We Study Billionaires - The Investor’s Podcast Network - TIP 099 : Billionaire Jack Ma and Alibaba (Business Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 99 of The Investors Podcast. Broadcasting from Bel Air Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish and Stig Broderson. Hey, how's everybody doing out there?

Starting point is 00:00:31 there. This is Preston Pish, I'm your host for The Investors Podcast. And as usual, I'm accompanied by my co-host Stig Broderson out in Seoul, South Korea. And that is obviously a change that we have to the show. And Stig has moved himself from Denmark to South Korea. So Stig, before we start talking about our episode here, I think some of the folks in our audience want to hear a little bit about why you're now living in Seoul and want to talk a little bit about your journey. And just so people know, we're going to have this quick discussion about Stig's personal life. So if you want to fast forward, because you don't want to know his personal life, that's fine with us. But after we're done talking about that, we're going to be talking about billionaire Jack Ma, who has a net worth of $23.7 billion for this episode. So Stig, I want to hear what happened here. So you move from Denmark to South Korea with your beautiful wife, who is now a teacher in South Korea, correct? Yeah.

Starting point is 00:01:29 Yeah, and I'm having to set that press because that's actually the reason why we are here. My wife, Sophie, she's got a visiting professor position for a year out here in Seoul. And we always wanted to try to live abroad at least for a year. And as it just turns out, she had a great chance to come to a good university here in Seoul. And we just took the chance to say, why not? My wife's a polar cloud. So she speaks like, I want to say six different languages plus. This is.

Starting point is 00:01:55 And she also speaks Korean. She speaks Korean well. Oh, yeah. Preston, you actually know that. Yeah. Yes. So here's a little bit of background. So I've never said this on the show. My wife is from South Korea. And she was born and raised in Seoul. And so when Stig and his wife came to our house, you know, they're both from Denmark. And my wife and our nieces also live with us. And they are from South Korea. And so they speak Korean really well. And so Stig and Sophie showed up at our house. And Sophie just starts speaking Korean with. with my wife and our nieces and just, they were totally blown away. Because if you ever seen Stig's wife, she's blonde and looks,

Starting point is 00:02:36 you know, like she's from Denmark. She doesn't look like she's from South Korea. And she was just speaking Korean with them. And they were just like, what in the world is going on? So this is really exciting for Stig and his wife to be living in Seoul.

Starting point is 00:02:51 We can't wait to come visit you guys is where we're really excited about this move. Yeah, I heard a room about that person. you might come and visit us. I can't wait for us to do that. Perhaps we even have our first recording that is not over Skype.

Starting point is 00:03:04 Who knows? Exactly. So, all right, we're going to move on. That's a little bit of the change. So whenever I do the intro now, you're going to hear me announce that Stig is in South Korea, in Seoul, South Korea.

Starting point is 00:03:18 But let's go ahead and move along and talk about this book that we just read about Jack Ma. And the name of the book is Alibaba. This was written by Duncan, Clark and really a great read. I thoroughly enjoyed it. And to be honest with you, I didn't know that much about Alibaba. I knew that they had a huge IPO. What was it a year or two years ago? You know, I knew it was a lot like Amazon was like the buzzwords that I'd heard was, oh, Alibaba's China's

Starting point is 00:03:46 version of Amazon. And they had one of the biggest IPOs ever recorded on the New York Stock Exchange. So like, that's all I really knew about it. I knew that the premium being paid versus the, the company's earnings or bottom line was a lot. So I just kind of stayed away from it and let all the hoopla and all the excitement kind of die down before I would maybe take a closer look at it. But I was really excited to read this book. And the writing, Duncan Clark writes a fantastic book on this one. So Stig and I are going to do is go about this one a little bit differently than the

Starting point is 00:04:19 way we normally do books. Normally we just kind of do a chapter by chapter analysis of what we learned as we going through the book, but we're going to do it a little bit different this time. After I was done reading this, and I did the Audibles book on this. If you guys want to download the Audibles for free, just go to our site and click on our link, and you can download this book for free using our link. Your first book on Audibles is free from us. But I listened to this on Audibles, and then after I was done, I said, you know what, I'm just going to write down the four main things from an overarching, big picture kind of mindset. What were the four main things that I just learned

