We Study Billionaires - The Investor’s Podcast Network - TIP288: Current Stock Market Conditions - 2020 Crash - COVID 19 (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey, how's everyone doing out there? On today's show, we do not have a guest, and instead, Stig and I are talking about the current market conditions. During the episode, we talk about how we were looking at the market before the coronavirus, how we see things now, and then finally, we talk about what we expect in the near future. I personally think this is one of the most unique investing environments we have ever seen in decades, and throughout this episode, you'll hear Stig and I talk about all the reasons why.

Starting point is 00:00:30 you guys enjoy. 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. Hey, everyone, welcome to the Investors podcast. I'm your host, Preston Pish, and as always, I'm accompanied by my co-host, Stig Broderson, and we don't have any guests today. We are just the two of us talking about what in the world is going on. Guys, this is going to. Guys, this is going to be our no-nonsense opinions on how we saw this before it happened, how we're seeing it right now, and what we think might be on the horizon. So with that, Stig, let's go ahead and kick off this candid chat. Oh boy, Preston, exciting times, huh? I have to say,

Starting point is 00:01:26 going into the first topic here of today, how we were positioned before and what we thought about the market before it all started, I don't think I took it seriously enough. If anyone had told me a month ago that we would be where we are today, even what we knew about the coronavirus at the time, I would still be pretty surprised. How about you? Back whenever we aired the conversation and we recorded this conversation back in January with Eric Townsend, I was extremely concerned about what this was going to do globally. And I think people probably heard that in that interview whenever I talked with Eric. The reason I was concerned is because I was seeing the, videos, mostly on Twitter, I was seeing the videos coming out of China. And to me, it looked

Starting point is 00:02:13 like a military exercise. I had participated in chemical, biological military exercises back in the day in the Army. And so I've seen what those look like. And I've been in the chemical mass. I've gone into the chemical chambers. And when I was watching videos coming out of China, I was saying, this is a kembio military drill that's going on over there. And the fact that they took Wuhan, which has a population of 9 million people and had literally barricaded the entire city off, to me, logistically, that was not even fathomable. It was insane. And so it was interesting when we were talking to Eric that he was seeing the exact same thing. And he was also saying, hey, this is going to disrupt all these supply chains coming out of China.

Starting point is 00:03:05 And so early on, I'd say January, February, I was looking at this and saying, I don't even care if they would get this under control. I think that the impact logistically from the supply chain management standpoint, 80% of medicines that we use in the United States come from China. And if the whole place is on lockdown and no one's working, and that's what all the videos were showing us, that's what all the data was showing us, is that they were seeing a drop in manufacturing. We were seeing that data in February that the manufacturing data was coming down by 80% in some industries. For me personally, I thought this was going to be a total whopper.

Starting point is 00:03:42 I didn't think that they were going to be able to control the spread. And so I think it was in February, maybe the beginning of February, the market was still screaming higher with all the things that they're doing with the repo operations and everything. And I was telling myself, this is not a time to have much exposure to anything. In fact, after we aired the episode with Eric and we posted on Twitter, the comments from everybody was, oh, you're out to lunch, you're fearmongering, you're this, you're that. And I was kind of questioning myself, am I crazy right now? Am I the person who's looking at this way too negatively?

Starting point is 00:04:18 But in the end, it wasn't. It was accurate. And it was very hard to go through all that, to be quite honest with you. emotionally as I was thinking, am I overreacting to this or is this really as bad as I think it is? And it turned out it definitely was, in fact, it was worse than I thought it was. I would like to talk about how I was persistent before. And then later in the episode, I would like to talk a bit more about like what I'm doing now in the financial markets, which is probably what everyone out there are thinking about. So I unfortunately didn't go

Starting point is 00:04:50 100% in cash. Hindsight in 2020, perhaps I should. I don't. did start piling up cash here some time ago. So I was around 20% in cash. And like many other investors, always struck with how much to keep in cash. So looking back, it might seem like it would be the right decision to just go 100% in cash. I generally don't think that's more or less ever a good decision to do. And I didn't do that either. I do think it's very important for us as investors that as much as there are special emergencies, special situations like this, that we more than anything think about a long-term strategy. I know it's sort of like it might seem silly of me to say that at this point in time, but I do not think that the old buying whole strategy

Starting point is 00:05:41 in any way is out of fashion. And I'll just go a big back in history. And we are going to talk a lot about history in this episode just so we can relate to something else. But I think it's important to keep in mind that whenever the Dow closed at 300 in 1928, the stock mug was also overvalued. So, whenever you're feeling the pain of everything that's happening right now, I do think it's okay if you have been close or fully invested. And if that is your strategy going into all of this, that you don't know what's going to happen, you can't understand, won't understand pandemics and so many other things. And you bought stocks years ago and you want to keep it for next 30, 50 years, whatever. I think that's still a solid strategy. For me, it's been very tricky. As much as

Starting point is 00:06:28 I've been looking at the market and I've seen it to be very expensive and I've been accumulating cash, I didn't want to be in a position where I was just waiting for that big crash and then plow in all my money. I just don't think I have that ability. You could even make the argument that the market was overvalued to some extent whenever the Dow was trading in 18,000, and then be 100% in cash, and you still wouldn't have been better off even with where we are today here the 19th of March. So I guess that's how I positioned myself here before this dreadful month. And later, I would like to talk a bit more about what I actually done with some of that

Starting point is 00:07:03 cash and what I'm seeing in my own portfolio. I'm curious, Preston, but going a month back, were you in a place where you said, I want to be in different types of currencies or just not really have any exposure at all? Yes. So in February, whenever the market was still going higher and this was looking like it was going to spread, that's whenever I started minimizing any exposure that I had in the market. I wouldn't say it was a complete liquidation by the middle to the beginning of February, but I was starting to pull back positions because I was expecting this to be very bad. We have a momentum tool on our website with TIP finance. and having written the code that this works off of it, it's looking at the volatility ranges

Starting point is 00:07:50 and then it's looking at statistical moves that are outside of normal volatility. And so I was paying very close attention specifically to the S&P 500 and the Russell 2000 on our TIP finance momentum tool because once that turned red, for me at that point, that was confirmation that what we're seeing is not normal volatility and it was probably going to be something deeper and worse than we were expecting. I was anticipating that to turn red. I was just waiting for it to do the math and show me that that was a reality. So that tool turned red on the 26th of February. I want to say the market was down maybe 10% from its high at that point, and that's whenever I went completely into cash through the use of that tool. The only thing that I was

Starting point is 00:08:36 holding at that time was Bitcoin, and Bitcoin from its high for 2020 has gone down significantly. I want to say it dropped 50% for that specific position. But if I was going to caveat that, the position for the year was already up 35% since the start of 2020. So if you were looking at the performance from the start of the year, that Bitcoin position was only down 15%, which was from, and we're recording this on the 19th of March, that Bitcoin position was only down, call it 15% for the year. And so the performance was actually really good compared to everything else from the start of the year, if you're looking at it in those terms. So, and I still have the Bitcoin position. I've added to the Bitcoin position after it dropped that 50%, and I still

Starting point is 00:09:31 have everything else in cash that's not in Bitcoin. So my portfolio, which probably sounds absolutely ludicrous to a lot of people right now and through the event was cash in Bitcoin. I would argue that most of the reason that I'm in that position right now, and it's so different than any type of position from a portfolio standpoint that I've been in the last 10 years, is because I've got major, massive concerns about fiat currency and fixed income markets that I think are on the cusp of a total meltdown at this point in time. I guess when people hear this and are saying, well, that's just crazy. That's not a safe way to invest. That's not, I mean, from my vantage point, we are in one of the most unique market environments we've seen in more than 100 years.

