We Study Billionaires - The Investor’s Podcast Network - TIP217: Current Market Conditions & Analysis (Investing Podcast)

Starting point is 00:00:00 You're listening to TIP. On today's show, Stig and I have a fun conversation about how we see the market in the third quarter of 2018. This has been an interesting year because the S&P 500 is only up 1% since the first of the year. In addition to that, we're seeing a lot more volatility than we've seen in previous years. As we look to close out the year, many people are wondering whether the longest bull market in stock market history is reaching its final legs. So on today's show, Stig and I provide our opinion on that I.

Starting point is 00:00:30 idea and what the key factors are driving our theories. In the second half of the show, we talk about some of our previous picks from our mastermind discussions and how those positions have performed when compared to the S&P 500. So without further delay, here's our candid discussion about the current market conditions. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. All right, welcome to the Investors podcast. I'm your host, Preston Pish. And as always, I'm accompanied by my co-host, Stig Broderson. And today, like we said in the introduction, we're going to be talking about how we see the market today, because there's so much happening, how we're positioned. And more importantly, we're going to talk about some of the stock picks that we've made in the past, how they've performed, how we think about them now today. And this should be just really a lot of fun for Stig and I just to have a candid conversation with each other. So a Stig, curious to see how. how you see the market today.

Starting point is 00:01:41 This is just very interesting times, especially with earning seasons upon us. That always gives a little volatility. We just have the midterms. We are recording this 9th of November. Then we have this correction that we saw not too long ago. Very, very interesting. A lot of great volatility. I have to say that.

Starting point is 00:02:00 Being a value investor at heart, I don't see volatility as something bad. I rather like it. I'm curious to hear how you see the current market right now. Whenever I'm looking at where we're at in the market cycle from the big picture, I always try to see how I can compare it maybe to other periods and time that we're similar to where we're at. And I think the thing that I find interesting is the Fed is still raising rates. They're still raising rates on the federal funds rate. And then they're also doing quantitative tightening, which has never been something that the market has experienced in the past, which might make things different than if you are using something as an in the past, that's where it might be a little harder to do that simply because they're doing quantitative tightening. And that impact is to make it simple for people to understand. It's the exact opposite of quantitative easing. And quantitative easing, I think you'd have a really hard time making the case that quantitative easing did not help the market go up, right? Like that

Starting point is 00:02:57 I'd argue had a very profound impact. So if we do buy into that narrative, the quantitative easing help the market go way higher, we would have to have maybe the exact opposite of about quantitative tightening. You said the thing about comparing it to where we've been in the past. One thing that really came to mind was whenever I reread Tony Robbins' book on Shakeable, we talked to Tony, not here too long ago. And one of the most interesting chapters there, that is about how often we have market corrections.

Starting point is 00:03:29 And the way that he defines that is a 10% drop, which is basically what you saw here with the peak there in late September, and then you saw the market buttoned out end of October. You saw almost an 11% correction now. We see that quite often. If you have a time period going back to 1900, we experience that once a year on average. And the average correction is 13.5%. So this is actually a smaller correction that we've seen in the past on average.

Starting point is 00:04:01 And it takes 54 days, again, on average, to recruit that loss. So I'm not saying that it's nothing. If anything, I still feel that the market is overvalued, even if there is a correction here of 11% or whatnot, that doesn't change the fact. But I think it's also important to be adamant about just because you see something like a correction. That does not mean that the market would crash.

Starting point is 00:04:26 There's still a chance it might crash. Again, we feel it's overvalue, but it's two different things. Well, and I think it's important for people to understand what the normal volatility is for, anything that they're in. So if you're in an individual stock pick, maybe the volatility is 20%. So if you see a 20% downturn, a lot of people will get scared and sell that position, but that's normal volatility inside that equity. And so then when you look at the market as a whole, that's what Stig was describing there. So the S&P 500, I'm looking at a trade stops platform,

Starting point is 00:04:58 which tells you the volatility of any pick. And that has a 9% volatility. So you just got to be aware of that and know that that's normal to see things operating within that range. Now, I would argue the most recent pulldown that we've seen in the market here and Stig told you the date where the 9th of November when we're recording this at 2018, that has exceeded that 9% pulldown, which kind of starts to make you cue and say, hey, maybe there's something a little bit more big going on or something that's a little irregular going on because it was such a large movement. And I think it has definitely has my concern.

