0:08

Welcome to Ditch the Suits podcast , where

0:10

we share insights nobody in the financial

0:12

services industry wants you to know about

0:14

. We're here to help you get the most remoney

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in life , so buckle up and welcome to

0:19

Ditch the Suits . Welcome

0:21

back to Ditch the Suits , stephen Travis , here with

0:23

you . We're going to be continuing episode number two

0:25

talking around this idea of corporate profits

0:27

. As we had mentioned , it's a political

0:30

season . There's a lot of finger pointing , there is

0:32

a lot of issues surrounding inflation

0:34

and how do you make sense of it . First episode , we

0:36

talked about this idea of , just at its

0:38

basics . What are profits ? What are they ? They're the

0:40

rewards for entrepreneurs and business owners

0:43

for the risk that they take for starting

0:45

businesses and having ideas . Well

0:47

, we had left that episode describing that there's something

0:49

even more important than profits that helps

0:51

add context to this , and it's this idea around

0:54

profit margins . Again

0:56

, we don't want to leave you if you don't really understand how

0:58

profit margins work . So , travis , when

1:00

we say they're more important , I think what's

1:02

a good starting point as to leading into why

1:04

profit margins are more important than profits

1:07

themselves .

1:08

We mentioned it in the last episode . We mentioned corruption

1:11

, and

1:13

politicians

1:16

can be corrupt , corporations can be corrupt

1:18

, individuals can be corrupt . I

1:22

think that , in general

1:25

, there's a corruption of the

1:27

language , of the terms that we're

1:29

using , because I think , when

1:31

we use terms

1:34

that are confusing to people and

1:36

we broad brush things , it's easy to categorize

1:38

things in broad groups and

1:41

really provoke response

1:43

, because it's okay . I understand what a corporation

1:46

is , and I understand profit is

1:48

about me making money , and therefore

1:50

corporations make too much money . They must be bad , and

1:53

we're going to go through kind

1:56

of how the numbers actually

1:58

the numbers gained behind this , because you

2:00

mentioned profit and profit margin . Profit

2:03

is how much money you have . Profit

2:07

margin , though , is how much profit from every

2:09

dollar of revenue you get , which

2:12

are completely different

2:15

things , and the reason why is , let's

2:17

say , it costs you a billion dollars to make a

2:19

million . That's very different

2:21

than if it costs you a million dollars to make a billion

2:23

.

2:25

Right and I think

2:27

then . So I understand

2:29

that profit margins are more important , but

2:32

tell us more like what is actually involved

2:34

and what can help somebody make context

2:36

of why profit margins are so important .