Starting point is 00:10:22 and I think it's only going to get more unique as the months come ahead. And yeah, that's how I'm positioned. I'm in cash in US dollars specifically and Bitcoin. Thank you for your transparency on this. And I remember we had this discussion a month ago or so, and you were very frank. As you always are, what you were doing and said, this is not the time to be exposed. And as with so many other times, I decided not to listen to you and then realize afterwards that I probably should have. Whenever I look at my portfolio that obviously the part that was

Starting point is 00:10:56 inequities obviously took a hit. I have some other investments in private deals that looking a lot more attractive. I guess it's almost impossible not to these days. But I have a strategy of buying long-term compounders. I have a position in Berksia Heatherway and Mackell, Google. Companies like that and obviously like the rest of the market, they have taken a hit. Obviously, I don't feel good about it. I'm actually adding to my compounders because I do think that the price levels you see right now are attractive. I guess my strategy is, for a lot of different reasons, very different than Preston's. We talked about momentum tool, which I think it's very important to understand. We talked about jumping in and out of the market and how to do that. I would like to caveat

Starting point is 00:11:39 that discussion. I do not live in the States. I live in Denmark. I do pay 43% in capital gains. So it's not as easy for me whenever I'm sitting on a lot of capital gains to jump in and out. If the market should jump 20%, I might actually, even if I knew that, I might still be, quote, unquote, better off not doing it, depending on how you measure it. So it is different situations we're in. I think that is a super important point for people to understand is the calculation of capital gains in your portfolio. because we have nothing close to 43% capital gains for a cell here in the States. And so that completely changes the way a person should invest in a major and unprecedented way because, I mean, you have, let's say you have a 50% gain, right?

Starting point is 00:12:27 And then you've got to pay a massive tax on that 50% gain, transition into something else with that sell order and you have to be right in order to continue to progress in your portfolio. So people, when you are transitioning or you're looking to make a sell, you have to ask yourself, okay, what am I transitioning this into? And what is the expected return I want to get in that investment after I pay my capital gains? After I take that frictional hit of for Stig, 43%. That's crazy, right? That's super high. So it changes the way you invest significantly. And if it's not, you're probably not accounting for everything you need to be accounting for in the way you're working it. Thank you for mentioning that, Preston. It is definitely true that many countries

Starting point is 00:13:14 here, especially in Europe, where we have higher tax rates. We need to account for that. We can't be as active with some decisions as you can in the States where you have a long-term capital gains tax of 15%. I have one quick thing here to Bitcoin that I know we're talking about back and forth. I've been as little surprised and then perhaps not of how much that it crashed here together with the stock market. And one of the reasons why I'm saying that is that if we saw what gold did in 2008, 2009, it crashed together with everything and then it rallied afterwards. And perhaps Bitcoin is doing the same thing. For the time being, it's not rallying, but it definitely crashed with the rest of the stock market. So in a way, it was expected. And in a way, whenever we look at the historical

Starting point is 00:13:58 data, it would strongly suggest that it was not correlated to the stock market. And it seems like it has been, how do you look at that, Preston? I think this was absolutely expected that you would see something like this, because when you get into these market crashes, what's actually taking place is you're having an absolute massive run to Fiat currencies. Because what you're having is the derivatives market is blowing up. And all those positions are getting reaccounted for as to what should be long and what should be short. So when all of the demand was coming offline and the world is saying, oh my God, there's so much supply, all the underlying futures and derivatives that basically make those markets and protect all these companies,

Starting point is 00:14:45 basically insurance policies for all these companies, right? Those are assets and liabilities on various people's balance sheets. So when you have a massive disruption in supply and demand, And now all those assets and liabilities are, well, the liabilities are getting impaired for people that were not positioned appropriately for this supply demand shock. So when you have that happen, all the people that are getting impaired on their balance sheet now have to liquidate other positions in order to come up with the fiat, which is what all of these are denominated in. So that's why you have a huge run to dollars. you have a huge run to euros to yen. Every major fiat currency in the world has a big bid and everything else has a sell-off because they have to come up with the underlying monetary baseline money that actually sits in these fiat currencies in order to adjudicate

Starting point is 00:15:38 all this impairment that's happening on the balance sheets. So gold acts the exact same way. You're seeing the bond market sell off right now. You're seeing the stock market sell off right now. So why wouldn't you see Bitcoin, which none of these financial derivatives are denominated in Bitcoin today. They're not. So guess what? Bitcoin's going to sell and it's going to sell in a major way in order to adjudicate these delinquencies that you're seeing in the derivatives market and all this impairment that's happening on the balance sheets. Now, the reason I think that you saw Bitcoin drop so much is because it has such a small market cap. So look at the gold market. It's a $7 trillion market cap where Bitcoin's $100 billion.

Starting point is 00:16:21 So it's literally 170th the size of the gold market. So think who's in Bitcoin. Believe it or not, you have a lot of institutional money and you have a lot of Wall Streeter's, you have hedge funds that want some type of exposure to Bitcoin. And if these other people that have that exposure also have derivative positions and also have these exposures in other areas. And Bitcoin's a place that they can set. in order to raise Fiat, they're going to do it. And they did do it. And here's what I find a little

Starting point is 00:16:52 fascinating is in the last three days, you've seen gold and Bitcoin specifically become completely uncorrelated to the S&P 500. So like yesterday, and I know this is a super short timeframe, but like yesterday, the S&P 500 was down 10%. I think Bitcoin was up a percent or a half a percent. So on that day, it outperformed by 10 percent. I kind of expect, and again, we're recording on 19 March, I expect that you're going to start seeing a drastic, uncorrelated take between Bitcoin and the S&P 500 from here moving forward, because I think all those liquidations that we saw initially to cover for all the derivative failures that people were swapping their positions into fiat to make good on those, all that

Starting point is 00:17:39 impairment. I think that has subsided and I think it's over. And now I think you're going to see a drastic outperformance if you compare it to the S&P 500 moving forward. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is.

