Description:
00:00 – Intro 01:00 – Job Report 04:40 – What the Bond Market is Signaling to Investors 06:50 – $SAVE Exploring Bankruptcy …

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 are 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 a at Focus compound if you’re watching us on YouTube or listening to us on a podcast app hit the Subscribe button that will notify you every time we upload a podcast and of course if you’re interested in our Money Management Services you could go to focus compounding dcom to get more access to that or reach out to me directly Andrew at focused compounding tocom so in today’s podcast Chef we are going to be uh first starting with the jobs report it’s been a few weeks since we had uh reported the podcast and uh today is October 4th and the FED released their uh non-farm payrolls and we added 254,000 jobs last month this caught a lot of people by surprise I think a lot of individuals were expecting these numbers to be a little bit softer especially because the FED had cut interest rates by 50 Pur points and projected being worried for the future and recession risks and uh they came in pretty hot 254,000 jobs were added uh something that is interesting to me is the bond market and what’s going on in the bond market talk a lot about banks on this podcast so obviously we we have exposure to Banks so we uh follow the yield curve fall what’s going on in the rate environment and on this news rates started to rise uh interestingly so the FED cut interest rates like what about a month ago now and we areally flat or maybe a little bit higher uh from where they cut that at least like the 10year and the 30-year Bond uh interestingly to think about when they originally Cut Rate started to run so what does that mean that’s the the bond market saying they are worried about uh inflation researching right um so that’s you know currently what’s going on so uh strong jobs report today now people The Narrative changes all the time but okay maybe we’re not actually going into a recession one jobs report is uh probably not indicative of a trend but want to hear your thoughts on that because it seems to have caught a lot of people off sides something that you know just monitoring price action for so long there’s a lot of geopolitical going on right now especially overseas and it just it seems like bonds can’t catch a bid to be the flight to Quality that they traditionally have been so I just think the Bond Market’s fascinating right now because it seems like it’s just not acting how it has acted uh over the past handful of years so why to get your thoughts on that yeah some people asked because of a previous podcast where we talked about I think I said that all the rules of thumb were pointing to a recession and I did mean that literally um but I didn’t mean that that means that there will be a recession just that this time I think most people are expecting there not to be a recession and for that to be in violation of normal rules that they would use to judge whether there’ll be recession we talked about that like inversion and then on inversion of the yield curve we talked about change in unemployment rate you know um and then even when we’ve talked about certain stocks some of the stocks that have not done as well depends are stocks that wouldn’t do as well because of fears of uh a recession or credit contraction or something along those lines whereas those that are in the same categories but not exposed to that kind of stuff have done better um you mentioned Banks Banks in particular you can see that if a bank benefits from um lower rates but doesn’t have a lot of credit risk it’s done really well this year as a stock whereas if it has a lot of credit risk it hasn’t done so well what do you think about that when the FED cuts it just rates uh shortterm and then the longterm end of the curve start to rise on that what does that signal to you are we going back to a very steep yield curve environment where banks are going to be able to make a again lend out you know at much higher rates and then obviously have their deposits paying short-term rate or uh smaller amounts so the curves can be incredibly steep what does that tell you how do you think about that I mean as of this report coming out and everything it looks like that’s kind of the consensus view I would say but it’s very fast to know that because I think expectations for cuts in the short term were reduced now to being expectations that feder will cut rates by 25 basis points or something but that they’re basically pricing in less rate cuts and then they’re pricing in more um economic growth so that’s what would happen if that’s the case um but expectations have changed a lot uh throughout the year for when rate Cuts would happen and all that so I I don’t know if that will actually be what happens but yeah that’s the expectation the expectation isn’t for a recession but it is for them to cut rates so um yeah pretty steep would be the expectation if you’re cutting if you’re still expecting them to cut rates and you’re expecting that this kind of jobs report is what you’ll see normally and everything yeah do you ever think the FED is uh maybe doing it also to bring down the interest payments on the debt because the amount of debt we have and what those interest payments would be which just contined to balloon the uh national debt you ever think they think think about that I mean they claim they’re not political but do you actually believe that to be true well I think that they think sometimes about fiscal policy and whether their policy is able to achieve what they want it to because of the importance of fiscal policy um but I don’t think that they would think that that’s a good idea because being particularly loose could not be a good thing to do I am not sure that that would be great unless there was also coordinated with restraint at the same time you know uh but if you’re asking would they like budget deficits to like would they like a balanced budget and the ability to cut rates more probably but they can’t coordinate I mean they’re an independent part of the government that isn’t able to work together on that interesting well we will continue to monitor uh but lots of interesting interesting things going on in the yield Market currently uh want to revisit our old friend Spirit Airlines never a friend in the sense that we actually own the stock but we have talked about it on the podcast a bit uh news came out yesterday after the close that spe Airlines was exploring a bankruptcy filing uh exploring chapter 11 so not a full-on liquidation chapter 11 would be more of a restructuring of the company Equity holders typically get wiped out debt holders get converted over to equity uh is usually what happens uh pretty interesting situation though right so obviously Jet Blue was trying to buy out Spirit Airlines it was blocked that merger was blocked and here we are what not even six months later and spirit AR is now exploring bankruptcy so is this those are argument for why they should be allowed to murder they did say that right they did say that we were going to have to go into bankruptcy people thought that that was just bankruptcy or you know negotiations you know talk trying to gain that leverage why they should close and here we are like I said not even six months later so I guess if you’re first thing if you’re Jet Blue do you say okay let’s try to re-explore this right and try to buy him in Banky or do you not you know re explore because it was blocked uh but yeah want to get your opinion your take on what’s going on with Spirit Airlines and we could of course pull it up through quick FS um gosh you know the airline industry just continues to always be a very tough industry for investors to make money but Prov it time and time again yeah I mean I think it’s tough right now for the companies that focus on the um lowest fairs Southwest is having trouble Spirit like we talked about [Music] um but you know from the government’s perspective this doesn’t necessarily matter because if they they aren’t going to liquidate you know you know what I mean so they blocked a merger of something happening and then if they’re able to prevent that kind of merger from happening that kind of consolidation then it doesn’t take capacity out in the long run so it’s not like it necessarily increases fairs for anybody so they make you know the they may get what they want it’s not like their job is to protect companies from going into bankruptcy no but also it just suck if they blocked it and they were saying that going to go into bankruptcy and then that happens that’s unfortunate and it’s likely that they’ll consolidate in some way with somebody it’s just that it will be somebody where there’s less overlap maybe and a less advantageous price for the the owners of the company right for Bond holders in this case basically what’s left there’s some value in the stock right now in the market but who would be a likely takeover if not Jet Blue well Frontier was the one that wanted to merge with them originally right and that’s true actually anyone would be likely if Allowed by the government it’s not impossible not Southwest but others would be why not Southwest they don’t have the same planes mhm are you following what’s going on uh Southwest yeah I mean I Fly Southwest all the time probably you are fre yeah you are I only fly American for me yeah everyone has your thing right I only fly American you only Fly Southwest yeah yeah I fly a lot from Dallas to New York and there’s multiple airports in both places and it’s highly competitive and Southwest offers very frequent flights at low prices and I also don’t travel internationally and I do travel domestically so it’s very convenient um and I don’t care where I sit so that’s convenient too so um and they’re you know historically they have been likely to board on time and leave on time and everything turn the planes pretty fast that you know at least the airports that I have been going to I had been going to some of the busiest airports which I think is more the problem but what are the issues with Southwest you want to give a summary of what’s going on with the company the activist yeah so we talked about it a long time ago Southwest the gap between Southwest and other airlines closed over time because other airlines became more efficient and what they did and Southwest became more like the Legacy Airlines but it still was doing well and then you had the problem of all these upcharge and everything which Southwest doesn’t participate in at all so Southwest advertised Fair might not seem that low but why I say it’s pretty low for me is uh you get um well first of all if you pay I think it’s $25 now used to be like 15 or something you basically can pick your seat because you get to board the plane before other people and it’s you know self Ser seating and um you get two bags checked bags for free so basically there’s no reason why anyone would pay more than the advertised fair that you see plus $25 to get everything they need unless they’re flying with more than two check bags per person or something which is a lot um whereas other airlines are all these up charges for everything else so I mean because for business things that we’ve done I have flown other Airlines and it’s a much more involved process of both checking out and then also um boarding the plane because it’s separated into groups and there’s all sorts of different charges that you have so the gap between the original fee that you pay for the fair and then what you end up paying is bigger at other Airlines and that’s working well because we’re in an environment where people want a lot of upgrades and things so it’s worked very well for the other airlines that way I mean I think Southwest would have benefited if there had been a recession faster I don’t think it’s an accident that Southwest has underperformed other airlines during a very long period without recession in the industry and the activist what what’s his uh main gripe with the company I don’t know what his main gripe is with the company but I mean it is underperforming other Airlines and they’re going to make the changes that you know that they they’re going to make other changes I think to look like other airlines my guess is that Southwest will look like the other Airlines at the end of this but we’ll see if that’s true and you think that’s going to ruin the customer experience then it sounds like no I think I’ll make it the same as the other Airlines and just will eliminate some choice that people had you know it’s interesting because from an antitrust perspective and everything the Southwest making these changes is a much bigger deal in terms of competition than any of the spirit stuff but the government has no ability to set policies and stuff yeah it doesn’t have I mean if you merge and stuff it has control over that but it doesn’t have control over whether you all choose to price the same way I mean it has control over that if you explicitly do it but airlines are so transparent that they can coordinate whatever they want to do um they can all set their prices the same or whatever without talking to anybody so it’s very easy for them to know what they’re doing and to all adopt the same sorts of policies and everything so but from a consumer Choice perspective more diversity in the industry in terms of pricing models and stuff is is generally what would lead to more innovation in terms of different options that you’d have and I think we’ll have less of that from the both of the things we’re talking about changes at Southwest will make it look like the other big Airlines Southwest is a huge Airline domestically and then also you have on the um real low end like Spirit um with being a choice of all those add-ons you know Spirit probably 50% of their revenue or something comes from things that aren’t the base fair so you have two completely different airlines that way one which is all about the base fair and one which that’s very small part of it and both of them are changing in some way so it’s you know it’s making it more commoditized that everyone’s going to look like the other big Airlines mhm I felt like a fish out of water the first time I flew Southwest yeah yeah it was definitely a different experience I was like okay I’m following the herd right here uh let’s look at South Line or Southwest Airlines and uh get your thoughts on the valuation 17.7 billion market cap 12.7 billion Enterprise Value uh price of sales is7 I think we’ve looked at airlines in the you know past couple of years and at one point weren’t they at like3 or point4 uh price of sales about 0.5 e sales okay um 10-year ker Revenue 4% assets 6.6 uh e to free cash flow on a TTM basis 14 and a half times uh yeah what are your thoughts on these levels yeah I mean you see the entire chart you can see from 2000 to today Southwest hasn’t done that amazingly versus other airlines so I mean as a stock I think it would underperform the S&P probably or has not done well for 25 years and would have been amazing stock performing from its founding through about 25 years ago and you know you have change in the model and change in leadership over time um it’s typical of what we see with a lot of these amazing founder-led companies you know it’s like a Walmart to me same thing Walmart had a model that was different from everybody’s it worked for a long time and then eventually you know kind of isn’t anything special now and there’s no room for them to deploy Capital at better rates same thing happen to Southwest eventually but we did do a podcast I don’t remember what we called it but we went back to looking at what the airline industry looked like say in 1995 and everything and showed the consolidation you had so many new entries yeah I mean when I was growing up on airlines you wouldn’t there um most of the airlines I flew for the first so like Trump Airlines no but I would have flown um let’s see the only major airline that I would have flown that people would know about and its name has kind of been erased at this point is Continental which became United Continental um and you know that’s major but we’re talking about probably twice as many major players at that time and then most of the other ones were airlines that came in flew for a few years and went away um and no one would recognize the names and some of them would be flights from particular places without coverage on the rest of the country um and there’s different reasons for why that might be we talked about loyalty programs and all that and the importance of that but also just you know slow down in growth I mean when growth in industry is too high in terms of Passenger numbers increasing all the time um you get new entrance all the time too so as you’ve seen growth is really a lot lower in the United States certainly Southwest you can really see it because they focus on domestic us um there just hasn’t been a huge growth in that industry and so you know people don’t pile into an industry with 6% % growth or 4% growth or something but they do if it’s 20% and that’s also helped that they’re just you know it’s a very mature industry in the United States it’ll be interesting what do you think will happen with uh spirit do you think they’ll just uh eventually get purchased do you think well I don’t know I mean process what do you think I don’t know it’s it’s too detailed for me to know that in terms of could be possibilties for people to make money and things in in debt that we’re talking about um because you don’t know the exact way that it’ll shake out right because it could end up in a way that has some value there for a lot more value um depending on if there’s some deal of you know that it’s somewhat attractive to people to consolidate stuff right I mean some of these things are attractive to people um I mean there were two biders at one time you know two different biders that want to offer a lot more money for the company than what it’ll end up being but that’s also when we talked about us steal right there I mean there people want to pay more for that company but will they be allowed to so it’s the same sort of thing now dish and Direct TV is the same sort of situation so they’ve been blocked to go to merge blocked you know and then um basically sold for like a dollar so basically like a bankruptcy it’s not much different they’re just assuming the debt to merge the two together but that’s a change in the industry where the feeling is okay um satellite TV is such a small part of the overall options now that it’s okay for them to merge but for a long time it was blocked on that interesting so we could talk about our topic and uh the topic for today is going to be um from an email that someone sent in and it’s an investing business model topic and I don’t know if we’ve ever directly talked about it on the podcast so I thought it’ be great to chat about it and uh this email says it’s about scaled economies shared I’ve heard scale economies shared I’ve heard scaled economics shared um so semantics uh but this concept comes from Nick sleep at Nomad and he owned Costco and Amazon and I thought this email right here lays it out well and uh then we can get your thoughts on it so the email says for people listening my question is concerning the scaled economy shared business model this is regarded as an excellent business model by some investors essentially if a business benefits from economies of scale they share those benefits with their customers through lower prices this enables the business to increase market share in turn gaining further economies of scale reducing prices again and the cycle keeps repeating it seems this business model inherently traps a business into growing Revenue without much profit growth due to constant price reduction and if the business ever wants to earn higher profits they will need to increase margins thereby opening up an opportunity for competition a business that struggles to increase profit without losing market share doesn’t strike me as ideal I’m curious to hear your thoughts on all this a few examples of the scaled economy shared business model or possibly Costco Amazon and maybe Ford around 100 years ago so just put a like a illustration on that yeah did some Googling around I think people listening generally understand it but Costco lower prices better value prop uh increased scale and efficiency which gives them lower cost per dollar of Revenue which gives them cost savings returned uh increased scale lower prices in the circle or the cycle all works together uh Amazon similar fly flywheel right low prices great customer experience experience better traffic more sellers uh better selection yada yada yada right we all know the story so was the same idea there you go the exact same idea so and and there’s others too it’s it’s not it has nothing to do with whether it’s technology or not technology Western Union was similar what we’re talking about is uh there’s a Jeff Bezos quote on this but basically it’s any company which Cuts prices ahead of time when it can’t prove that the increase in volume will exceed the uh decline in the prices initially but believes that it will over time so in other words you know you’re in some commodity business and you figure this happens all the time where you figure okay I can reduce my prices from $100 a ton to $95 a ton but the increase will be like greater than 5% of my volume so I should do this but that’s a projection for this year what Amazon would do is say we can’t prove that the increase is going to be bigger but we should cut our prices now and so they talk about it why I mention Western because Western unit always called them pricing Investments but it’s the exact same idea they would cut their prices over time and so the cost of um what’s essentially like a wire sending these uh money from one place to another um fell all the time now there’s others that did similar things and didn’t share that right so that’s where you get your really good businesses your like visas and Mastercards and all those things where they they get a lot more scale and yet they don’t have this idea of cutting prices as being the way to drive further volume um and then there’s lots of other businesses is where if you did a comparison over time you realize oh they haven’t really gotten much more expensive um if you look 100 years ago a candy company soda things whatever you might think oh they’re raising prices all the time they’re not because they’ve changed how they package things and so their price actually stay pretty low because they have so much scale they’re not thought of the same way as focusing on keeping costs really low and giving it to customers but actually their profit on each unit is like in real terms it’s down over time they’re just doing so many more units right so it’s normal in a scaled business like that uh cruise lines are also similar but with each of these you have the problem that you have a constraint I talked about Village Supermarket Village Supermarket would have the same model but they can’t keep opening up new locations and everything so there’s a limit to how many people that causes overcrowding in one location you can’t it’s very hard zoning rules and all that get approvals get all this to open up a new location it’s not like what you have with the Costco or even better in Amazon where they don’t even have to worry about those things so you run up against that Southwest had it for a time but eventually you’ve taken away much of their competition was bus stuff early on that’s who they’re taking the business from you fill up all the gates you do all that you end up starting to be in highly congested airports and all those things and you run up against a constraint again um you know I don’t know that Walmart was able to do this kind of model too much after they got out of rural areas and in other sorts of places but some of that was also there facing tougher competition because then you’re competing Grocery and stuff with people who are in Suburban areas as good or better than you whereas they would never face that in rural areas there’s very inefficient grocery operations in rural areas so I think it’s a model that makes a lot of sense up until a point that you will reach constraint with that and this was about those that can get really really big in a huge Market the other thing about it though is the model is built on the idea of faster turns so your margins could be lower but if you have good turns if you have lower Capital intensity you have to invest less yourself then this model makes a lot of sense you know and then we get from that we could talk about Dell computer whatever where they’re basically operating because they’re on negative working capital cycle is how they got started and so they’re able to do that on what looks like low margins but they’re not investing any money in the business you’re usually squeezing the other side in some way either by getting them to extend you long payment terms or um you could be doing it through getting them to to accept lower margins right so you know you’re helping your customers out a lot and hurting your suppliers a lot do you agree with him that this sort of traps the business I think it it’s a very specific system it will work for a period of time and have great returns and then after generation or two or whatever someone else will will overtake you and and the problem is that it’s so such a um integrated systemic advantage that you have that that will unravel like we saw with Southwest right and so then you’ll fall and the question is how far will you fall if you’re an airline or retailer you could fall to really bad places so you know I think I would like a business with this kind of thing especially to the extent that the founders around so it’s really like a thing right it’s great if you want to try to go get market share well it’s interesting because like Southwest never focused on market share whereas others did but they did keep cutting their prices um and they didn’t raise their prices when they could have made more money in some cases early on they just basically like Costco like were kind of just saying let’s not raise prices on certain routes Costco would say let’s not raise prices on certain um things that we do because I think this was even a discussion behind the scenes in Costco was yeah we could do this and no one would ever know because we got it a ridiculously cheap price some for some reason on some products but um it would look like we’re doing our normal markup but then if we let people inside the organization do this kind of markup then that means that in other cases you’ll come back to me and say I want to do the markup on this and this this and soon there’ll be 100 SKS a thousand SKS that we’re doing this on and we won’t have the same model anymore um yeah so I think it’s it’s very powerful I think most of them though are highly associated with a single founder usually in the period where they’re successful and I don’t know how many last more than 30 years or something of success that way but it’s possible there’s a lot of them in really smaller companies that you just don’t know about because they they top out at a much lower level and so the thing is with a Costco or with Amazon with these retailers that cover all sorts of things then it’s a really really big market and so they can keep repeating this in place after place there are other ones in other Industries but the industries are just so much smaller that you want to notice this and then they top out somewhere but if some point you will reach constraints on your growth which will be a problem because you’ve been using that to improve your price Cuts basically you’ve been using that to always be a step ahead that way at some point the engine will kind of stall on you mhm right because things like Costco and Amazon stuff haven’t invested let’s say in advertising or in doing other things to increase anyone’s desire to use them when their prices are different or their convenience is different than someone else right so that’s kind of the problems that you face um gosh Costco’s valuation 390 billion 52 time earnings 58 time fre cash flow you to sales 1.5 but for a uh company like that that’s still pretty high it’s just crazy very expensive do you have any thoughts on Costco’s valuation I mean they’re going International right yeah the stock price is too high but you know there’s always the argument that if you’re in the business and it’s working then why not keep holding it I don’t know that I would tell people to sell something like Costco if you thought that nothing was changing with it you know MH the reason to get off the train and Costco Amazon Southwest when I mentioned that or Western Union or Cruise Line things I talked about or whatever is when you think that the there’s something about the model that isn’t working anymore and that’s why you have to get out of there but it’s just a question of like how far will you fall I mean the thing that worries me with some of these is you know if you look at say Intel right Intel probably has half the market or more there’s a leader let’s say at least in many of the things that they were the leader in a long time ago you’d be surprised in terms of how many you know PC how many um home computers and things still use Intel stuff how many things in an office would still use it and yet the company makes literally no money now and hasn’t really made money for like two years um why is that um there’s so there’s a lot of problems going on Intel you can see most clearly in the gross margin generally you know that’s why you want to get out as as soon as you’re seeing that I mean has a gross margin even ever increased in the last 10 years or something no it increased once I guess for a little bit right MH yeah it did increase once from 2016 to 2017 increased but in all other periods um gross margin has been decreasing which is would in this industry would be a warning sign probably if you had to measure one thing that would be helpful an improvement in gross margin in that kind of business is good a decrease in gross margin is bad that’s your prob your best signal in a semiconductor type thing um why is that you would think with scale and bargaining power and all that sort of stuff that that would not happen but they did top out you know like when we talked about with the so like on relative scale I don’t know where I was saying that they’re still very big which is true but on a relative scale basis it’s not like they kept gaining relative scale I mean one thing when we’re talking about Amazon Costco Etc is they have historically even now been gaining relative scale m um if you look at Costco even though they’re much slower the last 10 years or whatever they’re still growing faster even in just an item like Revenue than the industries that they’re in right so they’re a little bit bigger versus competitors every year um and in all these things actually it’s generally relative it’s not generally it is relative scale that matters it’s not very important what your overall scale is how big you are although companies talk about that it’s not really that important if you have 50% market share and everyone else has uh you know I I if you had 50% market share and someone else at 45 that wouldn’t be better than you having a 10 and everyone else has two um it’s really your market share divided by the other person’s market share the next closest competitors really that’s what we’re talking about and so gaining scale that way is helpful um but it’s also when we talk about scale it’s also based on I mean an individual Costco is pretty big we it gets complicated because we can talk about individual planes individual stores Etc um individual lines that you have in certain things is where the scale might