Stig Brodersen  06:30

Yeah, I think this is as it is with all commodities, this is really a marginal cost perspective. So in the long term, you will just see that like a profit that’s simply the adaption between the marginal cost and the marginal revenue and you will see that you will have like increasing demand of oil. But even the steady demand for oil. And then you will see how the marginal cost for the different companies just adapt to that.

And then you will see for instance, what Toby was talking about oil sand and you’re talking about that what’s the marginal cost after hydraulic fracking? And then gradually you will see that the oil price just adapts to that. And I think that’s something a lot of people are missing because they’re saying, “We have too much supply.” Yes, that’s true, but it happens when you have too much supply, then you will have people going out of the market, and that will change the cost structure.

Hari Ramachandra  07:19

Preston, I just wanted to chime in on your thoughts on why Buffett and Munger, sort of from ExxonMobil. Interestingly, somebody asked the same question in this year’s annual meeting at Omaha. And Munger’s answer was very interesting. Buffett actually kind of evaded answering this question. He just passed it to Munger. And Munger, in his usual form, said, “Well, it’s better than hoarding cash.” And he saw it as a safe alternative place to put his cash which is waiting for deployment. That’s what he said and that was a very interesting answer.

Preston Pysh  08:05

He said he’d rather hold cash than to continue holding those companies?

Hari Ramachandra  08:09

No. It’s the other way around. He said he wanted to park his cash somewhere. And he chose ExxonMobil for that.

Preston Pysh  08:16

They sold out of that position and what was it January?

Hari Ramachandra  08:20

Yes. And they didn’t really talk about why they sold off. Nut the inference that at least I made from his answer was that they found something else. And it might be the deal that they recently stuck with the 3G folks, acquiring Kraft. So maybe there are some cash requirements there.

Preston Pysh  08:42

So it was just an opportunity cost type deal where they felt like they could get a better deal with the 3G then that’s why they moved out of it. So it wasn’t like they disliked it. They just found like, they had found something that was more valuable.

Hari Ramachandra  08:53

Exactly. It’s definitely like, I have been following Buffett’s oil bets and when he bought into ConocoPhillips in 2009 or 2010 and then sold it off. It was a clear loss. He lost a lot of money on that investment. Whereas, correct me if I’m wrong, on ExxonMobil I don’t think they lost much money. They pretty much got their money back so that’s kind of the answer at least I heard in the talk.

However, I liked Toby’s description essentially what Toby summarized was that the oil industry is a negative feedback loop. Toby, correct me if I’m wrong. And the way I see it as a negative feedback loop is if the oil prices go higher than all these marginal costs, that some of the hard to find oil incurs will become justifiable at that price, hundred and above or 80 and above. But as the oil price goes down, all these marginal players like oil sand, the frackers. All these folks become less economical at that point in time. And as we can see in the recent past, the records have been coming down drastically, which will impact the supply.

Tobias Carlisle  10:11

I think it was Stig who was talking about margin prices, but I agree with Stig. So I just shamelessly I’m going to plug my website right now. So I have this website called Acquirers’ Multiple which looks at all the companies listed in the US and examines them on the basis of this Acquirers’ Multiple, which looks for cash-rich balance sheets and strong operating earnings, etc.

If I run my model now, and you can see this on the side and the large caps of the top five cheapest large-capitalization companies in the States at the moment. Four of them are oil and gas. Sp Valero Energy is number one. Western Refining is number two. Fluor, which is a construction engineering company, is at three. Marathon is four. And YPF, which is the Argentinian energy company, is fifth.

So sometimes I’m asked, ‘Is this a good metric for looking at energy, oil and gas companies?” And well, I’ve separated out only the oil and gas companies to find which ones perform the best. This is the best metric for looking at that which sometimes it sounds counterintuitive, you know? Perhaps you want to look at what their reserves are like or what their costs are like. But for one simple single metric for conducting this type of analysis is an enterprise value Acquirers’ Multiple type analysis.

