We Study Billionaires - The Investor’s Podcast Network - TIP271: An Intrinsic Value Assessment w/ Dan Ferris (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. On today's show, Stig and I dig into the valuation of a single company to learn about important considerations when investing in businesses within the mining sector. Our guest expert is Dan Farris from Extreme Value and he comes with over two decades of experience in financial valuation. So without further delay, here's our assessment of Altius Minerals with Dan Farris. 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.

Starting point is 00:00:46 Welcome to today's show. My name is Dick Broterson, and as always, I'm here today with my co-host, Preston Pesh. And as we said, their introduction, we are here with Dan Ferris. Thank you so much for taking the time out of your busy schedule to join us here today, Dan. Oh, it's my pleasure. I'm very happy to be here. Thank you for saying so, and we are very excited to talk to you today. And and learn about how to value mining stocks, especially else minerals. But before we talk about the specific stock pick, could you please tell our listeners who do not have experience with mining stocks, what makes the mining sector so different than other sectors?

Starting point is 00:01:25 Just straight to your question, the mining sector is rough. It's a rough business. And I actually don't like to invest in regular mining companies because they are extremely capital intensive. you earn a single penny of revenue to build a mine that's worth building. And we're talking probably a couple of billion dollars usually, maybe several billion. So, you know, up front before one penny of revenue, right? And then the process, in fact, you know, from discovering the mineral prospect to getting

Starting point is 00:01:58 the permits and getting everything built and getting the financing, et cetera, it can take a couple of decades. So, you know, it's highly cyclical. You know, for that reason, over a couple decades, prices go up and down and up and down, and projects are on and off. And it's just, you're never setting the price. You've got all these upfront costs and fixed costs and things, and you've got to take whatever price the market gives you.

Starting point is 00:02:24 It's just, it's kind of Warren Buffett's nightmare, you know, the mining business. That's why he never wants anything to do with it. And I don't blame him. I never want to own a mining company. And neither does all be as minerals for that matter. Yeah, interesting you would say that. And I definitely look forward to the second part of the interview where we're specific going to talk about that. But we haven't really been covering mining stocks too much here so far in the show. And one of them is what you just said, you know,

Starting point is 00:02:52 we are founded in Warren Buffett. That's our base. And he would probably run away screaming for most, if not all mining stocks. Since we have you with us here today, Dan, we would like to dig a bit more into the mining sector as a whole, and then we're going to talk about royalties, specifically about this stock, and why it's related, but perhaps not a core part of the mining industry here. But all sectors have specific vocabulary. For instance, here on the show, we've talked about the retail sectors multiple times, and if you look into the retail industry, you have your own vocabulary. You know, you talk about same sales store. There's so many different terms you would use for that industry. Now, as mentioned before,

Starting point is 00:03:37 we haven't really been doing too much research into mining stocks. So could you please introduce some of the concepts that we as investors need to understand to begin a research in mining stocks? Okay, so financially, it's all the same stuff, right? You know, financial statement is a financial state in any business and in any business you want something that you can regularly pull cash out of that literally makes more money than they know what to do it. So if you're investing in mines, actual mining companies, you will want to know the state of the industry. If you are investing in a company that owns copper mine, you will want to know the global state of the copper mining industry. You know, where are we in the cycle? How does your mining company compare to other mining

Starting point is 00:04:26 companies in terms of the margins and the cash costs per pound of copper? That's extremely important with any mined commodity. You know, cash cost for ounce of gold per pound of copper, etc. A ton of iron ore. You always want to know those things. And it can be very complicated getting inside of them and figuring them out. Just figuring out what they're really paying to pull an ounce of metal or a pound of metal or a ton of metal out of the earth can get really tricky. It can be difficult. So that's something that's a little different than other industries. Those are some things that are a little bit different. And in the mining industry, as in some other industries, for example, just another example that comes off the top of my head is something like

Starting point is 00:05:11 banking or insurance. You really want to understand the management team well, like really well. You really want to know who they are and where they've been and what they've done and what kind of people they are, especially the smaller the company, the better you know those people. Because as we probably all know, there's a lot of shady stuff in the mining world. There just is. And you have to accept that as sort of not a cost of doing business, but a cost of doing your research as an investor, certainly. You've got to get around that and you've got to know people. So, Dan, like you said earlier, miners are very cyclical.

