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You're listening to Teip Today Show Traini talk about the Kuruma conditions, we discuss why we haven't seen the up despite the challenges the world is facing due to the pandemic.


We also talk about why billionaire Stanley Druckenmiller says that this is the market that is most difficult ever to write a playbook for and why we expect emerging markets and commodities to perform well and much, much more. You don't want to miss out on this one. Let's jump to it.


You are listening to the investor's podcast where we study the financial markets and read the books that influenced self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to the Investors podcast, your host brought us in. I'm always excited about doing these episodes, but now more than ever, because I'm sitting here alongside my co-host, Trey Lockerby, three. How are you today?


I'm doing great, so I'm really happy to be here. There is so much going on in the markets today, and I think we should dig in as much as we can because there's a lot to cover. And so the way the train I have talked about this episode is we're going to have three segments. The first one is just like an old look at the current conditions. We're going to talk in all kinds of directions on that one. So just talking about what we're seeing in the market right now, what's interesting to us and how we position ourselves.


And then in the second part, we've been talking about our Web application that we have on the podcast. ICOM is called Chip Finance. We're going to talk about some of the tools that we have and what that signals to us in the market and how we should position ourselves. And then at the very end, we have a question from Sean from the audience, and it's about having the right portfolio for the right conditions. But let's just kick this episode off.


One of the things that I can't help but think about is, are we in a new normal for the stock market? And I guess every time I hear the term like New Normal, it's just painful to say, you know, every time you said you just know something's gone wrong.


Shelta after and we've seen the stock market just explode in twenty twenty. Despite the pandemic, the Dow Jones Industrial Average has generated a nine point seven total return, including dividends, and that is trailing the eighteen point four percent return for the S&P 500. Again, far behind NASDAQ doing forty five percent. And so Traini, we're sitting here mid-February and the S&P 500 is up four percent. The Nasdaq is up almost eight percent. And I just can't help but think like, how long can this go on?


So if we look at the most obvious explanation of why all this is happening, we have to talk about the low interest rates and the expansion of the money supply. And what's interesting is that billionaire who has said that giving the current interest rate levels, he wouldn't be surprised if we in the foreseeable future would see stock markets trading around 50 times earnings. And he wouldn't find anything weird about that if you only compare stocks and bonds. And just as a reference, right now, the S&P 500 is trading at almost 40 times earnings and the Shilpi is thirty five percent.


This CLP take into account inflation and normalized earnings.


So during those market conditions, you generally don't want to hold cash in your portfolio simply because it's being debased at a relatively high rate at the moment.


And what I also want to say is because of these low interest rates, you know, we always talk about those interest rates, but it's simply because they just change the entire dynamic of all asset classes. Whenever we have a low interest rate, we can also use a low interest rate for the future.


Cash flows clearly not zero for math reasons, and the very low discount rate just leads to very high asset prices. And so if you consider a stock pick like Spotify, for instance, a stock we're talking about before here on the show, they don't make a lot of money today, but it's expected to do so in the future years from now. So those cash flows are now worth relatively more than the cash flows in the short term because we're just using a low interest rate.


Again, they're not worth more than Castella's today, but relative terms, if we had a higher interest rate, that would be different.


So this is just a very different environment that we're coming from compared to the recent decades.


But enough about how I'm seeing the Kromah condition. So I want to throw it over to you today and sort of like, what are you seeing right now?


So I'm going to, quote, stand drunken Miller here because I think he summed it up the best. He basically said that this is the craziest cocktail he's ever seen in his career and probably the most difficult time to develop a playbook of how to navigate this. My thesis kind of summed up is related to the old joke about don't fight the Fed. I think that is still very true today. And I think we're going to phase into a new era of not fighting the fiscal instead.


So I want to talk about that a little bit. But first, I'd like to kind of take a step back and take a 40 thousand foot view of what's going on, in my opinion. So the first place I like to start is typically with the total market cap to GDP ratio. This is otherwise known as the Buffett Indicator. The ratio is currently at one hundred ninety four point eight percent bit almost one hundred ninety five percent, meaning that the market cap of the entire stock market in the US is one hundred ninety five percent higher than our current country's GDP.


This is the highest it has ever been after even peaking in two thousand at one hundred and forty two percent. So you might be hearing that and thinking, wow, the market is incredibly overvalued. But going back to Stig's point that he just highlighted. The cyclically adjusted P e ratio, the cap ratio, also known as the Shiller p e ratio, still has not matched its peak from the dotcom crash, where it was around forty five. And like you said, Steg is only sitting around thirty five.


So in other words, there's potential for it to increase at least 30 percent from where it is now. So that's happening. And then meanwhile, our government has increased its debt by one hundred and seventy percent in the last 12 years and the money supply has expanded fourfold over the same period.


So there's just an unprecedented environment to invest in right now. I want to highlight just a couple of other points that have happened since covid began last year. And a good place to start is with the US dollar, which has dropped around 10 percent, its lowest level since twenty eighteen. In addition to that, US corporate debt is up now ten point five trillion and usually corporate debt goes down during recession as companies kind of reliquefy. But actually it's increased during the covid crash, even while corporate profits are down 18 percent.


So what I kind of want to do here, Stig, is walk people through a little bit my framework and we talk a lot about this on the show. But I kind of want to just walk the dog a little bit on it, because I think for the listener, they might be struggling to piece all this together and say, what does this all mean? And you hear a lot about the Fed and what they're going to do moving forward.


