We Study Billionaires - The Investor’s Podcast Network - TIP312: Investing In Businesses w/ Great Fundamentals w/ John Huber (Business Podcast)

Episode Date: August 30, 2020

John Huber, managing partner at Sabre Capital Management joins Preston Pysh and Stig Brodersen to discuss identify high-quality businesses. IN THIS EPISODE, YOU’LL LEARN: How to identify high-quality businesses and their moat. How to make growth assumptions for your stock picks. Why the vast majority of losses in the stock market come from picking the wrong business and not picking the wrong valuation on the right business.  How is the COVID-19 crisis different and similar to other crises in the stock market?   Ask The Investors: Should I borrow money and buy a real asset if I think we will see massive inflation? BOOKS AND RESOURCES Join the exclusive TIP Mastermind Community to engage in meaningful stock investing discussions with Stig, Clay, and the other community members. Preston and Stig’s interview with John Huber about the intrinsic value of Facebook. John Huber’s company, Saber Capital. John Huber’s value investing blog. Preston and Stig’s free value investing forum. Jeremy Siegel’s, Stock for the long run – Read reviews of this book. NEW TO THE SHOW? Check out our We Study Billionaires Starter Packs. Browse through all our episodes (complete with transcripts) here. Try our tool for picking stock winners and managing our portfolios: TIP Finance Tool. Enjoy exclusive perks from our favorite Apps and Services. Stay up-to-date on financial markets and investing strategies through our daily newsletter, We Study Markets. Learn how to better start, manage, and grow your business with the best business podcasts.  SPONSORS Support our free podcast by supporting our sponsors: SimpleMining AnchorWatch Human Rights Foundation Onramp Superhero Leadership Unchained Vanta Shopify Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

You're listening to TIP. On today's show, we have a returning guest that always has such valuable insights, and that's Mr. John Huber, who's the managing partner at Saber Capital Management. During the discussion, we talk about how to make growth assumptions for companies, how to identify high-quality businesses with an enduring competitive advantage, and then we talk about how COVID is impacting certain businesses. So without further delay, here's our interview with John Huber. 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. Welcome to The Investors Podcast. I'm your host, Dick Broterson, and as always, I'm accompanied by my co-host, Preston Pesh. Today's topic is value investing in 2020, and we are grateful that you, John, have taken the time to speak with us here today. couldn't find a better guest to guide us through this. Thank you.

Thanks for having me on. I really appreciate it. John, my first question to you is about investment ideas. Investors generate investment ideas in different ways. They might start with a stock screener. They might speak to a mastermind group where everyone pitches a stock or it might be on the value investors club.com. I mean, and this is just to mention a few options.

How do you generate your investment ideas? So it's a great question. I get this question a lot from perspective investors that people want to understand the process. And so to me, investing is a negative art, meaning identifying what not to do is often as important as knowing what to do. I think a lot of investors think of investing ideas like an assembly line where you simply piece together certain inputs and outspits the finished product. And in this case, that would be an investment idea. But it's my observation that the world doesn't work that way. I think great ideas involve a lot of preparation, a lot of hard work, diligence, patience,

but serendipity plays a role as well. So I think you need to position yourself to be open to those serendipitous moments because they come from unexpected places and sources and they come at unpredictable time. So we know this business requires great investment ideas. And if that's true, that great investing ideas come from unexpected places, then I think you need to solve that problem by using different methods. asking an analyst to come up with a new idea each month or each quarter is going to be suboptimal because great ideas can't be produced on demand. So for me, to solve this problem of finding

great ideas, I've tried to come up with a way that I think works for me. It's not the right way to do it necessarily for everyone, but for me, the process is to think of myself not as an investor, but more as a student with the objective of learning about a variety of subjects. So my wife always, she's always wondering what, what it is I do all day. She's never quite sure how to describe my job to other people. And so I tell her, the easiest thing to say is that I'm a professional student, which is also causes more confusion. But I really think of myself more as a good nonfiction writer who's working out a book. You know, my work involves a lot of reading, a lot of note taking, a lot of phone calls to learn from people who know more than me about a specific topic. And then

finally a lot of time thinking about everything that I've been working on. So the goal for me is simply to learn. And more specifically, I'm trying to learn about a different business model. I try to learn why some companies are better than others. One of the things on my daily task list is to read a report or a filing on one new company every day. So I read a lot of the primary sources, a lot of the annual reports. I read a lot of the write-ups on Vic and other places. I do find it really helpful to learn from others that share their work. So I read all that stuff. But the day-to-day goal isn't for me to find a new investment idea, even though that's

the desired outcome. To me, it's more a process of trying to position yourself to learn, be curious, and be okay spending a lot of time reading about a topic that might not lead to a specific action within the portfolio at that moment. And the thing about it is, to boil down my process, it's to try to produce a watch list of companies or build a watch list. I think of my job every day is coming in to work on building my watch list of companies that I know well and then just waiting for the market and give you a price.

But that process involves, like I say, a lot of reading and a lot of patience. If you have a goal of finding an investment idea this week or this month or this year, or this year try to find a couple new ideas every year. But if you're trying to manufacture an idea, I think that's where investors run into problems. So, John, we all learned from Warren Buffett that we're all supposed to invest in so-called wonderful companies. And if only it was that easy. Could you please provide some examples of qualitative and quantitative factors to help define what a wonderful company is? The best investments over the long run come from the best companies.

So if you're trying to figure out which stocks are going to go up next year, then there are all sorts of other factors. to consider, but for long-term investors, it's really simple. The best investments come from the best companies over time. So the question is, how do you find them? Peter Thiel gave a talk he called Competition is for losers. And this was at Stanford maybe six or seven years ago. And you can find the talk on YouTube. But I had two takeaways from this talk. Basically, there are two types of companies, monopolies and non-monopoles. And he says monopolies make money and non-monoplies don't. He's got an observation that I think is actually quite accurate. And he basically says monopolies are always trying to say they're not monopolies.

And this is sort of relevant in the current news. We just had the big five or four of the big five tech CEOs on Capitol Hill at the hearing on antitrust. And they're all basically trying to say that they're not monopolies. Google says their competitors are just a click away, they like to say. And all of them are trying to say they're either in a small piece of a big market or they're They're in very competitive markets. And so you have the monopolies are always saying they're not monopolies.

