. And I think I had my dad doing customer service. And I had like one half time part time shipper, right. And this was 2-3 million a year. It was like $30-$40,000 net profit with just, you know, three people half assing this. You start making some money and then I’m just like, well, I can’t really afford to put this back into the business unless I want to hire people because I can’t work anymore, my dad was exhausted, the shipper was exhausted.

Dan: Well, that’s a lot of money. I need to move around for such a small return.

Simon: That’s a good point. Because as you get growing, you’re like, this is a lot more money that’s just gonna generate a tiny bit more. And that’s when I look to stocks. I had already bought stocks before, but then I was just like, I’m just gonna start buying anything that pays a dividend, anything that looks cheap. I just want to live off of this passive cash flow, because it’s exhausting. I think we were managing about 16-1700 SKUs in Amazon.

Dan: Wow. What year was it that you got a taste for this dividend investing?

Simon: I think it was 2014/2015. The funny thing to me is, when I started, I was just buying everything. I was buying funds, I was buying low yields, and high yields. At first, you just look at those high yields, right, and you’re just like, ‘Ooh, that that’s gonna pay me more money’.

Dan: A high yield would be something like ..

Simon: Like an AT&T, or utility company usually have a high yield, like I’m talking like 5-7% yields, or like a real estate investment trust, a lot of these are basically paying out a lot of their profits.

Dan: Why?

Simon: Because like the business I was talking about, the return for them is not worth it, it’s better for them to send more money to the shareholder, because they have no use for it because the return is so low. So a utility company, I mean, it takes a lot of cash to generate a return from a utility company. But, as an investor from the outside, you look at this, and you’re like, ‘Wow, this is paying a 6% yield, a 7% yield, I’m gonna get a lot more than, say, buying a Clorox’ right, with a Clorox you’re looking at like a two to 3% dividend yield. I just luckily bought a full spectrum of everything that seemed to look cheap. But I kept track of everything on a spreadsheet, where I was like, ‘Okay, this is what I paid for it, this is what it’s worth’. And then I added in my dividends over time, and then I also factor in that compound annual growth rate to figure out how much money I was annually generating. And what I noticed was that the low yields, in the five year mark, were actually doubling and tripling. And these AT&T’s were still just generating a measly 6-7% per year, because there was not much growth. Because they’re paying out a lot of cash. So they’re not going to retain much to grow. And that’s when I started being like, ‘Well, how is Clorox doubling and AT&T is only, you know, generating 40% total return of my money. And Clorox is up 150%’. And that’s when I started looking towards the businesses that I was actually investing in. It’s almost the same, right? You’re looking at your private business, and you get $1,000 this month, and you say, ‘Where’s the best return on my investment?’ But I’m looking at stocks on an individual level, on an individual business level, and I’m looking at how much return are they generating internally. And that’s where you get this growth. That’s where you get this double, triple quadruple your money outside of 10-15 years. What they call it as a ‘return on invested cash’.

Dan: Let’s talk about how you might determine such a thing.

Simon: Believe it or not, I find the best companies will actually tell you this in their annual reports, like McDonald’s will straight out say, ‘We aim for 22% return on invested cash’. Or if you read Nike, Nike says, ‘We try to get 30%’. I think Brown Forman which like your Jack Daniels company, they also do consistently 22%, they tell you how they get that. So how they get that is basically all the invested cash that they have divided by their net income. So they look at how much cash they put in, and then how much profit came out. Just like we just like we would do in our private business, say ‘this return was bad. This return was good’, right? And then how they grow is basically they retain some of their capital, and then they reinvest it and that’s how you get this earnings per share growth. But what I realised was like a Clorox was growing, say, 8, 9, 10% per year. And AT&T is growing 2-3% per year. Well, AT&T looks great that first couple of years, but then you start adding time, 8% per year for 10 years, 20 years, you’re starting to crush an AT&T.

