TIP161: WARREN BUFFETT & CHARLIE MUNGER

W/ ROGER LOWENSTEIN

22 October 2017

In this episode, Preston and Stig talk to world renown author, Roger Lowenstein. Their discussion starts with a study of Warren Buffett and ends with a review of the Federal Reserve.  Roger has published six books, and three have become New York Times Bestsellers.

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IN THIS EPISODE, YOU’LL LEARN:

  • The one thing that people don’t know about Warren Buffett?
  • Why Charlie Munger has made Warren Buffett’s more fun, but perhaps not more prosperous.
  • Why we have the same conversation about Central Banks as we did 100 years ago.
  • Ask the Investors: What is the future of cryptocurrencies?

TRANSCRIPT

Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

Preston Pysh 00:00:02

One of the most exciting parts of doing a podcast is when we have the opportunity to interview a guest that we’re starstruck to have on the show. And today’s guest definitely fits that description because he’s the author of the national bestseller on Warren Buffett and other numerous books. The author’s name which I’m sure many of the people in our audience know is Roger Lowenstein. And in today’s interview, we talked to Roger about two different topics.

Stig Brodersen 00:00:26

The first is obviously Warren Buffett. And what Roger learned from studying “The Best Investor” of all time. And the second topic is all about the Federal Reserve. Recently, Roger published a book called, “America’s Bank”. It’s a detailed outline of how and why the Federal Reserve was founded.

Preston Pysh 00:00:43

So if you’re ready, let’s hop to it.

Intro 00:00:49

You are listening to The Investor’s Podcast while we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected.

Preston Pysh 00:01:09

All right, how’s everyone doing out there, Preston Pysh with you from Bel Air, Maryland and Stig Broderson from Seoul, South Korea. And today, like we said in the introduction, we have Roger Lowenstein with us. We’re so excited to have you here, Roger. Thank you so much for taking time out of your busy day to be with us.

Roger Rowenstein 00:01:25 

It’s my pleasure to be here.

Preston Pysh 00:01:26 

So Roger, you’re the biggest authority that I found in writing about Buffett. Stig and I have both read your book, “Buffett: The Making of an American Capitalist”. I can personally say that this is my favorite biography on Buffett. I’m curious as a fan of your writing, talk to us about Warren Buffett. What got you so interested in him to write an entire book? I mean, you really covered him in this book. What captivated your attention to do that?

Roger Rowenstein 00:01:53 

I had followed him since. It’s hard to remember now. But I followed him from late ‘70s to early ‘80s. We owned a little bit of his stock in the family. We used to get his annual reports and read them with a whole lot of interest, and frankly admiration. 

Of course we weren’t ignorant of the fact that his stocks seemed to be rising. We’d have discussions around the kitchen table like, “Gee it’s 200 bucks a share, can it go higher? It’s 400 dollars, should we hang on?” His wisdom was always that, “it’s not the sticker price. It’s the intrinsic value of the business and the per share value and the number itself is just a number”. 

In the late ‘70s, I got a job at The Wall Street Journal as a reporter. I came out of school, and by the late 1980s, I was actually writing the “Heard on the Street” column for The Wall Street Journal. That’s the column where they, at least in my day, size up a stock, a traded security every day. They’d get an analyst to tell you that it was either too expensive and advise your readers to sell it, or that it was cheap. They ought to pilot and buy it. 

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It struck me that the interviews that I was getting and the reasons from these analysts were so short term. They fell so far short of the wisdom and understanding of markets that I was getting each year in the annual reports from Buffett. I thought he really had a story to tell the American investing public. 

This happened in the very early ‘90s. Buffett was not well-known outside of Wall Street back then. But within Wall Street, he was certainly recognized. He was already the greatest investor of our generation. 

And then in 1991, there was a scandal at a Wall Street firm. I guess I’ve heard that one or two times since, from the Salomon Brothers. John Gutfreund, who ran the firm, was I guess a friend of Buffett’s. Buffett had owned a little bit of the preferred stock in the Salomons. Gutfreund called Buffett up saying, “I’m stepping down.” Gutfreund hadn’t handled the scandal well and wasn’t implicated. Buffett ends up running this Wall Street firm. 

There were a lot of headlines about that Omaha boy who goes to the evil caverns of Wall Street. Suddenly, I realized that this guy who I knew a lot about, or at least, you know something about, is very much in the news. So I took that as being a very good trigger to pitch a book and write it.

Preston Pysh 00:04:18 

Wow. So I’m curious. You found him in the ‘70s, which kind of unheard of for people that are huge Buffett fans like myself to find him so early in his career. Was it just serendipity? What was it that you were able to find him so early?

