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Guest Interview: Matthew Cochrane
(Edition Number: Fifteen)
Today we are welcoming 7Investing’s Matt Cochrane to kick off the fifteenth edition of the guest interview series.
I am excited to be bringing my interview with Matt to each of today. Matt is someone that I have followed for a while now under the handle, @Matt_Cochrane7, on Twitter, where he shares a great deal of insight.
A husband, a father to four children, a Navy veteran, and previously a fraud detective, Matt has had an interest past.
In the present day, Matt is one of the lead advisors over at 7investing, a stock recommendation engine that offers customers seven unique stock ideas, backed with research, every month, from each of their advisors.
In addition to the research and monthly picks, the team foster a sense of community amongst their subscribers through discussions, live streaming, updates on previous picks, and their 7Investing podcast, which is one of my personal favourite podcasts.
The team is packed with advisors who have particular specialities, from finance, consumer discretionaries, to genomics. A little of something for everyone.
“The future of the financial industry is an app; it's not pretty glass buildings downtown. There's plenty of space for more than one winner, but I think many banks are playing catch up and are having a hard time doing so.” - Matt Cochrane
Good morning Matt, and welcome to Investment Talk. I am a big admirer of the work you do, so I appreciate you taking the time to answer some questions today.
As far as introductions go, I always find it useful to kick things off by asking the guest to outline some backdrop for the readers who may not be aware of you, and for continuity too.
So, if you could introduce yourself, perhaps a little flavour into your backstory, and take us through the events that have led up to what you are focussing on in the current moment?
Thanks for having me! I'm a big fan of yours too, so I'm happy to participate.
I grew up in a very loving home, but we always struggled financially. My parents were both working class, and money was meant to spend. I was told growing up that we didn't have enough money to save, and I believed that. Investing was never broached or talked about, and I just thought that was something the rich did and not meant for the middle class.
Well, I brought those unhealthy money beliefs into my marriage which led to some early difficulties in our lives together. My wife is a saver, and she always wanted to save more money, and I fought against that, wearing her down on several important financial decisions. We didn't make much money when we first got married, so we quickly went into debt. A few years in, I saw the light and realized that what we were doing wasn't sustainable, and I decided to figure out how to get better. My wife introduced me to Dave Ramsey, and we quickly drew up a budget and a plan to attack our debt. These actions stopped the bleeding, and our savings slowly started building as our debt went down.
As our savings built and incomes rose, we realized we probably shouldn't be squirreling all of our money away into a savings account and thought about investing some of it. But I had no idea where to start. So we went into a book store and bought a random book about investing, Peter Lynch's One Up on Wall Street. And that's when my love affair with stocks and investing started.
Now I still had no idea what I was doing for years. We started saving for a house, and my wife left the workforce for a few years when we started having kids, so we didn't have too much money to put into the market. But several years later, I came across one of those clickbaity ads, advertising that 3D printing was going to be the next industrial revolution, right as my wife was re-entering the workforce and I got a nice raise at work. So all of a sudden we had money to invest again! While the 3D printing stocks didn't quite work out as advertised (to say the least!), losing money in those stocks motivated me to learn what I had done wrong, which led me on my path of market education and learning that continues to this day.
It is always entertaining to hear about how people discovered investing. It is equally interesting to understand their investment process and how that has shifted over time as they adapt.
So, could you take us through your investment process, and perhaps outline why these are the areas of the market that are of most interest to yourself?
The one thing I place above all else when investing is finding companies with economic moats or competitive advantages. In the same way that castles had moats to protect them from approaching enemies, companies have moats that protect them from potential competitors. Examples include patents that grant exclusive intellectual property rights, network effects, recognizable brands that customers love and repeatedly buy from, or products that become so familiar that it would be costly and time-consuming to switch to something else.
These are the things that allow companies to charge higher prices and generate greater profits. Over time, strengthening advantages tend to shield companies – and their stock prices – from competitive threats. Finding companies with sustainable economic moats is hard. Still, it is the single most rewarding thing you can do because it allows you to buy great companies and hold (and hopefully even add at opportune times).
Of course, valuation matters too and is usually one of the first things I look at in a company to see if a company's numbers seem to make sense. If a company is growing revenue at 10% with a price-to-sales (P/S) ratio of 50, I can quickly pass with a note to revisit from time to time. With finite time to study and learn about stocks, I find this a helpful hack to direct my attention to better current investment opportunities.
