Transcript:
Easan Arulanantham:
Do you have any advice for a novice investor? You know, how do I look at a company and evaluate them? You know, can I see? Like, you know, what, what kind of ratios are my looking at?
Tom Vaughan:
Yeah, I think this kind of interesting I have seen over the years and talking to different people, I get asked questions about, you know, what should I do and what have you. And then I asked them what they are doing. And it’s kind of amazing to me, there’s some people doing some really aggressive things, I mean, really aggressive, and they’ve been investing for three months or six months. And I don’t know, I’m sure that there are lots of stories where it works. But just personally, it’s really difficult. I’ve been doing this for, you know, 36 years, 35 years now, just professionally, and then I was obviously an investor before I became licensed. And one of the things that I’ve learned over the years is that it’s just it’s incredibly complex. And it’s super hard to learn. And it’s sort of like, Hey, I wake up one day, and I’m going to play baseball, right? And so you go from deciding to play baseball, I’m a novice at that thought to playing in the professional leagues trying to hit 100 mile an hour fastball and, you know, 96 mile an hour sliders and what have you, right. And that’s what I see people doing, the novices are just going for it. And again, in the right market, you look like a genius in 2020, when things were flying, it was difficult to lose money in that kind of market. You just throw stuff out there, it was really, really hard.
That’s not the market that we have now. And it’s not normally the market we have anyway. So a novice, in my opinion, should have a pretty good amount of their money, right in the big old indexes the S&P 500, like the Vanguard, S&P 500 vo O is the symbol for the ETF, or the Vanguard Total Stock Market Index, which is VTI. Right. So those, that should be where most of the money goes. But the question was about individual stocks, and what you look for in those individual stocks. And I guess my first thought would be keep that portion of your portfolio smaller than the if you’re novice than the bigger portion of the portfolio. I mean, even for us, I mean, we have only a few individual stocks that we have in our portfolio at a point in time. And most of the money’s in the overall markets, just because it is so difficult to get the right stocks. Now, what we what I look for personally, has a lot to do with cash flow. So price, what they call price to cash flow, that’s a big one for me, especially in this market right now, maybe not as important in 2020. You know, again, you could kind of throw some of these out the window in certain markets, because nobody’s paying attention to price to cash flow 2020, they were just looking at the innovative possibilities of that company. And that was what people were buying. And so you have to change your methodology sometimes.
Right now, earnings, so price to earnings, sales price to sales and price to cash flow. That’s what I’m looking at right now. Are those particular areas. And then I guess the last thing is just cash on hand, right versus debt in total. So you’d like to have companies that have great ring name recognition, relatively low debt compared to their cash on hand, great cash flow, good P E ratios at least reasonable and what have you. So I think that’s what’s going to lead us out of this. And so that’s what you know, that’s where the invidious are the apples are the Microsoft’s Are you know, even the JP Morgan’s and, and some of these, you know, big names that are out there, the Home Depot’s even target, which is you know, got pounded. Still really great name has great everything, you know, missed some earnings. And they got hit for that. But, you know, Starbucks, which is growing like wildfire actually do quite well. Stock is still down a bunch. So I like that right. Right now, I think this is sort of a bottom picking market in the really good names. And I’m sticking with things that I think, you know, almost everybody would recognize, to be honest, and you know, more from my own portfolio than for my clients. But but I’d be I’d be cautious here not to get too carried away with really speculative things. Just because we’re in a market that could fall another 1015 20%. For all we know, you know, we don’t know, like you said whether this is a recovery or not.
Easan Arulanantham:
Yeah. And if you’re investing in individual stocks, sometimes it’s a long game, you know, you can’t, you’re not gonna get a return for maybe two, three years or five years. And so you have to be kind of pick something that you’re really kind of trusting, you know, if you don’t believe in this company, should you be investing in it?
Tom Vaughan:
That’s a good point to my own. portfolio personally, outside of my broad market exposure, I have a list of about 20 stocks that I’m invested in. And that’s exactly it every time I look at it, I think to myself, if that drops, do I want to buy more? Do I believe in it? You know, when I look at it, and I look at the cash flow, I look at the name, I look at the earnings, price ratios, all those things, you have to believe in that stock. And that eliminates a lot of stocks for me, you know, because there are certain times where you do speculative play, you know, that are some great things that are out there. But they’re, when I’m looking at individual stocks, right now, I have to really believe that company is going to be significantly higher in price than the market might be in five years, let’s say maybe it’s low, but out did the market five years from now? Maybe it’s way higher. So who knows. But you know, so Home Depot, let’s say just for example, I look at Home Depot, I think to myself, Okay, you know, whatever’s happening right now with the price, will Home Depot be able to outperform the market going forward? I think so, right might not be true. But I believe that and so when it drops, and I want to rebalance my portfolio, I’m gonna buy some more Home Depot, you know, they’re high conviction companies and Vidya you know, all that kind of thing. So anyway, that that that’s, that’s a good point.
Easan Arulanantham:
Yeah. And if you feel like instead of a company, you feel you believe in a trend, you can try and look for an ETF that meets that trend. Yeah. So if you really believe in electric cars and autonomous driving, you can find an ETF for that. And so you should you could target based on your belief systems and what you have conviction in that way you can stay in the market.
Tom Vaughan:
Yeah, doing the same thing, actually. So I look at that, and I say to myself, Okay, will that category be bigger in five years, and so there’s a ETF at iShares called IE, Dr. Id RP, that I have cloud computing is another one, I think it will be bigger in five years, Clean Energy, I like, you know, for five year run here, and you know, just trying to accumulate healthcare, I like at this levels, you know, five years from now. And so, you know, you’re exactly right, you can buy an ETF that’s kind of buying the entire ecosystem of that particular category. And cybersecurity is another one that I have to so you can kind of combine, you got your my portfolios, you know, I’ve got this broad index pieces, and I’ve got these kind of targeted ETFs, like cloud computing, and then I have some individual stocks that I really believe in, right, so that, you know, again, that’s just my outlook on it. I think there’s some opportunities here, in this particular downturn, just trying to accumulate some of those. And I’ve been very happy, at least in the updates, that my portfolio has outperformed the market. So I’m hopeful that if the market does recovery, I my portfolio outperformed the market during that recovery period. So we’ll see what happens.
Easan Arulanantham:
Yeah, but you have to remember, when you’re introducing these individual stocks, you’re going to add volatility. And so your updates could be worse, they could be better, but you’re you’re not going to be as close to the market. And so you’re gonna have to be able to stomach that kind of movement.
Tom Vaughan:
Yeah, exactly. Most likely, you’ll fall more on the down days, because what you’re really doing is just adding beta, what they call beta, which is its volatility versus the market. And so, you know, again, that can be a bad thing. You have to be very careful when the markets coming down, you know, because you’re actually adding more volatility, which most likely means you’re going to come down further. And again, I think that’s why you need conviction in those pieces that you do have, if you want to continue to buy, and maybe you stretch your timeline if possible. So again, it depends on your age. And your situation is whether you should be doing that. What we’re talking about here isn’t something I do for the clients per se. We stick to the basics with the clients, but And that seems to work quite well. It’s just again, just trying to answer the question from my own personal experience.