So if we take a look at interest rates right now, the nominal 10 year, for example, is at one point nine percent and the PC is at one point eight seven and the CPI is one point four. So the inflation indicators, essentially, that means that the real 10 year rate is negative. It's now negative one point two percent. And that is important because basically all of the stimulus that we've been talking about just now is expected to lead into inflation to some degree.


No one knows how much or when, but people are talking a lot about it working its way into the market, especially with this new stimulus package of one point nine trillion dollars that's about to hit the market. The expectation is that all the stimulus money is going to continue to trickle down into the mainstream economy and eventually start leading to inflation. We can talk about how to define inflation rate, but as far as typical goods and services go, we do expect it to start growing.


And the question is, what is going to be the Fed's response to that? The Fed could continue to print money, do quantitative easing and buy these government bonds back off the market, which would artificially keep the interest rates low, or they can not do that and let inflation rise, which means that bond interest rates will rise.


And if that happens, I think a couple of things happen. So the common opinion about this is that the Fed can't afford to let the interest rates rise. So the expectation, I think, is weighted a little bit more towards the fact that they're probably going to print more money, probably going to buy back more bonds and keep these interest rates artificially low, which means the real rate is going to keep or is going to continue to stay probably at a negative number, which means that commodities might perform really well moving forward in the next few years.


And commodities, interestingly enough, just broke out a downward trend line going back to two thousand eight. So they're starting to kind of revamp a little bit. So my expectation is that commodities are going to continue to perform well. I also think that I don't think we've seen the top of this market yet. And going back to one of these things, you said that before, Trey.


You know, you compare this to two thousand with the dot com bubble, and it's hard to say like with just using the Sheila and Sam of being thirty five back then was forty five. Is that any indicator of where we are? I want to say that this situation is very different in the sense that the interest rate is just very different than two thousand and still went up to four to five.


Like we're seeing something very, very different right now. And I have a hard time wrap my head around whether or not this is a new normal. And again, time is infinite. So let's be careful about saying what a new normal is. But Ridley was right. And Trey, you talked about before your negative real returns on government bonds. And yes, we can always talk about how you define inflation, but yeah, this just called a zero percent.


Just be generous and say zero percent return. Well, if you got a zero percent in bonds and that's one, how do you want to preserve your wealth if you're afraid of inflation?


Equities is just not a way of generating cash flow. It's also a way of protecting yourself against inflation.


So these are just unprecedented times. It's so interesting to see what's going to happen. And it's sort of like takes me to one of the other points I wanted to talk about here. With the current conditions, the US, no surprise, just seems very, very expensive, right? Now and of course, again, this is due to the low interest rate levels, you can even then compared to Europe, that, at least to me, doesn't look as expensive right now.


And we have negative rates here in Europe.


So right now, I'm not looking to invest that much in the US. I have some positions in the US, but not a lot, especially not compared to what it used to have. Where do you see opportunities in the market? And for those of you who have been following what I've been doing in the previous Kerma conditions in the Mascoma episodes, I've talked a lot about looking internationally. And right now I find valuations in emerging markets more appealing. I wouldn't say I find them very appealing.


But again, you have to compare this to the opportunity cost. And if your opportunity cost is the S&P 500 right now, well, then to me, emerging markets looks more interesting. And to do that for a few different reasons. They do that because they are trading at just more attractive levels, but also because it's a way for me to diversify my portfolio. So let's talk about how they have performed in the past. If we look at the emerging markets and this talk about how to define emerging markets.


Well, most ETF providers would place emerging markets, the primary markets as China, Taiwan, India, Brazil and South Africa.


In that order, it is a bit different, like whether you like Vanguard or BlackRock or whoever you go to. But like more or less, there is this consensus that those are the main emerging markets.


And if you look at how they perform from twenty two thousand nine emerging markets did nine point eight percent where the S&P 500 did zero point one percent. And that's also known as the lost decade. But then from 2010 to 2019, emerging markets yielded three point seven percent, whereas the S&P 500 did 13 1/2 percent. So I just wanted to mention that you really show that this is also a diversification play. Like, yes, perhaps I would agree with you, Trey.


I like you mentioned before, perhaps this stock market hasn't seen this top yet. It's difficult to try and guess what the stock market's going to do in the short term, but I wouldn't be surprised either if this just continues for some time. But I want to take some chips off the table and start investing in other markets because I don't know how long this will go on in the states going to emerging markets. If you're a bit more adventurous than I am, perhaps you want to go to the very cheapest markets.


That would be something like Russia, Turkey. I'm not that adventurous. It's a little too exciting for me. So the way I'm playing it is that I focused and invested in a broad basket of emerging markets countries. So it's not a specific play on countries per say. It's more like a basket of countries.


Yeah, I tend to agree with you on that stage, I just want to highlight, though, that you have to honor your circle of competence at the end of the day. And I just spoke with Joel Greenblat about this, and it was a great reminder that, you know, he's very US centric and that's because he really understands corporate structures and the laws here in the US. And I think it can be beneficial to allocate some of your portfolio globally.


I no doubt think that that's a great strategy. Personally, though, it's not really within my circle of competence. I do think, though, just going to back to what Stanley Drunken Miller was talking about, that Asia in particular seems to be, of all the markets, probably a pretty good one, mainly because if you compare their response to the virus to the US, it's drastically different. I mean, China, for example, hasn't even increased their M2 supply while ours has gone up in twenty five percent or less in related to GDP.