After studying a company extensively, I again return my attention to its valuation, this time with much more vigour. Before investing, I must believe that the company's future cash flow expectations will give shareholders a decent return. If not, but if I like the company's economic moat and optionality, I might make a small investment to keep it on my radar. Over time, even if the price appreciates, I can almost always buy in at better valuations, slowly building a more significant position in the company.
I spend most of my time on names in big tech and financial services, though I like to think I search for investments across almost all sectors. The two major exceptions to that are in the biotech and energy sectors, which are just two areas I don't feel like I know enough to outsmart the market.
I think everyone is aware of the great work you and the team at 7investing do, but for those who are maybe not aware.
Can you tell us how you got involved with 7investing, what you do there, how this helps investors, and perhaps paint us a picture of your process for picking the recommendations?
Simon Erickson, 7investing's founder, is a good friend and a great investor. When he said he wanted to start a service that would give individual investors a combination of monthly recommendations and market commentary, I was first skeptical. What would differentiate 7investing from all the other stock recommendation services?
But when he promised that it would be a service that would only offer the lead advisors' best picks every month at a single price point with no gimmicky marketing, I knew I wanted in.
The way it's set up is that investors aren't getting clickbaity articles, but deeper dives and consistent updates on our recommendations. In other words, the focus is on quality of work, not quantity.
Every month, I make a recommendation. These are always for long-term holdings, never for quick trades. These are sometimes repeated, of course. And we also podcast, live stream, and weigh in on some market news throughout the month.
I'm a big believer that the person who turns over the most rocks looking for investments wins, so I'm constantly on Twitter following people like you to see what others are looking at. I do run some screens looking for stocks too, but I'm more interested in a company's economic moat or its competitive advantage than numbers alone. Sometimes good numbers mean that the company is a first-mover but that competitors will quickly move in.
I know that you have a deep interest in the financial/fintech space, as well as all the tangents of the umbrella that fall under that.
I am interested to know your thoughts on the battle between legacy banking institutions and the rise of digital wallets, super-apps, and neobanks.
So, if you could perhaps shed some light on your thoughts on where you see this industry heading, as well as the largest threats to traditional banks, and which companies are launching those threats.
Let's start by looking at the entire consumer financial industry from a big-picture perspective.
I think that big banks will essentially be fine. I'm not sure how they will fare as investments, but I believe that they can do more than survive in today's digital world. They have the resources, especially in the cases of JP Morgan Chase and Bank of America, where they can release great apps where consumers can do a lot of great things. I think they have great digital offerings. Those kinds of banks will be fine.
I think small community banks can also survive. My parents retired to a rural South Carolina community - their town doesn't even have a stoplight. The next town over was the big town because it had a drug store and a couple of small restaurants. And that town had one bank. And it was a one-branch bank. I think a bank like that, serving a community like that, can also survive because if you have a banking need in that community, that's the only place to go.
However, the regional banks, the banks in between the large giants and community banks, are in a lot of trouble. Yes, there are many third-party offerings where they can go for technological help, but I don't think at the end of the day that they're going to have the resources to fight.
These banks won't keep up with the agile and innovative fintech, like PayPal and Square, that I believe will take market share. And I think that's why we're seeing consolidation.
In late 2019, BB&T merged with Suntrust to form Truist, creating the sixth-largest U.S. commercial bank. In 2020, PNC bought BBVA for $11.6 billion to create the fifth-largest bank in the U.S. Don't be surprised if we see more consolidation too. These mergers and acquisitions help with bank branch efficiency. It also gives these institutions more firepower to compete with the digital offerings that companies such as PayPal and Square continue to roll out to the market.
Think about Square's Cash App's evolution, and I think it's easy to see where they want to go. In 2013, Cash App started pretty much just as a peer-to-peer (P2P) payments platform. It was useful for sending money to friends and family, but that was pretty much it. In 2015, users could then use Cash App balances to pay for Square's sellers' merchandise and services. From there, it continued to roll out new features every year, growing its user base as it went. It introduced debit cards and a reward program, the buying and selling of bitcoin, commission-free stock trading, and direct deposits. Last year it purchased Credit Karma's DIY free tax service. Soon it will be an all-in-one personal finance app where users can spend, invest, and save through the app.
