You're listening to Teip Harun, welcome to the podcast. Today's episode, Presson, I speak to Tobias, Kylah and High Ramachandra. Once a quarter we sit down and talk about where we see value in the financial markets. We try and shoot holes through each other's picks and help each other as much as possible. It's a fun conversation that shows how we can only think about investing in these extraordinary times. So without further delay, here's our discussion for Q1 2021.
You are listening to the Investors 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, and we've got the mastermind group here. Fellows, welcome back to the show.
Hello. Good to see you again. Good to see you guys. Great to see you guys, I always love doing these, we've already hash this out ahead of time. Stig's going to go first, so stick fire away. Looking back here in 2020, despite the pandemic, the Dow Jones Industrial Average did nine point seven percent and the S&P 500 did eighteen point four percent and then Nasdaq did four to five percent. Right. And you would think of all yes, the stock market definitely wouldn't soar.
So I've been thinking a lot about it, using my typical models and just seeing pig after pig that's just seems so expensive.
And then I read through the ask me anything that Retaliator did. I read it and he talked about how these current interest rate levels. And he said if we assume that to continue, there would be no reason why stocks would be trading at 50 times earnings. So I kind of felt that was an interesting talking point himself, but I kind of like the way he thinks. And if that is indeed true, you can definitely make the assumption that there are plenty of stocks out there worth investing in.
But also, as a value investor, I just tend to be very skeptical, like most investors have a monthly cash flow that I can set aside to investing.
And due to the Kerma condition, it just becomes harder and harder for me to find those undervalued stocks.
So I want to pitch a method to have a placeholder for cash. So that's going to be my pitch here for today. And I could, of course, choose to just hold actual cash, but giving the excess of money printing that we're seeing, I really don't want to have that with the opportunity cost of inflation. So I wanted to have that invested in something. And I kind of like want to talk to you about what that something could be.
And being a value investor, I tend to think about how about a value itself? And I'll be the first one to say that value ETFs probably haven't performed as well as we would have hoped here in recent years. So I was trying to think about, well, what if we did a value in itself, but also momentum ETF and just set 50 50 and then use that as a placeholder to dollar cost average into. And I also want to say that's until we find something that's really interesting.
So it's not necessarily like this is what you're supposed to do, but more like, hey, if you're just building up cash, why not get a return and have lower opportunity cost by doing so? And we know that historically momentum outperformed the S&P 500 in bull markets and our performance in bear markets. So thinking about that, why don't you have my cake and eat it, too? By saying that I also want to have this placeholder that could still outperform the market.
And obviously that is a tall order. There's a lot of evaluators and momentum ETFs out there. I also just want to say that as such, there's no strict definition about the rules of and value to. It's not like you can only call yourself a value to F if you by definition don't have stocks that's trading at, I don't know, single P or single digit price to operating cash flows. That's not how it works. But obviously all value ETFs are built up around classic price metrics that have historically been proven to be outperforming, just like there's no strict rules for values.
The same is the case. Fomenter meets the criteria select according to price performance. So for instance, it could be stocks that are gained most in price the past months or three months. Whatever this and omentum ETFs have different rules for rebalancing, but the core is again always price performance. So. So instead of going to rabbit hole with various individual ETFs, really to conceptualize the strategy, I just went with the biggest value and the based momentum ETF out there and both of them are focusing on large cap stocks was also traditional, have a bit lower volatility, which a lot of investors like.
And the value we chose for this example is the vanguard value to F and the stock ticker is VTE and it's a huge ETF with ninety seven billion on the management. And the return of the past 10 years have been eleven point two three percent. So ten thousand would have approximated turned into twenty nine thousand west. The S&P 500 would have turned into thirty seven thousand. Now Vanguard is notoriously known for low fees and this one only cost four basis points. So that is zero point zero four percent.
And right now I think that low fees are critical for us, especially because it's a cash placeholder, but also especially given the low interest rate environment.
And I don't expect equities to feel the high return in these markets for the momentum ETF.
I've looked at iShares MSCI, USA, Momentum Factor ETF and the stock ticker is MTM total as the management is fourteen point four billion and is by far the biggest out there. The expense ratio is a little higher, 50 basis point. This is also relative new, at least according to the chief I mentioned before, the inception was of April 2013. So if you invested ten thousand back then, it'd be worth thirty two thousand compared to twenty three thousand five hundred for the S&P 500.
So not surprisingly, is outperforming because we've seen the bull market. And as mentioned before, value has underperformed because we have seen the bull market. So when we do the numbers and we have the. A nation of value and growth, we can see that, yes, it has also performed better than the 500 in the time frame that we're looking at. Another way, of course, to make this play, not just look in the US, could be to go with a global value in a global momentum strategy.
But the idea is more or less the same. The reason why you might want to make this twist is because the US has the third most expensive stock market in the world mission on a p e ratio.
So perhaps you want to go that route, but sort of like the concept is more or less the same. So I really want to open up to the group. Harry, please go first. There should be a cash replacement somewhere you can have a store hold of value, of course. Some might argue that should be Bitcoin or gold. Who are you talking about here?
Nobody here, I guess. I think this is another interesting auction. So I really like the way you framed it. But the question I had was when I was looking at the holdings of both these items that you mentioned, one is value, the other one is momentum. And then you look at VTI, Vanguard Total Market Index Fund, it's kind of a union of these two. So instead of holding these to like, we can just simplify and whole Vanguard total index fund and interestingly, the returns for the past 10 years there is thirteen point eight percent are higher than these two.
And I'm trying to simplify it because it's a cash replacement. So I don't want to be tracking it all the time somewhere like it's more like a store hold of value. And then you brought up an interesting point, which they also pointed out recently is this is a time to diversify and across countries. So another idea from Vanguard is Vanguard excuse me, EU ETF that has pretty much every other country except us. So I'm just thinking from a simplification perspective, would that be something you would consider as a cash replacement?
