We Study Billionaires - The Investor’s Podcast Network - TIP 058 : Coined - The Essence of Money and How It Works with Kabir Sehgal (Business Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 58 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 Stig Broderson. Hey, how's everybody doing out there?

Starting point is 00:00:31 This is Preston Pish, and I'm your host for The Investors' Part. And as usual, I'm accompanied by my co-host, Stig Broderson, out in Denmark. And this is really going to be a fun episode because we're talking about the book coined. And this book was written by Kabir Seagal. And we have Kabir on the show with us today. But before my talk with Kabir and introduce him officially, I want to give the audience a couple quotes from the book coined, which we're going to be talking about today. So the first quote that I'm going to read here, this one says, the best things in life are free. but ever since civilization began, money has had a profound impact on humanity.

Starting point is 00:01:07 Kabir's book brings the story of currency to life, and it is worth spending a few of your hard-earned coins on it. And that endorsement, and that quote, comes from the billionaire Sir Richard Branson from Virgin. I've got another quote for you. An exceptional examination of the history of money, Kabir has written an engaging narrative that spans thousands of years and introduces readers to important people who have impacted the Chronicle of Currency. That's by the former president, Jimmy Carter. Okay, so one last quote, and then we'll get to the interview here. And I'm sure I'm embarrassing Kabir.

Starting point is 00:01:40 But here's the last quote. It says, coin doesn't resemble any of the usual textbooks on money. For one thing, it's actually fun to read, and Kabir will stimulate your thinking about our financial crisis and banking. And that was by the former Fed Reserve Chairman Paul Volcker, who was obviously one of the most famous Fed chairmen of all time. So just an amazing array of people endorsing this book in Kabir. Like, all I can say is, wow, this is really amazing.

Starting point is 00:02:10 Some of these endorsements are phenomenal. And we are so excited to have you on the show to talk about this phenomenal book. Thanks. I was blessed, especially with Paul Wilker. I didn't realize I didn't think he would do that. But I'm gratified that he did. Paul's a very impressive guy. I mean, I'd say you rank the Fed Chairman's in order.

Starting point is 00:02:27 Paul's probably the number one guy there for what he did back in the 80s with. inflation and all that is just really amazing. So I just want to tell the audience. So Kabir is the vice president of the emerging market equities at J.P. Morgan and New York. This is what I really like. He serves as an officer in the United States Navy Reserve. In addition to that, he's a term member for the Council of Foreign Relations. He's also a New York Times bestselling author for three different books. He's a Grammy nominated producer who has performed with Grammy Award winning musicians as a jazz bassist. And Kabir is also a graduate of Dartmouth and the London School of Business with economics.

Starting point is 00:03:06 So, Kabir, the background is just crazy to me. You're this Grammy-nominated producer. You're in the Armed Services. You work for one of the leading banks in Wall Street, and it's just quite impressive. Again, thanks for having me. I'm looking forward to learning for me. And I've listened to a couple shows. I really like what you guys do.

Starting point is 00:03:24 Well, thanks, Kabir. That's awesome. We're honored that you're listening to the show. So, hey, we'll throw it over to Stig. He's got the first question, and go ahead and fire away, buddy. So, Kabir, to really understand the scope of your extensive research and the structure of your book, could you please tell us about your experiences at the Galapagas Islands and why your book starts there? Yeah, so, you know, I started my journey really first at J.P. Morgan on Wall Street just months before the credit crisis began. and I found myself wondering what's happening,

Starting point is 00:03:58 people are losing their jobs, people losing their minds. And I asked a question that sort of governed the entire book, which was, what's happening in your brain? What's happening in your mind when we think about money, when we deal with money? That was largely a biological question. And so when I mentioned the word money to you right now and people listening,

Starting point is 00:04:18 there's actually an electrical current going through your skin, that you're having an increase in your skin conductivity. You know, they've taken brain scans of people who are high on cocaine and people who are about to make money. And they look similar. So it shows that there's kind of a neural reaction. So I wanted to figure out, is there a biological basis to using money? And so, you know, if you look at most histories of money,

Starting point is 00:04:43 they start perhaps in Western Turkey where there was the invention of coinage. Or maybe Africa, the Great Rift Valley, where you could dig up fossils that served his money. But I went to the Galapagos Islands because that's where Charles Darwin was inspired to come up with his theory of evolution, my natural selection. And so I went there and I met with a couple of marine biologists and we went diving and we didn't find any gold, but we found something else, which was I found symbiosis at work.

