James’ Investment Philosophy
Patience is key, but learn how James makes sure he embodies this with his choices. Learn about the three foundational building blocks he employs to his personal portfolio.
Dividend Investing Demystified
James elaborates on the nature of this investment strategy, underscoring the three crucial factors every dividend investor should consider: management, moat (sustainable competitive advantage), and the money situation (financial health).
Navigating the Healthcare & Biotech Sectors
James sheds light on the shifting sands of the healthcare sector—from the strategies of big pharmaceutical companies, the smaller players who are putting it up to them and the promise and challenges brewing in the biotech space, including this thoughts on CRISPR.
The Best Free Investing Resources
Hear about James’ number one free resource available to everyone which is one that has taught him how to think about investing. Most of you will have never heard of this resource.
High, Mid and Low-Risk Stock Picks
James brainstorms the stocks he’d pick in each category and hold forever. You’ll hear some classics here as well as some not-so-well-known stocks, why he’d have and in some cases has them already as part of his portfolio.
James Early: 0:00
Don't check your stocks too much. Don't check the news. I mean, they have to put something out on the TV to entertain you, to keep you watching. It's an attention game, right, that's their business. But that's not investing and that's not what investors should do. Companies like Walmart, Amazon, and Disney have done better than their peers for a long, long, long time. That's rare and that tends to be underpriced in financial models. In my experience, there were 900 e-commerce companies in the 1990s and at least a couple of years ago I think there were 40,000 different crypto coins. I don't know what number there is now, but that's the way things work. There's a whole bunch in the beginning and then almost all of them die, leaving just a handful.
Emmet Savage: 0:44
Hi there and welcome to Stock Club, a podcast brought to you by my Wall Street. I'm Emmett Savage, and joining me on today's episode is James Early. Before we get into today's episode, I want to give a very quick word from our friends at Vodafone Business. Vodafone have recently launched their V-Hub Digital Advisory Service, offering Irish businesses of all sizes free one-to-one digital support and advice. You don't even have to be a Vodafone business customer to avail of the service. Search for Vodafone V-Hub to book a call with one of the V-Hub digital experts and we will leave a link in the show notes. Hello, ladies and gentlemen and stock investors around the world, I'm delighted to be joined today by James Early, a name that will be familiar to anyone of my generation who has self-directed their stock investments from the outset. James is the Chief Investment Officer at BBAE, a digital investment platform. In the past, he has worked for or advised many of the largest companies in the investment research industry around the world, such as MarketWise, the UK subsidiary of Agora, investopedia and many more, but notably, it was his role at the Motley Fool, where I tuned in. James served as the Fool's first Director of Research and Analysis and was the lead advisor to its Motley Fool Income Investor advisory product for 10 years, outperforming the S&P 500 every one of those 10 years. He helped establish the Fool UK's equity advisory business and he was a founding commentator of the Motley Fool money which we all know about here, which for a time, as a lot of our listeners know, was the number one business podcast on iTunes. James, you're very welcome.
James Early: 2:37
Yeah, thank you. That is the kindest intro I've ever received. I'm listening and saying who is that person? It doesn't seem to be me, but I appreciate that.
Emmet Savage: 2:45
No, there's no imposter syndrome around here. James, speaking of being complimentary, I noticed that you're an immense member Straight off the bat. I want to ask you, is there a correlation between intelligence and successful investing?
James Early: 3:01
I think so of women. I think there's probably an inverse correlation. Once you get too far above the median, it's so easy in investing to think you're smarter than you are or to assume that it's a game of intelligence. But economics is a social science. It's not a deterministic science like physics. You touch a cactus. It's prickly. You touch a second cactus. It's prickly. You see a third cactus, it's probably going to be prickly. That's how our brains are wired. We think there's a correlation between how much effort we put in or how confident somebody is, and how competent they are. In social science there's not, or at least there's much, much less, whereas in a caveman world, the guy who's confident about where the water source is or where the game migration path is is probably right. It's totally flipped. In investing, intelligence is more likely to be a trap that pulls you away. The market is away from good returns. I should say the market is almost always smarter than you, but the market is almost never less patient than you.
Emmet Savage: 3:54
Yeah, what you're saying is IQ is one thing, but EQ is probably where you can win the race.
