We Study Billionaires - The Investor’s Podcast Network - TIP454: Current Market Conditions w/ Tobias Carlisle

Starting point is 00:00:00 You're listening to TIP. In today's episode, I'm speaking with Tobias Carlisle. Tobias is the founder and managing director of Acquire's funds and has $86 million on the management. The financial markets are going crazy these days. The S&P 500 touched bare territory and the NASDAQ has been hit even harder, only to see the market rebound. In today's episode, we're discussing how to best take advantage of the current market conditions. But before we do, you hear why Tobias just rang the bell on the New York Stock Exchange.

Starting point is 00:00:29 So without further delay, here is my conversation with Tobias Kyleyle. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to The Investors podcast. I'm your host, Dick Broderson, and I'm here with Tobias Kyle. Tobias, what a day to be having this interview. Thank you so much for joining the show. My pleasure stick, I always love chatting to you. It's great to be back. Toby, it's May 27th and the S&P 500 is down 15%. The NASDAQ is down 25 years to date. But before we get to order that, this is just crazy what we're seeing right now in the markets.

Starting point is 00:01:26 First things first, I saw that you rang the bell on the New York Stock Exchange the other day. I have to ask, what was the occasion? Yeah, it was the third year anniversary of the listing of the Acquirers Fund. Zigg. And if you know anything about ETFs, you might know that. The big dates for ETFs are the third year to get through the third year. The average ETF fails by the third year. And so it was good to get through. And so I thought we'd have a celebration. So I took my wife and kids and some extended family and the team and everybody. And we all went to New York and you can't otherwise get into the stock exchange. So you can't walk the floor. You can't do

Starting point is 00:02:01 any of those things without some sort of special invitation. By virtue of the fact that we're listed there, you can do those things. So we went in, got, you know, you get this great tour around the whole building. It's a really beautiful old building. They point out whether there was a terrorist attack in 1909 when they tried to drive a horse buggy full of explosives through the, through one of the walls and blow it up. Apparently the damage is still on the outside wall because J.P. Morgan didn't want it cleaned up. He wanted some sort of reminder of it on the wall. Then we rang the opening bell. That day was the worst day for the stock market since June 2020. So I'm sorry, everybody. That was partially my fault. That was the terrible, slippery finger on the opening

Starting point is 00:02:41 bell caused that. I can't help, but, but one, because we do see these on CNBC or whatnot and someone is ring the bell. And do you have any kind of specific criteria for what it takes? I know in your specific case, you said it was like three years after the ETF was listed. Is there any kind of you need to, you know, meet this checklist. It's fine. It's not easy. They have any IPO has precedence. So you have to be very flexible about when you can do it. And then we've been negotiating for a little while for a date. And it's just, it's been helpful that, you know, for a long time, the stock market was so strong. There was so many IPOs that was hard to get. There was just an IPO every single day. And we needed this sort of volatility. So the fact that the stock market is down

Starting point is 00:03:26 15, 20%, whatever it is, since the start of the year, that was helpful to us because it meant fewer people were going public. So that's one of them. And then being listed on the stock exchange is another one that helps unless you're some very prominent person. I'm not at all. It's just, I just got it because of the listing. And I just thought it'd be fun. I just wanted to take the kids and show them, you know, we walk the floor. They're all too young to sort of know what's going on, but I just wanted to give them the experience. So we did a whole lot of touristy stuff in New York as well. We went and saw Lady Liberty and went and looked at the Empire State Building and the Brooklyn Bridge and the High Line and all of these sort of really fun little things for kids today. So it was mostly

Starting point is 00:04:01 like a kid's vacation, but the rest of it was sort of ringing the bell. It was fun. You were there with your beautiful family and you look into the camera. And I don't know what they told you. It looked like you were saying, you need to look into the camera. There's some point in time, you know, dad is going to like push a button and then just clap, just smile and clap. And the kids are like, what is going on? It was just a great, great video and I guess a really fun family memory already. Yeah, it was cool. They tell you, there's all of that like clap really hard, pretend you're really excited. And, you know, you start the clapping off, so it's a little bit artificial, but it's fun. But then it's very loud, like the bell is

Starting point is 00:04:38 very loud and it gets going. You know, it's a beautiful old building. And then they've got, everybody knows what the floor looks like with all of those computers and with all of the guys and the blue jackets and CNBC's booth is right there in front with whoever the morning crew at the day. It was cool. It was a really fun experience, one I won't forget in a long term. Easy to understand why. It looked amazing. Toby, we are here to talk about these current market conditions.

Starting point is 00:05:08 The markets are just so volatile these days. Now we actually have seen a small rebound in the market. The Dow just rose for the fifth, six straight day. And the S&P 500 NASDAQ are poised to snap their seven-week losing streak. I have to ask you, what is your 30 feet thousand view of the financial markets right now? The way that I think about the market is on a valuation basis. And if you look at any of those very long-run valuation metrics of the market, and I'm talking about like the Schiller, PE, the Cape, sickly adjusted PE, Tobin's Q,

Starting point is 00:05:41 which is the replacement value of assets over the market value of those assets, or Buffett's measure, which is GNP, gross national product. on total market capitalization by any one of those metrics, we're still very, very expensive. That doesn't mean anything. So since I would have said the same thing in 2016 at the bottom in that drawdown, I would have said the same thing in 2018 in that drawdown, and I would have said the same thing in March 2020 at the bottom of that drawdown. The fact that it's still very expensive doesn't stop it at all from bouncing

Starting point is 00:06:10 and going to brand new highs from here. So I have no idea what direction is going to go. I just think that the role of valuation is it gives you some sort of expectation for what you can earn over the longer run. And at the top, before we sort of had this fall off, it had got to virtually, you had baked in to the returns and negative return on the index, and then you're going to get some very small positive return by virtue of the dividends that you were going to receive, which were well below what they are on average, in any case on a yield basis. but all of that means that over a decade, you're probably not going to earn very much in the index. Having said that, I don't know where we are in this drawdown, but the thing that characterizes the very big bear market drawdowns, and you can look at this in a 2000, at 2002, that's what I would characterize as sort of a mega bear.

Starting point is 00:07:07 That's the way some people describe it, to distinguish it from flash crashes. So we would say that March 2020 was a flash crash. you know, it went down very quickly, but it also recovered very quickly. Not many people took advantage of it. Buffett didn't buy anything on the way down. If you go back and look at 2000, 2002, 2007 to 2009, the thing that characterizes those drawdowns is that they had many, many bounces. And the bounces are very big. We're talking like a 25% bounce off the bottom. That then turns into a lower low. And it happens 14, 15, 16, 17, 7. 17 times. And it's that constant sort of bounce to a lower low that is the thing that ultimately

Starting point is 00:07:49 just destroys your confidence in your ability to invest or your desire to be in the market. And that's why most people tend to be, you know, just stop the pain. I'm getting out. And it's March 2009. We've been going down for two years. We've seen 17 lower lows. This thing's going to keep on going forever. So I want to pull my money out now. And then it's at that moment of maximum pain for maximum people that the market finds as bottom and rockets. So knowing that it's impossible to predict on any metric that you can think of, it's just impossible to work out where the market's going. The best idea is to sort of follow whatever your personal investment plan is.

