We Study Billionaires - The Investor’s Podcast Network - TIP413: The "Buy" List for 2022 w/ Eddy Elfenbein

Starting point is 00:00:00 You're listening to TIP. On today's episode, I sit down with Eddie Elfenbine. Eddie is the founder of Crossing Wall Street, which is a financial blog that's been running for 17 years. He's also the portfolio manager of an ETF based on his quote unquote buy list that he releases once per year. Interestingly enough, the list holds 25 stocks and is only rebalanced or changed at the end of the year.

Starting point is 00:00:24 The buy list has beaten the S&P 500 by 61% since inception. In this episode, we discuss what's on the buy list for 2022, what it takes to qualify to make it onto the list, how Eddie thinks through selling and rebalancing the portfolio, individual companies that stood out to me on the list and also Eddie's top pick, Eddie's thoughts on the recent jobs, numbers, Fed announcements, and the markets today, and much, much more. I found Eddie's approach and more importantly conviction, simply fascinating, and I thoroughly enjoy the discussion. With that, please enjoy this conversation with Eddie Elfenbein. You are listening to The Investors Podcast, where we study the financial markets and read the

Starting point is 00:01:10 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, Trey Lockerbie, and today, I am very pleased to have with me, Eddie Elfinbein. Welcome to the show. Thanks for having me. I've really been enjoying following you on Twitter initially and now we've gotten to know each other a little bit. And you have such an interesting story that I thought it would be great to explore it here on the show, which is you essentially started out blogging about the markets. That was a little while ago when you've now parlayed that into managing a fund and an ETF and creating this list that's very widely followed. So I want to kind of understand what you were doing when you started the blog and how it has grown from there. I started the blog in about 2005, and that's sort of at the time blogging was growing.

Starting point is 00:02:10 I think the first person that I read continuously as a blogger was Barry Riddholt, and I've gotten to know him over the years, wonderful guy, and huge sort of motivation and sort of leading me that you could do something in the blogging world and write something interesting. It was a very sort of fresh and exciting world. And this was before the major financial media companies had a web presence. So I remember at one point, Barron's in 2005 featured, they had a little segment that they would feature about bloggers, the internet and investing. And it was in October of 2005. I was featured, very, very small blurb in Barron's along with Joe Wisenthal at the same time.

Starting point is 00:02:53 And now he's at Bloomberg and his own financial media powerhouse, but we were just two bloggers just starting out. And I remember one of the bloggers was invited on, no, it was me. I was invited with some others and we were on CNBC. And they didn't understand what blogging was. And I was on to talk about the markets and talking about the Federal Reserve. And the interview, the woman was treated us like we were kids at the card table. She was like, now what are your bloggers saying? And she thought like the participants were bloggers.

Starting point is 00:03:26 So we shouldn't even understand what we were doing. and we wanted to have these sort of serious discussions about the markets. It was very odd at the time. But that was a fun time when everything got started. Yeah, something about blogging seems to lack a sense of authority because I assuming there was such a low barrier entry, but then you have some of the smartest people in the world putting out blog. It's hard to sift through it.

Starting point is 00:03:50 But the cream rises to the top, so to speak, which I think has happened in your case. Well, that was about 17 years ago, and you've now turned this into a fun. And, you know, the fund is really interesting to me. And I noticed that you tweeted recently this quote by Peter Lynch that goes, the real key to making money in stocks is not to get scared out of them, end quote. One way to not get scared out of them is to simply not sell the positions except to rebalance maybe once a year, which is the strategy you've developed for this ETF that you've launched.

Starting point is 00:04:23 And also the strategy for the fund, if I'm not mistaken. That's exactly right. So we started with the buy list on the blog. We started a yearly buy list. It started out of 20 stocks. It's not been expended to 25. But we said, here are 20 stocks and they're locked and sealed and we can't touch them for a full year.

Starting point is 00:04:44 This list is set. We make absolutely zero changes. And we wanted to try to say to people, look, we'll tie one arm behind our back. And we can do better than the market, and just as well, if not better. better than the market. And people think, oh, you're crazy. You have to be able to trade and get in. No, not at all. As long as you have high quality stocks and you don't get scared out of them. And the long term, you know, time is on your side if you own these very high quality companies. So that was the idea of the buy list that every year we would only change five stocks.