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Starting point is 00:22:04 For the first part of the episode, we talked about like how we saw it before. And let's talk a bit more about what we're doing now and what we see. Now, I haven't sold anything. More than anything I'm looking to buy. And I think that is important for most strategies. I know we have a lot of value investors here in our community. I think whenever you're listening to this, as much as you might get some takeaways in terms of what we think you should do in terms of going along this or that. I think my first piece of advice would be do not panic and do not sell. And if you're here to that advice, I think you're already way ahead of a lot of people, just knowing that. I think it's also important to keep in mind that even though we've seen a 30% drop, and here I'm just talking general stock market, whether we're going to measure it on Dow Jones or S&P 500, it's sure not as expensive as it's been, but it's not super cheap. I mean, we are far from a March 2009 scenario. The reason why it looks so attractive is because we have sort of become accustomed to crazy evaluations. We have someone become accustomed to, if you have a company that makes no money, you can still have a market cap of $100 billion. Like, we have become accustomed to a lot of free

Starting point is 00:23:12 money, and by free money, I mean like a non-existent interest rate and just crazy bull markets in equity. So keep that in mind whenever you look at the valuations today. And don't just look at where was the stock market a month ago. Try to zoom out if you can. So I would like to talk a bit more about what I'm looking at right now. I actually just put out a limit over on Bitcoin. I just would like to be completely upfront with that. I know I hear on the podcast that do tend to bash Preston whenever I can, just in general. I want to do that with Bitcoin because I would really like to have a more balanced conversation. With all that being said, I previously said how Preston forced me to buy Bitcoin a long time ago, which I was really happy about. I have put

Starting point is 00:23:54 in a new order, a new limit order for Bitcoin. I would like to talk about a few different things that I see in the market. So not too long ago, I sent out a newsletter to all our subscribers and everyone can sign up at tipemel.com. It's tipemel.com and it's a pretty free email and you can see how Preston and I see the financial markets. And we even put it on TAP Academy if you want to check that out. And this was right after the travel ban. I talked about how I was very interested in buying airlines. And I think that most people probably probably read that and thought that was the most ridiculous thing they ever read, because who wants to buy airlines right after there is a travel ban? So keep in mind that the rest of the

Starting point is 00:24:41 market knows that too. Like there is a travel ban. And what happened the next day was that major airlines dropped 20%. And this was already on top of, I think the market probably crashed 10, 15% by then. And airlines has really, really been punished. Now, take a company like Delta Delta traded at 60 plus, not too long ago, I think a few months, and I think yesterday closed to 23. Now, some of this is definitely fair. You know, it's not as attractive, especially Delta is not as attractive as it has been, not just because of the travel ban, there's been a lot of different problems. But I think it's also important that whenever you look at stocks that are facing a lot of headwind,

Starting point is 00:25:23 you have to ask yourself, has the business fundamentally lost its intrinsic? value. And let's just use airlines as an example. I think it's pretty safe to say that 2020 would be really, really, really ugly for airlines. But I think it's also important to keep in mind that whenever we value a stock, we are discounting the cash flows from the remainder of the assets' lifetime. So you have to make that calculation whenever you are thinking about exposing yourself to something like airlines. And I would argue that as much it seems implausible for us to ever bought an airplane again, I would say that you won't see a fundamental shift in people's behavior long term. Obviously, if we would start to get pandemics every other year, we probably

Starting point is 00:26:10 would. But without knowing too much about it, I don't necessarily think that's going to be the case. I think it's also very important to know that if we look at the infrastructure, it's just not something we can just say, oh, let's just not stop doing that. We already had the current administration being out and talking about the support of the industry. So it's not my way of saying, oh, guys, while all your money into airlines, I think that would be rather ridiculous. There's definitely more risky test to that compared to, say, a stock pick like Berksa Hathaway, but as it often is the potential upside when everyone is freaking out is also that much higher. So that was just one thing I wanted to talk about. And I would also briefly like to talk about

Starting point is 00:26:52 Berksa Hathaway. I've gotten a ton of emails from people talking about that now is the time to buy Berkshire Hathaway. And I do think that the stock is trading an attractive level. So at the time we're recording is trading 172. And that's definitely a lot more attractive than it has been for a long time. Just to give you like a reference point, Buffett bought back Bshaas of Berksa Hathaway in Q4, and that's the latest numbers that we have from Berksa Hathaway. And he bought back at an average price of 215. He bought back Sias for $2.2.2 billion, and the market cap of Berksie Hetherways right now, $460 billion. And I think it was very interesting to kind of like have that as a reference point. Now, keep in mind that everything is, it's always a question about opportunity cost.

Starting point is 00:27:43 So yes, Berksia in many ways is a lot more attractive than it has been, but so is so many other stocks. The other thing I want to say is next week we're going to do an episode about the intrinsic value of Berksa Heatherway. And without giving too much of a spoiler alert, we do talk about an intrinsic value, perhaps in the $250 to $300 range for the BCHS. Berksa Heatherway is definitely interesting, but it probably won't be as undervalued as other stocks would be right now. So please keep in that in mind whenever you're looking at it. Any comments or thoughts on that or what do you do, Preston? I guess I'm seeing what's happening from a much different lens than maybe most investors.

Starting point is 00:28:27 I personally think that we're seeing kind of a hundred-year kind of thing going on right now. And what I mean by that is I think that fiat currency is going to have a major unprecedented meltdown in the coming year, two, three years, whatever. I have a fundamental thesis on why, and this is my fundamental thesis. I have the opinion that fiat currencies specifically fail when three main things happen. First, when the currency has no peg, it's a fiat currency. That's the first condition. Second, whenever the country has the receipts that are receiving for all their tax revenues, they are not nearly enough to meet their fiscal spending habits.

Starting point is 00:29:09 The fiscal spending habits are running amok. They're running out of control and they're not raising enough money. So that's number two. Number three, in this third condition, all three of these have to be met to be put into this position where your fiat currency is going to fail. The third one is there's no interest rate yield left for the fiscal debt that's being issued. When you have all three of those situations and all three of those metrics being met, my opinion is that the fiat currency becomes vulnerable. You've seen in time in the past where countries have met all three of these

Starting point is 00:29:42 conditions, call it Japan, and they haven't had this big meltdown scenario. I would tell you the reason why is because when you look at other fiat currencies and everything in the world is fiat currency at this point, nothing is pegged, is there was other interest rates where that capital and that fiat currency could run into other countries, call it the United States, call it Europe, up to a certain point in time. Now, at this moment in time, anywhere you go, and I'm talking about rates from a real standpoint, not nominal rates, but real rates. Anywhere you go in the world, you have negative interest rates and nominal terms. And so all three of these conditions are now met. And so you have this event that comes along, the coronavirus. And you have all these markets that are super saturated

Starting point is 00:30:30 with money that's just been printed. And it's been printed in a manner that it's been inserted at the top through quantitative easing, dropping interest rates down to nothing. And now you come along and you prick that pin into that big bubble and it pops. Well, now you're in a unique situation where the weapon of choice for central banks moving forward is going to be QE. They're going to continue to do QE. They're going to continue to keep rates at nothing. But now they're going to have to do universal basic income. And we're already seeing this rolling out globally all over the place. My opinion is that when UBI starts hitting every single bank account in the country, if you have a pulse, you're going to get a check for $1,000, right? That's happening not just in the U.S., that's happening globally.

