SHAWN O'MALLEY | Invest Like The Legends Course

My guest in this episode is Shawn O'Malley from the We Study Markets Newsletter. Shawn has a new course called Invest Like The Legends. How To Get Started in Stock Market Investing. Shawn is a seasoned investor and educator who explores the intricacies of stock market investing. He shares his wisdom on avoiding common pitfalls, understanding the true value of a company, and the importance of an investment philosophy. The course is packed with actionable advice for both novice and veteran investors, offering a unique perspective on how to approach the stock market with confidence and clarity.

Learn the ropes of the stock market, from the psychology of trading to the concrete math behind shareholder equity. Shawn breaks down complex concepts into digestible insights, ensuring you walk away with a solid grasp of what it means to invest like the legends.

Invest Like The Legends. How To Get Started in Stock Market Investing course is distilled from the wisdom of investing legends like Ray Dalio, Howard Marks, Joel Greenblatt, Jeremy Grantham, and many more who have been guests on the We Study Billionaires podcast.

This course is a must have before you place a single dollar into the stock market.

Use the promo code STOCKS15 for a 15% discount on the full price.

Find out more at my review page.

TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE

Disclosure: The links provided are affiliate links. I will be paid a commission if you use this link to make a purchase. You will also usually receive a discount by using these links/coupon codes. I only recommend products and services that I use and trust myself or where I have interviewed and/or met the founders and have assured myself that they’re offering something of value.

EPISODE TRANSCRIPT

Investing Made Simple: A Beginner's Guide to Stocks

People don't really appreciate what it actually is to own a stock

Chloe: Stocks for beginners. Phil Muscatello and Finpods are authorized reps of Money Sherpa. The information in this podcast is general in nature and doesn't take into account your personal situation.

Shawn: I think there's a failure, kind of in that same vein, to appreciate what it actually is to own a stock. People don't really appreciate the fact that you're buying ownership shares in a business. These are often some of the greatest companies to ever exist in human history. If you buy in some of the big tech giants today, and it's not just a number on a screen, it's really you're buying into a company that's going to be reinvesting its profits year over year and compounding those, and you have a chance to participate in that wealth creation process. And to me, I think that's a really profound and inspiring thing. And when I hear people talk about the stock market as if they're just flashing numbers, it's really disappointing to me, because if that's the only thing you get out of it, then it's a shame.

How do you get started investing in the stock market

Phil: Hi, and welcome back to stocks for beginners. I'm phil Muscatello. How do you get started investing in the stock market? How can you avoid making mistakes and losing money? You don't need to go to a fancy Ivy league college or work on Wall street to explain. I'm joined in this episode by Shawn O'Malley, from we study markets and the course teacher for invest like the legends. Hello, Shawn

Shawn: Hey, Phil. Thanks for having me back on.

Phil: Thanks for coming back on. You were a very popular guest last time. So happy to have you here. So we're going to be talking about this course that you've launched, the invest like the legends course, and go through some of the key points of it, and the special deal that we have for listeners of the podcast. So, I'm very excited. Hope you are, too.

Shawn: I am.

Sean: I'm fairly excited to have Tom Waits on my podcast

Let's do.

Phil: Oh, except I heard in another podcast the other day. Do you know Tom Waits? Have you heard of Tom Waits, a musician?

Shawn: No, I don't know him.

Phil: He's got a very ironic sense of humor. He said, I'm fairly excited to be on your podcast.

Shawn: Fairly.

Phil: I like that. I'm fairly excited to have you here, Shawn

Let's talk about some common mistakes that first time investors make

Anyway, let's talk about some common mistakes that first time investors make. What are some of the things that you've analyzed in your role writing the newsletter and being part of the Investors podcast network?

Shawn: Yeah, well, you know, I've met a lot of first time investors, but I think the best way to do it is to reflect back on my own early days as a stock investor. And one of the first things I did I remember that comes to mind is it's, called the anchoring bias. And it's this idea of even subconsciously, you may not even realize that you've done this, but when you first buy a stock, you think of it as, that is just the flat benchmark. I paid $20, and if it goes to $21, I made a buck, and if it's below that, I lose a buck. And of course, there's no consideration for the dollar cost averaging or anything like that. you're just kind of thinking in very plain terms of, this is the price I paid, and you get stuck to it. And oftentimes, and I know me specifically, when I first started, I watched my first investment just lose value and go down, and go down. And let's say I paid 20 and it fell to ten, I had this mental roadblock where I was thinking, I have to get back to 20 before I can sell. And it's such a common thing. You hear it all the time. Some people don't even realize they do it. They don't even, maybe even consciously know that that is a psychological bias, but it is one. There's no reason to be tethered to the price you paid. It's, a completely arbitrary thing. Any given moment in time, you should be doing an assessment of, well, is this even a company I want to be invested in? And then you should be thinking about intrinsic value and whether the market is accurately reflecting the intrinsic value of the company. But at no point should you be considering the price you paid as the clear determinant of when you should buy or so, or, I guess, more when you should sell. And then another thing that is really common, and again, this is coming from somebody who I think my first year as a stock investor, I watched Mad money by Jim Kramer almost every night. And my point is, don't listen to the analysts. If you've ever. I'm a big football fan. Unfortunately, my team, the Washington commanders, are terrible. But you go on and you watch the experts predict who's going to win before the game. Every week. Monday night football countdown, whatever it is, it's 50 50. Literally. It's a toss up. Even the people who played football for decades are experts. They can't predict the outcomes of an NFL football game because it's so inherently unpredictable, it's chaos in action, and it's unknowable, and it's the same thing in the stock market. You can have kind of long term principles that guide you. And I talk about that in the course, and I'm sure we'll go through them more today. But don't just sit down and watch Mad money like I did every night for a year, and make your first dozen trades based on what Jim Kramer tells you. Because one, if somebody has an opinion on every stock, then they have an opinion about nothing, because it's just unknowable. And it's then, you know, I think there's a failure, kind of in that same vein, to appreciate what it actually is to own a stock. People don't really appreciate the fact that you're buying ownership shares in a business. These are often some of the greatest companies to ever exist in human history. If you buy in some of the big tech giants today, and it's not just a number on a screen, it's really you're buying into a company that's going to be reinvesting its profits year over year and compounding those. And you have a chance to participate in that, in that wealth creation process. And to me, I think that's a really profound and inspiring thing. And when I hear people talk about the stock market as if they're just flashing numbers, it's really disappointing to me, because if that's the only thing you get out of it, then it's a shame.