come from you have to really look at what things a company is doing and what it’s actually saving money on versus others you know having a I take the semiconductor example having a highly Diversified semiconductor group I don’t think would provide benefits of scale but having a single Blockbuster product uh would definitely you know drug companies a single Blockbuster product would provide a lot of scale but there would also be some scale from from having a portfolio of many different drugs so there’s some benefit to that too I don’t know that there’s much benefit from that for others um so it depends on are you talking about like the manufacturing function is the most important thing of doing it yourself is the design things that you’re doing yourself is it the amount of buying that you’re doing like Costco of a single product in a certain quantity is it where’s the scale coming from you know I think it’s always important to talk about not just how big something is um yeah that was your tell with the gross margins aren’t they uh likely going to get bought out or something like that yeah there there’s a few different possibilities of people there’s a few different possibilities of people trying to buy them they’re also trying to Pivot into other things but it’s not like you really would have had to look at gross margins people who follow these industries know that Intel has been I mean we only go back 10 years in that it’s been long ER than that that people who are following technology things have been saying that they’re lagging other people and that it’s a stock to avoid in everything it’s more the value investors who would have been investing 10 years ago in [Music] Intel interesting what are some other good businesses that have this concept of scale economy shared well mainly it’s going to be um very broad retailers like you have Amazon and Costco and Walmart are the best examples because they’re also similar to doing the exact same thing um it’s also going to make sense as a retailer more than other things because there’s some issues with doing it in other Industries so the benefit to a retailer is that doing this to shop with us is really something where you can capture all that benefit for yourself and you don’t necessarily improve things for the industry overall uh the problem with something like Ford which I think he mentions in that email uh in that question is that of course then that creates some issues we’re seeing that with Tesla which I’ve mentioned a few times the problem is that you then create a bunch of used Teslas and you also tend to create other things where unless you’re fully integrated in terms of In-House doing everything yourself you’re also creating a group of companies around you to support you that can also support your new entrance and your competitors in it so you know if you need um if you’re doing some special things yourself in house then yeah you’re gaining that advantage and that scale over time but if you are doing some things that are somewhat outsourced in terms of what’s supporting you then there’ll be more support for the next one that tries to come into the industry so generally you know Ford made it easier for others to come into that industry um but on a relative basis was making it harder because they were getting better faster than others were but they were also making it easier for others to just start up a business and have more support from other things and even something like Tesla or whatever does benefit from the fact that there was existing infrastructure for making cars in the United States um that weren’t electric I mean Tesla the companies that they use for for um a variety of different accessories in the car and stuff are are just the same things that other major manufacturers use it has nothing to do with whether they’re electric or not so you’re not starting everything from scratch that way um the benefit from Amazon and Costco is to some extent to take a a cynical view of it they’re not really helping the companies that they sell through them as much as others would right so they get to capture much more of the benefits themselves in other Industries you’re helping the companies that you deal with closely a lot more um so Amazon and CoStar taking advantage a lot of a base of C of um suppliers that’s pretty Broad and they aren’t helping any one of them too much to get too powerful and where that to happen they might you know try to to get um to drop them and everything and still have a great deal of power over that it doesn’t work perfectly all the time some of them have had problems with some of the Walmart wasn’t able to get away from some private label things because they were using someone who ended up bigger than than they were you know um so there’s some cases where there’s a lot of bargaining power with them because on again on a relative basis they’re not that big Costco had their problem I think with Coke right they hadp with Coke wanted to get rid of them and that’s difficult because you don’t have them many choices so many happen what happened with that situation I don’t it was a long time ago so I don’t know how it was resolved and they didn’t publicly say this is how we resolved it but I would guess that it was resolved without being terribly in favor of Costco um so you know that’s always going to be an issue where you have suppliers that are as big or bigger than you are there’s a limit to how much you can do with that I mean they could try to say we won’t cover we won’t buy this razor brand we won’t buy this brand of whatever but if you do to that too many times then people don’t want to shop in your stores you know um but the Costco model is very good um and it works there’s a limit to it though I mean I’ve shopped at Costco and I don’t use Costco so it doesn’t appeal to everybody um Amazon is more likely to you know be something that appeals to everybody obviously say is there technology aspect to it on where it could be very successful I mean technology allows for greater scalability of it but it isn’t a technology specific thing um I mean it’s usually so to do pricing reduction Investments there’s a few ways that it can be done one you could have very large Stores um very large units two you could have a high degree of investment in capital three you could have high degree of investment in technology four you could have high degree of investment in advertising now accounting wise they’re all going to look different but they’re all telling you the same thing which is that you have to put a lot of capital UPF front into something and even a price reduction and has similar you know things that you’re doing so you’re basically saying that you’re going to change the structure of the industry to benefit you more over time by doing this and you’re increasing the fixed cost of what you’re doing and decreasing the variable costs and in most Industries how the early leader gets a lot more power over it if they were to seek it out to be the one that would dominate the industry what you want to do is to greatly increase to turn variable costs into fixed costs to increase the amount of investment it takes to start something up to make it so that now you can’t have a 5,000 foot store you need a 50,000 you need a half a million square feet whatever to keep other entrance from getting in you want to shift things from variable type stuff to fixed stuff right um you have to have a base level investment all the time you have to buy a certain minimum order size you have to whatever you’re upping the stakes that have to happen all the time and then you’re hoping that your subscriber base your customer base whatever is large enough to be able to absorb that um very high overhead that you have effectively because the commitment of someone like Costco or Amazon or whatever is really high compared to someone just trying to compete with them now you are you know and so you’re trying to consistently make money that way but I mean I I think that works for as long as the system is effective that way but it is a question as to when that system breaks down um and it mostly happens because you you suck up all of the available business that you have that way like Amazon is a good example probably five years ago is when Amazon’s share of my online purchases peaked right now I would have been a customer with Amazon for about 20 years before then but that’s probably going to happen with all customers there’s no reason to think that Amazon will have a larger share of wallet after they’ve had a customer for 20 years so if you were an early adopter of Amazon things you would have already topped out years ago and be using other places more often so it doesn’t mean that I don’t make the most purchases of anything with Amazon I probably do but it’s definitely been losing share consistently since then losing share to what everything else a lot of direct stuff everyone has adopted many of the same things as Amazon so why not just buy from a manufacturer it’s more reliable to go to their own website than to use Amazon to be like jet.com walmart.com I constantly hear people that like talk about how great that experience is other smaller retailers yeah it’s easy I mean it was impossible we’re doing a podcast right now let me tell you that when I started a podcast in uh what 2005 2006 or whatever it was really hard to do now it’s easy no problem it’s really easy to set up a a store and sell things to their web now it was impossible when Amazon got started yeah it wasn’t just impossible for little sellers it was impossible for big comp compies to do it so Amazon created all that but now that’s all out there for anyone to use yeah weren’t we talking about uh recently privately because there’s been Innovation a ton of innovation in the podcast industry even since we’ve been podcasting right we should have been the ones to do it we would have been the perfect entrepreneurs to use something know how it works understand what could be very helpful beneficial and go and create it and a lot of those tools are available now what we’re recording this on right now uh streamyard uh it’s a great platform I wanted this back in 2017 2018 um you know so it is kind of funny how that does happen yeah yeah so I I mean the leaders will and you’ll get to a certain point where the leaders will lose share over time for a variety of issues including it’s easier to get into the industry with some of these things when there’s a big boom in terms of capex or whatever and there’s Capital that you have that helps um and then the other thing that you have is like they become the experience that people don’t want they will the things that people will complain about will start to be the things that Costco or Amazon or whatever does if that’s the main place that they shop you know it’s hard to be number one that way because then other people will be able to compete with that by saying let’s take a different model that that people like better so generally sounds like you like this model if it’s founder Leed owner operated I I think it creates lots of money for a generation or something but then probably over time yeah yeah so I mean the the thing with a I mean it did with Southwest why I I mean I’m saying why is Costco gonna be different than Southwest or something maybe that’s a question why is that or why will not be just culture just culture as soon as the people aren’t the same you know so there’s already been changes in terms of literally who’s running Costco but as long as they’re committed to that then you won’t have that problem but that’s a problem potentially at people ask about Geico and Progressive it’s a problem it is uh a retailer is very similar to like a a an auto insurer like that you know trying to do low prices and everything and it will work but I mean I think people think that retailers are a lot safer than those Auto insurers and I don’t think that’s necessarily the case um as long as that culture stays in place and they pursue that every day then that’s fine but if you think that Southwest could half pivot to adopting some things that other airlines do and not others and stuff no but they already have you know Southwest has already moved a lot of other things to being more like the other airlines anyway so it’s just it’s different and has been for a long time but if Costco says we’ll do halfway to what others do if if others you know Amazon any of these things that we’re talking about start doing that overtime you know they’ll get away from some of the things that they were focused on initially others will be able to come in and compete with that you know um I mean it is you have a model here which basically requires you to have volume growth to drive price reductions to drive volume growth to drive price reductions if you start to lose market share and have volume decline you know what happens and that would be the challenge that any of them face that way and so I I mean if we’re asking in like a steady state is a retailer like this safer I mean you’re in an industry in which you went from no market share to a lot of it by grabbing it over time by doing these things unless you somehow change the industry so that’s not that’s not possible again that’s the problem it’s the problem of social media things that did something by being very viral and stuff unless you made sure you seal that door very safely behind you you’re in an industry where something could have incredibly rapid growth to compete with you because you did it so the same methods presumably exist for someone taking away a lot of business from you if it’s the next thing [Music] got it let’s hop over to some questions on uh X and uh first question that somebody had sent in PSU incentives based on stock prices like Tesla and HR thoughts uh so performance uh was it performance share units I believe is the acronym yeah performance stock units and you get certain Tres based on share prices do you have any thoughts on that I mean it’s easy to calculate so it’s easier for me to do than what most programs look like what you just showed me is a lot simpler um usually it’s pretty hard to figure out what um to figure out what is actually being said about when things will be um uh yeah that’s pretty that’s awfully simple what we’re reading there you know mhm if it maintains for 10 consecutive trading days and all the yep that’s really simple mhm I guess I mean we talk a little bit about this before I don’t think these things need to be overly complicated if you say that in some big upside situation we’re going to give you a lot of um money then I think you’ve incentivized people um so but there’s a lot of ways that effectively do the same thing and many of the things that they give to Executives it has the same thing which is if your stock price goes up a lot you’re going to make a lot of money um this makes that really really plain oh it’s like the court that blocked it though for Elon Yeah well yeah that’s a complicated issue because you have the problem of that we could talk about you know with any of these things which is the problem of um uh you know should you pay someone a lot of money if they’re not not going to leave you know I mean if if you’re asking like should the company do the right thing and have paid him a lot of money to keep him because they actually believe that he could leave is a risk if they don’t do that then yeah they do the right things for shareholders right but if that’s the argument then in theory uh CEO or whatever could extract all the value that they create for a company from boards all the time right because they’d say you know why every doesn’t Jeff bezo say when he was at Amazon well I’ll just leave and start up another company and stuff I think it’s worse than that I think they he negotiated that and it was voted on by shareholders years before before Tesla had the meteoric rise and then it hits and then they weren’t able to pay it because of a Court ruling on something that the shareholders voted on that seems a little bit to uh like communism to me or something I don’t know I don’t know what it is but that’s not capitalism in my eyes you know it’s a bit bizarre and funny enough he reincorporated all of his companies in Nevada after that instead of Delaware yeah well that’s what will re well that’s what will really change it is that courts won’t do that because of that reason you know if Delaware starts losing some business to Nevada or Texas also encouraged other companies to do that you know which who knows if they did that’s this is what happens with regulatory things all the time is that they all end up going to the lowest it’s a race to the bottom that way because everyone has to change all their their rulings and all of their legislation and everything to make themselves the most attractive venue you know if if there’s nothing else keeping them there Delaware is a state of convenience anyway for them so they’ll just go to another state of convenience so uh let’s see any thoughts on PN uh PNC Insurance market and what investable opportunities there may be in that current market so thoughts on any PNC stocks um we’ve talked a little bit I guess let’s see what do we talk about I mean I guess Berkshire at one point bought some chub shares we probably talked about um we I just mentioned Auto things but I know that You’ mentioned things about you know how Geico is doing versus Progressive and all of that um um one that’s not so direct if you could look at home serve um that one’s the ones that someone may not have heard of because technically it doesn’t describe itself as like a PNC um I’m sorry front door front door we’ll look at front door Home Service fine too but we’ll look at front door that’s the U it’s a US Stock so it’s better um so this is just helpful in terms of understanding what happened so if you look here what this company does is they offer you know home warranty plans in the sense of I think they operate under the one that’s probably best known in the US for people watching cable or something would be like American Home Shield something like that um so you know it’s going to be that you’re going to just pay like a one-time price um per visit or something for a repair plus some like max amount and so you’ve basically smoothed it out so if you need to have appliances fixed and whatever that are covered Plumbing things that are covered by the um uh policy that you take out then you know it Smooths it out and this is very attractive especially to senior citizens and all that kind of stuff but I just pointed out because it has some of the same it basically what it is doing is being a insurance company even though that’s not how it’s described and so if you look over a gross margin I think you could see this best of what happened during covid if you see a pretty stable margin historically right I mean not in all years but pretty stable and then you have this um big decline there and then improving from that but you see on that base that that generates a lot less gross profit than they might expect which drives Opera profit down a lot so you had almost it wasn’t a 50% drop but what is that that’s a very big drop let’s see 40% probably yeah drop in operating profit in what’s normally a company that doesn’t have a lot of those kinds of declines and so that would happen for any kind of insurance thing when this happens where the the cost went up so much so is an issue where the frequency is normally more the issue so if you look at previous years you know with a company like this they’d normally say oh there was some storm in some part of the country that caused like all this higher frequency than we’re used to or whatever but it’s not usually that when we went out to we had to pay service people you know so much more money to go out there and repair things and the actual cost of these things went up so much during covid so um that’s what happened and then as a result you know you have improving things as inflation slows down so if you’re betting on look if you’re betting on Lower inflation um you know inflation slowing down everything in the near term then I think Insurance things are pretty good they’re not very economically sensitive and they do benefit a lot from having higher inflation in the recent past that’s slowing down a lot that helps them push through higher rates in the past and then you know the actual costs come in lower what you don’t want with insured generally is when you and or the insurer Andor everybody is expecting um lower inflation than actually happens that’s the big risk and uh it hurt here with covid but that it really killed people in in the 70s they constantly predicted that inflation would slow down when it didn’t so um here’s something any other podcast recommendations what’s on your uh your playlist Jeff I don’t listen to a lot of uh podcasts and C mostly I listen I read um Business book things not listening to the podcast I did mention that I thought Founders podcast was a good podcast because I had avoided it for a long time thinking it was about um Steve Jobs Elon Musk uh whatever you know very very recent Founders and covering them you know 10 different times for that one founder whatever but it does cover people from the 1800s 1900s more obscure ones so it was much better than I thought it would be so I would recommend that because it’s a way to find more books any P any podcast that can recommend things to you I think is a good podcast that you can use it to find other stuff so discussing books as podcast is always a good choice I think what about you Founders podcast um I don’t listen religiously but sometimes every now and then I’ll see it come up like oh yeah I’m actually interested in that person or if I do come across a biography or an autobiography about a individual I’ll see if he did a podcast on it and often times he probably has uh even obscure people um so I don’t really I do think his podcast is amazing though and he seems like uh he’s doing amazing work uh David uh but I would say more so the podcasts I listen to are Market um related so I like uh me fav Faber uh for guidance although the guy that uh hosts that podcast I think he’s doing something else now he just tweeted about that um let’s see what else um I like value hiive um yeah I do listen to Allin the podcast uh now that’s much more like I would say top down like economy and politics and like what’s going on in Tech I do like to get the different opinions I think they have pretty cool guests on there um of course I you know I do uh I don’t listen to every Joe Rogan podcast but every T every now and then when he has someone on that’s interesting I like to listen to him like he had Peter teal L uh listen to that uh Lex Freeman I would say I don’t listen to like every podcast religiously unless it’s they have a guest on that I’m interested in or they’re talking about something that I’m interested in um but no podcasts are definitely I do listen to a lot of podcasts but I I I listen to or watch a lot of YouTube that’s like my for form of entertainment I guess is YouTube so Rogan on there Lex all in different podcasts um if I’m interested in an investor and they go on something I like to listen to it um I definitely watch and listen to a lot more YouTube than I do just on the podcast app okay yeah yeah and we on both some people can get us both ways that’s right that’s right um let me see let me pull out my podcast up because I just want to make sure I’m not missing podcast that could never I mean Joe Rogan I guess is technically not a podcast now because of that but podcast that can’t take away YouTube They can they can that’s their choice if they want to get rid of our channel one thing I’ll do too is if I’m interested um here we go American history tellers that’s like American history like that um but unrelated to investing um if I get interested in like a particular industry or sector or um commodity the first thing I do is I go not the first but one of the first things I do is I try to find a podcast on it so we talk a lot about entertainment right there are podcasts and in movie theaters there are podcasts that are dedicated to the box office yeah so I like to chime in and listen to that right if I’m interested in um energy or a different commodity uh grain this past summer I was just for whatever reason interested in corn and just kind of just seeing what was going on there because of floods that were going on and droughts or whatever I found a grain podcast I just like to listen and go and listen to like experts in their industry so it’s actually part of a research process for me um but like I said I kind of hop around I go by if I it’s a topic I’m interested in that that person or podcast is talking about so yeah but it’s a good way to do it you know when we talk about like the box office or whatever there’s people where it’s basically like a magazine this is their entire life that’s all they focus on right we kind of come in and out of these industries and we focus on a lot of different things and it’s like these people this is all they focus on so it’s good to go in there and get their thoughts and hear what they’re doing I mean box office uh Pro I believe is the one that I listen to on uh as a podcast which is about the box office obviously and movies and all that sort of stuff yeah it’s the podcasts are basically magazines I mean that’s the real economics of them I mean when you’re talking about Joe Rogan and stuff that’s like a radio station that covers the you know Globe the country but um generally there are these Niche things that focus on what used to be what you’re talking about there is like there used to be all these trade magazines and everything but there was also espcially interest ones you know I think Munger gets quoted on talking about how they were getting killed by this um Motocross one or whatever you know um because he was saying just the economics of of a magazine focused on one particular thing used to be really big that way and it’s helpful if you’re a hobbyist or whatever in something um so it replaces that kind of thing I mean look what was it what did I say yeah if we go back 25 years I would have read like PC Gamer magazine or something right so that’s just focused on that one thing it’s not a trade magazine that was more of a hobbyist magazine and then you have other ones that are actually trade magazines like you said which is more like that’s kind of replacing the Box Office Pro stuff is kind of replacing like variety and all those which printed all that the numbers yeah the numbers is a good place for data there’s definitely places I go for data that I find very useful trust to at their publication their magazine that comes out monthly they have a business report it’s 65 bucks 65 bucks a month or something and yeah yeah so the numbers that’s the word the and a Dash then numbers.com is the best place for box office data really they are more famous ones that used to be good but I think people who really are interested in the data uh all use this even I’ve I’ve I think they’re using it other sources that I’m seeing and stuff I think are actually probably regularly checking this because it’s just better than the ones that are owned by the big companies now so um because I’m sure people know originally like Box Office Mojo was probably the first one that that was regular thing that that I think articles started citing and everything but that is a useful place if you want to see real data on all that stuff um yeah I don’t listen to as much of the uh things that are let’s see like I did in the early days of podcasting I listen much more to podcasts that would be similar to ours I guess um I talked about how I listen to the value guys that was the best podcast that I listen to because they did individual stocks every time and they used value line which I would be reading all the time then but that value got annoyed at them and you know the best marketing that was the best marketing for Value line too probably yeah to go to just go through uh industry groups right because value line is organized by industry groups so they would have to make picks through different industry groups and then it would you’d cycle through it once a quarter I do still recommend all I mean I can’t recommend value line because it charges a lot and then has those problems like we said so I can’t really recommend it as an organization but as a publication that kind of thing you’re creating something like it for yourself is a good thing to do and that podcast was excellent yeah mhm okay let’s see um can move on to the next question how will the possibility of more damaging storms impact the insurance Market in the short and long term uh I I’m not worried about it to be honest I mean the policies get repriced pretty quickly and everything so it’s not something well okay so you have Universal there if you’re talking about like how will it affect Florida and the politics there for things that individuals have to buy for their homes that’s a specifically reference uh the Florida storm well yeah but I mean I think that that did a lot of damage outside of Florida North Carolina yeah that’s specifically yeah so if we’re talking about shifts in societal attitudes in regulation whatever yes I would worry a lot about Florida long term because of the um kind of political environment and everything yeah it’s a really big kind of political issue it’s it’s effectively like having a tax in the state so could a could a state make bad tax policy and get into deficits and have trouble you know refinancing and everything yeah and they could do the same thing with like with homeowners insurance some states have with car insurance in the past I can tell you had problems with some of the policies they adopted just didn’t make Financial sense for the the insurers and so the insurers withdrew from those States and everything and that’s pretty normal um so I would worry about in aate where it’s that important um outside of Florida I don’t know how many states there are where all the voters are going to care so much about the issue that it leads to possibly irrational policym you know but you would know more about that Andrew what are your thoughts on that Florida I think they’re going to go up yeah I mean Florida’s insolvent basically uh or the insurance there and it’s basically state ran is what majority the people are on citizens and premiums probably need to go up yeah and it’s uh I mean they were talking about that at the Burkshire meeting too a g Jane and Buffett were talking about that in Florida yeah the things I worry about insurance honestly are not this makes the industry sound darker than it is perhaps but they’re not really the actual natural occurrence of things that we can all agree really happened or will happen an increase in frequency they’re how human beings will deal with those things what policies they’ll set up what systems how smart or dumb that is uh what that can create in terms of Fraud and other sorts of things expanding um ideas of what risks are covered and just disagreements over that and um but if it’s something as simple as you know how many storms of this kind name storms will occur an earthquake of this magnitude here whatever the policies are adjusted you know uh I mean I wouldn’t worry more about those Insurance things than than like we don’t talk too much about that when companies make long-term loans Banks and things and say how different will the interest rate environment be you know down the road these companies are much more Nimble for the most part the insurance things we’re talking about to adjust to that than than all sorts of contracts and agreements that people enter into all the time so it can be adjusted for being more really bad storms I I don’t worry about that and overall that would make the industry bigger I mean if people you know if