In this episode of MarketFoolery, Chris Hill chats with Stig Brodersen, co-founder of The Investor's Podcast Network and host of the We Study Billionaires podcast. Stig talks about his investing methodology and approach toward his work. He shares his thoughts on Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) stock, how he handles diversification, banking stocks, and much more.
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This video was recorded on Sept. 2, 2020.
Chris Hill: It's Wednesday, Sept. 2nd. Welcome to MarketFoolery. I'm Chris Hill. We've got something a little different today. It's a conversation that I had with Stig Brodersen. I'm sure some of you already know Stig, he's the co-founder of The Investor's Podcast Network.
A couple of quick programming notes: First, we're heading into the Labor Day weekend. So, this is the last episode of the week. Enjoy the break from MarketFoolery. We'll be back on Tuesday, because the market is closed on Monday. Again, great opportunity to check out the other Motley Fool podcasts, which leads me to my second programming note. On Motley Fool Money this weekend, Morgan Housel, going to be talking about his brand-new book The Psychology of Money. It's already an Amazon best-seller. I had a great conversation with Morgan, so check that out on Motley Fool Money this weekend.
But first, Stig Brodersen. So, Stig, as I mentioned, he's the co-founder of The Investor's Podcast Network. You may have heard him on the We Study Billionaires podcasts. And over the last few weeks, he and I have just been trading emails until we did a Zoom coffee, because a Zoom coffee is now a thing that people do. It took a little bit of coordination because he's in Denmark; a little bit of a time difference between Alexandria, Virginia, and Denmark. But you know, Stig is one of those people in the universe of financial podcasts that I just -- I see him from time to time and he's just one of those people who just I have so much respect for, for a lot of reasons, not the least of which is just the way he approaches investing, the way he approaches his work.
So, I'll stop rambling, and here's my conversation with Stig Brodersen.
Hill: As an American investor I focus almost all of my attention on the U.S. stock market. You're in Denmark, [laughs] you're six time zones away from where I am, what markets do you focus on in any given day or any given week?
Stig Brodersen: You know, like most investors I am, at times, prone to home bias. And I think it is a little different depending on nationality, but it's typically between 70% and 80% of your portfolio that you have in your home market, even though that if you want to say for the record that given America is a huge part of the global market cap, a bit more than 50%, you're not doing as bad as the rest of us international investors. But we do, as investors, just tend to concentrate in a few countries, because we feel it's within our circle of competence.
But really to your question, as you say, I live in Denmark, so it would be natural to think that I primarily invest in Danish stocks, but I honestly only own one Danish stock and I bought that at the very bottom of the COVID-19 crisis back in March. So, you just have to go where the value is. And again, what is within your circle of competence. And given that the Danish stock market is just the second most expensive in the world right now, it's just not too appealing, so I have a lot of focus on the U.S. right now, even though that the U.S. stock market also has somewhat inflated prices. And I was just talking, like, obviously we're talking about equities, [laughs] but really to make it a bit more specific, I am primarily looking at equities. And quick glance at the macro environment we're in right now with the excess money printing and QE [Quantitative Easing], if you don't want to be in too much cash, and that's typically an environment you don't want to be in cash in, well equities, are in many ways the least bad option.
But as your investment is really valued by your [unclear 00:03:54] cost, it's just the sad truth it seems. And occasionally, I do consider other asset classes if they really stand out. You know, just one example, earlier this year could be the run-up in the U.S. dollar, but that was because it was so evident that that was what you're supposed to do. So, I took a part of my portfolio and put it into euros, but it's really rare that I would make any kind of plays like that, it really would have to stand out.
Hill: You're a value investor -- how frustrating is the stock market right now?
Brodersen: Oh, Chris, you bet it's frustrating. [laughs] Already going into 2020, value investors underperform growth by, call it, 7% to 8% in the past five years, and 5% to 6% if you look at the past decade. And you know, given the nature of COVID-19 and how that has accelerated the demand for [unclear 00:04:45] products, you know, the underperformance of value just continues. And I hear a lot of value investors out there who have been asking themselves if we are now seeing a secular trend or if value is coming back and we'll see a mean reversion. I guess that is really the million-dollar question. But to me, everything comes down to valuation in the long run.
