How to: Avoid Confirmation Bias, Do Some Serious Sleuthing about a Stock, and Dissect the Wording in a 10-K

Gannon on Investing RSSListen to the Audio: Episode #80 of the Focused Compounding Podcast

Geoff:                   Hey, this is Geoff Gannon and you’re listening to the Focused Compounding Podcast. This is the podcast where Andrew and I talk general investing concepts. If you want to know more about specific stocks I like, go to Focusedcompounding.com where you can read stock ides written up by me and other members. Membership costs 60 dollars a month, but if you use the promo code ‘podcast,’ it will be 50 dollars a month for you. Andrew and I also manage accounts for investors. To learn more about our managed accounts, email Andrew at [email protected], or text or call Andrew at 469-207-5844. That’s 469-207-5844. Now, here’s Andrew with your regularly scheduled podcast.

Andrew:              We are back. How is everybody doing out there today? Hope you are doing well. My name is Andrew Kuhn, Focused Compounding Podcast. Mr. Geoff Gannon, how is it going over there?

Geoff:                   It’s going great Andrew. How is it going with you?

Andrew:              It is going great. We hope it’s going great for everybody else. Real quickly, I just wanted to say, “Thank you,” to everybody that has been listening and helping us out by giving us a rating and review on the iTunes podcast app. That helps us out a lot and it’s really helped put us on the map. I think we’ve talked about it many times, how the algorithm works with iTunes.

Andrew:              If you do want to help us out and you do like the work we’re doing here and you want to support us, feel free to go to your iTunes podcast app and give us a rating and review. We hope that’s five stars. It helps us get the word out and we spend a lot of time for these podcasts, so that would be great for us. Today, we’re going to be going … People just keep sending in a lot of questions.

Geoff:                   Right.

Andrew:              They like these question and answer, I guess, Q&A’s that we’ve been doing. I think it’s good also because we can just see what’s really on people’s minds. We just get to answer them live on the show. If you do want to have a question answered on the show, feel free to DM me. I usually compile them in a list and then when we have a Q&A session, I’ll just pull them up.

Geoff:                   That’s @focusedcompound?

Andrew:              Yeah. That’s @focusedcompound. If you do want to reach out to me via email for anything, [email protected] and Geoff’s is [email protected]. Alrighty, first question. What steps do you take to mitigate biases like confirmation bias/overconfidence in your research process and when making investment decisions? Good question.

Geoff:                   Yeah, that is a good question. It’s a tough one. I guess confirmation bias is the one we could talk about the most, which is once I’ve formed an opinion about some stock, presumably a biased stock I like, so something like the safety of the stock. If I think it’s safe or something like that. Do I find things that reinforce that view and ignore things that don’t reinforce it? That’s probably one of the most difficult things. One of it is talking with other people. Often, people want to talk with you for two reasons.

Geoff:                   One, they really are interested in the stock sometimes, but two, they’re really perplexed by why you would pick some stock or something. They’ll talk to you a lot about the negative things that they have seen and the risks that they see. Even if they want to buy the stock, they’re usually talking to you about the risks that they see. The upside is pretty obvious that way. I would say a lot of it does come from that, from people talking to me about some idea that they’re aware that I’m interested or that I write about.

Geoff:                   Often, I don’t necessarily own it first and I do usually look at stocks for a pretty long time before buying them. There’s that kind of awareness of it. I’ve certainly read lots of things from different people and try to read the negative things that they have to say about it too.

Andrew:              I was going to say, wouldn’t you say, also it’s like understanding why the shorts are shorting.

Geoff:                   Right.

Andrew:              Their thesis and their thought process.

Geoff:                   Absolutely, yeah. We have some things, some stocks I talked about before are, I guess, a bit more controversial that way, as seen as risky. A lot of them aren’t and those can be harder, the ones where they’re … We focus on over-looked stocks in the managed accounts and some of them are literally just that. They’re over-looked and most people that I talk to don’t have anything negative to say about the business or that it’s risky. They just might think that it’s not especially cheap or that it is very small. They just haven’t heard of it. It’s not the most exciting thing. Those are the hardest.

Andrew:              What would you think about for KEWL or NACCO, where there’s probably not a lot of people that write about it, right?

Geoff:                   Right. Right.

Andrew:              There’s not a lot of people that know about the stock and there’s probably not a lot of people that actually short the stock. I’ve never seen a short report on any of those companies.