And then additionally, China has practically defeated the virus. So they are poised for, I would think, a much stronger recovery, a much stronger currency, and I think a much stronger growth rate over the at least the next couple of years.


Again, not to go into a long discussion about inflation. I think we've done that multiple times on the show. But like we do see a lot of money printing going on right down in the States. And you started out by talking about 10 percent depreciation in the US dollar compared to a basket of other currencies. And it's just I don't know whether this will continue. And again, I do want to say that whenever you do make those currency baskets, especially compared to if you look at the US, they primarily compare it to the euro.


So you can always make the argument is the US dollar is not performing well, is it because the euro is too strong, but we print as much money as we possibly can to sell? It just seems to be to some extent like a race to the bottom. And one of the things that I really like about emerging markets, despite all the bad things you can say about emerging markets and political stability and all that, is really that you don't, at least right now, don't have the same amount of money printing.


Even if we would see that happening, it might be nice to have a sort of diversification in your fiat currencies.


I don't it's not like I see dollar breaking down or anything like that or for that happen to the euro at all. But I do see a lot of debasement in Horizon. So a kind of like this as an inflation play, too. And the currency play. Let's take a quick break and hear from today sponsor.


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Go to zip recruiter dotcom investors zip recruiter the smartest way to hire. Let's get back into the podcast. Yeah, and it's got sort of a positive or negative feedback loop, however you want to talk about it or do it, mainly because, you know, as our dollar depreciates, we're essentially mercantile turning these countries like China into a mercantile country. And so they've got already a current account surplus. And that's just going to continue as we continue to drive more of the economy back to them because of the currencies weakening.


If I can be about a bit on that, I wanted to talk about the concept of resulting and we spoke with a Duke back on episode two hundred and thirty one will make sure to link to that in the show notes. And we talked about how whenever we make decisions and she specifically mentioned poker, she used to be a poker player, but she also said this, the same with your portfolio. This is the same as what are you doing in your life?


Think about running this experiment, whatever you want to call the thing about having this scenario a million times, and that's how you're supposed to position yourself. So if you have, this might just be a small example. But if you can be let's say you had the example of a smoker and a non smoker and then the non smoker would be the person get a lung cancer, some people would take that and say, well, it doesn't matter if you smoke or not because, you know, even the person who is not smoking would get lung cancer.


And my dad, he's been smoke all his life. He doesn't have lung cancer.


But then obviously, if you ran that situation a million times with the same probability, clear the person who smoking would get lung cancer. And this is just one of the things that I'm thinking about right now in these Kromah conditions. You know, I get asked a lot. I'm sure the same for you to a lot of people from audience asking, so what are you doing right now? And what I would not be susceptible to is too much resulting.


I really want to focus on what if this happened a million times. And that's whenever Rodela comes in and he talks about, you know, you need to diversify at different currencies, different asset classes in different countries. And they definitely think that's the right approach right now.


And just one piece of action that I've taken here recently, I tend to be a slow learner whenever it comes to following my own guidance. But I I've sold my position in Spotify. I brought up Spotify. I was back in episode two hundred ninety nine. This was the Q2 mastermind meeting. And since then I made a decent sixty five percent return on that. Since then you can say it's been a bad decision to continue running up. So I don't know if I really phrased this is a good decision or a bad decision, but my point about this saying was that I made that decision because I wanted to diversify more, but also because I was thinking about running this scenario a million times.


I don't know what specifically is going to happen with Spotify without going too much into the specific stock pick. I could talk about what I expected to happen with the churn rate of listeners. What I expected to happen with the gross margins is just that really has materialized the way that Apple has gone into the market and Amazon made changes in the podcast market. I was just like, no, this is just not for me. And who knows who's going to prevail in the music and podcast space, Spotify, Macross, Cross, all of them.


And you can rightfully point laugh at me. But the point I wanted to make with this is not whether what's going to happen, the podcast market or the music market is let's run this a million times and what's going to happen. And I think that going out of this and I don't know, whenever this area that you refer to the forest and it's called the craziest market or whatnot, we have experience. I don't know whenever you can. Officials say now that has ended.


But I think that coming out of it, there would be a lot of people saying, oh, I see was obvious to me.


So that's why I did X, Y, C, and you can see how I met 10x of my portfolio. I would say that in this type of scenario, think about, again, doing this a million times and say be humble and say, I don't know what's going to happen.


I might not capture the greatest of all upsides by investing in this particular security, but I just want to be humble then just protect my downside.


Like, really, really protect your downside. Diversify into taking this from Adelia into different currencies, different countries and different asset classes.


That's really like my gospel right now going into these my conditions. Well, you know, they say history doesn't repeat itself, but it does rhyme, and so I agree with you that I wouldn't necessarily just compare today's market with two thousand in the run up with the dotcom bubble. But I do see another roadmap in which it could slightly rhyme with that. And it kind of goes into what I was talking about with the stimulus and how it's going to work its way into the economy, because there's three really amazing and unique, I think, situations sort of playing out from the stimulus.


So, for example, one is that household finances might be in the best shape they've ever been in ever, which might sound crazy to some folks because obviously with something like the covid crash and the recession we've been in in history, you would think that that would be the opposite. But in fact, personal income is actually up over five hundred billion dollars, which is even up a trillion dollars from two years ago. A lot of the surge came from the stimulus package, the stimulus payments and unemployment benefits.