2:39

Well , when you invest in a company , you

2:41

really buy or invest in a company

2:43

for one reason , and that's to make money . I

2:46

mean some people , when you get to the real

2:48

small businesses , like maybe

2:50

you individually want to start a business , you may want to

2:52

start a business because of a lifestyle

2:55

decisions or things like that , but when

2:57

you're talking about investing , when you're talking about companies

3:00

that make it to large corporate status and those

3:02

types of things , people

3:05

put their money in them for one reason , and that's to

3:07

make money . Money

3:10

is a measurement of profit

3:12

. Lots

3:16

of companies have profit , though . So

3:19

again , it's like I

3:22

want to make money . I'm

3:25

probably going to be able to make at least

3:27

a little bit of money . But

3:29

the argument is but what about if we're

3:31

making too much money ? And

3:33

before we get into kind of breaking

3:35

that down , I would say it like this for

3:37

anybody who's saying well , you know , I want businesses

3:39

that are

3:41

corporate responsibility and those types of things , that's

3:44

when all things are equal , right

3:46

, nobody is going to be

3:48

very successful if they go out there and they say you know what ? I've

3:52

got two investments , two companies that I

3:54

could buy . One company makes a lot of money , but

3:56

I don't like the guy running it . He's a jerk right

3:59

and he says stuff that he shouldn't say . And

4:02

the other company they don't make any money . But the guy who

4:05

runs it's really nice guy , but

4:07

the business isn't that great

4:09

. It's not a great product . They're probably , in fact they

4:11

may even go out of business next year . You're

4:14

going to take a hundred grand out of your savings account and

4:16

you're going to give it to one of these two people to

4:20

go make you more money . You're gonna

4:22

put it behind

4:24

one of those two people , the guy you can't stand

4:27

. But they make money hand over fist , and

4:29

let's say that they're doing it all ethically . You

4:32

just don't like them for whatever reason

4:34

. And then you got the other guy

4:36

who you really like , but

4:39

they can't seem to make any money out of

4:41

anything and in fact they may

4:43

even lose your money . Who are you gonna get the money to ? You're

4:46

not gonna give it to the guy that you really like and they can't

4:48

make any money . Or if you do , that's probably

4:50

why you're broke . Those

4:53

are really bad decisions . So

4:56

you may say , well , I'm not gonna give it to that guy . I won't give it to the

4:58

other guy because I don't like him , but you're certainly not gonna

5:00

say okay between the two . If I had to give

5:03

my money to one of them , you're

5:06

gonna give it to the guy who makes money Because

5:10

you're gonna want your 100 grand back someday . You

5:13

know , this is like one of those things . People get bent on a shape . I'll give

5:15

a loan to you but I expect you to pay me back

5:17

, right ? Well

5:20

, investing in a company that doesn't make money is

5:22

like giving a loan to somebody and knowing

5:24

that you're never gonna get paid back . Who

5:28

puts money in their 401k or

5:30

in their brokerage account or someplace

5:32

else ? So it goes here's my money , it's

5:34

okay . If I never get it back , I won't hold it against

5:36

you , I won't be upset . I don't know anybody

5:39

who does that . But yeah , when

5:41

we're thinking about you know the

5:44

reason why we invest , we somehow

5:46

get a little bit distorted . The

5:49

reason you invest is to make

5:51

money . The number one goal

5:53

is to make money . Lots

5:55

of businesses make money . So then the next

5:57

question is I wanna make the most

5:59

money for every dollar that I invest . That's

6:01

the goal .

6:03

Let's pause and hear a word from our sponsor . This

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Big Thing podcast on all major podcast

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platforms today . I

6:43

think , for those that may be new , to Ditch

6:45

the Suits with us . We have

6:47

a couple of years worth of episodes

6:50

now , and I think what you just talked about , which is

6:53

I wanna align my money with my values that's

6:55

true , but to a certain extent , there's an

6:57

entire episode that we went through with ESG

6:59

and socially responsible investing that , if you're new

7:01

to the show , I'd encourage you to go check out and listen

7:03

to . It was a really interesting dialogue that we

7:05

went through , which is like how far are we

7:07

really gonna go with some of this information

7:09

before we say the reason we invest is to make

7:12

money , and I think then , if you're talking about

7:14

that right For those that may not be entrepreneurs , we

7:16

talked about that profit is really the reward

7:18

for the risk that you take when you start , when

7:20

you put your home up as collateral . That

7:23

is really your return for the risk for sticking

7:25

it out . But if we say that profit margin

7:27

then is more important for those that

7:29

may not be making products every day

7:31

or understand sales transactions , what

7:34

are some examples then that can help people

7:36

start to have that light bulb moment of okay

7:38

, now I start to understand how profit margins work

7:40

.