Yeah, so you bring up a lot of good points here, Harry. I think the default answer would go to here would be global, but that's kind of like depends on how how ignorant that you choose to be, because you could say, for instance, something like momentum really works well right now in the states right now because we have this bull market.
And so to the first point where said, oh, why not like taking the entire stock market? So if you go with pure a value and if you go with pure momentum, the Tibaldi perform better. Like if you do like a 50 50 allocation to that. I have some research on this is actually a good friend with grey hair, done a lot of research on that.
And so if you want to dig more into it, I'll make sure to link to some links in the show where he specifically talks about. But you address there. But again, that also comes down to specifically how do you what is value? And in this example, I just took the two biggest to conceptualize the strategy. I think you can definitely argue that, oh, why don't we just go for deep value instead of going for value in general?
How would that work? I really just wanted to do it. Simple. I can see that Toby smirking there. So before I toss it over to Toby, Mr Disvalue, I just wanted to say that if you are listening to this in the European Union, the stock tickers would be slightly different. I'm in Denmark, so part of the European Union. I'm personally invested in Vanguard, Global Value, Facture and X Trager's MSCI World Momentum ETF. And so without going too much into what specific for European citizens, just in case I get flooded with people saying, but hey, I'm in Europe, I don't have access to these, what do you do?
This is conceptually the same strategy, Tobi. Like the late 1990s, the last decade has been characterized by the very big, very expensive companies running up the most, and so it's Microsoft again, but I don't think Microsoft is egregiously overvalued. But I do think that there are a lot of very big, expensive names that are unusually overvalued. Thing happened in the late 1990s. And then what happened was the next decade saw two big stock market crashes and the very expensive large names basically just drifted sideways with a whole lot of volatility.
And so I kind of think that at some stage this cycle will change. And that's sort of what's going to happen in this market, that it's going to be the big expensive names that are going to tread water and go backwards. And and I think that hopefully what that means is that the smaller value names do better, but certainly the smaller value names have not participated in the last decade and so don't have that same level of overvaluation. The only way that I would respond to this is you have to look at the interest rates back then.
So back whenever all these companies were running up in the twin range, interest rates were in excess of, what, seven percent on the 10 year Treasury? Something like that, I would guess. So as they are able to adjust those interest rates, they're able to somewhat normalize the markets. And so you were able to have these contraction, these contract credit contraction events back then. Now, I don't know that you're necessarily in that same situation with interest rates being down at zero.
So if if if that's the factor that allowed them to go sideways because the central banks were allowed to let things normalize. My concern is I don't necessarily know that that's what where we're at today. Can they let the markets normalize or are they going to continue to compress interest rates aggressively at any sign? I would argue that in February into April of twenty twenty was a perfect example of central bank stepping in and saying, nope, we are not going to allow things to normalize at this point.
We cannot afford to allow things to normalize. So my concern is more on the side of are we in a different type of environment just because of the way central banks are going to step in and continue to execute these policies that we've seen for the last 10 years relative to these other points in time where they were able to do that or. This is a very good Segway Western, and this is the question I had for both Toby and Stu, is the reason Stig is even thinking about this idea is to have a replacement or cash.
And that is the mood today because like everybody wants to get out of gas and they're looking for a home. So is it a fair assumption that the reason everybody is thinking like this is that we're all pretty confident then the central banks would not raise interest rates? I'm certainly not confident.
I was going to go into my answer in a little bit of detail because I wanted to respond to Preston to the two things that I would say is that the late 1990s and today share the same interest rate characteristic in the sense that they were both falling. Interest rates were higher then, but they they were certainly directionally down. And I think that the direction of interest rates is more important for stock markets than the absolute level of interest rates. If you look at the Fed model, is this sort of idea that the Fed kind of pushes, but that doesn't test very well.
But the idea is that they look at the basically the dividend yield over or the earnings yield even over the interest rates at a 10 year or the 30 whatever is most appropriate, probably the 10 year they tend to look at. And they show that when there's big differential between dividends or earnings and the 10 year, that seems to suggest that equities are going to do very well. And when there's a small differential, then you should be in in the bonds.
It turns out that's not the case. There's plenty of research that shows it doesn't work. It doesn't matter. They always talk about it like it's going to happen. But what that tells to me is that the interest rates really don't matter that much. It's more the direction of the interest rate. Does that mean, though, that interest rates can't rise from here? I certainly think that the central banks are heavily incentivized to keep interest rates falling and down, but they are always that way.
And they were certainly that way in the 70s and they didn't raise rates in the 70s because they wanted to. They raise them in the 70s because they had to. And if I look across the inflation expectations over the last five years, you know, they keep on saying we want them over two percent. But the inflation expectations last time I checked were about, according to the market, were about two point one eight percent, which is as high as it's been five years.
And trending up, which makes perfect sense. If you just reduce the amount of stuff that's made in the world and you pump a whole lot of money into the world, the stuff that gets made as denominated in that money that got pumped into the world, you're going to need more pieces of paper for fewer real things in the world. They're going to go up in price. That's what happens. And that will be caught by the CPI and it will show them finally that there is inflation.
And I think at some point they're not going to want to do it, but they're going to have to do it. The only other possibility, if they can't get it done is that we look like Japan, we look like Europe and both of those places. I don't think that they're well known for their stock markets over the last 20 years or 30 years. In Japan's case, they've both had shocking stock market performance. So I think there's a very, very nasty outcome on the horizon, like visible.
I don't know when it gets here, but everything's very, very expensive and interest rates are probably going to go up some stage. And if they don't, it doesn't matter because everything's going to get cheaper.
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Let's get back into the podcast. From a government standpoint, though, they can't allow interest rates to go too high. And that's why they keep talking about yield curve control, which is effectively unlimited QE to peg yields at whatever yield they want. So my concern with the narrative that rates are going to go up, I think they're going to go up, but I think they're going to go up all at once.