Phil: And it often seems to be a combination of the flashing numbers and the story as well. Like obviously, when you are watching Jim Kramer, he's telling all these stories, you're telling about what the company's doing. And it all sort of feeds into the anchoring bias. Part of the anchoring bias is also clinging onto your own story as well that you told yourself to start with. And really it comes back to, and this is, I'm really hoping that the course covers this, and I'm sure it does, is talking about them as real businesses, but also looking at the numbers and how the numbers feed into the decisions that you make as an investor.

Why should you invest in stocks, because there's many people who see the stock market as risky

Shawn: Yeah. Again, let's look at kind of the first principles. What does it mean to own a share of stock? Because even that can be an abstract thing, and that's something I go through in the course of, hey, let's just do some really basic balance sheet math. Shareholders equity, often just kind of referred to as equity, is assets minus liabilities. The difference between those two, hopefully a positive value. Not always, though. and when you're buying a share of stock, you're buying a claim on that equity, the residual difference between a company's assets and its liabilities. And you can think of the assets as, let's look at McDonald's, for example. Actually, it's a bad example because they have a franchise model. But the point remains of maybe they own, physical locations and grills to cook the food, and they have patents and brand value and all these things, those are going to all be assets. And then the liabilities are maybe what it pays to rent out the buildings that it has its restaurant, set up in, or maybe the debt that it's borrowed to finance its operations. In the short term, whatever it is, you net out those two things and that's the equity. And so, yeah, great businesses, over time, continue to build out that equity value. And the really plain way to think of it is just by being profitable. The more profitable you are, the more that equity value will grow over time and the more all else, equal as a shareholder, the value of that stock that you own, which is a claim on that growing equity, will grow proportionately. So, yeah, it's kind of a profound thing, but then it's also kind of just basic math and logic. And I know personally I'm biased towards. It's really this incredible thing to think that you can buy an index fund that gives you exposure to the, s and p 500 and America's best 500 companies. And you can say a lot of bad things about America, but we do capitalism pretty well. we have some great companies that have created incredible short term wealth and also some that have really stood the test of time and compounded their returns decade after decade. So to be able to buy into a simple fund and pay a 10th of a percent in a fee each year and own America's best 500 companies, that's a really cool thing to be a part of. And so, it's something I tell my friends when they're allocating their 401 ks or whatever, and they think I'm a nerd. And I am a nerd, but it is true. I'm like, hey, when you're deciding what funds to pick, you're making a decision about how much of your wealth you're going to invest in America's 500 best companies versus international stocks versus the treasury bond market, versus just having cash or whatever it is. So, I don't know, I think it makes investing a little sexier when you think about it like that. But again, I could just be a nerd who isn't?

Phil: And so you actually cover this in the courses. Why you should invest in stocks, because there's many people who see the stock market as risky. They prefer property or they prefer cash or bonds, for example. Why should you invest in stocks? I mean, you've just talked about the capitalism and that we got the best 500 companies in the home of international capitalism and that capitalism is brutal. Is this part of the reason why?

Shawn: Yeah, I would probably add to that to say on that point about capitalism being brutal. It is brutal, and most companies will fail. And when you look at the broad kind of course of history over the last century, at least, there's some small percentage of companies that have driven almost all of the stock market's returns.

Phil: It's darwinian, right?

Shawn: It is darwinian, yeah. And it's not this kind of normal distribution. There's a handful of companies that have created almost all of the shareholder wealth of the 20th and 21st century. And so if you're an active stock picker and you're going around and you're placing bets, if you're trying to play that game for a long time, you're really playing a game where you're trying to bet on picking a needle out of a haystack. And maybe you have slightly better at ods than that, but not much where you're trying to find those companies that will really create generational wealth and be the defining wealth creators of a decade or a century. Or if you're taking the kind of passive index fund sp 500 approach, you're pretty much guaranteed, you actually are definitely guaranteed that you are going to own that needle and the haystack. You're buying the whole haystack. And a lot of those companies are going to be losers and they're going to weigh you down. But if you have a stock that has a 10,000% return, and even if it's just 1% of your portfolio, you've done pretty well. You're still going to be able to compound, pretty well, pretty solid returns year over year.

