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This Was Hard to Admit... (Investing Mistake) — Transcript

by Drew Cohen · 8,269 words · 1,200 segments · language en · Watch on YouTube

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0:00So, I almost didn't release this video.
0:03I just listened back to it and
0:05I I I am, you know, very much on edge on
0:08whether or not to release this one, but
0:10I I decided I think it is for the best
0:12and and it will serve you if I do.
0:14But, the compromise I had with myself
0:16was to just make this little intro to
0:18make something clear at the outset,
0:20which was that I am talking about a
0:23specific stock and a mistake that I
0:25considered to make, but I want it to be
0:27clear that the mistake I'm talking about
0:30is about the process and what I learned
0:33from that rather than just the outcome.
0:36I don't want it to seem like I, you
0:38know, made this video cuz I feel like I
0:40saw a stock go up a lot and now I want
0:42to change the way I think about it and
0:44try to ex post facto rationalize,
0:48um, you know, why I made the decision I
0:50made. It is purely about me finding and
0:53believing I had errors in my process.
0:56And that it is something I want to be
0:58clear. And it's still not to say that
1:00the stock doesn't have, you know, risk
1:02longer term. Uh, it certainly does, but
1:05I think when you have an event in your
1:08life and you have the ability to learn
1:10from it you should do that. And so, uh
1:14without further ado, this is going to be
1:17one of the most
1:19honest and unfiltered videos I've ever
1:22made before
1:23because I think that is what is going to
1:26allow me to best serve you.
1:30But, also for me to not fool myself.
1:34And
1:38comes off like that. Because
1:42ultimately, we all want to become better
1:45investors, right?
1:46Certainly, that's why people are are
1:48watching this channel. And the
1:52desire to become a better investor
1:55often hits a wall.
1:57And the wall that I see it hit for many
2:00people
2:02doesn't actually have to do with
2:04research or understanding of financials
2:08or business analysis. I find people can
2:10be pretty good about learning that over
2:13time. It might take a while, but the
2:15wall I see most people hit, it comes
2:18more from the emotional side and dealing
2:23with psychology.
2:24And I'm not the first one to say this by
2:27any means, but it's funny because you
2:30listen to Warren Buffett and Charlie
2:32Munger and they would say that you
2:33should
2:34learn from other people's mistakes. And
2:37I think that's very good advice. I think
2:39it's also just not true. I don't think
2:42we actually learn from other people's
2:44mistakes. And if you've ever gone to
2:47dinner
2:48and the waitress, you know, brought you
2:51out a plate and said, "Don't touch it,
2:52it's hot." The first thing you ever do
2:55is you go and you touch the plate. And
2:58then you realize what it means when she
2:59says it's hot. And to me that means
3:02there's a difference between
3:04uh knowledge and that knowledge
3:07registering. And that disconnect is
3:12the difference between actually learning
3:14a lesson and it just being written.
3:17And I think very often we're quite good
3:20at learning about these lessons in in
3:23theory, but then we
3:25always have a shortcoming in applying
3:27them in practice.
3:28And so, in this video, I want to talk
3:31about one mistake that's really been on
3:34my mind a lot and it gets into my own
3:37kind of psychology and you know, it's
3:41something that it's a little, you know,
3:43embarrassing kind of um
3:46talking about all of this stuff because
3:49well, there's a lot of you
3:51>> [laughter]
3:51>> that now watch this channel and I
3:55think there's a little bit of a desire
3:57to want to protect yourself and come off
4:00as seeming like you have all the answers
4:03or maybe you have a stronger grip on
4:05what you are doing and I mean look, I I
4:08do professionally manage money for you
4:10know, a lot of clients.
4:12Um, the firm I'm at, we have over half a
4:14billion dollars under management
4:15currently and so
4:19admitting mistakes becomes harder, but
4:22it also becomes more important.
4:25And I think there's a lot of channels
4:28and and people out there that can
4:31it's very easy actually to to make it
4:33look like you are you've made right
4:36decisions, hide your bad decisions. It
4:39it it's honestly very very easy. On it
4:42be very easy for me too because I don't
4:43really give recommendations and so I
4:45could just hide behind that. And I I
4:47want to talk about that more too in this
4:48video, why I don't give recommendations
4:50and I've never really talked about that
4:51before either. Now, the the real impetus
4:54of this video, it is primarily because I
4:58want to make sure I continue to improve
5:00as an investor and I only need to learn
5:03lessons once.
5:05Uh, and so I feel like the honesty I'm
5:09going to give you, I do think it it's
5:10going to serve you, but I I think it
5:12also serves myself because the worst
5:15thing an investor can have is an ego.
5:19Uh,
5:20because it will push you to make
5:23suboptimal decisions and it won't allow
5:27you to learn from yourself. And let's be
5:28honest, learning can kind of be painful,
5:30especially when you're doing it out in
5:32public, which is uh, what this is right
5:35now. And to be honest, this is something
5:37I thought I wouldn't have been able to
5:39do before, but now I'm saying I I think
5:41I can and I think that talking about it
5:44will actually help me realize more about
5:46it and help the lesson um,
5:50entrench even further. And so let's get
5:52into it and why I'm here. So,
5:54I was thinking a lot about Apple 11.
