This week's installment of Industry Focus: Financials is a special one. Kevin O'Leary, Shark Tank star, entrepreneur, and financial literacy advocate, joins host Jason Moser and Fool.com contributor Matt Frankel, CFP, on the show to talk about his new investment app Beanstox (available on Google Play or on the App Store). O'Leary talks about why we have such a problem with financial literacy in the United States, how the COVID-19 pandemic has transformed the business world, and much more. You don't want to miss this one.
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This video was recorded on Dec. 21, 2020.
Jason Moser: It's Monday, Dec. 21. I'm your host Jason Moser. Joining me this week, as always, is my partner in crime Certified Financial Planner, Matt Frankel. Matt, this sounds like it's going to be a really fun episode for this week's Financial show. We've got a special guest today, don't we?
Matthew Frankel: We do. We have the one and only Mr. Wonderful, Kevin O'Leary. He's an investor, you know him from Shark Tank. Lately, he is the co-founder of a new investment app called Beanstox. Kevin came to the show today because he's passionate about educating Americans on financial literacy and generally helping people build their financial future. Kevin, thank you so much for joining us.
Kevin O'Leary: Great to be here. Thank you so much.
Frankel: You recently launched this new investment app called Beanstox, and it was launched during the pandemic. You told me the story a few weeks ago about it. Will you share with our listeners what led you to do this?
O'Leary: Yeah. I've obviously gotten some notoriety from Shark Tank. About 100 million people see these shows each year. Over time, we've been invited to high schools, it's very popular with young entrepreneurs. One theme keeps coming up over and over and over again, it's financial literacy. We teach our kids everything in high school: sex education, geography, math, reading, etc. We do not teach them anything about credit cards or debt or investing. Then we ask ourselves why we end up in a situation as we are today which has been highlighted by the pandemic a bit. There's 100 million people in America that have set nothing aside for their retirement. I don't know, if I'm looking for a cause which I am to really give back on in 2021 and beyond, it's going to be financial literacy. It freaks me right out that so many people, including many of the people that work for me in my own companies, have just two weeks of cash set aside, and that's not even investing, that's just poor financial planning. I decided to get into this space by getting involved in providing an app that would do the kind of investing I do, would share my investment philosophy, and help these 100 million people get going. I mean, just start, that's the plan.
Moser: Yeah, Kevin, that's a really good point. I'm glad you brought that up because it's something, obviously, it's very, very much in line with what we try to do here at The Motley Fool, and not only helping folks invest but really helping folks believe that they can achieve their financial independence. But it really does start with that financial literacy, it is obviously a major problem. I don't understand why it's not something that is just naturally taught us. It seems like half the states require it as a high school diploma, half the states don't. Understanding that financial literacy is a big focus for you right now, what are the things that you feel like within that financial literacy realm, what are the most important parts of that today? I mean, you mentioned credit cards, I think that's certainly one of them, but what are some of the key aspects that you're focusing on?
O'Leary: The No. 1 is to realize that saving and investing are two different things. One of the big challenges is people think, "Well, I'm going to take some amount of what I make in my paycheck and put it in a savings account." That is not investing. Investing is getting exposure to the market, which for many people, it's complicated. We make the assumption that people know how to buy a stock, buy a bond, create a diversified portfolio, know what large-cap, mid-cap, small-cap, tech, and growth are, and you good guys at The Motley Fool have been on this for years. Not everybody knows how to do that. In fact, the majority of people don't. So I wanted something like Beanstox to do that for you.
Beanstox is a platform for people that want to build a nest egg, be exposed to the market because a savings account doesn't get you market returns, market returns over the last 100 years, 6%-8%, depending on the year, generally over a long period of time.
So the whole idea is to invest a portion of your paycheck, I like 10% as the amount, at least $100 a week, and just let it grow from your late 20s to 30s and 40s and 50s, and you end up with $1 million to $1.5 million in the bank, and that's enough to retire on. It's like a safety net. But what I found out in doing all the research is that very few people have the time or the desire or the skills to read financial statements, learn about individual stocks, so I prefer to use a vehicle that I've been using in my own family trust, ETFs exchange-traded funds. There are over 2,000 of them out there. The question becomes, which ones do I invest in?