Roger Rowenstein 00:04:34

We were neighbors. My folks and clearly my father, we were neighbors of the guy named Jerry Orients who had gone to school with Buffett at Penn. Jerry used to tell my father that he ought to invest with him. I think dad would ask him, “What else?” And Jerry would basically say, “You don’t need anything else, just give it all to Warren.” 

Dad was a lawyer for a part of his career. He had a couple of exchanges with Buffett being on the other side of the deal. He would try to persuade his client that the businesses that Warren was selling were probably not a business you wanted to buy. But Warren is a very good salesman. He got the soft sell down to a T. I think dad came away wishing he had gone on the other side of the table with Warren. So there were a few points of contact.

Preston Pysh 00:05:20 

Wow that is so cool. You’re exactly right, he is such a soft seller. He’s so delicate in the way that he makes the person feel like they have an option. But deep down inside, he’s totally leading them in the exact way that he wants them to go. It’s hilarious.

Roger Rowenstein 00:05:35 

Yeah. And by the way, I’d advise people with an idea to pitch to Warren, or that maybe they want him to contribute to their golf charity or something. The soft sell doesn’t work with him. These conversations where you make pleasantries for five minutes and then say, “Hey Warren I was thinking it would be great to have you on the board.” 

He sees these things coming. It’s like he can see around the corner. He’s unique in that the things he does are precisely the things he wants to do, and not the things that other people are groomed to do. But no approach is going to work with him better than just a direct approach. 

Take 30 seconds if you get him on the phone and ask him to do a favor. But trying to sweet talk him, sneak up on him, is not going to work. He’s been there. As he says, he’s always getting these calls for people saying, “With my idea and your money, we can do wonders.”

Preston Pysh 00:06:23 

Oh my goodness. Well you know, a master at the soft sell can probably smell a soft sell really quickly.

Roger Rowenstein 00:06:29

Exactly.

Stig Brodersen 00:06:31 

It’s really interesting that you would say this, Roger. It’s a very good transition to my first question. 

Few people have been studying Warren Buffett as well as you have. What do you think is the most important thing that people don’t know about him?

Roger Rowenstein 00:06:45 

I think the hardest thing to get about Buffett, and the hardest thing to get about value investing is that there’s no formula. Buffett and his friend, Bill Ruane, can’t remember which said it, but to quote it, “You either get this in the first five minutes it is explained to you, or you never get it.” 

There’s no computer program that can tell you what the next six best stocks are. There’s no “Dogs of the Dow” secret formula. It’s part art, certainly part science when you’re evaluating securities based on their reported numbers. There’s also an instinct, but it’s an educated instinct. It’s the instinct based on years of appraising companies with similar dynamics. 

Every company has its own dynamic in its own period of time. If you’re looking at Uber, you might be looking at other companies that had network effects that were trying to disturb a settled industry like this taxicab industry. But you wouldn’t find one exactly like Uber that existed before. That’s where the art side of it comes in since you’re ultimately making a decision. And this is where I really get to Buffett. You, relying on your own judgment and not on what the stock market’s doing every day. 

It’s not about whether this stock has been going up or down. It’s where you think the intrinsic value is going to be. It means the cash flow generating power in five and even ten years. Buffett holds his investments for 10 to 20 years. If you’re holding for that time period, what they’re saying on CNBC is irrelevant. What the Fed’s going to do is irrelevant. 

I just had this discussion with one of your competitors, or so to speak who said, “Well don’t you have to know what the euro is going to do?” Seriously, I said, “You’ve got to be kidding.” If you’d bought Starbucks 20 years ago and you’d been right on the franc, it wouldn’t have mattered. If you’d been wrong on the franc, it wouldn’t have mattered. All that mattered was that you could see that there was a company that had been able to build a brand for premium coffee drinks. 

You know what the exchange rate was going to do, what the Fed was going to do, whether it was going to be a war in the Middle East. There’s probably been three of them since then. None of that mattered if you got the basic long-term decision about the company right. It takes a lot of, and I come back to Buffett again, a lot of self-confidence to ignore all that other stuff. That’s really his special quality. 

He’s more able than any investor that I know of to say, “I think this is going to work in the long term and everything else is shut to decide”. This could be market forecasts, market trends. He’s buying shares of businesses to hold.

Preston Pysh 00:09:20 

So let me ask you this since you have identified him very early on as somebody that you want to invest in, somebody that was worth watching, somebody that was worth writing about. If you had to make that call again today of who the next Buffett-like business person in America or anywhere in the world for that matter, who is that person? I think Jeff Bezos, but I’m curious to hear your thoughts as a person who.

Roger Rowenstein 00:09:44

I think Jeff Bezos is the singular businessman of our era. You mean, of his generation, I wouldn’t say he’s the Warren Buffett of this generation because he’s not a capital allocator. There’s no one business that Warren does. I guess the insurance business you’d have to say, but even there, he has people underwriting policies. 