Starting point is 00:05:33 But going back to what I was saying earlier about where I kind of feel where we're at compared to other points in time. When I go back and I look at how the Fed was raising the federal funds rate in the last credit cycle, they were raising the federal funds rate clear up until I'd say the end of the first quarter of 2006. And then they stopped raising rates. In fact, they held it steady for more than a year at that point. they continued to hold the federal funds rate for a year. And so if that scenario would play out and we'd see something similar where the Fed is tightening, they're tightening, and then they get to a point where they hold and they stop raising the federal funds rate, the market continued to hold for a year in that scenario because

Starting point is 00:06:20 the market peaked the beginning of 2007 during that last credit cycle. So you almost had a year to nine months of the Federal Reserve holding at an interest rate and the market's still holding on before it really started to capitulate at that point. So I find that interesting. That doesn't mean that that's what's going to happen here in the future because right now, the Fed is still raising rates. And the expectation is that they're going to continue raising rates. They have not provided any type of forward guidance that they're going to slow that train down.

Starting point is 00:06:50 So that kind of makes me feel like maybe the market is just going to kind of hang on a few more quarters. But it's really hard to say. But I personally believe, my personal opinion is that we are seeing a topping process right now. Where we're at in that topping process is really hard to say. But if we go back to just basic investing and stick, you correct me if you see this differently, but you go back to basic investing. It's all about putting on asymmetrical positions. And so whenever I ask myself, what does that position look like?

Starting point is 00:07:25 I start with a really simple narrative. What's my potential upside? What do I think my upside could be from here? 10%, 20%. I think 20% would probably be a stretch. I think 10% would be in the realm of possible. And then you'd have to say, okay, so what probability do you think that you're going to have that 10% upside? I think you're around 50%. When I look at the downside, how far do I think that could go down? I don't know, 30, 40, 50% downside. So we could just, just say 30 or 40 or something like that to hit the average. And then what do I think the probability of that is? Well, it'd have to be the remainder of the other, maybe 50%. And so when you start getting into that expected value of summing that up, my expected value for me personally, as I'm looking at where I think the market could go, is to the downside. It's a lot stronger to the downside than the upside. So I've got a concern about the macro factors that are at play. And in the past, I think you could have made the argument that the foreign markets are still easing in a major way.

Starting point is 00:08:31 Look at what the European Union's doing or look at what Japan's doing. And they're not really doing that anymore. They're not easing like they were. And so I think that further compounds in the narrative that central bankers are stalling this thing out. I just think that if you do have positions on, you've got to really kind of understand where your risks lie because you can have a great company. But when they're swimming against the current, even great companies are. going to go down whenever the macro factors are against you. And I kind of feel like that's where we're at today, but I'm not 100% confident in any of that stuff. I just, I see some

Starting point is 00:09:07 analogies. I don't know. Stig, I want to hear your thoughts on some of those comments. I think really reminds me of what Howard Marks was talking about, how you can never figure out what's going to happen in the future, but you need to know the odds, or at least the approximation of the odds. And that's really what you're getting at here where you're saying, yeah, I can't go higher, but probably won't go too much higher, and then there's just a high probability of it going down. If you ask me about my opinion, referring back to the statement I had before about what we've seen there in the past, we had the podcast here for four years, and since 2014, the market has been looking quite expensive, and it's looking more and more expensive.

Starting point is 00:09:48 And we've seen these corrections quite a few times just while we had this podcast, and the market has still kept going up. Now, of course, this is only a question of when it will stop. It can't go on forever. Whether or not it will go on a few more quarters, a few more years, I don't know. My guess is as good as yours. I'm very curious to hear how you positioned yourself now here, Preston, keeping that in mind that you see that the risk of a downside is perhaps greater than the upside right now. How have you positioned yourself? I agree with you in the past. We've always felt like the market's been pretty overvalued. But at the same time, that was before the Fed was even raising rates. Then they started raising rates. And historically, when we've been in that setting, the market continues the run,