Some apps are very loyal to one brand or selling their own product, maybe, that's not how Beanstox works. The way I invest is looking for the very best in each category. What's the best ETF for large-cap? The best for mid-cap? The best for small-cap? The best for tech, for growth, for dividend growth? Then I put those into your portfolio, or not me, the app does. It does the work, and it builds that core nest egg that you live and to grow on. It doesn't mean you don't trade stocks, but you've got to have the motherlode somewhere, that's what I keep explaining to people. Where is the real money? Where are you really investing your bedrock?
Moser: How did we get to a point where financial literacy is not something that's a focus in school? I mean, given everything that we know now, and given that it's obvious as plain as day, how important it is. I mean, how are we at a point where it's still not a priority?
O'Leary: Because the way our system works, and I know this because I spent over a decade working in the educational software industry for schools, our whole system is based on advancing reading and math scores through the testing process, as you go right up to college. We care more about that than anything else. Because if you score poorly in reading or math, you don't advance through the system. So, all the energy from the teaching focus to all of the software development focuses on that. That's a huge mistake because it leaves you at the age of 18 not understanding what to do financially, what to do. Not even understanding credit cards or debt but even worse, not understanding the concept of taking a portion of what you make from that age no matter where you get it from, and putting it aside for your own personal future.
That's really what Beanstox does, it says, "Look, even at an age of 18, you can start to put in $100, $50, whatever it is, you're putting in, and that is put aside into the markets for you and starts to accrue benefits all through your life. That's the idea. Now, Florida has advanced this. They are now teaching financial literacy at the high school level. As you mentioned, other states are doing this too, but we are so far behind with 100 million people in America with nothing set aside. Anybody who is involved in financial literacy and that focus is doing a good thing. If I can use my Shark Tank platform and notoriety to get people thinking, including parents about getting their kids set up, I'm doing, for me, an important thing.
Frankel: For sure. We've all seen the public side of your investment strategy on Shark Tank, which sounds like that's a lot different from how you actually invest your own money. When you first scheduled the show, the No. 1 question people wanted me to ask you is how do you invest your own money that we don't see on TV? You said Beanstox is loosely modeled around your own investment style. How do you invest your own money?
O'Leary: It's actually very much focused around my investment style. In fact, I couldn't find an app that invested the way I did, so I got involved in Beanstox. When I was young, my mother taught me something very important about the concept of diversification. As a young working woman, she worked for a company that made children's winter clothing. She used to take 20% of her salary and put it into a diversified portfolio primarily on dividend-paying large-cap stocks, and the other half was in telco bonds. For some reason, she was fixated on telco bonds. In that era, they were yielding 5% and 6%, five-year duration. When she passed away, I'm the older brother and became the executor for her wealth. She kept this little account secret from both of her husbands her whole life. She was married twice. The executor called me up and said, you've got to come down here, your mother has died a very wealthy woman. I went down there, I looked at the portfolio and I called my brother, I went, "You are not going to believe this."
She had this concept of setting something aside, which became the core of my own investment philosophy. People are asking, where is my real money? I love Shark Tank, but that's venture investing. It's very, very risky. That's not where my real money is, my real money is invested in a very conservative portfolio of ETFs that focus on large-cap, mid-cap, small-cap, tech growth, and dividends. That's what I do, and that's why Beanstox does the same thing. It's meant to be conservative, it's meant to preserve capital, and it's meant to provide diversification. I live off those trusts, and so do my whole family and the charities we support because they are designed to protect that wealth and we distribute 6%. You can decide what you want to take out, but you don't do that now, not in your 20s. You wait until you're retired.
Moser: That's interesting, your style there. You've been investing for a while, obviously, and I think we all have here and we all are familiar with how we evolve as investors as time goes on. How has your investing style changed through the years?
O'Leary: You guys at Motley have done a great job in explaining what investing is about. You've educated millions of people that it's not that easy. Some people are really talented at stock-picking and trading and willing to spend a couple of hours a day managing their portfolio, their long-term investment, but the majority of people can't do that. It's A, they may not have the time, B, they don't have the skillset, and C, they don't want to. Beanstox is designed for the rest of them. My point is that sometimes it's fun to trade, I get that. I'm not against that. But I taught my own kids, you have a strategy for building your nut, the thing that protects you for the rest of your life, and then you can do whatever you like on the side.
