Stig Brodersen (00:04:09):
Just like there are no strict rules for value ETFs, the same is the case for momentum ETF’s and the criteria select according to price performance. So for instance it could be stocks that are gained most and price the past months or three months or whatever it is, and all momentum ETF’s have different rules for rebalancing. But the core is again always price performance. So instead of going to rabbit hole with various individual ETFs, really to conceptualize the strategy, I just went with the biggest value and the biggest momentum ETF out there, and both of them are focusing on large cap stocks which also traditional have a bit lower volatility, which a lot of investors like. And the value ETF shows for this example is the Vanguard Value ETF and the stock ticker is VTV.

Stig Brodersen (00:04:53):
And it’s a huge ETF with 97 billion under the management. And the return in the past 10 years have been 11.23%. So 10,000 would have approximately turned into 29,000. Where’s the S&P 500 would have turned into 37,000. Now Vanguard is notoriously known for low fees and this one only cost four basis points. So that is 0.04%. And right now I think that low fees are critical for us, especially because it’s a cash place holder, but also especially given the low-interest rate environment. And I don’t expect equities to yield a high return in these markets.

Stig Brodersen (00:05:29):
For the momentum ETF, I’ve looked at iShares MSCI USA Momentum Factor ETF and the stock taker is MTUM. Total on the management is 14.4 billion and is by far the biggest out there. The expense ratio is a little higher, 15 basis points. This is also relatively new, at least according to the value ETF I mentioned before. The exception was 18 of April, 2013. So if you invest at 10,000 back then, it’ll be worth 32,000 compared to 23,500 for the S&P 500. So not surprisingly are performing because we’ve seen the bull market. And as mentioned before, value has underperformed because we have seen the bull market.

Stig Brodersen (00:06:08):
So when we do the numbers and we have the combination of value and growth, we can see that, yes, it has also performed better than the S&P 500 in the timeframe that we’re looking at. Another way, of course, to make this play, not just looking at the US could be to go with a global value and a global momentum strategy, but the idea is more or less the same. The reason why you might want to make this twist is because the US has the third most expensive stock market in the world mentioned on the Shiller P/E ratio. So perhaps you want to go that route, but sort of the concept is more or less the same. So I really want to open up to the group. Hari, please go first.

Hari Ramachandra (00:06:46):
There should be a cash replacement. Somewhere you can have a store hold of value. Of course some might argue that should be Bitcoin or gold.

Preston Pysh (00:06:56):
Who are you talking about, Hari?

Hari Ramachandra (00:07:01):
Nobody here I guess. I think this is another interesting option. So I really liked the way you framed it. But the question I had was when I was looking at the holdings of both these ETFs that you mentioned, one is value, the other one is momentum. And then you look at VTI Vanguard Total Market Index fund. It’s kind of a union of these two. So instead of holding these two, like we can just simplify and hold Vanguard Total Index Fund and interestingly, the returns for the past 10 years there is 13.8%. Higher than these two. And I’m trying to simplify it because it’s a cash replacements.

Hari Ramachandra (00:07:45):
I don’t want to be tracking it all the time somewhere like it’s more like a store of value. And then you brought up an interesting point, which Ratalio also pointed out recently is this is a time to diversify across countries. So another ETF from Vanguard is Vanguard XUS. VEU ETF that has pretty much every other country except US. So I’m just thinking from more a simplification perspective. Would that be something you would consider as a cash replacement?

Stig Brodersen (00:08:20):
Yeah. So you bring up a lot of good points here, Hari. I think the default answer I would go to here would be global. But it kind of depends on how [inaudible 00:08:29] that you choose to be. Because you could say, for instance, something like momentum really works well right now in the States right now, because we have this bull market. So to the first point where he said, “Oh, why not taking the entire stock market?” So if you go with pure value and if you go with pure momentum, they typically perform better. If you do like a 50/50 allocation to that. I have some research on, this is actually a good friend with gray who had done a lot of research on that. And so if you want to dig more into it, I’ll make sure to link to some links in the show notes where he specifically talks about what you address there.

Stig Brodersen (00:09:03):
But again, that also comes down to specifically, how do you … What is value? And in this example, I just took the two biggest model conceptualized strategy. I think you can definitely argue that, “Oh, why don’t we just go for de-value instead of going for value in general?” How would that work? I really just wanted to do it symbol. I can see that Toby’s smirking there. So before I toss it over to Toby, Mr. Devalue. I just wanted to say that if you are listening to this in the European Union, the stock tickets will be slightly different.

Stig Brodersen (00:09:34):
I’m in Denmark. So part of the European Union. I’m personally invested in Vanguard Global Value Factor and*inaudible MSEI World Momentum ETF. So without going too much into what’s specific for European citizens, just in case I get flooded with people saying, “But hey, I’m in Europe. I don’t have access to these. What do you do?” This is conceptually the same strategy, Toby.

Tobias Carlisle (00:09:55):
Like the late 1990s, the last decade has been characterized by the very big, very expensive companies running up the most. And so it’s Microsoft again, but I don’t think Microsoft is graciously overvalued, but I do think that there are a lot of very big, expensive names that are unusually overvalued certainly happened in the late 1990s. And then what happened was the next decade saw two big stock market crashes and the very expensive large names, basically just drifted sideways with a whole lot of volatility.

Tobias Carlisle (00:10:31):
So I kind of think that at some stage, this cycle will change and that’s sort of what’s going to happen in this market that it’s going to be the big, expensive names that are going to tread water and go backwards. And I think that hopefully what that means is that the smaller value names do better, but certainly the smaller value names have not participated in the last decade. And so don’t have that same level of overvaluation.

Preston Pysh (00:10:53):
The only way that I would respond to this is you have to look at the interest rates back then. So back whenever all these companies were running up in the 2000 range, interest rates were in excess of what? 7% on the ten-year treasury, something like that, I would guess. So, as they’re able to adjust those interest rates, they’re able to somewhat normalize the markets. And so you were able to have these contraction, these credit contraction events back then. Now, I don’t know that you’re necessarily in that same situation with interest rates being down at zero. So if that’s the factor that allowed them to go sideways because the central banks were allowed to let things normalize. My concern is I don’t necessarily know that that’s where we’re at today. Can they let the markets normalize or are they going to continue to compress interest rates aggressively at any sign? I would argue that in February into April of 20 was a perfect example of central banks stepping in and saying, “Nope, we are not going to allow things to normalize at this point. We cannot afford to allow things to normalize.”