It’s the same as our private business, we look for the highest rate of return we can find. I mean, that’s why someone these guys love SaaS. I mean, it takes nothing to generate high incredible rates of return. And then I go to you and say, ‘Well, let’s start a trash company’, you’re like, ‘Well, we got to buy all these trucks’, you know, like, all the profits got to go. No, it’s not a real good business. I mean, it could be a good business. But when I look at them now and say, if I’m going to buy an AT&T, if I’m going to buy a utility company that has to take all these profits, and reinvest it back in the company, and it earns very little, then you need to buy these businesses really, really cheap, to generate the same type of return that you could pay maybe on a Hershey’s. So I noticed that and I looked at the spreadsheet. And that’s when I started digging into the actual companies. I put $1,000, in the Clorox, I put $1,000 in the AT&T, seven years later, AT&T generated 40% total return, Clorox 150% total return. But it looks expensive, right? Because you see a low yield with a Clorox, and you’re like, ‘Well, I’m gonna get more money by AT&T’, it’s the same with real estate ..

Dan: Help me to parse that issue of the low yield rate versus the growth rate? It’s a little bit confusing to me, why doesn’t a high yield equal a high growth rate?

Simon: Well, because they’re basically giving you all that cash instead of reinvesting it themselves. So it’s the same thing as real estate, right? So you look at like, we still talked about a cap rate or a yield, it’s the same thing as a yield.

Dan: So a yield is different than like the stock price going up by that percentage? Can explain that a little bit?

Simon: So every company has a float, which would be the amount of shares issued to the public. And then what they do is they have a net income, and then they divide it by all their float, their shares outstanding, and that gives you an earnings per share. Now, based on that price that you see in the stock that everyone obsesses over, you can divide that price by the earnings per share, and that gives you your yield. They call it the P/E. The price per earnings. So that and you would take one divided by P/E is going to give you that earnings yield.

Dan: So different companies are going to have different P/Es based on their strategy, essentially?

Simon: Based on how many shares they have, based on their price, based on their entire business model, basically. Because not all yields are the same. A 5% yield from a Clorox versus a 5% yield from an AT&T, with time added with growth, the Clorox will crush the AT&T.

Dan: Because of the overall growth rate.

Simon: Right. Because of their ability to generate cash internally. And that’s why I always say you have to look at the specific companies. And you see like with new IPOs and stuff, these guys are pricing these stocks extremely expensive, because they’re estimating crazy high growth rates. You see some of these stocks that are 1000 P/E. And that may be appropriately priced. Right. But it’s very difficult to see 10-20 years out for a stock that’s growing that quickly, in my opinion.

Dan: So P/E would that be like the main thing you’re looking at as you’re looking across stocks?

Simon: I would say just to be simple, yes, a simple price divided by earnings is going to give you .. so that P/E may be 15. And then just a one divided by that P/E is going to give you your earnings yield, which you could use that earnings yield to compare it to treasuries, or real estate or any yield really.

Dan: So over the 10 years, you’ve been 10 years plus on at this point you’ve been running a portfolio. What have you learned about P/E ratios like what’s your sort of theory on them?

Simon: I would say they’re not all equal. You have to look at the company, you have to look at the internal rate of growth, because you could pay 30 times P/E for a Nike, and do way better than you could for paying 15 times AT&T. It really depends on the growth of the company. I think if you want to just do standard, I think, if you do old ‘Benjamin Graham school’, he would always say, the old school investor who taught Warren Buffett, right? So he would always say 8.5 times earnings is the max you should pay for a company that’s not growing at all. And then you could adjust to growth, right? So you could say, ‘Okay, this company is now growing 10 times per year’. So you could just add it and say 8.5 times plus 10, is now 18.5. So now, the max I would pay for this company is 18.5 times earnings, or that would be the P/E. So if a company is growing 20 times per year, then you would add 20 plus 15, say a Nike or something, and you could say, Oh, I could pay 30x. This is just a standard, you know, rule of a, you know, an easy way to do paper napkin math, I guess you could say,

Dan: Now, the day in life of an entrepreneur, I think is pretty well known to you to the listening audience, you know, you wake up, you get the coffee, standing meeting with the team, Slack stuff, email, phone calls with clients, blah, blah, blah. You know, maybe you read a motivational book at lunch, if you’re lucky.

Simon: A couple tweets,

Dan: A couple tweets here and there. I want to know what a day in the life – what your stack is, how do you trade? What do you read? How much work does all this require?