5:57And you know, maybe some of you have
6:00watched that deep dive video. And the
6:02way my process usually works when I'm
6:04researching stocks is
6:06there's something usually interesting
6:08about a stock that I wanted learn more
6:10about. And so then these videos are very
6:12good on that. Now when I'm researching
6:14for these videos,
6:16this is not a very deep research
6:18process. I know you know, a lot of
6:20people may comment that you know, it
6:22seems very in-depth and all of that, but
6:24it's probably spending anywhere from 10
6:26to 20 hours of like actual deep research
6:30on a name and then just making a video
6:31on it. Um and you know, there's some
6:33cases where the video where the stock I
6:35talk about I actually knew a lot more
6:37in-depth or research a lot more. So
6:38there there's exceptions to that. But by
6:40and large, it's like one to two days of
6:43like really solid research on a stock
6:46and then I go and and I make the video
6:48on it and and share what I've learned
6:50and within that time I'm usually able to
6:52identify the key risk. I haven't
6:55actually had the experience where I've
6:56gotten much deeper into researching a
6:58name afterwards and and found something
7:00that I totally missed. So that is enough
7:02research to get a pretty good idea of of
7:04what the key questions are, how the
7:06business works, etc. But
7:08it doesn't give you confidence in the
7:11probabilities of how things can fare
7:15out. And so after I did that AppLovin
7:17deep dive video, I then went ahead and I
7:21did a Speedwell research report. And
7:23this is where things get a little
7:24embarrassing. Let's be honest here. So
7:27this was a 100-page around that research
7:29report I did, spent like five-ish weeks
7:32researching it, and understood the
7:34business a lot better, understood the
7:36risk a lot better.
7:38And it's kind of funny. As you're
7:40writing a a report, I find that
7:42sometimes my opinion flips a lot. And it
7:46well I was writing it did flip a couple
7:47times and it ultimately flipped back to
7:50be pretty positively biased. And the
7:52main reason why was just because of you
7:55know, the price really, the valuation,
7:57what was priced in. And I had this
7:59analysis in the report where cuz one of
8:01my biggest fears with Thumbtack is I
8:03think they're over-earning. So I had
8:04this analysis in the report where I
8:06showed that the take rate, you know, the
8:07the spread on how much they're making
8:09between buying ad slots and what the
8:11advertiser is paying for them,
8:13even if that compressed a lot, as long
8:15as overall ad spend continued to grow,
8:17they could actually grow through that.
8:19And I think when I wrote the report, it
8:21was around 260 a share. So, that was
8:23around quoting off the top of my head, I
8:25want to say 18 times trailing, something
8:27like that, 17 to 19, somewhere in there.
8:30And
8:31that's a pretty low multiple for most
8:33companies trading at that multiple, you
8:35only need
8:36high single-digit growth to kind of
8:38support that multiple. You know, rough
8:40way to get there is you just invert the
8:42multiple, so you get an earnings yield,
8:44you add the growth rate, and that's a
8:46very rough barometer of the return.
8:48Um
8:49but, you know, they're growing a lot
8:51more than that.
8:52And the reverse DCF I did, the outputs
8:55were the best I've ever seen before,
8:56actually,
8:58uh for any company, which
9:00you know, it gave me of two minds. It
9:02made me feel like maybe I was missing
9:03something, that it could look this good.
9:06And I just couldn't really find that
9:09strong of a bear case. You know, I
9:10finished this research, I have a
9:12positive bias on it. The the valuation
9:15makes sense. There is still risk, there
9:17is still a bear case, and I couldn't
9:18dismiss it. You know, I do still think
9:20that Apple 11 is probably over earning.
9:24Um it's a very execution-dependent
9:26business. I mean, you could say all
9:28businesses are, but a lot of businesses
9:30have more slack than others. Uh you
9:32know, Apple is not just a few quarters
9:35away from, you know, the whole business
9:37falling apart, whereas
9:39uh when you're dealing with ad tech and
9:41how quickly things can change in the
9:43competitive response, which can actually
9:45weigh on your margins if you don't
9:47continue to improve, it's just a much
9:49more cutthroat business, a much more
9:51cutthroat industry. And let's face it,
9:53the history of ad tech names are not
9:55good. There's very few ad tech names
9:58that you would have wanted to hold for,
10:00you know, a long period of time. And so,
10:02that was kind of the the base case and
10:03the base rates there, but I kept going
10:05back to
10:07you know, is it priced in or not, the
10:08risk priced in. And I was kind of of two
10:12minds. On the one hand, I thought it was
10:15priced in and I thought, you know, the
10:16valuation made sense and all that. And,
10:19you know, as a bet it made sense, but
10:20then I also was still just a little
10:23I think uncomfortable with just holding
10:25this business for a long period of time
10:27just because I do think they were
10:29probably over earning, probably are a
10:31little bit still.
10:33Um but then you could argue, you know,
10:34at that price they were trading at that
10:36was priced in and they could grow
10:37through that. And so, honestly, I didn't
10:39have a great reason why I why I
10:41shouldn't have owned it. And I even had
10:43this tweet that, you know, this is just
10:45like I I, you know, asked people for the
10:47bear case and every single thing people
10:49have come up with on that tweet thread
10:51I've already considered and I could
10:53rebuttal. And there's really nothing
10:55that I didn't know.
10:57Um you know, not to you know, be fully
10:59like hindsight bias and all of that.
