Paul Winkler: Well, hey, hey, welcome. We’re not The Monkees. Where did that come from? I have no idea.
I’m Paul Winkler, this is “The Investor Coaching Show,” along with Evan Barnett hanging out here with me today, and we have a lot to talk about. Boy, oh boy.
Evan Barnard: Nothing going on in the news. What do you mean?
PW: Nothing’s going on. Nothing’s going on. Nothing’s happening Monday.
TikTok Ban
PW: So are you in despair over TikTok, Evan, or you’re going to have to close down your account?
EB: It’s going to cut my revenue in half, you know what I mean? By golly.
PW: It’s going to cut your revenue in half.
EB: I don’t have it on my phone. Other than if I’ve maybe clicked a link on a Facebook post or something. I don’t think I’ve ever been on TikTok.
PW: People have sent me stuff that I’ve seen on there. Well, I was thinking that maybe we ought to start up something where we have 27-year-old kids doing videos for us. Remember that time I did that video, I had Casey actually do the video?
And so those of you that don’t know, Casey was a pretty young girl that actually worked with us and I had her do a video. She wanted to do a video.
I said, “Oh, okay. We’ll have you do a video.” It was the most watched video we’ve ever done.
Funny how that works. Yeah, that was just no fair. That was no fair.
EB: I will say, and I don’t know how far you’re going down this road today.
PW: Not far.
EB:
To me, separate from the national security stuff, the governmental stuff, and all of that, I think TikTok is a fantastic example of the free market working.
I mean, some of the sob stories that I’ve been reading in some articles are these youngsters or middle-aged people pulling in 10, 15, $30,000 a month doing just random stuff, like God bless them. I mean, it’s really interesting that they could create that kind of revenue.
PW: Yeah, I didn’t realize that so many people depended so much financially on that, so yeah, it’ll be interesting. See, because they’re talking about a possibility of on Monday doing an extension, a 90-day extension.
EB: Only if there’s a sale on the table. I think they have to have a buyer that’s at least made an offer before they can extend it. Yeah, I don’t know. I don’t know where that’s going to go.
Bitcoin as an Investment
PW: One of the things that we bring up as a topic every once in a while, a lot, because it’s still out there — this is like joking — Chris Han was in here and jokingly just decided he was going to ask me about Bitcoin for a commercial. “Paul, Bitcoin, Gold, which one?”
I was like, “Oh gosh.” But it was a fun little thing that he and I had done, but it is still a thing that comes up so often that I have to address it on here. I feel like I’ve got to address it on here.
Because so many people look at that thing as an investment, and for those of you who have never heard me talk about it: It’s not an investment.
There’s no cost of capital. To figure out what something is worth, with investing, you have to have some kind of a stream of revenue that comes from it, whether it be interest payments, whether it be rent payments, whether it be earnings, companies, those types of things. And you can’t put your finger on it.
Or it has to be something physical. There’s something actually physically tangible, possibly even having a use that is outside of currency or something like that.
EB: Coal.
PW: Yeah, coal. I can burn it, and I can use it heat to my house. Although that’s becoming more politically incorrect every day.
Wood, I can build a house with it. Gold, I can use it as in electronics or something like that or wear it or whatever. You can use it as a status symbol.
So there was a guy that was on CNBC, I think it was. He was on and they were talking about the crypto and whether it’s in a bubble. I just thought his point that he made is something that I always like to make, but I like for people to hear it from another perspective. Here’s what he had to say about that.
CNBC: Not necessarily about my forecast in the piece, but yeah, I’m on the bubble side on net. To move me off that, you really need, not a price change, but a use case. The three uses I’ve identified for crypto is speculating in crypto, war-torn countries, and paying cyber ransom. When we get a better use case than that, I don’t expect this — again, I’m probably net a bubble guy but that’s more on instinct — that’s what could convince me to become maybe more of a crypto person, when I find any use for it, aside from speculation and criminality.
PW: And I think this is a good point right there. And the thing that he made about war-torn countries I think is a really good point. Because if you have a country that does not have any kind of real, reliable currency and you want to be able to buy and sell things, you’ve got to have something that people value. Even if it’s as volatile as crypto, you have to have something that is of value.
And that is in crypto. We’re talking about in that particular case, there are cryptos that are stable. You can look at some of the ones that are pegged to a currency, an existing currency, like the dollar, the stablecoin, or something like that. And you can make that case, but you wouldn’t make the case that it’s an investment.
Cryptocurrency in Your Portfolio
EB: Something that jumped out at me, and this was I think three or four weeks ago, and it was maybe when I was traveling because we don’t have TV. We were probably watching TV in the hotel driving to and from my son’s wedding. And there were some ads for Coinbase, which is kind of the exchange for some of this stuff.
