We Study Billionaires - The Investor’s Podcast Network - TIP 110 : Jesse Felder and the Current Market Conditions

Starting point is 00:00:00 We study billionaires, and this is episode 110 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll take complex things and make them seem insanely simple. They make your boring drive-to-work feel exhilarating. They give you actionable investing strategies. Your host, Preston Pish, and Stig Broderson. Hey, how's everybody doing out there? This is Preston Pish, and I'm your host for The Investors Podcast.

Starting point is 00:00:35 And as usual, I'm accompanied by my co-host, Stig Broderson, out in Seoul, South Korea. And today we brought back one of our favorite guests, and that is Jesse Felder. So if you didn't hear the first episode that we did with Jesse, it was probably what, Stig? Yes, that was back at Episode 90, and there was Jesse Felder's macro and micro views on the market we discussed back then. Jesse comes with just a ridiculous amount of experience here. He's been managing money for over 20 years. He began his professional career back at Bear Stearns before they became a curse word in the investing community. Jesse's smiling at me. But he co-founded his own multi-billion dollar hedge fund firm out in Santa Monica, California. Since 2005, he's been running the Felder Report and he's been writing for the Wall Street Journal, Barron's the Huffington Post. And as you guys will see real quickly here in our discussion, you will see how insanely intelligent Jesse Felder is. So Jesse, thank you for coming back on the show. I know our audience is going to love hearing another conversation with you. What an awesome introduction. Wow, I'm honored to be back. I had a great time with you guys last time. So thanks for

Starting point is 00:01:43 having to be back on. Absolutely. So Jesse, I wanted to kind of kick off the conversation with a quick little wrap up of what's happened and what hasn't happened since the last time we talked. Because since we've been doing this show for the last two years, the equity market, the U.S. stock market has literally gone nowhere. It's been at the same level for literally the last two years. So, since we talked with you at the end of May, and right now just so people know, it's the 20th of October when we're recording this, still nothing. I mean, it's just been flatlined on the U.S. equity market. So although it might appear on the surface like nothing has changed, what, in your opinion, has changed since that period of time?

Starting point is 00:02:25 Josh, that's a great question. You know, it just seems like the U.S. economy and stock market is like it doesn't change on a dime. And I guess we all kind of, you know, especially those of us who watch the markets on a daily basis, kind of expecting something to happen, you know, all the time. And it just doesn't work that way. You know, I try and talk to my wife about the market sometimes and when she'll actually listen to me. And I try and explain that we're like a huge ocean liner. And whatever the market's doing, a lot of it has to do with momentum and what's gone on over the. the previous months. And so it just doesn't change on a diamond as much as we'd like to,

Starting point is 00:03:00 you know, have things happen on a daily basis, weekly basis. It just doesn't work that way. So not much has happened on the surface of the stock market. And not much has happened underneath as well. I mean, earnings have continued to just be poor. It doesn't look like from what I've looked at in terms of third quarter earnings so far that there's really much in terms of signs of an earnings rebound out there. And I think that's what the bulls really need to have. happen to get another leg higher in the stock market is they need some fundamental strength to start kicking in. If it doesn't, you know, this quarter and, you know, in the third quarter reports and what's going on in the fourth quarter, the markets, you know, have kind of priced

Starting point is 00:03:38 in an earnings rebound already. If it doesn't happen, it's going to be problematic, I think. Because since the last time we talked, earnings have gone not down by a lot, but they've gone down a little bit in aggregate, if you're talking the S&P 500. They've gone down a little bit, And you're still seeing the prices hold, which means that the multiple is getting a little bit higher from where we were the last time we talked that people were willing to pay. So just an interesting dynamic. I'm real curious because Brexit happened between the last time that we talked. I'm kind of curious to hear your thoughts on some of the Brexit stuff and what that means for Europe. Yeah.

Starting point is 00:04:12 You know, I think that's another example of people freaked out after the Brexit vote. And that's another really slow-moving dynamic where, you know, I believe that. The European Union is on borrowed time. And it's an experiment that will eventually unravel, but it's going to take a lot of time. There's some referendums, you know, and most notably in Italy, you know, coming up. That'll be interesting to see how that happens. But they're not going to let the thing kind of unravel without a fight. So do you see Brexit as the catalyst that the market might have been waiting for to find this intrinsic value?

Starting point is 00:04:46 Or as you also suggest, since it's so slow-paced, that might not influence the market. This is all. You know, that's a really good question. I've been expecting a bear market for two years. I don't know if I told your audience with a story about growing my beard last time I was on the podcast. But that was mid-September of 2014. I said, forget it. I'm not shaving again until we get a 10% correction.

Starting point is 00:05:11 And then the market over the next two weeks went down 9.8% and didn't quite, you know, hit my hurdle. So then it took me, you know, 11 months had grown my beard out before we finally got the 10%. the correction, but really what I'm looking for is a reset of, you know, overvalued asset prices. And the catalyst for that really is totally unpredictable. It could be the Italian referendum and problems in Italy. It could be, you know, Deutsche Bank issue. It could be any variety of things. Now, Jesse, I've read some of your article since the last time we've chatted. And you're one of these guys. It really doesn't buy into the gap between what the fixed income markets offering and what the equity market's offering.

Starting point is 00:05:51 So the argument goes like this for people that aren't familiar with what I'm referencing here. So on the fixed income side with the 10-year treasury, where is it at right now? 2%. I haven't looked at it for a little bit. Just under, yeah. Just around 2%. If the 10-year treasury is at 2%, and the S&P 500's offering you, let's call it 3.7 to 4%,

Starting point is 00:06:10 that 2% gap is the reason why you have stock market bulls saying that it has more to run because the higher it goes, it's going to bring those. two yields to parity. Jesse, you've been arguing the opposite of that, and I'm kind of on the same fence as you, but I'm going to try to take the other side of this just to play devil's advocate, and I want to kind of hear your logic behind why you don't think that that argument stands up. You know, there's actually been some interesting discussion about this. You know, the mistake that people make when they argue that low interest rates should justify higher equity valuations essentially comes back to a discounted cash flow model. And they say, okay, we're

Starting point is 00:06:51 going to lower the discount rate, lower the risk-free rate of return. And so that means these asset valuations should be higher. The problem is, you know, a discounted cash flow model also assumes a growth rate for earnings. And when you lower the risk-free rate, your discount rate, but don't lower the growth rate, you know, that's either disingenuous or it's, you know, totally naive because when you look at the history of earnings, they're right in line with, you know, interest rates and inflation. You know, basically earnings grow at the same rate of inflation. So if you want to lower your discount rate to 2%, and then keep an earnings growth rate of 3, 4, 5%, you're going to have, you know, a discounted cash flow model that's

Starting point is 00:07:34 justifying asset valuations that are insane. Yeah, no, and I totally agree with you. Now, I should know this figure, and I don't. I'm hoping one of you, to know this. But what would be, if you were going to say the average between that spread, between the fixed income yield and the yield that you would expect getting in the equity market as far as like the S&P 500 as a whole, what's the gap usually at? What percent? Four percent? Yeah, I think what you're trying to get out is, okay, we have the risk-free rate at two percent. Obviously, a dividend yield is not risk-free. So we need to demand a greater rate of return from stocks. Dividend yield is not the best predictor of total return from stocks going forward.

