Going Back to School with The Master Investor

Episode 109 of the Investopedia Express with Caleb Silver (October 24, 2022)

Welcome back and welcome aboard. And if you're feeling a bit more support this week, you are not alone. The major U.S. equity markets showed some strength last week as investors must have powered a protein smoothie, because they hit it big, and they hit it hard. The S&P 500 and the Dow gained 4.7% and 4.9%, respectively, while the Nasdaq popped 5.2%—the best week since June for all three major averages. The strength in stocks came despite the 10-year Treasury yield surging to its highest level since 2008, and a mixed bag of corporate earnings reports. Still, stocks were back in style last week, especially last Friday, which is unusual lately. For the past eight weeks until last Friday, big investors were big sellers on Fridays, not wanting to hold positions through the weekend. I get it—a lot of geopolitical uncertainty, a nonstop news cycle, and the U.K.'s near-crisis in gilts.

But last Friday—and last week for that matter—felt different. Maybe the sellers are exhausted. Maybe comments from San Francisco Fed President Mary Daly at the end of last week signal the Fed may ease up a bit on its next set of rate hikes as it tries to cool inflation. Well, maybe seasoned investors know that October, which is historically unfriendly for stocks, is also known as a bear market killer, the month where big selloffs lose steam, and new trends begin. Or maybe last week was just another bear market rally fueled by short covering. Or maybe it's all of the above and a lot more we're never going to know about. But as market participants and educated investors, we need to be able to sense when the trend becomes our friend, and maintain the courage to stick to our investing plans, even amid the uncertainty. It's hard, but it's a lot easier when we have a plan, believe me.

Big numbers can be scary, especially when those big numbers describe big losses, but better we face up to them so we can know what we're dealing with—so brace yourself. $15 trillion—that's just about the total amount of market cap blown off of U.S. equity exchanges so far this year. That's more than what was lost during the Great Financial Crisis in dollar terms. But the stock market has gotten a lot bigger since then, making the 27% drawdown from peak to the most recent trough this year much less severe than the 58% drop that culminated in March of 2009.

Could the stock market fall further this year? Absolutely, anything's possible. But like I said last week, does the bear market of 2022 feel anything like the one in 2008 and 2009 for those of us who were around back then? The global financial system was frozen back then, and if it weren't for massive government bailouts and the flooring of interest rates, who knows what would have happened. Back to today, and we have to ask ourselves if the market has priced in all of the bad news that we know is headed our way: a likely recession, a big slowdown in corporate earnings, and central banks hellbent on bringing down inflation by juicing interest rates.

Meet Ian Dunlap

Ian Dunlap

Ian Dunlap is a Houston-based investor with one of the highest win percentages and success ratios in the country. Ian is also the founder of Red Panda Academy, an online investing academy providing market research and insights.

What's in This Episode?

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I've been in this business news game for a very long time. I've seen great investors come and go charlatans, ballers, shot callers, fakers, and makers. But I've never seen anyone rise to the level of our next guest in terms of organic influence, the clarity of message, the sense of purpose, and the willingness to share his knowledge with others. They call him "The Master Investor," and he's got the track record to prove it. But his wisdom and influence are about far more than his trading account balances and his last series of stock picks. That's not what makes him a master. It's his generosity towards others, his desire to keep learning, and the humble way he goes about his business that makes him the master investor. Please welcome Ian Dunlop to the Investopedia Express. Thanks so much for being here, man.

Ian: "That's an amazing intro. Thank you so much. How are you?"

Caleb: "I am great. Delighted to have you on the program. I've been waiting a long time to make this happen, and I'm finally glad we were able to do it together. So, folks, you may know Ian from the Red Panda Academy, or from Mark It Mondays with Earn Your Leisure, or through his own social media platforms that have hundreds of thousands of followers. But, Ian, how did you even get to this place of becoming an investor that has this type of an influence, that has this type of a reach like the one you have?"

Ian: "First and foremost, I had a friend, Art, who told me in 2008—he was actually working at JPMorgan as a trader—told me what to invest in. And listen, I made the mistake that most people make when it comes to investing—I put it off. Art, as a result, became really rich, retired from investing, and I kept working and did not. So, after that recession in 2008, I said to myself, "I would never let another opportunity go by." And I just began sharing information. So, I started out on Facebook in late 2009, marketing and investment advice just to friends. I wasn't trying to monetize, I wasn't selling the course or program, I was just sharing the things that I was learning, and the things that I wish I knew from the very beginning. And over time, you know, let's say after ten years, you become an overnight success. And, by 2020, I kind-of caught a few people's eye. And here I am now having the honor to sit here and talk with you."

