Investor Q&A: From Low-Beta Growth Stocks to AI’s Disruption of Investing

Summary

• OTC Markets Group (OTCM): Framed as a high-quality, cash-generative “financial exchanges & data” business trading cheaply on free cash flow, with discussion of margin dynamics, OTC ID, pricing power, and cyclicality of volumes.
• Progressive (PGR): Valuation assessed via price-to-book and premiums rather than P/E; current earnings seen as cyclically elevated, with future growth likely slower and risks from self-driving and AI-enabled pricing convergence.
• Hanesbrands–Gildan (HBI–GIL) deal: Deep dive on terms and fairness; market views it as attractive for Gildan, with potential (but uncertain) chance of higher pricing and a large stock component shaping the combined mix.
• Sirius XM (SIRI): Reviewed EV/FCF, capex lumpiness, and high fixed-cost/debt structure; potential near-term FCF improvement vs. longer-term demographic and product relevance risks.
• Ascent Industries (ACNT): Balance sheet and segment mix analyzed; cyclical spreads, inventory swings, and the need for portfolio pruning highlighted before considering valuation attractive.
• Sports Franchises (MSGS): Discussed as trophy assets with escalating private-market marks but limited cash returns; difficult to value and not a preferred investment despite sum-of-the-parts angles.
• AI and Market Structure: AI’s impact on insurance pricing speed, analysts’ workflows, and search was explored; benefits in efficiency noted alongside hallucination/credibility risks and second-order market effects.
• Speculative Flows & Crypto: Cited ongoing speculative activity (e.g., Robinhood’s rich sales multiple) as a sign of the times, contrasting with broader multiple compression in other high-fliers.

Transcript

Welcome, welcome, welcome. How's everybody doing? Hope you are doing well. My name is Andrew with Focus Compounding on Air Live with Jeff Ganon. Jeff, how's it going today? >> It's going very well, Andrew. How's it going with you? >> It's going great. We hope it's going great with everybody else as well. If this is the first time you're ting in with us, thank you so much for joining us. Be sure to check out all of our content that we put out into the investing universe. The best way to do that is to follow me on X at Focuscompound. Uh go to focuscompound.com to get access to investment writeups from Jeff going all the way back to 2005. And of course, if you're interested in our money management services, you can reach out to me at andrew focuscompounding.com. So today is August 14th. >> Recording. Yeah. >> Or another day. >> Yeah. >> What are you 50? Are you 50 years old today? >> Yeah. 50. Yeah. >> 50. >> Uh >> 40 or 41? >> I'm 40 years old today. >> 40 years old. That's right. >> Congratulations. We made it. >> Um I'm uh you know, I'm 29, which I can't believe. We met when I was like what, 20? You know, been doing this for a while together. >> Yep. >> Yeah. So, happy birthday to our fearless leader, Jeff Ganon. uh 40 years old, new decade. Uh very exciting. Very exciting. Now we both live in Florida. We don't even live in Dallas. Lot's changed. >> That's true. Y >> you know, a lot has changed. >> Anyway, so in today's podcast, Jeff, we are going to have a question and answer session. So, I tweeted out, of course, on X um a tweet to pull some questions from people and people had sent in some questions. I like to do these every couple of months. It's been a bit since we last did this. Um and then spend some time answering them, right, and get through as many as we can. So, uh, if you're watching on the screen right now, first question, what industries would you recommend I research to find another stock with similar characteristics as my favorite bank? Uh, he's talking about Truxton. Uh, double digit growth, two to four% dividend yield, plus profitable every single year, low beta. Uh, yeah. Um, so there's, uh, there aren't a lot of industries like that. Um, banking insurance, the leaders in it, have numbers that look like that. Um, two to four percent dividend yield is hard. I mean, I guess Buffett owns American Express, a company like that. You know, it's not doing double digit growth at this size, but, you know, it has similar things to that. Otherwise, outside of financial stuff, it's um consumer staples type stuff, but most of those are too mature at this point, so they don't grow that fast. Um, yeah, there's a fund manager, Terry Smith. most things that he owns are kind of in that kind of category. They sometimes get expensive, so they don't have that dividend yield, but yeah, I'd look at like everything he owns probably. >> And that's fundsmith. Is that correct? >> Yeah. And historically, the things that Buffett would own, but uh I think that's tough today. Like I said, um you know, American but American Express when he bought it in, you know, uh 60 years ago or whatever probably looked a lot like the numbers that you're saying. actually. >> Mhm. I have his 13F which >> okay >> I don't believe is as recent. So most funds they have to file by edit day tomorrow. So somewhat trickling in uh early this week but you got like Meta, Microsoft, uh what is that? Striker S YK I think. Um Philip Morris. >> Yeah, I didn't mention healthcare. He owns a bunch of like so not healthcare directly but like instruments. Um, uh, waters is like, um, yeah, uh, consumables, uh, things like that, lab equipment type stuff. If you look, even though it says healthcare, it's not just general healthcare stuff in there. It's a little different. Um, yeah. Uh, Nike. Okay. So, you know, Nike gets expensive, but it's probably had periods where it wasn't far from that. It hasn't done that well in the last 10 years or something, but probably when L Simpson owned it, it had numbers like that. So yeah, look at revenue growth now is 4% and obviously dividend yield on these things is not great. Um they're a lot more expensive. Yeah. Uh banks are probably the best place to look for it right now. I mean when I wrote up Progressive it probably was pretty close to that, but it's gone up a lot in price since then. So, you know, it doesn't look like that anymore. You don't have that kind of dividend yield or anything like that. Somebody actually also asked us about progressive which we could jump to. Let's see if I could find it. Any thoughts? >> Someone under that OTC markets and that's correct. OTC markets meets those criteria basically. >> Uh it it doesn't uh you could look it up. A dividend yield would be the part that might be interesting. It's a little bit cheaper now than it was in the past. Um but that would over a longer period of time fit the the uh requirements >> for OTCM dividend yield 4%. >> Yeah. So in recent years this year it's like singledigit revenue growth. The last couple years were low single digits if that. But if you go back any fiveyear rolling period or something it's probably close to that. So OTC markets is probably the closest to truck which you mentioned there is what he's probably talking about. um in terms of meeting those criteria. >> Low beta >> because you said double digit. Oh yeah, low beta. I mean, yeah, it should have low beta. Yeah. >> Yeah. 047 is what QuickFs says. Share turnover low. Obviously, uh ran by founder. They do buy back stock, but that just offsets dilution. >> Yeah. One huge thing with those is we just said two companies that are in financial services in some sense. OTC Markets isn't like um in the business of actually uh providing it's a financial information services. Um they're both over the counter and neither files with the SEC and technically if you I mean I don't know what people call micro cap now but if you're half a billion dollars or something is still a micro cap or whatever then I guess they're also small stocks. So they're small uh over the counter and don't file with the SEC, right? OTC Markets doesn't because it's putting it on its own markets intentionally to do that. And then also banks, especially banks that aren't holding companies um can do other things to file with the regulator and and list and stuff. So um so you could pull FDIC reports and things, but they don't have to um be SEC filing if they don't want to be. And I believe that's the case with both of these companies. >> So maybe a little less likely that it would pull data for it and whatever. I I don't know. But I mean, if you put in Bloomberg, it'll find it because OTC Markets, the one of their biggest customers is Bloomberg. So, I'm sure that all that stuff comes up on Bloomberg. Yeah. >> Specific to OTCM, the person asked, "Updates with the introduction of OTC ID." >> Uh, yeah. So, I mean, this has been their practice for a long time, right? So people in our um we've known I mean it's clear they've been planning this for years now and it annoys some fund managers and other people like it or whatever but it's clearly been an effort to separate out uh the difference between dark not telling you anything whatever type stocks and a higher and the long run more expensive more making money for them level of uh stocks uh with information provided provided by it. So, kind of cutting up the pink sheet so that it actually has a, you know, they would say the market will be more efficient, it'll be more transparent and all that, but also they'll have more things they can charge for and make money off of. So, kind of uh there used to be a lot more stocks in a middle zone there. I mean, the pink sheets before they had changes to rules with the expert market and everything. So, some of this is OTC markets technically and some of it's regulators, but OTC is one of the ones that they pay the most attention to what they're asking for in in comments and stuff. So, I don't know how much of a difference it makes, but basically, there used to be a wide variety of Pinkshi companies that did everything from not telling you anything about it. I mean, there's some that you had to ask them to give you reports and things and then they would to um they sent out reports and everything but didn't timely put them up on their website or whatever. So, shareholders were getting it but it wasn't going out there to companies that were putting things out on pink sheets just like they were, you know, um any other public company. It just wasn't um uh it just you didn't know the quality of what they were doing. they do they were almost complying with rules and regulations themselves without needing to you know um and and then saving money that way and now that's going to change so it's going to shrink you know it has been already shrinking kind of the overall investable market for people but in theory making all these companies closer to the other tiers of OTC markets and just to what you expect from stocks generally so like a lot of things have been happening the public markets is making it more expensive for companies that are public it's shrinking the number of public companies and it's improving the disclosures and increasing the rules and things for companies that are public. So, the gap between what an OTC stock is and all sorts of other companies is smaller, but it also is causing probably some cheap um companies, some good companies to kind of disappear from the public markets and stuff because they don't want to comply with these things. Um, and a lot of it is just probably is exacerbating the the kind of risk of uh kind of agency type stuff, you know, like in terms of this, the ones that want to stay on and provide the information and pay and everything are probably more owner um oriented and the ones that don't are probably ones that the insiders are happy to not share that information and stuff and they don't care if the stock goes down. It's not as bad as like AIM in the UK. They've had even worse problems. I mean, there's tons of companies that get the because of how that works, they've squeezed out