Preston Pysh  08:45
Yeah. Additionally, you’ll notice people like Tony Robbins, with a net worth of about a half a billion dollars, are huge on this book, on Napoleon Hill. I think this was one of the foundational reads for Tony Robbins in his life. The same goes for Brian Tracy.

If you looked at a lot of different billionaires and very successful people, they might not come out and say that this was the book that set them on their path, but I would imagine that it might have been. There are a lot of people that point to this book as being just one of those key turning points in their lives.

Anyway, Stig brought up a great point that you don’t need to have anything to start this journey. As the title suggests, Think and Grow Rich. It all starts with your mindset and your ability to control your thoughts.

I want to say this key sentence for people because it’s very important. The book says that your focused thoughts will bring your intangible desires into physical reality. Let me say that one more time:

“Your focused thoughts will actually bring your intangible desires into physical reality.”

That’s the premise of the book. What you think about most, and what you really desire, and what you want. If you think about those long enough, focus on it, consistently go back to that thought and that idea, and you do it over and over and over again, your subconscious mind will help you develop that into the material world that you live in, in this physical world that we experience.

I think for a lot of people, that might sound far-fetched, but that is the point of this book. It’s really profound, and that idea came from Andrew Carnegie and some of these other enormously wealthy people. It’s not just Preston Pysh or even Napoleon Hill saying that. That’s coming from these people that have had enormous success.

Go ahead, Stig. I see you have a point. 

Stig Brodersen  10:59
I actually have a question for you. There was something I really thought about when I read this book. Napoleon Hill is saying 98 of 100 people don’t have success. That was something that puzzled me since this is a best-selling book, and it’s free for everyone to acquire.

So, Preston, if I had to ask you, why do you think that so few people succeed? I would argue that the ratio is probably the same today. With all the knowledge that we have today, why do so few people actually succeed in what they’re doing, and really succeed? 

Preston Pysh  11:30
I definitely think that the reason why is that people would read a book like this, and they’d I agree with all that stuff, but then they never do any of the steps that are outlined in the book because it’s not simple. It’s something that you have to do consistently, every day. It’s focusing those same thoughts and having faith, which I think is the hard part. We’ll get into that discussion. I think that’s really what separates people that apply this book successfully versus those that don’t apply it successfully.

It really comes down to that faith element, to actually believe that the thoughts and the ideas that they’re putting, or at least trying to put, into their physical environment.

I guess I want to start with this. If you walk down the street and ask 50 people these two questions, what kind of response do you think you’d get? The first question would be: What are you doing today to improve your salary and to actually make it larger for tomorrow?

What do you think people would say? I think most people just say, “I’m going to work.” I don’t think that they’d have much of a response. Do you agree, Stig?

Stig Brodersen  12:33
Yeah, I think they’ll probably say, “Work overtime,” or something like that.

Preston Pysh  12:37
I agree. The next one is: What net worth do you plan on having when you’re 65, and how are you going to achieve it? What are you doing to achieve that specific amount?

Somebody might say, “Oh, I want to have $3 million,” or, “I want to have $500,000.” Whatever it is, I think if you ask 50 people that, I think you’d be really hard-pressed to find anybody to say an actual amount.

I think they’ll just say, “Well, I want to have enough to be able to retire by the time I’m 65.” I think you’d find less than 1% or 2% of people that would be able to say, “I plan on having $5 million when I’m 65 years old.”

You agree, Stig?

Stig Brodersen  13:19
Yeah, I completely agree. I think the aforementioned, Brian Tracy, said that only 3% of Americans have written down their goals. I think that’s really a must in life.

With Think and Grow Rich, you need to be specific. You need to write down goals and not just be thinking, “Well, it’s probably nice for me to be financially independent.” It’s different to say, “I need $3.4 million by the age of 65, and these are the six steps I need to take.” I think very few people actually do that. 

Preston Pysh  13:52
Yeah. So, that’s one of the things that the book talks about. Asking those questions, just to kind of make you think as you’re listening to this, could you answer either one of those questions? And if the answer is no, that’s no big deal because we’re going to lay out the steps that are said in the book.

We’re also going to send out our free executive summary on our mailing list so that anybody that hasn’t read the book can quickly go through that and see what the book’s all about. Then, if you want to read the book, too, which I highly recommend, you can do that.

Going back, here are the steps. These are the basics, and I think there’s a lot more to this than what we’re going to discuss in the podcast.

First, you need to set the goals. You need to write these down, and you need to know what it is that you want. Don’t worry about how you’re going to get that. First focus on what it is that you want. Okay? And you might want to figure out why you want it. If you say you want $5 million, why do you want $5 million? Figure out what that dollar amount is.

Here’s the second part: What are you going to do to achieve that goal? What are the steps or the ideas that you have that you’d maybe like to use to get that?  Because you can’t have value without creating it first. You have to give it to receive it. Okay? But start with what you want, then figure out what it is that you’re going to do it in order to get it.

Finally, here’s the big point. This is the key point: What is it that you’re going to provide to society that’s mutually beneficial for that product or that asset or that service that you’re going to create to receive it?

So, say you want $5 million, and you’re going to start up a new company that does whatever. How is that company’s value, adding to society? How is it making things better for society? That’s what brings things in full-circle, for you to actually create this value that you desire. This is where it gets a little bit funky for a lot of people. 

15:47
In the book, Napoleon Hill started talking about the power of your subconscious mind. Everyone is familiar with their conscious mind and what they do on a day-to-day basis, but I think very few people understand Napoleon Hill’s position, at least on the power of your subconscious mind.

