27 February 2021

On today’s show, Stig and Trey talk about the current state of the stock market. Specifically, they talk about how to interpret the low-interest-rate environment, and why they don’t expect the stock market to have topped just yet.

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  • Why billionaire Stanley Druckenmiller says that this market is the most difficult time ever to write a playbook for
  • Why commodities are priced to perform well
  • Why there is an opportunity in emerging markets
  • How to estimate the correct discount rate
  • Ask The Investors: How should I position myself given the current market conditions?


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.

Stig Brodersen (00:03):
On today’s show, Trey and I talk about the current market conditions. We discuss why we haven’t seen the markets up despite the challenges the world is facing due to the pandemic. We also talk about why billionaire Stan Druckenmiller says that this is the market that is most difficult ever to write a playbook for, and why we expect emerging markets and commodities to perform well and much, much more. You don’t want to miss out on this one. Let’s jump to it.

Intro (00:30):
You are listening to The Investors Podcast, where 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.

Stig Brodersen (00:51):
Welcome to The Investors Podcast, I’m your host, Stig Brodersen, and I’m always excited about doing these episodes, but now more than ever, because I’m sitting here alongside my cohost, Trey Lockerbie. Trey, how are you today?

Trey Lockerbie (01:03):
I’m doing great Stig. I’m really happy to be here. There is so much going on in the markets today, and I think we should dig in as much as we can because there’s a lot to cover.

Stig Brodersen (01:13):
So, the way that Trey and I have talked about this episode is, we’re going to have three segments. The first one is just an overall look at the current market conditions. We’re going to talk in all kinds of directions on that one. So, just talking about what we’re seeing in the market right now, what’s interesting to us and how we position ourselves. Then in the second part, we will be talking about our web application that we have on theinvestorspodcast.com, is called TIP Finance. We’re going to talk about some of the chores that we have and what that signals to us in the market and how we should position ourselves.

Stig Brodersen (01:45):
Then at the very end, we have a question from Sean, from the audience, and it’s about having the right portfolio for the right market conditions, but let’s just kick this episode off. One of the things that I can’t help but think about is, are we in a new normal for the stock market? I guess every time I hear the term like new normal, it’s just painful to say, every time you say it you just know something’s gone wrong shelf the after. We’ve seen the stock market just explode in 2020, despite the pandemic, the Dow Jones Industrial Average has generated a 9.7 total return including dividends, and that is trailing the 18.4% return for the S&P 500, again, far behind NASDAQ doing 45%.

Stig Brodersen (02:32):
So, Trey and I were sitting here mid February, and the S&P 500 is up 4%. Then NASDAQ is up almost 8%. I just can’t help, but think like how long can this go on? So if we look at the most obvious explanation of why all this is happening, we have to talk about the low interest rates and the expansion of the money supply. What’s interesting is that billionaire [Ridley 00:02:58] has said that given the current interest rate levels, he wouldn’t be surprised if we in the foreseeable future would see stock markets trading around 50 times earnings, and he wouldn’t find anything weird about that if you only compare stocks and bonds.

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Stig Brodersen (03:12):
Just as a reference, right now the S&P 500 is trading at almost 40 times earnings, and the Shiller PE is 35%, the Shiller PE taking into account inflation and normalized earnings. So, during those mock conditions, you generally don’t want to hold cash in your portfolio simply because it’s being debased at a relatively high rate at the moment. What I also want to say is, because of these low interest rate, I know we always get to talk about this interest rates, but it’s simply because they just changed the entire dynamic for all asset classes. Whenever we have a low interest rate, we can also use a low interest rate for the future cash flows, clearly not zero for math reasons, and the very low discount rate just leased to very high asset prices.

Stig Brodersen (03:58):
So, if you consider a stock pick like Spotify, for instance, a stock we’re talking about before here on the show, they don’t make a lot of money today, but it’s expected to do so in the future years from now. So, those cash flows are now worth relatively more than the cash flows in the short term, because we’re just using a low interest rate. Again, they’re not worth more than cash flow today, but relative terms, if we had a high interest rate that will be different. So, this is just a very different environment that we’re coming from compared to the recent decades, but enough about how I’m seeing the current market conditions, I want to throw it over to you, Trey, and sort of like, what are you seeing right now?

Trey Lockerbie (04:35):
So, I’m going to quote Stan Druckenmiller here, because I think he summed it up the best. He basically said that this is the craziest cocktail he’s ever seen in his career, and probably the most difficult time to develop a playbook of how to navigate this. My thesis kind of summed up is related to the old joke about don’t fight the Fed. I think that is still very true today, and I think we’re going to face into a new era of not fighting the fiscal instead. So I want to talk about that a little bit, but first I’d like to take a step back and take a 40,000 foot view of what’s going on in my opinion.

Trey Lockerbie (05:11):
So, the first place I like to start is typically with the total market cap to GDP ratio, this is otherwise known as the Buffet Indicator. The ratio is currently at 194.8%, almost 195%, meaning that the market cap of the entire stock market in U.S. is 195% higher than our current country’s GDP. This is the highest it has ever been after even peaking in 2000 at 142%. So you might be hearing that and thinking, “Wow, the market is incredibly overvalued.” But going back to Stig’s point that he just highlighted the cyclically adjusted PE ratio, the cap ratio also known as the Shiller PE ratio, still has not matched his peak from the dot-com crash, where it was around 45. Like you said Stig, is only sitting around 35.

Trey Lockerbie (06:02):
So, in other words, there’s potential for it to increase at least 30% from where it is now. So, that’s happening, and then meanwhile, our government has increased its debt by 170% in the last 12 years, and the money supply has expanded four fold over the same period. So, there’s just an unprecedented environment to invest in right now. I want to highlight just a couple of other points that have happened since COVID began last year, and a good place to start is with the U.S. dollar, which has dropped around 10%, its lowest level since 2018. In addition to that, U.S. corporate debt is up, now 10.5 trillion, and usually corporate debt goes down during recession as companies reliquify, but actually it’s increased during the COVID crash, even while corporate profit are down 18%.