And like you said, who knows when that day is going to come. They're going to throw everything they've got at this thing in order to keep those yields pegged at some percent and lower. I kind of suspect you might be getting to whatever that level is here pretty quickly because they can't afford to issue all this debt. The fiscal appropriation side in the rate at which it's growing is just astronomical. So they can't issue all that debt at higher yields because everything blows up at that point.
So that's why they have to do a yield curve control.
So although I agree with you, I think rates should be going up. I think CPI is a total farce. I think the real inflation rate is significantly higher and I think most people in the market would agree with that.
But I think everyone has so much faith in central banks stepping in and doing the yield curve control that it's not going to be something that you know. And so how are prices going to get punished if you continue to limit the amount of yield that's taking place? So this is my defense for Stig's Momentum ETF, because I think that the central banks are going to do everything and anything they can in order to prevent yields from going any higher from where they're at right now.
Do you think that they were doing everything and anything they could in 2000 and 2008? Yeah, but I think if we were talking about nominal yields, they had a lot more flexibility in area to maneuver back then. But now where we're at, it's compressed so much, almost like a spring. Like if you were thinking of it like a mechanical spring before it had some area to bounce. Now it's compressed so much. And if it even goes up a smidgen, like everything comes unglued, there's no way that they can allow that to happen.
So I'm with Harry. I think people are looking at I don't know that I would say that they're looking at equities as a new form of cash. I think they're looking at equities as something that won't become completely impaired if that dire scenario of yields going up plays out, because anything bond related just blows up, becomes completely impaired at that point. But if your own in equities, it's going to store your buying power. And that's in everyone's getting all this fiat that's being added into the system.
And it has to go somewhere and are looking at the equity market and saying, well, they're going to have free cash flows and they're not debasing the number of shares they've got outstanding. So I guess I got to go here to this company or this expectation of this growth rate because they are signing on 100 hundred percent more users next month. You could look at Buffett's experience in the 70s when he writes about this a little bit when he was the alternative to equities was commodities, precious metals, and he talks about gold and he says over a period of time and I forget exactly, but it was a long period of time.
The greatest investor in the world, the greatest equity investor in the world, could only just keep up with gold. And everybody else in the world is not the greatest investor in the world. So I don't know what the run in those things starts now, whether it started 10 years ago, whether you needed to be doing this stuff 10 years ago. So I got one point on your two picks, the TV and empty room for me, what I've been looking at over the last is like the benchmark or the hurdle rate is pretty much the Nasdaq.
And when I look at how manipulated the markets are now in the past years, a perfect example of how much central bank manipulation is playing out. What I'm looking for is something that can outpace the Nasdaq. I'm not looking at the S&P. The Nasdaq is my benchmark at this point as far as equity performance. So where I wanted to see is before the crash, before we had the February into April crash. That was dramatic, the government policy response and then all the performance that happened afterwards.
So we're almost at exactly it was three hundred and forty one days from that scenario that I'm describing, the peak, the crash and then the recovery. I'm using that as my benchmark of what can beat that performance through this manipulated period of time. The Nasdaq performed at a thirty seven percent return from that top to where we are today. When I look at the value ETF, it had one percent performance through that same period of time. When I look at the momentum pick, it had twenty four percent performance.
The reason I want to look at the top to the bottom, to the top again is because I think it gives us a sense of what's to come in the future. I suspect we're going to have another big liquidity shock to the market. The policymakers are going to step in. They're going to come with two times or three times the amount of stimulus that they had previously. And the companies that were able to do well during that period of time, in my opinion, are probably going to be the ones that continue to perform through the next manipulated pump.
So when I'm looking at those, I'm a little bit concerned because if this theory that I have that they're just going to step in and do what they did last time, but just two or three x the numbers, I suspect that both of those picks are going to underperform, just the Nasdaq in general, if that theory holds true.
Yes, I absolutely agree with that, but to me, Nasdaq is not the benchmark, I understand why you would do it because you capsulized into that theory. Nasdaq did really well because we had this crazy pandemic. And what performs well, quite obvious that would perform well would be the stocks. That would be a Nasdaq. That's the new world, the new detailed work that well, that we were in. I don't know if that's the right benchmark to have the way that I would instead conceptualize the strategy of saying, I don't really know what happens.
I can probably pick different ETFs that would be doing different things that would capture X I see happening. But I don't know what's going to happen. I don't know if the interest rate is going up or down. I don't know if I want to have too much exposure to these indexes with these major media companies are just taking up all of it. You could even look at something like the S&P 500. I just want a place where I don't get inflated away until I find something that I find interesting.
What can I dollar cost average into without doing a monthly analysis of that? And I was thinking that perhaps that could be 50 percent value of 50 percent momentum and then we can go in and talk. Well, how do we avoid being too exposed into some pics? If you look at the value itself? I think the biggest question that would be Berkshire Hathaway with a little less than three percent. So I think that's one component. The other component I would like to throw back to the group here is that I spoke to Pabrai about this last year, and he said that he thought a lot about placeholders for cash because we all need all the cash.
And he said he did want to use and value itself. He didn't want to use momentum ETF, but he thought about having his place all focus being Berkshire Hathaway. He didn't want to do it simply because if the market crashed, then Berkshire Hathaway would crash with it. So I kind of like want to throw that back to the group. And like here, regardless of what you think about this proposed strategy, what do you do for Praiseful Farkash?
Almost don't want to ask for because I know what he's going to say. But if I can throw that hard to Harian and told you, what is your placeholder for cash? Well, this might be a reasonable segue into my pick, which I'm going to propose my own ETF, I'm sorry about that, but I have to. So I have to. I have one is a small and micro ETF, us both small and micro, and it has about 100 names.
And I look for things that are cash rich generating cash flow and undervalued. And that comes from a universe of stocks. The ETF, we've only taken it over and changed it to this strategy since October last year, October 26 was a switchover date. That ETF, that universe of stocks, that small and micro value has had a very bad decade. It's fallen over the entire decade while the rest of the market has gone up. The other ETF that I run is called Zig, which I've spoken about on the show lots of times.