Starting point is 00:08:17 The best predictor that I've found for, you know, long-term returns from stocks is the Warren Buffett yardstick, the total value of the stock market to the total value of the economy. And when you look at that, it tells you stocks are expensive or cheap. And the reason that's valuable is when you actually flip that upside down, it basically shows you, it correlates, you know, like 90% with forward 10-year returns on the stock market. So when that measure's been really low, you get 10, 12, 15% forward 10-year returns. And stocks, awesome. When that measures really high, you know, like it was in late 90s, 2000, you get close to 0%

Starting point is 00:08:54 or even less negative rate of return over 10 years. Right now that measure shows, you know, zero to 1% over the next 10 years. That's what you should compare to 2% risk-free or 0% from stocks. I think that's a fantastic point. So Doug Short, who I'm sure you probably know who that is, Jesse. You've seen some of Doug's charts out there. Your great website. Oh, fantastic website.

Starting point is 00:09:19 So we'll have a link in our show notes because the chart that you're talking about, Doug updates about once a month. He'll update that Warren Buffett valuation metric. And we'll have a link to that chart so people can pull it up if they're listening to this and they're kind of curious to learn more about that. But I want to say that it's like at a standard deviation of two, right now based off of that warm Buffett metric somewhere around that ballpark, which pretty interesting.

Starting point is 00:09:44 I mean, it essentially lines up right with, you know, where we were in November 1999. Yeah. So there are four more months of the dot-com bubble that we saw higher valuations in the history of our stock market. The rest of the time, valuation has been lower than they are today. Yeah. And one of the things, and I would really encourage people to go to Dr. Short's site because one of things that he does really well is that he's not only including the one factor that Jess

Starting point is 00:10:09 is talking about here, Warren Buffett's metric here. He's including a ton of different factors. And you can actually look at all the metrics and they all show the same picture. Now, some might be one standard deviation above or two standard deviations above, but it's really across the board. You'll see a huge overvaluation. And just a quick note in terms of what Jesse also said about dividends, because it is true that it's really difficult to rely on that because that's how the picture might look like right now that you'll get just short of 2% yield in dividend. But also just remember the whole nature about dividends compared to the fixed income bond from the government is just less safe. And we can only just go back to the last financial

Starting point is 00:10:49 crisis and see what happened to dividends whenever we saw the problems in the financial market. So I would definitely not have people align those 2% from the treasury yield and then approximately 2% from the dividend yield and say, and then we have an upside. I think that's very dangerous approach. Absolutely. And I would recommend people just pull up a chart of, you know, what TLT, long bond ETF did during the financial crisis. That's how bonds, you know, typically perform during a risk off phase. And a lot of people, instead of buying bonds, are reaching for yield in real estate investment trust. So just pull up something like VNQ, the Vanguard real estate investment trust, ETF, and see what that did, you know, during the financial crisis. And you can see the

Starting point is 00:11:30 difference between how bonds performed and real estate investment. Real estate investment trust went down something like 70% in just a few months' time during the financial crisis. Bonds went up 50. So, you know, these people that are looking for bond alternatives, these are not bonds. Yeah. One final thing that I want to ask while we were talking about Doug Short, one of the charts that I find really interesting on his site is this New York Stock Exchange leverage chart that he throws up a lot of the time where he shows that level. That level Leverage contracting and how that's totally correlated to the stock market performance. And recently, you've seen that leverage, that New York Stock Exchange leverage, really start

Starting point is 00:12:11 to contract in a major way. I want to say it was like a 30 or 40 percent pullback. And for anybody interested in seeing this chart, what's kind of neat about the chart is it almost seems like it's a leading indicator as to what might be happening in the near-term future of the stock market. I think are you referring to margin debt? Yes. And New York Stock Exchange margin debt.

Starting point is 00:12:30 Yeah, that's a really interesting measure because it does just show, you know, I mean, I think it's sort of hilarious to see people talking about this week or maybe in the last couple of weeks all the cash on the sidelines when you actually look at, okay, some investment managers are saying that they have high cash levels, but actually when you look at the numbers, you look at individual investors, you know, we can see through the Fed that they have no money at money market funds right now. They have no cash on the sidelines. you look at the margin debt.

Starting point is 00:13:00 And it's huge debit balances. There are no credit balances. And it's much, much bigger than it's ever been. So one of the things I do with margin debt is I like to, just like Buffett does with stocks to the GDP, you can look at margin debt to GDP. And it's interesting to see financial leverage, you know, leverage speculation as a percentage of the economy. That measure has a pretty high 30-month correlation to future stock market returns.

Starting point is 00:13:27 And so when margin debt's really, really high, the next two and a half years in stocks has usually been pretty bad. When there's been a lot of cash on the sidelines, you know, measured by this number, the next two and a half years in stocks have been really, really good. So there is some utility to that for sure. And I'll tell you, the number, when you see this chart, which we're going to put it up in our show notes for people, I'm telling you, go to our show notes and check out this chart. The thing's going to blow your mind when you see how large this margin debt had grown to. and it kind of peaked, I want to say maybe the beginning of the summer, you see it peak out at a very high number, and you've seen it pull back about 30%. When you've seen this in the past, you've seen some major corrections in the stock market. So we're going to put that chart up for people to view and you can arrive at whatever conclusion you want of your own, but it's a very interesting look. Yeah, and I just want to point it out because a lot of people try and say margin debt is useless and it's correlated with stock market, but there's no causation there. I think to me it shows. potential supply and demand in the markets, right? When there's a bunch of buying power on the sidelines, you know, that's a bunch of potential demand to come into the stocks and push prices

Starting point is 00:14:37 higher. When people are fully leveraged, there's very little potential demand to push prices higher and a lot of potential supply that could come in if they're forced to pay off those loans. So to me, it's a clear measure of potential supply and demand in the stock market. Jesse, I would like to touch on one of the things you talked about before in terms of cash. And you talked about how some fund managers are saying that they actually have high cash balances. But it also seems like cash is a very unpopular asset class right now. Actually, there are some investors that seem to prefer negative yield bonds rather than owning cash, which might seem a bit odd. So could you explain why you can also observe this? And in continuation,

Starting point is 00:15:19 explain why Billing and Warren Buffett rather looks at cash as an option of every asset class with no strike price. You know, one of the questions I like to ask myself on a regular basis is, what's the most hated stock in the market? Because that's where there's going to be potential opportunity. What's the most hated asset class on the planet? Because that's where there's great opportunity. This time last year was gold.

