Daniel: Alright Sophia, I'm going to say a book title, and you give me your instant, unfiltered reaction. Ready? The Falcon Method. Sophia: The Falcon Method? Sounds like a top-secret CIA training program or maybe a really aggressive bird-watching guide. What on earth are we talking about? Daniel: That's exactly why we have to start there! Because the author, David Solyomi, would probably agree with you. The name is kind of absurd, and the story behind it is hilarious and says everything about the book's philosophy. Sophia: Oh, do tell. I'm sensing this isn't about actual falcons. Daniel: Not at all. Today we're diving into The Falcon Method: A Proven System for Building Passive Income and Wealth Through Stock Investing by David Solyomi. And he's this Hungarian economist who, driven by childhood experiences with financial hardship, became financially free by age 33. He developed this super-disciplined investment system, and a marketing guy just randomly told him, 'You need a brand. Call it the FALCON Method.' Sophia: Let me guess, he loved it? Daniel: He thought it was ridiculous and ignored it. But then he put a link on his website, just casually, with that name. Soon after, people started emailing him, desperate to buy the 'FALCON Method' course. The demand literally created the brand, not the other way around. Sophia: Okay, that's brilliant. So the method came first, the silly name came second. I like this guy already. It feels honest, which is not a word I often associate with investment books that have flashy titles. Daniel: Exactly. And that honesty is the foundation of the whole book. It’s not about a secret trick; it’s about a process.

Sophia: So if it's not about a cool name, what is the core philosophy here? What makes it different from the thousands of other investing books out there? Daniel: The central idea is that for most people, investing shouldn't be an activity you do. It should be a system you run. Solyomi argues that without a system, you are just gambling. You're relying on emotion, luck, and hot tips. He introduces this concept he calls the "black box" model of a company. Sophia: A black box? Like on an airplane? Daniel: Sort of. He says as an outside investor, you can never truly know everything that's happening inside a company. It’s a black box. So instead of trying to be an expert on its internal politics or product development, you should focus on the money pipes going in and out. What are its revenues? What are its expenses? And most importantly, how much cash is left over, and what does management do with it? Sophia: That makes sense. You can't know the secret formula, but you can measure what goes in and what comes out. But this sounds a lot like classic 'buy and hold' advice. What's the unique spin? Daniel: The spin is almost entirely psychological. The whole system is designed to create what he calls a "SWAN" portfolio. Sophia: SWAN? Another acronym? Daniel: This one is good, I promise. It stands for "Sleep Well At Night." The goal isn't to find the next explosive stock that will keep you glued to your screen. The goal is to build a portfolio of reputable, well-known companies that pay you dividends, so you can literally forget about it and sleep well. Sophia: Ah, I love that. It reminds me of that famous quote, "A portfolio is like a bar of soap: the more you handle it, the smaller it gets." Daniel: He uses that exact quote! It's all about fighting the human urge to tinker. The famous investor Joel Greenblatt pointed out why most people, even professionals, fail at systematic investing. He said the companies that quant models pick can be scary or unfamiliar, so people are afraid to buy them. And then, the strategy will inevitably have a bad year or two, and people lose faith and quit. Sophia: Right, they abandon the system right before it's about to work. Daniel: Precisely. Solyomi's solution is to build a system around companies you already know and trust. Think Johnson & Johnson, Coca-Cola, Target. Companies that have paid dividends for decades. It's psychologically easier to hold onto a stock that's sending you a check every quarter, even when the market is crashing, than it is to hold onto some obscure tech company the algorithm told you to buy. Sophia: That reminds me of that legendary Fidelity study. Didn't they analyze their client accounts and find that the best-performing investors were the ones who were dead or had forgotten they had accounts? Daniel: It's a story that gets told a lot, and whether it's perfectly true or not, it illustrates the point perfectly. Inactivity is intelligent behavior in investing. The FALCON method is a framework designed to make that inactivity feel safe and productive. It’s a system to protect you from yourself.

