We Study Billionaires - The Investor’s Podcast Network - TIP 071 : Value Investing Questions from the Audience and Benjamin Franklin by Walter Isaacson

Starting point is 00:00:00 We study billionaires, and this is episode 71 of the Investors Podcast. Broadcasting from Bel Air Maryland, Investors Podcasts. 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 Steve Broderson. Hey, how's everybody doing out there? This is Preston Pish, and I'm your host.

Starting point is 00:00:33 for The Investors podcast, and as usual, I'm accompanied by my co-host Stig Broderson out in Denmark. We've just got kind of a hodgepodge of stuff to talk about today. And we're going to lead off with a little bit of current market conditions. We're going to be talking about what's going on in the markets because it's just continuing to get more and more interesting by the day. And then what we're going to do is we're going to transition and we're going to answer five different questions for members of our audience that have been recording their questions at AsktheInvesters.com. And then after that, we have a book summary that we're going to be doing really quickly because we really don't have that much to talk about with this book.

Starting point is 00:01:07 And that is the Benjamin Franklin book by Walter Isaacson on American Life. So we'll be covering that at the very end. And it's not going to be very long, but we will still cover that and send out our executive summary of the book that we read. So real fast, I just wanted to briefly talk about the current market conditions. Now, we recorded this episode about two weeks ago from the time that you're listening to this. Right now, as I'm looking at my watch, it's the 18th of January, 2016. So when you listen to this, it's probably going to be the end of the month. And some of this information might have a little bit of a lag to it.

Starting point is 00:01:39 So I think that sometimes that's good because we're not able to talk about the play-by-play the minute-by-minute and really talk more about bigger ideas and kind of bigger trends that we're seeing and concerns or highlights. So the one thing that I wanted to talk about, and right before we started recording, I shot Stig this chart. And I said, I really want to talk about this when we start recording this episode. And Stig totally agreed. He thinks that it's a very good chart and something that we can really talk about here.

Starting point is 00:02:06 So I found this chart that is titled Global Stock Market Cap. And so what this is is it's the market cap of the entire equities market for the entire world. So you added up the U.S. stock market. You added up the Chinese stock market. You add up the Japanese, Europe, everywhere. around the globe and you add up all the prices for all the different stocks and you combine those into one single solitary chart and you can see this massive credit cycle and that we've been talking about. And I know when you watch the Ray Dalio video, it's all about the credit cycle and

Starting point is 00:02:45 the expansion of money and then the contraction of money. We're going to have this chart on the show notes so people can see what I'm referencing. So if you're listening to this in your car, when you get into work or you get home or whatever, go to the show notes and pull up episode 71. And when you do that, you're going to see this chart that I'm referring to. Now, when you look at this chart, you can see how from about the third quarter of 2011, up until about the summer of 2015, you saw an enormous growth in this global stock market. Every stock combined, you saw the price of the global stock market increased dramatically. And it increased by 72 percent.

Starting point is 00:03:24 from that third quarter in 2011 until about the second quarter of 2015. This was $30 trillion added to the global stock market, okay, if you took all the markets. Now, since that time, since that point in time, since the summer of 2015, where we had, and that was from a very long period of time, you go one, two, three, about, you know, almost four years of growth that you built 30 trillion into these markets, price that. just grew by 30 trillion. You've seen it since that point in time, about six months later, we have lost $15 trillion in the global stock market.

Starting point is 00:04:04 Okay. So half of that has been already lost in the last six to nine months. And that's a lot, folks. That is pretty dramatic. And the thing that I think about whenever I see a chart like this is this isn't just the start. Now, in the U.S., you're seeing a 7% pullback from really the start of the new year. and it's about a 10% or whatever off from the high that you've seen. And so it doesn't really feel like all that much.

Starting point is 00:04:30 But I think you've got to look at this from a much bigger picture and a much bigger context because those forces, those outside forces are all playing here. And one of the important things that I learned from this Ray Dalio video that he taught, which we can have a link for that. And I know we've linked to this about a thousand times on our show for people. If you haven't seen it, you need to watch it. But one of the key things that he talks about in these credit cycles

Starting point is 00:04:53 is that they're self-reinforcing. And I think that that point is so important for people to understand that whenever they're going up, that's reinforcing because as I have more money to spend and let's say I'm transacting with Stig, as I have more money to spend and I spend that with Stig, now Stig has more money to spend and it's self-reinforcing in the upward direction. Now, once you reach a point where basically the market becomes saturated and it starts to go back in the opposite direction,

Starting point is 00:05:21 as Stig saves and spends less. And now let's say he's transacting back with me. Now I'm going to have less. And then the next person I interact with is going to have less. And it's a self-reinforcing cycle. Unless, and this is the key point, unless there's an outside force that's injected into the market cycle by a central bank. Okay.

Starting point is 00:05:43 Or some type of massive fiscal spending policy. Those monetary fiscal policies enacted by a central bank, or by a Congress or a governing body internationally that actually has the firepower to actually spend at a level that would induce or change the direction of this self-reinforcing credit cycle is the only thing that can stop these things. And now we're already contracting on this thing. In my opinion, I think you're already contracting on this global stage a lot faster than what a lot of people domestically in the United States might realize.

Starting point is 00:06:18 And so that's my concern. And we're going to have this chart up there so people can. see how aggressive this is actually contracting at this point. So my expectation moving forward, as we talk about all this, my expectation moving forward is that this is going to continue to get worse and that you're going to see the international markets continue to go down because you're seeing credit contraction. You're seeing it globally. And right now, I don't see fiscal policy or monetary policy by anybody with enough authority and enough oomph, if you will. that can add dollars into the system outside of the United States changing their policy,

Starting point is 00:06:57 their current fiscal and monetary policy, which they're not. In fact, the U.S. just got done tightening, which is going to only make this worse instead of make this better. So as long as the Fed still has the opinion that they have as far as we're going to, I mean, Stanley Fisher, the number two guy at the Fed saying that they're going to raise rates four times in the coming year, as long as they're still. positioning and saying those kind of things, this thing is not going to get better. That's my opinion.

