We Study Billionaires - The Investor’s Podcast Network - TIP222: Mastermind Discussion 4Q 2018 (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. On today's show, we bring back our good friends for the fourth quarter of 2018's mastermind discussion. During our discussion, the guys pitched three different companies that might be value picks, and then at the end of the show, I throw out a very non-standard momentum pick that's definitely different than my typical Warren Buffett-style investment. For people that aren't familiar with our mastermind discussions, we have Toby Carlisle, who's the founder of the Acquires Multiple Website and a deep value expert.

Starting point is 00:00:28 And then we have our good friend, Hari Ramachandra, who's a good friend, who's an executive in Silicon Valley for all things tech-related. So without further delay, here's our mastermind discussion to close out the year. 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. As usual, I'm accompanied by my co-host, Stig Broderson.

Starting point is 00:01:05 My name is Preston Pish, and we're accompanied by our good friend. friends, Toby Carlow and Hari Ramachandra. Guys, welcome back to the show. Great to have you here. I know I always really look forward to these mastermind discussions, so we're thrilled to have you back. Hello, it's great to be here. Thank you.

Starting point is 00:01:21 We all sent out our picks for this quarter's mastermind discussion. Do we have any volunteers to go first? I know we always debate over who's going to go first, but anyone who's really excited to talk about their pick. I'm definitely not excited about mine, but I'll take a swing at it because you guys are warm up and get nastier as we go along. So while everybody's sort of still a little bit nervous about the start of the call, let me, let me do mine. Mine's HPQ, HP, the printer business of the old combined entity before it spun out. So I bought this post spin in 2016, something like

Starting point is 00:01:55 that, and it was trading for about 11 bucks. And now it's $22. So it's up a lot. And I haven't seen it for years, for a couple of years. And it's sort of floated back into my screen. So I think it's kind of, It's interesting. $34 billion market cap. Price earnings currently about 6.8, which is cheap for HPQ. It's been higher. It's been lower. The reason that it's a little bit cheaper is there's some compression in their EPS.

Starting point is 00:02:19 So it's likely that they had $3.25 next year. It's going to be lower than that. Throwing out plenty of free cash flow, paying a dividend, buying back stock. Just one of the reasons that I like this business, I think that they have a good attitude towards shareholders. so they do buyback stock, they do pay a dividends, and I think that you're going to get a lot of the return out of the stock from shareholder-friendly maneuvers like that. 12% of the return over the last few years

Starting point is 00:02:43 has come from those returns of capital, whether it be dividend or share buyback. And I think that that will continue on because it seems to be throwing off cash and it seems to be doing pretty well. Price savings at 6.8, say, is below the five-year average and at a pretty substantial discount to every other stock in the index, and it's certainly below where it was last year.

Starting point is 00:03:04 in the year before. So it's had some compression in the stock price as well. You know, many of there are concerns about it pretty simple to state. One of them is that it's carrying more debt than I would ordinarily pitch to you guys. So the balance sheet is a little bit weaker than I typically like to see. And there's also, there's just eyeballing that balance sheet. The book value doesn't sort of tell you quite how bad it is because some of that book value is goodwill. And so it looks like it's about a $600 million negative book value, but sort of $6.6 billion of that includes some, I mean, there's $6.6 billion that includes goodwill and other things that I wouldn't really count. On the positive side, I do think that it's pretty steady business.

Starting point is 00:03:43 The risks are just general sort of macro risks that something really nasty happens in the economy. But HPQ's been around for a long time. They're making printers, hardware. It's the stuff that nobody really wants to be in anymore. But I think that this is kind of a muddle through business that will just keep on muddling through. And you'll get, I don't have great hopes for the returns, but I think that you can sort of make 8 to 10% over the next five years because I think the valuation, stocks currently trading at $22. I see valuations around $35, even assuming a little bit of diminution in the earnings going backwards for a little bit here. I just think it's too cheap where it is.

Starting point is 00:04:19 So I think that's about a 50% upside model for a business where they're sort of looking after the shareholders with the proviso that the balance sheet's a little bit weak. And if we really see some nasty macro, then have to revisit it. That's my pick. You know, my only comment, Toby, is really kind of your last piece there is how you see the macro piece kind of playing into this. Because if we are, in fact, you know, hitting a top right now and preparing for a recessionary period, you're going to obviously talk a lot about that during my pick. But I'm kind of curious how this type of company performs during those periods of time.

Starting point is 00:04:57 Hard to say because it's always been part of the, it was spun out so it hasn't traded by it. self and naturally people put off buying these sort of things through. People can, you don't need a new printer, you can push that back. So they are a little bit cyclical. You know, I don't invest so much looking at that macro picture because I just tend to sort of hunt around for what I think is the cheapest at any given time. And I also run my portfolio long short. So I have some ugly stuff.