Caleb: "Well, the honor is ours. And, you know, you're talking about 2009, 2010—that's the ashes of the Great Financial Crisis. So many investors washed out from that. So many investors also missed a generational opportunity to build wealth because, as you and I both know, it's not that often that the Fed floors interest rates to zero and starts buying tens of billions of dollars of government bonds every single month, but that's what was happening. When I heard that too, someone told me to back up the truck, and thankfully I listened for the most part. And you have to be able to find—to be able to to see those signals and what's happening in the market. And you become so good at that. So given that, the signals have changed a lot—the signals have reversed a lot. Ian, how are you dealing with that as an investor, and what does that have you thinking about?"

Ian: "Are we going to go through a deeper bond crash? Because who is the institutional buyer for the bonds at this moment? I was just looking at the stats before we hopped on, and I think 40% is the greatest drawdown there's ever been. And I'm like, can we get back to a 40% negative drawdown in the bond market—which if you had a 60-40 portfolio—did you think that would never happen? So my adjustment has just been finding quality companies. I'm looking internationally, I'm looking to take all risk off the table. So for me—of course, indexing is always going to be, say, S&P 500. But if a company is not top two in their sector—do not want to touch them at all. Of course, with the war in Russia and Ukraine, I like General Dynamics, I like General Mills. But I'm not looking for anything that gives me any heartache or causes me to lose any sleep—I need guarantee right now in this market."

"So number one for me is always the global macro picture. Number two is looking at the fundamentals. So I like companies with high net profit margins and that have a strong economic moat—an emotional moat around the customer base. Apple is a prime example of having a bunch of incredible ecosystems. And then third, I'm going through my technical analysis. But I think for the first time in maybe 15 years, the technicals don't matter as much as the global macro picture. So I'm looking at when quantitative easing (QE) could come back, and if it does not come back for six or seven years, we will probably be in a flat trading range market for a long period of time—and it's scary, but it's a great time to build a base if you're looking to invest for the long term."

Caleb: "Absolutely. Everything is on sale, or so it seems. Of course we could get another leg down, but that's the whole thing, Ian. And you know this well, you've been doing this long enough. You can't time these things, but you can put your finger up to the wind and say, "Oh, I can tell which way the wind's blowing," and we don't even need to do that anymore. The Fed's told us they are raising interest rates to about four-and-a-half percent, and we're going to be selling bonds—big signal to everybody, which is creating that flight to quality that you talked about. Quality companies, good balance sheets, good management. I know you believe in good management at the top. That's so important, right? Who are some of the CEOs out there that you're like, "Whatever they do, I'm in?"

Ian: "Tim Cook—I think he's been the best operator-turned-Chief Executive. He's undeniable. I love Microsoft's CEO as well. Google has an amazing CEO. It is a noble idea. Companies with a good reputation, good earnings, and good profit margins should be the ones to win in this market. And companies that are not doing well, with not-so-great management, not-so-great of a product, are going to fall apart. I think we're really just getting back to core principles of investing—because 2020 and 2021, we're like..."

Caleb: "Everybody was a genius, right?"

Ian: "Everyone. It was like the steroid era in baseball. Like everything was a grand slam home run, especially the stock market. Everything was going at multiples of three, four, or five times earnings. I think we have now come down to the place where we should have been. And a lot of companies are coming down to the 2018, 2019 level. I think we're just floating back down to the areas in which we should have been operating in."

Caleb: "And it's not like you're just saying this today—you've been saying this for months. I've been watching you on Market Mondays, I've been following you on Instagram. You're not just coming out of the woodwork and saying, "Oh, it's going to be a rough one out there." You were talking about this when everything was great. Everybody thought they were a genius; Warren Buffett—I know you and I both admire him, says we find out who's swimming naked when the tide goes out. A lot of investors, a lot of traders were swimming naked. And that's the whole thing about education—financial education and investing education. I'm a smart investor—I think. I'm still down like a lot of other people, but I'm looking for the opportunity like I know you are, and telling the people that follow you to build a great base—another great foundation here for what happens next."

Ian: "Yes. And I think the biggest mistake people made was thinking that technicals rule the entry of price into an investment. And I'm like, if the Fed is now the market maker, everything that they talk about has to be the most important thing that you research. So in October of 2021, when I said a crash is going to come and everyone thought I was crazy, I was like, "Are you not reading that the Fed has said they're done buying bonds?" So if we have no market maker for that asset class, and inflation is going to go up, and they're for sure done with quantitative easing and transitioning to tightening, then the market is for sure going to slide down."