The non-monoplies are always trying to say that they are monopolies. It's just sort of an interesting observation. So to me, it's not exactly black and white, but I think it's a good mental model to keep in mind that monopolies are the businesses that make money. And I'm using the term loosely. I don't think it's as black and white as Peter Thiel suggests. There are some companies that can produce profits that are obviously not monopolies. But again, to me, you have a really simple choice as an investor.

I think there's two categories to look at. And the first category is the company a monopoly. And the second category is, is the company building towards becoming a monopoly? And again, it's not the Sherman definition of a monopoly. It's not the antitrust laws. But it's basically looking for a company that produces high returns on capital and can produce economic profits. And so what are some attributes that these monopolies or future?

monopolies have. There are some common denominators. So obviously the business has to make money. A wonderful company has to generate high returns on capital. And that's where, again, that's where economic value comes from. The goal of investing is to simply produce high returns on your capital. And the same goal exists for businesses. It's to earn high returns on the capital that investors funded it with. So high returns on capital to me is a definition of a great business. That's the result. There are some attributes that or characteristics that I think can lead to that result. And the first one I'll mention is adaptability to change. So I think it's extremely important nowadays because I think change is a constant now. I've said this before. Buffett likes to

say that he invests in companies that are resistant to change. But I think the critical question today is to ask whether the company is adaptable to change because I'm not sure there are any companies, even the monopolies that are resistant to change anymore. The world moves and changes so quickly and barriers to entry are generally so much lower that if you're not willing to embrace change, then change is going to embrace you and that won't be good for your company. So obviously, management is important, but also the employees at the company, human capital is much more valuable today for many companies than the physical assets that own because people and the ideas they generate where much of the value gets created.

So I think it's important for the company to be able to retain and attract talented people. and I think it's important to be adaptable to change. And you and I Stig did a podcast last year on Facebook specifically, and I think Facebook's an example of this, this adaptability to change. Zuckerberg is, in my opinion, a great CEO, despite all the hate he gets. I think he's very adaptable to change,

and it's a quality that is valuable. Facebook IPOed when the company was facing what I would call an existential crisis, and instead of doing what would have looked better to Wall Street in the short run, which would have been to continue to milk the cash coming from the desktop advertisements, Zuckerberg saw that the world was heading toward mobile and they needed to rapidly reinvent their business or it would soon die. So part of the solution there was famously buying Instagram, which was a mobile first application. But part of it was reassigning engineers and staffing them

with the task of killing their golden goose essentially in order to figure out how to find a way to fit advertisements onto an app made for a phone. So and they were able to do this. And that was probably the most significant. But the company also had to make a shift when it became clear that Snapchat had found an interesting idea, banishing messages. So they tried to buy Snapchat. They got rebuffed and they created Instagram Stories, which has been a massively successful

product, both in terms of adoption and in terms of collecting revenue. And so the company adapted from desktop to mobile, then from text to photos and then to video, And now they're trying to adapt again as the latest trend, the addicting videos of TikTok. And they just announced this week that they're, or they just, they announced this previously, but they just actually launched their product called Instagram Reels, which is basically a TikTok clone. So we'll see if that will end up being successful. I'm not sure if it will or not. But it's another example of how forward thinking the company is and how flexible the culture is there, which I think is good.

So another example of an attribute that I tend to look for is high gross margins. And this is one that is not necessary. So not every company has to have high gross margins. In fact, many great companies have low gross margins. But in general, I'm attracted to high gross margins. And we can keep talking about Facebook for a second because of their incredible business model, which users generate the content. So Facebook doesn't have to spend money acquiring content.

And also advertisements are self-serve. and they're essentially automated. So Facebook doesn't need nearly as large of a sales staff. They don't need the sales staff that a traditional advertising firm would require because the ads are automated. So Snapchat's an example. If Snap has 47% gross margins, Facebook has 81% gross margins. And those largely because of those two differences.

So the high gross margins are attracted because it leaves a lot of money left over to spend to pay engineers to work on R&D, sales and marketing, general op-ex, and there's still a lot of money left over for shareholders. Another thing to look for is economies of scale. I think a lot of great companies exhibit this characteristic. And this is simply a business that has high fixed cost, but very low marginal costs. And this does two things. The high fixed cost makes it hard for new companies with little or no revenue to enter

and low marginal costs. And so Copart here is a great example of this. The company owns a large percentage of the auto-sell. salvage auction market. So if you total your car in an accident, the insurance company takes it and then sells it to a buyer at one of Copart's auctions. And Copart invested a lot of money over the years to buy the land and build this model that they have, essentially the junkyards where the vehicles are stored temporarily. But Cobart doesn't actually buy the cars. It just takes a commission for connecting the buyers and sellers. So there's no inventory risk. And each sale that

runs across its network, the auctions are all done online. So each sale is very, very high margin and each incremental dollar is very nearly not quite pure profit, but it's very high margin. And so the business is high fixed costs and low marginal costs and it's difficult to replicate the assets in the network that Copart has built. And so another example is Amazon, obviously a well-known example, Amazon developing its warehouse network in the early days, high fixed costs, but then they allowed third-party sellers eventually to use that infrastructure and they took a commission on each sale and that meant each dollar of incremental revenue was pure profit. And they built the infrastructure initially, which was expensive to build and carries a lot of cost to maintain. But each new dollar,

again, has very low marginal costs. Now, in reality, Amazon and others, like Netflix is another example, the company, in theory, has fixed costs of very high margins on a certain amount of revenue over that fixed cost base. But in reality, what they do is they end up reinvesting those high margin dollars back into the business. And this does two things. It adds more fixed cost to the initial base, which delays the ability to reap the high margins, but it also makes it harder for competitors to attack the business because now the fixed

costs required to compete are even greater. And so it helps widen the moat, which Amazon famously tries to do. Netflix sort of has a similar strategy to buying content. The content is somewhat fixed. and can be spread over the entire user base, but then each incremental user, incremental new user, that wants to access that fixed amount of content is largely profit for Netflix.

