#93 - Stock Market Insights and Tax Strategies for High-Income Earners with Brian Feroldi

[00:00:00] Welcome back to Passive Income Pilots, everyone. Another week of amazing financial education. This platform just keeps getting better. Oh my gosh. Hey Ryan. Yeah, and our guest today, Tait, is one that's going to really ring the bell. I think we get a lot of questions on, should I hire a financial advisor to manage my stock account through my employer-sponsored plan through like Delta or United or whatever it is?

[00:00:22] Should I do Roth? Should I do traditional? How do you even dissect the stock market? Should I be picking stocks? Should I be buying them high or buying them low and selling them high? What's your theory on the stock market? So we brought on a guest who's written books on this, who helps educate people. But Tait, why don't you tell us about our guest today who's going to get all these questions answered? Yeah, Brian Feroldi, he is a stock market investor at Tried and True. That is his bread and butter. Been doing it since he was 19. He wrote a book called Why Does the Stock Market Go Up?

[00:00:52] Everything You Should Have Been Taught About Investing in School But Weren't. He's got a huge social media following, big on financial education and just teaching people about the stock market and how to analyze businesses. That's really his thing is if you want to be a real investor in the stock market, you want to dive into the deep, deep weeds on this, how to analyze businesses.

[00:01:13] So we touched on that, but really it's a broad conversation on the stock market, how it works, the difference between gambling and investing. So really interesting conversation. Yeah. Before that, you know, we have a Facebook forum called Passive Income Pilots where you can ask your questions, but we also have a place where you can go ask your questions. And we're actually going to open up our inbox right here live on the show and we're going to see what people are asking. So if you go to ask at passive income pilots dot com, you can ask whatever question you want and we'll give you an answer.

[00:01:43] So I'm going to go right here to the inbox. I've got a question from an airline pilot. He says his financial planner advised him not to do the Roth 401k contribution. So we're talking about post-tax contributions that are going to grow tax free and be withdrawn tax free. Right. But instead, put it all into the tax deferred side.

[00:02:02] And he says, as a high income earner, she advised me that the tax implication is better to get the write off of tax deferred income, knowing that I'll be in a lower tax bracket in 10 years when I retire. He says on the surface, this makes sense. I can contribute to this and not pay the 35 percent or the 24 percent tax effective rate. But is this something you've heard of before or been advised? I've realized most podcasts and people only talk about the overfunding and rolling over to the mega backdoor Roth auction.

[00:02:32] So, you know, I really think this depends on your personal situation. I'm going to let Tate talk about the advantages to doing the Roth here in a second. But I think this is a great personal situation. You know, I'm not a believer that we're going to be making less than we retire if we're investing wisely and growing our portfolio through doing alternative investments and non-alternative investments like real estate. But here's the benefits of what your advisor is saying. You're going to get that immediate tax savings. As you mentioned, you contribute that tax deferred side.

[00:03:01] You're going to reduce your taxable income today, which can be highly beneficial if you're in that 35 percent tax bracket. Right. And this allows you to invest pre-tax dollars and potentially grow a larger balance over time. Now, the benefit is lower tax bracket in retirement. Right. So if you anticipate being in a lower tax benefit or tax bracket when you retire due to reduced income or distributions or strategic withdrawals, you could pay less tax overall by deferring taxes now.

[00:03:30] Now, I have a strong opinion about where I think taxes will go in the future because the government can increase the effective tax rates. But we'll get to that later. And then the flexibility with withdrawals. So with careful planning, your distributions from tax-affered accountants can be timed strategically to minimize your tax impact. Right. When you do eventually retire, such as spreading withdrawals over several years or pairing them with years of lower taxable income. So you can throttle that as you get into that retirement age and you have those mandatory distributions.

[00:04:00] But, Tate, let's talk about the counter to this, why Roth contributions are so popular. Yeah. Before I jump into Roth, I actually do think that there's something I want to touch on here that isn't talked about a lot. And that is what state you live in. Right.

[00:04:14] Because if you live in California and you're paying 13% state taxes on top of 37% or 35% federal and 50% of your income is going to taxes and you can take a 50% tax deduction by putting that 10 grand into your 401k, that is pretty hard to beat. You're essentially 50 cents on the dollar because you're getting a 50 cent tax refund on that money dollar for dollar. That's pretty hard to beat. You're going to need a long time horizon on the Roth side to make up for the tax savings there.

[00:04:43] But if you live in Nevada or Wyoming or Florida, Texas, Washington, Washington, thank you, where you don't have any state income tax and you're only saving 35%, it might be different math. But the reason why Roth contributions are popular, here are some of the advantages. Tax-free growth. So with the Roth, you pay the taxes up front, right? You're using your after-tax money, so you do not get a tax benefit for putting that money into the account, but it grows tax-free. Well, of course it grows tax-free.

[00:05:13] It's instead of a 401k, either side grows tax-free, but it comes out tax-free, right? So when you bring that money out, $100,000 or $1 million or $2 million all in one lump sum, tax-free. No tax on that. There's also no required minimum distributions, the RMDs. So Roth IRAs or 401ks, once rolled over, allow you to leave the money in the account untouched as long as you like, which can be great for estate planning.

[00:05:41] Unlike traditional side where you have to start taking that money out. You know, you might be making tons of money in your real estate in retirement and you're like, ah, I don't really need to touch that. Well, you have to at some point through those RMDs. And then a hedge against tax rate increases. So some people worry about tax rates increasing in the future, making Roth accounts more attractive as they lock in today's rates.

