We Study Billionaires - The Investor’s Podcast Network - TIP 076 : Mastermind Discussion 1Q 2016 (Investment Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 76 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish, and Sting Broderson. 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. We've assembled the Mastermind Group again, and this is for the first quarter of 2016, and we've got a whole range of things that we're going to be talking about today. Unfortunately, Hari Ramachandra was not able to join us from Silicon Valley today, but we do have Toby Carlisle from Santa Monica, California. Toby, I'm just curious. Is it really sunny out there?

Starting point is 00:00:55 It's a little overcast today. It's not a perfect day. It's overcast in 70 degrees. I'm sure it's horrible. Colin, Colin Yablonsky from Inbound Interactive is with us. He's up in Calgary and is the weather as miserable as I would expect up there. It's unseasonably warm actually right now. Oh.

Starting point is 00:01:14 This is the one time when I think you'd rather be in Calgary than Santa Monica. And of course, Stiggs obviously with us. He's out in Denmark. And we just got a whole bunch of things we're going to be talking about today from just random topics, mostly about the current market conditions. So what I'm going to do is I'm going to throw it over to comment. Colin, he had some things that he wanted to bring up and he's going to kick off the show with some topics he wants to go with. Yeah, so I just want to open a question up to the group and it's really about what is happening in Japan right now. I mean, we're seeing a negative interest rate environment and I want to throw it out to you just to see what that really means for investors as well as what's going to be happening to the economy over the next call it six to 12 months.

Starting point is 00:01:56 Everyone's looking at each other like, I don't want to comment on that. I mean, I'll take a swing at it. I'm a big enough fool to do that. I think it's uncharted territory. Like, I really don't think that anybody knows what's going to happen. The objective of those negative interest rates is to force banks to kind of lend the money, encourage consumers to spend. It's sort of more of the same of what we've seen for the last eight years, just rather than very low. I don't think that it indicates a particularly healthy global economy, but I don't think anybody knows what the ramifications are going to be, but I expect that they'll be. be extreme. Hey, before I throw this over to stick, I just want to highlight Toby Carlow, I didn't really

Starting point is 00:02:34 give him the proper introduction that he deserves. He's from the website, greenbacked.com. He's written multiple books, a book called quantitative value, deep value. They're all published by Wiley Finance. Just a brainiac when it comes to finance. And also, he has a law degree. So, you know, he understands acquisitions and mergers and all that stuff like, you know, better than most people in the entire world. This guy is phenomenal. So that's who you just heard. the response from and Toby's definitely blushing right now. And for people that listen to our show, they're familiar with Toby. But if you're joining us for the first time, that's who he is. So go ahead, Stig. I want to hear your thoughts on this whole Japan thing. Well, my first thought was that

Starting point is 00:03:10 Toby didn't know what to do with Japan. So if someone asked as smart as Toby, if he doesn't know what to do, I don't think it's easy. If you look at the Cape Ratio for Japan, so that's the Shillopee. So you're looking at how much to pay for the adjusted earnings for the last 10 years. It's actually 24.1 in Japan right now. So that's approximately the same as it in the States. So you would get like a 4% return. Now, so despite all the problems they have in Japan, if you look at that ratio, it's not that cheap. I'm referring to some data from stock capital.

Starting point is 00:03:44 It's the same thing in Faber that we had on a few episodes ago. He also uses in his material. So I was sure to link this in the show notes, and you can see like all the different countries, how that's in relation to the U.S. but Japan and the U.S. is actually approximately equally expensive. Now, you might want to include exchange rate into that equation, and if look at the exchange rate, the yen does seem to look rather cheap. But if you just look at the earnings in yen,

Starting point is 00:04:10 it doesn't appear to me to be an attractive investment. It's definitely not an investment I would like to go through with, giving all the problems that do have in Japan at the moment. So you're seeing the currency over in Japan get stronger, and you're seeing that because there's a run on the currency. And when you're seeing that happen, that's, you know, obviously concerning because that makes it harder for domestic Japanese businesses to have better earnings in the coming quarters. So I think that that's going to, you know, punish them as they're looking at future earnings calls for their, you know, their domestic companies. So I've been saying this. I don't know since when end of the summer of 2015, I said that Japan's market needed to, you know, their equity market needed to contract and it has. How much more it could go, I don't know. But it's somewhere that I'm not even remotely looking at.

Starting point is 00:05:01 I'm staying so far away from there. It's something that I don't really pay too much attention to other than just kind of out of just pure interest at this point. I guess I'm looking at it from this is something that's ready to explode because of the currency, having the issues that it has. The country's debt levels, public and private debt levels, are through the roof like we've never seen before here in the last 30 years. Well, you've seen it in Greece, but Japan's even worse. And so my concern at this point is I'm ready to see something

Starting point is 00:05:33 explode. I'm ready to see something really bad happen. And will it happen? I don't know. But that's my expectation of what's going to happen. And so I'm just kind of staying away and just watching out of pure curiosity and interest. One of the things that, why I am kind of watching it, is because I think it's a precursor of what's to come for a lot of other developed countries around the world. We've seen, and this all started in 1990 with their crash and how it's kind of progressed with interest rates getting polarized to nothing, them implementing just ridiculous levels of quantitative easing. And I really see them really kind of laying down the roadmap for what's about to occur in Europe and also in the United States. I'm not saying that it will. I'm just saying