To me, this is somewhat debatable because Netflix, I'd argue the content is more variable than fixed, because if they stop making new shows, users might obviously leave. But I do think there's at least partially a dose of economies of scale that works in Netflix's favor there. So those are some examples. examples on economies of scale. Another thing that has been a theme of mine over the years in Saber's

portfolio is toll roads. So the toll road is obviously a metaphor here. It's a business that owns some asset that is so valuable that it can charge a price that far exceeds the cost to deliver that product or service. So customers are willing to pay that toll for access. And a great example here is Veracine. This is a company we owned in our fund for a number of years. and Verasine owns the dot com and dot net domain names. And so anyone who has a website address ending in dot com or dot net pays an annual toll to Veracine. And the company has 162 million domain names. It collects eight bucks a year for each one.

So it's a great business. It costs virtually nothing to serve a new website. So every time you sign up for a new website is essentially pure profit for Veracine, right? Electrons are essentially costless. Basically, Veracine has essentially no cost to add an incremental new dot com domain to its user base. And so it's got 65% gross margin or 65% operating margins. It's incredibly profitable business. And it does have leverage for those reasons I just described.

So that's that's a toll road. And that's about as close as a toll road as you can get, metaphorically speaking. But another example, are the companies that aren't exactly toll roads, but MasterCard is an example of a business that to me, is essentially a toll road on global commerce. So they did 108 billion transactions last year, ran across MasterCard's network, 4.8 trillion in dollar volume, which grew 13%. Transactions actually grew 20%. So in a $90 trillion economy, there's actually still runway ahead.

But MasterCard's position, along with Visa, they're basically toll roads on global commerce. If you want to participate in the global economy, it's likely you're going to have to pay MasterCard's toll. So it's a monopoly, in a sense. The last factor I wrote down here was intangible. There are certain intangible qualities. This is sort of a catch-all category.

But sometimes a company's value comes from something that's intangible. And so I'll give you an example of NBR is a home builder. Homebuilding is a tough business. You have to sink lots of money into the land, which you need to build homes on, obviously. And then you sell the homes. Then you have to replace the land. And so the land's expensive. And since builders don't generate huge profits, they never have enough money to pay for the land.

So they finance the land with debt. They finance most of it with debt. And this leaves them vulnerable when the next downturn comes. So they're left with lots of land and inventory that's hard to sell. And then a bunch of interest charges that don't go away. And so NVR escapes this by using options to tie up the land that they need. So they put up a small fraction of the cost of the land. and essentially the seller finances the land for the cost of the option premium.

So NBR finds the buyers when they want to build a house and only then do they exercise the option to take down the land. So they're not left hole in the bag if a downturn comes. And the worst case is they lose their option premium in that case. So NBR is no debt, requires much less capital, faster inventory turnover, and all of those lead to better returns on capital with less risk. So it's such a great model. Home building is more or less a commodity industry.

why wouldn't other builders copy it? And some are trying to do that, but it's very hard because of the way most builders incentivize their CEOs. So if you go through all the proxy statements of NBR's competitors, almost without exception, you'll find that the bonuses and the compensation structure that exist are often linked directly to total volume of homes sold or total earnings or total revenue or something on a gross basis, not necessarily the return on capital that's produced, just the total amount of volume that's produced. And regardless of whether the growth creates any value. And so the easiest

way to grow homebuilders revenue and profits is to go out and buy more land and build more homes. And in home building, that means taking on more debt and not sharing the profits with a land developer. And so they're incentivized to make as much as they possibly can with, and they're using other people's money to do that. So they're incentivized to go out and create gross profits without any regard for the return on invested capital. And so, NVR has a model that's very hard to copy because of the incentive that exists in the industry. And I'll give you one more example of an intangible, sort of a miscellaneous advantage that I just noticed recently. I was reading the S1 filing for Rocket Mortgage, or I think it's

called Rocket Companies, but Rocket Mortgage are Quicken Loans is their brand name. they're one of the largest mortgage companies in the country. And this is interesting because I just read an earnings press release from a company called Mr. Cooper, which is a strange name, but Mr. Cooper was touting the stat they called industry leading. And the stat was their recapture rate. And so mortgage company collects money by making loans. And it also collects money by servicing loans, which means collecting payments, passing the cash flows along to whoever owns the mortgage, usually an institutional investor,

who owns a security that the mortgage is inside of. And so servicers collect a small fee for each monthly payment that they process, basically. And it's only a few bucks on each payment, but spread across thousands of mortgages over many months, and you have a nice residual stream of cash flow. But the problem for servicers is that their customers might refinance. So this means they might find a new mortgage company with a better rate, and that would mean you lose the stream of cash flow. So mortgage companies are always trying to keep or recapture these clients when they refinance.

And so Mr. Cooper was touting the 30% recapture rate, which means for every 100 people that refinance, they keep 36 of those refinances. And that's above the industry average of 22%. But interestingly, Rocket Mortgage has a recapture rate of 76%, which is three and a half times the industry average. So why does Rocket Mortgage do so well at keeping? the customers when they refinance. The answer could be a variety of things. It could be their sales culture. It could have to do with their technology.

They have a really good user interface. It's super easy to get a loan from Rocket. But they're good at retaining customers. And in the mortgage business, that is incredibly valuable over the long run. If you can keep more of those customers and retain more of them, the value of your MSRs, the mortgage servicing rights that you own are more valuable than they would be with someone else. So those are a few attributes I look for when seeking out wonderful companies, as you say, to invest in. Let's take a quick break and hear from today's sponsors.

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now. And so with everything you just said to us about identifying modes, my question for you is, which investments in the past has been one foot bars to step over? That's a great question. So one foot hurdles are a central piece of my strategy. And it's a pillar of my investment approach that sometimes even the biggest, most well-followed companies can get mispriced by the market. And so you just have to look at the 52-week high and low list in any given year. It doesn't have to be a volatile year like 2020. I've done this over the last four or five years. I do this about once a year.

And you can look at the variance between the high and low price of the biggest stocks in the market, whether that's the S&P 500 as a whole or whether that's even the top 10 mega caps. I have a chart that I keep at the top 10 companies each year, the biggest 10 companies. And it's remarkable how much their stock prices change in any given year. The stock prices, this is obvious to most people, but it's worth noting because it is so interesting. The variance between the 52 week high and low is usually around 50% for the mega caps. And obviously the fluctuation of their actual underlying value does not change by anywhere near that much. So that just tells you that there's from time to time opportunities to capture value, even when the company is well followed.

