Jonathan Tepper on The Myth of Capitalism, his "Shooting Up" memoir and $BKMG | S08 E07
Summary
Core Strategy: Guest emphasizes buying dominant companies with high returns on capital and sustainable cash flows, especially in concentrated industries.
Booking Holdings (BKNG): Detailed bullish thesis on online travel, citing COVID mispricing, resilience of travel demand, direct app traffic gains, and limited disintermediation risk from Google or AI agents.
Alphabet/Google (GOOGL): Discussed as a perceived threat that likely won’t become merchant of record due to customer service complexity and loss of ad revenue, reinforcing BKNG’s moat.
AI Disruption: Theme focuses on perceived losers—software/SaaS, financial data & analytics, online platforms, and payroll processors—arguing some will adapt and benefit as AI models commoditize.
Data & Analytics: Firms like FactSet, Morningstar, S&P and Moody’s face AI substitution fears, but switching costs, contracts, and integrated workflows can defend economics (e.g., Bloomberg’s 2-year terms reflect power).
Risk/Opportunity Framing: AI agents can scrape platforms, but platforms control access and inventory aggregation; operational complexity (payments, service, translations) is a key barrier to AI disintermediation.
Market Outlook: Record-high profit margins seen as vulnerable to rates and taxes; the guest prefers bottom-up selection of quality cash generators over paying high multiples for uncertain AI winners.
Transcript
It looks like we're live. This is Value After Hours. I'm Tobias Carlile joined as always by my co-host Jake Taylor. Our special guest today is Jonathan Ter. He's the founder and portfolio manager of Private Capital. How are you Jonathan? Welcome. >> Doing all right. Thank you so much for having me. >> Yeah, >> tell us a little bit about Previt. >> Certainly. So, uh we we launched in 2020. We've been going for about six years now. Uh we are 580 million uh assets under management. The philosophy and the investment style is very simple. We're a long only fund but we have an absolute return orientation. Uh we try to buy quality companies and we try to buy them at a a discount to their intrinsic value. Um and we're we do deep analysis into companies and industries. We're trying to buy uh dominant companies. So companies that you know have a high market share that necessarily have done so via you know mergers and regulatory barriers but ones where you know we think that the delivery of the product dictates few players and we're trying to make sure that we're finding companies that have a a high free cash flow yield where that cash flow can come back to us you know whether dividends or buying back their shares if they're you know um under undervalued >> and if Jonathan's name sounds familiar it's he wrote a terrific book a while back called the myth of capitalism And I was curious what in that book informs how you practice investing today. >> Uh certainly. So I think that uh as I was doing a lot of research on the book, it was interesting that as I was finding industries that had become more concentrated and then just mapping out all different industries. often I was finding investors that I admired obviously and I mentioned uh Buffett but you know you have other investors there like you know Chris Hone Steve Mandel and others owning some of these companies and it seemed to me that you know if you you can invest cyclically you can buy cigar butts and there's not only one way to invest and that's one of the beauties of investing but I think that if you want to sleep at night and you want to make sure that your portfolio is growing over time I thought one of the best ways to do it is to buy companies that you know have uh high returns on capital that you know have a a dominant position and you know provide goods that people need. And so in the the fund you know when when we launched it in 2020 co was happening obviously it seems like distant memory uh in a stone age but uh you know we bought booking.com for example you know which is a online travel agent you have them and expedia are the main two players uh and people you know were treating this like no one would ever travel again we could we bought it very cheaply it was one of our largest holdings we still own it to this day and so that's an example where you know it just makes the most sense to have uh an online platform that can bring all the different together with you know particularly in Europe a fragmented market uh for hotels and accommodations. >> Can you take us through the thesis on booking.com when you bought it? What you saw that you thought was uh different from the way that the market was reading it? >> Uh certainly. So with booking it was actually very interesting because it wasn't just COVID. Um obviously co you know people had questions about the duration of the lockdowns and the disruption of travel and you know our view was that historically when you'd seen for example there was the recession in 2001 2002 and you had SARS and there were fears about travel you know these tend to be temporary in nature people want to travel they want to see friends they want to see relatives you know almost any interruption of travel historically had been brief and our view is that that would be the case the price the stock price was certainly not priced for that. I was, you know, priced for a much more negative outcome. But on top of that, you had the fear that essentially, you know, Google was might get into travel. It might disintermediate booking. People might go to booking first, sorry, Google first and then go book their hotel. And so you had a variety of reasons why it might be uh lowly valued, you know, despite being such a high quality company. Um today uh it's interesting that you obviously have the fear of AI where agents might do sort of what people were thinking Google might do which is sort of disintermediate some of the platforms. So some of these fears you know don't go away they just sort of recur over time. Um our view was that you know booking I'm sorry Google does not want to be the merchant of record. They don't want to you know run a customer service department. They don't want to be the ones dealing directly with the hotels. Booking and Expedia actually do advertise significantly on Google. They would end up hurting themselves too in terms of losing all the ad revenue if they actually did want to go into that line of business. And Google is much more sort of search for everything rather than trying to dominate a vertical. So I think our view you know is you know that those two areas which is one the duration of the of the downturns and two the threat posed by Google and as it turns out you know booking uh I think they have one of the best CEOs in the world Glenn Fogle and they've managed to uh dramatically increase the um traffic that they get directly going via their app I you know people aren't starting on Google and ending up on booking um and then you know Google has never really actually followed through in terms of the worst fears that people had where people might you know do their entire booking experience via Google which just doesn't happen. >> It's a similar sort of question today isn't it with AI that folks could just tell their agent to go and book these flights. How do you how do you come to terms with that? >> Certainly. So the the last conference call that booking had is worth reading. um you know if people have the time and and energy but Glenn Fogle pointed out that you know one you when you have a a middleman basically they've aggregated supply and demand and you you have a lot of uh hotels across Europe that are independent mom and pop where you have sort of alternative accommodation where it's an individual you know the idea that all these people are going to get all their inventory and make this readily searchable by you know every AI whether it's chatgptropic or xai or whatever it might be, you know, doesn't make a lot of sense. You don't have, you know, that much sophistication. Um, and furthermore, you know, a lot of these AIs, whether it's Claude, do they really want to be the merchant of record? Do they want to deal with the customer when their uh travel plans go bad? You know, like it's it's just I don't think people have fully thought through, you know, what it is to run an actual travel business. um you know and if you think about people book from countries all over the world with different payment systems and you know the uh websites and the uh history of reviews are translated into 40 languages you know it's it's not a simple undertaking and it's uh unlikely that the AI agents would be without the platforms some of the AI agents are actually pretty good at scraping the platforms um and certainly platforms themselves control whether that's going to whether they'll be able to do that on an ongoing basis. >> Tell us a little bit about the myth of capitalism. >> Uh certainly. So I wrote that in 2018 towards the end of the year. I think it came out in November or so. Um and then obviously near the end of the year, so most people probably actually read it in 2019. But the the uh book essentially was uh I was set out to answer the question why corporate profit margins were so high relative to history. One of the there's certainly multiple reasons but one of the main reasons uh in my view was the rise in industrial concentration where many industries were becoming more concentrated. This gave greater pricing power to companies. Um it in in many cases disadvantaged the consumer or disadvantaged the worker where you're you know you can't go out and sell your skills if you have a limited number of people who might bid for those skills. And so to me that seemed like a very interesting phenomenon. And the book was really about public policy and history and sort of looking at why you know despite the US having the Sherman act from 1890 to to the present there there was these sort of pendulums effect effectively that were multi-deade in nature and you went from having sort of uh very aggressive antitrust enforcement uh in the sort of 50s and 60s to then early 80s there's a change with Reagan and the merger guidelines and so the book goes through all of that. It looks uh quite a few industries and it has [snorts] various chapters on themes regarding this. Um and so that was the the central idea was that basically capitalism in theory should be about uh competition and about you know free enterprise. And in fact you often find that particularly in industries that are more concentrated uh typically a regulation often is a key barrier to entry uh not in all but it's the regulation often that impedes competition. Then you have certainly regulators who you know uh o over time and there's you know I have a chapter on um how you had a revolving door basically between sort of the FTC DOJ and a lot of the companies wanting to merge and so you ended up with mergers towards monopoly where there may have been competition there initially but sort of the mergers got rid of that and so that was that was the the book. Um at the same time obviously I was looking at a lot of this with an investing uh angle trying to understand sort of the investment implications of this uh wrote another book which will never see the light of day but it's our sort of internal um monopoly guide or uh sort of guide to understanding sort of investing you know given the implications of all this >> where um where are we today in the pendulum swinging as far as kind of antitrust enforcement and competitive dynamics. >> So, it was quite interesting. It seemed to have bipartisan support to have more uh enforce and I I think that you know certainly Trump and Biden Trump won and uh Biden uh were moving in that direction. I think in the last year it seems to be going almost in the opposite direction you know to say that businesses uh did not like some of the reforms or some of the mergers that were uh blocked. And so, you know, it's I I've obviously been busy focusing on my funds, so I've spent less time looking at the public policy side of this. Um, but, you know, there I think there were plenty of reasons to be optimistic. Now, I think it's a bit more of an open question, and I don't know, you know, where the chips are going to fall. >> We did stop a big purse, right, with Coach merging. Apparently, we can't do that. But >> I I do think that's funny that that was the the one merger that really got pushed hard. >> Yeah, I mean I certainly I I you know I'm I'm not responsible for DJ or FDC policy. Um some of them I thought you know the the mergers that were blocked made a lot of sense. The block was were a little more questionable in my view. >> It's funny to I don't I don't know where the profit margins were in 2018 but I would guess they were 10 or 11% or something like that. And now in 2026, I saw there's likely record profit margins. I think like 14.3%. >> Oh my god, >> that's funny in the context of, you know, Buffett said anything above 6%. >> Uh, and Grantham has said the same thing and Husman, I think, has said the same thing >> about that. Six seems like a like it's impossible to imagine how we get back to that. >> Well, I so you know, we're bottom-up stock pickers. um you know trying to find good companies, good industries um trying to understand sort of how sustainable the profits are. Um, from a macro standpoint, um, you know, clearly some of this is driven by by taxes and interest rates. And so, um, I I I I think there certainly will be a reversion to the extent that interest rates go back up. And, um, obviously, if you want to do something about the deficits, then taxes are likely to go up, too. And so, I I suspect that, uh, record high profit margins probably are not here to stay. Um, >> how about AI? What do you how do you think about AI impacting profit margins? >> I mean to be honest I don't actually spend all that much time thinking about it in the sense that I think a lot of these things aren't uh aren't entirely knowable. I think what we can do is try to what I do spend time thinking about is looking at sort of previous technological uh revolutions and bubbles and seeing how those played out. >> And there there two books that are terrific. Um I think Philipe Leafont recommended one. So the hardback now is actually pretty expensive, but if it's not expensive if you want to buy it on uh Kindle or iBooks. Um and the engines that move markets by Sandy Ner is a very good book and it's about the history of technological waves. And another very good one is uh technological revolutions of financial capital by Carla Paris. Um and they both have similar lessons even sort of look at it in different ways but uh that the consumer tends to be the net beneficiary in technological waves. uh early investors often pace face very intense competition because there's too much capital going into these new exciting areas and then often the winners uh in terms aren't even necessarily the ones that are around you know when the revolution starts and if you think of the internet uh for example the big big winners Facebook was started in 2005 Google really wasn't even a company um you know anyone really talked about during the com been found >> 17 search engine maybe something like Exactly. Um >> like you know just technically sophisticated people used it but everyone else was like you know playing around on Yahoo and >> Exactly. And so it's not obvious to me who the winners are with AI. Uh and I suspect that if we had this conversation eight years from now people