We Study Billionaires - The Investor’s Podcast Network - TIP304: Current Market Conditions w/ Preston and Stig (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. On today's show, Stig and I talk about the current market conditions and what kind of investments we think will perform in such a challenging environment. We also talk about two different specific stock picks that have good valuations and also good momentum characteristics. And then we filled a question from the audience about handling confirmation bias. So without further delay, here's our review of the current market conditions for July of 2020. You are listening to you are listening to.

Starting point is 00:00:30 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, Stigbroterson. And we're talking current market conditions. So, Stig, you wanted to first start off this conversation by talking about the valuation process that we personally have used for years, how it's evolved, has it evolved, and just kind of talk heart to heart on how we're seeing things these days. So I'm going to throw it over to you to start us off. I've gotten a lot of emails and questions here lately about, actually a lot of them about you,

Starting point is 00:01:24 Preston. I don't know why they're sending it to me. But I get a lot of questions about, hey, it seems like you and Preston are like you're no longer value investors. And whenever I get those emails, That's a course word, by the way. It's like, you are no longer value investors. It's like, you've been bad guys. Because we talk about sound or not sound money. We talk about momentum and macro, alternative asset classes. So I sort of like wanted to have a discussion about where did we come from? If I have to go first, I would say that generally I haven't really changed my approach. I am still primarily an equity investor. I do have multiple investments outside of the stock market, but I think I would probably have had that regardless.

Starting point is 00:02:04 But really, the approach of looking at the current price and then estimate the future cash flows of the business and discounted back, that hasn't changed at all. And I think that's important for people also to know that whenever we talk a lot about so many other things that we did in the very beginning, a lot of that is also just us exploring. That's not necessarily us endorsing this type of investment, the other type investing. We are really trying to get smarter together with the audience. But what I do want to say is that compared to 2014, whenever we started TIP and we did the very

Starting point is 00:02:37 first podcast, I would say that valuations have become more complex. Even whenever I started up my investing career, and this was before 2014, the way I looked at stock investing at that time, that was Warren Buffett whenever he talks about 10-year treasury yield, that's your opportunity cost. You can also use that as a discount rate. So I think a lot of people are puzzled probably about that statement because it's a statement that still pops up these days. And they were like, oh, like the 10-year treasury is like 0.7. Like, oh, so we don't need to discount anymore. Like, all the evaluations are just great. I would say that where I came from in 2014, very much looking at it as a value investor, I was thinking, okay, we need to have modest growth

Starting point is 00:03:22 rates, even better, no growth at all. And then identifying strong companies that then could sustain the next 10 year at least, if we were able to look out and say, oh, it's probably going to make at least the same. And they were sort of like where it came from, like looking historical data and then extrapolate that and say, yeah, that's probably what's going to happen. And especially if you can find them attractive valuations. I've also starting to look at that process a bit differently. I had a few painful lessons. I actually had quite a few painful lessons in the past 10 years in terms of investing. I've been vocal about all the pain with National all Velvago, GameStop, which we've talked about multiple times. And I remember you, Preston

Starting point is 00:04:03 years back, you were like, yeah, I don't know about this company. It looks cheap, but it also looks pretty bad. And I was, I was all over the moods like, oh, I need to invest in that. It was just so painful. So I guess what I've done is I focus more on quality today than, I guess, historical data and low valuations. And I guess I'm a bit more, I wouldn't call it generous. I would like to say realistic, perhaps a bit more realistic with the growth rates on some of the stockpics. You know, I've been mentioning Google, Alibaba, and Spotify on some of the earlier mastermind groups. And those three are companies that I've invested in. And it's interesting, whenever I think going into investing back in 2014, I would never ever have invested in companies like them at those valuations.

Starting point is 00:04:47 Really trying to summarize before I'm going too long here, to really to answer like, how is my stock valuation approach changed? since we started TIP. Fundamentally hasn't changed, but what has changed is that I'm looking at more asset classes than just bonds than just 10 year treasuries to determine my discount rate and opportunity costs of equities. I'm looking at currencies. I'm looking at private deals as long as they're generating cash flows. And I'm also looking at very different business models than before. The valuation technique is exactly the same, but the assumptions, especially about growth, has changed and I guess so far so good. In terms of macro, I know we do talk a lot of the a lot about macro here on the podcast. I'm a hot still a micro investor, but I think that macro is

Starting point is 00:05:29 really important to support any investment thesis that you have. Value in itself is still a driver, and I would still take position based on value itself. But I'm sort of looking at macro as a really powerful catalyst that could drive value stocks to its intrinsic value faster, for instance, through momentum, but it could also be a catalyst other ways. Preston, I'm curious to hear, like, going into this six years ago, more than 300 episodes, what has changed? What has changed? changed and what hasn't changed in your evaluation methods? Well, I've changed a little bit, definitely on the momentum stuff. But I think the thing that's changed most is just the environment that we're operating

Starting point is 00:06:04 in. And coming out of 2008, 2009, I was of the opinion that we were dealing with free and open markets because I think that would be a pretty normal assumption to have coming out of 2008, 2009 is that we have free and open markets. Today, I don't necessarily think that's really the case anymore. I'm not saying that to get a rise out of market participants or to sound controversial. I just, I really think it's a sheer fact that when central banks can step in and drop that much money, trillions and upon trillions of dollars into the market, I don't think you're dealing with free and open markets.