Starting point is 00:06:12 that that's my expectation based on the trend line that we're seeing with everything else. So I don't think I really answered your question, Colin, but I will tell you that I'm staying away from it. So I saw Toby had something else that he wanted to follow up on. One of the interesting things about Japan and it's Cape is that in 1990, which was the peak of their stock market, it got to 100 times, to contrast that with the US in 2000, got to 44 times. China very recently was at 100 times. Cape is not very predictive over a short period of time, but over 20, 30 years, it becomes increasingly predictive of the experience of investors in those countries. And so Japan, the index,

Starting point is 00:06:49 has performed really poorly. It's down from where it was 26 years ago. China's struggling a little bit at the moment. The US has sort of surpassed its 2000 peak in nominal terms, possibly also in real terms, I'm not sure, but we're still very expensive at 26, 27 times. What is interesting, though, in Japan is that value investing has worked quite well since 1990, even though the index is down, really cheap stocks have performed. So if you were Japanese and you were restricted to the Japanese stock market, if you were only investing in the very cheapest using really simple measures, price to book, price to earnings, price to cash flow, you actually could have performed reasonably well. I think the returns to that cheap desal have been in the order of 20% a year compound.

Starting point is 00:07:30 So sometimes the index is helpful when you're thinking about the global, the macro, but for an investor, the best place to look is really your own portfolio. So I always think that looking for undervalued stocks, even in very expensive markets, you can still do well. So really interesting point, Toby, and I completely agree with you that you can pick individual stocks. And if you look at very simple metrics in Japan, yes, it is true that they have been profitable. But I think my advice to someone that is going to look at Japan is not to buy the index. And also, if they're going to look individual stocks, they had to do it from a very systematic point of view. So say they'll buy the cheapest stocks on a PE basis or a price-to-book basis.

Starting point is 00:08:11 that would be a good approach. But other than that, I, again, this is just my part of you. I think you probably shouldn't go into Japan at the moment. I just look at it as like you're really making it hard for yourself whenever you're buying undervalued companies in an overvalued marketplace. So using the U.S. at the end of the summer was probably a much better example because the U.S. has contracted a little bit. It's still, you know, overpriced relative to other things, but not nearly as overpriced as it was last summer. And I think whenever I was looking at that market, yeah, there was companies out there, individual companies that I was finding that might have been great value investing buys.

Starting point is 00:08:49 But I just don't know the company well enough. I don't know what's going on and why that's been penalized so badly in the market price. For me to have a lot of confidence to say, yeah, I'm going to go out there. I'm going to buy this individual company, even though I know credits getting ready to start contracting. And it's harder for this company to turn a profit moving forward. Just a brief counterpoint. I do agree with you that expensive markets, when they fall, they tend to take everything down with them. So undervalued stocks, for the most part, don't really provide much protection in the actual crash. They do tend to recover a little bit faster at the other side.

Starting point is 00:09:24 But one thing that is interesting, in 2000 in the US, when the market was at its most expensive, because there was that great difference between the dot-com stocks and the old line businesses, the old line businesses was so cheap that even though the market fell, you did quite well by buying these undervalued businesses and long only value investors. So long only someone who just buys the stock and doesn't then go and hedge it by shorting the index or shorting individual stocks. Someone who just bought stocks actually made money through 2000, 2001, 2002 during a period when the stock market itself was falling because undervalued stocks was so undervalued and there was a sort of mean reversion, getting back to normal of those valuations. So I think indexes speak to risk,

Starting point is 00:10:08 but in terms of return, really, it's undervaluation, the place to look. Okay, so believe it or not, we actually cut the tape from right where I last spoke, and we dialed Harri in so you didn't have to listen to the dial in our initial conversation. But Harri has joined us. We have no idea why he was late in joining us. So right now, we're going to ask him to explain himself of why he was late. Hey, guys, I'm so sorry. My son was sick last night. Oh, get out of here.

Starting point is 00:10:36 Now you make me feel bad in front of the entire audience. Yeah, I had a late night. Oh, that's too bad. All right. Well, we're thrilled to have you here with us, Hari. So everyone knows. Hari runs the website bittsbusiness.com. He works out in Silicon Valley.

Starting point is 00:10:52 He's an executive over at LinkedIn. He provides us some of the greatest insights of what's happening out there in the Valley. So, Harry, great to have you with us. And I was going to help promote your newsletter because you recently sent out this great newsletter. And I was very impressed with the content that you had in there. I was going to tell everyone in our audience that they need to go there and sign up so that they get all this valuable insight. But because you were late, I'm not going to tell them that now. Just kidding.

Starting point is 00:11:18 All right. No, I seriously mean it, though. Your newsletter was fantastic. So a great job with that. Thank you. All right. So what questions you got, Hari? Let's just go straight to you.