Preston Pysh (00:12:03):
So my concern is more on the side of are we in a different type of environment, just because of the way central banks are going to step in and continue to execute these policies that we’ve seen for the last 10 years relative to these other points in time where they were able to do that. Hari.

Hari Ramachandra (00:12:20):
This is a very good segue question. And this is the question I had for both Toby and Stig is the reason Stig is even thinking about this ETF is to have a replacement for cash. And that is the mood today. It’s like everybody wants to get out of cash and they’re looking for a home. So is it a fair assumption that the reason everybody is thinking like this is that we are all pretty confident that the central banks would not raise interest rates?

Tobias Carlisle (00:12:51):
I’m certainly not confident. And I was going to go into my answer in a little bit of detail because I want him to respond to Preston too. The two things that I would say is that the late 1990s and today share the same interest rate characteristic in the sense that they were both falling. Interest rates were higher than, but there were certainly directionally down. And I think that the direction of interest rates is more important for stock markets than the absolute level of interest rates. If you look at the fit model, is this sort of idea that the fed kind of pushes, but it doesn’t test very well.

Tobias Carlisle (00:13:22):
But the idea is that they look at basically the dividend yield over, or the earnings yield, even over the interest rates. So the 10 year or the 30 year, whatever is most appropriate, probably the 10 year they tend to look at and they show that when there’s a big differential between dividends or earnings and the 10 year, that seems to suggest that equities are going to do very well. And when there’s a small differential, then you should be in the bonds. It turns out that’s not the case. There’s plenty of research out there that shows it doesn’t work, it doesn’t matter. They always talk about it like it’s going to happen.

Tobias Carlisle (00:13:51):
But what that tells to me is that the interest rates really don’t matter that much. It’s more the direction of the interest rate. Does that mean though that interest rates can’t rise from here? I certainly think that the central banks are heavily incentivized to keep interest rates falling and down, but they are always that way. And they were certainly that way in the 70s and they didn’t rise rates in the 70s because they wanted to, they raised them in the 70s because they had to. And if I look across the inflation expectations over the last five years they keep on saying, we want them over 2%, but the inflation expectations, last time I checked according to the market were about 2.18%, which is as high as it’s been five years and trending up, which makes perfect sense.

Tobias Carlisle (00:14:34):
If you just reduce the amount of stuff that’s made in the world, and you pump a whole lot of money into the world, the stuff that gets made as denominated in that money that got pumped into the world, you’re going to need more pieces of paper for fewer real things in the world. They’re going to go up in price. That’s what happens. And that will be caught by the CPI. And it will show them finally that there is inflation. And I think at some point they’re not going to want to do it, but they’re going to have to do it. The only other possibility if they can’t get it done is that we look like Japan, or we look like Europe. And both of those places, I don’t think that they’re well known for their stock markets over the last 20 years or 30 years in Japan’s case, they’ve both had shocking stock market performance.

Tobias Carlisle (00:15:17):
So I think there’s a very, very nasty outcome on the horizon. Like visible, I don’t know when it gets here, but everything’s very, very expensive and interest rates are probably going to go up some stage. And if they don’t, it doesn’t matter because everything’s going to get cheaper.

Preston Pysh (00:15:33):
From a government standpoint, though, they can’t allow interest rates to go too high. And that’s why they keep talking about yield curve control, which is effectively unlimited QE to peg yields at whatever yield they want. So my concern with the narrative that rates are going to go up, I think they’re going to go up, but I think they’re going to go up all at once. And like you said, who knows when that day’s going to come? They’re going to throw everything they’ve got at this thing in order to keep those yields pegged at some percent and lower. I kind of suspect you might be getting to whatever that level is here pretty quickly, because they can’t afford to issue all this debt.

Preston Pysh (00:16:11):
The fiscal appropriation side in the rate at which it’s growing is just astronomical. So they can’t issue all that debt at higher yields because everything blows up at that point. So that’s why they have to do yield curve control. So, although I agree with you, I think rates should be going up. I think CPI is a total farce. I think the real inflation rate is significantly higher. And I think most people in the market would agree with that. But I think everyone has so much faith in central banks stepping in and doing the yield curve control that it’s not going to be something that … And so how are prices going to get punished if you continue to limit the amount of yield that’s taking place? So, and this is my defense for Stig’s momentum ETF. Because I think that the central banks are going to do everything in anything they can in order to prevent yields from going any higher from where they’re at right now.

Tobias Carlisle (00:17:04):
Do you think that they were doing everything and anything they could in 2000 and 2008?

Preston Pysh (00:17:13):
Yeah, but I think if we were talking about nominal yields, they had a lot more flexibility in area to maneuver back then. But now where we’re at, it’s compressed so much, almost like a spring. If you were thinking of it like a mechanical spring before it had some area to bounce, now it’s compressed so much. And if it even goes up a smidgen, everything comes on glued. There’s no way that they can allow that to happen. So I’m with Hari. I think people are looking at, I don’t know that I would say that they’re looking at equities as a new form of cash. I think they’re looking at equities as something that won’t become completely impaired, if that dire scenario of yields going up, plays out, because anything bond related just blows up becomes completely impaired at that point.

Preston Pysh (00:17:57):
But if your own inequities, it’s going to store your buying power and that’s in everyone’s getting all this fiat that’s being added into the system and it has to go somewhere and they’re looking at the equity market and saying, “Well, they’re going to have free cash flows and they’re not … They’re basing the number of shares they’ve got outstanding. So I guess I got to go here to this company or this expectation of this growth rate, because they are signing on 100% more users next month.”

Tobias Carlisle (00:18:22):
You could look at Buffett’s experience in the 70s when he writes about this a little bit, when he was the alternative to equities was commodities, precious metals. And he talks about gold and he says over a period of time and I forget exactly, but it was a long period of time, the greatest investor in the world, the greatest equity and investor in the world could only just keep up with gold. And everybody else in the world is not the greatest investor in the world. I don’t know what … The running those things starts now, whether it started 10 years ago, whether you needed to be doing this stuff 10 years ago.

