We Study Billionaires - The Investor’s Podcast Network - TIP 105 : Mastermind Group 2016 3rd Quarter (Business Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 105 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 Preston Pish, and I'm your host for The Investors Podcast, and as usual, I'm accompanied by my co-host, Stig Broderson, out in Seoul, South Korea. And we have our mastermind assembled again for the third quarter of 2016. Today's date is the 12th of September. And we have Colin Yablonski with us. We have Hari Ramachandra, and we have Toby Carlisle, all of the members of our mastermind group. And today, we've got a whole range of things that we're going to be talking about. So I'm going to throw it over to Hari because Hari has a fantastic question that he wants to open this up to the group. Hey, Preston and Stake, glad to be here back in the mastermind. The question I had was regarding negative interest rates or low interest rate environment and what should a retail investor, a average Joe do?

Starting point is 00:01:23 What we hear today in the news is about the low interest rates that have never been so long and the economy being distorted. because of that. Price discovery mechanism has been disabled. And it's very hard to find any attractive investment. The cap rates on rental properties are not attractive. Stock market is overpriced. They say bonds are in a bubble. So what should a normal average citizen do in this environment?

Starting point is 00:01:54 And, Hari, I just want to compound and add to what you just said. I think another interesting piece to it is when you look at the earnings. expectations and the earnings forecast, those just continue to go down as the markets continue to hold these highs, which I think is just also very interesting dynamic. And I mean, that's been at play for more than a year now. The issue is that the market's overvalued, right? And that's not a new phenomenon. That's happened repeatedly since the Chulet Bowl. So we can look historically what other investors have done when the market's been very overvalued. And Warren Buffett, of course, has invested through many very high markets, very low markets.

Starting point is 00:02:34 He famously gave the game away in 1966 because the market was too high. And he was subsequently right. The market proceeded to fall pretty rapidly from that point, bottoming in 1974. But in that first incarnation of his investment lifetime, he was running what was then called the Buffett Partnerships. There were several of them. So workouts were what we sort of know today as special situations. There are companies where they were probably trading at a big discount to their tangible asset value.

Starting point is 00:03:07 And Buffett would buy a big enough position where he could get control of the board. He could force out the old managers who weren't really doing their job, realize the assets and then pay them out as cash, and then he'd make quite a big gain doing that. There are many categories of these sort of special situations. One that Buffett has written about in his Berkshire Hathaway letters as well is merger arbitrage or risk arbitrage is it sometimes known. You'll find these opportunities, and you can find websites where they just list out all of the mergers

Starting point is 00:03:38 going on at any given time. I'll show you what the bid price is. That's what the acquiring company is going to pay. And you can see the current market price. And then you can find the date that the transaction is expected to close. And you can determine a return, gross return from sort of the price that you pay in the market to the price that you'll take an out at, and then you can annualize that return. Buffett said that over the investments that he had undertaken over a very long period of time, he found that it did

Starting point is 00:04:08 something like 20% compound per annum, which is a gigantic return, really. And I can look around now, and I've got one that we have on in our discretionary strategies, is Humana, which is a healthcare stock being bought by Edna. It's a very big company. It's a $26 billion company at the moment. It's trading for about $175, $180, depending on where the market is at any given time. The bid is $225 approximately, and that bid is $125 in cash and 0.8375 Etna shares, which you can work out, you can calculate it's about another $100, so it's about $225. So Toby, my question would be, when you typically see these deals getting ready to take place, A, you typically see the market immediately react to the acquiring company and the share price, you know, immediately shoots up.

