Tobias Carlisle (02:33):
My pick today is William Sonoma. They’re the home furnishings retailer. They have a variety of brands besides William Sonoma. So, their West Elm which is for the 30 somethings and Pottery Barn, pottery Barn Kids. Was started up by Chuck Williams in California in, in 1956 in Sonoma, hence William Sonoma. And he was a big fan of food and cooking and wanted to import and sell French cookware in the States. And so I think I just was just doing a little bit of scuttlebutt beforehand, had a quick chat to my wife about what she thought William Sonoma was. And in her mind it’s still basically a French cookware kitchen kind of retailer, but they do have an expanded offering that includes furniture and table tops and bars, outdoor furniture and so on. The pandemic forced them to close some stores. So they focused on their digital channel when that happened.

Tobias Carlisle (03:28):
And that has more than made up for the losses from those stores. So they’re doing very well under these conditions and it’s probably they become more of an online retailer increasingly as we move forward. They’ve had this incredibly consistent growth at a top line basis for years and years and they’re run exceptionally well. They’ve got this great alignment between return and invested capital and executive compensation, which is one of the things that I really like to see. They’re trading reasonably cheaply at the moment EB EBIT is under nine EB EBITDA is under eight and PE ratio to the extent that anybody looks at that thinks about that anymore, 11-ish. So I think it’s a fairly modest sort of multiple that you’re paying for this thing. And then return on invested capital is about 20%, which is just 13% is the average for the S&P 500.

Tobias Carlisle (04:22):
So that’s a material improvement over the S&P 500 and it’s been incredibly consistent for years and years and years. I like these simple picks that have just got great balance sheets, great cashflow generation, great margins, and where there’s alignment with the managers. And so this is like my Lockheed Martin pick from last time, they’re reasonably safe, reasonably consistent, good cashflow generation, great alignment with the executive team. So that’s my pick in really simple terms. I’m ready for you guys to beat it up now.

Stig Brodersen (05:02):
I definitely don’t want to beat it up. I can already say that I need to ask you forgiveness whenever you hear what my pick is, toby. So I better made good friends with you. I absolutely love this pick and it’s a very Toby type of pick. Reasonably priced, we should also keep in mind that whenever it’s priced at call it 10 times free cash flow or whatnot, it’s you also seeing free cash flow doubling. There are some things that, to me didn’t really make a lot of sense in a way, but in a good way, if I can put it like that. Whenever I see how much it’s grown before the pandemic and to now so much more now comes from eCommerce, which is of course not completely surprising given what happened, but we are talking about 70%. I saw expansion on gross profit, always fantastic to see.

Stig Brodersen (05:46):
And for this type of industry, I was a bit surprised. Whenever I dig a bit more into the numbers, like the networking capital more or less the same, good to see. CapEx more or less the same. And not just from the last past year, but over the last eight years. Plus, the operating cash flow have gone from call it 500 in 2018, 586 in 2019 and trading 12 months is 1300. So I’m like, it looks absolutely amazing. I don’t really have any kind of major concerns probably should have, let me throw it over to you Hari, what’s your take on the pick?

Hair Ramachandra (06:23):
No, as you said, Stig, I think interesting pick Toby and a classic Toby pick. Question I have though, is Toby, how do you see this? Is it something that you think of as a long term buy and hold or is it a value player wherein you think it is selling at a discount right now, and then you are going to sell out of it in a year or two?

Tobias Carlisle (06:45):
Yeah. So I always try to find things where basically, there’s two ways for the pick to work. You can either… You generate pretty good returns by holding onto it, just because the assumptions embedded in the stock price are sufficiently low, that whatever happens to the business, you’re still going to do fairly well. But then there’s also this possibility that the business does quite well. I think it’s trading cheaply for something that is reasonably high quality. I’m guessing that the reason is that they’ve had this quite substantial ramp over the last year or so. And the market is just having to digest a little bit the bigger size. And it’s come back a little bit over the last six months or so. I’m guessing that if you look at it on its historical metrics, it’s looking expensive on its historical valuation ratios, it’s price multiples, because it’s been cheap for quite a long…

Tobias Carlisle (07:38):
I think it’s been reasonably good value for a reasonably long period of time and it’s been quite a good business through that time. So I think that either you get that mean reversion probably closer to where it’s worth, which it might be worth 30 to 50% percent more than here. Or you just clip the coupons, get the tickets on the way through where it’s got a pretty good yield and the business should continue to grow. I guess the question is if we normalize and we go back to a world where folks aren’t shopping online as much, will it hurt them to have shut down those stores? I feel like that was the trend anyway before the pandemic. There was a shift to online, other companies have made that shift successfully, Target and so on. Lots of those companies have… The retailers were struggling well before the pandemic and the pandemic only accelerated that. There’s a big differential between the winners and the losers.

Tobias Carlisle (08:31):
There are some who figured out how to get online and there were some who just couldn’t do it. And the ones who couldn’t do it have essentially gone away and the ones who figured it out have recovered and done quite well. And I’ve put William Sonoma in that latter category and the market has recognized it. And so you can see there’s been a very good run at the stock price. From my perspective, I don’t really care what the stock price has done historically. I’m only looking at it on its current figures and what I think it can do in the future. I think it’ll muddle along and I think it’ll generate reasonably good returns. If they can sustain this return on invested capital, and I think that they’re incentivized to do so because they do have that tight alignment between return on invested capital and executive compensation, which is one of my favorite things to see.

Tobias Carlisle (09:11):
So they’ll continue to generate that super normal return on invest capital. It’s still a great brand, everybody. It’s a very popular brand here. I asked my wife, if we were to get rid of our furniture and re-buy would we go and look at William Sonoma? She was like, a lot of the standard stuff that you would buy for the house would be automatically bought from there. So it’s still front of mind for folks like us. So I don’t think it’s a pick that’ll make you rich, but I think that it’s a pick that will keep you rich. It’s kind of, that’s the stuff that I look for these days.