Starting point is 00:31:16 I think what you're going to find is that from an inflation standpoint, this is going to wreck havoc. Because not only are they going to have to do that, but now they're going to have to do bailouts for these companies. So you have a Boeing, for example. They're asking for $50 billion. And guess what? There's a high probability. I'm not saying it's going to happen, but there's a high probability that the government's going to give that to them.

Starting point is 00:31:39 And they're not going to just give it to them. They're going to give it to every other company that is going to fail through all of this chaos. And I think that when you look at the fact that people, especially like restaurants, small businesses, the traffic flow that sustains their businesses. And these are low margin businesses that probably get by every month with just making it are not going to have that traffic flow anymore because everyone is quarantined inside of their house. And there's no vaccine that's potentially going to hit at scale.

Starting point is 00:32:13 And that's the important part. They're already working on vaccines. But vaccines at scale are not going to hit for another, I'd say, at the earliest six months. And I think that that's probably being aggressively optimistic. It's probably a year, right? And it doesn't even have to be real. People just have to think that it might be real to change their buying habits and their spending habits.

Starting point is 00:32:34 And if you pull those back, companies are not going to be making anywhere close to the revenues that they were making before. So long story short, with all of this, I think the governments are going to print at unprecedented levels. That's going to then drive inflation expectations and how this bond market that is yielding nothing because the bond market is completely based as a premium above inflation. So if inflation goes from zero to two percent, well, guess what? Whatever the bond was previously priced at, it's going to go up as a premium to that change in inflation. That's how bonds get priced.

Starting point is 00:33:15 And so if interest rates start going up, the valuations of everything on the planet start going down, whether it's a bond or a stock. One of the beautiful things about the most of the momentum tool that we have on our site that's looking at the volatility is it also tells you when it turns green because there's been a statistical change in the volatility to the upside. We have not seen that on a single ticker in our entire TIP finance tool to date. Everything, for the most part, there's a few that are green, right, that are still performing and they're the ones that, you know, the mass company, stuff like that, that stuff's going to perform.

Starting point is 00:33:51 But for the most part, almost every single pick on our entire TIP finance tool is red at this moment. I don't know how it could possibly turn green in the coming month, let alone two months or three months. I think that this thing is going to work itself out at the earliest by midsummer based on the numbers that we're seeing. The critical turning point is watching the medical facilities work through all the patients that they're going to have. So the reason everyone's at home is to slow down that rate of people showing up in the hospitals. That's the whole reason everyone's quarantined in their house right now and that they're not at work and they're not spending money out on Main Street like they used to, is because the medical facilities cannot

Starting point is 00:34:33 handle the speed of patients showing up with this virus. So if we're going to look at a turning point when the governments are going to say, hey, you know what, you can go back to work because we don't have that concern anymore. I think the earliest you're going to see that is in the summertime here in the United States. I mean, look at Italy. They're nowhere even close to working through the amount of cases and the amount of people that are waiting to get into the facilities. In the U.S., I think you haven't even hit max capacity and you're ramping up in an exponential way that you're going to probably hit max capacity by the end of April, and then it's going to probably take a couple months to work through that.

Starting point is 00:35:10 So as long as that condition's still in place, from my vantage point, you're not going to have normalcy in spending in the markets or anything, but you are going to have a whole lot of bailouts to the tune of trillions of dollars. Here in a state, you might even have state governments that start to go under because they're not using their own currency. They're using the dollar and they've made some very poor fiscal spending habits and they're not raising enough money as it is. So you might start seeing bailouts in that regard.

Starting point is 00:35:35 You're going to see bailouts to the individuals through the universal basic income. And as all these things are playing out, the last place that I want to be is pretty much in any kind of stock, any type of equity. I definitely don't want any exposure to the bond market if I expect in front. to start taking hold with the amount of printing that's taking place. I just see it so differently. If you have a stock and it's gone down a lot, what the question now becomes is how much more do you think it's going to go down? And what's your exposure to the scenario that I just described? Is your 10% down or your 20 or your 30% down going to turn into another 30% down? I don't know.

Starting point is 00:36:14 That's for you to decide and you're going to have to look at what that industry is and you're going to have to think, is that industry going to be impacted by everything that I just described, which is a just disgusting scenario, but in my opinion, it's reality. And we have to make investing choices based on reality. Let me talk real quickly about what I think's going to happen after the hospital rates subside and you start getting some normalcy back, which for me, at the earliest is going to be in the summer time frame. What I think you're going to see then at that point is you're going to see a transition to demand coming back online, and you're going to see the exact inverse with what just happened. And you're going to have this massive shortage of supply.

Starting point is 00:36:56 So let's just talk to the oil market. Let's say it's July or August and demand is now coming back online. People are now out driving their cars way more than they were before. You got oil liners moving in the ocean. All those things. Transactions are occurring again, right? People are moving and you have consumption taking place, but what you've had is an industry that has cut back on what they're manufacturing. And so now you have a shock in the exact opposite direction. My expectation from a commodity standpoint is that you're going to see prices absolutely rip in an unprecedented way to the upside. And I'm just talking oil. I'm not talking the oil companies. I'm talking the price of oil per barrel. I could think.

Starting point is 00:37:45 see that go into $100 a barrel in a very fast and dramatic fashion. So now when people see this, how are you gauging inflation? How are you measuring inflation? Well, it's the delta. It's the change of what the price was yesterday to the price today. I know this sounds unbelievable, but if you go from $10 a barrel of oil, which I think is actually in the cards, what we're going to see here on the horizon. If you're going from $10 a barrel of oil to $100 a barrel of oil, and what that looks like from an inflation gauge standpoint, these bond markets are going to lose their minds, absolutely lose their minds. The stock market, which is priced based off of interest rates, right? And remember, interest rates are based on inflation. The stock market is going to go down

Starting point is 00:38:40 because everyone's yield that they're pricing into their cap M models is going to be drastically different than the zero percent everybody's using today. So even though you're having a recovery comeback online, you're going to see things that perform in such a dramatic shift that, again, what happened in the past with the derivatives market, it blew up. The derivatives market had drastic supply demand changes and therefore it got repriced. And then everybody who had a liability on their balance sheet from a derivative standpoint got impaired, and then you had a huge sell-off in order to account for that. What makes you think that when this rips the other way, which is my opinion, and I could be dead wrong, but if I'm right, and this rips the other