James Early: 4:02
Yeah for sure In 2021, the more money went into the stock market, at least in the US, then in the prior 19 years combined, that was the very worst time for money to be going into the market. Yes, it's far more about emotional intelligence, about managing your own emotions. You have to be BDI If you look at people like Warren Buffett and I know I'm stereotyping, but investing is a game for people with a cool, calm, demeanour, people who don't get emotional, people who can understand the long-term effects of compounding. Compounding is extremely powerful, but it's also extremely non-intuitive, at least for many people. That's what investing is all about being able to see okay, this company is just a little bit better right now than the peers, but that 1% edge compounded over three years, five years, seven years, 10 years, whatever is going to make a huge difference in my returns. People who can see that, people who can kind of quell the emotion, calm down the storm, do well in investing. If you can't, that's okay. You just need to idiot-proof yourself. You need to buy it. I have a lot of ETFs. Very boring style of investing. Just buy stuff, sit there and hold it. Don't check your stocks too much. Don't check the news. I mean, they have to put something out on the TV to entertain you, to keep you watching. It's an attention game. That's their business, but that's not investing and that's not what investors should do.
Emmet Savage: 5:21
Yeah, good point, I mean. So, while we're kind of talking about philosophy and non-specifics, can you dive in for a moment and just describe your investment philosophy? You touched on ETFs there, but if you were to write your own one paragraph investing autobiography what would it say?
James Early: 5:39
I almost think I mean that someone's investing philosophy, at least for a fundamental-based investor like me, should be too boring to fit into a good media sound buy. But I'm going to try anyway. So you're always trying to exploit the cognitive weaknesses of other people in investing and that sounds bad or it sounds kind of predatory, but they're trying to do the same thing to you. They just don't realise it. In other words, markets are basically broadly efficient and that's good, because if you had some great idea that never came to pass in terms of the market coming to recognize it, if you knew the Hope Diamond was buried under some company's headquarters but there's never going to be a catalyst to find it, then it wouldn't make sense to buy that company. So you want markets to be efficient, but not always. And the way you do that, the way you exploit that, is just by saying, okay, people can be smarter than me, but I'm not going to try to play a game, excuse me, or I can be more patient. So patience is the game for me, for I think, anyone who's going to outperform in the long term. I enact that by buying mostly ETFs, low-cost, boring ETFs. This is the unsexy part. Now the more exciting part when I buy stocks. Beyond that, I have a reason. I always have a reason for buying a stock. Like is it going to beat the S&P 500 or not? Because I'm an American. So that's the index I compare to. If not, I'll just put more money in SPY or some index fund, right? I look for no thesis stocks. I don't want to have a lot of contingencies that have to go right for my portfolio to do well, for my company to make money. I want to see companies have done the same thing over and over and they can just wash, rinse, repeat year after year. I want to find stocks that don't mean revert. In other words, most companies tend to do well for a little bit, if they do well, and then collapse to the mean and sometimes just disappear altogether. But if you look at companies like Walmart, like Amazon, like Disney Disney not right now is not a good example, but traditionally Disney these companies have done better than their peers for long, long, long times. That's rare and that tends to be underpriced in financial models in my experience. And then finally, I'll say I look for the occasional biotech or whatever aggressive play If I think I've got a really strong thesis. But that's the icing on the cake. Those are small positions. Sometimes they do well, sometimes they don't. So mostly EFTF. That's the biggest block in my food pyramid. Then no thesis stocks and then the occasional sexy position.
Emmet Savage: 7:56
So when I take what you've said, James, and think about the service that you ran for 10 years so successfully, which was concerned with dividend investing, I think of dividend investing as the close relation of ETF investing. You're looking for these businesses that have reliable characteristics that are throwing off cash. Can you talk to me a little bit about dividend investing and if it still forms part of your philosophy?
James Early: 8:22
Close parallel to ETF. You're very wise in it. I've never heard of that observation, but I like it. I'm going to have to ponder that. Okay, so like sorry, your question was, I was just so enamoured with what works in dividends and maybe what doesn't?
Emmet Savage: 8:35
Well, yeah, I suppose let's dive into dividend investing for a moment, because I think a lot of our listeners would be more oriented towards growth investing. That's certainly my investment style and I would say that that's how I've tilted the table for the conversations that I've engaged in, but could you talk to me a little bit about dividend investing specifically? What is it that you look for in a great dividend paying business, and then the inverse as well? What is it that's a red flag to you when it comes to spawning a business that's paying? What does Pierce be? A regular dividend?
