A Decade Outperforming The NASDAQ w/ Brian Stoffel - TIP (2024)

[00:03:12] Kyle Grieve: Welcome to the Millennial Investing Podcast. I’m your host, Kyle Grieve. And today we bring Brian Stoffel onto the show. Brian, welcome to the podcast. Thanks, Kyle. really happy to be here. So Brian is well known on X and YouTube for his excellent breakdowns of interesting tech companies he owns and follows, but I want to tackle something right off the bat, which is track record.

[00:03:33] Kyle Grieve: So you see a lot of nonprofessional investors, especially on things like X showing their track records over very short periods of time, say the last quarter or the last year, or, you know, right now we’ve had a very good couple of months. But Brian has done a really good job of showcasing his returns as far back as he’s been able to go since 2015.

[00:03:50] Kyle Grieve: So I’m interested if you could share your track record with the audience and discuss why you think it’s important to be so transparent about it.

[00:03:57] Brian Stoffel: Sure. Let me start with why it’s so important to be transparent with it. I was a writer for The Motley Fool for a number of years and anyone who follows me knows that I’m heavily influenced by the work of someone named Nassim Nicholas Taleb, who’s written a lot of books that are very influential, especially for myself.

[00:04:14] Brian Stoffel: One of those books is called Skin in the Game and in it, he talks about how, especially if you’re someone who is giving advice about anything, that you need to be exposed to downside risks if you’re wrong, if you’re going to make a living off of giving advice. And I really took that to heart. And so I read that, I read that from him before he came out with his book, Skin in the Game.

[00:04:40] Brian Stoffel: And I’ve actually interviewed him twice. So I’ve had a chance to interact with him. And when this happened, it was probably around 2017, 2018, that I kind of hit me that I was like, huh, you know, I’m not doing that. Because as a writer, I wanted to write about stocks that were really, popular and writing about a stock that is really popular and having an opinion about a stock that is really popular.

[00:05:06] Brian Stoffel: Guess what? That gets you a lot of clicks and a lot of clicks means that you’re more likely to stick around as a writer. And of course. The problem with that is, is that if I’m picking out a popular stock, more often than not, that’s a risky stock. And if it’s a risky stock and I’m saying, yeah, you should own it, but I don’t own it myself.

[00:05:25] Brian Stoffel: Think about the dynamics of that, where someone reads this and they say, oh, so and so says, this is a great buy. I’m going to go out and buy it. And I get paid for that article. And I also get paid if it’s a really popular article, but what happens if the stock goes down and everyone who followed my advice, they lose money and I gain money.

[00:05:49] Brian Stoffel: And there is something that asymmetry, there’s something that’s just not okay with that. So what I did, Kyle, that was really eyeopening for me because at that point in time, I probably had about seven or eight years worth of articles that I’d written. And so I went back and the Motley Fool does a great job of this.

[00:06:07] Brian Stoffel: They, at the end of every article, you have to say whether or not you have a position in this company. And so I went back and I went over hundreds of articles and you can tell I had a lot of time on my hands at this point in time. My daughter had just been born and when she was asleep, I would just sit down and, go through these numbers.

[00:06:24] Brian Stoffel: And when I did, it was so clear when I made a recommendation about a stock for the Motley Fool’s free site, to be clear, this was the free site. It’s not their paid services. They did significantly better over the next three years when I owned the stock than they did if I said, so and so is a good buy, and I didn’t own the stock, and that was really eye opening for me, so all of a sudden I was like, Huh.

[00:06:52] Brian Stoffel: There is a problem with suggesting stocks and you don’t even own them. And it’s funny because a lot of people, and I get the argument that they’ll say, you’re just writing about this company because you own it. And I understand that argument, but I would much rather take advice from someone that eats their own cooking.

[00:07:11] Brian Stoffel: and someone who’s just going for clicks. That’s why I think that sharing your record is so important. First of all, I think you have a moral obligation to do so first of all, if you’re in our line of work and secondly, it makes me a better investor. If I know that my reputation is on the line. I’m going to take a lot more time to think about what it is I’m suggesting.

[00:07:36] Brian Stoffel: So from December 31st, 2014, up until January 31st of 2024. So we’re closing in on 10 years. My portfolio has a compounded annual growth rate of 17. 7%. As the time of this filming on February 15th, it’s actually, I think, significantly better than that. Because as you said, a lot of the stocks that I invest in have done well lately.

[00:08:01] Brian Stoffel: So 17. 7%, that equates to about 370 percent returns since I was measuring. The S&P 500 over that same time, 11. 9%. Some people might look at that and say, 17. 7, 11. 9, that doesn’t seem like a big difference. It’s a huge difference. And then I also throw in the NASDAQ composite index, which has averaged 15 percent over that time.

[00:08:25] Brian Stoffel: The one thing I’ll throw in there is a lot of people look at my portfolio and they’re like, yeah, you should always index to the NASDAQ. back in 2015, I wasn’t investing in the companies that I am now. In 2015, I own Costco and National Oilwell, El Varco and Viola Environmental, a garbage collection company and Viva Partners, a lumber company.

[00:08:48] Brian Stoffel: So there is no perfect comparison on the scorecard, but that’s why I offer up those results.

[00:08:56] Kyle Grieve: So now that we know a little bit more about your track record, I’d love to understand more about your investing strategy. So you compare your portfolio against the S&P 500, like you just outlined. So clearly you’re exposed to the US and looking at your portfolio, I know that you also have all sorts of very, tech related businesses.

[00:09:13] Kyle Grieve: So I’m interested in knowing, I mean, you said that you didn’t use to do tech, but obviously now you’re heavily into it. So what got you interested in investing into that sector?

[00:09:22] Brian Stoffel: Sure. Going back to who I just talked about, the writings of Nassim Nicholas Taleb. Another one of his books is called Anti Fragile.

[00:09:29] Brian Stoffel: To give you the lay of the land here, the way that he argues or talks about anti fragility is he says, you’ve got to know that in the world, there are three different types of things. And we normally only think of two of them. And the first one is things that are fragile. And that basically means when exposed to time and chaos and uncertainty, it will break.