Preston Pysh (00:18:52):
Stig I got one point on your two picks, the VTV and MTUM. For me, what I’ve been looking at over the last as the benchmark or the hurdle rate is pretty much the NASDAQ. And when I look at how manipulated the markets are now, and the past year is a perfect example of how much central bank manipulation is playing out. What I’m looking for is something that can outpace the NASDAQ. I’m not looking at the S&P, the NASDAQ is my benchmark at this point, as far as equity performance. So, where I wanted to see is before the crash, before we had the February into April crash, that was dramatic, the government policy response, and then all the performance had happened afterwards.

Preston Pysh (00:19:43):
So we’re almost at exactly, it was a 341 days from that scenario that I’m describing. The peak, the crash, and then the recovery. I’m using that as my benchmark of what can beat that performance through this manipulated period of time. The NASDAQ performed at a 37% return from that top to where we are today. When I look at VTV the value ETF, it had 1% performance through that same period of time. When I look at the momentum peak, it had 24% performance. The reason I want to look at the top to the bottom to the top again, is because I think it gives us a sense of what’s to come in the future.

Preston Pysh (00:20:25):
I suspect we’re going to have another big liquidity shock to the market. The policymakers are going to step in, they’re going to come with two times or three times the amount of stimulus that they had previously and the companies that were able to do well during that period of time, in my opinion, are probably going to be the ones that continue to perform through the next manipulated pump. So when I’m looking at I’m a little bit concerned because if this theory that I have, that they’re just going to step in and do what they did last time, but just two or 3X, the numbers, I suspect that both of those picks are going to underperform just the NASDAQ in general if that theory holds true.

Stig Brodersen (00:21:05):
Yes, I absolutely agree with that. But to me, NASDAQ is not the benchmark. I understand why you would do it because you capsulate it into that theory. NASDAQ did really well because we had this crazy pandemic and what performance well, quite obvious that what performed well would be the stocks that weren’t being NASDAQ. That’s the new world, the new detail world that we’re in. I don’t know if that’s the right benchmark to have, the way that I would instead conceptualize this is like you’re saying, “I don’t really know what happens. I can probably pick different ETFs that would be doing different things that would capsulate XYZ happening, but I don’t know what’s going to happen. I don’t know if the interest rate is going up or down. I don’t know if I want to have too much exposure to these index with these major main companies that are just taking up all of it.”

Stig Brodersen (00:21:51):
You could even do something like the S&P 500. I just want a place where I don’t get inflated away until I find something that I find interesting. What can I dollar-cost average into without doing a monthly analysis of that? And I was thinking about perhaps that could be 50% value of 50% of momentum, and then we can go in and talk, “Well, how do we avoid being too exposed into some pecs?” If you look at the value ETF, I think the biggest position there would be Berkshire Hathaway with a little less than 3%.

Stig Brodersen (00:22:20):
So I think that’s one component. The other component I would like to throwback to the group here is that I spoke to Mohnish Pabrai about this last year. And he said that he thought a lot about placeholders for cash, because we all need placeholder for cash. And he said, he didn’t want to use value ETF, he didn’t want to use momentum ETF, but he thought about having his placeholder for cash being the Berkshire Hathaway. He didn’t want to do it simply because if the market crashed then Berkshire Hathaway would crash with it. So I kind of like want to throw that back to the group and like here regardless of what you think about this proposed strategy, what do you do for a place hold for cash? I almost don’t want to ask Preston because I know what she’s going to say, but if I get throw that over to Hari and Toby, what is your placeholder for cash?

Tobias Carlisle (00:23:08):
Well, this might be a reasonable segue into my pick, which I’m going to propose my own ETF. I’m sorry about that. But I have to, so I have two. I have one that’s a small and micro ETF, US-based small and micro, and it has about 100 names. And I look for things that are cash, rich, generating cashflow and undervalued, and that comes from a universe of stocks. So the ETF we’ve only taken over it and changed it to this strategy since October last year, October 26 was the switch over date. That ETF, that universe of stocks, that small and micro value has had a very bad decade. It’s fallen over the entire decade while the rest of the market has gone up. The other ETF that I run is called Zig, which I’ve spoken about on the show. Lots of times it is long short value.

Tobias Carlisle (00:23:53):
So what we do is we have long value names, and then we’re short, overvalued, heavily indebted companies that have statistical earnings, manipulation, statistical fraud indications that they not only are they not worth a lot, but that they’re potentially worth nothing. And so that’s the sort of stuff that we like to show it. And the reason I like that, because before I launched, I thought about this a lot. What would you launch into a market that is extremely overvalued and has been hostile to value for a long time?

Tobias Carlisle (00:24:21):
I’m a contrarian and I do think that at some stage, the cycle will flip to a value type cycle. And so I want it to be long, the value names. Then I felt like it needed some protection because I was concerned that if I launched into a market like this, at some stage, we were going to get this earth-shattering blow up. And the way that I solved that problem was by having a lower exposure to the market. And by having that shorts in there, that when the market goes down, these are the sort of things that tend to go down more than the market goes down. So that’s sort of my solution to it that before we launched, I did think through this possibility, we carry a little bit of cash.

Tobias Carlisle (00:24:57):
We have some shorts and we’re long undervalued names that are cash rich. One of the names that were undervalued is Berkshire. We hope that we have a little bit more than 3% of that in the portfolio. I don’t buy these things as cash replacements. I buy Berkshire because I thought it was extremely undervalued at the time that we bought it, which was about March 23 last year. The differential was about as wide as it’s got in the last sort of 20 years for Berkshire and Berkshire had exposure to Apple at that stage.

Tobias Carlisle (00:25:24):
Berkshire has never got credit for the Apple, but it’s in there. I would never invest on the basis of having a cash substitute. I don’t fully understand what Mohnish is talking about when he does that, because I’m investing in something that I want to hold forever ideally, and Berkshire is one of those things that you can basically hold forever. It generates enormous amounts of cash. There’s approaching zero chance of that having a material blow up, but that’s just not a zero under almost any circumstances. There are very, very vanishingly few sort of possibilities of zero in Berkshire because it’s so well managed. You’ve got the world’s greatest investors sitting on control of the cash.

