When we first started our podcast, Guy Spier was one of the first guests on the show.  He is the founder of the Aqua Marine Hedge Fund and he’s a Warren Buffett Style investor.  Guy is the author of the best selling book, The Education of a Value Investor, and he’s a graduate of Harvard and Oxford University.  During our discussion, we cover a wide array of topics like, what kind of daily readings he looks at, the impact of statics and humility, credit cycles, cryptocurrencies, and much more.

  • In this episode, you’ll learn:
    • What publications Guy reads on a daily basis
    • How to think about intrinsic value calculations
    • What Guy thinks about cryptocurrencies
    • Guy’s opinion on writing letters
    • How to think about temperament

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WHO IS GUY SPIER AND WHAT IS HIS BOOK, THE EDUCATION OF A VALUE INVESTOR, ABOUT?

Guy Spier is the author of the book, The Education of a Value Investor. Currently, Spier is the CEO of Aquamarine Capital. His fund concentrates on investing in publicly traded equities. Today, it is implemented according to the ideas represented in Buffett’s original 1950’s partnerships (Buffett ran multiple partnerships during that decade). With amazing credentials from Oxford and Harvard and an impressive record of stock returns, Spier is considered a worldwide authority in value investing. His book is a very honest account of his transformation to become a successful investor. Spier is very open about his initial setbacks and experiences, which have guided his investment approach to what it is today. Every year, hundreds of thousands of people travel to Wall Street in droves to achieve something in their life. Obtaining a degree from Harvard, Stanford, or Oxford is definitely not a piece of cake, so most students who graduate with their shiny diplomas usually head-over to Wall Street to master the tricks of the trade. Similarly, Spier, fresh out of Harvard University, stepped into the world of investments, determined to become the Gordon Gekko type.

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Most students who graduate from prestigious universities are usually driven with high ambitions. Guy was no different. After he graduated with an MBA in Economics from Harvard, Spier took up a job at D.H. Blair as an investment banker. While there, he gradually realized that the working environment was compromising both his personal values and ethics. Now this is where the book is different. Instead of dishing out advise about investing, Spier talks about how he was forced to take a good look at himself. He rose to the challenge and devoted most of his time reading and understanding more about ultra-successful investors – like Warren Buffett. Since then, Spier hasn’t looked back and has modeled his life after powerful people like Buffett, Munger, and Benjamin Franklin. Most importantly, he has worked hardest on becoming a more authentic version of himself.

While Spier talks about a variety of investment principles he adopted from Warren Buffett in his book, what’s more fascinating is how he focuses more on personal growth and development from Buffett, rather than stock investing. He stresses that it’s vital to have an inner scorecard instead of an outer scorecard in life. An outer scorecard is used when you compare yourself to everyone else’s accomplishments, whereas an inner scorecard is all about judging yourself and seeking self-improvement. Simply put, you either live your life on your own conditions or care about what others think and have. The book talks about how investing is not all about money, but has a larger and deeper meaning. It advocates how authenticity can help you become a better investor and a better person. Authenticity cannot be taught, but it’s something that should be ingrained in an individual. Being authentic helps a person accept his own mistakes and learn from them. This truly is one of the most important elements for an investor as he/she strives to become a better version of themselves, instead of copying others. To prove his point, Spier describes how Buffett has conquered stock trading all while being true to his own self. He was successful with Berkshire Hathaway simply because it suited his temperament and not because it guaranteed high, profitable returns. Sure, we should all learn from our idols and heroes, but at the end of it all, we should never compromise our own essence.

WHY GUY SPIER AND MOHNISH PABRAI SPENT $650,000 ON A LUNCH WITH WARREN BUFFETT

Every year, Warren Buffett holds a charity lunch to raise money for a worthy cause. While winning bids have reached up to $3.5m in recent years, it’s important to note that the benefits go to the Glide Foundation in San Francisco. Guy Spier and his friend Mohnish Pabrai were among the lucky people to bid and earn a ‘power lunch’ with the brilliant philanthropist.

Spier and Pabrai met each other at Pabrai’s shareholder meeting a few years before the lunch with Buffett. Over time, their friendship blossomed and they also formed a Mastermind Group about investing. As of today, Pabrai is the managing partner of the prestigious Pabrai Investments, which was founded in 1999. You can read more about how Pabrai was also inspired by Buffett’s principles. Pabrai has managed to crush the market since 2000 by 1100%. Also, in Episode 4, we discuss Mohnish Pabrai with Hari Ramachandra.