Starting point is 00:05:22 I could have pitched you some shorts. I just don't want to be pitching shorts. I don't want to pitch a short that I might change my mind on in three months and then have somebody tell me like in two years time. I'm still in that short. That would be a bad thing. Speaking of which, and we're all laughing because my pick later is a short, but go ahead, Harry. Cool. I think this is an interesting pick. I wanted to understand, like, how do you see it? Is it more like a cigar butt that you want to have like one or two last box? Or do you think it's a long-term bet? I don't think it's a cigar butt. It's a business that's going to be around for a long time. And I think that it's going to sort of muddle through and maybe there's a little bit of growth in a,

Starting point is 00:06:01 it over the longer term, not in the short term, it's probably going to go backwards a little bit. So I don't think it's one path. Like, I think there's more to it than that. But it's certainly not that sort of Buffett compounder that you favor, Harry. So it's sort of maybe, it's the kind of business that I like where the business looks a little bit ugly, that the next short term looks really ugly, but the underlying business is pretty good and it's pretty cheap where it is. So I don't have high hopes for, like, I don't know where this will be in 10 years time, but in two or three years time or five years time, I think this is a, this is still a good business. So I don't know if it was the printer business you were also getting at before Harry. I mean, it looks like, but we will

Starting point is 00:06:39 see in terms of printers is that we'll have fewer printers, perhaps not as expensive printers. It won't have as a vital importance for most businesses. That is one of the concerns I would have. And then if you look more at what they're saying, they're talking about, you know, we have this new generation of 3D printers and they're going to be leaders in that. I guess my concern for a pick like this is I can't necessarily see how the mode they used to have and perhaps have around printers can be transferred to the new area of 3D printers. Yeah, I don't know that they have much of a moat in the existing printer business, but I don't think that 3D printers is such a game-changing technology from their perspective. It doesn't really change what they do that much. I don't know.

Starting point is 00:07:19 I could be wrong. Maybe 3D printing texts over the world. I still think that a lot of the reason that people buy a printer is you need at some stage to get what is on your computer into printed form that you sign and give to somebody else, which is, that's definitely a diminishing. You need less and less. We're not a paperless office yet, but where it's sort of trending in that direction. And I don't think that 3D printers are going to take over from that. But I think that everybody always assumes that these things happen very quickly. I mean, we've been hearing about the paperless office for a very long time. And I think that it takes a long, long time. And in that there are going to be some changes in the business. Yeah, I think that's a good point

Starting point is 00:07:52 that you brought up that. They don't really have a more. So it's more like a commodity business, but at the same time, they have a lot of legacy in terms of their printer division distribution channel and all that stuff. For me, the only concern I have is the way I'm looking at it is like when we were talking about when Buffett invested in IBM. We were also thinking of in the same lines that, you know, there are short-term problems, but they might work out and then they're buying back their shares. So in the long term, it might be a good investment. My only concern would be that is just like a value trap. I kind of see it the same way as Hari. It just, it kind of feels like a value trap.

Starting point is 00:08:32 And I think it's important for people that are listening to this conversation that whenever you hear Toby talk about how he originally took his position in this, it was back whenever there was gains to be had. And a lot of those gains have actually occurred and matured. And I'm not one to really talk too much about the momentum piece on it. But it appears like a lot of the price. starting to stall out on this. And I don't know if that's an indicator of what's to come or not, but it's not something that gets you real excited. So I don't know, Toby, I think it's important

Starting point is 00:09:03 for people to understand that you got in this at a different period of time and you didn't necessarily buy it last week. To be fair, I bought it in 2016 and then I sold out of it about a year later. And I haven't looked at it since that period of time, but it came back into my screen more recently with this volatility. So it's trading at $22.2.1 right now. And it's off, pretty substantially from, I think it topped out at 26, 42. So it's down about 20% along with a lot of other businesses of this type. When I first bought it, it was post-spin, and everybody who's a value investor loves those post-spin things because nobody can sort of analyze them property. And you just know that if you buy it, management's going to figure it out, it's going to

Starting point is 00:09:42 work out. This is not that situation. It's a little bit more mature. But I do think that this is still, you know, it's a tough market out there. There's a lot of overvalued companies. Those fangs and a lot of those other businesses are extremely overvalued. So this is not an overvalued business, but you don't get undervalued businesses without a little bit of hair on them. And there is some hair on this business. And they're sort of the metaphysical questions about how much people print in the future. Although printing doesn't make up a huge portion of their revenues. It's a business that it's easy to find all the things that wrong with it, but you've got to look at the fact that it is sort of undervalued where it is, I think. It's not one that you

Starting point is 00:10:14 compound away for five years, but I think it's one that gives a pretty steady return over five years. And another thing I would like to add, I'm really sorry that you actually went first, Toby, and we had all our frustration. We just put it on you here, the first pick of the show. No, I think it's a very interesting pick. I don't think there's so much wrong with it as such. This is not your, we talked about Google. I know that it had a big toe down, but we actually talked about that last time, but it's not the Google that compounds with 20% a year with huge network effects. That's not what we're talking about. And that's also why, you know, you see a company like HP that's trading at seven times earnings. And some investors might be out there thinking,

Starting point is 00:10:53 well, I'm just going to wait until now it trades at 14 times earnings, you know, like a great company. And it's probably not going to do that. It's probably going to stay around that, you know, call it six, eight, ten, whatever. I don't see go higher than that. So it has to, I think you're right, Toby, that it will come through how shareholders have been rewarded, and it will be like a slow and steady race. And perhaps it is going to slow and steady, it's going to win the race, but it's not going to outpace anything in the short. run. Hari, I see you have a point. I want to also stand on what Kobe said, like the paperless office and all these kind of

Starting point is 00:11:25 trends I have seen. Like, even in the heart of the Silicon Valley, I still see and I still see myself. And I want to really read a design doc or a requirement spec. I still take a printout. It's because you're old, Harry. You don't put it on your iPad and walk over Harry. I agree with Harry. And I don't buy into this whole 3D printing thing either. I mean, the 3D printing, I remember doing that whenever I was a college student a long, long time ago. And it's just not something that I think is going to be this revolutionary thing that's just going to burst out of nowhere, you know? I think it's going to be cool, but I don't think that we've kind of figured out what it's for yet.