11:01There was still a risk that maybe, you
11:03know, they missed on on revenue and, you
11:05know, margins uh contracted a little
11:07bit. But even if they did really at
11:09that, you know, multiple they ended up
11:10trading down to I think 14 times
11:12trailing, it you could still say it
11:14would have made sense. You know, again,
11:16stock trading at 14 times, you know, you
11:19don't need a lot of earnings growth to
11:20support that. And so, ultimately, I and
11:23I was trying to think why I didn't make
11:25a decision to own it. And I don't like
11:28talking about, you know, my stock
11:29decisions on this channel. It's not
11:32because I don't
11:35want to share. There is some aspect of
11:37it where I'm worried it could be seen as
11:39a recommendation and as a financial
11:41advisor I can't do that. But to to be
11:43honest, it's more than that. It's
11:45because I am worried that people will
11:48just blindly follow, you know,
11:50recommendations I may have and may not
11:53actually build conviction in the
11:55investment, which means that when
11:57invariably
11:59something happens with the investment
12:01like happens with all investments,
12:03um
12:04they're going to keep coming back and
12:05they're going to want more reassurance
12:08as to why to own it, why to hold it. And
12:11I just don't want to be put in that
12:13position of having to
12:15give people confidence into owning, you
12:17know, what dozens and dozens of
12:19different stocks I talk about and what
12:21their decision should be on that. And
12:24there's also an aspect of it I feel like
12:26it will limit my flexibility. Where as
12:28soon as I start telling people, you
12:31know, I think you should do XYZ with the
12:33stock, well, I have my own, you know,
12:35portfolio, my clients
12:37portfolios and I'm constantly making
12:39decisions there.
12:41What if I change my mind? Do I have to
12:43broadcast that out to everyone who
12:45listens to this channel before I make a
12:48change in my portfolio for my clients?
12:50Or can I make that change and then
12:53broadcast it out? That kind of feels a
12:54little weird. And so it just it feels
12:57like it was kind of fraught with a lot
12:59of
13:00moral decisions
13:03that I would rather just sidestep. And
13:06so that's really the real reason why I
13:07don't want to give recommendations is
13:09cuz I I I feel like it's just going to
13:11limit my flexibility. I feel like people
13:13are going to then they're going to keep
13:15wanting more and more. Anytime I've ever
13:17seen someone give like any
13:19recommendation, very quickly, you know,
13:21at some point, you know, the stock goes
13:23up maybe a lot or down a lot and then
13:24they want to know what happens next.
13:26What do I do next? I've had that own
13:28experience enough times that I don't
13:29want to be responsible for that with you
13:32know, everyone just constantly looking
13:34for
13:35you know, what to do next. Although
13:36maybe after I talk about these more
13:38mistakes more, I won't have to worry
13:40about that. And the last one too is that
13:42I think the more public you are on a
13:44stock, the harder it becomes to actually
13:46change your mind. That was something I
13:48was more worried about before and kind
13:51of I I think talking about mistakes and
13:55being honest and and seeing that I
13:56actually can do that, I'm less worried
13:58about that. I do think I could, you
14:00know, take the public ridicule if I was
14:02wrong on something publicly.
14:05But that that was a consideration
14:06earlier on cuz I do know that, you know,
14:08as Charlie Munger says, what you shout
14:11out, you pound in.
14:12Which Which to say the more you say
14:14something out loud, the more you believe
14:16it yourself and the harder it is to hold
14:18intellectual flexibility. And so let's
14:20pick up back on my mistake with Apple
14:22event and the embarrassment of having
14:25researched the stock for hundreds of
14:26hours and essentially not making a
14:30decision on it.
14:32Um
14:33It's funny because
14:35we think that more information can lead
14:38to better decision-making, but there's
14:41definitely a point beyond which that is
14:43true. And
14:45I This is something I've really thought
14:47a lot about because I I've now had the
14:49opportunity to talk to a lot of
14:51investment managers, people that manage,
14:54you know, tens of billions of dollars,
14:56very well-known investors.
14:58You know, I've had, you know, Chris
15:00Mayer, Bill Nygren on the podcast, but
15:02conversations with other investors too.
15:04And I was always waiting for this point
15:07where
15:08I would figure out that they knew
15:11something I didn't know.
15:13That there was like this missing piece
15:15that they had and I didn't have in terms
15:19of decision-making because
15:22I know my
15:24you know, I know this is about mistakes
15:26and all that, but I know my research is
15:27good. I know that it is. And I'm not
15:30worried that I don't know how to analyze
15:33a business. The thing I I spend a lot of
15:35time thinking more about though is what
15:38do you do with that decision? What do
15:39you do with the analysis? Whether it's a
15:42decision to buy, pass, I don't really
15:45short, but for some people that's the
15:47case. But then it's also what do you
15:48size that up? What position size do you
15:51do? And I think it really is interesting
15:54and helpful to think about this in terms
15:55of like poker where there can be certain
15:58odds of things happening.
16:01But then the the question still is, you
16:02know, what better you're going to make?
16:04How are you going to size that bet? And
16:06a lot of the research I see is kind of
16:08like understanding the landscape of the
16:11odds that that can be within a stock.
16:14But then, you know, what makes a good
16:16poker player isn't a mathematician,
16:18right? It's someone who has the ability
16:21to combine that with judgment, you know,
16:24intuition, I guess reading people, too.
16:27But in the context of business,
16:29it is really looking at a judgment.
16:34It's really just looking at a judgment
16:36on whether or not a management team is
16:38going to be able to do it. And there's
16:41different investments, I guess if you're
16:42invested in, you know, a net net, a deep
16:44value stock, where the management, you
16:46know, can mess up and it doesn't really
16:48matter. There There's exceptions to
16:49that. But by and large, it really comes
16:52down to that judgment. And I've always
16:56wondered because
16:59we're we're going to get into it now. Um
17:02I don't know where decisions come from.