Starting point is 00:05:48 So how do you personally read the cycles? There are basically three places in any cycle, right? There's the extreme top, the extreme bottom, and the middle. I stay away from trying to read the middle. And you, you know, you kind of know when you're getting near those extreme tops and extreme bottoms. At extreme tops, everybody on earth, you know, your brother-in-law is calling you and saying, hey, I just found this cool mining stock.

Starting point is 00:06:15 It's going to go up a thousand percent next week. So it's just anecdotally, it's really not very different from looking at overall cycles in an economy, a country's economy, or any stock market index or anything else. But trying to put too fine a point on it is probably a mistake. And believe me, if you've been around the block at all, you know what those moments like late 2015, early 2016, you know, the bottom of the cycle looked like and smell like. Nobody can get anything financed. Nobody wants to hear about mining. They refuse to even think about it. So for me, tracking cycles, I want to see extremes. I don't even think very much about them in

Starting point is 00:07:01 between. But whether it's in the overall stock market, the S&P 500 or the mining cycle or anything, man, the extremes just hit you over the head. It's hard to miss them. And for those of us who never been hit in their head by one of those clear signs, you know, they're just, you know, starting to look into it, what is a clear sign of something that is extreme? When the guys who are spending $1,500 to mine an ounce of gold are making money because gold is $1,900 an ounce, that is a pretty clear sign. When any of, you Anybody can finance any piece of garbage moose pasture anywhere on earth that you know darn well will never become a mine because it's in the wrong place and the geology is screwy,

Starting point is 00:07:49 you know, it kind of becomes obvious. That's the hit in the head moment. And as I said, you know, when people who are not familiar with mining are calling you on the phone and sending you emails and saying, wow, I got this great mining deal. When everybody wants to do it, you sort of know it. when you start trimming back your positions and heading for the exit. 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 00:12:31 Yeah, I mean, at this point, we're looking at a major change in the way people want their electricity generated, right? Lots of people, they just hate coal. They hate it. And in Canada, they're going to shut down all the coal mines in 2030. So, you know, they better come up with something else. And a lot of that something else will be so-called renewable sources, you know, the solar and the wind and the hydro. That's something that once you spend that money, especially like hydro, once you start, Once you spend that money and the thing is going, it can go for a very, very, very long time.

Starting point is 00:13:07 There's no reason to kind of go back the other way. That's secular. That's kind of one directional. That's a big one that affects mining, I think. Otherwise, since the mining deposits and the mines are all over the world, you know, political changes can be brutal. You can get wiped out on those, so you've got to be careful about jurisdiction. but that move from, you know, from fossil fuels to renewables, that's kind of a big deal. You can't ignore it.

Starting point is 00:13:36 Even if you disagree with it, you cannot ignore it. So, Dan, you first recommended the stock that we're talking about today, Altius Minerals, back in 2009. What did you see then and what has happened since? Well, it's transformed since 2009. When I bought this thing, I had known the management team because I had owned the stock, but I kind of lost track of it. And, you know, the financial crisis ensued and the thing was, you know, 30 and then it was like five or something.

Starting point is 00:14:06 And so I started paying attention to it again. But at that time, what I was looking at was something that was trading at a discount to cash and liquid investments. That's all I was doing. It was like a net net to me. And I had owned it. I thought the guys were honest and would run a good business. and not running into the ground. And I thought, okay, well, you know, net net, spring of 2009, you know, things don't get much

Starting point is 00:14:34 uglier than this. So here we go. And, you know, they were doing like $3 million a year or something. And they had one paying royalty. You know, they have like 15 of them now. And they had one paying royalty that was making them $3 million a year that was covering their GNA, right? So they were paying the bills on this royalty.