[00:06:03] So even though you're locking in, let's say, 35% at the highest bracket, if you think that taxes, federal taxes, are going to go up in the future, then maybe you want to participate on that Roth side. So like anything, it depends on your personal situation and you got to do a little bit of math and it depends on where you think taxes are going in the future. Yeah. And at the end of the day, you don't have to pick between one or the other. You can do a blended strategy. Right.

[00:06:31] So many high-income numbers, you know, they decide, okay, I'm going to shield some taxes now. I'm going to put maybe 50% tax deferred and then I'm going to put 50% into Roth. Right. And they do the mix. And that hedges against tax rate uncertainty. It provides flexibility in retirement. It provides you that tax savings today. And you can kind of control where your income comes from still and manage your tax bracket more effectively. Right. It also kind of thinks about time horizon. If you're retiring in 10 years, that's a relatively short timeframe.

[00:07:00] So a tax-deferred strategy aligns well with the timeline if your planner expects that your tax rate is going to decrease by then. Right. So, and then the mega backdoor Roth contributions, as you brought up, the plan, you know, a Delta allows for that after-tax contributions and in-plan Roth conversion. So this is a way to increase your Roth savings without sacrificing the tax benefits of your traditional contributions. We've also talked on the show about, you know, the difference in income from year to year. You know, you might have one year where you just crush it.

[00:07:30] Maybe you were in the training department and you were picking up recall and you made, you know, $700,000, $800,000 that year. There are pilots out there that are doing it. And that might not be a great year to say, I'm going to put money into Roth. You might want that traditional bucket that year. There are other years where maybe you had a kid and you took a bunch of time off and your income was down that year. Maybe that's the year to contribute to the Roth side.

[00:07:56] We talk about new pilots, you know, in their first year you're on probation pay. And maybe that's the year to chunk some money over to Roth. So it really depends. But the goal here is to understand the implications of both so that you can make that decision based on your personal situation. Kind of saying that a little bit of a different thing, which is basically you have to also consider your other income sources. So remember your advisor, make sure that they are looking at your entire picture, right?

[00:08:24] If you've got pension, Social Security, other investment income like real estate, that could also impact your tax bracket when you get into retirement. So think about all these things like holistically. That's why, you know, I always say like, you know, investment advisors are great when they have your whole picture versus just having a, you know, a sliver of what you're doing or looking at you from a singular focus. But, you know, let's get into the show and conclude with a little bit of perspective, right?

[00:08:50] Many people talk about Roth conversions and mega backdoor Roth because those accounts have long-term tax-free growth. And it's important to recognize that financial strategy because that's really powerful, right? So I think a lot of people like to talk about how powerful that can be. But at the end of the day, your financial strategy needs to be personalized to your specific situation. And that's why we have this show, because we want to give you more perspective and more guests. And that's why I think you guys are going to love Brian.

[00:09:19] He has a very good perspective on a segment of our investment landscape. So without further ado, let's get to the show. Welcome to Passive Income Pilots, where pilots upgrade their money. This is the definitive source for personal finance and investment tactics for aviators. We interview world-renowned experts and share these lessons with the flying community.

[00:09:47] So if you're ready for practical knowledge and insights, let's roll. Brian Feraldi, thank you so much for joining us. Tate and Ryan, thank you for having me. Brian, your name came across our desk a couple of times because you wrote a book on stock investing. Why did the stock market go up or why does it go up? And the other thing that really caught my eye is that you started investing in stocks when you were 19. And so I think it's really cool that somebody got that much experience so early in their investing career.

[00:10:15] You know, and there's a lot of listeners that want to pass this knowledge onto their kids and get them going and get them started early. But before we get into that, why don't you just tell the listeners a little bit about yourself? Sure. So name's Brian Feraldi. As you teed up, I've been really interested in the stock market for over 20 years. You mentioned I made my first investment in 19. I would say I bought my first stock when I was 19 because I don't consider buying a stock and investing to be the same thing. And I can guarantee you I was not investing.

[00:10:45] I was attempting to trade. That's how I thought you made money. I thought the stock market was essentially a giant gambling machine where you bought something for one price, sold it for another price. I had no idea that there were businesses attached to tickers. I mean, loosely, I knew that, but I didn't know how the two related to each other. I couldn't tell you how to analyze a business, couldn't tell you how to find information about the businesses.

[00:11:09] So while I've been buying stocks for more than 20 years, I would say I've been investing in them for probably about 18 or so. Well, this is great because I think with the COVID Robin Hood boom, there are a lot of people that are caught in that trap that look at it like a giant gambling machine. People were stuck at home, couldn't bet on horse races and football and whatever else. Right. And so they turned to Robin Hood and trading and crypto. And we saw this, you know, the GameStop debacle.

[00:11:39] I mean, it's it's been nuts for the past five years. So I'd love to get into that. But walk us through what did your education journey look like from 19 entering into to the world of stocks? So I always knew about stocks and the stock market. Right. Like you would see in the newspaper or on the news something about the Dow, something about the Nasdaq. And like when I when when I was a teenager, this was the late 90s.

[00:12:09] That's when that's when, you know, stocks were going parabolic because of the of the tech boom and the dot com, the dot com bubble. So I was loosely aware that the stock market was a thing, but I had no idea how it worked. I graduated from at the time, though, my dad was buying penny stocks. I think he was involved with that Wolf of Wall Street company. I forget, Stratman, Oatmark or something like that.

[00:12:35] I don't know if it was that company or something similar, but he was buying penny stocks through some broker that that that that was in contact with him. And again, that was my first exposure. So I was like, oh, this is how you invest the smart way. You buy these stocks for 50 cents and hope that they go to 65 cents and you get a 30 percent return on your investment. So I was loosely aware that that was a thing. But again, I had no knowledge about how business works or how the stock market works.