"And I think everyone has a chance to be a great investor, but not everyone wants the workload or responsibility that comes with it. And those who actually read the information or read the reports were able to at least brace for it. But those who didn't—Gamestop or AMC or ARC—they, all of a sudden, saw drawdowns that they never thought they could see. And I think the biggest mistake that every investor made over the last six months was just not reading the information. And I know it's boring, but we have to constantly hunt as an investor for one edge every day."

Caleb: "So, your process involves a lot of these things—you're bringing a lot of ingredients into the mix. But on a day-to-day basis, you're looking at so many things. I know you're a media consumer, but you do your own research too. Take us through some of your investing process. What are some of the things you bring to bear?"

Ian: "So I'll go through 50 to 60 stocks, depending on the day. So I'm going with all the indexes first, everything internationally as well—S&P, Dow, Russell, Nikkei—like I'm scanning the market to see if there's anything that is not pairing up correctly. Then I'll go through all the reports—Barron's, CNBC, Investopedia—I'll go through all of my publications, and then I'll look at the futures market and just kind-of hunt to see what areas are below. When oil went negative in the futures market in 2020, I'm like, "Okay, if it goes negative and the asset class isn't destroyed, it should shoot up from here." So that—my dad's in construction so I saw the opportunity in the lumber market before it took off. I look at wheat, gold, palladium, crude oil, natural gas."

"So I'm looking at all the commodities because I think, as investors, we get a better picture of what's happening if we look at every asset class. As much as I love tech, tech cannot be the only thing that we look at. So I'll scan the market for those and then I'll look at—there's a few shows that I like and a few podcasts that I like—I'll tune into Josh Brown and see what him and Michael are talking about on their show. And then after that, I'm just diving deeper into the stocks that I have on my research list. So it's not anything that's a magic formula..."

Caleb: "Talk to me about the Red Panda Academy. This is something that you started in order to really share the knowledge—share the wealth, so to speak, share the intellectual wealth. What is it? How do people get involved and what's going on there?"

Ian: "Red Panda is my community where I share my research and investor insights. So when I started—very simple premise—when I was watching CNBC, I didn't see an analyst say, "Hey, I like this company. Here's the buy. Here's a price on which you should acquire it." Now, a few years later, I understood why. They can't break certain securities laws—I get that—but as a consumer, I thought it would have been great if someone had said, "Buy General Mills at this price, hold it for this length of time." Because it not only democratizes investing, it makes it easier and allows more people to come into the business."

"So when I started Red Panda, it was just me sharing things on social media for free—for years—about what I thought about this company. And—still being on advertising—I would break down some of the insights that I saw that would give them a competitive advantage. And then from there, things grew. People ended up making money from some of the insights that I had, and that's how I really grew my fan base. So when everyone is asking like, "How did you grow your social?" I'm like, when you help people make money, people become fans of you—and also, for the longest time, I never charge. So I think for the first four years, I didn't charge anybody anything. I just literally gave and poured into the marketplace. And then when I started to chart, people were so happy to pay, because I'd made them or their friends money, and the clientele came in. So now I think we're like 40,000 members strong."

"At InvestFest, I think the reaction was pretty strong—when I asked everyone if I make the money, so kudos to Red Panda. And my thing in business—in every business that has done well over the last 200 years always lives by this principle: they give first, and then ask for the sale or deal. You've done it your entire career—Investopedia has done it. You guys probably put out more information than probably everybody else combined when it comes to helping investors and traders that are beginning—I've gone through the site plenty of times myself. So that's my guiding principle, to help first and then ask for the deal later."

Caleb: "Yeah, it's amazing how generosity turns into a windfall for you, because you're coming from the right place. And when you started—you said it was just sharing information, trying to help people in the community, opening people's eyes. And you and I know this is a lifelong journey. You may be "The Master Investor," I may be the editor-in-chief of Investopedia—we're pretty high up on that ladder, but we're not even close to being done. I have another 25, 30 years of investing in front of me, and you have much more than that."

"So I'm sure a lot of people ask you—and I've watched you on Market Mondays—I see the questions. There's this combination in—and you're familiar with it—this influence that you have—people are both asking you to tell them what fish to eat, but also some are asking you to teach them how to fish, which I know you prefer. Because stock picks from you are great, but you're in a particular situation—your life and mine are very different, and the next person's life is very different. So how important is that and what kind of questions do you get most of the time?"

Ian: "The questions I get most of the time is "What should I invest in?" or "How do I learn to invest?"—there are really a lot of questions centered around fear. The core of it is "how do I get over my fear of investing and begin?" I think you have to equip yourself with the right education. For me, the book that I recommend the most is Money: Master The Game, written by Tony Robbins. But also books written by Ray Dalio, Paul Tudor Jones, Carl Icahn—like the best of the best of investors. So if a person needs one book to read, I always recommend that book."

