Preston Pysh  10:51

I think that that’s a good point. I think that people got to realize we’re not necessarily trying to predict what’s going to happen next. I’m talking about more of I’m just not a buyer right now, I’m just waiting. I’m one that I will buy whenever I feel like the trend has kind of started going in the opposite direction. And if I show up to the party as oil hit $28, I’m not a buyer until it’s $38, because I think it’s kind of fixed itself. That’s just how I playthings. I don’t play them while they’re going down because I feel like the time that it takes for the bottom and then come back up, I could be doing other things with my capital for things that I feel like I do understand and that are moving in a certain direction. I don’t know how to describe it. But for me, I’m going to continue to be patient and see how things continue to play out.

I think that the strong dollar also plays an impact. So you got the supply and demand piece with oil. But I also think that you also have to look at oil and any other commodity as almost like a currency. And that’s how I kind of see it. As long as there’s a run on dollars and every other fiat currency in the world right now. And as dollars are contracting, I look at commodities as being much more fixed, as far as the amount of those in the system. And so as fiat currencies contract and those become smaller in number, that means the price of commodities has to go down with that. To me, that’s how I make sense of it.

So as credit would expand again, well, in the price of all commodities and other any other financial asset has to go up at that point. So that’s why I’m a little hesitant just waiting and watching and seeing what’s going to play out with all this.

12:26

So Stig, your comment made me think about something else to where you said that the ECB is still loosening. So the thing that I think about whenever I see these other central banks, Bank of Japan, so they were doing this aggressive QE strategy over there, which is crazy. And then their stock market started the contract, which we said in the summer, we thought that the Japanese market was going to start contracting. They’re now in bearish territory, which as I said, we’re not making predictions, but that one is pretty accurate, where the timing that we said in the summer time frame, where we said we thought Japan was going to be going down, and it has.

But the thing that I’m thinking about in Japan, they’re saying, “Well, we’re not going to do much more QE to spark this thing. We’re just going to kind of let it hang and we’re not going to do much more at this point.”

Well, over in Europe, you’ve got the ECB saying, “Yeah, we’re going to loosen. We’re going to make this more accommodative.” I think that’s dumb. I think Mario Draghi, I think he is making some poor decisions over in Europe.

13:22

And here’s why: it’s almost like he’s on… The best way I can equate this is you’ve got all these fiat currencies in the world contracting right now. Everyone’s running to these things, and there’s not enough of them. And so you’ve got to run on dollars, euros, whatever. It’s contracting globally. I’m speaking from global terms. It’s almost like a current. If you go to a waterpark or like an amusement park, and you got a lazy river. Imagine sitting on that lazy river in a raft and it’s just kind of taking you around. Okay? And that’s what it’s like whenever credit is expanding. You’re just kind of going along for the ride and you know what? If you can kick and swim with that current, you can go even faster. And that’d be like a great business that’s kicking and swimming with the current. They’re moving out and they’re making a lot of money. And they’re going.

14:09

Now, imagine that you’re on this current on this lazy river, and you’re just kind of swimming and you’re moving really fast, and all of a sudden, the currents start slowing. It comes to complete stop, which would have been about the summer of 2015. And it starts going the other way, and it starts reversing, and you’re that company and you’re just trying to swim into this current. It’s getting harder and harder. And as the current picks up, its pace. You, as a company, you’re getting tired of swimming into it, and eventually you just kind of get taken with it.

14:36

Now, when I look at the ECB right now, you’ve got the US that’s tightening, which is making that current go the other way. You got Japan saying, “We’re not going to be adding any more to this,” which is just allowing that current to go even faster in the opposite direction. But you still have the ECB saying, “We’re going to ease and we’re going to add more money into the system. We’re going to make it more accommodative.” He’s adding money into the system and he’s trying to hold it up and everyone else is trying to tear it down and all those dollars that he’s adding into the system, he just needs to take his hands off and kind of let this thing go for what it is. And then whenever it kind of bottoms out in the US is adding money to the system, that’s when you add it back in and you make it more accommodative for the people in Europe and those are like good dollars being spent that he’s adding into the system.

Stig Brodersen  15:20

Yeah, I think that Draghi is trying to smoothen the transition. But I completely agree with you, Preston. He’s probably just making it worse because when it does flip, it is just going to be that much harder.

Preston Pysh  15:32

I think it already has flipped. I mean, that’s my opinion. I know there are tons of people out there that will totally disagree with that but I think it’s already flipped and I think it flipped in the summer of 2015. You know, I was saying that it was going to flip a few months before that in February. But looking at this chart, this chart is so informative. I think that this chart says a lot and if it is true and it is moving in that direction and we are going to experience a big recession this year, and he is making a big mistake, in my opinion.

But you know, time will tell. He’s probably looking at things from vantage points that are far beyond my comprehension. I don’t know things from his vantage point.

