We Study Billionaires - The Investor’s Podcast Network - TIP 074 : Billionaire George Soros - The Alchemy of Finance (Business Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 74 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish, and Sting Bruterson. Hey, how's everybody doing out there?

Starting point is 00:00:30 This is Preston Pish, and I'm your host for The Investors Podcast. And as usual, I'm accompanied by my co-host, Stig Broderson, out in Denmark. And today we're going to be doing another book written by a billionaire. And this one is George Soros' book. And the name of this book is The Alchemy of Finance. Stig, I'm curious to hear your upfront thoughts on the Alchemy of Finance. I thought it was a pretty basic read and something that was kind of obvious. But I'm curious to hear your thoughts.

Starting point is 00:00:58 Yeah, I weren't too crazy about it, I've got to say. I think it was the way that he was writing it. It was sometimes he was just, I definitely don't want to say he was rambling on because it was a somewhat short book, but it was like you really needed to have very specific knowledge about especially micro and macroeconomics because a lot of the books was about like why the common theory was not correct. But he really didn't always explain the common theory. So I think that was my main takeaway from that. Yeah, I thought it was a pretty basic book. Even though it was short, it did go on kind of long. You could have summarized it in like a two or three page white paper, in my personal opinion.

Starting point is 00:01:34 And I think the fancy name reflexivity is, you know, that's the main theme of the book. It's pretty basic stuff. And we're going to send a quickly cover this book. We're probably not going to spend more than, you know, five or ten minutes on this. And then we're going to move on into the second part of the show. We're going to be taking questions from the audience. We'll probably play three or four questions from the audience. And that'll be the episode.

Starting point is 00:01:54 So that's what we got for you. So this book, The Alchemy of Finance, people that are familiar with, George Soros. They know his net worth is $23 billion. He's one of the wealthiest people in the entire world. And he has an approach that he implements for investing. And it's very different than call it Warren Buffett or a lot of other gram-based value investors. And Soros is obviously a macro investor. And he makes these theories and he comes up with these ideas of what he thinks the market it might do in a macro sense in the direction that it might move, he comes up with that theory, then he tests that theory, and then he kind of piles into a position as that theory continues

Starting point is 00:02:35 to prove itself correct. And so it's a unique approach. It's very, very different. And it's something that I think might be a little bit harder for people to implement just because he doesn't really put a lot out there on how he's coming up with these theories. That's the thing that he doesn't do. He just talks about this idea and this method called reflexivity, but whenever it really comes down to it, he doesn't say, well, I'm looking at this factor or this factor and this factor in order to determine that I think the Chinese Yuan is going to continue to devalue. He doesn't really throw out how he's making those assumptions or what he's basing his theory on.

Starting point is 00:03:10 But what he's doing is he's coming up with a theory. He's then substantiating why he has that theory. And then as time progresses, he either sees the idea mature and start actually moving in the direction that he sees it or not. Now, the thing that I think is kind of an interesting discussion, but it's not a long discussion, is reflexivity. So what is that? So Soros describes it as this. It's kind of this rivalry that goes back and forth between fundamental analysis and technical

Starting point is 00:03:37 analysis. So let me give an example. So let's say that we've got a small cap company. And I'm going to use the example, GoPro, the guys who make those little camera devices. So on the face value, GoPro, in my opinion, is just a bunch of silliness. For this company to be valued in the billions. And I mean, billions upon billions out of the gate for me is just crazy because it's just a video camera on a stick.

Starting point is 00:04:04 And recently we've seen GoPro get punished in the market. But let's talk about GoPro before it got punished in the market. What Soros is talking about with this idea of reflexivity is that if enough people think something's going to go in the right direction, or they have a positive or favorable opinion of where something's going to go. That has an ability to actually affect the company, let's call it GoPro, in a positive direction. So let's say that we have a ton of people that think that this company is going to be a $50 billion company. They think it's going to do fantastic. So what happens, you start getting all this seed money, you have venture capital throwing all sorts of money at it,

