Description:
0:00 Intro 1:16 Disclaimer 1:49 Background and history 5:30 Why Bosnia & the Potential 11:42 Viogor-Zanik Project and Drill …

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In terms of Trumanichi, which is the area high to the southwest of our project, we have a very shallow between zero and 80 m depth. High grade on average 1.2 kilos of silver equivalent per ton is our grade. Fold bounded um epothermal deposit that contains lead, zinc, silver, gold, and antimony. In terms of region, the second target 13 kilometers to the southwest and that’s where the phase three drilling that we about to start is going to be focused. We have again fault hosted shallowly dipping 35 degree dipping body. So that basically we have struck the target zone at 480 m. So between 480 and 500 we have that interval of about 20 mters with about half a kilo of silver equivalent of which probably 80% of value comes from antimony. So this is an antimony silver target. But the beautiful thing about it, it’s actually shallows. So now what we’re going to do, we’re going to chase this thing up dip as it shallows and as it comes to surface in in the context of about 9 12 holes that we have planned for this year. >> For disclosure purposes, our site does not make recommendations for purchases or sale of stocks, services, or products. Nothing on our site or this podcast should be construed as an offer or solicitation to buy or sell products or securities. All investing involves risk and possible losses. This podcast is for entertainment purposes only. Alex, thanks so much for joining the show. For investors and followers that are new to the Terara story, do you want to just give a quick overview of how you started the company and your projects? >> Good morning, Callie, and thank you so much for having me on. Uh started in 2020 at the height of the global pandemic. Uh I had at that time left Riointo in California where I was the global director of research and development and moved back to Montreal which is where I put together uh a little story about uh a few licenses that a co-founder of Terra and myself had staked back in 2018. They geographically focused on a well-known mining district in eastern Bosnia surrounding the town of Seanita. And um we had staked that land and really kind of forgotten about it to tell you honestly because both of us were busy with other things in our lives. But then subsequent to my rear tinter experience, I decided to um do something about it. And then between May of 2020 and September of 2020, so for those four months, I did manage to uh incite interest uh both in Vancouver and Montreal and put together initial supervisory team uh raised a little bit of cash uh to start off and quite brazenly or maybe foolishly threw myself into the deep end and started basically u doing field work before ever got uh the first 5 cent private round financing over. I mean basically as soon as I had some cash I hired five geologists and five geo technicians and we started prospecting and that’s initially string sediment sampling. So that’s how it evolved at the very beginning. We were private for the first uh almost two years. Became publicly listed on June 22nd, 2022. By which time we had already raised close to three three and a half million dollars through various private uh rounds, 5 10 20 cents. And then obviously um in year 2022 is when we started drilling the project. By that time we had already prospected enough, targeted enough, spent close to $2 million before we put ever before before we put a single drill hole down, which is a bit of a testament to how systematic and detailed and meticulous we were in terms of approaching what is really a green or what was a green fields project. I mean, yes, there was a mining district there. Yes, there was an operating mine 10 kilometers away from where I am right now. But ultimately, the land around that magnetic complex, which is 30 million years old, has never really been properly investigated in terms of modern exploration techniques such as airborne geohysics. We profited from the from the from the knowledge that existed on the ground primarily done uh and and compiled by the Yugoslav geologists, communist geologists before the country fell apart. Um and certainly, you know, took advantage of that to some extent, but then we also added a significant amount of new knowledge which allowed us to target these two zones of primary interest. Can you talk a little bit about the jurisdiction for the Balkans and specifically Bosnia because I feel like a lot of investors probably don’t understand how great the streamlining of the process for permitting is, how friendly it is for mining. Um, and then maybe some of your neighbors I did see your press release that um, Adriatic was acquired by Dundee which is fantastic and I feel like a lot of people know who Adriatic is. So, >> Right. Well, I mean, those who who know something about Bosnia usually know it by uh by the bad things that happened in the 90s. Obviously, there was a civil war here. That’s ultimately the reason why I ended up in Canada as a refugee back in 1995 in Vancouver. uh but I like to change that narrative particularly when it comes to investment into uh resource sector by just mentioning one single name that’s Adriatic Resources or Adriatic Metals PLC and for those who know that name know exactly what I’m talking about to from the time when they put a single drill hole down to the moment when they opened the mine it took them six years. So that unprecedented rate of advancement of the project um obviously there’s a reason for that. They were lucky to be brought to a particular area by some wellrespected and knowledgeable Bosnian geologists in the first place. uh they struck immediately a couple of first bowls were unbelievably juicy uh and uh they uh promoted the heck out of this uh out of this project. So now fast forward to September I think or November 2021. So literally three years after they started they raised quarter of a billion US dollars 253 if I remember correctly. So right now we’re talking 21 million ton at an average concentration of a silver equivalent of something like 580 to 620 depending whether you look at the measuring indicated or inferred component and uh you know I usually like to basically put that forth and tell them you know point to me a place on earth where you can actually see an example like this. I’m sure there are some but not that many. And uh I like to say well you know a part of the equation is certainly Bosnian government being um uh forthcoming and welcoming the foreign investment and you know I don’t want to say banding backwards but certainly being being quite accommodating in terms of you know fostering a project like this. Obviously the Bosnian government reaps benefits of this. You know I think Adriatic is if not the largest but one of the largest taxpayers corporate taxpayers in the country. They employ about 350 people. There’s a spillover effect. The town of Lash which is only about 80 kilometers away from us was practically a ghost town and now you know it’s entirely new uh place uh a renaissance. So uh just you know for all those ones who are criticizing mining and whatn not I would like to use that as an example of what positive effects mining can have on on a on a ecosystem of a local town or local region in a country such as Bosnia. So yes Bosnia is an ancient mining jurisdiction area where I am was mined by the Romans 2,000 years ago. Actually the name of the place was Argentaria which stands for silver city uh because this place is well known for for silver lead and zinc. Uh it was mined by Saxons in the mid medieval times obviously for the first time in the modern way by Austrohungarians and subsequently communist. Um the mining code currently in the Serbian part of Bosnia and Herziggoas called Republic of Suska is very much streamlined. You will talk to one partner and that’s the Ministry of Energy and Mines. You apply for a permit by submitting a work program which supposedly contain three years worth of work, planned work. Uh you get granted a permit, get a license that can last for seven years. You have right to change your work plan. In other words, you can amend it as you go. You’re not stuck to it. And after seven years, the government expects one to convert the exploration license into a mining concession and really start working on a on opening a mine, you know, according to their rules. But obviously, most public companies from Australia and Canada also work according to either 43101 or JR. So you you what you want to do is you want to satisfy both the local requirements in terms of proving a deposit or resource but also satisfy the requirements of the country where you listed. So I would I mean obviously I’m a bit of biased because I come from this country. I know the I know the region. I know people. I know language. Obviously all those things are you know something that you want to have under your belt when you start a project. Um so yeah to me it’s kind of a homecoming and u it’s been really uh I mean in terms of social license to operate on a local level we we have really secured it firmly obviously we worked hard at getting it but you know again you know this is a mining region ancient mining region and people know who geologists are they have seen miners before they’ve seen people roaming the land and doing you know ground geohysical surveys so they’re not freaked out about Um there’s also an operating mine 8 kilometers from where I am and employs about 300 people and everybody has either some member of family who works in the mine. So it’s as far as parable is concerned we really have a good jurisdiction located on a European continent which is start for resources and in our case a firmly secured license to operate. >> So that is a great overview of the whole area and the history. I love that. Um, can you now let’s get into your project because I feel like that’s the most exciting part. You’ve had some intercepts that I think are you in the top 10 nearly every time with some of your silver grades. >> I mean according to u well there are two outfits who kind of track that on a global level. I’m sure there are more but the ones I know about are mininghub.com and minor decks miners deck.com. Uh these these folks they I’m sure people have heard about them. They basically track um interest on a weekly and monthly and yearly basis worldwide per different commodity. So whether that’s lithium, nickel, cobalt, gold, silver and um yeah, I mean every time we put a almost every time that we put uh a material press release out containing an intercept when you use this particular metric, a proxy for how good your intercept is, which is really multiplying the grade times the width intercept or you know width of the intercept and use that as some sort of a measure, you know, gram per ton meters. Bit of a madeup metric but still useful so that you can compare different different projects from different jurisdictions. In terms of silver space, our project is silver rich. Silver is the dominant metal but it also is put on a metallic project. So it does contain lead and zinc and most importantly as of late antimony. Effectively, if you look at the composition or the cocktail of our metals in the via project, one could say that it’s actually a silver antimony project because those two metals dominate the assays. When you convert everything to a to silver equivalent, they end up dominating. So, we present everything in terms of AGQ silver equivalent. And yes, every time that we put forth uh a material press release, we get ranked, I would say, top 10 in the world. So that certainly feels good. Uh you know, that that you’re right up there. uh confirmation of the fact that all that meticulously conducted targeting during the first year and a half, two years, and that was $2 million spent on airborne geohysics and 3,000 soil samples, remote sensing and ground radiometrics and rock chip sampling. Obviously, hundreds and hundreds of rock chip samples uh proved to be a correct way of approaching the project. So we have defined two target areas one called brei the other one called trumalichi both of which I think bear tremendous potential in terms of trumalichi which is the area kind of to the southwest of our project or southwest part of our project we have a very shallow between zero and 80 meters depth highra on average 1.2 2 kilos of silver equivalent per ton is our grade. Um intermediate subdividation for those who care. Fairly simple ge geology fairly simple geometry fault bounded um epiothermal deposit that contains lead, zinc, silver, gold and antimony. In terms of region, the second target 13 km to the southwest we have and that’s where the phase three drilling that we’re about to start is going to be focused. We have again fault hosted uh shallowly dipping 35 degree dipping body which we have intercepted albides at a much significant much uh much deeper level than trumichi. So that bersian we have struck the target zone at 480 m. So between 480 and 500 we have that interval of about 20 mters with about half a kilo of silver equivalent of which probably 80% of value comes from antimony. So this is an antimony silver target. But the beautiful thing about it it’s actually shallows. So now what we’re going to do, we’re going to chase this thing up dip as it shallows and as it comes to surface in in the context of about nine 12 holes that we have planned for this year. >> Can you just give again a little bit more? I know you’ve done a lot of work on the project with like geoysics and um airborne surveys uh and two drill programs. So can you just talk about um just everything that’s been done so far? exciting for investors to hear all the work that you’ve done. >> Well, hopefully I don’t bore anybody to death, but yes, 216 square kilometers, we have identified almost every creek and sampled the the hell out of all the creeks trying to identify initially the target zones. Then we have conducted a fairly detailed 1 to 25,000 1 to 5,000 mapping uh concurrently with rock chip sampling. So sometimes only fist size sample sometimes 2 and a half kilos size sample. So in doing so we have then produced you know updated geological maps. I must say that the Yugoslav geological maps are superb, absolutely gorgeous maps, very well done by the former Yugoslav geologists and we didn’t really have to do much in terms of adjusting them except when you really come down to a scale of 1 to 500 or 1 to,000 where you can really, you know, move blinds up and down depending on how you see them. Uh, soil sampling has been magic. So unlike northern Canada where we have glaciers cover covering uh during the last glacial uh period much of what is now Canada and you know upper upper states as well uh which have smeared the signal all over the place depending how the glacier cover has moved. In other words, the so-called drift analysis is what you need to apply to kind of find yourself where exactly is the signal coming from. Well, the Balkans of Southeastern Europe has never been glaciated during the last glacial times, which is a great thing because there’s nothing to move around the signal. In other words, if you do a proper job in terms of soil sampling, in other words, you reach down all the way to the sea horizon. You don’t you’re not lazy not to drill a hole that’s 1.5 meters deep and extract a three kilo sample from you know that depth and then send it for ultra trace analysis to ALS and pay $80 US per sample then do that 3,000 times uh then detailed and very sensitive tool which allows you to see through the soil horizon into the bedrock Why is that important? Well, because the signal hasn’t been moved around. Soil has been very faithfully representing what sits underneath the soil cover. And we’ve used it extensively to target, let’s say, bre is an area that has never been mentioned in any of the archival information that we have come across. In other words, I call it terra volcanic abade because it’s never been discovered, never been mentioned. Unlike chumuchi which have been poked tax at looked at by the English but reji haven’t and guess how we discovered reji well through rock chip sampling and you do it densely enough and you do it detailed enough with good enough of a technique and I must say that ALS has been amazing to us they have an office in neighboring Serbia analyses are done in Ireland and turnaround time is about three to four weeks we were able to basically identify revenue which stood up like a sore thumb in terms of bismouth, antimony, porium, um, gold, zinc, lead. Then we paid 500,000 euros to fly airborne geohysics. not only one technique magnetic analysis or magnetic survey but we flew airborne geohysics time domain electromagnetics um with the help of a Danish outfit called Skyen and a German pilot back in May of 2021 covering the entire area 216 square kilometers at a initially 300 meter spacing and then infield with 100 meter spacing. I mean we really draped the horizon and draped the topography. This guy was flying 80 meters above ground and picking up a signal. They this this wide antenna 30 meters in diameter projects the signal about 700 meters into the subsurface and receive the response basically measures the conductivity. So we have both the magnetic spectrum and electromagnetic spectrum that we combine together together with our geochemistry. And again in the case of brey guess what we had a massive magnetic blob spatially overlapping our geochemical analog and then underneath that we found a highly conductive zone. So I’m like okay I mean if this is not a target I don’t know what is and that’s ultimately how we approached the drilling which came at the end. And then of course before we did the drilling which is the most financially extensive step we conducted some uh surfacial trenching real trenching. So 3 400 meters of trenching right on surface you know vertical trench and then couple of cross trenches and whatnot. And this is where we detected one gram per ton gold over well 15 meters in some cases. So when you put all those, you know, pieces of evidence together, layer them up, this is when I called the shot and said, “Okay, in August of 2022, let’s put a really big deep uh drill down which went down all the way to 700 meters.” And that’s when we discovered both gold on surface in case of brain and that deep conductor which ended up being mineralized. I know you can’t probably get into too many details, but now that you have this upcoming phase three for drilling, I know you had a press release out a couple months ago on the silver and antimony um findings. Can like are you following that path for your phase three and your drilling that’s upcoming or are you moving >> in our case genuinely anti-money project? Because these intercepts that I’m talking about were drilled back in 2022 and 2023, way before antimoney ever hits the $25 US a pound uh levels that it currently sits at. Team Trichi drill holes. In some cases, they have 8% antimoney over 7 meters. I’m like, wait a second, you know, and then I realized it’s truly genuinely antimony silver project. Although again, in Italy dubbed as poly metallic because indeed we do have lead and zinc and gold in some cases. Um yes phase three is going to primarily focus on this target called region. We as I said have intercepted this conductive body which we have interpreted to be mineralized horizon 20 m wide. We have intercepted it at 480 m depth. Now some would say who wait a second that’s too deep. But again the beautiful thing of it is that like a like a uh like a phone or a or a piece of paper it dips and we have now punched it here and now we’re going to go up deep all the way to surface. So good thing is it shallows at a fairly gentle angle. It is 600 m wide 1.2 2 km long and as I said 20 m wide. Now obviously nothing is perfect in nature. Things do tend to pinch and swell and I’m not saying and obviously everything’s predicated so far only a single hole. I want to caution the investors but uh again very conspicuously that single hole intercepts the conductor right where it’s supposed to intercept it which means in my mind that if we keep on following that conductor uphill technically we should be hitting it again and again and again. So the phase three drill program is now planned with quite courageous stepouts. The initial uh the initial step out from the initial hole is going to be about 80 mters away and then we’re going to do 100 meters 100 meters 100 meters and then on those subsequent platforms we’re going to basically repeat the dip and the azimuth of the hole and then we’re going to do one more on the side. So we’re going to do it like a basically cinder holes as you progress to the northeast which is where this thing eventually comes to surface. If we end up being successful when it comes to brei and and manage to follow this thing and keep on repeating these intercepts, I don’t think anybody’s going to be able to ignore this any longer because then we going to at least at the very basic back of an envelope calculation being multi- multi-million or scenario which then is going to give me extra encouragement and motivation to go really crazy for the lack of the better word on phase 4. >> Well, it feels like a very undervalued story considering the intercepts you have with Silver and Antimony especially that you know that’s the one-off story that’s kind of gone wild for the last 12 months. Can you just talk about like your burn rate and then maybe some of the competitive advantages that you have because you’re obviously from Bosnia. You have understanding of the whole area and have very technical background after all everything that you walked us through. So I feel like you know it’s a very undervalued story. >> A meter of drilling in Bosnia allin costs me $273 Canadian dollars per meter. that is stellar, diesel, accommodation, foods, drilling itself, boxes and analysis. The most important part which actually I must say you know ALS is a great company but they’re not cheap. They’re not cheap. It cost I mean of course we do of course you know everything by the book. So you know ICPMS with a proper prep and a fire assay finish 7580 US with a full you know 60 it’s called MS61 package when you see that there is a over overassay uh package kicks in means that you’re good because you have stuck something that machine cannot analyze in the first take uh it’s over the limit. So yeah, when you put all that together, including the assets, they’re 273 meters, which is actually, you know, probably half of what you would pay in Ontario, Quebec or BC, especially, you know, if you go up north, the rate goes even higher in Yukon and Alaska. Uh, so that’s quite affordable. Um, the burn rate obviously depends, you know, like the burn rate was $5,000 a month because nobody nobody was getting paid and we simply maintained the company afloat and kept alive. And that’s sometimes what you need to do. Obviously, when there’s a drill program, then the burn rate goes into hundreds of thousands of dollars per month. But that’s a good way good thing to do, you know, when you have money to actually sc it in the in the ground. Another metrics that I’ll mention to your audience is that probably seven and a half to eight dollars, let’s say seven and a half of all the money ever raised in this company and we raised so far about together with the life which is going to be over this week. I’m not going to say more. Um, we we will have raised $9.5 million Canadian over the course of the last five years. Not too bad. And about 75% of all of that cash went into the ground drilling, prospecting, targeting, paying salaries for geologists and whatnot. So, this is certainly not a lifestyle company. This is a company that aims to find something tangible. Now, when it comes to the to answer your second question, I’ll try to be brief. um comparative advantages I think there are a few um let’s take antimony for example I mean apart from the balkans and a few communist mines that existed in former Yugoslavia that produced antimoney either as a primary product or byproduct right to my knowledge there’s only one other antim-money project in kind of exploration stage in Europe in Slovakia I think u owned by the company called military metals and um just goes on to tell you how deficient Europe is in terms of some of the key critical metals. Um, and I think having a project that contains antimoney and silver, both of which are currently in demand, I think they’re going to stay in demand together with lead and zinc that only a thousand kilometers away from a BMW factory in Bavaria or 1300 km from Mercedes-Benz factory in Stokart, I think is a good thing. When you’re connected by rail and road and you have seaborn ports in both Montenegro and Croatia, that’s another good thing. Obviously, we would be, you know, if if this ever turns out into a mine. Another thing that, you know, probably I get criticized for not mentioning enough is the fact that we have an operating mine 8 kilometers away from is owned by a company called MCO LPD. They’re our neighbors. So far, we haven’t been, you know, collaborating with them in any shape or form. But guess what? They have inherited or bought a former Yugoslav mine that I think right now probably has something like three or four million tons of ore left. So depending on how quickly MCO presses the gas pedal, you know, at some point they’re going to run out of resource. Well, guess what? They have a crushing and flotation circuit on site, which means that should we find something minable, we could theoretically clock the or the site and use or reuse their equipment, which at that point is going to become obsolete. So why spend money on capex when we have it on site at least. And in terms of ore, obviously we so far haven’t done any specific metal energy because it’s too early. We’ve only done about three and a half 4,000 meters of drilling on this project so far. So I must emphasize the project is drilled. One more time, this is not pie in the sky. This is a drill project, but we haven’t done any metaly in terms of box sampling. So um but again, genetically it’s very similar to what MCO is mining 10 kilometers away. I would be highly surprised if all of a sudden our ore would not fix their flotation circuit. Um I’m sure it would. So that’s another advantage. You know, in other words, you wouldn’t have to spend 30 40 whatever million dollars on building cabinets. It would be it’s right there. So uh you know again in terms of a LAN curve after having detected these targets and drilled them and we are now really genuinely at the cusp of that Lan curve where we either prove the size you know we prove the mineralization mineralization exists now it’s just proving whether this is a minable size minable volume if we get to that point then I think it’s going to you know I’m not saying replicate the success of Adriantic although it good, but um you know it certainly would be uh something that cannot much longer stay at 10 cents Canadian that it currently sits. >> I love the highlevel overview of everything in Europe and the property, the project. It’s fantastic. Alex, do you want to just quickly talk? I know you mentioned that you are finishing up the life offering where like my favorite thing always as an investor is share structure. Um and you have a great one. So where are you at >> with that all? Um closing >> uh for all those who want to know more w.abresources.com therapy.com right on the title page you’ll see a PowerPoint oh sorry PDF presentation I think it’s slide 17 you’ll get it the so-called money slide so yeah we are going to when we close this live which is going to happen this week we’re going to be sitting at 67 million shares and outstanding little bit of warrants you know uh not too much about 15 million warrants or so so not a huge uh overhang uh mostly insecure but what what’s a good thing is that most of those warrants are sitting in the hands of insiders um what I call closely associated parties board and the management in other words well at this point I think the rate the ratio used to be 2/3 in other words 66% I think now has fallen down to about 59 or 60% of all the shares are in the hands of technically either insiders are very close to associated parties we do trade quite liquidly if that’s a word liquidly uh on those on stock market. Uh I think four or five million shares per month, maybe even more. We do have a market maker officially assigned and paid for who make sure that we turn over just a good amount of shares. I think at this point people are basically just waiting to see what this phase three is going to is going to result in before I think the the escalation really starts because there’s really no reason. I know some people have said that we are criminally undervalued, but I’m sure that’s what every CEO says. Um I like I like that word criminally undervalued. Uh but um we we really are I think in good hands. Uh there’s not much selling happening. There is some um I must say that last year in 2024 we raised cash primarily for for those who don’t know our uranium portfolio. I don’t want to obscure the story too much and divert from the primary topic which is Bosnia antimony and all that but yeah for those who want to know more we have options 600 square kilmters of uranium portion in Saskatchewan um and maybe some of the selling that we currently seeing comes from from those ones who you want to see that developed and I certainly do have plans to unfold that probably in terms of a some spin out uh but again my primary focus and this is why I’m physically in Bosnia right now is to see this come this come to life. Uh speaking of life, uh life is well it cannot be overs subscribed because life has a maximum and the best you can do is come to that maximum. You cannot go above the maximum. So yeah, we are fully subscribed. Let me use that word $1.17 million. Obviously majority of that will go into the ground in Bosnia in terms of phase three drilling. We plan to do 2,000 meters of drilling, nine platforms, 12 holes. Uh, by the way, as of Friday, we are on OTC QB. So, we no exclusive news for your audience. We are going to be listed on OTCQB. I think the the ticker is TEBAF uh is uh on OTCQB. So, again, a good corporate move. exposed ourselves to American audience, American investors and together with our Frankfurt listing and CSC listing, I think we are, you know, right where we need to be, especially if we start approving the pieces on the on the on the drilling level as well. [Music]

Description:
Andrew Walker returns solo for his January 2026 ramblings and discusses the current market euphoria, responses to his “weird …

Transcript:
All right. Hello and welcome to the add another value podcast. I’m your host Andrew Walker. Today’s podcast we have my monthly ramblings for January of 2026. It’s 2026. You know we these are the ramblings of a madman. So please see a full disclaimer at the end of the podcast. And by the way, speaking of the podcast, if you like this podcast, please review, rate, subscribe wherever you’re watching or listening to it. And if you don’t like this podcast, turn the podcast off and never leave me a review. Uh but anyway, the rambling today. I’ve got five different things. I’m going to talk about the state of the markets. I’m going to talk about the response to my weird markets podcast, my theory of weird markets I did. Thank you so much for the responses. I’m going to talk about investments that make me want to slap people. I’m going to do a quick talk on the power laws and the markets thoughts and just some push back I’ve been thinking about. And then I’m going to talk about uh something that I think I’ve changed my mind on recently. Uh vices is one thing I’ve changed my mind on. I’m going to talk about my change on vices and how I think that could show some tail risk in different segments of the market. So, we’re going to get all there in one second. I’m going to ramble in one second. But first, a word from our sponsors. This podcast is sponsored by AlphaSense. One of the hardest parts of investing is seeing what’s shifting before everyone else. For decades, only the largest hedge funds could afford extensive channel research programs to spot inflection points before earnings and stay ahead of consensus. Meanwhile, smaller funds had been forced to cobble together ad hoc channel intelligence or rely on stale reports from sellside shops. But channel checks are no longer a luxury. They’re becoming table stakes for the industry. The challenge has always been scale, speed, and consistency. That’s where AlphaSense comes in. 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That’s alpha-sense.comyavvp. >> All right. Hello and welcome to the yet another value podcast. I’m your host Andrew Walker. With me today, I’m excited to have myself. Man, I almost forgot the intro and uh I was laughing at myself. I’m excited to have myself. It is time for those of you who’ve been following the podcast for the past two years know every month I pop on and I do what I call my monthly random ramblings where I just hop on and ramble for 20 30 minutes about three four five things that are you know happening in the markets or that I’ve been thinking about that are kind of on my mind. So you know it’s just the ramblings of an increasingly mad man. And that bring me nicely to my next thing. Quick disclaimer remind you these are the ramblings of an increasingly mad man. So nothing on this podcast investing advice. I don’t think I’m talking about any specific stocks today, but you know, you should please feel free to see our legal disclaimer, see the disclaimer at the end of the podcast, all that sort of stuff. Okay, that out the way, let’s go to the topics I want to talk about today. So, I I will be honest. I started writing these and then I was just like so excited to get this going and I want to hit the gym at some point today. So, I just like put them on paper, haven’t fully thought through them. But, here’s my five things. I want to talk about the state of the markets real quick. Uh, I want to talk about my response to the Weird Markets podcast that I did, which I thank you so much to everyone who’s given me feedback. I’ve gotten so much feedback. Continue to get great feedback. I’ll talk about that. Uh, I want to talk about investments that make me want to slap some of my friends in the face. Again, we’ll talk in a second quick and then quick thoughts on power laws in the markets and things that people change their minds on. So, all that out the way, let’s dive in. And the first thing I want to talk about is the state of the markets. I’m recording this on January 22nd, 2026. Uh, you know, it’ll maybe it’ll be lost in the footnote of history. Maybe it’ll be the start of World War II. Who knows? But this week was kind of marked by, you know, at the end of last week, of course, Friday aftermarket hours. Trump really started going on and on about his threats to Greenland, saying he was going to tariff every country that was, you know, not that was sending troops up to. I don’t know. I don’t know the geophalist, but he’s going to tariff a whole bunch of US nations, US allies, because they weren’t going to hand over Greenland. That happens on Friday. Uh on Tuesday, the market kind of opens down at, you know, I think it closed one and a half% down. It wasn’t even that. And by Wednesday, the market’s ripping up as Trump kind of backs off. And today, I’m recording this close to the market close. I mean, the stock markets have just been on a face ripping rally so far this month. Aside from the, you know, including or aside from, I don’t know what the right word is, that one day Greenland diff, you know, as I’m writing this, as I’m wrapping this up, the Russell is probably up eight, nine%, maybe 10% on the freaking month. You know, the S&P is probably up 3%. I can pull that up and talk about as, but we’re just in this space ripping rally. And, you know, I look trit, I I do the trit the tritmonger series, the trip buffet series, all this sort of stuff. It’s really tried to say be fearful when others are greedy and greedy when others are are fearful. But I I do feel like that like I I think things are pretty stretched. I think it’s kind of time where you kind of want to be getting defensive. I’m getting some gray hairs on my head. I know like it’s when things are ebul euphoric is right before things can get weird and but you know all that’s right. The other thing I want to say is look over the past year there’s the taco trade, the Trump always chickens out trade, right? him. We had that in a big way with the tariffs in April. We have all sorts of things. And I I think that would extend to Greenland right now, right? He literally threatens, hey, I’m going to use force. We’re going to take Greenland, which I I think it would be the start of World War II, certainly the end of the NATO alliance. I don’t know if countries are going to war over us sending troops to Greenland or not. I have no clue. I’m not trying to play geopolitical strategist, but I would just say when you’re, you know, the the taco bet is the the most popular bet. I was texting with a friend over the weekend who’s like markets are going to crash on Monday on this Greenland stuff that I believe his term was there’s no offramp and I was telling him look I I I think it’s terrible and markets were down but I don’t think anybody say down 1% has crash but just based on my feed based on the strategy I see everyone is betting on taco everyone’s betting on Trump chickens up and I get it but where I’m trying to drive with this is you can only at some point you write a check and there is no taking it back. And I don’t know when that point is, but you can get yourself into such hot water or you can do something so crazy and there’s just no taking it back. And whether that is actually like, you know, the the one would be, hey, you actually send troops the the things to Venezuela, go crazy, whatever it is, you can do that or you you know, a lot of these have you say it and then at some point you try to reverse it and yeah, maybe you you know, I thought I actually thought this might happen with the tariffs for a while. You put the tariffs on and then you try to reverse it, but everybody’s already changed their strategy. You know, I think Oh, here’s here would be a good one. You you say something crazy, right? You say we’re going to take you were going to take Greenland and two two days later the response is terrible, markets go crazy, and you say, “Never mind, we’re not going to take Greenland.” But at one some point, the damage is already going to be done, right? Like the US brand is going to suffer so much. People are going to actually follow through on the dump US Treasuries. People are going to say we can’t trust US treasuries. You know, you you see this in emerging markets. It happens. I I guess what I’m saying is there’s the I I’m a little bit I’m quite cautious on the markets right now. It just seems like everything’s ripping to new highs. It’s harder to find value. It’s really lowquality stuff that’s really ripping and driving this market. I would say quite cautious that I’m quite cautious on the geopolitical thing. I think this taco trade that everybody, you know, the moment it happens and it’s weird where, you know, you taco on Greenland and the market closes at, you know, 100, it goes to 98 when you say Greenland, and then it goes to 105 when you say we’re not doing Greenland. It’s weird like you can drive the market even higher when you say, “Hey, we’re not going to do this crazy thing.” But at some point there’s going to be some crazy thing and it’s not going to be walk backable. Even if you can actually walk back the action, the damage of the brand, the damage of the sales, it’s going to be done. And I I’m I’m starting to worry we’re going to get there. And when that happens, you know, it’s not the market’s down three, it’s the market’s down 20. You you have a a geopolitical, you have financial crisis, something weird’s going to happen. I I’m I’m worried we’re getting there because these things are just getting so effing crazy. And uh yeah, anyway, I don’t know. Maybe and look, maybe I’m making too much of it, but it does seem weird that you would have geopolitical headlines of taking Greenland by force. like that it’s just it’s just so crazy and then to give it up for kind of nothing. Okay, and that was a a true rambling just on the state of the markets, but that’s kind of how I feel. And you know, I do think I mean again the I’ve got the gray hairs on my head. The it it feels tough when everything’s ripping up and you’re like, “Hey, these are lowquality stocks that are ripping. Everything’s ripping.” And what’s the thing that happened with the crypto? Everyone’s getting rich but you. But I there is the other side to this and I I’ve been through it enough time to know like you want to be on the other side and have the cash because the wash out at some point comes and I’m not saying the markets and crash or anything but there’s a lot of lowquality stuff that’s uh just ripping non-stop. Okay, let’s go to my second thing response to weird markets. So for those of you who who didn’t hear it, I did a podcast a week or two ago. It was what I called my working theory of weird markets. And the crux of it is this AI computer the markets are getting so competitive. the AIS are getting so good. Traditional valuation mech traditional ways of uh winning, they’re getting competed away, right? The only way to generate alpha going forward is going to be increasingly on the weirder and weirder side. And I got such great feedback and such great responses. So, thank you to everyone who listened. Thank you to everyone who gave uh responses. I I’m just I’m still working on the full post. There’ll be a full text post at some point. You know, it’s hard to compile all those thoughts just like throwing on your own. just wanted to talk a few things that people said in response that I thought were maybe missed the mark or I thought were interesting but I wanted to run. All right. So the first thing I heard there were two the two most common refrains were hey you know markets if you bought the market in April of 2025 you know at the on the absolute bottom of the Trump trade. Markets are up 30% since then. How can you say markets are weird? How can you not say you can’t generate alpha? And my response to that is easy guys. You’re literally describing the movement of the indices. You are describing beta. Like that is pure beta. Whether the market goes, you know, if the market goes up from now till the end of the year, if it goes up 4% or 40%, that is beta. That is not alpha. Now, your pocketbook probably feels a lot better if it goes up 40% versus four 4%. But that is beta. You know, alpha would be, hey, I could see where this was going. I knew to short the market on March 1st. I need to cover the the short on April 7th and then like reverse the short and go max long on April 7th, the absolute bottom of the tariff trade. That would be alpha, right? That would be macro alpha. That would be trading it. There are other things you can point to, but you know, just saying, “Hey, the market’s gone up a heck of a lot in a short period of time.” Absolutely not alpha. That’s beta. On a kind of similar vein, a lot of the people who responded would say something along the lines of, “Hey, you know what about Facebook at the end of 2022 when it traded for $100 per share and you know, Jim Kramer was crying on the was crying on TV. What about JP Morgan at the, you know, in the spring of 2023 when it was trading for, I think, eight or nine times price to earnings.” And I those are more interesting, right? We’re now talking about individual stocks and individual stocks that have generated a heck of a lot of alpha versus uh versus the overall market. But you know again I would just say I if you’re going and cherrypicking a past example that is not there was there could have been alpha in the stock but you can’t just cherry pick a past example and say hey this stock worked out well you know you have to be able to say like hey there was a systematic reason for the mispricing and if you were a active manager at the time and you loaded the boat on those then yes you generated alpha but again I would say just like being able to cherrybook one example even if an investment manager did that I don’t think that like speaks to systematic mispricing in the markets or and that’s kind of more what I was driving towards though I there is the single stock piece of it but again I just think going and saying hey you know if you bought Nvidia in early 2023 you did great yes that is true but that does not speak to alpha maybe you were taking on crazy risks you don’t know about right we’re living in the world where AI boomed what if there was another world where and chat GPT comes out in the summer of 2020 23 or late 2022 or whenever and it’s a complete bust and you bought Nvidia saying hey AI is here and you know it turned out to be the metaverse all over again, right? Where people were really hyped about the metaverse for a while and yeah, nobody ended up using it, right? There are other worlds to consider. So just because we’re living in this world where Nvidia did great, I don’t know if that’s the case. What if AI had been three years too soon? So, uh, speaking of AI, the other feedback I got, so a lot of my weird market theory rested on, hey, the AI is getting so good and also, you know, the quant models are getting so good, the competition is so high. uh individ individual investors are it’s increasingly hard to use uh fundamental models just say hey this is trading at eight times price earnings and expect to generate alpha like I just don’t think there’s alpha there and I got several people who said hey Andrew you forget we can use AI too so we can generate AI we can generate alpha using AI and again I think that’s false and if you’ll let me step into a sports metaphor I’ll I’ll tell you why uh think about golf clubs and golf I mean what drivers called the drivers are called woods because drivers and stuff literally used to be made out of big wooden heads. Now they’re made out of, you know, graphite carbon. They’re so strong. They’re so light, but they’re still called woods. Uh you can’t say is would me playing with well I’m a terrible golfer, but would me playing with, you know, modern woods, would that be better than me playing with the woods from 50 years ago? Absolutely. 100%. I’m going to hit the ball farther straight or whatever. But it is not alpha because everyone else plays with modern woods similar to tennis rackets. You know, you think about the pictures in the 50s of people playing with the little tiny ra wooden rackets versus today the the modern strings, everything. Yes, it’s an advantage to have a modern racket versus an old racket. But everyone plays with a modern racket. So there is no edge to having the modern racket because everyone’s playing with it. Similar to and that’s where I’m going with AI, right? You can’t say hey Andrew individual investors can use AI too. That is true but there is no edge to something that everyone can use. Now there can be edge you know I think I’ve used this analogy before sometimes a specific tool amplifies or detracts from a talent and maybe there is edge where you’re saying hey you know this specific individual investor is really good at reading management body language but he’s really bad at the uh fundamentals and there’s another investor who’s really bad at reading management body language but he’s really good at the fundamentals. Well, 20 years ago, the latter investor who was good at fundamentals, bad at body language, might have had a big edge over the investor who was good at body language, bad at fundamentals, right? But today, if the fundamentals are getting just kind of neutralized by AI, the latter investor, he might be increasingly obsolete, whereas the body language investor might be, you know, his skill set might actually be getting amplified by AI, which can make up for his weaker skills. So I I guess where I’m driving is this AI AI as a tool cannot generate alpha. You cannot say hey Andrew everyone can use AI so I can generate alpha. No it’s a tool. Now if you wanted to have a discussion on hey does AI amplify or attract from for specific investors. That’s an interesting discussion to have but I don’t think it really affects or impacts my weird market thesis unless we wanted to start saying hey there are certain unique investors who it makes it and yeah you know what I think I’m going to wrap it up there. I think those are the the two main points I wanted to hit. Again, it’s still an evolving theory. I’d encourage you to go listen to that podcast. I’d love to get feedback on it. I’m still working on a big big post on it that I I’ll probably post sometime in February just because, man, writing is hard. Turns out writing is hard. Who knew? Uh let me go to my third thing, and this is what I I was laughing when I said it. These are investments that make me want to slap people. And I’ve I’ve literally never hit someone in my life. So, I’m not actually saying I’m going to go physically slap someone, but this is, you know, it is mid to late January right now. Getting investor letters all the time. And I get investor letters from friends. I get investors from investors I kind of know. Sometimes just thanks to having a slightly larger than normal public presence. Sometimes I get investor letters from people I have no clue. Uh, but you know, I’ll read I read a lot of these investor letters. And sometimes I’ll read an investor letter and the person will be like, “Hey, you know, I spent eight years working at Coca-Cola and then I ran a consumer private goods company for a private equity firm for another five years and then I launched the fund.” And my top four of my top five holdings are, you know, consumer emerging consumer package good company one, emerging consumer package good company two, emerging consumer package good three, emerging consumer package goods company four, and then my fifth holding is, you know, oil companies drilling for oil off the coast of Africa. And this is my uh wanting to that’s one thing you know obviously that’s an extreme example but I think every investor and I’m trying to be better at this every investor has a skill set every investor has edge and when I read these types of letters I I just want to go to that fund manager and be like hey man like you obviously have a skill set you obviously have alpha uh maybe not obviously have alpha but you obviously have edge you obviously have skill in this one specific area why do you feel the need to go outside and do this thing that you have like not only do you have no edge. I think you might have negative edge when you’re when you’re going to do that. You know, again, in my example, you’re you’re domestic CPG focused and you’re going to emerging oil company. Like, I think you’re probably the psycher table. So, I I I say that because it’s something I say that because it’s a rambling, but it’s also something I’m trying to hold myself to a little bit more, too, right? where I look at a lot of companies and I think in the past I’ve gotten in trouble when I’ve tried to use someone else’s skill set and layer it onto someone else’s skill set, someone else’s thesis and layer it onto mine. You know, I see a lot of people with unbelievable thesises where they’ve done uni unbelievable due diligence. But when I’ve like kind of stretched I guess you know when you invest when you look at something that somebody else has done great diligence on one of the issues can be you do confirmatory diligence not your own thinking and your own diligence. And my history has been when I’ve stepped outside of what I think is my core skill set. Now maybe I’m using the benefit of hindsight to say that was core and that wasn’t. when I’ve stepped outside of my core skill set and invested in something where I think somebody’s done great work and I’m excited and probably my my research and my thinking goes more to confirming what they’re saying versus actually thinking through those have generally been my worst losses. So this is rambling but I guess what I’m trying to say is a if you see me investing something and you’re like hey that’s not Andrew’s course still you can call me out. And one thing I’m trying to be better at when I’m talking to my friends, and it can be a little awkward, but being like, “Hey man, you’re buying emerging offshore oil company.” Like, is that really your skill set? If that is your skill set, awesome. But, you know, for a lot of my friends, I don’t think that’s that’s their skill set. And I’d rather them spend the time, the focus, get the returns because I can’t tell you how many letters I read where it’s like, “Hey, we were up 2% this year. The market was up 10%. Our core longs were up 8% or our core longs were up 20%. Except for this one thing where we stepped outside our skis and it was down 30%. And it canceled out all the great the great things. And then you go read the letter their letter the year before and they’ll say, “Hey, you know, the market was up 15%, we’re up 6%, our core longs were up 30%, but this one thing was down 40% and it canceled out all the returns.” Be like, “Dude, for four years in a row, your biggest loser has been this offshore oil company. It seems like you’re maybe even doubling down on it over time.” And like at some point, let’s just say, hey, let’s go swing at what we’re really good at. All right, so that’s investments that make me want to slap people. Uh, quick talk on power laws. You know, I I’ve said it on this podcast before. There it’s gotten increasingly popular for people to talk about. And and there’s a stat that looks something like this. Over the past 50 years, you know, 40 stocks have driven the vast majority of stock market returns. And I I think it’s really interesting. And it’s a stat that compounder bros used to love. But I I want to spend some more time thinking about this because one thing that strikes me, you know, say you’re Walmart. You’re the largest company in the index. And I I just chose Walmart because they’re big. I I wasn’t specifically calling them up. And for the next 20 years, your stock does 4% per year. Well, that’s a terrible, terrible return, right? Barely more than inflation. Probably less than bonds are yielding these days. That that’s an awful return. But if you were the largest company in the index and you did that 4% per year for 20 years, you’re actually still going to account for a decent chunk of the index’s return versus say you’re, you know, the S&P 500. Say you’re the 480th largest company. You get added in year, you’re in it in year one and in year one your stock goes up 20% and then you announce a deal to get acquired for a huge premium, you know, a 75% premium. So your stock basically doubles that year. Well, in a 20-year time horizon, you know, you’re you’re not going to you’re going to recount for literally 0% of the index’s return, right? You’re way less than that company that went up 4% per year for 20 years, but your stock obviously did much better, right? So, anyway, just something I’ve been thinking about where I’m seeing a lot of the power loss quotes where it’s basically what compounders say, right? You you find the best company, you hold it for 20 years, and that’s true. That would be great. Very tax efficient. You know, if you bought Walmart in 1970, if you bought Birkshire in 1970, if you bought Nvidia in 2000, if you uh Nathan’s Famous is one that I I was involved in briefly that just yesterday announced the buyout and I the buyout premium was probably disappointing, but you know, if you have bought Nathan’s Famous, which owns the hot dog brand, the fast food concepts that everybody’s probably familiar with, mainly from the July 4th hot dog eating contest, if you have bought Nathan’s Famous 20 years ago, I mean, the stock’s been a home run because it was a franchise royalty stream. They paid out dividends, great business, grew a little bit. Uh, it’s been great. So, yes, there are power loss that, but I I wonder if they’re getting a little overstated in their All right, last thing. Again, just random rambling, so I’m just going to jump right to it. Uh, I I mentioned I believe it was last month in my random ramblings. Things people change their mind on. And one thing that I’ve been thinking about people changing their mind on that I think is also an interesting tale risk. And I might have mentioned this a few times, but you know, uh, vices is one that I’ve really changed my mind on. You know, I I I’ve got a pretty strong libertarian streak. I mean, people should be able to do what they want to do, I would say. And if you’d ask the younger me with a fuller head of hair and less gray 10 years ago, I’m like, yeah, basically all vices should be legal and people should be able to make their own decisions. Now, you know, 12-year-olds shouldn’t be allowed to get access to whatever drug you’re talking about, right? Like probably some age limits are appropriate, but uh once people are of legal age and can make rational decisions, they should, you know, make their own decisions and go their own way and everybody should be allowed left to their own devices. I always believe that, but I will tell you, I’m no longer sure that’s the case. And and I’ll point to two specific places. You know, cannabis cannabis isn’t getting increasingly legalized. Uh it might come off the federal permits at some point. And I I was always a fan like hey if alcohol is legal across the country why shouldn’t cannabis be legal across the country and I still kind of believe that but I also would say like look the cannabis that people were smoking at Woodstock in the 70s you know it it would get you high I’m sure I can’t say I’ve smoked cannabis in the 70s I don’t know but you know the stuff today is so potent and so strong and so engineered uh I I I don’t know and you know I the same thing with gambling. I always thought gambling should be legal and then people could decide if they wanted to go gamble or not. And I kind of believe that. But when you look at DraftKings and you look at online g even and freaking gambling even gaming like these things are so fine gaming and I’m specifically thinking of freetoplay gaming like you know the Candy Crush stuff these things are so finely tuned to addict you to get you to keep playing all that sort of stuff and having on your phone it it it I I’m starting to think like hey maybe it’s not good for society. Maybe it’s not good for people. And I understand that goes against a libertarian streak, but maybe it’s just like, hey, it’s a libertarian thing, but it also is coming again like humans weren’t designed to, you know, our bodies weren’t designed to process this uh cannabis this strong. You know, it’s unnatural. It wasn’t designed to be able to resist the lure of the phone, right? And particularly when it’s gaming and you know, I’m thinking about sports betting, right? He it was cool when you could if you had to It is cool if you can drive to a casino and go and say, “Hey, I want to bet 20 bucks on the Yankees to win today’s game or whatever, right? That’s awesome. But when it’s on your phone and you can do it in a heartbeat without even thinking about it and you can do it not just in the Yankees to win, but you know, you can bet on the next ball or the next strike or all this sort of stuff. And you can do it without a thought and you could burn, you know, serious amounts of money wast without even thinking about it.” like and that I guess taking away the people’s checks and inhibitions just because it’s on your phone and it’s so fast versus you know if it’s in a casino you have to decide you want to go to the casino you have to drive there you have to get the cash out all that sort of stuff I I I increasingly wonder if there should be like the libertarian hates to say it but if there should be some state imposed limits on hey all of these things are so engineered like humans just weren’t designed and society would be better off if there were some limitations on them and you know maybe that is in my, you know, if I was dictator for a day, I’d probably do like, hey, gaming’s legal everywhere, but online gaming is not. Hey, cannabis is legal everywhere, but you can’t make it so strong that, you know, you get 500 hits of the old stuff in one thing. And I think alcohol probably falls into this, right? Like I I I can’t say I’m insanely familiar with specific alcohol limits, but you know, we do beer and wine. Uh beer wine has specific alcohol contents and you can sell beer wine in specific places. And then liquor has specific alcohol contents. It’s much stronger and you need a different license to sell that and you can sell that in different places and uh maybe a small step. But those were the two things I was just thinking of. Hey, these are things I’ve changed my mind and to bring it to investing. You know, I do wonder uh DraftKings predict prediction markets all those things they trade at pred draftkings got hit a little bit over the past few months as prediction market the rise of prediction markets but Robin would probably fall into this bucket as well. I I do wonder if there is, hey, you’re investing them and you’ll make a return and you’ll probably make a little bit of alpha from it, but I wonder if some of that alpha that you capture investing them over the next 5 to 10 years, assuming that there is alpha, is actually paying you for the tail risk of, hey, Andrew is right. You know, there is or not even that Andrew is right, but there is some risk that a government at some point comes and says, hey, we need to change this, right? DraftKings. And it doesn’t have to be banning all sports betting for DraftKings. If you ban parlays, right? DraftKings makes all their money on parlays, which are where you combine, you know, you don’t just bet the Yankees to win, you bet the Yankees to win and score more than five runs or something. These those are insanely profitable for the books and they’re very popular among the youths and some of my friends uh because you can do these parlays and you know, you bet 10 bucks and if you string them together, right, 10 bucks to win a thousand, 10 bucks to win a million. the the book takes a huge pick from them, right? I wonder if there’s going to be some crackdown on parlays, and if there were, that would take away their most profitable revenue source, and I think it would be good for society. Um, Robin Hood, some crackdown on zero day trading, you know, does does trading zero day options, does that really create economic value? Probably not. Uh, I know right now it seems like the markets are going the other way. It seems like every market wants to go to a 247 model. I think that’s actually a really bad idea, but we can talk about that another time. But it seems like it’s going to everyone can trade anything all the time whenever they want. And the libertarian me says, “Great, that’s awesome.” And the market structure person in me says, “Hey, maybe this isn’t good for society.” And I wonder if there’s a risk at some point of, “Hey, if we had a stock market crash, are there lots of rules and regulations that come along and say, hey, let’s limit the trading. Let’s limit and by the way, let’s take away the zero day trading options.” Like, I don’t think it’s impossible. So, all right, I’ve rambled enough. This has been a lot of fun. As always, these are just my ramblings. I’m not saying like any of these are lifelong core convictions of mine. I’m always happy to talk. Always happy to chat. Hit me up in the show notes. Hit me up over email. Whatever it is, I’m always happy to chat about this. Always happy to chat about how to improve the podcast, how to do anything. So, I’m here if you want to talk. Um, look, thanks so much. See the disclaimers at the end. Uh, it is January 22nd. We’ve got some great podcast coming up in the near future, too. I will mention that. Uh, looking forward to chatting you then. A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.

