Guest Interview: Brad Freeman
(Edition Number: Six)
Today, we are bringing you the sixth edition of the Investment Talk Guest Interview series, whereby I bring you some discussion with a selection of my favourite investors in the Fintwit environment.
Today’s guest interview features our second successive Motley Fool content creator, in Mr Brad Freeman. Most of you will recognise Brad from his activity on Fintwit, as well as his articles in the Motley Fool.
Brad is someone who I have connected with frequently on Twitter, and have had the pleasure of engaging in some great conversations both on and off the timeline.
So, today we have Brad Freeman with us, marking the sixth instalment of the guest series. A popular young investor on Fintwit, and a prominent member of the Motley Fool team. You can find Brad on Twitter, under the handle @StockMarketNerd where he shares his insights, as well as demonstrates transparency regarding his own positions.
Being a member of the Motley Fool, Brad is another content machine. You can find the entire archive of his work on his Motley Fool Author Page. Brad is very active here, posting several articles each week.
Brad’s investing style is somewhat of a barbell approach, which is something I personally favour in my own process. During this week’s interview, we get to hear the thought process behind this approach, as well as Brad’s take on position sizing.
I had plenty of questions already on-hand once Brad accepted the invitation to be a guest. I hope you enjoy this one, as much as I did.
Welcome Brad, I would like to start off by saying thank you for agreeing to partake in today’s interview and allocating some time to do so. You are now the second Fool to join us here. I typically start these things off by asking the guest to share with the readers a little bit of historic backdrop.
So, if you could introduce yourself, and take us through the sequence of events that led to you where you are today, and perhaps some flavour on the kind of work that you are up to now at The Motley Fool.
I would love to. I started off in Real Estate -- just a few internships in undergrad. My investment passion blossomed in school (so starting about 3 years ago) when I realised I enjoyed evaluating companies much more than buildings. Had always owned a few companies thanks to my father being an experienced investor but did not care all that much until more recently.
My twitter handle stock market nerd is very accurate. Friends would tease me for talking their ears off about some random company I was researching, so I started seeking out other outlets to talk about what I loved doing. Applied to Motley Fool in April 2020 and was fortunately hired (Thank you Motley Fool J) as a consumer goods writer which is where I am happily situated today!
Twitter/Fintwit is the other outlet I have so gratefully leaned on to communicate with like-minded, intelligent folks such as yourself.
Thank you for the kind words Brad. Investing, for me, is largely about pairing your investing style with your own personality. Investing is great in that it can show you a great deal about yourself, as well as aid your personal growth over time. So, if you could tell us about your investing personality/style, perhaps your screening process, and what you are hoping to achieve with your investments, that would be great.
I would separate my investment strategy/philosophy into two buckets
a) High growth
I think a good comparison for this would be late stage venture capital meets public markets. I am looking for companies in the very early stages of their development which means these companies are inherently riskier/more boom or bust than your typical blue-chip. For this reason, I keep the cost basis of the positions small and let the company’s execution build the position.
From a screen perspective:
- There is no minimum revenue growth number I have in mind but every company I own & consider to be in this bucket delivers revenue growth over 25%
- I am not looking for profitability here (although it is nice). I am looking for margin profiles to be meaningfully improving. This is proof a company can grow without simply spending more. Good sign of future profitability.
- Looking for either a rapidly growing industry CAGR for where the company operates OR if it is disrupting a mature industry, serviceable addressable market and total addressable market are very important to me. Both a brisk CAGR & a large SAM/TAM is ideal
b) value/ black-swan investing
Looking for more mature companies experiencing abnormally powerful & temporary headwinds. There is a lot more focus on balance sheet strength here for me than in the first bucket.
A combination of severe short-term pain, assets to potentially deliver a brighter future, and a balance sheet to outlast the pain is a good summary.
- Qualcomm - Apple legal battles
- Goldman Sachs 1MDB scandal
- Pandemic for Planet Fitness, CVS
- Max crisis + pandemic for Boeing
To be candid, working at the Motley Fool and engaging with my co-workers has pushed me to embrace the high growth philosophy more and more. The general make-up of my portfolio has followed suit with a growing majority of my holdings part of this high growth bucket. As I age, I will likely transition to a value/income approach as cost of living/responsibilities grow and retirement approaches. Long was away from that.
Concentration is a hot topic. Once again, I feel that this can be a factor of one’s personality. I personally set an upper range in that I aim to hold no more than 18 stocks in my core portfolio. I see that you currently hold ~30 positions.
I am wondering, what is your reasoning for diversifying across so many names, and why is this your preference? I guess this could be another way of asking for your take on position sizing too, so feel free to go on a tangent if you wish.
So, with the high-risk, high-reward nature of my high growth strategy (which is the growing majority of my positions) I very much take a win big or miss small approach. No matter how much digging/researching I do, there is always the very real case that companies with this level of uncertainty don’t execute and fail. I will never bat 1000 and probably won’t come close.