James Early: 9:06
Sure, sure, and it's understandable, by the way, that people would focus on growth investing over the past 13, 14 years. Right, because we've had extremely low interest rates. We've had the best time, probably in all of our lifetimes, for growth investing, because when rates are low, that pushes up, relatively speaking, the long-term value of the cash flows that come far into the future. So if I have a biotech that's not going to make money for five years, for 10 years into the future, those cash flows that I project are worth relatively more under a low interest rate scenario. In fact, a lot more, not just relatively much, much more versus the here and now cash flows. That has flipped. We have much higher rates. Now they may come down, but much higher rates, which has put a premium on here and now cash flows like dividend stocks. Now, of course, bonds compete with dividend stocks for yield, but I still think overall kind of the tried and true bread and butter nature of dividend stocks is going to make them more sexy for a while. So that's my preamble In terms of what I look for, what I don't look for, I would say so a dividend is a preference. You don't have to invest in dividends, but you choose to, and there are companies that choose to exploit that preference. I would call them dividend imposters. They say hmm, you know, now's a great time to be a dividend stock, because everybody seems to be liking dividend stocks. So we're like, maybe kind of sort of a dividend stock, or not really fully a dividend stock. We pay a little bit of a dividend, but it's not that much. So let's see how we can look better. Let's try to pay more, either squeezing our cash flows or, even worse, borrowing money to pay the dividend. That's like the most heinous thing you can do because it's a pure animal. Yeah, and they do it. They do it because they know that some people say, okay, I want to open up my stock screener on whatever tab and search for dividends about 3%, right, and this one looks good, I'll buy it. So they're trying to catch the people who aren't really paying attention and it works sometimes. So don't fall for that. Watch the payout ratio, just comparing dividends paid to net income. You know there are different ways to do it. You know, for certain other companies, you might look at distributed cash flow compared to cash flow available for distribution. But I'm getting more nuanced and if you're looking at a company like a master limited partnership, you should know this already. For positives, what to look for in good dividend companies, I would say I look for what I call the three M's management, moat and money situation. Now, these could apply to any company really, but I think they especially fit dividends. Management obviously wants to see people who have been at least in the industry for a while, ideally with the company for a while, but at least in the industry, and you know that's normally the case with dividend companies. Sometimes with tech startups it's not. Moat is kind of the most important thing. I measure moat by a high and sustained return on invested capital ROIC. You could Google that metric if you'd like to learn more. But broadly speaking, the quick summary is if you, it's sort of like money available to pay the capital providers of a business compared to how much capital those providers have put in, if Emmett and James each put in a certain amount of money, we're expecting a certain return. Well, what's the return available to Emmett and James in that business? That's sort of ROIC. It's sort of like a bigger version of return on equity, which is Warren Buffett's favourite metric. It includes debt where the return on equity just includes equity. So moat that second one measured by ROIC. You could also look at things like ROE and then the money situation. Obviously, if you have a dividend paying company, you want to make sure it can pay its dividend and I look at the. I mean first of all just to back up with the money situation. If I'm spending a lot of time, emmett, on analysing whether or not a company can pay its dividend, that is a yellow flag, probably a red flag to me already that I should move on, and I don't want a company that's barely kind of maybe paying its dividend. But sometimes with a new company, you have to measure and say, okay, how sustainable is this dividend? Maybe, the payout ratio looks good for the moment, but in a couple of years things may change. But that should be something quick. You should not be spending a lot of time on that one if you're really looking for a solid dividend.
Emmet Savage: 13:14
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James Early: 14:36
Yeah, nothing wrong with it. It's probably perfectly fine. I don't know what the fee is. You look for the fees for these things but I think it's a perfectly fine way to get into dividends. If you're not a dividend guy, someone who wants to dig into the weeds and find your own stocks, what I would do is I generally find the most broad-reaching low-cost ETF for whatever I'm trying to buy and buy that I'm sure there are competitors For me. I mostly just do broad-market ETFs.
Emmet Savage: 15:06
James, I know you're passionate about healthcare and that you serve on a couple of boards and that area. Are there any publicly listed healthcare companies that you believe have something special? That's very difficult to replicate.