Description:
Host Andrew Walker speaks with Ryan Fennerty of AlphaSense about how investors can improve their use of expert calls and AI …

Transcript:
All right. Hello and welcome to the Another Value podcast. I’m your host, Andrew Walker. Today I have a really interesting podcast for you. I say that all the time, but look, I I I think this is going to be a specialized one. I think if you are a small fund, well, I should tell you what it is. It is Ryan Fennery from AlphaSense. AlphaSense is obviously a longtime sponsor of the podcast. So, I know what you’re thinking. Oh my god, this is an infomercial. I don’t think it’s an infomercial. We talk, you know, AlphaSense is the provider of AI tools to financial firms and expert calls to financial firms. I’m a heavy expert call user and you’re going to hear it. I’m going to grill Ryan on how can I be a better user of expert calls? How can I be a better user of AI tools as an investor? If you are an investor, and you probably are because you’re listening to this podcast or you’re one of my handful of friends who listens to this podcast even though they don’t care about investing. If you are an investor and you use expert calls or use AI tools or you use both, then you are going to get a lot out of this podcast in my opinion. And if you are an investor who doesn’t use AI tools or who doesn’t use expert calls, I’m going to ask you, what the heck are you doing? Get with the times. These are the two most important uh new tools and investors toolkit that have developed over the past 10 to 15 years. So, I know what you’re going to say. It’s an infomercial. It’s not an infomercial. You’re going to learn a lot about how to improve as an expert call user has how to improve for AI and how to improve as an investor. So, we’re going to get there in one second, but first a word from our sponsor, AlphaSense. Today’s podcast is sponsored by AlphaSense. Look, AlphaSense has been a longtime sponsor of this podcast. You’re about to listen to a podcast with one of the people from AlphaSense who’s going to talk about how you can improve with expert calls, with AI, all that type of stuff. If you’ve been following this podcast for a long time, you know, I believe over the past 10 years, the two most powerful tools that have come along and changed for investors are expert call, expert call networks, which have enabled uh funds and investors of all sizes to get access to expert calls, and AI, which has enabled all sorts of tools for funds and small investors. And AI and expert calls are a match made in heaven. They’re in increasingly blending together. And AlphaSense is rolling out an AlphaSense AI let expert call tools that lets you pair experts with a knowledgebased AI interviewer to conduct high quality conversations on your behalf. So, you know, if previously you were limited by, hey, I can only do two expert calls a day. I I maybe I can’t do like full surveys and all this sort of stuff. You can have the Alpha Expert AI call go and do a hundred calls. you know, you you if you’ve got the budget, you could have them interview every single McDonald’s manager who’s willing to sign up for an expert call and you can get some really interesting insights going with that. So, uh I just think it’s a match made in heaven. AlphaSense continues to push the edge, push the envelopes, evolve it. I think it’s great. You should check out Alpha. You should check out the AIE expert calls. I think it’s a really interesting tool. You can learn more at alpha-sense.comyavvp. And now on to the podcast. All right. Hello and welcome to the yet another value podcast. I’m your host, Andrew Walker, and with me today, I’m happy to have on from AlphaSense, Ryan Fennery. Ryan, how’s it going? >> It’s awesome. Good to see you. >> Uh, thank you so much for coming on. Uh, we’re going to hop into the podcast in one second, but quick disclaimer for everyone. Nothing on this podcast is investing advice. You know, I don’t think we’re talking any individual securities. We’re talking about generally how to improve as investor and use some interesting tools. But keep that in mind. There’s a full disclaimer at the end of the podcast and in the show notes. Uh Ryan, look, the reason I wanted to have you on is you work at AlphaSense. You are overseeing the AI tools at AlphaSense and the expert calls at AlphaSense. And I think, you know, I’ve talked about this before. I think these are two of the areas where especially for smaller fund managers, the landscape has evolved a lot over the past for AI tools over the past 10 days, for expert calls over the past 10 years. But uh wanted to do an update and talk about all of those for my listeners. So that makes sense. We’ll kind of hop into it. >> Yeah, that’s great. And then just um one piece of context just for your your your viewers and your audience. Um so I initially at TGIUS led the expert calls business and helped scale that and then we were acquired by AlphaSense and now I lead financial services sales for Alphasense. So um bring both the lens of how we were building at Tigus and how that’s evolving through AlphaSense especially as AI becomes a huge part of where the industry is headed. And then in addition, AlphaSense is much more of an AI forward platform to support investors and so can speak to some of how we’re seeing AI impacting use cases in the market. >> Your journey inside AlphaSense is like my journey outside AlphaSense because you know I knew Alpha from Stream and they bought Tigas. It was all about the expert calls for me and then you’ve got these burgeoning AI tools and I think we’ll talk about in this podcast but like the expert call the expert calls are awesome and that’s what I think about first when I think Alison but the AI tools are like kind of reshaping how expert calls and learning from expert calls are done and I I I’m still trying to wrap my head around it. Anyway, so let’s start with expert calls. Uh if I can frame I do a lot of expert calls. I probably do I I was trying to put a number on it. I’m gonna say 25 a year, but it could be it could be upwards of 50 a year. And of those, I’d say 10% of them are awesome. 50% are good, 40% are okay, and 10% are bad. Uh I So I wanted to frame this conversation around improving expert calls. You know, getting that 10% that are awesome to 30% are awesome. Getting all the bad ones out of there. So that’s my overall framing, my overall thought process for the expert calls. Let me start with this kind of maybe not easy question, but this question. If someone’s listening right now and they wanted one takeaway they wanted to say, “Hey, Ryan taught me one way I could improve as a investor using expert calls, what would just one takeaway that someone could have to improve expert calls be?” >> Yeah. And so obviously at the risk of generalizing knowing that there are many different people use expert calls for different discrete uses in their investment process probably the number one thing I would say to shift to having more satisfying expert calls is approaching more of the expert calls through the frame of I am testing a hypothesis or a thesis and I want a thought partner who’s credible to think through that and the second order implications. I think that’s where you find the best expert calls have a goal and something they’re trying to validate or invalidate and they have enough structure to allow for that to happen, but then they also have enough flexibility for you to probe and go deeper. And so I think anyone who’s ever, you know, used an expert transcript library and seen some of the expert calls like that was a great expert call. They kind of follow that arc. They’re flying at the right altitude. um versus I think you know some people come in really trying to say like I just want data that corroborates like XYZ thing I’m trying to test and then they come out frustrated that the expert was evasive or like you know gave ranges that didn’t make sense. So I’d say the number one thing is to frame expert calls are really well utilized for humans who can help you think through a hypothesis hypothesis you have and really help test your thinking on that >> one thing. So just on having a hypothesis, you know, I am a generalist in most sectors versus, you know, a a industry specialist. How should journalists be thinking about using expert calls versus industry specialists? Because for me, I might go in and my thesis might be, hey, we’re recording February 9th or 10th. Software stocks are getting destroyed. I want to talk to someone about this company about how AI is impacting software. Whereas an industry expert might say, I already know how it’s impacting software. I want to talk to industry people about like in real time how their spending is changing. Like how do journalists versus specialists differ when they’re using expert calls? >> I I think that’s a really fair question. Here’s what I would just say. I think is zoom out because like one of the things is how is this all changing given how dynamic the space is? I would say in general a lot of the work that used to happen around just getting up to speed, getting smart, like first order questioning to get triangulated on things has moved to uh the expert libraries where you can go see what others have done. Now that’s not always true, but like a lot of the work that used to go to expert calls to do that has moved to let’s go look and see what’s on these libraries to see who else is talking about this stuff. And then where a lot more of the effort has gone is to shifting into much deeper questions around an investment thesis or drivers of a company. I think that’s where we’re seeing a lot more of the behavior on expert calls that sort of like I’ll go talk to 10 people just to triangulate like how industry structure works big picture trends. A lot of that has really um that a lot a lot more of where we’re being utilized is the the latter stuff that I talked about. >> So again every person interviewer comes to the thing with bias. I I am an Alpha user, Tigga user, all these things. My bias, even though I do a decent bit of Alpha Sense calls, I read a lot more calls than I use uh than I kind of do live person calls, right? >> When you your best users who are making in your opinion the best use of expert calls to further their knowledge and all this sort of stuff, what is their blend of kind of expert calls that they are driving and they are doing versus transcript usage? >> Yeah, so I think um I you know I have a couple friends who’ve like used who are early users of Tikis and talked about how they shifted their behavior and how they’re using it now. And I’d say um one of the biggest things that’s happened if you think about you know where Tigus came in the the industry model for doing expert calls we disrupted the price of what it used to be done for an expert call. So it used to be you know 1,500 to 2,000 was the average price for a call right? >> Yeah. Oh, no. I I I I’m nodding along because I was in consulting and private equity before and like, you know, you expert calls. It was, hey, you know, we’re going to spend $2,000 on the expert. It’s a private call. No one can see it. We’re going to do we’re DDaying something. It’s going to be between eight to 40 calls and you know, this is the biggest part of the due diligence of the process. And please continue, but I’m done because I so agree with what you’re saying. >> So, I named this over like the the arc that’s happened over literally the last three to four years. So that was that was the state of the industry and then models like Tigus came in which basically monetized in a different way through access to an expert transcript library where everyone’s expert calls over time were put there to be searched and read and what that allowed is basically to do expert calls at cost. So there’s no margin and so you could it opened up the market. I used to be in a banker covered airlines like Spirit Airlines expanded the market of people who could actually take advantage of lowcost airline, right? And I think that was one of the giant things that Tigus introduced. A lot of our business was built on mid-market funds that previously couldn’t do the volume of calls it could do with us. So, I’d just say that’s that was like the first change, which was um I had to be incredibly selective about where I did my expert calls and I do a lot of them, you know, through our own network of people we referred to to being able to take a lot more of those triangulation calls. Then what happened is these expert libraries started to form out in the market and there’s multiple ones. Tigus has one. There’s other ones out there. And this is where a lot of the get up to speed. Um let’s go just understand like ultimately market structure, go to market model, uh pricing, operating leverage, like a lot of that kind of just cursory work got done through the expert transcripts. But then what you find is people are using those then as a stopping off point for the second or third or fourth call that they would have done becomes the first call because now they can triangulate on a name. They can see the drivers, the other questions people asked. And I think like the biggest thing we’re seeing in the industry, whether you’re public or private, is, you know, investing has always been about access to information and then an investment process that gets you to superior investment outcomes. And the access to information for all that insight that was trapped in expert calls has become a lot more available in the market. Right? So the bar for um what people spend expert call time on has gone up. And that’s true for private and public markets. What I’ll hear a lot is the stuff that we used to spend two weeks just getting up to speed on, we do now in a day using expert libraries. Sometimes if you’re in niche stuff, you still have to go through the cycle because there’s not enough out there. Just it’s a blank spot. But then now we’re picking two to three drivers that we really think we need to understand for the investment thesis. Not all of them are best suited through expert calls, but some of those questions are. And so then we want to go get three to 10 credible experts, really dig into that and validate that. So that’s I would just say that’s um it spans your direct question because ultimately the market like the cost of doing this work and how it’s being done has changed and that is true for both public investors and private investors and I’d say the biggest adoption shift we’ve seen is now a lot of private market investors in the last 18 months mimicking what public investors were already doing 18 months before. So let me ask you most people are using expert calls, expert libraries especially. I worry a running theme of the next few questions going to be bias, confirmation bias basically. But I also worry about echo chamber, right? And I’ll give you an example. >> You’ve got growthy tech companies are the things that have the most expert calls in general on tus whether it’s you know we’re in the SAS apocalypse right now. Apocalypse, Buzzy IPO coming up, a few of the kind of cultish uh tech stocks and I think everybody can figure out the ones I’m talking about or put them in their mind. I worry about you get echo chamber where you have one fund, five funds, whatever it is driving expert call libraries and they’re coming with bias and we’ll talk about their bias but you know if they drive 10 calls on this company in August of 2025 that sees and everybody who’s looking at the company reads those 10 calls like everybody’s thinking about and coming at the company the same way. So my question to you is do you worry at all about that bias once the library gets published? And I understand there’s information outside that but if everybody’s using it uh you get biased because everybody reads the same thing and are funds coming to you and saying hey how do we think about that bias when we’re reading it or do you hear any concerns about that? >> Yeah I candidly we haven’t heard that as a concern. I think um I think the other thing to name is like ultimately expert insight as a category of insight is absolutely prone to bias. It’s a different set of biases that you as an investor have to like interrogate and and like apply your lens to. So obviously the whole reason why people even use expert calls is we all know management guidance has a bias. Sellside research has a bias just inherently because of the market structure and how that works. financial data is backward-looking and so expert insight is ultimately what what gives it utility is that it is the operator ideally it’s the operator’s view to triangulate what’s actually true about how this company operates and the drivers and risks that sit in it and you know like I think um when investors do their expert calls and then those become like the top you know five funds are the ones doing the line of questioning around the transcripts you’re reading like absolutely that could be investors driving in bias but I actually think the the bigger bias to interrogate and to be to be clear-headed about is like the bias that can appear in experience. That doesn’t mean that they don’t have massive value. It just means you need to be very careful about evaluating what is the bias that this individual might have as I’m taking this and how do I you know think about where to apply what this person is saying and then secondly I think there’s no getting around and why it’s really exciting with the the nature of the industry is changing to make this much more possible. the end count matters. Like still at the end of the day, like the way to avoid bias with operators is to go get multiple operator views. You don’t need 30, but relying on one operator view to really invalidate or or like prove or disprove a thesis is obviously dangerous, right? That’s a leap of faith. >> You you front ran your bias answer. It front ran a lot of my questions uh both on the expert call side and when we talk AI, but I’m gonna I’m gonna ask them or modify them anyway because I’m very interested in them. Let me again I’m going to put it into my personal shoes, right? I get on an expert call, I talk to an expert. A lot of times I I have a view, you know, as you said, I generally don’t do expert calls the first expert call where I’ve just got no information on the company anymore, right? Like I I’ve read a little bit. I’ve got enough to be dangerous. I generally have some bias. My question for you is how much do you think experts when they’re on the call, they naturally can tell, oh, this guy is interested as long. So, they’re kind of responding to me, my proddding, and being more positive on that. And how do I or how are you hearing other funds, you know, I I know when I’ve gone on a call and I’m bullish on a company and the expert has been bullish, I’ve been like, “This expert knows what he’s talking about.” And a lot of times if I go on a call and the expert’s bearish and he can’t point to like really specific examples, I’m like, “This guy’s a clown.” We’ll talk we’ll talk about some expert bias in a second, but you know, how do funds think about them individually with their bias when they’re coming into these interviews and how it might influence both the interview and their takeaways? >> Yeah. Okay. So there are a couple like in in um we did a piece I think it’s available online recently on like what are some of the things that uh some of the top investors use expert calls a lot do repeatedly things that they’ve learned to try to to to like spot and counteract some of these biases that can come on a call. And so there’s like three things that jumped out from them. One is um a lot of them do like a double click as soon as they get on to confirm where this person sat in the organization and their purview so that they understand the perspective they actually had. So screening through some of that but that’s incredibly important hygiene to say this is the lens from which this person is coming from what they saw and what they couldn’t see. So they’ve already got that piece right. Uh then the second one is um at the end of the day an expert uh someone who’s providing expert consultation is a human and we know humans um are subject to in the line of questioning to give you very different answers really when you’re trying to try and go through the same thing. And so one of the things that you know a lot of investors will have they’ll say it’s like it’s my burner question which is it’s a way to gut check this person’s positivity or negativity at some point in the conversation. And so an example that was given would be I’ll go through a lot of the question. They’ll give me a lot of things about how they’re really bullish about the business model. And then they’ll throw a question about like talk to me about the culture. How has that shifted? And you can see that a question just like that can take someone who’s saying hey all these things are great. And they’ll go well actually there’s a really deep problem there. Actually I like we should speak to that. The culture’s gotten a lot worse recently. And what does that mean is it it helps you immediately go oh well that’s interesting. Tell me more. So while they might have been very positive on market structure business model it starts giving you a hint that like there might be misalignment right internally and that’s that I think is really unique to in expert calls and why they are very interesting as a place to find differentiated insight in the market because the more you can treat that as structure but then a human that if you ask open-ended questions and probe in the right way you can unlock really unique insight that is unique to that source of insight in the investment process. The last one I >> Oh, go ahead. >> Oh, go please continue. Finish. >> And then the last thing I’ll say, one of the questions is like the open-ended questions at the end can be pretty revealing. Um, and it’s really interesting. This is like a real parallel with how to interview really well. Like when you think about like interview processes for a candidate to hire, they’re absolutely prone to bias. Most of the information is absolutely garbage that you’re getting. Really, it’s just track record and the verified through references multiple. And one of the questions like that uh these investors ask that is also very popular in the way I’ve interviewed in the past is to say um let’s say we’re both wrong on what we just discussed or we’ve both agreed to. What do you think we might have missed? What could go wrong? Those questions at the end are very revealing and sort of uh going a layer deeper into things that this expert might have >> uh in thinking about risks in the business and drivers. I think one of the biggest thing experts are very good at is helping you understand second order and third order risks in a business that aren’t obvious from the outside. >> You know, one of the questions I asked earlier was generalist versus specialist. And what I have personally found is like like look if the risk is in a 10K or something, yes, I can see it. where I’ve gotten maybe not the most emotions but a lot of use is when I hop on the call with an industry specialist and you know start talking to them and I mention and then they’ll just come and there’ll be some risk that they live and breathe that I’ve literally never thought of and they’ll be able to talk to me and you know it talks to me about how this specific company is impacted by it. Let me stick on the bias question for a second. You know sure we talked about the investor bias that’s what I was talking about. Let’s go to the expert bias because for me uh most of the expert you talk to are one of two things. you know, they are you’re looking into Coke and they’re a Pepsi employee because current Coke employees can’t talk about Coke, but maybe a current Pepsi employee can. And that’s obviously just hypothetical. Or current Coke employees can’t talk about Coke. Former Coke employees can talk about Coke. And what’s the reason most people are formers? Most people are former Coke employees because there was a round of layoffs or they wanted to be the CEO, they got passed over for the CEO spot, they left. So a lot of the experts I find have a a negative bias towards the company. How do you think investors can like deal and address and kind of calibrate for that negative bias? >> Yeah, that’s a really fair question. I think um I I think like the number one thing is just to know that that is a bias. So what you’re going to be when you’re when you’re asking questions around where there’s risk need to understand that they might be overstating what’s likely or possible. It’s just it’s just reality. And then the other thing I name is talking to multiple formers helps you put people on a spectrum, right? So if you have three out of three people saying broadly similar things about the same risk, it’s probably credible information, right? If you have three out of three all like speaking negatively about something, but there’s varied levels of tonality in that, then you can make a different assessment. And I think that’s how a lot of people have like approached that same thing of invariably some of these people are going to speak poorly about management or the culture because they lift or decision-m because they’re disgruntled. But I think it’s um just you know I’m going to go back to interviewing some of the art of like running really good reference calls which are very similar to doing expert call is trying is being able to triangulate where someone is um being fact-based in their assessment about it versus applying a heavy color, [clears throat] you know, heavily colorizing it. And um I found that, you know, when I go conduct references, I have to do seven to eight references to really triangulate to truth. Every time I do that, I get one or two that had I taken that at face value would have really colored the picture very deeply. Okay, so let me again and I coming with this with my own biases, but let me go back. When you do an expert call, the first thing you’re going to do is you know you reach out to your expert recruiter and you say, “Hey, I’m looking to do an expert call on Coke. Find me Coke formers, Pepsi Formers, whatever who can talk to me about the industry.” And a lot of times if you’re, you know, not starting from step one, you’re starting from step two, three, four, you’re saying, “Hey, I really want to think about how sugar taxes are going to impact Coke or how, you know, ongoing sugar litigation impacts people’s view of Coke.” GLP1’s impact Coke consumption, right? So, you’ll have that >> uh you get experts back. The first and most critical step is kind of picking the right expert. And I find this can be hard, right? Because you’ll put generally some questions and experts don’t want to answer all your questions, right? They don’t want to give the horse away for free because if they put all their answers in the written question, what’s the point of having discussion? So, how can people again I’m [clears throat] just bringing it to myself. How can people improve at this screening process for expert calls? How can they get better at choosing experts? How can they ask better questions? And how can they make sure it sucks when you waste time and you talk to a bad expert, right? You you’ve generally kind of got to pay them anyway. You get it’s a waste of time. It’s a waste of money. So, how can you get better at making sure you get the right experts? >> Yeah. I think um I think the first thing I’d say is like we get thousands of projects every day from investors and I think if you talk to a you know a team that services and executes on those projects they’d say the best outcomes are when the investor takes a hot second to be really specific about hey here’s what here’s who we want to talk to and why and the questions we’re trying to answer. That then really helps inform the teams that do this day in day out to be like, “Okay, well, let me give you some perspective of like people that other people have had really good experiences with that we’ve already worked with and then we’re going to go fresh source people that we think align to your criteria.” You’d be surprised at how often people are like, “We want to talk to people with this title and that’s the amount of context.” If you do that, then you’re not leaning on the teams that do this all day to help you go find people who are more likely to fly at the right altitude. Where this is really common is, you know, someone will be wanting someone who can comment on, you know, operating le leverage, uh, inventory, supply chain things, and they’re looking for someone who’s just too disconnected from that level of the business and the titles that they’re seeking. Seniority is not the same, right? Um and so ultimately I mean on your discreet question there like the the answer is we do enough screening questions to see is this someone credible who can speak specifically to what’s being asked or are they too high level and unwilling to go there and then um ultimately it’s a joint decision on we’ll recommend to you we think this person is credible. We’ve worked with them before or if they’re freshly sourced are we getting signals that this person is kind of faking it and we wouldn’t recommend you take them or they’ve passed our screen. This might have applied to some stuff we’ve already talked about, but I do want to hit again. There’s two types of calls you can do, and obviously they’re broader, but the two types of calls in my mind are I want real time information, right? And we’re not looking for an NPI. We’re not looking for quarters, but you and I, again, we’re recording February 9th. There’s the SAS apocalypse. You might want to talk to people who are the CIO for a company, and you might want to say, “Hey, how much are you re-evaluating your software budget, your SAS budget, your Percy budget right now?” Right? That’s a real-time temperature check versus the longer term, you know, you want to talk to the CIO and say, “Hey, how are you thinking about Zoom versus Microsoft Teams in the long term?” Or that that’s a very specific example. That’s more, but you know, you might want to look at the overall industry landscape. You might want to say, “Hey, you run uh Dolingo. How are you guys thinking about the five-year uh evaluation progression? Like, where else can you expand the Dolingo? You were in learning, now you’re in chess. Can you apply it to fourth grade math? Can you apply it to learning how to play basketball? I don’t know. But that’s a longer term thing versus more in the moment thing. Where do you think expert calls like really excel? Where do you do you think they excel? Both. Do you think people see one as better than the other? How do you think people can use these the best? I >> I think they can do both. And I think what’s increasingly possible, opens up a lot of opportunities that were harder to get to. So I’ll speak to both. So generally um as you laid it out, there are deeper questions around understanding business models, drivers, etc. And those I think generally for a fundamental investor have been more satisfying in large end counts when done properly because those conversations lend themselves that way. Um what you’re describing on the former uh sort of real-time market impact what’s all what’s happening here like that is absolutely something but I um that is absolutely a place where people go for real-time insight to get perspective on the market. That’s very important. They’ll always be there. I think you I don’t know if you said it directly, but you were alluding to another form obviously is you know in surveys and channel checks. So increasingly treating these conversations as places to collect signal on trend um specific data points and that I think is where more and more people unless they have really sophisticated internal setups to do that have found experts frustrating or unreliable. And what I will say is um what has changed well one first they were just incredibly cost prohibitive. So the the cost to operationalize those for an expert network didn’t look that different from an individual expert call. You’re not going to spend 100,000 for a single survey whereas you could spend it on 2,000 for you know for an expert call. But AI is actually one of the biggest places where like we’re early but I expect this to have a big impact on you know your question there of like where expert call is going to be most powerful. I actually think on the things like survey like and channel check like insights AI makes the entire cost model and the operating model behind that like vastly different from what we’ve ever experienced in the industry. >> So now you could get you know with AI interviewers they’re not a human that has to arrange time. you could have them, you know, go talk to 10 CIOS um and do it on their clock, so it’s their availability to get to get really quick insight on a question like that in real time. And that was just stuff that was really hard to operationalize even six months ago. >> It’s so funny because the way I’ve structured this interview, structured my notes is expert calls front half, AI second half. And like for this is like the fifth point where we’ve hit the end state and I’m like oh I should talk about how AI is going to evolve this thing and stuff but even just like doing this interview you can see how AI is creeping into a lot of these things but I’ll I’ll say for let me ask note takingaking okay so I I just did an expert call uh last I I think you and I did a pre-screening call on Wednesday and I was literally coming from an expert call right I do an expert call and I read an extra call whatever it is >> one of the tough things I personally find is keeping track for notetaking on these expert calls, right? Like I’ll highlight it in the Tigus or AlphaSense app. I I’ll write down notes, but it can be hard. You know, you read four expert interviews over six months on company XYZ and it can be hard to remember these things. And it’s hard to remember anything you read about a company, but especially an expert call, it can kind of blend into it. AI when we get there will probably help a little bit, but how do you find the best people, especially in real time when they’re doing the interviews? How are they taking notes? what are they focusing on so that they remember and kind of ingrain whatever learnings they’re having of these expert calls. >> Yeah, I think um I mean a best practice is obviously to to book enough time right after to go synthesize and take stock, but I I think that skill set and that discipline. I I wish it was it was obsolete with us already. Um, but look, all road maps are leading in this direction where you do an expert insight. You do an expert call through Tigus. It’s table stakes that that should be able to be something that’s recorded instantly transcribe sent to you, which we do today. But more importantly, there’s an AI summary and synthesis that mirrors the way you want to organize your note-taking on that. Like I think the fact that we’re not there is um I mean within months I think like most people are going to be moving in that direction. But to answer your question like traditionally I think the the funds that have done this really well and systematically have a discipline around as soon as we’re done we take the notes it goes into internal drive that we can all extract from and then the other thing I’ll say that is a really big part of you know we’ll get to the next conversation is traditionally people have thought of like there’s expert there’s all these services for proprietary research and doing investment research then there’s all these like tools the traditional you know data um data feed leads and other providers and then there’s AI tools and then there’s our internal content and increasingly what’s happening is you’re doing expert calls as a firm all the time you have investment memos and then there’s external data providers and plugging all that in and using AI to extract those insights that’s ultimately where things are going and then we’ll get as we get to the AI conversation I’ll talk through some use cases that I’m seeing that are really interesting on how insights are coming out of that but um ultimately I think the world of having to be a really expert notetaker on back of your call has a very short halflife and like one of the things AI should be able to do for you is not make that a huge part of your routine. It’s you being able to have that and immediately send you a summary of exactly the insights and the structure you want. That’s the technology can do that. Right. >> Well, we we keep coming down to AI. So, let’s start transition to AI. And I will say in my head the AI discussion has like almost two parts to it. There’s just using AI tools in general and then because we started with expert calls, there’s how AI tools are shaping and evolving expert calls which I is obviously a subpiece of that but I I think it kind of fits into this. So let me start with the same question I did for expert calls. If I’m a listener and whether it’s using AI on expert calls or AI in general, if I’m a listener and I’m going to walk away from this conversation with one thing about how I can use AI to be a better investor, what would your kind of how would you kind of answer that? Yeah, I look I I’ll tell you where we’re seeing all the action for public markets focused investors, right? And that is like one use case where you can immediately start getting leverage and making your life instantly better is around uh earnings, right? So um the you know the advice and the way you kind of phrase it to me I was like the number one thing you need to do is pick a place where you find yourself spending a huge amount of time doing hand-to-hand comment on synthesis and uh taking multiple data sources and forming a view uh under time pressure that is ultimately where out where AI is strongest and so earning season is where we’re seeing that in public markets quite a bit. I’ll give you some examples. Um there are things that habitually people would have to do on the back of like I’ve got a name in my portfolio like this is a real investor conversation. Uh I’m looking I have read it. They just uh published earnings management guidance was very positive. Now I’ve got to go basically update the thesis on whether or not you know we want to stay in the stock and what’s happening around us. The things that you used to have to do very handtoand you can do now within hours. And so one of the prompts that this individual has set up is, okay, here’s management guidance. I want you to compare what this what the CEO is saying to the actual cash flow statements of the last five comps that I tell you that have already reported. And what that’s allowing people to do very quickly is say, okay, uh, this individual is speaking positively, but the cash flow statements show that there’s a lot of negativity on everyone else. So what does that tell you? Two things. One, Reddit’s an outlier and things are going really positively. And why? or two management’s overconfident, right? And we’re already setting up for a question mark there. These are the types of things that are happening right around um you know what AI is really good at is synthesizing insight from multiple sources and drawing connections that are very hard for human to do quickly and that’s probably the number one place I would say public markets investors there’s multiple things that people are doing right now all the time. >> So that’s super interesting. But if I could just push back on you slightly. Sure. >> You know this is yet another value podcast. My average podcast is a guest comes on and we talk about one stock for an hour. It’s a deeply researched generally concentrated investor. When you say earnings and things that need to be done quickly, you know, I just know in my mind my first thought process was he is talking to pod shops who are trading quarters and whisper numbers and all this sort of stuff, right? I are so let me just reframe the question. If I was ignoring immediate term stuff, how would someone who’s, you know, five stocks concentrated long-term investor, how are they using AI to evolve their process? >> Yeah. So I think there’s uh there’s another area is when you are going uh to you know take a position at a company I think there’s ultimately um a heavy heavy amount of work and what are the fundamental drivers of this business and can I get a differentiated view versus consensus. >> Yes. Yes. >> I love that you said differentiated view there. Yep. >> Yeah. And I think ultimately some of the really interesting use cases there are um you know like consensus is formed across multiple layers right what is like what are cells if it’s a you know widely covered name what are what are the key debates on the cell side and what they’re saying about it what are all the people saying what are all the experts saying on this on the key drivers that matter and then what is our internal view on those and you can triangulate you can compare those perspectives um one thing that AI I think you had asked me a question coming into this is like what is AI actually really good at uniquely that surpasses the ability of the average investor right versus where it’s merely coming up to the ability to do what an analyst that you you know a junior analyst you bring into the fund can do and one thing I will say it is the ability to go synthesize and compare perspectives across tons of different sources in a grid-like format and so one of these things that um I think we have seen investors using more the fundament fundamental verse is that you can look at so many different components and compare what is management guidance saying on this what is the sell side saying on this what are the expert calls we’re doing how do they compare to what’s being said what are the expert calls in the transcript library and I think that’s allowing people to say hey these are the real debates on this name that are really fundamental to the value creation story and that’s where we’re going to do a lot more work and I think that’s the kind of stuff that like you just wouldn’t know to do that level like I’m talking about like an 80 by 80 grid comparison of inputs across multiple data sources is it’s just not feasible that a human analyst would do that. But that reveals really insight insightful places to go and dig deeper for investors. >> We we’ll probably come back to this, but like one thing that just jumps out to me is there are some names on Tigus where there’s 80 expert calls a year, right? There’s no I mean maybe, but if you’re saying, “Hey, I’m going to follow 30 companies.” There’s no effing chance you’re going to read 80 expert calls on 30 different companies. Y >> AI can do it in half a second and summarize for you, right? So I I I want to ask two questions on that. The first question, you know, I I I know I’m not alone in this. There are lots of tools that will automatically build financial models for you and extrapolate them, you know, Comcast reports, Q3 earnings, they’ll automatically put it in, update the model, everything. I kind of I build all my models by hand, especially as I get like close to making an investment because there’s something about just going and doing it that like makes me learn and makes me think and all that sort of stuff. Whereas, if I just had it presented to me >> with AI tools, like I kind of worry about that, right? If I just have AI summarize 80 expert calls versus now 80 is a lot going and reading like there is something about getting the the summary that maybe I don’t quite understand it or internalize a lot. So when you talk to firms, especially portfolio manager level people, how are they talking about that trade-off, right, of I could never read 80 expert interviews, especially across 30 names versus, hey, if I just get 80 summarize for me, I don’t internalize. I don’t think it through as much. I I I’m kind of losing that edge, that insight, I’m just outsourcing it all to AI. How are you hearing people talk about that trade-off? Yeah, I look I think it’s a fair trade-off and it’s a very um it’s very understandable emotional reaction. I mean, I’ve had it myself. I went through the experience of building company models and I know that like what you’re describing that like it clicking the drivers and the sensitivities by actually actually building the drivers myself and running the sensitivities and the scenarios through it. Here’s what I’d say though. I think ultimately um like I I believe in my bones that like by 2030 they’re going to be really high performing portfolio managers to this next generation coming up who like never who absolutely never had to go through that like that you know they’ve never built uh a superdetailed M&A model and yet they’re pretty good at leveraging this stuff to to get to insights and triangulate on what really matters and get good investment outcomes. Um, and so the debates we’re having in the industry are more about exactly what you said, which is like until I can fully trust this stuff, it’s still prone to like errors and judgment data that just like I don’t trust or believe in. And I think so a huge part of, you know, like to name our philosophy for how we’ve built is that everything in AlphaSense is fully um fully traceable down to the source. And that’s really important because like when I go through workflows, even for my own research for like go to market, I need to see instantly where that insight is coming from. Otherwise, it just work it just interrupts my workflow. I don’t want to get two hours in and then suddenly have it all be on a shaky foundation. So I think that’s really important. And then the second thing I’ll say is like look AI is very prone to if you prompt it a certain way it’ll pound the table. And I had that experience where I say like you know like build my go to market plan for AlphaSense in the lens of a CR reporting to a board like the pro like the conviction it will give me and certain things and I go like that makes no sense. Like my judgment suggests that like while that might be true there’s a verbatim series of calls we had with customers saying X was true. I know enough that like the TAM of of like that segment doesn’t make any sense for that recommendation. And so I think that’s ultimately I’d say for the investor like the value that comes from judgment and understanding um market structure and business models I think like goes higher but a lot of the like like you know a lot of us in the you know for those who stayed in the industry I left the industry but for those who stayed a lot of the like your your um sense of self as an investor is your technical prowess and your and your analytical skills I think those over time are getting commoditized and what’s much more important is your pattern recognition, judgment, ability to push on these things. >> Look, everything you just said, especially towards the end, just like matches my worldview. So, let me ask this. You mentioned, if I’m quoting, having a differentiated view when you’re making an investment, right? That that’s kind of what you’re looking for when you’re making especially a concentrated long-term investment. If everyone is using AlphaSense and AI to summarize the same AlphaSense expert library, like this is why I don’t read sellside reports, right? is if you read all the sell sides and then you make your conclusions based on that then you’ve kind of just got like the market view or you’ve got that sellers view. uh if everyone’s using AI to summarize and everything, how are people thinking about hey that’s the table stakes, right? I need that I need that basic how are people thinking about hey how do I get a differentiated viewpoint or where where is my special sauce where I’m going to uh kind of have a differentiated viewpoint then everyone else is using the same AI to summarize the same expert calls. >> Yeah, I think with a lot of these like technology innovations it just shifts the baseline. So, you know, I think like the like, you know, you can think of like doing financial analysis before the PC and Excel like right like that no longer was it like having these really sophisticated ways of doing that like that became the baseline if you weren’t doing financial and out right like and so I think where we’re getting to is like it’s always been about access to information and then your ability to have an investment process that yields results that others can’t get to. And I think what AI is doing, you know, we’ve always talked about like markets are efficient. Everyone has exit, but like we know that’s not true. That’s like why we were all trained to like sweat the notes and and go deep into the 10ks and the 10 Q’s and like really synthesize all these disparate things and get to something that was differentiated even before we talk about getting an edge through like alternative data sets. I think what’s happened with AI is just the the the technology is so powerful that any gains from that are getting harder to come by. And so really the the alpha comes from um I think some of the same things we’ve always talked about. It’s like the ability to then have these systems work for you so that you can make decisions much faster with conviction. I’ll give you an example in private markets. It’s it’s like I’ve seen this really like come to play in the last 12 months. And like you know this is parallels as we talked about for like a long-term concentrated public market investor. There are very big parallels to you know a PE fund that makes a couple concentrated bets a year. >> Yep. Yes. And like when I’ve asked them, I’m like, “Hey, how’s this impacting you? Are you look are are you looking at more more names, more opportunities?” Yes. Are you making more investments per year? No. That’s not our strategy. We’re still going to only make three to five. But we are much much more convicted on those three to five as a result of what’s possible. So the due diligence we used to do that would get us to point from investment process from point A to point C like the time to get through point A to B in our process has compressed to a day from weeks. Therefore, the amount of time and energy we spend are really diligent in B and C, which is usually the key debates in the investment committee around where the value creation comes from, where um what are the drivers of the business and our differentiated view on that. That’s where all the real work is going. And >> do you think they should be going? >> So, you said 3 to five and they say, “Hey, we’re we’re more convicted.” >> Uh I think you suggested at the beginning, hey, because they can go from point A to point B faster, should they instead of doing three to five, should it be 8 to 10? Should it be the other way? like if they’re getting more convicted and they’re able to go uh deeper into B TOC, which is probably where they’re addressing the real niche cases and their real differentiation, instead of three to five, should it be, hey, we’re more convicted, so we should be more concentrated. We should be doing one to three instead of three to five. Do you think that should be the right answer? Yeah, I I don’t know because I do think there are some funds who’ve said, “Yeah, it actually has increased the amount of things we’ll do in a year, right?” And there are others who are saying that’s just not our operating philosophy and we’ll only be, you know, three to five that we usually do. And yeah, sure, maybe some it’s been like we’re going to go we have even higher conviction now, so we’re going to bet the fund on one or two ideas. I haven’t seen that as much. I think just the the general principle though is I think everyone recognizes like valuations are elevated. Uh it’s more competitive. There’s more to put to work. And so when we go like we have to be much more convicted to go bid for these good assets. Like that’s the scarcity. And therefore so much more of the work is making sure that we have a credible story for how we’re going to have value creation and a and a real exit. And that bar has just shifted dramatically over the last two years. Not because we chose it to, but we can feel it around us like how quickly people are moving on opportunities with conviction. We have to we have to stay in line. I think that’s ultimately what’s happening. No, I I just asked because exactly what you’re saying. I have some friends who used to do let’s say five investments per year and now they’re like, “Hey, because of the AI tools and I can get up to these faster, I do 10.” And then I have friends who say, “I did five, but now I do five with a lot more conviction.” And but I haven’t had anyone be like, “Because I have more conviction, >> I do three instead of five, you know, so I was just I haven’t heard that yet.” Yeah. But I I do want to understate too though that like the but I didn’t mean to say that um >> while the end result in the funnel might result in like the same three to five the amount of things that get looked at before they even get to that has expanded. I think that’s you know ultimately you think of like how many assets can you look at that might get there if that universe has expanded sometimes materially like some have said I’ve looked at twice as many things now because you know you get a sim you can analyze that sim instantly with AI with all of our internal stuff and get a green yellow red in a way that like took weeks of analyst capacity and so I think that’s been a huge difference. Yeah. So it earlier you were talking about hey 50 years ago you know financial analysis it was literally like Excel spreadsheets it was because before you put it into a the computer there was literally a physical piece of paper spreadsheet that you would build everything out right so eventually that goes online that gets commoditized now there’s all sorts of stuff that will automatically build off Excel so I would posit to you that 60 years ago you could make money with quants in your head right if you were a really good literal financial analyst right you could make money by modeling. You know, think about Ben Graham just calculating networking capital. >> Totally. >> Uh I would posit that maybe 10 to 15 years ago, you could make a lot of money probably better on the qualitative side, right? The financial analysis got commoditized. The qualitative is where all the money made. And I would just say like look at the past 15 years. If you bought if you thought it through Google, Facebook, Amazon, whichever one, these are the best businesses ever. The world is trending that way. The internet infinite returns to capital scale, all this sort of stuff. If you could figure that out, that was not a spreadsheet number. That was qualitative. That got you down. AI is kind of I’m not saying replacing the qualitative, but AI actually really raised the bar on qualitative. What do you think the next skills are that kind of generate alpha? If you know financial analysis already come down, a lot of that qualitative comes down. There has to be some skills that get elevated. Whereas, you know, 60 years ago, if you were great qualitative and you were terrible financial, you couldn’t make it work. But then when the financial gets commoditized qualitative makes if that’s coming down what’s the next skill set do you think? >> Yeah I I give you my thesis and you know there’s a lot to to be proven out here I think so I’ll talk private markets first and I’ll talk public markets because I think there’s some parallels but they’re going to be different. I think on the private market side, I think what’s been happening is like the returns from being really good at, you know, financial structure in deal making have been going. I think that’s like widely discussed in the industry. And so really it’s about like what AI will probably help is facilitating the ability to act really quickly on a much bigger opportunity set and um and win more deals when they fit in your I think like firms that focus on portfolio value creation post right I think there’s a lot of opportunity we didn’t go there here this was more of a lens on like AI and the investment process but I think one of the other things I was at a mid-market PE conference last year and like all the buzz in the room was like the things people could do taking AI to portfolio companies to drive value creation stories. So I think that is a likely place where um I think some of the big gains will come from um you know using AI like really effectively to drive more places where you can look and get um higher conviction on the deals in the way we discussed but I think a lot of it will also translate to portfolio value creation and I think that because I actually think AI has a real fundamental set of use cases where it’s changing operating models and cost structures that make sense in that world >> on the on the private front. This is hard on the public side, which is where I’m focused. But on the private front, I I actually think it’s going to be, you know, if AI is a tool that everyone can use. So you have the old Warren Buffett, you know, if you’re at a parade and you stand on your tiptoes, you get a better view, but then everyone stands on their parade, so no one’s better off. Actually, everyone’s a little bit worse better off. I I actually think it’s going to be financial analysis, commoditized, AI, and a lot of qualitative gets commodized. I think the people who are best at human resources and people are actually going to be the people who uh I think that’s going to be a skill set that gets elevated on the private side but you know I I don’t smoke but maybe I’m just smoking something or you know just too far out there galaxy brain. What about on the public side? What do you think skill sets get elevated? Yeah, you know, I think um this is like the common discussion in every industry, which is like like there’s a there’s a long-term problem with this answer, but I do think um like you know, one thing that we’ve talked about is like this shift from the analyst skill set to the architect skill set. So people who are really adept at using these things to to create leverage in the investment process from like portfol I know like for a concentrated three to five name long-term investor this is probably less resonant but I do think this will impact public markets. I think you’ll see a lot more people using AI in fundamental still fundamentally uh fundamental investment work to to do portfolio monitoring idea generation just like look at a lot more a lot more quickly. Um, I think that is going to change like the stuff you said like how pod shops behave. I actually think that pressure is going to move into more places in the industry. Um, and then long term I think ultimately like the real question mark is like what happens to fundamental investing in the way you described. Um, like ultimately do the do we have this like cohort of people who grew up in the world that you and I grew up in and are deep experts in it and understand through years of investing pattern recognition and we lose that with another group or does this new group that come in leaprog that somehow and start looking at you know like truisms that we’ve all lived with that like are uncorrelated in the data and actually don’t matter and then like there’s a whole different version. It’s not quant investing, it’s not fundamental, but it’s something in between, right? >> It’s one of Yeah, I’m very worried. I I’m I am already a dinosaur. Let me go back to our bias discussion, right? I these this is something I think about a lot. But actually before we go there, just on the public market side, I have to ask for my own curiosity. The portfolio man monitoring side, how are you seeing concentrated fundamental investors use AI for portfolio monitoring? Yeah, I think like really big examples would be um you know I think there’s like these I’ll give you like the extreme scenarios and then there’s like day-to-day scenarios. So the extreme scenarios was like liberation day last year, right? Like we saw people who had these portfolios and um like we’re instantly like what is my exposure and what are the recommendations or where should I go dig across you know like 10 15 names, right? And what AI was very good at was like in those kind of fire drill moments like within hours right had kind of indicated all the places all the different research that was like different from their view and aligned to their view and where their exposure was and then that’s where the work was done. I think that is like an extreme example, but we also saw that again around actually as you described more recently around all this like bearishness around SAS and AI exposure. Like people have been using AI to very quickly get their head around things like that. From an ongoing portfolio monitoring perspective, ultimately what really matters though for this to work well is like it’s only as good as the number of data sets you have access to in the market. But ultimately, like I think the market has shifted from things that help me go find answers to questions I’m looking for to things that help me produce like kind of these workflows I’m constantly doing to now custom autonomous things that run reports as if I had an analyst working on it. So people are using portfolio monitoring to say every Friday I want a report in this format that tells me trends and inflections on these parameters against my portfolio. Right? And that’s like >> those are the types of things where portfolio monitoring is just like always on custom way. Just imagine if you had infinite analyst resources where what would be some like nice to have discretionary things you’d ask for that would make you feel more in command of your portfolio. And that’s the kind of stuff that AI does pretty well, >> right? Let me go to bias real quick. So there’s three types of bias I could see in AI, right? If I’m crafting prompts for for AI, there’s bias in myself, right? If I’m crafting a prompt on a company I’m bullish on, I I can bias myself in the prompt. There’s bias in terms of the company side, right? If I have a AI read every investor day and every earnings call a company’s ever done, well, management teams are generally pretty darn bullish on themselves and they’ve got a lot of bias in the way they present. And analysts aren’t exactly going to get on and scream at the company because then they’ll get cut off and they’ll never get to talk to the company again. So, I I worry about bias for myself when I ask. I worry about if I have the AI train on a company’s data set bias on the company side and then on the expert side if I have AI read a bunch of expert calls as we talked about with expert calls experts in my opinion tend to be a little bit more negatively biased. So if I have the AI train on expert calls I worry about negative bias in the training data on AI. So how are investors thinking about kind of those three biases when they’re using an AI tool? Yeah, I think this goes back probably to the last question of like where is the skill of an investor become differentiate over time and I actually think like look bias is inherent in almost every data set you can look at to evaluate an investment. What’s different now is you can triangulate multiple of these sources with their their biases in a way that was really hard to do um as comprehensively. And so I think what investors are doing is like rather than trying to oversolve for how to eliminate all bias, I think there’s a recognition that they all have that and they’re doing increasingly sophisticated ways of comparing and contrasting sentiment perspective to see where the debates are and then forming their own independent view like who’s wrong and who’s right. like management obviously have a certain bias and as you said these experts might be really negative but where do we think the the truth lies and how can we get smarter on that if we can’t based on what we’re looking at here I don’t know that that look that wasn’t a super direct answer question but like I >> I think that’s just what I see happening is like in a prior world you had fewer sources you could evaluate on the time you had and they had bias now you have more sources you can evaluate all of whom are biased right but you the triangulation you can do across these different sources and perspectives is infinitely higher than you could before and that’s ultimately think great investment >> there’s no perfect answer I hear let me let me end by asking AI and expert calls right AI really shifts the use case for especially expert call libraries but also expert calls and the two which we’ve kind of hidden that I’ll just summarize like number one instead if I wanted to do a hundred expert calls on a company I just wanted to dive really deep I can’t I’m limited by my own time I could have an AI agent like serve as the questioner a hundred things and do that and like I theoretically could have that happen, right? That’s number one. Number two, I can’t read 80 call transcripts on 80 different companies. AI can. So there’s two ways that fundamentally now you can use more expert call library transcripts and maybe you can get more expert calls if you want to. How are you seeing AI and expert calls kind of evolve together? How are you seeing kind of your customers who at the far far tail end of using AI and expert calls? What how are they marrying the two? >> Yeah, I think um so ultimately expert calls have always as we kind of in the first part of our conversation, they’re a really unique source of insight. Um because they’re humans and they’re varied and they’re not going to give you yes or no answers, right? You can tease out a lot from them. So I think the first thing um you know when we talked at Tigus as we’re building like the business and the expert called we were saying like this is probably one of the most unique data assets in the market. It’s like like you can think about the amount of expert knowledge that sits out there on all the investable markets research names companies and it’s off platform. It doesn’t it’s not you can’t extract it anywhere. And so I think AI basically, you know, we had these business model innovations that opened up the amount of expert calls that could be done and how much it could be captured and searched that was like version 1.0 of like the Tigus model versus traditional. Then two, what AI is basically doing is playing like further on that trend which is like now you can have you know tons of AI uh if the the next gate was investor time to actually conduct those calls like that’s no longer a constraint, right? So ultimately it’s just the amount of resourcing available to go run at all these things. So I think to answer your question a little bit abstractly, I think one thing that’s really interesting is the amount of expert insight out there that can be captured, queried, looked at longitudinally and compared and contrasted over time. That is like a real-time data asset that’s building every day. And that wasn’t true in a few years ago. And so I think that’s where I think investors, some investors are really recognizing that and recognizing also especially really large ones that they have their own. They do massive amounts of expert calls. Some of them are crossover funds public and private and they’re comparing insight against those. So now you suddenly have two different data sets. What’s happening in private markets that we can see and public and as that helped shape our conviction on different names. I think that’s where um AI is a accelerant of a trend that was already happening in the market around expert networks and I think investors are really seeing this as like one of the more unique data assets that is being built and they want to stake in it and they also bring their own proprietary stuff that others can’t see to it. So I think one of the biggest things we’re seeing is a lot of investors initially were just like looking for an expert transcript library and AI tooling to search it. increasingly they’re also bringing their internal content alongside and that’s where you know this is much more relevant I think for larger well-resourced funds that do a ton of work but that’s a big trend in the market like they’re able to see things that others can’t because of all the things that um all the research that they’re doing in the market across disperate teams >> softballish question and then I’m I have two more questions softballish question and then I’m going to end with a true knuckle ball question softballish question we focus on investors and and public private AlphaSense does a lot of companies. Are companies going into the expert call library and using expert calls to source and think and change strategy or even just seeing the questions investors are asking to change up kind of how they’re responding to the IR or you could also tell me, dude, the companies are the experts. They don’t need to go to an expert library. They can just call up their supply manager and have them. So, I I’m kind of curious if you’re seeing companies kind of adjust and adapt to how both expert call and AI libraries work. Yeah, look, companies are are like a big part of our business. Um, at AlphaSense, we uh almost 40% of our business is built on corp dev, corp strat, and IR teams. And so, they’re huge consumers of the same um insight that investors look at. Their use cases are nuanced and slightly different, but I think this went from an industry that was, you know, very focused on fundamental investors to now becoming very much a core part of how, you know, sophisticated corporate decision-m is made. Yeah. I I was just that’s exactly what I was wondering if they’re using it or not. Okay, knuckle ball question. Super weird, but >> uh if I can give you the background, you know, in 2011 to 2014, there was this big Chinese reverse merger fraud in the stock market, right? And it was you would read the 20F of these companies and they would say, “Hey, you know, we have 600 million acres of woodland in China.” And people would say, “Oh, well, an acre of woodland’s worth a dollar. 600 million this is worth $600 million. It’s a buy.” Well, it turns out 600 million acres of woodland like doesn’t even exist in China. Like all all these things were frauds. >> I I I wonder if there is a return to if the scale and returns to fraud improves in an AI age because you know if you can get if you’re a company and you’re running a fraud and you’re getting the 10K and AI is just detecting it and they don’t have that human who’s going and saying dude their headquarters is like a PO box in Boca Raton. Now, yes, it’s the front page of the 10K, but you know, the the human person who goes and says, “This management team is is out of their mind.” Do you think just AI like kind of increases the return to fraud or the return to like far-left really nasty companies because if they just get bucketed into this big quantitative AI pool, it’s kind of tougher for them to detect. Does that make sense? >> Yeah. Could you um can you say one more time or reframe just slightly for me? Just >> so I I’m just wondering like if if I’m thinking about the the Chinese reverse merger frauds is really what I’m thinking about, right? >> If I went to Alpha Sense and I said, “Hey, find me undervalued companies on an asset value.” If it was just reading the Chinese reverse merger fraud 20F, it would say this is the best value by in the stock market, right? Every other pier with woodland acres trades for a dollar per acre. This is trading for 5 cents per acre. And it would be telling me buy, right? And there were a lot of these things out there. I just used the woodland, but there were a lot of these things out there and it took somebody like kind of calling around going snooping and plenty of investors fell for these things. But I wonder if in four years, you know, all these things that a human reading it would say, hey, there’s something wrong here. Or a human who like literally flies and says, “Oh, you know, this $4 billion company, their headquarters is in the third floor of a mall. This is kind of weird.” An AI wouldn’t see that. So I’m wondering if like AI increases the returns to fraud because as you get more quantitative money and as you get more quantitative things that kind of human check goes away. >> Yeah. So two thoughts on that interesting question. I think you know first thing that comes to mind is like ironically AI is being used a lot in the fraud detection uh industries right like to find patterns and um and things that just indicate that something like is a miss. And so I’d say that I don’t think there’s anything inherent about AI that suggests um it becomes an accelerant for the fraud that’s possible like because I think equally it can be when used right a pretty powerful weapon for detecting fraud in pretty idiosyncratic and straightforward ways in other industries. So I don’t think there’s anything that you know like stops it from looking at you know like to your example there like go looking at visual imagery satellite imagery of great point right and being like hey there is something that is mismatched versus company guidance like we can go see from imagery on shipping lanes that like the traffic is not even remotely what company guidance is. I actually think it could be powerful and helping investors parse those pieces that used to be required by having someone on the ground or go going and sending someone to go look. Uh on the other hand, what I will say and like this goes back to the core of what we’re discussing is like just like AI ultimately does some things in a superhuman way and I think ultimately that is synthesis uh and finding really discreet details and connection points in a way that’s very like humans cannot replicate what AI is able to do in that domain. On the other hand, it is absolutely not at the level of a PM or sophisticated investor on anything that remotely looks like an investment recommendation. Right? So, think of AI is like I think what I get really excited and bullish about is I love underdogs. I ultimately think what AI has like enabled here is like it has absolutely collapsed the resource advantage that the biggest funds have had versus your mid-market funds. Like you can basically go do stuff as if you had a crack team of, you know, incoming KKR analysts, right? And what they’re able to do like it can do a lot of the stuff they can do, right? But what it can’t do is what very likely you can do, which is look at that report and your spidey sense goes, “This doesn’t make sense. I got to go dig deeper.” Right. >> No, it’s funny you say level the point because I do worry like as a small investor like you you have a lot more nimleness, but you mentioned it when you were talking about AI use cases. the big funds with like lots of offmarket data. I worry that there will be no more role for a small investor because AI levels the playing field so much that it’s larger funds with that are you know sending their analysts to every every uh industry conference out there and having them put notes from every industry conference and getting like all this data analytics that just a small investor can’t do. I I I worry like the returns to scale actually acrew up and like there’s kind of only a place for larger funds that are generating literally proprietary information by sending people in person to do all of this different stuff, but probably a conversation for another day. Ryan, this has been so much fun. Uh I I as you can tell I I think about the stuff and I think about where it’s going all the time and you’re you were the perfect person to have on. Any last hits you want to do, expert calls, AI, any I think we’ve been pretty comprehensive, but I could probably go for another two hours to be honest with you. >> Yeah. Yeah. No, look, I really enjoyed the discussion and like I think the number one takeaway I just have for your users is that um like I think there’s going to absolutely be a role for fundamental investing. I think the the thing >> I got my fingers crossed every like absolutely and I think these debates that we’ve talked about like whether general being a generalist or a specialist like those like I don’t think that like there will be wildly successful specialists and generalists in the AI future like I don’t think that changes at all. I think some big funds will like have absolute advantages from what we’re talking about, but then I think there’s going to be a lot of like smaller funds that are really nimble with this stuff that out compete them. I don’t think that story changes. I just think ultimately, like all major technology changes, the baseline for what’s possible will shift and so people will have to figure out very quickly what is table stakes to not fall behind and what’s true advantage. And I think we’ve talked a bit about what that looks like in practice right now. There’s a lot of hype, but there’s also a lot of real stuff happening. So that >> perfect. Well, Ryan, hey, look, I I really appreciate you coming on. Again, these are just things I think about all the time and I appreciate you walking me through and helping me get a little bit better at using AI and thinking about how to use expert call. So, Ryan Benedy, Alsense, thanks so much. >> Great. Thanks, Andrew. >> A quick disclaimer, nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.

