The Intelligent Investor wtih Zweig’s Commentary



DG Value: Targeting Overlooked Opportunities In The Middle Market

Yarra Square Investing Greenhaven Road CapitalFounded in 2007 by Dov Gertzulin, DG Value is a value-focused investment firm. The firm runs two primary investment strategies, the diversified DG Value Funds and the concentrated DG Concentrated strategy. Q3 2021 hedge fund letters, conferences and more The flagship DG Value Fund was launched in 2007, specializing in middle-market distressed situations and event-driven Read More


0:00we study billionaires in this episode 88 the investors podcast adjusting from Bel
0:14Air Maryland investors podcast
0:20since summarize the lessons waters tell you when it’s cold will give you
0:27investing strategies your host Preston Parrish and staying person has everybody
0:36doing out there this presentation of Yahoo’s for the investors podcast and as
0:40usual on the company by Mike Obel stick brodersen out in Denmark today we’ve got
0:46a book a lot of people talk about the author of the book is Benjamin Graham
0:51Benjamin Graham Road two books that were really famous person security analysis
0:56which we’ve done an episode on and then the other book is the Intelligent
1:00Investor so to just give everyone a quick background if you’re joining us
1:04for the first time on the show maybe don’t have Benjamin Graham is so
1:07Benjamin Graham was born buffett’s professor at Columbia and RAM started
1:12teaching at columbia university back in 1928 he wrote this book and it was the
1:17textbook that he used in his class and the text book was called security
1:21analysis which we’ve done the previous episode how many episodes ago was that
1:24stick like 20 or something like that yeah that sounds about right about
1:28twenty episodes ago and so when Graham wrote this book security analysis
1:32security analysis was published back in 1934 so all this was really kind of
1:37going on during the Great Depression and Graham then was professor for quite a
1:42few years he ended up being the professor for Warren Buffett and Warren
1:47Buffett whose net worth is I don’t know where it’s at right now maybe seventy
1:50billion 65 billion something like that it’s it’s way up there one of the
1:54wealthiest people in the entire planet has said that everything that he’s
1:58learned in his investing approach was completely shaped by Benjamin Graham the
2:02author of these two books and so that’s why we really like to place a lot of
2:07emphasis on Benjamin Graham he’s you know the founder of value investing a
2:13lot of people have attributed their massive net worth to following the
2:17principles of management so in today’s episode we’re gonna be reviewing the
2:22Intelligent Investor by Benjamin Graham and where this book is a little bit
2:26different than security analysis is that the intelligent investor’s a
2:31may be easier version definitely geared towards the common investor opposed to
2:37like a security analyst that does a professionally working for a big bank so
2:42this is for the common investor and how they can invest so what we’re gonna do
2:46sticking I came up with actually sticking up with the agenda I should say
2:49he email it to me
2:52sticking up with the agenda in the way he broke it out as he said president
2:55let’s do chapters one through seven in the first segment two Chapter II that’s
3:00a really important one and we’re gonna do nine through nineteen and then
3:04chapter 20 all by itself so we’ll talk about intrinsic value to all sorts of
3:09things in hopefully you guys enjoy this one so let’s go ahead and start this off
3:12gonna be reviewing the first seven chapters 1 through 7 he kinda hit in the
3:17highlights between the two of us so the book starts off with a very very
3:22important discussion and that discussion is distinguishing between an investor in
3:28a speculator so here’s the difference
3:323m says that in when you’re an investor do not seeking a massive return in a
3:37short duration or short period of time you’re looking for a reasonable return
3:42and so grand doesn’t necessarily say a reasonable return is 10% or less or
3:47anything like that he believes that really up to the reader to determine but
3:51I think gramm would probably say if you’re looking for a 50 percent return
3:55in a one-year span her one-year timeframe that’s probably getting into
3:59the room where you’re here you’re looking for excessive gains net really
4:03starts to become speculative in nature so the second part is that when you have
4:09an investor he’s doing something to promote the safety of the return of on
4:13the principle so that an investor won’t do anything they’re really compromises
4:18his principal in in any type of extreme manner so you know let’s say you were
4:22gonna invest in a large cap company let’s just say it was a company like
4:27Apple and you were looking at Apple’s returns and their revenues were really
4:31steady they had all these insistent numbers in the expectation is that
4:35they’re going to continue to earn at least the level that there
4:38earning today into the future and there’s no really anything to you can
4:43see on the horizon that would cause a major disruption in that in the next
4:47couple years that would be an example of investing because at this point I’m you
4:53can’t necessarily say the revenues or the net income is all over the place so
4:59it’s not something that you can actually projector predict where the bad event
5:03has been occur that’s where you get into more of an investing approach opposed to
5:07a speculative approach you know back in the day SiriusXM Radio their net income
5:12was up and down there moving stuff off their balance sheet on their income
5:16statement it was just kind of a mess if you look at their financials and so at
5:20that point I’m you could as an investor versus a speculator you could look at
5:24that pic and say you know next quarter they could have negative net income
5:29where they just had a positive one that could totally happen based off their
5:32track record in the things that have happened if you know that as a person as
5:36a person is looking to invest up front and you know it could potentially be bad
5:42you’ve identified an event that could jeopardize your principle which it now
5:48goes into we would then gramm would call speculation opposed to invest because
5:53you already know the event occurred really kind of come crashing down to
5:57thats it those are the two things you gotta be able to protect your principal
6:00and you’ve got to go after things that are giving new reasonable returns and
6:05that’s what he would classify as investing so here’s the direct quote out
6:09of the book he says investing is promoting the safety of the principal
6:13and an adequate returns that’s where I’m pulling that from and this is big I mean
6:18this is huge for a person to really kind of understand that I know it sounds
