In one sentence: Using Li Lu's speech on value investing in China, Phil and Danielle compare cash, bonds, gold, Bitcoin, real estate and stocks over 200 years, and argue that stocks win because businesses produce cash flow, which is why a small number of wonderful businesses is the best 20-year bet.
Key ideas
- Bitcoin has no cash flow to value. Phil and Danielle reject the "it's worth what anyone will pay" view. Businesses produce cash flow, and you can ask what you'd pay for it. In the short run price is whatever people pay (GameStop shows it), in the long run it follows production. [01:00–04:30]
- Graham's voting and weighing machine. In the short run the market votes on emotion, in the long run it weighs value. Phil calls this axiomatic for Buffett and Munger. [03:30–05:00]
- Why people like crypto. Danielle sees an appeal in an asset outside government control, which Phil links to currency printing. Phil doubts the trust the buyers place in it and notes that there are many cryptocurrencies, so it is unclear which one wins. [05:00–09:00]
- Currency loses value. Per the research Li Lu cites (Jeremy Siegel of Wharton, as the hosts describe it), a dollar from 1802 buys about five cents of purchasing power today. They tie this to the 1934 gold devaluation and to recent money printing. Check the figures at the source before relying on them. [10:00–17:00]
- Gold roughly keeps pace; stocks run away. As described, gold turned $1 into about $3 in real terms, bonds into far more, and stocks into more than a million times. The point is the ordering, not the digits. [16:00–22:00]
- Gold and Bitcoin are stores of value, not producers. A store of value should do about what gold did, so Phil expects Bitcoin, once mature, to track gold rather than add new value. [18:30–23:00]
- Why stocks win. Li Lu's explanation: companies' sales are a large part of GDP, and stocks earn a premium over GDP for owning a cash-producing asset. Bonds track GDP, stocks beat it. [23:00–26:00]
- You don't live 200 years. Indexes can go sideways for up to 26 years, and Keynes warned that markets stay irrational longer than you can stay solvent. For a 20-year horizon Li Lu says to own a small number of wonderful businesses. [26:00–28:30]
- Cash is the worst "safe" asset. Cash feels low-risk but loses buying power. Phil holds a lot of cash anyway as Buffett does (about $150 billion at the time), waiting for a storm that "rains gold" and a big bucket. [13:00–15:30]
- Real estate. Unleveraged returns of about 4% a year over a century are close to gold, because rents rise with inflation. Real estate gets better if you actively manage it, which is more like running a business. [28:00–31:00]
How it maps to RuleOne
- This is the reason the screen looks at businesses (cash flow, ROIC, growth) instead of price patterns. It also explains why the site has no crypto or commodity view.
- The cash-as-a-pile-waiting-for-sales idea matches holding back cash until the /stocks/ list shows names below your buy price.
Buffett, Munger and Graham links
- Graham, The Intelligent Investor (ch. 8, Mr. Market) and Buffett's letters repeat the voting versus weighing idea.
- Buffett's Berkshire letters (for example 2011) argue that gold and cash produce nothing and that productive assets are the best long-term holding. Check the year before quoting.
- Keynes's line about irrationality and solvency is quoted by the hosts.
Words to know
- Store of value: an asset kept to hold purchasing power, which produces nothing itself.
- Real return: a return after subtracting inflation.
- Voting and weighing machine: Graham's image of short-term sentiment versus long-term value.
Try this
Pick a stock on /stocks/ with a long history of profit. Write what cash flow it produces per share and what you would pay for 10 years of it. Compare that with the answer you can give for Bitcoin or gold.
Check yourself
- Why do the hosts say stocks beat gold over the long run?
Answer
Businesses produce cash flow and grow with the economy, plus a premium over GDP. Gold produces nothing and tracks inflation. - Why not just hold stocks for 200 years?
Answer
You won't live that long, and indexes can go sideways for as long as 26 years. Hence a few wonderful businesses bought well. - What is wrong with holding cash as the "safe" option?
Answer
Inflation steadily erodes its purchasing power.
Short quotes
"In the short run it's a voting machine, in the long run it's a weighing machine." (Phil, ~03:50, auto-transcribed)