Stig Brodersen  3:05  

That’s why I really like it because when you talk about Bitcoin, one of the questions that always pops up is, “So what’s the value?”  Please tell the audience about your research.

Plan B  3:16  

I started with the numbers. Of course, Bitcoin is a different animal than the things I normally model. There’s no cash flow, like a company or a fixed income instrument or a derivative. It’s a bit like gold. How do you value it? 

In fact, the same problem is there for gold as well because you could of course, look at the cost of mining of gold or Bitcoin. I just went with the digital scarcity idea also after reading Saifedean Ammous’ book, “The Bitcoin Standard.” He has a whole chapter in there about stock to flow. 

Stock to flow is of course also known in the commodities world, gold, and silver. So I use that as a stock to flow measure as a quantification of the scarcity and then use that as an input and evaluation model. 

Maybe for the listeners who don’t know. Stock is the reserve, the amount of Bitcoin or the amount of gold that’s above the ground, that is just there. Flow is the yearly production. Then you just divide the two. 

Now, what I discovered was that the stock to flow number is correlated with the market value. For example, the stock to flow of gold is 55 or something, and the market value is about $10 trillion. If you put all those stock to flow numbers, of all the commodities out there and put them on the line, you get this straight line. It’s actually a power law with a super high R-squared. Super high correlation. It’s just amazing. 

There’s actually two models out there: the cross asset model where it all started with gold and silver. But there’s also the time series model, where if you plot the stock to flow time series of Bitcoin of the last 10 years against the market cap, you can also see the correlation there and measure the correlation. It’s also really high, like 95%.

Preston Pysh  5:18  

Well, I know personally, whenever I read it, this is it. It’s about time somebody has put… but I felt it was happening but didn’t know how to describe it. I think a lot of people in the community had this intuition that what you were describing and what you were actually applying mathematics to was happening, but we just didn’t know how to describe it. 

For people that are not familiar with R-squared values. Describe what this is. Describe what it means whenever you model something and then the actual goals compared to what the projections were.

Plan B  5:54  

R-squared is a statistical measure or goodness of fit of a model. If a model fits really good to the data like a perfect fit, it has a high value hundred percent. If there’s no fit at all, it’s zero. 

If you look at the numbers for the cross asset flow model 99.5%, that’s like almost a perfect fit. That’s amazing. I have never ever seen that before. If you look at the 95% of the time series stock to flow model, that’s also very high. 

It measures the amount of variance in the price, how much of that is explained by the amount of variance in the stock to flow. In fact, it’s not the most important measure. There are other measures, but it’s the frequently used measure so that’s why I use it.

Stig Brodersen  6:40  

You come up with this model and this model explains using mathematics what the price of Bitcoin should be. A  lot of that has to do with the halving function. So could you please elaborate on what that is and also give us an idea of the estimated price levels, depending on the year that we end?

Plan B  6:57  

The halving is a very important thing because every 210,000 blocks, that’s about four years. The subsidy that miners get when they mined a block is half from an investor’s point of view. The supply is half, that doubles the stock to flow measure and increases the value as well. So especially those stepwise nonlinear function is very, very interesting, because markets are anticipating on it

There’s a lot of debate and narratives always around halving, but if you look at the numbers, we’re now at a stock flow Bitcoin of 27. That gives a value of about a little under $10,000. We’re about there a little bit over right now. 

But off to the halving, if the stock to flow doubles, that’s May 2020. So that’s eight months away. Very interesting, very, very awesome event. 

The stock to float doubles, the value of Bitcoin goes 8 or 10. Somewhere between… Let me give a rough range somewhere between 50 and 100-k starting summer off in May next year. 

Four years later there is another halving in 2020, for the stock to flow will go to 100, something we as humans have never seen before. The value that goes mathematically with an asset that has a stock to flow of 100 is somewhere between 400,000 and $1 million per Bitcoin. 

