We Study Billionaires - The Investor’s Podcast Network - TIP 043 : Mastermind Discussion 2Q 2015 (Investing Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 43 of The Investors Podcast. Broadcasting from Bel Air Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish, and Sting Broderson. All right, how's everybody doing out there?

Starting point is 00:00:30 This is Preston Pish, and I'm your host for The Investors Podcast. And as usual, I'm accompanied by my co-host, Stig Broderson, out in Denmark. And today I'm actually accompanied by a whole lot more people than just Stig. I'm looking at Colin Yablonski. I'm looking at Hari Ramatranja. And I'm also looking at Toby Carlisle because we have formed our mastermind group for the second quarter of 2015. And we're going to be talking about all those topics that everybody wants to discuss out there. And just kind of looking at the direction that the market's going here in the future.

Starting point is 00:00:59 So I want everybody to know, you've got the insider conversation. that we're having with our own mastermind group and how we're preparing for the future with the financial markets. What do you guys think about oil? Let's talk about that. Where do you guys see that? And I'm really kind of looking at you, Colin, because you're so close to that area. And it's really kind of intimate to your region. But what's the word up there? What are people saying? People are nervous right now, to be completely honest. A lot of companies have been laying off employees, major companies, major organizations that are. involved in the oil and gas industry and the oil sands development in other resource companies. And I think it's starting to slowly trickle down to other elements of the market like I talked about with real estate. We're starting to see home prices drop month over month. Listings are increasing dramatically. The luxury market is getting absolutely crushed in Calgary right now where

Starting point is 00:01:56 any homes that are priced above a million dollars, they're just sitting there and they've been sitting there for months. So it'll be interesting to see what happens over the next, you know, three months because we've gone through this full cycle in Canada where about nine months after you see the drop in oil, typically it starts to trickle down to people losing their jobs, real estate prices dropping and so forth. So it'll be interesting to see in Stakeasai that you had something there. Yeah. So I don't know if this is this is good news for for the community in Calgary, but I'm definitely bull on oil. And I know that this might seem, completely contradictory that since we are hearing that we have a new world order, the game is

Starting point is 00:02:35 changing when it comes to oil, opaque has just been loose, and there was all these good arguments why oil prices won't rebound. But I just think that we need to remember that oil that's just a commodities business. So you can compare this to something like the insurance business, or you can compare it to other kinds of commodity, where there is actually a somewhat low barrier of entry. I mean, yes, it depends on how you define the oil market, but actually actually a very low, very entry because it's a homogeneous product. So you will see in general a very steady demand. The demand for oil is steadily increasing by just about 1%. It has been that for a long, long time.

Starting point is 00:03:15 But then you will see that the supply really keeps fluctuating. And now you're seeing a downturn in that person. I see you have something. So I guess I have the opposite perspective on this one from you. And I think Toby, if I remember right, Toby, you've been buying into a little bit of oil as it's been getting hit, correct? The energy company is not the commodity. Okay. So you've been buying into the companies a little bit.

Starting point is 00:03:39 This is my concern with oil moving forward. I think in the short term, maybe like in the next six months, you might see the price on the barrel oil kind of rebound. But here's my concern and why I think Buffett sold out of his big Exxon position is because I think that if you're a company that is very, heavy on tangible assets, I think you're going to get your lunch eating over the next decade, simply because of the fact that inflation, I think, is going to have some real effects on those types of businesses with their capital expenditure. So that's why I'm, I think that's why he sold out of that position. I could be wrong.

Starting point is 00:04:13 It could be something else. But that's why I'm a little hesitant, looking at it from a long-term investment standpoint, why I'm a little hesitant to get back into the oil businesses. Toby, I want to hear what you've got to say. The oil companies are having to do increasingly heroic things to find oil. So oil sands wasn't economical for a long period of time because the price of oil was simply too low and it costs more to get the oil out of the sands. Similarly for the offshore oil drilling, they have to go increasingly further offshore and deeper

Starting point is 00:04:44 to find those big oil fields which are expensive to do. Just on the price of oil. So the best guess, if you're trying to price out a commodity for the price of that commodity in 12 months, and it doesn't really matter what it is, the best guess is always the current price. And the reason is, it's not that it's likely to be where it is in 12 months' time. It's that it's so unpredictable up or down that you minimize your error by guessing or by putting into your model the current price. What interesting thing with oil, I saw some research just this week by a fund manager who, who I know in Australia, who was a university lecturer while I was there,

Starting point is 00:05:25 he's an econometrician, Dr. Chris Leidner, he's looked at the price of oil and said, typically that is the case, the best guess for the price of oil 12 months hence is where it currently is for the simple fact that it minimizes your error. But when oil drops precipitously like this, and it happens so infrequently, that you can find that there's a reasonable chance that it does rebound and it's considerably higher 12 months from now.