James Early: 15:17
That's a good question. You're basically asking about a mode. In so many ways, I'll be honest, I've avoided a lot of the larger healthcare companies. I mean, I hold Johnson and Johnson but because I don't think they have that much of a mode that's impossible to replicate. But at the same time they do have something that they fail An oligopoly. They have distribution. We're talking about the bigger ones like Merck, pfizer, those guys, they have distribution. The drug business particularly. I know healthcare has many different segments but the drug business it's almost become like the movie business in the sense that it's sort of like a blockbuster or bust model. You've got to be big or just go home. The big companies have sort of run aground in terms of the chemical-based drug discovery, a small molecule drug discovery method. They just sit there and say, hey, look, we're big, we're huge, we have deals with everybody, we have distribution. Let's just wait for these little biotechs to take the risk and do the innovation. And most are going to flame out and that's okay, but we don't care. When they get big enough, maybe past phase three, we'll just go in and buy them and then plug them into our network. That's been working well, even if they don't really have some massive advantage per se that nobody else could do. They still do that. They still have that advantage. I would say investing in those is more of a matter of saying okay, what does the patent cliff look like for each company? Honestly, any of these big companies could be the one to go in and buy any particular biotech Now. Some of them specialise more in oncology, some of them specialise more in immune issues, whatever but I think they're less differentiated than the average person may think. They're just big companies with cash and distribution that buy these smaller companies to add in.
Emmet Savage: 17:06
Can you foresee a business toppling one of the giants of Medicare? I always get confused.
James Early: 17:11
You're asking about Amazon healthcare kind of a thing, right yeah?
Emmet Savage: 17:14
Medicare. I suppose the DOG is UnitedHealthcare. Are they the biggest, yeah?
James Early: 17:20
Yeah, they're the big ones, they're the biggest thing in space.
Emmet Savage: 17:23
Can you see someone like Clover, or Clover, one of these small pretenders actually managing to take a reasonable bite at one of these giants?
James Early: 17:32
Probably not in the next five years. I will tell you I'm secretly desperately hoping for that because, as you probably know, healthcare is sometimes 18%, sometimes 19% of US GDP. It's rather obscene. It's a little bit. Part of that is because we encourage innovation here. If you've got some hot new drug, you're going to come here and it costs a fortune in the beginning. That eventually gets cheaper, right? That's kind of the okay part, at least the part I'm okay with. But we've also got all these middlemen like these pharmacy benefit managers that claim they add value into the system, when I would argue they do the opposite. They extract value. It's rent seeking and in an economic sense, you come in and you kind of stake your claim and you try to put barriers up that protect or prevent people from taking some of your profits. Right? Not because you're so good, just because you're kind of like race car drivers slowing down to stall, the guy behind them being difficult to pass, instead of trying to win the race by going fast, right? Yeah, there's a lot of that, a lot of that in the healthcare sector. I would love to see it disrupted.
Emmet Savage: 18:34
It's an incredibly complex area and the more I learn about it, the more I invest in it. The more I read it, the more I realise how little I know about it. It's like this giant ball of string, and it's so hard to find a particular niche or area that is actually primed to prosper, because of the very behaviour that you described there. If we widened the net a little beyond healthcare, are there any sectors or industries that you're kind of excited about right now that you think, yeah, I'm very happy about where this industry is positioned for the year, three, five, 10 years ahead?
James Early: 19:10
Well, actually I'll go not too far from those big healthcare companies and go to biotech in it, because biotech has been killed lately because interest rates mostly went up. Those companies that didn't have cash flows in the here and now went down and cleaned a lot of biotech companies. There are, I think, about 840 publicly traded biotech companies, at least as of a few months ago. But the FDA in the US only approves about 40 drugs per year. It's just completely unrealistic to have so many companies vying for those 40 slots. It's just way more than is sustainable. In general, the global dynamics, the population, and the wealth accumulation in the world is positive for biotech. I think we're going to have a great washout. I'm not yet excited about biotech, but I feel like I will be soon. We're still seeing companies trading for cash, sometimes less than cash, but they're really bad ones. This is natural evolution. We need to let this washout happen. Let most of those companies die. That's how all industries work. There's a boom, you have all these people come up and then almost everything. In the US there have been over 2,000 car companies and they've come and gone. Now we've just got a couple. There were 900 e-commerce companies in the 1990s and at least a couple years ago, I think there were 40,000 different crypto coins. I don't know what number there is now, but that's the way things work. There's a whole bunch in the beginning and then almost all of them die, leaving just a handful. It's not yet the time to go jumping into biotech, but it will be soon.