Starting point is 00:05:12 In one example, there was a sea turtle and the sea turtle was being cleaned by different fish. And so what's happening there? The sea turtles getting clean, but the fish is. are ingesting those parasites and getting nourishment. So that's an example of energy exchange. And so I went all throughout the Galapagos, and I learned how exchange is really, when energy is really the currency of nature,

Starting point is 00:05:34 all throughout the world. Right now you're having an exchange with the plant. When you're breathing out carbon dioxide, the plant is secreting oxygen, so you're in a carbon loop. The idea of exchange is everywhere. And so if you look at the first types of currency, what was it? It was salt.

Starting point is 00:05:49 It was meat. or even now money, if you boil it down, gives us the calories we need to survive. So in the most concrete form, money is really energy. So I went into that, and I went into the genetic basis of money. That's why I went to the Glopago is to look at money and to come up with the biological link between money and energy. Do you have any other examples with this exchange? And then how did you bridge that over into finance and money?

Starting point is 00:06:14 I guess that's where I'm really trying to have the audience understand that linkage that you talk about your problem. Yeah, so money is an instrument of exchange. Exchange is sort of a social interaction. There's all kinds of studies that show that people who are more social, they live longer. They feel more satisfied with their lives. And there's actually genes that we possess that regulate our social interactions. And this even gets to sort of financial behavior. So, for example, there is one study that showed that about 20% of someone's credit score can be influenced by their genetics. And so there's one gene. It's called a C-O-M-T gene and is evenly dispersed within the population. There's two variants of it that are evenly dispersed within the population. So in the study,

Starting point is 00:06:59 they swab some people's cheeks and they asked them a bunch of financial decisions, like make a capital asset allocation decision, choose between stocks and bonds and cash. And they found that if you had one of the variants, you're much more likely to be risk-averse and to put your money in cash, and you had fewer credit lines and a higher credit score. And if the other gene, it was just the opposite. You're more reseeking. You put more money in stocks. And so this goes to show you that it was about, again, 97 points,

Starting point is 00:07:31 which is about 20 points in your credit score, was influenced by your genetics. And so the good news is if you're not really good with your money, I was blame your parents because it's their gene pool. I think it's really interesting, Kabir, that you bring that up, Because last week we had James Soshone on the podcast, which you're probably familiar with. He was right on the same track as you were that it's really not just about you. You might be thinking, hey, I'm making all these rational decisions, but it's really in your genes.

Starting point is 00:07:59 Yeah, and there's an emerging field. It's called neuroeconomics. Basically, these are brain scientists that study financial decision making. They can scan your brain and they can show you what, before you're aware, before you're consciously aware of what stock or bond you're going to choose because they can see what's happening in your subconscious. And so these decisions are really manifest at the subconscious level and then they get sort of kicked up to a conscious level. And there's so many things that influence our subconscious, you know, advertising and genetics and things you've learned in the past. When you think you're making a financial decision, you should really remember that money

Starting point is 00:08:35 is really a biological output. It's really the evolutionary output of a biological mechanism called exchange. But one of the tools you created in order to survive better is called money. So, Kabir, I think this was really one of the most interesting things about your book. Chris and I, we are currently really following the expansion of money supply. And apparently, the concept is not new at all. It seems like the Roman emperor, Caesar, Augustus, and Nero, there were no better. So could you tell us the story from coined of the applied monetary policy that happened more than 2,000 years ago and what we can learn from history?

Starting point is 00:09:15 Yeah, good question. I think monetary expansion is, it comes up almost in every society going back thousands of years. So in that example, in ancient Roman time, you know, the word money comes from the Romans. The Roman root of it means worn, to warn someone.

Starting point is 00:09:32 That's where money comes from. In the Romans times, they would have currency called the DeNarius. It was basically a silver coin. And over the times when New York came to power, when others came to power, a lot of times they had to sort of make more money in order to finance their costs. So the Romans had to, and they kept on expanding their empire. And one way to pay for this was to issue money.