There are different schools of thought on why you should invest in stocks

So there are two different schools of thought. And I try to provide insights that are relevant to both also qualify that. And I think you would agree that most people probably should be passive investors unless you truly have the skill set and the discipline and the knowledge and, the passion, for sure, to be somebody who's playing that game where you're trying to pick a needle out of a haystack and look, people can do it. Warren Buffett and the great Charlie Munger, who recently passed away, they showed that you can do it. And one of the wonderful things they talk about is that what really matters for investors is temperament, not intellect. I think they're pretty smart guys, too, but they definitely have the temperament in place. So that's a bit of a rambling way to say there are different schools of thought to why you should invest in stocks. But I would say pretty plain and simply, whether you're trying to pick the best stocks of a century, or whether you're just going to buy the entire haystack and hope to find the needle along the way. The takeaway has been that at least in the US stock market, it's been a pretty good bet to make. And you can make some arguments about how, if you strip out returns from most countries stock markets internationally, it probably hasn't been as good of a place to invest. And there's a lot of truth to that. And, it's kind of interesting because we're talking about this idea of these skewed distributions within the US stock market. And then when you look at the global stock market, the US stock market is kind of the needle in that haystack where you look at the last century and 99% of countries stock markets. Well, I'm not going to say they've gone to zero, but they certainly have not been great places to put your money. And then the US has been that place. And so you can get really profound about it, but you could really zoom out and overthink it a lot. And it's easy to do that, and I'm guilty of that. But if I was going to put it concisely, history is not necessarily an indicator of future returns, but it's really all we can go off of and use our own judgment and frameworks to complement history and kind of pave the way forward from there. And yeah, the US stock market, for the last hundred years, has been a great place to invest, and I'm going to keep doing it until history teaches me otherwise.

Phil: Do you want to invest in the stock market, but don't know where to start? What are the basic lessons? You need to avoid making costly mistakes? Hello, fellow investors. I'm Phil and I'm the host of this podcast. If you're eager to step up your stock market game, I've found something very special for you. The invest like the Legends course, curated by Shawn O'Malley from the we Study Markets newsletter. This course is not just a game changer, it's a life changer with a whopping 49 lessons. This course is your ticket to unlocking the secrets of legendary investors. You see, Shawn is part of the we Study Billionaires podcast network. They've spoken to investing legends like Ray Dalio, Howard Marks, Joel Greenblatt, Jeremy Grantham, and many, many more. Shawn is a passionate stock investor and he believes in the power of sharing this accumulated knowledge. It's not just a collection of lessons, it's a journey towards financial empowerment. Stocks for beginners is proud to offer a special deal to access 15% off the cost of the invest like the Legends course. Go to stocksforbeginners. Net learnstocks to find out more. You'll find the links there so you can use the promo code stocks 15 for your 15% discount. Why wait when you could be investing like the legends?

Net learnstocks offers basic education before approaching the stock market

That's stocksforbeganners. Net learnstocks and use the promo code stocks 15. Your future self will thank you for it. I think one of the great things about a course like this, the one that you've put together is it's like the basic education. I know it is the basic education before approaching the stock market, but there are so many deals. Some would say scams sometimes, but there's people selling trading courses, there's people selling fundamental analysis courses, and they're conflicted in what they're actually selling to consumers. Whereas a course like this is giving you an overview so that you actually know what things to avoid when you're being offered. Sorry, just to go off topic for a second, I've got a friend who was contacting me the other day on messaging and she was just asking about, have you heard about AI investing? And I said, what do you mean? Do you want to mean investing in AI or using AI to invest? No. Apparently there's these AI investors that take the emotion out of it for you and do all the investing for you, the old black box thing. And I just want to be able to say, look, just do this course before you do anything. Approach the market. So, I guess what I'm trying to say here is, you really need to have the overview before you even start looking at using someone else's course or even investing yourself.

Shawn: Yeah, no, I appreciate you saying that. And I'm not selling anybody on stock picks or trading strategies or anything, really. I had my own journey through learning about stock investing, and this is kind of the principles I wish I knew when I started. And, yeah, that's kind of the perspective I bring from it. And one of the main things that I try to get into is kind of what the stock market is and what it isn't. And this ties back into our kind of original.

How is the stock price determined on the screen that we talked about

The first question you asked of what are some of the big mistakes that people make? And my point on people not appreciating what they own. One of the things that kind of blows my mind, and honestly, I'm kind of embarrassed to admit before how long I'd been an investor before I even thought about it, but is how is the stock price flashing on the screen that we talked about? How is that even determined? I would guess that some, maybe higher than you'd think. Percentage of people wouldn't have a good answer for that. It's one of those things that you just take for granted that I try to answer in my course, and I'll give you the answer now. As you know, it's not some moving average of the last seven days worth of trades. It's not some person sitting in a room deciding what the number is. It's the last transaction between a buyer and a seller, and it's the price that those two parties accept to initiate that transaction. And maybe it sounds obvious, but when you think about it through this perspective of, okay, that is what is actually happening when you're seeing those numbers flash up on the screen. And this is not even everybody who owns a stock endorsing the current price of it. This could literally just be the last two people who traded it. And that's the number you're seeing. And then you start to reconsider these things that we talked about, like the anchoring bias. And for a moment in time, you were the person who paid, who set the price and made that last transaction. Especially if you're a beginner, perhaps you had no business setting that price. And you can imagine that this is how factories like momentum and kind of groupthink and herd euphoria can take over and drive stock prices in one direction or the other. And kind of the case in point being that, yes, over time, the stock market is kind of a weighing machine, and companies trend back towards their intrinsic value. But in the short time, it's kind of human behavior and psychology, and it's whatever two people are willing to pay to transact in shares in a company. And sometimes those people making those trades, like you said, are two AI systems. So it might not even be people doing it.