Emmet Savage: 20:44
I believe this is a really unfair question, and if you don't know, just say I don't know. The next door neighbour of biotech is CRISPR. Have you had a look at that as a technology or an investable technology?
James Early: 20:55
Yeah, I own a little bit of the CRISPR therapeutics. This stuff is highly, highly, highly risky, and there are ethical concerns too that have not yet been ironed out. Basically, it's a punt. Nobody knows what gene editing is going to look like in five or 10 years, but we do know that if it works, it'll work big. That's one of those tiny little positions. At some point it's been the biggest gainer in my portfolio. It's been the biggest loser in my portfolio. It moves a lot.
Emmet Savage: 21:26
Yeah, yeah. So in the general sphere of technology and staying in the conversation, how do you think technology and Competitiveness affect investing? So, just as Warren Buffett had to modify Benjamin Graham's approach, Buffett's approach is already seen as the best days and he's inspired legions and Millions of copycats. So what captures? Some of what he captures are timeless, good business principles, but how do we invest when so many others are doing that similarly and now we're aided by breakthrough technologies like AI?
James Early: 22:04
Yeah, so, so true. You know, I have been to Berkshire Hathaway for a long, long time, but since 2018 I've gone to every meeting and the secret is out right, I mean the cats out of the bag. Everybody knows how well Buffett has done, phenomenal returns in that company, and he's, rightfully, rightfully, just created this, this legion of imitators and people following it. And now with, with AI, with Tech I mean even even analysts when I was still at Mali fool you just see how much faster they are with the technology at least, than I was, and I'm just Gen X, I'm not that old yet but you know, with AI now they're gonna be able to implement Buffett esque strategies super quickly. So this idea of finding these diamonds in the rough I mean, Ben Graham had net, nets right and, and Buffett, you know, couldn't find any more of those, so he kind of went to these high quality long-term businesses, I think. I Think, overall, the idea of patience Will never go out of style like that. I gave earlier that stat about 2021 having more money flowing into the market than in the prior 19 years. That still shows a lot. So I feel like, even though there are a lot of these, buffett Want to be, that that probably jump in, like if you find some really good Small company run by a nice management team and, by the way, people are catering to that audience too, just like we mentioned how people cater to dividend investors and try to put on a bit of a show. Sometimes rightly, sometimes wrongly, people do the same thing to the Warren Buffett crowd. Sometimes you'll see these financial statements presented in kind of a buffety way, or the company comes across and this you know, oh shucks, you know avuncular sort of A fashion, because they know people out there are trying to to invest that Buffett style and that's not necessarily a bad thing. I would say that's a good thing. He's really done a tremendous Service to global capitalism, to global Investing overall. So it's good for people to copy Buffett, but I don't think you're gonna be able to find as many. Just, you know, turn over the stone and here's a great company. That's gonna be harder. So, yeah, nothing wrong with index investing. And then people are just gonna have fewer picks. Pick your individual stocks more carefully. At least that's what I'm doing.
Emmet Savage: 24:14
Yeah, you touched on your Gen X. I always get confused about who's Gen X, y andZ, but I know I think Gen Z is the youngest group there, isn't that right?
James Early: 24:23
Yeah, under 26. I think it's okay.
Emmet Savage: 24:26
So is it? Is it realistic? I mean just again shifting gears here, but is it realistic that Gen Z's expectation for working in a rather working for and Investing in companies that are aligning with their values, is that a realistic kind of a Realistic premise in which you can live your life, that you only want to work and invest in companies doing good? Or do you think that people need to park Something, some of their, let's say, moral values, in order to kind of progress?