[00:09:52] Brian Stoffel: A teacup is fragile. If you have a teacup sitting on the countertop in San Francisco and an earthquake comes, it’s probably going to break. And then you’ve got things that are robust and things that are robust, pretty much are going to be unchanged by time and uncertainty and chaos. So if I had a piece of metal sitting on that same countertop, he said, we usually stop there, but that’s a mistake because there’s a third class of things that we neglect.

[00:10:21] Brian Stoffel: And that is the anti fragile things that when exposed to chaos over time, up to a point will grow stronger because of that chaos. And if you think about it, our immune system works that way up to a point, you know, obviously if you have a toxic pathogen that enters your system, it’s just going to kill you.

[00:10:43] Brian Stoffel: But if you don’t have that toxic pathogen, but you also don’t have your immune system exposed to anything, you’ll also have a very weak immune system. The right amount of stress can actually be really good. Our muscles are another great example. So I took those lessons that Nassim Taleb talked about, and I said, how can I take these and apply them to the companies that I evaluate?

[00:11:05] Brian Stoffel: And so that’s how I look at it. And that just naturally, it wasn’t something I set out to do, but naturally that led me to a lot of tech names. And that’s why a lot of those companies are in there because. I believe that amongst the best of them for a while, they had a wide moat, which to me is like defense, but they also have a lot of optionality.

[00:11:30] Brian Stoffel: And that’s the ability to create new products or services that further their mission that didn’t exist before. And a great example of this would be Axon Enterprises. I don’t know, Kyle, are you familiar with Axon? I am. Okay. So before they were Taser International and all they made were stun guns, basically.

[00:11:50] Brian Stoffel: But their mission was to protect life. And so they had a wide moat business with the tasers. There’s really no one else who’s going to get into that business, but they realized that body cameras, and even more importantly, the software that could run off of these body cameras would be really important.

[00:12:08] Brian Stoffel: That’s optionality. That’s coming up. That’s like the offense that’s coming up with new products that can do this. And that’s a lot easier to do with software than it is with hardware and a lot easier to do in tech than it is in say grocery stores. I mean, I don’t even know what kind of optionality you can get in grocery stores.

[00:12:25] Brian Stoffel: I remember I invested in Chipotle for a while because I was like, yeah, they’ve got these new store concepts coming out. But none of them ever moved the needle, but if you look at tech, I mean, for example, Datadog is one of my investments when they came public. I believe they had nine tools that were publicly offered.

[00:12:44] Brian Stoffel: And this was just like four years ago. And now they’re at 22 and almost 10 percent of their customers. Already used nine of those tools. That’s optionality. That’s the first thing. the other two is I like to see management with their own skin in the game, kind of getting back to what I was talking about earlier.

[00:13:01] Brian Stoffel: And then I also like to see that they’ve got lots of redundancy. So one of the things that Nassim Taleb says is if an economist were designing our human body, we would have had one eye. One kidney, one ear, because that’s the most efficient thing you can do. We love efficiency. And his point is efficiency actually kind of sucks because when you’re super efficient, you have zero room for error.

[00:13:23] Brian Stoffel: And didn’t we see that during the pandemic, our supply chain was phenomenally efficient, which is great when times are good, but when all it takes is a small hiccup, let alone a big hiccup. And then that lack of redundancy really rears its head in. So what redundancy for me means is that they don’t have any single point of failure, like one large customer, or they’re completely reliant upon interest rates or something like that.

[00:13:52] Brian Stoffel: And then the other is that they’ve got lots of cash and positive free cash flows, which Kyle, for what it’s worth is really important because there’s a lot of people who say you’re investing in these companies and they don’t even turn a profit. And I say, yeah, but profit is an opinion. You can’t touch profit.

[00:14:11] Brian Stoffel: You can touch free cash flow. And these companies are free cash flow positive. With lots of stock based compensation, so don’t get me wrong, but they are not reliant upon banks or a high stock price to fund themselves. So that’s the kind of philosophy behind how I built my portfolio.

[00:14:30] Kyle Grieve: Now that we know about your track record and we know a little bit more about how you got interested in investing in tech stocks, can you just give us a better sense of your general investing strategy?

[00:14:41] Brian Stoffel: Sure. So in general, if I become interested in a company, I’ll probably start out with maybe a 1 percent position. And then over time, as I’m comfortable with it, I’ll add to it until it gets up to about 5%. And this is not a rule that I’m afraid to break. I will break the rule if a situation warrants it.

[00:15:02] Brian Stoffel: But usually once a position gets to about 5 percent in my portfolio, that’s when I just let it go, I let it run. So it has to earn its way to a larger allocation than that, which I’m fine with. I will never, ever, let me say this. I never have not bought a stock over the last seven years based on valuation.

[00:15:25] Brian Stoffel: There’s a difference between a company and its stock. And if that company, in my opinion, is anti fragile, I will put it in my portfolio. Now where valuation comes into play, and Kyle, this is something I did not consider valuation for the longest time and 2022 taught me this lesson. And it’s not that I didn’t know how to do valuation.

[00:15:45] Brian Stoffel: It’s just that up until that point, it had ended up being a lot smarter to just look at the company and not look at the stock. And I still do that when I decide what goes in the portfolio. But when it comes to the allocations, then I start to look at valuation. So if something is starting to look. Like it’s got crazy high expectations baked into its price, especially if I do a reverse DCF, a reverse discounted cash flow model on it.

[00:16:13] Brian Stoffel: And it says that, say, I’ll give you an example, Kyle, for why I made this decision in late 2021. I think Shopify was almost, it wasn’t quite, but it was maybe almost 20 percent of my portfolio. And I wasn’t doing this back then. I wasn’t going and deciding upon allocation and making trims and ads based on it.