Description:
00:00 Intro 01:00 Optimal Capital Structure for Microcaps 10:00 Debt Deleveraging Stories 12:50 Debt Levels in Different …

Transcript:
welcome welcome welcome how’s everybody doing hope you are doing well my name is Andrew with Focus compounding on air live with Jeff genon Jeff how’s it going today it’s going very well Andrew how’s it going with you it’s going great we hope it’s going great with everybody else as well this is the first time you’re tuning in with us thank you so much for joining us be sure to check out all of our content that we push out into the investing Universe the best way to do that is to follow me on X Focus compound go to focus compound.com to get access to investment writeups from Jeff going all the way back to 2005 and of course if you’re interested in learning about our Money Management Services you can reach out to me at andreid Focus compounding tocom so in the last podcast that we recorded uh we briefly discussed um this question that somebody had sent in but I thought it would be good to dedicate an actual fullon podcast to it since we spoke a lot about movies and uh the movie industry in the previous podcast uh if you want to send in a question send it in email me andreid Focus compound.com we’ll pull them put them on the screen just like right here and we’ll talk about them on the podcast uh somebody asked could Jeff discuss how he thinks about optimal capital structure specifically for micro cap names that may or may not have access to investment grade Credit in addition how would he think about debt deleveraging stories that offer more upside via leverage when compared to some in quote higher quality names within the same industry how much credit in valuation does he give or not give when something is highly leveraged and he likes it verse unleveraged and he doesn’t like it but it might not change in everything in between feel free to take that in any direction okay um All About leverage yeah so this is a very complicated subject because I think when I talk on the podcast people think that I’m really against debt um and there’s a few parts to that one and Ben Graham I think said this in um uh the interpretation of financial statements I think but basically any company that has net cash has to be worth more than it would be if it had net debt and any company with net debt has to be worth less than it would be if it you know had had net cash right so in other words whether we always talk about in terms of Enterprise Value instead of market cap or something what he was saying is we can apply some sort of idea that if they’re piling up cash that might they might never get good use you should not ding a company to say the fact that they have a lot of net cash and haven’t done anything with it it means that they’re stupid and so I’m going to apply that they deserve like a lower PE or something on the other side sometimes people say oh look how smart they are that they’re using leverage I’m going to think that it should be even higher um uh my uh feelings about management and kind of the multiples I should put on it so so I think the um in terms of absent anything else about what our our feelings are about it it is better to have cash than to have debt just in terms of the valuation and you need to incorporate that into it having said that having debt and doing smart things with it like say um I think Nathan’s which is was maybe micro cap at the time borrowed and paid out a special dividend um I think that there have been ones that have borrowed and bought back a lot of stock so that can make a lot of sense Nathan’s you know outside of covid was a very very predictable sort of business now my guess on that actually is that some and I could be totally wrong about this there were was someone associated with Nathan on the board and everything that had a history with other companies that had used a lot of Leverage and which it’s more traditional to use leverage in those things that are bigger companies so my guess is that that may have kind of influenced things you see this more often with like private Equity firms that maintain some stake in a company that’s been public for a while sometimes they kind of recapitalize them instead of having some other exit right instead of selling the whole company so I think that’s what trickles down into that is the thinking from other parts of the uh how they work with other portfolio companies um the the uh we talked about The Outsiders John Malone has a chapter there and you can look at John Malone influence companies today that would be an example I’m not saying that I like every John Malone company in what they do but if you were looking for what I think is an intelligent use of debt I think you’re more likely to find that among those kinds of companies and I don’t think that non-investment grade um credit necessarily means that you shouldn’t be using it um but I do think that things need to be used in an intelligent way for creating value and that they need to be Str structured the right way many companies have debt because they need it in some form or or more accurately they felt they needed it to grow a lot of it is very shortterm and um a lot of it is also uh the companies are not highly liquid in terms of what things they have on their balance sheet off setting that so their current position is is sometimes quite weak and everything so I I do worry about that I also always say to investors who say they like the leverage like you know like Hostess was a public company remember and people would say oh I like the leverage on and stuff I’d be like look there if you want you can leverage safe low beta stocks yourself if that’s really what you’re into if you like that this thing bounces around a lot you could always apply leverage to something in your portfolio I’m not recommending it but it you know sometimes it seems like people like um they want to own the Johnson Johnson’s of the world but they want them to move a bit more and what that really means is you want to own them on margin or something is what they’re really saying um and but when the company does it it’s fine but I would never do it myself it’s not as dramatically different as you might think the same thing if you used like leaps or things like that so sometimes I think people like the idea of owning good companies but they like the whatever we want to call it the more exciting gambling whatever aspect of it that leverage provides so I worry about that a lot um but for companies where it makes sense I I I like it and usually that is super rare in micro caps because you need some sort of like financially oriented person maybe they’re a second career maybe you know something else like that you don’t see it naturally occur I would say that often in in things like micro caps um I I see a lot of you know I mentioned the John Malone thing because there’s very very few examples I can think of companies especially very small companies where them doing a lot of extraordinary events a lot of um issuing stock buying back stock putting on debt paying special dividends whatever is being done and it’s smart the more transactions you see like of that usually the worse the company is and you’re seeing a lot of at the market offerings or or whatever things a lot of delu of things they’re they’re they may be telling you that it’s really good stuff that they’re doing that’s their spin on it but when you look at the numbers I I don’t see it so uh you just see more of a promoter type aspect to it than a long-term owner um having said that if you look at the history of Berkshire hathway it was a tiny you know not by today’s standards it wouldn’t be a micro c cap if youjust for inflation stuff but it was highly liquid and not on things that people would have found easy to trade and it was doing all sorts of things it did it borrowing at 8% and doing this and that in the first few years buying things and everything and it was all very smart right and we talked about John Malone and TCI and all that that was obviously very junk credit um the other side of it too which I’ve mentioned before is there’s all these Factor things that include like the beta people talk about low volatility things um I’ve always thought that that you could replace that to a significant extent if you had an ability to understand the credit risk of a company I do think that companies that are perceived to have very low credit risk the stock stocks do trade higher than stocks that are perceived to have very high credit risk the way that works with the market though tends to be pretty fast the market gets worried about it seems to focus on that when there’s so high uh there’s so um great credits that they’re like AAA type stuff and they realize this and readjust and that they’re things that are on the verge of being ready to be headed for a real liquidity crunch they don’t seem to worry about small amounts so I do notice that there the market I don’t think gives enough credit to a company that has one times evid do in net cash and doesn’t punish a company enough for having one times uh um iida in in debt you know at what it starts to worry about is when it’s up there at five times or something when there’s a big pile of cash it doesn’t notice 5% of the market caps in cash it notice is 25% it doesn’t notice one times uh de B but it gets real worried at five and so it happens quickly that way um and I would separate the quality of the business from the quality of the the credit quality right so stocks often people write about them as if they’re junky and because they are in the possibility of danger of bankruptcy uh delution whatever because they have a lot of debt and companies that have beautiful balance sheets they write about as if they’re great but the business and the corporation are kind of two separate things um you can have a really high quality business that’s choking on too much debt and you can have a really low quality business that because of its past is really well capitalized has no danger of ever heading towards bankruptcy or anything what are your thoughts on debt deleveraging stories uh generally don’t like them as much just because I feel the returns that you get from them are usually pretty low in terms of the use of paying down the debth MH but there could be ones that are exciting if the price is really low right um personally I you know if I was picking a part of the cycle to be in I would rather be in the stock that can have debt and doesn’t yet and it adds the debt while I’m invested in it than the company that has a lot of debt and now says it’s going to pay it down now that might change in the future but debt has been quite cheap and so I’ve not been investing in companies where I think the returns inside the business or from buying back the stock would be worse than the return than um the returns that you could get from paying down debt right because you have to consider when you pay down debt there’s a there’s an tax aspect to it and other things but even today it even if is pretty expensive debt if you have like an better than about 8% after tax in cash uh investment opportunity it probably makes more sense to do that than to pay down the debt now it may make total sense to pay down the debt for safety purposes especially if there’s a chunk of it coming due sometime soon what I’m saying is almost more if you imagine like a very long-term Term Loan and so there’s no uh a bigger um maturity upcoming or something like that you know equalizing it as if it’s perpetual debt we’re thinking about it versus like Perpetual projects that you could invest in but it’s hard to come up with answers that paying down debt actually makes more sense than like buying back stock in a really good business or certainly what companies claim they get in terms of eida payback periods and all of that but that might be changing you know um it it could change like on the very short term it looks like it but still we’re talking about longer term things if you look at the uh yield curve and stuff that aren’t unusually high so um I don’t like them as much usually but sometimes they can work out because the they’re so cheap right if if people thought this thing was going to go to zero or something in the common then sometimes it can take a while for them to recover from that and so people can just see this much debt and not be happy about it but in general I would prefer the opposite um I would prefer that there not be debt but they’re telling me that they’re willing to put debt on that would be much more exciting to me than than there is debt and we’re going to pay it down would you think about debt on like an energy company differently than you would think about debt on like a entertainment business right we just spoke about movie theaters do you think those are two separate things entirely it a little bit but it depends more than I would have guessed about the people running it and their thinking you would think that you know I’ve invested now somewhat in energy things um oil and natural gas and other things um and it has been a bigger Factor what the capital allocation attitudes of the people running it are than what the cycle of prices are it has been bigger that way than I would have thought and you could have predicted that ahead of time in terms of their behavior and how they talk so I’m not saying that it’s 100% but it might be more like 50/50 who is is managing um Capital allocation and what industry they’re in rather than 100% what industry they’re in so it’s true that a more predictable say entertainment thing um is probably some place you feel safer in terms of them being able to make predictions right Tom Murphy would not have had the returns that he did or probably jum Malone if they hadn’t been in industries that were more predictable that way owning Media stuff it’s a lot easier to know how much debt to put on something how quickly you can pay down and everything than if you’re having to say well in this projection is oil going to be $90 a barrel or 40 in year three yeah you can’t pay down debt if that happens right um whereas he doesn’t need to know that much what uh the advertising Market is going to be to know that he can pay this debt down when he acquires a station within three or four years or whatever so yes but I’d say it’s at most 50/50 I still think that who is making the decisions is as important as the industry is what I’ve learned mhm mhm what’s the most leveraged company you’ve ever invested in off the top of your head is there anything you could think of I’ve invested in financial services things so in theory depending on how you count the leverage they’re by far the most leveraged ever um they would otherwise would be we Watchers okay which was controlled by private Equity thing basically yeah and the stock almost went to zero and could have gone into bankruptcy if it had been a um different kind of time in terms of Financial Market stuff now it went from probably $35 to $4 to $100 back down to like four or something but so you traded it way right you short it on the way down rebot it on the way up yeah got it yeah so you you also could have made uh in there are some people I’m sure who I mean I know people who made 10 times their money in it uh buying after I did and and selling after I did and there you could have lost everything in it basically um because I do know people who who had that experience um that was a that’s a combination there though so what happened was that was a highly highly um operationally leveraged company but very very predictable so historically it had been very predictable but it had these very high operating margins sort of like a if you want to think about it like um a daily newspaper or something right say you had a lot of Leverage on that and then something changes that’s exactly what happen so um uh it’s not even called Weight Watchers anymore the companies now goes by WW International and you also would have to go so far back in terms of uh years to see what I’m talking about you can’t see the good years anymore but if you look it had probably I guess you could see a little bit 2014 2015 that’s when it’s having the problems is then already but you can see that the what was the um well you can go to the cash flow statement that might help so if we look back what was Cash Flow in let’s say 2014 or 2015 232 million was 2015 was 55 million 2016 119 million yeah yeah now one thing you can see right is that if this company had never so basically a private Equity type fund took it over it was kind of a the original thing I guess it was a sort of carve out spin out whatever from Hines or something it had a corporate owner at one point and then and um it was basically almost half owned by a fund and um they paid made payouts several times of like uh they buyback stock I don’t know if they kept their proportional interest which would be like a dividend to them if they did but um they would like put on a lot of Leverage and buy back stock there’s a few issues that I had with it one because they came from a private equ typ background they were they were very um indiscriminate about the stock price so they saw it as leveraging up and buying back the stock is just to add leverage to it to improve the capital structure in terms of optimizing it not worrying about whether you’re paying $80 a share or $40 a share right you just do it because um it you want to add leverage and then the other thing is it is true we can see what debt does to a company truthfully so you want to look at the stock if you look here you can see where I’m talking about where it went from yeah so what is it years that uh so it had a high previous high of 2011 and then it looks like the low was 2015 yeah okay but then after that it went to an all-time new high right yeah it went from about four bucks to yeah $100 so if you want to be in really leverag things here’s the thing it was both operationally leveraged and fin financially leveraged yeah so it is true though that this company would not as much as people are say oh things change and now of course you have weight loss drugs and that’s why people expect it to be out of business but um it actually would you know as a stock without applying high amounts to debt to it it would never go broke because even if you just look at the business the business really doesn’t tie up capital and it and it has good cash Generations such that cash flow from operations is virtually always positive as a rule you don’t I would say and I know everyone uses eida but I would say uh you want to be much more careful putting debt on any company that ever has negative cash flow from operations than you do a company that even in the worst years has positive cash flow from operations generating cash flow from operations is really the most important thing for being able to um uh make payments on debt and everything and then also there’s the structure of it and all of that but um this stock was always extremely volatile that way mhm it also doesn’t really have recurring Revenue exactly which is a bit of a problem so it would spend very high on marketing to bring people in but they don’t they churn fast now they churn slower on Weight Watchers than they did with any other thing but all diet things all weight loss things churn at very high rates so and all Fitness things too people don’t actually keep gym memberships for long so they churn no matter what it’s not you know you’re better off in a business where you’re selling junk food and cigarettes and booze and stuff cuz people don’t churn on that stuff they keep using those things whereas if you have uh gyms and weight loss things they they turn off of those you know if there’s a recession or something people quit the gym and take up smoking again and and um so they don’t reverse that right so there’s always a problem that people churn too fast so they might go for nine months or something on this program and then quit um and so that means you have to spend a lot of money to bring them in next time so that was part of the problem too um obviously it could work out very well if you had um if it had improved back to the state that it was before and had a lot of Leverage and then it gets worse if it if it um didn’t and I would say the of those things the most important one was the lack of recurring Revenue that you were investing in something that is very hard to sell that people generally I think it’s good to be in a product that people use even if they don’t necessarily have High um good feelings about it and stuff rather than a product where people is more aspirational where people say they use it and they don’t you know and so uh so lack of recurring Revenue I think is a huge Factor there mhm are there any other things or anything that you think uh as it relates to micro caps people should be aware of or think about as it comes to leverage on those businesses well recurring Revenue like I said it’s very very important and there’s very few micro caps that have high amounts of recurring Revenue now something like Nathan’s which you mentioned does but most don’t so that’s one of the biggest problems and then um the other problem is that you you it’s kind of mixed you often have owners who are like either the people who took the company public in some cases but often someone who’s like a owner operator and sometimes that means that their operation stuff is focused on the uh business that they came from which may not have that much of a financial aspect to it that they’re focused on and so they’re less likely to run them in a in a way like that I think it is companies that were at one time owned by private Equity or something like that that are more likely to have that kind of behavior so someone who was in the company that was involved in a small transaction that was financial and is still public or then went public again or something is much more likely the thing um that you would see this kind of thing in then like a family business that does this because what they’ll do is they’ll just it’s not they won’t put leverage on it but they’ll put leverage on it buying you out and they can stay on as management you know there be a management buyout it’s not that small companies don’t put on Leverage they just don’t put on Leverage as like tiny companies that stay public and do smart things they’ll just do it for themselves you know got it cool well I want to thank everybody so much for tuning in with you both of us if you have a question uh that we can pull for the podcast uh just like did for this episode email it to me at Andre focused compound.com be sure to hit that subscribe button wherever you are listening or watching us here today and of course if you’re interested in learning about our Money Management Services reach out to me at Android Focus compound.com I don’t think everybody so much for the support and we will see you in the next podcast take care

Description:
00:00 – Intro 01:00 – Earnings vs. Asset Valuations 03:50 – Three Ways to Look at a Business 06:00 – $NC 10:45 – Buying on …

Transcript:
welcome welcome welcome how’s everybody doing hope you are doing well my name is Andrew with Focus compounding on air live with Jeff gon Jeff how goes it today uh it is going very well with me how is it going with you it’s going great we hope it’s going great with everybody else as well if this is the first time you are tuning in thank you so much for joining us be sure to check out all of our content that we push out into the investing Universe uh the best way to do that is to follow me on X forly known as Twitter at Focus compound uh if you would like to get access to investment right up from Jeff going all the way back to 2005 go to focus compound.com and you’ll get all of that for free at our website all the information is in the description below so today’s podcast Chef we are going to be going over a question um and uh if you’re listening and you would like to send in questions email them to me at Android Focus compound.com uh in the subject line just put question for the podcast or something and we’ll queue it and we will pull it for the podcast so this question says when it comes to valuing a business do you believe more in asset valuations or earnings earnings aren’t guaranteed to be there in the future depending on the industry of course but assets are only worth what you can sell them to somebody else do you think a pizza shop should be analyzed based on how much pizza they sell with the value of its real estate and bank account should they all be assessed when determining a value for the business this is the question I’ve been thinking about in trying to understand valuation so we could run with that get your thoughts on that I don’t know if there’s a difference in companies or how you think about it but yeah let’s go from there so asset valuation vers earnings valuation right so here I think that this is a great question but it’s also a it’s a great great question but it’s also really dumb idea which is that you would value something one way or the other I wrote a blog post a long time ago about assets earnings equivalence and one of my points about that was ultimately if you’re appraising things correctly you should be able to convert one side of a company um entirely into the other in the sense that you should either be able to come up with a with a um estimate of what the market value of everything would be um or you should be able to come up with an estimate of what all the earnings would be if everything was put to say it’s highest and best use or something like that so this comes up all the time in in Banks insurance companies Etc where interest rates were near zero you would say okay well let’s take the balance sheet and let’s apply different r rates to it that it will earn more in the future so you convert those assets into earnings this is the biggest problem with Burkshire people want to do it one calculation or the other they’re both really the same thing you know assets are things that produce earnings and earnings really turn into retained earnings they can be paid out or other things but they just turn back into those assets in terms of that’s the form that they take and I tried to mention that way in terms of like you know with physics you know um the same idea in terms of the equivalence there I wanted to give that same idea with earnings and assets and I think it’s really dangerous for people to focus on them as one or the other through time they’re the same thing right you can take earnings and turn them into assets you can take assets and turn them into earnings you can either take the earning the assets and make them more productive and everything they generate earnings or you can sell them invest them in other things that have earnings right so in the case of some companies it may be that you know that they’re stuck in a mindset that is going to be harmful to the company over time because they have other concerns besides you know Financial ones and then maybe it’s a family run thing maybe this thing’s been around forever and they’re stuck in this industry that will never get better whatever and they won’t follow a path that would be the highest and best use of the things that you see there with the assets then you could say okay well then I have to Value it based only on these meager earnings that it has and uh it’ll never sell but usually even then it does sell you know someone will die it will sell one day so there’s three ways to look at a business right you can look at what the assets look like right now and you can change them to the market value and everything that’s sort of the Marty Whitman way of doing it you can look at the earnings and say okay these are the current earnings and I’ll use that as it or you can use the basically the net present value of the future cash flows which assumes all the capital allocation decisions the company makes and all that of all the way so this is sort of a triangle and using this you can kind of triangulate for Value the most AC the most important one to know is the npv it’s also the one you have the least confidence in the hardest and has the most uncertainty yeah but it’s by far the most important the second most important is the earnings which also is less certain even in terms of the way that people just take reported earnings as if they mean something but even in terms of you have to go through the earnings and adjust them for all sorts of things to get an idea of what earnings really are earnings are actually quite more complicated concept than assets or cash flows usually at a company um they’re much easier to to to um they have a high subjective element and timing element to them and then um assets is the one you would be most uh um able to come up with a number for but it is the number that would mean the least so that’s the problem that you have the one you can have the most confidence in today is what it looks like is what the assets look like what they could be liquidated for ETC today but it’s the least important number to know usually and then the one that’s by far the most important is the npv number right so if you’re looking at Burkshire haway when Buffett takes over you know the asset number very well it’s actually kind of inaccurate in that it would turn out that you wouldn’t be able to liquidate as well as you had hoped or any of those things but you have confidence that it’s not too expensive but the number that you really need to know that this company’s going to do 20 30% a year for for decades is to know that MPV number but that depends on Capital allocation and what they do with everything which is much trickier for people to figure out and includes things above the business level and really what the the corporation is doing and how they approach things so you use all three of those things to try to see what could be the case and I always use all three of those always when looking at companies um but you then have the question of like margin of safety and how certain are you of some things happening and sometimes it also creates a difference in terms of valuations and maybe how quickly people recognize things in the market and whether you should invest in something or not so if you take an example like Naco I would have invested that on the basis of the idea that you’re going to have earnings over time and that will either turn into assets or as we said like an MPV type thing to a large extent I was not off on any of those estimates over five six seven years whatever so it has followed since the spin-off much the same path that I would have expected in terms of what it’s generated and how those things have kind of aifi on the balance sheet and everything so now it looks cheaper on like an asset basis whereas when it started it didn’t look cheap on an asset basis so it it migrated from that perspective from being something that maybe look cheap if you read the contracts and tried to understand the business to something that now looks cheap on stuff like priced a tangible book but all of those things that you see there came from buildup in some case there was contract termin and they got things from that in some case they actually you know um minerals were used up over time you know natural gas was brought out of the ground and sold and everything and they collected um their royalties on that and that turned into cash and in other cases just earnings that piled up on the balance sheet because they have some dividends and they’ve only recently started buying back but it followed the path that I would expect from the time of the the spin-off um and yet at times some people would focus there there’s different people who send things in and they would say oh well here’s on the cash flow thing why I like it or why I don’t and then they change at different times whether they like the stock or not then there’s other people say well on the balance sheet it’s not cheap enough at first right because has these contracts that that don’t have the same value in terms of what you’re seeing versus say cash just sitting there on the balance sheet but it also has has dumb things on the balance sheet too and they’ve written some of those off but they just have like you know loads of coal inventory in places that probably you know you couldn’t be so sure that they ever get used and they’re counting that as if that’s an asset that’s good but they’re maybe not paying as much attention to the fact you have a contract that as long as this plant keeps operating you’re going to keep making money now the plant could shut down any day but the cold could be worthless any day too um so you want things that are um attractive in the way that you look at them but you do have to be aware that most people are not going to take that kind of view of all the different ways you can value a company assets earnings and this MPV type thinking Some People your growth type investors um VC whatever type people who think of the videos and stuff today are only looking at the MPV type stuff they don’t care what the earnings are today or what the assets are then you have your hard Bend gram types which might be looking at the assets even in cases where that doesn’t necessarily make much sense because we know things about the future um and there are some cases where this becomes dramatically different the big ones are in cases of like insurance and banking I side with Buffett on that I’m very happy to buy a bank at two times tangal book or more without any hesitation if I like the the the actual value of the bank that way and yet I also won’t buy other Banks as 0.9 times tangible book because some banks have a an insurance companies but some of them have a real business with a real franchise to it that’s based on relationships that they have and you know lower cost deposits than others and advantages in different ways on fee businesses whatever but it’s a it’s a service business that way that actually has a lot of built-up Goodwill in it and then others basically are paying competitive savings rate type things and then like you know investing in the equivalent of just what would be like a portfolio of mortgages or something you know what I mean that what they say they do might be a little different from that but it’s awfully close to commodity on this side commodity on that side and so that business might be something that earns 6% return on Equity at a reasonable leverage ratio and someone else earns 20% and and it’s it’s not a risk-based thing it’s that there’s real um economic assets that aren’t captured on the books in one case and not in the other um it would be most noticeable if you were buying something that was started out from scratch that way if it acquired its way to all that then there’ be intangibles and things that you could look at that would look different but it becomes especially different that way so it’s the same as like with c’s you know there’s nothing wrong with paying a high price for something um on an asset basis so I have no problem that way uh of something that has no I I’ve invested in companies that have essentially negative equity probably I literally I don’t remember if IMS Health had negative equity when I invest in it but it probably may have it was buying back stock so I probably had no tangible equity no no Book value mhm what do you think generates better returns in the short to medium to long term buying on the balance sheet selling on the earnings or buying based on a cheap earnings multiple well I I think the thing that tends to make money is something where the effect is really really big so I don’t think that you make a lot of money in earnings or assets or any of those by buying at things that are close to the uh amount that it actually is worth right so when people say does assets work better than than earnings or something with a lot of people thinking today that assets don’t work as well I would disagree with that I think that assets work really well if there’s a huge discount right so I still think that they would work in a really big way if you’re getting a huge discount I think that people tend to be overly aggressive in writeups on the asset portion of it um a good thing we talked about the movie business and one thing to keep in mind with that cuz this applies to investing here is if you have movies that you’re now making and putting out not in theaters but just to streaming and all that you could make small amounts of money on everything you make you could have a well-controlled budget you know what you’re going to get paid for putting on these different Services whatever but you don’t have any possibility for these big windfall profits from a surprise run in theaters there’s not much of a cap on how much you could make if you happen to have something that everyone loves and if you don’t have that then you can’t make it this huge upside what I think the problem is with many of these asset things that I see in writeups is there’s not enough upside to be honest so you may be able to prove that there is some strong protection on the downside right or that it’s at 80% but I don’t think you want to buy something at 80% that’s going to go to 100 but that can’t go to 200 you know it’s much better to buy something on an asset basis that something could go really right with it and you can make a lot of money MH um so we talked about you know Encore Wire right if that cheap on a price to book or something at some point well in a short supply for the industry it actually makes a ton of money and it has a strong position in not a good industry really or um we talked about AAR precious metals right or even if we talk about things like um where people have low hopes of it being exploited anytime soon so Mau land and pineapple right it’s all about oh is there Catalyst soon or not so sometimes the trades at a big discount to what it might be worth because people are going I got to wait 10 20 years or they’re thinking this is going to happen at 10 or 20 months you know so there’s a big possibility for a big payoff a lot of times you’re capping your upside on the asset things today I don’t think that was the case 50 years ago but I think that that um the upsides that I see are really small on things that are bought on the assets usually mhmh do you think if you’re investing in so you had mentioned AAR precious metals oncore wire those are more cyclical Industries and if you’re investing in them cheap on an asset basis perhaps you’re at the point in the cycle where there star for Capital maybe supplies coming out you could hope that the cycle May you know the pendulum would swing back the other way right if you’re buying it on a cheap to asset basis you could sort of have that that uh Tailwind you know well you’re investig situation I don’t look at current period earnings at all really when I buy a stock I’m saying what will it earn in three years or something I’m using like what’s the long-term sales what’s the constant things that way and then looking at kind of what that could mean so you could be using Book value could be using sales and then you’re applying some sort of multiple to it but I would have no hesitation to buy something that’s in a period where it’s making nothing you know uh a insurance company that has made had a you know a combined ratio below 100 for the last 20 years and now it’s uh uh 101 this year you know um or let’s say 107 or something so that it’s investment stuff wouldn’t offset the loss so it actually reported a loss it wouldn’t bother me I’d be happy to buy an insurance company making a loss I I bought other I mean I think I literally bought Nintendo when the one time it made a loss um we talked about Airlines I’d be happy to buy Southwest when it made a loss it wouldn’t bother me uhhuh is that because of the brand of Southwest it’s such a dominant business that’s been around forever they have M shares staying power I mean this is a company that you know is is uh a very high quality business no it’s it’s like would you look at would you think differently about that if it was not a Southwest if it was like a micro cap or a company that isn’t yet proven or haven’t been around has not been around as long as Southwest has been no it’s just trying to to not be stupid to use your mind here there’s no reason why having a 12-month period where something had a loss should matter it just doesn’t make any sense I mean C’s candies I’m sure reports losses for quarters during the year because it’s a seasonal business um you know the question is did it outperform all the other companies in that industry or something it would be much more alarming if if a company and we showed this with Southwest over time the major Legacy carriers have closed the Gap with Southwest there’s no doubt that’s the thing I’d be worried about that happened even in years where Southwest had good margins and everything um so it’s that relative Advantage the same thing with insurers if you posted 101 combin ratio when everyone else had a 93 in your industry yeah I’d be worried that something happened and hopefully it’s a one-time event um but it wouldn’t bother me if you were still keeping much of your relative advantage over others so it’s you focus on the things that are you know I’ve said this before constant consequential and calculable so one of the things that I the calculable reason is because otherwise you just get people who write two pages of all the things that could happen with uncertainty and uncertainty isn’t risk yes there’ll be problems every business is going to have a lot of problems and just saying them ahead of time doesn’t help we talked about a company if you remember that we bought stock in that had to do with loyalty points in Airlines and we bought it before covid yeah we thought of some other the things that happened that did happen during covid yeah didn’t help us Co still happened the airlin still shut down it doesn’t matter if you said what would happen in a pandemic what would happen in war you have to ultimately make a decision and are you just going to avoid anything that would be devastating in that kind of situation so yeah there’s always lot of uncertainty and everything but um you have to look at the the long-term value of the company the most stocks today B basically all stocks are long very long duration assets the actual amount they earn this year and even pay out this year is is not highly consequential um it just isn’t usually enough to move the needle between a really good idea and a so so one even so it does not matter uh I mean even if you couldn’t predict as long as you knew that a company wanted would have the same number of shares out and the balance sheet wouldn’t look that much different in three years it’s not really that important that you know what they’re going to earn this year or next year maybe it matters to the stock but even then it’s arguable because if the stock is so focused on short-term earnings that it moves ahead of those times then it’s also moving on guidance and on expectations for the industry so it could move anyway for reasons that don’t make sense to you so it can still a stock can still work out really well for you one to three years even if you’re just focused on what it looks like in year three or something if I’m buying a stock in 2024 I’m really asking what’s this going to look like in 2026 because I don’t want to be thinking well will there be recession this year or not while you own stocks or while the next person who buys it from you and decides what to pay for this owns the stock there’ll be recessions some years there won’t be in other years it whether there’s a recession this year or something isn’t something we should focus too much on you know so I don’t think that current period earnings either trailing 12 months or forward 12 months is ever a particularly good idea to look at stocks I don’t think statistically it’s ever been proven that that’s helpful like the Schiller PE might have value price to sales might have value but I don’t think that PE would have value that doesn’t really make sense to me how different does it feel to you investing like at least since we started Focus compounding valuations have been very high versus different parts in your career where you’re buying FICO at you know single digit pees there investing has a lot of a fashion aspect to it right so it changes over time what people are really into and it happens to be that the FICO type thing um is really what everyone wants to be in right now um they love the Compounders you know we named our our our whole everything that we do Focus compounding uh I don’t know if we were naming it today would do that because although that word was out there a little bit that is a word that now if I go to Valley Investor’s club or something they just designate something this is a compounder as if that’s that means something yeah that’s a category of stock that’s not really what happens you know it’s a thing that happens to some and um I I I wouldn’t put things in categories like that I would say look most of the time does it do this or something is maybe a better way of thinking about it don’t just put companies in boxes where you say this is a great company this is a compound or whatever but more often than not does it tend to be better at controlling expenses than other companies yes so that maybe sometimes is a better way to think of it yourself than this is a um you know uh Cost Cutter this is a compounder or whatever yeah um I mean we’ve talked about over-the-counter markets is over- the- counter markets a compounder over time maybe it’s it’s not a compounder that every year it’s going to happen I don’t think it’s a good idea to put it in that sort of category that way I think it’s better to think it in in different terms but um yeah there’s there’s no doubt the market is quite excited about these kinds of companies that grow a lot and it’s excited um you know you have Nvidia up there to me that’s hard to make any sense of that that doesn’t mean it I don’t know mathematically we’re getting to points where it pretty much does mean it it can’t make money over time from here but you know I mean I think let’s take insiders no Insider ever Buys in video stock right it’s all sells no buys I believe that that’s true that if we looked at the last six months last year there can’t be anyone inside the company buying it they have to all be selling and that doesn’t mean they’re selling a lot or something but I’m pretty sure it’s like totally all one-sided um and they’re not wrong that they should turn a little of it into cash for themselves because what is the operating margin at Nvidia in 2024 and this is not updated for the current I mean this probably is updated for the current quarter but we’re doing a trailing number here mhm mhm 54% yeah okay do you think the margin will be 54% in the future I don’t think do it does anyone think that is that what people think well there’s an issue because if something trades at 70 times earnings and the margins are twice what they’re supposed to be then you’re active trading at 150 times I mean what’s likely to happen is that there will come a point where earnings don’t grow as fast as revenue or to put it in another way earnings fall faster than revenue and that may be a point where people are unhappy now they should notice that point beforehand but it’s not like you should look at Revenue growth as being an accurate number of what’s going to happen I I um you know so that’s the difficulty in doing these mpvs and all that is that you can but but I do like them because you if you just write down your assumptions about something you do realize that oh you’re assuming 50% operating margins which is probably crazy I mean what’s fico’s operating margins because Nvidia is not going to be as good as FICO but the expectation is that it’s going to be really close about the same as the expectation right now right 43% I mean it’s consistently gotten better but yeah I mean we’re talking 10year medium margins on EIT 21 and a half% but you know for operating margin it’s it’s 26% 31% 39% 42% yeah I mean ver sign I think probably has margins that are a bit higher than that probably but like we you could look at company after company which is Moody’s you know which are things where you have to almost legally you have to do this for some companies it’s it’s not literally legally but there are companies where realistically they kind of need to have FICO scores there’s Alternatives they could try to use them and stuff but basically you’re going to need to use a sign you know indirectly you’re going to need to use FICO you’re going to need Moody you could do S&P and Fitch or something but these are like taxes that are imposed upon you by Monopoly type things basically they’re kind of things that you do need Nvidia could have that position in a huge Market I just don’t think that it’ll ever have margins that are much harder than that and that’s why I’d say using things like sales MH there’s also a physical aspect to the Nvidia thing where you actually will pile up inventory and everything so um but look I don’t know you’re assuming that they it grows very fast that other people can’t get into the business right um so I think the it’s just something that I just don’t worry about you know I don’t just mean I don’t worry about Nvidia but I don’t worry about the fact that some companies have crazy multiples and does that mean the world’s changed we talked about a little bit I don’t think it means it it’s just something that people are into now and other points they’re really into value stuff or they’re really into you know what ever else don’t know that yeah I mean I don’t know that the exact multiple on some stocks is really all that more thought out than whether Bitcoin is the price it is or half the price it is you know there’s an element that’s thought about that way but but you know Charlie merer said that where he said you know that stocks are sometimes like REM Brands you know to some extent and I think that’s true um the I mean Nvidia is simple in the way that why it’s happening is that everyone wants to be in um AI stuff and they can only think of one name and they only see one name in The Press and everything so it’s the huge awareness and that happens but barbon Heimer happened why did it happen why did Nvidia happen I mean it just was a thing it was put in front of everybody it caught their eye they didn’t know of other choices they knew of that and they bought that mhm um there’s underlying reasons why Nvidia is great but I doubt that’s the only reason why the multiple is incredibly High cuz they’re great businesses in the past where the multiple for some reason isn’t very high you know um but this is one where obviously you can’t use either earnings it it fails that test is the current earnings is too expensive on that basis and then also it fails to test obviously on assets so it’s all about npv it’s all about npv and but we should keep in mind and I don’t want to Discount this everything you know about a stock a business you know is the past all that matters matters about it is the future for you as investor today the past does not matter so we can look at that chart and see that in nvidia’s past it certainly has never performed as a business in any way that would justify this the Returns on Capital here are off the charts and they have 20 some years of history that is all consistently below that and quite cyclical and everything it doesn’t mean that it will return to being that because it could be quite a different business now um so I I don’t want to just say you have to focus on those numbers and worry about it I would never say the PE is too high The Price to Book is too high so I’m betting against it or something even when I said earlier in the year the U magnificent 7 you know that is a group of stocks and so I would say that if you wanted to if you know that if you’re worried and I don’t think there is I I think you should just ignore it but if you were worried that even if you buy stocks that are great they are going to go down over time because everything’s going to go down you know the only way to hedge that is basically the Magnificent 7 um it’s a realistic fear I think that even if you buy relatively good stocks they they might still be absolutely not that cheap but it’s just something that we have to deal with we you know especially managing money for other people you kind of are putting the money to use in the best things that you can do you try to make sure that you think it’s double digit things but um you know let’s see from from 1999 to 2009 I would guess the inflation adjusted return in stocks was probably somewhat negative I don’t know if it was one or two% negative or something but like the real return was negative obviously in Japan it was negative for a long time so you know it could happen and that’s just something that you have to accept you hopefully you run on a um uh you know like a relative basis enough points ahead of the market that you still have a positive return but you know it’s not always that easy I would just steer very clear of these sorts of things I mean what I would say is like we’ve said you know you can have a very good success in life in investing never buying anything more than 10 times sales so why add that to your thing to buy things that are 10 times sales or more you can just ignore them it’s really not a big deal um and the same thing is true with all sorts of other kinds of businesses I think people do that with other things they ignore entire categories if they’re under litigation risk or something they’re just like I won’t buy it environmental things I won’t buy it but if it’s incredibly expensive they they don’t just say okay the company may be wonderful I can learn about it but no matter what I’m not buying it over a certain multiple because that has a huge kind of catastrophic risk to it that I don’t want to take got it cool well I want to thank everybody so much for tuning in with the both of us on the focus compounding podcast if you have a question you would like featured on the podcast email to me Andrew at Focus compounding dcom I than every so much for tuning in with the both of us U the focus compound podcast if you’re interested in learning about our Money Management Services you can reach out to me at Android focus comp.com and be sure to hit the Subscribe button wherever you are listening or watching us here today I don’t thank every always so much for all the support and we will see you in the next podcast take care