What he outlines in this book is that whenever you have a desire for something, and that you’re saying it continuously to yourself, and that it’s actually becoming a part of you, and that you have faith in that this will happen, what you’re doing is you’re putting a seed into your subconscious mind, and your subconscious mind is what brings that idea and that desire into reality for you in the material world. That’s a very obscure idea. That’s not what most people think or have ever even talked about, but that’s something that he throws out here in the book.

Then, he starts talking, in-depth, how you can energize and actually start planting the seeds in your subconscious mind so that you can make these things materialize. He talks about three elements that you can use to energize or create more gain or magnitude behind those thoughts and desires into your subconscious mind.

He says the three things are these:

He says you’ve got to have faith. If you actually believe that you’re going to amass a million dollars by the time you’re 65, believe that you’re going to be able to create that value with whatever product or service you’re creating, and believe that it’s going to create value for society, then the magnitude of that thought and that desire into your subconscious mind is going to have a lot of potency. It’s going to have some actual effect to it. But if you don’t believe it, and you don’t think that that can happen, you’re going to have a hard time energizing and actually putting use of your subconscious mind.

The next thing that energizes your subconscious mind, I’m going to say both of these at the same time. He says that love and sex have an impact on your subconscious mind in the way that you can plant ideas and desires into it. I’m not going to get into those two very much because those probably aren’t my forte. I’m sure my wife would have some comments on that, but we’ll leave that aside.

However, I think the first one is really important, which is the faith, that you believe these thoughts and these desires that you want, and that you have total confidence that the universe, your God, or whoever you keep your faith in, as long as you have that faith in those thoughts and those desires, that it will actually come into the material world for you.

So, those are very interesting thoughts. It’s a very interesting discussion. Stig, do you have any follow-ups on that one? 

Stig Brodersen  18:45
Yeah, I think I have something about faith. We’ll be talking about persistence later, but I think that those two are interrelated because we all repeatedly fail. However, one of the things that he writes in his book is that the people that are good at bouncing back are also the people that will succeed.

I think there’s this myth that some people just get success. They really don’t. The curve is definitely not linear towards success. I think that what separates a lot of these people is that they have faith. They know that they will succeed in the end, and they’re ready to roll with the punches that life will just bring them on. They’re on the path to that.

Preston Pysh  19:30
I think that a lot of people might have difficulty with this piece because let’s say that I’m a person making a smaller salary and I have the desire to amass $10 million. I think, for that person, it’s going to be really hard for them to have faith even if they go through the practice of what Napoleon Hill talks about, like continuing to try to plant that seed in your subconscious twice a day. I think the person is going to have a very hard time having the faith in their decision for whatever it is that they want. 

For that person, this is what I’ll tell you. It’s advice that Guy Spier gave us some podcasts ago. Guy said, “Sometimes you just gotta fake it until you make it,” and I liked that. I think that there’s a lot of truth in that. I think that if you go through this, and they talk about the idea of auto-suggestion in the book, where you’re constantly saying it, and you’re constantly repeating it to remind yourself that this is a very important piece of something that you want. I think that if you continue to fake that, and you continue to say it, if you say it enough, you’re going to start to actually have faith in it. You’re going to start to believe that you can accomplish it.

I think that you need to pay very close attention to the clues that come in your life because I think that there are very interesting things that have happened in my life in that the universe will interact with you in a very unique way at times. Sometimes, you’re given clues and you’re given ideas. I think a lot of people just write them off as being nothing. They could have a dream, and they just write that off as being nothing.

I think the closer that you pay attention to those little details of things around you, every part of the day, you’re going to start to pick up that maybe you are being helped and being guided in the direction of whatever your desires are.

I want to throw another idea out there. If you’re learning about your subconscious mind for the very first time and you’ve never read any books on it, there are a lot of good books out there. The one that I’d recommend that I would read together with this Napoleon Hill book, is the book called The Power of Your Subconscious Mind. I would definitely read that. It has fantastic reviews. I’ve read the book myself, and I think it’s fantastic. If you’re not really understanding all the points that Napoleon Hill talks about in this book, you might want to complement it with that other book.

Let’s go on to the next piece of Think and Grow Rich, which is the idea of specialized knowledge. I’m going to have Stig talk about that one.

Stig Brodersen  22:02
I love this because Hill started by saying, “You know, professors have a lot of knowledge, but they don’t make any money.” It is true. I think he has a lot of good pointers about specialized knowledge because he says, “It’s really not the total amount of knowledge that you have. It’s how you organize it, and how you carry that knowledge out in the world.” I think that was fascinating.

Then, he was talking about redigo, which Latin for “to reduce.” That was something I found really interesting, the need to reduce knowledge. That’s the key here. I’m thinking here, in 2015, the age of the Internet, we get so much knowledge. I just heard the other day that the amount of knowledge in the world doubles every three years, and it’s been going faster and faster. I would say that Napoleon was right on the money. I would say that, today, whoever is best at filtering that knowledge are the most successful people.

Preston Pysh  23:09
In the book, Napoleon Hill uses Henry Ford as an example of this. He said Henry Ford never went to college. He just had high school education. That said, what Henry Ford knew how to do is he knew how to assemble a team, to assemble people and all the knowledge. Whenever he had all that knowledge, he was able to organize it in a manner so that he could actually put it to practical use. Napoleon says, like Stig said, “All the knowledge in the world is useless if you don’t know how to apply it and put utility to it for society.”

Stig, I saw you smiling. What did you have to say?