"And then second, start by just buying one share. And then after that, map out a plan for how many shares you're going to buy every single month. Because let's be honest—if we have to buy 300 shares the first time we put an order in, the majority of people are not going to start. But if you get a Robinhood or TD Ameritrade or E-Trade, you buy a share and you're like "that is it." And I tell everyone, if you can buy anything off of Uber Eats, or send money or cash, then you have the ability to open up a brokerage account and buy some shares."

"And those are the two things that I tell people to do: equip yourself with the information, then buy one share. And once you see it work, people get addicted to it. And I want them to get addicted in the right way to build for the long term, and not just follow the meme hype. But it is amazing, thrilling to buy a company for $120, and then you see in two or three weeks it's gone up to $140. And then when an analyst says, "Hey, we're going to upgrade this and in two years it can go to $220," it's like "I should have put more in." So we just have to start early and be very consistent, and not deviate from our plan to have success."

Caleb: "And consistency is everything, and the magic of compounding—that's the fairy dust that's sprinkled all over the stock market, that people don't even know about until they get in. And they're like, "Wait, I only put in a $1,000, and then I put in $100 the next year, but look at this!" Yeah, that's the magic of compounding—that Rule of 72. It's brilliant and I love it. So, you're a master, but you've made some mistakes. What would you tell your younger self around some of the biggest mistakes you made, or what was the biggest mistake or two that you made, and how did you recover from that?"

Ian: "There are so many. If I can go back at least to when I was 21, I would probably put 80% of my money into the market long term. Even if I go back three or four years, some of the money that I spent on—let's just say business expenses—if the capital was deployed and it was put to good use, I still would have gotten better use out of that capital by putting it into the stock market. So everything that everyone encounters and the fear—I know we are trained to spend money on items to make us feel better—but it feels a heck of a lot better to have 10,000 shares in your portfolio than it does to have any luxury designer brand on your body, or to drive some kind of fancy car."

"Number two—of course we've all had stocks that we've missed out on, but overtrading—that was something that I had to work on over the last four years to get better at that, so I will take maybe four trades a month now. Another mistake—we talked about it before, but not convincing my family to invest in Facebook, that a $150,000 investment will now be $33 million. And even though all my family's on Facebook now, they didn't see the vision. But I said to myself, I have to learn how to pitch better. So, even through voiceovers, doing shows like these, looking at the meetings and what Charlie, Warren, and Steve would have, and seeing how they would pitch their product gave me a framework to then pitch if I needed to, to raise capital."

"But in a bull market, I think it's a huge mistake not to even put more money into the market, because now you have a case for upside growth potential. Like look at everyone who missed out from 2010 to 2020—I know people who waited from 2010 to 2021 to put money into the market. You missed out on 11 years worth of easy growth. Even companies that were Bs and Cs were getting three-to-five x value."

"And so, it goes back to that message of consistency and not deviating from a plan. And I know it's not the sexy answer that everyone wants, but if you're putting $10,000, $50,000, $100,000 into Apple, Microsoft, Google—you have the best CEOs, best executives, and best employees in the world work on behalf of you. Would you rather have you working for your capital, or having Tim Cook, Steve Jobs—when he was alive, Elon Musk, etc. working to bring you capital? I think the answer is very clear."

Caleb: "That is such a great way to put it. I've actually never thought of it that way—but you do own a fraction of these companies, and you are paying management to deliver returns, offer dividends—if they're going to do that, and reward you by growing that share price up and to the right over time. So you mentioned a few of the folks that influence you. I'd like to know some of your greatest influences, and I know that some of them are legendary investors. But you're also involved with a lot of people who are changing the game and the face of finance, and I saw it firsthand at InvestFest. I see it every time I turn on Market Mondays, all the time. You're changing the game. Who are some of your biggest influences and why?"

Ian: "My mom, dad, grandma are some huge influences. They gave me the foundation to learn how to protect money—don't waste it, don't get into debt. My grandmother was huge on that, but that came from her being in debt. So when she finally got out of it—and I know it's fashionable on Instagram now and on social media to say debt is okay, but if you've ever had a ton of it, it's not fun. But even more recently, people I've had a chance to become friends with, like Bonowan on the trading side, he's shared with me some information to make me a better trader."