Starting point is 00:15:41 You know, it's hard to imagine gold getting more hated than it was this time last year. And I'm no gold bug. I've almost never owned gold stocks in my career until this time last year. And that was just because they're so hated. I think cash is, you know, it's interesting today. There was a good interview with Howard Marks on Bloomberg recently talking about this. And him saying, you know, investors are talking like they're concerned about the markets of things, but they're all acting bullish.

Starting point is 00:16:08 Nobody's willing to raise cash. And even the moderator, you know, asked them and said, well, are you raising cash? Said, no, I can't. You know, people are paying me to manage their money. So even if I think we should raise cash, they're paying me to invest it. So, you know, I don't think there's ever been a. time in my career, certainly, but even along before that, where cash has been more hated than it is today. People are willing to put their money into negative yielding bonds rather than, you know,

Starting point is 00:16:36 keep it in cash. And not just, you know, negative yielding bonds, many, many asset classes you put money into today. You're locking in a negative return going forward. And people who would rather do that than own cash. And today, in terms of the optionality of cash, it's never cost you less to keep your money in cash, you know, because the alternatives are nothing. So, you know, when Buffett talks about the optionality of cash, he's talking about, you know, if I have cash, that's basically a call option on any asset class. So if bonds sell off and give me an opportunity by bonds at a better price, you know, cash allows me to take advantage of that opportunity for what, you know, real estate, stocks, whatever it might be, you know, cash is giving me that free call option and being able to

Starting point is 00:17:21 take advantage of an opportunity that might arise for the next few months. And Buffett's literally putting his money where his mouth is, because the last time I think I saw his last quarter, he was sitting on 70 billion of cash. Is that the right number, stick? 70 billion? Yeah, just above, yeah. I mean, that's insane. All these smart money guy, Mohamed Al-Aryan, came out today.

Starting point is 00:17:42 It said, I have the biggest cash in my personal money. Jeff Gunlack a couple months ago. Yeah. In terms of their personal money, they have more of it in cash than they've ever had in their career. Yeah, and I saw an interesting thing on Jeff just the other day where I guess one of his major indicators was tripped for a recessionary indicator with the unemployment rate, basically bottoming out for a 12-month period of time, which I found a very interesting. The one question I wanted to ask you, Jesse, really had to do with gold. So my opinion on gold at this point

Starting point is 00:18:14 is that once credit starts to contract, okay, and whenever that happens, we don't know, but when that event starts to really take place and it starts to unravel and basically all these positions are getting called and people have to settle those positions and have to settle their debts. They have to do that in cash. They can't do it in some other medium of exchange. And so my concern with owning gold at this point in time is that I think that the price is going to be penalized as for all these people that are holding. that position as this contraction takes place, they're going to have to sell out of that.

Starting point is 00:18:55 This is going to be forced selling out of that position in order to come up with cash in order to settle their obligations before you're going to see the rebound. I think that gold's going to just kill it, but I think it's going to kill it after the contraction takes place, at least in terms of a comparison to the U.S. dollar. That's really what we're talking about is, you know, golden dollar terms is what matters to us. Yeah, you know, I think that the idea of a massive dollar short out there is a very interesting idea that I, you know, there's some smart people talking about that. There have been a lot of Chinese companies, you know, that have borrowed in dollar terms

Starting point is 00:19:32 and, you know, banks, Japanese banks and etc. That have, you know, lent a lot of money in dollar terms. So there's this whole kind of shadow currency and lending market that's not stuff that the Fed really has control over, but it's. really kind of part of the euro dollar banking system. I think that's some fascinating stuff to think about. I do think there is a massive dollar short out there, people who've borrowed a lot of money in dollars and maybe forced to pay it back in certain circumstances. I think the gold thesis is valid regardless of what the dollar does. I think gold and the dollar can both go up

Starting point is 00:20:08 at the same time. I think real assets are a very interesting idea in an era when we've seen money printing like we've never seen before in world history. So, you know, when countries are trying to devalue their currencies and inflate their way out of these massive debt creations that have happened, you know, where do you put your money? You know, like Ray Dalio says, if you don't own gold, you don't understand history or you don't understand economics. And there's been times in history where, you know, gold is the only thing that can save a diversified portfolio of how different asset classes. So, you know, I think there's a, there's place for it all the time, but it's especially compelling today.

Starting point is 00:20:47 Yeah, and let's dwell on that for a minute because that was actually one of the things that we're also going to discuss in this episode because I know that you have been talking about real assets and you talked about gold. We also have one miles to think of something like oil or timber for that matter. So often we have done this as investors to diversify ourselves away from typically stocks and bonds. And with the yields that we're seeing right now, it might make a lot of sense. But why do you think, especially today, that real assets might be a good idea for the private investors portfolio as well?

Starting point is 00:21:21 That's a great, great question. I think, you know, MEP Faber has done some interesting work on this just generally when you add real assets to, I mean, talk about studying billionaires. He's done some great work studying some of the best asset allocators on the planet. And that's the one thing they all have in common is they don't just run a 60-40 portfolio or anything close to that. They own stocks, they own bonds, and they own a big chunk of real assets. And so we talk about real assets. People say, what are you talking about? We're talking about real estate.

Starting point is 00:21:50 We're talking about commodities. Sometimes you can separate gold out of commodities and then things like, you know, Treasury, inflation protected securities. So things that would do well in an inflationary environment. So I think there's a place for real assets in every diversified portfolio just to begin with. But especially today, when you look at real assets, assets, the valuation of real assets compared to financial assets, real assets are cheaper than they have ever been in history compared to financial assets. Now, part of that is because financial

Starting point is 00:22:23 assets are very highly priced. Part of that is because commodities have just gotten crushed in recent years. And I think, you know, the most compelling case within real assets is gold, because when I look around the world and go, in terms of currencies, do I want to own yuan? Do I want to own yen? Do I want to own euros? Do I want to own dollars? Do I want to own gold? Which currency, I mean, I think of gold as a currency. I would rather own gold than any of those currencies that are, you know, potentially being manipulated and devalued, you know, consciously devalued. Yeah. And I totally agree with you. 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.

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Starting point is 00:26:57 Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. My only hesitation with going to gold right now is just the concern of the credit contract. When you have this credit contracting, there's a run to fiat currencies. Once that run, which historically has only lasted a month or a couple months, once that run finishes and you kind of start to see some bottoming, that's when you see,

Starting point is 00:27:32 in my personal opinion, that's when you see the whole commodities, gold, hard assets just take off because this is where the central banks have to print and basically create the whole cycle over again. And that's when you see, I think, the big change and the big tide change on currencies. No, I agree with you. I think what's really interesting to me about this discussion is that a lot of people think, you know, okay, yes, if we have a de-leveraging, that's deflationary. And typically, it almost always has been deflationary. And that's, you know, bad for gold. and those types of assets. There have been times in the past, though, where, you know, you have a de-leveraging and

Starting point is 00:28:09 interest rates are going up and inflation is going up. And that's very, very bullish for gold. And so I don't know where inflation is going. You know, I have said that in the last six months, I think interest rates are in a bottoming process. And we're seeing signs of inflation starting to pick up. So if you get an inflationary rise in interest rates that creates a credit crunch, but inflation is taking off at the same time.