Phil: Yeah, I heard a great analogy. It's like walking down the street with a dog on a lead, and the dog's going to go to the left and then to the right. This is the analog for the way the stock price moves. So the stock price is moving at an average over a period of time. And that's you as the owner walking the dog, but the dog's going that way and then left and then right and left, running up ahead, going behind and so forth. And that's what stock prices are like.

Shawn: Yeah, I think that's well said. And again, it's those kind of obvious questions that people often take for granted and don't even stop to ask themselves. That's right. Unfortunately, like so many people, the world, when it shut down for Covid, I found myself sitting at home and not knowing what to do. And I just spent a lot of my time asking myself these questions and kind of answering them for myself of, hey, yeah, actually, when I see a number for a stock price, what does that actually mean? And you can imagine that over the course of an investing lifetime, you have a lot of those questions, and I haven't answered them all for myself, but I've tried to be pretty diligent about answering all the ones especially that are most relevant to beginning, investors.

The stock market is a way that capital is allocated

Phil: And, of course, the stock market is a way that capital is allocated. What's that meaning for you now, after you've, spent a lot of time thinking about this and becoming a stock market philosopher?

Shawn: That's a good way to put it. Well, one of the things that I come back to, and again, it's one of those obvious questions that people overlook. But it's the difference between the stock market as a primary market and as a secondary market. And so, for all intents and purposes, most of the stock trading that occurs, and you go and you log into your app, your robinhood, whatever it is, and you buy a stock, it's actually functioning more like a flea market. It's kind of like how if you go and buy a jacket at the flea market, you're not giving money to Nike. Nike is not getting any cut from that. If you buy a Nike jacket from somebody at a flea market, you're just paying the person who sold you that jacket. And most of the trading in the stock market, that's exactly how it is. It's called secondary, market trading. Essentially, somebody owns shares in Apple stock that they bought from somebody else, and now you could be buying those shares from them. But no point in that process are you giving money to Apple. And again, I think that's something that especially, really, truly beginner investors overlook. They think that every time you buy a stock, somehow the money is going to Apple, but they don't really have an explanation for how that's happening. That's kind of like the bias that they have, they don't really understand fundamentally what's happening. And then you might ask, okay, so why does stock market exist? And how are you allocating capital? What is the point of this ever going flea market of trading shares back and forth? And I guess part of the answer to that is that there is a primary markets function, and the primary markets are actually when companies do fundraising, and you've probably heard of ipos and the initial public offering, and that's sort of when companies get their payday. And you can think of it as a private company will go and work with investment bankers, and investment bankers will help them say, hey, here are the finances of your company, and this is the current market conditions, and this is what we think investors will be willing to pay for shares of your stock. And then they go out and they find people who buy shares of stock at that price. You pay the investment bankers, ah, a pretty hefty fee, and then you keep the rest as cash for yourself. That's kind of a very rough framework for how it works and the beginning of that process. At that IPO, you raise a lot of proceeds that support the operations of your company, but then your shares trade in perpetuity. Of course, there are secondary follow on offerings that happen where Apple might come out five years later and say, hey, we want to raise $20 million, and they might go sell their shares and kind of repeat that process to a smaller scale than an IPO. But, yeah, for all intents and purposes, it's one of those things, again, that people, I think, overlook of, like, when I'm buying a stock, who is actually getting the money, and how is that happening? And what does all that mean in this idea of allocating capital? And the stock market exists in real time to price companies equity. And even though the IPO is a really important process initially, like I said, those follow on fundraising efforts can be really important for, companies and their ongoing survival. We saw that with AMC when that company was on the brink of bankruptcy. And then they had the whole meme stock revolution, and then they went out and they did, a follow on offering, and they sold more shares of stock, which injected money into the company that allowed it to keep going. And it's not something I've continued to keep tabs with, but it's a great example, because it's one that was recent and it's one that people remember, and it kind of highlights the difference between primary markets and secondary markets and shows that's an example of capital allocation. And I would argue that it was probably not a good example of capital allocation, but it was certainly an example of capital allocation.

So are you saying that the value of capital is based on the share price

Phil: So are you saying that the capital allocation, the value of that capital is based on the share price? So, the higher the share price, for example, the more capital that can be raised. Is it as simple as that?

Shawn: No, not quite. Yeah, because obviously, it depends on the number of shares that the company has outstanding. So there's kind of two parts to that calculation. When you're multiplying the share price times the number of shares, which is more of an arbitrary thing, I actually haven't dove into the science of how companies determine how many shares they're going to sell. That would be another good thing for me to perhaps dive into one day. And then you multiply those two numbers, and then you get the market capitalization, market value, which essentially is what investors value the equity of the company at, which doesn't always line up with the balance sheet equity of the company. When you do the very strict accounting standard calculations of what a company's worth, oftentimes that's very different. And what you see actually happen in financial markets is that investors pay a premium to own a company, and maybe they value assets on the company's balance sheet more liberally than perhaps an accountant would do. But, yeah, it's essentially an assessment of what you think the company's equity is really worth. And the way that calculation is brought together, as I mentioned, is simply multiplying the share price times the number of shares outstanding.