Hair Ramachandra (09:39):
Yeah. I’m also curious how are they affected by all the supply chain issues and their business model essentially is going through a transformation in the sense that as you said, there were more brick and mortar stores. Now two-thirds of their sales, I believe came from online. So now they’re on the same playing field as the Amazons of the world. So do you see any risks there and do you see any advantages they have over somebody like Amazon or Wayfair and other online retailers?

Tobias Carlisle (10:13):
Yeah, that’s an existential risk, I guess. It hasn’t happened yet. I still think that if you’re looking for a particular level of quality, it would still be William Sonoma as the first stop for that. But there’s always a risk that Amazon or somebody enters that space. Maybe Amazon hosts a different, a slightly different brand maybe starts pushing that quite hard. I all think that the size of the goods makes it difficult to enter into that, that way. I think that William Sonoma has an advantage by occupying the mind share and in physical distribution of those things for the moment. But you’re right, that’s a risk, the supply chain issue. I think that is impacting them, but I don’t think that… It’s not unique to them so it’s not a risk that I think is specific to them.

Stig Brodersen (10:57):
No, I don’t think that’s specific to them either. I pull up here that 65% of the company’s selections are imported from Asia and Europe. So I’m sure they have their own issues. And that’s also one of the reasons why I’m just so surprised whenever you track the gross margins and the operating profits, trading 12 months, you have 43% and 16.6 correspondingly. And I’m like, how is that possible for that type of business? Why is Amazon not eating their lunch? And this is probably my lack of understanding of the business. Whenever I thought about it, or whenever you sent an email, that’s what you’re going to talk about. I was thinking, well, we’re going to talk about another Bed Bath & Beyond until I pulled up the numbers. What’s not to like about it? With all that free cash flow, they’re doing small yield dividend yield and buying back shares in decent chunks. It seems to be very well managed from a capital allocation basis.

Stig Brodersen (11:51):
I really wish I had something not as nice to say about it, but I really don’t. And so whenever you look at something like this, Toby, Hari alluded at it before, in terms of how you would hold it. Is this sort of in a basket approach like you have a lot of these type with a P of call it 10, or if we [inaudible 00:12:13] 10, 12, you would then hold and then take it from there and then automatically replaced. Is that how you’re seeing this?

Tobias Carlisle (12:20):
When we wrote Quantitative Value, which came out in 2012, we used a lot of these analyses that I regarded and always regarded as value. Fundamental analysis of a balance sheet, fundamental analysis of a business and cash flow conversion, all those sort of things. In 2013, AQR wrote a paper called Quality Minus Junk, where they took a whole lot of those factors and they decided they were quality factors rather than value factors, which is… That’s fine. So I’ve always said it’s hard to separate out quality from value, in my opinion. I don’t think that anything that’s too junky can be too high… Can be value unless your definition of value is quite literally a low price to book, which is the value factor. So I’m always trying to maximize. I think of it as just trying to maximize. We’re trying to buy the fattest gross margins, the best balance sheet, best cash flows for as little as we possibly can.

Tobias Carlisle (13:10):
It’s just that the world now defines some of those things as quality and some of those things as value. But in my mind, it’s still value. And I think if you look, obviously I’m a big fan of Buffet’s and I’ve tried to mimic what Buffet does in his approach, which is essentially as I’ve just described. And so it’s no surprise then that that’s what the portfolio looks like. It’s always going to be reasonably good value for pretty good company. That’s how I’m trying to put it together.

Hair Ramachandra (13:39):
And Toby when you were talking about Buffet, I was looking at their market cap. It is $11 billion.

Tobias Carlisle (13:45):
Surprisingly small run.

Hair Ramachandra (13:48):
Yeah. And it might be a good addition for Berkshire’s portfolio of companies. There is a lot of synergy between them and the rest of the nature and cookware business that Berkshire already has.

Tobias Carlisle (14:02):
Yeah. I don’t want to let it go just yet. It’s at 150 bucks, I think, 260, maybe. That’s about 50% plus higher. I think that’s the kind of number that you’d want to get for something like this. So I think that where it is now, there’s a pretty fat margin of safety in this. There’s a margin of safety in the business, in the balance sheet, in the price. I don’t think that… It’s not going to 10X from here in the short term, but if you hold it for long enough and it muddles through, I think it’s going to do a mid teens number for five or 10 years, which is kind of my bogie.

Stig Brodersen (14:38):
Well, I think that’s a good segue, perhaps, Toby to my pick because that’s also not going to do 10 X anytime soon. Let me see if I can ease into this. I might be insulting the value investing community, the Bitcoin community and the gold community with my pick. So just hit me up on email if I forget to insult anyone as I’m going through this.

Tobias Carlisle (15:02):
You’ll insult them personally.

Stig Brodersen (15:05):
No, I don’t think it will go as far as that, but it’s really official. I’m really happy we started with Toby bringing up a traditional value investing pick because my pick is not a traditional value investing pick. My pick for today is gold. And for those of you who have listened to the podcast for years and know how we have discussed Warren Buffet and talked about gold in the past, we’ve traditional always thought out this as a terrible investment. Right now, we are doing the classic episodes where we are looking back at some of the things we’ve said and some of the books we read in the past.

Stig Brodersen (15:41):
And one book we read back in 2015 was Tony Robbin’s book, Money Master the Game and how he talked to Ray Dalio about investing in gold. I listened to this actually yesterday by coincidence and I heard myself saying, it’s stupid to buy gold. Why would anyone do that? So here I am a few days later and say, well, why not invest in gold? So what’s the change of pace here. So I had the pleasure of reading Ray Dalio’s book, The Changing World Order, which is just a fabulous book. And one of the reasons why I really like it is because he takes so many lessons from history that I think we can learn from here today. Because it really makes you humble to think of the big cycles and how we as investors are ignorant to it because this time is not different.