[00:16:35] Brian Stoffel: I went back and I looked at it, and it’s cherry picking, but at its highest point, it had to grow its free cash flow by something like 100 percent per year for 10 years. So it had to double. Whatever 2 to the 10th power is, that’s what it had to do to its free cash flow. Obviously, that was insane. And so that’s where I learned the lesson.

[00:16:58] Brian Stoffel: I would not have sold all of it, but I probably would have pared it back significantly, probably even before it reached that point. And so that’s kind of how I go about building my portfolio.

[00:17:09] Kyle Grieve: An interesting question I like to ask investors is, do they consider themselves to be a value or a growth investor?

[00:17:14] Kyle Grieve: And I know that, you know, Warren Buffett has said value and growth are two sides of the same coin, but I’m always interested in knowing what people think about that.

[00:17:23] Brian Stoffel: I mean, I think that if you looked at the stocks that I own and you just had to decide for yourself, you would definitely say a growth investor.

[00:17:31] Brian Stoffel: And the thing that I like about growth stocks is that there is in a lot of situations, much more upside to them. That whole optionality bit that I was talking about, that’s not even that important when you’re talking about your traditional value stocks. With your traditional value stocks, you’re just looking for a company that can continue doing what it’s been doing in the past.

[00:17:52] Brian Stoffel: Again, there are exceptions to that rule, but by and large, I like going based on what could this company create in the future that’s going to really affect the world. And those tend to be more growth stocks.

[00:18:07] Kyle Grieve: So I’m interested, obviously you spoke, you’ve been speaking a lot about Nassim Nicholas Taleb, which is awesome because I’m a massive fan of his as well.

[00:18:14] Kyle Grieve: What other areas do you use his tenets in your investing?

[00:18:19] Brian Stoffel: Oh boy. I don’t know if there’s any ones inside of my investing that I usually use. I’ll say this for personal finance in general. When I interviewed him the first time, he talked about how the biggest mistake that people make is they look at the S&P 500 and they look at it getting about 10 percent per year.

[00:18:36] Brian Stoffel: And so they sit there and They draw out all their calculations and they’re like, Oh, okay. So if I start putting this much away when I’m 25, then by the time I’m 65, I’ll have this and bada bing, bada boom. There you are. He said, that’s stupid because you’re not thinking about life. You’re thinking about a spreadsheet.

[00:18:56] Brian Stoffel: He said, what’s going to happen to you is that. Your returns will be from wherever you start until what he called your uncle point. I said, what do you mean by your uncle point? He says, your uncle point is that month when all in the same month, you get divorced, you have a health problem, you get fired from your job and the stock market tanks.

[00:19:17] Brian Stoffel: And because of all those things, and because you’ve been trying to be super efficient with your money. then you don’t have a huge pile of cash sitting there that you can pull on to help you through that one month. And if you don’t have it, you’re going to have to sell your stocks during that one month.

[00:19:35] Brian Stoffel: And so your returns will be from wherever you started to that uncle point, and they’re not going to be good because that’s kind of how life works. I use that to try and always make sure that I do have that pile of cash that I’m not even looking to invest, but also having that within the portfolio where I’m investing money as well.

[00:19:57] Kyle Grieve: Obviously, you talked about, a lot about anti fragility, but what to you makes an anti fragile business?

[00:20:05] Brian Stoffel: To me, it’s really just asking a question. So we’re talking in 2023 right now. And what I’m trying to do is imagine 2033 and what I want to hit myself over the head with a pan is to remember that there’s probably going to be five or six things that I have no idea what they are between now and 2033 that are going to affect the world the most Kyle, do you remember where you were on December 31st, 2019?

[00:20:38] Kyle Grieve: No, I have no idea where I was then.

[00:20:40] Brian Stoffel: I remember, I was at, we went to a bowling alley, and we all made our resolutions, it was my family and some family friends, and we were just bowling, and if you would have told me, that 3 months later, your kids wouldn’t be in school, you wouldn’t be leaving the house without a mask on, almost every business that you knew would be I would have said you are crazy, like you are a crazy person, get away from me, and it happened, and the thing is, we look back now and probably do actually, Kyle, what you didn’t even mean to do, which is where oh yeah, I knew about, COVID back in 2019.

[00:21:18] Brian Stoffel: And so we can look back and say that, and we suck at looking forward and being like, guess what? That’s what the future is going to be like too. And by the way, it doesn’t have to be all bad things. I have no idea what the, what’s going to happen because of ChatGPT, but I think a lot of good things are going to come from it.

[00:21:37] Brian Stoffel: And before, two Novembers ago, the world had no idea what ChatGPT was. And I think there’s a lot of good things that are going to come from that. So the thing is you have to ask yourself between now and then five or six things are going to determine basically everything. And they’re going to pop up at moments that we can’t expect.

[00:21:57] Brian Stoffel: It is the company that I own shares in designed to not only survive, whatever that unexpected thing is, but actually emerge stronger from it. And let me give you a really quick sample of what I mean. Because it’s even okay if it gets weaker for a little while, as long as it gets stronger afterwards, whole foods ended up being an investment that actually did not turn out that well, but there was a period of time where it showed a certain level of antifragility and here’s what I mean.

[00:22:29] Brian Stoffel: In 2007, 2008, a lot of other grocery stores were starting to get into that natural and organic space. And it was crowding Whole Foods as business out. But then the stock market crashed. We had the Great Recession and Walmart and Costco and Kroger. They abandoned natural and organic goods because nobody wanted to pay more for it.

[00:22:49] Brian Stoffel: And that hurt Whole Foods more than anybody else. But they survived. And then coming out of that until about 2013. They were the only player left in the natural and organic space. So not only did their business grow by a bunch, their stock absolutely skyrocketed. Now, eventually the company really didn’t have a moat and their business was taken away by the Costco’s and the Kroger’s and the Walmart’s and everybody else.

[00:23:17] Brian Stoffel: But those are the type of dynamics that I’m looking for. And that’s why redundancy, lots of cash, positive free cash flows is so important and so is flexibility. Like having the ability to create new product lines that respond to different things that are happening in the world. That’s a big deal.