Starting point is 00:07:26 I could be completely wrong, but that's my opinion. So that's why I'm watching the Fed, and that's why I'm watching them very closely, because I really feel like, to be honest with you, they're the only ones that have enough firepower to really at least subside this downturn and make it the bleeding stop, let alone bring it back up into a positive growth, if you will, with the credit. I don't see that happening anytime soon. So I wanted to lead off with that and I want to lead off with these big ideas so that whenever I tell people that I think oil is going to continue to get punished

Starting point is 00:07:59 until either the Fed adjust its monetary policy or you basically see a total bloodbath in that sector and you see a ton of defaults and the competition disappears. That's why I have that opinion. And I just want to add more context to it so people can see kind of the bigger picture of how I'm seeing things. So I'm curious if Stig has any comments on. my thoughts there and what I'm talking about or I'm just curious to know your thoughts. Yeah, so a few different things. So first, if we talk about the interest rate and the impact

Starting point is 00:08:29 that Fed has, I definitely agree with you that Fed is the only one right now that has the firepower to do anything about it. But what you see here in Europe is actually that we go in the other direction. We actually see that we are still trying to expand credit, which I'll be the first one to say it's not working as well as you probably should. And what is interesting to see. because if you look at Asia and if you look at Europe, everyone is talking about, so how are we positioned to the American dollar or the US dollar? And if you look at that,

Starting point is 00:08:59 it's probably a question about time before all the economies have to tighten the credit as well, at least as long as the US is so predominant as it is right now, and at least as long as they continue with the same policy. I'm not sure about the thing about oil. And again, this is an amazing topic, and we discussed oil many times before. The way I see all is simply that we are doing a cycle.

Starting point is 00:09:23 It might be an extremely huge cycle. I mean, it's definitely a cycle that we haven't seen before, at least not recently. But whether or not we'll see a lot of defaults, we might do that. But I just basically see supply tightening in a time to come. And we discussed this many times before here in the podcast that this is not a demand issue. If you only look at demand, you actually see that it's been increasing the last 12 months. and it has done so the last 120 years or so only with two or three years where it didn't happen. But you will see a contraction in the supply.

Starting point is 00:09:57 And when you see that and you see that the psychology starts to back this trend, I think you can see a somewhat rapid increase in all price again. But saying that, obviously, I could be completely wrong. When you try to predict the oil price, when you try to predict interest rates, that's really when you can make a fool yourselves. Let's see how these things pan out. I think that that's a good point stick. And I think that people got to realize we're not necessarily really trying to predict what's going to happen next. I'm talking about it more of I'm just not a buyer right now. I'm just waiting. I'm one that I will buy whenever I feel like the trend has kind of started going on the opposite direction. And you know what? If I show up to the party as oil hit $28 and I'm not a buyer until it's 38 because I think it's really kind of fixed itself, that's just how I play things. I don't play them while they're going down because I feel like. The time that it takes for at the bottom and then come back up, I could be doing other things

Starting point is 00:10:51 with my capital for things that I feel like I do understand and that are moving in a certain direction. And I don't know. It's not, I don't know how to really describe it. But for me, I just, I'm going to continue to wait and be patient and see how things continue to play out. I think that the strong dollar also plays an impact. So you got the supply and demand piece with oil, but I also think that you also have to

Starting point is 00:11:10 look at oil and any other commodity is almost like a currency. And that's how I kind of see it. And as long as there's a run on dollars and every other fiat currency in the world right now, and as those dollars are contracting, I look at commodities as being much more fixed as far as the amount of those in the system. And so as fiat currencies contract and those become smaller in number, that means the price of commodities have to go down with that. To me, that's how I make sense of it.

Starting point is 00:11:39 So as credit would expand again, well, then the price of all commodities and any other financial asset has to go up at that point. So that's why I'm a little hesitant and just waiting and watching and seeing what's going to play out with all this. So Stig, your comment made me think about something else too, where you said that the ECB is still loosening. So the thing that I think about whenever I see these other central banks, Bank of Japan, so they were doing this aggressive QQE strategy over there, which is crazy. And then their stock market started to contract, which we said in the summer, we thought that the Japanese market it was going to start contracting.

Starting point is 00:12:15 They're now in a bearish territory, which, you know, like I said, we're not making predictions, but that one is pretty accurate. The timing that we said in the summertime frame where we said we thought Japan was going down and it has. But the thing that I'm thinking about in Japan, they're saying, well, we're not going to really do much more QQE to spark this thing. We're just going to kind of let it hang and we're not going to do much more at this point. We're over in Europe, you've got the ECB saying, yeah, we're going to loosen.

Starting point is 00:12:40 We're going to make this more accommodating. I think that's really dumb. I think Mario Draghi, I think he is really making some poor decisions over in Europe. And here's why. It's almost like he's on, the best way I can equate this is you've got all this fiat currencies in the world contracting right now. Everyone's running to these things and there's not enough of them. And so you've got to run on dollars, euros, whatever. It's contracting globally.

Starting point is 00:13:05 I'm speaking from global terms. And so it's almost like a current. If you go to a water park or like an amusement park and you got a lazy. river, okay? Imagine sitting on that lazy river in a raft and it's just kind of taking you around. Okay. And that's what it's like whenever credit is expanding. You're just kind of going along for the ride. And you know what? If you can kick and swim with that current, you can go even faster. And that'd be like a great business that's kicking and swimming with the current. They're really moving out and they're making a lot of money. They're going. Now imagine that you're on this current on this lazy river and you're just kind of swimming and you're moving real fast. And all of a sudden the current starts slowing. It comes to a complete stop, which would have been about summer of 2015, and it starts going the other way and it starts reversing. And you're that company and you're just trying to swim into this current.

