Preston Pysh  10:16

Alright, so Paul, one of the things that we’re talking about a lot right now is a video that we recently added to our website, thebuffettsbooks.com website. We added a new lesson in there. We haven’t added a lesson in probably over a year. And so, we added this new lesson, and it was actually a video that the billionaire, Ray Dalio,  the fund manager for Bridgewater and he’s worth about $16 billion, made this video on, basically, the economic machine and how it works–how the economy works like a machine. And in this video, he talks about how we’re in this world of deleveraging situation. We’ve got a lot of conversations happening in our forum about this particular subject, and we’re just wondering what your thoughts are on for the next three years. What they might hold, and whether you agree with Ray Dalio at this point.

Paul Arnold  11:10

Well firstly, the video. I would recommend everybody should go to your boards, and watch that video even having been educated in some of this stuff. I thought it was really easy to understand and down to earth lesson on the economy and sort of how the machinations work.

I think we’ve certainly come close to this scenario that Ray painted the longer-term debt cycle, the 75 to 100-year credit cycle event since 2008. Let’s get that out of the way. I think everybody is sort of felt that and we’ve seen a lot of reactionary events by many global players around the world. And Ray talked about this idea of a beautiful deleveraging. There are four things that Ray mentioned that need to occur when one of these larger long term debt cycle events occur. So number one, cut spending. Number two, reduce that. Number three, redistribute wealth. And four, print money.

We’ve seen some of these ideas play out, cutting spending. There’s been a lot of austerity around the world. It’s very painful. You know, very, very painful. Now Greece comes to mind. They’ve had, you know, particularly severe austerity, and you just saw a new government, elected as a result of that trying to minimize the impact of some of the austerity. So the spending cuts have occurred–debt reduction. So there’s a McKinsey paper that just came out and it talks about how debt is now greater than where we were in 2007. And so I don’t mean to discount. I don’t want to discount that paper at all, but there has been some progress in debt reduction.

Preston Pysh  13:28

Paul, I just want to chime in here. The paper that you’re referencing, the McKinsey paper, I’ve read that and yeah, you’re exactly right. $57 trillion of global debt has been added since 2008, and I think that you’re exactly right when you’re talked about how there have been debts reduced in the private sector. I want to say, compared to GDP, I want to say that the private sector is probably knocked off maybe 40% to 50% of their debt to GDP since 2008. But the problem is, that amount has done nothing more but then come on to the federal balance sheet and they’ve increased theirs, and now they’re what, 75% of GDP. And so it’s literally like a water balloon.

The way I’m seeing it, at least on the US side of the house, the other countries I might not be able to speak as intelligently on. But in the US, it’s been like we’ve just pushed one side of the water balloon all of the debt has now been written over to the federal balance sheet. If we keep pushing that private sector debt over onto the federal balance sheet, we’re going to look like Japan where their federal government is hundreds of percent of their GDP. Their total national debt is 500% of their GDP, which is, in my opinion, unrecoverable at that point.

So, I totally agree with you that we’re seeing signs of some of the debt coming down. But I guess my bigger concern is what are we going to do because it now sits on the federal balance sheet, not on the private sector balance sheet?

Paul Arnold  15:00

And so that’s obviously that’s a big question. I think, before jumping directly into that, one of the things the McKinsey paper did not touch on directly, I don’t believe, is the financial sector debt. A major, major pain point during the Great Recession that we just had was the leverage in the financial sector. And that has really worked, its way through. It was a very painful process of deleveraging. And it happened more swiftly in the financial sector. And with the financial sector being so levered the way it was, they could not help stimulate the economy in any way. I mean, they were unable to operate as normal. So we’ve seen that come down, and as you mentioned, households are no longer a major problem. The debt ratio is lower, the lowest level since 2002.