So why did Spier and Pabrai invest heavily in the lunch with Buffett? First, it was a great opportunity to donate to a very worthy charity foundation that offered a lot of support to underprivileged people. Second, Spier and Pabrai wanted to show their gratitude to Buffett for everything he had taught them.

Spier and Pabrai, along with their families, met Buffett at Smith & Wollensky, a steakhouse in Manhattan. To Spier and Pabrai it was a family event – not a business deal. In, The Education of a Value Investor, Spier mentions a memorable moment during the special event. To provide a little context, it’s important to note that before the lunch with Buffett, Guy felt compelled to change the management fee structure of his fund. Generally, most hedge fund companies charge a 2% management fee along with an extra fee once profits go above a specified rate. Either way, the manager is getting paid if the fund performs or underperforms. Inspired by Buffett, Guy changed the structure of his fund so that investors only pay a fee if he produces returns higher than 6% (annually). Anything less than that, and Guy is working for free. As a result of this drastic and difficult change to his fund, Guy told Warren about this decision and how difficult it was for him. Buffett responded, “People will always try to stop you from doing the right thing if it is unconventional.” Guy then asked Buffett if doing the right thing would get easier with time. After a long pause, Buffett responded, “Just a little.”

For most people, spending $650,000 on a lunch may seem ridiculous, but for Spier and Pabrai, it was an experience of a lifetime. To them, it was a priceless event that was more symbolic and appreciative for what they had learned from their mentor. The next lunch auction with Buffett closed at $2.1 million, so I’m sure Guy and Mohnish can take great joy in knowing they purchased their intellectual property for a 25% discount of the following year’s market price.


Podcast Transcript and Summary

Preston: [00:02:38] So going into the questions so we open this up to our Twitter community a lot of them are very big fans of yours and they had some really interesting questions. One of the first ones that I really want to hit out because I think this is so fundamental to where we’re at in space and time here in 2017 Akash. He asked how does an investor patience and temperament. This is something that we know Buffett and Munger talk about so much but I think for a lot of people that maybe aren’t is attuned to their teachings they hear the word temperament and they hear the word patience and it’s just kind of cliche. So can you talk to us why this is such an important concept.

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Guy: [00:03:16] It is but you know of all the questions and put them out in front of me the this was the one that I was most nonplussed about actually because I mean I’d walk around saying oh I need it my patience and my temperament I’m going to try it it’s small. I would argue the case. I feel the forces that make me want to sell something just for make me want to buy back something that I’ve just sold. And I find myself having to you know just go back each time. Fundamental analysis that I did and focus on the logic with fundamental analysis. It was hard for me to think through I didn’t have any easy answers for our cash. Ashikaga cash it’s a great question but maybe what I’m reaching for is the new compote temperament and patience and isolations that would be related to something you know in sight. If you are in a difficult marriage and everybody’s marriage is difficult sometimes the way I would argue that one builds patience and temperament there is to say Well yeah no she’s going through a tough patch. And our relationship is going through a tough patch. I’m not going to do anything until another month more three months. And by the way that’s the same. If we think of long distance running long distance anything we know. If you at the beginning of a marathon and you say I’m going to run the whole marathon that can be devastating. If you say I’m just going to run to that lamppost or I’m going to do anything that I’m just not going to stop jogging.
Guy: [00:04:44] So if I bring it back to investing obviously the question is investing I go through I think of myself doing an actual crisis of 2008 9. You know one day it’s in my book my this comes into my office and he tells me he’s on the cash and I was kind of angry with him. I felt like I didn’t want to have somebody at my office going to cash when I knew intellectually that was the wrong thing to do. But I also was feeling a lot of fear and I just I’m just saying to myself and sang some investors like look I know that Nestlé as well. Enormous amounts of money. Way more than where it’s trading wrong for. I’m just long on a solid loan to start a great business just because people are panicking but I guess the key is that you don’t build it in isolation you build in relation to the specific challenges that you have on that day. And he kind of building the connection between what we intellectually know to be true for example buy and hold is the right thing to do down to the specifics so you know I’m feeding this incredible fear and feeding compelling need. So my stocks along with everybody else but I know intellectually this isn’t the right thing to do and that’s kind of a little similar to the idea of not wanting to break out of the wrong when you’re on the marathon.