The advertisements really were around things like Venmo, like a vendor, a small shop, or a hardware store using a pay point where he can handle digital transactions. To me, that starts to conflate Bitcoin as just as nice as using your debit card. You know what I mean? It’s kind of making it seem more acceptable.
PW: It’s a currency type of thing, yeah.
EB: It was a very effective advertisement. But to me, it was more about bringing your business into the digital age, not so much in investing in crypto kind of assets.
PW: Yeah. Yeah. So that’s interesting to me because I think that’s right.
A lot of people, I just try to dissuade them from even thinking about it, but I see it in a lot of investment portfolios. And a lot of people don’t even recognize that it’s in there because the advisors stuck it in there and they don’t even recognize that it’s in their portfolio.
But I would tell people, look for it. Look for it. It tells you that there’s probably something askew. My example that I have given many times over was where Fidelity had their target date funds and their top holding was a commodities fund.
EB: I remember that.
PW: Which, again, is not an investment. That was their top holding, the biggest holding, and then it just fell off a cliff. It was just a horrible, horrible performance.
And then all of a sudden they put it as . . . I think last I looked, it was like number 20. It was still in the portfolio, which made no sense to me. But the portfolio performance was so bad that they moved it down and they divested.
EB: Or it just shrunk. It shrunk so far it was the 20th.
PW: Yeah, maybe. Yeah, that might be it. That might be it as well.
I think it was the same guy that was actually talking about U.S. versus international. I thought he’s made some good points about U.S. versus international.
So when you invest, you have U.S. stocks, you have international stocks, and just recognize that U.S. companies historically have to pay to use your money, and they pay through earnings. Now, if you’re lending the money, bonds, you issue a bond and then you have them pay interest, and the cost to use your money is the interest payment.
If you’re talking about stocks, they’re paying you the earnings. And a lot of people don’t think about it.
But the reality of it is that international companies, they have to pay to use your money as well.
And especially when you’re looking at a period of time when there’s so much uncertainty. Typically, the expected return would even be higher in those circumstances simply because of the uncertainty. You get paid more with more uncertainty. Risk and return are related.
U.S. Stocks Selling for High Prices
PW: So this guy actually, he’s dealing with U.S. and foreign stocks, and it just made a couple of good points in here. I just thought we’d both comment on it, Evan.
Speaker 1: I wrote a piece where I, a little tongue in cheek pretending I was in —
Speaker 2: 2035.
S1: Yeah. Pretending I was in the future looking back.
S2: But in the future, you said the global stocks outperform the U.S.
S1: I did because we are starting . . . You can think about it in concentration. I prefer to look at valuations. They’re related.
When the U.S. is like much more of the market, triple the market cap of Europe, chances are that the U.S. looks expensive versus Europe. But it doesn’t necessarily have to be right.
If all the earnings and cash flow and sales tripled, then the valuation ratio wouldn’t necessarily go up.
But the U.S. does look very expensive. It looks record expensive against the world. U.S. exceptionalism is something I do probably buy into a little. I think all exceptionalism is eventually arbitraged away in a competitive market.
But yeah, I do think the U.S. is in better shape. In my piece, I even said the U.S. continued to outgrow and be more profitable. But starting from record multiples against foreign, it did not win.
PW: There’s so much there. There’s so much there to deal with. So what he’s talking about is U.S. stock selling for very, very high prices compared to both earnings and the assets of the company.
So when we look at it, we hear people saying the stock market’s at record levels, that can mean a number of things. When the Dow was at a thousand, that was a record level, and then when it went to 2000, that was a record level.
And when it went to 3000, that was a record high. And because markets go up and down.
But in general, if you look at a stock market chart, it goes up from left to right. So it’s at this slope going up, but it’s jagged. It’s up and down and up and down and up and down.
Price-to-Earnings Ratio
PW: So you could look at it and say it’s at record levels, and that’s meaningless because markets just go up more than they go down. But you can look at what the selling price is compared to earnings, because the earnings are going up, which is the bottom number in a price-to-earnings ratio, price divided by earnings. So in your fraction, the bottom number goes up.
If the bottom number is also going up, then the top number being a higher multiple of that bottom number might be something that people look at.
And he wisely makes the point that, well, it can be justified if that bottom number goes up a lot. For example, you heard in the late ‘90s, rightly so, that tech stocks were selling for a hundred times earnings. And in hindsight we go, “That was way too high.”
EB: Almost infinite.
PW: And in some cases, it was infinite because they didn’t have any earnings. That’s exactly right, Evan.
So if I’m looking at this as saying, “Well, it’s selling for a hundred times earnings, is that high?” Well, it’s way higher than normal because they normally sell for about 16 times earnings, but if all of a sudden the earnings go up like sixfold, if they go up fivefold and then instead of one to a hundred, it’s one to 20.