7:42

Yeah . So if a company sells a product for $1,000

7:44

, and let's say every

7:47

product they sell for $1,000 , just

7:49

pretend these are washing machines

7:51

. For every washing machine for $1,000 , they

7:54

sell , they get a $100 profit . It

7:58

costs them $900 to build

8:00

it , market it , sell it , pay commissions

8:02

, all that kind of stuff . They end up with a hundred bucks left

8:04

over . Then you

8:06

got another company and they

8:09

make washers , but their washers cost

8:11

$2,000 . However

8:13

, they still only make a hundred bucks for

8:15

every washer they sell . Both

8:18

of them make $100

8:20

per washer , but

8:24

one of them it costs a lot more money

8:26

to make a hundred bucks . So

8:30

if a company makes $100 off

8:33

of a $2,000 washer , that

8:37

means it costs $1,900 to

8:40

produce and sell it . Someone

8:43

has to front the $1,900

8:46

before it can be sold . Somebody is taking

8:48

the risk . The business owners are

8:50

taking the risk . Somebody

8:53

is taking risk of $1,900

8:55

that somebody on the end of this

8:57

is going to buy that washing machine

8:59

for $2,000 . $1,900

9:03

risk . If you get a hundred bucks , what's

9:06

that ? Off of a $2,000 price ? That's

9:08

a 5% return , basically right

9:10

. So

9:13

we're gonna make 5% off

9:15

of this product that we sell . That's

9:18

essentially your margin there . It's 5%

9:20

. If a company

9:22

makes $100 off the $1,000

9:24

washer . That means it's taking risk on

9:27

$900 , and

9:30

it gets a hundred bucks

9:33

, which is a 10% return off

9:36

of the $1,000 sale price . So

9:39

it's taking less

9:41

risk , less financial risk , and

9:45

it's actually making a higher

9:47

return for

9:49

that risk . So

9:53

the company can produce two washers for every

9:56

one that the other company can and

10:00

it makes the same amount

10:02

of profit per unit sold . But

10:05

if it's selling two units for every one that

10:07

the other one is doing it for the same amount of

10:10

risk that it's got to take on , right

10:12

, it's actually a little bit less because in this case it'd

10:14

be $1,800 versus the $1,900

10:17

risk for the $2,000 washer . They're

10:21

actually taking less risk and they're

10:23

making $100 per washer . They're making

10:25

more return . So

10:29

the reason why you need to be

10:31

concerned about how much money per unit

10:33

that it's making is because there's other risks

10:36

out there . Like you

10:39

have an input cost . This is what it costs to build

10:41

that and here's the price . And the price is that's

10:44

at the store already and that's like what this

10:47

thing is going to sell for . And if all of a sudden

10:49

some of the input costs change and

10:53

because the cycle of these things , maybe those

10:56

input costs change

10:58

before the price changes at the

11:00

store . So

11:03

if it no longer costs $900

11:06

to build this product and it goes up to $950

11:09

to build the product and

11:12

my price is still at $1,000

11:14

, it just hasn't caught up yet , which is normally

11:16

what triggers a recession , as the

11:18

prices haven't caught up yet . With the underlying

11:20

cost of things going up , that

11:24

would trigger a recession , or could , because it

11:26

would make companies look not profitable

11:28

and it could be a well

11:31

, it doesn't necessarily trigger a recession , but it

11:33

certainly triggers economic

11:37

volatility , Significant

11:39

market volatility , significant economic volatility

11:41

, and a lot of times you're going to have a recession in those types

11:43

of environments . But

11:46

let's say that the input costs , gas

11:48

prices went through the roof and all that kind of

11:50

stuff , and now it's $950 to produce the

11:52

same product

11:54

. I'm still making a

11:56

$50 product . I'm still making a 5%

11:58

return on it . But

12:01

that $2,000 product

12:04

, well , if the cost went up $50 , let's

12:06

say per thousand you have no profit

12:08

left . You now have $0

12:10

left over . So

12:14

all your employees want to raise next year . That

12:17

means you have to make more money on the stuff

12:19

that you're selling or you have to sell more of it . So you

12:21

don't sell anymore , you don't make any more money on it . I

12:23

guess what you can't do , you can't give everybody a raise . Or if you're going

12:25

to give everybody a raise , you're going to have

12:27

to decide who you're laying off so that you can afford

12:29

to give everybody a raise that's left over . So

12:32

you can see how this tips

12:34

off an economic cycle . Basically

12:37

, If

12:41

the margin of the profit gets too tight , there's

12:44

not enough room to make cuts

12:46

or have additional expenses pop up

12:48

. So

12:51

the other thing is if

12:54

you gobble up that profit

12:56

and there's

12:58

still debt payments , how

13:02

are you going to make the debt payments ? Or

13:05

shareholders ? Shareholders are the people who put up

13:07

all the money and they're saying , hey , I want to cut , I want to

13:09

dividend , or I want to see the value of the stock go up

13:11

. Well , there's no money to support

13:13

the value of the stock going up and there's no money to give

13:15

you a dividend . You , as an investor

13:18

, are going to say now , that's a horrible investment

13:20

. What are these fools doing with my money

13:22

? They're not making any profits and

13:25

the stock market crashes .