Simon: I like to say it requires very little work as in once you understand the companies, once you find the companies, and I can list these companies that I think are worthy of my time to buy. It’s really more or less a waiting game now, because you’re trying to get these companies at an appropriate price. Because you can overpay. So really all I do is just set up alerts for about 40 or 50 companies that I want. And then I get notified, and then I buy. But for the most part, I’m not looking at the day to day market. I’m not stressing over the day to day prices, it really doesn’t bother me once I’m in the company, because you’re making money off the dividends. You’re getting sent checks. I mean, do you really care what’s happening on the day to day basis? I mean, the irony to me of this stuff is that if you bought shares of say, we talked about Clorox, if you buy shares in this company, you’re paying management, you’re an owner, you own this company, and you’re paying management millions and millions of dollars to run this company. But you want to micromanage you know, the share price, it’s madness to me, you know, if it’s a good company, and you want to hold it.

Dan: If one were to go out and buy, you know, $1,000 of Clorox what would be the dividend for that, just to get a sense for what these ratios look like.

Simon: I think it’s like 2.5 now. I think it’s come down a little since it kind of skyrocketed during the pandemic, for obvious reasons, I believe. But yeah, so about 2.5. But I think the earnings yield is like five or six, so you’re really earning six. So if you did 1000, you’d be earning 600 bucks, and you would be getting about, you know, what, 250?

Dan: If you did put 1000 in the stock,

Simon: Oh, I’m sorry. 60 Yeah, 60 bucks, right? A thousand would be great.

Dan: Now, a lot of entrepreneurs might say, ‘Well, I could do a lot more with 1000 bucks than get $60 over the course of a year.’

Simon: Then I would say you don’t need to be investing. Because, again, I was looking at my specific situation, saying my internal rate was no longer growing. I tell people this all the time, if you start a business, and you’re earning 30-40% return on capital, you’re not gonna get that, there’s no way you’re gonna get that buying into future earnings. So why even bother? Obviously, the business is way better. The only thing I was wanting to do was – my internal rates of return were lower and I wanted to free my time. You’re gonna make way more money selling future earnings to somebody else than you will buying future earnings. This was just a way to park capital and apart capital in a more profitable way.

Dan: But it sounds like you love it. I knew even when you were running the surfboard store that, like you always had an eye to the market, there was something about it that attracted you. What was that?

Simon: You have the ability to scoop up businesses that we could never recreate, like the distribution centre of Coca Cola, that would take us years to mimic or create. And then, in a crash, you could possibly get this business at 10 times earnings. As private guys, we’re looking at private businesses, and we see these at three and five times earnings. But this is still not included, if we had to hire someone full time to run this thing. So you may be looking at seven, eight times earnings. But during a stock market crash, you can scoop up these businesses for this exact same multiple of cash.

Dan: So to be clear, you’re making an interesting parallel here between going to a place like Empire Flippers dot com or buying a small business and doing the same kind of math that you’re doing with stocks that you’re buying.

Simon: Absolutely, it’s the same thing. When that pandemic hit Discover traded for four times earnings, I mean, you could get a credit card company that’s well known for four times earnings, you’re probably gonna do pretty well, I would be more interested in Discover than a private business at four times earnings, that may be a lot more work. This is just for capital allocation, right? I could probably make more money internally with a private business. But, for those that just want a passive cash flow, I mean, buying Discover 4x is probably going to end pretty well.

Dan: So you’re not going to go back and buy an e commerce company, another one?

Simon: I’m looking at them now. Because the stocks are so expensive. It’s all about what I can get from my money. If the stocks are overpriced, then I’m looking at smaller cap stocks, which I would also compare that exactly with a private little e-commerce company. But I would also factor in my time. Small caps usually traditionally always outperform large caps, because you get them cheaper. And they have a lot more room to grow in their marketplace. Like it’s hard for Coke to grow in their marketplace when it’s saturated. And so a smaller cap stock, traditionally, if you buy a small cap index, you are going to outperform a large cap index. But I was looking for safety, I wanted guaranteed payments from some of the largest best companies that have been around for hundreds of years, that have the economics of scale. I’m factoring risks too. Smaller caps tend to go bankrupt a lot more, they’re a lot more volatile. It just really depends on your goal. I wouldn’t even tell people to invest that they’re not looking to touch that money for five years. Plus, because anything can happen with that price.

