The Kickstart Garage - Value Stock Geek #2
Tags: Personal Finance, Stocks, Investing, Value Investing, Finance

THE KICKSTART GARAGE — VALUE STOCK GEEK — #2 — Transcript

Introduction:

Sam (0:00):

“Welcome to today’s show, I’m your host Sam John Byrne and I’m accompanied by my co-host Gavin Quigley.

Today, we’re joined by the anonymous investor, blogger, and author of “The Weird Portfolio” — Value Stock Geek. He could be Warren Buffett, could be Batman, will never know. Either way, I love his book, his blog and I’m a big fan. Really excited to have you on. Welcome to the show.”

VSG (0:33):

“Thank you, thanks for having me on.”

Sam (0:36):

“I suppose before we get started could you give us a bit of background as to who you are and what got you interested in investing in the first instance?”

VSG (0:43):

“Sure, so I became very interested in investing back in the late nineties, during the internet bubble. I was in high school and I was trading in that bubble and I was the most bulled-up, internet-bubble believer you had ever met. It didn’t sit right with me. I felt like something was wrong. Then, around the Spring of 2000, I read The Intelligent Investor (by Benjamin Graham), and it resonated with me and I realised that what I was doing was pretty idiotic, and I sold some stocks. Then I went on to read some of the Buffett letters, I read all of the Buffett letters and I majored in finance in college.

Then, I didn’t really do a lot of personal investing for many years because I didn’t have much money. Then around 2013/14, around that period, I started to get into personal investing again, as I had some money saved up. I spent some time around the 2000s getting out of debt and was more focused on personal finance and saving money, that kind of thing.

But around that time I had enough money saved up where I thought “Ok, I can start doing this in a more serious way.” For the ten years prior to that, I had mostly just bought the occasional stock, threw a grand or two into it from the money I had saved up. But, at that point, I had saved up a significant amount of money, to me anyway and I decided to start really investing it.

Before I really took the plunge, I read a lot of different books and what really resonated with me was the more quantitative-oriented value investing books. The most influential book I read, that really resonated with me was Deep Value by Tobias Carlisle. And then in 2016, I had the idea, why don’t I set aside some of my money and actually run a blog that will track all of my trades and have a live strategy, and just post all of that online?

I thought it would be good because it would force me to write about my picks, it would force me to write about my strategy, it would kind of keep me accountable. And it would be a good way to keep a live investing journal, and that’s basically it.?

Personal Finance Questions

Sam (3:02):

“Cool, I just want to say again, congrats on the book, it was very enjoyable. After reading, “The Weird Portfolio”, one of my favourite segments is the “why” you’re doing what you’re doing, that being the pursuit of financial independence.

Many people have different perspectives about money. Some believe it’s the root of all evil, some believing you should spend it all because you’ll be dead and you can’t take it with you and all these other perspectives. For the audience listening today, could you share your perspective on money and what it means to you, what’s the purpose of investing and perhaps what you’re trying to achieve??

VSG (3:32)

“Sure, so I’m pursuing financial independence. When I think of money, I think of it more in terms of not what you can consume, or luxury or that sort of thing. I’m not someone who really indulges in a lot of luxury. I drive a beat-up car, I have a roof over my head. It’s nothing fancy. I’m not into nice clothes, I’m not into nice things. As long as I have a computer screen in front of me and a roof over my head, I’m pretty much happy.

But money to me is more about giving you the ability to be independent, it gives you the ability to own your time. I would like to get to the stage where I am completely financially independent. I’d say I’m about halfway there right now. In my twenties, I was a bit of an idiot with money, as many twenty-somethings are. I got into some trouble with debt because I had the wrong attitude with money, I saw it back then as more of a tool for fun, a tool for luxury, that type of thing.

And then I spent a good chunk of time really becoming more disciplined with money and staying out of debt. And that was really my focus in my late twenties. It was getting out of debt. And to this day, I don’t have a cent of debt aside from my mortgage, which I’m paying off. But I don’t have any credit card debt, I don’t have any personal debt. I follow the rules, I have a good emergency fund saved up that’s in cash.

And the whole way that I approach it is I want to have enough money where it’s generating enough passive income, its generating enough capital gains where at some point I can be completely financially independent and I can completely own time, and I don’t necessarily have to work for someone else. I don’t want to retire, I don’t want to just stop working, but I would definitely like to get to the stage where I have total ownership of my time and my attention.”

Gavin (5:35):

“Yeah, you know I love your story and it’s great what you’re saying about putting everything public and just being accountable for everything. That’s something that I’d definitely be on board with, I think when you commit yourself to something and you have everyone else kind of counting on you, expecting you to speak about it, it just makes you a little bit more invested in the whole thing. So that’s fantastic.

And I wanted to ask you, I suppose, just to make sure we’re giving as much value as possible to our listeners, one of the most crucial steps before investing is, like you mentioned there, getting your financial affairs in order so that you have deployable capital to invest without jeopardizing your current financial situation if things were to go wrong, an unforeseen event were to happen or you just instantly needed cash for whatever reason.

How did you go about, let’s say, getting out of the debt, building the investable capital and when did you realise ok this is enough to properly get started?”

VSG (6:30):

“For me, it was 2008, and it was during the financial crises. I had originally had some problems with drinking and I had quit drinking around that time. I made the decision that I would stop drinking, that I would turn my life around, that I would pay off all of this debt that I had accumulated. It was during the financial crisis actually. I mean I wasn’t directly affected by the financial crisis at first, but I was aware of what was happening. I was keeping tabs on it, I was very scared, you know, “What if I lose my job?” “What if the United States enters a depression?”