If Beanstox is the thing that you're putting your $100 a week into, it's doing all the work for you. It's laying it all out and doing it. Then, if you want to trade stocks as you want to learn about it, great. But trading is not investing. I'm not against it, but it's not trading or something else, and I don't trade. I don't have the time for it. I make investments, I look at my portfolio, I manage it on a monthly basis, looking at the allocations. But I use a wide range of ETFs where I put millions of dollars to work.
Moser: Trading is extremely difficult to do sustainably well, I think that's what we always try to tell people. Anybody can flip a coin and get it right. But to do that well over long periods of time, it's very difficult. It's a question we get from all of our members all of the time. It's not just this year, but it's constant because we've frankly seen leadership changes here in the U.S. fairly constantly. I guess the question is, do you invest differently? Do you take a different philosophy or a different approach when leadership changes in the U.S.?
O'Leary: Not really. I do look at policy above all. The White House changes every four to eight years. But what really matters from your investment perspective is policy. We now know with this new administration, that they're going to be focused on vaccines and getting people back to work with recombinant Fed. This is a very good time to be investing and staying the course and equities. I have made a slight change because interest rates are so low. I used to be 50% fixed income and I've moved to 70% equities, 30% fixed income, because I prefer the upside of owning companies that have had some form of pricing power in an inflationary environment, and those are the large-caps. But also, I'm well exposed in mid-caps and tech and growth and dividend growth. I have diversification as the core to my strategy.
But we're talking about traders, one trader I had a conversation with, because I know a lot of people in that community and we talk all the time. I said, "Why don't you try this because you're in your late 20s, every time you have a winner, in other words, you trade into a winning position, take 10% of it, and stick it in Beanstox. Just take your winnings every once in a while, put a little piece aside because you're not doing any investments, you're just trading like a banshee. [laughs] Why don't you just take a little bit off the table?" He thought, "Yeah, that's not a bad idea because then don't I have to think about it." "Exactly, that's my whole point." If you consider trading your job, take 10% of your paycheck and put it aside for yourself in a more conservative mandate.
Frankel: I wanted to pivot to some questions about how you see the pandemic. How do you see just business in general? A lot of your businesses are retail in nature. You talked about your employees and how they didn't have a lot saved up and things like that. But a lot of your businesses are retail in nature. How do you see retail in a post-pandemic world? Do you see it bouncing back or do you see you having to fundamentally shift your approach to venture capital?
O'Leary: Well, I've learned a lot since March and I have a lot of clarity on 2021 now. I can give you an interesting snapshot of what's occurred. Most companies, particularly consumer goods and services, of which I have exposure to many of them, the ones that survived made the digital pivot. They moved away from selling through retail. When you sell through retail, you make $0.50 in $1. When you sell directly to your customer and you make $0.100 in $1. What they did is they licensed Shopify platforms. They got involved with DocuSign, they used Zoom, they standardized on Wix.com maybe, or whatever they had to do to digitize. Then they took and focused their customers -- not new customers, just their existing customers -- back on buying directly from them. Today, they're now 80% of my portfolio, ahead of forecast on free cash flow at the end of this year, which really shocked me quite a bit. The other 20% are involved in travel and leisure and entertainment and the wedding industry. They're not doing so well and it's unclear what's going to happen to them, but batting 800 is pretty good.
But one thing I will say, retail is forever changed. We're not reopening the stores that had mediocre returns, we're never reopening them, we're just going to continue with the direct consumer model. I think the retail landscape is going to change quite a bit. If you have a brand like lululemon or something, you can afford to have a retail store because you're selling $1,000 winter coats. But if you're a generic retailer in a generic mall, the outcome is not going to be pretty.
Moser: I think spot on in regards to retail, we were talking about this earlier today on MarketFoolery actually, regarding Nike's most recent quarter, direct sales, just phenomenal, representing almost 40% of their business. Now, I mean, all of a sudden, you look back several years that you can recognize the investments they've made in that direct-to-consumer are just paying off so well now. This is the work-from-home environment. This is something we've all been doing this past year, and obviously, given the nature of your job, demand is the GB in a number of different places, sometimes at once it seems. Are any of your employees, or are you working from home and what do you think about this work-from-home trend? Do you feel like retail is being forever changed? Do you feel like this work-from-home trend is something that's here to stay as well?