Starting point is 00:08:29 So I'm young enough that I'm fully invested in the market. I'm fully invested in the market all the time. I hold cash for sort of beyond my sort of living expenses, not much. Everything else is in the market. because I think that the stuff that I'm invested in, I can see the embedded returns, the expected returns out of those things. And I think they're quite good. I think that they're better than, you know, value has trailed for a long time.

Starting point is 00:08:50 So when I look at my stuff, I think that it's, and I do think that there's this portion of the market in that sort of the cheapest desal of the market in the US, because that's where I'm looking. That's what I'm talking about. Those stocks are so far away from the index. They are as far away from, they're further away from the index in terms of evaluation than They were in 2000 at the peak and 2009 at the trough. I know that sounds funny to sort of describe them that way,

Starting point is 00:09:15 but that's really the way. That's the way I think about it. I'm looking at the valuation of the portfolio relative to the valuation of the index. And I've never been as far apart as they are right now. The ratio is significantly higher than even the MSCI. So I think on that basis, there's a very good chance that the very undervalued stuff has a good run here and it may look something like 2000 where the index is soft for a long period of time but value which is sort of disappointed for so long actually starts to get its

Starting point is 00:09:48 run and I think that that's already underway I don't think that that has to happen I think that's already started happening I think if you look at most value portfolios including mine or if you look at you know if you look at the French data who's the FAMRA and French French data is available free online. It's not, it's not, it's not super easy to manipulate, but I know there are lots of young guys out there who are able to manipulate this stuff. If you go and grab that data, I do this all the time, and the data's out there for free. You can have a look at how wide the spread is, and you can see that the spread started closing in about September, 2020, September, October, November, depending on which ratio you look at, they all find their bottom

Starting point is 00:10:26 around that point. And since then, they've been outperforming the market. And so that's my expectation that even though the market is very expensive, we don't know where it's going to go. go, the only way that you can approach one of these problems like this where you don't know where the market's going to go is to start valuing stuff. And if you look at these things on a valuation basis, I think there's some very good value out there. There are very good businesses with rock-solid balance sheets. If this is not the bottom, it's no sin to hold these good businesses when they go through a period like this, provided that it's the sort of business that, you know, it's not the sort of business. It's not like a, say, a credit card company where it's squeezed on both sides and it

Starting point is 00:11:03 might find that it has people unable to pay through a period of time like that. You should be wary of that sort of business model. But for most businesses, people don't change their behavior that much when there's a stock market crash. For most people, it's not relevant to them. You know, I think people will still be buying Domino's Pizza through this stock market crash. And people have some odd behaviors when stock market crashes go on. People can't buy big luxuries anymore. So they buy little luxuries. They call this the lipstick effect. So people may spend more money on small luxuries. And so you might find that there are some luxury businesses out there,

Starting point is 00:11:38 ostensibly luxury businesses, even though the units of product that they sell are cheaper than the very big ticket items, that they might not even know that there's a recession going on. They may just print money through this whole thing because people take those little Starbucks might have that. Some of the makeup companies may see that. You may see that in the consumer discretionary. So that's sort of, that's the way I think about it,

Starting point is 00:12:03 that while there is this big risk that we do have this very big drawdown, and I think it's probably likely that we do continue on down from here, but I don't know. And I think that it's not really relevant for most investors you should be going through and looking at the underlying businesses in any case. There's typically always a good narrative, and you turn on CNBC, and there's always like, the mug went up by 0.4 or went down by XYC, and they're always like, oh, it's because of this. And the thing is, we don't know. We don't know if it's a,

Starting point is 00:12:33 If it 12% of the reason was because of SPACs or, you know, or the drawdown was because of the interest rate, we probably have an idea of that, but how much of that is it? And that's one of the challenges for all investors. I do want to say that it feels emotionally different than March 2020. And let's just leave the whole like pandemic aside. That in itself was different. I remember I was asking myself, so what's the pandemic really? I think most of us know that now. But it certainly feels different in many ways. The drawdown at the time was much faster and was also more event-driven. It seems today like someone that is value-driven, and I'm not talking about value investing,

Starting point is 00:13:15 but simply because of the valuations right now. Of course, some of that could be attributed to a rising interest rate also. But it certainly seems like some of the, I don't know if the right term is easier money is gone. I was sitting there reading this memo by Howard Marks. I subscribed to his write-up, and it's absolutely wonderful. And he talked about how the average spec that was despaqed since 2020 by completing acquisition is selling at $5.25. And if you might remember, these prices would be $10 for something like that.

Starting point is 00:13:52 So just to give you one of many, many data points of what's going on is probably also why you see this sell-off in tech. Keep in mind, though, whenever we talk about tech, you know, we always discount these cash lows and in tech, definitely not all tech, but generally in tech, the cash flows are further out. So whenever you discount that back to today, you just get a low valuation. So it does make sense that tech stocks are selling off faster than other stocks. But of course, you can also, again, point to the valuation.

Starting point is 00:14:22 Yeah, I think I tweeted a few times when the SPAC boom took off that I remember 2009 pretty vividly, 2008, 2009, because the same thing happened. All the SPACs traded down below their issue price. And the game became, can enough people in an activist sort of sense buy this SPAC to force them to not do a deal and return the cash? Because if a SPAC has a $10 in cash behind and it's trading at $5, if they can't complete a deal by the two-year window that they get to do that, they have to return the capital. And so that's a pretty easy. double in this market, $5 to $10, you have some, you know, they're heavily incentivized to do a deal because they get 20% of the capital in the company. So they really, really want to do a deal

Starting point is 00:15:11 and the investors outside really, really don't want them to do the deal. So you can see a little bit of fireworks. That's almost certainly about to start happening up. I just think that it's funny how, I don't think that I've been in the markets for that long. I've been watching for about 20 years. And I think it's amazing to me how regularly the cycles come around and how short everybody's memories are. You know, SPACs were just, it's just cash at a premium to cash. And when it's cash dressed up as equity trading at a premium to cash. And when people see that in the market and they trade it a premium, that's your signal

Starting point is 00:15:42 that probably it's getting too frothy and there's a download coming. Yeah, I think that's a good point. And we tend to have this linear way of thinking. You know, I mentioned March 2020 before. We have this idea of this happened last time, so there's a higher probability that it would happen again. That's generally not the case. History does rhyme, but it doesn't mean it has to rhyme on the last recession you saw or

Starting point is 00:16:04 the last bear market or whatnot. When people are paying a premium for cash that says that the market's too speculative, and now they're paying a discount for cash, which says that probably the market's expectations are too low. But, you know, $5 for $10, it doesn't really make any sense. There's some risk in them whether they do a deal or not. But if it traded at $8, then it's already accounting for the 20% dilution. At $5, you're in a pretty good position.

Starting point is 00:16:30 Your worst case outcome is that they do a deal and you get diluted, and it's now worth $8 in the acquisition, provided that they do a sensible acquisition. So $5 is probably too cheap at some indication that the market is becoming disconnected from underlying values and we may be closer to a bottom than not. But I really think it's impossible to tell for the reasons that you highlighted before that, you know, they can be talking about somebody said something and it gave the market confidence. One of the Fed shares came out and said something and it gave the market confidence.