Starting point is 00:13:53 It's getting harder and harder. And as the current picks up its pace, you as a company, you're getting tired of swimming into it and eventually you just kind of get taken with it. Now, when I look at the ECB right now, you've got the U.S. that's basically tightening, which is making that current go the other way. You got Japan saying, yeah, we're not going to be adding any more to this, which is just allowing that current to go even faster in the opposite direction. But you still have the ECB saying we're going to ease. We're going to add more money into the system. We're going to make it more

Starting point is 00:14:21 accommodative. He's adding money into the system and he's trying to hold it up and everyone else is trying to tear it down. And you know what? All those dollars that he's adding into the system, he just needs to take his hands off and kind of let this thing go for what it is. And then whenever it kind of bottoms out in the U.S. is adding money to the system, that's when you add it back in and you make it more accommodative for the people in Europe. And that those are like good dollars, being spent that he's adding into the system. Yeah, I think that Ra is trying to smoothing the transition. But I completely agree with your president.

Starting point is 00:14:51 He's probably just making worse because when it does flip, it's just going to be that much harder. And I think it already has flipped. I mean, that's my opinion. I know there's tons of people out there that'll totally disagree with that. But I think it's already flipped. And I think it flipped at the summer 2015. You know, I was saying that it was going to flip a few months before that in February.

Starting point is 00:15:10 But, you know, looking at this chart, This chart is so informative, in my opinion. I think that this chart really says a lot. And if it is true and it is moving in that direction and we are going to experience a big recession this year, he is making a big mistake in my opinion. But, you know, time will tell. And he's probably looking at things from vantage points that are far beyond my comprehension. And I don't know things from his vantage point.

Starting point is 00:15:35 So anyway, let's go ahead and do some of these questions. This should be really a lot of fun. And I apologize we haven't done some questions in the past. We've just been kind of in a time constraint with our recording. So we're going to consolidate all these questions. I want to play them for you right now. So the first one that we have in the queue is from Charlie McDonald. And I'm going to go ahead and play Charlie's question for you.

Starting point is 00:15:55 Hi, Preston and Stig. It's Charlie from Sydney, Australia here. First of all, fantastic show. I'm really loving the book reviews, interviews and insights. And the resources and tools you provide are really invaluable. I just had a question about episode 68, the current market conditions. I understand your point that Soros, Strach and Mellon, and Dahlio might be more insightful than Buffett and current market conditions.

Starting point is 00:16:14 But given your value investors, wouldn't you still be investing long-term and on companies and their long-time prospects rather than looking from a shorter-term market perspective? Just interested in how you balance these in investing. Thanks again, guys, and please keep it up. 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 00:20:53 up on it when the going gets tough. And I totally agree with that. But I think that also you have to have the context that everyone has their own little unique way of investing. I know I have, you know, I follow Warren Buffett very closely. I use tons of the methods that he uses for valuing companies, fingering out with their worth and managing my risk appropriately. But there's other people out there that have really had an impact on me as far as the way I see how I should be investing. One of those people when I talk about them all the time is Ray Dalio. And there's other ones out there, Stanley Drunken Miller. There's guys out there that I've read, their material, George Soros, you know, I've read some of his books. And so I guess my strategy has evolved through the

Starting point is 00:21:40 years. And it is what it is. And, you know, whenever I started moving into a cash position back in February and into the summer and really took a substantial cash position, there were things that I held, but those were things that I had large capital gains that I was going to be taxed through the nose on. And so in a way, I felt like I really was kind of investing, call it like Warren Buffett or a value investor. But at the same time, I was kind of investing like some other of these people as well. So I would say that my strategy personally is more of a hybrid strategy where, and I don't even really necessarily know that would be the best way to describe it, I think that whenever you're in a deep, dark credit contraction, which is where I would expect us to be at the end of 2016,

Starting point is 00:22:25 I will turn into this, you know, this hardcore value investor. But whenever you're kind of at a top and you're really getting higher market prices, let's just say domestically in the U.S., I think I turn more into like this macro investor where I'm just really trying to minimize my downside risk. And if there's a lot of capital gains, I'll still hold on to the pick. But if there's not really that much capital gains to be paid, I'll pretty much off. offload a lot of my equity picks and just move into more of a cash position because I really understand, and I think this is something that a lot of people have to have an appreciation for,

Starting point is 00:22:57 and that's the power of liquidity in times of a crisis. And I think a lot of people do not understand that whatsoever, and it's such an important idea, in my opinion, it's an important idea to understand the power of liquidity in the time of a crisis. So that's, I guess, kind of my investing approach. It's kind of evolved. I used to be just a straight, hardcore, or value investor, but it's kind of evolved through the years. But I'm real curious to hear what Stig has to say on this one. Well, I don't think I've involved. That would be my short answer. No, so I'm definitely 100% value invest. I'm 100% into Warren Buffett. And I'm actually really happy, Charlie, that you ask this question because I listened to episode 68 the other day

Starting point is 00:23:41 and I kind of felt like I wasn't clear enough what my strategy was. So yes, we have been discussing Drunken Miller and Soros and Dalio, but my approach hasn't changed. I think it's extremely interesting to study, and I study that because I love economics, love finance, but I don't plan to change my strategy. My strategy as a value investor is basically to buy companies when I think the value is good compared to the price, and that hasn't changed at all. Like Preston back in February last year, we were looking at Dow, and I think back then was trading above 18,000. And we looked at each other and we talked about, hey, perhaps we should

Starting point is 00:24:22 start liquidating our stocks and perhaps a whole cash through something else. So I thought a lot about that and I sold basically all the stocks I had. And I bought a few stocks since. And that's an oil primarily. I also bought something in Berkshire. But I think that was not so much a stock play. that was a play in the primary driver for the profits for these companies. That's the oil price. And I felt like oil, say, trading in 40, I felt that was too low, definitely below the long-term equilibrium. Since I don't know what will happen the next six, 12, 18 months, but not if I think that the oil price is low. If I think that the oil stocks, they're underpriced, I will just go ahead and buy those stocks.

Starting point is 00:25:08 I don't know. Then perhaps they will drop to 29, but they are today. But since I don't know that, I don't mind buying when it's on the way down. And I think, you know, I wouldn't be surprised if I lost something in my portfolio here in 2016. So I guess I follow a different approach than Preston. Like, I think I'm short of 30% in stocks. And I think that if I would say lose like 10% of that, that would be 3%, right? That wouldn't be good.

