Podcast by Andrew Sather and Dave Ahern
Source
Welcome to the Investing for Beginners podcast. In today’s show, we answer some great listener questions:
- How do we feel about investing in companies with ESG concerns?
- What are our thoughts of investing in precious metals or metals?
- How does the Proxy statement work, and voting for our values
- How do we deal with companies losing money over a year?
For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com
Today’s show is sponsored by:
SUBSCRIBE TO THE SHOW
Apple | Spotify | Google | Stitcher | Tunein
Transcript
I love this podcast because it crushes your dreams and getting rich quick. They got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast by Andrew Sather and Dave Ahern with a step-by-step premium investing guide for beginners. Your path to financial freedom starts now.
Dave
0:00
All right, folks, welcome to investing for beginners podcast; tonight, we have episode 237. We got two and a half great questions that we’re going to go ahead and read today. And we’re going to work through those. And Andrew and I will do our usual give and take. So I’ll go ahead and read the first question. So we have; hi, David. Andrew. I’m new to investing, and I found your podcast very informative and entertaining. Thank you. You’re welcome.
My recent investment research has suggested that industrial and precious metals could be smart investments, especially during a market slowdown or recession; looking into large market cap metal slash mining companies, it appears that they almost all raise human rights and environmental concerns. I don’t want to invest in an unethical company. If you either view holding stock in a metal company or have any other thoughts on this topic. Thank you in advance, crystal. So Andrew, what are your thoughts on Crystal’s interesting question?
Andrew
0:55
Really interesting question the skin completely become a can of worms. And I think it’s an interesting thing to think about for sure. It’s tough because I think you can dig deep enough and find something wrong with pretty much any company that’s out there. You know, obviously, you see the stuff that gets in the headlines. But if you dig down to the surface, the business world is an imperfect place. And there are bad actors, probably at every company. And so, depending on how specific you want to get on unethical, your definition of unethical company, it could take that too far could lead you to not investing in anything ever.
And I would never advocate for that. That said, you know, there is something to be said about ethics and investing. And I know that’s something that’s gained a lot more popular as of late. And so, as somebody who’s taking responsibility for your own investing, you kind of have to answer that question for yourself. I mean, I know for me, I feel like a fiduciary to the people who subscribe to my newsletter, as I’m picking stocks for them, even if I’m not, by legal definition, I feel that way. And so my thoughts on how I interpret a company’s ethics might be different than your own. And that’s completely okay. And so you have to balance, you know, whether you’re fiduciary of other people’s money, that’s one thing, or if you just for one reason or another, just don’t like a company, there’s nothing wrong in not doing that if you’re just talking about managing money for yourself. That’s kind of my initial thought. I don’t know whether you think,
Dave
2:30
Yeah, I would tend to agree with pretty much everything you’re saying; the hard part about when you start talking about investing, and some of the ethical questions, it can become a slippery slope. And I think you have to invest where you’re comfortable with your ethics. I’m not advocating for somebody to go out and buy something just because it’s gonna go up. But you absolutely hate what they stand for, or hate what it is that they do, or, you know, any of those kinds of things that just, you know, are gonna keep you up at night. It’s kind of the same idea. You don’t want to invest in companies like that.
But think for me, I think it has to be a personal decision on how what you think about different ethical treatments. I think when you look at some of the human rights complaints and discussions around the world, some of those are certainly valid. And I don’t know enough about them to comment either way. But I do know that you just have to follow what you think is right. And one of the things that I like, I guess, about the ESG idea is the idea of focusing on some of these things, but I guess I I’m not a big fan of the gaming of it that some of what’s been going on recently. But I think you have to put your money where you’re comfortable putting your money; it’s kind of like trying to impose my ethics on Andrew and vice versa. I think, by and large, yours a lot of things we’re going to agree on. But you know, some things maybe won’t affect us as much as other things.
But I think the bottom line is you need to put your money where you feel comfortable putting it, whether it’s human rights, complaints, environmental complaints, or whatever other concerns that might be out there, whether it’s with the management or whether it’s with staffing issues, whatever those may be. And I think you just need to do what you feel comfortable doing. Having said that, it’s really hard, like Andrew said, to find a perfect company; there is no such thing. And there’s always going to be some could potentially be some bad actors, or there may be something about their business that you are a huge fan of. So I think it’s one of those things; I guess you just have to give some thought and decide what you’re comfortable doing and kind of go from there.