Starting point is 00:05:20 At the end of the year, five would come in, five would go out. So at the time, it was 25% turn over. Now it's just 20% turnover. And so many people loved the idea of the bylis. And they always would ask, do you manage money? Is there a product for this? And for so many years, we said, no, there isn't one. And so then in 2016, I was able to connect with a wonderful partner and advisor shares. They really have been in Trivart Group.

Starting point is 00:05:49 No, I haven't. Who runs that? And we said, let's try to take the bylaws for legal reasons. we have to say it's based off the by list. We can't say it is the buy list. When you run a fund, you have to have some amount of cash just to keep it operational. But we said in the prospectus, it's going to track this. We had a track record of the by list, which has been pretty good over the years. So I went from blogging about managing money to actually managing money. My father, who's now 87, And he said to me, it's a good thing you didn't blog about MMA.

Starting point is 00:06:28 But now I went from blogging about something to actually being a practitioner. So it is kind of a fascinating job. And then you sort of learn that things are quite different in the real world. You know, when you prepare the fund and they go through all the fees, the listing fees. It goes on the New York. It's the NYSC ARCA for older listeners. You may remember the archipelago. that's what that is. Then there's prospectus fees and there's custodial fees and all these fees

Starting point is 00:07:00 and it's sort of like a cartoon with my eyes, the dollar signs, so many fees going into it. And when people talk about, oh, the fees in funds are so high, well, when you're at the other end and you realize all that goes in into running that, you're a little more sympathetic. So I had some lessons as far as that. But it's a great experience and just taking that theoretical construct with the buy list and turning it into a real product. And when just recently we got to new all-time highs for the traded shares, for the net asset value, and for the total assets under management. So we're in our 60 year now and it's growing and thriving.

Starting point is 00:07:42 Yeah. Speaking of the theoretical concept behind it, I'm curious about the inspiration behind the buy list originally, why the 20 stocks, why not 40 stocks, why not? Where did the numbers come from? What was the inspiration behind it? I think Lewis Rukhizer had sort of a contest on his show or like his guest on that show. They did something like that. And I remember a guy I worked with John Desauer. He did something like that. So I sort of borrowed it from that. And the reason we got to 20 is I feel that's just sort of a good. It's well diversified. You can get into a bunch of fields. And I also feel that that's a good number for the number of companies.

Starting point is 00:08:21 that I'm familiar with. Once you get beyond that, you know, there's some funds that have dozens and hundreds, and I can't keep track of that many. But 20 to 25, I find that's a sort of a doable I can understand. It's a knowable list and well diversified. Interesting. One other question that comes to mind with the rebalancing once a year is how you stick with that. I mean, I'm guessing you wrote it into the code, so to speak, so that you couldn't override it with your human biases. But I imagine that that's very difficult to kind of maintain that conviction, especially if you see a position in there going against you,

Starting point is 00:09:00 and you got 11 more months to go or whatever it might be. You're exactly right. I mean, look, I'm a human being. And you see something just getting clobbered and you feel like, no, no, I just want to jump in and pull it out. And I tell you, I bet if I had my opportunity to do that, I'm almost positive that would have been a net loop. loser for me. Because at the same time, like, oh, it's gone up so much. How much further can it go?

Starting point is 00:09:25 Well, it can keep going further. I'd give you some examples. We added Zoetis last year. And it started completely flopped out of the gate. I think it was down by about 12% around March. It turned up, you know, it was a 40-odd percent winner for the year. Another good one is Middleby. They make, which we recently just recently sold, they make a lot of the kind of industrial baking kitchenware for restaurants and hotels. And they got absolutely clobbered for obvious reasons when COVID first came out. All those restaurants shutting down and the stock fell from around 120 to 40 within, I mean, days. It was probably a couple of weeks, but not, not maybe three weeks. and it hit bottom and it took off and we sold it, it's around 200.

Starting point is 00:10:19 There's no way I would have predicted that. No way. Now, I knew the fact is that I liked Minilby. I thought it was a good stock and I thought it would work well for the long term. If I would have picked that bottom and gotten back in, absolutely no way. So the urge is strong, but what I like about my strategy and the rules is it forces this discipline upon me. It says, I have to do this. And getting back to what Peter Lynch said, another quote from Lynch is that he said that more money has been lost preparing for recessions

Starting point is 00:10:54 than the recessions themselves. I don't know if that's literally true, but there's a lot of truth behind that. That really raises the question around how do you know when to sell, right? When it does come time to do that and say something's been performing well for you for a very a long time. I understand there's some opportunity costs at play. But walk us through sort of the metrics you look at or what kind of weighs into that decision to finally replace a different position. It's a hard thing to do because it's selling your darlings. And again, I like it because it forces you not to fall in love companies. You say it's the end of the year. We got to rebalance and we got to prune the list and add new names. So a good example why I only sell