Starting point is 00:28:34 That's the one instance where it maybe is not a deflationary credit contraction or something else going on. So I don't know how that's all going to play out. I just know that there are a variety of reasons to be bullish on gold and also expect a credit contraction. Yeah. And trust me, I'm a bull on gold if you're talking long term. If you're talking the next five to 10 years, absolutely.

Starting point is 00:28:58 I mean, it's like a no-brainer as far as I'm concerned. Okay, so Jesse, in September, you wrote an article on junk bonds titled Junk Bonds officially enter bubble territory. This was based on the standard and porous chart that followed the valuation with respect to yield, which was at a two standard deviation away from the average. I'm curious if you can talk to us about this a little bit. And I also want to highlight to you, you might not know this, but back in December of this past year, I talked openly with the people on our show about how I was putting on a short for, high yield bonds. I started to, I mean, it wasn't a big position, but I wanted to talk about it on the show to see how it developed and just kind of talk about the trials and tribulations of putting that short on. And it hasn't really done so great. Initially, it did, but ever since probably the first two or three

Starting point is 00:29:47 months I had it on, it started to pull back. I still have the position on. I'm still continuing to short high yield bonds. I'm curious what you have to say about this and kind of your opinions moving forward. Yeah. Well, you know, I have to say that my blog post was based on the work of Marty Fridson, who really is the man when it comes to, you know, corporate bonds and junk bonds in particular. And the only time in the history of his, you know, record keeping, which is, you know, 20 plus years, when junk bonds have ever been as highly valued as they are today is literally just prior to the financial crisis. And I just think, you know, junk bonds are fascinating, Because you buy a junk ETF and it has what like a 5% yield right now on the ETF.

Starting point is 00:30:34 We're already passing or we will very soon, you know, 5% default rate in junk bonds. And the recovery on the bonds is the worst we've ever seen in history. We're not even seeing, you know, the down part of the credit cycle yet. But recoveries on junk bonds are like 20%. 20%. And so the recoveries are horrendous and defaults are rising. So, you know, to me I look at that. and they go, and you buy junk bonds today, you're locking in a negative rate of return for any time period, you know, you're looking at. And it's fascinating. And it's just the sign of the incredible, you know, I can't remember who coined this phrase, but the zeal for yield right now. People are so desperate for any yield, they'll buy junk bond at a 5% yield when they don't realize that you need a little bit more than a, you know, 3% spread over treasuries to make money in junk bonds. Yeah. And Jesse, I'm really,

Starting point is 00:31:28 interested in why this is happening. And I mean, I don't want to blame you for the price of the junk bonds. That's not what I'm saying. But also to talk about the difference between being an asset allocator having your own opinion, but might need to work on something else because you are obliged to do that. Because, for instance, if you Warren Buffett and you think that cash is a good investment, or at least it's not a good investment, but it's the best opportunity right now, You can basically just pile up all the cash you want because you have autonomy to do that. But as an asset allocator for other people's money, you might feel that you're pressure to take on because you're so hungry for yield, for instance, or whatever it might be.

Starting point is 00:32:07 So, Jesse, also with your background, could you tell us about like the mindset of a fund manager and asset management and how they might have one opinion about junk bonds but still buy into the asset? Yeah, well, you know, so there's a variety of different things going on. one of the main themes that I've been looking at is the price insensitive buyers. So there are people that have decided, and this is part of the whole indexing movement, that I'm going to buy this asset class regardless of the price, right? I'm not even going to look at what my potential return is. I don't even look at the yield.

Starting point is 00:32:41 I'm going to buy stocks no matter what the price is. I'm going to buy bonds, no matter what the price is. I'm going to buy junk bonds, no matter what the price is. And you're sounding like a central banker right now. Well, they're one of the price insensitive buyers. You have a number of these buyers, insurance companies. You wonder who's buying these negative yielding bonds. Well, they're insurance companies and pension funds that have to hold a certain amount of their money in this asset class regardless of the price. So you have central banks, you have index passive investors, then you have insurance companies that are buying that literally have made the decision we buy regardless of price. And I think we've probably never seen that before in the history. of finance, where we have a huge segment of the market of people that have just decided to buy no matter what, even if they're locking in negative returns. And so I think that's a lot of what's driving these prices in some things to astronomical levels. And the crazy thing is, you know,

Starting point is 00:33:38 people think about the financial market so different than anything else in their life. If you actually thought, okay, there's a big boom in cars, everybody's buying cars today and I'm going to pay $50,000 over MSRP. You know, you'd go, that's insane. I'm never, going to pay that much for a car. But that's what people are doing in the financial markets. I'll buy it regardless of the price. And it's interesting to watch. Yeah, no, I totally agree with you. My concern is this. I think central bankers around the world know that their back is in the corner of the wall at this point. And I think that they know that they really don't have any wiggle room left as far as being able to impact the markets. And so can the government do things to

Starting point is 00:34:21 basically spark the economy. I'm of the opinion. The answer is yes. They've got to use fiscal policy because the monetary policy, at least here in the U.S., because the U.S. doesn't have the ability to do some of the stuff that Japan's doing with buying ETFs and stuff. Here in the U.S., their back is up against the wall because now it's relying on fiscal in order to solve the problem. Monetary can't do it. So I think my personal opinion is that they are at a point that they are going to fight this until something breaks, until it literally breaks. They're not going to just allow the cycle to basically take its turn and run its course like they have in the past, where they've allowed it to start to contract because they had tons of interest

Starting point is 00:35:02 rate left to play around with to basically spark the cycle back into existence again. So that's why I see it maybe them really fighting this thing, and it might play out a little longer than some of us had suspected. I mean, I know for a fact, this has played out a whole lot longer than I ever expected it to. Well, absolutely right. I mean, look at any novice trader. What's the most common mistake they make is not cutting their losses. It's, you know, putting a trade on, because they have an idea or an investment, you know, whatever it is a novice investor. And the market's telling them, you're wrong, wrong, wrong. And they sell their winners to keep their losers, right? That's like the basic, first, most,

Starting point is 00:35:44 common mistake. And I think of these central bankers who are all academics and don't have any real world experience in running businesses or in the financial markets as like a novice trader, right? The markets are telling them this isn't working anymore. This is not stimulating the economy. Jason Cummins showed a great chart recently. He was a former Fed economist speaking two Fed heads at this recent conference and saying, look, in the past, when asset prices went up, increased spending. It goes, this cycle, it's not happening. So you create this wealth effect, and it's not inspiring people to spend anymore. Markets are telling you, it's not working anymore, but they're like a novice trader where they have this position that's going against them, but they're not going to take it off.