Starting point is 00:39:25 way from a commodity price standpoint, that the derivatives market is not going to have another massive sell-off in order to account for all the positioning that went the other way that we're seeing right now. I think that's what you're going to see by the end of 2020. I think that scenario is going to play out. And I think it's going to play out in such a dramatic way that no one is expecting that today. But let me tell you, that's what I'm expecting today. And that's just going to be yet another shock to the system. So this brings me to what I think is playing out here. And this is a highly, highly controversial opinion. And I understand that a lot of people are not going I like the opinion, but this is what I think it is. I think what you're seeing is you're seeing

Starting point is 00:40:08 the start of an inflationary event that's not going to be slow, but that's going to be insanely dramatic, and it's all the result of fiat currency breaking down. Here's a quote out of Ray Dalio's book. I'm going to read this. And this is a quote out of his book, Big Debt Crisis. I highly recommend that everybody reads this book, quote. It says, this is a strong word, but I'm going to use it, investing during a hyperinflation has a few basic principles. Get short the currency. Do whatever you can to get your money out of the country, buy commodities and invest in commodity industries like gold, coal, and metals. Buying equities is a mixed bag. Investing in the stock market becomes a losing proposition as inflation transitions to hyperinflation. Instead of there

Starting point is 00:40:59 being a high correlation between the exchange rate and the price of shares, there's an increasing divergence between share prices and the exchange rate. So during this time, gold becomes the preferred asset to hold. Shares are a disaster even though they rise in local currency and bonds are wiped out. So that last part there where he's saying shares are a disaster even though they rise in local currency. So nominally, this is going to be the next controversial thing that I'm saying right now is let's say we play this out and we're in the middle of the summer, end of the summer, and you're seeing the medical situation subside and the demands coming back online. It would not surprise me in the least bit to watch the stock market make a new all-time high.

Starting point is 00:41:48 I think that could happen by the end of 2020, maybe even into the early part of 2021. That could happen. But what people aren't accounting for is those numbers are going up in nominal terms compared to Bitcoin or compared to gold or compared to the price of oil. And I think we're going to see is a, I don't know if you want to call it hyperinflation, but you're going to see a lot of inflation globally from that key milestone. And I'm calling the key milestone when the demand on the hospital starts to subside. If you're comparing the performance of the stock market, I'll just say the S&P 500, to those underlying commodities, the stock market is going to be down if you're measuring in those terms.

Starting point is 00:42:33 But if you're measuring it back to the dollar, well, yeah, it might be higher. But your buying power is what we're talking about here. We're not talking about nominal dollars. And when you get into a situation like this, this is all about your buying power. Make no mistake about it. Anyone who's listening to this that lived in Venezuela or was down south in Argentina or any country that has experienced these inflationary events knows exactly what I'm talking about right now. And what I'm talking about is preserving your buying power. That's what this is all about.

Starting point is 00:43:05 And I say this, as humbly as I can possibly say this, I could be dead wrong about this. We are seeing something that I have never seen in my entire lifetime. I have never lived through anything like this. But I've read some history and I've read some different books that suggest that that's what we're seeing. And from my vantage point, that's how I'm position. I think it's very interesting for people out there, perhaps hearing both sides of the arguments. As you mentioned before, you see this very differently than I do. And time will tell who's right or perhaps if we're both wrong. Who knows? I would like to talk a bit about history. I think that's a good way of talking about what happened. And I reread Big Debt Crisis and I got

Starting point is 00:43:47 very different conclusions out of it, which is, I guess, interesting in itself. Whenever I look what happened, just like the last financial crisis. Let's say from October 2007 to March 2009, the stock prices fell roughly 50% from peak to drop. And so far, at the time recording, we've seen around 30% drop. I have no idea if the market would temporarily drop to 50% from the recent peak. But I do want to say that this happens in very, very rare situations. And perhaps it is one in a lifetime kind of thing, as Preston was saying before. So in that sense, I don't necessarily disagree with him. Over the past 100 years, we had 12 crashes over 20%, and now it's 13. So this is also my way of saying that those 50% crashes only happens a few times per century. And perhaps this is

Starting point is 00:44:39 one of them, perhaps not. I look at the corona crisis, whatever we want to call it, differently. And if we just continue in the comparison to 2008, I think it's very different. The economy back then, it was overheated and it was much weaker than anticipated, whereas the economy today before the crisis, obviously, before the coronavirus, were doing much better. It wasn't like it was fantastic, but it was definitely doing well. And speaking again here specifically about the Equities, I do think that it was priced for a correction or a bear market at some point in time relatively soon. So whatever you see here is not really crazy cheap, which is also why I think it might slide

Starting point is 00:45:25 even more. But it is different and it's the same if you compare with 2008. To the 2008 crisis was a banking crisis and it was a real estate crisis. This is very different because it hits all sectors very differently and people spend less money and people might lose their income and whatnot. So I don't know whenever this is going to blow over. I don't know, you know, whenever Preston is referring to with this happening three months or six months or whenever we're going to have those vaccines. I don't know. But I do think it would be back to business in relative terms

Starting point is 00:45:58 in many ways. I would like to address the thing about fear currencies afterwards because I don't necessarily think that would be back to business. But I do think that a lot of things would be back to normal. And I do think that today, that is a good thing. time to continue add to the compounders that you have, which is now a much more attractive level. So I want to address your comment about us kind of coming up with different conclusions after reading big debt crisis. So when you read this book, let me just start off by saying, this is not a simple read. If you're a person who's not like really into this financial valuation and market stuff, you're going to maybe buy this book and say, ah, this is a little hard, right? It's a very

Starting point is 00:46:42 hard read. It's a very technical read. When you read it, I think most people who read it probably walked away with the idea that you either have an inflationary bust or you have a deflationary bust. And when you read the book, you would probably come to the conclusion that in the U.S., you're seeing a deflationary bust based on the way that the book talks. But I personally think there is a really, really important paragraph in this book that addresses something that I think most readers are going to miss. It's a three-part book. This comes out of part one, page 40, and this is the quote, can reserve currency countries, call it the U.S., that don't have significant foreign currency debt, have inflationary depressions? Well, they are much less likely to have

Starting point is 00:47:36 inflationary contractions that are as severe, they can have inflationary depressions, though they emerge more slowly and later in the de-leverging process after a sustained and repeated overuse of stimulation to reverse deflationary leverages. I think that paragraph was put in the book to describe exactly what we are seeing on a global scale today. Nowhere in that book, Is there a scenario for what we're seeing right now? There isn't. There's never been a global inflationary scenario where every country goes through it. There's not a single example in the book because it's never happened.

