Value Investing: A Secret Method to Value Stocks Investing No One is Talking About

by birtanpublished on September 10, 2020

How to invest in value stocks at a discount price that is not available to retail investors and get paid even if your market order doesn't go through in this episode of the invest diva

Movement we're going to talk about an investment strategy that not many investors know about and if too many investors find out about it it might actually start working so i actually kind of don't want this

Video to go viral but my team was able to book matthew peterson managing partner at peterson capital management for today's episode to talk about the special value investing method this video is

Full of nuggets of wisdom so grab your coffee a pen and paper to take notes i'm your host kena danielle a four-time and a best-selling author and the founder of the invest diva movement the march to jump on to take

Control of your financial future and to make your money work for you our mission is to help one million moms start investing on their own so if you are a parent or if you know the mom who could benefit

From taking control of her financial future to create generational wealth please spread the word the best place to start is for learn.investiva.com yes now let's go

Say hi to matthew peterson welcome matthew we're super excited to have you on the investiva movement you have a fascinating story a very unique

Approach to investing that almost nobody is doing and i cannot wait to get down to the t i really want to get as much secret as possible from you you guys watching at home just get your grab your notes and

Start taking notes matthew welcome thank you kiana it's a pleasure to be here so you are focused on concentrated value investing so walk us through it and tell us what it is exactly that your

Fund is focusing right now okay that's a great question so i run a long-term value font so it ends up being very concentrated on a number of uh we look at a number of

Parameters in fact i think there's a very good framework to keep in mind that a lot of valued fund managers will kind of be focused on and that framework is i call it our cold priorities framework

And we're focused on kind of the greatest business models and the absolute greatest managers or ceos of the businesses and then the best value that we can find

And if you put all their co-priorities sort of together it um it leads you down to a very concentrated portfolio because there just aren't that many um great businesses

And managers at a great price okay that is like oh my god tell me what it is what are those workouts so what are these values that you look for what is it what are we looking at uh well okay so we

We run such a concert portfolio um and the firms that we're looking at are are often very niche sort of companies so they may or may not be of interest to your audience

Um but but i can list out a few and you can sort of follow the breadcrumbs it's like um you know warren buffett's one of the uh you know

Greatest investors of all time uh he has a partner charlie munger and a lot of people don't realize that charlie munger runs a little micro tech firm uh called daily journal and they do uh sas software

Implementation for courthouses um they're only about 285 million market cap with uh another equity portfolio and they're probably going to grow very large so we um we find these types of businesses

That are wonderful business models that are misunderstood by the market that are run by extraordinary people and uh and we hold on to those for the long term

I always was under the impression the value investing is investing in companies that are actually larger cap but you look at the right price for it so you look for the price or the

The stock the shares to drop and then buy is that a misunderstanding about that misconception so really what value investing means is buying a firm at a discount to its

Intrinsic value and the best way to understand the inclusive value of a business or one of a couple of ways is to take a discount of the free cash flow that will be available to the shareholders

Over the lifetime of the business so you go out you know uh a hundred years and you discount all the cash flow back today and you say well this is how much it's worth and if the

Market is offering you that business at you know a 50 or 80 discount to that price that becomes a really strong opportunity because when the market wakes up and recognizes that maybe cash flows you can grow or things

Are going to happen differently uh the price then rises so uh and to add to that camera there's two sort of key methods of value investing there's the ben graham method which is the

Um the old school like cigar butt method they call it so you buy at a discount to a business but it's not necessarily growing um it can be like a kind of a crummy business that

Uh might even be dying but you get such a great deal that you buy it and then when it appreciates a little bit you sell it you flip it you're trying to find something else

And then there's the phil fisher kind of opportunities and phil fisher is like the like growth at a reasonable price so you figure out a company that's actually growing and you get to stick with that company

For a really long period of time and for a number of reasons that's the preferred methodology and so i really like very small companies because very small companies can grow

Into very large companies well that's true so for example uh well again because the the scaling opportunity is much bigger so that kind of makes sense but then the question comes how do you even

Find these companies is it because your friend buffet or you just well though that's that's another great question uh how do you find these so i have a very

Specific process that we use a lot of your viewers can find a similar process there are amazing shortcuts that a lot of professionals uh won't do because they

Want to be creative or they want to uh or or or they just um or they won't admit but uh the sec actually requires funds larger than 100 million to post their holdings in a 13f

Every quarter and so if you're looking at high frequency trading or you're flipping shares it's not going to be of any value because it comes 45 days after the quarter ends and then you post your

13f but if you're watching you know bill ackman and david einhorn and and warren buffett and charlie monger seth clarkman they're spending billions