Phil: And also with allocating capital, that's the role of management as well, because they've got various ways that they can allocate the capital of company, whether it's going to be given away as dividends or for buybacks, or to invest in other businesses making acquisitions. So allocating capital. The other side of the coin is management having to do this as well and do it well on, behalf of shareholders.

Shawn: Yeah, it's an important point, and that's why you're investing in a company, for them to make those capital allocation decisions. And, yeah, if a company's stock price declines dramatically, they become a prospect for being acquired by a competitor who could go out and buy their shares in the open market. And, yeah, there's a lot of ramifications for it. And the stock buyback one is a particularly controversial point for some. I don't feel as opinionated about it, because to me, I think of it kind of the same way that I think Warren Buffett does. And it's this idea of business managers have the best idea of their company's intrinsic value. So if they're going out in the market and buying the company's shares back, essentially they're taking those shares out of existence, reducing the number of shares outstanding, which increases everybody's ownership stake and the company's equity. So as a shareholder, it's typically a good thing, of course, unless they are, for whatever reason, buying the company's stock back above its intrinsic value, which you do see. And there can be perverse kind of short term incentives where a CEO is sort of, maybe their compensation structure is tied to the stock's price performance in the short term, and they may be trying to drive, optimize for the short term by buying back stock at a premium to continue to push the stock even higher, which creates a greater payout for them. You can imagine some scenarios like that, and it certainly can happen. But, yeah, just kind of the very general removing the emotions and the kind of controversial feelings people have about whether companies should do buybacks and whether it's ethical to do buybacks. It's a pretty simple transaction where companies, are deciding to go into the open market and buy back their own shares and essentially increase everybody's ownership stake in the business, especially if they think that the company's shares are currently being undervalued by the market. It's a really great way to show faith in your own stock and basically signal the market of, hey, we think that stock price is trading at 90. We think our shares are worth 100. We're buying every share until the price goes to 100.

The importance of choosing your own investment approach is obvious

Phil: What's the importance of choosing your own investment approach?

Shawn: Yeah, this gets into the behavioral side of investing and having conviction in the decisions you make, because times will get tough, and inevitably that will happen. And if you don't know why you don't have a lot of these first principles questions answered, you're more likely to trip up and panic, sell your stocks at the wrong time, or maybe just have a lot of sleepless nights worrying about what is happening, because what you thought you understood or what your financial advisor told you would happen with your portfolio. And they said, well, you're expected to make 8% a year, every year, and the worst case scenario is you lose 30% or whatever it is, and then all of a sudden, the stock market's down 50% and you don't understand what's happening. So, yeah, this is something that I always encourage people to think about. And first of all, you make that initial decision of maybe, am I going to be an active investor or a passive investor. That sounds like a more binary decision than it has to be. I know for me, I'm probably 90% a passive investor. And then just to kind of hedge against myself making impulsive decisions around buying stocks, I give myself a portion of my portfolio where I allow myself to, right or wrong play with picking stocks, and it kind of scratches that itch. And then it allows me to invest the rest of my portfolio a little more conservatively in broader passive index funds. But even still, it's important to understand what is a passive index fund. It's not even as simple as being passive, actually, a lot of index funds are active. They're making active decisions around what is included. You look at the S&P 500, it's not a static list of companies. The S & P has their own sort of curia for determining what companies can be admitted into the S&P 500 and or what would force them out and to no longer be allowed in the index. And so, even as a passive investor, it's not as simple as I'm just going to buy the S & P 500. It's important to understand those wrinkles of how the S & P 500 is calculated, how other indexes are calculated. Which broad index funds do you want to be using? Do you just want to invest in the Russell 3000 or do you want to invest in the S & P is just large cap companies. You're not getting a lot of exposure to some of the best medium and small size companies in the US, which have different return profiles and business characteristics. And I can go on and on, but you can zoom into this a lot, obviously, as you know, but having some of those really basic first principles answered, of understanding what a stock is, whether you want to be an active investor or a passive investor? And if you're a passive investor, how much do you want to allow yourself to be an active investor? And sort of defining those boundaries and setting those frameworks in advance and saying, am I going to check my stock portfolio once a month, once a week, once a year, five minute chat? Hopefully not that. but any of those are okay. I just think it's really important to define those rules for yourself. You don't want to just be kind of going about things on a whim and making rash decisions, because then you will fall victim to a lot of the kind of psychological biases that cloud are thinking. So the more you can answer a lot of those first principles questions and define frameworks for yourself to follow. How many trades will you make a month? Or if you're picking individual stocks. Obviously, that thesis can change over time. you can invest in a company and what you thought was reality could not bear any fruit, and you could have just been completely wrong, or something could change that you didn't know about. Maybe there's an insider scandal or an acquisition fell through. Whatever it is, it's not as simple as you buy a stock and then it's a static thing of, well, I bought the stock, now I'm a shareholder forever. You need to have some criteria for determining, okay, I'm going to revisit my investment in this company once a month, or once a quarter, or once a year, whatever it is. And I have these certain rules that if it rises above this price or falls below this price, I'll revisit my decision to either buy or sell or continue to hold this stock. So, yeah, that's a rambling answer, again, to a lot of different directions you can go in. Coming back to the basic point of whatever direction you go in, define your investment approach and be intentional about it. And don't just be somebody who just goes along and kind of blindly follows the advice that others give you as I give advice to people, ironically.