we have self-driving cars that cause accidents to be nothing that’s actually more of a risk to an insurer than we have a lot of terrible storms that cause them to pay out a lot in losses paying out a lot in losses is their business over time as long as they price it right so lots and lots of losses aren’t a negative for the industry as long as it’s priced right and whatever your thoughts about global warming or whatever it’s not a question of things changing dramatically in a single year or two or three it’s it’s a trend that you can see over time so I I think that that’s not potentially a problem but I do think certain States certain places yeah I think that it could be a problem because if that gets to be big number um then people are going to say this is something we want the government to be involved in and this is something I care as much about when I vote as the quality of my schools and what my property taxes are and stuff it becomes a top issue then yeah they’re GNA it’s going to be what people want which probably won’t economically work that great next question cashtag Jeff really seems to have a great interest in entertainment companies movies Etc but I never really heard him talk about owning them just never cheap enough question mark that’s a good question uh there are the let’s see the Twitter handle there oh X excuse me is small cap value right small cap value yeah so I’m just mention that because yeah there are opportunities in small cap value entertainment things uh I think mostly it’s because I wouldn’t own the big giant companies to be honest um but we’ve talked about that with banks where I’ve said you know like look I probably wouldn’t own Bank of America Wells Fargo um JP Morgan and I probably wouldn’t own the biggest entertainment companies the biggest entertainment companies are super Diversified and I don’t see a lot of opportunities in them either in terms of interesting Capital allocation that they do interesting leaders of the companies and just like pricing things but you know we point them out when we talked about cinar and Marcus so that’s like a a they’re both considered small stocks but Marcus is really small and sarks whatever mid or something that at this point um so or or I guess Marcus would be micro and Sark would be small or something but yeah there are opportunities in those kinds of things and we do have or have had exposure even if we just we don’t talk about it on the podcast but yeah we do or have had either or no that’s true it’s just that it’s smaller and less wellknown and stuff is generally the case yeah MH yeah I’ve own entertainment things before myself and over the years plenty of times MH how long do you wait before deciding if your thesis is broken or the company is just experiencing a temporary dip in performance um that’s really hard to say so it depends on you try to be say here’s what we know is happening and then try to come up with reasonable explanations for why that might be happening and in some cases that are pretty noisy you might want to wait a while I mean you could get out but basically you would think your thesis is broken all the time just because the economic environment changed a bit because whatever happened and so you’d be doing it all the time in things that are very very not noisy uh then it might be able to get out fast so like let’s say um years ago Buffett was invested in anheiser Bush right if he’s seeing volume declines in there that are more than he expects in that then you could get out right away there’s very very little noise um in the actual if we’re talking about actual consumption Trends if he had access to that data of what’s actually being sold at to the end consumer and comparing market share right and he we know he was a subscriber to the um this one that covered the soft drink industry but not necessarily hard Beverages and stuff but if you had that kind of data you could get out on very small I’m talking just very small incremental loss of market share you should get out when I talked about Intel we said look at this gross margin stuffff if you knew the industry really well saw better gross margin at other places and worse at Intel then your thesis your original one would have been wrong it maybe would say okay but it’s justified by the stock dropping and there’s some other thing that’s going to happen that’s going to work out so I shouldn’t necessarily sell the stock that might be the case but obviously you’d have to accept that they were in a worsening position over time um in other ones it’s really really hard so fast changing noisy Etc so any economically sensitive thing it’s nearly impossible because you don’t know what we’re seeing in terms of how much of that is macro type stuff so you’re looking at and you’re saying oh it all has to do with this company but it’s macro type things that are happening so in most Industries we don’t have the kind of data that we’re just talking about with box office data with the numbers we can’t compare each company to every other company at all times and see that oh they’re not actually losing their relative position or something you know and that’s on the negative side on the positive side where you could misunderstand that would be like AI or something right now where you could be making a lot of money but you don’t realize that it’s like well some places like they just are not even able to meet customer demand and so you don’t have anything that’s impressive but you’re getting orders or something you know what I mean that would be the kind of thing in the opposite direction where it’s noising you don’t realize that a rising Tide Is Lifting all boats and that on a relative basis you’re not looking that good but it’s mostly if you have really clean data on a relative basis to be able to understand those things I think it would be that that would be the best way to do it it’s just a question how much noise there is let’s see how to think about companies that have hidden real estate value on their books if management has no specific plans to unlock its value yep um I don’t know what are your thoughts on that one I think it depends on the management for one thing right yeah and then it’s kind of soft signs of trying to figure out what you think is going on um I would say a lot of it is where the idea is sourced from normally if you got the idea because it was posted on places your value investors Club your whatever saying there’s hidden value there and there’s three other posts about this and everything I would be a lot more skeptical than if you researched this thing and found out that this is the case yeah I would say like so we use this example a lot Maui land and pineapple right this was a land bank for some time and the stock basically went nowhere right it shot up like crazy and 2007 came down 20 in 2008 and probably traded within a few dollar range for the next what 11 or 12 years um but now the stock is up a bunch and that’s because they are making changes at the company right and or trying to do stuff with that land uh they brought in I think a new uh New Management I think they changed the board a little bit I’m not so close to situation but you could see the soft signs were starting to happen so um you know that’s one end of the spectrum the other end of the spectrum are companies that we have visited in person where you’re like wow the land value of this company uh would be many many multiples what the market cap is but it’s controlled by somebody who has absolutely zero interest in doing that and you wouldn’t want to be locked up in a situation like that so me personally how to think about companies that have hidden real estate value on their books if management has no specific plan to unlock itself I I think it’s dead money honestly I think you should go find other things to do with your Capital but if you know you see the soft signs in place and you talk to them and you get a feel for how they’re thinking about it then okay but you know because the other end is yeah it’s good from a margin of safety perspective if they’re going to do something about it you know your downside is capped which is great but you know sometimes I’ll see um like a WR up on a retailer for example that owns a bunch of real estate and the retail business is horrible and the families operated the business for a very long time it’s you know second or third generation and people make a pitch that oh you know the value of the real estate that they own even though the the retail business sucks the value of the real estate that they own is worth you know two times the market cap or something like that and I’m just not that interested in a situation like that how do you know that they’re going to do they’re going to close their family business and sell all of their properties and and you know do something with it for shareholders I mean you don’t know that and I’ve consider situations like that just dead money honestly okay you want your money to work hard for you yeah I think it depends on which way that you’re finding it I mentioned before Rex American resources which was re stores that’s the one that sold off its land and went into ethanol it was a retailer and people compared it to like Circuit City and things like that well Circuit City leased everything they owned everything and they had a plan that they started going in that Direction the market did not respond very quickly when they started to sell some of the real estate and buy ethanol so that’s such a strange pivot you know even if they’re not communicating a lot of things that you know what they’re doing and if you wanted to look into that and do that um you know back was that uh I don’t know they may have started this process 18 years ago or something then you know the that’s not something that the market would be focused on and you see this allocation a different way with something like Mau Lane and pineapple I’d be very careful because it’s the opposite of hidden Real Estate Value it’s the only reason why people own the stock the only reason why people talk about the stock um we’ve mentioned Marcus I think the market significantly undervalues the of how much Marcus owns in assets and how um little they owe versus others um probably at times the markets undervalued how much Southwest owns and how little they owe compared to others and they’ll only realize that in the bottom of a bad recession or something you know so it is definitely a big factor to consider when you’re actually finding those things if we’re talking about actual hidden value um but I think it’s rare for someone to come to me and say look I was analyzing this company no one talks about this but they own a lot of real estate instead it’s the opposite I’m researching this company because they own a lot of real estate and this isn’t baked into the price but it how is it not baked into the price if all the writeups and everything are about it m I would really start from that perspective and try to analyze it that way um I think it’s very important to know where you got the idea from what ideas are circulating in what way and how things are being framed and if no one’s framing this with the Assets in there then it’s significant but if everyone’s framed this as an asset play then I think it’s not so significant you could find companies that are like under $50 million that own a bunch of land but the Val they’ve been they’ve been that cheap for like 20 years and yes I guess the value if they are going to do something about it there could be a lot of uh realized value there but you know I don’t know yeah I mean look but I mean if something doubles in the last day of the holding period that’s going to add 7% to a 10-year holding period right yeah I get so so I mean there are ones that have been followed for a long time where people did have that complaint I’ve seen ones that have been 25 years the stock ended up outperforming the S&P over the 25 years because when they sold it to a new owner it did go for a price you know of that amount so I think what is think a double over seven years or 10 years I just think that’s not that attractive I think there’s other opportunities out there oh oh no no no no I’m not saying that I’m saying if the stock the so there’s a huge difference of what we’re talking about if the stock isn’t also turning money over time right but if a stock is matching the market and then turns out to be undervalued by half you’re going to make a lot more money by that you know by it doubling at that point and so I think it’s very important so banks are a good example of this right this happens a lot with banks people will say why would you ever own a bank with a five or 6% return on Equity or something well you would if another bank will buy it for twice what it trades at so if it can return to you that kind of number and then at the end of your holding period it doubles but many of these land things we’re talking about are not like those Banks or insurance companies that are undervalued by half and that have decent returns but not great returns and that were they ever to be sold would sell for a much higher value I mean I think you have to do the math on it on how long is the possible holding period and how big is the discount usually the discounts are not big enough to me for it to make a difference I think what does get undervalued more is like holding companies that the net asset value is perfectly good but that because they’re how they’re valued in the market is not as good and so people say when will this value ever close when will you know and you’re saying well the underlying value is matching the market and there’s plenty of examples of that particularly insurance companies there’s some there’s it’s rare but it can happen in closed end fund type things and and other things that are very similar to closed end funds and people say Well it always trade half times a book it won’t trade on half times a book when the family sells not GNA sell it for half a book you know your risk is the family will buy from you which I’ve had happen but you still make money but that’s actually the biggest risk is that you as shareholders will be taken out by someone else doing that so um I mean I would go with the Ben Grand thing which is I don’t Ben gr would say like you know if there’s a big net cash position that may be negative in terms of the efficiency of the company and everything is seeing that and you can dock them for that so you shouldn’t value net cash on the balance sheet at 100% of what that cash is but it is always better to have the cash than not have the cash you should never value it at 0 perc and I would say the same thing with the real estate things um to have additional assets is a plus and you shouldn’t value it at nothing but I think it matters a lot where you get the idea from because I think some of what we’re talking about is the opposite of when I started in um investing where really it’s a pitch about the idea of the sole reason for this is that it could be sold for twice as much that it has all this land or whatever as opposed to finding a business that was mostly about something else and it happens to have some land as a result um but there’s no doubt that I if ever Marcus if ever that family was saying let’s look at a um going private transaction an lbo thing an acquire looking to buy them whatever they would be looking at financing the transaction differently than if all the locations were leased so the final transaction will take into account that you own some real estate and you don’t lease it and the final transaction for an AMC or something is that your all leases so it you know it should be captured somewhere in the value the way that we do Enterprise Value or whatever it does need to be adjusted for those facts mhm trying to find a DM that somebody read or sent me and I read to you uh a couple weeks ago which I can’t seem to find uh because I I think it ties into this topic um but I do think the best answer is to study the company and keep it on your radar and to look for changes like we said in in anything that management was saying in capital appliation whatever you do run a risk that’s maybe some offer comes out of the blue that you never knew about or whatever but okay so basically I read you the the DM so you remember I can’t find it right now but basically the this individual dm’ me saying I’m a super smart guy I probably have an IQ of this I did really great on my SATs I have been investing money for the past four years or three years myself and pulling a value investing strategy and my return is like a negative 3% kga or something like that right basically saying am I doing this wrong or you know should I stop investing should I change strategy should I index or whatever right and I you know my initial reaction or thought towards that is you know are you investing in a situation like this like we’re talking about where from like an accounting perspective yes there’s a huge discrepancy there right and if they’re going to sell a company or someone’s going to take them out yes you could probably make a ton of money but you know over a 3 to 5e period if nothing happens then nothing happens you know so is it you know is the individual focusing on a situation like that you know um I don’t know that’s what I just kind of thought about as we’re talking about this I mean I think the biggest risk in that from what I’ve seen is that people adopt the idea of they’re supposed to do things the way that it was described right so there’s a big D that you just learned a lot about value investing and so now you’re basically doing the things that you think value investing is supposed to be and doing that as opposed to making kind of Common Sense decisions about whatever things at a later um time when you had some distance between when you learned all these things and when you’re doing it I think it is dangerous for people generally to go right from like textbook type learning to doing this and it would help most people to manage money for themselves as early as possible and not just be reading things all the time time so the fact that you have a high IQ or good at studying things or whatever isn’t necessarily the same thing as practicing it because you could have a lot of thinking well I should check the boxes of what this strategy is you know now it’s also possible that the strategy itself isn’t doing well and I know from that one particular one you mentioned to me that’s not the only issue because that would just cause relative underperformance and that’s just yes you could be a great investor and have relative underperformance if you happen to commit yourself to I’m only buying these value things and it’s a big growth market for three years sure you could underperform now you wouldn’t be likely to lose money that that would be unusual but you know if the Market’s going up 20 or 30% in a year and you’re not I don’t know that you should quit after a year because of that um you know so first of all you would need at least three years to kind of Judge that at a minimum of anything um there there’s no point in at least having three years um and of making any decisions without that and then the other question would be was your strategy kind of consistent through that period period and how much does it reflect your decisions um the more important thing is kind of what decisions you make that don’t fit with the way you were taught and were those good or bad decisions those are that’s going to tell you more about like your likely future abilities to do this you know to invest your own money and everything the stuff that’s basically following a strategy by rot you know decision- making that’s kind of like a computer could have done that for you you know so it’s more the issues we’re getting into is like what I would be concerned about is okay but did they teach in the textbooks and everything the difference between what I said is you discovered this hidden Real Estate Value yourself or did you find this by being on message boards because that’s very different information and like the it’s not always explicitly explained in investing books the way that it would be in in a book on poker or something about what other information you might have and what risks you might be at of information you don’t know and different kinds of things about the way you have to make the decision with what information you have and so if it’s not as explicit about that then it might not really have sunk in about how did I get this information and am I putting too much value on it you know did I not really consider is something changing that someone could do something different here from what was done before um because there could be signs that they are going to do something different now sometimes those signs turn out to be wrong none of them will be perfect but you could see signs that are different from the past so we’re talking about the these real estate things or whatever you could look and look at the long-term past look for any evidence of these kinds of things happening in the past and say okay this is actually a big difference that so and so died or that they’ve refinanced this thing or they changed this contract or suddenly there’s a change of control thing in here or whatever and that’s never happened before or whatever the board did this there could be signs that you could take into account and when reviewing your performance you might not really be taking that like looking at that and saying oh I didn’t see I how did I evaluate the information that wasn’t just that financial information mhm um cuz that’s I mean otherwise it would be I I wouldn’t even suggest that someone invest on the basis that value investing beats other methods and then just stick to a value investing approach because that to me is the same mistake as like saying that I should just index well the reason why I think people I it would not be safe to just index forever is we don’t know that that can end really badly and value investing’s worked in the past but we don’t know that the market might not become efficient in a way that it would incorporate value investing into it to a sufficient degree that that doesn’t work anymore but there’ll be some other way of making money you know what I mean we were just talking about that right Ed Thorp and a man for all markets going into different pockets of inefficiencies and then over time they become more efficient but what he was great at is going from different things and we’ve talked about this before I mean spin-offs used to be a great place for Value historically as in the past handful of years they haven’t been right doesn’t mean that you don’t get a couple good ones a year it’s still a great place place to look but they just haven’t been um stocks emerging from bankruptcy or chapter 11 or reorganizations or restructurings they’ve been a pretty good place for Value I’m sure that’s going to change too you know so I just think markets changed there’s Cycles to all these sort of things when you you know you talk about uh buying FICO at you know whatever single digit or low double digit PE right W that market hasn’t been here in a while so you’ve had to go and do other stuff I mean what they talk about with Buffett doing different things and M be like well it keeps you out of the bars you know like you just got to play the hand that you have based on it and of course not get caught up in the craziness of of the bubbles and things that happen or whatever um but I do believe there’s Cycles to those things things comeing out of uh in out of like you know opportunity and that’s okay you got to play you know uh the field yeah and what drives me crazy about that is when people say those things about those inefficiencies that existed before and now they say well they don’t exist now but that was always that would have been the case back then too we just don’t know it that Buffett would have been looking at and saying oh these things that Graham could do I can’t do in this generation because the but I can do these other ones and there’s just always things that it a lot of people will wait for kind of the academic paper to come out and to be vetted a couple times before saying okay I should get well at that point it’s not even a question of whether it goes away because there’s a paper on it it’s like there was a lot of money to be made in this for a long time people have been kind of learning and training themselves on this there’s people starting to specialize in doing this thing why should we expect that this same inefficiency exists and so when I tell a story about something from right after the financial crisis or in the.com boom yeah it was inefficient and you could see it really was it wasn’t some crazy risk to do this but of course it goes away you know like yeah a people did learn some lessons from the Doom thing and so whatever things happen after that they’ll be a little different some of it was crazy in a way that it won’t be crazy that same way again and I don’t know if people be as scared as they were coming right out of um the financial crisis of not touching anything Financial as they were then and so that created situations you know there will be other panics and people worried about that and and but it won’t be exactly the same way and even when we’re seeing booms this time with AI and all that it doesn’t feel exactly the same as the the do one it’s not as pervasive I’ve said you know like outside of the institutional stuff it’s not pervasive in society and quite the way that it was in the dotc era and so like we do invest in small versus large but I would say if we started that in 1999 that would have been a better time to start the fund than when we did because it was more inefficient it was really more inefficient that people were just doing the Blue Chip giant stocks and not touching these other little things if they weren’t Tech things if they Tech things than they were but if they were anything that was boring and small they weren’t interested in now it is somewhat more efficient than that but that’s cuz after 2000 value out performed for a while people wrote a lot of like papers and things all about value and you know like there was much more interest in it for a time after that there was no interest in value investing in in like 99 2000 so you know to be doing it yeah so I’m still okay with looking at the spin-offs and everything but I mean once we’ve book talks about this as an in if it’s one of the if like your standard here are some inefficient things that you could have an advantage and it’s one of the dozen or so that they mention I’d be worried but I’d be worried that way too about Factor things if they said here are the four or five factors that that will cause a um you know that are inefficient that are underpriced in the market that you could buy and make money because they’re not really risks but they kind of are treated by people as if they’re risks right um I I I don’t know unless there’s some reason why they should continue to exist for all times then you know you’ll have to find other inefficiencies even things like that if they’re so but if they’re so primary like so inherent in the market they’re going to last forever we did do a podcast where we talked about that that means that they have to be quite painful to people so like if value investing will last forever that way as a way to make money it’s probably because it will significantly underperform in some periods and it may outperform performing periods where like say the market is down or something where that wouldn’t people may not value that as much as consistently year after year doing well a strategy that that is likely to give you a small gain versus other things every year is something that people would quickly adopt right if I could Market a strategy that says you’ll make 3% more a year every year forever uh everyone would swarm into that strategy but if I said here’s a strategy that you’ll match the market one year you’ll underperform in a down in a up year but in the down year you’ll you’ll do so much better than it in the down year even though you’ll also be down that you know over time you’ll you’ll make more money right that’s like a strategy that could last that people could keep adopting right and so with those emails about the DMS about that kind of stuff I don’t the issue is more like you’re playing a game against other people you know and so I don’t know I don’t that’s why I compareed to Poker or something I mean I don’t know that completely text learning completely textbook play without a lot of practical applications of it would necessarily give you a good idea of how what you’re doing varies from what a machine being taught the same thing you have is like here’s the rules of how to do things would be doing otherwise you might just be it may be that you’re diverging from the strategy that’s suggested in ways that are bad and negative in terms of value or to add them you know most people that I talk to I would say there’s some negative uh addition to the value strategy that is that they diverge from the straty to some extent in a way that’s a bit negative still they may do okay but like their own personal decision- making it is a bit negative yeah so even if you were to follow a spin-off strategy and say spin-off still worked the little bit that they add to it tends to detract but there’s a few people you’re Warren buffets and those that what they add actually is very powerful F Peter Lynch he’s a good example of that kind of thing he definitely um would be someone that would his addition to his feel for what things to buy and what not to buy and everything really added value so when people say let’s just do statistically a Peter Lynch thing I’d be very scared of that because I don’t think that really captures what he was about 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 hit the Subscribe button and check out all of our work uh great way to do that is to go to focus comp.com uh get access to West WR UPS from Jeff going all the way back to 2005 information on us our money management services and everything that we are doing with focused compounding Capital Management I thank everybody so much for all the support and we will see you in the next podcast take care

Description:
00:00 Introduction 00:27 Trump Economy: Interest Rates, Inflation, and Oil 06:00 Deficits and Their Impact 15:00 Banking …