16:10

So anyway, let’s go ahead and do some of these questions. This should be a lot of fun. I apologize, we haven’t done some questions in the past, we’ve just been kind of in a time constraint with our recording. So we’re going to consolidate all these questions. We want to play them for you right now. So the first one that we have in the queue is from Charlie McDonald, and I’m going to go ahead and play Charlie’s question for you.

Charlie McDonald  16:29

Hi, Preston and Stig. It’s Charlie from Sydney, Australia. First of all, a fantastic show. I’m loving the book reviews, interviews, insights, and the resources and tools you provide. They are invaluable. I have a question about episode 68, the current market conditions. I understand your point that Soros, Druckenmiller, and Dalio might be more insightful than Buffett in current market conditions. But given you value investors, wouldn’t you still be investing long term and on companies and their long term prospects rather than looking from a shorter-term market perspective? Just interested in how you balance these in investing. Thanks again, guys. And please keep it up,

Preston Pysh  17:02

Charlie, awesome question. And you know? We have a lot of people on the show that make a point to tell us that you can’t change your strategy and especially value investors, quant investors, they say, “You can’t just do something that works for four years, and then give up on it when the going gets tough.” And I totally agree with that. But I think that you also have to have the context. Everyone has their own little unique way of investing. I know I have.

I follow Warren Buffett very closely. I use tons of the methods that he uses for valuing companies, figuring out what they’re worth, and managing my risk appropriately. But there are other people out there that have had an impact on me, as far as the way I see how I should be investing. One of those people and I talk about him all the time, is Ray Dalio. There are other ones out there: Stanley Druckenmiller, George Soros. I’ve read some of his books.

So I guess my strategy has evolved through the years, and it is what it is. Whenever I started moving into a cash position back in February and into the summer and took a substantial cash position, there were things that I held. But there were things that I had large capital gains so that I was going to be taxed to the nose on. And so in a way, I felt like I was kind of investing, call it like Warren Buffett or a value investor. But at the same time, I was kind of investing like some of these other people as well.

18:33

So I would say that my strategy personally is more of a hybrid strategy where I don’t even necessarily know that would be the best way to describe it. I think that whenever you’re in a deep dark credit contraction, which is where I would expect us to be at the end of 2016, I will turn into this hardcore value investor.

But whenever you’re kind of at a top and you’re getting higher market prices, let’s just say domestically in the US, I think I turn more into like this macro investor where I’m just trying to minimize my downside risk. And if there’s a lot of capital gains, I’ll still hold on to the pick. But if there are not that much capital gains to be paid out, I will pretty much offload a lot of my equity picks and just move into more of a cash position because I understand, and I think this is something that a lot of people would have to have an appreciation for, and that’s the power of liquidity in times of a crisis. I think a lot of people do not understand that whatsoever. And it’s such an important idea, in my opinion, it’s an important idea to understand the power of liquidity in the time of a crisis. So, I guess, kind of my investing approach, it has kind of evolved. I used to be just a straight hardcore value investor, but it’s kind of evolved through the years. But I’m really curious to hear what Stig has to say on this one.

Stig Brodersen  19:48

Well, I don’t think I’ve evolved. That would be my short answer. No. So I’m definitely a 100% value investor. I’m 100% into Warren Buffett, and I’m happy, Charlie, that you asked this question because I listened to Episode 68 the other day and I kind of felt like I wasn’t clear enough what my strategy was. So, yes, we have been discussing Druckenmiller, Soros, and Dalio, but my approach hasn’t changed. I think it’s extremely interesting to study and I started out because I love economics and love finance. But I don’t plan to change my strategy.

My strategy as a value investor is to buy companies when I think the value is as good compared to the price. And that hasn’t changed at all. Like, Preston, back in February last year, we were looking at dow and I think back then it was trading above 18,000. And we looked at each other and we talked about, “Hey, perhaps we should start liquidating our stocks and perhaps hold cash to something else.”

So I thought a lot about that and I sold all the stocks I had and I bought a few stocks since, and that’s on oil, primarily. I also bought something in Berkshire. But I think that was not so much a stock play. That was a play and the primary driver for the profits for these companies, that’s the oil price. And I felt like oil, say trading at $40, I felt that was too low. Definitely below the long term equilibrium. Since I don’t know what will happen the next 6, 12, 18 months but not… If I think that the oil price is low if I think that the oil stocks that are underpriced, I’ll just go ahead and buy those stocks. I don’t know, then perhaps that would drop to 29 where they are today, but since I don’t know that, I don’t mind buying wins on the way down.

And I think I wouldn’t be surprised if I lost something in my portfolio here in 2016. So I guess I follow a different approach than Preston. Like I think I’m short of 30% in stocks. And I think that if I would say if I lose like 10% of that, that would be 3%, right? That wouldn’t be good. But I kind of feel like I’m having a good year so far, even though it might sound weird because that’s just the strategy that I use. And, like, in my opinion, I would find it hard to change my strategy because it’s right now that I think I’m making money as a value investor.

