Meet the Audience (30 Mins with the host 1 on 1) – Please Use This Form
Brendan has more than a decade of industry experience in investments and public finance since graduating from James Madison University with a Bachelor of Business Administration degree in Finance and Accounting.
For the last several years, Brendan has worked as a Registered Investment Advisor for Lafayette Investments. For Lafayette, Brendan manages a portion of the $800 million in assets under management, primarily for high-net-worth individuals.
Brendan is a Chartered Financial Analyst (CFA) charterholder. He has served on various boards and committees, including the James Madison University College of Business Board of Advisors (former Associate Board Member), Cystic Fibrosis Foundation’s Maryland Chapter (Board Member), Can Educate (Board Member) and the Member Engagement Committee for CFA Society Washington D.C. (former Committee Member). Brendan is a two-time winner of the Tomorrow’s Leader Award for his contributions to the Cystic Fibrosis Foundation.
Brendan is the author of two books: Markets in Chaos: A History of Market Crises Around the World (published by Business Expert Press) and The Wandering Investor.
We talk about Brendan’s book and research on market crises around the world. We start with the most recent global COVID pandemic and the market chaos that followed. We take a tour around the world, stopping by in Iceland, and taking a fresh look at what happened there over a decade ago. Icelanders became three times richer in three years as leverage, and banking led to trouble. Brendan shares stories of crises in Latin America and Asia. We have a longer conversation about the dangers of inflation, and specifically hyperinflation.
Our trip around the world wouldn’t be complete without a stop in Africa. We both have great curiosity about the 1970s in the US, the Japanese stock market rise and fall in the 1980s.
We both strongly believe that there is always a lot to learn from history, and past market crises can teach us a lot. They expand our imagination and show us how to navigate some more stormy seas.
Author: Markets in Chaos: A History of Market Crises Around the World
The Wandering Investor
The Wandering Investor: Hughes, Brendan: 9781098320317: Amazon.com: Books
--- Crisis Investing: 100 Essays - My new book. To get regular updates and bonus content, please sign-up for my substack: https://bogumilbaranowski.substack.com/ Follow me on Twitter: https://twitter.com/bogumil_nyc Learn more about Bogumil Baranowski Learn more about Sicart Associates, LLC. NEVER INVESTMENT ADVICE. IMPORTANT: As a reminder, the remarks in this interview represent the views, opinions, and experiences of the participants and are based upon information they believe to be reliable; however, Sicart Associates nor I have independently verified all such remarks. The content of this podcast is for general, informational purposes, and so are the opinions of members of Sicart Associates, a registered investment adviser, and guests of the show. This podcast does not constitute a recommendation to buy or sell any specific security or financial instruments or provide investment advice or service. Past performance is not indicative of future results. More information on Sicart Associates is available via its Form ADV disclosure documents available adviserinfo.sec.gov
AI-generated transcript, it may contains errors, thank you for your understanding…
Bogumil Baranowski (00:01.784)
Well, hi, hello, Brendan, how are you? It's so nice to see you.
Brendan Hughes (00:05.442)
Hi, Bogumil, I'm doing great and thank you very much for having me today.
Bogumil Baranowski (00:10.172)
So I was introduced to your book, Markets in Chaos, a history of market crises around the world. And I was very impressed with that book and it really resonated with me because I'm fascinated with anything that went wrong in the past and what we can learn from it. And your book is an incredible resource, a study of many, many different crashes and crises in the past around the world and what kind of lessons we can learn from them and what kind of themes keep on repeating throughout history.
But before I ask you about your book and what you've learned for your research, I'm always curious to start with childhood and upbringing. And I'm curious how your story got started, how you got interested in investing and maybe a little bit more why that interest in crises and what can go wrong and the chaos in the markets. Why that part of the market stock market history?
Brendan Hughes (01:01.638)
Okay, well, thank you very much again for having me, Boga Mill, and thank you for the kind words about the book and such. So since I was young, I've always liked to be around money. And I think that that's probably a common theme among people in investing, or I think at least it should be. If it's not, I think that there's probably something concerning going on there.
My earlier teen years, I was always working some kind of job before I was of age to have a full-time job. I would mow neighbors' lawns. I would be shoveling dry boys in the winter with snow and babysitting and things like that. I was always hustling to make money even from an early age. I think my parents instilled in me the value of hard work and the concept of looking for...
values when shopping for things and such. And I think that translates pretty well to money management. And I'm not embarrassed to admit that I shop at places like Walmart for groceries. Like some of the things that my parents raised me with like the focus on value, which you're getting for your money. I've carried that with me in terms of going out and purchasing things in terms of investing and also just in life.
From an early age, I got to see the value of compounding. My parents purchased some stocks for me, and I would periodically look to see how they were doing. I would recommend that other parents use this practice, because you get to see how money works over a period of time. Like say you're young and you had a few shares of...
TJX, which I specifically remember from when I was younger, you get to see it grow over time. And I think that that's really powerful. You'll have some winners, you'll have some losers, but I think the important thing is that you really start to understand how money works from an early age. And I think that was really powerful for me. And it definitely got my juices flowing from an early age.
Brendan Hughes (03:21.774)
I've always liked being around money for these reasons. And as an investment advisor today, I'm around money every day. And there's good and bad that comes with that. At times, as I'm sure you're aware, BogaMill, it's enormously stressful to be responsible for other people's fortunes. And during times like the COVID pandemic, it's difficult to...
to sleep. But there's also a lot of good that comes out of being around money. If you are raised with a background that I've described, I think it's just interesting. You either like it or you don't and I've always enjoyed it. As you mentioned, I've written on topics such as...
market crises. And I think that I chose to recently write about market crises is because I, as I've started to get further along in my career, I thought a lot more about.
really focusing on wealth preservation. Cause at the end of the day, that is what's most important. You can do, nothing else matters if you lose everyone's money. And I'm just not, if you study past market cycles, things like that, I don't agree with people that just say, oh, you can put it into this.
Bogumil Baranowski (04:40.625)
Mm-hmm.
Brendan Hughes (05:03.798)
this fond and just let it do its thing and everything will be okay. Like Ray Dalio researched, um, countries since 1900 and seven of the top 10 world powers, this is the seven of the top 10, not the, um, the, like some of the worst countries, seven of the top 10 have had their wealth basically completely eliminated at least once that since 1900. So like those types of things, understanding them gets me.
Bogumil Baranowski (05:17.881)
Right.
Brendan Hughes (05:32.302)
paranoid to an extent because I'm responsible for other people's life fortunes. So I think that that's at least a quick overview and some information about what got me particularly interested in market crises.
Bogumil Baranowski (05:34.396)
Mm-hmm.
Bogumil Baranowski (05:49.132)
I love what I'm hearing and I'm writing down so many notes about the perception of value that you grew up with. I share a story that my grandma would take me shopping and how she instinctively knew that, you know, price is one thing, value is something else. And when you pick a tomato or a cucumber or whatever it is, you look at what are you getting, what are you paying? And it really resonated with me once I picked up investing books, whether it was Ben Graham or Buffett or...
Brendan Hughes (05:52.238)
I'm gonna go.
Bogumil Baranowski (06:16.668)
Peter Lynch early on how it's the same idea. You're paying a certain price, you're getting a certain value. And the power of compounding, I think it just speaks to some people. And once you get it, once you see it, it's very hard to unsee it as a very powerful way to grow wealth over time. You touched on a very interesting topic that resonates with me, which is managing your own money, managing your family's money, and managing other people's money are very different experiences.
had many guests on the show, but I had Guy Spear, who is a famous value investor on the show. And we spoke about his experience managing his family money in the initial years and how he basically said he was shaking because he knew what kind of responsibility it is to manage the family money. And speaking of families, you're pointing out something really fascinating. Once you expand your investment horizon from even three, five years to maybe a century.
It really matters where that wealth is. And there are not so many countries in the world that offered a location, a platform, the framework, the circumstances to preserve wealth over the last hundred or 200 years, and I can really think of a handful. And if you talk about the larger economy, there's just one, the United States that I can think of that had 200 years where you had the currency that got obviously a lot weaker that you talk about in the book, and I'm sure we'll come back to it.
But on relative basis, in terms of democracy, stability, the size, what it offered, I can't think of any other place. And I talk about it in my book, Money Life Family, how the location that you choose. And it's an especially sensitive topic to me. I was born in Poland in the last decade of the Cold War era. And I've seen a newly reopened stock market after a 50 year break with a big bull market and a big bear market.