Starting point is 00:36:26 They're going to ride it into the ground. And I wish I could have more hope than that. But that's really what I think, you know, they're kind of doing right now. So, Jesse, I've really been looking forward to asking you this question because it's titled Janet Yellen for a day. It's a question that you knew on beforehand, so I just want to put it out there because it's a really horrible question to ask. Because it's definitely not an easy job to be chair of the board of governors of the Federal Reserve system. And I think that Ms. Jellon would probably agree with me because no matter if she's easening or tightening the monetary policy, someone will be unhappy with that and I will blame her for that decision. So, Jesse, if I can put you in her shoes, could you outline the implication of,

Starting point is 00:37:10 both an easing and tightening on the policies and what you would do if you have the power that she has right now. Well, that, I mean, that is a great question, right? And that is the question that should be put to every critic of the Fed or any central bank. It's okay, what would you do differently? And I have a lot of empathy for them right now because they're not in a very good position, right? You raise interest rates and we have the most over leveraged corporate sector in our country's history, right? you're going to start a default cycle and potentially a very painful one if you raise interest rates.

Starting point is 00:37:45 Now, if you don't raise interest rates, then the pension crisis is going to just get worse and worse. But I think if I were, you know, Fed chairman for a day, I would immediately go to Congress and say the dual mandate is impossible. I cannot possibly control inflation and employment. I don't have the tools. I mean, I do have the tools to try and keep inflation. and check, I don't have the tools to increase employment. I mean, that's kind of silly. All I do is exacerbate the credit cycle when I move interest rates up and down. So I don't have the tools to do that. And the third mandate, which nobody ever talks about, financial stability, that's the one that gets

Starting point is 00:38:27 forgotten. And all of these policies that we've seen over the last 20 years, especially lately, to create a wealth effect, go entirely against the Fed's mandate to pursue financial stability. And so I think we need a Fed chairman who says, this is why Alan Greenspan gave his irrational exuberance speech 20 years ago. I wrote about this today, is he was worried that if we don't rain in an asset bubble, it's going to have major painful economic consequences going forward. And he was worried about that in December of 1996. 20 years later, the Fed has not incorporated any of that thinking into policy. And so financial stability needs to come back as the number one mandate. That's why the Fed was created in the first place to maintain financial stability,

Starting point is 00:39:19 not to try and boost employment, not to try and rein in inflation. It was to prevent bank runs and assist in the event of a bank run. And ironically, they were created to help support financial stability And all they've done over the last 20 years is it make the markets and the economy more instable. And so, yeah, if I were fed chairman for a day, that would be my thing. I would say, forget the dual mandate. Financial stability is a paramount importance. And that's what we're going to pursue.

Starting point is 00:39:47 It's not just about what Jenny Allen is doing. Clearly, the U.S., that's the biggest economy. And it's very important what she is doing. But she also needs to think about what will other central bankers do if she does XYC. So, Jesse, what do you think the European Central Bank would do the Chinese, the Japanese? What would they do if she would say hike rates? You know, that's a good question. If she hikes rates, you know, that sends the dollar higher.

Starting point is 00:40:13 You know, I think that's what they want, right? They want the yen and the euro to drop in value. So, you know, it would be good for them. The problem is, you know, China is still trying to peg their currency to the dollar to some extent. And with all of the dollar debts in the corporate sector in China, could cause major problems there. So, yes, you're absolutely right. We are a global economy now more than ever.

Starting point is 00:40:37 And so what central bank does. And look at, you know, part of, you know, this all ties in together. You know, the Japanese central bank, you know, taking rates negative, I think a lot of the buying we're seeing in junk bonds and stuff here is from Japanese investors. So wait a second, I can get a negative yield here. I can get 5% in American junk bonds, you know, and hedge my currency risk. So I think a lot of money, especially, you know, this year has come over from Japan. And so absolutely, you know, and that's one thing I don't think the central bankers think about enough. There's a book called Economics and One Lesson. And it's essentially one lesson over and over in every chapter. It says every time economists try and come up with one policy to fix a short-term problem, they overlook or don't think about all of the consequences, the longer-term consequences of that. that one policy that they're pursuing. And I think that's, you know, current central bankers are

Starting point is 00:41:33 guilty of that as anybody. We're going to pursue this one policy and we're going to try and create this one effect. But what are all the other effects that are happening longer term, not just right now. And how are other people affected? You know, probably the most obvious example of this is let's lower interest rates to zero. Okay, it makes it cheaper to borrow. But what about all the people who are trying to save for their retirement and getting zero percent on their savings? The Fed doesn't consider the fact that that forces them to save even more money. So this is why the wealth effect is not working and getting people to spend. Lower interest rates to zero people are forced to save more, not spend more. It's kind of backfiring. And I think even going beyond what you're saying

Starting point is 00:42:13 there, and we brought this up in our last mastermind discussion, was when you have interest rates at zero percent and you start talking about the insurance industry and how they make profits by just investing their float because it's such a competitive marketplace on the underwriting portion of it, where they're underwriting at a loss a lot of the time. And they're left with trying to make the profit on the float. When you have zero percent interest rates, now you're putting all these large, enormous insurance companies in a position where there's no money to be made at this point. Not to mention, you know, German and Japanese banks. Oh my God, I know. mention funds. And, you know, I mean, yeah, absolutely. There's so many, you know, corollary effects that it's hard to argue that the ends, you know, justify the means at this point. And I absolutely, I really do think they understand that they have encouraged a massive amount of debt creation during this cycle. It's been all spent on buybacks and, you know, mergers and stuff. And if they do raise interest rates, that credit cycle is going to unwind and it's going to be painful.

Starting point is 00:43:17 Yeah. So, Jesse, uh, changing gears just a little bit. here. So I want you to talk to us about the Minsky theory and how it applies to volatility trading. Yeah, absolutely. Actually, he really created his theory in terms of the debt cycle. So, you know, fits right in with what we're talking about now. So Hyman Minsky wasn't actually, nobody knew his name until the financial crisis because he wrote this theory. Everybody thought he was crazy and nobody paid any attention to it. But his theory is basically there's three stages of the credit cycle. there's the initial stage where companies borrow money, you know, an amount of money that they can easily pay the interest and the principal back during the course of the loan. The next stage of the

Starting point is 00:43:59 credit cycle is they borrow an amount of money that they can pay the interest on, but they can't pay principal back. They're going to have to basically refinance that debt when it matures. The last stage of the credit cycle is when companies borrow an amount of money that they can't even pay the interest on, that they have to borrow more money to pay the interest. And Minsky called that Ponzi finance. And when credit, for some reason, you know, tightens for those guys, and they can't borrow money to even pay interest on their debt, they're forced to sell assets.