It is long, short value. So what we do is we're long value names and then we're short, overvalued, heavily indebted companies that have statistical earnings manipulation, statistical fraud, indications that they not only are they not worth a lot, but that they're potentially worth nothing. And so that's the sort of stuff that we like to short. And the reason I like that, because before I launched, I thought about this a lot. What would you launch into a market that is extremely overvalued and has been hostile to value for a long time?
You know, I'm a contrarian and I do think that at some stage the cycle will flip to a value type cycle. And so I want it to be long the value. And then I felt like it needed some protection because I was concerned that if I launched into a market like this at some stage, we were going to get this earth shattering blow up. And the way that I solved that problem was by having a lower exposure to the market and by having that shorts in there that when the market goes down, these are the sort of things that tend to go down more than the market goes down.
So that's sort of my solution to that. Before we launched, I did think through this possibility, we carry a little bit of cash, we have some shorts and we're long undervalued names that are cash rich. One of the names we're undervalued is Berkshire. We hold that. We have a little bit more than three per cent of that in a portfolio. You know, I don't buy these things as cash replacements. I buy Berkshire because I thought it was extremely undervalued at the time that we bought it, which was about March 23 last year.
The differential was about as wide as it got in the last sort of 20 years for Berkshire and Berkshire had exposure to Apple at that stage, but she's never got credit for the apple. But it's it's in there. I would never invest on the basis of having a cash substitute. I don't fully understand what Mohnish is talking about when he does that, because I'm investing in something that I want to hold for ever, ideally. And Berkshire is one of those things that you can basically hold forever.
It generates enormous amounts of cash that's approaching zero chance of that having a material blow up. But that's just not a zero under almost any circumstances. There are very, very vanishingly few sort of possibilities of zero in Berkshire because it's so well managed. You get the world's greatest investor sitting on control of the cash. It's generating cash all the time. He's redeploying at high rates of return. I think he can just hold Berkshire. Are you going to get some volatility through that period?
Possibly a bit. Like you said, stick your investing every month into these things. Just dollar cost averaging, the stuff that's undervalued. You be okay. If you look at the characteristics of a cash versus equity, I mean, it doesn't really hold on its own, like, let me put it to test. And when you need it, you probably will not be able to take it. And that is the risk of using equity as a cash replacement.
So I hope but whatever we are talking, it's not for our emergency funds. Our emergency funds should be in cash. This is beyond that discussion. One thing is it can go through just having monthly cash flow and then setting aside that money. That's one way. Another way is that I happen to sit on some cash for different reasons. And I think this is something that other investors resonate with specifically. I sold my position in Spotify here, and last week I saw some different characteristics in that space that meant me want to sell it.
And it doesn't really matter what the case was because I kind of feel there would be a long term what's happening in the music space and podcasting space and all that. But for whatever reason, I decided to realize my gains on that and just then sit with cash. And then suddenly I was sitting with what I felt was too much cash. And I see a lot of money printing. I saw a lot of inflation arguments before.
I don't want to be sitting there with that, which was why this whole idea of of having something like intermediate between I find something real value to invest in and then something I just know for a fact is going to be worth less and less.
So I guess my question to you would also be, do you even have such a type of investment?
Because it's not something I've tried before. Before I was either in cash or I was in something I wanted to hold for ever, preferably. Do you even have that middle step? You don't think that you find something over the next 12 months to deploy that cash into. I probably would, I guess it also depends what you think the inflation rate is if you think the inflation rate is two percent. You can probably just sit on it. I think the inflation rate is higher than the current interest rates.
I think that we're losing money. We're certainly losing purchasing power. Let's assume that that's a given. I still think that if you look at every year in the market, there is some time in the year when stocks go on sale, happen regularly, even, you know, not counting the two thousand, seven, eight, nine megabit every other year has had this opportunity. If you have your list of stocks that you want to own and you've got a rough kind of valuation for them, you just have to sit there and wait for the stocks to go and be like the apocryphal pig farmer.
In the Fortune article, he hangs out on his pig farm raising pigs. And then when he reads in the paper that, you know, the market's gone down 200 points for the day and it's going to go down another 200 points tomorrow, then he goes in and he buys stocks and then he goes back to his pig farm. And when he's on the pig farm and he sees the market was up 100 percent last year and experts think it's going to go up another 100 percent this year.
That's when he goes into town and he sells all of his stocks. He's selling the optimism and he's buying the fear and greed we have in a very, very optimistic point in this market. But I do think that there's going to be like the annual sale comes around. Sometimes that annual sale turns into a mega bear that goes on for a few years. I think that that's becoming increasingly likely. But whether it tends to make a bear or not, you're going to get an opportunity when the stocks go on sale with you.
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All right, back to the show.
This is a fascinating discussion, by the way. And my team was also very similar. I was looking for a store of value. My pick today is Brookfield Asset Management. This has been a company that I have been pulling for a while, and it is well known among value investing circles. And basically it's a global diversified alternative asset manager and it has nearly 600 plus billion dollars in assets under management. And it's spread across 30 countries wide continents. 50 percent of that, um, is in North America, but the rest is spread across and they're growing really fast in Asia and especially India.
They have been making some really interesting investments in India, including the company that owns the cell phone towers in India. And cell phones are a really hyper growing business in India and a lot more to grow. But in general, their investments can be out of their business. Businesses can be classified into real estate, infrastructure, private equity. And recently they bought Oaktree our sixty two percent stake in Oaktree. So they will credit us well now and in infrastructure to invest both in renewable energy and also what they call us data infrastructure.
In fact, from their annual report, what they say is they invest in critical global infrastructure that facilitates the movement of storage of energy, water, freight, passengers and even data. So if you want to know anything that investing in it. So what I like about them is definitely the track record. Obviously, they have a very strong balance sheet and good liquidity and more importantly, access to capital. I think they can raise funds more than anybody else and they have been growing the asset under management at a rate of almost 20 percent CAGR.