Tobias Carlisle (00:26:06):
It’s generating cash all the time. He’s redeploying at high rates of return. I think you can just hold Berkshires. Now, are you going to get some volatility through that period? Possibly, but like you said Stig, you’re investing every month into these things. Just dollar cost, average into stuff that sounded valued you’d be okay.

Hari Ramachandra (00:26:21):
If you look at the characteristics of a cash versus equity. I mean, it doesn’t really hold on its own, like when we put it to test and when you need it, you probably will not be able to take it. And that is the risk of using equity as a cash replacement. So I hope, but whenever we are talking, it’s not for our emergency funds. So our emergency funds should be in cash. This is beyond that discussion.

Stig Brodersen (00:26:48):
One thing is it can go through just you having monthly cashflow and then setting aside that money. That’s one way, another way is that I happened to sit on some cash for different reasons. And I think this is something that other investors resonate with specifically. I sold my position in Spotify here last week. I saw some different characteristics in that space that meant me we want to sell it. And it doesn’t really matter what the case was. Because I just kind of feel that would be a long tangent what’s happening in the music space and podcasting space and all that. But for whatever reason, I decided to realize my gains on that and just then sit with cash. And then suddenly I was sitting with what I felt was too much cash. And I see a lot of money printing. I saw a lot of inflation like you mentioned before.

Stig Brodersen (00:27:26):
I don’t want to be sitting there with that at, which was why this whole idea of having something like an intermediate, between I find something really value to invest in. And then something I just know for a fact it’s going to be worth less and less. So I guess my question to you would also be, do you even have such a type of investment because it’s not something I’ve tried before. Before I was either in cash or I was in something I wanted to hold forever preferably. Do we even have that middle step?

Tobias Carlisle (00:27:57):
You don’t think that you’d find something over the next 12 months to deploy that cash into?

Stig Brodersen (00:28:02):
I probably would. I guess it also depends what you think the inflation rate is. If you think the inflation rate is 2%, you can probably just sit on it.

Tobias Carlisle (00:28:10):
I think the inflation rate is higher than the current interest rates. I think that we’re losing money. We’re certainly losing purchasing power. Let’s assume that that’s a given. I still think that if you look at every year in the market, there is some time in the year when stocks go on sale, it’s happened regularly, even since … Not counting the 2007, eight, nine megabit, every other year has had this opportunity. If you have your list of stocks that you want to own, and you’ve got a rough kind of valuation for them, you just have to sit there and wait for the stocks to go and sell. Be like the apocryphal pig farmer in the fortune article. He hangs out on his pig farm raising pigs. And then when he reads in the paper that the market’s gone down 200 points for the day and it’s going to go down another 200 points tomorrow. Then he goes in and he buys his stocks.

Tobias Carlisle (00:28:58):
And then he goes back to his pig farm. And when he’s on the pig farm and he sees the market was up 100% last year and experts think it’s going to go up another 100% this year. That’s when he goes into town and he sold all his stocks. He’s selling the optimism and the buy and the fear and greed. We are in a very, very optimistic point in this market. But I do think that there’s going to be like the annual sale comes around. Sometimes that annual sale turns into a megabit that goes on for a few years. I think that that’s becoming increasingly likely, but whether it tends to make a bear or not, you’re going to get an opportunity when the stock is going so with you.

Hari Ramachandra (00:29:33):
This was a fascinating discussion by the way. And my team was also very similar. I was looking for a store hold of value. My pick today is Brookfield Asset Management. This has been a company that I have been following for a while, and it is not alone among value investing circles. And basically it’s a global diversified alternative asset manager, and it has nearly $600 plus in assets under management. And it’s spread across 30 countries, wide continents. 50% of their AUM is in North America but the rest is spread across. And they’re growing really fast in Asia and especially India.

Hari Ramachandra (00:30:19):
They have been making some really interesting investments in India, including the body company that owns the cell phone towers in India. Cell phones are a really hyper growing business in India and lot more to grow. But in general, their investments can be or their businesses can be classified into real estate, infrastructure, private equity. And recently they bought Oaktree, or 62% Oaktree. So they won’t credit us for now. And in infrastructure, they invest both in renewable energy and also what they call as data infrastructure.

Hari Ramachandra (00:30:57):
In fact, from their annual report, what they say is they invest in critical globally infrastructure that facilitates the moment of storage, of energy, water, freight passengers, and even data. So if you want to move anything, they’re investing in it. So what I like about them is definitely their track record. Obviously they have a very strong balance sheet and good liquidity and more importantly access to capital. I think they can raise funds more than anybody else. And they have been growing their asset under management at a rate of almost 20% CAGR.

Hari Ramachandra (00:31:37):
They were managing own 20 billion in 2002. Today they’re managing upwards of 600 billion. And apart from that, if you look at their related earning, I look at their valuation is they have free related earnings value, they have carried interest value. And then they have their own capital invested in their partnerships. So the way they work is they create this partnership in these different areas. They invest their own money. So they become the managing partners. So they get revenue out of the fee that they charge for the rest of the partners, and also from the appreciations of the cash flows of their businesses. And if you look at their fee-related earnings, they have grown 3X from 2015 and they’ve accumulated and realized carried interest.

Hari Ramachandra (00:32:32):
We look at gross that has grown around six times, 6X in last five years, starting 2015 and net has grown around four or 5X. So overall, really strong growth, both in terms of revenue, carried interest or asset under management. Another interesting thing that people don’t look at them, like read. But if you look at their dividend, even though they are not really high, they have been raising their dividend around 10% annually for the last nine to 10 years.

Hari Ramachandra (00:33:05):
And they have been increasing for the last nine years. So some of the trends that are going in their favor are the infrastructure build-out, especially in Asia and even in US, in terms of renewable infrastructure. Renewable energy infrastructure, our data center or IOT infrastructure. And that is an increase pace in the allocation of funds to alternative assets because of the low-interest rate, we were just discussing a lot of countries and family offices and solar gen farms are all also looking into a place where they can put their cash. They don’t want to hoard cash, obviously.

