Podcast Episode #4
Reed: [00:00:00] Welcome to the fourth episode of the tax-free millionaires podcast. I'm your host Reed Scott. And in today's episode, we'll be doing three things. First, we're going to discuss a popular investing philosophy and discuss why it could be the wrong approach to take inside your retirement accounts. Now I'm going to discuss a popular tool used by many value based investors. And I'm going to discuss when to use it and when not to use it.
And finally, I'm going to discuss. My stock pick of the week. So be sure to stick around to the end of the podcast, because I know you're going to want to hear about. An AI infrastructure stock that is poised to take advantage of the ongoing build-out. Of high-performance data centers.
All right. So I want to discuss a very popular investment approach and talk about why you may not want to use this approach inside your retirement accounts. And the investment approach I'm talking about is a buy and hold approach . Now this approach is very popular with value-based investors. As they believe by looking at the fundamentals of a [00:01:00] company, they can determine if the stock price is , properly reflected based upon the company's fundamentals. And they believe that. If they can determine a true value of the stock, that they can buy it at an attractive price. And wait for the market to recognize the true value. Thereby driving up the price and helping them. Double or triple their money. Now I stay portfolio analysis in graduate school, and I understand and appreciate this approach. I've also been a fan of Warren buffet. And he has been very successful using his method on occasion in his investing. However you should be aware that he does not use this method exclusively while I understand and appreciate this philosophy and use it sometimes myself in my taxable accounts. I believe this approach should be modified when investing inside your retirement accounts. Because you have a unique differentiator inside your retirement accounts. That they don't teach in graduate school and most investing courses I've seen. Don't seem to recognize its unique difference [00:02:00] in their investing approach. What is the unique advantage you have inside your retirement accounts? Of course it's that you don't have any tax consequences when you buy and hold stocks. Or buy and sell stocks. In other words, since you don't pay capital gains taxes inside a retirement account. I believe this unique advantage should lead you to modify your investing approach when you're investing inside your retirement accounts. Whether that retirement account is a traditional IRA, a Roth IRA, or a 401k. Now I understand that many people do not have the ability to invest or self-direct their investments inside their 401k. Unless, perhaps you own your own business. But did you know that more and more companies are letting you raw all or a portion of your 401k account to a self-directed IRA without having to quit the company to do in fact over 50% of US-based companies are now letting employees roll over a portion of their 401k's. To a self-directed IRA without having to terminate employment. Now, this is an important. Feature of [00:03:00] your company's 401k plan, because it would allow you to self-direct your investments and take advantage of what I'm talking about in this episode. It's a relatively new phenomenon.
So you should want it. You would want to check with your company's plan administrator to see if you have this option at your company. However. Let's assume for the purposes of this discussion. Now you at least have a self-directed IRA. Traditional IRA or Roth. You can manage your own investments. If so then this buy and hold investing method. Maybe the wrong method that you take in those accounts, it can be effective for longterm investment, but the challenge is one of timing just because this stock is a good value, doesn't mean the market will recognize that soon. The price of a stock is also based on emotions and perceptions. Prices largely driven by the market's belief in the future earnings power stock. That's why even financial ratios like price, earnings ratio, price to sales at Ford earnings projections are not by themselves.
A good predictor of stock [00:04:00] price. The price is the perceived value of a company's prospect for future earnings. This is why so many excellent financial analysts missed out on Tesla. The video and Amazon. And they will continue to miss out. The market gave tests a premium for its. Perceived future earnings and that drove the stock price up beyond any type of rational calculation. By the way this happens all the time in is happening now. And being able to understand this emotional component of the market can help you not only make money. But can keep you from losing money as well.
This is why tax-free millionaires are investing.
Approach adds a fifth M. To the value based for him approach. Now, the four M's of fundamental analysis are understanding the company's market. The company's management, the company's moat or its protection of its unique. Service or product differentiators. And the money for them, which is the financials of the company now.