So, what you’re left with is sort of the general government. And you know, we’ve seen some positive signs. The federal budget deficit is below 3% of GDP now. The austerity is still being bantered and bandied about on the hill. But I don’t know that there’s going to be a huge austerity immediate term for the US. But the fact remains that the Fed’s balance sheet is still very large. And so we’re going to have to see some sort of monetary tightening. It’s going to have to occur.

Ray has talked about this idea of beautiful deleveraging and the question is, as we move into what I would hope to be the final phase of this very, very, very long deleveraging that has gone on and that is, once we finally move away from a zero interest rate environment, can the economy continue to operate? Perhaps we’ll be in a slow-growth environment. I mean, the real question here is, can the Federal Reserve properly cut back? I don’t think anybody knows the answer to that. I think that’s really big, which is why I think they’re going to do it very slowly and sort of test the waters, see how markets react, see how companies react. Companies are a really great place. They’re generally very cash-rich and we’ve seen profit margin’s very high. So the question is, can companies sort of absorbing an increase in rates? And can the economy continue to run smoothly? And I don’t think anybody knows the answer that question including the Federal Reserve, which is why I think they’ve been very hesitant to come off zero. They know they have to, but they’re hesitant.

Preston Pysh  18:15

And I think one of the problems as you talk about compounding problems is, the national debt continues to go higher. They’re in a position where if they raise interest rates, they’re not able to pay off their own debts at that point. And so it’s this compounding problem where they’re kind of locked into this position where they can’t raise interest rates. And the longer that they keep interest rates low, the easier it is for the private sector to just take out loans and finance because there’s no cost of money at that point.

Just so everyone knows, I really feel like we’re in the exact same scenario we were in 2008. Only the debts that we have on the balance sheets, at least in the private sector aren’t as risky as they were and the interest rates are a whole lot lower. I’m looking at the chart right now because I didn’t want to put out any bad information here, but back in 2008, our total debt, including the private sector and government, was around 337%. And here in 2015, our total debt to GDP is also still at 337%. So it’s kind of interesting when we go back to that water balloon scenario, how we’re still sitting at the exact same debt levels that we were back in 2008, here in 2015, only we’ve basically smooshed some of it off the private sector table and onto the national debt.

Paul Arnold  19:46

Yeah. And I think to get back to raise four points there. Some other things that we haven’t seen occur yet, but that is talked about is, I think still, number one: you cut spending. It’s not talked about because we’ve just had a period where the government is seeing increased tax revenue. But it’s very clear that if you hear how the Republican Party speaking, for example, that they want to further cut spending. On the other end of the spectrum, raise the third point about redistributing wealth, we see that talked about on a daily basis from the left side of the government. From my perspective, the Bowles Simpson tax plan, this is something that’s been floating out for a while. I think ultimately, it’s going to have to come from both sides.

Preston Pysh  20:54

That’s the scary part.

Paul Arnold  20:58

I totally agree. The scary part is that we cannot get an agreement from the government. It’s not surprising that we’ve seen the financial sector, the non-financial sector, and households reduce their debt because when one person is looking at data and making the decision, it’s very easy when households see that they’re too levered and they can’t pay back their debt, they need to reduce that debt. When companies are looking at their forward-looking projections and realize they need to cut debt, or if they can’t, then they have to restructure their debt. That happens very quickly.

With the government, nothing happens quickly. And I think there are some very smart people there that know ultimately, that would be willing. This idea of some pain in terms of tax increase, paired with a cut and spending is something that many people would agree needs to occur. But you’ve got competing factions. And people need votes. And so you know, it’s a very difficult thing.

I go back again to what we talked about earlier with Greece. It’s not an easy decision to make, and it could cost you your position of power. So people are very hesitant to make a move that might lose them votes. It’d be nice if everybody, I don’t mean to get political, so I’ll just throw this out. And if everybody had a term limit, it didn’t matter. You might see something more get done.

