My 3 Biggest Positions Are PHM, NOC & CCI

Tell us a little bit about your background.

I went to school for engineering and started my career there, but found myself becoming really passionate about investing and the stock market. 

I fell down the rabbit hole, trying to soak up as much information as possible. Then I took what I learned and starting posting it on the blog (einvestingforbeginners.com), so other beginners who were one step behind could learn alongside me. 

This beginner has been the focus of our amazing team ever since.

What was the main reason to start a podcast for beginners? What topics do you usually cover in your podcast? 

My co-host Dave Ahern and I had no official background in finance and had to teach ourselves these topics. We figured if we could do it, so could anyone. So the podcast was born, to make learning about the stock market and investing accessible for all. Our goal is to make the language of money and finance as simple as we can.

Lots of times we spend entire episodes answering listener questions, so the topics can really range a bit. Most episodes are for stock pickers, so we teach the basics of a stock and most importantly, the businesses behind the stocks.

We’ve talked about the ideas of other great investors like Warren Buffett and Charlie Munger, Peter Lynch, Joel Greenblatt, Terry Smith, and Aswath Damodaran. We’ve had wonderful guest interviews with bright people like Vitality Katsenelson, William Green, and Brian Feroldi. We occasionally talk about personal finance, 401k’s, and other retirement accounts.

Dave and I try to always reinforce “back to the basics” principles, like investing for the long term and investing with a margin of safety, emphasis on the safety.

What is your current investment strategy? And what was your strategy at the beginning of your investment journey? Can you walk us through the development of your strategy? 

I look for businesses that I can hold for a long time who have a distinct competitive advantage. I also want to pay a fair price for these stocks. Because the future is so uncertain. And when Wall Street expects the world from a high-flying stock, it rarely turns out well.

I started my journey trying to pick very cheap stocks that I thought I could also hold for a very long time. This led me into some great businesses but also some not-so-great ones. Buying very cheap stocks is a strategy that can work very well if you’re willing to turn over your portfolio many times.

The more I learned about the track record of some of the best businesses, the better that approach sounded. It can take more work to find those opportunities at first, but like Pat Flynn says—the best passive income is found by doing the work now, so you can reap the benefits later. My co-host Dave helped open my eyes the most to the potential of this strategy.

How do you conduct your research before making an investment?

My research can take a different form with every idea, as I follow my natural curiosity when trying to understand a business and industry. 

I’ll start a month with different filters to narrow down my list of ideas. Nobody can become an expert of thousands of businesses overnight, so you must have filters to narrow down the research.

After determining that a stock seems to be reasonably valued in the market, and has indicators of growth, I’ll tear through its annual report.

Then it’s all about painting a picture in my head about the business. I use ideas like Michael Porter’s Five Forces to analyze a company’s competitive position. I try to think deeply about only the most important drivers of long-term compounding for a business.

My research intentionally stays as close to the original source as possible. Publicly available financial documents like 10-k’s and 10-q’s. This is to keep other people’s biases away from my thinking process. I feel that this is my own “competitive advantage”. It helps me see the big picture and avoid missing the forest for the trees.

I try to think of every possible reason that a stock might not work out. I’ll intensely concentrate to digest 10-k’s, but then also leave free time to let my mind wander and figure out tough problems that a business could face.

That’s where my strongest convictions come from, and it gives me the confidence to hold a stock or buy more when the rest of the street is freaking out.

What do you consider to be the most important factors when selecting a stock or other investment opportunity?

I think it comes down to two things, a company’s moat and the valuation of its stock. The valuation part of the equation puts numbers to the intangible. A moat is only as strong as the cash flow it generates for the business.

I’m probably overly emotional in my personal life compared to others. So I obsess about being very unemotional with my investments.

Like Warren Buffett says, “Investment is most intelligent when it is most businesslike”. 

Determining a company’s moat can be very subjective; by looking for both a moat and a fair valuation, you are reducing your chances of being wrong. And that’s one of the best ways to build wealth over the long term.

How do you determine when to sell an investment?

My overall selling approach is another great idea from Dave. It’s a simple thought experiment. Ask yourself, has anything fundamentally changed with the business?

Every business will go through its ups-and-downs. They will have easier and tougher times, and that will reflect in its stock price.

But the best businesses with strong moats (competitive advantages) will fight through and compound even more on the other side. If you sell out of these stocks when times are tough, you won’t reap the most of returns that stocks have to offer.