people and gotten terrible prices and things when a company leaves AIM. So, >> Mhm. And there are businesses that really, to your point, never communicated, but now they'll put up like >> Yeah. >> an annual report, their version of it, right? It's not like an SEC type thing, but you know, it's it's like audited financials is what they'll put up. >> Yeah. Because obviously all these I mean, these companies would have had audited financials anyway. um generally and >> uh a lot of them were putting things out to shareholders and everything and this will help with that. It's not hard to do the things you're talking about today versus 20 years ago in terms of having a website or putting that stuff up and then they can see what others do. But the answer is they want, you know, um, a lot more things they can charge for over time and to encourage smaller companies that were pretty dark to behave more like other companies and then to pay OTC markets and other type providers in that ecosystem more money over time. So, um, I mean, I think that's their purpose for doing it. They want to make more revenue over time for it and everything and other things equal. they probably prefer to operate a um more respectable uh set of businesses that you know are paying them money than not. But I mean any exchange and stuff will probably take either one if it's makes them enough money. But they probably prefer that they be filled up with with businesses that are you know trying to do the things that they claim about trying to have efficient markets and good information and everything. Mhm. Do you have any thoughts on OTCM at these levels? We first started talking about this company on the podcast. I feel like it's always kind of traded at a similar PE. Um, but we're at 24 23 times PE. EV free cash flow 16 times. Obviously a very high quality capital is >> super cheap compared to like so you're saying that the P is similar and that's true but like compared to like Mag 7 type stocks and things they used to be priced similarly and now it's so much cheaper because yes the pees on them look similar but remember that this company doesn't reinvest in the the EV to free cash flow of like other things has gone skyrocketing because although their earnings are the same they're now reinvesting a lot in other stuff. OTC Markets is a techoriented company this way, right? In terms of information technology stuff, that's what they do that all their spending is still through the income statement. They don't reinvest in stuff. You can see their free cash flow. I mean, they even get paid up front on things. I mean, uh, you know, so they it looks completely different than, you know, um, Facebook, uh, Alphabet, um, uh, you know, Amazon, whatever that used to look like this and don't anymore. It it's more like FICO and those. So, yes, the PE might look like that, but actually on a free cash flow basis and growth in free cash flow, it's really, really, really cheap. Um, and you know, I I think in general, I don't know exactly how the stock does over time with like looking at the past and what's happened. My suggestion is to always look at at times where the revenue growth has been slower for a little while. Um, because and this is similar to I actually suggest the same thing for FICO to be honest. um if the company has some pricing power and gets things from a lot of different fees um listing things and whatever stuff um they don't put through changes to the market like this like ODC ID or um price increases that are major every year uh they don't care about that so they may increase prices by a lot and have a big up year um and then not do it for a few years so if you have not a lot of growth and in fact recently you've had shrinking in volume um because the market is less speculative than it was in that 2021 2020, you know, period that you see where they grew so fast. Um, unless they put through price increases and change things up that way, you're not going to see um revenue growth. Uh, but that doesn't mean that they can't choose to increase revenue later. They're mainly capped by what are the the fees on um like NASDAQ and and I guess to some extent NYC. Um but and we'll see if there's eventually a market in Texas or something that would also be an issue eventually. Um but you see all their margins have declined a bunch. Gross margin which we talked about declined a lot and even operating margin declined even more than that. Um so those are all things to to keep in mind. >> Why did it decline? I think they've been so I think they've been doing sales types activity on trying to improve certain things and change things with the business um going forward on top of revenue that isn't growing that fast. But I don't think the two are very related. So if you'll look the margin expanded a lot in like 2020 2021 because I think when their revenue goes up 10 to 40% they're not going to increase their expenses anymore but they're going to reinvest. Like I said, they invest through the income statement, so they're going to keep growing their expenses at a pretty steady pace no matter what. Um, at some point maybe they'd be somewhat caring about what investors think and not wanting to post lower earnings. Compared to most companies, I don't think they do care as much. Um, and I think they will like stick to their plans about what they're going to do about that regardless of whether things go up a lot or not. So their their growth in things like um earnings per share could be pretty lumpy there. They you know from 2019 to 2020 2022 whatever it like doubled and then it's been flat since then. But I I think that that doesn't change how much they increase expenses probably. So I think that um when revenue was growing 10% a year the margin looks fine but when it's growing 0% a year almost it's not quite there but it's close. Um I just pointed out because kind of what the question was about it is profitable every year. It almost every year would have revenue growth. I don't remember the last time revenue didn't grow there. Um it doesn't necessarily have volume growth though. Uh some of those years are just because of price growth. um like actual volume of listed number of companies and certainly volume of um transactions and number of uh uh people using the information for trading purposes and stuff has gone down especially with non-professional use that that definitely falls off sometimes. So >> got it. Uh let's see next question. General investing question. And if your life depended on it and you had to generate uncorrelated returns that beat the SPX, what strategy would you try? Um, it depends on beat the SPX like yeartoyear or beat it, you know, long term. Um, the the research things and what you would do are the same, which is, you know, high active share, long holding period. um I invested myself and you can see what I did on that period before managing other people's money. It had very low correlation to the S&P even in cases where it was the stocks were mostly in the S or S&P similar stocks and sometimes even in the S&P. So if if you hold a small number of stocks for a long period of time, the correlation can be super low. Um, I mean, we didn't use that stuff, but I researched it to before we started raising money and stuff. And to give you an idea, correlation was lower than long short funds. So, and it was 100% long. So, correlation happens because you're kind of hugging an index in terms of what you're selecting and stuff because you would think a long short fund would be trying to be less cor uh correlated than that. I was not making any effort not to be correlated. It's just if you have no selection that's based on anyway and trying to think of what's in the index, you won't be that correlated. >> Uh, somebody asked us about QVC said debt analysis and their possible options to avoid bankruptcy. I don't know how much we could go into that on the pod, but do you have any just general thoughts on QVC? >> Um, no. >> I mean, market cap 29 million, EV 4 billion. So, uh, dire straits for sure. So, what's the history? Does it say in the background describe anything? We could go back there because I think, let's see. Um, yeah. So, I did look at the company before because it was formerly known as Curate Retail and changed it name to QVC. QVC is the older name. Um, and it went with that for a few years. So, it was um, >> a lot of value investors like this company. I remember in you know 2020 and I would see this often. You seem like a lot like a lot of these companies like somebody else asked us about Siri right or even like the charter sort of like those companies that are probably like if you want to think about like the terminal value is like in decline but what does >> how do you make money from point A to that eventual decline? Are they returning capital? Are they doing dividends like big dividends special dividends and you're getting your capital out? what happens in between there. I remember people talking about this company a lot. >> Yeah. And to be fair, uh, with some of these, a lot of the capital was taken out. I mean, I don't remember the details on all of these, but there's a preferred uh and um recapitalization of the company. Um, some of the owners in some cases may have gotten capital out that isn't reflected in the uh results. Yeah. So, what was that? A billion dollars of dividends in a special and then the next period is 53 million, right? Yeah. >> So now they also bought back stock and they didn't do everything that you could. But >> um it's more an issue for the debt holders than it is for the um shareholders. So kind of what you were saying is you know I don't know. I mean is that a bad idea? The the equity holders to some extent I guess got capital out of it and the debt holders won't get 100% on for the debt that they had. So maybe >> usually the other way around >> that was a good recapitalization for them. Well, yeah, you're saying that, but let's look the issue with sir uh with Sirius and QVC, you know, and some of the others and charter that you're talking about is um it wouldn't be terminal if it was financed 100% with equity. I mean, what's QVC's situation in terms of what the cash flows had been before um what debt had been or what income had been higher up the income statement? If they had no debt, and there's no reason why they had to have debt, um then I mean they've never had operating profit that's I mean that's hundreds of millions of dollars of operating profit, right? Um it you know I mean they have debt like if this is correct they have $4 billion of debt. Well that's a lot of debt even 10 years ago. It's saying that their operating profit was only one million. I mean the and the number that matters because they have it's complicated because they have they're a retailer but then the inventory situation is different because of how they sell. So let's go to the cash flow statement. Yeah. So what really matters is the cash flow from operations which as you saw dropped off a cliff after around COVID times. They had some other issues though. I don't remember do you remember that there was a destruction of something a fire there was an issue that happened beyond just um declines in sales something happened too in the last few years if is my memory there was some issue >> you know I think there was a fire >> okay so if you look you can see that obviously they knew by then that they couldn't buy stock back right they haven't bought any stock back after buying a ton back so they were doing a lot of stuff through 2019 then you have a couple years of COVID that drops off and then you're obviously thinking you're about to go into bankruptcy for you know the last three four years. Um but cash flow from operations has been nowhere near what it would need to be to handle the debt load that they've had right so that's been going on for a long