Description:
04:40 – Yen Carry Trade 12:48 – Stocks in Bankruptcy 15:00 – Buffett Selling Apple 23:00 – Marcus vs. Cinemark 37:50 – Why Do …

Transcript:
welcome welcome welcome how’s everybody doing hope you are doing well my name is Andrew with Focus compounding on air live with Jeff genon Jeff how’s it going today it’s going very well Andrew how’s it going with you it’s going great we hope it’s going great with everybody else as well if this is the first time you’re tuning in with us thank you so much for joining us be sure to check out all of our content that we push out into the investing Universe the best way to do that is to follow me on X at at focused compound uh if you’re interested in getting access to investment rups from Jeff going all the way back to 2005 go to focus compound.com and of course if you want to learn more about our Money Management Services you can reach out to me at Andrew Focus compounding tocom all that information is in the description below so in today’s podcast Chef we’re going to be going over a lot of different things uh it’s been a few weeks since we last uploaded a podcast it’s been a little bit less than that since we last recorded a podcast uh but so we actually recorded a full hour and a half long podcast that did not get uploaded because um I don’t know if there’s storms going on or what we had internet internet connections and um unfortunately we lost that uh but uh we are ready to roll with this here today so hopefully we are good so um today is Thursday August 8th and Monday the Futures the markets were getting smoked and the buzzword that we were hearing a lot or the phrase that was talked a lot about both on CNBC and Twitter and a bunch of different financial publications was the Yen carry trade and how it somehow blew up uh the Japanese stock market was down about 11% on uh Sunday night into Monday morning in the United States and markets got smoked so curious to hear your thoughts on everything that’s going on Jeff um I had told you that I’ve heard a few different people talk about the Yen carry trade over the past I don’t know year and a half couple years um you had said that you think you’ve heard more about it uh recently but I think it’s just people maybe I follow have been talking about it people thinking that like you know one day it could blow up it’s almost like selling a premium way out of the money or something it works a lot of the time but when it doesn’t it could be cat traffic so want to hear your thoughts on everything that’s going on in the markets and we could go from there yeah so I don’t know what happened um Yen’s a currency that basically doesn’t yield anything so if you’re doing Factory things that have basically trying to make money on stuff that goes sideways that doesn’t have yield on it like momentum things and and other things in Commodities and stuff like that I think that it sometimes uses um uh takes advantage of that and then it gets crowded right so I don’t know what there is to it other than it was probably very crowded for some reason whether that’s human beings or computers or human beings who are using things developed by computers or what but it’s your usual thing that way right um but probably had something to do with a big change in expectations for interest rates in the short term in the United States like that in a few months that rates would come down a lot that’s the only thing I could think of that was a big shift that would cause things to happen in markets all around is just expectation of a much faster possibility of a recession much faster possibility of large interest rate cuts and so you know then there’s differentials between um yields in different countries and all that and like that’s the thing that moved from what I can tell I don’t know what else would have moved that could have caused that all around the world macro has been uh definitely a topic recently whether we’re in a recession going in a recession whether rates are going to come down whether inflation is going to reignite um you know and of course with everything going on in Japan uh it seemed to have really spooked the US markets we had like a bit of this rotation trade going on where the NASDAQ was selling off and the Russell was going up and then you know jobless CA claims uh came out and it was like oh no actually we’re going into recession so then the Russell you know pulled back on that because smaller companies are maybe more um sensitive to you know like the economy and whether we’re going to be in a recession or not uh so want to zoom out right because it’s just been kind of crazy and uh just talk about you know just investing in general uh because so much of the conversation lately has been on uh macro and a few just key stocks in the S&P 500 uh so pretty crazy but you know when the Japanese stock market closed down 11 or 12% whatever it was I instantly started thinking about Buffett obviously because I think actually one of his positions that he owns in Japan was down like 20 or 30% in a day um so lots of crazy stuff going on I don’t think these are normal times that we’re living through but I also have said that a lot over the past four to five years so maybe this is the new normal I don’t know like is that a product of like computers trading and stuff like that you’re going to get like these huge swings that that happen in the market yeah so I mean so we recorded a whole podcast where we talked about you know passive and and all that and basically what I said was like look it doesn’t really matter passive and how big passive gets and everything as long as active and passive don’t contaminate each other and um so that you know if if there was lots of passive that people who were actively trading weren’t aware of and weren’t involved with it doesn’t matter because you still can develop um good uh uh like a you know you still have some people trying to figure out the actual values of things um mimicry is is sort of the problem I mean I think on that podcast that we didn’t upload we also talked about Ai and or it was May maybe it was that one or a different one but you said like oh AI will get better and better over time and I said actually I think if the problem would happen that AI would start training on AI generated content on the internet eventually if we start to see a lot of that and it will devolve quickly into problems and it’s the same sort of thing in markets so I I do worry about that with passive and just basically mimicry um but it’s not new to markets it’s humans have been capable of doing it themselves before and uh it contributed to the 1980s right we had a um crash didn’t last for a long time and everything but it was a contributing factor was people using the same strategy um there was a bond market problem in the UK a bunch of companies and and firms using the exact same strategy that was sold all around you know to everybody um remember you know housing market a few firms being you know basically doing the same sort of thing so I I think that’s always an issue and we just don’t know how big that is um till we see what happens but whenever there’s something that’s very crowded and doesn’t have a strong fundamental reason for why people would stick with it if they’re kind of doing what everyone else is doing they’re going to freak out when it unwinds you know and I had a long drive on Monday and uh so I was listening to CNBC on the drive and I don’t I mean I usually have CNBC on uh I don’t really ever listen to it much but it’s just kind of on my computer on my thinker tool map or whatever I don’t ever just like sit and actually listen you know and pay attention and stuff um but I had a long drive and it was Monday so I was like well I’m just going to listen to CNBC this is great I have a long drive but you know I’m going to be pretty um you know entertained today with everything going on and the amount of people that were coming on and just saying the FED needs to come out with an emergency cut and they need to cut by 50 BAS points or they need to cut by 75 basis points we need an emergency cut this is jal’s Fault blah blah blah and you know I was just thinking I’m like man the markets are so conditioned that there is like the fed put right or that they will come out and and stimulate I mean it was the market was down sure 5% in a day or whatever and we have come back down if you’re watching the screen right now looks like in July the NASDAQ peaked right just under 24% year to date um the S&P 500 was close to 20% a date and you know the nasdaq’s up 9% and the S&P is up 11% this is just the price movement so not taking in the dividends of the S&P 500 but I’m like you know zoom out and look at the S&P 500 and the NASDAQ over the past you know couple of years and as soon as you get some sort of major correction everyone just starts freaking out and I was thinking I’m like you know if the FED came out and did an emergency cut my opinion is I actually think the market would sell off more because they’d be like wait actually something is fundamentally wrong here you know this is actually like a systemic issue um but you know it’s it’s so interesting because I think you know 10 15 20 years ago people always knew that the Fed was there to you know do different things but it’s like now it it’s obvious yes the FED is there and people start to freak out on a couple percentage moves uh uh you know to the downside of course not to the upside but to the downside and then people start to come out and start screaming oh no they need to come out and and cut rates immediately and the Fed was they left rates low for too long that’s pretty obvious now right with inflation everything and they’re going to do the other thing on the other side uh but you know that’s what creates Cycles right I don’t know what else to say about it I mean that’s that’s just that’s just the way the cookie crumbles you know they don’t like to switch gears quickly they like to guide of a long time ahead of time so they don’t ever want to do we just raised rates and now we’re just cutting them I don’t see what theice problem is with that that’s they’re human beings so you raised rates in one month and then you bu 25 basis points and you cut them by 25 the next month something changed you change your mind you know but they’re never going to want to do that so they want to make it clear far enough ahead of time and you know all of that and so it’s kind of can be a little slow right um yeah so I mean expectations changed a lot I don’t know what they look like now but they changed a lot for what will basically end the year at uh in terms of where the FED funds rate will be and um they’re probably too high and knew that anyway earlier in the year but then there was a drastic change in that so they probably knew that they should go down to like 150 basis points or something but over a long period of time and then the market was suddenly like you need to cut 250 now you know uh and you know and we’re talking about intraday like you know in the moment where these things are happening um yeah but if you just look at where inflation is and everything then they’re they’re yeah they might be restrictive now for the first time in a while so they would have known that and that they should gradually bring them down um yeah I thought I thought it was funny because the FED met last week right I was like could you imagine so like the previous Wednesday um could you imagine if when Wednesday or Thursday if you know PA came out and said no they’re going to leave rates on change he had his press conference and then the following M day he comes out and says actually we’re going to have an emergency cut and we’re going to cut by like 50 basis points I mean what change between the you know the few days and Monday I mean nothing really other than I guess whatever was going on in Japan um but so far it doesn’t seem like the markets have really nothing has really come out of it yet um so very interesting and of course the jobs number came out today and and jobs are a little bit stronger so people are like oh I guess we’re actually not going to go into recession it gets sounds like the soft Landing is back on the table it seems to change every single uh couple of days yeah but I mean you you are inverted right to some extent not drastically but you’re inverted unemployment curve have been somewhat rising and inflation been somewhat falling all of those would say that you should strongly indicate you should be cutting rates but it’s like we’ll do that in six months or something because we had such a long time of telling people that we were going to raise rates so it’s just it takes a long time for them to switch up on that um you know most of them don’t do that green span was the only one I think that really did that look ahead see what’s happening adjust all the time that was more his Mantra than any of the other ones so recession talk obviously people been talking about it I did tweet out uh a few days ago that chapter 11 Finks have reached their highest level in over a decade I thought that was interesting uh so for people listening a good place to look for Value you could you know Source these different situations from like to Capital which we’ve spoken about in the podcast before stocks emerging from bankruptcy um you know it’s going to be a good Pond to fish and we’ve spent some time there we look at a lot of different things but since we’ve been investing together I think only one situation right um is one that we actually invested in we soon probably yeah yeah but why do you like to focus on this and somebody actually had asked is there any evidence why papers Etc on this being a good place to look for value and I don’t know if there are it’s it’s really hard to to aggregate data and a lot of these situations are super complicated and you’re dealing with the legal system and every situation is different uh so I hope there are no white papers or you know that people aren’t going to do more research on this because I don’t want this pocket of the market to end up like spin-offs and where you know now there’s just nowhere to look for Value so um you know it’s good I think in in sometimes where you don’t need evidence of returns especially if you have success in that area right yeah and I like looking at spin-offs IPOs chapter 11 whatever these things that you’re talking about because you can value the entire company and see what it will look like when it comes out now IPOs are like the opposite of chapter 11 everyone wants them so they tend to get overpriced um spin-offs for a time were pretty good and there may be opportunities in that they you know the thing probably with chapter 11 is similar to spin-off if you look at it whatever the papers say would suggest looking at an actual breakdown of you know websites that track it for each stock that it’s been because they are wildly different depending on uh you know their performance is wildely different stock by stock so when we’re talking about the mean and the median and everything it can really disguise that in a paper but also sometimes you could know some of those things ahead of time by really analyzing the business and and everything and I would say the same thing with chapter 11 I wouldn’t just encourage people to go out and buy anything that is emerging from that and there’s plenty of companies that you know end up going back into chapter 11 um too and because there’s things wrong with them as a as a business uh but there’s not many things that are underpriced unloved Etc so you got to look really hard these days for all that and that’s one place to look yeah so let’s talk about Buffett um sold half of his position in apple if you listened to the Berkshire annual meeting that year he sort of hinted that they were going to continue to sell stock yeah he basically said I’m going to sell a ton of apple yeah yeah yeah is like exact what with something like I foresee it being our biggest or one of our biggest positions for a long time or something and if you look at the math on that that’s like okay so he could sell like 50 to 90% or something yeah yeah we actually spoke about that on the podcast where like yeah the way he phrased it was yeah we’ll still be it’ll still be the largest position and we’ll be the largest shareholder whatever but it was like well you got a long way to sell uh for that’s still to be true I want to get your your take on this because obviously a lot of people on Twitter were speculating on why he was doing this he I believe holds more treasury bills than the Federal Reserve right now his cash horde is incredibly High short term yeah because the FED is not very short term yeah yeah uhuh and he also the FED yeah right sold down some Bank of America as well and we were together last week and your take on this was different than everyone else’s take that I saw on the internet so I would like to chat about that here on why you think he’s selling positions I mean I think he’s selling them down because of his age and that he’s afraid to have someone inherit these two positions because they’re they’re things he might have held in 2000 or something if he knew like they’re the C and jillette you know of today he doesn’t want to saddle those people with positions that he wouldn’t buy for the first time now he might have bought these five or 10 years ago but these are he doesn’t want them to inherit those position and so I think he’s going through and eliminating positions because of his age because he’s not going to be around forever so not burden them with positions that he you know so they have to make the decision to sell as soon as he does whereas with oxy or something that’s a new position for him he’s happy to keep buying it he wouldn’t be buying apple or Bank of America and he pretty much said those publicly I mean Bank of America he was like well it was a special deal and whatever but we sold our other bank things you know so I think he’s trying not to make the mistake he made in the 2000s um and I think he’s okay with that but if he was going to have someone inherit from him in 2000 I think he would have sold Coke and Gillette I don’t think he would have forced those on them if he knew that in 2001 or two or something someone was going to take over for him so what are other people’s take so that’s that’s not the No No most people think yeah that he’s going to do a big deal or or Market timing or stuff like that yeah uhhuh and you were the only one that said well actually maybe he just does want somebody else to inherit these huge positions um yeah that he put on cash or something like that yeah I do think there’s been a lot of thinking about that probably at Berkshire just the way that he talked at the annual meeting um you know Charlie dying I think too um but like um that they wouldn’t manage the entire you know that Todd and Ted wouldn’t manage you know 200 some billion dollars or whatever it end up being um and I think they a decade ago they he did think that so I think his thinking has changed in terms of the size of what berkshire’s gotten to be in terms of the fact that their Investment Portfolio I mean uh that he couldn’t find anything I think he was holding out hope that you know he’d get another uh you know not necessarily a 2008 type thing but something where prices would look attractive again and I don’t know that he has much hopes that he’ll get to see that at his age um and I think he wants to make sure that Burkshire is positioned the right way for that so not to saddle people with giant I mean how big was the Apple position we’re talking like in billions I mean you know that’s let’s see it’s holding end of second quarter 84.2 billion is what it was at the end of the second quarter and he sold more than yeah he sold more than 49% of the stake yeah so we’re talking 100 something billion I don’t remember the exact amount but it’s just you know um yeah and it probably you know like your Coke and stuff is not something he expects to do great and so do you want to give like 50% or something of your portfolio to someone into something that’s really overvalued mhm I think he could justify it more to himself although I think he knows that it wasn’t great to keep the Coke and stuff in 2000 um but he could justify it more to himself if he’s the one who has to deal with it I don’t think he wants to leave it to someone else to deal with that would be my guess so what do you think he’ll do with the cash right so the article says 277 billion it’s earning uh you know it’s earning some money um uh from uh the treasury bills I mean someone was like do we have a huge special dividend incoming do you think he’s just going to let it sit on the balance sheet what do you think I mean unless you find a $220 billion thing to buy I mean you’re not going to use it all up and they produce cash over time too so even if he wants to keep say 50 billion in cash which is possible at this point Burger’s big um I don’t think you want to keep much more than that and there’s not a lot out there what’s a company that’s 200 billion or something that you could buy the entire thing um you can’t do it in the stock market because it to buy a $200 billion it’s $2 trillion probably because you’re not going to buy more than 10% in the market yeah so you know that’s a handful of companies um that are in in two trillion that’s almost no companies you know it really is we could name them and then um even a couple hundred billion is really big and they have to be willing to sell to you if you’re going to buy the whole company so it would be hard I can’t really even think about what companies would be that size in the United States that would be possible there’s there’s almost no private companies that are that size it’s it depends you know they’ve had and and those that are anywhere near that he’s had dealings with in the past or something like um they wouldn’t be new things that he’s never heard of uh you know so like yeah would he at one day like to buy you know Mars Wrigley whatever stuff yeah probably something like that or whatever but you know I don’t think they’re plenty to sell right and everything else you can see is public companies there’s there’s not you know pretty much if it’s two if we’re talking about a couple hundred billion dollars those are public companies you could look up and and see and a lot of big companies are really small compared to that so yeah I don’t know how they’re ever going to use that money so how much in interest is he earning that on that 277 billion well if he’s in three months and stuff what is it a 53% five I don’t know what the every month you know 90 days or less is but that’s what he means equivalence has 14 billion yeah it has to be under 90 days and what’s that capitalized at like you know 10 times or 15 times or something you know from like a market value perspective MH yeah but if you but obviously if you put in longer term things it’s less I don’t know what 10 or 30e Bond 10 what’s 10 year bond at 4% yeah probably something like that so um um you know he’s earning more than the FED because the FED has less well the FED has some things that aren’t government stuff I guess but he’s earning More Than A lot of people are you have to keep in mind too because he’s shorter term than everyone else he’s more liquid in earning higher rates yeah 10 years at 4 rates are higher on the short term than the long yeah MH crazy crazy crazy what do you think what are your predictions for the future with everything going on right now in the economy the markets we’re still kind of at all-time highs right yes we’re off a little bit but is this really just a a correction on our way higher I mean is uh you know Nvidia going to go and come back down to earth you know what are your thoughts what are your predictions uh I I don’t have a lot of predictions thing things are very expensive if anything ever happens that is negative things can drop pretty fast because everyone’s expectations have to be of a you know really good outcome right now now uhhuh but find anything that’s cheap in the small cap world no no no I mean not nothing but like you know there are things if they get overlooked I so I think year-to dat cinear is up like 80% right and Marcus is down like 10% or something so there are just random things like that where two stocks that are pretty similar um Marcus has a hotels business too and operator yeah but what’s Marcus MCS Marcus down 11% that’s a wild dispersion yeah that’s insane but that’s what happens too and this is why I’ve warn about the pair trading and stuff like you could look and at some point this year you’d say what these why would this keep going up and this one not go this one’s cheaper I want and it’ll just get worse and worse that’s what happens to Value investors in these Bubbles at the end where they think oh I’ll buy the cheaper and short the mark even if you like cinear you’d be like oh I could short cinar and go long Mark no just makes it worse and worse as you go what’s the logic to it I don’t know one’s in something it’s bigger it’s in indexes I don’t know who knows there’s some logic to it that has to do with what it is as a stock and that’s why it’s happening probably there could be some underlying things that people could argue you can always come up with a narrative it’s it’s hard to come up with a narrative for explain why one’s up 80% and one’s down 10% you know that’s pretty tough these are really really similar like really good comps for each other on the on the um movie theater side really well somebody on the movie theater side but then Marcus the hotels in commercial real estate so you have a pure play in Marcus and then a perer play in Cinemark and then I guess not so much in Marcus but and and the box office has done well over the past month or so so Twisters yeah but what but are we’re saying like people are so negative on hotels that it’s like a they’re ascribing a large negative value to it they would have like how do you explain that kind of difference between the two uhuh that’s what you kind of have to say is it something like oh hotels are so terrible that yeah unless there’s you know but there’s also just like you know maybe people don’t look at um what the numbers that each one are and are just like look I want the Pure Play I don’t want the hotels things I want that you know that happens too mhm you know when you’re in a bubble thing you don’t you’re not really thinking about people aren’t looking at the numbers and stuff they’re looking at stories about things and how things are moving and everything and then also just the momentum things and stuff maybe that affects it these are high volatility stocks normally right like they’ve gotten very high betas for some reason over time so we’ve talked about it with Airlines movie theaters whatever oil companies um except for Big Blue Chip ones have that too and um so some of them get really attractive is for like momentum type stuff right and these things don’t really have much in the way of yield or anything like they used to have you know so they used to look like different kinds of companies different kinds of stocks they their companies are the same but they may show up because kind of looking different as stocks I guess than they used to um because they used to have value and yield and you know like they showed up I mean they’re the the companies didn’t change so it’s it’s silly to talk about this way but like if you were literally screening the stock the fact that it doesn’t pay a dividend or something like it used to exactly you know so and um and also again like it might not look as cheap on present day stuff but that’s kind of dumb because like 2026 let’s say will be a good year and you know people can look ahead and everything so I also don’t I think cmark has way more anal coverage than Marcus and everything and maybe there’s other reasons but I mean we could look at Marcus right obviously we’ve followed the company on here uh a few different times but current market cap 44 million Enterprise Value 536 million price to sales6 evit sales .8 10year medium margins on ebit about 10% um if you look at where this company was at pre-2020 you’re talking pretty regularly at least for a handful of those years at least 70 million in operating profit right um at an EV right now of 536 million if you get back to let’s say pre-2020 levels this thing’s pretty cheap you know that’s just on the business itself can thinker swim or whatever you using there do a longer term chart like five years or longer yeah no so we’re using qu but we could do yeah do you want 10 years here’s 10e chart got if you chart the two against each other yeah I just would just say that I think there’s more of a Divergence than you might have expected uhuh um in recent uh results let’s see what we have here so the yellow is Marcus and blue is cinar okay and and how far back do we go there that’s 10 right yeah mhm we could go 20 yeah yeah so uh but if you go back like 5 years or something um you’ll see that you there you go so this is what I meant it’s just this five year it’s pretty good indication of that what happened that’s wild that is wild even look at that look at I mean 2020 obviously everything jumped out but like look at the bottom of 2020 October 2020 I mean these things traded like neck and neck with each other and then the pull data every week they should be we we know what it is at I mean like this is so yeah um and then they just so what month is that so that’s early okay when is that so where did they start diverging it was back a little before April was that looks like February yeah February February okay and then it just February 23rd you know which is fine cinemar cheap good stock but like I what it got some momentum or something it showed up on something that this is It’s value with momentum now so you got to go for it and the other one’s just value with with no momentum but they’re this they’re not like they can’t really be that different like you know does have the hotels thing yes Sark does have Latin American things I can give you a little bit on that but the circuits are so similar in in the United States and just uh they’re so similar these are very very comparable businesses and and that’s great if you own Cinemark that’s terrific but one of the things that happens there is people who own marcet probably feel like oh I made a mistake or something people own Cinemark think I made a great decision I don’t think we should take seriously anything that happened between the two in the last six months like something will happen I don’t know what but that is really wow yeah this is a six-month chart right now so for people listening cine Mar’s up about 80% over the past six months and Marcus is down 5.6 if you look at a three-year chart cin Mark’s up 65% Marcus is down um about 177% uh let’s see 5-year chart well they both you know suck even you can see that they used to huge Divergence yeah yeah they used to track very closely and then there’s a big Divergence so uh I’m going to Tweet this out I’m going to ask people what the uh that Divergence is here between these and then we’ll we’ll bring this back up on the next podcast we’ll just read everybody’s response what do you think people are going to say I bet you people will reference Marcus um having exposure to hotels and C Mark not andark being a pure play um it’ll be interesting to see if anyone talks about like the momentum factor that you just referenced my guess is not really okay I think that most people today don’t want to own a value stock unless it’s moving for some reason something randomly started moving and so then we all crowd into the thing that’s moving and not the other one but it could be but like this to me is when we talk about the Yen carry trade or any of those things to me it’s more like this it’s like h a trend reinforced itself I don’t know why we come up with the narrative that’s why cinar is amazing and Marcus is is terrible and there was an exact date that like it’s not like it gradually happened either if you look at this it’s like there it is I just think it started moving and some people and computers and things said here’s something cheap and the future is good and it’s on the move and I want to own it now whereas when it was before they said it’s a cheap movie theater stock yeah 2025 will be better than 2024 2026 will be better than 2025 okay it’s a value stock okay but I don’t want to own it until it starts moving now it started moving and now I’m in you know mhm I mean if you’re a large fund though and you are investing in theaters or you’re bullish on you know the box office for the next couple of years I mean you’re not going to buy Marcus you’re just going to go for the it’s got it probably is momentum factor and it makes it worse because now its size is by market cap so because of that you almost on a relative basis it remember it doubled cuz it’s up 80 the other one’s down 10 that’s that’s a doubling in terms of its size in any index waiting and things not there AR a lot of indexes and Market doesn’t have a lot of float and so there’s there’s other things like that but cine Market is definitely the one that’s more likely that if something were to people to get excited about it cine Market is more capable of taking excitement from institutions and having that translate to a higher price than Marcus would be but I’m saying these are like to me you know Marcus is a control company and there’s and all that but to me these These are the difference between a stock factor and like a business factor I think it’s hard to come up with real business Factor explanations for why that would happen when it happened um and it’s not like they’re always 100% merried you can see that there is a little bit there where there was a Divergence where uh before I I mean I can only find one in I mean this is only the second time in five years that we see anything that looks at all like things are slightly moving differently for even a period of a few months so anyway I just find it fascinating but I think that if we were more knowledgeable about lots of different businesses and watching everything all around the world we would be able to find more examples of this of like why is this happening you know and um that’s very 2000s reminiscent to me why is Electronic Arts doing this and Activision doing that who know it’s one’s become a name that people are into now and the other one isn’t and that was a very 2000s thing that like stocks not just Industries and stuff but particularly favored stocks and things and and some of that is just like a broader concept of momentum and all of that I think but also the passive things we talked about what about the passive things well how big is cin Marcus market cap versus Marcus now it it’s it’s a lot bigger because I mean it’s like I mean in terms of float and stuff it’s like 10 times or something right it’s big because in terms of market cap before they were um it was only it was about four times by market cap I think before cinemar was is bigger than Marcus but then you know um we had the Divergence that we just talked about now and then also there’s a float issue it’s not huge but there is a float issue where there’s more economic ownership um in Marcus although it’s mostly voting ownership but let’s actually tweet this out right now we could go over it on the thing what’s going on with this Divergence between cnk and Marcus yeah let’s see do we do that what’s going on with this okay so you can get an instantaneous answer you should ask CH GPT what why they’re diverging um yeah so yeah let’s pull this screenshot there we go okay let’s see what people say about it I mean do you think Marcus is a good place to uh or it’s a good time to invest I mean look at the only other times the few other times that there was a Divergence it wasn’t this big and the Gap did close um yeah I think it’s good yeah you know mhm what’s going on with this diver between cnk and MCS yeah we’ll see what people say about that uh the question actually that somebody had sent in was about Marcus they had emailed it to you and um we didn’t know that we were going to bring it up we just by chance start chatting about it uh let’s see the person says he recently invested in Marcus I’ve tried to Value movie theaters and hotels separately I arrived at a similar come to that of your write up where you attempted to Value Marcus hotels by looking through transactions in the industry for hotels similar to the ones Marcus owns so that post was from 2020 I believe you go back to focus compound Ty Marcus that’s when we last uh did that and went through and value at a bunch of different hotels and stuff right so this does get to a big factor they he talking about there where if you value it as a sum of the parts and you put a very low eBid on multiple on Hotel and very high on I mean very high on hotels and very low on movie theaters which was not the case say 10 years ago or something if you looked at how people appraised them they would be more similar multiples but if you do that then it does kind of make it like the waiting of Marcus versus cinear is it’s way more weighted to hotels but if you look at it from the perspective of um the actual eida of where it’s coming from you know Marcus is is not as much a hotel company as people might think so it can happen for that reason I I guess but that’s weird I mean hotels are more susceptible to recession than movie theaters big time but lower rates are also good for hotels whereas they’re not that helpful for movie theaters so you’re much more economically protected in a movie theater than a hotel thing but it’s not a b big deal it’s they’re not a bad credit risk or anything Marcus so so the question that he had sent in was the individual said I can’t wrap my head around uh why hotels trade at such high multiples he said I believe mentioned in your podcast recently that you think hotels have been expensive historically relative to movie theaters and I totally agree Hotel reachs trade at 10 to 12 times even iida individual transactions are done at similar multiples if not more Marcus Rec s recently sold a 225 room hotel in Oklahoma at a 13.6 times 2019 EBA down multiple blah blah blah uh and then he asked why do you think a cyclical asset like hotels where revenue and profitability tends to drop in downturns and an asset that requires constant m maintenance trades at such low yields question mark when you approach valuing a company like Marcus would you value hotels as what the industry values them or think of them in terms of a DCF question mark given that the hotels at markets likely won’t be sold I tend to favor the second method that doesn’t come out to anything better than 12 times free cash flow as opposed to 12 times iida but that value derives substantially from how the market values them so he’s really just talking about how do you think about valuing uh Marcus as relates to the fact that they have hotels but then more so a larger question of why do you think cyclical assets like hotels uh tend to trade at higher valuations is that just because they don’t have a ton of free cash flow is it more of an asset thing what is that well I would value them based on the free cash flow so like they said at DCF um I think because there’s a private market for hotels whereas there isn’t lately for movie theaters right so people can’t compet to something that’s a private transaction they’re seeing what it trades for in the market it and so they see it move all the time that way and and it’s however popular it is that way um you know I I don’t really know the logic of it exactly I mean I think hotels could be seen as a super durable asset and like other real estate that way and so you know it’s not crazy that they could be seen as um better um having a higher multiple than than hotels uh hotels than movie theaters but yeah I mean I would rather think that generates more cash over time movie theaters aren’t seen as being very durable obviously in hotels are so hotels straight more in line with you know apartment buildings or something I guess you could think of them that way where you feel like there’s total durability to the asset class whereas you don’t with movie theaters that would be a good explanation so people responded to the tweet it says uh yeah real time right here customer trans preferring IMAX where which is also public compan we spoke that’s absolutely true Marcus doesn’t do IMax 100% true why is that cuz it’s it’s cheaper for them not to do IMax and I think that that’s potentially an issue but I should point out it’s not like they have worse screens they have plenty of great screens they just aren’t using IMAX technology and paying IMAX royalties on it that’s the decision that they made is that the right decision you know I I don’t know that I agree with them in the long run with that because I think there’s some risks to that that whether IMAX is or isn’t better screens better technology that you’re going to have it’s easy for people to know the brand name IMAX invests a lot in the brand name getting you know your Christopher Nolan and stuff to talk about that they film in IMAX and everything and um so saying that you have premium large format screens is not the same thing as saying you have IMAX um so was that a mistake that they made maybe but they then make more money paying less out because of it so we don’t know all the details of those deals but you give up money when you make a deal with IMAX where they get a big cut of it mhm mhm so it says that uh as it relates to the IMAX cinar has the upper hand Marcus noticeably underperformed when Dune 2 came out yeah but Marcus is a Midwestern uh thing it’ll overperform with Twisters right versus Cinemark Dune 2 is a very yeah Dune 2 is not for midwesterners it’s not for Red State people no uh Twisters is Dune 2 isn’t yeah uh and then uh number two he said cnk has exposure to the Latin America Market where movie watching Trends are arguably better so that was one of them uh and then the other one Marcus losing theater market share instead of Mark gaining it also maybe investors are worried about Marcus Hotel lodging business in a recession yes Bute but again I agree Divergence shouldn’t be this wide yeah the hotel thing makes a lot of sense sure uhhuh the the G Capital he gave more reasons too okay go ahead sure I was going to say the gaining and losing of Market Shar is tricky because you know different movies come out at different times so you have to be careful you know like um like where I I used to live was the biggest theater for twisters in the country the cut there which is a cinemar one so that’s big but that’s not normally the case usually you know a New Yorker or La theater something is your biggest so it depends on what movies are coming out so that’s always going to be a case like I know pulled people coming out of Civil War the a24 movie because there was they wanted to figure out their um like political leanings right but it’s not that good of a poll because anyone who watches an a24 movie is going to lean more left than right anyway it really doesn’t have to do with the fact that it was a movie that was political that might have contributed to it but you have an indie movie like that you’re always going to have a real skew an a24 movie is not going to play in like Iowa the way that it plays in New York or something so um yeah and you saw Dune 2 right yeah mhm yeah no D Dune 2 is not a lot of talking very moody very beautiful that’s the director that you have there it’s one of his more accessible movies actually because some of his others are even not so much for General audiences but yeah that’s not that’s not the same as as Deadpool and Wolverine or something you know it’s placed a different audience yeah mhm so the other reasons he gave you said Marcus pushing cash from movies to hotel vers Cinemark likely reimplementing dividend policy after debt level stabilize and then four cinar is more liquid no big players going to touch family-owned Marcus Marcus is definitely cheap but I could see why some people would avoid it yeah and I think all those are possible reasons huge Divergence though well it’s just interesting because it’s not like I’m saying there’s a price Divergence has existed for a long period of time there got to be a big Divergence in a short period of time like something seems to happened there right so but so I wonder that but but so if this was instead of Marcus and Cinemark this was you know the Yen and the you know pick another currency or something we’d come up with some wild explanations of why this must be happening to two things that otherwise should be similar and I don’t always know if if that’s true or just something happened with Trends I think any of those things might explain why something started to happen in the first place but it looks to me like it was some self- rein enforcement there of the trading activity in the stock itself then reinforced things about it it’s hard to believe that that was a narrative that caught on and if people didn’t see the stock moving it would behave the same way I kind of feel like it there just I see that so when you say are there things that are cheap or something yeah but they’re the things that people won’t want that way because they’re the things that are you know if you look at that chart most people are going to want the one that started to move in that correct direction right yeah mhm it’s a worrying sign if the thing you’re most comparable to is going up like that and you’re not what’s wrong with you you know there must be something that I’m missing right so now what for Marcus then what are some I mean at these price levels it sounds like you think it’s pretty cheap and it’s definitely something uh yeah and I’m not saying the cin Market is expensive I mean I I have to look at exactly what’s happened since it went up by that amount but um but it was cheap for a while and not moving and then it moved faster than it got you know business did not improve 90% or what 80% or whatever for camark in that period of time um yeah so that’s just what happens with stocks sometimes they lag sometimes the fundamentals and then other times they race ahead of them and I’m not saying it’s bad it’s still nowhere near where it was before or anything and you know um I’m just pointing out a Divergence between two things that are awfully similar um so I I yeah I think that’s um I mean let’s look at quick FS probably has it what’s the share turnover which I think is a large explanation for why this happens in stocks like this 523 per. okay and then marus in cinar let’s compare it to Marcus Marcus is at oh 78% yep so um if you look at volume we could just look at volume recently too that’s a good indication so if we go to cinamark um mean yeah OTC markets will be fine that’ll give it to us uh volume today when recording this is 3 million right okay so I don’t I don’t think a lot of people want to just be in markets for the long term or be in a s Mark for the long term so if you don’t want to be in a stock for the long term then you know you want stuff to be happening now and you start to focus more on what’s Happening Now now I think than just like it’s not enough for it to be cheaper we we talked about this with value things like is it enough for something just to be cheap I don’t know um that’s not how uh the machines are programmed Jee they like momentum they like inflections they like numbers that are incrementally getting better year forear quarter of quarter and moving to the upside yeah and and then the way it works too is this stuff becomes self-reinforcing because some of the these just go on price too right so they’re just buying the thing that’s working you know so if it’s working uh the price is going up yeah and I don’t know how how some of these things work that we’re talking about that’s Way Beyond what I’m capable of understanding but I I think some are as simple as if it if something moves up strongly after earnings then that’s a sign that things are positive there and that can be fed into how you’re uh in into what makes a good stock versus not a good stock but that’s tricky because that’s not exactly the same thing as knowing whether earnings were good or not it’s you’re taking everyone else’s assessment of it you know and then deciding what to do about it based on that but you’re basically saying okay they beat or something because I saw that the stock Rose a bunch after that so there’s interesting ones like that we’ve talked about that off the air about some that fascinate me where they have all their up moves after on news and earnings and stuff and then when there’s no news they go down you know even if the trend is to be fairly flat or up each quarter you can see this pattern that that it’s up constantly on news and then it’s down smaller amounts all the time when there’s no news and so it’s mostly evening out that way but it is fascinating that it’s NE that there are stocks that are almost never down with news or and are but yet manag to be down because they go down all days where there isn’t news basically yeah so to me that that’s odd right but again it’s with something that is no one is holding on to right it’s just being churned so much so it’s whatever you know that’s like George Soros type stuff his Alchemy of Finance what was his book about reflexivity yeah yep sure yeah a lot of these things are reflexive yeah so that’s Way Beyond you know what I think we can really cover in a podcast um with having much interesting stuff to say about it but there’s just there’s some things that are more about the stock as a stock I think sometimes than about the stock as a business mhm mhm what are your thoughts on the box office the Deadpool exceed your expectations I mean we had spoken about before we didn’t know how well it could do because it was a rated R movie um uh I I said the best com Fort was uh doctor strange and the um uh Multiverse Madness so that probably did 185 million or something opening domestic um and dead Wolverine did it finish at 210 205 where was it it’s I think it was projected at 205 and maybe finish at 210 or something um so did better yeah um worldwide box office 9003 million yeah that’s big yeah it will be a it will definitely I don’t know if it’ll make a billion two a billion four I don’t know what it’ll do exactly but it’ll be big I mean it’s going to be about double the other two probably it you know Deadpool 2 and Deadpool they probably only made 700 something worldwide I would bet 750 740 I don’t know so uh I’d be surprised if they made a lot more than that so we’re talking about something that’s almost going to be up 100% from that but now why is that is that because of the crossover with Wolverine Wolverine is one of the most popular character and play I mean Hugh Jackman is not ex we don’t really have movie stars anymore but Hugh Jackman’s awfully close to being a movie star and Wolverine’s like Spider-Man it’s a character that’s in a league of its own in terms of um pop culture and everything so now if you did it again would it be as big no but it’s closest to uh what was it no way home is that the one I’m thinking of uh where they had the three Spider-Man team up right so if you kept doing that it’s not going to work every time but it’s a sequel that had so this is a third sequel in that so the Spider-Man that was kind of the third sequel too a third movie that Standalone and uh you introduc something that’s totally new but also plays to The Nostalgia of the last 25 years and has the actual actors from it yeah that’s that’s really big yeah I mean if you ever did a James Bond movie where somehow you figured out a way to have you know three living actors or something who have played the role all appear in the same one somehow yeah it would probably make it bigger but since you can’t do that Marvel can with multiverses and things but most can’t come up with a reason that they can do that um you’re you’re always going to have um bigger uh numbers from that so it was impressive but like we said it was you know it was within 10% or 20% or whatever maybe outperform 10 or 20% of what I said was likely we thought it was going to be the biggest move of the Year domestically it will not be probably worldwide it will not be because inside out I don’t think any think can be an inside out too what are you excited for for the rest of the year do you think alien will do well no [Music] but it it will Beetlejuice could do well I don’t know that’s one that could break out but I also said you could have Fury Road or whatever breakout so who knows but yeah Beetlejuice is one that um is the same thing where it’s a giant uh it’s a huge time uh between the movies right but if they’re pitching it kind of like it’s a kids movie and and then the kids parents are the ones who actually like Beetlejuice and know what that is so that’s what they’re going for there um it’s perhaps a little too long you want to maybe go back to something that’s you know we’re in a point where it should be like 90s to 2000 Nostalgia not you know this is a little old you know it was the same thing with the flash where Michael Keaton was in that one going back to Batman 89 or or whatever the the um it’s a little old it was better to do the Spider-Man ones where it’s going back to you know and X-men too actually Spider-Man and X-Men are pretty close in terms of when they came out the you know both of them the original ones so yeah going back 25 years for your Nostalgia it works pretty well John Huber responded saying I think there is no real explanation other than a mispricing MCS also got booted from one of the passive indices earlier this year yeah wow interesting but we see what we want to see because I think John is more of a fundamentals investor too probably so uhhuh uhhuh interesting well Marcus then I guess uh good time for people listening uh to do some research on on the company you do have the box office uh strengthening into 20 uh 25 and 2026 so you should get a couple good years out of that um mhm you’ve had a couple good out uh blockbuster movies come out recently yeah when’s avar coming out is that next year who knows um there are some updates on something I James Cameron 2026 is very very strong I would say right now but the caveat with that right is it looks strong now but people’s tastes can change and this is why this always happens what’s green lit now sounds like a good idea and then by the time you get there you go o those things are off Trend now and you know because it takes so long so if if we were looking at Barbie and oppenheim everything we wouldn’t say oh this looks so amazing and if we were looking at a bunch of superhero movies not that long ago we would have said oh Blue Beetle and this and that that’s okay they’ll do fine you know but then there’s just less appetite for that by the time the movie actually comes out so but years ahead of time we’ say oh yeah that’ll do great that’ll just be another superhero one that’ll do fine um so the summer right now the summer of 2026 is like overpacked with things whereas we’ve been under with uh most of the on that that we have um so there there’s some adjustments too we I like I mentioned the Spider-Man thing I have no idea if there even will be a Spider-Man by then there’s one date that could be possible if there is going to be one but it’s not announced and um so that be a Sony one you know one of those is what I mean and uh obviously there was things with Marvel where they’re going to do uh Dr Doom stuff so that could be big too um but we’re talking a couple years from now basically but 2025 could be better than 20 24 I just think that 2026 looks more like a really good year right now so usually if people think that next year in your industry is going to be better and the year after that’s it’s going to be even better then they start to move so it doesn’t surprise me that cin mark would be going up or something somebody said I followed market for a while and the stock looks very cheap on a breakup slash some of the parts but how do you unlock value with dual class shares if who single class and activist would definitely come in do you believe that to be true oh oh yeah that’s that’s very possible sure and we talked about the Paramount decision before so obviously companies who there can be vertical integration in the industry now so like Sony’s buying Almo Draft House you could people companies can buy cinear and um Marcus Marcus is a family control company everything but they can make offers for either one to buy the whole thing which obviously would be something that wasn’t possible before what about five years ago something like that um yeah it used to be the impossible that Studios can buy theaters but now they can so there could be offers at some point for that sure got it cool well I want to thank everybody so much for tuning in with the both of us on the focus compounding podcast if this is the first time you’re joining us be sure to check out all of our content that we push out on the internet if you have a question that you’d like for us to go over on the podcast or maybe look at a stock on quick FS or a particular industry that you’d like us to go over uh email it to me at Andrew Focus compounding docomo every time that we upload a podcast and if you’re interested in learning about our Money Management Services like I said the beginning be sure to reach out to me at Andrew at Focus compounding tocom I want thank everybody so much for tuning in with the both of us and we will see you in the next podcast take care

Description:
00:00 Intro 3:00 P/Es from the dot-com era 06:50 13-F Season, $ULTA 14:20 First 12 hours on a stock, snap judgement 24:50 …