Stig Brodersen (16:28):
It’s actually the same cycles we see over and over again. But these cycles are just 50 to 75 years. Some cycles go even longer than that. So we don’t have too much experience with them. We might think back at what happened 2020, we might think back at what happened during the great financial crisis or the .com. That’s not how rebellious is looking at it. And I found it was really fascinating how he talked about how many times we’ve changed the monetary system. Actually, if we go back just to the forties, we had three different monetary systems. We tend to think that everything would stay the same and we are surprised whenever it’s not the case. So it changed in 1944 with [inaudible 00:17:08], you can think of this simplistically as from one type of gold standard to another. Then it changed again in 1971, whenever the Nixon took the world off the gold standard.

Stig Brodersen (17:17):
And the changes typically takes from a few months up to a few years, depending on how fast governments react. But everyone is always surprised whenever it happens. So you have this cycle where you have three types of money. You have to type one, that’s hard money. You can think of this as metal coins, if you want or gold. And then we have type two claims on hard money, like say for instance, bank notes. That’s what we had before 1971, where you could actually convert it to gold at a fixed price. Then it transitioned into FIAT money. That system blows up. And then we go back to hard money again. One stat that really resonated with me was that since the year 1700, we had roughly 750 currencies but only 20% of them remain today. And they’ve all been significantly devalued and the US dollar would be one example. Not that it’s from 1700, but just as one example, and it’s been significantly devalued since.

Stig Brodersen (18:15):
So why does this happen and will it happen again? That’s the rhetorical question I’m going to ask. I don’t believe that world’s governments are evil or at least most or are not. But I do believe that the governments react to incentives. And so what do you do in a democracy if you want to be elected or let’s even say that you’re a dictator and you want to stay in power. Well, first you would probably spend money directly to increase your popularity. And you can do that by lowering taxes or subsidizing the population one way or the other. Balancing the budget means that you would basically have to do something that’s unpopular. Doing something that’s unpopular short term is not a good strategy to be in power. So you have politicians and institutions that have an incentive to print money. And we’ve seen this in all countries and what Ray Dalio refers to as empires that leads to this circle of hard money, claims on hard money and then FIAT currency, then it starts all over because these FIAT currencies eventually blow up.

Stig Brodersen (19:17):
So if we just take the US who might be a reference point here, it’s not a left and right thing. I know it’s very often made out to that. If we look at the numbers, the last four administrations have all run significant deficits. Two left two right if I might add. And that was just the last time since the budget balanced. The US hasn’t been debt free since 1835. That was the time that the president was Andrew Jackson, the guy you have on the $20 bill. And so this is not me saying that democracy isn’t great. Like Churchill said, democracy is the worst form of government, except for all the others that have been tried. So I want to go into this by saying democracy is precious and it’s one of the most important thing we have, but it also has flaws the way it’s set up today.

Stig Brodersen (20:03):
And the monetary system has, and have worldwide suffered from politician, wanted to be elected or re-elected. So what do I mean by that? Well, I’m not saying that we will see a reset on the monetary system anytime soon. What I am saying is that it will eventually happen. I don’t know if it’s going to be tomorrow or 10 years or 50 years. I don’t think necessarily it’s going to take 50 years. I definitely don’t think it’s going to happen tomorrow, but it will eventually happen. It always happens, just look at the past 80 years and what has happened since then. So whenever we do have this “reset,” does it mean that we’re going to go back on the gold standard? I don’t necessarily think it… Well, it is one of many possibilities that it will, but I don’t necessarily say that’s the case. That’s not my reason for investing in gold.

Stig Brodersen (20:51):
For this smaller basket, we can always talk about sizing, but I’ve decided to allocate a very small portion of gold. So I spoke with my friend David Stein the other day, we had him on the show episode, 216 and 384. He’s the host of Money for the Rest of Us. And he dipped a bit into the different asset classes and how they’re done during inflationary periods. And one thing I probably should preface this is saying that, we do see inflation, we’re just coming off like a 7% print here. And I also want to say that we’ve experienced twice over the past century to have two consecutive years where there was a double digit deficit. Well, I should actually say three times the first one was during World War I, the next one was World War II, and then now. And just from September 19 to September 21, we’ve added $6 trillion to the money supply or close to 25% of the US economy.

Stig Brodersen (21:48):
What he’s been looking at and what this research paper shows is that if we look back to 1926, we had eight different inflationary regimes taking up around 19% of the time. And the finding was quite interesting. If we look at equities in those inflationary times, equities had a negative real return of minus 7% and at 10% real return, whenever it was not. Over the time period, the real return was 7%. Commodities on the other hand netted 41% in times of inflation but minus 1% in non-inflation. And if you look at it just across, it’s 3% real return. So I’m not saying that you should not hold equities. That’s not my point of saying this at all. And I’m not saying that the markets of today, there’s necessarily 7% negative real return.

Stig Brodersen (22:36):
Personally, just so you know where I’m coming from. My whole two thirds of my investor portfolio right now in equities, even though I do plan to perhaps change some of that a bit. But I do think it is prudent to diversify into other asset classes. Whenever we do see this pattern emerge once again, it might make, make sense to have something of a harder currency. So I wanted to talk a bit about my own experience buying gold, but before we do that, because I do feel I talked a bit too long here. I wanted to throw over to Hari and Toby, if you have any thoughts about gold as an investment.

Tobias Carlisle (23:10):
I guess the question is really, tell me if you want to answer this now or at the end Stig but I have three questions. One of them is how do you hold it? Are you going to hold through an ETF or are you going to actually go and buy the ingots or whatever and stick them in a safe? Because I’ve seen this argument a few times that Bitcoin is digital gold. And so Bitcoin is taking some of the attention away from gold, which is why people have been… Which is why gold hasn’t really done much in the near term, in the last, whatever it is, 10 or so years. I always thought it was a funny thing because there are circumstances where Bitcoin won’t work and gold will. So if you get like an electromagnetic pulse or something like that, or we get a big solar flare and it knocks out all of the computers and the communication systems, Bitcoin’s not going to be very helpful in that scenario.

