Stig Brodersen  2:11  

I think one of the two things I really want to highlight is that understanding the analysis behind the conclusion. I think that is so important. I think before we started the podcast, I was really fast to jump to conclusions because it gets in the way today. That’s how we also read new articles, like you have a journalist saying this is the conclusion. It’s somewhat easier to digest and you would just feel, “Yeah, that’s the takeaway.” So it could be that stock markets go up and down or the dollar would appreciate or depreciate against the euro. 

But I never really thought too much about how they came up with the conclusion. I think that after speaking to so many brilliant people and hearing their analysis, I think I learned so much about it. Perhaps, the best example I can come up with is that we talked with four people about oil. Actually, we talked to more people. We have four interviews that really stood out. So we have one with Raoul Pal, and he was bear on oil. His analysis was that it’s supposed to because the dollar would appreciate. 

Then, we have Gail Tverberg who said that because of the emerging markets, we couldn’t afford a higher oil price, that was why she might look at a new normal, or at least, she was definitely not bull on oil. She followed it more at the debt situation in the oil industry. 

Luckily, we also had someone that says something else and that was Morgan Downey, the author of “Oil 101.” He was bull on oil because he looked at the growth prospects for global demand and the production costs, together with the global oil reserve. 

So what I’m really going to say here is that you shouldn’t read or you shouldn’t listen to one of these interviews and say, “This is a smart guy. He says that oil is going up. Or this is my woman. She says oil this is going down.” What is the analysis behind it and do you agree with that analysis? That’s all up to you. So I think that was probably one of the most important things I’ve learned. I’m curious to hear, Preston, what your take is.

Preston Pysh  4:18  

So I like your point, because what I find myself doing just in like normal interactions with people during the day, after you’ve done 100 episodes, and you talk like all these brilliant people, and you read all these books, I see myself in just the normal engagement, just constantly saying, “Well, this is maybe what it is.”

And I could be definitely wrong, like there’s a strong chance I’m probably wrong. Just like, I see myself acting that way, which is totally different than my personality when I first started doing the show, simply because of the point that Stig said because you’ve been proven wrong so many times that you almost feel like there’s a guarantee that there’s something that I’m missing. I think that I can’t put a value on that. But having gone through this in such a public forum and in such a public way, like you really have to eat your crow so much that I totally agree with you. Like, I didn’t have that as one of my top two. But after you said it, Stig, I totally agree with you. That one’s huge.

Stig Brodersen  5:23  

It’s not natural for you to do as a human being, because you keep asking why? And the way you are asking why is sort of offensive in many ways when the people are saying XYZ. But you should actually be asking why. What is the analysis behind that conclusion?

Preston Pysh  5:38  

What you’re saying, so like, you know, 100 episodes ago, if I was saying something to somebody, it was because I wanted them to agree with me, but I think it was maybe more ego-based where I was wanting them to agree with me because that would make me feel like I was smart or because I knew something more than the common person. So it was more of like this convincing role where I was trying to convince them of my point, where now it’s the exact opposite where I’m trying to say, “Well, you know, this is my opinion, but there’s a really good chance I’m wrong and it’s not right.” Just because of all that experience that we both went through with all this. So I love that. I think that’s a great point. 

Okay, so here’s, here’s my first one. I wrote this down. And you know, we were having dinner in Omaha with Gillian Zoe Segal, who wrote the book “Getting There with Warren Buffett.” We were having a quick conversation, and just to throw this out there, Gillian was really instrumental in getting us the interview with Jesse Itzler who’s a billionaire-founder, NBA basketball team owner from the Atlanta Hawks.  

Gillian said to me, in just a real short comment, she said, “You know, it’s all about your connections in building that connection with other people.” I could tell she just really sincerely meant it. The thing that I really got out of this show for the last hundred episodes is that it really is. It’s all about this connection that you build with all these other people, and not just taking from those people. But more importantly, giving to these other people and giving them a platform to present whatever their idea, giving to our audience. Everything that we have given on this show, whether that’s through information, knowledge, or whatever, has come back to us in some way or some fashion. And it’s been just a total win-win. 

That connection that we’ve developed with our audience with our guests that have come on the show is something that I really can’t even put into words, but it’s something that I’ve learned to really have a deep appreciation for. And to always, I guess, really try to find that win-win situation, in anything that I’m doing because when it’s not this win-win where I’m giving away as much as what I’m receiving, it’s out of balance, and it just doesn’t work right. I don’t really know how else to describe that other than that’s something that has been one of the most profound things that I’ve learned through doing 100 shows.

Stig Brodersen  8:04  

I think it’s a really great point, Preston. This is really a new dimension we have to our show that we were meeting people in real life, that was something that we didn’t do the first year. The thing that has really kept me motivated to do this because you can actually see the impact, like in people’s faces. I mean, you might get downloads or YouTube, or whatnot, but it’s completely different actually meeting people.

Preston Pysh  8:27  

I kind of have a piggyback and I hope that this isn’t taken as a second because it’s kind of has to go with the same thing. But I was watching a Real Vision video interview last week, and they brought on this gentleman, his name is Don Yaeger, and he is like the head editor for these sports magazines. He’s interviewed some of the most famous sports coaches of all time. This gentleman said something that totally relates to this connectedness with the people that you’re surrounding yourself with. And I just love this quote, he said, “Look at the time that you spend with the top five people in your life. If you had to say, you know, Stig would be the one person that I spend a lot of time, either working with on email or on video recording or whatever. So he’d be one of my top five people. And then as I would go around, I’d say this other person, my wife is obviously another one of the top five people, and you’d name five people that consume your most time out of your day. And then you got to ask yourself this hard question. Is that person… As you evaluate each of those five people, are each one of those people taking me higher and taking me to the place that I want to go? Are those people a drag on my goals and my aspirations?”

He said that once you identify that and you look at those five people and that connection, is what I’m really getting at with these top five people. And man, I’ll tell you that was really profound for me listening to that interview and just hearing that because it’s so true. I felt really blessed whenever I thought about that audit in my own life because all the people that I’ve been able to surround myself with this through this podcast are just absolutely just having a profound impact on my life. 

And so, for the listener out there, I would challenge you do this audit and think of it in those terms, and then act on it and take it in the direction you want it to go. So that’s my first point.

Stig Brodersen  10:29  

Perfect. I think my second point is actually related to this. This is a cultural thing because when we started the podcast, we didn’t have la nice business plan or anything like that. I think people would be shocked at how little structure we had when we started. And it was more like, we both like Warren Buffett and talked about him. I mean, we never even came up with the idea of let’s study billionaires or reading books or anything like that, but I think what it has turned into… And this is probably what I have enjoyed the most recently is that I realized that I’m not alone. I don’t know if that sounds pathetic or sad, or whatever you want to say, but it’s just dawned to me in Omaha and also the TIP in Denmark not long ago, how many people that either worked or have been working in the financial industry. Like everyone was just sick or tired of it? And I feel, “Yes, I am not the weirdo here.” 

This is actually kind of fun, because when you work in the finance industry, you kind of know that everybody hates it, but like, no one speaks too much about it. Even though they do, I mean, they still go on and do the same job from 60 hours a week anyway. So you kind of feel like there’s no consistency between the action and the words, but I just felt like I was kindred spirits because apparently, it was okay to feel that. It was okay to make money was okay to be a capitalist and it was okay interested in stocks but it was not okay to mistreat other people. I’ve really felt a strong connection, again to your point, Preston, the strong connection with other people that felt the same way. I’m not saying that we’re starting a movement or anything against that. I can just feel that… It just seems to me like we have a niche within the financial industry that wants the same thing as the finance industry, but just doing it differently.

Preston Pysh  12:26  

So the second point that I have, Stig, comes down to just one word and that’s “balance.” So we studied all these different billionaires. And you know, I was watching the video with Jack Ma. Just this last episode that we did. I don’t know if anyone… If you go to our show notes, we put up different videos that we find on YouTube or whatever of like an hour-long interview with the person that we’re studying. I find them very useful. A lot of the time I go back and watch all these videos to learn even more. 

So I was watching this interview with Jack Ma. The thing that I love about Jack is just how candid he is and how honest he is. So the interviewer asked Jack, he said, “What have you done wrong? Like, what mistakes have you made?” And he said, “Well, I’ve made tons he said, but the main one is that I’ve just really neglected my family, my wife. I mean, it’s just a huge mistake. If I had to do this all over again, I definitely wouldn’t go down the same path that I went down.” 

I mean, you’re hearing this coming from a guy who has a net worth of over $30 billion. He says, “My wife tells me all the time, I’m not married to her I’m married to Alibaba.” And just hearing that emphasize the point that I’ve been noticing a lot, but maybe not talking about a lot on the show is just how out of balance so many of these different billionaires that we study are with their lives and what they’re actually focused on, and maybe what’s important and what’s not important in their lives, because for every decision that these guys are making, they’re making a conscious decision to not do other things. And in almost all these cases with some of these guys and some of these women that are making these decisions, just because they have enormous success in one area, call it financial success, that might mean that they’re a absolute total failure in other areas of their life because their time is being so consumed in this other area and this other location that they’re focusing their attention. There are this total neglect and another area. 

I think it’s really important for people to realize that and so it really comes down to what Tony Hsieh was talking about in his book, which was you’ve got to ask yourself why. So if you want to be polarized, and that’s how I’d like to refer to it, let’s say you really want just enormous financial success and like epic levels, okay, like multi-billions or whatever you come up with. You have to ask yourself why? Why is it that you want that? And then after you answer that, why you might even want to ask yourself why a couple more times and get to the root of what it is that’s driving you in whatever direction it is, whether it’s financial or whatever. 

So you have to ask yourself, “Okay, well, if I’m going in that direction, and that’s what I really want, what is ultimately going to be the price or the sacrifice that I’m gonna have to give up in order to have that thing that I really desire and that I really want.” And then you have to ask yourself, “Is that worth it?” That’s something that I totally did not know 100 episodes ago, that after you read all these biographies of all these billionaires, I mean, it really starts to stand out, at least it did for me, and I really wish that we would have talked about that more on the show. But I find that to be such an incredible learning point after studying all these people, that you’ve got to have balance. 

So I want to finish this off with a quote, that comment off with a quote from Warren Buffett. And somebody asked Warren Buffett, he says, “What do you measure? What would you say is success at your age? Because you’ve pretty much-accomplished everything. So what would you say is success at this point?” And how old is he? He’s like, 86, or something like that? He’s around that age. 

Stig Brodersen  16:19  

He’s turning 86 soon. Yeah. 

Preston Pysh  16:21  

And he said, ‘The success of my age is that the people that you want to love you, actually do love you on their own accord. That’s how I would measure success in my age.” And, you know, for me, that quote is really profound. It really kind of comes to this point of balance, and really kind of doing that audit on yourself of what’s really important. So that’s my second point.