Starting point is 00:05:05 And then being able to know that that announcement was going to be made, in my opinion, is like next in the air impossible. Then you run into the risk of not knowing if the deal is actually going to close. Like I know Yahoo a couple years back, probably almost a decade now, but, you know, that deal just completely fell through. And I mean, there's tons of instances where the deal. falls through and then you see that acquires company stock price just get crushed. How do you think through some of those concerns and those risks? So that's a great question. If you look at the Humana transaction right now, so you can work out it, say it's $175, which is close to where it closed recently as we're recording this. The bids at $225. So you work out that there's about $50 in gain over $175

Starting point is 00:05:53 dollars that you have to put up, then you would want to look at what is Humana worth without the bid going on. And there are a few different ways that you can do that. Basically, you're trying to calculate an intrinsic value for Humana. And then you're saying, if I can buy this and my downside is sort of where the intrinsic value is, then this is a good trade because I can potentially lose whatever it might be. I can gain whatever it might be. So I really like Humana.

Starting point is 00:06:21 So we put Humana on at the start of the year when the tax inversions, the Treasury blocked the tax inversion. So you might remember that there were companies that were trying to move their headquarters overseas by being reverse acquired by an overseas company and that would get them into a more favorable tax jurisdiction. Treasury blocked those. So particularly it blocked the Allegan-FISA deal. I'm curious about this story because I had a chance to look at Humana Inc. and I also read some of the reports in terms of the problems with the merger because it has to be approved and there have been some noise about that. And it seems to me it's not as transparent, I guess, as I would like to have that.

Starting point is 00:07:05 And when I look even closer to the company and look at the difference between gap and non-gap earnings and seeing the potential for unlocking value and we go into that level of thinking, I'm just curious to hear that when you're saying, say special situation, is that like a one-time thing in terms of putting a somewhat significant portion of your capital into that stock? Or is it more like you think in general this approach is good? So that's why you want to diversify it into, say, 20 different stock picks. So there's a few things going on. This is risk arbitrage. And so risk arbitrage is not a true arbitrage. And a true arbitrage is exactly the same asset trading in two months. markets at different prices and you can trade to take the typically tiny little difference between the two. This is risk arbitrage where there's a future price that you expect and there's a

Starting point is 00:07:59 present price that you know as well but you're not certain of the future price. So you're taking some risk when you put this on and when I said before that Buffett booked at the returns to this over a long period of time. What he was saying was he was looking at the ones that didn't work and that got busted apart and the ones that did work and made a gain on an annualized basis. And then he found that the average of all of them was about 20%. So you have to have some expectation that this could fall apart. So the reason that we liked it, when it first blew apart, it blew apart in sympathy with all of the other merger arbitrage transactions

Starting point is 00:08:32 that were going on at the time. And so we looked at it and we said, well, this is not a tax inversion, which was crucial. If it's put together, it will only be the third biggest in the nation. So it's unlikely to be blocked for trust purposes. And we put a pretty big position on it, closed up, and then we took some of the position off subsequent to that, and this is probably what you've been reading, the DOJ, which is in control of antitrust type issues, which is

Starting point is 00:08:59 anti-competition issues, raise some questions about the transaction. So the reason why you can get such a big return in it right now is because there's some risk that it doesn't complete. Hey, Toby, do you have anything that you've written on your process or how you've thought about finding opportunities like this in the market, because if so, I'd like to put that in our show notes so that if people that are listening to this conversation want to kind of learn more about it, they can read more either on one of your sites or maybe something that you've written for Forbes or whatever. I don't have anything right now, but I'll prepare something for you.

Starting point is 00:09:34 Okay. Yeah, that'd be great. So whenever this launches, and if it's not there, immediately, maybe check back a week later into our show notes, and eventually Toby might write something for this that if you guys want some more information. We'll have a link forward in our show notes. Stiko, I can give you a little idea about the way that we think about it. So let's assume that we don't know the likelihood that a transaction like this completes. Let's say it's 50-50.

