Wealthy Words: Break Down Financial Concepts into Simple Actionable Steps - Featuring Riccardo Grabbio

Pity Party Over

Financial advisors, attorneys, doctors, and fiscal consultants are essential professionals who help us navigate an ocean of information to make sound decisions. How do you choose a good one when the language they speak is a nebulous lingo few people fully understand?

Riccardo Grabbio is a seasoned financial consultant known for his pragmatic approach and extensive experience as Chief Financial Officer. In this episode, Riccardo helps clarify some common financial lingo so you can build trustworthy and clear communication with your financial advisor or find the perfect one you understand.

Listen to how to keep financial strategies simple on Spotify, Apple Podcasts, Google Podcasts, Amazon Music, Podbean, or your favorite podcast platform.

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TRANSCRIPT

Stephen Matini: So I represent your typical moron who doesn't know anything about finance. And let's say that I'm seeking for a financial advisor, where should I start?

Riccardo Grabbio: When we take a look at finance actually is not something very small, very narrow, something. There are thousands of aspects that we need to take a look at. So first question to me is asking yourself, what do I need? Because when you talk at about finance, it might be have your own personal budget, for instance, because your expenses are not under control.

Can be or maybe can be having a finance advisor because my company must improve, must improve for whatever reason because the balance between revenues are and cost are not enough or simply because I'm not managing well enough, my working capital for instance, or maybe because my cash flow is not coming, even though I'm making revenues, I, I do not understand why this is the second one.

Or maybe it can be for instance because I have a lot of cash, but I'm not capable of leverage that cash well enough to make my company grow better or how it should, or maybe simply because I have a personal heritage that I want to have a battery yield.

Riccardo Grabbio: And at the moment I don't have this is let me say very typical situation that Italian families has. For instance, just to give an idea because you need to know that the GDP of Italy is not satisfactory, is not a country that is growing a lot for several reasons. We are not efficient enough. Our industries are weak, must improve, we have tax issues and all those stuff.

But you need to know that Italian families are rather rich and what they have, they have a lot of cash because of generation and so on. And they have a lot of properties. And the big issues that I have seen, for instance in Italy is that what the Americans say is asset rich and income board, to me a financial advisor, this is the first rule of financial advisor, try to change this status because when you are asset rich and income board means that you are not efficient or better, you can't manage your asset.

And in this specific situation, for instance, the financial advisor can create tremendous value to, to a family for instance, try to think very rich family that has a good family office and exactly the same very rich family without the family office handling the money for them, the result would be completely different.

Stephen Matini: Based on everything you said so far, it seems to me that you, I think you mentioned like probably several things, they're important, but three are really important. One is that you don't need to have a big assets in order to start to be more financially savvy. That's one. Then you mentioned several times the importance of cashflow and the other one you emphasized the importance of time because from a financial investment standpoint, time is crucial more than the actual percentage you get paid in the moment.

Riccardo Grabbio: Yes, exactly. I can tell you talking about the time, which is the most important of one. There are several studies that I have read over the years from JP Morgan, but also from some other sources like banger and so on. And what they say is that in a period of at least 20 years in a bunch of 100% investors in the stock market, there was not one that lose one penny over or the 20 years.

It means that if you invest, if you buy and hold for 20 years, you're not going to lose money. If instead you try to, what, what we technically say, time the market. So you buy and sell, you buy and sell, then things get tricky. I can tell you one thing, I dunno if you have ever heard about Peter Lynch, I think in seven years in which he managed the found Magellan, he doubled the s and p 500 each and every year.

Riccardo Grabbio: So try to think a, a result what we are still talking now about his performance and the funny thing is that 90% of the investors that invest in his fund, they lose money over the year. And you can ask me how it can be possible that in 20 years a fund had a performance huge and the investors lose the money because they were not buying and holding, they were buying and then selling, buying and selling try to keep the best moment in which you to enter and to exit from the fund and doing that 90% of those, they lose the best return of the market. So buying a whole is a good advice.

Stephen Matini: So I I wanna ask you to define some key terms, you know that maybe could be useful for the people who are going to listen to the episode. How would you explain assets in the simplest way?