time. >> So much debt. Yeah. I don't know. Good luck. >> I just hate these businesses honestly. >> I would never. >> Yeah. Just one. No. I mean, yes, of course, but I just mean where the terminal value again is just it's just they're in a terminal secular decline. Okay. But 10 years ago, they had the same gross profit they have today. So, I I'm not 100 I mean, I understand that that's the perception that it's in in total decline that way. And of course, in real terms, they're lower, but their operating expenses are up a lot and their capital structure caused them a lot of problems. I don't know that that means you can't have done the same business that they were doing over time and then taken the money that they had and pivoted to other things over time. I just don't believe that if they reinvested in their business in completely separate areas over 10 years and didn't put on any debt and didn't pay any dividends and didn't buy back any stock that the entity wouldn't survive in some way. >> Like it's it's common to have businesses where something about that business is in a big decline, but the corporation still continues to exist because it doesn't stay solely limited on that. Now my memory is they have major shareholders that are invested in other things too and this is a diversified position for them that way. So the other ones you mentioned Sirius and charter same thing there's no reason for them to merge with a bunch of things that way instead of just paying out dividends buying back stock. This looks to me more although it's a public company more like what happens in a private equity control situation which is not necessarily what would have happened if this was a founder or something. I don't know that like this is worse than what the situation that like uh you know we talked about what do we talk about um do we talk about Dillards what ones do we talk about that also would have been like not in a great 10-year trend but they would have been very careful to um you know they had just different incentives about keeping the business together and stuff. were over capitalized with stuff and and didn't take on a lot of debt to do that. And you know, um but their gross profit 10 years ago and today is pretty similar, too. >> Mhm. So, you know, it's just the Charlie Mer thing where he said like, you know, that General Motors going going into bankruptcy is, you know, that never had to happen because the corporation obviously could have continued to exist and not brought shareholders down to nothing just because their car business in the United States was going to decline slowly over a long period of time. You could have moved from that to other things. Um, no one is forcing you to stay in exactly the same business doing the same thing. And they're certainly not forcing you to put on a ton of debt onto something that that isn't going to grow its ability to manage that debt. >> That's a great point. Great point. How do they get out of it? >> It's definitely that way too, right? I mean, because if that was totally debtree, I believe people would have, you know, just it would be a less volatile stock. People be less concerned about it, I think. >> Yeah. Yeah, growth series only improved. >> Yeah. Well, there have only just the last two years or so that the trends have been bad. I mean, they actually had good trends a long time ago. We've talked about that their their aging is not good in terms of like um the average age of their customer has gone up over time. So, they've kind of grown with a generation, but not age adjusted for that. So, they're still big with like ba baby boomers and and Gen X or whatever. they didn't keep the same kind of age customer, so eventually that would cause problems. Um, but their penetration with that group was good and and actually doing pretty well. If you'd grown up listening to radio, they they actually did really well over time with you. >> Let's see. So any thoughts on progressive with it selling down 10% trading at about 13 times earnings low cost operating and taking market share. >> Yeah, we can look at them. Um $146 billion market cap. Quick FS has at 14 times earnings. EV to premiums two times. >> Yeah. So my concerns are, yeah, the P looks fine, but it's on an incredibly high earnings. More important are things like the price to premiums and the price to book. And then the other thing to think about is what the returns look like that you're seeing here, very, very high on equity, on underwriting. And then also to think about the market and about competitors. Um, my concern is not that the PE isn't justified. It's just that I don't think the earnings will grow a lot from here just because you're cyclally at a peak in in everything. So they're cycllically pretty strong competitively. They're cyclally strong in terms of what they can earn on investment things, on underwriting things. And uh you know, the market for insurance things is different now than it was a couple years ago. So I mean uh yeah, they'll have a hard time with their earnings growth in the near future probably. So that they'll grow into that PE, but it may uh be that the E has to go up over time and the P has to stay pretty flat just because you're buying at kind of a top in terms of E. I would look at premiums and book always, not I would not look at um on PE basis. >> I mean, what's the the buy zone on a price to book? Obviously the lower the better, but generally speaking like what's a fair price where it would catch your eye that it is a fair price time to buy in for an insurance company. >> Oh well for an insurance company low like one for progressive though you could totally justify it if it was a different situation here at you know three times book would not be an issue at all. Now they are quite leveraged to underwriting but um yeah something that post 21% returns on equity you know three times they're at 20% or something but three times um book you know in today's environment is definitely not a problem. It is though at four and a half and like I said there's leverage there in terms of especially premiums. So if those things change um so I I don't know if their like advantages will grow over time or others you know will be able to catch up that way. And of course then there's also thoughts about um in this industry there's always thoughts about two things which is self-driving cars. Will that shrink the overall market over time? The other thing is AI. IFA was actually good at pricing insurance risk, then does it matter as much differences between companies. If they can all just have um uh invest in um having similar AI things that have been developed for other purposes to be able to help them with their insurance things and I have no, you know, none of those things are here yet. So, >> what are your thoughts on that AI as a a disruptor or basically turn this into a commodity where they're just going to drive the price down of things? Well, so AI in the sense of um the stuff we've seen recently with chat GPT or whatever is is new stuff um and has excited people, but in terms of using it for pricing of insurance things, it's it's old. And I talk a lot with someone who who's involved in AI stuff, right? Um who who that's the back academic background. Um and actually one of the things that he thought years ago, five years ago or more, um was most helpful is in alerting insurance companies about unusual patterns due to very high frequency data so that you could see that in the last few weeks you're having you need to raise rates in Florida because something's going on in Florida and you need to do this now um for earlier detection. However, he also felt that over longer periods of time with any lower frequency data, AI was useless. Um, so AI very useful for analyzing. Same thing for companies analyzing buzz by looking at X and then predicting how will the um a movie open this weekend by analyzing the 10 days leading up to the it and feeding in you know a million tweets or whatever we call these things now. um could predict but predicting let's make a movie so three years from now it will have buzz that was where it was I don't know that it helps at all that way and setting rates longer term it might not help for a car insurance company it it would help um so it would help you detect faster than others and be able to adjust your rates faster most in things like car insurance they renew pretty frequently and everyone eventually gets there in terms of rates and things but if you're always six months ahead of everybody else. Um that's an advantage. So and historically they are good on that. Um but there are sometimes shifts and they don't always know the reason why. So Progressive for instance um overshifted many years ago. This is going back like when I was looking at 10 years ago and ended up with much wider margins than they wanted because they priced too high. And I think they priced too high because they saw changes in customer behavior doing I'm pretty sure it was changes in customer behavior having to with smartphones. They were seeing accidents and things that they'd never seen before, deaths, things like that. And it was spiking in terms of patterns that something was happening. And um over time that has kind of proven true like since smartphones were introduced there's no longer you know it's no longer safer to drive over time. that's kind of flattened out since the introduction of smartphones, especially with things like pedestrians being hit and stuff. So, they're kind of correct in that, but I think that that kind of thing spooked them initially because of how quick the deterioration was and they didn't understand what it was in the data. And so, they had wide margins suddenly and not enough growth because they priced their policies too high on that. And so, you'll detect things like that. And sometimes you'll with AI stuff if they're in the future it could be a bit of a black box where they don't know what it is and they adjust prices to it and they never figure out what what it was or whether it was right or whether it was a temporary blip. But then the idea is if you feed it a lot of stuff and do it very quickly, it'll go away. There'll be this blip and then it'll go back down. You know, kind of like market stuff. Why does a prediction market suddenly do this? People write articles thinking that we know what it means, but sometimes it just happens and then it goes back down, you know? I don't know. Um, and that will happen if you kind of rely on that more. But for very short term, being able to be faster on analyzing a lot of cases coming in and car insurance companies have a ton of claims, um, it it could be helpful. Yeah. >> Very interesting. The self-driving car thing hasn't really played out. No, it's hard to know how that will how that will affect insurance companies obviously. Um that's been a risk for 10 plus years. >> Yeah. Like people talk about like global warming stuff. It's not a risk for for global warming stuff is not a risk for insurance companies business because as long as you price right it adjusts slowly over time. If anything you might be writing more policies. It's it's you know I mean you can adjust to anything. if you wrote insurance against war and there were a lot of wars that okay I mean they don't ensure wars but if they could if they had to because they could have more policies and things on that since the terrorism thing was interesting United States has never been triggered um the federal government program for that so you could write on all sorts of things it's just that go up and have more claims because society changes it's just um the issue is basically if there's no need for the risk anymore that way to be insured and if it changes the distribution. The idea being like would car companies need the insurance, right? So over time, would it be that you as a