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in 2024 we're going to be dealing with some of the toughest economic conditions we've seen in a very long time and that begs the question how do we approach our own investing for the year ahead well recently I got to sit down with legendary investor guy sphere to discuss exactly that guy founded the aquamarine fund back in 1997 but you might also know him as the author of the education of a value investor or as the man that worked with monus provide to secure the winning bid for Warren Buffett's charity lunch back in 2007.
it was honestly a great privilege to talk to guy once again in fact we ended up talking for over two hours but just quickly before I rolled the tape I just wanted to send out a reminder that we are currently looking for people to help review our new and improved investing courses that we've been working on for like the last six months so if you'd be interested in free Early Access and you have the capacity to hop on a call with me and give us some feedback sometime across the next few weeks then please check out the link in the description and the pinned comment but with that said let's get to guy and and the first thing I asked him was quite simply how should we be looking at the year ahead with things as they are in the stock market you know you've got to explore your landscape intelligently the landscape is different for every single person for a thousand different reasons first of all the instruments that they can buy or sell are different because they have access to different markets the size of their portfolio is different the access to information that each individual has is different don't allow that voice that says you idiot why are you not doing what Mike burry is doing why are you not doing what Bill Ackman is doing don't let that voice get to you because because you're you have to drive your investment vehicle from the perspective that you are in guys spoke to me at length about this topic the first key step is to acknowledge your own investing landscape and this comes back to self-awareness you as an investor need to understand where you are along your investing journey and thus what you should be looking at as an investor should you be looking at mining companies in Western Australia or energy providers in India idea or should you be starting with a more passive approach so the first step is to acknowledge what your own landscape is and what's appropriate for some investors might not actually be right for you so let's just get ground this a little bit I'm you know and I'm imagining I'm opening up my Charles Schwab account and so first of all if it's a Charles Schwab account which is a Us online broker I don't have access to every instrument so you know I'm not going to be able to buy Zimbabwe cement I'm not going to be able to buy the Chinese drinks company Mao Thai so already I have a landscape that's not a complete landscape that's okay there's plenty of things that I can I can look at but and then there's a dependency on my own personal knowledge if I'm putting myself on the shoes with somebody like that and let's say I'm I'm flush with cash there's 100 cash in the portfolio and I've decided that I'm able and willing to allocate X percent to equities which I know can fluctuate I think my first step is is probably an s p index and I think that I would go one step further and say okay well I understand that the market cap weighted index doesn't perform as well as a flat weighted index so I'll take the flat weighted index and and Charles Schwab provides me with access to that and then I would do that and then I need to pause and reevaluate because now I'm in a new landscape if you like so the first step is to Define what your investing landscape is be aware of your limitations and to be comfortable with them and this feeds into a huge Topic in the value investing World which is defining your circle of competence but before we get to that one thing I'm definitely not competent in is speaking another language but that's exactly what I'm trying to do with Babel the sponsor of today's video especially if I'm going to go hang out with guy in Zurich I'd better learn the local language but no while I joke about learning German one language I actually do want to learn is French and Babel is helping me do just that and the reason I chose Babel is because it's scientifically proven to help you start learning a new language in just three weeks but the thing that's great about Babel is it teaches you real world conversations so lessons prep you to have practical conversations about travel or business or relationships and more their lessons are designed by real language teachers and they even offer live classes plus they get two free classes with your subscription now Babel Has a few different subscriptions to choose from including a lifetime subscription so I encourage you to check which one might be right for you and as a bonus if you sign up with my link in the description you can score 60 off of your subscription so sign up with that unique link it's risk free with a 20-day money-back guarantee and thanks to Babel for sponsoring this video but as was saying before a huge part of investing in the next few years is going to be sticking to your circle of competence and importantly not over complicating it circle of competence expands gradually through experiences of existing businesses and it's okay not to feel like you know everything about everything I feel very supremely come comfortable with my investment in Berkshire Hathaway which very significantly