Preston Pysh  08:06

Okay. So let’s give him the benefit of the doubt. And let’s give them 20%. And let’s just say he’s like a Google and he can do 20% or whatever, which I highly doubt he might not even be profitable for all we know at the time. So let’s just say that his bottom line was maybe $10 million a year. So how much are you willing to pay for a business that’s doing $10 million a year.

Now, I will say there’s huge upside with the potential for how this could grow. And because it’s something brand new on unknown potential here. I mean, there’s lots of value there. I will definitely admit that there’s lots of value there. But just to show people the multiples that were paid back in the 1999 timeframe. This is the peak of the internet bubble, and we’re assuming that he has 20% margins on his revenues, he’d be making $10 million for the entire year. And Yahoo purchased broadcast.com for $5.7 billion. So when we’re talking multiples…

Stig Brodersen  09:11

Wow, you’re really making Facebook sound like a great deal.

Preston Pysh  09:14

Yeah, it’s a great deal. So you know, if we were talking at 10% margin, $5.7 billion, you’re probably at about 1000 multiple for Mark Cuban when he sold his company to Yahoo. So pretty cool that I think it shows you his negotiation skills if anything.

Stig Brodersen  09:33

It is called growth investing, Preston. It’s because we’re two months into value investing.

Preston Pysh  09:38

I’d say. And Stig is exactly right. When your growth investing, the multiples really don’t make sense. And you’re just looking at things more from a growth of the user base and things like that, stuff I can’t even begin to comprehend because there’s so much risk associated with it. But you know, there are people out there that love that stuff. They feel like they understand the space and so they pay $5.7 billion for it. And like Yahoo, if you type in broadcast.com, you know where it takes you. It takes you straight to the Yahoo top-level page and all the things that Cuban had created with broadcast.com are pretty much a total wash for Yahoo. So they probably had to write this whole $5.7 billion acquisition down to nothing onto their income statement because they never did anything with it. I think they fooled around with it for a few years and then they realized that they just really couldn’t take it to anything that had any utility. So that’s something else it’s totally amazing when you look at this deal for them the pay a multiple of 1000 on something and then to never even use it in the long term. It was pretty amazing to me.

Stig Brodersen  10:47

Yeah, and so think about that Yahoo. I think that bet something like a billion dollars on Google and there weren’t too far away from each other actually at that point in time. But apparently, the money went to Mark Cuban.

Preston Pysh  10:58

So I think that adds a lot of contexts when you’re talking about Mark Cuban because everyone immediately is just like, “Oh, he’s a billionaire. You know, he’s the best there ever was, and ever is.” And I think that Mark Cuban has a ton to stand on. Don’t get me wrong here. But I also like to add that context and for people to really understand the background of how he became a billionaire. It wasn’t like he was like Warren Buffett here and he’s investing in you know, he’s investing in a bunch of different companies and all these different backgrounds and slowly growing his money into the billions like that. That’s not how he did it. He really did it by having a great idea with broadcast.com and then selling it for a multiple of well over 1000, in order to check that block. But with all that said, I’m not trying to discount Mark Cuban because his book, I love this book, I thought his book was awesome. And it’s a very short read. It’s actually… What would you say, Stig? Under 200 pages, I think.

Stig Brodersen  11:57

Yeah, and I think it’s a compilation of all blog posts so it’s like the whole full and actually makes… It seems shorter than that.

Preston Pysh  12:06

Yeah, the format isn’t really organized in like a logical layout. You can tell that he stole a lot of his blog posts. Cuban’s a blogger if you guys didn’t know. Mark Cuban is a blogger. I think it’s a Blog Maverick or something like that.com, where you can go read his blog, and his blog is fantastic. So I highly recommend it. But they took a lot of his blog posts, he formed it into a book. And it’s really good because it’s all located in one area. And I think what he did is he took the posts that he liked the most, that represented his thought process, and he culminated in this book.

So what Stig and I are going to do is we’re going to hit the highlights of the book. We thoroughly enjoyed the book and you can also get this on Audibles. That’s how I listened to it. But Stig, go ahead and take the first point that you really like from the book.