Preston: [00:06:02] So the guy what do you think about people that write down their principles or trading principles before they put the position so if you’re talking specifically about nastily it might be something like I’m going to buy this. The reason that I might sell this would be reason X Y and Z and you list some of this stuff out in writing before you would put the position on that way you can reference that you can look at your principles and you can say hey this wasn’t one of my principles this wasn’t something that I’m thinking about so this is probably an emotional thing. Is that something that you believe would work and is that something that you do.
Guy: [00:06:35] I mean I think it’s more generalized yes. It’s definitely a good thing to do. It’s not the only route to take but I think you’re just enunciating a specific general principle that the more conscious we are what we’re doing what’s going on the better it is and writing is a great way to become more conscious of yourself. Even better it would be keep an investment diary. And it’s just I’ve found it very very hard to keep an investment type but I do actually use unloads all my devices and on when I’m thinking something I feel like I ought to catch or I go and capture and never know. And some of this relates to investing and some of it isn’t right. Yeah actually now it’s kind of like I told my regulator here this is what they do. Now I kind of like I have to do it and I like that because it keeps me more disciplined than I paid to keep sounds before I buy any stock. I have to write a paragraph at least. And I go through an Excel spreadsheet and go through a checklist about 70 75 items and many of them I leave blanks. They just don’t apply. Many of them I write something. So I think that’s a really really big thing to do at the end of the day. You know our cash. The question is how do you build patients in the abstract. I would argue is how did you find the patients to that stop. It’s been in your portfolio of creels hasn’t moved. How do you resist temptation to sell and then that becomes a little bit more concrete. And then maybe there are some some strategies that one can come up with when one gets to some call it situation.
Preston: [00:08:17] Interesting. So let’s talk about kind of your daily routine when you get into the office. One of the questions we saw on Twitter as well was what publications do you read daily. And I like this one. You listen to any other podcasts.
Guy: [00:08:33] So you know one of my goals actually you know what you go to where you need to is you need to come and visit me all week that stay with us and you’ll see that my library is a great place to conduct some interviews. So anyway I’d love to have you over here and we would love to come out there. It would be great but when you come into my office basically you can go left you can get right to go left. Takes me to the room I’m in right now which is my busy. It’s where computers are. They go right to my library. There’s no electronic devices and there’s lots of books. And my goal is to spend more time going right and going left. As a matter of habit and I actually I and you know some days I don’t make it in there at all. But the thing is I just go in there and I sit needing 10 or 15 minutes. You kind of clears my head you know see what I’m supposed to be thinking about doing yes so this is like your form of meditation.
Preston: [00:09:31] You know there’s people that swear by meditation there’s other people that say that they have like a different routine that’s similar to meditation. This is fascinating. I love this idea of not carrying an electronic device into the room. When did you start doing that and talk to us about this whole idea. Because I love this.
Guy: [00:09:50] I mean actually sometimes I do have my mobile phone with me but it’s a great point. It’s just that there’s no computers or there’s no phone in there. When I shut the door on that room what people in my office I tell them pretend that I’m outside the office. So you know if somebody calls I’m not here I doubt but sometimes I mean I sometimes think of my mobile phone with me. I didn’t actually think it through that far. I also say that it’s very mild meditation. I mean I’m deeply impressed. Well Harry Reid and his one month ear on that possible meditation retreat in India which he credits with two great books that he’s written and this a guy I know here the company is the capital of publicly traded company. He does regular a 10 day past meditation. And I actually have not managed to do that. I think that that’s what I really need is train my mind so I think I’ve got to figure it out. Meditation ultralight but it’s not much more than meditation light. It’s a place that makes me a little bit more quiet. But my point being that the I get into my son you can see some of it I’ve gone through so I had an enormous amount of publications coming in but they’re not the first thing I look at. I really try and locis whatever the hell I’ve printed out. Which might be a new report or a 10k or in my piece and background reading that I’m doing like now reading everything I can’t backlog’s smell or truck smells just amazing engineering mind we really think about the smog problems and I’m trying to understand more about oil.