So that’s one of the things that makes me think that energy companies are going to work because they’re simply too cheap. They’ve just been beaten up so much. There’s a lot of unhappiness with the oil price and there’s a big glut. So everybody thinks that the industry is ugly and going to be dead for a while and that’s the time that you want to be buying your positions if you’re going to.

Preston Pysh  12:00

So I just want to throw out there, you should have seen the smirk on Stig’s face whenever Toby said that he agreed with Stig.

Stig Brodersen  12:09

Toby is a lot smarter than me. So it is rare that people who are smarter than I agree with me. So, that’s really nice. No, but I actually, I kind of expected that because I remember the last discussion we had with Toby, he was saying that he had heard someone saying that there was only the tourist who were buying into the oil. And I was thinking that was so much fun and Toby actually bought into all that part-time and I did too. So we’re two people and a lot of dumb tourists. And I guess that’s always nice to think about.

Preston Pysh  12:38

Okay, so I want to bring up something real fast here. Then, Hari, we’ll throw it back over to you. So I got a really interesting email from a gentleman. His name is Matt Hyeon, and Matt wrote to me this. He said, “Preston, I noticed something and I want to share this with somebody. I was checking up to see where we were at with the Dondo Holdings IPO, which I learned about your podcast…” whenever we had Hari on early on. And he said, “I found this.” And he sent me this link. And in the link, he wrote to me with the quotation it says Dondo India Ltd is 100% subsidiary of a US-based multinational financial service firm, Dondo Holdings. Dondo Holdings has recently filed a provisional patent with the United States Patent and Trademark Office, which focuses on an enhanced indexed investing model. Not quite the IPO I was looking for, but what does this mean? And so what I’m talking away from that it kind of seems like he’s doing something like with the model that Toby has talked about in his Deep Value book. And I’m curious, Toby, do you know Mohnish? Have you ever talked with Mohnish?

Tobias Carlisle  13:41

I’ve exchanged a very few words with Mohnish on a few occasions because I’ve run into him at the Value Investors Congress out here in Pasadena. He’s based in Santa Monica. So we are kind of neighbors, but Santa Monica is pretty big. So actually, I haven’t seen Santa Monica. That enhanced indexing is very popular at the moment. And there are lots of patents for that sort of stuff. I don’t know exactly… Is it Mohnish’s index?

Preston Pysh  14:12

Yeah, that is his.

Tobias Carlisle  14:14

So there are lots of, you know, I think Research Affiliates have the first patent. And this is very broad. It’s sort of anything that’s not market-capitalization-weighted. So that’s anything equal weight, value weight. I wonder how defensible any of those patents are going to be but you know, it makes sense to set up a value-based index in India and then to invest on that basis. That’s a smart move, I think.

Preston Pysh  14:41

That’s really interesting. So I was just curious how much of that would have been pulled from like your Acquirers’ Multiple because I know whenever I read your book, for me, that was kind of a very big transition in the way that I kind of saw the world of investing. And I was just kind of curious if he had ever contacted you talk to you about this enterprise value, like some of the metrics that you had in your book where you… If you haven’t read Toby’s book, “Deep Value,” it’s a fairly transformational experience if you’re a value investor. But I was just curious if he had ever reached out to you or talked to you about your book.

Tobias Carlisle  15:15

He hasn’t. But there are lots of… It’s not, they’re not my original ideas in that book there. There are lots of people who are at the same time pursuing that opportunity. And I think it’s, I think it’s clear that stuff does work, which metric you choose to use. Or if you use some sort of combination of the metrics, it really doesn’t matter, as long as you’re getting some value proxy. So you could use price to earnings and you would do perfectly fine.

I think James O’Shaughnessy should get the credit there because he brought out what works on Wall Street in 1994. He kind of paved the way for everybody else and probably Joel Greenblatt, with a magic formula, deserves the credit too. So I’m very very late to that party. It’s certainly not my idea.