Andrew
4:43
Thanks, a lot of sense. What do you think about the other part of her question or she? I mean, it wasn’t really a question, but she kind of said her recent research suggested that industrial and precious metals can be smart investments during a market recession. Do you agree with that, or do you, You know, have other alternatives for somebody in that spot?
Dave
5:03
Yeah, that’s a very interesting question. So I guess I have a couple of thoughts. Some of it is a, I guess, bird’s eye view of knowledge. So take it for what it’s worth, I have done some work, trying to learn more about kind of the lithium idea, as well as a little bit about copper, because those relate to renewables and relate to energy and electricity in particular. And so I thought maybe that would be a way that I could dip my toe into those sectors.
And after looking at some of those kinds of companies, I found things that just made it really hard for me to want to invest. Part of it is the base metal that you’re dealing with; I think a large part is commodities. And so, the commodities market is not something I’m comfortable with. B know that much about so they’re weeds the uncomfortableness and part three is I don’t really know what I’m doing. And so, for me to invest in a miner like Albemarle, I would really have to understand the lithium market and the commodity market to understand the pricing of it because it fluctuates wildly, first of all, and that’s going to affect the bottom line of a company like Albemarle who was one of the leading lithium miners in the world. And kind of the same idea when you look at Copper Freeport McLaren, I think back around. Yeah, thank you. I butchered that. So they’re a very big copper producer. And it’s kind of the same idea. They’re very good at what they do. That’s certainly not in question.
But the nature of the beast of the fluidity of copper and the pricing make it hard for me to understand what I’m really buying. And so so there’s that, then if you look at some of the other metals that are involved in these lithium-ion batteries, cobalt, which is mostly mined in Congo, which leads us back to crystals, concerns about environmental and human rights concerns because there’s a lot of concerns about those mining operations, as well as some possible shakiness with legalities. And so that whole thing just kind of makes me a little bit nervous; I just kind of stay away from it; it’s not something that I feel comfortable playing in. And gold is not something I’ve ever invested in. And I, frankly, don’t know much about it other than that shiny, and it’s worth a lot. That’s about all I know,
Andrew
7:27
I’ve noticed that a lot of the column Doomers, these people who constantly will tell you the world’s going to end tomorrow, you typically find them touting precious metals, and gold, and silver. And they’ve been doing that for years and years and years ever since I started. First, paying attention to investing, you hear the same messages, different characters, same messages, they’re correct, maybe once every decade or so, you know, a broken clock is right, at least twice a day. So the idea of precious metals can be appealing because you think that you have protection, and you’ll be the only safe one, and every while the world’s going to chaos, and you’re going to be the one who’s safe from all of that.
So there’s like that kind of psychological lore behind that. But if you really break it down to what you’re, if you’re talking about buying gold, precious metals, and trying to essentially shield yourself from a slowdown or recession, you’re basically playing a timing game because over the long term, businesses and the economy are healthy, and they do well. So not only do you have to be right, but you have to be right once a decade. You know, we don’t get recessions that often. And the number of years we’re in recessions is generally short. So the odds are against you in that regard. The companies who, like Dave, you are saying doing research into the companies that are involved in the mining, those can also be looked at as favorable during recessions, for all the same reasons we just said, because their prices might hold better during a slowdown, but not only do you have a lot of the human rights issues and environmental concerns, as you mentioned, there’s also regulatory costs that come with a lot of that stuff. There’s a section in every company’s annual report where they have to report and disclose some of the mining in some of those conflict countries, right?
So there’s just more kind of paperwork that goes along with that. And just a generality, a lot of these companies have to spend a lot of capital in order to mine these materials. That’s not all of them. And some miners are very long-term plays, and maybe our outlay and capital now to have decades and decades and decades of cash flows. But a lot of the very volatile precious metals are stuck in that very difficult circumstances where they have to put a lot of capital in. And then they’re dealing with these prices that are so volatile that I don’t even know how you plan a five-year business plan. If the price is up 100% or down 75% In a couple of years makes, it is hard to make a consistent, steady profit, which is how a lot of wealth in the stock market has been built by a lot of people.
Dave
10:21
Those are great insights. What are your thoughts on like investing in gold or silver? Is it something that you would ever consider doing? I remember we talked to Vitaly A while ago, and he was like, I’ll never do this. And then he ended up buying it for, I think, at least a little while.
Andrew
10:37
Yeah, I’m in the camp of if it doesn’t generate if it doesn’t produce anything; I’m not interested in only that I want assets that produce. So like Buffett calls a farm or business, you know, in my case, I’m not buying farms. So I’ll buy stocks.