Stig Brodersen  12:58

I think the one thing I really like about it is there are a few pointers. But one of the things that really resonated with me was that he really encouraged that you start reading. That was one of the things he talked a lot about. And I think the best example of how important reading is, is that he started in the computer industry when he was like, I want to say 23 or 24… Something like that, which if you know, the computer industry is not that young. I mean, he was not like Bill Gates, who started programming since he was 10 years old or something like that. He didn’t know anything about computers in his early 20s. And he said the way that he caught up with his competitors in that industry was simply to read. And he was saying, it’s not just like one hour a day, he was reading day and night, and even today, he’s spending something like three hours a day, and he says he’s driving his family crazy because he wants to dedicate so much time to reading.

And one of the things that he talked about even though he was again back in early 20, he was almost broke, was that back then he even thought that 20 bucks or something for a book that was extremely cheap. And today, you can actually do it a lot cheaper than that. And he’s saying, why would you not start studying about something that’s important to you? If it’s like 10 bucks, and you can get a whole lifetime of experience, just by setting aside a weekend to go through that book.

And he said that when he started to assure that all his competitors were doing the same thing, it would be really hard to catch on. But no one does it. No one sits down and just study a book about how to succeed in the industry. And then that was something that really led the foundation to his success.

Preston Pysh  14:42

I absolutely love this point. I love the way that you frame this because in the book, Cuban talks about how he got ahead initially when he worked for this company, Your Business Software. So he goes in and he has to sell the software. He knows absolutely nothing about software and he says that in the book. And so what does he do? He goes and he gets these manuals from things like Lotus and Carbon Copy, like these obscure like old software programs. And he gets the manual and he just starts reading the manual inside out so that he understands the software better than the people that have been working in the software business for the last five years. He steps in, and he just studies this and he reads these manuals like crazy.

And so, then when he goes out on these on sales calls, he knows the software better than anybody else out there. So he educated himself in this field that he had no experience. And I think there’s this valuable lesson to everybody out there. Because if there’s something that you don’t understand, or you don’t know, that it’s so easy, and you hear this so often, where people will say, “Oh, yeah, I’d like to know something about accounting or whatever it might be. But you know, I haven’t had any classes on it or I didn’t go to college for that.” And they just leave it at that.

16:00

A guy like Mark Cuban’s, like I don’t know anything about the software business, it’s really complex. It’s brand new. But you know what? So what? And he says, “I’m going to get a manual, I’m going to read it. I’m going to teach myself.” And I think people that take that approach to life in general if there’s something you don’t understand, go on YouTube, buy a book, do whatever it takes to learn it. And I’ll tell you, it’ll take you places. I know from personal experience. I didn’t know how to program. I have taken some classes when I was in high school. I took one-year programming in high school and I took one-year programming in college, neither in any language that would help me build a website on the internet. You know what? I went after it. I went out and I’m not trying to toot my own horn here, but I guess I’m trying to tell you from my own personal experience, how this worked for me.

And so I went out on YouTube, I found this guy who taught me how to program in HTML, CSS, JavaScript, all that stuff. And I just sat down every single day and I watched those videos till I was blue in the face. Learning how to program a website. And then I was buying books and I’m reading these books, I’m trying to go through them and just trying to pick it apart so I could learn how to do it. That was a skill set I was not taught at all. But you know what, I really took the initiative and I’m so glad that I did because I was able to start up The Investor’s Podcast and Buffett’s books and things like that. It’s just been an awesome experience because I took this initiative that Cuban was talking about in the book. And just go out, do it, and get after it.

Stig Brodersen  17:27

Yeah, so you know, I definitely agree with you. Also, just briefly to touch on The Investor’s Podcast, it was not like Preston… We knew anything there was about investing. It’s not like we do that today. But basically, we are reading with the audience. And I have learned so much from just reading like book after book about something I didn’t know anything about.

Now, it might seem like we can come across an expert in inflation or an expert in an ETF but guess what? You can just buy a book about inflation. So really, it doesn’t have anything to do with your educational background. You could do that yourself as Preston was saying. Go on YouTube, that’s free. If you think 10 bucks is too much for a book, you just go online and find articles and that’s okay. There’s plenty of knowledgeable people who want to share their message too.