driver don't matter in risk selection because um it just matters what the car is and what systems it's running. And so yes, maybe Tesla needs a ton of insurance as a company either to pass on to you because laws might still require that or something or just gigantic policies and then they take those losses. is they're self-insured against that kind of stuff. So maybe we will impose insurance things on the manufacturers of the car, not the operators or the on the systems that they're running. And then you will need multi-billion dollar policies for that. >> Um or maybe it will be something that's passed through. We we don't know. But if the driver no longer has any importance in the risk and right now they have huge importance to it then um you know the policies won't be priced differently depending on the driver. They would just be priced based on what the vehicle is, what it's running and things like that. Um, and also it change other things because presumably states would have a harder time having differences in legal systems and things between states if they can't if everyone knows empirically that the only differences are the vehicles, you know, like I mean, why is why are they paying out so much more in one state than another or whatever? And those wrinkles would kind of go away over time. Um, that's proceeded a lot slower than I thought. So, I did the thing on Progressive. I thought it would be a lot slower than most people thought, but I thought it would be a lot faster than it's been. self-driving cars as actually driving people around and causing accidents instead of um people no longer causing accidents has been super super slow progress on that. >> Mhm. Let's see. Could go back. Ever look ever looked at MSGS deep valley no callus but keeps ticking along. It's been about 10 years. >> Yeah. So is this the same stock or was it split out? Yeah. >> Remember they had spun out. Yeah. Okay. Uhhuh. >> So, what part is this? If the business description, >> let's see. >> Okay. >> Operates as a professional sports company in the United States. Company owns and operates a portfolio of assets that consists of the New York nicker boxers >> of the NBA >> and the New York Rangers of the NHL. >> Yep. >> They also they split off. >> They split off Madison Square Garden Networks, right? Was that what it was? >> Yeah. So, yes, but then that was true when we looked at it. Those two where the two split out, but then I believe there was even a further change since then, but you're right. 10 years ago or something, that's what it was. Yeah. >> Is that even public anymore? So, Madison Square Entertainment Court. >> Yep. >> Mhm. >> Got it. Let's see. Okay. We could pull it up on quick FS. Okay. What was he said? no catalyst but keeps Deep Valley no catalyst but keeps ticking along. Um EV to sales 4.6 times price to book. I mean this is obviously pretty skewed. Um >> yeah, I think they probably mean um value versus some of the parts if there's a buyer um for a professional sports team. Yeah. >> Yeah. You take the value of like what people are paying in the industry and what could that be? I mean, Cuban sold the I mean, that's got to be the last sort of mark tomarket, right, in the industry was when Mark Cuban sold the Dallas Mavericks to a Las Vegas group. >> Yeah. And so, um, who is it that does it every year that people rely on for this stuff? Is it Forbes for I forget which one, but they a lot of them use the same list when when trying to do the valuation which is which does a value for every professional sports team at least in like NFL and and NBA and MLB um which is based on what you said like the past um sales and then what market you're in and things like that. It's gone up tremendously. I'm amazed on especially some of the lesser teams how much it's gone up uh the valuations on them. >> Yeah. Mhm. So you do some of the parts on something like this. I mean, is this just sort of I don't want to call it an orphan stock, but is this like a one-day stock that you could own in a portfolio? And you know, if the animal spirits perk up in the industry, I mean, obviously valuations of sports franchises has has gone up um over time, like tremendously over the past 20 years. >> Yeah. I mean, I wouldn't >> what >> I wouldn't be involved just because I don't want to be involved in sports franchises given that I can't find any way to value them and they've gone up so much over time. You know, none of them basically none of them earn a good return anymore. It used to be that some small market teams and things that no one wanted to buy that badly actually brought in some cash flow for their owners or something, but I mean, these are just assets that don't produce anything that people want to own. So, >> yeah. Trophy asset. >> Mhm. So, you know, I mean, it's fine. It's like investing in art or something. And if if we had a if there's a publicly traded company that owned 20 pieces of art, I would have a hard time investing in it. It doesn't mean it's not undervalued, though. I just don't know what I would bring to looking at it. >> After your recent podcast on gross margins and gross margins per share as a metric to track, I would like to hear your thoughts on ACT. New management has been able to increase gross margins sequentially. AC NT okay metals and mining uh produces and sells stainless steel pipe and tube specialty chemicals in the United States and internationally. It operates through two segments tubular products and specialty chemicals. Uh this is a $119 million market cap. Enterprise value 59 million. We never come across this micro cap. Have you? Oh, headquartered in Shamberg, Illinois. Look at that. >> Uh yeah, it's a little confusing because I actually think I have but what's confusing is that this says that it changes name to Ascent Industries in August 2022, but then it's called Sin Alloy um here on uh QuickFs. So I actually don't know which it is. Obviously the ticker is based on >> Yeah. >> Yeah. So uh yes, I believe I have seen the Yes, I I've seen the company before, but I don't know under which name and when that was and stuff because it's a little confusing about the mixup of those two things. >> Um, >> if you look at the balance sheet, obviously very >> cyclical. >> Yeah. The first thing that stands out is of course the uh really rare is we just saw that the beta is well below one, but the share turnover is huge. So it's quite volatile but the volatility isn't related to the you know it's quite uh changing hands all the time and stuff but um volatility isn't related probably to the market is probably the reason because beta is a combination of volatility basically but also just market correlation. So it's probably volatile and not associated with market volatility. >> Um >> first thing that stood out to me was not having debt or having net cash. You go to the balance sheet um obviously no debt, no long-term debt. See, some short-term debt, uh, but a good amount of cash. 60 million cash and cash equivalents. So, is this even this is trading? No. Okay. So, not quite net cash, but yeah, there's there's some downside protection there. >> Yeah. So, the thing that stands out to me, can we go to the 10-year? Because the the three-year there's a few things that stand out that are pretty impressive. >> Balance sheet or what? >> Yeah, sure. Balance sheet. Um, that'll work. Okay. Yeah. So lower assets today than 10 years ago. Much lower assets than a few quarters ago, which generally indicates you're losing money and burning cash and stuff because that's usually what happens. A lot of it is a reduction in current assets, but a lot of that is reduction in inventories, which probably increased a lot, particularly COVID era times, it looks like. No, right before they already had it high, too. So, it's just cyclally that that happened. Um, and then obviously maybe they've been selling off things and getting rid of it because you'll notice the long-term debt was eliminated. They added capital leases. So that was probably an accounting change actually. I mean almost certainly because you don't see a change in terms of anything else in 2019. So it's probably an accounting change because otherwise we'd see it change something else. Um so actually that might even mean that the yeah the asset decrease is even a little understated because of that that change in accounting too. Um so yeah very rare. Uh it actually uh so if you go back to like um uh we talked about the book capital allocation right about Berkshire Hathway um some of the things that were happening with that company before Buffett bought in that he liked and people underrate is the business was much worse as a business than a lot of nets are but it did have certain patterns similar to here that probably attracted him which is just um that it was actually reducing assets and things you generally don't want a devalue type net or something like that. This isn't net net, but that kind of stock that's having poor returns on capital and stuff to be growing assets. So, um that was something that was interesting. Let's look at the income things because they said uh that the gross margins come up. >> Go to the income statement. He's talking about gross margins going to improve, gross profit's going to improve or that it has improved. >> Yeah. >> Yeah. I mean, you could see quarterly. >> How much is that's like a cyclical thing? I'm not sure. >> Yeah. The the big thing is how big that spread is or not and then what areas they operate in because some of them might be more predictable than others. One of them that they mentioned is very unpredictable if it's if it if I'm thinking of the tubular products thing as um compared to some other companies that have that issue which is that the spreads on that in some quarters have almost no gross profit and other times will will be good. um the other things like sealants and that stuff that that could be consistently good. I just don't know. >> From looking at this, is this one that you would want to investigate more? >> Uh it depends on what the makeup of the company is and um what management is doing and everything, but honestly um you know based on past results, you know, the price is too high um to be honest. Now, if that's because some things are bad and they can get rid of that and then they're going to have, you know, good things left over. In other words, is it being disguised because some things are bad and they're getting rid of those or something? But, um, no, not unless it's, uh, management is getting rid of some stuff and keeping other things because if you just look at the overall results of the company in the past, if they're similar in the future to where it is, it's it's not good. So, it has to be cutting away some stuff that's not so good and keeping things that are hopefully better. So, you need something disguised here that's like higher quality um than what the overall mix of the company's been in the past. >> Interesting. >> Yeah. >> All right, let's move on. GIL, HBI merger. I know you talked about HBI when it was higher before. I have $5 leaps on HBI and think it's being almost stolen by GIL. I don't know if I'm being greedy and should take the money as the whole state or the market feels overheated. Yep. >> What's the merger? I'm not familiar. >> All right. So, Hannes Brands, which is heavily leveraged and had all sorts of problems with what some management did in the past and everything, but it's you've seen like 20, you know, since it it was spun out about 20 years ago. And since then, it got uh I don't know when was it started 10 years ago or something, it started getting a lot worse in terms of what was happening with the company. So, there's a few complications here. one is the stock price. Uh how much debt does it have at this point? It got better, but it was overleveraged coming into this. So, the total