Tobias Carlisle (23:57):
Whereas physical gold in your safe, may be particularly helpful in that scenario. So I guess gold is a little bit like my argument for William Sonoma. It’s not really going to make you rich, but it’ll probably keep you rich over a very long term because you’ve got no counterparty risk, an electromagnetic pulse, isn’t going to take it out. But then, if it’s not like a catastrophic thing, the other idea is, it’s like an investment play and you think it’s cheap and you think it could run up in the short term. Then I wonder if, why not then execute it through equities, which gold miners…

Tobias Carlisle (24:27):
I’ve said this a few times that I think the gold miners look pretty good at the moment. I hold some gold miners because they’ve all got religion because they haven’t been able to raise any capital. So they’ve got capital allocation under control. They’ve been quite profitable over the last five or so years, even with the gold price doing nothing. And if you are into equities you get a little bit more leverage against movements in gold. So if gold runs up the equities tend to run up even more. I guess that’s three questions there. I don’t know if you want to answer them now or punt until the end.

Stig Brodersen (24:57):
Toby I’ll be happy to answer those questions. Just make sure to reel me back in if I go on a tangent. So again, perhaps a bit too inspired by The Changing World Order, this amazing book by Ray Dalio. I do think that there’s something about having it simply due to we had stock exchanges being closed for periods of time. We’ve seen the financial system freeze just recently as in the great financial crisis actually. But it is something that I think about. I do see why it’s a more leveraged bet. I don’t think there’s anything wrong with buying gold miners even Berkshire Hathaway.

Tobias Carlisle (25:29):
They had a very small position, they seemed to sell it really quickly.

Stig Brodersen (25:29):
Yeah, I think they only held for a quarter or two. I do want to say for the record though, now that we do mention Berkshire Hathaway and Warren Buffet, as much as Warren Buffet has talked about gold, it used to own a third of all mined silver. I think it was back in the late nineties. It wasn’t required to be disclosed actually in the findings because it was too small of a position compared to what else they were invested in. Anyways. Even Warren Buffet can see a reason to invest in that. So to answer your questions and if we look back at 1900, I don’t want to give everyone a history lesson as I’m saying this, but I can hear it almost sounds like that. Imagine that you invested 10% of your portfolio in 10 different stock indexes. So a hundred percent total in the 10 most promising countries to be the future empire. You would be invested in probably Russia, Germany, Japan. But seven out of 10 of those countries their equity markets all blew up.

Stig Brodersen (26:29):
Completely, not just close, but blew up zero value. Three countries went through that period unscathed but with a devalued currency, there was the US, that was UK and Australia. And so whenever we talk about, well, what has the S&P 500 done or the returns of 7% or whatever it is, there’s a survival bias there. It’s just very important to keep in mind whenever we use US data as this is what’s going to happen. It’s like, no, this is what happened in the most powerful and prosperous country where things went well. That’s not what happened to the rest of the world. Which again, it is not my way of saying not holding equity. I think if you asked me when we started the podcast, I’ll probably say a hundred percent equity, that’s completely fine.

Stig Brodersen (27:07):
Today I do think slightly different about this. The vast majority in equity, yes, but not all of it. So I’m not completely sure if I answered all your questions. I think you had one more, which was ETF also. I think that goes back to the thing about gold miners also. It’s just a simple question to have something that is cut off from the financial system. And it’s not a lot, I just want to say for the record, that’s not where I would put 20% of my portfolio or whatnot. That’s not my point.

Hair Ramachandra (27:35):
These were great points. So is it fair to summarize your argument that you are looking at gold as an insurance against tail risk rather than as an investment and hence the position sizing?

Stig Brodersen (27:47):
Yes. And I think you bring up a great point Hari, because one of the criticism, and I was beating that drum for many years and I guess I still am, is saying that gold is not an investment. I can’t discount the cash flows. It’s true because after 10 years you would still just have that brick of gold, whatever it is. Gold is money. It’s not an investment. So yes, it’s not going to do 10 X unless we see some sort of a gold standard again any time soon. That’s not the point. It’s a worst case scenario, basket insurance. Yeah. So, thank you for pointing that out. I should probably have led with that, Hari.

Hair Ramachandra (28:21):
No, I think that’s a good point Stig but one concern I have with gold is that it’s like you win the game, but they change the rules and then you don’t win. And that’s what happened in, I believe 1930s when they confiscated all the gold. So you might do everything to protect yourself only to find out that the government just takes it away. So is it really insurance against tail risk is one question that I would like you to address?

Stig Brodersen (28:47):
Fantastic question. So Roosevelt confiscated gold in 1933 and it actually took decades before it was set completely free and also for commercial banks and even the regulations we have today for how that’s calculated on the balance sheet, isn’t really attractive for banks to hold. So it also really comes back to how are you going to story it? We’ve had a few people on the show here talking about gold and they always talk about like, don’t put in the bank’s vault. The way the station is, it could be confiscated. Typically, they would say Switzerland or Singapore for historical reasons and due to the independence of the countries. Then you have other people who would say dig a hole in the ground, or put it somewhere where no one is going to find it. And it is also something that I had to think about, which I also think was one of Toby’s questions.

Stig Brodersen (29:37):
How would I store it? It’s not going to be like ETF, it’s easy to store, it’s all digital. But then if you caught up with the financial system, it’s slightly different. Actually let me try and answer another question first in terms of gold’s role if we do see a reset. Is this going to be a gold standard? I don’t think it’s going to be necessarily the case, even though it is one of many possibilities. I definitely do not think it’s going to be a Bitcoin standard which is a different topic I’ll be happy to go into it if we have time, but would it make sense? I think some people would argue why it makes sense to go to some sort of gold standard again, because we had that before. If you see who holds the gold today, you could also see that say those countries probably would like that better because they actually do own it.