Stig Brodersen  23:49
He’s saying that college education has no point, that it’ s miscellaneous. I also laughed when I heard about that. I feel so proud about what I’m doing, but I think he has a good point. He says that it serves, rather, as a medium, where you get to learn how to acquire specialized knowledge. In that sense, I’m not saying  college education is useless. If I did, I really hope my students wouldn’t listen to this podcast, but some of them do.

I think the main thing to get out of an education is the tool to be further educated, to get specialized knowledge. I think that’s that’s really where you reap the benefit of education in any way in life. I think that Napoleon Hill was completely right about that.

Preston Pysh  24:40
The next one that we’re going to cover is persistence. This one here, I can say from self-experience of trying to create a company to building a brand to doing all that kind of stuff, persistence is one of the biggest things that you can do to be successful. Napoleon Hill’s not just talking about persistence of your thoughts by going back twice a day and thinking about the same things that you desire and that what you’re going to do to produce that, but the persistence of actually executing.

As an example, I get up very early every single day. If I told you, you probably wouldn’t believe me, so I won’t even tell you the time. But I get up very early every day to do the same mechanical-type steps as far as the online business goes, to editing, to writing, to doing all that stuff. I do it in a very consistent manner, and I’m very, very persistent with that. I know Stig is too. He just has a different time that he actually does his persistent acts.

I think the point is this: If you’re not doing something persistently, it’s going to be very hard for you to create whatever value it is that you’re trying to create to achieve whatever goal you have. So, figure something out. Whether it’s a half-hour, an hour, four hours, whatever that is, you need to set the time limit.

This is really the trick. You need to pay all this in advance. You need to pay the price in advance. I think that’s the hard thing because it’s hard to be persistent when we don’t reap the benefit. When you’re doing the same thing, getting up really early in the morning or working for weekends or whatever it is that you’re doing day after day after day and you don’t see the progress, or perhaps see it, but also see that you won’t reap the benefits until 2, 3, or 10 years later, that’s where most people quit.

For people that are just starting, I tell you to set a very small time limit, and build yourself into it. The further you get down the path, you’re going to start seeing the impact of being persistent.

If you start off with 30 minutes every day, and you do that every single day for 30 minutes, every single day, the next thing you know, you’re going to say, “Oh, you know what? I have more work to do, so maybe I can allocate more time,” and you’re just going to find yourself now moving that to one hour a day. Once you’re doing it one hour a day, and then it’s going to move into more, and next thing you know, you’re creating something huge. That’s what’s going to really lead to your success to be able to materialize what it is that you desire.

Stig Brodersen  27:17
Very few people just continue doing what they’re doing not because they’re smarter, not because what they’re producing is better anyway, but they’re just persisting in what they’re doing. 

Preston Pysh  27:27
I think a lot of people have to see something tangible for them to think that it’s paying off. I think that’s probably one of the biggest misnomers in life, that you have to see something tangible. There is so much intangible value that you can create for yourself that will sometimes transmute itself into something tangible later on. But you have to wait.

The time element is the thing that you’ve got to take out of this because it will occur, it will be paid back to you, but it’s just a matter of when. It might be tomorrow, it might be in 10 minutes, or it might be in 10 years. You have to have faith in the fact that it will come back to you.

When you make that transition, and you make that leap, it needs to be in the order of, “Everything that I give, I will receive.” I think most people just automatically think the only way I’m going to have something is if I take it, and they operate their whole lives like that.

However, as soon as you understand that that’s not how it works, and that it actually works in the exact opposite manner, that everything you give is what you will receive, you understand that most of the time, you have to do a lot of intangible acts, that all your value is being stored in intangible returns until it will start transmuting itself into a tangible result, I think you’re going to have a huge leap in the amount of success that you see in your life.

All right. So, Stig is going to go ahead and introduce this next idea. This is the last one we’re going to talk about in the book even though there is plenty more in the book that you can learn about. The next one that Stig is going to introduce is the power of the mastermind.

Stig Brodersen  29:10
So, the whole concept of a mastermind group was something that spoke to me. I thought it was an amazing idea as this is about gathering four to six people that have the same values and goals as you. If it helps, you can think of this as having the same goal and supporting each other. 

As it’s a mastermind group, you can think of it as you all want to be financially independent, for instance. In it, you would accelerate each other’s learning curves, challenge each other’s beliefs, and open up your networks to each other. Combined, you have this strong force that can help all of you to reach this common goal.

Now, this doesn’t mean that you need to run the same business and doesn’t mean that these do the same things. This means that you just support each other towards this goal. I think what we’re talking about persistence, and we’re talking about failure, I think having a mastermind group that can support you. I think that’s really what often separates those people who will be successful from those that will fail.

Preston Pysh  30:22
I can attest to the power of a mastermind group because, a few years back, I started the Warren Buffett forum where Stig and I hang out, and we talked about just different investing ideas. The amount of information that I have learned by participating in that forum is just out of control.

It was just amazing because I would put out an idea then other people would shoot holes through it, or they would say, “Hey, here’s some more information that you can read.” I’ve seen firsthand in my life how much that’s increased my investing knowledge and just my overall understanding of business in general. It’s been just absolutely amazing. 

Now, the thing that Stig and I are going to do that we were really looking forward to with this episode is we’re going to introduce to everybody our mastermind group. Our mastermind group consists of five people. It’s myself, Stig, Calin Yablonski, Hari Ramachandra, and Toby Carlisle.

What we’re going to do is going to be fun. Every quarter, we’re going to record our mastermind group, and we’re going to play it for people on the podcast, and each one’s going to be a podcast episode. This is going to be the very first episode that we do that.