Starting point is 00:04:55 from this book. So I'm going to talk about those four things. Stig went about it a little bit differently and he has like four main points that he wants to talk about from more of like the architecture of Alibaba and more about, I guess maybe the high points or stories from the book. So what we're going to do is we're just going to go back and forth with our main points and that's what we're going to discuss. And then at the end of the show, we're going to answer a question from the audience. Okay. So the first thing that I can say that I took away from this book, specifically about Jack Ma as an individual, is that this guy is like the ultimate positive thinker. Everything that Jack Ma touches is just, he somehow figures out a way

Starting point is 00:05:40 to turn it to gold. And it seems like he does it with probably the worst raw materials that you could really kind of go with. Just looking at his physique and just looking at him as a person, And he over in China, they call him E.T. Because they think that he looks like the E.T. character because he looks, I mean, he looks like kind of a strange cat. And you know what? He takes that and he just, he wears it as a badge of honor. And I love that. I absolutely love it. And so he just kind of takes this approach where, you know, even down to the way he physically looks, he has turned that into a positive for himself. And so this was such a common theme in this book that he has blow by blow. He just

Starting point is 00:06:26 constantly gets hit with another problem in his life and just continues to exceed and break through that. And that's what I really liked is all the different stories. So, like, he wasn't good at math. He knows nothing about programming. And yet, here he goes and takes Alibaba and he grows it into, like, one of the biggest tech companies on the planet. And I didn't realize how big Alibaba was until I started reading this book and you look at their sales numbers and all that kind of stuff. I mean, this is a huge company. This is a mammoth company. And Jack will be the first person to say, yeah, I don't really understand programming or I don't really understand. I was never good at math. I tried to take this test in China two times and I got denied both times to go to a decent school.

Starting point is 00:07:09 So like, this guy will break through anything because he is such a positive thinking. And he says, well, yeah, I'm not a programmer, but you know what? I can see. things through the eyes of the customer because I'm not a programmer. And so that's an advantage for me. And so he totally takes it. He flips it on its head and he moves in that direction. He never lets these things force him to think in a negative direction. He's always a positive thinker. So that's the first thing I had. I'm curious if Stig had any follow-ups on that idea. Was that a main theme you saw in this book, too, Stig, on Jack? Yeah, I think looking at Jack and actually Jack's personality is one of the things that I

Starting point is 00:07:48 would like to discuss is that he is really just one of a kind and he's very humble about his shortcomings. He proudly tells the story about him applying for a job at KFC and there is 24 applicants and they actually end up hiring 23 people, but they didn't hire Jack. I think that's an amazing story. But I really want to talk about his thirst of knowledge here because since he was 12 years old, he got so interested in learning English that he actually wrote his bike for 40 minutes. It was every morning rain or snow. And this was just like 100 miles southwest of Shanghai. And at the time China was opening up and there was a lot of foreign tourists. So he showed them around as a free guide to practice his English. And he has talked about how those eight years

Starting point is 00:08:41 has just changed him. And the thing he said was that he learned from his teachers in school that China was the richest and happiest country in the world. And that was just not the impression he got whenever he spoke with the tourists. That was actually also when he met some very interesting people. And this is a very touching story. He met an Australian family on one of his tours. And he ended up being pen pals with them. He ended up taking summer vacation when he was in Australia with them. The father, he was a very passionate communist. It's a bit ironic that he actually helped creating one of the most hardcore capsulists in the world. But they had a really great relationship. I think the family even helped him by his first apartment. I mean, they were

Starting point is 00:09:27 really, really close to families. And there was just this amazing story in the book how his personality and his thirst for knowledge and this Australian, the destiny of this Australian family was just intertwined. And the first thing I want to address before talking more about Jack Ma was someone would say, you know, he's lucky. I mean, of all the 12-year-old Chinese guys in the world, he would meet the perfect Australian family to teach him English and to help him succeed. But you know what? There were probably only one Chinese guy who actually rode on his bike 40 minutes every morning, really every morning for eight years to do free tours for the tourists. And I just love that story because it's one of those you can, I guess, be lucky. But lucky really comes