So I've seen hyperinflation that you talk about. I actually lived through it. And a lot of the stories that you share in the book really spoke to me on a personal level that wealth preservation is more of an exception than a rule, no matter how much money you start with, but I'm sure we'll come back to this. I want to ask you about the last crisis that you start the book with about the COVID global pandemic, a very unusual crisis.
Bogumil Baranowski (08:36.324)
You talk about the speed of the correction, which we all still remember very well, and it came up as a topic on this podcast, the 30 some percent correction in March of 2020, followed by an even more surprising, as you point out, rally that followed, but on top of it, it was a huge acceleration in a lot of trends and adoption of whether it's remote work or entertainment at home or digital services and so on.
kids were getting their education from home, so did students, and we all worked from home for quite a bit, and many of us still are. A big leap, but so many things happened. Tell me more about that period. What did you learn from it? And it's such a fresh memory to all of us.
Brendan Hughes (09:20.57)
Yeah. So I'm sure that you, um, just from an investment standpoint, had a similar experience, um, to me, but it was an enormously stressful time as, as an investor, um, everyone was trying to figure out what was going on. And the reason that I actually started writing my book on, on markets in chaos was after I saw, you know, this quickest 30% market decline in history, I thought, what could I have done?
to have been better prepared for this. Because something that was really interesting was every news outlet was saying, oh, this is an unprecedented situation. Well, I don't wanna take away from what happened in the COVID-19 crisis. It was terrible in terms of loss of life, the economy, a number of things. But to say that this was unprecedented in history is a wildly untrue statement. I mean, on many levels. In my book,
Bogumil Baranowski (10:00.584)
Mm-hmm.
Bogumil Baranowski (10:16.379)
Mm-hmm.
Brendan Hughes (10:19.422)
specifically reference the Spanish Flu in 1918 in the Black Death in the mid 1300s. In the Black Death, and the data is not good because this was in the mid 1300s. Obviously we have much more substantial data sources today.
Bogumil Baranowski (10:23.272)
Mm-hmm.
Brendan Hughes (10:39.414)
The rough estimates are between 30 and 60% of all Europeans in between 75 and 200 million people globally died as a result of this at a time when the pre pandemic population was just 475 million. So to say that the recent crisis was unprecedented is just not that's not true. And that's what got me interested in looking back. And I started to.
Bogumil Baranowski (10:52.04)
Mm-hmm.
Brendan Hughes (11:07.386)
I wanted to understand more as to, you know, what could have better prepared me for this. So we could go down a huge rabbit hole of statistics from past pandemics, but I think it's important to recognize that for thousands of years, pandemics have basically shaped the world that we live in today. And I think that, I don't think that that's going to change going forward. People have been trying to...
Bogumil Baranowski (11:30.222)
Right.
Brendan Hughes (11:33.858)
think about some of the long lasting effects of the COVID-19 pandemic, as you alluded to. Obviously, I think we're all aware at this point that hybrid work is here to stay. You can argue about what degree it'll be around, but for some portion of the population, that's here to stay. And that development has knock-on effects for office buildings and laterally businesses that provide loans to office buildings and things like that. And some demand
Bogumil Baranowski (11:47.546)
Mm-hmm.
Brendan Hughes (12:04.046)
ultimately proved to be pulled forward from future demand in areas that were related to technology. But I think it's clear that COVID-19 definitely accelerated digitization, which I think is just a long-running trend. I mean, you have the basically people spending less cash, shifting more to electronic payments.
Bogumil Baranowski (12:13.724)
Mm-hmm.
Brendan Hughes (12:30.086)
mobile ordering at restaurants, things like that. And that's just going to be, that has been a long running trend that was accelerated from COVID-19. That's gonna continue in the future. I think you would probably agree with that assessment.
Bogumil Baranowski (12:37.841)
Mm-hmm.
Bogumil Baranowski (12:47.956)
I know, absolutely. It's fascinating because in moments of crisis, in moments of distress, things speed up. Some things get removed and destroyed. They're not relevant anymore. And people forget how many new businesses were started in the 1930s. If you actually look at some of the publicly traded companies, a lot of them took a big leap or were actually started in moments of crisis. And I think you pointed it out how this unusual period allowed us to try something different.
and I would call it general, intangible digital virtual experience, whether it's work, education, entertainment, payments, and you name it. And I think it was a permission not to observe the rules that we've been observing so far, which for example, to me it means, work is only done when you show up at a desk. It's been a religion, a very strong belief, which I had doubts about for many years because.
even your work and my work, I just need a quiet place to read. And obviously be reachable and have decent internet. But it's secondary if I'm sitting at a desk in the middle of, you know, Midtown New York or somewhere in the woods, which I actually, that was the place where I spent some of the early months of COVID. But in those months I picked up history books and you point out something fascinating in moments of doubt when we're not so sure how the future looks like somehow for me looking at
reading a good history book and I was reading history of plagues just like you in those weeks and There are a couple of things I walked away with Yeah, it's the biggest thing was that the pandemics happen in waves So when I was watching TV and they would tell us it will be over in two weeks Every plague every pandemic in history had waves and those waves were very inconsistent. They would follow a very random seemingly random
Brendan Hughes (14:20.386)
Hehehehehehe
Bogumil Baranowski (14:43.836)
pattern around the world. So some islands in the Pacific would get the worst of the worst of the pandemic. You were talking about 1918 about the Spanish flu. The, the, the flu got to the, some of the islands a year or two later, not that different than what Australia was experiencing with COVID or New Zealand or other places that already celebrated the end of COVID have not seen or had not seen at that moment, the worst of it just yet. So I think the whole world took a while to embrace that this is not a two week thing.
This is a multi-year thing, and it will change the way we operate.
Brendan Hughes (15:18.594)
I think you bring up an excellent point. I just read a recent book on the history of the middle ages and the author is Dan Jones. It's a fascinating book that I think that everyone should read. But it talked about the black death and relating this to COVID-19, as I think you rightfully point out, a lot of times there's basically waves. Like the waves...
that were associated with the Black Death went on for decades. Now, obviously we have better technology with vaccines and such compared to now, but I think it's important to just understand like some potential scenarios. Like we're definitely better off than we were in 1350, but understanding that it's possible that you could just have decades of recurring...
Bogumil Baranowski (16:04.638)
Ha ha.
Brendan Hughes (16:13.734)
cycles where people just keep getting sick all over the place, I think you have to at least understand that that's in the realm of possibility. If your goal is to just if you want to understand the range of outcomes and tie that back to wealth preservation, I think that that's really important, but as it relates to the Black Death, that helped basically sow the eventual demise of the Mongol Empire that ultimately allowed for the
Bogumil Baranowski (16:41.317)
Mm-hmm.
Brendan Hughes (16:43.726)
for the rise of China and then countries in the West such as Spain, Portugal, Britain. And there was, in this particular instance, there was a lasting impact kind of similar to some of the things that we've talked about related to COVID-19. But the bargaining power shifted to workers because so many people died from the Black Death that there was a massive worker shortage. It lasted for a long time. So the recurring theme throughout all these...
Events is that there's world altering moments where there was a pre-pandemic world in a post-pandemic world in these really big scenarios so trying to figure out What you know, what are the short-term impacts and what are the potential long-term implications? Because some of these events can have really long-lasting impacts that people are just late to understanding and I think that the more you study these types of events the more you are
better able to pick on some things related to that.
Bogumil Baranowski (17:46.12)
I agree. Brendan, I want to ask you about the government and the reason I want to ask you about the government, I've lived through the dot com bubble and I've lived through the financial crisis, the housing market crash, and now I've lived through COVID and I notice how a big theme and I mentioned it in my book, Crisis Investing, is the government response and all I wrote down to myself to remember. Don't count on it.
don't count on the government to come to help you, but don't underestimate their response if they do come. And I'm curious about your thoughts on that front.
Brendan Hughes (18:23.308)
Yeah.
Brendan Hughes (18:26.914)
So I think I got this, I get to this later on, but basically as I've learned through various case studies, it's been better, in general, it's been better off for there to be a swift and forceful response from the government in times of crisis like this. Like a few times where the response was not basically,
strong and forceful was the Great Depression, which I think we understand was a very bad time. The government response could have been more forceful. And also during the long depression in the 1870s, those were two times where there was prolonged economic malaise. And I think a big part of that was because the government didn't respond forcefully. But
Obviously during the COVID-19 pandemic, they brought out all the tools. And I think that followed in the wake of the global financial crisis. And I think that was one of the things that they've learned from crises in history. But I think it's important to go to revisit a titanic moment.
in history, which was 1971. This because if you don't understand what happened here, I don't think we can understand where we are today because everything ties back to this moment, at least in my view. 1971, when the U.S. severed the link between the dollar and gold, in the roughly 50 year period, since the scrapping of this link, U.S. debt has soared 70 fold.