Starting point is 00:06:40 The question then becomes, how do you adjust your investing style to accommodate a manipulated market? Because if you don't adjust to the facts, because that's what you're dealing with, you're just going to get tore up. So I think one of the biggest things that have come out of this aggressive manipulation, I would say, in the last 10 to 12 years, one of the things that came out of it is that it's all about the data. These companies that are able to harvest data and then intelligently make decisions based off the data, I mean, it's like the crown jewels of business at this point. And companies that haven't adjusted to that are not going to compete in a relative basis as far as growth rates. So like if you're going to compare the brick and mortar company that's in small town, whatever, to a company that can compete on a global scale as far as their growth rate because they're harvesting data and using that data intelligently, you just can't even compare the two.

Starting point is 00:07:37 And for people to, this is one of my biggest pet peeves in investing is people say, oh, well, that's a different asset class. You're comparing apples to oranges. I'm comparing dollars to dollars, right? like what gets me the fattest return with reduced risk based on the competitiveness of the assets that send on their balance sheet. So when I'm looking at that and I'm saying, why has value underperformed? Well, so many value picks, in my opinion, are kind of those companies that fit the local business model or the brick and mortar business model and they haven't been able to compete globally

Starting point is 00:08:13 like some of these, you know, Apple, Netflix, Amazon, Facebook, Google. I'm comparing a chart of the S&P 500 compared to Amazon just since 2014. I mean, you're talking large cap company in 2014 to now just in the last six years. And Amazon's performance is 595% versus the S&P 500, which was 68%. Like, that's insane. That's nuts. And that's a large cap company. So what's driving that? Why do we see these companies that are able to do that? And I would tell you, it all comes back to their ability to capture data and then use that data intelligently for areas that don't even seem like they're related to the core original business model that was out there.

Starting point is 00:09:02 And so same thing with Netflix, same thing with Facebook, same thing with Google. These companies are masters at collecting data, harvesting the data, and then stepping into a completely different business model, using that technology to speed things up, to take people out of the process to save their costs. If you were going to plow into their financials and understand why these companies have been able to do this, it really comes down the one thing. Because they have lower costs, like let's look at Google, for example, huge margins in the advertising space for what they're doing. There's no one sitting there running. It's been completely outsource and decentralized to run ads.

Starting point is 00:09:44 So they've got fat margins. Well, what are they doing with those margins? They're then plowing all those margins back into capital investments that the company owns that through R&D, right, when you spend R&D dollars in your company, those are expensed immediately. Those expenses go on to the income statement for, let's say they spend $50 million on R&D. That's expensed. And then it's listed on their balance sheet, that asset that they created, that they created,

Starting point is 00:10:14 then goes and sits on their balance sheet, and it looks like they're not making any money because it was expensed on the income statement immediately that year. Well, if you see this, it doesn't look like the company's making any money. So we go to the Amazon model. It didn't look like they made any money, or it looks like it's a net balance of zero at the end of every income statement that they pump out each quarter and every year. Well, what they're doing is they're creating assets that then go sit on their balance sheet as far as listed asset, not based on valuation, but just a listed asset because they expensed

Starting point is 00:10:48 it according to GAAP accounting rules. And so it looks like the company's making no money, but then that asset starts kicking in more and more cash flows, which then they go and invest in more R&D and create more and more assets. So that's how the company's growing. But as far as if you were looking at it from a value investing standpoint and from a income statement standpoint, it's going to be like a mirage. But if you're looking at the price action and you're looking at the momentum, it keeps going up. So I think you have some really interesting things happening over the last 10 years specifically. That's a direct result of central banker intervention that's allowing this to take place.

Starting point is 00:11:24 The fact that we have technology after decades of inflationary monetary policy, you've set up an incentive structure that has allowed technology to do these crazy things. And now it's kind of this endgame of the biggest companies can now step in the markets that wasn't even their originally intended market. Because they have access to data and they have so much intelligence in their decision making, they're able to capitalize in industries that they are just stepping into because they're looking at things at such a different angle and they're able to do it so much cheaper than before. So moving forward, as far as my investing approach goes, you better believe I'm keeping an eye on Apple, Netflix, Amazon, Facebook, Google,

Starting point is 00:12:04 the big companies that continue to just suck the blood out of everything. I'm definitely using a momentum-based approach because one of the other effects of a manipulated market and for value investing to work is you have to be able to do a discount rate, right? Like, you have to be able to conduct a calculation on what something's worth. And at the core of value investing is that you're dealing with sound money. So if you're not dealing with sound money and the money's getting debased at a breakneck pace, like we talked with Lynn, and she was saying seven or eight just at a debasement rate, well, that I guess, becomes your new risk-free rate at a minimum. And that's assuming that seven or eight percent persists into the future, which I'm very skeptical of. I think it's

Starting point is 00:12:47 going to be higher than that. I guess what I'm getting at is it's really hard to be doing these valuations and math of what a business is worth when the ruler is being changed at a breakneck pace simply because of all the macro things that we talk about on the show. And so that's hard and that's concerning to do really well. So I think that's why I'm leaning more towards a momentum strategy. Now, if we would go back to sound money and we'd have some type of ruler, risk-free rate or a debasement rate that was sound or not flexing all over the place and has all this variance in it, I mean, value investing would crush it.

Starting point is 00:13:27 I have no doubt about that. I think that it would outperform tremendously. Those are some of my thoughts on why we're seeing what we're seeing. Really interesting response, Preston, and sort of like ties into the next two points we're going to talk about here for today's show. Next up is machine learning secular trends in 21st century. Then I would really like to talk about what to do whenever you're investing in a world with no sound money.