17:05I don't think anyone knows where
17:06decisions come from.
17:08And uh you know, there's this great Alan
17:10Watts uh speech where he kind of talks
17:13about how
17:15uh
17:16you don't actually make a decision.
17:18Instead, you just kind of mentally
17:20fumble around, and then all of a sudden
17:23a decision pops out like a hiccup. Uh I
17:26actually have that pulled up. I'm going
17:27to I'll read that a little a little
17:28later. It's just so fantastic. And I
17:31think
17:32a lot of times what feels like a
17:34decision is just um
17:36like mentally struggling with yourself.
17:39But then the decision is just made,
17:41right? You can't really watch yourself
17:43make that decision.
17:45And the The reason why I I'm bringing
17:47this all up is because if you are not
17:50aware of something,
17:52then it is controlling you in a way that
17:55you're not aware of. That's inherent in
17:56the definition, right? You know, Carl
17:58Jung has this great quote that Ray Dalio
18:00likes to sometimes take credit for.
18:03Uh kind of kidding, but not really. And
18:04it's um until we make the unconscious
18:07conscious, it will continue to direct
18:10our life, and we will call it fate.
18:13And that's a lot of the reason why I I I
18:15want to talk about these things today.
18:18So, let let's get into it. I feel like
18:19maybe I'm dancing around the point a
18:21little bit. So, the the real thing that
18:24I wanted to bring up today was fear.
18:27And fear can show up in a lot of
18:30different ways. I think for most people
18:32like myself, I thought fear would show
18:35up as um wanting to sell a position uh
18:39or wanting to just like not engage with
18:43something. I never realized fear can
18:45show up as indecision. And it was
18:47interesting cuz I was thinking about
18:49this. I have an investing journal. I was
18:50writing something down. And all of a
18:52sudden I remembered that there's kind of
18:53these four general ways that people
18:57experience fear. There's fight, flight,
19:00uh freeze, and fawn. And in the context
19:03of investing
19:05we could think of fight is being I'm
19:07going to just continue to buy this stock
19:09all the way down. No matter what. And
19:12maybe, you know, that sounds like it's
19:14kind of a good reaction. It's actually
19:15not though. Not always anyway because
19:18you don't want to just blithely continue
19:21to buy a stock on the way down. You only
19:23want to do that if it if the analysis
19:25didn't change and nothing changed. And
19:27maybe we've all seen examples of people
19:29in our life, I know I have, where they
19:31don't actually like reanalyze a
19:33situation when material things have
19:35changed about a stock. And they just
19:37continue to buy it on the way down. And
19:40that's kind of their response. And it's
19:41actually a fear response. Even though it
19:43may not seem like that, it may seem like
19:45brave or something, it's still a fear
19:48response because they're scared of
19:50admitting they were wrong. And so to
19:52avoid admitting they were wrong, they
19:53will continue to buy it on the way down.
19:55Which of course, if they are wrong, it
19:57just makes it a much worse situation.
19:59So, the the second one is going to be
20:00flight. I think this is an easy one to
20:02identify. That's someone, you know, with
20:04shaky hands, not diamond hands. And
20:06that's them just going on ahead and
20:08selling a stock, right? And they'll
20:10they'll sell the stock and they'll get
20:12out of it and it just was an
20:13uncomfortable situation for them. So,
20:15that's kind of self-explanatory.
20:18Um freeze, [snorts] which is the one I
20:20think I was guilty of here, is where you
20:23just don't make a decision uh or you you
20:26know, maybe if you own the stock you
20:27don't add
20:28you don't sell you don't do anything.
20:30You kind of ignore it and it you kind of
20:32freeze in your spot and
20:34with Apple eleven
20:36I had all of the research. I didn't need
20:38to do more research, but it did get to
20:40the point where there was a decision to
20:41be made and I feel like I just
20:46didn't make that decision. I I could
20:49have said I want to avoid it for XYZ
20:51reason or I want to own it for XYZ
20:53reason and either of those I think would
20:55be okay.
20:57The real thing though that I'm
21:00embarrassed about is I feel like I just
21:01kind of let it sit for a while and you
21:04know, it's funny cuz I had this this
21:06conversation with Arya yesterday and
21:09he's much younger than me. He's like 20
21:11years old and you know, usually you're
21:13not supposed to learn
21:14something from someone younger, but
21:17I did I did cuz when I was talking to
21:19him I we were talking about Apple eleven
21:22and this decision and I remember saying,
21:25well, I feel like opportunities actually
21:26they sit for like a while longer than
21:28you realize. And while I generally think
21:30that it actually is true, they don't sit
21:33forever and you know, I probably had
21:36like two months to make this decision
21:39and I just essentially didn't make it
21:42which is really like I don't know for me
21:44that's embarrassing. It's a stock I
21:46spent a hundred plus hours researching.
21:48I wrote a research report on it. I
21:50talked publicly on the stock and then I
21:53rebut every single bear case and then I
21:56don't end up actually doing the one
21:59important thing.
22:01Come on. So I don't feel good about
22:03that. It doesn't help that the stock is
22:05up probably more than I remember any
22:08stock ever being up in like two days,
22:10three days. So it's like 60 70% but you
22:13know, I don't want to dismiss this as a
22:15lesson for me because
22:17I I do believe that when events happen
22:20to you in your life, you have the
22:21opportunity to learn from them and I
22:25think if you don't learn for them, the
22:27cost continues to get bigger and bigger.