Starting point is 00:14:55 So because early in their history, the founder, Brian Dalton, said, you know, I hate this, you know, digging holes and diluting shareholders model that everyone pursues, you know. And so they had a big winner early on. They put $600,000 into a uranium deposit and sold it for $200 million. So when I found them, they had put $600 grand into this uranium deposit. They sold it for $200 million. they were hanging on to, you know, after taxes, they wound up with like $150 million or so or something. And they were hanging on to it and making a list of all the premier royalty assets they wanted to own. And they were taking their time and they were waiting for things to come to them.

Starting point is 00:15:40 You know, they wanted to be, you always want to be the liquidity provider, right, at the moment when liquidity is at a premium. But then they really built it into something. So, you know, three million a year after a few acquisitions and a decade later is probably going to wind up close to 80 million a year in royalty revenue this year. You know, I mentioned the insurance companies a moment ago. All the insurers want to say, we have discipline. We have underwriting discipline, right? And it's the same with all the prospect generators in the mining industry. You know, they want to say, we have discipline.

Starting point is 00:16:16 But, of course, they don't all have discipline. But these guys really do. They waited and waited and waited. They sat on that money. They got it in 2008. They sat on it until 2014. And then they found a deal to do because, of course, by 2014, the cycle was way down. And there were debt crises in the mining industry.

Starting point is 00:16:40 And people were having to cough up assets to raise cash, et cetera, et cetera. You know, you probably remember companies like Cleveland Cliffs and the company they bought, from Share It. Share it was a company that was having trouble, and they needed to disgorge some assets, and they had a really cool mining royalty portfolio that contained some wonderful potash royalties. It also had some coal royalties, so they kind of had to take the two together, you know, to get the whole deal. And they partnered up with Liberty Mutual, an insurance company that had a history of investing in mining, and they bought this thing. I think the total purchase price was like 262 million. When Altius side, in 2018, Liberty Mutual got tired in the mining industry, and Altheus wound up buying the other piece of it.

Starting point is 00:17:27 So they own all of these stolen potash royalties. And, you know, that's just one deal. But they've made a bunch of them over the years. And they waited. You know, they started in 2014. They put some money to work through 2018 or so. And just that one deal, I mean, the potash royalties are a thing. of beauty. So with mining, like the average gold mine that you'll find today, they'll tell you that

Starting point is 00:17:55 the life of the mine will be, you know, maybe like if you're really lucky, like 12, 15 years, maybe more, if you've got a really good one. But these potash mines in Canada, the royalties on these lines, this is like, this is something like a fifth of the world's potash production that Alteus has a royalty on. Okay. And so the mines, the mine lives are like 800, 900, well in excess of a thousand years. You know, so this is like something you pass on to your great, great grandchildren or something, which is highly unusual. A mine is a depleting asset, right? So it becomes less valuable over time. But these potash mines, they'll get capital investment and they will increase. the production as they've done since Altie has bought these royalties. So over time, the royalty revenue, it's perfectly rational to expect it to grow, which is a little weird when you've got a depleting asset. But it's just so large. And over time, they can, you know, they can expand to meet increased demand for, you know, potash fertilizer as the global population increases.

Starting point is 00:19:11 And it's just a really cool asset. And that's the one. they were targeting, and they got it. They own 100% of it today. And that alone, I think that the consensus net asset value in that these days is like maybe 220 some million, and they've pulled about 36 million in after-tax cash out of it, and their cost is like 138 million. So, you know, and this is like just the first few years of literally centuries to come. Well, and this is one asset.