[00:13:03] And when I graduated from college in 2004, I read a book called Rich Dad, Poor Dad. My dad actually gave it to me as a graduation present. And that book was the first book I ever read that introduced basic concepts like the rich build wealth in one generation. They think differently about money. Your home is not an asset. It's a liability. You can buy and own businesses. Right. The difference between an employee and a business owner.

[00:13:31] These are very simple, very basic concepts, but they were brand new to me. And by the way, I say that as someone that graduated with a degree in business. So that's kind of sad that like I had to learn after I graduated about like ridiculously basic stuff like that. Now, that book advocates for real estate investing. And this was like 2004, which was not the peak of the market, but pretty close.

[00:13:55] So I was looking around at properties, but the math did not work anywhere I looked like you'd be lucky to cover just the mortgage, like let alone make a profit. So the math did not work. Plus, getting into real estate, you need a lot of capital up front, which I did not have. So when I discovered the stock market, I was like, well, this is a much better fit for my personality. I didn't want to manage property or people. Plus, you can get started with way less money, right? A few hundred dollars, you can start investing.

[00:14:25] So extremely poorly in the beginning. But I was really, really interested and passionate about learning about the market. So I read every book that I could find on investing and just slowly built up my knowledge that way. So you mentioned earlier that you didn't think that what you did at 19 was investing, that you were just gambling. And then it sounds like you went on quite the journey to learn about these things. What is the difference between the two, investing and trading? Oh, there's many differences between the two. But I'll point out two, two, two differences.

[00:14:54] The first difference is knowing how to do the research. I didn't know how to do the research when I first started. The only thing I knew was how to put in a stock ticker and see the price of a single share of stock. End of analysis, right? I didn't know anything about the business, let alone how a business is connected to the stock price over long periods of time.

[00:15:19] So that's thing one that separates trading from investing is research, knowing how to analyze a business. A thing two is time horizon. When I first started buying and selling stocks, I wanted to sell them like a week later or maybe a month later for a higher price. That's not investing. That is trading. So the difference between investing and trading is analysis and holding period.

[00:15:44] To me, investing is doing the proper analysis up front, investing when it makes sense, and then investing is buying and holding great companies for long periods of time. It's the Warren Buffett method. Yeah. Yeah. I mean, you know, there's people out there that make money trading, you know, that do that. Do you still trade today or do you still think of yourself more as a research and invest long term? I don't trade at all. I only log into my brokerage account a handful of times per year.

[00:16:11] I just did a video on my YouTube channel where my top seven holdings, the newest one, the one that is the newest to my portfolio is like nine years old. Wow. So I am a find great business, buy great business, hold great business for a long period of time type of investor. There are people that can successfully trade. Most of them are on Wall Street and they have access to way better information and way faster computers than anybody listening to this podcast does.

[00:16:38] So I don't think trading is a game that retail investors can win, nor do I want to spend my free time staring at a screen and watching numbers move up and down randomly. So I don't trade myself. But if that's something that interests other people, have at it. That's such a good point. So I'd love to get into how you analyze businesses. But first, how does the stock market work? Well, that's a pretty big question. So I guess we'll go with the high level overview.

[00:17:07] So what is the stock market? The stock market is a collection of exchanges where companies can issue shares and sell them to investors. And then investors, once those shares are issued, can trade them with each other or exchange them with each other. So the stock market exists to give companies a way, a market, a liquid market for them to sell stock, which allows them to raise capital.

[00:17:36] So like if you go right now and look at like Apple stock or Microsoft stock, if you go out there and you buy it, Apple doesn't get the money. Microsoft doesn't get the money. A lot of people are really confused about that very simple principle. Who gets the money when you buy a stock is the investor that owns the stock that is selling it to you. So it is investors trading ownership in the companies with other investors in exchange for money. So a real simple analogy is like everyone understands what a farmer's market is.

[00:18:05] A farmer's market is people who want food go with money and they buy food from food producers. Stock market is the same thing, except for exchanging money for food. It's money for stock. Got it. And, you know, I was going to use the example. I brought up a book that I read a long time ago before the show, The Neatest Little Guide to the Stock Market. And that's a small, it's a short read. But one of the things it mentions is, yeah, if I buy a used car from you, Ford doesn't get the money.

[00:18:36] You don't owe Ford anything for that transaction. That Ford is owned by you. I bought it from you. And now it's a used car sale. Right. So once that stock is out in the market, it belongs to investors. So if the stock price goes up, you know, the company doesn't necessarily benefit unless it issues more stock. Correct. Yeah, exactly. It's the same way that Ford wouldn't really benefit from a car increasing in value unless it made another car and sold another car. Yeah, that's a good analogy. Right.

[00:19:04] And how does the company determine that initial offering share price? That's a semi-complicated process that is done by investment bankers. So companies can't really take themselves public. They do have to work with big investment banks like Goldman Sachs or Merrill Lynch or Bank of America, etc. There's a couple of big banks out there that they make a lot of money by taking companies public. And as part of their due diligence process where they're preparing the company to come public,

[00:19:30] they do set a valuation for the company based on initial investor demand. And they use that interest in the company to set a price. And that is the price that they debut the company at. And that's the price that they sell the stock at. And from there, the stock often goes up or down quite wildly on the first day, which tells you that the price that the bankers guessed at was wrong. The real price is what the market is actually willing to pay for it.