These positions never receive more than 2% of my cost basis but examples like Trade Desk and CrowdStrike have already climbed well above 5%. That is the beauty of fixed losses and potentially limitless returns in the equity markets.
My approach here is a for the most part borrowed from Brian Feroldi and other Motley Foolers. Let the winners win & grow as a portion of my portfolio and accept the fact that there will be losers, which is why position sizing is so important. I do trim a little more than some buy-and-hold investors. Generally, I like to take a little off the table -- 5-10% every time the position doubles in size as a rule of thumb.
For the value/black swan bucket which is 8/30 holdings -- I allow cost basis to approach 3% and approach selling/trimming in the same way.
As a new investor still (23 years old) my philosophy is still constantly evolving but as of now this is where I am.
As a young investor, your historical track-record might be fresh, but I feel the first few years of investing are when we overcome some of the important lessons. I am interesting to know, what have been some of the mistakes you have made that you are grateful for making early on?
Moreover, if you could also walk us through how (if it all) your investment process have changed from the point where you first started investing?
Mistake 1: I started off as a day-trader and options speculator. I have always sparingly dabbled in sports gambling and this was a natural extension of it when I first started out. I was arrogant and ignorant which is quite the dangerous combination but also grateful I had so little money at the time. It took losing nearly my entire account value to have the epiphany that I may need to tweak my philosophy. Reading books from Buffett, Munger and Lynch and some deep talks with family members really helped me to re-think how I approach investing and pushed me embrace the buy, hold, and monitor mentality.
Mistake 2: Beginning of my transition from trading to investing I was selling winners too early. I sold Shopify several hundred points ago and Apple several hundred billion in market cap ago. Thought I was being cute/smart taking profits, when in reality nothing about the investment thesis was changing. Therefore today when I’m inclined to take profits, I take 5-10% of the position for example instead of 100%.
Mistake 3: Borrowing conviction. Merely listening to popular investing figures for what to invest in, rather than developing personal conviction through research. Stomach for volatility comes from putting in the work, and fully understanding a stock/company. That cannot happen by listening to Jim Cramer on TV telling us what to buy.
For some, part of investing is about ascertaining where the world is heading, and which firms stand to benefit from those tailwinds to the greatest extent. Whilst I acknowledge that humans are futile future-tellers, I am interested to know which spaces/sectors/industries you feel have some of the largest tailwinds coming into the next decade?
The two themes I see for large sector tailwinds in the stock market is disruption and legalisation
a) For disruption -- It’s about continuing to give consumers and enterprise clients a more convenient and valuable experience
- Improving the processes and efficacy in which we deliver products or services & helping enterprises evolve. Examples being DevOps, zero trust security, cloud computing, AI/ML improving traditional financials/healthcare/logistics etc). Companies like Lemonade or Sofi that build insurance and fintech APIs for enterprise clients or companies like FedEx building out logistics infrastructure to support e-commerce.
- Shifting with evolving consumer preferences. Examples being streaming, plant-based food, e-commerce, online dating.
b) For legalisation -- essentially sports gambling and cannabis are massive illicit market industries that are now set to gradually shift to legal means of consumption powering long term double digit legal market CAGRs for both spaces. I have exposure in both.
For those who read these guest interviews often, you will know that I like to throw in a few questions to each guest that are the same. Thus, allowing some comparison or range of perspective.
If you had to choose three books, of any genre, that you found either; changed your outlook dramatically, or were just fun reads, which would you chose and why?
I apologise in advance for the basic answers
1. Predictably Irrational -- Investing meets human psychology. Really helped me understand the irrational nature of market moves and how I’m better off avoiding market timing altogether
2. One Up On Wall Street -- Peter Lynch is perhaps the investing icon I borrow from most. I think I have read that one about 5 times and plan to more in the future. It’s an easy read but I learn something new to apply to my process every time.
3. The Complete Investor -- Charlie Munger deserves more credit for his contribution to Buffett’s success. Diving into how Munger shaped Buffett’s philosophy and Munger’s life in general was truly fascinating to me. I think his name should be as ubiquitous as Buffett’s.
We all search for different things when we are first analysing a company. Some focus on company culture first, some prefer capital allocation, some like to observe management’s track record, some are accounting buffs, and some like narrative.
If you had to choose three things that a company must have before you even consider investing, what are those three things, and why?
1. I have to understand every aspect of the company, its mission and its value proposition. This is the only way I can properly evaluate how a new piece of information impacts my thesis. If I do not understand the business, I can’t invest.
2. Financial statements are the most important aspect of a company beyond me understanding it. A CEO can paint a pretty picture on company success and goals, but numbers do not lie. Cash flow statement to me is more important than income statement as it’s generally more objective with less flexibility for talented CFOs
3. Management red flags. I am not an insider; I have no way of knowing when an executive is lying to me. It is rare but it happens. Evaluating the history of management teams based primarily on moral records with resumes also a consideration. If they have a history of lying, how can I trust if disclosures -- no matter how eye-popping -- are accurate.
