Preston Pysh  07:37

And I also want to hear Stig’s opinion on focusing on those types of people whenever you’re in this type of market condition. I want to hear what your thoughts are on that, Stig.

Stig Brodersen  07:46

Well, so I’m happy to say that, Preston, because I often get emails from people, and sometimes people are saying, “You and Preston always agree on everything.” And like, I don’t know, like it’s a bad thing. But to some extent, I guess it’s a good thing that we do agree on most things. I think I agree with you that the people to look for are not Warren Buffett, but it’s people like Druckenmiller, is people like George Soros. Another gentleman that we’ll talk about later in the book called *”Bass,” someone that thinks out of the box when it comes to crashes. We’ll definitely discuss him more later.

Stig Brodersen  08:22

But I’m still more into value investing and Warren Buffett like I can definitely see the points of say, going into commodities because of the problems that we now see with currencies. I can definitely see why it might be a good idea to go into shorting S&P 500 or shorting whatever, but it’s just not my play. I think for me in 2016, I will look at equities carefully and if I find a good business that I like at a good price, I wouldn’t be surprised if I would start investing in that. I’m not ready, at least not yet to go into other asset classes. I’m simply not comfortable with that. I would like to ask you, Preston, because you are thinking about commodities right now. Why is it that you think that commodities might be a good play?

Preston Pysh  09:15

Well, I think commodities are a horrible place today at the start of the year. But I think that it’s going to be a fantastic play potentially by the end of the year. And that’s what I’m taking a close watch. And I think that, as I said earlier, the main catalyst that I’m looking for is the US Federal, or I’m sorry, the US Fed Central Bank, adjusting their current position of, “Hey, we’re tightening.”

Preston Pysh  09:44

I mean, you had Stanley Fischer come out and recently and said, “Yeah, we’re going to tighten four times this year in 2016.” As long as they’re sending that message, this is going to continue to get worse. I promise you this is not going to get better as the US Fed is saying that stuff. As soon as they change that and they start signaling, we’re going to have to ease or we’re going to have to do something that’s more complementary with our policy. I think that’s when you’re going to start to see people start to try to front-run their next decision of a major devalue on the dollar. They’re going to have to do QE. I mean, the next QE round is going to be just massive. I mean, massive, you thought you saw a lot of QE in the past, just wait till you see the next one.

Preston Pysh  10:30

And I think whenever they start, just even initially signaling that you’re going to see… I think you’re going to see gold quite solidify, if not start to move in a positive direction at that point. I think that’s the key variable with gold is when they start just signaling that something’s going to happen, you’re going to see gold start to take off. And I will be putting that play on. I promise you I will be buying that pretty heavily.

Preston Pysh  10:58

And that’s something that a lot of value investors, especially hardcore Warren Buffett value investors, they’re probably covering their ears and they’re saying, “I’m an idiot.” But at the end of the day, we’ll find out who was right and wrong. And I’m not saying that because I’m boasting or I’ve got an ego. No, definitely not. I could be completely wrong. But I can tell you, I’ll probably be taking a fairly large position on something like that.

Preston Pysh  11:20

The other thing that I’ll be looking at is commodities in general, because when you look at the commodities index, I mean, it is getting absolutely crushed. And I think that the turning point for that is going to be two things. I think it’s going to be A) the monetary policy change, because that’s going to be the point when you’re saying fiat currencies, there’s not this run on fiat currencies. That’s what you’re seeing right now, you’re seeing a run on fiat currency. the value of those is going to be going up. And, so that’s why commodities are going down.

Preston Pysh  11:47

What you typically see is that commodities and currencies work in opposites, okay? When commodities are doing well, the currencies are usually doing performing poorly relative to those commodities. Then you see the inverse of that play.

Preston Pysh  12:02

And, so as the Fed starts to adjust that I’m going to be watching commodities in general, particularly oil very closely. There are a couple of other commodities out there that have just been abused. I’ll be watching those very closely for them to start changing course.

Preston Pysh  12:18

Now the concern I think that you have is that the supply and demand on this stuff are still out of whack. even though the Fed adjusts its policy, you still need to see the competition. And a lot of these sectors die out and get crushed, particularly in oil. even though the Fed might change your policy, I’m still going to be a little hesitant to buy into the oil until I start to see a detox if you will,l occur in that sector. When I see that happen, let’s say we start seeing a lot of defaults in the oil sector, I’m going to be watching that very closely and starting to take a position.

Preston Pysh  12:53

I haven’t decided whether I’ll take the position just straight in the commodity because I think that that’s going to rebound faster than the companies. I think there’s going to be a little bit of a lag for the companies to start performing well again, but time will tell I’m just going to continue to watch it and try to take that position.