Starting point is 00:09:55 But there was only a fixed amount of silver in the world. And so they started to debase the currency. They would literally punch a hole in the denarius. So the quality of the coin would go down, but they would increase the number of coins circulating within the kingdom. And so over time, the currency depreciated there was massive inflation. And a lot of the folks who have studied the end of the Roman Empire, they attribute one of the problems is to the economic malaise, was to a monetary crisis in persistent inflation. And so the place that I found this most intriguing, in order to really bring this home, and I didn't write about this in the book, but is I went to the middle of nowhere to study about this.

Starting point is 00:10:35 I went to over 25 countries in researching this book. My job took me around the world. And I went to Mongolia. And why did I go to Mongolia to learn about money? And that's because Chinese in particular, the Mongols came in later, they sort of invented paper money in the 9th century AD. And then what happens in the 13th century, the Mongols conquered the Chinese.

Starting point is 00:10:57 And they added 60 million people to their empire. The Mongols have this currency and it was backed by silver and silk. and Kubla Khan said, you know, we have a problem. We have 60 million people. We don't have enough silver to back our money. So he cut that link between money and metal. And he said, you know what? I'm going to issue paper money.

Starting point is 00:11:18 Marco Polo said, the great Khan issues money out of the barks of trees. He said essentially, if you do not accept my money, I will kill you. Or if you counterfeit my money, I will kill you. And so he ruled his entire vast kingdom that went from Burma all the way to Hungary with paper money. And what happened? He started to print and print and print. They wanted to expand their kingdom, their empire. And then there was a monetary crisis, which led to an economic crisis. And eventually that part of the Mongol Empire came to an end. And so money is really a Faustian bargain. A paper money, particularly, is really a Faustian bargain. And there's always a sort of a proclivity

Starting point is 00:11:58 for governments to print, print, print, because it's a silent tax. It's an easy way to finance things instead of directly taxing your people. And it's the last thing that comes up even to today. I'm just so glad that has nothing to do with our current circumstances. And I say that as jokingly as possible. Yeah. That is just an amazing story. And the parallels to what we're seeing today is almost a little scary. 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. That's what the Oslo Freedom Forum is.

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Starting point is 00:16:38 So when we look around the world and we see the extreme situations that central banks are facing, I think a lot of people are wondering, how does this problem get solved? Because when we look back in history, the problem basically doesn't get solved. Everything goes up in smoke. So in your book, you talk about how money is this stored energy, and I just love that reference, but whenever you said that, I immediately thought of these cryptocurrencies like Bitcoin because that's all that that is. It's just energy sitting on a server rack, and it's representing this new type of potential

Starting point is 00:17:08 money in the world. So when we talk about that and we talk about cryptocurrencies, the reason that they are so exciting for a lot of people is because it sets a fixed monetary baseline. So do you see cryptocurrencies playing a larger role in the years to come? And specifically, that question really relates to offsetting these inflation-seeking central banks. Do you see cryptocurrencies basically being that offset, I guess, is what I'm getting at? I don't see cryptocurrencies being the offset to the central banks in inflation, the potential inflation we may see. I think there's a misunderstanding with what Bitcoin really is.

Starting point is 00:17:48 I mean, most people focus on Bitcoin as a currency. I don't think Bitcoin will flourish as a currency because of governments. The governments can essentially say what is or is not money. Like in the 1930s, Frank and Roosevelt said, gold is no longer money. Ordered everyone's gold. He took everyone's gold and he built Fort Knox.

Starting point is 00:18:08 Government always has the capacity to say, what is or is not money. Even now, the FBI owns like 10% or I think even 15% of all the Bitcoin because it sees so much Bitcoin. But look, I think Bitcoin is going to be very, very powerful as a technology. What do I mean by that? When you can boil it down, Bitcoin is a decentralized way of authenticating transactions. So if I wanted to send you a PDF, like if I wanted to transfer a PDF to you,

Starting point is 00:18:37 like right now if I emailed it to you, I still retained a copy for myself. But if I wanted to transfer that PDF, I could use the Bitcoin blockchain protocol, which is just a fancy way of saying Bitcoin to transfer the file and I no longer have ownership of it. And that's a very profound way of transacting. So the implications of this is that anything that can be represented digitally,

Starting point is 00:18:59 like a stock or a bond, I can now transfer that without a bank, without a broker. Bitcoin is an incredible way to transfer things. And so people often get hung up and Bitcoin as a currency. That's not the reason the venture capitalists are so excited about Bitcoin.