6:23really simple but if you aren’t doing that then you are speculating then you
6:29are saying I feel like this is the direction things are going to going
6:33anything he started throwing out the fuel word opposed to I have looked at
6:38the company’s cash flows
6:40they have been very consistent over the last five years looking towards the
6:45future I expect those cash flows to continue to remain consistent if not
6:50slightly grow and because of that when I do it discounted cash flow analysis
6:55taking those future cash flows and discounting them back to today’s present
6:59value I expect the value the company to be $35 a share at a 7% discount rate if
7:06it doesn’t sound like that that’s how do you know when stick and I are doing in
7:10the intrinsic value of an individual company that’s the conversation that
7:14were having in our head and that we’re actually writing out in order to return
7:18the values and here’s a really key point in all of that conversation were saying
7:23the competitive advantage of the company will be sustained or the expectation of
7:28the competitiveness will be sustained during that period
7:31those are the things were saying as an investor now on the show because it’s a
7:37lot more fun to talk about this kind of stuff on the show a lot of the times
7:40were talking macro
7:41we’re talking you know what we think from a speculative point of view yeah I
7:45think japan’s gonna be you know a disaster but we’re really kind of step
7:50in the realm of more speculation when we talk about that kind of stuff on the
7:53show then really how we invest our money yes so the way to think about investing
8:00is that is really really boring I think you might you have to have a quote
8:05something like that he’s been really be making his money just by waiting I mean
8:09if you think it’s fun just to wade and if you’re looking for action if you
8:14looking for a lot of things to happen really fast
8:17investing is prob enough for you as an investor there is no action all you
8:21would buy a company and you will hold it for ten twenty years perhaps the rest of
8:26your life so really think of investing at something that’s that’s really boring
8:31that’s there was actually my key point here
8:33extremely important point from chapter 12 chapter seven is the grants
8:38discussion about active and passive investing I think his definition of a
8:43passive investors really interesting today’s context because to the passive
8:46investor who is really talking about finding high quality pics and then just
8:50pulling onto them I think if benjamin graham was latched day he would probably
8:54say something like find an ETF has its week of value in that that’s how he
9:00would assume
9:01gramm would look at it has invested a really interesting thing about passive
9:07investing is that when reading the Intelligent Investor these guidelines he
9:11provides for it really saw the text I think they’re just timeless when I read
9:15that today I’m thinking that sounds like a great idea that’s probably where once
9:19you do if you had no opinion about the market if you have no opinion about the
9:23sustainable competitive advantage
9:25fine blue chip stocks with these given criteria in terms of dividend payments
9:29to church to financing and so on
9:31you probably do better on the most active investors with sticks really hit
9:36net in the book between passive and active RAM describes the book as the
9:41defensive investor in the aggressive investor and so here’s a quote from the
9:47book room has for the aggressive investor he says
9:51the aggressive investor will expect to fare better than as passive equivalent
9:55of his results may well be worse and he gets into a lot of discussion about that
10:00when he says that he’s aggressive investors their armed with all this
10:05information and they’re actively trading they’re using the speculative approach
10:09if you will and they’re actively trading in making all these decisions and he
10:12says it’s so is everybody else thats armed with that same amount of
10:16information and what he finds his these guys are going after trying to get a 12
10:23or 15 percent return are the higher end of this return to what they actually get
10:27his return is slower than the defensive investor who’s really just kind of going
10:31after may be called a seven percent return maybe a little lower in today’s
10:35markets then when Graham wrote this is back then you were at different you know
10:39interest rates in different multiples and stuff but now I think if you’re
10:43you’re going for 7% these days you might be stepping into something really risky
10:47I call this the activists actually if you read the book he was sometimes
10:51called the in surprising investor or the aggressive like I remember the first
10:56time I read this book I was like investing are there there’s only two he
11:02just uses a bunch of different rooms before lunch as well as a one one quick
11:06thing i really respect him as one of the biggest things in terms of investing as
11:11a writer I’m not really sure that was his forte you know you glad you brought
11:17this up because people need to be prepared cuz if you’re listening to this
11:20and you go out you buy his book it’s not an easy read it’s quite dry it’s
11:25difficult if there’s financial terminology that you’re not familiar
11:29with you’ll probably really struggle with this book even though it’s the
11:32dumbed down version of security analysis I remember the first time I read this
11:36because I didn’t have a background in financial accounting and things like
11:40that man that I struggle with this book I mean it was brutal I just knew is a
11:45really important read as Warren Buffett and all these other guys it said it was
11:48so important man when I first picked it up and said trying to read it I
11:52struggled it was very difficult
11:55yeah it is funny because in financial accounting us as many out is no we have
11:59a lot of different sense for the same things and obviously gramm you though
12:03he’s a professor he’s used teaching people he was just use all the almost
12:07like them or different terms for the accepted the same thing the better so
12:11it’s definitely not your jaw hurts textbook but just one quick thing I like
12:16to say about the active investor is that he would be saying bye unpopular stocks
12:22and the winner Ben Graham looks as though is that he’s showing people at
12:26staple of PE ratios and he’s actually saying and this is i think i read the
12:30book is written 1949 and already back then he was conducting studies in terms
12:35of how well companies perform if there is in this discipline terms of PE and I
12:41think he was just so much ahead of his time because he didn’t have a computer
12:44or anything like that disposal he just thought this would make sense then had
