We Study Billionaires - The Investor’s Podcast Network - TIP 083 : The First Billion is the Hardest by T Boone Pickens (Money Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 83 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, everyone, how you doing out there?

Starting point is 00:00:30 This is Preston Pish, and I'm your host. host for The Investors Podcast. And as usual, I'm accompanied by my co-host Stig Broderson out in Denmark. And today we've got a book for you. And this book was written by a billionaire. And his name is T-Boon Pickens. And I'm sure many people out there know of T-Boon Pickens. He's on the national news, financial news media all the time talking about oil. So the book that we read, and this book was kind of older. So I think a lot of the information, not a lot of it, but some of the information. and it was a little outdated with his respect to peak oil and things like that. But the book was written.

Starting point is 00:01:07 It says a copyright of 2008. And the name of the book is the first billion is the hardest. So that was his cliche on people that say the first million is the hardest. Reading through this, Stig, what you think, buddy? I weren't too crazy about it. I think his whole discussion about energy independence was extremely interesting. But I kind of feel like this was his legacy. book. He would like people to remember exactly what the book says in like 50 years from now.

Starting point is 00:01:35 And what I would really like to learn from a billionaire would be something like Oprah's book. This is the life lessons. I don't think it was kind of a live lessons book. It's more like, see how I created this and see how my sports team won all these events. No, I'm glad you said that because I didn't really know what to say other than, I guess I didn't really like it. But you hit the nail on the head. That's exactly what it was. Now that you said that it makes perfect sense. He was really trying to annotate and put into writing what it was that he did through all the years. And it wasn't necessarily like he was trying to teach other people how to do it. I think he was just trying to document, hey, I did all these things. That's kind of how I read it.

Starting point is 00:02:17 Yeah, totally. I completely agree with you. So let's give some folks a little bit of the background. So it's not, well, I can't say it's not all bad. The book was long for me. And I guess I judge my way I read books is, you know, everyone knows I use audibles and that Stig uses audibles, but whenever I'm going through the book, if it's something that I'm just kind of dreading to put on and listen to, I already know that that's probably not, you know, a book I really want to talk about on the show. And this, unfortunately, was one of those books. But whenever I looked at the paperback version of this book, and I'm holding it up right now, and I'm flipping through it, it's really kind of a short book. It's only like 240 pages or something, and the

Starting point is 00:02:57 text in it is pretty big. But listening to the audiobook, it seemed like it just kept going and going and like it would never end. And I guess the reason that it was kind of hard to listen to was just because he talks about deal after deal after deal, which is kind of interesting to hear the discussion of like, hey, I started off doing this, which was, he was a geology major in college. He went to Oklahoma State University. And after he got that degree, he graduated and it kind of just skims over this part of the book pretty quickly. Wouldn't you agree? Stig? It didn't really talk about how he acquired his first, you know, $5 million. It really doesn't get into that, which I kind of found because, I mean, that's where I think a lot of people really need a lot of

Starting point is 00:03:40 guidance. Like, hey, so I did this and this is the way I saw things. This is the way I thought about things. He really didn't do that at all. It was just kind of like, yeah, so I got this geology degree. I worked, you know, a little bit as a person in the workforce. And then next thing, you know, I started my own company and then I did this acquisition. I think he did that by raising money from friends and relatives, something like that. But he didn't really go into debt with it. It was more like, oh, I was broke and I had no money. My wife thought it was crazy.

Starting point is 00:04:07 And then I bought an oil company. The first million didn't seem to be the hardest for Pidon Piggins for sure. The first million was definitely not the hardest. It seemed like it was just like from family and friends and just came from magic. So that was definitely a complaint of the book. instead of name in every one of these. And I want to tell people, if you're listening to this and you're wondering what the end of the show, so the show is going to be broken into two different segments.

Starting point is 00:04:32 We're doing the first segment, and I apologize for not saying this up front, but we're doing the review of the book here, and it's not going to be really a long review. And then we're going to do three questions from the audience at the end. So if you're not really liking the review, just kind of hang on and we're going to get to some of these questions from the audience. So he started doing all these different acquisitions. And instead of naming all these different acquisitions, I'd rather talk about, I guess, the style in which he was going about these acquisitions. So he's out there. He's seeing other companies that are competitors to his in the market. And he's making different bids for, you know,

Starting point is 00:05:04 trying to buy them out, doing basically a hostile takeover with the controlling interest in the shares. And that's kind of how he got his notoriety. In 1985, I believe it was, 1985 Time magazine ran a front cover with his picture, basically describing him as this, you know, oil tycoon takeover kind of guy. And that's where he really started to get a lot of notoriety after that Time magazine article and front page review. So the rest is kind of history as far as him just continuing to grow his business, continuing to do these hostile takers, kind of like a Carl icon kind of way of investing. But he doesn't really get into, and again, this is my frustration with the book. he doesn't really get into his mindset of how he was valuing companies, what he was doing to look at

Starting point is 00:05:54 competitive advantages of owning it and like the strategic part of it. Yeah, I think in consideration of that, Preston, I like his discussion about always thinking like an owner. And I really thought about you, Preston. Actually, you talked about that so many times whenever you see a business, like how do the operate and really the teaching from Tibu and Piggins now. You can do this different ways. And what he did was more like as an activist investor, if you called it like that. You mentioned Kyle Icon. It's somewhat the same approach. You acquire a lot of shares and you don't like the management and then you struggle a lot, but then you might be able to realize some of the value in this company. And I completely admire that approach. I think it's really good that some people are doing that.