Preston Pysh  15:59

Yeah. Well, you’re a really modest guy, because, in his book, he actually proves how his numbers are actually what 2% higher than Greenblatt’s magic formula. So you’re a very modest person. And I’d like to leave it at that, so you don’t try to undermine my comment. I’m gonna throw it over to Hari. And what were you gonna say before that Hari?

Hari Ramachandra  16:18

Oh, I was just planning to ask you all a question about oil prices. Since we are seeing a lot of fluctuation right now. What’s the future of oil 10 or 20 years from now, keeping in mind that there is a lot of technological innovation happening in the energy space, including the synthetic fuels of our genetically modified algae that Exxon Mobil is investing in, along with another company, as well as Elon Musk’s. A constant and persistence I would say, to kind of you know, want to work towards an oil-free world. What do you guys think about all the development and how will OPEC fare in the future?

Preston Pysh  17:08

Dude, I don’t know but I’ve got to tell a really cool story that happened to me this morning. So my son and I went to a car show because it’s Father’s Day. I want to go out there and see some cool cars. y son loves anything mechanical and we went there and there was a guy who had a Tesla. That was the first time I’ve really kind of got up close to a Tesla car and we walk up there and the guy who owned the car, the handles for like opening the door were completely flush with the door itself and I was like, “How in the world do you open this thing? Is it like a fingerprint or something?” And the guy says, “No. Watch this.” He walks over, he has the key in his pocket. He walks over and as he gets close to like opening the door, the door handle like slowly emerged out of the side of the car, and then he just pulled it open. It was the craziest thing I’ve ever seen. And so then I look inside this thing and the dash is like monstrous and it’s just nothing but a big large touchscreen, like iPad looking thing. And he said it’s a completely touch-interactive dash inside this car.

So your comment I think is I really think Silicon Valley’s on the hunt to turn Detroit upside down. And I think that you have a really good comment, like, how is technology going to just kind of revolutionize this oil industry? I don’t think that I see it happening quickly. But I definitely think that you got a very strong concern and risk that you identified. So let’s throw it out to the group and see what they think.

Tobias Carlisle  18:36

I think that the death of oil has been one of those things that everybody predicts 20 years hence. And it has been the case for a long period of time, you know, that peak oil idea that we just run out of oil or it gets too expensive to kind of extract. I hope that happens. I hope that we get to that stage where you have a battery at home, it draws energy off-peak. So you don’t pay peak prices, we sort of get smarter about distributing power. So you don’t have to, you know, when it’s really hot in the middle of summer, you’re drawing it at the worst part-time of the day, which is what makes it so expensive.

So the battery power is going to time-shift the way that we draw power. And hopefully, that’ll change the entirety of that of several industries. And then you have a car that you can plug in at home. Solar panels on the roof, I think all that stuff would be great. And I hope it gets here really soon. But I think that it’s going to take a lot longer than then we think. Hopefully, it’s 20 years, but I would guess longer than that.

Stig Brodersen  19:41

Yeah, I really love it when you talk about oil because I kind of feel like, Preston and me agree on everything. I mean, I didn’t read everything when it comes to investing when it comes to life in general. But when it comes to oil, I’m always much bolder than Preston. So I think that’s it’s always good fun.

So, Toby, I think that you really hit a spot on when you’re talking about distribution. So a lot of people, they would be thinking, “Hey, we have other types of energy, why don’t we use that instead?” That’s really not how the energy model works. It isn’t like you can say we can have one barrel of oil, and that gives certain our energy and then we can have a windmill, or a hydro-generator. It doesn’t work like that because partly there is distribution, you have to get the power somewhere.  And then we also have a storage problem You can’t store all types of energy the same way. And I think that’s just something that we met from time to time.

And then another thing I also want to say about oil and you know… it’s not like I don’t think it would be amazing if we had an oil-free world, it’s also better for the environment. But often when we talk about energy, and we’re talking about oil, in particular, we talk about that in the Western world. So we are really privileged in terms of how we are consuming our energy and the technology that we have access to.