Geoff:                   Right, that’s true. Yeah. NACCO is a good one though because there are a lot of people who are short something related to coal. I did read a lot about it, just so people know. There is a company, Westmoreland Coal, which as we’re recording this, I think may have, as we’re recording it, just emerged from bankruptcy or at least when you’re hearing this, they will have emerged from bankruptcy. They briefly were in bankruptcy. Some of their business is similar to what NACCO does. That’s a good one.

Geoff:                   I did read a lot about that company’s bankruptcy and why it happened and things like that. Comparing it a lot to NACCO and what could go wrong with them. Still, there is the risk of confirmation bias there because they had a lot of obligations that NACCO doesn’t. It’s very easy … Doing that, it can be very easy to fool yourself then because you’re like, “Well, their situation at NACCO isn’t as bad as it was at Westmoreland a year or two or three ago.

Andrew:              Sure.

Geoff:                   That doesn’t really prove that it’s worth buying it. I think at one point, because it had this risk of bankruptcy, it probably traded at some incredibly low price and people were excited by it. I did read a lot of the … I found going back, as many of the positive write-ups of Westmoreland as I could to see what people got wrong and stuff. Actually, I find that to be better than reading the short thesis a lot of times, is to find something that has performed badly and read the good things that people wrote about it. I actually did that with KEWL from about 10 years ago. I could find a couple things where people were very positive on it about 10 years ago. The stock didn’t perform well for 10 years. It was very flat.

Andrew:              Sure.

Geoff:                   It was interesting to read and see, well what did they see 10 years ago? Are they the same things I’m seeing in it today? That sort of thing. Sometimes that’s better is that when you know the outcome using the internet now, because all those things are permanent, you can look back and see what the people got wrong in terms of the long cases.

Andrew:              What about what they got right as well? Where you can go back on VIC or wherever and see past reports that they wrote about the stock.

Geoff:                   Yeah, yeah. You can see all those things and that’s very good that way. The most useful information I get I would say for reading reports and things are not about stocks today, but sometimes they’re even about a stock today, the information is useful, but they’re writing about it from five years ago or something. A lot of times it’s very helpful for learning about the management and things like that

Geoff:                   We use the internet very heavily. When we have an idea about something like a stock that … Yeah, I did a good amount of research on timberland stuff and why people are positive on it or negative for a long period of time. For something like coal, it’s true that there is not much. There were some from value investors. I found probably … I probably read five or six pretty extensive write-ups on it in some form.

Andrew:              On KEWL?

Geoff:                   Yes.

Andrew:              Yeah.

Geoff:                   Including one thing written up by, now a member of the board. Actually, there is actually a member of the board now. He got on the board as part of the dissident slate of investors … The hedge fund was about 25% owner or something of it. They won a vote and one of the people they got on the board happened to have written a book about value investing. There is an example he gives in the book, which does not say that it is KEWL. That it’s KEWL, that stock, but you can tell from how he’s describing it, that it was. You can get this old case and it’s from before he was on the board and stuff, so it does give you some example. It’s presented like a hypothetical case, but if you actually read it, you can tell.

Andrew:              Yeah. You can tell they’re talking about a real life situation. Absolutely.

Geoff:                   A real life situation. Yeah, yeah, absolutely. There are even things like that that you can find. Yeah.

Andrew:              Interesting. Okay, cool. I think also just being aware of it is a huge step as well.

Geoff:                   Yeah.

Andrew:              Like being aware of the potential confirmation bias and how you could be subjected to it is huge as well.

Geoff:                   Yeah. A lot of times, being aware of your own past mistakes and your own biases. You personally even more so than what you read in Behavioral Finance or stuff like that. I think a lot of times, people are aware of those things. They like to read about things about thinking fast and slow or whatever, those sorts of things. The truth is, as the people who wrote those sorts of books will tell you, they know all those things. They’ve studied them and it hasn’t really helped them to not have those biases.

Andrew:              Yeah.

Geoff:                   They still have those ways of things. Often it’s useful to think about your own biases. Like, I’m very aware of the ways in which I do make certain … I tend to make the same mistakes over and over again, but also in some things that a lot of people might make mistakes, but I tend not to.