Warren’s singular unmatched skill is allocating capital to companies and managers who do run businesses such as Jeff Bezos. I would say that Jeff is the John D. Rockefeller of his age, someone who has competed so relentlessly. 

Rockefeller basically drove everyone else in his business either into merging with him or going out of business. I’m not saying that Bezos is an illegal monopolist as Rockefeller was convicted of. But he’s clearly the greatest competitor and the hungriest competitor of the digital age. 

Can he pick stocks? I have no idea. Buffett talks about the circle of competence. There are other things that Bezos does well that he sticks within his circles of confidence, which is, electronic retailing and spin-offs, to as the same physical retailing to Whole Foods. 

In terms of “the next Buffett”, there are a half dozen investors I really respect. I think of Buffett as a really “one-off”. He’s been doing this since 1956. That’s 61 years. He’s had top drawer results for 61 years. If you combine Buffett’s record with his endurance, also, his skill as a manager running a conglomerate with 70 companies with his larger role in the American business culture, he’s really become the teacher of business and investing for student annual report readers, and now listeners on all the shows he’s interviewed on. 

He’s created a role that never existed. I think there’s not going to be another one. Interestingly, I saw signs of this way early in his career before anyone had heard of Warren Buffett when he was in a fraternity actually. When he transferred to, maybe was it Penn, the first school he went to, his fraternity brothers used to have him stand up against the wall and then pepper him with questions just because they like to hear his answers. 

And then a few years later, when he was a young investor, he’d go to these dinner parties in New York and then have a kind of a ritual. A bunch of young brokers and investors like Bill Ruane were probably there. Half a dozen of others would all gather around his feet. This includes these other grown men and his peers. They would listen to him talk and pepper him with questions because they want to hear him speak. 

It was an unconscious dress rehearsal for the day decades later, when he’d be running his company, Berkshire Hathaway with annual meetings. This is where 40,000 people would show up to hear him talk. When has ever been a stock picking with 40,000 people flying across the country. I think he’s sort of a “one-off”. We’re not going to see it again.

Preston Pysh 00:12:49 

Yeah, you might be right about that. I want to throw this out there though, Roger. If you ever wrote a book called, “Bezos”, I would absolutely buy it.

Roger Rowenstein 00:12:58 

With a biography at least, all the things I just said about Buffett is, self-confidence, the way he approaches stocks, his unique role in the American investing culture and so on. That hasn’t changed although it’s certainly grown. Whereas with Jeff Bezos, I don’t think his story can quite be written yet. Will he go down as the guy who ended the bookstore? Will he have his own antitrust challenge? 

It’s certainly not unthinkable and you wouldn’t want to miss that. After all, Bill Gates had Google’s dealing with those types of threats and there’s certainly a very live issue about how society will deal with and regulate digital giants that although they escape some of the traditional nets for any trusting regulations nonetheless, are extremely powerful and getting more so, economic entities. 

At some point, these tremendous business titans face what I would call, “their role in society moment”. At least, a great many of them do. It wouldn’t surprise me if there’s some type of drama that Bezos had at some point, or at very least, until he’ll face decisions on what to do with his wealth. So right now, when both he and Amazon are still sort of a rocket ship pointed upward, well they may have to get a younger biographer.

Preston Pysh 00:14:22

Well, I hope you do write it someday.

Stig Brodersen 00:14:25

Speaking about business titans, it’s really hard to tell you about Warren Buffett without mentioning Charlie Munger. I’d say, based on my own experience in partly reading about him beforehand, but also experiencing Charlie Munger at the Berkshire Hathaway meeting, he is such a brilliant person. I’m curious about your thoughts on this. 

Do you think that Charlie Munger has a huge impact on where Warren Buffett is today, or do you think Warren Buffett would probably be where he is today in his own right regardless of the influence of Charlie Munger?

Roger Rowenstein 00:14:58 

I would say, it is more of the latter. That’s not to depreciate Charlie at all. Charlie is also a genius, a curmudgeonly genius, whereas Warren is sunnier and optimistic. He is at times, almost so optimistic about America. He’s almost a cheerleader. 

I’ll never forget the time I first met Charlie. I was reporting about researching the Buffett biography. I was very excited. I was writing to people close to him. Most people did cooperate but some didn’t. And naturally when I sent a letter, I’d wait with bated breath and Charlie said, “Come out. I’ll see you at the California Club”, which is where he hangs out in Los Angeles. 

So I flew out there and we sat down. I had a primitive personal computer laptop with me and I started to ask questions. Charlie just starts to talk. I probably asked two questions. In four hours, he just kept on. I just kept typing. And you’d think that there would be no limit if you’re trying to get all the dirt, not in an unclean way, but just the good stuff you can get on your subject. 