might be surprised you know about the companies we're talking about today versus the ultimate winners. uh I think that given the uncertainty it's difficult to pay might be very high valuations with you know a high degree of confidence because you don't know um and so you know I try to focus on things I can understand things that you know I have some reasonable idea about and you know where I might get my cash back you know the company returning it to me um and I just don't see a lot of that and so you know we're not a short we're not a hedge fund in the sense of running a shortbook so I don't feel any uh obligation to go out and find things to bet against. uh and bubbles can certainly go further being if they're irrational as my friend John Hampton said like you know there's no reason why it couldn't be five times more irrational right so um I think that uh you know we're just trying to find the losers or the perceived losers you know and in the dot certainly um when I I started my career at SACE Capital in 2003 and they had what was you know informally known as the old economy group right because you had that sort of new economy and the old economy and those that area obviously was like very cheap and unloved and and ended up doing very very well. So, uh I think right now I'm much more interested in the things that people think are going to be disrupted or losers that might actually be good investments. >> Well, that's an interesting question. What what do you think is going to be uh is going to fall into that bucket? Well, so there are four areas currently I think that are the most affected by um AI or currently the market's telling you that they think these are going to be losers based on the change in stock prices and the fall in multiples and and valuations. And the first one is uh which I think most everyone's focusing on which is software. So you have this sort of SAS they call it the SAS copalypse or apocalypse or whatever. Um and then you have so that's software obviously number one. You also have uh data and analytics firms right if AI is going to go off and do the analysis then do you really need to pay for faxet or morning star or um refinitive which is part of the seal Thompson Reuters but it's part of London stock exchange group >> and even S&P and Moody's have you know been hit not as badly but they've been hit um and then you have online platforms the idea that the agents can go out and do the booking for you and therefore you don't need uh the platform and the network effects effectively >> classified been um neutered. And then you have the the fourth which is I think uh not as badly as affected as the others but certainly I think uh has been hit have been sort of payroll processors and you know uh you have ADP paychecks, paycom and so on. And so within all of these, I think that there are some businesses that will certainly be affected um and others that you know will probably I I believe actually benefit in the sense that if you think that these AI models are ultimately commodities right where Chad GBT is not that different from claude which is not that different from um then and anyone can use them then surely is as in previous technological waves it's the consumer that ultimately benefits and people who can use them, you know, where you get, you know, you can travel further and get cheaper railroad tickets or you can, you know, make phone calls more cheaply. Like all these things are great for humanity, not not so great for shareholders. Um, but there's no reason to think why a lot of these companies can't use AI in their own um workflows and the experience they might provide their customers. Yeah, it seems to me that that's that's a likely direction that there's uh some commodification in the in the models and the next even if you're just using the next best model there's not much drop off in between the two might be a little bit of lock in with people creating their own projects and workbooks or whatever the case may be but that doesn't give you much pricing protection you can't gouge your customer the way Microsoft has been gouging their customers for example you know hands off to Microsoft >> yeah if you want to see uh so who has the power. You know, one gauge of that is like how long do you have to sign up for the subscription, right? And Bloomberg gets you for two years, right? Like that tells you quite a bit about Bloomberg's power. The fact that with almost all of these uh AIs, you basically have monthly subscriptions. I mean, that pretty much tells you everything you need to know, right? >> Interesting. That's a good metric. I haven't really thought about that before. >> They said that they that they limit the $200 super version that you use, JT, because uh they it's there's such a huge discount on it. I don't want people using multiple versions of this to to steal a whole lot of compute. So, they're still selling it below the cost of goods. >> They have to be losing a ton of money out of me. There's no way. Like, [laughter] >> well, I mean, I think that one thing that's very interesting is that, you know, similar to the dot bubble today, none of these companies are profitable. Um, a lot of the capex that's being done is being done on their behalf, right? So, you can talk about how demand is extraordinary. And I I read a long blog post a friend sent me you know, unlike the dot where you're laying down dark fiber, you know, there's tons of demand here. Well, you know, who's that coming from? And ultimately, these are companies that have to go out to the equity market to raise, which is why we're going to get some big IPOs this year. And, you know, if like 45% of your uh, you know, uh, revenue performance obligations are coming from a company that, you know, has about 13 billion in revenue and a trillion in, uh, sort of plan spending, you probably got a problem. >> Those numbers get a little scary quickly, don't they? >> Yeah. Jonathan, you've got a new book uh shooting up a memoir. Do you want to tell us a little bit about that book? >> Uh certainly. Yes. So, um I my parents were Christian missionaries and I grew up in Spain in the 1980s. My parents started a drug rehab center working with heroin addicts and uh so this I wrote this, believe it or not, when I was at um SACE Capital years ago um or evenings and weekends and so it's a world away from my world as an investor. Um but almost all theum heroin addicts shared needles and became HIV positive. uh they they were my brothers and sisters to me and it's a story of of love and loss. It's a I hope a beautiful story of family and and friends. And so it's uh it's not an investment book, but it's one that you know the early readers absolutely love. And it it came out last week and um I almost never do any podcasts. Glad to talk about the book a little. Obviously very happy to talk about investing and I'll probably uh go back into my shell and maybe probably not do a podcast for another five years. That's not how book sales work, Jonathan. You gota you gotta pound the uh pound the podcast. >> Yeah. >> Why release it now? >> Uh so it was very interesting. I was having lunch with a mentor of mine who's a retired fund manager and two years ago and he said you and I and I mentioned that I'd written this thing and it was sort of sitting in my uh on my shelf or in my computer drive and he said, "You really should get this out before your father dies." and my father's 79 and uh I just thought you know he's probably right and so uh went away edited a little later agent went out and got a contract and so I'm very glad that I've done that and uh I hope it uh honors the memory and of my friends and you know that I hope that their memor is a blessing to others I hope it's a beautiful book that that people will enjoy reading >> what' your family think >> uh so it's interesting >> stroll down a memory lane for them or what you know is it >> well some painful memoirs lead like families to stop talking to each other. Yeah. You know, blow them up. Um my father thinks I was too hard on him in the book. Uh but he he loves the book and thinks that I told the story as it was. And uh almost everyone who was in the book uh loves the book. And I didn't realize uh when I wrote it and then now that it's coming out that like the daughters of some of the main characters, you know, were three or four when their father died. And um they didn't really know their father very well. And I hope that through this book they told me that they feel much closer to him and that it brings his personality to life. So I I I was just thrilled and you know if obviously I want the book to do well and I want everyone to read it but no one ever read it. Like for me that's just a beautiful thing. >> Yeah that's how how long ago did you write the book? Uh so it it took me about probably three almost four years because I was like writing an hour in the evening after building financial models and you know a little bit on the weekend if I had some time and so I I think I probably finished it early08 um and then uh you know like typical publishing you get some rejections and I was just very busy um you know I'd started uh a user generated newswire with a friend Terry we sold it to Corbus which Bill Gates owned and at the time I was writing sort of investment pieces which became variant perception and so there life just sort of took over and I just put it away on a shelf and and and didn't really sort of hustle to get a book contract. Um and that that was really the only reason for putting it away for so long. >> What was it like revisiting it after such a long time >> and Yeah. Yeah. >> Yeah. So I think like I I hope it's improved a lot with a bit of maturity but also like I'm a dad now. I wasn't when I wrote it. And differently, I think, you know, when you have uh children or even as your own parents, you know, you're 20 years older um when the book's coming out and you start to see sort of I mean, I I think that we're all uh links in a long chain of love and you you realize, you know, one day my son will lose me. And you know, it's uh it it changes the way you read and the way you edit and and I hope that it leads to like a more mature editing and and writing. So the story is the same, but I hope it's better or deeper. >> Yeah. So you did revisit it and you did rewrite a little bit as 20 20 years hence. That's interesting. And not not because you felt that you'd mischaracterized the events, but perhaps because you were you just you had changed a little bit. >> Yeah, I think that's a a very good way to put it. And you know it's uh it it you get a a lot more perspective on on the events that were there and you know and I hope it's a uh a more profound and and deeper book because of that and I think that you know one of my mentors he had written a memoir and when he read the first draft he said I don't think you're old enough to write this and I was very upset at him and uh and now that I've read >> that was actually pretty sage huh >> I think he was 100% right. So any rate, good lesson to the listeners. You know, if you have an investing mentor or someone, you know, you may not like what they have to say, but uh they're probably right. So >> how was the transition from Spain to where did you go after Spain? >> Uh so I went to the University of North Carolina at Chapel Hill. >> How was that? >> Um that so that was a big culture shock. I I went from basically Madrid at the time had maybe four a little over almost four and a half million people um to a college town that had you know maybe 20 to 30,000 the exact number and uh you know businesses were open and closed 9 to5 and you know was all students and was used to living in a slightly chaotic neighborhood where you had you know grandkids, grandparents, junkies playing in the street and uh shooting up and so it was a very big big change and at the same time the peak of deaths from AIDS in Spain was 94 95 and that was when I was going off to college. So for me I felt very uh just sort of cut off from my friends. Didn't know if I'd be able to see them again when I got home and in in many uh cases if not most I didn't get to see them. So I was very isolated and I think I poured my energy or angst or sadness into studies and I think that's probably why I I ended up becoming a road scholar. It was just a sort of how I found my outlet I think just sort of studying. >> Were you Spanish speaking at home or were you you >> always English at home but I always spoke Spanish in the street, Spanish in the drug rehab obviously watch Spanish TV um and so like I'm you know fully fluent bilingual but and it was all English was always at home and then went to like very small missionary school where they spoken English. >> And you lived in London for a while? Yeah, I I so after Oxford I moved down to London and then uh basically was there until 2020 and then moved to Nassau to the Bahamas where I've been uh ever since. >> How the Bahamas? >> Uh it's great at this time of year. You know, you have a blizzard in uh the northeast of the US. Um or it's like dark and mid and cold in London. Um it's a bit hot and humid and oppressive in the summertime. Um but I I do love it. There quite a lot of very thoughtful investors and family offices and others there. So, it's uh I find it's a great place to work and Sir John Templeton was one of my investing heroes. So, another reason why I ended up moving there. >> Does that geographic distance do you feel like it creates some insulation for your own thinking? >> Um I think it does actually. Um I I tend to It's not to say that like you know we don't speak to people or we don't read what other people write. Uh but I think a lot of the work that we do tends to be driven by like our our own research and thinking and I'm grateful for that. Uh, Jonathan, you you have a you've got to go over the top of the hour. >> I do, unfortunately, and I I really do apologize. Um, as I said, I'm going to like turn back into a turtle um and go back to my shell uh eventually. But um I I I do have uh my publicist uh for the books ended up scheduling too many uh questions, but I absolutely love your show and both of your books and well many books, but um I uh I'm just very grateful to be able to to chat with you guys and um you know, if if you did want to have me again, I would love to come back and not five years from now. Um, so I'm very very grateful and and we can do no talking about um the memoir and do more about um anti-bubbles and great investments. >> Well, that's we we we do like talking about that stuff. Just give us a quick uh if folks want to follow along with what you're doing, get in touch and tell them where they can get the book. >> Oh, yeah. So, the book anywhere people buy books, whether it's Amazon, Barnes & Noble, your local bookstore, you can find it there. Um it's called Shooting Up and uh hope people enjoy that. Myth of Capitalism 2, if they want to get into that, didn't read it the first time around. Um and then our our fund uh you know we're not um but uh we do have a extraordinarily simple web page with our email address and obviously um you know just uh uh happy to chat more with thoughtful investor like-minded thoughtful investors. >> Well thanks very much for coming on Jonathan and telling us about your book. >> Thank you guys. Good to see you. >> Absolute pleasure. >> See you. >> Cheers. Thanks Jonathan. >> Bye. I'll give a quick shout out to the folks. Jupiter, Florida, Breenidge, what's up? Yorkshire, Orlando, Southshshire, Tallahassee, Pedatika, Israel, Waterl, London. What