Podcast Summary
Tobias Carlisle celebrates Acquirers Fund ETF's third anniversary at NYSE: Despite market volatility, Acquirers Fund ETF survived and celebrated its third anniversary at the NYSE, an achievement rarely seen for ETFs, thanks to fewer IPOs and market downturn.
Tobias Carlisle, the founder and managing director of Acquires Funds, recently rang the opening bell at the New York Stock Exchange to celebrate the third anniversary of the listing of the Acquirers Fund ETF. The occasion is significant because most ETFs fail by the third year, and the experience is usually limited to prominent individuals or those listed on the exchange. Despite the market volatility, the occasion was made possible due to fewer IPOs and the current market downturn. It was a fun experience for Tobias and his family, who also got to explore tourist attractions in New York City. While the interview primarily focused on market conditions and investment strategies, this anecdote showcases the unique opportunities and experiences that come with being listed on the stock exchange.
Stig Brodersen reflects on CNBC Delivering Tomorrow event, Joe Percoco discusses market valuation and past bear markets: The market remains expensive but can still experience rebounds and reach new highs, past bear markets featured numerous large bounces followed by lower lows, testing investor patience and confidence.
The CNBC Delivering Tomorrow event was a memorable experience for Stig Brodersen, despite some artificial elements. Meanwhile, Joe Percoco discussed the current state of the financial markets from a valuation perspective, explaining that while the market is still considered expensive, it doesn't prevent it from experiencing rebounds and reaching new highs. He also compared the recent market fluctuations to past bear markets, noting that the characteristic of those significant downturns is the presence of numerous large bounces followed by lower lows, which can test investors' confidence and patience.
Focus on undervalued stocks and solid balance sheets for potential gains: Stay informed, stay disciplined, and look for value in the market during uncertain times, as undervalued stocks with solid balance sheets may provide potential gains and unexpected opportunities may arise in seemingly 'luxury' sectors.
Despite the uncertainty of market movements, having a well-thought-out investment plan and focusing on undervalued stocks with solid balance sheets can lead to potential gains. The speaker believes that the spread between the valuation of undervalued stocks and the index has never been greater, indicating a potential for a value rebound. Additionally, consumer behavior during economic downturns can lead to unexpected opportunities in seemingly "luxury" sectors. The speaker emphasizes the importance of avoiding businesses with unsustainable models during economic uncertainty. Overall, the key takeaway is to stay informed, stay disciplined, and look for value in the market, even during uncertain times.
Focus on underlying businesses, not market noise: Investors should focus on businesses, not market conditions, and remember that history doesn't always repeat itself linearly. Paying a premium for cash is a sign of a speculative market, while a discount may indicate low expectations.
The current market conditions are causing uncertainty and volatility, with the risk of a significant drawdown. However, Stig Brodersen emphasizes that it's essential for investors to focus on the underlying businesses rather than getting caught up in the day-to-day market noise. He also notes that the current market feels different from previous downturns, with some of the "easier money" gone and tech stocks selling off due to their further-out cash flows and higher valuations. Ross Gerber adds that the SPAC boom is leading to a situation where investors are heavily incentivized to complete deals, while outside investors want them to return the capital, leading to potential fireworks. Ultimately, the speakers agree that it's important to remember that history doesn't always repeat itself linearly, and that paying a premium for cash is a sign of a speculative market, while paying a discount for cash may indicate low expectations.
Navigating the uncertain market environment: Focus on individual companies, consider macroeconomic factors like rising interest rates, and prepare for potential changes in company valuations as the market transitions from a low-interest-rate to a higher-interest-rate environment.
The current market environment is uncertain and chaotic, and the relationship between stock prices and underlying company values can be disconnected. Buffett's advice to focus on individual companies is still important, but the macroeconomic environment, including rising interest rates, should also be considered. Cash, as a commodity, is influenced by interest rates, and the price of cash (interest rate) can provide some indication of future trends. However, it's important to note that the market's trajectory is influenced by the collective actions of various market participants, and it can be difficult to discern the reasons behind these actions. As we transition from a low-interest-rate environment to a higher one, value investors should be prepared for potential changes in company valuations. The long-term average interest rate acts like gravity on the stock market, and a significant increase in interest rates could have a substantial impact on discounted cash flow analyses. Ultimately, the uncertainty of the market requires a thoughtful and adaptive approach to investing.