Preston Pysh  8:21  

When you say this has never happened in history, I just want people that are listening to this to understand what you mean by that. What you’re saying is because we’ve never had a digital asset that had scarcity. That’s what we’re dealing with here, because that’s what blockchain technology provides, which is a decentralized fixed supply of a digital token. 

Because of this halving function, you’re introducing this in the past, if you’re mining gold, you can keep mining and pulling more gold out of the ground, but with Bitcoin that noose is tightening with this halving function and that’s why you’re seeing the stock the flow gets so insanely tight and we’ve never seen those kind of numbers before, like you described.

So you’re suggesting that that’s going to potentially create this situation where we see these very high prices on a digital fixed supply asset?

Plan B  9:11  

Yes, and I think people underestimate the speed at which this is going. The stock to flow will double to around the gold levels after May 2020. That means the market cap of Bitcoin will be around the same as our low but under but in the trillions like one or $2 trillion, compared to the monetary base of the US dollar, which is $3 trillion. 

That’s already an order of magnitude in the same range four years later. 2024 stock to flow 100 and the market cap will be in the 10 or 20 trillion, way above the US dollar so it has all kinds of implications. We’re not going there smoothly, I guess.

Stig Brodersen  9:50  

Now I have to ask you, what is the end market cap for Bitcoin? Say this goes all the way and replace currencies. I’m not saying this is possible at all, but I think it’s important to understand the impact of your model, should this materialize? 

So for Bitcoin right now, we are around $180 billion. You mentioned gold’s market cap before is around 8 trillion dollars. What are we looking at here?

Plan B  10:15  

First of all, I think if we hit 10 trillion 20 trillion market cap, that will be the point that your unit of account will change. Maybe it wouldn’t make sense to measure things in dollars. The model isn’t dollars as well, of course, so that would be the point in time where you have to think about measuring maybe in Bitcoin.

If we look at the dollar world, like you said, derivatives, what is it $500 trillion? Or the bond market under $200 trillion? I think there’s real estate. It’s amazing and all those markets have a monetary premium. That’s beyond the fundamental value of those assets’ half.

If you look at stocks, for example, that fundamental value of stocks, it’s derived from dividends, but the dividend yield now is very low. It is the same with bonds, very low and even negative interest rates. 

What is the value of a bond like that? That’s actually real world problems that we have to deal with as institutional investors. 

Also, look at real estate, real estate is bought as an investment, especially in big cities like New York, London, and Amsterdam. The value of living is also there, but the monetary premium, if you will, is bigger. 

I think the monetary premium will go to the asset that captures and holds it the best. That will be Bitcoin. So it might as well trigger some very unintended consequences like stock markets and real estate markets losing that monetary premium.

Preston Pysh  11:39  

When we look at the market cap of Bitcoin today, and I think this is important, because a lot of people that are participating in this are looking at it from a very myopic point of view, just because it’s not something that they dedicate a lot of their time to.

So they’re looking at the price today and they’re saying, “Wow, it’s $10,700. That’s really expensive for Bitcoin right?” That’s kind of the end of their analysis because they’re looking at it from a very short sighted point of view. 

However, when you scope out and you hear those huge numbers and you’re looking at the market cap where it sits today. So if one Bitcoin is priced where it is today at $10,700, the market cap is only  $192 billion. Now, you’re looking at if we go 10-x from here, that’s $2 trillion. If you go 100-x, now you’re at $20 trillion. That’s where the price if you would see these numbers that Plan B’s talking about, going up to a couple hundred thousand dollars or a million dollars. That’s how you get there from here is because that market cap is going to go into the trillions instead of just being 200 billion like it is today. 

I love asking this question: what is an interesting conversation that you’ve had recently, maybe with some of your friends that are quants or you’re saying that you’re getting some pretty interesting emails from some interesting folks, that are in some very high places, has there been a conversation? Has there been an engagement that is at the top of your memory?

Plan B  13:07  

What amazes me most about a lot of the conversations I have with my traditional colleagues, if you will, not with the Bitcoin colleagues, is the level of misunderstanding. Even the people that are a bit positive, they don’t really trust the high predictions made by the stock to flow model, for example, they just don’t believe it. 

