Rob Mercuri 7:08

Hey, thanks for having me, guys! No, the only thing I would add is that on those trips back and forth from West Point, we were in a canary yellow Corvette that Preston acquired in college. So just to paint that picture for your, for your listeners about who’s running this investor’s podcast. That’s the guy.

Preston Pysh 7:24

Thank you, Rob. Now, I’m embarrassed. All right! So the…the first question, let’s move right past that. Rob, I briefly described our opinion on interest rates, but we’re, we’re interested to hear your perspective. Do you see them as a critical variable to the boom-bust cycle like I had described?

Rob Mercuri 7:43

Yeah, absolutely. And I think, I think one thing kind of where I would like to, to go with the discussion is really about that, that critical part that interest rates play in the boom-bust cycle, and to understand that I think what you have to think about is what’s driving those interest rates? And so in banking, what we’re relying on is the rates that the Fed sets for banks to lend to each other or which influence the rates that banks lend to each other, right? And so that’s considered the federal funds rate. And so for your listeners, that’s kind of the key rate that when you hear about, you know, whether the interest rates are rising or falling, is the Federal Reserve that kind of sets that policy. And for the banking industry, if you think about what we do at its core, we’re taking capital and deploying it out into the economy at the rate that the market sets, and that the Fed influences. The mom and pop of companies that want to invest and grow, and the way that we can do that is to–at the cost of capital, make loans for those businesses to grow. But that’s really the engine of the economy. And I think, when you think about interest rates and how they affect boom-bust cycle, that’s really at the core of it. Where the Fed plays in, and how everybody’s focused on where are the interest rates going because we want to try to predict where in that cycle are we. So one of the key predictors is what’s the cost of capital set by the Fed, so the banks can take that capital deploy it into the market for businesses to, to, to grow. And I think that’s kind of a key component that not a lot of, you know, investors think about or, or kind of your common person; the key role that banks play in that, in that exchange of value.

Preston Pysh 9:40

So Rob, I’m sorry, I stepped on you a few times there. I was trying to chime in on this one point. I think a lot of people don’t realize that banks can lend out more than they have sitting in their, in their account from, you know, everyday investors that come in and put money into the bank. So if I come to your bank, and I give you $10 to put into an account. You, depending on what reserve ratio the Fed gives you, let’s say, that the reserve ratio is 10 to 1. If I come in and I give you $10, that bank now has the ability to lend out a $100 instead of just the $10 that I put into the bank. And I think a lot of people don’t realize that, that you guys can lend out more than what you actually have from, from, you know, customers. Is that correct?

Rob Mercuri 10:29

Yeah, that’s exactly right. And that, that plays into the bank’s leverage ratio. It plays into something very critical on the balance sheet, which is your deposits to loans ratio. So internally in the bank and in risk management, we look at that because we don’t want to be over leveraged. We want to be leveraged at a rate that we’re comfortable with. But you’re exactly right. So we take, and that’s really, you know, part of how the economy grows–is based on leverage and how banks are willing to–based on the deposits they have and, and the rates that the Fed sets…manage their capital and the credit risk of the borrower, which is really the key component there, right? So, you know, we could be–if we, if we had perfect credit on the borrower side, meaning that we knew 100% that whoever we lent money to was going to repay us on time and at full value, you know? We, we could lever–leverage ourselves well beyond what we do today…but we know that’s not true, right? That the credit quality of those borrowers is not always 100%. And so we have to manage that risk and make those decisions based on, you know, the strength of the economy, the likelihood of the borrowers to repay based on their credit history, and how leverage we want to be. And so those are some of those important variables that we have to consider.

Preston Pysh 11:51

Yeah.

Stig Brodersen 11:52

And Rob, so as you can probably hear that Preston and I are pretty keen on interest rate, and leverage, and catalyst events as critical drivers for the boom-bust cycles. Do you have any, any other factors that you would like to, to add to that list?