Starting point is 00:11:36 stock is they're being bought out. And that happened to us this year with CERner. Oracle came along and offered a lot of money to buy CERner, all in cash. Oracle is a very, very big company. I believe this would be their largest purchase ever. So with CERN, which actually had been kind of sluggish for us, boom, it takes off huge gain in one day on the news. And so at some point, that will become part of Oracle. I would imagine that CERN shareholders will get at Oracle shares. So once that happened, we just took it off the list. That decision was kind of made for us. Another reason is sometimes we come off across the valuation, ANSIS, which is a wonderful company. I really like this. They make a lot of the 3D computer modeling for engineers. So if you

Starting point is 00:12:24 ever see something on a computer screen that's twisting and turning all different ways, it's a good shot that comes from ANSIS. It really lowers the cost for engineering projects. What? wonderful company, and it took off for us in 2020. Then in 2021, it ran into a brick wall, and just didn't perform as well. And I thought something like 50 times future earnings. I love the company, but that's just too much. So I decided to take that one off the table. And again, like Middleby, which I just mentioned, that had such a big run up. It really comes down to, it's not the thesis that we thought. We were buying it for X, Y, and Z, and the company is now A, B, and C.

Starting point is 00:13:12 Another very frustrating one is where I thought we were right was Disney. We added Disney, and they had absolutely blowout earnings this past year. One, I think for the Q4 of 2020, they were expecting to post a big loss. was, yeah, and they posted a game. It was like Wall Street, it was back to, you know, 40% loss, and they had a 30%, 30 cent gain, sorry. And, you know, really didn't budge at all. And it was very frustrating because I thought, we were right on that, we were right on streaming business, and just got nothing from Disney. And there, I thought, if there's a stock I need to sell, it's time to prune Disney.

Starting point is 00:13:58 So sometimes I hope to revisit these, as we had with FICO, that's back on the list. and we've done it with others. But the main thing is if it's no longer the stock you originally bought. 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.

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Starting point is 00:18:22 Well, let's talk about the buy list for 2022 that you just recently published. It's like the horse races started all over again and the bell just went off. Walk us through the qualifiers to make the list in the first place because when you mentioned valuation there just now, I kind of went through the list. I was doing some back of the envelope math quickly to kind of get a rough feel for evaluation on, in my opinion, for the majority of the stocks, and this is very subjective, but I was coming up with pretty conservative estimates for yield, I guess, you know, for talking discount rates and expected return. So it seems like these These aren't your high-flying tech stocks, you know, in the list, right?

Starting point is 00:18:58 And that brings up a lot of questions. So walk us through what it takes to kind of qualify to be on the list. The first is one important point is since we have 25 stocks and we turn over five each year, that means the average holding period is going to be five years. And when you sit down and you say, okay, is this a stock I am comfortable with owning for the next five years on average, as if I can't touch it for five years. It's not literally true, but it is conceptually that will be the average. Is it something I'm very willing to do that with? With a company like Hershey, I have a pretty good idea what that company is going

Starting point is 00:19:37 to look like in five years. With Tesla, I'm not so sure about that. So that's an important fact. I like to look for, as they come back to always say, companies with a strong market niche, A company that, if not is a literal monopoly, has very much a monopolistic like control in their industry. It doesn't have to be exactly likely, but it has some similarities. There's few companies that you can go to to get this service done. I like companies that have strong, consistent operating histories. I like to see consistently rising earnings and revenue and dividends. Not always, but that's a good sign. I don't pay that much attention to industry. For example,

Starting point is 00:20:27 I don't have any energy stocks. And that's not a prediction about the energy market or oil prices or any geopolitical. I just don't see anything that looks like a really good value at the moment. So it's sort of a bottoms up approach. But I would say, I don't like the phrase moat, but that is a good way to describe it companies that have a strong market position. Why don't you like the phrase moat? I'm curious. I don't know. I just figure it's something about it sounds a little corny, but maybe it is fine.

Starting point is 00:20:56 I guess that that best describes it, the list of 25. Very interesting. So earlier you were mentioning about this allows you to not fall in love with a certain stock. And as you were saying that, the stock that came to my mind was Moody's, which is a duopoly. It fits that description. It's in the portfolio. It's in the buy list. and it is one of the most widely held stocks for a lot of the billionaires that we follow.