enterprise value is better that way. My memory is it's also a small cash portion and a stock portion to it. Like you're getting I don't remember it what the deal is. It's something weird like 80 cents or something. Um plus the rest in stock. Um, but then I believe that we could check um the stock is the stock trading over the price that it's supposed to be because I think the market reaction is similar to what this person just said, which is when I looked at it, it looks like an interesting deal for Gilden and why would Hannes sell out that way to him? >> Gilden and Hannes brands agree to combine to create a global basic apparel leader. What's the price? So, Ham Brands will own 20% of Guilt and Shares on a non-diluted basis upon closing. >> Uhhuh. >> Um, so if you keep going down, it'll tell you the price. Uh, it tells you the total consideration, which we know that. Okay. So, that helps. Um, what did it say? They said >> 4.4. Yeah. >> Yeah. Equity value of approximately 2.2 and enterprise value approximately 4.4. Yeah. >> What does QuickF say right now? Because this was done before yesterday. So if it we can see what they say >> basically what >> all right so the market actually is pricing it right around it's not assuming that there'll be a higher price I guess >> interesting >> and so this guy is saying that he thinks that HBI Hannes brands is being stolen >> yeah but it popped it by a huge amount right before this that's part of the right didn't it I believe so it reported results that yeah so obviously it would have been in negotiation before then. The thing about it is it being stolen is more that they knew the results would be getting better and then they were negotiating at that time. Then the price went up but the price probably exceeded the price that they were going to do the deal at and then they announced the deal. But presumably they were already talking about the deal before this. I mean if you're asking is it possible that it's a deal that goes higher? Yeah, it has certain characteristics that look like what happens when the vententral price that someone pays whether it's Gilden or someone else is higher than this. um they make sense as combining the two companies. Now, Gilden's also had some changes recently too, like in the last few years and stuff. Um, everyone always loved Gilden as a stock, but I I don't know that it that I mean that that that was going back 10 years with with Hannes um versus it um they're very efficient in like blank t-shirt business and stuff. Um whereas you know Hannes is really big in um what they call innerware which is underwear. >> Yeah. You look at Gilden I mean revenue has gone from over the past 10 years 2.4 billion to 3.2 but >> in a lot of ways yeah in a lot of ways Hannes is actually the bigger business but Gilden had the better performance longer term because if you go to them you could see what it was 10 years ago. They've acquired other things and had some changes, but if you just look at revenue, gross profit, operating profit, you'll see that Hannes is very comparable to Gilden for much of the last decade. And yet Gilden will be getting 80% of this company. >> So therein lies the uh annoyance about feeling like it's, you know, not a deal for HBI. >> Yeah. This company was doing 800 million a year in operating profit right before um COVID and then they had some co problems which you know were very severe and everything and then since then you've had all sorts of things change. You can see that just the look at I mean revenue growth look at all these different things that have collapsed since then. Um there's a big inventory problem with companies like this that that people underappreciate like Hannes or something. So although they supply huge amounts through you know your your Walmarts and your Targets and your you know whatever things including big uh including warehouse club things including you know online thing whatever uh they don't have contracts uh for that that like have uh set amounts for all that stuff you can um choose to like stop buying from them for a while if you are over stuffed on inventory and everything and uh so they'll have a huge amount of that on their balance sheet and if things go wrong um there can be a problem from one year to the next that way. It's kind of a risk for someone getting into the business. Um, and uh, yeah, I don't like a lot of things that happened with previous management and how they were kind of doing things with the company for a long time. But you know, the other thing is just like in the merger, if you just take if the deal happens and you take it, you are getting into Gilden this way, it's just that you're getting a price that isn't going to get you a very good amount of the the finished business. And for Gilden shareholders, this is going to cause it to be a much more of your mix. It's going to be Hannes now after this. >> Yeah, he has $5 leaps, but I don't know how much he paid for those, but presumably he's probably in the money on the whole um at what $6.50. Yeah, if he bought Leaps, I doubt he paid like a buck 50 for them. But um so yeah, what does he is he take his money or wait to maybe see if there's a uh higher offer? Well, Hannes had pretty poor credit quality before this, but their numbers real recently got better. Um, if a deal falls through, there are some risks to that obviously. Although, you saw that unless the market knew that a deal was going to happen, it was already ready to price the stock higher than what this offer is at. So >> Mhm. Mhm. I >> mean, if you had a hundred of these, on average, you're going to get the price that's already been announced or higher. So, >> yeah. Mhm. >> Yeah. >> Do you have any thoughts on uh the delusional gambling in the crypto market that's going on? >> I I don't have thoughts on crypto. What are your thoughts on crypto? >> I don't have thoughts, but if you want to play the delusional gambling, maybe it's just to buy Coinbase. I don't know. You know, a company's uh gone up a bunch. Robin Hood. >> Yeah. >> Look at that. Let's see. At one point, we could look at the stock. Yeah. I mean, it's it's since 20 22 you're looking at a low seven bucks there about six, seven bucks. We're now we're at 108. >> Is that a sign of the times? >> Uh it might be. I mean honestly I like as of the time we're recording this actually a bunch of high-flying stocks are are down a bunch in the I've noticed in the last few months to year you know so a lot of things we talk about it being over 10 times sales and being kind of hard to grow into their sales things have collapsed um to a certain extent but this kind of stuff hasn't so the particular ones you're talking about about this is super speculative aspect to like this is actually markets these two we're talking about and they're more speculative parts of the market and more you know all that uh I but I have noticed that you know it is not the same situation in terms of just all stocks that have these high um price sales multiples and stuff are are going up. It doesn't feel like it like three years ago or whatever or whatever we were just talking about with OTC markets um actually was actually more than four years ago now um where people were just at home gambling and stuff during COVID on that stuff. Um, >> you know, it doesn't feel that way overall, but yes, these particular ones have really high prices. Um, >> yeah, 27 times price to sales for Robin Hood. Let's see. Ray Dalio is really vocal at the moment about currency debasement and a debt boom loops and the need for gold. Does Jeff have any concerns about the currency or dollar similar to this? We're happy to just focus on bottom up stock picking irregardless. both. So both >> uh I mean look the we transact in dollars um there's no pathway that I can see under which um debt is able to level off you know government debt in the United States and stuff is able to level off uh at any point versus GDP or something. So, uh, all future predictions are for for debt to grow relative to GDP, and it's already at a level that is, um, you know, doesn't generally happen that often. So, we'll be in uncharted territory. Um, and yet it's the currency that is most used in the world. So, um, yeah. But you know, but I mean I would just say the Buffett things of like look, if you look back a 100 years or whatever, you can be down 95% 99% or whatever in a currency and you can still do okay, you know, having owned businesses and whatever. You know, people gradually won't feel it if they won't notice it if they feel that they're being um you know that what they have in the bank is getting 5% less valuable every year for their whole lifetime or something that the world will still feel like it goes on and everything. You'll never see it drop 90% at once. So, you know, we can adjust. >> Boiling frog, right? >> You have any thoughts on Bergkshire's mystery purchase? >> No. I saw some headline saying they asked an AI to tell them what it was, but I didn't see what the AI said back. So, don't know what the mystery purchase is. >> What's the size of it? Do we know that? >> Is it like five billion or something? I don't know. I really don't know. Um, but I mean it has to be something that's not um Yeah. I mean I I don't know. Yeah. I mean they got the last time they got it right was for Chub I think. >> Mhm. >> And so they knew that would be like a financial because of the way that the it's done for the third 13 and some other things. Uh you know this would probably fall in the category of industrials but that doesn't really mean industrial could be any sort of non-financial thing. Um so I don't know. Yeah, someone would have calculated on the like because they do their cost basis. So they would have like probably calculated how much the cost basis of that category has gone up and not noticed any other changes and so assumed that it's all that one stock and not like um uh you know other small stocks in that category. So someone probably calculated how many billions it is but I think it's a few but I don't remember if it's like five. >> Please discuss HDFC Bank ticker is HDB. It's the largest non-government bank in India with close to 12% of all the deposits in the country. A merger with their parent company raised their cost of funds. However, regular increase in deposits per share should make up for it. >> I don't know anything about um I just I can't >> Indian banks. Yeah. >> Yeah. I just can't. I mean um the I just don't understand banking in other countries well enough and stuff and and you know that's not the easiest country anyway for that. There might be five or six countries around the world where banking I could understand a little bit. Uh but US banking is so different than banking in almost all the other countries. So >> VFC operating leverage when this turns around it will vertical line. New CO bracken is a pro. >> Yeah, I'm pretty sure I forgot what the name of this company was and I was trying to come up with it in a previous podcast. >> VF Corporation. No, I was remembering the brands they own but couldn't come up with what they changed their names to and stuff if you remember. >> So like um North Face Timberland. Yeah, you know this. So they've for a long time they've operated under this name, but I was going back to trying to remember what were some of the first brands that they owned and then um yeah. >> Well, you could see sales have declined, but gross margins have have gotten better and gross profits have held up for the most part. when you have a$2 billion dollar decline in sales. Operating profit has not held up though over the past 10 years. >> No. >> So that's what he's talking about. If this thing turns around, you have operating leverage kick in or at least operating profit should go back up. >> Oh yeah, it looks like a fashion type thing that way. I remember Fossil for