Guy: [00:11:25] So I’m reading plenty about the oil industry and the publications though that are regular for me. I love the manual. Light is a lot of the new format but I have to say that at some point I love finding out about investors who are out there that at some point away from reading about investing and reading for investing. But on publications about two years ago I had subscriptions to Automotive News Scientific American New Scientist nature Advertising Age Gerbe publications done by kraines and I was kind of drowning in paper at some point I said right. Just going to go on the publications diet I’m going to get rid of the vast majority of them. And then if I decide to resubscribe or resubscribe some of them the industry publication is really like buried in paper and in some way another one was Aviation Week which is a great publication but on some level I felt like I was so like walking around the forest looking at the Fonz and not seeing the trees the complications I didn’t give up or The Economist and Business Week and I don’t like the design of BusinessWeek but I think there is an awful lot of great stories in it as a publication I get here in Switzerland called Lance like the Swiss version of Fortune magazine and from I think our room Fortune’s chirps and start I and I want back. I like what’s in there and I actually like daily publications. They still get news as I get the Financial Times we get no social science on a weekly basis. I get your Maund I get the New York Times International. So I kind of is a lying.
Guy: [00:13:16] The truth is I don’t read a daily basis but every now and then when I fly somewhere I’ll take eight of them. All the magazines and I’ll read through them because I find that I am reading more and more of those news publications on my iPhone. Yeah but the thing is I used to get grants publications as. And then I think I’ve kind of reengage with my Bloomberg monitor and now I get grants on the Bloomberg monitor and every now and then I’ve printed out to read. I think what I have going on is that in spite of the magazines not coming in some time ago I decided to buy. I kind of pretty much any company I look out at Hoffe interests me go and buy one share and my Charles Schwab account. I make sure that my Charles Schwab account is set up to get a physical delivery of mail. So no I’m getting proxies and 10 Qs. I mean I just got a two inch think Prossy on the merger of two companies Praxair and Linda. So you know that’s a tracer to interesting document that’s been sent to me and I’ll I’ll find those things lying around along with whatever the hell else I’m working out. You’re looking at something you know the scope presentations to tout Sutent case and Qs and I have a really high quality large printer paper handling stapling so my printer 60 page printout and double side and that’s stuff I carry around myself. Now I’m looking out all the time so I say that’s the stuff that I’m trying to read trying to for some long odds to show us.
Preston: [00:14:50] Now it to me it sounds like the focus is really the 10 caves in the tent. You’re like you don’t miss it. And it comes out for any business you own. Would that be a correct statement.
Guy: [00:14:59] Oh I cried to miss quite a few but I’m printing out the ones I think are interesting and are important to look out by the way something is really important. But you know this was a written article I want this color. I gave it to the Swiss. If a society which I was quite pleased with came out reasonably very well for Brown prints that I made Prust. So I really appreciate your respect me it’s really kind of you. Thank you. Me What You have to do is read seem to love book all around us and it is very convincing that I have a 20 year old I’m centage points proximately better than the S&P. So that’s good return it’s not Omaha numbers but it’s still non-competing but there’s no way that you could prove to a who understands how the numbers work. I’m lucky smart so you know you’re interviewing me and I’m what I’m doing. The you know the story is you take 1000 people and you run a coin for Comcast. You can’t keep flipping coins round one run two and three and you find the person who’s flipped series of heads of the people go however many times it is the one guy who flipped series of heads when you don’t interview that guy and they’ve done this. All right. So the guy is flipped series of has really genuinely feels like he’s got some kind of skill and you like what is it the way you find just that stop even. So what am I trying to say is that your listeners the investor community should not necessarily troll less. What I’m saying is just interesting guys it does. But we cannot rule out lives just a coin. We have flipped a high heads. Many reasons I’ve got nothing to do with what I’m about right now.
Preston: [00:16:53] I think the learning point for me when I hear you say that is you have to be self-aware. You have to know what those probabilities are and then you have to have zero ego in total humility to be at a point where after 20 years and you’ve beat the market after 20 years but you’re saying you don’t have statistical proof that you’ve beat the market with high probability a large confidence interval to basically say statistical proof. I think that that’s insanely profound. And the reason I think it’s profound is because it’s telling people even after 20 years if you’re not looking at things through that kind of lens and saying you know I might be wrong my thought process might be wrong. That’s the turning point for me. We were reading Ray Dahlia’s new book The Principles book and in the book he talks about how he went through this just destruction of his company back. I want to say it was in 81 just literally lost everything. And he said I went from asking myself why am I right to asking myself why am I wrong. And that became his thesis for everything. Like how am I wrong. What am I doing right now. That proves that I’m wrong. And I think that that’s what you’re really getting at with your comment is Am I wrong right now. Is all this information that I’m talking about just dead wrong.