O'Leary: Let me give you an anecdotal example of a friendly change. This is a product that I invested in, the company called Boost Oxygen. This is a can of commercial oxygen, which is 95% pure oxygen, 5% air and it's what pilots breathe on aircrafts, and if the mass comes down, it'll be what you breathe. The idea of this company was to provide a boost in high altitude cities like Aspen and in the high-altitude locations. It's pure oxygen, I use it instead of coffee now. It's much healthier and I use it in the afternoon.
Now, this product, as you can imagine, because of the pandemic, has done extremely well. Not because of high-altitude, because of people's concerns about health, and living at home, and wanting to be healthy for respiratory basis. The world's largest retailer, the name I can't give you, but let your imagination wonder, normally they had it in high altitude locations and said this thing is selling so well, we'd like to hear a plan to roll it out across the country in over 3,600 locations. Now, normally, when that would happen in the past, the CEO would fly there, the head of sales and her team would fly there. Out of respect, because I own a significant position in the company, I would fly there too and support it in that presentation to the buyer because it's a very, very large order. That's not what happened. We did it on an 18-minute Zoom call with some very high-tech 3D graphics that showed the planogram in terms of how we're going to present the product line. I had a chance to speak to the buyer for a few minutes afterwards, she was a huge Shark Tank fan. We talked a little bit about how our life has changed. She's getting 30% more productivity in every day, because instead of five meetings a day, she's doing 18-minutes Zoom, five minute break, 18-minutes Zoom, five minute break. She's getting more work done from her own home and she is driving the process with the companies. We're not wasting our time, so I called my guy in accounting, how much money did we save collectively by not having to go there? $37,000 straight to the bottom line.
Now, that's happening all over America and it means bad news from hotels, bad news for the airlines, great news for the other 80% of the economy that's going to accrue the benefits of that huge reduction in business, travel, and entertainment, and more productivity in terms of getting their products. This is for an online order with that retailer and a planogram for shelf. It's a huge order and we did it all using technology.
Frankel: Has the COVID pandemic changed the way you invest at all, or is it just evolving your existing investments a little bit, what do you say?
O'Leary: It hasn't changed the way I invest. It made me focus on quality, because there's a lot of change going on in the balance sheets of the S&P 500. I do not own the S&P 500. I own 100 of the S&P 500 that I think of the highest quality balance sheet space, our return on assets, free cash flow. That is exactly the philosophy that I wanted in Beanstox. It's really about per preservation of wealth. Going back to the Beanstox story, that's what I did there. That was one of the main reasons that I didn't promote some other app. When I actually looked at what they had inside of them, they had generic, in many cases, generic ETFs, which were just indexes. I don't own indexes anywhere. I wouldn't own an index. There's many companies that aren't going to be here in five years. Why would I want to own them? I was really looking for the different ETFs from different publishers, different providers to make up the portfolio.
You really have to look, when you're doing long-term investing, at any strategy. My own personal motto inside Beanstox, what do you really own? What is it you actually sit there sleeping with, year in year out? Because I don't think generic indexes are going to perform as well as figuring out which companies, what they're going to look like five years from now. The Biden administration has made it clear they are not in favor of hydrocarbon infrastructure. Low and behold, many of the large pension plans have come out saying we're not into it either because our own LPs, our own investors don't want to invest in non-sustainable energy. These things, you care about them, because the incremental buyer, if when an institution stops buying. If they're not there for you and you start owning energy stocks, well, maybe you should reconsider that, that's not the best place to deploy capital, even though energies had a big run. I don't think it's a great place to deploy capital for the next five years because the incremental buyer, the sovereign funds, the CalPERS, the university pension plans, they're all pivoting away.
You want to go where they're going, to the quality names. That's the philosophy that I made sure was embedded into the DNA of Beanstox. I think I would really want people to try it, particularly if they don't have a plan. You guys say that to everybody that listens to you. You've got to have a plan. You've got to figure out, are you a person that invests in stocks, are you a person that reads balance sheets or not? If you don't, use a robo, then ask yourself which robo? If you want the one that reflects my personal style of investing, it's got to be Beanstox. That's the way I invest anyways. Beyond that, I wanted to make sure I shattered this out, for the month of December I've waived fees for anybody that downloads the app, sets up an account. No fees for the next three months. I want people to try it.