And here you  got the guy who in the business sense knows him best. You sit there for three days. But the human mind doesn’t work that way. After some spell of time, you just can’t really take it anymore. You just got to walk around a block or something. So I remember that four hours had gone by, and I said, “Charlie, it’s been great. I think I’ve had enough for the first day.” He just stood up, turned 90 degrees towards the door and walked out. Not a word. Not an “I enjoyed it or I didn’t enjoy it.” It was more. 

And I said to somebody, “Did I say the wrong thing?”. And that person said, “Oh no that’s just Charlie. He doesn’t waste time on salutations. In terms of your question, you know how responsible he is.” I think Charlie has been a terrific sounding board for Warren because he’s so smart. He’s so unconventional, or at least unafraid of convention. There’s no censor there. 

There was one time the two of them were walking down the hallway. They had this manager whose company he was running wasn’t going well. The guy came and was always asking him questions, “Should I do this, or should I do that?”. He was just a big bother for them. He was coming toward them and Charlie just blurted out, “Here comes trouble.” 

He and his singular ability. Warren used to call him, “the abominable no-man”. Charlie doesn’t get stars in his eyes about company CEOs they might be investing with, or he doesn’t fall for “you heard it all”. 

If you give me a million dollars and use it to try to con Charlie Munger, I would give your money back. I just couldn’t do it. And by the way, he doesn’t get conned by Warren either. A lot of people find it hard to tell Warren, “You’re really all wet on this one.” Not to Charlie. That’s invaluable. 

One may see that a lot of politicians surround themselves with “yes-men”. Warren is surrounded himself by one guy that he has personally called, “the no-man”. So I think that’s been tremendously useful. It saves him from mistakes. I think it’s made the work more fun for Warren to have this partner alter ego. They see so many things alike and they have this professional and personal partnership for four or whatever decades now. I don’t think you know that many of the ideas came from Charlie. 

So, early in his career, Warren was still very much picking stocks the way his teacher Ben Graham picked them, which was basically looking for inexpensive securities. Holding them until they got up to their trading value, fair value. Charlie urged Warren to go from now, I’d say, “okay businesses” with cheap prices to good businesses with reasonable prices. And one of the first ones they did this was See’s Candies. 

I think the figures in the book are something like 30 to 35 million dollars. It was a lot of money back then. Charlie certainly encouraged him to do that. I think Warren would have gotten there anyway. In fact he already knew when he was running See’s during the mid-70s. But in the late ‘60s, Warren on his own, was buying American Express. A terrific business, a bump in the road. 

So Charlie encouraged and probably hastened Warren’s evolution to paying more than Ben Graham would pay. But I think had it not been for Charlie, we would still be having this conversation would the stock be 270K or 240K. That stuff’s hard to say. But I think it’s been a bit of a healthier, more pleasurable process for Warren. 

I’ve known or maybe you’ve known people who run businesses. They find themselves who haven’t had someone at their level, bounce things off of. And that’s a strain. They suffered for it maybe in ways that are intangible as much as tangible.

Preston Pysh 00:19:53 

Roger, I just want to highlight to the audience why the nugget that Charlie Munger kind of added to Buffett’s approach is so important. It really comes down to the tax implications. So when Buffett was able to buy good quality businesses at a decent price, as opposed to just a severely discounted price, that’s a marginal business. 

He was able to continue to hold the pick in perpetuity as long as possible and by doing that, he didn’t pay any capital gains by half and sell it a few years later. He was able to just continue to let it compound a compound. And so there’s many people out there that believe that this approach has added significant value to Buffett’s ability to compound at such a high rate. It is because that means that the tax aspect is important.

Roger Rowenstein 00:20:36 

I don’t think it’s the largest aspect. Actually, if you have a business let’s say, it earns 8 percent a year on capital, which most people say, “good but not great”. But if it’s clocking the way that 8 percent year after year, and if this is a big “if’. If it’s a type of business that is growing so that each year, it can reinvest the earnings at 8 percent a year and you do that over decades. The relative difference is enormous because what’s not happening is you’re not selling after three years as you said, “paying the tax”. Then the money is dead for 18 months or 6 months. 

Do you buy one for another three years? If you keep buying a succession of businesses, 1 or 2 is going to become 11. So instead of having 8 percent, you’re going to have minus 14 every so often. Are you going to have to find a business that gives you one great shot of 20 percent and then can’t take the money? Then you’re just getting cash back. You don’t have to hunt for that money if you can keep the money at work. 

8% to 11%, year after year, over a span of time, the compounding effect is extraordinary. You’ve avoided the real pitfall of most Vestris which is that dead space time or the backtracking because in investments that is good.