Starting point is 00:10:35 even though it's overvalued. And so then we have conversations with Bill Miller and Bill Miller's like, hey, if we could get to a PE ratio of 35 back in 2000 when interest rates were over 5%, what makes you think that we can't get there when interest rates are less than 3%. people like that have really helped us understand that although it is overvalued, you can't be too jumpy and scared of this thing because the interest rate environment has allowed prices to go higher. And I think that's why we're seeing how high this really went, which is, it's extremely

Starting point is 00:11:09 high with the Fed now tightening and now doing quantitative tightening. I think that that's where we're starting to see the final leg of this is starting to mature. But back to what Stig was saying. So how are you positioning yourself? He was talking about how if you have this opinion, you can keep saying I've got that opinion. But you also have this thing called fallacy bias, which is just because something happened in the past means it's going to continue to happen in the future. And you've got to be very careful that you don't get sucked into that trap. So my positioning is I am looking for a big upside in commodities.

Starting point is 00:11:46 And I don't think that we're there yet. In fact, I think that in the short term, in the next. quarter, commodities are going to continue to sputter around or whatever. I don't expect them to have that big jump in the next quarter, but I do expect them to have a big jump in 2019. I think they're going to have a massive jump in 2019. And what I think's going to drive it is when the Fed gets to the point where they are not able to continue to raise rates and they start holding steady, that's when I think you're going to see commodities really take off. Going back to the 2006-2007 time frame. What we saw during that period of time was as the Fed was raising rates,

Starting point is 00:12:25 you actually saw commodities really kind of struggling. They were trying to go up, but it was just sputtering around. And then as soon as the Fed reversed course and they said, hey, we're not raising rates. We're going to hold them steady. You saw commodities just start going crazy because it's tied to the dollar. And the dollar started the weekend at that point. I'm expecting a very similar thing to play out in 2019. And I think that there's going to be money to be made. And then what I think is really interesting about that situation, if that situation wouldn't even happen, if all these commodity prices start going up because the Fed has capitulated on their interest rate rising and their quantitative tightening, what you're going to see is you're going to see that inflation is

Starting point is 00:13:06 really going to start taking hold and it's really going to start taking off. And if that situation plays out, then you're going to see the bond market start selling off and you're going to see bond rates start increasing as well, which is bad for equities, which further Ray Dalio talks about these credit cycles and how they're reinforcing. And I think that's one of the main reasons why you see these credit cycles reinforce is because as those commodity prices start pushing higher and you see inflation start to take hold, then you see the impact in the bond market and then you see the impact in the equity market. That's what I'm preparing myself for moving in the 2019. Whether that actually plays out, who knows, but that's how I'm thinking.

Starting point is 00:13:45 through the problem. And I think the critical element that's going to drive that narrative is if the Fed stops their federal funds rate increases and if they pull back or hold steady on their quantitative tightening. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history.

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Starting point is 00:18:06 Back to the show. I would like to talk a bit about how I position myself here for the time to come. They will also give some of the framework of some of the picks I'm going to talk about here later. One of the major things that I did, I actually bought a rental property. That might look like a very defensive way of looking at the stock market, and it definitely would be true. Whenever I'm looking at this, I don't know how long this has been going on, but as we talked about before, the stock market was expensive in 2014.

Starting point is 00:18:35 It's even more expensive now. If you look over the past 130, 40 years, you know, the stock market was expensive. market has only been more expensive once. Some people might say it's a new normal. I don't know. To me, it just looks like I don't want to be fully invested in the stock market. So I've taken out some of the money I have and put it into rent or property. I also started to invest outside of the US. Whenever we talk about these stock market, particularly always referred to the US, which I consider my home market. I'm still predominantly invested in my stock portfolio in the US, quite a few reasons. One of them is also capital gains tax, even though that the stock market might look expensive.

Starting point is 00:19:15 If you made decent profit, you'll have to pay tax on that if you want to take the money out and invest it somewhere else. We'll link to resource here in the show notes where you can check different countries, different areas where their stock valuation is. But right now, the US stock market is the third most expensive stock market in the world. That's also one of the reasons why I've started to invest other places. I've invested a little in India. I also invested in Europe and even a little in Africa, even though it's very, very little.