Stig Brodersen (30:22):
And they feel like they probably have a better understanding of it than something like a cryptocurrency. Let me just give you some numbers. So, the US have disclosed around 8,000 tons of gold. We have slightly more in Europe, but it’s spread across many different countries. It’s primarily in Germany, France and Italy. No one really knows how much gold China has except for, I guess, China, but they are the biggest producer of gold themselves. And the government is buying all of that and they’re buying all that they can find other than that. So they probably have the second biggest portion of gold next after the US. If we do see this reset, I don’t know if it’s going to happen. Again, it’s a worst case scenario type of thing, but if money or when money is going to be hard, whenever that’s going to be, I do see gold as one of many potential scenarios.

Stig Brodersen (31:11):
So what to do in terms of storage. I definitely don’t believe that I would have it in my own home and I don’t. And also, it’s a very small amount so I do have it placed safely somewhere else. We also different relations. I’m based in Denmark as some of you might know so we have different relations here. And even if you put it in a vault in a Danish bank, they can come and take it the same way. So there are different reasons why I see this differently because you, of course also can run into the issue is if that is in a vault somewhere, how are you going to get it? Different provisions? Can they just pay you in FIAT currencies? There was a bunch of different things in terms of storage. One thing that I’ve… I do think that this argument for gold would be listened to very differently, depending on where you’re from and what your background is.

Stig Brodersen (31:56):
I get very different responses whenever I talk about gold or Bitcoin, for that matter, depending on where people are from. So born and raised in Denmark, people think it’s the stupidest idea they ever heard about because stable government slow inflation, it doesn’t make any sense for anyone. Even our central bank, we have very little gold net stored in England. We don’t even want to touch it. People would think you’re crazy if you would buy something like that. I had the pleasure of living two years in Asia, five, seven years ago. And people are like, yeah, we get that. Don’t invest in equities. That’s so risky. Invest in gold. They had a very different perception of what is safe and what you can trust. Gold, that’s tangible. They’ve experienced inflation multiple times. Yeah, we get that. We understand why that’s the case.

Stig Brodersen (32:43):
I wanted to transition and talk a bit more about my experience buying gold simply, because I just have to tell you guys, because for me, someone like me, who’s a very intangible person who always thought he would be buying shares on his brokerage accounts and never think about anything tangible, it was a fun experience. So I’ve gone from nothing to know a little more than nothing. It has been an adventure that was almost like whenever I found stocks the first time, it was really fun to dive into. I want to say, if you want to own gold, you have to make it clear to yourself why you own it. It can be quite daunting to get started on the process. And you’ll probably find someone who going to sell you like a collection of whatever. But if you want to store this as a wealth for you as a small part of your portfolio, you probably want to look into unbranded bullion bars.

Stig Brodersen (33:30):
So the first thing I wanted to say is that gold are generally a commodity, but even so you have branded gold bars, which I never thought. I thought gold was gold. So you even have more expensive type of gold that still, if you melt it down, it’s worth the same, but comes from a limited series or there’s a producer who doesn’t make them anymore or whatever it is. So don’t go that route, go for the raw gold. The lower the quantity you buy the higher the premium to the spot. So everyone pays a premium to the spot price simply to cover the cost of the producer and for the dealer. So if you buy one ounce coins, which is the most popular way of buying gold, you would typically be paying like five to 8%= percent premium. It really depends on the country you’re from though.

Stig Brodersen (34:16):
Whereas if you buy a kilo bar, which is 2.2 pounds, you would around 2% for that. There’s a lot of cost going into making smaller pieces of gold. So also think in mind, I talk about bars, I’m not talking about the 400 ounce bars, that’s 12.5 kilos that you see in the movies. They’re going to cost you 750,000 plus change, plus your premium so that’s not really what I’m talking about. You can have bars, that’s like one gram or like one ounce, so I just want to clarify that if it sounds like I’m too much of a high roller, which I’m definitely not.

Stig Brodersen (34:52):
So just keep in mind, it’s pretty efficient. I found a dealer here in Denmark that I used as called Tavex because it was just the cheapest option I could find, not necessarily because I had any other reason to do that. You can go internationally and find like cheaper price. But what I quickly found, at least in my case is that with all the duties, insurance, shipping and all that, because it’s such a efficient market, it doesn’t make any sense. Plus there might be some type of thing you haven’t seen. So to me, what’s very clear out of the gates, I would probably buy in a country where I reside.

Tobias Carlisle (35:23):
I think it’s a great, Stig. It’s a wealth preservation idea. It answers all those questions that I had about… Well, I guess one question I had just for interest, it’s not really a critique. There’s this idea that Bitcoin has stolen some of gold’s thunder because it’s digital gold and as a result, gold perhaps hasn’t participated as much recently as it might have whereas Bitcoin’s had this extraordinary run. What do you think about the prospects for gold and Bitcoin, from here on out? Do you think that that is true, that Bitcoin just stole a bit more popular imagination over gold? And then the follow on is just, there are scenarios where gold protects you and Bitcoin doesn’t. So I know you’ve got a little bit of both, so that makes sense.

Stig Brodersen (36:12):
I do own Bitcoin and significantly more Bitcoin than, than gold. I do think that the upside of Bitcoin is so much higher. I also do think that the downside is going to be different. We are going to talk a bit more about the regulation piece whenever we get to Hari’s pick. If I can just do that briefly, I don’t see a lot of problems with regulation whenever it comes to gold compared to Bitcoin. That’s not the same as saying if you know what hits the fan, there won’t be any kind of issues with gold. But I think compared to how people perceive Bitcoin, I think it would be very, very different. Then you asked this very humble question in terms of what’s the future prospect of gold and Bitcoin that’s a big question to answer. I think that would probably come down to when I see like an asymmetric bet. I don’t necessarily see… Well, I do see Bitcoin a bit as a risk, but I do think that gold has probably a bigger component with that.