[00:19:56] One of the most interesting pieces of information that I've read relating to stocks, which I think was really insightful, is that a lot of people think that the primary purpose of owning a stock is for it to go up in value over time. But it's actually for dividends. You know, the reason you own, at least from a primary, if we boil it down and we go back in time,

[00:20:22] that the reason you would buy a share of Apple was in order to participate in the profits of that company through dividends. So can you talk to that and the difference between buying a stock for a dividend for a cash distribution or cash flow stream, much like you would for real estate, or buying it simply for appreciation? And the difference between those two, why do companies, some companies pay dividends and not pay dividends?

[00:20:48] But at its very basic level, isn't that why the stock market was created, is to own a piece of a business and share in those profits? Yeah. The whole reason that investors put money into a business is to have that business multiply the investor's money for them. So when you are buying a stock, when anybody is buying any stock anywhere,

[00:21:12] their goal is to buy the stock for, you know, $10 today and then receive more than $10 in value from that company throughout their ownership period. To your point, there's two ways that investors can make money by owning stock. The one that most people think of is through capital appreciation. You buy a stock for $10, the stock goes to $15, you sell it, you've made $5 profit for every share that you own.

[00:21:36] In addition to that, some companies, not all, but some companies take a portion of the profits that they make and they give it directly to their shareholders as a distribution. And that distribution in investing speak is just called a dividend. So if you own shares in Microsoft or Apple or Johnson & Johnson, they take a portion of their profits that they make each year and they give it directly to the shareholders of their company as a cash payment.

[00:22:05] So if you own shares of Johnson & Johnson in a brokerage account and the company pays a dividend, cash just appears in your brokerage account as if you made a deposit. But instead of you making the deposit, the company you own is making a deposit. Now, dividends are just a capital allocation decision on the company's part. The reason that some companies pay dividends and others don't is that when a company generates a profit,

[00:22:30] there's several things that they can do with that profit to deploy in the business. First off, they could use that money to pay down debt, right? If the company has debt, they can use that cash to eliminate some of their debt, making the company less financially risky. They could use that money to buy another business, buy a competitor, or use that money for research and development, to research a new product or service. Beyond those uses, they can also just say,

[00:22:58] we can't think of a good thing to do with this money. Let's just give it back to the shareholders of the business. And there's actually two ways that a company can do that. One is just giving them the cash directly. That's a dividend. Another way of doing that is to buy back their stock from the public markets. So these are quote unquote stock buybacks, which are very confusing and get a lot of ire, a lot of political hate from a lot of people.

[00:23:24] But all it is, is a company repurchasing its shares, thereby reducing the number of shares that exist for that company and increasing the total value of each existing share in the business. So many companies don't pay dividends at all, and they use all of their cash to repurchase their stock. And that has created tremendous amounts of shareholder value over time. That makes a lot of sense. How do you know that a company is going to issue a distribution or dividend?

[00:23:53] Do you have insight into that before you buy a stock? Yes, you do. If a company doesn't pay a dividend and then they start paying a dividend, they'll make an announcement about that. So dividends are actually declared at the board level, and then they're approved, and then there's a payment. So the entire process takes a couple of weeks from, hey, we approve this dividend to the money actually going into the shareholders' pocket. But typically speaking, in America, once a company starts paying a dividend,

[00:24:20] it tends to consistently pay that dividend over time. It actually tries to consistently raise the dividend. In a lot of foreign countries, basically everywhere except the U.S., they just take a portion of their profits and pay it out. And the amount that you get varies depending on how well the company did that here. But you will know a company is a dividend payer by pulling up its ticker in basically any software out there, and you'll see if the company pays a dividend or not. You can do the same thing for stock buybacks.

[00:24:50] You can analyze the company's financial statements to see if they're buying back stock, paying a dividend, or doing other things for cash. So airline pilots always call Tate Night, and they say stuff like, I feel like the stock market is way overinflated, and I want to diversify into one of your syndications of real estate. Where is that coming from, and what do people really mean by that? And how would you unpack that, Brian? Sure. First off, the last two years have been very good for public stock market investors.

[00:25:19] The market's gone up over 20% annually over the last two years. And if you look, if you analyze the market at a macro level and look at simply valuations, there's no doubt that right now the market's valuation is elevated. And as a general statement, when valuations are elevated, future returns for investors go down. And the inverse is also true. When valuations are depressed, future returns for investors tend to be higher.

[00:25:44] So if you feel like the stock market is overvalued, the first thing to ask yourself is a very important question to make before you make any investment, which is, when do I need this investment to pay off? I feel like so many people just skip right over this unbelievably important question. So if the answer is, I need this investment to pay off in less than five years, well, you shouldn't have that money in the market anyway.

[00:26:10] You should be investing in the stock market for a multiple year period. So if you need that money to put a down payment on a house or send a kid to college or pay for some big expense in the next five years, that money shouldn't be in the market regardless of the current valuation of the market. But on the flip side, if you say, well, this money is for retirement and retirement is 20 years away, then you shouldn't care as much about the current valuation because you want to take advantage of that 20 years

[00:26:39] of compounding that the market can give you. But to push back against that comment, or I guess to put some emphasis on that comment, if you think valuations are high and that you can earn a better return by looking at other investment classes, there's absolutely nothing wrong with that, so long as you know those asset classes well that you're going to be putting your money into. That makes sense. That's a great answer.

[00:27:02] Within the stock market, when valuations are high, what are some wise places to rotate into? So that always depends on the situation. However, if you want to stay invested in the stock market, but you're worried that the market might fall, there are some more defensive parts of the market that you can target that when the market goes down, they go down less than the market in general. And the inverse is also true.