13:28

Well and to help , I think that was an awesome

13:30

analogy and just even using the examples we've

13:33

used so far , if you remove the word corruption

13:35

, which is where I think a lot of people kind

13:38

of mix these ideas together . But we just talk

13:40

about smart businesses . If you

13:42

talk about that small business that took a chance of

13:44

themselves , they wanted to make a difference

13:46

, so they invested in themselves , and it took them years

13:48

of making some money , reinvesting

13:50

, and they're now that first company that you've talked about

13:52

. They've reinvested so much that they've been

13:54

able to figure out how to increase their profit

13:58

margin by making better products in a faster

14:00

, more efficient way . You would say , hey

14:02

, that's a pretty smart investment , right ? Because

14:04

what is that doing ? That's going to attract more

14:06

investors , that's going to attract more people to

14:08

their business , and that's , I think , what

14:10

you're talking about in all of this is , if

14:13

you understand profit margin and you're an investor

14:15

, to be just kind of shaking

14:17

your fist at corporate profits and not understanding

14:19

that you invest money in your 401k and your

14:21

IRA . You're investing in companies

14:24

like the example that we just take the word dishwasher

14:27

or washing machine out of it and label it company

14:29

A and company B If those are your two

14:31

investments , with your million dollars , your two million

14:33

dollars of your investment money . It

14:35

would behoove you to understand what

14:37

are the profit margins so that you can get a potential

14:40

better alignment with a company that

14:42

could be that potential better return because of

14:44

profit margins . This is how it all ties

14:46

in together and

14:48

I think it's really important then . So then , okay

14:50

, we've talked a little bit about margin and why

14:53

it's important . Why

14:55

is it more important than profit

14:57

with that context ? Hey

15:01

guys , steve Campbell with Ditch the Suits Want

15:03

to take one quick moment to make a big ask . If

15:05

you haven't already , travis and I would love for you to subscribe

15:07

to this podcast , but if you haven't , also

15:10

we would love for you to leave a five-star rating

15:12

and review . Your rating and review will let other

15:14

podcasters know if the show is worth their time

15:16

. So let's get right back to the episode and thanks

15:18

for listening to Ditch the Suits podcast .