Starting point is 00:25:39 But I kind of feel like I'm having a good year so far, even though it might sound weird, because that's just the strategy that I use. And like, in my opinion, I would find it really hard to change my strategy because it's right now that I think I'm making money as a value investor. All right, Charlie. So that's all we have for your question. What we're going to do now is we're going to move on to Matt's question. And Matt, Matt, here, let's pull up your question here. Hi, President Stig. My name is Matt McNevich.

Starting point is 00:26:09 I'm asking my question out of Waterloo Canada. As a new self-directed investor, I would like to share my deep appreciation for your podcast and sharing your knowledge with investors like myself. It has been a huge help. For my question, I want to start by saying that the other day, my parents asked me to attend the meeting they had with their financial advisor, who works for a management firm because they know nothing about investing,

Starting point is 00:26:31 and wanted my help understanding what they were getting themselves into. During the meeting, this financial advisor picked out seven individual stocks for my parents invest in. When I asked her how she made her choices, she looked at whether the average analyst rating recommended the stock as a strong buy, what their price target was, and whether she was buying the stock near its 52-week low, thus giving it a high potential increase in share price. Her reasoning was that these stocks are poised for recovery, and that her firm and the market analysts believed that the recovery will occur in the next 12 months. When I asked about high p-re ratios, short rates, and other valuation criteria I felt were off or too high, she could

Starting point is 00:27:09 She could not offer a good defense, but insisted the analysts knew what they were doing. My question is, do you guys look at analysts' recommendations and targets and read their perspectives? And if so, how do these factors influence your investing decisions, since it seems to be a major factor that decides how financial advisors choose their client stocks. Thank you. Matt, so I'm just, I wish I could have been a fly on the wall. That's all I can say. I wish I could have been there as you were asking these questions because I know you were asking the hard questions. that nobody goes in there and asks. So, Bravo for your performance. I already know it was fantastic.

Starting point is 00:27:45 I just wish I could have been there. So to answer your question about the analysts, so the answer is no, I really don't pay attention to very many analysts or any analysts, really, but I do pay attention to all-star investors. So Jim Rogers is a perfect example. I read an article on Jim Rogers the other week. You know, his net worth, I want to say it's like $200 million. In fact, Jim said that he was going to come on the show. We sent him an email. He said he was going to come on the show. I'm trying to continue working that out. But it's kind of, oh, it's gotten lost in my inbox.

Starting point is 00:28:15 But anyway, so I pay attention to people like that, Ray Dalio, Warren Buffett, all the people that we really talk about on the show. What are they buying? And then they kind of give me some ideas of, I think through why are they buying that or why are they selling that? And then I'll dig and figure out from my own reason so that I can actually have conviction behind the purchase or the sale of whatever it is that I'm looking at. I do my own analysis.

Starting point is 00:28:39 And that's why I think it's so important for people to do their own analysis is because of conviction. And we've been talking about that a little bit on the show recently. But if you don't have any conviction behind your pick and you don't know why you're actually doing the pick, you're not going to be able to stay with it if it starts moving against you. And you definitely won't be able to add to the position if it starts moving against you. And so that's why I think it's really important for people to do their own analysis and to understand things on their own. Now, as far as you're meeting with your advisor, I think that her or him, I can't remember, I think you said it was a female saying that they look at a 52-week low.

Starting point is 00:29:16 I think that that is a really great strategy. In fact, I know Monish Pabright talks about looking at 52-week lows whenever he's trying to get ideas for things. I would take that a step further. I would tell you that 52-week lows are a really good thing, but whenever you can look at a 52-week low in a commodity, let's just take oil. Perfect example. And if you're implementing this strategy because you're a value investor,

Starting point is 00:29:40 oil's at a 52-week low right now. I think through the night, it went down and it even hit into the $28 range last night. And when you're looking at that, that's at a 52-week low. So already we know that it's depressed. It's a depressed price. So instead of going and buying an individual pick behind that, let's just say ExxonMobil or Chevron or whatever, what I would tell you is go look at an index of energy companies and buy that or start looking into that more because what you're doing is you're distributing your risk so that you're

Starting point is 00:30:10 not buying a company that could potentially fail after all this. I mean, this is going to be bad. This whole oil thing. It's just, it's getting started and you're going to see this get a whole lot worse than the next three months, in my opinion. You're going to see a lot of defaults. And so you can distribute that risk evenly and buy that and just forget about it for five years. I think you'll do really well. I think you look at that in five years from now, it's going to do really well for you. So I do like that recommendation. But, But if you're doing individual picks behind that, that's where I think you're assuming a little bit more risk because you might not know all the specifics on why it's down, you know, hitting a 52 week low. So Matt's super cool question really.

Starting point is 00:30:47 And I completely agree with Preston and Mnuch about generating ideas from a 52 week low. I also want to point out what Matt said in the previous episode that, for instance, if you look at Japan after the huge bubble that they had, even though you would buy into the lowest last five years, not only. only the previous year, it would still be losing a ton of money because the bubble was just so big and the trend was just going so much down and it wasn't even reasonable price. So, yes, you can use it to generate ideas, but you really need to understand when it lies behind why it's a 52-week low. Sometimes and often there's actually the reason why it's priced as it is. About what you said about price targets, I never use price targets. That don't make any sense to me. First of all, it's really hard for me to figure out how they calculated the price in the first place.

Starting point is 00:31:38 Often you would just read, oh, so this bank says it's worth $82. And I have no clue how they come up with $82. And whenever I'm lucky enough or misfortune enough to figure out how they calculate that to be $82, I'm still none the wiser. It still doesn't make any sense to me. So no, I never use price targets. And the whole idea about taking advice for other people is actually really, interesting. So Preston and I right now we are doing course about the intelligent investor.