Starting point is 00:13:53 The first point here about machine learning secular trends. We spoke with Arif Karim from Ensemble Capital, just a few. episodes ago, and I really wanted to hear his thoughts on potential undiscovered secular trends. Who wouldn't like to be invested in Amazon even before it was like the Amazon we know today? He did agree that if you can find undiscovered secular trends, that would be fantastic. But he also said it's really, really, really hard. But you can still invest in secular trends and make a lot of money if you play your cards right. He mentioned MasterCard and Amazon as just two of those companies who've been riding on secular

Starting point is 00:14:28 trends that everyone was out there to see for decades, but still you can make a ton of money of that. One of the most impactful book that I read this year, that was Jeff Booth's book, The Price of Tomorrow. I absolutely loved that book. We interviewed them back on episode 294, and again, you should definitely listen to that interview, but if not, pick up the book in any case. It's a fantastic book. And Jeff talked a lot about how competing in the 20th century is this.

Starting point is 00:14:58 different than competing in the 21st century. And so I thought a lot about how to tie those two together about what Arif said and what Jeff said. And one more point that Jeff made was that it used to be economies of scale. That was how you compete in the 20th century. You're a big company. You can leverage your size to get discounts for our suppliers. Walmart would be an example of that. They have economy of scale, the old generation of companies. And that worked really, really well in the 20th century. And the problem is that those type of businesses have a bias that they had to prioritize what sells best. And so since they have a limited storage, they will continue with the best selling products. So it's sort of like becomes a self-reinforcing effect that leaves out

Starting point is 00:15:43 innovation. And then Jeff talks about how networking effects is 70% of the gain of these tech companies and comparing Walmart to something like Amazon. You have customers doing the two you have suppliers doing the promotion, and the market automatically innovates for Amazon in a very different way than it can do for Walmart. And again, I'm talking about the traditional Walmart. I do know that they have been doing a ton of new stuff on the internet lately, even though it definitely trails what Amazon has been doing. Now, of course, if you have advantages like economy of scale, it's not like it's not

Starting point is 00:16:17 important anymore, but the real winners companies like Google and Amazon, they emerge as winners in the 21st century because we are now in a winner-takes-all or close to a winner-takes-all type of industry. They just have the vast amount of data to serve the customers, the very best products and services. And I know what you're thinking. You're saying, we already knew that. Preston said that 10 minutes ago. We knew that. And it seems like everyone knows that right now in the stock market. And yes, that is my entire premise. But I would like to put a layer on that in terms of how we can perhaps make money as something that is not priced in using the same secular trend. So again, let's say that networking effect is here to stay and so is the case

Starting point is 00:17:02 for machine learning. Which countries will really benefit from this more than any other? And Preston and I have previously talked about Kaifoli's book, AI Superpowers, which is a great book in itself if you want to learn more about big data. And he talked about how Google, in his opinion, had the best engineers. They were the best in machine learning in the world. But he also talked about how mediocre AI engineers with more data at any time would upperform a company like Google if they had more data. I was trying to do like a high level thinking of, okay, so we have three regions in the world right now that has a lot of technology and also has a lot of data. You have US, Europe and Asia, specifically China in Asia. I wanted to take.

Starting point is 00:17:49 take an alternative view of not just thinking about the current situation, but include ideology in terms of predicting what's going to happen in the future. Let's talk about an ideology that has failed. And whenever I say ideology, I basically mean a data processing system. So one that failed, communism. Communism failed because the data processes was just all centralized. And the Western capitalist societies won because the modern economy of the 20th century was just so much better off with a decentralized data processing system. And let me just give you an example of the virtues of a great information system in the 20th century. So there was this famous story about Gorbachev sending a key aid to London to learn what

Starting point is 00:18:35 the British did well, that they didn't do well. And Gorbachev's aid was taking around in London and he was shown how the British businesses operated. And then after a few hours, he just burst it out. We've been going back and forth in London for the entire day, and there's just one thing that I don't understand. In Moscow, we have the finest minds in our country working on a bread planning system, and people still have to wait in line for hours.

Starting point is 00:19:04 But I see no cues in London. Please take me to the person in charge of bread planning. Let's take a quick break and hear from today's sponsors. All right, I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year bringing together activists, technologists, journalists, investors, and builders from all over

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Starting point is 00:22:48 and even enhance your product photography. Plus, if you ever get stuck, they've got award-winning 24-7 customer support. Start your business today with the industry's best business partner, Shopify, and start hearing... Sign up for your $1 per month trial today at Shopify.com. S.B. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. Now, I'm sure you see where I'm going with this. There was no person in charge of breadclank. That's the entire point. That is the secret of why Western capitalist countries did so much better than the Soviet Union. To bring my point home, which data processing system will be most competitive in the 21st century? Assuming that data and machine learning is as important as we think it is, Europe will be in

Starting point is 00:23:44 a world of pain in the 21st century. You already see a lot of that now. In terms of how we collect data in Europe, you might argue that it might be better in terms of personal privacy, but in terms of competing with the US, with the current legislation, it's just much more business-friendly in terms of big tech. And so the US definitely has a leg up there. Now then if you compare that with 21st century China, I've got to be able to be. I would argue that they have a leg up, but with the chain-six technology, that is in many

Starting point is 00:24:14 ways just much more efficient than a decentralized system, because machine learning works better the more information it can analyze. And I want to emphasize that this is by no means a way for me to glorify communism. Actually, the very opposite is my point. And I think that everyone who's been listening to the podcast for the past six years knows that I'm the very opposite of that. But I'm saying this because the way the Communist Party in China controlling the population and collecting all the data without their population's consent, in a weird way may turn