Trey Lockerbie (06:57):
So, what I want to do here, Stig, is walk people through a little bit, my framework, and we talk a lot about this on the show, but I want to just walk the dog a little bit on it, because I think for the listener, they might be struggling to piece all this together and say, “What does this all mean?” You hear a lot about the Fed and what they’re going to do moving forward. So if we take a look at interest rates right now, the nominal tenure for example, is at 1.09%, and the PCE is at 1.87, and the CPI is 1.4, so the inflation indicators essentially, that means that the real tenure rate is negative. It’s now negative 1.02%.

Trey Lockerbie (07:40):
That is important because basically all of the stimulus that we’ve been talking about just now is expected to lead into inflation to some degree, no one knows how much or when, but people are talking a lot about it working its way into the market, especially with this new stimulus package of $1.9 trillion that’s about to hit the market. The expectation is that all the stimulus money is going to continue to trickle down into the mainstream economy and eventually start leading to inflation. We can talk about how to define inflation, but as far as typical goods and services go, we do expect it to start growing.

Trey Lockerbie (08:22):
The question is, what is going to be the Fed’s response to that? The Fed could continue to print money, do quantitative easing and buy these government bonds back off the market, which would artificially keep the interest rates low, or they can not do that and let inflation rise, which means that bond interest rates will rise. If that happens, I think a couple of things happen. So, a common opinion about this is that the Fed can’t afford to let the interest rates rise.

Trey Lockerbie (08:56):
So, the expectation, I think, is weighted a little bit more towards the fact that they’re probably going to print more money, probably going to buy back more bonds and keep these interest rates artificially low, which means the real rate is going to continue to stay probably at a negative number, which means that commodities might perform really well moving forward in the next few years, and commodities, interestingly enough, just broke out a downward trend line going back to 2008. So they’re starting to revamp a little bit. So my expectation is that commodities are going to continue to perform well. I also think that I don’t think we’ve seen the top of this market yet.

Stig Brodersen (09:35):
Going back to one of things you said there before, Trey, you would compare this to 2000 with the dot com bubble, is hard to say, like with just using the Shiller PE as example of being 35, back then was 45, is that any indicator of where we are? I want to say that this situation is very different in the sense that the interest rate is just very different from 2000 and still it went up to 45, like we’re seeing something very, very different right now. I have a hard time wrapping my head around whether or not this is a new normal, and again, time is infinite. So, let’s be careful about saying what a new normal is, but Ridley was right.

Stig Brodersen (10:10):
Trey, you talked about it before, negative real returns on the Goldman bonds. And yes, we can always talk about how to define inflation, but this just call the 0%, just be generous and say 0% return. Well, if you’ve got a 0% in bonds, and that’s one of how do you want to preserve your wealth, if you’re afraid of inflation, equities is just not a way of generating cashflow, it’s also a way of protecting yourself against inflation. So, these are just unprecedented times. It’s so interesting to see what’s going to happen. It takes me to one of the other points I wanted to talk about here with the current market conditions, the U.S. no surprise. It just seems very, very expensive right now.

Stig Brodersen (10:51):
Of course, again, this is due to the low interest rate levels. You can even then compare to Europe that at least to me, doesn’t look as expensive right now. We have negative rates here in Europe. So, right now I’m not looking to invest that much in the U.S. I have some positions in the U.S. but not a lot, especially not compared to what it used to have. Where do you see opportunities in the market? For those of you who have been following what I’ve been doing in the previous current market conditions and the mastermind episodes, I’ve talked a lot about looking internationally. Right now I find valuations in emerging markets more appealing.

Stig Brodersen (11:24):
I wouldn’t say I find them very appealing, but again, you have to compare this to the opportunity cost. If your opportunity cost is the S&P 500 right now, well, then to me, emerging markets looks more interesting, and they do that for a few different reasons. They do that because they are trading at just more attractive levels, but also because it’s a way for me to diversify my portfolio. So, let’s talk about how they have performed in the past. If we look at the emerging markets and let’s talk about how to define emerging markets, well, most ETF providers would place emerging markets, the primary markets is China, Taiwan, India, Brazil and South Africa in that order.

Stig Brodersen (12:02):
It is a bit different whether you go to Vanguard or BlackRock or whoever you go to, but more or less there is this consensus. Those are the main emerging markets. If you look at how they perform, from 2000 and 2009, emerging markets did 9.8%, whereas the S&P 500 did 0.1%. That’s also known as the lost decade, but then from 2010 to 2019, emerging markets yielded 3.7%, whereas the S&P 500 did 13.5%. So, I just wanted to mention that you really show that this is also a diversification play like, yes, perhaps I would agree with you, Trey, like you mentioned before, perhaps this stock market hasn’t seen its top yet, it’s difficult to try and guess what the stock market is going to do in the short term, but yeah, I wouldn’t be surprised either if this just continues for some time.

Stig Brodersen (12:52):
But I want to take some chips off the table and start investing in other markets, because I don’t know how long this would go on in the States. Going to emerging markets, if you are a bit more adventurous than I am, perhaps you want to go to the very cheapest markets, that will be something like Russia, Turkey. I’m not that adventurous. It’s a little too exciting for me. So, the way I’m playing it is that I focused investing in a broad basket of emerging markets countries. So it’s not a specific play on countries per se. It’s more like a basket of countries.

Trey Lockerbie (13:22):
Yeah, I tend to agree with you on that, Stig. I just want to highlight though that you have to honor your circle of competence at the end of the day. I just spoke with Joel Greenblatt about this, and it was a great reminder that … he’s very U.S. centric and that’s because he really understands corporate structures and the laws here in the U.S. and I think it can be beneficial to allocate some of your portfolio globally. I, no doubt think that that’s a great strategy. Personally, though, it’s not really within my circle of competence. I do think though, just going back to what Stanley Druckenmiller was talking about that Asia in particular seems to be, of all the markets, probably a pretty good one, mainly because if you compare their response to the virus to the U.S. it’s drastically different.