Rob Mercuri 12:09

Yeah, that’s, you know, I would say that’s kind of the three big ones. I would say, I would point to interest rate, I mean, it’s the topic, you know, we’re discussing. It’s, it’s key, you hear about it every day, if you’re, if you’re reading the Wall Street Journal, or if you’re listening to an update on Bloomberg, you know? Interest rates play such a big role. And the reason for that is it’s that it influences the cost of capital, which which cascades to all the businesses who were, you know, borrowing money to, or raising money to deploy into the market to grow and to create jobs. You know, I think the other thing I would, I would point to is the ease of credit, right? So we remember after the the crash in 08, that credit constricted a little bit and, and folks were concerned about that because, you know, that speck of credit in order for the, for the economy to really grow and expand has to be turned on. If it isn’t, then things really start to break down because companies can’t get access to the capital they need to deploy, you know, they end up having to, to reduce workforce and change plans to grow in the future, you know, by lesser amounts and things like that. So I think that ease of credit, which now in this, you know, this economic time, I think we’re in a pretty good place. Although, you did hear of, of Federal Reserve Chairman, former Federal Reserve Chairman Ben Bernanke that he had a little trouble getting his mortgage approved, which is a true story, and it’s quite of unbelievable.

Stig Brodersen 13:43

Really?

Preston Pysh 13:43

I did hear that. Is that true?

Unknown Speaker 13:45

Yeah, it’s absolutely true. He gave it as an example, as he was speaking to some investors about, you know, the ease of credit. And, you know, he applied for, for, you know, to refinance his mortgage actually. And it’s actually funny that you even think of him as having a mortgage. You just kind of assume, you know, a guy in his position would be free and clear of debt. But…but he said it actually was very tough for him to get approved. And, and he had some issues with it. And he said, “Look, if I can’t get my refi approved, you know, there’s no hope for, for Joe, and, and, you know, Joe and Harry out there in, in America to get their loans approved either.” So he said, you know, “We have to be careful about how constricted that we make the credit in this country.” And so those fed policies do, do kind of influence that. So I would say the ease of credit is something. And then the other thing I would say is you gotta watch valuation and how we’re valuing companies in the market. And I think sometimes that can play into, you know, the boom-bust cycle as well. So if you look at the internet boom, you know, Preston, you mentioned coming at the turn of the decade that we were valuing internet company in a way that really didn’t make sense. So I think those, those are some of the canaries in the coal mines to look at–your interest rates, your ease of credit, and, and the valuation. How sound are those valuations?

Preston Pysh 15:12

Yep. Hey, that kind of reminds me of a book that I had read a couple years back. It was called the…The Holy Grail of Macroeconomics. And the book–we’ll have it up on the show notes if anyone’s interested in this book–but the book talked about the, the lagging economy and the lack of growth over in the Japan market. And what was the root cause of what was causing that, and what it was is…you know, this is really kind of a real generalization for the whole book, but basically, all these businesses had very high debt on their balance sheets. And because that debt was so high, the government as they were trying to subsidize this. Basically the government was taking all that debt indirectly; was taking all that debt off of the balance sheets, and that’s what had caused the market to continue to drag at a flat rate for decades because the companies were so highly leveraged prior to the start of that. But in–a very interesting read that kind of relates to some of the stuff that you were talking about there in your last point. So…we understand that the Fed has kept interest rates this low because of the housing market. And I, I think that they didn’t want to bring the, the interest rates up higher because there were such a shock to the system back in 08. But here’s my concern is they’ve kept interest rates for so long now. I mean since 2008 till 2014. To borrow money, it’s been so cheap, and this has just continued to persist for so long. What’s the impact of that on–into the future as we look to the next, you know, five years? You know, my opinion is that the market’s going to be extremely sensitive to any type of interest rate increase, and that it could potentially be the catalyst that would would make it collapse really fast as soon as you start bringing these interest rates. But I’m real curious to hear what your opinion is on that. You feel that it’s going to be very sensitive whenever they start to bring it in because everyone’s been so accustomed to such cheap money for so long?