Unfortunately, Toby wasn’t able to record with us today because his wife just had a baby. So, congratulations to Toby! For anybody that follows Toby on Twitter, you can go ahead and send him a message and tell him congratulations on his newborn son. He’s not going to be with us this time, but on the next recording, he’ll be with us.

That said, just today, we’ve got four people, and recommend that you keep your close-knit mastermind group to about four to six people, like Stig said.

So, that really concludes our comments for the summary of the book. Like I said, we’ll send out the executive summary notes. If you’re not on our list, sign up for our list right there on the top-level homepage at theinvestorspodcast.com. You can click there and sign up. You can also sign up via any one of the episode links on the show notes, and we’ll send out our free executive summary of the book for you to read.

Okay, so we’ve got the group together. We’re all sitting here on Skype, so everyone knows we can all see each other. The topic for this mastermind group discussion is based on a conversation that Calin and I had on Friday. Just so our listeners know, Stig and Hari do not know about this conversation. They’re hearing this for the first time.

Last Friday, I gave Calin a call because he wanted to talk to me about something. So, Colin, I’m going to hand it over to you. Go ahead, Calin.

Calin Yablonski  33:10
Sure. On Friday, Preston and I talked because I got to a position where I was starting to feel concerned that I had sold a large percentage of my portfolio. I’d sold about 90% of my portfolio. 

As an investor, it’s really tough to just sit on cash. In Canada, we have what are called GICs, and the rate of return is about .65%. And so, as an investor I’m having a really hard time because I pulled the large percentage of my capital out of the market. Assuming that you even get a 5-6%, if it’s just going to track the earnings yield, that’s a heck of a tracking error on my portfolio.

I’d love to hear what the rest of you have to say about that. What do you think about that?

Preston Pysh  34:02
I’ll talk about my response to him first, and then you guys can piggyback and shoot holes through that. Stig and I have been talking about this a lot on the podcast.

If you have a very large position that had enormous capital gains, like some of Warren Buffett’s positions that come to mind, where he had like 10x the return of whatever he paid, that makes no sense to sell because he’s going to get hit so hard with the capital gains.

A lot of the positions that I had were not in the position where they were 10x the price that I paid where they were trading right now. So, for me, even if you had 100% gain, which would be a 2x, selling that position would maybe make sense if you expect the downturn to be around the 40-50% mark.

So, what I told Calin was if he didn’t have any returns that were in excess of that amount, as I had a lot of positions that weren’t in excess of that amount, those positions, for me, were very easy to sell and turn into cash.

The question then becomes: Where do you put it as you’re sitting on the cash? Do you just keep it in cash? Do you put it in some type of tip, which is an inflation-proof low-duration bond? That’s pretty much what I told Calin I’m doing personally. That doesn’t mean it’s the right thing, but that’s what I’ve been doing, personally. That’s also what Colin was doing.

Just so everybody knows, the timeframe that we’re talking right now is the 22nd of March 2015. If you’re listening to this in the future, you guys can do all the Monday morning quarterbacking that you guys want to.

That’s a term here in the United States for basically looking back at what happened. It’s very easy for people to shoot holes through things after they know what actually happened in the future, but you can see our thought process and how we were going through this at this point. So, at this point in time, we don’t think that it’s necessarily a bad idea, but I’m really curious to know what Stig and Hari think of that position based on where we’re at in the current market cycle.

Stig Brodersen  36:10
I don’t know if you guys know this but I spoke to Hari about a week ago about what to do in the overvalued market, which is the main main topic here. I’m definitely struggling with the same thing as Calin. My current position is that I am heavily exposed in equities right now. I think I have something like 90% of my portfolio in equities. So, this is something I’m thinking a lot about too. I don’t like to pay capital gains tax either, but I pay 43% while I know you guys there in the States only pay 15%. That’s really a dream. 

Preston Pysh  36:50
That’s a big difference. Just so everyone knows, that’s just monumental. Stig’s over in Denmark, so he’s dealing with a whole different challenge than we do here because he just gets killed over there by capital gains tax. He’s having to juggle a whole different problem from Calin, myself, and Hari here that are stateside, and up in Canada.

Stig Brodersen  37:17
Yeah, I have to be honest, I think that if you listen to Benjamin Graham, he says that you shouldn’t be focusing too much about the tax because if the stock drops, and then it drops. It doesn’t matter anyway. But it’s something I’ve thought a lot about.

I remember telling myself about a half-year ago or three months ago that if I was paying less than tax, I’d probably be selling before. What has happened now is that I actually placed a few sales orders on some of my stocks at the moment. I’m not selling off all of it. I still have a few stocks that I think are not cheap, but at a reasonable price, that I’m holding on to.

However, I’ve sold some of the stocks that I’ve made a decent profit on, even though I’m paying for 43%, because I think that if you look at the current stock valuation of the overall market, you’ll probably see a drop real soon. I don’t mean in a week or month. I don’t know what will happen, but I think that you will see that the stock market is overvalued.

Before I let Hari speak, I just pulled up a statistic I would like to share with you. This statistic is the  market cap to US GDP. This is one of the only stock market metrics that Warren Buffett talks about. He spoke about this in a letter in 1999 where he was saying that this market cap to US GDP was probably one of the best measures to look at. We will put a link in the show notes to this letter.

 If we take a look at where we are at the moment, right now, we are at 126%. The higher it is, the more expensive stocks are to the overall GDP in the economy. When you saw the peak in 2007, it was 110%, and if you look at the bottom in March 2009, it was 57%.

I’m not saying that you can just take one of these numbers as sure indicators to mean that when it reaches 120, then it will drop. They are just some of the indicators I’m seeing, and it is my opinion of the stock market is overvalued. 