And this is not something specific to the US. This is something going on around the world in most countries. Not all, but many. But this is what's always happened when we've had unbacked paper money. There's a loss of monetary accountability. This is, I've gone back and studied a lot of these events, and this has been a recurring theme. I don't know how you feel about...
Bogumil Baranowski (20:37.108)
Mm-hmm.
Bogumil Baranowski (20:48.912)
I feel the same way and I wrote about it in... I feel the same way. I think it's the elephant in the room. That's what I call it in my book Money Life Family. That's something that we conveniently ignore because you can't see it. The amount of debt and the fact that the paper money is not backed by anything. It all relies on trust and we believe in it.
Brendan Hughes (20:48.918)
this based on your studies.
Bogumil Baranowski (21:11.596)
I lived through hyperinflation as a kid, as a teenager in Poland. Poland went through a massive economic transformation from a centrally planned economy, basically disconnected from the world in terms of trade with very big restrictions to completely open economy with a booming economy for quite a while. But one of the things that happened was hyperinflation. Things were so out of whack and the prices were catching up with reality. And I think hyperinflation is something you have to live through.
It's like trying to explain to anybody what's it like to be a fish or to explain to a fish what it's like to be walking on the land. Hyperinflation is such a massive force and it's hugely disorienting to people and businesses. And people do, people try to be rational about it and they might be making purchases that make no sense. And businesses are trying to survive and make decisions that really make the best sense in the moment, but are highly, highly
disruptive in the long run. So any economy that's dancing with higher inflation and eventually going into hyperinflation has not fully embraced what kind of risk it is. And in your book you mentioned some stories with Zimbabwe, with Germany in the 1920s, and Latin America went through their waves too in many countries around the world. But if you want to jump in and talk about hyperinflation, we can do that. I think it's
the elephant in the room and a danger to any wealth preservation you can think of and there are very few places you can hide.
Brendan Hughes (22:46.894)
Do you want to talk about Zimbabwe specifically? Or, okay.
Bogumil Baranowski (22:51.205)
Let's do that because it's such an incredible case study and I think we can learn from it.
Brendan Hughes (22:55.447)
Okay.
Brendan Hughes (22:58.79)
Yeah, I think that everyone should study the Zimbabwe, what happened in the 2000s there. I think this is a great case study for business schools specifically. It's unfortunate, but it's also interesting and I think that we can learn a lot from it. And I also wanted to note some of the most famous hyperinflation sagas in history include Hungary in the 1940s. You noted Poland and I'll include that in there.
Yugoslavia in the 1990s, Germany in the 1920s, which I also discussed in my book, and Greece in the 1940s. I think it's important to basically learn about what were the seeds for the hyperinflation saga that were related to Zimbabwe. The seeds for hyperinflation were planted when Zimbabwe's government launched land reforms that resulted in the government. They went out and seized.
white-owned farms and gave them to local black individuals who didn't have any farming experience. So, this development led to a food shortage and then foreign investment dried up. Basically, people didn't want to put their money in real estate in Zimbabwe because they were afraid that the government was just going to come and seize it.
Brendan Hughes (24:24.894)
This all set the table for the hyperinflationary scenario. As is typical in hyperinflationary scenarios, the government was increasing the national debt, which was the case in Zimbabwe. They were fighting a war, a regional war at that time. They were rounding up deficits, as is the case in, I think, every hyperinflationary scenario.
Brendan Hughes (24:53.294)
As usually happens when similar scenarios come to pass, the government ultimately resorted to price controls, which price controls always stimulate inflation because then businesses and they don't have an incentive to produce anything because they're not going to turn a profit. If their costs are going up and they can only make a certain amount of money, they're just not going to...
Bogumil Baranowski (25:08.88)
Mm-hmm.
Brendan Hughes (25:17.698)
produce it. This is what always happens. It stimulates inflation and that's what happened in Zimbabwe. It's happened in the United States in the 1970s and that's what's gonna happen again because I know the governments are gonna continue to do it but it's interesting. So in 2008, in flight... yeah.
Bogumil Baranowski (25:32.728)
Right. We never learn. Somehow we never learn.
Brendan Hughes (25:41.47)
In 2008, Zimbabwe, the inflation was a daily inflation rate of 98%. I mean, it's just astonishing. Basically, at that time, basically the local government things like running water, it was shut off because the economy could just completely shut down. It was...
Bogumil Baranowski (25:52.505)
I can't even imagine that.
Bogumil Baranowski (26:07.298)
Mm-hmm.
Brendan Hughes (26:09.918)
very interesting time. And Zimbabwe has never really recovered from this hyperinflationary saga. And this happens to some countries where people lose confidence in the currency. And sometimes it takes a really long time to restore. And this has been going on since the mid-2000s. They periodically tried to bring in a new currency. It fails. Then a few years later,
try and come up with another currency, it doesn't work out. But I also wanted to touch on one more concept that kind of ties into hyperinflation, as you alluded to with Poland. There's been this idea in recent years, people have proposed this modern monetary theory, which is, I don't know.
Bogumil Baranowski (27:02.087)
Hehehehe...
Brendan Hughes (27:05.47)
I think it's been disproven for a long period of time. The idea that you can just run up deficits without any consequences because you monopolize your currency and you can never default on it. That's true, but you have situations like Zimbabwe where people just say, okay, we don't trust this. We're going to pull our money out of it. Or you have a situation in Japan, like what I talked about, where there's...
there's high deficits, but people don't invest. They hoard the cash and you just have basically no growth for decades. So I don't understand how this is a theory because I think, I think it's been disproven for the last few thousand years, but what are your thoughts on that?
Bogumil Baranowski (27:39.057)
Mm-hmm.
Mm-hmm.
Bogumil Baranowski (27:53.956)
No, it's absolute nonsense. But the truth is that there's a big difference if you have your debt mostly in your own currency or in a foreign currency. And the United States has a very unusual, very privileged position that's not appreciated enough the fact that the US is borrowing mostly, if not exclusively, in the US dollar, which is very unusual.
Even in Europe, countries borrow not just in the euro. And then if you think of Latin America or Asia, because of the trust in the dollar, people would usually borrow in the dollar, but then earn whether it's tax revenue or their business revenue and business profits in their local currency. So you put yourself in an extremely vulnerable position. And Poland experienced a similar situation where they borrowed quite a bit. It overlaps with the Latin American crisis in the eighties when Poland was
borrowing in the 70s and had to face a very expensive public debt, government's debt in the dollar in the 80s and had to negotiate, renegotiate, and then eventually pay it off as I was growing up. So I have a vivid memory of those conversations, but go ahead.
Brendan Hughes (29:09.09)
Yeah. And what you just alluded to happens frequently where countries borrow in like the US dollar and then they don't think about it until they realize that they don't have enough reserves on hand. That's what happened, as you said, in the Latin American debt crisis that happened in the Asian financial crisis as well in the mid 1990s.
Bogumil Baranowski (29:33.352)
But I think the big theme is that we never learn. You talk about Latin America and we can jump in and talk about that and you can set the stage. But I would add that Argentina, I think, holds one of the records in terms of default. And when I was in college, Argentina just devalued its currency and I think took over dollar deposits that people had in the banks and converted them at half the value or less, basically.
If you don't call that theft, I'll let the audience decide what's that cult if half of your money is gone because of a government's decision. Something that Americans never experienced. Maybe they did actually, but not knowingly when the dollar went off the gold standard on two occasions, once in the thirties.
And then in the seventies, you write about it in the book, you might chime in. I talk about it in my books to remind people that holding gold was illegal at some point in the free country that the United States is and I'm American and Polish, so I feel it on many levels. But let's talk about Latin America. What happened in there? Because it's yet another continent that did not escape chaos and crises. And if anything, got more than a fair share of those.
Brendan Hughes (30:35.118)
I'm gonna go.
Brendan Hughes (30:52.734)
Yeah, I think what set the table for the Latin American debt crisis in the 1980s was the oil shocks in the 1970s because the Latin American countries were big net oil importers. So when oil in the span of one year in the 1970s went from $2.50 a barrel to $11.50. So we think that...
you know, in the past year, you know, this is a pretty big spike. Well, it's nothing compared to what happened in 1970. So when that happened, it set off a wave of defaults in Latin America. There was soaring debt levels and ultimately 16 countries in Latin America rescheduled their debts as a result. I did a case study on Chile.