Guy: [00:18:10] Yeah. So that you know well the way I was data is you can’t rule out I don’t know the confidence interval is you call rule out. I was just lucky coin. And your listeners the listeners should take that into account when you ask me questions about what I do when I get up every day do I turn left or right. That’s my meditation process. All of those things. And then you know I get the feeling. I mean I if you take monish. Right. It’s a lot more than I do. And iTunes has an impact on retailers. And why does it need a lot more. I just want a plane crash on a wall. I mean I’m not saying I don’t read a lot. I think I read a law. But I think that he reads more and it’s kind of like it’s cumulative. I mean if I read I don’t know 300 I read 300 maybe I read a hundred books here he’s reading 150 200 here yeah. And that does make a difference. I’m not saying that I don’t absorb the ideas as well as he does. But on the other pulls I think is what is really important for some is that whatever it is you’re doing you’ve got to be doing it intelligently and I think that’s something that when Coombs talks by his 500 pages a day I think it stimulated a lot of people just fine. I approach 100 pages a day to read. But you’ve got to be intelligent about how you really mean if he’s called a nanny or a pool with Fiorinia a Tengku and you know there’s a change in the business. Ferocious I’ll treat everyone and be smart.
Preston: [00:19:39] So just for context for the audience. Todd Combs who dies mentioning that’s who everyone thinks is going to be the replacement the buffet. This is who Buffett has basically tapped as being his replacement after he dies. And you know talking about this idea of education which is just a huge theme for our show an ongoing theme of our show. I think this is really neat to highlight when Buffett was asked well how did you make your selection of Todd and Ted and Buffett came back he said you know these two are the only two guys we could find that read more than Charlie and I and I loved that quote. It is such a profound quote. What he values and what he values is people that are just going through an enormous spurt of learning at all times. And I just think that’s just so incredibly important and I think it goes back to our first point of temperament.
Guy: [00:20:27] You know like you’re going to have great temperament if you know what the hell is going on and the way I think that I want to answer that question is. I mean I don’t know. I live inside my brain and inside anybody else’s brain. I feel like my brain is kind of like an unruly horse that is galloping around the enclosure. Every now and then every now and then you know the host notices a good objective in the distance and I’m in a position to ride the horse and then I go to Africa and ride the horse to that objective. And the key is actually I would argue to get the worst thing is to read something that says to 500 pages a day is not the objective of the horse I’m writing you know and like in some way right towards meaningful object or pay attention towards meaningful things and when it’s meaningful objective changes then don’t keep moving towards the same thing out of the same kind of sense of duty or slavish desire to follow some precept that you’ve read somewhere we want you to know in a certain way maybe it’s encapsulated this into a learning machine which has changed directions vending machines stopped halfway through books from Israel realizes nothing else the Lovefilm machines don’t waste time reading stuff that’s not worth reading and what it’s saying is that your audience is. I’m not saying that I’m a learning machine. To me it’s an aspiration is much as it is for everyone in the end I think it’s this podcast thing that I’ve thought to read books but I actually find myself reading a novel a Kindle because I get into bed next to my wife she’s never let me switch the lights on but Kindles fine. So now I find that so I love it. So I found two copies of Kindle in hardcopy.
Preston: [00:22:24] So awesome. So this is a question that came up on Twitter and I guess I’m going to just kind of change it a little bit. Related The credit cycles. So one of my frustrations with the value investing community is the complete lack of respect for macro. I think that when you talk to most really hard or Warren Buffett investors they just say Yeah I have no idea what Maccarone is going to do I just ignore it and I just focus on the small cap large cap business and I look at it from that vantage point just buying equities. And so Howard Marks wrote his incredible book and he talks about Punit knowing where you’re at and accredits like when he really goes against a lot of the literature that you see with Buffett and Munger. And so I really applaud Marx for this because I’m in the same camp as him I think that it’s very important it almost be like if you were looking at a spectrum and value investing is in one part of the spectrum then you’ve got macro investors in another part of the spectrum. My opinion is if you have knowledge of all those spectrums you’re going to be more informed and more knowledgeable and work inside of your environment better.