Starting point is 00:06:38 I think personally, I might be more into Buffett's style where he doesn't do hostile takeovers. because it also seemed like, even though Thibon and Piggins was very successful with this activist approach, it also seemed like he suffered a lot personally, which I guess you do whenever you are fighting with other people. And one thing I really like, and this was just a short anecdote, but it just said something about corporate governance in the 50s and 60s. And he's talking about the union oil company out there in California and talking about how management's looked at shareholders. And he's talking about the largest individual shareholder in the union old company is later to be UNICAL. And he proposed a higher dividend. And to that during the annual meeting, the CEO responded, why would we give away money to a bunch of people that we don't

Starting point is 00:07:31 know? And I think that that was obviously, that was a horrible answer to give. But I think even today, you see a lot of horrible management decisions. So even though I might not do it myself, I think it's important that we have people like Cibon and Piccans and Kyle Icon to fight the managements out there. So his company kind of wrapping up his initial start to his career that really kind of gave him the notoriety in his name is. So the name of the company that he was running and operating and he found it was Mesa.

Starting point is 00:08:03 So what I found kind of strange is after he sold Mesa, and I think that this happened in 1996, 97 is when he sold Mesa. And it was kind of like this didn't really end very well. The way he sold it, he kind of got forced out. And it was an interesting part of the book to kind of hear him talk about his leaving Mesa. But he had, you know, obviously a very large amount of money after he was forced out. And he started a new company. Did he go through a divorce at this point in time?

Starting point is 00:08:33 I can't remember where that kind of lined up. I think so. Yeah, it all happened at the same time. where he went through a divorce and he kind of talks about all that part of it and the troubles and kind of the just enduring losing his company, losing his family. So I appreciate his honesty and kind of talking about that in the book. I think that that says a lot about him. Then after that, he went out and he started a new company called BP Capital Management. From what I can understand in the book, this was just basically a futures company.

Starting point is 00:09:01 He's out there trading futures contracts. Yeah, well, there was a funny story about he had to take the license. right. He couldn't be licensed to do it because he failed several times. I forgot about this. Yeah, you're right. Good. Tell the stories think. This is good. It was just like he wanted to start this company and then someone patted him on his shoulder and said, well, you can't just set that up. And clearly, you know, a guy like Tewan Piggins, he would just set it up. Like, I'll figure it out. But he was forced to be licensed and couldn't pass the exam. And people coming up to him saying, aren't you tip of Piggins? Didn't you write the book on commodities,

Starting point is 00:09:36 the book on oil. Yeah, so he took it through, I think he passed on the third time of taking this commodities test that was required for him to get licensed. And I love the fact that he told this in the book because, to be honest with you, I might have left that out of my book. But I was really impressed that he told the story. I think that that, you know, for how much of the other parts of the book that I thought were egotistical, I was happy that he left that in there because it was a funny story.

Starting point is 00:10:02 And I think that it was, you know, it made them seem human, you know. you know, in the book he talks about the same person was administering the test and just kind of looking at him like, is this dude ever going to pass? And then on the third try, he basically brokered a deal with the person who was administering the test that he could use a calculator. He could have as much time as he wanted even though it was a time test and on and on. And he did pass the last time. So. Yeah, President, when you got to admire is that he was 67 or something like that. And like all the other guys are like 20s, whatever. Yeah. Yeah. Yeah. He was like, He was really old at this point.

Starting point is 00:10:37 So he's this old dude who's, you know, this oil tycoon just sitting in the room taking this test with these 20-somethings and could not pass it. So interesting start to his career at BP Capital Management did extraordinarily well as a futures trader. Now, here's where I find this really interesting. So he started the company in 1997, 2006. So fast-forwarding almost a decade. He earned $990 million from his equity in the two funds and $120 million from his share of the 20% fees applied to the fund's profits. So, I mean, he made a billion dollars is what it comes out to be. And his net worth right now is about a billion.

Starting point is 00:11:18 And he's given away a lot. I want to say $900 million or something. Hold on here. I got the number. Yeah, it's close to, I want to say, almost a billion dollars is what he's given away. So what he's really kind of a master of the years is probably $2 billion. and his net worth is around a billion, maybe a little shy of that right now. So he made his money and he did it through futures and he did it in the oil industry.