Bogumil Baranowski (31:25.18)
Right.
Brendan Hughes (31:43.682)
And the Chilean crisis began in 1982. And like all crises that I've studied, it was the result of loose financial oversight and extended period of booming credit creation. And one of the triggers was that as you had alluded to, they were borrowing in dollars and they were issuing debt in local currency without proper reserves.
Bogumil Baranowski (31:44.694)
Mm-hmm.
Brendan Hughes (32:11.714)
But the trigger was when the United States started their monetary tightening in the early 1980s. I think it was in 1981. That was when Paul Volcker famously waged his war on inflation and interest rates in the United States went up to 20 percent, which is obviously well above what we're familiar with these days.
Bogumil Baranowski (32:28.914)
A different era.
Brendan Hughes (32:42.046)
So that caused a lot of problems for Chile specifically, because at that time there was also declining commodity prices. So Chile to this day is heavily reliant on copper. So the combination of those things basically blew up everything in the Latin American market. And I wouldn't be surprised. Just given the extreme moves.
With what's happened with interest rates in the United States and how it's still so interconnected with what's going on with the world I think we're still early and seeing how this plays out in terms of how it's gonna affect other currencies and things like I think there's gonna be more of like what we saw with Latin America just because of Having studied these types of things I think that
The odds are likely that we're going to see more of that. But yeah, I think as we've discussed, Chile responded to this disaster with a swift policy response. And I've learned that if you are going to use unbacked paper money and have a fractional reserve banking and such, if you're going to continue down that path, the best way to mitigate
basically having a prolonged depression in an instance like this is to have a swift policy response. Chile did that. The central bank initiated various restructuring programs, and the government nationalized 14 of the 26 banks. And Chile recovered relatively well from this. And I think, at least when you're talking about regionally, they've been a success story for the last several decades. And I think...
They've endorsed free trade, they've been fiscally conservative, which is important. Whether some people want to think it is or not, I think it's very important. They've enforced local laws and contracts and they manage their currency and exchange reserves much better than they did in the 1980s.
Bogumil Baranowski (34:56.392)
It's that's very true. You know, I'm thinking of banks. I had John Maxfield on On this podcast who is a banking analyst banking expert with a family history in banking which overlaps with the topics We talked about family wealth preservation. His family has been in the banking business for five generations and I told him John there are very few places on earth that provided Stability for anybody to own a bank over that long of a period of time and you just talked about Chile
how many banks are around just in the name, but if you looked at the shareholder base, that shareholder base got wiped out time after time after time, including some big European banks, including some of them not long ago, big, big names that got completely removed from existence. So banks are a very powerful part of the story, but also a very vulnerable part of the story.
And I'll ask you in a second about Iceland and what happened with banks there and what happened with that story because I think it's a fascinating lesson. But I want to mention the hundred year bond that Argentina issued, I want to say five, six, seven years ago. And I went in New York to a meeting where they were presenting and pitching this hundred year bond in dollars to investors in New York. And the room was full and there was a huge interest.
And only 15, 17 years earlier, around the year 2000, 2001, 2002, I remember Argentina imploding. And I was thinking, what are the odds of that happening all over again? It looks like the building blocks are still in place for something like this to happen again. And you might know how poorly that hundred year bond has performed. And it has caused the glosses, not just that particular issue of many others, but this one was really a big thing too.
Brendan Hughes (36:41.262)
Thanks for watching!
Bogumil Baranowski (36:50.296)
accept and to trust Argentina for a hundred years. Yet all over again.
Brendan Hughes (36:57.947)
I think you've brought up a fascinating topic. And I would like to, at least for a little bit, touch upon the environment after the global financial crisis. Because I think that that's also a critical element to understanding where we are today, where we have been. I think it's well documented that there was ultra easy.
policies as you've alluded to with a 100 year bond effectively yielding nothing and then people getting excited about it. That's an encapsulation of the craziness that was going on during that time period. That's only really reversed somewhat, but now people that have only lived in the past decade think that 5% is a really high interest rate when that's not, historically that is not at all a high interest rate. But just setting the-
Bogumil Baranowski (37:46.64)
No.
Brendan Hughes (37:51.294)
the table, the idea that was pitched, at least from central bankers, was that we're going to initiate these ultra easy policies and it's going to stimulate growth. It's going to help us get out of the global financial crisis. It never really stimulated growth. What basically happened was the market for assets just went through the root. You saw housing, stocks, cryptocurrencies.
Bogumil Baranowski (38:07.037)
Mm-hmm.
Brendan Hughes (38:20.558)
Literally, yeah, I mean, cash wasn't earning anything. So people put their money in anything but cash. That's what they're incentivized to do. Like that's, so that's what happened. I think that just, there will be a lot more case studies on the pros and cons of what happened. But I think it's probably safe to say that 0%.
Bogumil Baranowski (38:20.788)
Used cars. Used cars got more expensive than new cars.
Brendan Hughes (38:50.098)
in terms of interest rates is too low. I think most people would now agree with that assessment because I don't know what the argument is in favor of. I think every crisis is...
Bogumil Baranowski (38:55.557)
Ha ha.
Brendan Hughes (39:15.09)
ultimately predated by an extended period of monetary policy. And this, what happened after the financial crisis was very extreme, even by, you know, going back over whatever time period you want. But, easy monetary policies, if, if they're done in excess and for a long period of time, that is a precursor for basically every crisis.
Bogumil Baranowski (39:42.864)
you know, the saying kicking the can. And I think that really explains what's happening here. So there is some argument that using those tools, more debt and cheaper money in moments of distress can really help and there might be a liquidity crisis. And I think we had one of those in March of 2020, but it was so brief that people moved on. But there was a moment when treasuries were trading in strange ways and I think there was a moment of.
an equivalent of a heart attack when it comes to the markets, where you want the parent to step in and create a moment of peace and stability, but then you allow the market to resume its normal operation. If you don't, then if you keep zero rates for a prolonged period of time, as you pointed out, and if you keep on adding more debt to it, and if you...
add and expand the role of the Federal Reserve, the central bank of the United States, where the bank is participating in the market in ways we haven't seen in the past and that this particular institution was not supposed to, then the distortions lay the ground for the next crisis. And I think that's what you're alluding to. I want to talk about Iceland because I feel like everybody forgot Iceland. The only way people remember Iceland is sheep.
cheap flights and geysers and volcanoes. But there was something remarkable that happened in Iceland. And the reason I remember it is because I listened to Michael Lewis in New York, give a talk when he wrote his boomerang book, when he traveled to all the countries that experienced the echo of the financial housing market crash of 08, 09 that followed, it was Greece, it was Iceland, it was Portugal, but Iceland.
is one of a kind. It's an island, a fishing island with a huge exposure to tourism, relies on very few flights that bring all the tourists to that island. And not really famous for banking, not really famous for billionaires. And it was unheard of, but Icelanders became, and you pointed out in your book, three times richer in three years. Brendan, if that's not a success story, what is?
Brendan Hughes (42:02.485)
At least on paper, there were three times retrograde. I'm glad you're interested in Iceland. It's a small country. It doesn't get a lot of attention. But what happened there during the financial crisis was very interesting. And I think it's another good case study for business classes in particular.
Bogumil Baranowski (42:05.36)
hahahaha
Brendan Hughes (42:22.938)
As you alluded to between 2003 and 2004, the Iceland stock market went up 900% in one year. I that's tough to wrap our head around. But as usually happens, there was a massive growth in money supply leading up to the global financial crisis in Iceland.
Bogumil Baranowski (42:30.617)
Mm-hmm.
Brendan Hughes (42:51.458)
The money supply expanded tenfold over a 14 year period. And this is a common theme when you don't have any laws. Like an issue with the way that a lot of fractional reserve systems are set up these days is the interests of the private commercial banks and the health of the overall country are not aligned. Like the private commercial banks care about how much profit they produce because that's what they're incentivized to.
Bogumil Baranowski (43:15.516)
Mm-hmm.
Bogumil Baranowski (43:20.722)
brain.
Brendan Hughes (43:21.198)
And if they have the ability to just print how much money they want, they don't have to worry about, you know, a debt crisis or something or what's going on with the overall country. These things are going to keep happening. And that's what happened in Iceland. And in Iceland during the financial crisis, it was just stunning. Like even by banking standards, it developed very quickly. The entire...