Starting point is 00:16:59 But what really happened was that some big hedge fund was blowing up and covering it shorts and it looked like a big rally. That's what makes investing so difficult because it's really chaotic. It's sort of closer to chaos than it is to some sort of orderly, sensible, logical thing. And everybody's doing different things for different reasons. And the Some of all of those is the trajectory of the market, but we don't really know why anybody's doing anything underneath. Buffett has taught us that we should focus on micro and not macro. In other words, we should focus on the individual company.

Starting point is 00:17:35 That being said, even individual businesses have to consider that interest rate is creeping up right now. And even if they don't have, say, debt they had to refinance shortly, they still have to take notice of the macro environment. Perhaps the company has customers, suppliers who are positioned differently than they are. But I want to throw that over to you, Toby, and say, so we are going from this low interest environment into this high interest rate environment. What are the called two or three most fundamental changes for us as value investors giving

Starting point is 00:18:04 this new scenario? Let me just, just to be painful, let me challenge the first assumption. Cash is a commodity and the price of cash is the interest rate. And you limit the errors that you make your best guess for where a commodity price is going to be in 12 months time, is where it's trading. And I know that that doesn't make any sense at all because they wiggle around so much, but that's the point that you'll make the fewest errors in guessing where a commodity will be by guessing it will be where it is now because it could be up and it could be down and you don't

Starting point is 00:18:34 know on the average of all those guesses about where it's trading. That doesn't apply at the very extreme. So when oil was negative $37, it was probably more likely that oil was going to be positive in a year or so from there. And when interest rates were exceptionally low, probably more likely that they were going to go up. Having said that the fact Europe had negative rates meant that it wasn't clear that the US, for example, could avoid negative rates. And that was a discussion that was going on for a long time, whether America would go into negative rates. And America may still go into negative rates.

Starting point is 00:19:08 I don't know. I don't know where it's going to go. But it does seem more likely now, given that the inflation numbers over here, are running so hot that the Fed at least can't lower rates. So they may have to raise rates from here. So the rates are approaching their long run mean. They're still lower than their long run average, but they're getting closer to their long run average.

Starting point is 00:19:32 When that happens, Buffett says it acts like gravity, the stock market. And the reason is if you're doing a discounted cash flow analysis or you're doing any kind of, I don't do DCFs, but I still know that the 10-year is, I think, the 10 year is the hurdle rate. And so the 10 year is pushing up about three. The long run average is about six. It's been as low as 0.3. I think it got in the depths of the, in March 2020. Point three to three, you know, that changes your assessment of that. If you were just to plug that naively into a DCF, that changes a 10fold increase in the interest rate should reduce your

Starting point is 00:20:11 valuation by something like 10 times. A doubling of the rate should increase, should reduce your assessment of value by about half. If you look at the long run average and you plug that in, that'll reduce your DCFs again. And if you look at where they got to in 1982, which was the absolute peak of interest rates in the US under Paul Volcker, there aren't very many companies that are going to be worth book value, if that's the case. There will be some, but there aren't going to be very many. It's going to be the best of the best that are worth more than book value in that environment. Most companies will be worth less than book value in that kind of environment.

Starting point is 00:20:47 Because the way that I think about valuation, if there's something out there that earns 3% with no risk of an duration risk, which is the wiggling around of the price. So if interest rates go from 3 to 6, the 10 year will halve. And something else that's got a 3% free cash flow yield on it should halve as well because it's no longer worth book. It's worth half book now. or it's worth half or it's trading at least.

Starting point is 00:21:15 So that's the way I think about it. So the risk is really to the valuation of everything if rates go up. But then you have other factors in there that make it a little bit more complicated because banks will earn a little bit more money. They'll get a better spread between what they're lending and what they're earning, although they've got a pretty good spread now from the difference between my checking account and my credit card. They seem to be pretty wide in there.

Starting point is 00:21:37 They're doing okay. I'm not going to worry about them. And then businesses that are highly leavered. will struggle with too much debt, that will be harder for them. They'll have to roll the debt or hold that debt for a long period of time. So it's not a simple matter of saying that everything will come down. It is a little bit more complicated because higher rates do help some businesses. They do hurt some leverage businesses and they change valuation. So it is going to be very, very complicated when it happens. But on balance, I think that valuations inevitably have to come down.

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Starting point is 00:26:10 Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right, back to the show. Yeah, it certainly looks like it. And I can just say that here in Europe, the boss of the European Central Bank, said that we would stop having negative interest rate in around September. That was her expectation right now. What does inflation look like in Europe? It's around 7% right now. So, you know, yeah, it's running pretty hard. The economies here in Europe are just structured very differently

Starting point is 00:26:45 than in the States. And the labor market isn't as tight. So I'm not surprised that they're doing what they're doing now. But I do expect that you won't see it to the same extent as you see in the States, our economies aren't doing as well. So no surprise is there. So that's probably why you would see higher interest rates, but not as high as in the States. And also, of course, why you see such a weak euro right now with the capital inflows into the state. Hey, so Toby, I wanted to talk to you about positioning in these market conditions. You would read a lot about bear markets these days and they say, oh, it's, you know, when it's down 20%, there's not like a big difference if it's like 19.9 on 20 points, whatever. But we did see, we did see an intraday last week

Starting point is 00:27:34 of the S&P 500 in bare territory. Most investors would probably say it's more, it's more mental, more than a specific number, which was what you were getting at before, Toby, about that, losing that confidence in the market. But regardless, I'm looking at one of your funds like CIG, and you are a deep value investor. And I can see that the correlation short term has been quite significant, which is more or less the case for all assets. Like whenever something happens, you know, things go down at the same time. What is the correlation between something like the SP 500 and deep value over time?

Starting point is 00:28:11 Anything that is, you know, so ZIG is a long only product. And we, that is a change since December last year. And we'll talk about that in a little bit. But it's a long only product. It's a little bit more concentrated, but it still holds US assets. It's not going to offer a wildly divergent performance from the S&P 500, just by virtue of the fact that they're drawing from the same pool, essentially, although ZIG buys smaller companies in the S&P 500. But everything is pretty tightly correlated, particularly when you go through an event like this, because this is one of the things that investors will say that correlations go to one, which means when people are panicking, they don't see. sell what they want to sell, they sell what they can sell, and just anything gets tipped out.

Starting point is 00:28:58 And that's why it's such a great opportunity. That's what creates the great opportunities for value. So I think value typically does. The two times that value seems to really stand out and the times that value doesn't do very well, the tail end of a ball market is terrible for value investors because I've observed this that value tends to sell off before the market does. And so value will have this sort of sell off. And I think partly that's what's happened over the last few years, that I think the market has looked expensive and topy, and the market value is sort of sold off and then recovered a little bit and then sold off again and recover a little bit and sold off again. And March 2020 was a great example of that where value got sold harder than anything else.

Starting point is 00:29:38 And it was a really unusual thing because my portfolio tends to be net cash. So the companies in there tend to have more cash on the balance sheet than debt. And the market itself tends to be more debt than cash. And so that should have a higher, if you think about the equity as a portion of the capital structure, I don't want to make this too complicated for everybody. It gives it a higher beta. It gives it a high, it should move more. The market should, something that is levered should move more than something that is unleavened from financial theory. And my portfolio was moving more than the rest of the market. So it was just general sort of, It's possible that it was like the stuff that was going to be online was going to do better in a pandemic-type world and the stuff that's more physical bits was going to be more difficult in that kind of world.