Preston Pysh  22:22

All right, Charlie. So that’s all we have for your question. What we’re going to do now is we’re going to move on to Matt’s question and Matt here, let’s pull up your question here.

Matt  22:31

Hi, Preston and Stig. My name is Matt McDevitt, and I’m asking my question out of Waterloo, Canada. As a new self-directed investor, I would like to share my deep appreciation for your podcast and sharing your knowledge with investors like myself. It has been a huge help.

For my question, I want to start by saying that the other day, my parents asked me to attend the meeting they had with their financial advisor who works for a management firm because they know nothing about investing and wanted my help understanding what they were getting themselves into during then. This financial advisor picked out seven individual stocks for my parents to invest in. When I asked her how she made her choices, she looked at whether the average analyst rating recommended the stock as a strong buy, what their price target was, and whether she was buying the stock near its 52-week low, thus giving it a high potential increase in the share price. Her reasoning was that the stocks are poised for recovery and that her firm and the market analysts believe that the recovery will occur in the next 12 months. When I asked about high PE ratios, short rates, and other valuation criteria, I felt were offered too high, she could not offer a good defense but insisted analysts knew what they were doing. My question is, do you guys look at analysts’ recommendations and targets and read their perspectives? And if so, how do these factors influence your investing decisions, since it seems to be a major factor that besides how financial advisors choose their clients stocks?

Preston Pysh  23:52

Thank you, Matt. So I wish I could have been a fly on the wall. That’s all I can say. I wish I could have been there as you were asking these questions because I know you’re asking the hard questions and nobody goes in there and ask. So bravo for your performance. I already know it was fantastic. I just wish I could have been there.

So to answer your question about the analysts, so the answer is no, I don’t pay attention to very many analysts, or any analysts really, but I do pay attention to all-star investors. So Jim Rogers is a perfect example. I read an article on Jim Rogers the other week, you know, his net worth I want to say is like $200 million. In fact, Jim said that he was going to come on the show, we sent him an email he said he’s going to come on the show. I’m trying to continue working that out, but it’s kind of gotten lost in my inbox. But anyway, so I pay attention to people like that. Ray Dalio, Warren Buffett, all the people that we talk about on the show, what are they buying? And then they kind of give me some ideas of… I think through why are they buying that or why are they selling that and then I’ll dig and figure out for my own reasons, so that I can have conviction behind the purchase or the sale of whatever it is that I’m looking at, I do my own analysis. And that’s why I think it’s so important for people to do their own analysis is because of conviction. And we’ve been talking about that a little bit on the show recently.

But if you don’t have any conviction behind your pick, and you don’t know why you’re doing the pick, you’re not going to be able to stay with it, if it starts moving against you, and you definitely won’t be able to add to the position if it starts moving against you. And so that’s why I think it’s important for people to do their own analysis and to understand things on their own.

25:30

Now, as far as your meeting with your advisor, I think that her or him, I can’t remember I think you said it was a female, saying that they look at a 52 week low. I think that that is a great strategy. In fact, I know Mohnish Pabrai talks about looking at 52-week lows, whenever he’s trying to get ideas for things. I would take that a step further, I would tell you that 52-week lows are a good thing, but whenever you can look at a 52 week low in a commodity.

Let’s just take oil, a perfect example. And if you’re implementing this strategy because you’re a value investor, oil is at a 52 week low right now. I think through the night that went down and even hit into the $28 range last night. And when you’re looking at that, that’s at a 52, week low. So already, we know that it’s a depressed price.

So instead of going and buying an individual pick behind that, let’s just say Exxon Mobil or Chevron or whatever, what I would tell you is to go look at an index of energy companies and buy that or start looking into that more, because what you’re doing is you’re distributing your risk, so that you’re not buying a company that could potentially fail after all this. I mean, this is going to be bad. This whole oil thing is just, it’s getting started and you’re going to see this get a whole lot worse in the next three months, in my opinion. You’re going to see a lot of defaults. And so you can distribute that risk evenly, and buy them and just forget about it for five years. I think you’ll do well. I think you look at that and five years from now, it’s going to do well for you. So I do like that recommend, but if you’re doing individual picks behind that, that’s where I think you’re assuming a little bit more risk, because you might not know all the specifics on why it’s down, you know, hitting a 52 week low.

Stig Brodersen  27:09

So, Matt, super cool question really. And I completely agree with, with Preston on Mohnish about generating ideas from a 52 week low. I also want to point out what Matt said in the previous episode that if, for instance, if you look at Japan after the huge bubble that they had, even though you would buy into the lowest last five years, not only in the previous year, you would still be losing a ton of money because the bubble was just so big and the trend was just going so much down. It wasn’t even a reasonable price. So yes, you can use it to generate ideas, but you need to understand what lies behind why it’s a 52 week low. Sometimes and often, there’s a reason why it’s priced like this.