Now, if you look at something like Eastern Europe or something like Russia, they use a lot of gas, they use a lot of coal. They just have a completely another type of system that can distribute that amount of energy, because the infrastructure is so much different. And I think that that’s something that we might forget when we’re talking about oil, is that the developing world is actually using less and less of the world consumption oil while the developing country is using more and more. And also they don’t have the same environmental issues.

Preston Pysh  21:38

So I just want to throw out there. So Stig got so frustrated with my lack of understanding with oil, that he found the best book on Amazon about oil, and it’s written by Morgan Downey. The name of the book is “Oil 101.” And he’s actually coming on our show next week for us to interview him. So if you guys have some really good questions about what your concern is with oil, send us those questions over email.

And I’m talking to The MasterMind Group because by the time this airs to our audiences, we’re going to have already interviewed him. So if you guys seriously do have some really good questions, send those over to us so we can ask him next week. And I’ve been poring through his book, and it’s totally insane. Like, I’ve never thought a person could understand oil at this level. But the book is totally amazing, like, unbelievable. But anyway, we’ll go on to the next topic here. Stig, did you want to ask one of the questions that you had for the group?

Stig Brodersen  22:29

Yeah. So we have heard a lot of smart people talking about how many stocks you need to have to diversify if you pick single stocks. So a lot of people would say, you need to have like 20 stocks because then you can calculate volatility. And if you believe that it’s a risk measure. It also makes kind of sense that you have something like 20 stocks.

And then you have another party who’d be saying something like, well, we should just invest in index funds. And the thing that most people could agree on that we can just buy it like the world stock market or S&P 500 something like that. We don’t need more than one to two to really diversify, because it’s inherent in that. So I came up with that probably not by all by myself, but I just thought, what if I did something in between? What if I invested in something like one of this publicized company? So something like Berkshire Hathaway, an actively managed ETF. So I would have like, the diversification terms of a lot of different stocks. But I would be heavily exposed to the manager. I mean, even in a company like Berkshire Hathaway, there was a lot of different subsidiaries, you’re still exposed to Warren Buffett’s ability to be capital allocator.

23:39

So my question for the MasterMind Group is how many stocks do we need to own to diversify that managerial risk? You CO risk so to speak.

Tobias Carlisle  23:49

It’s a great question Stig, Buffett has said that you’ve got basically two choices when you invest. One of them is just buying the most diversified lowest cost index fund that you can find, or you invest like a value investor and you find undervalued positions and you went towards the ones that are most undervalued. And he says that you know, basically, the better you are at identifying those opportunities, the fewer positions you need to hold.

So for Buffett, he says five. Munger says three. I think Pabrai I would say 10. Klarman says 10. The academic literature says… It depends a little bit, but it’s somewhere between at 20 you’ve got kind of 94% of the diversification achieved. At 30, you’ve got kind of 97 and then you’ve got these reducing returns to scale as you add more positions to the portfolio. You don’t get any sort of additional benefit beyond that.

The one thing that I always think about in relation to the indexes, so market capitalization weighting makes sense if what you’re trying to achieve is to measure the performance of a market but it doesn’t really make sense to invest that way. And the reason is that when things get very expensive, they become an increasingly larger part of the index. And you’re kind of putting more capital towards more expensive things. When all else being equal, you’d rather not do that.

So the solution is therefore to either equal weight, which just gets rid of that random error, or value weight, which is you know, we were talking earlier about those smart beta. That’s exactly what smart beta does. So it’s looking for some underlying metrics.

So Research Affiliates have a thing called the fundamental index, and they weigh according to the sales of the assets. I think they might even have a number of employees. So that’s another way of weighting, fundamentally weighting, but I think the best way is to value weight, so you look at a discount to valuation. And then your weight, and you need kind of a computer to do it if you’re doing it across an index of 3000 positions or 500 positions or globally. But that’s what I think they’re going to do. I think it’s gonna be very, very hard for active managers to beat those indexes going forward.