Preston Pysh  18:17

And I will say this, I tell people this all the time. I said, “Read books, read books, don’t go on the internet, and just research things there.” I’m very biased when it comes to reading books versus doing cursory research on the internet because I look at it this way. So like Mark Cuban, so we’re studying Mark Cuban. We read his book, we didn’t read his blog, a couple of his blog posts. The reason we read his book is that I have the opinion that if a person writes a book, they’re putting their most treasured secrets in that book, on you know, for Mark Cuban, it’d be why he became successful. I’d be of the opinion that the things that he guards most, that he feels are the real key recipes to his success. Yeah, I’m sure it’s on his blog, but it’s spread about tons of articles that he’s posted in the past and you’re going to have to like search around for it. But for his book, he’s going to put all of that right into the meat and potatoes of his book. And guess what? It’s just not Cuban. It’s any other person out there.

If somebody’s going to write a 300-page book, you better believe that they’ve done a lot of research. And they’re putting all the key important parts of whatever research that they’ve thought of because it’s taken them probably two or three years to write it. So I have a lot of respect for reading a book as opposed to an article on the internet. Plus, you don’t understand the reliability of the source. So I think it’s so important that we talk about this point, particularly.

Stig Brodersen  19:44

Yeah, so I definitely agree with you, Preston, because a book could definitely do something that online articles can’t. It’s for one thing, it’s more coherent. Ironically, that might not be the case with this book, because this is basically a blog post that’s been edited and compiled into a book. But basically, a book is much more coherent, which will give you a broader picture.

Another thing is that you need to have time to reflect on what you’re reading. And you need to have, I want to say reach some mental state to really digest what you’ve just read. And I don’t know if it’s just me that’s old. But I think it’s much harder to do that when you’re reading a book or listening to a book. If you’re sitting on a sofa than if you’re online, and you could just check your email and on the right panel, it says that this is the top 10 Katy Perry, Taylor Swift, whatever. I mean, it’s really going to confuse you a lot.

Preston Pysh  20:40

Oh, Stig. We know…

Stig Brodersen  20:42

It seems we are not using the same web pages.

Preston Pysh  20:44

Yeah, looking at those pages. And one other thing that I want to throw out there, so a lot of people ask me, “How do you read all these books so often?” And I’ll tell you, I do it through Audibles. audible.com you can get right on… I have my iPhone. It’s just that’s An app I downloaded onto my iPhone, it’s through Amazon. And so I got and I find the book, I put it on my phone. And then when I’m driving in my car, or if I’m cutting grass or whatever it might be, I can listen to the book right there on my phone. So it’s pretty awesome to be able to read books at such a fast pace because I’m listening to them. And any of this time that you really look as being just a total wasted downtime, like driving in your car is now a time that you’re like learning and turning that into like a learning laboratory is like, what I like to refer to it as.

But okay, we’re going to go to the next point, we cut a little bit off track there, but I really liked that point that Stig captured. So we’re going to go to the next point in the book that we really liked.

Stig Brodersen  21:45

One of the things that I thought was really interesting was Cuban’s view on the success of future business models. So he was talking about if you want to be successful in business, and especially online business, you should be looking toward convenience. I mean, convenience was really the keyword today. And he was saying something, which is called least resistance. That was the term he used over and over again.

And basically what he means by least resistance is think of Amazon or think of YouTube. Like, it’s really easy just to keep on consuming that product because everything is tailored to you. And you just sit by and you just click on it, and it will take you right to what you want to see. So like real short, that was like his success of the future business model. And if you are in business, you should always aim to create the least resistance for your customer.

Preston Pysh  22:47

So one of the things I want to talk about because Cuban is big on this, in fact, I think if you even watch the Shark Tank, this comes out from time to time, from time to time. And that’s this idea of being a salesperson and how important sales are. So, I think Cuban has such enormous respect for this, because when he moved down to Texas, and he was working for Your Business Software, that was, that was his forte. He had to go out there and he had to sell, he had to convince people, “Hey, you need this piece of software because if you don’t have it, you’re going to be losing money, because you’re not saving time or whatever the case might be.” And so he developed these hardcore sales skills early on, and to this day, I think if you’re a person that can come in and sell and convince him to buy something, you immediately grab his respect. And he thinks very highly of you. Because I think at the end of the day, when you think about business, in general, it’s all about closing the deal and getting that sale. And so that’s why he really has this strong preference.