[00:23:37] Kyle Grieve: Yeah, so continuing on with this line of thought about anti fragility, I noticed one thing in your analysis videos is that you apply a score on a scale, I think it was 1 to 15.

[00:23:46] Kyle Grieve: So I’m interested in knowing how do you quantify anti fragility in the businesses that you analyze?

[00:23:52] Brian Stoffel: Yeah, it’s not perfect. It’s not perfect at all. But the things that I look at is believe it or not, I actually think a mission statement is pretty important because I think that it can guide when those five or six things happen, the companies that have a good mission statement with most people don’t pay any attention to, they actually have a compass to try and help them through that period of time.

[00:24:13] Brian Stoffel: But then I look at the moat and I look at optionality, those are the most important things and I apply a certain number of scores, so I look at the different types of moats, and to me there’s five different types of moats, there’s switching costs, there’s network effects, there’s low cost production, which is very similar to economies of scale, there’s intangibles, like patents, like government licenses, like brand value, and then there’s counter positioning, where the competition would be We’d have to hurt themselves in order to adopt your business model.

[00:24:46] Brian Stoffel: Basically what happened to Blockbuster when Netflix came on the scene. And then what I do is I try and say, okay, is this the kind of moat where I could, it would, basically what I asked myself, the question is if someone gave me 10 billion and 10 years to take on a company, a leader in an industry, Which ones would I not touch just because either the switching costs, the network effects, whatever those moats are, I just feel like I couldn’t surmount that.

[00:25:20] Brian Stoffel: And so for each moat that a company has, if I’m like, yeah, I couldn’t do that, I give them two points. And if I’m like, I think I couldn’t do that, but maybe I could do that. I’ll give them one point. And as I said, it’s very subjective and I’m okay with that because. Here’s the thing, Kyle. To me, if I make all of my decisions, just based on objective numbers, I’m probably just going to get market matching results because that’s what everybody else is basing it off of.

[00:25:48] Brian Stoffel: If I have some subjective measures in there and there’s got to be a balance, yes, then I could underperform the market. But that’s the risk I have to take if I want to see if I can outperform the market.

[00:25:59] Kyle Grieve: I’m interested in knowing you, you, might not have done this and gone back, but have you ever gone back and just looked at the performance of businesses that were scored that scored high for you on the anti fragility score?

[00:26:09] Brian Stoffel: So it’s a bit unfair for me to tell you the numbers that I have. because the last time I ran through them was 2021, which was kind of like a high watermark. But what I can tell you is at that point in time, any company that scored a 12 or above. Had market smashing results and companies could score lower and have great results.

[00:26:32] Brian Stoffel: But in general, over a long enough timeframe to that point, and this is something I should go back and do, but to that point, the framework did a great job of giving me true positives. So there was, never a false positive. Like I never had a company that scored really great on the framework and turned out to be a terrible investment.

[00:26:54] Brian Stoffel: But I did have a lot of companies that scored poorly on the framework and ended up being a great investment and I’m okay with that because I still have a smaller sandbox to play in where the percentages were higher that the companies I was picking were going to do well.

[00:27:10] Kyle Grieve: Let’s discuss some more details about your portfolio construction.

[00:27:13] Kyle Grieve: So I looked back at X from the end of 2023 and saw that you had a post that showed you owned about 19 stocks. Maybe it’s changed since then. So I’m interested in knowing, you know, I also look back at other years prior to that. And it kind of seemed like you were in that kind of high teens, low twenties number where you would, that’s kind of the amount of positions you had.

[00:27:31] Kyle Grieve: So I’m interested in knowing how you arrived at this number and why does it fit into your investing strategy?

[00:27:36] Brian Stoffel: I wish I could tell you that there was a certain way that I arrived at that. I think part of it might just be that naturally. Your brain can only follow a certain number of companies and feel comfortable with that.

[00:27:47] Brian Stoffel: Like that might be part of it. I don’t know if that’s a human thing or just a me thing, but if you think about it, if I’m saying that 5 percent is going to be the max of where I put my allocation into it, Somewhere between 16 and 24 stocks is probably where it’s going to land, if that’s the case. And I’m, unless it’s a small cap stock, it doesn’t really make much sense for me to put a small amount into a large cap stock, unless I think it really has the potential to grow.

[00:28:19] Brian Stoffel: So I actually have done that with Tesla because I think the range of outcomes for Tesla is enormous. Much more so than say the range of outcomes are for Microsoft. So I tend to put those smaller cap stocks there. And that’s why it can get over 20 sometimes.

[00:28:39] Kyle Grieve: So one interesting point about being a relatively constant investor like yourself is how high you can allow a position to get before you start getting nervous.

[00:28:48] Kyle Grieve: So my question for you is what level of concentration do you start losing sleep at?

[00:28:53] Brian Stoffel: Boy, you know, it depends on what stock is there because when Shopify was there, I basically, I’ve had three or four different stocks that have been there. Amazon, which I originally bought in at a split adjusted 7 a share.

[00:29:09] Brian Stoffel: Shopify, which I was lucky to get in at 4 a share. MercadoLibre and CrowdStrike. Amazon, I got nervous because at the time it was a very volatile stock. It got up to about 15 percent of my portfolio. Shopify, I’ve already told you about. With MercadoLibre, I’m less nervous about that just because I see its valuation as not egregious.

[00:29:38] Brian Stoffel: CrowdStrike makes me a little bit more nervous, you know, as of just. Yesterday, which would have been Valentine’s day, actually bumped up to my number one position for a short period of time. I just, when I say that, what I mean is, that’s one that I could see. It’s the type that could fall 30 or 40 percent in a day.

[00:29:58] Brian Stoffel: I’m not saying it’s going to happen, but it certainly it could happen. I don’t, see that same dynamic with Mercado Libre and I guess, Kyle, the other thing I would say about that is, is the more a company deals in the real world with things that you can touch, the less worried I am. So if Tesla grew to be that size.