Starting point is 00:24:46 into a competitive advantage, which I clear to think is horrible, but not something I should ignore, neither as an investor or as a private citizen of the world. I'm saying this because we need to think about which type of world we want to live in and which type of sacrifice we're willing to make. I just wanted to have this as a new input to investing and the opportunities in a secular trend that we all know, machine learning, there's privacy, networking effects. And whether we like it or not as private citizens as investors, how should we position ourselves? So again, and I know I said this before, but my point is not that I want the Chinese to

Starting point is 00:25:26 uncompete the West. In close to all areas of business, a freer market would always be better. But I am very concerned that big data mind chains the rule of the game where the more data you collect and the more big brother of society is, the more it can be turned into a competitive advantage in the 21st century, because I hope I'm wrong and I do hope that capitalist and free economies will prevail even in the world of big data. I'm very curious to hear what you think, Preston. So I think this is really simple. When you're looking at democracy, the engine for democracy is capitalism. But in order for capitalism to work, you have to have a sound money, period, right? Because with sound money, you can now conduct economic calculation. You can price out how much it costs to go buy the flour, how much it costs to do the labor,

Starting point is 00:26:18 and then you can competitively step into the market and compete. And if you suck, you fail. You go bankrupt. That's how capitalism is supposed to work, is if you suck, you go bankrupt. right now today, I would argue you don't have that. And you know, it's not just me who's saying this. You have Ray Dalio, who's arguably one of the best investors to live right now, who's literally come out this past week and said that we don't have free and open markets anymore.

Starting point is 00:26:48 So I would argue democracy becomes at risk when capitalism is not actually being conducted. We're not allowing there to be a free and open market. for companies to fail and for companies to prosper if they figure out a better way to do things. So stepping in and saving a company that makes jets just because there's only one of them in a country and they've mismanaged themselves, let them fail. Let them fail. Some person will step in there, some company will step in there and buy their assets and repurpose their assets. It might not be the price that we like, right? might not be the price you like at all. It might be for 20% of what you thought it was worth on your

Starting point is 00:27:35 balance sheet. But somebody will step in there and buy that. They will repurpose it. And then they will prosper and they will take off because they have a better way to manage the business so that they're not cash flow negative. We have to allow that to happen. And when you do that, all economic calculation will take care of itself. And everyone has an equal opportunity to prosper. We've gotten far, far away from that around, not just in the United States, but all around the world because of an idea, an academic idea on money printing and controlling economies. And guess what? It works over a long period of time. But if you keep doing it for 80 years, you get yourself in a situation where now they have to print to prevent social unrest. I think stepping in and saying

Starting point is 00:28:25 a communist country like China, which is the epitome of control. in manipulation. When I think communism, I think peak manipulation. And if there's one thing that I've learned in nature is when you don't allow to function free and open, you get yourself in the biggest drastic setbacks. And it might not happen in a 10-year time frame or even a 40-year time frame, but eventually it's going to erupt and explode because there's a human being in the loop controlling it, opposed to allowing free and open markets to naturally work themselves out through the process

Starting point is 00:29:00 of capitalization of failure and success. So I'm hesitant to agree, Stig, and I might be missing your point with the way you were describing it, but I don't think artificial intelligence or any type of technology is going to allow communism or some type of hybrid communism to succeed. And please correct me if I'm misunderstanding your thesis there. I feel that AI and machine learning could turn the tables, which again is not what I want to happen. So we can think of this as capitalism versus communism, and I think we would all, for good reason, have a pre-notion of everything is right. Clearly, capitalism is better, no discussion. My thesis is, let's see if we can leave the ideology out of this and only think in terms of data.

Starting point is 00:29:46 If China can collect 10 times as much data as Europe and 3 times as much data as the US, Does that or does it not give them an advantage? I would argue that it gives them advantage. Like I said before, I hope I'm wrong. Since I clearly don't side with China and global competition, I think privacy and democracy is at the very core of a good society to live in. But if the rule has changed and it's a question of the amount of data, which is the main input of machine learning,

Starting point is 00:30:16 I unfortunately think that more data is an advantage. So that's much clear now that you say it that way, Stig. I'm with you. I think that if a communist nation is able to enforce all the businesses inside of its borders with a massive population, if they're able to force the companies to push all their data through their prediction models to do this AI, they're probably going to have better intelligence in order to act on that. Now, what that means as far as the performance of those businesses relative to a democracy where we have much freer and open markets than over in a communist nation, I don't know from a performance measure, I guess from an investing standpoint, whether you're going to get an outperformance in the communist nation versus an outperformance in a democracy. I know as far as an investor, man, it's getting really hard for me to invest in China. It just is. I see some of the things that are going on and maybe it's just my home bias that I have, but I just find it very concerning. And I find it really concerning if you think about how they could potentially outsource that those AI models that they're using to other nations and what the implications of that might mean in the future.