And he talks about that a lot in the book. He talks a lot about that on his blog of how important it is to be great at sales, just straight up cold calls, to having a long pitch or whatever it might be. He just has a lot of emphasis on how important it is to be able to sell. And I think a lot of that comes down to your interpersonal skills and just being able to communicate effectively, and having confidence in yourself when you’re trying to sell something being creative with the way that you may be pitch something. So there’s a lot that comes together into that one piece of being a great salesman. And so it was just a really interesting point of how much weight and interest he places on that skill set.

Stig Brodersen  24:30

Yeah, and he will never go out of fashion. It’s not like, if you’re saying, I don’t know, I specialized in this medium. I mean, that might be old in 2, 3, 5 years. You know, the concept of selling. It is as valid today as well 1000 years ago, and I can promise you guys in 1000 years from now, selling will be equally important as it is today. All profit comes from the top line.

Preston Pysh  24:54

So if you guys are looking to hone your salesmanship skills, I’ll give you two book recommendations. One is by Joe Girard? What’s the name of the Joe Girard book, Stig?

Stig Brodersen  25:04

Something with a car?

Preston Pysh  25:06

Yeah. So I have not read this book but Guy Spier told us about the book and it’s definitely one that I would like to read. I’m pretty sure you’re going to get a lot of good nuggets out of it. It might be a little extreme at times from what I’ve heard, but there’s this book by Joe Girard. He was the number one car salesman in the entire US. And he just talks about all these skills that he developed for selling cars and how he became you know, I don’t know how many he sold but it’s like an insane amount of cars. So there’s one book, it’s by Joe Girard and then the other one is “Influence” which Stig and I already did an episode on. I can’t remember which episode that was. But the name of the book is “Influence” by Robert Cialdini. If you look in our episode list, you’ll find that we also wrote a book summary for that, if you want to download our book summary. But those two books will help you become better at sales. I would argue at a much higher level than anything else you can read. So there are two book recommendations if you’re trying to hone those skills.

Stig Brodersen  26:04

Another thing I really found interesting about the book was that he said, Cuban said, “Don’t listen to customers.” That was one of his main secrets. And to someone like me, that has taken all these marketing classes, and all everything you hear is just like, you need to listen to the customer. You need to make market surveys, you need to make focus groups. I was really surprised by this, but I just heard so many billionaires saying you should never listen to your customers.

Now, I think they’re taking that to the extreme, but I definitely think there is something to it. If you’re very visionary and someone that comes to mind decides for Cuban is someone like Steve Jobs. He was also saying the same thing. You should not listen to customers. Because basically, how can your customers know that they need an iPhone or an iPad when it’s a disruptive technology that they don’t know. You know, they don’t know it exists. They don’t know that they have a need for it. I think I have another quote from him before. He said that if I asked people what they wanted, they would say they wanted faster horses. So you have these very visionary people that just think outside the box, someone like Mark Cuban, who has just been, for instance, we were broadcast.com. No one has ever seen this before. And it’s really hard to make a focus group and ask people about something that they cannot visualize.

Yeah, I think that you’ll find a lot of these people that have that same opinion as Steve Jobs. These guys were ultimate creators. So these guys are bringing new products to the world. And that’s why I think they really have this opinion. Like you can’t ask the customer what it is that you want, because here they are creating something that’s new, that’s never been done before. And I think when you start asking people, “Hey, what do you think about this?” Well, they’re going to shoot holster and be like, “Oh, nobody’s going to listen to the radio over the internet. Why would they do that? They can just turn on the radio and they can hear it.”

So you’re always going to have those naysayers and I think it is important to ignore people. If you really think you’ve got something and you understand how it could shape the world in a different direction, go for it, ignore them, and run after it.

All right, Stig, you got the next point.