So the idea that you have to have an edge, an informational edge, I've never bought it. into that theory because a lot of times the biggest companies in the market get mispriced. So when you look at one foot hurdles, they often come from this category, not necessarily the biggest companies, but companies that are well followed, there is no information edge, but from time to time, for whatever reason, the stock gets mispriced. And so an example of this happens to be the largest stock in the market, but Apple is an example. It's a stock we've owned for a number of years, and I think it's been a one-foot hurdle on a couple different occasions, but initially back in early 2016, the stock was trading at eight times free cash flow. So you had one of the

world's most valuable brands and one of the stickiest ecosystems trading at an incredibly cheap price relative to what I would consider to be normal earning power. And it was a remarkable situation where the market was, I think, doing two things. One is they were valuing the company and Apple always used to get valued this way. In recent years, it's gotten revalued. The market has started to value it more like, I think it should be valued, more like a consumer brand, like a Nike or Starbucks or some of these great consumer brand companies, because that's what it is. It's probably the most valuable consumer brand in the world. But for a long time, it was valued like a consumer electronics company with hardware margins and the, the, the,

The idea was if you're Dell, your margins are going to revert to the mean at some point. Or if you're HP or any of these commodity hardware companies, any sort of economic profit you create is going to be fleeting. And that was sort of the narrative around Apple in early 2016 because Samsung had a phone that was competing and Google was starting to compete. Amazon was even competing at that time. And people were worried about Apple's margins. And I think the other thing was just simply that Apple's iPhone sales had temporarily

stalled. And so even when a majority of market participants were agreeing that Apple's long-term future was still good, they still had bright future. People worried about the next three months, next six months, next 12 months. And so people would say things like the stock's dead money or something. And so no one wanted to own the stock. The stock got really cheap. And so I think that's an example of a one-foot hurdle. The broader point to me is very much worth paying attention to very high-quality companies that for one reason or another can get mispriced. And Apple from that point has compounded at 40% a year for the last four and a half years. It's a really remarkable situation in a stock where there's 200 analysts, there's absolutely no informational edge. And so the lesson for me from

observing that from watching Apple over the years is that you don't need an informational edge. Informational edge can be very valuable, obviously. But I think nowadays where information is much more of a commodity because the barriers to entry, the ease, it's much easier to acquire information, so it is becoming more of a commodity. And so I think the edge now is called time horizon edge looking out longer term, being able to look out three, four, five years when the market has a hard time. Most market participants are not willing to look out past the next year or so. I think that's a good example of a one-foot hurdle. So, John, when we create our investment thesis and make our growth projections for our company.

A really important component is the addressable market and the addressable market size. For me, that's always been a real challenge to try to understand and wrap my head around in a realistic way. And when you're listening to the corporate management talk about how much of the addressable market they plan on capturing, they're obviously incentivized to blow it way out of proportion and it's not something that I really put a lot of credence in whenever I hear management and talk about what they're going to address in the addressable market. So I'm kind of curious how you look at this and just some of your thoughts on it.

I'll go back to something Peter Thiel said in that same talk that I just referenced earlier. He said that great companies create X amount of value. He has this equation. He says great companies create X amount of value and then they capture Y percent of X. So that's the equation. X is the value created. Y is the share of that value. So you can think of X as the market size and Y as the share of the market.

And to me, the most important variable in that equation is the Y, not the X. So the Y is the percent of the market. Because most companies will not get to monopoly like economics with a tiny share. There are a lot of exceptions. Obviously, you can, I mean, there are some great companies. Geico had 1% market share. And it had phenomenal economics. and now it's got 10% market share.

There are a lot of exceptions to this, but I think generally, if you have a business with a tiny slice of a huge market and a business with a big slice of a smaller market, the latter company will usually have much better economics, much better returns on capital. So ideally you have a company with a big share of a big market, and that's when you get the true mega cap monopolies like the Googles and the Amazon's. But I think most investors, and especially most startups, are much to focus now on the size of the TAM, the total addressable market, and they're not enough focused on building a strong position in whatever market they're in. And I think it's easier for companies to build

a strong position in a small market first and then expand from there. Teal talked about Amazon and they first dominated a small niche selling online books. And then they went to different e-commerce verticals and then they went into ancillary businesses and then they went to the third-party platform and then they started AWS. So what you're getting at is even beyond just the addressable market. You're talking about businesses going upstream and downstream from their original product line. Do you have any other examples of that in practice?

I have a friend who specializes in buying and selling single family homes in the $250,000 price range near a local military base. He made 37 investments last year. he focuses almost exclusively on a single asset class in a very small submarket in a very specific price point. And he even specializes in how he sources these assets generally from, he generally gets them from the courthouse. So he's built up this business over the years, and he has come to be extremely good at it. And he's got a fairly sizable payroll. He cuts out the third-party vendors. So his own staff do all the repairs and the maintenance on the homes.

And he slowly has built up his own painting crew. And then one day it dawned in him that he could start painting for other real estate investors and then other homeowners. And so now he's got a paint company that's booked through the fall and he's doing very well with it. So he plans on kind of doing the same thing for property management, just basically using what he's created for his own business and subcontrading it out to other people that want that service.

So I told him he's like a mini Amazon. He's developed an expertise for his own properties. and then he sells that service to third parties, which is really nice high margin revenue for him. And so it's a great little business. Now, obviously, the Tam is tiny and the total value of his company has a ceiling, obviously. But he's created a significant amount of economic value for himself because he didn't start out by saying, hey, US real estate is a $22 trillion asset class. he started out by saying, hey, let me work and build up some expertise here in this small little market and try to get good at one tiny market and then go from there.

And so I think this makes a lot of sense as a general business strategy as well. So how do we identify the TAM? It's hard to know, but I'd first look for companies that are in strong positions in their markets and then working toward building a strong position. And then secondly, look at the TAM. And I think the world is filled with mediocre companies in massive markets. And one last point I make here stick is that the very best companies often figure out how to expand the markets that they're in. So the best management teams tend to expand the TAMs.

So Facebook and Google are famous for this. They created businesses that wouldn't have existed without the products that they own and they operate. There are thousands of small businesses that exist solely because they can find customers on Instagram. And so Facebook's market wasn't the size of the digital advertising market when they started, or even the advertising market overall, it was the advertising market that they would help single-handedly create. And lots of other examples as well. Etsy created an entire ecosystem of homemade stuff that can be sold on its platform.