Starting point is 00:04:46 and the company might not even be profitable. It might be struggling as far as its actual fundamental being, if you will, how the company functions fundamentally might be horrible. But if enough people and enough backers think that it's going to do fantastic and they continue to fuel it with more and more money, that actually has a compounding impact to it. Now that they're holding a bunch of cash, they can now make the investments to get the right people on their team. They can spend money on marketing. They can do all these. They can spend more money on the technology, which then further compounds the performance and actually build. it up. So even though you might not have this fundamental good standing at the start, because you

Starting point is 00:05:24 had these people that might have been backing it and thinking of it in a favorable and positive manner, it actually creates that momentum itself. And so as this compounds upon itself, it reaches a point of, what would I say? Maybe a tipping point or maybe that analysis starts trending in a different direction. Or it might be tipped off between, and this is the rivalry, this is the reflexivity part of it, maybe the fundamentals of the company start performing poorly. Maybe it's not growing as fast as it was before. And so then it starts turning. The psychology behind the company also starts turning.

Starting point is 00:06:01 And so it's this love-hate relationship where they're intertwined, they're completely intertwined between the psychological and the fundamental piece of how the company operates and how the company performs. And that's what reflexivity is all about. So Soros in his book, he describes this in a whole lot better detail and maybe more thoughtful analysis than the way that I described it right there. But that's the underlying theme and the idea of reflexivity. So just the real quick highlight for everybody, we have our executive summary of this book typed up. If you go on to our website and you sign up for our email list,

Starting point is 00:06:35 we'll get this executive summary. And as usual, it's about five pages long. And we just kind of summarize everything from the book chapter by chapter for you. So no advertisements, no spam, no nothing. Just if you sign up, you get our free executive summary. So we highly recommend you do that. So you can kind of read through this and maybe even get a better idea of what reflexivity is and also the way that Soros' book is laid out. So Stig, I want to throw it over to you to hear your thoughts. I have two things I'd like to discuss. I think the first one about currencies, that was something that was really interesting. And I think Soros definitely knows what he's talking about. He was making this big, famous bet on the British pound where he made a billion

Starting point is 00:07:12 dollars. So I definitely know what he's talking about. But so what Soros is basically saying is that the academics are wrong whenever they discuss exchange rates. And I learned a lot from this discussion because actually what he's saying is also what I'm telling my students and when it comes to floating exchange rates. So the theory goes like this. If you have an overvalue in currency and let's just take the US dollars as an example. I'm not saying it's overvalue, but I'm just saying it's So what the academics is saying is that when you have this dollar that is really strong, you would buy more international goods and you would buy less domestic goods. So what does that mean?

Starting point is 00:07:48 Well, that means that there will be relatively higher demand for international currencies and relatively lower demand for the US dollar. Well, that means is that the dollar will slowly depreciate toward equilibrium. Now, the whole idea of equilibrium is this stable point, or you might also call it the fundamental value, look at it as the fundamental value. So basically, the effect we're talking about is that if you have a floating exchange rate like the dollar, it depreciate, and perhaps it will be undervalue, and then it will appreciate again toward equilibrium.

Starting point is 00:08:20 So that's the theory that I'm telling my students, because that's the one that is in all textbooks you can find out there. Now, like all billionaires, George Soros is saying that the textbooks are wrong. And so this is how Josaurus looks at floating exchange rates. he is saying that they are bound to crash at some point in time. It's inherent that they will crash because there are no equilibrium in understanding the fundamentals like that. So imagine that the exchange rate is strong and again use the US dollar. If that happens, it actually discourages inflation. Now, if that happens, the wages will be stable and the price of

Starting point is 00:08:57 imports will fall. This is really interesting because we also teach that to our students. What he is saying is that when import has a large import component, a country can stay competitive for a very long time. And he actually mentioned Germany in the 1970s as a really good example. So you can actually have a stable, I wouldn't call it equilibrium, but you could definitely have a stable point with a really, really strong currency for a long time. They can actually grow stronger and stronger or the other way around. So he's saying that when you're looking at the causality, it's not like a linear consality.

Starting point is 00:09:29 It's a really look at it as a circle that can just, you know, compound. Compound can worse and worse or better or better, depending on how you look at it. Well, you couldn't describe our current circumstance any better, Stig. Well, I have you said that? I'm also under the impression that the dollar is overvalued. But my immediate thinking was that since the dollar's overvalue will see depreciation soon, but apparently according to source and also when you look at the bets that he's doing in the market, he might think that it could stay there.