Starting point is 00:30:24 But whatever the thesis of the market was, the beta on my ETF at that time was higher than the market. So it went down more. It ended up being at the bottom, they were down about the same amount, roughly about 37% each. And then they bounced off there, but we didn't bounce as hard as the rest of the market did. And that sort of set of circumstances persisted until we got all the way through to September 2020 and of that sort of last quarter of 2020, which was when there started to be a little bit of differentiation where value started working again. So I think we saw what was a little bit of a crash, what is typical behavior of value versus the market that we tend to sell off first. In that instance, we sold off more, but I don't think that's ordinary behavior. and then the recovery was slower,

Starting point is 00:31:14 but it did eventually kick off and then value started performing very well. That was one of the things that helped Value for a while there from September 2020. It was only a very short burst and it sort of stopped working again about April 2021. At the time, Zig was long short. So Zig's shorts really started working last year

Starting point is 00:31:35 because I tend to be short the stuff that I don't mean to pick on Kathy Wood, but I tend to be short more arc type, you know, her ETF arc. Those sort of holdings were the sort of stuff that I tended to be short, the stuff that didn't have the momentum in it. So a lot of the performance last year in Zieg was as a result of the short book going down a lot. And that helped disguise the fact that the longs were a little bit soft. And so now we've got to a point I think where the longs again was soft going into this until sort of April.

Starting point is 00:32:06 And then since April, and this is only the end of. May, so it's not a very long period of time. But I think we're now in the teeth of the drawdown, and in the teeth of the drawdown, value starts looking better again. So when everything's selling off, value seems to hold together a little bit better. Value will find a bottom first and it will bounce harder. That's the typical behavior from value because these are the things that have been sold out the most. And so I'm very optimistic about my biases that I would like a crash and because that will be the thing that will help value. And I also, I think we just generally, it's better for humanity of things trade closer to what they're worth

Starting point is 00:32:45 so that everybody participates on the upside and you don't have these huge crashes, which we sort of were probably overdue for one. And to get back to normal valuations, it's a long way down still from here. So I think that I try not to think too much. I've said this before, but I try not to think too much like a stock market operator of trying to predict all of the wiggles and what everything's going to do. And I try to think more like a business owner, which is looking at the cash flows and so on. But I've been doing it for so long.

Starting point is 00:33:15 And I spend a lot of my time looking at back tests as well. So I have an idea of the typical behavior of the market and value. And I think that we're seeing pretty typical behavior now where value has started outperforming a little bit as the crash gets underway. The other thing that I point out is that this was Ken Fisher pointed this out. And I've said something similar in the past, but Ken Fisher said that the first two-thirds of a bear market, you see about one-third of the drawdown. In the first two-thirds in time, you see one-third of the drawdown in magnitude. And the last third of time, you see two-thirds of the drawdown in magnitude. And that's that sort of waterfall-type-looking shape.

Starting point is 00:34:01 But through then, you've got these like wiggles. You'll have the market bouncing all the way down. you have the 17 bounces or whatever it'll be. And so I think we've gone through the two-thirds of time that give us the one-third of drawdown and probably what we have in front of us is the one-third of time that gives us the two-thirds in drawdown. What I used to say is what I have noticed on average, looking back at the S&P 500 to, I think, goes back to 1850 or something like that. The typical length of time for a bear market is about 18 months.

Starting point is 00:34:32 And the first 12 months, nothing much happens. You basically almost back at all-time highs, 12 months into it. And it's that last six months that really terrifies people. That's the really hard sell-off. And so 2008-2009 was about 20 months from top to bottom. And the selling really didn't get done away until Q4, 2008, Q1, 2009. And I sort of think that's, we've probably not, if this turns into Omega Bear, we haven't really seen the big selling yet, and I think it's probably about to kick off anytime soon.

Starting point is 00:35:06 But if it's just a regular market, we probably rally back from here. I have no idea what's going to happen. I just find it helpful to think through these scenarios. So I don't panic when we get the really hard sell off. I'll say, well, this is sort of what we were hoping for. Now we're going to get some good valuations. That'll help performance on the other side. This is a good thing. Definitely don't sell all your positions out because you think it's going to go to zero. So, Toby, keeping that in mind and knowing the performance of last year, and you said some of that performance came from the shorts. Also, I wouldn't say your expectations because that probably wouldn't be reasonable. We don't know what's going to happen in the future. But I can't help but play there was an advocate here and say that Zick transitioned from a long short to a long only

Starting point is 00:35:49 and to active management. Why is that giving what you just said there before? It was a philosophical change. So I had this, I've had this, I think that the pandemic had this impact on me that I realized that really it's possible to do very well in the market, provided that you stay in the market for long enough. Because I've been watching, you know, value's been underperforming for a very long period of time. It's been miserable being a value investor, particularly the way that I practice. And I shouldn't say that. There are some guys out there who at the much growthier end of the spectrum, and they did seem to do. better and they understood that market better than I did. I didn't understand that market. And it took until sort of September 2020 when we saw that finally turn around and I probably didn't realize it was happening until 2021 that we were actually starting to outperform all of a sudden. That had this sort of profound impact on me where I started thinking that that really the key to this business and Buffett has been saying this for a long time. I just haven't been listening to him or hearing what he was saying and a lot of other investors too.

Starting point is 00:36:54 The key to performing over the very long term is staying in the market for a very long period of time and not blowing up. You just have to survive. If you can survive any market, there's always, there's so much luck and opportunity in the market. You just have to be alive to capture it at the time. And so I started going through all of the sources of risk in my portfolios and all of the sources of risk in my life. And one of the things that I found in the portfolios, and I just, I thought, what other ways that people have blown up in the past. Too much debt is an obvious one. People blow it with too much debt. Overpaying. You can overpay and you can be down 90%. We've just seen that happen to a whole

Starting point is 00:37:35 lot of companies. You can have a business model that is akin to picking up pennies in front of a steamroller. So I think some of those credit businesses, I don't want to name them, because some of them look cheap. They're kind of, they're difficult decisions to make. But I think that on balance, I'm probably going to avoid them because they have a lot of embedded liability in there. They may be unable to collect on some of these credit cards. Those sort of businesses and the other thing that's in there is, of course, being short because a short has unlimited loss potential. Now, I shorted very small.

Starting point is 00:38:06 I rebalance regularly. I'm in stuff that has no momentum and I'm in stuff that has no intrinsic value. Shocking financials. But I realize that when you go through a market where AMC rallies the way it does or the AMC and GME rally the way that they do, you know, that took out. Melvin Capital and Gabe Plotkin has been a good investor and that fund is now wound up. So I just started looking at all of the potential sources of risk and I realized that being a little, even shorting, even though I think that there was about as little risk in the shorts you could

Starting point is 00:38:40 possibly have put in, there was still some risk in there. And I just thought, I'll just eliminate every source of potential risk in a portfolio. The switch from passive to active was really, it's just a change in form rather than a change in substance. That's just me. rather than passing the way that you run an active, a passive fund is you have to create an index and you give that to an index provider and then the index provider provides that to a sub-advisor who trades the portfolio with active management.

Starting point is 00:39:07 You just cut out the index provider or the way that I invest, I cut out the index provider and my sub-advisor and I just deal with each other the way that any other fund is run, the way that ARC has run, any other fund, any traditional sort of mutual fund or hedge fund or managed account where I can trade the portfolio. I don't do any trade.