Sophia: Okay, so the system is designed to be psychologically easy to follow. But easy doesn't automatically mean profitable. How does the method actually aim to make money? You mentioned a 'double-dip' benefit in the book's preface. Daniel: This is the engine of the whole method. Solyomi breaks down total return from a stock into three parts. First, there's the dividend you get paid. Second, there's the growth of the company's earnings, which should make the stock price go up over time. But the third, and the one most people ignore, is the change in valuation. Sophia: What do you mean by valuation? Like, how expensive the stock is? Daniel: Exactly. It’s the price the market is willing to pay for a dollar of the company's earnings. This is often called the Price-to-Earnings, or P/E, ratio. And this is where the "double-dip" comes in. The book has this absolutely brilliant case study using CVS Health to explain it. Sophia: Okay, give me the story. I learn best through stories. Daniel: So, imagine it's the end of 1998. The market is euphoric. You decide to buy stock in CVS, a great, growing company. But you pay a sky-high price for it—about 55 times its annual earnings. Over the next ten years, CVS as a business does fantastically. Its earnings grow and grow. But your investment? It returns a pathetic 2.5% per year. Barely beating inflation. Sophia: Whoa. How is that possible if the company did well? Daniel: Because you overpaid! The valuation multiple collapsed from 55 down to a more reasonable 15. The market came to its senses, and all of the company's fantastic business growth was wiped out by the shrinking price tag the market put on it. You bought at the peak of the hype. Sophia: Ouch. Okay, so that's a bad investment. What's scenario two? Daniel: Scenario two: you buy CVS at a different time, when it's trading at a fair price, say 14 times earnings. You hold it for a few years, and you sell it at roughly the same valuation. In this case, your return is a very respectable 15.2% per year. You basically got the full benefit of the company's growth and its dividends. No harm, no foul. Sophia: That makes sense. You paid a fair price, you got a fair return. So what's the double-dip? Daniel: This is the magic. Scenario three: you buy CVS when the market is pessimistic. The company is still great, but investors are scared, so it's trading at a bargain price—only 10 times its earnings. You buy it, and you hold it until the market gets optimistic again and the valuation expands back to that fair level of 14. In this scenario, your annualized return is a massive 20.6%. Sophia: Wow. Same company, same business growth, but wildly different outcomes just based on the entry price. That makes it so clear. Daniel: That's the double-dip. You get the first dip of profit from the company's underlying growth. And you get the second dip of profit from the valuation multiple expanding back to normal. You're getting paid for being patient and buying when everyone else is fearful. Sophia: So the core of the FALCON Method is to first identify these wonderful, stable, dividend-paying companies, and then just wait patiently for the market to offer them up at a discount. Daniel: You've got it. As the book quotes, "A stock well bought is half sold." The work is in the waiting and the valuation, not in predicting the future. It’s about buying a wonderful company at a fair price, or if you’re lucky, a wonderful company at a wonderful price.

Sophia: This sounds very quantitative, very numbers-driven. You find good companies, you check their valuation, you look at their dividend history. But the book's subtitle mentions a 'proven system.' Where does human insight fit in? Or are we just robots following a formula? Daniel: That’s the perfect question, because it leads to the final and maybe most important part of the process. Solyomi calls it the "Final Round: Enter the Human." After all the quantitative screens and filters are done, you're left with a shortlist of maybe 10 top-ranked stocks. But you don't just blindly buy them. You have to apply a final, qualitative, human sanity check. Sophia: And what does that check involve? What are you looking for? Daniel: A few key things. First, dividend safety. Is the company actually earning enough cash to pay its dividend? A high yield can be a trap if the company is borrowing money to pay it. He tells a story about Coca-Cola in the early 2000s, where they kept raising the dividend faster than the business was growing, which was a red flag. Sophia: Okay, so checking if the dividend is sustainable. What else? Daniel: Second, you look at Return on Invested Capital, or ROIC. This is a fancy way of asking: how good is the management at using the company's money to generate profits? A company that can consistently generate high returns on its capital is a sign of a well-run ship and a strong competitive advantage. Sophia: That makes sense. It’s not just about having money, it’s about what you do with it. Daniel: Exactly. And the last human check is maybe the most subtle and important: understanding the nature of the business, especially if it's cyclical. The book gives a great example comparing a company like VF Corporation, which owns brands like The North Face and Vans, to an oil giant like Chevron. Sophia: How are they different from an investor's point of view? Daniel: VF Corp's business is pretty stable. People buy clothes and shoes in good times and bad. Their earnings are predictable. Chevron's business, on the other hand, is completely tied to the price of oil. Its earnings will swing wildly. The danger is that a purely quantitative screen will tell you Chevron is "cheap" when the price of oil has crashed and its earnings are terrible. Sophia: Ah, I see the trap. It looks cheap, but it's cheap for a reason. Its business is about to get even worse. But when oil is at a peak and Chevron is making record profits, the numbers will make it look "expensive." Daniel: Precisely. And that's when a human investor needs to step in and say, "Wait a minute. I know this is a cyclical business. The numbers are lying to me." The human element provides that crucial context that a spreadsheet can't. It's the final margin of safety, as the great investor Benjamin Graham would say.

Sophia: So we started with a funny, almost accidental name, but we've ended up with a really profound idea. The book isn't really about finding a magic formula called the 'FALCON Method.' It's about building a personal system that protects you from your own worst instincts, and then having the wisdom to apply a final, human check. Daniel: That's the perfect summary. And Solyomi's key message, which he repeats throughout the book, is that consistency is everything. He cites research from people who track investment newsletters, and they find that subscribers consistently underperform the recommendations of the newsletters they follow. Sophia: How is that even possible? Daniel: Because they don't follow the system consistently! They get scared during a downturn and sell, or they get greedy and chase a hot stock that isn't on the list. They break the process. The author's whole point is that having a good process is useless if you don't have the character and discipline to stick with it. Sophia: It makes you wonder, in what other areas of our lives could we benefit from a simple, consistent process instead of relying on emotion and luck? It applies to fitness, to learning, to our careers. Daniel: Absolutely. The book ends with a powerful quote from W. Edwards Deming: "If you can't describe what you are doing as a process, you don't know what you're doing." It's a call to be an architect of your own systems, not just a passenger of your own emotions. Sophia: That’s a great place to leave it. It’s a challenge to our listeners. We'd love to hear your thoughts. Join the conversation and let us know what systems you use in your own life to stay on track. Daniel: This is Aibrary, signing off.