You're listening to Teip on today's show, we've collected some important audio clips from some of the most prominent investors in the world will be highlighting clips from billionaire Sam Zell, Ray D'Alessio, Peter Thiel and Eric Schmidt. The clips covered topics like the hospitality and real estate market, education, social media monopolies, and the forced sales from Chinese governments to U.S. based businesses, and much more so without further delay. Let's get rolling.

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. Hey, everyone, welcome to the Investors podcast, I'm your host and is always am accompanied by my co-host, Stig Broadus him. And we just want to welcome everybody to today's show. And as we said in the intro, we've got a bunch of really interesting clips from various self-made billionaires on the current state of the global economy.

First up in the queue is billionaire Sam Zell. His net worth is almost five billion dollars, and it's a fortune he has made as the founder and chairman of the private investment firm equity group Investments, which really specializes in real estate. That's how he really kind of made all of his money was in real estate. So we found this audio clip from about a month ago where Sam is talking about the hospitality business, the hotel business. And so I'll give this a listen and then we'll provide some comments afterwards.

To go from 70 percent occupancy to zero kind of gets your attention in, the answer is the hotels are going to slowly open, occupancy is slowly going to increase. One of the big issues that I have been focused on since the pandemic began and the shutdowns began, and that is everybody's talking about the cost of having your building closed down. Nobody's talking about the cost of reopening. And those are very significant. And even in the best hotels across the United States, they're going to open at five percent and then they're going to go to 10 and they're going to go to 12.

And so I think it's going to be a tough environment. I don't believe that this is going to end the quote unquote, convention business or the use of hotels to make deals. I think it'll start with a lot of people say, God, with the experience we're having right now, I don't know why we ever put anybody on the route. I would expect that starts. They will be reticent of people to go on the road and they'll say, we'll just zoom it out.

And that's what will happen until some young aggressive guy gets on a plane, goes and gets the deal done while you're sitting on Zoome selling an idea. So I don't think we have any significant change. We had, again, just like the space, we had an oversupply in the hotel business already in place before the pandemic. And the result is there's going to be a significant number of hotels that are not going to reopen. I would bet that they would have not reopened except maybe a year or two later then what's going to happen now?

So I think the hospitality business is not going anywhere. I think people like Marriott, Hyatt and Hilton going to get only more dominant and stronger as the world reopens. I wanted to play this clip because I found it very telling of the importance of understanding the competitive situation in any industry that you would enter as an investor, the lack of competition is really what you're after because less competition means higher margins and more pricing power is hard to find the industry with as much competition as the hospitality industry.

Partly this is because the service they provide is high tech commodities, because USO telecast has too many similar options and you're switching costs just so low going from one hotel to another. Now, what's themselves really saying here is that the big hotel chains will start to consolidate coming out of the pandemic. One could just mention the recent Ruwart between the cartels and IEG is one example. And what could happen is what we've seen in a similar way in the airline industry, at least before the pandemic.

That, too, was a commodities sector, ontime relations, a lot for them to be restructured then to consolidate, which in effect meant gaining more monopoly power and then indirectly allow for a higher profit margin and higher prices for consumers. In reality, that is a little harder to do for the hospitality sector because you can add new capacity much easier than in the airline sector. Just take Airbnb as an example in the past, and you might even argue today, even though it's very challenging during the pandemic.

But they've been a major disruption because anyone with an extra bed could now add more capacity to the market. And even as a small time investor or a small group of investors, you could much easier open a new hotel and then say, start an airline. And we very often see this after crisis, different sectors becoming more and more consolidated simply because it's survival of the fittest. Love the weak companies, those with less access to credit, for instance, they just go bankrupt.

And then you see the bigger change, which is also what stemcells getting out here, getting more and more dominant, which again means that they can push up prices.

The only comment that I would add into that, Steg, is just it's going to be interesting to see what happens here in the coming quarter, the fourth quarter of the calendar year, just to kind of see how much the travel picks back up. I kind of anticipate that you are going to see some of the travel pick back up. You're going to see some of the hotels have more traffic than what we've seen in the last two quarters, mostly because things things appear to be getting a little bit more back to normal.