But private wages and salaries are back at a new high. So our average hourly earnings and weekly earnings and on top of that, household debt payments are down one point five percent, which is the lowest it's been in 40 years. And this kind of makes sense, right? Because if you get all this stimulus money, especially the unemployment benefits, but you've got nowhere to go and nowhere to spend it on. I mean, restaurants haven't even been open in the last six months in most places.


So what do you do with that money? Well, you probably pay down your debt. So a lot of the households in the US are sitting on lower debt than they've been in the last 40 years. And if you're not paying down debt, you're probably saving that money. Right. So savings has increased to levels not seen since the 1970s, which makes sense as well, because people are earning good pay and not able to spend it. So I think all of this said you've got probably the largest amount of pent up demand probably since the nineteen twenties.


And so I could see as the vaccines start to roll out in the next six months, which are already doing now, and people are able to get back into the economy, they've got more money than ever to do so. And then you're going to start seeing a lot of these companies that haven't even been earning profits. That's whose stock prices are soaring. They're going to start earning more profits, which I just think is this positive feedback loop that's going to grow the stock market lease much higher.


So, you know, at the same time with you, Steg, I say all that and this is not an uncommon narrative. Right. You've heard this probably from other folks. And that in itself, the contrarian in me is squeamish a little bit, because the more I hear about something, I'm like, OK, well, probably the opposite is about to happen. Right? But there's one other dynamic I also just want to touch on, because I do think this is somewhat of a groundbreaking event and that is the rise of retail traders is what I'm calling them.


But basically, you've heard about the Redit communities that are banding together to short squeeze stocks like game stock that may have just felt like a flash in the pan and even old news by now. But I don't think we've seen the end of that. And I mean, what we saw is basically the empowerment of the retail trader in ways that we've never seen before. And since people are sitting at home not working or even at least working remotely and potentially having more money than ever and looking to put that money somewhere, a lot of people are picking up stock investing, stock trading, speculating for the first time ever.


And if you look at charts about call options, for example, it's incredible. It's going parabolic. I mean, people are jumping into these options, I hope, intelligently, but it remains to be seen. But the point is the adoption of this is probably higher than it's ever been. And I think that's only increasing, especially as these retail raters are empowered with more money and seeing the results from this. I mean, basically the power of banding together and putting that into individual stocks.


So I think that's just a further dynamic that is very new to this market and probably unlike anything we've seen before.


All right. Let's transition into the second segment of the show where the topic is teip finance. So TPE finance was something that and I originally created because we wanted a tool that could help us in our own stock investing decisions. And then a bunch of stuff happened. And now we're not just only looking at equity, should be looking at all kinds of asset classes because of what's happening right now. But to me, equities, this has always been my home, like that's always where I revert to.


Still have around 60 percent of my portfolio in equities right now.


And one of the things that I always find very interesting in finance is the filter. We had the shochu, the cheapest large market and small cap stocks. And I always find that very valuable for me whenever I stop by research. And what you see right now is that where that could potentially be value is in a lot of financial companies. Those are the companies that the filter finds to be the cheapest compared to their earnings. And you might say that you're not surprised by that financial companies have been unloved for a long time for a number of reasons.


You can even say that they've been unloved since 2008 due to the systematic issue that there have been the financial sector. Also, capital requirements for banks today makes it much harder for them to make the same amount of money simply because they can leverage as much as before. They still need to keep more of the cash on the balance sheet. And then the low interest rate is typically not beneficial for banks. And I would talk about so far like this, just a low environment.


Banks used to have more than 80 percent of interest income. Now, for instance, Bank of America, it's 50 50. So they're transitioning away from having interest rate income to the same extent as before.


Perhaps they're also feeling that we are some sort in a new normal, but also one of the reasons why you see all these financial companies being so cheap, at least compared to the rest of the market, is that financials are really set up for major disruption. Like all the things that's happening in FinTech these days, a lot of the old big banks just doesn't seem as appealing to most people as they used to be. And I want to say that the way I decided to utilize the filter is to invest in one of those old banks, you know, one of those noninterest banks, at least according to the market.


I specifically I invested in Bank of America. I pitched that back in the last year, my conditions, and it was a three hundred and sixteen. And I would like my investment thesis of that in that episode back then at the time was trading around twenty four dollars. Now it's trading at thirty three. And I'm still sticking to my investment thesis of intrinsic value between 40 and 50 dollars.


So I'm holding on all of that. Being sat in a bull market. Everyone seems to be a genius.


So please don't take that from all of this. And we have seen a very nice run up in banking. But as we talked about here before, we really seen them run up in more or less all kinds of asset classes these days.


Currently, the only sector that is more unloved than financials, that's energy, which is quite interesting. So if you're really a big believer, I mean reversion not just for the financial industry, but also in energy, you can invest in an ETF called XLE, which is a major energy ETF with more than 30 billion dollars on the management, is only point one three percent in expense ratio. I just want to highlight to stick that on the the filters that we have on the tip finance tool also include a momentum status.


And typically, if I were looking at this, especially with banking, which, to be honest with you, really scares me as an industry. But I guess that's sort of the point, right?


You're seeing high yield, but you're also seeing the price momentum turn green on a lot of these picks, which I think is an interesting thing to point out, because, you know, typically with things this cheap and the secular trends we're seeing, I would kind of assume that with the banks that aren't able to adapt to the new economy, might be in serious trouble and could become value traps of some degree. But the momentum, I think, is just a bit of a hedge against that if you're adding these to your portfolio.