Putting billions into a company they've done you know hundreds of thousands of hours of research maybe spent millions in doing that research they also run concentrate

Portfolios so maybe they have 10 positions and they turn around and stay with conviction i'm gonna buy this and usually they're buying for maybe five or ten years

That is a really nice thing to know you know so uh you can go to the sec's website and look up any fund and you can see what their holdings are and you can see how they change quarter

Over quarters so if you see that one of these uh super investors uh are sort of piling into a new opportunity it might be worth digging deeper and

That's that's the starting point for a lot of our research uh we only need sort of one or two you know four of our positions make over 50 and we'll probably hold down this entire decade

So it's not like we're turning things it's not like we need a new idea every week uh but we're looking for that like secret gem that we find where there's a uh

Extraordinary business model extraordinary management and then you get a good price for it this is very interesting but my question is all right how come the media isn't going

After those things and how come they're not not hyping up the um the assets that the powerhouses are buying but instead they're hyping up you know the stocks like tesla and all the other like nvidia which i actually

Like i i believe in those companies but obviously those are not i've talked to a number of fund managers they actually do not they refuse to include these types of stocks in in their funds

So why isn't the media take note of this well uh so there's a few reasons i don't want to hate myself in trouble here i spent a lot of my my i spent a bunch of years in new york at uh goldman doing risk

Management work and um part of it honestly from a media perspective is because it's not really that sexy you know to just kind of get like that i'm gonna get

15 annually for the next 10 years and and uh just pay attention to like cash flows and ebitda it's just not fun right so everybody wants to know oh what what tesla do today what's going on with

Amazon what's happening here and that's fun plus it's fun stuff right or we're gonna get this rocket gonna go up if you're talking about you know i'm telling you daily journals of good value

Uh they do uh software solutions for courthouses i mean that's there's nothing more boring than that very little competition anybody who graduates with a degree computer science you know there's a million places they

Could go they don't think of daily journals uh so it's just not uh it's just not gonna draw the eyeballs let me let me stop you here and talk to the audience for a second

You guys that's the reason why precisely if you go to my youtube channel i've been testing out i've been testing boring stocks and i've been testing tesla and apple and all the sexy stuff they get the most views so guess which

Video i'm going to publish publicly the one that gets me the most views i just gave you away my secret and matthew here just admits it but i'm an open book that's the reason why i choose

These stocks and the interesting thing is people know about me find out about me through one of these videos and they come to my world they're like okay tell me you went to

Buy tesla i'm like uh well actually i don't have any shares of tesla right now i'm looking at this stuff they're like what tell me about tesla what did you have to test on your youtube channel was like well because it

Gets more clicks that's so right yeah i can i share something with you actually so because we're talking about tesla and tesla gets people's interest um we are in i

Just i think your viewers will appreciate this we are in such an extraordinary time it's like the largest probably transfer of wealth in our in our lives right now and

Uh we in fact just have in in march um the vix which is the volatility index just broke all time records that's the fear index so we are like at record fear we just broke the fear

Index we're at record fear and and a lot of people know rationally you be greedy when others are fearful right and so during this time of like maximum here where everyone's locked up we have social unrest everyone's

You know there's a pandemic going on there's a recession happening it's just so chaotic there's so much uncertainty it's like the ideal environment to get hyper rational and allocate to

Really good businesses that are cheap because if you look through this crisis and you're like in 2020 late 2021 maybe 2022 i think people will look back at today and just think wow that was just an

Extraordinary time to put money to work to buy these great businesses and so with that in mind tesla okay you mentioned tesla gets a lot of clicks so we can bring up tesla i want to share with you because

Uncertainty is so high the way that we buy our securities is really a unique we have a really unique approach and anybody can do this it's just you're it's it comes in

Multiples of 100 shares um instead of buying our stock to the new york stock exchange or the nasdaq like any retail investor would with like a limit or market order uh we actually don't do that at all we

Go through the chicago board of exchange and we write a contract called a put and it's important that you kind of do some research and learn about these a little bit if you want to try it try it with one kind of

Thing but it's so fascinating because when you write a put you're basically insuring somebody else that you'll buy the shares from that so we write cash secured puts for example

So this it's best explained as an example so let's take tesla tesla post split i think is around four hundred dollars a share okay so you can go and buy it for 400 a share in the market or

And because volatility is so high this is happening it's this is the price i just checked you go to chicago you can do it through your schwab account ameritrade or whatever it just

Gets routed through the chicago change and you write a put committing to buying for 400 so instead of buying it for 400 you just commit to buying for 400. if you make that commitment out till january of 2022