Geoff:                   For instance, I would tend … I’d be much less likely to pay too much for a stock than most people would, for a popular stock, but on the other hand, something I saw as a good business, safe, cheap enough, whatever, I might misjudge the durability of that business or something like that if there was a lot of debt or something like that. That’s something I’ve been very aware of is the downside risks from leveraged things. That’s because of past cases whether it’s Weight Watchers or Barnes & Noble. They didn’t go well.

Andrew:              I was going to say, does Weight Watchers come to mind?

Geoff:                   Yeah. Those are two that come to mind.

Andrew:              Yeah, because I know those are two that come to mind.

Geoff:                   Yeah. Those two stocks. Weight Watchers and Barnes & Nobles are good examples of the kinds of mistakes that are made in the past.

Andrew:              If you’re interested in cognitive biases, read Poor Charlie’s Almanack. That will help you out.

Geoff:                   Yeah. That’s good.

Andrew:              You know what’s interesting? You were talking about thinking slow and fast and I’m pretty sure the author of that book, I think I read an interview once that he actually hated the book. Like, he couldn’t stand it. He did not like the book. He didn’t think it was good quality. He didn’t think people would like it or benefit from it. It’s been such a popular book.

Geoff:                   Yeah, yeah. That would make sense. Yeah.

Andrew:              It’s funny. Alrighty, next question. What do you think about the recent Fed actions? Just kidding. This guy really asked that, but he was kidding.

Geoff:                   He did ask that?

Andrew:              He was kidding around because they didn’t raise interest rates today. Okay, but then he goes on, “Tell us more about your sleuthing techniques.”

Geoff:                   Sleuthing. Yeah.

Andrew:              “Just Google Maps?”

Geoff:                   No, there is more than Google Maps. I guess I just mentioned one. There was a hypothetical example in a book, which wasn’t really hypothetical.

Andrew:              A very long time ago, we put out a checklist that was like a roadmap for how to find the steps that we go through with the investing process.

Geoff:                   A lot of people ask for those sorts of things. Yeah, I guess we could go over some of them, the most basic things. The most basic things are find the names of all the people involved. Whenever you find any sort of name of someone. There is always a proxy statement, which can be filed a couple different ways with the SEC, but it’s usually filed as some sort of … It will be listed as a 14 in some form. It will be like DEF 14 and then there will be a letter at the end of that.

Geoff:                   That will give you information on the proxy stuff. It can also appear in the 10K. It will give you information on who owns how much of the stock and they’ll have things like a name and address for those people, which will be like an office address or something, but by Googling those names and things like that, anyone connected to the company, you can start to see if there are family connections, if there are business connections, and look into the history.

Geoff:                   Like, okay, if you find out that this person owns a business, which is in the same sort of … Say an aerospace related business or something and they’re a 5% owner of the stock and the stock does something related to aerospace. Okay, well is this a business relationship that they invested in years ago? Can you find out why? Usually you can if you Google around and stuff enough, there will some sort of mention of it. People’s names are great. Specific locations of things are great. I’ve said before, I do pay attention to where a company is headquartered, where it says its offices are, a lot of things like that and the history.

Andrew:              Just to get a general idea of where they operate and stuff?

Geoff:                   Yeah, and trying to figure out more about the history because so often there will be a local paper that will cover it more or something like that.

Andrew:              That comes from just Googling around.

Geoff:                   Yeah. You can find things from many years ago about whether there was ever an attempt to merge with this company that failed or this thing happened or whatever. I can think of one case where I was able to find out information about a company’s … We knew a company owned a building, that it didn’t need to use most of it, and it was in Manhattan.

Geoff:                   I was able by putting in that address and doing a lot of Googling, to find out that there was someone who had, for a long time, been interested in buying up an entire corner in the city and needed three different buildings to do it or something. This building was a lot shorter than the others. They needed to do it for whatever building plans they had in mind. Now, I didn’t know if that would eventually go through or not, but it was a multi-hundred million dollar idea that this person had to redevelop this whole thing. You could just find that originally by starting by looking for the address and stuff like that.

Andrew:              Sure, yeah.

Geoff:                   You always look at what the properties are and things like that as a value investor. It’s probably easier with those things. As we’ve said, we go to county records for land and appraisal of them and things like that. We can always find tax appraisals of things.

Andrew:              You were talking about the proxy, the people involved. That’s what Buffett did back in his early days. He wanted to see, think, like how did people think and what sort of ticked them or what got them going or whatever? Was it money? Was it whatever?