Tobias Carlisle (37:06):
Yeah, just the prospects for it and that I think that they protect you in different scenarios. If there is some sort of communications breakdown, I don’t know how well Bitcoin will go, but having some gold in your vault that’s strategy has worked for a really, really long period of time. Through history, it’s like thousands of years or maybe more than that many thousands of years. Bitcoin is a little bit untested in that scenario.

Stig Brodersen (37:28):
And can I ask you, and I know we also have to get to Hari’s pick here, but can I ask you Toby, for you as a hardcore value investor, a better disciple of Buffet and Munger perhaps than I am, would you consider holding physical gold? Is that too foreign of a thought for you?

Tobias Carlisle (37:44):
No, not at all. I’m as much [inaudible 00:37:47] deep value as I am Buffet is more franchise value. Somewhere in between those two guys. Yeah, I could see that scenario. I don’t hold any at the moment because I have all of my… My money is in the two funds that I run. Deep and Zig for anybody listening at home. I’ve just got everything in those for the foreseeable future, because I think you need to eat your own cooking. But yeah, I think that there would be a point where I would in a wealth preservation type scenario, I would be diversifying into physical goal.

Stig Brodersen (38:13):
Hari, let’s throw it over to you.

Hair Ramachandra (38:16):
Yeah. I think this session is going to be different. We both are going off the rails, but I think it’s a good segue though from gold to my Bitcoin base. And the way I see this is whether it’s gold or Bitcoin, I think they have their source and the libertarian mindset, a deep distrust in central authority, a distrust in custodians and trying to find a way where we can insulate ourselves from authorities controlling our fate. I think that’s what gold was about all the time. I think Bitcoin was born out of that. However, the pick I have is actually a business, which is Coinbase. And Coinbase is a leading cryptocurrency exchange and it has positioned itself as a reliable on ramp into the cryptocurrency space. So for people who are not familiar with exchanges, traditionally exchanges fulfill the role of a marketplace, but Coinbase does more than that.

Hair Ramachandra (39:19):
It’s a trading ecosystem, asset custodian as well as a broker and broker is what most of us might know them for. One of the things that works in their favor is obviously the network effects because exchanges are networks. So being one of the first movers, they have that first mover advantage. And the second thing is their cryptocurrency custodianship is actually a key part of their business model. And in fact, they had around 200 billion in the first quarter of 2021 when I last looked in terms of client owned cryptocurrency. Which is around 11 or 12 percent of the outstanding market capitalization of all the cryptocurrencies. And instead of this industry where regulation is still enforced very spottily, people can’t trust all the exchanges or all the vendors, Coinbase has positioned itself as a safe and fully compliant exchange. And hence they’re able to charge a premium.

Hair Ramachandra (40:19):
And one of the things I see Coinbase as, is more about folks who are making the shovel during the gold rush than actually the folks who are looking for gold. And in fact, it is a well known myth or legend that the makers of the shovels made more money than the ones looking for gold. But more than that, one of the things about Coinbase is it’s not about Bitcoin. In fact, 40% of Coinbase total trading volume was other than Ethereum and Bitcoin. So it supports lot of different cryptocurrencies. But that’s their current business is model. The way I see Coinbase is as AWS or an infrastructure for Web 3.0 rather than just an exchange for Bitcoin or any other cryptocurrency. That is their current business model where they derive a lot of the revenue from, but they’re rapidly expanding into other areas. And that has always been their vision.

Hair Ramachandra (41:24):
Their CEO, Brian Armstrong which I have been following for a while, has been looking into expanding into distant opportunities. In fact, they’ve already started collateralized cryptocurrency loans, crypto debit cards, blockchain infrastructure, data analysis for services. They also started… They’re going to be starting the NFT marketplace. They recently also announced a partnership with Facebook to build a digital wallet so that people can send money internationally because Facebook couldn’t get Libra off the ground, but now they’re partnering with Coinbase and they also have partnership with NFL that was announced. And then they have Coinbase ventures that has multiple investments in cutting edge technologies. In fact, like earned.com was one of those acquisitions through Coinbase ventures. In fact, [inaudible 00:42:16] who’s a famous angel investor became CTO of Coinbase for a while. That’s the optionality you are looking at, which is not reflected in the price today. In fact, if you look at their valuations price to sales, they’re selling at a much deep discount than other similar high growth or high flying companies, which already have taken at fall.

Hair Ramachandra (42:37):
But even after that fall companies like DocuSign, Zoom, Snowflake, they sell at a much higher price to sales, even though they have negative EPS. Whereas Coinbase has a healthy $11,75 cents EPS, good cash flow of around 10 billion. Whereas Snowflake has 4 million in cash flow and DocuSign has 400 million in cash flow. And the price to earning is close to 20, which is kind of a standard run of the mill P for most tech companies. In fact, Google is 27. There are other companies who are in hundreds. Tesla is 358 for example. And if you look at their growth and it’s granted that they have been public for a short while, but according to the S3 they started with a half a billion in revenue. And today they’re close to 6 billion in revenue, in last two years. They’re growing at a quite fast pace, no guarantees, but based on the vision the CEO, has his commitment and also the areas that they’re trying to expand into and also their first mover advantage, I believe this is a company to watch.

Hair Ramachandra (43:52):
I do believe that they’re fairly valued for their current business model today, but what you’re getting for free is the optionality. But again, that’s the uncertainty. We don’t know whether that’ll pan out. And that’s the reason they’re priced… I think they, they took a fall. The other uncertainties are obviously regulation risks. And one of the things that I want to highlight is the reason I was one watching them and not pitching them so far os I wanted that six months after the IPO to expire and see how the stock sells off. Obviously it has. Insiders will sell. A lot of employees will cash out. So it has fallen from its previous peak quite a bit. It’s still fairly valued. I wouldn’t say it is cheap or in deep value territory from their current business model perspective.