I know that the schools are starting to start up and a lot of states here, at least in the United States, and I kind of suspect that some businesses are going to probably send more employees out there to travel. So it's going to be interesting to see in the way I'd be tracking this is really kind of watching the top line for all these companies, looking at the revenue for the quarter that we're currently in. Whenever it closes out, I'm really kind of curious to see how that top line revenue compares to the previous quarter.

So that'll be something to watch closely. I don't know how much more pain these types of businesses can endure. And you can hear some of the numbers that Sam is throwing around, which are really kind of crazy. But let's go to one more clip from Sam. This is him talking about commercial mortgage backed securities and he has some thoughts on this. So we're going to play this clip and then we'll have some more comments. If you look at where the real focus of CMBS has been, it's been in retail, there's much more retail in CMBS than there is residential or anything else, but it's primarily retail, which, by the way, as far as I'm concerned, is still very much about falling knife.

And when you package things together as CMBS does, you end up with you might have a good morning for bad. And that just drags down the whole scenario and sends capital fleeing. And that's basically what's happened. And I wouldn't be very confident that those people who have stepped up and taken advantage of the CMBS market are likely to end up with very high positive results. You know, in this clip, he's talking about the malls and just that type of real estate, and I can I can just tell you my buying habits have just changed drastically from what they were five years ago.

It's almost like they're in just a completely different universe, the way I consume in the way I buy things. And I think most people are similar to myself in that if I want to buy something, I just pretty much go on Amazon and order it. I don't need to. I think the thing that has surprised so many people is just you just don't need something right now. You can typically wait two days or even a week for something to arrive way more than what I think I would have suspected before this craze, this Amazon online shopping type craze.

I honestly cannot even tell you the last time I went to a mall and walked around the mall to go find something. I don't even know when it's years ago. Now, maybe I'm a more extreme example of of that scenario. But whatever it is, I think that the main thing here is that buying habits covid has has warped buying habits in a major way. And I think that this is probably one of the biggest victim areas of covid is just the malls are not a place.

I don't want to go inside and walk around and look for things. I just want to be able to, heck, just go on my phone and place the order while I'm sitting there on my couch, let alone getting up to a desktop computer to place the order. It's that easy. So I'm I'm with him on this. This was this was interesting to hear how much of a falling knife he sees this this area. And I suspect this is going to continue to play out in a in a very abrupt way here in the coming two to four quarters.

All right, so the next clip we're going to play is from billionaire Peter Thiel. Peter Thiel became famous for being the co-founder of PayPal. Later, he made a fortune as Facebook's first outside investor whenever he bought ten point two percent stake for only five hundred thousand dollars back in August, two thousand form. And he later started Pelletiere and many other companies. So here's a clip with Peter Thiel about technology investment and formal education. But there's obviously a lot that one can do online in all these forms, when I take my venture capital w hat and look at these things as things to invest, and I always think it's very important to sort of break down a little bit the abstractions and to remember that education itself is always an abstraction.

And if we make it a little bit less abstract, let me suggest the four different things that education means in practice in our society. One thing is certainly the official meetings. That's all about learning. It's about information. So positive sum game, it's about learning, but for sort of variations of it is it's an investment in your future. So you go to college is sort of an investment into a better future. Second, it's a consumption decision.

So it's like a four year party. And I used to think that it was sort of this bad quantum superposition of investment and consumption, sort of like people. The housing bubble bought a large house with a swimming pool and it showed how frugal they were and how much they were saving for retirement. And it was we're sort of conflating investment and consumption, which is always a mistake. But I now think it's the third and fourth one that are the more important.

The third one is that it's an insurance product and that it's something you buy to avoid falling through the ever bigger cracks in our society. And they can charge more and more for you because people are getting more scared about some of the things that have gone wrong in this country. And the fourth one is it's a zero sum tournament where you have to think of Harvard and Stanford and Caltech and the other elite universities as a sort of studio. Fifty four night club.