They created an entire market that wasn't there before. Apple's App Store created a huge market. It started with 50, or I think Tim Cook just said it in the, I trust hearing the other day. It started with 500 apps, 12 or 13. years ago. Last year, did 500 billion in total volume, basically the total amount of commerce that went across that app platform, the App Store, has estimated to be half a trillion dollars. So incredible business, an entire generation of developers have created businesses because of the App Store. Instagram doesn't get started without the App Store, most likely. Uber might not exist

without Apple. So there's something to keep in mind. The very best companies can expand their markets. But generally, I spend a lot more time thinking about the competitive position than I do thinking about the size of the market. So, John, Warren Buffett has this famous example where he said that it was obvious to everyone that the car would replace the horse as the preferred method of transportation. However, what was much less clear was to pick the winner in the car industry. So I know this is a grateful question to ask, but how do we pick winners in the industry? industry. That's a great question. And I think it goes back to the, what I said before,

about adaptability to change. So I think companies now have to have an element of flexibility, malleability. They have to be able to change with the current environment. And the reason for that is because the speed of information, the speed of technology, the speed of evolution in the business world is so great that companies can no longer rest on their laurels. So you can no longer rest on a competitive advantage that was built 50 years ago because that advantage is now being attacked because it's a lot easier for new businesses to get started. Partly because of things like the App Store, things like Facebook and Google, it's easier to reach customers to acquire customers and it's easier to start businesses that can grow

very rapidly and very quickly over the internet. Even if they operate in the physical world, they can acquire customers using technology. So, yeah, it's very difficult to pick winners. I don't have a good answer to the question, Stig, but I would focus on companies that are building strong positions in their market. And like I said before, focusing less on maybe the size of the addressable market, don't worry about the $22 trillion U.S. real estate market. Think about how can I dominate the small niche in Lillington, North Carolina or something,

like focused on companies that are building strong modes, have strong competitive positions in their markets, and then think about how to expand and how to go from there. So I think the winners in an industry will be exhibiting, the future winners in a given industry will likely be exhibiting some characteristics of those quality companies that we talked about earlier. They'll have some degree of profitability or the unit economics will look attractive now. And each situation is different.

That's part of this game. It takes critical thinking and analysis to determine that. But there's no way to fit that into a box. Every situation is different. and it takes a lot of thought and a lot of flexibility on the investing side as well. You have to be willing to adapt your thesis as things change and businesses get attacked and businesses grow and that's part of being an investor, I think, these days. And I really like that you didn't have a fixed set of rules of how to do that.

I mean, the question that I asked, not even Buffett, said he had a recipe for that. But in continuation of that, we do know that the mighty fall. And companies have shorter and shorter tenure in the SP 500. And disruption of existing business models are just happening faster than ever. And it seems like it's accelerating. So keeping that in mind, what are the implications for individual stock pickers like us? That's a great question. I think the SMP 500 index is an active index in a sense, because what it does is

it's a great investment vehicle because it allows you to own the best companies at any given time. So the best companies meaning the biggest, those two don't always equal the same thing. But generally over time, companies that fall out of the index that die off, right, the Pennsylvania Railroad, even a company like General Electric, which is still in the index, but a shell of its former self. These companies come and go. And that's, as you say, you have to be aware of that as a stock picker. you have to adapt as companies adapt and companies change. And so it's the same theme that I've talked about.

I think the important thing is focusing on companies that have competitive advantages currently and then finding companies that are durable. So durability is a very important feature or attribute that I look for when I'm looking at companies is companies that can withstand these changes and they can withstand attacks. So they have good economics now, but they have some competitive advantage that gives them durability. And there's a lot of things I talked about earlier. Maybe it's a toll road business. Maybe it's a company that has high fixed costs that provides sort of a barrier to entry.

But I think, again, the most important thing, not to be a dead horse, but to me, the most important attribute you can look for now is high quality human capital, meaning the talent level of the employee base, because that's where ideas, that's where great ideas come from. And that's where you can create a culture that can adapt. Humans can adapt to change. if they're in the right environment. And so the companies that will do best going forward, I think will be the ones that can change and navigate these waters that you're talking about.

So, John, you've said that the vast majority of losses in the stock market come from picking the wrong business, not picking the wrong valuation on the right business. Elaborate more on that idea and provide a few case studies of both the scenarios if you could. I think my mistakes have come when I've focused too much on what I'll call optical valuation. And that means like the current PE ratio, for example, the current price to free cash flow, as opposed to focusing on what the business looks like five to seven years down the road sometime in the future. So the longer your holding period, the more important it is to own great businesses. So one of my philosophies is that, and I mentioned it earlier, but the tenet of our approach,

is that great investments come from great businesses. But it's also true that the longer you're holding period, the more critical it is to own quality companies. Because in the short run, like I said before, valuation drives a lot of stock price reactions. It's actually more important to consider what someone else is willing to pay for your stock if your holding period is only a year or two. You're more concerned about what somebody else is going to pay you for that stock or what the perception of the market will be in a year or two. Versus if you own a company for five, seven, 10 years, you're much more concerned with what that company is going to look like. So Buffett says the tailwind, something that effect of great businesses have tailwind or

time is the friend of the great business, something to that effect. If I could boil down the best advice from Buffett, it would be that buy the great companies and understand the simple fact that time is the friend of the great business over time. So that's really what I'm trying to point out in that, I think in the blog post you're referring to. it. The other thing about great businesses is they're safer. They produce more value, but they're also safer because they're better at handling adverse environments. I'm a big believer in the idea that a margin of safety comes not just from valuation, but from the

quality of the business because great businesses can adapt to change. They can weather economic storms more efficiently. And I think we just saw this with COVID is the great companies have survived. Now, COVID is unique because some of the great companies are strangely, well positioned to basically navigate the waters that we just went through. And that's sort of a unique situation. But generally, I think that is true. The best companies in the financial crisis were the ones that came out the other side with more market share. It happens every recession. The best companies will invariably see some sort of cyclical volatility to their revenue at that moment, but they will come out stronger to have more market share. They'll be a better business.