Preston: [00:23:29] So I’m curious to hear your opinion on that idea. And then I’m also curious that if you kind of think that it’s important to kind of know where you’re at and the credit cycle where would you put us in the credit cycle today. As you think through this because my personal opinion is whenever I look at this past credit cycle it’s been completely manipulated by central banks and signaling that I’m seeing is that the U.S. specifically the Bank of Japan they’re done with their quantitative easing for the most part the only one that’s still in town pumping out money is the ECB. And it’s looking like they’re going to start winding down which for me is signaling the end of the credit cycle that we’re at the top of the credit cycle. So curious your thoughts on all that stuff I know it’s a lot of speculation and we have no idea but I think it’s important for people to be thinking about that knowing the risks that are associated with it if you like reading about the credit or you enjoy graphs because it has a central page and you see a central bank to.
Guy: [00:24:26] The resource again Grant’s Interest Rate Observer to ground. I mean what do we call him. He’s part of the scaffolding of Wall Street. I mean he’s been around so long is an incredibly talented fighter the rising occasion for a very long time includes low macro stuff related to the credit cycle actually. And then he’s always connected up some interesting idea or rather the heel print on his pages. It’s kind of over time that one of his conferences it predates a lot of the new media stuff. Surprisingly and try and sell I think that I can do that. Hey Preston come out saying that I’m better off not allowing the site to determine my last decisions. I think it’s the end of it. Ignoring the critics is if you ignore the credit cycle neutral try and buy cheap stocks that will do well no matter what. And if you pay attention to the credit side is this huge danger that you end up becoming some kind of closet timer on kind or another. And so if you’re super pretty and you’re capable of paying attention to credit cycle and allowing that to steer you in way you pay attention. Stocks you buy. And that’s really fantastic. But I think the vast majority of us and many of us in the credit cycle which in itself is not a terrible thing to do. Lead to the next step which is not time the market should probably a terrible thing to do.
Preston: [00:26:01] And I completely agree with what you just said that makes total sense. But then whenever I look at Buffett’s balance sheet which for me is the truth when he goes on TV and he says whatever that’s less meaningful to me than what his income statement and balance sheet say that’s what I really pay attention to. I don’t necessarily listen to what he says. And so whenever I look at the balance sheet and I see that he’s sitting on a hundred billion dollars one hundred billion dollars of cash that doesn’t make any sense. The argument falls apart for me personally it falls apart because when you’re sitting in cash you’re effectively saying I’m going to select a negative 1 or 2 percent return. That’s what you’re physically doing by looking at that on the balance sheet. So why not take. And I know he has a huge problem because it’s such a large amount of capital. And I hear that argument all the time always just sitting on too much money. He can’t move. Well you know you could move it into an ETF which is priced at a 3 percent or three and a half percent return today. You could do that. Which is better than a negative 1 percent return. But he’s not doing that. That’s where unlike now it seems like he’s saying one thing and doing something different.
Guy: [00:27:08] I’m curious to hear what you think the goal is to pay dividends. You know he was just sending it by now I mean it’s an enormously profound statement he’s making. He’s saying that he believes that at some point within the reasonably near future he’s going to get the 100 billion dollars to it or most of it to some it is either right now he can see what conditions will arise will make that possible. No it would be something like buying back America or buying J.P. Morgan or buying general may be enormous purchase. And he’s basically implicitly saying I believe I’ll get Tuesday so somebody said a CFO of a business inside Berkshire Hathaway that I met a long time ago. So that’s why it’s was me which get out as well. Which is pay attention to both. It does. It’s more important than what he says he calls and I get Steria picture. But yeah there is a bit of a dissonance there.
Preston: [00:28:12] Whenever I started out in studying Buffett. From what I read I was under the impression that I’m not ever going to think about what the market’s about to do. All I’m going to do is I’m going to look at right now what is offering me the fattest yield with the lowest amount of risk and whatever that is I take my cash flow for this month and I stuff it into whatever that asset is. And so if that was a true statement today because that’s what all the literature says is that he knows his approach. I don’t have to predict anything. I just have to know what’s in it give me the best yield today and that’s what I buy. But that argument falls apart when you look at his balance sheet at the top of credit cycles when you go back historically. He starts putting a lot of money into liquidity now in the past like you go back to 2008. He was buying bonds because there is yield there but now there’s not really any yield in bonds that’s worth the spread the cash. And you’re seeing them sitting in some bonds that are short maturities of it. I mean it’s cash equivalents. I don’t know I guess I’m just having a hard time understanding these actions maybe.