[00:30:17] Brian Stoffel: I’d be less worried. MercadoLibre, I’m in Costa Rica right now. They have physical operations throughout Latin America. I’m less worried about MercadoLibre, even though MercadoPago, a digital asset, is a huge part of their business. They’ve got stuff that you can touch. Amazon, I was not as worried because I see those vans and I see those fulfillment centers.

[00:30:40] Brian Stoffel: I drive past them. They’re not going anywhere. And if they’re getting disrupted, I’m going to see that with my own eyes. CrowdStrike, that’s a different story. Shopify, that’s a different story. I don’t see customers leaving CrowdStrike and Shopify in my daily life. I don’t take my dog on a walk and I’m like, Oh, there’s some customers leaving CrowdStrike.

[00:31:01] Brian Stoffel: But I can take my dog on a walk here in Costa Rica and be like, Oh, Mercado Libre, or at home and be like, Oh, Amazon. So I don’t lose sleep over those things. So I guess I never really thought about it this way until you asked. It’s the ability to actually see it in the real world. If I can’t, then I might lose some sleep over it.

[00:31:22] Kyle Grieve: Obviously, you just kind of brought up a quote in one of the previous questions I asked where you said something along the lines that evaluation plays, you know, zero role in a company making into your portfolio, but now as of 2022, it’s going to play a larger role in the allocation once it’s in your portfolio.

[00:31:37] Kyle Grieve: I’m interested in understanding a little more about how you manage risk using that strategy.

[00:31:43] Brian Stoffel: The biggest thing that I do with that is I’m usually investing in companies that are still trying to maximize their profit margins. And so it can be really difficult to figure out, how much can earnings grow moving forward?

[00:32:02] Brian Stoffel: If you’re looking at the company and you’re like, okay, so they could grow sales by about 15 percent per year for the next 10 years. How much does that mean that earnings could grow? I don’t know, because earnings are probably going to grow a lot faster than sales can grow. And so it becomes this really tough guessing game.

[00:32:20] Brian Stoffel: And so what I try and do is I try and look around and say, what is that free cash flow margin that this company could have by 2034? And I look at it and I’ll just give you an example. So CrowdStrike is one where I start looking at it these days. And I’m like, if they don’t run into any huge problems, they could have a, anywhere between 35 and 40 percent free cashflow margin.

[00:32:46] Brian Stoffel: They’ve released information saying they believe it can reach 38%. And so what I, do, Kyle, to try and manage the risk in that valuation, cause there’s two types of risks. One type of risk is that I’m significantly overpaying for it, which is basically. Every day that you wake up and you don’t sell a stock, you’re basically buying it, which I think is a really important idea that a lot of people miss.

[00:33:12] Brian Stoffel: They’re like, yeah, you got in at Shopify at 4 a share, but what should I do today? And I’m like, look, I’m not selling. So that’s the same as buying to me. And the first risk is that you overpay. And that’s what happened to Shopify for me, even though I wasn’t paying, I was paying, the other risk is that I look at a company and I say, it’s got a PE of 200, I got to sell.

[00:33:38] Brian Stoffel: And then it just continues to go up and up and up. And the reason for that is that people don’t understand what happens to profits or free cash flows. When you’re going through operating leverage, I try and assume, say, when I’m looking at CrowdStrike, I try and assume that today they’ve reached that free cash flow margin.

[00:33:58] Brian Stoffel: So I don’t have the numbers in front of me, but let’s say they’ve got 10 billion in sales and they’ve got a 38 percent free cash flow margin. Then I say, okay, I’m going to put myself in a world where they have 3. 8 billion in free cash flow, 38 percent margin. How much does that have to grow to justify today’s stock price in a reverse discounted cash flow model?

[00:34:20] Brian Stoffel: And that, I don’t know if this is just giving me false comfort, but that’s how I try and manage, because you have to balance about selling because of some multiples that aren’t really appropriate to be applying versus, hey, This is a really expensive stock. Everything needs to go perfect in order for it to justify this price.

[00:34:41] Brian Stoffel: That’s a fragile stock. Even if it’s an anti fragile business, if a stock needs everything to be just it’s just like that teacup sitting on the countertop in San Francisco. you have to account for that.

[00:34:55] Kyle Grieve: I liked how you use probability weighted valuations when you analyze a business. You speak about this a lot in your videos.

[00:35:03] Kyle Grieve: And in my opinion, the hardest part of doing this is figuring out how do you weigh each scenario? So I’d love to know your framework for how you weigh each scenario and, you know, how you try to improve accuracy on that.

[00:35:15] Brian Stoffel: In the end, what I really think it is, Kyle, is, so I do this more with what I call stage one, stage two companies.

[00:35:22] Brian Stoffel: Those are companies that aren’t even profitable yet, where at that point you’re just looking at what’s the addressable market, what percent of that market could they get? What kind of free cash flow margin could they get? And then you build, you know, your base case, your bear case, your bold case. And like you said, you assign probabilities.

[00:35:39] Brian Stoffel: And what I would say, Kyle, is that instead of just picking one, but when I go on X, I have to pick one because I can’t sit there and play with this tool for an hour, like no one’s going to watch that. And it’s not going to do anyone that much good, but you know what I do, Kyle, I sit there and I play with it for an hour, because that’s what you actually have to, you literally just have to sit down and play with it and be like, huh, if I, and it’s so interesting because sometimes I can have.

[00:36:09] Brian Stoffel: a 5 percent chance of the bull case, and it looks like a great investment, and I pull that down to say like a 3 percent chance of the bull case, and all of a sudden it looks like a terrible investment, and that makes me sit back and say huh, the dynamics at play here are really saying that this company has to do really well to be worth it.

[00:36:32] Brian Stoffel: On the flip side, there’s sometimes where it’s the difference between the bull case and the base case that I have, it doesn’t make that much of a difference. So it really comes down to playing with those probabilities and saying, let’s make it, and I will say, I always make the bear case the biggest.

