We Study Billionaires - The Investor’s Podcast Network - TIP 054 : Mastermind Discussion 3Q 2015 (Business Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 54 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. Everyone's excited because this is the third quarter's mastermind group. And we got Hari Ramachandra back with us from Bits Business. We got Colin Yablonski from Canada. And we also got Toby Carlow out in California with you. We're going to have to talk with Harry first because he's kind of in a predicament. He's out camping right now and he's borrowing somebody's phone just so he can dial in.

Starting point is 00:00:59 Harry, what's going on out there? First of all, give us an update on how this all went down. And you got out there, you had no Wi-Fi, and then you couldn't dial in. So tell us the story because this is kind of funny. Yeah, this is interesting. I came here for camping. This is called Russian River out here in the northern California, a couple of hours drive from San Francisco.

Starting point is 00:01:20 And I thought I will have signals everywhere, so I should not have any problem connecting. I figured out that AT&T has no coverage. So for all you investors, thinking of investing, in AT&R Verizon. This is a litmus test. Is the guy who you stole his phone because you had the wrong service. So you find a guy that has Verizon. He lends you his phone. Is he staring at you right now? Is he like giving you the mad dog as you're talking to us? No, he's having his coffee and enjoying it while I am talking to you guys. And I probably

Starting point is 00:01:51 will buy him that coffee. Oh my God. Yeah, that and more. Well, please give him our best. And I'm sure if you can tell him the name of our show, he can listen to this. and be very proud that he lent the phone in order for this to happen. It's really important that we have Hari on the line today because Harry last weekend was at Monash Pabrai's shareholders meeting, and he's going to talk to us about being there, but we're going to have to drop Harry off the phone so he doesn't run into some issues

Starting point is 00:02:17 with this guy who's lending his phone. So, Hari, tell us about the shareholders meeting that Pabri put on. I'm really curious to hear what's going on with his holding company that we know he was going to try to get going here in 2015, so lay it on us. So this is my second visit to the Pobrai annual meeting. Now he calls it the Dando and Pabrai Friends annual meeting. As usual, Pobri was a great host. The format was typical, same as last year.

Starting point is 00:02:47 We had initial meet and greet for first half an hour where we could talk to Pobri. And I also met Guy Speer, and it was great fun chatting with him and catching up with him. After the initial meet and greet, Pabrii has. his presentation for almost an hour. He talks about what he thinks about the current economic conditions, the markets, as well as he has a quick review of his fund performance, followed by a post-mortem of some of the previous investments. So sorry to interrupt, but I'm curious to know how his fund has performed in the last year. So that is an information he requests not to make public. So it's only for his investors. Okay. And since I was there as a guest,

Starting point is 00:03:30 I will comment about. We don't want to get you in trouble. Yeah, we don't want to get you in trouble. So what I think most of the listeners will be interested in is about Dhando. Dundra Holdings that he formed last year. And there were rumors that it will go public this year. Quick summary of Dundah Holdings is that it's not going to go public this year. And Paburai didn't give us any date.

Starting point is 00:03:56 However, there were a couple of things he announced. One of the things is that he has opened. an office of Thundda Holdings in India. And he's also planning to start a ETF based on value investing principles. He's going to call it Junun. Principles are very similar to what Toby has talked about in the past. So there are certain quantitative analysis that goes into this ETF. So at the end of the day, Hari, I'm curious, is he basically going in this direction where he's just going to have an ETF and that's going to be really the path forward? Or is he ultimately going to still do the Dondo holding, but it's just delayed probably because of the current

Starting point is 00:04:36 market conditions. And I know you might not be able to comment on that. But is he still pursuing starting his own holding company and going down the same path that Warren Buffett went? I believe so, because he has already purchased Tone Trust Insurance, which is a worker comp insurance company, a wholly owned subsidiary of Dundah Holdings. ETF is going to be one of the activities that Dunderholdings will be involved in. From what I heard, he is interested in buying off companies completely, like as a subsidiary. But at this point of time, he has identified multiple opportunities where Dunder Holdings can be involved. So I just want to give some context to some of the newer listeners that maybe haven't been following the show since the very beginning. So Monish Pabri is a

Starting point is 00:05:23 very close follower of Warren Buffett. Monisha's returns over the last 10, 15 years have been absolutely monumental. Harri, do you know how big the returns have been over like the last decade? I want to say it's close like a thousand percent. Yes. And annualized it's going to be 19 to 20 percent from some of the funds since inception. So he's up there. Yeah, he's really close to the same return level as Buffett around the 19 to 20 percent annualized rate. So this is somebody that we follow very close attention to. We really like to form our opinions on maybe where the market's going, some ways that he invest and just talk about that on the show because he's just such a brilliant mind when it comes to investing. So here's my opinion.