It's important to understand etfs as opposed to single stocks

Phil: And it's important as well, not even investing in etfs has almost become like investing in individual companies as well, because there's so many flavors of them, there's so many styles. So it's important to actually understand how they're constructed, how indexes are constructed, how they're used, if you're investing overseas, whether they're hedged or unhedged and so forth. So do you believe it's really important to understand this as well, these kind of aspects of etfs as opposed to single stocks?

Shawn: Yeah. And again, that kind of goes into your approach, because you don't have to own all these different flavors of etfs. You could buy the vanguard total world stock index, and I think there's 10,000 stocks around the world in that index. And you could just buy that and say, hey, I have exposure to the entire global stock market and it is what it is. Or you could make decisions and say, I want to own the S&P & P 500. And then you have to ask yourself another question, okay, do I want to invest internationally? And if I invest internationally, where do I feel comfortable doing so and defining those rules of the road? Right. Some people are not comfortable investing in chinese stocks. They think that, the ods of a war between the US and China are prohibitively high. And as a us citizen, the risk of financial sanctions that affect that investment decision is too high and they just won't invest in China. Some people do that. And then maybe you say, okay, my investment universe is only going to be North America, Europe, and you kind of have to make these decisions for yourself. Like I said, you could say that I'm just going to be VT World index and that is what I do. And there's good reasons to do that, but just understand why you're doing that. Or you could increasingly zoom in and say, okay, am I going to invest in chinese stocks or okay, well, actually only these sectors are at risk of sanctions, so I'm not going to invest in AI companies in China. And you can zoom in and zoom, in and zoom in to your comfort, but sometimes it's best to simplify things. I've zoomed in a lot in my kind of investment journey as I've learned things. And the more I've learned as I've zoomed in, the more my reaction is to say, maybe you just buy vt world and you just buy 10,000 stocks and you just leave it, or you buy everything x China, whatever it is, if that's something you flag as a particularly high risk for you, and at.

Phil: The same time keep learning all the time because you're going to be making mistakes as well, aren't you?

The most common bias in investing is the confirmation bias

And of course, the biases come in. So what are some of the biases that you do cover in the course and investors need to be aware of?

Shawn: Yeah, well, I mean, the most common one is the confirmation bias, obviously, and that's kind of, you hear about it in a lot of other fields besides just investing. But it's a particularly potent one in investing because you're constantly making these decisions, like I said, of where to invest and what type of funds to invest in, in, whether to even to invest in stocks or bonds or what companies to invest in. You're constantly making decisions at, so many different kind of forks in the road, and it's really tempting to kind of consciously justify, well, this guy on this podcast told me I should invest in stocks, so I invest in stocks. And then you confirm that decision to yourself. And he said, to buy the S and P 500. So I bought the S and P 500. And you can fall down these rabbit holes where you're just kind of constantly convincing yourself of every decision you made. So with any decision you make, I would say be a really good devil's advocate. The best investors can argue an investment both ways, and then they pick one based on the probabilities that they expect to unfold. But if your thesis is only bullish for a company, you haven't done enough work. If you can write a five page report on why you should buy a stock, you should also be able to write a five page report on why you should never touch the stock. And only after you get to a position to be able to do that, then you can say, okay, actually, I am going to buy the stock. I, sufficiently understand sort of the downside risk. So that's how I would think of confirmation bias, is you have so many different decision trees that maybe don't even realize that you're making, and just don't be a victim to constantly validating those decisions. And then of course, another one is the overconfidence bias. And you see this a lot. This was a big thing that was prominent in 2000 and 22,021 where everybody was a retail trader, everybody was making a million dollars trading options, everybody was trading dogecoin and bitcoin and every coin. And the sort of reality of it is, yeah, if you get in, there is an element of luck and randomness in investing, and there's maybe a 50 50 chance you'll make money or lose money. And so, yeah, you could easily win on your first couple of investments and think that you're a genius. And the reality is, if you haven't done the work to understand what you're doing and why things are happening the way they're happening, you're just streaming together sort of a series of random luck, and you haven't necessarily earned as much as you've earned. And that's a harder one to appreciate. I think most people just have to experience those first couple of losses to really appreciate the overconfidence bias. But I would say if you're listening to this now, and you're a beginning investor, you're going to make those mistakes. You're going to have to learn that lesson. But if you're going to lose, don't get totally wiped out. You're going to lose and learn those lessons, but don't let it be something that's totally disastrous. Don't put all of your money on some speculative meme stock and then get wiped out. so, yeah, that's a, particularly detrimental one that's hard to prepare for, and I think really kind of particularly afflicts beginning investors. And then another one is loss aversion. I would say this affects everybody differently, but there's a lot of psychological studies that have kind of verified that it's more painful to lose something than it is to gain something. So, if you could imagine on Christmas day, you get a gift, and you have a certain quantifiable amount of joy from receiving the gift, and then if somebody rips that gift out of your hand and destroys it, you would actually probably feel more pain than you felt pleasure. On the upside of when you receive the gift. So, it feels a little abstract, but there are some kind of real behavioral realities that, affect how people invest, where they're often tempted to be really afraid of the downside, which impacts their investment decisions, and perhaps their ability to earn better returns over time. And they may even handicap themselves by being overly conservative. So, yeah, that's one that I think the best remedy for loss aversion, really is knowledge. And if you have a first principles understanding of everything that's happening in the markets, and what stocks are, and yada, yada, yada, you'll have a lot more comfort with the fact that there are fluctuations in prices. But as I said earlier, this is just a transaction between two people, and it's not necessarily an indication of what the company, its equity value is truly worth, especially if you have good reason to disagree with the market.