Guy: [00:29:15] I mean I’m not sure I can explain them but maybe what I’m about to say will help a little. It’s worth also saying that he’s not sold anything. So cash is building up because. You know profits are coming through and he’s not getting any. But he has not made a move like he’s never said it was fitting we’ll talk. I’m going to sell my portfolio securities.
Preston: [00:29:40] Well the guy with with all due respect that’s due to the cap gains. You know like he’s not going to sell Coca-Cola because his cap gains are just going to. I mean he’s making more on the dividend than his purchase price for some of these things like Coca-Cola. So he’s not going to sell out of those just because he’s going to get murdered in taxes. But when you look at the companies like IBM he had no capital gains. He’s selling that. You know what I mean.
Guy: [00:30:03] I don’t know I’m just saying that for fundamental reasons he decided it’s not as the side of the poacher you know meetings decide it’s not as good a business as he thought originally thought he was. Donahue that was the kind of asymmetry when it comes to investing. I mean you got it. When people talk about price being a good entry stock kind of thing once you’ve entered into it you know pay attention to March whether it becomes a phone call. And I think it’s far hard to sell stocks well than it is to buy stocks. Well I think Warren Buffett saying I’m going to let this cash disappear. I don’t want to sign anything in my portfolio on the stuff like what’s to. Like all businesses that are good businesses I’m going to let them ride baby sometimes like who are overvalued. I’m going to add significant chunks to my investments and I know being really really ready this is my dream that you buy when things are cheap. We don’t necessarily sell things is expensive. And I think that that’s what he’s doing the cash builds up. And here is the point. I think for me I just think it’s really really important. I don’t know how to square this this awareness of the credit cycle so I think we can all agree that 2008 was a trough in the credit cycle credit contract in a massive way. And credit continued to track in a massive way the system sort of like how cell XXIV mechanisms like the drawing in of credit the banks more stringent requirements more stringent requirements on bond ratings meant that it was just much harder to get money.
Guy: [00:31:47] Many many people. And now we’re probably five years into a very long credit churn. And I think that the danger of thinking about that and then when is that credit expansion coming to an end. Is it coming to an end in six months. Is it coming to an end and for yours. And obviously we knew that it was coming to an end in six months you might want to position ourselves very differently in our portfolios with this Comintern ending for yowes. And I think that’s where it’s really hard to tell. And I think for myself there are so many times when I felt like I’ve had so much evidence that we were at a turning point in terms of stocks going up the last time was when so many of my friends felt like election of will trump that it was time to get out of the market because is going to be a total disaster and the market totally surprised everyone and I can’t say that I didn’t have the same feeling I did. I was like oh gosh I’m not feeling very comfortable about a Trump presidency and house work workout. I never let to interfere with a desire to basically be fully invested as much as I can in terms of central banks. Again I think your point is well taken that when you look whatever the hell exclamations I’m trying to give you and your point is when you look at the behavior of Warren Buffett he appears to be looking at the credit cycle making decisions in relation to that cycle. And you know I can’t prove it to you but maybe somebody who’s super well tuned to valuations.
Guy: [00:33:18] Obviously that is going to look that way even though they are not consciously aware they’re doing it. But just to address something that you’ve talked about central banks this idea the central banks manipulating stuff and central banks will always have manipulated stuff and always will manipulate stuff. That’s what central banks do. That’s why we went off the gold standard. That’s nothing new. I agree with you but it’s not something that we can settle out and manipulated. They believe that they are doing the right thing at the time and now there’s an honest debate goes on in academic circles around what the right thing to do is a very very powerful lever that they pull. I would tell you that someone I don’t have the exact quote but it’s along the lines of never get into an argument with somebody who prints money by something I don’t remember what it is. Central banks have this towering is very hard to comprehend. Just what is wrong with you. As much as they like they have enormous enormous enormous power and one should never be against them. And you have this kind of dichotomy. They open through a major major way. Nobody can really understand why inflation didn’t take off. The results of explanations are nothing definitive. Japan’s been in that kind of state for more than 20 miles. So exactly what point they stop the QE and what would make them responsible again is hard to understand and again you just don’t want to get on the wrong side of that as I would say.
Preston: [00:34:53] Now I think it’s a major concern.