Starting point is 00:06:07 And I wasn't at the shareholders meeting. So I'm not, you know, obliged to anything. But I really think that he, and I don't really want Hari to comment because I know that Hari is in a tricky situation attending the meeting. So Harry, you know, please don't comment because we don't want to get you in trouble with Monash. But my opinion is Monish is holding off because he doesn't want to have an IPO right now. I have a bunch of people buy his stock for the IPO. This thing goes south and he has a bunch of people mad at him and just not happy and then it just could get worse from there. Yeah, that's one of the great challenges of running businesses like that that you have. The best times to raise money are the worst times to deploy money.

Starting point is 00:06:42 He's probably got a big enough name that he's able to hold off to a worse time and then that'll be a better opportunity to deploy it. And I think it speaks volumes about his character. I mean, like you said, this is the absolute best time for him to probably do an IPO. He's able to raise a ton of capital and maybe just sit on it as he basically protects that liquidity and then he can employ it maybe if the market goes a lot lower and buy back equities at a cheap price. So I think it says a lot about his character that he's not taking advantage of potential investors. I guess I'm a bit sad that he's not putting up his holding company right now.

Starting point is 00:07:18 It's definitely an investment. I would pay very close attention to. But as you also said, the timing might be good. But what he wants to do is to prove to himself that he's not. He can compound at 20% or 20% plus even, and that's probably not going to happen if he issues he shares at the current time. At the end of the day, it doesn't matter if it's a holding company or what, but you've got to create a brand.

Starting point is 00:07:41 You know, when you look at the Berkshire brand and what Buffett has created around the Berkshire brand, it's phenomenal. It has so much power at this point. And I think a lot of that has to do with the fact that Buffett never took advantage of people whenever he easily could have at certain. points in time with the market because he understands it so well. Now, I see Toby might have a little bit of a different opinion because he's smirking, but I don't think that Buffett's ever taken advantage of his own shareholders, but he's certainly taken advantage of low interest rates. He's under no

Starting point is 00:08:12 obligation to look after the people who buy Berkshire's debt deals, but I wouldn't buy Berkshire's debt deals. It's very hard to make money out of them. It's not a charity. You're allowed to try and make money. Harri, what else do you got from the shareholders meeting? I know you've got to get going. I think, Preston, to add to your point, and Toby made a great point to, Pabra, in fact, mentioned that right now, the market might not be in a bubble. He didn't confirm that it's in a bubble, but he definitely said that it's frothy. Yeah, one of the data points he gave in the meeting is that during the dot-com bubble in the year 2000, there were 120 companies which had P ratios more than 100. And he compared it to today where we have around 80, which have P ratios more than 100. He said, it's not a bubble, but it's getting up there. And for your listeners, I'm going to document my notes and publish it on my blog soon.

Starting point is 00:09:09 He went over a lot of details about the history of bubbles in the stock market. And he tried to compare the bubbles in the past to what's happening now and gave us insight into what can we expect in the future. So, Hari, those are some fantastic comments. I think the most important thing for our listeners to hear in that is Hari types up detailed notes of when he goes to the meeting. So if you guys want to capture some more information of what Ahari types. took away from the meeting. I'm sure he's going to have a lot more information in what he writes out in his notes. Go to bitsbusiness.com. We'll also have a link in our show notes. Go there and we'll link to Hari's write-up of attending the shareholders meeting and all

Starting point is 00:09:53 of Pob Rice's thoughts. I guarantee you'll get a lot of value out of that. So, Harri, thank you so much for just taking people's phones captive to come on the show today. We greatly appreciate it. And I know our viewers, I appreciate your comments. So thanks for joining us, bud. Thank you guys and see you guys next time. All right, I'm throwing it over to Toby because Toby's been doing a little bit of quantitative analysis on the current market conditions and I'm really curious to hear what this is all about. So give us a little bit of an update on what you've been up to, Toby. The thing that has differed from what I would ordinarily talk about, I think that the market's very expensive. The evidence that I give for the expense of the market

Starting point is 00:10:32 is those longer term cyclically adjusted market measures like Schillers, PE, also known as the cyclically adjusted price earnings. Or you could look at Tobin's Q or Equity Q, which basically looks at the replacement cost of assets versus the market value of those same assets. And when the market value vastly exceeds the replacement cost, then it's overvalued. And we're kind of at historic highs on the basis of that measure.

Starting point is 00:10:58 And the other one is Buffett's measure where he talks about the market value, the total market value of equities versus gross national product. And those two should be in some sort of ratio and basically you can look back 100 years at those levels, and you can see that we're now at a point where we're exceeded only by 2000 in terms of overvaluation. So those three metrics look at very different aspects of the market,

Starting point is 00:11:20 and they basically agree in broad terms that the market is exceptionally overvalued right now. Now, that's been the case since about 2012. And so what does it matter that the market's overvalued if the market can clearly be very overvalued and continue to become more overvalued. The market's kind of been above its average since 1996, which is coming up now on 20 years of overvaluation. So the other wrinkle that I've added to that is this trend following idea.