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 are tuning in with us thank you so much for joining us be sure to check out all our content at Focus compound.com that we push out into the investing Universe you can go to our website hit that blog section uh to get access to investment writeups from Jeff going all the way back to 2005 if you want to stay up to date on everything that we push out into the investing Universe uh be sure to follow me on X at at focused compound um that’s where I typically push everything out uh everything Focus compounding so uh be sure to follow me there and that’s a good way to keep up with everything we’re interested in and everything we’re doing uh if you want to learn about our Money Management Services you can reach out to me at Andrea Focus compound.com or go to our website um and uh you’ll get that uh special email info@ Focus compounding uh.com which will also come to me uh to learn more about everything that we are doing so in today’s podcast Chef today’s date is November 7th did something pretty big and meaningful happened a few days ago yes yes US presidential election so I want to get your thoughts on the election as it relates to the market okay we don’t have to get political here but curious to hear your thoughts on a trump presidency obviously he was uh president in 2016 and you wrote a very interesting blog post after Trump was elected the first time about how you had thought the tax cuts were not baked into stocks so cous just and that proved to be true and a very good opportunity uh cous to hear your thoughts your view on a second Trump presidency how that could affect markets the economy perhaps interest rates he’s even talking about he thinks he should control interest rates um you know what the implications are for us Equity markets and just your thoughts on that well stocks went up a lot uh Regional Banks basically went up the most yeah um so hangam was up like 15% yeah and long-term interest rates um moved a significant amount for they don’t move that much each day usually so like 10 years something moved by a pretty significant amount um so I guess you could say markets expectations are higher growth higher interest rates for domestic type companies um um especially some of that could be nominal so they could be expecting more inflation uh higher deficits things like that but definitely domestically focused um smaller right I mean S&P 500 and NASDAQ actually were up a lot too but probably not as much as like Russell or something like that easier credit I was watching the Futures overnight and the Russell was up five six% at one point MH yeah I’d say a lot of banks were up 10 to 15% for no reason yeah and that’s just baking in more growth what I don’t know what it’s baking in it’s an odd uh thing to happen um so I I don’t know I think it’s probably it can’t be very human driven and things like that those are incredible moves especially to have I mean he wasn’t not favored he was maybe half chance that he would win half chance that he wouldn’t would be about the extent of it but certainly I don’t think there was any uh there was no I don’t think anyone had predictions that the Democrats would be favored by a material amount in the election so at best it was a toss up um so and then other things that matter matter a lot Senate and House as far as we know haven’t been much different than predictions the Republicans were definitely going to win the Senate the Democrats won’t be competitive in the Senate till 2030 probably um if that but I mean they just mathematically they won’t have a chance to take a majority in the Senate till at least then um and house the Republicans as far as we know didn’t do that well for winning the presidency just like they didn’t I mean the last three elections for the house the winning the party that’s done better hasn’t done particularly well so um four years ago the uh when Biden was elected the house result was really bad for the Democrats there wasn’t much of a midterm Improvement at all for the Republicans after that and then uh and then same sort of thing here it just hasn’t moved a lot for for four years or something so I mean it’s pretty within the bounds of what should have been expected so if you’re already pricing in some of that then those are amazing jump to have so I don’t know mhhm what’s the Playbook here I mean what if he takes corporate tax rates down to what’s he talking about 15% it could increase the value of companies yeah not by a lot but yeah are you any what surprised or maybe not surprised is the right word but worried about deficits and all that sort of stuff I mean all I could think about at the last meeting was how much Buffett was talking about deficits and how it sounded like that’s something that he was very worried about long-term for America yeah uh it’s a yes so deficits there’s different issues with the deficit and the debt that we could get into for political things or whatever things and we’ll that and talk about the interest rate things it’s so what people are mostly concerned about then would be interest rates on this podcast and it’s a matter of supply and demand um as you run up debt overtime a government you vastly increase the amount of supply and then you just have to issue more and more every year so that you know that the supply will go up even with what we’re talking about with the percentages here in terms of you now have yielding a meaningful amount so the question is just how much demand they’ll be how much demand from the rest of the world to some extent if the world runs a trade imbalance with the United States and doesn’t have anything you know China under consumes for instance so if it over produces and underc consumes it doesn’t have a choice except to buy you something denominating Us doll and that’s true for some other countries um and then there’s also questions for you know if are other things unattractive too so you would buy bonds um so but at some point this if you’re growing the supply all the time at some point unless the demand is growing all the time you run into a problem uh there’s no doubt the supply will go up over time so yeah it’s something like what a third of our debt is owned by other countries and those countries it seems like have been selling off treasuries for the past couple of years well one the size of the market is determined by the debtor so someone will own them no matter what two there’s not much they can do um I mean you have to the reason that Japan years ago they’re still a big holder but years ago was a huge holder China owns a lot is they don’t have a choice they they’re need us denominated assets because they’re not consuming us denominated things um and they ran a trade IM balance with us so you know they can there are other things but they’re not very big I mean you could own lots of some Commodities I mean you could own H you know I don’t know if the United States will even let you buy things in the country for that much longer which would have been your other option uh that was a big one so you know you could buy lots of Assets in the United States and own them that may become less likely over time so yeah I’ve been worried since they started cutting interest rates long-term rates have just gone up and today like I said is November 7th and the FED is uh uh I mean there’s like a 99% probability or something crazy like that that they’re going to cut again and the economy just seems fine somewhat fine to me right and cutting into that I mean stocks are at alltime highs and when they first cut 50 basis points which by the way was the first time cutting 50 basis points that wasn’t in a crisis situation MH the long end just took off and since then you’ve just seen rates uh step higher and I feel like our economy is so over levered especially at like a low 10year right so what if the 10e just continues to go higher and blow out I mean is the Fed GNA have to and again this is tin foil hat but you know you got to think about these things especially if you have exposure uh to interest rates in sort of a roundabout way but you know does fed are they going to be forced to do some sort of yield curve control like what happens then I mean historically that is incredibly inflationary and then you have a whole bunch of other issues as well so I don’t really know what they’re going to do but I do expect them to cut today and if they don’t cut then you think people will be like well I guess the FED cut uh 50 basis points recently and be looked at as being too political now they’re not cutting and it’s just probably a route that they don’t want to go so I do expect them to cut I think the market could expect them to cut something like 90 plus per. and it’ll be interesting to see what the long end of the curve does um but my opinion I think you could see a scenario where the 10 year is way higher than where it’s at currently so I don’t know how how that flows through to stocks and everything but I mean the bonds are just melting away every single day basically they will be cutting and uh with Incredible favorable um overly loose Financial conditions into euphoric Market situation so which is you know not a good idea but they already said they’ll do it so what’s nominal GDP right now what is nomal GDP right now I mean I I could check predictions for what it is in the quarter we’re in but it’s probably two or 3% MH MH I mean sorry two or 3% real real so yeah so would make nominal probably like what five or six uh yeah depending on how you measure it yeah yeah and the 10 year being close to nominal GDP is Not Unusual that’s my point history says the 10e should be at like five or six probably right track nominal GDP yes uh I I don’t know how strong that theory is that’s based on a very short number of years in a particular economy I think if we look longer term there’s other things that matter um mainly that doesn’t include a period where you had a high risk of uh poor the Creditor worthiness of the country is much lower than at any point that they’re looking at for that um and then there’s other factors that aren’t usually taken into account by Economist such as demographic factors and things the median age of your population if you had a closed economy that you weren’t trading with other countries and stuff should affect things like desire to hold things like that um I don’t think that anyone has very good theories on what that should look like one thing I am excit go ahead go ahead no and then also um there there’s just the issue that while that’s true during that period inflation was higher than what they want you know if you’re looking at when not when the 10year yield and nominal GDP were similar probably average close to 4% inflation during much of that period not two which is goal so that’s something to keep in mind it’s also to keep in mind with the past fed funds people mention average fed funds was 3 4% it’s true in the long-term history of the series but it’s also true that they overshot their inflation by more than 1% during that period one thing I am excited about is I think event driven investing in situations will probably come back into play m&a perhaps spin-offs stuff like that I think you saw a lot of that when Trump was uh presedent and uh a lot of stuff has been blocked with oh current Administration so maybe there’ll be a lot more opportunity there um it funny actually Dan L I believe tweeted something out saying that like a picture of uh I can pull it up right now a picture of you could be a stock market genius and to read the book which I thought was uh aligned with my thought process ladies and gentlemen it is morning in America for event driven investing dust off your old copy of Joel green blads class classic uh so kind of excited about that but uh yeah it’ll be interesting what do you think you know this whole drill baby drill do you think stuff like that affects energy and the price of oil and all of that we have some exposure to oil Buffett owns ocidental you know how do you think about that yeah longer term it affects it mostly because it’s become politicized for carbon things and stuff like that so overtime oil and coal and things like that are are um better off than they were before because they became highly political issues where so there’s I should say highly partisan issues so whereas previously there was more of a consensus on going away from fossil fuel things there won’t be anymore which doesn’t I mean it means policy will swing from Administration to Administration but it’s not like a consistent consensus in the United States among politicians anymore so whereas it would have been you know 20 years ago or something with rates being where they’re at and sort of just marching higher do you expect that to be a pretty good environment for banks then I mean you had mentioned the K Regional Bank index was up something like 14% you can make the case for okay strong economy plus higher interest rates does that flow through to Banks and uh is that going to be a good environment for them what’s your thoughts on that I don’t know I mean the the problem is that you know why you have crisis and stuff is not always because of what it looks like originally but the reaction to it which is why I would caution on these things if things go too far in a boom that actually increases the chance that you have a bust later on and so um you know the FED cutting rates is inconsistent with the kinds of reactions in the stock market and expectations for the future and stuff so you would overheat and then you would probably tighten too fast and you probably cause a crisis or something so that’s the problem um the it’s not like uh people aren’t going to react to what they see happening they will so if things get too loose too fast and stuff then it can snap back the other way and that’s what usually happens and the reverse was true too that’s we’ve talked about the whole time with the soft laning the soft not soft laning but yeah soft Landing the perfectly setting it down is that the reason why the swings the Market are sometimes so violent is because it’s not just that they have it has to be um to bring inflation down everything but also then has to be growth has to be good enough but not too good and you’ve seen that sometimes where the expectations overshot one way or the other probably the Market’s expectation is Switched at one point from um there might be no Landing to there just coming in too hard you know yeah within a matter of six months or something so that’s the that’s the problem um yeah and then things like inflation and all that it takes some time to sustain much momentum in that so it could be a while before you realize that especially if when the fed you know and others make projections and everything they tend to be behind the curve then afterwards because they’re surprised by that but they still keep putting in their projections even though the projections tend to be wrong over time while they’re doing that and so they aren’t necessarily just plotting the path that they see from actual results coming in but they keep saying we expect to come down we expect to come down and that can lead you to kind of take longer than you should so very interesting it’s going to be uh very interesting four years I think there’ll be a lot of opportunity which is good uh there’s always opportunity in America so we’re going to go over some questions that people had emailed in if you want to uh send in a question there’s my email right there Andrew Focus compounding tocom if somebody says I’m a regular listener of your podcast and also professional investor given the name of your podcast and the fact that these companies have been solid wealth generators over the long term I’m wondering if you have looked at the publicly traded wireless tower companies I know they’re somewhat larger cap than the typical companies you talk about I think there’s an interesting question whether they’re just in a temporary growth slowdown because their customers are reducing capex or whether they’ve saturated the market with towers and long-term growth going forward forward will be a lot lower than in the past so have you ever looked at any Wireless Towers uh not really of the big um Tower companies no so that’s like American Tower and those I mean people know these stories of them I don’t know you’ve probably heard PAB talk about this okay I think I think he tells a story about the CFO of one of the companies I could be wrong I’m not familiar what what did you say what’s the story oh then I might be wrong basically he was saying you know no you’re not you got a good memory his J was just sit there and wait till the phone rings and then you know um decide you know and then buy the the smaller operator you know that’s that’s selling them to them but basically it’s consolidation of these things over time um which has worked out really well as opposed to like funeral homes or something which had a period that was good and then um slowed down so 10year kager total return about 10% on American Tower um which I believe a structures a Reit Now American Tower yeah okay so that that might you know that’s the only thing to keep in mind then is that um yeah so let’s see so operating profit yeah so I mean it’s trading at 25 more than that times operating profit or something so yeah people expect a lot of growth into the future um we’ve covered this kind of thing in the past in that this is not my area of expertise and I would be uncomfortable in this kind of thing a telecom type stuff I don’t really want to have much to do with you’re putting up a lot of capital and then you don’t know if the capital will be obsolete later because of some change in technology or something so we’ve talked about cable cowboy and everything that’s great but if I live through it I probably would be cautious um about which technology would be successful and which one wouldn’t and that you’re spending tons of money to do this well John Malone strategy was to let the other people figure that out the new technology and then go from there right he was never the first mover in the space that way yeah um but so it it leads to I don’t know if you want to call it somewhat monopolistic or whatever situations because you basically need space on towers and there’s going to probably be a limited number of them and then also you have the difficulty of working together from companies either for antitrust reasons or just because they don’t like each other so it’s more economical to put several um carriers on the same Tower but carriers won’t build their own Towers doing that kind of thing it’s interesting that way it’s sort of like um I don’t know in the uh it’s very rare but in the cruise line industry something there have been dry docks that are built to be shared by different companies because it’s so uneconomical for a giant because you need a dry dock for a giant giant ship which there’s only a few companies in the world that would have them but it does are you going to spend that just because you have a few ships or are you going to do it with someone else but if they don’t get along too well then sometimes someone else has to build it capture all the profit from it right so um it’s fine if you own a bunch of businesses like that seem like by economic theory they should work out like this what veras sign we’ve talked about talked about F when it wasn’t trading at 100 times earnings or moody or uh whatever sorts of things um you know co-art right we’ve talked about that there’s things that have natural advantages I think in terms of the way the economic setup is this one has more risk of Technology change over time possibly um and then some other ones have possibilities of uh of legal changes and things um I kind of thought you were kind of joking around why is FICO up why is it actually no it’s 100 times earnings I thought you were kidding when you said that why is it uh 91 times EV to free cash flow and why is it up 76% year that was my point about the the banks I think we have to just accept that you know some things don’t make sense did something happen what the it’s been a momentum type driven thing for a long time now yeah I knew that but I thought you were kidding when you said 100 times earnings no it it’s 100 times so if you look on a 12month basis this is trading at over a 100 times um so we’re talking about so anyone not watching the video we’re talking about Fair Isaac Foo here so we’ moved on from the last topic um it’s trading at 100 times Peak earnings yep that’s the highest earnings they’ve ever had in their history it’s trading at 100 times it so literally look at that on the screen 100.3 that is insanity it’s about a 100 not yet but it’s it would have to go up another 30% or something before but it would be a 100 bagger from where I bought it or something because you can tell because the stock hasn’t split I believe since I bought it um but so it shows you that if you buy these things and just hold on that can work out if it you know the the um multiple they getting in the semiconductor business is that what it is well their earnings are probably very semiconductor looking at at this point but um we look at quick FS we can see this so um we can see how big their earnings have gone up recently yeah 10 year kager 40% 5year kager 44 3E 75 goodness yeah I mean look the problem here is uh so you can see their their operating profit is you know let’s say quadruple the last 10 years or something much of that being the last 5 years and then a lot of that being very recently where you had the big expansion in the operating margin so operating margin went from you know 21 22% to doubling that to the 40s without movements and the other things and revenue growth has been very slow um you know it I think what was that it increased briefly before at the start of that period 2019 2020 by you know 12 16% but then since then has been in the 2 to 10% so right in line with the long-term 10e average like 7% um doesn’t take Capital to run the business so they can return in all buying back stock is some of what they do which is not a good idea when your stocks trading 100 dim earnings but you know obviously they’ve bought back a lot of stock yeah yeah I mean more than their cash flow from operations uh yes yeah because they’ve had some debt recently whereas they didn’t before yeah I did like it a lot 10 years ago when it was buying back what now looks like a small amount but it was buying using all of his cash flow from operations to buy back stock and as part of the appeal as I remember from the CEO who came in there where he had been before looking at that looking at whether they would really buy back stock in the past the company had kind of done an acquisition where they use shares and things so you were worried about that it was trading at you know 10 12 times free cash flow or something at the time um I mean but the problem here is what’s the Enterprise Value or market cap on the company let’s see market cap 49.2 billion price value 51.2 you know you’re getting to where you’re trading at almost 100 times cash flow from operations right because the cash flow from operations yeah the the the funny part about that Jeff is normally companies that trade at those valuations it’s it almost seems like they’re always like just these crappy companies or I don’t know you could look at it right away be like yeah okay like huge bubble okay but it’s like fico’s like a a very legitimate business and you get that value is just something that I feel like doesn’t the other uh way happens way more frequently than that you know what I’m saying yeah the there’s or it’s like oh Nvidia right total dressable Market infinite artificial intelligence infinite you know and then they they put the multip but it’s like Fair Isaac it’s such sort of a sleepy company you would think you know not sleepy returns though no uh and they’ve had very good growth in earnings recently now there are mathematical problems that come into there if your margins are 40 or 50% and you’re growing Revenue by you know amounts like they’ve grown recently then you can’t grow by that much more now they also disclose certain things in the filing for instance I my interpretation of what they said last year or something is I I think that they raised their price by more than their increase in their revenue is my guess so if you see Revenue growth of 10% or something effectively they put through price increases of high than that and the volume declined somewhat you know um so look that’s great that’s the kind of business you like that way but it’s the problem of people can love seize candies and stuff but if it was publicly traded could this kind of thing happen to it at some point in the 7s or 80s or whatever when it was Raising prices like it was yeah I mean I think this is like the bank thing I don’t understand this kind of thing when this happens I did live through the 2000s and this you know um the the 99 2000 kind of Boom period and this kind of thing could have you did have your coca-colas your gilletts your GES that you wouldn’t think would get overpriced they’re pretty understandable businesses but some of them started to go like this this is a little extreme even by those standards so yeah momentum people love these kinds of things I’m sure I mean it’s a it’s a really good business and it has a really strong position economically obviously um but it’s hard to pay 100 times I mean the reason why this puts to the test kind of the Better Business buying better businesses you know instead of cheap ones what you have to ask yourself is okay you know we can talk about what the earnings are and trying to price all that out and do the math on it about kind of a DCF but the other way of looking at is just you can buy most people listening to this are going to put some of their money in stock so you’re kind of going to pick one stock or another so you could say well what are the odds this thing goes from to 200 times PE okay versus goes to 50 which is more likely in different scenarios I mean at some point is it as likely that the PE goes from 100 to 25 as from 100 to 200 I don’t know there’s some scenarios in which there’s not a huge difference between the odds that goes from 100 to 12 as 100 to 200 not a lot of businesses go to 200 times earnings when they kind of have earnings every year and all that it could happen for a brief period of time but you start to run a very dangerous risk reward when you pay these kinds of prices so what would you do if you still held it I mean high class problem they have but yeah I mean that’s been a lose that’s been a losing trade but it’s like come on at some point you know what I’m saying 100 times earnings for a business like it is losing that’s absolutely true it’s a losing trade but you know the other thing will happen the other way which is they’ll come a point where it will be years and years and years where it won’t do well after that you know I’m sure Cisco or something was a losing trade for you know three years of being priced like this but then you were better off for 15 years if you’d sold or something like that probably um yeah I mean let’s look at EV to sales and things like that on it just to give me an idea it’s up 71% over the past says 044 of a year so I mean since what’s that June it’s crazy here’s your e to sales 30.8 times yeah and I would say 10 is pushing it for a lot of companies so I mean they have great margins and the margins could go even higher but I just want to point out like at this point if you have 10% margins you can take them you know if you have 10% margins on like a a fixed basis on something that you’re just doing a little better than even but internally in the business your gross profitability your marginal uh profit gross profitability is really really high then you can quintuple it it can happen it does happen in certain businesses um so if you looked at you know I don’t know what it would be but like uh you know Amazon web services or something if it’s like at the moment where it’s breaking even to at the moment where it’s highly profitable yeah you’re you could 5x your your um margins within a period of years but you can’t do that once you have the margins that they have because you have to flip it and say that the part that isn’t your margin you know is your cost you can’t bring it down by that amount um anymore because there’s not that much remaining right if you look at it and you have a 5% margin 10% margin there’s 95 90% of sales left to for you to take now there isn’t there’s one and a half times I mean there’s two and a half times um but or I should say you could would you know if you had 100% margins that would be 2.5 times increase um if you’re at 40% or something so there’s just other things I mean in terms of you’re pushing the earnings quality in all sorts of ways like I said with the cash flow from operations with whatever it it’s not even the 100 times earnings although that is a lot uh it’s that the those earnings are to me look genuinely like really what the earnings you’re not in underway under you’re not in any way understating those earnings if you look at things like sales if you look at the operating process we looked at the actual cash flow from operations on cash basis you know those things are really important to figure out if there’s something odd going on here there isn’t there are other companies that trade at 100 times sales there aren’t a lot that trade at 100 times sales and that’s a very good indicator of their actual um like uh expected earning power now you have there that the I guess the forward earnings is expect 75 times I put up the I just put up the NTM next 12 months and that’s 75 so I’m like okay what are people baking into the price I mean clearly that earnings are going to go up a bunch how about far back does this chart go this is year to date I could go back I mean as long as you want well take it back take it back take it back 20 or so we could just see and if we can show people a multiple I think that will help if we do any of these yeah if we do one of these that’s multiple based do you want to do so my screen zoomed in for recording would you prefer Eevee to sales or E to uh or Price earnings price to earnings or eeve to sales it doesn’t matter to me either one it’s fine okay let’s just do Eevee to sales okay so we’ll go back 20 years 2005 and the eeve to sales it looks like was three timesh and you said you bought it out of the financial crisis correct so we’ll say yeah you go forward a little bit I don’t remember I could figure out the exact timing but it was a period in which it went up about 100% in 12 months so it probably would have been maybe closer to 10 than nine so you have it at the bottom there March of 2009 is kind of the bottom for FICO as as well as all stocks sort of and then um it probably if you go forward another year to 18 months or something it took them a little while to come out of that but yeah looks like maybe one to two times sales is what you bought it at yeah that would be accurate yeah definitely it’s crazy and then you can see how it really took off even pretty recently I mean before Co what was it right before Co looks like it was yeah so there you go nine times yeah so something can go from nine to to 30 like what happened here when we talk about stocks it’s not like there’s some magic thing about the 10 but then so what happens then is you think okay so was that a good purchase and everything and maybe the stock went up a lot so if you bought it then and held for five years and sold then you did really well if you don’t ever sell then that’s a question so it’s like what they’re baking in always curious about these sort of things if I could do that on here I mean even Revenue growth it’s still not they’re not baking in a lot well that’s I mean that’s high yeah for 100 times earnings let see yeah it’s it’s all EPS yeah so their EPS they’re expecting 20 25% 20 yeah so what do we have there 21 25 23% is the EPS growth expected so MH that’s crazy I’m gonna tweet this out I had no idea I was trading at a 100 times earnings that’s bizarre yeah I’m not I’m not saying short the stock or something but I’m saying it these things are very expensive I don’t know necessarily why they’re as expensive as has happened with them it’s kind of like when we talked about the cinear Marcus thing yeah that one’s really shot back yeah I’m like did we out that price Discovery or what I don’t even know but we didn’t participate we were just talking about it because it just was baffling that way yeah but so why does one thing go up you know almost 100% in a year and one not so much there’s possible explanations but I think there’s just momentum into it and everything something like FICO is probably many people’s favorite stock that they own I can understand that you know it’s done really well for you as you own it you don’t want to sell it it’s really a monopoly you know let’s let’s be honest about it and it costs nothing right I mean they’ve moved in terms of the way that they charge for it and there’s other things that have changed but when I originally bought it which we’re talking about is you know closer to 15 years ago than 10 I did estimate that the scores business that they have had probably in excess of a 70% operating margin