Starting point is 00:11:26 We're not going to give you any break or any breath here. What's on your mind? One of the things I have been thinking about is the slump in the oil prices and the contagion it can potentially have. And one of the reasons I have this question is in the Silicon Valley, I've been observing that a lot of companies, executives and the venture capitalists, all are kind of in the mood of tightening their belt, being cautious. They see uncertainty ahead or turbulence ahead. I see companies being very cautious in hiring overall. And the overall mood in the valley is really somber. So I just wanted to throw that out to you guys from your perspective.

Starting point is 00:12:13 What do you guys think is happening in the economy today? I think that the oil thing is not actually the issue. I think that the issue, and I think Stig, I don't remember when we recorded this or when we talked about this, but we think that the issue is really the dollar and the strength of the dollar at this point. and just, and we're recording this on the 28th of February. Just, I think it was Friday or Thursday. It came out with a report that some of the inflation information is actually somewhat up, which is, in my opinion, that's a really bad thing because then that gives the Fed even more ammunition

Starting point is 00:12:47 to tighten the dollar potentially even more or gives them a reason to say, hey, maybe we need to tighten the dollar and rein this little bit of inflation we got in, which is like nothing. It's not hardly anything. But it's something. It's not negative, you know. So as the dollar. Dollar continues to get stronger and stronger, stronger.

Starting point is 00:13:02 I mean, how in the world are U.S. domestic companies going to be able to perform as the dollar gets stronger and stronger and strong? I don't know. I think it's a great question, Harry, and I'm very cautious about the oil market at the moment. And for one thing, the average, all companies twice as leveraged as S&P and 500, and a lot of the old hedging contracts that are running out. So I think Q1 here in 2016, only 15% ahead of the moment, versus an historically. comparison is really, really low. I'm really not saying that we need to hedge the price. That's always a good idea. I mean, in essence, hedging is often very good for the all company because then they know what kind of revenue they're getting. And it's good for the buyers, say,

Starting point is 00:13:43 an airline company because then they know whatever the cost is. But hedging basically just means certainty. And having a certainty for, which you will see here in this quarter to, certainty of low revenue is not a good thing. That being sad, we do know as value investors, that the market is almost always all reacting. And I definitely see that the market is all reacting in terms of all stocks at the moment. The earnings has been down more than 70% year or a year in the oil sector, but I see a lot of value in companies very low debt. So I have a follow-on point. And then I want to throw it over to Colin because Colin lives up in the oil sands. He lives up in Canada, right? Where all this death and

Starting point is 00:14:25 destruction is taking place in that industry. But I have a point. And my point is this, what is going to cause the shift to make it go higher. And it really comes down to just like a couple variables here. And the variables are the supply and demand changes. All of a sudden, there's not as much oversupply and it's starting to come at parity with each other. That's going to push the price up. I don't see that happening as long as you have the same number of players in the market that are all fighting for market share. This is like a fight until the death of somebody or something that happens. I don't necessarily think we've seen that yet. I think that you're starting to see the of it and you're starting to see high-yield debt and all they're borrowing, the cost for them

Starting point is 00:15:04 to borrow, go through the roof because no one trusts any of them anymore. But I don't see that happening. So that's one of the things that I'm looking for. The other thing that I'm looking at is if the dollar continues to be strong like this, that is a crippling effect for oil. Okay. So we haven't seen the dollar basically let up. And so when you have those, really, nothing has changed.

Starting point is 00:15:24 So whenever I'm looking at oil, it jumped up to, where is it at right now? stick, $32, $33 a barrel or something. And the lowest has been is $25. So a lot of people see that jump and they're like, oh, I'm jumping in. And I'm looking at it more from fundamentally, why are you jumping in? Did supply and demand finally balance itself out? I would say the answer is no. Now, they are dropping rig counts, but you're still having this oversupply issue.

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Starting point is 00:20:09 So it's really been like a game of limbo here where everyone, is guessing to see how low oil is really going to go. And for perspective, so far in about the last 18 months, the oil and gas industry in Alberta has shed about 100,000 jobs. And these aren't 50,000 a year annual salaries. These are jobs where people are earning, you know, 100 plus thousand dollars a year. So for Canada, not just Alberta, it's had a dramatic impact because Alberta effectively subsidizes other parts of our country. We have. equalization payments, which subsidized provinces like Ontario, Quebec, and the Maritimes. So it's really a scary situation now because we're starting to see the trickle down effect

Starting point is 00:20:53 through our local economy. You know, one person's spending is another person's income. And when you cut out 100,000 jobs, what's really fueling our economy, you start to see weakness in the construction industry. You start to see weakness for local businesses. And it's just continuing to compound. I'm curious to hear the answer to this question because I've heard, so many different numbers on what their break-even price is up there in the oil sands in order

Starting point is 00:21:17 to be profitable. What is the number that you hear? I mean, you live there. So what's the number that you hear? We've heard anywhere from 40 up to about $60 a barrel. And it really depends on what form of extraction they're using, whether it's oil sands, whether it's carbonates, which is very expensive oil to extract. But that's typically the range that we're hearing somewhere between 40 and 60. So it would be safe to say that at $30, they're all losing money. Absolutely. Absolutely.