Transcript:
welcome welcome welcome how’s everybody doing hope you are doing well my name is Andrew with Focus compounding on air live with Jeff Ganon Jeff how’s it going today it’s going very well Andrew how’s it going with you it’s going great we hope it’s going great with everybody else as well if this is the first time you’re tuning in with us thank you so much for joining us be sure to check out all of our content that we push out into the investing Universe the best way to do that is to follow me on X formerly known as Twitter at Focus compound if you want to get access to investment R from jef going all the way back to 2005 go to our website focus compound.com and of course if you’re interested in learning about our Money Management Services you can reach out to me at andreid Focus compounding tocom all the information is in the description below if you have a question that you would like for us to go over on the podcast uh email to me at Android Focus comp.com I’m going to like insert that ad like three or four times throughout the podcast we don’t take any advertisements on this right but if I were to turn it on through Spotify or YouTube um well I guess we do have some YouTube ads on so that’s not completely we say yeah it will say on the podcast side of things if I wanted to turn the ads on for our uh long list of our backlog they would just insert ads throughout it you know but our only advertisement is going to be just send in a question help keep the content going uh let us know what’s on your mind and we will bring it up on the podcast so email it in Andrew Focus compon .c so Jee I want to show you this I came across this last week this piece of content that I thought was uh interesting to look at I call it historical art and this says unsustainable values large cap companies with price or earnings ratios over 100 and of course this is from the do era it says that uh this was actually from March 22nd 2000 um pretty interesting the thing that stood out to me that’s just crazy you know I was talking about Nvidia being super overvalued and and everything and you know it probably is right but when you compare it to what some of these other stocks look like I mean Yahoo at 623 times earnings I mean that’s just insane right I mean do any of these names uh do you recognize any of them obviously you talk about Cisco a lot on here I’m sure you recognize Oracle there’s a few of them though uh like JDS unase not familiar with that Nell Network not familiar with that but every other one I would say uh what do you think about that it is remarkable how high the PE was even 10 years later for some of them uhhuh um now some of them also had growth slow a lot from what they expected you know both those things happen so like Cisco became not a Growth Company it was a growth company for maybe another 10 years and then after that not really a big grower um yeah there was there was certainly a lot more in the very big cap things back then we’ve talked a little bit about that about how there was a real disconnect with the big cap ones being so expensive and there was actually a lot of value in in small cap and all sorts of other old economy things back then so it was definitely a large company and Technology media Telecom type bubble yeah you know I look at this and I see Yahoo right and I instantly think of Mark cubin why do I think of Mark cubin because obviously he owned I think he still owned some of the Dallas Mavericks he’s on Twitter a lot always tweeting about a lot of different things seems to be into the whole sensationalism um sort of stuff and I think about you know Yahoo purchased his company broadcast.com or broadcast. whatever it was uh and they used their stock to buy the company now what he did was brilliant was he collared it off so he hedged it away right but you talk about a lottery ticket and of of course you started the business and everything so it’s not complete luck but a company that’s trading at 623 times earnings uh buying you and then I guess you know I don’t know being smart enough I mean I guess you you got to say he was smart because there’s a lot of people that lost a lot uh during the Doom era right um it’s crazy that’s got to be like the biggest I don’t know just craziness and it’s funny cuz I saw a snowflake uh or an article about snowflake recently that said that they purchased a company for a billion dollars when they were only doing $1 million in ARR it’s crazy when you hear about valuations like that you know it’s insane yeah we talked about uh Ted Turner I think and we’ve also talked about John Malone and they both sold their companies um you know sort of around that period and did not get out the way that Mark Cuban did but they were kind of locked up because they agreed to be on the board and everything thing and couldn’t do that which John Malone said was a mistake right he’ll never put himself in that position where he’s locked up without having control of the outcome mhm crazy crazy crazy anyway so uh we keep over 13fs a lot of 13 FS came out some things that stood out to uh people I have data Roma pulled up right here but someone did summarize uh some different changes of course Warren Buffett was the first one on here uh you saw that he sold down his Apple steak um one thing that stood out to me was Ulta as somebody purchased now this is a retailer so we’ll in the size of it we’ll go by it not being Buffet um let’s see Ulta beauty right here but company that has no debt 12 and a half times earnings EV to free cash flow 16.6 times uh looks really good when you do like a snap judgment on this stock so curious just to hear your thoughts let’s get your own snap judgment on Ulta beauty and who do you think it was is this a Ted or a Todd position oh that’s a good question I hadn’t really thought about that um it it sounds on the face of it I guess a bit more like a a Ted than a Todd um but I don’t know I’m not really sure actually um it’s close enough that it I can’t rule out either one mhm um what do you think I would say probably Ted yeah yeah cuz Todd tends to focus more on Insurance Financial stuff like that yeah um and we know Ted’s bought some retail things before [Music] um so it one thing that stood out to me is this is such a small position I don’t know if you have it there for Berkshire as a percentage of their portfolio but the actual value of how much they own we’re talking um if you look at the dollar column there how big all their purchases are yeah so what does that say 266 million yeah and what percentage type position does it show that as 10 basis points on the entire portfolio I mean it’s way down the portfolio and they have to buy a few hundred million so that gives you some idea of the size issues that they have this isn’t a small company right it’s is what’s the market cap on 15 billion right 15 billion yeah yeah I also don’t know a lot about um what’s happening with online with the uh you know Tik Tok Instagram all those sorts of things and the influence that it’s having on on beauty products um that’s something that I really don’t know a lot about but it’s certainly happening it’s kind of like competing with Kylie Jenner I remember when she sold that her brand right I remember reading like a Forbes article that she had 15 employees or just nothing um and it sold for whatever like a billion dollars or something crazy like that you know that’s the power of like influencer marketing you see so I do think that’s going to be a trend for like Coca-Cola all of these Legacy businesses that have been around for a long time they’re going to have to compete differently because you have guys like Mr Beast doing his own Mr you know feas ofal or Logan Paul doing his own energy drink all these celebrities that have these huge followings they could just post a tweet or post it on Instagram or whatever and do that for free and millions of their followers will support them and and want you know their products it’s incredible that way yeah now I wouldn’t worry about if you’re selling if you’re a legacy chocolate bar or soda or something like that but for um anxiety driven things so for things that have to do with let’s say exercise all right let’s say beauty um luxury products are you talking like anxiety like as in self-image social anxiety comparing yourself to other people yeah that’s what I think that social media is very good at um and so it’s very important and that kind kind of thing has always been very important anyway for um luxury Brands right we may not know what a particular watch is or handbag or whatever but some famous person being photographed with it is worth a lot of money to those companies and now you have the same sorts of things in in other in other things um like I said that that are apparent in people’s appearance is what I mean really either how they um yeah Ulta looks like it’s let’s see it’s down year to date but I kind of like it here at this level 12 and a half times earnings um gross margins are pretty stable it looks like I mean this stock for a long time was I mean like crushed it what’s the long-term Returns on this sucker it’s got to be pretty good I imagine right so let’s go to the performance you could look up fiveyear well you have it right up here 10-year K gear 14.88% 5year 3% uh Total return has just been incredible um yeah and with a uh end point there that’s not very expensive right what do we see 8 times e or something a very normal sort of price at the end so that’s through growth in the earnings obviously yeah interesting what else stood out to you on Buffett’s uh 13f that came out I mean it’s funny you think about 266 million right and I know pushing Square Bill akman had a a similar size actually position in Nike it was like 200 something million and I was wondering I mean who knows maybe they just started buying Ulta and that’s why it showed up being tiny maybe they’ve been buying since or whatever right that’s why these things are um I don’t know I don’t want to say noise but it’s a good place to look for Value but you just can’t put too much stock in it because who knows right there’s there is definitely a lag but someone like Buffett and and persing people that make such few trades or Investments it could be a good place to to start right oh no everyone at Burkshire it’s a good one to look at because they’re likely to hold it for a while they may reverse themselves on some things just like Bill I see people talking about like dck and Miller and David teer and those guys 13 NS and I’m like those things probably change so much who knows right especially if the Stock’s volatile or if there’s any macro overlay of what they’re doing you know um yeah I wouldn’t say that like Michael bur or something is the best one for looking at their positions you know Berkshire is much better that way and what is a small position for them could be the it has maybe it has to be small for you you could make it a big one if you wanted to there’s no limit to how much Ulta you can buy if it’s a$1 15 billion company but there’s there’s some limit to them without affecting the price you know so they may only be able to buy a few hundred million a quarter or something yeah speaking of Michael bur it’s going in on Asia right Alibaba Buu jd.com yeah I also wonder what things we’re not seeing in his portfolio that’s the other thing same just like different and stuff like that and all that you don’t know if they’re yeah hedged in different ways versus the entire Market or something yeah mhm yeah cuz look at David terer everyone freaked out because he has sold down a bunch of his tech stocks okay yeah which are the biggest ones yeah so when you go to data Roma and you look at this weekly do you look at like the top buys what do you look at uh Insider trades definitely and then also um yeah so those that you see down at the bottom on the left yeah definitely look at those and then also I would look at um particular ones that I think are good for more concentrated and longer term investors um so I think on the list that we have recently here you know your Warren buffets Glenn Greenberg Lee Lou um what else is there uh you know so there might not be a lot of things changing but when it does change it might be interesting if it’s a stock you haven’t really thought about in a while or don’t know um those are definitely interesting ones yep so for people that may not focus on like these Mega cap stocks is it for you just uh you know a a way of looking at what industries you should look at maybe and find companies in the smaller cap space that could be true it depends on what kind of investor they are so you know if Glenn Greenberg or uh um Bill Miller or um you know uh there’s probably a few other ones was suddenly buying into some particular industry that would be really interesting um you know because they’re the kind of people who might like Buffett did say buy a bunch of Airlines or railroads or whatever at the same time they’re the kind of people who might do an analysis of that industry and think the future might be different from the past so that would be that would definitely be something to look at um you know if someone buys a big giant you could look if you should buy a small one if they buy an insurance company you could look if you could buy a smaller one you can also buy the same ones that they do too um there’s nothing wrong with buying the big companies there the the portfolios where they aggregate them isn’t as interesting because they have so many different super investors on a list like this and so it’s more of a consensus you know this is just what a lot of hedge funds and things own you know MH so somebody had wrote into us and this ties into looking at a company like Alto we could use that as an example uh asking if we can go over our first 12 hours on a stock and what that typically looks like and then ask if we could provide a method for a snap judgment uh to determine if it’s worth a deeper dive so basically the email was asking what our first 12 hours look like if you could take us through that whole process and then if there’s a method uh like where do your eyes go for when you do a snap judgment on a stock and decide yeah yeah it’s worth taking a look at yeah that’s really hard because I think my Approach is very different from most people’s that way in terms of it’s not standardized at all in terms of um thinking about a stock a certain way and duplicating that research for each stock um it’s really going to depend on what are the key questions to have about something and deciding that early on of you know what don’t I know and how harmful can that be to me um and and so like I brought up immediately the things that I might not know about about Ulta and so that would be a big issue about understanding it and having to research that particular um things about what’s changing in that yeah what’s changing in the marketing right through social media and through influencers and what effect that’s having on people and how the consumer behavior is changing and that’s going to be very important for specialty retail obviously um for other things it could be so this is something that’s not very cyclical but it’s a societal shift right but for something that’s more cyclical If instead of being Ulta beauty it was sleep number or something then it would be okay what’s the cyclicality of that or or Home Depot if it was some giant stock or something you know um where are we in the cycle and what does that look like and that would be more of a concern is this purely a cyclical thing or is this a societal thing or is this a competitive position of this company versus others um it would usually be researching other companies that I think are similar to this one um um at the same time and comparing them and seeing how it’s doing kind of competitively to isolate those things that we see in recent Trends right because it’s pretty easy to have the long-term I mean a huge part of it is the long-term record that could be 80% of your research on a good business could be the longterm record uh 80% of your your ultimate decision but it’s not going to be 80% of the time you spend on the company so the rest of the time will be saying okay well what’s going to make the future different from the past um so I would be less concerned if you had these prices 12 times earnings or something on something that was you know Cola or candy or something but I would be much more concerned if it is something like this where I’d say okay well do other people see something that I don’t and I’m predicting that for future because there are some things that are actually changing with customer Behavior marketing things like that and so that’s where I would be um focused on here uh I would certainly read the um I mean a large part of the first 12 hours I guess would be reading the proxy the 10K and the 10 q and I would do that for every company always uh no I I would probably read the um 10K first and then the 10 q and then the proxy um and then I would probably see if there’s an investor presentation and earnings transcripts after having read the proxy at you know having gone through all three of those things so that won’t be 12 hours but it could be six um that could be spent doing that not sure 10K is the best place to start because it’s the least promotional uh it’s scrutinized a lot by lawyers and the SEC and generally it’s less Pro promotional I mean you go and uh look at an investor presentation and that is way more promotional I would say um so so I guess it’s good to take people through your mind so like with Ulta right and I doubt you’ve read a 10K uh for Ulta recently but when you talk about like social media and marketing and stuff like that is I guess your worry or your key question that you want to think about and research more on is that just people being able to go direct to Consumer and cutting out the retail aspect of it sort of like what H what happened with Amazon or what um no yeah I mean I I guess that could be a potential issue but that’s not really what I’m thinking of what I’m thinking of is more um starting with one what are the trends in it versus other things are we potentially in a period that it’s unusually high for some period of time that I’m seeing there so is some of the growth because of things that were happening that aren’t going to be happening in the future that’s one potential thing so like for instance um covid right people coming out of covid um you could have unusual um purchasing of uh um of high public visibility things suddenly uh the same way you could have a change in ticket sales to uh Live Events or something right people were locked down for Co they weren’t able to do those things it could cause a jump in results for a period of time pull forward demand you know all those sorts of things so you’d be very worried about that what you don’t want to do is buy at like an all-time high in terms of profits or something that actually includes things have been pulled forward so you think that it’s doing particularly well and it’s going to now um do worse after that it’s easier if you have something that’s at a cyclical low or that isn’t favorable in terms of the societal Trend lately because then you can say okay well then I can look forward and I’m not putting a high multiple on something that this is not a high multiple on this stock but I’m not saying oh the results are good and um uh know that they’re not likely to be a top for it right [Music] um and then the other thing is yeah changes in consumer behavior um and then you’d have to research kind of what they sell versus what others sell and and how they do that and how Diversified it is and and all of those sorts of things um and that would be things that would be in the 10K but also investor presentations would be helpful with that and transcripts would be helpful a lot of that kind of stuff is more product mix and uh degree of diversification in different things versus competitors that’s kind of why you read the investor presentation and especially transcripts because a lot of times there’s not enough detail on that in the 10K mhm I like listening to or reading the transcripts of uh two or three competitors just to hear what everyone is saying a lot of times the same analyst will be on the call if they’re covering the industry but it’s a good way just to get a good grasp on the narrative the industry um you learn a lot about the companies uh through doing that and then you could see who’s doing you know maybe a different strategy or who’s playing their hand better than uh the other and you could quickly kind of figure that out but it’s a good way to learn about an industry it’s just two to three different companies four different companies right so for the overview for this one what does it say for the business description basically operates as a specialty Beauty retailer in the United States the company offers branded and private label beauty products including Cosmetics fragrance Hair Care skincare bath and body products professional hair products and Salon styling tools through it Ulta Beauty Stores shop in shops ala.com website and it’s mobile applications yeah so even then you know there there are other companies that you could obviously find as peers I’m sure there’s sites online that try to generate publicly traded peers but there’s also some things that might be somewhat peers that aren’t publicly traded I think Sephora is owned by lvmh maybe um I think and then um and then they have Partnerships with certain uh retailers where they’re you know kind of storing store or attach them or something but I think that’s right and so it wouldn’t give you a lot of detail on that and then um Sally Beauty is not really a a very I guess it’s a comfor part of it yeah so I think about it Sally like being hair like you’re going to get your hair cut like that sort of stuff like okay I guess stuff I think of it as yeah like what you would Supply to salons and people running their own business that way initially and then I think it sells to the General Public like as a result of that but I don’t know if that’s exactly the history of that company but that’s kind of always how I thought of it as like salon supply yeahh um so and then you just have to do a lot of scuttle button talking to people and figuring things out that way to see what the differences are especially retail is Pretty Tough usually and then especially retail in an area that I don’t understand anything about is really really tough so yeah MH it’s tough when you have to judge the societal Trends too right mhm I mean compare that to I guess Coca-Cola or different companies I don’t know it is tough especially with fashion right yeah stuff I mean that’s why I mentioned Ted I guess because he had bought uh into uh department store when it was a tough time for them and and everything and so I’m sure a lot of that was Capital allocation everything but it was also having to evaluate some of those Trends and and how bad that would get and whether some things would stabilize that way um but it it’s hard it’s the comparison I always give is like look you know at one time Best Buy and Bed Bath and Beyond were both category killers in similar positions one of them went on to be perfectly fine as a stock in a business and one of them did not and it isn’t always that easy when you’re first starting that period to know which way Trends are going um because people are pretty down on on Best Buy future there so whatever happened to Circuit City Circuit City went out of business it actually liquidated in a chapter 7y I think instead of chapter 11 yeah they were public yeah around the time of the financial crisis I guess um they would have been similar to borders you know um I think that they I honestly think that they ended up in bankruptcy where they liquidated they didn’t just um get sold to structure wow yeah I think so crazy crazy well I H did a call for questions we haven’t dedicated a a Q&A podcast uh in quite some time um so got to watch your that we could spend some time going over this obviously if people have more in-depth questions they could email them uh to me at Andrea Focus compound.com again that’s Android focus.com uh someone asked curious about your views on Nike and Ulta okay so interesting we just went over at Ulta uh Nike had I’m not that bullish on Nike I think we’ve talked about this right okay why is I don’t know if we’ve talked about it have we I told you million in stock so I think Nike’s pivoting but a couple companies did something that I think the stock market liked that I didn’t love that much which is they got really enamored with during Co with going direct right so oh we’re going to be able to sell all of our stuff direct and Nike of course has these what are they call are they sneakerheads what do we call these people who collect all the things yeah yeah okay so they have some super customers you know some whales and stuff and um and then they have selling all sorts of things to the people buy a lot fewer shoes right and other products too they sell tons of apparel and all that but Nike Under Armour a few others as the um Sporting’s Goods stores and some of the the more Sporting Goods than um than Footwear but but still you know that too um these retailers whether they’re Mall based or not uh had some of them went under right and and uh that hurt sales for some of them and then with Co and everything you had this big opportunity to go direct and that was a big exciting thing for them and I think they pushed it way too far um and I think the the stock was even doing well while they were pushing it too far and I don’t think that was a good strategy long term for them um so I think you can really overdo it with that with going direct these things are helped out a lot by being sold through different channels and your job is to advertise them and create a lot of demand for it but that doesn’t mean that you necessarily want to cut everyone out and do that and then you hurt a lot of your relationships that way and you know um I that’s kind of thing since 2020 that’s been my issue with Nike the direction they were going and what they talked about that way I wasn’t as enamored with but I’m sure that you know it it certainly worked for results for a period of time but I just don’t you could take that to 20% of your business from zero but I don’t know that you want to take it to 100% of your business you know price or earnings about 22 times e free cash flow 18 times uh 10 year meeting margins on EIT about 13 times e to sales 2.3 three times um margins gross margins have been declining over the past 10 years but pretty stable still I would say um yeah I don’t know it’s interesting place to look I mean the stocks on some of them are pretty wild like what happened to Adidas at one point with how pessimistic people get and then remember how pessimistic people were on Under Armor yeah they had a lot of problems yeah do you think Nike will still be a main brand 100 years from now it could be sure there’s no reason why it can’t be see what I got on Nike t-shirt yeah got it so you are a little bit pessimistic on Nike you’re not bullish no I don’t I haven’t heard their recent comments on it I think that their comments are that they uh are not going to over go too far with that anymore but I mean I just saw a lot of things like Foot Locker terrible Nike great you know and I I just think it it went too far with people’s ideas about how that would happen um you know and what the brand is um I mean they’re not really a retailer and there are some things and Foot Locker is a good example where look they’re selling so much Nike compared to everything else there then what does it really matter what are you really getting there but you are getting something of being able to sell different things I mean the Best Buy thing this is a thing with Roku and Best Buy where I kind of disagree with some other people Best Buy is critical to all the major tech companies because it’s a neutral place that will sell all of your things and they can’t sell each other’s stuff and so the idea that you can just go direct um and the same thing with with like where I mentioned Roku um the one thing that it has going forward versus any of these Tech things that people think oh they’re going to use an Amazon fire thing or Google Android will be running on this uh Smart TV I have or whatever well yeah but you might want to put something on top of that because in terms of advertising and all that and the different things that you’re going to have on the um on on your um video viewing platform whatever it is at home you probably don’t want it to be controlled by one company because other companies aren’t going to play well with them so there can be an advantage that way we talk about that in movies with Sony not having a streaming thing and others having streaming things it creates conflicts of interest and there’s a reason why you separate the retail function from the the brand function in many cases uh where you have that now for some super luxury Brands like the like lbmh some of the brands they own then you can have boutiques in a few PL you know in 100 boutiques around the world sell all your stuff and you don’t necessarily have to sell that much through department stores and everything but uh I don’t I think you could go too far with that and I think they may have and I think just in general people are have gone too far with liking this idea of going all this way direct when it it’s a different thing that you do versus what you have in retail people like to have a few different choices when they buy something that’s always a plus for them mhm well said uh let’s see is buying a company losing money that has never made money but expects to break even soon always a speculation I mean I guess it’s speculation but like Buffett would say you know in all investing is speculating right because you know all that matters is the future even when you’re talking about things like balance sheet they could do something very stupid with their balance sheet or they could do something very smart so you’re speculating on Capital allocation and and all of that so that there’s always a speculation no matter what when you’re investing and even though we look at all these past historical things there’s always the the forward-looking things so I don’t know that it’s always just an unintelligent gamble or something it could be an intelligent gamble an intelligence speculation and I think that’s fine and I think um with some companies now they could be reporting Gap losses that and have a future that looks good um because the underlying economics are good which if they don’t make money on like a product economics thing it’s kind of tough um one that’s a good example of this for me always have been carvana because that’s the most borderline kind of example the product economics were sufficient early on to say okay they’re improving over time and at some scale they can make money doing this but it’s really iffy um you know and as opposed to like an Amazon or something in the early days Amazon actually looked pretty good A little while before they started showing profits so you could have seen under the hood and liked what you’re were seeing there carvana you know it it’s not like movie pass or something it had a business model that made sense if it was big enough um but it didn’t require pivot to something else but it also was you know not as amazing as the stock price was usually reflecting so remember that movie pass we would talk and you I don’t know how this is going to work as a business but as a customer I’ll use it mhm and did yeah and then whatever happened to that did not work out huh no and they came back in some other form where I think they like use your data they track your eyes or something they do something to like take information on people and sell it that’s their new business model when they came back wow crazy yeah year to dat carvana the returns I mean it’s $150 stock wasn’t this just like close to single digits recently if you if you can speculate something that people expect to file for bankruptcy doesn’t file for bankruptcy you can make a lot of money yeah that would be the best inside information someone could have is not like even that there’s going to be a merger or something but that I’ve heard they’re going to restructure I heard they’re going to not need to file or whatever that if you can predict that then there’s some of these companies before where I’m like gosh you just put like a tiny position on but it goes up you know 100 times well the stock was pretty cheap versus like its balance sheet size now not and like it had a lot of Li total assets had a lot of liabilities and a lot of assets so you know you’re you’re it’s a super leverage bet in a lot of car inventory at that bottom point there I mean we’re talking let’s say end of 2022 beginning 2023 a $5 stock but I’m sure that there are some people that were lending to them that were concerned about oh whether they would get 100 cents in the dollar okay yeah yeah so I said maybe you don’t put 20% of your portfolio in it but where you’re like the unit economics can make sense you know there’s something here someone could be interested in this business I don’t know they also did shift some things so you know this has happened with a few companies where the other issue was when you were looking at it um there could be a concern that how much do they how worried are they about what’s happening and are they just being optimistic for the public and actually they’re going to try to make sure that they are financially healthy here and they’re going to slow down the amount of growth they had if you look um probably quarterly or something in the quick FS we can see see like it it they were growing with results getting worse basically you know what I mean so part of the fear when I’m talking about concerns about bankruptcy and everything it’s not a good sign when you’re rapidly growing into not great economic uh results you know what I mean so they were not necessarily focused on uh survival or you couldn’t be sure that they would be you’d have to take their their word for it you know what I mean um if earlier in Co let’s see where was there do we have like Revenue growth I mean I guess what I was thinking is more like okay so balance sheet if you go to balance sheet I guess we could see the growth in some of the items there was quite large um we’ll probably have to go annually but if you go back to co period they had a real explosion in um inventories at a time that wasn’t uh great to be doing that in terms of the financial results they were getting when we look at the margins and everything so but you know but it’s not like just a service business or something then it has a lot of like I said a lot of assets and everything so what is the market cap on the company now 16.6 billion right so when we look at that low stock price it was pretty that’s a very low stock price versus the balance sheet you know so that is a very very leverage bet at that point and that’s why you can go up a lot that’s something useful people can do like just calculate what are current assets what is the total balance sheet in a per share base and that gives you some idea of like the leverage in the business if this survives you know um and because then it has to recover to much higher levels I know people mostly focus on Book value but could go the other way Lumber Liquidators what was once called that now it’s called LL flooring Holdings um they filed for bankruptcy uh recently um so and I believe somebody tried had an offer out to buy the stock at like a fire the company at like4 or5 something like that that they turned I don’t remember Lumber liquid his whole history but didn’t they have an issue with where they were sourcing some of their product from so I think Whitney Tilson had something against them there’s something with from alide in the flooring or something like that there’s some weird Shenanigans going on yeah okay yeah um I feel like there was a TV thing done on them at one point yeah like 60 Minutes 60 minutes okay yeah yeah yeah is that weird when a short seller takes something to 60 Minutes I don’t know but I mean if look if there’s the your floor your floor is causing cancer or has Trace Amounts of whatever or high amounts or whatever of stuff that could be dangerous uh yeah I guess that’s that’s like Prime TV for 60 minutes or whoever it was that took it but it was one of those shows 60 Minutes the middle of their show has historically been a um like they end with something nice usually like some interview or something but they have um whistleblowers short sellers Etc you know that’s their big thing is uh kind of investigative reporting there yeah yeah I forget who it was yeah it was 60 minutes I’m looking up right now yeah interesting uh okay let’s see next question overall opinion on valuation of the market spy X mag 7 much more reasonable so take out mag 7 uh will broadening out be enough to sustain a rally if leaders are not leading question mark If breath plus mag seven leads Market gets more expensive from here yeah I I don’t know I don’t have a prediction on it the the Market’s very expensive you know we could look at the Schiller PE um it’s really expensive and you know rates may go down in the future but rates are not at levels that are you know when we look at everything that happened before say 1996 where you have all that period before that we’re not talking about rates that are way out of line with much of that plenty of times in that period so that’s no longer a argument for it so we’re in a phase where we have to say we’re different from what things were in the 1900s and um in the 2000s and maybe we are um got a Shiller PE up 35 times um he’s saying if you take out mag s it’s much more reasonable is it going to be broadening out what’s going to you know happen I could see forward returns uh in the market just being not so favorable I would say over the next five to 10 years yeah I mean I I guess things did I mean if you took things out in 1999 would they have been a lot cheaper I mean you just had that right it told you what it was outside of the top however many stocks right um so so I I think that that did happen in in uh the 2000 bubble that basically the biggest leading companies then trailed companies after that um so it kind of did broaden out and stuff but it broadened out in a decline for the overall Market that was pretty big MH what do you think about Buffett’s buy of Siri this is a fascinating one right so Siri now they aren’t actually buying serious right they the stock that that Burk has been buying forever is the one that’s going to be folded in the tracking stock but let’s look at yeah so it’s been tightening I believe I have trouble remembering the Ticker on the other one it’s liberty serus XM so it be lsxmk is that right you’d have to plotted against it for the last year or something okay yeah that if you could get that one plotted against it um for the last year you can see what I’m mean okay so that’s a year okay that’s that’s good so in theory these two stocks one’s the tracking stock and one is the actual um stock uh serus explain the tracking stop uh stock oh it’s impossible to explain it’s a piece of paper that says that it’s related to something that whatever and then they eventually just fold it into the real company and so the tracking stocks Never Last Forever he’s gotten rid of most all the tracking stocks basically over time there’s almost no tracking stocks left in the United States you know um but certainly the idea would be you know in of a merger or whatever then you would get your value for it so think of it like a different class of stock or something like that it’s not exactly um but it’s meant to track another stock but there’s going to be differences in how much people own of each one the the float of it the um also just things like you know people know what Serius XM ticker symbol SII is and the other thing they don’t know and some people will pick one or the other based on that um and then it’s just too complicated they might feel like I don’t trust this person or whatever for whatever reasons it tracking stocks often trade at a discount to what they’re supposed to be tracking um so these two stocks for a while there should have been the idea that they’re going to be folded in together and so they should have quickly move to the same level um the correct ratio between the two that was announced in the investor presentations and all that and then from then on um they should basically track each other and instead you’ve seen that sometimes there’s a wider or narrower or Gap um so part of it is arbitrage of buying that and we should be careful because obviously that doesn’t mean that someone could be shorting the other thing on the other side um I think that the stock itself is kind of interesting and so we could look at Sirus from that perspective but just keep in mind that there’s often been a much cheaper way to get the stock which is to buy this other stock that we just said what is the ticker of the other stock we said it is okay don’t have it’s like LS lsxmk okay so if you were to buy that for much of the past year at least um it would be a cheaper way because uh then when the the stock the tracking stock is eliminated the shares that you would get of Sirius would mean that you had hadn’t effectively bought the price at a lower price than what was trading at that day and sometimes it’s been kind of significant um I mean at one there might have been a day where it’s a 40% discount or something like really significant um yeah so uh so I believe berkshire’s always been buying that one do you have the data rum one have they ever bought Sirius uh maybe they have but presumably what they want because they’ve been buying so much is a lot of serus but what I think they had been buying is yeah there you go which one is up top yeah so Liberty okay yeah here you go lsxmk Liberty serus X series C okay and then they do have Sirius that they’ve just bought for the first time now right is that right or no have they ever no I thought I saw maybe not okay okay so obviously you could and if they wanted to yeah added 62% right and the logic behind that would be now if the price is closed more and depending on the volume in the two and everything it might be perfectly fine to be buying that now like if I was buying the two just just classes of stock where I was buying one sometimes you might end up with multiple classes that’s happened to me where I’ve owned some two different classes of stock in the same company because on some days it just made sense that there was a discount and it made sense to buy the cheaper one and then on other days it the other stock was cheaper or was just there was basically no difference and so you bought it turning point Brands like that at one point was it yeah or I thought so so like you know Berkshire it’s very tight the relationship usually but it would make sense that there’s no reason why you would buy uh you know because a shares Berkshire can be converted into B shares but not the other way around so it would always make sense to buy a shares if you had enough money to do it um anytime that there’s not really much of any gap between them but if there’s a meaningful Gap then it could make sense to just go ahead and buy the B shares right away you know um and so certainly at some point I I bought a bunch of B shares or something there was more of a discount and it made sense but that doesn’t mean that I would never buy an ashare um so that could be why they did it um let’s see um they added to both at the same time yeah is that right now much more uh to C they up I don’t know what it was last how much C do they have now 376 million and how much of the other one do they have 1.5 billion and they only added a tiny bit was the percentage that they added to that one 7% okay so they’re obviously buying more serious um stock re in the last quarter and if we look back at the chart that’s probably that’s probably what the change is for is just price cuz look um could that be right Siri is this one down here yeah yeah it could be let’s click well we’re out of date though so like three months is going to help us right we need like six months to see what the real period is for here cuz when would they actually been doing the buying I’m not sure but it it’s just that it might have made sense we don’t know the exact dates they were doing the buying I guess on that I mean we might have want of the two um I guess tracking stock we won because if it doesn’t have voting sh then it’s not tracked for SEC purposes but uh anyway we we’d have to look but it could just be that on those days it made sense it it they’ve always wanted exposure I assume to just serus at the end of the day when this is all over and it’s collapsed together I don’t think it’s an Arbitrage thing where they’re shorting one and buying the other um that’s always been the one in like Barons or whatever that talks you about that oh you can make guaranteed money by doing this this Arbitrage but the other way of it is just saying well I want serus what’s the best way to buy that historically for a while now at least a year or two um It’s Made much more sense to buy the tracking stock than to buy Sirus so there’s no reason to buy Sirus um even if you wanted serious stock at the end of the day it’s not the security you would actually buy so that’s probably why the change is they’d been buying can you check how long they’ve been buying the other one for because that gives you an idea of how far back if you click on data Roma on that actual stock on Siri or the other one the other one track stock yeah so they’ve been very long time yeah yeah going back to2 of 2016 is when they started and they doubled it around what’s that 2020 did they start doing it is that the big increase MH yeah and they do and Berkshire does own a bunch of different John Malone companies right yeah different Liberty stuff yeah mhm mhm and do they own anything else isn’t called Liberty lilac group a Liberty Media corpse series they also Charter which is effectively also John Malone yeah uhhuh uhhuh Char they bought throughout the Malone Empire there and it’s very the Malone Empire who’s that Ted Turner at one point uh what is it that one Atlanta Braves Holdings yeah yeah that was Ted Turner at one point that was a but that’s a tracking stalker spun out from uh Li from Liberty company because they had what Atlanta Braves in Formula 1 look at this Liberty lilac Group C so many yeah I me small position but still yeah so we can look at Sirius just as a business you know uh but just understand that they bought different stocks throughout the Jalan Empire and so it may have to do with the fact that the price was more attractive on a particular stock at a particular time um and then volume concerns because they’re such a big buyer too they they wouldn’t be able to buy the the smallest float ones mhm so 11.6 billion market cap 20.5 billion Enterprise Value so this thing has a bunch of debt uh price to earnings nine times uh Eevee to sales 2.3 Eevee to evida 7.7 Eevee to free cash flow uh 17 yeah the really attractive things are the big free cash flow the free cash flow generation is huge compared to reported results so even things like iida could be underestimating that I believe they said that they’re going to launch a few satellites in the next few years but then after that they’re capx would drop down a huge amount you know so it’ll their Free casle Will plummet in years where they do a satellite launch I think but in other years it would be lumpy but in other years I think it’ll be a lot lower is what they’ve said but I’m not following the situation closely this a very big company it’s not really the kind of thing we normally buy they used to buy back way more stock like at like 2014 onward and then they stopped in 2021 too much yeah too much dead I think but um because if we look there they went to doing what did they do they did dividends they did a big special dividend I think right two years ago yeah mhm okay 2022 so I mean on the stock that would have been well the stock today is probably a lot cheaper but on today’s stock or something it’s like a 10% dividend or something in one go so that’s big um and then the business 10% dividend 10% dividend but the stock Falls 51% got it mhm the issue with the business right so it’s very predictable like cash FL from operations is a good one to look at here if you’re seeing that on your screen very very predictable this is the kind of thing you’d want to put a lot of debt on when you have that much cash flow from operations year after year after year um very stable like even stable compared to other parts of the business that might look more volatile on a reported basis and that’s what really matters obviously the actual cash at the end of the day and then maybe taking out the capex if you really need to do it for paying your debt but cash from operations is really how you pay your debt um the the problem is sort of age for them right so the company started out let’s say 20 years ago or something meaning that it would sign up people who were 40y old men you know uh those are radio listeners and they have a lot of different music channels and on some talk channels and all that but that’s clear that that’s who it was I don’t think that they’re bringing in the same number of 40-year old men now which is meaning that their average age is going to you know for that first cohort is 6 6ye old men now and so that’s kind of a problem you know um that’s not a problem from an advertising perspective or something because it’s a pay service but it is a problem from the perspective of like not having scale issues where you have operating leverage walk working the uh wrong way if you start to have declining subscriber counts which is their issue is declining subscriber counts it’s not like the not having the ability to raise the price a little so I don’t know have you used um Sirius XM before you certainly rented cars or bought a car that probably had it on it for some period of time just during the trial periods that’s it yeah yeah yeah but my dad uses it religiously so every time I get in the car with him CNBC is going and I know that’s coming from SiriusXM so mhm yeah it doesn’t have a lot of churn for people who are already subscribers and have been for a long time it has for the initial blooth guy Spotify and podcast that’s it that’s their problem right so if those people never were radio listener the difference I think I don’t even listen to radio in the car I mean I did when I you know obviously at one point in my life but now just Bluetooth Spotify went from ox cord to you know Bluetooth just Spotify and podcast that’s it right but those are basically the same thing so Spotify you’re going to listen to a bunch of music that you would then listen to a music channel to hear so I mean they’re they’re direct um alternatives to each other and I think it is a uh my concern with it would be is it a societal thing between those people who grew up listening to radio not just grew up but listen to radio while they were of a driving age basically for a period of time whether that was driving to work or something is probably the key thing were they driving to work and listening to radio and had that habit at one time and now are reg generationally shifted to it so even though they might talk about with the ages that I just did oh our Target is middle-aged men or whatever okay is it really middle-aged men or is it a say baby boomer Gen X you know especially um generational thing and then sub Gen X are they really getting enough people and if it’s a generational thing rather than an age thing that’s a big problem yeah okay let’s see assuming we only have value line to work with do you have a preferred method to determine an insurance company’s float image for reference oh no that’s pretty hard to do it first of all determining insurance companies float everyone will get a different calculation um I think even where you see the history of burer hathway I think Jacob McDon wrote some things about that and trying to calculate it whether versus how Buffett said it in those years and other things you’re not going to get the exact same number um you can get some idea though basically on the investment leverage so do they have Investments per share here I can’t read that that’s too small for me basically but near the top do they have anything from that at um I’m Progressive if you look at the right hand side of what those things are um I’m looking right now let’s see premiums earn per share Investments per share $815 okay so if you look across that line if you know what their investment policy is and what is being included in Progressive in uh how value line is doing that and here’s the tricky part of how value line chooses to do that because you have the same issue sometimes with value line with operating earnings and what they mean by that exactly with like EBA do or something so sometimes there’s a little weirdness with how valine does things with certain cash flow things you have to be careful if you look at their list of like highest cash flow per share stocks and things some of them are totally legitimate and some are a little more questionable um and here you have the same thing is whether they’re including everything if there’s not violent shifts in that in then it probably is pretty accurate and ultimately that’s kind of what you need to know more so than even what their float theoretically is is what’s their float that they’re actually willing to use um and then that gives you an idea um and then usually you break it into two buckets where you look at the underwriting results and you look at these Investments but they’re you’re basically going to be financing the Investments with um with your float there I mean it depends on the company but let’s say Burkshire over their entire history or something ultimately they’re going to be their their cash and their fixed income stuff is often going to be the amount of their float really and their stocks are going to be more their Equity it’s not a perfect way of describing it but it kind of is so it’s not like they’re they’re they’re not really financing their um it’s not always as simple as people think in terms of uh believing that Berkshire stock portfolio is really financed with their liabilities that they have instead it makes more sense to think that they cover all their liabilities with their cash and their bonds and then they’re able to invest the equity of the insurance companies as if in stocks right and then for many other insurance companies you’re going to invest everything that you have in in Ms which is going to exceed your float there um but so value line the best thing would be Investments per share but you have to figure out what that means by comparing it to actual balance sheets from Progressive and uh the biggest issue for Progressive is probably how they treat cash versus Investments because a bunch of their portfolio is quite short term or something so some of it might like right now say Buffett decides he wants all three-month treasuries or something well 3 months treasuries yield more than 30 year so that could be an investment we’re all saying that’s like he’s sitting on cash but look what would you invest in it’s the highest yielding government security that he has laying around right there that could be his way of investing right now so you have that problem on the short end of the curve yeah and so if they say that’s cash and then the 30e is an investment then you have a bit issue somebody asked more about valuations of Max 7 we already talked about that so we going on to the next one if you own a very cheap stock like BDL that has no catalysts and have an opportunity to sell that position and replace with something equally cheap but with a catalyst is jef’s experience that it’s worth doing yes but it’s also my experience that you’re usually wrong when you think that not about the Catalyst part that might be fine but when you sell something that you understand you know you’ve owned a while or whatever um and think that something else is cheaper that’s newer to you you have to be very careful about that usually your judgments about something that’s new to you are not as good as your judgments about something that you’re quite familiar with for owning for a long period of time so that’s where I would be cautious um but yeah I agree with that I I don’t see a problem with doing that at all I’ve certainly sold things that are cheap but don’t have a catalyst to buy something that’s cheap and does have a catalyst would some of parts be a good way to Value an anity business for example take the fee income the business collects value it and then add it in the net asset value mainly us treasuries and investment grade Corp bonds or am I missing something here um so I guess the main question would some of the parts be a good way to Value an annuity business income the business and then I mean I I am not very good at valuing an annuity business um and it’s hard for me from that question to know that I understand the question fully I guess we could read the second part for example take the fee income the business collects value it and then add in the net asset value mainly us treasuries and investment grade corporate bonds so I think he’s taking the assets and then he’s also putting a multiple on the income yeah I I don’t know I’m a little worried about that I have to see the specific uh stock okay uh what is your view on Geographic differences in multiples he says uh let’s see comp business in Europe cheaper than in United States China cheaper than Europe Etc fundamentals vers float argument and investment cases based on relisting elsewhere and multiple Arbitrage yeah I think that’s really good to compare companies in different um countries because often they are quite comparable and what matters is really just the the cap allocation who’s running it right and um than what the industry is like in that country now in some countries the industry is not as good or or as competitive or you can’t have as much um uh how do I put it so Progressive is a better insurance company because Progressive is achieving what it’s achieving in the United States which is a tougher market for insurance if you had the same thing in another Market you should be worried that someone could come in and really do a number on them um uh you know we talked about like uh your supermarkets in the United States I would feel better about supermarket in the United States than than a UK Supermarket because the industry wasn’t as as competitive you know so there are differences in some places that way about okay is this just are they earning good returns here because it’s not as competitive and someone could come in and make it more competitive um but yes I I would say I use that all the time and you’d be surprised sometimes their their entire industries were the United States UK Japan their comps they have very similar business results and yet the eidon multiples are very different and I don’t know if it was in the education of a valley investor and gu spear wrote about it or monish poai did um but they had said the first thing they do when they find a company here that they like is they will go look and see if they could find a comp overseas or somewhere else just because the multiple difference yeah I would I’d say that’s a great thing to look for um yeah next question have your views on portfolio concentration change at all is the amount of money you manage and in particular the amount of other people’s money you manage has increased um yeah I I think you know so we do a fund and we do manage accounts I think manage accounts yeah that’s true definitely that it changes the concentration things uh that’s not necessarily the amount of money I guess it’s certain technical things about it not just technical but so people can see what it is that they’re buying and selling right then you have complication in terms of maybe fewer things that you could buy sometimes just for there’s some things that are kind of off limits more because maybe it would complicate tax things or it would do whatever you know we do do things in different currencies so we don’t shy away from that um but you’re probably going to end up with a more conventional more Diversified portfolio in something like manag accounts than you are in in the fund um so I guess the process of doing that I don’t know what do you think about that that more Diversified yeah M so I mean we’re still very heavily concentrated and and idiosyncratic and stuff for managed accounts versus any other people normally but it’s less it’s not exactly the way that I would run my own money that that’s true um in part because you have I guess it’s flows more both for the fund and manage accounts I would say it’s that with your own money um you don’t necessarily have to make decisions worrying about the timing of things whereas timing becomes an issue just in terms of always needing to be able to put money into something or take money out you know you can’t be as sporadic so the Buffett approach which is great of just doing nothing and then buying a ton of apple and then doing nothing and selling half of it is great but it doesn’t work as well when you have um clients generally and it even for a fund if that’s as concentrated as he was in apple that would present problems if he kept bringing in money or having money going out or whatever right but he had a stable permanent form of capital so it’s the flows I think more than anything mhm thoughts on Farm Equipment dealerships question mark I see most have been taken private opportunistically mostly by management you said example Serv us uh Rocky Mount dealerships I see only one publicly traded now thoughts on this I don’t know the industry yeah I just don’t know the industry so I can’t say me neither uh if you knew for certain then an elite business were to grow earnings for the next 10 years to about 10 times current would you still be unwilling to pay a 50 times multiple no no definitely not if you had that certainty right if you knew it yeah I mean look the the thing here’s the thing um the problem that I often have with paying that kind of multiple right is that it’s you can be very certain about the growth in an industry or the number of people who will need it or the number of units sold or something but you don’t necessarily know who will dominate that industry and whether it’ll be highly profitable so it gets back to Buffet things about cars and Airlines it’s it’s not that we can’t predict that 10 years from now there’ll be a lot more um product sold to be used in AI things the question is would we correctly identify Nvidia versus uh any other company that it could be right we can for now certainly but in but it would be hard to predict that Ford would be overtaken by GM or something in the early days you would have said oh Ford is dominant I mean Ford certainly was dominant the way that Nvidia is dominant and then that went away you know um so you be right Ford’s dominant now and 10 years later they’ll be selling a lot more cars but does Ford lose a lot of market share in that time and that’s fine if your multiple is low but the problem is that you often have a the same stock has a lot of uncertainty about future changes in market share and the the price um the closest is something like when we talked about like Celsius or something those are the ones that are the closest they’re very small very small percentage of the overall market then it’s a question of whether that brand takes off and there’s not all that much harm that others can do to them um but then they get to a point where it’s big and it’s different it’s different that way but I also wrote up something on Boston beer many years ago that’s similar so things like Celsius Boston beer if they’re growing much earlier in their history let’s go back 15 years or something with Boston beer but and maybe five years or whenever we’re talking about Celsius almost 5 years whatever it was if we go back that far those are the kinds of things that I could be interested in at even a high multiple um you know there was a period where this is many many years ago but I didn’t buy Netflix but I did say look if I was a uh running some studio or something I would want to the first thing I’d want to do is sell a lot of my shares to take over Netflix at the price that it was at it was at a much lower price and so it it was an undervalued company definitely um because you could see the the future of of that to get to where it is now there seemed to be no doubt that it would get to saturation that people would have it now they might use other services but I wasn’t afraid anymore that people would use other services and then not Netflix um so I I don’t have a problem like if you’re launching something and you have a small number of subscribers but I feel confident that you’ll eventually get into basically everyone who wants a streaming service which is my feeling with Netflix in the United States then yeah and the what brands that we said there an emerging entirely new like Market you know that’s tougher so like when Netflix first made the switch from doing physical DVDs to introducing the idea of streaming and everything no that would be less so you know that I would be able to make that choice um I always love to see how much they still make from that because they do still make like a 100 million last time I checked really yeah from DVDs see if I can find it yeah here you go DVD revenues let’s see what was it yeah 82 million is that it yeah 82 million yeah down 145 million so it’s down 43% yeah so like a smaller fish in a larger Pond or the Netflix thing is that it’s just so it was so simple in that you know ultimately at the end of the day for people once it was streaming instead of DVD rental it’s just like TV we can pretend that it’s some high technology company and stuff but what it is is a cable TV service right and so I know what an HBO is or what a Disney channel is or whatever and so Netflix will be that and it turned into that completely because then it started doing advertising everything so you’re not afraid of that and so at that point it would be fine it’s not actually radically changing at that point um but when you’re trying to convince people to send DVDs to have DDS sent to them in the mail send DVDs back and doing all that will every grandma and stuff ever do that I don’t know but they’ll be happy to sit there if you put this preload the Netflix on the thing that they’re getting everything and Netflix has got into a situation where it was like that likewise if you know that it’s just a question of getting in more and more places for a beer company or for an energy drink company it’s just about okay will more and more places carry this product that’s already selling in the places that it’s at then I’d be interested but honestly like even you know why we mention the Nvidia things and stuff is that’s just so far outside of what I could do because it’s just so much change happening in it so it it actually to me is not that certain that it will H that there’s a lot of appetite for it right now yeah but who will be the leader and will there be changes ever in terms of what what people prefer and everything I don’t know that the first place company will be the first place company 10 years from now and I don’t know that there’ll be profits in the industry or that there’ll be so much competition so who are the investors Jeff Ganon respects the most and who is most overrated in his book I don’t think I’m gonna say who’s most overrated um no I mean the the one that I respect most is Buffett right uh especially in the ways that the parts that other people don’t emulate right Buffett got rid of his apple right and everyone shocked I don’t know that people were shocked but whatever it was but he said when he was selling another stock I forget how long ago they said oh is this a trim or whatever he said well you know we don’t trim’ so everyone wants to slowly go into the position right and everyone wants to slowly go out of the position and trade around it even the Buffett fans you know and everyone does not want to sit on a ton of cash and then do a big whatever like he does they don’t want to completely shift to i s never bought a railroad in my life and now I’m going to buy uh you know make it one of my biggest deals ever or I’ve been telling people forever airlines are terrible and then I bought them you know so like the airlines thing did not work out for him right Solomon Brothers was a disaster too and both of these weren’t as bad as they could have been um but a lot of people after making public statements about those things would just not do it he tried to still think rationally about what made sense and was willing to say I’m going to buy it I mean of all the industries he talked about I think Airlines were the industry he said the most negative things about and yet he was willing to consider buying them them so I think that that’s very interesting that he’s willing to look at things and try to reframe them um you know he has principles that he sticks to but then everything else he’s flexible on instead you know on on Rules and Things and so a lot of other people are either not very sticking to their principles their entire career or they stick both to their principles and all their rules of thumb no matter what happens and what changes with the market so yeah definitely buff it that way somebody asked uh if you could take it a step further with this Nike and Ulta and pick one for each Buy sell hold Nike Ulta Starbucks so so Starbucks got a new CEO this week which was CEO which is a bad sign like like it might work out great but the history of agreeing to incredible payday to steal someone away from another company and all these like accommodations these usually end in disaster yeah what he’s going to have a an office and a assistant in was it Huntington Beach or somewhere in California I forget where yeah yeah moved Chipotle’s headquarters too yeah yeah I mean I don’t know him so he could be a genius and everything I think acman recruited him before because that was definitely an acman recruitment to Chipotle to chipot I said Chipotle to Chipotle um and uh yeah so I thought that was interesting and Chipotle stock was down a good amount on that news and Starbucks stock was up a big amount on that news I’m a big fan of Starbucks as a place to go for coffee um they are just about everywhere they have a good app Traina Trenta size iced coffee yeah yeah I didn’t realize I could do that till you ordered it for me I would always aent iced coffee and then you actually ordered me a iced coffee recently like oh wow that’s right I’ll just get a trena people areer for my caffeine intake uh if they’re concerned about yours they should be more concerned about mine probably I’m concerned about yours that’s say lot concerned about mine yes I think it calms you down actually so it’s good okay um yeah I don’t know I’m not no I’m not uh that optimistic about the long-term future for Starbucks just because now there’s so much room for people to come and compete in different ways with it you know um I think that it’s overall a really good business I’m very impressed with how it’s been run over the years and how much it’s stuck to what it does most companies at least you know I don’t know what it’s like outside the United States very well at all but inside the United States you know although they’ve tried lots of different things they’ve done a very good job of sticking to what they do best and improving that over time because everything shifted I mean now they’re doing tons of things through drive-thru and mobile things and the whole point of the company at first was this place to hang out and like a lounge you know and it’s completely the opposite of that now and yet they’ve um operationally been very consistent so they haven’t jumped on every little Trend that everyone else has been doing um but they’re the big giant company and the industry hasn’t grown over time that they’ve been in it and now everyone else will come at them with differentiating themselves in some way from it right you’ll have your Dutch Brothers and your uh what other things I don’t know that the McDonald’s thing will ever take off but your different drink things competing with it um I mean I I don’t know what their latest problems are except for you know resistance on price you know I mean it’s a it is a habit and so it has this danger that people are going to realize that it’s a place where you can economize or basically cut out entirely um you know one reason why people used to have their you know folders giant tub of it that they would have at home or s or whatever back then whatever Brands were Cofe so good um is cuz it’s so much cheaper to do it at home yeah and even though they could say well on a black coffee look it’s not that much it’s not like we have this huge difference on that no the most basic thing that you can make at home versus the most basic thing you can buy out someplace okay they’re not if you do the math on it it’s not some huge difference over month what you’re paying at all but the they sell you a bunch of other stuff when you’re there so what’s happening to people is what’s the average ticket actually turning into it’s you know they’re spending 10 or $15 on a cake pop and uh upgraded drink and stuff instead of what they would at home which would be you know they’d have almost no cost beyond the uh coffee there so favorite word by the way cake pop cake pop yeah oh yeah Daddy cake pop cake pop won’t stop till he gets one so you know gota do what you got to do yeah what’s their I mean their same store sales haven’t been good lately basically it’s the answer and I don’t I mean when we adjust in the United States for real sales and stuff it’s it’s not that amazing obviously I think recently um what uh Buy sell hold Nike Ulta Starbucks well what’s the price on Starbucks we are at 26 times earnings but 3.3 times eeve to sales 2.9 times price to sales so it is kind of more expensive out of out of the bunch I think right because Nike is 21 times oh 2.4 2.3 times Ulta is definitely the cheapest uh it would be hold hold hold I mean Ulta is the most appealing from the perspective if you want to make money the other two I don’t think I’d suggest to people to sell Nike or Starbucks if they owned it if it’s like a threeyear play I feel like I’m going Ulta to buy but if this is like 10 15 years it’s got to be Starbucks or Nike in my opinion I mean would you say the Starbucks and Nike are in the top let’s say 30 ions images whatever that Americans know okay then why would Nik I think that’s my point well yeah I think I’m saying if you’re going to make the the best irr over like 3 to 5 years I think Ulta has the potential to do that but if you’re holding 10 15 years Nike or or Starbucks yeah I won’t even say that Ulta won’t do better over time or anything but I I would be hesitant to tell people to it’s hard to replace something that has special uh place in people’s minds so unless it’s very expensive or they’re going to do something really dumb and even you know whatever the recent results were they seem certainly Starbucks is making a huge pivot um that can be bad sometimes so we’ll see when it happens everyone’s excited because they think the pivot will be good but pivot is bad as often as it’s good so sometimes that’s a good time to exit is when everyone’s excited about the new Direction um question views on incorporating momentum into buy or sell strategy empirical data shows it would likely improve a value Investor’s returns has Jeff considered using it in some way especially to avoid value traps I have not considered using it in any way um I do think that if there was something that momentum would add to that yes what he’s saying there is that uh value and momentum would be good together as compared to some other things that we could that it could be paired up with so I don’t know that momentum will be helpful for everybody but yeah it would be helpful in the case of um value things yeah it’s just an issue of I mean this is the issue of the uh how do you wrap your mind around it here and this is what I was talking about with Buffett what are we doing if we’re saying that we buy stocks that go up in price and then how does that fit with the rest of the value approach um value is an approach that makes sense to me regardless of what would happen with the market this is something that that the approach that we use would make sense with the idea that it’s durable in all sorts of different Market environments momentum the question is like is this just empirically something that has worked and then should I just incorporate anything that is empirically worked you know I wonder if he’s referring to business momentum well I I think he’s probably referring to stock momentum but yeah we certainly incorporate ideas about business momentum deeper in the business all the time when when making decisions about stuff um to the best that we can I think that’s critically important I think that that’s what you want to have when you’re doing things with value stuff um or just in general it’s the most undervalued part of it is how things are going to get better for the company that doesn’t you know the good company that becomes great or the lousy company that is now things are getting better um it’s pretty easy for humans and computers to see looking at the past what the situation was but it’s harder for them to then look ahead and say oh look at supply and demand going forward or something you know um yeah would you ever invest in REITs or utilities how would you value them I don’t know I don’t think I’ve H it’s not technically true but I I’ve not invested in those things unless um it was like a special situation basically I I’ve never invested in a regulated utility for its like dividend or predictable results and I’ve never invested in a re for like it’s its dividend but I have invested in things that produce power um but aren’t you know uh utility effectively um not the way that it’s meant here and uh I’ve invested in things that were like in a liquidate or something but that’s about it so any particular insights on CEOs operating outside the headquartered City and the impact on company performance for example Starbucks CEO allowing to operate remotely people are yeah hung up on that yeah that’s often not a good sign but it’s fine it’s a sign that you are desperate so it’s kind of like if you you think from the company’s perspective or from the CEO you know what it’s similar to is um uh Dr Doom is going to now be played by someone who played a different character before was big with the um the studio right so it’s saying what it is a sign of is that they need a savior right and so that’s why and so they have this belief about that and that’s usually wrong that you overblow in your mind how effective this person can be in doing what they need to do but it’s possible I mean there’s certainly plenty of cases where someone was brought in and it was a key thing that they were brought in and they did great stuff but how many times was that someone that was kind of brought in and and given all this and famous I mean Steve Jobs they did it with and that worked right so Steve Jobs was brought back as a savior for that company and treated that way certainly and it worked out so um I wonder if it’s different when it was his it was his baby at one point that he started you know yep there was a little little bit of that with um Jamie Diamond yeah uh when he went to um was it was it called bank one at the time do you remember what it was called M so pre the merger with Chas yeah so there was a bit of that too so it has it’s happened before and those were successful second careers for people so it’s possible uh Steve Jobs technically I guess was employed in stuff but not a company that was making any money right right and um you talking about next yeah that was his company yeah but it wasn’t doing anything I don’t think it was doing as well as Apple but they were making I think well Apple was about to go out of business so I mean it wasn’t doing well but I mean there was no need to steal him away from I don’t think anyone but Apple wanted to steal him yeah he he wouldn’t have been in demand anywhere else um yeah I I don’t know stealing from an actual other company that they’re already working at I don’t know why do you think Steve when you read the accounts of like his time at Pixar it seemed like he was almost a different Steve Jobs with Pixar than he was with apple do you think that’s just because Apple like the level of passion was different where it seemed like at Pixar he was much more let them take the driver’s seat you know trust people more not be crazy and then Apple people always talk about you could look at him the wrong way or he could look at you the wrong way in a the elevator and you’ll be packing your stuff up what do you think that is I think that’s why I mean I think that Buffett left people for other for running businesses completely alone but if they tried to touch his stock portfolio they’d be out the door so I think it just he had felt complete ownership over it as an extension of himself and not Pixar let’s see next question how do you discern which businesses in an inventory heavy industry are the most well-run I would say how many times they’re turning over their inventory you could tell uh well run you could do like a gross profit to the net tangible assets that’s like that yeah right so one thing is you could plot it if you like doing that kind of stuff you can see visually so often in Industries there’s going to be a you’re going to say that theoretically what’s grouped in the industry are not really the exact same business model and so there’s going to be tend to be more of a relationship than you expect in terms of higher gross profits on items that turn slower and lower gross profits on items that turn faster which is predicted by the idea that in in capitalism and stuff you’re competing on returns on Capital not on on like margins or sales or something um so you have to compare them that way I see so many things written up where they’re like this company has higher margins this company yeah but it doesn’t have higher turns or this company has higher turns yeah but it doesn’t have higher margins so what you just said about gross profit to net tangible assets and all that is is really good um yeah the hard thing is of course getting ahead of it so that you don’t get in and a point out which they’re making a mistake about something else if you ever know that they’re going to take a lot of inventory out and you can predict that ahead of time boy does that get you good results because that is something the market highly highly highly overlooks they’re not great the market is pretty bad about understanding how receivables and inventory work yeah are fears of national debt widely overblown considering that Nvidia gained 3% of it since the August 5th open uh yeah as long as people take are willing to be paid off in in shes of Nvidia and you don’t have a problem yeah yeah I think they’re uh I think it’s uh underappreciated how much deficits uh in the national debt could really harm the country’s future I mean the issue with perceptions of the national debt and Nvidia are related in we talked about like the George Soros type stuff in some previous podcasts whereas like reflexivity and all that my problem with these are if there’s something that can go on for a really long time then people can be unaware of the risks that are happening there so you could pile up a huge amount of debt and not have a problem for a long period of time anyone can do it a company can do it an individual household can do it a government can do it and it won’t affect how it’s run up until the point where you decide to do something about it right and maybe someone forces you to decide to do something about you decide it yourself but there’s no ill effects for a period of time just like there’s no ill effects to a stock getting wildly overpriced until someone says oh I think this is over price starts selling it and then it changes um it’s harder to fix the problem the bigger the problem gets and so what you end up doing is more frightening when the problem is several times bigger but you don’t feel that until you know the time where it’s the um day of judgment on that stuff where someone decides oh we have to do something about this problem but if you have a credit card with a $10,000 limit and you start at zero it’s only when you get to 9500 that it starts to feel like pain you know what’s your view on the Auto industry given the depressed valuation especially for the OEM in Europe yeah I it’s an industry I don’t know much about and feel like I don’t understand well and everything but that is true some of it looks very cheap to me but have you looked into deer and Company it is Big moot company I’m struggling to read the balance sheet because of its Financial segment yeah I would appreciate if you could touch on that that’s all I can touch on it’s mainly a finance company in terms of how it actually makes money which is fine that’s fine I mean that’s that’s how some companies make money and everything but I’m just yeah that you know I mean when people talk about Kmart as some sort of car dealer or something no Kmart is there has car dealerships to create loans you know mhm how should you analyze defense stocks that’s a great question and I don’t know the answer to that one either um they I mean a lot of them are highly highly Diversified so it doesn’t necessarily matter all that much so what countries are they in what countries do those countries have relationships with what projects have they worked on historically how much do each of those things add up to and so just an idea of what that looks like to the overall budget the truth is like a giant defense company isn’t necessarily all that harder I mean people feel like I can’t analyze it but can you analyze a big mutual fund company you know asset manager can you analyze a big um uh Ad Agency can you you know like we get into these companies where yeah you don’t know everything about every little part of it but there’s most of the projects aren’t adding up to that much and there’s only going to be five people that they’re going to go to to five firms are going to go to to say would you like to bid on the next project or something you know what I mean so if you have an entrenched position in the military of France or the UK or the United States or whatever there’s only a that do and then you can it’s not that hard to estimate how much percent of their GDP they’re going to use on Military things so yeah I don’t you know I don’t think it’s all that different than Aerospace for being able to figure it out to be honest you know Aerospace is more Winner Takes all um for some of it but yeah but a highly concentrated one would be tough if you’re telling me that they’re making all their money from a couple um contracts or something mhm uh somebody asked for your take on hellofresh quick take or otherwise you’ll have to give more your take because I don’t think I understand the the I’m not the person for the service and stuff right so I don’t have a take on the business itself but as a customer I I liked it actually except for the POR were a it was a little too tiny for me you know I I have a big appetite but it was nice uh sending the exact ingredient ingredient to use to your house so you’re not wasting ingredients and stuff like that you get to pick your meals and whatnot um but I turn it off I don’t know why I did I think just I don’t know if I just didn’t want to pay the price or what but yeah so my my problem with these generally is it falls in the category to me I think of the be careful because if you have something that you’re trying to get a recurring you know whatever sort of thing going it’s better to play to people’s worst instincts rather than their best right okay like you know what I mean um some someone that’s selling um scotch and cigarettes and stuff as opposed to weight loss things I’m going to be thinking that that’s more a long-term business model here I just worried about the churn and the marketing all the time with any of these things you know of how much you have to do because I I just wonder if everyone will trial it there’s always an appeal to something that you haven’t tried before but does everyone try everything one time and then you know move on how many people have actually used like four different services for a period of time and you know that’s what I mean so that’s why I was asking if you could just talk like Factor meals you know yeah but the difference is like Factor comes already uh made for you so you just pop it in a microwave whereas hello fresh they send you all the ingredients and you just cook it yourself right but what I I guess what I’m cons concerned about is like let’s say Factor right yeah they send a direct mail thing to you and it has a QR code on it or something and a you can save money the only reason I’m peing interest is cuz I got a discount for like 50 bucks for five meals for a week or something like that yeah and my concern with that is does that as a marketing thing my thought would be that will work if you’ve never heard of factor or if you’ve vaguely heard of it but not tried it right but is that working to get you to try it one time and if they send you that later after you’ve already been a customer and stuff it doesn’t work but the problem with that is as long as there’s new entrance are you always interested in the new thing that’s always my problem with with weight loss related things diet exercise all those I mean that’s all even things that aren’t there to make money I do wonder if people are like here’s the latest new thing in this you know which doesn’t necessar make the most sense why would the best thing be the latest thing why would we have just come up with the best diet this last month or something they’ve just discovered it they’ve just discovered the best way to exercise or diet or something probably not probably based on principles that they knew decades ago you know what I mean why would the best service be something just now we’re not thinking oh we’ve just invented something better than Starbucks this week you’ve got to try it you know um so that’s the kind of downside thing to it for me with that always is the marketing part of it um and the appeal of the other ones is like I said with the the the vice type things is that people may not like it and may keep doing it but um I think it’s harder to send something in the mail and say try this and um I don’t know there’s just a feeling that people are like I should be doing this or something and then here’s something I can try and try it but then is the same factors that were involved last time with why you didn’t stick with that one and then how much does it cost and everything so I mean I got a pro what was it uh tavala I had that’s a product that you can buy and it does meals and it’s like a little microwave oven type thing right I I kept the equipment and just canceled the service over time and love the equipment but never Ed the product and it’s probably sort of a razor and blade type business so I don’t know if I was a highly profitable customer for them h this thing TOA yeah yeah the actual equipment was pretty useful yeah oh interesting MH interesting but that wasn’t why I got the equipment in the first place it was just for for um to use with it and then I was like oh this is actually really useful for me just making other stuff in it so but you can also just buy from Hamilton Beach brands or something you know like uh yeah go to Walmart Styles and pick up right probably something that’s similar or whatever yeah but uh what are your thoughts on over-the-counter markets so I guess maybe because the stock’s down a bunch and the ORS recently right and earnings been very flat I would say in terms of Revenue and down in terms of earnings a little bit I mean we’re not talking about huge this isn’t a business that has huge up or down years normally MH yeah so call it down from 60 bucks to $47 we have coup questions on this okay the last time the stock was even meaningfully going up was like late 2021 or something I mean it’s been barely goes up to although it hadn’t gone down much and now it’s going down you know yeah it’s not a super cheap stock so you always have that problem of where’s the floor on it when people decide that they don’t like it you have any update thoughts on it on the business I like it a lot better than the market I mean you’re buying something at what is it free cash flow is often very comparable or better than earnings and you’re talking about earnings being only you know 20 times or something yeah I would like to buy something like that um cyclically it’s not great time for it in the market obviously um with the businesses that they’re in so that’s not doing so great I mean we talked about that like all the speculation right now seems to be mag seven or big things there doesn’t seem to be a highly speculative environment around tiny things and foreign things and OTC market says nothing in big us companies basically so it has zero exposure to all the speculative stuff that’s going on now so they’re kind of i’ say in a cyclically low period for speculation but yeah what you like it more than the market over the next handful of years and in part because of the price I mean if it was 1.5 times more expensive then I might feel the two are more comparable but this is you know for very for something that has you know doesn’t really require capital and in most years grows a bit in nominal terms all the time with the ability to pay that all out to you 20 times is not crazy I’m not you know 20 times is a lot to pay for some asset heavy thing that has to reinvest it all but for something where that’s all the free cash flow and everything I mean you can only get in bonds something like that and you have no upside you get a little bit more I mean in trunk bonds you get a few hundred basis points more but you you really can’t lock in something to own forever a long duration you know let me own this thing as if it’s a 30-year Bond or something and get really good upside Beyond just like getting paid this amount out now they don’t literally pay it out I mean they do some BuyBacks and dividends in some ways um but and and the BuyBacks really just offset the the um delution they’re not really much in the way of BuyBacks but you know in terms of their so the cash could sit on the balance sheet but their cash flow is basically giving you a yield like you could get as good as you could get in long-term investment bonds and then you have upside beyond that with the idea that they might grow each year there’s not that many years where they shrank if we go to the overview they’ve only had a few years where they’ve actually declined right in terms of um they I guess they reported maybe they’ve declined a little bit I mean what do they have in terms of an actual down year there and how big is it that you can find are you referring to earnings or Revenue well both I was refering yeah but the earnings is trickier because it does depend a little bit on what we’re seeing but let’s start with earnings I guess okay well earning I mean the only you’ve had you haven’t had any Revenue uh year-over-year declines but you have had earnings declines uh 2019 right and then 2023 but that’s basically it okay so let’s go with operating profit from in the year where they declined what how did it go from the year before to that year uh okay so the year that it declined was 2019 operating profit in 2017 went from 18 million to 20 million and then fell another 2 million uh or 2 million in 2019 down to 18 back was two years before yeah mhm and then this most recent time they had that happen again and we don’t know when they would be back to the level they were at before I guess yeah in 2023 yep so you know it you like when there’s a decline maybe you lose a year of progress you know you lose two years of progress so it fits and starts but you know I mean there’s some banks like this and and some other companies like this but anything that doesn’t really need additional capital and every 3 years or so is going to be a bit better in terms of their earnings over time if it’s priced just at the levels like bonds are priced at in terms of free cash flow yield here I think it’s attractive yeah I think that that’s attractive now if growth went to nothing it wouldn’t really be attractive you know but as long as there’s some growth you don’t need a lot and like we saw here the growth was like 10% or something over the last 10 years I don’t know that they’ll be able to duplicate that but um that’s a lot for something that your your free that your multiple on is only 20 or something something right now so mhm got it cool that is a great place to stop I want to thank everybody so much for sending in those questions on Twitter follow me on Twitter or x uh if you want to be on the lookout for next time I will do that but if you want to send me a more in-depth question that we will put in the presentation and pull it up on the screen you can email it to me at Andrew Focus comp.com I thank every so much for tuning in with the both of us on the podcast here today make sure you hit the Subscribe button wherever you’re listening or watching us so you will be notified every time we upload a podcast um and reach out to me if you’re interested in learning about our Money Management Services Andre Focus compound.com I thank you everybody so much and we will see you in the next podcast take care