Stig Brodersen  28:21

Yeah, I think that there were a few good nuggets and one of them which… I guess I disagree with Cuban or at least I have another thing I wanted to chip in, is that he’s saying that business is the ultimate support. Now, it’s not necessarily I disagree with that statement. But what he’s saying is that in business it is all about winning. It’s all about if you can win, someone else has to lose. And you should always strive to be in the position where you win that game. I mean, he’s using all these sports metaphors, which is a lot of fun, and I could definitely see where it comes from.

Now, I do agree that that is the life of the business. But I think that for a lot of people that might be better off going into, say, a mutually beneficial type of business. I think that if you set yourself up for always competing with other people, and especially always thinking that, for me to win, someone else has to lose. I think that you might not find the same satisfaction in life as you otherwise could, unless you’re as good as Mark Cuban, of course.

And this was really something I thought a lot about after reading Guy Spier’s book, “Education of a Value Investor.” He also thought a lot about it. And if you should just take one example from personal life, for instance, if I am doing a podcast episode, and I’m bringing on the guest, that guest will have the chance to tell his personal story. I will have a great show. And the audience will have a great experience learning from that person. I mean, we have three parties and everyone wins.

Being in the middle of something like that, I think gives you a lot of great things and gives you a lot of great emotions. But being in the opposite direction, like for instance, I used to do as a commodities trader and a guy did something similar when he was an investment banker… Someone has to lose before you can win on that trade. I   see where Cuban is coming from, but I think you should think about carefully if that’s the path you want to take.

Preston Pysh  30:27

And something to highlight off this point that you’re making. So one of the key points of Cuban was making in the book, I think he was trying to motivate people more than anything, is when you create your own business or you’re working for a company, there’s always somebody out there that’s trying to kick your rear end, and they’re trying to take you to the cleaning house. And so if you’re not on your A-game and you’re not trying to outsmart them or prepare yourself for something that’s going to compete at a different level, you’re going to get eaten alive.

And I think that that’s what he’s really warning people with that metaphor, where he’s talking about business, where he’s staying with my basketball team, it’s only a couple minutes in the day, and then it’s over. But with business, it’s 24 hours a day where somebody is trying to kick your butt. And that’s where he’s really trying to make people aware, like, “Hey, you might create a product. But guess what, there’s going to be somebody right down the road who’s trying to create a better product and take it to the extreme and basically put you out of business. So if you don’t have a that competitive spirit, and you’re always trying to bring your best, there’s a chance that you might lose.”

And I think that that’s one of the main points he’s really trying to make is trying to motivate people and tell them, “Hey, this is not for the faint of heart. Like you can’t just start a business and think that it’s going to continue to exist without somebody else trying to come along and kick your butt.” So it’s neat because when he talks about that, he says he has the saying, “I always want to figure out how I could kick my own ass that way. I can make sure that somebody else doesn’t come along and do it.”

And Steve Jobs also had a very similar thing out of his book, where he says, “I would much rather cannibalize myself than let somebody else cannibalize my company.” What he’s getting that is people will say, we’re asking him, why are you coming out with a new iPhone when you don’t even have a competitor in the market back when iPhones first came out. You don’t even have a competitor on the market that’s even close to competing with you. And you know, Steve Jobs said, “Well, if I don’t cannibalize myself, somebody else will.” So that was his way of always staying ahead of the technology and always staying ahead of the competitors was, “Hey, I’ll just cannibalize myself, and I’ll make it even a better product.” I think that’s a really good approach because you never know when the day is going to come when somebody does come along with a better product.

Stig Brodersen  32:44

Yeah, and just to follow up on that, Preston, I came to think about a marketing class. So with Mohnish Pabrai, the other day, and this might sound weird because people usually know Monish from picking stocks. But what he’s saying is if you look at entering a new market. And, again, think of someone like Steve Jobs and like Mark Cuban. You should not think about, “If only I can get like 1% of this market. Or if I can just get one-tenth percent, I would be rich, because it’s such a huge market.” That’s the wrong way of looking at business.

What Mohnish Pabrai is saying is that if you can’t get at least 60% of the new market, then you’re not specific enough of what you want to do. And I think that really pretty much captures some of the really big thinkers of how they think of business and disruptive technologies.

