We Study Billionaires - The Investor’s Podcast Network - TIP316: Current Market Conditions w/ Preston & Stig (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey, everyone. Welcome to the Investor's podcast. On today's show, Stig and I cover the current market conditions. Specifically, we're talking about some of the changes in Warren Buffett's portfolio, where he's sold a lot of bank stocks, but he's added more to Bank of America. We talk about a couple different stock picks that are coming up on our value filter. And we also take a question from the audience where we talk about the optimal asset allocation mix right now with everything going on.

Starting point is 00:00:27 So without further delay, let's get this one going. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Hey, everyone, welcome to The Investors Podcast. I'm your host, Preston Pish, and as always I'm accompanied by my co-host, Stig Broterson. And it's just the two of us today, Stig, so I guess we can just go ahead and kick this thing. off and get right to it. So, Preston, let's start out by talking about billionaires, or at least I have one billionaire

Starting point is 00:01:15 in mind. I don't know if it comes as to anyone's surprise that the billionaire wanted to talk about right now, giving the current mind conditions. That is a gentleman named Warren Buffett. Let's talk about what Warren Buffett is doing right now. And I guess the cheeky answer is that the headline could be that he's not really doing anything because everyone is really looking for him to bring on that elephant gun. He's been talking about for years and put some of that $140 billion of cash to work.

Starting point is 00:01:41 But I don't really think that's the full story. Rather, I think that there are at least one actionable purchase that he did over the past quarter. And there's a lot of interesting observations here for Warren Buffett. Most noticeable is that Buffett has picked a winner in the U.S. banking sector. And now we as investors know that it's very hard to pick a winner in any industry. And that's even so that it's sometimes easy to see that a sector in general will perform well. So Buffett picking a winner, you just better pay attention.

Starting point is 00:02:17 And so what I noticed here is that he picked up an additional $2 billion of Bank of America at an Everest price around $24 in change. And right now, Bank of America is trading very close to that price. So if you agree with Buffett on this thesis and we'll talk more about what the investment thesis could be, there could be some value here. And now, so what is the thesis? Well, Warren Buffett is hard to ask, so I guess you have to put up with Presta and Lee here today. But we have seen a few interesting things there. Because whenever I say he picked a winner just for qualification, like he picked up more Bank of America, but he also liquidated his position in Goldman Sachs,

Starting point is 00:02:58 and he actually reduced his exposure and most of his other bank stock. So it really seems like Buffett has a key nine to the stock. And Buffett or Berksa Hallaway now owns 12% of the stock. And what's interesting is that back in April, the Federal Reserve Bank of Richmond approved Berksia's application to boost its stake as high as 24.9%. And it's quite crucial because usually we talk about there's a 10% limit for investors. So they can buy more than 10% and if they do, then I could have to get approval. It might be an issue because, for instance, you don't want someone to have too much of one sector and perhaps that person would own several of the bigger player. So that's why it needs to be improved. And actually, Buffett can still buy more than 24.9

Starting point is 00:03:42 percent, but then he would have to do another filing and then have his company become a bank holding company, which is a bit more complicated process. But the other more practical implication of owning more than 10 percent is that the way Berksa Heatherway is now regulated is that they are now considered an insider. So that means that they can't just load up on the more stock without telling anyone. They actually have to disclose it every time that they're buying. So that's also why this purchase has been disclosed, even though it's not in the findings yet, because it's a very recent purchase. And you might be thinking, well, Stake, didn't you start off by saying that he had like $140 billion in cash and he only plowed in $2 billion?

Starting point is 00:04:24 Well, still I think it's worth mentioning for a few different reasons. It's a public stock that most people can take advantage of. It's very easy to pick up. He also made another purchase, which we'll talk about later, which might be a bit harder for people to imitate. So it's very easy for most investors to do. And Bank of America is now the second biggest public holding. It's only trailing Apple. And the exposure to Bank of America now is more than $20 billion. So it's bigger than both Coke and American Express. And I just do want to say for the record that I do own shares in Bank of America. And I just wanted to highlight most of the most of what he's doing is pruning and adjusting his marketable securities, the stocks that he owns within

Starting point is 00:05:04 Berkshire Hathaway. So when you look at his stock portfolio inside of Berkshire Hathaway, it's $202 billion as of the last quarter. And so it's not like he's really added too much to it. The cash position, like you said, what was it? Stig, 140 billion? Yeah. And this is an important highlight. So when you're thinking of how is that $202 billion allocated in his portfolio, $89 billion of that is Apple stock. It's kind of interesting to see because a few years ago when he first started taking a position, it wasn't like this big overall position inside of his portfolio. But because it's gone up in value so much, it's really kind of taken on. And I think it's helped maintain his stock price significantly having all that Apple stock in there. And then what you're seeing on

Starting point is 00:05:49 the financial stuff, what Stig's talking about. He's really just kind of re-baseline his allocation instead of owning BNY Mellon, PNC Financial, U.S. Bank Corps, Visa, MasterCard, all those, he's cut back the positions that he's had there and he's added to the Bank of America position. It's kind of interesting to see what he's doing in that regard is how he's basically re-baselining everything and making it more focused than having it spread out. Yeah, and it's interesting you say that, Preston, and I really wanted to talk what looks like it's just changed for someone like Buffett. What happened whenever he did disclose it, as probably most of you would expect, you know,

Starting point is 00:06:29 the price just shut up, which was probably why he just bought all he could. But then what happened after that is that the price has fallen back to the point. And that's a very classical thing you see with a lot of Buffett's bigger buys. Like you see like a short-term effect. And then sort of like, you know, there's another new cycle or whatnot. And then people forget about it. And then the price falls back down. But Bank of America in particular has really been on my radar for a long time.