Preston Pysh  26:05

It was awesome. Thanks for that response, Toby. That was fantastic. I have nothing to add on. Hari, Calin, do you guys have anything to add on that one?

Hari Ramachandra  26:14

I have just one comment, like, you know, many times like when people say risk, some of them refer to volatility and some of them to permanent loss of capital. And Stig, I’m assuming you were referring to permanent loss of capital, were you?

Stig Brodersen  26:30

Yeah, that’s correct.

Hari Ramachandra  26:32

Yeah, in that sense, I think, as Toby said, there are multiple ways. It all depends on your risk appetite and the kind of capital you have. For example, if you have a capital that’s really long term, and it’s permanent in nature, as an individual investor, I can stomach volatility better than a fund manager who has to answer to his clients every other quarter. So it all depends on the situation of the investor, I believe.

Stig Brodersen  27:03

Okay, so I think that’s, that’s a really good point that it really depends. And you know, I also know it’s hard to come up with a number like we all like to have been able to quantify that and saying 4 or you need 6, but let me rephrase the question differently then. Would you feel comfortable about only owning Berkshire Hathaway for instance? So the vast majority of Warren Buffett’s own net worth that’s in Berkshire Hathaway because he says he is now heavily diversified. How would you feel about that just owning one stock? I mean, do you feel this is diversified because you had that means you’re at risk.

Hari Ramachandra  27:40

So I will tell you the way I think about it, number one, whenever I’m thinking about returns I can get in the market or I should get… I kind of consider my opportunity cost and also whether I deserve it, in terms of the knowledge I have accumulated the work I’ve put in.

So the question is, am I comfortable owning 100% or putting 100% of my investment in Berkshire? At this point, I would say no. And also, it depends on the opportunity cost, because I’m assuming I’m not going to put everything at once. So based on Berkshire Petroleum at that point in time. That’s how I would say it. I would be interested in knowing what are your thoughts on that?

Tobias Carlisle  28:29

I think one of the reasons that smart beta is so attractive is that you don’t have that single person standing there who, who can, you know, people, people do get old, they get dementia, they get emotional if they lose money. Some guys take big swings, if they get down to one, you could be in a position you could be in a fund like Bill Miller’s. Bill Miller had a very good long term track record something in the order of 13 years and then he had kind of a disastrous period. That’s why I always advocate for systematic quantitative approaches to investment because it just takes that human element out. The system always invests in a way that makes me really uncomfortable.

So I think we were talking about oil and gas at that stage. I always feel like I have to apologize for what the system is doing because I always think this is the time when we’re going to do something really stupid. Now, I can read as anybody else can we can go out and see all the people criticizing the tourists in oil and gas. And you know, the arguments, they make good arguments. That’s why it gets so cheap. That’s the best arguments are always really good arguments. And I can read them and agree with them because I’m sort of naturally conservative as well.

But over the long term, it has been a sensible thing to invest in those undervalued things where they look really with the prospects look really bleak, and a computer will do that, where a human can make mistakes. So that’s why I think it’s smart beta or some variation that’s going to be, it sort of solves that problem a little bit. Whether you necessarily put all of your investment into a single one of those indexes that, you know, maybe three makes more sense. Or something happens to the person running the index, or there’s some fraud going on, and you don’t lose all of your eggs. But I think if you’re in a good index, and you got a very long term, long term horizon, you’re going to be fine.

Hari Ramachandra  30:31

I just have a follow-up question you talked about the system. Is the only way to invest in those systems is through a manager who is following that system or you have any recommendation for somebody like me, who’s an individual investor who can follow that system on my own?