Starting point is 00:09:57 I personally think it's a little bit better than that, but I don't think it's much better than that. So let's say it's 50-50. So the first thing that we did was look at the downside. I like Humana. It's already, if you go to the Acquirers Multiple website, it's on the Acquire as multiple website. In the large cap, it's sort of 26 or 27 in the large cap is trading less than nine times acquire as multiple. It's a stock that I've held for a long time. I sold it 12 months ago when the bid was announced, but I'd held it for six years before then. And one of the things that I really like about them is through that

Starting point is 00:10:27 entire period, they were really cheap. They were in my screen for most of that period. And through at the entire period, they bought back a material amount of stock, which substantially bumped up up the price. So every year, even though it was cheap, it was up quite substantially. So at the end of that period, we got a bid from Edna. So as part of the bid, there's a standstill agreement on the buyback. So they've been unable to do a buyback for about 12 months. All of that cash is built up on the balance sheet. In addition to that, so it's a $26 billion market capitalization. They've got a few billion dollars in cash there. So the best case scenario on the downside is that it's blown apart. It trades down really far, and then they're able to buy back a gigantic

Starting point is 00:11:08 amount of stock at that level, and that will concentrate the remaining intrinsic value into fewer shares, which is a good thing if you're a holder. But more likely, I think, is that it probably does get taken out. And so at $175, your upside is $225-ish. Toby, I would really like to continue the discussion talking about the downside here, because depending on which metrics you're looking at, it's not necessarily an expensive company, as you're also saying, like, what's the downside? It's trading at 0.5 price sales right now. But I'm also... thinking, opportunity costs, say that the deals fall through, it might take years before that catalyst can really be activated in terms of the fundamentals. How do you look at that in your

Starting point is 00:11:50 portfolio? Is that a concern for you? That'd be great if that happened. It's a stock that I've held for a really long time and I really like management. So I'd be more than happy for this to get sold down a long way and then for them to go back to their old trick of just buying back stock. You know, in a material sum every year, they spend a lot of money on. So they have the free cash flow there. Typically, the way that you value insurers like Humana or Edna is by book value. So they're trading at a premium to book value, but they've got a very liquid balance sheet plus lots of free cash flow that they've used to buy stock consistently for a long period. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:16:55 and what impact and long-term impact that's going to have just across the entire insurance complex in the United States and for Europe and Japan and everywhere else where you're seeing these zero rate policies. So I remember distinctly when we were out there at the Berkshire shareholders meeting and Buffett was talking about how competitive the insurance industry is and how they practically have to underwrite at a loss in order to remain competitive. and then they basically take all the float or the money that they're sitting on and they reinvest that in order to be profitable. So as we look at that model and we see the fact that interest rates are at nothing, so now he's being forced and I'm speaking specifically of Buffett, but this could be applied to any insurance company. They're sitting there.

Starting point is 00:17:46 They're not making any money on the upfront underwriting, but now they're sitting on all this money and they've got to invest it and there's nowhere to go in order to get any kind of yield except for the equity market. What is the long-term impact of that? And more importantly, if interest rates go up, because let's say that they do have some things in fixed income bonds, okay? And interest rates actually do go in the opposite direction and start going up,

Starting point is 00:18:07 whenever that might happen. They're going to get obliterated on their float. Their float is now going to turn into a huge liability at that point. And when I look at the Berkshire model, and I see that, I mean, that's really the main source of operating revenues. And this is another point. Monish Pabri, and this goes back to what was it, our second interview with you, Hari, where we were talking about Monish Pabri, he was going to basically take the Warren Buffett insurance company model, create a holding company, and now he's

Starting point is 00:18:41 not doing it. And I can't help but think the reason that he changed course and he's not going down that path is because of this disaster that I just described in the universe of insurance. policies and insurance business. Not only that, there is one is interstate environment, but also in a recent discussion, he said after working with one insurance company, he did acquire one property and casualty insurance company. And after working in that industry for some time now, he has realized that that's not the way he wants to make money.

Starting point is 00:19:18 But for me, when I'm looking at that industry, that's not a place I really want to be sitting long term. Just because of, you know, where rates are at and the expectation that rates will go up someday. I mean, you can't keep these things negative. Or at least I don't think you can. That's my opinion. Maybe I'm completely missing the boat here.