12:49conducted a lot of research in South OKC probably by a popular stocks mentioned
12:54on the on the p/e ratio basis I think that was really interesting in the last
12:59active investor and and this is something to return soon later in the
13:03broadcast is that he is always comparing price and quality he saying as an active
13:10investor welcome i buy high-quality companies but also by local it depends
13:15on the price so I just think that’s really the discussion customers reforms
13:20to talk about discount rate and the earnings thank all that is good is fine
13:26but we have to speak about what is the valuation and that’s why we have this
13:31conversation between the two of us and we’re going to talk a little bit more
13:34about intrinsic value later in the episode and you know we have a tool for
13:38calculating that stuff will hand off do so if you’re wanting that just stay
13:42tuned we’re going to get to a year later on so the next thing we’ll talk about in
13:46this group of chapters that were discussing right now which is 137 is
13:50inflation in corporate earnings so Rams opinion was that stocks are companies
13:57were somewhat inflation proof not a hundred percent inflation proves I don’t
14:03think that if you buy a stock that it’s going to be protected completely by
14:08he said that a portion of it is protected now he doesn’t really kinda
14:13get into how you would sawyer figure out a mathematical number of how much of it
14:18is or is not be saying if you’re comparing it to a bond a bond is 100%
14:23impacted by inflation so in Jim Rickards talked about that a little bit in our
14:28interviewer he was saying you know if the inflation rate is is 5% in your
14:33interest on your bond is 3% well the person who who owns the bond is getting
14:38tore up there just getting crushed because the inflation rate is exceeding
14:43the money that they’re actually getting back so with a stock grant doesn’t say
14:48how much but you’re partially protected from that inflation peace now it’s
14:52really interesting I can’t remember the year that Warren Buffett Rule
14:55shareholder letter discussing this exact topic that Buffett talks about why that
15:00exists why companies are somewhat inflation protected and where Buffett
15:04gets into it is a company that has a lot of intangible assets on their balance
15:09sheets they’re actually protected more from inflation than a company that has a
15:14lot of tangible assets on their balance sheet and his reasoning is when the
15:18company has to replenish their inventory or they have to replenish their property
15:22or whatever that tangible asset is on the balance sheet when they had to
15:26replace that they have to pay the higher price of the inflated price of whatever
15:31it is that the replenishing it with it said that portion of the company’s
15:35revenues that then support the balance sheet sustainment and things like that
15:39thats whats impacted by inflation whereas if let’s just say you had an
15:43intangible asset like a brand or maybe digital media that you’re selling on the
15:48internet or something that the price can just be simply adjusted to the inflated
15:53price and you’re not really have to deal with inventory or anything like that
15:56where you’re having to pay a higher price so that’s where Buffett kind of
16:01went and took grams idea and took it to a whole new level now here he is taking
16:06his professors content and just elaborating on a more just kind of you
16:11can see how he does blossom some of this information that he learned as a young
16:14kid and
16:16just ran with it as an at all later on in his life if you ever heard it Warren
16:20Buffett talk about the intelligent investor who would say you need to reach
16:24after eight and you need to reach up to 20 so that’s also why I decided to have
16:29these four segments and one of them is 28 Mrs Mr market
16:34let me just try to describe the way that Benjamin Graham I describe this in his
16:39class so the way he like to describe it is he say imagine that you’re at your
16:44house and you’re just kind of sitting there reading the newspaper on your
16:47chair and the doorbell rings and so you go over and you open up the door and
16:52there’s a gentleman there he’s dressed up in a suit in his name is Mr market
16:56and so mister market comes to your door literally every single day
17:00the same time he rings the doorbell and he says hey I’ve got these companies
17:04that I want to sell you and he says I’ve got this one here it’s called XYZ and
17:09I’m selling it for $30 today yesterday it was $35 but today I want to sell it
17:15for 30 and he says I have company no ABC yesterday I was selling it for ninety
17:21per se i 100 for this one so the way he was describing it as each day this guy’s
17:28gonna come back with a different price sometimes he’s gonna one more sometimes
17:32he’s gonna want less sometimes he’s gonna want way less and you as the calm
17:39competent insistent balanced thinker that you are need to listen to what he’s
17:46offering you and then make your own conscious decision on what something is
17:51worth so whenever he comes and says company XYZ and it’s you know he wants
17:56to sell it to you today for $30 that’s his offer now what do you think it’s
18:02worth if you think it’s worth $50 will offer it to you for 30 well that’s a
18:06heck of a deal and you you should maybe buy some of that from him because he’s
18:10offering you agree price now the other company ABC if you want a hundred and
18:15you think it’s worth 75 why in the world would you buy that if he’s offering it
18:19to you for under that makes no sense and said this is the example that he would
18:25use in his classroom to teach students that it’s a choice the price that you’re
18:32being offered on the market is a choice for you to determine whether you think
18:36that’s a good place or a bad price
18:38we using your own analysis of what you think something is worth or the value of
18:43the intrinsic value would stick is talking about the prices just that it’s
18:48an offer it somebody saying hey I’m gonna sell you my car for $35,000 even
18:54though you could go to a lot right next to him by 4:25 it’s an offer you don’t
18:58get upset you don’t get angry does kinda look at it for what it is like a it’s
19:02about offered thanks and that’s why that chapter is so important so incredibly
19:07important facts exist in the interest of the book that Warren Buffett provides
19:11the preface that is one of the Warren Buffett made four points onus on a
19:17treatise out loud that says investing doesn’t require a high IQ Warren Buffett
19:22says successful investing as a result of implementing a sound strategy being able
19:26to control your emotions this book the Intelligent Investor provides the
19:31strategy and you need to provide the emotional control the next one is paying
