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

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0:00
so mr. wonderful shark tank let's play a
0:02
little role reversal here I'll be the
0:04
shark and you absolutely I'm ready that
0:05
you be the young man pitching business
0:08
tell me about Oh shares how did it get
0:09
created what are the rules behind it
0:11
this new etf business you've launched
0:12
getting some buzz well thank you I am
0:15
it's a solution for me personally for my
0:17
family trust you know I I have been a
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big fan of using ETFs and I thought it
0:24
could be in a trust situation very good
0:26
my mandates very simple in 97 after I
0:28
sold the learning company I created a
0:30
series of trusts to do a few things
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within my family when I was young my
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mother decided to cut me off after I
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finished education I didn't believe she
0:39
would do it but she did she had this
0:41
little philosophy she said that the dead
0:43
bird under the nest is the one that
0:45
never learned how to fly and I get what
0:49
she meant now because that's what
0:51
happened she said you got to go make
0:53
your own fortune and you know if you can
0:55
do it so what I decided is to structure
0:58
trust to do this they basically provide
1:01
for children from birth the last day of
1:03
education and then they get nothing
1:05
after that but they all it also takes
1:07
care of their issue when they have
1:08
children it'll take care of that birth
1:10
to the end of education so it's got to
1:12
be multi-generational so this trust in
1:14
97 was structured so in 51 percent or 50
1:18
percent equity 50 percent fixed income
1:19
with the equity side I used to use
1:23
active managers and this has been around
1:25
decades now and what I would find
1:27
there's nothing wrong with them is some
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great managers out there and I've used
1:29
many but style drift creeps in and so I
1:33
have fun from time to time have to make
1:34
changes what happens when I'm gone
1:37
that's what I'm worried about when I'm
1:39
not here to do that that's when I
1:41
started looking at ETFs because ETFs are
1:44
rule-based
1:45
indices there is no style drift and so
1:49
my covenants are very simple my trust
1:52
has to pay a 5% and I'm telling you this
1:54
because the creation of a shares was to
1:57
solve this problem and I'm telling you
1:58
about every year I got a pal five
2:00
percent I learned years ago and this is
2:04
just a fascinating you know one of the
2:06
things in life that just comes from
2:08
a unique experience my mother used to
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take 1/3 of her paycheck and put it into
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large captive and paying stocks and
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corporate credit back in the early 60s
2:20
and when she died this portfolio too
2:23
existed for 50 years as an executive
2:25
first time I got to look at it she'd
2:27
hidden it from both of her husband's it
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was amazing if dividend-paying stocks
2:31
and corporate credits over 50 years you
2:35
can't find it it exhibits that and so
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when I started to do some research I
2:39
found out one interesting fact that
2:41
changed my investment philosophy forever
2:43
over the last 40 years 51 per sources
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sorry over the last 40 years 71% of the
2:49
market returns came from dividends not
2:50
capital appreciation so rule one for me
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is I'll never own a stuff that doesn't
2:55
pay a dividend ever number two
2:58
diversification really matters so I
3:00
never want oh more than 5% in any one
3:01
name and you know that really works when
3:04
you go through periods like Oh 809 we
3:06
have volatility in sectors in number
3:08
three when you start to look at capital
3:11
from multi generations you want
3:12
preservation so I thought I'd go to the
3:16
ETF market to solve for it and I found
3:19
out something very interesting that I
3:20
think others have found out recently as
3:22
well the first generation of ETFs are
3:24
market cap weighted indices so over time
3:28
when companies grow their market cap
3:30
that becoming an ordinal large piece of
3:32
the index if I have a covenant a 5%
3:34
market cap weight in any one name most
3:37
of these ETFs I can use because you get
3:39
four or five names represent 40 50 60 %
3:42
of the index so I went to Kerr the
3:45
footsie russell guys and said look my
3:48
rules are simple can you give me a new
3:51
index that meets my 5% market cap
3:53
weighting 20% in sector but above all
3:56
lower vol and I want 50% more yield from
4:00
the index in the generic index can you
4:02
design something like that for
4:04
I've a fair amount of capital put to
4:05
work I thought that these rules would be
4:08
of interest to other investors that was
4:11
the genesis of Oh shares we created
4:14
something new for the ETF market it's a
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new generation you know one of the
4:18
things you're speaking about is
4:19
preservation of capital companies that
4:21
pay dividends so much excitement and
4:23
buzz around the stock market during
4:25
periods like we've been in for the past
4:27
few years goes to the other side of
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things they're really hot stocks the
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things that run up by crazy amounts this
4:33
sounds to me like your strategy is going
4:35
to avoid the distraction of worrying
4:36
about when the ubers of the world will
4:38
come public and how Facebook stock is
4:40
doing you're in a very kind of you know
4:42