15:22

Well , and to step back a second on something that

15:25

you said profits

15:27

today , because I told you , profits are a measurement

15:30

of the money you made over the most

15:32

recent time period . When

15:36

we say that the company's record

15:38

profit is today is

15:41

happening . Today these companies are having record

15:43

profits . We're measuring

15:46

that against only the last 12 months

15:48

or whatever , or possibly

15:50

even against the fact that in

15:53

order to get the company to make

15:55

the profits that it's making today , for

15:57

instance , it

16:00

is very normal when you start a business to

16:02

go 10 years without making any money . So

16:06

when I started to seed , I could have certainly

16:08

worked and Ryan , our

16:10

other original

16:13

partner , we certainly could have worked for

16:15

other financial companies making a lot more money than we made

16:17

, and

16:19

we sacrificed that money . And

16:21

not only did we sacrifice that money , but

16:24

we put our own money into it and we

16:26

sacrificed all the money that that money would have made . And

16:30

so when you get to the point where you're profitable

16:32

and you have a good year , it's

16:35

not like , oh , that year was too good

16:37

. That's not fair . That

16:40

year was eight years before that

16:42

that you sacrificed and

16:45

you got a long way to catch up to where you

16:47

would have been had you had gone

16:50

a different path . But you

16:52

take the risk because you believe in where

16:54

you're going and you're believing that you can do it differently

16:56

and you're believing that you can bring value to people , so

16:58

you take this risk . So the issue

17:01

with profits and reading profits today

17:03

and saying you know what they made a bunch of profits

17:05

and therefore

17:07

you know it's no good

17:09

is the fact that , like you said I

17:13

think you alluded to this at least like profits

17:16

today . Do

17:19

not count all the reinvested

17:21

profits along the way , all

17:23

the money that when them , when

17:26

, when Amazon took 20 years

17:28

to really get going , all the money that was reinvested

17:31

in the infrastructure and buying up other businesses

17:33

and making it the behemoth

17:35

that it is . There were lots and lots of

17:37

years where it didn't look like it made any profits . Now

17:40

it makes lots of profits and people go . I can't believe how

17:42

many profits it's making . It's all record

17:44

price , like , yeah , because they sacrificed

17:46

and they reinvested and they , you

17:49

know , I mean they built and built and

17:51

built and built and now

17:53

they've got these record profits . But it's there's

17:56

for the people who sacrificed

17:58

for the first 20 years . Most

18:02

people have a hard time sacrificing for three

18:04

months or six months or a year . I mean , just look at

18:06

diets and gym memberships and all that

18:08

kind of stuff . Like we have a hard time actually

18:10

getting ourselves committed to

18:12

something and making through three months , six months

18:14

, people with investments that

18:17

investments a loser . It's like it's been down for three

18:19

months . What do you mean it's a loser ? Well , I haven't made

18:21

money on it . It's like you've owned it for three

18:23

months , had

18:26

that in the grand scheme of a corporate

18:28

lifetime . That's a day that doesn't

18:30

even . It's not even registering yet

18:32

. You haven't even had like an

18:34

entire cycle yet with that business . But

18:37

we're already judging it . We're very , very

18:39

impatient in

18:41

the way that , like if you had to commit to waiting

18:44

20 years to making some money

18:46

on something , most

18:49

people would not do it . Most people

18:51

say , no , you know what , I can't

18:53

. If I give you a hundred grand today

18:55

and I don't see any return on that

18:57

for 20 years , I don't even

18:59

believe that I'm going to get it . In

19:02

fact , if they don't see some money on that within

19:04

the next two years , they're probably not going to be very

19:06

happy about it . So

19:08

, all right , a little bit of a tangent . But to

19:10

get back on why the margin is more

19:12

important than the profit . And

19:15

this is again , this is a head game that

19:17

gets played with us . Excuse

19:20

me , if you buy a company

19:22

that makes $10 for every $100

19:24

products that it sells , you

19:27

pay a specific price for that company because

19:30

it's got a 10% margin . So

19:32

you go on and you say look for every $100

19:35

that that company . Well

19:37

, for every $90 that that company

19:39

spends , it's going to make $10 . I

19:43

like that , I want to make that , I

19:45

want to get a cut of that $10 for every single

19:48

thing that it does . Imagine

19:52

if that amount that it makes on every

19:54

$100 actually increases to $11

19:59

. So it went from $10

20:01

to $11 . Now you

20:03

make $11 for every $90

20:06

, essentially well

20:08

, actually every $89

20:10

. So you're making $11 on $100 , that

20:12

means that your cost actually went down . So

20:14

now you're making that extra dollar , you're making

20:16

$11 . That's

20:19

a 1% increase in margins , 1%

20:22

increase . Or

20:25

I could say that you know what that's

20:28

a 10% increase in the margin , right

20:30

, one divided by the 10

20:32

. Or

20:35

I could say that's a record profit . You've

20:38

never made so much money . You sold

20:40

100 units last year and

20:42

you made $1,000 . And this year you sold 100

20:45

units and you made $1,100

20:47

. Record profit

20:49

, say 1%

20:51

difference . How much was inflation last year ? Hell

20:54

of a lot more than 1% . Does

20:57

that record profit equate

21:00

to somehow

21:02

somebody's ripped you off ? Like

21:04

the reason why your food went up 50%

21:07

is because the company made a 50%

21:09

greater profit ? Nope

21:12

, those numbers aren't adding up anymore . It's

21:17

still just $1 for

21:19

every $100 . So what happens

21:21

, though , if I go , okay , steve , I

21:23

make $1 for every product , I

21:26

make $10 for every $100 that

21:28

thing that we sell , right ? Let's

21:31

say that we're selling car tires and they're

21:33

each $100 , and for every car tire I would get

21:35

$10 . And last year I

21:37

only sold I'm a new company

21:39

I only sold 100 tires , so

21:42

add two zeros to that , that means that's $10,000

21:45

in sales . I make $1,000 . Then

21:49

I do some Instagram stuff and I go viral and

21:51

everybody comes and buys my tires , and

21:54

I sell $100,000

21:57

worth of tires next year , and now my profit

21:59

is $10,000 . Record profit still

22:02

$10 for every $100 for every tire . Am

22:06

I doing something unethical

22:10

by still making my $10 per

22:12

tire even though I have record profits ?