Starting point is 00:12:02 Somebody will figure that out, but it's just, it's not obvious yet. All right. Anything else, guys? Should we go to the next peg? I can go next. Toby has broken the ice now. I'm feeling a little bit more. brave. So my pick for today is HDFC Bank, which is a private bank in India. One of the motivations for me

Starting point is 00:12:23 was recently Buffett took a large stake in multiple banks. That was interesting to see, I think, almost $14 billion, if I'm not mistaken. So to give you a bit of background about banking in India, there used to be private back at one point of time, but in 1970s, they just nationalized all the banks. They are called as public sector banks, basically. In 19, 94, as part of the liberalization efforts, they opened up banking. There were a few banks that was founded in 1994. H.TFC is one of them. Their returns has been in the 20 to 25 percent CAGR or long periods. And I was just comparing some of their metrics. For example, their revenue growth in the last five years has been 20 percent. To compare that to any of the U.S.

Starting point is 00:13:10 banks, JPMorgan Chase is 0.53%, Wells Fargo is 0.59%. U.S. Bank is 1.27% in the last five years. Their ROE is in the 17 to 20% range in the last years, whereas J.P. Morgan Chase was 10% and Wells Vargo was like 12%. Net margins are in the 30% range, whereas J.P. Morgan Chase is like 22%. Wells Fargo is 24%. Asset turnover is also. good. The ratio is around 11-ish. However, they're not cheap. And that's where, like, I wanted to submit this to you guys, Toby and Stig and Pristin, to comment around the valuation. So I'm not going to get into the valuation. But all I want to tell you is the story of this bank. There is a huge tailwind for them. And the tailwind is that, unlike US, a huge section of Indian population until the 2000s

Starting point is 00:14:04 was not in the mainstream banking. Close to 100 plus million people. just in the last one year came onto banking. And that trend is continuing. A lot of getting bank accounts. More people will be banking. HDFC is number two now. From nowhere, from 1994, it is now number two, with more than $300 billion in assets, total assets.

Starting point is 00:14:28 And also, the other aspect is HDFC, one of the things about HDFC is they are known as the early adopters or first movers in terms of technology. They were the first ones to bring mobile banking. they were the first one to implement centralized retail systems. That means what we take for granted in US where you go to any branch, you can see your account, you can see your activity. That was not possible in India.

Starting point is 00:14:51 Whatever I'm saying now is all well known. So I'm assuming a lot of it is baked into the price already. But I'm not sure whether we are paying too high a price for it. However, I feel like my taking a look at the Indian banking sector. So look forward to your comments. I'm having a little bit of trouble getting a valuation on HDFC and so I'm not really going to talk about the valuation, but I just in sort of broader terms, I'm a massive believer in India being one of the bigger growing economies in the world for the rest of my life, probably. I think that if you look at where India is now relative to where it's going to be, I think that it's it's got massive growth in front of it. I don't think that that's rocket science to figure that out.

Starting point is 00:15:33 And I also think that the banking sector in India is undersized for such a large economy. So I do think there's going to be even faster growth in the banking sector. I do think that almost everybody else in the world has figured that out, though. And so I think that if you look at India, HDFC is the biggest and the best. And I think that it's the one that's in the indices. And I think it's the one that a lot of people already own. And so I can see why it's the sort of thing that Buffett would be attracted to if you could get the valuation right. Do you favor HDFC over something like ICICI or Axis or something that's sort of a little bit further down?

Starting point is 00:16:09 Maybe not quite as picked over, not quite as well known. And maybe you don't need to do that because the underlying thesis is just so strong for India and for banking in India. And what you really want to do is being the biggest and the best. I think that's a pretty good argument. But then the other side of it says the valuation is tough to sort of get my head around as a deep value guy. 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 00:20:36 All right. Back to the show. Just to piggyback on some of the stuff that Toby's saying, when you look at the top line on the company, it's exploding to the upside. But the other thing that you're also seeing at the same time is you're seeing the price to book. Also, that multiple is growing significantly. So you just go back four years ago.