Geoff:                   Yeah. A lot of times, it will have mention of each of the customers and things. For instance, NACCO. NACCO has very few customers. I have a list of all their customers and have looked up all the information on all their customers, so I know who they sell to. That’s easy because they have specific mines associated with specific customers, but there are some other companies that have relatively few customers and will just say it.

Geoff:                   A lot of times, with very small companies, for whatever reason, I don’t know if they don’t have the lawyers that are careful about, like you don’t really have to put this in here, but they will just sometimes be just more open about the list. Like, five of their biggest customers or something. Sometimes when you have a very big company, I’ve noticed I know who the customers they’re describing are. They’ll say some big customer that uses our jets or their wide body aircraft or something.

Geoff:                   We know who they mean, but they won’t even say what the company’s name is. Things like that. For some small companies, they’ll come right out and say it and list five or 10 companies. I’ve seen many 10K’s where they say, “We compete with companies such as … ” and list five of them. It could be almost all their competitors, where it gives you a really good idea of looking those up.

Andrew:              I remember when we were doing research on Hostess brands. I think we were trying to figure out which product of theirs sold the most or something like that.

Geoff:                   Okay, yeah.

Andrew:              I can’t remember. I don’t think it actually broke it down, but when they were talking about what they do sell, like their brands or whatever, you could tell it was going from biggest to smallest in that little table.

Geoff:                   Right. Yeah.

Andrew:              They weren’t actually coming out and saying it or using percentages or anything like that.

Geoff:                   That’s a great example. You can often find things that way with the order in which they say things.

Andrew:              Yeah.

Geoff:                   You realize it’s the same. Sometimes people do … I don’t want to over-say how important it is because some people get almost paranoid about seeing things about what happens here, but you can compare by looking for the exact same lines in different filings each year, whether they’ve changed things. I’ve mentioned that before. I know that I had mentioned before and people asked about it, a while ago, I had said that I thought NACCO would have better royalty stuff than in the past because they had for a long time said, “We expect royalties to decline,” and didn’t give any reason why they thought it was. When asked about it, they said, “Well, we just don’t know what it will be, so whenever it’s high, we say we expect them to decline or whatever.”

Andrew:              Yes.

Geoff:                   Finally then, they eventually this past year, gave guidance where they said, “We expect it to substantially increase.” That wasn’t so much of a surprise to me because they had changed the language that they had been using a quarter or two before then. It’s a sign when they finally took out something that they had had in for a really long time that way. I’ve talked about that before with things that, you get used to certain, very standard ways of companies talking about things. Like, our industry is highly competitive. It’s something that almost all 10K’s put into them.

Andrew:              Yeah, sure.

Geoff:                   When a company doesn’t say that, it’s a big clue. I was looking at one company recently and when they described what its products were and stuff, I wasn’t really that into it, but I realized in something it said, I was like, “It’s saying something that makes me think this is very not competitive.” Then I was able to find something else where they said, “We’re only aware of one other company that this technology has been licensed to.”

Andrew:              Yeah.

Geoff:                   From that, I was able to figure out that only two companies make this stuff. The tip off to that was the way in which they very much were not using the regular language for saying how competitive the industry was.

Andrew:              Yeah, sure.

Geoff:                   They were saying what the risks were in the industry. What they weren’t saying is competition basically.

Andrew:              Yeah. That obviously stood out to you.

Geoff:                   Then you go hunt down thinking, “Oh.” You write down, maybe competition is really low in this industry and then you look it up. It’s just like, I say that to people all the time that it’s like, you have to write down a guess based on okay, well this might be the situation here. Like, there is something unusual here. You take it as a lead.

Geoff:                   When you see, oh, this is … Normally, when you see something about land or something, it’s very easy to see, oh okay, well this was land that they bought in the last 10 years in Iowa or some place. It’s probably not that different from what it is today. If they say something like, “This land was acquired 100 years ago,” or something in the information, then that becomes a thing that you become obsessed with figuring that out because that’s such an unusual item in there.

Andrew:              Sure.

Geoff:                   That’s how you do the sleuthing. Yeah.

Andrew:              That’s interesting. That was a great answer. What changes have you made recently to your investing style?

Geoff:                   Hmm.

Andrew:              You start reading 10K’s on the computer instead of printing it out?