Preston Pysh  22:44

I totally agree with that comment. That’s funny that you said that. Whenever I talk to people on a personal level, I say this all the time. The critical variable is term limits in Congress, in the US at least. I know a lot of our audiences are outside of the United States. But if they would fix that one variable right there where they were people would go to Congress and they would have a specified amount of term, kind of like the presidency, you would see a lot of things get accomplished because you’re basically taking out the self-interest piece of it at that point, and it’s all about the people. But because people can get re-elected for a lifetime, that sometimes the self-interest is put ahead of the people that they represent. So you fix that one critical variable, I feel you start fixing a lot of problems that you see here in the US.

I have one other thing that I want to throw out. I personally see, and this is just Preston Pysh’s vantage point. I personally see where we’re at right now as a snapshot in time in 2015, as being so similar to where Japan was in 1990. When you go and you look at their total debt levels of where they were at back in that time frame in 1990, they were at 400% debt to national GDP. We’re around the 337% mark right now. So when you look at how Japan has progressed over the last 25 years from that snapshot where we have very similar points where they were in 1990 and where we’re at in 2015, Japan has progressed since that time for 25 years. For 25 years, their total debt to GDP has gone up from 400% – 500%. You’ve seen the private level decrease by 100%, and you see that balloon straight into their federal debt, and you saw that grow from 83% up to 283%.

So, if we take that same path as Japan, and we continue to just kick this can down the road, and we don’t let businesses fail and let them leverage themselves and make bad loans, and print more money, if we don’t do those two things, we’re going to go down the same path. And you know what? If you look at their stock market, it goes through the difficult business cycles, but the only difference is that the aggregate is going down. It’s not going up through those cycles. I think that, if we don’t have policymakers to really make some hard decisions during this next crash, which I think is pretty imminent, we’re going to see a very similar cycle as what we’re seeing in Japan. I don’t know if you agree with me.

Paul Arnold  24:15

Yeah, we’ve been talking about something similar. I remember a lot of fund managers would come in and we would talk back and forth about projections. And certainly, it could be a case that the US could go down that road, but I think Japan’s biggest problem is they can’t drive. They’re having a lot of trouble creating inflation. I think in the US, we have more levers at our disposal. We’re also not at that point yet. I think it remains to be seen. But I still think the US could continue to move through this and come out of it in a better place than Japan.

Preston Pysh  26:16

I totally agree with you. And I think that we’re really at that critical point where decision-makers, if they start making some very good and hard decisions, not popular decisions, we can pull ourselves out of this and we won’t go down that path as Japan. I don’t know how they’re going to get out of it. But I really totally agree with you. I think that we are such at a critical time that it’s really important that citizens really start to educate themselves on this so that we can force the hard decisions.

I really think that when you go back and you look at the Great Depression, and at the 1933 point, that’s when they came off the gold standard. When they did that it basically inflated the currency by 30% or so. And when that happened, that critical point was able to basically help reset a lot of the issues that we had because the currency got inflated so much. That made for very hard times but it also put us back on the track where we are able to move forward. I think that if we don’t have something like, unfortunately, something like that happens. we need somebody in our political offices to start making very hard decisions. I just don’t know how we’re going to climb out of this. We could persist in this for decades. That’s the thing. That’s really scary and horrible. But go ahead Stig. I see you have a point.

Stig Brodersen  27:32

Yeah, I’m really excited. I don’t know if if I’m excited as you are Preston because what people can see is that Preston is holding up his 300-pages Ray Dalio note, so we really geek out about economics here. But what is actually interesting is that if you look at this note, and if you look at what Ray Dalio has to say, there’s a lot of negative things to be said. I think if you are a private investor, you’re really facing the dilemma here because if you look at bonds, the rates are so low. It’s hard to get any return and if anything is going to be that way by inflation. And then you have the stock market, which seems really high at the moment and as we just heard Paul talk about, we might see a bubble bursting at some point in time. So Paul, if I have some excess cash, and perhaps I don’t want to invest in stocks, perhaps I didn’t want to invest in bonds, what should I put my money in?