Starting point is 00:11:39 Now, what I find really interesting is when you've listened to him in the news recently, and I'm talking in the last year, you go back to the start of 2015, kind of that first quarter, second quarter, when oil was really getting punished. And Boone Pickens was on every national financial news network saying, oil's going to be $70 by the end of the year. Oil's going to be $70 by the end of the year. Then when you get into the really deep, disgusting part of this oil glut that's been happening, when oil got into like the $30 range, he was still singing the tune.

Starting point is 00:12:13 Oil's going to be $70 by the end of the year. And he has been so far off the mark with this, I mean, not even close to being on the mark with this, that it's not even funny. And if I was going to say, and who am I to say anything, especially when you're dealing with a guy who's as accomplished in oil as much as him. But I think the thing that he's missing is he's not understanding the correlation and the relationship between currencies and commodities. I really don't think he gets that based on his recommendations and his comments in the past year. Now, I could be completely wrong and that

Starting point is 00:12:45 might be really egotistic for me to say that. But that's where I think he's making the mistake. So I'm curious to hear Stig's thoughts on this. Yeah, I thought it was really interesting too because I also had to look up Tebow and Pagan's current you. And I think, Preston, you sent me in a video a few months back when he's sitting discussing with Carl Icon. And it's kind of fun because I can't remember the last time I saw an interview or read something with Tipumpinous where he didn't say, like, oil is going to rebound tomorrow. But I guess people will just laugh out there and say that I've been saying the same thing on the podcast. So I think it's really interesting that he talks about how he looks at fundamentals when he is investing in oil.

Starting point is 00:13:25 And he's saying, even though I am a trader to some extent, I don't cut off my profit. saying after a profit 25%. That's not how I invest. I look at the fundamentals. I look at the weather. I look at storage, all of that. But what I think I missed from the book is him more going into depth with how he actually were looking at the fundamentals.

Starting point is 00:13:45 Because I think I really listened to that three or four times just to be sure I really got it and I didn't get it. So I had the exact same experience. I was really listening to that part because when he gets into how I fundamentally look at creating oil futures, I mean, for me, me, that's really what I'm wanting to know in here is his thought process. But you know what? I took away from it.

Starting point is 00:14:06 He just kept bringing up the weather the whole time. He just kept talking about, oh, when the weather is bad and the weather is good, then, you know, the price is going to move because you're going to have a draw and you're going to have an oversupplier under, you know, under supply him. And I'm thinking, that's a short term kind of thing. Like, that's a quarter kind of trade, not a five-year play. And then, like, in the same breath, he turns around and says, I hold and I let my gains run for five years. And I'm thinking, this does not make sense. My impression of his BP capital management

Starting point is 00:14:36 portion was just, he hit the market at the right time. That was my, that's the way I took it. I was like, he hit the market at the right time and just really, if he was in the market right now and trading BP capital, he'd be getting crushed, absolutely crushed. So do you agree with that analysis that do you think it was a little bit of luck? You know, I think it's hard if you made so much money as Tipu and Piggins really to dedicate to really to say that it's luck. But you look at how the fees were structured. He was charging 1.75% each year. And it was so easy for him to attract capital, at least compared to, you know, you're right like out on the street because he knew so many billionaires and multimillionaires back then. So it was somewhat easy for him to set up.

Starting point is 00:15:20 Even though he says that he only had six employees from Mesa when he was starting, you know, that was quickly 400 people because it was so easy for him to. to hire the right people and all the employees bought stock and the company. And then he talks about this incentives fee of 20%, which is obviously extremely profitable whenever you start making the returns, whether or not it's luck. And I really disliked what he said about that he wanted the incentive fee of 20%. I'm like, if you're charging almost 2% a year,

Starting point is 00:15:51 do you really need an incentive to provide a good performance for yourself and your shareholder yourself and to the other shareholders and was just completely contradictory to what he has said like previously in the book. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future.

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Starting point is 00:20:12 Whenever I look at how commodity cycles, particularly in oil, go, as far as the waves, and the dips and the highs on it. When you look back, when he was in the commodity business, he was in the boom time of oil. When you look at the housing crisis and all that stuff, oil really did well from that time frame from like 2000, call it 1, 2, to up until 2008. Please don't take this out of context like I'm implying that that's what Boone Pickens was because he is very accomplished as a manager in the oil sector before all this happened. But I'm just saying his timing was amazing. Now, whenever we come out of this contraction that I believe that we're approaching right now, let's say in about a year, two years from now, I feel like oil will do

Starting point is 00:21:00 just phenomenal again for another five to seven year tear. And so I just kind of see Pickens, the timing of when he stood up this BP capital management, as being like right in that ripping zone of easy performance. So that's my opinion. And then when you're charging 20% fees on every profit that you make, I mean, it's a little hard not to make money when you have that capital structure and you got a bunch of millionaire friends. So that's my impression. I really hope that I'm not being over simplistic here. And I'm sure that I am. So in the last part of the book, and I like this, I really like the fact that he brought this up in the book.