Stig Brodersen  13:09

Yeah. though if people out there are thinking, “Yes! Finally, Stig and Preston disagree on something.” I don’t know if I necessarily disagree with Preston on this one. Preston has definitely done very well. And he is definitely also looking more careful at things like currencies and oil price something than I am. when I say that is because like I took a position in oil when it was like, I don’t know 80 bucks, and then I took another position when it was 60 bucks, and another one because it was 40 bucks. like, I’m looking at the fundamentals thing. Do I like the price? If I like the price, I would definitely buy it. If it goes up, it’s good. If it goes down, I can probably buy something more.

Stig Brodersen  13:50

One thing I want to add is that I think Preston’s strategy is good. I think, especially if he knows how to time this and he’s been a lot better than me, so you should probably just listen to him, is that one thing to keep in mind is that demand for oil is still going up in 2015. The demand like everything in commodities, occurrences, whatever, it’s all about supply and demand. And if you look at the demand, the demand for oil has still gone up in 2015.

Stig Brodersen  14:15

So you heard about like, the oil price being slammed and you’re thinking that doesn’t make any sense. Demand has gone up, what’s happening? Well, it’s no surprise that the supply has just overflooded the market. it’s not enough if demand has gone up by a million barrels a day, whatnot if you see this huge supply. And I think whenever you hear, for instance, news from China. China’s not using as much oil as they used to. The growth is not as high as it used to be. Right now, China is using something like 11 million barrels a day. The US, just for comparison, is using 80 million barrels a day. But whether or not they’re using say 300,000 barrels more or less, that is not what is moving the market right now. What is moving the market is both the anticipation but also the amount of oil that’s flooding the market. And once you see that stopping, I think that is probably what you’re looking at, Preston, that’s when you will see the shift in the oil price.

Preston Pysh  15:08

And a little bit of my concern too is if you do start having this global contraction with the credit cycle with where we’re at if that does happen, the demand is going to also decrease. It’s going to be less than what they’re thinking it’s going to be. And I think that that’s something that allows me to continue to have the position that I’m not going to be late to the party here, concerning oil.

Preston Pysh  15:31

I think that price down in the $30 range, for me, when I’m looking at next year, I look at oil  $50. If it gets above $50, I’d be very surprised. It could absolutely shoot higher than that. You know, billionaire Boone Pickens had this interview with Carl Icahn. Boone Pickens in his interview with Carl Icahn in December said that in six months from now, oil is going to be $70 a barrel. Carl Icahn was like, ‘Yeah, I’m not, so sure about that.” I agree with Carl Icahn. I do not see oil being at $70 in six months from now. I could be wrong. It could be. If this thing unravels itself a whole lot faster than I’m expecting it to, like, let’s say the next month or two months, this thing just totally unravels itself, then maybe you could see it by six months. But I don’t necessarily see that happening.

Preston Pysh  16:23

What I think you see oil up at $70, you’re talking like a year from now, if not more. And the interesting point that I had is, if you rewind the tape six months back, Boone Pickens was saying that oil would be $70 today. he’s been saying that catchphrase for quite a while and it’s not catching on. And he’s not able to substantiate his position. And let me tell you, Boone Pickens, I mean, this dude’s been in the industry a whole heck of a lot longer than Preston Pysh has and he’s knee-deep in understanding this stuff. he’s maybe somebody to listen to. I just want to throw that contrarian point of view out there by another billionaire that has a different opinion than me.

Preston Pysh  17:00

But I’m standing by and those are the two critical variables for me, which is the defaults of the large substantial amount of defaults in the industry. And also the Fed changing their policy is going to be my turning point where I try to start taking the position.

Stig Brodersen  17:12

Yeah and personally, I think it’s interesting to talk about that and the problems that you see in the oil sector right now because still, it is a different approach than for instance, what I do because you’re saying, “Okay, so you have a lot of problems in the oil sector, you want to stay out of it, or at least wait until the drops.” I’m definitely still seeing the same warning signs as you are but for instance, I took a position in Exxon not long ago, because Exxon there will be hurt, but this balance sheet is super strong. They’ll probably still be making money in the years to come. I just want to say like that’s what I’m saying. And if something should go wrong in the sector, I think you’re right, it might be. The time for me is just too tricky.

Preston Pysh  17:52

And this is the reason why I keep putting the decision off because at the end of the day if the oil is at $30 a barrel, all these oil companies have gotten, they’ve had a very horrible last two years. I mean, horrible. And if I think if you bought them at the price that they’re at right now, and you didn’t look at it for five years, and you opened up your account, and look, it’s going to be a very good investment for you, I fully believe that. But for me, I feel like I could still get that same price. In my opinion, I feel like I’m going to be able to still get that same price six months from now. And I think that I can make a whole lot of money in other investments between right now in January 2016, and call it the middle of the summer. That time from those six months.