Hari Ramachandra (00:33:46):
And all these bought well for Brookfield Asset Management and based on their own valuation, today’s prize for Brookfield Asset Management is way below their own assessment of what their fair value to be. Again, we don’t want to take their numbers. And I’m not an expert at valuing businesses. So I’m looking to you guys to give me insights on their valuation, but in terms of downside protection index, slightly contrarian but because the market is not so happy with them, because of all the stuff that’s going on with Covid and their exposure to real estate and commercial real estate, especially in malls and whatnot.

Hari Ramachandra (00:34:28):
But they’ve been aggressively buying up. In fact, they are taking their read which was focused on retail and commercial real estate private. They went offer to buy back their shares and their rates and Bruce Flatt, who’s the CEO, has a good track record and has good insights in this area. So all of this gives me confidence to park my money with them for the foreseeable future. So I wanted to hear your thoughts on valuation and what do you think of that?

Tobias Carlisle (00:34:57):
I like the pick Harry and I’ve had a look at Brookfield Asset Management quite a few times in the past because Bruce Flat is very well known. Brookfield Asset Management is very well known, great operators, great investors. If they can continue to do what they’ve done in the past, it’s probably going to deliver above-market returns here. I have looked at it and passed in the past, and I’ll just tell you why I’ve passed. I’m probably excessively nitpicky when it comes to these things. So feel free to dismiss this. But when I look at their structure, I just can’t understand it. I can’t figure it out. And I have this kind of bias because I’m Australian, I’ve seen a lot of fad in the early 2000s led by [Macuary 00:35:37] for sort of securitization. And they became very good at finding big assets, securitizing them, selling them off in these reasonably complex structures.

Tobias Carlisle (00:35:45):
There were a lot of copycats around who did the same thing, putting it together, these complex structures, and I’ve seen them collapse. And so I always get very nervous when I see a complex structure that I can’t understand and I’ve gone through it. And I’ve tried a few times. It’s just, there are too many moving parts in it for me to figure out what it’s worth. That’s just my bias. I’m not saying there’s anything that’s going to happen with Brookfield. And it’s just unlimited in that regard, but it’s just for my own purposes. I need to understand exactly what I’m owning. And I just can’t get there with Brookfield.

Stig Brodersen (00:36:15):
I’m really happy you set that Toby. Because I kind of feel the same way. I looked at it for quite some time. Not because it’s … I wouldn’t say at all, it’s too similar to Brooks or Hathaway but it has some of the same cost of risk and people very often put them in the same sentence, even though they are quite different companies. Like you, whenever I look at it, I kind of feel, I don’t want to understand the accounting anymore. I tried to do some valuation that came up with some sort of five to 7% expected return was a strong downside, which is definitely appealing to some investors in this environment. But to me, I just need a much larger margin of safety for a company I do not understand as well.

Tobias Carlisle (00:36:55):
That isn’t an above-market return at the moment, by the way, I forgot to mention this earlier, but my estimate of what the market’s going to do. So if you assume that we go back to normal valuations over a decade. So that’s the assumption that some people are going to say, that’s ridiculous. We’re never going back to normal valuations. But if you go back to the long run average that we’ve had since 1850 in the stock market, which is a P of about 16 or 17, you trend that way over a decade. What the next decades returns look like in terms of returns are 0.9% compounded.

Tobias Carlisle (00:37:26):
And that includes 1.5% in dividends. So the index is actually going to go backwards. Your return is going to be mostly from dividends. So that’s the context of like looking at something that’s got a five to 7% return that doesn’t sound like a higher return, but that is in this market.

Stig Brodersen (00:37:42):
You brought up a really good point there too, because it’s all about assumptions. We talked about inflation before, do you think inflation is 2%? There’s definitely a lot of people who are listening to our Wednesday shows who would feel that inflation is much, much higher. Do we think that interest rate is going to stay this low? And we’re going to have a P of 50. Is that going to be the new normal? Well, then we have a lot of undervalued equities out there. Or do we look at more historical data who would say like what you suggest there, Toby, like perhaps I think you said 0.9, but that’s in the very different interest rate environment that we’re looking at.

Stig Brodersen (00:38:16):
So we can talk about five or seven to 10% returns. And Preston’s pick is like good historical performance of that is just absolutely amazing, but it really, really depends on what are the assumptions that you’re looking across this lens. And I also think that’s why we have, to some extent we might have different picks also here because we looking at it through slightly different lenses. I probably shouldn’t say it slightly different. We were looking at very different lenses and when this five or 7% enough, it really depends on the assumptions you’re looking at right now.

Preston Pysh (00:38:44):
So Hari using the benchmark that I was using before to … Looking at Stig and Toby’s pick, I’m going back and I’m looking at that date before we had the big market contraction. Looking at how it performed through the drop and then looking at it, how it performed through the rebound. And when I’m looking at this particular pick, which the ticker is BAM, the performance was not good and where the performance really struggled was during the credit contracting event. So when you look at how much it dropped compared to those other benchmarks, particularly the NASDAQ, this pick was down 51%.

Preston Pysh (00:39:23):
And then from that drop of 51%, it rebounded probably what would it be? 10 months. It rebounded 68%, which wasn’t bad, but if you’re comparing it to the NASDAQ, the rebound from the bottom matched the S&P 500, but during the liquidity event, it was significantly lower. And that’s why it had such a significant under-performance. So if we’re comparing through that entire cycle, through this, I’m calling it a manipulated cycle event over the past year. It underperformed the NASDAQ by 50% approximately. So that’s where I’m looking at this and just saying, because my expectations moving forward is what we’ve seen over the past year is what we’re going to continue to see moving forward for the next year.

Tobias Carlisle (00:40:08):
I kind of want to defend Hari here a little bit, because I don’t know that you can look at one drawdown and recovery and sort of conclude anything meaningful from that for a number of reasons. One is that you don’t really know what the characteristics of the companies were, you’d have to adjust for where were they trading before they went into it. And secondarily, we are in this market cycle that is still a large cap growth cycle that hasn’t ended yet. And so it’s always going to favor large cap growth. So we went through the dip, large cap growth, bounce, the hardest out of the bottom.