Moser: Yeah. I think you really keyed in on something there with folks in regards to not wanting to do it because of a lack of time, a lack of understanding, whatever it may be. It does feel like so many folks feel like investing is too risky, when clearly, the bigger risk is not doing it at all.
O'Leary: I'll tell you what's risky, getting to 65-years-old with no money in the bank.
Moser: I can't even fathom that and thankfully, I've been living my life in another way. Let's take a little bit of a turn here. We consider humility to be one of the investor's greatest traits, I'm sure you believe that as well. The older I get, the more I enjoy being able to say, you know what, I was wrong. Because it means that I've learned something and it's made me better. Looking back through your life as an investor, it doesn't have to be the worst, but what is one of the investments that really sticks out as not such a good one? What's one of the worst investments you've ever made? What do you learn from it?
O'Leary: I learned a very, very important lesson and I'll never forget it, and it's a great lesson for everybody listening. I shortened Yahoo! before it was put into the S&P 500. I shorted it at $32 a share, and I was convinced that it had no value and watched it go to $280. The margin calls, it was with the old Bear Stearns before it was gone, were in the millions of dollars an hour. I was committed to holding onto that short because I knew one day, Yahoo! would be at least a zero, I thought. It took years and I remember I was golfing in Boston at Brae Burn, my golf course, when my broker from Bear Stearns called me up and said, "Kevin, Yahoo! is back to $32 where you started this horrific journey, can I cover?" I said, "No. I think it's going to $0." [laughs] It's not that I was right, it's that I killed myself by not understanding when you short a stock, your losses are unlimited. I tied up for years millions of dollars of my capital just for the margin to do something very, very stupid.
So now, what I do in terms of being an investor, the lesson I learned there, because I covered that short I think at $12.50 and I made a few thousand. I made nothing compared to the money I risked, it's so stupid. But the point was, I never let a stock become more than 5% of my portfolio and I never let a sector become more than 20% ever. That way, when I own a Tesla and it's doing its thing, I'm selling into the strength, keeping my 5% waiting, selling, selling, selling, selling, keeping my exposure. Now, I don't get all the winnings, but I also don't get the losses when it corrects, because my cost of capital in the stock, my acquisition cost is $0. I've covered it all off as it moved up. Managing those positions is what Beanstox does, and it does the same kind of thing if you're not doing it yourself, but it's kind of a philosophy, 5% and 20%. It's very simple to remember, 5% and 20%. Don't get caught off side, that will protect your high-need for the rest of your life, and don't do stupid things like shorting the next Yahoo!, whatever that is.
Moser: 5% and 20%, that's better than 2% and 20%, right? [laughs]
O'Leary: 5% waiting on the stock and 20% in the sector, it will protect you as an investor your whole life.
Frankel: What you said before about Beanstox, and I have another question, that sounds like a real key differentiator that you don't just put money in the S&P or in the total bond index or any of those.
O'Leary: You're right, because you're just indexing when you're doing that, which is what many of those robos do.
Frankel: That's sounds like a key differentiator, because I've done a lot of robo reviews for The Motley Fool, and it seems like a lot of them, all the indexes are either the S&P 500 or something very close to it, or a generic small cap index or something like that. So, that could be a key differentiator worth noting.
O'Leary: I am very proud of that, because when I'm out there talking about reflecting my investment strategy, I do not own a single index. I just don't do that. I would never do that. There's so many stocks I don't want to own and that's reflected inside. I would urge others to look at the performance of Beanstox versus other robos. I mean, let the numbers speak for themselves.
Frankel: It's interesting you mentioned that. I mentioned this several times, we see you as a venture capital investor, things like that. What are the differences between investing in public and private companies that people would need to know? Because a lot of people would love to do what you do. But as you said, it's not for everybody. It sounds like Beanstox is one end, investing automatically, then you have venture capital, which is what you do on Shark Tank, and then investing in public companies directly is in the middle, like Tesla or something like that. What are the differences, in your mind, of investing in public and private companies? I know you said risk is one, but what else?