It's actually the value comes from excluding people. And so there's like a Harvard or Stanford version of putting Harvard or Stanford classes online and letting people take them. And these universities have done it. And people can take those classes in many cases, but they don't get credit at Harvard or Stanford. And taking those classes does not lead to Harvard or Stanford degree. And that tells you that a lot of the value of this very strange good that is called education comes not from the actual learning, but more from things like status, selection, exclusion, things of that sort.

And I think that when we look at these different approaches, we have to try to disentangle what they're doing. So online education is great for learning, but unfortunately, learning has almost nothing to do with the so-called educational system. OK, guys, so I really wanted to play this clip because Butyl is voicing a concern that has troubled me for years, both as a student at Howard University but later as a college professor at a local college, is talking about the elephant in the room.

That formal education has fundamentally changed for the worse. And education is increasingly decoupled from learning, for example. I don't think the quality of education I got at Howard was significantly different than formal education elsewhere, but in reality, it really wasn't that different.

It has opened a lot of doors that otherwise would have been closed, but I didn't really learn more for business relationships and employers. At the face of it. There is so much asymmetric information that we use as signaling whenever we enter a new working relationship and formal education is just one, but a very important example of that.

And it's used as a very often irrelevant filter to exclude people. So, again, there's a decoupling between learning and education today where most of us are losers or at best we are no better off. And it's not just a signal issue from Ivy League schools. You see the same problem on the labor market given the oversupply of CDs. And what you've seen is that CDs are taking jobs that had previously been helped by those with a master's degree. And you've seen too many people with master's degrees and they in turn have pushed down those who the bachelor's degrees and on it goes.

So when education and qualifications do not go hand in hand, education creates dead weight loss in society. We all rake off more student debt and just as bad, we spend years and education that we don't need instead of joining the labor market, creating value for society. So I'm sure I sound like a broken record when I say some of these things. But this is the result, in my humble opinion, of printing. This is this is the result of an incentive structure that's based on spending and increasing spending and increasing spending.

Some more people go out. They have to compete at an even higher level by spending more money at obscene. You know, no way you're ever going to get that money back. Rates of return for the for the cost to get the next degree, to just remain competitive, to do the job that the persons do. And they don't even require the degree that they often have at a Masters or a PhD level. It's learned on the job. I don't know.

I I really wanted to play this clip to stick because I just find the whole education model to be insanely frustrating. And recently there was some news that Google was coming out with some courses that you can take their courses. And if you take those and you don't have a college degree or anything else, Google is going to wait. That is for as being just as valuable in their hiring process. That's what they say. And I don't know if that's necessarily how it'll play out an application, but I think it's a step in the right direction.

Now, when I talked about this on Twitter, I was kind of surprised that the amount of people that just started kicking and screaming, saying, well, they're training you on how to program things the Google way, that then creates a network effect that further amplifies their strength as a company and builds further dominance for them. And I just don't know what the right answer is. But I but I do think that Peter Tilse comments about the exclusivity of this just separating people and not everybody having a fair shake is completely accurate on the money it needs to be said and needs to be talked about more.

I just I completely agree with him. And I think it's a big problem. And I think that technology is definitely coming for the education sector here in the coming five years. I also think it's coming for the finance sector in the coming five years. And it's going to be really interesting to see how this plays out. I really hope that it transitions and allows more people opportunities at a much lower and substantially reduced cost in that employers will honor that and look at that as being the same in the eyes of performance in the way that they hire.

But we'll see how things progress here in the coming five years.

Let's take a quick break and hear from today's sponsor.

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ICOM spelled Belin KNST blankest dotcom billionaires to get twenty five percent of a premium membership and a seven day free trial. Blankest dotcom billionaires. All right, back to the show. OK, so next up, we're playing one of our favorite economist investors, Ray D'Alessio. This is Ray's comments on the limitations that exist for policy makers and central bankers dealing with this current situation that we all know we're in. As far as the printing and the universal basic income, all of those factors, Ray, goes on a long discussion of this, and this was recently recorded.

This is something that he had talked about just within the last month. So this is this is a really important clip as far as I'm concerned. And I hope you guys enjoyed listening.