Starting point is 00:06:52 And we can even go back to 2011 whenever he did. that famous purchase of Bank of America, he bought $5 billion a preferred stock with a 6% annual dividend and then 700 million shares or warrants that could be converted as yes. And for all audience, it might be more familiar with Bank America from Bill Nygren that we had on here from Oakman funds. And he manages more than $3.5 billion. And together with Charlie Munger, Warren Buffett, Guy Speer, and Liu, so quite a few investors you're probably familiar with, he has made the most significant conviction bets on Bank

Starting point is 00:07:28 of America. And that was back on episode 293, and of course, we'll make sure to link to that if that's something you interested in. And Nygrant, just to give you a spoiler alert, he was looking at a fair valuation around $40 plus for one share of Bank of American. Right now is trading around, I want to say, just looking up here, $24.47 before market opens here the 22nd of September. And I just wanted to mention a few things. that I found interesting also about the stock. Generally, I kind of feel that there's an interesting thing at play here with, let's just call the interest rate protection. And you might be thinking, what do you mean with interest rate protection? Because there's no way that interest rate is going

Starting point is 00:08:09 up. And Jay Powell has talked about it and, you know, giving COVID-19 everything that's happening, why would you even say that? The reason why I am saying it is that you would probably have a normalized earning for a stock like this around $3.00. And, you know, And you are looking at a stock that back in the 1980s, revenue from non-interest income was only 15%. So I guess my point is that Bank of America has really done a good job adjusting to the times with low interest rates. You know, back in 1980, revenue from non-interest income was only 15%. And today, when they're not really making any net interest income, today, 50% of the revenue

Starting point is 00:08:47 is now non-interest, primarily from fees, as a lot of customers, including ourselves, might never have noticed. They're really good at making money like that. So it was just something I found interesting. And as you go through that specific episode, I don't want to sit and repeat everything that Bill Nicaran talked about. But I would really concentrate on some of the arguments about having that concentration between the biggest banks in the US. There's just a lot of interesting things going on. Combined, they have around a market share of 30%, but they're capturing 50% of the new deposit. So you see the same type of banking concentration in the US and and seeing that for some time that you have been seeing in other Western countries for some time.

Starting point is 00:09:25 So there's just a lot of structural changes and their networking effects and the commons of scale. But I don't want to talk too much about that because Buffett did other things here recently. But Preston, I don't know if you have any thoughts here before we talk about the Japanese investment that he made. When I'm thinking about Bank of America and thinking about the future, your comment earlier about the interest rates going up is the thing that just kind of has. has my mind just turning because I don't think anybody really has a good idea as to how this is going to play out in the coming two years as far as interest rates. Because when you're talking about a bank, and you did a great job talking about how the fees are the real selling point

Starting point is 00:10:07 here with Bank of America compared to some of the other banks because they're not reliant on that interest rate income. But in a world where we're talking about MMT, and I guess from my perspective, I think that they're going to actually be able to implement this for, I don't know how long. I think that's the question. I think they're going to be able to implement MMT. I think they're going to try this whole negative interest rate thing. I don't think it's going to work. I think it's going to fail miserably. But I don't know when it's going to fail miserably. And it seems like, and I think another part of this too, is I expect UBI to be a really huge part of what's going to happen next. In the coming 12 months, in the coming 24 months, I think that the UBI checks are going

Starting point is 00:10:52 to ramp up. I think the fiscal stimulus to small businesses and mid-sized businesses are going to ramp up. And so when you look at how these banks have kind of benefited from these fiscal and monetary policies, even though there's no interest rates, they're still crushing it on the revenues. And so when I'm looking at the valuations on this thing, and it appears like the price is being penalized because I think the rest of the market is kind of seeing things through a similar lens of what I just described as far as my confusion over how this is going to play out. And I think a lot of market participants are saying, I'm just not going to get near that because I just can't understand what the future is going to hold as far as interest rates and whether the Fed's going to overprint and it's going to blow up a bond market or what, right? So the market's looking at that and saying, I'm not getting near this thing. Well, you can see it in the valuation because when I'm looking at this and doing an intrinsic value on the company based on free cash flows and not even having a growing free cash flow, just something that's flat. I mean, you're talking easily double digits on this, like by a lot.