Trey Lockerbie (14:08):
I mean, China, for example, hasn’t even increased their M2 supply while ours has gone up 25% in related to GDP. Then additionally, China has practically defeated the virus. So, they are poised for, I would think, a much stronger recovery, a much stronger currency, and I think a much stronger growth rate over at least the next couple of years.

Stig Brodersen (14:32):
Again, not to go into a long discussion about inflation. I think we’ve done that multiple times here on the show, but we do see a lot of money printing going on right now in the States. You started out, Trey, by talking about 10% depreciation in the U.S. dollar compared to a basket of all the occurrences. I don’t know whether this will continue. Again, I do want to say that, whenever you do make those currency baskets, especially compared to, if you look at the U.S. they primarily compare it to the Euro, so you can always make the argument, the U.S. dollar not performing well, is it because the Euro is strong, but we print as much money as we possibly can here in Europe too. So, it just seems to be, to some extent, like a race to the bottom.

Stig Brodersen (15:11):
One of the things I really like about emerging markets, despite all the bad things you can say about emerging markets and political instability and all that, is really that you don’t at least right now, don’t have the same amount of money printing. Even if we would see that happening, it might be nice to have diversification in your fiat currencies. It’s not like I see dollar breaking down or anything like that, or for that happen to the Euro at all. But I do see a lot of debasement in the horizon. So, I like this as an inflation play too and a currency play.

Trey Lockerbie (15:43):
Yeah, and it’s got a positive or negative feedback loop, however you want to talk about it or view it mainly because, as our dollar depreciates, we’re essentially mercantile turning these countries like China into a mercantile country. So, they’ve got already a current account surplus, and that’s just going to continue as we continue to drive more of the economy back to them because of the currencies weakening.

Stig Brodersen (16:09):
If I can piggy back a bit on that, I want to talk about the concept of resulting. We spoke with Annie Duke back on episode 231. We’ll make sure to link to that in the show notes. We talked about, whenever we make decisions, and she specifically mentioned poker, she used to be a poker player, but she also said, this is the same with your portfolio, this is the same as … whatever you’re doing in your life, think about running this experiment, whatever you want to call it, think about having this scenario a million times, and that’s how you’re supposed to position yourself.

Stig Brodersen (16:41):
So, if you have … and this might just be a silly example, but if you can be, let’s say you had the example of a smoker and non-smoker, and then the non-smoker would be the person getting lung cancer. Some people would take that and [inaudible 00:16:54] and say, “Well, it doesn’t matter if you smoke or not, because even the person who is not smoking would get lung cancer, and my dad has been smoking all his life, he doesn’t have lung cancer.” But then obviously if you ran that situation a million times with the same probabilities, clear the person who’s smoking would get lung cancer. This is just one of the things that I’m thinking about right now in these current market conditions.

Stig Brodersen (17:14):
I get asked a lot, I’m sure the same for your Trey. A lot of people from audience are asking, “So what are you doing right now?” What I would not be susceptible to is too much resulting. I really want to focus on what if this happened a million times, and that’s whenever Ridley comes in, he talks about, you need to diversify different currencies, different asset classes in different countries, and I definitely think that’s the right approach right now. Just one piece of action that I’m taking here recently, I tend to be a slow learner whenever it comes to following my own guidance, but I’ve shown my position in Spotify.

Stig Brodersen (17:51):
I brought up Spotify. I think it was back in episode 299. This was the Q2 mastermind meeting. Since then, I made a decent 65% return on that, since then you can say it’s been the bad decision to continue running up. So, I don’t know if I really phrase this as a good decision or a bad decision, but my point about this saying was that I made that decision because I wanted to diversify more but also because I was thinking about running this scenario a million times, I don’t know what specifically is going to happen with Spotify, without going too much into the specific stock pick, I could talk about what I expected to happen with the churn rate of the listeners, what I expected to happen with the gross margins, it just really hasn’t materialized the way that Apple has gone into the market, and Emerson made changes in the podcast market.

Stig Brodersen (18:36):
I was just like, “No, this is just not for me.” Who knows who’s going to prevail in the music and podcast space? Spotify might cross all of them, and you can rightfully point laugh at me. But the point I wanted to make with this is not whether what’s going to happen in the podcast market or the music market is, let’s run this a million times in what’s going to happen. I think that going out of this, and I don’t know, whenever this area that you referred to before as Stan Druckenmiller called the craziest market or whatnot he ever experienced. I don’t know whenever you can officially say, “Now that has ended.” But I think that coming out of it, there will be a lot of people saying, “Oh, XYZ was obvious to me, so that’s why I did XYZ, and you can see how I met 10 X of my portfolio.”

Stig Brodersen (19:18):
I would say that in this type of scenario, think about, again, doing this a million times and say, “Be humble.” And say, “I don’t know what’s going to happen. I might not capture the greatest of all upsize by investing in this particular security, but I just want to be humble.” Then just protect my downside, like really, really protect your downside, diversify into taking this from [inaudible 00:19:42] into different currencies, different countries and different asset classes. That’s really like my gospel right now, going into these market conditions.

Trey Lockerbie (19:51):
Well, they say history doesn’t repeat itself, but it does rhyme. So, I agree with you that I wouldn’t necessarily just compare today’s market with 2000 in the run-up with the dot com bubble. But I do see another roadmap in which it could slightly rhyme with that, and it goes into what I was talking about with the stimulus and how it’s going to work its way into the economy, because there’s three really amazing and unique, I think, situations playing out from the stimulus. So for example, one is that, household finances might be in the best shape they’ve ever been in ever, which might sound crazy to some folks because obviously with something like the COVID crash and the recession we’ve been in, in history, you would think that that would be the opposite.

Trey Lockerbie (20:37):
But in fact, personal income is actually up over $500 billion, which is even up a trillion dollars from two years ago, a lot of the surge came the stimulus package, the stimulus payments and unemployment benefits, but private wages and salaries are back at a new high, so are average hourly earnings and weekly earnings, and on top of that household debt payments are down 1.5%, which is the lowest it’s been in 40 years. This makes sense, right? Because if you get all this stimulus money, especially the unemployment benefits, but you’ve got nowhere to go and nowhere to spend it on. I mean, restaurants haven’t even been opened in the last six months in most places.

