We Study Billionaires - The Investor’s Podcast Network - TIP418: Mastermind Q1 2022 w/ Hari Ramachandra and Tobias Carlisle

Starting point is 00:00:00 You're listening to TIP. I always look forward to the quarterly mastermind meeting, but this quarter, more than ever. I can't wait to hear what Hari and Toby say to my pick. It's something I've said multiple times on the show I would never, ever invest in. Toby is pitching a wonderful value stock, William Sonoma, and Horace is contemplating whether Coinbase is the right investment

Starting point is 00:00:22 for the Web 3 future. So without further ado, here's the Q1-2020 mastermind meeting. are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to The Investors Podcast. I'm your host, Dick Broderson. And as always, for a mastermind group, I'm here with Tobias Carlisle and Harry Ramachandra. So, Jens, how are you today? I'm really well. Good to see you, Harry. Good to see Stig. Happy new year to you guys and to everyone listening to the show.

Starting point is 00:01:10 Before we kick this off with the discussion, I just wanted to kick this episode off with a short story. And let's just call that story advice of the day. So the advice is do not catch a falling knife. I know what you might be thinking like, which horrible stock did Stig invest in since the last mastermind meeting. I actually haven't really bought any in view of stock since. But I did catch a falling knife and it was absolutely brutal. So I was cooking with my wife and chopping up onions. And for whatever reason, I dropped the knife on the floor.

Starting point is 00:01:42 And it was just a pure reflex. I caught it. So I don't know if that was good or bad news, but I have good reflexes apparently. But the bad news is that, well, I did catch a falling knife. And I cut into my ring finger and it got infected. So I'm calming off like an antibiotic treatment here over the last five days. So going into this meeting, I wanted to say the advice of the day is do not catch a falling knife. It's very, very painful.

Starting point is 00:02:06 With that said, Toby, I want to kick it over to you because your pick is a great candidate and it's not a falling knife. I'm pretty confident saying so. So why don't we start with you, Toby? You got those crazy cat-like reflexes stick. Right. I don't think you just grabbed it out of the air. It's all that spy training or whatever you did, James Bond.

Starting point is 00:02:26 Exactly. But not like in the movies because it actually hurt a lot in this case. Jason Bourne. Yes, exactly. My pick today is William Sonoma. They're the home furnishings retailer. They have a variety of brands besides William Sonoma. So, you know, they're West Elm, which is for the 30-somethings in Pottery Barn, Pottery Barn kids.

Starting point is 00:02:48 It was started up by Chuck Williams in California in 1956 in Sonoma, hence William Sonoma. And he was a big fan of food and cooking and wanted to import and sell French cookware. the States. And so I think I just was just doing a little bit of scuttle, but beforehand had a quick chat to my wife about what she thought William Sonoma was. And in her mind, it's still basically a French cookware kitchen kind of retailer. But they do have an expanded offering that includes furniture and tabletops and bars, outdoor furniture and so on. The pandemic forced them to close some stores. So they focused on their digital channel when that happened. And that has more than made up for the losses from those stores. So they're doing very well under these conditions

Starting point is 00:03:35 and it's probably they become more of a online retailer increasingly as we move forward. They've had this incredibly consistent growth at a top line basis for years and years. And they've run exceptionally well. They've got this great alignment between return and invested capital and executive compensation, which is one of the things that I really like to see. they're trading reasonably cheaply at the moment. EVEBIT is under nine. EVEEBIT does under eight and P.E ratio to the extent that anybody looks at that thinks about that anymore.

Starting point is 00:04:10 11-ish. So I think it's a fairly modest sort of multiple that you're paying for this thing. And then return on investor capital is about 20%, which is just great. 13% is the average for the S&P 500. So that's a material improvement over the S&P 500. it has been incredibly consistent for years and years and years. I like these simple picks that have just got great balance sheets, great cash flow generation, great margins, and where there's

Starting point is 00:04:39 alignment with the managers. And so this is like my Lockheed Martin pick from last time. They're just, they're reasonably safe, reasonably consistent, good cash flow generation, great alignment with the executive team. So that's my pick in, you know, in really simple terms. I'm ready for you guys to beat it up now. I definitely don't want to beat it up. I can already say that I need to ask you a forgiveness whenever you hear what my pick is, Toby.

Starting point is 00:05:06 So I better make good friends with you. I absolutely love this pick, and it's a very Toby type of pick, reasonably price. We should also keep in mind that whenever it's price that call it 10 times free caslow or whatnot, you're also seeing free caslow doubling. There are some things that to me

Starting point is 00:05:24 didn't really make a lot of sense in a way, but in a good way. If I can put it like that, whenever I've seen how much it's grown. Before the pandemic and until now, like so much more now comes from e-commerce, which is, of course, not completely surprising, giving what happened, but we're talking about like 70%. I saw expansion on gross profit, always fantastic to see. And for this type of industry, I was a bit surprised. Whenever I dig a bit more into the numbers, like the networking capital, more or less the same. Good to see. Capix, more or less the same. And not just from the last past year, but over the last eight years. Plus, you know, the operating caslow have gone from, call it 500 in 2018,

Starting point is 00:06:07 586, 2019, and training 12 months is like 1,300. So I'm like, looks absolutely amazing. I don't really have any kind of major concerns. Probably should have. Let me throw it over to you, Hardy, what you'd take on the pick. No, as you said, Stig, I think interesting pick, Toby and a classic Toby pick. Question, I have, though, is Toby. How do you see this? Is it something that you think of as a long-term buy and hold,

Starting point is 00:06:36 or is it a value play wherein you think it is selling it a discount right now, and then you are going to sell out of it in a year or two? Yeah, so I always try to find things where there's basically there's two ways for the pick to work out. You can either, you generate pretty good returns by holding onto it just because the assumptions embedded in the stock price are sufficiently low that whatever happens to the business, you're still going to do sort of fairly well. But then there's also this possibility if the business does quite well, then I think it's trading cheaply for something that is reasonably high quality. I'm guessing that the reason is that they've had this quite substantial ramp over the