Impact of High Interest Rates on Company Valuations: In a high interest rate environment, some companies may be worth less than their book value due to decreased future cash flows. However, not all businesses will be negatively impacted, and some may even benefit. Companies with high debt levels may struggle to refinance or roll over debt.
In an environment of high interest rates, most companies will be worth less than their book value due to the decrease in the value of future cash flows. However, it's important to note that not all businesses will be negatively impacted, as some may even benefit from higher interest rates. Additionally, businesses with high levels of debt may struggle to refinance or roll over their debt. Overall, valuations will inevitably have to come down, but the impact on individual companies will depend on their specific financial situations. It's essential for investors to consider these factors when assessing potential investments in a rising interest rate environment.
European economies contributing to weak Euro and US interest rates: Europe's higher inflation and interest rates, weak Euro, and volatile markets create challenges and opportunities for investors, particularly for value investors during market panics.
European economies, with less tight labor markets and different structures compared to the United States, are experiencing higher inflation and may raise interest rates, but not to the same extent as the States. This, in turn, is contributing to a weak Euro and capital inflows into the US. Additionally, in volatile market conditions, correlation between assets like the S&P 500 and deep value funds remains high, making it a challenging environment for value investors. However, these conditions can also create significant opportunities for value investors during market panics, as anything can be sold indiscriminately, and value tends to sell off before the market does. This was evident during the market crash in March 2020, where Ross Gerber's portfolio, which tends to have more cash and less debt, moved more than the rest of the market. Overall, these market conditions present both challenges and opportunities for investors, and it's crucial to understand the underlying economic factors and asset correlations to navigate them effectively.
Value stocks underperform during market crashes but recover: Value stocks sell off more than market during crashes but eventually outperform, benefiting long value strategies. Historically, first two-thirds of bear market sees one-third of drawdown, last third sees two-thirds. Long-term focus on cash flows and intrinsic value advised.
During market crashes, value stocks tend to sell off more than the market and recover more slowly. However, this behavior is not typical and value eventually outperforms again. In the 2020 market crash, value stocks underperformed significantly, but started to recover in September 2020 and performed well until April 2021. The speaker's investment strategy, which was long value and short momentum stocks, benefited greatly from this trend. Looking forward, the speaker is optimistic that value will outperform again during the current market drawdown. Additionally, the speaker believes that it's better for the market and humanity as a whole for stocks to trade close to their intrinsic value, and that the current drawdown may still have a ways to go before reaching normal valuations. The speaker also mentions that historically, the first two-thirds of a bear market see one-third of the drawdown in both time and magnitude, while the last third of time sees two-thirds of the drawdown in magnitude. The speaker advises against trying to predict the market's every move and instead encourages a long-term focus on cash flows and intrinsic value.
Long-term investment and risk management: Stay invested for long-term gains, minimize risks such as debt, questionable business models, and short selling to achieve strong investment performance.
Staying invested in the market for the long term and avoiding excessive risks, such as high debt, questionable business models, and short selling, are key to achieving strong investment performance. The speaker, Toby, shared his personal experience of underperforming as a value investor during a prolonged period and how the pandemic helped him rethink his approach. He realized that staying invested and surviving market volatility is crucial, as there are always opportunities to be found. He then went on to discuss the risks he identified in his portfolio, including debt, credit businesses with embedded liabilities, and short selling, and decided to eliminate them to minimize potential losses.
Switching from passive to active fund management: Active funds allow investors to have more control, offer tax advantages, and respond to market conditions, but require trust in the trading firm's expertise
The switch from passive to active fund management is more about form than substance. Active funds allow investors to have more control over their portfolio, cutting out the need for an index provider and having a sub advisor directly manage the portfolio. However, the practicalities of active management involve hiring a professional trading firm to execute trades on behalf of the investor. The investor sets the desired portfolio composition and the trading firm executes the trades to align the fund's portfolio with the model portfolio. The investor and trading firm communicate regularly to make adjustments as needed. Unlike passive funds, active funds offer capital gains tax advantages and allow for more flexibility to respond to market conditions and company-specific events. Despite the benefits, active management requires trust in the trading firm's expertise and market knowledge. As Sir John Templeton once said, "The 4 most dangerous words in investing are, This time it's different." While the current market conditions may differ from past bear markets, it's important to remember that historical trends and market principles still apply. The Fed faces a challenge in balancing monetary policy to support the financial markets while managing inflation. Active management may offer advantages in navigating such complex market conditions.