Starting point is 00:31:41 So as much as I don't want to agree with you, I think I do agree with you from an investing standpoint. I just am not going to participate in those markets. And I don't, I mean, at the end of the day, I don't think that that's going to have any impact. Of course, it's not going to have an impact. But I guess that's just me thumbing my nose at that system and just trying to remove myself from the thought of that happening. So let me take what you said there and tie back to the first topic of today. about how we've involved in our valuation process all the past six years. I really wanted you to challenge me on something I've been thinking a lot about

Starting point is 00:32:20 because I'm primarily investing global equities. I completely agree, and we talked multiple times here on the show, that there is a debasement of the US dollar, and you see the debasement of different currencies across the globe. We talked about the CPI before that that's not covering the true debasement. Lynn talked about that on the last episode, about how that might be 8% or whatnot. But my basis thesis for being invested in equities is that if you own shares in a company that

Starting point is 00:32:47 adds value to the customer, customers will exchange whatever they have a value in exchange for that product or service. And it doesn't really matter if it's called US dollar, euro, or the currency that we had. Not long ago, it was toilet paper hand sanitizer. You know, it seemed like that was the new currency. So whatever they have that the theme is worth, I would say that while the manipulation has become more prevalent, valuation has been harder. The principle of owning companies that's spinning off cash in any kind of nominal currency is still valid because the fundamental relationship

Starting point is 00:33:22 between the real cost and equities and the real return on one hand, and then the normal cost and number return is the same unless we see a massive change like at hyperinflation. And even the case of hyperinflation, you would still like to own real assets because they have intrinsic value. I completely agree with you. And I think what the thing to really focus on is which companies' assets are not going to be impaired through a depression-like scenario. So when you look at Google, are their assets going to be impaired through that? Probably not. Amazon, well, I think we just saw how Amazon performs through dire situations, right? It performed flawlessly. So when you're looking at the assets, not necessarily the dollar figures that they're listed for or the income statement, the numbers that are flowing through it, but you actually look at the qualitative value of the assets that are sitting on their balance sheet and whether they're going to be impaired through a dire situation, those companies that are plentiful of those types of assets on their balance sheet are going to do fine. Where I think that it's going to be a challenge is if we move to a new

Starting point is 00:34:32 currency. That company, even though they're sitting on great intangible assets or tangible assets that aren't going to be impaired, their ability to transition to this new currency is going to be vital for them to continue to keep pace with the valuation of the new underlying currency that steps in. And that's what Ray Dalio talks about in his book, Big Debt Crisis, is that investing in equities, and I believe the quote is, is a mixed bag, is the way he described. it for that reason. But what you're talking about Stig, I completely agree with. I don't necessarily see that we will not have fiat currencies for a very long time. I don't think enough and the right people have an incentive to do that right now. And I outline a lot more about that in the main

Starting point is 00:35:22 newsletter that was sent out. I'm sure to link to that in the show notes. I think we might have different opinions on that because I know you said that it's something that will be demanded. I think it could happen, but I don't think you'll happen anytime soon. I think what's important right now in 2020 for investors to understand is that there's nothing inherently bad, at least in my opinion, with fiat currencies. It's about how they're used and they're used in that system that it's been designed by. Because this is two very different things. If you say that I'm being robbed every single year because I hold cash and that's not supposed to be the case. The government's robbed me. I'm not saying that you're not having good

Starting point is 00:36:02 point. But in that case, my kind of argument would be, so what do you do about it? You can go into the Fed's homepage and it says that the goal is to debase the currency. It's not like it's a secret. Like, that's the official policy. And then you want to save up U.S. dollars. You're going to be in the world of pain. So how do we navigate? How do we protect our principle and how do we compound our wealth in a field-based monetary system? I guess that's what I'm trying to figure out. And for me right now, one of the things that I'm doing is I'm holding global equities. To me, that's the key more than say, this is a monetary system that we should have. But that's not happening.

Starting point is 00:36:39 It's more like a philosophical question than something for investors to act according to. One of the things that I think is really important for people to understand about a change in the way that I'm investing is, I think that the basement rate you're seeing now is so different than we saw 10 years ago. So prior to 2008, 2009, your debasement rate was, you know, really kind of your rate of inflation that you would see on CPI. Now I think it's being totally masked because the QE is going straight into the asset prices. So if you're using that debasement rate that Lynn talked about on the last show and you're saying, okay, well, what do you own now? And that's really your big question. I mean, at the end of the day, you have to own something that has some type of scarcity to it, where you have to have, you have to own equities that have.

Starting point is 00:37:28 really great assets, like the ones we were talking about earlier on the show, you have to own those that aren't going to be impaired through really difficult times. And so we've been talking about gold on the show. We've been talking about gold miners on the show. We've been talking about Bitcoin, even though a lot of people don't like us talking about Bitcoin. And let's just take gold and Bitcoin, for example, totally have outperformed the S&P 500 for this year. And that doesn't mean that it'll continue to do that. I suspect it will, but that doesn't mean that it will. I think that these companies that have really strong assets, like the ones we talked about, are going to continue to outperform because there's going to be a demand.

Starting point is 00:38:07 And regardless of what happens to the currency, whether it happens quickly or slowly, those companies are going to continue to perform just because of the sheer demand that the public has for the products and services that they produce. You see a huge debasement. So you do anything but just holding cash. My fear, and I don't know if this is an entire different episode, is I feel I'll be paying the opportunity cost if I'm waiting for another monetary system to happen because I have my living expenses, my taxes and everything else. That's a fair currency. So I want to protect that. I want to compound that if possible. Now, what that means in terms of purchasing power, I don't really know. I know that being in equities and other assets is better than just being in cash. I guess that's sort of like easy to understand. why, but that's sort of like what I'm trying to get at here. So what should we then do? And you mentioned Bitcoin as one example. If this new monetary system change will happen decades from now,

Starting point is 00:39:07 I personal thing it will be in decades. You can make the argument that it will be much sooner than that. I don't know how much my purchasing power will be diluted if I'm not doing something about it. Yeah, I think it's happening sooner than that. And I think there's a lot of people that disagree with me on this. But I think you're within a three-year time frame that there's going to be a breaking point. The reason I think that is I'm just looking at the speed of debasement that's happening across the globe with central bankers and the fact that you have no interest rates. And the speed is aggressively accelerating. And I think that when I look at the solutions that are in place today or the solutions that are being proposed today, there aren't any. And how much more

Starting point is 00:39:49 debasement that's expected just before the end of this year in the next six months before 2021 even arrives. I mean, you got major banks saying that that's to the tune of five to $10 trillion more. And I just don't even know what it's actually going to fix because at the heart of it, I think you have major fundamental issues with the economy and everything that they're doing is just propping it up for another six months or four months or whatever until the next debasement tranche is then dropped into the economy and not just in the U.S. but all over the world. So I kind of suspect this is going to really start to unravel at an accelerated pace. Not only that, but I hear a lot of people say, well, what about UBI?