Starting point is 00:12:04 Like, I don't even want to say the number because it's so high based on the free cash flows. So when you're looking at the math on how much they're earning and how much they're banking onto their balance sheet for the shareholders, it's significant right now. I mean, really significant. Like, it makes everything else look like you're in a completely different universe as far as the numbers go. So do I own this? I don't own this mostly because of my confusion as to what's going to play out. And plus I think that there's just a lot changing in this sector. But I don't think that that's going to change abruptly. as far as we're still going to have a need for banks. Like, even though everyone knows I'm a big fan of Bitcoin, right? And that it's a bank that you can put on your smartphone. But I think that there's still going to be custodial pieces to all of that, especially when you're talking like large businesses. They're not going to want to be managing their private keys.

Starting point is 00:12:57 They're going to be outsourcing that to a big bank to do a lot of those things. So I still see there being a world for this, not whether they have the technical chops to step in and start securing private keys and stuff like that in the crypto space. I don't necessarily think that they have that right now. They're probably going to have to outsource it to like Gemini and some of these other big crypto crack and just became gut a charter for a bank. So I think there's a lot changing in this sector. Technologically, there's a lot changing. I'm not so sure where Bank of America sits relative to all the other ones. It seems like Fidelity's kind of got a jump on the transition

Starting point is 00:13:30 to be able to go into this cryptographic world that it seems like we're going towards in the banking sector, but those are some of my thoughts. And again, I don't own it, but I can tell you, looking at the numbers, this thing is ridiculously juicy. So if any of those comments piques your interest, I'd tell you to dig into it more. 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. future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo

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Starting point is 00:17:48 Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. about the comment you had there about the interest rate. The reason why I wanted to bring that up, because I don't necessarily see a high interest rate being a big catalyst or anything like that. I don't really see it going that way. I guess one point is that it's always been very difficult to predict where the interest rate is going to go. But the other thing is there's a lot of

Starting point is 00:18:16 leverage companies right now. There will be in a world of pain if the interest rate went up. And so that was kind of like my point. They had a build-in that's called a hatch. I don't know if that's the high term to use. With Bank of America, keep in mind that even though it would increase their income, that would obviously be discounted because, you know, with a high rate, because the high interest rate would make the value of all the assets go down. But I just feel that's an interesting thing to consider too as you're evaluating the risk of this business. I think it's extremely important. If you're trying to buy various banks that are discounted severely because of all the things we mentioned, I think that probably needs to be at the top of the list is how much of their

Starting point is 00:18:55 revenue is based on things that are outside of interest rate income. Because my impression is, in the coming year and the short duration, interest rates are just going to keep getting pushed lower. These governments cannot allow interest rates to go up. Even though you got the Fed chairman going out there and saying, hey, we're going to start hitting our inflation goals. And if it's running a little bit hot, we're going to let it run hot. That still doesn't mean that they're going to allow that although they're trying to make inflation go up. And historically, interest rates are based on a premium above that inflation, I don't think that that really is going to be the case because they're just going to keep buying the debt to keep the interest rates low because

Starting point is 00:19:34 fiscally they can't afford interest rates to go up. I mean, I think everybody knows that. I think they know that they can't allow interest rates to go up just because the economy could not even begin to handle that right now. So I think the trend for interest rate income for banks is they better expect rates to even go lower from here, which is crazy. But I think that's probably the most likely scenario. So I think Stig's point finding something else, you better have that at the top of your list if you're looking at the revenues and finding something that they're making money from something other than interest rate income. Going back to Mr. Buffett here, I think the Bank of America purchase is very interesting

Starting point is 00:20:13 for most retail investors because it's so easy to follow that specific pick if you want to do that. He also made an interesting purchase in Japan here recently. He deployed $6.5 billion, and it was announced here August 30th on his 90th birthday. And the way the deal was structured was not as applicable to most investors. So simply he issued debt in Jen and he used the proceeds from that. He only paid 0.67% interest rate on that on average. And he matched that with his investment into those five major Japanese trading houses. And just a quick note to that because you might be thinking, you know, whenever you hear like a trading house, like, that sounds risky and buff it and trading that shouldn't go hand in hand. Keep in mind that trading houses in Asia

Starting point is 00:21:02 has a very different construction than what we think of here in the West. It's really a thing that's ingrained in the culture. And the trading houses, you know, first of all, they trade almost any product you can think of. So it's not financial derivatives necessarily. That's, that's not what you think. It should be corn or toys or really whatever you can think of. And It's really not a boom and bust thing. Specifically, the yield on these companies is in excess of 4%. And it's generally perceived as one of the safest investment you can make because these companies are so systemic to the economy.

Starting point is 00:21:34 It's a very different thing. If you've been to Japan or perhaps some of our comments would make a slight more sense, but it doesn't seem as far out whenever I heard it, I guess, as it might be good to other investors. So I just found that that was interesting. So let's say the yield on those, I'm not talking about the dividend yield, but their type of return. I would probably be surprised, you know, the way it's been priced, let's say it's six or seven percent return. He's paying, you know, 0.6 or 0.7 percent for that.