Also I don’t sell a stock just because it’s gained a lot. Peter Lynch calls that “cutting the flowers and watering the weeds”. If you buy the best businesses, they will have the highest gains over the long term. So a higher stock price is usually a great signal to keep holding, not to sell.

What are your thoughts on diversification?

I think diversification is critical, especially for the average investor. 

There are just too many factors that determine the success or failure of a business or industry. Too many times in history, the best businesses in the world have been disrupted. That’s just a part of life, and the way to reduce that risk is by diversifying your portfolio.

If you do it right, then the winners in your portfolio will override the losers. But if you don’t have enough diversification, the losers might anchor the portfolio in poor performance for a long time.

How do you allocate your investment capital across different asset classes?

I don’t. 

I’ve kept 95% of my liquid net worth in the stock market, and will continue to do so. 

I believe the stock market is the best place for the highest gains on the least risk. Nothing is riskless, but the stock market is a pretty safe bet over the long term.

And it’s simple. The economy is driven by businesses. In a free market capitalist society, much of the growth of the economy goes to the owners of businesses. And we can all take part in that.

Risk management is a critical part of investing. Can you, as an experienced investor, provide insights on how to manage risk effectively? What is your approach to risk management?

I completely agree with that, and it’s a great point.

If you are a stock picker, it comes down to managing a portfolio that does not get too concentrated in any single business. I know that idea runs counter to many investing greats, but there could be some survivorship bias with their advice. In other words, we only hear the stories of the successful “don’t diversify” investors.

I was burned by having too much capital in a couple of single stocks, and it weighed down my performance for several years. 

My general approach to risk management is to have a healthy dose of humility.

The future is just too uncertain. We are bound to make mistakes in our research and analysis. So size the positions in the portfolio appropriately.  

How has your portfolio performed over the last year?

As of March 31, 2023, the Real Money Portfolio for my stock picking newsletter The Sather Research eLetter has a 1-year return of 4.5%, versus -7.1% for the $SPY ETF, which tracks the S&P 500.

The Real Money Portfolio follows my stock recommendations, with a $150 per month deposit into a brokerage account that I own. This is benchmarked against what a portfolio would earn by just buying $SPY with the $150 per month deposit. All dividends are automatically reinvested, and the performance for both my portfolio and the $SPY ETF are adjusted for these $150 deposits to calculate an IRR.

What is the average annual return on your portfolio over the last three years?

As of March 31, 2023, the 3-year annualized return for the Real Money Portfolio is 21.6%, versus 16.2% for the $SPY ETF.

What is your best-performing stock in your portfolio, and why do you think it has performed so well?

From purely a total return basis, Cisco (CSCO) is the highest with 162.5%. I’ve owned that stock since 2016, and it’s the simple math of a good business compounding over time.

(Strike.Market CSCO Share Of Search Data)

On an annualized basis, Texas Roadhouse (TXRH) is up 50% in less than a year, and that’s been a win so far because I bought when everybody had fears about inflation.

(Strike.Market TXRH Estimated EPS vs. Reported EPS Data)

The Progressive Corporation (PGR) has stood a longer test of time, up almost 70% over two years. It was also another contrarian pick, where I bought a slower growing stock in 2021 when everyone else was buying the most exciting growth names.  

(Strike.Market PGR Google Trends Data About Insurance Companies)

Have you made any significant changes to your portfolio recently, and how have these changes impacted your portfolio performance?

The most significant change was through the evolution of my approach from cheaper stocks to higher quality businesses. Also, I started being intentional with bouncing my ideas off my co-host Dave, which led to us doing regular weekly chats about my portfolio.

Since those two things, which was throughout 2020, my performance started improving slowly and steadily over time. I’m still underperforming over the life of the portfolio, but have been doing very well since this shift. 

What are the top 3 biggest stocks in your portfolio? 

As of March 31, 2023, my 3 biggest positions were PulteGroup PHM, Northrop Grumman Corporation (NOC), and Crown Castle (CCI), with portfolio sizes from 5.5% - 7%. However I have almost 10 stocks in the 4% - 5% position size range. 

I expect that the businesses out of this group which perform the best over the next decade will make up an increasingly bigger size of my portfolio. And I won’t have to do much. The top stocks will select themselves. 

(Strike.Market PHM Profit Margin Data)

(Strike.Market NOC Ratios Data)

What do you believe are the top 5 most important lessons every investor should learn? 

• Invest for the long term
• Diversify your portfolio
• Don’t time the market. Invest a minimum dollar amount each month through dollar cost averaging
• Remember there is a business underneath every stock
• Invest with a margin of safety, emphasis on the safety

What are the biggest mistakes investors usually make and why?