You see a remarkably similar evolution with PayPal and Venmo. The future of the financial industry is an app; it's not pretty glass buildings downtown. There's plenty of space for more than one winner, but I think many banks are playing catch up and are having a hard time doing so.
I am not sure if you follow this interview series, but recently we had some great argument and rebuttal from two great guests in Kermit Capital and Liviam Capital. The topic of discussion was Facebook.
The narrative for Facebook essentially boils down to this giant, cash-producing, a machine that contains vast quantities of embedded optionality, but struggles due to public perception and trust. I personally feel the price reflects that sentiment, in that Facebook is reasonably valued for the assets it possesses.
I know you are an avid follower of Facebook, so I think it would be interesting to hear your elevator bull and bear cases for the company.
First of all, Kermit Capital and Liviam Capital are both smart, and I only want to disagree with either of them after much thought. In this instance, though, I agree much more with Liviam Capital, though Kermit makes excellent points.
Justifiably so, Facebook has suffered a lot of scathing criticism for the way it has handled users' personal data. It is also facing heat from Washington D.C. over antitrust concerns.
The question is whether Facebook has eroded consumer confidence enough so that its future efforts, such as Oculus, will ever be able to realize their full potential. I don't think that's the case.
I think when it comes to virtual and augmented reality, the best platforms will win. Right now, I think Facebook has a clear lead in virtual reality and is pouring fuel on the fire to make sure it maintains that lead. Since 2017, its engineers and developers working in its Reality Labs division have increased by a magnitude of 10, from about 1,000 employees in 2017 to 10,000 today. It is quickly expanding the number of games and apps available on its Oculus platform, and that number is only going to continue to grow.
Zuckerberg is all but begging for politicians to introduce legislation and regulations for social media companies. The legislation would give the company clear boundaries to navigate within, helping it substantially. While these regulations might damper Facebook's operating margins (which still stand at 38%!), they will hurt future competition even more. It has more than enough cash on its balance sheet to handle any fines thrown its way by politicians. As long as antitrust regulators do not break it up, I don't see any actions taken by Washington as too negative. If it is broken up, I think it hurts Facebook, but I don't think it will be catastrophic to shareholders.
Finally, I don't think Facebook's privacy scandals are as big of a deal in other parts of the world as they are in the U.S. and Europe. Offering free content for advertising is a proven model. From newspapers to radio stations to broadcast TV, it has worked for decades. While some U.S. users might rather pay for some services so that there are no privacy issues, I think many international users, especially in emerging economies, are more than happy to make that trade-off.
As an investment, I think Facebook's valuation for its current growth and margins, and future opportunities are incredibly attractive.
Next, I wanted to discuss position sizing and concentration. Everyone I interview has a different view on this topic, so I find it useful to gather several different investors' perspectives.
So, I am wondering if you can provide us with some colour on your allocation approach.
Is there an upper-bound that you will allow a position to grow into? What are your thoughts on the sizing for new positions? How do you feel about concentration? I would be keen to hear you share your thoughts on this matter.
Portfolio allocation is probably just as important to investors' returns as actual stock picking, yet few give it the same amount of attention (including myself). Because I didn't give this concept much thought, my portfolio was haphazardly constructed for many years. Sometimes I would enter a position all at once. Other times I would slowly ease into a position by dollar-cost averaging.
Over time, primarily through learning by mistake and discovering my own comfort levels and investing style, I began to formulate guidelines for how I think about putting together my portfolio, most of which revolve around these three principles:
1. Move slowly. I'm never in a rush to build a position anymore, so I buy a little at a time. That first bite can be quick, though, before I'm done thoroughly researching a company. So I start small, but if the thesis holds and my confidence grows as I learn, I'll add over time. If not, I'll sell. While I'm a long-term, buy-and-hold investor, I can quickly sell small positions that I buy before completing my research. I think of this as time diversification.
2. Make stocks earn their position. To become a significant position in my portfolio (say anything over 5%), the stock must do a lot of the heavy lifting. This is especially true for my most prominent positions. I'll keep buying to a point, but eventually, positions need to earn their keep.