Stig Brodersen  16:47  

I’m really happy to set that because one thing that I thought a lot about the previous hundred emails is how much to focus on stock investing because that was really how we started this and I don’t want to say that it has been interesting learning a lot more about stocks. But I think the biggest change for me has been reading all these books and the life experience. I mean, that is really done the trick for me. Yes, I know how to read balance sheets better, but that’s probably not going to change my life.

Preston Pysh  17:15  

Yeah, it’s funny. I didn’t even think about that, as I was making this list bit. What I was really learning really wasn’t anything about stock investing. I was really learning a lot more about myself, and what’s important in my life. What’s funny, though, is I think that some of these lessons are I then apply them to investing, as far as balance and thinking of things in terms of balancing out and just… 

You can kind of equate a lot of this stuff back to investing. Like your top five, who are your top five people in your life? Well, what are your top five picks that are going to have a huge impact and where are the risks located? I mean, the correlation between the stuff is amazing to me.

But alright, let’s move on to the next one because we want to get to the phone calls. All right, so the top two things that the market has taught us in the last hundred episodes. And just for some context, we started recording, I want to say we started recording in November 2014 or October 2014, something like that.

Stig Brodersen  18:20  

Yeah, I think what I learned about the markets is the significance of macroeconomics and the insignificance of macroeconomics at the same time.

So please let me elaborate because this is, that might seem like a bit off. But to me, macroeconomics has always been very complex. I mean, even as a grad student, I  like micro a lot more. It just made more sense to me. Now, after 100 episodes, and we have slowly transitioned into more macro for one reason or the other, I feel like an entire new world has really opened for me. And I do want to start off by saying that I still don’t look too much at macro when I pick stocks. So I didn’t do that when I started and I don’t do that today. And if you’re only looking at micro, I think you’ll probably still do well. 

Now, I think that you might want to look at the macro as something that can enhance your ability to cope with the micro piece because you need to remember that micro still operates within a macro framework. I’m not thinking I pay too much attention to that before. So micro really has to do with everything about the firm, and macro that’s really the surrounding. So we talked about inflation, we talked about debt levels, we talked about interest levels. But remember, the company still has to work within that. 

So let me give you a simpler example. When you estimate the normalized earnings, you need to have a good understanding of the business cycles. It’s really hard to understand business cycles unless you want to include the macroeconomic piece of it. So what should you do? I mean, what makes more sense to you? It’s not for me to say that macro is better than a macro. You just need to think about, if you’re in the same position as most of the people, and you might be confused about this macro stuff. If you’re still interested in individual stock picking, I can feel that most people that are still most interested in individual stock picking, focus on the predominant amount of time on the micro piece. But make sure to have the macro piece in the back of your head, make sure that you understand the cycles, that you understand the concept that you don’t need to have the nitty-gritty on that. But if you have a good sense of the framework, I think you’ll understand the business a lot better than you analyze.

Preston, if you want to piggyback on that. I know you’re bigger on macro than I am. 

Preston Pysh  20:49  

Yeah. So I’ll tell you so that was my approach absolutely 100 episodes ago. I definitely kind of look at things a little bit differently after everything that I’ve read and all the people We’ve interviewed.

Let me explain it like this. So, as a former attack helicopter pilot, and whenever you’re flying a helicopter, and you’re supporting somebody on the ground who comes into contact and they want you to shoot the helicopter. That’s usually not an easy process, because your sight picture of what you’re seeing is completely different than the guy who’s on the ground who might be getting shot up. Okay, so how this handoff occurs if somebody wants you to shoot something in an attack helicopter, if you said, “Oh, I see a red building in front of me.” Well, from the helicopters’ vantage point it might see 100 red buildings out there. Okay, so my sight picture is really big and really robust whenever I look across the landscape. But the guy on the ground, his landscape is really kind of small and more superficial than what he can see.

So when you’re conducting that handoff that discussion from the ground to the sky of where the target is and where you need the flying where you need to go, it starts off with the big picture. And then it slowly works its way down to the small picture. So it might sound something like, “Hey, there’s a big river and it runs east to west. Do you see that big river?” And the answer would be, “Yes, I see that.” Then the guy on the ground would say, “I’m to the south of that river.” And you say, “Oh, okay, now you see the three big open fields with trees that run north.” And you would describe that and you would do that handoff and say, “I’m in the middle field.” And then you’d slowly work in, “You see the center mass of the field. I’m on the east side of that field.” 

And as he’s talking that big picture to small picture, you can slowly gain this understanding of what’s happening. I see financial markets the same way as that discussion. I really think that whenever I look at the…Let me just do the same thing from a financial standpoint. Let’s talk about the US stock market specifically, not the bond market, not the commodity market. Let’s talk about the stock market in the United States because over in Europe, it’s different than in Japan, which is different than China, which is different than everywhere else. But let’s hone in on the United States. 

Okay, a price to earnings ratio in the United States on the US stock market today in August of 2016, the Shiller PE is around 26 or 27, something like that. So that means I’m probably going to get around a 3.5% to 4% return if I buy the market at the current price. Okay. So then I would look at that, and I would say, Okay, well, that’s pretty expensive. I’m not getting a lot of yields there, 3.5 % for my money? And you got to realize, I own a business. So if I’m going to take that money and invest in maybe a new product or a new thing that I want to create inside my business, do I think I can do better than a three and a half percent return? Yeah, I do. So why in the world would I tie my money up in US stocks, just that specific market? Remember, it’s all relative to what I’m comparing it to when I could maybe go and invest my money and get 5%, 10%, 15% by investing it back into an asset, that would be organic to my own company that I might create. That’s just one comparison. 

So then I walk the dog further, well, then I could invest in a 10-year bond and get one point whatever percent return right now. And who wants that? Well, I don’t want that. I don’t want to invest in nothing return. Okay, that’s how I see 1% as a nothing return, relative to what I could do with that money. 

So as I’m walking the dog, and I’m thinking about the big picture down the small picture, I start with the macro landscape, what’s my return across the entire market? Could I go find an individual company in there that might give me a 7% return? 8% return? Yes, I could. Would there be a risk in there because I don’t know the underlying details of it? Absolutely. So I know that was a really long response. It’s a lot longer than what I want to give. But I think it’s important for me to lay it out, the thought process of how I start really big with the macro landscape. What’s the big return of the overall market? Let me narrow it down into an individual pick and then have a deeper appreciation for the idea that central banks and the amount of lending that’s created into the entire macro economic ecosystem of all this money that’s out there. It contracts and expenses, that is a fact. And if you think that we’re at a time as debt and credit is at a max and it’s starting to contract, your red flag needs to go up from a macro standpoint. 

That’s how I think about things before I go and I just invest in a small-cap company that might be undervalued. I’m concerned about those bigger waves, those bigger movements. Okay, so I agree with Stig, but I guess I’m definitely more influenced by the macro landscape in the overall valuations of the market just because I think credit plays such a huge part in this. I think if credit is contracting, it’s going to have a big impact in a major way.

Stig Brodersen  26:07  

I’m really happy they were saying that because I remember when we started the podcast, I’ve got so many emails saying, “You and Preston always seem to agree. Why is that?” And vaguely, I haven’t got so many of those. So perhaps we are actually bringing a more interesting show. And I think it’s especially on the macro side that I don’t want to say I disagree with you. I just think I’m putting less weight on it. Like I see the same reflexes as you’re doing. Yeah, it’s really a question about weight.

Preston Pysh  26:35  

Yeah. Okay. So my first point that I have for this one is, I think what the market has taught me is that we’re completely uncharted in unprecedented times. I didn’t necessarily know that 100 episodes ago. I mean, this is gonna sound really bold, because I definitely think that markets are free and open, in the sense that anyone can go buy things. But I think that they’re being heavily, and I mean heavily influenced, by government entities at this point, a lot more than they ever have been in the past. 

Strictly speaking from a central bank standpoint, when you look at the treasuries and the central banks of all these countries around the world, I think that you see enormous amounts of buying specifically on the open market, from government entities buying up public companies and buying up public and private debt more than you’ve ever seen in the last hundred years. I think that that is grossly manipulating the way a lot of people see things right now, a lot more than you’ve ever seen before. I think that whenever you look at all these billionaires and people that have really kind of struggled over the last, really the last six months, you’ve seen a lot of people struggling with what’s going on. And that’s when you have seen the central banks really kind of completely change course. they’re not even making any sense. We have unemployment lower than we’ve ever seen it, like I don’t even know what it’d be. But I’d be willing to guess, decades that you’ve never seen unemployment, specifically here in the United States, as low as you’ve seen it. 

And yet, the central banks continue to keep interest rates at nothing. What I think you’re seeing at this point is, in order for capitalism to work, you have to have a boom and a bust. That is a core fundamental element of capitalism. If you don’t allow the bust to ever occur, or as a government manipulating that to the point where you are just creating enormous bubbles and support for deadbeat companies to exist, I think you’re starting to step away from the idea of a free and open market and you are destroying the premise of what makes capitalism work. So that’s something that I’ve learned in the last hundred episodes that I didn’t nearly have the appreciation for that I have today.

Stig Brodersen  29:14  

Yeah, Preston, and it’s definitely going to be interesting to see where we are around episode 200. I can’t wait to see that and it really resonates with my second point here of what I learned about the market. I think what I really learned is patience. I think this is really interesting, because, in a way, we probably have been following the stock market more intensely than we used to because we are doing a weekly episode and we get like a ton of email traffic. Everyone is asking about the stock market. I remember I was quite worried about that when I started because I thought back to the first time I bought a stock and I was checking the stock price like 16 times that day or whatnot. So I was just thinking if we’re doing this, I will be checking stock prices all the time, and I’ll get so many inputs on it and I will probably be overtrading. 

I think, if anything, all the people that we talked to and all anyone from the audience, who is contacting me, I don’t know how you feel about it. But I’ve just thought that really shows how patient you need to be because you will get an email saying it’s going up. You’ll get an email next Thursday, it’s going down. You get really humble in terms of your own ability to predict what’s going to happen. So I would like to call it patience and not analysis paralysis, but just to really feel like I can’t act on all these impulses. I need to be very specific about what I want to do. 

I think the first time we really talked about the overvalued stock market was back on February 15.  I think the Dow was probably like 82. What is it today like 85 or something like that? I mean, it’s 300 points, it could just move in a day, right? It’s literally just been flat. Well, it has been volatile, but you wouldn’t have made any money if you just invested then. 