Starting point is 00:05:48 And I think he said the margin is something like, 40 to 70% higher from the low. Yeah, I think this is, as it is with all commodities, this is really a marginal cost perspective. So, and, you know, so in the long term, you will just see that, like, the profit, that's simply the adaption between the marginal cost and the margin of revenue. And you will see that you will have, like, an increasing demand of oil, but even a steady demand of oil. And then you will see how the marginal cost for the different companies just adapt to that.

Starting point is 00:06:19 And then you will see, for instance, with Toby was talking about. you know all sand and you're talking about that what's the marginal cost of developing fracking and then gradually you will see that the oil price just adapt to that and i think that's something a lot of people are missing because they're saying we have too much supply yes that's true but what happens when you have too much supply then you will have people going out of the market and that will change the cost structure christin i just wanted to chime in on your thoughts on why buffett and munger from ExxonMobil. Interestingly, somebody asked the same question in this year's annual meeting at Omaha.

Starting point is 00:06:59 And Munger's answer was very interesting. Buffett actually kind of evaded answering this question. He just passed the buck to Munger. And Munger, Munger in his usual form, said, well, it's better than holding cash. And he saw it as a safe alternative place to put his, cash, which is waiting for deployment. And that's what he said. And that was a very interesting answer.

Starting point is 00:07:28 He basically said he'd rather hold cash than to continue holding those companies. No, it's the other way around. He said he wanted to park his cash somewhere. And he chose ExxonMobil for that. And when he found- They sold out of that position in what was it, January? Yes. And they didn't really talk about why they sold off, but the inference that at least,

Starting point is 00:07:51 list I made from his answer was that they found something else. And it might be the deal that they recently stuck with the 3G folks acquiring craft. So maybe there is some cash requirements there. So it was just an opportunity cost type deal where they felt like they could get a better deal with the 3G than that's why they moved out of it. So it wasn't like they disliked it. They just found like they had found something that was more valuable. Exactly. It's definitely like I have been following Buffett's oil bets. And when he bought into ConocoFillips in 2009 or 2010, and then sold it off, it was a clear loss.

Starting point is 00:08:33 They lost a lot of money on that investment. Whereas, correct me, if I'm wrong, on Exxon Mogul, I don't think they lost much money. They pretty much got their money back. So that's kind of the answer, at least I heard in the talk. But however, I liked Toby's description. Essentially, what Toby summarized was that oil industry is a negative feedback loop. Toby, correct me if I'm wrong.

Starting point is 00:08:59 The way I see it as a negative feedback loop is if the oil prices go higher than all this marginal costs that some of the hard-to-find oil incurs will become justifiable at that price, 100 and above or 80 and above. But as the oil price goes down, all these marginal players, like the oil sands, the frackers, all these folks become less economical at that point of time. And as we can see in the recent past, the recounts have been coming down drastically, which will impact the supply. I think it was Stig talking about marginal prices, but I agree with Stig. So I just shamelessly, I'm going to plug my website right now. So I have this website called Acquireers Multiple, which looks at all the companies listed in the US and examines them on the basis of this Acquireis Multiple, which looks for cash rich balance sheets and strong operating earnings, etc. If I run my model now, and you can see this on the side in the large caps, of the top five cheapest large capitalization companies in the states at the moment, four of them are oil and gas.

Starting point is 00:10:13 So Valero, Valero Energy is number one. Western refining is number two. Fluor, which is a construction engineering company, is three. Marathon is four. And YPF, which is the Argentinian energy company is fifth. So sometimes I'm asked, is this a good metric for looking at energy, oil and gas companies? And when I've separated out only the oil and gas companies to find which ones perform the best, this is the best metric for looking at that,

Starting point is 00:10:45 which sometimes that sounds counterintuitive. You know, perhaps you'd want to look at what their reserves are like or what their costs are like. But for one simple single metric for conducting this type of analysis, it is an enterprise value, acquire as multiple type analysis. So that's one of the things that makes me think that energy is going to, energy companies are going to work because they're simply too cheap. They've just been beaten up so much.

Starting point is 00:11:09 There's a lot of unhappiness. with the oil price and there's a big glut. So everybody gets really, thinks that the industry is ugly and going to be dead for a while. And that's the time that you want to be buying your positions if you're going to. So I just want to throw out there. You should have seen the smirk on Stig's face whenever Toby said that he agreed with Stig. You know, Toby is a lot smarter than me. And it's really rare that people that are smarter than me agrees with me.