[00:36:52] Brian Stoffel: Always. And then the bass and the bowl case just, you just kind of have to play around with. That’s how I arrive at it. And I’m just kind of, I kind of sit there, I play with it. And honestly, Kyle, then I’ll wait two or three days and I’ll come back to it and I’ll be like, okay, what seems like the most reasonable way to look at this?

[00:37:11] Brian Stoffel: And I’ll, say just, I’ll give you an example of where this played out well for me is with Transmedics, a company that basically is helping organs make it to don’t ease healthier than just putting them on a bag of ice. I did that and no matter how much I weighted things towards the bear case back in, I think it was November, maybe before the stock, just, it was up like 60 percent the next day.

[00:37:36] Brian Stoffel: And I remember I just got lucky. This is not skill. That was luck. And I bought it the day before that happened, but that’s what led me to is I just sat there and I played with it and I played with it and I played with it. And I was like, they just have to not do terrible. And this looks like it’d be a pretty good investment.

[00:37:52] Kyle Grieve: You brought up moats, obviously, in a previous answer that I asked, and you’re talking about how you kind of look at five general moats. So I know that you’re a fan of Hamilton Helmer and his Seven Powers, and I got a chance to interview him and talk about all of his moats, but I’m interested in knowing more about how you assign moats to different businesses and also What are your favorite moats to look for in a business?

[00:38:14] Brian Stoffel: I think switching costs are probably my favorite. And the reason that switching costs are my favorite is because they’re the most plainly obvious in my own life. I bank with Wells Fargo because I went to college in rural Iowa. And I knew I wasn’t going to stay in rural Iowa. I knew I was going to go be a teacher.

[00:38:35] Brian Stoffel: I was a middle school teacher in Washington, DC after college. And I knew there was Wells Fargo’s there. So I signed up with Wells Fargo because that just made the most sense to do. There are few banks that kind of have disappointed me the most than Wells Fargo. And guess what, Kyle, I still bank with Wells Fargo.

[00:38:54] Brian Stoffel: Why? One, it’s a pain in the butt to switch, but two, I am deathly afraid that I’m going to forget about one of the critical accounts that’s linked to my bank, and I’m going to miss a payment. Mortgage, credit card, what have you. And I know I could sit down and take care of that, I just don’t want to. Now, that’s just me with the bank.

[00:39:17] Brian Stoffel: Imagine a hospital that has Intuitive Surgical’s da Vinci robot that they’ve put down 1. 5 million dollars for. And they’ve got three doctors that have spent most of the last five years training on that machine. You cannot have a comparable product and get anyone to switch to you. You have to have a product that is leaps and bounds better than anything else.

[00:39:44] Brian Stoffel: And at a better price to get them to give up what they’ve already devoted that money to. And then Kyle, the other thing I love about switching costs is what most people ignore. Is that there are a lot of companies out there that have what I call sneaky switching costs. And the number one example of this to me is Netflix.

[00:40:03] Brian Stoffel: I used to think Netflix doesn’t have switching costs. That’s ridiculous. It takes me two seconds to cancel my subscription. And unlike Wells Fargo, I’m not going to suffer any negative consequences by doing that. I can always just go back and sign up again. And that was one of the reasons I didn’t invest in Netflix for a long time.

[00:40:19] Brian Stoffel: And then I did, and I’m not anymore. That’s another story. But then I sat back and I thought about it and I was like, you know, when is the last time that I watched Netflix? And at that point in time, it had been like three months. And I was like, huh, it’s just something I don’t even think about. It’s connected to my credit card.

[00:40:34] Brian Stoffel: It at that point in time is like 12 bucks a month. So what, like going out and getting two beers with a friend, like it’s sneaky switching costs. Cause it happens and I don’t even think about it. And there’s a lot of companies out there that are the same way in that respect as well.

[00:40:49] Kyle Grieve: So I know that you’re a big fan of using the reverse discounted cashflow analysis, which you’ve already referred to multiple times.

[00:40:56] Kyle Grieve: So just for people in my audience who might not even understand what that is. And hopefully you can kind of describe it over audio format, but would you be able to kind of describe what that is and also how you use that and fit it into your investing strategy?

[00:41:10] Brian Stoffel: I think first we should talk about the one that’s kind of more popular with people who really like to get into valuation, which is the discounted cashflow analysis.

[00:41:18] Brian Stoffel: And so with the discounted cashflow analysis, what you’re doing is, you’re putting in the current price, you’re putting in a growth rate that the company will have over, let’s say the next 10 years, you’re putting in a terminal growth rate. So you’re making all these assumptions about how much a company will grow.

[00:41:37] Brian Stoffel: And then you’re giving it a discount, rate. And for those don’t be, turned off by discount rate. What a discount rate just means is you’re saying, I want this stock to go up by X percent every year. So if you want it to match the market. S&P 500 about 10%. S&P 500 goes up by about 10 percent every year.

[00:41:58] Brian Stoffel: So you put in today’s stock price, you put in the growth rates, you put in a discount rate, and it spits out a price for today. And the problem that I have with that Is that the output, a price for today that it’s so clean, it’s sexy. It’s oh yeah, I got it says it’s 130. It’s trading for 140.

[00:42:23] Brian Stoffel: I’m just going to wait till it gets to 130. I’m no fool, but guess what? Like you’re forgetting about the assumptions that you made. We always forget about the assumptions that we make. it’s like the COVID thing I was talking about. We can look to the past and say, oh yeah, those things happen, but I knew about them.

[00:42:41] Brian Stoffel: And we forget to look forward and be like, no, there’s going to be a lot of surprising things coming up as well. What a reverse discounted cashflow model does is you still put in today’s stock price, which is, that’s something that’s real. You still make a dis you put a discount rate in, which is just saying, Hey, here’s how much I would like to get per year.

[00:43:03] Brian Stoffel: And what it spits out is not. What it spits out is not some future stock price that it needs. What it spits out is how much, whatever your profit metric is. I like to use free cashflow. It tells you how much does that need to grow over the next 10 years? And so now you, it’s not sexy, it’s not easy, it’s not, but it makes you think.