Guy: [00:34:55] So my sense is press and that you’ve been telling some truth in the whole world you’d call them gold Hounsell gold something gold bugs. Yeah. And monetary peers if you like to them you know and I was one of those guys I was like these people just praising the currency. You know it’s just terrible to me. It was one of the worst meetings that somebody asked hatemongering is purchasing power the nominal U.S. dollar the last hundred years. So what the dollar was well 100 years ago is like two cents now. So cash is constantly depreciating Charlie Munger looks up the room he says and this is good. I don’t know why you are complaining. It could be a lot worse. That’s what central banks do. Is that a over time debase currency and they do it in the interest of horses. And we as investors can’t get upset about it. I would argue that the answer to that is that clearly you should see that currency there’s a way of transactions off but don’t stick around in that cash too long do you know which way it’s going. Something very serious. The South which to come back to you know in a the day that Bitcoin bounced about ten thousand dollars. You know great sailor. And that just came back to Warren Buffett’s Berkshire Hathaway. It’s again an incredible statement from Warren Buffett saying I know the cash is depreciating at some rate PR so hold it. I think it was something within a reasonable period of time. Can it make it worse.
Preston: [00:36:37] Well so the whole point thing is probably one of the Crase discussions happening right now. I recently did a Google Trends and a search was going in it the kind of see the global map the heat map of where it’s being discussed. And when I did that it’s literally being discussed almost in every single country around the world and no more so you know where the hottest spot was on the map it was Switzerland. So I know there’s conversations happening in Switzerland that you’re hearing about it. Now I want to throw out an idea and I want to hear your thoughts on this. So all these fiat currencies are the pay and they have been for a very long time and so there’s no incentive for countries domestically no incentive whatsoever to be responsible with their spending because they devalue it. It manufacturers growth domestically. So we basically have a race to devalue currencies that’s happening around the world. And now all of a sudden this technology enters the space group bitcoin. BLOCK gene technology coined the emerging protocol compared to all the other ones that are out there and you look at the market cap of this space and it’s now at 300 and 15 billion dollars. So this is not we’re not talking about something that’s like a little science experiment anymore. Like we’re approaching at the pace we’re going we’re approaching a trillion dollars in this space extremely fast and this is becoming very real. And if this becomes real we now have a peg and we don’t just have a peg domestically we have a peg globally and so I guess my question is this Are we seeing a re-enactment of 1921 in Germany but only on a global level.
Guy: [00:38:28] You know I think Bitcoin is a complex phenomenon. When the history is written when we have the perspective of a hundred years we’ll see that there are many things going on and so I don’t think there’s any one way to describe it. But here’s what I in the past underappreciated the simple facts. So more bitcoin gets embedded in all sorts of different things the more the currency is created using Bitcoin as the reference the more software embeds bitcoin the network effect to being the first mover. It’s the cyber currency with the largest reach and that involves the south making it an intrinsic value that it didn’t have before. So that same principle exactly is everything. Much smaller network and it could be blown out of the water with the intrinsic value in this is the same as intrinsic value of writing or Ionesco writing for Windows rising or androids or any of those. So there’s no question in my mind that I probably does land Bitcoin an intrinsic value even though the process itself would be replicated by thousands of people in it and it is being replicated by thousands of people with all the work. So the next thing that I feel I want to say about bitcoin is that you know I don’t think anybody disagrees that the underlying block chain technology is extremely valuable and we can separate out the block chain technology and what that means for transactions and King system and many other systems and separate that from the client and people say that we’re in that age the block chain is where the Internet was in the 19 the early 1990s and I think that’s probably true. There are a couple of Ethereum based currencies that I am really interested in. Ogar A.G. You are kenosis us as it yes. I love these political betting markets and they keep getting shot down proposals are reasons. I’m really looking forward to those two companies getting going. I think there’ll be so many ways to use it.
Preston: [00:40:46] I’m excited about that and I want to comment on that because that’s a really important point because a lot of the smart content piece of this is reliant on technology that proves whether something is true or false through these poll type protocols that are true or false type prediction markets. So if you’re entering into a smart contract with something and it’s reliant on whether something happened or didn’t happen the way that that can be proven to be true is through some type of block chain protocol theory. It seems like 3M is one that’s doing this but I completely agree with you so we’ll have the links to those in the and it’s for people that check it out. This is not in any way investment advice. All this stuff with no end block chain is extremely risky but it’s interesting stuff that people need to be aware of. I’m sorry to interrupt but keep going there.
Guy: [00:41:35] So