Up until now, I have never asked this question, or muttered the B-Word in an interview. However, you shall be the first.
Very simply, why Bitcoin?
I have no clue if we will ever use it as a means of transaction, and to me that does not matter. It’s as simple as supply and demand in my mind. We have an inherently fixed supply with some bitcoin whales even locked out of their fortunes due to forgetting passwords (that would SUCK). Demand is continuing to grow with Square and MicroStrategy adding it to their balance sheets, icons like Cathie Wood and Scott Minerd calling for ridiculous price targets. Banks like JP Morgan and Citi have come around to the asset and Fidelity is even recommending its clients have a little exposure.
I think it is safe to say extremely dovish fiscal and monetary policy Is creating a strong, but temporary tailwind. If institutional support continues to grow, I think it will continue heading higher which large pullbacks on the way.
It is definitely a win big or miss small type investment for me. I have fully accepted the less than zero percent chance of it going to 0.
I am interested in knowing how you first discovered investing. For me, it was during university during a corporate finance module. A few Benjamin Graham books later, and I found out that this was my passion. I don’t follow the Graham-way, but I do follow the mental models he shared.
So, how did you first discover investing, and what about it appealed to you? Moreover, are there any investors that you admire the most?
Sorry if there is any overlap between this and my previous answers.
I am someone who gets easily bored. The constantly moving, always evolving nature of equity markets and their news flows is like a drug to me. Real Estate did not provide this constant stimulation for me, but equity markets do.
There is no better feeling to me than being early on a call and watching it become mainstream as you cash in. I love seeing hard work get rewarded.
- Lynch and Munger
- Tom Lee
- Cathie Wood starting to enter that conversation as well
Lastly, I like to round-off this segment with my favourite quote, that comes from Graham. The one concerning the short-term voting machine and the long-term weighing machine.
I find it helps me reconcile the irrational price action in the near-term. I do not know who first coined it, but another of my favourite quotes is “If you don’t laugh, you’ll cry”.
I find this quote helps me appreciate the randomness of life and the lack of control we have over external factors.
What is your favourite quote, and why?
“Everybody Love Everybody” -- Jackie Moon from semi-pro
Markets are built for disagreement. Philosophies differ broadly with no one-size-fits-all approach. I think it’s important to always disagree/argue in a respectful way in order to accomplish something/learn something from the conversation.
Questions from Twitter:
In this segment, we collected questions from the Twittersphere, and present them to Brad.
@avgodfather: “What is the next $NNOX?”
$NNOX is the next $NNOX J top of the first inning for this one. If it executes… watch out. Lot left to prove.
@TheMarkCooke: “How do you decide how much to allocate to each new position, or is it case by case?”
Split between those 2 buckets I referenced earlier:
a) High growth = 2% cost basis max -- generally start with 1% cost basis in the initial purchase and slowly dollar cost average up to 2%
b) Value/Black Swan = 3% cost basis max -- generally start with 1.5% cost basis in the initial purchase and slowly dollar cost average up to 3%
@Couch_Investor: “WHY BOEING?!”
Hard to think of a company that has had a worse 18 months than this one. Still, it’s status as a global duopoly in an aviation industry still set to enjoy growth over the long haul is the main attraction for me. Regardless of its failures, its order book still offers several years of production thanks to its only other competition (Airbus) featuring an even larger backlog. There is nowhere else for airlines to go.
The 737 Max re-certification is not an all clear for the company. it does, however, mean, the company can enjoy a recovery more in line with the rest of its sector and recovery sectors more generally. It removes the unique tailwind that would have precluded their comeback.
Boeing is essential to national security, American GDP and a large part of the American defence industry as well. It will not fail and its long-term recovery is rigged in the company’s favour. This will take a lot of patience but that’s par for the course in investing.
@adventuresinfi:” What do you think you would be doing if you were not working for the Fool?”
Grad school classes and working for the mutual fund I worked for previously called Diversified Portfolios.
PS - Thanks so much for having me and for the thoughtful questions.
That wraps up today’s guest newsletter, which marks the sixth edition of this series. I want to thank Brad for taking the time to answer these questions today. There are a lot of impressive young investors in this space. I personally like to shine a light on both up-and-coming, and experienced investors. I feel there are important takeaways to be garnered from each.
Stay tuned, as we have some excellent calibre guests lined up for you in the coming weeks.
You can find previous editions of the guest interview series below:
• Edition One: Bill Brewster
• Edition Two: Kris FromValue
• Edition Three: ValueStockGeek
• Edition Four: AdventuresInFI
• Edition Five: Brian Feroldi
• Edition Six: Brad Freeman
• Edition Seven: Mostly Borrowed Ideas
• Edition Eight: Richard Chu
• Edition Nine: Kermit Capitál
• Edition Ten: Liviam Capital