I was in a very tenuous financial situation. When I looked at my life, I had no savings, I had a tonne of debt and I just made that decision, you know, no more. I am going to turn this situation around, I’m not going to lie like this anymore. I had just had enough and the approach I used was “The Debt Snowball”. That’s where you list of your debts from smallest to largest, and you start attacking them starting with the smallest balances first.

That doesn’t make a lot of mathematical sense. You should probably attack the debts with the highest interest rates first, for instance, but what it does is it gives you a kind of psychological momentum. As you pay off each individual balance, you feel more empowered. You feel like you’re on the right track. Every time you pay off a particular balance, its like a psychological win.

So I just went through that systematically and I just lived way below my means. I lived on nothing for a long time and I got out of debt and then I applied the same kind of focus on saving money from that point forward once I was totally out of debt.

It’s for all reasons you cite, you know, a lot of people might look into investing early on like I did, where they’re very interested in it. It’s a good exercise and it’s very interesting and challenging but from a personal perspective, you’re not going to get anywhere with your saving or your investing unless you have a firm financial foundation where you’re out of debt, where you have an emergency fund set up.

If you don’t have an emergency fund set up, you’re going to end up dipping into your investments when an emergency pops up, and that defeats the entire purpose of investing. If you’re in debt, you will always be behind the curve, because if you’re in debt it means you already have a bad psychological attitude towards money. It means that you’re spending more than you earn. And that’s an equation that’s going to eventually get you in the hole.

It’s not really about necessarily doing the mathematics of the debt, I mean, that’s part of it but what it’s really about is your attitude towards money. If you’re constantly accumulating debt, you have an unhealthy relationship with money. And if you have an unhealthy relationship with money, then it’s nearly impossible to accumulate wealth?”

Questions related to Investing

Gavin (9:38):

“Great, yeah I love that answer. And I understand you have a portfolio that’s primarily driven by diversified asset classes, that being the weird portfolio, and one which you coined in a previous conversation that I believe you had with Sam, the “gunslinger” portfolio where you pick individual stocks.

Before talking more about the diversified asset class portfolio I was wondering if you could take us through your approach to individual stock selection?

VSG (10:08):

Ok so, I’m a value investor. I believe that your goal in the market is really to find mispriced securities. You’re trying to find differences between the underlying value of securities, and its true value. You’re supposed to do that through some sort of fundamental or quantitative analysis.

So when I started my blog, my original plan was that I would follow Ben Graham’s low debt-to-equity, low p/e strategy which is really kind of a quantitative investment strategy, where you’re not so much paying attention to the quality of the individual companies in the portfolio, you’re merely buying cheap stocks with good balance sheets. You’re assembling a portfolio of 20–30 stocks, and then you’re selling after 2 years or at 50% gain.

My plan eventually was that there would be a situation where there would be a crash in the market. I assumed for a long time that a crash was coming and that I would then pivot the low debt-to-equity, low p/e strategy to buying net-nets which are companies that sell below their liquidation value. And I tried that kind of approach for a long time, and my thesis was basically that the US was headed towards some type of crash and I would get my opportunity very soon.

I waited patiently for that. Then when the yield curve inverted, say in the middle of 2019, I felt that that opportunity was imminent. I felt that I would be able to purchase these net-nets and so I started accumulating some cash. Then the March crash came along and I thought that we were going to have a nasty recession with a 50% decline without Covid. So, once Covid came along, I thought we’re probably going to have another depression. And then I accumulated even more cash, which turned out to be a big mistake. That finally shook my belief that I had the ability to time the market and predict the economic cycle.

So, since then, I’ve thought about my approach and I’ve thought about the changes that I need to make in lieu of that realisation that I really couldn’t figure out the economic cycle, that I really couldn’t predict a thing. So what I’ve trying to do now is, I’m trying to build up a more concentrated portfolio. So, instead of owning like 20–30 stocks, I’m looking for like 12 positions, which is basically like the bare minimum you need to reduce volatility and reduce drawdowns to the market. As close as you can get to the market’s levels of volatility and the market’s levels of drawdowns.

My strategy there is to buy companies where I would be confident enough to hold them if another Covid situation went down. Back in March, when all of that happened, I looked at a lot of the names and they were very terrifying (in my portfolio). If we did have a depression, all of these companies would be zeros, which was a major reason I had to sell them, which is a major reason why the market punished them so much.

And I took a look at my individual stocks and I said “Well, the future of what I want to own is the type of company with a durable enough competitive advantage and a good enough balance sheet where I would be able to hold during an event like that. To be these companies at very attractive, deep-value prices. So that’s what I’m trying to do now and its been an evolution from where I started in the blog. And it’s not really about what world the best in investing, its more about what would work for me.

I learned a lot about myself in that crash, I learned a lot about myself dealing with those events. And I think this is an approach that I’ll be able to hopefully stick to in the future.”

Sam (14:15):

“So your strategy seems to have developed from Graham-orientated to more so Buffett-orientated, and it’s even similar to Buffett’s journey as a whole, is there any other investor that would have influenced your strategy? I.e. Phil Fisher with the scuttlebutt method or anything like that?”

VSG (14:30):

“There’s a lot of different investors, but I mean the main one is Warren Buffett. I actually went back and reread his letters over the Summer while I considered the changes I wanted to make to my portfolio and the changes I needed to make to my approach. I also reread Hagstrom’s book which I read many years ago. And a lot of what they said really resonated with me.