Starting point is 00:40:32 If they start doing UBI and not QE, well, then maybe we can counter some of these forces and make this play out a lot longer. I think I have an unpopular opinion there, too. I think that UBI will only further enhance the need for quantitative easing. And here's here's the reason why. So Lynn on the last episode started talking about how the average household income actually went up through COVID because of all the policies that were in place for unemployment, the UBI check that went out that we all kind of suspect to get turned back on here before the end of the summer.

Starting point is 00:41:11 we'll think about what that's going to do to prices of various commodities in the economy. It's going to make it go up. We saw that with meat prices. And there's many other examples of things that have gone up in price through this. So if we continue to do UBI, maybe what we start to find is that there's a further sell-off in the bond market because all this UBI is supplying buying power to the masses. who are then going out and buying their basic needs and actually driving the price of those items that fit into that CPI bucket up. And if those prices are going up and CPI is going up, well, guess what? It starts getting priced into the bond market. There starts to be a premium

Starting point is 00:41:58 above the inflation, the CPI inflation that we haven't seen being priced into the market. Well, that adds pressure. That increase in CPI means that you now have to have a premium of above the inflation rate if you're owning a bond. And so that would put even further pressure on the ownership of bonds for all those bondholders that they're going to want to sell that off in order to account for that premium above the inflation rate, which is only going to be subsidized by more quantitative easing in order to fix the yield curve, which they've already talked about extensively is yield curve control. So I kind of suspect what's going to happen that as they,

Starting point is 00:42:41 continue to implement more UBI around the world, it's going to put even further stress on the need for more yield curve control by fixing the yields. Because all that is is people that actually own the bonds are stepping onto the market and the Fed stepping in and buying everything that's being sold in order to fix that yield curve at a certain yield, to call it 50 basis points for the 10 year or whatever. So I kind of suspect that UBI is only. going to further enhance the need for more QE. It's going to create even more debasement. And then you add into the fact that you have this competitive devaluation happening around the world. So we just saw this where the U.S. stepped in. They printed $4 trillion. And what did

Starting point is 00:43:29 that do to every other economy around the world? Europe, Japan, you name it. What happened to their currency? It started gaining and appreciating in value relative to, the dollar. So then they had to step into the market and start debasing in order to make their prices for goods and services competitively on a global scale. So you're seeing this pickup speed, this competitive devaluation across the entire world. So as the U.S. steps in and does more UBI and they do more QE, it even puts more pressure on these other countries that do the same. And it's a race to the bottom. So it's just crazy stuff we're seeing right now. in the realm of currency, fiat, the basement, and what implications that means for people wanting

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Starting point is 00:47:43 All right. Back to the show. All right, guys. So I can already say now that for the next current market condition episode, we definitely would like to talk a lot more about sound money, currencies, and monetary systems. I think it could be very interesting to explore even more, but we also have a few other things we like to do for this episode. We want to talk a bit more about what we're seeing in TEP finance in terms of what is interesting for us in our investing universe, and then we also want to play question from the audience. So looking at TIP finance, whenever I look at our filter for large-cap stocks, you know, the fourth cheapest stock, that is Bank of America. Right now, it's trading at a TAP multiple of 2.7, and this is in comparison to the TIP median,

Starting point is 00:48:28 which is 10. So historically, it is trading at a low valuation. Not surprised. The momentum of Bank of America is red. And while the near future looks bleak for Bank of America as with so many other banks, a bet on Bank of America is really a bet on the US riding up the storm, which I'm confident will happen. So that was some of the reasons why I really wanted to talk about Bank of America specifically. Now, if you look at the top three super investors, and whenever I say super investors, I'm referring to Datara, where they collect information from asset management companies or individuals that manage for more than $100 million, because that needs to be disclosed.

Starting point is 00:49:10 And if you look at the top three super investors who are the most exposed to Bank of America in the portfolio, it's Charlie Munger, Warren Buffett, and Guy Spear. And number four on that list is Bill Nygrin from Oakmark. And he was actually here in episode 293, where he pitched Bank of America. So I kind of like found that interesting if you want to know more specifically about Bank of America, but I just wanted to give you guys a few binders. Clearly, the exposure you have also from these super ambassadors, that's depending on which price you bought at.

Starting point is 00:49:41 Buffett bought Bank of America last time in Q2 2019 at $28. And he was trimming his position in Q3 of $32. At the time of recording here the 1st of July in 2020, Bank of America is trading at $23 in change. So just a stock that I had on my radar that's been validated by investors that really respect and that looks relatively cheap compared to other U.S. large-cap stocks. Now, so going from a call-it-value play, we also have momentum play. S&P 500 turned green May 5th after turning red February 26th.