Starting point is 00:21:59 I mean, he can get, say, 5 percent spread or whatnot back with a lot of safety, and he's found a place to pack his cash in an intelligent way. So I definitely more see it like that than any type of something you should try to mimic or any type of, you know, this is going to be a fantastic trade. I don't think it will be fantastic. It's just like a strong downside remediality to return, which is not too bad these days. So my only question, is this Buffett's way of doing the VIX as far as volatility? I mean, that's the only way that I see this is he's taking a position on increased trading, and he expects that to continue. And it seems like these companies that he invested in have kind of a stranglehold

Starting point is 00:22:45 on that over in Japan. So to me, it seems like a really smart play. Okay, so we're going to go ahead and transition over to just talking about some of the things that are coming up on the radar for the TIP finance tool. Stig's going to kick it off first with Liberty Global and talk about this one. So the ticker is LBTYA and then the last letter, they had different asset classes. But the name of the company is Liberty Global. That's the company that really stood out to me. It's the second tip is stock that we have in our last cap filter. It has a TIP multiple of 2.3 and a TIP median of 5.4. So, in other words, it's not just cheap on absolute numbers, but also in relative numbers. And just introducing Liberty Global, it's international broadband and television company

Starting point is 00:23:32 with operations and more than 10 million customers in Europe. And it's not a small company. The my cap is $12 billion, and they have an enterprise value of $20 billion. So, He carries a lot of debt too. But it is a stock that has been on my radar for quite some time. As you guys know, I follow a lot of different prominent investors, just sort of like having, I think Money's Pop-Rite jokes about this and refers to them as having the best investors as his unpaid analysts, which I found to be a funny way of looking at it. Seth Claremann, investor I really respect, bought this company back in Q3, 2018, and he recently

Starting point is 00:24:11 He bought more here in Q2 2020. And keep in mind that even though we're sitting here in Q3, we don't have any data for what he's been doing here in Q3 just yet. That will be out mid-November. Even since then, the stock has generally continued to decline. And it's now 14.7% of his portfolio. So the conviction from him is definitely high. Talking about what other prominent investors have been doing, Berksha has also owned the stock

Starting point is 00:24:37 for quite some time, but the reason they trimmed their position slightly. in all fairness, it also did look like a bet that either Todd or Ted made, given that the current market value of the Berkshire position is only $400 million. And the last investor just wanted to mention here before Dick Moore into the stock is that in Q1, Howard Marks bought 2 million shares of the company equivalent to just above 1% of his portfolio. Now, again, my disclaimer is always that I don't want this to sound like you should only buy stocks that super investors would buy.

Starting point is 00:25:06 but it just really serves as a filter to perhaps where you might start looking and then you can make up your own mind. Especially here in a situation with Liberty Global where we have investors you might also really respect who bought a lot of the stock and it's now selling at even a higher discount. It might be worth your time. And it's sort of like a weird thing. As a value investor, I can almost not help myself feeling FOMO, but I feel FOMO in a very different way. And of course, I'm saying this in a goofy way. because I don't see it as when something goes up, you know, that's not how I feel. It's like, if something really goes down, I'm like, should I really should I buy into this? I do want

Starting point is 00:25:43 to say for the record, though, that most frequently it's actually not a good idea because there is a good reason why they're dropping and why the momentum is shifting. But whenever you see such prominent investors perhaps continue buying and buying when the price go down, again, it might be not a place for you to invest, but it might be a place for you to start looking. Again, it's not a pick for the fainted hearts. The momentum of the stock has turned red since February 2018, so keep in mind that you might be looking at a falling knife here. And as you look closer at the stock, the pick might look like it's all over the place

Starting point is 00:26:18 when you look at some of the key ratios, especially some of the margins. But keep in mind that over the past five years, Liberty Global has made five major strategic acquisitions. And they also sold a lot of the businesses. So it's not the same business they have now. which they had five years ago. So it can be a little tricky to compare it as abels and apples. And initially, this has been fueled by debt and with a massive issue of shares. But together with strong focus on free cash flows, you really see those reserves have quickly built up. And at the same

Starting point is 00:26:48 time, the company has aggressively been buying back stocks. They haven't been paying out in dividends. And since 2016, as many as 27% of the shares outstanding has been bought back. So if you do have a lot of faith in the management and in the business, you would definitely like that aggressive approach. Another thing I also want to mention is that as you value the business, whenever I see some of the things that the management are saying and talking about with the synergies, I would probably be a bit wary of that. They work in European, very fragmented markets. So I would more go in and look at Tadlet specifically or Waterphone Cigos specifically and say, okay, what's the sum of the parts here more than anything else? And so whenever you do decide to do your entree,

Starting point is 00:27:31 intrinsic value calculation, I guess I would be quite conservative in your estimates. And looking forward, I definitely do not expect the price-to-free cash flow to continue to who are around five. That's not what I'm seeing with the headwinds. The industry is facing. But short term, you will definitely see different earnings and cash flows coming out from Liberty to Global. But I wouldn't be surprised if this is a stock with an expect return that could be double-jigit, if you can withstand the volatility that you might see. So I just wanted to mention that. That's one of the stocks that's been our radar to the second cheapest stock in our filter. But Preston, I don't know if you have seen anything in TAP finance you wanted to share with the audience.