Trey Lockerbie (21:16):
So, what do you do with that money? Well, you probably pay down your debt. So, a lot of the households in the U.S. are sitting on lower debt than they’ve been in the last 40 years. If you’re not paying down debt, you’re probably saving that money. Right? So savings has increased to levels not seen since the 1970s, which makes sense as well because people are earning good pay and not able to spend it.

Trey Lockerbie (21:38):
So, I think all of this said, you’ve got probably the largest amount of hint up demand probably since the 1920s. So, I could see as the vaccine start to roll out in the next six months, which we’re already doing now, and people are able to get back into the economy, they’ve got more money than ever to do so, and then you’re going to start seeing a lot of these companies that haven’t even been earning profits that’s whose stock prices are soaring. They’re going to start earning more profits, which I just think is this positive feedback loop that’s going to grow the stock market lease much higher.

Trey Lockerbie (22:11):
So, at the same time with you Stig, I say all that, and this is not an uncommon narrative, right? You’ve heard this probably from other folks. That in itself, the contrarian in me is squeamish a little bit because the more I hear about something I’m like, “Okay, well, probably the opposite is about to happen.” Right? But there’s one other dynamic I also just want to touch on because I do think this was somewhat of a groundbreaking event and that is the rise of retail Raiders is what I’m calling them, but basically you’ve heard about the Reddit communities that are banding together to short squeeze stocks like game stock. That may have just felt like a flash in the pan and even old news by now. But I don’t think we’ve seen the end of that.

Trey Lockerbie (22:52):
I mean, what we saw is basically the empowerment of the retail trader in ways that we’ve never seen before. Since people are sitting at home, not working, or even at least working remotely and potentially having more money than ever, and looking to put that money somewhere, a lot of people are picking up stock investing, stock trading speculating for the first time ever. If you look at charts about call options, for example, it’s incredible, it’s going parabolic. I mean, people are jumping into these options. I hope intelligently, but it remains to be seen.

Trey Lockerbie (23:26):
But the point is, the adoption of this is probably higher than it’s ever been, and I think that’s only increasing, especially as these retail Raiders are empowered with more money and seeing the results from this, I mean, basically the power of banding together and putting that into individual stocks. So, I think that’s just a further dynamic that is very new to this market, and probably unlike anything we’ve seen before.

Stig Brodersen (23:54):
All right, let’s transition into the second segment of the show where the topic is TIP Finance. So, TIP Finance was something that Preston and I originally created because we wanted a tool that could help us in our own stock investing decisions, and then a bunch of stuff that happened, and now we’re not just only looking at equities, we are looking at all kinds of asset classes because of what’s happening right now. But to me, equities has always been my home. Like that’s always a way I revert to, still have around 60% of my portfolio in equities right now.

Stig Brodersen (24:27):
One of the things that I always find very interesting in TIP Finance is the filter we have that shows you the cheapest, large, mid and small cap stocks. I always find that very valuable for me whenever I start my research. What you see right now is that where there could potentially be value is in a lot of financial companies. Those are the companies that the filter finds to be the cheapest compared to their earnings. You might say that you’re not surprised by that, financial companies have been unloved for a long time, for a number of reasons. You can even say that they’ve been unloved since 2008 [inaudible 00:25:02] to the systematic issue that they’ve been in financial sector.

Stig Brodersen (25:05):
Also, capital requirements for banks today makes it much harder for them to make the same amount of money, simply because they can’t leverage as much as before. They still need to keep more of the cash on the balance sheet. Then the low interest rate is typically not beneficial for banks. I would talk about so far like this just a lower environment. Banks used to have more than 80% of interest income. Now, for instance, Bank of America, it’s 50, 50. So they’re transitioning away from having interest rate income to the same extent as before. Perhaps they’re also feeling that we are in the new normal, but also one of the reasons why you see all these financial companies being so cheap, at least compared to the rest of the market is that financials are really set up for major disruption.

Stig Brodersen (25:47):
All the things that happening in Fintech these days, a lot of the old big banks just doesn’t seem as appealing to most people as they used to be. I want to say that the way I decided to utilize the filter is to invest in one of those old banks. One of those non-interesting banks, at least according to the market, I specifically invest in Bank of America. I pitched that back in the last Primark conditions in episode 316, and outlied my investment thesis of that. In that episode back then, at the time was trading around $24. Now it’s trading at 33 and I’m still sticking to my investment thesis of intrinsic value between 40 and $50. So, I’m holding on, all of that being said, in a bull market, everyone seems to be a genius.

Stig Brodersen (26:34):
So, please don’t take that from [inaudible 00:26:37] out of this, and we have seen a very nice run-up in banking, but as we talked about here before we really seen run off in more or less all kinds of asset classes these days. Currently the only sector that is more unloved than financial is, that’s energy, which is quite interesting. So, if you really a big believer in mean reversion, not just for the financial industry, but also in energy, you can invest in ETF called XLE, which is a major [inaudible 00:27:05] ETF with more than $30 billion on the management is only 0.13% inexpense ratio.

Trey Lockerbie (27:12):
I just want to highlight too, Stig, that on the filters that we have on the TIP Finance tool also include a momentum status. Typically, if I were looking at this, especially with banking, which to be honest with you really scares me as an industry, but I guess that’s the point, right? You’re seeing high yield, but you’re also seeing the price momentum turn green on a lot of these picks, which I think is an interesting thing to point out because typically with things this cheap and the secular trends we’re seeing, I would assume that with the banks that aren’t able to adapt to the new economy might be in serious trouble and could become value traps of some degree. But the Momentum, I think, is just a bit of a hedge against that if you’re adding these to your portfolio.

