The Upside of Ownership | Erik Averill, Brandon Averill | AWM Insights #14
Episode Notes
On last week's episode, we started our conversation on the idea of ownership by defining risk and discussing some of the rewards that come along with the different types of risk you can take. Ultimately, this can be described as the upside of ownership.
This week, we'll continue with part two where we'll explore the fundamentals of ownership and cover topics and questions like:
What exactly are the fundamentals of ownership?
How do we define ownership when it comes to investing?
What does it mean and what are the implications to owning stock?
Why could equity be preferred over being a bond holder?
Is all equity created equal?
Is now the time to invest in a specific company?
+ Read the Transcript
Erik Averill (00:00):
Hey, everyone. Welcome back to another episode of AWM insights. I am your host, Erik Averill, and I am joined by my cohost Brandon Averill. And we want to pick up our conversation from the last episode where we were talking about risk and ultimately, what is the reward for the type of risk that you take? And this is the upside of ownership. What we wanted to break down today is what are the fundamentals of ownership? It's a term that gets thrown around a lot, whether it's ownership or equity. And sometimes I don't think we all truly understand what goes into it. And so we want to dive into that conversation today. And Brandon, let's just start with the definition of what do people mean when we talk about ownership, when it comes to investing?
Brandon Averill (00:44):
That's a great question, Erik, I'll start off with really looking at it from a stock perspective. So, you know, I think when you buy a stock, you need to understand that you actually own a piece of that company, that issues it. So you become a part owner of that company and you'll generally make more money if the company does well. Or if the company doesn't do well, you're going to lose as well.
Erik Averill (01:09):
That that's helpful, just even in a basic definition. And why is equity really preferred over being a bond holder or, you know, what we invest in the public markets known as fixed income?
Brandon Averill (01:23):
Yeah, that's a great question as well. So kind of sticking with the stock market, what it really does when you have ownership. So when you buy that stock and you have ownership in that company, is it gives you the opportunity to join in the success of that company. And as we expand out on asset classes as well, so you look at like real estate. I think a lot of people understand this when you actually buy the house or you buy the apartment building, it's gonna give you the opportunity to do well. If that, if that entity does well. So if the real estate property does really well at appreciates and value or kicks off a lot of cash flow you're going to do well, but if you have an earthquake and the building falls down as the owner of that building, you're going to lose everything that you have. So it's very much the same way with the stock market. If you invest in one single company, that company does superbly well, you're going to do great, but if it happens to go bankrupt, you're probably going to lose all of your capital invested there.
Erik Averill (02:22):
And just on the flip side, I think it's important to point out as the, as the debt holder, right? The security that comes on the downside compared to why they don't get to participate on the upside. Sticking with that example on the real estates, you know, we saw in 2008, 2009, when investors that were flipping homes, unfortunately couldn't pay, pay the mortgages. And clearly they weren't going to make money. They lost everything, but the banks because of their position of a bond holder actually retain the asset of the home. And so there's definitely a place for fixed income, your portfolio, and really, that's more of a conversation of your risk appetite. So it's really important to understand what is the benefit of, of equity and of fixed income. Brandon, when we start to talk about equity, is it all created equal? I mean, it, can't just be only about how much equity, but how important is it the type of company that we're investing in break that down for us?
Brandon Averill (03:24):
Yeah. Another great question. I think when you start to think about the value right. Of, of your ownership, and we'll go back to ownership of companies, that value is really derived based upon what all of the owners think that that company is worth in the future. And so what goes into that is figuring out, okay, do we think this company is going to appreciate as part of it, but really how much cash flow is going to kick off from that company and what's the company worth. So it's very forward looking and ultimately your equity is only as valuable is only valuable if your company has a successful future ahead and successful predicted outcome. And I think that's really where we get into the differences. I think what you're pointing at and what our expected returns from those differences are. So kind of sticking with the public stock market, where we know that all information is available and it's efficiently implemented. There's a difference, right? Your large companies are a little bit more stable than your, than your small companies. But what comes with that is that your large, large companies generally have less room to appreciate and value. So really understanding the differences and what those expectations are, are going to drive, how much you should expect from a return from those investments.