Preston Pysh  18:37

I have other things that I’m doing with my money that I don’t particularly want to talk about on the show, because they’re very speculative. And it’s not something that I even want to put that thought in people’s minds because it’s such a speculative thing. I want to talk about investments in the show. I don’t want to talk about speculation and potential because this is a great topic, okay. The idea of conviction. If you’re the type of person that makes an investment and you fully I mean, just have a lot of conviction behind that position, because of the knowledge that you’ve accumulated on it, you’re going to continue to hold that position. And if that position moves against you, if you have a high level of conviction, you’re going to buy more, because you have this opinion, you have this theory that it’s going to move in a certain direction.

Preston Pysh  19:19

So I get in these positions where I have a lot of conviction behind something, and I’m very comfortable buying it. But if I told somebody else about that position, it would take me a day to substantiate why I might have such a high-level conviction and theory behind why I have it and even then they might not fully understand or have the same opinion of why have it. And what I don’t want to do is I don’t want to throw out these picks and these ideas that are very complex, that are macro ideas or whatever and people just action them and then they have no conviction. And then when it moves against them five or 10%, they sell out of the position. That’s what I want to avoid and that’s why I don’t talk about all the things that I’m doing, especially the speculative things because I don’t want people to be speculative.

Preston Pysh  20:06

I think when you get to a certain point with your investing, you can be a little bit more speculative than not. But I want people to focus on investing. I think right now, and this is what I wrote in the article that I published on one January, I think one of the best things for people to be doing is having a fairly substantial cash position. You know, we beat up on Warren Buffett a little bit, but you go to Warren Buffett’s balance sheet on Berkshire Hathaway. And the last one that I saw was what, $70 billion of cash that he’s sitting on? It’s a lot of money. And so, you know, we’re saying he doesn’t perform well on the market, basically, because Berkshire Hathaway’s victimized by the people that hold the shares and sell it. But at the end of the day, Warren Buffett is a very smart dude and he is preparing for this in a very good way. He’s just not doing the Stanley Druckenmiller and George Soros plays. He’s going to sit on cash. And that’s what we’re recommending for the audience is that you would be in a substantial cash position.

Stig Brodersen  20:58

Yeah. Well, what Buffett does better than the market when there’s a downturn in the market, but he doesn’t do the same play as the hedge fund guys that profits during a downturn. what Warren Buffett does is that he loses less than the rest of the market, which is also extremely valuable.

Stig Brodersen  21:15

I have another point to what you’re saying, Preston, about not always disclosing everything that you’re doing. And I struggle with the same thing because we’re here to… I don’t know if we’re here to guide people. I don’t think that’s up to people to determine that, but I think in a way, we are obliged to say what we’re doing because we just don’t want to talk our positions to thousands of people. And then you know, people can have this thought that while Stig is speculating that people do, as you say, and he would do something opposite. But at the same time, you don’t want people, not necessarily in a bad way, but to be messing with your head like you don’t want to be, “Hey, I’m Stig. I’m investing in oil.” And since I have that, and since I’ve said that to, so many people, I can never change my position. And I think that’s also very important to stress, so hopefully, you will have a chance to meet Preston out in Berkshire and we might be saying like, “Oh I’m Stig and I will short oil.” And Preston will say, “I love oil more than everything.” I can’t see this happening, but you know, take it for what it is.

Stig Brodersen  22:13

And like it’s also important for us to stress that it’s nice to have a platform where you can change your mind. Basically, this is, I think Preston just said this, but we’re recording this on January 8, but you know, tomorrow we might do something completely else. And now I’ve said that I took a position on Exxon not too long ago, whenever we meet I might think it is the most horrible company you can see out there.

Stig Brodersen  22:35

And right now, the reason why I did that, but right now is just that I don’t see the same place as Preston, or at least I don’t dare to pull the trigger on the same utterance of asset classes. right now I’m just saying, I can get what like 3-4% whatever, dividend yield at the moment, and just wait for the rebound. That’s my play. If I can get the return 2016 while I wait for the return, and I heavily expose to oil, that’s fine for me. And Preston might have another opinion because he’s living somewhere else.

Preston Pysh  23:07

Yeah, my approach is drastically different. But I’m a lot more aggressive. Like, when you meet our personalities, I’m a lot more aggressive. My plan for 2016 is to have an epic year. But you know, sometimes those end in chaos and disaster. it’s definitely a different approach.

