TIP293: Intrinsic Value Assessment of Bank of America w/ Bill Nygren (Business Podcast)

Automatic TRANSCRIPT

You're listening to Ti on today's show. We're going to be doing a deep dive intrinsic value assessment on an individual stock pick and the company. Today Is Bank of America to help us with today's assessment. We have Mr Bill. Nygren and Mike Nicholas Bill is the CIO at Oak Mark Funds which has over seventy six billion dollars under management. So get ready to hear some indepth discussions about the intrinsic value of Bank of America. You're listening to the investors podcast while we study the financial markets and read the books that influenced self made billionaires the most. We keep you informed and prepared for the unexpected always. I'm here with my co host Preston Pysche on the show we have bill nygren and Mike Nicholas. How are you guys today? We're hanging in there. Stay can't really say we're good. Markets down ten percent today after a couple bad weeks. We're doing okay and it is definitely special times. Is Bill set there? The Magas down ten percent. Yes you heard right. Ten percent be recording here. Mon- Sixteen but guys. I'm sure someone like you managing a lot of money. Your inbox must be full these days. What are the typical questions? You're beginning and what do you tell your clients question. We get most often is ranked will happen with the corona virus. I think something is always important for investors in crisis is to remember. What your expert at and what. You're not an expert and we are certainly not infectious disease experts here at Oak Mark. We read a lot with what they write. We listened to what they say. And unfortunately the views of the path this could take or so diverse is hard to base any kind of investment strategy off than opinion on or the virus might go but what we are good at it. Mark is valuations and that's been our expertise for a long time. Stocks are really cheap today. If you believe as we do the five to seven years from now things will look sort of normal again. Most of our approved lists I think all one or two names are beneath there by targets. Typically it's a third to a half of our list that's below by targets and like two thousand eight. We're trying to take advantage of the market volatility to restructure portfolios typically. We sell things close to sell targets and by close by targets. Today we'd be selling close to buy target to buy something that would have to double to be. His by. Argon is really unusual times so bill the last time you were on our show you talked about your investment process. Some of the picks that were on your radar back then were net flicks alphabet in mastercard and on today's show we're GONNA be talking specifically about Bank of America the Ticker for Bank of America for everyone out there be a see the bill. Could you please provide us? Just a basic overview of the business model of America is one of the largest money center banks in America today in our house perhaps the bass consumer banking franchise in the US industry leading wealth management platforms that that typically operates under the Merrill Lynch ran a really really great management team is strong balance sheet at in. Our view went along runway for market growth. We believe that the bank is priced attractively today. Engine used only wide minutes bogged specifically as relates to its lead within consumer facing technology where Bank of America in part due to it still has been able to invest that much higher rates than a lot of their molar regional competitors into technology solutions. Which have really named to lower their direct deposit. Costs engage in to focus on the consumer drive more value scenario customers so we believe the valuation is attractive. The steel that they operate within congenial remand significant competitive advantage and underlying business are on par with some of the best financial institutions. Thank you for your thoughts on that Mike now. I also want to preface this by saying that at the time of Recording Bank of America has dropped from just short of thirty five dollars to twenty one dollars in less than a month and today it changes all the time but it dropped another twelve percent. I mean it's just incredible. Just even talking about these numbers now. The Corona viruses already had a meaningful negative impact on economic activity and this negative impact will continue. I'd say that the hand is how negative the impact will come along. Persist and finally how economy will behave after the corona virus recites. Now what are your thoughts on the economic impact off the corona virus and has already been priced into the current Stock Price. Off Bank of America. I think one of the things we do well at stake is to focus on business. Value and quite a business will be worth in for lack of a better term. We call normal times and we're not GONNA be any better guessing than anyone else. As to how severe the impact could be in the short term or Bankamerica. Or how many quarters of bad performance has been already discounted? But what we do know. Well is to say the stock price has gone from thirty five to twenty one and that's basically but four five years of free cash flow that we expected it make America so a lot has been priced in things ought to be really dire to justify this kind of decline. We're at our best but we can focus on saying. This is what we think we'd have to happen to justify how big a move. The stock is already had. Our guest is no better than anybody else's and we saw yesterday that even the Venture Jerome Powell had a difficult time going out with a forecast or economic activity for two thousand twenty. What we do now is be resilient economy bills written some bar pass ladders about America's economy by extension the equity markets who grew another astaire's time wars and natural disasters and Real Estate Valentine's and other viruses. You name it. We all feel. This'll be now different banks as you mentioned that punish they're viewed as macro proxies that report particularly worldly