Starting point is 00:21:38 He talks about energy independence. So Stig's going to talk a little bit about some of these comments here. Yeah, that was definitely one of the discussions that I like the most. And partly it was politically loaded, which was extremely interesting. And it might look like, if you watch the news right now, that the U.S. is producing so much oil, which there are, that they don't need to import. But actually, the U.S. is still importing a lot of oil. They are importing the most recent number of fine is 6.8 million barrels of day. Just to give you some numbers of comparison, the U.S. consumers close to 20 million barrels per day.

Starting point is 00:22:14 It's really interesting that you have a country like the U.S. that might consume like 20 something percent of the world consumption of oil, but still is only 5 percent of the population. So the U.S., the way it structures, is very dependent on oil. And one thing where I think he missed the mark is his distinction between energy and electricity. Well, clearly he knows what he's talking about, but I think he made it sound very easy when he talked about his wind investments. So for instance, he's saying that you have one three megabatt wind turbine and that can produce the same energy as 12,000 barrels of oil in a year. And while that's true, I think he should mention that electricity is a form of energy. You can't just replace fossil fuels with windmill. And I think you could kind of get that impression whenever you are reading his book.

Starting point is 00:23:05 And he places a lot of emphasis on renewables. And I think I've been bashing renewables a few times before here on the show. And it's not because I think renewables is a bad thing. I think it's great and I think it's good for the environment. But I think he misrepresent how important it really are. Yeah. So, Stig, I think that the point that you're talking about is one of the reasons why Elon Musk has been able to really kind of take the energy market by storm is because what you just said as far as oil being different than electric energy in a different form of how you can kind of convert that and transportation really being reliant. on oil because it's portable and it can kind of move with the vehicle.

Starting point is 00:23:46 That's where Elon Musk has really said, you know what, you're right. But let me tackle that problem and try to make it so that electricity can be transportable and go on the move. And that's where he's placing all of his emphasis and really his hardcore technology in his technological development of the products that he's designing is so that electricity can be portable and try to bridge that gap. And you don't really see other people going at it as hard as Elon Musk. Maybe he just has a better branding and marketing campaign than other people out there.

Starting point is 00:24:18 But he's the guy who's really trying to make that happen. And you can see that it's really paying off for him because he's bridging that gap. But I'm sorry to interrupt and keep rolling. No, it's actually a really good point because I was typing up some notes and I actually had a section about Elon Musk. I think you bring up a good point here, Preston, because renewables has its limitations. And especially whenever the book was written, but still today. because in general you can't store electricity in meaningful amounts, which also means that you can transport it.

Starting point is 00:24:45 It has to be used right now. And you might be thinking about Elon Musk and Tesla, and he has done some amazing research in terms of building batteries. But I also got to say, like, if you look at the effect of what they can store, it's really close to zero. If you look at it in a broad American perspective. Now, that doesn't mean that the technology is not there. it doesn't mean that it's something that could be better in the future. But as it is right now, it's just very, very difficult. And I would like actually without being too geeky,

Starting point is 00:25:15 because I think I also mentioned there's a podcast I used to work in energy training and I'd be managing some of this renewable energy. And it's just evident for me to see the limitations. Because you might be thinking, well, isn't the wind always blowing somewhere or is the sun always shining somewhere? Couldn't we just use that electricity? Well, the problem is that you have different limitations. So, for instance, you have something like cables.

Starting point is 00:25:41 You can't just transport something in a cable that can't be there. And you have power grids. So that means that sometimes you can transfer something to another power grid, which basically means that just because the wind is blowing in Oklahoma, that doesn't mean that you could use it in New York. That's just not how it works. Well, and stick, what you're saying is that under the current infrastructure, it can't take place.

Starting point is 00:26:02 but we could as a world start developing more infrastructure in order to handle those demand if that would be something we'd try to move towards. It just wouldn't happen quickly is what you're really saying, correct? Yeah, in the power grid, you need to have the same frequency. So for instance, in Europe, it's 50 hertz. So it needs to be stable. How will you have a stable electricity system when demand supply changes all the time? You have higher demand during the day than during the night.

Starting point is 00:26:29 So what we're doing in the power grid right now, and we're probably, do for a long time is that we figure out, so what is the stable way of delivering electricity? That's something like coal. Coal is actually huge in the U.S. It's not political correct. It's also pollute a lot. And if you start to clean it, it's very, very expensive. But we're using a lot of coal. We're also using natural gas. But it's because it's a more stable resource and we can store it and we can also transport it if we have to. That's one of the other things that Musk has taken on with these battery storage capacitors basically where he stores this energy when it's in high demand or whenever it's cheaply being produced.

Starting point is 00:27:08 You can actually, the thing that he's designing is a large battery power unit that you would put into your house that you could then store and you could draw and charge that thing whenever the energy costs are cheaper and you could then draw on it whenever the energy costs are more expensive. So it's interesting that he's trying to tackle the energy costs. these problems that Sticks talking about, the issue is really how do you go about distributing these to a very large audience that actually starts having a impact around the world where he's nowhere close to that at this point. Yeah, and I think you bring up a good point here.