a great spread. Toronto, Mterrey, Mexico, Mendescino, California, Chicago, Bolognia, Italy, what's up? Main streets of Jared's Cross, Capavogga, Iceland. Barrow Inferness, UK, what's up? Uh, Valpareo, Cereton. Thanks, team. Here comes JT with some veggies. Market right at the top of the hour. Uh, all right. So, imagine a world before trees, before birds, before nearly anything that we would recognize as biology. And we're down on the seafloor and life is doing what life always does. It's trying not to get deleted. And this is the story of how that foreign world turned into human intelligence. Like how did we get here? What how is our brain? How did our brain evolve? And it comes, this segment comes from this really terrific book called a brief history of intelligence by Max Bennett. Highly recommend it. Uh and in the book, Bennett describes a ladder and there are five rungs to this ladder and each one is built on top of the last. You can't skip steps. So these are the five biological breakthroughs that really bootstrapped human intelligence. And each breakthrough is it's only possible because the earlier scaffolding already existed. Like you you can't take shortcuts here. So breakthrough number one is steering. And remember we're going back to like you know we're down in the the ocean floor. Uh and it's it's a very different world. Uh but the ability to navigate by sorting the world into good and bad and then turning toward good and away from bad. And actually at that time the body plans shifted. Animals became went from being like things that were symmetrical uh where they kind of would float around in any direction it didn't matter to actually being bilateral meaning like you could cut them in half and like each half would then be uh symmetric. And they now all of a sudden have navigation is a series of binary decisions. Do I turn left? Do I turn right? Do I go forward? Do I go back? uh and the brain at this stage is basically like this little internal compass with two needles. Positive veilance like approach like I want to go towards this good thing and negative veilance like I want to go back I want to avoid the bad thing. And even even back then we had neurom modulators like dopamine and serotonin that created these persistent states that helped an animal keep searching, keep moving, keep trying again instead of resetting to like a neurological like neutral every second. And this is also where early affect shows up like pleasure, pain, stress, satiation. All right, breakthrough number two, reinforcing. This is the ability to learn from experience by repeating behaviors that lead to positive outcomes and suppressing behaviors that lead to negative ones. So vertebrae animals, they add this machinery for pattern recognition and trial and error learning like do more of what worked basically. And with that we had a much we we get a more familiar kind of emotional pallet that we would all like sort of imagine like curiosity, fear, excitement, disappointment, relief because once you can kind of learn over time, you can also start to anticipate a little bit. Breakthrough number three was simulating. And this is the ability to run a rough internal model of reality and then test actions inside of that model before you go test them with your actual body. So this is the neoortex starting to form like we're learning by imagining and the simulation then buys you something really priceless in a dangerous environment which is planning episodic memory so being able to replay past events to see like how did that go down uh counterfactuals like hey if I had done X instead what would have happened and it's very expensive calorically like the brain burns a lot of fuel but it's a big advantage to spend those calories now to avoid dying later uh and so breakthrough number Four, mentalizing. This is like modeling your own mind as an object that you can then inspect. This is like kind of a bit of a strange jump. Like the brain builds a model of itself, intent, knowledge, uncertainty, and then uses that machinery on others. So now this is where you start to get into theory of mind like anticipating what someone else wants, what someone else knows, what they believe, what they might do next. Uh and then this is where social learning starts to become more efficient because you can learn by the observation of others and not just by your own expensive trial and error. And then the fifth one was speaking. And this is language, naming things, grammar to convey actions. This is where individual intelligence starts compounding into cultural intelligence. And language tethers all of these inner simulations that we're doing together. And then, and this is really key, it lets thoughts persist across generations. So you're no longer limited to what your own nervous system can kind of discover in one single lifetime. You inherit this accumulated library of priors from from all the generations before. So bringing this uh [clears throat] this all kind of back to the investing world, you know, there were there those five rings in Bennett's ladder that I just described of intelligence made me think also about Graham Duncan's five levels of the game essay as as which is kind of describing the maturation of investors. So and I love it when there's symmetries to these things. Uh but before we get into to Graham's uh observations, let's do a quick little quiz for the value investors. When you say mean reversion is inevitable, which rung are you outsourcing your thinking to? Is it a steering which is cheap equals good? And we're we're basically done here. Uh B, reinforcing. So it worked in 2000 to 2004. Therefore, it it this is basically a mathematical certainty like physics. Uh C simulating. I ran three scenarios, baseball, bull, and coping. Uh, and then D speaking. I'm not wrong. I'm just early. And now here's a 40-page memo to support that. Uh, so what's what's your This is very tongue and cheek, obviously, Toby. So if you want to guess, you you can you can guess, but >> uh I'll take the I'll take the bottom level. >> All right. You want to go D speaking with your 40page memo? >> Is that No, I took the dumbest level. The dumbest level. >> Yeah. Yeah. Cheap equals good. And we're done here. Okay. Good. That's that's the correct answer probably. Uh, all right. So, part two of this is bringing it back to the investment world of Graham Duncan and his levels of mastery. And, you know, Duncan's premise is that great investors view investing as this game where they always know what game they're playing at the time. And he ties this really to like a locust of control. Like strong investors focus on what can be controlled and they don't narrate every outcome as the world was like happening to them. Like, can you imagine Buffett complaining about something bad just happening to him? And I'm like he know he takes responsibility. He's a big boy. Um and in evolution you know cognition upgrades came in these layers. And the same thing this mastery upgrades come in layers as well. So [snorts] level one from Graham is is apprentice. And this is you know this pipeline of huge numbers of ambitious young candidates. They're all competing for a small number of seats and they arrive sort of all with this ba the same basic training that they get in school but otherwise they're pretty much blank slates. And you know the most efficient path here tends to be like apprenticeship model. You find a mentor, you absorb the craft, you learn what matters. And this is like steering in biology. Like you're getting these very primitive but essential skills of kind of sorting the inputs into good, bad or uh you know I need to turn from this or away from this. Uh and it the steering builds on this kind of internal compass of distinguishing signal from noise, separating risk from volatility, learning which mistakes are annoying versus fatal. uh developing the ability to act to not act actually when when it might be seductively uh you know available to act and and Duncan notes that these early environments leave a very lasting frame of mind on people. They kind of carry their first market dialect for years and I think we see that with like you know people who came up during GFC seem to have different risk appetites than those who were come in even a few years after them who didn't get that early imprint. All right, level two would what Duncan would call the MA an expert. Um, and this is, you know, survivors who move from processing other people's research agendas to actually generating ideas on their own. This is typically in your late 20s, early 30s. A lot of people plateau here, uh, especially if you have kind of a static identity that locks in a particular style and limits the ability to to cope with change. Uh, he also flags pride of authorship as a common failure mode. So when when you get too attached to your own analysis, you can kind of block adaptation. Uh and this this is maps to the reinforcing part of biology, like repeating what worked, inhibiting what didn't, letting feedback do all of the steering. Uh and it's an essential skill to to learn how to spot those key drivers, like seeing the underlying reality rather than just producing sort of raw analysis for its own sake. All right, level three is the professional in Gramps Graham's terms and this is u you know imitation finally gets shed. There's more idiosyncratic style emerging consolidating maybe multiple influences beyond an original mentor and and like integrating those. And he uses Buffett as an example here of synthesis you know blending influences from Graham and and and um you know Munger [snorts] obviously uh Bill Fischer. Yeah. and then being pushed you you kind of start to push beyond the previous constraints and Duncan also makes a a point of like the very highly e ecological point uh the game often gets crowded and so a single playbook can work and then it becomes common and then that edge decays. So u this is kind of like the simulating part of the biology like you're running internal models of possible futures testing strategies before testing them with actual capital iterating without dying basically. Uh level four is master and this is this is changing the game that you play like and this is kind of a small minority. Uh but they become like true kind of absolute return oriented over multiple decades. Uh defining success internally rather than by peer comparison at any given moment. Uh he uses David Ter as a study of flexibility like multiple mental models moving across context not being constrained by any particular fixed role. Uh, and this is like the me the mentalizing part of of the biology terms like theory of the mind. So, modeling other minds incentives, intent, knowledge. Uh, you know, markets maybe aren't just cash flows. They're just they're also cash flows filtered through other people's incentives and constraints and fears. And Duncan explicitly leans into this psychology of the players view uh by quoting Robert Green uh with mastery includes seeing not just chess pieces but the whole game. Um he he even gives an empathy like an example from Paul Tudtor Jones which was putting himself in the shoes of a a pressured Japanese fund manager helping anticipate behavior and market directions. So really like there's a lot of mentalizing here that gets rendered into a P&L. And then level five the last one we're almost done uh is the steward and this is becoming like part of the playing field. So this is like a mastery plus enough success to redirect attention towards taking care of the playing field itself. Uh you know me mentorship modeling good behavior influencing the norms uh that that make you a steward of the system. And he uses buff as as during 2008 crisis is an obvious example. Hire you know bigger public presence then calming metaphors by America I am uh taking responsibility for the system itself not just your own results. And this is like the speaking part of the biology uh language as this kind of technology that lets thoughts compound across generations. And the Steuart is is really not just like a better stockpicker. It's it's like transmitting teaching frameworks that outlive the teacher using metaphors to coordinate shared attention for everybody. And Duncan describes stepping back for like a bird's eye view of the whole field. So if you strip away the miracle that is intelligence, uh really it's just sort of like better error correction under constraints and and investing is just error correction with money attached effectively. Uh and Bennett shows why the upgrades arrive in a particular order and Duncan kind of shows the same thing why why careers do it too. So, if you want one practical takeaway here for the investors, locate the rung that you're likely on and then do kind of that unsexy work that that that particular rung demands because they're really every shortcut here is just kind of delaying paying some bill of tuition. Uh, and you can't skip steps in biology or investing. >> Good one, JT. Do you think that Buffett becoming a steward around that 200 wherever somewhere between 2000 2008 somewhat diminished the signal for from him saying you know in 2007 like there's lots you can find lots of quotes from him in 2007 at the absolute peak saying market doesn't look that expensive to me. I I would put the stewardship even earlier than that though. Like I mean >> I would say it started earlier than that but I'm just saying do you think it diminishes the signal a little bit? Like when he's saying I don't think that like you say if you if you know that he's a steward and in 2007 he's saying I don't think the market looks that expensive. Is he saying don't panic rather than I actually think the mark I think the market's cheap here. I'd have to go back and see like the specific reference to that, but my hunches what he said was had some caveats stapled to it which were like if rates stay low if >> exactly then then stocks are reasonably priced here. Uh those are the kinds of comments he says in those time periods. >> So yeah, so if everything stays at perfection then there'll be no problem. But if we move away from perfection, you got to hear the part that he doesn't say. >> Right. >> When you started talking about underwater, I I I saw this uh I saw a YouTube video on an animal called an isopod. Have you ever heard of an isopod? >> No, but I'm ready for your veggie segment next. >> I'm going to do some veggies, folks. It's it's a it looks it's it's very closely related to a roly pololy. Those little insects that you see on the ground. Might also might almost be identical to a roly poly except they're about 2 feet uh long. >> What? And they're like covered in kind of crab shell looking stuff. So they look like a a crab cockroach hybrid kind of thing. >> And these are really old though, right? Is that they don't >> Well, they exist. They continue to >> They're still around. >> They live on the floor [snorts] of the Mariana Trench. So right at the very bottom. And what they do is they they eat whale carcasses when they fall to the bottom. So >> you can imagine how infrequently a whale dies and it falls all the way to the bottom of the Mariana Trench. So when they find them, they have to gorge on these very and they can they can eat and then not eat again for something like 2 to 5 years. >> It's like a value investor. >> So when they find these things, they fill themselves up so much that they they literally can't move. They just jam their body full of, you know, rotten whale meat to the point that they're