Dave
10:52
That’s a good point. So I guess, did we go there with crypto and whether that’s a replacement for something like this?
Andrew
11:00
I guess people have made that argument with Bitcoin, that it’s digital gold. And I don’t really have an opinion here or there on it that would be any more credible than anybody else. I think there’s a lot in the crypto space that actually probably will be productive one day. But there’s so much more that’s not that you better be like an expert in that stuff, or don’t even touch it.
Dave
11:23
Exactly. We’re definitely very early innings with crypto and all the use cases that could come out of it. But I think one thing that we’ve learned over the last, I guess, year or so is that it moves in tandem with the stock market, at least at this point. And so the idea that it was a digital gold or that it would be kind of de pegged, in other words, it wouldn’t move in the same way that the stock market moves. It’s kind of proving that maybe that’s not necessarily the case. So it’s early innings; I’m by no means an expert.
So you kind of take that for what it’s worth. I guess one nugget I would like to throw out there for you, Crystal, is we did an episode back in August of 2021 with Martin KATUSA. And he’s a really smart guy in precious metals and just metals in general. And so he would be something that if you wanted to learn something about, I think he does YouTube videos as well. And so he would be a cool person for you to check out. If that’s something you’re really interested in learning more about, I would highly recommend him.
Andrew
12:22
Awesome. Well, let’s move on to the next question, then. So this one, this person says hello; Dave and Andrew have a question. I know one of Andrew’s hard and fast rules is to sell if the company has negative earnings. But would you sell immediately even if you’re at, say, 20%? Loss? So I guess the first part of that question is kind of addressing me; the easy answer is yeah.
Dave
12:45
Would it matter if it’s a 20% loss? Or would it matter if it was, you know, a 5% loss? Or would it matter if you were up 10% And they had negative earnings? Would you still say bye-bye?
Andrew
12:57
Yeah, so it’s not what the stock has done that’s making me want to make a sell on negative earnings. It’s simply the fact that negative earnings historically have been tied with bankruptcies. So an overwhelming majority of the major bankruptcies we’ve seen in the last 20-plus years have also had negative earnings. And the simple idea that why do companies go up? Why does the stock market grows because companies are growing?
How do companies grow? They take their profits; they reinvest them, and those profits become bigger profits. When you take profits, you reinvest them. And now instead of more profits, you have negative profits, you did something wrong, most likely, sometimes it’s not your fault, right? The market can, or the economy can be brutal, you know, and one day, I may make an exception for the exceptional company, but I haven’t found that to be the case yet. And so I’ve sold every time I’ve seen negative earnings because I want to compound.
Dave
13:57
Just to clarify, it’s not like a quarter of earnings. We’re talking like a full calendar of 12 months straight of negative earnings. Yes, thank you. Some people may think, oh my gosh, you know, they had one bad quarter, and he’s dumping the company, you know, it’s like 12 consecutive months of negative earnings. And in sometimes that could be, you know, two quarters or Okay, and then the other two are really bad. Something like that. I remember you had to sell Disney. I think it was not too long after the pandemic started because they shut all those parks down, and they ended up having negative earnings for the year, and you had to sell them. I remember that.
Andrew
14:29
Yeah, that one in particular. They basically said that we had made these capital outlays. I think it was related to their amusement parks. So imagine you spend $2 billion or whatever it is on these amusement parks, and you’re expecting cash flows to come from that; the capitals aren’t coming in. So the amusement parks are just sitting there rusting. So you know that the 2 billion we just spent is lost, that’s not going to compound. So their stock price, I think, kind of followed the idea; it’s been flat because they haven’t had much free cash flow.
Dave
15:03
Exactly. Those are great insights. And that’s a great way to think about it. So all right, let’s tackle the second part of the question. So what if you see something you don’t agree with in a voting proxy, and you are totally against it and feel good overall, hurt the company? Not today or tomorrow? But if the wrong person steps in, would you sell for a loss? So what are your thoughts, I guess? Let’s talk a little bit about voting proxy and maybe how that impacts our decisions to continue to own or not own the company.
Andrew
15:31
Yeah, so a proxy is a form that management sends out to shareholders every year; there are a bunch of details in there. But the details, I guess, that I tend to care about is who are the board of directors and who owns how much of the company; those details tend to be in there. So as an example, if we were to take Berkshire Hathaway, as an example, Warren Buffett is the CEO and chairman of Berkshire Hathaway; he also owns 30% of the stock. So for whatever reason, Buffett decided he didn’t like himself; as CEO, he could vote people onto his board of directors, and then the bar directors would pick a new CEO, but because he owns 30% of the company, he has 30% of the vote for who is on the board of directors.