19:35attention the chapter eight chapter 20 which we’re just talking about Chapter
19:40II and then the last one which is a really interesting point is outstanding
19:44results depend on three factors intellect effort research and the number
19:49of market swings you get the opportunity to experience and there is how he says
19:54the opportunity to experience a market swings so when you have a major downturn
19:58away Warren Buffett looks at that is an opportunity because he knows that price
20:03and value are completely out of whack and that’s his ability to really time to
20:08take advantage of the opportunity so thats chapter 8 it’s all about mister
20:13market its understanding that you’re being offered opportunities it at every
20:17single day there’s an opportunity because every single stock is priced at
20:21a different level and all these different emotion yeah now just want to
20:25ask you a quick question here president because this is a very public Christian
20:28so giving what you have told us about mister market and I heard you can time
20:34the market so the two opposite sassou paradox or other two different things I
20:39don’t see that is being two different things that also my opinion is not
20:45timing anything we should do now as you’re looking at all the different
20:48opportunities that exist at time now
20:52so as I look at a bond ten-year Treasury there’s all sorts of different bonds you
20:58got federal bonds you got corporate bonds communities you got all these
21:01things that all have a different level of risk that if I was gonna do it would
21:06love it was described as a zero risk investment that’s the ten-year treasury
21:10that’s giving me you know a one-point what is it 1.7 percent return somewhere
21:16around in that ballpark when I look at the you s equity market it’s almost it’s
21:20it’s 17901 the 26th of April when recording this has for me is very high
21:26but when you figure out what return and I’ll give you based off the the new
21:31earnings you’re at about 4 percent return where it’s been for the last year
21:35ever since we’ve been reporting this podcast it’s been four percent return it
21:39hasn’t really moved very much so when comparing those to this is the key point
21:44the yields are drastically different ones giving you double the return of the
21:48other but you have a lot more risk associated with one versus the other so
21:55now you ask yourself and this is where it becomes different for each person and
21:59every person’s gonna see this differently is the extra risk associated
22:03with owning a stock worth the extra two percent return that I’m receiving
22:09compared to a fixed income no zero risk investment you were talking about
22:14inflation is impacting bonds completely so if inflation which is inflationary
22:20now stick 1.7 it’s about the same yield is about the same yield is the ten-year
22:25Treasury so that now takes my return on the on the fixed income bond down to
22:30zero and then I have to say that some of that is actually impacting the stock as
22:36well it wouldn’t be the whole 1.7% in maybe half of that or something tonight
22:42you’re really looking at is your percent return to 3 percent return this is my
22:46thought process as I’m going through that and then I say is 3% and i’m
22:51looking at it and then a real terms here is 3% worth my risk of owning the stock
22:56market right now fully knowing that everything’s pretty much being
23:00manipulated by central banks at this point
23:02and I would say maybe not i mean that’s really kind of a hard question and I
23:07think that it’s not something that I can really say with a lot of confidence that
23:11I feel one way or the other I just think that there’s a lot of risk in equity
23:14markets just because of how much they’ve been manipulated when I look at how
23:18equity markets have been in am talking about the stock market and the stock
23:21market has been completely manipulated through quantitative easing those are
23:25the things that I think about from a macro standpoint to a micro standpoint
23:28to timing the market which cigs really kind of getting to with this question I
23:33look at it from what are my other options you better believe I’m
23:37constantly looking across that array of choices whether it’s fixed income
23:43equities commodities currencies what’s going to give me the best return at any
23:48given point I’m making that choice I’m not timing anything I’m just looking at
23:53what’s gonna give you the biggest yield yeah and I’m really happy a set that
23:56precedent because when people listen to the podcast hopefully there won’t be
24:00thinking okay so what Christmas days talking about is that if the Japanese
24:06central bank does this then this will have any influence on my portfolio
24:09that’s not what we’re saying and that’s different don’t want to talk to them I’d
24:13like that what I’m saying and will present the saying is that ok so when
24:17you are buying a car
24:19what’s the value of that car what’s the price of the car and that’s what we’re
24:22doing what stocks you don’t think about the stock market due tomorrow and I
24:26think a lot of people over thinking the question of can you top of the market
24:30you probably shouldn’t thinking like that you should be thinking what does it
24:33cost and what’s the value and just stop your thought process there and if you
24:37find good bugs you probably better off and time will really take the rest for
24:41you in a really gets back to the fundamental thing that gramm’s talking
24:44about in this book is are you speculating are you investing because if
24:49you’re investing you’re protecting your principal you’re putting your money in
24:54the things that you have no idea how it could go wrong that’s investing is when
24:58you’re saying hey this looks like a very good sound investment that has been
25:03consistent returns over time that concludes chapter eight let’s go to 919
25:09and kinda hit some of the high points here
25:11so if we should label chips in 92 chipped in nineteen is truly about how
25:16to find the right stocks and Ben Graham he’s much more specific in these chats
25:21as compared to the first seven chapters of miscrits serious just set up but the
25:25first thing I would like to talk about is him explain what is a discount rate
25:30and what is normalized earnings why is that important in determining the
25:34intrinsic value of a stock soon the thing that I was kind of surprised with
25:40in getting kinda to what sticks referring to here with the discount
25:42rates and when you’re reading security analysis which was his big first text
25:47book a lot of it was all about fixed-income bonds I’d say what the
25:52first 25 chapters are almost all about bonds and fixed income investments with
25:57this book with the Intelligent Investor it’s really kind of hope is to Ward’s
26:01common stock in really kind there’s some discussions about bosnia really he’s