fixed in place and then gradually they they digest it over the next two to five years. And then right behind that YouTube video, I saw another one about this ramen place in Korea that they top their ramen with the shell of an isopod that they steam. They do nothing else to it. And then you can eat the interior of the isopod. And the guys eating it thought that it didn't taste that good. >> Wow. I mean, imagine the uh >> well, let's not get too gross, but imagine the after effects of eating that much. You know, what does that uh [laughter] >> the the really interesting thing about the isopod is that it lives under that crushing pressure at the bottom of the Mariana Trench. And every other animal you pull up, like their eyes explode out of their head and all their insides come out because they they need to be under that pressure to survive. But the isopod, you can pull it up to the surface and you can keep it in an aquarium at the people can go and have a look at these things walking around. They're perfectly fine. They don't suffer from the lack of >> an exoskeleton protects them. >> And they found one uh I think they kept in San Diego or somewhere like that. And they they put some food in there for it and it ate I think the first time they fed it and then it never ate again and it lived for another two or five years something like that. And at the end of >> no eyes. Do they have no eyes? >> No. I mean, they've got, you know, insect stalk kind of things coming off their head. >> Okay. >> They've got some ability to sense. Anyway, this thing didn't eat and then it died. And that what they realized was it probably died of old age. It didn't die from lack of eating. It was just it didn't need to eat again because it had just decided it didn't eat anymore. It didn't eat any more food. >> Wow. >> Anyway, gross. But I felt a lot of affinity with it. You know, as a as a value investor only gets to eat every seven years or so. >> Get to eat every Yeah. What do you do in the meantime? Just lay there inert [laughter] >> as much as possible. That would be my preference. >> Oh, you write books. That's that's how you [laughter] >> That hasn't worked. >> Okay. >> Um, what do you think about this market? >> It's more interesting than it was. Uh, right. I mean, there's definitely some price movements that are grabbing some headlines. I think Twitter's uh sentiment seems quite apocalyptic and um >> apocalyptic. Yeah. Although when I, you know, when I go look at I've kicked the tires on some of these companies that have supposedly been hammered the most. >> Yeah. >> And I still don't see a ton of cheapness there yet on any metrics that I kind of care about, especially if you count the stockbased comp. like you you throw that back in there as a uh to try to arrive at some kind of a flow number of you can't you know earnings cash flow from ops some kind of like version of that and it's still I don't know for all of the uh hand ringing I would have thought they'd look cheaper on some of these metrics so >> I put this chart up today on Twitter looking at uh price to sales for Mag 7 which um it got up to eight times on price I know I know that sales is a limited kind of metric because it doesn't tell you what the margins are like and so on and so on. But >> but at least you can't mess with the number, right? It it kind of is what it is. >> It's topline number and there's very little manipulation that can go into it. Although I know there's some manipulation that can go into it when you recognize revenue and so on, but um even after this most recent kind of pullback, they're at 7.1 times, which is as expensive as they got in 2021 at the very peak. you're saying >> Mag 7 the margins are fatter now so like it's not it's not an apples to apples comparison but it is kind of an interesting >> and I I don't know as Jonathan mentioned earlier >> and as we've discussed many times before there is some mean reversion in margins supposedly I haven't actually seen it in my lifetime but there's [laughter] this theoretical a lot of the older guys seem to talk about it a lot like it's a thing that they've seen it's nothing that I've ever observed in my >> in my investment career but at some point like the next print is going to be the highest ever at 14.3%. >> It's like the lost city of Atlantis. Like you just hear people, you know, whisper about it in hush tones. But [laughter] >> how much of that like I think Husband has this he calls it an account an accounting identity. >> Yeah. >> Where the deficit >> profit equation or something like that >> turn up as profits on private. There's something about that that I don't like. There's some sort of relationship that says that governments have to run deficits in order for corporates to run profits. I don't understand that well either. Um I've tried to look into it and a lot of the macro economic stuff makes my head hurt. So I I don't know. I don't get very far but um that doesn't make sense to me. Maybe I'm stupid. I'm I'm totally willing to accept that. >> I don't like the theory of it either. But the practice of it when you you know we run massive deficits and then we've seen these greater profit margins than we've seen at any other point in time. Like it does seem that there is some sort of relationship there. >> Well, couldn't even just like the the kind of no duh version of that is like corporate profit margins going from 35 to 21 is going to increase deficits and increase profit margins. >> Oh, corporate taxation going from 35 to 21. Yeah, that's true. I mean that's like a simple little I don't have to have a kicki profit equation to understand that do I >> do the margins taxes come out of margins? Ask a dumb question. >> Sure. >> Net income is below the tax line. >> Well, how about this? Rates have gone up and rates don't seem to have impacted much of anything. >> Yeah, but I think corporate America was pretty smart to like term out a bunch of debt that would have been really cheap. Yeah, they're they're not dumb. They knew that they were probably getting away with something. the little guys after suffering for the last decade or so, you know, evidently that was as good as they could do because the rates were really low and then rates went up and they all just tripped over almost immediately. >> Yeah. Having said that, there something something has clearly changed in the market since Q4, beginning of Q4, end of Q3 last year, where I've been pointing out this relationship for a long time on my Twitter where, you know, equal weight for a hundred years, equal weight has outperformed market capitalization weight because small outperforms large, value outperforms growth for the most part. But there are clearly these periods of time where all of these 100-year relationships have broken down over the last decade. And so I'm looking for the turning point and equal weight clearly started outperforming which is not to say that it's I'm declaring the end of it. I'm just sort of narrating it in the moment as it's happening because >> you don't know when the reversal sticks because we've had at least two other head fakes just in this run from 23 to to the current one not including the big turnaround from 22 to 23 whatever it was. It is quite interesting to look at the and you know I said this to you three times a day privately but the uh morning star style boxes with different time periods of performance and just looking at the top right corner of large growth and then the bottom left corner of small value and just seeing like how those numbers change over you know >> today uh you know one month three months like >> they're pretty there there's something different happening now right like because when we used to look at that it would just be like green in the upper right down in the bottom left like every day every like it was it was fractal in nature uh every single >> you you couldn't even tell if you clicked the button between you know 10 years and and one day [laughter] >> it is different one one thing that is interesting is that the rebound has been I think that growth has lost more than value has gained since the rebound but value has still made reasonable gains through that period of time >> but it's now >> last time I looked on what was it the three-month maybe it was >> minus 10 and plus 10 >> something like that >> and five year also because it coincides with the 2021 >> oh top. >> Yeah. >> Yeah. Yeah. >> Also that you know the 25 years started looking pretty funky too because that's the top of the.com bubble >> catches 2000. They've been looking it's been looking good for values over the last 25 because it's just it catches that first seven years of the of the 2000s. >> Yeah. Interesting. What would that look like? Do does it do you is it one like could you be imagine that we're six months from now and the 10 years hence that was like all anomalous against the hundred years before completely wiped out of the data set. It's amazing how quickly it turns around because I think now value has outperformed over the last 12 months which I wouldn't have picked uh because we've gone through the tariff tantrum plus a big bounce from MAG 7 with most of the small and micro value midcap not really doing much at all. But the reversal in Mag 7 and the other more growthy software names has been so severe that now uh small value it's all outperforming on a 12-month basis. So it's entirely possible and I think going back 5 years so it's it's entirely possible that that >> that turn is violent and quick and it does start looking better for value but then the the the margin for you know the multiple margin that you're paying for growth over value has collapsed pretty quickly too and so do you want the better >> the better names for a small premium >> versus 15 I guess >> it's amazing how quickly that's happened I've looked at a few things that the the P multiple uh advantage for S&P 500 value over growth is not much >> really. We're back to tight dispersions. >> It's it's it's not back to it's not it's back to >> it's still it still favors growth, but it's it's closing in on on flat. It is surprising to me too to look at uh you know all of the talk about Mag 7 dominance and outperformance and when looking at like year to date and you like most of the names in there are kind of down maybe not like hugely down but there's some enough in there where how's the market still at like damn near all-time highs if this big component of it that was supposed to be carrying the whole thing starts shedding the load and yet somehow we're we're still at alltime highs. What's going on there? >> I didn't get it either. The the narrative last year was certainly that it was all concentration and it was mag seven concentration that was driving the market and the other 493 >> just not participating >> shiftless uh layabouts. [laughter] >> But then I I look at some charts and I see mag 7 uh has the bulk of the earnings has the bulk of the margins has the bulk of the market capitalization of the S&P 500. Yeah. I have no idea how that whatever happens the index is okay. Like the the components of the index are all over the place, but the index is okay. >> How's that work? >> What does it take for a systemic draw down in the index? >> Can't be done. >> Permanent permanent new high plateau [laughter] >> forever. >> Forever. >> I think it's encouraging to see. I mean, I I watch I watch equal weight versus market capitalization rate because that's the simplest. It's the you know, you say value and people say, "Well, I don't like book value. want to buy those dog companies. >> They're bad companies. They're not growing as well. But I say equal weight at least then like it's a you still >> same companies. >> Yeah, it's it's the cleanest measure. And so when that turns, I think that that's that's uh it's interesting. It's worth watching. And with that turn, small and value and mid and everything else cyclical starts working. >> But it's nothing to do with it's nothing to do with rates because rates have gone up and down. It's nothing to do with the yield curve cuz that's >> that's been Massively inverted, uninverted, flattening out again now. >> Yeah. >> Not absolute rates, not tariffs, >> the business cycle deficit. [laughter] >> I can't think of anything else to tell. Like, if anybody's got any good ideas, let me know and I'll go and have a look. >> Yeah, momentum. Momentum's looking a little bit long in the tooth, maybe. >> Is it? Well, when does some of these uh previous value names fall into the momentum bucket? >> Well, my my momentum is is like zeroth percentile in [laughter] a lot of my names. Absolutely wax. >> Fold full drums just dead in the water. >> Yeah. Yeah. >> It's been hilarious to watch. I mean, I I I can't I don't know what caused the turnaround either from 22 to 23. 23 24 whatever it was Thanksgiving 23 Thanksgiving 24 maybe was when cyclicals really fell over. >> Isn't it it weird though the the difference between uh chart time and behavioral time. >> Like we look back at these things and it's like oh yeah that looked easy or obvious or whatever but then when you're actually living through it it's like it's still pretty much fog of war right? I mean, when particularly when you look at a back test, you [laughter] the 70s suck. That must have been rough. That was a decade. >> Yeah. Yeah. Right. Oh, no problem. I could do that. >> And then we It's been so long since we've seen a grinding bear, too. You know that even you know 2000, 2002, three. >> Yeah. >> 2007, 2009, like those are 20 month bears. But then >> 18 months is the average, right? Isn't that what you told me at one point? >> Something like that. Yeah, about 18 months. >> About 18 days. Is that I thought we we got it down to 18 days now. >> I mean, now it just bounces like a golf ball off a concrete path. It just ricochets higher than it came down. >> But but I think I think there's been this little earnings recession. Like there's clearly been a little earnings recession certainly in the cyclicals that I watch from 22 >> until I think that there was a turn in about Q3 last year. They started looking much healthier than they have looked in the past. And I I is that tariffs? I mean, I have no idea what's causing that. >> What are margins S&P margins going to look like on if you jam $300 billion of depreciation from all of the AI capex per year in over the next five years? >> Well, they're I mean, Google's free cash flow is flat for the last five years. Like that's credit to them for like delivering flat free cash flow because I think a lot of the other ones are going to go backwards. >> Yeah. Well, I mean they're some of them are levering up their balance sheet now too. Even off balance sheet, right? That was uh >> that's the only place to carry your debt. >> Yeah. That's as good as money, sir. >> That's an IOU. >> Tesla is one that I that I find kind of it's it continues to perplex me. It perplexes me that it perplexes me because I've just it completely defies. Yeah, it just completely defies all you know the argument was always well it's growing so fast so it can command this premium multiple. Well, now the growth's gone. >> And I see this morning in the Wall Street Journal that uh sales in Europe are dropped like 18% and BYD's tripled uh in Europe. >> Oh, competition showed up. Huh. Who would have thought? >> And and in the rest of the world as well. I saw the same thing in Australia, but sales are off. >> Turns out cars are a hard business. >> Well, now it's all now it's all going to be self-driving. >> Self-driving taxis, >> robots >> and robots. I do think it was funny that when we were in this in China, they said that the uh the Tesla bot was the one that was the most advanced. Optimus. >> Yeah. And we weren't sure whether they knew there was a dude inside the the [laughter] costume or not. >> Yeah. Did they know that that was just a guy inside of the robot suit? >> On that note. >> All right. We're supposed to criticize by category, Toby, not by name. >> It's fun. >> It's fun. >> All right. Thanks, guys. Uh we'll see you back next week. JT uh journalic still great out there. >> Apply for a job there. Come work with me. Uh yeah, we'll talk about value next time. >> [laughter]