3. My largest positions, especially by market cost, are those that I believe won't lose a lot of money, rather than ones I think could gain the most. For example, my Paycom Software and Shopify positions have grown so much that they would've been top positions if I had never trimmed them. But with those valuations, I know drawdowns are likely, and so have cut a little on the way up. I give myself permission to trim and add to positions based on valuation, though I never sell out of a position entirely due solely to valuation.
These principles naturally steer my portfolio so that my most significant positions are the ones I've held the longest and are the ones with which I am most familiar.
I believe it is challenging to run a concentrated portfolio and be a long-term, buy-and-hold investor. Since I sincerely believe the best compounding comes from years of holding, I allow myself to hold 30-40 positions at a time, though I will eliminate positions at that point. Starting small and allowing my portfolio to balloon over 30 positions permits me to buy companies I would not otherwise have. For instance, I doubt I would have ever bought Shopify, a 13-bagger for me if I had some arbitrary rule telling me it would have to start as a 5% position.
This is what works best for me. Some investors I know, though, run a much more concentrated portfolio and have seen gangbuster returns. Others have portfolios with literally hundreds of companies, and they too have succeeded wildly. When it comes to portfolio allocation, there is no one-size-fits-all. Find the style that best suits you, and invest accordingly.
Another one that I like to ask everyone. What are the three most influential books that have changed the way you think?
Well, I hope my Christian faith shapes everything I do, so first and foremost, I have to list the Bible.
Second, the book Living Life Backward by David Gibson is a wonderful book about the death of all things. Both my parents passed away in 2020 and this book helped me deal with that loss in a more thoughtful and constructive way I think than I otherwise would have.
Finally, I'll throw out my favourite investment book for my last one, and that's Peter Lynch's One Up On Wall Street. Fantastic book for new investors or experienced investors to review every few years.
When assessing a company. What are the must-have factors that must be present in the company before you would even consider allocating one ounce of capital into their business?
More than anything else, I have to believe in a company's long-term potential before investing in it. And to believe in a company's long-term potential I have to see that it has an economic moat, or a sustainable competitive advantage before investing. I don't look for one single metric, I don't think there's a magic number, but I do want to understand why the company will start/keep winning into the future.
Last week, I asked Richard Moglen about financial idioms. I suggested that there are a number of financial idioms that investors like to recite during certain periods in the market. Most of them are fairly solid, but all of them require context.
I am interested to hear your opinion of the BTD mentality?
"Buying the dip" can be great advice, or it can be horrible advice. It just totally depends on why the stock you're interested in is dipping! When it's a part of broader market sell-off or short-term concerns, buying on a 10% to 30% correction can be an excellent buying opportunity. I purchased many stocks in early 2016, late 2018, and March 2020 in situations like that. However, if a stock is faltering for more serious, potentially thesis-busting concerns, it is more likely to be a value trap than a good value.
As long-term investors, a great deal of the discussion can often circulate around buying, with less emphasis on selling. For me, I operate under the option that I never sell my positions, unless they trigger a pre-defined batch of sell-allowances. This can range from funky movements in management, an acquisition I do not like, the original thesis being broken, and so on.
What are some of the conditions that must be apparent for you to consider selling a position?
In addition to that, I am wondering if you could share with us your thoughts on the importance of time horizons with respect to the dynamic between buying and selling.
Selling is the voodoo magic of investing. It's tough to get right. It's much more challenging than buying.
In general, I think most investors – myself included! – are better off never selling except for two reasons:
1) You need to raise funds for a company that you are near-certain is a better opportunity; or
2) Your original investment thesis is completely broken.
Outside of those two reasons, I almost always think it's better to hold than to sell. There are times, not often, where I have trimmed a position a little (but held the majority of my shares) due to valuation concerns.
Could you with us some of the companies that you passed up on, that went on to perform very well, perhaps sharing with us why you passed up on them, and what you learned from that?
I don't mind taking starter positions in companies before studying them. Usually, when I take a position, it motivates me to study the company further and make an informed decision about whether the company is a "keeper." The problem is I sometimes get lazy, depending far too much on others' opinions without knowing enough to make my own. Unfortunately, when a stock price sinks, others' opinions matter less and less. A hard truth about investing is that it is very difficult to borrow conviction. This cost me dearly when it came to The Trade Desk, a technology platform for ad buyers.