Starting point is 00:19:16 That's not the reason Mark Andreessen, himself a billionaire, is so excited about Bitcoin. He's excited because of the technology applications that, wow, we can start transferring things using the Bitcoin technology. And so that's sort of a distinction that I think gets lost on people,

Starting point is 00:19:33 the Bitcoin is really about file transferring. I'm really happy you said that, Kibir, because Preston and I, we also studied Bitcoin in one of the previous episodes, and one of the things that was really interesting, was how this might change our lives, really not because of the currency as you're saying, but because of the technology. One thing is what will happen in the developed world which might be limited, at least in my opinion,

Starting point is 00:19:58 but what do you think could happen in the developing world if they started to use Bitcoin or not a digital currency? I'm glad you asked that because that's the most profound example of how Bitcoin could be immediately impactful. So I was in Saudi Arabia last year, and there's a big Filipino population there. Then I asked one of them, I said, do you send money home to the Philippines? She said, yes. I said, how much do you pay in terms of remittance fees?

Starting point is 00:20:25 She said, it's 15%. That's a lot. And so Bitcoin, using Bitcoin, she could save almost the entire thing. So how does that work? In Saudi Arabia, she can then use a Bitcoin converter, and she converts from the local currency into Bitcoin, and then someone in the Philippines goes and picks it up, and it converts from Bitcoin into local pesos. And the transaction cost is far less. I mean, anywhere there's like a huge friction to transfer money, that's going to be taken out by Bitcoin. So like in America, for

Starting point is 00:21:00 example, when you go to Starbucks and you swipe your credit card, it's really, I think it's only about 2% that's going to, you know, the credit card companies and the merchant acquirers. But in the developing world is the huge cost saving. So that's why even in like Kenyas, they call it the Silicon Savannah, there's a lot of capital going into Bitcoin investments in the emerging world. I think that is the most powerful example of Bitcoin use in the coming future. So Kabir, when I hear that, I immediately think, okay, well, why don't larger banks start implementing this or even smaller banks? Why is the world not starting to conduct those transactions as international transactions in that manner? if they can just convert it to Bitcoin, transfer it, then convert it back, and they do that in a short

Starting point is 00:21:44 duration of time, you would think that the flow of capital, blowing through the Bitcoin community, through that protocol would then increase and maybe even drive up the price, which would then, I guess the point that I'm getting to is I see it as really becoming that peg, that global peg over time for other currencies. So if these countries want to continue to manipulate, like let's just say the U.S. dollar, let's say they want to inflate the dollar. Let's say they want to inflate the dollar in the next year. As time marches on, I see cryptocurrency, specifically Bitcoin, potentially acting as that peg just naturally because of these cheaper transaction fee as you go internationally and all the other benefits that it has.

Starting point is 00:22:25 Do you see banks kind of picking up that transaction piece of it and potentially it turning into a peg or not at all? The first part, yes. I think banks are, like JP Morgan's investing, Bank of America's, they're investing. they're actually creating patents to do just that, to look at how Bitcoin can be used as a transfer protocol to do money transfers. It's happening. I don't know if it's going to become a peg in that banks have, especially big banks, they have an agreement with the government, which is essentially the Fed says, go out and make some loans. And that's how money is really introduced throughout the

Starting point is 00:22:59 world. And so I see it as sort of a private mechanism, Bitcoin, as a way to transfer money. But in terms of money itself being a peg, I don't know. The dollar's not going anywhere anytime soon, and I think the dollar is going to remain the universal peg for a long time. When I read your book, it's got so many different levels and layers to it. What did you uncover in writing this book that was really kind of the big nugget? I think one of them is that talking about currency, what's the most powerful currency in the world? It's not Bitcoin, it's not the yen, it's not the dollar. I learned how powerful a gift can be. it was really debt that led to the invention of money.