And then, you know, he basically can decide, keep himself a CEO, because he has a pretty strong vote there. But that’s kind of the idea, if you think about checks and balances in businesses, is you have the shareholders who have a voice. And then you have a board of directors, who a lot of times can be more independent. So they’re almost like an outside third party to basically, I won’t say, like regulate, but basically, keep the CEO accountable. So if the CEO messes up, the board of directors can do something. And if the Board of Directors messed up, the shareholders can do something. So those details of how that kind of goes and who’s been reelected every year for the board. That’s all in the proxy statement. Now, do you want to tackle the voting proxy, that’s the overall proxy, and then, as part of this whole process, every year, they’re doing the proxy, they’re electing the directors, they also will hold shareholder votes. So every year, shareholders will vote on pretty standard things that tend to be just voted through all the time. For example, did the CEO earn his compensation for the year? Or do we approve his compensation package?
Most of the time, shareholders will vote yes; yes, he did. Or she did. But sometimes, you do see; actually, shareholders vote no if they feel like the CEO did a poor job. That’s one way that shareholders can police themselves against the CEO who does a bad job by not approving their pay package. Other things that they’ll vote for would be to change the structure of the board of directors, change how they meet, change who the company’s auditor is, and the accounting firm that that looks at the books. So it’s a lot of jargon, a lot of stuff that generally just kind of gets flown through no problem.
But you do see the occasional company, which is something I ran across with my investment and Griffin, where you get into a proxy fight. And so somebody who’s a shareholder who owns a significant stake can basically propose a vote that other shareholders can vote on. And so you basically say, hey, I want the board of directors, or I want the CEO to be doing this. And then they’ll send out proxy vote materials, and then everybody votes. So I don’t know if that kind of explains how that process works, hopefully, on the surface level, without getting too into the nitty gritty.
Dave
18:54
I think it definitely does. Didn’t add this last year with the Berkshire meeting. I think one of the larger shareholders; I think it’s a pension fund. I think they were pushing to get Buffett removed, as was the CEO or chairman, or maybe it was both. I can’t remember what, but it was kind of comical.
Andrew
19:13
Yeah, I think they wanted to split. And they said that Buffett should not be the chairman and CEO. It should be two separate roles, which is completely ridiculous because it’s Buffett’s company. And there’s a ton of Chairman CEOs out there. It’s not like this is an uncommon thing. And it’s not like Buffett has done a bad job like he’s been trouncing the s&p, especially lately; it’s just an absolutely ridiculous idea.
Dave
19:37
It’s pretty comical. So I guess let’s ask the question, then. Let’s say that you see something in the proxy or you read about it from other shareholders. Would that be something that would give you pause to continue to own a company? Or would it be something they’re like I’m out, you know if they vote something like that in as whatever it may be?
Andrew
20:00
Yeah, our favorite two words over the last few months, right? It depends. So I’ve seen, I don’t know, I get so into the weeds with this stuff, like, I just don’t know how applicable this for, for the average investor, but I’ve seen like board structures where there’s like a document that tells you how all of the details of the board go and how they get elected and all of these things. And so sometimes the board can be designed to basically keep the CEO and his buddies all in place. And so even if you are a shareholder who comes in and makes a big ruckus about it, you can make the ruckus, and we can do the votes. But it actually doesn’t mean anything because he and his buddies still have their committee that decides who the CEO is; I’ve seen I’ve run across that. And so I did not sell a stock exactly because of that.
But as one of many factors is kind of how I saw it, where, and I’ve said this before, but basically, if you’re a manager, or a CEO, and a company I’m investing in, I’ll give you the benefit of the doubt, right? It’s like innocent until proven guilty. But once you make a questionable decision, and a huge capital outlay that looks questionable, or did not perform well, or something in that nature, or he didn’t have a good track record. Now, as a shareholder, you’re starting to think, Okay, this guy is obviously screwing up. Is there going to be somebody that comes in and replaces him? And then if you dig deeper, and you look into the proxies, and you see that, actually, there’s no way for somebody that come in and clean things up, then that’s probably a situation where you’re gonna want to sell. But it’s because you have both the entrenched management and you have management doing bad financial things and not allocating capital.