Starting point is 00:50:19 And we'll make sure to include a screenshot of that in the show notes. But if you followed the momentum tool, you would have made a decent profit. Back whenever our momentum tool told you to sell SNP 500, it was trading at 3,116. And then it recommended that you would buy back at 2,868 points. That was back May 5th. And now the SMP 500 is trading at 3,100 again. And the momentum is still green, indicating that you should continue to be invested in the S&P 500. And so if we do the quick calculation on that, you would have made an 8% return.

Starting point is 00:50:57 if you follow the momentum tool compared to a 1% if you just held on. So a way to play this could be to just stay in the S&P 500 if you're already invested. And then whenever momentum turns red, you might want to consider some of the international markets that we talked about on the last current market conditions. Back on episode 300. I'm curious to hear, Preston, what do you find interesting on TEP finance right now? Well, Stig, like you, I start off kind of filtering for value to see what kind of companies are hitting the top of the filter. Interesting, one of the companies that has popped into the

Starting point is 00:51:33 filter is Intel. Ticker is I-N-T-C. They've got a green momentum status. They've got good valuation metrics. Whenever I step in and do an intrinsic value on Intel, I'm getting a valuation that is an IRA around 8%, 9%. So when we're looking at how this will perform, in the coming years. And going back to what we were talking about earlier, as far as a debasement rate, maybe being the best way to think about risk-free returns relative to just how much we should expect equities to appreciate in nominal terms, I think this company would do well relative to the rest of the S&P 500 or whatever index, major index you would like to use as a comparison.

Starting point is 00:52:27 So I went in. I looked at the free cash flows of the business. It has really good free cash flows, a good positive trend of free cash flows as I interpolate those out into the future. I'm coming up with an IRA around 8 to 9%. And I think that this is a company that as far as the assets on their balance sheet and their competitiveness moving forward, I mean, it's going to do fantastic. Or at least it should do fantastic.

Starting point is 00:52:56 We're looking at the top line. It looks fantastic. So I'm really happy with this. This was a pleasant surprise to see it kind of come up as far as large cap companies in valuation terms to come up so high in the filter and to also have a green momentum status. So maybe worth some of the listeners' times to dig a little bit deeper into this one. All right, guys. So at this point in time, time in the show, we'll play a Christian from the audience. And this question comes from Cole. Hey, Preston and Stig. I absolutely love the show. I know this isn't TIP's focal point, but you guys seem to discuss Bitcoin quite often. I've been in the Bitcoin community for about a year and a half and I can sense that my information sources, Twitter primarily, are beginning to become a bit of an echo chamber. How do you guys subject yourselves to opposing viewpoints relating to Bitcoin or any topic for that matter that you have strong opinions towards?

Starting point is 00:53:47 Thanks and keep up the awesome work. Cole, I absolutely love that question. Just by downing your own sources of information, you're just waiting. ahead of the pack. So when you ask me specifically, yes, there is a lot of information that I don't pay attention to. That's also one of the reasons why I've been much less active on social media. For instance, every Sunday, I've dedicated seven minutes on Twitter. That's typically to share the newest episode, to respond to the audience. And of course, once in a while, find great content. But I really try to limit my time on social media for the same reasons as you mentioned, because I tend

Starting point is 00:54:25 to live in the ecotamber too. I typically only seek new information if it's by a trusted source or referred by a trusted source. And that is partly to save time, but also to enhance the quality of the time, I do spend consuming new information and making myself smarter. So I try to do that a few hours a day. Now, this is not the same as saying that I'm not critical about the information I get, but I do spend a lot of time thinking about whether a trusted source is right or wrong. and of course, whether I'm mistaken myself. At least in my experience, when it comes to investing, and it might be even worse with Bitcoin, as you mentioned, it can get pretty ugly. You have one extreme who, quote unquote, found the truth. And everyone who is not invested in Bitcoin must be

Starting point is 00:55:14 almost cognitive challenge by not understanding the virtues of Bitcoin. And then on the other extreme, you have people who look at Bitcoiners as degenerate gamblers who found a digital to the mania. And those people typically never researched Bitcoin with an open mind and sort of like sticks to the childmonger notion of Bitcoin being rat poison. So keeping that in mind, I would like to elaborate more on how I go about combating my own biases because I don't want to be in those two extremes. But what I do to combat my own biases and I sure have a lot is that first I always think about the incentives whenever I listen to what people are saying. I've experienced a lot of people who missed the boat on Bitcoin were wrong in their analysis.

Starting point is 00:55:59 They become really angry whenever it comes to Bitcoin because even though that you might say that they don't have a financial incentive, if they, in their mind, are losing $1,000 every time the price of Bitcoin moves $50, all financial biases kicks in. And they continue to look for explanations why Bitcoin will eventually fail instead of being objective that they could just have been wrong. But then I would say that Bitcoin is just as biased. If you argue for Bitcoin, you typically have a long position. And there's nothing wrong with that.

Starting point is 00:56:30 And you might rightly say that if it wouldn't make any sense to argue passionately about Bitcoin if you don't have skin in the game. So people are in no way insincere whenever they have a Bitcoin position and argue that it's valuable. They truly believe that. And you can count me in on that. But they have all incenses in the world to spread the gospel of Bitcoin. and since it's by definition is based on trust in mass adoption.

Starting point is 00:56:56 So if I can choose who I listen to, I don't want to speak to the firm believer or the firm non-believer. But the thoughtful person who used to hold Bitcoin are now sold, or it could be the thoughtful person who, after careful analysis, took a position. Lynn Alton, who we had on the last episode, we referred to a few times here already. Now, she's a good example of the latter,

Starting point is 00:57:20 someone who is very critical and then decided to take a position because of careful analysis after being very skeptical, or it could be the other way around. And so that really takes me back to my argument of understanding both sides of the argument, really to get rid of my own biases, challenge myself, speaking to Preston, who will do everything you can to challenge me, which is great. If you want to truly understand both arguments, what should you then do? And it is very difficult. We are wired a different way in terms of how we collect our information.