That’s something that reminds me of the Black and Scholes model at the time. I really liked that story of Black and Scholes who won the Nobel Prize in Economics. They invented in 1973 the option pricing model and they put it out there. 

It was in public but not many people understood it, not many people believed it. Basically there was like 10 years of time to exploit the model while it was out in the open. That’s also what’s going to happen if the stock to flow now. People just don’t believe it or don’t know it or are so far behind. That’s what amazes me and all the discussions I have.

Stig Brodersen  14:07  

Continuing on this, you have extensive experience with derivatives. Talk to us about what is happening to Bakkt. For those of you who are not familiar with Bakkt, it’s a new exchange and the owners of the New York Stock Exchange are standing up right now. Could you also talk to us about why the derivatives market selling Bitcoin is different from one settling in cash?

Plan B  14:29  

Yeah, great question, especially today, since Bakkt is opening its warehouses today. Derivatives markets are very important because of the network effect or Bitcoin. It’s one of the network effects and it opens the market and makes the market more attractive for institutional investors. 

Big investors are always on the lookout for a way to sell their investment. It has to be a liquid market, a deep market. They must always be able to sell at a normal price and futures markets enable that. You can always sell Bitcoin outright in this case, but with the future markets, you can also sell and close your position in the futures market. 

There are several futures markets and there is a big one in Chicago, the CME. It has been open since 2017. The CME is a cash settled futures exchange so you can sell and buy Bitcoins for a price somewhere in the futures and to be settled in the future. But all is settled in cash. 

You could theoretically sell more than 21 million Bitcoins, even if there’s not even 21 million Bitcoins. Of course, you need a lot of cash for that, but you could do it, especially in the context of quantitative easing and governments having endless access to the printing presses, that is not a favorable thing. 

There could be fear of games out there, and that’s why it’s very important to have Bakkt opening his warehouses today and going live on the 23rd of September with a physically settled futures contract. 

So in order to sell Bitcoins in the future, you actually need to have those Bitcoins. If you don’t have them, you can’t sell them. That changes the whole game because first, it can be arbitrage between CME and Bakkt between Chicago and New York.

If the prices are very different, you just buy and sell at the same time in the future against different prices. It would be like free money so that it will be arbitraged away very soon. 

The second thing is, it will be very hard to open a short position because if you sell your Bitcoin and you know you have to deliver this Bitcoin. You have to have it. You have to buy it and when the price goes up, it’s not a matter of putting in more fear. You really need to buy those Bitcoins. I think people will be very, very cautious shorting nothing.

Preston Pysh  16:43  

My personal opinion, I was hearing you talk about the Sharpe ratio and position sizing. This has been something that I’ve been kind of shouting from the mountaintops after hearing you talk about it. 

I personally think this is the elephant in the room for all of you financial planners and managers in the world right now. I think this idea is absolutely massive, this whole idea of correlation, Sharpe ratio, position size.

Plan B  17:12  

Yes and it ties into the derivatives pricing as well. Sharpe ratio is a measure of risk return a risk adjusted return, actually you divide the return of an asset by the risk and the risk is usually measured in standard deviation. 

Now, it’s very hard to see assets that have a Sharpe ratio above one where the risk is smaller than the return. Usually the return is higher than the risk and you get the return is lower than the risk. So you get a Sharpe ratio of less than one. 

In theory, of course, the more risk and the more standard deviation, the more return and that’s what you see in the Sharpe ratio. 

Now with Bitcoin, it has a superior Sharpe ratio because it has leverage, but it has average returns of above 200% per year and the worst loss is about 80% in a year, which is a lot. It’s the reason why people don’t invest in Bitcoin because “Oh it has such high volatility.”

I never understand why people say that because, okay 80%, that’s a lot and actually it did that three times: 2011, 2014, and 2018. All those three times you see the papers and the mainstream media write about the tulip bubbles, and it’s all a Ponzi and blah, blah, blah.