Starting point is 00:09:58 Yeah. Yeah, that's a really interesting point. And it's interesting to hear that idea of it compounding and compounding until it gets to maybe a breaking point. But it's amazing to hear the thoughts of some of the smartest people in the world on this stuff and how they, you know, they'll take something that they start with the textbook with this equilibrium idea and just kind of embellish on it just a bit. All right. So going back to the book, there's a section called, and this is in part three, the real time experiment. So at this point, Soros talks about how he comes up with some of these different ideas. He talks about individual theories that he's tested in the past and kind of what he used as benchmarks for that, but he doesn't talk about the overall analysis of how he comes up with those theories. So here he's in the third part. He's talking about the real-time experiments, and he uses a couple of examples to demonstrate that.

Starting point is 00:10:52 Then as you move into the fourth part of the book, he talks about how he's evaluating those theories and how he's basically coming up with the metrics in order to determine whether he thinks that it's moving in the right direction or not. 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. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists,

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Starting point is 00:15:11 All right, back to the show. I basically have two takeaways from this book. And the first one that was the currencies. The other thing that was for the individual investor. And that was actually something that surprised me a bit. And when I say individual investor, I'm more thinking about micro here. Obviously, sorry, he's a macro guy. But he's talking about conglomerates and how you should be very cautious whenever you are seeing conglomerates that are growing rapidly. And he has this great example. And it's actually a very similar example to what Warren Buffett highlights whenever he's looking at high growth companies. And he's saying that imagine that you have a company with a market cap of 20 million and the earnings of 1 million. So this is trading

Starting point is 00:15:57 at PE of 20. Now then imagine that that company would buy another company with similar earnings but with a PE of 10. And sorry, I know I'm throwing in a lot numbers here. But what he's basically saying is that if you consolidate that, being the conglomerate now having earnings of $2 million, then your company would suddenly be value at $40 million and not at, say, $30 million, which is the $20 plus $10. So when he's basically saying is that when you see a growing company, you should always pay attention whether or not to use overvalued stock to grow. And then you should, as an investor, not fall into the trap of always looking at growth

Starting point is 00:16:37 or something that's good. Just keep trading that at a high multiple. if that growth is financed by stock issues or even worse by debt. I know this was kind of like out of the blue. Now we talked about macroeconomics, but I think also for the individual investor, that's something you should really pay attention to. So whenever you see some of the stock picks make acquisitions,

Starting point is 00:16:58 you should always really look into like the size of the acquisition and how it's finance. So yeah, that was my second takeaway. Yeah, I like that point. I also like the idea that Soros just takes this efficient. market hypothesis piece and just really kind of slams it and shatters it in this book because I would argue that he has the exact, it would be his antithesis is the efficient market hypothesis where he is of the opinion that it's always mispriced and that it's just a function of how

Starting point is 00:17:28 badly mispriced it is. So fantastic book. I know we covered this one pretty quickly, but it's, it is kind of a short read and the main thesis is really this reflexivity part that we've already really talked about. So instead of beating that down, we're just going to stop that here. If you do want to listen to this book, go to our link on our website for Audible, and you can listen to this book completely for free. If your first download, if you use our link is completely free, I know this book is actually available on Audibles. It's The Alchemy of Finance by George Soros. So consider that a free gift from Stig and I if you guys want to read this book. So, okay, let's move into the second part of the show where we answer some questions from our audience, and we love doing this. So if you've got a

Starting point is 00:18:08 question you want to record for our show, go to Asktheinvestors.com and you can record your question. Okay, so the first question we have comes from Justin Colletti, and here's this question. Hi, Preston and Stig. This is Justin from Brooklyn, New York. I want to ask you guys a question about valuing commodities and maybe even cash. Right now, as I leave this message in January of 2016, stock market has been going down for quite a while. And like Preston, I had moved to cash a bit earlier when I saw valuations and the Cape ratio getting really high, and it seemed like there wasn't much upside potential, at least in domestic equities. But my other big question is I'm thinking now to diversifying a bit more into commodities because so many of these things,