Preston Pysh  33:40

So I’m going to talk about a point here that Cuban made in the book, which I thought was really good. And he says, You only have to be right once.” And what he’s really getting at is say you have a great idea and you try to create your own business or whatever the case might be and it totally falls on its face. You know Cuban would tell you to get up off your feet, dust yourself off, and get back into the game and come back with something new. And he is saying you only have to be right once is you can fail 5, 6, 7, 8 times, but then you get that one business that hits and does it right. Well, guess what? Now you’re a multi-millionaire, whatever the case might be.

And so he’s saying stay in the game, stay after it. And it’s really quite motivational. And in fact, I think the whole book is quite motivational. I think for somebody that might be just starting out, and maybe you’re in college or whatever, I would highly recommend this read. He gives out great pieces of advice, great business sense, little tidbits here and there. He has a couple of lists where he talks about like, my list of the Top 12 things I learned in business and all that stuff is very useful, especially when you’re starting out. And I think it’s very motivational for people to understand that.

34:54

Something else that I found to be highly interesting and very useful for a lot of people that might be working a job where you have a boss, he tells people that you need to think like an entrepreneur. The best employees are the ones that think like an entrepreneur. And what he means by that is, you need to be thinking from the lens and the context of the owner. When you’re that employee, and I get frustrated, whenever I go into a business, and I say this to my wife all the time, she just rolls her eyes at me, I say, “That person is thinking like an employee, not an owner.”

And what I mean by that is, you go up to the counter, let’s say you’re at a fast-food restaurant, or you’re at wherever, and the person is just sitting there and they could care less. If you made a purchase, if you made an order, or whatever the case might be, they could care less about what choice you made. Like you’re asking them some questions, and it was like, yeah, so they’ll give you the cookie-cutter answer and then they’re just looking like I could care less if this person makes a purchase. In fact, I hope they leave so I don’t have to do my job. And that is how an employee thinks.

And what Cuban talks about is you need to think like an entrepreneur, you need to think like an owner. Not only can I make this sale, but how can I make this sale and then convince this person to go tell their best friend to come down here and buy from me after that? That’s how an entrepreneur thinks because they’re the owner, they want as much business as possible.

So if you’re an employee working at a company, I would really challenge you to take on this mindset: how can I think like the owner of this business? How can I try to bring more business and follow on business and compounding business for this owner? When you think like that, I’ll tell you, you’ll get promoted faster than anybody else in the block. And on top of that, you’ll probably have the sense to maybe start your own business someday and run with it. I thought that was a really good point.

Stig Brodersen  36:41

Yeah, and I definitely agree with you, Preston. This book is definitely well-suited if you’re a college student, and he addressed college students plenty of times. And I also want to say especially if you are a college student, don’t educate yourself to be an employee for a company. Educate yourself to be the owner of the company even though you probably, like everyone else, have to start working for someone else. As Preston was saying, you will get promoted faster and people will recognize you. And by the end of the day, you might create a network to create your own business, if that’s what you want to do. But no one wants to promote you and no one wants to network with you if you think like an employee.

Preston Pysh  37:20

I was lucky as a kid, I’m just going to shoot your straight. Both of my parents were entrepreneurs. My mother ran her own business. She had her own dance studio. I want to say she had like 200-300 students, it was a lot of students. And then my dad, he had this apartment company. So I   grew up in this environment where entrepreneurship was pretty much the way things worked. It wasn’t like we’re working for a boss. You had this entrepreneurial spirit in our house. And so I was brought up around that and it was I look back at how much of an advantage that was growing up as a kid. And I think a lot of people don’t necessarily have that same experience, but I guess my point in telling you this is to try to hone those skills of like what it takes to become an entrepreneur.

Because when you do, I think that you’re going to find that you have so much more potential to increase your net worth your income stream when you own something, and you create it yourself. And I think that this would be a great starter book for a person to get that entrepreneurial spirit because that’s what Cuban talks a lot about in this book. And probably one of the reasons I really liked it so much.