However, it’s just 80% drawdown and 80% is less than 200%. That’s what I wanted to say: the Sharpe ratio is above one and four quants, for someone who is used to pricing derivatives. That’s like a light bulb.

To keep it simple, it’s all about investment sizing. If you see numbers like this, it’s the same with *inaudible* By the way, maybe that’s recognizable. It’s the Kelly criterion.

Depending on the odds that you have, you can size your bet. If your odds are low, if your Sharpe ratio is low, you’re not going to bet the farm. You’re going to bet a little bit. If your odds are better, you bet more. For example, size, your investment to 50%, you would not have the risk of minus 80%. You would have a risk of minus 40%. That’s more or less what stocks would give you. The return would be not 200% but would be 100%, which is more than stocks would give you. 

So if you go to the extreme and invest just 1% of your portfolio in Bitcoin and let the other 99% do nothing, keep it casual. Only 1% in Bitcoin that would outperform the S&P 500 over a four year period or over years in the past 6 to 8 years. Every single year, Bitcoin 1% and 99% cash would outperform the S&P 500. I think you’re right about the elephant in the room that opens all sorts of doors for arbitrage.

Preston Pysh  20:02  

I was reading a book where they were interviewing Ray Dalio. Ray was giving his points on how he does his approach and for people. Most people on our show are familiar with Ray Dalio, but if people aren’t familiar with Ray Dalio, his personal net worth is anywhere from $16-18 billion. He runs the biggest hedge fund on the entire planet, hundreds of billions of dollars. 

Ray was asked, “What’s your secret sauce?” Ray says, “Well, I believe the holy grail of investing is really kind of two things. It’s finding something that has a very high Sharpe ratio,” which is what you just described.

The highest Sharpe ratio you can find and then you have to mix it with 10 to 15 uncorrelated, at a minimum 10 to 15 uncorrelated positions that also have high Sharpe ratios. So when you combine the uncorrelation with very high Sharpe ratios, with what you just described, that’s how you can optimize a portfolio that minimizes your downside risk, but maximizes your upside return. 

So we’ve already established the return relative to the risk you’re measuring volatility with the risk that Bitcoin has outperformed the US stock market, all the commodity indices, the fixed income market, even though central banks are bidding them into oblivion. I mean, you could go on and on. You can list every single asset Bitcoin is outperforming them from the Sharpe ratio on every single one of them for the last five years without incident in the last five years.

Plan B  21:26  

I totally agree with Ray Dalio. It’s all about the high Sharpe ratio. Bitcoin has already a high Sharpe ratio and that is not even taking into account the correlation diversification potential that’s there. 

Bitcoin could be that safe haven asset that gold was in the past. There are some studies out there that show this already that Bitcoin has a negative correlation to equities. For example, and to other assets or other assets basically, which will make it the holy grail right of all investments. It has a high Sharpe ratio and negative growth correlation with all the other assets. 

However, we haven’t had a real financial crisis in the last 10 years. In a way, we haven’t been able to really stress test this correlation, diversification potential of Bitcoin, because Bitcoin was made at the beginning of 2009, just off at the height of the global financial crisis. As a response also to the global financial crisis, that was the last big dips we saw in equities. 

We’re actually adding of course the past towards the second recession and crisis, inverted yield curves, and all the other measures are pointing to a next recession. That will be the time that we really test Bitcoin or negative correlation with other assets.That would make it undeniable for even the most traditional institutional investor. 

Stig Brodersen  22:50  

Let’s zoom out here, there are $17 trillion of negative yielding bonds in this world. I know you have some very interesting thoughts on how that plays into the Bitcoin thesis. Could you please elaborate?

Plan B  23:03  

The negative interest on $17 trillion worth of bonds is together with quantitative easing, the reason I am in Bitcoin. That was actually the reason I was actively looking for a higher Sharpe ratio, non-correlated assets, a hedge, if you will, against the next crisis. That’s how I came on the path of Bitcoin. 