during the last. Turn but I think what's missing and some of the analysis in the way. The socks recently is how much improvement. There's been debate since last night and Branson of that perception Yoga's actually's assail who's been enormous amount of capital built by Bank of America. Number of the large banks performed very vulgar anxious and they do have really diverse revenue streams and unlike other sequels reinvestment. They set aside money for today's talk the lumber experiencing so we think they're going to perform much better than they have prior downturns early. This is an opportunity for them to approve the underwriting discipline in the capital bell the way they do business is far superior than the way that usually guys talked about the low interest rates just recently fed chair. Pow has cut the rate by one hundred basis points. It's been since nineteen eighty two that we've seen such a significant cut Not to mention all the bailouts in quantitative easing now for a bank lower interest rates simply mean that interest income Get smaller and smaller. Which is the top line of the business? So do you guys see this as a bad thing or do you think a normal interest rates are going to be coming back into the future despite the downward pressure that we've seen in yields for decades at this point. How are you guys seeing that? Low rates are undeniably verse for banks than higher rates especially with the sheep of Yule curve as we see if they were longer term rates. Aren't you are of her? Shorter-term rates are today. And if you think about a bank or Bank of America in particular that's largely funded by overnight deposits but that ultimately leads further out mccur. You could imagine that the more narrow that difference or that spread is more impactful. It'll be on. Its first margin and net interest income makes up roughly half or so of Bank of America's revenue. Jeez rates look nothing like history by the absolute level or that this ravaged Michelle report rates at a long-term rates. We don't necessarily believe this looks like environment on the shoulder of this year. America's earnings or the underwear brushing they'll have lower net interest income like we hire charge offs next fence as the economy slows down here. So earnings number that we see here or two thousand twenty we all think is what they're capable of earning allows a business cycle on average over time when you think about the services of the banks provide binger patient respected. They're very necessary. They're extremely valuable to the consumers. They store money. They protect your money. They live and move and transfer money. They give you advice. Invest your money from our perspective. You don't believe that there are over earning relative to the value that are provided in Or certainly not. The highly competitive offering around here are in so remark perspective. Where you see this year is not likely to be remarks. By the normal earnings power of the bane wiping to remember lower for longer mate environments. His debate business models have been very adaptable over time. You think back to the nineteen eighties interest rates in the high teens. Most icy insured banks were generally a mid to high teens percentage of their revenues. Beatty's but if you fast forward to today some of the big banks like Bank of America are generally almost half the revenue from fees. So it's not just interest income that dictates the growth of the business anymore. But of course there's also the other side of the mystery of Michigan June nine assault of his past where no rates could go up. They have historically been previous in short. We're seeing today. In that specific instance we think the banks have to typically higher power perhaps even higher than what we saw last mirror would make America org about dollars a share so from our perspective. They'll be able to weather the storm. They'll be apple. Business model perhaps even cosby lead to and some of their competitors so-called intimate bags they compete under positively might not harder time beating this market as well as they face. Samri investment risks on the acid side of their balance sheet about physicians. Virginia so let's talk a bit more about that. What are the key factors of success and banking? And what Does Bank of America do better than its competitors US I think? There's a couple stringent underwriting discipline of course a very solid risk management platform increasingly scale being one of the biggest branch years steel really enables the ability to invest in technology. And it's a client systems regulatory reasons it really allows them to ask the residual tools for their customers. And when you think about the absolute stale bet that Bank of America is appointing now new technology facing services and solutions last year. That number was about three billion. It's been like that for almost half a decade longer and the magnitude of that is really enormous. I was listening to your interview with Sean Sandercock outburst public. Not long ago really enjoyed the shots interview reading. Shawn's long as well. But First Republi- total operating expenses for the whole bank is less than what Bank of America spends. I knew proctor. Vouching loan every single year. So their ability to reinvest multiples of some of US more medium sized banks expense bays are being truly widening. They're about to the neighboring investment accounting customer students. How would you describe the competitive situation between the biggest banks like Bank of America Citigroup Wells Fargo? And if you honors I would describe it as highly competitive but in our opinion the Big Three Banks. Wells Fargo J. P. Morgan and Bank of America. Of course will ultimately are the winners. The all in deposit costs for the Big Three banks today which is an important driver of profitability given how significant deposits are as a percentage of the overall funding sources for the banks. Those costs are about half of what most regional banks would pay. And if you think about user growth a fifty