Stig Brodersen 00:21:58

That’s such a grand point. It’s something that we try to talk about on this show because time is such a massive expense for us investors. It’s hard to sit on the sidelines and not do anything. But continuing the discussion of Bob and Warren Buffett, it’s been a long time since you wrote the first book. Is there anything you wish you included that you learned? 

Roger Rowenstein 00:22:21

In terms of how I would paint him then and now, a very little has changed. As I said, I did update the book with a new epilogue or afterword or something. But 12 years after the book came out, I reissued it because his wife died. He remarried to who turned out to be his first wife. This required him to fill in a piece of the puzzle that people were very interested in. It was of course what he would do with his estate. 

That wasn’t going to Suzy because he asked away. The plan had been that she would make this decision. So now, he had to make them. And of course he chose, to the bulk of his estate, the Gates Foundation plan of peeling off stock year by year through Gates Foundation.

I thought that was a required update. That it was more than whatever new company he’s acquired since then. Certainly, it was plenty. So for that purpose, I updated the book. That’s the only time.

Preston Pysh 00:23:21

I think that that’s such an important story to tell. It’s such a profound story about the impact that all this money is going to have in so many lives. 

Let’s go ahead and talk a little bit more about your newest book out there, “America’s Bank”. I just recently finished this one Roger. It was quite interesting. I have read the creature from Jekyll Island about the Fed and it kind of has a very pessimistic point of view. I found that your book was more balanced. It seemed like you paid more attention to just the pure facts of how the bank was set up and you’re telling that story which was refreshing to hear. 

I guess I’m curious if you have the same opinion as many people have today. They think that the Fed is in a very tricky situation. And some would call it, “a dire situation”. Do you see that as being as dire as everyone is saying?

Roger Rowenstein 00:24:15 

I think it’s remarkable that we’re having virtually the same conversation about the Central Bank today as the one we had in the period of 100 years. It was the focus of the book. It is the same conversation that we were having. 

180 years ago, when Andrew Jackson was taking a hatchet to the second bank of the United States. The previous Rutlidge experiment in central banking had the same discussion that failed the first bank. 

I’d say the one founded by Alexander Hamilton has this enormous suspicion of large central banks. Any connection between governmental banking authorities in Washington and large private banks in New York were demons for Andrew Jackson. 

Woodrow Wilson and Paul Warburg Carnac tried to set up what became the Federal Reserve. It was their demons for certainly the entire Tea Party section of the Republican Party and for many in the far left in the Democratic Party. 

By the way, that’s not the way it is in the rest of the world such as in France or in Japan. Can any other country think of the idea of having a central monetary institution to regulate the banks’ interest rates unify the financial strength of the country in times of stress? 

This is as basic as having a cohesive army instead of a bunch of random foot soldiers. That is having a centralized post office. The Federalist mistrust of the centralized authority is our birthright in this country. It’s a very strong force even today, which is why for me, writing this book was a lot of fun.

Roger Rowenstein 00:25:57

In terms of whether the Fed is at a tricky point today, tell me about a time when it hasn’t seemed to be at a tricky point. I mean, that is if it is responsible for the monetary stability of the largest economy in the world. What it does has great ramifications, specifically that today’s gigantic balance sheet accumulated during the aftermath of the great recession. It’s four trillion dollars. That’s a lot of balance sheets. 

My own guess by the way is that it’s going to be a little bumpier. I just don’t think you can sell that out of bonds and not have some disquiet in markets. I mean, what does it mean to be when you’re buying bonds that you’re lending? And that’s what they were doing all these years. They were lending therefore, adding quality to this. 

When you’re selling bonds, you’re borrowing, you’re creating demand that generally drives up interest rates. Some of this they’re going to do, not by selling bonds, but just not by replacing the ones that they have on their balance sheet. Now, that will probably be less disruptive. But nonetheless, that means that markets won’t be enjoying the periodic stimulus that they’ve been getting because up till now, the Fed has been replacing bonds or bills that have been running off.

Preston Pysh 00:27:14

Whenever I look through today’s issue and compare it to spots and time in the past, the thing that I think makes today so much different is that you have this polarization with this credit expansion that occurred when you look over at Europe, Japan, and the US.

Now you’re talking about how they’re going to start off-loading it. They’re going to just basically let the shorter term bonds not just mature. That’s kind of how they’re going to offload it. But I don’t know that we’ve seen something happen on such a global level. Would you agree with that? And I’m curious to hear your thoughts on it.

Roger Rowenstein 00:27:50

In the 1920s, the late ‘20s, and the early ‘30s, the French, the British, and the Americans tried to coordinate central banking activities. They didn’t do a very good job of it. But it’s not as if international markets weren’t interconnected and affecting each other for many decades. To some extent, it’s beneficial right now because there’s still QE going on in the countries you mentioned. We’re still a stimulus. 