Dan: I was gonna mention, you’re deeply invested in the stock market, maybe we can talk about portfolio composition, if you’re open to it. We both met each other right on the heels of 2009. And if something like 2009 comes along tomorrow, or something more profound, how do you think about that?

Simon: I think, how can I sell some furniture to buy some cheap stocks? I’m excited. This stuff may hurt my ego, when you watch your portfolio gets slashed in half, but it does not affect my standard of living. I’m still getting paid.

Dan: Through dividends and/or yields.

Simon: Well, just mostly dividends.

Dan: Yield you have to sell the stock to realise it?

Simon: Yeah, the price of the stock, but the yield is still always happening internally with the company, right?

Dan: I see. A dividend is the portion that you get,

Simon: The way I look at – a dividend is my salary. So if I’m looking at a private company, and I’m valuing this at 5,6,7X, and I say, ‘I want to hire somebody to run this’, there’s an internal rate that the company is retaining their earnings, and then I’m getting paid a salary. So this is how I’m comparing a stock to a private company. So during a collapse of price, you have the ability to scoop up these businesses even cheaper. And what’s funny is during 2008, if you look at Coke, they’re actually raising their dividend. They’re making more money than ever while the stock is collapsing. And people are terrified and they’re selling and they’re liquidating. And guys like me are just like licking chops, man, this is a dream come true because you’re getting more shares. for less money

Dan: I must point out that one of my business mentors came from a brokerage background. And I was staying at his wonderful house when it crashed. And he was so excited that he put aside his business for a month, and just poured money into the market. And he made like a million bucks in a matter of a couple weeks working at his laptop.

Simon: I think once people understand what’s actually happening, then you are a cheerleader for stock market crashes.

Dan: I’m going to take that pull quote out and just put it at the top of the episode, Simon, people are gonna send us 8 tweets.

Simon: But I’m not focusing on that. I’m looking at the earnings of the actual company, because this is what’s really happening. And the irony for a lot of these companies, let’s say, Hershey’s or something, if you go and look at their annual report, and you go to the statement of cash flows, and you see what’s happening on a cash flow basis, let’s just say they’re making 500 million net. And they pay 250 million out in dividends, but they’re taking maybe another 200 million and buying back shares of their stock continuously. Basically, eliminating those shares. Less shares means that the owners have more profits coming to them. So as these stocks collapse, these businesses are still buying back stock. So now they’re able to buy back even more stock at an accelerated rate. So now your dividends are increasing even faster. So as someone who lives off dividends, and as the majority of the companies that I own are continually buying back stock, I want the dividends to rise as fast as possible. And one of the ways for the dividends to rise as fast as possible is for stocks to crash. Because the companies are able to accumulate more of their shares faster. Would you rather see the stock go up or would you rather just get paid more? I mean, I would rather get paid more.

Dan: I’m so glad we’re talking about dividend returns, because I have a couple of friends in my life who’ve really opened my eyes to this the past year. And I’ve always kind of been tacitly in this crowd of vaguely suspicious of the stock market because of my experience in 2009 and watching all these movies, where people involved in the stock market are demonised. Give us your kind of philosophical perspective on this idea that it’s an unfair playing field, that it’s rigged, how do you think about that stuff?

Simon: There is a nasty side of it, where people are just pumping this stuff up. I feel like it’s not so unfair, it’s more people don’t really know what they’re buying. You mean, these are businesses, and you can’t pay 50 times earnings for a business and expect to do well, there is this whole other side of this auction. And with all this liquidity, it can go crazy. The funny thing to me is, when you have a lot of people trying to buy one certain stock, you have to realise that it’s gonna send the price up. And when everyone’s buying the same thing, it’s probably not a good deal. The irony too, is if you also pay attention to the businesses, that most of the owners, they’re liquidating the shares to you at the top of these peaks, they know that the stock is overpriced.It’s very hard to get burned if you’re focusing on the business, and you’re watching the business, and you’re watching insiders. So I think Microsoft has been hitting its top and the execs in Microsoft have been unloading shares like crazy. Why would they do that if they don’t think the stock is overpriced? I think if you’re watching the business the way that these things are supposed to be watched, then it brings a lot more sanity and Yin to the market, instead of just trying to buy the hype. Because eventually, always, stock prices reflect the earnings capacity of the business. And if you’re buying at 50,60 times earnings, you might be waiting a while before the earnings catch up, could be years. And then they’re like, ‘Well, you don’t want me to make money’. People say the same thing to me, ‘Why didn’t you recommend GameStop? And I was like, “Because it’s completely disconnected from the earnings capacity of the business’, it doesn’t stay up forever. And maybe you can get in, and maybe you can get out. But that’s the craziness to me that I really am not interested in, I don’t want to be reliant on someone else’s opinion of what my shares are worth.