38:33

All right, so there’s more stuff that we could talk about with Mark Cuban and the different points that he makes in the book. And I’ll tell you, there’s a lot of different chapters and a lot of different points. So like we said, we can’t highly recommend this book enough. But what we’re going to do at this point is we’re going to take a question from our audience and this question comes from Satosh.

Satosh  38:51

My question for you guys is about inflation. How likely is a scenario where an economy can experience severe inflation, such that it can potentially invalidate the currency, something that many economists call hyperinflation? In such a case, the currency would essentially lose its value and all our investments and liquid assets would essentially become useless. I read about such an event happening a few years back in Zimbabwe, and in several other countries in the early 1900s. It is something that as an investor, I should be worried about. What is the best way to be prepared for such an event? Is considering investing in fixed tangible assets like real estate a good idea?

Preston Pysh  39:40

So, Satosh, this is a really great question. I think that it’s a question that a lot of people have on their mind because of the current land conditions around the world. So when you talk about inflation versus hyperinflation, I think the most prominent example in history is Germany back in the 1920s timeframe.

The reason that Germany went through the hyperinflation back in the 1920s is that they had enormous war reparations that they had to pay from World War One, finishing up. And those reparations were in such a large amount that Germany just couldn’t possibly pay it all back. So they printed more money and devalued it. And it’s just a total disaster when you go back into the 1920s. I think the picture of the guy with the wheelbarrow of money was from that time period, I want to say that that picture was taken like around 1922, or somewhere around in there.

So really, when you’re trying to understand what causes hyperinflation, it really comes down to the domestic obligations, being in such exceedance of what that country’s ability to pay and to collect tax revenues. It just gets completely out of whack. You know, I would argue back in the 1920s for Germany, the payments that they needed to make to all the different foreign countries from the war reparations were far in exceedance of what the company could bring in with their tax revenues. And that’s the reason that they went through that.

Plus, you had some extreme leadership in place, following World War One. And it was just a crazy time. And I think when you go around the world and you look at all these different hyperinflation scenarios, you’re going to find that that country was in enormous amounts of debt that far exceed what they could bring in.

So when we look at the United States right now, I don’t necessarily think that the United States is anywhere near that scenario where hyperinflation could occur. I could be completely wrong. We’ve done an enormous amount of quantitative easing. We’re going to be having a guest on our show here and what is it October that we’re having Calin on the show, Stig?

Stig Brodersen  41:46

Yeah, the middle of October.

Preston Pysh  41:48

We’ll have a link to Calin’s website in our show notes. And Calin wrote this paper, this white paper on how the how modern monetary policy works and he talks a lot about what you’re getting at here. And I want to say his white paper is like 50 or 60 pages long. It has been highly downloaded across the finance industry. And I highly recommend people read this because it’s quite fascinating how well he depicts the modern monetary system.

And he gets into debunking a lot of things like money multipliers and how it’s going to impact inflation. I know back during the 2008-2009 crash, he had a bunch of people out there saying that we were going to have hyperinflation with all this quantitative easing

Calin went out very early, I want to say like in the 2009-2010 timeframe and said, “That’s not going to happen. And here’s all the reasons why.” So we give him a lot of kudos for calling something so obscure that I think you talk to any modern economist, they’d probably have told you that we would have had hyperinflation in the United States with all the QE. And Calin was one of the few people that said that we wouldn’t because I think he really had a fundamental understanding and knowledge of how things work.

I want to also highlight that back in the, I want to say was the late 70s or early into the 1980s. In the United States, you had an enormous amount of devaluation that happened with the dollar. I think the dollar lost almost 50% of its value over like a five year period during that timeframe. That’s what I think. People are going to see this time around where you’re going to see that the dollar and every other world currency that’s competing for market share right now, continue to lose its value. And that’s how people are being taxed and how that’s how this deleveraging is actually taking place is through the devaluation of the currencies.

Stig Brodersen  43:41

Oh, I’m so sad, Preston, you’re talking about the vulnerability of the dollar. Because you know, me living in Denmark and we’re looking towards the Euro, looking at the dollar and just thinking this is a safe haven because I have no trust in ECB whatsoever. So I think this is a great discussion and one book that really comes to mind here is the “Black Swan,” which we did not too long ago by Nassim Taleb.