Starting point is 00:10:14 from seizing opportunity. And I think Preston also tossed on this. He has just been seizing every opportunity he can get his entire life. And he proudly tells that the story of Alabama is the story of 1,000 and one mistakes. And yes, he'd made many mistakes. But his successes really comes from that. His thirst for knowledge and the opportunity that he keeps seizing. So I'm glad that you brought that up, but you stole one of my four things, Stig. The third. The third. one that I had written down was infectious personality. And that's what Stig was really describing here. It was just Jack Ma's really likable. Like you start reading some of his quotes. You listen to some of these stories about him in the book. And this is a guy that you'd be like, I'd really like

Starting point is 00:11:02 to know this guy. Like he seems like he'd be a lot of fun. He seems like he'd be just somebody who's happy and somebody you'd want to just be around all the time. And I'll tell you what. I mean, I'm serious. Whenever I finish the book and I said, what are the top four things? That was one of the things, was his personality. And then the first one that I said was his positive thinking. Those two kind of really go together of the four things that I wrote down. Those two really are closely tied. But I think that they are a little bit different. But I'm glad that you told the story. Because the story about the KFC, and I know I laughed ridiculously hard when you said that, but it's so true. In the book, it says 24 people applied for a job at content. tuckie fried chicken when it first came to China, 23 of the 24 got a job and Jack Ma was the only guy who didn't get hired. So, I mean, it just shows you, like, how a guy could take such a beating. And this is just one story of many stories that he just got beat down. This guy just got crushed on like a daily basis, but he was so persistent.

Starting point is 00:12:09 It was ridiculous. Yeah. Yeah. And, Preston, and talk about his early start. when he founded his first company, China Pages. I mean, he was perceived as a con man, and why wouldn't he be? I mean, he was trying to sell websites on something called the Internet that people didn't have access to.

Starting point is 00:12:29 I mean, how can you start on a venture like that? He was just so courageous and he was just people being rude to him and they were calling him the worst of names, but he was just so sure that the Internet would change the world. he started selling websites that people couldn't see. And it just takes such a tenacity to do what he has been doing for so many years. And just one story I would like to talk to you about also to understand his work ethic. So if you work with Jack Ma, apparently he requires everyone to be working seven days a week

Starting point is 00:13:06 and 16 hours a day. At least that was how it is in the very beginning. And he even told people that wanted to work for him that he wanted to work for him. that he wanted them to live no more than 10 minutes away because they shouldn't waste the time commuting when they could be working for him. Clearly, I would like working in a place like that, but I think that vision and that work ethic,

Starting point is 00:13:27 I'm really impressed by that. And just one story I come to think of. Him and his wife, apparently, they went to Switzerland some point in time, and it was a Sunday, like the shops weren't open. So she was like thinking about it and said, of course they're working second jobs it's Sunday isn't it just amazing Preston? Yeah, no, you're exactly right.

Starting point is 00:13:48 So when they were talking about the hours that they were working and so like whenever he was getting in the full swing of like creating Alibaba like in the early 2000s and he had a team of I don't know how many it was maybe like 50 to 100 people that are now working with him to create this. I was just kind of blown away at the hours that Jack was working in his team

Starting point is 00:14:10 and how he was able to convince his team to continue to work at these kind of hours and this kind of pace. I think it might be with the culture. I think that over in the Chinese culture and even in the Asian culture, you find a much more acceptable for people to work long hours like that. I think that that's just a cultural norm that's more accepted. But even with that, I think that it maybe comes back to Jack's personality of why that was able to persist is because he was really, likable. And I think the people that were working for him enjoyed working with him because he made the environment fun. Even though they're there for 16 hours a day, I apologize for not being able to provide any good stories. But the way that the author described it in the book was that Jack had a