Okay so we're get almost q4 2020 so you're going out 15 months you get paid 175 for the commitment to buying it for 400 which means if the shares dip and they put it into your portfolio

You keep them you keep your counterparts capital it costs you 225 stock instead of 400. so basically when volatility is high and we've just broken the record volatility and by the way

Volatility of volatility is very high so volatility gets high and low when that happens and you get high volatility you get really high premiums and so instead of buying through your

Stock exchange you just sell a put and and now instead of buying tesla for 400 you can actually just buy it for 220 225. so this is kind of like setting a buy limit order through your exchange but

Also getting paid for it that's right it's actually a two-step process right it's a two-step process and it's kind of like options trading it's not true uh i think there's danger in trading yeah

Um what it is but it is using those products it's just using them differently it's sort of similar to like buying a pork belly future but instead of having a cash delivery you're like no

I want my pork okay so i'm not you're you go out and you write a put contract one contract one time and then you just sit and wait and you

Want them to then put the shares into your portfolio you'll give them 400 in the case of tesla but 175 of it is their money in the

First place and so you end up getting in with a with a cost basis of 225 for tesla which is trading f1 you turn around selling the market for 400. so let me

See if i got your process right you first go and find all these powerhouses funds and see what they are holding in their funds you select the best of the best then you go to chicago mercantile

Exchange buy a put and get your money and run with it that's that's that's right i mean there's there's a lot of nuances um that go along with it but um for your viewers they can follow that

Process they're gonna do pretty well um if you're following 13f you know there's maybe 10 000 securities that people can search for it's really hard to find that needle in a headstack markets are pretty efficient

Right the efficient market hypothesis is relatively true in practice we do get swings around the actual price um so you know but if you're looking at these 13 apps you might narrow down 10 000 to like 50

Securities that are really interesting and now you get to go and pick your very favorite and then yes um fundamental analysis is a big part of step two but step three is how do you

Buy it and uh and certainly um since 2005 when i discovered that this method will work i i would never buy through the traditional exchange

It doesn't make any sense to me because somebody will pay me if i wanted to buy it sooner um you could go look right now you'd probably get paid i don't know what but maybe 20 30

Um just for like mid-september contracts so why buy it for 400 if you can get it for 370 in a week so what happens if everybody does this uh then the prices will stop being so irrational and

Uh and i used to be very afraid of that i don't actually talk about this very often uh because i actually used to never talk about it and then i started to talk about it a little bit

And i realized that only the very few smartest people in a massive audience would go out and do it so i realized i could be comfortable explaining it it's just it's kind of out of your comfort zone

Because you're telling me this right now and i'm just used to my own investment strategy is my bread and butter i have my own process so it definitely is very hard to just break out of the strategy that you feel is working for

You to go and use a different strategy and the reason why i'm super excited to share this with my audience is that you guys there are so many different strategies

That actually work and the strategy that matthew is presenting to you is obviously something that not many people are talking about and if you were looking to change your

Screen strategy i i'm going to look into this myself as well it's something to consider because at the end of the day you know you want to have the strategies that are

Suitable to your unique risk tolerance to the time that you want to put into this if you are willing to take more risk then by all means go ahead and do other types

Of investing or trading so i i'm just in my opinion what matthew is presenting right now kind of falls into a portfolio of somebody who is medium to lower risk who has a medium to

Low risk tolerance am i correct uh well it depends on how you classify risk but i would say that that's i would say that that's accurate basically uh if you look at it at the simplest fundamental level what you're

Doing is you're lowering your purchase price so uh instead of paying 400 for tesla uh if you're willing to wait for a little more than a year you can get in at 225

To me that lowers your risk because if the shares fall to 200 instead of losing 50 now you're down just 10 percent that little slimmer so uh you you build in a margin of safety

By doing this so uh i find it i don't personally uh classify risk as volatility as they often do in academia i look at risk as the probability of the permanent loss of capital

And uh and this reduces uh the probability of a loss in capital because you're sending out less right so actually let me clarify this uh if the put not the price that you put for the put the

The price that you commit to doesn't go through you still get paid correct right there are a number of firms out there i want i don't think we have time to go into

Detail but um particularly volatile firms so uh you can look through your own portfolio you can look at the firms that you've liked and loved for years and what happens is if a company let's

Say abc firm just went to 100 and it drops to 50. that's when those premiums actually grows to this type of level and that's why right now is the is the

Opportunity so this isn't a lifelong shift in strategy this is me just uh showing you that right now because we are in a unprecedented crisis uncertainty