Rob Mercuri 17:10

Yeah. I, I absolutely agree, Preston! I think it’s something that we have to be very cautious of as an economy. And I think, you know, it’s hard sometimes. You lose the forest for the trees; sometimes as you’re investing, you know, you want to just keep those rates low, so that the companies you’d like to invest in, you know, can, can have access and retain that access to easy credit and easy money to go do the investing that they want to do. If you think about, you know, Apple has you know, $150 billion cash on its books. What a great place for a company to be in terms of a capital position and a balance sheet. You’ve got that cash there on your books that you can access at any time, and there’s no bank that they have to pay interest to…to do their their next project, right?

Preston Pysh 18:00

Yeah.

Rob Mercuri 18:00

For their cost of capital is very low. That’s a good thing. They’ve earned that. What’s artificial is when the Fed subsidizes the economy effectively by keeping rates low at a near zero rate, which they’ve done for years and years, which artificially puts that access to capital on every company in America’s balance sheet. And so, the question really is: Have they earned that? Have we earned that as an economy? And I think, you know, you could talk all day about the impact to it and how we’re going to have to come back to reality at some point. And that’s that come down that I think you’re talking about; that you’re worried about that…how long can we keep this going? I think the real thing we’ll have to watch is inflation, right? And so as you start to take for granted that easy access to capital, the effect of that I think in the long run will be that inflation will start to take off. And so I think we have to watch as inflation starts to tick up, that those rates, we should really be prepared for those rates to also tick back up; to kind of slow that artificial access to easy money.

Preston Pysh 19:13

It’s almost…Rob, it’s almost like a–an addiction for a small company or even a large company. That if they have this exposure to cheap interest rates for an extended period of time, they grow reliant on it. And they think that it’s just a given. And so, they start to operate in a manner that their business model is dependent on low interest rates. So as soon as that comes into play, that the interest rates are rising, and they can’t get their money anymore. They’re not in the same position as Apple where they’re sitting on that boatload of cash on their balance sheet, and they just can’t go out and buy it those interest rates and they’re too highly leveraged, and then you start to see them start dropping 1, 2, 3 and then it just kind of compounds, and then that’s your catalyst. So…

Rob Mercuri 19:53

That’s right. And I think if I could add that the corollary from the, from the crisis was that Secretary Paulson and, and Secretary Geithner, our Fed Bank President Geithner, had to consider was the moral hazard of guaranteeing the solvency of every financial institution in the country, which again would be…

Could you…oh sorry, Rob. Could you please, could you please…explain to us the moral hazard of something. Why is that important?

Yeah, absolutely. So the moral hazard…basically was a concept that, that during the crisis became kind of the term to think about in terms of could the government guarantee companies’ existence and solvency, when those companies have made mistakes in how they’ve, you know, behaved in terms of making financial decisions and over leveraging themselves, and not, you know, holding reservoirs of cash for, for a rainy day. Which in 2008, it, it was, it was the rainy day of all rainy days. But, but in doing that; by guaranteeing their solvency, they’ve created this condition in the market where companies no longer have to prepare for themselves for that rainy day. And that’s really the moral hazard. So it changes fundamentally how companies would operate. If they know that Uncle Sam’s gonna bail them out, whenever they make, you know, whenever they, you know, drive into a pothole, then they’ll make different decisions with their capital. They say, “Hey, we’re, we’re okay to deploy ourselves and highly leverage ourselves,” you know? Deploy at, at a fast pace…with no concern of their own, you know, solvency and, and emergency fund or, you know, capital reservoir because Uncle Sam’s going to backstop that. That’s the moral hazard that, that Secretary Paulson wanted to avoid and did avoid. And I use that as a corollary because I think the easy money policies of the Fed can be seen as something similar. And companies will start to depend on that easy money, and, and change their behavior in a way that’s not fundamentally sound.