Starting point is 00:23:40 And actually, there's an anthropologist who went back and studied it, and they said, oh, there's never been a society in the history of the world that's ever existed, which is saying something, that's relied on bartering. It's sort of the principal means of exchange. Because bartering is what you do with someone you don't know. It's like, okay, if I don't see you again, it had to get a good amount of value for whatever I exchanged. But if you know the person and they live sort of in your community,

Starting point is 00:24:03 you're going to do an exchange. change. And so I looked at, you know, 4,000 years ago, actually 4,000 BC rather, there was financial loan documents. They were loaning out money to each other in ancient Mesopotamia. And it's not until the 7th century BC until coins are invented. So you have thousands of years where like money was really debt. So just as you think about a mile as a measurement of distance, think about money as a measurement of debt. And so as I traveled all over the world with my job, everyone looks in money in this way. It's sort of like a way to measure debt.

Starting point is 00:24:36 And everyone has their own kind of quirky ways of looking at gifts. I was in Japan and I gave a present to my friend and he said, Kibir, I cannot accept this. And I said, well, why not? He says, I'll never be able to repay you. The word in Japanese arigato means this difficult burden. There's another word in Japanese called Sumimazin, which means I'm so sorry I cannot accept it.

Starting point is 00:24:59 So they have all this kind of strange cultural quirks in dealing with debt. Even on Wall Street, JP Morgan's CEO, Jamie Diamond, you know, billionaire himself, he keeps a list in his suit pocket. And what's on that, what's on that list is people who owe him something and people who he owes. He's keeping a list of his gift economy. So we all do it. We all track who owes us. And we all track who we owe.

Starting point is 00:25:25 And it's sort of this deep-seated psychology that if you want someone to do it, do something for you, you have to give them a gift. You have to control them. So when you give a gift to someone, you're not just tying the present wrapping paper, you're tying the recipient to an obligation. And that obligation could be very, very powerful. So I learned the power of gifts is not just a benevolent thing, but it's kind of a controlling and manipulative thing. And that gets back to the original currency, which is social debt. Kabir, this is so interesting. And I'm really happy that you told this story about Japan, because whenever I was reading your book, I was feeling like how can these Japanese think about gifts that way?

Starting point is 00:26:03 And just as you're saying, everybody's doing it basically, because I know that if I receive some presence from some people, perhaps people I don't like, I feel bad about it because then I feel that I'm indebted to them. And you might be thinking, well, because I don't like that person, I might not care. But I just can't wrap my head around because I still feel like I'm indebted to them.

Starting point is 00:26:25 And now it's just a very nasty feeling to have because you're indebted to a person that you might not feel good about. 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. Vantza automates your compliance process

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Starting point is 00:29:55 And I think that gets back toward the biology, because that gets back to ancient times and caveman days. When you would go out and kill some game, you would come back and bring it, you would share it with your tribe. Because if you didn't, the time would come when you would be hungry and you wouldn't be invited to eat with everyone. And so when you invite someone to eat with you in ancient times, I was basically like a forged derivatives contract saying, I'm going to hedge my future.

Starting point is 00:30:21 because ultimately we need each other to survive. That's what gifts giving really highlight. But money really introduces like an anonymous way to go about it. So for example, if you go to Starbucks and let's say the Starbucks, you order a coffee and the Starbucks barista lets you have the coffee for free, you may have obligated to come see her in the future and there's kind of a relationship there. But if you just use money, then their relationship is over. So a lot of people are happy to use money because it's sort of paper is over.

Starting point is 00:30:50 you don't owe anyone anything. It's just money sort of formalizes it and it's over. So money's an escape from the gift economy in a way. Kabir, it has been so great talking to you about money. You're really a wealth of information. If you could recommend one book to our audience, or perhaps a few books that you have read to really understand money and finance,

Starting point is 00:31:13 which book would that be? I think one book that gets overlooked is one called Second Nature. It's by Haim Ofeck, and it's about the idea of exchange and how money is really an instrument of exchange. And he goes into like thousands of years, the caveman days, he goes into how fire was manipulated to form early currencies. So it gets into the sort of biological aspects of money. And this book is sort of off syllabus for most investors. Most investors are reading about the markets and so forth.