I had strayed from that strategy, and I knew about the Buffett strategy. The reason I went away from it is because I know it doesn’t offer the level of returns that the Graham strategy offers. The Graham strategy is actually the higher return strategy. Like, if you can stick to that over a long period of time, you’ll probably earn higher rates of return than you would in a Buffett-style strategy.

One of the insights, for instance, if you were to read Deep Value by Tobias Carlisle, he tested Joel Greenblatt’s magic formula study which tried to combine quality which he defined as high returns on invested capital with value and what he discovered was that the quality metric actually detracted from the results. And, Buffett himself turned higher returns back in his partnership days, back when he was more Graham-oriented.

But what I realised in March is that I can’t stick to that strategy, is that if things are going to get dicey, I do not want to own a bunch of companies that don’t have any kind of competitive advantage. If you can stick with a strategy like that over the long-run and not really think about it. And not really worry about the companies in the portfolio too much.

If you can stick to a strategy like that, you’ll do very well over the long-run, you’ll do better than a kind of quantitative-oriented Buffett strategy. But I want a strategy I can stick to. When something like that happens again, I want to be able to look through the companies that I own, go through them one-by-one and think to myself “Will this survive whatever crisis we’re in right now?” And that’s the level of quality that I want to own for the long-run.”

Sam (16:41):

“Got you. And what has the performance of your individual strategy been like compared to the market or even your passive portfolio? Do you feel you would be confident enough that you could beat the market or is it just that, like you said, it’s just for your own style of strategy to keep you on track?”

VSG (16:59):

“My results have been terrible in the Gunslinger portfolio, but that said, my returns have been better than the value ETFs that are out there, so I think that a lot of my underperformance is due to the underperformance of the value factor in the last 4 years. I bought a portfolio of cheap stocks, I basically outperformed ETFs that tracked cheap stocks so I’d say that’s pretty good.

Moving the cash while philosophically it was the wrong thing to do, and I look at it as a mistake, it did actually help to reduce my maximum drawdown and it did help to improve my results over a lot of the value ETFs. So, that’s been the story so far. Can I outperform the market in the future? I don’t know. I hope I can, but at the moment, I really enjoy researching companies, picking stocks and I think that this new strategy will help me get there.

There are no guarantees with investing. My track record would leave a lot to be desired at the moment, but I’m thinking that whenever value comes back into favour, and a lot of these very momentum-oriented, really expensive stocks fade from relevance, which at some point, they will if history repeats itself, I think I’ll have better relative performance.”

Sam (18:27):

“Yeah, fingers crossed, I think all us value investors are hoping for that anyway! So, one of the most cumbersome elements that I find to investing is the time between discovery of an investment to actually investing, and I was wondering what is your typical time frame between initially screening, finding these ideas, and then placing money on the table? “

VSG (18:45):

“So that’s gonna change. When I was doing the more Graham-oriented, low-key style investing, I was trying to fill up a portfolio with 30 stocks. I added a discretionary element where I wouldn’t just buy the screen, I was picking and choosing within it, but because I was really focused on just filling up a portfolio full of companies immediately, I would just buy them right away. I wouldn’t really worry about timing. I would throw out some of the things I didn’t like during the screen, but for the most part, I would just buy it then and there as soon as it showed up on my screen.

Now what I’m doing is being a little more deliberate, so I’m building up a list of companies that I’m interested in owning for the long-term. I’m developing a list of businesses that I actually want to own. I’m trying to research at least three companies a week, go through them, see if I like them or not, and then if I like the business, I’m adding it to a watchlist and I’m tracking it. And if that ever gets cheap, if it ever enters that cheap bucket where it would be around a 10 EV/ EBIT multiple, I would move on it.

So that’s what I’m doing now. Instead of buying a screen and eliminating some duds from the screen, I’m developing a list of businesses that I actually want to own, and I’m waiting for them to get to the right price for me.”

Gavin (20:15):

“Yeah, it’s evident that, I suppose, you’ve really honed your strategy as you’ve developed your understanding as an investor, you’ve mentioned some of your main inspirations. But just for some of our novice investors, I mean, I wouldn’t have too much experience, I’ve read Deep Value by Tobias Carlisle, and a couple of the other books, the notes from Warren Buffett, but a lot of people listening won’t really know where to start.

So, outside of the general quantitative screening process, what qualitative factors do you consider are the most important when you’re conducting a deep dive in a particular stock?”

VSG (20:50)

“So, the kind of companies that I’m looking for right now, are companies with a durable competitive advantage. So this is a company that has some kind of economic characteristic where it can withstand competition and I know that it will be a continuing factor for at least 10 years. Where I can put money into the stock and I’m confident that this company is going to survive.

So those are more qualitative considerations, so I’ll give you an example, a stock I recently bought was General Dynamics which is a US defence contractor. The competitive advantage there is that there are only a few US defence contractors. You can’t simply start up a company tomorrow and start making nuclear submarines. So I bought General Dynamics because I know it has that kind of “secret sauce”. It has that economic aspect to it where it will be able to withstand competition.

Other key considerations I want to look for in terms of a quality business, I want something that can generate relatively high returns on equity without using a lot of leverage. So, this implies that the company has some form of pricing power. So for a company like General Dynamics, it does have pricing power and that comes from the fact that there are only a few different defence contractors that you can actually deal with.

So that gives them some pricing power within the market where because they know there aren’t many competitors out there, they can charge higher prices for that service and they can earn a higher return on equity. And those are the kinds of things I am looking for, I’m looking for something that has that secret sauce, that has that moat. It has something to protect it from competition, which enables it to earn above-market returns and hopefully sustain those above-market returns for a long period of time. And then I’ll wait for one of those businesses to sell for a compelling price.”