Bogumil Baranowski (43:42.972)
Hmm
Brendan Hughes (43:48.258)
banking system in Iceland collapsed in the span of a week. Over the course of three days, the government effectively nationalized the three largest banks, which were the bulk of the banking assets. So, yeah, it's a theme and it's going to keep happening. If
Bogumil Baranowski (44:06.509)
I'm seeing a theme. I'm seeing a theme with those bangs.
Brendan Hughes (44:16.974)
something isn't changed. You can argue the pros and cons, but the reality is if banks are set up where they earn one to 2% return on assets and then they use like approximately 15 to one leverage by printing money to finance this leverage, everything can look okay one day, but then when something a little bit out of the ordinary happens, all of a sudden,
you're out of people will go to retrieve their assets at the same time as usually happens. There's a bank run and then the government says is this too big to fail? If not, they, you know, everyone loses everything. In the U.S. you have the FDIC insuring up to 250,000. But I think an interesting question
is to what degree should we incentivize this behavior? Because when we have these bailouts, the taxpayer is on the hook for this. People should have known the risk going into this. What are your thoughts on that?
Bogumil Baranowski (45:28.965)
Ryan.
Bogumil Baranowski (45:35.74)
You know, I grew up in a whole different world, and then I went to schools around Europe and came to the U.S. So I collected experiences along the way. And I remember in the 90s, the interest rates in Poland were much higher than in the U.S. They were high double digits. And my parents are doctors, and they're not economists or financial experts, but they would open CDs. And as inflation would go down, effectively, they would compound.
their savings at a much higher rate than you think. But the one thing that I do remember is my parents checking the health and the quality of the new banks that are opening, who is behind them, what kind of capital they have, what kind of business they're in. They were going out of their way to understand if the money is safe with those banks, because there was no such thing, at least not in an effective way as FDIC insurance of deposits. So it was up to you, the consumer, to make sure that you give the money to somebody you can trust.
And some of those banks went bust, some of those banks got acquired, got bigger and grew and became big players. But it was up to the consumer to decide. In most of the developed world these days, including Poland, people don't even think anymore if this bank is healthy, there's some sort of a deposit insurance. So you outsource your thinking and decision making and your responsibility to a large government body that says, no.
whatever happens, we'll step in and we'll do something about it. And they've done it with Silicon Valley bank only this year and few other banks this year as well. So the system works when very few banks failed during the 1930s. A lot of banks were failing and there were real bank runs where people would run and get the cash. And I I've actually seen as a kid, as a teenager bank runs with people running to banks and trying to get money out of banks that are failing, but
It is remarkable to me that after living in the U S for two decades, I'm seeing bank runs in the U S something that I thought is just my childhood memory, a long, you know, left behind to forget. And here, you know, we've seen bank runs in a whole different world with, you know, social media, sharing Twitter and photos and everybody actually seeing it and experience experiencing it. We had clients that had money with some of the banks that might have been at risk.
Bogumil Baranowski (47:55.724)
And so we took calls and had conversations with them what to do about it. The bank runs are a peculiar thing because once people stop trusting the institution and start taking money out because of what you just mentioned, the fractional reserve system, you will make the next bank fail, not because it deserves to, but because, because of the wisdom of the crowd, whatever you call it, people are running the, in the other direction. So I think we'll see more of it as much as we might see more of other.
chaos and crises that you point out. Brendan, if you indulge me, I want to talk about the 1970s and the reason why I want to talk about... Go ahead.
Brendan Hughes (48:29.179)
Yeah, I...
Brendan Hughes (48:36.442)
Oh no, no. Yeah, we can move on to the 1970s. That sounds great.
Bogumil Baranowski (48:42.992)
The reason I want to ask about the 1970s, I'm 43, and I started in the business in 2005. So 18 years, short, long, however you want to look at it. But when I got started, there were quite a few senior partners that I worked with that got started in the 70s. And they got really, they were really shaped by that time. And I've heard all kinds of stories. One of them,
became a famous gold investor. And I think gold resonates with you if I'm reading between the lines, John Hathaway that you might know the name of, and other partners that remember the 70s. So I heard stories from all different angles of what happened back then. And you talk about that period in the US because US has not experienced anything like that since. And the only period that was anything like it was the 1930s, at least in the last 100 years.
Tell me about the 70s, what happened? What can we learn from it? You talk about the oil price shock, you talked about price controls, some big macro events, and that overlapped with the dollar effectively going off the gold standard, and gold trading freely for the first time since the 1930s.
Brendan Hughes (49:58.302)
Yes, and thank you for taking us back to the 1970s because I think that there are some important themes going on today that tie back to what was going on back then and there's a strange irony and the unfortunate events this weekend that tie directly into what happened 50 years ago, but we'll get there in a second. Yeah, so 19-
70s in the United States. A few differences between today and in the 1970s is for one, the global energy market looks different. The United States today is a much bigger player than it was in the 1970s owing to the rise of shale oil. That's a big difference. Another key difference today
in comparison to the 1970s is that balance sheets are in much worse shape. I don't think that there's any debate that government balance sheets today are much worse than they were in the 1970s. But the 1970s era was defined by what we now call stagflation, which a lot of people weren't even familiar probably with this term up until the past few years because nobody even
Bogumil Baranowski (51:14.767)
Mm-hmm.
Bogumil Baranowski (51:18.309)
Hehehe
Brendan Hughes (51:20.686)
thought about inflation for a long period of time. The focus was more on deflation and how do we get our inflation rate up to 2% and all of a sudden you do have inflations of people. I think we're then going back to the 1970s and seeing what could we learn from this. But stagflation is a period of low growth or yeah, period of low growth and high inflation. And between 1973 and 1982,
There were three technical recessions during this stagflationary era. But one of the key events that happened in 1973 that eerily is similar to today, Syria and Egypt attacked Israel in what would become known as the Yom Kippur War. This event rocked the oil market that was already being upended by the rising influence of OPEC and OPEC.
Bogumil Baranowski (52:13.919)
Mm-hmm.
Brendan Hughes (52:17.866)
I think was founded, I would have to go back to my book, but I think it was 1957, but their influence had been just increasing in the period leading up to the Yom Kippur War. So those two events were critical to the skyrocketing oil prices. Between 1973 and 1974, as I alluded to, oil price per barrel went from $250 to $1,150. And this was when the United States was...
much more dependent on foreign oil. So it impacted the United States to a much larger degree than we're more self-sufficient today than we were back then. But there were widespread oil shortages. I alluded to it in my book, but there was apparently hours long lines at gas stations as you've probably studied in some more developing.
countries probably still going on to this day, but that was something that was unusual and that we have, if you grew up in the United States today, that's not something that you would ever really think about. But that happened and President Richard Nixon responded as usually happens when inflation skyrockets by implementing wage and price controls.
Bogumil Baranowski (53:21.105)
Mm-hmm.
Brendan Hughes (53:45.514)
Naturally this stoked inflation further. I don't know why we, it's been a recurring theme throughout a lot of the case studies I've looked at and yet it continues to happen. I don't understand it, but there we are. Yeah.
Bogumil Baranowski (53:46.758)
Mm-hmm.
Bogumil Baranowski (53:52.188)
Hmm.
Bogumil Baranowski (54:06.089)
It seems like a quick fix. And I think it also taps into the idea that we are the government and we're gonna tell the economy where it belongs. And it's a mistake that a lot of countries have made in the past. The economy is like a force of nature. It will go wherever it wants to go. If you don't allow people to do a certain thing, but they really need to do it. In Poland, for example,
It was a centrally planned economy still until 1989 or so. And there were shortages in stores because the government owned companies would not provide enough of anything. And people will still trade in simple goods the same way they did in Zimbabwe and the same way they're doing in Venezuela today outside of the official system. So the economy, it's like a river, you know, it will find a way to the ocean.
And no matter how many dams you build and how many laws you pass, price controls or whatever it is, the water will find a way to get through. And those price controls obviously didn't work.
Brendan Hughes (55:14.826)
I want to touch upon a few items that got us to the end of the really high stagflation era. One of them ties directly back to where we are today, the topic of labor unions, because that was a hot topic back then. In the 1970s, labor unions had a lot of power, and that was putting upward pressure on it.
inflation. President Reagan in the early 1980s launched a well documented assault on labor unions and a lot of people think that led to the long term decline of labor unions which has only resurfaced in the past few years. So there's a lot of similar themes when you're looking back then compared to today that really haven't happened in...