But we add [00:05:00] another critical M to our analysis at tax-free millionaires. And that 50 M stands for momentum. Because if you don't look at momentum, You can be waiting a long time for an upward price movement. What drives momentum? It is the near term expected earnings and near term expected earnings can be measured by earnings revisions, upward. The change in a company's future earnings potential as reflected in earnings estimates. Has proven to strongly correlate with the near term price movement of stock. The influence of institutional investors has a partial contribution to this relationship.
As these big financial organizations use earnings and earnings estimates to calculate. The fair value of a company shares. An increase or decrease in earnings estimates. In their valuation models reflects or results in higher or lower fair value for stock. And the institutional investors typically buy and sell stock based upon these estimates. They're bulk investment actions then lead to [00:06:00] near term price movement for the stock. Now you can argue that the institutions are wrong in their valuations, or you can take advantage of their upward earnings revisions and use them to make higher and higher annual returns inside. You're no tax consequences, retirement accounts. Why are these earnings revisions useful in your retirement accounts? Since you can buy and sell stocks and options without having to worry about capital gains taxes. Why wouldn't you take advantage of these near term upper price moments in stock price. So you can buy low, sell high and pay no taxes.
When you sell the commission cost. In most discount, brokers are zero or negligible today. And even if you factor those costs into your equation, they are diminimous in relation to how much money you can make to boost your overall annual returns. Buying and holding onto stock may be okay in a taxable brokerage account because you have to factor in capital gains as part of your transactional costs. But since there are no capital gains taxes in a retirement account. Why would [00:07:00] you buy a stock and wait three to five years for the market to recognize the value of the stock and reward you with a price increase. This is a real loss.
It is an opportunity cost. And it's as real as any other type of loss. And I used to factored into my analysis when I was an investment analyst at Ford motor corporation. Why would you not factor it in. As an investor. You can always play stocks. You believe are a good value on a watch list and buy into them.
When the market starts to recognize the value. If the market ever does. Because we are dealing with a highly liquid market stocks. Could you miss a few points on the upside because you weren't in the stock at the very beginning of its own movement. Perhaps. But in the ensuing months or years, while the value investor is waiting for the price to go up. Hoping to squeeze out every penny. You are making double digit and returns on stocks at the market already values. Like Novidium Amazon.
RADCOM Google, Microsoft, just name a few. [00:08:00] By the way, the stocks that I just named are all companies that are pure value based investor would almost never invest in. Why. Because they would never. Proceed them is a good value. But it's actually millionaires. We teach you how to take advantage of both fundamental value and momentum investing to increase your longterm returns. You can make money with good stocks that also have momentum and put your value stocks on a watch list.
And when the market starts to recognize your value plan, you will be able to make, or to buy more shares than you ever would have been able to buy. If you tied up your capital, waiting for that recognition.
Is there a way to find out when the institutional analysts are revising earnings estimates. There absolutely is a method for doing this and we show you how in our courses at tax-free millionaires.com. Momentum can be determined from recent earnings and sales results and estimates and the market's expectation of future projections. It's a number that can be quantified.
And that is why we included as part of our stock [00:09:00] selection process. In other words, you can fight many stocks that are a good value. From a fundamental analysis perspective. And if you buy the stock on that basis alone, The stock price may never go up and you will be tying up your capital in a stock that maintains its price, but never grows in price. Or does so three to five years from now. I know many value based investors that have purchased docs that appear to be excellent values.
And they've had this doc for three years or more with no gains in the price. And a tax free millionaires courses. We show you how to make money. More money than you lose by never getting emotional about a stop. Research shows that if you invest in the best stocks in the best sectors, You will outperform other types of investing as long as you practice good risk management and don't hold onto stocks as they go down. For example. A pure value based investor would never buy the video. Because they evaluate a company based on historical earnings and cashflow, whereas the market value perceived future earnings. Would determine [00:10:00] the price of many stocks. A value where the investor calculates the value.
They believe the stock should be an attractive price to buy it. And then they wait for the hit that price before they buy it. Novidium other actually growth stocks. Like the it will never be purchased on that basis because they'll never going to drop to that price unless some. Horrible event happens. And then you'd have to evaluate them based on the circumstances.