Starting point is 00:21:23 And Buffett comes to mind. He's held it forever and others. And there's a lot of appeal to it, I think, for that reason. But investors just seem to love this stock. That's what came to mind. And why do you think that is exactly? One reason is it's treated us so well. If you want to be involved in that field, you basically have to deal with them.

Starting point is 00:21:42 There's nobody else you can go to. I think that that's really what it comes down to. So on that note, I made the list again for this year. And until further notice, you know, if we seek some kind of disruption to that business, I feel like is it just going to continue to make the list no matter? I mean, there's obviously a price too high at some point. I would think so. Maybe if they do an unwise acquisition or something, then I might, again, it's not

Starting point is 00:22:09 the company I originally bought. So that could happen. And there's often a lot of talk about. a player coming in, upsetting the current market segment. I don't see, there's a lot of talk about that. I haven't seen that just yet. The company just delivers. I mean, year in, year out, it really does. It's sort of one of these steady ballplayers and always there. I was like Tom Brady going to have 44 years and just delivering solid results. It's a wonderful company. So given that you're selling off five stocks a year, this like 20% turnover, is that mandatory?

Starting point is 00:22:50 Do you have to trade out five stocks? Is that part of the regimen? I don't. I've always done it. And there's nothing that says in the prospectus that I don't. So even my business partner, I said, why don't you sell like two or three? But then I think I always want other ones I want to add. And so it always gets to five when I work towards in the closing months of the year.

Starting point is 00:23:11 deciding what I want. Technically, I could do that. I haven't done it yet. And we do the rebalancing. That always happens regardless. So something I'm just endlessly fascinated about is how people distill down from the huge universe of stocks down to say something like 20. And maybe distillation isn't the right word, but that to me is how I've been doing

Starting point is 00:23:34 and filtering it through screeners or what have you. Do you take a quantitative approach to get lists or the universe down to a certain size that's manageable? What I do is I have a broader what I call my watch list. And that's usually I aim for about 100 names. So that's names that I don't know, as I was saying, I can know 25 stocks. 100 stocks, bullet points about it. I can know something. And that's sort of AAA for you know, that that's where the pool of talent comes for the buy. Is a company making it into there. And so I'm constantly adding and deleting to that. And it's not so much quantitative. I like to look behind the numbers. I think that's an issue for many investors. So looking for a company with a strong

Starting point is 00:24:25 mode, a strong market position will manifest good numbers. So if you screen for whatever ROE or whatever kind of numbers, it will come up. But I try to look behind those numbers. You want to to look at numbers, but don't be a slave to that. And that's very important. I talked about this recently with a stock I like called Amerisoros Bergen, which is a drug wholesaler. And it's very, very consistent operating history. Nice earnings line just going right up. And the stock hasn't moved that much. And by conventional metrics, it's a bargain. It's less than 15 times earnings. and just getting this beautiful earnings line going up. Well, the problem is it has, it's open to the opioid crisis and litigation from that.

Starting point is 00:25:18 So that's sort of weighing on the stocks. And that can give you, without looking behind it, a false sense that this is a value stock. So screening is fine, but it has to be, you have to know more about the company as well. You mentioned value. Is that the school of thought you come from when you started out? investing? Were you following the Bing Graham approach and following the likes of that kind of philosophy? I would not call myself a strict value investor. I have a lot of companies which are very much on the growth side of things. So I would not, I applaud the tenants of value investing,

Starting point is 00:25:56 but I'm not looking to buy, say, a B minus stock for a D minus price, because then you're just stuck with a B minus company, I'd rather get the A plus stock for the best price I can get. That's more important. So I think a value investor is less concerned about the quality of the company where I'm much more concerned about that. So a company like, you know, Thermo Fisher, Scientific, that's a growth stock. That's a tech stock, you know, just because I used to have Microsoft, but I don't have, you know, Google or Facebook. But that's up there as well. But again, it's got the qualities I like. I noticed a number of positions in the buy list offer dividends. Is that something that you factor into the equation and all when you're considering a stock? I can. Again, I'll look at it,

Starting point is 00:26:49 but there are companies that don't pay dividends. But more than that, I would like to see the consistent increase in earnings. So step in, I think, just had their 54th consecutive dividend increase, and Abbott Labs had their 50th, 50 straight years of increasing dividends. I think FACCET is up to 17 years, maybe more than that. It's more like a lot of the companies I look for have those consistent increases. So they have the market position that can manifest those cash flows to supporting those rising dividends. A couple more questions around the actual portfolio itself. So in reading some of the comments on the stock positions that you've posted, I noticed

Starting point is 00:27:39 this interesting fact about Affleck, and that was that 70% of their revenue comes from Japan. And given I'm in the U.S., and I'm familiar with how much they market here in the U.S., I just found that surprising and made it into your short anecdote or bullet point. I'm just kind of curious what your thought or why that is. It's a fascinating company. So it's originally the American Family Life Assurance Company. It's based in Georgia.