Dan: This is kind of the idea that I’ve seen – this cycle where, if you don’t have a lot of capital you raise capital from investors, or you take a loan out or a credit card, and you take 20 grand, and you drive the investment of that capital in your own small business. You buy surfboard racks, and you sell them on Amazon and you buy click campaigns and stuff, and you start to get up to this point where now you got a couple $100,000, now you got half a million in your stacking this cash, and you start to move it in to fractional ownership of these larger companies, you’re essentially kind of doing the same thing, except your gear ratio is a lot lower, so you’re gonna make less returns. But you start to see that dividend income come in, where now you’re making $15,000 a year dividend income like you would a landlord or whatever. And it’s sort of like, ‘Man, that’s pretty sweet’. And you get it up to the million, million and a half figures you’re talking about. And now all of a sudden, my pretty decent digital nomad lifestyle is completely funded by my fractional ownership and these companies that require none of my time, essentially,

Simon: Right, and you get some decent raises. always say, the best if you’re looking at 2-4%, dividend yield, you’re probably going to get anywhere from a 6-8% dividend increase per year.

Dan: Why is that?

Simon: Just from the retained earnings, and the buybacks, and the growth of the companies. I think any company looking at maybe organic sales of like 2-3%, you know, buybacks, add another percentage, some mergers and acquisitions, maybe add another point. So it’s just that internal reinvestment. It just depends on really what your goal is. I mean, do you want a lot of cash. I kind of wanted the best of both worlds, I kind of wanted the management in the company to take that cash and grow some for me. And then I wanted to just spend and not have to worry. I mean, I spend, I would say 90% of my dividends. I’m not trying to reinvest. I’m letting the companies do that for me. If I wanted to read. If I wanted to spend time allocating, you know, capital every month, then I would probably be looking at real estate or, you know, maybe something with a higher yield.

Dan: Can you talk about your portfolio composition by percentage?

Simon: You mean like the industries that I’m in? Or are you talking like bonds or ..

Dan: Total net worth I was thinking of actually.

Simon: I would say 25 .. hang on a minute, let me count my house.,20%. And then the rest is all equities, no bonds ..

Dan: 80/20%, So 80% equities, 20% house, do you have any cash equivalents as part of your portfolio or anything?

Simon: I guess 10% cash, but none of this matters to me, I’m just looking … all that portfolio allocation changes based on price. I’m not looking at a certain percentage and say, ‘Man, I only have 50% in equities or 60%’. I’m just looking for deals. If that happens to be 100% equities, I’ll sell my house to buy Hersey’s at 10X earnings and be like, ‘I don’t have any real estate, who cares’?

Dan: Now, I own a lot of index funds, because that’s what everybody says – go to, you know, Betterment or whatever Robo-Fund and put a bunch of money in there and watch it, you know, grow. This is like gonna show my ultimate naivete – there’s a lot of companies in there that pay dividends? Who’s getting those dividends when the fund is just buying the stock?

Simon: Well, you’re getting those dividends still. And it’s just getting reinvested. It depends on the index fund what they’re doing. But you could get checks. Yeah, I mean, it would be cash deposits in your bank account.

Dan: So right now, in Betterman.com, those dividends are probably just going back into my Betterment account?

Simon: Yeah and it’s probably based on your Betterment settings, you probably have it set to reinvest.

Dan: I see.

Simon: But you could totally be getting cash deposits and pulling them out, it’s no different than what I do. Index is just a collection of the same businesses.

Dan: Actually, could you describe that for us, like, what an index fund is and do you use them?