Preston Pysh  23:25

But what I want to talk about on the show is good sound advice. , so let me talk about this. I had a friend that I said, “You know, I think a cash position is probably a very good position to be in going into 2016.” This person took my advice. And the first week with this opening you know, the market was down, let’s just call it almost 10%. And, so I was talking to this person on the phone and I said, “Wow, you had one heck of a week. You basically, you know, made $100,000 in your position.” And the person said to me, they said, “What do you mean? I didn’t make $100,000. I didn’t make anything.” And I said, “Yeah, but it’s always relative to something else. If you would have continued to basically own the index, or the S&P 500,” which is what the person had, “if you continue to own that you would have had, you know, $900,000 in your portfolio instead of a million.” And the person was like, “Yeah, I guess.”

Preston Pysh  24:22

And I’ll tell you, folks, I think that this idea is the trap. This idea is the trap that gets investors like nothing else because they don’t understand the power of protecting your downside. We had William Green on our show, and the very first person and William Green’s book, he wrote this book that was just a fantastic book that outlines the greatest minds of investing. And one of the very first people in his book was a gentleman that just recently passed away. This man shorted the market during the Great Depression when the market crashed during the Great Depression. He was shorting the stock.

Preston Pysh  25:00

So, in this book, in big giant quotes, he was asked what’s the most important thing investors need to know. And what this gentleman said single-handedly, the most important thing investors need to know is how to protect their downside risk. And I totally agree with that. And I think that the problem that a lot of people have is a psychological problem, that if they don’t feel like something is going up or progressing, they don’t see that as a win.

Preston Pysh  25:27

So going back to my friend that I was talking to on the phone that basically had $100,000 week, in a week, he had $100,000 in a week, because he had moved into a straight liquid, you know, short term bond cash type position that didn’t move an inch as the market, as the S&P was down 10%. He didn’t feel like he did. You know, he wasn’t happy. And for me, I’m thinking this dude just killed it. And he wasn’t happy. And, so I think that people got to wrap their heads around that because that guy just killed the stock market, absolutely murdered it. He could just be completely flat with the S&P for the rest of the year. And if he takes that 10% gain, he just killed it. You know, professional investors, if they can beat the market by 2%, they are a master at their craft. I think people need to have a lot of respect for that idea of protecting your downside risk. And just because it doesn’t go up, that is a win, folks if everything else goes down.

Stig Brodersen  26:25

I’m, so happy you said that Preston, because I was just looking at my stocks, and I was thinking, “Oh, they just dropped, so much.” But then, first of all, I thought, “Wow, that means I can buy more.” And the second thing was that “Well, luckily, I’m 70% plus in cash.” Like when I say I’m heavily exposed to oil, that is in that 30 %. And you kind of… it’s like all relative, right? so if you have 20% oil and you have 30% equities, you feel you’re heavily exposed in oil, but you might also have like, 99% of your whole portfolio in the oil and that’s when you feel like you’re crushed. I feel like I’ve been making a fortune, as Preston was saying, but a fortune in terms of I’ve been losing less than otherwise, what if I was invested in equities.

Preston Pysh  27:08

That’s exactly right. that’s the key point now, which people don’t understand. And I’ll tell you a Wes Gray does a great job of talking this. Dr. Wesley Gray, whom we had on the show a few episodes back.

Preston Pysh  27:19

It’s all about asset allocation. This is what Tony Robbins talks about in his book when he interviewed all these different people. You can’t time the market, you might think that that’s what we’re talking about a lot of times. We’re not talking about that at all. What we’re talking about is the asset allocation. As things became riskier, in the markets, I moved more and more and more into a cash position. I’ll tell you, for the last year I’ve been struggling because I’ve had to be patient. I’ve had to sit on my hands for a long period, just not doing too much because I knew there was a lot of risk in the market. And I adjusted my allocation of what it is that I own based on that risk profile. whenever I was looking at stocks, to me, they seemed extremely risky because of the downside risk. I start moving out of it. I don’t have a large position.

Preston Pysh  28:08

I’ll tell you, you go back three or four years ago, I was like 100% in stocks. Okay, not today. Not even close. I bought this book, and one of the people on Twitter hit me up and said, “Hey, did you read Ray Dalio, his Economic Principles?” And I was like, “Yes. Not only did I read it, but I love it.” And I wanted to just talk about this just a little bit, and maybe read through one section of this book. And sorry, Stig. if I’m going off tangent here, but this is something that I wanted to talk about because I think it definitely relates back to a lot of the discussions that we’ve been having with currencies and commodities. And I also wanted to just highlight to people how important this book that I’m about to talk to you about.