22:29And in investing, there's there's
22:31mistakes of omission and commission,
22:33right? You know, you have a type one
22:35error, a false positive, a type two
22:37error, a false negative. A type one
22:40error in this case is going to be a a
22:41mistake of commission, which means that
22:44you do something and it ends up being
22:46bad, right? So, in this case, that would
22:48be you invest in a stock that you
22:50shouldn't have invested in. I've been
22:52very careful to try to avoid mistakes of
22:55commission. And I think most investors,
22:58as they
22:59invest enough, they get burned by
23:01stocks, they have bad experiences. Um I
23:04will say AppLovin did remind me of a a
23:06different stock I used to own called
23:07Evolution, which I want to talk about in
23:09a moment, too. And the net of that was I
23:13think there was a lot of loss aversion
23:15in me.
23:16Which it's good, but you can't be
23:18overboard in anything, because this goes
23:20back to poker, right? You have to bet
23:22the right odds. If you're not making the
23:24right bet when the odds are in your
23:26favor, you're just not going to be a
23:28good poker player at the end of the day.
23:30And you can't always be conservative. If
23:32you have a good hand, you should play
23:33it. And you know, maybe we don't know
23:36the full story about AppLovin. We don't
23:37know if next quarter they end up blowing
23:39it and all that. So, I don't want to
23:40like over over extrapolate from just
23:43this story, but I want to take the
23:44bigger lesson out from this. And so,
23:47with a a mistake of omission, that means
23:49that something kind of was right in your
23:51area to hit it, and you didn't hit it.
23:53Which is, you know, and Buffett talked
23:54about this with Google as being one that
23:57um for years they saw how good the
23:59advertising was. GEICO was one you know,
24:01a huge advertiser, you know, valuation
24:04was decent, and he just never bought it.
24:05He passed on it for years. And that's a
24:08mistake of omission, and those are very
24:10costly. And in fact, I think a lot of
24:12great investors realize eventually that
24:15the mistakes of omission are just as bad
24:18as the mistakes of commission. It may
24:20not feel that way, because you can say,
24:22"Oh, well, like, you know, I it's not
24:23like I lost money, right?" It's easy to
24:25kind of dismiss these.
24:27But they're they're actually more
24:28important, I think. You know, again,
24:30back to poker. If you have a really good
24:32hand to play in poker, and you don't
24:34play it, that is a mistake. That is That
24:37is an equally uh valid mistake as, you
24:40know, playing a really bad hand poorly
24:42or something. So,
24:44that that's kind of what I want to say
24:46on that. And I wanted to talk about this
24:50publicly because
24:52you don't see the decisions I'm making
24:54behind my research. And I'm I'm going to
24:55still by and large, you know, continue
24:58to do that because I just don't still
25:00want to be responsible for a bunch of
25:01people's investment decisions. I have
25:03have seen people make comments where
25:05they're like, you know, I bought the
25:06stock cuz I watched this video. Like,
25:08now what do I do with it? I don't want
25:10to have to respond to unlimited of those
25:12comments and in feel responsible for
25:14that. So, I I It still should be the
25:16case that if you're investing in
25:18something, it's on your own confidence
25:21that you decide to do so. I'm happy to,
25:23you know, give the research to the
25:24extent it helps you, and hopefully my
25:26research is good and helpful and correct
25:28by and large, but I I mean, everyone's
25:30going to make mistakes. But, um so that
25:32that's why I still though I don't plan
25:33on doing that. But, the reason why I
25:36wanted to do this was I think that
25:39talking about mistakes openly
25:42uh will help me avoid them in the
25:44future, grow from them, but I also think
25:46it'll help you because I don't think
25:47there's many channels out there that
25:50talk about issues that they've had and
25:53and really embarrassing things. And I
25:55don't know whether or not you guys are
25:56going to consider this embarrassing or
25:57not. It feels very embarrassing for me.
26:00When I was I remember I was looking at
26:01the stock. This was on uh Friday at 14
26:04times, and I just
26:07I couldn't bring myself to buy it, but
26:09I'm really now thinking more and more
26:11that was a fear response. And again, I
26:13never really thought of a fear response
26:15as being like uh indecision, but that's
26:17that's kind of what it was for me, how
26:19it showed up for me. And as soon as I
26:21realized that though, it really unlocked
26:23the ability to say, "Oh,
26:26I can actually now change that in the
26:27future." Because once you become
26:29conscious of a pattern of something in
26:32you, that now gives you the opportunity
26:35to make a different decision in the
26:36future. And that is really the key. And
26:39I I'm pretty sure that there's going to
26:41be some people that watch this video
26:43that this is going to give them that
26:44opportunity to now act differently in
26:46the future. I know it's hard to learn
26:48from other people's mistakes, but
26:50sometimes you hear something and if it
26:51resonates thoroughly enough,
26:54you can change. You can definitely can
26:56change.
26:57But I want to talk more about the kind
26:59of um
27:02other psychological biases that I think
27:04I had with this.
27:06And there was a few. And it's tricky
27:09because as you invest more and more, you
27:11build up a repertoire of experiences.
27:15And these these experiences of
27:18businesses and investments, it's
27:20history. And
27:22you shouldn't ignore history. I do think
27:24that you should be it'd be wise to learn
27:26from these things. But it's hard to not
27:28over extrapolate or overfit lessons,
27:31which is the first thing I think I did.