Starting point is 00:21:46 And it seems like every week we're hearing that there's another round of layoffs due to the fact that they just cannot continue to afford their staff. They're closing down rigs. They're closing down facilities. And really, the trickle down effect is probably what's been most striking where some of the northern cities in Alberta, such as Fort McMurray, for example, which is purely an oil. oil and gas town. Not only has it had an impact obviously on just employment, but also things like real estate prices. They have absolutely tanked. And so it's been really interesting to see how

Starting point is 00:22:20 your engine for your economy, which in Alberta, it is the oil and gas industry. Once that engine slows down, the trickle down effect to all of the other segments of that economy also slow down. So the couple of things that I wanted to highlight here, in one of the DJCO annual meeting, that is the Daily Journal down here in Los Angeles, a Charlie Munger has once told that when the oil prices are low, it's better for United States to import oil rather than produce our own oil. He said, just let the oil be in the ground. That's good for our civilization because our next generation will benefit. just use up all the cheap oil from others.

Starting point is 00:23:02 And I know that it's very painful for people who are involved in the industry, but as a society, as a country, it might be good for the United States that we are now getting cheap oil from outside. I think this is the hipster stock market crash. It's not an overall stock market crash. It's just occurring in these sort of artisanal small batch micro crashes. So every day I see some company report earnings and they tend to miss. and where previously the market might have ignored that,

Starting point is 00:23:32 they're really being hit hard sort of down 20 plus percent. This is big companies, the ones in my sort of largest 1,000. Do you see eventually that filtering out to the rest of the market? Toby, I agree with you. It's kind of, you know, Pabra I said in his annual meeting. It's kind of the repeat of Nifty 50, where one by one, the Nifty 50 stocks were taken down and shot. And we saw that with many of these, you know, the darling of Silicon Valley,

Starting point is 00:24:02 one by one, they are being shot when they disappoint the investors or Wall Street in terms of their expectations or projections or even earnings. What is interesting and not visible to most of us is what's happening in the private market. A lot of these unicorns are going through downward valuations. many investing institutions are writing down their investments in some of these companies. I'm curious, what multiple do they pay over the user base of whatever website they're trying to put onto the open market? Because they don't value businesses off of their net income. It's off of like the user count.

Starting point is 00:24:42 Is it a multiple of 20? It's a really bad joke. Go ahead. You guys keep your conversation going. I'm sorry. Yeah, I mean, it used to be eyeballs and all that stuff before. And now I think one of the, like, you know, strong opinion from the valley like Mark and Rison and many other VCs was that, hey, this is not a bubble. Now there are real earnings.

Starting point is 00:25:06 Whereas in the 2000s, the dot-com era, there were no earnings. The only problem was there was real earnings. But as you said, Kristen, the multiples were like, you know, ridiculous. Like, for example, Uber is valued at close to 70 billion or at least was valued at 70 billion. Their revenue is like probably $1 billion or so. So there is no kind of, you know, real valuations there. It's just hype and expectations in most cases. I got there just after Google went public in 2003, I think, late 2003 or maybe it was late 2004.

Starting point is 00:25:45 And they did it by this via this Dutch auction, which is a very unusual IPO process. Basically, they listed at the lower end of their range, which is around $80. and it was a depressing time. One of the things that were previously people had sort of wanted to go public, you build your little business and then you try to list it in a blockbuster IPO. What they were trying to do at that stage was to get, it's called AC Hired, Acquired. It's a combination of two words. It means acquire and hire.

Starting point is 00:26:11 And basically you get a little bit more than a hiring bonus. So what guys were doing, what everybody who I sort of knew socially, because I was a young lawyer at that stage, they were all, you'd find something that Google did. So Google Maps had just sort of just started. And you'd build like a mission burrito locator. And you'd like, you'd fit that into Google Maps. And then you'd go and take it to Google and say, you know, hey, I'd know how to build one of these things.

Starting point is 00:26:36 You can take me on so they'd give you, you know, a million dollars for you and your other tech partner to come on. And that was kind of the big, that was the big exit. And I didn't think that Silicon Valley had ever recovered from that. That's a thing that a young man thinks. I think you don't really realize how. The only reason I bring it up is because I heard you say, Andrew. Dresen before. The funny thing is that when Andresen arrived in Silicon Valley, he thought that it all happened already and he'd missed the party. And of course, he then went on to create Netscape Navigator

Starting point is 00:27:03 and Netscape Communications, which was the IPO that kicked off the next tech boom. I wouldn't count it out. But I think that I do think that Silicon Valley is probably coming off the top of another peak and it's going to be a few years before it recovers. Yeah, I agree, Toby. And you brought up a couple of very interesting point because in the last couple of years, I have heard a lot about three or four engineers who would have come up with some product. And that product once acquired will be pretty much killed. There will be nothing coming out of that product. And you will always see, and it's interesting, you should keep watching the proxy of these companies after they acquire. And there will be a lot of write downs down the line, a couple of years down the line.

Starting point is 00:27:46 And most of the time, the acquisition is called either strategic or talent-based acquisition, but there is little valuation there. And that's when I get scary. I mean, you never know. Like, Yahoo at the peak of the dot-com bubble, paid, I don't know how many billions to the broadcast.com. Six billion. Six billion. Yeah.