[00:27:31] So if the market goes up, they go up less than the market. But if the point is capital preservation as opposed to capital growth, there are some areas that you can look at. And they're mostly defensive places. So utilities. Utilities are a low beta part of the market, so they don't go up a lot during bull markets, but they don't go down a lot during bear markets. The same is true for consumers, consumer staples.

[00:27:54] So food makers, companies like Coca-Cola, Pepsi, Conagra, those companies are also low beta companies simply because the products and services they sell are in demand, whether it's boom times or bust times in the world. So there are places in the market that you can invest. You can also look at what is not participating in the recent rally. The stock market has had a couple of good years, but that doesn't mean every stock in every sector is up.

[00:28:22] I mean, the place to be has been the Magnificent Seven, right, the big tech companies of the world. But if you look at small cap companies or value companies or even real estate, publicly traded real estate companies, a lot of them have traded sideways or even gone down over the last couple of years. So you can put money into those sectors, which have much more depressed valuations than the quote unquote market in general. So there are always places that you can invest to achieve things that are different than the market. You just have to know what you want.

[00:28:50] You mentioned earlier on the show that you only log into your brokerage account a couple times a year. What are you doing when you go in there? I'm typically checking my account balance. I open it a couple of times a year just to get my tax information, but I do occasionally make trades. So if I feel that a stock that I own, the thesis is busted or there's no upside left or I just don't want to own it anymore for any reason,

[00:29:17] I do occasionally trim stocks that I hold and I put that money into cash until I wait for a better investment to come up. Or conversely, if I find a company that I'm really interested in adding to or adding to my portfolio, obviously log in to buy that. But I don't tinker with my portfolio all that much. The analogy I've heard is like a portfolio is kind of like soap. The more you fiddle with it, the smaller it gets.

[00:29:41] So I generally take that approach where I want to set my portfolio up so that I can buy it and almost forget about it for a couple of years. I still want to have confidence that my wealth will continue to grow. Yeah, makes sense. So let's pivot to that. How do you do that? How do you analyze a business and how do you pick? Because you pick stocks. You wrote a book called Why Does the Stock Market Go Up? And you wrote a book on picking stocks.

[00:30:09] So when you're analyzing a business, where do you start? So just a clarification, my book is not about picking stocks. My book is about the market in general. Fair. It's more for beginner investors. Essentially, it's for people that have a 401k but have no idea why they're invested in a 401k other than they were told it was a good thing to do. Sounds like airline pilots. So my book is not for stock pickers. It's for people that literally know nothing about the market and they just want to get an elementary education about what is a stock market.

[00:30:38] I basically wrote it for my sister-in-law who said to me, I want to invest. Do I call the bank? How do I invest? It was literally like those level of questions. So I myself am a stock picker, but it's not a strategy that I recommend to other people simply because most people I know, 99% of people I know, aren't interested in learning how to analyze businesses, aren't interested in cracking open SEC filings and following company news.

[00:31:06] The idea of reading an annual report bores them to tears. And I say, OK, congratulations, you're normal. Don't buy individual stocks. Just buy index funds and call it a day. But if you're in that weird 1% like I am that likes to analyze businesses and is fascinated with the idea of analyzing companies, I do have content about that on my YouTube channel and things like that where I dive deep into them.

[00:31:34] But are you interested in my process for analyzing a business? Yeah. Yeah. OK. Maybe the top two or three things that you look for or whatever you're willing to share would be great. Sure. So as a general statement, I would never look at just two or three things and then make any money decision. So I have a over the last 20 years, I have through trial and error, I've built essentially an investing checklist for myself.

[00:31:57] So when I am analyzing a company, like if you just said some random company and I'd never heard of it, I would pull up my checklist and then I would go from top to bottom and answer the questions in my checklist. So that at the end of the checklist, I would know whether that stock was a fit for what I'm looking for in a business or not. So in the checklist is things like, does the company have consistent revenue growth? Is the company profitable and producing free cash flow?

[00:32:27] Does the company have more cash than debt? Who's running the business? Who founded the business? How long has the company been public for? Has the company beaten the market so far? Does the company pay a dividend? Does the company buy back stock? Does the company have a moat? Does the company have favorable long-term growth prospects? What is the company's current valuations and what risks am I assuming by taking on the company?

[00:32:48] So there's a few of the things that I check for, but that's the type of analysis you need to do in order to have confidence that if you're going to put money into something, that that thing will actually perform for you. And that's the difference between investing and gambling, right? Because when your brother-in-law says, hey, you should buy this stock, all of those things that Brian just said should flash through your brain, right? Otherwise, it's just gambling. Your first question should be, what does the company do?

[00:33:16] See if that person who just pitched you that stock can actually answer that question. A friend of mine one time said, hey, I just bought this marijuana stock. What do you think of it? And all I did was go right to the annual report and I read the first sentence and I said, are you aware that this company sells plans for greenhouses and doesn't actually produce marijuana? And they said, nope, that's brand new information to me.

[00:33:43] So I said, well, this is the kind of thing you should probably know before you buy this stock. Yeah, that's great. You know, kind of getting to your portfolio more, kind of give us a breakdown, if you don't mind, an allocation of, you know, where do you have your money? Sure. So I have both taxable and tax advantage accounts. So like, you know, 401k, Roth IRA, all that kind of stuff.

[00:34:07] Surely for simplicity in my taxable accounts, there are 100% index funds, total stock market index funds, international market index funds, etc. I do that for simplicity. Essentially, I don't want to ever have to think about or open those accounts other than to have money automatically added to them. So that is how I invest in my tax advantage accounts, which I can't even access until I'm 60. So I don't want to even think about them.