So as we withdraw stimulus, the fact that other countries are behind us, in a worldwide sense. In many years of sedative effect by not having everybody rushing out the doors at the same time. 

But yes I mean they’re interconnected and that makes things harder to program, predict, and so on.

Stig Brodersen 00:28:36

I found it really interesting when you said about us, perhaps discussing something we talked about 100 years ago. I think some of the issues that we are debating today might be dating back to the formation in 1913. What’s the most profound thing you found about the formation of the Fed?

Roger 00:29:03

One of them was just how avidly they debated the same things that we debate today. The same styles, they release populace who didn’t trust bankers. They were bankers who were aghast at the notion of putting anyone in government in charge of anything to do with the banking sector. There were Wall Street people who were convinced that the Fed was going to basically destroy the economy by being inherently inflationary. 

Roger Rowenstein 00:29:28

By the way, the gold standard still existed when the Fed was created. On the other side, there were people from the southwest and agricultural sectors who were afraid that the built-in dynamics of the Fed research would be inherently disinflationary. And by the way, I think that they were much closer to the truth than the “inflationistas”.

Preston Pysh 00:29:47

What do you think would be the reason to call them the “inflationistas”? Would you say that they were wrong because there was a gold standard in place? And I know that we came off the gold standard for a brief period of time there in the ’30s during the Great Depression. We then went back back on the gold standard. We were on it for decades at that point. Do you think that that’s why maybe the “inflationistas” were wrong about their opinion of the Fed?

Roger Rowenstein 00:30:08

They were for a couple reasons. One was that we were still in the gold standard which had been so ultimately unable to mint more Federal Reserve Notes, even though they were different notes. The national bank had been serving us money. You couldn’t print more of them. Then there was gold behind them. Some ratio and the amount of gold was limited. 

And then there was so much controversy over whether authority in the Fed would be housed in the branches of the Fed Reserve Bank of Philadelphia, St. Louis, New York, and so on, or in Washington. They get it through Congress. Many of these decisions were left vague, and the Fed was born with very uncertain lines of authority. So when the time came, that we really needed a dose of liquidity of course, meant the Great Depression.

There were cross lines and uncertain lines of authority and there was no clear organism or mechanism or actor responsible for getting the economy going again. Obviously, Ben Bernanke, was in charge in 2008. The gold standard was a terrible restraint. And there were just lines of authority check, which hampered them from using the tools they did.

Preston Pysh 00:31:23

Interesting. So this is one of our favorite questions to ask on the show, because it’s our chance to kind of pick your brain even further. But after the interview is over. So what’s one of the best investing books or business books that you’ve ever read?

Roger Rowenstein 00:31:37

I really like John Kenneth Galbraith’s, “The Great Crash, 1929”. You read it in a day and a half. It’s a thin little book. It’s terribly witty. Ball races are always wonderfully witty. I just pick out a few that are in no particular order. 

“Once in Golconda” by John Brooks. It’s about the ’20s and ’30s. It was a wonderful book. I’m going to stop here because I don’t want to seem to be even close to exhaustive because then I feel bad about leaving out some very good books. But those are the three that I’ve always really admired and enjoyed.

Preston Pysh 00:32:13

Those are fantastic. I can’t wait to dig into the first one because I wasn’t familiar with that. So I’ll be picking that up today.

Roger Rowenstein 00:32:30

“The Great Crash”?

Preston Pysh  00:32:31

I haven’t read it yet.

Roger Rowenstein 00:32:23

He’s a terrific writer.

Preston Pysh 00:32:25

I want the audience to know. The two books that we were talking about today, that Roger wrote, “Buffett: The Making of an American Capitalist” is such an incredible book. This is one of Stig and I’s favorite books out there. And then the second book is, “America’s Bank.” It’s all about the formation of the Federal Reserve.

Roger, if people want to learn more about you, where can they find you on the internet?

Roger Rowenstein 00:32:45

Our website is rogerlowenstein.com. So, it’s really complicated.

Preston Pysh 00:32:50

Perfect.

Roger Rowenstein 00:32:51

You can order any of the books there.

Preston Pysh 00:32:53

Fantastic. Roger, thank you so much for taking time out of your busy day to talk with us and share your thoughts with our audience.

Roger Rowenstein 00:33:00

Preston, it was great talking to you. I really enjoyed it.

Preston Pysh 00:32:02

Alright, so at this point in the show, we’re going to go ahead and play a question from our audience. And this question comes from Brandon Bradshaw.