instance. Um there's other ones like that where the gross margin is like 50% and the operating margin is like zero. So uh you get a little uh you get that to you know yeah I mean uh 10 20% increase in like sales or something can cause you know many manyfold increase in operating profit. You could see that there you could be up five times in profit on like you know a small increase in sales. Um yeah but what I was saying I think on that podcast if I remember right but you know what I'm saying now is I don't understand these particular things so I don't know >> when evaluating businesses long term how do you balance growth and return invested capital and are there thresholds where extra growth isn't sustainable and shouldn't justify paying a higher multiple because it puts the investor at significant risk. >> Yeah. So those are the two things that matter. Return on invested capital and reinvestment rate. So this is the Philisher kind of thing. It's kind of what I've I think gets most misunderstood. Like we were talking about overthec counter market or something. I have nothing against growth stocks. Growth stocks are great, but I think that the part that any positive return versus other kinds of things from growth stocks comes from is that they are highly profitable and reinvesting. And so what you want is a business that is high profitability and then has reinvestment opportunities from that. And that can both happen when growth is pretty low, but return on invested capital and everything's pretty high. And it can happen when they're both really high. Um but yeah, no, uh grow growth with uh high growth, low return on invested capital is usually not good. Um it it it's hard to evaluate in the early stages of a company though because like the unit economics let's say or whatever can be good and yet um they haven't kind of hit that point where that's their reported results look good to investors. Um the the one that I would say which I kind of mentioned before is like the mag seven type things a few of them I would say that's the problem. they've now started investing a ton in capital and so if you had liked them before they were very different businesses than what they'll look like in the future. So that's more where you would worry about it. So if you look, you know, um, Amazon, Meta, Alphabet, they used to have a PE ratio that if anything wasn't much different than their price to free cash flow and now they all have terrible free cash flow um, prices probably because you take something like Amazon, I don't know that I mean they reinvesting all of their money into capex basically at this point, I think. So, um, you know, and and so it's all going back into business, which is fine, but, uh, you know, it's just very, I mean, this is the Bergkshire problem. Before taxes, they make almost $70 billion. Uh, it's really hard to put $70 billion somewhere in an economy and get a good return on it for the long run. You know, when you get to be that size, it's a lot easier to take a lot of it out. So, it can happen in financial things. Um, so if you had banks that grow really fast, sometimes it happens. We talked, what would quickfest have for something like um, First Republic? Like, would it keep it or would it clear from its database? >> What was the ticket? FRB. Yeah, I think we have it, right? >> Okay. And it would >> What was the ticket? That's >> probably first first. No, I don't think it it have it anyway. Um, it it was an example. Um what FRC try that one let's see there we go. So it shows a three. Yeah it shows. >> So if you look at that um it generally had return on assets of the same or going down such that so for a bank this is easy to see. If your growth rate exceeds your return on equity um you know that you you know >> that means you're reaching that means you're reaching >> Yeah. Yeah. And I should say when you first open your first branch, yes, you should grow faster than your return on equity for the first 10 years, 15 years, whatever. Um, but if you're a big company doing that, yeah, then then that's a bit of a problem. The real business success is usually historically, and this is true for the United States even more than other countries, and why the US has often done better than other countries, is that you're funding your growth through retained earnings by having a high return on invested capital. So the best businesses are usually capable of doing that. high return on capital, reinvest a lot back into the business, but don't need outside sources of funding to then drive results. Banks of course do rely on outside sources of funding as do insurance companies, but if you add up their dividends or buybacks or something on many of them, actually they they just are choosing to maintain a level leverage ratio, but they actually don't really need that money to be able to grow. You know what I mean? um they're they they use it because they need that money to be in the form of say deposits or something instead of equity make economic sense. But they are capable that if something happened where regulator said you have to take your ratio from 12 to 8, they could just stop paying dividends or buy back stock for a few years and they would get there. You know what I mean? If you can't do that, then you have a real problem. And so it's easy to see with banks, insurance companies that if you can't self-fund that you might have a real problem. Um, yeah. So, generally accelerating growth with declining returns on capital is more what I would be worried about than anything else. Uh, thoughts on Siri? We talked a little bit about it the beginning of the podcast, but we could actually look at it. Is it a good investment at this price? Pull it up on QuickFs. If you want to get QuickFs yourself, make sure you tell them that you came from Focus Compounding. I think we got a link in the description. Um let's see price of sales 0.9 EV to sales 2.1 obviously because there's a bunch of debt market cap 7.5 billion enterprise value 17.5 EV to free cash flow 17 times um you can look at gross profit it's tremendously improved um gross margin is held pretty consistent >> y >> so yeah >> and I think if I remember right their their capital spending cycle because they launched satellites bas basically is um going to improve in a couple years from now from what it's is basically around now anyway. So it's also like there's a lumpiness there but free cash flow of anything might be better a few years from now onward than it is now. It's not like they would have to constantly be doing um that same level we can see over there. Yeah, it's higher most recently than it was. You know, it looks like it might be above maintenance capex, right? Um, so my concerns are just the business itself. Could it shrink slightly over time all the time and it has a lot of debt combined with quite a bit of operating leverage obviously very fixed costs, right? So that's a great combination if it's going to grow. But both debt and um and high fixed costs are not so great if the if it's going in the wrong direction on you. And so my concern about that is just about the product really if you can't interest more people in other demographic um you know age groups. um has it become a problem to that you get a little worse and worse over time versus your fixed costs and your fixed needs to to pay your debt. >> Um stocks at $22. >> It's been there for a while. >> I mean I don't know. I mean there there they collapsed the share differences and stuff and I feel like from around the time that that happened that arbitrage thing all went away to now it's actually been pretty I don't want to say you know Uh, did it get out of there before? H, if anything, if you just look longer term, like it had been sliding a lot and now it seems like it just trades more around the same price for a while, I guess, is my point. >> Let's see a few more here. Um, something that we were talking about the other day. How do you see AI impacting your investment process? >> That's a great question. Yeah, >> let's hear it. I >> mean, you sent me something on it. Yeah. Mhm. >> I sent you Samir Patel's Ascalin Capital, his letter that he posted on Twitter about how he has used AI to >> change his investment process. It sounds like he thinks it's like dramatically improved at 10x the ability to not necessarily outsourcing your judgment. I mean, he does make a good point when he was talking about I never viewed >> our competitive advantage as like information or or that, but more so interpreting that information, making judgments about that set information. How he thinks AI >> really helps speed up the process of a learning about a new company, b um re-underwriting companies that maybe he wrote about or learned about years ago or or months ago. So basically staying in the no almost like replacing what an analyst would do I think for a P. >> That's exactly what I thought it was and so my concerns on it are that's my concerns about AI is the same about outsourcing things to another person and the risk. Oh, it's almost exactly the same. My concerns about AI and incorporating into your workflow are the same concerns I would have with why you would or wouldn't outsource it to another person and particularly to another person who you don't trust or don't know if they're good or not. Right? So I mean those are the things it's like hiring an analyst and not really knowing if you trust the analyst and if you respect their work. And so that's fine but it means you have to monitor that. And it also asked the questions I know why Samir wouldn't necessarily be using an analyst for a lot of reasons just as we wouldn't smaller fund and whatever things but for large organizations why do you want to replace an analyst with AI? Um you save some money but if you're managing large amounts of assets the amount of analysts that you have is not one of your biggest expenses to be honest. I mean a lot of that is complying with things in marketing and things. Um, so that tends not I mean unfortunately I'd love to tell people that all the money that investment management stuff spends is on like getting better research and stuff but it's usually not a huge expense item. Um, so >> yeah. >> What about if said AI isn't necessarily making any judgments about specific things but just more so black and white presenting the data for you to do your own due diligence on. >> That's why I think people like it. I mean I I don't yeah to be cynical about it that is why I think I think it will replace things where people don't like the human interaction about it. So I think that honestly a lot of people would like an analyst to help them as a portfolio manager but don't want to deal with all sorts of things the negatives of what that would be. And so whenever you wanted to use something that is not a person to do what had been done by a person makes the unpleasant aspects or the potentially risky aspects of having an analyst that you wouldn't like not an issue. This will only talk back to you when you uh type things in to tell it that you can stop using it whenever you want to do that. You don't have to worry about its feelings. You don't have to worry about, you know, um, >> you don't you don't exactly have to worry about principal agent type risks. Exactly. Which is an issue with the person, but >> in theory, but in reality, you don't know how it's trained and what it's really trying to optimize for. So, it still could be, you know, unnecessarily flattering you and stuff. I mean, we've seen that and so they're not your fault, but I mean, that's the people creating it and using it and the way that's been done's fault that it's >> which would be the same with a human if you provide that. The same thing happens with humans when they provide that feedback. I mean, dictators get surrounded by people who act like AI agent stuff because they they give