percent of all new checking accounts they are being opened up one of those big three banks. Despite the fact that they only control about a quarter of the country's branch network so we believe they're taking considerable share even younger cohorts and the most of that is due to what we talked about before it was scale and their ability to invest that much higher levels than many of their smaller competitors to improve the customer experience so while obviously going through its own issues today and we have a lot of respect for J. P. Morgan's franchise but ultimately believe that the big three banks were spending by far the most to continue to separate themselves in terms of digital solutions services that they offer will ultimately be the winners in a highly competitive market. Might mention the the big three in the. Us heard about fifty percent share of new accounts. If you follow the model that you see in most of the rest of the world it's unusual for the top three banks to only have fifty percent market share. So I think there's a historical precedent that we've seen a lot of other countries where the growth of the big three becomes the best part of the story. Yeah Bills Right today. Those top three are probably thirty percent of deposits but a much higher percentage of new accounts that are happening in the market today. And you look back maybe ten or twelve years ago. That number was closer to twenty percent. So if you do look at a lot of developed markets. The top three owned a lot. Bigger percentage of share of total deposits and Bank of America alone has talked about their desire to double their consumer deposit share over time. So we think there's a long runway for Bank of America to continue to win in the market and continue to gain share so bill. The last time you were on the show you talked about how. The market remembers the two thousand crisis. You said that was maybe one of the reasons that banks were still so unpopular. How has that thesis evolved? And how do you see that today with the crisis is going on twenty twenty for starters if you think about the way the banks were positioned a little over a decade ago into the Great Financial Crisis? The quality of their balance sheet in a lot of different ways was way inferior to what it is today. I if you start with capital the average bank today has almost twice as much capital per dollar of assets is it had in the great financial crisis. Then if you look at the quality of the underwriting any loan that's been written in the past twelve years has been to a substantially higher standard that it was going into the crisis. Frankly banks mortgage loans as all they really cared about was the quality of the House. They weren't worried about the quality of the borrower. And today it's more like good old fashioned lending where a bank is worried about. Whether or not they're going to get paid back I think. Investors have heavily punished the banks for this higher level of capital which means the return on equities are unlikely to be as large as they were fifteen twenty years ago but they haven't given them credit for the flip side of that. Which is they become much less risky businesses because they have so much more capital in fact. Some of the people who've been negative on the banks talk about the banks because they have so much capital becoming almost like utilities. We think they're really cheap. They're better businesses. They're motzer growing their market. Shares are growing. They're just much better position than fifteen years ago. So banking stocks are extremely regulated. Howdy recommend somebody get smart on. All these legal frameworks. That are very complicated. That an investor. A new investor can feel comfortable taking on a position. There right stick. There's been a number of new regulations put in place since the great financial crisis in two thousand in two thousand nine. Almost all of these regulations were designed to ensure that the banks are better prepared for the next downturn. There's been more stringent rules placed on the types of instruments that the banks can put on their balance sheet that liquidity of those instruments their ability to perform proprietary trading. You're more recently. The way reserve against bad loans and of course the amount of capital. They must hold throughout cycle in two thousand ten senator. Chris Dodd and Representative Barney. Frank past probably the most sweeping bank regulation that we've seen since the Great Depression. The Dodd Frank Act and among a number of the different provisions within the act one of which forced the banks to adhere to annual stress tests and these stress tests would be conducted by the Federal Reserve and they would put the banks through stress scenarios one of which they call a severely adverse scenario. This scenario is very adverse at assumes the equity markets declined by fifty percents on employment goes up to ten percents. Fed funds goes to zero residential. Real estate prices declined by twenty five percent. Commercial prices down thirty five percent a tough environment severely adverse and. What's interesting is even at the trough of that hypothetical environment that the Fed would run. Somebody like Bank of America. Through Bank of America has more capital at that trough than they did entering the prior downturn. So I think it's it really shows how much better capitalized the bank. And the whole system is relative to what we saw. Twelve years ago the regulators are taking a much more hands on approach. But for your listeners. I would advise perhaps reading through which the Fed makes public a number of these reports. That the dowd fast annual stress test reports to get a better feel for how your potential investment might perform a much tougher environment interesting. Mike you mentioned the interview with it with Johnson Toxin from Samba capital. We had not too long ago where he was pitching. First Republic. Bank pee on the podcast and one of the things that he highlighted was the net promoter score and he hide that as an example