Starting point is 00:39:24 personally that I give them the portfolio to trade. So that's really no great change, but it's worth mentioning just because there have been some tax reasons why you couldn't be an active fund in the past, and they've now taken away those reasons. So it's an active fund that has all of the capital gains, tax advantages of a passive fund. So how does that work in practice, Toby, whenever you say that you don't do any of the trading yourself and you ask someone else to do it, Is it a specific, please buy 50,000 shares in Disney, but only up to this price? How does that work in real life? I could hire in a trader, and I could do that trading myself.

Starting point is 00:40:03 It's just I don't have any great expertise in trading, and I don't particularly like it. I'm not a very good trail. I know there are people who are very good at getting the low or the high of the day or getting their price. I'm not that person. I do all the wrong things when I try to trade, and so I'm better of finding, I think, firm that does it professionally that has all of the market depth and all of the experience and expertise and they just know how to work a position and get it on or off. And so I have a firm called Toroso that does my, they're my sub-advisor. That's all disclosed in the prospectus. I tell

Starting point is 00:40:37 them what I want the portfolio to look like. And then they trade the portfolio to look like the model portfolio. And then over the course of, over a period of time, the model portfolio starts deviating from what the fund's portfolio looks like. And at that point, I'll go back to them and I'll say, I'd like it to trade the portfolio back into this. We want to have this much of this and this much of this and this much of this. And we'll need to sell some of this out. And then they will trade the portfolio back into line with what I regard as sort of the optimal portfolio at that time.

Starting point is 00:41:10 So let's say that just using Disney as an example, let's say it's trading 105 and you think that it's a good position. You want to build a 2% position in it or what? not. And then for whatever reason, the price goes up to 120. Do they just call you and be like, are you still sure, Toby? Or do they just execute the trade? Because that's what they're being asked to do. They execute the trade. There's never that much movement in a position. But in that event, yes, they would send me a note and say, this has moved a lot. What do you want to do? Or this is, received a takeover bid. What do you want to do? Because that's happened. That happens all the time.

Starting point is 00:41:46 Something gets, you know, particularly because of the way that I invest, I tend to be in stuff that's financially cheap. And so if companies have a strategic reason why they want to own it, so there's a high proportion of, there just tends to be a high proportion of trades in the portfolio, there are a few takeouts. Interesting. So I would like to start with a quote here for the next question by Sir John Templeton. And he famously said the four most dangerous words in investing are this time it's different. So keeping this in mind, what I want to say is is different compared to other bear markets. We now have a level of inflation that we haven't had in a long time.

Starting point is 00:42:26 And it seems like the Fed is between a rock and a hard place. They can, of course, ease monetary policy to support the financial markets, but inflation will run hot if they do. They can also hike rates to fight inflation, but then financial markets will tank everything else equal. And so whenever I think about deep value, which is where you're an expert, Toby, I'm thinking that inflation is on one hand less of a worry because you want to buy very cheap stocks where the cash flows do not have to be discounted from far into the future.

Starting point is 00:42:58 But the other hand, many deep value stocks also have a lot of tangible assets that you do not want to hold in time of inflation. So you have your pros and cons. So how is deep value performing in inflationary times? And have you decided to tweak your portfolio due to some of those concerns? Yeah, that's a good question. and thanks for that. I don't change what I'm doing depending on what I think the macro backdrop is, because what I'm trying to find are things that are so wildly mispriced that it really doesn't matter

Starting point is 00:43:30 what happens in a macro sense. And so just to talk about my process a little bit, the first thing that I do is go through and eliminate anything that has the potential for a total loss of capital. So I do that in lots of different ways. One of them is statistical. go and look at, do these things have reasonable Altman Z scores? Do they have, do they have financial strength? Do they have any indications of fraud? Do they have any indications of earnings manipulation? Honestly, the companies that I'm putting in the portfolio are so far away from that, that process that that's never impacted any position that would ultimately end up in the portfolio. So it's almost like, that's just like a T-Ceremony part of it that I do that. Manipulation is this sort of question of

Starting point is 00:44:17 How are they treating all the things that they have discretion over in the financial statements? What are they doing with these line items in these financial statements? Are they always sort of giving themselves the benefit of the doubt? Or are they trying to be fair and balanced? A lot of things, the manipulation score is this sort of continuum. And I can see some companies a little bit more aggressive in the way that they account for stuff than other companies. On balance, you kind of want the ones that are treating you as partners. You want the ones that are, you know, you want the kind of business that you don't have to read every footnote in the financial statements to see how these guys are tricking you. You know, you want the ones that are run by people who are trying to help you along as much as they are. But that's a big part of the process. And then I go through all of the other, you know, the 1,001 ways that people have died in the West. You know, I go through and I find all of the ways that we've been, anybody has been blown up in the past. And I eliminate all of those ideas. And then from the pool that's remaining, I'm looking for the best risk-adjusted return.

Starting point is 00:45:15 And so that's a question of how undervalued, how good is the business, how much cash is being thrown out? Is there a near-term potential for something to happen in the business to make it appear much better than it ordinarily is? And that sort of process is partly looking at how fast can this business grow, how much money can this business throw off? And it's partly also, is this trading a sufficient discount? And so those two things together, that's the process more than it is looking at what sort of business will do well in an inflationary environment. Having said that, you know, Buffett's early advice where he wrote that, I think he was comparing the performance of his portfolio to gold. And he said that for the period of time that he had looked at, gold had done comparably well to all of these other portfolios, to all of these other really high quality businesses that he had bought. And I think that there's reasonably good chance

Starting point is 00:46:12 that something like that happens in the future too that it doesn't matter how good the businesses you buy. Are you going to struggle to keep up with commodities? And so you might hear that and think, well, a really good place to be then is in commodity businesses. And I do think that they do provide some ballast, but when you have a business that's reinvesting in lots of capital all the time to earn anemic returns on that capital,

Starting point is 00:46:35 inflation destroys those businesses. they will trade at a big discount to what they're worth. So what you want in that kind of scenario is a business that has better returns on its invested capital than it needs to be better than inflation. It needs to be better than the tenure. It needs to be with a big margin of safety, multiples of them, I would say. But that's sort of already part of the process. I prefer that kind of business over a comparably valued business that doesn't have those

Starting point is 00:47:04 same qualities in it. So the thing that makes me deep value is I really try to pay a big discount to those things, but I am, and I know I've said in the past, that you need to be careful with return and invested capital because it is highly mean reverting, and I continue to believe that that is the case. There are definitely some businesses that can resist that mean reversion, and we'll do, have very robust businesses that it doesn't really matter what happens. We're all going to go out and continue to use those services. They are going to survive through whatever comes, and they're, it's going to survive.

Starting point is 00:47:36 currently available at a price that allows us to participate, along with management, because they're a discount, they're not trading in a big premium. That's the big problem, I think, for a lot of investors who've been through this last market cycle, that they think that the stock price performance is the thing that generates all of their returns. And the problem with that view is, because they have that view, they're looking for the very best businesses. They're looking for really high growth and really high returns on invested capital. When all else being equal, not really what you're trying to find. What you're trying to find is a price that you can pay that can generate enough returns for you as a holder of those businesses. And so the example that I give

Starting point is 00:48:16 is the early 2000s when we all remember 1999 and 2000 as a sort of dot com boom. It's the dot com bubble. That's what everybody says. But really the dot com was a little bit of a sideshow. The main event was companies like Walmart getting way too expensive. Microsoft getting way too expensive. GE getting way, way too expensive. And then from 2000 to 2015, the underlying businesses, they don't know what the stock price is doing. The underlying businesses of Walmart and Microsoft and GE were great. They did really, really well for that 15 years. The stock prices went nowhere and there were two big drawdowns in the interim.