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All right, back to the show. I think you're right, Ray, momentum is definitely something to take into account. I tend not to focus too much on momentum as probably as much as I should at heart on the value investor. And I really I want to read the financial statements and see, like, how to get bang for our buck.


I don't always look at the stock performance of the particular stock, but I do want to say that whenever I look at the banking sector, the banks that I see most ripe for disruption, all the smaller banks, simply because of what's coming in here with fintech, there will be a lot of disruption even for the bigger banks. But even so, the bigger banks are to a large extent still in the forefront of this development. And they are such a core part of the infrastructure that I would be highly surprised if there would be completely left out of the disruption that we're seeing right now in the positive sense that us and I think the best example I can give you is what happened with Visa and MasterCard.


Like we all talked about the disruption that were happening with payments.


And here PayPal, the biggest disruptor, would then come in and say, well, we probably have to use the MasterCard network so to be set up. And so I think that's a very important thing to include. If you look at the big three banks, I think they would benefit from it or even in my their case, they won't be as disrupted at some of the regional banks. I think the regional banks are really in for some hard times and talking a bit more about what to see in the type of finance replication.


I also want to highlight that we now have a new international filter. As you can tell, I always talk about investments in the market. So we finally did something about it. And now you can see the valuations of the different markets in there. You have the cheapest markets, Russia, Turkey, Poland. They're priced into something along the lines of a 14 to 17 percent return.


But again, you have a high local currency risk. So this is something that's in local currency, which probably not especially for Russia, Turkey.


It's not something that I would be again, it's probably too big exciting for me. But if you're really just hunting for value and if you see this differently, it could be something that you want to invest in. Like you mentioned before, one of the worries that I have right now is holding too much in US dollar. This might be different for you. Like if you live in the States and you shop in the state and you give your income in in US dollars, it might be different from you.


I have a lot of my cost in other currencies, the US dollar, but I get my income in US dollars, so I just don't want to hold too many US dollars right now.


So investing internationally, again, this is a way to diversify into different currencies.


And another way to use that filter is to look at high growth markets. So I would say that a market like India is very interesting right now, but I don't want to drag on too much about the international markets. Like I mentioned earlier, I'm buying into an entire basket of emerging funds and I'm using the filter here to figure out like, where do I see value?


Just dig. I'm curious what you think, especially with the financial sector, about Buffett decreasing his allocation to banks in general over the last year. What do you think about that? I think that's really interesting, I do want to say, like as a caveat to that, that he has chosen the winner and that is Bank of America. So he has sold his stake, for instance, in Wells Fargo. And and for everyone who's been following Buffett, he's been praising Wells Fargo for I don't know how many years.


And he sold his stake. I want to say he sold his stake in JP Morgan to. Yeah, he dropped the position in Wells Fargo and JP Morgan and totally out of Goldman Sachs. Yes.


So he's betting big on Bank of America, which at being a fellow investor, I don't think I like you mentioned, Trey, don't fight the Fed, but, you know, don't fight too. I want to say so. It's a it's an interesting stock, but I don't really know what to make out of it other than Buffett just doesn't know. I think it's the same reason why he sold his airline stocks like they could still be value out there.


And by the way, the airline stocks soared after that. But I think he just needs clarity right now. I think that's part of it. The other thing is and I'm not definitely not an expert in this, this could also be for regulatory reasons. I think he's still allowed to hold several banks. But there are some issues there right now. The way that Berkshire Hathaway has to file is that they're considered an insider. I want to say that the whole something along the lines of 12 percent of Bank of America, they can own up to twenty four point nine percent of that company.


They have to disclose all the time, but they can do it. And then they will have to register as banking hold company before they can buy more. So they might also be some regulatory reasons why he's chosen the way he have. And perhaps he needs to pick just one stock. But I'm not 100 percent sure of of the regulations when they when it comes to that. All right, so let's hop to the third segment where we're going to play question from the audience, and this question comes from Sean.


Here we go. Hi, guys, my name is Sean, I'm from the UK, and firstly, I want to thank you both for the knowledge you pass on every week. I'm a fairly new investor and it's helped me learn a lot. So thanks, guys. So I have two questions. Firstly, as momentum has been built in value investing strategy for some time, how is it actually measured? Are there specific metrics that you follow and how do you use these metrics to determine your asset allocation?


Do you always have a selection of volume growth stocks in your portfolio or do you start selling some great stocks when the momentum changes and start allocating money into more value type stocks, for instance? And my second question is really about diversification. There's a notice that when the momentum of the market breaks down, it seems that a lot of the time everything comes down in tandem, including hedge your bets in gold, et cetera. So it's true. Diversification actually split the money between assets like real estate, bitcoin, physical gold and bonds rather than sector specific industrials, tech, oil, et cetera.


Thanks, guys. It'll be interesting to know your answer. Cheers. So, Sean, I love this question, and it's something I've been thinking a lot about lately, and I want to say I've had somewhat of an epiphany even in the last six months.


And a lot of it has come from my discussions with people like Kathy Wood and a few other folks. And what I'm kind of learning, at least about myself, is that my style of investing needs to be more dynamic. And I say that because I believe that the current market is more dynamic than it's ever been. And so when the facts change, my opinion changes. So how do you ask me a year ago or six months ago, I probably would have told you that I'm a hard core value investor and I rarely look at momentum.