Tobias Carlisle  30:49

It’s easy enough to set them up yourself. You need to be able to screen as a first step and you know, the best books on-screen branding, probably James or Shawn sees what works on Wall Street. And I have, you know, quantitative value and deep value, which are both about screening and valuation. And then you need some, you just need a sort of fixed handful of rules for the way that you’re going to treat the portfolio. And you need to write them down at the outset. So you decide, we’re going to, we’re going to sit down with a portfolio every quarter. And we’re going to apply a handful of rules, and we’re going to buy without fear or favor. And so without fear or favor, I think it’s easier if you have it’s kind of automated because it is always that trick that it’s hard to do it. So you know the Acquirers’ Multiple, just to plug it again, does offer it does a pretty good, you know, pretty good screen.

Preston Pysh  31:49

So I just want to throw this out there. So when we look at these different approaches, I’m kind of the opinion, my investing approach has kind of morphed through the last three to four years. And I kind of side more with Toby these days than I do with the Bill Miller kind of style of individual stock picks. And just because I think it does take that emotional element out of it. I think when you look at Ray Dalio, that’s exactly what he’s doing. He has a model very similar to with kind of Toby’s describing here where it’s, he’s not making the picks and he has set up rules. He has programmed those rules into an algorithm and it’s making all the selections for him unemotionally, and he’s doing it across a world economy. And that’s the big thing with Dalio.

32:35

So I got a two-part question for the group. The first one is in 20 years, 25 years from now, do you think Ray Dalio will be viewed as a better investor than Warren Buffett? And then the other part of the question, this kind of go hand-in-hand maybe. What is the biggest risk that you think we face with the current market moving forward? From what I understand Ray Dalio has suggested that the biggest risk is the junk bond market and also the emerging bond market.

When you combine those two together, the emerging bond market in the junk bond market, it’s accounting for about $15 trillion right now. And that’s what they’re kind of pinning the rose on it that this thing’s ultimately going to fall in on that, this being the critical variable for the next crash. Regardless of whatever psychological factor that might be the catalyst. But I’m curious to know your opinion on those two different questions as far as what’s going to be a big risk that’s going to make this thing fundamentally crash. And also whether you think Dalio will be viewed as a better investor than Buffett in the long term?

Stig Brodersen  33:35

I actually, I have no clue about the second question. So but the first question, I would definitely say no, and this is really a perception thing. He might get better returns, but there’s just something about the art of picking individual stocks that are really hard to compete against, even though that you have you know, created the best beta funds ever and even though you’ve created the best screener ever. It’s not something that the public would really accept as being a great investor. I think the public would say, I understand Warren Buffett, I understand the principles he’s outlining, I deeply admire his ability to pick the best stocks. So ergo, he must be the best investor. You know, that we might see that a lot of people would gradually, at least my opinion go into this systematized way of indexing. I think that the last, I still think that the vast majority would look at the art about picking individual stocks as the finest art no matter what the returns are.

Preston Pysh  34:38

Now see, I guess I see it a different way. I look at the returns being the true gauge. And I think that from my vantage point, I think Dalio protects his downside better than Buffett does. So that’s maybe why I’m framing the question and ask and just to kind of get your opinion.

Tobias Carlisle  34:53

I think Dalio has a little bit of leverage, though?

Preston Pysh  34:56

Yeah, he is leveraged. Absolutely he is.

Tobias Carlisle  34:59

It’s way too early to, you know, Buffett. The reason why Buffett is so well regarded is that his track record is public and so long, while Dalio is 40 years into his career, he’ll still be 10 years behind where Buffett is now. Yeah, Buffett’s got a 50-year public track record, just kind of with phenomenal returns over that period of time. But I think Stig’s approach is a good one to that. Buffett will be regarded as the better investor because he doesn’t hand it over to a system. He’s done it himself.

Preston Pysh  35:32

You smirked again. Go ahead, Hari. I want to hear your thoughts.

Hari Ramachandra  35:39

Yeah. So I think I agree with Stig because there is a risk that even if Dalio succeeds as Toby just mentioned, people might credit the system. But I’m curious how is it doing so far. Has he beaten Buffett so far?