Stig Brodersen (27:59):
I think you’re right, Trey, Momentum is definitely something to take into account. I tend not to focus too much on momentum as probably as much as I should, at heart I’m a value investor. I want to read the financial statements and see how do I get bang for my buck? I don’t always look at the stock performance of the particular stock, but I do want to say that whenever I look at the banking sector, the banks that I see most ripe for disruption, all the smaller banks, simply because of what’s coming in here with Fintech, there will be a lot of disruption even for the bigger banks, but even so the bigger banks are to a large extent still on the forefront of this development.

Stig Brodersen (28:35):
They are such a core part of the infrastructure that I’ll be highly surprised if there’ll be completely left out of the disruption that we’re seeing right now in the positive sense that is. I think the best example I can give you is what happened with Visa and MasterCard. We all talked about the disruption that were happening with payments and here PayPal, the biggest disruptor would then come in and say, “Well, we probably have to use the MasterCard network.” So I’m like to be set up. So, I think that’s a very important thing to include. If you look at the big three banks, I think they would benefit from it. Or even in my bear case, they won’t be as disrupted as some of the regional banks. I think the regional banks are really in for some hot times.

Stig Brodersen (29:14):
Talking a bit more about what I see in the TIP Finance replication, I also want to highlight that we now have new international filter, as you can tell, I always talk about investing in international markets. So, we finally did something about it, and now you can see the valuations off the different markets in there. You have the cheapest markets, Russia, Turkey, Poland, they’re priced into something along the lines of a 14 to 17% per turn. But again, you have a high local currency risk. So, this is something that’s in local currency, which probably not, especially for Russia, Turkey, it’s not something that I would be … again, it’s probably too bit exciting for me, but if you’re really just hunting for value, and if you see this differently, it could be something that you wanted to invest in.

Stig Brodersen (29:58):
Like you mentioned before, one of the worries that I’ve right now is holding too much in U.S. dollar. This might be different for you. If you live in the States and you’re shopping in the State and you give your income in U.S. dollars, it might be different for you. I have a lot of my costs in other currencies than U.S. dollar, but I get my income in U.S. dollar. So, I just don’t want to hold too many U.S. dollars right now. So, investing internationally, again, is a way to diversify into different currencies.

Stig Brodersen (30:25):
Another way to use that filter is to look at high growth markets. So, I would say that, in market like India is very interesting right now, but I don’t want to direct you on too much about the international markets. Like I mentioned earlier, I’m buying into an entire basket of emerging funds and I’m using the filter here to figure out like, “Where do I see value?”

Trey Lockerbie (30:44):
So, Stig, I’m curious what you think, especially with the financial sector about Buffet decreasing his allocation to banks in general the last year. What do you think about that?

Stig Brodersen (30:57):
I think that’s really interesting, I do want to say like, as a caveat to that, that he has chosen a winner and that is Bank of America. So he has sold his stake for instance in Wells Fargo, and for anyone who’s been following Buffet, he’s been praising Wells Fargo for … I don’t know how many years, and he sold his stake. I want to say he sold his stake in JP Morgan too.

Trey Lockerbie (31:17):
Yeah. He dropped the position in Wells Fargo and JP Morgan, and totally out of Goldman Sachs.

Stig Brodersen (31:23):
Yeah. So, he’s betting big on Bank of America, which being a fellow investor, I don’t think I … like you mentioned, Trey, don’t fight the Fed, but don’t fight Buffet too. I want to say. So, it’s an interesting stock, but I don’t really know what to make out of it other than … Buffet just doesn’t know. I think it’s the same reason why he sold his airline stocks. They could still be value out there and by the way, the LN stock soared after that. But I think he just needs clarity right now. I think that’s been part of it.

Stig Brodersen (31:52):
The other thing is, and I’m not definitely not an expert in this. This could also be for regulatory reasons. I think he’s still allowed to hold several banks, but there are some issues there. Right now, the way that Berkshire Hathaway has to file is that they’re considered insider. I want to say that the whole something along the lines of 12% of Bank of America, they can own up to 24.9% of that company. They have to disclose it all the time, but they can do it. Then they would have to register as banking whole company before they can buy more. So, the model should be some regulatory reasons why he’s chosen the way he has, and perhaps he needs to pick just one stock, but I’m not a 100% sure of the regulations whenever it comes to that.

Stig Brodersen (32:31):
All right. So, let’s hop to the third segment where we’re going to play question from the audience, and this question comes from Sean. Here we go.

Sean (32:40):
Hi guys, my name is Sean. I’m from the UK. Firstly, I want to thank you both for the knowledge that you pass on every week. I’m a fairly new investor and it’s helped me learn a lot. So, thanks guys. So I have two questions. Firstly, as momentum has been beaten in value on an investing strategy for sometime, how is it actually measured? Are there specific metrics that you follow, and how do you use these metrics to determine your asset allocation? Do you always have a selection of value and growth stocks in your portfolio, or do you start selling some great stocks when the momentum changes and start allocating money into more value stocks for instance?

Sean (33:17):
My second part of the question is really about diversification. Because I’ve noticed when the momentum of the market breaks down, it seems that a lot of the time everything comes down in tandem, including [inaudible 00:33:27] gold et cetera. So, it’s true diversification actually splitting money between assets like real estate, Bitcoin, physical gold [inaudible 00:33:36] specific. So, industrials, tech, oil, et cetera. Thanks guys. It’d be interesting to know your answer. Cheers.

Trey Lockerbie (33:45):
Sean, I love this question and it’s something I’ve been thinking a lot about lately. I want to say I’ve had somewhat of an epiphany even in the last six months. A lot of it has come from my discussions with people like Cathy Wood and a few other folks. What I’m learning at least about myself is that my style of investing needs to be more dynamic. I say that because I believe that the current market is more dynamic than it’s ever been. So, when the facts change, my opinion changes.

Trey Lockerbie (34:18):
So, had you asked me a year ago or six months ago, I probably would have told you that I’m a hardcore value investor and I rarely look at momentum. I think that’s still true, but when I’ve been describing this to people, the best analogy I can come up with is that, given my background used to be in music, and I reference that a lot because it’s my point of reference. So if I’m talking about music and being an artist in music, I would probably listen to a wide range of music, right? Whether it’s folk blues, whatever. If I were going to write my own music, it would probably incorporate some aspects of all of that.