Starting point is 00:07:18 last year or so, and the market is just having to digest a little bit the bigger size. And it's come back a little bit over the last six months or so. I'm guessing that if you look at it sort of on its historical metrics, it's looking expensive on its historical valuation ratios, it's price multiples because it's been cheap for quite a long. I think it's been a reasonably good value for a reasonably long period of time. And it's been quite a good business through that time. I think that either you get that mean reversion probably closer to where it's worth, which you know, it might be, it might be worth 30 to 50% more than here, or you just clip the coupon, keep the get the tickets on the way through where it's got a pretty good yield and the business

Starting point is 00:08:00 should continue to grow. I guess the question is if we sort of normalize and we go back to a world where folks aren't shopping online as much, will it hurt them to have shut down those stores? I sort of feel like that was the trend anyway before the pandemic. There was a shift to online. There's other other companies have made that shift successfully target and so on. Best Buy, lots of those companies have, the retailers were struggling well before the pandemic and the pandemic only accelerated that sort of, there's a big differential between the winners and the losers. There are some who figured out how to get online and there were some who just couldn't do it. And the ones who couldn't do it have essentially gone away. And the ones who figured it out

Starting point is 00:08:37 have recovered and done quite well. And I put William Sonoma in that latter category that and the market has recognized, and so you can see there's been a very good run at the stock price. From my perspective, I don't really care what the stock price has done historically. I'm only looking at it on its current figures and what I think it can do in the future. I think it'll muddle along and I think it'll generate reasonably good returns if they can sustain this return and invested capital. And I think that they're incentivized to do so because they do have that tight alignment between return and invested capital and executive compensation, which is one of my favorite things to see. So they'll continue to generate that supernormal return on invested capital. It's still a great

Starting point is 00:09:15 brand. Everybody, it's a very popular brand here. I asked my wife if we were to get rid of our furniture and re-buy, would we go and look at Williams and Somers, like a lot of the standard stuff that you would buy for the house would be automatically bought from that. So it's still front of mind for folks like us. So I don't think it's a pick that will make you rich, but I think that it's a pick that will keep you rich. And it's kind of, that's the sort of stuff that I look for these days. Yeah. I'm also curious, how are they affected by all the supply chain issues? And their business model essentially is going through a transformation in the sense that, as you said, there were more brick and mortar stores. Now there are two-thirds of their sales, I believe,

Starting point is 00:09:56 came from online. So now they're on the same playing field as, say, Amazon's of the world. So do you see any risks there? And do you see any advantages they have over? somebody like Amazon or other Wayfair and other online retailers. Yeah, that's an existential risk. I guess it hasn't happened yet. I still think that if you're looking for a particular level of quality, it would still be William Sonoma as the first stop for that. But there's always a risk that Amazon or somebody enters that space with.

Starting point is 00:10:30 Maybe Amazon hosts a slightly different brand, maybe starts pushing that quite hard. I still think that the size of the goods makes it difficult to enter into that that way. I think that William Sonoma has an advantage by occupying the mine share and in physical distribution of those things for the moment. But you're right, that's a risk. Supply chain issue, I think that is impacting them, but I don't think that it's not unique to them.

Starting point is 00:10:54 So it's not a risk that I think is specific to them. No, I don't think that's specific to them either. I pull up here that 65% of the company's selections imported from Asia and Europe. So I'm sure they have their own issues. And that's also one of the reasons why I'm just so surprised whenever you track the gross margins and the operating profits. In 12 months, you have 43% and 16.6 correspondingly. And I'm like, how is that possible for that type of business?

Starting point is 00:11:21 Why is Amazon not eating their lunch? And this is probably my lack of understanding of the business. Whenever I thought about it or whenever you send an email, like, that's what you're going to talk about. I was thinking, well, are we going to talk about it? and another bath, bath, beyond until I pulled up the numbers. I mean, what's not to like about it, but all that free cash flow they're doing, small yield, dividend yield, and like buying back shares and decent chunks,

Starting point is 00:11:47 seems to be very well managed from a capital allocation basis. I really wish I had something not as nice to say about it, but I really don't. And so whenever you look at something like this, Toby, and how I alluded at it before in terms of like how you would hold it, Is this in the sort of like in a basket approach? Like you have a lot of these type with a P of call it 10 or Freecastle of 10, 12. You would then hold and then take you from there. Like, and then automatically replaced.

Starting point is 00:12:18 Is that sort of like how you're seeing this? When we wrote quantitative value, which came out in 2012, we used all of these analyses that I regarded and Wes regarded as value, you know, fundamental analysis of a balance sheet, fundamental analysis of a business and cash flow conversion, all those sort of things. In 2013, AQR wrote a paper called Quality Minus Junk, where they took a whole lot of those factors, and they decided that were quality factors rather than value factors, which is, that's fine. So I've always said it's hard to separate out quality from value, in my opinion. I don't think

Starting point is 00:12:49 that anything that's too junkie can be too high can be value, unless your definition of value is quite literally like a low price to book, which is the value factor. So I'm always trying to to maximize. I think of it as just trying to maximize. We're trying to buy the fattest gross margins, the best balance sheet, best cash flows for as little as we possibly can. It's just that the world now defines some of those things as quality and some of those things as value. But in my mind, it's still value. And I think if you, you know, if you look, obviously, I'm a big fan of Buffett's and I've tried to, you know, mimic what Buffett does in his approach, which is essentially as I've just described. And so it's no surprise then that that's what the point.

Starting point is 00:13:31 portfolio looks like it's always going to be reasonably good value for pretty good company. That's sort of how I'm trying to put it together. And Toby, that when you were talking about Buffett, I was looking at their market cap. It is $11 billion. Surprisingly small run. Yeah. And it might be a good addition for Berkshire's portfolio of wholly one companies. There is a lot of synergy between them and the rest of the furniture and cookware business

Starting point is 00:13:59 that Workshare already has? Yeah, I don't want to let it go just yet. It's at 150 bucks. I think, you know, 260 maybe. That's about 50% plus high. I think that's the kind of number that you'd want to get for something like this. So I don't, I think that where it is now, there's a pretty fat margin of safety in this. There's a margin of safety in the business, in the balance sheet, in the price.