Preston Pysh  28:54

So, Ray Dalio, everyone knows we talked about the video that Ray Dalio made talking about Credit cycles and you know basically how he sees the economy works like a machine. But a lot of people don’t realize is that Ray Dalio has about a 300-page PDF online for free, called Economic Principles. And what it is is he has basically, the first 25 pages of the book, talk about a textual form, where he’s written out his ideas of how the economic machine works. You’ll see some things in there that you don’t necessarily see in the video. It’s well worth your time.

Preston Pysh  29:31

He then goes through deep analysis, a 100-page analysis of debt cycles, leveraging things and deleveraging, short term cycles, long term cycles. And he uses real-world events that have happened over the last hundred years.

Preston Pysh  29:44

Then he gets into this third section, which is another 150 pages where he talks about productivity and structural reform and where he’s basically investing his money and where. I treasure this guide. This thing is like one of my most prized possessions I keep it on my bookshelf. I went out and took the PDF and I got it printed, you know, one copy for myself, and I had it bound at the local Kinkos. I would highly recommend this to everyone in our audience. I will have a link to this free PDF. You don’t have to buy anything, you can download this PDF, we’ll have a link on our site.

Preston Pysh  30:18

One of the things that Dalio talks about in this guide that I just found insanely useful for me to understand how currencies work and how commodities work. And we talked about this a little bit in the show. this is one of the reasons I want to read this section. This probably took me about five minutes to read this. But I think that this is very useful. And it’s something that I think about often as I’m thinking about how currencies work and how commodities work. here it goes. I’m going to read this and this is from Ray Dalio, billionaire net worth about $16 billion, the guy that wrote this.

Preston Pysh  30:50

“Since the value of money has fallen over time relative to the value just about everything else. we could tie the currency to just about anything to show how this monetary system would have worked. For example, a one-pound loaf of white bread in 1946 costs 10 cents. Let’s imagine we tied the dollar to the bread. In other words, let’s imagine a monetary system in which the government in 1946 committed to buying bread at 10 cents a pound, and stuck to that until now.

Preston Pysh  31:20

Today, a pound loaf of white bread costs $2.75. Of course, if they had used this monetary system, the price would have risen to $2.75 because we all would have bought other bread from the government at 10 cents, instead of from the free market until the government ran out of bread.

Preston Pysh  31:36

But for example, let’s say that the price of bread is $2.75, I’d certainly be willing to take all of my money, buy bread from the government at 10 cents and sell it in the market at $2.75, and others would do the same.

Preston Pysh  31:52

This process would reduce the amount of money in circulation, which would then reduce the prices of all goods and services and it would increase the amount of bread in circulation, thus lowering its price more rapidly than other prices. In fact, if the supply and demand for bread were not greatly influenced by its convertibility to currency, this tie would have dramatically slowed the last 50 years’ rapid growth in currency and credit.

Preston Pysh  32:16

So obviously, what the currency is convertible into has an enormous impact on this process. For example, if instead of tying the dollar to bread, we chose to tie the eggs since the price of a dozen eggs in 1946 was 70 cents instead of 10 cents. And today, it’s $2 for the price of eggs. Currency and credit growth would have been less restricted.”

Preston Pysh  32:38

Okay. So, what he talks about here ideally, if one has a commodity-based currency system, one wants to tie the currency to something that is not subject to great price swings and supply and demand. For example, if the currency were tied to bread, bakeries would in effect have the power to produce money, leading to increased inflation. Gold and to a much lesser extent silver have historically proven more stable than most other currency backings, although they are by no means perfect.

Preston Pysh  33:06

The second type of monetary system, a Fiat system in which the amount of money is not construed by the ability to exchange it for a commodity. The growth of money and credit is very much subject to the influence of the central bank in the willingness of borrowers and lenders to create credit. this is such a profound idea where you’re talking about when you back a fiat currency to a commodity that can’t be manipulated or adjusted in its supply, you’re going to have a much tighter credit cycle aren’t going to be nearly as pronounced. And as you step away from that, and you get into something that the price that it’s tied to is very volatile or nothing at all. You see these credit cycles that go into these big swings. And what you can see in this as well, as you can see how currencies and commodities are tied at the hip, but it’s almost like they’re tethered together, because something always has to be related back to something else to talk about price.

Preston Pysh  33:59

So that’s just a little glimpse of some of the stuff that’s in this book that billionaire Ray Dalio has written. I know that was a little bit longer. I’m sorry to just keep on reading and droning on Stig. He’s yawning right now.

Stig Brodersen  34:13

No, I’m not. I like you’re playing first.

Preston Pysh  34:17

All right, so we said that we were going to talk about this book, and it’s probably going to be one of our shortest book summaries ever. We’re talking about Michael Lewis’ “Boomerang” book. For anybody, if you don’t want to read this book, which is what I recommend. Don’t read this book. I didn’t like this book. Stig, did you like this book?