Starting point is 00:11:38 So that's really nice. No. But I actually, I kind of expect of that. Because I remember the last interview we had with Toby, and he was saying that he had heard someone saying that it was only the tourists who were buying into oil. And I was thinking, that was so much fun. And Toby actually bought into all that part of time, and I did too. So we were two people, then, a lot of dumb tourists.

Starting point is 00:11:57 And I guess that's, that's always nice to think about. Okay, so I want to bring up something real fast here. Then Hari, we'll throw it back over to you. So I got a really interesting email from a gentleman. His name is Matt Hayon. And Matt wrote me this. He said, Preston, I noticed something and I wanted to share this with somebody. I was checking up to see where we were at with the Dondo Holding IPO, which I learned about your podcast whenever we had Hary on early on.

Starting point is 00:12:22 And he said, I found this and he sent me this link. And in the link, he wrote to me with the quotation. It says, Dondo India LTD is 100% subsidiary of a U.S.-based multinational financial service firm, Dondo Holding. Dondo Holding has recently filed a provisional patent with the United States Patent and Trademark Office, which focuses on an enhanced indexed investing model. Not quite the IPO I was looking for, but what does this mean? And so what Mom taken away from that, it kind of seems like he's doing something like with the model that Toby has talked about in his deep value book. And I'm curious, Toby, do you know Monash at all? Have you ever talked with Monash?

Starting point is 00:13:04 I've exchanged a very few words with Monash on a few occasions because I've run into him at Value Investors Congress out here in Pasadena. He's based in Santa Monica. So we're kind of neighbours, but Santa Monica is pretty big. So I actually haven't seen him at Santa Monica. That enhanced indexing is very popular at the moment. And there are lots of patents for that sort of stuff. I don't know exactly. Is it Monisha's index?

Starting point is 00:13:37 That's his. So there are lots of, you know, I think research affiliates have the first patent. And this is very broad. It's sort of anything that's not market capitalization weighted. So that's, you know, anything equal weight, value weight. I wonder how defensible any of those patents are going to be. But, you know, it makes sense to set up a value-based index in India and then to invest on that basis. That's a smart move, I think.

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Starting point is 00:18:22 Because I know whenever I read your book, for me, that was kind of a very big transition in the way that I kind of saw the world of investing. And I was just kind of curious if he had ever contacted you, talked to you about this enterprise value, like some of the metrics that you had in your book where you, I mean, if you haven't read Toby's book Deep Value, it's a fairly transformational experience. a value investor. But I was just curious if he had ever reached out to you or talked to you about your book. He hasn't. But there are lots of, you know, it's not, they're not my original ideas in that book. There are, there are lots of people who are at the same time pursuing that opportunity. And I think it's, I think it's clear that that stuff does work, which metric you choose to use, or if you use some sort of combination of the metrics, it really doesn't matter. As long as you're getting some value proxy. So you could use price to earn.

Starting point is 00:19:15 and you'd do perfectly fine. I think James O'Shawness, he should get the credit there because he brought out what works on Wall Street in 1994, and he kind of paved the way for everybody else, and probably Joel Greenblatt with Magic Formula, deserves the credit in there too. So I'm very, very late to that party. It's certainly not my idea. You know what? You're a really modest guy, because in his book, he actually proves how his numbers are actually, what, 2% higher than Greenblatt's Magic Formula. So you're a very modest person, and I'd like to leave it at that, so you don't try to undermine my comment. I'm going to throw it over to Hari.

Starting point is 00:19:48 I'm going to throw it over to Hari. And what were you going to say before that, Harry? I was just asking, I was planning to ask you all a question about oil prices. Since we are seeing a lot of fluctuation right now, what's the future of oil 10 or 20 years from now, keeping in mind that there are a lot of technological innovation happening in the energy space. including the synthetic fuels or genetically modified algae that ExxonMobil is investing in along with another company, as well as Elon Musk's constant and persistent endeavor, I would say, to kind of, you know, move us towards a oil-free world. What do you guys think about all that development and how will OPEC fare in the future?