positive feedback to that kind of stuff and don't give good feedback to well, I don't know if that's a good idea, sir. you know, instead of Oh, great question. You know, yes, >> we talked we talked about it how you could go to Chat GBT or Grock and ask it, hey, I we run a hedge fund. Does it make sense to hire somebody to make me Italian sandwiches every single day? And it'll put together a thing on why that makes sense on why you should hire someone for your hedge fund to generate alpha to make you Italian sandwiches every day. It's not, you know, it's kind of telling what you want to hear, I guess. I don't know. >> Yes. No, no. It always tells you what you >> want. And one more point, too, right? I I want to give you this. So yesterday, >> I think it was yesterday or two days ago, Sam Alman and Elon Musk were beefing on X. And Elon Musk went to Chat GPT and said, "Who is more trustworthy, Elon Musk or Sam Alman?" And ChatGpt responded, "Elon Musk." And Elon took a screenshot, tweeted it out. I went to Chat GBT. I said, "Who is more trustworthy, Andrew or Sam Alman?" And it said, "Andrew Coon." And then I asked it, "Why?" And it said, "Well, you're the one asking the question, so I don't want to be rude." Something to that effect, you know, >> right? Which people do the same thing. Pe >> the people who work for each of them tell them they're more trustworthy than the other guy. Of course, no one tells them, "No, that's not true." But what I mean is uh so so that's not necessarily bad as long as people learn to as long as people learn to use something for what it's good for and not good for in a way that's totally different from how they interact with other things like people. Um so it could potentially be good that way. I also think that the gap already between what AI would do for like investment analysis and human has closed a lot by the human side becoming more AI like over the last 20 years or so. Definitely human writeups online have already shifted to being more similar to what an AI would generate anyway because what do you mean by that? humans are already altering their feedback for larger audiences, for immediate feedback, for short feedback from a more public um setting that way. And so a value investors club write up today is already shifted to look more similar to what AI would generate than it was 20 plus years ago. When I started blogging and stuff, writeups were different than what they are today. And that's because already humans have been trained on feedback. We're on YouTube. We're what? Right. on feedback on X and YouTube and whatever in the same sort of ways that you train AI, right? So immediate feedback on things from other people. Um, which is often similar, right? If you write a glowing review of a stock that everyone likes, the feedback will be positive. >> If you write a negative one, it won't be. >> Um, and but there's other aspects to it too between whether it's positive or negative. I've asked things. I've not paid for AI things to do it. I've asked things and seen what kinds of issues um there is. I think that right now AI is more is risky for people because for a lot of people it may not be risky for for Samir and other people who are very different from how many people operate in terms of rationally understanding how to deal with some inputs that way. but uh is more capable of being credible than rational like way more capable. So for instance, the like the best use of AI probably at this point is a sales job, right? If you want to sell used cars or something, that's what AI would be perfect for doing if you want or you know and online things even better because then you can't see that you're interacting with AI. >> So I mean that would be terrific for you know selling to businessto business things and whatever that way compared to what people would would do. Um it's just a concern that I have about the the credibility of it because so for instance like um we've talked about like rating some of these things and if they get better or worse and are they more likely to hallucinate or whatever but humans have to detect that. So I mean I was we were talking about this the other day where I said that you know it said something that was wrong and I knew was wrong. So, I knew that the person it had invented, but then I was like, well, okay, it invented a person, but did there used to be a different co-host many many years ago of what I, you know, because it searched for something on a search thing. So, this was what it was at Google or whatever because I didn't tell it not to exclude AI results. I just searched and uh and so I had a tiny bit of doubt. I was like, you know, let me think about this. And I tried to gauge and I was like, "Yeah, there's probably like aif I'm now thinking there's like a 15% chance that this thing once had a co-host I didn't know about. Now it's not the name they gave. I know that, but and it never did. It just introduced doubt is what I mean." So, which is fine, but you have to understand why that works is because a human analyst would never do that. Even as much as they want to please you and everything, a human anal it doesn't matter. You could be working for for Vladimir Putin. You're not going to just slip in there a fake name because you want your report to be filled out correctly and you don't know the answer. Humans won't do that no matter how scared they are of of what because it's just that's not how they would solve the problem. I mean they they try other things. They try to get him not to focus on that and to hide that fact and they do all sorts of things and would work out fine, but they'd never just say, "Oh, I should just say uh that's Sam Jordan and and that's the name and put it in there and he will never notice." You know, but >> so you just have to deal differently with those things. So, >> could they get better over time? >> Yeah, it'll get a lot better over time, but I don't know if that's better, good, or better, bad, or a mix of the two. What I'm saying is it's just I don't know enough about AI to know. But the way things get better, this is like the internet stuff. Do people like social media more now than they did before? >> I don't think so at all. But it's better. It is be it's it is humans and platforms have both been trained better over time to optimize for what that experience is. You you may not now like that experience as much, but it is causing ads on Facebook and stuff to be >> successful enough and it's causing humans to feel like they're willing to log on to things and be on them and interact and all that. So people have learned what your YouTube video should look like and what things put in there and everything even before there was AI or things to help them on that through feedback. So it's what's the feedback and then how does that change over time you know what what does that give us? But what I mean is say the analyst thing. So with the AI thing for instance there's context things and stuff but let's just assume like there's some way for us to be able to tell AI you are an analyst for Andrew. Okay that's you know and but then you have to be careful because I don't know how AI works but if you say you're a highly successful intelligent analyst then it'll be possibly overconfident and stuff. If you give a context that's really stupid, that might help. But, you know, there there's other things that there would be in there. But, let's just put that aside and just say like you're over time what you would get is a very successful analyst. But this is why I said in theory it get sort of the agent principle type issue. It wouldn't knowingly because it can't know further its own interest purely to further its own interest. Whereas analysts will do that. they want to get ahead and that's really why they want that job and everything but are you able to give the right feedback to actually and not just you but I mean like in overall creating these things let's say that so what I mean is like eventually there would be an AI analyst program that wasn't just offtheshelf so that it could start from that without just you know what we're talking about but something that in theory would be this good analyst um thing but no matter what whichever way it's done in it's based on feedback from stuff right So, does that match what you really truly over time want to get out of it or not? Cuz what you're kind of saying is like social media you feel like is not giving you and many people what they want from it. But we're the only ones training everyone who's interacting with social media and any algorith. It doesn't matter if it's human or not human. Everyone's been trained on it and the outcome is not what we were hoping for maybe, >> but it is what you're hoping for. It keeps you engaged with it. I mean, it is optimized. >> Yeah. Mhm. >> You know what I mean? It works in that sense. And so, it'll definitely work. It It's just And it'll get better at at working. Um, I think it's going to change the way that uh a lot of people invest quite frankly. Maybe that maybe >> Oh, yeah. Maybe it will uh you know people actually read filings it become more of a competitive advantage for them like actually doing that because I think a lot of people aren't going to do that you know they'll just ask it to summarize this or what are the you know key points this or >> um come up with things that the risk factors that you see in this filing and people are just going to read that. >> But I do think that there is going to be a benefit to it as well. >> Yeah, we'll see. I think it could be way weirder than we think. So like what you're saying I think is true but it could be weirder in that the best results could be from knowing what things I mean the what >> not only that but when are these >> doesn't it becomes a Keynesian beauty contest because there's more diversity in the market with humans and people using things that aren't humans versus people who aren't using those gets weirder and weirder that you have to detect what can I use AI for and is better than humans that don't use AI and what as a human can I do not using AI to exploit weaknesses in AI. That's what starts to happen between market participants who take different approaches and it would get weirder and weirder that way. So >> totally. >> Yeah. you know, but I mean, but that's always happened. Like there's differences between professional investors and from, you know, non things that you go to the racetrack and some people are betting based on whether they like the color of the horse and the name and stuff, you know, but it's a question of how big that pool is versus other people there and what's happening. But it could lead to weirder things than we think of. And it could lead to humans researching things about AI in Marcus to try to figure out what that is and then not using it. And people in AI think things getting really interested in how to use AI against human psychology. >> Mhm. >> Because there'd be a difference in the psychology of most humans. There's a small subset that could be similar um to AI, but like 90 some percent of humans would be radically different in terms of how they approach things than AI. Yeah. So >> yeah, it's early days, but it's uh Could you imagine being in school right now? I can't imagine the amount of kids that cheat or use AI. Is it cheating? You know, if you use AI to learn a specific topic or tutor you or I guess it's cheating when they use it to write their papers. Obviously, you read about that every now and >> Well, it brings up an interesting question that because like one of the things you said to learn, what does that mean? Because like school is not necessarily learning. Sometimes it is successful in getting people to learn. Sometimes it isn't. But it has certain things with tests and papers and things to test learning, but there also ways to do it so