And that might be the time to do a value-based investment. Now while the volume investors were waiting for stocks, they hit their perfect margin of safety price, and the media made triple digit gains. Will the price drop someday. Of course it will. All stock prices go up and down. And if you sound risk management techniques, however, you'll be out of that stock and not lose money and be able to keep the profit. And you'll be out of it automatically when the price drops and you'll use the cash you made to invest in other high quality stocks or investments. In summary. Value based investment has its merits, but it is extremely limiting and You [00:11:00] can prevent you from making money. And missing opportunities.
If that is all you use. Now, this is just mean we don't teach fundamental analysis in our courses, attacks for millionaires. Absolutely not. In fact, we combine fundamental analysis with momentum investing and technical analysis to find the best stocks at the right time. That not only will have near term upward price movements will also be a stock you want to keep an eye on over the longterm is their prices may fluctuate in short term. But over a period of years, they may be an excellent stock to buy and sell several times.
Each time you buy them as they're going up and sell is before they go down or don't go down too much. Pocketing the full profit each time. And if you can find high quality stocks to do this with repeatedly. It will be much further ahead in terms of total return. Then if you had just bought that stock and held onto it for the same. Time period. And while this may sound like a lot more work than just a buy and hold approach.
We teach a system for doing this in as little as two hours per week. In my opinion, [00:12:00] a very small time investment. For potentially doubling tripling or quadrupling your annual rates of return. Again, remember, I'm talking about the approach to use in a tax deferred or tax-free retirement account, like a traditional IRA. A Roth IRA or a 401k, if you are able to self-direct your investments in that account? I'm not suggesting this approach in a taxable brokerage account. Where you have to pay capital gains tax on every profitable transaction. However. Even with tax consequences in a taxable account, this approach, it could still be profitable. Versus a straight buy and hold approach depending on the time of the hold. Or other factors. But you can only determine that on a case by case basis, and it would depend on your individual tax profile. So that's not what I'm going to recommend here.
I'm only talking about using this approach in your self directed traditional IRAs. Roth IRAs. And if you have the ability to invest in side your 401k, then of course those accounts as well. I believe [00:13:00] that any investment approach that doesn't recognize this distinction is causing you to miss out on the ability to double, triple or even quadruple your annual returns inside your retirement accounts. At tax-free millionaires, we teach several methods of investing and teach you when to make the distinction. Now, why is it important to know when to use which method?
Because using the wrong method at wrong time can have huge opportunity costs for your portfolio. Let me give you an example of what I mean. There's some investment courses in portfolio managers that cost a lot of money. And only use one method of investing. And they don't teach you when to make the distinction of when to use that method.
And when not to use that method, For instance, Warren buffet has said his number one rule is don't lose money. Then when asked for his second rule, we said, see rule. One now this is very clever and has led to a number of courses that supposedly teach you how to invest like Warren buffet. But this is really what Warren buffet does all the time. Does he never risk money? Because if he took his [00:14:00] own rule, literally Warren buffet would never invest in stocks. I believe Warren Buffett's real rule is. Make money and make a lot more money than you lose, because no matter what price you pay for stock, it can always go lower. You can always lose money when you're investing in the market.
Even if you think you got the price of the stock price at a bargain. And if you aren't willing to risk even a small amount, you would never make an investment in the first place in the stock market. And when you buy any stock. Who are taking a risk? Because. You're essentially placing a bet. Because when you buy a stock, Anything could happen the next day, even if you don't only analysis and it looks like a bargain the next day award breakout or a pandemic.
In a matter of fact, we've had this in the last few years. And it affected stock prices dramatically. It could wipe out your entire investment, even if you purchase a stock at a good value. If you weren't using good risk management. And there's no such thing as a completely risk-free [00:15:00] investment. And Mr.
Buffett knows this and he knows it better than most. This is why he demands double-digit returns. It's also why he uses good risk management on always uses stop-losses and puts. To protect his principle. He sets a point at which he is going to get out of stock. If it moves against him, even if he got into it at what he thought was a great price. And he would never just sit in a stock and have it lose more than he wanted to risk, just because he believed he'd bought it at his lowest price. Mr.