So at least it’s a little bit reasonable if the earnings go up fivefold. Well, if you have a ton of expenses when you first started a company, it doesn’t take much to get the earnings to go up if you just bring the expenses down or you just start to sell something.
If you aren’t selling anything, then you’re going to have nothing in earnings and you’re going to be putting all your money that’s walking in the door as a business, you’re sending it all out to expenses. And just the moment that you get past where you’re going into positive territory, whereas your earnings are high compared to your expenses or your sales are high compared to your expenses, hey, it’s all cool. And then all of a sudden it doesn’t look like it’s overpriced anymore.
U.S. Exceptionalism
PW: So he’s making that point that the earnings could go up and he makes some points, and I think this is really, really important because you may be a person that goes, “Yes, U.S., exceptionalism. Yes, the U.S. is exceptional.”
Regardless of what some politicians will say. “No, they’re not.” Come on. Really. No, we have a really good capital system in America.
EB: For sure.
PW: And the reality of it is we do have a lot going for us, and that may tell us that earnings will grow faster or are likely to grow faster in the United States versus the rest of the world.
But if the companies are selling for big, big multiples compared to those earnings, it may not be fast enough to justify it.
And that’s why he’s saying, “International, you might want to not forget about it.” And I think that’s the point that we like to make: Recognize that good diversification means that if all of a sudden those earnings don’t come through in the United States for one reason or another, whether it’s competition, whether it’s some unforeseen event that happens, to us versus somebody else, or if all of a sudden our currency drops versus other countries, you could be looking at a case really, really quickly where the U.S. gets significantly outperformed.
And we’ve seen that in the 1970s that happened. In the early late 1980s, excuse me, that happened. In the 1990s, the U.S. won the day. In the 2000s, though, that happened.
And it goes back and forth. And you can’t predict it. And I think that his point there is just to go, “Guys, don’t forget about this stuff.”
Because we have a tendency to look around us and go, “Wow, the U.S. has been exceptional over the past 10 years.” And it has, but not necessarily the case going forward.
EB: Yeah, you think about it, and I know you track numbers closer than I do. I think the last time I saw the U.S. —
PW: I get bored easily.
EB: The U.S. P/E was like at 28 and normally 16. The last number I saw was like 28.
PW: Just slightly over 20 right now.
EB: And so I don’t know what the international P/E is, but I think it’s below historic norms. Is it closer to 10 or 12?
PW: Yeah, I think around 14.
EB: Fourteen?
PW: Yeah. And then if you’re looking at small international, you’re looking at like eight for the value, somewhere in that neighborhood. Yeah, it’s pretty low.
EB: And so I picture there’s somebody doing a broadcast or sitting in a corporate boardroom in the U.K., in France, in Germany, and they’re making a case for German exceptionalism or British exceptionalism.
PW: When nobody’s making that case right now. Germany’s got a problem with immigration that’s been killing them.
EB: Some CEO is trying to make that case, right?
PW: That’s right.
EB: And so we always look at it through the lens of being in the U.S.
PW: Ethnocentricity.
International Stocks Outperforming
EB: So they’re not all sitting around just kind of waiting and hoping that international stocks do well. They’re doing the same thing CEOs do here. They just have a lot more room whenever they finally get their house in order.
Just because international outperforms over some period of time doesn’t mean the U.S. went down.
And I think a lot of times people think, “Oh, well, the U.S. isn’t going to drop, so it will outperform.”
Well, it could still go up 10%, do great. If international is up 16, okay, it outperformed. But they both did good.
PW: No, no, I think that’s a point well taken because we talk about dissimilar price when we talk about diversification. And when you had the market recovery after, we had the tech bubble.
I mean, good grief. That was a horrible period of time for U.S. stocks. Awful, in 2000, 2001, 2002. And you had the technology stuff going down 70-80%.
And then you have the U.S. going down 40 plus percent. And then people thought, “Oh man, that’s dropped a lot. It’s going to outperform in the future.”
And I got that phone call a lot on the radio show, and actually what ended up happening was just the opposite. It was international, the smaller companies, the value stuff up seventy-something percent.
But U.S. did well, as Evan’s talking about. It went up 28, as I recall. And it wasn’t terrible in 2003, but it was nowhere near what some of the smaller companies had done during that period of time.
Yeah. Well, I’ll tell you what, let’s take a quick break. You’re listening to “The Investor Coaching Show.”
There’s a lot of stuff, a lot of news, a lot of interesting things that have been going on. Private equity is something that I talk about from time to time here. Made the news this week.
I’ll talk a little bit about that. There was a lawsuit that actually took place and I think Evan’s got a few of those stories. So we’ll get into that after this.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.