Starting point is 00:19:36 But I think that these things are going to normalize. And when that happens, I just think it's going to be a very, very difficult time for some of these companies. Yeah, I think it's super tricky because to really analyze an insurance company, I know we're talking about this, like in general, but the balance sheets of insurance companies are very different. And they're also very complicated. That's another thing. But they're very different in terms of the concept of duration. And the reason why that is important is that what Preston talked about before in terms of bonds and the price of bonds, because you need to have some sort of matching.

Starting point is 00:20:13 I mean, this is an illustration thing, actually. It's not an investing thing. You need to be able to match the claims that you have and then the funds that you have. All of the other. Otherwise, the insurers can, you know, in the end, not be insured. So depending on which type of insurance company you have, you might not be exposed to the same type of interest rate risk as other insurance companies. So that was the first thing I want to add. Another thing was actually what Toby said before in terms of valuing insurance company, which traditionally is you're looking at the price to book because the way the accounting works

Starting point is 00:20:45 for insurance companies is that it's really a mock-to-mark kind of thing. So you need whenever something is priced at $100, it's on the books for $100. And that just really regardless of whether or not it's overvalued or undervalue, that's just the way it is. So that's another element. I don't think it's a bad metric to use necessarily, but I think one should really have respect for the current mind conditions in terms of using that metric. I know I briefly mentioned like price or sales before. That's not necessarily because it's the better metric because it also had a lot of drawbacks, especially because the sales or the premiums are not necessarily a good thing right now,

Starting point is 00:21:22 as Preston also talked about before, because if you're basically just losing money to underwriting insurance and you can't really invest that time of money, that's not something that you should look for. So I know I'm not coming up with like, oh, so this is how you should invest in insurance stocks because I don't necessarily think that's the best thing. But I just wanted to put that out there in terms of if you're reading literature or insurance,

Starting point is 00:21:47 That's just some of the factors that you have to be especially careful about in the current mild conditions that you might not be as relevant if you have a book that's 10 year old. I quickly want to throw out here just a number for the audience to hear. I'm looking at the Berkshire Hathaway Shareholders balance sheet and I'm looking at the cash and cash equivalence account. And it's showing $72.6 billion in cash and cash equivalence right now for Berkshire. Shire Hathaway. So when you think about that enormous sum, I mean, absolutely ginormous is the word I'm going to use. And you're looking at the yield that he's getting on that. It's totally insane here

Starting point is 00:22:31 in the fall, if you will, at 2016. For an average guy who's not a professional investor, just want to park it in a safe place. A lot of people used to say real estate, investing is a hedge against money printing, but looking at the asset prices now, especially if you come into Silicon Valley, it feels like it's in its own bubble. So this is my comment on real estate. Okay. And I really want to hear you guys shoot some holes through this. So I think that the concern with real estate is as interest rates go up, let's just say that this 35 year bond bubble actually starts to go the other way. If interest rates would start increasing, that's going to be just catastrophic for any type of tangible assets, call it real estate, because interest rates and

Starting point is 00:23:19 the price of assets, you know, move in the opposite direction. So I think that if you're dealing with real estate that's in the high-end market, meaning you only have a small group of people that can actually afford the price of call it a multimillion dollar house, I think real estate in that category is going to have a very difficult time if you see interest rates start actually going in the opposite direction, talking long term here. In the next three years and the next two years, I don't see this stuff playing out. But I'm talking long term. Like if you're going to buy a house for 30 years, I think that that's a concern that you have to have if you own it outright. If you're buying that and you're highly leveraged and you can continue to make the payment on

Starting point is 00:24:04 that, well, then you're going to do really well because you don't actually own the house. The bank does and they're going to get tore up as interest rates go up. So that's my two cents. So if you're going to buy commercial real estate or rental properties, let's say you're going to buy an apartment that has 10 units in it or whatever, and it's supporting a lower income family or individual person renting from you, I think that that's going to weather this a whole lot better simply because you're going to have a larger pool of potential people renting