Preston Pysh 22:05

So Rob, I, I got a question. This isn’t something that we had prepared ahead of time. But the question that I got is whenever I’m looking at the market as an investor, okay? It’s all about opportunity cost and looking at time now and making decisions, okay? So whenever I do that, and I look at equities, and you look at where the market is as far as like the–just general price-to-earnings ratio that you would have fo, for an index, okay? It’s given you maybe a 5% return or somewhere in that ballpark, okay? Whenever I compare that to what I would get on like a 10-year treasury or something like that, it’s below 3%. So my opportunity cost from just from a purely index standpoint, I’m, I’m still in equities at this point because the return in the fixed-income-zero-risk type area is, you know, lower and, and in my opinion, worth the, the trade off there. But, as we, as we talk about the risk associated with how fast this market could potentially turn as soon as interest rates start coming up, is something…interesting that I would maybe be interested in knowing is looking at the market from an index standpoint; that debt-to-equity ratio, okay? How has that changed over time as we talk about these businesses that would become more and more reliant on debt? Or is that something that you’d be considering as, as a risk manager at a bank? Would you be looking at the index of the, the, the debt-to-equity of the entire, you know, dow or S&P 500? Is that something that you would consider and see how that’s moving more to a leverage position over time?

Rob Mercuri 23:41

Yeah, I think that’s a great question, Preston. And probably something that a lot of investors miss. But I, but I think that, that leverage ratio really, which is your, your, your debt ratio to your, to your income is, is something that, that investors should focus on. Because I think it, it gives you a good view of: Have you taken on as a company or an economy–to your point, looking at the whole market–have you taken on in terms of debt more than you can handle from an income perspective?

Preston Pysh 24:12

Yeah.

Rob Mercuri 24:12

I think when you, when you start to do that, even if you think of your own personal balance sheet, you know? If you’ve, if you’ve, you know, you got your mortgage payments, which is part of your leverage on your personal balance sheet. You’ve got your car payment. And if, if you start to take out your, your home equity lines of credit, you know? And you start to, you know, put a student loan on there, and finance different things, your leverage increases. And if your income doesn’t increase with that, or if you don’t have the room within your income to add that leverage, you’re in a less flexible position to maneuver if things go poorly. For example, if, if you have to take a pay cut, or if somebody gets sick, or if you have a large capital expense, you know? Your roof caves in. You know, so just, just taking that own personal finance example and translating it to the market, which is what you did and explained there well, Preston. That it applies. It absolutely applies. So I think, yeah, I think looking at leverage is one of those basic economic fundamentals that investors can miss all too often.

Rob, I actually like to ask you a question about the stock market because clearly the interest rate in the stock market are interrelated. So the thing that Preston talked about before, he would be looking at P/E ratio is really high, say above 20. You might think that the stock market is overpriced, or if it’s very low, say below 10. It might be undervalued. But do you think that we can use another parameter like the interest rate to, to predict whether or not the, the stock market is going to crash or, or the opposite?

I think it, it definitely you know, talking about canary in, in the coal mine, can be something to watch. I–in, in isolation, though, I would hesitate to say, you know, based on your interest rates, you should be able to predict the directionality of the stock market in general. You know, I think there are some finer points and, and more variables that are often involved. You know, it’s one driver, I would say, but I would hesitate to rely too heavily on it. Now, we talked a lot about the economic fundamentals that the interest rate is a part of, and so it’s hard to get away from that. It’s always going to be there. But, but I think in terms of corporate investing; looking at these companies; making decisions; valuing them as you guys, you know, talk in detail about the Buffett methodology and things. That interest rate is one part of that equation, but you’re gonna want to look at the, the health of the individual company and whole as well.

Preston Pysh 26:57

And Rob, just to kind of piggyback off of that question. So for me personally, I’m always looking at the opportunity cost because that’s kind of what’s giving me the driver of where do I go next; where–or what do I transition into assuming that the capital gains and all that stuff are, are considered as well. So you know, is, is the market–as equities climb higher and like Stig said they’re over a P/E of 20. And you, you know kind of where that’s putting you at a 5% or lower, you know, level in, say your opportunity cost of moving into something that’s in the fixed income realm, say inflation does happen, and it’s much higher and you can get a fixed income investment at 7%. You’re just naturally transitioning your capital into an investment that’s going to protect you in the long term. Do you agree with that approach?