Starting point is 00:28:12 Wow. I mean, that product, they didn't even make a single. dime out of it. If you go to broadcast.com and you type it into your web browser, it'll take you to the homepage of Yahoo. Hey, I've got a question. This is a risk that I wanted to kind of present to the group. Sorry to change gears on you.

Starting point is 00:28:33 Moving forward, one of my biggest concerns with the current market conditions is really all these companies that are fighting to maintain their peg on the dollar. So the one that I think is really kind of one of the biggest risks right now. is not China. I think that that one's a risk, but not in the short term here in the next couple months. I think Saudi Arabia is more of a concern for me and that I would expect them to kind of get in a position where they're going to have to do a devaluation of their currency, but they're going to have to do it in somewhat of a large scale here, like not a couple percent, but I could say like tens to 20 percent devaluation on their currency

Starting point is 00:29:12 and basically drop that peg in an abrupt way. And if that happens, I think that that would pose a lot of risk to the market because then it immediately makes the dollar even stronger. If they drop off that peg, it makes the yuan over in China even stronger. Every other currency in the world basically gets stronger when they do that. And then I guess I'm concerned of what ripple effect will that have and what message will that send to other countries as maybe call it a Saudi Arabia would do something like that. Is it a set of precedence for other countries to say, you know what, they does devalue. and dropped their peg. So now we can do that. And in effect, all it's doing is making the dollar stronger and stronger and stronger. It's almost as if the Fed would be raising rates at

Starting point is 00:29:55 that point, which even make it worse for U.S. businesses. So I guess my question is this. Do you guys agree with that concern? Do you kind of see that as maybe the next big thing to kind of play out as the market goes forward? And I know we have no crystal ball here, but when you're basically looking at all the potential risks that are lining themselves up, do you kind of see that one playing out next or I'm just curious to hear your thoughts. I have to say it's not it's not something that I track closely because I you know I'm a deep value guy all I'm looking at is individual businesses and their stock prices and trying to find ones that are cheaper than that are trading for less than they're worth. I do agree that there are all of those those macro risks definitely impact

Starting point is 00:30:39 the price of oil the price of the dollar all of those things do have a huge impact on on these sort of businesses. The thing is, I just think it's so unpredictable. I don't think that macro doesn't seem to follow any kind of sensible path. So I think that there's a great quote, and I don't know who it came from, but he said the Portuguese biscuit maker only worries about selling more and cheaper biscuits than the biscuit maker down the road. He doesn't worry about global macro. And I think, I do think that there's something to that you can just focus on undervalued companies. Yeah, it's the macro investors, an argument that value investors ignore this stuff and get hit by it is absolutely right. And if I had some sort of

Starting point is 00:31:17 good insight into it, then I would definitely include it in my analysis. The thing is I just don't. So I've got to use the things that I know that I can do marginally better than other guys. And I have to, I'm sort of subject to the stuff that I can't understand. And I think that on the stuff that I can't understand on balance, it kind of works out over the long run. You get lucky sometimes and you get unlucky sometimes. And you just have to be in a place where the bad luck doesn't hurt and the good luck doesn't help too much. All right. Stick, do you have a question you want to ask?

Starting point is 00:31:46 Yeah. So my question today is somewhat about oil, but not completely about oil. Specifically, I would like to talk about ExxonMobil. So as I revealed a few episodes ago or some episodes to go here on the podcast, took a position in X&Mobile. And, you know, for me, I wouldn't call it a no-brainer, but it seemed to be an obvious choice for me. Strong cash flow, strong balance sheet.

Starting point is 00:32:12 And I really still like my pick. And so I reported the earnings for last quarter and the earnings was down 58% a year of year, which was, in my opinion, quite decent. I mean, it was not as bad as I expected and they still make a ton of money. And I like almost everything about the company. And still, when I compare a price to value, I think that the value is definitely vastly more than the price. Now, so this is really what frustrates me. So Exxon has decided to halt their share repurchase program and still they don't cut the dividend.

Starting point is 00:32:49 And this is just the opposite asset allocation of what I want to see. So this is the thing that really frustrates me is that Exxon, they don't cut back the dividend, but they are halting their share repurchase program. And it's right now that you should actually be repursing their shares. It's now that it's undervalued. And if I look back since 2000, Exxon had 12 periods where they've been buying back shares and 10 other times has been at prices higher than it is today. And in a way, this is quite obvious because management don't like to cut dividend, they know they can penalize if they do that, investors don't like that. But at the same time, if they're really responsible management, you should be buying back stocks right now. And I think that obviously this is just my opinion. When I look at the numbers, I think it's on the value.

Starting point is 00:33:36 But even if you just look at it in the historical perspective, this should be quite obvious that now is the time to buybacks. Yes. And even though that they see a drawback in the earnings, you know, poor, I mean, there's still have very, very strong cash flows to do this. So my question to you guys is that when you see this behavior from a management of a company, even though you like the company in general, you like the numbers, you like the valuation compared to the price, is that something that would tick you off and perhaps even sell the stock off at some point of time? That sort of behaviour is incredibly frustrating. It's one of the factors that I look at when I'm considering an investment. I'm wholly quantitative, so I'm not considering management's actions by themselves or management's discussion of their actions. I'm sort of looking at the impact of management's actions in its financial statement. So one of the ways that you can do that is looking at buyback yield or shareholder yield, which is a combination of buyback yield and dividend yield.