Deep value investing in inflationary times: Deep value investing can be effective during inflation, but eliminate potential total loss investments by checking financial strength and accounting manipulation, then seek the best risk-adjusted return from the remaining pool of investments. Focus on well-managed businesses with strong fundamentals, regardless of the macroeconomic environment.
Deep value investing, which involves buying stocks of undervalued companies with strong fundamentals, can be effective even during inflationary times. However, it's important to be cautious about companies with tangible assets that may lose value during inflation. Ross Gerber, a deep value investor, emphasizes the importance of eliminating potential total loss investments through various methods, including checking financial strength and accounting manipulation. He then looks for the best risk-adjusted return from the remaining pool of investments. While commodities may provide some ballast during inflation, businesses that require significant capital reinvestment and earn anemic returns may trade at a discount to their true worth. Buffett's past performance compared to gold suggests that it's possible that businesses may struggle to keep up with commodities during inflationary periods. Ultimately, Gerber's investment process is focused on finding well-managed businesses with strong fundamentals, regardless of the macroeconomic environment.
Focus on purchasing power and finding undervalued businesses: Successful investing involves finding businesses with good returns on invested capital, a margin of safety, and considering real returns, not just nominal numbers. Even great businesses can experience significant drawdowns, so it's crucial to buy them at a discount.
Focusing on purchasing power and finding undervalued businesses with good returns on invested capital and a margin of safety is key to successful investing. The speaker emphasizes the importance of not being blinded by nominal numbers and considering real returns, as demonstrated by Warren Buffett's impressive track record. However, it's important to remember that even great businesses can experience significant drawdowns, so it's crucial to buy them at a discount. The market cycle of the early 2000s serves as an example, where the underlying businesses of overvalued companies like Walmart, Microsoft, and GE continued to perform well despite stock price stagnation or decline.
Investing in businesses with high ROIC and low cost of capital: Find businesses with a large gap between ROIC and cost of capital for potential value creation. Be cautious with industries with negative sentiment but strong fundamentals.
Investing in businesses with a high return on invested capital relative to their cost of capital is key to making money in the stock market. However, this margin can be mean-reverting, so it's important to find businesses with a low cost of capital and a stable or rising return on invested capital. These businesses, which may be undervalued during difficult economic times, can create significant value as conditions improve. It's important to be cautious with certain industries, such as financials, which have faced negative sentiment due to past crises but can be attractive when they have strong fundamentals and improved balance sheets. Overall, the difference between a business's return on invested capital and its cost of capital is the true measure of its value.
Discover the benefits of Iflex stretch studio and high yield cash account: Iflex stretch studio offers affordable professional assisted stretching backed by scientific evidence, while public.com provides a high yield cash account with a 5.1% APY.
The Iflex stretch studio franchise offers an affordable solution for professional assisted stretching, backed by scientific evidence of increased flexibility and improved joint range of motion. The Mayo Clinic supports these benefits, making this an attractive investment opportunity in the rapidly growing health and wellness industry. Additionally, public.com provides a high yield cash account with an impressive 5.1% APY, a higher rate than many competitors. On a different note, during the discussion, Stig Brodersen expressed curiosity about the inner workings of an ETF, specifically regarding expense ratios. Joe Percoco, the adviser of the Acquirers Fund, clarified that there are various roles in an ETF, and the adviser is responsible for compliance and trading. The expense ratio covers these costs, and the money is typically reinvested back into the fund to maintain its performance. However, the specifics can vary depending on the ETF's structure.
Setting up and operating an ETF involves substantial costs and responsibilities for the responsible entity: Setting up and operating an ETF requires substantial costs, including exchange fees, audit fees, compliance, custody, and more, which can total several hundred thousand dollars per year. The responsible entity, often the sponsor, may need to cover these costs for the first 18 months before revenue covers them.
Setting up and operating an Exchange-Traded Fund (ETF) involves significant costs and responsibilities. The responsible entity, which could be the sponsor or a third party, is responsible for covering these costs, including exchange fees, audit fees, compliance, custody, and more. These costs can be substantial, totaling several hundred thousand dollars per year. For the first 18 months of a new ETF's life, these costs may outpace revenue, requiring the sponsor to cover the shortfall out of pocket. The breakeven Assets Under Management (AUM) for a typical ETF is $30 million to $50 million or more, but for a self-managed ETF with a slightly higher fee, the breakeven AUM can be lower. However, setting up and operating an ETF is a full-time business for at least 2-3 people, requiring significant resources and dedication.