of the strength of the bank. Now the net promoter score is a customer loyalty metric that measures customers willingness to not only return for another purchase a service but also to make a recommendation to the family friends or colleagues. So when I was looking for Bank of America the score was minus twenty four and that is about ass popular or unpopular if you like facebook. Scores higher than zero typically considered to be good and scores about fifty considered to be excellent so in comparison the Industry Everett's financial services and banking is eighteen and again bank of America. That was minds twenty four. Should we asked potential in Bastos in Bank of America? Be Concerned about the negative. Net Promoter. Score? It's a good question. The net promoter score for Bank of America that you quoted. It doesn't really seem to sink much with the business trends that they're actually seeing within their own business of course they're on customer satisfaction. Scores are at all time highs. They continue to take a lot of market share. Purdue accounts and the overall deposits for the bank have grown by more than forty billion every quarter for the last five years. That's adding the deposit bakes base of like nearly the twentieth largest financial institution. America every quarter. So I think jd power was just out talking about how the average customer relationship duration for Bank of America has increased significantly from two thousand eight thousand nine to today. And you can't help but see references littered about customer centrisly and doing the right thing when you read. Bank of America's annual report so we think customers are voting with their actions. I can certainly speculate as to perhaps why that perception may exist or where it may have come from based on on some of the actions that took place during the great financial crisis but when we look at the actual fundamental trends in the customer trends within the business. It really doesn't seem to sync up well with the score that we're seeing. Let's take a quick break and hear from today sponsor. Although we're value-based investors at heart it has long been known among investors around the world that systematic or quant base strategies have become a highly successful way for professional investors to extract returns from the market. In fact most of the top ten hedge funds in the world today like bridgewater associates and renaissance technologies discovered this decades ago. And there's one podcast that covers this area and finance in great detail in its top. Traders UNPLUGGED DOT com. And Right. Now you can get a free book explaining how to systematically identify and follow market trends as well as a comprehensive guide to one hundred of the best investment books of all time just go to top traders unplugged DOT COM SLASH T. Ip to get your books today again just head over to top traders unplugged dot com slash T ip. You'll be glad you did Preston and I are looking for a host for a brand new show. The Intrinsic Value Podcast we expect the show to feature different Intrinsic Value Assessments and for you interview guests. Just as we do with John Steiner Stockton detailer felder. And so many others here in the master's podcast. Who also likes the you have your own mastermind discussion where you pick your favorite stocks and talk about the Kurd Mike conditions if you want to learn more about the position and how to be a part of the team. Please send me an email at stake at the master's podcast dot com in your email together with your resume. Please include a stock analysis off a stock. You recently found interesting all right back to the show so guys thank you so much for laying the groundwork there so let's dive into the fun stuff here. How are you guys looking at the intrinsic value of Bank of America? Sure per any idea that we're looking at or looking for three criteria to be mad. The first of which is that company is trading for steep discount to what we think it's worth is be always require that the businesses run by manager that truly think and act like owners and we want her share value to be growing over time from our perspective. Bank of America passes all three of these tests. As you mentioned earlier this dachshund the low twenties today. Call it twenty one or twenty two dollars a share and last year. They aren't about three bucks generated. Roughly a sixteen percent return on its tangible. Common Equity. This year is going to be more challenging rates as we talked about we'll be a headwind bad debt expense or bad loan expenses. Likely to go up. There's going to be some headwinds that they're going to be facing but over time we believe make. America is capable of earning a low to mid teens return on tangible common equity and we think that tangible common equity on a per share basis looking out a few years is going to be twenty two twenty three dollars a share so using our substance we think the earnings power for the bank is north of three dollars a share so today's level the stocks trading about six and a half times our estimate of a normal earnings that we think they can grow off of now as you think about evaluation on from downside protection perspective. The stock is trading about what we would appraise to be liquidation value or tangible book value. What we think they could sell other assets and pay Back Liabilities for and the valuation relative to the S. and P. Five hundred is near historic lows so from our perspective. We don't think the market is really rewarding. Bank of America for some of the improvements that we discussed since the last downturn whether it's credit quality or capital levels for expense reduction or more sustainable return profile and the companies taking advantage of that repurchasing a high single digit percentage of their shares. They're paying out a really competitive yield. Today and the total capital yield the combination of the two is amongst the highest of any public company. That's in existence today. God forbid there is some existential threat. Every