We Study Billionaires - The Investor’s Podcast Network - TIP 006 : The Next Stock Market Crash & Interest Rates (Investing Podcast)

Starting point is 00:00:00 This is episode six of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll take complex things and make them seem insanely simple. They make your boring drive-to-work feel exhilarating. They give you actionable investing strategies. Your host, Preston Pish and Stig Broderson. All right, good morning, everybody.

Starting point is 00:00:32 This is Preston Pish, and I'm accompanied by my co-host, Stig Broderson. And today we have another, yet another special guest, and we've got Rob McCurry with us. And he's going to be talking to us about interest rates and how important interest rates are in market collapses and how it impacts our economy overall. So a very, very important subject. And before we start that discussion with Rob, I just kind of want to open up and talk in a very high-level, overarching strategy. an idea of how interest rates play into our economy and to us as investors. So Stig and I kind of pool our understanding of interest rates from the way Warren Buffett looks at it.

Starting point is 00:01:18 And it'll be interesting to talk with Rob, who's a VP at a major bank here in the U.S., who manages all the risk for that particular bank, and kind of get his opinion on interest rates after we have this general discussion and overview at the beginning. So really two segments here. I'm just going to open up, have a quick segment on just Warren Buffett's opinion on interest rates. And then the second segment, we'll talk with Rob and see what his opinions are and how it relates to the Warren Buffett approach. So the first thing that we're going to discuss is the three critical variables and the three basically phases of how interest rates impact the boom bust cycle of the market. So whenever you're looking at how the market proceeds, you have these periods where you have the, these deep recessions or mild recessions, and then you have these boom cycles where stocks are

Starting point is 00:02:10 very highly priced and everyone in the market seems to be fairly happy. And so our opinion, and we base this on Buffett's opinion, is that interest rates play an enormous role in controlling that. Okay. And so whenever the market crashes, what happens is, is the Federal Reserve adjust interest rates that they're extremely low in order to spark spending and it pushes the money out into the economy so people spend that money and it sparks the economy. Then, as the economy recovers and things start doing better and businesses are able to have better earnings, what happens is the Federal Reserve slowly starts adjusting things in order to raise those interest rates. And as those interest rates rise, the economy becomes primed,

Starting point is 00:02:57 if you will, for a potential crash. The timing of that crash is something. that I would argue no one could really predict when that's actually going to happen. But as those interest rates continue to climb and continue to get higher, what happens is it makes it harder and more difficult for businesses to continue to finance their debt as that interest rate climbs higher. So think of it from the business's perspective. When interest rates are low, let's call it two or three percent that they can borrow money at, it's very easy for them to do business. They can borrow and buy inventory and create materials and services. And it's very cheap for them to do that because the money that they're borrowing,

Starting point is 00:03:37 the interest that's associated with that money that they're borrowing is really cheap. Now, as the economy improves and those interest rates on that money that they're borrowing, it continues to go higher, what happens for that company is they then start to become handicapped because they're used to this, call it 3% rate, and now they're having to pay a 6% or 7% rate. it's harder for them to do business and to operate. And so what happens is, is this continues to rise and rise, this interest rate, the economy starts to slow down. Earnings don't continue to be at the level that they're at and maybe even start to drop,

Starting point is 00:04:11 okay? And then that's where we would like to say, and Buffett would like to say, that the economy becomes primed for a change and for a recession to occur. And so then what it needs at that point is a catalyst, okay? And that catalyst could be anything. And who knows what the catalyst will be and when it will actually occur? Okay, we don't know that. It could be like back in 9-11 whenever the World Trade Centers were hit by terrorists.

Starting point is 00:04:38 That was a catalyst. And you saw the market, which was already primed from the Internet bubble, that catalyst shocked the system and brought it into a collapse. Okay. So that's kind of the overarching theme, the big picture look at interest rates and how the Federal Reserve is adjusting those interest rates. and kind of how the boom bus cycle occurs and how you really don't know when that catalyst is going to be induced into the system whenever it's primed with high interest rates and, you know, difficult debt levels for businesses when it's actually going to, when that collapse is going to take place. So that's our intro. That was the first segment. And now what we're going to do is the part that I really want to do so I can shut up.

Starting point is 00:05:16 And we can bring our guest on here, which is Rob McCurry. And Rob, and so we're moving into the second segment here. And so Rob, he's a gradual West Point. Rob and I actually went to college together, so Rob and I know each other for quite a few years now. And he is from Western Pennsylvania. He's a big Steelers fan. And I'm from Western Pennsylvania. And we used to drive home whenever, you know, Christmas break or whatever, Rob and I would ride back to Western Pennsylvania together.