The limiting factor has to do with the demand for that money and debt. In other words, what debt is a bond is a promise to receive a lot of currency. And so when it gives no good return or a bad return and there's a printing of a lot of currency, clearly it's not desirable relative to other things for private investors. However, the central bank can buy it, too. And so the limit has to do with the limit of demand.

And that limit of demand has to do with the central bank's purchases of that because they could buy it and hence there's no problem. So you look at periods of time where in history where was the most of it that has ever taken place? And to try to define the limits and the war years was an example. I think the most analogous period we're in now was 1930 to nineteen forty five. I'll explain the various ways it was analogous, but more importantly, I'd like to deal with the question of the limits.

And so you first had the Depression and in that depression and when you hit zero interest rates, you had the printing of money and the buying of financial assets and then you had a lot of fiscal policy. So programs that produced large deficits, which then were monetized by more of that. And then you went into the war years and the war years, very similar to now in terms of the need for a lot of money and credit, produced an enormous amount of money and credit.

But it was managed by the central bank in a way where they were de facto taking that on. It was a good example of testing the limits of that. Now, we went into periods where, you know, what is an alternative source of wealth. And as I say, it could be stocks gold, it could be other assets, but those became the boundaries. What would happen in terms of this limit is if something transpired where the dollar as a reserve currency, the holders outside made another market, that was a better market.

It could be gold, it could be stocks, or it could be an alternative currency. In the earlier session, which I listened then to China as a reserve currency, there will need to be an alternative asset when that happens, and I think it will happen, then it looks like a currency defense. What I mean by currency defense is if money leaves that asset, if those who are holding bonds don't want to hold the bonds because they have lousy returns and the printing a lot of money and they want to go to something else and that starts to accelerate.

Should that happen, then what that does is as money leaves, it puts the central bank in the position of having to decide whether it buys more bonds in order to fill in that gap or it lets interest rates rise. Well, they can't let interest rates rise. There's too much debt. And then also interest rates rising means that the asset prices will go down and it's too vulnerable. So like all currency defenses, what it means is that they then have to accommodate that.

And the act of accommodating that in and of itself is a big problem. Should that happen, that would be terrible for the United States. Earlier, I heard about the discussion of the privilege. That's right. The United States dollar is a tremendous privilege and we are certainly pushing the limits of that. And if we were to think that the dollar was to be any other currency because of us pushing the limits, if that were to happen, it would be probably the biggest disruptor, not only to the markets, but to the whole world geopolitical system.

So we're in a fiat monetary system. What I mean is throughout most history, there was gold, let's say nineteen forty four. We create the Brentwood system linked to gold. The United States printed a lot more money and more claims on gold than there was gold. And in nineteen seventy one, which wasn't very long ago, we couldn't meet those claims on gold. Because we have too many IOUs, so we had devaluation and the dollar as the world's monetary system or currency is critical, but it very much depends on the United States competitiveness and so on.

So it's a longer term risk. One of the things that's been a prop for the dollar is the fact that there's a lot of dollar denominated debt. So what that means, it creates a demand for dollars that debt will either be satisfied and in some fashion or another because they'll be the dollars to produce it or that dollar debt will be defaulted on in one way or another. That's a whole other discussion we can get into if you want. But at that point, it'll reduce the desire, the short squeeze for dollars which will serve to weaken the dollar at the same time.

And also, as we look longer term, the squeeze, the politicalization of that changes the nature of the capital flows because we are in a situation where you can be squeezed. And so when you start to think about, yes, if you're China, you're holding a trillion dollars of Treasuries, would you want to do that particularly? I mean, given the returns, given all that and given the conflict. So this China piece is important piece. Let's say there's three things we're spending a lot of time discussing the monetary and debt cycle.

The second is the what I'll call the wealth gap and the values gap cycle. And then the third is China. So if we look at those things in combination, I think that's the best way to look at the whole picture.

So there's a lot going on in this conversation. And Ray is covering a lot of territory. But if a person's listening to this and it sounds kind of confusing, this would be the best way that I could simplify it for you. We're at a point where interest rates have been pushed down to nothing if the demand for newly issued debt in the United States goes down. Central bankers are just going to step in and continue to keep the yields at zero percent.