Rob Mercuri 27:46

I do. And I, I like how you, how you kind of phrase that, Preston. I think–because that’s the key to Stig’s question, I think. It’s that interest rates are a driver, but to use them for investing, it’s got to be relative. And it’s that opportunity cost concept that you talk about that is the key. So if you look at, you know, 10-year treasuries, you mentioned, Preston, they’re under three, you know? It’s mid twos for that 10-year treasury, which is very closely tied to interest rates. That’s pretty much your, your most, you know, your go-to conservative investment that, you know, you’re going to put your money there. You’re always gonna get that return. So compared, compared to what you can do in the market, where there’s, there’s volatility, you know? There’s so many other factors, the long term stability of the companies you’re investing in, you know? That–those catalyst events that you talked about, which aren’t gonna impact your 10-year treasury, but…will impact your, your your stock choices, and so it’s that opportunity cost. The other thing that, that I think to draw out would be–so if, if you’re confident about the solvency of your, of, of the companies you’re investing in, and if they pay a good dividend, then there’s always an opportunity cost of investing in treasuries and foregoing those dividend yields, right? As an example, if you, if you take a, you know, a nice, moderate company; stable Fortune 500; pays a good dividend, you’re probably looking at a year over year yield of, you know, above two-and-a-half percent, right in that ballpark. So in today’s interest rate environment that beats the 10-year treasury.

Preston Pysh 29:30

Yeah. Oh, exactly!

Rob Mercuri 29:31

And that’s guaranteed money as long as the company is there.

So Rob, Preston and I find that successful investors are typically shaped by a single or a few powerful investment tips that they have received. What’s the best investment tip that you have received?

Yeah, I would say, you know, I love, I love good investing advice. I think some of the, the fundamental stuff is what rings true for me. So…you know, my, my wife’s grandfather always used to say, “It’s not what you make. It’s what you save.” And you see examples of that every day. You look at high-earning people, who are…living, you know, a cash flow lifestyle. They’re spending every chance they get on big-ticket items. You know, they might, they may as well have a, a smaller salary and, and not be spending it. I think, and, you know, from an investing standpoint, you’ve got to have that capital to be able to, to use in the market. So I think it’s, it’s really important to be able to pay yourself first. Take a portion of what you earn, and make sure that you’re investing that money, you know, the best you know how. You don’t have to be a…a Preston or a Stig type investor or, you know, very well-versed in complex strategies. You just have to do some basics, and, and do a little homework. And, and, and, again, make sure you’re not living beyond your means. So I think that’s what I would say, “It’s not what you make. It’s what you save.”

Stig Brodersen 30:59

Yeah.

Preston Pysh 30:59

I absolutely love that advice because there’s so many people out there, and I’ll tell you what we get–we ask this question to everybody when they come on the show, and everyone gives us a fantastic answer, but Rob, that’s so spot on. Because when you look at the, the equation to wealth, financial wealth, it’s two variables. It’s what you make. It’s what comes in, and it’s what goes out. And so often people only focus on that very first variable, and they totally forget about the second variable like it doesn’t even exist. And they, and even when they do increase that first variable, which is their income, and let’s say they go from making $50,000 to $100,000 a year, and they used to spend $45,000, and now they spend $95,000. Their relative gain is literally nothing because they’ve just filled all that extra income into just more expenses that aren’t expenses that are assets that they purchased. It’s just more liabilities. So fantastic recommendation, Rob. I absolutely love that.

Rob Mercuri 32:00

Yeah, and I completely agree, Rob. Because as you’re saying, you don’t have to be an expert to make money in the stock market. If you can set a decent amount of…of money aside every month, and just invest in the market, you will do fairly well before you retired. For sure.

Preston Pysh 32:15

Hey, I want to ask this next one. So Stig and I are really big on books. In fact, our next episode is going to be a book summary that we have on Peter Teal, who’s the founder of PayPal, a major investor in Facebook. He wrote a new book called, Zero to One, and Stig and I had just finished reading that book. So our next podcast is going to be basically summarizing that book and going through the key points that we learned from it. So we’re really big on reading and trying to find the best books from the most successful people out there. And so Rob, what is one of the top books that you would recommend that you’ve read?