Starting point is 00:28:06 It's basically a family-run company, all the top executives, with the Amos family. So I think it was three brothers who started. So now it's all these nephews and cousins that own the company. Been really impressed by them over the years. They're one company that they've been on my buy list since the beginning. And what they did was one of the brothers, I think, visited Japan at their World's Fair at Osaka, and he saw all the people walking around with masks on.

Starting point is 00:28:37 That was a big deal back then. I realized this is a risk-averse country. And at the time, they, I'm not sure the terms of that, but they were sort of legalistic monopolies that the Japanese economy was rent. And Affleck was allowed to have that. They were benighted to have this important position within the Japanese economy. And so that enabled them to grow very quickly. Now, they have a big business in the U.S. as well.

Starting point is 00:29:07 Everybody knows them about their advertising. They had an interesting crossroads where they went to an advertiser and they said, we've had great business results, but nobody has ever heard of us, the American Family Life Assurance Company. So they said, I have a crazy idea. When you say the name of the company, it sounds almost like a duck talking. And they said, let's run an ad involving a duck. And they ran it on the Fiesta Bowl on January 1st, I think maybe about 20 years ago.

Starting point is 00:29:40 And the ad took off. And they went from something like 20% name recognition to like 97% name recognition. And even Mrs. Trump was even in an ad. So now everybody knows the duck stock, and that just came from their advertising. But I'll give you one example when there was the awful earthquake in Japan a number of years ago. I remember when Dan Amos, the CEO, you know, everybody's sort of worried about what's going to happen and the payouts of this.

Starting point is 00:30:13 And I remember he said, look, this is what we plan for. You know, when we go to work on Monday morning at 9am, this is exactly what we plan for. So we got this. It's not a big deal. We can take care of that. And it really impressed me the leadership of the company. They ran into some difficulty just being in a low interest rate world. So they've made some changes about how they run their portfolios. But they've even noticed recently, I think the stock just hit a new all time high today. It's over $61, maybe $62 per share. So they're one of these, it's sort of like a blue blazer. It never goes out of style. It's always has a place in a gentleman's wardrobe. There's a few other names that stood out to me in the list, just when I was doing those rough valuation calculations, they just kind of popped out as potentially opportunistic. And I was kind of curious to get your thoughts on a few of them, just high level what the appeal is for you. The first one was Silgan Holdings, Inc, if I'm saying that correctly.

Starting point is 00:31:18 I hadn't heard of this stock before. It's coming up on our platform. and with some interesting numbers. Kind of curious to know a little bit more about it. Containers is what they do. Everything you see has got to be shipped, and they do everything with metal containers. They have a very, very strong market position. Boring stock, completely uninteresting and very profitable.

Starting point is 00:31:41 And I always find it interesting that there's so much commentary you can find about other stocks. And really nobody talks about this one very much at all, but wonderfully run company and just consistently turns out very impressive earnings. I don't think Wall Street bets may talk about it very much. Maybe they do, but it doesn't come up a lot. I like boring company, make something everybody needs. Very much a Peter Lynch kind of company.

Starting point is 00:32:10 This next company might fit that description as well, I'm not sure, but Science Applications International Corp, S-A-I-C. Talk to us a little bit about this one. Brand new to the portfolio. Cool company based not too far from me in Reston. And probably the best way to describe them is they're the Pentagon's IT help desk. They're tech support for the entire Pentagon. They also have civilian and things like aerospace and the intelligence community they work with as well.

Starting point is 00:32:43 Very strong connection. I mean, they're sort of just an outsourcing. They're the Pentagon dressed in corporate clothing. They do so much work. Things like getting all of the intelligence and IT structure behind a new Navy defense systems. That will all go through SAIC. And it will be several different companies working on the armament system. And SAIC sort of brings it all together.