Starting point is 00:05:45 So we know each other pretty well. So that's where Rob and I had originally met. After he graduated from West Point, he became a... captain in the military intelligence community in the U.S. military. He got his MBA from the University of Massachusetts at Amherst. Now, and then after he got his MBA, he went as a senior consultant at Ernest and Young and a couple other major companies. And now he's a vice president for risk management at a top 10 consumer bank in America. So Rob is doing quite well for himself, and he has a lot of important information.

Starting point is 00:06:21 He's extremely knowledgeable. And the thing we're going to be talking about with Rob is interest rates. So Rob, my first question, did you have anything you wanted to add on the background or anything else that I might have missed? 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 listeners about who's running this investor's podcast, That's the guy.

Starting point is 00:06:50 Thank you, Rob. Now I'm embarrassed. All right. So the first question, let's move right past that. Rob, I briefly described our opinion on interest rates, but we're interested to hear your perspective. Do you see them as a critical variable to the boom-bust cycle like I had described? Yeah, absolutely.

Starting point is 00:07:09 And I think one thing, kind of where I would like to go with the discussion, is really about that critical part that interest rate. play in the boom bus cycle. And I 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.

Starting point is 00:07:42 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, it's 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 to mom and pop, to companies that want to invest and grow. And the way that we can do that is 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

Starting point is 00:08:35 rates going because we want to try to predict where in that cycle are we. And so one of the key predictors is what's the cost of capital set by the Fed so the banks can take that capital deployed into the market for businesses to grow. And so I think that's kind of a key component that not a lot of, you know, investors think about or kind of your common person, the key role that banks play in that, in that exchange of value. So, Rob, sorry, I stepped on you a few times there. I was trying to chime in on this one point.

Starting point is 00:09:09 I think a lot of people don't realize that banks can lend out more than they have sitting 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 $100 instead of just the $10 that I put into the bank. And I think a lot of people don't realize that you guys can lend out more than what you actually have from, you know, customers. Is that correct? Yeah, that's exactly right. And that plays into the bank's leverage ratio. It plays into something very critical on the balance sheet,

Starting point is 00:10:02 which is your deposits to loans ratio. And 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 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 had perfect credit on the borrower side, meaning that we knew

Starting point is 00:10:42 100% that whoever we lent money to was going to repay us on time and at full value, we could 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 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. Rob, so as you can probably hear that Preston, I'm here, pretty keen on interest rate and leverage

Starting point is 00:11:23 and catalyst events as critical drivers for the movement bus cycles. Do you have any other factors that you would like to add to that list? Yeah, 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 we're discussing. It's key. You hear about it every day. 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 influences the cost of capital, which cascades to all the businesses who are, you know, borrowing money to or raising money to deploy into the market to grow and to create jobs. I think the other thing I would point to is the ease of credit, right? So we remember after the crash in 08 that credit constricted a little bit.

Starting point is 00:12:19 And folks were concerned about that because, you know, that spicket of credit in order for the economy to really grow and expand has to be turned on. If it isn't, that 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 reduce a 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 these, you know, this economic time, I think we're in a pretty good place, although you did hear of Federal Reserve Chairman, former Federal Reserve Chairman Ben Bernacki, that he had a little trouble getting his mortgage approved, which is a true story and it's kind of unbelievable.

Starting point is 00:13:08 I did hear that. Is that true? 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, you know, to refinance his mortgage, actually. And it's actually funny to 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 he said it actually was very tough for him to get approved. And he has to, and he has a some issues with it. And he said, look, if I can't get my refi approved, you know, there's no hope for Joe and, you know, Joe and Harry out there in America to get their loans approved either. So he said,

Starting point is 00:13:50 you know, we have to be careful about how constricted that we make the credit in this country. And those Fed policies 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 got to watch valuation. and how we're valuing companies in the market. And I think sometimes that can play into the boom bus cycle as well. So if you look at the internet boom, Preston you mentioned coming at the turn of the decade, that we were valuing internet companies in a way that really didn't make sense.

Starting point is 00:14:27 So I think those are some of the canaries and the coal mines to look at your interest rates, your ease of credit, and the valuation. How sound are those valuations? Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord,

Starting point is 00:14:50 and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, and journalists, and investors and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive currency collapse, using AI to expose human rights abuses, and building technology under censorship and authoritarian pressures. These aren't abstract ideas. These are tools real people are using right now.