Starting point is 00:27:46 And just to give you some numbers for comparison, so if you look at renewable energies, including hydro, wind, solar, that's less than 10% of the global energy. And we see a lot of great developments here in the Western world. But, Here's another thing. That's not what the rest of the world uses. In China, they're huge on coal, for instance. In the States, they use something like 10 to 12 times as much oil as they do in China. And China is on the way right now.

Starting point is 00:28:12 So even though that we might come up with a lot of great inventions here in the West, the rest of the world is developing as well. And they're not using the same technology, at least not yet. So I think Stig's point, and he's not coming out and directly saying this, but I think what Stig's trying to say is next time you open up, Bloomberg.com or you're reading the Wall Street Journal and you read some swoopty article about how Elon Musk is going to change the world with energy and how it's all going to be different in a year from now or three years from now, don't buy into the hype. And I would agree with that.

Starting point is 00:28:44 I think that it's something that catches a person's attention because it's something new and it's something that's changing the world and it is. But it's not going to do it at the pace that I think some people think that it's going to occur, especially in developing countries. And go over to China and some other places, that is not going to happen quickly. That's a change in mindset and culture. Here in the U.S., we're wanting to quickly adapt this and move in a different direction, but I can tell you, I think in the rest of the world, it's not as nearly guarded as something that has to happen quickly or soon. So the important thing is an investor when you're looking at this, is the trend and the kind of the delta and the change as it occurs

Starting point is 00:29:23 so that you don't get left in the dust. Because eventually, I think a lot of this stuff is going to kind of take hold, but it's going to be decades. from now, and you kind of know when that pendulum is starting to swing the other way. And the only way you can do that is really kind of look at the big picture, look at those percentages and how they're shifting from maybe gas to electricity to whatever, okay? That's for you to really kind of do your research and your homework. But you've got to look at that trend in the direction that it's going. And I think that's what Stig's really getting at with his comments.

Starting point is 00:29:53 Yeah, and just to round this discussion off about energy independence, we actually just got a confirmation from Gail Treiberg that runs the site of Finan World. And for me, I've been following her blog for quite some time. For me, together with Morgan Downey and those two know each other, by the way, there are the two top authorities in terms of educating people about oil. It's going to be an awesome episode. And before we are, we move on, also want to talk about, I wrote a blog post about the intrinsic value of oil calculated to be 75.6, which just gives you an idea of that's probably not the right number if I put it on a decimal. But I come up with some arguments why that might be the case. And I'm just extremely curious to hear what you guys

Starting point is 00:30:35 think about the model and your take on oil as well. So I'm curious, what would be the time frame that you expected to get to that price? Do you have any estimate on like how long it would take to get to $76? No. And this is actually the really interesting thing because I've looked at a time series back to 1970. And I should probably be completely upfront and said, this is mainly the work of my colleague Professor Morton Peterson that has created a model based on hoteling's rule. And what Hurtling did in 1931 was that he said, all assets have some kind of intrinsic value.

Starting point is 00:31:09 And the market is somewhat good at estimating its worth, but they're just not right all the time. So this model is basically looking at the development since 1970 and then saying, well, market is probably somewhat correct since that time. So we don't have a starting part in that sense, but how much should oil be valued at right now if the market is somewhat efficient in the long run? That's like the overall premise. So we can't say it will happen like in a month. I don't think you can have any model saying that or in five years.

Starting point is 00:31:41 That's just the fundamental value. Sort of like saying I bought a stock. It's worth $50, but I bought it at $20. When would that happen? I don't know, but value is a driver in itself. So one of the fun things about having a podcast and kind of having a blog is we can float ideas out to the audience. And then you guys go in there and comment and tell him why he's wrong. Please do.

Starting point is 00:32:03 That's what Stig's wanting you to do is read his blog post and maybe help him shape this thesis that he has and what he's trying to develop. So with all of that said, that's our long review of T-Boon's book. The first billion is the hardest. Stig's going to probably, you know, title his the first trillion's the hardest someday. Yeah, now that I estimated the intrinsic value of oral, like the first person in the world. Yeah. But that's our review for the book. We also have an executive summary of this book that kind of goes chapter by chapter and kind of outlines everything that's in it.

Starting point is 00:32:38 So if you guys want to read the executive summary and just kind of skim through it and see what the book's all about. We send that out to everybody on our email list. So sign up on our email list. It's 100% free. We don't send out any spam or. advertising or any of that kind of stuff. So feel free to sign up on that and not have to worry about seeing anything from us other than two times a month. So let's go ahead and take some questions from the audience. So Stig, who do we got? Yeah. And our first question comes from James Forerner.