Description:
00:00 Intro 01:00 New Bid for Paramount 05:56 AAP/AZO: Capital Allocation Differences 23:30 Fixing a Declining Business 36:30 …

Transcript:
welcome welcome welcome how’s everybody doing hope you are doing well my name is Andrew with Focus compounding on air live with Jeff gon Jeff how’s it going today it’s going very well Andrew how’s it going with you it’s going great we hope it’s going great with everybody else as well if this is the first time you tuning in with us thank you so much for joining us be sure to check out all of our content that we push out into the investing Universe best way to do that is to follow me on x at at focused compound if you want to get access to investment writeups from Jeff going all the way back to 2005 if you’re watching on the screen right now you can go to focus compound.com click that blog spot on the header and you can get access to all those writeups look at this December 2005 if you’re interested in learning about our Money Management Services you can reach out to me at andreid Focus compounding doccom and we will start that conversation so today’s podast Chef we have a lot of stuff to talk about and you know we talked about Paramount a few podcasts ago right mhm and I made the claim I said I don’t think this is the end of the story I think somebody’s G to come scoop in and sure enough few days ago this ad it looks like it was updated two days ago August 21st Edgar broth brothman what’s his name BR yeah the bromfman family yeah this is uh what serums was their original thing that they made their money in what what’s that they’ve been in entertainment things Canadian um well beverage beverage yeah they’re making a run at Paramount says the bid gives non- Redstone non boning Paramount sholders an option to sell shares at a premium okay um that the issue is the go shop was with the special Committee of the Paramount board but Paramount’s a Shares are controlled by national amusements and the complexity for these deals are always buying National amusements but also getting the approval of the Paramount board for it right so that was the issue we did did know that there was a go shop period for that and they extended it right when this offer came in yeah yeah they extended and now I think um Ellison’s Sky Dan company he’s arguing that they violated something with that go shop that it ended or they were supposed to let them know and they didn’t and now they’re pissed off about it too obviously I believe there’s a penalty um if they end up going with a different deal that’s meaningful it’s in could be hundreds of millions yeah so it says brofman has submitted a revised bid of six billion for National amusements and a minority stake in Paramount according to people familiar with the matter he formerly entered the fry on Monday night with a $4.3 billion offer uh the new bid includes 1.7 billion for a tender offer that would give non Redstone not voting Paramount shareholders an option to cash out at a premium of $16 a share the people said in his initial bid brontman didn’t offer Paramount Class B shareholders that option to cash out so it was a new sweetener that went on it Ellison’s roughly 8 billion offer involves by national amusements and merging Sky Dan into Paramount the deal would put 1.5 billion on Paramount’s balance sheet that could be used to pay down debt additionally it would provide more than 4 billion to buy out about 50% of nonbing Paramount shares at $15 each or allow them to roll into the new company mhm yeah the complexity here has to do with the fact that you have the super voting shares and then also maybe National amusements really needs the money you know MH um so that’s the difficulty of being in a completely controlled company where you have no votes I mean in this case the B shares don’t vote at all it’s a very unusual situation actually normally you get like one vote and the other get 10 or something but here it doesn’t have any um so I mean does it I think it says somewhere how much the economic stake of the national amusements is in it versus the voting the economic stake is pretty small at this point um so although they have all the votes and they control it it’s you know it’s a small company controlling a big company and then there’s also debt and all that too so it’s a big asset to battle over big trophy asset but this is something that’s been done done before in media things where they have the super voting and everything mhm with Allison’s offer of merging Sky Dan into Paramount do you think Paramount is still a good asset at this point well Sky Dan is related to the movie studio so I think that maybe their plan might have been to merge that and improve it and sell off the other things but I don’t know that that was the plan but that would make the most sense because that’s the part that the uh younger Ellison um knows about that business and Sky Dan is a big partner for them well we’ll continue to bring this up on the Pod but do you think this is the end of it do you think they’ll just take Sky Dan offer or do you think there’s more to come here I don’t know if you’ll get the value for the um for what the assets are really worth that’s always been the problem here of whether they could organize in such a way to orderly sell off the assets and get shareholders back their money shareholders of the the non- voting shares um and I’ve always doubted that here so I think they have kind of non-economic interests in it and this is a way that probably doesn’t go for the most that it could go for so it’s good for whoever is able to finally buy it possibly depending on how it’s structured um but it’s not so good for other shareholders potentially although it could be fine because it could continue on depending on how the deals are structur you can continue on and then you could get asset sales later or something that get you your money back um but it would have been better if this had started years ago MH mhm so another piece of news that came up that caught my eye because it was interesting because we’ve talked about Advanced Auto Parts we probably at the end of last year I think we brought it up on the podcast and the stock was down a good amount if we look at a chart right now I mean let’s see so it’s down about 20% year-to date but it’s off of a high of $239 per share it’s currently trading around $50 right so it’s come down a ton um and it came out that carile is buying uh World pack for 1.5 billion the deal is expected to close before the end of the year and it says in the 12 months that ended at the close of the second quarter World PEC generated about 2.1 billion in revenue and about 100 million in iida right so what’s that about uh you know pretty healthy uh multiple on that business but you know the fascinating thing about autoart or Advanced Auto Part which I was thinking about is they’re basically in the same business as AutoZone right mhm and the difference in the performance of the companies over the past you know 10 odd years or something like that so wanted to see if you could give like a snap judgment on Advanced Auto Parts so market cap 3.6 billion Enterprise Value is 5 billion like I said they’re going to have 1.2 billion after taxes and fees from selling that company that business does about did about about uh 100 million in iida but what happened here at Advanced Auto Parts it’s always so interesting to me when you have same industry sort of the same business two different philosophies on Capital allocation right AutoZone has long been known as a cannibal since like 2008 and the performance of these two Securities and businesses could not be more different you know yeah I think Advanced Auto Parts was doing well until the stock collapsed as a stock it wasn’t doing that well as a business if you look the things we look at right it’s gross profit higher each year it’s operating income higher each year all those things it hasn’t been for like 10 years I mean it’s been going flat to down for a while so as a business it hasn’t necessarily been getting better and return on invested Capital as you can see there is lower almost every year for a decade or more yeah um yeah when did it Peak it let’s see 2011 okay and then it which makes sense right in the middle of the recession basically or coming out of the beginning of the very slow growth out of it but it basically was flat to down since before then of 2007 or 6 or whatever let’s say to you know a few years after that Peak that lasted three or four years and then it’s been flat to down on those measures the whole way um but it traded at pretty impressive multiples I I mean I guess you could see that probably on you know some of the key ratios and things of the MH um yes so I’ll just read the uh price to earnings so let’s see when it Peak and well we have it going back to 2014 but yeah it always trade north of 20 right so I’ll read from 2014 on for the PE and I’ll round up or down 24 times 23 times 27 times uh 15 times 27 23 21 so yeah it always trade at uh traded at a pretty high multiple of earnings which is a very high multiple for a company that during much of that time wasn’t growing if we look like if we at sales gross profit operating income it wasn’t having a lot of growth of the business um over time so that’s kind of a high multiple for that to be happening yeah it was like mid single digit growth some years or really you look at it’s even easier to see on the overview because if you go a few years at a time you can see that it’s not really growing that much especially in the numbers that really matter which like we said are gross profit more so than Revenue especially which if you’re retail and then operating profit you know the gross profit is I mean let’s see if we take five years at a time or something how much does it grow 2014 versus 2019 2014 we’re at about 4.5 billion 2019 4.3 billion and then five years after that what was it at back to basically 4.5 billion yeah so the same that had beened 10 years before and hadn’t really grown so you know I mean and there’s inflation during that time period right I mean actual car prices used car prices prob of the past past 50 years of inflation at maybe 4% I mean there’s adjustments the FED adjusts things because they say there’s you know honic um things so like the cars are better but if we just said what’s the cost to actually buy for cash a used car for a consumer it’s probably gone up at 4% a year for a long period of time I would guess it’s it’s ahead of actual inflation um so you would think it cost more to repair things over time so you think in real terms that your real gross profit is not going up and that your business in real terms is shrinking a little bit which is fine I mean that’s fine but that’s unusual to have a 20 25p or whatever on that I guess it’s very resilient and people like that that it will do as well or better in a recession than it will in a boom that’s true MH um the quality of earnings so look at the operating profit so 2014 operating profit 852 million 2019 677 million um and now I mean 2023 was a horrible year 114 million uh but it’s just gone downhill from there now they do they have tended to convert I mean I haven’t calculated the cumulative numbers those are median numbers on on Quicks but they have tended to convert free cash flow at a pretty good rate versus pre-tax income like that’s not terrible um for a business that has a lot of you know working capital it’s actually pretty good so for an actual real physical business it does convert into free cash flow pretty well um but we’re still talking about I mean it often has traded on multiples equal to or higher than over-the-counter Market maret and it’s grown you know a lot less um and its Returns on capital or less right so I I think the stock got ahead of itself when it gets to those sorts of multiples why do you have those multiples as opposed to like average multiples for a business why do you think the businesses deteriorated is that like competition is it what what would you say it’s a good question I don’t know the answer to that I mean I don’t know how much it’s deteriorated really like I don’t know how inconsistent the results are I think the results are more consistent than inconsistent actually if we look it’s almost 20 years of mostly pretty consistent results there was that that blip up that we talked about with the the coming out of the recession but and then there’s bad results very very recently but actually that’s a pretty consistent like 20 year almost record there 15 20 years there’s a long record there let’s see if you do you see with the lip where it starts to come up uh or where it tops out there yeah a couple years after that if you go up like there what year are we there let’s say one year before that 2005 2004 okay so from 2004 to 20 yeah about 20 years most of that is actually really consistent for business much more consistent than any other business and then it’s not economically sensitive or it’s counter cyclical so maybe the extreme consistency of the business even though it wasn’t growing or getting better is an attraction for people yeah mhm mhm compar it to AutoZone that has consistently grown uh both Revenue gross profit operating profit I mean this looks like a dream if you own this company asset growth of the two businesses is pretty similar actually asset growth and revenue growth is probably not radically different I think it’s yeah look at that so for people listening 10year ker in Revenue at Advanced Auto Parts 6% 10-year ker in Revenue at Auto Zone 7% % if you round up 10year ker in assets at Advanced Auto Parts 8% 10year ker in assets at Auto Zone if you round up 9% so it doesn’t look that much different yeah no and that could be also even the assets could be a start and end thing because it could be Heavy right now and they could have been light 10 years ago possibly it depends but that’s very possible given where we are in the Cycles too so they could actually have asset growth and revenue growth more in line with each other but obviously at AutoZone like you see there the EPS growth is good and free cash flow like we talked about but you could just see that you don’t even need to look at the percentage numbers you can always just run your eyes across the 10-year numbers and the numbers we talked about like if we just use gross profit as the Top Line basically and use that do we have kind of incremental growth more often for this company yeah MH so same thing if we look five years ahead or something let’s say 2014 to 2019 what was the change in gross profit for AutoZone we’ll go we went from 5 billion to 6.3 billion and then 5 years later 6.3 billion to 9 billion so I mean that is like a big growth difference over time and really gross profit is the only thing that you get to use to run all the rest of your business you know anyone if they’re willing to sacrifice gross profit can show additional sales in a business that’s at all retail oriented or inventory oriented in any way you just cut your price and you can sell more um I mean I think we had some economic data that people were impressed with sales numbers but we we adjust them for certain things so if you cut your prices and sell more which is very possible in a single month um that’s actually a sign of bad things about to happen but it causes your retail sales to go shooting up so you need to know both of those numbers what you really want to know is what are the gross profits at a minimum of retailers not really what was the total amount of final sales that you had um but we don’t have you know government data on that so it’s not just I mean it is capital allocation but it’s not even just Financial engineering I guess is what I would say they’re just things more basic if you look I think that um would suggest one should have a higher multiple than the other but I don’t know does it give you EV to eidon numbers on the two of them um each year it gives it gives you pe but then you have to kind of adjust for the structure of the sure let’s see it do not on here but we could actually pull it up on kin uh let’s see so I think we go to historical and we do EV to eida okay and then I think we could also do um a and evid so there you go right there yes so it has the two so we can compare we can go back 10 years and you could see they I mean they’re obviously very different right now Auto Zones at 14 times EV I and AAP is at five times but for most of the history like go back I mean they kind of traded very close to each other I mean at least from like 2014 to8 no they they really always traded pretty closely I mean I think it looks like they mainly started to diverge in 2019 yeah correct I think that you basically have the Divergence from what I can tell from it the Divergence in the markets realization of the difference between the two companies is since Co but the or a little before Co in this case but um it’s only going back about 5 years whereas the results difference easily goes back 10 years and it could go back further than that we don’t know um from just looking at the that data um I mean we know some because we have the return on invested Capital getting better even earlier in Auto Zones history so um but some of that is also people look at the stock price and if let’s say your earnings per share are going up 15% a year if your stock goes up 15% a year in some climates people get a little nervous about that even if your earnings per share went up that much they think oh I should take a profit I should you know um so some boring businesses that can grow 15 or 20% a year in earnings per share can get where they don’t get wildly overpriced you know like a a hot growth stock if you can grow consistently at that kind of number because there are always people who are going well why is it ahead of the market this year and this year and this year because its earnings per share growth is higher you know look at this Jeff from the quality of business just going downhill so Advance Auto Parts will go back to 2011 the return invested Capital looks like is in the 25% area and then AutoZone is the green line but AAP just consistently went down where Auto Zone say the same were got better basically over the time period yeah but you see a lot of writeups of Valley investors club or whatever things you can think about that are comping things against other businesses and so at any static point it might seem well you get a little bit lower multiple I mean it wasn’t much lower much at all but occasionally you might say oh you get a little bit lower multiple or oh they’re bringing someone in who is going to turn things around more there’s more stuff that can improve at this company in the next 18 months than this company and so it creates demand for the other um stock there you know mhm even if it doesn’t have as good a long-term result um we could throw O’Reilly in the mix and that traded I mean the business was similar to uh AutoZone where it got better but it looks like it started off at a worse spot and just consistently got better seems like Auto Zone’s always been pretty good O’Reilly’s gotten better over time and Advance Auto Parts has just gone downhill I love it though wherever you see an Auto Zone you always see an O’Reilly right next to it but it’s sort of a mixed bag if you’ll see an advanced auto parts right like right by it but I swear wherever there’s an Auto Zone couple blocks away or right down the street like 20 yards you’ll see a uh o mhm I mean we can I mean we’re looking in retrospect so it’s easy to see this but this is sometimes the case that highly operational businesses if things don’t change with them have good results or have ways of getting better all the time as opposed to ones that don’t and that could be organizational things or it could be other things and it sometimes gets overlooked it would be natural for people to look at these three and say Yes their business mods are a little different or whatever but that there there’s not a moat around one and not the other you know um you see it in Insurance things banking things a lot of times that you know yeah it could be argued there’s not a natural Mo but one is operating better and has a different kind of strategy maybe a different focus on what it’s trying to achieve um than another Auto Zona has obviously been a cannibal uh shares outstanding in 2014 34 million and where we sit today it’s at 19 million you can look at a AAP compare that um 73 million in 2014 60 million and uh at the present and then we could look at O’Reilly as well just while we’re at it O’Reilly Automotive uh wow they’re like Autos Z they bought back a huge chunk 106 million in 2014 61 million where we sit here today it’s a shrinking business long term I mean it’s doesn’t grow as fast as the economy grows certainly and it may even not really be growing much in real terms like we said at all we don’t have numbers under the hood on that but I’m sure that as a frequency percentage of people who are actually buying from you um for do it yourself and stuff as opposed to what it was before as a percentage you know penetration of the population is or car owners is lower and lower and lower all the time probably we can guess that just by looking at the numbers and saying they’re not keeping up in real terms and the companies aren’t losing market share to the overall industry so it’s pretty clear that that’s must be what’s happening the beautiful thing is though Jeff is that you could have six or 7% Topline growth control your gross profits control your expenses generate cash keep return invested Capital High buy back a bunch of stock and if you look right here the three-year ker Total return for AutoZone 24% 10 year 19% five year uh I should have said that first move it over uh 5e 24% 10 year 19% uh kager so the results have been incredible abs and I mean there’s lots of famous stories of companies that probably their original Market has not grown during much of the time that they were successful stock coffee consumption hasn’t grown During the period you know per capita and stuff During the period where Starbucks was successful certainly the kind of retail that Walmart was originally in hasn’t grown as fast as the economy over their period of time now they’ve got into slight all those companies have got into slightly different things over time but not enough that it’s not just mostly market share gains and just high profitability on a a per location basis um now you always run into the problem that eventually the per location numbers are a lot worse and so that’s why you have to buy back your stock and everything because you saturate yeah yeah O’Reilly right here total return 3year 22 or 23% 5 year 24% 10 year 22% Total return ker it’s incredible absolutely incredible so I guess if you’re Advanced Auto Parts now what do you do how do you you know get back up to speed here and and turn things around well we have to look at some of the numbers there so I think we probably want to start with balance sheet on that so you can see that on a reported basis their offering profit Dr dropped off a cliff two years ago they were making 800 million now they’re making 100 million there’s never been a number like that in their history going back a really long time um but then if we look at their balance sheet what do we see in terms of like um their current assets recently and we’d have to look quarterly too but dudes that look fairly normal in terms of what they’re carrying in inventory and what they’re doing in terms of yeah let’s see on an annual basis that looks pretty normal right MH we go over to quarterly see if it looks different but kind of looks very similar well on an income basis how did they lose $700 million of operating income that they had two years ago it went somewhere [Music] mhm so how much a gross profit dropped in the last couple years I’ll just read from 2020 on uh 2020 4.5 2021 4.9 2022 4.9 2023 4.5 yeah so it wasn’t from gross profit or no more than half of it was from gross profit coming down that’s for sure so it had to have come in other forms below that mhm what do we see in terms of the cash flow 2021 1.1 billion then 737 million then 287 million yeah so that is a big negative that you see and it will happen with these companies sometimes depending on the cycle is that their their cash flow from operations is going to vary more because of working capital things so can we see what large working capital items changed much let’s look at the ones that are um negative uh a big difference was let’s see change in working capital I’m just going to go from okay 2021 on word change to working capital 128 million uh 2022 negative 93 million 2023 51 million uh change in deferred tax 59 million 2021 2022 17 million 2023 negative 48 million um and then stock based Compass jump around a bit but I would say it was the change in working capital and change a deferred tax pretty big amount mhm let’s see um um yeah so they their inventories are about 200 million more than it was a couple years ago their um accounts people are similar and their inventory is much more important number than anything else their inventory is like a third of their balance sheet or something probably and that might include Goodwill and things like that yeah so tangible Valance she is even more than that um liabilities stay pretty similar so it was generated by having less net income which means that they had um some amounts of higher sgna basically but how much higher could they have had yeah well total operating expenses went up about 300 million and and sgna went up about 300 yeah okay so those are the same number so that went up about 300 million and then we said gross profit was about the other 300 million so that explains about 600 million which is about what the drop was from 800 something million to 100 something million probably and then it was a little bit worse in terms of cash flow from operations because we said there’s a little bit of a build right in in inventory essentially which is not a big percentage build but if a you know a change in inventory for them of 10% would be half or 2third or something of their operating income you know their cash flow from operations could drop by 50% if they had say a 15% increase in in inventory or something you know a company like this if they had a 30% increase in inventory would go even if they were selling at the same rates and everything as before if they just it this never happened but they just decided that they needed to grow inventory by 30% or something that would wipe out all of their cash flow even if they were exactly as profitable as they had been at their Peak so you could imagine so divide that by smaller numbers and say okay even if a little change of five or 10% that you shouldn’t have had um so maybe they overestimate what their sales would be and everything it’s possible do we have gross margins yeah could pull that up right now gross margins went from 44% average to 40% in 2023 MH which could if they had cut their price to achieve that um then that might be what we’re seeing in terms of inventory and all of that or if they just failed to pass along inflation which could also have been happening if the things that they had were inflating but that’s kind of the factors that their sales weren’t sufficient Rel you know the demand probably wasn’t sufficient to what they expected in the last two years I can’t really think of what else the issue would have been mhm so how do they turn it around they’re shedding assets bringing in capital well I mean what was their gross let’s let’s just use gross profit as an example what was their gross profit years ago across that line let’s just say from 2014 to today what kind of numbers do we have you can you can round them off itn’t it was it was always CL it was we’ll say 4.4 billion 4.5 billion yeah but what was their their gross margin margin was always 45% is high 44s to 45 it looks like okay all right and then their Returns on Capital were okay right I mean the return that I’m seeing does include intangibles but I think we just saw intangibles are 10 or 15% or something in the balance sheet I we’d have to check but it’s not a huge huge number so in terms of tangible returns it’s not that much higher so it’s really just a question of what the gross profits are what the turns are um their revenue right now we we said what is it is it close to 12 billion what is it now 11.2 okay so on a cost of good sold basis they’re turning not even three times they might be turning two and a half times though so you’re turning two and a half times and you have say you know like we said 40 or higher percent gross margin yeah I mean the on you’re talking about a high you know really high number there of what you could be doing um terms of return on tangible assets probably I mean they have property planning equipment too but even when I add that stuff in it’s not a problem I mean those numbers look really good compared to to say a supermarket or something which would aim at its best to be making you know good returns but like the supermarket will do better because they probably have lower sgna as a percentage of what they have that could be a potential problem for them I mean sgna we said is about is it about a third of sales sgna let’s see if we look at the income statement it’s one turn right so sgna is normally about the amount of inventory they’re carrying so what was it recently a she in 2023 4.4 billion before was 4.2 so it’s gone up right so I’ll just read onward from 2019 uh 3.6 3.7 4.1 4.3 4.4 so pre-co was it was about 3.6 and we’re at you know 4.4 so so if you turn your inventory like two and a half times let’s say basically the first two turns are to pay for everything and then the last turn that you get is your profit right that’s what’s actually coming through because the the First turns of the gross profit the first two are being used basically to cover the sgna and that’s kind of the the break even that you have to hit and then after that you you get that last number that you have so even if the turns decline by you know um let’s say about 10% or something that would feel like a really big change in the business so it’s probably due to turn slowing but uh I mean when we looked it wasn’t that bad let’s see um if we but but wait what did happen to gross profit in the last two years a gross uh margin okay gross margin went down yeah it was out rate across from 2021 44.8 44.2 and the 40.1 so if we look at the balance sheet for those same years did inventory stay the same because if inventory stayed the same and gross margin came down then what happened is you actually basically uh you only maintained inventory went up yeah okay so that’s the problem insufficient demand or excess of Supply compared to the Demand right cuz what you were doing I mean they weren’t literally cutting their prices because presumbly prices were going up initially in the early parts of that period at least but they weren’t passing it on fully and so by not passing it on they actually weren’t able to generate even more sales from that to clear inventory if your margin goes down and you don’t clear any inventory then that’s a sign that you’re you have insufficient Demand versus the amount of inventory you have on hand so here it’s an interesting question of like why did that happen mhm I was say is that just people going to AutoZone or are O’Reilly more over Advanced Auto Parts is competition well we could look at AutoZone and see what happened with them sure we’ll look at their gross margin the last three years now they don’t have exactly the same customers they have some of the same customers but some are different so let’s look at their gross margin the last three years okay 2021 52.8 52.1 and then 52 okay and then let’s look at their balance sheet inventories went up a good amount from 4.6 billion in 2021 2022 5.6 and then 2023 5.8 rounding up okay now the questions that we have there is like how does that relate in terms of turns because if their sales were also going up then that’s not necessarily a problem but we could also see that from cash flow if we go to cash flow has their cash flow deteriorated while their incomes gone up cash FL from operations 2021 3.5 billion 2022 3.2 2023 2.9 so it’s gone down yeah so that could be a strategic difference too is that um AutoZone has not reduced pricing but has accepted a higher absorption of inventory on hand um so that would mean that their Returns on Capital are going to go down over time their cash flow is already going down and then to clear that they would need to cut prices or to you know order less inventory and to have lower sales in the future too so there’s always a mismatch between Gap and the actual cash flow that you see in the business that’s more indicative looking at cash flow and balance sheet of what’s really happening in the business right now um and then that gets reported later basically I mean in terms of what you’ll what you’ll see because if you have too much inventory and you’re not cutting prices on it you don’t have to mark it down in any way now but you know that your gross profit will be lower later and then your earnings and everything will be lower later as that happens um we could also look at income statement to get an idea of what there sgna is what’s their sgna so they just have total operating expenses on here some reason quick to break it down but total operating expenses uh 2021 onward 4.7 5.2 5.6 in 2023 okay and then what’s their um what does their income statement say in terms of sales 2021 Revenue 4.6 I’m sorry 14.6 2022 16.2 2023 17.4 billion okay so AutoZone has both higher gross margins and it has higher and it has lower sgna as a percent of um sales if we look at the balance sheet then let’s see what their turns look like so what’s their inventory normally 2021 onward 4.6 billion 5.6 billion 5.7 billion okay so AutoZone has higher turns higher gross profit and lower SG has a percent of sales so it’s a better business in all three of those points that’s very operational so it just means that its business model is superior to advance by a significant amount like the margins are so big in this industry that one isn’t necessarily going to push someone out doing that but if you had that kind of difference in like supermarkets in the same town one would push the other one out because they’d be able to take all their business with those differences in a business like this that’s not going to happen for a few reasons one customers are less frequent don’t have a good idea of what prices are they’re just going to show up because it’s the most convenient place there so you’ll get some business that way and then two all of them certainly on a gross profit basis at least are so profitable that they don’t drive each other out of business but one business model can be better than another one and certainly at least for the last few years we haven’t looked at all past years AutoZone has a better business model in all the key respects as compared to advance which doesn’t make Advance a bad stock it just makes it a worse business at the same price mhm interesting well that’ll be a a fun one to follow speaking of cannibals I wanted to highlight this company tweeted out this yesterday I file companies that announce like large BuyBacks you know and I was reading in the Wall Street Journal and uh Builder First Source oh they recently announced that they are going to buy back another billion dollars worth of stock uh the crazy thing is Jeff is over the past three years as I have highlighted right here they’ve bought back 45% of their shares 45% okay of their stock over the past three years and majority of that buyback was was done at uh as somebody pointed out done at lower prices I think in the $80 share price but as you can see right now I tweeted out bill bilder for Source has repurchased 45% of his shares over the past three years uh but the returns the stocks kager Total return kager 50% over those three years um and I said that I thought it was a cannibal that would make Munger proud um but yeah look it right there shs outstanding going from looks like under 250 million to 116 million here today okay you know what I’m going to say about this one though right what so okay so these BuyBacks are timed exactly with cash flow things so if you look they’ve gotten 80 or 90% of all their cash flow for like the last 15 years in like the last three years which is when they did all these BuyBacks they were not cash flow generative until very recently and then they’re hugely cash flow generative and that’s when they’re buying back their stock yeah um yeah okay I mean these are very cyclical businesses right yeah I mean this company let’s go to the cash flow statement just cash flow from operations is really really simple uh preco what was it doing preo uh 2019 54 million mhm which now for them is like a couple months of business or something or something right yeah uhhuh MH they also acquired a different business too so they’ve been like buying other suppliers and whatnot so their Market power has gotten better yeah but I I don’t even know that they were yeah I mean I don’t even know they were profitable during much of that period right so something has happening where they’re generating a lot of cash flow from operations recently um and it probably has to do with pricing because unless they went into totally different businesses their gross profits also jumped from like 25% to 35% or something incredible so um which depending if you’re in a more commodity type business generally means that there’s just scarcity in the business and that that’s what happens so it could be fine it’s certain I mean it’s it’s better for the industry than if they invested it back in the industry in some way if you have unusually high prices what you don’t want to do is invest in growing inventories and everything so that’s saying return that Capital to shareholders they are returning the capital shareholders but they’re basically buying it back so that you get more and more inventory and more and more everything over time you know so it’s different from a dividend now they could buy it back and you could sell it mhm the question is should a company like this pay out maybe special dividends or something like that or go into a different business line or whatever at a time when this happens um look at that asset growth over the past 10 years 500 million in 2013 to 10.5 billion yeah so it was like a Serial acquirer you know before right yeah MH yeah thought that was and maybe the improvements are from other things happening there that that caused that um you know with scale you could say that your gross profit went up for reasons because of that but mhhm yeah interesting so this week Jeff what what I want to start doing going forward is talk about like a stock of the week or an industry of the week something to bring keep bringing people back and US profiling different things right so not necessarily giving stock ideas because if we’re going to record one podcast a week 52 ideas a year good luck but just things that weer can do it I think Kramer can do it so you know Everyone likes to dunk on Kramer to like give I couldn’t even name as many stocks is he can somehow say that he know has heard of these stocks he’s awesome dude he he’s a great I mean people like to dunk on him and it is kind of funny but like he’s a commentator as a hedro manager he was very successful I mean people forget about that but um he’s a commentator right do your own research do your own due diligence I don’t think we’ve ever purchased a stock based on you know a recommendation on TV or anything like that and we never will but um so I wanted to talk about family entertainment uh company so explain what that is yeah yeah it’s in our wheelhouse of like circle of Competency things that we like to focus on you like the business uh I mean you look at like gross margins high gross margin business uh theme parks stuff like that uh David Busters then we could talk about uh you know I want to talk about maybe uh Bull bwl and then um uh Top Golf as well and get get your opinion on like just this industry uh how it came up for me was I was reading a value investors club right up on uh David Busters which I thought actually was interesting and I like the business David Busters recently merged with main event and uh they have new management in place and their goal is to do different things change their marketing up a bit and try to like improve iida um I don’t know if I’ve ever gotten your opinion on the podcast about what you think about like Main Event uh oh the merger was amazing yeah yeah what this is the kind of thing that’s amazing that gets allowed you know talk about anti-competitive things this is a horizontal merger where they’re all the same thing I was thinking the same thing it’s great I mean even if they just took over the main events and closed them all down um it would be something yeah I think the last time we talked about Dam Busters was 2020 when the stock was like single digits yeah they needed to raise capital and everything because of Co right yeah yeah and then of course when it opened back up and people had nothing you know they weren’t spending as much time working and doing other things and there was not a there weren’t movies for years and there was lots of you know they actually then sort of benefited much faster than people might have thought whereas like Cruise Lines or something it took much longer for them to get back so it was one of these interesting stories that way but temporarily it was like oh we could go out of business immediately you know when it they were shut down for a month or something right if if landlord said you got to keep paying your leases CU it’s all leas stuff with these companies mhm mhm uh so I’ll give a background on what he says the business is we could go from there he says uh David Busters operates in the family entertainment center space it’s large 15,000 55,000 foot locations feature arcade style gaming food and beverage offerings including alcohol and lots of TVs for watching sports lots of TVs I think they actually put that in their uh in their investor presentation they highlight that uh the arcades feature both traditional games as well as virtual reality type offerings the food is typical bar food burgers fries Pizza wings fried appetizers salads Etc there’s a full bar with a large variety of specialty cocktails uh so if you’re not reasonbly priced compared to competing yeah and these things are usually attached to malls right like good large Mall basically yeah that’s why I think of it if you see a Cheesecake Factory or something you should see a dve Busters right there they’ve come in more they want that kind of thing more malls than ever before I mean especially since Co and all that but even the last 10 years more non-shopping things right so they’ve been attracted to things that especially things that also have doors to the outside and inside um the mall both most people going to dve and Busters are probably not going from the mall side of it even if there is an entrance from there but so yeah they like to add movie theaters uh restaurants for you know sit down dining stuff and entertainment things like this all the time to malls now try to fix them up mhmh yeah when I was reading this I was thinking about I was like you know I like DAV and Busters as a child and I like DAV Busters as an adult whenever you find a business that’s like that you should probably pay attention to it that’s like a good model I think if you liked it as a child or you enjoy it as an adult pay attention to that you know yeah I mean because it’s kind of DAV Busters is the poster tra for family entertainment but it’s also kind of a lie that isn’t their business it’s not family entertainment uh their business is that we’re both catering to kids and to you know adults um single adults and people like that not so so much that it actually is family but that it’s what you want to call it all ages or whatever and at different parts of the day yeah mhm it’s basically like you’re in a casino there’s like no windows or anything like that you hear you know all the games playing and whatnot sure so I mean that is that’s the actual business model of a family entertainment center is to make it like a casino like a Vegas casino where you don’t necessarily make a lot of money on some of the things that you have in fact you don’t make any money on some of them but it’s there to drive traffic and to keep people as a captive audience to spend money on high gross margin things um the highest of which are the games themselves um but then also on that you have things like alcoholic drinks you have you know and then down the list you have the food and down you know as we said I mean you’re you’re not trying to make a ton of money on on your Entre and things but you are maybe keeping people there longer doing that and then anything that you have to have staff for and they don’t have much of D Busters that would require that but that stuff probably doesn’t make any money but it’s there to lure you in and keep you busy and everything to play the game and all of that umh and because they are connected to malls almost every single time um that probably added to the selling pressure in 2020 like with malls closing down and sort of the depth of the malls and the pandemic and all that sort of stuff too I remember we were talking I guess but it’s somewhat a benefit to them because they’re basically buying the from landlords you know what I mean you’re leasing so the weaker the bargaining position of the landlord the stronger your position especially if you’re bringing traffic to the mall but I remember that was that was the narrative in 20 like when the St basically crashed I don’t think that as many people enter from a mall entrance that are also Shoppers as people might think but I don’t have good data on that so you think they’re going to Deon Busters because they want to go to Busters knows that and that that’s why they want them that’s the same thing why do you think Barns and Nobles in some malls and stuff because they I mean it doesn’t even have to be that successful a store I mean they the landlord wants them like look you know they want those kinds of things on the outside that are bringing people in there I don’t know how much it helps them but it helps them some what I mean what’s there you know I mean these are huge we’re talking about what we say 15,000 or something whereas that’s 10 times the size of maybe some small store that you might put in but you know would they rather have a Dave Busters or 10 Buckle type stores or something yeah I mean they have enough of those kind of stores they would rather this are the kinds of things they want to bring there yeah I think so yeah I agree that’s the same thing with Cheesecake Factory that always gets brought up right like are people going to the mall to go to Cheesecake are they going to Cheesecake because they’re walking the mall and shopping at Buckle and now they’re hungry right yeah it used to be helpful before when there was many more people at some impressive malls and certain times of the year it did help yeah people went to a mall and also went to the movies went to a mall and also went to the the um uh restaurants and for teens for some things that still happens but not to Cheesecake Factory teens can’t afford that kind of thing MH in 2022 David Busters acquired privately held competitor main event which operates similar facilities although main event locations also feature bowling there are 165 David Busters and 59 main events with plans to open more so you’ve been to both yes which do you like more personally I think I like Main Event more okay yeah how about you probably D Busters okay we’re just different that’s okay uh competition in the family entertainment center space is fragmented with with two prominent competitors that are publicly traded Bolero B WL which operates bowling alleys that also have arcades laser tag and food and beverage offerings and top golf M odg which operates upscale driving ranges with food and beverage offerings formerly public Chuck-E-Cheese operates arcades with FNB offerings that are targeted at families with young children there are also a variety of regional operators that compete with Dave and Busters but there are no competitors other than the three just mentioned that approach having National scale um yeah and I don’t know how much I would call those competitors they’re they’re comps for parts of the business but if we’re calling those competitors then everything that you otherwise could spend is also a competitor depending on who we’re talking about if we’re talking about a group of single people we’re talking about a couple if we’re talking about young kids whatever there’s tons of other competition that are just in different categories um the same people are not going to watch those big screen TVs that are going to Chuck-E-Cheese I don’t even think they’re allowed in Chuck cheese right they they you can’t just have adults go to Chuck-E-Cheese without children right isn’t that their policy oh is that right I think that’s been their policy for a long time I think so but I don’t know um so yeah so Chuck-E-Cheese is competing with one part of their segment which is part of their day part and stuff but it’s kind of like saying there’s we have face competition during our daytime part with this kind of company yeah but there’s not I mean most towns that have a um well yeah I would say most towns that have I’d have to check but most towns that have a d ERS would also have a Chuck-E-Cheese there’s there’s many times more Chuck-E-Cheeses originally I mean the footb has been reduced I think but Chuck-E-Cheese is a much smaller format what’s it the size yeah maybe probably even smaller than that honestly yeah okay so he talks about the business the company does 65% of its revenues in entertainment games which carried the very high gross margin of 91% the other 35% of the business is done in food and beverage which has a high gross margin for a restaurant operation at of 74% presumably because of the higher mix the beverage Revenue both alcoholic and nonalcoholic I should it’s really a bar it’s not a restaurant I mean it’s tall as a restaurant but even how the seating works and everything there is seating that you can have but it’s the kind of seating that a sports bar or something would have it’s not a it’s not uh it’s just like a bar with an expanded restaurant business just like many successful bars would have like a uh some food things like that too but the