Riccardo Grabbio: An asset is something that brings you money in your pocket and on the other side you have liabilities. That is something that takes out money from your pocket. Why is tell you that? Because for instance, try to think to have a new big car, an expensive new car. Actually from the accounting standpoint, this is an asset. Then you, you, you d it in your, in your balance sheet, this is an asset then you will depreciate in 10 years and so on. This is technically an asset, but to me this is not financially an asset. Why not? Because it's not bringing you value any kind, it's not bringing you money in your pocket, it's draining money from your pocket. So keeping it in very simple. For our listeners, asset is something when you buy something that will bring you further money in your pocket than you are buying an asset.

Riccardo Grabbio: If it doesn't, then it's not an asset. Then we have some asset that intrinsically they produce something, they produce a value. Let me give you an an an example. A stock index or a single stock for instance, you have a company, you have an organization. Those people, they are all working together with a common purpose, which is to create earnings and so on. So it doesn't matter the price in the short term, in the long run it'll increase in value. Why? Because those companies are making earnings, they're paying dividends and so on. So there will be a good result in the, in in the future. But then there are some other asset that those, they have a value fine, but they don't produce anything. Let me give you an example. If we talk about precious metals, I dunno, gold for instance and so on in this one here is just a simple piece of metal, right?

Riccardo Grabbio: It has big value. Yes it does. The market is valuing is up and low value, it does a function in investment portfolio but is not producing anything. I mean, so in this case we are a bit more speculating. The price can go up or down. We don't know in the future can be be a function in the portfolio, but it's not creating anything. But this is another different kind of asset. Another kind of asset are bonds for instance. The returns typically is low, but you lend money to someone, to a government, to a private company, to a corporation, whatever, and they pay you the interest in in your return. This is another asset. It bring you money in your, in your pocket. Then there are also real estate. You can buy flats for, for instance you can buy apartments and so on. Rent it and as a return you have the pay that the people are paying to you. This is another, another example. For instance, those are assets.

Stephen Matini: How would you explain? Same question in super simple terms, P&L?

Riccardo Grabbio: Very simple difference between revenues and cost difference between what you from your business or from in your private light and the cost that you have to bear to stay alive or if you're talking about a company that you need to pay to keep your company alive. Difference between revenues and cost. And what I'm surprised that several organizations, several entrepreneurs and also private people, sometimes they do not understand why they are not making earnings and they don't arrive to a very simple conclusion. Either you increase your revenues or you reduce your cost or you do them both. And again, I go back to the first concept and and statement that we said keep it simple. You can have a p and l, okay, which is long one kilometer for ista with 1000, 2000 different lines detailed and so on. But in the end, if you take a look at things from 1000 kilometers from from the moon, if you take a look at things from the moon, from a very high distance, in the end you will see two things. You will see revenues and costs. Either you increase revenues or you reduce cost. I know it's very simple, looks trivial, but trust me that nine out of 10 of dozen per they look at the tree but they don't look at the wood because if you take a look at from things from the from the moon, this is what you will see. And you either you are just one or you are just the other.

Stephen Matini: How would you define super simple cashflow?

Riccardo Grabbio: Cashflow is the difference from the money that you have in the first day of the year and the money that you have in the last day of the year. The difference between the two is the cash that you have generated and beware because the cash that you have generated is not perfectly linked with the earning that you made in that years because it might happen that in the year you made good earnings but you didn't generate good cash flow because you didn't manage while you are working capital on the things that we said before can happen or the other way around might happen that in one year for instance you have a good cash flow but your earnings are not satisfactory enough. It might happen for instance because in one year you dismiss a big asset or something and so on and you find a lot of cash in your bank account, yes, looks good. But then if you take a look at p and l, which is your business, you see it's not profitable enough. So beware, we have just defined what cash flow is, but it's not one-to-one with your earnings with your business.

Stephen Matini: If I said, and this is just how I personally define it, which is very trivial. Cashflow is the money that I need to run my business. It is essentially what is in my banking account after I pay all my expenses, after paying all, all taxes, what is left in my banking account? Would this be a good definition of cashflow?