Tobias Carlisle (00:40:43):
There’s no guarantee that that’s what happens the next time around. And in fact, I think it’s probably not going to happen that way. I think it’s much more likely that we’re coming to the end of this cycle and that I don’t know if it’s the next drawdown or the one after that, but the relative return. So good old school investment manager, Rich Pacino had a note that came out earlier this week where Pasino said, “You can look at the …” He’s talking Russell 1000, which is the biggest 1000 names listed. And he’s looking at dividing that index into two, one half is value in one half is growth. The growth side of it is expected to grow earnings at 16% a year and trades at a P of 22. The value side is expected to grow earnings at 23% a year, which is six or 7% higher than the growth side. And it trades at a P of 15. So it’s going to grow faster and it’s trading at a discount. I know which side of that I want to own. So I think that there’s market is prime for a change.

Preston Pysh (00:41:43):
I definitely think it’s prime for a change. I don’t think we’re talking about a small-cap company. I think the top line on this company is $67 billion. So it is not a small company. This is a large-cap company. And if we wanted to extend out the manipulation cycle to let’s just make it 2012, the performance on this as 231%, and the NASDAQ is 478%. So my opinion is everything that’s happened since 2008, 2009 has been a totally manipulated cycle with quantitative easing inserting itself through the fixed income market. My expectation is that’s not only going to continue, but it’s going to aggressively continue. And for me, I’m just looking at it saying we’re just going to have more of the same because the central banks aren’t going to allow this thing to meltdown. So my expectation moving forward is that the NASDAQ will continue to outperform this pick.

Hari Ramachandra (00:42:28):
Really good insights. And that’s the reason I bring my picks here just to get through this shredding machine and see if it’s our wives. Going back to what Toby was saying. One of the things I was looking at is which are the stocks that will have a surprise to the upside. And I think Toby kind of referred to that when he was talking about the split and Russell 1000 and with Brooksfield also right now, I think people have written them off because of pandemic and if the vaccines work, and if people get back to normal life, then the surprise is always to the upside of them. Because that is where they’re hardest hit right now. Both from a sentiment and also from a bottom line and top line perspective. So that was one of my thinking when I was speaking this top or this mastermind.

Preston Pysh (00:43:22):
All right. So, I mean, you guys have heard a little bit of my thesis on where I think this is going and who knows whether that’s a valid thesis or not. I will say this. A lot of my thinking changed after reading a book called The Price of Tomorrow by Jeff Booth. I don’t know if you guys had a chance to read this book. So in this book, Jeff, pretty much outlines why the impacts of the incentive structure that inserts itself after so many decades of this inflationary monetary policy and how it effectively creates technology that’s moving so fast.

Preston Pysh (00:43:59):
And I would even argue moving so fast now that it’s starting to outstrip humanity’s ability to handle the speed at which the technology is growing. So that’s one of the reasons why I’ve kind of started looking at the NASDAQ is kind of my benchmark of performance. If you’re not outperforming that over a long period of time, call it five years, four years, whatever you want to use from an equity to equity basis, you’re comparing a stock or multiple stocks to a basket. I think this is the basket to beat. And if you’re beating it, then kudos to you.

Preston Pysh (00:44:31):
When I look at the value filter that we’ve got, the thing that is just so prevalent irregardless of market cap is finance. There are so many financial companies that are in the top valuation categories. And I have to ask myself, why is that the case? Why are so many people not applying the premium to financial equity companies, especially the big ones that they’re applying to everywhere else in the market. And my opinion is that I think most market participants can suspect, or they’re anticipating a change in the air as to how finance is going to be conducted in the future.

Preston Pysh (00:45:11):
Everyone knows my topic. It’s Bitcoin, that hasn’t changed. My expectation in the coming 12 months is that it’s going to go eight to nine or 10X from where we’re at right now. And we’re at, where are we at? $32,000 right now on Bitcoin. And this is another important thing. I hear from people all the time. They’re like Preston, I just can’t understand Bitcoin, or it’s just too much work for me to dig in and understand network effects, protocols, all that kind of stuff. And they’re saying but I want to have some type of exposure because when I listened to some of your conversations, I do agree that there is something that’s systematically going to change in the way that finance is conducted. But I’m not buying into the idea that it’s just Bitcoin, it might be these other things.

Preston Pysh (00:45:54):
So my pick today is for FinTech, financial technology. The ticker for this is Ark F, A-R-K-F. Last week on the show we had Cathy Wood. Cathy, I believe, I don’t know if you know this stat or not Toby, but I think I read somewhere recently that her funds are attracting more capital than any other ETFs in the entire space right now. And if you listen to Cathy or you listen to last week show and you listen to any of her other interviews, she is brilliant. She is somebody who I think has a real beat, especially when it comes to technology, the things that are up and rising in the space. I think she’s one of the smartest people out there in the ETF space.

Preston Pysh (00:46:40):
So this is her ticker for FinTech, anything that’s financial related. When you look at this performance over the baseline that I measured, everybody else too, it’s performed really well. It’s up 99% from pre-crash before the April, or you go back to the beginning or the end of February when the market was at its top before the big liquidity crunch. If you go from that top to where we are today, it’s done 99 to 100%. Whereas the NASDAQ has done 37%. So it’s nearly three times the out performance of the NASDAQ over that same period of manipulation cycle. That’s how I’m calling it.

Preston Pysh (00:47:23):
My expectation moving forward is that this is actually going to get aggressively better, mostly because when you look at a lot of these large cap banks, I think a lot of them are very late to the game. I think that the companies that are in this space call it the Square, the PayPals, there’s some over in China that are part of her basket. They’re going to do extraordinarily well in the coming year, especially with some of the expectations on where I think some of the other things are going to go particularly Bitcoin.

Preston Pysh (00:47:52):
When you look at how they’re adding or kind of their metric for companies that fit the basket, they’re looking at things that have transaction innovation. We just saw probably three weeks ago, the OCC came out and is now allowing big banks, small banks, it doesn’t matter, if they want to use blockchain technology in order to conduct clearing that’s now based on regulation approved and allowed which demonstrates to me that the regulation that many people kind of suspected was going to take place in this space, which was that they’re going to regulate everything and that it’s not going to materialize is actually the exact opposite. The other thing that they’re looking for in this basket for this Ark F is anything that’s dealing with blockchain technology.