Geoff:                   No. I still read 10K’s through print outs. I don’t know if I’ve made that many that recently. I could say over time, there have been some changes I guess. Well, actually that’s not true. Somewhat recently, there have been some changes and I guess I became more interested in some things that were cheap on an asset basis.

Geoff:                   Last year for instance, in the managed accounts, we had over a third or something of them, of the portfolio, in things that were in some way related to land values of some kind. I’d say that was very unusual for me. That’s not something I’m usually interested in. I wouldn’t say that’s a change in my investment philosophy or something as much as just a reaction to prices for things in that stock prices perhaps are rising a lot faster than land prices.

Geoff:                   You know what I mean? It was becoming harder and harder to buy earnings at a cheap enough price and so it became attractive to buy assets. I’ve done that before where I bought things in Japan or something. Part of that wasn’t just that I was excited about something in Japan, but also that it was getting difficult to find things in the US.

Andrew:              Have you always thought about … Because when you’re managing other people’s money, it may be different than managing your own. Maybe, maybe not. Have you always thought about stock working geometrically over time? Where you know over time, the business is going to do okay? Did you always think about it in those terms?

Geoff:                   Yeah. That’s true. That’s always been the same. Where I was always thinking about it long-term that way. Certainly the things that we own now are less leveraged than some things that I owned a few years ago.

Andrew:              Purposely?

Geoff:                   Yeah, purposely. Again, maybe that’s an earnings thing though, a price thing, whereas we’re able to buy some things. We’ll find some things that have the sort of same P ratio that a lot of stocks have, but maybe the ones that have no debt or a little more cash. Maybe I feel like the market might be undervaluing safety right now I guess. That’s part of it is, I don’t know if it’s like that my philosophy has changed necessarily in the last few years, but it’s always changing in response to what you’re getting thrown.

Andrew:              Like the market changing.

Geoff:                   Changes in the market.

Andrew:              Which just comes on your radar because it’s cheap.

Geoff:                   Yeah. Right. Because like …

Geoff:                   Yeah. I have not owned tech things and stuff, but actually in the very early 2000′s, I did own some tech things. That was because you had the bubble that burst in 2007, so you had some become actual value investments in terms of assets and things in the early 2000′s. That can happen where it’s a response to what the market is giving you that way. I think that things that are like very consistent, earning high quality businesses, I like them as much now as I did years ago.

Andrew:              Sure.

Geoff:                   But the market prices are that much higher now I feel than it used to. People talk about Buffett’s approach to things and what he has owned and stuff. Part of the reason why he bought Coke now almost 30 years ago, is just that that kind of business was cheaper. Things like Coke and Gillette weren’t valued as high as maybe they should have been and now they’re valued at least as high.

Andrew:              Sure.

Geoff:                   He said that he overpaid for Kraft and I think that’s true. A lot of those food companies were over-valued. Yeah. I have changed a little bit in terms of certain things of avoiding some kinds of risks I would say, but other than that, I think that although I have changed in the last few years, it’s mostly in response to what things are expensive in the market, which I would say is …

Andrew:              Just being thrown at you really.

Geoff:                   … Earnings growth.

Andrew:              Yeah.

Geoff:                   Yeah. Companies that paid, if they didn’t have good earnings growth each year, those have become so expensive, so I probably bought less of them and more of other things lately.

Andrew:              Cool. How would you think about the value of Lyft, Airbnb, and other similar companies? I’m guessing this is because Lyft just came out saying that they lost 900 million dollars last year or something like that. Maybe that’s just top of mind.

Geoff:                   That’s a very hard question to answer and you might be able to answer it better. I don’t know. I have a somewhat different opinion on …

Andrew:              I think Airbnb is probably a better company than both Uber and Lyft.

Geoff:                   Yeah, yeah.

Andrew:              Why? It’s because A, you think about Google and all these other people who are like in the self-driving car, I guess, if race you could say, right? Airbnb, they just set up the platforms, less capital intensive, and more scalable I would say for sure.

Geoff:                   Yeah.

Andrew:              It will be interesting to see what happens because Lyft is going to go public and Uber brought in that new CEO from, is it Expedia or something? Now I can’t remember where. Do you remember where?

Geoff:                   No.

Andrew:              I can’t remember where. I want to say it’s Expedia, but maybe I’m wrong.

Geoff:                   Okay.

Andrew:              Part of his goal was to actually bring the company public as well. That’s obviously going to happen. Yeah. I would say Airbnb is probably a safer, better company than both of those companies.