Starting point is 00:33:13 The company was started by an interesting guy who was very much a pioneer. in the employee ownership company. And so they had a huge amount of the company was owned by the employees. And many people made a huge amount of money. Now, that changed a lot once they had their IPO. But again, it's one of those companies that isn't talked about a lot,

Starting point is 00:33:36 but very, very impressive. If you want something done, you can go to SAIC or pretty much nobody else. So if you have a big defense system, you want to get the IT architecture behind it, they're the ones you got to go to or they're sort of first on your list. Now, this next one I'm very curious about Reynolds Consumer Products, R-E-Y-N. And I'm curious about it mainly because it seems like the free cash flow really took a dive through COVID. And it sounds like this is added to your portfolio. Is there a turnaround of events that you expect for this company?

Starting point is 00:34:12 where's the bullishness coming from here? It's Reynolds wrap. It's hefty bags. It's not literally the solo cuts, but it's the part of it comes. I mean, they're in 95% of U.S. households. They just make, you know, stuff that make behind running a house. What I really like is they're the exclusive private label distributor for Amazon. Remarkable position they have there.

Starting point is 00:34:39 I love a lot of consumer staple stocks. So I do see a bright future for them, despite this stumbling during the COVID. I think that maybe gave us a bit of an opportunity to add them. Cool company. 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.

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Starting point is 00:38:30 16% financials, 16% information technology, 12% materials, 20% industrials. Again, I'm rounding 13% consumer staples, 4% consumer discretionary. If you go over, say, like, 20% in a certain sector, you said you were kind of agnostic to sector earlier, but I'm curious, there's a certain weight that I imagine you consider. You don't want to be 100% necessarily, maybe one thing. Would you think about changing the allocation if you were hitting a certain threat? I have to say, it's kind of fascinating hearing you say that because I've never calculated it for, I was actually impressed, it seemed pretty fairly well divided among the groups.

Starting point is 00:39:13 So there are certain companies I really like to add. For example, love Hershey's, Church and Dwight, these consumer staple stocks and Reynolds. I love those kinds of companies, very consistent. They're easy businesses to follow. You get a 10K, and you see pretty much what's going on. No, you know, bizarre embryonic industries or technologies, shaking things up. Other companies, I'm a big fan of medical device companies and medical devices, you know, Stryker, companies like that.

Starting point is 00:39:50 So I'm always worried about adding too many of those kinds of companies, but it's not an overwhelming urge. A lot of it I really just look for the best company and I'm going to say I'm surprised by it falling out that way. I would think the ones I don't have are the financials. Of course, have Affleck and the energy. Even energy is now it's a very small part of the S&P 500. It's probably about three or four percent. So that would come to maybe one name. But I know when there's a big day for energy on the market, you know, usually we're going to lag. If there's a bad day for energy, usually we're going to do well. I don't follow any rules as far as that. It's all bottom up and it's sort of worked out the way.

Starting point is 00:40:36 If it did get, you know, really slanted like 30% or more to one company, then I would probably consider. But up until now, it's just never been a foremost concern of mine. Well, I definitely wanted to save some time to move on from the buy list because you write consistently about the markets and the economy in general. I really wanted to get into some of that. So your latest report was talking a lot about jobs, mainly that the U.S. had created nearly 200,000 jobs, but it was well below expectation. How do we read into that exactly?

Starting point is 00:41:10 That is a good question. I don't know exactly. We came in less than half of expectations. Then earlier this week, we got the ADP report, which doubled expectations, more than doubled expectations. So we got this huge increase and also a huge beat and a huge miss. I think the economy is still growing. And I think the Federal Reserve is going to be focused on raising interest rates this year,

Starting point is 00:41:39 three times, perhaps four times this year. In fact, I think there's a good chance it will become four. rate increases. We're at a very bizarre point in the economy. I did a tweet today. Right now, the unemployment rate is lower today than it was at any point during the 1970s, the 1980s, and the 1990s during that entire period. But we get this odd thing where a lot of people, particularly people in that sort of late 50s, early 60s age group who maybe had planning on retiring in a few years, they're retiring right now. So we see at one end that workforce is getting smaller, so less people looking for work. In the younger age cohorts, it hasn't had a big shift among

Starting point is 00:42:29 those. We need to see more people in the workforce, but that's not as large as a lot of people assume. So we have this odd thing of increasing inflation, low interest rates, and low employment and lagging workforce participation. Of course, there's still COVID, so people are just plain nervous about going back to school. For a lot of families, childcare, that's a major issue. You can't somebody look after the kids so they can go. And then, you know, with remote learning and things like that,