Stig Brodersen  34:34

No, I did not like it. I considered shooting an email saying, “Let’s not do this book.” But then I came up with this idea, “Hmm… Could we just do something with the current market conditions and then still say that we did the book?” And that’s what we did, I guess.

Preston Pysh  34:49

Yeah, that’s exactly what we did. I almost sent the same email. But here we are. We did complete the book. I was not impressed. And, you know, to be honest with you, Michael Lewis, is probably one of my favorite writers. It was a weird book, he goes around the world. Michael Lewis travels around the world. And he looks at all these different economies like he starts in Iceland. And he goes to a different location. And he basically talks about a lot of the issues that have unfolded in some of these countries. And there’s a lot of interesting points, I’m not going to lie. There are some interesting points. But in totality, I didn’t get the gist of the book, like, what was the big main theme of the book? And I just didn’t capture that. I think that’s probably more of my frustration than anything else. There just wasn’t a point to the book other than just talking about different locations that he went to and the trials and tribulations and the corruption of different governments and how they didn’t know what they were doing, investing in certain markets. And how, you know, eventually, the country paid for their lack of understanding of what they had invested in and what they had done over a long period and devaluing their buying power within the country and things like that. I’m going to throw it over to, Stig. He has main points from the book.

Stig Brodersen  36:01

Yeah, so I think what Preston was saying is that Michael Lewis just travels around the world and starts in Iceland. And I think the key takeaway I had from his story in Iceland is how basically you can manipulate asset prices. And I guess that’s basically what the financial crisis was all about. But I think he had a very interesting anecdote to that. just to give you a point of reference from 2003 to 2007, the stock market was up nine times in Iceland. For comparison, in the States, it doubled, which is still a lot but just think about it nine times. That’s crazy.

Stig Brodersen  36:36

And one of the reasons and this is basically just assets and doesn’t have to stock. Specifically, this was property. basically, one of the things that went wrong on Iceland was the way that they were handling the asset and how it was inflated. say that I own property and Preston wants to buy it from me. Say the price is $1 million. he would borrow $1 million from the bank, and then buy the assets from me. Then what would I do? I would like that asset back, for instance. And Preston would say to me, it now costs $1.5 million. I would go into the bank and borrow up to 1.5 million, and then buy back from Preston.

Stig Brodersen  37:14

Now, it was a bit more advanced than this. It was not just two people, because that would be too obvious. But they have like a whole circle of people doing this. they were passing around assets and then borrowing it to the inflated value and then spending that money. And I think that was one of the things that disgusted me about the whole story about Iceland if that is what has happened. I guess I was not too surprised by what happened up there. that was definitely one of those scary stories that hopefully shouldn’t be repeated.

Stig Brodersen  37:47

So the second point, then he went to Greece. And I think Michael Lewis, his whole story about Greece was strange, like, I was waking up thinking that I listened to an hour about some monks in Greece, like, did you get this impression?

Preston Pysh  38:04

Well, to be honest with you, this is maybe one of the parts in the book that I liked.

Stig Brodersen  38:07

Oh, really?

Preston Pysh  38:08

Yeah, I like the Greece part. I think it was an interesting story. Now, I didn’t think that it added much value to my understanding of markets or anything like that. But it was a neat story. It just didn’t apply to anything. You know what I mean?, so I liked it, but I didn’t like how it fits into the broader context of the book.

Stig Brodersen  38:24

Yeah, well, I think my Greece story is that Greece is such a weird country, and especially the way that they manipulate the numbers even you know, from the States. if you are thinking how could Greece ever adapt to the Euro because there is a lot of rules and regulations they have to follow. And, for instance, one of them is that it cannot have more than a 3% deficit to GDP. what did the Greek government do? They just moved expenses like pension and defense, they just erased that off the books.

Preston Pysh  38:56

They cook the books.

Stig Brodersen  38:57

And this is my favorite story because there are also rules in terms of inflation. And apparently, there was a lot of inflation in Greece back then whenever there were adopting the Euro. one of the guys whose job was to figure out how we can get less inflation. And what he did was that the way that you measure inflation is that you have a basket of goods, and apparently, back then in Greece, tomatoes were very expensive. what he did was he removed tomatoes from their inflation index, because it is very expensive. And suddenly they have lower inflation.

Preston Pysh  39:32

It’s like magic. The inflation goes down when you take the tomatoes out.

Stig Brodersen  39:37

Yeah. I don’t know. Do you have anything to add about Greece or do you want to go to Ireland there?

Preston Pysh  39:43

Well, there was a little bit of an interesting discussion with the monks and buying up all this real estate. I enjoyed the Greece portion of the book. I thought that it was interesting and talking about how they could cook the books and how they got into the euro. I think that that was an interesting discussion but it doesn’t fit into a broader theme of the book. That’s my only comment.