About what you said about price targets, I never use price targets. They don’t make sense to me. First of all, it’s hard for me to figure out how they calculated the price in the first place. Often you would just read, “Oh, so this bank says it’s worth 82 bucks,” and have no clue how would they come up with 82 bucks. And whenever I’m lucky enough or misfortunate enough to figure out how to calculate that to be 82, I’m still none the wiser. It still doesn’t make any sense to me. So no, I never use price targets.

And the whole idea about taking advice from other people is interesting. So Preston and I right now, we are doing a course about the “Intelligent Investor.” In chapter 10 of that book, Benjamin Graham is talking about how to look at stock market advice. And what he’s saying is that the less you know, the less you should rely on advice, which might sound completely counterintuitive, but it’s simply because you can’t filter the information and understand how to go about them if you don’t have the knowledge. And you said this about your parents: how should they not think it would be a good approach to follow the financial planner, because she is referring to analysts that for all we know might be good at that job? But that’s not how to look at it. If you don’t know anything about a given subject, you should be cautious about advice. And I think in their situation, yes, probably just more focus on say, minimizing the costs and perhaps buying the right index and definitely not go into individual stock picks. I think that’s, in any case, that would be the most horrible idea.

Preston Pysh  29:31

So Stig already knows where I’m going to go after his comment. So I have a pet peeve with price tags, which he was talking about where these analysts say, “Oh the price is we think that the price for this company is $90 a share,” which this whole idea goes to intrinsic value. And my pet peeve with intrinsic value and price tags or whatever you want to call it is this: I never see a price tag or an intrinsic value that has an associated discount rate or yield associated with it. That drives me bananas. It makes no sense whatsoever for me to say, “I think the intrinsic value of Coke is $40.” Or whatever number you want to throw out there, because every price has to have a corresponding yield or discount rate that’s tied to it or it’s tethered to it.

So anytime a person says, and we get tons of emails from people saying, “Hey, I calculated the intrinsic value of company XYZ, and it’s $100.” And then they don’t say anything about the discount rate that they use. And when you do that, you’re saying a half-sentence, it’d be like me starting, and then just stopping, saying whatever it was that I was saying. You got to complete the sentence.

30:44

When you’re talking about intrinsic value, it always has to have a discount rate. So when you’re figuring this out, what you’re doing is you’re figuring out all the future cash flows. You’re saying, “From time now into the future, I think that the company is going to earn $100 a year, whatever the amount is.’ Okay? And you’re adding all those up and then you’re using a discount rate in order to bring it back to today’s present value, and then it has a number associated with it.

So when you do that and you bring it back, let’s say we use a discount rate of 10%. Take all those future cash flows, bring it back to the present value today, we’ll use 10%. So when I do that, let’s say the price comes back and it says the Price Is $100 a share at a discount rate of 10%. So if the company is trading at, you know, $40, a better scenario would be if the company was trading at $100. Okay? And we got $100 for our intrinsic value, you know that if you buy it that day at $100, you should expect to get a 10% return into perpetuity for owning that stock. That’s why it’s so important to know what the discount rate is because if you don’t know that, you’ll have no idea what your yield should be and that discount rate should include the retained earnings and the dividends combined into just one single solitary yield that you could expect to get from the pick.

31:59

So I think that’s important for people to understand. If none of that made any sense, go watch our videos. We’ve got two different videos on calculating an intrinsic value in two different ways. We’ll have links to those in our show notes of this episode, so that if you’re having trouble finding it, just go to the show notes for episode 71. And we’ll have links to both of our intrinsic value calculators and then you can see how you have to have this discount rate associated with the price that you’re figuring this out for.

32:25

Sorry to go so long on that, but I think it’s so important for people to understand this because we see the mistakes so often. All right, so we’re going to go ahead and do a question from Kip Stringfellow and this is the third question that we’re going to play.

Kip Stringfellow  32:39

Hi, Preston and Stig. My name is Kip and first off, just wanted to thank you for all the time and energy you put into this show. It’s a great learning resource and appreciate it. My question has to do with the psychological and emotional aspects of long term value investing. Today, I was talking to one of my friends who’s been an investor for many years following a value approach and he’s had a real hard time recently because a lot of his positions and his portfolio have been going down a lot in value. And it’s caused him to question his ability and skill at being an investor and if it’s something he should be doing going forward into the future. So I was wondering for you guys, if you’d seen any good strategies or systems that successful value investors have used over the years to make sure that they stay the course, don’t give up, and keep learning and keep applying their skills to become even more successful over the long term, even when temporarily, you have large losses. So just wanted to get your opinion on that. And thanks so much.