as best that I could tell they didn’t break it out for you but if we pulled away everything else and the company was just that business it it you know would be 70% or so operating margin it maybe even a little higher less all the corporate costs and everything I didn’t think that was particularly aggressive in assessing what that business is it’s a it’s one of the best business franchises in the world is their scores business but they had other things attached to it they had General and administrative costs and things and you know you would think if you ran like a pretty stable software business Capital light generates a ton of cash think of the names that we’ve spoken about on the podcast right you would that have very strong positions you would think that they would look at case studies like this and be like wow a lot of this is obviously growth from the business but you know Capital allocation too buying back a ton of stock over time you know I mean obvious we just call they’re expecting eps to grow by 20 to 25% but there’s still 20 years of doing the right things on the capital allocation front yeah and not and not yeah not issuing shares and all that stuff now I don’t know if it’s the right thing to buy back stock in the last couple of years which they’ve been doing but they didn’t issue shares it would have been tempting for them to issue shares to acquire things at 150th of the price that the company eventually ended up at and even if I think the stock is vastly overpriced I you know I still would think that that would have been a really bad deal they giving away you know if we go back 10 15 years they’d be giving away 20 cents on the dollar or something for what their business was worth no there’s no doubt when I bought it I thought it was worth you know three times or something what I was paying for it right so if I was saying I was paying you know that means I thought a free cash flow yield of 3% made sense or something in the long run yeah because you know in the very long run if they were if they business was strong and everything they would be able to track on a revenue basis something like nominal GDP which is they’ve done that they haven’t wildly overperformed that but they’ve done that and they’ve been really good at all the other stuff there’s also just other advantages to it in that if you’re talking about things like price increases over time if you’re talking about an intangibles heavy business it’s usually easier to control costs and so you can be have more faith in cap allocation management whatever really being able to accomplish things because it’s not the same as like opening new locations and adding headcount no matter how Ruthless People say they are and everything it’s much harder to roll back headcount increases and things like that than it is to um have a business in which there’s that’s not a lot of what your business really is um so it’s just funny we we’ve had the discussion of Costco at 50 times 55 times earnings like oh we wouldn’t buy today maybe wouldn’t sell it maybe you would and then uh FICO just says hold my beer you know yeah but like fico’s at 100 now it was at like about 10 or something once at the bottom like we said certainly in terms of sales it’s been at three times sales in 30 or whatever we just said so it’s an unpleasant reality of investing in markets that you know on really great businesses certainly and sometimes on other kinds of businesses um you know 10x of a return or something could be due to expansion or contraction of the multiple you can own something it can do well and it can contract while you own it um both of those of course FICO we should like point this out more clearly you know there’s probably a heavy economic aspect to that people’s attitudes about well people’s attitudes about what the they think credit well one would it go the other way though I don’t know that they well they credit a lot of credit applications are good for FICO in the long run and uh a lot of inflation is good for FICO um more actual volume of credit decisions being made and uh higher pricing in general is always a benefit because what they’re doing is taking a small percentage of what your business is basically for you to do this so it helps if it looks like a small number versus a big number and it helps if they do things to make it look like a small number that way and then they don’t really have real assets and things to worry about the other way so this is a very unreal stock you know in terms of the unreal in terms of the business and every way so it it is yeah an overheated economy would be good for for FICO so you know if you could keep the economy running overheated all the time that this would be a good stock um that’s probably why it was so bad back in let’s say 2010 or something not just concerns about everything that happened with credit and all that but just that it could be really slow there was no inflation there was no growth credit could take an incredible long time to get back and now it feels like a different kind of world from that so crazy let’s see somebody sent an email what will have a better return over the next five years build Supermarket or angles uh we can look on quick FS I my best guess would be Eng Les just because it’s probably cheaper now but Village has gone up a bit so yeah it’s probably up 50% not that long ago um yeah and here’s the opposite here’s a company that hasn’t well EPs and stuff on paper look good because I don’t know how it’s probably the start time from that no that can’t be right there’s some miscalculation of the EPS thing um but here we have you know you’ve increased what a 50% or less let’s say probably Village for people listening for Village yeah um on the other hand you know look it’s selling for less than the reproduction value of the assets probably and angle definitely big time so you can see it’s at like one times book it’s at it’s as to say four times iida six times ebit yeah I mean for free cash flow I think they’re doing some meaningful cap XS we could check that uh I remember reading about what they were doing so that could be affecting it yeah yeah 63 million is very meaningful capex for them to do store you know building out of store and stuff I mean let’s see uh um Ian building a supermarket is kind of some of the most expensive commercial real estate that you build out normally it has pretty high prices on it where they’re building all that yeah I mean they’re remodeling some things or expanding or moving some of the stores too that’s all normal things though um I mean it’s not that much different it’s probably a little high I’d have to read the 10K and everything again to get an idea but it’s actually if you adjust or what Co was before to what now is that probably gets you most of the way to that so if you have been spending between 35 and 55 million before I would guess that you now have to spend 63 million in nominal dollars because the inflation I think supermarkets are cheap as stocks generally I think people way under realize that you can’t reproduce these assets for this you know um amount it would be for a competitor it would be easier to buy Engles or Village even at a premium um village is part of Co-op and stuff so there’s a problem with that but it would be easier to buy entry that way than to to build it out yourself it’d be faster it’ be cheaper you know you could probably pay a pretty big premium I don’t know I mean I’d have to look carefully at Angles but I wouldn’t be surprised if a 50% premium in a takeover price or something would be a way cheaper way to enter than trying to open competing things and then you wouldn’t have the competition from them so um but this isn’t unique to these businesses right we’ve talked about this before probably steel it’s been easier in the United States for a long time to buy an existing steel um mill than to try to enter um relative to like the prices at the market has put on it at times so the market in essence lets it trade below reproduction value sometimes and I think both Village and angles are trading below reproduction value definitely what’s interesting about that though is they make money every year so if an asset makes money every year should it really trade below what it would cost to produce the assets new right now you know um but let’s look at their most recent I mean I think most of them have stepped up in terms of Returns on Capital since covid basically we look US capital angles I mean it’s shot up obviously yeah and we can also use Roa or Roe because it’s might capture it better in this case you know they they have leases and then they have debt you know and then so they own some outright this is a different situation in terms of what they each own so it’s probably best to use something like that honestly okay yeah but you can see yeah so if angles their return on Equity was in the 10 to 15% range from 2014 to 2018 or something or 2019 and then Co bumped it up to 20 to over 20% but return on tangible capital is fine if you have a return on tangible Capital that’s 8% or higher it’s hard to see why you should always trade at Price to Book of less than one and they are trading at less than one right now um yeah actually I think it shows tangible assets per share at the bottom of that or maybe the bottom of the income statement I forget which one yeah it just priced a book oh yeah tangible asset right there tangible Book value so this is for Village so yeah so it’s about $30 or something it shows there that’s correct and so it’s trading a bit above that now right it’s trading you know 20% above that or something I think it’s around $33 yeah and then um angles angles we have it saying that the um tangible Book value is $77 a sure and we’re currently trading at 71 yeah um but you know when there was a period where there was concern about deflation and the grocery prices did deflate a little bit before covid for the first time in like 60 years or something um these stocks weren’t so popular and everything they’re pretty cheap though they’re pretty cheap right now I mean how much are the stock the stocks can’t they’re not coming down so that means the earnings has to be going up even more I mean I do think villagers gone 50% within the last year year and a half or something probably it has to have so yeah okay so earnings basically doubled and I guess the the um stock did not double and that is that earnings from operation operational efficiency I mean you look at operating profit operating profit went up a bunch Revenue did not go up a bunch infation if you look Village like for instance Village if you look at the revenue on a real basis revenue is flat from 2018 to 2024 if you put in an inflation calculator to um billion 237 million and then asked what that would look like in nominal terms back in 2018 2019 uh it would look like that so it’s it’s just inflation yeah so which company do you think has a better fiveyear return potential Engles I think now it also has the ability to allocate more money in a way that you might not like that’s very limited billage although Village did acquire stuff and and not they did two Acquisitions that weren’t that great so they managed to do that they acquired something and then rebranded at a shop right in state that hadn’t had shop rights historically Maryland and that didn’t go that well and then they bought things kind of related to New York City too which was a different name than their own and that didn’t really you know go that great either it was kind of competitive biding for that one too so they all can find some way to return some of the money I mean I I if you’re going to sell me an existing Supermarket of either of these and promise that they want to do things with the capital I I would be very happy with either of these stocks the question is you know it’s the same thing we talk about oil things or whatever there’s lots of times where I would have been okay buying an oil company and didn’t buy the stock because I didn’t want what the oil company was uh management was probably going to allocate it to and I’ve been burned on that um and sometimes it works out even if that is the case if if the price is cheap enough in the future for the commodi is bright enough and everything but yeah you can buy I think you can buy supermarkets in the um stock market cheaper than you you can buy them by trying to go out there and buy them yourself or to build them so it’s a cheaper way of entering the supermarket business if you want to um we could look at like competitors like Kroger and stuff to see what the multiple differences are in everything just to give people an idea Kroger’s on the screen and Kroger is not really a better business I mean it’s very it’s very efficiently operated and there’s some really strong things about it but it’s locations aren’t better it’s you know any of that like it is not better than angles or or Village and you can see that in the record um it’s a big stock a liquid stock and uh you know is operationally well done but the assets probably aren’t as good as the the two companies we just looked at probably not across the whole board so you know some of it is on the Eid stuff of what it trades at the trades low for these um you know this is very Kroger six times and for the others what did we say four and five area yeah so they have low multiples you know yet Village and and Engles is at about four times zah some of that might be people thinking that that won’t be sustained you know I’m a little less skeptical of that I think it’s more likely it will be sustained for some period but and if it’s not sustained then I don’t know it’s a different world than probably what you’re pricing into other stocks they wouldn’t do well if we went back what would be really really bad for these stocks if we went back to what we had in the you know last decade where like the internet things were growing but inflation was barely anything there wasn’t a lot of growth and other real things um they there’s a question about cash conversion but it’s not terrible it’s if you look at free cash flow divided into like ebit and stuff it’s not that out of line with what um I mean the long-term averages if you look at that for any of these three companies it’s not that out of line with what it is for businesses that that operate in the real world and and pay taxes like these companies do and all that um it looks pretty pretty normal um you know so if we do Eid whatever you kind of have to divide that to get another number but I mean yeah four times eaab which we were talking about before the other two yeah it’s not like you’re paying more than 10 times cash earnings or anything for him so like the free cash flow on average it’ll be lumpy but it doesn’t convert worse than that so I mean they’re both pretty you could look at them both I I think I would make the decision more on which management and I liked and what they were saying about the future and all that than anything else probably because but in general if you like a business and it’s pretty decent business if you can get it at less than at five times uh EBA do or less then you should be okay long term in it um and not worry which is kind of Cheaper let’s talk about a stock that you had wanted to discuss on the podcast cboard Corporation why are you flagging what’s what’s uh tell us about this company and we could close up uh well Seaboard was on like valy investors club or something but it we just did the supermarket so it kind of plays into the same thing but this is a good example of something that is um pretty cheap and doesn’t have a very good history um of Returns on Capital and all that um and you know but is in a period in which it’s basically not making any money right now which sometimes can cause things like this to get very cheap um the company is probably best known I would assume to investors for its stock price although FICO also has a very high stock price but SEO hasn’t split their stock in forever so it’s like one of the most expensive stocks on New York Stock Exchange or something um they bought back some stock from the family at one point um and they they have when they’ve done that they haven’t bought back at uh premiums and stuff so so that’s helped with the price to to tangent Book value of it um we could check that what they say that is it’s complicated a little bit with this company but if we look on the uh that will give you some idea of what I’m talking about is if we look at what the um tangible book value per share is here there you go so tangal Book value is uh 4,000,000 yeah so about 4,000 and it was let’s 10 years ago it was 2,300 right uh per share the P the Share account numbers have changed a little bit so actually if I look at yeah not by that much so that’s fine we can go with that so if we look at back at the stock price what we’re saying is that basically this company is trading at a pretty big discount2 $2,700 a share versus um it’s tangible Book value but also it’s not trading that differently from what the tangible Book value was like 10 years ago right um so why is it like this one there’s no promotion to the company at all so we should always keep that in mind it’s a closely held company to some extent and it for a company this size um it doesn’t communicate anything ever it’s actually pretty secretive it looks like it’s the cheapest the tangible Book value has really ever been according to Kin yeah it’s very been a public trading company for a very long time so click on all or 20 years or something so we can see how long back this can go I’m actually reading a book right now called dynasties of the sea which sort of ties into I mean kind of I mean to this company uh so that’s interesting that we brought it up but yeah okay so in 2000 it was very cheap which is my memory right on price to tangible how cheap did it go there looks like four yeah yeah so my memory of this stock in the very long term which could be wrong is that it generally trades uh in a way that won’t be helpful to Value investors because it trades as a value stock inverse to Euphoria and growth and all that so at the moment at which it tends to hit a very low tangental Book value at moments in which value is really out of favor and then it tends to do well when value is in favor um I mean yeah and some of that is the businesses that it’s in which can go over I don’t think anyone would recognize any of the business except their part owner of Butterball you know the Turkey um brand yeah so but pork processing um there’s some power generation things in it there’s I mean there is a description in the quick FS that will give you exactly kind of what’s in the 10K um total commodity things um but it was interesting because they they kind of lost money and stuff which is which can be really good for uh if it’s a highly cyclical stock if you’re buying on things like Price to Book or something because people will look at the PE and everything but they can get turned off now if you look at it right you pull it up on quick f f and you see this it’s ugly enough that you might not really look into it any further yeah the Market’s extrapolate so they take that Mo Money losing situation and kill the stock but for cyclicals obviously that could be an interesting time yeah I do not think it’s particularly great competitive position of the markets that it’s in and I think the markets are not good markets that it’s in how much is the family owner of this company a lot but they just sold a lot so we let’s see um where could I see that uh I can pull it up probably but it was a lot that they sold um let’s see this would be uh was 75% something like that but they but I’m just trying to figure out where it says that how much they sold um I don’t remember the date on which the sales took place and stuff but it was in the last year so it could definitely be that it’s not updated in this um uh you know most recent filing for the the proxy and everything yeah so but that’s another factor which means that as it gets really cheap which can be let’s say that theoretically the the Insiders own 2third or three4 of the company or something right if that’s true then you look at the um the market cap what are we down to now because when we drop that much 2.66 billion yeah so if you know when that happens that can mean that the actual float is 700 million or something you know um so and that doesn’t sound like a big difference but then of course if you go back to where it was what it was five times the price to book back in the 2000 to 2010 period or 2000 now there’s other reasons that people might not want to own this so one it’s not liquid enough and all that two it doesn’t give a lot of disclosures three family controlled for the kinds of businesses and aren’t very attractive as businesses on top of that though they aren’t the kinds of businesses that people want to hear that you’re in and that the company is doing what it’s doing so it also doesn’t score very well on your like ESG type stuff I mean um you know some of the processing plants and stuff are going to you know um use a lot of very very low wage labor in in r random towns in out in the middle of nowhere that wasn’t much of a town probably before they built a plant there and everything you know it’s not wildly different than some of the things that Tyson or Pilgrim or something has either but they have a brand and everything to go with it um this definitely looks like an asset you would not want to hold it’s more of a tradable asset I mean look at even over the past 20 years it’s underperformed past 10 years it’s gotone smoked just disgustingly underperformed yeah well if we look that that’s possible I obviously in the very long-term history of the company it hasn’t done that badly um but it doesn’t have particularly good returns that’s true um I’m not saying you can’t make money I mean the point to buy is when it’s at 0 five times tangible Book value kind of like where it’s at right now but I do think there are some assets that you trade right on like maybe a two or three year basis and said you’re like okay said it and forget it I wouldn’t coffee can this no but we saw the problems of if you coffee can FICO it could go to 100 times PE too I mean that’s a great that’s the situation you want that is what I’m saying you’re like okay 20 years this thing this is a yeah you can have you can have it go either way in terms of uh it’s one of the first times in their history they’ve lost money I mean it’s not a high credit risk uh stock nor I mean we we could look at like what the free cash flow has been over time and everything it owns the variety of different assets um that generally tend to be somewhat generative of cash yeah so you know you have high capb back spending and high Acquisitions sometimes that can cause you to not generate cash but as we saw cash flow from operations has been positive for a long time here I can’t remember the last time that they had an operating loss I think that it has happened before um and you could look into exactly why that is it’s driven by a few different commodity things I won’t get into a long description of the company we could go quick so I could just say a few of the lines of what it does but there’s a reason why I’m not describing that um it operates in many different places so this is the easiest way to say it it operates through six segments pork commodity trading and Milling Marine sugar and alcohol power and turkey but then in addition to that you have things like the the power segment is an independent power producer that generates electricity for the Grid in the Dominican rep public some of the other things are also related to each other um how they got into it so they talk about it’s a terminal um you know so um uh I it it’s I don’t remember when we talked about this before but basically it is one of these where I don’t know in the future if uh if if it will be priced high enough in public markets and stuff in the future but it might be like you know if we are in a world in which there’s not a lot of active investing and not a lot of active investing is something that has a float this size and not trying to learn about a company that doesn’t put out a lot of information now there’s no reason the family can sell whenever they want to although they got a discounted price when they sell to back to the company um but you know it’s it is one of these things that I think might have become less efficiently priced over time which is a interesting question to ask you know what causes people to recognize something might be too cheap and what to do about it since it’s a control type situation that’s probably a big part of what causes there not to be a lot of interest in looking at oh what would the assets be if we broke it up and that kind of thing do you ever think companies that own like this is one of those situations 70% right you said 75% something like that do you ever think to themselves like in a situation like this maybe we could just take it private I mean Hunter Douglas did that um I don’t know and I do Wonder too if it’s like could you could you could you think about okay so they own 75% which is a weird amount to own of a public company in my opinion right that that’s a lot right and if you’re looking at it could you be like are they ever going to buy back a ton of stock or do anything else do they want to continue to make their their ownership go up is that the plan I mean it just it’s I don’t know it’s it’s bizarre that way like why are these guys even public at this point well hun dougl have the same issue there’s a few possible reasons right the biggest one is you’d have to buy other people out here’s the problem who do you think owns the we don’t know who owns the stock but who probably at any time owns the stock probably people who know that it’s worth more than you know um but then there’s also issues of if you’ve been public for this amount of time and stuff do you just go private doing this some do Hunter Doug has tried all sorts of things to to to get rid of shareholders um at lower prices because they tried opportunistic tenders over time to do it so yeah you can take advantage of people certainly if you own a large enough part of the the stock and especially like I said as as it becomes less active over time and all of that there’s possibilities um but then there there’s also the issues of like do you want to take it private for some reason I don’t know you could if if your goal is to like just make a little more money I mean one thing from a family perspective or something one you have shares so I mean that’s helpful really helpful in planning things and stuff I mean I think a lot of families that have a lot of money would benefit if they were publicly traded but owned almost all the public company um so that’s really helpful there’s a market that it creates for that that you can use you can basically exit anytime you want by having the company buy back your stock um even though like I said it’s at a less attractive price and what does it matter to you if the stock languishes for long periods of time you could sell the whole company um it doesn’t really matter to you you just don’t care dayto day what the Stock’s at but in the long run you would care to be able to exit and everything but what difference does it make sometimes it trades at three times tangible book sometimes at you know not three but like whatever we just saw two and a half times or something sometimes at half yeah um let’s see it has um let’s see uh I’m sure it’s been written up in detail uh in detail on Valley investor Club more than once because this is not at all an obscure company in terms of people knowing about it it just doesn’t put out a lot of information um I researched it a lot for um a long time ago and decided that I just didn’t want to write it up yeah it would have been back in 200 [Music] in the 2009 to 2010 period um basically I decided that it was um too difficult to to write a good report about it I didn’t decide that it wasn’t a good company or wasn’t something interesting to write about but it just wouldn’t have enough sources I could site that would be confident and stuff but I did some research on things to find out more things about interview things that aren’t from um the the public investors might not know about legal things that they’ve had problems with communities whatever so like I I looked into some stuff to figure out what they’re really up to and everything um as far as this goes from 1993 to today the stock and the S&P are the same they they’ve had the same returns for the last 30 years or something so that was obviously because it did better in the 90s and then obviously your exit amount is important here so we don’t know because I didn’t check what the entry level point was but if you you know obviously if we the date that we have for exit is super significant here so I’m always cautious when telling people about look at the long-term stock chart because there’s a tendency to think it’s doing really well or really badly because of changes in the multiple this is I mean what’s that uh let’s see when is the S&P traded at higher prices to tangible book or EVD but I mean it’s near some of the highest levels it’s ever been at and this company is near some of the lowest levels it’s ever been at so [Music] um obviously it’s possible that that things could just improve if it you know reports some earnings in the future years um and has levels where it’s almost um you know uh where basically it’s losing it’s losing money on an operating basis right now it’s reporting no earnings and then if it reported some earnings it would do better maybe I just don’t know if there’ll ever be much interest in this kind of stock in the future unless you know how the market works and stuff changes um kind of like what I was saying is you know Marcus’s family control company or whatever would there really be a change at some point people might just assume that it would trade more in line with cinear but you kind of have to have enough people believe that and bet on that and believe that other people will believe that even if no one ultimately believes that they’re all betting on other people believing it maybe it’ll still happen um I follow all those company all those theater stock they all just sort of move at the same like they all move together iMac Cinemark Marcus a few others yeah and the banks uh like we talked about all moved a huge amount in one day because it didn’t matter if it was Frost or hangam or whatever they’re very different in terms of future for things but they all move together they’re all in the same sort of category that way what’s interesting about these I think for the future with like a seaboard is like um I do wonder about the ones that what group is this in like I mean for industry purposes this is are they putting it in this is labeled as food it is so it’s the middle of the chain in food that’s correct commodity it’s a commodity food so what you’re dealing with even where they talk about the pork and all those things it’s commodity food products and it’s really in the middle of the chain um so it that’s something that I don’t know like yeah it’s consumer staple sector right that’s what it says there which is crazy when you look at what they’re actually in so they’re very driven by commodity prices not by the price of the end user um yeah but I do Wonder like will people seek out a company like this learn about it write it up so I said it because I believe I it was written up on Valley investors club which just stood out to me way back not not recently I mean this year but not recently um yeah it was written up in July so and it wasn’t some huge detailed um description of it or something but it was interesting to me that it was was actually written up and they went into things like the ownership and all of that um they did make the point okay so it was mid 2023 so this so when I cited that before [Music] um it was mid 2023 that they did the transaction so this is helpful that’s including the value invest just write up in mid 2023 the company repurchased 20% of the family stake which was 16% of shares outstanding so they own 75% a 14% discount to the market price and 24% discount tangible book um they did a similar transaction in 2002 the company repurchased 15 shares 15% of shares outstanding at $22 so like you know obviously it’s gone up a lot since then which was also at 60% of Book value and within three years Book value doubled and so um it I don’t know because there the information going back that you could find out on the company to me kind of predates what current management and stuff is you can read the valy investors Club thing to get some ideas about who died and who inherited things and all that but you’re kind of assuming that something the last things that we got much communication to have philosophy about things are like 15 years ago so you’re just assuming that because people happen to have the same family name they’re going to do the same sort of things um 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 for us to go over email it to me at Android Focus compound.com if you’re interested in learning more about our Money Management Services reach out to me via email and of course be sure to hit the Subscribe button wherever you’re watching or listening to us here today I want to thank everybody so much for all the support that you’ve shown to focus compounding over the years and we will see you in the next podcast take care