Starting point is 00:20:42 Dude, I don't know, but I've got to tell a really cool story that happened to me this morning. So my son and I went to a car show because it's Father's Day. I wanted to go out there and see some cool cars. My son loves anything mechanical. And we went there and there was a guy who had a Tesla. And it was the first time I've really kind of got up close to a Tesla car. And we walk up there and the guy who was, you know, who owned the car, the handles for like opening the door were completely flush with the door. itself and I was like how in the world do you open this thing is it like fingerprint or something like

Starting point is 00:21:16 and the guy says no he says watch this he walks over he has the key in his pocket he walks over and as he gets close to like opening the door the door handle like slowly emerged out of the side of the car and then he like just pulled it open it was the craziest thing I've ever seen and so then I look inside this thing and the dash is like monstrous and it's just a nothing but a big large touch screen like iPad looking thing. And he said it's completely touch, like interactive dash inside this car. So your comment, I think, is I really think Silicon Valley's on the hunt to turn Detroit upside down.

Starting point is 00:21:55 And I think that you have a really good comment. Like, how is technology going to just kind of revolutionize this oil industry? I don't think that I see it happening quickly, but I definitely think that you got a very strong concern and risk that you identified. So let's throw it out to the group and see what they think. I think that the death of oil has been, it's one of those things that everybody predicts 20 years hence, and it has been the case for a long period of time, you know, the peak oil idea that we just run out of oil or it gets too expensive to kind of extract. I hope that happens.

Starting point is 00:22:28 I hope that we get to that stage where you have a battery at home, it draws energy off peak, so you don't pay peak prices. we sort of get smarter about distributing power. So you don't have to, you know, when it's really hot in the middle of summer, you're not drawing it at the worst time of the day, which is what makes it so expensive. So the battery power is going to, you know, time shift the way that we draw power. And hopefully that'll change the entirety of that of several industries. And then you have a car that you can plug in at home, solar panels on the roof.

Starting point is 00:23:02 I think all that stuff will be great. And I hope it gets here really soon. but I think that it's going to take a lot, lot longer than we think. Hopefully it's 20 years, but I guess I would guess longer than that. Yeah, I really love when you talk about oil because I kind of feel like Preston and I, we agree on everything. I mean, literally everything when it comes to investing, comes to life in general, but when it comes to oil, I'm always much more bold than Preston.

Starting point is 00:23:30 So I think that's always good fun. No, so Toby, I think that you are really hitting a spot on when you're talking about distribution. So a lot of people, they would be thinking, hey, we have other type of energy. Why don't we use that instead? That's really not how the energy market works. It isn't like you can say we can have one barrel, and that gives a certain amount of energy, and then we can have a windmill or a hydro generator. It doesn't work like that because partly there is the distribution.

Starting point is 00:24:01 you have to get the power somewhere. And then we also have a storage problem. You can't store all the type of energy the same way. And I think that's just something that we emit from time to time. And then another thing I also want to say about oil. And it's not like I don't think it would be amazing if we had an all-free world, also better from the environment. But often when we talk about energy and when we talk about oil in particular,

Starting point is 00:24:27 we talk about that in the Western world. So we are really privileged in terms of how we are consuming our energy and the technology that we have access to. Now, if you look at something like Eastern Europe or something like Russia, they use a lot of gas, they use a lot of coal, they just have a completely another type of system. They can't distribute that amount of energy because the infrastructure is so much different. And I think that that's something that we might forget when we're talking about oil. is that the developing world is actually using less and less of the world consumption of oil while the developing country is using more and more. And also they don't have the same environmental issues. So I just want to throw out there.

Starting point is 00:25:14 So Stig got so frustrated with my lack of understanding with oil that he found the best book on Amazon about oil. And it's written by Morgan Downey. And the name of the book is Oil 101. and he's actually coming on our show next week for us to interview him. So if you guys have some really good questions about which your concern is with oil, send us those questions over email. And I'm talking to the Mastermind Group because by the time this airs to our audience, we're going to have already interviewed him.

Starting point is 00:25:42 So if you guys seriously do have some really good questions, send those over to us so we can ask him next week. And I've been pouring through his book and it's totally insane. Like I've never thought a person could understand oil at this level, but the book is totally amazing, like unbelievable. But anyway, we'll go on to the next topic here. Stig, did you want to ask one of the questions that you had for the group? Yeah, so we have heard a lot of smart people talking about how many stocks you need to have to diversify if you pick single stocks.

Starting point is 00:26:12 So a lot of people would say you need to have like 20 stocks because then you can calculate volatility. And if you believe in that as a risk measure, it also makes kind of sense that you have something like 20 stocks. And then you have another party who'd be saying something like, well, we should just invest in index funds. And I think most people could agree on that we can just buy like the world stock market or SMP 500 or something like that. We don't need more than one or two to be really diversified because it's inherent in that. So I came up with that, probably not all by myself, but I just thought, what if I did something in between? What if I invested in something like Moni's Poprise company, something like Berksa Hallaway, an active managed ETF.