Starting point is 00:44:31 And so you get a piling on of selling assets, and this ties into margin debt. And basically, Minsky's point was that over the course of an expansion, and the longer an expansion goes, the more this is true, people take on greater and greater risk. such that basically the bubble or the expansion so's the seeds of its own bust. And so during the financial crisis, we saw that where the banks took on amazing risks in the mortgage market. And when they started to have to unwind those risks, everybody was selling at the same time,

Starting point is 00:45:06 and everybody essentially became insolvent at the same time. The firm that I worked for, you know, Bear Stearns was one of those. That was, you know, became a casualty of the financial. crisis. So one of the things that's going on in terms of risk taking, you know, we're seeing that in junk bonds, right? So people have gotten to the point that this expansion is so long. Fed's never going to raise rates. I can go buy junk bonds because we're never going to see another down cycle and credit again. So I can, you know, buy junk bonds for 5%. What's going on in the volatility markets is investment managers are not just reaching for yield in junk and real estate,

Starting point is 00:45:40 these things, they're selling volatility futures to try and generate premium income. And in the past, these volatility products are really only about 10 years old. We've never really seen them go through a market cycle. And shorting volatility is a very frightening trade for me, I think. First, I should probably explain what happens when you short sell volatility. Okay, well, I short volatility. that means I'm betting on the market, you know, basically going higher. Market needs to go higher for volatility to stay low.

Starting point is 00:46:15 So somebody on the other side of that trade has to buy volatility. In order to buy volatility, you know, the market maker then offsets his risk by buying stocks. Since February, right, we see this pretty steady up trend in the stock market. And I think a lot of that is due to this volatility selling, forcing market makers to go out and buy stocks. What happens when volatility goes up and this mass? massive, you know, it's futures market and volatility ETFs. These guys have to cover some of this volatility short. They have to go buy volatility from the market maker who has to short volatility,

Starting point is 00:46:50 and he has to sell stocks in order to put on that trade. Volatility goes up higher because you have selling in the stock market, which creates more volatility. And these guys have to buy in their volatility to cover their short. And it's a vicious cycle. To me, it's very, very similar to portfolio insurance that we saw. 1987. We're selling, we get selling, we get selling. So you have this volatility short, but then you also have $3 trillion in volatility targeting funds. And this is a lot of insurance

Starting point is 00:47:20 companies. We're talking about the insurance companies. If you want a variable annuity, the way they protect your downside in the annuity is they sell stocks when volatility rises. If you have this volatility short, which could be exacerbated, you know, exacerbate a sell-off, And then you have $3 trillion in volatility targeting funds. So volatility starts rising. Now, these guys start selling. In addition to the volatility market makers, you could have a situation very similar to like the data. I'm not calling for a crash.

Starting point is 00:47:49 Let me clarify that. Very, very low probability event. I'm just saying that the structure of the markets right now is very similar to portfolio insurance in 1987. We're selling, beget selling, beget selling. Let's take a quick break and 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 00:51:01 is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. So I read something from Carl Icon that he had posted talking about this exact same subject, but it was probably a while ago. I wouldn't say it was probably 10 months ago or it was back in the end of 2015 that I saw this. And he was saying that this is something that is a huge issue moving forward. And he thinks it's going to potentially be something disastrous whenever this all starts to unfold.

Starting point is 00:51:51 Absolutely. I mean, if you think about it, it's almost, I should clarify, too, all these volatility targets strategies, I'm lumping them all together. They all have different strategies. They don't necessarily sell right when volatility comes up. Maybe they give it a week to see what happens. And then they start selling. But essentially, you have this huge short position against volatility, which is essentially a massive, massive levered long position. It's like you talk about the margin debt is a huge levered long position in the stock market. Well, that wasn't enough. that levered long position isn't enough. We're going to short volatility, which is leverage upon leverage. This is why Warren Buffett calls derivatives weapons of mass financial destruction. And I think these volatility ETFs are going to be outlawed at some point because they allow these market practitioners to create a structure within the market that's very dangerous to the whole financial stability. So when I talk about the Minsky moment, so these investors, are at the point where they've gone so highly levered because they've been encouraged by a rising market for seven years now that's just gone.

Starting point is 00:53:01 We've had one 10% correction or something. And however long, and they feel like the Fed has my back. The market's never going down. I can take incredible risks that I would never dream of taking in another environment. And when those risks unwind, it creates a very difficult situation. So I just think risk is extremely high. Very, very interesting discussion. And I know that there are some people out there because we get emails from time to time from people talking about VIX and volatility.

Starting point is 00:53:29 And I'm sure that that's going to be some very useful and valuable information for them. Yeah. And I blogged something about it a few months ago. If you go to the fellow report.com, you'll see it. There's a reference a piece written by a guy who's a volatility specialist. It's like a 70, 80 page piece. So if people are interested in this, they can really delve into it. Oh, I'd love to have a link. So we'll get a link to that in our show notes. So if you're wanting to read more about that, we'll have it up. All right. So at this point in the show, we're going to take a question from the audience. And this is going to be fun because Jesse's going to stick around with us. And he's also going to join in on our comments back to the question. So this question comes from Subratt. And here's his question.

Starting point is 00:54:09 Hi, I'm Stig. My name is Subbrath Dahl. I'm from Houston area. I really enjoy your show. And your show has been a companion for. me while driving to work. I have a small request if you can explain how we value in the balance it I find sometimes goodwill as an asset. So is there a kind of guideline for that? Because when we pick our select a few stocks and then try to use the tools to have an insincy value calculation, but this particular aspect, I'm not sure how to account for. Because sometimes I see these numbers are really, really big. So is there a way to kind of evaluate this aspect of the asset? So I really appreciate your answer on this.

Starting point is 00:54:59 Thank you so much. All right. Sabra, so I love this question because I know whenever I was first starting to try to learn how to do stock investing and I was reading income statements and balance sheets and everything, I saw this figure Goodwill on the balance sheet and I had no idea what that stood for. So Jesse's going to take the first stab at the question and then we'll just kind of go around the horn and get some different responses. So go ahead, Jesse. Yeah, this is a great question. And, you know, goodwill on the balance sheet, which is what I

Starting point is 00:55:29 believe you're referring to. It mainly comes from, you know, when a company makes an acquisition, and they buy a company and they pay a price above the net asset value of that company's net assets. So, you know, they pay with 100 million of assets, they pay 200 million. That 100 million of assets will go on the acquirers balance sheet and then 100 million will go into goodwill on their balance sheet. To me, I don't use those goodwill numbers for anything when I'm looking at an individual company. It's interesting to look at those from the standpoint of are the managers of this company good capital allocators? Have they made good acquisitions in the past or not? If they're regularly having to write down that goodwill, then maybe they've made some bad acquisitions in the past.