Geoff:                   Yeah. That would probably be true in terms of the industry.

Andrew:              Probably profitable. I’ve actually listened to interviews where Brian Chesky, I think that’s his last name, he’s talked about Airbnb and how they’re a profitable company. I think it’s a good business. Yeah.

Geoff:                   Yeah. It’s not an industry I know a lot about or something. I have done some research and an analysis of Booking Holdings and stuff like that, which are related to those sorts of things. In terms of, for example, I guess things like Lyft and Uber, those are somewhat unproven in terms of the industry. It’s an industry that I wonder how much of the returns will go to them.

Geoff:                   When you talk about Airbnb, it’s just in terms of the way that that kind … The product economics work. You would expect them to capture a huge amount of the value. One thing I wonder is if the system that Lyft and Uber have really means that they will get a lot of the value and not that it will go … I think primarily honestly, it goes to the consumer and secondarily, I think it goes to the drivers. I’ve actually talked a bit with someone who drove and made a fair income from it.

Andrew:              How much?

Geoff:                   How much?

Andrew:              Yeah. I don’t even know what the average Uber driver makes or Lyft driver. I’m sure they’ll have to talk about it. I have no idea.

Geoff:                   Yeah. Well, a big part of it was getting the car from Lyft. It was the ability to have the car.

Andrew:              Yeah.

Geoff:                   Yeah. When they changed some rules on that and stuff, he stopped driving for them. It is one that … I don’t know. I think I know enough about the industry that Airbnb is in that I would be more comfortable saying that the winner in that industry will have a lot more go to that platform. I really don’t know in the case of Uber and Lyft, if so much of the returns will go to them, will go to other people. In some ways, that’s probably more disruptive to society and stuff. Maybe it’s good for society. Maybe it’s good that way. It changes the world and everything, but I don’t know that makes them incredibly rich.

Andrew:              Interesting.

Geoff:                   Yeah.

Andrew:              Interesting. Well, that was 25 minutes. Let’s see if we can get one more question in here.

Geoff:                   Okay.

Andrew:              Here we go. What are some outstanding positive and negative examples of public firms that are focusing or neglecting to focus on creating long-term shareholder value by refraining from often value destroying behavior, like risky acquisitions, short-term earnings targets, et cetera.

Geoff:                   For really big companies, I guess we could say probably I would say Amazon, Apple. I would also say Costco. Each of those I can think of as doing things that, well, one, refraining from a lot of acquisitions that they could have done. Amazon has done some pretty big acquisitions.

Andrew:              You don’t ever hear about Costco doing anything like that.

Geoff:                   No.

Andrew:              Yeah. They just stick to their business and go.

Geoff:                   When Costco opens new warehouses, it would take quite a long time for it to be earning as much in terms of their as already opened warehouses. In terms of return on equity and stuff, it depresses it as they make those investments. I would say that those are just three that come off the top of my head. Certainly, Apple has refrained from making acquisitions in a very big way.

Andrew:              Yeah.

Geoff:                   Compared to what other companies in their … Certainly, they’ve been encouraged to do that I would say at lots of different times.

Andrew:              A lot of people want them to buy Tesla.

Geoff:                   Yeah. There you go. Tesla is something I can’t evaluate in terms of …

Andrew:              Yeah. I was going to say, what about …

Geoff:                   They invest a lot. Yeah, they certainly invest a lot.

Andrew:              What about those antics. Yeah. We need to have Peter Rabover to come back on and talk about Tesla.

Geoff:                   Yeah. In terms of things that are value destroying things, I do think there is too much focus on short-term earnings guidance and things like that. I don’t even really like the idea of guiding for a year ahead for a lot of things. For some things, it’s okay. Like, we talked about NACCO. NACCO is not in a competitive business.

Geoff:                   Their customers are giving them a lot of ideas about what the plant will produce and stuff. It’s okay if they do that. It never bothered me. BWX Technologies talks about what carriers and subs and stuff they expect to work on and produce for them. For an engineering company, it doesn’t bother me in the same way. For the ones that are telling you, “We expect to win this much new business,” that’s what I worry about. We expect to sell this much new stuff to new customers. It’s the sales part of it that bothers me.

Andrew:              Sure. Facts.

Geoff:                   Not, “Here is our backlog we expect to deliver.” Yeah.