Buffett knows better than anyone that stock prices often do not reflect their true value because of emotions. This is why he also said by when others are fearful . And sell when others are greedy. If Mr. Buffett truly believed he could never lose money. He wouldn't buy stocks at all because there are other investments that guarantee your principle. And in fact, I teach one of those investments in tax-free millionaires. But these alternative investments. Don't allow you to hit the home runs like Mr.
Buffett has done a number of times in the stock market. [00:16:00] In fact, one of Mr. Buffett's most profitable investments ever. Wasn't Geico insurance, the one with the little lizard on the TV commercials, everybody loves those ads. And the company has been very profitable. Mr. Buffet invested in the company before they went public at pre IPO valuation. So they had no public earnings history, no public market where he could easily. Don't they share as if things went south.
So we couldn't use a stop loss or put, and this investment really met none of his rules in terms of don't lose money. Cause he was risking a lot of capital. And if it went the wrong way. He could have lost it all. In other words, he ignored his rule of never lose money and bet a lot on an unknown entity.
Pre-market. He did this based on his analysis that the company's future earnings were going to exceed far exceed its historic Oregon's. And because the stock was not publicly traded, there was no liquid markets to sell shares in. If this investment had gone south, Mr. Buffett would have lost a great deal of money. Does this sound rule [00:17:00] one to you? Because it's true.
It doesn't sound like it to me. To me, it sounds be opportunistic. And take advantage of opportunities when they are presented. And that is what we're teaching at. Tax-free millionaires. Why are you not buying stocks that are going up in price? When there is no penalty for buying them in your retirement accounts. Letting the price increase in your tax-free portfolio and selling. Before they go down too far. There's an easy way to do this with minimum risk, much less risk than Mr.
Buffett took when he bought Geico. Because when you buy stocks that are publicly traded. It's a very liquid market and you could set your initial stop. Loss is very close to your purchase price. So you can predetermine how much risk you're willing to accept on each transaction. Your downside is set and your upside is open.
If the stock goes up, you stay with it. But the moment it goes against you, you can be out automatically. If the price continues to rise, you keep moving your stop loss up accordingly. And when you have enough profit and a stock, you can switch to protect the puts, which give you more [00:18:00] flexibility than stop losses. And allow you to keep the stock longer. As it continues to rise over time. When you are in your retirement account, you can do this as often as you like and pay no taxes.
So take these profits and plow them back into your portfolio to consistently increase your games. Also realizing that investing in the stock market means your investment is highly liquid. You can't do things that you wouldn't do with other types of investments. If the companies you invest in have large amounts of stock that are frequently traded, you can be in and out of your investment in seconds. Why then would you use a stock valuation tool that many companies teach that is traditionally used to value real estate? A market with almost low liquidity. Where, if you want to get out of your investment, it could take months if not years or never. And yet many investment courses teach a evaluation tool that has traditionally come from real estate investing.
It's called 10 cap analysis. And 10 cap analysis is basically a. A way to put a value on a piece of real [00:19:00] estate based on its earnings history.
Now this method makes perfect sense for real estate investing because the real estate market is highly illiquid. In other words, if you make a bad investment in real estate, You'll have a very hard time getting out of it. There's almost no market for real estate. That is not earning money. And meeting its earnings projections. There is no methodology for putting a stop loss order. On a piece of real estate. The stock market, however, is exactly the opposite. It is highly liquid. And if my investment is not performing as expected, I can be out in a matter of seconds. With the exception of the large hedge fund. This is a method that was said to be used by Warren buffet, the 10 cap analysis. And other value based investors. And some investment courses have made it popular because they tell you, this is what Warren does.
And if you invest like Warren, you'll get rich. But in my opinion, if you rely solely upon a 10 cap valuation method alone to make investment decisions in stocks. You will miss out on a great number of excellent opportunities. What works in real estate does not always translate to [00:20:00] stocks. Now my saying, I know more than Warren buffet. Not at all.