Gavin (22:50):

“Yeah and I think that’s very important, that’s one of the first things I learned when I started looking into investing, that a company does need to have a competitive advantage and I suppose that’s important for anyone listening if they are just getting into investing. A lot of people think they can just pick the biggest companies in the world, but if there isn’t a competitive advantage, they might not stay around for that long.

So, if you could just sum up your investment strategy for the people listening. Let’s say you could only base your strategy on 3 rules for the future, what would those three rules be and why? You’ve kind of mentioned the competitive advantage, which I take is one of them, but if you had to just pick three what would they be?”

VSG (23:29)

“I mean to sum up the strategy simply, it’s wonderful companies at wonderful prices. So I wanna buy an extremely high-quality company and I want to get it at a compelling price. One way that you can measure that is in the EV/EBIT multiple. After the price, which is the EV/EBIT multiple, when we’re determining what is a wonderful company, it’s a company with a durable competitive advantage that gives it pricing power and it’s also a company with a high degree of financial quality where it has a very good balance sheet and it will be able to withstand a recession.”

Gavin (23:59):

“Yeah ok, and i was actually just wondering as well, because a lot of people are in a similar enough position to myself, they’re just getting into investing, maybe they’ve said up a brokerage account, and they’re wondering are there any specific resources or tools that you’d use to conduct the investment research that you mentioned there a minute ago or even to track your portfolio? Do you use anything in particular? “

VSG (24:21)

“My portfolio, I just track it pretty simply in a Google Sheet. I track it on my brokerage website, but I keep track of all of my performance on a Google Sheet. The nice thing about Google Sheets is that you can actually use formulas that can input the price, so it will update automatically every time you word it up. You can also add in P/E ratios. It’s a very blunt instrument. It’s a simple valuation tool but its good because I’m developing a list of about 50 companies so far that I’m looking at that have passed my quality screen and I’m waiting for them to get to a good price. So that’s a good way to get a quick snapshot of where it’s trading, so that’s a helpful tool.

So in terms of screening, I’m trying to get away from using more of the screens where I”m not just going to buy something that shows up in a screen. But, if you want to screen and you want to see the latest value stocks, I think the best screen around is Tobias Carlisle’s screen on theacquirersmultiple.com. There’s a large-cap screen that’s available for free where you can look up the different companies that it shows that are trading. There’s quality metrics, it also has a smaller micro-cap screen that’s also very nice. I’ll look at that screen occasionally, I’ll see what’s in there.

Another good way to screen is to look at Joel Greenblatt’s screen which is magicformulainvesting.com. When you go into that, you need to understand that the return on capital invested metric can be very misleading as returns on invested capital tend to mean-revert. Companies with high returns on invested capital tend to decline. Companies with low returns on invested capital tend to bounce back to where they were.

Another great way to look at things is to look at holdings in different ETF’s. So, going back to Tobias Carlisle and Wesley Gray, they wrote a book called Quantitative Value, there’s an ETF which is based on that book which is QVAL. Those are available on the Alpha Architect website, that’s another great place to look for ideas.

AAII, they also have a number of wonderful screens on there. A really good screen that they have is the Hagstrom screen, so Robert Hagstrom wrote a book called The Warren Buffett Way, where he talked about Warren Buffett’s methods and broke them down. And there’s a screen there that’s based on that that’s returned basically 13% a year since 2005. So it’s a great place to go in and look for a lot of different ideas and look at other good stocks that are out there.”

Sam (27:09):

“I know a while back you were invested in Gamestop, which is a company I think many people would be familiar with. And is probably coming back into the spotlight again with the PS5, Xbox Series X and their recent partnership with Microsoft. Alongside Burry, obviously being in it too.

As a way of an example for our audience could you take us through why you initially invested in Gamestop and why you decided to sell your position? Just to give us an idea of your thought process in real-time?”

VSG (27:35):

“So GameStop is probably the textbook definition of why I don’t do that anymore, but I bought GameStop because it was irresistibly cheap at that time. It was one of the cheapest stocks in the screen in the market at that time. GameStop had a good balance sheet, it was very cheap, it was generating a lot of free cash flow, and the market, the way it was priced, it was left for dead.

And my assumption was, well, this situation is obviously bad, people are moving away from physical games, physical gaming consoles. In the long-run, GameStop eas probably a zero, unless they dramatically changed their strategy. That’s the probable future. People are probably going to buy their video game consoles online, whether it’s on Amazon or possibly a GameStop website, they’re going to get those games and they’re probably going to pay for them online, just download them on the internet.

And I figured that’s probably not going to happen immediately, it’s probably much further away than the market realised. Keep in mind, when I invested in this, it was like late-2016. And then I also knew that the business that generated most of their free cash flow was selling used video games. So I said, you know, they’ll have that which will generate some free cash flow for a while. It will probably be a growing concern for more than 10 years and the market are acting like this is dead.

So I invested in it. And I also doubled-down on it in 2017 and I bought even more. And I was totally wrong, and the stock nearly collapsed. Fortunately, I got out around $12 a share, and I think it hit a low of about $3 a share, and then I believe I bought it around $20 to $25 dollars, so I lost basically half of my position, but it could have been a lot worse.

It became apparent to me when I sold it that the market might be right, this might be a zero. And it’s kind of a textbook example of when I really started to do a systematic strategy. I was really just instinctually contrarian like I really wanted to buy it because the market hates it, and that was kind of a demonstration to me that that’s not enough. You really do need to have some type of unique insight.