businesses facing some form of technological obsolescence today in the case of Bank of America if that were to come to fruition. It's nice to know that the majority of today share price is reflected in tangible asset value. That could be ultimately returned to shareholders as for what it's worth by our math assuming that return structure and a reasonable discount rate. We see no reason why the bank can't be worth two time tangible book value or more and that would lead you to believe the stocks were somewhere in the mid forties or so are more than double today share price. Look at how. Our assumptions differ from consensus. I think the first thing you see. Is that most people who write about. Bankamerica are unwilling to give them as much credit for growth that comes from reducing their denominator. The share base as they do for companies that grow the top line. But it's important that it's just as valuable to an investor and it creates just as high. Eps growth rate this denominator shrink is the numerator grow. Secondly who see a lot of reports written that say over the past thirty years? The average bank stock typical P. E. was ten to twelve times earnings. And I think what that MRS is during a lot of that time the SNP multiple wasn't much higher than that but today pre corona virus scare the SNP. Multiple is getting close to twenty times earnings and yet the bank analysts were still talking about a target ee of ten to twelve times earnings as we said earlier because of the way these companies have expanded their moats their competitive power is growing the safety of the companies much better than it was during the past thirty years. We think the gap to the market P. E. should be shrinking so we're looking at a higher earnings per share number out five to seven years from now. The average analyst is and we're putting a higher multiple on that. So would you say that? There's a catalyst to this happening or is it just as much the that's called the. Maga wising up and understanding that that difference Cadillac Suv always been a hard thing for us to anticipate even when you look back on. Some of the biggest market terms like when the Internet bubble popped in early two thousand. It's still hard to look back. And they this was what the catalyst was that started. That declined the Internet names. I think one of the things we look for is companies that are generating a lot of excess capital so the longer the market the company undervalued the more shares they can repurchase another thing. Is We like companies that pay back cash flow to shareholders via dividend and the average bank? Hang out about a third of their earnings. In dividends The dividend yield will become so compelling on these stocks as will the growth rate investors will have to stand up and take notice. Now let's go to the next segment of the show and we not going to talk about Bank of America but we're going to talk a bit more. About the industry of asset management. All audience are primarily value investors. And the way that we are brought up is with the zero six twenty five fee structure that Warren Buffett used for his partnership as the optimal fee structure for both investors and portfolio managers. We also have other value investors like Guy Spear and Moore's pop riots. Who had been here on the podcast with the same structure for their fund. The fee structure implies that asked vast you pay zero percent management fee but they're patrolling manager has a six percent annual performance hurdle with a high water mark that means investors need a minimum of sex percent return before the portfolio manager is paid and the high watermark is the highest peak in the value that the investment has reached. Meaning that demand you can collect incentive fee. Less the funds value is above the high water mark and returns are above the hurled rate. So the is then pay a twenty five percents fee returns over six percent now that is not the model that oakmont funds has chosen taking oakmont select fund ethnic sambol. You chosen a more conventional fee structure with a one percent expense ratio. Why did you choose your fee structure? And what are your thoughts on the Euro Sex twenty-five model? We would've loved to have gone to the model that you suggested the no fee until we make six percent and then a quarter of the profits above that since the Oak Mark Fund was launched in Nineteen Ninety. One the fun went up about twenty four times. Its initial value. The fees to US would have been substantially higher under that arrangement than they were a fraction of one percent of the assets. But realistically the reason we chose that fee is regulation doesn't allow the Mutual Fund industry to adopt that fee. You're going to take any positive. Incentive fee than the shareholders have to get refunded that same amount. If you don't meet the hurdle so if you're going to take twenty five percent of all prophets above six percent that anytime you fall short of six percent you have to return twenty five percent of that shortfall to the investors with the month that we've just been through with a crisis like the corona virus every mutual fund has an equity portfolio would have been out of business if they had that kind of fee structure so the only way we can get the mutual fund industry to move to an incentive fee based model via change in the regulatory environment. I'd certainly be supportive out. So mutual funds have really had a bad name in the marketplace. In the last I would say in the last decade relative to ETF's if you're going to argue against that ideal what would you say? I think the biggest issue that active management has had generally that also specifically within the mutual fund industry is for a long time mutual funds ran what I would call closet index portfolios where typical model might be the portfolio manager saying. I think utilities look expensive today. So instead of owning the market weighed in utilities all on eighty percent of the market way and I think banks look really attractive so instead of the market wait boost