Key #1 to Invest Like a Pro | Erik Averill, Brandon Averill, Justin Dyer | AWM Insights #56

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Episode Summary

The S&P 500 hits a record high, Bitcoin continues to climb, real estate is exploding and yet the questions of higher taxes, inflation and a bubble loom.

Headlines seem to elicit either fears of missing out or fears of inevitable doom.

You have worked hard for your money and rightfully so, want to make sure you are making the best decisions.

Listen in as we discuss the #1 Key to Investing like a Pro and what the most recent headlines mean to you.

 
 

Episode Highlights

  • (02:25) Should You Invest In IPOs?

  • (06:52): The Media’s Business Model

  • (09:34): We Want To Buy Your Next Cup of Coffee

  • (10:26): Why Investing In What You Know Can Be Dangerous Advice

+ Read the Transcript

Erik Averill (00:00): Hey, everyone. Welcome back to another episode of AWM insights. It's your power three, two CPWAs and a CFA. We are Erik, Brandon and Justin, and each week we aim to equip you with the knowledge and skills you need to invest like a pro and here at AWM, we like to always remind you that we're not loyal to wall street. We are loyal to you. And so each week we aim to cut out the noise of the news. And what wall street is trying to sell you to help you capture the returns you deserve in today. That's the topic we are tackling is, is how do we look beyond the headlines? How do we cut through the noise? But before we get into that topic, let's chat a little bit about what has been going on in the markets this week. We've seen some negative news show back up during this COVID time.

Erik Averill (00:52): Unfortunately, unemployment claims have bounced back up to around 700,000. One of the things we like to remind you though, that a lot of this data can be noisy, which is why it's so difficult to make an investment decision based off of this type of news that comes out on a weekly/monthly basis. On the positive side, markets continue to march higher, the S&P 500 hits all time record high for the first time above 4,000 and as a by-product of that, what we're seeing a tremendous amount of is the rise of active management. As we recalled last week's podcast, we're asking the question, is this really skill or is it luck?

Erik Averill (01:36): And in other news, as we've seen markets move higher, of course the IPO craze continues to loom with Compass real estate being one of the biggest ones that we're going to talk about. And before we jump into the topic, the last thing just of what we see coming ahead, it's the end of the quarter, it's earning season, which is another reason we're going to see so much news coming out about specific companies and investors can find themselves making amateur moves, trying to trade on this information. And so just transitioning into this conversation of looking beyond the headlines, let's start with the Compass IPO.

Brandon Averill (02:25): Yeah, I'll jump right in. I mean, I think this is a fascinating one that certainly hits home for us. We got this question earlier this week from one of our clients that, hey, I got access to the Compass IPO. I can buy between the initial range. I think it was 23 to $26 a share. How many shares should I buy? That was the question not, Hey, should I get in? Should I get in? But I think they're falling victim to those headlines. I think we've seen these headlines of IPOs just going crazy and the assumption becomes, hey, if I can get access to an IPO, it's going to go to the moon. And we've seen that recently, the Deliveroo IPO disappointing, and now this Compass IPO basically under-subscribed, they had to drop the price, I think, to $15 a share.

Brandon Averill (03:17): So I think it's just going back to, Hey, let's all take a step back and really start to think about this stuff logically. Don't let the media get in our head and put this in our head that, hey, everything's going to go to the moon at some point, right? We also have to look at the fundamentals. And then I think we've hit on this a few times. I know Justin, you have in previous podcasts, but IPOs are probably not the best place to actually be making investments, right? Like if you, if you want to get in early on, maybe the seed, series A, series B of Compass, that's where the money is related.

Justin Dyer (03:53): And just to put some numbers to it, I was pulling this up actually, as we were talking. IPOs in general, as a category, have underperformed pretty substantially. There are some smaller, shorter periods of times, five plus years, plus or minus years, where IPOs have done okay. But not substantially better than the market. In most cases, they're doing half as good as the market return overall. So I think that to your point, Brandon, it's really important to understand that just because it is an IPO and there's so many attention grabbing headlines around IPOs, stacks, whether you go direct listing and all these kind of inside finance, inside baseball type finance conversations around IPOs, it's not always the best thing to do. In fact, it's generally not the best thing to do to participate in IPOs.

Justin Dyer (04:46): And to your point, it's getting access early on in that startup life cycle, if you will, a series A, a series B, series C and sometimes it's even hard to get access to that as well. I think it's also important to, like you said, think about all this logically, right? We're going to have this huge onslaught of, of headlines. We have an onslaught of headlines every single day, right? Let's not lose sight of that, but we're going to have this crazy onslaught of headlines over the next month or so as earning season really kicks off earning season really actually tracks on kind of throughout the entire quarter. It takes that long for all these companies to report the results.

Justin Dyer (05:30): But the big companies are going to start reporting earnings soon. Tesla is going to tell us what their quarter Q1 deliveries were and the CNBC and Bloomberg Financial Times, Wall Street Journal, they're going to cover it like crazy, right? And maybe there's a little bit of good news in there and the stock's going to pop, or maybe there's some bad news in there it's going to drop. You just don't know. And that's not a replicable investing approach, right? Like this is just letting your emotions dictate how you're dealing with your money and not taking a step back, looking at the data overall. I mean, that IPO example is a great example, right? Because I think most people think IPOs all right, they're always going to go up. They're going to go to the moon. And in general, they don't. Right.