And they will not just survive, but in some cases thrive. So the same thing that we just saw with COVID has been an extreme case of this, but it happens every single recession. So I think you're better off owning the better companies. And my mistakes, like I said before, come from the times when I get more attracted to the current valuation. So Wells Fargo is a mistake that I made recently, actually about a year ago. I bought Wells Fargo. And that company has a lot of issues. It's got some cultural issues. It had some management issues. Possible the new manager is doing much better or will do much better and he's attempting to change culture, but it's hard to change culture with 260,000 people. That's something that I've observed and I've learned. And some issues that Wells is facing

is to no fault of their own, interest rates are extremely low. Spreads are extremely thin, net profit margin, net interest income, profit margin of a bank are at all-time lows. And they're not as diversified as some of their bigger competitors. So they're struggling on that front as well. But if you observe how Wells Fargo has from a business, forget about the stock prices, look at how the business is done in the last year, it has struggled mightily in an environment where the better businesses have done much better. And so I think that's a microcosm of the point I'm trying to make, which is over time, the best businesses will be the best investments. And over time, they'll also be safer. So, John, let's talk a bit more about mistakes. I mean, I don't think

that you can't have invested, no one could have invested for too long before they make their first investment mistake. I think it was, was the Templeton that said that if you're right, like, two out of three times, you're like the best investor in the world. Let's talk about being wrong, because that is a challenge that we face as an investor. And I'm curious to hear your thought process about those investment decisions, because it's a tricky situation because you might not be sure that you actually made a mistake. And you don't want to second guess yourself and incur a lot of extra cost by selling, but you also don't want to pay the opportunity cost. of being invested in the wrong business.

That's exactly true. Opportunity costs are a big thing to consider. Stig, and so a lot of my mistakes have come from not investing in something I should have invested in. But obviously the mistakes of commission where you buy a stock that goes down or buy a stock that doesn't go anywhere when the mistakes that actually cost you money, those are the mistakes that you need to correct quickly. And my method for selling in general, there's three reasons to sell a stock.

one is you come up with a better idea and you're fully invested and so you need to raise cash. And that's a tough decision to make because you're never quite sure if the stock you're about to replace the stock that you're about to buy and replace something with is actually, in fact, a better value. But that's one reason. The second reason is the stock reaches fair value. Then the third reason is the easiest and that's just you made a mistake. And so I've never had a problem selling when I realized a mistake has been made.

the process to come to that conclusion varies each situation is unique. But I think you need to know how to separate the noise from actual negative changes in a business. And that's part of the skill that's required to play this game. And then I think that skill needs to be coupled with the ability to be completely honest with yourself. And this is the most important character trait for an investor, I think, is being honest. It helps you mitigate mistakes before they get worse. And it also helps prevent mistakes in some cases. So I think all of those things are critical.

Not everyone can do that because it means admitting to yourself that you are wrong and that can bruise the ego and so forth. But this game is not about being right or not about achieving the best batting average. It's about creating the most amount of return with a minimum of risk. And so that can come from a variety of ways. It can come from a high batting average. But it can also come, as John Templeton says, from a hit rate of 66%. and just ensuring that your winners are greater than your losers. You can actually have a hit rate of less than 50% and still do quite well.

I think Soros used to say that he was only right a third of the time or something, but his winners were so big that he could still make 30% a year. So it's all about mitigating mistakes, making sure your winners are bigger than your losers. But when it comes to making mistakes or identifying mistakes, I think one of the things I try to do is I have a list. Number one is I write an investment thesis for every stock that I buy so I can look back at that and I can look and see what I was thinking in real time. And that makes it easy to see if the thesis has changed. And I think it's really important to not adapt your thesis to the new environment.

I think it's important to recognize that if your thesis has changed, not to try to fit it to a new narrative, but to just admit a mistake. And it's more often than not, there are exceptions to that, but more often than not, it's better to just, when you've realized that the game has changed, either you made a mistake in analysis or the company has deteriorated in some way, it's better to just sell. And so I keep a list of a few key variables that I track for each company, each investment.

And then I can easily tell if one of the variables or multiple variables have changed or are starting to degrade, then you can recognize that in real time. And you can adjust. And oftentimes that means selling. And sometimes it means selling at a loss. So, yeah, mistakes are part of the game. probably will make one mistake out of every three or four investments, but that's just the nature of it. So I think mitigating those mistakes are a critical part to success. Let's take a quick break

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And so that obviously is the most unique thing about this. I was watching what was happening in China. And I remember reading a lot about SARS in 2003. And I have a book that talks about that. And it's remarkable what they did then. And I saw a lot of the same things happening earlier this year in the winter. And it looked very much, they were following a lot of the same playbook that they used to battle SARS in China. and that means locking down apartment buildings and stationing a guard outside and shutting down cities and so forth.

And so I just never thought that the rest of the free world would do that to the extent that they did. And that has been a remarkable, unique aspect of this crisis. But there are always similarities. And I said this in a recent blog post, but I can point to four like very broad general similarities that happen almost without fail every single crisis or every single recession. And the first thing is everybody brings up the 1930s. So whenever there's a downturn in the stock market of substantial size, 15 to 20 percent or so, whenever we reach bear market territory, everyone starts to bring up the 1930s because there's always something bad that's happening in the economy at that time if the stock market

is down that much. And so it always looks bad. And the second thing is every bare market has unique aspects, which is also scary because there's no playbook. And so people think the worst. people think the current crisis they're in is unprecedented. And we've heard that word a lot, and that is true with COVID. A lot of it has been unprecedented.

But because of the fact that every single time is unique, whether it was the 1970s with the oil embargo crisis, where we were worried about acquiring the energy we needed to sustain our economy, 1987 was sort of a flash crash. We were worried that that could spark another Great Depression when the Dow dropped 22% in one day in October of 80s. the 2000.com bubble was extremely unique. And of course, 2008 was a financial crisis that we haven't seen likes of in 100 years. So every single economic crisis has unique aspects to it. And people always fear the worst. The third thing is people sell because they fear prices are going lower. And that's just

natural human behavior. You want to sell because you fear that tomorrow the stock price is going to be lower. And the idea is, well, bring you to the fourth point. The idea, is you buy back when there's more clarity. Everyone thinks you'll be able to buy back cheaper or, you know, the experts are advised to wait for more clarity. But Buffett says if you wait for spring, the Robbins have already gotten a worm or something. I think I just butcher that quote. But basically, if you wait too long, prices will already reflect a much rosier outlook.