Starting point is 00:56:15 And that's something to pay attention to, that they're not doing a great job of allocating the shareholders' capital. Now, there are companies like Berkshire Hathaway who paid nothing for C's candies, and they still have a little bit of goodwill probably on the balance sheet for C's. But C's is worth incredibly, you know, so much more money than they paid for it. You know, obviously Buffett is maybe the best capital allocator on the planet. But that's what I would look at goodwill for us to evaluate, is this management team good at allocating capital in terms of acquisitions, or are they, doing a bad job and overpaying for companies. When you see companies that have a long-term streak of making acquisitions and then writing down Goodwill, that's a real big opportunity for some financial shenanigans in the statements and for them to hide some things and whatnot.

Starting point is 00:57:01 Valiant pharmaceuticals might be a good example of that. So, you know, that's my take on Goodwill. So I read a shareholders letter from Buffett. He had a really fun discussion about goodwill. And he talks about economic goodwill and he talks about accounting goodwill. And so what you're referencing in your question, you're talking about accounting goodwill and what that number represents. And so the way that Buffett framed to the argument or his point that he was trying to make is he said, if you went on to the stock market, and let's say you picked out one share of, let's just call it General Electric. And let's say that the book value for General Electric was, I don't know what it is, but let's just say it was $20 a share. And let's say that the market price, and you bought one share of General Electric, and let's say that the share was trading for, and excuse me, because I don't know what the market price of General Electric, but I would guess it's, what, $30?

Starting point is 00:57:57 If you bought that one share that was $10 higher than the book value, supposedly you have now been able to add $10 of $10. goodwill to your acquisition of that one share. So what's really fun about the conversation that Buffett has is, you know, you obviously don't do that as an individual investor that you're now able to take that extra premium that you paid over the book value of the company and carry that now as an asset onto your balance sheet, your personal balance sheet. And that's the way that he described it. But when you're doing that as an entire business, that's actually how the accounting

Starting point is 00:58:34 goodwill works. And so the thing that Buffett really wanted to get into with his discussion on this is that the accounting goodwill is pretty much worthless, exactly what Jesse just said. It's not something that you can really place much value in when you're looking at a company as a snapshot in time to determine what the value is. But what you can value is that there is real economic goodwill with a business. So let me give you an example of economic goodwill. Let's say you go into a Walmart and you see a bin of DVDs there in the business. the, you know, 50 DVDs sitting there. And let's say you're picking out a movie for one of your kids.

Starting point is 00:59:10 And you're flipping through the thing there and you see that there's a movie from Disney. It has the Disney logo on it. And then there's some others that, you know, you don't really necessarily recognize where they're from. A lot of the times people will go and buy the movie from Disney because there's this goodwill that's established with the customer with the brand loyalty that's associated with economic goodwill. that has nothing to do with the accounting goodwill that you would mark up because you bought it at a premium to the book value of the individual share. So that's the discussion. So you have to determine that as an investor. What is the real economic goodwill that I'm gaining by owning this company through brand loyalty or whatever?

Starting point is 00:59:50 That's my comments for it. And I would just also make one other point is that, you know, Buffett's teacher, you know, Ben Graham would say, I'm never willing to pay anything for that goodwill. will, that I want to actually buy a company for half of the value of its tangible net assets. And so, yeah, it's a very interesting discussion. Yeah. And I think the discussion of Goodwill really underlines how important it is to read through the financial statements and really understand them because if you're looking at a company and there might be reporting a loss and you see all these writedowns in the oil industry

Starting point is 01:00:23 and you're saying this is a horrible sector. And yes, the sector might be punished for a lot of reasons, but there's a huge differences between the individual stock picks. So for instance, if you look at a stock like National Oval Vago, it looks like they've been punished, but the 1.6 billion write-off that was on Goodwill. So actually, the company is still having positive cash flows, and they don't have a cash flow problem like all companies are doing.

Starting point is 01:00:48 I also have positioned myself, so that's not why I'm saying it. I'm saying it really to understand the accounting and how that works and how something might be a write-off, but not like it doesn't influence your cash position. on the cash flows for that company. And I think it's important to understand that Jesse, he also talked about, as he's candy, Warren Buffett's famous acquisition, and he bought that 50 years ago or whatnot for, I think it was like $25 million. And it has a lot of goodwill now. So the way it works in terms of accounting is that if you have goodwill that's above what's called the carrying value, so that's the value you see in the balance sheet, you can't write it up, but you can't actually

Starting point is 01:01:27 write it down, and that's what's called an impairment charts. So the management would every year go in and value the goodwill of that company and potentially write it down, not up. So that's why it's really important that you actually go in and read the financial statements and see how he really calculated the earnings. Is it because of the operations or is it because of roddowns of Goodwill, for instance? It's two very different things. And it's important to note that the company gets a tax advantage whenever they would test it for impairment and write it down, which is. is a thing that you see a lot of companies do when they need to save some money on tax. Subrat, thank you so much for a fantastic question.

Starting point is 01:02:06 We're just going to round this episode off with Jesse, and then we're getting back to you with a brand new reward for asking the question in addition to a free sign copy of the Warren Buffet Accounting book and the pay courses about the intelligent investor. All right, so Jesse, first, we want to thank you for coming on the show and answering the question with us and just providing our audience so much valuable information. If anyone out there wants to learn more about you, where can they find you and any other information that you want to highlight? Yeah, thefelder Report.com. I try and write, you know, one or two blog posts a week and just write about stuff that I'm thinking about scratching my own itch in the markets. And so, yeah, that's kind of where you can find my stuff.

Starting point is 01:02:48 Awesome. Thank you so much, Jesse, for coming on the show. Thanks for having me. Had a great time. You guys are awesome and I really appreciate it. All right, fantastic question. And one of the things that we're giving away in that three-part package that we just announced is how to invest in ETFs. And one of the things that we wanted to do is I wanted to talk with Stig and I wanted to talk with Dr. Chris Habib, who is also one of the developers on this of this new course and talk about what they had learned going through this process, kind of what their intent was for doing this. And if you're not interested in this discussion, feel free to hop off. But I think that you guys are really going to enjoy this conversation as they talk about the course that they developed. So, Chris, you and I started chatting a little bit back.

Starting point is 01:03:33 And you were a listener of the show. And you had reached out to me because you were interested in developing a course for the audience. He was just highly motivated. And so Chris and Stig decided that they were going to try to tackle this, how to invest an ETF course. And so Chris, I want you just to briefly introduce. yourself to the audience so they know a little bit about you. And then we're going to just talk about the development of this course that you guys made. For sure, thanks. So I'm an evidence-based naturopathic doctor. I manage businesses and I'm also an investor. I'm the CFO of a

Starting point is 01:04:05 herb company and I'm the clinic director of two health clinics. I'm also involved in teaching, research, and publishing. I'm a clinic supervisor at a college. I teach board exam courses and I'm the associate editor for two medical publications. So you just do a few things. Yeah, I just juggle a few things. So Chris has probably one of the sexiest sites you've ever seen on the internet. And I want, if you guys, it's right stick, you have to admit it's pretty. Yeah, I don't know how he does it.