They're going to continue to be a buyer of pretty much anything that's issued. And like Ray said, they can't allow for interest rates to go up. The main reason they can not allow interest rates to go up is because the value of everything on the planet is based on those interest rates. When interest rates go up, the value of everything goes down. And so if they allow the fixed income market to allow to allow it to have rates, it start going up.

It's going to have an enormous impact on the stock market, not in a good way, in a very bad way. And that's going to have just a rippling implications for the value in everyone's buying power across the globe. So you can see how we're at a situation or an end game. And that's why you see some some really great macro thinkers. Some of them, like Grant Williams out there doing shows called The End Game. This is what they're really getting at.

And although Ray's comments are really valuable to kind of hear him put them in perspective, he doesn't really offer, in my humble opinion, in this in this exchange, he doesn't offer an example of of what's going to happen, like how does this play out moving forward? What's the most likely scenario of this playing out now? He does say that there has to be weakness in in the dollar, but he doesn't necessarily get into how much buying of the bond market the central bankers are going to have to do, how much liquidity in fiscal spending they're going to have to do.

He talked a little bit about how much they did back in World War Two.

But I suspect this is way more profound and way bigger of a deal than your typical market participants might realize. Way bigger deal. So really fascinating to always hear Ray's thoughts. Recent clip. So we want to play that for you guys and let you interpret it whatever way you want. But but that's the way we were hearing it.

OK, so the next clip that we have is billionaire Eric Schmidt. He's known for being the CEO of Google from 2001 to 2011, executive chairman of Google from 2011 to 2015. And he's holding a significant stake in Alphabet, the parent company of Google. And together with his other investments, he has an estimated net worth of 14 billion dollars. In this clip, he's talking about things like tick tock, talking about the consolidation of technology. This piece with China, it's a really interesting clip.

So we're going to get and play this one for you.

Twenty years ago, the one really big player was Microsoft. But Microsoft has now been joined by four other very, very large companies, each of which is run cleverly but in a different way. They have different ways in which they win and they lose. We benefit from that brutal competition. Look at what you have in a mobile phone. The competition between Android and iOS and Apple phones and the Android ecosystem has brought a supercomputer into your pocket. That's.

Going to continue, the reason it'll be different in 20 years is because artificial intelligence will create a whole bunch of new platform winners. And remember that the way this works is the US establishes global platforms that everyone else uses. We are forgetting that it is US leadership at the platform level, whether it's Google or Apple or what have you. It has brought us to this point where we have multitrillion dollar corporations that are leading the market. So I don't know enough about their dispute.

I left the board a decade ago. The important thing about the app stores is that they provide some level of security, branding and protection for the user. In China, for example, Google does not have a single app store because of regulatory issues. And there's always been issues of is the app that you're using, certified and so forth. I would be careful about breaking up the App Store model as it does provide some security and protection. We can quibble about how they're managed, but the important thing is when you use an app store, you can rely that what's on it is represented to be what it really is.

Just think of all those viruses that you are not getting as a result of the App Store. I don't know what the confidential security concerns are about TOCK. The claimed reason for this action is data sovereignty. In other words, people would like to have data for Tock to be held in the United States. If that is the goal, there is a much simpler way to do it, which is you require ticktock and other companies like it to work with a cloud provider, Amazon, Google or Microsoft as an example, who have the necessary security protections and are covered by US law.

What I worry about is that the US taking data sovereignty position, which is what this effectively is, sets the precedent that this will now be done against American firms that have global presence. Essentially, every American tech firm has data that's stored in the US that that's subject to US law. It's used by Europeans, for example, and they bristle at that. So now you're setting the precedent that they can insist on this to be very careful about the multi move scenario of the back and forth in these things.

It seems appealing, but then it sets in motion a whole bunch of things that can affect American dominance.

We have benefited enormously by American values and American technology being used globally. I worry again, sorry, we have all these worries that what we're doing is we're splintering the Internet, as you said, because it's so easy for a country to say we don't like these are the people.