And the reason why I’m saying is, to continue with what Preston said because Preston said that he thinks this is really highly unlikely. And I completely agree. I would say that for hyperinflation to happen in one of the major developing countries right now would be, I wouldn’t put a percentage on… But it’s highly, highly unlikely. But again, we’ve seen so many crazy things in the financial markets and there has been a black swan. So could it happen? Yes, it could.

And, what you also asking about Satosh is, so what should you invest in to prevent that? I think one of the things I probably should look into is to look into Taleb’s fund. I actually heard that he has like a Black Swan fund. I don’t know how that’s how he invests… That could be really interesting.

44:59

But if I just should think of some of the asset classes, type of assets that you can buy, it would be something like TIPS, which is inflation-proof bonds. I mean that might be a suggestion. Another thing which you suggested is real estate. And the reason why you would do something like real estate this because you have a fixed-rate mortgage and it’s in a given nominal number. So, basically, what you have borrowed to buy the building almost gets depleted. And also that you can raise your rent as there is more inflation. Although as a class it would be something like commodities, oil, and gold. Something that people used to plug into when there are higher uncertainties, which are on top of inflation.

 

So at least that is like the traditional asset classes and you might even include something like stocks to which is not fully inflation-proof but like partial inflation proof. So I think that would be my best advice to you if that’s in the direction you’re going. Am I doing that myself? No, not only because I trust the Fed because I’m not really I sure do just more than the ECB. But I think the position I’m in and how I look at the world right now, I don’t think I should be paying a premium to someone to protect myself against hyperinflation.

Preston Pysh  46:31

So I’m going to talk about market conditions right now in August of 2015, real briefly. So one of the concerns that I’ve got right now is the strength of the dollar. So the dollar is getting extremely strong. You’re seeing all these different currencies pour into the dollar. You’re seeing them pour into the 10 year Treasury. And so for the United States domestically, that’s not a good thing because what’s happening is it’s really hard for us… The import versus an export piece of that, it’s really cheap for us to buy things outside of the country. But very expensive for outside countries like China or people over in Europe to buy things in the US.

Well, that’s really bad because an enormous amount of the revenue being generated by these US companies is all from foreign currencies and from foreign countries. So as the dollar gets stronger, that’s going to be an enormous amount of pressure on the US’s ability to continue to grow its GDP. That’s where I’ve got a concern moving forward.

And I think that with these pressures mounting in the US, I think that the Fed is going to be in an extremely tricky situation, because if they start tightening, meaning that they basically start to reverse all that quantitative easing that they’ve been doing, and instead of buying bonds, they’re going to start selling these bonds, then you’re going to have a flood of bonds on the market, which is going to raise interest rates in the US.

47:50

If they start raising interest rates in the US that’s going to only make the dollar stronger yet and that’s going to put more pressure on the US businesses. So I don’t necessarily see how the Feds going to be able to do that this year. Does that mean that they might still do it? Yeah, absolutely, they might still do it. In fact, if they do actually do this, I think they’re going to do it at just a small piece just to be able to say that they did. Like, I don’t think that they’re going to even remotely adjust interest rates that much that people might not even notice. But I think it’ll be maybe a psychological movement because they’re going to say that they did it.

You’re really at this pivotal point in time where we don’t necessarily know which decision they’re going to make. But we know pretty much whatever decision they make. It might not be a good one. So it’s going to be interesting to see how it plays out. We’re watching it very closely, we’ll be sure to. And this is what I want to highlight to everybody. If you sign up on our list, either through Buffett’s Books or The Investor’s Podcast, we type up an executive summary of every book that we read. So this book on Mark Cuban, we got an executive summary we’re going to send out to everybody for free to go and sign up on our list.

48:56

Also, when we send out those executive summaries will type up our current thoughts on the current market conditions and just give you some thoughts like this in the email. We have no spam whatsoever, no advertising, no, nothing like that. So if you’re signing up on our list, you’re just getting these executive summaries, and then in the body of the email, you’re getting our notes on the current market conditions. So thanks for joining us, and we’ll see you guys next week.

Outro  51:15

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