James Early: 24:56
Well, you know, I actually wrote a forced piece about this when I got back from the Berkshire Hathaway meeting, because it struck me that there's clearly a tribe around Berkshire Hathaway and that tribe is based on sort of, you know, companies doing well, kind of like these do-gooder ethics companies. You know shareholder primacy, in other words, the shareholder primacy notion is the one that says companies need to do its best for their shareholders and that's largely been what's prevailed for the past. You know 1,500 years. But there are a lot of younger people, millennials too, and Gen Z's hey, you know, I want to find good companies doing good things and there's a tremendous amount of goodwill. And guess what? I'm kind of like that too right, I mean I would. I used to be vegetarian for six and a half years. I do eat meat now, but I only mean raised meat, like whole foods kind of meat, or hunted meat. You know, I don't believe McDonald's kind of feedlot cattle is ethical. So I'm cautious about that with my consumerism. But with getting into investing, how realistic is it? I think it's a question. I Think it's challenging, because the globe and 90% of Gen Z say they either want to work for or invest in companies that Align with their value. So I think the intention is good. But the global economy is kind of like a water balloon: you squeeze one part of it and the other part bulges out, right. So you say, you know, I don't want to be, you know, buying oil, I don't want to burn oil. So you know, I'm gonna, I'm gonna, you know, you know, do XYZ right. Well, guess what I mean? Someone else is gonna, is gonna take advantage of that low, lower oil price. Or I don't want to. In the old days when there were conflict diamonds I think it's been cleaned up a lot, but you know, you might be a shoe to beer, right, but actually most of the conflict diamonds go into electronics like 70 to 80% of the going to Electronics that you probably certainly have used. So I didn't know that. Yeah, it's much harder to and I'm saying this is somebody who wants to make the world better ESG investing is. I mean, it's taken a lot of heat in the past couple of years and we're not talking about just that with the millennial question, but I think that's a large part of it because there's a lot of hypocrisy. Like the EU, I think, the committee on sustainability and, I think, the city group Used to hate guns, right, guns are bad. Everybody knows we avoid guns. But then after Russia invaded Ukraine, suddenly, well, maybe defence companies are better. Right, guns are okay when they're defending us. Or, you know, Tesla gets kicked out of the S&P 500 ESG index while Exxon Mobile remains right. There's a lot of hypocrisy. There's a lot of well, well meaning intentions too, but we found out I think correctly, over the past couple years that this stuff is just much more of a tangled web. Then we thought and as far as working for a company or investing in a company that lines with your values, I think that could be done to a limited extent certainly, working, you want a good company culture. But If we start talking about taking stances on issues aside from the company's core scope of business, like if you're a coffee company and somebody wants you to take a stance on abortion, yeah, I think that's just not in the cards. I don't think it makes sense, you know. And then what? We end up having a world where there's, you know, the pro abortion coffee company and then there's the anti abortion coffee company, and and we've got this kind of like hodgepodge or barnacle style system of Causes stacked on top of each other, and I don't think it works.
Emmet Savage: 28:12
I James, this, I presume, has been your pursuit of stock investing for something between 20 and 30 years. Is that fair to say?
James Early: 28:20
It has, yeah, about 25 years Right.
Emmet Savage: 28:23
Okay, so we're probably in and around the same age, despite the fact that you look 10 years younger than me, I wish.
James Early: 28:28
I wish, I wish Everyone does, but I haven't seen the top of my head yet.
Emmet Savage: 28:33
So over those 25 years you've obviously read some books that have inspired you. You've encountered resources that you just couldn't do it out. Can you just tell me and their listeners what are your favourite books, what are your favourite resources as a stock investor?
James Early: 28:47
Okay, I'm going to go with resources because, believe it or not, this is almost like a thing now. I've never read an investing book in my life. I read many textbooks about investing or looked at pieces here and their equity valuation, derivative stuff. You're a CFA, right? I'm not. I'm not. I mean I could probably pass level one, I would say, but I don't know about the rest. But I mean I taught equity valuation for many years at Motley Fool. I've built all my models. I used to do Steadar, but at a hedge fund years ago and in fact Global Arb, like before it got banned, you could arbitrage different time zones. So I've built a lot of models in my day, but it's always been like, okay, I need to know this, let me dig here. I need to know this, I'm going to dig here. But I always say I'm absorbed. I've read a bazillion articles about everything right.
Emmet Savage: 29:32
And you've written a bazillion as well. I've read too many, Too many.
James Early: 29:36
But in terms of resources, the first thing I would mention is Professor Oth's Western Order and content. He is a fantastic guy. He's a professor at NYU and despite being a finance professor he really doesn't care about money. I've had the privilege of meeting him. He came to Motley Fool at our invitation. Very kind guy. He puts all of his stuff up for free, which years ago was a really big deal. It angered his publisher so he had his classes on the internet and I watched and I just absorbed it hook, line and sinker and that taught me how to think about investing. It's not really that complicated and most people do it the wrong way. You know they try to look by example first, like here's this company in the news, here's this company, that's good. That part comes a little bit later. I would say you want to get a good grasp on the first principles first, Otherwise you're going to be just in this blur of noise and it's very hard to figure out what really matters and what doesn't. So Oswath the Mordorant has all I think, still probably up there for free.