22:17

And I guess I would pose this I think you would kind

22:19

of elude to it in the first episode which is

22:21

I think we have sometimes a

22:26

greater idea of what we think we do when certain

22:28

things will happen than what we actually end up doing . What

22:31

I mean by that is when you talk about profits from just

22:33

our everyday personal lives . If

22:35

I had more profit , I would be smart

22:37

and save that money . When

22:39

push comes to shove and you finally have profits

22:41

, what do most people do as families ? Take a dream vacation

22:44

, go buy the new car . We don't do the things

22:46

that . We just say if only I

22:48

had more money , I would be able to invest

22:51

more . And I feel like it's kind

22:53

of what we're talking about with this whole idea with

22:55

companies . Is we're getting angry

22:57

for the fact that we're hearing things

22:59

like record profits and not

23:01

understanding that it's almost like we're

23:03

being sold , that these companies

23:05

are killing your future in dreams that

23:08

if you could just lower the price in grocery

23:10

stores and put more money in your pocket , then you

23:12

would always do the right thing as an individual and

23:15

invest that money . So

23:18

are we getting mad at the wrong things

23:20

because it's being

23:22

told that's who's doing this to you , and

23:25

now we're all of a sudden going to be super benevolent

23:27

and good stewards of all this extra money . So

23:29

I think this whole idea around margins

23:31

is really important to understand

23:34

that , even if you don't understand companies

23:36

, you still get the opportunity to invest in these

23:38

type of companies . So even just understanding

23:40

from an investment standpoint what

23:42

you're looking at and the very cool opportunity

23:45

that we have as people to own bricks

23:47

of companies and participate in their

23:49

profits and what their revenues and what they're making

23:51

, I think even understanding this for most

23:53

people is probably more eye-opening

23:56

of like okay , I never really understood that's how margins

23:58

work . Like , tell me more . Like , what

24:00

are the things that I should be aware of , so that

24:02

when I hear certain news , I can either back that

24:04

up or say , hey , whoa , hold on

24:06

a minute , that's not true . So what else within

24:09

profit margins is important

24:11

for people to know ?

24:13

Well , people are also confused . All the time . You'll

24:15

get earnings report season and they

24:17

come out and they say , oh , record profits for

24:19

a company , and somehow the company stock still

24:22

goes down . Like , why

24:24

, thought , if record profits were so good , why would the stock

24:26

price go down ? And

24:28

so the only logical conclusion

24:30

I can come to is , if record

24:32

profits are a bad thing , that

24:35

investors are punishing the companies for making

24:37

too much money , which is a silly thing to actually

24:39

think about , because most people are saying they make

24:41

more money , I want to have them . Here's

24:43

what's actually happening . Imagine

24:46

if the amount of money that you actually make

24:48

on your $100 profit or your

24:50

$100 product , you're

24:52

selling tires again , and now , instead

24:54

of making $10 , I make $9 per tire

24:57

. So

24:59

this

25:02

is obviously not good , because

25:06

even if I sell more so

25:09

let's say that I did my numbers

25:11

there what did I say ? We sold a thousand .

25:16

Is this when we went viral ?