Starting point is 00:20:55 You were at a price of the book that was around a 10, and now it's double that. So it seems like everybody's kind of jumping on the bandwagon. So then my concern really kind of becomes, am I the sucker that's buying at a huge multiple? And is this revenue sustainable at the growth rate that they've got right now? And I don't know that right now where I sit, but those would be the things that I'd be digging into to try to understand a whole lot better is whether that multiple is something that's going to be sustained or if it's just something that's being reflected because of the

Starting point is 00:21:24 huge revenue growth that they've seen lately. I'd also be interested in looking at what kind of price the book the rest of the financial industry has in India. Is it also at around a 20 for the other companies, the other banks? Yeah, these are all very good questions. I think I'll take one by one. Most Indian companies are highly valued like 20 p ratios in India is common. I mean, for the good ones are the ones that are discovered, the ones that are in the indices, the blue chip kind of companies. However, I think to Toby's point, I think Toby had a very interesting point. There are companies that are not as well known as HDFC or ICICI, HDFC, especially because it is traded on New York Stock Exchange, so people anywhere can get access to investing in that. But there are other

Starting point is 00:22:12 banks that are not as well-discovered as HDFC, but are well-run and are on a growth trajectory. But there is one bank called Kotech Mahendra Bank. It's really well-run. However, they don't trade outside India. So that's the disadvantage. And the rumor is that Buffett might be interested in investing in that bank. Very interesting, Peck. And I think I would look more into how the bank is going to profit from the rising middle class. And the reason why I say that is, I know that the this was not the context you were saying this, and Hardy, when you were said hundreds of a million people being unbanked, good point. Facebook could say the same thing about people that is not online. The people who are not online, they're typically not the, you know, where you get the most ad

Starting point is 00:22:55 revenue. People who are unbanked in India now is not the people you're going to make money on, most likely it for the next few decades. If you look at the rising middle class, like how is the making money, and they're making money from the housing market? That's a classical thing that they might do. What is the situation of that? So to get a better understanding, of the debt they're sitting with. How is that financed? How does that work in India? For the regular, I have no clue how that's going to work. How much is that flowing back to the banks? So from this 7, 8, 10% rise in GDP we might see for some time. We would say, at least historically, if we're looking at developing countries, a lot of that will flow back to the banks.

Starting point is 00:23:31 Would the same be the case here for a bank like HCFC? And then another thing I would like to put into the mix here. The political risk, you mentioned before that you had the banks who have been nationalized. I know that this bank is classified as too big to fail. That's not really what I'm talking about. But what is happening if it's being nationalized again? Is that a real threat? How will you be bought out if ever by the government? And I'm sorry, I'm going to put another question into that, Harry. How is a company a bank like this competing with government banks? What's the dynamic between those two? I guess that's another concern that I have. Your comment on the rising middle class and also the bottom population who are just coming online to banking was really valid because

Starting point is 00:24:12 I think banks will profit from the middle class. The Indian demographics is really positive for banks in the sense that if you look at most of the developed countries, especially in the Europe, you will see that the demographic pyramid is top heavy. That means a lot of old people, few middle-aged and few young people. So that means they're all in the savings mode or like retirement mode. India is in that perfect demography where it's a perfect pyramid. I can see the change when I was growing up in India back in the 80s and 90s.

Starting point is 00:24:45 Hardly people own cars. Now, everybody wants to have two cars at least. Taking loans to buy cars is a norm. I mean, nobody even blinks an eye on that. And in fact, there are a lot of financing going on for everything, not just cars, but homes. And one of the priorities for the government is to provide housing for everyone. A lot of initiatives and incentives by the government also to help ease the lending for housing sector as well. But you also ask me, how does it compare with the public sector banks?

Starting point is 00:25:16 The way I see is it's a very unfair competition for public sector banks. The reason being public sector banks are saddled by government initiatives. Government comes up with policies to, say, provide loans to certain section of the population. who are known to be not creditworthy. But because of the government policies, the public sector banks are mandated to lend money to them. Private sector bank goes after the lucrative customers. The public sector banks are like the post office here.

Starting point is 00:25:51 They have to serve everyone. They are not really for profit. I mean, they're supposed to be. And the second one, you asked about political risk. What if India nationalizes their banks again? that is a hard one actually. I don't know. It has happened in the past.

Starting point is 00:26:07 The way things are going now, at least in the near term, I don't see it happening again because there is a huge political risk for any political party to rewind the liberalization and capitalism. It has just taken roots in the past 20 years so much that the aspirations and the expectations of the general public

Starting point is 00:26:28 is much different than what it was like 20, 30 years back. All right, so we're going to go ahead and have Stig throughout his pick. All right, guys. So my pick is Phonar. The stock ticker is F-O-N-R. I was really worried that you guys would come hard. So I chose one of the smallest companies I could ever find and hope you didn't have too many questions. I chose a company with a mile cab of around 140 million.

Starting point is 00:26:55 So this is probably one of the smallest companies, if not the smallest company that we ever discussed on the mastermind group. I have the same problem as Toby and I guess everyone else here is that if you're looking at companies with a decent return, you have to look at something that has a bit of hair on it or at least think really untraditional. So I've looked away from Dow, S&P 500 and I found this tiny, tiny company. So Phonar, there's businesses that the design and manufacturer cell and service MRIR scanners, which is used for diagnosing different human diseases. The founder was also the guy who invented the MRI scanner back in 72, but even so, it's not necessarily

Starting point is 00:27:36 because they have been the most successful. It is still trading at a very interesting multiple. It's trading at P-Round 7, which is very similar to ATP, and it has been profitable since 2011. You've seen a steady optic in revenue that has primarily come from the new business strategy of setting up their own centers, where they are doing the diagnosis and taking pictures too. I could say generally about the business, it is a huge investment to set up for healthcare providers. Costs typically range between $1 to $3 million, sometimes even higher.