So in regards to the 1930s, this COVID, a lot of people started talking about Great Depression too. And what's very interesting is if you study history, we will. live in a time where we are doing things as a country, as a government. In this country, and this also goes for central banks around the world, the Western world attacks financial crises in a completely different way than they did in the 1930s. So especially when it comes to the United States, in the 1930s, we had no unemployment insurance, we had no Social Security, we had no FDIC, so it wasn't safe to keep your money in a bank. If your bank went under, you lost your life savings.

We had no safety nets for workers, retired people, depositors. And we did things that would be considered by most economists today to be exactly the wrong thing. So in 1930, we tightened fiscal policy instead of loosening it, right? We flooded the system with money earlier this year. We did the exact opposite in 1930. There's this famous tariff called the Smoot-Hawley tariff. And that 1929 was a stock market crash.

We had the banking system had liquidity issues. We exacerbated those issues. by slapping tariffs on our trade partners. So we sparked a trade war with Europe and with Canada. And it was done with proper motives. We wanted to protect domestic producers, but it sparked a trade war and it accelerated the Great Depression. It made things much, much worse.

We also tight monastery policy in the 30s instead of loosening it. So we actually raised rates, the Fed raised rates under Hoover instead of cutting rates. And we had a hard currency policy back then. We had the gold standard to a certain extent. And we obviously have no gold standard today. So we had less flexibility to print money and we were much less willing to do things necessary. It wasn't until FDR came into office in 1933 when we began recovering. His Fed engaged in QE basically.

They started buying bonds and putting cash into the system, took us off the gold standard. They printed money. They instituted social safety nets. It was very, very controversial. A lot of the things that we essentially take for granted today, like Social Security, were initiated as part of the New Deal legislation that was passed in 1933 and in the early 30s. And so all of those things brought back confidence. You can debate the merits of those various regulations and various laws that were passed, but they did lead to increased spending, increased investment, and we slowly recovered. But the point is we did the exact opposite of what we needed to do to break the past.

panic in the 1930s and it was the exact opposite of what we're doing now. So I think that's just something general to keep in mind. I don't I don't make investments at all based on any sort of macro outlook that I have because I have none. But it is something to keep in mind that when people bring up the 1930s, it's really like comparing apples and oranges. We live in a completely different world and we've learned a lot. It doesn't mean we won't have depressions. I think in this case, we're made by the technical definition of a depression, we had one. Of course, the other side of the balance sheet was matched with an equal or maybe even greater force with $3 trillion of new money coming in. So it doesn't feel like a depression. But we will have a depression at some

point again. We'll have numerous recession. It doesn't mean things can't get bad, but it's not going to look like the 1930s. Let's talk more about portfolio management. I can't help but wonder, do you optimize for expected returns only or do you also consider the correlation between your stocks in your portfolio? I think about each investment as a piece of a business. And I tend to think, I do look at the portfolio overall from a top-down view because I do want to have a certain diversification. But other than that, I think of each investment, and I want each investment to stand on its own merits. And so I think of Saber Capital as a holding company in a sense that owns stakes in a select few high-quality businesses that happen to be publicly traded. And I think

of each stock as a separate company that I'm a part-owner in and that we're a part-owner in. And so that's how I think about it. Again, I do have certain diversification requirements, but I don't try to optimize anything and I don't really look at correlation at all. You hear a lot of pundits saying that the key to investing is asset allocation and not so much picking individual stocks, which is what you do. And so for that reason, I wanted to hear your thoughts on how you feel about being 100% invested in equities, considering the my condition we have right now, or do you consider diversifying into other asset classes? What are your thought process about that first you and perhaps also a few thoughts for the retail investor?

I think every investor has to make that decision, the decision on asset allocation based on their own risk profile, their own risk tolerance and so forth. For me, I have all my money invested in stocks. And I have a very simple philosophy on this as well. It's that over the long run, and part of this depends on your age and so forth. But over the long run, I think stocks as an asset class will continue to be the best asset class to own. So Jeremy Siegel wrote a book called Stocks for the long run, I think, was the title. And he goes through, there's a simple chart in there. And this is a book that's, I think, a number of years old, but there's a simple chart that shows various asset classes, stocks, bonds, gold, cash. I think you can throw any sort of currency, any sort of

other asset class in there, whether it's art or real estate or anything else. And over time, there'll be lots of years where this won't be the case. But over the long run, over, say, a 10-year period or more, it's, I think you're almost always going to be better off better. on stocks. There will be exceptions to that if you're in the midst of, let's say, a 99-style bubble where the S&P is trading at 40 times earnings or something. But those situations will be very rare. So you're almost always better off owning stocks. And my philosophy is American business is the best asset class in the world to own. And again, there will be economies that grow faster. That won't always be the case. But for me, it's where I live. It's within my circle of competence.

So for me, as an investor, it's the best asset class that I can own. And so if American business is going to outperform all those other asset classes, then you ask yourself, well, how do I get exposure to that asset class? And I think American business is going to provide a baseline return that you can achieve by simply owning the S&P 500. And so that means owning a Vanguard fund. And I think it's my approach, is my profession, to try to achieve a result that hopefully significantly beats that baseline result by picking stocks from within that index.

And not necessarily within the S&P. I will invest in lots of different stocks outside of the S&P as well. But the point is, if American business offers you a baseline return and the S&P 500 is the way to get that baseline return, I think you can do better than that by instead of selecting 500 stocks, you select the five or 10 best companies that are within that index, for example. So that's a general philosophy. I think the best way to get exposure to that return is through ownership of high-quality companies. Amazing.

John, we covered a lot of ground here in this interview. And Preston and I can't thank you enough for your time to taking time out of your business schedule to be speaking with us here today. We would like to give you the opportunity to talk a bit more about where the audience can learn more about you and Sabre Capital Management. Yeah, so Saber Capital runs a fund called Sabre Capital. SABRE investment fund and it's modeled after the original Buffett partnerships. There's no management fee and there's a 25% performance fee over a 6% compounding hurdle.