Trey Lockerbie (34:56):
Now, I could be a folk singer and just be a hardcore folk singer, right? But that’s not been my style. Typically, I listen to a wide range of music, and so therefore, if I were to make an album, you’d probably hear elements of all different types of music, all sort of aggregated or combined together. That’s how I’m looking at my investment style right now. So, to be honest with you, given the current market conditions, I’m pretty heavily weighted in some commodities and Bitcoin and probably what you would call irresponsibly long even on Bitcoin.

Trey Lockerbie (35:26):
Then on top of that, to Stig’s point, I do have some positions in Visa. I do think the Fintech space is going to be disrupted. My play has been in Visa so far in square. I’m heavily invested there. I think that’s very different than what my portfolio would have looked like even a year ago. It’s mainly going back to something that I was talking to Cathy Wood about mean reversion. Right? With value investing mean reversion was a very … almost predictable cyclical thing, but with the new economy and the disruption taking place and the innovation taking place and things like the cloud and the internet really taking off and it’s just provided a lot of gray area for me.

Trey Lockerbie (36:07):
So, I’m still trying to figure it out for myself. I would just tell you that the bottom line here is that I’ve learned that you can be more flexible and maybe that’s bad advice, Stig, you correct me if I’m wrong, but Stig might have a different opinion from me on this, but what I’m trying to say here, I guess, is that, I think the market is more dynamic than ever, and so my philosophy is to try and be as more flexible than I’ve ever been.

Stig Brodersen (36:31):
I think it’s interesting that we, Trey, met at the Berkshire Hathaway annual shareholders meeting. There was definitely not a lot of talk about Cathie Wood type of stocks. I don’t think anyone mentioned Tesla, you’d probably be shunned from that gallery if you said something like Tesla. That would be a curse word. I don’t have any position in Tesla for that matter, but I think you’re right that the market dynamic … and I came to think of one of the most prominent value investor, Howard Marks, he recently in his memo, which is just amazing resources, his memos, but he talked about how he are naturally skeptical about new things happening because he’s a value investor, and that is his strength, but it’s also his weakness.

Stig Brodersen (37:15):
But what you also saying, Trey, is that you’re doing that too, you’re looking at stocks that someone like Warren Buffett typically wouldn’t be investing in. Is that because your circle of competence is just different? Is that just because you are seeing market in perhaps a more, let’s call it a modern light? Or is simply because a guy like Warren Buffet being a true value investor probably feels that this is going to be a major mean reversion. This is just something that would pass.

Trey Lockerbie (37:44):
Yeah. Well, to that point, I just want to highlight something for everybody. Warren Buffet is the first person to tell you that value investing is redundant, right? What we’re talking about here is investing, and I just think that people get a little too dogmatic in which lane they stay in, and, “Hey, I am this kind of investor.” I actually think that that might be a mistake, especially with the dynamics at play in the current economy. We’ve never seen this level of involvement from our federal reserve, for example, and this amount of stimulus and this type of economy and these dynamics once in a 100 year virus. I mean, these are different times and I know that history repeats itself or rhymes at least to some degree.

Trey Lockerbie (38:29):
But I guess what I’m trying to say is that, what we’re talking about is investing, and that just means that I’m putting money out now to get more money in the future. What I’m trying to highlight here is that I recently tweeted about this and the idea was investing is everywhere. I mean, hiring a new sales team is investing, building a Gigafactory in Berlin is investing. So to me, I try not to get wrapped up in the labeling if I’m a value investor, I really just look at that like, “Hey, I’m an investor and I’m going to invest where I think the biggest return or the biggest yield is right now. Otherwise, I’m just weighing out opportunity costs and reallocating to different buckets based on that.”

Stig Brodersen (39:08):
So, Sean, you might be sitting out there and thinking, “Weren’t they supposed to answer my question?” So, let me try actually and go back to the question. We do apologize, Sean, we’re going back and forth here. There’s so many things to unpack. So to the first part of your question about managing a momentum strategy, and again to Trey’s point about not saying this is momentum and this is value, or this is growth. But if we stay within the more classical definition of that, as you mentioned, Sean, momentum has outperformed value dramatically over the past decade. This is not surprising since we are in a bull market.

Stig Brodersen (39:43):
Momentum strategy is just typically doing better whenever you are in a bull market per se, but in particular, recent times, momentum strategy has just performed really, really well. So, just a quick reminder for those of you who are not completely familiar with what I mean, whenever I say momentum strategy, that is buying the best performing stocks regardless of the fundamentals. So, it’s really just a question of buying something that’s going up, and then whenever they’re not performing well, you have to sell them off, and then you invest in the newest price performing stocks.

Stig Brodersen (40:10):
If you want to do a momentum strategy, the best way to do it is through an ETF, simply due to the tax efficiency, don’t try and figure out, “Oh, Tesla now went up 12%, let me just ride that momentum.” From a tax standpoint, it’s just too difficult to do that. I want to mention that, and then I wanted to say that the most popular momentum ETF, if you are U.S. based and you only want to invest in U.S. stocks, that is, the stock [inaudible 00:40:35] M-T-U-M. I personally invest in XDM since I live in the European Union, which is a Global Momentum Fund, but the principles are really the same. It’s all about the price action.

Stig Brodersen (40:46):
So, going back to Trey’s point about how dynamic is the market? What are we seeing in market right now? To me, it’s too hot to know if momentum will continue to outperform value. If you force me to choose over the next 12 months, I’ll probably say momentum, for the sole reason that there is a momentum behind momentum right now, because with the excessive money printing we have right now. Yeah, the answer is most likely yes, but really as a segue into your second question about diversification, I still own a value ETF, guessing what the stock market will do in the short term, to me, it’s just too difficult and I can easily see the stock might decline. I mean, who knows what’s going to happen? We might see a new mutation and vaccines doesn’t work then, or whatever. I don’t know what’s going to happen.