Simon: I don’t do indexes, because I think I can, at least I like to think I can, value companies. And index funds – I kind of have a problem with some index funds. It’s usually based on market cap. And so as a market cap grows, and I’m saying the size of a company grows. So, if you look at the S&P 500 index, I think right now, 20% of that fund is going straight to tech. So you’re not quite as diverse as you think you are. But for someone who doesn’t want to value individual stocks, you’re still getting, what, 500 of the USA’s best businesses, that’s fine. And that’s all in indexes, it’s just the collection, but more of your money is going to be allocated to more overpriced stocks, which unfortunately, that’s the way indexes are built, so they can handle more money or more fees. Basically, I just individually pick out these companies.

Dan: Now, when you hear that so many people say, ‘Well, you can’t, you know, so many hedge funds lost money relative to the market over the last 10 year period, don’t, don’t be a dummy, don’t pick stocks, just buy index funds’. What’s your response to that?

Simon: Well, I would say, ‘Well, how are these guys buying private businesses?’ I mean, you’re buying private businesses, people are good at it, and people are bad at it, It’s so funny, because, you know, a lot of good investors normally have a very good sense of what a business is and what it does, right? I mean, I think for the average person who doesn’t care about business an index is fine, you’re still participating in the productivity of the US. But for people like us that like the numbers, that like to maximise returns, if you can buy an individual business, you can buy stock. I mean, it literally is no different. It’s a little more complicated, I think, because you got shares, and I think people get hung up on the price. They look to the market to tell them what this business is worth. I’m not looking to the market. I have an idea of what share should be worth well before I’m looking at the price of the stock. If you can 3-4X times a private business and you have an idea of what it’s worth, then you should be able to look at the net income of a public business. And then, you know, divide that by the shares and have an idea and say, ‘Okay, this should be worth 15 times net income based on the amount of shares’, and have some idea, and then you look at the market, and it’s 50X earnings, and you’re like, ‘Well, bummer.That’s not for me today’, you know?

Dan: So you don’t think of the stock market as a casino?

Simon: No, I think it is something I can take advantage of, when it’s in my favour.

Dan: What are some of the mistakes you’ve made in the past decade investing?

Simon: I would say, not being patient. Now I tend to be too patient, I wait 10 years before I buy something that I want, that is finally attractive. It does come down. I bought a lot that were overpriced. And I’m still the returns are shit, even though I’m like, yeah, I’m excited because I own this company. But I mean, if you want to make money, or do you want to own cool companies? I don’t know, that’s the way I think of it now is just, you have an idea of a valuation, and you stick to it. And I think that’s been the biggest mistake is just not being patient. Overpaying. Sometimes it works, if you look at Tesla, I mean, and I think I was even telling Ian, ‘Stay the hell away’, but it doesn’t go on forever. And maybe it does, but I just don’t want to be tied to the disconnect from earnings and price. That’s how I get burned. That’s how I’ve always got burned. I mean, I bought GoPro, you know, it was 40 a share everyone’s. ‘Oh, yeah, this is a great company’, then it went to 80. And then I looked at the financials, and I was like, ‘Oh, I’m out of here’. And then I sold it,

Dan: What was the what was the signal when you looked at the financials?

Simon: I think it was just trading at a very high multiple. I’m not a big fan of tech, you have guys, every day waking up going, ‘I’m going to disrupt this company’. Well, no one wakes up and says, ‘I’m gonna disrupt toilet paper, I’m gonna disrupt chocolate, I’m gonna disrupt alcohol’. I don’t want to be owning these tech companies that these kids are coming for. You know, so GoPro people, people came for it. All you are is a brand, you’re buying overpriced recorders. And people come atcha, and then I think the stock collapsed to $10 a share. Because that growth that was factored in was no longer there.

Dan: Now, the unique thing about constructing a portfolio as you have is that you can essentially walk away more or less regardless of what’s going on in the marketplace, you cannot just stack your dividend checks and live life that way. And I want to underline this idea, because this is actually an idea that has really affected my thinking in the past year, because I have a friend like you who’s constructed a really powerful dividend portfolio. And it’s awesome. I mean, it’s really, really cool. And I just really hadn’t thought of it that way for whatever reason. I thought, you know, ‘Oh, you got to sell a stock to like, get your money out of it’. Can you just talk around that idea, a little bit of this, like potential to build just a money printing machine, essentially?