that to one hundred twenty percent but you have these industry weightings that are very tightly. Clinging to what the SNP index weighting is and effectively eighty percent of the portfolio. Our so is nothing more than an index bond and then the manager is charging the fee only on the twenty percent. That's actively managed so I think the active management industry has brought a lot of this problem on itself by basically running call it an index fund plus but charging active management fees on the whole portfolio. I think the way you defend yourself against it. Is You do what the Oak Mark Fund family has done. And we don't hug. Index is at all we buy stocks we think are cheap. We hold them long term. We analyze them in depth. And we don't worry about what our tracking error is versus the S. and P. Five hundred every dollar that's invested in our court. Folio is an actively managed dollar. And we've seen all the studies that say that the funds that rely on long-term Holdings of active share high active share portfolios have tended to be the best performing funds and the thing is very important for the listeners. Also to hear that because we have a lot of each absolutely have caught a lot of different partnership models and very often. A mutual funds have been brought up as the skier example of how? It's not supposed to be so a really appreciate you. Stepping up to the plate and giving US another perspective for listeners. It would be safe to say that. The asset management industry have changed dramatically over the past few decades passive. Men's funds with lower and lower fees have increased in popularity and we see more and more algorithm trading. Just mention a few of the changes for US investors and perhaps those listeners who are thinking about a career in management. What does the future hold for activist funds employing traditional portfolio managers? It's interesting I think. Been a lot of focus passive management in just the past couple of years but my view of it is if I look at the time I've been interested in the stock market which goes back to I was in high school and there's been kind of a natural progression where the equity market has been able to provide high rates of return better than almost any other asset category. And because of that it's been an attractive place for individuals to put money back in the nineteen seventies and eighties the easiest way to access that as an individual was through your local stockbroker given a very extensive way to do it not a well diversified way but it be putting all your assets in bonds and then he started to see mutual funds. Come in and that was a much lower cost. Way of investing in the local stockbroker was a typical fund had hundreds of holdings in basically performed in line with the market. Then you saw index funds. Come that said why should we try differ? Just a little bit index in charge of big feet. Let's lower the fee and just produce average returns. And then you saw the value based bonds and growth based funds and after that it was value. Etf's in growth. Ats All along the way the active managers have had to do something that justify their fees and I think that keeps changing when I started at Harris Associates the advisor to the Oak Mark Funds in the early eighties. Simply being value-added there was a reason to earn an active feet. It provided a better return over a long period that an index fund did and there weren't a lot of easy ways for investors to access just a diversified value portfolio. Today you can do that with a value. Etl The charges nothing. That's why it's so important that we've had to evolve in stock selection criteria. You mentioned at the start of the show. That last time we were on a we talked about our holdings of Netflix an alphabet and how those were such unusual names to see in value portfolio. We've had to be responsive to how the economy has changed to an asset light model that gap accounting doesn't do a particularly good job of defining so the old statistics of price to book and P. E. don't work really well on a lot of the industry and at Oak. Mark we've evolved and we've owned a lot of the names that don't necessarily look cheap on gap metrics but on another form of business valuation. Metrics look stunningly attractive. And that's been one of the reasons that oak mark funds has been able to outperform most of its value peer group over the past decade. As we've talked about what a tough decade it's been Value Managers the people thinking about a career in this industry. Just have to understand. It's a constant evolution and you have to stay a step ahead of the computers if the computer can do what you're doing it's going to charge a lower fee than you can but you have to have human judgment human analysis that can't be done. That effectively zero cost in order to make a career in this industry. Thank you for the Liberation on that and for the piece of advice to many of the younger listeners. Now Bill and Mike. You have been very very patient with me here today and you've been very gracious with your time. So thank you so much for coming on. The masters podcast. I'll definitely like to give you guys opportunity to talk a bit more about my funds. What you do and whether Audience Kalin more about you. The Oak Mark Fund family has seven funds. We invest with a long term value framework. If we do that across markets the United States and internationally equity and extend so. We've got the Oak Mark Fund the Mark Select Fund market or National Oak Mark small-cap and then three global funds where we handle the asset allocation between international markets and domestic markets. We also have an equity income fund where we handle the asset allocation between stocks and bonds. You can read about how we think about investing at our website. Okay Mark Dot Com. The commentary pieces that we right. We put a lot more focus on that a lot of our competitors do if you go through and read a couple years worth of our commentaries. You'll have a very good idea about how we invest everything we do