26:06he’s talking a lot about stock investing
26:09and so he does not come out and say this is how you calculate the intrinsic value
26:13stock he doesn’t do that and what he does do is he talks about a discount
26:17rate talks about really kind of just looking at multiples of earnings to
26:23price and so let’s talk about intrinsic value and discount cash flow and all
26:29that kind of stuff so when you talk about free cash flow of the business
26:34that is the cash that’s left after everything is paid for and it’s the cash
26:40remaining in the bank account this number is so important because at the
26:46end of the day the money that the company brings in at their top-line
26:49their revenue that’s what is referred to the sales revenue there’s a different
26:54terminology and that’s where accounting kinda gets a little bit confusing cuz
26:57you hear people throw around these terms and sometimes they mean the same thing
27:00but your top line that if you had a let’s just say your business was selling
27:04pepsi’s in you charged $1 for a drink just to make the numbers easy that $1
27:11that you would receive is called the revenue or the sales at your top line
27:16whenever we say top-line that’s what we’re referring to that’s the $1 then
27:20after you pay your employees you pay for the medal in the can you pay for the
27:24sugar you pay for all the ingredients that make the drink all that stuff you
27:27pay your taxes after all that stuff is stripped away from that one dollar in
27:31that sale that top-line number you get to your bottom line which is your net
27:36income and that number might be ten cents and now they would make your 10%
27:41margin that’s what we’re talking about is that top-line and bottom-line number
27:45of what the company is able to retain from their sale so when you talk about
27:50free cash flow you’re really kinda getting into that bottom number that net
27:54income but she also have depreciation all these are the things that New York
27:58accounting for your eventually come into what is the company able to retain in
28:02cash after everything is said and done and that’s the number that’s important
28:08for determining the value of the business over time so when we look at
28:11the company’s free cash flow let’s say that we’re just gonna talk whole numbers
28:17of a business let’s say that a company is able to have a million dollars in
28:21free cash flow
28:22low this year and then they had $900,000 of free cash flow last year and the year
28:28before that they had $800,000 a cashless you can kinda see the trend here is that
28:33the companies basically adding $100,000 cash flow every year that’s a good thing
28:38that’s trending in a in a good direction that’s what you’re wanting to see when
28:42you’re looking for a business is determining that free cash flow so when
28:47you see that in there is no guarantee there’s absolutely positively no
28:52guarantee that that company will have that kind of cash flow moving into the
28:56future with what you’re looking for is a business that has some type of
29:00sustainability stability to it that use your reasonable expectation that in the
29:07future you can expect the same results so one that’s taking I really like to to
29:11use as coca-cola this is a company that has pretty stable results you can go
29:16back now there’s gonna be some fluctuations here and there is you the
29:20listener listening to this is your expectation that next year
29:23coca-cola’s going to continue to sell just about the same number of soft
29:28drinks if the answer is yes then that’s the tunnel company that we’re talking
29:32about the you can reasonably assess the value of it now appearance a pic of a
29:38business you think would be really volatile that you would say yeah they
29:41made a lot of money this year but maybe next year I’m not so sure they could
29:44maybe pull that off again those are the companies that Buffett doesn’t even try
29:49to figure out the value over Benjamin Graham try to figure out the value of
29:52because it’s really kinda hard to put a value on it now if the price is low
29:57enough yeah they’ll try to evaluate but for the most part they’re trying to find
30:01that steady stable business that they can actually determine that say I think
30:06over the next ten years they’re going to continue to have this kind of free cash
30:09flow and because of that they feel like they can have a lot of confidence in
30:14their ability to take those out up all his cash flows and then discount them
30:19back to today’s present value did they try to determine what the value is
30:22somewhat when we talk about a discount rate this is the thing you understand
30:26when you add up all your future cash flows so let’s just say next year you’re
30:31gonna earn a million the year after that you’ll earn a million and you go
30:35ten years into the future so you’re gonna make ten million dollars over the
30:38next ten years and what’s that ten million dollars over the spread across
30:43the next 10 years into the future
30:45worth today that’s the key thing you gotta figure out what’s it worth today
30:49opposed to the value ten years from now so in order to figure that out you need
30:55what’s called a discount rate in order to calculate what it is today we have
31:00this in all of our books we talk about this on Buffett’s books in fact we have
31:04a calculator though I’m actually figures this out for you on Buffett’s books will
31:07have a link for it in the show notes if you want to go play around with it but
31:10what you’re doing is you’re adding up all those future cash flows using a
31:14discount rate and so the discount rate that you typically use or the Buffett
31:19recommends that you use is the ten-year Treasury when you discounted back
31:23whatever interest rate you choose and I think the starting point is always the
31:27ten-year Treasury you bring that back its gonna say that the stock is worth
31:31$100 or $50 you obviously have to divide out the number of shares outstanding
31:36so this is kind of a process if you will and we have videos we have detailed
31:42videos that teach people how to do this and to be honest with you gramm doesn’t
31:47get into this level of valuation in his book he talks about it he says you need
31:53to do
31:54discount analysis you need to figure out what the present values today based off
31:59of the expectations of the company to earn in the future but he doesn’t get
32:02into these equations he doesn’t get into the math behind us and that was one of
32:06my frustrations with this book because I wanted to get into that I think for a
32:10lot of people out there they hear the discussion of how do I do this
32:14yeah you definitely representing because we all looking for that one stroller
32:18just tell us with insurance evaluate us compare that to the current market price