So I think that’s definitely something I learned. And in continuation of that, I see a lot of investors that come to me and they realize how important it is to invest and realize how important it is to take care of their own financial situation. I’m kind of familiar with the concept of opportunity cost. But what that transition into is that I need to be 100% invested now. I just want to warn everyone about that approach because I really applaud everyone out there saying, “I need to do something about personal finances and once you grow a portfolio.” The thought about having money in your portfolio that you’re not investing and you’re thinking I’m losing so much because they’re not investing in stocks right now, I think that’s probably not a good strategy. 

So I’ll flip it and say that now is a good time to start investing, at least investing in the sense that if you look at the stock market right now, if you follow our advice, say it is overvalued and you’re still psyched about the stock market, this is great because you can learn so much about the stock market before you potentially lose a lot of money. 

I mean, if this is the first episode that you’re listening to when you’re saying, “So Stig and Preston keep saying that you shouldn’t invest in the stock market and I should probably just revisit that in like four years, whenever I hear someone saying now it’s a good time.” That’s probably the best decision. Not to come back to the stock market but just stay out of it. 

If you’re not excited about the stock market and learning about the stock market when it’s overvalued, you probably won’t have the patience and the passion for stocks so you can actually profit when the stocks are trading lower, at least not in the long run. So I think that was my second point I learned about the markets, in the previous hundred episodes: patience.

Preston Pysh  33:14 

So the reason you saw me smirking and laughing back here is that you literally were reading like my exact notes for my second one. So this is what I had. This is what I had written for number two, and we didn’t talk about what our two things were before we started recording. So this is just completely off the cuff. I wrote patience isn’t something you can teach someone or talk about. It’s something you need to experience firsthand to have an appreciation for. 

So then you talked about February 2015. I had written that as my note in the next line about how I started moving into a pretty strong cash position in February of 2015, which is what Stig just said. And you know, from that point in time until now, which has been about a year and a half, since I moved into that strong cash position, the market has gone up 1% in that time, in that year and a half the market has gone up. It’s at like 18,500 now in the summer on August 14th of 2016. I moved into cash when it was around 18,200 or 18,300. Somewhere around there is when I moved to a pretty heavy cash position. 

And here’s where this comes to this main point of what we’re talking about: just the patience part of it. It has been excruciating for me to sit on my hands for that long. It really has been brutal. But whenever I look back at the decision, the decision was actually, so far and I think I need that really emphasize that point, so far it has been a fantastic decision for me. The dollar has gotten much stronger between now and a year and a half ago. So relative to every other currency, man, I’m killing it. I’m absolutely murdering it being in the dollar. 

The other thing that’s been nice is, you know how much risk I put up in order to have that return or just basically protect my principal. I had no risk, really, there was no downside potential at all with that, while I sat in that position, whereas if I was in stocks, you know, a lot of people out there would argue there’s a 20 to 40% downside risk sitting in that market right now, with where it currently sits. So even though that didn’t happen, that was the risk you were basically putting up against in order for the upside versus downside during that period of time. 

So I’m very happy with what’s happened. I’m just, I guess I’m very happy with the performance that I’ve had, even though it’s been like nothing to risk. But at the same time, it’s been really, really hard and it’s been hard because of exactly what Stig’s talking about us because you pretty much talk to anybody out there. If you’re not doing something, they’re looking at you like you’re crazy. They’re saying, “Well, you got to do something, you got to do something.” And you know what? I love Charlie Munger’s quote, “Don’t just do something. Stand there.” And what a profound statement and I think he really emphasizes that point when you get into overvalued equity markets when you’re at the top of a credit cycle. That’s when you see Howard Marks, billionaire Howard Marks, and these guys really adjust the sizing of their portfolio allocation to protect their downside risk and protect their principal. But you know what? You have to have patience, and it’s something that has just been excruciating for me to experience. But absolutely, the number two thing that I’ve learned,

Stig Brodersen  36:40  

Preston, I also think it is counterintuitive for us because we identify ourselves as stock investors. And if you were to identify yourself as a runner, and you’re saying, “Yeah, you know, I’m a runner, but I don’t run.” And people would be like, “Yeah, he’s just, you know, making up excuses or whatnot.” But now you’re actually saying to yourself, I’m a stock investor, but I don’t know how to invest in stocks. That’s completely fine. That’s a part of being a real stock investor, that you always look at the opportunity cost that we also touched upon before.

Preston Pysh  37:10  

You know, if you would ask me last fall, if I thought it was going to go down in flames, I would have kind of looked at you like, “Yeah, I think maybe it might.” I was really kind of leaning in that direction. I don’t know what I would have said the odds were but I would, I would have said there may be 50% or higher. And that didn’t happen. So I was very surprised. I think that I see it from the same vantage point right now. But who knows? It goes back to this patience thing, man. 

You just gotta put it out there. You got to know that it’s expensive. You got to just go back to your basics, what’s the yield? The yield is like nothing. The upside is definitely not worth the potential downside for me, and I’m just going to continue to sit here, be patient and look like a boring lame-o is my approach. 

So all right, let’s do this, Stig. Let’s start calling some folks. 

Okay, so we’re going to do this kind of live. We might not get an answer from some folks. Who knows what’s gonna happen here. Okay, so the first person we’re going to try here is Nick Sharma

Is this, Nick?

Nick Sharma  38:18  

This is Nick. Hey guys, how are you? 

Preston Pysh  38:21  

What’s going on?

Stig Brodersen  38:23  

Awesome having you on.

Nick Sharma  38:25  

Oh my god, I can’t believe I’m here. Good to see you both.

Preston Pysh  38:29  

All right, man. So fire away.

Nick Sharma  38:32  

All right. Good to see you both finally. I’m so excited. Let me start by thanking you guys, which I do quite often on Twitter. So what a fantastic podcast and I am so amazed that I have learned so much in one year and being a rookie in the investment world. This is amazing. Like I love listening to you guys. How much I appreciate that. You guys have contributed to the community of rookie investors and of course, experts. Also, I was just reading your executive summary for Alibaba. It was fantastic. I can’t wait to buy the book and start reading it.

Alibaba is personally close to me, because that was my first investment last year. I remember when it went down in 2015 December and I keep listening, your thoughts as to value investment: if you believe in the company, they’ve been right, keep holding it. And I’m really surprised and happy with the results they have in the last one week. 

Preston Pysh  39:38  

Here’s the thing that I didn’t realize about Alibaba. So I went after reading the book, I went and started playing around on the site. And the thing that I found kind of amazing and I kind of picked up on from listening to some of the video interviews with Jack Ma, where he’s talking about, “This isn’t like Amazon. This is me trying to open up a world market. If you want to buy something in China and have it shipped to America and then upsell or mark up the price of something, you can do it.” 

So I went onto their site and I’m looking through… I mean, right there on their top page, there were cell phone cases, like nice cell phone cases for like, I don’t know, it was like 15… It was more than that. It was like a set maybe 70-80 cents for like one cell phone case, but you had to buy him a lot of 100. So it was almost like if you want to sell Chinese products in the US or anywhere in the world, you can do it a bit more on a micro, small business scale as opposed to like big Walmart. That’s how you think of doing business with China and you got to buy you know, 50,000 lot of something in order to do business over there. But no Jack Ma is truly trying to open it up through the Alibaba site for small business to small business internationally. That’s what I didn’t really get until I played around on the site.

Nick Sharma  40:57  

I totally agree with you, and let me tell you, my personal experience with Alibaba. It’s not mine, but my wife’s. I was reading the summary and I read about the company, and the vision of Alibaba was to support small businesses and bring small businesses together in China through e-commerce. And that was a fantastic vision rather than focusing on big things like Amazon, or Walmart, or other companies, and Alibaba having just changed small businesses in China. 

My wife started a small business from home. She’s a software analyst, but on her part-time, she makes some cosmetics products. And at Christmas time, she wanted to buy a gift back for her consumers. She went to Alibaba and we were a little skeptical, even though the company is so big. You’re not gonna believe this. We contacted people, the vendors, or the suppliers, and we got such an amazing response. The best customer service, they were giving us free samples, and the product was delivered within two weeks. It was more than a perfect product. 

So we were just amazed that Alibaba is also helping many small entrepreneurs or businessmen around the world. Long story short, I’m just going to end with this. I remember reading an article, I don’t remember the whole thing. But this guy in the US, I think, in Texas or somewhere, started a billion-dollar business from a drone business, making his own drones. All he did is bought parts from Alibaba, put them together as we all do with Legos. He started his own business. It’s pretty amazing. Again, I didn’t want to talk about Alibaba. We’re just reading it and I was just amazed. So thank you for that podcast. 

Stig Brodersen  42:40  

I would actually like to talk a bit more about Alibaba. Sorry about that. Perhaps we can transition to other companies as well. But I think one thing I really liked about the book was, how he was able to build trust, how important trust is. Especially in a country like China, where I don’t want to offend anyone who says that China is probably known for a lot of knockoffs. But Jack knows this and he’s saying that he’s actually losing five of that product, call it a handbag, whenever people are buying something that’s fake. 

So he’s actually rotating his personnel around different departments so they won’t get too connected to people. He’s actually having a former cop running the operations to be sure that it trusts all the way through and that no one is being exploited. I was curious to hear a first-hand experience from you. How do you experience the trust not only in Alibaba, well also companies, in general in Asia, and how do they build trust? And what are the warning signals that you see? 

Nick Sharma  43:41  

Oh, really good question, Stig. So I’m born and raised in India, Delhi, being an Asian and Indian in Chinese markets are really, really different. But when it comes through the small businesses and street businesses, it’s pretty similar. So I’ve always been skeptical if I buy something in my own country. 

The trust thing, I think when my wife and I were looking to buy something from Alibaba, so the brand name definitely came up. And even though the brand got really bad media attention and reading on your executive summary. Alibaba used to have a great connection with the Chinese government and the relationship went bad. And in China or India, when your relationship goes bad with the government, that’s a pretty big deal. This is not like the US. You know, it’s a pretty big deal, because there’s a lot of bureaucracy. But I think his image as an individual, like Elon Musk for Tesla, speaks a lot. Even Jeff Bezos doesn’t have that for Amazon. Everybody in the US knows what Amazon is, but not many people know Jeff Bezos. Go ahead.

Preston Pysh  44:50  

So I agree with you and I think that that might be one of the main reasons why Jack Ma may be able to get away with this maybe bad blood with the government because of the fact that he has become such a huge international business superstar at this point. Alibaba has become such a big name that I think if the Chinese government starts getting too heavily involved with it, everyone’s gonna call it for what it is. I think that he kind of got so big that it doesn’t even matter at this point is kind of my opinion. 

So after I went to the site, I looked at the stock ticker, obviously, and kind of looked at the numbers and the PE is like at 100. But I think this is important for people to understand. Even though Stig and I are like hardcore value investors, we also understand growth in the potential there. So whenever I’m looking at the Chinese market, I think that that site is gonna be mammoth. You give it another 5 or 10 years, I think is gonna be huge, much bigger than where it is right now. 