Emmet Savage: 30:38
My first recommendation is, yeah, excellent. Okay, hit me with another one, james.
James Early: 30:43
I would say the Warren Buffett annual letters, that's. I mean not a book, but actually they have been put into a book by Larry Cunningham, a really a friend of mine, sort of a very nice guy. They. They have that kind of going from the opposite side of the Mordorant, whereas he's much more technical here's how things should work, algebraically. You know, Buffett kind of puts it into this kind of pithy. You know he's kind of the Easebs Fable's guy of the investing world and if you're just starting out, that's another great way to absorb it from someone who's obviously proven to be an outlier, proven to be successful. Whereas Mordorant is more algebraic in his approach, buffett is more like well, kind of here's how the world really works. I think that's another first principles way coming from the opposite direction.
Emmet Savage: 31:28
James, I usually finish out interviews with guests like yourself with a simple question, which is if you could only buy and hold a handful of stocks, what would you choose? So I'm going to take that question modified slightly because I understand your investment thesis or your investment profile at this stage. So if you could only buy one high risk, one mid risk and one low risk stock and hold that three stock portfolio for the rest of your life, which ones would you choose and why?
James Early: 31:59
Okay, All right. So I'll brainstorm a little bit here and try to nail it down to one. So low risk. I don't know if Berkshire Hathaway is low risk, but I like it. It's probably slightly better than the S&P kind of a stock in the long run. I mean, obviously Buffett and Munger aren't going to live forever, but they've got great lieutenants and Apple, which is not one of their initial picks, it's probably made more money. I think it has made more money for Berkshire than any other investment. So Berkshire Hathaway is one option. Next era energy NEE is the ticker. This is the former Florida power and light. Fpl used to be kind of a bad guy company with not a good reputation, but they really since embraced the shift the world was making to cleaner, greener energy and as a bonus, at least in the southeastern US, the regulatory environment is very friendly. Utilities live or die based on their relationship with the regulators. So if the regulator says, okay, you're allowed to earn this much, then great. If not, if not, so in certain places like Illinois, California, Massachusetts, the regulators tend to be kind of adversarial, but in the southern US they tend to be less so. So that's one of those two would be my low risk stock, maybe NEE, if Berkshire Hathaway is not quite low risk, if we go to mid risk, probably Diageo. Diageo is one of my no thesis kind of stocks. I mean, what do they do? They make booze Very simple and they've been doing it forever. This was a long time pick of mine in my income investor newsletter at Motley Fool and it did very, very well. Alcohol consumption is growing faster than global GDP, something like 10% or just over that per year for the next 10 years. According to some estimates, Diageo has, I think, about just a little under 5% in Markishare, about 4.7%. They're targeting 6% total Markishare in alcohol by 2030. And the super premium brands have a cheesy name, super premium, right, but that's what they call it. The expense of booze is more valuable as a status symbol, as the world and they make an. I mean, you kind of argue about it. Yeah, you're right, but if you go to China, if you go to India, if you go to these emerging or developing markets that are probably a little bit past that now, one of the first things they do is start spending on expensive liquor, expensive alcohol as gifts. So, long term, I like the dynamics for Diageo and I said as a non-drinker, as a teetotaler, high risk.
Emmet Savage: 34:16
Hold on. Can I click pause? Let me click pause on that for a minute. So, diageo, I always regard constellations as a major competitor of theirs. They do, I think, corona and a couple of other big brands. But I saw a couple of years ago they invested very, very heavily in the CBD industry. Do you think that's now? This is a very niche question, but do you think CBD and all these kinds of related products are a flash in the pan or a real industry that is going to, I suppose, run in parallel with alcohol?