Simon: It’s just ‘4 hour Work Week’ applied to stocks, I just wanted the cash flow of a business. I didn’t want to be reliant on the price. And I just wanted ever increasing income streams. It’s the same way we started these businesses to free up our time. I know people who have millions of dollars and watch that market every day and trade. That is stressful as shit to me. And you’re reliant on the opinion of the market to make money. And it’s not always roses, you know? I just wanted to be completely disconnected. And I think. if you focus on the business, it allows you to completely disconnect.

Dan: You’re pretty cool, dude. Let’s put it that way. but, you know, one thing I know about you is that you’re a total nerd, you read books all the time. And I’m wondering if you could let us know some of your favourite books about investing, about running businesses or whatever, some things that affected the way you approach investing?

Simon: I would say the most important book that I read was not even a book, was just Warren Buffett’s letters to shareholders. That’s where it started to click for me to say this is a business. These are businesses. He wanted to own businesses, at cheaper prices, instead of acquiring entire businesses in their entirety. So if you go to some of these small cap businesses, right, you may pay 30-40X earnings for the entire business, right? And Warren Buffett is like, ‘Why would I do that when I can buy fractional businesses, shares of businesses, for 20-30X and make a lot more money, and we don’t even have to do anything’.

That made me really realise that, hey, these are businesses that I can add to my portfolio, that I can add in the same thinking of a private ownership, I treat them as private businesses that I own. I have a spreadsheet that shows how much I’m earning based on how much I bought and then, you know, the total earnings yield, and then the total dividend, and then I have an estimated growth. And to me, that is no different than owning a private label business that generates a certain amount of cash. His letters to shareholders made you realise that it’s no different than buying an entire business, it’s no different than buying a fractional share business.

Dan: I would say they’re, they’re quite entertaining to read too. They remind me a little bit of Paul Graham’s essays and I just liked to watch them think And they’re quite frank.

Simon: Yeah, he’s completely honest. It. I love how he points out his mistakes too, most people aren’t doing that. I’m willing to give my money to anyone who’s going to sit and wait for deals instead of just trying to buy something. Because there’s pressure, like he’s sitting on 100 billion just going, ‘Well, this is where we are’. I mean, that’s rare. That’s really rare. Most fund managers are buying anything and everything.

Dan: What about, like daily sources of information in the investing space, there’s so many big businesses that are selling the shovels to investors like yourself, like, Motley Fool, is what everybody knows, a lot of people go to, you know, Investing Twitter, what are some of your preferred sources of information that our listeners could dip their toes into?

Simon: Say, you want to follow any business, I would just Google that business and go to their Investor Relations page, and sign up for their email alerts for anything about that business. That way, you’re getting it direct from them, instead of this third party twist. And another site that I do that is, I don’t know if you’ve ever heard of Seeking Alpha, I just follow all of the stocks on there for news, but again, most of this day to day stuff I’m not interested in, I’m just looking at the annual reports.

Dan: And Alpha as a technical term. They’re not talking about alpha males.

Simon: Yeah, I forget what it is. Half the time .. a lot of this stuff is options that I don’t even do anymore. And I can’t remember half the stuff. I mean, the stuff that I was doing, you know, back in 2014, like selling put options was so risky. It’s just crazy. But you know.

Dan: You’re older and wiser.

Simon: Yeah, you learn, right?

Dan:Do you agree with this -can you get rich investing?

Simon: I think you can get lucky. I don’t see it happen a lot. I think the richest people we know are probably business owners. I don’t know any rich traders. I don’t. I know guys that have done well, it was a lot of work. I’m sure there are technical traders, I just don’t have the patience for that. I think you’re almost kind of just reliant on luck of what happens in the market.

Dan : I think the progression that I see amongst my wealthiest friends are – you get rich with your small business and you stay rich. And part of staying rich is having that dividend income every year so you’re not spending down your principal.

Simon: That’s another good point. I always tell people to focus on the cash flow, and not the principle because, again, if you’re relying on that principle, and you’re in the market, like that’s why they tell people who are about to retire to go more heavily in bonds, right? They do these latter bonds to say, ‘This bond will expire’. Part of your principles are expiring.