Starting point is 00:14:56 fun personality and he had this infectious behavior in order to kind of convince people that they should want to stay for 16 hours and that they are part of this bigger thing and this bigger event. And they were creating something that had never been done before in China. And it really really, really motivated these people to continue to work for them. So it really kind of goes back to that point that I was trying to make is how powerful his personality was at convincing people to want to do things like this. 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

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Starting point is 00:19:37 We were exhausted, we were into our hotel, and my wife asked me to go down to the shop and buy whatever we need something to eat. And luckily, not only could I find something to eat, I could also find underwear. And you might be thinking, so why is stick telling me this story? This is about the working culture.

Starting point is 00:19:58 So in Asia, you're working so hard. I was told afterwards that sometimes it doesn't make any sense you to go home. So you would just work, you would go to the near 7-11, buy a bottle of water, some noodles, some underwear, and go back to work. I mean, that's how it is sometimes out here. And that's the same culture that you read about in this book.

Starting point is 00:20:21 And from someone from the West, I mean, I'm from a country at, you know, 37 hours a week, and, like, we can't stop complaining about how tough it is. You used to try to come to Asia. This is very different. So it's funny stick because I literally just this week saw a chart where somebody put together all these different countries and what their average work week was as far as the number of hours that they work in a week. And it showed the country that worked the hardest and the one that worked the least or the smallest number of hours in a week. and I could be wrong, but I think I remember seeing Denmark at the very bottom of the chart

Starting point is 00:21:05 as far as working the smallest number of hours in a week. And then at the very top of the chart, it wasn't number one, but it was like number two or number three was South Korea. So the difference from what you're experiencing now, moving into the Asian culture and seeing the work ethic is totally crazy. I lived there for two years, so I've seen it. crazy. It's amazing. I absolutely love it. But it's the difference, that contrast has to be amazing for you to see a close and personal. Yeah. So I know we're digressing here, Preston,

Starting point is 00:21:39 but I just really enjoyed the chance to say underwear on the podcast. Okay. So my next point, that's actually about Edibaba and the difference to Amazon, because Elbaaba is very often called the Amazon of the East. And perhaps first we should, address why it's called Alibaba, because for a Chinese company, that's probably a rather odd name, I think most people would say. Well, the reason for that was actually that Jack Ma wanted a global company, so he chose a global name. And he first of all, he found that Alibaba is easier to spell. And I know it seems like a dull thing to be saying, but it's actually super important, like companies that you can't spell or you can spell different ways, they actually have a

Starting point is 00:22:25 hard time on the internet. But he also found that people everywhere, literally earlier in the world, they associate Ali Baba with open sesame. And he said that it was a very good metaphor because going to Alibaba, that should be the same as opening the doors to hidden treasures, just like in the tale 1001 nights. So that's actually a story about the name Alibaba. And I was just, I remember the first time I heard Alibaba and someone said it was Chinese. I was like, no, that can't be right. But that's the story about the name.

Starting point is 00:22:56 I think it's really important to highlight this is your comment about him thinking globally and internationally from the start. So, I mean, Al-A-Baba is such a big name now that it's easy for people to say, oh, yeah, you know, it's a global company and everything. But you've got to think in the context of where he was at whenever he created this. He had nothing. His business at that point was so puny and the stuff that he was doing before this was so small. for him to say, I'm going to create an internet company and just not dominate China, but I'm going to try to dominate the entire globe with this company. That's just showing you how big Jack Ma thinks from the start.

Starting point is 00:23:39 Like he thought from the very beginning he had something that was going to go global. And I think that that is something that is really important for a person that's trying to understand the mindset of a billionaire. These guys think big. And they think big whenever they have nothing. they're thinking that way from the very beginning, not 10 years down the road. Yeah, and actually just press in as a follow-up, the name Alibaba wasn't available back then. So, and it was a Canadian guy who owned it.