Starting point is 00:11:50 So you can use these moving averages and you can determine whether the market is trending up or trending down. And when you combine that with these cyclically adjusted overvaluation measures, it becomes quite predictive of the type of market that you're facing. So the worst type of market to be in is one that is very expensive and trending down. And that's what we find ourselves in at the moment. And the trends that I'm talking about, you can either use just a 12-month simple moving average or you can use this thing that identifies what they call the Death Cross or the Golden Cross,

Starting point is 00:12:22 which is the 50-day moving average versus the 200-day moving average. And it doesn't really matter whether you use a simple moving average or an exponential moving average. They all broadly agree. To refer to what you said, Toby, about Chile's PE. because I use this metric myself. And I think there's a lot of interesting articles on this subject. And one of the most common critiques that are here is that if we look at ShillusP. right now, earnings, they're still artificially low because of the financial crisis.

Starting point is 00:12:51 At least that's one of the most common critique. So what would be your response to that critique, Toby? Do you think we can still use Shillus PE in evaluating the current mild conditions? Let me just step back one step before I answer that. So of the three metrics, I gave before, I think Schiller's P.E. is the worst. I think the best is that replacement cost of assets. So Tobin's Q or Equity Q, so Tobin's Q looks at all of the capital of a business. So the earnings question is an interesting one. If you actually look at the earnings against their

Starting point is 00:13:21 long-term trend, this is Shillers earnings, which are adjusted for inflation and then a 10-year average is taken. If you look at those earnings, they're actually above trend. So the critique has been up to 2012, Shillers average included the 2002 recession, and it included 2007-8-9, which was the worst one we've had in a very long time where S&P 500 earnings went to zero or negative because the banks wrote down so much in terms of assets. So even including those two huge earnings recessions, earnings were above trend through that period. And the reason is that, and this is why we take an average rather than using a single year, each of those years in between, was so far above the trend that even including those two recessions, it was still above trend.

Starting point is 00:14:06 So you can have those averages where you pick and choose, or you can sort of treat it the way it's supposed to be treated, which, you know, you've got to take the good with the bad. And if you include the good, you're above trend. There's an argument to be made that the Schiller P.E. where it is, even though it's very, very high, actually understates the situation. What's crazy is Schiller's on TV. I've seen multiple interviews with him in the last, say, two months. and he is a huge bear right now.

Starting point is 00:14:30 For the guy that came up with the ratio itself and the guy who wrote the white paper and teaches a Yale with a PhD, he's a big bear right now. And I think that just further complements your comment there where you're saying maybe it's even understated at this point with the Schiller PE. Just for people out there,

Starting point is 00:14:47 if you don't know what the Schiller PE is, what it is when you take the regular price to earnings ratio, which every stock out there has a price to earnings ratio, when you look at the market as a whole, you can basically add up all the price to earnings ratios of all the different stocks. When you do that, the price is on top, the earnings or the profit is on the bottom. When you invert that, it tells you a percent. So let's say that you have a PE of 25. That would equate to a 4 percent return on the market when you invert that. The Schiller PE is the same exact thing. Only accounts for inflation over the last 10 years and it gives you a more accurate expected return. I recently heard Ray Dalio on Bloomberg this week and Dalio was throwing around the three. and a half percent return is how he kind of saw U.S. equities at this. For me, when I'm looking at this, and the reason why I'm a huge bear is not necessarily because of the U.S. market, but because of the implications of the global market. When you look at all the other dependencies

Starting point is 00:15:42 that the U.S. market has, even though you could get a three and a half percent return potentially out of the U.S. market based on the current market prices, I think that places like China, Japan, Europe, South America, all these countries. are just in the hurt box. Whenever you look at their path, their GDP growth, their inflation numbers moving forward. And I think that that piece, that's why you see Dahlio, I think being such a big bear at this point, is because he's saying that the global credit expansion and contraction is the piece that people need to pay attention to and not this short-term U.S. credit cycle of the last seven to 10 years.

Starting point is 00:16:23 He's saying that that's the small picture. you need to take a step back and look at the bigger picture and you'll fully understand it why we're in such a bad position right now. 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, and every conversation you have is with people who are actually shaping the future.

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Starting point is 00:20:41 Back to the show. So, Toby, I don't know if you can put some numbers on this, because because we keep saying that the market is overvalued. So in your research, but have you come up with a number saying this is probably where we should be if things were normally valued? I think it's about 1,200 on the S&P 500, which is kind of shockingly low. In 2000, I was at university and I had this econometrician professor of mine who was a value guy who sort of introduced me to value investing.

Starting point is 00:21:10 And he said, what is the mean valuation of the market? and I wouldn't calculated that at the time. And I was kind of embarrassed to show it to him because I thought this is clearly wrong because it's just so far away from where the market is. And he said at the time, look, that's probably the correct number. You're unlikely to see that any time soon. But just keep on following that.