Dan: Can you explain what a bond is from your, how you think about them? Because everybody says stocks and bonds. And for me, stocks are a lot clearer what they are,

Simon: A bond is just a fixed yield, basically, so a company will raise money via a bond. And most of the people that are buying these are insurance companies, and pension funds for asset liability matching purposes. When people are retiring, they need specific bonds to mature, and then that cash comes back to them, and then they’re giving it to their pensions. There’s no reason I need a bond. Because I’m relying on the cash flow from the companies. And I think that’s another reason why I’m so disconnected from the day to day is I’m not relying on the principal to live off of. Like you pointed out, a lot of people going into retirement, they’re looking to sell percentages of their net worth to generate cash to live off of where I’m just focusing on the cash flow.

Dan: My smartest investing friends are telling me this, so I’m gonna flag that up as well.

Simon: Yeah, and I’m living on dividends that are growing, you know, 6%, 7%, 8% per year. I mean, who cares what the principal is?,

Dan: It’s the same deal if you own laundromats or whatever that are paying you and the neighbourhood gets a little bit worse, but your customers still come in.

Simon: Yeah. I say this all the time. If you buy a $100,000 apartment and you’re getting $10,000 a year from rent. And it’s like someone knocking on your door and offering you $50,000 and you’re like, ‘I don’t give a shit man, get away’. But you see this in the market. And people like, I’ll take $50,000 because you have multiple people offering $50,000. But you forgot that it’s generating $10,000. This is crazy for me to accept this price.

Dan: Now a lot of people listening to the show are foregoing investing in the stock market to invest in crypto. What’s your general take on that?

Simon: I usually stay away from crypto because, again, it’s still reliant on opinions. I want to see some kind of intrinsic value. And from my opinion, crypto has no intrinsic value. I mean, it’s reliant on the ability of more people to accept it. I think it’s a lot less riskier than it was.

Dan: Yeah, it’s like every year that it exists.

Simon: Totally. And, and now more banks are, ‘Hey, what can you trade it with us?’ They want the fees but I really don’t know, obviously, people have done well. I hope they’ve continued to do well. But again, I want the cash flow. I prefer productive assets.

Dan: Cash flow over store value, or cash pile.

Simon: Again, if you’re buying crypto hoping to retire, you could see a drop. I don’t know, that stuff makes me nervous, man. I like to sleep well. And I just want to wake up with my $1,000 dividend deposits and go about my day.

Dan: How much money … there’s this concept in, you know, my book, I borrowed it directly from Jason Cohen, it’s called ‘The freedom line’. It’s the amount of money that you need to not consider financial questions for the rest of your life. In your opinion, which city do you live in currently?

Simon: I’m in LA downtown. A bit more here.

Dan: What is that number?

Simon: So I posted this on Twitter the other day, I think there was a study for happiness, for income. And it was saying you kind of maxes out at $75,000 a year in income. That’s about a $2.2 million portfolio. But again, this is for dumping that cash. I mean, if you start earlier, you need a lot less. I still think you there’s no reason to be looking at stocks if you have a private business, you’re going to make way more money, the returns are higher. I don’t think there’s anything wrong with taking some cash off the table for alternative investments. But I don’t think you should be trying to use the stock market as your number one income generator. But I think once you get up to that amount, I think $75,000 a year in dividends, you’re pretty well set. So that’s about $2.2 mil.

Dan: That’s cool. That’s a lovely answer. Simon, you’re like an OG, ‘Four Hour Work Week-er’, you’ve embodied it in so many different ways. Any kind of parting shots or advice that you have for listeners here today?

Simon: I would just say treat stocks like businesses, that’s the way they’re designed to be treated, if you want, you know, to do well. And consider risk and consider your time. I mean, time is the most valuable asset we have. And I don’t want to be spending it in front of the computer all the time. So these things that can pay us without us being there is the ultimate life accelerator. I feel like instead of waiting until we’re 65, we can do this in our 30s, there’s no need to wait.

Dan: It’s awesome. Simon Stock. Thanks for dropping by the show.

Simon: Thank you so much.

Dan: Shout out to my guy Simon Stock. What a great conversation. Give him a follow on Twitter. That’s at SSStock and you are guaranteed to learn valuable stuff there. Let us know your thoughts on this one. What do you think about Simon’s approach of trading stocks like any other business you would own? That was a big eye opener and ability for me to understand what otherwise is a bit complex. We’d love to hear your thoughts, record a message, send a Loom video or just drop me an email Dan at Tropicalmba.com that’s it and as always, we’ll be back next Thursday morning.