Starting point is 00:48:18 But Ray did squeak that little paragraph in there, page 40, book one, and there was nothing else it was mentioned other than that paragraph. I underlined that paragraph. I highlighted that paragraph. I tabbed all corners of the page in the book on that paragraph because In my very humble opinion, that paragraph is describing what we're about to see on a global scale. And that's why it's so different than anything else that you could study.

Starting point is 00:48:43 Because think about it. In that quote, he's talking about these deflationary delevergings that are happening and how that's exactly what it looks like we're having in the U.S. right now. And therefore, they're using quantitative easing in order to stimulate. And so is everybody else. So how did we get here? How did the whole global market get correlated so that we're all having to be? having the meltdown at the same time. And for me, the answer is really quite straightforward.

Starting point is 00:49:08 It was Bretton Woods. It was Bretton Woods in 1944. The dollar was pegged to gold and every other country pegged their money to the dollar. So guess what? They were all correlated. They were all coordinated together. And it just didn't happen for a few years. It happened clear up until 1971. And so you had this harmony of currency manipulation that has happened since that time. And we've had fiat currencies ever since 71 on a global level. And we've had interest rates that have been declined, cleared down to zero percent, harmoniously across the globe. And guess what?

Starting point is 00:49:50 They're now all at zero percent. And they're all fiat currencies. and the fiscal spending in every single country is exceeding their revenues. Therefore, my opinion, total meltdown of fiat currency globally and all the ramifications that come with it, which results in hyperinflation. And now I think the globe has to position themselves in any way that prepares for global hyperinflation. And you're not going to find a scenario in the entire book that talks about it because

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Starting point is 00:53:42 advertisement. All right, back to the show. Preston, I actually, after reading the book the first time, we did an episode about it, and we'll make sure to link to that in the show notes. We talked both about the deflationary cycle and inflationary. Also, just want to keep in mind that Preston is talking about inflationary scenario in the U.S., which by definition is deflationary because it's a global reserve currency. The other thing I want to say is that Redalio, very recently, They did a write-up about interest rates hitting zero and the coronavirus, and we'll make sure to link to that in the show notes too. That is a fantastic read, and it's very interesting to hear what Redallio is talking about

Starting point is 00:54:23 these days. He's also hinting that perhaps the time is right to take a position in gold, and perhaps that is for those reasons that Preston also mentioned before, because you want to maintain that purchasing power. The other thing I would like to highlight here is that whenever you're betting on the stock market, and now we're talking about more normal conditions, and then I would actually like to address Preston's point about the fiat currencies that I might see slightly different. Whenever you're doing that, it's not so much a bet on stocks or the stock market.

Starting point is 00:54:57 It's really a bet on the world prospering. And I have to go back and look at history because I don't want to have too much availability bias. People are panicking around me. I should panic too. I will do what I can to zoom out a little. And if I look at the past just 55 years, 51 of those years, we have seen GDP growth to be positive. Now, with that happen in 2020, probably not. At least that's not the projections right now from the World Bank. And there are so many reasons why we see a positive GDP growth and why we can expect to see that. And I'm talking about real numbers. I'm not talking nominal numbers here. And a lot of that comes back to technology. I know I'm just making it very simplistic. There are so many different

Starting point is 00:55:40 things you can put into growth and what happens. But if we just take one of the big ones, technology, it's very important for global growth and therefore in turn also in the real growth of the stock market. Can we imagine a scenario long term where we stop innovating? Can we imagine a scenario where that just doesn't happen that we become more productive because of whatever kind of invention. And here we can just think assembly line, steam engine, however long you want to go back in history, that's probably not going to happen. So I do want to say for those of you who are listening to some of this, and again, Presta might be right and I might be wrong, people are listening to this. At least that's my vendon's point, that it will blow over. We will have

Starting point is 00:56:23 somewhat normal conditions again. And both in real and nominal terms, we will see people holding assets to be better off than holding cash, everything else equal. Now, Preston said something really important before. He said, yes, it might be better to hold equities. Actually, to be fair to Preston, Preston quoted Redalue saying this in his book, equities might be a mixed bag. It would be better than cash. Whenever say cash, I'm just talking US dollars here, but it won't be as good as real assets, real assets being oil, gold. I wouldn't necessarily say Bitcoin. Redalio is very critical about Bitcoin specifically, but the idea is still the same here. I do think that it's very, very concerning that right now we see zero rates in the U.S. and negative rates in Europe and in Japan.

Starting point is 00:57:13 Let me give you one example. Here, the 12th of March, everyone expected the ECB, the European Central Bank, to lower the leading interest rate from negative 0.5 to a negative 0.6. That didn't happen. the euro soared as a result of that. Now, I would like to explain a bit more about that because that might not make any sense at all. The way that currencies work is that it's always in comparison to something else. But what they did say was that they wanted to increase the net asset purchase at that time about 120 billion euros until the end of the year. And in preparation to this episode, I put down, make sure to check news on a daily basis and see whenever they're going to buy back more. And what, 10, 12 hours ago before we started this recording, they

Starting point is 00:58:04 increased that to 750 billion. The chance of that working to Preston's point is very, very limited, and I would even say it's very limited at best, because bonds can't be pushed much higher because of the environment that we're in. And that is a huge, huge issue. ECB also said that they continue to expect QE programs to run as long as necessary. And In all the fairness, they also did say that before the coronavirus, and they also provided temporary capital and aberration relief for banks. So in a way, you might say that the ECB are not that much more constrained, but they were still in a very bad place. Now, if you compare that to the US, I do think that there are some serious concerns that we need to address. And again, I want

Starting point is 00:58:52 to go back in history just to talk about that. Back on the 3rd of March, the Fed lowered interest rate by half a point to 1%. And this was the first time since the financial crisis that it was unannounced. Then, not too long after, it was lowered again by 100 basis points or fancy way of saying 1%. And that was the biggest since 1982. But keep in mind that the interest rate in 1982 was very, very different. And what they also did was they increased the holding of treasure securities by at least 500 billion and mortgage back securities by at least 200 billion. It seems like a lot of money, and it's sort of is. It's around the market cap of Google, all and all. But it's very simple. What you see right now is that monetary policy can't stand

Starting point is 00:59:35 alone, especially at a time where you don't really have that much back on the toolkit, and what you have probably won't work because of what I've said before. So what you see right now is that through fiscal policy, and I just like to explain that. Whenever it's a monetary policy, you know, think about interest rate, thinking about liquidity pumped into the market, it. Whenever I talk about fiscal policy, it's universal basic income, it's new government programs to stimulate growth. That's a difference here. And what Redali would say in his book, Bit Debt Crisis, is that it's very, very important for a government to be extremely expensive in the fiscal policy to mitigate that effect that you have from people spending a lot less

Starting point is 01:00:19 money. So you're hearing hundreds of billions of dollars. And just yesterday, there was talking about a new package with a trillion dollars. Whenever you hear that, it is a lot of money, but you also need to consider how much is withdrawn in the economy. And what the good policymaker would do, and this is very, very difficult to do, and Radale, you acknowledge that too, is that you need to make sure that you can stimulate growth so you don't fall into this deflationary depression that could be a risk in the US. Now, this is how I see it. This is how I read the book. This is how I read the news right now. So I more look at it as mitigating that deflationary pressure more than what Preston is doing.