main things they focus on are the kinds of things that are in a bar MH uh the reason I wanted to bring up D Busters too I mean it looks like the stock peaked recently at $66 per share and we’re at $32 per share so it it has sold off a huge amount and honestly if there’s actual talks of a recession or whatnot uh this is the type of stock not necessarily the business but the stock that I could see just from flows and momentum and stuff like that to get sold off so that’s why I was like okay this is could be an interesting because it looks cheap already and if we actually do go into res five times iida yeah that’s my point yeah I was like it’s pretty cheap that’s remarkable and that’s not that shocking because it’s only had 10 times like pre-co IID or something because it’s not like iida went shooting up and they own a lot more things now mhm cuz that hasn’t been re estated to reflect that I don’t believe for quick aass doesn’t have restate financials from previous periods so uh let’s see so it says after the closing of the main event deal most of the SE Suite of David Busters turned over with Main Event CEO Chris Morris assuming the role of David Buster CEO um and then it says this Sky rights or this change of management is an important piece of the David Buster story because the company has historically been undermanaged under prior leadership David Buster simply had not been following many of the best practices of retail and restaurant management as an example they only recently began building a customer list that they can directly Market to another example Also regarding marketing best practices until recently almost all their advertising was being done on linear TV and they spent almost nothing on digital so he’s making the case for a change in thek marketing a little bit right um it says at its June 2023 investor day the new management team outlined a series of six operational initiatives that they believe have the potential to grow iida by 430 million to 600 plus million given the company did 556 million in iida last year executing against only a fraction of the opportunity to find last year would be a GameChanger to iida so that’s a part that kind of caught my interest event people coming in doing all this yeah I don’t know that I agree with any of that and they might run it right into a ditch yeah how could they that’s what I would be scared uh well because I why should Dave and Busters be run more like businesses that are inferior you know like all the examples that they’re giving to copy the marketing that they’re doing and the other things that they’re doing at the other ones none of those businesses make as good returns and stuff on the underlying store economics um I don’t think so and Dav Buster’s record was actually okay considering you know going and everything before then um so yeah um I also just as someone who went to D Busters and stuff I think that their marketing was perfectly good and actually probably pretty cost effective and everything of how they were doing it but yeah he said so this is the six levers for organic Revenue growth from marketing marketing optimization strategic gaming pricing improved FMB remodels special events technology enablement yeah I mean look they have play cards and stuff in it and then you carry those over and everything so they have data and all that that’s the part that’s important to know who your whales are and stuff that way and what they’re playing and and how much and um you know what that drives in terms of the gross profit and everything um there’s a lot of operational complexity added by increasing the food and the food part is certainly but even food and beverage just in general um cleanliness concerns all sorts of things when you go down that road um and so I I I don’t know about that um having a very good idea of what they’re doing when they’re on premises I think is some of the most important and targeting them for reactivation that way is is somewhat important um but basically having the right mix of people playing the right mix of things in terms of how high it drives your gross profit is something I would focus on more and I would like I said it’s a casino really it’s not a restaurant so I think to be completely honest people from a casino SL Resort Hotel type thing I would be more knowledgeable about that kind of thing people who are um from uh the other side of things and I think bowling is actually quite different and and it it’s combined with family entertainment things but I think it’s the least similar part of it um it it brings people in and uses it during other periods of time but it’s interesting how completely 100% dedicated bowling things are different from things that combine it with other stuff um I put it in a different category definitely but what do you like about this industry well look I I like any industry certainly where you have a audience that’s kind of captive on premises and then you can be maximized what you’re doing for their enjoyment and your profits throughout the the premises you know I mean I like a supermarket type thing that way I like a um a family entertainment that way um or theme park or you could say that or Casino or whatever things um you have a lot of information about people and what they’re do doing you can see it right there and you can design things to drive the profits that way you also have a wider selection of things that can keep them coming back and enjoying it through synergies that you have um like a cruise ship right a bigger and bigger cruise ship in general they’ve made the cabin smaller and smaller that’s not what they’re competing on they’re competing on the idea that there’ll be more experiences more different things more whatever that you can do for everybody and you have more choice that way than you would on a small one um and a very large premises allows for that now one thing that is interesting is that in general in this industry an odd aspect of it is that the larger and larger the place is the lower the returns are on like a per square foot basis tends to be yeah which is unusual in most Industries that’s not what would happen and so you wouldn’t build ones as big as what they have um but that’s not necessarily bad it it it you know your operating expenses and stuff can be lower and there can be other benefits to it too like we talked about with rent and all of that but it isn’t necessarily the case that like if you had a highly trafficked arcade only thing that was 3,000 sare ft like we were at some place that was a boardwalk right in New Jersey yeah that’s a more profitable business model it depends on what the rent is and everything but no you can’t compete with all these other things that you offer on a bigger area as you can with a really packed in arcade in a hight trffic area that’s going to make a lot more money obviously on the gross profit things that we’ve talked about yeah so stripping all that out offering no food offering no any of that stuff and just focusing on that yeah it’s more profitable but you can’t do that in town after town around the country you could only do that in vacation type uh already like destination locations right that you could put something like that in and make it make money these you have to make your place a destination and then get them to play the arcade games MH so what do you think about Dam Busters on that five times IAH is there some potential here is there enough of a margin of safety for you to be interested I that’s pretty cheap for a company like that [Music] um yeah I guess then I would have to know more about the management that’s taken over and what their plans are okay so it’s a great example so okay so plans management take us through that thought process people are always asking what are the right questions to ask what would you be focused on so well so the marketing thing is one problem so I I think customer acquisition cost is going to be very very high if your idea is that you’re going to go out and get new customers who aren’t already coming to your place right um so I think that’s tough you know there’s not a huge number of people who regularly play arcade games for instance and account for a large amount of your spend but there are some people who come in and buy a $100 card and start spending it there and that’s going to be very valuable to you as you can imagine versus other things I mean let’s you could certainly draw people in to do the food and food things but if we do the math on that the food things they’ll spend you know the versus the person who you’re not going to get a lot of people who are coming back all the time right so your your margins are going to be lower and also the difference between your worst customer and your best customer in restaurants is not going to be the same I mean some restaurants are if they have like lunch business for business people and stuff they can do incredible numbers where someone goes there every day basically but um for this kind of thing you’re not so you’re going to go out all the time trying to get people to come in to watch a football game and eat wings versus trying to find people who want to play Arcade games I don’t know I mean that’s probably the thing that marketing is easier to find those people there’s this bigger pool and to drive them there but is that really the best part of the business I mean we looked at some arcade some Casino things where in Co they realized oh maybe we should just like have half our people not come to our casino and make more money because we didn’t have good data on the fact that we’re making all our profit off of half of the people who come here and guess what it’s a better experience for everyone else if we understand our players and if we cater to them and get everyone else out of here yeah yeah so understanding the marketing understanding management you’ve said before I don’t know if it was on the podcast or maybe in person at event that you know everyone always wants to talk to co about like different things but you know if you could talk to like the head of marketing that’s somebody that you’d be so interested in speaking to at these companies yeah I mean I think the most interesting thing here would be okay let’s not worry about getting people in the door the first time whatever we’re in the Place it’ll show up on things that can people can do people have friends they have whatever they’ll go there one time let’s not worry about that let’s worry about once they’re in there what does it look like for people who repeat what does it look like for people who spend a lot whatever and then let’s try to see how we could focus our marketing dollars on that to actually drive gross profit to be better over time that way you know um but it’s just a question of what you think it is if you think that it’s mainly like a food and beverage type thing or if you’re saying it’s more like a casino or team park or something well those things are run incredibly differently and of course it depends within a category that way Six Flags has run completely differently from Disney they have completely different economics in terms of how you how you do it I mean in Disney you’re trying to get people to repeat and spend a lot of money and everything and at Six Flags you’re trying to kind of you’re running like a seasonal business and you’re trying to to drive a certain amount of attendance basically at lower prices there um yeah what do you think about Bolero or Callaway golf company which owns Top Golf my biggest concern for all of these Dave and Busters on all the way down is that it’s very easy to expand these businesses and to compete and so that scares me it’s what scares me with restaurants I mean um if you have a one unit that makes money then you can just go to a landlord and Lease another one and Lease another one lease another one and you can expand quickly and cut into the margins and everything and so that’s my biggest concern with any of these is over competition I think that’s always the big problem they could do other things wrong but I don’t think there’s much likelihood other than they or their competitors expand too much um so you just kind of have to do the math on a Town and say doesn’t make sense to put in here given the population and then if there’s a few in here is there too much you know um you can do it for anything I mean with with movies we’ve talked about that it’s pretty easy to calculate you can say okay there should be 40,000 screens or something in the country here’s the population what are the differences in the population but basically is this place unders screened or overc screened or something same kind of thinking here it does depend on the demography but you still want to you know I mean I literally say a Chuck-E-Cheese I think they look at the ZIP code say how many kids between these ages are here and there should be X number of Chuck-E-Cheeses per this many thousand kids in an area within a driving distance and I think that that you know is a concern sometimes with some of these companies especially es really especially when they’re public so cuz you can sell this on okay we can grow and here’s our unit economics and whatever and and each unit might be worse than unit before as you grow too much and it’s just like it’ll scale up and it’ll get better you know mhm why do you think and yeah why do you think it’s trading at such a different Val valuation than these other companies I would have to know more about the situation of what’s been happening recently I mean have they been disappointing on their guidance and everything and I do people have doubts about this management company I mean when we talked about Six Flags I think that that is kind of what happened is that there was some interest in the management when they first came in and there was like oh it’s not going as well as we thought and then you know it was there’s going to be an acquisition you know so uh you know merger to close that out so I mean the writeup certainly made it sound like that like there’s going to be a pivot into better things and that’s a recent write up uh this was from June 30th 2024 yeah okay so that’s not that bad MH so I mean what so was the price on it at that time not that different was it like 40 or something instead of today’s okay but this is a stock that peaked at I guess twice today’s price it’s back to the same levels that it was at recovery from Co actually it’s not that far from levels that it was at before Co right yeah is that true cuz it used to be a very popular stock before Co so that’s remarkable but it is also interesting how did this happen that main event took them over cuz like when I look at the headquarters now it also does not give me the headquarters that I thought from living near it was DAV Buster’s headquarters it gives me the headquarters that’s I assume Main Events headquarters they’re only a couple Towns over in Texas but I think that that um it literally is like main event took it over mhm yeah now they’re all running it yeah it’s weird huh it’s interesting yeah so you don’t know though like if it’s Let’s see we could see on the chart if it drops on days where they reported earnings or something no it’s been pretty consistently down since I it could it be recession type fears that’s what I’m wondering I don’t know I’ll try let’s see if I could put something else that should be recession next to it let’s see I feel like this is the thing that people would sell off or be worried about right or wrong or just it is something that would naturally [Music] happen yeah what would be okay wow I mean it is look it’s cons the other thing is indexes and things like that what is this I’m assuming it’s listed as just consumer discretionary is that what category they put in do you know like quick fs and stuff probably says what it thinks it’s being categorized as what’s it in no hotels restaurants and Leisure it says yeah oh consumer discretionary right there to the left sector yeah okay so it could be being affected by that it has insane share turnover no one wants to own this business for the long term even though I think on a unit basis I’ve always thought that it has good economics so I don’t know why that is but same thing with Marcus and cinear right when we talked about those it has the same sort of thing insane share turnover and violent movements based on assumptions about the economy now I have to say this is more economically sensitive potentially DAV Buster is way more economically sensitive potentially than either cinar or Marcus and Marcus is somewhat more sensitive because of hotels but even more than Marcus because the spend potential is heavily uncapped at a dve and Busters so which makes it like a casino that way the thing about a movie theater one big reason why it’s not very economically sensitive is you just can’t you may think a movie theater is expensive because you want to spend a very low amount but you can’t find ways to spend an incredibly high amount I mean you could have eight kids uh but there’s I mean there’s just a limit I mean you’re going to have you only have two free hands what can you can buy $8 in each hand for concessions and you can buy a $12 ticket or something you eat so much chocolate right I mean you have to physically move it yourself I mean some have food and beverage that they bring to you but you are limited at some place like a Cino or dve Busters oh you can stay there for many more hours and it’s all done digitally with a card and everything and you can open a tab at the bar yeah you can spend a lot more so that can definitely get cut back on a lot more the same way that you’ll see a difference with like Swatch or something you know Swatch the most of the brands are not the Swatch brand so a high-end watches versus you know a a Mado or go even further down like a fossil or something like there could be a much more of a drop off in a recession because in some parts of the world you know people are feeling less Rich they’re not going to buy really expensive watches they’re also not going to go to places like Dave and Busters as much um they’re instead going to go to other places they’re going to say kids you have to go to you know a movie instead of DAV Busters you have to go to uh Chuck-E-Cheese instead instead of DAV Busters or whatever you know you have to go to Six Flags instead of Disney some place where you can’t possibly spend as much money you know yeah I mean if you’re going to David Busters versus movie theater I feel like going to David Busters would probably be more of a better more fun more expensive day out than a movie theater right oh of course no doubt and the frequency is much much lower obviously if we took all the family entertainment centers and compared it to the frequency of movies and things is much lower that’s why I’m saying though that from a recession perspective a lot of times people try to replace the experience they have at a lower potential top spend especially cuz what people will start to realize like a lot of people don’t know how much they are spending at dve and Busters right that’s part of the thing about it the same as a casino or other things too where you can split the bill across different things and so you don’t see it all at one time what it is you know mhm um yeah it’s a casino for kids Jeff and adults that’s what makes dve and Busters a lot more successful is their ability to fill up so much of the times of the day and everything with different groups of people different specials use the space so well yeah cool so we have a couple emails that were sent in thank you to the people that sent them uh if you want to email us a question to have a PLL for the podcast email it to me at Andre at Focus compounding tocom uh let’s see and one of these was a follow-up question from a podcast we did uh two podcasts ago where we talked about Marcus and it says when evaluate Marcus as a perspective investment how much if at all does the key supplier to its theater business concern you for its concentration rough percentages of box office revenue greater than 25% from Disney 18% Universal 16% Warner 15% Sony 10% Paramount and 15% other yeah it doesn’t concern me at all so there’s a few reasons one if you flip it the other way from the movie theaters perspectives in the United States it looks very similar it’s AMC Regal cinemar Etc they’re getting 50% I mean the top three theaters or something could be accounting for 40% of their box office or something top seven could be closer to 60% I mean I don’t know the exact numbers for each company because depending on what they release it would be a little bit different um but yeah so in the United States they on the flip side look very similar the other things is that both of the these groups basically uh although they don’t negotiate as groups with each other they have trade groups and things and so they basically have like model deals like trial balloons that are how they work out what relationship they’re going to have with each other for the most part so like when you had something with the window and it was like there was a deal that let’s say was done by I forget but let’s say Universal and and Cinemark agree that movies under this amount of box office will at no longer be put on our you know peacock or whatever within 60 days or something that’s actually like a test to be for all movie theaters um you know what I mean even though it’s negotiated by one so it’s similar to like when unions negotiate with uh um car companies or when they negotiate with an airline or something you can tell that that will probably be the template for the other deals there too so they deal with each other as groups that way there are not the same restrictions that there were before which so it could change you know with the Paramount decision um you know there were things that were illegal in the states that aren’t illegal anymore but it it wouldn’t concern me and then honestly like historically there’s stuff that I don’t even know it’s disclosed like um if you look at say a network TV thing they would have said that our you know years ago when they weren’t allowed to to do production on their own they would have had a huge number of of a huge percentage of their shows coming from a few production companies but that’s not a serious problem because you just find another production company um you know it you are creating the demand there by doing that there there’s a limited number of the screens that they need to be on and so they have to put it all everywhere and you’re basically going to get it on like a commodi type fashion there are some slight differences to things um and they do cord each other a little bit on stuff you know I knew people worked at Cinemark I lived in the HQ that they had uh they did have a dress code for uh when Disney was on premise that was not enforced for any other studio so that gives you an idea of care about the other Studios look busy and for and their beverage partner yeah your most important one is going to be the B the beverage partner for any of these theaters so like cinear I believe is a Coke partner and was at the time so of course all over their HQ and stuff everyone gets free Coke and every flavor you want and every whatever CU Coke is courting Cinemark like they Court Airlines or McDonald’s or whatever so of course these are really really big items and you can do the math on that and say oh wow every weekend the you know this one customer is you know millions and millions of dollars of syrup is being sold through cinar AMC whatever and if Pepsi takes this account from us oh boy but so it works both ways yeahh look at that price Divergence did a podcast on it but crazy Cinemark cinar just keeps going up Jee it’s up 97% year-to date and Marcus is still down 3% year to date crazy now I do have to say there were some there have been deals struck and Disney struck them I guess just preco just before covid um that were slightly different from normal deals with box office split so like what different percentages there’s no set percentage in the United States it’s easy to estimate that it’s a 50/50 but that’s not really how the deals are structured the deals could be structured differently because they require usually minimum commitments so like if you hear limited engagements or something like that that means that they weren’t able to get theaters to agree to the two month uh two month two week minimum so normally you can’t book any screens unless you agree to take the movie for two weeks right because that you’re not showing sufficient support for it that way so when you have something that says that there’s limited um engagements that means that they could take it out in one week um the other way to do it is like to say that it’s in certain cities first as a test and then you can show them that it worked in LA and New York so we want to expand it um so that would be like committing to only certain theaters having it as opposed to committing to only certain screens having it um and then for some movies you’ll make more as the movie goes on um or less depending on a sliding scale which would be decided to encourage them maybe to play for longer because what will happen is from the theater’s perspective I mean there’s a variety of different interests involved but right from a theater’s perspective historically you would want to play the movies that have the highest per theater average also because remember half of your money is coming from concessions as opposed to just Revenue at some theaters so it is much more in your interest to not play things that would play well because they need require more showtimes more screens whatever as opposed to playing things that are fairly full it’s in the theater’s interest to be fairly full and so not to play Things indefinitely it’s in the Studio’s interest to play things as long as possible before streaming because we’re still making money on it so why not make money on it this gets into an issue with support of the theaters and the studios for things that are released but might not make enough money so okay so like for instance there’s a movie out now Coraline it’s a re-release um it it was out last week it’ll be out this week in a limited fashion if it’s released the same way as say Phantom was where it made like 8 million or something I think Coraline made similar amounts in a single weekend that’s fine um but there’s actually other movies we’ll see what the crow does um we’ll see you know I don’t think it’ll end up making much more money than a Coraline or a re-release of some other film would be and it might require them to play it for a few weeks um so I think like apple did um the wait I might be mixing up who it is but I think it was Apple it could be Amazon MGM I think it was Apple did um Fly Me to the Moon earlier this year and they were going to do wolves and I think they’re not going to do wolves now in theaters so something like that is complicated because it may be that if it was a limited amount of time it would be fine in a per theater average but if they want to say oh let’s run it for a month and it’ll make some money over that full time from the Studio’s interest that helps it makes money but then like on per screen average is not very good so that’s more the concern that they might have if you agree to show it for a really short period of time like the uh concert event for Taylor Swift or something is very attractive to movies and they’ll take a lower cut so if you had that and especially if you agree to put in a time when they’re not going to play other things they you could probably negotiate a deal where they they just take it because they want the concessions and everything say if you’re saying it’ll only play for a few weekends it only play at certain times I only have to show it at 700 p.m. and you’re guaranteeing me an audience sure if it’s a dead month let’s put it there and I’ll make money and everything but getting me to commit to it what they don’t want is like a major Studio Movie that flops so I mean Borderlands was Lion’s gate but that has to play for a few weeks no matter what and then it’s going to be playing to pretty empty screens I mean I saw it at the smallest screen they could put it on so they knew what was coming but that’s still a problem you know mhm do you think those concert films are more likely to generate more um food and beverage Revenue alcohol revenue and stuff like that for movie theaters too than the standard movie uh it might it’s also it’s a long movie um and they couldn’t play anything after probably anyway so I mean it’s good they would like doing it but there that one was also complicated because I believe the basically Taylor Swift or whoever the her company is or whatever probably was taking a huge cut and then it was being distributed by a movie the theater chain that was taking the other part of the cut and so there was probably less left over for others but then there’s also pricing differential and things like that um so I I mean they they’re kind of like Airlines from the the simplest thing is movie theaters like butts in the seats and that’s the most important thing for them they can figure out how to make money if they have that they don’t like a lot of empty seats that don’t have people in them and so that’s more what the relationship is about with a studio or something like that but it is true that there was a time where there was like oh we should get a little more on a Marvel movie you should keep a little less of it than we do or something but even then that might be okay if if um there’s other factors because this the the theater is only taking the theater also is getting concessions either way so from the Studio’s perspective it’s 100% that you’re negotiating over from their perspective is like 50% of the pie that we’re talking about because the other 50% you’re not affecting our concessions you know and then the other thing is like some of these have upsell things that are fine for theaters too that they like um but that limits the capacity sometimes so they like movies that can play on IMAX and these these premium large format things and everything but that sometimes hurts like Mission Impossible or would have had higher attendance if so many people didn’t want to see it on a big enough screen because it probably sold out in some towns for desirable seats at desirable times the first couple weeks you know so it is a trade-off that way but basically they want a hit movie at a time where they don’t have other hit movies and you can supply it to them and that’s really what they want I mean the industry is set up so that both the theaters and the studios and even competing with each other all want every in it they they would like as much as legally allowed to work together to make each release as highly attended as possible they intentionally don’t release things against each other that they know that the same person wants to see you know so it’s not a very it is not the kind of relationship of am I worried about Costco would I be worried about a company that’s selling too many batteries through Costco yes I’m worried about that am I worried if Disney’s selling too much through AMC or Cinemark or vice versa no not worried at all in large part because there’s rarely much negotiation about price the the price of the ticket is what the ticket is which is the same as basically all other tickets and the cuts are very similar and so the terms are pretty similar so it’s just do you want it or not you know what are the new economics of those new deals with Disney that you spoke about well so that would so in that case I mean I think this is all public stuff and whatever but I mean they would have gotten a slightly higher percentage of opening weekend stuff on certain highly desirable titles is what I would say and then like scale down over time on that right um and then even on that stuff like that’s dangerous because it depends but you can structure deals all sorts of different ways to make everyone happy which is what you want to do they will do that no matter what because they’re not going to screw you on a deal then they’re going to have to come and negotiate you with the next one um I mean like as an example I can tell you that some there I’ve seen movies where um the studio doesn’t particularly want to make the movie they they made it but they don’t really want to make it theater definitely doesn’t want to take it but it’s playing in the theater because the studio wants the actor or director or whatever to do another picture for them that they really want and so this is to keep them happy but the relationship is good enough with the theater that they can say look we’ll make it up to you we’ll figure something out but you’ve you know this is a Matt Damon vanity project you’ve got to play it for 2 weeks and your you can be in your smallest screen and your most Indie Centric things but we want that because he was going to be Jason Bourne for us next year okay and this is how we do that and so that’s like the relationship which is different than other things it’s a cozy relationship I would say in general um than some of the other things we’re talking about um so that something like retail supp when we’re talking about supermarkets and Costco and online things and um all of that when I talked about Nike and the things they sell into that’s where I worry about it more and about companies pushing that too far and not being smart about that because they they tend to try to think oh I’m the brand I have all of this power and the distributor really doesn’t count for any of that or vice versa sometimes and not realize the value that the other one is adding and that the entire profit pool of the whole ecosystems needs to be high enough um I think that in general theaters and studios are smarter about that than say supermarkets and brands that they sell or something and definitely you know there’s always things we probably Target or Walmart or Costco or whatever push things too far that way or vice versa when others have a have the ability to push them on it you know instead of working together to do something more intelligent for the long term yeah next question that somebody emailed in do you think it’s a coincidence that most of Buffett’s Investments were in companies who customers were individual consumers not other businesses deposit heavy Banks Insurance newspapers consumer Brands like and Coca-Cola or is it not a coincidence I.E consumer focused businesses generally have more pricing power do you favor companies whose customers are people not other companies so not necessarily they’re completely different what I focus what I like is companies that don’t have bargaining power uh your customers don’t have bargaining power so there’s a few ways that can happen for the general public that is to serve the highest number of people with the least amount of bargaining power so it is to sell to the general public here’s a candy bar and you each buy it or whatever you know that’s great for businesses businesses work the opposite way businesses you need a non-price competition thing and then you can have them forever if it’s just too complex so if you make it where it’s too difficult for them to switch away your product because it creates some headache for them it’s not their money ultimately I mean small businesses the owner operator they’re there may be caring about it but in business people are very free with wasting money if it avoids a Heche for them which consumers are not so you need to have a product you know so um an accounting system uh you know a customer um what they call customer relationship management you know things that keep track of that sort of stuff database things in the background that no one knows about but core processors even some Point of Sales Systems I mean like just anything that they’re like oh this would cause me a little bit of pain for a while that’s great to sell to a business yeah so information system that you sell to businesses anything you can integrate into a business that stuff’s really really great um but in general yeah you want to be a very large um you want it to be a huge relationship from their perspective and to have thousands and thousands of them and everything you know so I mean that’s why when I talked about the theme park think something Disney right so Disney has millions of people who for them The Big Spenders Disney is their most important entertainment relationship and the customer it’s the thing they know them that resonates the most with them and then to Disney it’s millions and millions of people so there’s no negotiating power on one side and there’s all on the other and everything you know um so yeah I think that Buffett’s very very good about product economics about the the understanding the customer things that way um do you think customer behavior is more predictable as well oh yeah I mean he’s like Jeff basos that way right Jeff Bezos was like why don’t we focus on the things that aren’t going to change in the long run rather than the things that are going to change all the time about the internet and everything and that’s Buffett’s approach this stuff isn’t going to change um how you deposit at a bank and insurance and all I mean some of things did change unfortunately for him with newspapers and all that but it often changes in that unfortunately what you owned no longer is the it it there’s a similar thing replacing it but it’s not developed by the same company unfortunately right so they can’t make that transition um but yeah it’s consumer focused businesses are very good to have because you have a very low amount of bargaining power on their side I mean that that is the really key thing is the value of the two sides that you have your costs and what bargaining power there is there and then on the profit side um on the revenue side which gives you the profit spread between the two is you know their bargaining power with you now I think he’s even said you know buy a commodity sell a brand the the ideal thing is for both sides of that relationship to be heavily in your favor so you go out and you sell to Consumers millions and millions of them for Coke but then what are you buying sugar aluminum whatever you know at each you know I mean in Coke’s actual example is just syrup and stuff so they don’t even need the things that we that I’m talking about with needing the bottling and all that but throughout the whole system we’re talking about commodity type things and then you turn it into Coke that way um it’s obviously not as good if you’re you know a if you’re just buying it and then marking it up and then selling to someone where there’s a dependence on the other side of it so you want to have be able to bargain with your cost side being the stronger bargaining position and you also want to be able to bargain on your sales side and be in the better position and those two negotiations will tend to get you better results now the thing is and this is why Buffett like Waits until buying them at the right time that only gives you the potential you then need a good operator to actually make it work so there’s lots of banks that probably have the kinds of consumer um kind of product economics that would naturally be in terms of negotiating factors what Buffett wants but they’re not Penny Pinchers and they’re not smart about everything else and so if they then are making sure that they don’t have the loan losses they’re making sure that they have the lowest possible cost to operating that Branch you know so you have an Illinois National or you know the Rockford Bank that’s something special um but lots of banks would have had some sort of Economics like that given the laws and everything but then you had a guy running it who was a real penny pincher that way and so you get the full benefit to the owner there are other brands that probably are like CES or Coke but they don’t quite make as much money as they should because they’re not careful about that I mean Buffalo Evening News when he took it over they were buying their their newsprint in a way that was a lot more expensive then he took it over and immediately changed how they did that they always had the same bargaining power they just didn’t use it until he came you know so it’s the potential and then it’s whether you grasp that potential or not and that’s the operator part of it so some of the numbers we see with like AutoZone and stuff you know it could just be that they’re also good operators like there could be other companies that have some of the same economics that they have and haven’t fully you know throughout what they do taking advantage of all that so the difference between the business models inherently may not be as great as what we’re seeing it could also be that autoone may be a better operator than others it can’t be all of it some of it is there’s got to be other stuff there that probably it’s inherently a better business but some of it can change if management changes and if the culture changes [Music] mhm well said final question again Andrew at Focus compound.com email us how do you guys think about companies with high-f free cash flow per share but negative net income so we kind of talked a little bit about that earlier right for example wbd has been free cash positive for several quarters in a row and looks cheap on a free cash flow basis but still has negative to no earnings right well they’re so wbd I believe is Warner Brothers Discovery are we talking about the same company or what is wbd let’s see let’s see I believe so yes correct yep okay yeah so look in the business that they’re in earnings don’t mean nothing so you know they can write off whatever they want and now why do they H here’s the issue why do they have free cash flow and everything what’s really going on here they got a lot of debt and so they’re not running this business for you the shareholder right now they’re running this business to not you know be not not able to pay off their debts right so 19 billion market cap 52 or 53 billion Enterprise Value so yes a ton of Deb so this company’s famous for this because like on Max they pulled things uh like they’re now not available anywhere this is the problem with digital things right so there used to be there would be DVDs or whatever in the time of books and all that but now companies if they own it could pull it and they have pulled it from their service so they sometimes own the rights to something and have taken off their service probably to be able to expense some things now and get some tax benefit from that and then but that means you’ll never see it it will never be seen by the anyone ever again you know and if you have some things where that was never put on hard copies of things that just that content’s gone now it’s content that probably isn’t very popular they also killed a couple movies we know Warner Brothers for probably similar reasons right so they’re very very focused on this um it’s you know you can write off a lot of stuff I don’t know how much of their things have been writeoffs recently they’ve been huge um and some of those are write- offs of different division things entirely because there was a merger so they could do that with the Goodwill and then also you just have write offs of things in film inventory where they’ve been aggressive with and everything um it’s a very complicated company so there’s not a breakdown of enough things that we could really judge what they’re doing but um in the long run you know it’s cash flow that matters not the income stuff at all so I mean John Malone built a a very valuable company without paying basically any tax right all about cash flow look it’s worrying they have as much debt as they do for the kind of business that it is and also people are a lot more optimistic on them as a mix of Brands and everything than than I am I’ve talked about that where I was like eh I mean Paramount done terribly but I think War Brothers stock has also not done well during that same time and everyone was very not everyone but value investor type people were very were more bullish on on Warner than than I am um as a business I think I think they’re kind of yeah it’s just gone downhill I mean fiveyear return down 72% when was the merger closed do you remember that we can find the I can find the exact date and it was kind of a I don’t say a minnow swalling wh okay it complete April 8th 2022 so let’s go back to that let’s check that date so we can check like from May or something on of 2022 to clean up the numbers April 2022 yeah I mean look at this yeah I mean it was it was way higher it’s down a good amount since then yeah so it was basically like a way of for Discovery to go into Warner um Warner had a lot more value long-term probably you know like more durability Warner Brothers than um here you go looks like it was around Discovery yeah um but they all I mean both sides had cable properties that probably don’t have a lot of value in the long run I mean cable streaming cable that’s a big problem that they are the same sort of thing and the economics of moving to streaming aren’t as good as what they were with cable before and there’s not going to be as many cable channels stream channels in the future probably that are successful as there was with cable where we talked about that you know so that side of the business I think is it’s hard but I mean the question was specifically about the difference between the cash flow and the income statement it’s the cash flow that matters so being free cash flow positive is what matters I would just warn that this company is doing that I think because of serious questions about the debt and everything I don’t know if there’s is there any information news about that um let’s see what specifically like what they’re doing with that um yeah I was just curious where there was information about the um if there had been news and stuff about where the bonds trade or anything like that but I don’t see a lot of like news story specifically about that side of it it’s just the write offs and stuff that I can see but I would guess that that’s overwhelmingly why they’re doing it they’ve said their focus on free Cas FL but I think that the reason is probably related to the debt that they have mhm how much debt do they have officially we go to quarterly to get a updated snapshot uh let’s see short-term debt 3.7 billion and then long-term debt uh 37 billion so a lot yeah yeah over if we look at the overview of the most recent time period how what have they been doing in sort of like cash flow from operations that sort of thing if we go to the annual cash flow from operations looks like 7.5 billion TTM is 7.9 billion okay and so before that they were not merged together basically um that we’re seeing you know not for the full year um so I mean that obviously is going to take out just for the United States things that’s taking out your taxes and things like that so it’s different than if we’re looking at an international company but that is ultimately what’s really available to service the debt and to pay it down if they want to pay it down over time you don’t have more than that and their capex is significant we include things you know we’re talking about intangible Capital expenditures but um that’s heavy right I mean I don’t think you want to be five six times your cash flow from operations um what your debt is especially if you’re you know lacking durability for some of your businesses but like them writing off say a cable channel or something no it doesn’t matter it makes absolutely no difference and so in the long run if a company had didn’t wasn’t reporting net income but was reporting cash flow yeah that’s what you want as opposed to the opposite it’s all about the cash flow and the balance sheet that you have not about the income statement I’m just saying in this particular case the reason that they’re probably doing it has to do with the amount of debt they have in their awareness of that and how they’re going to deal with that cuz what do we right now we have the market cap at what 18.8 billion okay so we’re talking about um let’s see I mean at face is it 2third or something their capitalization uh more than that is debt basically if we take that that’s 40 I mean the there’s 40 billion of debt that they have and you’re being told that the equity portion of that is only worth you know in the market is only worth 18 billion or something then they’re kind of saying that this is a capital structure that’s very very heavily debt MH um now on a leverage basis that’s not that bad if we look at cash flow again just to see this is what kind of what the question was so what do we have in terms of free cash flow for the recent years 6.1 billion and 6.7 billion on a TTM basis yeah right so it’s trading at say three times right so but even on a leverage basis it’s trading at what 10 times right if it has six billion in free cashow and yet the entire Enterprise Value is only 60 billion or something then it’s only trading at 10 times free cash which isn’t bad either now is the cash flow exaggerated though because they’re intentionally doing this because of their awareness of the debt um what is the operating profit there’s none in recent It’s like because of that it’s including right offs and stuff yeah yep so it’s probably very confusing to people to be able to analyze that and figure it out um you know obviously there’s lots of things that you could sell off and pay down your debt as a way of doing it instead of having getting it from your cash flow so I don’t care about I would care about cash flow not reported earnings but I just warning that they may be generating the cash what they’re generating right now because there’s a focus on their debt situation got it cool well I want to thank everybody so much for tuning in with you both of us on the focus compounding podcast if you have a question that you would like us to go over uh email to me at Andrew at Focus compound.com if this is the first time you are tuning in with us be sure to hit the Subscribe button wherever you’re listening or watching us that helps spread the word and hack the algorithm uh with Focus compounding and it also notifies you every time we upload a podcast if you’re interested in learning about our Money Management Services reach out to me at Andrea Focus compound.com thank you so much for tuning in with the both of us and we will see you in the next podcast take care

Description:
1:00 Geoff’s take on Ajit Jain’s sales 2:30 Berkshire, Chubb 4:00 Policy in markets 7:10 Yield curve, interest rates, recession fears …