Starting point is 00:19:48 And then there's another side of the business, which back then was a lot more important, and that is the prospect generation business. So there's the royalty business and the prospect generation business. There's constantly these two lines of business. And the first thing you notice is that they're at opposite ends of the mining value chain, right? So at the very beginning, this prospect generation, you take a little bit of money and you, Take out an original mineral prospect, then you bring a partner in and have them spend their money and earn their way into a bigger share of it to drill it out and see what you got there. You're finding these prospects and then getting someone else to take the lion's share of the risk. And you just keep doing that.

Starting point is 00:20:33 You keep doing it over and over and over again. And part of the secret to this business, which Altie's head of exploration Lawrence Winter taught me years ago, he said, Dan, these prospect, we were at a mining conference. He said, you look around, everybody's saying they're a prospect generation firm, but they're not. They're not really doing the model right. Because if you're doing the model right, you find your prospect, you spend as little money as possible, then you get that partner in and do that deal and you move on. But all these guys at this conference we write, he says, look at this guy and this guy and this guy,

Starting point is 00:21:07 they're talking about their flagship asset. There's no flagship asset. That's like a red flag, you know, in the prospect general. generation business. Somebody says, we're a prospect generation. We have three assets and this is the one we're putting all our money into it. That's not the way the model is really supposed to work. So I got an education and I just happened to be getting an education from the best people in the business. And if you ask around, other companies will tell you that they want to be like Altiest Mineral. So over time, I've seen them do this. I've seen them to spend little bits of

Starting point is 00:21:40 money and take, you know, in one case, hundreds of millions of dollars out or tens of millions of dollars. And I've seen them invest equity in other, you know, just sort of pick and choose one or two other equities. You know, they put money into the, into Virginia mines that was run by Andre Gomont, you know, which was eventually bought out. And they, really nice royalty there that's owned by another company called a Cisco. And they made tens of millions. I think they made about, 30 million off of that. I guess my point here is there's a lot of really cool stuff going on on both sides of the business. Right now, like starting in 2016, that prospect generation side, they've done like 57 deals. They've done 57 deals in which they took out a royalty and or got

Starting point is 00:22:30 some equity too. And their, you know, their equity portfolio was like, you know, 20 million or something back then. It's like closer to 70 million now. If you include, their, the venture in there, it's worth about 10 million. It's worth about 75 million if you include that now. So that business, it pays for itself, which is really cool. So, Dan, with many listed companies, especially smaller companies, your money managers, experts like you, they can build a relationship with the management. And you have that and you've seen how they behaved over a full cycle. Now, arguments on both sides here, why it's so important to build that relationship, but you also hear people who are saying, well, it's probably not a good thing to become too

Starting point is 00:23:17 familiar with the management because you can also become biased in the way that you evaluate them, say that you like them or you dislike them. It might be a bias to the way you evaluate their performance. Now, you've chosen to get to know the management really well, but what are your thoughts are the general issue about separating yourself from the management of a company? Most of the time, you don't want to get too close. But in the mining industry, you want to sit down and have a drink with these guys on a regular basis. You want to recreate with them. I went up to Labrador and went fishing for a week with these guys. You want to get to know them. You want to just talk to them and find out who they are and what they do. Because, you know,

Starting point is 00:24:02 there's just so many weird characters in the mining business. I'm telling you. And there's a lot of shenanigans in the mining business too. So I hear you. And it's true. We don't, you know, sit down and recreate with the managements of hardly, of any other companies. These are the only ones where we do. It is my personal opinion that you really shouldn't do it any other way. You really need to know who you're dealing with. You know, more so than any other industry that I can think of. So, Dan, talk to us about the ownership structure. The company has only capitalized at around 360 million. So what are some of the advantages and disadvantages associated with that? Well, the insiders own about, I think, 10% at this point. And capital structure is not weird.