"Seeing what Josh Brown has been able to do at his firm, and the amount of capital that they have under management, just by being—same thing—putting out content, helping first, being filled with integrity—there are some amazing lessons that I've learned there. Same with you—great energy, great integrity, always looking to help. You know, we were talking at Josh's event—one of the first things he said to me was, "Hey, you want to come on the show?" Like, you were doing things to help me, and I'm like, "there are other people you could talk to here—advisors that are managing $2 to $3 billion." So I've just learned over time to operate with integrity and give first. And every investor that we truly like—they're a person of integrity, and they're a good person."

Caleb: "You know that we are a site built on our financial terms, on our dictionary. It's probably how you found us to begin with—that's how I found Investopedia to begin with, snd I'm talking 20-plus years ago. We're 23 years old as a website. What's your favorite investing term? What's the one that really speaks to your heart, Ian, and why?"

Ian: "The one that has the greatest impact on me is "risk-to-reward ratio." So if I'm taking one action, what is a return I'm going to get for it? Or, if I'm putting a dollar to use, how much am I going to get in return? As a trader, having a bad risk-to-reward ratio will tear apart your career. So for the longest time, I was using $1 to make one. And when you go on a losing streak, it is terrifying, because you don't know when you're even going to get back to break-even."

"And, the section I read on Jones—he wants to risk $1 to make $5. That was a life saver to me, because I'm like, "you really can take four shots at a trade, and if it doesn't work out until the fifth one, you can still be profitable." Pretty fascinating, and I adjust it to one-to-11, and I really like his one-to-50, so if I put out a dollar, I want to make 50x on a return. Not always easy to do, but it allows me to not to have to hit 50%, or 30% as a trader. Asymmetric risk-to-reward is the one term that has had the greatest impact on my life and career."

Caleb: "Not a surprise, because that is basically what you do—as an investor, and you're always looking at that. But I know you think of that beyond the investing realm as well, because you could look at risk-reward in any situation in your life and say, is this worth it? Is this worth the risk, the reward? I love that. One of the most popular terms on Investopedia, for sure."

Ian: "Absolutely. Even if we look in our personal lives, with the people that we choose to be with romantically, the friends that we pick, the business associates we pick. One of the biggest lessons I'm learning is to only be around people that bring you joy, happiness, and a lot of great energy. My test is always: after I talk to someone, do I feel uplifted and inspired, or do I feel tired and drained? So even, you know, it's been a long day for me, but after we talked earlier, I was like bouncing off the walls like a kid. And our relationship should be like that as well. So return on happiness is a big thing in a personal relationship, that have to begin to measure as well."

Caleb: "Amen to that. And I feel better talking to you every time I see you, and I'm liking the fact that I'm seeing more and more of you. That makes me feel like I'm in the right spot. And we so appreciate you, for all your time, and all the knowledge and the sharing that you do, the generosity of spirit. You can't teach it, but when you have it, it is so enriching to others. Ian Dunlap, "The Master Investor," you have done that and more. Folks, follow him on his Instagram—we will put that in the show notes. Follow the Red Panda Academy. Follow him on Market Mondays with Rashaad and Troy on Earn Your Leisure—one of my favorite shows out there, some great guys out there who have been on this podcast as well. And I want to thank you, sir, for a) coming into my life, and b) sharing your time, and best wishes on everything that you're doing, and we'll be watching very closely."

Ian: "You as well. I appreciate you so much, man."

Term of the Week: Covered Call

It's terminology time. Time for us to get smart with the investing term we need to know, this week. And this week's term comes to us from Mr. Brie on Instagram, who suggests "covered calls" this week, and we like that term given all the recent activity in the options market lately. Well, according to my favorite website, a covered call is a popular options strategy used to generate income in the form of option premiums. Investors only expect a minor increase or decrease in the underlying stock price for the life of the option when they execute a covered call. So to execute a covered call, an investor holding a long position in an asset, like a stock, then writes or sells call options on that same asset—bets that that stock is going to go up.

Covered calls are often employed by those who intend to hold the underlying stock for a long time, but don't expect an appreciable price increase in the near term. The strategy is often employed when an investor has a short-term neutral view on the asset or the stock. For this reason, they hold the asset long and simultaneously have a short position in the option to generate income from the options premium. Simply put, if an investor intends to hold the underlying stock for a long time, but does not expect an appreciable price increase in the near term, then they can generate income or premiums for their account, while they wait out the lull as long as the price of the stock increases.

If you're looking to learn more about how to trade a covered call, or how the options markets work, click the link in the show notes for this week's term, and watch our tutorial on video. You can also trade covered calls on the Investopedia Stock Simulator with paper money—no risk and for free. That's a good way to learn without getting burned! Good suggestion, Mr. Brie. Some brand-new Investopedia socks are coming your way in the mail. Dress accordingly.

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