I think that Jack has an international vision, much more so than maybe even some US big-name companies. I think he really knows how to go after that cultural difference better than US companies can. So when you look at it from that vantage point, I think that it’s a company that I’d be very interested in potentially buying after the credit kind of contracts whenever that is. Who knows when this is going to happen? 

But I think whenever you see maybe a real tight contraction, that might be a company I’m very interested in looking at and maybe taking a closer look at down the road. Just not today just because of, I think, where the macro setting is, and Stig and I had a conversation on that before we gave you a call but kind of where the macro setting is right now. It’s just not something I’m ready to step into. But I’m watching that company really close. I think it’s very promising in the long run. 

Nick Sharma  46:44  

Yeah, I agree. 

Preston Pysh  46:46  

Alright, so throw us your question real fast and we got to, unfortunately, gonna call someone else.

Nick Sharma  46:51  

I know I emailed you earlier. I’m gonna reduce it to two questions because I know you guys are busy. So let’s talk about a value question. I’d like to title this as a value question. So why don’t both of you tell me your one breakthrough moment in your life? And I know there are many of those right. But one of them put you on the path where you are right now, regarding The Investor’s Podcast or regarding what you guys do is successful. So what was that one thing? And let me give an example for me, I just became a father. I’m pretty sure you know that. I’ve been posting my daughter’s pictures on Twitter. And that’s my motivation to be a better person and be successful. So I’d like to know your breakthrough moment. 

Preston Pysh  47:38  

I don’t know if this would be a breakthrough moment for me. But what I would say that really helped me kind of achieve at a different trajectory was a simple idea. The simple idea was this: If I want to do anything in this world, you name it. You want to be a great stock investor, you want to be a great basketball player, whatever it is, find the number one person in the world at that thing. And just study them relentlessly. Get every single book you can on the person, watch every video you can on the person, and just continue to study them, read all the stuff that they read. And I think when you take that approach, you’re kind of setting yourself up to achieve at that same level because success really does leave clues in a major way. I think that when a person kind of takes that on, it’s important not to just study the subject, but study the best person at the subject. I think that’s the thing that I think gives people breakthroughs.

Stig Brodersen  48:39  

I think for me, it was in the spring of 2013. I don’t want to say it was “How to Win Friends and Influence People.” I think I’ve talked about this moment, perhaps once or twice, but to elaborate, I was reading two books in the spring of 2013, “Change Your Thinking, Change Your Life,” by Brian Tracy, and “How to Win Friends and Influence People” by Dale Carnegie. It was not so just so much that those books were just amazing. I think for me was also a question about timing and a question about I was ready to improve myself. 

And the thing is really, you know what we say that you can’t help a person that doesn’t want to be helped? Sometimes it’s the same with the one person… You might be sick and tired of your life. You might still not be in a place where you feel you can really change it. But when you feel that you’re mentally ready, see your flaws, and be open about it, and start sharing with other people. I think that was really a life-altering moment for you. It was a process, the process of figuring out that you can’t just blame other people and you can’t do anything by yourself. You just simply need to stop blaming others. The only thing you can do is to change yourself. And this was almost like magic when you start changing yourself, just wait and see what happens to the people around you.

Nick Sharma  49:59  

Perfect. Thank you. Thank you both for that answer. That was amazing. 

My last question, and you can go crazy on this one with the imagination. How will you see investment 20 years from now? And I’m more interested in your views about the role of artificial intelligence and the future of investment, especially when Elon Musk thinks that artificial intelligence will take over. We all will be house cats, according to him. So I want to know your views, the algorithms, the technology, all the banks are already investing a lot of money in artificial intelligence. They’re putting a cover story like it will reduce the pressure and the hours for the analysts. I think they will all lose jobs in the future. But I want to know your view about the future of investment. 

Preston Pysh  50:49  

Well, one thing’s for sure. Whatever I’m about to say will be wrong. So I’ll start off with that.

Nick Sharma  50:55  

I like that.

Preston Pysh  50:57  

You know, I’m just not intelligent enough on the AI stuff to really talk at length. I guess I’m a little skeptical of AI, kind of taken off within a 20 year period of time. You know, I use this as an example, when you go back and you watch the Back to the Future to the movie when they got to 2015, what it was going to be like, and that was 30 years of what they thought the future was going to be like, for 2015. And you look at where we’re at right now and where they thought it was gonna be like back then. And they missed the mark so far. So, you know, I kind of think a little that might be going on. Maybe I’m wrong. I don’t know. 

I do think this: over the next 20 years, I really think currencies, in general, are broke in a major way. I think a lot more broke than what the world really realizes at this point. I’d say that that’d be the one thing that I would say. In the Peter Thiel book, you know where he said, “What’s the one thing that you know that no one else in the world has?” I would say that that would probably be the thing that I would answer that question with. I’d say that the global currencies are broken in a major way. And we have to do something to fix the monetary baseline of global currencies. So I see that playing out in 20 years, I don’t know how it’s gonna play out. I personally think that it has to be done in one or two ways, which is a precious metal or a cryptocurrency. But I think that that is coming to a head and I just don’t know what the timing of that will be. But I do think that that’s within a 20 year period of time and I think that’s going to be a very interesting event. I think a lot of people aren’t prepared for it. 

So I know that kind of steps a little bit away from the technology side of things but that’s maybe in a realm that I maybe understand a little bit better

Stig Brodersen  52:49  

You know, AI that was not the question I was expecting but I think it was a really interesting question and to be hundred percent honest, I have nothing intelligent to say about AI. I don’t know if I have anything intelligent to say about AI investment over the next 20 years, but I would like to give it a shot. 

I definitely think that it will be cheaper and better to invest for most investors. I think the increased focus that we see right now, on the customer experience, I think that’s something that we’ll see a lot more of. And when I say customer experience, you might say, “Well, we had that in the 50s. Whenever, like you were a high net worth client, you would drink champagne and go be entertained.” I mean, you still see that today. 

But for the common investors, I think you will see a big change and I think it will be a lot cheaper to invest and I think you have better options. That might be because I’ve been so much into the podcast, but I think something like quant investing is something you will see more of. I don’t know if we’ll have insurance of an ETF, or if that… 

But I think the whole idea about you can actually make really good returns in the stock market using somewhat of a form. I think that’s something that would resonate with more and more people. And in any case, the returns will be, in comparison, I’m not talking about where on the business side anything, but their terms will be better because it will be cheaper. It’s just more efficient due to the technology that we have today. If you look at how an ETF is structured that was simply not possible before it kind of happened. It’s just not technically feasible. So that’s also a change that you see in the financial industry. 

Preston Pysh  54:32  

Kind of going in at Stig’s point there. I think you see with blockchain technology as well, you could get into equities performing more like a currency I guess, where, you know, you want to start a new company. You have a great idea. You can just come up with 100,000 shares. You release them on the blockchain and you’re able to… basically the equity, the company is going to trade a lot more like a currency and so you’re going to see these. I think you’re going to see currencies and you’re going to see equities and commodities and all this kind of stuff really kind of merge itself a whole lot more through blockchain technology in the next 20 years. I think that that’s something people really don’t understand at all. But they’re going to have to start understanding it if they’re going to be competitive in the next 20 years, I think.

Nick Sharma  55:17  

Thank you. Those were really good answers. Thank you.

Preston Pysh  55:19  

Awesome questions, Nick. I’m sure we could talk to you for at least another hour but we try to get a couple more people on the call.

Nick Sharma  55:27  

I totally appreciate your time. Thank you so much. I was really excited and this is amazing. Thank you.

Preston Pysh  55:32  

Thanks, Nick. 

Stig Brodersen  55:34  

Wow, that was an awesome conversation.

Preston Pysh  55:36  

I loved it. That was so much fun. Okay. Derek.

Derek  55:48  

What’s up, man?

Preston Pysh  55:49  

Hey, this is Preston.

Stig Brodersen  55:51  

Hey, this is Stig.

Preston Pysh  55:53  

Hey, so we’re live on the show right now. So go ahead and fire away from your question. I think you said that you had an intrinsic value… You want to talk about intrinsic value, you read Peter Lynch’s book. Hey, let me see what else I got that. Well, just fire away. What do you have for us?

Derek  56:09  

I was able to look at your website a little bit and I saw some of the videos you made. They were actually broken down a little bit, a much easier way to understand. I guess my first question is I did the first one that I’ve ever done with the calculator. I did it for Apple. That’s the only stock I owned and I guess I noticed that if the growth is really, really large at the beginning, it seemed like it was really hard to judge how accurate it was. On this one, when I calculated it, I was getting an average book value change of 30%. And that was within 10 years. I think it was because five years ago, *inaudible.

Preston Pysh  56:50  

Exactly. So let me talk about this a little bit. So when you’re trying to figure out the value of a business, the intrinsic value, it’s really kind of difficult to do any type of intrinsic value on a business that doesn’t have stable and predictable earnings power. That goes for a company that’s growing really fast or it goes for a company that’s growing really slow, even into the negative earnings category. 

So this is why one of Warren Buffett’s key tenets or one of his top four rules is stability. Because when you get that stability, and you have something that’s very predictable like they earn $1 per share this year, next year it’s $1 per share, the year after that $1 per share, you’re setting precedence and a standard that the company is in a stable market. There’s not a lot of competitors that are changing their earnings power, and they’re consistently demonstrating the ability to earn at the same level each year. When you do that, you have a little bit better predictability of what they’re going to be able to do into the future. That doesn’t mean they can do it. It just means that maybe the probability is a little higher that they can do it. When you can do that, then you have that stable earnings power. What you’re able to do is you’re able to make a better assessment by adding up those future cash flows and then discounting them back to today at an appropriate rate. 

So, with Apple, it is a perfect example of a business that was growing over the last 10 years like crazy. I mean, just like a weed they were growing. And so the earnings, the earnings growth that Apple had five years ago, six years ago, was astronomical compared to what it is today. In fact, when you look at the top line of Apple, the sales that the company has, not their profit, but their very top line of like what they’re bringing in before any expenses or taxes or anything like that. That top line is actually decreasing I believe. Is that right, Stig? Apple’s top line is gone down a little bit just recently in the last quarter. 

So that would imply that their earnings are not even growing at this point. They might actually start contracting as we move forward. So when you look at the company, you’re trying to figure out that intrinsic value, I would tell you, if you’re using data over the last 10 years to figure out what that value is, it’s going to be drastically warped compared to their earnings power moving forward into the future. Simply because they’re not going to be growing like they have been. So that’s really, really important as you’re doing that intrinsic value assessment.