Starting point is 00:28:08 My comments on the Liberty Global one. So two things really kind of jump out at me. And I'm, I guess I'm a little bit more hesitant on this one. I think the numbers, when you're valuing the free cash flows, it's exceptional. Like, amazing, similar to like what we were seeing with Bank of America. Where my concern on this one is really the momentum. This thing's been in a downtrend, like Stig said, but it's really been in a downtrend since the middle of 2015. And when you look at the volatility of the downtrend, I mean, it's right inside of that volatility trend. And yeah, our momentum tool is still saying this is red. So I would be watching this, but I definitely wouldn't be taking a position until that

Starting point is 00:28:48 thing would turn green. My concern is much less of a valuation standpoint. It's just when is the market going to start to recognize and realize. the value that you're clearly seeing, I'm seeing, and all these other super investors are seeing, but I do think you're going to be kind of in a falling knife scenario until the market just starts to recognize the value of it. So that's my concern with this pick. But I agree with you, Stig, I think there's a lot of value there. It's just a matter of when it starts to get recognized. I've got kind of an odd one, and I don't own this, but I do want to highlight it because it is coming

Starting point is 00:29:22 up in the filter. And this is coming up in the midcap filter. And Stig, I'm curious, I'm curious if you even know this company. Have you ever heard of Big Lots? No. I never heard about it. So here in America, I would argue most people probably know what Big Lots is. It's a retail store. It's like a T.J. Max. Have you ever heard of T.J. Max? No. Oh, God. I'm so ignorant, Preston. No, it's just, it's an American thing. So you wouldn't know. It's like a retail store. So like, let's say Polo and you wouldn't, I don't think you'd find this at Big Lots. But like, let's say you have a polo shirt and there's like a small amount of damage or like they have overstops. or whatever. They sell it to these retail stores that then go and sell them at a significant discount, even though they're kind of like brand name things. So they're really popular here in America. So Big Lots came up on the filter. And because it has such a strong enterprise value and it has strong earnings, it's hitting the filter. And whenever I'm looking at the top line,

Starting point is 00:30:20 it's really flat. I mean, this thing has literally not moved in 10 years at all. It's just, it makes 5 billion a year is pretty much the answer key. This really got crushed in the March sell-off. This went down to $10 a share. And today, it's up at $46 a share. I mean, I can't imagine what the intrinsic value was in March when this thing hit $10. It had to have been like 30 to 40 percent return based on that price. Okay, so the company's making $5 billion on their top line and then on their net income, they're making about $200 million a year consistently at this point is what I would use. So when I'm doing the intrinsic value on something like that and I'm using around $200 million, I'm coming up with a 14% return. And that's at this recovered $40, this $44 price,

Starting point is 00:31:15 I'm still getting a 14% return. So I think this is a company that's going to perform well in the environment that I kind of expect us to be moving towards here in the coming five years. It appears like the company is very sound in their financials. They get a current ratio 1.22, an interest coverage ratio of 19. The debt to equity recently jumped up a little bit. And I think it's mostly because they moved from a structure where they used to own the buildings to now where they're leasing because I see on their balance sheet that capital leases have gone up significantly from where they were before. So, you know, people on Twitter hit me up if you have a better insight into this. But I kind of see that as being a smart play as far as leasing

Starting point is 00:32:02 the properties because it gives them a little bit more flexibility, maybe to not have all these cap-ex of sustaining buildings. So like they start running into problems. They can just shut it down. It gives them that ability to be a little bit more flexible on how they manage. They're really expensive part of the business, which is all the infrastructure. So I don't know. I, I see it as an interesting pick. The momentum on it's good ever since March. It turned green. I don't know when our tool turned it green,

Starting point is 00:32:30 but it turned green shortly after the March because it had a meteoric rise from the $10. But something to check into, I don't own it, but I do find the pick kind of interesting. Yeah, and the other thing to note here, Preston, I'm really happy you highlight the green momentum. You know, I tend to highlight the ugliest businesses

Starting point is 00:32:47 with the red momentum. And I guess people should also, you know, keep that in mind, you know, as they're using the filter, like those are the cheapest of the cheapest companies. Think about the intuition. Like if something is very, very cheapest and if it's cheapest in the universe, it's probably because the price has gone down. The momentum has, you know, turn red. So especially what Preston is looking for. And correct me if I'm wrong here, Preston, you're looking at, okay, so this has been very cheap, but now like the market is sort of like found its bottom and now it's on the way up. That's what you're looking for. That's exactly it. Your pick that you have