Preston Pysh  39:33
Where was it at in 2000? Just so everyone can have that as a reference. And just so you know, 100% would mean that it’s right at its absolute value, or at its intrinsic value. Correct?

Stig Brodersen  39:46
I think that we actually go less, like something between 75-90%, but yeah, I think it’s a good measure.

I think it was 148% in 2000, so we still got some to go. Still, I think we are in this area right now where things are getting very critical. 

Preston Pysh  40:13
It’s getting critical to protect your principal, I think, is probably a good way to say it.

Also, I just want to piggyback on something that Stig was saying. My biggest fear, though, from this point forward, as you as we start moving into that position, is that we have a repeat. Whenever I look back at 1996, that was a point where I felt like I would have been preparing for that thing to tank, and then it went a whole ‘nother four years before it did. Do I think that that could happen this time? Yeah, I think it could, but I think the probability of that is pretty low. That’s why I’m more comfortable being in the position that I am right now.

Hari, go ahead.

Hari Ramachandra  40:55
Preston, you brought up a very interesting point. In fact, as Stig mentioned, this is something on my mind and many other investors I know. But just to comfort you, I want to read a quote from Charlie Munger, Vice President of Berkshire Hathaway. He once said, “It takes character to sit with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.” So, you’re in a good position now.

Additionally, Stig brought up a very good point. There are different indicators that people can use to see where we are today or where the market is today. The market cap to GDP is one good example.

The other one that I use is the Shiller PE Ratio. This was introduced by Bob Shiller, the Nobel-winning famous Yale University Economics professor. I will send out the link to Preston, you can add it to your show notes. There is a website which actually tracks this.

The difference between a normal PE ratio and Shiller’s PE ratio is that Shiller’s takes 10 years worth of earnings and calculates the PE, rather than just this year’s earnings, because that can have a lot of variance. This one is more stable that way. To give you a comparison, in 2000, the Shiller’s PE ratio was 43.7. Today, it is 27.82. In 2009, it was 15. So, you can deduce for yourself whether this market is overvalued.

Preston Pysh  42:47
Hari, where was it in ’08, though, before the crash?

Hari Ramachandra  42:50
It was 24. In 2007, it was 27 exactly what it is now.

 

Preston Pysh  42:58
To add, just so everyone knows the history of that, the market peaked in 2007, and from then, it gradually went down. It wasn’t an abrupt withdrawal, but it went down from 2007 into 2008. In October 2008 was when it had the hard crash. So, if you would have gotten out in 2007, and you waited that whole year, you were actually beating the market by a significant margin during that year by just sitting in cash.

Stig Brodersen  43:28
I just have a quick thing. It was a really good point, Preston.

What I really like about the Shiller’s PE is that we’re looking at earnings. We also kind of look at earnings when we look at the other metrics like the market cap to GDP.

When you hear that an index hit an all-time high, that really doesn’t tell you anything, because indexes will, by definition, always hit an all-time high. Therefore, we always need to compare it to something like earnings as that will grow. Since the economy will grow, we will always see these all-time-highs. However, we could be talking about this a century from now to say it’s an all-time-high or that we’re going to see a crash. We don’t necessarily see a crash when it’s an all-time high, but we need to compare it to something to check if it is sustainable. Right now, it’s not sustainable.

Preston Pysh  44:19
When I was talking with Calin on the phone, I said, “You know whenever I get in these feelings where maybe I’m the outlier and I’m doing something dumb right now, I always try to look at what are the really smart people doing.”

When you take that approach and see what Warren Buffett’s doing with his retained earnings that he’s making for the last year– like we’ve talked about here on the podcast– basically, everything he earned in the last year has pretty much stayed in a cash or cash equivalent position.

When you look at Carl Icahn, a guy whose annual returns are actually better than Buffet’s, his returns for the last year have been pretty much kept completely in cash and cash equivalents.

We listened to Larry Summers, the former president of Harvard and Economics, and pretty much one of the greatest macroeconomic thinkers out there. We heard his thoughts during the Davos World Economic discussion just last month. He was saying we’re at this point here, and the future looks pretty grim. When you hear people like that saying things, it makes it a lot easier for me to continue to be that outlier by moving into an unpopular position that a lot of people are trying to drive the market higher, and I’m getting very worried and scared.

So, that was one of the things that Calin and I discussed. Calin, what are your thoughts now? What do you think? 

Calin Yablonski  45:45
It’s nice to have you three in my corner, that’s for sure. I think it comes down to more of a psychological effect that the market can have on you. I think, for a lot of first-time investors, it can be really difficult when you hear so much noise and information that’s just pumped out and pumped up by the media. Due to that, every single day, you’ll see conflicting opinions on what’s going to happen over the next 6 to 12 months. 

All that said, I think, ultimately, yeah, I have the same opinion. I did sell the majority of my portfolio because I do take a more conservative approach to investing. But, yeah, it’s still really difficult to, as an investor, sit on a large amount of cash, knowing that your returns are going to be lower. But ultimately, over the next couple of months, I’m hoping that will turn around and become a more positive thing.

Preston Pysh  46:50
So, let’s take the devil’s advocate approach here. Let’s say that the market does well over the next two years and that it does 15% for the rest of 2015, and then another 15% for 2016. How are you going to feel emotionally and psychologically if that would happen?

Calin Yablonski  47:09
If the market goes up 15% year-over-year? 

Preston Pysh  47:11
Yeah, so you’d have basically lost out on 30%. 