Jonathan Tepper on The Myth of Capitalism, his "Shooting Up" memoir and $BKMG | S08 E07
Summary
Transcript
It looks like we're live. This is Value After Hours. I'm Tobias Carlile joined as always by my co-host Jake Taylor. Our special guest today is Jonathan Ter. He's the founder and portfolio manager of Private Capital. How are you Jonathan? Welcome. >> Doing all right. Thank you so much for having me. >> Yeah, >> tell us a little bit about Previt. >> Certainly. So, uh we we launched in 2020. We've been going for about six years now. Uh we are 580 million uh assets under management. The philosophy and the investment style is very simple. We're a long only fund but we have an absolute return orientation. Uh we try to buy quality companies and we try to buy them at a a discount to their intrinsic value. Um and we're we do deep analysis into companies and industries. We're trying to buy uh dominant companies. So companies that you know have a high market share that necessarily have done so via you know mergers and regulatory barriers but ones where you know we think that the delivery of the product dictates few players and we're trying to make sure that we're finding companies that have a a high free cash flow yield where that cash flow can come back to us you know whether dividends or buying back their shares if they're you know um under undervalued >> and if Jonathan's name sounds familiar it's he wrote a terrific book a while back called the myth of capitalism And I was curious what in that book informs how you practice investing today. >> Uh certainly. So I think that uh as I was doing a lot of research on the book, it was interesting that as I was finding industries that had become more concentrated and then just mapping out all different industries. often I was finding investors that I admired obviously and I mentioned uh Buffett but you know you have other investors there like you know Chris Hone Steve Mandel and others owning some of these companies and it seemed to me that you know if you you can invest cyclically you can buy cigar butts and there's not only one way to invest and that's one of the beauties of investing but I think that if you want to sleep at night and you want to make sure that your portfolio is growing over time I thought one of the best ways to do it is to buy companies that you know have uh high returns on capital that you know have a a dominant position and you know provide goods that people need. And so in the the fund you know when when we launched it in 2020 co was happening obviously it seems like distant memory uh in a stone age but uh you know we bought booking.com for example you know which is a online travel agent you have them and expedia are the main two players uh and people you know were treating this like no one would ever travel again we could we bought it very cheaply it was one of our largest holdings we still own it to this day and so that's an example where you know it just makes the most sense to have uh an online platform that can bring all the different together with you know particularly in Europe a fragmented market uh for hotels and accommodations. >> Can you take us through the thesis on booking.com when you bought it? What you saw that you thought was uh different from the way that the market was reading it? >> Uh certainly. So with booking it was actually very interesting because it wasn't just COVID. Um obviously co you know people had questions about the duration of the lockdowns and the disruption of travel and you know our view was that historically when you'd seen for example there was the recession in 2001 2002 and you had SARS and there were fears about travel you know these tend to be temporary in nature people want to travel they want to see friends they want to see relatives you know almost any interruption of travel historically had been brief and our view is that that would be the case the price the stock price was certainly not priced for that. I was, you know, priced for a much more negative outcome. But on top of that, you had the fear that essentially, you know, Google was might get into travel. It might disintermediate booking. People might go to booking first, sorry, Google first and then go book their hotel. And so you had a variety of reasons why it might be uh lowly valued, you know, despite being such a high quality company. Um today uh it's interesting that you obviously have the fear of AI where agents might do sort of what people were thinking Google might do which is sort of disintermediate some of the platforms. So some of these fears you know don't go away they just sort of recur over time. Um our view was that you know booking I'm sorry Google does not want to be the merchant of record. They don't want to you know run a customer service department. They don't want to be the ones dealing directly with the hotels. Booking and Expedia actually do advertise significantly on Google. They would end up hurting themselves too in terms of losing all the ad revenue if they actually did want to go into that line of business. And Google is much more sort of search for everything rather than trying to dominate a vertical. So I think our view you know is you know that those two areas which is one the duration of the of the downturns and two the threat posed by Google and as it turns out you know booking uh I think they have one of the best CEOs in the world Glenn Fogle and they've managed to uh dramatically increase the um traffic that they get directly going via their app I you know people aren't starting on Google and ending up on booking um and then you know Google has never really actually followed through in terms of the worst fears that people had where people might you know do their entire booking experience via Google which just doesn't happen. >> It's a similar sort of question today isn't it with AI that folks could just tell their agent to go and book these flights. How do you how do you come to terms with that? >> Certainly. So the the last conference call that booking had is worth reading. um you know if people have the time and and energy but Glenn Fogle pointed out that you know one you when you have a a middleman basically they've aggregated supply and demand and you you have a lot of uh hotels across Europe that are independent mom and pop where you have sort of alternative accommodation where it's an individual you know the idea that all these people are going to get all their inventory and make this readily searchable by you know every AI whether it's chatgptropic or xai or whatever it might be, you know, doesn't make a lot of sense. You don't have, you know, that much sophistication. Um, and furthermore, you know, a lot of these AIs, whether it's Claude, do they really want to be the merchant of record? Do they want to deal with the customer when their uh travel plans go bad? You know, like it's it's just I don't think people have fully thought through, you know, what it is to run an actual travel business. um you know and if you think about people book from countries all over the world with different payment systems and you know the uh websites and the uh history of reviews are translated into 40 languages you know it's it's not a simple undertaking and it's uh unlikely that the AI agents would be without the platforms some of the AI agents are actually pretty good at scraping the platforms um and certainly platforms themselves control whether that's going to whether they'll be able to do that on an ongoing basis. >> Tell us a little bit about the myth of capitalism. >> Uh certainly. So I wrote that in 2018 towards the end of the year. I think it came out in November or so. Um and then obviously near the end of the year, so most people probably actually read it in 2019. But the the uh book essentially was uh I was set out to answer the question why corporate profit margins were so high relative to history. One of the there's certainly multiple reasons but one of the main reasons uh in my view was the rise in industrial concentration where many industries were becoming more concentrated. This gave greater pricing power to companies. Um it in in many cases disadvantaged the consumer or disadvantaged the worker where you're you know you can't go out and sell your skills if you have a limited number of people who might bid for those skills. And so to me that seemed like a very interesting phenomenon. And the book was really about public policy and history and sort of looking at why you know despite the US having the Sherman act from 1890 to to the present there there was these sort of pendulums effect effectively that were multi-deade in nature and you went from having sort of uh very aggressive antitrust enforcement uh in the sort of 50s and 60s to then early 80s there's a change with Reagan and the merger guidelines and so the book goes through all of that. It looks uh quite a few industries and it has [snorts] various chapters on themes regarding this. Um and so that was the the central idea was that basically capitalism in theory should be about uh competition and about you know free enterprise. And in fact you often find that particularly in industries that are more concentrated uh typically a regulation often is a key barrier to entry uh not in all but it's the regulation often that impedes competition. Then you have certainly regulators who you know uh o over time and there's you know I have a chapter on um how you had a revolving door basically between sort of the FTC DOJ and a lot of the companies wanting to merge and so you ended up with mergers towards monopoly where there may have been competition there initially but sort of the mergers got rid of that and so that was that was the the book. Um at the same time obviously I was looking at a lot of this with an investing uh angle trying to understand sort of the investment implications of this uh wrote another book which will never see the light of day but it's our sort of internal um monopoly guide or uh sort of guide to understanding sort of investing you know given the implications of all this >> where um where are we today in the pendulum swinging as far as kind of antitrust enforcement and competitive dynamics. >> So, it was quite interesting. It seemed to have bipartisan support to have more uh enforce and I I think that you know certainly Trump and Biden Trump won and uh Biden uh were moving in that direction. I think in the last year it seems to be going almost in the opposite direction you know to say that businesses uh did not like some of the reforms or some of the mergers that were uh blocked. And so, you know, it's I I've obviously been busy focusing on my funds, so I've spent less time looking at the public policy side of this. Um, but, you know, there I think there were plenty of reasons to be optimistic. Now, I think it's a bit more of an open question, and I don't know, you know, where the chips are going to fall. >> We did stop a big purse, right, with Coach merging. Apparently, we can't do that. But >> I I do think that's funny that that was the the one merger that really got pushed hard. >> Yeah, I mean I certainly I I you know I'm I'm not responsible for DJ or FDC policy. Um some of them I thought you know the the mergers that were blocked made a lot of sense. The block was were a little more questionable in my view. >> It's funny to I don't I don't know where the profit margins were in 2018 but I would guess they were 10 or 11% or something like that. And now in 2026, I saw there's likely record profit margins. I think like 14.3%. >> Oh my god, >> that's funny in the context of, you know, Buffett said anything above 6%. >> Uh, and Grantham has said the same thing and Husman, I think, has said the same thing >> about that. Six seems like a like it's impossible to imagine how we get back to that. >> Well, I so you know, we're bottom-up stock pickers. um you know trying to find good companies, good industries um trying to understand sort of how sustainable the profits are. Um, from a macro standpoint, um, you know, clearly some of this is driven by by taxes and interest rates. And so, um, I I I I think there certainly will be a reversion to the extent that interest rates go back up. And, um, obviously, if you want to do something about the deficits, then taxes are likely to go up, too. And so, I I suspect that, uh, record high profit margins probably are not here to stay. Um, >> how about AI? What do you how do you think about AI impacting profit margins? >> I mean to be honest I don't actually spend all that much time thinking about it in the sense that I think a lot of these things aren't uh aren't entirely knowable. I think what we can do is try to what I do spend time thinking about is looking at sort of previous technological uh revolutions and bubbles and seeing how those played out. >> And there there two books that are terrific. Um I think Philipe Leafont recommended one. So the hardback now is actually pretty expensive, but if it's not expensive if you want to buy it on uh Kindle or iBooks. Um and the engines that move markets by Sandy Ner is a very good book and it's about the history of technological waves. And another very good one is uh technological revolutions of financial capital by Carla Paris. Um and they both have similar lessons even sort of look at it in different ways but uh that the consumer tends to be the net beneficiary in technological waves. uh early investors often pace face very intense competition because there's too much capital going into these new exciting areas and then often the winners uh in terms aren't even necessarily the ones that are around you know when the revolution starts and if you think of the internet uh for example the big big winners Facebook was started in 2005 Google really wasn't even a company um you know anyone really talked about during the com been found >> 17 search engine maybe something like Exactly. Um >> like you know just technically sophisticated people used it but everyone else was like you know playing around on Yahoo and >> Exactly. And so it's not obvious to me who the winners are with AI. Uh and I suspect that if we had this conversation eight years from now people might be surprised you know about the companies we're talking about today versus the ultimate winners. uh I think that given the uncertainty it's difficult to pay might be very high valuations with you know a high degree of confidence because you don't know um and so you know I try to focus on things I can understand things that you know I have some reasonable idea about and you know where I might get my cash back you know the company returning it to me um and I just don't see a lot of that and so you know we're not a short we're not a hedge fund in the sense of running a shortbook so I don't feel any uh obligation to go out and find things to bet against. uh and bubbles can