Starting point is 00:14:23 I don't think that, you know, it's not going to 10x from here in the short term. but if you hold it for long enough and it muddles through, I think it's going to do a sort of mid-teens number for five or ten years, which is kind of my bogey. 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 00:18:48 Well, I think that's a good segue perhaps, Toby, to my pick, because that's also not going to do 10x. anytime soon. Let me see if I can ease into this. I might be insulting the value investing community, the Bitcoin community, and the gold community with my pick. So just hit me up on email

Starting point is 00:19:08 if I forget to insult anyone as I'm going through this. You'll insult them personally. No, no, I don't think it will go as far as that. But it's really official. I'm really happy we started with Toby bringing up a traditional value investing pick because my pick is not a traditional value investing pick. My pick for today is gold. And for those

Starting point is 00:19:33 who have listened to the podcast for years and know how we have discussed Warren Buffett and talked about gold in the past, we've traditionally always thought about this as a terrible investment. Right now, we're doing the classic episodes where we're looking back at some of the things we've said and some of the books we read in the past. And one book we read back in 2015 was, about what was Tony Robbins book, Money Master the Game, and how we talked to Red Delio and about investing in gold. And I listened to this actually yesterday by coincidence, and I heard myself saying, it's stupid to buy gold. Why would anyone do that? So here I am a few days later and say, well, why don't not invest in gold? So what's the chain of pace here?

Starting point is 00:20:14 So I had the pleasure of reading Redelius's book, The Changing World Order, which is just a fabulous book. And one of the reasons why I really like it is, because he takes so many lessons from history that I think we can learn from here today. Because it really makes you humble to think of the big cycles and how we as investors are ignorant to it because this time is not different. It's actually the same cycles we see over and over again, but these cycles are just 50 to 75 years. Some cycles go even longer than that. So we don't have too much experience with them. We might think back at what happened in 2020. We might think back out what happened during the great financial crisis or the dot-com. So that's not how Redalia is looking at it.

Starting point is 00:20:59 And I found it was really fascinating how we talked about how many times we've changed the monetary system. Actually, if we go back just to the 40s, we had three different monetary systems. We tend to think that everything would stay the same and we're surprised whenever it's not the case. So it changed in 1944 with bread and wood. You can think of this as simplistically as from one type gold standard to another. Then it changed again in 1971, whenever Nixon took the world off the gold standard. And the changes typically takes from a few months, up to a few years, depending on how fast governments react. But everyone is always surprised whenever it happens. So you have this cycle where you have three types of money. You have type one that's hard money, so you can

Starting point is 00:21:45 think of this as metal coins if you want or gold. Then we have type two claims on hard money, like say, for instance, banknotes. That's what we have before 19-171, where you could actually convert it to gold at a fixed price. Then it transitioned into fiat money. That system blows up, and then we'll go back to hard money again. One stat that really resonated with me was that since the year 1700, we had roughly 750 currencies, but only 20% of them remain today. And they've all been significantly devalued. And the US dollar would be one example, not that it's from 1700. But just as one example, it's been significantly devalued since. So why does this happen and will it happen again?

Starting point is 00:22:28 That's the rhetorical question I'm going to ask. I don't believe that world's governments are evil, or at least most or not. But I do believe that governments react to incentives. And so what do you do in a democracy if you want to be elected or let's even say that you're a dictator and you want to stay in power? Well, first, you would probably spend money directly to increase your popularity. And you can do that by lowering taxes or subsidizing the population one way or the other. Balancing the budget means that you would basically have to do something that's unpopular.

Starting point is 00:23:04 Doing something that's unpopular short term is not a good strategy to be in power. So you have politicians and institutions that have an incentive to print money. And we've seen this in all countries and what Redali refers to as, as empires that leads to this circle of hard money, claims on hard money, and then fiat currency, then it starts all over, because these fiat currencies eventually blow up. So if we just take the U.S., it might be a reference point here. It's not a left and right thing. I know it's very often made out to that. If we look at the numbers, the last four administrations have all run significantly deficits. Two left, two right, if I might add. And that was just the last time

Starting point is 00:23:44 since the budget balanced. The U.S. hasn't been debt-free since 1835. That was the time that the president was Andrew Jackson, you know, the guy you have on the $20 bill. And so this is not me saying that democracy isn't great. Like Churchill said, democracy is the worst form of government, except for all the others that have been tried. So I want to go into this by saying the democracy is precious

Starting point is 00:24:09 and it's one of the most important thing we have. But it also has flaws, the way it's set up today. and the monetary system has and have worldwide suffered from politician wanted to be elected or reelected. So what do I mean by that? Well, I'm not saying that we will see a reset on the monetary system anytime soon. What I am saying is that it will eventually happen. I don't know if it's going to be tomorrow or 10 years or 50 years. I don't think necessarily it's going to take 50 years. I definitely don't think it's going to happen tomorrow. But it will eventually happen, it always have been. Just look at the past 80 years and what has happened. since then. So whenever we do have this quote-unquote reset, does it mean that we're going to go

Starting point is 00:24:49 back on the gold standard? I don't necessarily think it well. I mean, it is one of many possibilities that it will, but I don't necessarily say that's the case. That's not my reason for investing in gold. For this smaller basket, we can always talk about sizing, but I've decided to allocate a very small portion of gold. So I spoke with my friend David Stein here the other day. We had him on the show, episode 216 and 384. He's the host of Money for the rest of us, and he digged a bit into the different asset classes and how they're done during inflationary periods. And one thing I probably should preface this is saying that we do see inflation, just we're just coming off like a 7% print here. And I also want to say that we've experienced

Starting point is 00:25:34 twice over the past century to have two consecutive years where there was a double-digit deficit. Well, I should actually say three times. The first one was during World War I, the next one was World War II, and then now. So, and just from September 19 to September 21, we've added $6 trillion in M2 money supply or close to 25% of the U.S. economy. What he's been looking at, what this research perverse shows is that if we look back to 1926, we had eight different inflationary regimes taking up around 19% of the time. And the finding was, quite interesting. If we look at equities in those inflationary times, and equities had a negative real return of minus 7%, and a 10% real return whenever it was not. Over the time period, the real return was 7%. Commodities, on the other hand, netted 41% in times of inflation, but minus 1% in non-inflation. And if you look at it just across, it's 3% in real return. So I'm not saying that you should not hold equities. That's not my point of saying this at all. I'm not saying that the day the markets are today, there's necessarily 7% real negative