Riccardo Grabbio: No, it is not the money that you need to run your business. This is something that we definitely call the short term debt. This is your financial position. Keep it very simple. Even here if you are a class, your balance sheet Steven, you need to know that your business must be financed simply. It is a bit more tricky, but very simply can be financed only in two ways, either with the equity which the owner puts in in his company or borrowing money from the banks, meaning from the financial institution. There are several other ways, but keeping simple, those two things. So on the right side of your balance sheet, you only have those two things, your financial debts and your equity, nothing else now. So those are the ways in which you support your business, but this is not the cash flow. The cash flow is the difference in your cash from one moment and in another one, let me give you an example. If the beginning of 2024, first day you have 10 K in your bank account and at the end of the year you have 20 k, your cash flow of the year is 10 k, which is the difference between the end and the beginning. This is what you generated, this is the cash flow, okay? While instead your financial position, what you need to let me say keeping your business alive is something that is your short-term debt is your position that you have in your balance sheet.

Stephen Matini: I wanna ask you one thing. What'd you think? Would you say the cashflow is the star?

Riccardo Grabbio: It is and I have a specific example that I bring that is a company for which i, I do consulting also now, and they came to me because they could not understand why the cashflow was not coming. And I will tell you more if you take a look at this p and l for instance, right? The revenues last cost is, is very profitable. I mean they are making a lot of earnings, margin are very high volumes are growing, but the cashflow is not coming and they did not understand why actually the, the reply was rather simple, okay? And the cashflow is not simply coming from the p and l revenues less cost, but then there is the balance sheet, there is the working capital. Let me give you a very simple example. If you do a lot of earning each and every year, but then you can't collect money from your customers simply because you did not a good credit management and, and you sold a lot of stuff, a lot of items, your products or whatever to a customer that actually is in, in trouble is financially weak and is not capable of paying you, I know for one year or even more, then you have a problem of cash.

This is an example or another example can be if you have a very good p and l but you inventory is growing and growing, the terms of your items that are in your stock are staying there and they don't go to the customer, then you need to finance those stuff that you have and also in this case you are absorbing cash and this, this is the second one or the third one can be for instance because your p and l is very good but you pay your vendors very quickly too quickly, okay? Compared on the timing in which you collect cash and you keep your items in in stock. Also in that, in that case you have issues of cash and then there might be also some other reason for instance investment. Try to think at investments they don't hit your p and l but you can do big huge investment that turn out to be in the future not good enough.

They don't have a good payback, they don't have a good return. And also in that case you have a problem of cash. This is another thing then this is the last thing that we call when your balance sheet is not robust enough. If you have working capital right of 10 and you have your short term debt which is 12, so you have an issue of two because it means that in a short term you have to pay 12 to someone to the banks or investors, but your cash that will come will be only 10 and you will be short of cash. So your balance sheet must boost enough. So there might might be several reasons, but the tricky thing for a non-finance people is try to link and bridge the earnings, right, the result of your p and l to the cash and make them to understand that from your earning to the cash flow that you generate, there are several, a lot of stuff that you need to make otherwise you can be very profitable but not generating cash.

Stephen Matini: And it's important not to keep your money under the mattress by actually invest them.

Riccardo Grabbio: Exactly. This is the second one now is a bit different because actually the interest rate are rather high. They are more than 4% are recording now in December, 2023. So they are rather high. And I would say that in this situation might be sensible also to pay someone that you have to do so if you have cash if you have liquidity you can pay something. But try to think for instance till two years ago when interest rates were zero and the market was returning six or 7%, I'm talking about stocks for instance. In that case it would've make sense to borrow a lot of money because you borrow for free and the money who you have is returning 7%. So on depends from the market situation for sure. It's not so wise to keep your money under your mattress.

Stephen Matini: You know, to me as you talk, I understand what you're saying because I've been doing this for little bit. Once again, I'm not super financially savvy but I made a lot of mistakes in the past. So inevitably I learned but not, not knowing who's going to listen to this episode. That could be some people they may feel unfamiliar with this whole territory. If they had to choose a financial advisor, what would you say they are three features they should look for in a financial advisor?

Riccardo Grabbio: To me, first thing a financial advisor must have a good track record. Let me say that the market is something that, I mean we have been studying that for 120 years and what we have seen that nobody has still completely understood it. There are always new situation and so on. So to me the more the financial advisor is experience, the more he has spend time on the market, the more he is trustworthy. I mean it is not the only rule but you need to know the market very well. So a long time and in the market with a good track record is one feature that you need to take a look at. Then there is a second feature that of course is very important is having a good feeling with that person seems not fundamental but it is because that person will help you on very sensitive topics. It'll help you on things that are rather dear to you in the and because they are talking about your finances and so on. And so if you don't have a good feeling, if you don't have a full trustworthy of that person, I think is not the the person good enough for you.