27:33So
27:34evolution is a business that if you're
27:36not familiar with,
27:38they are a live casino gaming provider.
27:41What that business essentially is is
27:44they have people in an actual like, you
27:47know, warehouse that looks like a
27:48casino. They have actual dealers.
27:51They'll deal blackjack, but then they
27:52also have game shows. They're their own
27:54proprietary game shows.
27:56They'll have, you know, different brands
27:58like MGM will have their actual names on
27:59the table. They'll outsource tables to
28:01them.
28:03And it's a very hard business to
28:04actually disintermediate because
28:07their games are just the best games. And
28:09in specific, their game shows. They're
28:10very popular. People love gambling on
28:12them. And
28:14the thing with that business was that it
28:16was a B2B business, right? So they sold
28:19to operators
28:20who then sold to the consumer. And they
28:22had very, very high margins. And when I
28:25was doing the research on that,
28:27you know, I flagged the fact that they
28:29had high margins, but that they were
28:31pretty competitively insulated. It was
28:33pretty hard to compete against them. I
28:35won't go against all the factors now.
28:36And so what ended up happening was
28:38basically a couple things, but one of my
28:41lessons from it was that I do think when
28:43a company does have very high margins,
28:45they do have a target on their back. And
28:47it just makes it very hard to sustain
28:49these high margins. And what ended up
28:52happening
28:53without getting too into it cuz this
28:55shouldn't be just like an evolution
28:58breakdown, but
28:59basically there was mix of regulation
29:02changes,
29:04litigation changes, cyber attacks,
29:07crazy in Asia from their own end
29:09customers, too.
29:11That didn't want to pay them the full
29:13price. And
29:14well, this is like a pretty
29:16idiosyncratic situation and I do think
29:18you could say they had a good bit of bad
29:20luck going on here. I think that a
29:22company that has high margins and
29:24doesn't have a lot of customer surplus,
29:27if you will, it kind of
29:30is that more at risk of of
29:32bad things happening to them, basically,
29:33right? You know, if you're looking at a
29:35company like Costco, you really there's
29:38really very little risk I can even think
29:40about. You know, evaluation aside, but
29:42in terms of things that can actually
29:44hurt that business cuz their consumers
29:46love them, right? Whereas with
29:48Evolution, that wasn't really the case
29:50with their their customers. And so I
29:51think that just opens up more doors for
29:54them to try to take advantage of the
29:56business when they can. And that's not a
29:59full analysis of what happened, but it
30:00was one of my lessons that I took away
30:02was I was just a little skeptical of
30:03businesses with very high margins and
30:06how sustainable those would be.
30:08And AppLovin, prime candidate for a
30:10business with extremely high margins. I
30:12think it was 77% EBIT margins. Some of
30:15the highest EBIT margins I think I've
30:17ever seen for a business while growing
30:19very quickly. And the concern I had with
30:22it was that
30:24they basically have a very high take
30:28rate. I estimate around 35-40%.
30:31So that means for every dollar an
30:32advertiser spends, they take 35-40%.
30:35That's pretty high. The reason why it
30:37works for them is because there is a
30:40spread between what the publisher
30:43wants and then what the advertiser is
30:45willing to pay. And so let's say you pay
30:47the publisher $6, they could be happy.
30:50Then the advertiser was willing to pay,
30:53you know, maybe up to to $10. So they
30:56take $10. So they take $10 from the
30:58advertiser, they give six of them to the
31:01publisher, then $4 in the middle is what
31:03they end up pocketing. And that is, you
31:06know, a pretty large spread. You know,
31:08that that number of take rate, it's
31:09pretty large. And my concern was that
31:13the publisher as ad cost could rise
31:17from competition. Because a competitor
31:19like Unity stepping in
31:22would bid more in those ad
31:24slots essentially, which would then
31:25compress their ability. And so I was
31:28concerned about that. On the other hand,
31:30it looked like compression was already
31:31priced in at that valuation. And so the
31:33other lesson I want to talk about is
31:35that I started thinking of investing in
31:39terms of bets, and I've never really
31:42thought about it that way because I've
31:43always been more of the Warren Buffett
31:45camp of looking at downside risk.
31:47And only investing when you're very
31:49confident and you could really see the
31:51future out for many years in a business.
31:53And I just I felt like I couldn't see
31:55the future out many years for for Apple
31:5711. It seemed like a very execution
31:59dependent business. I I do think that
32:01there's still a risk of them over
32:03earning. Um and so that that kind of
32:05made me a little queasy, if you will.
32:08But on the other hand, you know, that
32:09valuation, very little needed to happen
32:12correctly. And so I started thinking,
32:13well, you know, as a bet, it more than
32:15makes sense. This is most of the time
32:17going to pay out. And I didn't want to
32:19invest on that logic though because
32:22I am very careful of people that change
32:25their investment discipline, and I
32:27didn't want to do so cavalierly. You
32:29know, what kind of Terry Smith
32:32I I love Terry Smith, but you know,
32:34there's this quarter ago this investor
32:37letter he had where all of a sudden he
32:38says I'm going to focus on momentum
32:39names. And that hasn't gone well for
32:41them. Very poor timing on that because
32:43what tends to happen is as soon as you
32:45change your investment style, um you're
32:48you're doing so to really look at, you
32:50know, the trends of what's popular in
32:52the market at the time. And what happens
32:55is that what's popular changes very
32:57quickly. You know, I record this video
32:59as a lot of AI stocks uh or the Nasdaq's
33:02down 5%. A lot of AI stocks are down 10%
33:05plus. So, what's popular can change very
33:08quickly. And so, you need a an
33:09investment style that you can um hold on
33:13through the storms and believe in enough
33:15for all of the, you know, sort of um
33:18whims of what can happen in the market.