Hair Ramachandra (44:41):
But what I’m looking at is their future and some of the areas that they can expand into. This is five to 10 year term bet, not a short term bet. And if crypto, I wouldn’t even call it crypto, I would call it Web 3.0. It’s not about Bitcoin or any Ethereum. It’s about Web 3.0, which is metaverse is another popular term used nowadays. Essentially a distributed computing model, a distributed ledger model, DAPS which is distributed applications and DAO, which is distributed autonomous organizations. These are the future trends and Coinbase is a safe way to bet on them. While you have some downside protection with their existing business model. That’s my thesis for Coinbase. And with that, I am ready to be pounded by both of you.

Tobias Carlisle (45:37):
I got to say I was ready to really hate this pick, but while you were talking, I was just having a look at the financials. It’s not nearly as expensive as I thought it was going to be. It’s actually, it’s a great looking business with extraordinary growth rates. And then as you point out, it’s expensive to fairly valued, but it’s not out of the… I mean, it’s fairly valued, I think is right. I shouldn’t have said expensive. I think it’s fairly valued. It’s not egregiously valued. For what you’re getting I think it’s probably, as you say, close to fair value for one of those things that if you had a very long term view and you’re prepared to buy it a little bit cheaper, if it ever got a little bit cheaper then you could probably put some on and buy it as you went along because it looks like… What’s the competition like in a space like this, Hari? If you become the exchange, do you just sort of run away with the whole market? And is that likely to happen for something like this?

Hair Ramachandra (46:28):
That’s a very good question, Toby. And in case of Coinbase they’re actually not the eating exchange. There is Binance and others. Coinbase would rank third or fourth, there. I think the way this space is evolving is Coinbase is focusing more on institutional investors, US-centric retail investors, whereas Binance are focused on another set of customers basically. So each one of them are carving out their own space. But you are right, eventually you’ll end up with a couple of them or not more than five or six of them who can operate at scale. That might be one outcome eventually, but right now it is still the wild west so there are a lot of players, as of now.

Tobias Carlisle (47:13):
Their growth rate is extraordinary, it’s kind of an eye-popping rate of growth. It’s amazing.

Stig Brodersen (47:18):
I’m a customer of Coinbase and so far very happy with that. And you’re right just looking at it, I was actually a bit surprised too, just like Toby, whenever I saw it, I thought like the most of us would probably be outrageous like 80, whatever. I wasn’t even sure if the company made any money, but they do. Gross margin is high eighties, trailing 12 months operating margin, 40%. That’s pretty decent for company doing like 10 X over the past two years on the top line. Most of the trading volume, 71% that’s institutional, but they actually make their money on retail clients, at least for now. I don’t think that Coinbase has a wide mode, but I do think that perhaps what goes a little under the radar is how compliant they are with all the rules. And I think that’s going to be extremely important in the field we’re going in.

Stig Brodersen (48:10):
It’s a little too complicated to me to decipher what’s going to happen with the regulation piece. We do see that there was a lot of lobbyism going on right now, both in Europe and the States. And I’m sure other places. I saw this stat from the economist I might misquote this but they were like, the equivalent of one full time lobbyist last year and 86 this year. And there were 57 in Brussels, which is basically the capital of Europe in terms of regulation. So I do think that’s a “win” for a crypto space. And so there are a few different thoughts into that because they would need to have the regulations with them, eventually. It’s probably not going to be that short term and I don’t think it to be as easy as a lot of people would make it out to be. One of the things I found a bit ironic in the crypto space is that you have so many people who believe that governments are just evil, but at the same time they do not…

Stig Brodersen (49:03):
And perhaps they are, who knows, but at the same time, they’re like, yes, but I will also welcome Bitcoin as the new wealth preserve currency. And like, well, if they were so evil, they probably wouldn’t give out the control of money, which is one of the reasons why they have power in the first place. Those two arguments have just always seemed a bit counterintuitive. And I think it’s so important to understand this. I hear a lot of arguments about, they close mines down in China and even that it just shows how strong crypto is. And I don’t know if I necessarily agree with those arguments. I do see the price of Bitcoin and that’s also my second biggest asset allocation so I’m definitely talking against my own position when I’m saying this. But I do think a lot of people underestimate how important the regulation piece is.

Stig Brodersen (49:46):
And most people choose to ignore it simply because it’s too complicated to figure out what to do with. Regulators can make it extremely, extremely hard for you to hold crypto. What are you going to do if you’ll be fined to hold it, or if you’ll go to prison if you do it well. A lot of people would say, well, I can still run my own node in my basement. The government will never find out like, yes, true. I grant that it can’t be leave the surface of the planet, that’s not what I’m saying. But if you’re saying to all institutions, they cannot hold it and they need to disclose it and to pay tech dollars what they do, it is a problem. You might be a hardcore Bitcoin fan who would say, I’ll never let go of my Bitcoin. I get that. Great point.

Stig Brodersen (50:27):
The 95 or 90 percent of the people they would just be like, it’s just too hard. Can I just watch Netflix? I don’t want that fight. It’s okay. That statement is probably going to make me very unpopular in the Bitcoin community. So that’s sort of like what I see if I could come up with some kind of projection over the next five, 10 years, or whatnot. At the set same time I think there is a longer running trend that are very important for crypto. I know whenever you talk about Coinbase specifically Hari, you’re also talking about Web 3.0 whereas I’m perhaps a bit more talking specifically about crypto and cryptocurrencies. But I wanted to bring up this quote. This is an amazing quote by Max Plank who won the Nobel Prize in physics in 1918. He talks about how science advances one funeral at a time.

Stig Brodersen (51:10):
So he has this quote, a new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die and a new generation grows up and is familiar with it. All right. So what’s the point of this quote? Well, you have a major wealth transfer going on here right now and in the time to come. Where you have the boomers going out of the market, some of them pass away. And then you have millennials who have grown up with everything being digital. And I think that longer term trend is really, really important. So those millennials are not the regulators right now, but they eventually will be. So I do think that’s a plus long term. Short term, I think there’s going to be a lot of more pain compared to what you might expect.