I find it amazing the amount of negative interest rate bonds, it’s uncharted waters, for sure. We have never seen this before. I also think it’s unsustainable and it has unintended consequences. 

Actually, there’s a very important report out there. It’s an IMF report about deep negative interest rates. It’s not research. It’s a proposal. It’s a readily implementable proposal. Deep negative interest rates means minus 5%, minus 10%. That report is out there ready to implement. I actually talked to the writers that report one of them is very active on Twitter.

It is very interesting to see what the intentions are, what the thinking of the central banks is behind those negative interest rates, and especially the deep negative interest rates, because we will go there. In fact, the intention is really good. It’s like a bank deck. They’re saying, “Okay, the banks and all the Big Bad boys, they are getting negative interest rates so they’re earning nothing. But of course, for the public, the retail investor, they cannot go to zero. They’ll be at zero, which is low, but still better than all the big investors. That’s a way to make it better for the common man.” That’s the intention. It is a good intention. 

What’s also an argument of that IMF paper is that it’s better to go the negative interest rate route than to let it all explode, have a recession and then build it up from there. The losses are bigger in that scenario, so let’s go to negative interest rates. That’s one opinion.

I think the unintended consequences like gross misallocation of capital is making it worse than better. Most people like me or either an investor, quant or something are looking at the markets. They are starting to see the unsustainability of this because we’re talking about 25 to a third of all the bonds out there that are negatively yielding at the moment.

Of course, you can still buy them and make money. If the interest goes even deeper, you make a lot of money if you have value on those assets. That army of people hedging, not trusting this negative interest rate scenario and hedging their positions accordingly with Bitcoin, that army is going to grow slowly, but steadily every day.

Preston Pysh  25:34  

Back to the idea that you stated there as well, if people have an expectation that the rates are only going to go lower than they could buy them and sell them at a profit. It is the definition of the greater fools theory of investing where you’re entering into a contract that you fully know you’re going to lose money on. If you hold it into maturity, you are guaranteed to lose money.

The only way I can make money in that deal is if I find a fool that’s greater than myself, I’m issuing it there at a $5 loss. The only way is if somebody else comes along and is willing to take an even bigger loss. There’s just no way that’s sustainable. 

Plan B  26:23  

It is the very definition of a Ponzi in a way, right?

Preston Pysh  26:28  

Yes, yes. I mean, it is the definition of a Ponzi scheme. 

So historically, there’s plenty of examples of hyperinflation in the world. We could go back to the 1920s. That’s the most famous one with the mark against gold and you kind of look at that chart and you can just see this massive printing of the mark through that period of time. 

I’m kind of curious because if we’re measuring the value of Bitcoin compared to all other fiat currencies, this chart looks very similar, the parabolic shoot to the moon kind of printing of Fiat in relation to the value of these 21 million bitcoins that has a fixed supply. 

I’m kind of curious if you’ve ever thought about doing any kind of research or if you’ve heard of any kind of research as to how long that takes to play out because we’re dealing with the global supply of Fiat versus just the Fiat supply of a small country that we’ve seen in the past. We’ve never seen anything like this on a global scale historically.

Plan B  27:28  

Actually, two things. I have one chart out there, that comparison of Weimar 1923 hyperinflation in Germany with Bitcoin. It is really scary how well it tracks that Weimar picture.

The wider picture is, as you described it, it’s very parabolic, even on a log scale. The last 10 years, Bitcoin tracks that Weimar chart, that hyperinflation chart, perfectly. As a matter of fact, I was looking for some other assets that had the same performance as Bitcoin had the last 10 years so 10-x every two years for example. There was nothing I could find. 

I’m actually doing some research to predict which country will be the first one to adapt Bitcoin, which I mean, you can calculate which ones are smaller a monetary base than Bitcoin already, which countries don’t have large exports.They don’t have the Triffin dilemma that you see and Very well displayed in the Trump tweets at the moment. The US has a world reserve currency, US dollars, you can print it, that’s the advantage. 

But of course, the high value of the strong US dollar makes it more difficult for the companies like Boeing and Caterpillar to export because their exports will be more expensive for other countries.