Starting point is 00:24:36 or using that space, if that, I'll call it, catastrophic event where interest rates start going up occurs, I think you're going to be better protected for it. That's my two cents. I hear everybody saying that it's very difficult to find stuff to invest in, but I can find a lot of stuff to do at the moment. Crucially, a lot of stuff in that kind of workout type basket where you're not looking to hit a home run that sails out of the stadium. I can find lots of ways to hit singles. We might look to sell an option on something. We're looking for ways to sort of play the market against itself. So if there's a lot of fear in something that's cheap, we might sell an option, sell a put option in that, which for those who are not familiar, it's sort of

Starting point is 00:25:19 if you sell a put option in something, you've got a risk profile that looks like you're getting long the equity. So basically, you've underwritten the equity. So if you're a deep value investor and you're comfortable buying the stock, you should be comfortable selling an option in it. And the advantage of selling the option is that you have a set period of time before the option expires, and then over that period of time, you're basically saying, I agree to buy the stock at this price. And in the event that you don't have to take the stock, you've got the cash flow coming in, and then the liability drains away to the day of expiry. So that's one way of generating returns.

Starting point is 00:25:55 It requires some sophistication, though. So Toby, I'm really curious about a specific point to this. What kind of term are you looking for on that option? Whatever generates the best annualized return is the way that I look at it. So I don't really mind if it's a quarter out or if it's three quarters out or if it's 18 months out. But typically what happens is I'm looking for stocks that are in some sort of crisis going on. So in that crisis, the stock goes down and the put option price swells up. It becomes quite volatile.

Starting point is 00:26:27 So when you get those two things working together, you get a rich, option on a cheap stock. So I'd be happy to buy the stock at that level and then the option just gives me another buffer again. And the chances are that it turns around and you're getting paid. So typically it's sort of, I'm looking three, six, nine months out, whichever one gets me the best annualized return. And what kind of analyzed returns are you looking for right now, Toby? So I've got a threshold that I use. I don't want to say that this is me going out and getting these kind of returns. But in terms of annualized returns, like I would want 35 to 40 percent.

Starting point is 00:27:00 It depends a little bit on the underlying. If I really want to own the company, if I want to own the shares and I'm just kind of doing it as a proxy, as a way to get into a little bit cheaper, I might look at about 25%. If it's something that I'm sort of more interested in an option trade, I want it to be sort of 35, 40% plus. Wow, super interesting. I'm really happy you had a chance to talk about both options and special situations, which is something that we carried a few times but not really have gone into depth with. So for the next thing here on the agenda, let's shift gears here a bit. And Colin, I know that you have an interesting question. Yeah, I mean, it was along the same lines as Hari's question.

Starting point is 00:27:41 It was more to do with as a retail investor, somebody who likes dollar cost averaging as a strategy, is now a good time to implement that strategy. Yeah, so I like this question. And I think it really applies to a very large amount of the listeners on the show. I'll be honest with you, Colin, I'm frustrated. I'm very frustrated. I'm looking at the Dow Jones Industrial Average over the last five years. Since the time Stig and I started this show back in the end of 2014,

Starting point is 00:28:12 do you know what's happened on the Dow Jones between that period of time to where we're at right now? And I'll just answer the question. It hasn't moved at all. From a price point, it literally has not budged maybe not even a percent since the time we've been doing this. the show. And so if you own the index, let's say you own the S&P 500 index, your money to be made was simply on the dividend alone during that period of time. So I don't know what the average dividend is at these prices, but I would guess it's what? A percent, maybe less? I think it's about two. Is it two percent? Okay, so it's higher. I think it's about two at the moment. It's on the S&P