Derek  59:24  

I guess one thing I thought about too, was, I looked at doing it for, like the last five, and I got, like an 8 or is about 8.5, which would be a lot more realistic for the next five to 10 years for a company that size just because, I mean, that’s pretty good, but it’s not.

Preston Pysh  59:45  

If I was gonna figure out what their earnings would be for the next 10 years, I would do one of two things. I’d either take today’s earning power and just use that across the next 10 years. I wouldn’t give them any growth at all. Because I would want to lowball this. If anything, I want to definitely give them a lower estimate than what you think is actually going to happen because you want to have that margin of safety kind of built into your numbers. 

So I might even take their current earnings and take 10 or 20% off of that and use that number into the future to do my assessment. Just to build some margin there in case they actually start to contract a little bit moving into the next 10 years. What would you do, Stig? I’m curious how you would approach that.

Stig Brodersen  1:00:27  

I don’t think it’s too long ago that *Todd and Ted, I think from Berkshire, they actually bought Apple. Something a lot of people were surprised about. So you’re definitely not alone on that one, Derek. Like personally, I wouldn’t look too much back at the high growth and say that would just continue. And the thing that highlights a very important point. The important point is that it’s really, really hard to predict the future and how we usually do that is to look at the past. Now, that’s very often a very bad approach, especially if it’s a high growth company because ou said before, Derek, you were looking at something like 30%. It’s probably never the size Apple has today. It is almost fiscally impossible for them to grow 30% over the next 10 years, like every year. 

So you raise the question, what should you actually do? Well, the first thing to look at is really the current earnings, and especially the current cash flows. And if you look at a company like apple, you will see they have very, very strong cash flows. The thing that’s really interesting, because even though you see that the growth has slowed down, even declined, you can still see that they have really strong cash flows. And this is where it really depends on you, as an investor, do you understand the business well enough? 

If you don’t think you can reasonably understand and predict what the earnings will be the next 10 years, actually, without really looking at the previous 10 years for a company like Apple, then you probably shouldn’t be invested in the first place. So I know that this is kind of an unreasonable thing to say to you, Derek, because you’re basically looking at 10 years and you’re saying, “Well, that’s the data I have. That’s what I know what I can do, how can I, by any means, estimate what it will do in the next 10 years?”

And yes, that is super, super hard. But that’s really the challenge. So I think what I would do, we actually have two calculators in there. I think I would use the discounted cash flow calculator that does not include book value to analyze a company like Apple, partly because Apple has grown so much, but also because Apple has really rapidly the previous four years starting to buy back stocks, which is kind of messing up the first calculator that you brought up. 

So I’m sorry for the lengthy answer for those of you who are saying he’s talking about different calculators, but I’m sure if you go into our site, we should make sure to link to them, you can see what I mean.

Preston Pysh  1:02:48  

Yeah, and Derek, I completely agree with Stig. I’d be using the discounted cash flow calculator, not the book value one to do that assessment. To be honest with you, most of the time, I’m using that calculator more than the other, anyway. The discounted cash flow one.

I want to highlight one thing that Stig had mentioned there in his response, where he said that Berkshire Hathaway recently took a position in Apple. I’ve heard a lot of emails from people on this and a lot of talk on the forum. And this is the one thing that I keep telling people: Yes, he took a position in Apple, but you have to put it in the context of his overall portfolio allocation. Okay, he took a $1 billion position in Apple. So a lot of people would hear that and say, “Oh, my God, that’s a lot of money.” But when in relative terms, it’s really not. If you look at the market capitalization of Berkshire Hathaway right now, this is off the top of my head. I don’t know what it is, but I guess it’s 350 billion dollars. That’s what I would guess his market cap is. So if you would do a comparison of that position to his market cap, you’re at like a .3% position of his overall company, .3% of everything Berkshire Hathaway owns is in Apple.

Stig Brodersen  1:04:00  

Just a follow up. I completely agree with you, Preston, because what Berkshire Hathaway really bought? I mean, Apple is one of the top companies in the US in terms of market size. Where else can they just put in a billion dollars and get some of that juicy dividend and get some of that cash flow? I mean, clearly there are other companies than Apple, I’m not saying that, but Apple is *inaudible like single digit price to cash flow. I mean, how many companies in the US of that size can you do that with? Well, probably a few handful, but they actually did the same thing in many of those. So this is not like an Apple investment. This is just as much as strategic investment in terms of how they allocate capital. So I just want to completely support your argument there, Preston.

Preston Pysh  1:04:43  

And Derek, if I was told, “Will Apple outperform the S&P 500?” I would say yes. I think over the next 10 years, I think it will outperform the S&P 500 over the next 10 years. I just don’t think it’s going to be by a huge margin or anything. 

What other questions? We’ve been talking forever. Go ahead. I’m so sorry.

Derek  1:05:03  

Yeah, no. That’s awesome. Like, I mean, personally, I just thought that they had just been getting hammered so bad with just bad publicity. It is really what they’ve been doing and really changed a whole lot. So, I think I mean, from my perspective, it seemed like the price was low enough that it made sense to them to go for it, even though it’s… they’re newer, because I noticed that you’re going back 10 years, there’s not a lot of companies that have really, really consistent data for that far back, from what I then did from looking at that today. So that’s gonna be it’ll take a minute to figure out where to look for more places like a company like that. 

Preston Pysh  1:05:44  

You’re exactly right there. When you go back and you look at most companies, the 10 year data is not a perfect line, and that’s where this really becomes an art. It really becomes an art at this point where you’re making these judgments. And that’s why Buffett says, you know, it’s not an absolute number Whatever you come up with, that’s not a precision kind of thing. It’s an estimate. And you’ve really got to kind of look at the business and have a firm understanding of the direction,  their vision of where they’re taking the business in the next 10 years, and kind of understanding how they’re going to hit those bottom line figures that are going to continue to hit those marks into the future because that’s how the company is valued is into the future, not on past performance.

Derek  1:06:30  

So as far as like the additional discount cash flow calculator, I haven’t looked at that one yet. But is that one easier to use if you have… Say you’re trying to break down a company that doesn’t have  as much history that one that you can use as a little bit you know, easier to do with less history that because you want as much can get, but if it’s not, you know, if they haven’t been stable for more than five years, it’s hard to look at it beyond that.

Preston Pysh  1:07:01  

I guess I would tell you this, it really doesn’t matter. So like, the Apple example is a perfect example of you got all this data, you got this 10 year data. But moving into the next 10 years, I would tell you that the past data is not that useful, but it gives you kind of a benchmark and kind of an idea of where to kind of start shooting from and where to kind of aim your target into the future.

Derek  1:07:27  

I was gonna say, I mean, like, I would totally agree with that. I think where they are now is completely different than where they were five years ago. They are so large there’s no way they can grow, you know, at the rate that they were doing, it’s just not possible. But is there sort of  other method of looking at companies that are in a similar position that may be you know, they started out really high growth and now they’re starting to level off, just kind of looking at where they’re going to go. Are there other ways of doing it? 

Preston Pysh  1:07:57  

Yeah, I love this question because I think a great example of a business we could talk about would be Tesla. Okay, so whenever I look at Tesla, and I look at the electric car market size that it could potentially become, I think that the current car market for electric cars is miniscule. It’s like nothing. And I think that the potential for this moving into the future would be actually fairly big. I think that there’s a lot of growth potential. So how would you do that? Well, I would look at what’s the overall car market size today, and then what’s the market cap of Tesla. I would guess, again, this is off the top of my head, I would guess Tesla’s at a $30 billion market cap. It looks like Stig is looking it up. So correct me if I’m off, but I would guess they’re $30 billion. 

All right. Good. So I’m 3 billion off so I would guess that they’re around that point. So there are $33 billion. Okay, it is their current market cap. If I was going to look at a Ford or something like that, I would guess Ford would be at $50 billion, Toyota I noticed huge, they’re probably at $155 or $150 billion or something like that. They’re three times the size of Ford. 

When you look at the size of all these car companies, you have to ask yourself, “Well, how much more of that market can Elon Musk basically take with Tesla?” I think he could get as big as a Ford, but it’s going to take them a lot of years to get there. So you can see how much of a premium people are paying on the price. 

But I think what’s important is, when you’re looking at the future of how much he can grow, that’s how you’re kind of doing this analysis. And you’re kind of thinking of things, you got to think of things in terms of the big picture first, how big is the whole car market in the world? How much of that do I think he could take? How much of it exists for the price point that he’s currently building cars for? And where’s he going into the future? Is he going into the $15,000 to $25,000 car market? I don’t know. That’s something you’d have to do some research on, and then see how big that is. 

But that’s how you’re doing these assessments. That’s how you’re doing this analysis as you’re moving forward. Then you have to ask yourself, “Am I willing to put my neck out on the line that own this one company that’s stepping into this space, because I think that he is so much more superior and owns all the intellectual property, as far as the battery technology, the electric car technology, all that kind of stuff that’s going to allow him to be the winner?” And so that’s the assessment. That’s where you’re looking at all the different risks and in trying to make that projection into the next 10 years.

Stig Brodersen  1:10:26  

Yeah, and I think I’m really happy you brought up this discussion, Derek, about the calculator and which one to use and which number to put in. I think, and this is not to say that you shouldn’t use the calculator, I think it’s definitely a good thing. Think about the collaboration between you and the calculator, in like better words, when you’re talking about methods and talking about, “Should I use this or should I use that?” 

I think the investment should more or less be screaming to you. I think if you are concerned about what the intrinsic value is and it’s not obvious. I think that’s a red flag. I know that we touched upon this a few times in terms of what is the value pick and what is a growth pick. And in that sense, a lot of people would say something like Tesla is definitely a growth pick. 

But think about this before you use a calculator: Can I buy the estimated cash flow at a single digit? Is that possible? And does a lot of things need to happen before that? And if the answer is no, you probably shouldn’t go for it. And I know we didn’t talk about this with you there was recording with it, prior to the conversations, but we talked a lot about patience. And I think that patience is so important if you can find that stock pick. And even in the situation that we’re in right now, we need to talk about what these opportunity cost. We have so many different options out there. 

If you really can’t find something that fits those two questions about th single digits and if a lot of things have to happen before that is so, it’s probably not the best value. And that’s pretty much regardless of the calculator that you’re using.

Derek  1:12:14  

What do you mean by you elaborate on the single digit portion of that?

Stig Brodersen  1:12:19  

Yes. I think Apple is actually a really great example. Actually, I think the price to cash flow right now is something like 9.5. But I would like more than 10% of the cash flow, especially for a company that I don’t expect to grow that much. I think if you can do that, it’s a really, really good sign. And this is probably because I’m very much into my own *hat. But if the price to cash flow is something like 20, then or even something like 15 or 17, for that matter, when you look at the numbers, and clearly the podcast is not the right way to do that. If you do the calculations, you will quickly see that a lot of growth has to happen to justify that multiple.