Now you contrast this with the way Michael Burry handled it.

Michael Burry bought it near the lows, and he bought it because he knew there was a near-term catalyst which was the PS5 and he knew that that PS5 wouldn’t necessarily need to download video games off the internet. It still does that but there’s a nicer version where you actually want to buy the physical disk. And he knew that was on the horizon, he knew it was very cheap.

He knew that the market was discounting that and I think he bought it around £3 or £4 dollars and I haven’t looked at his recent filings but I wouldn’t be surprised if he sold it. And that’s probably a better example of a way to handle a stock like GameStop than the way I did it where I didn’t really idea of a catalyst or an activist coming in or anything like that. I just bought it because it was cheap and then hoped some miracle would happen that would save me. That was the wrong way to handle it. And, Burry’s approach when you are dealing with a deep value situation, I think his approach is much better where you do it and that’s why he’s so good at it. And I suck at it.”

Gavin (31:29):

“Yeah, and i think investing, and I’ve kind of learnt this, it’s just all about learning curves and you learn different lessons from different investors. You learn what not to do and what people have found success in. But if you were to narrow it down, and you have gone through a few of the lessons you’ve learned, but what’s the most important lesson that you’ve learnt when it comes to investing so far?”

VSG (31:50):

“I think that just that, its that an investor needs to find what works for them. So I spend a lot of time looking at the data, looking at the backtesting. Testing out strategies by looking at it in that way, but what the backtests didn’t tell me is what was going to work for me. What was going to work for me in different situations and the types of companies that I would be comfortable with holding, what kind of strategy that I could endure, and my own beliefs and my own thoughts about things.

And I think that’s the key lesson in investing, that it’s really a personal process. There’s not one strategy that’s better than another. When you’re looking for that, when you’re more of a quantitative investor, you’re looking for what works the best. But that’s not really the right question, the question is what’s going to work for you? And that’s a really tough thing to figure out.

And anyone who’s read my blog, it’s basically been a chronicle of that struggle, of me trying to really figure out what’s going to work for me.”

Sam (32:56):

“Yeah ok so we’ll transition now into the other side of your portfolio, so in the investment community, it’s well understood (well by some but not many) that it’s extremely hard to beat the average or in other words, the market consistently over the long run.

So most investing gurus would propose that individuals invest in an index. However, you’ve shown in your book “The Weird Portfolio” that this also isn’t the best approach for individual investors because markets can experience these long drawdowns like Japan.

As a result, you’ve built this passive portfolio of diverse asset classes that avoids bubbles, limits drawdowns, safely builds wealth over time based on back tested data. Could you take us through your weird portfolio, how it works, explain the various reasons why the average joe should consider a diversified asset portfolio rather than index investing or individual stock selection?”

VSG (33:47):

“Sure, so indexing is a perfectly valid way to invest, you’re basically owning the entire market based on the market capitalization. And it will work out in the long-run. I think if an index investor holds onto an index fund for 20 years, they will do well, they’ll earn a return. The problem is that indexes tend to enter bubbles every 20 years. Where everybody will get very pumped up on the index and they’ll go all in.

And what that then creates is these long 10–15 year periods of time where stocks do nothing, except deliver pain. So, a great example of that is 2000. So, the market was red-hot, it hit an incredible CAPE ratio of 40. Market cap/GDP got up to 140% and stocks basically had a loss decade where you earn no returns and you experience two 50% drawdowns. There are other examples of that in history. You can go back to the late-1960’s. At that time they were called the gunslingers. They were the bulls, the compounder-bros of the day.

That resulted in the nifty-fifty bubble which were all really high-quality American companies, and then once that bubble collapsed, you had roughly 10–15 years where stocks did nothing. You go back to the Depression, you can see the same thing. You go international, you look at many different international markets, they do the same thing. They kind of gyrate between extreme fear and extreme euphoria. You can have long periods of time where the markets don’t really do anything.

The most extreme example is Japan.

Japan hit a CAPE ratio of 100. I want to say, the US is not that right now. The US is extremely expensive. I think it’s in a bubble, I might be wrong about it, but its nowhere near as extreme as that Japanese bubble. But what that bubble did was it resulted in a few years where Japanese stocks did nothing.

So I’m well aware that indexes can deliver pain for long periods of time. I’m also aware of the fact that there are different asset-classes outside of stocks where you can get a different return and where those things you’ll have different assets that will perform well in different periods of time. And if you build a portfolio of asset classes, you can actually create a more consistent result and you can reduce your drawdowns.

Probably the best example of this style of investing is Harry Brown’s permanent portfolio. So, Harry Brown developed this permanent portfolio which was to do exactly what I just described. To have a portfolio of different asset classes where they’ll deliver a different return in different environments, and that will in turn create a more consistent result as you rebalance them over time. Where you won’t have these lost decades. Where you’ll be able to be confident that over

Pretty much every 5/10 year period, I’m going to earn some type of return. It might be a low return, but at least it’ll be a return.

Harry Brown’s portfolio was a four-way portfolio where it’s the US stock market, gold, long-term treasuries and cash, split four ways. Rebalanced when one of them gets out-of-whack. And, what that does is, you’ll have periods of prosperity where your US stocks will do very well, your bonds and gold will do poorly. Then, you’ll have periods of time when it could be the inflation that’s raging out of control when inflation is going to hurt both stocks and bonds. Fortunately, the portfolio owns some gold.