Starting point is 00:24:07 And back then, it's not like today when you could put money in escrow and you'll make sure that there's no fraud or anything. He actually paid $4,000 for that and he didn't have $4,000 back then. But it's just so important for him to get that name that he managed to raise those $4,000, even though he had to accompany at the time, more or less, and he actually just shipped that off to Canada and hoped that the guy on the other end of their connection that he would actually honor their arrangement

Starting point is 00:24:34 and actually sent him the domain, which he eventually ended up doing. So it's just another small follow-up story about how many things that could probably have gone wrong the old estates of Alibaba. But just to understand how Alibaba works, it's actually a bit different than Amazon. you can probably better compare it to eBay. And the reason why I'm saying it's probably easy to compare to eBay is that eBay,

Starting point is 00:24:59 they're connect, sellers, and buyers usually don't have their own products, and then they take a listing fee and a small commission. So actually what IDBaba is doing is that they don't charge anything for the listings and they don't charge any commissions, for instance like Amazon is doing, or eBay for that matter. What they're actually doing is that everything is more or less free, but then the companies in there they pay all the sellers. Then the sellers in that they pay for the ranking. So you can more or less compare this to Google AdWords.

Starting point is 00:25:32 So if you Google big screen TV, it's not random what shows up. It's probably the vendor that has paid more for that. And Alibaba is actually a group. It's a network of various websites. The biggest one is Taubao. It's Chinese means search for treasure. And it's actually a network of different websites that are all in e-commerce, but that target different customer groups.

Starting point is 00:25:59 And in China, it's huge. It's 80% of all online retail sales in China. It has more than 350 million registered users. I mean, think about that. I mean, that's more people than in the U.S. It just shows what we talked about before how big and the magnitude of the new world that we've seen right now in China. And just for some context to add to what Stig said, this Taubal site that is part of the

Starting point is 00:26:28 Alibaba Enterprise, Taubau is the ninth biggest site on the entire internet. That's how big this is. And for me, I never even heard of that before reading this book. Maybe I'm just out in left field. There's probably a strong chance of that. But yeah, Taubo, I'd never even heard of that. And it's the ninth biggest site that has more people, more people on that site than that live in the whole United States.

Starting point is 00:26:51 It's totally insane. And this is just one little piece of the whole Alibaba framework that Jack Ma is establishing. All right. So let me talk about one of my other four points were. And this kind of relates to what Stig was getting at with the way that Alibaba's set up. And the second point that I had was that Jack Ma cares about the customers. I mean, such a parallel between him and Jeff Bays. and the way that they operate their business where it is all about the customer.

Starting point is 00:27:25 It is not about the owner. It's really kind of not about the employees, maybe a little bit more about the employees with Jack Ma than Jeff Bezos. But it is all about the customers with Jack Ma. And so the way that he has its structure, the way the stick said, it's like, hey,

Starting point is 00:27:40 if you want to sell something on Alibaba or Taubo or T-Mall or any of these sites that he owns, you don't have to pay anything in order to be a seller on these. platforms. In fact, if you would sell something on the platform to somebody else, Jack Moss still isn't taking a cut from what I understand off of that sale. What he is charging, though, is for the real estate in order to get ranked higher, which is a smart play. So it's giving everybody a shot. It's not sucking attacks off of sales, which people over there love. And so what he's been able to do is just establish an enormous amount of goodwill with the Chinese people and that is why he is just killing it over there. But it all started with this idea of

Starting point is 00:28:26 taking care of the customer. I mean, you see this with Sam Walton, you see it with a bunch of very successful entrepreneurs. And I think everyone kind of gets the point of why that works. But it's yet again another theme that we saw with another billionaire this time with Jack Ma. All right. So what Stig and I are going to talk about now is business in China. And I think that this is a really interesting idea. So I'm going to throw it over to Stig, and he's going to discuss some of this in a little bit more detail. Yeah, so the whole discussion about Alibaba and Yahoo and also eBay is just really interesting.