Starting point is 00:26:57 So I would have the diversification in terms of a lot of different stocks, but I would be heavily exposed to manager. I mean, even in a company like Berksa Hellawey that owns a lot of different subsidiaries, you're still exposed to Burma Buffett's ability to be capital allocator. So my question to the master group is, how many stocks, stocks do we need to own to diversify that managerial risk, the CEO risk, so to speak? It's a great question, Stig. And Buffett has said that you've got basically two choices when you invest. One of them is just to buy the most diversified lowest cost index fund that you can find.

Starting point is 00:27:37 Or you invest like a value investor and you find undervalued positions and you wait towards the ones that are the most undervalued. and he says that, you know, basically the better you are at identifying those opportunities, the fewer positions you need to hold. So for Buffett, he says five, Munga says three. I think Pabri would say 10. Klaman says 10. The academic literature says it depends a little bit, but it's somewhere between at 20,

Starting point is 00:28:05 you've got kind of 94% of the diversification achieved. And at 30, you've got kind of 97, and then you've got these reducing returns to scale as you add more positions to the portfolio. You don't get any sort of additional benefit beyond that. The one thing that I always think about in relation to the indexes, so market capitalization weighting makes sense if what you're trying to achieve is to measure the performance of a market, but it doesn't really make sense to invest that way. And the reason is that when things get very expensive, they become an increasingly larger part of the index. and you're kind of putting more capital towards more expensive things when all else being equal, you'd rather not do that. So the solution is therefore to either equal weight,

Starting point is 00:28:50 which just gets rid of that random error, or you value weight, which is what, you know, we were talking earlier about those smart beta. That's exactly what smart beta does. So it's looking for some underlying metrics. So research affiliates have a thing called the Fundamental Index and they weight according to the sales or, the assets or I think they might even have a number of employees.

Starting point is 00:29:15 So that's another way of waiting, fundamentally waiting. But I think the best way is to value wait. So you look at a discount to valuation and then you wait. And you need kind of a computer to do it if you're doing it across an index of 3,000 positions or 500 positions or globally. But that's what I think they're going to do. And I think it's going to be very, very hard for active managers to beat those indexes going forward. That was awesome. Thanks for that response, Toby. That was fantastic. I have nothing to add on that.

Starting point is 00:29:46 Hari, Colin, did you guys have anything to add on that one? I had just one comment, like, you know, many times, like when people say risk, some of them refer to volatility and some of them to permanent loss of capital. And Stig, I'm assuming you were referring to permanent loss of capital, were you? Yeah, that's correct. Yeah, in that sense, I think, as to we said there are multiple ways. It all depends on your risk appetite and the kind of capital you have. For example, if you have a capital that's really long term and it's permanent in nature as an individual investor, I can stomach volatility better than a fund manager who has to

Starting point is 00:30:30 answer to his clients every other quarter. So it all depends on the situation of the investor, I believe. Okay, so I think that's a really good part, and it really depends. And I also know it's hard to copy the number, like we would all like to have, be able to quantify that and say four or you need six. But let me rephrase the question differently then. Would you feel comfortable about only owning Berkshire Halleway, for instance? So the vast majority of Warren Buffett's own and it's worth that's in Berkshire Holloway, because he says he is, you know, heavily aversion. How would you feel about that just owning one stock?

Starting point is 00:31:10 I mean, do you feel this is a versify because you have that that means you're at risk? So I will tell you the way I think about it. Number one, like, you know, whenever I'm thinking about returns, I can get in the market or I should get, I kind of consider my opportunity cost and also whether I deserve it in terms of the knowledge I have accumulated the work I have put in. So the question is, am I come from?

Starting point is 00:31:36 is I'm I comfortable owning 100% or putting my 100% of my invest in Berkshire? At this point, I would say no. And also it depends on the opportunity cost because I'm assuming I'm not going to put everything at once. So based on what's a better alternative at that point of time, that's how I would say it. I would be interested in knowing what are your thoughts on that. I think one of the reasons that smart bait is so attractive is that you don't have that single person standing there who can, you know, people, people do get old, they get dementia, they get, they get emotional if they, if they lose money. Some guys take big swings if they get down a lot. You could be in a fund like Bill Miller's.