Stig Brodersen  40:02

Yeah, I definitely didn’t like it too much. Sorry, Michael Lewis, I love your books but this is just, so negative. But I did definitely didn’t like the Ireland part. I think what Michael Lewis does well is that he has these interesting anecdotes that can build up a story and build up characters.

Preston Pysh  40:18

He’s a great storyteller. That’s the one thing I will say that what Michael Lewis does well. This guy will set up a story. And I think that’s why so many of his books have been turned into motion pictures is because he’s a great storyteller. you will get that in the book. But this one was lacking as far as the structure and just the layout and it was a mess. You could tell he probably put this one together pretty fast.

Stig Brodersen  40:41

Yeah, I think the one thing I did like about his story about Ireland is his discussion about when is a bank is systematically important. And the thing we have this discussion in Europe. Do you definitely have that discussion in the States like when is a bank too big to fail? And one of the problems that they have in Ireland was that they have this Anglo Irish Bank. It was a very small bank, six branches, no ATMs. And basically what they did was they were borrowing money from foreigners. And then there were lending out to people that want to develop land and develop real estate. And one way or the other, they convinced the government that it was systematically important for Ireland. when all this turned south, obviously when the bubble burst, like all Irish citizens, had to pay for this. And I think that was probably one of the lessons from the financial crisis that when should the government go in and guarantee basically anything? I think that was my main takeaway from this chapter.

Preston Pysh  41:44

an interesting point to piggyback on that, Stig, where you’re talking about the citizens having to pay for. Right now over in Saudi Arabia, just to tie it to a real-world example, what he’s talking about. Over in Saudi Arabia, what they’re doing because, you know, believe it or not, even though they’re the lowest cost producer with all this oil stuff, they might be the first person to break, which I just think talks tremendously about the efficiency of the operations that they have over there. And I guess how much money is being sucked out at the highest level within some of these companies that are being run over in Saudi Arabia.

Preston Pysh  42:17

But what they’ve done is they’ve increased the price of their gas and a lot of their other commodities by almost like 40% to try to offset the ever-growing deficit or not deficit, but because they were in a surplus, but they’re chewing away, that surplus at such a rapid pace that they’re going to be taking on a deficit. And to try to combat that, they’re now pushing those prices and everything off to the citizens to protect the public debt from expanding over in Saudi Arabia. that’s a real-world example of what’s happening right now.

Stig Brodersen  42:51

Yeah, and the thing T. Boone Pickens said and this is the same interview, as Preston was referring to before, he’s saying right now with the oil price, it costs the Saudis $500 million a day. it’s very, very costly what you’re seeing at the moment.

Preston Pysh  43:04

And as you can see, we didn’t want to talk about this book, we just want to talk about current events.

Stig Brodersen  43:09

Yeah, we just want to talk about oil as always. I have one final point about the book. And I just want to say that because it was hilarious there was about Germany. And, so this is a story about how complex an economic system can be and how transparent it is to everyone looking in. if people are not familiar with this, and we have something called the EU Rescue Fund, which has been saving a lot of countries like Ireland, and right now we’re saving Greece. Or we think we will save Greece for all the troubles after hearing the financial crisis.

Preston Pysh  43:39

Big, big think.

Stig Brodersen  43:41

Yeah, yes. this is what Michael Lewis is saying in his chapter in the book. He’s saying that what’s happening is that Germany gives money to the EU Rescue Fund, and then the rescue fund gives money to the Irish government, which in turn gives them to the Irish banks. Now, so you can guess what does the Irish banks do with all the money now? Well, they use them to pay off their loans to the German banks. suddenly, you just have a circle here. And money is just fluctuating around in Europe. everyone can say that no one is defaulting. But the money is just going round and round.

Preston Pysh  44:18

The biggest concern with the Euro is Germany, because once the Germans have enough, and they’re going to stop basically bailing everybody out. That’s when you’re going to see major issues with the euro. It’s going to be interesting to see how it all plays out. I think Germany’s getting to a breaking point with some of this stuff.

Stig Brodersen  44:34

Yeah, I think, wow, that was short Preston and we even had a chance to talk about Saudi Arabian oil in the meantime. That was basically all I had for the book and it was like, it wasn’t that short. It was like a few hundred pages.

Preston Pysh  44:47

At the very end of the book there, there was a discussion with Arnold Schwarzenegger and state bonds in the United States which was an interesting discussion. I liked some of that just because he was talking about Arnold and just the way he was describing him was neat. I don’t know if there are any Arnold Schwarzenegger fans out there, but if you are, it’s definitely worth your time to read his description of Arnold, and the discussion on state bonds and how you know, states like California are just wow. You talk about a lot of friction in the system. that was a neat discussion as well.