Phil: So, what's the importance of monitoring your investments?

Shawn: Yeah, well, this gets back to something I said before, but having those kind of defined frameworks where if you have an initial thesis, when you picked a stock, you should set an established framework for every month, every quarter, I'm going to revisit that thesis and see if it still lines up. And if my thesis was that Netflix is going to grow its sales by 20% in China, and then it only grows by 5%, well, now my investment outlook has materially changed. And am I going to fall victim to confirmation bias and come up with a new thesis for why I should invest in Netflix, or am I going to reconsider that investment altogether? So, of course, if you're making active stock picks, that's the obvious reason for why you should be monitoring your investments. And it's really just seeing if the thesis for your investment has fundamentally unchanged, or if the facts that you perceive to be true when you formulated that thesis, if those are actually accurate, and sometimes they're not. And then for passive investors, the reality is that you have different parts of your portfolio to sort of, they all play different roles and can hedge and offset each other. And not every part of your portfolio is going to go up at all times, especially if you're investing across many different asset classes and sectors. Some years, us stocks will be the best in the world. And some years, european stocks will be the best in the world. And when you have a portfolio, you may sit down and come up with the percentages and say, I want 50% of us stocks and 40% in Europe and 10% in Southeast Asia. And then a year later, you flash forward. If us stocks have particularly outperformed, they may, now make up 60% of your portfolio. And so you don't want to just sort of just go along with the whims of the market. If you came to a, strategic allocation of whatever reason you want 50% of your stocks in the US market, then you would want to maybe sell some of your exposure to us stocks and essentially rebalance your portfolio and bring it back into line with your original strategic plan. And so the point being kind things, economic and financial realities change over time, and your portfolio will drift away from your original plan that hopefully you sat down and spent a lot of time thinking about. And it's okay to change that plan. But the point of rebalancing is sort of bringing back the alignment of your portfolio back to that plan that you've constructed.

Phil: I've spent time at some shareholder meetings with older investors who've invested for decades and done it sensibly, directly in the share market without mutual funds or etfs. And one of the lessons that I came away from that is that they treat it like a garden and they're just looking to grow certain flowers in the garden and then taking out the weeds. And it's just something that they do on a yearly basis. It's not something that they're looking at every moment of the day going, oh, where have I made a mistake here? What should I be planting? What should I be doing? And I think it's really important for people to understand that long, long term view. And that, like you say, monitoring your portfolio gives you the tools to be able to work out what is going to make your garden bloom the best.

Shawn: Yeah, I couldn't have said it better than myself. You actually said it much better than me. It is true, though.

Phil: Well, I was told to me as well, trim the weeds. Yeah, let the good way to think of it.

Shawn: And unfortunately, too many people actually, they trim their winners. And this is especially true for active investors, where you're making individual stock picks and some people think, oh, wow, I bought Alphabet or I bought apple and it's up 100%, so I should sell. And they're coming from a place of ignorance because they didn't understand in the first place. They didn't have a good rationale for why they made that initial decision, and then that put them down a path of future decisions that they weren't equipped to make, such as, when should they sell the stock? Should they buy more of the stock? So it's really important to be fully equipped and prepared to make that first decision and that kind of leap of faith of, I'm investing in a company, and if you really understand the investment thesis for that company, you'll also be able to recognize, hopefully not always, but hopefully, that, oh, yeah, this company is a winner. And like, the example I used before I invested in Netflix, because I thought that they would have 20% sales growth in China, and they actually had 40%. So I shouldn't just sell the stock because the stock price isn't going up, because of psychological euphoria in the market. It's because some really important things have gone well for the company. So even just having some of those baselines in that context is really important.

Warren Buffett says rebalance and water the flowers rather than cutting them

But, yeah, the takeaway being rebalance and trim the weeds and water the flowers and really do not cut the flowers.

Phil: Well, it's like Warren Buffett says, why would you bench Michael Jordan? You don't take Michael Jordan off the. What's it called? Is it a field off the. I don't even. Off the court.

Shawn: There you go.

Phil: Yeah. Showing my ignorance there. And then the other side of that is that everyone's always asking, where's my ten bagger? Where's my 40 bagger? and you're not going to get a ten bag or 40 bagger or whatever. If you go, oh, that's up 100%, I'm going to sell it. Now, that seems to be two sides of the same coin, doesn't it?

Shawn: Yeah. You hear a lot of people say, oh, if I bought Facebook stock in 2008, or if I bought Apple in the 80s, or even people who say, if I bought bitcoin in 2013, I'd be a billionaire. And it's like you would on paper. But in reality, when you're looking at most people would take a ten bagger, or what should have been a ten bagger, and they probably cut it at a two bagger or a three bagger. Yeah. And that's the reality of it. And that's kind of that loss aversion where it's like, hey, I want to take my profits while I have them. And not appreciating that it, maybe you own a truly exceptional company that's going to grow to be the most beautiful flower in the garden, and instead, you're benching Michael Jordan to put a couple different references together.

The course is distilled from the we Study Billionaires podcast

Phil: Yeah, we like a mix of metaphor in this podcast. So invest like the legends is the course that you've created. How much has been distilled from the we Study Billionaires podcast that you're associated?