I think that's still true. But when I've been describing this to people, the best analogy I can kind of come up with is that given my background used to be in music and I kind of reference that a lot because it's my point of reference. So if I'm talking about music and being an artist in music, I would probably listen to a wide range of music. Right, whether it's folk blues, whatever.


And if I were going to write my own music, it would probably incorporate some aspects of all of that. Now, I could be a folk singer and just be a hardcore folk singer. Right. But that's not been my style. I typically I listen to a wide range of music. And so therefore, if I were to make an album, you probably hear elements of all different types of music, all sort of aggregated or combined together. And that's how I'm kind of looking at my investment style right now.


So to be honest with you, given the current market conditions, I'm pretty heavily weighted in in commodities and bitcoin and probably what you would call irresponsibly long even on Bitcoin. And then on top of that, to Stig's point, I do have some positions in Visa. I do think the fintech space is going to be disrupted. My play has been in Visa so far and square. I'm heavily invested there and I think that's very different than what my portfolio would have looked like even a year ago.


And it's mainly going back to something that I was talking to. Kathy, what about mean reversion with value investing? Mean reversion was a very, almost predictable cyclical thing. But with the new economy and the disruption taking place and the innovation taking place and things like the cloud and the Internet really taking off, and it's just provided a lot of gray area for me.


So I'm still trying to figure it out for myself. I would just tell you that the bottom line here is that I've learned that you can be more flexible and maybe that's bad advice. You correct me if I'm wrong, but a stick might have a different opinion for me on this. But what I'm trying to say here, I guess, is that I think the market is more dynamic than ever. And so my philosophy is to try and be is more flexible than I've ever been.


I think it's interesting that we met at the bookstore, Healthways annual shareholders meeting, and there was definitely not a lot of talk about Cathy, what type of stocks? I don't think anyone mentioned Tesla. We will probably be shunned from that gathering. If you said something like Tesla, like that would be a curse word. And I don't have any position in Tesla, for that matter. But I think you're right that the market dynamic and I came to think of what are the most prominent value investors, how it marks here recently in his memo, which is just amazing resources, his memos.


But he talked about how he are naturally skeptical about new things happening because he's a value investor and that is his strength, but it's also his weakness. But what you also saying, Trey, is that you're doing that, too. You are looking at stocks that someone like Warren Buffett typically wouldn't be investing in. Is that because your circle competence is just different? Is that just because you are seeing market in perhaps a more let's call them modern light or system?


Because a guy like Warren Buffett being a true value investor probably feels that this going to be a major mean version. This is just something that would pass.


Yeah, well, to that point, I just want to highlight something for everybody. Warren Buffett is the first person to tell you that value investing is redundant. Right. What we're talking about here is investing. And I just think that people get a little too dogmatic in which lane they stay in. And, hey, I am this kind of investor, and I actually think that that might be a mistake, especially with the dynamics at play in the current economy.


We've never seen this level of involvement from our Federal Reserve, for example, and this amount of stimulus and this type of economy and these dynamics with the once in a hundred year virus. I mean, these are different times. And I know that history repeats itself, rhymes, at least to some degree. But I guess what I'm trying to say is that what we're talking about is investing. And that just means that I'm putting money out now to get more money in the future.


What I'm kind of trying to highlight here is that I recently tweeted about this and the idea was investing is everywhere. I mean, hiring a new sales team is investing, building a gigafactory and Berlin is investing. So to me, I try not to get wrapped up in the labeling.


If I'm a value investor, I really just look at that like, hey, I'm an investor and I'm going to invest where I think the biggest return or the biggest yield is right now. Otherwise, I'm just waiting out opportunity costs and reallocating to different buckets based on that.


So, Sean, you might be sitting out there and thinking what they're supposed to answer my question, and and so let me try to think of a question and we do apologize and we going back and forth, you know, so many things to unpack.


And so to the first part of your question about managing a momentum strategy and against Trey's point about not saying this is momentum and this is value or this is growth, but if we stay within the more classical definition of that, as you mentioned, Sean, momentum has outperformed value dramatically over the past decade. And this is not surprising since we are in a bull market. Momentum strategy is just typically doing better whenever you are in a bull market. Persay, but in particular, recent times mentioned strategy has just performed really, really well.


So just a quick reminder for those of you who are not completely familiar with what I mean whenever I say momentum strategy, that is buying the best performing stocks regardless of the fundamentals. So it's really just a question of buying something that's going up. And then whenever they're not performing well, you sell them off and then you invest in the newest price performing stocks. If you want to do a momentum strategy, the best way to do it is through an ETF simply due to the tax efficiency.


Don't try to get out of Tesla now. It went up 12 percent. Let me just ride that momentum from a tax standpoint. It's just too difficult to do that. And I want to mention that and then wanted to say that the most popular momentum ETF, if you are us based and you only want to invest in US stocks, that is the stock picker empty. You am a person. Invest in SDM since live in the European Union, which is a global momentum fund.


But the principles are really the same. It's all about the price action. So going back to Terry's point, about like how dynamic is the market? Why are we seeing in the market right now? To me, it's too hard to know if momentum will continue to outperform value. If you force me to choose for the next 12 months, I'll probably say momentum for the sole reason that there is momentum behind momentum right now, because with the excess of money printing we have right now.


Yeah, the answer is most likely. Yes. But really, as a Segway into your second question about diversification, you know, I still own a value ETF. Gissing with the stock market will do in the short term to me is just too difficult. And I can easily see the stock market decline. I mean, who knows what's going to happen.