Starting point is 00:24:49 They have some debt. They have some little bit of preferred stock that was sold to Kremwatha, the Warren Buffett of Canada, but I don't see anything weird and certainly in the capital structure and certainly the folks invested in it are non-insiders. You know, the only potential red flag is the one you point out, you know, I am close with these guys. I mean, I'm friendly with them. That could mean that I am biased to, you know, maybe not wanting to sell the thing. But I don't know, you tell me that, you know, you find a company that goes 13-fold on the revenue and waits, you know, six years till the cycle bottoms out before they start putting money to work.

Starting point is 00:25:29 I mean, you know how this works. Money burns holes in people's pockets. Cash burns holes in people's pockets, especially in these little companies where they feel like they have to impress someone. A couple of guys within Altius were like, hey, Brian, is it time yet? Is it time yet? Is it time yet? And he was like, nope, wait.

Starting point is 00:25:46 And he kept saying, don't wait, you know, don't worry. She'll turn. She'll turn. She'll turn, meaning the market, the cycle, you know. And it did. It's just like, you know, it's a thing of beauty to see that kind of discipline and somebody who really is willing to kind of put their money where their mouth is. And it was rare.

Starting point is 00:26:04 And I started getting much higher conviction about these guys in the downturn, right? When things are going swimmingly well, everybody looks good. And the business model is so capital efficient. It's not a mining company, right? They're at either end of the spectrum. They take something off the top of the mining revenue and the royalty side. and they are the first guys in in the Prospect Generation side with little amounts of capital. So, and, you know, the royalty side is a thing of beauty in itself, right?

Starting point is 00:26:31 It's, you know, you get this royalty. You're never on the hook for operating expenses. You're never on the hook for capital expenses. And if you get an expanding, you know, volume where the mind volume can expand, like with the potash I was describing, woo-ee, wonderful, you know. And that's what they look for. They look for those opportunities, the optionalities of being in. able to expand the mine and grow the revenue. And it all comes without any incremental investment,

Starting point is 00:26:59 right? That expansion, all the CAPEX is out of the mining company, not out of Altius. So let's continue talking about those cycles down. You know, many companies in the mining industry throughout the value chain, they really give investors a headache whenever they start looking at the financial statements. This is not your steady as the beating drum. So if you look specifically at LTS. You know, if you look at the income statements from 2009 to 2011, it was profitable, and then became unprofitable financial year of 2012 to 17, and then became profitable again last year in 2018. Now, for you who are very familiar with reading their financial statements, what is your advice to our listeners who are interested in the stock and want to dig into

Starting point is 00:27:47 the financial statements of the company, but who are probably more familiar with? with financial statements where it is more steady as the beating drum from year to year? If you're going to invest in Altius and you're going to look at these financial statements, you have to get on the phone and ask questions. That's all there is to it. You know, when you see these things where, you know, they go from getting revenue from a partnership, which is how the potash and the coal royalty started out to getting the revenue directly because now they own the whole thing, that's a big change in the financials.

Starting point is 00:28:23 So you need to call them up and just ask them what's going on. Why is this thing called other revenue? And then they explain, well, it's coming from a partnership. That's why it's other revenue. And then you just learn things like that over the years. And pretty soon, I won't say it ever starts to look normal, but you start to be able to figure it out. And sure, I'm saying call the company. I'm not saying you're always taking the company's word for everything.

Starting point is 00:28:48 you have to keep asking questions until you're satisfied. So, Dan, this value that you see in Altius, how much do you attribute to where we're at in the cycle versus the stock itself? Well, I would say like almost zero. This is not a play on higher metals prices for me. Not at all. It's a play on long-term value creation by a highly competent management team over the full cycle. And I think, you know, the revenue growth,

Starting point is 00:29:18 But the 13x revenue growth that we've seen, I think this is just the beginning. And I've said I thought this stock had multi-bagger potential for some time and people have kind of scratched their heads and say, you're kidding me, you know? But I'm not. Their goal is to become kind of the Franco-Novata of the diversified mining space, right? They're the non-precious metal version. They want to be the non-precious metal version of that. And there isn't one, and there has never been one.