Stig Brodersen (51:50):
And the lobbyism in the crypto space is just… It’s a lot bigger now than it was, but it’s going from nothing to very little over nothing right now. If you compare it to the lobbyism for defense or tobacco, oil and gas, it can’t even be compared, it would take many years. So what do I think about Coinbase? Wow, I kind of feel like I went in to a lot of detail here. Coinbase to me makes a lot of sense whenever look at the numbers. For the time being it’s probably a bit too much in the too hot pile. I do think that they have a bit more [inaudible 00:52:20] from the regulation stand point than some of the other exchanges in that space. It’s also one of those where I’m like, it’s too hard to figure out who the winner is even though there’s probably going to be a major, major growth for the industry as such. So that was my very long winded way of saying, I don’t know. So let me send it back to you, Hari.

Hair Ramachandra (52:40):
No, I think these are really good points. And as you brought up, Stig, I think regulation is a tail risk that all these companies will face. But I think Coinbase is one of the diversified players. They’re not really depending upon Bitcoin or any specific cryptocurrency for that matter. In fact, I’m more excited about their NFT marketplace. And if you look at the gaming industry today, it’s around $80 billion and it’s expected to be like 250, 300 billion dollars by 2025. And a lot of those, and I don’t have the stats ready on my hand now, but a significant percentage of those players actually buy virtual goods. Might be skins, stuff like that online on these games. And that’s where the NFT is making its way into. And that can be a huge marketplace in the future. So yeah, it’s kind of borderline venture investing that way because when I say this, I’m looking at Toby, he’s like, I have no way to provide any data to back what’s going to be the prospects.

Hair Ramachandra (53:50):
And that’s why I think the way I’m looking at it is I would value them as an exchange today with an optionality of all these new ventures that they’re having. But if I’m getting the exchange at a fair value or a little bit above the fair value, then my downside risk is protected because I get the optionality for free. But what I have not covered as you mentioned, Stig, is in my thesis or in my valuation is the downside risk of regulation. It’s almost like a binary there, based on what I’ve seen in fact, coin base is one of the players in the forefront in terms of regulation. They’re one of the regulatory friendly companies. They have a foundation that advocates for cryptocurrencies in general. They have former justices on their or folks from DG on their board. So they’re pretty much well connected to the Washington political circles in that sense.

Hair Ramachandra (54:46):
And that gives them the advantage of working with the regulators. But they’re just not doing it for themselves, it’s more for the industry. So they’re doing their part to reduce the tail risk. And there is a lot of money, in fact, a lot of politicians are now invested in cryptocurrencies, and I was recently looking at a tweet. I don’t know whether Toby you saw that. A lot of our congressmen and women have actually beaten the S&P in the last one or two years. Did you see that stat?

Tobias Carlisle (55:16):
Yeah, I did.

Hair Ramachandra (55:17):
I think our politicians are great investors. We don’t just give them the credit. I’m pretty sure a lot of them have bought into Bitcoin as well. But I think that’s not the point. I think Coinbase is not dependent on Bitcoin’s future. It’s an on ramp and infrastructure play on Web 3.0 is how I see it. So it’s a diversified player, but as you said, it has downsides for sure. And I think that is the uncertainty which is being to some extent priced into the stock price today. But whether all the risk has been priced or not is something that I’m not sure. So yeah. But great question. I think you made me think so thank you both of you.

Stig Brodersen (55:56):
I guess if I can just add one thing, Hari, I would say that whenever it comes to store of wealth, I think that you have to think about regulations slightly differently. You need the institutions there. Individuals cannot pump the market cap up to those of say gold. That’s 12 trillion, Bitcoin is hovering under a billion. I guess the entire market cap of crypto might be what, 2.5 or something like that. So I think it’s important to have that piece of stored wealth. Whereas some of the other initiatives they’re doing, they’re a lot more catered to individuals and they won’t face the same type of scrutiny, because it’s not as sensitive as talking about money. Toby I’m curious to hear like now a value investor, true value investor, having been through this horrible experience, talking about both gold and Bitcoin. Any thoughts here before we end the show?

Tobias Carlisle (56:47):
I think this is a good diversified portfolio. We’ve got gold, Coinbase, a good growth-y stock and a deep value stock. This portfolio, whatever happens it’s going to do well and badly.

Stig Brodersen (56:57):
Gents, what can I say? It’s always such a pleasure having opportunity to speak with you on these Mastermind episodes. But before I let you go, I’d like to give you the opportunity to tell the audience where they can learn more about you.

Hair Ramachandra (57:10):
Thank you again, Stig. I have enjoyed joining the show for many years with you and Toby. Everyone can find me on my blog bitsbusiness.com. My Twitter handle is harirama H-A-R-I-R-A-M-A. I’m happy to join the conversation and know everybody’s feedback and thoughts.

Stig Brodersen (57:28):
Wonderful. Thank you, Hari. Toby?

Tobias Carlisle (57:31):
I run a firm called Acquirers Funds. We manage two ETFs. The Acquirers Fund, the ticker is ZIG, which is a mid cap, large cap, domestic US, value quality fund. And I run another one called Deep, which is a small cap micro cap version of the same thing. I have a little website called acquirersmultiple.com where you can get free… It’s a free screen that sort of follows the same rules. I’m on Twitter @greenbackd, G-R-E-E-N-B-A-C-K-D.

Stig Brodersen (58:00):
And we’ll of course, make sure to link to all of it in the show notes. Toby, Hari thank you once again. I already look forward to next quarter’s meeting.

Tobias Carlisle (58:09):
Thanks, Stig. That was fun. Thanks Hari.

Hair Ramachandra (58:11):
Thank you guys.

Outro (58:13):
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