Starting point is 00:34:33 And it's very clear that shareholder yield is one of the value. the most powerful and predictive measures of future stock market performance. So the better the shareholder yield, the better the performance. So when they're cutting their buybacks at a time when they are cheap, which would, and if you maintain the same level of buyback and your market capitalization shrinks, your shareholder yield goes up because you're buying back more stock. It's more undervalued. So, yeah, that's a real shame to see that because it's kind of the opposite of what they should be doing. I'll tell you the thing that's really frustrating is an owner, if you were an owner of that stock, is that they get taxed on the dividend, okay, but they don't get

Starting point is 00:35:11 taxed on the share re-purchase. So then you have to ask yourself, okay, so why in the world would management do that? Because that makes no sense whatsoever. You can return just as much value by buying back the stock. So for me, that's a very weak board of directors, and that is a very strong management team that knows that they might get fired tomorrow because of the market conditions, and they're trying to line their pocket with as much cash as they can. That's how I would read that. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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Starting point is 00:38:36 since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund fund's prospectus at fundrise.com slash income. This is a paid advertisement. back to the show. You've got to have a good point, Preston. So I wanted to understand what is the composition for not just Exxon, but many other oil companies in terms of paying dividends.

Starting point is 00:39:10 So one of the things I have seen is, say, Conoco Phillips recently cut their dividends and there was a lot of volatility in their stock. Are these oil companies scared to cut their dividend? I think many of them treat it as sacrosan because a lot of people are depending on income, maybe. So there is something to do with this kind of, you know, unwritten rule that you never cut a dividend for oil stock. I don't know whether they are taking that very seriously

Starting point is 00:39:38 and essentially cutting down on their buybacks to maintain the dividends. So there's an intelligent response. And you're exactly right. They're making sure that the market price and the dividend doesn't get, you know, a double whammy to all the shareholders. That's why they're not dropping the dividend. Because I know as soon as they do that, the market price is going to get hit with it.

Starting point is 00:39:56 So you've got all these people just sitting on it sucking a, what's the dividend on it? Stig 5%. Yeah, 3.6. Oh, okay. Yeah, but you guys are absolutely right. This is really an exercise in the management has to look good. And you just see this over and over again. And this is also really what frustrates me.

Starting point is 00:40:15 This is not only for Exxon. You see this for almost all companies that the last thing you want to do is to cut the dividend because it just makes them look competent, where actually when you think about it, cutting the dividend in times like this actually makes them seem very competent. but that's just not how most investors perceive it. I can tell you one thing. If I was the CEO of the business, this is how I would handle this. I would do an initial cut of the dividend.

Starting point is 00:40:36 You'd see the share price get brushed, okay? And then you know what I'd do with all the money? I'd go back and I'd buy all those shares off the open market at an even cheaper price. And then me as the owner, I'm killing it. I'm killing it. You know what I mean? Like, take advantage of that. And this is such an important and fundamental thing to understand.

Starting point is 00:40:56 stand. Every single weakness has a strength that is tethered to it. In every single situation in life, it's like there's a rope tethered these two things together. So if there's a potential weakness that if you drop the share price because you killed the dividend, what is the strength that you can then maneuver on to to take advantage of that? So what is surprising to me, Preston, is ExxonMobile has a very good reputation, their management especially in terms of thinking long-term and taking a long-term view of everything. In fact, I remember reading this book, ExxonMobile, the private empire, where the author is very critical of the company for other reasons. But one of the things he points out is whenever they are going for a new site for exploration,

Starting point is 00:41:47 they run it through a model where the oil prices are between $25 to $100 or so. So at that time when I read a couple of years back, I thought why were they doing that? Now I really understand why they think like that. They really think long term. Having those qualities in the management, it is surprising that they had to make suboptimal choices in some situations. So if I give them the benefit of the doubt, I can think that they are under siege in terms of their own tradition or their own commitments, which might not be perfectly logical as Preston rightly demonstrable. right now. But nevertheless, it's like our Fed, right? Like many times what Fed does doesn't really sound logical, but it still goes ahead and do it, does it basically. And that's a

Starting point is 00:42:34 fantastic point, Harry. It's the culture. It's the culture of the group think. And maybe the CFO understands very well what, you know, what I just talked about. But being able to convince the rest of the culture there and the board of directors and everybody else that that's the right path, you know? Yeah. And I also think it's a question about how you look at the management because you can also have people out there who are saying Xomobile is doing a fantastic job, never cut dividend, it's still increasing, they have no debt. And when there's problems ahead, they just make sure that they always pay out the dividend, they even cut KPEX here with 25%. We can completely trust XMobil. I can definitely see why someone who is looking to retire soon

Starting point is 00:43:17 is thinking this is the best management that we'll ever see. But that's just not the position that I man. So I think my takeaway from this is also that you need to have a management that is aligned with your interest. So I'm not looking to retire. I'm 31. So hopefully it takes quite a few years. And it is actually important to, mail or not, I get taxed on my dividend because all the money I make, I reinvest that back in the stock market, whatever asset I can find that that it looks more attracted to me. I don't have to live off that income. So I'm just at the side of the fence where the management is not aligned with interest. You can have someone who is 100% in agreement with ex-mobile management.