sized position in my phone and has grown a lot and there are all sorts of people who come and say well it's trading at a premium to book value what if you know maybe they should be split up what happens when Warren dies but there's all that premium to book value disappear there are all sorts of concerns I've thought through those concerns and I I am extremely confident that I don't need to be worried about those I could maybe claim that that's within my circle of competence but somebody else might might not feel the same way about Berkshire Hathaway in which case maybe the s p is a far better far better way for you to start and you start with the s p and then you start looking at specific businesses in the s p and then at some point you say you know what I'm comfortable owning and I'm really just picking a name randomly out of the Hat United Healthcare or I'm I'm confident I've read about this strategy why where you buy the dogs of the Dow you buy the dogs of the s p and out of these five businesses that have performed really badly in the s p I actually really like this one or I work in the industry or so that that's the this nature of this changing landscape and we have to constantly evaluate where we are in our own personal changing landscape so particularly in uncertain Economic Times we need to ensure we stick to things that we understand well but beyond that I also wanted to quiz guy on two topics that will be a big part of investing throughout 2024 inflation and interest rates now in the US headline inflation has recently ticked up against so I asked guy if we do see ongoing inflation how can we best protect our portfolios if you start living in the world of businesses and start thinking about them in inflationary environments there is a broad diversity of businesses and one in some cases we don't really know we have to kind of think through the Dynamics of what will happen but to take you to the other end of the spectrum and to kind of the end point of where all this was going a bank received money and deposits and lends it out in a rising interest rate environment their net interest margins the the difference between what they what their funds cost for them to raise through client deposits primarily and what they get when they loan the money out Rises so that an interest rate and a rising interest in interest rate environment tends to be good for banks with those kinds of balance sheets it tends to be good for any business the source of the revenues is denominated in nominal terms so um the beautiful thing about credit card networks is that they take a percentage of nominal amounts spent they don't have to go and ask for price increases because they take a percentage of what the customer spends in the store so so as the as people succeed in raising prices they're they're baked in on that another example would be a stock exchange the stock exchange is baked in because their revenues tend to be a proportion of the total value nominal dollar value of the shares traded and so they're in many ways inflation protected so there are businesses that are find it have a far easier time in an inflationary environment and you kind of ideally want to be in those businesses for all sorts of reasons so here guy is essentially telling us that the number one thing you can do to try and Safeguard your portfolio from inflation is to make sure the businesses in it have a competitive advantage and beyond that his tip is to think about the business models do they make money in a way that is inflation proof guy talks about credit card companies where they simply take a percentage of money spent thus as people spend more because things cost more a Visa or a MasterCard automatically makes more or even beyond that are you looking at a business with such a strong moat that they can simply pass on price increases to the End customer for example Coca-Cola last year raised their prices as inflation hit hard but did their sales Fall no they continued to rise so that's a really smart idea as to how to protect your portfolio as best you can from inflation but with inflation also comes higher interest rates from central banks so how should we be thinking about this High interest rate environment in 2010 for so especially high growth businesses as interest rates rise their valuations can come down very very dramatically and so there's a question that arises yeah okay but if they're fashion protected what should I do I would tell you that it's reasonably clear to me that if you have the expectation that interest rates will rise then there is a very high likelihood even on non-growth businesses that their valuations will come down and that's not very pleasant and I think that over time you make it back because they will be able to raise prices in line with inflation and their earnings therefore will grow faster but those two things work against each other you can make a very good case for saying we'll wait for interest rates to rise hold on to your cash and then buy but what I choose to do because that's just too hard for me because that gets too close to kind of like timing the market so what I choose to do is I just say I want to be in these businesses I'll try and buy them at a good valuation I don't want to waste my brain cells thinking about inflation and so I just decide not to think about it and say well if I'm in a good enough business and I've given some of the criteria that I'm using to try and try and select them then I should be fine no matter where interest rates are I found this clip from guy really insightful the unfortunate reality is that when