Starting point is 00:29:47 So that's pretty cool, I think. And I think it's a good goal because if you look at the market caps of all the diversified mining companies versus the market caps of all the gold mining companies, you know, one is like five times bigger than the other. So there's a lot more to do in the diversified space than there is in the gold space. Everybody thinks gold royalties are the thing to have. Actually, there's no such thing as a cheap royalty of any kind, really. Royalties are valuable and they always trade hands at solid prices, but people are a little extra crazy about gold royalties, you know. Franklin Nevada routinely trades it north of 20 times royalties, whereas, you know, Alteus, the Canadian market cap, you were talking about the U.S. market

Starting point is 00:30:32 cap, 360, right? Canadian market caps around 470, and the guidance is for 2019, which is almost over, is 77 to 81 million in royalty revenue, right? you know, we're in the neighborhood of like six times. And let me ask you, would you rather have a gold situation that's maybe just call it a 15 year or 20 year, you know, really shoot the works, 15 or 20 year mine life? Or would you rather have those potash royalties I've described? And you're getting paid in a dollar of royalty revenue. So what do you care where it comes from? It's a little loony that people go so crazy for gold royalties. And they've let all these as minerals get this cheap, it's a little weird.

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Starting point is 00:34:50 of Alters minerals? And where do you see catalysts to realize this value? So I've got about $31 million in cash, and I'm calling the equity portfolio $75 million. They call it $65, but I'm including a $10 million debenture that they have, that instrument. I take the low end of the royalty range, which right now for this year is $77 million, and I kind of multiply it by $13. I think that's a reasonable market multiple. And then I've got some other assets here. They have a thing called the Carbon Development Partnership,

Starting point is 00:35:28 and less the value of some royalties that came out of that. And I get a gross asset value somewhere in the neighborhood of a billion. And then total liabilities are $173 million on the very latest balance sheet. So I get this net asset value of around $990 million. We impaired the coal royalties because the Canadian government says that, We're shutting down all the coal mines in 2030. And so we impaired them, and then Alteus came out and impaired them a little more. Since their impairment is higher, we use theirs.

Starting point is 00:36:02 It's about a buck 75 a share. So, you know, net of that impairment, all liabilities were around 900 million, and the fully diluted share counts around 42, slightly south of 43 million. And it gets us up around 21 bucks a share, which sounds insane, But the insane part, if you think I'm insane, is my revenue royalty on the royalties. So you can impair that how you like. And I think you won't get very far south of 15 or 16 bucks. You know, if you really want to stick it to him and say, well, the market doesn't like them right now.

Starting point is 00:36:41 So I'm going to cut that multiple way down. And the thing is 11. And there's also, you know, a bit of a funk right now amongst natural resources. sources companies that are not precious metals firms. I think they're being lumped in with that. One thing people don't realize, like, it's your dream to find something that stays relatively cheap for quite an extended period of time. It's going to continue to throw off the cash that it makes, and I think they're going to continue to raise the dividend over time. And, you know, you're whatever it is right now, I think it's like 1% or 2% or something. But, you know, over time,

Starting point is 00:37:20 I think you're going to eventually be making like a double-digit yield over your cost. And, you know, certainly if you got in when I first told people to, you know, at like seven bucks way back in 2009. And even now at 11, it's not much higher. And yet the value of the thing has just, and they've managed it brilliantly. I mean, they used to have five times the net debt to EBITs. It was like five times. Now it's like south of two.

Starting point is 00:37:48 Little north of one, not much farther north of one. Put a huge range here. Say it's worth 16 to 20. Let's do that. And you're at 11. Fantastic deal. Dan, thank you so much for coming here on the show and talk to us about mining, talk about the good things, the bad things, and one of the specific picks here in royalties.