Preston Pysh  33:39

Boy, I don’t think you could ask a harder question, Kip. That’s a hard one. And it goes back to what we were saying is people, you know, they get down in a position and think about that, if you were in doubt for a year where you’re just kind of getting obliterated. The market is killing you. And you experience that for an entire year. It is so easy, psychologically, to just abandon and say, “This just doesn’t work.”

And I think for a lot of people that it could have worked for the previous seven years, and they go through one year of it not working. It’s just so easy to get caught up in the moment, especially when you’re talking in the context of an entire year. It just kind of is overwhelming, and it’s a little hard to stay the course. And I don’t know if I’ve got a good answer for you. I don’t.

You know, I think Toby Carlisle’s deep value strategy is probably the best strategy out there to be honest with you, for most people, because I think it’s fairly easy to implement. And I think it’s based on good solid found principles. I think it’s important that you got to make sure you have your portfolio distributed enough that you have at least 20 picks or more.

But you know, that’s the strategy that I would probably recommend to somebody in my family if I was going to recommend a strategy that was just foolproof. You just keep doing this year in, year out regardless of how things are going. I think would be one of the better strategies, but that’s a hard question to answer. I mean, I’ve got my approach. You can see Stig’s approaches a little bit differently. What do you have, Stig? I’m curious to hear your thoughts on this one. This is hard.

Stig Brodersen  35:12

Yeah, I think it’s a tough question too. So you won’t get this advice for me, you would get it from Warren Buffett’s. So that’s probably already a lot better because he’s saying that you should write down why you bought the stock, and then you should reread it when times are tough. And if nothing has changed, it’s probably just missed a market that’s at play. I think that’s really, good advice. And obviously, if your friend is looking at his portfolio, and he can see that the moat has changed for the company, I don’t think that necessarily have just because of the market drop. Then he might consider going out of that stock. But if nothing’s changed, you know what, why would you change your strategy?

It’s when times are tough that you are making money as a value investor by sticking to your strategy. So I think my advice would just listen to Warren Buffett, what he is saying and what you can see him doing right now with his own portfolio. And I think that would be my best response to that question.

Preston Pysh  36:08

Yeah, I totally agree with that. Okay, the next question we got is coming from Rich Shaner. So here we go.

Rich Shaner  36:14

Hey, Stig and Preston. My name is Rich Shaner from Philadelphia PA. I can’t thank you guys enough for all you’ve done and helped me develop as an investor and person in the past 12 months. My question for you is how do you manage a stream of great books suggestions you get and what process have you used to prioritize what you read? Thanks again for all you’ve done and I look forward to hearing from you guys.

Preston Pysh  36:38

Well, I don’t know if we do manage it very well, Stig. I mean, when we started the show, we came up with the list and I think a lot of people out there might have seen our list, but we just said, okay, who are some influential billionaires that people know and recognize? So when we mentioned them on the show, it’s not like we’re talking about somebody that nobody knows.

So we found some people that we felt were pretty famous billionaires. And then we just did some research and we just started doing some digging of different books that they’ve said in public forums that have been influential for them. And we just kind of listed all those out. I think how many books that we come up with 40 or 50 different books on that list?

Stig Brodersen  37:16

Yeah, this is about right.

Preston Pysh  37:17

So that was kind of our starting point was that list. And then, our audience is amazing. You should see some of the emails we get from them. Well, we get some bad emails from time to time. But sometimes we get some good ones. And people were like, “You guys need to read this book, and here are the reasons why.” And so then we’ll just add that into the queue. Usually what it is, is Stig will say, “Hey, I got this book recommendation. This looks like a good one.” And usually, I just say, “Yeah, sounds good. Let’s do it.” That’s it.

Stig Brodersen  37:46

Yeah and as you can see later today, I’m wrong because we’ll talk about more about this later, but that’s a billionaire endorsement that we will do today. But what we learned pretty fast, Preston and I are that all billionaires, they are readers. They are avid readers, and whenever you hear from a very successful person, you should read this book, to me, that’s just the best endorsement you can get. So I think of all the books out there, obviously, we can’t read all of them. If we get them from a trusted source or someone that we respect, we will usually go ahead and read those books.

And the other good thing and I think we talked about that before is that we listen to our books. So that also makes it… I wouldn’t say it makes it easier to prioritize, but we can just do it a lot faster. And I was also going to say that after listening to all these books, I’m also trying to find relatively short books, which to me is less than eight hours because very often you would see that books just because they are big, they usually have like, three, four or five learning outcomes anyway, so I try to prioritize my time that way too.