you know your corner and you're sticking
4:44
to it and it's been successful for you
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in the past so that's why you're
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continuing with it right yeah I think
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there's other reasons too you know if
4:52
you look at the volatility in the market
4:55
around names that don't pay dividends
4:57
they're extremely volatile because
4:59
there's no cushion of yield what's
5:02
what's the value of a stock that never
5:05
returns capital to its shareholders I
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don't know because the only way you can
5:10
make money is if somebody else is
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willing to buy that position at a higher
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price for some emotional reason perhaps
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or for some you know foresight that
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maybe the company will return capital
5:22
one day and I think of it you know what
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when you learn as an investor over
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multiple decades is the only thing that
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matters is free cash flow that's it
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there is no other reason to own a stock
5:35
and with that philosophy it brings you
5:39
into a place where you focus on a
5:42
company's ability to generate
5:44
incremental cash flow because just
5:46
owning a dividend paying stock is not
5:48
good enough because you know let's say
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we find a stock today that's paying a
5:52
three percent dividend yield and
5:53
tomorrow because it's forecast for sales
5:56
get cut in half the stock drops on 50
5:58
percent now it's yielding six percent I
5:59
don't want to own that stock either so
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my tests in this index that I've you
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know created with let's see Russell
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looks at the balance sheet every year we
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test to make sure that the company is
6:12
viable in its ability to generate cash
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this is extreme
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conservative investing this is for the
6:18
long haul
6:19
these tools are not for as you're
6:21
suggesting for spicy you know the hot
6:25
stock does your I've done that I've been
6:27
there you know let the young legs do I
6:31
have zero interest in that I don't care
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what the hot new stock is you know when
6:36
a company comes public I won't own it
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either it's got to prove to me over
6:40
multiple years that it can continue to
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generate cash before it even fits in to
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what I'm doing so I'm really boring and
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I like it that way so a great company
6:49
doesn't necessarily have to equal a
6:50
great stock they can be two very
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different things from your perspective
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there's many companies where I buy their
6:55
products and services I would never
6:56
touch their stock so you know it's sort
6:59
of we're talking about real money here
7:03
the stuff that you need to preserve you
7:06
know when I think about my family trust
7:07
I can't afford to mess around with that
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I'm guessing it came from your mother
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but what would you say was the best
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piece of financial advice or business
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advice you ever got in your long lengthy
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career when I was seven and my brother
7:21
was five she take us to the bank with
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her you know to because that's where you
7:26
would buy bonds back in those days you
7:28
could actually buy the certificate with
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the coupons every six months you clip
7:32
them off she'd say to his boys never
7:34
spend the principal only the interest I
7:36
had no idea what she was talking about
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that's all I do today in my world you
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never touch a principal you adjust your
7:44
spending habits your gifts to charities
7:47
your use of capital based on how much
7:49
you can generate from your portfolio I
7:52
view my portfolio and my trust and my
7:55
positions as a chicken on a spit
7:57
dripping cash everything has to generate
7:59
yield whether it's a fixed income
8:01
position or in equity it has to it the
8:04
only reason it can be in my world is
8:05
generating capital back to me I take
8:08
that I disperse it the family lives off
8:10
that the charities I've committed to so
8:13
I'm always looking for a company that
8:14
can help me with my problem of
8:16
generating more yield everything that I
8:19
mean I can't even imagine by missed
8:21
doesn't pay a difference why would you
8:23
do that what would it be the reason you
8:25
would do that I don't get it so to me
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that means about 28% of the market to me
8:31
is just speculation a stuff that doesn't
8:33
pay a dividend is a speculation it's not
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an investment
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