Starting point is 00:32:08 And in chapter 10 of that book, Benjamin Graham is talking about how to look at stock market advice. And what he's saying is that the less you know, the less you should actually rely on advice, which might sound completely counterintuitive. But it's simply because you can't really filter the information, really understand how to go about them if you don't have the knowledge. And you said this about your parents, how should they not think it would be a good approach to follow the financial planner? Because she is referring to analysts that, for all we know, might be really good at that job. But that's not how to look at it. If you don't know anything about a given subject, you should really be cautious about advice.

Starting point is 00:32:51 And I think in their situation, you should probably just more focus on, say, minimizing the costs and perhaps buying the. write index and definitely not go into individual stock picks. I think that's in any case that would be the most horrible, horrible idea. So Stig already knows where I'm going to go after his comment. So I have a pet peeve with price tags, which he was talking about, where these analysts say, oh, the price is, we think that the price for this company is $90 a share, which this whole idea goes to intrinsic value. And my pet peeve with intrinsic value and price tags or whatever you want to call it is this. I never see a price tag or an intrinsic value that has an associated discount rate or yield associated with it. That drives me bananas. It makes no sense whatsoever

Starting point is 00:33:46 for me to say, I think the intrinsic value of Coke is $40 or whatever number you want to throw out there because every price has to have a corresponding yield or discount rate that's tied to it. It's tethered to it. So any time a person says, and we get tons of emails from people saying, hey, I calculated the intrinsic value of company XYZ and it's $100 and then they don't say anything about the discount rate that they use. And when you do that, you're basically saying a half sentence. It'd be like me starting and then just stopping saying whatever it was that I was saying.

Starting point is 00:34:17 You've got to complete the sentence. And when you're talking about intrinsic value, it always has to have a discount rate. So when you're figuring this out, what you're doing is you're figuring out all the future cash flows. You're saying from time now into the future, I think that the company's going to earn $100 a year, whatever the amount is. And you're adding all those up. And then you're using a discount rate in order to bring it back to today's present value and then it has a number associated with it. So when you do that and you bring it back, let's say we use a discount rate of 10%. Take all those future cash flows, bring it back to the present value today.

Starting point is 00:34:48 We use 10%. So when I do that, let's say the price comes back and it says the price is $100 a share at a discount rate of 10%. So if the company's trading at $40, a better scenario would be if the company was trading at $100, okay, and we got $100 for our intrinsic value, you know that if you buy it, that day at $100, you should expect to get a 10% return into perpetuity for owning that stock. That's why it's so important to know what the discount rate is, because if you don't know that, you'll have no idea what your yield should be. Okay. And that discount rate should include the retained earnings and the dividends combined into just one single solitary yield that you could expect to get from the pick. So I think that's really important for people to understand.

Starting point is 00:35:38 If none of that made any sense, go watch our videos. We've got two different videos on calculating intrinsic value for two different ways. We'll have links to those in our show notes of this episode. that you're having trouble finding it. Just go to the show notes for episode 71, and we'll have links to both of our intrinsic value calculators. And then you can see how you have to have this discount rate associated with the price that you're figuring this out for.

Starting point is 00:36:01 Sorry to go so long on that, but I think it's so important for people to understand this because we see the mistake so often. All right, so we're going to go ahead and do a question from Kip Stringfellow, and this is the third question that we're going to play. Hi, Preston and Stig. My name is Kip, and first off, just wanted to thank you for all the time and energy you put into the show.

Starting point is 00:36:20 It's a great learning resource and really appreciate it. My question has to deal with the psychological and emotional aspects of long-term value investing. Today I was talking to one of my friends who's been an investor for many years following a value approach. And he's had a really hard time recently because a lot of his positions in his portfolio have been going down a lot in value. And it's caused him to question his ability and skill at being an investor. and if it's really something he should be doing going forward into the future.

Starting point is 00:36:50 So I was wondering for you guys if you'd seen any really good strategies or systems that successful value investors have used over the years to make sure that they stay the course, don't give up and keep learning and keep applying their skills to become even more successful over the long term, even when temporarily you have large losses. So just wanted to get your opinion on that. And thanks so much. Boy, I don't think you could ask a harder question, Kip. That's a hard one.

Starting point is 00:37:19 And it really goes back to what we're saying is people, you know, they get down in a position. And think about that if you were down for a year where you're just really kind of getting obliterated. The market's killing you. And you experience that for an entire year. It is so easy psychologically to just abandon and say, this just doesn't work. And I think for a lot of people, it could have worked for the previous seven years. and they go through one year of it not working, it's just so easy to get caught up in the moment,

Starting point is 00:37:50 especially when you're talking in the context of an entire year, it just kind of is overwhelming, and it's a little hard to stay the course. And I don't know if I've got a good answer for you. I really don't. You know, I really think that Toby Carlisle's deep value strategy is probably the best strategy out there, to be honest with you, for most people,

Starting point is 00:38:10 because I think it's fairly easy to implement, and I think it's based on good solid found principles. I think it's important that you've got to make sure you have your portfolio distributed enough that you have at least 20 picks or more. But, you know, that's the strategy that I would probably recommend to somebody in my family if I was going to recommend a strategy that was just full proof. You just keep doing this year in, year out, regardless of how things are going. I think that that would probably be one of the better strategies.

Starting point is 00:38:37 But that's a really hard question to answer. I mean, I've got my approach. You can see Stiggs approach is a little bit different. What do you have stick? I'm curious to hear your thoughts on this one. This is hard. Yeah, I think it's a really tough question too. So you won't get this advice for me. You get it from Warren Buffett. So that's probably already a lot better because he's saying that you should write down while you bought the stock and then you should reread it when times are tough. And if nothing has changed, it's probably just Mr. Margaret that's a play. And I actually think

Starting point is 00:39:07 that's a really, really good advice. And obviously, if your friend is looking at his portfolio and he can see that the mode has changed for the company. I don't think that necessarily had just because the market dropped, then he might consider going out of that stock. But if nothing's really changed, you know, why would you change your strategy? It's when times are tough that you're really making money as a value investor by sticking to your strategy. So I think my advice would be just listen to Warren Buffett,

Starting point is 00:39:36 what he is saying and what you can see him doing right now with his own portfolio. And I think that would be my best response. to that question. Yeah, I totally agree with that. Okay, the next question that we got is coming from Rich Schener. So here we go. Hey, Stiggin Preston. My name is Rich Schener from Philadelphia, PA. Can't thank you guys enough for all you've done to help me develop as an investor in person the past 12 months. My question for you is, how do you manage to stream a great book suggestions you get and what process have you used to prioritize what you read? Thanks again for all you've done and looking forward to hearing from you guys. Thanks, thanks. Bye.