Calin Yablonski  47:15
I don’t think I’m going to feel too bad. Honestly, I’m more interested in protecting my downside than making a return over the next two years. The warning signs are there. 

For me, there are a lot of red flags that I’m seeing in the economy. That’s why I’m willing to take a more conservative approach. I think that now and again, you just need to have a network of people that you can talk to and rely on, and say, “Hey, here’s what’s going on in my own head. What are you thinking? And what are the facts that back up some of the decisions that we’re making? 

Preston Pysh  47:45
So, I want to ask the group this question: How probable do you think that it is that a person can just ride it out until the thing starts to drop, and then you can get out right before it has the catastrophic fall off the edge? Do you guys think that that’s a probable path? Do you think people can do that?

Stig Brodersen  48:02
No. Just by the law of large numbers, I think a few people can do that, but it would be hard.

If I may, I just want to want to say something to what you said before, Preston. I wouldn’t be surprised. I’m pretty sure we’ll see a crash, but I wouldn’t be surprised if you see a 15% gain in 2015 and a 15% gain in 2016 because of what’s happening right now.

When we are building a bubble, which we are right now, you’ll see large gains until it bursts. I wouldn’t be surprised the least bit if we’re sitting here again in two years and talking about when that bubble is going to burst.

Before we even recorded this, some of my previous email correspondences with Preston from 2013 already talked about warning signs. We weren’t talking about seeing a bottleneck just about to burst, but we were talking about there being not so many great deals out there. Things can last for years before the burst.

Preston Pysh  49:04
Yeah, I think you got a good point. I think that people just need to be prepared for that, psychologically. For the person that’s worrying, that is chasing the top, to you, I say this analogy: You don’t make a lot of money from the 75% mark to the 100% mark. You make all the money from the bottom, like from the 25% mark back up to the 75% or 100% mark. That’s where real professionals make a lot of money in the stock market.

I totally agree with Stig when he decisively said, no, I don’t think that you can get out right before the thing falls off the cliff. I would agree with that. Having gone through 2008 like, yeah, it’s not as simple as people think as far as just getting out and knowing what in the world’s coming next. There might be a 5% or 10% downturn, then it comes right back, so I think that that’s very hard to do. But I always err on the side of caution and trying to protect my principal, as Colin said.

Hari, you got something? 

Hari Ramachandra  50:06
Preston, you have a very good point. You make the best of your returns from the 25% to the 60% mark. The question is: How prepared are we to invest when things are all kinds of doom and gloom? How many people invested during the 2009 recession when Wells Fargo was $7 or $8? That’s when Buffett was investing. We should ask ourselves: When we are selling at the top, how prepared are we to buy at the bottom?

Preston Pysh  50:44
Yeah, see, I had no problem with that in the last one. I really found it quite fun during the last crash to be getting involved in some of the buys that were out there. It was just amazing what, what some of the offers were. 

I think for anybody that’s gotten involved in the stock market or investing in the last couple of years, you haven’t seen how much of a bloodbath it can actually become as far as the values of some of these companies go. You can buy companies at just unbelievable prices. 

I will tell you, looking back in hindsight during the 2008-2009 timeframe, one of the best things that I think I could have maybe done was invest in an index of that industry that was troubled or was looking very dark and scary.

I think investing in an individual pick in the banking industry was just disgusting in the 2009 timeframe. I think people that were investing in individual picks were assuming a lot of risks because it was really hard to know what was actually on these companies’ balance sheets.

But if I had to go back in time and do that over again, I might have invested in a banking index during that time frame to offset my risk across the board. If you had invested in that industry from 2009 till now, you would have had enormous gains. For this next crash, who knows what the catalyst is going to be, but if it’s an industry-type catalyst, I would recommend that type of approach.

So, Calin, you got anything? Stig? Everyone’s quiet.

Calin Yablonski  52:24
I think that what you just brought up is really interesting, what you said about the catalyst. What do you think is going to trigger? 

Preston Pysh  52:40
I think that it’s going to be something in Europe. That’s the trigger. That’s my personal opinion. Stig, what do you think? 

Stig Brodersen  52:45
Yeah, I agree with you. Before the show, I looked up a few numbers. I was looking at the debt situation in Europe. That’s really interesting. I look at the US and I see two months of debt, but then I look in my own backyard and it’s making the US and all that debt over there just look like heaven.

We have countries like France, Italy, Spain, the UK, which are some of the largest economies in Europe. Those four big economies in Europe have more debt to GDP than they have in the US. To add, the smaller countries, like Portugal, Greece, Belgium, Netherlands, and Ireland, have even more.

For instance, you might be thinking, “Greece, is that that important?” If you look at the numbers, Greece holds only 3% of the GDP that we have in the European Union, so you might be thinking that’s not really that important. However, it’s important that Greece survives for stability. If Greece doesn’t survive, you’ll just see a chain reaction. You will see Spain, then Italy, and then France just pulling each other down. You will also see a lot of speculation.

So, a small country isn’t an isolated problem. In a globalized economy, all those countries are just interrelated. It’s really hard just to isolate the problem.

Preston, I see you have a comment there.

Preston Pysh  54:20
Yeah. I think that this whole issue that we’re facing right now is a currency issue. Particularly, the Euro, I think, is really in a bad place. I’m not going to say that it’s going to fail, but I wouldn’t be surprised if it failed.
I’m reading a book by Richard Koo, who is one of the best economists out there. He’s a Taiwanese gentleman. He originally wrote this book called The Holy Grail of MacroEconomics, which talked about this 20-year recession in Japan and how the stock market basically lost 75% of its value during those 20 years.