Starting point is 00:15:29 You'll be in the room with about 2,000 extraordinary individuals, dissidents, founders, philanthropists, policymakers, the kind of people you don't just listen to but end up having dinner with. Over three days, you'll experience powerful mainstage talks, hands-on workshops on freedom tech, and financial sovereignty, immersive art installations, and conversations that continue long after the sessions end. And it's all happening in Oslo in June. If this sounds like your kind of room, well, you're in luck because you can attend in person. Standard and patron passes are available at Osloof Freedom Forum.com, with patron passes offering deep access, private events, and small group time with the speakers. The Oslo Freedom Forum isn't just a conference, it's a place where ideas

Starting point is 00:16:14 meet reality and where the future is being built by people living it. If you run a business, you've probably had the same thought lately. How do we make AI useful in the real world? Because the upside is huge, but guessing your way into it is a risky move. With NetSuite by Oracle, you can put AI to work today. NetSuite is the number one AI cloud ERP, trusted by over 43,000 businesses. It pulls your financials, inventory, commerce, HR, and CRM into one unified system. And that connected data is what makes your AI smarter. It can automate routine work, surface actionable insights, and help you cut costs while making fast AI-powered decisions with confidence. And now with the NetSuite AI connector, you can use the AI of your choice to connect your

Starting point is 00:17:01 directly to your real business data. This isn't some add-on, it's AI built into the system that runs your business. And whether your company does millions or even hundreds of millions, Netsuite helps you stay ahead. If your revenues are at least in the seven figures, get their free business guide, demystifying AI at Netsuite.com slash study. The guide is free to you at net suite.com slash study. NetSuite.com slash study. When I started my own side business, It suddenly felt like I had to become 10 different people overnight wearing many different hats. Starting something from scratch can feel exciting, but also incredibly overwhelming and lonely. That's why having the right tools matters.

Starting point is 00:17:46 For millions of businesses, that tool is Shopify. Shopify is the commerce platform behind millions of businesses around the world and 10% of all ecommerce in the U.S. from brands just getting started to household names. It gives you everything you need in one place, from inventory, to payments to analytics. So you're not juggling a bunch of different platforms. You can build a beautiful online store with hundreds of ready-to-use templates, and Shopify is packed with helpful AI tools that write product descriptions and even enhance your product photography. Plus, if you ever get stuck, they've got award-winning 24-7 customer support. Start your business

Starting point is 00:18:23 today with the industry's best business partner, Shopify, and start hearing Sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. Yep. Hey, that kind of reminds me of a book that I had read a couple years back.

Starting point is 00:18:52 It was called The Holy Grail of MacroEconomics. And the book, we'll have it up on the show notes if anyone's interested. this book, but the book talked about 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, and 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

Starting point is 00:19:33 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 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 think that they didn't want to bring the interest rates up higher because there was such a shock to the system back in 2008. 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 into the future as we look to the next five years?

Starting point is 00:20:23 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 make it collapse really fast as soon as you start bringing these interest rates in. But I'm real curious to hear what your opinion is on that. Do 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? Yeah, 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.

Starting point is 00:20:58 You know, you want to just keep those rates low so that the companies you like to invest in, you know, 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 do their next project, right? Yeah. So their cost of capital is very low.

Starting point is 00:21:39 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

Starting point is 00:22:12 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.

Starting point is 00:22:37 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. It's almost, Rob, it's almost like 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 relying 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 that 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 to those interest rates and they're too highly leveraged and then you start to see them start dropping one, two, three and then it just

Starting point is 00:23:27 kind of compounds and then that's your catalyst. That's right. And I think if I could add that the corollary from the crisis was that Secretary Paulson and Secretary Geithner or 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 Oh, sorry, Rob. Could you please explain to us the moral hazard of something? Why is that important?

Starting point is 00:24:00 So the moral hazard basically was a concept that during the crisis became kind of the term to think about in terms of should 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 a rainy day, which in 2008, it was the rainy day of all rainy days. But by 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.