Starting point is 00:28:09 And another huge expense is the suite in itself that can be in excess of $5 million. In general, it's a growing market. The current market size, 40 scanners, is around $6 billion. Phona only has $82 million. They're definitely not a market leader in any way. They do not have a wide mode around what they do. and they're also very depending on the general spending on healthcare. So whenever I'm looking at how to value the company,

Starting point is 00:28:36 I'm looking at different scenarios either to include the historical growth of MRI scanners. I've also been looking into what is the general increase in healthcare and also have a negative scenario. What if there is no increase at all? Having all this in mind, I look at around a 15% return for this company. Guys, I'm very interested to hear what you. you think about this tiny, tiny company. Is it just me being creative with the numbers, whenever I think I can have a decent double-ditch return? Or what do you guys see? I love the pick.

Starting point is 00:29:09 It's currently in my Acquirers small cap screen. Everything about it on the numbers just is eye-poppingly good, great growth, massive return on invested capital. It's cheap because it trades under Acquires multiple less than six, throwing off lots of free cash flow. Everything about it is very, very impressive. I find it really hard to find anything wrong with it. Honestly, the DCF off the charts, I think it's kind of like, it's trading at like half price, even assuming pretty kind of modest growth assumptions. I think it's one of those stocks that really the only thing wrong with it is that it's small, but if you can get over that, then I think it's a, I can see this being worth a lot more. I mean, it's had a monster run since 2011. It's up, it's up sort of 15 times, something like

Starting point is 00:29:53 that. So if it does that again, then this would be a, this would be a great investment. It's interesting you would say that, Toby. Whenever I looked at the numbers, it looked like a very interesting company. The issue is just like I'm not an expert in banking in India. I'm definitely no expert in MRI scanners either. Whenever I go through like the reports and they talk about, well, they do think they have a mode because their technology allows you to watch TV and you can sit and it's much more comfortable for you as a patient to use that. I don't know too many of that. It's not too transparent for me at all. The R&D expenses for this company, for the industry, is not that high.

Starting point is 00:30:31 A lot of it really comes down to the sales team as far as I can see through the numbers here. What I do like about the company is that they have a lot of cash. Again, it's a very small company. They have around 20 million in cash, but it is a lot for a company like this. I have a strong balance sheet. If a company is very transparent for me, I would like to see a very nice dividend. So I kind of feel that there is cash. I can see the cash.

Starting point is 00:30:54 it would come back to me as a shareholder. That's not what I see with this company. They are using all the cash they have to build new facilities, to acquire new centers. Currently, they have 26 in Florida and New York. And it seems to be perhaps the right strategy. I guess for me, for a company like this, perhaps because I feel it's too good to be true, I'd like to see some of that cash returned, especially if I don't know more about it. So I can tell you, Stig, from a fundamental standpoint, reviewing all the numbers

Starting point is 00:31:24 and then running an intrinsic value calculation or an IRR on the company. I'm coming up with anywhere between 10 to 12% based on the numbers. So I think it looks fantastic from that standpoint. The top line revenue is growing, not aggressively, but it's going up. The free cash flow is good. It's a small company and therefore the price on it is very volatile. The volatility on this, if you're looking at it over like an annual time frame, is close to 30%.

Starting point is 00:31:53 If a person is going to buy this, they just kind of need to be prepared to be whipsawed all over the place. The only negative thing I can say about this is if you start off, and this is how I look at my investing approaches, I always start off with the fundamentals and try to understand whether I think that there's a lot of value to be had. In this case, I would say that there is. But then whenever I transition over to the momentum side of it and try to understand, how is the market treating this company right now? Is the price action suggesting that it's in a positive trend?

Starting point is 00:32:23 And it's not. The market is not treating this as it having a positive trend. And so how I'm looking at that, just so people understand what I mean by that is if the price action is positively sloped and it's staying inside of that 30% volatility range, then I would call that a green and all things are a go. If the fundamentals are good and the momentum's good, then I see that as a buy. But right now, it's not really kind of meeting my momentum metric. And I think that it has cause for concern. So for me, I'm just going to sit back. I'm going to continue to watch this because I think there's a lot of value here.

Starting point is 00:32:59 But I'm not going to enter into the position. I'm just going to continue to watch it until I'd probably see a change in that momentum trend. 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 Vantta is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform.

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Starting point is 00:36:23 This is a paid advertisement. All right. Back to the show. Well, thanks for the comment press. And I'm really happy you always bring this piece about momentum. As value investors, it is really hard not to look at this general warm. If the evaluation is right, just go ahead and buy it because you don't know what's going on. But perhaps you are right.

Starting point is 00:36:44 Talking about that piece, you do see a bit of insider selling. It's not a lot. It's from the founder. So I'm not too concerned about that. So I just wanted to mention that. Also, that perhaps something, one should take a look at, if you do see a negative trend for a very, very small company, it doesn't have a lot of volume. I think the average is around 10,000.

Starting point is 00:37:04 So yeah, something like that for a $22, $20 company. Hari, any comments on your end? I was looking at its competitors and it is GE Healthcare and Simmons and all those guys. Two thoughts came to my mind. One, they can outcompete KONAR with their marketing budgets or it can be an acquisition target too. So you might benefit from acquisition spree among the bigger companies as well. It's a really good point. If you do look at the competitors, you know, they are generally much bigger.