Starting point is 00:32:31 So Bill Miller had a very good long-term track record, something in the order of 13 years, and then he had kind of a disastrous period. That's why I always advocate for systematic, quantitative approaches to investment, because it just takes that human element out. The system always invests in a way that makes me really uncomfortable. So I think last time I was on, we were talking about oil and gas at that stage. I always feel like I have to apologize for what the system's doing, because I always think this is the time when we're going to do something really stupid.

Starting point is 00:33:04 And I can read, like anybody else can, we can go out and see all of the people criticizing the tourists in oil and gas. And the arguments that they make are good arguments. That's why it gets so cheap. The Bears arguments are always really good arguments. And I can read them and agree with them because I'm sort of naturally conservative as well. But over the long term, it has been a sensible thing to invest in those. undervalued things where they look really, where the prospects look really bleak. And a computer will do that where a human can make mistakes.

Starting point is 00:33:38 So that's why I think that's smart beta or some variation of that's going to be, it sort of solves that problem a little bit. Whether you'd necessarily put all of your investment into a single one of those indexes, that's, you know, maybe three makes more sense. So if something happens to the person running the index or there's some fraud going on, then you don't lose all of your eggs. But I think if you're in a good thing, good index and you've got a very long-term horizon, you're going to be fine.

Starting point is 00:34:06 Toby, just a follow-up question. You talked about the system. Is the only way to invest in those systems is through a manager who is following that system, or do you have any recommendation for somebody like me who's an individual investor who can follow that system on my own? It's easy enough to set them up yourself. You need to be able to screen. as a first step.

Starting point is 00:34:32 And, you know, the best books on screening are probably James O'Shauner sees what works on Wall Street. And I have, you know, quantitative value and deep value, which are both sort of about screening, about valuation. And then you need some, you just need a sort of fixed handful of rules for the way that you're going to treat the portfolio. And you need to write them down at the outset. So you decide, we're going to sit down with a portfolio every quarter. and we're going to apply our handful of rules, and we're going to buy without fear or favor, and sell without fear or favor.

Starting point is 00:35:09 I think it's easier if you have it kind of automated because there's always that trick that it's hard to do it. So, you know, the acquires multiple just to pluck that again. It does offer a pretty good, you know, pretty good screen. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. 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,

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Starting point is 00:38:47 So I just want to throw this out there. So when we look at these different approaches, I'm kind of of the opinion. My investing approach has kind of morphed through the last three to four years. And I kind of side more with Toby these days than I do with the Bill Miller kind of style of individual stock picks. And just because I think it does take that emotional element out of it. And I think when you look at Ray Dalio, that's exactly what he's doing. He has a model very similar to what kind of Toby's describing here where he's not making the pick. He has set up rules.

Starting point is 00:39:23 He has programmed those rules into an algorithm, and it's making all the selections for him unemotionally. And he's doing it across a world economy, and that's the big thing with Dallio. So I got a two-part question for the group. The first one is, in 20 years, 25 years from now, do you think Ray Dahlio will be viewed as a better investor than Warren Buffett? And then the other part question, these kind of go hand in hand maybe. what is the biggest risk that you think we face with the current market moving forward? From what I understand, Ray Dalio has suggested that the biggest risk is the junk bond market and also the emerging bond market.

Starting point is 00:40:02 When you combine those two together, the emerging bond market and the junk bond market, it's accounting for about $15 trillion right now. And that's what they're kind of pinning the rows on, that this thing's ultimately going to fall in on that is being the critical variable for the next crash. regardless of whatever psychological factor that might be the catalyst. But I'm curious to know your opinion on those two different questions as far as what's going to be the big risk that's going to make this thing fundamentally crash and also whether you think Dalia will be viewed as a better investor than Buffett in the long term. I actually have no clue about the second question. But the first question, I would definitely say no.

Starting point is 00:40:42 And this is really a perception thing. he might get better returns. But there is just something about the art of picking individual stocks that are really hard to compete against. Even though that you have created the best beta fund ever, or even though you created the best screener ever, it's not something that the public would really accept as being a great investor. I think the public would say, I understand Warren Buffett, I understand the principles he's outlining, I deeply admire his ability to pick the best stocks, so that, ergo, that must be the best investor. Even though that we might see that a lot of people would gradually, at least in my opinion,

Starting point is 00:41:24 go into this systematized way of indexing, I think that the last, I still think that the vast majority would look at the art about picking individual stocks as the finest odd, no matter what the returns are. I guess I see it a different way. I look at the returns being the true gauge. And I think that from my vantage point, I think Dahlia protects his downside better than Buffett does. So that's maybe why I'm framing the question and asking just to kind of get your opinion. I think Dahlia is a little bit leverage, though, isn't he?