Starting point is 00:31:42 But this gives a very sort of deep understanding of the conceptual origin of money. But I think more recently, obviously, Thinking Fast and Slow, Danny Kahneman's book is a great one to look at the biological cognitive biases that we deal with when it comes to money in investing. So if you have not read that book, I would definitely recommend Thinking Fast and Slow. All right, Kabir, those are fantastic. And Stig and I just, for our audience, we just did an episode on Thinking Fast and Slow, and we have a executive summary of that book for anybody that's interested. But Kabir, thank you so much for coming on our show. So for our audience out there, the name of Kabir's book is coined. If you go on the Amazon, you'll see the reviews.

Starting point is 00:32:21 I think he has a perfect five-star ranking, which is almost next to near impossible to do on Amazon. So that just tells you about the quality of information in this book. And Kabir, if the audience wants to learn more about you, where should they go? Coined book, C-O-I-N-E-D book.com. Thank you. Yeah, absolutely. So Kabir, thanks for coming on the show. We really appreciate your time.

Starting point is 00:32:43 My pleasure. All right. So this is the point in the show where we're going to take a question from our audience. And this one comes from Zachary Morton. Hey, Preston and Stig. This is Zach Morton, a Black Diamond, Washington. Seahawks fan. I love your guys' show, despite the loyalty to the Steelers. But I've been listening to guys' show and going on your website and watching those videos for about a month now and learning about investing only for about a month. And it's been my primary source of education. I have to say it's very helpful. And it's well laid out and I love it. So please keep going and please keep doing it. A question for you today is on Warren Buffett's fourth rules for investing, which would be about the company being undervalued. You know, how undervalued does it need to be? So, for example, if you value the company at $40 per share, would you buy it at $39 or does it have to be at $32 or $30 or $25 or what would you say a good rule of thumb is if you have

Starting point is 00:33:32 any information on what Warren Buffett says about that or any other value investors, that'd be great. Thank you. All right. So, Zachary, we just wanted to play the question to tell you we're not going to answer it because you're a Seattle Seahawks fan. So that concludes our episode and I know I'm just joking. So Zachary, this is a great question. And this is the number one question. I think Warren Buffett gets at all his shareholder meetings. Everyone wants to know how do you do the intrinsic value calculation and what are the parameters of it and whatnot. So the best way I can describe this. And I think one of the

Starting point is 00:34:05 best things that I ever heard in response to that kind of question came from Charlie Munger where he said it's all about opportunity cost. He said it's all about opportunity costs when you're doing intrinsic value. And what he means by that is there's going to be times in the market where a lot of companies are undervalued. Then there's going to be times in the market, similar to now, where a lot of companies aren't under value. And what he's getting at is it really depends on the circumstances and where you're at any

Starting point is 00:34:35 given point in time. So when you look at a company and it's say it's undervalued, let's say, you think the value is at $40, it's selling for $30, so there's a $10 discount per share. But this is the part that a lot of people miss. It's based on a discount rate. It's based on a certain percent yield for that price. Well, the intrinsic value is $40 and it's trading for $30. So that doesn't mean anything to me.

Starting point is 00:35:03 And the reason that doesn't mean anything to me is because I don't know what the yield is at that $30 price point if you think it's worth $40. So intrinsic value always has to have a discount rate attached to it. And when you have that discount rate, then you can compare it to other assets like a bond or whatever else you might be looking at or another stock. So when you understand that aspect of it and you know that there has to be a yield associated with a subsequent price, then you can start saying, well, this one's going to give me a 7% return, or at least that's what I expect based off of my calculations. And this one over here is going to give me a 5% return.

Starting point is 00:35:40 So this one's going to give me 2% higher of a return than the other choice. Let's call it stock B and the other one's stock A. When you have that offset of 2%, the next thing that you've got to then look at is which one's riskier? And is that extra 2% worth it? If we come to the assumption or we come to the conclusion that both assets are equally risky, then we go with the one that's going to give us the 7% versus the 5%. And that's the part that I think people need to understand is it's this constant re-evaluation of opportunity cost when you're looking at the risk versus reward comparison.