Starting point is 00:28:51 500. I'm not entirely sure on the doubt, but it's two on the S&P. Okay, okay. So it's a little higher than I thought. So that's been the gain. And so I'm going to kind of bash the financial news a little bit. I can't understand how people can go on on a daily basis and just continue to really kind of provide good long-term guidance. That's really kind of a value-based approach where you buy and you hold and really kind of change too much of their line of thinking because we really haven't had any major change in the entire two years that we've been doing the show. So my guidance would really kind of tell people to continue to be very conservative, protect your downside risk. I think there's so much downside risk. And I'm talking from the big picture here. A lot of the stuff that Toby's talking is much more micro-focused and you really, really have

Starting point is 00:29:45 to know what you're doing if you're implementing some of those strategies. And I think for a lot of people that, A, don't have the time to be doing that or they don't know somebody that they trust enough to, you know, give their money to in order to allow them to be doing some of those things. And so if you're just trying to implement a good buy and hold strategy, I would tell you that you need to be very careful because you do have billionaires, like George Soros, who makes all of his money on macro plays, and he is shorting the S&P 500 right now. And you've got Warren Buffett sitting on $72 billion of cash. So, I mean, there's guys out there that are doing some very defensive things in my opinion. Let's take a quick break

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Starting point is 00:33:59 before. You need to connect those two. You can really be saying, oh, so I invested like two years and I actually collected the dividend. So that was a good investment. The result might have been better than, you know, a global meltdown, but it's not necessarily a good investment if you consider the risk that you incurred at the same time. So that's just one thing I would like to add into that. And that's actually regardless of whether or not, the SPFunders, but rise 5% tomorrow. It's still a risk-reward kind of thing as it is with everything in investing. Just to piggyback on your question and call in and to ask you a new question, actually,

Starting point is 00:34:32 you talked about the U.S. And I know that you're a Canadian, but I would also assume that it must be some sort of home bias. At least that's something we know from the financial literature that we would like to invest in our home country. Have you considered looking at equities outside of North America? No, I focus primarily on Canada and the U.S. It's challenging, though, right now,

Starting point is 00:34:57 because the Canadian dollar has taken such a huge hit relative to the American dollar. So I was looking at other opportunities for things like Canadian companies that are traded on the TSX, but do the majority of their business in the United States, so that you would get a premium on all of the earnings that they had. But really right now, my majority of my portfolio is in cash right now just because of what I've been seeing in the market.

Starting point is 00:35:23 I'm more bearish than any of you guys. That's what I'm going to come out and say. Just to preface what I'm going to say. I would say that I was very, very bearish in 2012, too, and I've sort of been very bearish through that whole period. The thing that you're doing with dollar cost averaging is you're saying, I don't know what the market's going to do. Don't know if it's going to be back to where it was in 2000 on a Schiller-Pe basis, which we're doing. was 44 times. It's been a while since I've done the calculation, but I think that gets us to like 3,000, which is insanity. But, you know, there are other markets around the world. Japan got

Starting point is 00:35:56 to 100 times. China got to 100 times. There's a risk that it goes up a lot too. And this is just one of the things that you have to contend with as an investor. It's not an attractive opportunity set. There's nothing that's really good to stick your money into. Cash doesn't work. Property doesn't really work because real estate's been, there's no yield in real estate. there's no yield on the market either. At 2%, that's historically pretty low. That's not too bad over the last five years, but companies are paying up more of their earnings

Starting point is 00:36:24 to sustain that level of dividends. The thing about the dollar cost averaging is that the idea of it is that when the market is high, you're still following your plan and you're putting the money in and you're saving a little bit into the market. When the market is low, the same sort of dollar amount buys you more of the market. So over a lifetime of doing it, it will put you ahead of somebody who's not in the market. So having said that, I think I've probably called down the market gods to send it crashing down

Starting point is 00:36:52 just after everybody gets fully invested. I'm not proposing full investment. I'm just saying if you've got a plan, you should stick to it. So I can tell you all the reasons why this market's really expensive and why this ball market's really long in the tooth. And I can see that earnings are falling over. And I think that down is probably more likely. I'm not saying that it's not.