Starting point is 00:19:45 It might sound like a contrarian perspective. For me, it's also a way of diversifying. I am in terms of currencies, I am still primarily in US dollars. I think the US dollar would do well if we see a downturn. And aside from the US dollar, I'm also in euros and then some of the smaller currencies. So that's how I'm positioned. In general, I like to hold a little cash. if something pops up, that's very interesting. I think that's very good. But I'm also very aware of the danger of paying the opportunity cost of not being somewhat fully or partly invested. I don't in any way recommend just a cash position, but perhaps you shouldn't put all your money into the US stock market if that's what you're thinking about right now. In terms of picking

Starting point is 00:20:33 Stucks, I would say that great companies with very little debt and fair valuations. You could probably say you should do that all times, but especially in times like this, buying these great companies at fair valuations might be better than having these fair companies at great valuations. As Preston was referring to before, you know, if something really goes wrong, that's where we can really see how good companies would perform during a crisis, even though that they will get slammed to some extent. They typically rebound, a lot faster. I guess that's what I'm looking at right now in terms of positioning myself. Two examples of these great companies at whether

Starting point is 00:21:14 you want to call the fair valuations have not definitely not very cheap companies. The two biggest positions I hold today, that's Berkshire and Google. Okay, so what Stig and I wanted to do is just talk about random picks that we've made through past mastermind groups or intrinsic value assessments that we have written and sent out to the community on our email list. The way that we're going to talk through these different picks is we'll briefly tell you the timeframe of when we recommended something, how it's performed, and more importantly, how it's performed compared to the S&P 500, and then maybe a little bit of tidbits about why we had originally selected it and kind of how we see it today.

Starting point is 00:21:54 The first one that I'm going to talk about was a company called Foot Locker. I think for anybody that would hear a footlocker just off the top of your head, you'd be thinking, oh my God, why in the world would anybody want to own that? With the day and age of online shopping and the mall traffic being so low, we made this recommendation on September 23rd, 2017. Since that period of time, if you would have bought it on that date until today, you would have got a 52% return on the pick. The SMP 500 has performed at 10%. So you've outperformed the market. So you've outperformed the market. market by 42% with that pick. When we made the recommendation for this pick in our article, it was purely based off of the financials. So even though it was probably one of the scariest articles to write, because it just seems so wrong from a qualitative standpoint, the financial metrics were

Starting point is 00:22:46 so strong on this company from the balance sheet to the cash flow. And so that's why we had recommended it if you read the article back then. And so far, this one's turned out pretty well. Now, my concern moving forward is I think that you've had a lot of mean reversion on the price. And when I'm looking at the company today, my concern is more from a macro perspective and from a momentum perspective. You've got this huge jump in the price of this. The momentum is very flat, if not going kind of negative on the price. The fundamentals, I think, are still good, but not nearly as awesome as they were back when we made the recommendation purely because the price has gone up so much. And so now you're going

Starting point is 00:23:31 to get a lower yield with the price being higher compared to the fundamentals of the business. I mean, if you've got a really large capital gain on this, maybe you continue to hold on. If you think that the competitive advantage of Foot Locker is going to remain to be there, I'm a little suspect on that. I would personally turn this pick off at this point in time. But that's me. I would probably take capital gains and pay the tax and just probably offloaded because I think that if we are right, huge if, if we are right about where we think we're at in the market cycle, I think that this would really have a real struggle moving forward in the next three years. I know I said earlier about searching it on Forbes, but what we'll do is

Starting point is 00:24:09 we'll have a link in our show notes for every one of these picks where we wrote up, it's a three or four page article on how we're looking at it at that point in time and how we came up with the valuation, and then you can compare the performance and all that fun stuff. but we'll have a link in our show notes to our intrinsic value page where we have all of these captured. And we can also send them directly to you in your inbox. So if you just go to tipemail.com, so that is tipemail.com, you sign up to our email list and every month we'll send out our newest intrinsic value assessments and a link to the page

Starting point is 00:24:46 where you can see all our picks since we started the podcast and you can track their performance. But speaking of footlogger in retail, I have three pecks here from the mastermind groups that I would like to talk about. The first one is Beth Beth Beyond. We had that on in the second quarter of 2017. And back then, it was trading at $35. Right now is less than 15. I would really like to talk about that because that pick really made me humble. At the time, we talked about what would be the valuation if the company's future cash flows was just flat.