Preston Pysh  1:12:56  

You’re paying for something that hasn’t even happened yet. I think the best way to describe a Tesla, for example, for them to have a market cap of 30 billion almost at the same level as Ford  is totally insane when you think about the fact that they’re producing what? I don’t even know what the number would be, if you did the number of cars Tesla’s making compared to like a Ford. It would be just an insane difference. 

So you’re effectively paying for the price that he’s already done it. That’s what you have to look at that as. It’s like I’m gonna pay as if he has already done this, even though he hasn’t. Then hope that he grows beyond that. When you look at things from that context, whereas when we were talking about Apple, we were saying, “Hey, let’s just say that this earnings that they’re already getting is sustainable into the future.” 

And I think when you do that assessment, you’re going to get a higher yield than you’d get owning the S&P 500 right now, which is why Stig and I were both saying, we think Apple will beat the S&P 500 not by a lot, but it’ll beat the S&P 500 where a company like a Tesla based at its current market price, is going to have a very hard time doing that without a lot of risk involved in achieving it just because people are already paying those prices as if he’s done it.

Derek  1:14:13  

Yeah, it’s overvalued. I mean every time I look at it, I am amazed.

Preston Pysh  1:14:18  

No. Here’s what I’m looking at with Tesla, although I would never own it today because of the price. I’m totally watching that company for a big credit contraction type event where people are going to somehow value that thing at 30 times earnings or 25 times earnings. And when that happens, you better believe I’m going to pay very close attention to it because then you’re getting into a price point where I think that… Do I think Elon Musk is going to have a really successful car company in 10 years from now? You better believe I do. I think it’s going to be one of the best out there, just based on what I see today. But am I gonna pay 100 times earnings for it? No way. So I’m waiting for it.

Derek  1:15:02  

Yeah, I totally get that. I’ve been looking at that thing the same way. I mean, it’s just a matter of time before… I don’t know if I had any questions about it. Yeah, you guys did a good job. I was getting some good answers.

Preston Pysh  1:15:14  

Derek, we’re gonna try to get some one more person on the phone here to do a question with us. But we really appreciate you listening to the show and thank you so much for replying to my email and talking with us tonight.

Stig Brodersen  1:15:28  

Yeah. Oh, before I forget, Derek, we actually have a small present for you for making yourself available. 

Preston Pysh  1:15:34  

You’re really gonna like this too. We know you’re reading “The Intelligent Investor.” You said that you got our summary guide. Is that right?

Derek  1:15:42  

Oh,  I looked at the first two. I just looked at the first two. 

Preston Pysh  1:15:50  

Well, you’re gonna love this because Stig created an entire video course that goes chapter by chapter through “The Intelligent Investor” and this is a paid course that we have on our site, but we’re going to give it to you completely for free.

Derek  1:16:03  

Nice. Cool.

Preston Pysh  1:16:05  

So I will send you the details for how you can log into your account and start using it. So we really appreciate you talking with us tonight.

Derek  1:16:14  

Thank you guys. That was very helpful.

Stig Brodersen  1:16:18  

Take care.

Preston Pysh  1:16:20  

Okay, Stig one more. Yep. Let’s see here. Let’s see if we can get someone.

Stig Brodersen  1:16:25  

This is so much fun, Preston. 

Preston Pysh  1:16:26  

Dude. This is awesome. Makes me want to do this more often. All right. I think we got… Can you hear Chris there, Stig?

Chris  1:16:34  

Hey, Stig. 

Stig Brodersen  1:16:35  

Hey, Chris. Awesome. 

Chris  1:16:37  

Pleasure to meet you. How’s Seoul?  

Stig Brodersen  1:16:39  

Awesome. Do you live close? We can always get a cup of coffee.

Chris  1:16:46  

No, I’m in Canada. So miles away from you.

Stig Brodersen  1:16:51  

Okay. The offer still stands though..

Preston Pysh  1:16:55  

So Chris, welcome to the show. Tell us a little bit about yourself. We haven’t asked too many people about themselves tonight, but we want to hear about you. 

Chris  1:17:04  

I’m a high school English teacher here in Winnipeg, Manitoba, Canada. I’ve taken a keen interest in value investing over the course of the last six months. It really all started with the Buffett Books website. I kind of stumbled upon it and then took in a couple of the videos and the rest is history.

Preston Pysh  1:17:26  

That’s great. That’s awesome. I love the fact that you’re an English teacher. That’s pretty cool.

Chris  1:17:31  

I mean, it’s an upstanding profession. I’m giving back and I work in the high school that I once graduated from. I played basketball. I played university basketball here in Canada, and then I played overseas in Portugal. Then as that wrapped up, I entered the field of education and now I’m back at my home high school, influencing young people. It’s pretty cool and believe it or not, I’ve gotten some of my students to go to the Buffet Books website and take in the lessons.  

i’m gonna be honest with you my vision is to somehow create like a young investors club in my high school, kind of using the resources you guys created to influence these young people because I think, like Napoleon Hill talks about and “Think and Grow Rich”, this is very important that young people start to think about finance, how to invest and how the markets work. It’s really what makes the world move. 

Preston Pysh  1:18:32  

It would be a cool episode if your students went through the Buffett’s Books course. And then we kind of did a live interview where they could ask us any question because I’m serious. Sometimes the best questions about investing come from like really young minds, like kids that are in high school that just really have like, a really core fundamental question. I think people eat that up to be honest with you. So maybe that’s something we can look at doing in the future.

Chris  1:18:57  

Absolutely. I think it’s a great idea. Well, let’s see where it goes. I’m obviously on vacation right now and just got married. 

Preston Pysh  1:19:04  

What question do you got for us, Chris?

Chris  1:19:06  

Well, guys, it basically boils down to this. Three weeks ago, I married the love of my life and my best friend. And we had a fantastic wedding. I’ve been studying value investing now for about six months, took the course. I’ve read “Security Analysis” and I did “The Intelligent Investor,” and  “A New Case for Gold.” I’m currently listening to Napoleon Hill, under your guys’s guidance, I’ve listened to every episode you guys have produced. Now, I’m kind of trying to figure out a strategy for myself to set my family up for a good financial future and I think right now the way the markets are, I’m a little I’m just very nervous about it. I’m just wondering what your advice is to someone observing the markets and wanting to enter?

Preston Pysh  1:19:54  

“Watch out.” That’s my advice. When I look at your background and what you’ve got going for you, like your asset and your skill set, I mean, you have a writing skill set, which I’ll tell you that I think is an enormously valuable skill set for online business. When I look at like our website and everything like my skill set, what I enjoy doing is really math. I really don’t like writing at all. I can do it. It’s not something that I really prefer. Stig, would you agree with that? Would you say that you’re much more math than really kind of enjoying writing just because?

Stig Brodersen  1:20:35  

No, I would actually say the opposite. I enjoy writing more. I think writing is… Clearly math is super important too. But I think we *need those skill sets also in terms of financial education. I know for my own students, one thing is to speak to them about finances. Another thing is to give them something, a piece of paper. It just shares different ways and if you can accompany that with your… It’s called coaching. I think they feel that it gets something tangible, make sure you just don’t send it  to them, but you actually printed it out and gave it to them. I think that will make a difference. The shorter and more concise you can do that, I think that’s better. 

In terms of setting your family up, sorry to digress here, but I’m thinking the very best thing you can do is that you might be in charge of the family’s finances. And really, I think that’s the best way of setting your family up. I think when I look at my parents, it was not so much that I’ve got a lot of money, in terms of being set up. But getting the financial literacy is really the best gift you can give to them. 

So I’m sorry, I wasn’t responding to that part of the question. I know Preston has another point. But I just like to stress that was top of my mind.

Preston Pysh  1:21:55  

So I look at things in terms of these quick assets.

Kristen  1:22:00  

 Hi!

Preston Pysh  1:22:01  

Oh, I like this. I absolutely love this. This is awesome. How much fun is this?

Stig Brodersen  1:22:13  

Chris, I actually thought when you said like, “Oh, I just got married and I’m interested in investing.” I was like, do you want us to teach you how you can eventually pay for your marriage? I mean, like, “I was so much in debt now. It was $200,000 for this dream wedding.”

Chris  1:22:30  

No, it’s all over.

Preston Pysh  1:22:33  

Now, it’s all the fun part.

Chris  1:22:35  

Yeah, it’s about living and taking care of ourselves.

Preston Pysh  1:22:40  

What’s your wife’s name, just so we can say hi to her on the show?

Chris  1:22:43  

Kristen. 

Preston Pysh  1:22:44  

Kristen, thank you for stopping over to say hi to us. It’s amazing.

All right, Chris, this is what I would tell you: when you look at things from an investing standpoint, I think it’s all about asset accumulation. So you have a skill set, one of your assets is that you’re a school teacher that consumes a lot of your time and your labor. So the thing that I think really gives people a big edge is how can I accumulate and amass different assets that I’ve created through time, whether that’s buying stocks, whether it’s owning debt instruments, whether it’s actually creating my own assets, and moving forward. 

And what I would tell you is to emphasize on that last one, because I think that there is enormous opportunity in financial education for high school students. When you talk to anybody in the United States, Canada, anywhere in the West, the first thing that they’ll tell you that’s broke, like the number one thing that’s broke with our school system, is they don’t teach you one thing about business investing or nothing. Then once you graduate from college, what’s the number one thing that you have to now know? You have to know about business, investing and all that kind of stuff that they never teach you in school.

So what I would tell you is, as a writer, I think you have an enormous opportunity with the internet, because with a brick and mortar business, you’re stuck to the physical location of your town. But with the internet, your town has literally become the entire world. And so what I would tell you is maybe invest your time more in understanding online business, understanding how you can develop an audience and how you can basically do things to teach young, high school type students about finance and investing from a really basic and fundamental level. I think when you do that, it’s gonna be a really, I mean, this is a huge uphill battle what I’m telling you to do. But what you will potentially have the ability to do is to accumulate assets that you own 100% of the equity of, and I think that that’s probably one of the most powerful investments that a person can make, is taking their time and investing in equity that they own 100 percent of.

Stig Brodersen  1:25:01  

Chris, I’m really happy that you’re giving us a shout out on the podcast to your students. But really, I think before they really dig into everything with stock investing, this is probably something that a lot of the guys that you’re teaching they’re really interested in… Teach them about personal finances first. I think it’s super easy to speak to, especially young guys about saying,” Oh, you can get so and so much money.” And they probably want Wolf on Wall Street or what not, and think that would be pretty cool. Or The Big Short and thinking of that as a cool thing.