32:24but unfortunately is not that simple so we talk about the Disco is first how I
32:30teach my students to look at this is i teaching them about the opportunity cost
32:34first of all so it’s really important that’s also why Warren Buffett use of
32:40the ten-year treasury because that is an opportunity cost a risk-free investment
32:45intuitively that’s also
32:47Obagi would rather 11 told today that in a year because you had the chance to
32:51invest that dollar and get a return from that or that one year another thing to
32:56include is inflation if we have a high inflation would everything else demand a
33:01higher return on our capital also think is important to look at risk and compare
33:07that to the discouraged that using and the heart thing about this that there
33:12are no finite number that just say this is the perfect measure of risk and I
33:18think one of the best examples I come up with is that a lot of people have
33:21approached me and want to help me raise capital to their style company and
33:25whenever you are you in such a process and you would usually
33:29to raise capital to have to consult with them about so what do they think their
33:34companies worth how do they come up with the valuation of the company
33:38this all come back too discouraged because they were showing me all these
33:42graphs and all these prospects of how much money they will make and that might
33:47be all right but it is extremely risky it extremely uncertain and you the
33:52highest cash flows when you disconnect with the appropriate discount rate if
33:56it’s a risky company like a startup you’ll just see that that is complete
34:01reflected in the intrinsic value so if it helps with you to understand look at
34:07the discount rate and the earnings of the castles of Christmas talking about
34:10the four as two sides of the same crimes you have earnings but they have to be
34:15discounted giving the risk inflation opportunity cost so let me talk about
34:21where I kinda have a different opinion than Buffett and not necessarily
34:25grandpa’s gramm doesn’t necessarily say that it needs to be a ten-year Treasury
34:29use this discovery that’s much more Buffett that saying that I disagree with
34:34Buffett on that I think that the discount rate should actually be the the
34:37current yield of the S&P 500 that’s what I think should be used when you’re
34:42comparing an individual stock picking the reason I had that is because the
34:47reason I have that opinion is because of this if I go and I stick an individual
34:53and I use in today’s example
34:56ten-year Treasuries 1.7% that’s gonna give me a much higher intrinsic value of
35:02a stock using a 1.7 percent discount rate then using what we think the
35:06current S&P 500 yield is which is 4% so if I use four percent compared to an
35:12individual company I’m actually gonna get a lower intrinsic value on that
35:17business because I used hired this country now the reason why I’m saying
35:21use the S&P 500 is because if you took an individual stock and you compared it
35:27to the S&P 500 you made both of them have the same yield in this example 4
35:32percent discovery I’m gonna tell you every single day of the week that the
35:37S&P 500 is lower risk than an individual company so why in the world would I use
35:44the discovery of the ten-year Treasury when I could be using something that’s
35:47giving me a more match if you will risk the end more conservative price estimate
35:56by using the current yield of the S&P 500 I think that’s a much more
36:01appropriate discount rate that’s giving you much more conservative estimate
36:05that’s apples to apples kind of estimate a because you’re using equities and be
36:11because you’re actually getting a much safer or much more appropriate risk
36:17appetite comparing a basket a 500 stocks to an individual stock but that’s my
36:22opinion I’m curious here with stick thinks about that idea well the thing is
36:26a good point that you have Preston and also thought about so if we do use the
36:32ten-year treasury does that mean that there is no risk and then you think
36:35because a solo I can see that the interest rate would work and saw
36:39territories but it doesn’t work today and perhaps at the time but it was
36:44saying it in my particular context and the interest rate might be allowed
36:47higher so I just think if you return to what you said before pressing when you
36:51said four percent for this be 500 to listen to the Treasury it doesn’t mean
36:56it’s just twice as a good the best way for me to explain this is that you hear
37:00about if you do have a
37:03a third percent higher chance of this disease that might be right but you know
37:07a third of a cent increase of nothing is still nothing I think that would be my
37:13take on some stuff explain what is the opportunity cost here because I’m
37:17looking at this opportunity cost and if you just picking an individual stock
37:22obviously there could be a management issue or they could be like something
37:27catastrophic have this company but if you own S&P 500 you own all the
37:31companies and you don’t have to spend time on it so I definitely see where you
37:34are where you come from this press with this idea can have originated with was I
37:39would get frustrated cuz people would go and use the intrinsic value on our site
37:43and get these emails and all these messages from people needs they would do
37:47the analysis they were calculated the value and they’d be using the ten-year
37:51treasury and it was like yielding you know 1.7% and they’re figuring out the
37:55intrinsic value these companies using a 1.7 percent discount rate because that’s
37:59the way Buffett says and they begin is really high market prices for different
38:04companies because this is the easiest way to understand it the lower that that
38:08discount rico’s the higher your intrinsic value numbers going to be on
38:12the company so is these interest rates continue to be manipulated by the
38:17central bank syndicate pushed closer and closer to zero the intrinsic value of
38:21all these stocks just get pushed to the moon you know i mean they just go
38:25through the roof and so i’m looking at that in a person would be saying yes
38:29company XYZ is worth a thousand dollars a share
38:33discounted at a 1.7 percent discount rate and I’m thinking man yes yes it is
38:39but you’re not accounting for the fact that with the Treasury you you’re gonna
38:44get your money no matter what the federal government’s gonna pay that back
38:47you’re going to get the coupon with the company you have no there’s tons of risk
38:52that the company may not be able to get those earnings and then you’re only
38:55discounting at 1.7 percent which is giving you this crazy price so that’s
39:00whenever I was like there has to be a better discount rate than the ten-year
39:04treasury that’s representative of a and equity to equity in this is totally