We might see a new mutation and the vaccines doesn't work then or whatever, like I don't know what's going to happen. And again, if we do see a bear market, at least traditionally we've seen that stocks traditionally perform better that are characterized as value stocks. And the other thing I just want to say is that there be a lot of bashing on traditional value investing picks. But keep in mind that with everything that's happened here with the coronavirus, this is not a normal crisis.


If there is such a thing as a normal crisis, like value stocks, you know, airlines or railroads or whatever you want to mention, value is just much more exposed to a complete lockdown of society in a way that we just never seen before.


You cannot compare this to what happened in 2000 or in 2008 at all, which is really why Belgium has underperformed to that extent. Yes, the whole evaluative, but also whole momentum itself right now.


Yeah, and I just want to highlight to Sean that a lot of this has to do with interest rates, right? Because if inflation does start to creep into the market and interest rates do begin to go up, then I think that at least the growth stocks that we've been used to performing or outperforming over the last decade will probably be the first to take a hit. Right, because basically the higher the interest rate goes, that becomes the new discount rate that's used.


And when you're not a profitable company, it gets a lot harder to justify the really astronomical prices that we're seeing. So I would start there. I think, you know, as interest rates start to rise and that's something I'm watching really closely, I would then shift more to a value based portfolio and it's mainly tied directly to the interest rates. So, Sean, what I would tell you is that momentum is not how I approach investing. It's probably the last box I check before I go into a pick.


Going back to the idea of just simply laying out money now to get more in the future, I do my due diligence on a stock. I really try and develop the narrative around the free cash flow and project that out into the future. And then the last thing I do is typically check momentum. It doesn't make or break my investment decision. If I do see that it's become green recently and in a positive trend, then that's a good thing that might even further give me conviction into the pick, but it doesn't really dictate how I invest.


What I would tell you, though, is that I'm really watching interest rates carefully because with the risk inflation really creeping up in the near future, potentially my growth kind of picks that I might be looking at now, I would be more skeptical of, mainly because as interest rates rise, that becomes a new discount rate. And companies that are not producing free cash, those are not profitable will probably be the first to take a hit. And that environment of higher interest rates, we've seen value type stocks outperform.


So if anything, my portfolio might shift more to a I guess you would call value type of portfolio, but it would be mainly derived around the opportunity cost with the interest rates. So let's talk about this rates. I'm very curious to hear how you're seeing this. We have guests here on the show, primarily on the Wednesday show, where Preston talks about Bitcoin, which talks about the expansion of the monetary base line, typically referring to as M2.


They're saying that if that's 15 percent, that's our discount rate or they might even say that's our inflation. And now you talk about what's happening with interest rate. You're talking about it might be say zero and you're looking is it going up to one percent? Like, what is your discount rate whenever you value different assets? That's a good question. What I just said might sound like I own a lot of growth stocks, which I really don't. So interestingly enough, I was just talking to Joel Greenblatt about this, and he said his benchmark, no matter what the environment is, is six percent.


And I found that to be really interesting. And the way he's looking at it is the hurdle rate he's trying to get over for his investments. I have a pretty aggressive hurdle rate, if that's how we're thinking about it. My typical hurdle rate is 15 to even 20 percent sometimes, but it really has nothing to do with the M2 money supply. It's basically just looking at the hurdle rate that I want for my investment returns. When you're in a bull market, especially like this, where you can find opportunities that are yielding 50 percent a year, I think even 15 percent is somewhat conservative, honestly, which might sound crazy, but in this type of environment, I'm looking for a much higher hurdle rate than I might be if there is a higher interest rate environment moving forward.


Thanks for your feedback on that tragic is to me, it's been quite difficult to figure out what your buddies can be. You know, we both follow Warren Buffett and we heard him talking about using the 10 year Treasury.


And so whenever the 10 year Treasury is like one percent, like, what do you do? Because if you do, the math is just astronomically high valuation, and that's probably not the way to go about it. Well, I want to touch on that, right, because Buffett has also said that if he were managing a million dollars, his hurdle rate, I mean, he said this indirectly, but it was basically 50 percent because he was basically saying, look, if I had a million dollars, I could produce 50 percent a year.


Maybe that's his hurdle rate necessarily. But that kind of tells you with smaller amounts of money, which is what I have, I'm expecting more aggressive growth. Yeah, and I'm with you today, if I had to answer my own question, what is my discount rate to me, that's just such a tricky question right now. I wish I could just look at the 10 year Treasury and say, oh, this is my rate. Warren Buffett was asked about this during one of the annual shareholders meetings, and he said that if it was a very, very low and I think he probably set this back in 2007 twenty or something.


So the Treasury rate was definitely much higher than it was today. He said we can't do it. I just have to use like a higher number regardless. And I don't know what that number is like.


Yewtree, I'm not looking at M-2 and saying, well, you know, if it's spent by 15 or 20 percent, that's what I'm going to use to me. I'd say it doesn't make that much sense to me. That's not the type of inflation I'm seeing right now. Also, I don't believe in the narrative that tech is going to disrupt everything. And if you're not growing with call it 15 and 20 percent, you don't have a business anymore.


That's not how I see things. I understand the tech people saying that's the world and that's how I see it. I understand the argument, but I just see it differently. If I said this clearly higher than zero percent, but it's lower than 15, I think it's probably too vague of a response. But I think it's you would be doing yourself a disfavour if you said, oh, it's like six point seven, eight, like, I think that would be too tricky.