Starting point is 00:40:13 Well, I don't know if we really do manage it very well, Stig. I mean, when we started the show, we came up with the list, and I think a lot of people out there might have seen our list, but we just said, okay, who are some really influential billionaires that people know and recognize? So when we mention them on the show, it's not like we're talking about somebody that really nobody knows. So we found some people that we felt were pretty famous billionaires. And then we just did some research, and we just started doing some digging of different books that they've said in public. public forums that have been influential for them. And we just kind of listed all those out. And I think how many books do we come up with? 40 or 50 different books on that list. Yeah. Yeah, this seems about right. Yeah. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:44:22 You should see some of the emails we get from people. We get some really bad emails from time to time, but sometimes we get some really good ones. And people are like, you guys need to read this book. And here's the reasons why. And so then we'll just add that into the queue. So, and usually what it is is Stig will say, hey, I got this book recommendation. This looks like a really good one. And usually I just say, yeah, sounds good. Let's do it. That's it. Yeah. And as you can see later today, often I'm wrong. Because we'll talk about more about this later, but that's actually a billionaire endorsement that we're doing today. But what we learn pretty fast person is that all billionaires, they're readers, the average readers. And whenever you hear from a very successful person, you should read this book. to me, that's just, you know, that's the best endorsement you can get. So I think of all the books out there, obviously you can read all of them. If we get them from a trusted source or someone that we really respect, we usually go ahead and read those books.

Starting point is 00:45:23 Another good thing, and I think we talked about that before, is that we listen to our books. So that also makes it, I wouldn't say it makes it easier to prioritize, but we can just do it a lot faster. And I also going to say that after listening to all these books, books. I'm also trying to find relatively short books, which to me is less than eight hours, because very often you would see that books just because they read really big, they usually have like three, four, or five learning outcomes anyway. So I try to prioritize my time that way too.

Starting point is 00:45:54 I'll tell you, there's no, and we have this on our website. We've written this. And I know people hear us say this a lot, but there is no greater asset, in my opinion, than for Stig and I, than just reading, reading all these books. And I think that when you immerse yourself in something that's very focused, a book that's very focused in one specific topic or idea, that is so much more beneficial than getting, you know, going online and just searching for information on that specific topic, because you're just getting really kind of surface level information. You're not able to really kind of deep dive into something. So that's why I really like books. And And Stig's right. You won't find one person like Warren Buffett, Charlie Munger, Ray Dalio, all these guys.

Starting point is 00:46:39 Every one of them, they are just, I mean, hardcore readers. We had Mab on the show last episode. He was saying he was doing like a book a week. Stig and I are doing about a book every two weeks. I don't have the time and my day to do more than that. But Mab, I mean, he's doing a book a week. And you can see why he's so darn smart. The guy's brilliant.

Starting point is 00:47:01 So you're going to see that as a common thread amongst a lot. lot of these people's that they just read like crazy. All right. So our last and fifth question for this segment of the show is from Michael. And I'm going to play Michael's question here. Hello, Preston and Stig. Recently, Bloomberg published a story about two of the world's most famous economists, Robert Schiller of Yale and Jeremy Siegel of the Warden School of the University of Pennsylvania, taking opposite bear and bull cases on the current market. Preston and Stig, You often comment on Schiller quite a lot and seem to believe that the market is on the pricier side.

Starting point is 00:47:37 Jeremy Siegel believes that the market isn't pricey and may even be slightly undervalued. What are your thoughts on Siegel's view and why you might think he is correct or incorrect? Now, some of his main points are that the strong U.S. dollar makes earnings look artificially low. Oil price has hurt the EPS of energy companies only in the short term. U.S. GDP ratios are less relevant because U.S. companies are making more money overseas. Current prices are below historic P.E. ratios in low interest periods. And most importantly, the P.E. ratio, according to Jeremy Siegel, should be 18 to 20 because of a new normal because of the low interest rates. So I'd love to hear your answers.

Starting point is 00:48:23 So that was some really interesting facts that you were thrown out there. And, you know, we've been, I've been broadcasting my opinion on this for quite some time now, almost a year of how I'm a bear. And, you know, not too many people have thrown out that argument that because interest rates are low, it might be the new normal that PE ratios are a little bit higher. And that would make total sense from an intrinsic value discount cash flow perspective, to be honest with it. It makes total sense. But with that said, I think Siegel is really going to not be happy with the outcome of what's about to happen. and I think that he is wrong. And I think that Schiller's right. And my reasoning for that is really this. My opinion is that you don't have any spreads left between asset classes. And when you have that,

Starting point is 00:49:11 I think that you're setting things up for the market to really get scared and get scared really fast because they realize that they've been gambling with not much yield for their gamble. And so here's what I mean by that. So when we look, at fixed income investments right now. Let's just call it 2%, because that's probably the easiest way to do it with a 10-year treasury, 2%. When you looked at stocks before the credit cycle has started to go back in the direction, I think Meb said on the last episode that the Schiller P is about 24. So you're looking at, let's just call it, I'm just ballparking this, but let's just say it's like 3% to 2.5% or whatever for your yield to be in equities. Worst case scenario,

Starting point is 00:49:53 Well, you'd actually be around a 4% with a 25. So you'd be at a 4% yield, and you're comparing that to the fixed income side. So when you don't have much of a spread between those prices, and as the Fed is raising rates, which means interest rates on fixed income is going to go higher, okay, those are going to basically come to parity with each other between fixed income and equities. We're seeing that happen right now. We're seeing that the yield curve is starting to flatten. And as you have that occur, and people aren't getting any extra yield for extra risk,

Starting point is 00:50:27 because there's a whole lot more risk in equities than there isn't fixed income. When people are seeing that shift, I think you're putting things in a position where people are saying, hey, I'm not going to assume this extra risk for pretty much no yield whatsoever, and they're going to move out of it, and they're going to move in the fixed income. And then whenever things further, you know, kind of devour themselves, then they're going to say, I'm not staying in this junk fixed yield. This is scary. and then they move into cash or whatever.