Preston Pysh (00:48:36):
They’re looking for something that’s risk transformation. Maybe they’re using artificial intelligence in order to start assessing risk in a more analytical way than some person sitting in a desk saying this is triple B or double B or whatever. Frictionless funding platforms, customer-facing platforms and new intermediaries is the metrics that they’re using to drop things into this basket. I had mentioned Square, PayPal, Tencent is in here, Zillow Group. These are some of the top holdings, Alibaba’s in there. So I think that this is a great place for a person who is looking at the current dynamic that’s playing out in the banking industry and saying, “I think there’s a lot of change in the horizon. This is a massive industry, but I just can’t wrap my head around all the technical things that are happening.” I think this is a great place to park some of your money. And I suspect that it’s going to continue to aggressively outperform the NASDAQ.

Hari Ramachandra (00:49:37):
Preston, this is an interesting pick. I was looking at their holdings and I agree with you. I think Cathy has a great track record. She was one of the investors who found Tesla early on and held on to it through all the ups and downs. She has a lot of conviction and great insights. One interesting observation was Pinterest is number two with 5% almost of their holding. So if Pinterest is there, why Facebook isn’t there so that I wasn’t able to square that. Tencent, Facebook go together. So, but anyway, that’s a nitpick. She must have her own reasons.

Hari Ramachandra (00:50:12):
This is a complete tangential question. So I’m sorry for bringing it up, but while we are discussing about all this, are we also thinking about unrealized gains tax or taxing unrealized gains that Janet Yellen is talking about and how will it impact all of these? Whether it is Bitcoin or whether it’s this FinTech, these are all really high growth ETFs or vehicles?

Preston Pysh (00:50:38):
I had a person asked me the same question on Twitter. If I was Janet Yellen. And she has to know that the QE is inserting itself straight into asset prices. Because I mean, she’s the one buying the bonds and then the cash that’s being stuffed into these people’s hands is obviously trickling into other asset prices. So if you’re her and you’re doing all these things to manipulate the market to make asset prices go higher and it’s not trickling down into payments because you can clearly see that through the philosophy of money, it just keeps dropping. What would you try to do if you were her in order to handicap that growth rate that’s happening for the upper call it 5% of the population that their asset prices just keep going higher and higher? Well start taxing their unrealized gains as the only way that you could claw some of that back off the market and account for top line revenue for tax receipts.

Preston Pysh (00:51:34):
Now, do I think that this is going to go through, I suspect she can’t do that without intervention or votes from Congress. So I don’t know if that’s going to be something that can actually be performed. I know it gets into a really interesting discussion when you start talking about Bitcoin in particular and self custody. If you’ve got an E-Trade account and they want to exercise an unrealized gains tax, they can do it. But if you’ve got a self custody wallet that no one can possibly access, how are you going to implement an unrealized gains tax without people wanting to run to another country very quickly, especially if you’ve got some large holdings, it gets a little bit trickier.

Preston Pysh (00:52:16):
So I don’t know how they would possibly be able to do that from a technical standpoint, but as far as equities, unrealized gains on equities. Yeah I mean they could clawback. I think it’s more of a talking point than something that’s actually going to get executed anytime soon. And I think that they have a huge uphill battle with respect to lobbying. If they’re going to try to do something like that.

Tobias Carlisle (00:52:37):
I think that struggled to get that through because there are a lot of people out there who’ve got unrealized capital gain to … Until you realize that you’ve got no way of paying it, you’ve got to service that. It’s virtually a dead duck. It’s kind of interesting that Yellen’s gone from monetary so now she’s going to be on the fiscal side, working in the Biden administration and that’s her first proposal. So that’s going to be an interesting idea to see if she can get that through. The only comment that I would make, it’s going to sound like sour grapes because Cathy has done so well. And I’ve done so badly over the last 24 months.

Tobias Carlisle (00:53:08):
But the only thing I would point out is that her ETFs tend to be exactly the kind of thing that I was describing. They tend to have been beneficiaries of probably as Preston would describe it, this environment. I don’t know that I’d necessarily just tied to the fed, but they are large-cap and they are high growth. And so when you look at the ETF, if you have a look at the characteristics of the things that they’ve got in there, the average price-earnings is 54 times as at the time that we’re recording this.

Tobias Carlisle (00:53:34):
The historical earnings growth is not that impressive. It’s 6.46%. And I think that’s because a lot of these companies, while they do grow pretty quickly, if you’re a shareholder in. They may not such a beneficiary of that growth. I realized that the stock prices are going ahead, but in terms of what you own, you’re constantly diluted because there’s such a huge amount of share, but it’s compensation paid out and they just don’t tend to make a lot of money. So my main concern for Cathy and I’m hugely impressed by her. I think she’s a phenomenal intellect and I take my hat off to her with what she’s achieved in a very difficult marketplace.

Tobias Carlisle (00:54:09):
My concern for her is that she’s a little bit like Janus Funds. So you guys might recall Janus Funds were kind of like the arc of the first.com boom. And they were very successful buying these very high growth companies. And so they’ve raised a lot of capital, which they then reinvested into these high-growth companies. In many instances, they were sort of the driver of the stock price. The stock price went up a lot because they raised a lot of money. I think that Cathy has sort of got to that point now whereas you … I think Stig said more money now flows into the Ark ETF than flows into spy or it’s close to that. They’re one of the biggest ETFs around.

Tobias Carlisle (00:54:47):
So what that means is that when she gets those flows, she redeploys them into these companies and she’s the one pushing them up. If at any stage that reverses, there’s not going to be a lot of room to get through that door. And I think that that could go back very violently. So I just think it’s overvalued and it could come backwards. I don’t want it to sound like sour grapes, but I understand if everybody thinks that.

Preston Pysh (00:55:12):
So Toby, I like this point that you’re bringing up and it’s also tied into the Mike Green argument about the ETFs driving the valuations on so many of these companies that fit into these baskets. If I was going to push back and it’s almost like a counter to the counter, for me it implies that the next drop and the next liquidity event, where everybody runs to the fiat and runs to the dollars all at the same time, is going to be that much more aggressive and that much more of a decline per number of days than the one that proceeded it. Which is going to further cause central banks to step in and quadruple down on what they did last time. Because if they don’t, they’re going to realize that they are at such a systematic pitfall. If they do nothing, that it’s going to generate the Forex response.