[00:34:34] My taxable account, which is the larger of the accounts and where most of my most of my personal wealth is, that is 100% invested in individual stocks. Many of my largest holdings are going to be no strangers to many people listening to this. I own companies like Tesla, MercadoLibre, Netflix, Visa, MasterCard, Amazon, Meta, the Trade Desk.

[00:35:02] So companies like that, that I have held for multiple years, and those companies have been some of the biggest winners that I own. In addition to that, I own the smaller portion of my portfolio is a collection of losers that I've bought.

[00:35:20] So I own plenty of companies that have traded sideways, or they've trailed the market, or they've gone down drastically over the years because my analysis was simply wrong about the businesses. But the good thing about investing is if you add up all of the losses that I've had on every loser that I've bought, and there have been many of them.

[00:35:42] If you add up all the losses on all of them combined, I have made more money on Netflix, the gains from Netflix than every single loser that I've had combined. So this is how investing works. You need to just occasionally be really, really right on one, two, or three mega winners. And if you have enough capital in those winners and let them do their thing, they will pay for all of your losers combined.

[00:36:12] Yeah, makes sense. So let's talk about tax loss harvesting. Let's talk about those losers. What is tax loss harvesting and how do you do it? So tax loss harvesting is when you sell an investment that you've lost money on in order to book a loss from a tax perspective. And then you can use those losses to offset gains that you have. Or I think the number is like the IRS allows you to take like a $3,000 loss each year and you can roll that over.

[00:36:41] So if you have like a $10,000 loss on a company and you sell it, you can use that $10,000 loss over a period of a couple of years to lower your taxable income. Don't do this in a tax advantaged account, right? Don't do this in an IRA or 401k. Yeah, that's a very good distinction. Thank you for saying that. So tax loss harvesting is one of those things that you can tinker with. And at the margin, it might slightly improve your return. And if you don't do it, it might slightly reduce your turn.

[00:37:10] But it's one of those minutiae things that really won't move the needle for you as an investor over the long term. The thing that really moves the needle for you as an investor is did you make good investments? Not did you optimize the tax situation of your losing investment? But when I'm logging into my brokerage account a couple of times a year, I always try and sell my losers to minimize my tax bill in any given year. This is something I've learned the hard way. It is an important point.

[00:37:36] I used to log into my brokerage account and I would sell my winners so I could buy more of my losers. And that is exactly, exactly the wrong thing. The market rewards the opposite strategy. You should sell your losers to buy more of your winners. But that can be mentally very, very hard for people to do because you don't want to put money into a company that's already up big for you. But more often than not, that's actually the correct strategy.

[00:38:06] That's so good. Where do you get your news and educate on stock investing? Where do I get my education? Yeah. Where are you tuning in daily? Where have you tuned in? Or what book? I mean, I know we talked about Rich Dad, Poor Dad. And that purple book helped tons of us get better. Why Does the Stock Market Go Up is your book. We're going to put a link to that in the show notes. And we encourage our listeners to go buy that book and read it, especially if you're just getting started in the market and investing.

[00:38:34] But where are you going to get your knowledge and where have you received it? So when I started in 2004, YouTube wasn't a thing. Podcasts weren't a thing. Blogs weren't really a thing, right? So the only way that I could get information about the market was books. So I voraciously read books that I could. And there's lots of classic books out there. One Up on Wall Street by Peter Lynch, The Intelligent Investor by Benjamin Graham. There's a bazillion books that have Warren Buffett's name in them.

[00:39:02] The Warren Buffett Way, Warren Buffett, and the Interpretation of Financial Statements. Those are all great. So I initially kickstarted my education with books like these. This is a great book if you want to get nerdy about accounting and analyzing financial statements. This is a great book called Quality of Earnings. Quality of Earnings by Thornton Ogloff. This book called The Little Book That Builds Wealth by Pat Dorsey is a great book for analyzing competitive advantage. It's a really quick read. This book by Terry Smith called Investing for Growth.

[00:39:29] This guy, Terry Smith, for those that don't know, is probably one of the best investors in the world. In my opinion, he's out of England and he has a fund called Fundsmith. And I love his investing style. And this is just a collection of his memos that he's written to his investors over the years. But you can go on YouTube, type in the name Terry Smith, and just watch hours and hours of interviews with him. And it's just unbelievable the information that we can access now for free in any format that we want.

[00:39:58] So it is dramatically easier to learn about investing today than it was when I started. But for me, it was books and, believe it or not, but discussion boards. Specifically, the Motley Fool's premium discussion boards, which is housed by thousands of smart investors. And we would just openly share information with each other. And while there's always lots of noise, if you're on platforms like that, you quickly learn who the smart people are.

[00:40:26] And you read what they say and how they think. And that can be a wonderful way to educate yourself. One question that we get all the time in the emails, in the chat forums that we have. And by the way, if you're listening to this, if you haven't joined our Facebook group, join us at Passive Income Pilots. We have a private Facebook group. We always skim that for questions and answers and great discussions. And it helps us inspire who to bring on in the show, guests like Brian.

[00:40:52] And we also have an email, ask at PassiveIncomePilots.com. Ask at PassiveIncomePilots.com. We have questions that come into that. But one of the things that always comes up, I feel like almost weekly, is I'm at Delta or I'm at United. I've got a 401k and there's an option to pay a percentage to somebody to manage what's inside my 401k. You know, to pick some stocks, to pick some of the investing strategies. What's your advice to someone like that?