We are safer as a world because we're using each other's applications that we're getting to understand each other better. You have to make accommodations for national security. In Wallies case, there was some evidence that while we was busy doing things that are inappropriate, there are a number of ways of stopping that and detecting it. But the best solution to walk away is to have a strong competitor in the United States and that strong competitor should be able to wipe them out competitively.

So, again, we're playing with ticktock and walk away from a behind position. I'd rather have strategies where I'm quite sure the US will win. We can win these battles with focus, great innovation, all the things that we do so well and open borders and lots of people using it outside the country. As you can tell, he is addressing a concern that all of the three major business regions, the US, Europe and China are facing right now how to compete globally and the role of regulation now.

Smith is very smooth whenever he presents his arguments. What he's really saying there between the lines is that the big tech companies are competing, which is good for consumers, but they shouldn't compete too much domestically and the US government should protect them as much as possible for the benefit of the country. And, of course, keep in mind that Eric Smith is speaking as a private citizen and not a suburb of Batek here like Google.

Now we know what the big tech companies want, but what do we want as private citizens? Well, we want for all national companies, of course, to be able to compete globally. That is tax revenues, at least to some extent. You might say it's jobs. A lot of good things comes from our companies being able to compete. We also want privacy of our information and we want low prices for our goods and services. So the good news is that we can get at least one and perhaps we can even get to.

But you cannot have all three, so you cannot compete globally. You cannot have privacy of information. And if you at the same time also want low prices for goods and services, because the thought of having companies like Google and I'm just using here as an example, it comes at your expense background, but you can just as well have said Apple to protect the national interest of the US is just not realistic, if you ask me.

Just to give you one argument, both companies have more international revenue than domestic revenue.

So you have a management and the board that is hired to optimize shareholders profit, they're not hired or incentivized to do anything for the greater good of America, which is likely also why both companies have been giving up IP and made considerable concessions to compete abroad, most noticeable in China. Also, they try to evade tax in the US. Now, Eric Smith is not using the curse word monopoly here. And he's also not saying that as private citizens, we should trust big tech companies with our sensitive personal data.

But that is the implications of what he's saying. You cannot have global dominance, privacy of citizen information and low prices in the new era that we are facing today. And I don't fault him for saying that. Please do not get me wrong. You hear the same arguments in all of the three major business regions.

But he in the West, we as voters and consumers have to make a choice. All right, so next up, we have another Ray Dalio clip in on this one. He's talking about some of his ideas on what's going to happen here in the near term.

Once we get past this post pandemic period, when we talk about a document, you have to start with who has what money to invest. That's where it starts. And that's why you have to look at incomes and balance sheets of all of the pieces. OK, and what's happened is it's damaged. So there are holes. And so when we look at that right now, today, a lot will depend on who gets the support. So there's going to be an important redistribution of wealth that is happening today.

When checks go out and get sent to people to fill in those particular holes, the economy will then re-adapt, but it will adapt. I want to encourage you to think of it as follows. There is a real economy that does it. Just imagine there's no medium of exchange, that there's no money and credit, that it's just the real economy, the things you have around you and the ability to produce that. And then there's by Milton Essley, this financial economy that has a lot of IOUs, people who have accumulated this buying power, who have a claim on the goods and services purchased, as do the producers.

So the amount of claims on these the debt is a suck, a vacuum cleaner, essentially that on network. That's a claim on net worth. And so how that's filled in by the government and how well it is will be a defining characteristics. I would imagine what's going to happen is that savings rates are going to rise. That'll be individuals and companies, because everybody wants to assure themselves of safety. It's redefined financially. I imagine what the priorities are going to shift.

In other words, the priorities will be into health care and building the basics. I imagine. I imagine you're going to see we'll learn things about social distancing and so on and regards the last part of the question. Yes, we're going from a world that was interconnected and worked in a way where the most efficient producers on a global basis would compete with each other to sell things. And so it would be originated wherever it was best. And it was a highly interconnected world and a more efficient world because of that ability to specialize, that won't be anywhere near the same.