Justin Dyer (06:17): And here you highlighted two great examples of kind of these headline sexy IPOs. Deliveroo is a big company in the UK Compass is a SoftBank backed company, right? SoftBank is one of the biggest venture capital players in the world. And I'm sure everyone sees the Compass real estate signs all over the place, right? These are big companies, big names. And those IPOs have arguably flopped so far. I mean, time will tell, I'm not going to say it's guaranteed, but time will tell. And it's not working out great for them. So yeah.

Erik Averill (06:52): And to your point, Justin, here's the hard thing I think for us in everyday life, we were so distracted and there's so many pieces of information and advertising and things coming into our head. One of the quotes from The Psychology of Money by Morgan Housel that I think was fantastic. And I remind myself, nobody's ever made an irrational financial decision in the moment, because if they thought it was irrational, they wouldn't do it. Right. So there's this justification, there's this framing effect that happens. There's confirmation bias, there's all these things, and so one of the ways to jar it is to bring awareness and ask some questions of where am I getting my information and what's their end game, what's their incentive? So media, right? If I'm on news, understanding that the way that they make money is by selling advertising.

Erik Averill (07:54): So they're not committed to your financial success. They're committed to trying to extract dollars from your pocket and from companies by getting your eyeballs. Same thing that happens on so many people today, Twitter is a unbelievable platform and we're so thankful for the good things that it's brought real time information, but it's also brought a bunch of characters around, right? That are amateurs that are literally spewing information that has real impact on you as the investor. So it's asking the question, same thing on the IPO, right? I can't tell you time and time again when it's under-subscribed what do they do? They go to the brokers at Wall Street, the Merrill Lynch's, the Morgan Stanley, UBS;s, and they use these as sales tools to say, hey, I can get you- remember the Facebook craze IPO. I can get you access to the Facebook IPO.

Erik Averill (08:44): We're literally a NFL player looking through his investment stuff. And he's got this random holding of Uber at Morgan Stanley, right. Sales tactics. So I think it's asking these questions. And one other thing I do want to acknowledge and I'd love for us to focus on this part is it is hard when I see Compass real estate signs everywhere, or I see WeWork everywhere and they're beautiful offices, and it seems like people are in their Compass real estate. A bunch of our clients have bought homes through Compass. I mean, it looks like how can this miss? Because day to day the companies, my client experience is fantastic. It seems like they're booming, but why is it about investment?

Brandon Averill (09:34): I think that's a great point, Erik. And before I go there really quick, I'd love to throw out an offer to everybody. A lot of times we're looking at headlines and we're not always in tune with maybe the headlines that you guys as listeners are taking a look at, and we'd love to make this as valuable as possible. So if you drop us a note, you shoot us via the website, AWMinsights.com, shoot us a text if you have our contact information, let us know, Hey, what Twitter followers are you following? What podcasts are you listening to? Where are you getting your headlines? We'll buy you a cup of coffee. So we'll send you a gift card to buy your next cup of coffee. So we'd just, we'd love to get that from you so we can address it, but going back to your point, Eric, I think the Compass IPO, you see these beautiful signs, as you said.

Brandon Averill (10:26): I think the thing to always remember is just because you buy the product, like the product, et cetera, you don't know how it's financially managed. And so think about it. A lot of money goes into that. Look, is it sustainable? We talked to some close friends that we have at Sotheby's for instance. And he laughs every time I'm around him, I always say, Oh, there's the Compass sign. He's like the business model doesn't work and that's somebody in the industry. Right? And so they're trying to buy attention. They're trying to make that feel for you. And that might be great for the person buying or selling the home. But is it great for the business until you see the financial statement until you look at what the income is? What are the expenses? What's the Cap X if you don't know what Cap X is, stop buying individual companies yourself, because you're just fooling yourself. So anyways, I think that's the point though, is don't judge the book by its cover because you actually got to go read the book to figure out if this is worth investing in.

Justin Dyer (11:28): You could say the same thing about Tesla. You could say the same thing about a number of companies, right? Tesla, super popular product, really interesting cars. I'm fascinated by them. And the company itself is overvalued, right? I could say that. I'm fairly confident in making that statement. So the product does not mean the company is automatically a good value or a good company. Brandon, to your point, right? An interesting- or Eric, you highlighted, WeWork, right. Fantastic perception, brand, all that stuff. Fantastic experience. You go there, you visit someone. You're like, oh my goodness, this is fantastic. This is phenomenal.

Justin Dyer (12:12): But from an investor standpoint, you're like, wait a second. We're charging them X for all of these services that doesn't make any sense whatsoever. And you guys are asking for a 45, $49 billion valuation. No, that doesn't make sense. That is essentially what happened with WeWork two, three years ago and now they went public or they're going public currently for a fraction of the valuation because they went through that analysis and that whole process. And it takes time to have investors digest the information, sort it out, go to the public markets and get that lens of transparency that the public markets can put on a company.