Andrew:              It’s funny. Remember, wasn’t it last year that Warren and Jamie Dimon went on TV trying to campaign against it?

Geoff:                   Yeah.

Andrew:              I remember Jamie Dimon was like, “Yeah. If you’re trying to beat next quarter’s estimates, just turn the jet off for a day,” or something like that.

Geoff:                   Right, yeah, yeah.

Andrew:              Because then you’d be getting on that game.

Geoff:                   Yeah, yeah. Especially getting an earnings line that way. Where the company says, “Oh. We just missed a little on revenue, but we made on earnings or whatever.” That is what he’s talking about. That is the kind of thing you could do. Yeah.

Andrew:              Just financial engineer it a little bit.

Geoff:                   Yeah. There are some particular ones where they want to hit a certain percentage of it in terms of … Often it’s digital or something is the big thing now. It’s something like that. That kind of stuff just does worry me. When it’s almost like we want to move people to something that sounds more high tech or of a more new thing. You always get that. Sometimes it’s good, but I did write up of Resideo Technologies and I think it’s good over time if they move to doing more stuff on a subscription basis and more connected things. They can do that.

Geoff:                   I don’t really like when I feel like sometimes a company like that is trying to present to investors, “Oh. We’re not an old technology company. We’re not this old thing that is just your thermostats and your things that all of this is … None of this is connecting stuff. We’re an internet of things or whatever. When they say, “We want to hit a certain number next quarter, next year, a certain percentage of our stuff will be this connected stuff or whatever,” do the customers really want the connected stuff right now? I don’t know. Do the contractors want to sell, put that into places? I don’t know.

Andrew:              Yeah, yeah. That’s pretty interesting. Why do you think they do that? Because they want the market to think differently about them?

Geoff:                   Yeah.

Andrew:              Is it like the Enron thing, how they never want to be known as a trading company because the multiples are different?

Geoff:                   Yeah. No, I do. I think that some of them do presentations to investors and things and realize that investors are like, that’s old-school of whatever things that you’re doing. Sometimes it makes sense and sometimes it doesn’t because there is … Because think about Disney or whatever. Years and years ago, I’m sure people were saying to them, “Oh. You have to get into all this new media thing or whatever.”

Geoff:                   Then they come out. They have Marvel. Then they put out Marvel movies. They’re like, “Oh no, that’s okay.” Now that those make a billion dollars, you can do this stuff that is basically the same stuff you were doing. The same sort of blockbuster movies you were doing 20 years ago or whatever. It works out fine. A lot of times, it’s best not to just listen to the analysts that way. To listen to the market because the market is often focused on comparing you to what’s the new hot area in these few years.

Andrew:              Sure. Interesting. Cool. Well, I think that’s a good place to stop this week. I want to thank everybody for sending in questions. Of course, again like I did say, if you want to have a question answered of us, please just go ahead and email either Geoff at [email protected]. You can email me at [email protected] or just send me a DM or Tweet at me @focusedcompound on Twitter.

Andrew:              We compile all of them together and then we’ll definitely chat about them on the show. If you do want to get access to Geoff’s weekly memo that he sends out for free, there is a premium one for members and then there is a free one as well. Go to Focusedcompounding.com, enter in your email, and then you’ll receive that in your inbox every single week.

Geoff:                   Yep.

Andrew:              Anything else to add?

Geoff:                   You could rate and review the show on the podcast app.

Andrew:              If you want to make Geoff happy, rate and review the show.

Geoff:                   Okay.

Andrew:              Give a comment. We’re just trying to make Geoff happy.

Geoff:                   All right.

Andrew:              Thanks so much everybody for tuning in. We’ll see you in the next one.

Geoff:                   Hey, this is Geoff Gannon and that was the Focused Compounding Podcast. The podcast where Andrew and I talk general investing concepts. If you want to know more about specific stocks I like, go to Focusedcompounding.com where you can read stock ideas written by me and other members. Membership costs 60 dollars a month, but if you use the promo code ‘podcast,’ it will be 50 dollars a month for you. Andrew and I also manage account for investors. To learn more about our managed accounts, email Andrew at [email protected] or text or call Andrew at 469-207-5844. That’s 469-207-5844. Thanks for listening.

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Source: http://www.gannononinvesting.com/blog/2019/4/3/how-to-avoid-confirmation-buys-do-some-serious-sleuthing-about-a-stock-and-dissect-the-wording-in-a-10-k