Starting point is 00:43:54 One thing that we haven't covered yet is that Buffett's letter came out yesterday. Has everybody had a chance to read through them? Yeah. Anything jumped out that was really interesting? I think that Buffett did better than the market once again. So the per share book value of Berkshire increased by 6.4%. And that's compared to the S&P 500, which was 1.4. But the interesting thing about that is that the Berkshire share price has been penalized a lot by the market.

Starting point is 00:44:25 So it's actually been down by 12.5%. And in general, I don't want to talk too much about valuations and mutual companies, even though I said that Exxon is highly undervalued. And I'm sticking to that. But I think your Berkshire is very appealing too. What stuck me was, like many other investors have been observing, value investor especially, whose portfolio has taken a beating when they are. when I attended their annual meetings or when I read their letters,

Starting point is 00:44:52 there is some aspect of defensiveness. They're trying to justify their decisions or their portfolio and trying to explain why it feels so illogical for their positions to be down or their performance to be bad. I didn't see any defensiveness in Berkshires in Buffett's letter, basically. He never even talked about American Express, IBM going down. He never talked about some of his, like, you know, subsidiary's suffering. In fact, I think in his case, BNSF did it, did very well last year.

Starting point is 00:45:27 But still, that was pretty interesting to see Buffett's take on the world. I mean, he is not apologetic to any of his decisions and neither defensive. So I want to beat up on Buffett. I'm tired of reading the same song and dance every single shareholder's letter and not actually having somebody discuss and trying to solve. this disaster of a problem that we have. So whenever I read the shareholders letters, they're great. You know, I've read every one of them since 1965. It's great. And I think that he's putting out great information. But I think it's time for him to actually start talking about things that

Starting point is 00:46:03 could potentially solve this situation that we're facing globally. And for people who don't think he knows that stuff or thinks that he doesn't know macro or whatever and can actually, you know, work with people in government. He might be doing this behind the scenes, but I just kind of wish that he'd be talking about that as much as he's talked about all this other stuff. I think it's terribly important that we have leadership in this country,

Starting point is 00:46:26 not just in the U.S., but globally, that tries to come up with a remedy for this problem. I think his letter this year didn't have anything new. I think you're right. I mean, there was nothing, no insights about what's happening in the world, about the interest rate environment,

Starting point is 00:46:43 or even the oil prices. It was as if it was written in some other year, not this year. I look at how much influence he has and what kind of a difference he could make. And he's just totally acting like it's not even there. Like there's this elephant in the room and he's not even talking about it. And trust me, I love Warren Buffett. This guy has taught me more about finance and everything else and any person on the planet through his writing. So I'm deeply appreciative.

Starting point is 00:47:07 And please don't take it that I'm not. I'm deeply appreciative of the contributions that this gentleman has paid to society. in a moral way too. I mean, some of the morals and things that he's personally taught me through the books, recommendations, and whatever, I couldn't be more appreciative. But I think this is a time where we need stern leadership from very smart people that have a lot of credibility and a lot of influence and we're not getting it. He has addressed it in an essay that's about five plus years old.

Starting point is 00:47:36 He uses the analogy of greenhouse emissions and he describes them as greenback emissions and he says that it's not good for society to be sort of pumping out so much greenback emissions. I think that he's constrained a little bit by the fact that he's watched so closely. And he can't, I wonder sometimes, you know, he's criticized for perhaps being seen to be too close to the establishment. And I wonder sometimes if he restrains himself a little bit that if he was to say something about the Fed, then people would say, well, the Fed's an independent body. And here you are, you're a multi-billionaire, try to. influence what the Fed does, even if a lot of us might think that we would agree with what he would

Starting point is 00:48:15 say. But there's equally, there's an enormous, the orthodoxy in academia would say that the Fed's not being dovish enough. Paul Krugman would say that the Fed's not being dovish enough that they're not printing enough money. The interest rates are too high. They should be running negative interest rates. So I don't think it's perfectly clear cut. So I'm holding an article from Bloomberg that I printed off from the 27th of February. We'll have this up in the show notes. It's called the G20 wants government doing more and central banks doing less. So this is my frustration with people that actually understand what in the world's going on. Because I think there's a few of them out there.

Starting point is 00:48:51 I think they're far and few between. And the ones that do understand aren't, I guess, being vocal enough and using their influence in order to shape things in the right direction. In this article, this G20 article, they come out and say that the central banks have to start doing less because all this QE and everything is actually creating the problem and we need to implement more fiscal spending in order to offset all this, you know, polarization to zero percent on interest rates. And I totally agree 100 percent. You have to get people to understand this that these arms, be the fiscal arm and the monetary arm have to be working hand in hand. Okay. And if they're not, you're just basically saying the Fed has to fix that the Fed has to. That's not the solution here. So how do we educate people in order to do this? Well, I think it's people like, like Buffett or a Carl Icon really kind of beating their chest and getting out there in the media and

Starting point is 00:49:46 saying these things over and over again because people listen to those people. Soby, did you have anything that you would bring to the group? I had some comments about Buffett's letters. The first one was that I thought that, you know, it's like saying a favorite band. You know, their first album is always their best album and everything that comes out after that gets increasingly less interesting, even though they're kind of better as they get older. I think that Buffett's best letters are his first letters. If you can get your hands on his Buffett partnership letters, they're the best.