So you can rank all the 150 countries against those kinds of criteria and actually quite easily predict which countries will be very beneficial to make the jump to Bitcoin.

Stig Brodersen  29:14  

So in the same context, who would be most at disadvantage to make that jump?

Plan B  29:19  

I think the United States has too much to lose to give up their reserve currency position. For example, for Germany, it has too much export to make that jump. If you think about it, the Triffin dilemma is a real monster and Bitcoin is the solution. 

That’s one of the big misunderstandings at the moment. I hope it gets out of the way soon. I might play a role in that as well. I would really hope that central bankers, the IMF and all the big naks come together to talk about this situation that’s out there now with quantitative easing and negative interest rate yields that may be the next recession because the intention I’m sure is good. They want to solve it and Bitcoin, if well explained, could very well be a solution. 

Our only way out of all this is to get rid of the Triffin dilemma, but you can only do it if everybody does it so nobody has the disadvantage. So if you can come to an agreement with all the big countries, for the world that could really mean much. That could be the next step to a better money technology that Bitcoin is. 

I think if there will be a coalition of countries it will not be the big countries because they’re fighting over a lot of stuff and they have too much to lose. However, it could very well be a coalition of smaller companies that go together and there’s some very pro-Bitcoin small companies out there. More high tech countries probably will cooperate.

Preston Pysh  30:54  

Plan B, what is the number one thing that you think people misunderstand about Bitcoin?

Plan B  31:00  

Yeah, that is a tough question. This being an investor podcast, I think one of the big misunderstandings is why Satoshi left? If you know the answer to that question, if you research it and know the answer to that question, you protect yourself against a lot of misunderstanding because there is a lot of scammers, fraud and misinformation out there. 

Why did he leave? Why is it important? *inaudible* have a leader, no CEO, no Corporation, no government, if you understand why that is and why you need just a peer to peer network and peer to peer mathematical protocol and some energy to protect it, you know the answers to a lot of things in Bitcoin.

Stig Brodersen  31:43  

One of the last questions that we always like to ask is where can the investor go and make their own informed opinion about a topic? Why should the novice investor go to seek the best unbiased information?

Plan B  31:57  

I would certainly advise them to go look into their circle of friends and family who are already Bitcoin experts or know about Bitcoin to teach from them. That goes a lot faster.

Of course you don’t know how good they are. So I’ll give some resources. Please read the White Paper. The White Paper is a must read. If you haven’t read it, go read it. It’s only nine pages, including the references. It’s very concise and easily written and it has everything in it. It will make a lot of things clear and you won’t be sensitive to scammers anymore.

Saifedean Ammous’ book “The Bitcoin Standard” of course, is the Bitcoin Bible. You should read it. It’s longer, but it’s a good read. I would say all the podcasts that are out there right now also. Things are going so fast that books are too late. I never listened to a podcast before I was in Bitcoin. Now I listen to podcasts before every day in the car. That’s really good. Make sure you have the right one. 

The ones I mentioned, that’s important for investors, but also for journalists. There is a site out there. It’s called hive.one. It has a list. It’s a sort of Google of who is who in Bitcoin land. So you can see who’s number 1,2, 3, it goes to 1000. But if you want to know something about Bitcoin, follow those people first, then you can spread it out to others. But make sure you follow those people because they know. They are mathematically chosen to be on that list because they did a lot of podcasts. They wrote a lot of stuff and they are respected by the community.

Preston Pysh  33:42  

I absolutely love that last point. It is so important that you get your information from the right people and will have a link to that hive site that has that listing. I’m telling you folks, make sure you follow the right people. Don’t follow some rules from a random person that you come across on Twitter because they might be trying to push or shill something that is in their self interest and not yours.  

I would tell you to hyper focus on the top few people that actually are the ones that are creating and designing all of this plan. I’ll have that in the show notes.

Plan B, please give people a hand off to yourself and anything else that you want to put out there for the community about yourself.