Paul Arnold  28:28

Before I dive in, for all this doom and gloom, I would at least like to acknowledge the possibility that stocks and bonds will continue to see positive returns, and perhaps, even acceptable positive returns over the near term. We talked about a little bit earlier about optimal asset allocation, and how it’s much harder to predict over the short term. Just to give an example, for the past four to five years, investors have been expecting a sharp increase in yields. Very wrong. Anybody who has been doing short duration has underperformed, all else equal.

Even in the stock market, last year S&P did 13.7. People have been predicting that we’re going to see a pullback. Our valuations are too high, but it is not necessarily the case that’s going to happen in the immediate term. And so I just want to start by saying that. Because if you move your money out of stocks and out of bounds, and those assets do well, then you’re really taking a huge tracking error to your baseline portfolio, and it could hurt you in the long run.

29:52

That being said, let’s look at what might happen here. So the Fed might also continue to raise rates slowly. And if you look at World yields, the German boons tenure 0.36, UK 1.69, well below the US tenure. So the demand for Treasuries could still keep rates depressed even as the Fed starts to raise. And I think they’re going to raise rates very slowly. So, it’s not fully clear how big of an impact as you guys know, and your listeners know, as yields rise, there is a direct a negative impact, price impact on the value of your bond. And so, if rates rise very, very slowly over time, that price in a negative price impact is minimized, and you can collect some higher coupons. So it’s important to note that it’s unclear how that will end up going forward.

So, depending on the day in the calculation, we think of your simple PE ratio, for example. We think stocks are about one standard deviation overvalued. And that might seem high. It is certainly overvalued based on this simple measure and an idea of a long term, average PE ratio, but there are historical precedents for this number to actually even run up further. So I just want to I want that to be out there for people to understand that eventually,  markets go through cycles, but it’s hard to pinpoint when those cycles will turn.

31:42

If you do believe that rates are going to rise, and rise in a fashion that would really make bonds a poor choice to keep your money and over the near term, and you really do feel that stocks are just too rich, and you’re uncomfortable placing a large portion of your money in stocks, I’ve got two ideas. One: is more of a traditional idea here. We see value in emerging markets. So emerging markets, from our perspective, have seen post Ukraine and post the oil drop. They’ve represented a very good buying opportunity over the longer-term from our perspective. Again, we could see a further downside here. But relative to other stock markets around domestic or developed, we find emerging markets provide some of the most value going forward. And it’s no surprise that they’ve had a tough period. So in 2013, emerging markets were down around 2.3%, while domestic markets were up between 30 and 43%. And in 2014, emerging markets were also negative. So, as other markets have continued to see some price appreciation, we find value in emerging markets right now.

And now, I’d also like to talk about a more broad and sort of different idea here. I think that one of the hottest areas in the retail investment product space which we call the 4DX space. It’s the space where retail investors can purchase mutual funds or purchase other investment vehicles. Alternative investments are one of the biggest areas of growth. And there’s not a day that goes by that I don’t receive an email, a call, for due diligence request or providing information on new fund launches or fund performance in the alternative space. And I think it’s really important to provide a little bit of background for retail investors to help them understand what is an alternative asset class. So, we view an alternative asset class is an asset class that has a lower, or maybe non-existent correlation with the stock market or with the bond market. And there’s been a large swing. You used to have to be very, very wealthy, and it had to be an accredited investor in order to get into some of these hedge fund type strategies.

Preston Pysh  34:44

And so what you’re talking about are tangible items, usually expensive, tangible items that you can’t liquidate very easy, is that correct?

Paul Arnold  34:53

It used to be the case if you were in a hedge fund or private equity. You would be locked up there. First of all, you’d have to have a lot of disposable income in order to qualify. You’d have to grant a portion of your net worth to a fund, funded invested on your behalf. And then, there were periods where you could pull your money out. Those firms are now transitioning. I mean, those funds are still obviously running, but a lot of shops are trying to move some of those types of strategies down. They’re trying to push it down to the retail investor. So number one, I don’t want to forget. I heard the word expensive. And I don’t want to come back to that. So don’t let me forget to bring that up because some of them are very expensive. But what’s interesting is,  before investors cannot get access to some of these types of strategies.