What I'm saying is it isn't accurate to say Warren buffet only uses Tim cap valuation, his sole method of investing. In fact, as I just showed you earlier with the Geico example, Warren buffet is often ignored. What he has said her his rules, or perhaps he's being sly and not really stating publicly. What his real goal is. Which is. Don't lose opportunities. However I do believe there are occasions where tin cap analysis can't be useful. And I've used it myself in combination with other tools. For example. If I've done a complete fundamental analysis using the five in method I mentioned earlier. And I find the stock attractive using that five in analysis. And the 10 cap analysis also positive.
That can be another indicator that it may be a good time to acquire the stock. For example, I used to complete five M analysis in one stock that had a negative event on its stock price earlier this year. It drove the stock price down to a [00:21:00] historically low level. And after doing the fundamental analysis and the tin cap analysis. It confirmed for me that the price was a bargain. But remember if I didn't have a belief that this company stock is going to recover based upon my complete analysis of the company. My faith and management it's market it's moat it's financials.
I would not care what the 10 cap valuation showed me. I only mentioned this tin cap, valuation method here to drive home the point. That different circumstances, call for different investment philosophies yet some courses are using a hammer, even when a job calls for a drill. There is no right or wrong.
There is only knowing how to identify opportunities and knowing when and how to act on them. I believe that when Mr. Buffet says don't lose money. He's also talking about not missing an opportunity because opportunity costs are as real as any other costs in the investing world. And not recognizing and taking advantage of an opportunity is as real, a way to lose money is any other way of losing money. That's why we teach how to increase your returns. [00:22:00] By leveraging every advantage you have. And your retirement accounts. So now that we've discussed different investment approaches and when to use them and when not to use them, it's time to discuss. An individual investment. On every episode of my podcast. I give a breakdown of stock.
I like, and why? I like it. But first, I must give you the following. Disclaimer.
The stocks I discussed on my podcast are for entertainment and educational purposes only. And I'm not making a recommendation to buy or sell. You should do your own research before purchasing or selling any stock op or options. And you should never rely upon anyone else's opinion, including mine. Any losses that you may incur if you purchase ourselves stocks or options that are discussed on this program. Are your responsibility alone.
And neither I read Scott tax-free millionaire, Scott wealth advisors, or anyone affiliated with me. On this program or these companies will not be liable for losses, if any. I very often own the investments I discuss on this [00:23:00] program. It could personally benefit if the market price of stock increases. However, I'm not paid by anyone for mentioning a stock. Or a company and I'm not being paid a commission or endorsement fee for discussing any stocks on his program. Without the way I want to discuss an interesting stock and what I believe will be one of the next big growth areas of the market. And that growth area is in the field of high-performance data centers, our HPCs, and the cooling of those data centers. Now, first of all, what is an HPC?
And why is it growing so rapidly and why he's cooling? Data centers, a hot area. Pun intended. First of all companies like alphabet, Microsoft, Amazon, and many others are dedicating billions of dollars to building out more and more high-performance data centers. High performance data centers are not just any data center. But data centers that are focused on. Having a faster and faster graphical processing units GPU's as opposed to CPU's. [00:24:00] And.
These HPCs are needed because the company's demand for AI features in their products is driving a greater need for data analysis and data crunching. This massive need to. Crunch or analyze data to deliver AI functionality. Requires more and more power in each computing chip. And by the way I saw one analyst today . That said. We have only. Tapped into 1%. Of the market for AI functionality.
So that's true. This market has a lot of room to grow. AI functionality requires more and more power in each computing chip, which is why new video is so popular. The video was the first to market. With graphic processing chips are one of the largest first to market or GPU's instead of just ordinary computer processing chips, which was the traditional realm of Intel. Nibia yet. Really dominated the gaming market, which needed these GPU's to process the faster requirements of gaming. So talk about great timing.