However, I also do want to say that the magnitude of which will come back in, I mean, value here, it might be disappointing to a lot of value investors. Because, you know, the example that's often used is, value was also underperforming after the dot-com for, call it, five years. And value investors caught up in seven months back then. And I'm not really sure if you'll see the same rebound this time. But we really haven't had similar low Treasury rates since the 1950s, and that's just something very few investors have experienced.
And I also want to say that a lot of value investors haven't really accounting for the low rates that we've seen in the past years. With such low rates, what that really indicates from the valuation standpoint is that the typical value stocks where a lot of the earnings are frontloaded, just have a less of an impact because as you discount the lower rates, companies with cash flows coming in later, you know, you can think of companies like Spotify and Square, that just changed their relative attractiveness.
Hill: So, are there bargains out there? Like, where should someone looking for value in today's market be looking?
Brodersen: So, Chris, being the optimist, I always do think that there are bargains to be made, and then here I come with all my disclaimers, because given the valuations right now, it can be challenging. And then if you look at the U.S. stock market; I was just complaining about the Danish stock market being the second most expensive. If you rank them, the U.S. stock market is the third most expensive stock market. And that is not the same as saying that you can't find any bargains, but the valuation baseline is already set so high that a wide difference between the intrinsic value and the price that it's currently trading at in your favor, it's just so much harder to find. And then, if you add the systematic changes with fewer public stocks and stocks being followed closer and closer, making the markets slightly more efficient, you might really feel that you are, call it, playing against a stacked deck.
And I know a lot of your listeners, Chris, are based in the U.S. So, they might even consider diversifying nationally, both, because of the diversification piece of the underlying security, but also as a hedge on the U.S. dollar. And I also want to say that the price might be a bit more appealing, because if you don't feel comfortable picking individual stocks in international markets, you can find cheap ETFs tracking them. And just looking at European ETFs right now, a lot of them are priced between, call it, 8% to 12% return, as opposed to the U.S. stock market that's priced at, call it, 3%-and-change. So, there are some opportunities there. You might even argue that it comes with less risk because of diversification. But it really has unlocked the European markets for quite some time, even though you could also [laughs] argue that it has been for a reason, whenever you have looked at the past growth rates.
Hill: I know you follow Berkshire Hathaway closely. Looking at the B shares, because I know I can't afford the A shares. Like, when you look at the B shares, do you see value at the current price?
Brodersen: You know it's interesting that you would ask that, because it has been all over the media, especially, what, call it a month ago, that Buffett has bought back a record $5.1 billion of shares there in Q2. However, if you do read the SEC filings, it was at an average price of $174 for a B share. And I would be surprised if Buffett bought back his own stock at the current price level to the same extent. And here we also should note that he bought back $1.7 billion, with an average price of $214 back in Q1. And I know we're tossing around, like, billions and billions of dollars like it's nothing, but keep in mind that we're talking about a company with an enterprise value of close to $600 billion.
But really to your question, you know, what do you get whenever you buy Berkshire? Well, you get $140 billion of cash, you have another $200 billion in equities. And so, you already have more than half of the enterprise value and then you get another, call it, +$20 billion in annual operating earnings from the subsidiaries that are fully owned. And even in these challenging times, that's probably what you can expect. And you might even include a bit more of Berkshire's earnings that's not a part of the SEC filings. And, well, if you do that, and of course depending on which type of multiple you want to put on that, you would probably get a valuation around $250 to $300 of value from the B shares. So, I would say that the stock is likely slightly undervalued, which in today's climate is not too bad in an overpriced U.S. stock market.
Hill: Stig, you've touched on diversification a couple of times. I'm curious, because there are a lot of different ways you can diversify, you can diversify by industry, you can diversify by market cap, by geography. How do you look at diversification in your own portfolio?
Brodersen: So, I'm generally quite concentrated. You might say that I'm taking a page from Warren Buffett's playbook whenever it comes to that, especially whenever it comes to my individual stock picks. I don't have too many good ideas, so whenever I do find them, I really like to invest a decent size to take advantage of that hopefully good idea. So, right now I hold 10 individual stocks, and I can't help but think I might be spreading myself out too thin. But let me try and be a bit more specific. I find that you learn a lot from owning a stock. And regardless of how much research you do before you buy it, it seems like you're learning differently whenever you have skin in the game.