Starting point is 00:48:54 There was the 2000, 2002 drawdown. There was a 2007, 2009 drawdown. That could easily happen again for many of these businesses. Yeah, they're great businesses. I don't disagree with anybody. They're really, really good businesses. But at a price, if you overpay for these businesses, you're not going to get sufficiently good returns. What you should be doing as an investor is finding the best risk-adjusted opportunity in the market,

Starting point is 00:49:17 which is eliminate all the donuts, try and find the things that are going to generate sufficient return going forward and then try and buy them at a discount. If you do those things, it doesn't really matter what happens in the market. You are going to be okay. Yeah, and the thing is very important. and what you said there, it's about purchasing power. It's so easy to be blinded by nominal numbers. That's just not how the world works, at least not whenever you go down to the supermarket and look at the prices that you now see. Toby and I did a master my discussion about gold, physical gold,

Starting point is 00:49:51 not too long gold. I'll make sure to link to that in the show notes. This is not two value investors here talking about that you should buy gold instead of equities. That's not what we're saying. We're not supposed to say you should buy gold. But the point is more. more that what's the real return? And that's what you need to look at. Let's talk, for example, about Buffett. Buffett had fantastic track record, like really outperforming the SP 500. I think that you also referenced in one of your podcasts here recently, Toby, I think it was Chris, Chris Woonster and a note to Buffett about what was it, like how much that the Berksa had to decline in value before it was on par with the SP500? It was astronomical. It was like 99.8%. It's

Starting point is 00:50:33 It's so far ahead. Yeah. Yeah, it's absolutely amazing. And it's astonishing, but you should also keep in mind that whenever you hear about a track record like that, and I don't want to bash in any kind of way, I should be the last person on the planet to do that. He's actually the very reason why Preston, I started this podcast, but he's also invested in an inflationary time.

Starting point is 00:50:56 And, you know, it's easier to get higher nominal returns in inflationary times because you just get, you know, a rising tide. That's just something to think about. So always think about real returns. I'm concerned that I talk a little bit too abstract sometimes. So I'm just trying to, in a concrete sense, what you're trying to find is a return on invested capital that is well above what the company is what the company's cost of capital is. You need to understand what those. People who understand those terms, that is nobody will disagree what I've said that that's the case.

Starting point is 00:51:27 If you don't understand what those terms are, then you know that's probably one of the first things you need to go and understand. you're the return and invested capital over the cost of capital of a business. The margin between those two things is how you make money in the stock market. The wider that margin is and stays, the more money you make for a longer period of time. The risk, and this is what I've always said, that the risk for return and invested capital is it's highly mean reverting. And so if you think about a cost of capital that stays low and a returner invested capital that is high but mean reverting low, that will crush the value of the company. What you want is a low cost of capital and a stable or rising return on invested capital. And it's a quirk of the

Starting point is 00:52:07 market sometimes that those things are found in the businesses that are struggling at the time. So they already have the return and invested capital is close to the cost of capital. And so they're not worth very much, but through some sort of business cycle improvement, that starts widening out and all of a sudden the value starts being created. And that is really what the value of a business is. It's the difference between the return on invested capital over the cost of capital because there are many businesses that don't earn any margin and those businesses aren't worth bulk value. They aren't worth the capital that's in them. I've noticed that in SEC, you have a lot of financials in that portfolio. I think that there's still some fear about

Starting point is 00:52:50 financials from the 2007-2009 crash because that global financials, that global financial crisis was really concentrated in the banks and some of the other financials and the insurers. And now people, you know, when I was talking before about the types of business models that you want to avoid, that pennies in front of steamrollers, business models, banks are certainly in that class of business and so are insurance companies. And you need to be exceptionally careful with those sort of businesses that, for one thing that they can survive. This is the kind of the devil of it, though, is that they are very, very, very careful. very good businesses when they get the right conditions. And so we've been going, they've been going

Starting point is 00:53:32 into a headwind and they've been trading at a big discount because of this general fear about the business model and the behavior in sort of the first decade of the millennium. I think that they've now all got religion. They've got much better balance sheets than they had before. They're much better capitalized than they were before. There's been some consolidation. There's a good prospect of of them earning more as we as interest rates go up or even if interest rates just stay where they are. I think that they are going to be much more attractive looking businesses as we go forward. And I think that you need to be careful going through them that you're buying the ones that can survive. There are lots out there that will be too heavily exposed to drilling in some area

Starting point is 00:54:20 or they'll be too heavily exposed to commercial real estate in another area. And if they're small and that's a big part of their loan book than they are at very high risk of, you know, seeing some sort of material impact to their asset values. And so I think you need to be very careful. But my portfolio is, I think it's the sort of the best of the breed. And I think that they're all really undervalued. And so I'm kind of, I do think that there's return in financials from here. 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.

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Starting point is 00:58:04 Fund's Perspectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. I wanted to talk a bit more about your fund and running in ETF. And I've always been fascinated with that. Actually, I don't know if you know this, but Preston and I actually talked about setting up at ETF. Like, I want to say it was like four or five years ago. And we were talking back and forth. And we won't like super serious, but we were looking into it at the time. And I think it was around the time that you were also. also thinking about starting your own, and so we had some back and forth on that. And one reason why, I just remember vividly, one reason why I didn't like it was I noticed

Starting point is 00:58:42 all of that red tape. I'm not good with red tape. And I was saying to Preston, you know, it makes sense for Toby. He's a lawyer. He can handle it. But I'm curious more about the inner workings of an ETF. For example, sick, you have an expense ratio of 89 basis points. I was curious about how that works in practice, me included by a lot of our, and also a lot of our

Starting point is 00:59:10 listeners, they own an ETF one way or the other. And I don't really know how we pay. I'm pretty sure we do. Otherwise, they wouldn't be there. But do you sell stocks equivalent to that expense ratio, like once a year continuously? And what happens with that money? Is that reinvested back into the fund in your name? Is it fees to the exchange? or lawyers, like, how does this business work? There are lots of different ways of setting up an ETF. You can be in many different roles in relation to the ETF and sort of be the person who is representing the ETF.

Starting point is 00:59:46 So you could be a sponsor of an ETF, which they don't really have any of the legal obligations of. So the main legal obligation falls on the advisor, and I am the advisor. My company Acquirous Funds LLC is the advisor to the Acquiris Fund. and what that means is that it's responsible for all of the compliance, all of the trading. It is the responsible entity for that ETF. That's responsible entity is actually a legal term.

Starting point is 01:00:13 It's not the RE, but it is responsible for that ETF. But you could be, there are what they call white label, ETFs where that's, it's, all of the back end is done by somebody else. And then the sponsor is just sort of the face of the ETF. And they don't really have any of those obligations. But as you point out, I was a lawyer for a decade. I've been in capital markets. And I have some familiarity at least with exchange listing rules and just general compliance. And so it's still very burdensome.