Starting point is 00:25:27 And then we had Jesse Felderon and Jesse, super smart he is. He was like, I don't think it will be flat. I think the cash flows would contract dramatically over the years to come. So far, he's been right. Whenever I'm looking bad at what the company has been doing, Beth, Beth Beyond had been hiking the dividend. And in turn, they're making less and less. money, which to me seems a bit weird. If anything, it says something about the management. They're not really been buying back any stock or at least very, very little. And it really looks

Starting point is 00:25:59 like the dividend payment is a cry to build a floor below the stock price. They have been investing in the business. I think that they should probably focus more than paying out a, what, close to 5% yield, especially for a stock they used to not pay dividend. It was actually whenever where things really started to go bad, and it was very clear as going bad that they're starting paying out dividend, which is kind of odd from a capital allocation perspective. For me, there are quite a few teachings here, though a lot of retail has been heard, and at the time we talked about the influence of Amazon, e-commerce, the new age, and how Beth Beth and Beyond's new e-commerce initiatives might not be as effective as what Amazon is doing. That was really not so much

Starting point is 00:26:46 what I took away. You know, just one example is the footlogger pick. Preston just talked about before. It's not all retail. You have Nike, another company you've been looking at, it's up more than 40%. You have a lot of retail that has done really, really well. But I think what I learned from Beth Beth Beyond story here is that in times like

Starting point is 00:27:06 these, buying stocks at fair prices that are wonderful, that's definitely a lot better than wonderful prices because at 35 at the time, Beth, Beth, Beth, Beyond was definitely a wonderful valuation, at least based on historical numbers. But the business itself is just not good. And then using that historical data like I was whenever I was pitching this stock to foresee the future, really make me humble. I was almost ready to take a position in Bethbeth Beyond at the time. I thought a lot about what the group said, especially some of the items that Jesse Fowler

Starting point is 00:27:43 brought to the table. I ended up not taking a position in the stock, and I should probably get Jesse something nice next time we get together because it saved me a lot of money. And I also just want to say that even with this very, very low valuation that you see right now for the stock, this would definitely not be a stock recommendation for me. So just to give the audience, because we always want to use the metric, at least I think the best metric is the S&P 500 to compare, your performance to. This particular pick when it was made back in February of 2017 had gone down negative 65 percent and the market had gone up to 22 percent in the green. So there is a significant

Starting point is 00:28:29 margin on this one. Most of the loss kind of happened in the middle of 2017 where it just had this significant drop. And then it's just kind of continued to have a pretty negative trend ever since. And I would argue that that trend is still negative today. It definitely didn't pan out the numbers back then. And I think when we were having the conversation with Jesse, we're all like, you know, the numbers look good, but something about this one just doesn't feel right. I hope you didn't take your position. I didn't like it back whenever you pitched it. You know what's interesting about this one, Stig, is when you look at this and then you look at Foot Locker, I get the same qualitative feel about both of those picks and how they both just don't

Starting point is 00:29:10 really feel right. But at the same time, Foot Locker, you had a huge return and Bed Bath and Beyond you didn't. When you're really thinking about how hard this stuff is, you have two picks that were suggested at the same time, but just drastically different performance. One thing I'll bring up, and this is something that Toby mentioned, on that podcast. He was saying that he had really hard time, I don't think he specifically mentioned footlogger, but he had a really hard time figuring out if Beth Bath and Beyond was a good pig or not, but he said there were so many hated stocks in the retail industry. So what he did was he just owned a basket of retail stocks where across the board you can just see on the fundamentals

Starting point is 00:29:56 that this are probably too cheap. And whenever you have that mean reversion, then you will see and all all gain. You know, something that's changed about my investing approach that has evolved through this show is really always taking a look at the momentum trend of the pick before I make the final selection. With Bed Bath and Beyond, the one thing that I distinctly remember about that conversation is I did not like the momentum trend on the pick whenever it was suggested that it might be a buy. We talked about this a little bit earlier in the show where we were talking about

Starting point is 00:30:29 understanding the volatility of the company and what kind of fits into that volatility trend. And so when you looked at Bed Bath and Beyond back then, it was in a negative trend. So like when you'd look at the 200 day moving average, it was negative. It was going down. Where the volatility was at, it was within completely within its range of that downward trend. So what it was doing was normal in a negative bear market. My opinion when I mix that momentum investing with value investing is I see all the indicators that are telling me that this thing's a buy. This is a very good price. But I have zero indication that the purging that's currently happening is over. And so what I'm looking for in that momentum shift