Brandon Bradshaw 00:32:09

I’ve got a question for the both you. I want to know if either of you think that cryptocurrencies will ever be a legitimate thing. I know that there are things going on in Congress. They are trying to decide whether it’s legit or not. 

I looked into it early in high school. I thought about investing. There’s a bunch of other cryptocurrencies coming out like Litecoin and Monero. What do you guys think about that, and how it would work out in the world of finance? Thanks, guys.

Preston Pysh 00:33:38

Oh, Brandon. Talking about cryptocurrencies on The Investor’s Podcast. Stig just couldn’t wait to play this one because he really wants to hear my response on this. He’s over there smiling as I’m listening to the audio of your question. So this is my point of view. 

I think blockchain technology is going to be huge. I think that it’s a total game changer. We read the book, “The Age of Cryptocurrency”. I’ve read a couple of other books about Bitcoin and cryptocurrencies and stuff like that. I’m completely convinced that this is going to be a game changing technology. 

The big question comes down to which one’s going to emerge the winner. It’s kind of like trying to predict that Microsoft was going to be the next Microsoft before it happened. And that’s really hard to do. The way it looks now, Bitcoin is definitely the winner at this point. This is as far as market capitalization, and the number of trading. You don’t really need to have a huge position in this stuff if it becomes real. 

00:34:40

And what do I mean by becoming real? That means, Bitcoin would become a real currency, or become a global currency. Do I think that could happen? Absolutely, I think it could happen. What do I think the probability of that happening is? I don’t know. I really don’t know. And I think that for anybody that would say that they think it’s a 70% probability or 30% probability, I think they’re just completely fooling themselves into thinking that they actually know. 

00:35:05

I understand what they’re trying to do. In my opinion, this is what they’re trying to do. They’re trying to fix the issue that is prevalent around every single country around the world, which is that central banks are broke. They’re printing money, and they’re diluting the value of currency all the time. There’s no incentive for them not to since no currency is pegged to some type of gold standard. Even when there was a gold standard, that never meant anything. They just adjusted the ratio of how much gold they held in the reserves.

With cryptocurrencies, supposedly that will change and that will be fixed, and it can’t be adjusted. Whether that’s true or not, the future will tell us the truth on that one. But I really like cryptocurrencies. I like the promise of what they could potentially do to change. What they’re really going to do is that they’re going to potentially create a peg to all the domestic currencies. 

00:35:58

So if I’m in America, and the Federal Reserve wants to devalue the dollar a whole bunch to pay for wars or pay for whatever, they print a lot. What I see happening is, a cryptocurrency, whatever that might be in the future, will be the global peg. And if a country acts irresponsibly like that, the value of their currency will diminish. The value of the cryptocurrency will continue to hold its peg. And that’s going to be a huge advantage for countries that are very responsible with the way that they manage their domestic money supply. 

I don’t see cryptocurrencies and domestic currencies being in a “winner takes all” kind of thing. I see these two coexisting together. I see cryptocurrencies existing as a world money supply potentially. And I see the domestic currencies continuing to serve the role that they have. But those are some of my thoughts. I know there’s a lot of people out there especially in the value investing community that might think that some of my comments are crazy. But I think it’s something that people really need to pay attention to, and try to understand if they know nothing about it.

Stig Brodersen 00:37:03

I think cryptocurrencies will be, I don’t know if I think it will be an aspect of suppressing, but I think it will be a lot bigger than it is today. It might sound crazy to some, but it’s also one of those, if you said before 1968 that we wouldn’t be on a gold standard, like, wouldn’t that also be crazy? Yeah, I guess it would. I mean, we can use one kind of standard and that’s also what we kind of expect in the future.

I definitely see cryptocurrencies play a vital role. Like Preston, I don’t know if it’s going to be bitcoin. I don’t know if it’s going to be either. I guess there’s a good chance that if cryptocurrencies are going to be something big for the future, that cryptocurrency has not been invented yet. But I really think that cryptocurrencies have a place here. I just want to throw some numbers out here. 

The transaction costs of fees of payment and processing fees are between $250 billion and $300 billion a year. Cryptocurrencies could do a lot about that. I’m not talking about whether Bitcoin is going to x thousand dollars. That’s really not my concern. But I think that it will be a lot easier if we could have a digital currency that is almost cost free to transfer, and that everyone has access to and can use. 

00:38:20

And that’s what we’d see now with cryptocurrencies, for instance, Bitcoin. That’s what we don’t see with all currencies. I mean, even the US dollar, which is the biggest currency out there. A lot of countries outside the US are trading that still incur a ton of different processing fees. And you can mitigate a lot of that within your standards. 

 So I think, once we only had fiscal money. And now we have digital money when you go to an online bank. I think it makes sense to think that we will progress to some sort of digital currency, one way or another. And I think there will be some sort of coexistence with the current system that we have. 