Starting point is 01:00:44 And I pay. So the way that it works is that the fee is calculated on a daily basis. And there's a small amount of cash that accrues and it's paid out on a monthly basis. And from that payment, I have to cover the exchange. the fees to list on the exchange, the audit fees for the fund, all of the compliance in the back end, the custody of the assets, the cost to run an ETF is very significant. It's several hundred thousand dollars a year. And so that has to be covered from the fee. And to the extent that the fee falls short of the cost of the ETF, I pay for it. And so for the first 18 months of

Starting point is 01:01:27 Ziggs life, it was well short of that. And I was just paid. paying that amount of money out of pocket, which is why a lot of people get venture capital backing when they do these things because the sums are very large. I just saved up for myself and paid for it out of my own pocket. I don't necessarily recommend that to everybody because you need a reasonable path to getting to break even. And I thought that I could get to break even before my money ran out. And it turns out that was true. And so I was a little bit lucky in that sense, but you have to think about that when you're setting these up. Can you, the costs to set them up have come down a lot, but they're still pretty significant.

Starting point is 01:02:03 And then the cost to operate them are way more significant than the cost is set up. And that's really what cuts people to pieces. That's why, you know, you get to three years and you're still not making money and you wind up the fund. That's why the average fund winds up in three years because they're super expensive. It's a lot of work in a compliance sense. And then there's also additional stuff on top of that marketing. trading the portfolio, all of those sort of things.

Starting point is 01:02:28 So a fund is a full-time business for about three people, I would say, to sort of, to do it properly. You can outsource a lot of stuff and sort of reduce those numbers, but you really need, I think the kind of the bare minimum that you can get away with is probably two or three who are going pretty hard. What is the break-even AOM on a typical ETF? And I know that depends, because you might have expense ratio. that's higher or lower. So I guess that's the first part of my question. The other part of my

Starting point is 01:02:59 question is, is the expense ratio? Is that the only income you have from running NETF? The break even, for the typical fund, the break even is $30 to $50 million or above that. For Zigg, it's much, much lower than that because I have a slightly higher fee, which will come down over time, but I have a higher fee and I do most of the work myself. So I don't have to engage a lawyer for some things. I do them myself. I don't do a lot of paid marketing. I do a lot of that myself. I run the portfolio myself. I've set up the strategy. All of that stuff is sort of is me doing it and I don't pay somebody else to do it. So the revenue for my fund, the break-even for my funds is much, much lower than that. It's still pretty high. It's still a

Starting point is 01:03:38 scary proposition out of the gate. And I want to set up some other funds too. I want to, you know, as we've discussed previously, I'd love to do a global fund. I'd like to do it in Europe. So it's a use its structure rather than ETA. But that still makes me nervous at some point that will need, I don't know what the break-even. I haven't done the math, but it'll be similar. It'll be 30 to 50 million dollars and so I'll have to work out a path to getting that break-even. And so yeah, the fee is fixed what the fee is and any cost above that fee has to come out of the pocket of somebody. And if you're, you know, there may be an arrangement between a white label and a sponsor. In my case, I'm the advisor. They just give me the bills and I just give me the bills and I

Starting point is 01:04:18 just pay them. If they don't get paid, then the fund gets wound up. Sounds like a stressful job, Toby. You know, I was an M&A lawyer working 100-hour weeks. That was a stressful job. This is a great job. I love it every day. I feel your pain. I used to be a commodities trader trading in night and 24-hour exchanges. That was a hard job. This is not a hard job compared to that at all. It's a fun job. Yeah, it's a fun job. And, you know, I appreciate, I'm just doing a a quick detail here. I want to get back to you, but it's so weird, like having experience as

Starting point is 01:04:52 commodities trader and trading netbook and it was intradate trading. So you would hold something physical, physical commodity for three seconds, and then you would sell it again. And you have this crazy, crazy volatility. So whenever the oil price hit $37 was like, of course, because, you know, I wasn't trading oil, but whenever you have something that's at a fiscal delivery, that marginal price just goes all the place. You can go from, I don't know, plus 100 euros to like minus 100 euros within the same hour. Like if it's thin to trade it enough per megawatt.

Starting point is 01:05:26 In this case, it was energy. And so, and it could be even crazy for all the type of commodities. And so, it's so weird, like with that background and with that stress that came with it, perhaps that's why I became a buy-hold investor. I don't know. It was just the irony in that. Going back to you, Toby, you've been. guests here on the show more than any other person, which I'm very grateful that you spend

Starting point is 01:05:49 so much time with us and the audience. And it seems like our value investing community are not only interested in your strategies, but they're also interested in you as a person. So I'm curious to hear, what is the future hold for you? Do you have any kind of upcoming projects? You mentioned like global ETF before, any kind of other interesting projects that might be relevant for audience? I've mentioned before, I've been writing this new book. So, you know, as part of my, I don't know what you call it, my midlife crisis, as part of the changes to the fund, like this sort of, it dawned on me this sort of idea

Starting point is 01:06:27 that all I needed to do to be really successful in this business. And I think this is true for everybody. This is not unique to me at all, which is why I'm putting it into a book. All that you need to do is to survive to fight another day because you will find conditions that are wildly favorable to you. You know, you do get these opportunities that are better than you could possibly hope for. And probably the reason that people become investors is they encounter one of these opportunities early on when they start investing and they get this big payoff and they say, oh, this is really easy,

Starting point is 01:06:57 which is exactly what happened to me. And then they go and they spend five or six years in the wilderness kind of chasing that opportunity again. But what I've noticed being in this business, seeing people fail out of it and seeing people give up and change their strategy and seeing all of the different ways that you can sort of defeat yourself in this business. And I really do think that this is the key to it, that to, in any endeavor, is just to make sure that you can continue to do the thing that you're doing and that you don't put yourself at risk of blowing up. And so this is a thing that philosophers have considered for thousands of years. This is why the source of the book is this idea that Sun Su had this idea when he wrote The Art of War.

Starting point is 01:07:41 The art of war, I think, is completely misunderstood, partly by virtue of the fact that there was a translation done by this gentleman by the name of Giles. It came out in 1909. It was British. He grabbed this story from this thing called the 36 Strategies of War. So there was this period of time in China called the warring states period. And it followed on from the collapse of one empire. And it was this period of several hundred years. And then there was another empire that emerged at the end of that.

Starting point is 01:08:10 And in the interim, all of these little states warred with each other until there were seven of these states. And they had these, they basically nobody could ever get the upper hand because when you went and attacked your neighbor, you became weak and your other neighbor on the other side would attack you. And so they developed these, there are these stories about that period called the warring, the stratagems of the warring states or the history of the warring states. And one of those stories talks about a Mr. Sun or a Sun Sioux, which is, all that that means. It's a very common name as being a general. And he's about the same period of time that Sun Suu who wrote The Art of War existed if he did in fact exist. And so there's a story about him chopping the head off a concubine of one of the generals. And that story is put at the front of the Art of War. It has nothing to do with the Art of War whatsoever. But everybody has

Starting point is 01:09:02 this impression now that the Art of War is about chopping people's heads off. And the translation that I have read. And I've now sort of delved into this a little bit more and read some more of the back, read some more of these other stories. Sun Su's art of war comes from this sort of Taoist idea. And Taoism is sort of a philosophy, something like stoicism. It's not a religion so much as it's a philosophy. Or religion might be if you don't follow these rules, then you know, you go to hell or you don't receive the bounties of the God. In a philosophy, it's just, there's no canonical book. There's just a number of philosophers who discuss the idea and they all propose their own ways of dealing with it. And that's what Taoism is. And Sun Su is one of those books.

