Simple Rules For Investing With Shark Tank's Kevin O'Leary | Forbes

so Mr Wonderful uh Shark Tank Let's uh play a little roll reversal here I'll be the shark and you be absolutely you be you be the young man pitching a business uh tell me about oares how did it get created what are the rules behind it this new ETF business you've launched uh getting some Buzz well thank you I um it's a solution for me personally for my family trust you know I I have been a big fan of uh using ETFs and I I thought well it could be in a trust situation very good my mandate's very simple in '97 after I sold the Learning Company created a series of trusts to do a few things within my family uh when I was young my mother decided to cut me off after I finished education I didn't believe she would do it but she did and she had this little philosophy she said that the dead bird under the nest is the one that never learned how to fly and um I get what she meant now because uh that's what happened she said you got to go make your own fortune and you know if you can do it uh so what I've decided is to structure trust to do this they basically provide for children from birth the last day of education and then they get nothing after that but they all it also takes care of their issue when they have children um it'll take care of them birth and end of education so it's got to be multigenerational so this trust in 97 was was structured so it would be 51% or 50% Equity 50% fixed income with the equity side um I used to use active managers and this has been around decades now and what I would find and there's nothing wrong with them there some great managers out there and I've used many but style drift Creeps in and so I have from time to time have to make changes what happens when I'm gone that's what I'm worried about when I'm not here to do that that's when I started looking at ETFs because ETFs are rule-based indices there's no style drift and so my covenants are very simple um my trust has to pay off 5% and I'm telling you this because the creation of O shares was to solve this problem that I'm telling you about every I got to pay 5% I learned years ago and this is just a fascinating you know one of the things in life that just comes from a unique experience um my mother used to take a third of her paycheck and put it into large cap div on paying stocks and corporate credit back in the early 60s and when she died this portfolio had existed for 50 years and as an executive the first time I got to look at it she'd hidden it from both of her husbands it was amazing if if dividend paying stocks and corporate credits over 50 years you can't find an index that beats that and so when I started to do some research I found out one interesting fact that changed my investment philosophy forever over the last 40 years 51% or sorry over the last 40 years 71% of the Market's returns came from dividends not capital appreciation so rule one for me is I'll never own a stock that doesn't pay a dividend ever number two diversification really matters so I never want to own more than 5% in any one name and you know that really works when you go through periods like 0809 we have volatility in sectors and number three when you start to look at capital for multi-generations you want preservation so I thought I'd go to the ETF Market to solve for it and I found out something very interesting that I think others have found out recently as well the first generation of ETFs are market cap weighted indices so over time when companies grow roll their market cap they become an inordinately large piece of the index and if I have a covenant of 5% market cap weight in anyone name most of these ETFs I can't use because you get four or five names represent 40 50 60% of the index so I went to C the footsie Russell guys and said look my rules are simple can you give me a new index that meets my 5% market cap waiting 20% in sector but above all lower of all and I want 50% more yield from the index and the generic index can you design something like that for me I have a fair amount of capital put to work I thought that these rules would be be of interest to other investors that was the Genesis of O shares we created something new for the ETF Market it's a new generation you know one of the things you're speaking about is Preservation of capital companies that pay dividends so much excitement and Buzz around the stock market during periods like we've been in for the past few years goes to the other side of things the really hot stocks the things that run up by crazy amounts um this sounds to me like your strategy is going to avoid the distraction of worrying about when the Ubers of the world will come public and how Facebook stock is doing you're in a very kind of you know you know your corner and you're sticking to it and it's been successful for you in the past so that's why you're continuing with it right yeah I I think there's other reasons too you know um if you look at the volatility in the market around names that don't pay dividends they're extremely volatile because there's no cushion of yield what's what's the value of a stock that never returns Capital to its shareholders I don't know because the only way you can make money is if somebody else is willing to buy that position at a higher price for some emotional reason perhaps or for some you know foresight that maybe the company will return Capital One day and I think of you know what when you learn as an investor over multiple decades is the only only thing that matters is free cash flow that's it there is no other reason to own a stock and with that philosophy it brings you into a place where you focus on a company's ability to generate incremental cash flow because just owning a dividend paying stock is not good enough because you know let's say we find a stock today that's paying a 3% dividend yield and tomorrow because its forecast for sales get cut in half the stock drops by 50% now it's yielding 6% I don't want to own that stock either so my tests in this index that I've you know created with footy Russell looks at the balance sheet every year we test to make sure that the company is viable in its ability to generate cash this is extremely conservative investing this is for the Long Hall these tools are not for as you're suggesting for spicy you know the hot stock dour I've done that I've been there you know let the young legs do that I have zero interest in that I don't care what the hot new stock is you know when when a when a company comes public I won't own it either it's got to prove to me over multiple years that it can continue to generate cash before it even fits into what I'm doing so I'm really boring and I like it that way so a great company doesn't necessarily have to equal a great stock they can be two very different things from your perspective there's many companies where I buy their products and services I would never touch their stock so you know it's sort of we're talking about real money here the stuff that you need to preserve you know when I think about my family trust I can't afford to mess around with that I'm guessing it came from your mother but what would you say was the best piece of financial advice or business advice you ever got in your long lengthy career when I was seven and my brother was five she'd take us to the bank with her um you know to because that's where you would buy bonds back in those days you could actually buy the certific certificate with the coupons every 6 months You' clip them off she'd say to us boys never spend the principal only the interest I had no idea what she was talking about that's all I do today you in my world you never touch your principle you adjust your spending habits your gifts to Charities your use of capital based on how much you can generate from your portfolio I view my portfolio and my trust and my positions as a chicken on a spit dripping cash everything has to generate yield whether it's a fixed income position or an equity it has to the only reason it can be in my world is generating Capital back to me I take that I disperse it the family lives off that the Charities I've committed to um so I'm always looking for a company that can help me with my problem of generating more yield everything that I mean I can't even imagine buying a stock that doesn't pay a dividend why would you do that what would be the reason you would do that I I don't get it so to me that means about 28% of the market to me is just speculation a stock that doesn't pay a dividend is a speculation it's not an investment

Channel: Forbes

Views: 417,540

Keywords: Forbes, Forbes Media, Forbes Magazine, Forbes Digital, Business, Finance, Entrepreneurship, Technology, Investing, Personal Finance, Shark Tank, Reality, Television, Kevin O'Leary, Mr. Wonderful

Id: 9PMkgtwMkxc

Length: 8min 41sec (521 seconds)

Published: Fri Sep 25 2015