certainly go further being if they're irrational as my friend John Hampton said like you know there's no reason why it couldn't be five times more irrational right so um I think that uh you know we're just trying to find the losers or the perceived losers you know and in the dot certainly um when I I started my career at SACE Capital in 2003 and they had what was you know informally known as the old economy group right because you had that sort of new economy and the old economy and those that area obviously was like very cheap and unloved and and ended up doing very very well. So, uh I think right now I'm much more interested in the things that people think are going to be disrupted or losers that might actually be good investments. >> Well, that's an interesting question. What what do you think is going to be uh is going to fall into that bucket? Well, so there are four areas currently I think that are the most affected by um AI or currently the market's telling you that they think these are going to be losers based on the change in stock prices and the fall in multiples and and valuations. And the first one is uh which I think most everyone's focusing on which is software. So you have this sort of SAS they call it the SAS copalypse or apocalypse or whatever. Um and then you have so that's software obviously number one. You also have uh data and analytics firms right if AI is going to go off and do the analysis then do you really need to pay for faxet or morning star or um refinitive which is part of the seal Thompson Reuters but it's part of London stock exchange group >> and even S&P and Moody's have you know been hit not as badly but they've been hit um and then you have online platforms the idea that the agents can go out and do the booking for you and therefore you don't need uh the platform and the network effects effectively >> classified been um neutered. And then you have the the fourth which is I think uh not as badly as affected as the others but certainly I think uh has been hit have been sort of payroll processors and you know uh you have ADP paychecks, paycom and so on. And so within all of these, I think that there are some businesses that will certainly be affected um and others that you know will probably I I believe actually benefit in the sense that if you think that these AI models are ultimately commodities right where Chad GBT is not that different from claude which is not that different from um then and anyone can use them then surely is as in previous technological waves it's the consumer that ultimately benefits and people who can use them, you know, where you get, you know, you can travel further and get cheaper railroad tickets or you can, you know, make phone calls more cheaply. Like all these things are great for humanity, not not so great for shareholders. Um, but there's no reason to think why a lot of these companies can't use AI in their own um workflows and the experience they might provide their customers. Yeah, it seems to me that that's that's a likely direction that there's uh some commodification in the in the models and the next even if you're just using the next best model there's not much drop off in between the two might be a little bit of lock in with people creating their own projects and workbooks or whatever the case may be but that doesn't give you much pricing protection you can't gouge your customer the way Microsoft has been gouging their customers for example you know hands off to Microsoft >> yeah if you want to see uh so who has the power. You know, one gauge of that is like how long do you have to sign up for the subscription, right? And Bloomberg gets you for two years, right? Like that tells you quite a bit about Bloomberg's power. The fact that with almost all of these uh AIs, you basically have monthly subscriptions. I mean, that pretty much tells you everything you need to know, right? >> Interesting. That's a good metric. I haven't really thought about that before. >> They said that they that they limit the $200 super version that you use, JT, because uh they it's there's such a huge discount on it. I don't want people using multiple versions of this to to steal a whole lot of compute. So, they're still selling it below the cost of goods. >> They have to be losing a ton of money out of me. There's no way. Like, [laughter] >> well, I mean, I think that one thing that's very interesting is that, you know, similar to the dot bubble today, none of these companies are profitable. Um, a lot of the capex that's being done is being done on their behalf, right? So, you can talk about how demand is extraordinary. And I I read a long blog post a friend sent me you know, unlike the dot where you're laying down dark fiber, you know, there's tons of demand here. Well, you know, who's that coming from? And ultimately, these are companies that have to go out to the equity market to raise, which is why we're going to get some big IPOs this year. And, you know, if like 45% of your uh, you know, uh, revenue performance obligations are coming from a company that, you know, has about 13 billion in revenue and a trillion in, uh, sort of plan spending, you probably got a problem. >> Those numbers get a little scary quickly, don't they? >> Yeah. Jonathan, you've got a new book uh shooting up a memoir. Do you want to tell us a little bit about that book? >> Uh certainly. Yes. So, um I my parents were Christian missionaries and I grew up in Spain in the 1980s. My parents started a drug rehab center working with heroin addicts and uh so this I wrote this, believe it or not, when I was at um SACE Capital years ago um or evenings and weekends and so it's a world away from my world as an investor. Um but almost all theum heroin addicts shared needles and became HIV positive. uh they they were my brothers and sisters to me and it's a story of of love and loss. It's a I hope a beautiful story of family and and friends. And so it's uh it's not an investment book, but it's one that you know the early readers absolutely love. And it it came out last week and um I almost never do any podcasts. Glad to talk about the book a little. Obviously very happy to talk about investing and I'll probably uh go back into my shell and maybe probably not do a podcast for another five years. That's not how book sales work, Jonathan. You gota you gotta pound the uh pound the podcast. >> Yeah. >> Why release it now? >> Uh so it was very interesting. I was having lunch with a mentor of mine who's a retired fund manager and two years ago and he said you and I and I mentioned that I'd written this thing and it was sort of sitting in my uh on my shelf or in my computer drive and he said, "You really should get this out before your father dies." and my father's 79 and uh I just thought you know he's probably right and so uh went away edited a little later agent went out and got a contract and so I'm very glad that I've done that and uh I hope it uh honors the memory and of my friends and you know that I hope that their memor is a blessing to others I hope it's a beautiful book that that people will enjoy reading >> what' your family think >> uh so it's interesting >> stroll down a memory lane for them or what you know is it >> well some painful memoirs lead like families to stop talking to each other. Yeah. You know, blow them up. Um my father thinks I was too hard on him in the book. Uh but he he loves the book and thinks that I told the story as it was. And uh almost everyone who was in the book uh loves the book. And I didn't realize uh when I wrote it and then now that it's coming out that like the daughters of some of the main characters, you know, were three or four when their father died. And um they didn't really know their father very well. And I hope that through this book they told me that they feel much closer to him and that it brings his personality to life. So I I I was just thrilled and you know if obviously I want the book to do well and I want everyone to read it but no one ever read it. Like for me that's just a beautiful thing. >> Yeah that's how how long ago did you write the book? Uh so it it took me about probably three almost four years because I was like writing an hour in the evening after building financial models and you know a little bit on the weekend if I had some time and so I I think I probably finished it early08 um and then uh you know like typical publishing you get some rejections and I was just very busy um you know I'd started uh a user generated newswire with a friend Terry we sold it to Corbus which Bill Gates owned and at the time I was writing sort of investment pieces which became variant perception and so there life just sort of took over and I just put it away on a shelf and and and didn't really sort of hustle to get a book contract. Um and that that was really the only reason for putting it away for so long. >> What was it like revisiting it after such a long time >> and Yeah. Yeah. >> Yeah. So I think like I I hope it's improved a lot with a bit of maturity but also like I'm a dad now. I wasn't when I wrote it. And differently, I think, you know, when you have uh children or even as your own parents, you know, you're 20 years older um when the book's coming out and you start to see sort of I mean, I I think that we're all uh links in a long chain of love and you you realize, you know, one day my son will lose me. And you know, it's uh it it changes the way you read and the way you edit and and I hope that it leads to like a more mature editing and and writing. So the story is the same, but I hope it's better or deeper. >> Yeah. So you did revisit it and you did rewrite a little bit as 20 20 years hence. That's interesting. And not not because you felt that you'd mischaracterized the events, but perhaps because you were you just you had changed a little bit. >> Yeah, I think that's a a very good way to put it. And you know it's uh it it you get a a lot more perspective on on the events that were there and you know and I hope it's a uh a more profound and and deeper book because of that and I think that you know one of my mentors he had written a memoir and when he read the first draft he said I don't think you're old enough to write this and I was very upset at him and uh and now that I've read >> that was actually pretty sage huh >> I think he was 100% right. So any rate, good lesson to the listeners. You know, if you have an investing mentor or someone, you know, you may not like what they have to say, but uh they're probably right. So >> how was the transition from Spain to where did you go after Spain? >> Uh so I went to the University of North Carolina at Chapel Hill. >> How was that? >> Um that so that was a big culture shock. I I went from basically Madrid at the time had maybe four a little over almost four and a half million people um to a college town that had you know maybe 20 to 30,000 the exact number and uh you know businesses were open and closed 9 to5 and you know was all students and was used to living in a slightly chaotic neighborhood where you had you know grandkids, grandparents, junkies playing in the street and uh shooting up and so it was a very big big change and at the same time the peak of deaths from AIDS in Spain was 94 95 and that was when I was going off to college. So for me I felt very uh just sort of cut off from my friends. Didn't know if I'd be able to see them again when I got home and in in many uh cases if not most I didn't get to see them. So I was very isolated and I think I poured my energy or angst or sadness into studies and I think that's probably why I I ended up becoming a road scholar. It was just a sort of how I found my outlet I think just sort of studying. >> Were you Spanish speaking at home or were you you >> always English at home but I always spoke Spanish in the street, Spanish in the drug rehab obviously watch Spanish TV um and so like I'm you know fully fluent bilingual but and it was all English was always at home and then went to like very small missionary school where they spoken English. >> And you lived in London for a while? Yeah, I I so after Oxford I moved down to London and then uh basically was there until 2020 and then moved to Nassau to the Bahamas where I've been uh ever since. >> How the Bahamas? >> Uh it's great at this time of year. You know, you have a blizzard in uh the northeast of the US. Um or it's like dark and mid and cold in London. Um it's a bit hot and humid and oppressive in the summertime. Um but I I do love it. There quite a lot of very thoughtful investors and family offices and others there. So, it's uh I find it's a great place to work and Sir John Templeton was one of my investing heroes. So, another reason why I ended up moving there. >> Does that geographic distance do you feel like it creates some insulation for your own thinking? >> Um I think it does actually. Um I I tend to It's not to say that like you know we don't speak to people or we don't read what other people write. Uh but I think a lot of the work that we do tends to be driven by like our our own research and thinking and I'm grateful for that. Uh, Jonathan, you you have a you've got to go over the top of the hour. >> I do, unfortunately, and I I really do apologize. Um, as I said, I'm going to like turn back into a turtle um and go back to my shell uh eventually. But um I I I do have uh my publicist uh for the books ended up scheduling too many uh questions, but I absolutely love your show and both of your books and well many books, but um I uh I'm just very grateful to be able to to chat with you guys and um you know, if if you did want to have me again, I would love to come back and not five years from now. Um, so I'm very very grateful and and we can do no talking about um the memoir and do more about um anti-bubbles and great investments. >> Well, that's we we we do like talking about that stuff. Just give us a quick uh if folks want to follow along with what you're doing, get in touch and tell them where they can get the book. >> Oh, yeah. So, the book anywhere people buy books, whether it's Amazon, Barnes & Noble, your local bookstore, you can find it there. Um it's called Shooting Up and uh hope people enjoy that. Myth of Capitalism 2, if they want to get into that, didn't read it the first time around. Um and then our our fund uh you know we're not um but uh we do have a extraordinarily simple web page with our email address and obviously um you know just uh uh happy to chat more with thoughtful investor like-minded thoughtful investors. >> Well thanks very much for coming on Jonathan and telling us about your book. >> Thank you guys. Good to see you. >> Absolute pleasure. >> See you. >> Cheers. Thanks Jonathan. >> Bye. I'll give a quick shout out to the folks. Jupiter, Florida, Breenidge, what's up? Yorkshire, Orlando, Southshshire, Tallahassee, Pedatika, Israel, Waterl, London. What a great spread. Toronto, Mterrey, Mexico, Mendescino, California, Chicago, Bolognia, Italy, what's up? Main streets of Jared's Cross, Capavogga, Iceland. Barrow Inferness, UK, what's up? Uh, Valpareo, Cereton. Thanks, team. Here comes JT with some veggies. Market right at the top of the hour. Uh, all right. So, imagine a world before trees, before birds, before nearly anything that we would recognize as biology. And we're down on the seafloor and life is doing what life always does. It's trying not to get deleted. And this is the story of how that foreign world turned into human intelligence. Like how did we get here? What how is our brain? How did our brain