Rob Mercuri 32:50

Yeah, thanks for asking, guys! And, and I enjoy, you know, looking at different folks’ reading lists as well. I would, I would go to, to books by Jim Collins. So this may be a little bit off of the investor path. But, but, but from what I’ve learned about investing, you’ve got to understand the fundamentals of companies. What makes some companies explode, and grow, and succeed, and others wither on the vine? And they have similar business models, right? So what, what Jim Collins has done in a couple different books, is he’s compared, and he’s used data-driven analysis to do these comparisons, but he’s compared large companies over time. And he’s explored the concept of what makes certain companies do well, and certain companies fade away, and other companies do extremely well. And as an investor, that’s what I’m really looking for is value creation. And I want companies to take my money, my capital, and do well with it. And so he’s got a couple books I’d recommend. The first one he wrote was called Built to Last. And in it, it compared companies, and two good examples are Westinghouse and GE. And he compared them over time to similar large industrial companies. And he compared them across a number of different factors. And he answered the question, why did General Electric do amazingly well and, and return multiples of itself and grow multiple times in its value over its lifespan? Versus Westinghouse, which eventually, you know, was, was divided up and sold off? And, you know, didn’t return near the value that GE did to its shareholders. What are the fundamental reasons that, that GE was built to last, you know? Created by Thomas Edison, you know, over a hundred years ago versus Westinghouse, which was also had similar roots; very innovative founder, but didn’t make it. So what are those key fundamentals? And then, he wrote another one, Good to Great, which, which looked at different companies. Wells Fargo was one where they were a super regional bank that exploded to become a national powerhouse bank. So what, what, what was it? What were the factors that took that company from being a good company in a local market and regional market and, and made them a great company, and returned so much to their shareholders? And then, he’s got a new one called Great by Choice, which also looks at some variables within companies. So it’s–I like his perspective, which goes under the hood of these companies, and digs around, and tries to find data-driven reasons why these companies have done well.

Preston Pysh 35:41

Yeah. And, hey, just so the audience knows, Stig and I plan on doing a summary and an episode on Good to Great ’cause that’s just–I mean, that book is really a highly successful book; has some fantastic information in it. And Rob’s guidance is really hitting at the heart of what, what it is that Stig and I are trying to convey to our audience which is: Look at the business. Okay? Don’t, don’t–I hate using the word “stock.” I like to use the word “business.” What businesses are you buying? And Rob’s recommendations there are exactly what we want people doing is. Understand the business. Understand the fundamentals of the business. Why has it become a great business? And why should you own it? So I think that those book recommendations are fantastic. We’ll have those on the show notes for people if you just want to maybe you’re listening to this in the car, and you want to come back and, you know, find out if you didn’t remember the names of that. So what we’re going to do right now is every week, we get questions that come in, and we selected the, the question for this week. So we’re going to go ahead, and go through that right now. Okay, so here’s the question from Joe Rizzo. And we really appreciate Joe for recording this question on our website, which you can go to asktheinvestors.com and record your question. And if your question gets played on the air, we’ll send you a free signed copy of our book, the Warren Buffett Accounting Book. So here’s Joe’s question.

Joe Rizzo 37:01

Hello, Preston and Stig! This is Joe Rizzo, 2013 graduate from Naval Academy. Just starting out in my professional career; trying to save money and invest like Warren Buffett. So my first question would be, if a company has a high P/E, you know, maybe 40 to 60 range, but it also has tremendous DPS growth. So, so, you know, maybe 30 to 30 to 40% EPS growth per year, will this still be a…investment that Buffett was, would be interested in? Or would the high P/E automatically roll out the company even though the growth is so high? Thanks for your show. It’s really, really interesting and great learning.