Starting point is 00:21:31 And so I followed it pretty closely for 15 years and it's been kind of an extraordinary period in the markets because we had the longest bull market from 82 to 2000. And it's hard to say it now. And I think that there are bulls out there who'll say, where we're at the beginning of a new bull market that probably bottomed in 2009. Colin, what kind of questions you got right now? I'm curious in what's running through your mind with all this.

Starting point is 00:21:57 Yeah, sure. So one of the challenges that I'm facing right now is that up in Canada, given what's happened to the price of oil over the last few months, the Canadian dollar relative to the U.S. dollar has declined by about 30%, 25, 30%. And so for me, making purchases of equities on any American exchange comes with an associated risk in that if the price of oil is to increase, that should also stimulate the Canadian economy, which would drive the value of the Canadian dollar relative to the US dollar up. And so my struggle right now is do I transition my Canadian dollars to US dollars, purchase US equities, and then invest? or do I wait for the price of oil to rebound, hoping it rebounds, to see the value of the Canadian dollar relative to the US dollar go up? And so I'm having a difficult time understanding fully how I can hedge against that issue.

Starting point is 00:23:00 These things are complicated, but add in additional complication that you don't need. I think what you're trying to do is construct the portfolio of the largest amount of earnings that you possibly can over the next 10, 15, 25 years. The question that you ask yourself is, is it more risky to be concentrated into a single currency or is it better to be diversified into more? And I think if you don't know what's going to happen, which I don't, nobody does, you're better off being diversified into a lot of different currencies. We've all got biases for our home countries. We all vastly prefer our own currency. I'm Australian originally. I'd be concentrated into Australia. Australia looks a lot like Canada. It's sort of a mineral-driven economy. And it's tied to the

Starting point is 00:23:43 fortunes of the US dollar when the dollar in Australia tanks, everything looks much, much more expensive globally. So it makes sense to be sort of, you wouldn't want to be concentrated in Australian. As a Canadian, do you want to be concentrated in Canada? That doesn't necessarily mean that you put everything into the US. That means you sort of diversify more globally seeking to maximize the earnings that you can possibly buy, given all of the developed markets and everything that goes on around the world. So in Canada, we have the TSX, which is the exchange here. and I had sent a question to Toby probably a month ago about an oil ETF that's offered in Canada. And I said, well, Toby, does it make more sense for me to buy the oil ETF in Canadian dollars as opposed to buying a USO, UCO, something from the States?

Starting point is 00:24:27 And he said, well, not really because they're still purchasing oil in US dollars. So the currency component is certainly a factor whenever you are not buying in the currency of that exchange. I think it's really important to distinguish between diversification and hedging. So I definitely agree with the tour with that it's a good idea to be diversified. I don't think that for most investors, it makes sense to hedge. When we talk about hedging, that's something that makes sense for a lot of companies because they have some exposures to their normal operations. That's completely fine to hedge for these companies.

Starting point is 00:25:03 You might hear that you should definitely hedge because the dollar might decline in value or the euro or the yen, whatever. I don't think generally it's a good idea. I think that you can look into derivatives. I think you can look into parishes. I have this about the dollar. I don't think the dollar is that strong, at least not if you're looking back in history in terms of the paratists.

Starting point is 00:25:26 And when I'm saying paratism, talking about inflation and interest and how to predict the exchange rates. When it comes to that, the dollar is simply just in its own buckets compared to all those smaller currencies. But I think in general, as an individual investor, I think that you should stay away from that because that's basically

Starting point is 00:25:43 just extra cost you are paying to, I guess, some way lower your volatility in a situation where it really doesn't pay off, in my opinion. So I totally agree with Stig's comment. And I think that that is a really profound comment. I would say the only exception that I have to that opinion is if you are investing in a country that has like just ridiculous amounts of debt on their government balance sheet. So an example of that would be Japan. I think I would not even be remotely interested in owning Japanese stock simply because I think

Starting point is 00:26:17 their currency is getting ready to just have a total catastrophe. And that's the point that I'm going to be discussing in just a little bit. That's where I think people really need to pay very close attention to the currency is whenever you look at the government. Greece is a perfect example. the euro is a little bit of a different animal simply because there's kind of like this conflict of interest that keeps all of that. In general, if the country prints its own currency, and I like the point to Japan is a perfect example. I think over there I probably would be hedging my currency.

Starting point is 00:26:47 Outside of that, I think Stig's comment is absolutely a great recommendation for folks. The worst thing for most investors is paying too much in fees. You just want to be broadly diversified in a country sense, in an industry sense, in a currency sense. and you want to do it as cheaply as you possibly can, and then you don't want to trade them, you just stay fully invested all the time. And that's until you get to the point where you're going to start living on those assets.

Starting point is 00:27:12 For most people who've got a long time horizon in front of them, you want to be mostly fully invested in equities and you want to be broadly diversified because then you're limiting the risk of any of those currencies blowing up. But if you're fully concentrated in your own home country, then you're having a bet that yours is the one that outperforms every other country in the world. Good luck to you, but I'm looking at four faces as I do this.