evolve? And it comes, this segment comes from this really terrific book called a brief history of intelligence by Max Bennett. Highly recommend it. Uh and in the book, Bennett describes a ladder and there are five rungs to this ladder and each one is built on top of the last. You can't skip steps. So these are the five biological breakthroughs that really bootstrapped human intelligence. And each breakthrough is it's only possible because the earlier scaffolding already existed. Like you you can't take shortcuts here. So breakthrough number one is steering. And remember we're going back to like you know we're down in the the ocean floor. Uh and it's it's a very different world. Uh but the ability to navigate by sorting the world into good and bad and then turning toward good and away from bad. And actually at that time the body plans shifted. Animals became went from being like things that were symmetrical uh where they kind of would float around in any direction it didn't matter to actually being bilateral meaning like you could cut them in half and like each half would then be uh symmetric. And they now all of a sudden have navigation is a series of binary decisions. Do I turn left? Do I turn right? Do I go forward? Do I go back? uh and the brain at this stage is basically like this little internal compass with two needles. Positive veilance like approach like I want to go towards this good thing and negative veilance like I want to go back I want to avoid the bad thing. And even even back then we had neurom modulators like dopamine and serotonin that created these persistent states that helped an animal keep searching, keep moving, keep trying again instead of resetting to like a neurological like neutral every second. And this is also where early affect shows up like pleasure, pain, stress, satiation. All right, breakthrough number two, reinforcing. This is the ability to learn from experience by repeating behaviors that lead to positive outcomes and suppressing behaviors that lead to negative ones. So vertebrae animals, they add this machinery for pattern recognition and trial and error learning like do more of what worked basically. And with that we had a much we we get a more familiar kind of emotional pallet that we would all like sort of imagine like curiosity, fear, excitement, disappointment, relief because once you can kind of learn over time, you can also start to anticipate a little bit. Breakthrough number three was simulating. And this is the ability to run a rough internal model of reality and then test actions inside of that model before you go test them with your actual body. So this is the neoortex starting to form like we're learning by imagining and the simulation then buys you something really priceless in a dangerous environment which is planning episodic memory so being able to replay past events to see like how did that go down uh counterfactuals like hey if I had done X instead what would have happened and it's very expensive calorically like the brain burns a lot of fuel but it's a big advantage to spend those calories now to avoid dying later uh and so breakthrough number Four, mentalizing. This is like modeling your own mind as an object that you can then inspect. This is like kind of a bit of a strange jump. Like the brain builds a model of itself, intent, knowledge, uncertainty, and then uses that machinery on others. So now this is where you start to get into theory of mind like anticipating what someone else wants, what someone else knows, what they believe, what they might do next. Uh and then this is where social learning starts to become more efficient because you can learn by the observation of others and not just by your own expensive trial and error. And then the fifth one was speaking. And this is language, naming things, grammar to convey actions. This is where individual intelligence starts compounding into cultural intelligence. And language tethers all of these inner simulations that we're doing together. And then, and this is really key, it lets thoughts persist across generations. So you're no longer limited to what your own nervous system can kind of discover in one single lifetime. You inherit this accumulated library of priors from from all the generations before. So bringing this uh [clears throat] this all kind of back to the investing world, you know, there were there those five rings in Bennett's ladder that I just described of intelligence made me think also about Graham Duncan's five levels of the game essay as as which is kind of describing the maturation of investors. So and I love it when there's symmetries to these things. Uh but before we get into to Graham's uh observations, let's do a quick little quiz for the value investors. When you say mean reversion is inevitable, which rung are you outsourcing your thinking to? Is it a steering which is cheap equals good? And we're we're basically done here. Uh B, reinforcing. So it worked in 2000 to 2004. Therefore, it it this is basically a mathematical certainty like physics. Uh C simulating. I ran three scenarios, baseball, bull, and coping. Uh, and then D speaking. I'm not wrong. I'm just early. And now here's a 40-page memo to support that. Uh, so what's what's your This is very tongue and cheek, obviously, Toby. So if you want to guess, you you can you can guess, but >> uh I'll take the I'll take the bottom level. >> All right. You want to go D speaking with your 40page memo? >> Is that No, I took the dumbest level. The dumbest level. >> Yeah. Yeah. Cheap equals good. And we're done here. Okay. Good. That's that's the correct answer probably. Uh, all right. So, part two of this is bringing it back to the investment world of Graham Duncan and his levels of mastery. And, you know, Duncan's premise is that great investors view investing as this game where they always know what game they're playing at the time. And he ties this really to like a locust of control. Like strong investors focus on what can be controlled and they don't narrate every outcome as the world was like happening to them. Like, can you imagine Buffett complaining about something bad just happening to him? And I'm like he know he takes responsibility. He's a big boy. Um and in evolution you know cognition upgrades came in these layers. And the same thing this mastery upgrades come in layers as well. So [snorts] level one from Graham is is apprentice. And this is you know this pipeline of huge numbers of ambitious young candidates. They're all competing for a small number of seats and they arrive sort of all with this ba the same basic training that they get in school but otherwise they're pretty much blank slates. And you know the most efficient path here tends to be like apprenticeship model. You find a mentor, you absorb the craft, you learn what matters. And this is like steering in biology. Like you're getting these very primitive but essential skills of kind of sorting the inputs into good, bad or uh you know I need to turn from this or away from this. Uh and it the steering builds on this kind of internal compass of distinguishing signal from noise, separating risk from volatility, learning which mistakes are annoying versus fatal. uh developing the ability to act to not act actually when when it might be seductively uh you know available to act and and Duncan notes that these early environments leave a very lasting frame of mind on people. They kind of carry their first market dialect for years and I think we see that with like you know people who came up during GFC seem to have different risk appetites than those who were come in even a few years after them who didn't get that early imprint. All right, level two would what Duncan would call the MA an expert. Um, and this is, you know, survivors who move from processing other people's research agendas to actually generating ideas on their own. This is typically in your late 20s, early 30s. A lot of people plateau here, uh, especially if you have kind of a static identity that locks in a particular style and limits the ability to to cope with change. Uh, he also flags pride of authorship as a common failure mode. So when when you get too attached to your own analysis, you can kind of block adaptation. Uh and this this is maps to the reinforcing part of biology, like repeating what worked, inhibiting what didn't, letting feedback do all of the steering. Uh and it's an essential skill to to learn how to spot those key drivers, like seeing the underlying reality rather than just producing sort of raw analysis for its own sake. All right, level three is the professional in Gramps Graham's terms and this is u you know imitation finally gets shed. There's more idiosyncratic style emerging consolidating maybe multiple influences beyond an original mentor and and like integrating those. And he uses Buffett as an example here of synthesis you know blending influences from Graham and and and um you know Munger [snorts] obviously uh Bill Fischer. Yeah. and then being pushed you you kind of start to push beyond the previous constraints and Duncan also makes a a point of like the very highly e ecological point uh the game often gets crowded and so a single playbook can work and then it becomes common and then that edge decays. So u this is kind of like the simulating part of the biology like you're running internal models of possible futures testing strategies before testing them with actual capital iterating without dying basically. Uh level four is master and this is this is changing the game that you play like and this is kind of a small minority. Uh but they become like true kind of absolute return oriented over multiple decades. Uh defining success internally rather than by peer comparison at any given moment. Uh he uses David Ter as a study of flexibility like multiple mental models moving across context not being constrained by any particular fixed role. Uh, and this is like the me the mentalizing part of of the biology terms like theory of the mind. So, modeling other minds incentives, intent, knowledge. Uh, you know, markets maybe aren't just cash flows. They're just they're also cash flows filtered through other people's incentives and constraints and fears. And Duncan explicitly leans into this psychology of the players view uh by quoting Robert Green uh with mastery includes seeing not just chess pieces but the whole game. Um he he even gives an empathy like an example from Paul Tudtor Jones which was putting himself in the shoes of a a pressured Japanese fund manager helping anticipate behavior and market directions. So really like there's a lot of mentalizing here that gets rendered into a P&L. And then level five the last one we're almost done uh is the steward and this is becoming like part of the playing field. So this is like a mastery plus enough success to redirect attention towards taking care of the playing field itself. Uh you know me mentorship modeling good behavior influencing the norms uh that that make you a steward of the system. And he uses buff as as during 2008 crisis is an obvious example. Hire you know bigger public presence then calming metaphors by America I am uh taking responsibility for the system itself not just your own results. And this is like the speaking part of the biology uh language as this kind of technology that lets thoughts compound across generations. And the Steuart is is really not just like a better stockpicker. It's it's like transmitting teaching frameworks that outlive the teacher using metaphors to coordinate shared attention for everybody. And Duncan describes stepping back for like a bird's eye view of the whole field. So if you strip away the miracle that is intelligence, uh really it's just sort of like better error correction under constraints and and investing is just error correction with money attached effectively. Uh and Bennett shows why the upgrades arrive in a particular order and Duncan kind of shows the same thing why why careers do it too. So, if you want one practical takeaway here for the investors, locate the rung that you're likely on and then do kind of that unsexy work that that that particular rung demands because they're really every shortcut here is just kind of delaying paying some bill of tuition. Uh, and you can't skip steps in biology or investing. >> Good one, JT. Do you think that Buffett becoming a steward around that 200 wherever somewhere between 2000 2008 somewhat diminished the signal for from him saying you know in 2007 like there's lots you can find lots of quotes from him in 2007 at the absolute peak saying market doesn't look that expensive to me. I I would put the stewardship even earlier than that though. Like I mean >> I would say it started earlier than that but I'm just saying do you think it diminishes the signal a little bit? Like when he's saying I don't think that like you say if you if you know that he's a steward and in 2007 he's saying I don't think the market looks that expensive. Is he saying don't panic rather than I actually think the mark I think the market's cheap here. I'd have to go back and see like the specific reference to that, but my hunches what he said was had some caveats stapled to it which were like if rates stay low if >> exactly then then stocks are reasonably priced here. Uh those are the kinds of comments he says in those time periods. >> So yeah, so if everything stays at perfection then there'll be no problem. But if we move away from perfection, you got to hear the part that he doesn't say. >> Right. >> When you started talking about underwater, I I I saw this uh I saw a YouTube video on an animal called an isopod. Have you ever heard of an isopod? >> No, but I'm ready for your veggie segment next. >> I'm going to do some veggies, folks. It's it's a it looks it's it's very closely related to a roly pololy. Those little insects that you see on the ground. Might also might almost be identical to a roly poly except they're about 2 feet uh long. >> What? And they're like covered in kind of crab shell looking stuff. So they look like a a crab cockroach hybrid kind of thing. >> And these are really old though, right? Is that they don't >> Well, they exist. They continue to >> They're still around. >> They live on the floor [snorts] of the Mariana Trench. So right at the very bottom. And what they do is they they eat whale carcasses when they fall to the bottom. So >> you can imagine how infrequently a whale dies and it falls all the way to the bottom of the Mariana Trench. So when they find them, they have to gorge on these very and they can they can eat and then not eat again for something like 2 to 5 years. >> It's like a value investor. >> So when they find these things, they fill themselves up so much that they they literally can't move. They just jam their body full of, you know, rotten whale meat to the point that they're fixed in place and then gradually they they digest it over the next two to five years. And then right behind that YouTube video, I saw another one about this ramen place in Korea that they top their ramen with the shell of an isopod that they steam. They do nothing else to it. And then you can eat the interior of the isopod. And the guys eating it thought that it didn't taste that good. >> Wow. I mean, imagine the uh >> well, let's not get too gross, but imagine the after effects of eating that much. You know, what does that uh [laughter] >> the the really interesting thing about the isopod is that it lives under that crushing pressure at the bottom of the Mariana Trench. And