Starting point is 00:29:04 And I actually think that eBay might be the most interesting thing to talk about because eBay, I think if we think back, we can probably remember how big eBay was. And this was also really before Amazon really grew to the mastodon that is right now. But eBay was really taking over e-commerce all over the world almost. And eBay, I don't want to say that they were arrogant, but they definitely thought that they could enter China the same way that they have done elsewhere internationally. So what does that mean? Well, it means that for one thing, they will start charging commissions,

Starting point is 00:29:45 talked about before. I mean, it provides a barrier of entry. It also meant that they were flying their executives in from San Jose to Shanghai and tried to, I don't want to say that they had this approach of they knew best, but it was definitely very difficult for them to work with the Chinese because many of them didn't speak the language. And even those that they had that was of Chinese origin, well, they have studied in the US. So culturally, they were very different from each other. And I think one really good example of how they looked at this differently was that eBay, they wanted to own the market. So that was why they bought the largest player that time. It was called EachNet, and East Net had like an 80% market share.

Starting point is 00:30:33 Now, this is interesting because eBay wanted to own the market. Alabama wanted to create the market. It's two very different things. eBay wanted to own the existing market. And what they wanted to do was that since they were taking a cut off as a commission, they wanted to make sure that the sellers and buyers weren't communicating with each other. Chinese people, at least according to this book, wants to feel that they're at a real marketplace.

Starting point is 00:31:02 They would like to communicate with the seller. So what actually made Alibaba successful was that they created a platform. actually they encouraged the buyer and sell to communicate with each other and to use that platform to settle the transaction. eBay, on the other hand, still wanted them to use their platform, but they didn't want to communicate outside of the platform because then they would use their commission, which basically meant that there was no reason to use eBay in the first place.

Starting point is 00:31:30 Now, that was just one example. Another example was that eBay wanted to integrate each net to the own platform. So they wanted everything to look like eBay. Now, that made a lot of sense in terms of planning and in terms of programming. But Eatsnet already had a lot of customers. And not only did they actually delete their usernames, they also completely reorganized the whole site. And I don't know if anyone has seen a site from China.

Starting point is 00:31:58 It's very, very different than a site in the West. I mean, the reason why I really like to use Google is because it's so simple and it's so, I mean, there was nothing to confuse me. If you're in China, if you use a Chinese site, everything is confusing you, especially if you're from the West. And it looks very dull and it looks very impersonal if you're Chinese to look at a page like Google, as opposed to a Chinese site where you get all these impulses. So that was another thing like Chinese people that don't want to look at Western websites

Starting point is 00:32:32 that want to look at Chinese websites, cater to them. So that was another mistake that eBay made. Let's take a quick break. hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer.

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Starting point is 00:36:06 Alibaba was able to, you know, they were able to capture that appropriately with their design, with their understanding of how people socially wanted to interact with each other. And that layout and that homegrown design,

Starting point is 00:36:23 if you will, was probably the thing that just put them over the top compared to these other companies, eBay, Yahoo, whoever that was trying to come over there and really kind of rule the space. And I think this really kind of came from Jack Ma focusing on the customer, being of Chinese descent and living there his entire life, and just knowing what people really did want. And having his, I mean, the guy had his ear to the ground. He knew exactly what it was that people wanted and didn't want.

Starting point is 00:36:53 And I think that all these companies from Silicon Valley were having a hard time capturing that and then focusing on it and then providing it. And I think that that's totally what set him apart, which gave him the final edge in order to to break through. And I'm really happy you said that, because I think us in the West, we tend to look at China as, you know, one market. And I think every American that you speak to, they would say, you know, you shouldn't market yourself the same way in Lamont as you do in California or New Mexico. And it's exactly the same thing in China.

Starting point is 00:37:26 I mean, there's so many people and so many different preferences, so many different provinces. then it's really, really hard to figure out what works for that region. But you know that that region might be 200 million people. So the last thing that I had on Jack that I really kind of learned from just reading this book was that, and we've kind of already hit on this a little bit, but he's just relentless. He has a personality that is so focused and so persistent in what he's working on that he does not accept defeat or failure at all. He is just driving on.