interest rates are higher valuations on most businesses fall that's the reality of how macroeconomics plays out but he simultaneously acknowledges that interest rates are one of those things that's just completely unknowable and to try and time the market by predicting what interest rates will do is a Fool's errand so I really like his approach instead of trying to predict the macro which is top down thinking instead focus on each individual business which is bottom-up thinking and if you can find businesses that do have those competitive advantages and you can buy them at reasonable valuations holding those businesses over a long period of time is in guy's eyes the simplest way to get around the pain that is short-term variability and a rising interest rate environment so with that said how does guy approach his own investing how's he positioning himself for the year ahead what I do is I do something something I would call barbell so imagine I'm a caveman and um you know on the one hand there's really really juicy bison and uh what are those big elephants the prehistoric elephants were called you know mallets or something like that exactly you know tasty meat lots of it they're out there the only problem is to go out hunting for that stuff you know you need to go out and there may be saber-toothed tigers and all sorts of nasty animals that can kill you so it's dangerous stuff now deep back in my cave I've got a supply of dried fruits and I've got a supply of maybe some grains I've managed to pick up and those are like deep there and they're safe and where I want to sit is I want to sit at the mouth of the cave I want to have lots of stores behind me that if if storms come in if if lots of nasty tigers are out there I can stay inside the cave or close to the mouth of the cave totally safe and I can eat and every now and then when the conditions are really good or if a juicy Mammoth comes real close I can go out and try and get it what does that mean in the portfolio well the back of the cave are the things that even the if the apocal this comes will still be able to feed me and we've got in my case I've got things like uh Nestle in there as the best example that I'd like to give but I also have American Express and I have Bank of America and I have Berkshire Hathaway and and then you know I go outside the cave so to speak and I go and hunt uh for things that could be multi-bagger Investments so in my case you know I go out and I look for Indian energy exchange and I look for care ratings and I look for uh these situations Heritage would be another where I could make many multiples of my money but I might not uh and so that's kind of like uh it's a sort of like barbelled approach you've got you've got your safety stuff and you've got the stuff that could generate huge returns and that works really really well for me and I feel very very comfortable with that but all of my long Prelude was to say that's what I do and you need to see that in the context of who I am and where I am that doesn't mean that you should do it Brandon or a listener should do what I'm doing taking an example don't take it as advice so ultimately that's the approach that works best for guy given his own investing landscape but I think there are some good lessons to be learned there for everyone the first thing is that he follows Buffett's first rule of investing which is don't lose money and he does that by having the real really solid foundation of super stable long-term businesses in his portfolio that protect him from any potential economic storm but then with that safety in his portfolio that also enables him to watch for those infrequent opportunities where you could strike gold in a sudden situation now this is certainly not Financial advice and please remember that this might not be right for you but guy's approach is very similar to what I do with my own portfolio for me my solid foundation is not Nestle or Berkshire but it's a simple S P 500 Index Fund and then from there I look for companies like an Alibaba or a Google or a meta that get beaten down heavily sometimes and sure they might struggle but they also might double or triple my money over time so they were my four key takeaways from my chat with guy spear going forward in this kind of investing environment you need to firstly understand your own investing landscape and your own circle of competence then to combat inflation you need to hone in on the business model and ensure the business has a competitive Advantage where it's naturally inflation resistant or can pass on price Rises to customers with little consequences thirdly don't get sucked into watching interest rates rise just focus on bottom-up thinking hone in on a solid valuation and think long term and then lastly remember guys approach to having the grains and fruits in the cave behind you and then from there keep an eye out for those big infrequent opportunities to get a mammoth and with that said I wanted to say a massive thanks to guy for once again agreeing to come and join me on the Channel please leave any comments or messages to guy in the comments section down below and I'm sure he'd love to hear them I'll be sure to pass them on to him uh you can also watch the full unedited version of the conversation over on the young investors podcast feed if you'd like to hear more from my chat with guy but with that said guys that's all for today leave a like on the video if you did enjoy it subscribe if you'd like to see more and I'll see you guys in the next video foreign foreign
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