Starting point is 00:27:32 I'm in the US now, but each one of us has a different home country. Do anybody here want to take a bet on which of the countries is going to outperform from here over the next 10 years? I wouldn't want to take that bet. I'll take Australia, but I wouldn't necessarily want to take that bet. The reason I take Australia is not because I'm Australian. It's because Australia is currently the cheapest developed market in the world. It's the only one that's just under its long-term intrinsic value. I'm kind of a bull on India myself, but I'm curious, what country do you guys think is going to do well over the next five, ten years?

Starting point is 00:28:02 Well, I definitely think that India would do really well, at least in terms of GDP growth. But I read this interesting book that which is great that we have on the show the other day has been writing. And he says that there is no correlation, not really between real GDP growth and stockmark returns. And I can see that Toby is nodding. And now I actually remember Toby actually wrote a book with West where they were actually concluded on the same thing.

Starting point is 00:28:26 That's in both of my books. You can find that that study has been conducted lots of different times and using lots of different metrics, but basically the correlation between GDP growth and stock market performance is either there's no correlation or it's slightly negative. And the reason is that growth countries are like growth stocks, people overpay for them. What you really want is slow or no growth in GDP because then they get forgotten about it. The contrast that they always make is between China and England over the last sort of 50 or 60 years. They say China's been sort of leaping ahead in GDP growth England's not done so well, but the stock market in England's been much, much better than the

Starting point is 00:29:04 Chinese one has been. I'm just curious, Colin, like you started talking about the Canadian dollar and US dollars, and suddenly you heard us talking about GDP growth in India. I'm really curious if we even managed to answer your question. I think that was valuable. And if I were to bet on a country, I mean, as soon as people taste maple syrup, I think the Canadian economy is just going to go on a run and sticking a table. test to this. When he was here in Montreal, he got a taste for it. So I'm going to put my money on

Starting point is 00:29:34 Canada. Oh, yeah. Anytime. I'm putting my money on maple syrup. All right. Let's go ahead and I'm going to talk about something that I'm very interested in right now. And I cannot wait to hear this panel's comments on what I'm about to say. So I think the important thing for people to understand about quantitative easing is that it's, it has this polarizing effect on yields worldwide. and it's polarizing yields lower and in some cases down to zero. And I think you could look at Japan and Europe for an example in that. So here's what I mean by that statement because a lot of people might hear that and say, what in the world does he even mean by that?

Starting point is 00:30:10 So to understand this, the quantitative easing piece, it's governments buying back bonds off the open market. So whenever governments buy back bonds, it creates a supply and demand imbalance from the buying and selling standpoint. So in case you don't understand what that means, it's really simple. When you have a bunch of buyers and a few sellers, that means that the price is going to go up. Now, everyone knows that the price yields are inversely proportional. So when you have a government buying up bonds at a ridiculous pace, that means that the bond prices go up, but the yields subsequently go down. That means if the governments of the worlds continue to conduct this quantitative easing or all this bond buying in order to provide liquidity to their market because deflation is taken over, then the bond yields have this enormous pressure to keep going. down. When bond yields go lower, everyone else runs to the stocks in order to get their fix for

Starting point is 00:31:02 yield. This is what's driving all these stock markets higher. So when we look at Europe since the start of 2015, when they announced their newest initiative on their quantitative easing, that's what we've seen happen. When we look at Japan for the last few years, that's exactly what we've seen happen. When we look at the U.S. when it was conducting its QE, the stock market was directly correlated to those bond purchases or the quantitative easing. When the U.S. stopped that quantitative easing at the end of 2014, you've seen the stock market go completely flat. Now, the more that the governments conduct these bond buying or quantitative easing, the

Starting point is 00:31:38 closer they get to having their bond markets completely obliterated. Look at Japan. The yields in Japan are at 0%. They've been at 0% for the last decade. There isn't a person on this planet that wants to own a Japanese bond. That's why the only organization buying their bonds in Japan, is the government. So here's the riddle that makes your head hurt. The Japanese government issues debt or issues their bonds, which it can't possibly pay back, then their central bank and

Starting point is 00:32:04 their treasury buy back the debt in order to supply the cash into their economy. This is why you're seeing their government's balance sheet completely explode. Now that I've gone over all this, and I want to get to my interesting point here, I think that there's a major issue with the Japanese stock market. I really think that it's the next market that's going to have some serious issues. In the past two years, we've seen the Japanese stock market go up 100% in two years. When we look at what was induced this massive growth in their stock market in a short amount of time, it's completely correlated to the start of their really aggressive QE program that they just recently did in the last two years. So as we know all this and we know that QE causes the

Starting point is 00:32:46 stock market to go wild, it's almost like a performance enhancing drug for a professional athlete. I want to read something that I got out of a Bloomberg article for you. The Bank of Japan this week expanded its liquidity providing facilities to include treasury bills. And just so you know, the term on those bills are a few months up to one year in duration. The yield on those bills are below 0%. A sale of three-month securities Thursday produced a negative average yield for the 11th straight auction since June. The amount of T bills circulating in the market contracted to the least. since the Central Bank unveiled its record stimulus in April of 2013.