Preston Pysh  35:44

Paul, can you say what one underlying asset of something like this would be, just so the audience would know what you’re referring to?

Paul Arnold  35:53

There are many categories now of alternative. So you could have a long short… Equity fund, you could have a long-short credit fund. And what’s going on in that scenario is funds are trying to…  they’re in a way balancing risk. So you could have a market neutral fund which is going long a basket of stocks and shorting a basket of stocks. And the end result between the long and the short portion is that you have a potential zero beta to the market.

Stig Brodersen  36:31

So this is a really interesting point you bring up here, Paul with the alpha and beta. So I think it might be something that you might want to consider if you think that the stock market is overvalued. And as Paul was saying before, perhaps you are seeing an overvalued, one standard deviation. So what Paul is actually saying is that, you are not your neutral. If you think that the stock market crashed, but you still think that you can find some stocks that are doing better than others. And this is the process that the hedge fund has been using for many years. So that might be a direction you want to look at. Again, if you think that stock market ball is overvalued, but if you think that you can, or someone else can find stocks that in comparison will do better.

Paul Arnold  37:16

Yeah, absolutely. You mentioned expenses. I’m very critical about mutual fund expenses. And I find that some alternative investments because they have to use derivative type instruments, like swaps, futures, to implement their positions. Expenses can be a little bit higher. And so I think it’s important if a market neutral fund is going to return on average because it’s unlevered in for the retail investor. If it’s going to return, 1% to 3%, but you’re going to have 150 basis points of fees, at that point, I’d rather just be in short term bonds, and pay 20 basis points.

Preston Pysh  38:06

It’s funny you said that because whenever you’re talking about the upside and the downside, basically being a wash, that’s what I was thinking. Well put your money in a short term bond so that you can just basically protect your principal because that’s what it is. I find it really interesting, you have a lot of people that are interested in this type of alternative investment at this point. I find that very interesting that the interest in that has gone up because the way I understand it, that’s just people wanting to protect their principal.

I want to ask this next question here because it totally correlates to what we’re discussing. So we’re big fans of Warren Buffett, and when he does certain things that make us start asking important questions, and right now Buffett is sitting on over $62 billion of cash and cash equivalents, I personally find that very interesting. And I’m really curious to know what your thoughts are on his capital allocation decisions to hold this much cash or cash equivalents on his balance sheet of Berkshire Hathaway.

Paul Arnold  39:12

So it’s hard to know Mr. Buffett’s true motivation, but for one, I’m not one to bet against him. But I will say for all we know, he’s loading up for a big acquisition. It sounds to me like, you believe he’s being defensive, and if that’s the case, as a firm, we don’t necessarily disagree with that sentiment. Again, I obviously can’t comment on why he’s holding that much cash. But we are actually as a firm in our tactical portfolio, overweight cash. And we’ve had many fund managers as well come through our doors over the past six months and talk about their increasing cash position as they find less and less acceptable asset valuations. And downside protection is not sexy but it’s one of the major advantages of active management.

If you really believe that there is a correction on the horizon, you can insulate yourself from some of the overall market losses. And I think that’s really important. Warren Buffett obviously has a very good grasp on the level of risk that he’s taking. And I’m certain that he has something in mind to do with that $62 billion of cash. Perhaps, he’s just waiting for a better buying opportunity. I think back, I believe it was in 2008, and I think it was Goldman Sachs. He loaned, I think he purchased a $5 billion preferred security vehicle. But I know it’s at that time where there’s a lot of concern about many of these banks and investment banks collapse.

Preston Pysh  41:14

It was $10 billion preferred stock that he could exercise in the common stock at $115 a share as it was.