Starting point is 00:31:20 is prove to me somehow that that bottom has happened through the price action exceeding that basic volatility that it continues to demonstrate through the years. So for Bed Bath and Beyond, that was not happening. That's why it was very hesitant to go along with the pick, even though I thought, and I read with Stig back then, that the fundamentals looked good according to all the numbers and that it looked like a value. So just something to maybe help people keep themselves out of trouble is really kind of paying attention to the momentum trend, especially if it's a long trend and looking for something that statistically showing them that they're outside of that volatility range to the upside. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:35:14 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. The next peg I wanted to talk about that would be Fiat Chrysler. And we talked about this year in the early September 2017 at the mastermind meeting.

Starting point is 00:35:33 I already took a position at the time prior to that. But I really wanted the mastermind. views on that. And as far as I remember, the group was not overly thrilled about it. But the reason why I wanted to talk about Fed Chrysler, especially after talking about Bethbath Beyond, is I see something different from the management. I see a better management, which is why I ultimately also ended up investing in it. The management have these five-year plans, and they do as they say, which is more than you can say about Bethbeth Beyond. It's very cheap.

Starting point is 00:36:09 It has consistently, all the past few years, when I've been looking at my screener, being in the top five of the cheapest company based on an EV to EBIT ratio. Basically, that means that you would get around a 20% return on your operating earnings if you bought the entire company. Since I pits the stock, a few things have happened.

Starting point is 00:36:30 They've sold Magnet to Morelli, one of the divisions that developed and manufacturers high-tech components for the automotive industry and that would be a special dividend of a dollar and 50 cents. This is the stock that's right now trading a little less than $17. So this is a significant special dividend. They also paid off all this debt just like the set that would in 2013. So that's something I really like. And back then, they took on a ton of debt. So they're doing as they sat. And now here with the new playing going on to 2022, they will start to pay out 20% in dividend, which right now is close to a 3% yield. I don't remember exactly what I said when we were looking at Fiat Chrysler. I remember doing the

Starting point is 00:37:12 intrinsic value on it, not really coming up with that high of a yield, at least from the way I was viewing it whenever it was recommended. I wasn't looking at this as a buy, and it has matched the market performance over since the recommendation was made. It's been the exact same as what the market's performed at, which is like 10 or 12 percentish. My concern more is owning it today moving forward. My expectation is that auto sales you're going to be that they've hit a top. I don't expect auto sales to really perform very well moving into the coming three years. This is a company more importantly that I would not want to own today for many of those reasons of the macro factors. I think you have some good points there. And it's definitely not a

Starting point is 00:37:54 stock you would put 20% in. I guess you can say that about most picks. There are definitely some concerns. One of the things I remember you brought up, which was a really good point today, but also at the time, is that they really haven't made any significant investments in the electric fleet. They actually recently did that, but it's definitely not one of the first companies in that industry. Whenever I think back on the latest pick I had here in the mastermind group, that was Google. And I was talking about how I found value in Google, you know, with 20% plus multiples. I mean, that was what we're talking about. And then you have something like Fiat Chrysler, the cheapest of the major stocks, you know, trading an EV to EBIT of 5. You know,

Starting point is 00:38:36 this is ridiculously cheap. There are different states of the market cycle. And I'm not talking about the overall cycle for the stock market, but for that specific industry and for that specific stock, if you like. Google grows 20% per year. Fiat Chrysler does not. The inventory levels of cars, somewhat high. Google is probably better positioned for the time ahead with the new era that you end. You know, it's just two very, very different stocks. But I think that Chrysler is very interesting. And I think it's very interesting to talk about as stock investors because it's a company that's good at unlocking shareholder value. They're selling off the vision that's not a part of all strategy, paying it out as a special dividend instead of perhaps buying back

Starting point is 00:39:21 shares. He might be thinking, huh, this should be. be buying back shares now that it's cheap. For cyclical stock like a car stock, they tend to be either very, very cheap, you know, at the peak of the cycle or very, very expensive whenever they're bottom out. And the truth is somewhere in between. So it's not as cheap as it looks like, but it's very, very well managed. And the trajectory that's on the unlocking of the shareholder value, not just for this division, but also what can be expected in the time to come of sending off some of the other brands. It's an interesting special situation for you as a stock investor to think about, but it's a very good case study in terms of understanding management, understanding,