[00:43:29] Brian Stoffel: The problem with the DCF is people can use it and then they think that they don’t have to think. The great thing about a reverse DCF is it makes you feel uncomfortable. And that discomfort is where its power lies because you have to think for yourself. How confident am I that free cashflow can actually grow by this amount moving forward?

[00:43:50] Brian Stoffel: Or I take it one step further and I say, I’m going to assume that today it’s already got that free cashflow. Margin that I’m expecting in the future. Cause look, Kyle, if it doesn’t reach that, at least I know where the error was in my process. My error was that I thought it could reach a 38 percent free cashflow margin.

[00:44:09] Brian Stoffel: And in reality, it was just 20%. There it is. That’s where my error was. Whereas. If you just spit out a price, you don’t even really know where the error was. So I don’t know if that answered your question, but the real thing is, that with the DCF, you’re left with the question, is the stock trading for less than this today?

[00:44:32] Brian Stoffel: And if so, buy it. With reverse DCF. What you’re left with is, here’s the growth rate it needs in free cash flow in my case. How reasonable does that seem? And then you make your valuation determination based on that.

[00:44:47] Kyle Grieve: So one thing I noticed in your analysis videos is that you use a lot of analyst estimates.

[00:44:53] Kyle Grieve: So Warren Buffett once said, quote, forecast may tell you a great deal about the forecaster. They tell you nothing about the future, unquote. So I’m just interested in understanding more about how you use analyst estimates to augment your own investing.

[00:45:06] Brian Stoffel: Not much. So the videos that you’re referring to are videos that Brian Feroldi and I put out there.

[00:45:12] Brian Stoffel: And typically these days, because we’ve got a lot of things going on, Our YouTube content is really focused on dissecting earnings of a company, and a lot of people come to those videos and they want to know why a stock is moving so much today, which isn’t that big of a concern for us as long term stock investors, but we also want to meet people where they’re at, and especially if you’re a beginning stock investor, you want to know why is the stock moving so much today?

[00:45:41] Brian Stoffel: And for the 24 hours immediately following a company’s earnings, where that stock is moving is almost entirely based on what the company said versus what Wall Street was expecting. Over time, it’s meaningless. And so Warren Buffett is right. And I agree with Warren Buffett in that if you’re a long term investor.

[00:46:00] Brian Stoffel: Because look, my biggest positions I’ve owned for more than 10 years. I guess CrowdStrike would be an example. I got that right after its IPO, but most of the others I’ve owned for more than 10 years. So I agree with Warren Buffett. We throw those in there because it does help explain why a stock is moving in a certain direction in the 24 hours after it comes out with its earnings.

[00:46:22] Kyle Grieve: You spoke with Brian Feroldi about how narrative follows price, and I really liked it, and this was one of your major lessons I think you learned back in 2022. So one thing I wanted to highlight was how you mentioned that it works both ways as, you know, a good narrative and a bad narrative. So when the narrative is negative, it usually means that the stock price is also in the dumps, just like when the narrative is positive, that usually means that the price is sky high.

[00:46:44] Kyle Grieve: So looking at the language that investors use to describe a narrative, obviously is super important because it helps you identify where investor sentiment and perception is of that stock at a particular point in time. So I’m interested in knowing how do you use narrative to help you improve your decision making and investing?

[00:47:01] Brian Stoffel: What I try and do is, I try and remember that narrative, and by narrative we’re talking about stories, really. Stories, some people say that the greatest instruments that humans have ever invented are like, the Hubble telescope, or nuclear power, or AI. And I think that’s completely wrong. The greatest tool that humans have ever invented, by an order of magnitude, are stories.

[00:47:27] Brian Stoffel: We think in stories. We’re convinced by stories and stories are not good or all bad. Stories are just powerful. And so they can be powerful for good or powerful for bad. And you can’t escape stories. Nobody can escape stories. We have to make sense of the world somehow. But you have to be aware of how influenced you can be by the story that’s out there in the world about a stock that you own.

[00:47:58] Brian Stoffel: The best way that I know how to make sure that you’re trying to inoculate yourself a little bit, as much as you can from the stories surrounding a stock. Is to go to the company’s financial releases. What I do is I try and take once every six to 12 months, review my portfolio. And what I’ll do is I’ll read over the annual report.

[00:48:22] Brian Stoffel: I’ll read over the quarterly reports. I’ll read over the presentations. I’ll look through the presentations, but I won’t look at what anyone else thinks about it at all. Just last night HubSpot came out with their earnings and I made sure that I read through all of it. And I came up with what my initial opinion was before I went to see what the stock had done after hours, before I went to the message boards of the Motley Fool or the community that Brian Feroldi and Brian Withers and I have.

[00:48:58] Brian Stoffel: It’s kind of like Kyle. I don’t know if you’re familiar with this, but if you’re in a meeting with a lot of other people, it’s a lot better to have everybody write down their idea. If they say, what’s the best thing we can do over the next year? Have them write their, idea down on a sticky pad, give it to someone and someone reads them out.

[00:49:13] Brian Stoffel: Because if instead, You just go based on the first person that raises her hand or the first person that speaks up. We are all naturally inclined because stories are the most powerful thing humans have ever invented. We are naturally inclined to bend our own opinions toward that story, because now that story has the floor.

[00:49:34] Brian Stoffel: And reality doesn’t give two, you know, what’s about the story, but we humans do. And so that’s why writing it down is such a much better idea for teams, because then you’ve got all the options out there and you can sit there and actually think about all of these options. That’s why I think it’s so important that investors.

[00:49:53] Brian Stoffel: Sit with the financial statements, sit with the, say, interviews with the CEO before you see what anyone else, including the market, thinks about what’s happening with the stock, and then start to calibrate yourself. So write down what you thought after Alphabet recorded, reported their earnings, write down what you think, then go around and see what everyone else thought, notice any differences, and then check back on that a year later, because if you really start to get a feel for the companies you own, you’ll notice when you had a feeling that ran contrary to the narrative out there, and you were right, and how sometimes You were wrong.