Starting point is 00:26:46 real return. Personally, just so you know where I'm coming from, I hold two-thirds of my investor portfolio right now in equities, even though I do plan to perhaps change some of that a bit. But I do think it is prudent to diversify into other asset classes. Whenever we do see this pattern emerge once again, it might make sense to have something of a harder currency. So I wanted to talk a bit about like my own experience buying gold. But before we do that, because I do feel I talked a bit too long here. I want to throw it over to Harry and Toby if you have any thoughts about gold as an investment. I guess the question is really, you tell me if you want to answer these now at the end stick,

Starting point is 00:27:25 but I have three questions. One of them is, how do you hold it? Are you going to hold through an ETF or are you going to actually go and buy the ingots or whatever and stick them in it safe? Because the, I would feel it as so. I've seen this argument a few times that Bitcoin. is digital gold. And so Bitcoin is taking some of the attention away from gold, which is why people have been, which is why gold sort of hasn't really done much in the near term in the last

Starting point is 00:27:49 whatever it is, 10 or so years. I always thought it was a funny thing because there are circumstances where Bitcoin won't work and gold will. So if you get like an electromagnetic pulse or something like that, or we get a big solar flare and it knocks out all of the computers and the communication systems, Bitcoin's not going to be very helpful in that scenario, whereas physical gold in your safe may be particularly helpful in that scenario. So I guess gold is a little bit like my argument for William Sonoma. It's like it's not really going to make you rich, but probably keep your rich over a very long term because you've got no counterparty risk in an electromagnetic pulse isn't going to take it out. But then, you know, if it's not like a catastrophic thing, the other idea is you just,

Starting point is 00:28:28 you know, it's like an investment play and you think it's cheap and you think it could run up in the short term. then I wonder if you, you know, why not then execute it through equities, which, you know, gold miners, I've said this a few times that I look, I think the gold miners look pretty good at the moment. I hold some gold miners because they've all got religion because they haven't been able to raise any capital. So they've got capital allocation under control. They've been quite profitable over the last five or so years, even with gold price doing nothing. And if you're in the equities, you get a little bit more leverage against movements in gold. So if gold runs up, the equities tend to run up even more. I guess it's like three questions. I don't know if you want to answer them now or punt until the end. Toby, I'll be happy to answer those questions. Just make sure to reel me back in if I go off a tangent. So again, perhaps a bit too inspired by the changing world order of this amazing book by Redaleo. I do think that there's something about having it simply due to we had stock exchanges

Starting point is 00:29:23 being closed for periods of time. We've seen the financial system freeze just recently as in the great financial crisis, actually. But it is something that I think about, I do see why it's a more leveraged bet. I don't think there's anything wrong with buying gold miners, like even Berkshire Hallaway. They had a very small position. They're small. They're small.

Starting point is 00:29:38 Yeah, I think they only held it for a quarter or two. I do want to say for the record, though, now that we do mention Brooks Halloway and Warren Buffett, as much as Warren Buffett talked about gold, it used to own a third of all mined silver. I think it was back in the late 90s. It wasn't required to be disclosed actually in the findings because it was too small of a position compared to what else they were invested in. Anyways, even more above it can see a reason to invest in that. So to answer your questions, and if we look back at 1900,

Starting point is 00:30:09 I don't want to give everyone a history list. I'm saying this, but I can hear it almost sounds like that. Imagine that you invested 10% of your portfolio in 10 different stock index, so 100% in total, in the 10 most promising countries to be the future empire. You would be invested in probably Russia, Germany, Japan, but seven out of ten of those countries, the equity markets all blew up completely, not just close, but blew up zero value. Three countries went through that period and unscated, but with a devalued currency, there was the US, there was UK, and Australia.

Starting point is 00:30:49 And so whenever we talk about, well, what has the S&P 500 done or real returns of 7% or whatever it is, there's a survivor bias there. It's just very important to keep in mind. Whenever we use US data as this is what's going to happen, it's like, no, this is what happened in the most powerful and prosperous country where things went well. That's not what happened to the rest of the world, which again, it's not my way of saying not wholly equity. I think if you asked me whenever we started this, the podcast, I'll probably say 100% equity. That's completely fine. Today, I do think slightly different about this. The vast majority in Inequity, yes, but not all of it. So I'm not completely sure if I answer your question. I think you had

Starting point is 00:31:27 one more, which was like ETF also. I think that goes back to the thing about gold miners also. It's just a simple question to have something that is caught off for the financial system. And it's not a lot. I just want to say for the record. That's not where I would put 20% of my portfolio or whatnot. That's not my partner ball. This were a great point. So is it fair to summarize your argument that you're looking at gold as an insurance against tail risk rather than as an investment, and hence the position sizing. Yes. And I think you bring up a great part, Harry, because one of the criticism, and I was beating that drum for many years, and I guess I still am, is saying that goal is not an investment.

Starting point is 00:32:07 I can't discount the cash flows. It's true, because after 10 years, you would still just have that break of gold, whatever it is. Gold is money. It's not an investment. So yes, it's not going to do 10x unless we see some sort of a gold standard again anytime soon. That's not the point. It's a worst-case scenario basket insurance. Yeah, so thank you for pointing that out. I should probably have left with that. No, I think that's a good point stick.

Starting point is 00:32:32 But one concern I have with goal is that it's like you win the game, but they change the rules, and then you don't win. And that's what happened in, I believe, in 1930s when they confiscated all the gold. So you might do everything to protect yourself. only to find out that the government just takes it away. So is it really insurance against tail risk? It's one question that I would like you to address. Fantastic question. So Roosevelt confiscated gold in 1933, and it actually took decades before it was like set completely free and also commercial banks and even the regulations we have today for how that's calculated

Starting point is 00:33:10 on the balance sheet. It isn't really attractive for banks to to hold. So it also really comes back to how are you going to store it. We've had a few people on the show here talking about gold, and they always talk about, like, don't put it in the banks, well, the way the listation is, it could be confiscated. Typically, they would say Switzerland or Singapore, due to the, for historical reasons and due to the dependence of the countries. Then you have other people who would say, dig a hole in the ground, or like, put it somewhere where no one is going to find it. And it is also something that I had to think about, which I also think was one of Toby's questions. How would I store it? Like, it's not going to be like ETF. You know, it's easy to store. It's all digital.