Starting point is 00:38:11 Where can the audience learn more about you and Stansbury Investor Hour? Well, you can go to www.w.com. That'll tell you everything you want to know about the Stansbury Investor Hour. And if you want to learn about the Extreme Daly newsletter, you can go to Stansburyresearch.com and poke around on the website and find out about it. Thank you very much. I really enjoyed being here. And I just want everybody to know listening.

Starting point is 00:38:36 I love we study billionaires. I think it's like, you know, one of very few financial podcasts on the planet. I really like it. I feel like I discovered something really cool when I found you guys. That's very kind of you. Thanks, Dan. We're totally flattered and really enjoyed having you on the show today. So thank you so much. All right. So for the next segment of the show, we'll play a question from the audience. And this question comes from Jake. Hi, Stig and Preston. Love your work. This is more of a business

Starting point is 00:39:06 related question, I guess. Do you both prefer and enjoy focusing on the TIP business or individual security investments. I know you've spoken in the past about Buffett being just as much of a businessman in owning and running Berkshire as an investor. Do you both feel similar? Again, thanks for everything. Keep up with good work. We all love you. Cheers. Wow, that's a really insightful question. I really, really like that. So first about Buffett, yes, it is a common misperception than he is the best stock pick in the world. He's fantastic. but he's likely not the best. He is, however, one of the very best business people in the world. And I think this is best exemplified if you look closer at the Berkshire businesses.

Starting point is 00:39:58 The value of Buffett's stock portfolio is smaller than the value of his operating businesses. And what Buffett has been so good at is to build, grow and manage a collection of operating businesses. So just one famous example is whenever he bought up insurance companies and used the so-called float, meaning the premium we as consumers pay for our insurance. And Buffett used and still uses that flow to invest in the stock market. Because you can accumulate a lot of wealth if you have billions of essentially free money to invest in compared to a slightly better stock picker that only invest what he makes from his day job. And then you ask about the TIP business compared to picking individual stocks. Now, we all heard these stories about investing in Amazon,

Starting point is 00:40:46 Google or whatever company many years ago, and the value of that investment has just been growing, say, 100-fold. However, most of that return that we make for the investor who has not been smart enough or lucky enough to invest in these amazing growth stories is really from investing in the right asset class. And by that, I mean the price to value ratio and not so much on the individual investment. For instance, with specific stock to buy. So let me give you an example.

Starting point is 00:41:17 If you make $50,000 per year and you're able to set aside $2,000 per year, the size of your portfolio will likely not depend on which stocks you invest in, but rather how much money you make and in turn how much you're able to set aside, and then it's depending on which asset class you decide to invest in, stocks, bonds, real estate, commodities, or whatever asset class that is priced most attractively. For instance, if the stock market is priced at a very low, expected return, which it is right now. You will just be finding an uphill battle with a diversified

Starting point is 00:41:52 portfolio. And you might be able to beat the markets, say, 3% expected return and make 4%, which in itself would be really impressive. Beating the market is really, really hard. But perhaps you should take a look around and see where you can put in your time and energy to find an asset class where you can expect to make a significantly higher return. Now, I know I make it sound a lot easy, than it really is, but please allow me to provide an example. Through my holding company, I'm investing in a real estate deal where I make an 11% return annually. And the risk profile is different than investing in the stock market. And if I've done my homework right, the risk will actually be lower, but it definitely requires a little more work than just investing in the stock

Starting point is 00:42:38 market index. Also, for many private deals, you cannot invest an indefinite amount into the investment, which you sort of can the stock market, and you also had to learn about a new asset class. So more than thinking like an investor, I had to think like a businessman in the process to set up what hopefully turns out to be a profitable deal. But as you point out, it's really two sides of the same coin. And this is the tricky part.

Starting point is 00:43:05 Being both a businessman and an investor would likely not pay off in the short run. For instance, whenever I was a professor at the local college, I could choose to make short-term money by cheating an extra class per week. Or I could create assets like recording more podcast episodes or building a new course. But that won't pay me anything, or at least not in the short run. So whenever you educate yourself as an investor and as a businessman, you end up spending a ton of time on research and you make many mistakes.