[00:50:31] Brian Stoffel: And that can be really valuable.

[00:50:34] Kyle Grieve: So one thing that I, I didn’t even know about Brian until he, I, got him onto this interview was that he actually lives in, Costa Rica for six months of the year. So I know I’ve seen photos of you in what looked like beautiful, sunny areas, and I just kind of assumed that you like traveling a lot.

[00:50:50] Kyle Grieve: So can you talk a little bit about your experience of kind of how you got to this point of living in Costa Rica for six months out of the year?

[00:50:58] Brian Stoffel: Yeah, I will say it used to be six months. These days, because I have kids that are in school, it’s more like two months, but I’ll still take it because I live in Wisconsin for the other 10 months and it can get cold there.

[00:51:08] Brian Stoffel: But my wife and I were middle school teachers in Washington, D.C. We worked at schools that were charter schools. They had a little bit, they had different rules. For instance, the school that I taught at, the kids were in school from 7:30 AM to 5 PM every day. There was school on Saturday. There was school during the summer.

[00:51:25] Brian Stoffel: It was great. Like we accomplished what we wanted to with those students, but it also wasn’t sustainable for me. So after five years, we both looked at each other and we said, it’s time for something different. So what do we do? And neither one of us knew what we wanted to do. So we said, the hell do we do with that?

[00:51:42] Brian Stoffel: And my wife said, we don’t have to, we’ve been saving. We live in this tiny little apartment in Washington, D.C. and we work so much. We don’t spend that much. We can do nothing like no, no mandatory job for a year. And we said, we can’t do that in Washington, D.C. Where can we do that? And we landed on Costa Rica.

[00:52:01] Brian Stoffel: We found a place to live there based off of Craigslist because Airbnb didn’t even exist at the time. We. Got picked up at the airport by a random person who brought us to the house, and we were in this mountain town with very few expats that were anywhere close to our age, and it was pretty weird at first, then that’s when I kind of started going crazy.

[00:52:25] Brian Stoffel: My wife handled it very well. I did not. And I needed something to work on. We had to roll over our 403Bs. And I was a writing teacher. I’d never taken an econ or finance class in my life. I took one my senior year of high school. That was it. But the more and more I looked at, you know, what we could do with our money and importantly, what the company had done with our money that our school had used, the more and more I was like, this doesn’t make sense.

[00:52:55] Brian Stoffel: And I had all the time in the world to spend on it. So I just started learning about it. And I started writing on the Motley Fool’s boards and they contacted me and they said, Hey, you know, you can do this and we’ll actually pay you for it. And I was like, that’s crazy. I don’t have a background in this.

[00:53:12] Brian Stoffel: And they said, yes, we can tell, but you’re a good writer. Cause that’s what I was. I was a writing teacher and they said, you come, we’ll train you. You’ve got the writing, we’ll give you the finance stuff. and then we can go from there and you can work from wherever. And I said, okay, that’s great.

[00:53:29] Brian Stoffel: and so 14 years later, we live on a coffee farm in the mountains of Costa Rica, not our farm, but a family that has become family for us. And we just, we live on the farm for two months. Our kids run around and play. It’s great.

[00:53:43] Kyle Grieve: I know that you don’t take evaluation in as much of account, but obviously I think there’s probably a business out there that maybe you wish you could own, but you just can’t wrap your head around the price.

[00:53:54] Kyle Grieve: Or maybe you don’t understand it as well as you think you need to. What would be that business?

[00:53:58] Brian Stoffel: I mean, I’ll go with can’t understand it as well as I think I need to. Nvidia would be that business. I would buy it if I, the valuation wouldn’t bother me because you can always buy 1%. Like anyone can buy these days, you buy 10 worth of NVIDIA if you use some trading brokerages.

[00:54:16] Brian Stoffel: But for me, I am not technical enough to truly understand how wide the moat is that NVIDIA has. And there are a lot of people out there who are smarter than me who do understand that and who have made a killing on that. And I say the more power to them, but if I don’t understand what the moat is, it’s not going to work for me.

[00:54:43] Brian Stoffel: That’s why Axon is my favorite example of the widest moat business I can think of. Another person that works with Brian and I, his name is Matt Cochran. He’s actually a police detective in Florida. And I’m just like, Matt, what would it take for a police department to switch away from Axon at this point, given that you’ve got the stun guns, you’ve got the body cameras, and forget about those, you’ve got the software that stores all of this information, and he, you know, he’s an act of God, basically, is what it would take.

[00:55:13] Brian Stoffel: I can understand that. And especially being a teacher working in the public service, I know how hard it is to switch. from a grading platform for middle school. So I can get that super processors and GPUs. That’s too hard for me. And I’m okay. Staying on the sidelines there.

[00:55:33] Kyle Grieve: So Brian, thank you so much for joining me today.

[00:55:35] Kyle Grieve: Before we say goodbye, where can the audience connect with you and learn more about your newsletter and your investing course?

[00:55:41] Brian Stoffel: Sure. So Kyle, a couple of places that they can go, obviously Twitter. I’m underscore Stouffle underscore. If you go to longtermmindset.co, we just launched the webpage this week, you can go there, sign up for our newsletter, and you can see the courses that Brian Ferroli, Brian Withers, and I offer there.

[00:55:59] Brian Stoffel: And then one other thing that I do, I’ve partnered with Savvy Trader lately to show my portfolio in real time for anyone to see. You can subscribe to see that there. I do not encourage you to copy what I’m doing, but when I was a teacher, Kyle, the best way to teach my students how to write was to literally sit at the overhead.

[00:56:19] Brian Stoffel: And to think out loud and write. And that more than any lesson that I could come up with, improve my students writing the most. That’s what this partnership with Savvy Trader is. And just for your audience, if they go and they want to register, if they use the code word PODCAST in all caps, PODCAST in all caps, they can get 50 percent off of that.

[00:56:41] Kyle Grieve: Okay, folks, that’s it for today’s episode. I hope you enjoyed the show and I’ll see you back here very soon.

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