Starting point is 00:33:51 But then if you're caught up for the financial system, it's slightly different. Actually, I'll be trying to answer another question first in terms of goals role. If we do see a reset, is this going to be a goal standard? I don't think it's going to be necessarily the case, even though it is one of the main possibilities. I definitely do not think it's going to be a Bitcoin standard, which is sort of like a different topic. I'll be happy to go into it if we have time. But would it make sense. I think some people would argue why make sense to go to some sort of gold standard, again, because we had that before. If you see who hold the goal today, you could also see that, say, those countries probably would be, would like that better

Starting point is 00:34:31 because they actually do own it and they feel like probably have a better understanding of it than something like a cryptocurrency. Let me just give you some. number. So the US have disclosed around 8,000 tons of gold. We've slightly more in Europe, but like it's spread across many different countries. It's primarily in Germany, France and Italy. No one really knows how much gold China has, except for, I guess, China, but they are the biggest producer of gold themselves, and the government is buying all of that, and they're buying all that they can find other than that. So they probably have the second biggest portion of gold next after the US. If we do see this reset, I don't know if it's going to happen. Again, it's a, it's a

Starting point is 00:35:11 worst case scenario type of thing. But if money or when money is going to be hard whenever that's going to be, I do see gold as one of many potential scenarios. So what to do in terms of storage? I definitely don't believe that I would have in my own home and I don't. And also it's a very small amount. So I do have it placed safely somewhere else. And we also have different relations. I'm based in Denmark as some of you might know. So we have different relations. here. And even if you put it in a vault in the Danish bank, they can't come and like take it the same way. So there are different reasons why I see this differently, because you of course also can run into the issue is if that is in a vault somewhere, how are you going to get it,

Starting point is 00:35:51 different provisions, can they just pay your in fiat currencies? There's a bunch of different things in terms of storage. One thing that I do think that this argument for gold would be listened to very differently depending on where you're from and what your background is. I get very different responses whenever I talk about gold or Bitcoin for that matter, depending on where people are from. So born and raised in Denmark, people think it's this stupid idea they ever heard about because stable governments, low inflation, like, it doesn't make any sense for anyone. Even our central bank, you know, we have very little gold net stored in England.

Starting point is 00:36:26 Like, we don't even want to touch it. People would think you're crazy if you would buy something like that. I had the pleasure of living two years in Asia five, seven years ago, and people like, yeah, we get that. Don't invest in equities. That's so risky, invest in gold. It had a very different perception of what is safe and what you can trust. Gold that's tangible.

Starting point is 00:36:47 They've experienced inflation multiple times. Yeah, we get that. We understand why that's the case. I wanted to transition and talk a bit more about my experience buying gold simply because I just have to tell you guys. Because for me, someone like me who's a very intangible person who always thought he would be buying shares or his brokerage accounts and never think about anything tangible, it was a fun experience. So I've gone from knowing nothing to know a little more than nothing. It has been an adventure that was almost like whenever I found stocks the first time.

Starting point is 00:37:17 It was really fun to dive into. I want to say, like, if you want to own gold, you have to make it clear to yourself why you own it. It can't be quite daunting to get started on the process. and you would probably find someone who's going to sell you like a collection of whatever. But if you want to store this as a wealth for you, as a small part of your portfolio, you probably want to look into unbranded bullion bars. So the first thing I want to say is that gold are generally a commodity, but even so you have branded gold bars, which I never thought I thought gold was gold.

Starting point is 00:37:51 So you even have more expensive type of gold that still, if you melt it down, is worth the same, but comes from a limited series, or there's a producer who doesn't make them anymore, or whatever it is. So don't go that route. Go for the raw gold. The lower the quantity you buy, the higher the premium to the spot. So everyone pays a premium to the spot price. It's simply to cover the cost of the producer and for the dealer.

Starting point is 00:38:17 So if you buy one ounce coins, which is the most popular way of buying gold, you would typically paying like 5 to 8% premium. It really depends on the country. you're from, though. Whereas if you buy like a kilo bar, which is 2.2 pounds, you would pay around 2% for that. There's a lot of costs going into making smaller pieces of gold. So also, think of mind, like I talk about bars. I'm not talking about the 400-ounce bars. That's 12.5 kilos that you see in the movies. They're going to cost you 750,000 plus change, plus a premium. So that's not really what I'm talking about. You can have bars that's like one gram or like one ounce. So I just want to

Starting point is 00:38:58 clarify that if it sounds like I'm too much of a high roller, which I'm definitely not. And so just keep in mind, it's pretty efficient. I found a deal here in Denmark that I used. It's called Tavix because it was just the cheapest option I could find, not necessarily because there had any other reason to do that. You can't go internationally and find like a cheaper price. But what I quickly found, at least in my case, is that all the duties, insurance, shipping and all that. Because it's such an efficient market, it doesn't make any sense. Plus, there might be some type of things you haven't seen. So to me, it was very clear, Radar the Gates.

Starting point is 00:39:31 I'll probably buy it in that country where I reside. I think it's a great idea. It's like a wealth preservation idea. It sort of answers all those questions that I had about. Well, I guess one question I had, just as a, you know, for interest, it's not really a critique. It's just, you know, there's this idea that Bitcoin has stolen some of gold's thunder because it's digital gold and it's, and as a result, gold perhaps hasn't participated as much

Starting point is 00:39:58 recently as it might have, whereas Bitcoin's had this extraordinary run. What do you think about the prospects for gold and Bitcoin, you know, from here on out? Do you think that that is true that Bitcoin sort of just stole a bit more popular imagination over gold? And then I guess that the follow-on is just, you know, there are scenarios where gold protects you and Bitcoin doesn't. So I know you've got a little bit of both that sort of makes sense. I do own Bitcoin and significantly more Bitcoin than gold. I do think that the upside of Bitcoin is so much higher. I also do think that the downside is going to be different.

