TIP335: Mastermind Q1 2021 w/ Tobias Carlisle and Hari Ramachandra

Episode Summary

Executive Summary: The episode debates whether equities can serve as a better cash placeholder amid low rates, money printing, and inflation fears. Stig proposes a 50/50 value-and-momentum ETF mix; Hari and Toby question simplification and macro assumptions; Preston argues that central bank intervention favors growth and fintech-like exposure; all agree the next regime shift could be dramatic and that investors should think carefully about what “store of value” means.

Main Topics: Cash replacement in an inflationary, low-rate world (Priority: 5/5): The panel explores whether cash should be replaced by equities or equity ETFs to avoid inflation and opportunity cost while waiting to deploy capital. Value vs. momentum as a placeholder strategy (Priority: 5/5): Stig proposes combining a value ETF and a momentum ETF to balance bull-market and bear-market behavior while remaining invested. Central banks, rates, and market regimes (Priority: 5/5): Speakers debate whether interest rates can rise materially or whether yield curve control and QE will keep assets supported for longer. Benchmarking against the Nasdaq (Priority: 4/5): Preston argues the Nasdaq is a better benchmark than the S&P 500 for judging whether active choices are actually outperforming in the current regime. ETF structure, valuation, and concentration risk (Priority: 4/5): The group discusses the risks of large, popular ETFs being driven by flows and owning expensive large-cap names at high multiples. Alternative picks: Brookfield and fintech (Priority: 4/5): Hari pitches Brookfield Asset Management as a global storehold of value, while Preston pitches ARK Fintech as a way to ride structural change in finance.

Key Arguments: Stig argues that if cash is being eroded by inflation, a low-cost blend of value and momentum ETFs could act as a temporary parking place before better opportunities appear. Hari argues that a simple broad-market ETF may be a better cash substitute than splitting between value and momentum because it is easier to hold and track. Toby argues that the direction of rates matters more than the absolute level, and that if central banks cannot allow normalization, equities may remain supported for longer than many value investors expect. Preston argues that the Nasdaq is the right benchmark because central bank liquidity disproportionately benefits large-cap growth and technology-heavy names. Preston also argues that ARK Fintech could benefit from blockchain adoption, regulatory change, and broader shifts in financial infrastructure. Toby warns that ETFs like ARK can become self-reinforcing because large inflows help push the underlying stocks higher, making them vulnerable if flows reverse. Hari argues Brookfield Asset Management could function as a store of value because of its global diversification, infrastructure exposure, and access to capital. Toby and Hari both caution that Brookfield’s structure is too complex to value confidently, limiting its appeal as a placeholder despite its quality.

Data Points: Dow Jones Industrial Average 2020 return: 9.7% - Stig cites 2020 market performance while framing the discussion on valuation and cash alternatives. S&P 500 2020 return: 18.4% - Used to illustrate that equities rose strongly despite the pandemic. Nasdaq 2020 return: 45% - Referenced as an example of how growth stocks led the market. Vanguard Value ETF (VTV) 10-year return: 11.23% - Stig compares VTV’s long-term performance with the S&P 500. VTV assets under management: $97 billion - Stig describes VTV as the largest value ETF in his example. VTV expense ratio: 0.04% - Highlighted as a low-cost option for a cash placeholder. iShares MSCI USA Momentum Factor ETF (MTUM) assets under management: $14.1 billion - Stig cites MTUM as the largest momentum ETF in his example. MTUM expense ratio: 0.15% - Stig notes the fund is slightly more expensive than VTV. MTUM performance since inception: $10,000 -> about $32,000 - Stig uses this to show momentum’s outperformance in a bull market. S&P 500 comparable MTUM period: $10,000 -> about $23,500 - Benchmark comparison for MTUM’s inception-period performance. VTV 10-year comparison value: $10,000 -> about $29,000 - Stig contrasts value ETF returns with the broader market. S&P 500 10-year comparison value: $10,000 -> about $37,000 - Benchmark used against VTV. VTI 10-year return: 13.8% - Hari suggests a total market index may be a simpler cash replacement and notes it outperformed the proposed value/momentum mix. Brookfield Asset Management AUM: $600+ billion - Hari uses this to support Brookfield’s scale and diversification thesis. Brookfield AUM growth: ~20% CAGR - Hari cites strong long-term growth in assets under management. Brookfield AUM in 2002: $20 billion - Used to show the company’s long-term expansion. Brookfield fee-related earnings growth: 3x since 2015 - Hari highlights profitability growth. Brookfield carried interest growth (gross): ~6x since 2015 - Supports the argument for earnings power. Brookfield dividend growth: ~10% annually for 9-10 years - Hari notes steady dividend increases. BAM drawdown during liquidity event: -51% - Preston compares Brookfield’s performance in the 2020 crash/rebound cycle. BAM rebound from bottom: +68% - Preston notes it recovered, but not as strongly as Nasdaq on a cycle basis. BAM performance from pre-crash to present: ~+231% from 2012 baseline - Preston argues the Nasdaq still outperformed materially over the post-2008 regime. Nasdaq performance from 2012 baseline: ~+478% - Used as evidence that growth-heavy indices have dominated the entire QE era. ARKF performance from pre-crash top: ~+99% - Preston cites strong outperformance versus the Nasdaq from the 2020 low. Nasdaq performance from pre-crash top: ~+37% - Benchmark for ARKF comparison. ARKF largest holdings examples: Square, PayPal, Tencent, Zillow, Alibaba - Illustrates the fintech/disruption theme of the fund. ARK ETF average P/E: 54x - Toby cites this to argue valuations are stretched. ARK ETF historical earnings growth: 6.46% - Toby questions whether the fundamentals justify the valuation. Unprofitable tech stocks vs Nasdaq 100: +268% over 3 years - Stig references the extreme strength of speculative tech. US value vs growth snapshot: Value: 23% expected earnings growth at 15x P/E; Growth: 16% expected earnings growth at 22x P/E - Preston cites this as evidence value looks cheaper and faster-growing on paper. Bitcoin current price referenced: ~$32,000 - Preston uses this as a reference point when discussing future upside. Brookfield valuation implied return: ~5-7% expected return - Hari says his rough valuation suggests moderate upside with downside protection. Historical market mean P/E: ~16-17x - Toby uses long-run valuation reversion to estimate very low future index returns. Projected index return if valuations revert: ~0.9% compounded, including ~1.5% dividends - Toby’s estimate for the next decade under normalized valuations.

Pivotal Quotes: "I don't really know what happens. I can probably pick different ETFs that would be doing different things ... I just want a place where I don't get inflated away until I find something that I find interesting." — Stig: Explaining why he wants a market-based placeholder instead of holding cash. "The direction of interest rates is more important for stock markets than the absolute level of interest rates." — Toby: Central to his argument that regime direction matters more than current rate levels. "I think everybody has so much faith in central banks stepping in and doing the yield curve control that it's not going to be something that, you know, and so how are prices going to get punished if you continue to limit the amount of yield?" — Preston: Explaining why policy support may keep risk assets elevated.

Implications: Listeners are urged to think in regimes, not slogans: cash may be losing purchasing power, but the best placeholder depends on whether central banks keep suppressing yields, whether value rebounds, and whether growth-heavy ETFs remain flow-driven winners.