Plan B  34:56  

So you can find me on Twitter at @100trillionUSD. There is a medium article with all the stuff and the model I described in it out there. It’s on the pinned tweet. If you want to calculate doctor flow yourself, play with the models. There’s a GitHub as well. It’s under the pinned tweet with all the models and data available.

Preston Pysh  35:18  

Plan B, we can’t thank you enough for coming on the show. Your research is just fascinating. It’s so exciting to see somebody, I’m so excited to see somebody come into the community and just drop these really high quality papers with a lot of analysis in there, a lot of math in there. It’s just really exciting to be able to chat with you. Thank you so much for coming on our show. 

Stig Brodersen  35:41  

Alright guys. So at this point in time, the show will play a question from the audience. And this question comes from Adam. 

Sender  35:47  

Hey, guys, I’m a huge fan of your podcast. Thank you so much for your amazing work. So I recently listened to Ray Dalio talk about the impact of China’s growth on the world economy.

During the discussion, Dalio describes China as the rising power that challenges the US, the existing world power. Here are my questions. How should one invest considering China’s rising power? Would you suggest investing directly in Chinese stocks? If yes, which one would you consider? Thank you so much and have a wonderful day.

Stig Brodersen  36:21  

That’s a great question. I think it’s important not to overestimate the effect of the rise of China for US stock investors. The rise of China is known by stock investors in general, just like the rise of India is known. Based on the Shiller PE, you can expect something like a 6% to 7% return investing in the Chinese stock market, which is definitely not expensive, but it’s also not very cheap. 

It’s a valuation that reflects both the potential in China, but also the risk of investing in the country where regulation is very different from what we’re used to in the West. So to your question, I personally only own one one Chinese stock and that is Alibaba. This is not a recommendation by any means. 

I also bought the stock at a different price than what it is today. But it’s more a bet on e-commerce in general, which of course is heavily dependent on GDP growth, which is variable in China compared to the West. 

But it’s also because I think that China has an advantage in collecting data, which is very important for big tech companies. The thing that’s fundamental for the very structure of what Alibaba is trying to achieve, but it’s important for me to underline that this is not a bet on China, per se, but on this specific company. 

Keeping that in mind, I do not recommend that you invest in China for the sake of investing in China, if the sole reason is that you think it would prosper and grow stronger. If you were to target specific Chinese stocks, you would need to understand Chinese culture better, as it is, to a large extent, a closed economy compared to many other economies. 

You could buy a Chinese ETF tracking the stock index. I can’t see why it won’t make a decent return, say if you hold it for this decade, but if you do, I have a few words of caution. Some of them are quite expensive with management fees, which they shouldn’t be for a passive managed index. 

Another issue is that the migrated funds are tilted heavily into financials. Up to 50% is not uncommon, which poses a risk in itself if you decide to go for a specific Chinese ETF. 

To sum up, yes, like Dalio, I’m bullish long term on China. I do think there’s a paradigm shift, but I do not invest differently. It doesn’t change my overall strategy.

Preston Pysh  38:37  

For me, I think investing in China is fairly straightforward. First, the ETF approach that Stig mentioned earlier is the simplest way to get exposure. Watch the fees like Stig said, and also make sure that there’s not too much exposure to the financial companies. 

If you’re feeling more adventurous and looking for individual companies that tell you to focus on three things. The first thing would be to find a company that originated in China. The second thing that I would tell you is look for companies that are fairly large in market cap, but still have room to grow. Then the third thing I would tell you is look for companies that have government leadership entrenched into the company. 

So companies like Tencent and Alibaba are perfect examples of businesses that started in China, they’re large and still have even more room to grow. They have tons of government entrenchment. 

I know this sounds really simple, but let’s face the facts, China’s a dictatorship that is dressed up in a capitalist costume. So if you’re going to try to participate in those markets, I think the best way to try and achieve that is through that three simple step process if you’re buying individual companies. If you want to do the ETFs, that’s fine. As a side note, I don’t personally have any investments in China. 

Outro  40:39  

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