[00:41:21] Or what's your shared experience there? To paying an advisor to pick stocks essentially for you? Yeah, or pick investments. Yeah. Yeah, I'm not a fan of that. So in my book, I have a whole section there about financial advisors. It wasn't my initial goal to put a section in there about financial advisors. But when I asked my friend group, I was like, how do you invest?

[00:41:43] A lot of them said, a guy came into our office this one time and I started investing with him and my money is still there. And I'm like, great. How do they get paid? Blank stares every time. Like nobody knows how their advisor gets paid or how their advisor makes money. So two simple questions to ask is, one, is the advisor a fiduciary? Fiduciary just means they're legally obligated to put your needs ahead of their own.

[00:42:13] A lot of people say they are fiduciaries, but they may or may not act like that. But at least you want that protection. And then two, how do you get paid? Understand how that person gets paid. Many of them just take a fee. So like a 1% advisory fee, which doesn't sound like much.

[00:42:31] But when you compound that advisory fee over long periods of time, it actually adds up to a substantial amount of money, especially since that advisory fee gets paid whether or not you, the investor, make money, including in down markets and stuff like that. So as a general statement, I don't think you need to work with a financial advisor, especially through a simple retirement account. I'm a big fan of just doing index funds into retirement accounts and not even thinking about them beyond that.

[00:42:59] But if you're interested in buying individual stocks, I'm a fan of do it yourself. Learn how to do it the right way and pick your own. But as we said at the top of the show, that's only like 1% of people. So I don't think you need to work with a financial advisor to pick your own stocks. Let me just throw out a quick plug. A friend of mine named Jeremy Schneider, who's if anyone's on Instagram, he's Personal Finance Club. He started a company called Nectarine. I think it's like joinnectarine.com.

[00:43:29] And it's fee-only financial advisors. It's like $150 an hour for advice. And they cannot make money off of commissions or asset under management. So if you want to talk to a financial advisor, I would start there. That's fantastic. Yeah, this is a great conversation.

[00:43:44] And, you know, I want to make a dissection here a little bit because we're not talking about like a registered investment advisor or someone a little bit more elevated in your ecosystem that's going to take a whole look at all of your holdings and help with estate and tax planning. Maybe get you access to some private equity funds that you wouldn't otherwise have, access to DSTs. We're not talking about that.

[00:44:07] We're talking about a singular focused advisor who is just living inside of your 401k and picking your stocks. Right. I mean, that's that's that's kind of where we're at, because, you know, if you have a very complex investing ecosystem, it might make sense for you to hire an advisor for the whole thing. But what I'm I just want to make sure that because we've had some great advisors come on the show and talk about the different benefits to having a higher level, like not like a holistic approach. Right.

[00:44:37] But this is just for like, hey, I just want to hire a service that's going to pop open my 401k and make some picks for me. That's what we're talking about. Right. I mean, is that kind of what you're saying, Brian? Yeah. OK. Yeah. There's many different flavors. And in my personal opinion, you don't need that. Yeah, exactly. The answer is index funds. Index funds should be your first choice and and your last choice if you don't want to do anything, anything beyond that. There's a great podcast, actually, on Planet Money that it's they call it the million dollar bet.

[00:45:06] And we'll put a link in the show notes. But like Warren Buffett basically makes a bet a bet against his most savvy hedge fund managers. And he gives him a million dollars and he gives a million dollars to index funds and he gives them 10 years to see who performs the best. And guess who performs the best? The index funds. You know, it's just playing the long game, investing in the average of the market. And, you know, and when you invest in index funds, guess what? You don't pay that one percent fee. It's a very low fee or no fee environment.

[00:45:35] So that was kind of the whole point of setting this up. So there's a great quote by Jack Bogle, who's the founder of Vanguard. He says in investing, you get what you don't pay for. Yeah, that's great. That's pretty good. I like that. What about day to day? What are you looking at now? What kind of education are you seeking or what kind of things are you keeping up with, Brian, that keeps you sharp and keeps you up with trends? So my portfolio has been built out over a period of years.

[00:46:03] And it's largely just making sure that the companies that I own are continuing to be worth owning. That's where I spend a lot of my investing time. I kind of view my portfolio almost as like a cruise ship at this point where, yeah, I can make changes, but it's going to be a really long time before the direction of it actually changes. As I said previously, I'm not an active investor. So maybe I add one or two stocks to my portfolio each year. Maybe I subtract one or two.

[00:46:31] So it's really just at the margin that I'm adjusting. But I spend more of my time focused on the companies that I own. Are they still worth owning? So that's where I try and focus my investing time. Although when I come across a company I've never heard of before that's exciting to me, I still like to type into the details and really rip apart the thesis. But I keep up with other markets on the same ways that many people listening to this do. I like Yahoo Finance, CNBC.

[00:47:01] Occasionally I listen to a lot of podcasts about money. But as a general statement, I try not to over consume financial content because if you do that, you tend to want to have an itch to make a move or do something stupid to fiddle with your portfolio. And as a general statement, that leads to less wealth, not more. That's great. What's your general thoughts on diversification outside of the stock market?

[00:47:30] So my personal plan is I own a house. I own stocks and I own cash. End of portfolio. That's it. The reason is I understand my house. I understand cash and I understand stocks. There are lots of different asset classes that you can invest in. Alternatives, there's farmland, there's precious metal, there's cryptocurrencies, all that kind of stuff.

[00:47:55] If that interests you, if you are willing to do the work to understand how those things work, have at it. I am totally not against any particular asset class. It's just that for me personally, I understand stocks. I understand businesses and that's the only asset class I think I need to own for the rest of my life. That's great. That's great.