Starting point is 00:38:00 He's going to drive through something. He will do it a million times before he gives up. And that's something that we see common. That's a common thread that we see with all these billionaires. So very, very obvious when reading this book, probably more so than other billionaires that we've seen just because of all the struggles and all the difficulties that he had to go through in order to get to where he's at.

Starting point is 00:38:20 So just wanted to highlight that one. What we'll do at this point, that's pretty much all the stuff that we have for this. We have an free executive summary that we're going to email out to everybody on our email list. So if you're not on that, make sure you sign up and then you'll get our chapter by chapter summary of this book. We really did like it. This was a fantastic read. If you're wanting to learn more about the Chinese market, you want to learn a little bit more about Jack Ma. This is definitely worth picking up. But what we're going to do right now is we're going to transition. We're going to go ahead and take a question from our audience. And so this week's question comes from Peter Bauman.

Starting point is 00:38:49 Hi, Stig and Preston. I love your podcast and it has really taught me a lot. So thank you both very much for taking the time to educate us all. My question today is about India. The middle class in India today is around 50 million people, or about 5% of the population. But that's expected to grow to 200 million by just 2020 and 475 million by 2030. This seems like a safe value investment opportunity to me. ETFs like EG shares India consumer ETF, Incco or INCO, or INCO, is up nearly 25% in just the last six months. What advice would you give to investors looking to tap into this market? And do you see any downside to what seems like, at least in macro terms, a sure thing?

Starting point is 00:39:39 All right, Peter, fantastic question. So I have a document that I read from Bridgewater Associates, which is Ray Dalio's company, that talks about some of the different countries that he sees as the most promising locations to invest moving into the future. And I believe, I read this report a while ago, but I believe the number one pick that he had in that report was India. And he, I mean, he has tons of metrics why that, why he holds that opinion. What we'll do is we'll find that report. We'll have a link to it in our show notes. So go to the investors podcast.com, check out this episode's link for the show notes. And we'll have that report, which I'm telling you, folks, this is so worth your time to

Starting point is 00:40:23 read this report that we're going to provide a link to. In addition to that, I think that India has a lot of promise moving forward into the next decade or two. I think that when you look at their culture, their work ethic, just in general, I agree with you. I think that there's huge opportunities there. Now, when you start talking about things from a value investing standpoint, I think that you look for things just the same way that you would look for them if they're here in the states. You have different reporting requirements. I tell you that that might be where some of the risks are as far as making sure you do the homework. Because here in the States, in the United States, you've got GAAP accounting, which is, in my opinion, a very good method for measuring and

Starting point is 00:41:04 the reporting requirements are very stringent here in the United States compared to other parts in the world. So I tell you, there might be some risks there where you might find something that seems like a deep value kind of pick that might not necessarily be following all the rigor that you necessarily have from an accounting standpoint here in the United States. So I'd tell you that that might be an area that you might want to look. I will say this is another risk. Right now, today, when you're looking at India, it is a small market relative to some of the other players. And who I'm referencing is the U.S., Japan, China, Europe. Those are huge markets with huge sums of capital that have enormous amounts of credit in those systems. And so when those systems,

Starting point is 00:41:49 And so when those systems contract, they are going to take smaller economies like India at this point in time with them. So I would tell you to be, even though it looks great today with all the different metrics, I think that those other economies that we've been talking a lot about on the show pose a lot of risks just because of the credit that I think is on the cusp of contracting either this year, next year, or sometime very soon. And I think that it could potentially take an economy like India with it. So that's where I would tell you your risks lie. I'm really curious to hear Stig's thoughts on this one, though. Yeah, so, Peter, I would definitely agree with you and Preston in a sense that I think that India is very promising. Now, I find a lot of red flags, though.

Starting point is 00:42:35 And this is really not just to be a grumpy old man because I have like four or five that I would like to go through. But it's all in the framework that India is a super interesting. to look at the moment. So first of all, is this a value pick? Again, it really depends on what you put into the word value, but if you think it's undervalue, it's probably not. Also, because as you were saying, India is expected to grow a lot.