Starting point is 00:40:33 We're going to talk a bit more about the regulation piece whenever we get to Harwich Pick. If I can just do that briefly, I don't see a lot of problems with regulation whenever it comes to gold compared to Bitcoin. That's not the same as saying if, you know what, it's the fan. there won't be any kind of issues with gold. But I think compared to how people perceive Bitcoin, I think it would be very, very different. Then you ask this very humble question in terms of what's the future prospect of gold and Bitcoin. That's a big question to answer.

Starting point is 00:41:05 I think that would probably come down to what I see like an asymmetric bet. I don't necessarily see, well, I do see Bitcoin a bit as a risk, but I do think that gold has probably a bigger component with that. Yeah, just the prospects for it and that I think that they protect you in different scenarios. If there is some sort of communications breakdown, I don't know how well Bitcoin will go, but having some gold in your fault. That strategies work for a really, really long period of time through history. It's like thousands of years, maybe more than that, many thousands of years. Bitcoin's a little bit untested in that scenario around.

Starting point is 00:41:39 And can I ask you, and I know we also have to get to Harri's pick here, but can I ask you, Toby, for you, like as a hardcore value investor, a better disciple of Buffett and Munger perhaps than I am, would you consider holding physical gold? Is that too far enough a thought for you? No, not at all. I'm as much ram, deep value as I am. Buffett's sort of more franchise value somewhere in between those two guys. Yeah, I could see that scenario. I don't hold any at the moment because I have all of my money is in the two funds that I run deep and Zieg for anybody listening to home. I've just got everything in those for the foreseeable future because I think you need to eat your own cooking. But

Starting point is 00:42:16 Yeah, I think that there would be a point where in a wealth preservation type scenario, I'd be diversifying into physical gold. 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.

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Starting point is 00:45:49 Yeah, I think this session is going to be different. We both are going off the rails, but I think it's a good segue though, from gold to my Bitcoin base. And the way I see this is, whether it's gold or Bitcoin, I think they have their source in the libertarian mindset,

Starting point is 00:46:07 a deep distrust in central authority. distrust in custodians and trying to find a way where we can insulate ourselves from authorities controlling our fate. I think that's what gold was about all the time. I think Bitcoin was born out of that. However, the pick I have is actually a business, which is Coinbase. And Coinbase is a leading cryptocurrency exchange. And it has positioned itself as a reliable on-ramp into the cryptocurrency space. So for people who are not familiar with exchanges, traditionally exchanges fulfill the role of a marketplace,

Starting point is 00:46:49 but Coinbase does more than that. It's a trading ecosystem, asset custodian, and as well as a broker. And broker is what most of us might know them for. One of the things that works in their favor is obviously the network effects because exchanges are networks. So being one of the first-movers, they have that first more advantage.

Starting point is 00:47:12 And the second thing is their cryptocurrency custodianhip is actually a key part of their business model. And in fact, they have around, they had around 200 billion in the first quarter of 2021 when I last looked in terms client-owned cryptocurrency, which is around 11 or 12% of the outstanding market capitalization of all the cryptocurrencies. And inside of this industry where regulation is still enforced. very spotty, people can't trust all the exchanges or all the vendors. Coinbase has positioned itself as a safe and fully compliant exchange, and hence they're able to charge a premium. And one of the things I see Coinbase as is more about folks who are making the shovel during the gold rush than actually the folks are looking for gold.

Starting point is 00:48:04 And in fact, it is kind of a well-known myth or legend that the makers of the shovels made more money than the ones looking for gold. But more than that, one of the things about Coinbase is it's not about Bitcoin. In fact, 40% of Coinbase total trading volume was other than Ethereum and Bitcoin. So it supports a lot of different cryptocurrency. But that's their current business model. The way I see Coinbase is as AWS or a infrastructure for, Web 3.0 rather than just a exchange for Bitcoin or any other cryptocurrency. That is their current

Starting point is 00:48:48 business model where they derive a lot of their revenue from, but they're rapidly expanding into other areas and that has always been their vision, their CEO, Brian Armstrong, which have been following for a while, has been looking into expanding into adjacent opportunities. In fact, they've already started collateralized cryptocurrency loans, crypto debit cards, blockchain infrastructure, data analysis for services. They are going to be starting the NFD marketplace. They recently also announced a partnership with Facebook to build a digital wallet so that people can send money internationally because Facebook couldn't get Libra off the ground,

Starting point is 00:49:29 but now they're partnering with Coinbase. And they also have partnership with NFL that was announced. And then they have Coinbase ventures that has multiple investments in cutting-edge technologies. In fact, like Earn.com was one of those acquisitions through Coinbase ventures. In fact, Balajushinvason, who's a famous angel investor, became CTO of Coinbase for a while. That's the optionality you are looking at, which is not reflected in the price today. In fact, if you look at their valuations, price to sales, they're selling at a much deep discount than other similar high-growth or high-flying companies, which

Starting point is 00:50:09 already have taken a fall, but even after that fall, companies like DocuSign, Zoom, Snowflake, they sell at a much higher price to sales, even though they have negative EPS, whereas Coinbase has a healthy $11.75 cents EPS, good cash flow of around $10 billion, whereas Snowflake has $4 million in cash flow and DocuSin has $400 million in cash flow. And their price to earning is, is close to 20, which is kind of a standard run-of-the-mill P for most tech companies. In fact, Google is 27. There are other companies who are in hundreds. Tesla is 358, for example. And if you look at their growth, and it's granted that they have been public for a short while, but according to their S3, they started with a half a billion in revenue, and today they're

Starting point is 00:51:03 close to $6 billion in revenue in last two years. They're growing at a quite fast pay. is no guarantees, but based on the vision the CEO has his commitment and also the areas that they're trying to expand into and also their first mover advantage. I believe this is a company to watch. I do believe that they're fairly valued for their current business model today. But what you're getting for free is the optionality. But again, that's the uncertainty. We don't know whether that will pan out. And that's the reason they're price. I think they took a fall. The other uncertainty is obviously regulation risks. And one of the things that I want to highlight is the reason I was watching them and not pitching them so far is I wanted

Starting point is 00:51:52 that six months after the IPO to expire and see how the stock sells off. Obviously it has. Insiders will sell. A lot of employees will cash out. So it has fallen from its previous peak quite a bit. it's still fairly valued. I wouldn't say it is cheap or in deep value territory from their current business model perspective. But what I'm looking at is their future and some of the areas that they can expand into. This is more like a five to 10 year term bet, not a short term bet. And if crypto, I wouldn't even call it crypto, I would call it Web 3.0.

