TIP 071 : Value Investing Questions from the Audience and Benjamin Franklin by Walter Isaacson

Episode Summary

Executive Summary: The episode opens with a broad bearish macro view: Preston argues that a global credit contraction began around mid-2015, driving a major selloff in global equities, commodities, and risk assets, while Stig largely agrees on the cycle but is more patient on oil and less certain on timing. The hosts then answer listener questions on investing style, analyst recommendations, intrinsic value, value-investing discipline under drawdowns, and whether the U.S. market is expensive versus the “new normal” thesis. The episode closes with a brief, mostly lukewarm review of Walter Isaacson’s Benjamin Franklin biography, highlighting Franklin’s ethics, self-improvement, and mastermind thinking more than investing lessons.

Main Topics: Global credit cycle and market contraction (Priority: 5/5): Preston frames the market selloff as part of a worldwide credit contraction, citing a chart of global stock market capitalization. He argues the decline is self-reinforcing and likely to worsen unless a powerful central bank or fiscal authority intervenes. Federal Reserve, ECB, and policy divergence (Priority: 5/5): The hosts debate whether central banks can or should counteract the downturn. Preston sees the Fed as the only institution with enough firepower to stop the contraction, while criticizing the ECB and BOJ for mixed or ineffective responses. Oil, commodities, and supply dynamics (Priority: 4/5): They discuss oil’s collapse as a function of both macro liquidity and supply tightening. Preston remains cautious and waits for a trend reversal; Stig emphasizes that oil is not purely a demand story and may rebound sharply when supply tightens. How the hosts invest: value vs macro (Priority: 4/5): A listener asks whether their strategy has changed. Preston describes a hybrid approach that shifts toward cash and macro awareness in downturns, while Stig says he remains a pure value investor focused on price vs. long-term value. Analyst recommendations, price targets, and intrinsic value (Priority: 5/5): The hosts reject reliance on analyst targets and emphasize independent research. Preston stresses that intrinsic value must be tied to a discount rate and implied yield, otherwise the valuation is incomplete. Behavioral discipline in drawdowns (Priority: 4/5): A listener asks how value investors stay committed when positions fall. Stig recommends writing down the investment thesis and re-reading it when volatility rises; both hosts emphasize conviction and patience. Benjamin Franklin biography and life lessons (Priority: 2/5): The book segment finds limited investing relevance in Walter Isaacson’s biography, but the hosts highlight Franklin’s mastermind group, ethical self-improvement, and disciplined character development as notable takeaways.

Key Arguments: The decline in global stock market capitalization reflects a broader credit contraction, not just a normal correction. Credit cycles are self-reinforcing on the way up and down, making policy intervention critical once contraction begins. Preston believes U.S. tightening worsens the downturn; Stig notes Europe is still trying to expand credit, though he doubts it will work. Oil is being hit by both liquidity contraction and weak pricing dynamics; Preston would rather wait for confirmation of a bottom than try to catch falling knives. Value investors should not outsource conviction to analysts; independent analysis is needed to hold or add during drawdowns. Price targets are incomplete without a discount rate because intrinsic value must imply a return/yield. A 52-week low can be a useful idea source, but only if the investor understands why the asset is cheap and whether the business model is sound. Stig argues that listening to Buffett’s advice—documenting the thesis and reassessing when times are tough—is a practical method for staying disciplined. Preston argues the equity market is expensive relative to bonds because the spread between asset classes is too narrow given rising rates. Stig agrees with Schiller over Siegel, because cyclically adjusted valuation metrics matter more than short-term earnings or a supposed “new normal.” The Franklin biography is more useful as a historical or character study than as a direct investing/business manual.

Data Points: Episode timing: Recorded about two weeks before release; Preston says it is January 18, 2016 - Used to explain why some market observations lag the listener’s current date Global stock market cap increase: 72% - Preston says global market capitalization rose from Q3 2011 to Q2 2015 Global stock market cap added: $30 trillion - Preston cites total increase in world equity market capitalization over the growth phase Global stock market cap lost: $15 trillion - Preston says about half of the gains had already been erased in the prior 6–9 months U.S. market pullback: About 7% YTD; about 10% off the high - Preston contrasts the U.S. pullback with the much larger global contraction Fed rate hikes expectation: 4 hikes in the coming year - Preston references Stanley Fischer’s guidance as a sign tightening will continue Oil price example: $28 per barrel - Used repeatedly as an example of depressed commodity pricing Oil sector position: Preston says he is waiting to buy until the trend reverses, even if that means buying later at a higher price - Illustrates his patience and avoidance of catching falling assets Portfolio cash position: Stig says he is short about 30% in stocks - Signals his cautious stance during the contraction Schiller CAPE: Around 24; was 27 not long ago - Used in the Siegel vs. Schiller debate Current PE referenced: Around 20 - Used by Michael’s question and by the hosts to discuss low-rate justification for higher multiples Equity yield vs. bonds example: About 4% equity yield vs. ~2% fixed-income yield - Preston argues the spread is too small to justify equity risk

Pivotal Quotes: "I really feel like, to be honest with you, they're the only ones that have enough firepower to really at least subside this downturn" — Preston: On the Federal Reserve’s role in stopping the global credit contraction "The way I see oil is simply that we are doing a cycle." — Stig: On whether oil’s collapse is mainly cyclical and supply-driven rather than purely demand-driven "You got to complete the sentence." — Preston: On why intrinsic value must include a discount rate and implied yield

Implications: Listeners are encouraged to think in macro cycles, not just headlines: preserve liquidity in downturns, verify valuations independently, and treat analyst targets skeptically. The episode suggests policy, credit, and yield spreads will dominate asset prices more than near-term fundamentals.