Starting point is 00:33:27 Policy Board members said Thursday that the side effects of the Bank of Japan's programs are increasing and will be difficult to handle. A day earlier, the Deputy Governor said that the Central Bank is monitoring to see whether quantitative easing is undermining liquidity. 95% of respondents in the Central Bank's annual investor survey in February said market functioning was either low or not very high, and three-quarters said conditions had worsened. The fact that the Bank of Japan added T-bills, and this is a quote, so I'm reading a quote from somebody right now, he said, the fact that the Bank of Japan added T-bills to their liquidity operations signals they are getting ready for an emergency situation.

Starting point is 00:34:11 T-bills can't be traded in the market now, even if you want to buy them, and nobody finds that worrying anymore. If you think about it rationally, there's something wrong with that. T bills in the market shrank 28% from the start of the QEE campaign just two years ago. I could keep going. I actually have even more here. In short, I think Japan is in a very, very bad situation with respect to their stock market. If I think that there's going to be something that melts down, I think that's going to be it. In fact, two weeks ago, you saw their stock market jump 7% in. a day. This is not normal, folks. I think that this is very alarming. I think that somebody's got to be ringing this bell on the Japanese stock market. And I'm that guy. I'm ringing that bell right now. I think that there is a huge concern. I know that was really long. I think it's really important for people to understand the size of the Japanese stock market and what implications this might have for the world economy. And I want you to just be aware of that concern that I have. So I really want to throw it out to you guys and hear your comments.

Starting point is 00:35:17 I think what's happening in Japan is incredibly sad. It's been one of those things that I'm going to show my hand a little bit. I'm not a great fan of Keynesianism. I think it's a nonsense. And when I look at a country like Japan, it's sort of been implementing it for so long. That's the card that the Keynesians have always played is to say, well, Japan has been running these extraordinary deficits. They've built up an enormous amount of debt.

Starting point is 00:35:41 We got the term quantitative easing from the Japanese. They've been doing it. And it hasn't had a negative impact. for them. So therefore it's okay for every other developed country in the world to do it. There must be an end point for this at some time. You can't go to infinite debt. And I think that we're kind of seeing it. It's been, you know, the death of the economy has been trumpeted since about 1990. So the bears have had a very, very long period of time where they've been eating crow, 26 years of being wrong. But that doesn't mean that they're always going to be wrong. I think there

Starting point is 00:36:12 is an endpoint, this could be getting close to seeing it. All of that extraordinary quantitative easing that they've conducted over the last two years, they've actually had negative GDP growth over that period. So it's looking ugly for Japan. It's very, very sad. I don't see any way out for them at this stage. I think they're going to print their way out and that's just going to blow up the yen. Hopefully that gives every other central bank around the world pause when it happens. I doubt that it will. 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

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Starting point is 00:39:53 fundrise.com slash income. This is a paid advertisement. All right. Back to the show. Stig, what are your thoughts? I'm curious to hear what you have to say. To be honest, I would just stay away from Japan right now. And this is basically also to follow on the discussion we had before about hedging the yen or not if you were to into the Japanese market. I think my play would be way simpler. I just wouldn't touch it.

Starting point is 00:40:19 And I definitely wouldn't go into the Japanese stock market and then trying to predict what was going to happen and then buy some derivatives to hedge that exposure. We have to remember the soon as we're going to time things. I mean, it's kind of shortening the market. You might know it's overvalue. You might know there is too much debt in Japan, but you don't know when it's going to happen. And while you wait, if you're not right, you will just pay a ton of fees. So I think that would be my key takeaway.

Starting point is 00:40:45 I know, Preston, that was probably not the answer you're looking for. To me, it's probably because I'm lazy. And I think there are better bargains out there, even though there are a few. I just think that Japan is just too hard to figure out right now. Hey, there's an Einstein quote that talks about simplicity being bliss and being brilliance. And I think that you couldn't represent that more with Stig's comment. Stay away, folks. I think that's the message.

Starting point is 00:41:11 Stay away. If you're getting sucked in over there, well, you've been warned. Japan's been interesting for most of my investment career because it has been one of those countries that's been very cheap. You could buy gigantic net nets, which are companies that have sort of more liquid assets on their balance sheet than they have liabilities. And then you can buy them for less than their market capitalization, which means that they're very, very cheap, their price for liquidation. You could buy them for a lot of my investment career. And everybody said Japan's a terrible place to be invested because it's been going down for 20 years. And I think that was some huge bargains around over the last four or five years, not anymore.