We're now going to be moving to a self-sufficient world. Not only will individuals want to assure their self-sufficiency, but countries are going to want to have it self-sufficiency because they're also vulnerable. A different geopolitical world. So for political reasons and for various reasons, right now, merchandise is being shipped from China to the United States for mask's, for ventilator's and so on. And that's a vulnerability. I imagine we're going to then want to build those things and build self-sufficiency.

When that self-sufficiency is built, it'll make things more inefficient in the process. And so the world will look different in that way.

So even though Ray doesn't get into anything really to specifically in this clip, I find the clip interesting because it's it covers this idea that so much of the things that used to be purchased overseas, whatever those big chunk items are. So if you're somebody who's trying to analyze where do I where do I want to invest in the future, I would I would challenge a person to really look into what are the things that we have imported the most. And then of those things that we've imported the most, what strategically makes the most sense to keep organically or domestically inside the country?

Those are the areas that I would probably take a really hard look at, because what he's getting at is that things are going to become more compartmentalized in the future. I agree with that. I don't think that trend is going to change. Post covid. At the first part of this clip, Ray was talking about the difference between money and credit and the idea that when the credit is becoming impaired or blows up, that has to be replenished by the government.

That has to be put back into the system. And how it gets put back into the system is such a key point to try to understand, because where it gets inserted is is going to have a huge impact as to where those specific markets blew them up. So I think it's going to be another area to investigate as we get this compartmentalisation. Also, as the governments replenish these these promises in these these agreements of credit that have. Impaired, how they get replenished into the system, I suspect there's going to be a lot more UBI that's done in the future.

So how does that play out? If we're putting money into the hands of the population, how are they going to raise suggests there's going to be a higher savings rate, but for the part that isn't saved, where is that going to go? Those are some of the things to think about. Let's take a quick break and hear from their sponsor. This episode is brought to you by Apollo Nuru Apollo Noro is a new wearable that trains your nervous system to be more resilient to stress.

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All right, back to the show. All right, guys, so this point in time, the show will play question from the audience and this question comes from Sjaak. Hey, Preston, Steg, Zacchia, first thing I want to say is thanks so much for the podcast. It's amazing and it's taught me so much and I'm finally getting close to finishing all your episodes since I jumped on your guy's journey a bit late.

My question has to do with portfolio diversification. I'm starting to understand how to value stocks and the accounting side of things, but I'm struggling with trying to figure out how to diversify my portfolio to minimize risk. So my question to you guys is, how do you feel about the Markowitz modern portfolio theory? And is that something that a newer investor such as myself could or should use to help me with diversifying my portfolio? Thanks for any help you can provide me with.

So, Sack, that is a fantastic question and a very important question to ask before I do give you an answer.

Please allow me to introduce to the audience what the modern portfolio theory is typically refer to as empty.

The general rule behind empty is that you want to optimize your return for the least amount of risk, which is a very nice idea.

I also had to say that aside from the intention of the idea, the theory and the corresponding model is just so flawed that I would be doing you a great disservice not to tell you already that before I start this accommodation why the model and the theory is flawed. Really, keep in mind that the best advice I can give you is to completely ignore MBT. Empathy is taught in business schools worldwide, and one of the many issues with the model is that it measures risk in terms of volatility and it doesn't include any thinking in terms of intrinsic value or assessment of the underlying securities.

And there is no such thing as intrinsic value in the model because it assumes that both stocks and bonds surprise correctly at all times and that all asset returns are distributed through a bell shaped curve around a fictitious assumed rate for the stock market now. So if you're thinking that just made no sense what you set there, that's completely fine. I couldn't understand it either when my professor spent lecture after lecture in business school explaining why we shouldn't think for ourselves. And so just to give you an example of how absurd this theory is, when the S&P 500 tanked in March this year and the S&P 500 went from thirty three hundred to twenty two hundred, academics want you to believe that the price you bought in that would matter and that it was riskier to buy whatever the market quickly bottomed out of twenty two hundred then before it was trading at thirty three hundred.

And you might, as a stock investor, be thinking, well, if I can buy the same basket of stocks for twenty two hundred, why would I buy them for thirty three hundred? Wouldn't it just be a better deal just to get them cheaper? And you would be right.