Preston Pysh  38:55

I’ll tell you: there’s no and we have this on our website. We’ve written this and I know people hear us say this a lot. But there is no greater asset in my opinion, for Stig and I, than just reading all these books. I think that when you immerse yourself in something that’s very focused, a book that’s very focused on one specific topic or idea that is so much more beneficial than going online and just searching for information on that specific talk topic because you’re just getting kind of surface-level information. You’re not able to kind of deep dive into something. So that’s why I like books.

And Stig is right. You won’t find one person like Warren Buffett, Charlie Munger, Ray Dalio, all these guys, every one of them. They are just, I mean, hardcore readers. We had Meb on the show in the last episode. He was saying he was doing like a book a week. Stig and I are doing about a book every two weeks. I don’t have the time and my day to do more than than that. But, man, I mean, he’s doing a book a week and you can see why Meb is so darn smart. That guy’s brilliant. So you’re going to see that as a common thread amongst a lot of these people, that they just read like crazy.

All right, so our last and fifth question for this segment of the show is from Michael and I’m going to play Michael’s question here.

Michael  40:15

Hello, Preston and Stig. Recently, Bloomberg published a story about two of the world’s most famous economists, Robert Shiller of Yale and Jeremy Siegel of the Wharton School of the University of Pennsylvania, taking opposite bear and bull cases on the current market.

Preston and Stig, you often comment on Shiller quite a lot and seem to believe that the market is on the pricier side. Jeremy Siegel believes that the market isn’t pricey and may even be slightly undervalued. What are your thoughts on Siegel’s view and why you might think he is correct or incorrect?

Now, some of his main points are that the strong US dollar makes earnings look artificially low. The oil price has heard the EPS of energy companies only in the short term. US GDP ratios are less relevant because US companies are making more money overseas. Current prices are below historic PE ratios in low-interest periods. And most importantly, the PE ratio, according to Jeremy Siegel should be 18 to 20, because of a new normal because of the low-interest rates. So I’d love to hear your answers.

Preston Pysh  41:25

So that was some interesting facts that are thrown out there. And, you know, I’ve been broadcasting my opinion on this for quite some time now almost a year of how I’m a bear. And you know, not too many people have thrown out that argument that because interest rates are low, it might be the new normal that PE ratios are a little bit higher. And that would make total sense from an intrinsic value discount cash flow perspective, to be honest with you, it makes total sense.

But with that said, I think Siegel is going to not be happy with the outcome of what’s about to happen. I think that he is wrong and I think Shiller’s right. And my reasoning for that is this: my opinion is that you don’t have any spreads left between asset classes. And when you have that, I think that you’re setting things up for the market to get scared and get scared fast, because they realize that they’ve been gambling with not much yield for their gamble.

42:25

So here’s what I mean by that. So when we look at fixed-income investments right now, let’s just call it 2%, because that’s probably the easiest way to do it with a 10 year Treasury, 2%. When you looked at stocks before the credit cycle has started to go back in the direction… I think Meb said in the last episode that the Shiller PE is about 24. So you’re looking at let’s just call it, I’m just ballparking this, but let’s just say it’s like 3% to 2.5%, or whatever for your yield to be inequities.

Worst case scenario, well, you’d be around 4% with a 25. So you’d be at a 4% yield. And you’re comparing that to the fixed income side. So when you don’t have much of a spread between those prices, and as the Fed is raising rates, which means interest rates on fixed incomes are going to go higher, okay? Those are going to come to parity with each other between a fixed income and equities.

We’re seeing that happen right now. We’re seeing that the yield curve is starting to flatten. And as you have that occur, and people aren’t getting any extra yield for the extra risk, because there’s a whole lot more risk in equities than there is in fixed income. When people are seeing that shift, I think you’re putting things in a position where people are saying, “Hey, I’m not going to assume this extra risk for pretty much no yield whatsoever.” And they’re going to move out of it and they’re going to move into fixed income.

And then whenever things further kind of devour themselves and they’re going to say, “I’m not staying in this junk, fixed yield. This is scary.” And then they move into cash or whatever. They just keep reducing their risk into a cash position. That’s where I think Siegel’s wrong because he’s not talking about those yield spreads. There’s a lot of other billionaires out there like Dalio and I mean, look at Buffett’s portfolio. He’s sitting on $70 billion of cash. He’s not investing that into financial assets. And I’m sure he could if he wanted to.

So I think that there’s a lot of people that have a different opinion than Siegel. I’m definitely with Shiller on this one.

Stig Brodersen  44:24

Yeah, it’s probably no surprise that I’m with Shiller too, and I think we need to understand that we have the CAPE or the Shiller PE, and that’s around 24. It was 27 not long ago. And then we have the current PE and he’s probably referring to the current PE, which is around 20. So he’s talking about a 5% return, which Preston was also referring to before.

I think his whole premise is wrong. I think if his premise was correct about the new normal, yes, then that would be somewhat correct, like having a 2% yield on your bonds and then 5% in stocks. If that was like your paradigm and that was like the truth… I don’t know what the truth is. Let’s just use that word for simplicity. Yes, he would probably be right. But I just think that paradigm is wrong because the Fed is hiking the rates, so you cannot use 2%.