It’s hard to answer because investors aren’t always upfront with their mistakes. Not many people like to trumpet them on social media.

I believe the biggest mistake that anybody can make is to quit investing, or never start.

Many mistakes can be made up in investing. Quitting or never starting is really tough to overcome, and it can have a huge effect on your financial wellbeing over the long term.

You have always believed that average investors have so much potential to build wealth, through the power of patience, a long term mindset, and compound interest. Can you explain what compound interest is and how it works?

Compound interest is money making more money. This makes your money multiply. Your wealth will grow exponentially through this. Think of it like a snowball. As you roll a snowball down a hill, it picks up more and more snow as it rolls. That’s exactly how compound interest works to build wealth.

What are some examples of investments that can generate compound interest?

The stock market is an easy one. You can collect dividends from stocks, and reinvest those back into more stocks. Every year that you do this, you will get a higher and higher dividend amount.

The businesses underneath a stock represent also compound in a similar way. They earn profits, which they reinvest back into the business, which creates more profits the next year and the next. 

That’s how stock prices grow exponentially, and how investors get compounding. 

How can you maximize the power of compound interest in your investment strategy?

Make sure you are automatically reinvesting your dividends through a DRIP (dividend reinvestment plan). It can magnify your returns like you wouldn’t believe, over the long term.

What role does time horizon play in the impact of compound interest on an investment?

It plays a massive role. 

Take an investor who socks away $150 per month over 40 years, and earns an 11% return. That turns into $1 million. Add another 10 years, and the money triples to $3 million.

The longer you invest the more it multiplies.

What are some risks or drawbacks associated with relying solely on compound interest for investment growth?

I don’t think there’s any drawbacks with compound interest because it’s just math. If you are growing wealth by reinvesting it, you are benefiting from compound interest.

Now if you don’t pick winning investments, you won’t get compound interest.

But that’s not compound interest’s fault, that’d be poor judgement on the investor’s part. That’s where diversification, again, can help with avoiding that.

How does inflation impact compound interest?

Inflation grows like investments grow. It compounds on itself as well.

We can’t avoid inflation over the very long term; you can’t have sustainable economic growth without it.

Yes, your portfolio will buy “less” in the future because of inflation. But if you’re investing in the stock market, you should very easily outpace inflation with your returns, so you will be richer on an inflation-adjusted basis if you do it. 

In your podcast you have talked about value trap indicator. Can you explain what the value trap indicator is and how it works?

The Value Trap Indicator is used on a company’s financial statements over time, and flags situations where a business might be deteriorating. It is a spreadsheet with which users must input the financial data for a stock themselves. 

What are some of the key metrics used in the value trap indicator?

The Value Trap Indictor compares a company’s total liabilities to its shareholders equity. If that ratio is increasing at an alarming rate from year-to-year, a No Buy/ Strong Sell signal will probably trigger. Also, the formula looks at Net Income and flags companies which suddenly dip into negative earnings. 

How can the value trap indicator help investors identify potential value traps?

The VTI formula keeps investors away from companies that are profitable and suddenly turn unprofitable. That is a very underrated but important feature.

It also alerts investors about stocks that may be cheap for a reason, because they may be riskier.

What are some examples of companies that have been identified as value traps using this indicator?

90% of some of the biggest 30 bankruptcies since 2000 have been flagged as a Value Trap Indicator Strong Sell in the year or years before they went bankrupt.

I came up with the first version of the VTI formula in 2015, and its latest iteration was in 2020.

Companies like Bed, Bath and Beyond (BBBY) and American Entertainment Holdings (AMC) have been VTI Strong Sells for years now, and it’s due to their failures to generate positive earnings lately.

(Strike.Market BBBY Mobile App Ranking Data)



(Strike.Market AMC Insider Trading Data)

How should investors use the value trap indicator in their investment strategy?

I would say that investors should look at the Value Trap Indicator as tool for starting to understand a stock. It’s a screening filter to help you sort through lots of ideas quickly. I do not use only a Value Trap Indicator score when deciding to buy or sell a stock. It is just the first step of the process.

What are some red flags that investors should look out for when using the value trap indicator?

I’d just reiterate that it’s a starting point. I do sometimes buy stocks that are flagged by the Value Trap Indicator, but because I intimately understand the business, its balance sheet, and its risks. And as a long term investor who tries to sell as little as possible, I don’t blindly follow VTI Strong Sell signals but only use it as a sign to dig deeper.