Starting point is 00:33:21 From a fundamental analysis standpoint, I mean, it's hard to find anything better. I mean, the thing is just crushing it. It's pumping out so much profit for how much you pay for each dollar of profit. It's amazing. But for whatever reason, the market is just continuing to say, based on the momentum, it's continuing to say, yeah, it's got more to fall. I mean, you could have bought the bottom. I just don't feel like I have the skill set to be able to say, right? Here's the bottom, I'm going in and I'm going to buy it. So I'm just looking for statistical. When I say statistical, what I'm saying is we're looking at the volatility of the price action for Liberty. So you're looking at the volatility of the price action on a long-term basis. So for Liberty,

Starting point is 00:34:05 their annual volatility is around 23%. So you should see the price action move within a 23% range on an annual basis. So when the price is moving, as long as it continues to move inside that, call it a 23% trough, and it's moving down in this 23% trough, my expectation is that it's going to continue to do it until the price demonstrates that there's a change on the horizon. It almost be like, this might be a good example. Let's say we were tracking the temperature outside, right? And the volatility in the temperature is 5% over a three-month period of time. And I use three months because we're talking about something that's an annual event, right? So we're looking at a 5% volatility in the temperature.

Starting point is 00:34:52 And as long as that temperature just keeps going down, I'm saying, hey, it's still winter. It's still going down. Now we just hit a low of 20 degrees because we're up north or whatever. And then it's kind of staying in that volatility range. And then all of a sudden it starts going back the other way. And it breaks out of that, let's just call it 5%. And I have no idea what these numbers would actually be. But when it breaks out of that 5%, I'm saying, hey, something just changed.

Starting point is 00:35:17 I think we're out of winter and we're about to go into the spring, right? It's a very similar thing when you're trying to look at momentum for stocks. You can look at the momentum in an hourly chart or you can look at momentum in a long-term chart. Since we're value investors, we're looking at the momentum from a very long period of time. That way, we can say, hey, there's something here that has changed in the market. it could be a false breakout, but I mean, you can go in and look at the charts. They're pretty darn accurate as to being able to forecast long-term momentum trends. So that's just my concern when I'm looking at something that is saying that's just screaming value, but it's still within

Starting point is 00:35:55 that momentum trend trending down. I'm just not going to buy it until it turns green. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up. And customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across more than 35 security and privacy frameworks. Companies like Ramp and Riders spend

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Starting point is 00:39:10 charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. All right, guys, so now that we had our billionaire segment and we talked about TAP finance, now is the time to answer a question from the audience. And this question comes from Yuri.

Starting point is 00:39:33 Hey, Preston and Stig. I'm a big fan. I'm listening for about two and a half years. And I started listening right around an episode that mentioned Ray Dalio's All Weather portfolio where there's a 40 to 60 equity to bond portfolio split. So with that, I want to know over the last six months to 12 months, how has your preferred portfolio allocation between different asset classes changed over that time period? I know Preston, you've mentioned in previous episodes,

Starting point is 00:40:00 you're almost exclusively invested in Bitcoin and Stig, you seem to not be on board with that. So I want to know if you're like me, someone who's not really interested in investing in bonds, what are some other options that you're seeing and how does that tie into some of the conversations you've had with professional asset managers that may also agree that bonds aren't yielding enough to justify that continued investment? So again, the question comes down to what are some different suggestions you have for portfolio allocation given the current environment that we're in. Thanks a lot. So, Yuri, fantastic question, and I don't know that I'm going to give you a good answer. I'll start off with this.

Starting point is 00:40:42 I definitely don't own any bonds. And I'm looking at Stig and he's nodding his head. You don't own any bonds, right, Stig? No, I'm not. Yeah, I think, I think that let's start with the easy part. It's interesting because at the start of the show, we were talking about our expectation for interest rates to go even lower. So if you own bonds, I mean, that's the dream scenario, right? The interest rates just keep going lower and the price of your bond just keeps going up. I just don't trust like how much longer they're going to be able to, they being central banks, be able to keep this farce alive. So from my vantage point, if you have something that has a lot of counterparty risk, which bonds have complete counterparty risk, like that is the last place I want to be

Starting point is 00:41:23 in the market right now. Like March was a perfect example. When you see, these big giant liquidity events where the market just melts down. I think your amateur investors will say that, oh, it was just an emotional thing. Yeah, the emotions got the hold of a lot of people because they were looking at the supply and demand shock that was going to come. And then what it was was it was all counterparty risk. It was derivatives blowing up. It was debt blowing up. It was a complete impairment on a lot of balance sheets. And it was forced selling. People had to sell positions that didn't have counterparty risk in order to come up with the cash, the U.S. dollars, or whatever fiat currency that they had their derivative or their counterparty risk denominated in, they had to come

Starting point is 00:42:11 up with that fiat money in order to make good on the impairment that they had in their other positions. So I would stay away because I think that these shocks are going to continue. In fact, we might even be experiencing one right now for all I know. The market has had a, I don't know how much of a pullback, but it's happening quickly. And these things can kind of unravel really fast because once that impairment starts to roll, it just trickles down into all the other counterparty risk positions for everybody else. And it just unravels itself. And my expectation is when it happens again, the central banks are going to step in