Starting point is 00:37:12 I just think that I would have said something like this in 2012, and I've been wrong for a really long period of time. Yeah, but Toby, that's back in 2012 before they announced the QE3 and the epic levels that that was going to go to. So whenever that came out and you saw that they were going to buy it in even more unprecedented manner with quantitative easing three, I'm sure you probably saw that as, hey, that this thing's going to go for another pop, or it's going to even go higher. Is that how you saw it back then? I'm just curious. No, I'm sort of a subscriber to the, I don't actually think it has much direct impact. I think that those Fed interventions sort of, to the extent that they do anything, they're sort of more psychological. I don't think they'd directly pump up the market.

Starting point is 00:37:56 That said, who would have thought they would have done QE3? I mean, what's to stop them doing QE7, 8, 9, you know, Rocky 6, Rocky Alboa? You know, I think it could keep on and on. No, I think you got a great point. No one's signaling that in the U.S. at least right now. But, you know, I had a chart that I posted on Twitter where as soon as the U.S. Fed winded down their QE3 back in, I don't want to say it was November of 2014, you saw an immediate takeover from the ECB over in Europe where they basically just picked up right where

Starting point is 00:38:32 the U.S. Fed left off. So, I mean, this is definitely sequenced. These central banks are sequencing this. I mean, I've got charts that I've posted on Facebook and other places that totally show that as a collective balance sheet growth from the Fed. It can get weirder than it already is. Einhorn has this great quote where he's talking about an overvalued company. He says, company trading it two times its intrinsic value is silly. The company trading it four times intrinsic value is not twice as silly.

Starting point is 00:39:06 It's still just silly. I kind of think about that sometimes. Like, there's some unprecedented stuff going on. What's to stop more unprecedented stuff occurring? Yeah, I think it's interesting because we had Robert Paul on the podcast. I think it was episode 94. And he said something similar because we've been talking about QE insights before. And I guess, especially if you live in the America, it's east to say, well, you know, we have QE

Starting point is 00:39:30 and then we have a strong stock market. They're probably, I mean, they're probably correlated one way or the other. But then you have someone like. customer or someone like Ropold is saying, well, we actually seen abroad that that's not necessarily what's going to happen. And we can have like tons of other factors that are really the reason why you see that kind of stock market. So I've gone to Doug Short's website, Dshort.com is a quick way to get there if people want to go. And he puts up this chart from time to time that shows the timing of the QE and the growth in the stock market and basically shows how correlated.

Starting point is 00:40:04 And I know that that's a horrible word to use because you can't actually prove whether it is or isn't. But the way that the charts look, it looks like it's correlated. And so for me, I've been, I saw this chart. I was like, oh, my God, this is like a 1.0 correlation when you look at these two events or the QE with the stock market. And so then Stig said, we asked Raoul and he flat out, it's like, no, I don't think that there's a correlation there. And I was shocked when he said that. And now you're saying that you don't think that there's a correlation there. I'm really curious.

Starting point is 00:40:33 If there's somebody out there that has a hardcore statistics background that would like to try to take on this problem, I'm thinking through like the gymnastics of how it happens. So the Fed swapping, they're basically buying bonds. They're replacing cash into the economy, taking bonds that have a coupon to them out of the market. And then that cash has to go somewhere. It has to be reinvested into something. And so where does it go? And I mean, in my opinion, it goes to the highest yielding asset class. at that point in time as long as you're not in some type of contraction situation, which was the market.

Starting point is 00:41:06 So maybe I'm oversimplifying that. Maybe I'm not fully understanding it. I would love for somebody to send me something. We will put it into the show notes of this episode and try to provide as much information to the audience on this. And I also want to put up the chart from Doug Short's site to show people this idea of how correlated everything looks when you combine the two charts. Man, I'd love for somebody to school me up on why that idea is wrong. I want to make two points here. Number one, the first is a question I have is, isn't it in the best interest of United States government that the interest rates are low because they have so much of debt so that their interest payments stay slow?