Paul Arnold  41:24

That would potentially be at a time where everybody else in the world was saying, sell, sell, build cash, build cash, and he went out and made a purchase, while there was a great amount of fear in the market, and that’s when he jumped in. So, perhaps right now, he isn’t seeing those types of buying opportunities. But again, it’s hard for me to comment on what he’s doing. I can only say that if he is being defensive, we don’t necessarily disagree with that.

Preston Pysh  42:02

You know, you don’t really see him go into a preferred stock too often, but during the last crash, he was very brilliant the way that he exercised it because he basically got the common stock price that was reasonable, and at the time 115 was the book value on Goldman Sachs whenever he struck that deal. What was nice is he was able to get a 10% dividend on that preferred stock that he continued to collect 10% basically a billion a year because it was a $10 billion deal. He got a 10% dividend until he wanted to go ahead and exercise the option on converting it into common stock and Goldman went way past the 115 mark because that was the book value at the time and I think Goldman’s at 200 a share, somewhere around that price point right now. So, I don’t know if he’s exercised that or not, but he continues to basically collect this 10% dividend while that common went, and then whenever he exercises, he gets that price too. So it’s a pretty brilliant move. Go ahead, Stig.

Stig Brodersen  42:56

Yeah, it’s really such a brilliant move because he didn’t have any downside. I want to say it was a really Warren Buffett classic. He basically had no downside and his upside was just phenomenal. And he dared to enter the mark when everyone was just screaming bloody murder. So I mean, this was just a fantastic move by Warren Buffett.

Preston Pysh  43:16

His only downside was whether they were going to let the bank fail or not back then which for us common folk, we probably wouldn’t know that, but he probably had some good information as to whether that was going to actually happen or not. So anyway, Stig, go ahead and take the next question.

Stig Brodersen  43:31

So, Paul, I think that we learned a lot about asset allocation and a lot about macroeconomics, but if I would ask you to recommend a book or a resource where I can build on my knowledge, perhaps especially in terms of asset allocation, where would that be?

Paul Arnold  43:50

So I’ve got a couple for you. I’m going to start with Andrei Shleifer. His book is called Inefficient Markets. It’s an intro to behavioral finance. And also this one’s been a while for me, but Burton Malkiel’s Random Walk Down Wall Street. I’m sure a lot of your listeners have probably heard of that book or read it. These two books build a foundation. They talked about, first of all, behavioral finance is one of the most important, and in my mind overlooked factors that lead retail investors and even institutional investors for that matter, to make poor decisions. And I think that it’s really important to understand what’s going on in your own brain, investors’ brains in general, that will lead to investment decisions. And by knowing that you might be able to help yourself make some corrections to your actions.

Preston Pysh  44:54

Fantastic. And just so our audience knows we’ll have all those books listed in show notes. If you go to our web page, go to the very bottom, and you can find all those books that we have listed. We’ll also have the Ray Dalio pamphlet that Stig had referenced that I was holding up whenever I was talking, we’ll have a link to that. That’s completely free. That’s a 300-page document. I highly recommend that you read it. Actually, I couldn’t recommend it highly enough. But we’ll have a link to that. And you can download the PDF right to your computer. And also, I’m very interested in the book that Paul just mentioned.

Anyway, Paul, this was just fantastic having you on the show. We really can’t thank you enough for coming on. Please tell Morningstar we appreciate them letting you come on as well. We really appreciate it, Paul.

Paul Arnold  45:41

Thank you guys very much, and thanks for having me. Hopefully, I provided a bit of information for everybody.

Preston Pysh  45:45

All right. So it’s time in the show for our questions from the audience. And this one comes from Jamar Griffith, and here’s this question.

Jamar Griffith  45:51

I have a question. My question is, do you use the PE and the book value method to buy stocks today? What will be the best method to choose a stock as an up-and-coming entrepreneur and investor, I want to know the best methods to use when I’m making a decision.