Starting point is 01:09:50 It's just his approach. And if you go and read other books like the Tao Te Ching, which is another well-known Taoist book, it's a surprisingly martial book. A lot of it is about going to war and fighting. And Sun Su's is the same. And when you read that book from this sort of Taoist perspective, it becomes pretty clear that what the Sun Tzu's identifying, that the main sources of, you know, losing your kingdom or losing a battle is the general or the sovereign. So they call the king or the emperor the sovereign in the book. Just doing something that sort of invites self-defeat. So getting angry and attacking when they're angry.

Starting point is 01:10:30 And so he talks about make the other side angry. Don't get angry at yourself. Wind them up and get them all upset. Find the point in time where you have. have the overwhelming odds and attack when you have overwhelming odds. And he goes through all of these things. And I thought, it's amazingly similar to Buffett's strategy. If you take out that sort of martial element, you think about what Buffett's doing. He's looking for these, don't get emotional, you know, Buffett says this all the time. He says it's more about temperament than it is about

Starting point is 01:10:56 intellect. And I think that's very clear from Taoism that that's exactly what they're saying. It's not, he says, Sun Suu says you can find these haughty generals. and you can take advantage of their haughtiness or their arrogance or their ego or their ability to be induced to anger. And you need to be careful of those qualities in yourself. And Buffett says the same thing. You know, conduct yourself in this way that you don't invite disaster doing that. And I think that that's a really great life lesson. But then in addition to that, the natural extension of that in Sun Su as well,

Starting point is 01:11:37 is that he says you need to, the very first thing he says is like, I look at the five elements and I can see who will succeed. And the first element that he talks about is, is the emperor or the general imbued with the way or another way of saying that is the moral law? What they're saying is, does the general or the emperor have this sort of moral right to lead? Are they good? Are they doing things that are good for the people? And if they are doing things that are good for the people, they'll be supported. And if they're not, if they're sort of tyrannical, they're going to be overthrown. And when you look at what Buffett says, he says, you know, you should, and Charlie Munger as well,

Starting point is 01:12:14 you should conduct yourself in this noble manner. Nobility is a word that sort of sounds like royalty. Like I sort of conflate the two, but they're not at all. Mobility is just this old idea of trying to be generous in your dealings, conducting yourself in a honorable way, find other people who do that. this is what Charlie Munger talks about in his seamless web of trust. Find people who you can trust. Find managers who you can trust.

Starting point is 01:12:41 Deal with them on a trust basis and give them the benefit of the doubt. And if they don't sort of meet those standards, then basically never deal with them again. But you can find other people who will behave in this way. And I just think life is better and easier if you can, if you know that that's what you're looking for. And then you've got a standard to hold yourself to as well. hold yourself to this, you know, behave in a noble manner, be honorable. And I see that in Buffett, and I see that in Sun Tzu. And I think that's, it's a powerful way of sort of approaching the world. And that's the book. Wow. Thank you for sharing Tobias. I almost feel guilty because I

Starting point is 01:13:21 read The Out of War just a few months ago and it kind of felt a must have misread something. It is interesting because it's a book about war that's not about war. I certainly didn't read it to the same extent at the same deep level as you did. It's fascinating to hear what you got out of it. I've said a number of times that I have read it. I read it in high school and I probably read it every five years since high school and hated it every single time. And I had this impression that people who were reading it and saying they were getting something out of it were kind of lying. They were pretending like they had seen this deeper meaning in it as a way of sort of making them appear more intelligent or something like that.

Starting point is 01:14:02 And it just didn't exist for me. And I read it over and over and over again. So I've probably read it. It's not an exaggeration to say that I've read it 10 times. And part of the problem is there are so many translations. And the differences between the translations are stark. It's kind of funny how many different ways you can, because it's ancient Chinese.

Starting point is 01:14:20 It's not modern Chinese. And then it has to be translated from this ancient Chinese into English. And so it's almost sort of, it's almost written in this. It's written as. poetry rather than it's prose. And so there's different meanings and that the significance of some term to someone in ancient China is wildly different to the significance of that term to us in the modern day. So you need someone who you need a translation.

Starting point is 01:14:43 And so the translation that I really like, they're called the Shambala edition. I'm just blanking on the guy's name. But I've now bought all of his translations because they're so good. Damn, I'll have to think of it. I'm just blanking on his name. I'll remember it a bit. his translation with his foreword really made me understand what the book had been about because I had been familiar with the Giles, which is the more famous when.

Starting point is 01:15:06 Giles was the one. He was like a, I think he was a British historian in the early 1900s or the late 1800s. And he had heard this rumor that Napoleon had got a copy of the art of war. And Napoleon had used that to sort of great success. And so they had tracked down this sort of art of war. and translated it. It's not a very good translation. He's very critical at the front of the book

Starting point is 01:15:31 of other people who've been pulling in other bits of information that weren't part of the art of war. And then he goes and does that himself. It's the funniest. It's the funniest thing. It's not a very good translation. If you can find these later ones

Starting point is 01:15:44 that bring in that taussed element, they're much better. They're much more easy to understand. And I have to credit that guy. I wouldn't have understood it if I hadn't read that translation at that time. That's one of many, many reasons why I love speaking with you, Toby. We start out talking about current market conditions in interest rate that may or may not go

Starting point is 01:16:04 up and we end up talking about the out of war and different translations and what Taoism is really about. Toby, thank you so much. It's always so fascinating. You always learn so much and I'm sure the audience feels the exact same way. We learn so much from listening to you about life, about financial markets. please give a hand off to anything you like to our audience. Where can I learn more about you, your books, and your fund, Sagan and Deep?

Starting point is 01:16:30 That's very kind. I always love coming and chatting to you guys. It's been really fun watching investors' podcast grow from what is a podcast to like the dominant financial media in the world today. It's better than CNBC because I don't like that, you know, they get on the traders and they talk. It doesn't make any sense. It's not enough time for anybody to discuss an idea.

Starting point is 01:16:53 Well, what do you think about this here? I like it. Okay, great. Let's move on. And then the nice thing about the podcast format is it's a very long conversation, which you can actually hear what somebody thinks. So I'm very grateful that you guys keep on having me on, and I hope that I can keep on coming on in the future.

Starting point is 01:17:07 If people want to get in contact with me, my website is AcquirisMultable.com. That's got a free screener. It's got links to all of my books. My two funds are Zieg and Deep. And so you can find Acquirersfund. or acquire as funds.com is the manager. And you have to search deep as the ticker for the small and microfund.

Starting point is 01:17:29 And then I'm on Twitter all the time, Greenbacked, it's a funny spelling, G-R-E-N-B-A-C-K-D. I kind of post there through the day and I use it as like a news feed. So I am there on and off through the day, although I'm trying to cut back because I've got a little Twitter addiction. Toby, thank you so much for your time. I'll already look forward to our next mastermind discussion in Q3 with Harrow and Chandra. My pleasure. Thanks, Stig. Thanks for having me. That was all that Toby and I had for this week's episode, The Investors Podcast.

Starting point is 01:17:57 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. 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 - TIP454: Current Market Conditions w/ Tobias Carlisle

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