Starting point is 00:18:49 oil, silver, platinum, steel, copper seem to be so much less expensive than they happen historically. I want to ask you guys a question about how do you think we can appropriately value those things on a fundamental level. How can we take, say, the gram and dot approach to something like commodities? Thanks again and looking forward to hearing your answer. Hey, Justin, what a great question. I think this is a question that is on a lot of people's minds, is how in the world do I value a currency or a commodity? So this is a hard question to answer, and I don't think that you can look at it necessarily the same way that you would if you're valuing an individual stock pick where you're basically coming up with a discount cash flow. Where I see these is kind of going back to the Howard

Starting point is 00:19:37 Mark's kind of point of view of where is the pendulum swinging? The pendulum has a left and right limit. And so you've got to say, is the pendulum out at the extreme or is the pendulum right smack in the middle? And the hard thing with this is you don't necessarily know how far out the pendulum's going a swing, especially as you get into kind of extreme scenarios, kind of like what we're in right now. So whenever I look at the dollar, let's just say the dollar, for example, the dollar gets stronger as the Fed tightens interest rates. So the question of a person would have right now, and the dollar is extremely strong relative to other currencies or relative to commodities. So if we were going to take this point in time, this snapshot in time, how much more do we think

Starting point is 00:20:21 that the Fed has the ability to raise interest rates moving forward. I'm of the opinion that I don't think that they can raise rates at all. Okay, that might be a more extreme position. Other people might say they can raise it two more times and then they're going to have to start easing because the market's going to get so, you know, disgusting at that point. And so it really becomes a very qualitative discussion because now you're coming up with a theory of when you think Janet Yellen's going to make a decision or not. But I think that you can say at this point time, now if we go back three or four years from now, I think that it was a much more mushy kind of conversation where you wouldn't be able to necessarily say one way or the other.

Starting point is 00:21:03 Now that you're kind of testing the limits of how strong can the dollar get, I think it becomes a little bit of an easier conversation and you can make up a little bit more of a general understanding of what's going to happen next. That's my personal opinion. A lot of people, especially hardcore value investors, would probably strongly disagree with that opinion. So if we're going back to the graphic representation of what I'm talking about, which is the pendulum, and we're saying, is that pendulum completely pegged out at its left or right limit? And I would say, yeah, I think it's getting there. Do I think the dollar could get stronger? Yeah, I could probably get a little bit stronger, but not much, not anything that I'd be too

Starting point is 00:21:41 concerned about losing much money on. So when you see it from that advantage point, that means you've got to either short it or you've got to do something to invest that has a total correlation to the dollar that moves in the opposite direction, i.e. probably gold. So that's how I'm looking at it. I'm kind of looking at it in a more general term and it's not nearly as mathematical, if you will, then you would do for anything else. And so the other discussion here is that commodities and currencies typically go hand in hand. So when you have commodities, let's just speak from the dollars vantage point. When the dollar gets really strong, commodities are probably, you know, way down. And that's exactly what we're seeing right now. If the dollars were extremely weak, let's go back to like 2010,

Starting point is 00:22:25 2011 time frame. Commodities are probably doing really well. So when you look at that, you got to look at that relationship between commodities and the dollar. So that's whenever I send out the email notice with the executive summaries, and I was telling people, you know, I'm really looking for the turn in oil to occur whenever the Fed announces that they're going to start easing or they're start signaling that they're going to start easing because when there's more dollars in the system, the price of a commodity has to go up. Now, where this gets a little bit tricky when you're talking about commodities like oil versus gold, which kind of has a fixed unit quantity, when you're talking about oil, that's also heavily impacted by the supply and demand piece.

Starting point is 00:23:06 And so now it's like hitting two different balls whenever you're playing pool. You're looking at the monetary supply with the currency and how that relates back to the commodity. And then also you're looking at for the commodity, you're looking at the supply and demand piece, which makes it very, very tricky. So we're seeing oil really kind of run into trouble going much lower around the $30 price. And it's gotten as low as $26. It's been slapping around there at that price point from 26 to low 30s for months, now. Does that mean that you hit a bottom? Maybe. I don't know. I know that you've seen the rig count

Starting point is 00:23:41 really drop off significantly, which means the supply side might be contracting, which could potentially push the price higher. My concern at this point is not necessarily the supply side, even though that was the major issue for the last year and a half, two years. My concern at this point now is the demand side. As we're coming out of the winter months in the northern hemisphere, You also have the concern that, you know, the global economy is starting to slow down. And as that happens, the demand might pull back enough that it actually doesn't offset the oversupply. So that's why I'm just continuing to sit and watch this oil thing. And I might be late to the show.