Brandon Averill (12:58): I think, and one thing is I think maybe to relate it back to the sports world, the devil's in the details, right? And we just saw this. Francisco Lindor signs a massive deal, right? $341 million. You turned down $325 million a couple of days ago. Everybody thought it was dead in the water. Now he signs this $341. So the question becomes, that's amazing. Right? Record setting, his agents are probably totally pumped up, but then you start looking at the details. That original $325 million had zero deferred money, which is incredible, absolutely incredible. But then he goes and agrees to the $341. That's great, whoops, 50 million in deferred money. When you look at what it's worth in today's dollars, we don't have all the details.

Brandon Averill (13:47): So I can't hundred percent say this, but I think it's very, very, very likely that that deal he disagreed to is worth less than the deal he held on the table table a week ago, few days ago and turned down. So I think it's just really- you got to understand the financial aspects of this. Unfortunately headlines don't always show that, right. Let's look beyond those headlines, that quote unquote headline number that everybody's worried about in sports. It's all about what gets into your pocket at the end of the day. So I just thought that was a fascinating deal. Something to think about, same thing, kind of translate it back to the investment side.

Justin Dyer (14:26): This whole conversation on- go ahead.

Erik Averill (14:30): Yeah. Sorry. I was just going to say, it's the difference between an amateur and a pro, right? The professional approach is using the evidence. It's using the data. They're not getting caught up in the headline value. Very candidly, Steve Cohen and the New York Mets, they don't care that the headline says $340 they care about cashflow, right? This is an assassin. This is an expert. When it comes to investing, he understands that professional sports is an entertainment business that's trying to produce profits. So it's Hey, great. I'm going to let the amateur mass media gets super excited about the headline, but I'm actually going to make money by deploying what the evidence says and what the expertise says. And I think that that's what we're trying to say here is, is if you want the keys to unlocking true financial success and capturing the returns you deserve, here's the good news.

Erik Averill (15:24): There's tons and tons and tons of evidence of what works they're called fundamentals. Right? And one of the things we encourage that we're putting out for the first time is, is if you head over to AWMinsights.com, you can download the key fundamentals, the takeaways, the 10 principles of how to invest like a pro, that if you implement these 10 keys, you will have success. Here's the hard thing, very, very simple, very difficult to execute because it takes discipline and it takes you turning your head off and going against the crowds.

Justin Dyer (16:04): Yeah. And you know, I think what we're saying all today on this episode speaks exactly to that. And even ,quote unquote, some professionals or people that are perceived to be professionals get wrapped up in this chasing of your tail or the behavioral side of it, or trying to outperform or participating in the next IPO, whatever it is, right? The data or the article you referenced about the rise of active management. I think that is largely driven by the feedback loop that we're in right now, right? Oh, this get rich quick scheme here. There's this other one here. So on and so forth. Similar to that, there was an advisor who serves pro athletes. I don't believe he was credentialed. So, you know, keep that in mind as well. He just was charged by the Securities and Exchange Commission for fraud because he put client's money in some kind of- call it a sexy investment product.

Justin Dyer (17:08): Really what it was, was something that had a bunch of leverage or debt involved with it. And he didn't understand it. He got caught with his hand in the cookie jar, if you will, trying to promise too much to his clients and his clients lost out as a result. Because he was trying to chase return, trying to give them quote unquote, what they wanted or what the media was telling them and not really doing what's in the client's best interest. I mean, that is, that is literally what's in the kind of SEC filing. It says he breached his fiduciary duty to the clients because they all got wrapped up into this chasing returns type deal or chasing the next fat. So I think that's as well, right. Really do your diligence. We always say at the outset, Hey, CPWAs, CFAs, those credentials matter. They're in and of themselves not a guarantee, but they definitely matter. And they show that we've put in the time and energy and effort to really serve you as best as we possibly can.

Erik Averill (18:10): And I think those are some great takeaways for you, the audience, of how do we stack the deck in your favor? How do we put you on a path to make sure that you're capturing the returns you deserve? And one of those key components from that story right there is making sure that you're trusting the right people, that there is independence in the advice that they're providing for you, right. Is one of the best questions we can ask of anybody when we're trying to understand whether we should trust them or not, or are their incentives aligned with us? Unfortunately, most of the ways that we're getting information are from people trying to sell us things, whether it's trying to steal our eyeballs to sell advertising to somebody else, or they're trying to sell their products to you, there are conflicts of interest. They're not in your best interest.

Erik Averill (19:02): And so making sure that you have independent advice, that's completely integrated and ultimately individualized because you deserve advice that is customized to you. And the great news is there are incredible advisors out there. There are the CPWAs the CFAs, the registered investment advisors that have these foundational principles for you. And I want to point you once again, before we close out this episode of how to look beyond the headlines is we're not telling you just to not do something. We're giving you something. It's the 10 keys to investing like a pro. Head over to AWMinsights.com. You can access the show notes. You can access this download, and until next time, own your wealth, make an impact and always be a pro.