Starting point is 01:01:01 And I hope people will then consider what they think is most possible. Yeah, so I completely agree with what you just said. 100%. And I think what we've seen up to right now has been exactly what you described. We've been in this deflationary depression type scenario where they're using QE, they were using stimulus. I think right now is the transition point to that paragraph that I read where the deflationary depression type scenario is now not going to take place. I think you're going to watch a pivot from the status quo of what has been to this now inflationary scenario

Starting point is 01:01:39 globally that's going to start playing out. I think right now is that moment. I want to tell people, so it's always fun to come on here and kind of talk about our theories on what's going on and what's not going on, and whatnot. But at the end of the day, I want to tell people how I plan to position myself in the coming year. So like I said earlier, I have two positions. I've got U.S. dollar cash and I have Bitcoin right now. And I know that portfolio sounds obscene, but that's what it is. I'm just being honest. Moving forward, there's some more things that I'm going to buy. And this is the event that's going to probably trigger it. As of today, this is a how I stand. This is what I'm looking to take a position on. So I think the huge milestone event

Starting point is 01:02:26 that I was saying earlier is when it looks like we're going to finally start to get relief on the medical front, the demand on the hospitals, and they're going to start sending people back to work. That event, for me, is going to be the turning point on literally the entire direction that the markets are currently in, and I expect them to continue to trend in until this event takes place. When that takes place and you start to see people go back to work, I think the position to take is to buy gold miners and I think to buy the underlying commodity oil, not oil companies necessarily, but the underlying oil. I'm also going to do long-term call options on both of those, on miners, on gold miners, and I think silver might

Starting point is 01:03:14 also do well, silver miners, but the gold miners specifically. I'm reading some things that there's some issues with the derivatives around gold right now, separating from the underlying prices. So for me, I'm staying away from GLD. I'm staying away from these ETFs that track the price of gold because I think there actually might be some issues with them not actually having what they say they have as far as, I guess, the trust around those vehicles I've got some concerns with. So if you are going to own gold, I would tell you to own it physically in your hand based on those concerns. But the thing I like about gold miners is that you don't have that risk because you're basically trading the valuation of the company.

Starting point is 01:03:57 So for me, I'm going to own the gold mining companies. I'm going to have call options on the gold mining companies. And I'm going to own oil long as a call option as well. and the timing for all of that is going to be whenever we see people start going back to work and you see the medical facilities actually start to get some relief. And I'm obviously going to continue to own Bitcoin. Just one final note on oil companies. I tell you, I'm interested in buying oil, the commodity long.

Starting point is 01:04:27 I have reservation about oil companies simply because I'm concerned about the demand coming back to what we saw before all this crisis took place with the coronavirus. If all this is playing out and you're seeing basically a dislocation of the status quo and the norm, you're going to see spending habits, I don't think, come back to where they were before all this. So call it the end of 2019. Whatever those spending habits were, I do not see those spending habits being the same moving forward in the coming two to three years.

Starting point is 01:05:00 I see those spending habits being lower. So if you have oil prices sky high and you got companies like ExxonMobil that are now going to absolutely capitalize on those higher prices. And I'm talking probably a year from now, right, or nine months or whatever that is. If that scenario plays out and those prices go higher, not only do they have to have higher prices, but all the previous demand has to come back online in order for those oil companies to pop in price. I think you're definitely going to see a pop from whatever the low ends up being for oil companies. I just don't know that it's going to rebound to the level that you saw before all of this happened. That's my concern. But it absolutely could. I just

Starting point is 01:05:44 don't feel like I have enough confidence in that happening because I have concerns with demand coming back to the way it was. All right. So with that said, I think it would be good to play a question from the audience, also because specifically this question is about Leaps. And Leap is an acronym for long-term equity anticipation. You can more or less see it as a bet on where you think a price for something like gold or oil or a specific stock for that matter is going. So let's play a question from your audience from Philip. Hey guys, thanks for picking my question.

Starting point is 01:06:17 I'm a huge fan of this show. As I record this, the market had its worst trading day since 1987 due to the panic caused by the coronavirus. This has definitely opened up some attractive value opportunities. What is your opinion on buying long-term call options like Leaps instead of just the underlying stock itself. Also, how frequently do you guys protect your own long positions and equities with puts? Thanks in advance. So, Philip, love the question. It's a very pertinent question for what's going on. I really like leap. And when I say a leap, it's basically a two-year call option is what

Starting point is 01:06:52 we're talking about here. I have some rules, and they were completely adopted from Jewel Greenblatt's book, that he does not allow himself to take more than 50. 15% principle. If you got a $100 portfolio, he's not going to allow himself to put more than $15 into call options. His other rule is that he only does call options. He does not do puts. I personally don't do puts. I only do call options. That's really kind of the simplicity of it. The reason I can't stand puts is because they have unlimited risk. If you're using it in the manner that you described, I see it as kind of just a frictional insurance policy. If I have concerns with the company, I'll set my stop at whatever I think that quote unquote insurance policy is. And if it has too much

Starting point is 01:07:38 volatility, well, then maybe it shouldn't be in my portfolio if I don't have conviction on it anyway. So when you're talking about doing this, especially at this point in time, like I mentioned earlier in the episode, I plan on using these leaps and these long-term call options and I plan on using them for gold mining companies. And I plan on using them for the underlying oil price. but I don't plan on doing that until that specific milestone in time. Today, I have no exposure to these things. I think putting that on right now, based on my thesis that you heard me say earlier, I think putting that on right now for any equity is just premature.

Starting point is 01:08:19 I think there's more pain on the horizon simply because no one's working. All of that still being priced. Mark Yuskoff had a awesome tweet that I really, liked. He said, when you get in a situation like this for a market that's going down, it's almost like taking a ball and rolling it down the steps. The bounces at first are very small, but as the ball kind of gains more energy as it goes down the steps, the bounces in the ball get more violent and more volatile as they get to the bottom of the steps. When you're looking at this, I think that there's probably more pain on the horizon. When I say that, it could be a month. It could be 15

Starting point is 01:09:00 days. I don't know based on everything kind of revolving around people staying at home and all that demand dropping off. And I think the market is trying to figure that out and price that accurately. And that's why you're seeing the violent swings. But as long as you see the market go down 10%, and then the next day it's up 5%. And then the next day it's down 7%. And then the day after that, it's up 3%. When you're seeing that volatility in the movement or the trend is going down and it's staying inside of that volatility range, I'm not going anywhere near that with Bob. until I feel like there has been a statistical change in that trend. So I would tell you, great idea.