Starting point is 00:50:53 And they just keep reducing their risk into a cash position. That's where I think Siegel's wrong because he's not talking about those yield spreads. And there's a lot of other billionaires out there like Dahlio and, I mean, look at Buffett's portfolio. He's sitting on $70 billion of cash. He's not investing that into financial assets. And I'm sure he could if he wanted to. So I think that there's a lot of people that have a different opinion than Siegel. and I'm definitely, definitely with Schiller on this one.

Starting point is 00:51:23 Yeah, it's probably no surprise that I'm with Schiller too. And I think we need to understand that we have the Cape or the Schiller PE. And that's around 24. It was 27 not long ago. And then we have the current PE. And he's probably referring to the current P. He was around 20. So he's talking about a 5% return with Preston also referring to before.

Starting point is 00:51:44 I think his whole premise is wrong. I think if his premise was correct about the new normal, normal, yes, then that would be somewhat correct. Like having a, say, 2% yield on your bonds and then 5% in your stocks, if that was like your paradigm and that was the truth, I don't know what the truth is, but just use that word for simplicity, yes, he would probably be right. But I just think that paradigm is wrong because the Fed is hiking the rates, so you cannot use 2%.

Starting point is 00:52:11 And the other thing is that I don't look at current PE like Siegel is doing saying that's 20%. I'm looking at Chillers' PE because that is sickerical justice. So that's 4%. So already there, the premise is wrong. So just in short, this is not a new normal. This is probably the least normal thing they can never get. So that's why I don't agree with him and agree with Schiller. So one of the major changes in the way that I invest really came from just kind of understanding the positioning of the Fed. Stanley Drunken Miller has a quote where he says, I was told early on in my investing career that you always look at what the Fed's doing and try to position the assets that you own

Starting point is 00:52:51 one year in advance. So because the Fed's moving in this position, I will move into this type of financial asset because I think in a year from now, because of the Fed's movement, this is going to be more valuable. That's really an enormous part of George Soros and Stanley Drunken Miller's approach. I agree with that. Okay. And I think that whenever you get a guy like Siegel, you know, the professor over at Wharton, when you have him saying that he's really just looking at it from an interest rate level, inflation level, discount cash flow of the business, and there's no discussion whatsoever on what the Fed's doing to manipulate the money supply in the system, I think that that's a flawed strategy. I think there's a gap in the knowledge and the understanding

Starting point is 00:53:37 of what's happening from the big picture. That's my personal opinion. Warren Buffett would say that, and he's on record, I saw an interview with him where he said, if somebody would come up to me and whisper in my ear what the Fed's going to do in six months from now or a year from now or even today, it wouldn't change my investing approach whatsoever, not even one iota. And for me, that's crazy. That makes no sense to me.

Starting point is 00:54:00 But that's me. That's Preston Pish. So I'm looking at what the Fed's saying and what they're doing and what my ex-exam. for their future movements are because it has such a dramatic impact on the number of dollars, the fiat currency that's in the system. And make no mistake about it, is the Fed's adjusting this money supply. It's impacting the value of every single financial instrument in the world. All right.

Starting point is 00:54:25 So that completes our questions. For the five people that ask their questions, we're going to go ahead and send you a free signed copy of our book, the Warren Buffett Accounting book. And we're just really thankful for the people to come on to our website. Ask the Investors.com, they go there, they record their questions. There's lots of people recording questions. So we apologize that we can't play all the questions. But for the ones that we kind of like and maybe feel like we can answer well for the audience, you'll get a free sign copy of our book if you guys go there. It really costs nothing to do it. Just not much downside, a little bit of

Starting point is 00:54:55 upside with getting a free book if you guys go ahead and do that. So we really appreciate it. So we're going to move on now to the book summary. This is going to be very quick. So Charlie Munger is a huge, enormous Benjamin Franklin fan. And so this was one of the books that Charlie Munger recommended. He's the vice chairman out of Berkshire Hathaway, a billionaire and Warren Buffett's best friend. This book was written by Walter Isaacson, the Benjamin Franklin book. It's called An American Life. There's another person that endorsed this. Elon Musk is another billionaire that said that this book had really influenced him. So Stig and I were pretty kind of, I was excited to read this because you need to just have one billionaire.

Starting point is 00:55:36 You had two billionaires and two people that, you know, I respect from a business point of view recommending this book. And I didn't get it. I really, I didn't get it. I didn't see how this really taught me all that much to be honest with you. And maybe I'm just missing the boat here. But Stig, what were your thoughts on reading this book? Yeah, I'm definitely with you.

Starting point is 00:55:57 We actually tried to get World's access on the podcast. And that was before we read the book. perhaps it's a good thing. It's a good thing he didn't accept. Yeah, I just didn't get it. The original book is, I think it's like 24 hours or something like that. And I read the abridged version, which was eight hours. And I felt like I could probably do that in like 15 minutes and still get the high points.

Starting point is 00:56:19 It was very superfluous. You know, I did get a lot of great brusups on my history lessons, like all the things I forgot about the American Revolutionary War. Yeah. So that's up to the day. but in terms of business, I don't know, like the learning outcomes I really got. So we're just going to touch on a couple topics for this, but we do have a good outline and we do have a good summary that we have written for this book. So we're going to mail that out to everybody on our list.

Starting point is 00:56:49 And like Stig said, you know, if you're trying to get a refresher on your American history, you're probably going to like the executive summary that we're sending you. It's not real long. It's five pages like all the others. But we go chapter by chapter and we talk about, you know, a paragraph for one of the chapters just kind of highlighting the key points. In short, the thing with Benjamin Franklin is he really got his notoriety for, I would say, two things. The first one would be his writing. He was just a fantastic writer.