And, the way that they all interact with each other in these different environments is that you get a much more consistent rate of return. So, I wanted to develop a strategy that combined my beliefs about investing, for instance, my belief in value investing as opposed to market-cap leading. I also wanted to be a little bit more aggressive than Harry Brown’s approach.

So I developed my own strategy which is The Weird Portfolio, which I wrote a book about. And that’s that type of strategy, it’s the type of different portfolio so that you can be confident it’s going to deliver a decent rate of return over the long-run. Where it’s going to avoid these bubbles, and where you’re also going to limit your drawdowns.

And, where you don’t have to predict anything, I wanted a portfolio where I’m not trying to make positions. I’m not trying to move out of stocks when they’re expensive. I’m not trying to predict when the dollar is going to collapse. I’m not trying to predict if we’re going to have deflation like it’s the kind of thing where there’s no speculation.

It has protections for all the different macro environments and you can just put it on the shelf and pile money into it, and not really worry too much about it.”

Gavin (39:03):

“Yeah, You really are providing a lot of value as well. I mean even offering your perspective on different things, it really shows that you’ve put serious work into developing your knowledge. And I wanted to ask you a bit of a “potential scenario”. So how would you, let’s say, adjust the portfolio if one of the asset classes suddenly became literally redundant? Hypothetically, assume Elon Musk starts mining all the gold from asteroids or gold just becomes this useless commodity for whatever reason.

How would you adjust the portfolio for something like this? How would you shift your asset allocation? Do you have a particular substitute asset class in mind if one were to just completely stop performing as well as it has in the past?”

VSG (39:48)

“Gold is an interesting asset class. So, I originally hated gold, I was definitely very influenced by Warren Buffett. Warren Buffett’s point is that this is just metal and it just sits there in a vault, it doesn’t earn anything. What’s the point of owning it? And I agreed with that for a long time. So When I originally started this portfolio, I actually used a treasury of inflation-protected securities.

But when I stepped back and thought about that. And I thought about well; what is the role? Like when Harry Brown was talking about gold, what was he talking about? And what he’s really talking about is kind of an extreme currency debasement situation or something where the government falls. Like if the United States Government were to fall apart, you would have an asset that would be worth something.

So its really in that sense something that’s going to be backed by the Department of Treasury. And then I also looked at the data and I saw that using gold does work very well when combined with other asset classes. Like if you were to combine a 50/50 portfolio of stocks and gold, over the long-run, it has a higher rate of return than both of those asset classes. Owning those two things and then just annually rebalancing them delivers a better rate of return. The result is greater than the sum of the parts.

So gold is a really unique asset because of the unique relationship that it has with stocks. So when would I pivot away from gold? I think it would have to be something very extreme, where it was something like that where Elon Musk started mining asteroids. I don’t think that’s going to happen anytime soon. I think the cost of mining an asteroid for gold wouldn’t really be worth it. It would definitely cause a crash in the price of gold to the point where it would probably also destroy the business incentive for mining the asteroid in the first place. I don’t think anything like that is going to happen in my lifetime, so I’m not too concerned about something like that going down.

Outside of that, I think gold has been around for thousands of years. I think it’s been a store of value for thousands of years in human history. I’m pretty sure that 50–100 years from now, people will still be wearing gold jewellery, people will still keep gold in safes, in case they’re worried about currency collapsing or that type of thing. Gold will be worth something.

You go back, and you think about it, you know, a hundred ounces of gold could have bought you a house in 1930, a hundred ounces of gold could buy you a house today. So that’s the durability of that asset. I don’t think it’s ever really going to go away unless there’s some kind of major technological revolution. But I don’t think that’s really going to happen.”

Sam (42:40):

“Yeah, technological revolution like Bitcoin would you say? I just want to get your thoughts on Bitcoin?”

VSG (42:47):

“I’m a Bitcoin sceptic. I realise that’s probably a controversial opinion these days, but I’m very much sceptical of it. When I look at Bitcoin, and I look at what it does, the technology is incredible. Where you can create this decentralised ledger, where you can have transactions that are memorialised in the blockchain, that’s incredible. The way that the computer science that’s built around it, where you can’t build more Bitcoin, that’s an incredible technological revolution.

But, you move away from all the impressive technology of Bitcoin, and you think about it, what is it useful for? Well, the main argument is that it’s a medium of exchange. Well, what does Bitcoin achieve that you can’t already do with Venmo or a debit card? And do you really want to transact in Bitcoin?

The other thing that it would need to do to be a medium of exchange would be to have some level of price stability. So you look at the US Dollar, that degrades over time because of inflation. Inflation grows at 2% per year and that means every 100 years, basically, your cash in the mattress effectively becomes worthless over that period of time. But you look at Bitcoin and it had a 75% drawdown a couple of years ago.

It has tremendous volatility. It’s way more volatile than any of the fiat currencies that are out there so I don’t really think it solves that issue, I don’t really think it does anything there. The other alternative would be, basically if you dislike fiat currency to a large extent. I don’t really buy into that either. Fiat currency and central banks definitely have their drawbacks, but I think if you look at the period of time before central banks existed, the economy was a lot more volatile.

We might have had a more stable currency, but what you basically had was a depression every ten years, major market panic. The Federal Reserve ever since the great depression has mainly been able to contain the recessions pretty well. I don’t really think 2% inflation is the end of the world. You see these graphs where it’s like: the dollar has lost 98% of its value in the last hundred years. Well, that sucks if your asset allocation is cash in a mattress, but if you own anything else besides just hard currency, you’re doing fine. So I don’t really think inflation is the end of the world, I don’t hate central banks.