Preston Pysh  35:56

No. I think his returns are probably around what are they annually? 15% over what a 25 year period or something like that? And they’ve been pretty good. I don’t think that they’re at Buffett’s 19-point what is it? 19.6% or something like that over the 50 years or…

Hari Ramachandra  36:13

And what is the capital he has under management?

Tobias Carlisle  36:17

It’s like 100 billion.

Preston Pysh  36:18

I think he’s at 120 billion.

Hari Ramachandra  36:21

Okay. That’s pretty huge. 15% at that level seems quite impressive.

Preston Pysh  36:27

I guess the thing that I’m really impressed with is in 2008-2009 with Dalio. His alpha fund actually was in the green in 2008, which for me, that’s just totally crazy, especially knowing that he has a computer algorithm making the trades like I think that’s totally crazy. And then the year after that, or I’m sorry, you know, in 2011, when the market was down in 2011, when it was down, I think he’d had something like a 30 to 40% return in the green during that year. I mean, it was massive. It was jus… He obliterated the market that year. So, I guess I’m looking to recently on trends. And I mean, as Toby said, it’s hard to go up against Buffett after he has such long decades and decades of experience to prove that he can get a 19% return. It’s really kind of hard to do that. But well, it’s next near to impossible to do that except for one person. But I just wanted to frame that question, because I have so much respect for Ray Dalio and I just want to hear what other people thought about it.

Calin Yablonski  37:29

I just wanted to actually jump on the second part of your question there about risk, Preston. I recently read an article and I’m really interested to hear what everyone else thinks of this and their thoughts on the topic, but it was called “Radishes, Onions and the Stupidity of Debt.” And what it was talking about is the amount of margin that’s being used on the New York Stock Exchange. Apparently, it crossed the 500 billion mark in April, up from something like 475 billion the month before. And I found that really interesting because that’s roughly 50% higher apparently than it was right before the crash in 2007-2008. So that’s really interesting for me to see the amount of what is essentially just loans that people are taking and using to purchase their equity. So I just want to know what everyone else thinks when they hear those figures.

Tobias Carlisle  38:23

I think dshort.com has the charts showing the amount of margin that relative to the market capitalization of NYC or whatever the index that attracts. I don’t know contextually whether that’s a bigger number than it was in 2007. And there does seem to have been sort of this consistent growth over a very long period of time. There’s just more and more debt in the system all the time. I don’t know whether that’s kind of a secular thing, and it just keeps on piling up forever and ever.

And we look back in 20 years’ time and so 500 billion, how quaint. No, that’s, that’s one-tenth of one 100 to where it is now. Or whether it’s one of those things that you know only happens when interest rates get really, really low. And you’ve had a very long period of time we’ve had really good returns on the stock market. That’s one of those things that when it cracks, it’s got to be making the system more fragile, right? It makes it harder for people to hold on to their positions. If you’re down you get a margin call or even if you’re the kind of guy who doesn’t care about volatilities on the portfolio, you’ll find that your broker does, asking you to make good on those on those positions that are down that’s where for selling you know, the cascading for selling, that’s when you get the really big bus in the market. So yeah, it’s a frightening thing that there’s that much debt there. From my perspective, I think it’s… I’m in more in the second camp where it’s fragile and it’s scary.

Preston Pysh  39:52

I totally agree with Toby on that. I think that it’s creating a more fragile environment. I think that it will make your downside a little bit more abrupt. He threw out a very important tip there if you didn’t hear it at the very start of what he said, dshort.com. d as in dog, don’t spell it out, just D short dot com. Go there. I’m telling you, the charts that Doug puts up on his webpage are phenomenal. I go there all the time. I was really, I found that really interesting that you threw that out there, Toby, cuz we’re going to the same site. Stig, I saw you had something you want to say?