Starting point is 00:24:21 And I might not be late to the show. But I'm not anxious to get into it just because I have that concern with the supply and demand and balance. It's continuing to happen and my expectation for the global economy that continue to contract more. So there's two examples of how I'm looking at oil. It's how I'm looking at the dollar. I can't give you anything quantitative, which is probably really going to annoy a lot of people. But unfortunately, I think when you're dealing with currencies and commodities,

Starting point is 00:24:47 it's much more qualitative and you're looking at things from a left and right limit. So I'm curious to hear what Stig has to say on this one. Okay, so, oh, there are so many things to say about commodities. And it's such a great question, and we really haven't been discussing too much about commodities as a group. I know we talked a lot about oil. I'll probably be the worst one when it comes to that, but about valuing commodities, we really haven't been talking much. So I'm really happy, Justin, that we have a chance to discuss this. So the way I see commodities is that it's really a question of supply and demand. And if they're in balance or if they're in equilibrium,

Starting point is 00:25:21 usually commodity prices would move somewhat in lockstep with inflation. Now, that is, again, that's kind of like the academic explanation, because when it comes to supply in demand, especially in commodities and especially in currencies, or in oil for that matter, supply and demand, they're never in balance. You know, you have always some kind of effect that you need to figure out. And so let's talk about oil first. So at the moment, you're hearing that countries like Iran and also the Saudis will keep producing. And what you'll see is that you have a lower oil price. Now, this is interesting because there's no extra supply that second when they're saying it, but there is an expectation of more oil supply. Okay, so two different things. Do we see more

Starting point is 00:26:07 oil? No, do we expect more oil? Yes. Still it has effect on the price of oil. So basically, what this comes down to is also expectations. Now, if you expect something to happen, say that you expect two million barrels more a day and you only see one million. Well, relative to terms, you will see an increase in the oil price. And exactly, the same thing with currencies. So if you are better at guessing than the common expectations, you can actually make a profit when it comes because it's really just supply and demand kind of thing. Another thing we talk about currencies, and this was a very interesting discussion from the Davis meeting. And this is Merrick Callahan, she is the CEO of J.P. Morgan. She was talking

Starting point is 00:26:51 about that she could see a drunk dollar because she really wasn't sure that you only see two small interest rate hikes. She was talking about what is he? history show us of whenever the Fed is tightening. And on average, she was mentioning 2.25% whenever they were tightening. And that was typically within a year. If you just look at the last five, I just looked it up, you actually see 2.7%. Like, you know, it's a lot. So if the rest of the world thinks that it will be, say, 0.5 or they might think in terms of easing, but Merrick Callahan might be right, then it's, you know, above 2%. Then you will see a complete shift in the strength of the dollar because that is not priced in the dollar.

Starting point is 00:27:35 Yeah, I'd definitely like to say, I think she's wrong. But no, that's a good point to show there's some people out there looking at it from historical standpoint. There's other people that are looking at it from maybe a bigger context of the global economy and that the Fed's hands are pretty much tied. They're not going to be able to raise rates. And that this time is different because you're at the end of a long-term debt cycle. There's a lot of different opinions out there.

Starting point is 00:27:59 And people are all looking at it from a different. vantage point. And so my opinion is, is if you're the person who's looking at it from more vantage points than the others and your expectations are right, you can do well on commodity. I will say this. Typically, currencies and commodities move in like three-year trends. Okay. So if you think that it's going to flip in a quick amount of time, historically, that has not been the case. Typically, you see these things move in like three-year cycles as a currency or a commodity. Okay. So our next question is from Jeff Hinchman, and here we go. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:31:50 prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. Hey, Preston Stig. This is Jeff Hinchman from Peoria, Illinois. Love your podcast.