is long term value. So that in a snapshot is what we try and do it out. Mark Fantastic and we'll definitely make sure to linked all of that in the show notes and we'll also make sure to link to the previous interview that we have with bill guys again. Thank you so much for time and for coming on the Masters podcast. Thanks for having all right guys so this part time in the show we'll play question from the audience and this question comes from Brad. Let's take a quick break and hear from today sponsor this free podcast episode is brought to you by Radius Bank. The Best Online Bank in two thousand twenty according to bankrate dot com as a forward thinking digital bank radius has always been well prepared to handle all your banking needs with their interest. Earning rewards checking account you get to enjoy unlimited one percent cashback on all of your purchases and right now you can earn one point five percent cashback in categories important to you from groceries. Pharmacies restaurants and entertainment rewards checking has no monthly or hidden fees free worldwide. Atm Rebates and a friendly US based customer service team that can be reached by phone email or chat seven days a week plus their award. Winning MOBILE APP allows you to track spending view transactions and manage. All your banking needs at any time from anywhere. It's like having the benefits of a community bank available to you anytime you want. You can apply online in less than three minutes and start banking from anywhere. Just go to go DOT RADIUS BANK DOT COM slash. That's go DOT RADIUS BANK DOT COM SLASH T. I P Many ultra successful. People have noted making you bet is an important task that is often a prerequisite for success. I believe this to be true as well. And it's much easier for me to complete this task in the morning when the half the energy from a good night sleep. Thanks to the high quality sheets and bedding from Brooklyn before Brooklyn and had spent a ton of money on high quality mattresses only to have his convert ruined by low quality sheets. Now thanks to Brooklyn and not only do comfortable bet back. But it's been made even better and I'm seeing an improvement in my sleep because of it. Brooklyn was the first direct to consumer betting company their work directly with manufacturers and sellers with no middleman that means a great product service and price. They provide luxury products without the lottery. Markup Brooklyn and also has a variety of sheets call patents amateur aerials all your needs bundle sheets and bedding or save. Even bigger including Deve Corset. Said an extra pillow cases. Brooklyn sheets are the perfect place to stop making your bed great. And they're so confident in the product that all the bedding counts with a lifetime warranty get ten percent off your first order and free shipping when you use Promo Code investors only at Brooklyn Dot Com. That's B. R. O. K. L. E. N. DOT COM Promo Code Investors Brooklyn. Everything you need to live your most comfortable life all right back to the show. I really enjoyed your recent episode number. Two Eighty eight where he built discuss current market views physicians. In how you believe the next few months or going to play out. I'm a big follower of the podcast in in enjoy keeping up with some of the great minds you both follow like radio. Lebron Row Powell. On episode two eighty eight you indicated. It might make sense to purchase gold and oil towards the second half of the year. Can you provide some input on why you would favor physical gold over paper gold especially since the current flocked to cash is providing? Good bar ends in the paper. Gold and silver markets. Thanks Gus so Brad. I think this is a fantastic question. And to understand the argument for fiscal gold or paper. Gold I think it's important to understand history the US dollar replaced the British pound sterling as the world's premier restore currency back in nineteen forty five in the courts with the Bretton Woods Agreements. And at the time the. Us dollar was the currency with the greatest purchasing power and the only currency backed by gold but in effect the world bus To gold because other currencies were packed to the dollar now throughout history have multiple occurrences the happy in the dominant currency for instance in the seventeenth century. He can be argued that the currency was even the most important as a credit system was reinvented by the Dutch and the enforcement off credit claims were art. No better place in the world now. My point by saying that is that believed that. Us dollar will forever be the world's most important currency in its current form is just very very unlikely. The reason biggest change was nineteen seventy one when Nixon took the US off the gold standard. Yes it was still called the US dollar before and after that but it was a very different currency than must before because we entered the rail mafia occurrences where central banks around the world could print infinite amount of money. And perhaps that is best exemplify here. In the corona crisis where money has been printed an unprecedented levels so when we look back in history which currency has maintained his purchasing power gold has and gold has thousands of years so when we talk on the show about the risk of hybrid inflation one way to hedge against that is through gold. And just for the record. I would like to say that I think the inflation numbers can go much higher than today but anywhere near the higher inflation rates that you have seen with hundreds of percents in annual inflation or even higher than that. I think that it's very very unlikely in the US but I do think that we will have more inflation in the time to call or these. Their significant risk that we'll have more inflation in the time to come in especially in the case shoot hardware. Inflation happen fiscal goal. Becomes much more attractive than paper gold because as soon as you have goal in the financial system say through an ETF dod or through a derivative. It doesn't mean that you have access to the