Starting point is 00:36:17 And that's why you can't really say, hey, it's 5%. Because let me give you an example. Back in 2008, 2009, when the market had the enormous crash, when we were looking at intrinsic values during that time period, they were very high yield. Like I'm saying for stocks, well, in excess of 15%. When you look in today's market, speaking about the market in general, like the S&P 500, you're probably at about a 4% return. So in today's market, you're going to be settling for a much lower yield simply because

Starting point is 00:36:48 the conditions have changed. And that's where people have to be very dynamic when they're doing intrinsic value calculation. As you probably have seen on the videos that we have on our site, we have provided calculators and we have shown you how you can find the yield of these investments that Preston was just talking about. But guess what? your calculation is nowhere better than the assumptions, the underlying assumptions.

Starting point is 00:37:13 So if you think that the company is growing 6%, you come up with one result. If you think the company is growing with 8%, you come up with a different result. And since this is something that you have to estimate for the future, there is some room for error. In theory, it's very, very easy. But in practice, it's really, real hard to come up with a finite intrinsic value. Now, I do want to say a few things. Obviously, the cheaper you buy the company, the better. If I can give you an example, say that you buy a company at a fair value, and that grows

Starting point is 00:37:45 the intrinsic value with 10% of year. Now say that in the other hand, buy the same stock by a 50% discount to the intrinsic value, and that intrinsic value still increases by 10%. Then you will have 18% growth in your portfolio. So as you can see from this very simple example, the cheaper you buy, obviously you will get a higher return. The very interesting thing about investing is that if you go back and at least look at least look at the history, you will see that value is probably the best catalyst in

Starting point is 00:38:17 itself. So I know that you just started, but Zachary as you go along and you learn more and you learn more about investing, you will see that as long as you find a really cheap company and perhaps a basket of very cheap companies, you will see that you don't necessarily need a catalyst. And when I say a catalyst, it's something like buybacks or regulation changes, something like that. If you are indeed buying way below the intrinsic value, you will see in a given time period that the intrinsic value and the price will converge again. You will see that for almost all equities.

Starting point is 00:38:51 It's basically a matter of time. So I have a very important highlight to put into this mix when we're talking about intrinsic value. And that comes from security analysis and Ben Graham. Ben Graham says that it's important to look at the safety of the security before you calculate the value of the company and to not get sucked into doing it the opposite way around. A lot of people what they want to do is say, oh, this company's really undervalued. It's a great pick. Now let me look at how safe it is to invest in. Ben Graham says, make sure that you look at your safety barrier first.

Starting point is 00:39:24 You have to determine this is a safe asset for me to own. then you look at whether the asset has a good return or not, and then you compare that to other assets that were safe, and then you see which one's going to give you the best return. You've got to do it in that order, because when you don't do it in that order, you're going to get sucked into potentially buying something that has a lot more risk than what you were willing to do. I think that that's extremely important for a lot of people to know as they're conducting their intrinsic values of companies and know that that's the method that Buffett and all these other people that are highly successful. always look at their safety first and then their return second. That's all we have for you guys this week. I just wanted to tell Zachary, the book's in the mail. Unfortunately, I'm going to have Ghost Steelers written all over it whenever I mail it to you. And that is the Warren Buffett accounting book that we'll be mailing out. For anybody else out there, if you record a question, especially if you say that you're a fan

Starting point is 00:40:18 of anything other than Steelers, we will write Go Steelers on the book. We will sign it and we will put it in the mail for you. You can record your questions at AsktheInvesters.com if you guys are curious. and you want to get your question played on the air. But we do want to thank Zachary for recording this question. That was a fantastic question. I know a lot of people out there have a very similar question and want to know more about intrinsic value.

Starting point is 00:40:38 So we really appreciate your recording that. That's all we have for you guys, 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. www.theinvestorspodcast.com. Submit your questions or request a guest appearance to the Investors podcast by going to www. 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 00:41:08 This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before a commercial application.

We Study Billionaires - The Investor’s Podcast Network - TIP 058 : Coined - The Essence of Money and How It Works with Kabir Sehgal (Business Podcast)

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