Stig Brodersen (41:31):
Again, if we do see a bear market, at least traditionally, we’ve seen that stocks traditional perform better that are characterized as value stocks. The other thing I just want to say is that, there’d be a lot of bashing on traditional value investing picks, but keep in mind that when everything that’s happened here with the coronavirus, this is not a normal crisis. If there is such a thing as a normal crisis, like value stocks, airlines or railroads or whatever you want to mention, value is just much more exposed to a complete lockdown of society in a way that we just never seen before. You cannot compare this to what happened in 2000 or in 2008 at all, which is really why value has underperformed to that extent. Yes, a whole of value ETF, but also whole in momentum ETF right now.

Trey Lockerbie (42:19):
Yeah, and I just want to highlight to Sean that a lot of this has to do with interest rates, right? Because if inflation does start to creep into the market and interest rates do begin to go up, then I think that, at least the growth stocks that we’ve been used to performing or outperforming over the last decade, will probably be the first to take a hit, right? Because basically, the higher the interest rate goes that becomes the new discount rate that’s used. When you’re not a profitable company, it gets a lot harder to justify the really astronomical prices that we’re seeing.

Trey Lockerbie (42:52):
So, I would start there. I think as interest rates start to rise and that’s something I’m watching really closely, I would then shift more to a value based portfolio and it’s mainly tied directly to the interest rates. So Sean, what I would tell you is that momentum is not how I approach investing, it’s probably the last box I check before I go into a pick, going back to the idea of just simply laying out money now to get more in the future. I do my due diligence on a stock. I really try and develop the narrative around the free cash flow and project that out into the future. Then the last thing I do is typically check momentum. It doesn’t make or break my investment decision.

Trey Lockerbie (43:31):
If I do see that as become green recently and in a positive trend, then that’s a good thing that might even further give me conviction into the pick, but it doesn’t really dictate how I invest. What I would tell you though is that, I’m really watching interest rates carefully because with the risk of inflation really creeping up in the near future, potentially my growth picks that I might be looking at now, I would be more skeptical of mainly because as interest rates rise, that becomes a new discount rate and companies that are not producing free cash flows or not profitable will probably be the first to take a hit, and that environment of higher interest rates we’ve seen value type stocks outperform.

Trey Lockerbie (44:14):
So, if anything, my portfolio might shift more to, I guess you would call, value type of portfolio, but it would be mainly derived around the opportunity costs with the interest rates.

Stig Brodersen (44:24):
So Trey, let’s talk about discount rates. I’m very curious to hear how you’re seeing this. We have guests here on the show primarily on the Wednesday show where Preston talks about Bitcoin, who talks about the expanse of the monetary baseline. Typically, referred to as M2, they’re saying that if that’s 15%, that’s our discount rate or they might even say, that’s our inflation. Now you talk about what’s happening with interest rate. You’re talking about, it might be say it’s zero, and you’re looking, is it going up to 1%? Like, what is your discount rate whenever you value different assets?

Trey Lockerbie (44:59):
That’s a good question. What I just said might sound like I own a lot of growth socks, which I really don’t. So, interestingly enough, I was just talking to Joel Greenblatt about this, and he said his [inaudible 00:45:09] no matter what the environment is, is 6%. I found that to be really interesting. In the way he’s looking at it is, the hurdle rate he’s trying to get over for his investments. I have a pretty aggressive hurdle rate if that’s how we’re thinking about it. My typical hurdle rate is 15 to even 20% sometimes, but it really has nothing to do with the M2 money supply. It’s basically just looking at the hurdle rate that I want from my investment returns.

Trey Lockerbie (45:33):
When you’re in a bull market especially like this where you can find opportunities that are yielding 50% a year, I think even 15% is somewhat conservative honestly, which might sound crazy. But in this type of environment, I’m looking for a much higher hurdle rate than I might be if there was a higher interest rate environment moving forward.

Stig Brodersen (45:53):
Thanks for your feedback on that, Trey, because to me, it’s been quite difficult to figure out what should my discount rate be? We both follow Warren Buffet and we heard him talking about using the 10 year treasury. So, whenever the 10 year treasury is like 1%, what do you do? Because if you do the math is just astronomically high valuation, and that’s probably not the way to go about it.

Trey Lockerbie (46:12):
Well, I want to touch on that, right? Because Buffet has also said that if he were managing a million dollars, his hurdle rate … I mean, he said this indirectly, but it was basically 50%, right? Because he was basically saying, “Look, if I had a million dollars, I could produce 50% a year.” Maybe that’s his hurdle rate necessarily, but that tells you with smaller amounts of money, which is what I have, I’m expecting more aggressive growth.

Stig Brodersen (46:38):
Yeah. I’m with you, Trey. If I have to answer my own question, what is my discount rate? To me, that’s just such a tricky question right now. I wish I could just look up the 10 year treasury and say, “Oh, this is my rate.” When Buffet was asked about this during one of the annual shareholders meetings. He said that if it was a very, very low … and I think he probably said this back in 2007, 2008 or something. So, the treasury rate was definitely much higher than it is today, but he said, “We can’t do zeros …” I just have to use like a higher number regardless, and I don’t know what that number is like you, Trey, I’m not looking at M2 and saying, “Well, if it expand by 15 or 20%, that’s what I’m going to use.”

Stig Brodersen (47:15):
To me I’d say, it doesn’t make that much sense to me. That’s not the type of inflation I’m seeing right now. Also, I don’t believe in the narrative that tech is going to disrupt everything, and if you’re not growing with call it 15 and 20%, you don’t have a business anymore. That’s not how I see things. I understand the tech people saying that’s the wealth, and that’s how I see it. I understand the argument but I just see it differently. If I said [inaudible 00:47:41] higher than 0%, but it’s lower than 15, I think it’s probably too vague of a response, but I think you would be doing yourself a disfavor if you said, “Oh, it’s like 6.78.”

Stig Brodersen (47:53):
I think that would be too tricky, and I think this is just more about understanding what is going on in the market more than anything else. Having said that, I just want to quote Charlie Munger who said, “If you’re not confused, you don’t understand what’s going on right now.”