[00:48:19] I mean, that's the beauty of the show is we're not slanted towards real estate, stocks, bonds, mutual funds, crypto, whatever it might be. We like to bring on great different perspectives. And I think there's a theme, though, that emerges, which is, you know, we get a lot of questions. Hey, should I buy this house or should I invest in this deal or should I invest in that person's deal or how much, you know, should I pay an advisor or not pay an advisor? Really, it boils down to personal preference and what you're comfortable with.

[00:48:44] But for God's sake, make sure that you take the time and educate yourself on this thing that we're doing and investing so that you can feel good about what you're doing and you kind of understand what you expect to get out of the thing that you're about to do. So, you know, that's a great perspective. You know, you do what works for you and, you know, there's lots of options out there. And the nice thing is, is we have lots of options, which is great. Brian, let's talk about, you know, pilots.

[00:49:09] If I'm an airline pilot and I'm approaching retirement age, you know, you talked about the fact that, you know, if your time horizon is less than five years, you know, you shouldn't be in the market anyway. You know, let's touch on volatility versus risk, right? Because if you own a great company and it declines by 30%, you know, that's not necessarily risk, right? It's volatility. It means if it's a good company, it's going to bounce back.

[00:49:35] What would your advice be to an airline pilot who's 60, approaching 65, which is our mandatory retirement age, and how to sort of take chips off the table prior to that finish line, especially considering how highly valued the stock market is today? Hmm. This is a great conversation to have with a financial advisor about your specific situation and a higher level of financial advisor.

[00:50:02] But as a general statement, when it comes to spending your money in retirement, you're absolutely going to need money over the next five years to pay for your living expenses. But first off, figure out how much you need to spend each year. Roughly is perfectly fine. And then two, how much of that is going to be covered by systems that you have or from Social Security? Or do you have a pension in place or what income are you going to be generating during that period?

[00:50:29] And then it's just the delta between what you want to spend and what you have to spend from income that you need to worry about. And even if you retire at 65, well, guess what? You could live to 95. You might have 30 years ahead of you where you actually need to have your money compounding for you.

[00:50:47] So while you need to worry about spending in years 65 through 70, from 70 on, you need to plan for a living beyond 70, that money might be invested in the stock market so that it can continue to beat inflation and grow. So it's really important that when you are retiring, you start to think about a multi-year buffer for yourself. Keeping money in the market is perfectly fine.

[00:51:13] In fact, it's advised for many people, depending on their situation, of course. But you need to start thinking about for the first time, how am I going to bridge the income versus spending a gap? So many people that are employees never have to think about that their whole life because they're just like counting on their salary coming in constantly. So you need to have a plan for what happens when your salary spigot gets turned off and you need to start turning on your income from your portfolio.

[00:51:42] There's a number of strategies that you can pursue to do that. You can invest more in income producing assets like dividend stocks or bonds or even cash. Cash accounts play decent income rates right now. So I would always just think about things in five-year plans and then every year come up with a new five-year plan for how am I going to cover my income needs over the next five years? And then money beyond that, you can keep that invested in assets like the stock market. That's great.

[00:52:11] Well, Brian, this has been fantastic as we're coming up on the finish line here. What are your top three things that you love, that you're passionate about, that you teach in your book? Because your book is called Why Does the Stock Market Go Up? Everything You Should Have Been Taught in School But Weren't. And that resonates with me because I've been on a lifelong journey of financial education for myself. And I think it's unbelievable that they don't teach this stuff in school.

[00:52:39] What are your top three things that really fire you up that you teach in your book or outside your book? Well, I think it's absolutely criminal that we don't teach that this kind of stuff is not taught in school. Just the basics, just covering the basics would go an extremely long way with making people comfortable. I mean, so many people, when they graduate, they get a job, and then they're told, put your money into this 401k thing. And they're like, okay, that's the thing that I'm told to do.

[00:53:09] And they have no idea what a 401k is. They have no idea what they're invested in. They have no idea why investing in a 401k is a good thing and why the 401k is going to compound their money over long periods of time. So that's who I wrote the book for is people that have money in the markets, but literally don't know why the market has gone up over a long period of times. I wrote the book because I myself, when I started, like many people, I picked up a book about investing,

[00:53:39] and I saw a chart of the S&P 500 and just went up, up, up, up over like a century. And I was like, cool, that's great that that has happened. Why did it happen? What is the thing that causes the stock market to make you money? That was never explained in any book that I read about investing. I was always just supposed to take it on faith that this thing that's always going up, it's going to continue going up.

[00:54:09] And I'm the type of person that like when I get on an airplane, I feel comfort in knowing about Newton's laws and Bernoulli's principles and airfoil design and why the plane stays in the air. Like, I don't want to just take it on faith that while they've always stayed in the air, maybe they'll keep staying in the air. So I wanted to understand how the stock market worked at a fundamental level. And I think if you, once you understand that concept, which is not that complicated,

[00:54:37] your confidence in your ability to fund your retirement and fund things you want in your life would just skyrocket. That's fantastic. Love it. Well, we'll link to the book in the show notes. You also have over a half million followers on X, Twitter. You've got a ton of followers on Instagram. You've got a huge YouTube channel. How do people find out more about you or potentially get in touch? Yeah, whatever platform you're interested in, just search my name, Brian Feraldi. I'm on every platform with the exception of podcasts.

[00:55:04] So TikTok, X, Instagram, YouTube, whatever it is, type my name in and follow my content there. Thanks for coming on, Brian. Appreciate the time. Thank you for having me, guys. Cheers.