They were managing around twenty billion in 2002 and today they're managing upwards of six hundred billion. And apart from that, if you look at their fee related, I mean, the way I look at their valuation is the how fee related earnings value, the carried interest value, and then they have their own capital invested in their partnerships. So they the way they work is they create this partnership and these different. The areas they invest their own money, so they become the managing partners, so they get revenue out of the fee that they charge.
But the rest of the partners and also from the opposition said the cash flows of their businesses. And if you look at their fee related earnings, they have grown 3x from 2015 and they have accumulated unrealized, carried interest. We look at the that has grown around six times in the last five years, starting 2015, and that has grown around four or five. So overall, really strong growth, both in terms of revenue, carried interest, our asset under management.
Another interesting thing that people don't look at them like I read, but if you look at the dividend, even though they are not really high, they have been raising their dividend around 10 percent annually for the last nine to 10 years. And they have been increasing for the last nine years. So some of the trends that are going in their favor are the infrastructure buildout, especially in Asia and even in the US in terms of renewable infrastructure and energy infrastructure.
Our data center Iot infrastructure and there is an increase phase in the allocation of funds to alternative assets because of the low interest rate. We were just discussing a lot of countries and family offices and Sulligent funds are all also looking into a place where they can put their cash into more cash. Obviously. And all these bodes well for Brookfield Asset Management and based on their own valuation. Today's surprise for Brookfield Asset Management is way below their own assessment of what their fair value to be.
Again, we don't want to make their numbers. So and I'm not an expert at valuing businesses. I'm looking to you guys to give me insights on their valuation. But in terms of downside protection and slightly contrarian, because the market is not so happy with them because of all the stuff that's going on, could and their exposure to real estate and commercial real estate, especially in malls and whatnot. But they have been aggressively buying up. In fact, they are taking their breed, which was focused on retail and commercial real estate private.
They even offered to buy back their shares in Derry. And Bruce Flatwoods, the CEO, has a good track record and has good insights in this area. So all this gives me confidence to park my money with them for the foreseeable future. So I wanted to hear your thoughts on valuation and what do you think of the risks? I like to pick Harry, and I've had a look at Brookfield Asset Management quite a few times in the past because Bruce Flatt is very well known.
Brookfield Asset Management is very well known. Great operators, great investors. If they can continue to do what they've done in the past, it's probably going to deliver above market returns. I have looked at it and past in the past, and I'll just tell you why I've passed. I'm probably excessively picky when it comes to these things, so feel free to dismiss this. But when I look at this structure, I just can't understand it. I can't figure it out.
And I have this kind of bias because I know I'm Australian. I've seen a lot of FADH in the early 2000s led by Macquarie for sort of securitisation, and they became very good at finding big assets, securitizing them, selling them off in this reasonably complex structures. There were a lot of copycats around who did the same thing, putting together these complex structures and I've seen them collapse. And so I always get very nervous when I see a complex structure that I can't understand.
And I've gone through it and I've tried a few times. It's just there are too many moving parts in it for me to figure out what it's worth. That's just my bias. I'm not saying there's anything that's going to happen with Brookfield, and it's just I'm limited in that regard, but it's just for my own purposes. I need to understand exactly what I'm owning.
And I just can't get there with Brookfield. I'm really happy you said that job because I kind of feel the same way I looked at it for quite some time, not because it's I wouldn't say at all. It's too similar to Berkshire Hathaway, but it has some of the same cancer risk. And people very often put them in the same sentence, even though there are quite different companies like you. When I look at it, I kind of feel I don't want to stay in the county anymore.
I try to do some valuation that came up with some sort of five to seven percent expected return with a strong downside, which is definitely appealing to to some investors in this environment. But to me, I just need a much larger margin of safety for a company I do not understand as well. But it isn't above market at the moment, by the way, I forgot to mention this earlier, but my estimate of what the market's going to do, so if you assume that we go back to normal valuations over a decade.
So that's the assumption that some people are going to say that's ridiculous, we're never going back to normal valuations. But if you go back to the long run average that we've had since 1850 and the stock market, which is a PE of about 16 or 17 year trend that way over a decade, what the next decade's returns look like in terms of returns are point nine percent compounded, and that includes one point five per cent in dividends. So the index is actually going to go backwards.
Your returns are going to be mostly from dividend. So that's the context of like looking at something that's got a five to seven per cent return. That doesn't sound like a higher return, but that is in this market. You brought up a really good point there, too, because it's all about assumptions, right? Like we talked about inflation before. Do you think inflation is two percent? There is definitely a lot of people who are listening to our Wednesday shows who would feel that inflation is much, much higher.
Like, do we think that interest rates are going to stay this low and we're going to have a 50? Is that going to be the new normal? Well, then we have a lot of undervalued equities out there. Or do we look at more historical data? Who would say like what you suggest there be like perhaps I think you said point nine, but that's you know, that's in the very different interest rate environment that we are looking at.
So we can talk about five or seven to 10 percent returns. And Prestons pick is like the historical performance of that is just absolutely amazing. But it really, really depends on what are the assumptions that you're looking across this lens. And I also think that's why we have to some extent, we might have different picks also here, because we're looking at it through slightly different lenses. I probably shouldn't say it's slightly different if we were looking at a very different lenses.
And when this five or seven percent enough, it really depends on the assumptions you're looking at right now.
So, Harry, using the benchmark that I was using before to looking at Stig and Toby's pick, I'm going back and I'm looking at that date before we had the big market contraction, looking at how it performed through the drop and then looking at it, how it performed through the rebound. And when I'm looking at this particular pick, which the ticker's BRM, the performance was not good. And where the performance really struggled was during the credit contracting event.