In October 2017, I established a position in TTD for about $60. I never did my homework, though, and even though the smart investors I knew who liked the company were still bullish, my attention waned, and I grew disinterested as the stock price languished for the next several months. Unfortunately, I exited the position at about a 20% loss approximately six months after purchasing it.
Since I sold, TTD's stock price has appreciated about 1,250%! Ouch!
Lastly, I like to round-off this segment with my favourite quote, which comes from Graham. The one concerning the short-term voting machine and the long-term weighing machine.
What is your favourite quote, and why? Feel free to pick a few if you like.
As far as investment advice goes, Warren Buffett's "Our favourite holding period is forever" ranks up there among the best. It reminds investors, including me, to focus on the long-term. It's so easy to get caught up in the daily noise that cable news, social media, and everything else on the internet throws at you that if you don't keep reminding yourself to focus on the long-term, you can quickly get lost.
While #neversell is more aspirational than prescriptive, it is probably taken too literally at times. However, Buffett's quote perfectly captures the sentiment that investing is best done with a long time frame in mind.
Questions from Twitter:
In this segment, we collected questions from the Twittersphere, and present them to Matt.
@brianferoldi "Five Favourite Dad Jokes?"
Here's my favourite:
A man is being taken to the gallows for his execution. The executioner asked if he had any last requests, and the prisoners ask for one last high five. But the executioner just left him hanging.
@IrnestKaplan: "What are your views on longer-term competitive pressures to Mastercard and Visa? They are solid rails, but what could encroach and erode their strength over time, say 10Y out?"
Cryptocurrency or digital fiat currency is probably the biggest threats to Mastercard and Visa over the long-term.
@Fiducia_Invest: "How often do you spend reading about core names you follow, what is your routine? How do you level out the noise vs the fact like most investors should?"
No matter what, I always read the four-quarter conference calls and new 10-K every year. Beyond that, I do try to read more transcripts, but how many I get to depends on time and other factors. Good analyst research reports can also be good.
@Willgriffith16: "Why are you so interested in fintech and financials?"
At the same time when I was first learning about investing, I had just become a fraud detective and had to start working with banks at my job. It allowed me to see the industry from a different angle and gave me a few insights I leveraged early on.
@RobertGCart: "What is your opinion of multiple companies adding bitcoin to the balance sheet, in particular Square?"
In small percentages it's fine. Anything more than that is risky.
@kongolo: "Venmo and CashApp, will there be one winner or a duopoly?"
There's room for plenty of winners.
@Andrewholder22: "Is the Cash Card for Square overly reliant on Boosts, seeing how it doesn't offer points like most credit cards."
Well, Cash Card is a debit card so I'm not sure if that's an apples-to-apples comparison. I think Square is using Boost as an excellent tool to drive engagement with Cash App though and that they have not come close to using Boost to its full potential yet.
We got a few questions about BNPL for you Matt, so here is a couple:
@willgriffith16: "Thoughts on BNPL and its impact on credit card companies like American Express, Capital One, and Discover?"
@RXsupply_Chain: "Do you have any criticisms of the BNPL model, and do you feel they will face regulatory scrutiny?"
I basically think BNPL is a commodity that will be able to be used by every player in the financial industry, from retailers to banks to digital wallets. I would be wary of investing in BNPL pure plays.
Thanks once again to Matt for taking the time, as this is one I was excited about sharing. I have followed Matt for some time now, and really enjoy what he has to say.
Remember, you can find Matt over at @Matt_Cochrane7 on Twitter.
Stay tuned, as we have more excellent guests coming soon.
You can find previous editions of the guest interview series below:
• Edition One: Bill Brewster
• Edition Two: Kris FromValue
• Edition Three: ValueStockGeek
• Edition Four: AdventuresInFI
• Edition Five: Brian Feroldi
• Edition Six: Brad Freeman
• Edition Seven: Mostly Borrowed Ideas
• Edition Eight: Richard Chu
• Edition Nine: Kermit Capitál
• Edition Ten: Liviam Capital
• Edition Eleven: David Belle
• Edition Twelve: Mark Cooke
• Edition Thirteen: 10-K Diver
• Edition Fourteen: Richard Moglen
• Edition Fifteen: Matthew Cochrane
• Edition Sixteen: Michael Mitchell
• Edition Seventeen: Pythia Capital
Lead Analyst at Occasio Capital Ltd