fiscal gold when push comes to shove and that's whenever you need fiscal the most so even if you do own goal on paper it won't really do any good if the government takes away the goal from you and if you don't think that's possible consider what happened in nineteen thirty three through the secretary or a six one zero to president. Franklin D Roosevelt made it a criminal offence for US citizens to own trade gold anywhere in the world with the exceptions for some jewelry and collects coins. But the reason why I'm saying this is that a hope that you breath worth look back in history and see that the system that we have a stable as it may look like we've just throughout history seen so many changes just in the last hundred. We've seen dramatic changes in the monetary system so fiscal gold. Dust makes sense or paper gold even though it can be a little more troublesome to own it now to end my response with a quote from. W If you don't go you know neither history north economics so Brad I think Stig provided a just an outstanding overview of kind of the history of the risk associated with governments potentially stepping in Whether they can do that now with how interconnected and digital the economy has become compared to the last time that Some of these things were implemented on the gold market is something that is just really insanely difficult to quantify what this really are because it is different We we just have a different economy at this point I don't know that I have a good answer for you. I just when I look at the physical. Gold market verse. The paper market These are my concerns with the physical gold market is just the speed at which you can receive your payment and if there would be something else that would that would takeoff Other than gold your ability to sell out of that position due to the speed at which you can settle. I think is a concern for me personally On the paper gold market the the big story right now at least for the last month has been The separation between the the premium that you actually catch on the physical market versus the paper market now whether that trend persists or not. Or what's even driving? That is yet to be determined and I don't think anybody can say with a whole lot of confidence which driving that If that trend would continue to persist in the coming months I I don't know I think that's a little bit concerning so I don't have a good answer for you. I'm like everybody else kind of standing there on the from aside kind of looking at what's happening in saying this is very interesting. This is very fascinating. What's taking place? And I just don't know if there's a good answer as to where to be positioned based on everything that stig laid out there Based on these nuances between the price difference between the physical market and the paper market. And then just the con- the whole confiscation pieces just something that I don't even know how you'd put a determination on that I do as as anyone who's listened to the show knows has a concern. I have concerns about Fiat currency moving forward to not just the US dollar but all the Fiat currency around the world because like sticking mentioned Everything when when the. Us came off the gold standard seventy-one everyone else came off the gold standard at the exact same time because they were pegged to the they were pagan their currency. To the dollar. So you've had this competitive devaluation that's been going on for literally decades and now that you got interest rates in real terms pegged at zero. I just think you're gonNA see some crazy things happening in the market Especially with respect to volatility When they're printing this much money and they're pumping the Q. E. AND THEY'RE PUSHING INTEREST RATES. They're going to sustain interest rates at zero percent. The market's going to be looking at that and saying oh things aren't things aren't unstable because the yields in the fixed income market aren't volatile. There's going to be pegged at zero and people are GonNa be lulled into thinking that there's nothing wrong there when in fact behind the scenes. I think there's there's a lot of things wrong And then what's the implications of all this universal basic income? That's rolling out. And what does that mean? There's there's so many unknowns. This is so crazy that what we're seeing I just don't know that I have a good answer for you so Those are our thoughts. That's how we're looking at all the different variables and maybe it's helping you determine where you may be. You have more confidence after hearing all that. So Mike for asking such a great question. We're going to give you free access to RTP finance tool on our website. And one of the great things about the T. I P finance tool is like you learned in this episode where we're calculating the intrinsic value of a company. This tool on our website allows you to go into any company on the US markets. You can pull it up and automatically Graphs the free cash flows of the company. You can come up with an array of of what you think. Those future free cash flows will look like and then the software automatically does the intrinsic value. Estimate of what that company will be worth. We're really excited to be able to give this away to you for free and we really appreciate you asking such a great question on the show so if anybody else out there wants to get a question played on the show and get free access to. Rtp finance tool on our website. Go TO ASK THE INVESTORS DOT com. And you can record your question and if it gets played on the show you get a free subscription to RTP finance tool our guys. That was all the press on. I had for you for this week's episode of the PODCAST. We each again next week. Thank you for listening to ti to access our show notes causes or forums go to the investors podcasts dot com. This show is for entertainment purposes only before making any decisions consult professional. This show is copyrighted by the investors podcast network written permissions must be ended before syndication.

Coming up next