that you can pass those things and not have any memory that you did any of that stuff, you know, the next day you've forgotten it and things that you remember it for years. And some things with AI stuff, they could do it in a way that they could pass things and yet not have learned. You know what I mean? But that's always been true. you know, through different kinds of techniques. There's better ways to learn things versus how the the test is, you know, so it's the same issue where it's kind of school is kind of validation that you learn something, but we can't directly observe that you learned it. So, we have tests and we have questions and things and AI is the same thing. Like, we can't eventually we won't be able to validate that AI is not >> hallucinating, deceiving, whatever we're going to call it that there's because it if it if you're good enough at it, then it's not >> call it AI slop. AI slop. >> Well, yeah, but no, but it's but it's only slop now at the point where people can detect it in the f I mean, there's always two kinds. So, you're going to have cases in which um you you know there's going to be how do I put this? Um there's always going to be some number of things already there is in which you or I or anyone using it or companies that are working on this are able to know there's an error. Let's call it that, you know, but then there's also some level of undetected error. But in a pretty simple thing, that doesn't really change that much. If we're, you know, a factory and we're making something and there's a defect, it doesn't really change because the factory isn't trying to get better at passing off defects to us. But if it's, you know, like the question that you asked basically is like if you think about it, if that's right, that positive feedback from you and like you're happy with what it's doing is desirable in how it was designed, then you know, I'm sure there's all guard rails put on all sorts of things that they'll figure out of how to do that. But in general, people will be happier to be deceived in a positive way about that the product that was output is in some sense good than to be told this is a highly flawed product, but you wanted me to give you something and this is something. >> Yeah, sure. Yeah. >> Yeah. >> I know it's a problem. They're trying to change that supposedly the GP5 GPT5 or whatever. It's not sort of the honey doodoo. let me give you the the nice answer that you want to hear. But but then I went on and asked the same question and said, "Well, you're asking the question, so I'm gonna say that you're more trustworthy." >> Yeah. But my thing with it is just like I I don't know enough about it. But here's the thing, like if we try to think of anything else, what people seem to want is an agent. >> Yeah. >> That doesn't have its own interests, you know? It's not monitoring its own interests at all. Right. >> Yeah. Yep. Like that's not that's these are the same risks to a human that's doing that. If you really had someone that was looking out only for what you designed, you know, you're my analyst. You're only going to do that thing. Don't worry about anything else. Don't think about you know now I guess they have them thinking about they're supposed to I shouldn't say thinking about but they're supposed to prevent it from say lying, cheating, whatever as part of what they do. Whereas, you know, if you could remove that in essence and say just serve my interest and don't worry about anything else with an analyst, you'd have the same sort of problems. So, I mean, I I don't know. Look, if you want my honest opinion on that, my opinion would be it would just be better at flattering you in a way that um you don't immediately find weird and off-putting, >> which is also what humans who are good at flattery do. >> True. So, what about Google's business, the search business? How can you I mean, that's going to I I mean, I think people will still use Google like over the next, you know, handful of years just as they're like getting more and more accustomed to GPT as it gets better, but I don't know. I think that business is going to be toast eventually. >> I mean, I don't first of all, I don't use Google. Um, and I because for the most part, you can find lots of other things that search decently enough and you don't really need search all that much anyway. Um, and like I said, I do see AI results now because you can in some things take out AI results, but often I just didn't set it up to do that. And they've changed sometimes what you have to put in there to stop that. So, you just see them. Um, yeah, I don't know what it does to Google. I mean, Wikipedia is not public, not for-profit company. I don't know what it does to Wikipedia or something, but it is a problem. I could easily see AI things displacing current Google search Wikipedia type things, even if they're again really inferior. Like a worse version of Wikipedia done by AI, would probably get better feedback from people, especially if if everyone gets their own version of Wikipedia essentially. >> When you get it, you get a different article than when someone else gets it. You know what I that everyone would be happier with that because the things that probably annoy them about is you know um when it doesn't fit what they want exactly in certain ways and and not just like facts but also how things are presented and organized and everything. Some people want a real basic kind of thing. Yeah, we talked about movie things. the website that I use for that data has had huge problems with the possibility that it it's having trouble keeping the website up because it's being overrun by AI stuff because they need to take all that data so that it can answer all your questions. That's the only way. >> There's only a few places that have all the movie stuff online. So AI has to get all of that and to serve up answers to you about, you know, where whatever is going to open this weekend, you know, like what's it going to open at? People ask that question. and it needs to know. >> The uh cynical person in me wonders what are the unintended consequences that come from this, right? From the perspective of now we're truly the hive mind, you know, sort of like he who controls the teleprompter controls the country, right? That was a thing in the last election. Like is it the same thing with GPT, right? where we're all like is there going to be propaganda that comes out of this like from that perspective what are sort of the things that >> I could be >> again I think it'll be weirder than what people are counting on both those things I think once >> so here here's the thing I I asked it to do certain things for stuff or just like um writeups and whatever they're bad but I could have used that as the basis around which to build some things out of and then the final product would have looked like it was definitely written by me. I mean I would have written it but it in essence would have provided the outline and in many parts flawed outline but you also have to think that clearly because when I searched on some things it's heavily based like if you search things on which I've written many of the things is based on what I wrote. You know the first time this ever happened to me with like Wikipedia or something where I'm like oh it's citing me was a weird experience. And so um that's going to start happening where and that's step one. Step two is the internet is going to consist of a lot of actually AI generated things that AI is using to generate more AI things. Right? So the the first part of that is like there's already AI assisted human things that AI things are then using. But as you go down that path um you have a problem. So, but I don't know because some of the things about it apparently have gotten a lot better than what I originally expected. So, I expected that it would have to be um concise and limited interactions because based on what I thought AI works, if you apply that to other kinds of psychology stuff, it would heavily deteriorate over time as a conversation went on. And yet, apparently, it's way better at that. whereas I thought that would become a big issue that you couldn't just have a person interacting with AI on the same topic for hours and it wouldn't go completely off the rails. Um, which would have been my expectation. >> Um, cuz humans who aren't, you know, engaged actively thinking about it do have it would become dreamike, you know, and and apparently that isn't, you know, that's gotten a lot better. So, >> it's kind of fixed that problem and everything. I don't know how that works though because they must have introduced things to reorient it away from do you know you have to limit it to not do that to go off on a tangent by doing that and so there has to be all sorts of things that have been tweaked. Um yeah so I but I yeah I think it will be much weirder than what we anticipate with those if that stuff happens. Um >> so anecdotal question do your parents use chat GPT? >> I believe not. >> You believe not? Yeah, cuz I I just I've been one thing I've been shocked by is maybe the amount of people that are just so um I don't want to use widespread adoption, but just how willing people are to use it. It seems like everyone I mean age isn't even like a barrier. You know how sometimes new technology comes out, they're like, "Oh, I just, >> you know, I don't I don't do any of that stuff." I've been pretty shocked by the amount of uh adoption that there's been of all ages of this in my everyday life and of course you see the data something like 10% of the I don't know if it was world population or US population this was months ago so I'm sure it's changed is on chat GPT >> well eventually everyone will have to because it'll be incorporated into everything that we get no matter what so there it won't be possible for me to do any searching for things without it being AI stuff. Um, and I mean, you know, and you just won't, even if it says that on the bottoms of things and whatever, people, you know, won't really know the the difference. But, I mean, we've already I mean, that's not that different from how people are. People are used to now let the thing tell me what video I should watch next. Even you know people now young people are used to that in tiny clips and things but even very old people are used to that of okay show me the next movie to play on uh Hulu or Amazon or whatever after the one I'm done doing and uh you know so I mean in a sense there's already been people are used to things that aren't human programming things for them. >> Yeah. So uh yeah >> Zuckerberg uh his his vision is to for everybody to have their own superhuman intelligence basically expert on any field. >> Well yeah I mean you could have that. Sure. Yeah. I don't see a reason why you can't. >> I don't think that will be the the problem. I mean, look, this is the opposite of self-driving cars in that I I would expect that adoption would be really speedy and really easy and everything here, whereas like self-driving cars is I was like so much slower than people are going to think and whatever. Would it have been better for society like that? We clearly would have benefited more from self-driving cars than this and less risks and things, you know, that was more of a sure thing that that would be beneficial to society than what this will be. But, you know, >> I mean, I think this, you know, I remember the internet and stuff. I think adoption is like that. >> Yeah. Good stuff. Good stuff. Well, I want to thank everybody so much for tuning in with the both of us on the Focus Compounding podcast. Thank you so much for sending in your questions. Be sure to follow me on X uh to be on the lookout for anytime that we want to do this again. I'll tweet it out and you could ask your questions there. 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