Starting point is 00:41:49 I think if you're looking now globally for a cheap country, it's Australia. and the reason that Australia's cheap is that all of those mining services companies have had the stuffing kicked out of them with the fall in the commodity prices. And so I think that the last time that they looked as cheap as this to me was 2000 when sort of dot com was the rage and mining was not particularly sexy. And all of those companies like UGL, Wally Parsons, Monodolphus, they all went on monstrous runs after that, up to 2007 when they all got too expensive and nobody sensibly would have held them After that, I sold out, they all went up a lot after that, of course.

Starting point is 00:42:24 So that was a silly thing to do. The thing is valuation is its own catalyst eventually. If you buy something cheap enough, buy those earnings, buy that balance sheet cheap enough. Eventually, the world does find out that something's undervalued and come and pay you more for those stocks. As I've been looking more into purely deep value, I think it's really interesting to talk about Japan because I've also noticed that in the recent years that you can find Japanese companies really, really, cheap. And when I saw that, I was like, yeah, that might be really cheap, but it's just so risky, what about the yen, and what's going to happen? Now, the funny thing is that you can actually make a

Starting point is 00:43:00 very decent profit if you have done that. If you are not, listen to me, I guess, listen to all the difficulties about Japan, but just saying, this is really, really cheap, as Toby is saying from a net, that perspective. And then whatever that has increased in value, because value is its own catalyst, you would just take that out of your portfolio and replace it with something else. are. The most damning criticism of the Schiller Cape, Schillopee, or any of those long-term cyclically adjusted valuation measures is that the market in the US has been so overvalued for so long. They say, well, it doesn't mean anything for it to be overvalued. What does that mean? If you're a value investor, you're buying individual stocks, what do you care where the market

Starting point is 00:43:38 is? And the answer to that is that since 2000, we've had really very low growth in the stock market and that's one of the consequences of having a very overvalued market. To the extent that we have any growth, it's only overvaluation, it's multiple expansion now, which can easily reverse. I've been kind of grappling with that for a while. And so guys like Wes Gray and Meb Faber have been advocates of moving averages, which I've kind of, I always thought of them as kind of voodoo. It's sort of not real fundamental analysis. It's something that you should ignore. But I think enough smart guys kind of apply those rules. It's worth kind of sticking your head into it and getting to understand it. So that's been a project that I've been working on for the last few months.

Starting point is 00:44:23 And I've kind of got to the point that I do think there is something to the moving average in a market like this. And the idea is that it allows you to stay invested in a very expensive market if that market continues going up. Then you have to be careful in periods like this where we're now in a very expensive market that's trending down. So I want to make this point really clear for people that are listening. A lot of people think that because we're huge bears, we're saying sell everything. We're not saying that. We are not saying sell everything.

Starting point is 00:44:55 What we're telling you is if you have a cash flow that's coming in, how you invest that cash flow is how you've got to be very careful and you've got to protect that investment because right now things are absolutely primed for a potentially bad downturn. The second part of that is if you've invested money in the last year and the market's gone nowhere and you have no capital gains, I would tell you to protect that principle and maybe sell out of that position because you're not going to pay any capital gains. Now, let's say you invested back in the 2008-2009 time frame and you have a 3x position

Starting point is 00:45:33 that has had enormous gains for you. You're going to pay enormous capital gains to get out of that position. that's one that you probably don't want to sell depending on whether the future forecast of those cash flows are still good. It's a situation-dependent calculation that you have to do and you have to understand where am I at? Yeah, I think it's a great point, Chris. One of the things that I would really like to discuss, and that was actually my main point for today, that is Warren Buffett's two latest purchases. Even though that the stock market is overvalued, in least in our opinion, he has really been buying big. So he actually made his biggest acquisition so far that is precision in Kaspat, and he paid more than $30 billion for that one. Now, I don't know, guys, if you look too much into it, what I was surprised about was really not that he bought into this.

Starting point is 00:46:23 company. If you look at the numbers of precision cost part, it's just a very, very typical Warren Buffett acquisition, very stable numbers, very low debt. There's really nothing bad to say about this company, huge mode in the aerospace and the manufacturing industry. What I'm surprised about is that he paid more than 20x on the earnings. But for that particular company, it's difficult to say. I wouldn't necessarily use the PE as the metric for valuing it. But his hurdle rate has definitely gone down as his capital has grown. Out of the railway acquisition they undertook a few years ago, they thought they could get 10% return on. So I suspect that he's looking at a 10% hurdle rate for this as well. And that probably includes some growth over a period

Starting point is 00:47:08 of time. And I think that's a function of interest rates being so low. Now, and I totally agree with that comment, Toby, and that was one of the things that we heard in the shareholders meeting when we were there two years ago when somebody was really railing on the railroad purchase saying, hey, these numbers are horrible. Why did you go this? And he basically told the guy, hey, you got to look at the growth piece of this too if you're going to value it properly. And that's where you messed up. But here's the thing why I think he's buying. And I think that this is another important point for value investors to understand. Warren Buffett, in order for him to move his percent change in his earnings growth, he is heavily relying on owning operational companies so that

Starting point is 00:47:47 he can have a cash flow coming in and not having somebody else directly responsible for that because whenever his company is traded off of the PE, you're not going to get any E unless you own it as an operational subsidiary. The reason why I think he's buying is because for him to pull in a $30 billion acquisition where he outright owns it as an operational subsidiary, that is really hard to do. He's not playing around $10 to $100 million here, folks. He's dealing with a $30 billion acquisition. That's a problem. That's a really hard problem whenever you're trying to buy a company for $30 billion.