So when you look at how much it dropped compared to those other benchmarks, particularly the Nasdaq, this pic was down 51 percent. And then from that drop of fifty one percent, it rebounded probably what would it be, 10 months? It rebounded sixty eight percent, which wasn't bad. But if you're comparing it to the Nasdaq, the rebound from the bottom matched the S&P 500. But during the liquidity event, it was significantly lower. And that's why I had such a significant underperformance.
So if we're comparing through that entire cycle through this, I'm calling it a manipulated cycle event. Over the past year, it underperformed the Nasdaq by 50 percent approximately. So that's where I'm looking at this and just saying, you know, because my expectation moving forward is what we've seen over the past year is what we're going to continue to see moving forward for the next year. I kind of want to defend Harry here a little bit, because I don't know that you can look at one drawdown and recovery and sort of conclude anything meaningful from that for a number of reasons.
One is that you don't really know what the characteristics of the companies were. You'd have to adjust for where were they trading before they went into it. And secondarily, you know, in this market cycle, that is still a large cap growth cycle that hasn't ended yet. And so it's always going to favor large cap growth. So we went through the dip, large cap growth bounce the hardest out of the bottom. There's no guarantee that that's what happens the next time around.
And in fact, I think it's probably not going to happen that way. I think it's much more likely that we're coming to the end of this cycle and that we're I don't know if it's the next drawdown or the one after that, but the relative returns. So good. Old school investment manager Rick Pessina had a note that came out earlier this week where Pessina said, you can look at the he's talking Russell 1000, which is the biggest 1000 names listed, and he's looking at dividing that index into two one half his value and one half is growth.
The growth side of it is expected to grow earnings at six per cent a year and trades at a P of 22. The value side is expected to grow earnings at 23 percent a year, which is six or seven per cent higher than the growth side. And it trades at a PE of 15. So it's going to grow faster and it's trading at a discount. You know, I know which side of that I want to own. So I think that this market is primed for a change.
I definitely think it's time for a change, I don't think we're talking about a small cap company. I think the top of the line on this company is sixty seven billion dollars. So it is not a small company. This is a large cap company. And if we wanted to extend out the manipulation cycle to let's just make it twenty twelve. The performance on this is two hundred and thirty one percent and the Nasdaq is four hundred and seventy eight percent.
So my opinion is everything that's happened since twenty eight thousand nine has been a totally manipulated cycle with quantitative easing inserting itself through the fixed income market. My expectation is that's not only going to continue, but it's going to aggressively continue. And for me, I'm just looking at it saying we're just going to have more of the same because the central banks aren't going to allow this thing, the meltdown. So my expectation moving forward is that the Nasdaq will continue to outperform this pick.
Really good insights, and that's the reason I bring my picks here just to get through this shredding machine and see if it's survives, going back to what we were seeing, one of the things I was looking at is which are the stocks that will have a surprise to the upside. And I think we kind of refer to that when he was talking about the split in Russell one thousand and with Brooks Field also right now, I think people have written them off because of pandemic.
And if the vaccines work and if people get back to normal life, then the surprise is always to the upside for them, because that is where their hardest hit right now, both from a sentiment and also from a bottom line and top line perspective. So that was one of my thinking when I was speaking the stock of this mushrooming. All right, so, I mean, you guys have heard a little bit of my thesis on where I think this is going and, you know, who knows whether that's a valid thesis or not?
I will say this. A lot of my thinking changed after reading a book called The Price of Tomorrow by Jeff Booth. I don't know if you guys had a chance to read this book.
So in this book, Jeff pretty much outlines why the impacts of the incentive structure that inserts itself after so many decades of this inflationary monetary policy and how it effectively creates technology that's moving so fast. And I would even argue moving so fast now that it's starting to outstrip humanity's ability to handle the speed at which the technology is growing. And so that's one of the reasons why I've kind of started looking at the Nasdaq as kind of my benchmark of performance. If you're not outperforming that over a long period of time, call it five years, four years, whatever you want to use from an equity to equity basis, you're comparing a stock or multiple stocks to a basket.
I think this is the basket, the beat. And if you're beating it, then kudos to you. When I look at the value filter that we've got, the thing that is just so prevalent is regardless of market cap is finance. There are so many financial companies that are in the top valuation categories. And I have to ask myself why? Why is that the case? Why are so many people not applying the premium to financial equity companies, especially the big ones that they're applying to?
Everywhere else in the market, in my opinion, is that I think most market participants can suspect or they're anticipating a change in the air as to how finance is going to be conducted in the future.
Everyone knows my topic, right? It's Bitcoin that hasn't changed. My expectation in the coming 12 months is that it's going to go eight to nine or 10x from where we're at right now. And we're at what are we at like thirty two thousand dollars right now on Bitcoin. And this is another important thing I hear from people all the time like precent. I just can't understand Bitcoin or it's just too much work for me to dig in and understand network effects, protocols, all that kind of stuff.
And they're saying, but I want to have some type of exposure, because when I listen to some of your conversations, I do agree that there is something that's systematically going to change in the way that finance is conducted. But I just don't I'm not buying into the idea that it's just Bitcoin. It might be these other things. So my pick today is for fintech financial technology. The ticker for this is Arek F a R.K. F. Last week on the show we had Cathy would Cathy, I believe I don't know if you know this stat or not, Toby, but I think I read somewhere recently that her funds are attracting more capital than any other ETFs in the entire space right now.
And if you listen to Kathia, you listen to last week's show and you listen to any of her other interviews. She is brilliant. She is somebody who I think has a real beat, especially when it comes to technology, the things that are up and rising in the space. I think she's one of the smartest people out there in the ETF space. So this is her ticker for fintech. Anything that's financial related. When you look at this performance over the the baseline that I measured everybody else to, it's performed really well.
It's up ninety nine percent from pre crash before the April or you go back to the beginning or the end of February when the market was at its top before the big liquidity crunch. If you go from that top to where we are today, it's done ninety nine to one hundred percent, whereas the Nasdaq has done thirty seven percent. So it's nearly three times the outperformance of the Nasdaq over that same period of manipulation cycle. That's how I'm calling it.