Starting point is 00:32:02 It's a great resource of information and knowledge, and I love applying it to my own investing. So my question for you guys is, after listening to the Meb Faber podcast, I started investigating global equities. And I am struggling to try to calculate the intrinsic value. After looking online, I've noticed there's several methods and models in regards discounted to cash flow, liquidity models, etc.

Starting point is 00:32:27 And I'm just curious to know how you guys like to calculate the intrinsic value. Thank you very much. And I look forward to listening to you guys later. Bye-bye. You know, I was really psyched whenever we had this interview with MEP because I was really surprised that I wouldn't say that international markets was so cheap, but I had a chance to look up like the cheapest international markets. and you would have international markets that were trading at a cap ratio below five.

Starting point is 00:32:50 So an expected return above 20%. And then you were looking at the US was like 4%. So my immediate thought was, I need to start investing international markets. And it kind of stopped right there. I'm not investing international markets, even though I guess fellow Danes would say that I am because I'm solely invested in the US. But when I say international, I'm just saying non-US. Well, if you're evaluating an international stock,

Starting point is 00:33:16 But in essence, it's just the same process as evaluating an American stock. So you are discounting the future cash flow or you estimate what the future cash will be and then you're discounted back to today. Now, where things get a bit different is that it might not be as easy. So for international stocks, especially if it's international stock picks, it's usually harder for you because it might not be within your circle of competence. There might also be a lot of different things that you need to be aware of. might be the accounting that you're looking at. So I think for international investing, I would

Starting point is 00:33:52 probably buy an index instead, really be diversified into a country. And I might not even do one country. I think if you look at the very cheapest at the moment is countries like Brazil and Russia. I might not buy a Russian ETF. I might buy an ETF tracking the five or 10 cheapest based on the Cape ratio or by five individual ones. So if you are going to do that, you should probably do two things. First of all, diversify and then be very systematic in your approach. So my response for this one is really just quite simple. I always use an ETF whenever I do international investing, anything outside of the United States.

Starting point is 00:34:31 A lot of that is because I don't understand the accounting the same way that I understand the accounting in the U.S. So whenever I look at things over in Europe or anywhere, really, Japan, which I don't look there very often these days. But if I'm looking internationally, I'm really looking at ETFs and I'm looking at specific sectors. So, you know, the energy sector has been just hammered. So that might be a sector that I'm looking at internationally. I completely agree with Stig. I think that when you distribute your risk across a breadth of stocks and you're maybe stepping into an industry that's been pummeled, that's probably the best approach when you're talking international.

Starting point is 00:35:08 And he's right. Some of these PE ratios and countries right now are like a five or under 10, which is fantastic for returns. So, you know, intrinsic value-wise, you're taking the PE ratio for that country, and I would strongly recommend that you use a CAPE-Ratio for the country. You just take that, you invert it in order to get your expected yield. So if the PE is 10, you go 1 divided by 10. That gives you 10%.

Starting point is 00:35:33 That should be your expectation of the value that's, you'll continue to get by holding that ETF. Okay, and this is the last question we're going to take, and this one's from Derek Randall. Hi, Preston and Stig. Thank you for all you do. It's Derek Randall in Moncton, New Runswick, Canada. My question is related to the current market condition, I guess how it compares historically. Warren Buffett famously wrote in his 2005 Berkshire Hathaway Stockholder letter that between

Starting point is 00:36:02 December 31st, 1899, and December 31st, 1999, the Dow rose from 66 to 11,497, a gain of 5.3% compounded annually over that 100-year period. He then points out that to achieve an equal rate of gain for the 21st century, the Dow will have to rise by December 31st, 2009, to precisely 2,011,11. Using this math, if we compound the Dow figure from December 31, 1999, or the 11,497, by an average of 5.3% annually, it tells us that the Dow should have been 27,661 on December 31st, 2015. But in fact, the Dow was only 17,425. with the Dow currently at 15,914 on February 10, 2016, do you think U.S. equities are overvalued?