Starting point is 00:41:47 In fact, there are statistics which show that if interest rate goes up every percent, the debt payment kind of balloons. So that is number one. Number two, to your question that what would happen if there is more QE announced or if the interest rates remain low for a longer time, my answer to that is it will erode the confidence on dollar among people, among investors. And currency like gold might then catch up at that part of time. Yeah, you're exactly right, Ari. Everything that you just said is true.

Starting point is 00:42:21 Your comment reminded me of a book that I read that Stig and I never did on the show. And this one was recommended to me by somebody in the audience. I didn't think it was a real good fit just because it was kind of a difficult subject to really tackle. But the name of the book is this time is different. And I guess Bill Gross, billionaire Bill Gross, who's like the ultimate bond investor ever, he, how'd you like that narration I gave for his description? But he, I guess, swears by this book. This time is different. And what this book does is it goes back into like the last 500 years of financial history. And they show that what we're experiencing with these large debt cycles, these large credit cycles, these 75 to 100 year de-levergings, are very, very common

Starting point is 00:43:10 and that they've happened in just countless times throughout history all around the world. And what this book does is it profiles the steps that these countries go through and how all this kind of stuff plays out. Now, one of the things that it talks about in the book, is how we've never seen one of these large credit cycles take place on such a global scale like we're seeing right now. And that really has to do with the fact that the dollar is polarizing all these global markets. So that's a book that I'm going to throw out to the audience to definitely get your hands on if you want to dig into this idea more and maybe understand some of the stuff that Hari was talking about and maybe how all this fits together. The name

Starting point is 00:43:49 of the book is, this time is different, highly endorsed by billionaire Bill Gross. I think it's fun just for anyone out there. If you go back and listen to all our episodes, sometimes you hear of saying, yeah, so that's the causality between quantitative easing on the stock market, or that's how gold and dollar work together, whatever it is. And we just haven't speaking with so many people and have a different opinion.

Starting point is 00:44:11 We have studied so many of the subjects ourselves that sometimes we're just uncertain, like we just simply don't know. And for what it's worth, I hope this comes out at something that's positive, of something that you would appreciate, but really something that also really should signal to everyone that you need to be able to do your own analysis. It's really not enough to listen to the investors podcast or what's Bloomberg. It's really a question about what is your analysis saying. And for what it's worth, I really hope that that's a takeaway from this discussion and from all the discussions we have in the mastermind group. All right, guys, that's all we got

Starting point is 00:44:50 for you this week with our mastermind discussion for the third quarter. I just want to give a quick highlight to all of our members and just thank them for taking precious time out of your schedule to talk with us every quarter. If people are wanting to know more about some of the members of our mastermind, so Colin Yablonsky, he's a master at search engine optimization marketing, you name and anything in that realm. He has a company called Inbound Interactive. We'll have a link in our show notes to that. Also, Toby Carlisle has a website called the Acquires Multiple, which is all about his deep value philosophy. He's also written a book called Deep Value, which is one of my personal favorites. And I'm not saying that because he's on the call. I truly mean it. That's probably

Starting point is 00:45:30 one of my top investing books I've ever read. And I see Stig on the call here nodding his head because he completely agrees with me. So go to the Acquiresmultable.com or you can go to our show notes and click on the link there. And then Hari Ramachandra, he is out of Silicon Valley. He's an executive at LinkedIn, and he has a website called Bits Business, where he's writing all about different business ideas and things that are happening out in the Valley. So we highly encourage you to visit his website as well. So, guys, thank you so much for talking with us. I think this was a really fun conversation. We hit a lot of really amazing topics. All there's left to say is that we'll be back in three months time with a new mastermind discussion, and we'll be back next week with a new

Starting point is 00:46:06 episode. 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. www.theinvestorspodcast.com. Submit your questions or request a guest appearance to the investors podcast by going to www. www.org. 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.

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We Study Billionaires - The Investor’s Podcast Network - TIP 105 : Mastermind Group 2016 3rd Quarter (Business Podcast)

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