Starting point is 00:41:53 Does he have some leverage? He is lever. Yeah, he is leveraged. Absolutely he is. It's way too early to, you know, Buffett. The reason why Buffett is so well regarded is because his track record is public and so long. Yeah. Will Dahlio in 40, you know, when Dalia's 40 years into his career, he'll still be 10 years behind

Starting point is 00:42:12 where Buffett is now. Yeah. Buffett's got a 50-year public track record. It's just kind of with phenomenal returns over that period of time. But I think Stig's approach is a good one to that. Buffett will be regarded as the better investor because he doesn't hand it over to a system. He's done it himself. He smirked again.

Starting point is 00:42:34 Go ahead, Hari. You want to hear your thoughts. Yeah. So I think I agree with Stig because there is a risk. that even if Dahlia succeeds, as Toby just mentioned, people might credit the system. But I'm curious, how is it doing so far? Has they beaten Buffett so far? No, you know, I think his returns are probably around, what are they annually, 15% over, what, a 25-year period or something like that? They've been pretty good. I don't think that they're at Buffett's 19. What is it, 19.6% or something like that over the 50 years or.

Starting point is 00:43:11 And what is the capital he has under management? It's like $100 billion. It's massive. Yeah, I think he's at $120 billion. Okay. That's pretty huge. And 15% at that level seems quite impressive. The thing that I...

Starting point is 00:43:24 I guess the thing that I'm really impressed with is an 0809 with Dahlio. His alpha fund actually was in the green in 08. Okay, which for me, that's just totally crazy, especially knowing that he has a computer algorithm making the trades. I think that's totally crazy. And then the year after that, I'm sorry, you know, in 2011, when the market was down, in 2011, when it was down, I think he had something like a 30 to 40% return in the green during that year. I mean, it was massive. It was just, he obliterated the market that year.

Starting point is 00:44:00 So I guess I'm looking too recently on trends. And I mean, like Toby said, it's hard to go up against Buffett after he has such a long decade. and decades of experience to prove that he can get a 19% return. That's really kind of hard to do that. But, well, it's next and near impossible to do that except for one person. But I just, I wanted to frame that question because I have so much respect for Ray Dalio. And I just wanted to hear what other people thought about it. I just wanted to actually jump on the second part of your question there about risk, Preston.

Starting point is 00:44:32 I recently read an article and I'm really interested to hear what everyone else thinks of this and their thoughts on the topic. but it was called radishes onions and the stupidity of debt. And what it was talking about is the amount of margin that's being used on the New York Stock Exchange. Apparently it crossed the $500 billion mark in April up from something like $475 billion the month before. And I found that really interesting because that's roughly 50% higher apparently than it was right before the crash in 2007, 2008. So that's really interesting for me to see the amount of what is essentially just loans that people are taking and using to purchase their equity. So I just want to know what everyone else thinks when they hear those, those figures. It's, I think Dshort.com has the charts showing the amount of margin debt relative to the market capitalization of the NYC or whatever, the index that it tracked.

Starting point is 00:45:36 it's extraordinary that it's been blown so big. I don't know, I don't know contextually whether that's a bigger number than it was in 2007. And there does seem to have been sort of this consistent growth over a very long period of time. There's just more and more debt in the system all the time. I don't know whether that's kind of a secular thing that it just keeps on piling up forever and ever. And we look back in 20 years time and say 500 billion, how quaint, you know, that's one-tenth or one-oneth of where it is now. or whether it's one of those things that it only happens when interest rates get really, really low, and you've had a very long period of time.

Starting point is 00:46:12 We've had really good returns on the stock market. That's one of those things that when it cracks, it's got to be making the system more fragile, right? It makes it harder for people to hold onto their positions. If you're down, you get a margin call. Even if you're a kind of guy who doesn't care about volatility in his own portfolio, you'll find that your broker does. Broker will be asking you to make good on those, on those. positions that are down. That's where

Starting point is 00:46:36 force selling, you know, the cascading, forced selling, that's when you get the really big busts in the market. So yeah, it's a frightening thing that there's that much debt there. From my perspective, I think it's, I'm more in the second camp where it's fragilized and it's scary. I totally agree with Toby on that. I think that it's

Starting point is 00:46:53 creating a more fragile environment. I think that it will make your downside a little bit more abrupt. He threw out a very important tip there, if you didn't hear it at the very start of what he said, D-short.com. D isn't dog, don't spell it out, just D-short.com. Go there, I'm telling you, the charts that Doug puts up on his web page are phenomenal.