Description:
00:00 Intro 01:40 Movie Theater Smash 11:30 S&P 500 YTD 14:11 Airline Industry After $SAVEQ Bankruptcy 21:30 Berkshire …

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 Canon 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 formula known as Twitter at Focus compound if you’re watching us on YouTube right now this is our website Focus compound.com if you want to get access to our archive our blog archive going all the way back to 2005 you can go to the website click the blog section and then you will have access to all that if you’re interested in learning about our Money Management Services you can reach out to me at Android focus comp.com and we will start that conversation so Jeff uh how’s everything going on your end today is just M 7th sometimes I feel like I should say the date you know it’s like on YouTube You’ll see a video and it’ll say oh this recorded 2 years ago and then you go in the about section and they actually list the date and it was like four years ago three years ago like the YouTube when it was recorded is never accurate so today’s December 7th how about that yep mhm how was Thanksgiving good yeah did you happen to go to the movie theaters Thanksgiving a big uh Thanksgiving weekend yeah ever I guess in nominal dollars yeah yeah I mean Cinemark they put something out cinear achieves alltime domestic records with spectacular Thanksgiving movieo surge so you had Wicked Gladiator 2 red one and then of course Moana too which was Moana was the biggest one yeah so I think in nominal dollars I guess depending on how you do it exactly uh Wicked would be the third biggest or something and it didn’t even open it was second you know so two of the mo so they both be some of the top movies ever on Thanksgiving weekend um but you know uh but adjusted for inflation not as impressive you know years ago they used to have basically there haven’t been major C uh Thanksgiving releases for a long time the uh Disney released things that didn’t do well they did Strange World and wish the last couple years and uh so this is much bigger than that yeah so you see any of them uh I’ve seen some of them yes and I’m going to see more which was your favorite I mean was this the first time I mean I thought it was funny so you have red one which the Rock is in I’ve seen red one yeah and then you have Moana 2 which The Rock’s voices in so I was thinking the it’s the first time ever that I was wondering from a promotion standpoint I was wondering I believe it is technically the first time that I can think of that anyone has ever opened t two number one openings in the same calendar month that’s a weird record though uh I think that other people have probably had that I can’t think of two movies that opened within 30 days of each other at number one or something like that but I can’t think of anything that is in the same calendar month like this it might be a record some weird record that way yeah now of course he wasn’t supposed to be in Moana 2 because obviously there’s a big news about that is Moana 2 was supposed to be a TV show it’s been it was recut to make it into a movie and his voice was added and stuff but it was meant to be a Disney Plus show so that’s the amazing thing about it it’s going to be one of the biggest movies of the year and it was never intended to be a movie really and red one obviously was pretty much meant to be online you know that was the real reason for financing and stuff is not that it was going to playing theaters but didn’t red one bomb I mean their their budget was pretty high to begin with right they have ridiculously high budget but you know I with the Rocks could be like that I feel like I mean they made they’ll make a fair amount uh I don’t know maybe they’ll get to 90 Millions it’s probably at close to 70 or something right now and it’s not going to drop very fast during the uh as we approach the holidays and everything so um yeah I mean it’ll do it it’ll be worth it to have released it this way you know that’s I mean be the production budget 200 million yeah no that that’s crazy but worldwide has been 151 million yeah but there’s been things made for Netflix and all of those that are expensive Apple you know um and some of them have been released in both movie theaters and um then you know used online too and some haven’t been at all so um it you make a lot I mean it makes sense to release them in movie theaters at this point because this is whatever red one is it’s going to probably like I said it could definitely make 90 million or something it domestically and it you know it doesn’t cost you much to to Market it um in addition because you have to kind of Market it anyway I guess you could just drop it on some service but you kind of have to Market it anyway so um and like Moana for instance it’ll probably help make the liveaction Moana which was always planned to be a movie you know coming out in two years or something um bigger because this came out you know it it helps it it helps advertise and everything it’ll probably have a bigger run on streaming things you know all that it helps so but we are we’ll have some more big releases to the end of the year mainly Lion King um and then we will have like nothing for three months it’s like some of the worst I’ve ever seen uh it’s pretty shocking what is being released uh I think there’s a week in January where I think officially there’s no I don’t know what the numbers has I think there may be no wide releases at all the week of January like 3rd or whatever that’s almost unprecedented if that’s true do they have something no those are all limited no wide releases at all that almost never happens and uh and then I mean we have some shocky ones I could go through but there’s like I mean uh there’s one that it’s I think was made five years ago and is being released I think is among it uh there’s a there’s some pretty yeah there’s some there’s some like horror things or something that might do okay but you have almost nothing until like April or something but you do have Lion King and Sonic left in this year so this year will be fine how this year will end will’ll be good but then expect really bad next three months like shockingly bad um it’s always a bad time but it’s gotten really bad in terms of how only during certain times of the year big things are released yeah if you look at the stock price of Cinemark and Marcus Marcus is obviously rated a bit C Marcus Crush did that yeah we were literally talking like we literally like why is this what why is Marcus not moving and then I think that was the bottom there but what do you do here right so I mean what are your thoughts for 2025 box office and then 2026 I mean how much of those future uh box office improvements have been priced into Cinemark do you still think Cinemark could potentially be cheap at these levels uh yeah what would you be thinking if you held camark at at these price levels it’s gone up a bunch yeah I mean I I don’t think next year we’ll be bigger I don’t think we’ll be back really to certainly not just for inflation even in nominal dollars we won’t be back to where we were before Co yet next year so it’ll be better than this year but you’ll probably keep improving into 2026 is my guess 2026 looks better than 2025 right now but a lot of that is outside of the major biggest movies sort of things um cuz actually even this year the biggest movies or something were fine it’s just like a lack of them throughout the year and that’s still an issue so lack of films I mean I don’t know they they do some things on the numbers where they estimate attendance or something I think Deadpool and Wolverine estimate attendance would be very high like it would compare well to anything from 5 10 years ago any year but there’s fewer movies at like say 25 30 million people attending them you know and there used to be more of those so there used to be more moderate hits uh and there’s less of that mostly because like there’s just less of the Year where they were hits if you remember this year you know until like inside out 2 and it yeah there wasn’t a lot going on yeah MH so did you think be big would have been as big as it it was did you expect that no but the biggest movies of the year are always bigger than you expect I mean the the numbers is a good example of that and they’ll even tell you that where their estimates for how big movies will be will always be wrong for the biggest ones because they’ll estimate they’d be 300 million or something and they’ll always be movies that break out and do 500 or something but they don’t know which movies they are so the biggest movies are always bigger than estimated basically like people had high estimates for Deadpool and Wolverine but they wouldn’t have been as high as it turned out to be or something like that yeah so I mean compared to other stocks yeah they’re they’re not too expensive movie theater stocks I mean even if we’re talking about 10 times EAA or something where EAA is likely to get better for next couple years yeah I mean that’s not cheap for all times for the stock probably but it’s cheap for um versus other stocks probably so yeah but yeah they’ve gone up a lot obviously I mean cinar it’s over 100% this year right in the last year there we go year to date year to date 150 yeah that’s up a lot yeah and then you can even add on IMAX which is another one 72% year-to date Marcus now 56.6 which as you can see it started to really perk up uh beginning of October oober is yeah I mean that’s sometimes a surprise how that works out but I also think to some extent they seem to be trading like um just higher risk things I guess if that makes sense they don’t trade just on box office type stuff they seem to do well when stocks in general are doing well and you know higher beta things and whatever doing well it’s not purely just how’s the box office doing and how it’s expected to do in the year term mhm can you believe that the market I mean Total return 29% year to date yeah yeah that’s one of the I don’t know but it’s got to be one of the best in the last 25 years or something it’s got to be right up there and it just shows the timing I mean if you would have said the Fed was going like I mean rates have just kind of marched higher right like at least the 10-year um valuations are stretched I mean if you don’t own mag 7 I don’t know how much you’ve participated you know well you could have owned the box office related things we just saw that I mean they’re actually better than the mag 7 Mag 7 what like a Facebook or something’s half of up half of what Cinemark is probably I was talking to a uh an investor in the fund and our performance in the fund is it’s been great year to date I mean better in the market and I said the part that sucks is we owe nothing Market related we owe exposure to any of this the beta or anything like that and I almost feel like cuz the market is up so much it’s almost like oh wow it looks like we own a bunch of Market related stuff yeah happened that how amazing the correlation is when you own things that have no relationship to the market yeah it’s baffling sometimes that way but that’s the way that it is a lot of things do go up like I said you know be they seem to be pretty highly correlated some things now there’s other periods of time where that’s not true and that obviously wasn’t true you know during covid or something things were not moving together right like there was the co type things that were doing well and the co you know things that are harmed by Co so there’s years where that wouldn’t be true if we were in an economically sensitive time we would not see the same correlations you know you’d have like things that benefit from a you know cyclical type things and non- cyclical type things would be doing very differently it’s just kind of loose Financial conditions uh some optimism good economic results some pretty steady a lot of things can move together you know can you believe Bitcoin cross $100,000 it was up to like 104,000 even so there you go Bitcoin do coins at like 40 cents now up from 8 n 10 cents yeah so we just said you could own Fang things you could own Bitcoin you could own theater stocks they all show similarly shockingly good results I don’t know why the underlying fundamentals are similar you know so mhm yeah crazy crazy crazy want to uh get your thoughts on spe Airlines bankruptcy okay uh Equity holders are getting Bagel uh but more so generally on the industry I had a joke that the aah holic hotline was ringing off the hook um we’ve talked a lot about Southwest Airlines you’ve R about Southwest Airlines a lot uh yeah what are your thoughts how does this bankruptcy affect the industry if at all do you expect them to get acquired what do you think yeah I don’t know that it affects the industry that much and some of these things it might even only encourage make it more possible things could get acquired later so it might not matter that much that’s kind of the problem with Airlines right is that usually while they don’t well sometimes the government blocks um um Acquisitions of things it doesn’t really result in a lot of capacity exiting because they don’t end up you know we’re all full on liquidation yeah someone ends up owning the planes and flying them right or leasing them and flying them yeah um I I mean Southwest you know hasn’t been great obviously you know it had a very impressive um run as a company a long time AG go and then as we kind of went over there was some podcast where we talked about it’s become more and more like other airlines over time and so um and then what we’ve seen with Airlines is the things that are more exposed to International things premium things upch charges for things have done a lot better than the discount type things right so you’ve seen that too but I don’t know if that’s unique you know I dollar stores aren’t doing that great right now and stuff so that might be part of a larger thing where it’s super low end things that sell based on really low advertising prices have not done as well in their Industries as other kinds of businesses that’s pretty Universal right now are Airlines in your mind just always in the to hard pile I don’t know about that I mean in the United States passenger growth is not that fast capacity is not growing that quickly um it’s pretty mature into industry has fairly few players it’s been very hard for anyone to get in and stay in and be successful for a while now it certainly looks like an industry that is investable yeah it looks okay um like you won’t have the same kind of losses as before but what does that mean I mean it might make it just like lots of other industries that aren’t necessarily that great but if they’re cheap enough and if you expect better things for them for a while then you’ll do okay but yeah it seems like it’s a very different industry than it was before yeah I I don’t think it would be easy to start up new airlines in the United States and have any success with them or to come in um yeah it’s the Bears to exit exit portion that I hate I mean it’s not like they’re scrapping planes and capacity comes out you know and it just goes more to uh other people that’s the part that sucks about the industry like you said somebody else will just buy them and fly the planes so that competitiveness will always be there you know so that’s a one-year chart that we’re looking at there for all of them yeah okay yeah yeah um yeah I mean I I mean I think some of it even like with the Buffett thing where he invested in them and then you know sold out and everything it was a onetime fluke thing about covid you know I I think some of it is luck that way too that could happen in lots of different Industries and did the same thing would happen if you were movie things you wouldn’t be doing better off now than you were before then if you bought into them and then you feel like you had to sell out of them Cruise Lines you know so I think something that would be hard to predict that way and I do think that over time like we saw the industry is much more uh commoditized in terms of very low differentiation but only a few players usually if you have an aopo with not a lot of differentiation it’s okay like it’s all right they may be value stocks from time to time yeah mhm when you talked about uh dollar stores so a little bit of a different Market than the people shopping at Ulta but want to get your thoughts on uh Ulta beauty obviously somebody at birkshire Ted or Todd uh owns it and want to uh pull it up on quick fs and see what your thoughts are the stock was up a bunch really Bunch like mid single digits basically after they reported this week um but you could see e to sales 1.7 times yeah let’s un you know underwrite this on packet and get your thoughts on Ulta from the perspective of looking at it on quick FS yeah I think the thing it’s hard about is what we talked about before which is that what if there things that are different now than there were earlier and it’s likely to make for big changes um where it’s like overpriced because you know you’ll have declines versus what it was preco basically uh I I mean I don’t see a lot of that the gross margin is higher you know by quite a bit we used to be 35% now it’s like 39% you know Revenue growth is higher but not radically higher since since Co actually it’s only a little bit higher probably um so you know it used to be pretty steady grower even in the years before that and the Improvement in the gross profit drops completely to the bottom line right so it’s like 3% to 3% higher in terms of an operating margin and you know that’s that’s would mean that your P of what is it 16 now if that reverted to what it was before it would be more like 22 24 something like that so that that’s kind of what the concern is that it might not really be that cheap or what when we looked at it before I should say that might not really be that cheap um and for me it’s not something that I can evaluate right so that’s the problem um but it doesn’t look you know on the numbers it doesn’t look like it there’s other things that changed a lot more since Co than this so I mean the the bigger thing is the long-term thing that is an industry I don’t understand you’re talking about something that went from three billion in sales to 11 billion in sales in 10 years um that’s pretty impressive you know gross profit quadrupled um operating profit quadrupled so that’s just you know it was a growth stock before Co so I don’t know if it’s just purely something that’s happened since then um it’s way outside of what I can evaluate though and now it’s it’s not so much you know cheaper compared to other things where as it was before so but yeah f financials it looks like a great business right like the Returns on Capital everything that we saw yep Buffett or somebody at uh Berkshire had a another interesting we could look pull up there 13 app that came out let’s see where is it at uh November 14th you could see he sold some more Apple which was to be expected sold some Bank of America why do you think he’s selling Banks or Bank of America so much I think it’s an a thing and those I think that originally he didn’t want to sell Apple and Bank of America uh seeing them as more longer term things that he wouldn’t sell even if he thought that he said Bank America was a special deal it was different than the other Banks and then over time now I think he’s been cutting those so I I do think that it’s like age and transition related or something like that probably those two MH sold uh some serus XM mhm that went through the uh we had talked about that before for now it’s one stock yeah uh-huh uh-huh uh couple buys though oh sold Ulta right yeah uh um but bought Domino’s Pizza and pool Corp yeah very growthy stocks right yeah mhm so we could pull up probably not Buffet purchases definitely not both purchases you know who is this is this a Ted thing you think this looks like a Ted purchase yeah yeah might be yeah uh price earnings 28 times e e to free cash flow 41 times um I haven’t looked at Domino’s in some time but I did look at Domino’s Pizza group couple summers ago the uh is that one that trades in uh on on the London Stock Exchange okay so yeah there’s the publicly traded one in the United States which also owns in you know um which is the basically the main parent company and then I guess there’s when in Australia four technically something like that total if you take all the ones that trade around the world the UK like you said is the one that was pretty cheap compared to the US One often yeah although its results hadn’t been as good recently although now the US one isn’t so amazing either so they’re probably more similar results recently in terms of sales and things like that like growth yeah I mean growth slowed it was negative 1.33% uh year overy year now how much of that I mean they’re incredibly tough comps probably from when people were just ordering pizza a lot and staying at home during covid right but but gross margins have gone up a bunch MH yeah um it’s a really good business uh but I mean it’s it’s it’s 20 times EBA or something you know just I guess it’s a style that’s different than like Buffett I mean he’s never paid I don’t think he’s ever paid a multiple like that you know no for a business no never has and it’s and then Al was a quick flip too yeah although it’s fair I mean I didn’t we didn’t check the stock right on that but it’s always fair to I I think to flip a stock if the price changes radically from when you bought it or something I mean that that’s you can change your opinion for lots of reasons but I if someone bought cin Market it goes up 150% and then they sell or something um yeah then it’s kind of like the price is different so you decide to make a different decision but there could be other reasons why someone would do that too um yeah no I mean I I think the turnover is higher in the non- Buffett part of the portfolio than the buffet part yeah and some of these are also smaller they never got to be that big a position so you know you’ve seen that a lot more often it’s tended to be the very big positions I think even for the other portfolio managers have lower turnover than the smaller ones which they get in and out of faster which maybe like they never developed it into a big position or what happened yeah I think Bill Miller had said it’s good to have a concade portfolio and then have you know a part of your portfolio where you have a bunch of smaller like 1 to 2% portfol positions just to stay active and basically restrain yourself from touching the uh like the larger portions of the portfolio and just letting the swings affect you like having some activity to keep the brain active you know kind of scratch that itch if you will and they may do that the other two Buffett does not yeah that’s for sure mhm yeah like a bunch of one I think he said that I think actual quot was like 21% positions or something just and I mean my memory of Bill Miller’s portfolio is that that’s true MH um that the top 10 stocks or something might be as big as all the rest of the portfolio almost but then there’s a ton there’s probably a couple dozen 1% type positions yeah mhm mhm so on the last podcast we talked about FICO and just the crazy valuation yeah um this is my other favorite incredibly expensive stock Wing Stop and you know they announced on the 5th that they are going to buy back another $500 million or they add an additional 500 million to their share repurchase authorization and this thing is trading at like what you 100 times earnings and it always trads out like 100 times earnings which is fascinating to me um but this was something that was interesting so they added 500 million and then in this 8K they said with this additional repurchase authorization the company anticipates executing a 250 million accelerated share repurchase program that will commence in the fourth quarter of 2024 so I was concern with FICO too we talked about that that when I bought it you know at 100 times artics you know yeah well the it used to have much more impact the share repurchases do when they’re done at much lower you know earnings per share um you know pees yeahh they they they lead to more earnings per share growth because they’re a larger percentage of the company yeah I’m like are they just going to go out there and just start ripping you know shares from the offer and just putting that money to work you know yeah I mean it’s a concern because if you look let’s see let’s go look at them um that’s actually a lot of there so like it shows free cash flow there um let’s see where are we yeah if we look at the free cash flow statement the cash flow statement we could get an idea of why I’m saying this right so they are doing 250 million yeah and their largest cash flow from operations ever is right now at less than 200 million yeah so they’re using all their cash flow from operations Plus more to buy back stock so that’s great if your stock is cheap and it’s not so great if your stock is expensive and so you know it’s kind of like if you have payment in kind or something type things you know you basically you’re getting more shares over time you know you’re getting more ownership over time you’re not getting that money returned to you in any other way um yeah I mean it’s just it’s the world that we live in right now it’s insanity I mean the thing that’s more a big deal we should point out like hard a while ago but it’s just crazy it it it’s a good business I mean it has a really good kind of unit economics you know Domino’s FICO those are all great businesses and um but it is what did we just show like 18 times sales or something I mean that’s trailing type sales but I mean the sales are sales might be go up 20% % a year but they’re not going up you know 100% a year so it’s going to take a long time to work that down into sort of a normal level I mean it could take they have to keep growing at the let’s look at it to see what I mean but if we look at the quick FS thing recently let’s see how far um yeah at the rate that they’re going it will take them three to five years of growing at this rate probably to get down to a just somewhat expensive like an eight times you know price to sales or something like that um now you are buying back some stock but it’s very small part of that so just it would have to the stock price would have to go nowhere for like 3 to five years to get it down while it was still growing at like 20% a year to get it down to like kind of a normal price to sales you know that’s the problem that you have um I mean it’s kind of the question I ask people is like okay if the EV to sales is 18 as in this case How likely is it it goes to 36 and How likely is it goes to like nine you know you have to kind of think about it that way EV to EBA do might be a great business but How likely is it is it more likely it goes to 30 times eeve to EA do then to 120 and if it’s more likely then the risk reward is kind of you know skewed that way and that’s the way that we have with all of these companies that are while very good businesses really high prices you know there’s just a really big difference when you’re talking about 20 * P versus 100 time PE you know and we say PE but it’s all these numbers as you you can see they’re on the every single one of them is really high it’s high on every basis yeah could it just be that so much of the market is Factor investing and momentum and pod shops spending on next quarter next year sales being higher um I mean you talked about aqr they release a report and have markets become more efficient or less efficient and you had said that you agree with aqr that they’ve actually become less efficient and um yeah I mean so much of the market I mean that’s the topic I wanted to discuss because when we were talking about FICO a lot of people had emailed me this uh blog post what’s driving stocks and I’ll I could put it in the description and somebody wrote A Blog so I guess this was a a blog post that someone was allowed to post from a substack okay and he said the other day I was chatting with a good friend and our conversation went something like this I just don’t understand why my stock is getting hammered sure the near-term Outlook isn’t that good but by 2026 this stock will print scads of money and then the writer said my friend then goes on this five minute rant about how this industry is set to explode he explains the fundamentals in a way that I could only dream about being half as articulate he knows the story cold he has thought through every angle the short-term is challenging but he is completely convinced about the stocks long-term Prospect effect and I think he’s quoting the person that’s talking about the stock I watch all the stocks trade and the short interest is actually increasing this makes no sense what do these short sellers know that I don’t and then the writer said you’re thinking about this all wrong you’re assuming the market is efficient it’s anything but I bet I can explain the movement in your stock over the past year and he says really how he says stocks are overwhelmingly moving on forward EPS revisions explain and the person says but why would they short something that’s so cheap and then he says cuz these managers aren’t thinking about it as an individual stock they’re thinking about it as a portfolio strategy let’s pull up your stock with the 40ps estimates and see if it correlates to the price action and the stock price in this has correlated with uh EPS provisions and analyst uh estimates and he says you see how the periods of rising EPS forecast positive revisions saw your stock price gain and then look at what happened when revisions went negative the stock price fell you’re wondering why your stock is getting hammered over the past couple of months but it’s obvious that EPS revisions are comping negative and he says in reality there isn’t just one factor like EPS revisions that could explain all the movement but it was an easy prediction for me to make because this Factor has become so important and then he you know talked about a different guy but it’s just momentum and um quants that they’re not it’s not guys like Marty Whitman or or um you know Buffett going out