So they were there [00:25:00] when AI came out and their chips. Their GPS became very popular and are still popular today. And. GPU's run faster than a CPU and. Davidian other companies are building even faster. GPU's chips. And the faster they run, the hotter they get. Therefore the need for more cooling. This is one of the reasons that SMC stock took off for the last two years, because SMC, I provided. The infrastructure for building out racks to hold these GPU's and to cool them with air cooling fans. But it's faster and faster.
Chips are being delivered. Technicians are finding that air coin is not enough to call these faster and therefore hotter running chips. So guess what's next. That's right. Liquid coin is the next big thing. Also guess what. Just as SMC, I was trying to build out liquid coin chips. SMC has imploded because their public accounting firm resigned. And in case you don't know it. When a publicly [00:26:00] held companies, accounting firm resigns. It is not good news. I don't know what the future holds for.
SMTI it's very murky right now. But guess what? SMC. I was not the leader in liquid cooling. Anyway. There was a smaller player on the block that has been in a liquid cooling. Market for years before SMC, I even began to look at liquid cooling. The company I'm talking about is Vertiv the stock symbol, a V as in victory, R as in Roger and T as in Tom. And they have decades of experience in liquid cooling, locked before it became necessary for cooling.
HBC's kind of the video was there with GPU's before the market needed. GPU's. So verite has a new CEO, but even though he's new, he is only been in the CBO position for about a year. But he's been with the company for years. His name is Joe Adorno Alper, Tazi. I probably got that wrong, but as you can tell from the name he's Italian. He was educated at the Polytechnic university of Milan with an injury degree. [00:27:00] And he has a master's in management from Stanford. As a matter of fact, I like the entire executive team at Vertiv.
They have been with the company for a while, have a great understanding of the market. Now Vertiv is the rebranded old Emerson network power. So even before they came Vertiv they have a long history of understanding, not just cooling. But uninterrupted power systems, which is what Emerson was. Famous for or known for. And Vertiv seems to be taking advantage of liquid cooling, becoming a new Darlene of HBCs.
They have a strategic partnership with the video and they've introduced new products designed to take advantage of the move to liquid cooling. As the demand gets greater and greater for high performance and hotter chipsets. Vertiv is not the only player in his growing market, but because they've been doing this for awhile, they are particularly well positioned to take advantage of the current growth in demand. Now since I've been following which was in September of 2023, their stock prices risen. From around $79 a share. [00:28:00] To over $141 a share as of November 22nd, 2024. So they have essentially doubled in about a year. And they do the question is of course, do they have more room to grow now?
I believe they do, as they are consistently growing revenue and earnings and their products are in high demand. Remember SMC. I went up almost 600% over two year period. We'll VRT do the same. Who knows? Not me. I don't know, but I do believe the stock is poised to take off. So I encourage you to keep an eye on them. I don't know if this doc will continue to move up or if they were crash and burn, but neither does anyone else.
That's why I always teach. You should never go bare on a stock. In other words, always use good risk management. Whether that's a stop-loss puts or never investing more than you can afford to lose in the first place. And we always teach. Using stop-losses or puts on your positions to protect your portfolio. Someone recently said to me the other day, That they thought the market looked crazy.
So they sold off all their holdings. Aren't [00:29:00] sitting in cash. Now my thought on that was why try to guess what the market is going to do. Why don't you instead protect yourself and let the market determine whether you're in or out. When you protect your positions, we either stop losses or push. You can sleep soundly. If you wake up and all your positions is sold out. Or all your puts are now in the money. You'll be sitting in cash and your portfolio is protected and well-positioned to get back in when you're ready. But why get out before the market sells you out? Especially when you're investing inside your retirement accounts, where there are no capital gains taxes to worry about. Okay. That's it for today's show.
Thanks for listening. And make sure to tune in for our next show, where I discuss more unique ways to leverage your portfolio returns. And I'll be giving you another stock of the week. Pick. Be sure to catch it. And if you want to make sure you get our podcast schedule and you're on the wait list for my new book, tax-free millionaires. Then be sure to join our Facebook group. At facebook.com. [00:30:00] Forward slash groups. Ford slash tax-free millionaires. Thanks for listening.