Starting point is 00:47:12 I go there all the time. I found that really interesting that you threw that out there, Toby, because we're going to the same site. Stig, I saw you had something you wanted to say. Yeah, and I actually like to talk about that exact site because I'm such a huge geek. So every month that these charts are coming out, there's one month lack. I'm always really excited to see the development. And Toby was completely right about the trend, so we will see more and more debt as we go along.

Starting point is 00:47:41 And right now it's around $500 billion. And I know that this, I mean, it's really hard to, how much is that, $500 billion? But I actually posted the chat on our forum and said, you know, guys, this looks really frightening in nominal numbers and almost also in relative numbers. We're looking all-time high. I don't know what's happening, but it could crash.

Starting point is 00:48:04 And then one of the, Christopher, one of our great users, he's saying, well, you know Stake, you might be right, but the market cap of S&P 500 is 20 trillion. So to me, it seems like relatively small amount of debt. And, you know, I don't know what to answer him. So, guys, I was really hoping for your help now that we're talking about it. I don't think you can look at it from market cap.

Starting point is 00:48:27 I think you have to look at it in terms of maybe trading volume. the amount of trading volume per day. I could be wrong because that was just off the top of my head. But Toby, you seem to be nod in your head as well. Yeah, I think it's very hard to know what that number means out of context. And that's kind of the point that I was making. It's hard to know whether that's a lot of money or not a lot. But the way that Doug puts those charts together on that,

Starting point is 00:48:52 it certainly seems that you get these peaks in margin debt that coincide with peaks in the stock market, which makes intuitive sense. And he also seems to be suggesting that when you get the reduction in margin debt seems to precede the bust, which I find really interesting. There's not enough data points. There's only three peaks that it captures. But it seems to be that margin debt comes off before the market comes off. I don't know how that is the case, but he has a discussion about it on his site where he talks about that. Yeah, and I just want to throw out a quick statistic.

Starting point is 00:49:26 The correlation between that debt and the market is 0.97. So it's quite significant, I'd say. So it's interesting. Colin, I think you kind of answered a little bit of the second part of my question as far as what's the biggest risk that we have moving forward and what could potentially cause the downfall. So you're saying that because there's so much leverage on the market that you think that that that's setting yourself up for margin calls that are really going to have kind of this quick and immediate impact if it gets much more leveraged. Does anyone else have any other highlights or concerns that you think could be that critical variable from a fundamental standpoint, not a psychological standpoint, but a fundamental standpoint? I feel like it's all about the easy money. And today I think there is all the incentives for people to take debt, not just in the stock market, but everywhere else.

Starting point is 00:50:17 And that's, when you talked about a fundamental factor, Preston, I would identify that as one of the, fundamental factor how Fed incentivizes investors. Hey guys, so we typically play a question from a member of our audience, but instead of doing that, what we're going to do is we're going to go ahead and send Matt Hayon, who sent me that email that we were talking about with Manich Pobri. We're going to send him a free signed copy of our book, the Warren Buffett accounting book. I also want to highlight the other members of our group. So Toby, he wrote this book called Deep Value.

Starting point is 00:50:47 He also wrote a book called Quantitative Value. And they're fantastic books, just totally amazing if you have not read the books. Also, he has a website called the Acquiresmultable.com. That's where he has this scanner that goes through and finds the enterprise value of these different companies and that they prioritize them for you. So I highly recommend his site if you're looking to take more of this quantitative approach. Colin has a website. It's called Inbound Interactive where he is a search engine optimization expert. I highly recommend you go there, especially if your business is more of on the private level. He has a website that specializes in that to help you get ranked within Google for

Starting point is 00:51:22 those local searches. We also have Hari Ramachandra. who's an executive over at LinkedIn. He has a website. It's called bitsbusiness.com where he writes about going to the Berkshire Hathaway Shareholders meeting to any other just business topic. I think you'll find the things that he writes about extremely interesting. So we're really just thrilled to have you in our audience. If you're really enjoying our podcast, please go to iTunes, leave us a review that helps us out

Starting point is 00:51:44 so much. We just really appreciate everything that everyone's doing out there for us. And we really hope that you got something out of our mastermind discussion today. So we'll see you guys next week. 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.com. Submit your questions or request a guest appearance to the Investors Podcast by going to

Starting point is 00:52:08 www.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 was copyrighted by the TIP Network. and must have written approval before commercial application. Thank you. Thank you.

We Study Billionaires - The Investor’s Podcast Network - TIP 043 : Mastermind Discussion 2Q 2015 (Investing Podcast)

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