The value of perseverance and adaptability in investing: Investing requires resilience and adaptability to thrive amidst stress and volatility. Success stories include Toby Shute's experience as a white-labeled investment advisor, Ross Gerber's journey in the industry, and inspiration from Sun Tzu's 'The Art of War'.
Importance of perseverance and adaptability in the world of investing. Toby Shute, a frequent guest on the show, shared his experiences as an advisor for white-labeled investment funds, where he pays the bills and bears the cost if they aren't paid. He contrasted this with his previous experience as an M&A lawyer and Stig Brodersen's background as a commodities trader, highlighting the stress and volatility involved in those professions. Ross Gerber, another guest, emphasized the importance of surviving and continuing in the investment industry to find favorable opportunities. He is currently writing a book about this concept, drawing inspiration from Sun Tzu's "The Art of War." Through their stories, we can appreciate the value of staying the course and being resilient in the face of challenges.
Lessons from Sun Tzu's 'The Art of War' during China's Warring States Period: Understanding self-control and moral leadership, as taught by Sun Tzu, can lead to success in various aspects of life. Maintain calmness and control emotions, exploit opponents' vulnerabilities, and uphold ethical business practices.
Key takeaway from the discussion of the Warring States Period in China and the philosophy of Sun Tzu's "The Art of War" is the importance of self-control and understanding the moral foundation of leadership. During the Warring States Period, states weakened when they attacked each other due to the resulting vulnerability. Sun Tzu's teachings, rooted in Taoism, emphasized the significance of not inviting self-defeat by controlling emotions, particularly anger, and exploiting the vulnerabilities of opponents. Buffett's investment strategy shares similarities with Sun Tzu's approach, as both emphasize the importance of maintaining a calm and rational perspective. Furthermore, Sun Tzu believed that a leader's moral character was crucial for success, as a strong moral foundation would lead to the support of the people. This idea resonates with the importance Buffett places on ethical business practices. Overall, the lessons from Sun Tzu's "The Art of War" provide valuable insights into leadership, strategy, and self-control that can be applied to various aspects of life, including business and personal relationships.
Finding trust and honor in Sun Tzu's 'The Art of War': Seeking trustworthy people and conducting oneself honorably, as per Buffett and Munger, can be gleaned from Sun Tzu's 'The Art of War'. The text, when understood correctly, provides insights on building trust and winning in various situations.
Conducting oneself in a noble and honorable manner, as advocated by Buffett and Munger, and finding trustworthy people to deal with, as emphasized by Munger in Sun Tzu's "The Art of War," can lead to better and easier experiences in life. Buffett and Munger encourage us to be generous and trustworthy in our dealings, while Sun Tzu's ancient Chinese text, when read with the right translation and understanding, can provide valuable insights on building trust and winning in various situations. The importance of trust and honor in business and personal relationships is a powerful way to approach the world. Stig Brodersen shared his personal experience of struggling to understand the deeper meaning of "The Art of War" until he found a good translation and gained a new perspective. The text, despite being about war, can be applied to various aspects of life, and its lessons on trust, honor, and strategy can be valuable in both personal and professional contexts. The conversation highlighted the importance of seeking out trustworthy people and conducting oneself in a noble manner, as well as the significance of finding the right resources and translations to gain a deeper understanding of classic texts.
Understanding Financial Ideas Through Deep Conversations: Successful investor Toby Shute emphasizes the value of long-form discussions like podcasts for in-depth exploration of financial ideas. Engage with him on Twitter for real-time updates.
Toby Shute, a successful investor and author, shared insights on the current market conditions and the importance of deep conversations in understanding financial ideas during his interview on The Investors Podcast. He emphasized the value of long-form discussions, such as podcasts, which allow for a more in-depth exploration of ideas compared to traditional financial media. Toby also mentioned his website acquirersmultiple.com, where listeners can find his books, links to his funds (Zig and Deep), and his Twitter handle (@Greenbackd). He encouraged listeners to engage with him on Twitter for real-time updates and discussions. The podcast hosts expressed their gratitude for Toby's insights and looked forward to their next discussion with Hari Ramachandra in Q3. Remember to subscribe to Millennial Investing by The Investors Podcast Network and visit theinvestorspodcast.com for show notes, transcripts, and courses. As always, this show is for entertainment purposes only, and it's essential to consult a professional before making any financial decisions.