My expectation moving forward is that this is actually going to get aggressively better, mostly because when you look at a lot of these large cap banks, I think a lot of them are very late to the game. I think that the companies that are in this space call it the square, the PayPal's. There's some over in China that are part of her basket. They're going to do extraordinarily well in the coming year, especially with some of the expectations on where I think some of the the other things are going to go, particularly Bitcoin.
When you look at how they're adding or kind of their metric for companies that fit the basket, they're looking at things that have transaction innovation. We just saw probably three weeks ago the OCC came out and is now allowing big banks, small banks. Doesn't matter if they want to use block chain technology in order to conduct clearing that's now based on regulation approved and allowed, which demonstrates to me that the regulation that many people. Suspected was going to take place in this space, which was that they're going to regulate everything and that it's not going to materialize is actually the exact opposite.
The other thing that they're looking for in this basket for this RCF is anything that's dealing with block chain technology. They're looking for something that's risked transformation. Maybe they're using artificial intelligence in order to start assessing risk in a more analytical way than some person sitting in a desk saying this is will be or double B or whatever.
Frictionless funding platforms, customer facing platforms and new intermediaries is the metrics that they're using to drop things into this basket. I had mentioned square PayPal. Tencent is in here, Zello group. These are some of the top holdings. Alibaba is in there. So I think that this is a great place for a person who is looking at the current dynamic that's playing out in the banking industry and saying, I think there's a lot of change in the horizon. This is a massive industry, but I just can't wrap my head around all the technical things that are happening.
I think this is a great place to park some of your money, and I suspect that it's going to continue to aggressively outperform the Nasdaq. Christine, this is an interesting pick. I was looking at their holdings and I agree with you, I think Kathy has a great track record. She was one of the investors who found Tesla early on and held on to it through all the ups and downs. She has a lot of conviction and great insights.
One interesting observation was Pinterest is number two with five percent on most of their holdings. So if this is there, why Facebook isn't there? So that I wasn't able to square that like 10 cents Facebook go together. So but anyway, that's an epic. She must have her own reasons. This is a complete tangential question, so I'm sorry for bringing it up. But while we're discussing about all this, are you also thinking about unrealized gains tax or taxing unrealized gains that Janet Yellen is talking about?
And how will it impact all of these, like whether it is Bitcoin or whether it's. This winter, these are really high growth ETSA vehicles. I had a person ask me the same question on Twitter if I was Janet Yellen, and she has to know that the QE is inserting itself straight into asset prices because, I mean, she's the one buying the bonds. And then the the cash that's being stuffed into these people's hands is obviously trickling into other asset prices.
So if you're her and you're doing all these things to manipulate the market, to make asset prices go higher and it's not trickling down into payments because you can clearly see that through the velocity of money, it just keeps dropping. What would you try to do if you were her in order to handicap that growth rate that's happening for the upper call it, five percent of the population, that their asset prices just keep going higher and higher? Well, start taxing their unrealized gains as the only way that you could claw some of that back off the market and account for top line revenue for tax receipts.
Now, do I think that this is going to go through? I suspect she can't do that without intervention or votes from Congress. So I don't know if that's going to be something that can actually be performed. I know it gets into a really interesting discussion when you start talking about Bitcoin in particular and self custody. Like if you've got an E-Trade account and they want to exercise an unrealized gains tax, they can do it. But if you got a self custardy wallet that no one can possibly access, how are you going to implement an unrealized gains tax without people wanting to run to another country very quickly, especially if you've got some large holdings, it gets a little bit trickier.
So I don't know how they would possibly be able to do that from a technical standpoint. But as far as equities, unrealized gains on equities, yeah, I mean, they could claw it back. I think it's more of a talking point than something that's actually going to get executed any time soon. And I think that they have a huge uphill battle with respect to lobbying if they're going to try to do something like that. Yeah, I think that struggle to get that through, because there are a lot of people out there who've got unrealized capital gains, too, you know, until you realize that you've got no way of paying it, you've got to service that.
It's just it's virtually a dead duck. It's kind of interesting that has gone from monetary to now. She's going to be on the fiscal side working in the Biden administration, and that's her first proposal. So it's going to be an interesting idea to see if she can get that through. The only comment that I would make, it's going to sound like sour grapes because Cathy's done so well and I've done so badly over the last 24 months. But the only thing I would point out is that her ETFs tend to be exactly the kind of thing that I was describing.
They tend to have been beneficiaries of probably as president would describe this environment. I don't know that I'd necessarily just tied to the Fed. But, you know, they are large cap and they are high growth. And so when you look at the ETF, if you have a look at the characteristics of the things that they've got in there, the average price to earnings is fifty four times as at the time that we're recording this.
The historical earnings growth is not that impressive at six point forty six percent. And I think that's because a lot of these companies, while they do grow pretty quickly, if you're a shareholder in them, you're not such a beneficiary of that growth. I realize that the stock prices are going ahead, but in terms of what you own, you're constantly diluted because there's such a huge amount of share based compensation paid out and they just don't tend to make a lot of money.
So my main concern for Katherine, I'm hugely impressed by her. I think she's a phenomenal intellect. And I take my hat off to her with what she's achieved in a very difficult marketplace.
My concern for her is that she's a little bit like Janus funds. So you guys might recall Janus funds were kind of like the arc of the first dotcom boom and they were very successful buying these very high growth companies. And so they raised a lot of capital, which they then reinvested into these high growth companies. And in many instances, they were sort of the driver of the stock price. The stock price went up a lot because they raised a lot of money.
I think that Cathy has sort of got to that point now where as you I think Stig's said, more money now flows into the markets than flows into SPI that or it's close to that.
They're one of the biggest ETFs around. So what that means is that when she gets those flows, she redeploys them into these companies and she's the one pushing them up. If at any stage that reverses, there's not going to be a lot of room to get through that door.