Starting point is 01:09:38 It's going to be a very lucrative idea if you do it right, but you've got to provide yourself the most advantageous timing in order to do it. I would much rather show up a little late and miss the price capture on the bottom by being late than to put this on too early, and you totally misunderstood how bad the coronavirus is, and you get timed out on your call. So I would tell you you want to be on the right side of that V and not on the left side of that V is just my personal opinion. So Stig, what do you got, man?

Starting point is 01:10:12 Especially in times like these, it is very important to understand both the impact of a leap, a pressing call before, but also potential buying a put. And I think that whenever we're talking about put, you can sort of think about it as insurance to your portfolio. And situations like this, you might say, because of your put exposure, your portfolio wouldn't go down as much as it otherwise would. And it looks very attractive these days. It hasn't been looking attractive for years whenever we have the bull market.

Starting point is 01:10:43 So let's just zoom out here a bit and talk about should you buy insurance. And I think the best example I can make is to use a real-life example of should you or should you not buy a travel insurance. So like so many other people, the intention was to go to the Brexit Heatherway event, unfortunately that's being cancelled. And I'm a value investor, so obviously I found a very cheap ticket. It was around 500 bucks. And I could buy an insurance for another 50 bucks so I could cancel it if needed, which I didn't buy because I thought to myself, I can afford to pay that $500. Everything goes wrong. And don't even get me started on if there is a severe crisis, you might even be able to be paid back in any case, which might be the case here.

Starting point is 01:11:27 So the reason why I'm using that sort of silly example is whenever you're considering, should you buy put options or not, you can think about it as travel insurance. Can you afford if your portfolio would temporarily go down 30% before it bounces back? And if the answer to that is yes, you probably shouldn't spend money on something like a put. That is sort of like the overall theory on this. That being said, whenever we're talking about leads, which I find a lot more attractive that puts because your risk is limited and it's a very different bet. What I want to say is that the way that options are being priced, this is basically

Starting point is 01:12:05 what is called an option. You're thinking about different scenarios and the market price that a different way. The price of an option is based on multiple factors, including volatility, and something called a strike price, which is something I would like to talk about here shortly. But my main point first about this model is it's proven to be quite accurate within a year. Whenever you go out for more than a year, it tends to be widely inaccurate, which is very interesting if you have a very different opinion on something like, say, the price of oil, when everyone is thinking it's just going to go down, the oil price is here to stay at this low level or whatnot.

Starting point is 01:12:41 That's whenever you can really get a very interesting return if you think that the oil price, like Preston mentioned before, will go to something like $100. Hey, Stig, I just have one other thing to add there. So think of it like this. If you were going to have, let's just say you had a company X, right, was your stock pick and it's trading at $100. And you have concerns about the downside. And so you want to buy a put on it.

Starting point is 01:13:05 I think for me, the cost to put those puts on in order to protect that, you have to see how volatile the pick is. If the pick is really volatile and the cost for that put option is more advantageous then a stop that's very volatile. Let's say that the company has 30% volatility. And let's say that to protect that volatility, the put is really cheap at the strike price that you're at. Well, then the put makes all the sense in the world. But let's say the put is expensive relative to that annual long-term volatility range. I would tell you you're going to get a better return on your money to protect that by putting in a stop that would be 10% or let's say the volatility on

Starting point is 01:13:46 it's 5% or 10%. Put in the volatility, put in the stop based off of that to protect your downside and it might be more advantageous from a price standpoint. You have to do the math on that to understand which one is more advantageous based on the price of the option and then based on the volatility range that you're looking at that you would say, all right, there's a statistical change to the downside and I need to sell it at that point. That's how I would look at that scenario. And just follow up on that precedent. I think it's also important to understand that the way that these options are being priced is for practical reasons, you typically do that on historical data. How much do they fluctuate? We are in a very different

Starting point is 01:14:27 situation right now, which of course, also to some extent is being priced into the option market. So you can't necessarily use that today as under other conditions, especially if you have a different opinion on that. And especially if something is punished or really popular. So like, let's talk about oil, right? So I'm saying that I'm going to take an oil call here in the future whenever I think that all the demand and everyone's going to come back to work. Well, those options are going to be priced really advantageously because they're going to have been so punished through this move. So that's something else you've got to consider when you're looking at using options as an insurance policy is depending on how punished or how exuberant your company is at whatever point in time,

Starting point is 01:15:15 might dictate whether you're getting a sweetheart price on the put, or maybe it's way overvalued and the stop would make more sense. It's on a case-by-case basis, but I think those are the variables that you have to use and you have to think about as you'd be putting something like that on to kind of relatively compare to each other. And just to round that off, I think it's very important for people to understand strike price and the concept of being in and out of the money. So whenever we're talking about options, it's not paid out like on a one-to-one basis. It's all a question about probabilities. So if we are talking about a strike price on the barrel of $80, obviously that would be priced, very lucrative in these

Starting point is 01:15:58 conditions. And I think that for people who are considering taking advantage of all the uncertainties that are right now and might be interested in real assets because of the reasons that Preston said before, not necessarily today, but I do agree that in the next few months to come, you will get some very attractive valuations that you haven't seen in the options market for a very, very long time, especially if you are of the opinion that real assets would spike dramatically, because that is definitely not what the market is expecting right now. All right. So, Philip, that's all we have for you. We're going to give you free access to our TIP finance tool.

Starting point is 01:16:36 We've talked about this a lot on the show today. And what we've talked about specifically on it is this momentum tool. that's looking at the volatility, that's helping you understand what the annual volatility of the companies are, this tool will tell you stop prices that will help you understand when the company is moving outside of its statistical volatility range to help prevent some of the things that we've seen in the markets. And like I said earlier, using this tool, the 26th February, our tool went from a green status to a red status saying, hey, the S&P 500 and also the Russell 2000 also went red on the 20th.

Starting point is 01:17:12 26th of February on our tool. And the market had only dropped, I don't even know that it had dropped 10% on the Russell 2000 and it had turned into a red status and would have protected you from some of the chaos we've seen recently. So I personally use the tool. In fact, we designed TIP finance for ourselves for Stiggini to use personally. And we were like, hey, you know what? There might be some other people that want to look into the tools that we're using as we find them so valuable. So we're excited to be able to give that to you for free. and thanks for the awesome question. All right, guys.

Starting point is 01:17:46 This was definitely a fun episode, and we'll definitely make sure to record a lot more of them here in the near future. But, guys, that was all that pressed on eye for this week's episode of The Investors Podcast. We'll see each other again next week. Thank you for listening to TIP. To access our show notes, courses, or forums,

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