Starting point is 00:40:02 sick of whole stocks. The pick that I'm going to talk about is back in September of 2016, one of the big news headlines was that Berkshire Hathaway was taking a position in Apple. Whenever Stig and I went and looked at Apple at that period in time, because we saw Buffett was buying it, we're thinking, okay, well, what is this worth? So we went and did an intrinsic value assessment on Apple. I felt like we did a very conservative estimate on what those cash flows might look like. And lo and behold, when we did this back in 2016, we found that the expected yield based on an IRR calculation was around 11 percent annually, which was extremely high relative to everything else that was being priced in the market. We felt like this

Starting point is 00:40:50 was probably a very good decision by Buffett back in that period of time. We ended up writing some articles. I wrote one on Forbes, posted a bunch of charts and showed how we went through that analysis to come up at the 11% price. We also posted this on our intrinsic value page, which we have the link to. What's fascinating is since that period of time, this company has just crushed the market. It's looking like at about an 83% return this company has performed at since we posted that article and since Buffett bought it. And the market has done around 30%. So you have nearly a three-time outperformance of the S&P 500 if you would have bought this position back whenever he put it on. Looking at it today, you've had a lot of, and let me caveat that, you would have actually been at

Starting point is 00:41:41 100% return on this pick if you would have. have gone back just 30 days ago because it's had a very rough last 30 days here in the fall of 2018. The point I want to make is moving forward, I think Apple is going to continue to kind hold its own, but it is such a large business. And if we do subscribe to this macro concern or macro narrative, that could impact the performance of Apple moving forward. As I look to Apple's performance, I look at it being somewhat similar to what we'd see out of the S&P 500. I don't see it really outperforming or underperforming in the coming couple years at this point. And most of that just has to do with the macro factors. Very interesting to go

Starting point is 00:42:24 through this intrinsic value in the X year that you mentioned. And some of the picks that had performed really, really well, they're the retail picks that we did. Picks that has just looked so bad, you know, at the time. And in terms of the market just really didn't like them, but we projected really good yields based on the fundamentals. You know, something like Target, Nike, food log that you mentioned. Now, we're looking at 30, 40 plus percent on those stock picks. I think that's something that's very interesting to consider that, yes, we are talking about specific pecks, but very often that specific pick is just being carried away by the

Starting point is 00:43:05 sentiment of that industry, whether it's in a positive or negative way. You know what I find interesting about this Apple pick, in particularly the date of when Buffett and all this kind of came out. It was in the September timeframe. You had a little bit of a bear market that happened in Apple from, call it the middle of 2015 to about the middle of 2016. You can see the volatility and that momentum kind of going down. But as soon as it had a breakout and kind of proved that it was coming out of that volatility range of that down cycle, that's when this position was put on. And that's whenever we were talking about it. And what's interesting is you've just seen it go to a huge upside ever since that point in time.

Starting point is 00:43:49 So the momentum made sense whenever we were talking about it. And I can't say that in my article, I even addressed that because that wasn't something that I was personally looking at at that point in time when I was investing. I really wasn't considering that very much back in 2016. But it almost seems like Berkshire understood that or something, or maybe they were just buying it because it was cheap. They've got to move a lot of money, so they don't necessarily have the same flexibility as a small investor. But I just find that fascinating. All right. So this was obviously a lot of fun to talk about some of these. And there's some other ones that are really good. And there's some that are really bad. But there's a good mix of learning lessons and things that

Starting point is 00:44:29 we've kind of taken away. And we have all these documented in that intrinsic value. index. So we highly encourage you to go in there and look through our thought process of why we were saying whatever at each point in time. At this point, let's take a question from the audience. This question comes from Santoche, and this is what he's got to say. Hi, President Stig. My name is Sanchoche. I've been following your podcast from last three years, and I've learned a lot. Thank you for that. My question for you both is, given the current market cycle, which probably is the longest bull market in the recent history, and the relatively higher interest rates,