Preston Pysh  46:14

So Jamar, I really like this question. And this question is really appropriate for the discussion we had today on the show. One of the questions that we didn’t get to during our show is this question that we had about using the PE ratio and how sometimes during really large market bubbles, or even in a slight market bubble, PE ratio is can be misleading because people are looking at them, and they’re actually using money and earnings that are in this overall economic system that’s inflated. And because the whole system is inflated, the PE ratios sometimes look like there may be better than what they really are. I believe that we’re kind of in that phase right now. I kind of think that we’re, and you heard even Paul say this, that they’re saying that the market’s overvalued by one standard deviation. So when you get into statistics and stuff like that, that’s where you get into different standard deviations.

But I guess my point is this. I think if a person is out there investing solely off of price to earnings ratios and price to book value ratios, I think that they might be setting themselves up for not entering the market at the proper time. This market, like Paul, said, this market could go for another three years before you see it burst. You could potentially lose out on gains that could happen from right now at the start of 2015, to whatever that point is. I think that all the money to be made in the stock market happens at the very bottom of the crash to the 75% mark, as it comes back up and starts rising again. If I was going to put a percentage on where I think it’s at right now, I really don’t know. But I would be guessing that it is around that 75%, if not higher mark. But I don’t know that. And it’s almost impossible to be able to predict it. I do know there’s a lot of credit in the system. And I think when you look at it from a macroeconomic standpoint, that’s really kind of the biggest indicator that you’re kind of reaching a peak. And the credit in the system right now is higher than it’s ever been. So that’s my point.

I guess, for people that are down into the individual companies, that’s really important stuff. You’ve got to really understand that, but at the same time, you got to make sure that you’re entering the market at the correct time. You got to understand that through the macroeconomic principles. So I’m going to throw it over to Stig and see what he has to say.

Stig Brodersen  48:33

So, Jamar, I complete the preview price to earnings is often a very good indicator to search for undervalued stocks. Now basically, when you are looking at a stock, you’re looking at the cash flows because the cash flows that will return to you as an investor really determine if it’s a great pick or not.

One thing and I think this is also in relation to what Preston was saying before was, what is the quality of the earnings. If it’s high-quality earnings, then they are worth more. So if you were looking at a company that has a lot of debt, and if they had high earnings that might be due to this debt, I would definitely be cautious about the company. So, I would always try to find what I would call normalized earnings because we know that the prices might be $50 for a company. But I would always try to see if I can find what the normal earnings are.

For instance, one thing that I might look at is if I’m looking at a mining company saying cover, then I would look at the price of that cover and see if that is like historical high, historical low, what are the fundamentals that are driving this sector? And from that, I will try to see if I can find normalized earnings. And it’s just the same way if you’re looking at debt. So if you have like a high debt environment, and you’re seeing that you have artificial earnings, well, then you probably shouldn’t trust the price to earnings because well, you’re looking at the earnings.

So, that was a fantastic question. And even though it might seem a bit vague, I would say that the quality of earnings is really the fundamental thing to be looking at.

Preston Pysh  50:12

All right, Jamar. I don’t know how much we helped you out with that. But I guess from our vantage point,  if you’re a first-time investor, you’re just getting into the market, I would tell you to be very cautious, to go at it a little slowly. And definitely not take all of your capital invested all at once. This is something that you definitely want to slowly educate yourself with as you’re doing it.

All right, Jamar, so we’re going to send you a free signed copy of the Warren Buffett accounting book for submitting your question. If anybody else out there wants to submit their question, go to asktheinvestors.com and you can record your question there. We really enjoy having this interaction with our audience, and I’ll tell you, we appreciate you more than you could ever imagine. You’re helping educate us with your questions. Stig is actually starting to stand up his own question and answers by video. So if you guys go ahead and submit your questions, you might just get Stig to respond back to yours personally by video, but we really appreciate all this interaction. So we’ll see you guys next week. And thanks for listening to us.

Outro  53:04

Thanks for listening to The Investor’s Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.theinvestorspodcast.com. Submit your questions or request a guest’s appearance to The Investor’s Podcast by going to www.asktheinvestors.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett accounting book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP network and must have written approval before commercial application.