And the other thing is that I don’t look at current PE like Siegel’s doing, saying that’s 20. I’m looking at Shiller’s PE because that is cyclical *inaudible. So that’s 4%. So already there, the premise is wrong. So just, in short, this is not a new normal. This is probably the least normal thing they can ever get. So that’s why I don’t agree with him and I agree with Shiller.

Preston Pysh  45:35

So one of the major changes in the way that I invest came from just kind of understanding the positioning of the Fed. Stanley Druckenmiller has a quote where he says, “I was told early on in my investing career that you always look at what the Fed is doing and try to position the assets that you own one year in advance.” So because the Fed is moving in this position, I will move into this type of financial asset because I think a year from now, because of the Fed’s movement, this is going to be more valuable. That’s an enormous part of George Soros and Stanley Druckenmiller’s approach.

I agree with that. I think that whenever you get a guy like Siegel, you know, a professor over at Wharton, when you have him saying that he’s just looking at it from an interest rate level, inflation level, discount cash flow of the business, and there’s no discussion whatsoever on what the Fed is doing to manipulate the money supply in the system, I think that that’s a flawed strategy. I think there’s a gap in the knowledge and the understanding of what’s happening from the big picture. That’s my personal opinion.

46:41

Warren Buffett would say that and he’s on record, I saw an interview with him where he said, “If somebody would come up to me, and whisper in my ear, what the Fed is going to do, and six months from now or a year from now, or even today, it wouldn’t change my investing approach whatsoever. Not even one iota.”

For me, that’s crazy. That makes no sense to me. But that’s me. That’s Preston Pysh. So I’m looking at what the Fed is saying and what they’re doing and what my expectation for their future movements is because it has such a dramatic impact on the number of dollars, the fiat currency that’s in the system. And make no mistake about it is the Fed is adjusting this money supply, it’s impacting the value of every single financial instrument in the world.

47:26

All right, so that completes our questions. For the five people that asked their questions, we’re going to go ahead and send you a free signed copy of our book, the Warren Buffett Accounting Book.

We’re just thankful for the people that come on to our website, asktheinvestors.com. They go there, they record their questions. There are lots of people recording questions, so we apologize that we can’t play all the questions. But the ones that we kind of like and maybe feel like we can answer well for the audience, you’ll get a free signed copy of our book if you guys go there. It costs nothing to do it. Just not much downside, a little bit of upside with getting a free book if you guys go ahead and do that. So we appreciate it.

48:01

So we’re going to move on now to the book summary. This is going to be very quick. So Charlie Munger is a huge, enormous Benjamin Franklin fan. And so this was one of the books that Charlie Munger recommended. He’s the Vice Chairman of Berkshire Hathaway, a billionaire and Warren Buffett’s best friend. This book was written by Walter Isaacson, the “Benjamin Franklin: An American Life.” There’s another person that endorsed this. Elon Musk is another billionaire that said that this book had influenced him.

So Stig and I were pretty kinds of excited to read this because you need to have one billionaire yet two billionaires and two people that I respect from a business point of view recommending this book, and I didn’t get it. I didn’t get it. I didn’t see how this taught me all that much, to be honest with you. Maybe I’m just missing the boat here. But Stig what were your thoughts on reading this book?

Stig Brodersen  48:57

Yeah, I’m definitely with you. We did try to get Walter Isaacson on the podcast. That was before we read the book, perhaps it’s a good thing… I just didn’t get it like the original book is I think it’s like 24 hours or something like that. And I read the abridged version, which was eight hours. And I was kind of… I felt like I could probably do that in like 15 minutes and still get the high points. It was very superfluous. Now, I did get a lot of great brush-ups in my history lessons. Like all the things I forgot about the American Revolutionary War. So that’s up to date. But in terms of business, I don’t know, like the learning outcomes I got.

Preston Pysh  49:39

So we’re just going to touch on a couple of topics for this but we do have a good outline. And we do have a good summary that we have written for this book. So we’re going to mail that out to everybody on our list. And like Stig said, if you’re trying to get a refresher on your American history, you’re probably going to like the executive summary that we’re setting. Yeah, it’s not real long. It’s five pages like all the others, but we get chapter by chapter and we talk about a paragraph for one of the chapters, just kind of highlighting the key points.

In short, the thing with Benjamin Franklin is he got his notoriety for, I would say two things. The first one would be his writing. He was just a fantastic writer, and he had access and he had distribution back then because, in the family business, it was through publishing, newspapers, and media. So he had this outlet, he became a great writer.