Starting point is 00:48:26 So when he has that deal lined up and the shot is in his sights, let me tell you, he's going to take the shot. He has to deploy this capital regardless of where the market's at because he's dealing with so much money. I think that's a really great point, Preston. And if you go back like decades, you will hear that people are saying, yeah, but he should really be buying C's candy and he bought that for, guess what, $25 million. Now, $25 million won't even make it then in his portfolio right now.

Starting point is 00:48:55 So when he's talking about, well, you probably need to pay a lot in capital expenditures for the company and acquisition cost part. It's still very logic for Ron Buffett to go into that sector because it has a white mode and he can employ capital, like a huge amount of capital year after year. That's the same reason he's going into railways as Toby was saying, it's the same reason he's going to utilities. I love the fact that you use the Seas Candy example. I just want to go around the horn real fast. Are you a bear?

Starting point is 00:49:24 Are you a significant bear or whatever? I'm going to throw it over to Colin right now. What's your opinion is on the current market? So I'm a bear. I'm still almost entirely in cash with a small amount of my portfolio in equities. And I'm kind of just sitting and waiting at this point in time. I'm a bear too. I definitely think that if you can find some.

Starting point is 00:49:43 good markets out there, you should go ahead and invest in them. As Toby is saying, you shouldn't look too much of the overall stock market, but really look at the individual stock. But if you do find great picks, you know, give me a call because I have a really hard time finding him at the moment. Toby. I think the US is very expensive, but I think you can find individual companies here that are pretty cheap, and I think you can find companies globally that are cheap. And I think Australia is particularly interesting right now. I'm going to be doing some things in Australia. that maybe I'll talk about on our next podcast. So I love that point.

Starting point is 00:50:19 And I think a great guest for us to have on our show to talk about that exact comment is Mab. I know that he is really big on being an international investor and understanding the price to earnings ratios around the globe. Do you know Mab, Toby? Yeah. Can you please hook us up so we can have him on the show? I can do that. Perfect. All right.

Starting point is 00:50:40 I am a bear. Everyone knows I'm a bear. I'm not even going to talk anymore. So you guys have heard my comments. Guys, so just before rounding up this podcast episode, I just want to say one quick thing. Actually, we're not just doing like all five of us, as you hear now, once a quarter.

Starting point is 00:50:55 We also sometimes just chat one-on-one if we have different issues that we're struggling with. I've been looking into Berksa-Halloway and I'm looking into ETFs and quantitative investing. Now, what I do in this situation is that I will call up Hardy for Berksa-Halloway and I will call up Toby if I have any issues about ETFs. I actually recorded the last two conversations I have with them. So that is two times one hour extra material to this mass mind meeting.

Starting point is 00:51:20 And I'll make sure to embed those at the show notes. I really want to thank Colin Yablonski for calling in. Colin runs a search engine optimization company. It's called Inbound Interactive. He specializes in local search results. So if you have a local business and you really want to understand how to optimize that on the internet to get ranked higher on Google, Colin's your man. and we'll have a link to his website up on our show notes.

Starting point is 00:51:44 So go there if you want to learn more about search engine optimization for your business. Toby Carlisle, a fantastic author that's written the book Deep Value. He's also written the book Quantitative Value. He runs a website called The Acquires Multiple, which helps you pick out across all the different companies on the internet, how to figure out which ones are the cheapest price that give you the most value. So we highly endorse AcquiresMultable.com. So we'll have that in the show notes as well if you want to check that out. You can obviously see how smart these guys are.

Starting point is 00:52:16 We want to also thank Hari for dial in in. Hari has a website called bitsbusiness.com. And that's where you can go and see his notes from going to the Pobri meeting. We just really appreciate our audience. And you guys just have such amazing comments. We really appreciate all the comments on our forum, the Warren Buffettforum.com. Go ahead and check that out. And you can interact with Stig and myself there and many other really smart investors.

Starting point is 00:52:39 So thank you so much for joining us and 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 www.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book.

Starting point is 00:53:08 This podcast is for, entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before a commercial application. TIP!

We Study Billionaires - The Investor’s Podcast Network - TIP 054 : Mastermind Discussion 3Q 2015 (Business Podcast)

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