Starting point is 00:24:46 And that's really the moral hazard. So it changes fundamentally how companies would operate. If they know that Uncle Sam's going to 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 okay to deploy ourselves and highly leverage ourselves, you know, deploy at a fast pace with no concern of their own, you know. know, solvency and emergency fund or, you know, capital reservoir because Uncle Sam's going

Starting point is 00:25:19 to backstop that. So that's the moral hazard 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. The companies will start to depend on that easy money and change their behavior in a way that's not fundamentally sound. So, Rob, 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

Starting point is 00:26:00 like the just general price to earnings ratio that you would have 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, something like that, it's below 3%. So my opportunity cost, just from a purely index standpoint, I'm still in equities at this point because the return in the fixed income zero risk type area is lower and, in my opinion, worth the tradeoff there. But 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

Starting point is 00:26:46 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? Is that something that you'd be considering as a risk manager at a bank? Would you be looking at the index of the debt to equity of the entire Dow or S&P 500, is that something that you would consider and see how that's moving more to a leveraged position over time? Yeah, I think that's a great question, Preston, and probably something that a lot of investors

Starting point is 00:27:20 miss. But I think that leverage ratio, really, which is your debt ratio to your income, is something that investors should focus on. Because I think 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?

Starting point is 00:27:48 Yeah. And I think when you start to do that, even if you think of in your own personal balance sheet, you know, if you've got your mortgage payments, which is part of your leverage on your personal balance sheet, you've got your car payment, and if you start to take out your home equity lines of credit, you know, and you start to, you know, put a student loan,

Starting point is 00:28:10 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 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. So just taking that own personal finance example and translating it to the market, which is what you did and explain 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.

Starting point is 00:28:55 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 the PE ratio and if it's 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 predict whether or not the stock market is going to crash or the opposite? I think it definitely, you know, talking about canary in the coal mine can be something to watch. 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 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.

Starting point is 00:30:01 You know, 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 I think in terms of corporate investing, looking at these companies, making decisions, valuing them, as you guys talk in detail about the Buffett methodology and things, that interest rate is one part. to that equation, but you're going to want to look at the health of the individual company and whole as well.

Starting point is 00:30:32 Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure

Starting point is 00:31:00 and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across more than 35 security and privacy frameworks. Companies like Ramp and Ryder spend 82% less time on audits with Vanta. That's not just faster compliance, it's more time for growth. If I were running a startup or scaling a team today, this is exactly the type of a platform I'd want in place. Get started at vanta.com slash billionaires. That's vanta.com slash billionaires. Ever wanted to explore the world of online trading, but haven't dared try?

Starting point is 00:31:38 The futures market is more active now than ever before, and plus 500 futures is the perfect place to start. Plus 500 gives you access to a wide range of instruments, the S&P 500, NASDAQ, Bitcoin, gas, and much more. Explore equity indices, energy, metals, 4x, crypto, and beyond. With a simple and intuitive platform, you can trade from anywhere, right from your phone. Deposit with a minimum of $100

Starting point is 00:32:06 and experience the fast, accessible futures trading you've been waiting for. See a trading opportunity. You'll be able to trade it in just two clicks once your account is open. Not sure if you're ready, not a problem. Plus 500 gives you an unlimited risk-free demo account with charts and analytic tools for you to practice on. With over 20 years of experience,

Starting point is 00:32:28 Plus 500 is your gateway to the markets. Visit Plus500.com to learn more. Trading in futures involves risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500, it's trading with a plus. Billion dollar investors don't typically park their cash in high-yield savings accounts. Instead, they often use one of the premier passive income strategies for institutional investors, private credit. Now, the same passive income strategy is available to investors of all sizes thanks to the Fundrise income fund, which has more than $600 million invested in a 7.97% distribution rate. With traditional savings yields falling, it's no wonder private credit has grown to be a trillion dollar asset class in the last few years.

Starting point is 00:33:18 it fundrise.com slash WSB to invest in the Fundrise income fund in just minutes. The fund's total return in 2025 was 8%, and the average annual total return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund's prospectus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. And Rob, it's 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,

Starting point is 00:34:07 or what do I transition into assuming that the capital gains and all that stuff are considered as well. So, you know, is the market, as equities climb higher and like Stig, said they're over a P.E. of 20 and 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? I do. And I like how you kind of phrase that, Preston, I think, because that's the key to Stiggs question, I think, it's that

Starting point is 00:34:52 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-toes for that 10-year treasury, which is very closely tied to interest rates. That's pretty much your your go-to conservative investment that, you know, you're going to put your money there, you're always going to get that return. So compared to what you can do in the market, where there's volatility, you know, there's so many other factors, the long-term stability of the companies you're investing in, you know, those catalyst events that you talked about,

Starting point is 00:35:38 which aren't going to impact your 10-year treasury, but will impact your stock choices. So it's that opportunity cost. The other thing that I think to draw out would be, so if you're confident about the solvency 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 take a nice, moderate company stable

Starting point is 00:36:15 Fortune 500 pays a good dividend. You're probably looking at a year-over-year yield of above 2.5% right in that ballpark. So in today's interest rate environment, that beats the 10-year treasury. Yeah, right. And that's guaranteed money as long as the company's 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?