Starting point is 00:37:32 It is, however, hard to get a really firm grasp of the MRR market, at least for me. me because the way that if you look at a company like GE, a huge competitor, and you have a company like Canon, huge companies, and it's not always as transparent, but they're doing in that specific industry, which again leads me back to this idea of, you know, with the kind of return that they're achieving right now, I would love to collect my six, eight percent back in dividend or whatnot. If I could do that, I think it would take a lot of risk off on my end. I still feel that the evaluation is very generous. It is just as a market follower in many ways and as such a small company and it has almost no coverage, it's just really hard for me to get a really

Starting point is 00:38:16 firm grasp of where are we with that company, which is perhaps also why it's only trading at seven times PE. All right, guys, thanks for the comments and the thoughts you had to Phonar. Just one thing I would like to put out there. Prestonai write up different thoughts on various picks that we find interesting. And only a few weeks ago, we did a write up our phone are. It's on our free intrinsic value index. Everyone can just go and take that out on TAP Academy or they can simply sign up at TIPE email.com and they automatically get signed up and have analysis like the one I'm providing here sent to the inbox. All right. So I'm going to talk about my pick. Just a little disclaimer here. So I tweeted about this idea of this position.

Starting point is 00:39:01 and let me tell you, I have received a lot of hate mail over this idea. But I think it's going to be fun to talk about and I think it's going to be fun to kind of go through. My recommendation this week is ticker S-H. That is S-H. And this is the S-M-P-500 short. I guess if you think the S&P-500 is going to go up, then you'd want to own something like SPY. If you think the S&P-500 is going to go down, you probably want to own something like, S-H. Here's my narrative, and I'm not one to really short. I don't have a lot of experience

Starting point is 00:39:37 shorting, so I think people need to take some of my comments with a grain of salt here, and I think if you're trying to put on a position like this, and you don't have a lot of experience in the markets, and even if you do have a lot of experience in the markets, it might not be the best decision. So I want to emphasize that before we even start talking about it. I purchased this. My average purchase price was around $28.30 whenever I put this position on. Currently, the price is at about $30.45. So I'm already up in this position about $2 from the time I put this on. I'm looking to increase that position. If the price, anything below $28.90 is where I'm looking to add to the position. And that point is really

Starting point is 00:40:19 the 200-day moving average on this ticker. So if it goes below that 200-day moving average, I'm looking to add to the position. Now, with that said, I've also set up. a stop limit for myself on this so that if I am in fact wrong and I've already decided what point I would consider myself wrong and the stop limit for me is the $27.40. I would consider myself wrong in this position and I would liquidate and I would take a loss on the idea. So I just want to put that out there up front so people kind of understand how I see it. This is my narrative.

Starting point is 00:40:56 All major central banks around the globe are currently tightening. They are not loosening monetary policy like they have over the last 10 years. The global stock market is well below the 200-day moving average, and the moving average has a negative slope. And I think that second part is really important because a lot of the times whenever you'll see the price go below the 200-day moving average on something like the global stock index, you'll see a quickly rebound and actually bounce right off that 200-day moving average. And whenever you see that quick bounce off the 200-day moving average, it's typically whenever the 200-day moving average. still has a positive slope. Right now, we don't see that. We see the price really kind of, especially on the global side, you're seeing the price sustained below the 200-day moving average by quite a bit, and the slope of the line is actually starting to go negative.

Starting point is 00:41:45 The other point that I want to highlight is that the unemployment numbers are at all-time lows, and they appear to be starting the flat line. They're sub-4%, which you know hasn't really happened for decades. The bond yield curve is extremely flat and in, some portions of the curve, they've actually started to invert. We're expecting the federal funds rate to go up to around 2.5% here by the end of December. If the Fed decides to hold steady on the tightening, which many are suggesting might start happening after this quarter, maybe one more quarter of raising the federal funds rate, if they do start to hold steady, I think that you're going to see the dollar really kind of have a strong sell-off. And I think

Starting point is 00:42:24 that that's going to have a significant impact on rates. And you're going to start to see a lot of that being priced into the bond yield curve, which then is going to have an impact into the equity market. So one other point that I wanted to highlight was that we were seeing buybacks for the S&P 500. They've exceeded $620 billion for 2018, which, you know, you go back to 2007. It was around $590 billion back then. So we're above that buyback level. And there's been no other time in the last basically 20 years where we've seen buybacks that high. So buybacks are typically an indicator of really good times and probably the peak of good times. We've seen the Schiller-Cap ratio peak out at about 33. Today it's back down to 28.7. My expectation is that that's not going to go back

Starting point is 00:43:12 up higher than where we've seen it. I'm laying out a very bare case here. The hard part of getting this right is really kind of buying it. First of all, if this call is right, let's say that the market is going to go down. I think it's really hard for people to put the position on at the right times because the time to buy is whenever the market price is going to be really kind of accelerating up and it's going to be looking like you're wrong like any position. And that's when you really need to be buying more of the shares if in fact this is, if we are in fact seeing a topping process and we're going to see a year or two or three of the market going down. So I think that that's the real challenge for people that would be putting this on. It's going to

Starting point is 00:43:52 feel really comfortable to buy this on days where you have a 3% drop in the market. But that's probably the days you need to be maybe offloading some of the positions so that when the days when it's going back up, that's when you need to be buying. And that's going to be really, really hard from a psychological standpoint. So that's my pitch. I don't have a lot of conviction in this position. I would say that if I had to stick a probability on it, I'd say that 55% sure that this might be right. I don't know. But it's not a lot. And I think. that that's important for people to understand too because as I'm dipping, I would call this, dipping my toe in the water to kind of see whether this is a good idea or a very bad idea.