Starting point is 00:33:04 Hi, President, Stig. So a couple of weeks back, you had a fascinating discussion on your podcast regarding Exxon Mobil stock, and specifically its buyback policy and now dividend policy. I was wondering you could further elaborate on what you look for in companies pursuing by buybacks are paying dividends. And more broadly, what red flags do you look for when looking at a potential investment? Thanks a lot. So James, this is a fantastic question. I think it's a really kind of simple response for share buybacks. Look at it the same exact way of how you would buy stock yourself. So right now, when you look at the market, it's highly priced in the US, at least the US equity market, probably about a 4% return at current market prices. So if a

Starting point is 00:33:46 company's buying back their stock at that point in time, and they're not doing other things with the money. Maybe, you know, for me, I'd be investing in maybe a new product, R&D, something like that that's going to give me a bigger return in the long run than 4%. I think that that's a better use of your money. Now, the company might not have a product to produce. There might be other implications, and that's where you really got to do your homework and kind of dig in and see why they're doing the stock purchase. But for the most part, if you're buying right now in your large cap company in the U.S., you're going to get a 4% return with over the next 10 years annually at the current market price.

Starting point is 00:34:21 So the way you really have to look at it when the company is doing it is you've got to look at it in the same context, would I be buying back stock? So let's fast forward and say we just had a major drawdown in the U.S. equity market, and it was offering much lower prices. If I saw a company buying back their stock and they were safe and they had enough money in their war chest to weather, the downturn, and the cruise. credit contraction. If they were in that position, they're buying back stock, I see that as a really good thing because they're basically compounding for me by using that as retained earnings,

Starting point is 00:34:53 and they're doing it in a tax advantageous way whenever they're buying back stock, opposed to issuing dividends to me as a shareholder. That's one of the reasons why Warren Buffett doesn't pay a dividend is because of the tax disadvantages and his ability to compound the money. So those are some of the key variables, as far as I'm concerned, whenever I'm looking at a dividend versus a stock repurchase. There's a lot of companies out there where I'd rather take the dividend because I don't think their ability to actually compound the returns are that good. And so that's where you might want to prefer a dividend over a share buyback.

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Starting point is 00:38:48 Back to the show. I think you respond on, Preston, when you said, it's really not so much about should it be buyback or should it be dividend. And there's more a question of saying, where can the money best be put to use? and as you also suggest, it might be retained earnings. It's not like you can't say, hmm, this company is really good because they have been increasing dividend for 20 years. It might give you a good indication of it's a very stable company,

Starting point is 00:39:15 but it really doesn't tell you that is the approach that puts the capital best to use. And I think it would be unrealistic to look at a company and say, well, the stocks probably haven't been undervalued for 20 years. If I can go back and say, well, the cut the dividend, back in 2009. And it was actually going okay back then, but the stock was just really, really cheap. For me, that's not a red flag. I can see why it would be a red flag to a lot of people because they're looking at dividends

Starting point is 00:39:43 saying, why do they cut dividend? But I think the problem probably rather lies in the management carrying so much about a dividend cut, how it signals something wrong in the short run to investors and really not look off for them in the long run. And I kind of seem like it's the same as giving your son a chocolate bar because you don't want him to scream or whatever. It's really a question of what is best in the long run. And when you look more into dividends, you start looking at payout ratio, which might be a good place to start. And even more importantly, into the cash flow statement and the cash reserve on the balance sheet,

Starting point is 00:40:22 then you'll have a somewhat good understanding of how is it actually that they are using their cash, how save is the company and how good are there to not store cash inside the company when they don't need to. All right. So let's go to the next question. The next one comes from Wesley. And here we go. Hey, Preston and Stieg. My name's Wesley and just a bit of a background. I'm a medical student. So I've never done any business courses in high school or in university. So thanks very much for doing this podcast because it's a great place for me to learn how to invest. So from your podcast, I've learned that you've got to look at the PE ratio. You want to look at the EPS. You want to look at also the board of directors. So all that's overwhelming, especially for someone who has no business background. So I was wondering if there's one

Starting point is 00:41:04 parameter that will tip you over towards buying or not buying a stock. Is there just one trait of a stock that will become the deciding factor in either buying and not buying the stock? Thanks very much for that. So the best analogy in Wesley, this is a great question. We hear this one a lot. And I love the fact that you're digging into business as a doctor. That's pretty cool. So I used to fly helicopters. I've mentioned this a couple times on the show. So the Apache helicopter, when you go in and you sit in this helicopter,

Starting point is 00:41:36 there are so many buttons and knobs and you know, you push the wrong thing and you might shoot a missile and you got all sorts of things happening inside of this cockpit. And it'd be kind of like asking me to sit down in that helicopter and I have to fly it, but I can only look at one gauge. And I've got to, you know, I can't look outside. I can only look at one gauge and I've got to fly it. And I'd tell you, I would never take that on. And I'll talk a little bit of more with this analogy.