Starting point is 00:52:32 It's not about block Bitcoin or any Ethereum. it's about Web 3.0, which is Metaverse is another popular term used nowadays. Essentially, a distributed computing model, a distributed ledger model, TAPs, which is distributed applications, and Dow, which is distributed autonomous organizations. These are the future trends, and Coinbase is a safe way to bet on them while you have some downside protection with their existing business model. That's my thesis for Coinbase. And with that, I am ready to be founded by both of you. I got to say, I was ready to really hate this pick.

Starting point is 00:53:14 But while you're talking, I was just having a look at the financials. It's not nearly as expensive as I thought it was going to be. It's actually, it's a great-looking business with extraordinary growth rates. And then, as you point out, it's expensive to fairly valued, but it's not out of the world. I mean, it's fairly valued, I think is right. I shouldn't have said expensive. I think it's fairly valued. It's not egregiously valid. It's for what you're getting, I think it's probably, as you say, close to fair value. One of those things that if you had a very

Starting point is 00:53:43 long-term view and you're prepared to buy it a little bit cheaper, if it ever got a little bit cheaper, then you could probably put someone on and buy it as you went along because it looks like, what's the competition like in a space like this, Harry? If you become the exchange, do you just sort of run away with the whole market? And is that likely to happen for something like this? That's a very good question, Toby. And in case, of Coinbase, they're actually not the leading exchange. There is Binance and others. Coinbase would rank third or fourth. There, I think the way this space is evolving is, Coinbase is focusing more on institutional investors, US-centric retail investors, whereas Binance has focused on another

Starting point is 00:54:25 set of customers, basically. So each one of them are carving out their own space. So, but you're right, eventually you'll end up with a couple of them or not more than five or six of them who can operate at scale. That might be one outcome eventually. But right now, it is still the wildest. So there are a lot of players as of now. The growth rate is extraordinary. It's kind of an eye-popping rate of growth. It's amazing. I'm a customer of Coinbase. And so far, very happy with that. And you're right. Just looking at it, I was actually a bit surprised too, just like Toby, whenever I saw it, I thought like the multiples would probably be outrageous, like 80 or whatever. I wasn't even sure if the company made any money, but they do it.

Starting point is 00:55:11 Like gross margins, like high 80s, trailing 12 months, operating margin 40%. Like that's pretty decent for a company doing like 10x over the past two years on the top line. Most of the trading volume, 71% that's institutional, but they actually make the money on retail clients, at least for now. I don't think that Coinbase has a wide mode, but I do think that perhaps what goes a little under the radar is how compliant they are with all the rules, and I think that's going to be extremely important in the field we're going in. It's a little too complicated to me to decipher what's going to happen with the regulation piece. We do see that there's a lot of lobbyism going on right now, both in Europe and the States, I'm sure other places. I saw the

Starting point is 00:55:56 stat from the economists that might misquote this, but there were like equivalent of one, time lobbyists last year and 86 this year, and there were 57 in Brussels, which is basically the capital of Europe in terms of regulation. So I do think, you know, that's a quote-unquote win for the crypto space. And so there are a few different thoughts into that because they would need to have the regulations with them eventually. It's probably not going to be that short-term. And I don't think it's going to be as easy as a lot of people would make it out to be. One of the things I found a bit ironic in the crypto space is that you have, you have some so many people who believe that governments are just evil, but at the same time, they do not,

Starting point is 00:56:36 and perhaps they are, who knows, but at the same time, they're like, and yes, but they will also welcome Bitcoin as the new wealth-preserved currency. And you're like, well, if they were so evil, they probably wouldn't give out like the control of money, which is, you know, one of the reasons why they have power in the first place. Those two arguments have just always seemed a bit It's kind of intuitive. And I think it's so important to understand this. I hear a lot of arguments about, you know, they close mine down in China. Even that, it just shows how strong crypto is. And I don't know if I necessarily agree with those arguments. I do see the price of Bitcoin. And, you know, that's also my second biggest asset allocation. So I'm definitely talking against

Starting point is 00:57:13 my own position when I'm saying this. But I do think a lot of people underestimate how important the regulation piece is. And most people choose to ignore it simply because it's too complicated to figure out what to do with. Regular layers can make it extremely, extremely hard for you to hold crypto. What are you going to do if you'll be fine to hold it? Or if you'll go to prison, if you do it. Well, a lot of people would say, well, I can still run my own node in my basement. The government will never find out.

Starting point is 00:57:40 Like, yes, true, I grant that. It can't leave the surface of the planet. That's not what I'm saying. But if you're saying to all institutions, they cannot hold it, and they need to disclose it and to pay tech dollars what they do. do. It is a problem. You might be a hardcore Bitcoin fan who would say, I'll never let go with Bitcoin. I get that. Great point. Like the 95 or 99% of the people, they would just be like, it's just too hard. Can I just watch Netflix? I don't want that fight. It's okay. That statement

Starting point is 00:58:10 is probably going to make me very unpopular in the Bitcoin community. So that's sort of like what I see if I could call with some kind of projection of the next five, 10, 10 years or whatnot. At the same time, I think there is a longer running trend that are very important for crypto. I know whenever you talk about Coinbase specifically hard, you're also talking about Web 3.0 and whereas I'm perhaps a bit more talking specifically about crypto and cryptocurrencies. But I wanted to bring up this quote. This is an amazing quote by Max Planck, who won the Nobel Prize in physics in 1918. It talks about how science advances one funeral at a time.