And I think that that could go back very violently. So I just think it's overvalued and it could come backwards. I don't want it to sound like sour grapes, but I understand if everybody thinks that. So, Toby, I like this point that you're bringing up, and it's also ties into the Mike Green argument about the ETFs driving the valuations on so many of these companies that fit into these baskets. If I was going to push back and it's almost like a counter to the counter for me, it implies that the next drop in the next liquidity event where everybody runs to the Fiat and runs to the dollars all at the same time, is going to be that much more aggressive and that much more of a decline per number of days than the one that preceded it, which is going to further cause central banks to step in and quadruple down on what they did last time.
Because if they don't, they're going to realize that they are at such a systematic pitfall, if they do nothing, that it's going to generate the forex response. So as the system becomes more and more unstable, I think the reaction is going to be that much more profound as this continues on, because we are at in my opinion, we are at an end game from a systematic level for 80 years of an inflationary monetary policy being exercised not just in the US, but globally, because everyone was tied to the dollar through all this period of time.
Then everyone, you know, adjusted their federal funds rate lower and lower and lower. And now we're getting down to zero. And you're seeing these systematic issues arising in the market, in my opinion, is that they're going to continue when it turns. It's going to be nasty. But I think you have to have some type of sound money that supplants the previous system before everyone starts to go back to measuring market cap based off of bottom line instead of new users adopting a platform, which is pretty much how it's done today based on this incentive structure of inflationary monetary policy, which I think Jeff Booth's book outlines probably the best out of anything I've read in the last probably five years.
Ari, what do you got? So I think both of you have a good point, but I want to follow up on this point, I didn't know what the Janus funds during dot com, so that's an interesting historical perspective to have. But even in the last few years, we have seen this play out in the Valley. People who are in the valley are clued into this. So they know it. I'm talking about Bay Area. Silicon Valley is Softbank.
They also had a very similar experience where they were raising so much funds. This was all in private equity, though. So that's why most public investors wouldn't be aware of this when they come in to a round of funding Series B or C, C, they would just raise the value of those points. And that was basically having it impact on those valuations. And then it kind of went on for a while, didn't? And we all know we work like a poster child of one of their investments, so I just wanted to bring that.
Am I tied with Toby here once again during this conversation than sorry? I think that's what you said, Toby. A lot of great things to say about Cathy. You know, how can you find smarter people than her?
And just as I'm about to say that, you know, I'm going to say something negative right after it. So let me try to go a long way around this, because I might be biased. I might be one of those grumpy old men thinking, you know, being skeptical by nature, also by being a value investor. Well, that pains that have really come with that. Perhaps I just haven't kept up with the times. Now I'm looking at this same thing as Toby is saying about propping up those same stocks.
It's big growth stocks. Fifty three percent of the picks are large cap stocks, lots of them, 10 billion dollars, 32 percent is allocated to mega stocks. Several hundred billion dollars. If you look at the median, my cab, it's fifty 58 billion dollars at the weighted average man cap is two hundred and thirty one billion dollars.
So I'm looking at it. I'm saying this is going to turn and half of being the negative.
I'm thinking this is going to churn. And one of the things that I'm a bit worried about with everything that's been going on here is will not be going blind in terms of like big numbers I'm looking at, I'm thinking, oh, that's an expensive expense ratio of point seventy five percent. Perhaps that's not what I should be thinking. Perhaps I should be thinking. Well, the Nasdaq last year did four or five percent. Oh, and last year, I think like yes, Cathy's fund did almost one hundred and eight percent.
Perhaps I shouldn't even care about expenses because like all of these numbers, it just like it's just going great. This is just going to continue. And I think and naturally I'm skeptical about this and I'm I just want to pull up some stats here. The looked at it's an index for unprofitable tech stocks. If you look at the index for unprofitable tech stocks, it has outperformed the Nasdaq one hundred by two hundred and sixty eight percent over the past three years.
And so we can talk about whether cash is trash or we can talk about is profit. Trash is just thinking about it and think this has to end one way or the other.
I completely agree with what you guys are saying as far as the valuations on this are not what we typically talk about on the show. My concern is what are we seeing right now that suggests we're about to have a change in policy? When I look at the landscape of the policy that's been executed since twenty eight two thousand nine, it's like the toy economy broke and we keep taping the wheels back on the toy economy and we keep pushing it forward. We've got plenty of tape left.
The wheels are still intact. If we can just keep taping them back on their end, like everything that I look at that they're doing from a policy standpoint suggests to me that they're not even close to being done taping the wheels back on this thing. So although I agree with you, there's going to be a day when the transition comes. And in my humble opinion, the thing that's going to cause that to happen is there's going to be some type of money that forces a sound money back into the economy and then all of a sudden value investing like there's nothing that's going to beat it.
But until that happens, we've learned through the last 13 years, 12 years, that. Risk is encouraged, risk is incentivized, and I just kind of suspect that that incentive structure is still in place and there's nothing that I can see on the horizon that's going to change it any time soon.
All right, guys. So before we ending off this show, Hari Toby, thank you so much for taking the time out of your schedule to join the Mossbank group here today. What can the audience learn more about you? I manage Queyras funds, we get two funds, Zik, which is a long, short mid-cap value fund and deep, which is a small and micro value fund. And I have a website, acquirers, multiple dot com, where you can get free stock picks.
And I have some books most recently as acquirers multiple, and that's available at Amazon. And I'm on Twitter at Greenback. It's a funny spelling, GNB, a CKD. Thanks, fellas. Thanks for having me. This is really fun.
Always fun, Toby. Sorry, it was a great conversation today. Thank you for having me back. And you can reach me at Twitter or Eramo HRA. Ihram is my handle or my blog bips business dot com and look forward to the feedback and conversations. Fantastic and just a quick message to our listeners out there, if you like a mastermind episodes, make sure to subscribe to our show on your favourite podcast app so you don't miss out on future episodes like this.
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