So that's Buffett's original structure, which I thought was a good fair structure for LPs. And so Sabor runs a fund that, again, is modeled after that structure. And you can read more about my firm, Sabor Capital, at the firm's website, which is sabercapitalm. gp.com. And there you can find a lot of the writings that I've done over the years, a lot of different things I've had to say. So I publish a lot on that website. And feel free to check out the work there. And yeah, it's really great to talk to you. Say it's always great to talk to you and Preston. And I appreciate you having me on. Well, John, thank you so much for joining us. You are always welcome to come back on the show. I know I personally always learn so much from you

whenever you join us. So thank you so much. All right. So as we're letting John go, we'll take a question from the audience. And this question comes from Tim. Preston and Stig, thank you for taking my call. I'm very new to investing. But in this weird time where interest rates are zero, money is essentially free. And inflation seems to be inevitably going through the roof, at least money supply, whether that's tied directly to inflation or not. My question is, for a semi-normal person like myself who's not really a high dollar investor, it seems like one of the best moves that one could make would be to buy a real asset with highly leveraged debt at a low interest rate. And it seems like the reason for doing this is that the real asset,

is going to increase in value in proportion to inflation, but the debt is going to remain fixed. It seems like you're ultimately earning value on inflation through this mechanism and wanted to see if this was a sound concept and appreciate your guys' time. I've already learned a lot from you. Thanks. The short answer to your question is no, do not leverage your position. And there are multiple reasons why I would suggest that you do not do that. And I really want to start up my response with the Yogi Berra quote.

And the quote is this, in theory there is no difference between theory and practice. In practice, there is. And what I mean is that in theory, you are right. In case of high inflation and low interest rates, you can affect. accidentally erase your debt and keep the real asset. Say, it could be gold and then maintain your purchasing power, which in theory would be very profitable. However, even if you are right, the volatility of what would happen between now and whenever

your desired scenario plays out could wipe you out. And that really makes me think of Riggarin. Rick Garin was a very successful value investor who was involved with Buffett and Munger in the early days of Berkshire. And the way Warren Buffett explained what happened was this. He said that him and Charlie knew that they were always going to be incredibly wealthy, but they were not in a hurry to get wealthy. So what about Rick?

Well, Warren said that Rick was just as smart, but he was in a hurry. So in the 73-74 downturn, Rick was levered with margin loans, and the stock market went down almost 70% in those two years. And so he got the margin call. and he sold his Berkshire stock back to Warren. Actually, Buffett bogged Rick's Berksia stock at under $40 a piece at the time, and now is Berksa Heatherwe's ASES at trading more than $300,000. If you look at the track record of Warren Buffett and Rick Garin,

they're not that much different, but how the leverage themselves was very different. That was eventually why Warren Buffett prevailed. The time it takes for you to be right might bankrupt you. The second reason is that you could be wrong. Even the great investor John Templeton said that he was wrong one third of the time. And looking back of his strike record, I mean, he was one of the most successful investors ever and arguably the most successful international ambassador in the 20th century.

So if he's wrong one hour or three times and he even said that might be on the low side, we would likely do no better. So that's another reason why not to leverage your bets. And you also said there in your question that you are not a high net worth investor. I don't know if that also implies you don't have a lot of experience, which could also be an issue if you're working with that. I mean, you do have investors like Redalia who takes leverage bets from time to time. But Radalia is a high net worth investor, and he knows exactly how to structure a few leverage

bets here and there, and only for a small part of his portfolio. So even if you want to test it out, which I would strongly suggest that you do not, you really should be doing this for very small amounts of your portfolio. But really to sum up, I completely understand where you're coming from. And it is an interesting thesis where you might be right. But if you want my advice, please do not take leverage bets on the expected inflation and interest rates. So Tim, just to piggyback on Stig's recommendation, which I completely agree with. In theory, you got it all right. Like the, what you're talking about is as far as

borrowing money and then paying it back with money that's worth way less is a very, uh, non-intuitive idea that people, I don't necessarily, as we move forward in the coming few years, and I think things are going to get very interesting. People that have a lot of debt are going to find that it's actually advantageous if they're paying it back with money. that's significantly worth less. Now, here's where this all gets a little bit tricky. So the environment that I kind of expect we're about to step into is going to get very depressed. My expectation for how the economy fundamentally is going to perform in the coming three years is not good.

I suspect that there's going to be a lot of people that are struggling for work. Ray Dalio is on the record as saying that we're in. entering into a depression at this point. Believe it or not, that's the quote that he actually has and how he's described this. If that plays out, you might have had all the logic exactly right as far as borrowing and then owning some type of hard asset, but it really comes down to your personal skill sets and the demand of those skill sets going through a very challenging economy. That's the thing that's really important. So if you have, let's say, your house, Let's say a person would go out and buy a house that's that they're taking out a lot of debt.

They're highly leveraging themselves because they're wanting to play this, this idea that you're talking about. If that person's skill set in the environment that I just described, which is going to be a very, very shaky economy doesn't hold up. And that person is not going to be able to keep that same rate of pay and salary that they were receiving when the economy was where it's at. right now and before. Now you're putting yourself in a bind to even make the payments back on that debt. So is it okay to have some debt? Of course. How much really comes down to your own personal tolerance. It comes down to your personal skills and how those skills are going to endure and perform in a very challenging economy. And I think that's where people might not be accounting for how bad things could potentially get moving forward.

And my anticipation is it's going to get a little crazy. So something to think about. You definitely understand the fundamental idea of what's about to play out here. And that's that the people that are lending money are, you know, they're not going to do so well. The people that are borrowing it are going to have an advantage. But the challenges are you going to be able to sustain the salary and the pay each month in order to continue to just make the minimum payments on something like that.

A very interesting question, very smart question, but I would tell you to be very careful with that. So, Tim, for asking such a great question, we're going to give you free access to our TIP finance tool. This is on our website, and you can do intrinsic value calculations. You can look at the momentum status for all these publicly traded companies. It helps you manage your portfolio. It shows you the correlation between all your stock picks.

And we're going to give that to you completely for free. And for anybody else out there, if you want to get your question played on the show, go to asktheinvestors.com. And if the question gets played like Tim's, you get a free subscription to TIP finance. 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. To access our show notes, courses or forums, go to theinvestorspodcast.com. This show is for entertainment purposes.

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