Preston Pysh 37:45

So Joe, that’s a fantastic question. This is a question that Stig and I actually get quite a bit. And what we’d like to say is that for, for the way that Warren Buffett invests and the approach that we also implement, finding the company that’s going to be the next Microsoft or the next Apple is sometimes a difficult task to do. And whenever you’re talking with a company that has a P/E ratio that’s extremely high like that, the company’s earnings have to continue to grow and compound year after year after year in order to account for that high price and that high premium that you’re paying to own the stock. So what I would suggest if you’re really interested in investing in growth picks, Benjamin Graham in the Intelligent Investor had an equation. Now a lot of people don’t realize this ’cause a lot of people think that Benjamin Graham have this intrinsic value calculation that talked about value picks. But the equation in his book is actually for growth picks, and a lot of people don’t realize that. So what Stig and I are going to do is in the show notes, we’re going to put this equation that Benjamin Graham has from the Intelligent Investor, and we’ll put it into the show notes for this Episode Six. So if anyone’s interested in seeing that equation and applying this equation to a growth pick, we’ll have it there for you. With that said, I would say that your probability of being able to pick a high growth company is not very good in the long term, okay? And if it’s something that you’re looking at for a short-term gain or something like that, that might be useful. I don’t have very much luck in applying a growth strategy and picking companies that will continue to progress at a rapid pace. So I don’t really do that. But that doesn’t mean that there’s people out there that can’t do it. But what I would recommend is use that equation because what that equation is going to do is it’s going to help put you in the ballpark of finding a company that you’re not paying too high of a premium for based on that company’s growth.

Rob Mercuri 39:36

So Joe, I agree, this is a really good question. I would like to, like to start to discuss the P/E ratio you were talking about. So for some of our listeners that might think, “Well, is the P/E ratio of 40 or 60, is that high?” So for instance, the P/R ratio of 40 that would mean that you need to pay $40 for $1 of that company’s profit and just to give you an example, for instance, a company like Facebook that had a P/E of 85 at the moment. So when we’re talking about growth picks, it’s not necessarily small companies because it can also be big companies. But we’re talking about a very high price to earnings. Again, that means that you’re paying a very high price for money that you’re not certain enough will return to you as a shareholder. The thing I would like to, to discuss is that why we like growth, the more the better. There’s really no guarantee that this growth will continue. And this brings another problem because this company is not stable. As you might know, Warren Buffett does not like to invest in unstable companies, simply because it’s very hard to value unstable companies. If you don’t know how much a company is going to make in a year or three years, five years from now, it’s really hard to estimate what the, what the value is of the company. And if you don’t know what the value of the company is, it’s very hard to…to, to buy stock.

Preston Pysh 41:01

So I’m going to conclude real fast with a simple quote that Benjamin Graham, which was Warren Buffett’s professor had said, and that’s the difference between investing and speculating. And whenever you’re looking at the difference between those two, speculating is whenever you’re reliant, it has to happen that in the future, your earnings are going to get better than they already are, okay? But investing is whenever the earnings could stay exactly where they’re at right now and just continue to persist. That’s the difference between investing and speculation, okay? And whenever you’re looking at a high P/E company, those earnings are going to have to continue to get better and better and better in order to justify the price that you’re paying for it, so it becomes very speculative, which is high risk. So we’ll conclude by answering your question with that. Fantastic question. And we really appreciate that, and we hope to have more in the future. So Rob, did you have anything that you wanted to add or throw out there on the question?

Rob Mercuri 41:58

No, I would just say thanks for having me guys. Love the show! Big fan. Would love to come back!

Preston Pysh 42:03

Well, you’re definitely welcome to come back anytime, Rob. And as things continue to progress in the market, we’ll probably bring you back in to talk about this specific area ’cause this is something that we’re very interested in and would like to continue to track. So…

Rob Mercuri 42:16

Really, it will be great.

Preston Pysh 42:17

Yeah, really appreciate it! It was really fun. Great catching up with you ’cause we haven’t talked in a few years. And we really appreciate everyone out there. If you guys are enjoying the show, please go to iTunes. Leave us a review. Send your questions to us, and we’ll be sure to answer those on the next show. So, see you guys next week!

Extro 42:34

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