Starting point is 00:45:06 do you guys think it's a good time to bias more towards bonds instead of stocks for my portfolio? And what is your general take on rebalancing stocks and bonds based on where we are in the market cycle? Thanks again for all the great work. Bye-bye. You know, I personally can't stand bonds right now, and most of it just comes down to the fact that you're getting almost no yield after you account for the inflation, completely impacts the bond, you're really getting nothing. And on top of all of that, you're in a position where central banks, at least here in the U.S., are raising rates, which is not good for owning

Starting point is 00:45:43 bonds. Now, if you're owning a short duration bond, it's not going to be impacted nearly as much. But anything that's long duration, I think you're going to have not a good 2019 if you're sitting in bonds. And the reason why you would say that Preston that it's about duration, basically what you're talking about is if you have a one-year bond, you know, you might always be a one-year bond. You might only get, say, two semi-annual coupon payments. So it really doesn't matter what the interest rate is doing. But if you have your 30-year-long bond, you know, then you have a lot of lower coupon payments that compared to if you bought that.

Starting point is 00:46:18 But Santos, I think it's a good question that you bring up right now, because if you look at the yield of the 10-year treasury, right now is 3.2%. If you look at the Shillow PE, a key ratio that President and I have been looking at quite a few times here on the show, it will also give you 3.2%. So you might be thinking, why would I not invest in bonds? I think that makes a lot of sense to bring up that question, because would you rather have 3.2% that is safe because it's risk-free, it's issued by the government, or would you rather have a 3.2% giving everything we talked about here on the show? with a huge drawdown that we see that I could do here over the next period of time. That being said, I'm still in the same camp as Preston. I don't own any bond at the moment either. I don't find the yield attractive right now. Of course, you can make an argument that if something really goes wrong in the central

Starting point is 00:47:18 bank would just cut the rates and you would see the value of your bond go up. If that is your strategy, you have to be really good at timing. That's for sure, because we see rates climbing up right now. Just to give you an indication here, the start of the year, the 10-year treasury was selling at 2.46%. And before talking about rebalancing, which you also bring up, you should also keep in mind that the capital gains on bonds are typically different. You pay them every year because you get your coupon every year compared to a stock. You incur the tax when you sell it. Typically, you could be a bit more liberal with the stocks in terms of taxes. And that really takes me to the other thing

Starting point is 00:47:55 about rebalancing. I don't think there's anything wrong with rebalancing. I don't think there's anything wrong rebalancing, but I would definitely consider the tax piece here if that's what you're doing. Going into a rebalancing strategy, depending on how it's set up, it can be very costly for you if you're buying and selling too frequently. At the same time, you also have to be aware of what inflation is doing because the bond market is repricing things based on what their expectation for inflation is. So earlier in the show, I said that my expectation here in 2019 is that you're going to see the central banks eventually get to the point where they've got a capitulate or whole.

Starting point is 00:48:28 hold their rate rises, right? I don't know when that will happen, but I would expect it to happen in 2019. So if that would be true, that's whenever I think you're going to see the price of commodities go up, which means your inflation rate's going to go up, which is more pressure to the bond market, even though the central banks would then be holding their and not raising rates. So I guess that's why I'm just so negative going into the coming year with the bond market is just because I think that even if the central banks don't get you, I think that, The inflation that we might see could potentially get you as well. But we'll see.

Starting point is 00:49:02 We'll see how right that call is and we'll keep track of it as we continue to progress in the show and we'll continue to talk about these topics for sure. All right, Santos, thank you so much for asking your great question. We had so much fun talking about it here on the show. As a token of our appreciation, we'd like to give you a free subscription to our Intrinsic Value course, which is on our TIP Academy website. If anyone wants to check out the course, you can go to TIP intrinsic value.com. That's tip intrinsic value.com.

Starting point is 00:49:30 And if you'd like to ask a question on our show, just go to Asktheinvestors.com and you can record your question there. So, Sancho, thank you so much. All right, guys. That was all the press that I had for this week's episode of The Investors Podcast. We see each other again next week. Thanks for listening to TIP. To access the show notes, courses, or forums, go to the investorspodcast.com. To get your questions played on the show, go to Ask the Investors.com.

Starting point is 00:49:57 and win a free subscription to any of our courses on TIP Academy. This show is for entertainment purposes only. Before making investment decisions, consult a professional. This show is copyrighted by the TIP network. Written permission must be granted before syndication or rebroadcasting.

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