Starting point is 00:36:45 Yeah, I would say, you know, I love good investing advice. I think some of the fundamental stuff is what rings true for me. So, you know, 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. 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 may as well have a smaller salary. and not be spending it.

Starting point is 00:37:18 I think, and you know from an investing standpoint, you've got to have that capital to be able to use in the market. So I think 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. And you don't have to be a Preston or a Stig type investor or, you know, very well-versed in complex.

Starting point is 00:37:45 strategies. You just have to do some basics and do a little homework. 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. I absolutely love that advice because there's so many people out there. And I'll tell you what, 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 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 even when they do increase that first variable,

Starting point is 00:38:32 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. The 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. 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 money aside every month and just invest in the market,

Starting point is 00:39:10 you would do fairly well before you retired for sure. 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 Thiel, 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? Yeah, thanks for asking, guys. And I enjoy, you know, looking at different folks reading lists as well. I would go to books by Jim Collins. So this may be a little bit off of the investor path. 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.

Starting point is 00:40:17 And they have similar business models, right? So 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.

Starting point is 00:40:49 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 it compared companies, and two good examples are Westinghouse and GE. And he compared them over time, two 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 return multiples of itself and grow multiple times in its value over its lifespan?

Starting point is 00:41:29 Versus Westinghouse, which eventually, you know, 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 GE was built to last, you know, created by Thomas Edison, you know, over 100 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 looked at different companies. Wells Fargo was one where they were a super regional.

Starting point is 00:42:06 a bank that exploded to become a national powerhouse bank. So what was it? What were the factors that took that company from being a good company in a local market and a regional market 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 I like his perspective, which goes under the hood of these companies and digs around and tries to find a data-driven reasons why these companies have done well.

Starting point is 00:42:40 Yeah. And hey, just so the audience knows, Stig and I plan on doing a summary in an episode on good to great because 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 it is that Stig and I are trying to convey to our audience, which is look at the business. Okay. I hate using the word stock.

Starting point is 00:43:06 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 find out if you

Starting point is 00:43:32 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've selected 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 AsktheInvesters.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. Hello, Preston and Stig. This is Joe Rizzo, 2013, graduate from Naval Academy,

Starting point is 00:44:06 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 EPS growth, so, you know, maybe 30 to 40% EPS growth per year, would this still be a investment, that Buffett was, would be interested in, or would the high PE automatically roll out the company,

Starting point is 00:44:38 even though the growth is so high? Thanks for your show. It's really, really interesting and great learning. 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 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 PE 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

Starting point is 00:45:17 to own the stock. So what I would suggest, if you're really interested in investing in growth picks, Benjamin Graham and the intelligent investor had an equation. Now, a lot of people don't realize this because a lot of people think, 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

Starting point is 00:45:48 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, it 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.

Starting point is 00:46:20 But that doesn't mean that there's people out there that can 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. So, Joe, I agree. This is a really good question. I would like to start to discuss the PE ratio you were talking about. So for some of our listeners, they might think, well, there's a PE ratio of 40 or 60 is that high. So, for instance, the PE ratio of 40, that would mean that you need to pay $40 for $1 of that company's price.

Starting point is 00:46:57 profit. And just to give you an example, for instance, a company like Facebook that have a P of 85 at the moment. So when we're talking about growth picks, it's not necessarily small companies. It could also be big companies. But when we're talking about a very high price to earnings, again, that means that you're paying a very high price or money that you're not certain of will return to you as a shareholder. The thing I would like to discuss is that while 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,

Starting point is 00:47:40 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. estimate 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 buy stock. 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

Starting point is 00:48:20 going to get better than they already are. 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. And whenever you're looking at a high PE 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? No, I would just say, thanks for having me, guys. Love the show. Big fan. Would love to come back.

Starting point is 00:49:02 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, because this is something that we're very interested in and would like to continue to track. So really... That'd be great. Yeah, really appreciate it. It was really fun. Great catching up with you because we haven't talked in a few years.

Starting point is 00:49:20 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. Thanks for listening to The Investors 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 appearance to the investors podcast by going to www.w.com. If your question is answered during the show, you will receive a free autographed copy of the

Starting point is 00:49:55 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 a commercial application.

We Study Billionaires - The Investor’s Podcast Network - TIP 006 : The Next Stock Market Crash & Interest Rates (Investing Podcast)

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.