Starting point is 00:57:18 And he had access. And he had distribution back then because in the family business, it was through publishing newspapers and media. So he had this outlet. he became a great writer. The other thing that he was really, I think that really kind of set him in the international stage and notoriety for being smart and for really kind of becoming the person that he became early on. And that was because he invented the lightning rod that you stick on your house to prevent lightning strikes. And so this was a big invention back then.

Starting point is 00:57:52 You think about it now, it's just like a metal rod that you just put on your house pretty generic. But back then this was like the new iPod, if you will. So, and notice how out of touch with reality I know. I'm saying the iPod. That was like 10 years ago. The new iPhone, I guess, would probably be a better. Jeez, a man. If my kids heard that, they would die.

Starting point is 00:58:10 But anyway, he invented the lightning rod. And that really kind of put him on the international stage because these things sold all through Europe. They sold in the U.S. And it was kind of this revolutionary thing. And so he dabbled in electricity, dabbled in writing. He obviously is a well-known politician as a world. well. And the book just kind of outlines it's a biography. I mean, it goes step by step from his

Starting point is 00:58:34 birth to his death and just kind of gives you the whole history of him. Now, as far as, I guess, because I was always looking at the book from the lens of how can I take something out of this that I could communicate to the podcast about business or investing? And I just didn't really see anything, to be quite honest with you. It was more of just like this historical account. So I'm not going to waste people's time on the podcast by going into every little detail because I just don't really think it applies to what it is that we're trying to talk about on the show. So I'm curious if Stig was able to extract anything. Well, I think I had like two small things. The first one is not so much a learning outcome. I'm just very impressed that Benjamin Franklin actually created a mastermind group

Starting point is 00:59:14 in 1727. So at age 21, he created a mastermind group. He probably didn't call it a mastermind group. I think he called it something like a club for enterprising young businessmen or something like that in Boston. And like the main goal for that was really just financial independence and how can we help each other. And you know, yes, as terms of learning outcome, what we can communicate to the audience. I don't know how usual that is. But I was very impressed that you could think about that. And even today, that's not something, even though all the knowledge out there is available, a lot of people don't do that. And Prest and I was even late to the party. I could tell you one thing. I bet you his mastermind group was not as diversified as ours.

Starting point is 00:59:55 We've got a guy from Australia, India, Canada, Denmark, the U.S. Come on. Ben Franklin, you don't have nothing on us. Yeah. Then the other thing, that was about how to better yourself. And I think that discussion was nice. And this is actually a thing that Warren Buffett referred to a few times that you can change your personality if you want to. Like, this is not set in stone.

Starting point is 01:00:21 If you want to behave a certain way, why not just behave that way? And that was something that Benjamin Franklin spent a lot of time and energy on. He tried to change his personality because he said that he needed to change his personality to have success in business. And he was really adamant about reevaluating himself. And this is actually something I've done myself a few years back. So there were probably a lot of people saying, yes, Dick, you really need to change your personality.

Starting point is 01:00:48 But I was actually taking his advice. And I was, you know, every Sunday night, I was looking back. my personal relations during the week. And then I think I had like eight or nine principles that I wanted to make my own. And then I was evaluating myself and how I was interacting with LLP. For me, that was extremely helpful doing that. So at least from a personal perspective, I think that discussion was really good. But again, that was probably the 15 minutes I was talking about before. I really didn't care for the rest, at least in terms of how I could create value for the audience. It was more like a history lesson. Yeah, I think that's important to highlight is, you know,

Starting point is 01:01:28 it wasn't a bad book. I just don't necessarily know how we can relate it over to our audience, to be honest with you. I really like your point sticking. That's something that I found very intriguing in the book that I failed to highlight. And that's just his focus on ethics. He worked very hard at trying to be the most ethical and moral person that he could be. And that's, he had all these different laws and rules that he had written down and said that he was going to try to basically lead the this perfect life with the way he interacts with other people. Very interesting discussion. And I think that it really goes to say that that's a common thread that we see with a lot

Starting point is 01:02:02 of these people, not all of them, but a lot of them, that they place their ethical code and their moral code pretty much above anything else. And if there's anything to jeopardize as that, it's just not a deal that they'll do. It's not a business transaction that they'll want to be included in. I think that that's really important for people to think about and to understand that all these people operating at such a high level. and that are super successful, really value that more than anything else. So that is definitely a good highlight that you had there for the book.

Starting point is 01:02:29 So we'll send out our free executive summary of this for anyone that signed up on our email list. Just go to the Investors Podcast website. You can sign up on our email list if you're not there. You get all of our free executive summaries. If you want to read this book, which maybe you're just a history person, you want to read this. Walter Isaacson's a fantastic author.

Starting point is 01:02:46 I will say that. His book on Steve Jobs is fantastic. All the other ones that he's written or his book on Einstein. I've read. It's very good. But if you want to read this book, it's probably kind of expensive for the audio format, but you can download it for free if you go to Audible, our link on our website for audible. If you use our link, the first book that you download is completely free.

Starting point is 01:03:06 So let's just say this book's $30. You can download that completely for free. It's a $30 gift from Stiginaim, but you've got to use the link from our website in order to get it for free. That's all we really have for you this week. We really enjoyed answering all the questions from our members of the audience. We'll send you a free signed copy of that. the Warren Buffett Accounting book, and we'll see everybody next week. Thanks for listening to The Investors Podcast.

Starting point is 01:03:29 To listen to more shows or access to the tools discussed on the show, be sure to visit www.com. Theinvestorspodcast.com. Submit your questions or request a guest appearance to the Investors podcast by going to www. www. Asktheinvestors.com. If your question is answered during the show, you will receive a free autographed copy

Starting point is 01:03:48 of the Warren Buffett Accounting Book. This podcast is for entertainment purposes. only. This material is copyrighted by the TIP network and must have written approval before a commercial application.

We Study Billionaires - The Investor’s Podcast Network - TIP 071 : Value Investing Questions from the Audience and Benjamin Franklin by Walter Isaacson

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