Stephen Matini: You know, the rule that I gave myself when I was trying to select the right one was if I cannot understand what he or she says, then it's not the right person for me. Truly. I mean you can be the most incredible person and I'm not questioning your, you know, education, your experience, but I'm the client and I need to understand.

Riccardo Grabbio: I will. I will tell you one thing. Over the past 15 years I have seen a lot of portfolio and there is a feature that all the beginners investor that then will have some troubles for sure, which is mathematically they try to seek things very complicated and one rule that the investors and beginners investors they need to take a look at or better to search in a financial advisor to keep things simple, what they have seen in life that the more the investors are beginners and the more they look for complicated stuff, this is a big mistake but it's very natural. For instance, if you happen to have an investor that has either know a big quantity of cash to be invested, but he doesn't know anything about that and you talk to him about very complex fund, fund of fund robot advisors or structured product derivatives and some other things, very technical and very complex product with leverage and so on, they immediately fall in love about that because they think that that we all exotic products, new products with artificial intelligence and so on, they completely fall in love them thinking that will be very cutting edge and that will beat the market.

You know what will happen in that case that you will create a mass, you will create a portfolio with huge costs and the result will be for sure far below the market.

Stephen Matini: Again, I understand what you're saying, but I feel my head getting dizzy a little bit like because also, you know, money is something that is so connected to our survival. I mean it's not just status or I can buy this, I can buy that, but it's connected to so many things such as, you know, when people say money does not give you happiness and always say that's the biggest someone has ever said, because you know when my money's fine, I'm so glad I can think of all the things that I love in a way that's more peaceful. You know?

Riccardo Grabbio: Yes, the said that you just mentioned can be truth or not, I dunno, but there is one thing to tell you when a family and a person goes under financial stress, in that case you need to talk to them about that saying, because financial stress I think is one of the worst situation ever. And I can tell you one thing be because of that you need to have also a good financial planner because what he will help you to do is not only to deal with the markets properly, but also to manage the psychological impacts that you have from the up and downs of the market. If you are very expert, you know how the market works and so on, you don't have the impacts. But if you are a beginner, if you don't trust the situation or if you don't trust the financial advisor when the market is down 30% because from time to time it happens, then you start to have some bad feelings maybe not to sleep at night and so on. So the financial advisor for this situation is fundamental

Stephen Matini: And that to me goes back to what you were saying about the relationship. You know, particularly these days of artificial intelligence, everything being automatic and such and such, that is such a key relationship to have in a life that is so uncertain. You know, you read the news and millions of different things, so it's very easy, you know, in this situation to fall for trends and the stupid things that you hear everywhere. But a good financial advisor, that relationship in my opinion informs you and really helps you to stay grounded.

Riccardo Grabbio: I agree with you. You must stay the course. The Americans say, and this is a really valuable advice. You need to stay the course and stay the course being not being trapped into the new fashion stuff, new fashion things, the new hot stock that might come on the market and so on because they, they were not going to help you, they'll harm you.

Stephen Matini: How do you feel about anything that has to do with ESG investing, anything pertaining sustainability?

Riccardo Grabbio: First point is the tactical situation about that. I have some portfolios that I'm managing where the, the clients is asking me to invest in those specific companies. We, which has a good status for being very ethical, being very keen on environment and so on because they are interesting in that. And I think that from that standpoint, it makes you feel better because you feel that you are doing something good for the environment and so on. Then we need to see what is the reality under those companies because we don't know 100% because when we buy an ESG for instance, found, we don't know if all the companies that there are inside, those are all the features that they should have because sometimes working in the companies, I have seen that sometimes, okay, they are ESG, fine, they have white certificates and so on, but then let me say energy must have been used better was not managed well enough.

So there were some inefficiencies from the environmental standpoints. So I would say that okay, this is a good thing to do good for the environment, which I'm very keen on as well. But we don't know exactly if all those are the best choices that we could have made. We don't know, we hope, but we don't know. This is the first thing. Then we don't need to forget that when we invest we are looking at returns. The first reason of course why we invest is having a return. And what I can tell you that I have compared the s and p 500 with the SGN funds for 10 years and so on. And what I have seen that in the long run, the returns that I have is very, very close so far we don't know in the future, but so far is is more or less the same. So from the pure yield standpoint, right, the return in that case, I would say that there is not much difference in that. What drives the difference in the return in the long run is the asset allocation.