25:18

Yeah , well , let's say we sold a hundred

25:21

hundred dollar tires and

25:24

that's $10,000 , and

25:27

that means we made 900 bucks for

25:31

the year . And then we go viral Yep , right

25:33

Now we sell a thousand

25:35

tires and that's $100,000

25:38

and that's a $9,000 profit . We

25:41

had to work extra hard , right

25:43

, we actually worked

25:45

a lot harder . We had a lot more tires that we

25:47

had to sell and we actually

25:49

made less money per

25:52

tire . We have record profits

25:55

, but we actually have less

25:57

money per unit . So

25:59

, as an investor , you're saying listen , man , for every

26:02

hundred bucks that I have

26:04

invested with you , you know what I mean . Basically

26:07

, when I give you my money and you're

26:09

using my money , I'm expecting to make the

26:12

business to make a 10% profit on

26:14

it , and

26:17

now

26:19

the company is making 9% profit

26:21

on all of their products . I'm going to take my

26:23

money back , right , because

26:26

I'm looking at this going . You were making 10% , now

26:28

you're only making 9% . That's not good

26:30

. I wanted a company that was making 10%

26:32

, so I'm going to sell my

26:34

investment and go buy a company that makes

26:36

10% with my money . That's

26:39

the thought process in that . So when you see

26:42

the stock market and the stock market , or

26:44

the stock or even the stock market

26:46

crashes , even though there's record profits , the

26:48

reason is because that margin is constricting

26:50

or it's not expanding the way

26:52

that it's thought that it should be expanding

26:55

. So if you say

26:57

, okay , there's record inflation , wouldn't

27:00

you expect margins to get much , much

27:02

bigger Because you'd say

27:04

, record profits ? The companies are price gouging

27:06

. That's why we have inflation . That margin

27:09

should be getting bigger . Well , if the margin

27:11

isn't getting bigger , if it's possibly even

27:13

getting smaller , even

27:15

though we're making more money because we're selling more

27:17

units , we're having to do more work or we're

27:19

having to front more capital to get that

27:21

same , you know , to get that record

27:24

profit . So the profit per

27:26

unit that we're making is actually

27:28

going down . That's a concerning

27:30

issue . You might do it purposefully

27:33

right . There might be a business that says we're

27:35

going to disrupt , we're going to go based on volume , and

27:37

so we're going to undercut prices because

27:39

we're in a volume and through volume we're

27:42

going to find some synergies and that's where we're

27:44

going to make up our profit , or whatever that

27:47

may be the case , but in most

27:49

cases , when you're talking broadly across the

27:51

market , it's

27:53

not a good thing to

27:55

see margin erosion , to see margin

27:57

shrink . That means that the company

28:00

or the product is not in as good a shape

28:02

as it was in the prior period

28:04

, and that's also why you

28:06

see layoffs and

28:09

it's why you see plants get closed down

28:11

and it's why you

28:13

see prices increase because

28:15

they go . Oh my gosh , we're not making as much

28:17

per unit as we were making . We should have record

28:19

profits , but it's costing

28:21

us more and more to produce to get to

28:24

actually make less and less money . So

28:27

we need to adjust our input

28:29

costs or the

28:32

price .

28:33

Well , and you said it in the first episode , that

28:35

the news does not educate . The news stirs

28:37

up emotion . We hope that through

28:40

this podcast , we actually educate you , because now

28:42

it's been interesting that the same concept

28:44

has carried over from many different series

28:46

that we've done , which is what

28:48

you are being forced with as you are trying to live

28:51

your life and make good decisions . Now that

28:53

you understand profit margins , it helps you understand

28:55

how to make sense of this news . When you hear record

28:57

profits and you see the stock price go down

28:59

, what happened ? What was missing ? Same

29:01

thing , when you scour the internet and you go to search

29:04

up certain terms and you get these are the best investments

29:06

. We did an entire series on that . You

29:08

see the word best , so you assume that you're getting truthful

29:10

information and then you start to

29:12

read the article and it's crap . But

29:15

if you don't know that , you could be led

29:17

astray and take an action . What

29:20

I think you and I are trying to do is help give

29:22

you enough information to educate you , enough

29:24

to understand how to move the

29:26

ball forward in your life . And

29:28

I think , as I was thinking about what you were talking

29:30

about , if you see the fact

29:32

that record profits but the stock price goes

29:34

down and you panic . I

29:36

think a lot of investors also are very emotional

29:39

and you have to understand that . We've talked about this in

29:41

videos over the years . The

29:43

stock market is just that . It's a marketplace . There's

29:45

buyers and there's sellers . There's not just things happening

29:48

by a computer , necessarily

29:50

, unless an algorithm kicks in , but there's a

29:52

seller and a buyer on the other side . When people

29:54

get panicked and they sell things , it can

29:56

create fear in all of this . But

29:59

if you understand this information , then you understand

30:01

. Should I hold something ? Was it seasonal

30:03

? Was there some kind of disruption in the business

30:06

chain ? This is the kind of empowerment

30:08

Go as deep as you want to go with all of this

30:10

. But I think that this is the exciting part is the more

30:12

information that you want to make educated decisions

30:14

, the more that's available , and so I think

30:17

that this was a super helpful kind of

30:19

conversation . Was there anything else that you wanted to leave

30:21

off with before we close out about profit margins

30:23

?