Transcript:
welcome welcome welcome how’s everybody doing hope you are doing well my name is Andrew with Focus compounding on air live with Jeff gon Jeff how’s it going today it’s going very well Andrew how’s it going with you it’s going great we hope it’s going great with everybody else as well if this is the first time you’re tuning in with us thank you so much for joining us be sure to follow me on Twitter or ask at Focus compound to get access to everything that we push out into the investing universe if you want to learn about our Money Management Services you can reach out to me at Andre Focus compounding docomo a new podcast so in today’s podcast Mr Jeff we’re going to be talking about some news that came out uh late last night uh or yesterday that AET Jane if I can move over my screen here AET Jane had sold something like 40% of his Berkshire hathway Holdings and uh worth 139 is that what it is 55% 55% yeah okay 55% of his birkway Holdings 139 million a lot of people were surprised to see this people were saying like on Twitter that perhaps this was a a charity driven thing other people are saying well if this was charity why wouldn’t he just give them the shares so I want to get your take why do you think Mr AET Jane uh sold a huge chunk of his stock that’s probably pretty surprising right I mean he is older 73 years old I think the actual form four said it was uh what it say something with aate planning right um but yeah want to get your take on that I so I didn’t read the filing and although I can see it here I don’t think I can read it fast enough to understand what it’s saying I’m sure other people looked at it to understand that um it could be age related it could be um tax related um you know if you thought that taxes would be different in the future than they are now um it could be um price but I don’t think that’s a major factor probably and then it could be um you know if things are changing at Berkshire and stuff changing how well if he’s not going to be there very long uhhuh yeah so I mean Tire well so Burkshire owns some stocks in chub right and I have no reason to believe that Berkshire plans to acquire all of chub but I think Burkshire would probably be very interested in acquiring Olive chub right and that might be like a 150 $160 billion dollar deal or something if that was possibly to happen it’s likely that they would have someone else to take over a jeet’s job if they did that but you know I don’t know I you know if there’s one deal that Buffett might do before he leaves it would probably be a giant Insurance deal like that and I can’t think of anything other than chub mhm as Buffett ever hinted towards chub or thinking saying anything about it being a good business why do you think chub is it just the scale of it the size of it of what they could do it it’s very similar to certain parts of Berkshire that are much smaller and I think they’d be interested in owning just looking at the two companies and they did buy some and I’m sure that I’m not sure but I think that it’s very possible that was a buffet purchase and not a um a uh Todd purchase but it could have been a Todd purchase I don’t know they ask for special treatment on it and everything and there’s also connection with the family and everything Buffett knows people involved with chub but they through other people that he’s known for a long time and stuff so it just it would be the most natural one of all the giant things that you could acquire that would be the most natural I have no reason to believe that they will do that but if they ever going to do a Transformer type of thing I have thought about that as possibly how they replace je but they could just have someone internally that will replace him or it won’t be replaced in exactly the same way in the future M you make a good point when you say perhaps it’s because he thinks tax rates are going higher in the future and it just with age and stuff like that I actually did have it down on my notes to see if you uh watched the debate I’m sure you did not did not no did you get any of the clips or see anything about it okay smart man but want to just get your your thoughts on how much you think about policy and how much it could change for example it’s like so going back to uh when Trump was first elected you wrote up a blog post about how his tax cuts were not priced in to the market that was a pretty obvious sign and then ultimately you know the market ripped um when you have two parties in this situation where it’s like their thoughts on tax rates are very different I’m just curious if you think about that sort of stuff when thinking about like crafting a portfolio or anything like that it’s too hard to predict I mean in the United States you need to get it through the B pretty much you need to have it get through the house and the Senate and the president approving it um while it’s theoretically possible Democrats could win a senate for like one twoyear period or something and also control other things and then they could get something through in the long run it would be hard for the Democrats to have a workable majority in the Senate ever and then it’s not that hard for them to win a presidency or to win in the house so you’re it’s it’s very hard for either party to have large workable majorities across all three um parts of the the government that they need and then on some things you have the Supreme Court being relevant it wouldn’t be on those tax things but you know that obviously has a large conservative majority that’s not going to change anytime soon so am I hearing it’s just too hard to predict and I guess the whole Trump thing was Trump was already in office and you didn’t think that it was being priced into the market right oh yeah and also I think corporate tax uh cut from whatever 35 to 21 or something like that is not a hard sell there’s certain things that I think are very very hard policy things to change and then there’s others that aren’t that difficult want to come in with a whole different attitude about defense spending or something it would be highly significant to defense stocks because you could get a majority on that kind of thing but if you came in saying I have this attitude about abortion one way or the other guns no it doesn’t matter I mean you could be the president but there’s there’s strong opinions in both houses there strong opinions in courts there’s all sorts of things so it’s not going to get you anywhere based on you know highly controversial issues like that but on some other ones yeah like if someone came in and said I’m going to land on Mars yeah I mean there it’s not like there’s huge opposition I to doing that so that should cause space stocks to go crazy or something if there was like that kind of support the the president does get to determine the you know the the topics that are discussed and sort of the focus of the country on things they have a big um you know they call it the bully pulpit but they have a big megaphone to talk about those things and to take up a lot of oxygen in the room because it’s the one position whether it’s the most important or not you know it is the one position which there’s only one of you right there’s there’s everyone else there’s a large number of people in the the body even the Supreme Court even the FED um and so it’s one of the few things where you have one person who controls all the discussion even though they may not have that much actual real power they control the conversation so let’s talk about interest rates a lot of interesting things going on want to get your thoughts the yield curve finally is no longer inverted it has to be one of the longest in history if you’re looking at the screen right now it looks like uh is basically flat right um want to get your thoughts though on interest rates um you know where you think they’re headed uh in the future um the FED is going to supposedly cut interest rates next week if you’re watching here on the screen September 18th it’s currently pricing in a 57% chance of just a 25 basis point cut uh but a 43% chance of a 50 basis point cut uh the 10year which I could pull up somewhere uh right here 10 year is at 3.65% thirdd year is just under 4% at 3.98 7 and then the two years at 3.59 uh percent so rates have been coming down fear of uh recession is uh seems to be talked about every single day um so I want to get your thoughts on interest rates and how you’re sort of thinking through all of this sure so first of all yeah the 210 is not inverted or was for part of the day not inverted so that would normally be the sign if you’re using that that that triggers the re uh that that’s a trigger for like recession and stuff that basically that’s a good estimate of want a start dat for recession might be it’s not perfect but that’s a pretty good estimate and then it’ be over pretty fast in modern era 6 months 11 months something like that not long like it used to be um the actual statistically better one is 3 months and 10 years there’s no reason to use two but the reason why people would do that is because we kind of can know faster because it’s already pricing in you know things like we just talked about with the FED otherwise it’s a slower signal if you use three Monon I remember jpw had talked about that one time that they look more at the three-month one oh and I yeah I agree because I studied um you know the when I went to school to college and everything my plan was to do um Financial history of uh pre- capitalist studied societies like the ancient um Greece and Rome and things like that and um and I think that’s one thing I actually have never asked you before about what you were going to study at school yeah because a lot of the things in those history things are interesting from an economic perspective but they’re mostly people aren’t trained in economics and then economists have very poor understanding of pre like they know almost nothing about things before the 1500s maybe 1600 they might know a little bit about they really occasionally you get an economist who will mention the black death um Ben beran’s book did mention the Tiberian credit crisis in Rome so he knows it exists and stuff but most people don’t go back to earlier periods there and study other eras but if you go back across all periods of time it’s more helpful to understand some things about yield curve like why would it be the way it is people talk about as if this is natural this is probably more a feature the the slope to the yield curve that it’s normally um that you normally have a a yield curve that’s not inverted um is a modern thing due to having uh printed money that causes inflation and everything so at other times it would be much more natural a very flat yield curve but the thing I’m pointing out that’s important is that um although lots of people use long-term bonds to judge where stock should be and everything the much better number to look at across all of history has always been very short-term money and it’s much more predictive of what’s happening so it isn’t so accurate to say people are discounting Stocks by the fact that there’s this rate 10 years 30 years whatever that’s at a certain level but rather just the amount of oxygen that there is in the very shortest term how easy is it to get your hands on money this week and everything what’s the very shortest call Money type thing if that gets tight then valuations collapse so if people are no longer willing to roll over a loan or something that’s when you have dramatic drops in things the other side of it is much weaker even when I did things with P ratios and stuff I’m not sure I buy into it economic theory says it makes sense but I’m not sure I think it makes much more sense to say that short-term um borrowing rates so when we’re talking about this three months and last which is kind of like cash equivalence that makes much more sense to look at that and the way they do that now is the financial conditions Index right and so a financial conditions index I think is an accurate way of trying to do that but basically Val valuations collapse when there’s when credit is too tight and then valuations expand a lot when credit is too loose and that’s kind of the thing you see throughout history the yield curve and all that I think is something that we shouldn’t assume I mean you have about 90 years postwar um 80 years of um data on that and then you really only have about 50 or so that’s truly pure in terms of being after the US um you know no longer had any standard really and so that’s probably all the data we have for this kind of thing because the possibility of very very high inflation is a lot higher in this modern era than it was in previous eras so it’s a lot more dangerous to lend long term and and there’s a lot more reluctance to do that and so the curve takes on a different sort of um there’s different reasons why you would have preference for short-term versus longterm I think than in societies that thought that there wouldn’t be inflation normally so I I just think that the steepness thing is something that is more predictive when we talk about recessions everything we really only we’re really only talking about the postwar period so that’s not a huge data it’s not a huge pool of data be to be drawing from especially when recessions are now so rare so it’s a really small number of occurrences so why do they why are they so rare is that because of government intervention yeah so generally economic growth is slower in real terms per person than it used to be before the war um and but but still very very fast compared to all periods of human history before the Industrial Revolution which is when almost all the growth is um and then you have longer periods of Boom shorter periods of bust and very shallow and there’s a few different possibilities for why that is could be involving government intervention financialization of things that’s probably big factors but the most theoretical sort of thing is simply look it should be based on the form that Capital takes and how long live that form is and so if you have an economy that’s let’s say you have an economy that’s driven mostly by textiles or something let’s say the UK hundreds of years ago right versus one that’s driven a lot by housing like the US 15 years ago well the cycle is going to be much harder to come out of that and to recover it’s going to be a much shallower recession and it’s going to be much slower recovery if you’re if the capital that we’re talking about in your economy is all a bunch of people invest in houses as opposed to everyone invest in textiles which they can quickly liquidate working capital right but that’s going to cause a brutal short recession if you have very short-term stuff and so it’s just a question of across the whole economy like in the fashion industry they have brutal short-term recessions and it’s over semiconductors a recession could be six months but they’ll be down 50% yeah you know um but then ship building recession could be years and years um and it could take a long time to recover so it’s just a question of like what your economy really looks like and that is the thing about how if the FED is as effective as before in controlling inflation and and I think they know that they can’t be so like the vulker they can’t if they raise rates as much as vulker did they wouldn’t be as effective in lowering inflation because the economy no longer depends as much on the the sorts of things that that would have a big factor on they can’t control services stuff that’s same way they can control durable goods and things they can stop you from buying a washing machine easier than than stop you going to Starbucks or something you know what do you uh I mean do you think we are headed towards a recession I mean it’s it’s it’s such a bizarre market right so I don’t know if you caught Alli Financial um the stock was down like 20% after they reported earnings and after they had their conference call uh Ali Financial shares dropped 19% Tuesday after its CFO warned of weaker Financial Health among borrowers High inflation and a shaky job market have weighed on Ally customers ability to repay loans Alli Financial a major Auto lender expects Rising delinquency rates going forward and it’s like you look at the price of a lot of different Commodities as well like coal steel I mean oil was was getting hit as well um I don’t know but but then you go to like it’s a weird Market though because because then I see a uh a headline come out of uh cruise lines and like Airlines and it’s like they’re busier than ever you know so it’s is it is it just the lower half that’s really you know dying and hurting right now I mean and you’ve heard those buzzword like oh it’s the lower half that’s that’s rotting and it’s working its way up um real estate has stopped interest rates are going down so I don’t know it’s such a bifurcated market right to use that that term that everybody uses uh to talk about but it’s there’s so many conflicting signals I mean it’s like the most fascinating period ever in my opinion I I mean personally I think all the traditional signals point to recession and pretty much like now but want to ignore those and say that how do you explain the cruise the cruise lines like being busier than ever how do you explain I mean you go to the airport and it’s like every seat is full yeah and that I mean uh I mean I did just fly on a flight that was half full but um so that was nice where they said this is going to be a light flight um and boy was it cheap um but that was during in the middle of the week it’s very expensive on on weekends um I I think the market though already anticipates many of the things that we’re talking about in terms of what matters like if you look at Hingham and Kmart which are both sensitive to interest rates they both are they both have to to pay Market type prices for their liabilities basically to fund themselves so different kinds Kmart’s more expensive that way because hangam is a bank using deposits and Carmart is is um borrowing you know a third or whatever their balance sheet to be able to make these high interest rate loans but you’ll see that the market sees this and says okay something that benefits from lower rates like Hingham and is not very sensitive to recession conditions uh because it’s say apartment buildings and things like that can be up a lot and then something like Kmart which also benefits from lower rates can be down um because of the recession issue so this is a very pure comparison of two things they would both benefit from lower rates and like if you had something like frost which is a neutral example it’s probably Falls right in the middle and um because Frost does cni lending so it’s somewhat exposed to that and then it isn’t better off if it goes down right down the middle yeah for people listening Ham’s up 24% year to date Kmart’s down 21% year to date and frost is up 3% uh year to date yeah so I think the market knows that interest rates are coming down but it doesn’t know if there’s going to be a really bad recession a somewhat bad recession no recession whatever rates are coming down but they’re worried about some things and so Frost they’re saying okay this might be fine that’s a business type thing where there there would be higher losses there than normal hang on there there there was a lot of apartment buildings bu bu and stuff so it’s not great for the owners of these things since Co probably but for the banks doing this kind of lending you know it’s uh it’s a very safe category we just broke down like three the the least economically sensitive is up the most the in between economically sensitive is in the middle and the Very economically sensitive is down a lot and when we talked about it at the beginning of the year or whatever I said if you want to bet on a soft Landing Kmart’s a stock that will do the best well so clearly I don’t think the market is betting on a soft Landing when you look at that it’s saying rates will come down but it’s because they needed to come down faster there won’t be really as they’re not sure of that soft Landing thing so and that’s usually why rates go down it’s because something happens yeah yeah it’s they’re cutting interest rates everyone’s excited about that but the bad part is is because there’s a recession coming or we’re already in one right and then the the big thing on the inflation stuff is really tricky because that’s the sign that I think is the strongest that you have you know the Jamie Diamond stag flation type fears is that the sticky portion is now like up 4% year-over-year and the not sticky is down like 2% or something so what that’s telling you is the not sticky portion is usually the economically sensitive portion so that tells you that you’re in a period of probably high average inflation but at a low point in the cycle and I think people believe that even if they don’t believe in a recession they believe that this is one of the worst times in the cycle they expect in other words they expect things to get better from here both people probably do so either you have some people who are bearish or whatever and saying we’re basically in a recession now we’re going to figure that out in a little bit but then we’ll start to recover from that in like I said what is that six to 18 months and then other people saying well we’ll just recover from here it’ll start to growth will start to accelerate again from here once uh inflation has come down but no one is saying this is the boom part of the the cycle yeah and that could be a lot of China probably I the the the flexible component of CPI is heavily China based you know or import based and you know Goods based and all that as compared to the uh the sticky portion it’s been a tough year to be a farmer as well price of wheat corn everything not having a good year um a lot of things are I mean I guess Financial assets are doing okay we’re up a lot in the stock market that’s for sure MH um but you know most Commodities are falling in real terms lately I would say yeah I mean I’m not even sure that like for a lot of people their house is up in real terms in the last you know year or two may not be down in nominal terms at all but it’s it’s probably pretty flat can you talk about hurdle rates and how you think about them uh during changes in interest rates I don’t know if we ever changed the way that we think about them but I do know that other investors do um as it relates to like investing in stocks and like your portfolio and everything like that how do you think investors should think about uh hurdle rates and how do you think investors think wrongly about them um I mean I think it’s fine as long as you’re comparing things that are truly similar in duration that you’re looking at the is is more when you’re looking at oh I can make money in this short-term Thing versus I’m investing in a stock which is actually very long-term right and so there’s a significant component of risk there that you don’t have with let’s say three months you’re getting you’re saying okay I could get 5% or something and it matures in three months or I could invest in a stock that has a 5 per yield a lot of people would say oh that’s better than cash I should do that that’s might be true but most of the value of the stock that we’re looking at is over a long period of time because you’re not getting paid back at the end the year in anyway um so I think that that’s the most important thing is pairing those two things off but like if people want to use long-term corporate bond rates and compare them to stocks or something I don’t have a problem with that I think that’s always made sense but I think what a lot of people do is like compare the dividend yield on a stock with with the short-term money what about from managing a portfolio and picking stocks and running your own irss does that change at all or is it just based on what you’ve done in the past for what you think you could do or what you think you could get in the S&P 500 I don’t think you’re going to get really good returns in the S&P 500 so I I would be very happy in in three-month money or something just like Buffett is but the problem with that is what’s the stock market up so far this year high 15% or something yeah right so that you’d have missed out on that you know in six months were okay okay so S&P is up and this is just the price index so not even total return about 18% NASDAQ up about uh and then we have the Russell up about 8 and a half% yeah so you don’t want to miss out on that yeah but I mean in terms of like when we talk about Sher P or any of those things no it’s it’s at a level that any calculation I’m sure that websites do would tell you that you’re better off in in cash than you are in those things right now I mean if rates come down a bunch then that might not be true but the 15-year forward return expect or something I don’t know if gur Focus does some other places do it it can’t be better than 5% MH with the yield curve starting to flatten and hopefully steepen in in in the near future I mean are there any banks or any interesting situations you think people should look at or we kind of going to go back to it won’t be as extreme clearly as 2020 when the yield curve was so steep um but do you start to think okay maybe it’s going to be be a good time for banks over the next you know one to two to three years assuming that their lending holds up through a recession yeah not economically sensitive Banks but some banks aren’t very economically sensitive and they would benefit a lot yep what are some examples of ones that priv Banks multif family Banks yeah I mean you could figure out what you know cni has some of that there’s other things that are specific to I mean it depends on what kind of bank but you can go down the list to ones that are higher and higher risk and then if you really want to get technical about you could say okay well what are the ones that are taking commercial type risks and what are the ones that are taking more consumer type risks and what you am I more worried about consumer numbers are bad already so they would suggest that that you know those numbers could be really bad um in a recession for consumers and lower end and everything so that is ones like lenders for cars Carmart that’s why it’s down a lot probably um anything that does subprime type stuff all that it’s possible but it’s also possible that it develops from that and spreads into businesses you know the place where the first crack show up doesn’t necessarily mean that that’s just where the most damage will end up being and everything and some of these things are well positioned in terms of capital or just that they’re they already assume very large losses on those things whereas others don’t people would have assumed in that housing crisis is that AIG and the gsse were like some of the worst positioned but it’s because they were reserving like nothing you know I mean like AIG was taking a lot of risk people didn’t know about and reserving almost nothing for it something like Kmart or whatever is assuming already that there things won’t go that well so it depends on how far up it goes it turned out with housing that it went much further up from subart than people thought how would you think about judging A bank’s lending standards and just their Lending in general take take Harmon out because we know that they’re doing subprime but let’s say a bank that does maybe a bunch of different type of lending I mean honestly it’s asset growth since Co right now because it’s so different so you can look at what the period was before but if stuff is going to go really wrong it’s it’s that they grew categories since covid and those have something strange about them so there’s a lot of different ways it could be but like um it could be I mean it could be all sorts of different things but let’s say that you grew assets related to like bu now pay leader stuff right that’s basically same thing since that period um even other things converting something to be a you know Airbnb thing to being this to being that you know like different risks that you’ve taken since covid it would be the area that would be the most concerning um crypto type stuff that we talked about before certain Venture type things certain things tied to very specific locations in the country that have had unusual booms or busts since then you know so like um towns that have grown dramatically in the time since Co um things like that I would say if there hasn’t been very high asset growth since Co it would be hard to imagine how you would not know that the bank is taking high risks and yet it is taking it you know what I mean the thing that would surprise you is if it’s things that haven’t had a long process of being seasoned of you having experienced being able to judge that kind of loan and so I think that has to be something since Co basically isn’t it still crazy to think about First Republic Bank what happened there and how quickly in the speed of that it’s insane I mean how long was that was that bank around for very long time yeah and then boom gradually and then suddenly right I don’t even know if that was gradually it was just suddenly is what it seemed like at least in the stock crazy yeah and Buffett talked about life you know snaps you at your weakest link and so in that case they had something that was not good in terms of asset and liability match that’s rarely the reason why a bank fails but you know usually it’s a bank that’s doing something unusual in whatever way it does fail so you’re taking an unusual amount of credit risk an unusual amount of concentration something and usual amount of mismatching your balance sheet that way or whatever else um I mean I thought their lending standards my personal experience so we had a relationship a business relationship with them I don’t know if I ever told you this and I was looking for a mortgage and I thought okay well it’s it’s difficult like with fund income and like getting a mortgage and stuff like that with car interest like it’s not you’re not going to a rocket mortgage to get that so I thought okay First Republic Bank they we have a relationship ship with them this is basically what they do maybe they’ll take me on so they were willing to take me on I talked to a loan specialist and she’s like oh this house is outside of our territory because of that we’re going to need like 70% loan to value and I’m just like okay no that’s that’s not what I was looking for but my takeaway was wow pretty strict lending standards right especially when you at the time I would hear like certain VCS with a different bank that people used in California everyone the other one that failed uh I guess it fails I guess Silicon Valley Bank where they were talking about wow like they were giving VC’s like record low interest rates and like 100e mortgage just crazy stuff right and um so I was like oh First Republic they’re they keep everything pretty tight they’re pretty strict and I actually did not end up getting a a loan through them it was um outside of their territory territory or whatever but I was like wow that’s that’s pretty strict you know so I don’t know that’s why I was my my personal experience our business relationship with them and everything it was a shocker yeah but it it’s like is that Overkill is is it really desirable to get your losses down from 0.9% to 0.09% or something you know in one category or is it you’re more likely that you’re going to fail from some other reason that you don’t understand you know is what I mean so there are some banks that have very low losses and some things that’s not you don’t have to spend a lot of time worrying about whether that will cause them to fail I mean there are banks um let’s see there are banks there only a handful of them they’re small but I can tell you there are banks that have existed for a little over 15 years and have to say we use methods to estimate our loan losses that don’t involve our historical losses because we have almost no historical losses so they’ve been they’ve been lending for for 16 to 18 years and they don’t have sufficient data because they have almost no losses and why is that well some of it is that they do one kind of loan and it hasn’t gone bad um and interest rates help with that but it also is like then if it goes bad do they all go bad together I mean that was the issue with the mortgage things as opposed to some of the like with the cni thing even in different parts of the cycle as an example um I think Frost had writeoffs or had problems at least with some things that are Kmart type companies that it was lending to not Kmart but but other companies like that and it happened at a time where they didn’t have losses on other loans because you’re lending to a bunch of different Industries and so someone might have loans on something related to travel during covid they had restaurant things whatever things okay but it doesn’t affect everything that they were doing whereas First Republic had basically one model of what they were doing and also then how they were funding themselves um and expenses and things too it’s very easy if you’re generating a lot of money if you’re making a lot of money each year um by having very low expenses relative to the amount of like net interest income you should normally be bringing in so um same with an insurance thing with with Burkshire the same sort of ideas um you know I I don’t I mean I most most fail through credit issues I would say that is the most common but whether it’s nine out of 10 fail that way 19 out of 20 I don’t know exactly but that doesn’t mean that’s the only way they’ll fail in the future and over time people are more and more aware of that and not other things the FED wasn’t very aware of the risks to those other banks by doing that and they were very aware of credit risks so you’re kind of looking at last year’s um last times um failures and stuff and not updating it to today what are your thoughts on insurance premiums they’re through the roof and insurance companies in general yeah they’ll slow down but but yeah it’s it’s been very good for them MH I mean what are they up year-over year Insurance uh depends on what category but it’s up a huge amount yeah there’s a lot 15 16% or something like that categories where it’s up that much now that’s talking about renewal that probably they would have known that six months ago or something so um I don’t think that that’s still what’s happening but yeah mhh yeah but I mean there was a lot of I mean the things they were insuring have probably gone up almost 30% cumulatively since since Co in fact maybe they has with a inflation so [Music] mhm yeah let’s talk about something that is not up our old friend okay a regular on the Pod going all the way back to the old days Jeff Celsius what’s going on with this company if you’re looking oh you’re not looking at the screen sorry not at screen let me let me putot you in really quick if you’re looking on the screen right now it’s been a blood bath we got a high of $82 we’re at $3 32.93 year to date uh let’s see what we’re at year to date do the math for me we are down 42% year-to date um pretty crazy uh price movement anyway is crazy we can look at it on quick FS uh price s were five times price of sales which has to be the cheapest in a very long time let’s go to price of sales yeah I mean at one point there is this annual let’s go quarter see what we look like price of sales yeah I mean always more than 10 right even 13 14 times that’s what it looks like uh we are currently at five times okay EV to free cash flow 27 times EV iida 20 times um want to get your thoughts on our old friend Celsius and see is your recovery from here I mean it’s interesting we talked about the stock when it was a I don’t know 300 or $400 million market cap naturally I’ve done the calculation once or twice on what our carried interest would have been if we made that a normal size position and had you know the were fall to hold it all the way through which who knows I mean there it would I it’s funny like when you think about those sort of things I’m like well Jeff always says you know you could go your entire life without owning something north of you know 10 times sales it’s like would we have held it you know we like the product we talked about the product a lot I don’t know we wouldn’t even invested obviously because we didn’t because there were other things that you didn’t like but um yeah want to get your thoughts at uh well Sal it’s come down a good amount right I say in a fund we would not have held because what would have happened was it it would grow to if you made it something like that a meaningful position would grow to be too much of the fund too fast and you’d end up selling a bunch because you don’t want most of your fund to be in something that’s more than 10 times sales the question is more like if it was an individual I had different attitudes on that I’d be more willing to if no one knew I owned a stock I just bought it and hid it away and kept it for years I’m more open to that um yeah well it’s a very high competition space and so the question is what’s been happening lately right and the stock although it’s I mean it was once a huge stock and everything we’re talking only a billion what in sales a something I think in sales 1.3 billion last year and at like 50% margin so at retail we’re probably talking about less than3 billion dollars of units sold um so you know not huge it’s not like when we compare that to monster or something um yeah but she got to be a Celsius to become a monster one day Jeff yeah I don’t I don’t know what’s happened recently so I don’t know the only thing that worries me is every time you know I go into any place where it’s sold there’s a ton of other things that look just like it stacked next to it you know that’s always been my worry with this it was something to do with uh this uh Celsius CFO I believe and Pepsi I think he said something about [Music] um yeah I don’t know he said something basically about Pepsi’s not order they order too many C is or something like that and that like really spooked everybody demand has slown down is what people’s uh impression was of that but it also could be maybe they just bought too much in the beginning I don’t know but they’re going International let’s see okay so all right let’s go to balance sheet then if we do quarterly by balance sheet yeah okay quarterly balance sheet there you go okay so they’re afraid that the channel that they’re selling into is stuffed with their customers are holding too much basically I believe so yeah okay yeah well there’s no way I can tell you if that’s true or not without having sell through data I mean that’s the most important thing to have whenever you do any of these things I talked about that once when I wrote up Boston beer and everything and stressed that to people you need to know what it’s selling through at the stores and bars and everything you you know how many how much how much is being consumed as best you can estimate that all the time you want to know how much liquid is being consumed each week and compare that more so than what they’re selling in case you know someone does get too excited and it’s full of inventory that then takes a long time to to deal with yeah so I guess if you’re looking at this and you were not an investor in the company what would you be looking at is a five time sales for a business like this still too expensive nope that’s fine okay so it’s in that uh range of where you could see yourself buying so what would you for don’t have problem the price things yeah no problem let’s talk about the business then what would you be thinking about personally I don’t even drink Celsius anymore okay I like Alani I feel like after I drink a Celsius I’m more tired and I’ve also other people have told me the same thing I don’t know if they changed their formula maybe my tolerance to caffeine is a little different but I like drinking Alanis that’s what I’ll drink nowadays so there you go uh competition see and I don’t think they are uh they are still a private business but these are the ones I like to drink okay yep so when you talk about competition yeah but people still love Celsius it was the same things that we talked about when we talked about um uh you know when you order meals at home what did we talk about with that specifically what brands I forget all ones we talked about we do we to talk about Factor um because that was owned by the one that someone asked questions about hell fresh yeah hellofresh y y MH um yeah and I talked a little bit about that with other things I would feel more comfortable if it was you know Celsius cigarettes than Celsius you know supposed to be doing something healthy for you I do worry about that part of it like I said okay so that’s interesting so well I mean when we talked about before you said you had tried the meals at home thing and switch right and then we just said you tried Celsius and switch you know yeah I’m not saying that no one switches and now is not drinking Bud after they started that way or something but I just think it’s less likely I don’t think everyone’s looking for the newest best cigarette every week yeah it’s probably true yeah or or or soda if you don’t say it has health things you know what I mean or candy bars if you say it you know I’m more skeptical that that the top protein bar in the country will be top protein bar 20 years from now than the top candy bar will be the top candy bar but you know that’s just why is that that’s that’s a no that’s a good observation though I’ve never I don’t think I’ve ever heard anyone say that but I do believe that try to articulate that for us why is that well look health things have a signific it’s almost like if it’s bad I just give me if I know what I’m getting you know like that’s what I’m getting but if it’s good things their version or their view of good changes so often you know bad changes also with like society and stuff but I don’t know that’s that’s interesting but very slowly it’s a very long time it drops like yeah like smokers drop off or something but they might drop off 2% a year for 30 years it’s not like everyone was drinking um one thing last year and then we all switched to something else you know it takes a while um yeah I mean with health things there’s significant like snake oil aspect to it right there’s a lot of how does it feel how does it make me feel does it do good things for society it’s it’s very feelings based that way I’m not saying that people sto taking Advil or something if they took that at a at a uh for a long time whenever they had a headache or something but that’s very different it’s an effective drug that they can feel the effects of immediately that way this is honestly they’re taking a drug caffeine and there’s all different ways of mixing it with other things how do I get that drug but I mean if you feel a certain way after having something it’s probably because you’re taking a drug called caffeine that’s in it and not the exact way in packaging and stuff of what it’s in and how it’s flavored and everything but it could be mhm why is that though so who knows where celsus will be 10 20 30 40 years from now but people most likely if I was a betting man I was going to stake my life on it you know is a rees’s and a Snickers are those going to be around you know 10 15 20 years from now verse Celsius yeah yeah it’s interesting but I I would obviously bet on the candy but like Reese’s for instance has a specific flavor of peanut butter that people are eating that does not taste like other peanut butter I’m not sure it’s better or worse um I think people get used to worse things and like them better sometimes um but it’s the acquired taste of whatever it is that they liked at a certain age and then they can go back to that in that Nostalgia and have that same thing um I do worry about anything that’s functional like you know but that’s true with other things electronic things whatever anything that’s telling you the benefits and here’s what it does for you I think that’s a harder business anything that is too difficult to explain what it is you know I think is usually going to be better for the long term you know um and it’s not just look it’s not just a um like sin thing or something like that I would have higher faith in even [Music] certain you know um even certain things that are a questionable like what does it really do for them but it gives them a feeling of something that is not functional and is known not to be functional so okay if someone is drinking a Celsius and has a Coach handbag which do I have more faith in that they’ll still be using in 10 years or something it’s more handbag and it’s not really because the quality of it or whatever is comparable to some other thing but because it’s not sold on the benefits that it gives to you you know what I mean luxury products are similar to what we talked about with snack foods and other things like that where they’re not selling it on some of the benefits that same way so and that’s why I said electronics and stuff I don’t like businesses with electronics where it’s like you know you’re selling a small appliance or something and you’re like it has this function and that function and but compare it to this other thing you know mhm so we’ll see uh Celsius is also pretty high caffeine level is it 20 milligrams 250 yeah it’s like 250 or something which is uh I mean if you were if I was designing a product to be addictively used all the time I would use a lower caffeine count I’m just going to be honest I see so more like a Coca-Cola or 607 yeah yeah you want around 100 I don’t think you want to exceed that mhm yeah I mean it’s pretty it’s a pretty strong drink and then it has to have a pretty strong flavor to make it palatable too um because you’re also going for you don’t want people don’t want calories and they do want a lot of caffeine and they want it right now I don’t know it’s just you know I’ve seen people online talking about Starbucks and Celsius and where they both can exist together or if one is taking share from the other I personally think they could both exist it’s funny at Starbucks you and I were just talking about this you walk in and they have their own energy drink right that’s what I thought this was related to when you were saying the stock was down I thought it was because of Panera and Starbucks and um Dutch Brothers and uh you know the McDonald’s one was it MC Cosmic Cosmic whatever it is and all those which are drinks based um places to go and drive through and everything and then they have a large energy component I do try some of those just out of curiosity from a business perspective and stuff which one you try uh are you talking about the lemonade at Panera things instead now the Starbucks things yeah were they good they’re not as bad as I thought they would be but I wouldn’t drink them yeah I don’t yeah are they fruity flavor they’re they all have the same thing which is it’s basically a fragrance I mean let’s be honest if you’re giving a zero calorie thing you’re basically creating a perfume that you’re shoving into a carbonated thing and that you know so so it’s not it’s it’s honestly when they’re selling you like an orange flavored thing what they’re doing is taking the component that is an orange smell that is already being added to things like orange juice for Tropicana or something to help them have it smell and taste like fresh orange juice all the time year round and they’re just taking that kind of thing and putting it into your zero calorie thing and yeah it’s it you know so I yes they they have a taste smell whatever that’s fine and would be fine if it was added to other things but there’s no substance to it beyond that there can’t be because you’re trying to make a zero calorie or close I forget what those are maybe 10 or I don’t know but you know anytime you’re trying to make these things that are 20 calories or less or something you know I mean gum that’s almost no calories I guess would work that’s about it for actual thing things but you know caffeine gum it seems like that has never really took off the way that people thought it would have yeah I mean I think it is interesting the the changes I mean because we are talking about something where people are now what tripling the caffeine intake in a single serving and I don’t think it’s because people want to be so much more caffeinated than they were before part of it is the huge drop off in in just like cheap black coffee drinking over time in the United States which was just a constant all the time thing and so um Teddy Roosevelt used to drink a gallon a day a lot of people drank a lot of it yeah um I don’t know I guess people want it faster and everything now it’s hard to say there there’s swings and things alcohol consumptions same way where there swings from higher to lower alcohol by volume and mixing it and making it palatable to people and everything so you know there’s some societal swings the same way here I guess um yeah no the price is fine and everything I don’t have any problem with that um it’s a very competitive space I feel like in terms of every fast food place seems like they’re going to do some sort of energy drink thing it’s a category they want to get into I don’t know it’s hard to tell because when I talked about the inventory thing I don’t know if you remember but the um spiked Seltzer type stuff so a couple years ago I was in a supermarket where it was like it went I mean it went from being massively overstocked with it to basically eliminating the category being just empty like you know and put everything on sale just to let’s get rid of this but like you had half an aisle of stuff that they had done really since covid and within 18 months or something it was like let’s get that out of our store um and it exploded so fast where you probably had a couple competitors initially and then so many people started doing it so um and I don’t know enough about the success of things like monster and Red Bull and stuff in terms of their marketing and how much that led to their durability over time versus other things you know I do feel like we’re generationally a different category where all these energy things are promoted not all of them but don’t you feel like a lot of them are promoted as being healthy as opposed to the opposite yeah yeah and I feel like some of the early ones were not so so I’m also skeptical of that on the demographics I always felt like if it was people playing video games I’d be more comfortable the idea they’re going to keep buying it and using it then then people you know I’m more of a search for wellness all the time isn’t that what happened with Boston Beer Company the spike Seltzer and when that stock was trading at crazy valuation and then it fell out bit right you know they’ve had that in their history a few times before it just hasn’t always caused the stock to go crazy um and sometimes that category was big enough that it caused him lots of problems that grew so much right was that during the time too I mean that was during like covid right yeah where everything was going crazy look at that look at that chart 2020 361 bucks is up to 1,200 within like a year or two yeah that’s crazy so long-term Revenue they might grow volume you know 5 six% a year and then grow price three or 4% a year or something in their history and then with what you’re talking about if we do 2018 2019 2020 2021 they grew 15% 25 39 19 that’s you know really wildly high growth for a consumer Products Company like that in a category that’s that you know the beer part of the category wasn’t growing at all down to 1.6 times price of sales let’s see what they trade to and yeah it’s G was pretty high wow you’re at the same is that true that you’re at about the same market price that you were your stock basically has you’ve round tripped I would think let’s see all of Co yeah you’re back to9 level do you know if they bought back stock let’s see I guess I could have gone an income statement and see share count yeah not since that boom happened they were buying before the boom basically yeah wow you know this actually ties into the topic that I want to speak about today with you um and it’s this idea of like an individual stock idea versus a theme in what you think is more powerful and just your thoughts on that in general going back to 2020 I would have said like a theme could have been owning Financial stocks right Bank stocks 202 2021 with the yield curve I personally think a theme is probably I don’t know two three four times more powerful than an individual idea because there’s so many different ways to make money and there’s a lot of momentum and everything like that but want to just get your thoughts on like themes so industry themes uh versus individual stocks I mean so here we are talking about Boston beer company and of course Hind 2020 and we’re just picking and choosing but seltzers and Celsius all these companies back in that era it was a theme you just had to own it it didn’t matter what it was right and the stock just went to the moon so want to get your thoughts on themes in general versus individual stock ideas in the medium term I think that themes are the most important in the long term they’re not very important there is some difference between industry but in general which IND Industries you’re allocating to is not very important for super long-term like building a fortune and stuff what company you’re in is important um it would be helpful 100 years ago to be in tobacco and not coal no doubt about that but even the gap between those is not necessarily bigger than the gap between some stocks within the same categories and stuff so you know it’s more important to be something that’s going to last for the very long term so if you’re putting money away to be what’s around for Next Generation really good business really good management team that kind of thing that’s what really matters more so than a theme but yeah in shorter periods of time like you’re talking about of course the theme is much much bigger and even when I we talk about talk about things like um cinear and Marcus I do even wonder about that is that people want to participate in investing on a certain kind of thing and it’s easier to do sometimes now through one thing versus another I don’t know if you read the um what was it the uh was it aqr the um you know whether the Market’s gotten less efficient over time is that a recent piece yeah let me see less efficient market hypothesis September 3rd 2024 no I have not read that okay yeah yeah what was the uh conclusion what were his thoughts uh I will we we can discuss it some other time actually it would be fine to do as a longer term thing sometime probably because it’s a question we get all the time and his career in some ways in terms of stuff matches some of the time that I was investing in the market and so some of the same ideas are true I think for both people when people ask like so he covers some of the topics of like speed and yeah there’s no doubt things have gone faster but that’s not a very big factor usually in uh how good returns are like he you know he’s a some Factor driven person short-term quantitative but you know is honest about the fact that look if it prices something in in the first day or the first week that shouldn’t matter that much of a strategy that’s holding for 9 to 12 months otherwise the strategy should be to hold for a week you know um that wouldn’t make sense so like we shouldn’t pay too much attention to the fact that these things can happen really fast versus how right they are about it so Marcus and Cinemark I do wonder about something like that look they’re different you could be more exposed to hotels look hotels are sensitive to recession in a way that movies are not although hotels are somewhat helped by lower interest rates if they go down and State down for a while like the value of the hotels and everything um which is not such a factor in the in the movie side um but it’s just like is it easier for money to flow into cinemar than it is to Marcus for people to find it and to make that bet are they making a top down sort of bet you know yeah it even including IMAX so just having exposure to the box office and movie theaters anything right like let’s say it just checks that industry box it’s a much more liquid stock so you have Cinemark liquid you have IMAX liquid and then you have Marcus not liquid or less liquid and I wonder if you just don’t get those flows right it seems like momentum flows move everything nowadays at least in the short term and all the people invest have never been to a Marcus Theater because it’s a Midwest and cinarc has cinema right in the name of it so I don’t know but that’s always a question I mean I do think you could make your for theming purposes you could have your stock go up more if you Chang its name and stuff yeah uhhuh it’s kind of like that related hedge right yes no it’s totally yeah which works over time explain that why don’t you explain that for people that don’t remember that it was just an idea that I suggested for something which you know was not accepted as a but uh there’s two stocks one had a history of being in a different industry and so had a totally different name and one did not but what both of them were doing is acquiring things ethanol pretty much putting all their money into that and so one would eventually change his name and say it was an ethanol companies the other one and their so their book values were different one was at like half a book and other was two three actually was probably three times book at that time um yeah so that is an Arbitrage kind of thing of like okay well if if um movie theater things are so hot or whatever why don’t you change your name to that you know but they’re trying to do that with AMC the opposite way like let’s adopt things that are are not movie theater you know a few years ago let’s stop things that are not movie theater related and kind of make us sound like we’re something else you know it’s a lot easier to change the idea of what the stock is than to change you know the underlying um reality usually but sometimes you can do it in other ways I mean GE basically grew you know 90s 2000 basically grew a lot in terms of um finance and presented itself as an industrial company as like a diversified company and so was more able to get people to kind of think of it that way and we’ve talked about that with with other things where sometimes you see companies that are financials and grow quite well and they’re not valued as highly by the market as if they had the same growth but were a non-financial company but it doesn’t last forever I mean I think Pro Progressive is pretty has had pretty good multiples lately for instance I think it eventually got valued like a growth stock um yeah it’s valued like a growth stock now but for years it grew it’s not you know for years it grew like a moderate growth stock but was priced like a value stock because it was a financial company let’s hop over to questions that people had sent in if I could find them let’s see so for whatever reason I can’t pull them up on my screen so I will just uh read them out loud I don’t know why they’re not pulling up but um couple good questions in here if you want to send in some and have them pulled for the podcast email them to me at Android Focus compound.com someone said Jeff had said in the past if you were to recommend someone to start investing to just going through to just start going through annual reports and that he has learned a lot about business reading them which company’s annual reports has he read that helped him learn the most question mark has any particular company’s reports given him any particular insight into an industry so I have an answer that is not really going to answer his question but it’s just more advice in general I would say just pick a company you’re familiar with if you want to learn about business something that you use daily you understand the product the customers or you think understand the customers why people use it and just read that start there and that I would say that’s a good way to keep you interested and uh be able to go through like that so if you drink Starbucks daily go read Starbucks’s annual report if you use Apple products go read Apple um you know if you’re interested in I don’t know um Celsius you drink Celsius daily go there I would say that’s the best way to to do it I don’t know if there’s anything that gives you an example or I’m sorry gives you any sort of insight to an industry other than just reading two or three or four different ones listening to Ernie’s calls reading them um and just going through one by one that’s the best way to do it in my opinion yeah there’s we haven’t I don’t think we’ve talked about this podcast before but there’s an excellent podcast Founders podcast Founders podcast I did not think would be a podcast I would enjoy but you suggested something and he covers many more obscure um biographies older biographies and things instead of just all being you know like Steve Jobs and and things like that but uh one that’s not so obscure for Valley investors but they covered was leelo and so basically what he was talking about is the leelo um talk at Colombia where he yells at the students you know the one that I’m talking about yeah yeah so it may not like I’m sure the quality if you can find that video is not great you know the audio whatever and then the students aren’t that helpful so he kind of just yells at them whatever but that is like the best what lelu is talking about in that lecture is really the best way of how to invest and how you learn things from annual reports and everything so he’s basically talking about Timberland and he’s like here’s how I figured it out and then I looked into this and looked into that you know and uh I had to learn about the people I had to learn about the the dad and the son and I had to learn about why it was the way it was and you know he just goes through the whole thing and he basically gets annoyed at them for not you know doing the work and putting it in to figure these things out he’s like you have to have curiosity and try to figure these things out so that’s what the annual reports are really useful for and like you said having different ones that you can compare can be really helpful um something that you have some experience the product and everything is really helpful um occasionally there’s things in annual reports that are incredibly helpful that I don’t even know if they intended to put in there to make helpful but you know much more common with small companies that they don’t remove certain stuff and so they just uh you get so much more it’s surprising if you go to like a Microsoft annual report or something how uninformative it would be if you didn’t understand what Microsoft’s products were and everything and then you have some tiny thing that has one product sort of business and there’s so much information about it so um I would probably start with the simp smallest simplest one that you know in an industry or something um a lot of buffet companies are good examples for annual reports because he tends to invest even in giant companies that are giant in a single industry a single product line or something so like apple right is probably one of the simplest big tech companies to understand because it has so much from such few product categories and everything right one thing I’ve come to appreciate just through our own investing and experience is how much a lot of these reports especially 10K are written by lawyers I mean it’s all written by lawyers but one thing that I’ve learned whatever experience it’s easier for me to see when something was written by a lawyer when it was written by management and when it was probably written or suggested by an auditor and being able to sort of filter that out just from our own uh experience and filings and all that other stuff and I would strongly strongly encourage people to read all past transcripts I like to read theual report and all the past transcripts and highlight them and everything it’s not an issue it most of the questions are really stupid and there’s no reason to listen to an Ernie’s call for this quarter to learn about this quarter or next quarter that’s not important what’s important is to have all of the past earnings called transcripts together to understand management doesn’t always know exactly what they’re going to ask and even if they do know what they’re going to ask they’ll ask for clarification on something or whatever and they’ll just blurt out something actually useful about it you know and trying to answer the question um and so that’s much th those are really really good and I’ve always felt that you get a much better feeling for management from reading all past durings called transcripts than you do from say the annual report go from the past and work your way up correct yeah back up somebody told me sorry go ahead I was gonna say which is pretty much also I do annual reports so annual reports oldest and newest I read first and then I go from the back up but I’ll read the newest annual report and the oldest annual report first to get an idea of how big the change has been and all that and then would read the anual reports in order but I always try to read the very newest and very oldest annual reports mhm somebody told me and they worked in uh investor relations and he was talking about how all these companies they know they try to know who their shareholders are their fund style do they do activism do they don’t are they long short whatever the uh situation is and for their earnings calls they’ll put their favorite investors the positive people in the queue right and because they don’t want to start it off with like negativities sometimes they’ll Loop in somebody that they know has like a cell rating on them and answer their questions and then they’ll end it with they someone that’s a shareholder that they know is gonna ask a positive questions because they don’t want to end a call like that uh so yeah it just I guess playing the game we’re just seeing how some of these companies do it is something that is just I don’t know maybe eye opening to me maybe that’s because a lot of the world we focus in people don’t really do earnings calls too much so it’s been a while since I would sit in on them and stuff like that although I was on AOS pretty much every quarter but um just interesting to hear like the other side of it is what I should say yeah and when someone is really close to the operations the earnings call is usually a lot more helpful yeah as as good or whatever it is listen to a Disney ears call you know um Bob iger’s like the Ambassador the face of Disney or whatever I mean like there’s these different units and you’re not getting earnings call with each of them and what youd really want is an earnings call of the parks or an earnings call of the studio those people would really be able to tell you something that would help you understand those Industries and everything and so it’s not going to help you so much when you have a conglomerate like that honestly like a lion’s gate thing would be more helpful to understand the industry or Thunderbird or whatever that what was the other one you remember the Thunder yeah things like that that you might not be interested in them as stocks but you actually could learn more about the industry from learning about that so same thing with you know Cedar Fair would be a more useful one for Parks than um Disney would be M somebody else s Us in another question about that but we did just answer it um one thing we’ve never talked about on the podcast is rsus and grants and how you think about them so someone said how do you guys look at management compensation especially all the rsus and grants and then he has another question which we could go over any thoughts on rsus and grants in general no I’m just skeptical I don’t know I’m skeptical about being able to tweak these things in different ways to improve you know incentives I mean look there’s a few different things but the the big one is obviously look you want someone to own a lot of stock versus uh their salary right and then you also want to consider which is a problem in some cases and that’s a private Equity problem and stuff you want to bring people in and everything who don’t own a stock so what do you do how do you get them to think like an owner and this is kind of the different ways of doing that but making elaborate ways of doing it other than just we need them to own a lot of stock and to be paid a low amount of money you also don’t want them to be generally very rich so you could you it’s Everyone likes when you bring in someone who made a ton of money someplace else but actually it’s better if they have a lot tied up in this particular company and don’t have a lot of money outside of it or they have potential for a big bonus but they don’t have a lot of money outside of it or something um and then you also want to consider what incentives they have that are non financial and I think that’s one of the really big ones the incentives they might have that are not Financial um and people tend to underestimate the non-financial ones and overestimate the financial ones so if their name is on the business or something they have big incentives regardless of what they’re paid and everything for it if they’ve been there forever if they kind easily get a job anywhere else with it or if they can’t you know if they’re at a job that they’re never going to get that kind of job somewhere else then that’s going to affect their incentives even in ways that don’t show up in the financial numbers but generally just say owning a lot of stock versus having a small amount of guaranteed money coming in and being younger helps for being honest it you can’t incentivize extremely old people yeah it just can’t be done I mean there are ones who will do great things for you but basically that’s cuz they were doing them before and then they got older and they just kept doing them but you can’t find someone who’s old now and say oh I’m going to incentivize you people typically think the other way they think about the age being a benefit of all the experience that they have well you get experience yeah I’m just saying do you incentivize I mean so usually the people with the most experience are the hardest to get to take some of the actions that you want to have happen right those two don’t normally match up that’s always the issue with the Charlie Munger the Warren Buffett those things it’s not just they’re very smart but they also carry out those actions at the times that they have to there’s lots of people who are great at understanding what to do but don’t do it and there are other people who are great at hustling and doing everything and half the things they do are are dumb um you need to have the combination of those two and you can find people who are great at hustling but are doing no you know their hit percentage is not amazing you can find people who are amazing analysts who wouldn’t necessarily be great investors or great operators or you know of a business or something but might be great if brought into analyze a particular problem or something so is you know um I mean the other thing that’s tricky with the incentive stuff is it really depends on what position the person’s in so um the reason anything that isn’t stock gets tricky for the very top people really tricky anything that isn’t a lot of their wealth is permanently kind of tied up and something it’s very hard to try to duplicate that for people at other levels in the organization there are ways to do it and it’s possible right so at Berkshire it’s possible for someone who’s running Seas candy to be incentivized in more elaborate ways that looks more like what a compensation uh consultant would say or something for people at the very top it’s really really hard um because ultimately it’s building the business in a way that is the best for realizing value at some future point and that Future Point could be six months from now or it could be 60 years from now but it’s kind of like a present value thing and so I think that you know It’s Tricky they’re weird incentives and I mean like a lot of these schemes they come up with they inadvertently cause I don’t know that people realize them but they cause weird optionality in terms of what would happen like you’re incentivizing them potentially to say okay you wouldn’t you wouldn’t be harmed that much if things went really badly really fast but you benefit a lot if this business gets sold in three to five years or something at a high price so try to you know Gussy it up and get it sold or something is often what you’re incentivizing them for even if it means not necessarily having the safest situation in the short term and I don’t think that causes necessarily a lot of problems but I just think that that happens when you do anything much more elaborate than basically just giving people stock well cool well I want to thank everybody so much for tuning in with the both of us on the focus compounding podcast if this is the first time you are joining us be sure to hit that subscribe button wherever you are listening or watching us here today and of course if you want to learn about our Money Management Services you could reach out to me at Andrew Focus compounding domcom I thank everybody so much for all the support and we will see you in the next podcast take care