Shawn: Yeah. Yeah. So that's my company's flagship podcast, and so I don't produce the podcast, but it is actually what pulled me into this business, where a couple of years ago, I stumbled across them and just found myself listening to we study billionaires every single week when the episodes came out. And so I would be lying if I said I didn't take a lot of the learning that I distilled from probably hundreds of hours of podcast interviews every single week with many of the world's best investors to have ever lived. Probably can name just about any investor alive except for Warren Buffett. And we've probably talked to them and not me, but on the we study billionaires podcast and at my company, and I've certainly listened to a lot of those podcasts, and they've humbled me and they've taught me a lot, and they've allowed me to chase my curiosity down a lot of different rabbit holes. And so, yeah, at least subconsciously, I would say many hours of distilled lessons from those podcasts have been brought into this course and shaped the kind of first principles framework that I try to provide for people.

Phil: That's what I like about it. It's the first principles framework, and it's just all of the things that investors need to know, or would be investors need to know before they even take a look at a screen, really, because too many people, they're looking for a quick fix, aren't they? And I think this is a kind of a sensible antidote to that kind of behavior when you're entering the stock market. Is that the way you're trying to feel about the course?

Shawn: Yeah, and I think in, the course promo page, inoculate, inoculating yourself. Right. Yeah. making the leap of faith. And for not everybody, it is a leap of faith. The idea of stock investing comes more easily to some than others. But for many people, it is a leap of faith. You're asking them to. For a lot of people, they're investing in stocks, their 401K, or their IRA. Those are the kind of two main touch points, and they're usually putting faith in somebody else to make that decision for them. I know I have friends who ask me to help them set up and allocate their portfolios for them, and I'm happy to do so. But ultimately, they're outsourcing a very important financial decision to somebody else. And I'd like to think that I do a good job helping them, but I also try to encourage them to be like, hey, I shouldn't be the one doing this for you. You should have kind of the wisdom and context and perspective to be making these decisions yourself. So that's kind of the goal of the course, is to help a lot of folks who maybe are outsourcing some of their basic financial decisions to somebody else to be able to make those decisions for themselves. And of course, I put in a lot of extra, areas to go deeper for folks who are not truly beginning investors. But I think no matter what stage of the investing journey you're at, it never hurts to go back and revisit the first principles and you might learn something new, or you might have a new appreciation for something.

Phil: And how long is the course designed to take?

Shawn: It's not long. It's a little over 2 hours of video content. And then there's, ah, a couple of different keyword guides and I link to a lot of different resources that I vetted for further learning. So essentially I'll go through and I try to touch on as many topics as possible in that set of two hour videos or 2 hours worth of videos. And then I will say, hey, this is the source I use to learn more. And this is a, really high quality video that's available for free, or this is a really good study guide. So yeah, it's 2 hours of really action packed learning with a whole lot of resources to learn more keywords, guides. And you should really come out of it feeling like you know everything. You need to be equipped to make your first stock investment. Or if you're, like I said, a more experienced investor, you'll have an appreciation for principles that are hopefully underpinning many of the decisions that you make.

So what's the full price of the course? The full price is $175

Phil: So what's the full price of the course?

Shawn: The full price is $175, but yeah, we have a special coupon stocks 15. That's 15% off. And that brings down the final price to, I think, $148.75. 75, cents.

Phil: Yeah. So if you're keen, what's the web address for listeners to go to? We'll put it in the blog post and the episode notes as well.

Shawn: Yeah, I would say you can go to theinvestorspodcast.com and then you can click on the courses tab and then you should see the how to get started with stocks course.

Phil: And of course, full disclosure, I get a small commission on these sales as well. But of course, I only recommend products that I really believe in. And as you can see, Sean's a great guy and he's not going to do you wrong.

Shawn: Well, thanks for having me on, Phil. Yeah, it's been an absolute pleasure. I provide my email and direct contact info for everyone who takes the course, actually. And so, yeah, I'm really kind of tying myself to it to, not just sell you something and run away, but I actually invite people to follow up and email me if you have questions, if you think I could have done better with the course, if there's things you disagree with. Hopefully just questions, though, I'm more than happy to, continue the conversation. So, yeah, it's not a one way transaction where it's like you buy the course and thanks for the money and never see you again. It really is coming from a perspective of, yeah, I hope this helps people. And if it doesn't, we give full refunds. And if it does or you have further questions, I'm just an email away.

Sean O'Malley hosts Stocks for Beginners podcast

Phil: Fantastic. Remember that code. Stocks 15 for off. Shawn O'Malley, thank you very much for joining me today.

Shawn: It's a pleasure. Thanks, Phil. Thanks for listening to stocks for beginners.

Phil: If you enjoy listening, please take a.

Shawn: Moment to rate or review in your.

Phil: Podcast player or tell a friend who might want to learn more about investing for their future.

Stocks for Beginners is a production of Finpods Pty Ltd. The advice shared on Stocks for Beginners is general in nature and does not consider your individual circumstances. Stocks for Beginners exists purely for educational and entertainment purposes and should not be relied upon to make an investment or financial decision. If you do choose to buy a financial product, read the PDS, TMD and obtain appropriate financial advice tailored towards your needs. Philip Muscatello and Finpods Pty Ltd are authorised representatives of Money Sherpa PTY LTD ABN - 321649 27708, AFSL - 451289.