33:20And so, Terry Smith kind of capitulated.
33:22I talked on the podcast I had with Arya
33:24about why I can sympathize with that cuz
33:27there's a difference between um
33:29investment um
33:31mandates and like your investment
33:32prerogatives and your business
33:34prerogatives. And what ends up happening
33:36is if you have bad performance on the
33:38investment side, your business falls
33:39apart. And so, in order to save your
33:41business, you start changing how you
33:42invest in order to kind of catch that
33:45wave. And the same thing, even if it's
33:46not a business, it's just a career, like
33:48you work at a firm, the same thing
33:50happens. And so, that's one of the
33:52reasons why, by the way, I think it I um
33:55think it's very important to when you do
33:56invest, if you're investing with
33:58someone, you you make sure that the
34:00business is set up as such that you
34:02don't have to worry about that sort of
34:04change in style cuz when the changes in
34:06style happen, it tends to be at the
34:08worst possible time, which seemed the
34:10case for Terry Smith. And also, um Dev
34:13uh Contisario uh Contisario, I always
34:16mispronounce his name, but he also
34:18seemed to have just switched his
34:19investment style buying a lot of
34:21semiconductor names um
34:23in an interview that came out just last
34:25week. So, I don't I don't know enough
34:27about that situation. And people do
34:29change their investment styles when they
34:31feel like, you know, they could get
34:32better investment performance by chasing
34:34a trend, something like that. And I
34:37wanted to be careful of that because I
34:39again, I've never kind of had this
34:41investment style of thinking in bets.
34:43And even though I have been thinking
34:45more and more about it for a few months
34:46now, I just I it's such a tough mix
34:50between wanting to adapt and grow and
34:52continue to get better
34:54and improve your results and also not
34:58wanting to be so
35:00uh cavalier in doing so or really maybe
35:03a better word is um led by the market or
35:07led by the zeitgeist if we're using, you
35:10know, a Heidegger term. And
35:13that was kind of how I was feeling. I
35:15wasn't sure whether or not I was wrongly
35:18switching my investment style. And so uh
35:21that was kind of something else kicking
35:23in the background. Uh so it was a few
35:25things. It was over fitting the
35:27evolution uh lesson. There was a good
35:29bit of a fear, kind of the frozen
35:31response. Uh there was this thought
35:33process, am I um changing my in
35:35investment philosophy? Am is this the
35:37right thing to do? Is it a positive
35:39adaptation or a mal adaptation? Um
35:43and those are kind of I think the big
35:45ones that were there. And look, overall,
35:47there still was some risk in all that,
35:48but I think it was a mistake. I think it
35:50was something that was within my zone
35:52and I could have hit and I didn't. And
35:55the whole purpose of this video is I
35:58don't know that I've ever actually had a
35:59bad error of omission before. And this
36:02feels like a bad error of omission for
36:04me. And so to the extent that you can
36:07learn from someone else,
36:09learn from my mistake here. Um
36:11cuz I certainly want to. And my the
36:13other purpose of this video is I want
36:16you to know that, you know, when I'm
36:18researching businesses, I'm making
36:19decisions on, you know, businesses every
36:22every week, multiple stocks. Uh there's
36:24always a decision of what do you
36:25research more? What do you buy? What do
36:27you allocate to? How much do you
36:28allocate to? It's a lot of decisions to
36:30make. And I want to give you a very
36:34honest example of one where I did not
36:36get it right. And I hope that that can
36:38also help you. I mean, not just like get
36:41better in the future, but also think
36:43about how you use me as a resource. You
36:45know now know I can make mistakes. Um
36:48and you know, I have a client that
36:50wrote me and said that um
36:52his son said that a a lot of the videos
36:54what I what I had the effect of doing
36:56was aura farming, you know, you know,
36:59creating a lot of aura mystique around
37:01what I do and all that and it's you
37:03know, a positive thing and I wanted a
37:05video that does the opposite. So this is
37:08a video to aura flush. I want all of
37:10that gone. I don't need an ego. I think
37:12egos get people in trouble in investing
37:15and I instead want you to have an
37:17example of a mistake I make that's top
37:20of mind so you can factor that in
37:22whenever you're kind of reading into how
37:25I do research or decisions I'm making
37:26and all of that. Sometimes it you know,
37:28maybe even easier for you to make a
37:30decision on something than I am just
37:33using my research because we all have
37:35you know, different psychological biases
37:38and it's different ability to see things
37:39clearer or not.
37:42So that's kind of I think everything I
37:44wanted to say, you know, I spent 100
37:47hours researching a stock that I missed
37:49and it is now up 60%.
37:52I feel just brilliant about that one.
37:55And
37:56I do think though that
37:58you know, I I wonder what it'd be like
38:00if Warren Buffett had like a YouTube
38:03channel when he was younger if if we
38:05would see him make a lot of mistakes and
38:06and not attribute as much brilliance to
38:09him. I mean, don't get me wrong. His his
38:10record is the best of all time, but
38:14it is something that that I think about
38:15a lot is is how much we attribute to
38:19someone's abilities that maybe is really
38:22more mystique, sometimes mistake
38:25and we don't actually know how they
38:27actually made the decisions they made.