Preston Pysh (00:56:08):
So as the system becomes more and more unstable, I think the reaction is going to be that much more profound as this continues on because we are at in my opinion, we are at an end game from a systematic level for 80 years of an inflationary monetary policy being exercised, not just in the US but globally. Because everyone was tied to the dollar through all this period of time. Then everyone adjusted their federal funds rate lower and lower and lower. And now we’re getting down to zero and you’re seeing these systematic issues arising in the market. And my opinion is that they’re going to continue. When it turns it’s going to be nasty. But I think you have to have some type of sound money that supplants the previous system before everyone starts to go back to measuring market cap based off of bottom line, instead of new users adopting a platform, which is pretty much how it’s done today, based on this incentive structure of inflationary, monetary policy, which I think Jeff Booth’s book outlines, probably the best out of anything I’ve read in the last probably five years. Hari, what do you got?

Hari Ramachandra (00:57:16):
I think both of you have good points, but a lot of follow-up on Toby’s point. I didn’t know about the Janus Funds during dot.com. So that’s an interesting historical perspective to have. But even in the last few years, we have seen this play out in the Valley. People who are in the Valley are glued into this. So they know it, I’m talking about various Silicon Valley is a SoftBank. They also had a very similar experience where they were raising so much funds. This was all in private equity though. So that’s why most public investors wouldn’t be aware of this. When they come into a round of funding series B or series C, they would just raise the value of those funds.

Hari Ramachandra (00:58:01):
And that was basically having an impact on those valuations. And then it kind of went on for a while, it didn’t. And we all know WeWork. That’s like a poster child of one of their investments. So I just wanted to bring that up.

Stig Brodersen (00:58:17):
I might tie with Toby here once again during this conversation then so raised, I think that’s what you said, Toby. A lot of great things to say about Cathy, how can you find smarter people than her? And just as I’m about to say that you know I’m going to say something negative right after. Let me try to go a long way around this because I might be biased. I might be one of those grumpy old men thinking being skeptical by nature also by being a value investor of all that pains that have really come with that. Perhaps just having kept up with the times. Now I’m looking at this same thing as Toby is saying about prompting up those same stocks, it’s big growth stocks. 53% of the picks are last cap stocks, lots of than $10 billion.

Stig Brodersen (00:58:58):
32% is allocated to mega stocks, more than $100 billion. If you look at the median market cap, it’s $58 billion and the weighted average market cap is $231 billion. So I’m looking at it and I’m saying, this is going to turn and sorry for being so negative. I’m thinking this is going to turn and one of the things that I’m a bit worried about where everything has been going on here is will it not be going blind in terms of like big numbers. I’m looking at it, I’m thinking, “Oh, that’s an expensive expense ratio of 0.75%.” Perhaps that’s not what I should be thinking. Perhaps I should be thinking, “Well, the NASDAQ last year did four, 5%. And last year I think like, yes, Cathy’s fund did almost 108%.”

Stig Brodersen (00:59:46):
Perhaps I shouldn’t even care about expenses because like all of these numbers, it just like, it’s just going great. This is just going to continue. And I think naturally I’m skeptical about this and I just want to put up some stats here that I looked at. It’s an index for unprofitable tech stocks. If you look at the index for unprofitable tech stocks, it just performed the NASDAQ 100 by 268% or the past three years. So we can talk about whether Cassius trusts or we can talk about his profit trash. It’s just thinking about it and saying, “This has to end one way or the other.”

Preston Pysh (01:00:21):
And I completely agree with what you guys are saying as far as the valuations on this are not what we typically talk about on the show. My concern is what are we seeing right now that suggests we’re about to have a change in policy. When I look at the landscape of the policy, that’s been executed since 2008, 2009, it’s like the toy economy broke and we keep taping the wheels back the toy economy and we keep pushing it forward. We’ve got plenty of tape left. The wheels are still intact. If we can just keep taping them back on there. And like everything that I look at that they’re doing from a policy standpoint suggests to me that they’re not even close to being done taping the wheels back on this thing.

Preston Pysh (01:01:08):
So, although I agree with you, there’s going to be a day when the transition comes. In my humble opinion, the thing that’s going to cause that to happen is there’s going to be some type of money that forces a sound money back into the economy. And then all of a sudden value investing. There’s nothing that’s going to beat it. But until that happens, we’ve learned through the last 13 years, 12 years, that risk is encouraged, risk is incentivized. And I just kind of suspect that that incentive structure is still in place. And there’s nothing that I can see on the horizon that’s going to change it anytime soon.

Stig Brodersen (01:01:50):
All right guys. So before we ending off this show, Hari, Toby, thank you so much for taking the time out of your schedule to join the mastermind group here today. Where can the audience learn more about you?

Tobias Carlisle (01:02:02):
I manage Acquirers Funds. We’ve got two funds Zig, which is a long, short, mid cap value fund and Deep which is a small and micro value fund. And I have a website acquirersmultiple.com where you can get free stock picks. And I have some books. Most recent one is Acquirers Multiple, and that’s available at Amazon and I’m on Twitter @greenbackd. It’s a funny spelling, G-R-E-E-N-B-A-C-K-D. Thanks, fellows, thanks for having me. This was really fun.

Preston Pysh (01:02:31):
Always fun Toby. Hari?

Hari Ramachandra (01:02:34):
It was a great conversation today. Thank you for having me back and you can reach me at Twitter. Harirama, H-A-R-I-R-A-M-A is my handle on my blog bibsbusiness.com and look forward to feedback and conversations.

Stig Brodersen (01:02:52):
Fantastic. And just a quick message to our listeners out there. If you like our mastermind episodes, make sure to subscribe to our show and your favorite podcast app. So you don’t miss out on future episodes like this. Preston will be back with a new episode on Wednesdays, and then Trey and I are typically hosting the episodes over the weekend. Next weekend, Trey is speaking with Sahil Bloom about mental models.

Outro (01:03:15):
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