40, 50 years. But another key component that got us to the end of what was going on in the 1970s was when energy markets began to stabilize when President Reagan fully deregulated oil prices in 1981. This was important because then the non-OPEC producers again had incentive to produce oil. So eventually that...
Bogumil Baranowski (56:34.673)
Mm-hmm.
Brendan Hughes (56:37.398)
helped the price of oil come back in line with market fundamentals because a free market was, or a more free market was allowed to operate. And I don't think it should be surprising that, you know, given the incentives at play, how that developed and all this was capped off with, as we touched upon, Paul Volcker jacked up interest rates at 20% in 1981. Inflation did eventually come under control in 1983. It got down to a bit over 3%.
Bogumil Baranowski (57:10.664)
And I think a couple of things happened at the same time. One of them was China truly joining the world economy and providing low cost manufacturing over time. At first it was Taiwan, but then followed by China in a large way and, um, global trade opening up more. I think that also created a way for the pressures to kind of escape the system.
And obviously the oil dynamics that you mentioned, I think, helped and the US growing its independence. But the thing is that when you create a friction like that, people forgot, maybe some people remember the kind of cars that were on the roads in 1970 and the cars that were on the roads in the 1980s. And I think Europe went even further going into smaller, tinier little things with two doors. Energy efficiency on all levels became a big thing. So the demand.
shifted and in some places it shrunk.
Brendan Hughes (58:08.623)
it, and I'm really glad that you brought this up because this kind of takes us to one of our next topics. Because as you alluded to, people were searching for like more energy efficient vehicles with the United States. Auto automobile producers were caught off guard. They weren't ready for this shift. So, um, Japan greatly benefited. Um,
Bogumil Baranowski (58:22.673)
Mm-hmm.
Brendan Hughes (58:31.614)
from this at the United States expense in terms of the automobile producers, because the US producers were running up huge losses and the Japanese automobile manufacturers were much better prepared for what was happening at that time period. And that set the stage for the period of time where everyone said that Japan was gonna overtake the US and economic strength and...
Japan was booming in the 1980s.
Bogumil Baranowski (59:03.912)
Mm-hmm and it's a fascinating period and the reason I wanted to ask you about it was I Visited all kinds of investors seasoned investors legendary investors over the years and I remember one specifically that had quite a few books about the 1970s and the 1980s and the 1980s books really caught my attention because a lot of them were about Japan that Japan is the future and
people might forget but there was a time in the eighties when Japanese businesses were buying everything from high rises in New York City all the way to movie studios in Hollywood and it looked like this is the century of Japan and there was a point that you mentioned in the book when the value of the land in Tokyo of a certain part of the city it was more than an equivalent of a
I don't know, another place on earth. The dip, the, it was all out of proportion. I think that was the, the point and the stock market in Japan rose really, really high imploded and has been trying to find its way back for the last 30 some years.
Brendan Hughes (01:00:19.63)
Yeah, Bogumov, I'm glad that you brought us to this topic because this is another fascinating scenario and similar to China in the 2000s, Japan saw years of export led growth that boosted the economy in the 1980s. And what I've learned is if you don't have an encore to this export led growth, it's not going to be sustainable. You have to have some cultivation of a consumer class domestically in order for this to basically.
continue over the long term. But what happened in Japan in the late 1980s was astounding. Most people, or some consider the Japanese market bubble to be the greatest in history in terms of total market capitalization and recovery time. And that could be an accurate assessment. As you alluded to, at one point, the Imperial Palace in Japan, which is
their equivalent of the White House. It was the residence of the Emperor of Japan. So, you know, oversized house was reported to have been worth more than the state of California. That's difficult to understand, but that stuff was going on throughout Japan. To give you a sense of in terms of the stock market, the PE ratio, the average PE ratio was over 60. So the
Bogumil Baranowski (01:01:33.916)
Hehehehe
Brendan Hughes (01:01:45.738)
Basically, the entire Japanese market, real estate, stocks, everything was in a bubble. And people, I think the famous investor Terry Smith alluded to this. He said that people were trying to justify saying, oh, the accounting's different and things like that. But as we now know, it was an epic bubble. So.
If you had dumped all of your money into stocks, Japanese stocks at the end of the 1980s, just this year you would have earned a positive return. People in the Japanese market for three decades, whether it be bonds or equities, you wouldn't have earned anything. So, you know, this brings us back to wealth preservation. It's not as easy as some people think it is.
Like if you were a domestic investor in Japan and you had just kept everything there for the past 30 years up until the past couple, you wouldn't have had any return. And I think that that's an important thing to think about, not saying that markets like the US won't continue to be good markets, but you have to at least entertain the idea that things...
Bogumil Baranowski (01:02:38.905)
Mm-hmm.
Brendan Hughes (01:03:07.326)
you know, in certain markets may not be as good as they were in the past. And you just have to understand that what happened in Japan, what's happened in other markets, that's in the realm of possibility. I think that people normally only think about what they've experienced in the last 10 years or, you know, more broadly their lifetime and say, this is the way the world has always worked. And this is, this is how things are. But that
But I think that's really, really dangerous. And if you're in charge of managing other people's money, I think that it's your duty to understand these range of outcomes. I don't know if you feel the same way, but I would think you probably do.
Bogumil Baranowski (01:03:54.624)
I do and I want to come back to it and ask you more about investing in this age of crises, but before that You We're talking about What I'm hearing is passive investing how people look at the last even hundred years and they say US equities have returned this much and They look at a very long period of time or they look at a decade or two Where we might have gone from rates that were you know, five percent to zero a very different setup
I want to point out that there were periods in the US market when the market went nowhere between 1929 and 1954, 1969 and 1981. And then the dot com bubble, some of the companies needed 15 years to come back to the price that they were at during the peak of the dot com bubble. Incredible companies with huge profits, huge potential, but it took them 15 years to just get back to even.
That's longer than even the most patient and disciplined investors are willing to wait. Right? That's something to keep in mind. Go ahead.
Brendan Hughes (01:05:01.746)
I completely agree with your thinking. I think you have some very nice research there to supplement that line of thinking. And I think it's important for people to understand that.
Bogumil Baranowski (01:05:14.136)
And if you look at the stock market as a lab, economic, social, financial lab, where things happen, if you just look at one market, whether you're in operating out of London and you look only at Europe, or if you're operating out of the U S and you only look at the U S you limit the range of outcomes to consider. And I think that you're doing a remarkable job because you looked around the whole world. And by the way, you wrote the other book, wondering investor.
where you traveled to some 18, 20 countries and you describe, and I highly recommend that book, not just the economies, but the markets and anything unique about those countries. So you had the exposure to a whole variety of outcomes and you mentioned how anybody that grew up in the US has never seen a bank run or hyperinflation or many things that we mentioned today.
And I think it's very helpful for all of us, no matter who is listening, where they're listening to look outside of their domestic market and see that the outcomes can have a much wider range than what we're used to. And that's something worth keeping in mind when you're managing your own money, your family's money, other people's money. And when you're thinking about the true long-term wealth preservation, you're not just thinking about this quarter or this year that you have to beat a certain benchmark that actually becomes so
secondary to your consideration when you start to think about what's the big plan? So I want to talk more about that. You manage money for wealthy individuals, you build portfolios and you pick individual stocks. You are very aware of what can go wrong. Too much debt, cheap money, hyperinflation, bank runs, businesses getting nationalized and so on. How do you...
plan and think about it when you're making your investments, when you want to be a bottom up stock picker, but I always say that it's nice to look outside the window if it's raining or not, because it will give you a better context of what kind of investments you could consider, or maybe you should be more aware of what kind of risks you should be more aware of.
Brendan Hughes (01:07:17.911)
Yeah.
Yeah, I mean, from a portfolio context, I try and plug it into some of these scenarios that we've discussed and just think about how they would behave and even look at individual businesses during these periods of time and just seeing what is going to come out the other side of this. I think that things like...
Terry Smith, the famous investor that runs Fundsmith Equity Fund, he likes to bring up, I believe it was either Diageo or, no, it was Brown Forman, because that's a pure U.S. company, but he likes to use the example. They were purely an alcohol company heading into prohibition.
Bogumil Baranowski (01:08:06.316)
Mm-hmm.
Brendan Hughes (01:08:19.682)
So their only product was deemed to be illegal and they survived. So like I think those types of things are important to think about from a portfolio context. If something so extreme as something like that happens, how is your portfolio going to behave? We've touched upon it a number of times,
Bogumil Baranowski (01:08:26.498)
Uh-huh.