But really, personal finance is spending less than you’re making. I think that’s just so important. So I would definitely focus a lot more on that. And in terms of doing the online marketing thing, in general, I think that’s a good suggestion also, because it takes a lot of money to start up your own physical business. But I think it’s really important for you once you… If that’s something you want to start looking at. You don’t get sucked into the whole online marketing world. I mean, I think it’s amazing. But I would stay very true to my passion and my intention. 

Forget all about the, “Oh, that’s how I reach so much so many people. And that’s how I market this in a smart way.” Yes, marketing is important. But as long as you keep staying true, it might take a little longer, as long as you’re staying true to the products you’re developing and the young people that you’re helping. I think that’s the core thing for you. 

The other thing might be a distraction. I might speak from experience and you might start looking too much at money, which is not the intention, not the purpose at all.

Preston Pysh  1:26:42  

So we like to give book recommendations, and I have a good friend. His name is Douglas McCormick, Doug McCormick. And he went to West Point quite a few years before I went there, but Doug is the brother… His brother is the number two guy at Bridgewater with Ray Dalio. And so Doug is also in finance. He was the first Captain at West Point, the number one student at West Point when he graduated. I think he graduated in the 80s, I want to say.

But Doug wrote a book, and it’s called “Family Incorporated: Using Business Principles to Maximize Your Family’s Wealth,” and it gets totally at what you’re talking about. What I like also about Doug’s book is he has free income statements and balance sheets that you can do through the book with his website and stuff. You can download these income statements and balance sheets that are designed for your private life. And he gets into a lot of the stuff that I was talking about is creating your own assets, and all that kind of stuff, and how to look at your job as an asset. I highly recommend his book for you because it’s totally up your alley of what you’re looking to do.

Chris  1:27:56  

Thank you very much. Do you guys mind if I transition into some questions about like, actual value investing? 

Preston Pysh  1:28:03  

You are the last person we’re going to talk to so you fire away.

Chris  1:28:07  

Okay. If they don’t make this go, I mean, this is such a rare opportunity. So like, the first thing I’m finding like I use your  checklist that was on the website. And what I’m noticing is when I’m running it through the Google screener, it doesn’t give you many options. Then if you change the metrics on the cap, you can find small caps with some of the metrics that you guys have. And I’m just wondering, in current market conditions, is it attractive to be investing in these small caps that meet some of the Graham value investing fundamentals?

Stig Brodersen  1:28:47  

Yeah, I think that’s a great question. I think the first thing to think about the checklist when Preston and I created it is that we’re really picky, as you can probably see, that’s one thing. Another way of looking at it is that the market conditions right now are really unfavorable because you can go back to March 2009. And I can assure you, there will be plenty of stock picks for you. 

So in that sense, it’s really a question about patience. Keep being patient. If you’re doing something like a small cap, I think, in general, I’m not too concerned about small cap. And I think you can see there’s an inherent risk. But it’s still in this framework saying, I know the business I’m investing in. We actually had this conversation before with another gentleman who talked about Apple and was really curious about our thoughts on Apple, and how to estimate the future cash flows. Well, I’m not invested in Apple. I don’t know how to predict the next 10 years for Apple. But if you can find a company where we can break in the next 10 years, I don’t care if it’s 50 million, or it’s 5 billion or 300 billion, that would probably work for you. And I think that should really  be the key whenever you are evaluating that.

Some small companies, they’re more vulnerable to something like a recession, for instance. So that’s just something I will add into that. It’s not necessarily because they’re small always. But there is a tendency that small companies are more vulnerable intersections than bigger companies. So I would definitely look at that because a lot of small companies that have the debt obligation structure in different ways than larger operations. So that might be something I would ask the investor relations about in detail. Sorry, go ahead.

Chris  1:30:38  

This may sound super novice but would you actually pick up the phone and phone some of these businesses because I’ve actually like wrestled with that, like, I would just love to call and talk to someone and see what’s going on? Have you guys ever done that? What do you suggest?

Stig Brodersen  1:30:56  

Yeah, no shame in that. It works for a lot of different life situations. And one of them is really Investor Relations. And it’s a great way of checking how they treat their investors. So definitely and I’ve seen so many different responses, like some people that don’t want to talk to me. And I was like, “I’m invested, why do you want to talk?” Like I was almost interrupting them in their day. I mean, and we’re talking about Investments Relationship Manager. Their job is to speak with me or you. So that’s a big red flag for me. 

Preston Pysh  1:31:26  

It will show you where the power in the company lies as you go from company to company. Like, let’s say the CEO holds an enormous amount of the equity and a lot of the voting rights and so he’s pretty much making the decisions autonomously from what any other shareholder thinks. You can probably see the shareholders department that you’d call they’re really lacking in any kind of support, just because there’s no reason for it to really be there because the decisions all lie at a much more individual basis. So it really depends from company to company of where that power lies within the equity. 

But yeah, I think the reason you’re seeing the checklist really not materialize too many results as simply because of where you’re at in the credit cycle. Like Stig said, you go back to 2008 to 2010, I guarantee you would had a lot of companies showing up in that filtering that you’re doing on Google. But now you’re not. 

So I don’t invest in the smaller companies that kind of kick out of that filter, just because I can’t really operationally control them. I think if I did have operational control of the decisions that were occurring inside of those companies, I might be a little bit more favorable on maybe taking a position in them. You had a follow up question there, Chris? 

Chris  1:32:37  

Well, my follow up question is a very natural transition and it goes to the Shiller PE ratio. And what do you suggest for an investor who follows the Shiller PE ratio? How do you suggest they use that metric to find an entry point into the market, because obviously, these drawdowns don’t take place over one month or two months. They could very well take place for a number of years. How do you guys kind of see the bottoming of that or a reversal? And at what point do you decide? This is a good time for me to maybe start indexing because as a rookie investor, from what I’ve learned from you guys, and some of your guests, that indexing is a very smart thing to do under certain market conditions. Maybe not right now. But if the opportunity presents itself in the index, but how do you guys suggest I use the Shiller PE ratio to improve my entry?

Preston Pysh  1:33:35  

So this is a very difficult question just because of the timing of the question. So I think that if you would have asked this question anytime in the last 20 years, it would have been a lot easier to respond to simply because of the fact that you had interest rates that were in reasonable positions in the Fed. It could lower those interest rates and it was all within a margin of normal, but now you’re in a position where the Fed raised the federal funds rate by 25 basis points or .25%. In the last, let’s just call it almost a decade, okay, like, that’s where we’re at. That’s insane. That’s totally nuts. 

So as we look at the next credit contraction, whether that happens here in the third quarter, it happens in another year from now or whenever. When that happens, the Fed doesn’t have the tools that they’ve had at their disposal in the past. 

And so, for me, what I would tell you in the past would have been, well look at the volume spike, you know, look at those normal things that that really kind of gave you that indication that there was a bottoming that occurred, you’re starting to see reinvestment and things like that. Maybe it’s time to get back in and you’re seeing lending occur again, you’re seeing, high yield debt is looking a lot better than it did going into the contraction. All those kind of things were really the cues that you look for to get back in and take another position.

Stig Brodersen  1:34:59  

So Chris, you’re talking about indexing. And I think what you kind of said was, so should I invest when they read 20 or 15?  Is that where you’re getting at, in terms of when to enter the market?

Chris  1:35:14  

Yeah, like, if the Shiller PE ratio is reading 15 or below, I’m thinking that might be a good opportunity to be indexing.

Stig Brodersen  1:35:23  

Yeah, in that sense, I think it’s a good idea. You know, it might take 10 years. I don’t know when it will happen. So it’s hard, you know, sitting with all that cash for so many years. I think the way to look at PE at least right now, Shiller PE, is to say, okay, index in America doesn’t make a lot of sense for a long, long time. And if you want to wait, just call something like 20, say that hits 20. And you said, I’ll allocate I don’t know 4% of my portfolio, whatnot, then it bounced back to 23. I mean, what are you going to do then? 

I think the good thing to do is really to look at if you want to index and look at the world, and see that there are actually a lot of, if not cheaper and cheaper markets out there. Yes, a lot of risk and their interest rate debt levels, a lot of bad things out there. But you might use another strategy saying you would just rebalance the 5 or 10 cheapest based on the Shiller PE ratio. And I’ll just make sure to send you a link and put a link in the show notes, where you can see an overview all these but if you’re looking to Shiller PE, and you’re seeing well, it’s Russia that’s appears to be most attractive, and then Brazil, Poland, Czech Republic, and you don’t find those appealing. Think about something like developed Europe, for instance, 14.7 I’m not saying that developed Europe is necessarily the best solution, but you probably won’t see your hyperinflation and whatnot in that market. So just think about that, if that’s an approach, Chris, you want to take if you wanted to index in and if you think that the US, as I would agree with you, is simply not interesting.

Preston Pysh  1:36:57  

I agree with where Stig was going there at the end. Maybe let’s start looking internationally for value where you have an economy that has normal interest rates. I think it is maybe a better play, and maybe a better place to look. Whenever I’m trying to think of, of a situation where I would have got crushed in the past, historically, if you took me back to 1990, in Japan, and I was investing domestically in that market, and I’m trying to think of how I would react to that, after you had the big credit contraction in 1990, the stock market meltdown, you know, you’d might say, “Hey, it would have been a great time to buy into that market at that point.” Then you would have a little bit of a little pop there for a few years, but then you would have got crushed again. And if you would have stayed in that market for a decade, 15 years, 20 years, you would have had a horrible experience. 

Whenever I look at the parallels between where Japan was in 1990, and what I think could potentially happen here in the United States and also over in Europe. My opinion is there in a similar situation as Japan in 1990. And like that’s my concern moving into the coming decade in the US market and also in Europe is does that play out because interest rates have nowhere to go? And this thing’s just a struggling disaster that has nowhere to go? Or do you go to a market that still has some interest rates to play with, like over in India or in the whole China shadow banking things a mess, but they do have interest rates that are in what I would classify as somewhat normal territory. And they do have potential growth prospects with their population, which is where the US and Japan and Europe is in.

Stig Brodersen  1:38:40  

Another thing, Chris is patience. I know that you’re just starting a new family and you want to do the best thing you can. One of the most logical conclusions to reach right now might be to be fully invested or at least close to because now you probably read that you really need to start investing and compound that over the years. And you can’t predict what’s going to happen all of that. And I would say, I would agree with all that we can’t predict what’s going to happen. But we do know right now that it’s an expensive market. And if you’re looking at stocks, especially American stocks and thinking, “I probably should do that for my family.” I’m sure you see where I’m going with this. That’s not the way to look at it. I think you should be patient, and you should increase your financial knowledge. That’s the best thing you can do for your, for your family. And if it takes a year, if it takes two or three years, it would still be a lot better than for you to say start index and because you read that you should just do dollar cost averaging and over time, it will just average out. You were nodding, so you probably read that. 