Starting point is 00:50:16 And the letters that came early on when he was running Berkshire Hathaway are excellent too. I think he's become increasingly aware that he's being observed. And so he's become more constrained about what he says. And so they're less interesting and I don't think that they teach as much. But the two interesting things that I found when I was scanning through the letter, one of them was that he gave some justification for hostile takeovers. He said that Berkshire won't engage in them. but he thinks that there are times when they're justified.

Starting point is 00:50:41 That's one thing that I often encounter with other people that they don't realize that Buffett did start out as a corporate raider. Berkshire Hathaway was a hostile takeover, and he undertook some liquidations and various things. And he's now got an image that's much more friendly, but he did start out as sort of a much more aggressive kind of investor. The second interesting thing that I took away, he's addressed this on many occasions,

Starting point is 00:51:04 but he brought it up again in this letter, is the use of EBITDA for people, who don't know what that is, that's earnings before interest taxes, depreciation and amitization. The two parts of it that are important are depreciation and amitization, basically those are non-cash charges from the acquisition of assets where the cost of the acquisition is spread over the useful life of the assets. So a 10-year asset, you can put some portion of it 10% per year to that asset. Amitization is in relation to intangible assets, so that's paid to the and copyright and other intellectual property.

Starting point is 00:51:41 Depreciation is in relation to tangible assets, which is equipment. In any given year, that those two entries, they're deducted from the net income line, but they're actually cash that flows into the company or accounting earnings that flow into the company. Interest and taxes are the other element of that. Basically, the reason that you add them back in is that the capital structure of a business, its mix of debt and equity impacts how much tax it pays because interest is tax deductible. So you add all of those things back in, and it gives you the clearest picture of what the actual businesses' operations are generating. So Buffett has said that from reading the letters, he has

Starting point is 00:52:13 two complaints about it. One is that it's an adjusted number and it's often touted by management as look at our EBITDA number and his objection to it is that it's often the companies that have the biggest expenses in terms of depreciation, amortization, who quote that number. So what they should really be doing is saying here is our EBITDA number, but here is what we actually spent on capital expenditures this year too to give you a better idea of the wash. The other objection that he has, was similar to that in the 1980s that the leverage buyout guys would use it. The fact that he has those complaints about it, I don't think necessarily invalidates its use. You just have to be careful when you're looking at it to understand what it is.

Starting point is 00:52:52 So it's not a net income line. It's not something. You can compare the net income line versus the market price, market capitalization of a company. And you can then go and look at alternative investments, putting cash in a bank account, buying a 10-year. You cannot do that with acquire as much. multiple EBITDAO and enterprise value. The use of those sort of metrics is in comparing different companies that have different capital structures, different financing of their assets to see which of those two is the cheaper of the two companies. And when you do that and you test that

Starting point is 00:53:25 over a long period of time, you do find that it's quite a predictive way of finding cheaper companies. So in short, Toby, just so I make sure I understand what you're getting at here is you're saying it's a very useful number when you're looking at it from a basket of picks. But if you're using it from one individual company to another, like you said, if the company has a lot of depreciation and amortization, of course they want to use that number and they want to compare it. So I think what you're really getting at is, although Buffett highlights that in the letter, Buffett's kind of looking at it from a narrow scope and he's looking at it from comparing one individual company to another. But if you're the type of person that's more of a basket, quant kind of investor, it does be. become a very important number and very useful and valuable number and you've statistically proven that in your book, I know. But that's a great point. That's really interesting that you brought

Starting point is 00:54:14 that up and kind of picked that out of his letters. All right, guys, I think that's all we got for this week. If you haven't signed up on Hari's newsletter, I'm telling you, I read his last one. It was phenomenal. So go over to his site, bitsbusiness.com. You can sign up for his newsletter there. He also has some phenomenal posts. I'm sure he'll do a recap on the shareholders letter that just recently went out and some other stuff. Toby Carlow, he has a website called Greenbacked. He also has another one called the Acquires Multiple. But he has both of these websites. He's constantly making blog posts. He has a screener that helps people filter out the most valuable stock on the market. It's the Acquires Multiple.com. We've got Colin Yablonski. His website is

Starting point is 00:54:50 called Inbound Interactive. And he is an SEO expert, search engine optimization expert. For anybody else out there that has a small business, that's what he actually specializes in. If you have a small business, brick and mortar in your local town and you want to try to boost your search engine optimization, results on the web. This is the guy to talk to. So this is our mastermind discussion for the first quarter of 2016, and we really appreciate everybody joining us. So we'll see you guys next week. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.theinvestorspodcast.com. Submit your questions or request a guest appearance to The Investors Podcast by going to www.com. If your question,

Starting point is 00:55:35 is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before a commercial application.

We Study Billionaires - The Investor’s Podcast Network - TIP 076 : Mastermind Discussion 1Q 2016 (Investment Podcast)

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