He recently wrote a new book called The Escape from Balance Sheet Recessions and the Quantitative Easing Trap. I’m currently about halfway through that book. In the book, he talks about how the United States is in a very, very similar situation that Japan was in during the 1990 timeframe.

What I find really interesting is he doesn’t even know how to describe the European situation with the euro. He just basically writes it off as, “This thing’s just a mess, and I don’t have any idea how they could get out of this.” That’s pretty much the way he describes it in the book. And this is probably one of the best writers on the subject out there.

So, I really think that the catalyst is going to be how that all gets resolved. We saw last month that they decided to kick the can down the street till the summertime for what they were going to do with Greece. The market had a surge that day, which I just thought was hilarious because I saw it the exact opposite way, like, “Okay. Yeah, let’s just give them more money, and pile that more money on top of the more money that they already owe, and we’ll just figure this out sometime in the future.” That’s how I interpreted that solution.

We can either deal with the reality that this thing is a mess right now, or we can add to that mess and then try to clean it up later. That’s what they’re doing right now. There will be a point when Germany’s tired of footing the bill, and all these other countries that are footing the bill, and they’re going to have to pay the piper someday. Whenever that happens, I think that’s going to be your catalyst. But that’s just me.

I think Italy’s got huge issues. France has huge issues. Spain, as well. If you look at every one of their total debt, the GDP of each of those countries, you’ll see it’s a mess.

Hari Ramachandra  56:42
I just wanted to bring this point up. In his book, The Black Swan, Nassim Taleb writes that usually what gets you is what nobody has seen. This is the Black Swan that he talks about, and not the one that everybody kind of knows already, that is a problem.

I just want to put it out there that the European debt issue is so well-publicized now that most financial analysts and most of the people in the market know about it. So, my main fear is: What else is there that we don’t know? And that might be the thing that will get us, like the housing bubble. Very few have seen it before it came.

Preston Pysh  57:26
How did you like that book? I’ve been meaning to read it. I know, that’s one of Jeff Bezos’s favorite books, but I haven’t read it.

Hari Ramachandra  57:32
I have probably read it like three times now, so it’s good.

Preston Pysh  57:37
All right, I need to put it on there. Stig, we’ll do an episode on that. 

Stig Brodersen  57:40
Sure.

Yeah, we have so many problems in Europe. Definitely, one of the big problems is our growth. Last quarter, we grew 0.3%. That’s not impressive, especially if you compare it to the US, which is about 3-4%, something like that.

Preston Pysh  57:58
The GDP growth in the US? Now, I think it’s 2%.

Stig Brodersen  58:02
Really? Wow. Yeah, so it’s horrible here. What we see here is quantitative easing, so we’re basically printing money. The last last thing I heard was that we just increased our projections for 2015 from 1.3 to 1.5 now, and apparently some politicians are happy about that. Also, printing more money? That’s not a sustainable situation. It would just completely dilute the currency, and we’ll have a ton of problems with that, too. We are not really fixing the problem here. We’re just putting out fires. 

Preston Pysh  58:42
Yeah. That’s Ray Dalio. You guys all know this because you’ve all read the Ray Dalio stuff that we’ve been talking about. That’s Ray Dalio’s big thing. The interest rate has to be below the GDP growth rate. When it’s not, that’s when you run into some major issues. That’s why my anticipation as we go through the next 10 years is that interest rates are going to continue to be this low. I don’t think that they’re going up anytime soon. I know whenever you look at interest rates during the Great Depression time frame, like they remained at near zero clear into I want to say the mid 40s and 50s. And even then it was like a 3% at the highest.

Hari Ramachandra  59:18
So, what do you guys think? If you think of probabilistic outcomes of what is happening in Europe and general economies in the world, what are the probabilities? Is it inflation going out of control? Or is it Europe breaking up, causing massive disruptions in the global economy? What are your thoughts on that?

Preston Pysh  59:50
Here’s my opinion. I’ll give it real fast because I want everyone else to talk. I think that Ray Dalio is right in saying that the only lever we have at this point to fix this is with currency.

On the other hand, the issue you run into with currency is if you inflate it to the levels that you need to have an impact and to stimulate the economy, you have to do it at a very large scale. So, when we look at the amount of quantitative easing we did during this last crash, it was an enormous amount of money. It was one-third of our total GDP for the year. That’s enormous. We were able to do that because we changed the reserve ratio of the amount of credit to offset that. 

The problem with this next crash is you don’t have that luxury to offset it like you did on the last one with taking more credit out of the system. So, that leaves you with a very small currency lever that you can play with. Let’s call it 10%.

Do I think that inflating the currency by 10% over 5 years is going to have enough stimulus to get the GDP going again? I don’t. Do I think that the government’s going to inflate it more than 10% of the pop? I don’t think so.

So, this is all hypothetical, but my anticipation is that there is going to be a long drawn out recession that will occur. I think it’s going to be really slow and gradual. I think it’s going to be longer than the ones that you’ve seen in the past, like the one in ’09. Nine months later, it was already on its uptrend coming back up again. I don’t anticipate that with this one. I think that it’s going to last longer than a couple years, to be quite honest with you. I think that it’s going to be that anomaly that most people haven’t seen in their lifetime, and I think that that’s going to be a huge upset.

My concern, as we go through this, whenever it occurs, whether it’s in a year or three years, I’m going to be real slow to enter back into the market because I anticipate it to be a real slow, drawn out recession period that it takes to hit the bottom.

Hari Ramachandra  1:01:53
Stig?

Stig Brodersen  1:01:54
Yeah, you know, I could say that I will probably let Calin speak as I really don’t know about that, but I always like to guess. So, this is my guess.