Erik Averill (04:48):
And I think that brings up a good point of going back to your plan as an investor of understanding what you're trying to accomplish as there are over 10,000 publicly traded companies, or your decision to go into the private markets is every type of ownership carries a different higher, expected return based off of the level of risk that you're willing to take. And so it's really important that it's not just a, Hey, I want to invest in this one company based off of the name of it. We see this a lot going on right now, Brandon is we've had crazy volatility in the public stock market. And there's this enticement from people to think about individual companies watching their prices changed drastically with what's going on in the world and now thinking, Hey, you know what? This has to go back up. What would you say to trading individual equities and, and believing that certain companies have to return to the prices that they've been at historically?
Brandon Averill (05:48):
Yeah. I think anytime you start a sentence where with this has to go up or down, you're probably, you know, not, not thinking about the problem correctly. So there's nothing certain, none of us have a crystal ball. I wish I did probably wouldn't re recording this podcast, but at the end of the day, you start to look at it right? Well, a couple of weeks ago we had Warren buffet generally considered one of the greatest, if not the greatest investor of all time sells AmErikan airlines just gets out of the position. And now you've got a lot of people that think, well, shoot, AmErikan airlines, it's gotta go up from here. I mean, the share price is only $5 or whatever it is. And I think that's a little bit tricky. I think you have to understand what goes into a share price. You know, psychologically we think, you know, a hundred dollar per share stock has has less room to grow, but unfortunately that's just not the case.
Brandon Averill (06:44):
You just need to have a little bit better understanding how that goes, you know, gets, gets put together. Another great example is Hertz. I mean, we had Carl Icahn, same thing, another great investor sell out that company's bankrupt. And yet we're seeing like wild price movements and people just feeling like, Oh, people come back and rent cars. There's no way Hertz goes out of business. You know, those are just difficult places to be when you take into account, the fact that information is efficient, it's available to everybody. So just kind of speculating on these, on these stocks, short term is, you know, we know not very successful or not very sustainable, but in times like this with high volatility, it's definitely enticing. But at the end of the day, you just want to go back to being a long-term investor. That's really, really where the value is at.
Brandon Averill (07:38):
And so that's where I would continue to point people because you can, if you're a long-term investor, take advantage of some of these opportunities, as you know, Erik and, and we do here at AWM, you can look at, at the situation say, Hey, I know small companies generally outperform large over time or value outperforms growth. And so if I'm a long-term investor, I'm willing to, to ride those ups and downs a little bit, and I'm willing to allocate because I want those higher expected returns over time. And to kinda stay on the rift, the same goes with the private markets, you know, companies that are private, information's not as available and there's all kinds of different stages in private companies. But if you have the ability to take a long-term horizon, we know that if you have a diversified portfolio of startup companies, it probably will give you at least a chance for higher expected return. So you can start to look back at your plan. Like you mentioned, Erik, which is the most important, and you can start to figure out where do I want to be from a higher expected returns and, you know, what's the risk and is that risk adjusted return? The place that I want to be, you make a great point there of even bringing up on the private markets, is this
Erik Averill (08:56):
really what we want for first our clients and then for the audience, and really for everybody is it's not just asking what is the best company to invest in? Is, is it a right piece of our plan, given the risk and the goals of, of what we're trying to achieve. And it's stepping back and asking better questions. It's remembering who has an incentive for us to want to trade our accounts or to invest in certain ways is when we see things on the media of understanding that their job is to sell news, or a lot of financial advisors, unfortunately are driven by a brokerage commissions. And it's really taking a step back and saying, as an investor, we want the highest expected return. We talk a lot about like making sure that you capture what you deserve. And that's the best thing of understanding what goes into market prices is going, you know what?
Erik Averill (09:49):
You don't have to make the mistakes and, and take on a ton of risk of trying to trade a bunch of individual companies on the short term, because there's a long proven evidence based way of investing both in the public and the private markets that is really accessible to people through, through qualified advice. And so listeners, we super appreciate your guys's attention is always tuning in. We love these conversations. Please reach out to us, let us know if there are topics that you would like for us to cover, even to dig into more of how you put together an investment plan that is diversified and takes advantage of everything that we've talked about. And until then stay humble, stay hungry and always be a pro.
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