And as you read the 10-Ks and go through the earnings call, it just becomes clear what you should pay attention to. So, very often I would like to take a position of, call it, 1% to 2% first. And if I like the stock and if I still like the price and the value, I would build a full position of up to 10% of my portfolio. And from that point, the position can more or less get as big as it gets as long as the intrinsic value somewhat follows the same stock price. But I also do look into a few different currencies at a time, as I was also mentioning before. And I do think that geography also plays a role. And then again, I would say that if you don't feel too comfortable about making too many individual stock picks, you might want to consider an ETF or tracking an index for those international markets.
Hill: In terms of industries, are there any particular sectors that you're looking at right now?
Brodersen: So, as I'm sure you know, Chris, value investors are wired a bit differently than most people; at least, whenever it comes to stock investing. They go shopping for stocks the same way they do their regular shopping. So, when something is on sale, they just buy more. And you might even say that value investors have some sort of reverse FOMO [Fear Of Missing Out]. So a way to start is to look at the most unloved sectors, and right now banks are unloved. And again, you can [laughs] argue that that's for good reason. Even going into the COVID-19 crisis banks were selling at a discount to the rest of the market, because it just seemed like there was still recency bias from the great financial crisis. So, whenever COVID-19 broke out, you just saw banking stocks take a horrible dive, and why wouldn't they, right? So, we have this horrible economic outlook, so why would anyone invest in banks?
Well, I also want to argue that banks have a lot of great things going for them, especially the bigger systemic banks. If you look at the big three, Bank of America, together with JPMorgan and Wells Fargo, they're really consolidating their positions right now and making fantastic long-term investments in digital services. And if you add that they can borrow at lower rates than regional banks can, and when you add in that they are better funded than ever and the competitive situation. Yeah, I would say that especially a bank like Bank of America looks appealing on a price-to-value scale, especially now it's trading at, call it, mid-$20s these days.
And another thing I would like to highlight with, actually most banks, but specifically here about Bank of America is that, it has the built-in hedge of rising interest rates. And I know that if we look at today's macro environment, you know, we don't expect to see higher interest rates because we are forced to keep them low to spur growth. But history has just shown that it's a very hard game to play if you try to predict interest rates. And stocks do become less attractive whenever you have high interest rates, because the opportunity cost changes.
But going back to banking stocks, that is actually a good thing for most banks. It used to be so that banks primarily made a profit from the net interest margin. So, that's the difference between borrowing and lending. But due to the low interest rate environment it has been challenging. Banks have to some extent change their business model because of that, and a bank like Bank of America, I mean if you look at filings, they make roughly half of their revenue only on net interest margin and almost half on fees. So, the investment thesis for banks have really changed. And I would argue that the market hasn't really priced it in just yet.
Hill: I like the idea of reverse FOMO. [laughs] That's a concept that I hadn't really identified with before. So, I think I'm going to look for that going forward. I know you're busy, Stig, and we've got the time difference, so I really appreciate you taking the time to talk today.
Brodersen: Anytime, Chris. It was an honor to be on your show. Thank you so much.
Hill: I hope you enjoy that as much as I did. I really enjoyed talking to Stig. Again, you can find the We Study Billionaires podcasts and the other shows that are part of The Investor's Podcast Network, you can find them everywhere you find podcasts.
One more thing before we wrap up, if you are a Motley Fool member, you may have been checking out our live video programming stream that we've been doing at Live.Fool.com. Starting next Tuesday, we've got some new programming. Fool School, we're going to be doing this from 3:00 to 4:00 PM Eastern each weekday for the middle two weeks of September. Short financial lessons like, picking the best stocks, the three best financial habits for students and a lot more. David Gardner is going to be involved in this. Again, go to Live.Fool.com if you're a Motley Fool member. You can check out Fool School starting on Tuesday, Sept. 8th.
As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.
That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill, thanks for listening, we'll see you on Tuesday.