every other animal you pull up, like their eyes explode out of their head and all their insides come out because they they need to be under that pressure to survive. But the isopod, you can pull it up to the surface and you can keep it in an aquarium at the people can go and have a look at these things walking around. They're perfectly fine. They don't suffer from the lack of >> an exoskeleton protects them. >> And they found one uh I think they kept in San Diego or somewhere like that. And they they put some food in there for it and it ate I think the first time they fed it and then it never ate again and it lived for another two or five years something like that. And at the end of >> no eyes. Do they have no eyes? >> No. I mean, they've got, you know, insect stalk kind of things coming off their head. >> Okay. >> They've got some ability to sense. Anyway, this thing didn't eat and then it died. And that what they realized was it probably died of old age. It didn't die from lack of eating. It was just it didn't need to eat again because it had just decided it didn't eat anymore. It didn't eat any more food. >> Wow. >> Anyway, gross. But I felt a lot of affinity with it. You know, as a as a value investor only gets to eat every seven years or so. >> Get to eat every Yeah. What do you do in the meantime? Just lay there inert [laughter] >> as much as possible. That would be my preference. >> Oh, you write books. That's that's how you [laughter] >> That hasn't worked. >> Okay. >> Um, what do you think about this market? >> It's more interesting than it was. Uh, right. I mean, there's definitely some price movements that are grabbing some headlines. I think Twitter's uh sentiment seems quite apocalyptic and um >> apocalyptic. Yeah. Although when I, you know, when I go look at I've kicked the tires on some of these companies that have supposedly been hammered the most. >> Yeah. >> And I still don't see a ton of cheapness there yet on any metrics that I kind of care about, especially if you count the stockbased comp. like you you throw that back in there as a uh to try to arrive at some kind of a flow number of you can't you know earnings cash flow from ops some kind of like version of that and it's still I don't know for all of the uh hand ringing I would have thought they'd look cheaper on some of these metrics so >> I put this chart up today on Twitter looking at uh price to sales for Mag 7 which um it got up to eight times on price I know I know that sales is a limited kind of metric because it doesn't tell you what the margins are like and so on and so on. But >> but at least you can't mess with the number, right? It it kind of is what it is. >> It's topline number and there's very little manipulation that can go into it. Although I know there's some manipulation that can go into it when you recognize revenue and so on, but um even after this most recent kind of pullback, they're at 7.1 times, which is as expensive as they got in 2021 at the very peak. you're saying >> Mag 7 the margins are fatter now so like it's not it's not an apples to apples comparison but it is kind of an interesting >> and I I don't know as Jonathan mentioned earlier >> and as we've discussed many times before there is some mean reversion in margins supposedly I haven't actually seen it in my lifetime but there's [laughter] this theoretical a lot of the older guys seem to talk about it a lot like it's a thing that they've seen it's nothing that I've ever observed in my >> in my investment career but at some point like the next print is going to be the highest ever at 14.3%. >> It's like the lost city of Atlantis. Like you just hear people, you know, whisper about it in hush tones. But [laughter] >> how much of that like I think Husband has this he calls it an account an accounting identity. >> Yeah. >> Where the deficit >> profit equation or something like that >> turn up as profits on private. There's something about that that I don't like. There's some sort of relationship that says that governments have to run deficits in order for corporates to run profits. I don't understand that well either. Um I've tried to look into it and a lot of the macro economic stuff makes my head hurt. So I I don't know. I don't get very far but um that doesn't make sense to me. Maybe I'm stupid. I'm I'm totally willing to accept that. >> I don't like the theory of it either. But the practice of it when you you know we run massive deficits and then we've seen these greater profit margins than we've seen at any other point in time. Like it does seem that there is some sort of relationship there. >> Well, couldn't even just like the the kind of no duh version of that is like corporate profit margins going from 35 to 21 is going to increase deficits and increase profit margins. >> Oh, corporate taxation going from 35 to 21. Yeah, that's true. I mean that's like a simple little I don't have to have a kicki profit equation to understand that do I >> do the margins taxes come out of margins? Ask a dumb question. >> Sure. >> Net income is below the tax line. >> Well, how about this? Rates have gone up and rates don't seem to have impacted much of anything. >> Yeah, but I think corporate America was pretty smart to like term out a bunch of debt that would have been really cheap. Yeah, they're they're not dumb. They knew that they were probably getting away with something. the little guys after suffering for the last decade or so, you know, evidently that was as good as they could do because the rates were really low and then rates went up and they all just tripped over almost immediately. >> Yeah. Having said that, there something something has clearly changed in the market since Q4, beginning of Q4, end of Q3 last year, where I've been pointing out this relationship for a long time on my Twitter where, you know, equal weight for a hundred years, equal weight has outperformed market capitalization weight because small outperforms large, value outperforms growth for the most part. But there are clearly these periods of time where all of these 100-year relationships have broken down over the last decade. And so I'm looking for the turning point and equal weight clearly started outperforming which is not to say that it's I'm declaring the end of it. I'm just sort of narrating it in the moment as it's happening because >> you don't know when the reversal sticks because we've had at least two other head fakes just in this run from 23 to to the current one not including the big turnaround from 22 to 23 whatever it was. It is quite interesting to look at the and you know I said this to you three times a day privately but the uh morning star style boxes with different time periods of performance and just looking at the top right corner of large growth and then the bottom left corner of small value and just seeing like how those numbers change over you know >> today uh you know one month three months like >> they're pretty there there's something different happening now right like because when we used to look at that it would just be like green in the upper right down in the bottom left like every day every like it was it was fractal in nature uh every single >> you you couldn't even tell if you clicked the button between you know 10 years and and one day [laughter] >> it is different one one thing that is interesting is that the rebound has been I think that growth has lost more than value has gained since the rebound but value has still made reasonable gains through that period of time >> but it's now >> last time I looked on what was it the three-month maybe it was >> minus 10 and plus 10 >> something like that >> and five year also because it coincides with the 2021 >> oh top. >> Yeah. >> Yeah. Yeah. >> Also that you know the 25 years started looking pretty funky too because that's the top of the.com bubble >> catches 2000. They've been looking it's been looking good for values over the last 25 because it's just it catches that first seven years of the of the 2000s. >> Yeah. Interesting. What would that look like? Do does it do you is it one like could you be imagine that we're six months from now and the 10 years hence that was like all anomalous against the hundred years before completely wiped out of the data set. It's amazing how quickly it turns around because I think now value has outperformed over the last 12 months which I wouldn't have picked uh because we've gone through the tariff tantrum plus a big bounce from MAG 7 with most of the small and micro value midcap not really doing much at all. But the reversal in Mag 7 and the other more growthy software names has been so severe that now uh small value it's all outperforming on a 12-month basis. So it's entirely possible and I think going back 5 years so it's it's entirely possible that that >> that turn is violent and quick and it does start looking better for value but then the the the margin for you know the multiple margin that you're paying for growth over value has collapsed pretty quickly too and so do you want the better >> the better names for a small premium >> versus 15 I guess >> it's amazing how quickly that's happened I've looked at a few things that the the P multiple uh advantage for S&P 500 value over growth is not much >> really. We're back to tight dispersions. >> It's it's it's not back to it's not it's back to >> it's still it still favors growth, but it's it's closing in on on flat. It is surprising to me too to look at uh you know all of the talk about Mag 7 dominance and outperformance and when looking at like year to date and you like most of the names in there are kind of down maybe not like hugely down but there's some enough in there where how's the market still at like damn near all-time highs if this big component of it that was supposed to be carrying the whole thing starts shedding the load and yet somehow we're we're still at alltime highs. What's going on there? >> I didn't get it either. The the narrative last year was certainly that it was all concentration and it was mag seven concentration that was driving the market and the other 493 >> just not participating >> shiftless uh layabouts. [laughter] >> But then I I look at some charts and I see mag 7 uh has the bulk of the earnings has the bulk of the margins has the bulk of the market capitalization of the S&P 500. Yeah. I have no idea how that whatever happens the index is okay. Like the the components of the index are all over the place, but the index is okay. >> How's that work? >> What does it take for a systemic draw down in the index? >> Can't be done. >> Permanent permanent new high plateau [laughter] >> forever. >> Forever. >> I think it's encouraging to see. I mean, I I watch I watch equal weight versus market capitalization rate because that's the simplest. It's the you know, you say value and people say, "Well, I don't like book value. want to buy those dog companies. >> They're bad companies. They're not growing as well. But I say equal weight at least then like it's a you still >> same companies. >> Yeah, it's it's the cleanest measure. And so when that turns, I think that that's that's uh it's interesting. It's worth watching. And with that turn, small and value and mid and everything else cyclical starts working. >> But it's nothing to do with it's nothing to do with rates because rates have gone up and down. It's nothing to do with the yield curve cuz that's >> that's been Massively inverted, uninverted, flattening out again now. >> Yeah. >> Not absolute rates, not tariffs, >> the business cycle deficit. [laughter] >> I can't think of anything else to tell. Like, if anybody's got any good ideas, let me know and I'll go and have a look. >> Yeah, momentum. Momentum's looking a little bit long in the tooth, maybe. >> Is it? Well, when does some of these uh previous value names fall into the momentum bucket? >> Well, my my momentum is is like zeroth percentile in [laughter] a lot of my names. Absolutely wax. >> Fold full drums just dead in the water. >> Yeah. Yeah. >> It's been hilarious to watch. I mean, I I I can't I don't know what caused the turnaround either from 22 to 23. 23 24 whatever it was Thanksgiving 23 Thanksgiving 24 maybe was when cyclicals really fell over. >> Isn't it it weird though the the difference between uh chart time and behavioral time. >> Like we look back at these things and it's like oh yeah that looked easy or obvious or whatever but then when you're actually living through it it's like it's still pretty much fog of war right? I mean, when particularly when you look at a back test, you [laughter] the 70s suck. That must have been rough. That was a decade. >> Yeah. Yeah. Right. Oh, no problem. I could do that. >> And then we It's been so long since we've seen a grinding bear, too. You know that even you know 2000, 2002, three. >> Yeah. >> 2007, 2009, like those are 20 month bears. But then >> 18 months is the average, right? Isn't that what you told me at one point? >> Something like that. Yeah, about 18 months. >> About 18 days. Is that I thought we we got it down to 18 days now. >> I mean, now it just bounces like a golf ball off a concrete path. It just ricochets higher than it came down. >> But but I think I think there's been this little earnings recession. Like there's clearly been a little earnings recession certainly in the cyclicals that I watch from 22 >> until I think that there was a turn in about Q3 last year. They started looking much healthier than they have looked in the past. And I I is that tariffs? I mean, I have no idea what's causing that. >> What are margins S&P margins going to look like on if you jam $300 billion of depreciation from all of the AI capex per year in over the next five years? >> Well, they're I mean, Google's free cash flow is flat for the last five years. Like that's credit to them for like delivering flat free cash flow because I think a lot of the other ones are going to go backwards. >> Yeah. Well, I mean they're some of them are levering up their balance sheet now too. Even off balance sheet, right? That was uh >> that's the only place to carry your debt. >> Yeah. That's as good as money, sir. >> That's an IOU. >> Tesla is one that I that I find kind of it's it continues to perplex me. It perplexes me that it perplexes me because I've just it completely defies. Yeah, it just completely defies all you know the argument was always well it's growing so fast so it can command this premium multiple. Well, now the growth's gone. >> And I see this morning in the Wall Street Journal that uh sales in Europe are dropped like 18% and BYD's tripled uh in Europe. >> Oh, competition showed up. Huh. Who would have thought? >> And and in the rest of the world as well. I saw the same thing in Australia, but sales are off. >> Turns out cars are a hard business. >> Well, now it's all now it's all going to be self-driving. >> Self-driving taxis, >> robots >> and robots. I do think it was funny that when we were in this in China, they said that the uh the Tesla bot was the one that was the most advanced. Optimus. >> Yeah. And we weren't sure whether they knew there was a dude inside the the [laughter] costume or not. >> Yeah. Did they know that that was just a guy inside of the robot suit? >> On that note. >> All right. We're supposed to criticize by category, Toby, not by name. >> It's fun. >> It's fun. >> All right. Thanks, guys. Uh we'll see you back next week. JT uh journalic still great out there. >> Apply for a job there. Come work with me. Uh yeah, we'll talk about value next time. >> [laughter]