and like just waiting for things to get super cheap they’re betting on next quarter next year but also just momentum in general as a factor and just basically our price takers so I almost wonder if that is going to allow things to really overshoot I mean we know it overshoot on the upside but like overshoot on the downside as well um so I wonder how that all ties into you know the market becoming actually less efficient over time because prices really are going to become distorted for reasons where if you could look out next you know two to three four years you could get some pretty good opportunities because so much of the market at pod shops they’re just betting on next uh next quarter or the next two quarters and if it misses or whatever they’ll just puke it you know yeah your thoughts on that well that’s the problem that you have when things get to be as expensive as the ones we talked about is that where it really hurts is when there’s a transition in the perception of the company usually so I mean one is Market environment i s talking about but if Financial conditions aren’t really that tight ever or anything then I don’t know how much things change I mean truthfully like it’s not that common I would say historically for the entire Market to rate to a more reasonable p ratio from a not so reasonable one without like a recession or something like something usually happens that causes that and it’s more the magnitude of it that’s determined by what that is rather than just people suddenly waking up and saying well 40 is too high it should be 30 or something it’s um more likely that the distance of the fall or or the recovery in it is determined a lot by that so you know like coming out of the great uh you know coming out of the Great Recession or something like that or the coming out the Great Depression let’s say in the 30s is a good example too then stocks go up a lot because they got so cheap right but they don’t necessarily start going up until things are positive you know or the perception changes that way it’s just that it determines more the size of it and that’s what I’m saying here it’s more how much upside do you really have versus how much risk are you taking is it just that you’re taking an incredible amount of risk um and then the other part of it is the transition is that at some point there’s a change in perception of the company where the perception of these companies is very positively growth likee and that’s not always the case you know FICO is just as an example because you know Wing Stop’s not a good example because it went public and it’s been like this the whole time and everything and it will change its perception eventually but FICO is easy to do because it was perceived as just like a value stock you know um back in uh you know in say like 09 uh 2010 2011 even um and then it’s completely rated to a different level right so it’s easier to see when you have that example in the same company um for people to see that that transition happens that things that are once considered great grow stocks now are value or vice versa um whereas the new things it’s always hard to tell that that will eventually happen to them um but it happens even what we’ve had a huge change in Facebook from what 2023 2022 I guess to now or something um so I mean it’s got have had a couple years in a row that were amazing in terms of multiple expansion and everything so it was perceived at one time to be almost as cheap as value stocks that we talk about right and then that changed um so it yeah if you can predict you know what the change in how people perceive a company will be then that’s how you can be very successful and that is one way that in the long run buff it was very successful was finding things at a time when people didn’t recognize how great a business they were and then holding them as they were rated to be really considered something special and that’s kind of the case of what happened with FAO I think I mean the other side of it is look at Celsius right how expensive that stock was and as soon as growth slows I mean we’re down from about 100 bucks to 28 uh $28 and you’re still at I mean how much how many times sales I mean we talked about this on the Pod was like four times or something like that you know okay I mean Celsius and and Wingstop and those are a little different because they’re really competitive businesses so they can grow a lot faster celus grew much faster than FICO ever did um but then it can also change in terms of the profitability of it and everything and you know people’s perceptions of a way that make it a lot more negative quickly um which is less likely in something like FICO um but that doesn’t mean it still won’t rate by a tremendous amount I mean some of these they could decline by 23ds and they wouldn’t be particularly cheap yeah mhm if you have a p of 100 or something so um yeah it I mean let’s see I mean what is f is it FICO I mean over 10 years is it high single digits Revenue grow it it’s not even that right a lot no I think the it’s 8% there you go earnings per share EPS growth raising prices people I mean from us posting that and people responding they’re like they could raise their prices three or four times and people wouldn’t blink it on yes uh I believe that’s true cuz when I looked I I believe that almost all the increases that I could find in the last two years are probably explainable why price increases um obviously it’s a little complicated they don’t have just one price and everything but but you can see that you know obviously with gross margin of what happened there that’s one of the easiest ways to tell but even just really the operating margin doubled you know and that was mainly I shouldn’t say mainly but you know you had a really big increase in the gross margin over over 10 years you had an increase that’s really surprising from like 68% to 80% but also some of that is you know maybe where they focus on stuff because Gro margin probably was always like that in their best business so um what’s concern I don’t know I mean if you look though at the share BuyBacks that’s the part that of this that fuels concern for me of like the feedback into it of this isn’t necessarily so if you look at let’s see where do we have okay so free cash flow okay um let’s see yeah so you see okay so you have diluted shares so you can see that there’s been a big decline over time in the diluted share count right okay but if you go to the cash flow statement you can see what I mean so in 2015 they bought [Music] back 130 million right and that was 6 and a half% we saw of the share count went down so I mean it was probably even more than that in terms of BuyBacks they probably had some share issuance too there stock based comp there was so that really made it decline a lot now they’re spending 800 million on BuyBacks to achieve a lot less you know so that’s the problem is that they’re kind of buying in at that really high price that that’s probably the other part that kind of concerns me about it but um and a lot of companies do that you know share BuyBacks are not always the best timed right so sometime I mean sometimes companies do them at prices that are like um I mean because at this point the company had mostly because they did increase debt over time a bit is my memory so they’ve for most the last 10 years they’ve almost been 100% of operating uh cash you know cash flow from operations on BuyBacks which is you know not bad that’s really good and so the fact that the company requires almost no capital and that it grows through price increases and stuff it’s like a c candy that way and so where with C candy they paid that out in dividends to Berkshire here they’ve used it all the buyback stock I mean it’s it’s it’s crazy I mean look at uh their cash flow from operations and then look at what has to go back and uh capx right and even looking at their income statement I mean it’s mhm it’s the margins everything are just so impressive yeah yeah and so as we can see here you know this is basically human capital as they say you know that’s really where a lot of their Capital has to go to or expenses yeah and going human capital there they’re mostly just a technology I mean yeah I mean it’s crazy I it’s not like you’re going to build like a massive gig Factory or you have to increase capacity or anything like that what do they have to increase bandwidth maybe you know and even that’s cheap nowadays but it is interesting just to note on this so in where we see from 2015 to trailing 12 months you can see it’s a pretty much exactly a doubling of Revenue now let’s go to the key ratios to see how much from 2015 to today the market cap changed so if you see yeah one 2.6 billion to 47.4 billion yeah so we’re talking about a market cap that went up you know not quite but close to 20 times on a two-time increase so it’s a 10 times increase probably yep you know it’s a 10 times increase by some of the you know price multiples and things like that MH um not as Extreme as that because they bought back some stock too but um yeah I mean we’ve talked about this before look if you can predict changes in the multiples then that’s going to matter more over most holding periods than the actual business performance unless you’re in some really amazing businesses now something like Celsius is growing so fast that yeah if you can pick things that grow 100% a year then the business performance will matter a lot but for most other companies if you can find things that you know even if something doubles in 10 years to offset that you would need to have like a difference in terms of the business performance like 7% or something that’s a big difference so you know avoid things that are going to be cut in half and find things that are going to you know double their their exp multiple expansion and you that’ll make a bigger difference than the the growth yeah I mean why did Apple get such a huge multiple expansion I mean sure revenues mid single digits right I mean let’s call it 8% done well um but a lot of that as you could see right here came from 2021 other than that it’s been kind of a lot lower but the multiple on that stock went from [Music] what less than 10 to now uh what does it say 40 times yep I don’t know that these things are always easy to predict um I do think that Buffett probably bought Apple at a time where it was transitioning though from one type of holder to another which is your big opportunities and your big threats of when you know you find something that was an attractive growth type stock it’s no longer and now you find it in terms of quality or whatever things it’s just shifting from one kind of bucket of something to another you know um but yeah it’s a everyone wanted to own Apple at some point just as everyone wanted to own meta you know um and at another point they didn’t it’s hard to remember that a few years ago we’ve talked about that with Microsoft too that’s happened twice probably in Microsoft’s history that you know it was pretty cheap and then it got to a very high price again so it’s been perceived as being really good quality quality um do you have any thoughts on like the momentum factor and how that affects prices I mean a lot of people not I mean a good amount of people response to the FICO pod was was sending us this blog post and um wanted us to bring it up how it seems like a lot of the clows and whatever you don’t think yeah no no I don’t think they’ll stop working it’s the same thing I’ve said with like AI things and stuff even if there turns out to be a bubble in those of overspending gone for a really long time because someone would have to not it’s so far away from the consumer and someone would have to notice it here I mean people if they keep holding the stocks and keep counting them if you count them in your brokerage account 100 times earnings or 10 times earnings the stock and you just go by the market value it doesn’t bother you to own something this 100 times you just say that’s what it’s worth I could sell it tomorrow for that and that’s true um I think ultimately it doesn’t really it’s a difference between frequency and severity here I think people like winning like things going up that they own with a high degree of frequency but the problem with that is eventually that could mean that you have very severe losses for not very severe upside potential eventually and that’s just I just think something’s a lot more likely to decline to 50 times earnings than to go to 200 times earnings but you know um if you look FICO started the year quite expensive and had like I don’t I don’t know literally year to date yeah probably cuz we’re near the end of the year or whatever you could see I mean it probably was pretty expensive and then I don’t know if it was 60 times earnings or whatever it was and then went to like a 100 or something I mean like it went up a lot while it the PE Ratio expanded while it was already at really high level so right um yeah you think stocks tend to overshoot on the upside more than they overshoot on the downside FICO overshot on the downside pretty severely I mean I think when I bought FICO I probably thought it was worth three or four times more than what I was paying or something you know but that means I think it’s worth 60% less than one people are paying now you know so I mean it overshoots in both directions like it traded at 10 11 12 times free cash flow probably it was probably worth 30 or 40 it’s probably still worth 30 or 40 you know what I mean I mean if we mean something that we buy and hold forever now if you mean trying to predict other things that’s a different story that you could be in too early they would spent years I mean if you look there it’s spent what is that um if we look back at what 2000 yeah you have it on that line is like the median or whatever I don’t know what you have on that line but like 20 times basically or 21 times it shows um so it stayed for several years um in the 2000 you know I don’t know 2008 to 2015 almost or something you probably could have kept owning it for a long time as almost a value stock then accelerate a lot more from them but people probably would have been a lot happier if they waited a few years to buy it you know and and have it go up rapidly then they would have felt a lot better than if they owned it for you know long periods of time um where you know it wasn’t doing quite as well but the earnings per share growth was actually pretty strong back then cuz remember they were buying back the stock like we saw 6% the year or something so um yeah I look I I don’t know I mean you can just we can look at that p ratio and see what happened recently and get an idea that a lot of that is just in the last two years or so so but it works and the same thing we see that sometimes with Schiller PE things where they’re you know looking back at the past it seems easy to say oh it was too high or something but if it makes an all-time high in it which it basically has with the p ratio that means that at its previous all-time high it’s gone up like 50 you know it’s almost almost doubled in PE from what was almost like an all-time high before and people were probably saying it’s too expensive at the all-time high before they’d look and say look it’s never been this expensive in 30 years or it’s rarely been this expensive and then it doubles from there mhm it’s a good segue to uh a few emails that uh people had sent in so another question somebody had emailed in they want to know about your piece about how someone should invest with just one hour per day right he said it makes sense he said my only question is if someone adopts this Playbook how will they know what stock to sell when they find a new stock to buy assuming they’re doing no maintenance work on existing portfolio Holdings it’ll be challenging to know when to sell I wanted to get your thoughts I mean you’ll have to spend some time thinking about what to sell um but it’s shouldn’t be that hard you just list what things you own and which you like best to which you like least all the time you know on a pad of paper or something it it depends on what kinds of things you own but if you own Buffet type things and you’re reviewing them once a quarter you don’t need to do more than that you know to know with you own those things that we talk about you know um Mo most all those things I mean most stocks that we talk about on the podcast you wouldn’t need to revisit more than once a quarter um and then it’s just go question of which do you like least and that’s the thing that you sell first you know so basically to have a pecking order in your mind at all times about what you would sell if you had to sell something today now is that based on price or is it based on quality is that like okay I think the irr over this company could like over the next five years is 15% versus other one that’s 20 and I also think it’s a better business how do you think about that in your head uh I mean it has to be based on all those things so it has to be based on both you know price and quality basically um so so for instance you would sell something like f over was 100 times but you wouldn’t if it was you know 20 times or something but then if two things were similarly priced but the quality was different than you know I mean we’re talking about something that’s very different well we’ve been talking about is something that’s very different from say the buffet type approach or something but the approach of someone like Buffett is to say look it doesn’t matter what the market Market puts values of stock at dayto day and I think that’s the approach to use and so if that’s the approach that you’re using you’re just saying there’s a trade-off with price at a higher price means you have to get more from the stock in terms of growth and in terms of those things to make up for the higher price for over a longer holding period so then you can afford to hold it for a longer holding period it can grow into its price and it can still do okay for you if it makes up for that um so with the FICO example that I gave it’s perfectly reasonable for want to think that at 30 times earnings um that it would get Market type returns or something it’s hard to believe it at 90 times and it’s really easy to believe it at 10 times or something so you know it’s kind of like a horse race it’s the odds you know you’re not necessarily betting on the favorite you’re betting on what has the best odds relative to what you think the real probabilities are MH how do you think BFF thinks about in his head yeah what he’s most sure of is doing well enough um so I think we’ve seen that you know look what he’s sold and what he hasn’t sold right so he’s selling Bank of America but isn’t selling American Express selling Apple but isn’t selling Coca-Cola you know so some of that may just be things he’s own forever but some of that is also what things didn’t get crazy expensive and so it’s okay to hold on to them so things that he had a lot of certainty about but also the prices were pretty reasonable and then maybe to some extent things that got oversized Apple’s a rare example of that but normally he wouldn’t do that but maybe Apple got so oversized that he’d be willing to trim it which is not something you would normally do so that’s the other thing for people to consider is you might have things that you want to trim if they get to be an unusual size of your portfolio and people make that decision based on how much diversification they want how many different stocks they want to own and everything um but so should you spend a couple hours you know on stocks you already own Maybe but I I don’t know if you need to spend more than you know five hours a year what we’re just talking about if you’re spending about an hour a quarter or something on it if you have a few stocks you could spend a lot more time on it and that would be fine but if you want to own 30 stocks or something then it’s going to be hard to do that I think that most people’s time would be better spent mostly focusing on finding a really good new stock to buy and not so much worrying about selling the things they already own we just talked about stocks that are at really extreme prices that doesn’t normally happen normally you could buy a f go hold it for 10 years and it never get to a ridiculous price you know so you make the right decision one time and it’s okay and you don’t have to worry about it I guess you can worry about things if they’re in the triple digits and stuff you made all the right decisions but the price got too expensive you know then yeah you could worry about a bit more but for most things it’s not going to matter that much and if you own 10 or 15 stocks you’re not going to have to worry too much about that constantly evaluating you know price versus where they are now I think your time for most people who aren’t like professionals would be better spent finding a really good new stock to buy than worrying too much about what they already own um just cuz you’re already owned thing is always focused much more shortterm to be honest you’ve owned it for a while and so you’re always looking at really shortterm what’s the price now what was it before should I sell just like it creates too much action that you’re doing just because things have changed a little bit because you know it so well and you kind of have a tendency not to be able to see the long term when you actually own it um you see too much of the period by period kind of results what about the thought process of what you don’t own can’t hurt you so if you do own something in the portfolio and and maybe is it just the nature of what you know the companies you focus on if you’re buying high quality businesses they probably don’t change as much asset growth or competition is probably a lot less than other companies I mean how do you think about that yeah I mean if you bought Cinemark and 150% or something then obviously yeah you should think about should I sell it have things changed a lot or have things changed because during covid or something I mean you know you want to use common sense about those things so obviously you would revisit things during Co about Airlines and movie theaters and whatever because suddenly there was this big change in the business that you weren’t expecting um there’s nothing wrong with you know selling something quickly after you buy it because the world’s changed a lot or because the price is changed a lot so it’s totally okay to quickly turn portfolio mhm to to toally turn over portfolio if like something like Co happens or if something like a stock goes up 100% or or something like that and the same would happen the other way there might be a stock that you think oh I’d really sell this and then it goes down a bunch and then it doesn’t make sense to sell it you know for it to be the top thing that you would sell so I mean these are the idea is if you really only have like one hour a day that kind of thing which the idea of the topic was of this that is what the post title was if you hour a day yeah and the reason for saying 1 hour a day is because everyone should if they want to do this have one hour a day that you can do if I said you have to have 4 hours day then some people would say well then I can’t invest my own money and everything but people can find one hour so yeah I do think that the vast majority of people that I’ve talked to would be really better off if they just worked really hard to find the next best new idea and the reason why they sold was simply to make room like if they just said I’m going to have a 12 stock portfolio or whatever and the way that they sold is that they really really wanted to own something new so they had to bump something off and that’s how they decided to do it that would probably work better for more people than deciding I’ll sell to hold cash or something and then you know and spending a lot of time selling a lot of people spend a lot of time thinking about the things they already own you know instead of finding new ideas so I I would discourage people who don’t have a lot of time from doing that you know don’t spend as much time worrying about the portfolio you already own spend a lot more time worrying about and finding something new that’s really good if you only have an hour mhm if you have a lot more time though I would still spend a lot of time looking for new things but yeah you could spend some time reviewing your portfolio that way but I do find that most everybody has a much more short-term focus when looking at things they already own because they’re just looking at the rates of change of they they know they forget how much they know and stays the same but a lot of things stay the same and when they find a stock for a first time ever they can take kind of a longer term view than something that they own and they’re really worked up about how it’s changed while they’ve owned it and they kind of see more change in it than really is it’s a lot easier to look at the long term for something that you’ve never owned before you know I guess it also depends on the type of company you’re investing in if you’re investing in like a Costco or a Wing Stop or a FICO where again like it’s not like a cyclical business you know where you’re like okay there are Cycles to this and this thing will have you know more challenging times and you kind of want to pay attention to to capacity and all that other stuff I think it yeah I’m being very simplistic in this it would make a ton you might want to be looking every week at an Arbitrage situation spending hours on it yeah but that’s CU things are changing all the time there’s new information that really might move the stock you know you just have to kind of think that way how much how much really is there that could change about Costco other than big changes in the stock price from quarter to quarter other than very big changes in the stock price there’s not a lot that should be making you decide to buy bu or sell you know agreed yeah so another question so if people listening want sending questions email me Android Focus compound.com somebody asked kind of more on what we were just talking about how do you think about valuing a cyclical business the traditional DCF mindset when valuing a cyclical is tougher because the numbers can be all over the place especially if I’m if I’m around the trough or the first few Innings of a new cycle should I simply think about what a business can earn at certain points in the psycho and throw multiple on it should I just buy below replacement value and wait for the cycle to change sometimes I feel like it’s hard to put a numerical value on a business but I know that if I’m buying something at trough earnings or way below replacement value and I expect the industry to come back to life that can still be an interesting situation to invest in sort of like buffi ISM of not need to know someone’s weight to know that they’re fat do you agree with this how do you think about valuing cyal businesses after industry has gone through a downturn long question um yeah I think one it’s going to be it’s tough for people because it’s always going to go way past what you’re thinking you know not always but it’ll probably go way past what you’re talking about with like should I you know pick a earnings that I think it’ll hit and throw a multiple on it for a cyclical business that could be way way off so you’re going to have a number that’s off for what it’ll be a few years from now and so it end up that you think that you should sell at $10 and the stock goes to 30 some dollars but actually it does that on pretty low earnings the tough thing is that Peter Lynch type comment which is true that the cyclical business it may be expensive when it actually has a low PE and cheap when it has a high PE because the earnings are almost nothing at that point so that’s going to mean that you should look at things like Book value you might also want to look at things like sales things that are different places in the um uh besides just looking at earnings for things that we can value commod type things on you know measuring the capacity and all that if you really understand that as well as other people in the industry which can be hard to make that evaluation then just appraising it on what that’s worth might be a really good way to do it but you would also need to evaluate its financial situation and if the industry is going to go away you know you kind of have to say Okay this is an indust so you know take an extreme example like steel or something Steel’s not going to go away so you would say okay am I sure this business is going to survive and then yes you could use like replacement value and things like that and there are people in the industry who know that kind of stuff and would say if you’d have more confidence if it was much cheaper to buy this business than to build what this business has I’ve mentioned that with supermarkets there’s some where it’s like they’re pretty cheap compared to other things and it would be hard to replace what they have now you lease it and then use you spend a bunch of money and stuff but so I mean some of them own their real estate but it doesn’t seem like it’s quite the same thing but it would give you much more confidence if you say okay I think it always gives you more confidence if you say it’s hard to bring in capacity that would be profitable at a lower price or something it’s hard to replace that that you’re getting something cheaper um but there are Industries where you might wonder well would anyone should anyone have ever bought this is it misplaced is its location bad for instance that’ be the most obvious one it could be out of date technologically or other things but you know that the most obvious one would be like just not good location and this isn’t where people would buil it today you know and then maybe it’s not worth what it was originally bought for or built for what’s the most cyclical business you’ve ever invested in ship building related probably okay yeah yeah mhm cuz a lot of to spend time there and is MHM yeah and I think there’s times when they’ve been attractive I wouldn’t rule out cyclical companies necessarily yeah it’s the same thing we talked about before though you have to kind of apply a discount to cyclical companies versus other kinds of companies if their average earnings of the cycle are lower and people tend to overestimate that and think that they’ll own pretty Aver it it’s much easier to achieve your Returns on Capital goals at a much lower cyclical business than a higher cyclical business because the reason why business is highly cyclical is because there’s some degree of miscalculation by some people in the industry otherwise you know it would be pretty efficient and they’d all figure out what they should be doing and there’s no mismatches and these shortages and and everything would and happen in the industry so there’s some misallocation of capital in a cyclical business to some extent but it could be in your favor at sometimes that there’s not enough capital in it as there should be or something when you get it um so I I think we’ve brought up CLE businesses from time to time you know um but we brought up Seaboard or something in that was point it had like no earnings so that’s why we would bring it up um I’m sure we brought up oil things or something like that at times where the price of oil wasn’t particularly high or something so you know use common sense in those areas but the time to buy into something often might be when it doesn’t have a lot of earning but it looks cheap versus assets yeah replace value you think industry is going to come back or that’s why I like it I mean when they go through a downturn people just get hosed and so it’s like if it’s if capacity comes out or they scrap stuff then there’s less of it and then