Brendan Hughes (01:08:51.306)
I do think that things like country diversification are more important than a lot of people think. I think a lot of US investors don't have an appreciation for it just because the US market has been so good on a relative basis for so long. I'm not saying that it won't be in the future, but I think it's, to make that judgment, it's based on a bunch of variables that are completely unknowable.
Bogumil Baranowski (01:08:58.49)
Mm-hmm.
Brendan Hughes (01:09:18.85)
but I don't know how you feel, but I do. One of the issues that I run into is, and this is good from the United States' perspective is, I find it more difficult to find good, the level of quality of businesses that I'm seeking in markets overseas. Not that there aren't any. I mean, you have like the fashion houses and drinks companies in Western Europe, which I think are good businesses. ASML is a good business.
Bogumil Baranowski (01:09:18.932)
Mm-hmm.
Brendan Hughes (01:09:46.89)
Netherlands, Novo Nordisk, Denmark, a few IT companies in India, semiconductor businesses in Southeast Asia. Those are, those are good businesses in my view. There are some out there, but like when we're looking at developed markets like Japan and Germany, they're still being primarily led by manufacturing, like automobiles, things like that. So that I view as being very poor businesses. This is a world that's shifted to service. And.
technology-led. So from the US's perspective, I think that reflects well, because I think innovation is still thriving here on a relative basis. But even taking that into account, I do think you need to have some country diversification, because over the course of history, as you've studied as well, various things happen. Like, governments confiscate assets. Things like that happen. You can have the best business in the world, but if the
Bogumil Baranowski (01:10:41.505)
Mm-hmm.
Brendan Hughes (01:10:46.03)
you know, we're nationalizing this doesn't make any difference. But so it lessens the odds. Yeah, it lessens the odds of that happening from a portfolio standpoint, if you do have some degree of diversification, I don't want to, you know, say that this is going to happen in this market, or that market. But if you have everything in one market, and then
Bogumil Baranowski (01:10:51.407)
You kind of almost don't want... go ahead.
Brendan Hughes (01:11:11.73)
Like if you had all your money in South Africa, I think in like 1917, before they passed the Native Land Act, if you had all your money in property there and the government said, well, we're taking it, well, there's nothing you would have been able to do. Those types of things do happen. I think just think it's important to be aware of. And I think you have an appreciation about that as well.
Bogumil Baranowski (01:11:37.544)
You know, having worked with families with multi-generational wealth and wealth creators that created wealth in this lifetime, but especially families with a lot of history, I've heard too many stories of wealth confiscation in so many places on earth in all kinds of contexts where the wealth was just taken away. So that's something to keep in mind. We started with the quality of sleep. You hinted on it and I write about it. The quality of sleep to me, it's a good test. Is it an investment that I can sleep well?
holding and if my clients can also sleep well that's the ultimate test. What gives me some peace of mind on that front is that when you look at the S&P 500 let's say how much of the business is outside of the US. These are very well diversified businesses with revenue and profits coming from all over the world. So that gives me some peace of mind and I'll explain why. And I write about it in one of the books about the Cuban experience. You know Bacardi and you know Havana Club.
and two different stories, two different families with their own complexities. They're fascinating books, but Bacardi had operations outside of Cuba and had some patent protection, brand protection in the United States. Havana Club was mostly in Cuba and they pretty much lost it all. They were not able to resume their operations when Cuba was taken over by Castro.
And Bacardi continues to this day, acquired other businesses, they operate successfully and they're a very famous brand. Havana Club was licensed in many different ways. You might come across the brand, but the family, to the extent that I know, is no longer benefiting from the sales, if anything. The Cuban government was at some point. I don't know the details up to date today, what the arrangement of licensing is.
But two examples where one family had their operations, assets, and intellectual property in more than one place. And the other one that unfortunately was more in one single place that was very promising. Cuba was a remarkable, booming place at some point, and hopefully we'll be again in my lifetime, our lifetime. That's, that's one of the hopes I have for the world, but that's a great example of wealth confiscation that happened. Now.
Bogumil Baranowski (01:14:04.536)
On an individual stock level, there are a couple of things that we look at the level of the debt, how loyal is the customer base, where there are operations and so on. So even if you are exclusively invested in the U S some of the companies have more than half or sometimes 70% of their actual profits in not in the U S I write about it in my books, how I do like, and I appreciate having lived in Europe, having traveled around the world and having seen.
how shareholders are treated in different places, how the rule of law is observed or not in different places. There's a huge benefit and a huge peace of mind in the fact that when you own a U.S. listed company, you have an amazing shareholder friendly culture, you have an incredible history of disclosure that's been built over time that the shareholders get to know what's going on within the business. Managements that grow up, you know, they are not.
all of them the best, but they serve the shareholder. They're not just serving themselves and very few people around the top executives. And the property rights that I talk about quite a bit in my book, Money Life Family. Property rights is kind of like the other big topic that people don't talk about. In the U S we are so comfortable with the fact that I bought the land, there's title insurance and so on. I know I own the land. Try to leave the U S.
and go to a slightly more exotic place. And I don't mean Canada. And you'll see that property rights, it's, it's a blessing. It's a luxury. It's a privilege that's not available to everybody. And in many places you might feel that you bought the land, but you don't actually own it. And I have some personal family story where we bought the land and another owner showed up in Poland when things were changing and it was a whole mess with.
Brendan Hughes (01:15:36.11)
Hehehe
Bogumil Baranowski (01:16:00.52)
who owned the land after so many years of unclear rules. And we ended up settling with the original real owner, not the one we bought the land from. So I have a very personal experience with the fact that just because you have a piece of paper that you, it says that you own it, it doesn't mean the same thing. Depending on where you are in the world. Poland is a very different place today, so don't get me wrong. But in the 1990s, 30 years ago, it was a country that was catching up with the world.
Something to keep in mind when you think you own something, do you really own it? And the reason I mentioned it and the recent stories with Venezuela, Venezuela is one of the richest, if not the richest oil reserve countries in the world. Correct me if I'm wrong. One at some point was the richest or richest to be country in South America. And took a path that rhymes with Cuba and Poland and other places on earth where they thought that the economy can work as a
Brendan Hughes (01:16:49.358)
Yeah, that's correct. Yeah, it's one of the riches.
Bogumil Baranowski (01:17:00.044)
not a free market economy but a centrally planned socialist communist you-name-it economy and it failed uh... businesses that were in nationalized and it's only slowly resuming and it's a very slow process with a destroyed currency destroyed banking if you know people in venezuela which i happen to have met people that have left there and left it's a country that was the biggest country the biggest promise but the biggest destruction of wealth in the system but the reason i mention it
Closer to home, Colgate. Colgate is a familiar brand to a lot of people. If you look up filings from a few years back, you'll see how Colgate had a massive write-off for their assets in Venezuela because they had to walk away from those assets. I wanna say it was a billion dollars, but I'll double check. But it was a very large amount of money because they were producing for all of Latin America. And Colgate is just one of many companies that experienced that pain. So something to keep...
Brendan Hughes (01:17:46.039)
Wow.
Bogumil Baranowski (01:17:57.04)
Keep in mind when you have a company that has headquarters in the US, listed in the US, operations in 150 countries, it's good because it's diversified, but also remember what kind of risks they're taking on that you might not be fully aware of.
Brendan Hughes (01:18:14.47)
And I think it's important to just note that things can change quickly. You have to be on top of it. I think more so than most people think. And I've read that book on Bacardi that you mentioned. I thought it was a really interesting book, the good history of Cuba and very interesting story. And I thought that you did a good job comparing that to the Havana club.
Bogumil Baranowski (01:18:31.75)
Mm-hmm.
Bogumil Baranowski (01:18:44.636)
Things can happen. I think that's the big lesson to me that things can happen and just be aware of it, be prepared for it. And some of the things are outright theft when things are taken away from you. Some of it is a slow devaluation of your currency. Some of it can be a sudden devaluation of currency like Argentina did on a couple of occasions. Talk to Argentinians these days and some of them are holding cash at home for a reason. They have very limited trust in the system. Brendan.
I want to ask you one last question. I love asking my guests about their definition of success, your professional and your personal definition of success. How do you know you're on the right track?