And the thing is just more about understanding what is going on in the market more than anything else. Having said that, I just want to quote Charlie Munger, who said, if you're not confused, you don't understand what's going on right now.


I want to challenge you on that a little bit. Only because I'm just really fascinated by that, because to me, the discount rate is the hurdle rate. So if you're going to lay out money, you're saying, look, if I'm going to lay out this in money, I want this percent return. So it's interesting that yours might be fluctuating depending on the pick. So you're like, I'm looking at Bank of America. I'm interested in it because I think I can get 12 percent.


But over here I'm looking at VSA. Maybe I get 15 percent there. You're not sticking to a fixed discount rate. That's interesting. Yeah, I think you bring up a good point, I think that it's all about staying within the circle of competence. If I were to invest in something I don't understand as well, and I would just need a higher margin of safety. And you know how it is with math. Like if you use a lower discount rate, you will come up with a higher valuation and vice versa.


So that's really the reason why I'm doing that. But you are right, like you could be saying across all assets, I'm going to use the same discount rate.


What is most attractive to me and I think that's also what I'm doing. And that's also one of the reasons why I'm still focusing on let's call the traditional value picks. Like to me the thesis about if you were to live in a world where you have to grow your company at least 50 percent or 20 percent in fiat currency terms, like you would only have big tech companies left and you would have changing companies all the time because those tech companies who before grew were like 20, 50 percent.


They won't continue doing so. And we'll just have a whole world of tech companies that will change every three or four years, or it might be oversaturating a bit.


But that's not how I'm seeing things at all. I see we have Kuruma conditions right now where giving that this specific type of virus that we have, giving this specific type of printing that we have right now, we see tech companies do really well. I don't know how long this print is going to continue. And I see us change environment. I'm not saying we'll come back to this is going to be 2017 or this is going to be two thousand five.


That's not what I'm saying. I'm just saying that we have ideal terms for tech companies right now to perform really well. The market has realized that, which is also why Tesla is the fifth most valuable company in the S&P 500. And someone like Cathy, what would know a lot more about us than me? She still feels that there is some runway and will continue to go up. The market knows that these are ideal times for tech companies. And that's also why a company like Apple, which is you might even call consumer goods and not a tech company anymore, more like depending on how you define it, is trading at four times earnings.


To me, it's already been priced in. And I don't know, it might be priced more than N, which is why I still go with traditional stock picks. I still have a valuation because I believe in that mean reversion. Tech stocks are doing great, but the question is, will they be doing great compared to the current valuation? And of that I'm not too sure of. Well, I think this actually ties in really nicely with the debate over being highly diversified or being highly concentrated also because another epiphany I've had in the last year is I used to take a very diversified approach to my portfolio and I just wasn't seeing the movement I was really expecting.


Again, I'm starting with a pretty small portfolio. And in the last year I decided to switch it my strategy and decided to start going big into my high conviction bets. And so my portfolio over the last year has become much more concentrated, as I kind of alluded to earlier. And I think that goes hand in hand with what you're talking about, Stig, because if you're like, hey, tech stocks are the only things yielding 20 percent. Well, I mean, in this environment, my portfolio might take the shape more allocated to something like that in a more concentrated way, wherever the yield is that I can expect.


That's just how I'm approaching it now. I think my opinion would change once I get to a certain scale and I'm just looking more to not lose money and protect what I own. I probably move into a more diversified model at that point. But I do want to kind of speak to that because I think it's another ingredient here to what we're talking about.


I don't necessarily know which asset class is going to do best.


I want to say that while I'm quite sure of is for most retail investors, it is going to be the asset class is going to determine how well you perform, not necessarily the individual stock picks. And also want to say that you should be in the antithesis of cash. Right now we can make arguments why should be in commodities, we can make arguments. Why should be in stocks? I think most people are probably in agreement that we shouldn't be in long term bonds right now, but like you should not be in cash right now.


Whether or not you think that the money printing machine right now is reflected into a higher inflation number, I'm of the opinion that the CPI is understated and we have a lot more inflation. That what the official numbers are saying. Even if you disagree with that statement and you still use CPI as you measure, you would probably still not like to be in cash right now.


I agree 100 percent with you. I'm fully allocated myself, so I definitely am with you there. So we just covered a lot of ground. I hope you got something useful out of that. And since you ask such an amazing question, we're going to offer you a free annual subscription to our Tippee finance tool as well as our intrinsic value, of course. And if you're listening along right now and you haven't checked out those resources, you can Google tip finance and we'll pop right up or you can go to tippy intrinsic value dot com for the course.


All right, guys, so we really hope that you enjoyed this episode, and I sure have a lot of fun and it's always fun to speak, to try and especially about the current market conditions. It's the first time we've done this type of research together and we hope to make many more. If you listen to this and you not subscribe, please make sure to do so. Make sure to subscribe to the feed on whatever podcast app you're using, Apple podcast, Spotify, whatever that is.


And if you do not have our episodes going out every weekend, it's typically more traditional value investing. But even also interviews, for instance, with Kathy would surely have a great interview coming up. Jon Greenblat. So it's a lot more that's called the traditional. We still don't ask content and we ask Preston every Wednesday is talking about Bitcoin. But that was all the training I had for this week's episode of the Mestas podcast. We see each other again next week.


Thank you for listening to type. 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 the investor's podcast dot com. And 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 rebroadcast.