James Early: 34:49
I think it's small. I mean, first of all, I'm biassed, okay, like I've never taken any drugs and never smoked a cigarette in my life. I mean, it's just not my question. So I hate it. I don't like the idea. I mean the oil itself, I mean you're putting on your elbow whatever, Sure, no problem, Okay, but I don't like it. I should specify. I don't like recreational marijuana, I mean maybe medicinal marijuana. But I think the industry we're finding now it's been kind of a joke. I mean there is something there, but what's there is much, much smaller than people were expecting. Nowhere near justifies that. I mean, the CBD products are probably the better buy, the better, the more legitimate sell. I think that I don't know, I'm going off the question a little bit but I think the actual marijuana to get high, it just has such a strong competition from the illegal market that that industry is really, really suffering. So probably not the best move by you know, by these guys in the long run.
Emmet Savage: 35:46
Yeah, I tend to agree. It's funny because Azure just stuck with the knitting and, as you said, the market, the global market, is still growing, where constellations seem to just kind of spin off and lose that strategic focus. And that's why I raise it, because I am a big fan of Azure as well and I've been looking at next year. Okay, hit me with your small, or rather your kind of high risk, high risk.
James Early: 36:11
Yeah. So if it's held forever, I would not go. Biotech, those are too risky. A weird one might be Disney it's. You know they've taken a beating. The stock price just just killed. They've got activists now at the door who backed off when Bob Iger, the old CEO, became the new CEO again. I think there's still something about those brands and the company may be split up into multiple pieces. People, if you Google Disney split up something like that, you'll find every year there's a bunch of people revisiting the same question that has never happened but it may still happen. But having had a son in it, toys these days are not about toys like when we were growing up. You know you play with the ball. It's all about branded stuff. You're at the Elmo backpack or the Elmo football, the, you know, the Disney princess basketball or the scooter, whatever it is. So they've got lots of valuable IP that in some way shape or form is going to be very enduring if they can find out how, packaged it right, they're not doing a great job now. They're probably doing the right thing to invest more in their parks, which they're doing. They just announced a double layer of investment in their theme parks, so they've got some struggles. You know they may spin off ESPN. Obviously the linear TV business is not good right now, but Disney's one option. Another thing it all throughout, which is certainly not a life or kind of investment, but just something interesting and this comes courtesy of BB AE CEO Barry Freeman. He was looking at this airline company called Delta. Usually I don't like airlines, but Delta has this credit card business, the mileage business called SkyMiles, which is basically outsourced. But just to give you some proportions here, the company makes about $56 billion a year in revenue, about $7 billion in EBITDA, but the SkyMile business $6 billion of revenues, just a tiny little bit of that $56 billion of revenue, but it's half or just about half of the EBITDA. So on a, you know, in terms of punching it well above its weight, I mean, it's just, it's very impressive and it's a spin off candidate at some point Because right now its value is likely being depressed by virtue of forcibly being bundled in with an airline. And we all know airlines have been, at least in the US, the most difficult businesses to operate. You know, we got unions, we got high fixed costs, especially the US, because union labour I mean the labour is 30 to 40% of the airlines revenues. In South America, for example, it might be 12% or 15%, much, much, much less right? Because you know they hire younger people and when you're, you know, mid 30s, then you know get out of there, right? I'm not saying that's good, but it keeps their labour costs down, whereas in the US we've had very expensive unions. So Delta could be an interesting spin off candidate.
Emmet Savage: 38:50
Very interesting. I flew Delta last week out of Denver, which I think is kind of their HQ or their home airport, and yeah, I was surprised, frankly, that the plane could still fly. It was in 1970, something bowing, I think. I have to hand it to you, James, you're probably the only person I have ever met who would qualify Disney and Delta as high risk picks. You and I spent a week together in the same office. It would be literally like cold fusion would happen. I don't know how it would go, so that's great. So we're talking next year. Berkshire is kind of neck and neck with Diageo, Disney and Delta, because it has its own little version of the iPhone with this, with this financial product that you said, which is going to creep up on its revenue lines. James, it's been an absolute pleasure to interview, interview you in Stock Club and I hope I can entice you back another day for us to talk other high risk stocks, like I don't know, Johnson and Johnson and the likes Any time in that I'm happy, but all the high risk you want, of course. See you soon, James.
Mike : 39:58
Thank you. Before we finish up the show, I just want to give a quick word to our friends and sponsors of Vodafone Business. They recently launched their V Hub Digital Advisor service, offering Irish business of all sizes free one to one digital support and advice. You don't even have to be a Vodafone business customer to avail of the service. Just search Vodafone V Hub to book a call with one of their digital experts and we will leave a link in the show notes for today's episode.
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