38:29How much luck is involved in all of that
38:31and there's a lot of investment managers
38:34that I highly respect that just in the
38:36last year or so have like track records
38:38like blown up and are now
38:40underperforming. And
38:43it's you know, we're definitely playing
38:45a game that's very very hard when you
38:47are trying to invest and beat the
38:49market.
38:51There's no doubt about that. That it's
38:53extremely hard to do and there's a lot
38:55of smart people doing it and to do it
38:57over a long period of time is really
38:58hard as well.
39:00And I do think you need to continue to
39:02adapt and learn and I think that
39:05the best chance we have of doing that is
39:08to just
39:09be as honest as we can with ourselves
39:11about the mistakes we had and to not
39:15have an ego about it, to not feel the
39:16need to defend it and instead to learn
39:19from it and I think that feedback cycle
39:22will be very powerful over time.
39:25Cuz I know the mistakes I've made in the
39:27past and I don't make mistakes like
39:29those anymore. I do think that if you're
39:31if you are aware enough, you could learn
39:33lessons once, which is how many times I
39:36hope you only have to learn them. And
39:38so, you know, but kind of just closing
39:40the loop on that idea of
39:43the decisions we make and where that
39:45decision comes from. I think a lot of
39:47times
39:48we're not fully aware of it and it maybe
39:52only will become apparent to us after
39:54the fact. Even when you have all the
39:56research and all of that, there's a lot
39:58of things that can still influence you
40:01that you don't become fully aware of.
40:04And you should do the best you can to
40:05become more and more aware of this. And
40:08I want to read this Alan Watts
40:10quote cuz I just think it's so fantastic
40:12and
40:13uh here it goes. You do not know where
40:16your decisions come from. They pop up
40:19like hiccups.
40:20And when you make a decision
40:22people have a great deal of anxiety
40:24about making decisions. Did I think this
40:26over long enough? Did I take enough data
40:28into consideration?
40:30And if you think it through, you find
40:32you can never take enough data into
40:34consideration.
40:35The data for a decision in any given
40:38situation is infinite. So, what you do
40:41is you go through the motions thinking
40:43out what you will do about this. But
40:45worriers are people who think all of the
40:47variables beyond their control and what
40:49might happen.
40:51Choice is the act of hesitation that we
40:54make before a decision. Oh, come on,
40:56that line is just so great. I'll read it
40:59again. Choice is the act of hesitation
41:02that we make before making a decision.
41:05It is a mental wobbling and so we are
41:08always in a dither of doubt as to
41:10whether we're behaving the right way,
41:12doing the right thing, and so on and so
41:14forth, and a lack of certain kind of
41:16self-confidence. And if you see you lack
41:19self-confidence, you will make mistakes
41:21through sheer fumbling. And if you do
41:23have self-confidence, you may get away
41:25doing entirely the wrong thing. I just I
41:28think that quote is so great and the
41:30last thing I want to say on that too
41:31actually is
41:33and this is going to be a good one for
41:35for newer investors too, but um people
41:38are uh spending more time in their
41:39investing journey as well as that the
41:41other lesson I I think I have is trust
41:44where I need to trust more where my
41:47research leads me
41:48because it can be uncomfortable going
41:51against a crowd and you know, there
41:54there's a lot of people in my investing
41:56community and all that and I've it does
41:58help sometimes when you're with them um
42:01and they could kind of you know, bounce
42:03ideas off of you. It's harder when
42:05people in your investing community also
42:07think that something is a mistake. And
42:09so the last lesson I had from this is
42:10that I need to really just trust myself
42:14more and I love this line he has, if you
42:16do have self-confidence, you may get
42:17away doing entirely the wrong thing. And
42:19I think that was my concern for for a
42:21long period of time. And it should
42:23always still be a concern to be fair,
42:24but I I do think that um as you learn
42:28research and as you get better at
42:30research and once you reach a level
42:32where you've you're talking to analyst
42:35at all of these different funds and
42:37portfolio managers and you realize that
42:40they're not thinking about a business
42:42any differently than you are, you get to
42:44the point you get to the point that
42:47it's not about the research, it's about
42:49what what with it. It's about that
42:51decision you make and that decision is
42:52nothing more than a judgment. You
42:55understand the hand you have, the
42:56mathematical odds and all of that. Okay,
42:58now what is your decision there? And
43:01it's sometimes hard
43:03to make that decision going against, you
43:05know, other people, but I think that
43:09what experience really is and learning
43:11from it is the ability to see when, you
43:14know, your research pushes you
43:15somewhere,
43:16trust it. And you know, not everyone has
43:18a problem with this. I've talked to many
43:19people that I think have the opposite
43:21problem where they
43:23where they're overconfident and arrogant
43:25and that gets them into trouble in the
43:26other direction cuz they just continue
43:28to buy all the way down. But this one
43:31for me was more a lesson in in kind of
43:33trusting myself and now that I made this
43:35all public and I have this out on a
43:37video and I'm a little nervous about
43:39releasing this one to be honest, but I
43:42think that it's important there's a
43:44record of this and that I can have this
43:48ability to I guess this is just
43:50personal. I can have this ability to
43:52analyze my own actions and in my own
43:54shortcomings in order to improve myself
43:57and maybe by me doing so, you have a
43:59chance to to feel open that you can do
44:01the same.
44:03Um that was a lot of talking and uh
44:07thank you for listening.
44:09Appreciate it.

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