Stig Brodersen  40:22

Yeah, and I actually like to talk about that exact site because I’m, I’m such a huge, huge geek. Every month that these charts are coming out, there’s one month lag, you know, I’m always really excited to see the development. And Toby was completely right about the trend. So we will see more and more depth as we go along. And right now it’s around $500 billion. And I know that this I mean, it’s really hard to… how much is that 500 billion, but I actually posted the chart on the forum and said, “Guys, this looks really frightening in nominal numbers, and almost also in relative numbers, we’re looking all-time high. I don’t know what’s happening, but it could crash. ” And then one of our users he’s saying, “Well, you know, Stig, you might be right. But the market cap of the S&P 500 is 20 trillion. So to me, it seems like a relatively small amount of debt.” And I don’t want to answer him. So, guys, I was really hoping for your help. Now we’re talking about it.

Preston Pysh  41:27

I don’t think you can look at it from market cap, I think you have to look at it in terms of maybe trading volume, the amount of trading volume per day. I could be wrong because that was just off the top of my head. But, Toby, you seem to be nodding your head as well.

Tobias Carlisle  41:41

Yeah, I think it’s very hard to know what that number means, out of context, and that’s kind of the point that I was making. It’s hard to know whether that’s a lot of money or not a lot. But the way that Doug puts those charts together on, it certainly seems that you get these peaks in margin debt that coincide with peaks in the stock market, which makes intuitive sense. And he also seems to be suggesting that when you get the reduction in the margin that seems to precede the bust, which I find really interesting. There are not enough data points. There are only three peaks that it captures. But it seems to be that the margin that comes off before the market comes off. I don’t know how that is the case. But it’s he has a discussion about it on his site where he talks about that.

Stig Brodersen  42:26

Yeah, and I just want to throw out a quick statistic, the correlation between the debt and the market is .97. So it’s quite significant to say.

Preston Pysh  42:36

So it’s interesting, Calin, I think you kind of answered a little bit of my the second part of my question as far as what’s the biggest risk that we have moving forward and what could potentially cause the downfall. So you’re saying that because there’s so much leverage on the market that you think that that’s setting yourself up for margin calls that are really going to have kind of this quick and immediate impact if it gets much more leveraged.

Does anyone else have any other highlights or concerns that you think could be that critical variable from a fundamental standpoint, not a psychological standpoint, but a fundamental standpoint?

Hari Ramachandra  43:06

I feel like it’s all about the easy money. And today, I think that is all the incentives for people to take debt, not just in the stock market, but everywhere else. And that’s it when you talked about fundamental factors, Preston, I would identify that as one of the fundamental factors how Fed incentivizes investors.

Preston Pysh  43:31

Hey, guys, so we typically play a question from a member of our audience. But instead of doing that, what we’re going to do is we’re going to go ahead and send Matt Hyeon, who sent me that email that we were talking about with Mohnish Pabrai. We’re going to send him a free signed copy of our book, the Warren Buffett Accounting book.

43:44

I also want to highlight the other members of our group. So, Toby, he wrote this book called “Deep Value.” He also wrote a book called “Quantitative Value,” and they’re fantastic books. Just totally amazing if you have not read these books. Also, he has a website called the acquirersmultiple.com, that’s where he has this scanner that goes through and finds the enterprise value of these different companies and that they prioritize them for you. So I highly recommend his site, if you’re looking to take more of this quantitative approach.

44:11

Calin has a website. It’s called Inbound Interactive, where he is a search engine optimization expert. I highly recommend you go there, especially if your business is more of on the private level. He has a website that specializes in that to help you get ranked within Google for those local searches.

44:25

We also have Hari Ramachandra, who’s an executive over at LinkedIn. He has a website it’s called bitsbusiness.com where he writes about going to the Berkshire Hathaway shareholders meeting to any other just business topic. I think you’ll find the things that he writes about extremely interesting.

So we’re really just thrilled to have you in our audience. If you’re really enjoying our podcast, please go to iTunes, leave us a review that helps us out so much. We just really appreciate everything that everyone’s doing out there for us and we really hope that you got something out of our MasterMind discussion today. So we’ll see you guys next week.

Outro  46:48

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