30:24

Yeah , and it's going to lead us right into

30:27

our corporate profits to blame for high inflation

30:30

. To keep this simple

30:32

, let's pretend that our expenses

30:34

double . So let's pretend that our

30:38

tires now the

30:41

cost of the tires is going to go up

30:43

, the cost of the tires that we're actually selling . So

30:46

we had a $10 profit

30:48

on each of the $100 tires that we were

30:51

selling . So the cost was really $90 . So

30:54

what if it costs double

30:56

that now to make the tire ? And

30:59

it costs that because of taxes and

31:01

tariffs and manufacturing

31:03

costs and labor shortages , whatever it is

31:05

, the cost to make that tire

31:07

goes from $90 to $180

31:09

. Well

31:13

, shouldn't the margin be the same ? I

31:15

was making $10 per every hundred before

31:17

. Shouldn't I still be making $10 for every hundred

31:19

? So the

31:21

price , the cost , went

31:23

from $90 to $180

31:26

. The price goes from $100 to $200

31:28

. It's the same math

31:30

, same 10%

31:33

margin , same

31:35

return on the money invested in the company

31:37

. I want to make my $10

31:40

per every 100 of product that

31:42

I'm selling . When

31:45

we're looking at inflation , we're saying okay , what's the

31:47

impact of inflation ? Inflation

31:51

, in a lot of ways , is the reason the

31:53

product is more expensive in the first place

31:55

. It costs

31:58

more to put that product

32:00

together All the bits and pieces along

32:02

the way . If it's got raw materials

32:04

in it , it costs more

32:06

to get those materials . Get them into the country

32:09

, get them put together . Get the pieces

32:11

put together for the

32:13

next company to procure them . Put those pieces

32:15

together . Have the patents . Have the

32:17

workers do it all . Put the

32:20

pieces together . Get it to the store . The store's

32:22

got to pay laborers . The store's got to pay

32:24

somebody to stock the shelves . They

32:26

got to pay people to help you at the cash register , pack

32:28

your bags , that kind of stuff . If

32:31

all those costs go up , that's

32:33

where the inflation is . That

32:36

just gets passed along . Inflation

32:38

is a tax . It is just simply passed

32:41

along to you . Here

32:43

you go . It was 100 . I

32:45

was making 10 bucks . Now it's 200

32:48

. I'm going to make 20 bucks . Same 10%

32:50

. But we do this

32:52

. We're stuck for some reason in

32:56

yesterday . We're stuck in $10

32:58

yesterday and $10 today . So

33:00

it was $10 yesterday . It's $20 today

33:02

. That's not fair . It's $20 today

33:04

. But the $20 today is equal

33:06

to the $10 yesterday , basically . But

33:10

our minds haven't caught up to that . It's like I can't

33:12

believe they're making $20 today . Well

33:15

darn it . Don't you want to raise two ? I

33:17

can't believe that . People back in the 80s were

33:20

making $5,000

33:22

a year and they're making $50,000

33:25

by the time I graduated college . That

33:28

was pretty amazing . That's

33:31

inflation .

33:32

Well , I think that's such a cool story , because if you've been

33:34

tracking from the first example of an

33:36

individual profits up to a company

33:38

, shouldn't we celebrate companies that have

33:40

figured out how to work smarter , make better

33:42

products and all those

33:44

tiny bits and pieces to source them correctly

33:46

so that they do have a healthy profit

33:49

margin ? Wouldn't that be something ? But it's

33:51

almost like we

33:53

get angry at success and

33:56

we make success equal corruption

33:58

and greed . The only reason you're successful

34:00

is because you must have done something or screwed somebody along

34:03

the way . What if it's also just really good companies

34:05

? And we have to learn how to separate corruption from this

34:07

idea of profits , profit margin . So I

34:09

think , as we enter this next conversation

34:12

really surrounding inflation , I think

34:14

it's really going to be eye-opening if you've struck with us

34:16

. So again , thanks for stopping by . I did just reach out to Travis

34:18

and I , but , as always , we're here to help you get the most from your

34:20

money in life .