Starting point is 00:44:32 If it goes past that stop limit that I had said previously, which for me is around $27.40. If it goes past that, I'm going to sell the position and just kind of reassess and maybe just, you know, stay away from something like this. But if people do want to kind of track my thought process on this and how I continue to play it, I'll be talking about it more on Twitter. you know, if I'm wrong, you know, everyone can kind of sit around and get a good laugh at my expense, literally at my expense. I think it's a really good idea. And I'll just tell you why. I've done this similar analysis. You can look at the market in very simple terms as being trend and value. And if you look at it in terms of trend, the 200 day moving average or the 10 month moving average, same thing. If the 200 day is up, the market is up. If the market closes below the 200 day, the market is down. That's how complicated that analysis is. And then you can look at the Schiller PE when it's above and below average. So that gives you four states for the market, trending up and overvalued or trending up

Starting point is 00:45:30 and undervalued, trending down and undervalued, trending down and overvalued. So in those four states, it's no surprise to anybody, I'm sure, that if the market is trending up and undervalued, that's where you get the best returns. And the market since 1950 has managed to do 15.5% each year on average under those conditions. When the market is trending down and expensive, which is the current state that we are in, the market has averaged negative 1.3% per year under those conditions. Then the other two are sort of mixed. Trending up and expensive is actually 8.4%.

Starting point is 00:46:09 Trending down and cheap is 6%. There's time to be nervous in the market, and that is when it's below the 200 day and it's extremely expensive, which is where we find ourselves. Now, the main reason to be nervous, though, is that this is a lot of. where all the big crashes occur. So all of the biggest crashes occur when the market is in this kind of state. The thing to be sort of nervous about when you're putting a position like this on, I don't mind the instrument that Preston is using to invest in this because you're putting a long position into S-H.

Starting point is 00:46:39 So it can go against you, but you can't lose more than you put into this position. So that's one thing to think about. But the reason that these sort of positions work and the reason that that analysis that I just gave before work, is that the stock market has this behavior where when it sells off, it sells off very deeply, but most of the time it doesn't work. So what that means is that when you put this position, this state has existed at various times over the last 10 years. And if you put this position on, you would have lost money in it.

Starting point is 00:47:08 And it's likely that you put money on in this position and you lose money at it because the frequency of these positions being right is low. But when they do work, the magnitude of the win is. so big that it pays for all of the other times that you've put it on. So that's a reason why you want to put it on, but then you need to be watching the 200 day and ready to pull it off again when you're proven wrong. So that's that's sort of my very brief analysis of this. And I would say if you're going to put a position like this on, you put it on and then you go and find the thing that you wanted to buy long and you wait for it to get cheap and you buy that thing long,

Starting point is 00:47:44 and then you might put a little bit more of the position short on and you can go and find a little another long that you like to buy. So you use it to sort of, the way I use it is to protect my long positions rather than sort of as an outright speculation. My first comment to this is that Preston is probably the most courageous member of this group. Think about shorting the market and then tell everyone on Twitter, you know, of all places in the world. I kind of like that. It's a tricky thing. We talked about shoring multiple times here on the show. And we always talk about how difficult it is to get the timing right. We've also talked about the market being overvalued for quite some time. Yes, it is overvalued now. It was so a year ago and two years

Starting point is 00:48:25 ago. So when is it going to drop? And I think it's interesting also what Toby mentioned, that Preston is probably wrong, but his upside if he's right is so much higher. So that's always the calculation we need to make. I'm curious, Preston, with a pick like this, which is very expensive. it has expense ratio of 0.89%, which is actually not a big issue because you're typically only holding this for a very, very short period of time. What are your thoughts on an exit point, assuming that you're right, assuming that the market does crash? When has it crashed enough for you to exit the position? So I'm really looking at it from the volatility of the S&P 500. The S&P 500 for me, the volatility is around 10%. So as long as the price action kind of

Starting point is 00:49:12 stays within that 10% range on the way down. If it is, in fact, going down, I'll just continue to hold it. I'm not going to try to really kind of time anything. I'm just going to really look at whenever it sets its newest low, if the price of whatever that low would be, or really on this, it would be the high if we're talking specifically for SH. I know this will get convoluted if we start talking, whether it's going up or down. So let's just talk about SH. So as SH would potentially be going up, if I'm right, the price action should operate within a, 10% volatility. So let's say that it goes up to $40 and that's the highest price that it goes to. If the price drops back down below $36, that would be my exit point at that point because that

Starting point is 00:49:55 be 10% below the highest point that it basically achieved. But as long as it stays within that 10% volatility range, I'm just going to continue to hold it. So if it goes up to $90 and comes down to $81, then that would be the point I would sell it. I wrote an article discussing these metrics that was in Forbes in January 14, 2016. So I'll make sure they send the link through to you guys so you can stick it in the show notes to this one where it has those statistics I was just discussing then. But it is worthwhile mentioning that these conditions did exist in 2016, in January 2016, and it didn't then follow through. This is just one of those things that you need to understand frequency and magnitude. The frequency bet here is likely wrong, but when it works, you make a lot of