Starting point is 00:43:01 It's actually something everyone knows, which is also why the ETF that you're specifically talking about is somewhat expensive. The P is above 30. So we need to have some growth to justify why we're buying it. Now, the reason why I'm hesitant to rely too much on growth, and I think one example is what Pabri has done with horseshead holdings. So this is a company that has big on sync, and there is this bet that something will soon happen, and that's something that will happen just to give you, I don't want to digress,

Starting point is 00:43:34 but there was a factory that needed to be open, and issued processes within working with sync, and they're very reliant on China, which used a lot of sync, because expect to grow a Now, so China has slowed down. They have problems at the factory, and they're not using as Marsing anymore. What does happen? Well, in this situation, the company went bankrupt for a lot of reasons, but it is a big risk that everything, you want something to happen. It's usually always priced into that price one way or the other. So you want the middle class to grow by X million dollars, which is likely going to happen. You want them to have more money. That's likely going to happen. And you also want them because they're consumers and the middle class to spend a lot of

Starting point is 00:44:19 money on these companies that are in this index, which is likely also going to happen. But also just want to say that even though we are not talking about a 90% chance of one of these things happening, which might be true, think about 90% times 90% times 90% and just finish that calculation. There is a good chance that there might be problems with them justifying the growth. Another thing is that you talked about that the ETF was up 25% six months. For me, it's not necessarily a good sign. And if anything, that means it's 25% more expensive because it has likely not increased as much as 25% in value over the same time.

Starting point is 00:45:00 So that's just something to be cautious about. It might just mean that it used to be overvalued at now. It's even more overvalued. And I also want to come up with another example. And this is that even though you can see the potential and the potential will happen, you might still not be making a lot of money. And I think one of the best examples is Warren Buffett examples of when he's looking at the car industry at the beginning of last century. But if you have bought stocks in car companies at that time, you actually lost a lot of money.

Starting point is 00:45:33 So I see a lot of red flags specifically about this ETF because I know that you've been. been looking at that is that there are no cash distribution. Sometimes there might be a lot of good reasons for this, but if it's a question about these companies not spending off any cash, it might not be super interesting, especially because it's in a merchant market. And also, when I look at the metrics just really briefly, like a priced book above seven and a price to earnings above 30, expense ratio close to 1%. It seems to me to be an expensive pick. I think you are definitely right about looking at India as a promising market. I don't know if I would go with this pick, and I would definitely be very cautious.

Starting point is 00:46:14 So I love how Stig laid out all the risks in today's current snapshot, and I think it's really important that people understand the timing of how we're describing this. So like today, we're not investing in India. It's expensive. It's, you know, 30 times your earnings, which is, that's really, expensive when you look at the interest rates over there too. So that's important to understand the snapshot of time of right now today in August of 2016 when we're recording this. But our long-term outlook is that there is huge opportunity here in the future. It might be a completely different

Starting point is 00:46:54 landscape in 12 months from now. We really want you to read this report, though. I'm telling you, this report that Ray Dalio pumped out is amazing on India. So fantastic question. you're looking in the right spot. Let me tell you, it's just, I think the timing's a little off right now in the summer of 2016. So, Peter, here's the deal. Two gifts for you for sending in your question. The first gift is a free signed copy of our book, the Warren Buffett accounting book. And you'll also get a free subscription to Stig's Intelligent Investor video course that he made, which is a paid course that we have set up on our website. If anyone's interested in seeing that go to our website. But Peter, you're going to get that completely for free for asking your question.

Starting point is 00:47:36 And so anybody else out there, if you want to ask a question, get it played on our show, go to Asktheinvestors.com. You can record your question and you'll get our two gifts for free. So thank you so much for participating in that and being a part of our community. All right, guys. That was all that we have for this episode. We'll see each other 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 00:48:06 Submit your questions or request a guest appearance to The Investors podcast by going to www.w.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. DIP!

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We Study Billionaires - The Investor’s Podcast Network - TIP 099 : Billionaire Jack Ma and Alibaba (Business Podcast)

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