Whether or not cryptocurrencies will be huge, it’s I guess, too soon to tell. But I think we’ll see some sort of digital way of transferring money easier. I just want to point out something here that I find really interesting.

00:39:12

I am currently living in South Korea. What I realized was that Bitcoin, in particular, is huge in South Korea, and also in the Philippines. South Korea has a lot of immigrant workers from the Philippines. They’re sending money home. Actually, 20% of all the money that’s sent from South Korea to the Philippines is in Bitcoin.

So it makes a lot of sense if you’re in the developing world where you might not have access to a bank account. And if you do, you may not trust the system. It makes a lot of sense for you to hold something in cryptocurrencies. That’s really been an eye opener for me. Coming from Denmark, which is a country where you don’t even have cash because you just pay with your phone, or you can pay with your card. You don’t see cash at all. 

00:39:55

I think it talks a lot about how on the continent with billions of people. You might see something like that in the future. Another thing would be something like China. You can only transfer $50,000 out of China in a year, if you’re using the conventional system. What does that tell you about the market for cryptocurrencies?

I know this sounds sketchy. Like, “Oh, why would you transfer so much? And why won’t you go through the conventional system? Is it because you don’t want the government to be involved?” Well, there’s actually a lot of practical reasons for this. If you live in China, and your child is studying in an Ivy League school in the US, you can’t transfer enough money to pay for the tuition fee. 

So there’s a lot of practical issues in having the conventional system. It’s not just an issue with cryptocurrencies. I think we can avoid that from progressing to whether or not the nation states will just have a very loose regulation, which I don’t see happening at all, or we have the rise of cryptocurrencies. I guess, I believe more in the latter.

Preston Pysh 00:40:57

I think this is my final point on this. My opinions are somewhat worthless. I think what people need to do is that they need to go out there and read for themselves. I think there’s a lot of people out there that know nothing about this. And they kind of hear a very short or small narrative on it, and they immediately form an opinion.

What I would tell you is to start with no opinion on this. Go out and read a couple of very good, well-researched books that are written by very qualified people. I’ll name what I think are very qualified people. One book is called, “The Age of Cryptocurrency”. And then the second book that I’ve read is called, “Digital Gold”. 

I think both of those books are very good to give you just an appetizer of what all this is about. Then I think you got to go and do even more research about all the risks associated with how all this could fail and really understand it. 

But for somebody who does not know what this is, or what this potentially could turn out to be in the next 5 to 10 years, I think you’re missing something that could potentially be very huge. 

So Brendan, awesome question. We’re really glad that you asked this. We really actually enjoy talking about this. Stig and I were talking over the summer and had a little bit of free time. This conversation came up quite a bit, whenever we were not recording anything and just talking candidly. 

00:42:15

So for calling in and leaving this great question, we’re going to give you a free subscription to our new Intrinsic Value course that we just created. This teaches you how to value stocks, how to look at individual stock picks, and how to come up with a value and an IRR calculation of what you think the yield will be on that stock moving forward. We also wrapped some of Joel Greenblatt’s recommendations on how you can use options trading in conjunction with value investing. We think that some of that stuff’s really unique and valuable to the course as well. 

We hope you enjoy that free course, Brandon. And for anybody else who wants to check out the course, just go to TIP Academy on our website. You can find it there. 

So if anyone else wants to get a question played on our show like Brandon, and potentially get a free course, go to ask asktheinvestors.com, and you can record your questions there.

Stig Brodersen 00:43:03

So before we round up this show, we have a short announcement. theinvestorspodcast.com will now be a financial news site. Several times a day, you will see new stories that are primarily about stock investing. 

And the best example I can give is that whenever we have guests like Eric Cinnamond who we had a few episodes ago. As well as Jesse Felder and Cullen Roche. We have set up syndication deals with them. This means that whenever they’re posting a blog post on their side, we’ll be given the permission to pop this on our site.

We also have new stories for that specific day. And from time to time, we also discuss other asset classes and stock investing. We also have Jim Rickards’ blog post, where he discusses gold. As a new feature that we just implemented on our site, you can also track the stock market in Europe, Asia and of course, the US, directly from the front page of theinvestorspodcast.com.

Alright guys, that was all Preston and I have for this week’s episode on The Investor’s Podcast. We’ll see each other again next week.

Outro 44:05

Thanks for listening to TIP. To access the show notes, courses or forums, go to theinvestorspodcast.com. To get your questions played on the show, go to asktheinvestors.com and win a free subscription to any of our courses on TIP Academy. 

This show is for entertainment purposes only. Before making investment decisions, consult a professional. This show is copyrighted by the TIP Network. written permission must be granted before syndication or rebroadcasting.

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