Starting point is 00:42:47 with an even bigger bazooka than they stepped in with March. And then they'll reflate it through more fiscal stimulus, just straight into the population. and they'll also do it with more QE so that they can keep the interest rates continually push the interest rates lower because they can't afford for them to go up. So now how does this impact my portfolio? Well, you already mentioned it. I am heavily exposed to Bitcoin. And for people that are listening to this and saying, that sounds absolutely nuts, maybe it is. Maybe it is. I don't have a good answer for you. So far, it's worked out for me extremely well. I mean, I've absolutely murdered 2020 thus far. That doesn't mean that it's going to end that way, but my anticipation

Starting point is 00:43:30 is that it will. But instead of getting into all the nuances of that position that I have a very high concentration in, I would just tell you to really focus primarily on stick with the things that you understand and, you know, stick with things that don't have a lot of counterparty risk. because if you don't understand something, and I tell people this all the time, especially with respect to Bitcoin, if it's not something that you understand, you're not going to have the temperament to continue to hold it when the price action goes in a direction that you're not prepared for, especially when it's that volatile. So, like, I have a lot of conviction in it because I feel like I understand technically what's happening with the code, and I understand kind of the backdrop of what's going on, or at least that's my impression. And of course, I have a bias. And like anybody, who has any position has a bias. So I would tell you to focus on things that you understand, things that you're comfortable with, and things that don't have counterparty risk. And that's why, you know, you look at Buffett, what's he doing? He's in a lot of stocks. He's in stocks that he understands. You know, you go back to looking at Buffett's portfolio back in 2007, 2008 time frame. He had a lot

Starting point is 00:44:40 of bonds on his balance sheet tons because his anticipation was into the long-term trend of interest rates where they just keep going down ever since 1980s. They just keep going down. So, of course, he's going to own that. But now where you look at where he's at, he's just sitting in cash and cash equivalents in stocks. That's what he's doing with all the retained earnings from his operational businesses. And so I would recommend people do something very similar is you need to have something and he owns stocks, which don't have the counterparty risk. You have the risk that the company can dilute their shares, right? That's your counterparty risk. I guess you could claim that that's counterparty risk that the company could step in and dilute their shares. But in general, there's no

Starting point is 00:45:20 counterparty risk there when you're dealing with stocks. So that's where I would tell you to look. I would focus on things that have good valuations like Stig and I just talked about on this episode when you are buying equities and try to give yourself that advantage of if you are wrong, you had a large enough margin of safety in the price. Those are the things I'd tell you to focus on. And then the correlation is really important. And this is coming from a guy that has a very highly concentrated portfolio. So here I am saying one thing and doing something different. But I'd tell you, if you can try to uncorrelate your positions, that is vital. That is really important. If you're wrong, if you're dead wrong on one pick and it's uncorrelated to everything else,

Starting point is 00:46:03 your whole portfolio doesn't move in that direction. It's going to be compartmentalized is kind of the way that I would think about why correlation is so important. And on our TFP finance tool, which we're going to give you access to, it helps you piece out the correlation between your picks as well. I think that's a good segue to what you asked there, Yuri, about Redalio. If anyone, Redalia talks

Starting point is 00:46:23 about having uncorrelated assets. So I think that's very timely. And so whenever you talk about the all-weather portfolio, just briefly outlining that for the audience, really what Redalia talks about, whenever he talks about

Starting point is 00:46:36 the all-weather portfolio, is a different portfolio mech. So I just wanted to clarify that first. 30% in the stocks, 15% in medium-term bonds, 4% long-term bonds, and 7.5%. in commodities and the last 7.5% in gold. Like Preston, I would say that that is likely not the right

Starting point is 00:46:54 way to structure your portfolio right now. But I also want to say that it really depends on who you are, like different portfolios for different people. Preston and I follow the financial markets. We have an opinion about financial markets. We also make concentrated bets. I recently talked with a few friends who have been in this wonderful situation that they sold their company and they were like had a very different objective than what I would imagine press than I have, which is about compounding our portfolio. And you know, they're all about not losing principle, but they're also about they didn't like volatility. They would much rather have lower return and low volatility. And if that's the case, something like your old weather

Starting point is 00:47:35 portfolio will definitely help you in terms of lower volatility. You know, that's the way it's been structured. And it gives you a decent return. It just gives you the highest upside you can think of. But again, that's not the objective. So I would say that a person could consider the all-weather portfolio as an alternative to dollar cost averaging just with a lot lower volatility and perhaps slightly lower return. If they do not want to follow the financial markets, if they don't want to be active investors, that could be a way to do it. But now that you are asking, so how do we see this? What would we suggest? And I also want to say for the record, now we are talking about Redalio. Redel doesn't recommend the All-Weather portfolio to investors in general. He also has a