O'Leary: Liquidity. The biggest problem with taking on risk and venture capital or private equity is liquidity. You should consider that investments gone from liquidity are gone from you for five, seven years. You should have in your mind the ability to live without that capital for a very long, extended period of time. The people that make mistakes in venture investing or in private equity forget that they need liquidity in their lives because in life, coo-coo happens. You just don't know when it's going to happen. When that occurs, you need liquidity.
I would say that 95% of what I invest, or maybe 90%, let's make it 90%, is in very liquid large cap companies or companies that are profitable, mid-cap or small tech companies, all done through ETFs. That's my core holding, and that's the philosophy of Beanstox. The stuff I do, the very speculative stuff I do in Shark Tank, for example, and I have many other companies. One of the great things about being a Shark, I'll be honest with you, is I get shown everything now, I see every deal there is, practically, and I have a whole team of people analyzing and we make many investments outside of Shark Tank because we see wonderful ideas and great entrepreneurs and I want to be supportive. But I consider that money gone when I invest in it, because I have no idea of what the outcome is going to be. Then every morning, because I've got so many of them now, I have a complete Shakespearean drama playing out. [laughs] Euphoria in one area, maybe five companies just exploding with upside like this last week. The call that we're going to do that Zoom with that giant retailer, that's euphoria.
Then I have companies in business travel, that are just begging for another PPP loan. Maybe they're going to make it, maybe they're not. So that plays out all day long, it's just a giant chorus of euphoria versus complete misery, and that is the nature of venture investing. Then every once in a while, I'll get a phone call saying, "Oh, they want to buy Plated for $340 million. Albertsons wants to buy my Plated company. That's good, [laughs] I like that. That's a good outcome and that pays for all my mistakes. That's the nature of that business, but that has nothing to do with the bedrock strategy that I teach my kids about investing for themselves or what Beanstox does. If you want to be a venture investor, you better be ready for rock and roll, because the outcome is completely unknown, completely random, it's very lots of energy, and I love working with the entrepreneurs, but the outcomes are crazy outcomes. You just don't know what's going to happen.
Moser: Kevin, before we wrap things up today, we always are very interested to know the investors that we speak with, we like to know the investors that have had an impact in your life. Throughout your entire investing life, what investors have had an impact on you and why?
O'Leary: There is one. Charlie Munger. Charlie Munger is my guy. I mean, there's nothing wrong with Warren Buffett, but you want to know where all that philosophy comes from and who keeps Warren Buffett on a straight track, it's Charlie Munger. He has two words, cash flow. [laughs] Cash flow, that's what he believes in. My whole investment strategy is built around cash flow. I have a little Charlie Munger on my shoulder [laughs] every day when I look at a deal, and he's just saying two words, "Cash flow, cash flow." He's right, he is the most astute balance sheet guy in the world. No BS guy, says it the way it is, you can't sell him crap, it's impossible. Does it keep him out of speculative situations? Yeah, there's many stocks that probably had fantastic returns. But because he stays onto the straight and narrow on cash-flow, he is an incredibly wealthy and successful man. You can't go wrong with cash flow.
Moser: I agree with that.
Frankel: Well, Kev, thank you so much for joining us on Industry Focus today, and it sounds like that will wrap up the show for the week.
O'Leary: Thank you. Really appreciate it. I love what you guys do. Keep it up. Financial literacy is part of what you do and it's really important. Thank you for focusing on Beanstox, I'm very proud of it, and I want everybody to try it.
Moser: Great. Thanks, Kev. That'll do it for us today, folks. Remember, you can always reach out to us on Twitter @MFIndustry Focus, you can drop us an email at email@example.com. Let us know what you thought of the interview with Kevin O'Leary. A lot of great stuff here today.
As always, people on the program may have interest in the stocks they talked about and the Motley Fool may have formal recommendations for or against, so don't buy yourselves stocks based solely on what you hear.
Thanks, as always, to Tim Sparks for putting the show together for us. Thanks again to our special guest, Kevin O'Leary, for taking the time to join us this week as well. For Matt Frankel, I'm Jason Moser. Thanks for listening and we'll see you next week.