Preston Pysh  45:19

But here’s the thing, folks, if you don’t want to buy this book, which is what we recommend, do not buy this book, go out and download our executive summary of the book. You can scan through that. See if we hit the high points of every chapter, the summary is about five pages long. if you go through our summary, you’re going to be able to capture the key points to the book. And if it’s something that does interest you, then go out and read it. But I think for this one, just read our summary on this and see what you think. And I’d call it quits and move on to the next book.

Preston Pysh  45:45

Anyway, if you want to get our summaries this summary, any book, we read a book about every two weeks, we send that out to our community, sign up on our email list at theinvestorspodcast.com. It’s completely free. you can sign up on that. If you don’t like it, you can unsubscribe at any point in time, it’s not going to hurt our feelings. We do it for the audience. great to have people on that list.

Preston Pysh  46:05

The last thing that I want to talk about a real fast is we are going to Berkshire Hathaway Shareholder meeting in the last week of April of 2016. We sent out a message to our email subscribers with our last executive summary with a link that people could use to sign up to go to the Berkshire meeting and hang out with us. Stig and I will be at the meeting. A lot of the people that we’ve had on the podcast are going to be at the meeting. I’m assuming Guy Spier will be there. Gillian, who interviewed Warren Buffett, she’ll be out there. There’ll be tons of people that are going to be there and what we’re going to try to do is we’re going to try to bring a lot of these guests to come over and meet our community right now. We have, I want to say like 160 people that signed up in the first week. it’s going to be a big audience, a big community from The Investor’s Podcast out there. We cannot wait to interact with you guys.

Preston Pysh  46:56

A lot of the emails that I’ve been getting from people about this event, they’re saying well, I’m not that much of a hardcore investor. I’m just learning right now I’m getting my feet wet. I’ve only been doing it for a year. Is this something that I, you know, is appropriate for me to go to? And the answer is yes, yes, it is definitely appropriate for you to go. In fact, you’re probably going to be some of the people that we enjoy talking with the most. please, please, please, if you’re in that local area, or you want to fly out for just like a little mini-vacation and just see something neat to see Warren Buffett on the stage with Charlie Munger and Bill Gates, and all those guys, come out for this event. It’s going to be a great time. And you know, the thing that I took away from the last shareholders meeting more than anything, was the people that I got to meet, you’re going to meet some of the most interesting people with these things.

Stig Brodersen  47:41

Yeah, last time we met Hari, right? And now he’s part of Mastermind group.

Preston Pysh  47:45

So like those are some of the people that you’ll get to connect with and you’ll get to connect with people from our community. And, you know, some of the bonds that we had from that meeting are just, so strong with some of the people that attended last time. highly recommend that if you guys have the extra cash to pay for the ticket to get out there and to pay for the hotel. That’s pretty much all it takes.

Preston Pysh  48:04

Oh, one other thing I want to clear up that with the meeting. In order to get credentials for the Berkshire meeting, you only have to have a B share, you do not have to own an A share, which is like $200,000. you don’t have to own A share, you can own a B share and still attend the event. a B share is like $129, I want to say right now. you can buy one B share, and then you can apply for your credentials to attend the meeting. just realize that it’s a lot easier to go through than you might think.

Preston Pysh  48:31

So one of the most useful tools that we have that Stig and I use is audible.com. We use Audibles because we can listen to all these books when we’re traveling on the road. And I’ve got four kids. I don’t know if I’ve ever talked about that too much on the show, but it’s like a circus at my house. And it’s very hard to read books. a lot of the times when I’m in the car and on a 30-minute commute or whatever, I’m able to do two things at one time. I can drive the car, and I can read a book. And there’s plenty of other opportunities you might have. You might be cutting your yard, or you might be washing dishes or whatever. You can do two things at once when you do Audibles. And this has been a huge part of our ability to plow through, so many books and to be able to learn and just share a lot of this information.

Preston Pysh  49:37

So that’s all we have for this week on the show. We thoroughly enjoyed talking about some of these current market conditions. We’ll continue to watch what’s happening in the market, provide you guys information through our emails, or podcasts or tweets, and Facebook posts, and all that stuff to help keep you educated on some of the things and some of the important variables that we’re looking at as the market conditions continue to change. We just want to thank our audience for joining this week and we’ll see you guys next week.

Outro  51:55

Thanks for listening to The Investor’s Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.theinvestorspodcast.com. Submit your questions or request a guest’s appearance to The Investor’s Podcast by going to www.asktheinvestors.com. If your question is answered during the show, you will receive a free autographed copy of The Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before commercial application.