Right now, I think it’s horrible advice. I don’t think you should do that, especially because you are starting a new family right now.

Chris  1:39:57  

Right and obviously there are other options. Like, assets at home real estate, etc. So it’s a balancing act. And I guess part of it is this whole process of educating oneself because now for the first time, we have the surplus in our income to start thinking in these ways and that’s a big step in life. 

It’s interesting what Stig’s talking about because Meb Faber is talking a lot about this. I’ve started following his podcast. Yeah, I love that episode. Then I read his global asset allocation text. And what he’s saying makes a lot of sense. But I like where you’re going, Stig, with the risk and with the hyperinflation piece and everything. I’m even thinking the Canadian market may be an option for me down the road because there are some good, like P/E aren’t that out of control for some of the big Canadian corporations. And that’s something I’ve been keeping an eye on. But definitely, I think the sidelines until I acquire enough knowledge is probably the best play for now.

Preston Pysh  1:40:58  

We’re huge fans of Meb Faber and for anyone who doesn’t listen to Meb, you need to because the guy’s brilliant. And he makes things very simple. I can’t speak highly enough of Meb Faber. So yes, I totally agree with you on him.

Stig Brodersen  1:41:13  

Yeah, amazing podcast. And he’s actually, I think he’s actually even doing this where he’s balancing the cheapest indexes. I mean, I haven’t looked too much into that. I’m not endorsing anything. I’m just saying if that’s something. I have a tremendous respect for Meb so I would definitely read up on his prospects. 

Chris  1:41:31  

My wife has a question.

Preston Pysh  1:41:32  

Yeah, bring her out. That’s awesome. 

Kristen  1:41:37  

Okay. So I don’t know a lot. But he tells me and he educates me through what you tell him and what he reads elsewhere but with us because we’re just starting out, we don’t especially because we just got married and it’s a big rip. But after you get married and you’re trying to build savings now. He’s obsessed with physical gold. I hear you guys talk about physical gold all the time. And especially you guys are talking about the trends throughout history, through Japan and all the gold standards and everything else. With us just starting out, do you think it’s smart to buy physical gold, even if it’s in?

Stig Brodersen  1:42:20  

No.

Kristen  1:42:21  

Yeah. I’m just wondering if it’s smart for us, as we’re starting to save just because of the instability of the markets and the banking systems and how everything’s digital. Is it a good idea to have physical gold in your possession as you’re saving, I guess elsewhere in the process? Not just to buy gold, but just to have some physical gold.

Preston Pysh  1:42:46  

This is like the zinger question that probably everyone on the show wanted to hear. 

Stig Brodersen  1:42:55  

Sorry, I was almost cutting you off by shaking my head. It was a great question. And I would say no, and especially not in the position that you’re in right now. I know that you’re probably not going to do like 100% gold. But even so, I think right now, it’s a question, especially the *inaudible and it’s about preserving your capital. And I know a lot of people would say gold is the way to do that. I don’t think I would agree with that 100% in your situation. 

The other thing is that you need to compound now. It’s really hard to compound, as you also talked about earlier in this conversation, but I think you should really see gold as a currency insurance. And I mean, if I was like, 60 or 70, I was about to retire. I had a really nice net worth. I might be thinking about what would I really do if this and that would happen to the currencies. 

You’re not in that position, and I don’t think that’s something *inaudible. But I don’t think like the whole system come crashing down and we will start bartering with gold or anything like that. And I also think that, you know, I don’t know how old you are. Well I can look at you. So I would probably estimate around 30 or something like that. 

Chris  1:44:15  

I mean, right on the money. 29 and 31.

Stig Brodersen  1:44:19  

Perfect. Yeah, I wouldn’t be too worried. I mean, you’re still young and clearly want to start as soon as possible. But if it takes a few years to get the natural acquiring knowledge, I think that’s okay. And you’re also paying a huge opportunity cost in your age, and, well, I’m 31 as well. In our age, whenever we are investing 10 or 15% fold because we’re not making a return on that. And that adds up too. 

So to answer your question, no, I don’t want to do that. And especially because you’re talking about physical gold. It is quite expensive to do that. You might be around 1% and I mean, it makes sense for someone like Kyle Bass who has like hundreds of millions and because he’s building a vault and like for him the extra cost to you know, security guards or whatnot. That is not, that’s not really a thing. But for you to put some of your investment into something and you’re just paying quarter percent off in case the whole monetary system is crashing down, I think that’s not the right solution for you. I just think you will pay a huge opportunity cost for that.

Preston Pysh  1:45:26  

So I kind of agree with Stig, I think that my reasoning for why I would tell you kind of the same response is simply because of your domestic currency that you guys have in Canada. So yeah, well, so whenever I look at your currency, your currency has been punished over the last year and a half. You guys have gotten crushed because of the whole oil industry and everything. Everyone is kind of moving out of that currency. 

So here in the US, everyone’s piling into the dollar right now. So if you live in the United States, I might tell you that yeah, it might not be too bad of a play to put on because I think gold’s going to do really well versus the dollar, moving forward into the next five years. But I think your currency, in my opinion, I could be wrong on this. But I think your currency is actually going to do fairly well moving into the next five years, as oil eventually kind of comes back and I think does really well moving into the next five years. I think that it has still had some rough times for the maybe the next couple next quarter to year. I think it’s going to continue to struggle, maybe even move lower. But after that moves past, II think your currency is going to do really well. So the hedge that you’re kind of having, I would just I would probably just keep it as cash. I would keep it as Canadian dollars at this point because you guys have already gotten punished. 

What was your question on that?

Chris  1:46:49  

My question on that is talking about the oil and the potential recovery. Looking at Canadian oil producers, there are some that are trading at really good PEs right now. When you look at it, it looks like such an attractive time to buy. And I guess sometimes for us as Canadians, we become very disenchanted by a lot of what we hear from the US market or other markets globally, that it affects fear and buying Canadian equities. 

Preston Pysh  1:47:19  

I mean, this is easy. Look at the debt on the company. If the company is not very highly leveraged, I think that that’s probably the main starting point for me. you’d want to dig into more of the business but especially if you’re buying individual picks, but I would look at that and if the company doesn’t have a lot of debt, and they’ve been really kind of paying for everything out of retained earnings in order to finance growth, they’re probably going to be in a very good position to either be a acquired by a larger company as they come out of it or have enormous recovery five years from now, moving forward. So you might have to put up with a lot of pain in the coming quarters because you know, you might put the play on and you might get crushed in the next six months, if oil would move in the direction. I kind of feel like it might be moving in. 

But if you’re in the play for the long haul, you’re fine. And what I would tell you is I wouldn’t go, I wouldn’t go all in, if you would say, let’s say you’re going to put on 15% of your portfolio into it, I wouldn’t tell you to step completely into it right now. I would tell you to just maybe say in an entire year from starting right now to a year from now, I’m going to be in a 15% position. And then I would put in a linear just purchasing of those companies that you would identify as being the ones you want and I put that on and just let it run until it hits a position a year from now. I’m curious if Stig would have a similar approach to that.

Stig Brodersen  1:48:46  

I’m actually quite excited about oil in Canada. And I know I always seem to be excited by oil but I also think you should be very careful, especially in Canada. So this is really the key in terms of understanding the company that you’re looking at. 

So a lot of Canadian companies are no surprise, very much exposed to the Canadian industry. They are exposed to oil sand. Now makes a lot of sense that they’re punished right now because before well, they have a *inaudible call it 70 or 80. I mean, they’re really getting crushed right now. And if you don’t think oil will go into that territory, you’ll see a lot of bad things happening in Canada. 

Now, you also have a lot of oil companies in Canada, they’re not as exposed to the Canadian industry. They are selling to the major vertical integrated companies all around the world. I think that’s a lot more interesting and they are getting punished too, because the market right now can’t distinguish between where the risk really is. I would really think a lot in terms of what their exposure is. I would always do that specially for Canadian oil the companies right now,

Preston Pysh  1:49:52  

Just because of the highest cost producer really globally. I mean, they cost them the most to pull it out of the ground. So they are going to have the hardest time having any kind of margin in retained earnings because of that. So that’s where it gets really tricky when you’re playing around with Canadian specific companies.

Chris  1:50:10  

And to be honest with you, I’ve been quite surprised that we haven’t seen as many defaults, as we have south of the border. Some of the things you guys have shared on Twitter and on the show notes and everything have really shown a tremendous amount of default but in the Canadian oil sands, it’s just not there yet. But there are some that are close.

Preston Pysh  1:50:31  

I think that’s a testament. I could be completely wrong with this. But I think it’s a testament to how well run they are relative to other companies around the globe. I think that it really kind of speaks to the management and their ability to kind of manage how difficult the circumstances are. 

So All right, guys. I think that’s it, I gotta get to bed. 

Kristen  1:50:56  

Really nice to meet you.

Stig Brodersen  1:50:59  

Nice meeting both of you and congratulations. 

Kristen  1:51:01  

It’s our three week anniversary. No big deal. 

Chris  1:51:08  

So romantic.

Guys, keep doing what you’re doing. Your show is incredible. Such a tremendous resource. You guys are really good guys. Very intelligent guys. You guys get amazing guests. I don’t know how you do it. 

Preston Pysh  1:51:23  

But we don’t either.

Stig Brodersen  1:51:28  

It was so great speaking to both of you.

Preston Pysh  1:51:32  

See ya.

Stig Brodersen  1:51:32  

Take care. Bye.

Preston Pysh  1:51:35  

All right, so we’re gonna wrap this up really quick because we know this was a really long episode. But for everybody that we talked to tonight, we are going to send them a free signed copy of the Warren Buffett Accounting Book. We are also giving them free access to Stig’s video based chapter by chapter Intelligent Investor course on our website. So thank you guys so much for participating in our hundredth episode. 

And this is for you audience. Thank you from the bottom of our hearts, you guys are the reason that we were actually ranked number six in the world a couple nights back on iTunes for business podcasts. We cannot thank you enough for listening to our show and supporting us, telling all your friends and leaving the reviews, and like everything you guys are doing, we were totally floored and humbled and so thankful for. So thank you so much.

Stig Brodersen  1:52:31  

I personally can’t wait to see how much we can all learn together over the next hundred episodes, and just want to take the opportunity to tell all of you how grateful we are. We couldn’t have done any of this without you. And I hope that in time we can repay the goodwill you have shown us. This was such a fun episode to record and we hope you’ll join us next week.

Preston Pysh  1:52:52  

So one of the things that Stig and I are very strict about is not endorsing any kind of service or product that we don’t personally use ourselves. So with that said, we give our full endorsement of our sponsors’ content realvisionTV.com. Real Vision is a site that Stig and I personally use ourselves and it has had a profound impact on the way that we view the financial markets. 

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Extro  1:54:45  

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