We talked about this in our mastermind group before we started recording, so I’m completely sure that you follow me on this.

I think the first thing to really pay attention to is that we are the end of a long-running debt cycle. We also see these short term cycles, so let’s first talk about that. These are typically between 5-8 years. On average, 7 years. So, if we go back seven years, 2008, and seven years before, 2001. I’m definitely not saying you can just go seven years ahead, and then you’ll see a crash. That’s not how it works. But we definitely will always have some ups and downs, and I think it’s about time that, if we look at the numbers, we’ll probably see the end of a short-term cycle.

If you look at the more macroeconomic factors, you see that we are at the end of a long-term debt cycle especially, as we discussed earlier in the podcast, because you see very low interest rates. I think it’s going to be extremely interesting since we can’t put stimulus into the economy by lowering the interest rate this time, as we could in the last time. That’s what I think will happen.

Anyway, this is really my answer. What I think will happen is that we will see this get drawn out as Preston was saying. We will see asset prices go all over simply because people can’t figure out what things are worth. For those of you that can remember what happened in 2008, we also saw some of this happening.

For instance, in the banking sector we were talking about before, most people could not see the balance sheets of these banks. It was completely intransparent about where all the bad debt was. We don’t have an option to regulate the economy again as we did have the last time.

What I think is even more problematic today is I have a hard time figuring out where the growth should come from. I think you can see in the last crash that you have a lot of economies in Asia that were really doing a lot of good things and pulling the world economy ahead, but I can’t see that now. The only thing I can look at right now that looks reasonably stable to me is the US, and to be quite honest, it’s not a pretty sight. It’s just because it looks worse when I’m sitting right now. 

Preston Pysh  1:04:42
You know we’re in a great position when the US is the best looking option.

Calin Yablonski  1:04:48
Yeah, it’s super interesting because if you watch the Ray Dalio video, when he gets to the point where he’s talking about the long-term debt cycle, he’s got this illustration of this lever as he’s talking about interest rates. He explains that once you get to the bottom, you can’t pull that lever down any further to stimulate the economy. I think that that’s the position that we’re very quickly approaching.

Austerity measures, in terms of reducing your debt, who wants to save money, the redistribution of wealth. That can have an impact, but not one that’s going to solve the problem. *inaudible* is something that I can certainly see becoming more frequent. Lastly, printing money. When you print more money, though, you’re going to inflate the currency, which I think is highly likely something that’s most probably going to happen, so.

Preston Pysh  1:05:37
Hey, guys. Let’s wrap it up there. I’m sure everyone’s tired of listening to us yak here, but that was really fun. I’m glad that we recorded that so we can document our positions. I’m sure that in five years, we’re going to play this back and listen to this, and laugh at some of our opinions. It’s good though. You have to go through those discussions as mental gymnastics to try to make sure that you can understand it better. To add, to be honest with you guys, I really don’t like when we agree on things. I feel like I get a whole lot more whenever we don’t agree on things, especially on the forum.

For anybody that’s on our forum, I guess I’m looking for somebody to shoot holes through some of my opinions and some of the things that I put out there. I’m not looking for people to agree with me. I want them to tell me why I’m wrong.

That’s one of the beauties of these mastermind groups. I’ve discovered through the years that if you’re open to suggestions, which you should be because that’s how you can increase your knowledge, these things can be enormously beneficial as you can get all the different vantage points. Whenever you see things from different vantage points, that’s where the truth lies.

So, it was a great discussion. I think that everyone will get the utility out of a mastermind group. That’s why we’re doing this, to demonstrate to people the importance. So, think of who those people are in your life that you can surround yourself with, that have these unique skills that can help you develop this mastermind to help you achieve what it is that your goal is. That’s what we were talking about in the first part of our episode.

When you look at our mastermind group, Stig and I, our expertise is in finance. Although Calin and Hari can jive on the finance piece, their expertise are in different areas. Calin is an expert at marketing. He’s an expert in search engine optimization online. Hari’s an expert at programming and executive leadership. If you look at Toby, he’s another guy who’s an expert at investing, and also an expert at law.

Each person in our mastermind has a unique skill set and they bring a different vantage point. That’s what you want to find in the mastermind that you assemble and orchestrate. You don’t want everybody to be an expert in the same exact thing. So, that has a very unique benefit as you move forward and as you discuss your topics.

Another key point that I want to highlight for the mastermind is that you can’t bring people in that have an interest in getting something from the other person. When you look at our mastermind group, we truly are just exchanging ideas. Some people might think that I pay Hari for this and that Hari pays me for that, but it’s not like that at all.  Our relationship is purely a friendship-type relationship where we sit down and we talk on email and we call each other. It’s almost like hanging out with friends even though we’re in all different locations.

Hari’s up in San Francisco. Toby’s down in the LA area. Calin’s up in Canada. Stig’s over in Denmark. Just three of us have met in person, which is amazing. It just shows you the power of the internet. When you’re assembling your mastermind, it doesn’t have to be people in your town. It can be people that you’ve met online. It can be just an expert in whatever field that you’re trying to understand better.

1:08:58
That’s all we got for you guys. For this week, we’re not going to play a question. We’ll play a question from the audience next week, but we really appreciate what everyone’s doing. 

If you have some thoughts or you have some ideas about this mastermind group or the book, Think and Grow Rich, be sure to send it off to Stig or myself, or come on to our forum and talk to us there. We’ve got plenty of ideas and different topics there that everyone can talk about. It was great having you with us. We’ll see you guys next week. 

Outro  1:11:15
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