And you might also be thinking, what is it really that you learn all these finance classes, whatever you're taught, that it doesn't make any sense for you to think about what a stock is worth, because the sum of all people who don't think rationally should make the stock market rational. But that is really a story. For another day, I will stop by Radboud academia for now. So what is risk? Well, let me borrow Warren Buffett's definition.

Buffett defines risk as the permanent loss of capital. That's one. And the second one would be risk of adequate return on capital. Now, keep in mind that both of those measures are at the time of decision, a qualitative assessment. It's not a fixed calculation. So to sum up, please do forget everything that has to do with the modern portfolio theory or NPT and use Buffett's definition instead if you want to be successful in investing. And to answer the second part of your question, because you might be thinking, well, if I'm not going to use NPT, then what should I do to diversify?

Well, if you want to diversify, you should identify and invest in uncorrelated assets. But really and this, of course, comes from an investor who tends to be quite concentrated more than diversification for the sake of diversification, look for investments that have very little risk. The less risk you incur, the less you need to diversify in the first place. I'm curious to hear what are your thoughts about this, Preston?

So stick to the last point that you're talking about, which is the correlation, I think is how Ray Dalio would describe it as the holy grail of investing is finding things that are uncorrelated. So let me just take Zach through a thought experiment. A lot of the times you'll hear professional investors say, oh, you're too concentrated in that sector.

I absolutely hate when people say that because it goes against just the logic of digging a little bit deeper. OK, so let's say we're in the energy sector now. The chances are that most of the companies in the energy sector are correlated, but that doesn't mean that they are correlated. So let's say you have Company A and you have Company B in the correlation between these two companies is zero. OK, those two companies are completely uncorrelated. So if one has in you in your valuing these companies, which is a completely separate process.

Right. You're looking at how correlated they are. You're looking at what you think the value is. And let's say that for company A and B, you find both to be of substantial value, Wolf. They're completely uncorrelated. Your volatility risk becomes reduced. Now, imagine doing that for four companies or five companies or 10 companies. If the proportion of those 10 companies that you own are somewhat equally weighted and your correlation is at zero, you're drastically, drastically reducing that volatility, quote unquote risk.

And I think that I would really challenge people to think in terms of if you're concerned about volatility and you and you do buy into academia's definition, that that risk is equal to volatility, which I don't see it that way. I see the volatility as my opportunity to capture something of value because of the volatility that that the lower price offers me whenever it happens. OK, you just got to make sure that your whole if you're buying 15 different stocks in, they're all correlated at one point zero.

Right. And there's a lot of volatility in those picks. Well, you better be prepared for a wild ride, but if there's no correlation between the picks, are they some out to a correlation of zero and you have a lot of volatility in those and your weighting them appropriately based on that volatility, you can have all your picks in the same sector if the correlation on it is zero. So I would just challenge that line of thinking. It's usually a good rule of thumb, but you got to dig deeper and you can actually understand what the correlation is.

So, Zach, I'm really excited to be able to give you our tip finance tool because this is something that the tool does for you. Just automatically. We have a portfolio tab where you can enter all your different stock picks that you have and then it pumps out a correlation table and it shows you for each pick how correlated they are to each other. And your goal is to try to zero out your portfolio with respect to its correlation. And I believe that's how you reduce the risk in your portfolio.

And it's not just me, it's people like Warren Buffett, Ray D'Alessio. That's how they look at these kind of things. So I'm really excited to do that. If anybody else wants to get your question played on the show, just go to. Ask the investors, Dotcom, get your question played on the show, you get free access to our top finance tool. And Zach, we're really excited to give that to you and we really appreciate you asking such a fantastic question.

All right, guys, Preston, I really hope you enjoyed this episode of the Masters podcast, we will see each other again next week. Thank you for listening to Te IP to access our show notes, courses or forums, go to the investor's podcast Dotcom. This show is for entertainment purposes only before making any decisions, consult a professional. The show is copyrighted by the Investors Podcast Network written permission must be granted before syndication or before casting.