Starting point is 00:42:03 So when you first start learning how to fly, you do a thing called instruments. And when your instrument flying, what you do is you, you wear it on your helmet, you put a visor down and the visor shields your ability to see outside of the cockpit. All you can see are your gauges. And this is kind of an intimidating portion of your flight training. military flight training at least, that you really have to rely on your instruments and you have to fly the helicopter from one airport to the other and you're not allowed to look outside the windows at all. You have to only look at your gauges. Let's say my altimeter, I'm supposed to be flying at

Starting point is 00:42:35 a thousand feet because of the obstacles on the ground. And that would be something that I would have done in my flight planning before I left. I'd be looking at that and saying, okay, I've got to fly at a thousand feet to miss every obstacle. That's just an example. So as I'm flying along and I look at my altimeter, I might see that it's at 1,050. So I'm a little high. I need to come down. So I adjust the stick to move down a little bit. But now I got to look at all the other gauges because maybe my air speed's getting slow and I might start stalling. Okay, so I'm looking at all these different gauges and I'm constantly going through them to see the changes and I'm making small adjustments to the controls in order to try to keep this thing just afloat. Investing in companies,

Starting point is 00:43:13 in my opinion, is the exact same thing. You have to constantly look at all these different gauges in order to know how something's performing and how it's getting to an end state that you want to achieve. So when you look at a company, there's some really key metrics that I would say are those gauges that you've got to be looking at. One of the most important ones is the earnings, the EPS, the earnings per share. Another one that uses the EPS, the earnings per share, is the PE ratio. The E in the PE ratio is the earnings. The P is the price that you're currently paying for that exact point in time. So what you're doing is you're comparing, okay, what is somebody on the market offering as a price to buy this stock and then how much profit or earnings

Starting point is 00:44:00 are there in order to own it? So let's say I paid $100 for a company that was earning $10. Okay, so I could expect a 10% return on that. My PE would be a 10. Okay, because the price is $100, by 10 is the earnings of it. Those are just two small metrics that you're looking at when you're assessing the value of a company. So as you go further, you've got to determine what those key gauges are for yourself as an investor. Stig and I came up with a checklist that you can download if you go to Buffett's Books.com or you go to the Investors Podcast. We have little pop-ups and stuff for you to download this checklist. But on that checklist, we basically laid out what we thought some of those key gauges were and some of those critical variables.

Starting point is 00:44:43 variables that you really have to be able to continue to watch in order to know that your company is on track and flying in the right direction. So it's kind of a long response. And I apologize if you didn't like the analogy. I think that it makes sense from my vantage point based on my background. But I can't give you just one metric. But if I was going to tell you one thing that's really, really important, it's the earnings on the company. Yeah, I think if I have to come up with one metric, it should be valuation. And that's a tricky answer because valuation is composed of so many other metrics. That is probably not fair for me to say. But the thing is really important that whenever you buy something, you just start with this simple notion of what is it

Starting point is 00:45:23 worth and then go out from there. And the interesting thing for me is that no asset is really so horrible that you wouldn't buy it at the right price. At least that's how I look at it. And before I'm going to return to your question, I'm just going to mention horse head holdings right now. And it's a very interesting company because they're going through a bankruptcy right now. And what's really interesting about that company is that the market cap is like $8 million right now. KPMG, I just read and report from them. They estimate the value to be between $800 and $1.4 billion. I don't completely agree with their approach, but it's interesting to see how much value they can find in there.

Starting point is 00:46:02 Gaspier, who invested in the company, he's saying that the equity is in excess of $400 million. So this is a special situation, what we call a special situation in stock investing. It's definitely not something I would like to recommend to a beginner. But it's just underlines my whole part of saying that even though there are no promise that you ever see one cent if you buy like really horrible looking assets, everything is a question that upside versus downside. And you can only lose what you invest. So that's what you can lose.

Starting point is 00:46:33 But what is the upside for you? And that really relates back to valuation. So figure out how much is it worth and how much does it cost? And that's really the two factors where you should start your research. And that really relates back to what Preston is saying, because what is it worth is basically just the cast that they generate discounting back to today. So no, don't look at a single key ratio. If you have to look at valuation and then look at the key ratios that you use to calculate evaluation based on that. So I have one final follow-up point to what Sting and I were talking about as far as the valuation.

Starting point is 00:47:07 When you talk about a valuation on a company, you're talking about a multiple that you're paying on the earnings. So in the example that I provided with a $100 company trading on the stock market and it has $10 of earnings, you're trading in a multiple of 10. It will take you 10 years to get back the principle that you initially invested through the earnings itself. Now, where this conversation gets really interesting and where people really need to understand how valuations work, it really comes down to the competitive nature and the

Starting point is 00:47:37 competitive advantage of the business. So let me take an example of Google. So when you look at Google, they have a huge competitive advantage just in the fact that when you go on the internet, what do you type almost out of just sheer habit when you log on to any internet browser? You type in google.com because you're going to search for something. That act is a branding situation that has an enormous competitive advantage that has been ingrained and indoctrinated into the world's culture of how they use the internet. That is something that is enormously difficult to overcome. That is a competitive advantage. So for me, I'm willing to pay, assuming that they make a lot of profit on that, which they do, I want to say Google's margins are 20%, maybe even higher, 25% somewhere around there.