Well, I do invest in companies where it’s like, basically like a family business, and they have majority ownership, and they’ve locked that all up. And there’s nothing you can do about it if you don’t like it other than walking away and leaving. But they have good track records. I like the way that they present themselves. And I trust the things they said, and I’ve seen them do good with the money, and I trust they’ll do that in the future. So that’s why I say, you know, solely on the proxy statement, I wouldn’t sell or do anything crazy like that. But it could keep me from buying. But you do want to factor them as one of the other factors and kind of paint the whole picture. Rather than make a generalized statement, I would agree with,
Dave
22:31
I think one of the things you have to think about is you have to kind of keep it all in relation to the overall company. And when you buy a stock, you’re buying a part of a business. And part of buying that business is Pai is buying the management that’s going to be running it, and you have to trust that they’re going to do what’s best in the best interest of you, as well as the business. And if they’re just looking out for themselves, you’ll discover it pretty quickly; you’ll see it either in their compensation packages or the way that maybe they glorify themselves above the business; there are all kinds of ways that you’ll discover all these things that it’ll become evident. And then you can decide if that’s something you want to continue to have your money involved in or not. And it’s all part of the package. Sometimes you can have a great CEO but a horrible business. And sometimes it could be vice versa. It was that phrase by a company that’s so great; a monkey could run it because someday one will. So it’s kind of that idea. And it’s all part of the learning process.
And I think really, the only thing that would really ever make me go out is if the company is obviously doing poorly and is losing money. And the management is voting themselves huge pay raises, you know, something like that would tell me that, hey, these people are just trying to glorify themselves on the way out of the business as it goes, you know, to zero. And I don’t want to be involved in that. Because, you know, they’re obviously not trying to turn around the business; they’re obviously just trying to suck as much out of it as they can. And that’s, unfortunately, this is a, I guess, a generalization. But if you see a CEO or management team that job hop, a fair amount, kind of, I guess, be a little bit wary, if you see them come in, like if you notice that their track record is that they’re with a company for three or four years, and then they come in and they’ve done that a lot, chances are they’re not going to be with that company that you’re talking about for a long time.
So it’d be something you’d want to kind of keep your eye on to make sure that you know, let’s say that this the industry standard is the CEO gets 2 million a year, for example. And all of a sudden, this guy’s granting himself 14 million a year, including all of his options and stuff. He’d be like, you know, maybe not. So, again, those are all part of learning about the company and understanding the management and how they pay the management. And those are all parts of checklists that you can add to help you kind of weed out some of this stuff. You should vote. Anybody that owns stock has the ability Need to vote. And it’s super easy. Now you can literally do it through your brokerage account. I did this last year through fidelity, and it was a breeze; it just went on there and clicked a button and voted; it was super easy. So, you know, it’s what we pay for is one of the rights to do that. So I strongly encourage you to do so.
Andrew
25:17
I would say, again, the danger, insane generalities. But in general, the bigger the company is, the less of that you’ll see; almost like some of the really small companies, you have to be careful because the CEOs can kind of skate under the radar and pull heists like that, or they are just pillaging the company. Eric’s line kind of talked a little bit about that with our interview with him way back in the day. So something to keep in mind.
I think it’s good that he’s, you know, this listener is looking at the proxy, but at the same time, don’t get so caught up in it. I think the business is the most important first and foremost, and then innocent till proven guilty unless something looks completely egregious like just because managers paid a lot, I wouldn’t necessarily disqualify a company for that. It would need to be multiple factors
26:06
Good. Good points. All right, folks. Well, with that, we will go ahead and wrap up our conversation for this evening. If you have any questions about anything that we talked about today, please check out our website e investing for beginners.com. We have a great search bar at the top of the page that can help you find all sorts of topics that we discussed today. Proxy statements and things of that nature to help you learn a little bit more about negative earnings, for example, all kinds of stuff that you can learn more about, and it can help you on your investing journey. So without any further ado, oh, good and sign us off. You guys. Go out there and invest with a margin of safety. Emphasis on the safety. Have a great week. We’ll talk to you all next week.
.
A
Contact sales@advertisecast.com to advertise on Investing for Beginners podcast. The Investing for Beginners podcast is part of the Airwave Media podcast network.
We hope you enjoyed this content. Seven steps to understanding the stock market shows you precisely how to break down the numbers in an engaging and readable way with real-life examples. Get access today@stockmarketpdf.com until next time have a prosperous day. The information contained just for general information and educational purposes. Only it is not intended as a substitute for legal, commercial, and or financial advice from a licensed professional review, our full disclaimer@einvestingforbeginners.com.
The post IFB237: The Impact of Proxy Voting and Investing in Money Losing Companies appeared first on Investing for Beginners 101.