5. Investment Options

In this episode, Josh explains the variousdecisions that go into investment options like mutual funds and exchange tradedfunds, and how stocks are valued and either become value or growth stocks. ETFsare just another form of mutual funds. So it's a wrapper. ETF means exchangetraded fund with a typical mutual fund mutual funds have been around since the1920s.

[00:00:31] So very old fashionedtechnology, but it's basically a way to own many stocks or many bonds, but youonly buy one investment. So it's a pooled asset. So to speak exchange tradedfunds. Can be bought and sold on the exchange during the day and mutual fundsget bought and sold only after the market closes each day after 4:00 PM, NewYork time, there are some other differences in terms of the tax treatment.

[00:00:56] I think before anyone buys anyfund, they should understand what the fees they're paying are. What the taxconsequences are and what other alternatives exists. Um, and so that's aresponsibility that every investor has for every investment they make, butbroadly speaking investment options, that's one of the problems that investorsface right now.

[00:01:18] There's this idea in Americathat you know of choice is good than endless choice is amazing. You walk intothe supermarket, there's 900 different types of mustard on the shelves. Iassure you, they don't have options like that. And the Soviet union back in theday, maybe now they do, but you know, there's this American kind of Zeit Geistwhere just give me unlimited options.

[00:01:38] Unlimited options are not greatlimited options where most of them are not catastrophic. That's great. Soinvestors right now are faced with, I think too many choices, but it's America.What are you going to do? So I think the main thing that you want to figure outfirst is what your asset allocation should be.

[00:01:56] How much stocks, how much bonds,how much cash, how much gold, how much real estate and come up with that basedon historical returns and historical risk. How much do these asset classesfluctuate? And can I handle that in different proportions? Once you have a goodsense of what your asset allocation should be across those different assetclasses, then you want to figure out the right vehicle.

[00:02:22] To get invested in each of them.So in the case of bonds, you may decide, you know what? I don't have enoughmoney where it makes sense to buy individual bonds. I'm just going to buy abond fund or two bond funds, and I'll try to buy one. That's diversified italone, treasuries it alone. The bonds of corporations, it alone, municipalbonds, which are bonds issued by cities and States.

[00:02:46] Right. And you might want to dothat with a fund. And then on the stock side, you might say, okay, I want to havefunds. I want to own an S and P 500 index fund, which by the way is almost freenow. But then I also want to own some individual stocks because I want to keepmyself engaged in what the market's doing.

[00:03:04] So you might say for the portionof my portfolio, that's us stocks, 80% of it I'll do with an index fund. Andthen I'm going to sprinkle in some individual shares of Apple, right? Now youdon't mean to, because Apple is the largest holding in the index fund that youbought, but I'm just giving you an example.

[00:03:22] So the first decision is assetallocation and how much of which asset class to be exposed to the seconddecision is how, what vehicles to get each piece of the pie, the portfolio.

[00:03:40] Momentum in science is an objectthat's moving and it's picking up speed as it moves. So most people, when theysay momentum stock, they're referring to a stock has really nothing to do withthe company itself. They're literally referring to the stocks price. And theway that it's trading usually higher, but that can be any kind of stock.

[00:04:00] It can be a value of growthstock. The distinction between value stocks and growth stocks, I think hasprobably, um, caused more consternation among investors than, than it, than itreally should. And it's probably cost people to miss out on a lot of greatopportunities. And I really don't love it. But what we're trying to do withthose terms is we're trying to say.

[00:04:22] And there's a cutoff point atsomewhere when we're trying to say, okay, this 3000 stocks in America, thebottom 1500 in terms of valuation, meaning the 1500 most inexpensive stocks.Based on a certain criteria, usually it's priced to earnings or price to bookvalue the earnings of the company or its profits.

[00:04:44] The book value are the assetsminus liabilities of the company. So usually we're taking a dividing line andwe're saying the 3000 stocks that exist, here's the bottom 1500 in terms of howexpensive they are relative to one of those metrics. And here are the other 1500that are the most expensive.

[00:05:03] Compared to those metrics. Um,so you would have a stock all the way on one end, which would be Tesla, whichis one of the most expensive stocks in history. And you understand why peopleare excited about the truck. People have a crush on Elon Musk, whatever it is.That's one of the most expensive, what are the cheapest stocks?

[00:05:23] These days probably going to bea bank. So you can buy shares of bank of America or Citibank or JP Morgan at 10times earnings, or you could pay a thousand times earnings for Tesla. So when Isay times earnings let's pretend city group is earning a billion dollars ayear. You could buy city group for $10 billion.

[00:05:43] So you're paying 10 times citygroup's annual profit. Very very cheap in today's market, right? Tesla is athousand times its last 12 months worth of earnings. So you are paying morethan you probably would in the real world if you were to buy a business. So Ihave a landscaping business, we mowed the lawns of all the houses in this townand we're going to do a million dollars in profit this year.

[00:06:09] You probably wouldn't pay athousand times that million dollars in my profits, but you might say. Hey, I'llgive you a five times your yearly profit right now. I'll give you $5 million.It'll take you five years, give or take to earn back what you paid for mybusiness, right? So this is how stocks are valued.

[00:06:28] And the growth stocks are theones that traded the very, very high multiples to earnings or to revenue orwhatever metric we're using. And the value ones are the most inexpensive,multiple to earnings. And. How does the stock become a girl stock or a valuestock? I told you at the beginning, you asked me what moves the stock marketsentiment, how people feel.

[00:06:52] The reason why growth stockstraded a higher multiple is not because somebody from a PI looked down and saidyou are a growth stock. It's because investors have assigned that highervaluation for that company because they believe it's growth prospects in thefuture are extremely bright Chipolte ley trades for a much higher value thanWendy's.

[00:07:16] Wendy's is a value stockcompared to Chipola. So why? Because we think Chipotle is going to grow howmany stores it has at a much more rapid rate than when these will, which is alittle bit older, more established, not as sexy to the next generation ofconsumers. So that's how these stocks become either value or growth. .