The other thing that he was really, I think, that kind of set him in the international stage and notoriety for being smart and for kind of becoming the person that he became early on. And that was because he invented the lightning rod that you stick on your house to prevent lightning strikes. And so this was a big invention back then. You think about it now like a metal rod that you just put out. Pretty generic, but back then this was like the new iPod if you will. And notice how out of touch with reality I am, I’m saying the iPod that was like 10 years ago. The new iPhone I guess will probably better. Man, if my kids heard that they would die.

51:12

But anyway, he invented the lightning rod. And that kind of put him on the international stage because these things sold all through Europe, they sold in the US, and it was kind of this revolutionary thing and so he dabbled in electricity, dabbled in writing. He obviously is a well-known politician as well. And the book just kind of outlines it. It’s a biography. I mean, it goes step by step from his birth to his death, and just kind of gives you the whole history of him now as far as I guess, because I was always looking at the book from the lens of how can I take something out of this that I could communicate to the podcast about business or investing. And I just didn’t see anything to be quite honest with you. It was more of just like these historical accounts. So I’m not going to waste people’s time on the podcast by going into every little detail because I just don’t think it applies to what it is that we’re trying to talk about on the show.

I’m curious if Stig was able to extract anything?

Stig Brodersen  52:07

Well, I think I had two small things. The first one is not so much a learning outcome. I’m just very impressed that Benjamin Franklin created a MasterMind group in 1727. So, at age 21, he created a MasterMind, he probably didn’t call it a MasterMind group. I think he called it something like a club for enterprising young businessmen or something like that in Boston. And like the main goal for that was just financial independence, and how can we help each other and, yes, as terms of learning outcome, what we can communicate to the audience, I don’t know how useful that is. But I was very impressed that you could think about that. And even today, that’s not something even though all the knowledge out there is available a lot of people don’t do that. And Preston, I was even late to the party.

Preston Pysh  52:52

I could tell you one thing: I bet you his MasterMind Group was not as diversified as ours. We got a guy from Australia, India, Canada, Denmark, the US. Come on, Ben Franklin, you don’t have anything on us.

Stig Brodersen  53:09

Then the other thing that was about how to better yourself, and I think that discussion was nice. And this is I think that Warren Buffett referred to a few times that you can change your personality if you want to like this is not set in stone. If you want to behave a certain way, why not just behave that way?

And that was something that Ben Franklin spent a lot of time and energy on. He tried to change his personality because he said that he needed to change his personality to have success in business. And he was adamant about reevaluating himself and this is something I’ve done myself a few years back. So there are probably a lot of people saying yes, Stig, you need to change your personality, but I was taking his advice. And I was, you know, every Sunday night I was looking back at all my personal relations during the week. I think I had like eight or nine principles that I wanted to make my own. And then I was evaluating myself, and how I was interacting with other people that for me, that was extremely helpful doing that.

So at least from a personal perspective, I think that discussion was good. But again, that was probably the 15 minutes I was talking about before. I didn’t care for the rest, at least in terms of how I could create value for the audience. It was more like a history lesson.

Preston Pysh  54:27

Yeah, I think that’s important to highlight is, you know, it wasn’t a bad book. I just don’t know necessarily know how we can relate it over to our audience, to be honest with you. I like your points, Stig. And that’s something that I found very intriguing in the book that I failed to highlight. and that’s just his focus on ethics. He worked very hard at trying to be the most ethical and moral person that he could be. That’s he had all these different laws and rules that he had written down and said that he was going to try to lead this perfect life with the way he interacts with other people. Very interesting discussion.

And I think that it goes to say that that’s a common thread that we see with a lot of these people. Not all of them, but a lot of them, that they place their ethical code and their moral code pretty much above anything else. If there’s anything that jeopardizes that, it’s just not a deal that they’ll do. It’s not a business transaction that they’ll want to be included in. I think that that’s important for people to think about and to understand that all these people operating at such a high level and that are super successful value that more than anything else. So that is definitely a good highlight that you had there for the book.

So we’ll send out our free executive summary of this for anyone that signed up on our email list. Just go to our The Investor’s Podcast website, you can sign up on our email list if you’re not there, get all of our free executive summaries. If you want to read this book, which maybe you’re just a history person, you want to read this Walter Isaacson’s a fantastic author. I will say that his book on Steve Jobs is fantastic. All the other ones that he’s written. His book on Einstein I’ve read, it’s very good. But if you want to read this book, it’s probably kind of expensive for the audio format, but you can download it for free if you go to Audible. Our link on our website for audible.com. If you use our link, the first book that you download is completely free. So let’s just say this book’s $30, you can download that completely for free. It’s a $30 gift from Stig and me, but you’ve got to use the link from our website in order to get it for free.

56:17

That’s all we have for you this week. We enjoyed answering all the questions from our members of the audience. We’ll send you a free signed copy of the Warren Buffett Accounting Book, and we’ll see everybody next week.

Outro  58:20

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