Stephen Matini: What have you learned about yourself throughout this whole thing, working with people in different situations?

Riccardo Grabbio: Well it, it's difficult to answer for different reasons. The first one is we need to take a look at if we are taking a look at finance from the company standpoints or from the financial advisor standpoints, which is very different. And the second one is because you need to know the finance has been changing so much over the years. I remember Steven when, when I started working in finance, the value added for the organization and for, for the people who was perceived and basically also what the companies were asking to the finance people were things completely different from the things that there are now. So over the year things have changed and as a result also the finance people, people that work in finance must change and see things in different ways because the market is asking to go to the finance people different stuff.

In the past it was much more mathematically the mathemat result they were asking about preciseness they were asking about and so on. But as the time goes by, as the artificial intelligence goes by, the technologies is growing and so on. What I see that now what the partner, the CEO, the stakeholder are asking to the finance community is being a tremendous business partner, not being extremely technical and so on. So what they want is having a support that translate their view, okay in finance language or better to translate the finance language to them so that they can understand what they can do and they cannot do. And of course help supporting them in having the right strategy in getting their result doesn't matter if you are looking about a private person or if we're looking about a corporation from that standpoint is exactly the same.

What they are asking now today is to support them to understand what are their goals, their needs and so on and to set kind of strategy in order to get their targets. This is what they want. Now, just to make it an example, and this is a bit sad also to me to say that nowadays people for instance that do finance me say rather low level. So for instance, booking invoices, booking transaction, general ledger journals and so on, those are profiles that are not interesting for the market anymore because there are the emerging markets where there are people doing that for an extremely low cost or there is with a new tech iTech and so on, there are computer that are doing those transaction automatically themselves. Those were profiles very helpful in the past or better indispensable, but today it's not like that. Today they are not needed any, any almost needed anymore. So it has changed a lot. So if you want to work nowadays in this field, you need to be a good financial strategist and you need to support and give direction to investors, to entrepreneurs and so on.

Stephen Matini: What would you say that is the right posture that a good finance person should have to enter this job?

Riccardo Grabbio: Well I would say more than possible, I would say the, the right mindset in finance, you do need to have a good mindset. This is key from a several standpoint and I believe that if you want to be a good finance person, finance manager, finance advisor or whatever, you need to have good background. This is a commodity. Without that you cannot go ahead, but you need to have also a good mindset because having the good mindset meaning is to trust what is your view? To stay steady, to stay the course, to stay consistent with with your choices, not to change the strategies, being methodical and not to lose the focus on your goals. Straighten your way because you know what happens in finance? Finance is like the seasons that we have in the year, right? We have summer, winter, spring, autumn and so on, and things change and like things change in the day and in the season, in the years they change exactly in the same way also in finance because no matter what after winter, spring will come and in finance it's exactly the same after resection. Sooner or later you don't know exactly when the new grow will come. And that's why he said you need to have the right mindset, trust your knowledge and staying the course and not changing strategies and so on. Because if you try instead to change strategies because of the season you are in and you don't know when the decision will will change, you run the risk to take an umbrella and after two minutes to have the sun shining and your your umbrella, you don't need it anymore.

Stephen Matini: Riccardo, out of anything we have covered so far, what would you say that is something that those who will listen to this episode that should pay close attention to?

Riccardo Grabbio: If we are talking, for instance, to private investors, they need to keep things simple, try to understand what they are doing because as you said before, for instance, if you are not understanding what you are investing in, this is not a good investment or better, they should be very careful. So if they don't understand what they are investing in, no matter what, they don't have to invest.

Stephen Matini: I've heard that a famous investor does that. Warren Buffett, you know, he only invest in things he understands, you know, and if he doesn't, he doesn't.

Riccardo Grabbio: Yes, wow you are mentioning is, is not a new kid on the block. I think that the S&P 500 for 50 years in a row about either, I don't know, 10 or 8 points per year. Average per year. So yeah, an outstanding result. And what it does is something like, like you said before, what it does, he, he stays in his circle of competence. He does not diversify a lot. So he stay focused on a bunch of share that he knows very well and he stay on those for a long time. What his strategies is by and old forever it is an extreme strategy his but the reward is very remarkable given the facts.

Stephen Matini: Riccardo, thank you for keep it simple. I've learned a lot today. Thank you.