Starting point is 00:43:03 at school, that plays into it. So all of these things are going on at the same time. I've never seen anything quite like this. So the jobs missed surprise me. just as much as anybody. We are seeing the increase in earnings as pay. Workers are getting more pay. But a lot of that's being eaten right back up by inflation. Inflation is particularly cruel on lower income people. It hits you at the gas tank. It hits you in milk and eggs and things like that. So a lot of the gains that people have, really workers have not seen anything like this

Starting point is 00:43:41 In decades where they've been on the upper hand, we saw the recent report this week, an all-time record number of Americans quit their jobs in November. There's something like 10 million jobs that help is wanted for, and we can't fill them all. So it's sort of all these cross currents going on in once. It's all from COVID and trying to get back to COVID. I don't think the unemployment benefits are such a huge variable, but I think that plays into it as well. So I really don't think I answered it all for saying that it's a difficult position where the economy is right now. And it's just being, of course, we don't know what will happen with the Omicron.

Starting point is 00:44:26 I'm in Washington and next week we're going to go to vaccine passports. So I don't know how or when this will all end. Now, the market, the week we're recording, which is this first week of January, is experienced somewhat of a tantrum again. And the U.S. tenure has been inching upward at 1.76% as of today, which is essentially pre-COVID numbers. It was back flirting with these numbers, you know, about a year ago. But this is where we were right before the big drop and yield. I'm kind of curious if you think this gain in rates maybe has to do with people expecting

Starting point is 00:45:07 a lack of liquidity and the Fed to actually raise rates over the next. year or two. Is that why we're seeing a dip here? And do you have any forecasts where we go? I think you're exactly right. And we saw this. I mean, you can see it happened this week when the Fed released the minutes from their last meeting. This was the meeting in mid-December. Now, if you remember at that meeting, when the Fed decided to ramp up its tapering. So it was going to pull back it's bond buying at a faster rate than they had originally planned. So when the minutes came out this week, the description of the debate among the Fed participants showed that there was a greater concern about the direction or the need to raise interest rates. That spooked the market. You can see,

Starting point is 00:45:58 it was right at 2 p.m. on Wednesday, everything changed in the market, started to pull back and had that sort of temper tantrum. I got to say, for me speaking, I wasn't particularly surprised. I thought the Fed has sort of had been suggesting that very strongly in their actions and in their speeches and comments. Perhaps it was just actually seeing it in the Fed minutes convinced in Wall Street investors that this was really going to happen. But that's why I think there's a good chance we're going to see maybe four rate heights next year. And here we are where the 10 year, the benchmark is at one in three quarters, and we're still getting six, seven percent inflation. We're going to get the CPI report next week. And I think the year over year rate of

Starting point is 00:46:47 inflation will be in excess of seven percent. So I assume that the market believes that this inflation will cool off at some point. That could be right. That could be. I haven't seen the evidence for it just yet. Would you say that that is the biggest risk to markets at the moment, as far as you can see? I mean, obviously there's unknowns out there. We don't know everything, especially with the Omicron stuff. But as far as investors who are wanting to put money to work right now, should they hesitate?

Starting point is 00:47:21 Should they be reluctant to put money into the markets at this time? It depends what you buy. But I don't think there's any hesitation for buying shares of Church and Dwight. I mean, it's baking soda and condoms. It's always going to be with us. So what you say, scariest known concerns would be inflation. I would say that's top of the line and any sort of economic weakness. Of course, there are the unknown ones. We don't know what those could be. But I would say I see no particular reason why investors should be afraid of investing in high quality stocks like you find in the ETF right now.

Starting point is 00:48:06 Yeah, I noticed the ETF was, I would say, defensive of sorts would be kind of a term that comes to mind. Is that intentional? I guess it sort of comes out that way. I wouldn't say intentional, but for the kind of companies I look at, it comes out that. I would say high quality defensive oriented portfolio. Now, the buy list of 25 stocks, obviously you don't fall in love with any of them.

Starting point is 00:48:29 Is there one in particular that you're very excited about, though? Is there one that you're like, I think might be the best opportunity of the bunch? Oh, boy. You know, it's funny because always the big winner of each year completely surprises me. It's like I never would have guessed that one. I have a soft spot in my heart for Miller Industries, which is by far the smallest company. I think it's Step-in, which mentioned before, it's something like six times larger, and that's the second smallest. And Miller makes towing and recovery equipment.