Starting point is 00:37:10 And the second part of this question is, is 5.3% a realistic average return moving forward for the Dow? Thanks so much for all you do. And this is a little heads up into the 2016 Berkshire Hathaway meeting. Thanks again. Bye-bye. Right. Let's look at the intent of what Buffett was writing about. He's basically using that, this is my opinion at least. He was using that exchange in his shareholder letters to highlight the fact that the market, on average, was moving at 5% over the last 100 years. And if it's going to move 5% again, this is the super high number that represents that. I think reading into that any more than that piece of it, I think, is maybe reading into it too much. And I think that you can kind of use that maybe as a trend line moving forward as far. as maybe 5%, but to go, you know, what would it be 15 years after the start and say,

Starting point is 00:38:03 hey, we didn't hit the mark of where it should be on the trend line, I think is a little bit narrow in scope. And so for me, I'm looking at the market from this vantage point as well. I think that if you're starting in the late 1800s and you're going to 1999, there's a 30-year period there, and maybe not even 30 years. Actually, there's about 15 years where there was no federal reserve in the system. The Fed had stood up in 1914. I believe that's the year.

Starting point is 00:38:34 I might be wrong, but it's around that time frame where the Fed was stood up. And I think that something that we aren't really necessarily accounting for as we do this transition from the timeframes that you're talking about is what impact is the Fed going to have with this long-term debt cycle that was created and what impact is that going to have in the next 10 to 20 years. my opinion is that it's going to handicap the performance quite significantly. I could be wrong about that, but I think that that's a variable that we've got to talk about as far as our expectation moving forward. But who knows, I think that 5% is probably a good number to really kind of focus on. I think that the Dow got up to 18,300 is the highest it got. And I think that the credit cycle is now contracting.

Starting point is 00:39:17 So my expectation is that it's not going to go higher than the 18,300, at least not for quite a few years. But that's my position. So I'm curious to hear Stig's thoughts. Yeah, Derek, so I think I want to really go back to your question and say, why has it grown by 5.3%? And then actually ask that question first. Or the way I look at it is that the stock market is really a reflection of the earnings. So if you have a growth of 5.3%, he must also have earnings grow at a somewhat same rate. And then ask the question, so where does earnings come from? I keep going one step back. Earnings come from efficiency and productivity.

Starting point is 00:39:56 Now, what has happened in the States? Because in international comparison, if you look at the last century, the U.S. has done remarkable well. Well, there's a lot of good things to be said about efficiency and productivity. Electricity for one thing, manufacturing, railroads. There's a lot of things to say about why things have been so good in America. So, will let's continue? Will you see the same growth in earnings?

Starting point is 00:40:19 That's really the question that you should be asking. and not the question of whether or not the Dow would be $2 million or not, because that's somewhat of an arbitrary number. If the earnings doesn't follow, it really doesn't matter anyway. And then if you look at the Warren Buffett's letter from 2005, he's saying that it's 5.3%.

Starting point is 00:40:37 It's correct, but he's also saying you need to include dividends. Because whenever you're tracking index, usually that is without the dividend, at least in this situation here. So remember whenever you're comparing international markets to the US market, does that include dividends or not?

Starting point is 00:40:52 So you might even add, say, 2% to that number. It might be even 7.3% you're talking about here. And then the final thing, as with everything, even for something like a hundred year cycle, I know 100 years is a long time, but where do you end and where do you start? And if you look at December 31st, 1999, the market was very high. It was just before the burst of the dot-com bubble, right? So I definitely like that you might say 5.3% plus dividends as like a reference point, but I really wouldn't put too much into it.

Starting point is 00:41:23 All right. All fantastic questions. And for everybody that asked their question, we're going to send you a free sign copy of our book, the Warren Buffett Accounting Book. And again, if you want to record your question and get it played on our show, go to AsktheInvesters.com and you can record your question. So we'd love to thank all of our guests for submitting those questions.

Starting point is 00:41:41 We enjoy the book, The Alchemy of Finance. It's not really quite exhilarating, if you will, but it's a very good read. And I think it makes you think about commodities, currencies, this idea of reflexivity is an interesting and really kind of neat idea. So fantastic. We're just so thankful for everybody that listens to our show and submits your questions. So that's all we have for you 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

Starting point is 00:42:10 www.Theinvesterspodcast.com. Submit your questions or request a guest appearance to the Investors podcast by going to www. www. Ask theinvestors.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett

Starting point is 00:42:26 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.

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