Starting point is 00:58:43 So he has this quote, like, A New Scientific Truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die and a new generation grows up and is familiar with it. All right. So what's the point of this quote? Well, you have a major wealth transfer going on here right now in the time to come, where you have the boomers going out of the market, some of them pass away, and then you have millennials who have grown up with everything being digital.

Starting point is 00:59:09 And I think that longer term trend is really, really important. So those millennials are not the regulators right now, but they eventually will be. So I do think that's a plus long term. Short term, I think there's going to be a lot more pain compared to what you might expect. And the lobbyism in the crypto space is just, it's a lot bigger now than it was, but it's going from nothing to very little over nothing right now. Like if you compare it to the lobbyism for defense or tobacco, oil and gas, like it can't even be compared.

Starting point is 00:59:39 It would take many years. So what do I think about Coinbase? Wow, I kind of felt out in that detail here. Coinbase to me makes a lot of sense whenever I look at the numbers. For the time being, it's probably a bit too much in the two hard pile. I do think that they have a bit more mode than from a regulation standpoint than some of the other exchanges in that space. It's also one of those where I'm like, it's too hard to figure out who the winner is, even though that there's probably going to be a major, major growth for the industry as such.

Starting point is 01:00:07 So that was my very long wind of way of saying, I don't know. So let me send it back to you, Harry. No, I think these are really good points. And as you brought up stake, I think regulation is a tail risk that all these companies will face. But I think Coinbase is one of the diversified players. They are not really depending upon Bitcoin or any specific cryptocurrency for that matter. In fact, I'm more excited about their NFT marketplace. And if you look at the gaming industry today, it's around $180 billion. And it's expected to be like $250, $250,300. billion by 2025.

Starting point is 01:00:45 And a lot of those, and I don't have the stats already on my hand now, but a significant percentage of those players actually buy virtual goods. Might be skins, stuff like that, online on these games. And that's where the NFT is making its way into. And that can be a huge marketplace in the future. So, yeah, it's kind of borderline venture investing that way. Because when I say this, I'm looking at Toby. It's like I have no way to kind of, you know, provide any data to back what's going to be the prospects.

Starting point is 01:01:23 And that's why I think the way I'm looking at it is I would value them as an exchange today with an optionality of all these new ventures that they're having. But if I'm getting the exchange at a fair value or a little bit above the fair value, then my downside risk is protected because I get the optionality for free. But what I have not covered, as you mentioned, Stick, is in my thesis or in my evaluation is the downside risk of regulation. It's almost like a binary there. Based on what I've seen, in fact, Coinbase is one of the players in the forefront in terms of regulation. They're one of the regulatory-friendly companies. They have a foundation that advocates for cryptocurrencies in general. They have former justices on their or folks from DOJ on their board.

Starting point is 01:02:11 So they are pretty much well connected to the Washington political circles in that sense. And that gives them the advantage of working with the regulators, but they're just not doing for themselves. It's more for the industry. So they're doing their part to reduce the tail risk. And there is a lot of money. In fact, a lot of politicians are now invested in cryptocurrencies. And I was recently looking at a tweet. I don't know whether Toby you saw that.

Starting point is 01:02:41 A lot of our congressmen and women have actually beaten the SNB in the last one or two years. Did you see that stat? Yeah, I did. I think our politicians are great investors. We don't just give them the credit. I'm pretty sure a lot of them have bought into Bitcoin as well. But I think that's not the point. I think Coinbase is not dependent on Bitcoin's future.

Starting point is 01:03:01 It's a on ramp and infrastructure play on Web 3.0 is how I see it. So it's a diversified player. but as you said, like, you know, it has downsides for sure. And I think that is the uncertainty, which is being to some extent priced into the stock price today. But whether all the risk has been priced or not is something that I'm not sure. So yeah, but great question. I think you made me think.

Starting point is 01:03:27 So thank you, both of you. I guess if I can just add one thing, Harry, I would say that whenever it comes to store of wealth, think that you have to think about regulations slightly differently. You need the institutions there. Individuals cannot pump the market cap up to those of, say, gold. That's 12 trillion. Bitcoin is hovering under a billion. I guess the entire mindcap of crypto might be, what, 2.5 or something like that. So I think it's important to have that piece of stock wealth, whereas some of the other initiatives they're doing, they're a lot more catered to individuals, and they won't face the same type of scrutiny because it's not as sensitive as, you know,

Starting point is 01:04:04 talking about money. Toby, I'm curious to hear like, now a value investor, a true value investor having been through this horrible experience, talking about both gold and Bitcoin. Any thoughts here before we win the show? I think this is a good diversified portfolio. We've got gold, Coinbase, a good growthy stock and a deep value stock, this portfolio. Whatever happens, it's going to do well and badly. Jens, what can I say? It's always such a pleasure, having an opportunity to speak with you on these Mastermind episodes. But before I let you go, I'd like to give you the opportunity to tell the audience where they can learn more about you. Thank you against Digan. I've enjoyed joining the show

Starting point is 01:04:46 for many years with you and Toby. Everyone can find me on my blog, bitsbusiness.com. My Twitter handle is Hari Rama, H-A-R-A-R-A-M-A. I'm happy to join the conversation and know everybody's feedback and thoughts. Wonderful. Thank you, Harry. Toby? I run a firm called Acquirers funds, we managed to E-T-Fs. The Acquirus Fund, which the ticket is Z-I-G, which is a mid-cap, large-cap, domestic US, value quality fund. And I run another one called Deep, which is a small-cap, micro-cap version of the same thing. I have a little website called AcquirisMultable.com where you can get free to free screen that sort of follows the same rules. I'm on Twitter at Greenbacked, G-R-E-E-N-B-A-C-K-D. And we will, of course, make sure to link to all of it in the show notes.

Starting point is 01:05:36 Toby Harry, thank you once again. I'll already look forward to next quarter's meeting. Thanks, Dick. That was fun. Thanks, Harry. Thank you, guys. 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,

Starting point is 01:06:00 go to theinvestorspodcast.com. 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 - TIP418: Mastermind Q1 2022 w/ Hari Ramachandra and Tobias Carlisle

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