Trey Lockerbie (48:09):
I would have challenged you on that a little bit, Stig, only because I’m just really fascinated by that. Because to me, the discount rate is the hurdle rate. So if you’re going to lay out money, you’re saying, “Look, if I’m going to lay out this money, I want this percent return.” So, it’s interesting that yours might be fluctuating depending on the pick. So you’re like, “I’m looking at Bank of America, I’m interested in it because I think I can get 12%.” But over here, I’m looking at Visa, maybe I can get 15% there. You’re not sticking to a fixed discount rate. That’s interesting.

Stig Brodersen (48:43):
Yeah. I think you bring up a good point. I think that is all about staying within the circle of competence. If I were to invest in something I don’t understand as well, and I would just need a higher margin of safety, and you know how it is with math. If you use a lower discount rate, you will come up with a higher valuation and vice versa. So that’s really the reason why I’m doing that. But you all right, like you could be saying across all assets, “I’m going to use the same discount rate. What is most attractive to me?”

Stig Brodersen (49:10):
I think that’s also what I’m doing, and that’s also one of the reasons why I’m still focusing on, let’s call it the traditional value picks. To me, this is about … if you want to live in a world where you have to grow your company at least 50% or 20% in fiat currency terms like, you would only have big tech companies left and you would have changing companies all the time because those tech companies who before grew at 20, 50, a 100%, they won’t continue doing so. Will just have a whole world of tech companies that would change every three or four years, it might be oversaturating, but that’s not how I’m seeing things at all.

Stig Brodersen (49:46):
I see we have current market conditions right now where, given this specific type of virus that we have, given this specific type of printing that we have right now, we see tech companies do really well. I don’t know how long this printer’s going to continue. I see us change environment. I’m not saying we’ll come back to … this is going to be 2017, or this is going to be 2005. That’s not what I’m saying. I’m just saying that we have ideal terms for tech companies right now to perform really well. The market has realized that, which is also why Tesla’s the fifth most valuable company in the S&P 500, and someone like Cathy Wood would know a lot more about Tesla than me. She still feels that there’s some runway and will continue to go up, the market knows that these are ideal times for tech companies.

Stig Brodersen (50:36):
That’s also why a company like Apple, which is … you might even call consumer goods and not the tech company anymore. Like depending on how you define it, is trading at 40 times earnings. To me it’s already been priced in. I don’t know, it might be priced more than in, which is why I still go with traditional stock picks or still have evaluated [inaudible 00:50:55] because I believe in that mean reversion. Tech stocks are doing great, but the question is, will they be doing great compared to the current valuation? And of that, I’m not too sure of.

Trey Lockerbie (51:04):
Well, I think this actually ties in really nicely with the debate over being highly diversified or being highly concentrated also, because another epiphany I’ve had in the last year is I used to take a very diversified approach to my portfolio, and I just wasn’t seeing the movement I was really expecting, again, I’m starting with a pretty small portfolio. In the last year I decided to switch up my strategy and decided to start going big into high conviction bets. So, my portfolio over the last year has become much more concentrated as I alluded to earlier. I think that goes hand in hand with what you’re talking about, Stig, because if you’re like, “Hey, tech stocks are the only things yielding 20%.”

Trey Lockerbie (51:45):
Well, I mean, in this environment, my portfolio might take the shape more allocated to something like that in a more concentrated way, wherever the yield is that I can expect. That’s just how I’m approaching it now. I think my opinion would change once I get to a certain scale and I’m just looking more to not lose money and protect what I own, I probably move into a more diversified model at that point. But I do want to speak to that because I think it’s another ingredient here to what we’re talking about.

Stig Brodersen (52:11):
I don’t necessarily know which asset class is going to do best. I want to say that what I’m quite sure of is for most retail investors, it is going to be the asset class who’s going to determine how well you perform, not necessarily the individual stock picks. Also, I want to say that you should be in the [inaudible 00:52:29] of cash right now. We can make arguments, why should it be in commodities? We can make arguments, why should it be in stocks? I think most people are probably in agreement that we shouldn’t be in long-term bonds right now, but you should not be in cash right now.

Stig Brodersen (52:44):
Whether or not you think that the money printing we’re seeing right now is reflected into a higher inflation number, I’m of the opinion that the CPI is understated and we have a lot more inflation than what the efficient number is seeing, even if you disagree with that statement and you still use CPI as your measure, you would probably still not like to be in cash right now.

Trey Lockerbie (53:05):
I agree a 100% with this, Stig, I’m fully allocated myself. So, I definitely am with you there. So Sean, we just covered a lot of ground. I hope you got something useful out of that. Since you asked such an amazing question, we’re going to offer you a free annual subscription to our TIP Finance tool, as well as our intrinsic value course. If you’re listening along right now and you haven’t checked out those resources, you can Google TIP Finance and it’ll pop right up. Or you can go to tipintrinsicvalue.com for the course.

Stig Brodersen (53:35):
All right, guys. We really hope that you enjoyed this episode. Trey and I have sure had a lot of fun and it’s always fun to speak to Trey and especially about the current market conditions. It’s the first we’ve done at this type of episodes together, and we hope to make many more. If you’re listening to this and you’re not subscribed, please make sure to do so. Make sure to subscribe to the feed on whatever podcast app you’re using, Apple Podcast, Spotify, whatever that is. If you do, Trey and I have our episodes going out every weekend. It’s typically more traditional value investing, but even also interviews for instance, with Cathie Wood.

Stig Brodersen (54:06):
Trey have a great interview coming up with Joel Greenblatt. So, it’s a lot more, that’s called the traditional, We Study Billionaires content, and whereas Preston every Wednesday is talking about Bitcoin, but guys that was all that Trey and I had for this week’s episode of The Investors Podcasts. We see each other again next week.

Extro (54:24):
Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only, before making any decision, consult a professional. This show is copyrighted by The Investors Podcast Network, written permission must be granted before syndication or rebroadcasting.


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