Starting point is 00:43:36 And if you can set aside, say, $2,000 per year, whether you return 3 or 4% the first year won't really have an impact, but being a good businessman will allow you to set more money aside each month, and you'll be able to generate a significantly higher return because you will have the skill set to move around in the respective asset classes and even navigate better in the same asset class like equities where you'll be able to pick much better stocks. So Jake, I really like this question, and I don't think it's anything that I've really talked about too much on this show, but I've talked to friends.

Starting point is 00:44:12 family acquaintances about this idea before. And the thing that I tell these people when we have conversations is I almost feel like a lot of people in business, particularly people that were entrepreneurs that stood up a company that was successful. And I would call something successful if the companies capitalized at $10 million or somewhere in that ballpark. I would call that success. But what you find a lot of the times is these private companies, that kind of hover around between the 10, the $50 million mark, these founders are really good at the operational business, whatever that product or services, they've mastered it, they've done really well for themselves, but they kind of hit like a ceiling and they can't

Starting point is 00:45:01 get past that growth point. I would argue, and this is very arguable, some people might have a different opinion. I would argue that those founders, if they continue to be in the management role and control the equity of that business have difficulty expanding and growing beyond that mark. Some of them might not want to, but I think a lot of them struggled to go beyond that mark because that's where their business has to transition from being an expert at whatever that product or services to being great capital allocators of their retained earnings. So that business is producing earnings every year. Now they've got to figure out a way to go beyond that product or service that they've mastered and that they understand really well.

Starting point is 00:45:43 And they have to start allocating that non-operationally. Now, the returns when that person makes that transition to a non-operational form of allocating their retained earnings is often very difficult because the returns that they're getting on that capital is lower than the returns that they had seen by investing locally in their business or in that product or service. And the main reason why is because when you're creating the assets inside your business, it's definitely more risky, but there's also a whole lot more upside to that because you're setting everything up.

Starting point is 00:46:22 There's no middleman. There's no person that's cutting away at that profit margin. When you're allocating resources in stocks, bonds, whatever security you're talking about, you often get into a point where you're just buying the assets that somebody else produced. you're also competing against all the other people out there that are trying to own that equity that's in the public sector. And sometimes even in the private sector can get very competitive for the value of certain businesses depending on how strategically aligned it is with your business.

Starting point is 00:46:53 So I know that's a really long answer to your question, but I think it's important for people to understand that a lot of the stuff that we talk about on our show, which is investing in companies that are public securities are lower, return type investments than if a person would be able to invest operationally in themselves and create a product or service that serves the marketplace in a competitive way. So I think that transition is very tricky and I think that that's one of the reasons why so many people can't do is because they have to step out of what it is that they know to understand how finance is done.

Starting point is 00:47:30 You know, a lot of these businesses that go this route, they have somebody else to do all their accounting. They're not looking at the income statement and the balance sheet, kind of with that investor mindset or that investor eye, that a Warren Buffett looks at both parts of the business, the operational side and the non-operational side equally in from a similar light. So Jake, for asking such a great question, we have an online course called our intrinsic value course that we're going to give you completely for free. Additionally, we have a filtering and momentum tool, which we call TIP Finance, we're going to give you a year-long subscription to TIP finance completely for free. Leave us a question at asktheinvestors.com. That's ask theinvestors.

Starting point is 00:48:14 If you're interested in these tools, simply go to our website, the investorspodcast.com, and you can see right there in our top level navigation, there's links to TIP finance and also the TIP Academy where you'd find the intrinsic value course. All right, guys, that was all the pressed on I had for this week's episode of the Investors Podcast. We see each other again next week. Thank you for listening to TIP. To access our show notes, courses or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decisions, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permissions must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP271: An Intrinsic Value Assessment w/ Dan Ferris (Business Podcast)

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