The Bitcoin fanatics, they seem to me more like millennial gold-bugs. So you talk to someone who’s over sixty, they’ll talk about gold in the same kind of way that millennials talk about Bitcoin where usually it’s driven by a lot of dead hatred. I don’t really understand that or relate to that at all.

So, I guess I just don’t really see the point of it, and when I look at the price action, it looks to me like it’s more of a speculative asset. It’s basically like a levered-up, risk-on asset. When there’s risk-on in the market, which is what is happening right now, with the feeling of the euphoric market where people want to own things, Bitcoin skyrockets and it goes to the moon.

When you’re dealing with a risk-off moment, like March, or December 2018, Bitcoin is going to crash. So that doesn’t really strike me as something that’s a durable asset class that performs in the long-run. That said, maybe I’m totally wrong about it, I mean, I’ve been wrong about plenty of things in the past. Maybe I don’t have the right perspective on this. But with that said, I’m not interested in owning it, because, for my asset allocation, I want to be able to backtest it. I want to be able to look back and say, how did this thing do in the depression? How did this thing do in the 1970s? What happened to this in the 1980s?

I want to be able to know how this thing is going to react in different types of environments, and Bitcoin is just so new that no one knows that. Everyone has their kind of confident belief in it that X, Y, Z are going to happen but I don’t see how they can say that with any degree of certainty. That’s why I’d rather own gold where I know how it’s going to perform in those kinds of environments. I know the relationship that it has with bonds and stocks, and that’s the type of thing I’d rather own instead of Bitcoin.”

Sam (47:30):

“Yeah I’d be of a similar mindset, but even gold for myself, I’ve just eliminated it from my investment portfolio just as I don’t go near things that are not income-producing assets, but anyway, we’ll come back to the weird portfolio now.

So, as from a previous conversation we had, I mentioned the penalising tax regime around ETFs for individuals in Ireland which makes the weird portfolio almost redundant for an Irish Investor. In addition, you’re gonna love this, I’ve also discovered a law introduced in January 2018 called PRIIPS (packaged retail investment and insurance products) which basically pushed out all the Vanguard ETFs you recommend in your book from the EU investors because they don’t provide key information documents, although the information is readily available on the Vanguard site, which is, I find, ridiculous. So Irish investors are basically cornered into these high-cost pension funds and subject to a near 50% tax rate, and you can’t even offset your losses, which I believe is just totally unfair.

So with that said, do you think there would there be another way to structure this portfolio through a different investment vehicle and if so, would performance differ much? From my knowledge, I know mutual funds are also subject to the same tax regime as ETFs which would pretty much leave investment trusts. Or would you be aware of alternative low-cost ETFs similar to Vanguard?”

VSG (48:57):

“When I think about the Weird Portfolio, the first thing I’d want today is that this is not something that would be suitable for every investor. Just like how I based a lot of this off of the template that I got from Harry Brown. Harry Brown’s approach wasn’t the approach for me, I had to develop my own style. So I do think that everybody needs to figure out what works for them. Like I mentioned earlier, you know, you don’t want to own gold? That’s perfectly fine. I think everybody needs to find an asset allocation that works for them.

That might be 100% stocks, it might be some mix of stocks and bonds. What I developed was really for me, and I think the template that I used for it would probably be useful for other people, but it’s not the approach that works for everybody.

Anyway, thinking about the taxes, I don’t know anything about European tax laws. I would definitely be the wrong person to ask about it. From a US perspective though, ETFs are more tax-efficient than mutual funds which is why I would rather own an ETF than a mutual fund. The risk of an ETF is that you won’t be able to get out at your net asset value, but the wonderful thing about an ETF is that you don’t have to pay taxes on it until you actually sell it.

Wherein a mutual fund, those taxes are passed onto you when it’s realised in the fund itself, not when you decide to sell it. So all of this activity and compounding can occur within the assets of an ETF, and you, the investor, don’t have to pay taxes on them until you actually go ahead and sell it.

It’s a shame that it’s not treated the same way globally because I think ETFs are a great way to invest, it’s a great instrument to have, and it also has a layer of tax efficiency to it, which I think outweighs the drawbacks which is the risk in that you won’t be able to get out at the net asset value.

It’s really a shame that they’re not allowing you access to Vanguard products. I mean when you think about investing, Vanguard is the gold-standard. They have the lowest fees, they created the index fund. It’s in their DNA to do these things in the right way, so that’s really a shame that you guys don’t have access to their products.”

Gavin (51:23):

“Yeah, you’re making me feel like crying here. Just being based in Ireland, it’s not very kind to the investor. There’s not really a whole lot we can do, and that’s why myself and Sam are really trying to just build a foundation of knowledge that we can share with people who are based in Ireland. That’s where most of our listeners would be from.

Just on that, and you might not be too equipped to answer this question, but just from what we’ve mentioned and what you do know, do you reckon investors in Ireland would be better off crafting their own rules-based investment strategy and create a diversified portfolio of different equities rather than trying to build a diverse portfolio of asset classes?”

VSG (52:01):

“Well, you know, the thing is when you’re buying equities, you have to realise that most equities are going to rise and fall together. So there’s no way you can really construct a portfolio wherein 2008 you’re not going to lose money. So it depends on what your goals are. There are people that can look at a major stock drawdown and be fine with it, and they can own 100% equities, and they can just assemble that portfolio in their own way and they can be fine with it. So that’s one approach.