Starting point is 00:48:25 Those are huge margins. Typically, if a company's doing really well, they'll have 10% margins. If you're in like a competitive industry, like the defense industry, maybe 5% to 7% margins. So those margins, when you make a dollar and you're able to keep 30 cents of it, that's a very big margin. And so I'm willing to pay more and pay a higher premium on those earnings for a company like that. And they can protect the margin. That's the important part. I think they can protect that margin because of the psychology that's built into it. That's a competitive advantage.

Starting point is 00:48:56 So if you see that that competitive advantage is an enduring one. And Warren Buffett talks a lot about this, this enduring competitive advantage. That's something worth paying maybe a premium for, and that's completely in the eye of the beholder. And that could change. There could be something revolutionary that kind of comes along that would change it, that maybe you all start using Yahoo. I don't know what that could possibly be. I can't quantify that. And that's where you really kind of know you have something is when you literally can't come up with a quantification on how something could be destroyed or could be really kind of challenged in a competitive market.

Starting point is 00:49:32 But I think that that last part is very important when you're talking about the price and the value that you think something's worth. You have to tie in this qualitative piece into the quantitative analysis. All right. So the next question that we have, this will be the last one that we do, comes from Yuella. Hi, Preston. Hi, Stig. Thank you for putting in so much of your time to help us learn how to invest more responsibly. I recently found your website and I'm amazed.

Starting point is 00:49:59 There are very few websites out there that provide as much valuable. investing education as yours does. And I so appreciate the executive summaries. I've been reading the intelligent investors since December. It is now late February. And even though I'll keep reading it, it sure is nice to have your summaries around. I recently listened to Podcast 36 with Joe Schmidt talking about how he started his own stock exchange to help mitigate the negative components of high frequency trading. And my question is, when I place an order, say to either buy inequity or buy or sell an option, I have the opportunity to state the limit of how much I'm willing to spend as opposed to accepting the market price. So I don't understand how HFT would impact this.

Starting point is 00:50:45 And this is what's confusing me. Thank you for taking the time to read and answer my question. Wow, that's a great question. The short answer is you probably shouldn't be worried about high frequency trading, especially because you use limit orders. So just for everyone out there, limit order is that you would say I want to pay 20 bucks for the stock. And if it's not 20 bucks, you won't buy it. And I think this type of order makes a lot of sense to me because I don't want to place a so-called market order, which is basically the cheapest offer price that you can find up there and that someone else decide how much I should pay for my stock. And that is basically what you're hoping for. And that's also how high frequency trading can influence the market

Starting point is 00:51:28 price. Because if enough people see that you will go out and buy it at whatever price is the cheapest, that's when you have these really, really fast machines that can just pull away that price and you'll have to pay a higher price. Obviously, you don't make that impact if you buy, call it a few hundred shares of a $20 stock. But if enough people are doing it, or if you have these big investors out there or traders, they usually do this in blocks. So that might be buying 100 shares at the time, but they might have like 10,000 stocks under there. Then they will actually move the market. And since they're trading so frequently, they might be losing, call it 0.12%, but still that's a lot of money if you keep making, say, a few hundred

Starting point is 00:52:09 trades a day. That's definitely something you need to pay attention to. So I think for the normal trader, I think the game has somewhat changed. I used to trade on commodities exchanges a few years ago, and I could just see that it started to be more algorithm-based. And you'll just see not only that the market would be irrational, but also that there was something else going on, that something was just happening so fast that you couldn't have a real person doing it. And especially if it's as thinly traded as something like commodities, and in this case it was electricity, you will actually see a big drawback if you are using the old form of market orders.

Starting point is 00:52:49 All right, guys, so that's all we have for you this week. We enjoy doing the review of the book. The First Billion is the hardest if you guys want to get our executive summary, sign up on our email list. If you want to listen to this book for free, go to our website and click on any of the links that we have for audibles. And if you do that, the first book that you sign up for through audibles will be completely free. And now you can take that as a gift from Stiginae. The Audible service is through Amazon. So if you can find a book on Amazon that's in the audible format, which is pretty easy to do,

Starting point is 00:53:19 you have access to probably the biggest library of audio books on the entire planet. We use audibles for every single book that we use, and we highly endorse that for people to really kind of continue to grow their knowledge. If you guys are leaving us a review on iTunes or Stitcher or wherever you guys are listening to the show, Stig and I just want to say thank you so much. We're fastly approaching 100 episodes, and it's kind of mind-blowing and eye-opening to us that we're that far along with our show. but it's all because of the help from our audience. And we cannot thank you guys enough for

Starting point is 00:53:52 everything that you've done to help promote our show, help bring it up in the rankings. I know we've been as high as in like the top 10 in the world for business podcasts. And that's just so humbling. I can't even tell you how humbled. I am just stating that. That's just crazy. And we just really appreciate our audience. And we just want you guys to know that. So thanks for listening to this episode. And we'll see you guys next week. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www. TheInvesterspodcast.com.

Starting point is 00:54:25 Submit your questions or request a guest appearance to the Investors podcast by going to www. www.org.com. If your question 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. I'm

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