Starting point is 00:50:37 money. I think that that's a really good point, Toby. And I've thought through that as well, the things that I'm seeing that are different between now and back in the 2015-2016 time frame, when wherever we saw a lot of these similar conditions was that the central banks were acting very differently back then than they are now. Back then, a lot of, I know over in the ECB, they were still aggressively loosening. You had Japan was still aggressively loosening. And now you don't necessarily have that happening. Also back then, you didn't have the bond yield curve nearly as flat as what you have right now. And then the last thing that I would tell you is that the U.S., they've already did this massive tax play that shot the market up at huge rates in the last two

Starting point is 00:51:24 years. And they basically don't have that play here at this point in time to do over again. And I think that that's very different. I think that when you look at the amount of unemployment, that was different now and way lower than where we were at in the 2015-2016 time frame. So I guess for me, that's my justification. That doesn't necessarily mean that it makes it right, but I think that it adds maybe a little bit more probability to the fact that the call could potentially be right compared to back in the 2015-16 time frame. And I'm not arguing that you're wrong either. I'm just saying that when you're putting these positions on, you have to approach them probabilistically and you have to realize that each time

Starting point is 00:52:04 you put it on is likely not right. But the one time that you do put it on and you get it right, you're going to get a very, very right. And then your ego explodes. Well, then you're famous, right? Then you're one of the guys that you're in the big short or you're the greatest trade ever or something like that. But you've got to realize that for all those guys that were in the big short, there are other guys who came beforehand. They wore a lot of arrows in the back before they, before somebody got it right. No, I think that what you're saying is absolutely valid. And I think that's why I'm saying my confidence level is very, very low in this. I think this is right. I'm putting a little bit of money on the position to feel what that is like. So far,

Starting point is 00:52:46 it's been great because I kind of put it on at a good position. I'm a little bit ahead. And I think that helps me feel a little bit more comfortable talking about it, to be quite honest with you. But we'll see how things continue to progress. And I think it's really important that people understand that I have put a stop on the position that if price goes below the $27.40, 40, I'm just going to liquidate out of it and then reassess and rethink about things. So, Hari. Would you suggest this as a insurance policy in general, have it all the time? So kind of have a hedge against your positions, long positions?

Starting point is 00:53:21 I mean, I don't personally. I don't do it that way. No, this is, you put it on only when you're below the 200 day. That's that particular trade. other trades that you could put on that are tail risk type trades that you can keep on all the time. But tail risk catching has been extremely expensive for the last sort of five or seven years. And there are a lot of people who have lost a lot of money. And a lot of the money went to that ETF, XIV that eventually blew up.

Starting point is 00:53:44 But that was exactly what Taleb was talking about when he was, Taleb would have been on the other side of that XIV trade. I'm not saying that he did. I have that information. But he's looking up for those strategies that make a little bit of money all the time. But given enough volatility in the market, are going to vomit the whole. lot back and more. Tail risk has been a very tough place to be for a long time. But there are going to be some famous tail risk investors who are going to get it right when the market does

Starting point is 00:54:09 eventually blow up. Chris Cole at Artemis Capital is one of them, not a well-known name now, but will be a well-known name sort of post the next blowup. Well, we'll see what happens. I think it's fun to talk about it. And I think it's fun to document it. And I think that, You know, there's a very strong possibility that this could be a bad position. But you know what? It's going to be a great learning example for everybody to observe if it is, in fact, wrong. So I think it'll be kind of a fun thing to kind of track and do. Well, I mean, the interesting thing is you're probably right, Preston, or you are right. The question is if you're going to be wrong before you are right. All right, Toby, go first. Tell people who you are. Tell everyone about some of the different things that you do. out there. I'm an investor and an author. I run a website called Acquireasmultable.com, which has stock picks if you're interested in the strategy on the site. There's lots of blog posts and things like that.

Starting point is 00:55:05 There's also a book available through Amazon called The Acquireas Multiple, which is a condensation, summary, simplification of three other books that are written, quantitative value, deep value, and concentrated investing. The strategy is a deep value strategy looking for sort of private equity and activist-type stock picks. So I like deeply undervalue. positions where the business is a little bit busted, but there's a possibility that if you get some activist or private equity attention or management just starts doing the right thing, buying backstock, whatever, it'll do better. It's been a really rough period of time. It's only been not working for about 10 years, but I'm hoping it'll start working sometimes

Starting point is 00:55:42 soon. Horry? I guess I'm the odd man out here. I'm the geek from the Silicon Valley hanging out with all this financial visitors. However, I learn a lot from you guys and others. And whatever I learn, I just write in my blog, the bits business, www.bidsbusiness.com. Happy to be in touch with you guys. There are on Twitter.

Starting point is 00:56:07 My handle is Harry Drama. So we'll have Toby and Hari's Twitter handle in the show notes. We'll also have links to their websites that they discuss there. So if you guys want to check that. out. We highly encourage you to click on those links and check their information out. All right, guys, that was all that Preston and I had for this week's episode of The Investors Podcast. We'll see each other again next week. Thanks for listening to TIP. To access the show notes, courses or forums, go to theinvestorspodcast.com. To get your questions played on the show,

Starting point is 00:56:40 go to AsktheInvesters.com 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. Thank you.

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