Starting point is 00:57:53 But what I found to be very useful, let me just give you an example of what I'm doing right now. So it probably doesn't come as any surprise to people, but I'm very interested in understanding economic systems and the role of governments through history. I try not to speak too much of that here on the show because I don't want it to make the podcast into a financial history lesson. I think everyone would just be super bored if I did that. So that's not the intention, but I do get a lot of my inspiration from understanding those

Starting point is 00:58:22 systems better and looking back in history. Just last week, I was reading Adam Smith, Wealth Nations, and now I'm reading Capital and Ideology by Thomas Picath. And he, of all people, a French economist, comes from the very opposite spectrum of the pure capitalist like Adam Smith. And he definitely has a very different agenda and incentive. But to me, it's too easy and wrong just to really. read Wang Shangra and say, well, then that's the truth. Like, this economist refers to this

Starting point is 00:58:54 economist who says that this economist is right. Like, no, like, if they're holding the same startup group together, you're not going to be any smarter. And you might think that you don't form your own opinion then. So to answer your question, not through short posts, but through multiple well-research, primarily books, with opposing opinions, and speaking with thoughtful people who argue both sides of the arguments, if you are well aware of the incentives, of those authors and those people you speak to, that is how I would say that you should form an opinion. And it's a quiet time-consuming approach. Most people don't want to do it for that reason, because most people prefer to listen to pundits who are very one-sided because it confirms

Starting point is 00:59:33 what they already believe in and they don't have to reflect on it and make their own conclusions. That is what you want to avoid. I would suggest the other way around, even though it is a time-consuming process, I think you'll find that you'll be rewarded in the end. So, Cole, I absolutely love this question. I think this is such an important question, especially right now with everything that's happening in the world. There was a book that Stig and I covered. We did a whole episode on this. I can't remember when we did it, but the name of the book was super forecasters. And this book really helped me gain an appreciation for seeing both sides of how important it is to see both sides of an issue to hear the arguments for both sides,

Starting point is 01:00:15 like Stig was mentioning. I would highly encourage you to go read that book. It is a fantastic example of why it's important and how lethal you can become by looking at both sides of an argument. I remember Charlie Munger talking about when he went through law school and how they would be given a case and they'd have to argue one side of the case and then they would go back and they'd retry the exact same case over again, but then they'd have to take the counterparty to the counterparty to the, decide that they just got done doing. And what it taught him is an analytical way to remove emotion and everything but the facts surrounding both sides of an argument. And I think that whenever you're doing any type of investment, whether it's Bitcoin, a stock or a commodity, a bond, whatever it is, you have to try to exercise this process. Now, when you're online, it can get very difficult

Starting point is 01:01:09 to do this effectively. I think it's really important for people to focus on especially on Twitter in particular, when people step away from focusing on the ideas and they start focusing on the person or the personality of the person, for me, that's somebody I don't want to follow. That's somebody I don't really want to interact with because they're letting a emotion and feeling enter into something that needs to be much more objective and a focus on the actual ideas. So try to find people that are like that, that they're not slandering you or other people. when I see that, I try to remove those people from my feed, and I try to only focus on people that are hyper-focused on the ideas. The other thing that I tell you is ask yourself why five times.

Starting point is 01:01:57 So when somebody says, whatever the argument is, I think Bitcoin is going to be successful because of X, Y, and Z. Say, well, why do you think this particular thing? And then you'll see different responses from people. And then you can go another layer deeper. I would challenge you to go five layers deep on whatever the issue is. And you might even have to go deeper than that to really start to fully understand something. And Stig's point about somebody's own interest. So like Stig, I own some Bitcoin.

Starting point is 01:02:27 And so that in itself will bias or warp the way that you see things because you have a vested interest in it going up or it succeeding. So you always have to tell yourself or challenge yourself and saying, am I leaning in this direction simply because I have a position? And a lot of the time you're going to find that you are. And so you have to try to seek out the people that have counter opinions, but just don't seek them out because they have a counter opinion. Seek them out because they have a deep appreciation or understanding for a counter opinion. And I think the way that you can understand whether they have a deep appreciation or understanding of the counter opinion

Starting point is 01:03:06 is by going five layers deep, asking yourself why, five times why they have this position. and really challenge it. But it's a lot of hard work. At the end of the day, what you're talking about to have an unbiased or a balanced position or understanding of a topic, it's a lot of hard work. In Bitcoin particular, I mean, that's one of the reasons why I am constantly on Twitter arguing with one side of the issue or the other side of the issue simply because I'm trying to uncover the truth. And I've been doing that for five years at this point. point. So the only way you're going to really understand something is by hearing every side of an argument and exposing yourself to that vulnerability and to really dig in. And it's not easy stuff.

Starting point is 01:03:56 It's a lot of hard work. So Cole, for asking such a fantastic question, we're going to give you a one-year subscription to our TIP finance tool. We're thrilled to have you part of the community. And if anybody else out there wants to get your question played on the show, just go to asktheinvestors.com. If your question gets played, you'll get a one-year subscription to our TIP finance tool. So, Cole, thanks a lot for being part of our community. All right, guys. Preston, I really hope you enjoyed this episode of The Investors Podcast. We will see each other again next week. Thank you for listening to TIP.

Starting point is 01:04:28 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. podcast network. Written permissions must be granted before syndication or rebroadcasting.

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