39:10geeked out on you when you’re talking about a bond you’re talking about a
39:13finite financial instrument
39:14it’s something that that will mature on a fixed date when you’re talking about
39:18an equity it’s something that goes into perpetuity
39:21so you’re already comparing apples to oranges as far as I’m concerned because
39:24you’re comparing a fine instrument to an infinite instrument when you’re talking
39:28equities and fixed income so I wanted something that was different than that
39:31that comparing apples to apples equities equities if you will and I also wanted
39:37something that had that compared a stock to start but it was also taking into
39:42account the risk appetite so for me when I look at the S&P 500 if you can’t match
39:49if you can’t match that price and in fact if you can’t beat that price why in
39:54the world are you taking in individual stocks over the S&P 500 if you can’t
39:58beat it and so that’s why I like using the current yield keeps killer I know
40:03that the people listening as may be frustrated I think there’s a few people
40:06out there that are listening to this that are maybe really enjoying the
40:09conversation because we are really getting into the weeds and some hardcore
40:14finance and accounting type stuff but this is really important if you’re a
40:19person is actually calculating values of businesses and not just kind of
40:23selecting things on an emotional level but you’re actually doing some math to
40:26figure things out and to be honest with you one of the first things the gramm
40:30talks about in this book is if if you’re an investor and you’re figuring out the
40:35value something there needs to be math associated with what you’re doing it so
40:40that’s why we’re really kind of going down this path and talking about the
40:43math behind terming the value of a company yeah just continuation that
40:49person I’m sure you experience the same but I get so many emails that talks
40:52about the intrinsic value and also hello emails from people say could you discuss
40:57that more in the show so good news and bad news we just did that and you just
41:02saw how complicated it is and also wanna say it has something to do with the
41:05participating because we thought about this man’s house before she would talk
41:07more about the value and you can just hear that we’re talking about this we’re
41:11talking about grass we’re talking about math a podcast is just really hard
41:15medium to explain that and if it just comes another example so if you look
41:20specifically in the Intelligent Investor then been crammed with say you can use
41:25these rule of thumb when you’re looking at earnings you look at those limited to
41:30ten years and then you would wait and different compared to how long has been
41:34since they had earnings now I’m sure a lot of people would understand what
41:38about asset here but it is not difficult to explain but it’s difficult to
41:42illustrate and simplify speaking on podcast so that would be my disclaimer
41:47for not doing it before so if you really frustrated about this competition
41:52espresso set before we have some videotape illustrates this is not
41:55because we don’t want to talk about the podcast but it’s hard medium to do so
42:00yet definitely go to the show at this stuff picture interest you wanna learn
42:03more about it or shown as we have links to the intrinsic value calculator which
42:08has the video is on the same page that teaches you how to where to find the
42:12data to plug into the calculator how to think about some of the stuff we got all
42:17that on the on the web sites just go to the show and it’s so we’re gonna skip
42:21over a bunch of the stuff between those chapters and directed chapter 20 which
42:25is a really important discussion one of the chapters that warren buffett said
42:28that we need to focus on in the Intelligent Investor thats discussion
42:32about margin of safety and how important this is to investing so the best example
42:38that I think Buffett provided that people can easily conceptualize and
42:42think about is the idea of a truck crossing over a bridge too but it’s as
42:48if your gonna build a bridge that can support 10,000 pounds and drive across
42:53the bridge how strong would you build a bridge would you build it so that it was
42:58ten thousand and one pounds that it would support you build the bridge so
43:03that it would be a good sport 15,000 pounds and it’s such an easy discussion
43:09for people to have but it doesn’t necessarily have an answer
43:14it’s really kind of a mean if I was the person building the bridge and say ok
43:18what confidence level do we have that the trucks gonna wait ten thousand
43:21pounds will kinda whether we can have and what kind of environmental
43:25situations that we have in this area where the bridge is gonna be built
43:29there’s all these different considerations have been at the end of
43:31the day you’re gonna kind of make a swag if you will as to what margin to see the
43:38year comfortable building the bridge yet so you know off the top of my head and
43:42say I will build it for fifteen thousand pounds of the heaviest vehicle gone over
43:4610,000 that were you have your margin of safety so when it comes to investing
43:51it’s the exact same thing is you’re wanting to buy a company and you can get
43:56two percent return on it on a ten-year Treasury and a company is priced at a
44:03two percent yield
44:05it’s a no brainer you by the ten-year treasury because the yields of the same
44:09this is assuming that inflation is is nothing just ease so that’s an easy
44:14decision because the bond is a lot lower risk than the equity for the stock and
44:19that’s where he’s getting into this margin safety so how much above that
44:24ten-year treasury prices soar above the you you’d expect to get out of the S&P
44:29500 how much above that you need in order to make a selection on an
44:34individual stock pick so if you’re out there and you’re dating the intrinsic
44:39value of General Electric and I don’t know if the intrinsic value generalities
44:43but let’s just say the you determine it is 5% or 6% is that margin that one or
44:50two percent is that extra one or two percent above the S&P 500 giving you a
44:54four percent return worth your risk I can’t answer that I don’t know that’s
45:01completely up to you to determine what that margin of safety needs to be in
45:05order for you to make that selection but thats would buffett’s getting into here
45:09where you’re you’re jumping from one risk scale to the next where S&P 500 is
45:15lower risk than the individual stock pick in the ten-year treasury is less
45:19risk than the S&P 500 you have to make that determination of where you’re
45:23satisfied assuming more risk for the yield that you’re potentially going to
45:28get that’s a keyword potentially going to get and it’s really kind of up to you