If you don’t think you’re going to behave correctly, you want some assets in there that are going to restrain those drawdowns and keep you acting correctly when they act that way. In terms of assembling portfolios that consist of stocks, just like with asset allocation, you kind of need to just find what’s going to work for you. What really resonated with me, was the value philosophy. I think the best way for you to get started with value investing is if you were to read Joel Greenblatt’s book, The Little Book That Beats The Market. I think that’s kind of the best template to approach it.

There are some flaws to that strategy, but I think reading through the book itself gives you the right way, and the right mental template to think about the market, and to think about volatility, and to think about analysing businesses.”

Conclusion:

Gavin (53:24):

“Yeah I was actually literally just going to ask you that and we won’t keep you much longer, we’re going to wrap things up here, there’s just two more questions that we wanted to ask you just before we finish up;

You mentioned The Little Book That Beats The Market by Joel Greenblatt, and i was just about to ask you before you finished, If somebody was looking at getting started in investing, would that be the main book you’d recommend? Would there be any other specific books you’d recommend to the novice investor?”

VSG (53:51):

“I really love The Little Book That Beats The Market. A lot of people would recommend that you dive into Graham right away. Graham has a very dry style of writing. He has profound ideas, he’s written the most important book about investing anyone has ever written, but it’s a bad starting point. I would say read Greenblatt, and that’s a quick read, you can sit down for like 4 hours and get through it on a Saturday afternoon. He has a very good style of writing, a very clear, understandable style of writing. I think his ideas are in the right place, and so I think that’s the best place to start. It’s to start there.

Tobias Carlisle’s books are also excellent. Deep Value is a little more advanced for a beginner investor, I would say to start with his book, The Acquirer’s Multiple. That’s another excellent book to begin learning about investing. I would say start with those building blocks and if they resonate with you, go from there.

The thing is, value investing isn’t for anybody, picking individual stocks for investing isn’t for everybody. So I would say start with books like that, and if they resonate with you, and if you read it and you’re like, “I would really like to try something like this”, well then go further in your journey and start reading things like Graham, like David Dodd, read something like The Intelligent Investor.

After The Intelligent Investor, there’s Security Analysis. Now, Security Analysis is a really hard slog to get through. I read the whole thing, it was like doing homework. I did it, because, I kind of persisted through it. There’s a lot of very important insights in there, and there’s a lot of key quotes that you can get from there. There’s a lot of core ideas that are timeless. The commentaries are also really good if you were to get one of the more recent editions.

So, that’s a great place to start, but don’t start there. Do not go to The Intelligent Investor right away and certainly do not go to Security Analysis right away. Another really great resource that everybody should probably read are the Buffett Letters. They’re all available for free at the Berkshire Hathaway website, and that’s probably the equivalent of getting an MBA education. If you were to just read through those things. And they’re all free! Anybody in the world can sit down and read those letters for free.

What you’ll learn from them is probably more than you’ll learn from most MBA curriculums.”

Sam (56:21):

“Yeah, I’d absolutely agree. We’ll be sure to leave the links to the resources you just mentioned there. Also, just to take a little break from investing, I know you’re a big film buff so I wanted to get your top 3 movie recommendations to watch this weekend.”

VSG (56:35):

“My top three movie recommendations? Hmmm, that’s tough! Let me think of some off the top of my head…

I love Heat. That’s one of my favourite movies of all time. With De Niro and Pacino, that’s an incredible film if you just want to sit down and go through an incredible journey right there with some incredible writers and incredible directors and whatnot. With some amazing actors, I mean, what a cast to have De Niro and Pacino in the same movie. And it’s a compelling plot, I mean it’s really well shot, there’s the famous scene where they’re robbing the bank and the sound on that was very cool. It’s not like movie bullets, it sounds like you’re actually there, especially if you have a good sound system. So that’s a really cool movie, I loved that one.

Other great movies? I’d have to recommend Goodfellas, so if nobody has seen Goodfellas, everybody should watch that movie. That’s one of the greatest movies ever made, that I’ve ever seen. It’s just a total classic.

Then I’d say something more science fiction-oriented. A movie I really love is Gatica, that’s a really cool movie. It’s about genetic engineering where Ethan Hawk plays a guy in a world where people are genetically modified, and people with the best genes, who are basically like the rich kids, they wind up with the best jobs. Ethan Hawk is kind of the average joe, he wasn’t genetically engineered. And he tries to break into the space program. So that’s something interesting of thinking of, probably something we’re actually going to have to deal with, probably in the next 50–100 years. Genetic engineering and the effects of that.

I could name a lot more, but those are the three that immediately popped into my brain!”

Sam (58:29):

“That’s fantastic, sorry to catch you off-guard there!

VSG, it’s been a pleasure, thank you so much for taking the time out to run through those questions with us, we really appreciate it. Anyway, we’lll hand the floor over to you. Where can our audience go to find out more about you and where can they check out the weird portfolio and all the other resources that you offer?”

VSG (58:49):

“Sure! So you can go to my blog which is valuestockgeek.com and like I mentioned earlier, the blog is really a chronicle of this money that I kind of set aside to run this Gunslinger portfolio and I track every trade and every idea in there. Going back 4 years, my track record is there to see, warts and all. Mostly warts!

So you can go back and you can look through that, there’s also a tab on there for The Weird Portfolio if you want to dive into that book and learn about my approach to asset allocation. And then, I’m pretty active on Twitter, my handle is @valuestockgeek.”

Sam (59:26):

“Brill, fantastic, anyway, everyone, thanks for tuning in and thank you Value Stock Geek!”