Starting point is 00:48:19 very strong opinion right now about how you should be positioned in the market. More than anyone, he is an active investor. The All-Wether portfolio is a different portfolio mix for different investors. So my approach really hasn't changed too much during COVID-19. I would say the bonds are even less attractive, but they're already unattracted going into the pandemic. So the thesis for that really hasn't changed at all. As I'm sure many of you know, I'm primarily inequities and I diversified away from the US. Not fully. I still have US stocks, but I've diversified away to a bigger extent to international markets. And having said that, also just wanted to give a handoff to another resource by our friend Rich Jainer. He recently, this month,

Starting point is 00:49:02 published his latest research on pricing the return of US international markets. And it's published over our friends at Alpha Architect, and we'll make sure to link to that in the show notes. But it's just if anyone would be more interested into learning more about investing international markets, we've covered investing into national markets quite extensively here over the past few months, so I don't want to repeat myself too much. And then I also want to say that if it is possible for you, Yuri, if you have someone in your network who you really trust, perhaps now it's the time to look into private companies. And it's sort of like difficult to up with a guide to how can you invest in private companies? Because it depends on like,

Starting point is 00:49:45 what's your own circle of competence and who are your friends and who do your trust. But you can definitely find higher yield than what you can in the stock market, and not to speak of the bond market right now. And if you find the right people, they will come with even lower risk. If you do not have any network, you can also go through different investment platforms. And there's a lot of great investment platforms out there. So that's a way to do it. Clearly, you know, there's a middleman and they have come up with some pros and cons if you want to do that. And perhaps one day we can do an episode about how to go into private deals, even though that's kind of like beyond the question this time. But giving the current environment, I guess one

Starting point is 00:50:21 point is that if you're not dealing with Warren Buffett billion types of money, it can be a very good approach to compact your wealth and protect your downside. And of course, also diversify away from the financial market. So there was it again, you know, that correlation piece. And so, giving the current market conditions, I would argue that you should consider having exposure to a fixed monetary baseline. Gold could be an example of that, and that is what Redali have said earlier this year. It's also included in his old weather portfolio, but he really talks about, you know, the antithesis of cash. Gold being one example, Preston mentioned Bitcoin. That's another example of that. And then Delio, and you can even put Buffett in that, would mention

Starting point is 00:51:02 equities. I'm primarily in equities guy. I'm more familiar with that. And I like that play right now. But really, I see my portfolio in three buckets right now, equities, private deals, and then exposure to a fixed monetary baseline. And for me, the latter would be smaller than the public and private ownership, partly because I do see it as a hatch, but I also see it as a very interesting value to risk ratio and less as a call it steady growth compounder. I'm just going to quickly explain Ray Dalio's all-weather portfolio for people that are listening and if they're not familiar with what it is. So, Yuri, was describing there, 60% bonds, 40% stocks. What Stig was describing was more accurate because he

Starting point is 00:51:44 included the commodities and gold piece actually encompassing about 15% of the portfolio. But what Ray had effectively discovered was that when the bond market was going up, the equity market would lag. But when the equity market would go up, the bond market would lag. So there was this inverse correlation between bonds and stocks. But what was happening was, the stocks were the stocks were twice as much volatile than the bond market. So what he did is he levered up the bond position so that it became more volatile and it was still producing those returns because we were in this long-term declining yields in the bond market, which makes the bond prices go up for 30, 40 years. So he was playing this and I'd be really curious if anybody out in the audience that's listening

Starting point is 00:52:31 to this, if you could hit us up on Twitter, I'm really curious how he's managing this right now. because I know he's come out publicly and stated that he thinks bonds are a terrible place to be right now. And it would just shock me to see such a significant portion of his all-weather portfolio still in bonds, levered bonds. I would suspect that that's probably not the case right now. But I'm sure there's somebody in our audience that knows the answer. And if you do know it, please tweet at me and I will retweet it so people can kind of see your response. But based on historical interviews that he's done, that's how the all-weather portfolio

Starting point is 00:53:08 it works. But I'm real curious to see what they're doing nowadays. All right. So you're a fantastic question. It's a really important one for people to think about. And Stig's point about it being a personal choice and has to fit your personality and all the other things that you have going on in the backdrop as far as your earnings power and all those kind of things. Those are really important considerations when you're designing your portfolio and the volatility that you're allowing yourself to step into. So to help you manage this, we're going to give you. free access to our TIP finance tool. It helps you with the correlation. It helps you with the momentum. It helps you with the intrinsic value estimates. It helps you filter the best valued

Starting point is 00:53:49 companies for the profits that they're making. It does all those things. And we're really excited to be able to give this to you. If somebody else wants to check this out, just go to Google and type in TIP finance. It should be the first thing that pops up. It's right there on our website. And if anybody else wants to get a question played on the show, go to asktheinvestors.com. You can record your question there. And if it gets played on the show, you get access to our TIP finance tool. All right, guys, that was all that pressed on I had for this week's episode of the Ambassadors podcast. We see each other again next week. Thank you for listening to TIP. To access our show notes, courses or forums, go to the investorspodcast.com. This show is for entertainment purposes only.

Starting point is 00:54:29 Before making any decisions, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permissions must be granted before syndication or re-broadcasting.

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