Starting point is 01:04:36 It looks super slick. It's probably the slickest site I've ever seen. Chris, I want you to tell people the name of your site so A, they can check out your sexy site, but B, if they are into this, if you're studying for one of these exams, because I'm sure some of the people in our audience might be in this scenario where they might be interested in some of that stuff, give them a handoff to that site that you have that deals with your day-to-day stuff. So it's just my name.

Starting point is 01:05:00 It's chrishabib.com. Okay. Very easy to find, and I promise you, you'll be amazed at the aesthetic layout of his website. Let's start talking about the ETF course. So my first question is, is how much time did you guys put in? this was really Stig and Chris that did all this. I didn't really put in anything other than really going through the outline and kind of making sure we hit all the different parts that we wanted to cover in this.

Starting point is 01:05:24 But how much time did you guys end up putting into this? A few months. Yeah. At least a few months. And it's one of those situations where you end up doing a large amount of editing. You might do like an hour or two of work for two or three minutes of a clip. So it's, yeah, you make sure that the end product is really good. So let's talk about a little bit more of the nuts and bolts.

Starting point is 01:05:44 of the ETF course. So you originally were wanting to do the ETF course just because of why, Chris, what really led you to having an interest in doing this from the beginning? Yeah, I got interested in investing a few years ago and eventually and gratefully stumbled upon you guys. So that helped me learn and become a better investor. So I'm somewhere in my life now where I want to provide value for other people. And I recognize that I have a lot of different passions, investing is one of those passions. So I think it's another way that I have the ability to connect to people and to break down complex concepts and make them simple.

Starting point is 01:06:24 Awesome. And Stig, why did you do it? I think it's weird that you basically coming from a background where you think individual stock picking is the best thing. So for me personally and perhaps the US world, Preston, you were doing it because that was kind of what Warren Buffett was doing. But we kind of skipped a lot of steps here because he's the best in the world. but that's not necessarily the best approach for everyone.

Starting point is 01:06:46 I think I should probably have started looking at EFs first and then transition into individual stock banks because there are a lot of advantages investing in ETS for new investors. So I think it was a way for me to relearn a lot of the basic principles about investing that applies to ETCF investing and also to become smarter about the terminology. People might be thinking so ETF, stock investing, what's the difference here? Isn't ETF just like buying multiple stocks at the same time? And in many ways it is, but I think the hurdle for a lot of people, whenever they're looking at JF,

Starting point is 01:07:21 it's just the same thing as whenever they start looking into individual stocks. They need to learn an entirely new terminology. So they need to learn expressions like expense ratios, whereas for individual stock picks, you might be looking more at moat or other terms that might be irrelevant to you. So I think that was a good way for me to relearn that. because I think I needed that as well. Yeah, I think just one of my comments that I think I've learned just through doing the podcast is I was obviously a hardcore individual stock investor before deeply getting into the podcast and interviewing all these great minds. And you kind of realize that, hey, if I'm estimating the return on a single stock pick at 4%, and then I take what I think the S&P 500 is going to give me through an index and it's giving me the same yield.

Starting point is 01:08:08 why in the world would I ever buy that individual stock pick? Why wouldn't I go and buy the ETF? And I think these are some of the things that you and Chris have obviously taught in this course and how to think about that and how to go about making that assessment. Those kind of things are so needed in today's market, in my opinion, for people to understand that difference and to mitigate your risk by distributing it across an array of equities instead of just one that's going to give you the same return. Yeah.

Starting point is 01:08:36 And I also think it's a different way of looking at investing because if you look into ETF investing, you'll be talking about why does the strategy work? You talk a lot about strategies in general when you are investing ETFs. Whereas if you are looking at individual stock, you might be talking about whether or not the business model is broken. So let me just give you an example here. So if you're looking at an ETF, that's a value ETF. You might have some knowledge about that.

Starting point is 01:09:03 And generically, you can say that it probably wouldn't perform that well in a bull market, at least compared to another strategy, say, growth, but it might perform really well if it's a bearer market. Now, if you compare that to a stock pick, call it Bethbath and Beyond, it's another kind of decision because now we're rather thinking about, is the business model broken now because the competition from Amazon is too much, and it's just a different way. I'm not saying it's harder or is easier. If anything, it might be slightly easier to think about that because it's broader and not as specific. But it's just, Another way, I think that's my point of thinking about investing that we probably haven't been

Starting point is 01:09:41 coring as much as we should. And I think that's a takeaway from this sort of investing. All right, Chris, so when you were doing this course, what was the biggest problem or issue that you saw with ETF investing? Yeah, that's a great question, Preston. I think the biggest problem that Stig and I identified is that generally investors fail to stick to their strategy. There are really four keys to successful investing. Number one is maintaining a low cost, which BTFs achieve. Number two is diversifying your portfolio, which ETFs achieve. Number three is optimizing tax efficiency, which ETFs achieve. And then number four is keeping your emotions and temperament in check,

Starting point is 01:10:21 essentially sticking to your strategy. And I think that's the hard part. So Chris, if people are going to go to the ETF course, what's one of the things that you think is going to be a large value add for them by going through this video tutorial? Yeah, for sure. So, I mean, we talk about answering some of the most common questions, like, how do I find the best ETFs or how many ETFs should I own? What should I invest internationally, that type of thing. But I think one of the key points that the audience will really appreciate is that the course provides the step-by-step blueprint of Stig's process for selecting ETFs. And I know for me, as I went through some of the editing and learning, I was just blown away by that information. awesome. So Chris, if people want to sign up for a subscription to the ETF video-based course, where should they go? So I'm sure we'll have a link for the course in the show notes, but otherwise you can find it on the website at the Investorspodcast.com slash how to invest in ETFs, or you can find it on Tip Academy, which is at the top of the navigation bar on the website. And make sure that you act now because there's a massive launch discount that's only available for a limited time. Awesome. Thank you so much, Chris. All right. We'll wrap this conversation up real fast. I just wanted to make sure that everyone in the audience knew about the new course. And for anybody that leaves us a question on the show by going to Ask the Investors.com, if you record a question there, you will get a free subscription to our ETF course. So make sure you guys leave us some questions to potentially be in running for that.

Starting point is 01:11:52 Okay, guys, that was all we had for this week's episode. We'll see each other again next week. Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www. TheInvesterspodcast.com. Submit your questions or request a guest appearance to the Investors podcast by going to www.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.

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