45:33to determine that I think the discussion and for a lot of people just thinking of
45:37things in that context is a really important to stick imperious to hear
45:42your thoughts on this margin of safety stuff
45:44well I think I agree the person actually if you saw I was either forcing
45:51something it wasn’t so much about the homogeneous safety it’s one of those
45:54things that either you get it or just don’t think the vast majority of people
45:59out there that was saying rich 10,000 pounds fifteen thousand pounds it makes
46:03a lot of sense and then you have other people in the might not listen to this
46:07podcast saying oh so I saw that the stock was down 4 percent yesterday so
46:12it’s probably gonna bounce today I mean it’s just different ways of looking at
46:16stocks and if you accept the whole notion above that price and value is two
46:21completely different things I think the margin of safety because it is extremely
46:26powerful but also thing is so simple that if you have the right mindset you
46:30could probably have figured the whole thing out faster than we could explain
46:34it because it’s just so obvious but if I should talk about the intelligent
46:39investor in general rule and when I was missing because I would really like a
46:43discussion about competitive advantage and in one who knows about gramm now
46:49percent stake that doesn’t make any sense that you say that because Benjamin
46:52Graham he’s very core insists he’s not saying this company do well because they
46:57have valuable intangible assets or he would not be saying this company would
47:01do well because they have a strong brand that’s not his type of investing just
47:05wanna throw that out to you guys out there if you looking for D one book and
47:09you heard about everyone saying should be the best because that’s where you can
47:14really see a big investment philosophy now say yes the latter is true this book
47:18is a virus HCV investment philosophy Justice Warren Buffett but still if you
47:23want to do
47:24active investing and if you want to do active investing like Warren Buffett is
47:28doing then you also need to have the qualities of pot included and I think
47:34that was something I was missing from from this book i second wraps up our
47:40summary the Intelligent Investor one of the things that I want to throw out
47:44their tour audience ticking higher kind of working on creating more value for
47:48our audience building new things into our website and things like that so
47:52one of the things it we talked about a few times on our show is when we look at
47:57our own personal business we kind of break it into two different segments you
48:02got the the operational side where you’re creating assets like this podcast
48:07this is an asset for us that’s reading a cash flow for are you know our personal
48:12business you might have a business of your own you might have a
48:15brick-and-mortar story might have a digital online store whatever it is
48:19that’s creating a caste flew for yourself once you create that cash flow
48:23you then have to be able to invest the retained earnings of that cash flow and
48:28that’s what we’re typically talking about on our show is that second part
48:31where would you do with this money once you have it whether it’s your salary
48:36whether you’re on business and like today we’re talking about investing in
48:39stocks were talking about how do you take that cash flow and purchase another
48:44asset that somebody else has created in order to own a piece of equity in that
48:49business we’re trying to do is talk to people and maybe teach people how to do
48:56that first part where you’re creating online assets are you’re creating equity
49:01in some type of business or you’re doing something that’s creating a cash flow
49:06stream for yourself and so in order to do that what we’ve done is is we’ve
49:10gotta do mean that’s going to point you back into the investors podcast website
49:15but we’re trying to create videos and tutorials in order to teach people how
49:19to create income
49:22specifically passive income because that’s what we’re that’s what a lot of
49:25our assets are for yourself and so we purchased the demand create passive
49:31income as you type that into your web browser create passive income it’s going
49:35to take you to a page where we’re creating tutorials and video courses for
49:39people to learn passive income investing stock investing all sorts of things but
49:45if you go there to create passive income you’re gonna be able to see some of the
49:49products it’s taking iron ore building so one of the products that state just
49:53recently bill is a chapter by chapter video course of the Intelligent Investor
49:59so let’s just say you got you buy this book that we just got done discussing
50:03and you’re going through and it’s difficult for you to understand stick
50:06created a chapter by chapter course video-based course where he teaches
50:12literally every chapter of this book so that’s something you be interesting go
50:16to create passive income dot com and you can see the course that stayed till
50:20we’re actually creating other courses in the process on the little bit slow not
50:25as quick as stick but the process of building a course on how to how to stand
50:32up and create your own podcast so if you’d like to do maybe you maybe your
50:37specialization in hunting or whatever it is I don’t know and maybe you want to
50:42create your own podcast and talk about this kind of stuff I’m trying to create
50:46a tutorial video that shows you all the equipment we use kind of how we do our
50:51share all that kind of stuff but that’s something that we’re trying to build out
50:54for community so that you can start creating different online assets digital
50:59assets for yourself if that’s something you want to do if not no sweat you can
51:03just completely ignore all that I want to throw that out there for people so
51:07that they know that it exists so that concludes our episode for this week on
51:12the intelligent investor who for you guys enjoyed our conversation we
51:16apologize if we got a little too technical over the audio format but if
51:20we did and you wanna see more stuff on video we got the buffets ebooks
51:23tutorials which are completely free all the calculators all that stuff is free
51:28of links in the show notes for that so thanks for joining us this week and
51:33we’ll see you guys next week thanks for listening to the investors bought gas
51:38to listen to more shows or access to the tools discussed on the show be sure to
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51:54answered during the show you’ll receive a free autographed copy of the Warren
51:57Buffett accounting book this podcast is for entertainment purposes only

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