Brendan Hughes (01:19:24.67)
Okay. Boga Milla, I want to thank you for having me again today. I've thoroughly enjoyed this conversation. It's, it's, it's been a blast. Um, but I define success as being happy in a sustainable way. You might say, what on earth are you talking about? But, um, what, what I mean by that is in life, there are plenty of things that make you temporarily happy. Like you can go out and make an impulse purchase or eat some unhealthy food that'll make you may make you feel good for.
period of time, but sustainable long-term happiness comes from balancing the short-term and the long-term. That's kind of how I approach everything and I think that that's to some degree how investment type minds think of things. Isn't happiness the purpose of life? To me, success is achieving happiness through a sustainable balance in terms of long and short-term trade-offs when weighing professional success, personal relationships and personal health.
And this is a very different definition of success, I think, compared to most people. A lot of people will say they just strictly define success in terms of how much money has someone made or how much power have they seemingly amassed. I completely disagree with this because I've seen a lot of billionaires or very wealthy people who over the years, they run off a lot of the real authentic relationships that they've had. And they...
you know, sometimes they'll work around the clock neglect everything else and then they'll seemingly go out and purchase a mega yacht or something like that to make up for their shortfalls elsewhere. And I think what they eventually find out is this, you know, did this make them happy? Most of them I would say not. So I don't deem that to be successful. I think you have to be
happy in a sustainable way and that ties back to professional success, personal relationships, personal health, and I think helping others to the degree that that's important to a person.
Bogumil Baranowski (01:21:39.016)
So Morgan Housel had this article, and I think a podcast episode too, about, I think he used the word optimal wealth, or a level of wealth that maximizes your benefit. And it's a very different number for very different people, and might change over your lifetime as well. But his point was that once you go past that point, it's actually detrimental.
for the reasons that you mentioned. You might be losing friends, maybe not genuine people are gravitating towards you. People want to sell you things. People have to borrow money from you. It's all kinds of things that follow. So that's something to keep in mind. You pointed out something really interesting and I have to mention Luca D'Alana, who was a guest on the show twice and he wrote a book, Ergode City. And I don't know if you're familiar with his name. I'll share more with you after if you want. But he has this idea of optimizing life in terms of living for a day.
Brendan Hughes (01:22:28.28)
Yeah.
Bogumil Baranowski (01:22:33.756)
Like you have one day left or you have 50 years left. And I think it's a great advice for living and investing. How would you live if you had to balance the two, just in case you have just one day left and just in case you're going to be around for half a century, right? So you'll never know, but if you try to balance the two, you might come up with a relatively smart framework. You have some thoughts?
Brendan Hughes (01:23:02.794)
I think that that's a very important statement. And I think to some extent, and I should do more of this myself, but I think we need to think more about, you know, when we're on our deathbed, what do we want to look back on and say, I'm happy that I did. And I don't think a lot of people are going to say.
Oh, what brought me happiness was accumulating the most amount of money that I could have had. It's highly unlikely that almost anyone as they're about to go is going to say that. I think it comes back to, as you're alluding to, some things that are more sustainable. You know, having good personal relationships, having some level of wealth that keeps you happy.
Morgan House also alludes to this in his writing, but having a level of wealth also just makes you feel comfortable. If you think of it more in terms of a safety blanket as opposed to being able to go out and purchase lavish things, at least to me, I completely agree with that line of thinking and I try and live by it. I don't know what your thoughts are.
Bogumil Baranowski (01:24:24.644)
No, it's very true. I'm thinking, you know, we spoke about money quite a bit in this episode. And with a lot of guests, I speak about money and investing. We ended up talking about time, independence and freedom. And you talked about it at the beginning, how in my mind, money provides certain things, the idea that you have six months of savings, six months of expensive, say expensive saved.
Expenses safety, it gives you a peace of mind that you don't have to worry. If you have 25 years, some people claim that that's enough to claim financial independence and so on. So some money gives you the freedom to decide how you're gonna spend your time and then it's your choice how you're gonna go about it. In terms of investing, to me, of course, it's fascinating that if you're right, some investments will do well and they will lead to compounding and growth in your wealth and make your clients happy, make your family happy if you're managing your family money.
But to me, it's an intellectual pursuit. I mean, what I liked the most about the last hour and a half was think about the all kinds of connections we made around history and biology and the pandemics and social interaction and how much we get to benefit from having really an excuse to read fascinating things and try to connect the dots and make sense of it. And then the stock market is kind of at the end of that road where, okay, I know
these things and then I'll buy these kinds of stocks. But that's really at the end of the process. To me, getting there, learning about it, talking to people like you who spend, you know, years both traveling the world to get to know the world and reading so much about the history, just the intellectual benefit of testing your ideas, learning new things, questioning things. I think that gives me the majority of the satisfaction and money is kind of a bonus that it follows.
Brendan Hughes (01:26:21.106)
And that's what I liked about your book, Crisis Investing, was the fact that you were writing these essays in real time. And I think that there's a good amount to be learned from that. Cause then you can go back later and learn, you know, how was I thinking at this time? It's one thing to, to go through some of these crises, but to, to try and go back to think about how you were thinking. But if you.
actually write it down in that moment, it's usually different than how you remember it later on. So I think that that's an interesting perspective that I appreciated about that.
Bogumil Baranowski (01:27:02.988)
I think that one of the things, best things that an investor can do or anybody can really do is to start writing. Even if you're not going to publish it, even if you're not going to share it, just start writing. Because even if it's a journal to yourself, I think you can look back and as you mentioned, you can learn from it. And it creates a certain discipline in your thinking. The minute you write it down, it has a whole different dimension and power. And I can't imagine buying a single stock without being able to write down on a page or half a page.
Why is it that I think it's a good idea? There's something about it that changes the minute it's written down and you read it and you ask yourself, does this still make sense? And then Peter Lynch had this idea of pitching it, the investment to, uh, to a kid, both you have to do it quickly. So you keep their attention and you have to do it in a simple way. So they understand what you're talking about. And I think it's an amazing test for anybody building an investment case for any investment out there.
Could you sit down with a 10 year old or a 15 year old or a 12 year old and explain why that makes sense? And a lot of the technical stuff has to leave the room and you have to focus on the things that we all can relate to. Loyal customer base, special product, quality, attractive pricing, so on and so on. Things that we can all touch and relate to. But that's just my thought. Start writing if you can.
Brendan Hughes (01:28:29.766)
I completely agree. And in writing, you learn, at least to me, you learn the subject much more intimately than you would otherwise. If you're trying to describe something to someone else, you have to understand the subject matter deeply, at least if you're trying to write in a successful way.
Bogumil Baranowski (01:28:51.228)
And you have to write it in a way where somebody will understand it, not misunderstand it, when you're not in the room. Like you have to remember, you're not gonna be in the room and somebody's reading it. And you're not there to correct them and say, no, that's not what I meant. That's the difference between a conversation and a written word, you're not in the room. Somebody's reading it and thinking something. So how do you write it so you're not misunderstood, first of all, and that people, the message, you get the message across.
Brendan Hughes (01:28:55.086)
hahahaha
Bogumil Baranowski (01:29:21.328)
Brendan, this was incredible and I highly recommend both of your books, Markets in Chaos and Wandering Investor. They're both wonderful reads and I think you did a remarkable job of expanding all of our horizons and introducing us to history of some really unique moments in the past where things have not gone the way people expected and we can learn from it and to me, anytime anything bad happens, it's a good idea to sit down with a history book.
and realize it might've happened in the past. It's probably gonna rhyme all over again. What is it that I can do to make the best decision today? I call it being the least wrong. I don't have to be 100% correct, but I wanna be the least wrong. And that's what I've learned. And that's what I shared in the Crisis Investing book. Being the least wrong in times where things are very uncertain. Brendan, thank you so much for today. I really appreciate it.
Brendan Hughes (01:30:20.162)
Thank you very much, Bogumel. I had a blast the last hour and a half talking about a wide range of topics. And I also, I enjoyed your book, Crisis Investing. I thought it provides a unique perspective and talk about a number of really unique individuals that, like one in particular, I find it really interesting is Tony Deaton. You seem to have a personal relationship with him.
But I think you talk about a number of interesting individuals and thought you did a good job you know documenting how you were thinking going through different crises. So that was great. And I had a really good time today discussing. It was a wide-ranging discussion, but we had a good time.
Bogumil Baranowski (01:31:11.228)
Thank you so much. And Tony Deaton is a legendary investor based in Switzerland. And I highly recommend everybody just looking him up and finding that very long interview he gave at some point. I think one of very few interviews he ever gave where he explains how he thinks about family wealth management, investing for the long run and what kind of businesses he invests in. And I think all of us that are serious about long-term patient investing could learn from him. And he's a very generous, wonderful person. And he has some
incredible lessons in that long interview that's out there available to everybody. Brendan, thank you again so much.