Breaking records people are willing to pay huge amounts volatility is one of the factors of the black shoals black trolls is used to price these contracts so when volatility goes up the

Price these contracts goes up so for example we're buying into one firm it's worth about 40. uh it's selling for 15. we're committing to buying it for 14. we're getting paid four dollars for that

They go out eight months so we're making four dollars on 10 collateral which is 40 over 8 months and probably will not buy the shares these are nuggets of wisdom you guys

Thank you so much matthew for sharing and now i i'm gonna ask you a bunch of fast questions because people are like okay how did you come up with this tell us a little bit about how you got started

In investing and how you found this specific method fine uh well uh i'll make it brief but uh i you know i've always been passionate about this stuff like

Since i was a child i was doing strange things trading bank cds and things like while my parents were at work so uh i've always been passionate about it i got i studied economics and math uh i i went out to wall street um

And i've been for investing professionally for two decades so this is kind of my third crisis there's a lot of like major crisis you know you have the dot com collapse and 911 and then you

Have you know financial crisis now you have this and there's a lot of similarities but um so i went out to wall street right after uh uh

9 11 started working in risk management at goldman i'm doing consulting for goldman or a few other banks i spent a couple years in london uh building out this calculator and uh

Always with the intention of putting uh my fund together and then in 2000 and uh 2010 uh moved out to los angeles and uh and launched capital management and um and

So at the same time i went to wall street 2010 okay really high level overview so i know that your wife uh actually is from turkey and she

Uh studied japanese teaching uh and that's correct you've done your homework that is correct so if you guys share something with your dad with your wife over there absolutely yeah she lived in japan too i know that

You lived there for a while and we went to university yeah yeah yeah i lived there for seven years yeah japan's wonderful i've been there four times she was there

We've kind of we have a little bit of an international life i think you probably do as well yes yeah my husband is australian i'm from iran lived in japan we live in connecticut it's just like all over the

Place i'm like what am i like my daughter is gonna get super confused matthew before i let you go when we were chatting before the the podcast you said that you have a tip for

Our viewers because you know that my goal is to help one million moms start investing on their own so i'm obviously super curious to know what this stuff is

I i do it when i saw that uh i realized there's there's something i've i've done this uh people don't know that most people have never really thought about this

Um but i think it's probably the greatest gift you could give your child financially uh so how to help a million moms well okay so let's assume that everyone understands um iras

Raw iras right raw iras you know you put in capital post tax and now it grows and it's never taxed again um i guess for this to work you sort of need to have a

Business of some kind or access to some llc or something of that nature uh but the idea basically is um help your child to have some income at a very early age so for us my wife had a import export business and

Um we hired some models for doing some modeling work and we also hired our children to be models uh and we gave them six thousand dollars for their modeling work

And then we funded their minor raw iras okay so six thousand goes into the minor roth ira he did this when they were one uh if roth ira you know that it's never taxed again and uh and it has

All sorts of benefits if that compounds at ten percent for their life uh if it if they need it let's say there's a special rule of 72 so if you go out to when they're 72 and

They've earned 10 a year it actually becomes 5 million dollars so uh you're able to basically uh sort of set them up with a five million dollar tax-free account

At retirement uh when they're very very young can also be used for medical emergencies and document our first home or even educational purposes but it does something else that's really

Subtle which i think is so important as it teaches them psychologically about the value of compounding so when they're 10 or 15 it won't grow maybe enough to

Completely spoil them uh but when they're 25 30 they'll start to recognize that their account's really growing and uh oftentimes it takes a lot of years for people to really

Understand the true value of compounding i think this helps them learn it at a very young age so i highly recommend doing that for uh for anybody who's young in their life thank you so much matthew for sharing

That and that is absolutely correct like my passion is to help these moms because they are going to set their children up for generational wealth is not about

Just about you is also for your children and their children to come and this is a beautiful thing to start them up early and what you just pointed out uh is absolutely correct because it takes

Years for that roth ira to actually have that the growth that you can actually see and you're right like by the time that they should start looking into their finances hopefully

Earlier but if they have that kind of background it will help them to understand the value of it um again thank you so much matthew for enjoying it this was awesome

You guys did you guys what do you think of matthew's approach to investing and are you going to chicago american dial exchange tomorrow and

Check this put a strategy out let me know in the comments i'm super curious to know and if you're gonna do it which companies are gonna do it for so let me know in the comments again thank you so much matthew for joining

And you guys remember the only path to true wealth is by making your money work for you thank you matthew before i let you go we have a tradition in our show we ask all of our

Guests to do a silly face three two one okay you're a pro you're a pro i have kids too so um

you

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