Starting point is 00:49:07 They very much, very close to a monopoly. They're not followed by any analyst. And last year, when we added them, they started very well for us, and then they had a very bad, I mean, they were down 10, 12 percent or something for the year. swimming against a pretty strong year. So I like, there's something I really like about this company. It's kind of an off the beaten path company. As I said, no analyst file it. So when you come out earnings, did they beat or they miss?

Starting point is 00:49:37 We can't say. And since it's so small, I wouldn't be surprised if it gets a big jump in the year at head. So that's the one that really has a soft spot for me. I think it's a cool company. The strategy somewhat brings to mind the management. magic formula by Joel Greenblatt, at least the rebalancing or lack thereof, you know, the infrequency of that. And I was actually surprised to hear when I asked you about it

Starting point is 00:50:02 that you didn't say, well, we back tested this thing 40 odd years and this is how it came out. And so this is why we have the conviction that we have. But it doesn't sound like that's quite the case. It sounds like it's a much more qualitative approach. Absolutely. And I think that that's a problem that investors have, it's not a about the numbers, it's about the story behind the numbers. It's not buying a low P.E. ratio. It's about getting a value stock. It's about look what makes the numbers go. Don't look at the numbers themselves. A lot of people, I've noticed my years in investing, a lot of people on Wall Street who are interested in investing, they are, I always get this backwards. I think they're right

Starting point is 00:50:46 side people. It's the very rational part of the brain. But you also sort of need that creative side of the brain to be able to look at what the companies do and what they address in a marketplace that you can't quite see on a balance sheet. And that's a key to investing that I've learned to appreciate over the years. One thing our listeners love to learn about are books that have really inspired or influenced the way that you invest. So I'm curious if there's some that you gift most to other people or one that kind of sit on your bookshelf is the most cherished books that really got you to where you are on the investing piece. To clarify, it could also be philosophical, any other,

Starting point is 00:51:31 it doesn't have to be an investing book. On the investing, I think something like one up on Wall Street by Peter Lynch probably had the most impact on me, just understanding what really works in the market and the right ways to think about investing. A lot of Warren Buffett's essays, is yearly shareholder letters, lots of great nuggets of wisdom in that. It doesn't tell you what to invest in, but it tells you how to think about the markets, how to think about investing. So I'd say those are sort of the two of the bedrocks of the industry of the financial book world. Fantastic. Well, Eddie, before I let you go, I want to make sure I give you the opportunity

Starting point is 00:52:14 to hand off to the audience where they can learn about you, where they can learn about the buy list, crossing wall. Street, any other resources you want to share? You can get my substacks, and that's CWS.S.substack.com. And I have a more general interest newsletter that goes out on Tuesday. That's free. And then if you want to get the premium one, that goes out. Very late Thursday night, we dated for Friday.

Starting point is 00:52:42 So cws.substack.com. And then there is the ETF, advisor shares. com backslash ETS, backslash CWS. If you just go to advisor shares, you can find CWS there. And that's a great webpage because it has all the information about the net asset value. And we have our customer service team there that can help you out. So anything about that, you always know exactly what's in the ETF. It's the same as what's on the buy list.

Starting point is 00:53:16 So you get that absolute transparency. see, what other thing about the ETF, we were the very first ETF to have a fulcrum fee, which basically means that if the fund does better, I get a little bonus comes to me. If the fund trails the benchmark, which is the S&B 500, then shareholders get a little savings. So that did exist in the open end phase, I think Fidelity and a bunch of fulcrum fees. but we were the very first one, ETF, to have the fulcum fee in that space. More have joined it in, but are a little fun. We were the first one to do it.

Starting point is 00:53:55 Very cool. Well, I've really enjoyed this, and I love your takes on Twitter, and this was a really fun discussion. So I hope we can do it again sometime soon. I'm really eager to maybe catch up a year from now and see how the virus has performed and catching up on the horse rate. Thank you very much for having me. All right, everybody.

Starting point is 00:54:14 That's all we had for you. week. Hey, listen, Eddie and I connected on Twitter originally. You can always find me there at Trey Lockerbie. And what was so cool was to compare the buy list to what a lot of billionaires are currently holding in their portfolio. And there were some crossover, which you can see on our TIP finance tool. Simply Google TIP finance, it'll pop right up. And with that, we will see you again next time. Thank you for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com.

Starting point is 00:54:53 This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP413: The "Buy" List for 2022 w/ Eddy Elfenbein

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