when things finally start to turn um prices day rates whatever could be higher and everyone in the industry just been hates it those could be great opportunities there’s also different kinds of cyclical businesses I guess I mean the big problem with some cyclical businesses is they only this is kind of the definition of a non-franchise business a true commodity business they will only earn high Returns on Capital in years of like a shortage of unusual things in the industry and that happens even in technology things that we’ve talked about semiconductor things where they can go through long periods where they don’t have very good earnings it can happen with um what do we talk about AAR presses Metals is a good example something that like it doesn’t sound as commodity like as something else but gives you the same idea where there’s the tightness of Supply you saw that in some covid related things if you remember there were those like um protective gear type companies and things like that where okay so you can see what the longterm history is but you can always see that yeah if there’s not if there’s too much demand and not enough Supply in an industry then almost any business that doesn’t sound like a great business can earn really high returns when we talk about what a great business is it’s the ability to earn good returns even when there isn’t some industrywide shortage all businesses are capable of like passing the magic formula in the right year for their industry if something strange happens and there’s there’s a shortage in the industry which can happen in basically any industry yes so you can see there they went through like a decade or something where their returns were you know mediocre and then they make all their profits in a period of a few years but if read about what the company is and what they do that’s not that surprising you know um yeah I think the pitch with AAR is they’ve Consolidated they’ve acquired a bunch of other stuff so if there’s ever that speculative boom or the industry is different they’re going to benefit better from it or something like that yeah and something like this would just have a bigger balance sheet and be way Bigg we’ve done that with steel companies and things too they won’t go back to where they were before their Returns on Capital could end up getting a lot closer to where they were before but they’ll have so much more Capital that it’ll still work out for you um you know they’re not going to go back to the same earnings per share that they had some years ago but there’s also just more Capital they’re like their Book value and stuff will be a lot higher than ever was before you know yeah it’s easier to to own the fos but it’s more fun to own the the steel company shipping business yeah I mean uh Amar is back to almost one times Book value or something like it’s not even at a premium to book right now I think is what says yeah and it’s up a lot from where it was before so obviously Book value went up a lot we could check the key ratios to see that cuz I think it has tangible book there it’ll give you an idea of what I mean that even if it goes down to where it was let’s see yeah so if you look it went from T So tangible book you know I don’t know if they issued Shar do they have per share Book value yeah they have per share Book value so it’ll end up being about four times higher than where it was probably right tangible book not quite as much okay but you know so if it goes back to having the same returns that it had once before you’ll still be doing a lot better because you have so much more Capital invest in the business if you owned it from back then um MH I mean I think those things for most people are easier if they own like you know if they can find 20 of them right because then they don’t have to worry about it they just buy things that will make a lot of money if they ever have tight Supply because I mean at some point it would be hard to predict that it was going to happen you know in this case there’s like a covid related thing that’s not the only Factor but um it could be hard or you have to you know Discover it once it’s happening um so I think it’s hard for a lot of people because you could sit for years the same argument probably made sense in 2015 as 2020 with this company and so some people people were in it and doing well in a year and some people were sitting around for 5 years before it started to do well mhm I think the pitches is that like shipping companies or like Seaboard I mean whether this is true or not I think it those companies are harder to Value than probably like a FICO that’s in like a Ste State yes yeah I I agree with that but then also that would make perfect sense but the weird thing about FICO right is the extremes yeah it overshoots like crazy that’s be I don’t know I think that’s the theme though of just the market in 2024 2025 in general just the way that the market works now is that you’re going to have extremes I mean think about that we talked about on the podcast but I listen to a podcast where guy worked at Citadel he said look if if we own something for eight months nine months and we were down on it or didn’t move we cut it because momentum was such a big factor people selling or buying for just reasons that are so reflexive non-economical reasons basically and that’s reflexive so that’s why I think when people ask has Market become more efficient less efficient I think that’s the answer is that you’re just going to have more extremes of overshooting of undershooting and as an investor I think that’s a pretty good opportunity for you you know yeah I do you think though that like 20 years ago there was some pretty big extremes too so I don’t know how much of it is a you know back 25 years ago the.com and everything so I mean you know let’s see how far do these charts go back they go as far as you want them to go okay so if you pull up like micro strategy is a good micro strategy is that what I mean yeah try that one the Bitcoin one all right well yes bonds by Bitcoin basic a bet on bitcoin going up forever well but that’s not what it’s always been it’s whole history and if you go all time I think you’ll see something here go back that far no it doesn’t go back that far yeah it does okay all right so you can barely see that on the chart then but it was once at a very high price there you go that chart’s good yeah so it you know it took 20 years to get back to the price that it was at in the 200000 boom so you know these things do happen um you know FICO we couldn’t quite find something as extreme in its past you know but we did have a point where it was really cheap so it’s easier to come up with that where you can’t find another example in the past 20 years tell something like that happened it’s rare for it to happen in the exact same stock like this that’s unusual uh Nvidia I mean it’s so much bigger company now than it was then but you know something like that you can find examples where had a really high P multiple or a high whatever and then didn’t for decades and then did again um so I I really don’t know it’s hard to say things got a little crazy in the 1920s and some stocks they they got crazy in 2000 so I don’t think it’s like a completely new thing um I think the biggest issue has been the length of time for people but you know it outside of Co and some other things I don’t know how tight Financial conditions and stuff have been all that often so I don’t know how hard things have been tested there there’ve been a lot of months of some expansion in the economy and everything so I think it’s just more an issue of like the consistency of it rather than the extremes it we did cover some extreme stocks but been extreme things before too I just feel like the length of time that it’s lasted is more like when we talk about Fang or something like that is more people saying this has worked for years and years you know got it cool well I want to thank everybody so much for tuning in with the both of us on the focused compounding podcast if you have a question you would like for us to go over email to me at Andrew Focus compounding tocom if you’re watching us on YouTube make sure hit the Subscribe button you will be notified whenever we upload a new podcast and of course if you’re interested in learning about our Money Management Services you can reach out to me at Andrew Focus compounding docomo much for all the support and we will see you in the next podcast take care

Description:
00:00 Introduction 01:30 Initial reaction to the letter 05:00 Errors 16:30 Pete Liegl’s story 25:42 CEO selection 28:00 Last year’s …

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 the best way to do that is to follow me on X at Focus compound if you want to get access to investment write ups from Jeff going all the way back to 2005 go to focus compound.com click that blog section and you’ll get access to all of that if you’re interested in learning about our Money Management Services you can reach out to me at Andrew Focus compounding tocom so today’s date February 26 and around this time every year we record the same podcast and that podcast is going over Warren Buffett’s annual letter to shareholders so I’m going to pull it up right now on the screen can you see that Jeff yep perfect and we can go through it uh give our thoughts talk about it and go from there so I guess what was your initial reaction or your first pass what was your uh original thoughts or just thoughts in general about this letter well have I haven’t seen any um reactions online or anything like that um I read this I guess when it came out so Saturday morning yep um and I probably saw something right before then you know uh things about what might be in it you know so whether it’s CNBC Bloomberg uh whatever things you know like to cover that stuff of what might be in it and of course most of that stuff probably isn’t really going to be in it um right why they think he’s going to explain why he’s selling things down and his opinions on the market and things like that yeah um I thought it was good I thought it was interesting which things were chosen to be put in there and then I thought there were a few interesting uh sentences or things that are big you know new sorts of things I guess um yeah that are um but they weren’t like highlighted out as big sections for that um there were a couple of them that was my thought process to I’m like wait this is he he’s kind of making a big statement but saying it in a few words and it would just be at like the end of a paragraph where he didn’t spend a lot of time talking about it it was just like a single sentence I would assume that things that might have gotten attention from people or at least for people interested more in Berkshire than just you know uh Market things would be he talked about how it won’t be long before he’s replaced as CEO and will and Greg will be writing the letters he mentioned uh his Cane I believe and you know balance type issues basically with that you know getting old and um he also uh mentioned changes to the format of the annual meeting in terms of time and things like that I would think those three would be kind of you know they’re all in separate parts of it but those are kind of transition type talk yeah no that that caught my eye too obviously when he was talking about how uh Greg will be writing these soon and so I didn’t know if he was just saying like yeah I mean factually I’m 94 years old he is going to be writing these soon or was it more literally like no he’s going to be writing these much sooner than people think yeah I mean he’s about 30 years Beyond normal retirement age at this point so yeah what about uh markets I guess just what were your one sentence big takeaways or big hits that you think he threw in there and I’ll give you what I had jotted down uh well so this isn’t necessarily about markets he has the the big section which is mistakes you know but normally when he’s talked about those he’s talked more about what happens at birkshire and doesn’t make a lot of commentary about the fact that other companies don’t talk about that but he specifically called out during the 2019 2023 period and made it sound more like companies not saying anything negative for you know the last five plus years years or something um and let’s see he has a sentence during the 2019 to 2023 period have used the words mistake or error 16 times in my letters to you many other huge companies have never used either word over that span and then he calls out that Amazon did have very candid observations in its 2021 letter um I think that that you know um he made he connected that idea more to the time period that we’re in I think more so then um just saying this is something that we do at Burkshire and other companies don’t and you know what shouldn’t a letter be and all that he talks about that in the beginning with the responsibility you know the report part of it um and then I also thought I mean that’s the big one there was also some commentary that you could take more as like the future bash the government was one that I took that was a big one when he was talking about like um he’s talking about like maintaining a stable currency and then something about spending the tax money wisely because B obviously paid a huge chunk that was an interesting one because I saw um something where someone said he was critical of trump or something by saying that but actually he’s critical he’s equal opportunity critical even in that one sentence and it’s not even clear that he’s not critical of the um not critical but reminding Republicans Democrats and the Federal Reserve all at the same time if you read that entire thing together he puts together a few things let’s see um yeah that’s where he talks about bonds that you have highlighted there but where he talks about the responsibility for spending the money um uh let’s see yeah so he says those last three sentences spend it wisely take care of the many who for no fault of their own get the short straws in life they deserve better and never forget that you need to maintain a stable currency and that result requires both wisdom and vigilance on your part that’s not criticism of one particular party it’s not a criticism of Congress or the Federal Reserve of the president alone it’s it’s he put all those things together there’s no there’s no party that has as a platform all of those things yeah uhhuh I mean that’s that’s I literally copy and pasted that last uh this whole section for my notes because that was I was like huh he’s kind of you know bashing the US government a little bit I don’t know bashing but just like calling them out like hey spend it wisely stop being I mean he’s talked about I mean last year he talked about deficits and I do think that is something that he’s been more vocal about in his own way uh the past few years which everybody has but for somebody that doesn’t typically criticize or you know he did say you know criticize uh by category by group not by any individual I think yeah he is kind of worried about those issues MH and the stable currency part especially that is something that he was more critical in some ways you could say or more talking about um issues that had a political aspect to them economic issues if you read the 1970s things and um for the most part he talked about you know uh 1980s through 2000 or so he talked about maybe trade deficit widening and you know things like that and he always talked about that the trade deficit was more an issue than the fiscal deficit but he talked about those to because they did have some of that over that time period but there was certainly everyone was focused on having a stable currency in the 80s 90s and 2000 um it’s really since just the financial crisis that that’s become not a concern really um or I guess you could say since the.com bust I mean it’s it’s hard to say but um so I mean but even now I think I’d have to see but I think fed funds and stuff is lower now than it was when they were trying to slow down the housing bubble so um and I don’t know that inflation is a lot different so um things have gotten a lot looser in terms of government spending big time since covid especially um to some extent even just from after the um Great Recession and then the Federal Reserve stuff too I think um you know so those those have been not so good numbers lately and everything so mhm I just controlled F because I did notice that he he spoke about Charlie a lot so nine times he wrote his name in the letter which I thought was great uh so still carrying obviously Charlie had a huge influence on not only Buffett but B Burkshire and kind of carrying those principles forward was nice to see and he did address the issue um of people thinking that he’s selling all his stocks to get into bonds kind of thing by both saying you know they that’s not where they primarily want to be because of the the risks of inflation over time you don’t want to fix coupon um but he also did it by kind of confusing the issue that gets covered in the Press which is look we own businesses and we own stocks and they’re both equities and so our actual allocation to equities is really big um and if we own uh railroad uh uh electric utility uh Geico you know that’s the same thing as if we own stocks um you know like like apple and and um Bank of America which they’ve been selling down so I wanted to kind of go Section by section and get your thoughts I mean you you had spoken about uh the error uh part where he had talked about basically people they try to hide from their mistakes and Buffett I mean he says it best elsewhere it has generally been happy talking pictures when he talks about these letters and just annual reports in general just communication General why is that do you think like what is that from like a psychological perspective why do you think buffit is so open about mistakes whereas others just aren’t because I feel like if you’re really open about mistakes people probably are more forgiving of them over time you know what I’m saying yeah um I think there’s well maybe like four reasons but um one is that he’s an investor you know that’s always his background even when looking at as a business owner everything and so he’s always come affirmed from that perspective and most CEOs and everything have no background on that side of it so they’re not going to care as much about that and not going to understand things the same way they’re going to think about the short term and the the the way that it looks right now um he has effective control of the company for a long time you know from the beginning certainly and then over time he had built up a reputation so even as he had less shares and everything um you know he was associated with so strongly uh that he could treat it that way and then also Focus much he’s more psychologically oriented um in understanding his own thinking and everything which I think is also an investor thing where most CEOs aren’t so CEOs generally don’t understand the investor side of things so they think that by maximizing your kind of short-term image that’s the best way to go but he knows in the long run that’s not so good because eventually you’ll disappoint people you’ll you know it just won’t work you can do it for a few years but it’ll you know make it worse in the long run he lived through the conglomerate era and all those things and doom was similar too um and then also I think that related to that is he’s much more worried about how things affect his own thinking that way and that talking about mistakes is the best way to deal with that on your own thinking because you can’t go and talk to the public about something without eventually starting to believe some of those things yourself and so that’s his last sentence there and that’s a Charlie Munger and him sort of thing that they both agree on they’re much more um they have a much better understanding they they had a much better understanding of themselves and analyzing themselves like being able to stand apart from themselves and rationally analyzing their own behavior than CEOs do CEOs are generally not real good at understanding themselves as a group they’re probably worse than than most um human beings uh the people who get to that position and everything so you know that’s the looking from the inside out that way at yourself almost as if how am I making decisions what affects me and trying to not do those things so saying certain things in public all the time is a issue I even think that’s some of the things about stocks it’s not just that he’s afraid of people copying what Burkshire does or something it’s also that if you say too much about stocks um it’ll affect how you behave later you know if you never said a word about Coca-Cola might he have sold it in uh 2000 or something yeah maybe but if you talk about it for a decade or something talking about how great it is it’s always hard to reverse that when it gets out of control in price you know yeah he writes and he he was talking about Greg uh but he also understands that if you start fooling your shareholders you will soon believe your own baloney be fooling yourself as well yeah and that’s a really big issue and that’s also one that maybe there’s a few different reasons why he might focus on that it’s something he says all the time but I also think one the transition to reinforce for people what things will stay the same with Greg the reporting and all of that the attitude about it and about shareholders and their ownership of the business and what you do and talking to them but the other part is also we are are living in a time right now as we did like I said in the 60s and the uh late 90s today where there’s not you don’t hear a lot of people talking about risk you don’t hear a lot of companies talking about mistakes uh you know it’s just it’s that phase of things you know or has been for the last few years where it’s all um Rosy projections and and talking about things that way so it’s a little even more extreme than normal yeah about Greg he said was talking about myself at 94 it won’t be long before Greg replaces me as CEO and will’ll be writing the annual letters yeah so uh what’ you think about this uh Pete story did you know of this gentleman not really no so this is Forest River um I know the other one better that he talks about later was there associated cotton shops yeah but he really did not talk much about the manager of Forest River ever and I don’t know how much attention forer ever even got as a company inside Berkshire why do you think he shot him out in this letter um I mean well he died you know so within the year so it would be an obvious one to talk about but he doesn’t talk about every manager who dies um by giving them more than a sentence um I mean it’s it’s a great story right he decided I didn’t want to make more than my boss I mean Buffett iCal fashion he didn’t check his valuation work they just kind of sounds like made a deal over a handshake and had a great working relationship and then also Pete did phenomenal yep and he does also talk about you know we get some insight into how compensation probably works at Burkshire because he says okay but if this is Burkshire this is Buffett talking to Pete um okay but if for Server makes any significant Acquisitions we’ll make an appropriate adjustment for the additional Capital but what he says is that they didn’t decide on what that would mean appropriate or significant you know the vague terms um so he’s talked a lot about how they don’t get into a complex contract things that way but basically saying that you know he’d be paid based on a percentage of earnings which has been employed by lots of different companies at times um pretty effectively sometimes um but with that um you know he it was always the kind of return on Capital sort of thing um that if they put you know they acquired other things that he he wouldn’t keep making more money just because of that or have to be adjusted for that fact so you know the part that’s interesting I feel like there’s a good amount of stories similar to this where there was no contracts two people that trust each other done over a handshake and you just don’t ever hear a story about Buffett having uh like a contractual dispute with one of his managers or anything like that you know what I’m saying and and why do you think that is I mean to me it speaks to Buffett’s ability to size people up and get into business with the right people and avoid getting into business with the wrong people but you know I mean I’m sure you hear all the time of oh maybe in your I don’t know your personal life but more so just like in passing or people hearing about it like oh they they jipped me out on my bonus and I’m upset or oh I think I should have got X and I didn’t get X and it seems like you know Buffett with the managers that work for birkshire the companies that they acquire it’s almost like it’s just they’re both like rowing the boat in the same direction and there’s a lot of trust there and they just it’s just way different than Corporate America you know yeah I think I mean they did have a big dispute with what was it um Pilot Flying Jay um it was the yeah and that was because the could that been a fraud thing is that little different story you think I’m talking like person to person or I think that it also had to do with the transition between two generations in that case but I don’t you know that we didn’t that court case that never it got settled right before the trial was supposed to start so it was never all revealed what was in there but basically the accusation was that they employed certain things to um pump up what the payment would be and I know that there was a case in the reverse case where soal um was the the people said that you know he was doing the reverse thing trying to push down the price cuz was like in both cases kind of an earnout type thing those are always dangerous that way unless you do like an average of a few years or whatever things you know and that’s actually the kind of the danger of it being too decided by contract that way because you write something in that way into a formula that you’re locked into and you could imagine the problems that causes what if you had an earnout that it happened to expire in uh 2020 when Co happens um someone’s going to say we have to revise this contract or Sue or something right so so you can never put in a contract everything that could happen right um the other thing is they’re selling to him right so that is definitely part of it he has to valuate the person but it’s also effectively he’s getting control and everything which is a lot easier right if someone like sells and then you have control in some way and then you can be trustworthy in that respect and um the other one is they tend to buy from individuals or people who can make the deal some sort of control thing that way and the ones where they’ve had the most problems are like public companies or things whether the deal would actually close and you know so there’s committees involved in that there’s all sorts of things and like that can complicate it there was even one where you know they wanted him to bump up the price the investment bankers were pushing it to bump up a price and you know he said I gave him 25 cents more per share than I would have normally um you know where if they might have asked for too much and then the deal wouldn’t have happened right and that’s less likely in the case of personto person you know cuz the board or something might say well what’s the harm in asking for the 25 cents or something you know or for a dollar or whatever but he might say okay well then you’ll come back asking for this and that I’m not doing it and go away whereas a person can kind of gauge what will make this deal happen or not and be like no we’re we’re not risking a whole deal over this small amount of money um he’s pretty good usually at knowing the motives I think for someone selling you know like in the case of Illinois National the bank um it was basically that they could get a better offer but the guy running it would have walked because he would have been annoyed by other people um and so he said basically I’ll keep running it and you can sell it to him for not quite as good a price and of course they didn’t have someone else to come in and run the bank that they thought would be as good and everything and so you know that made sense to him that he understood that kind of was key to the deal right um but even these if the the person dies or something I mean he’s talked a lot about how he needs to find people continue to run it in this case he had someone with Forest River who was what probably 60-ish at the time he sold and kept working until he was 80 yeah so he 19 years yeah and so there were several deals where they told him I’m leaving in six months or something and then they stayed on for a long time if someone leaves immediately that would be tricky right and if you have he also just knows that if there’s too much stuff in the contracts it makes it potentially a lot worse and he said about the due diligence things which I think is absolutely true um there’s lots of problems with companies that quote unquote didn’t do sufficient due diligence that is they made a bad deal because they didn’t understand some things but it’s never been I mean not never but in the experience of looking at all companies that Acquire other companies it really isn’t oh here was the problem with this lease or that thing or this um you know the things that they go through with the properties each of them and this and that about and everything it’s that they made a business misjudgment or it could be a person one but that’s fixable once you buy the company but a business misjudgment that goes way beyond that right so like when he didn’t ask for an inventory um thing when buying um a Nebraska Furniture Mart he’s just judging that there’s nothing way out of line that he doesn’t you know think and he can see the store he can walk around he can talk with her you know all of that so yeah I mean I mean it’s not going to matter if it’s off by a small amount what matters is if there’s some big surprises that you don’t know going into it um but there have been some disputes like I said with the public company thing right Clayton Holmes other the shareholders there who weren’t the family didn’t want to sell out they felt he was getting the bottom of the cycle um and then like I said Pilot Flying J they had issues there too so it can happen and there’s been some Jud of people issues I guess sometimes um you know you could say with due diligence and all that stuff Jen re he probably relied too much on their long-term past record and not enough on like how much things had changed right so that’s something when you’re familiar with a long time but he has a really really good record on those things um and even when there’s been big mistakes it’s not from usually misjudging the person not from anything that could have been protecting a contractor due diligence it’s more like a overall assessment of the business when he talks about railroads and you utilities you know utilities especially with the fires and all that that’s about the liability risks in society from that you know and and regulation risks well that’s public knowledge that anyone could have made a judgment on that those are the things that really mattered in those um you know and then like uh you know he said Precision cast Parts was a problem and that was his he said there’s they haven’t done anything wrong it was just his Mis assessment of the of their position and everything basically another example of Buffett and how he thinks which is truly long-term um he says our experience is that a single winning decision can make a breathtaking difference over time think Geico is a business decision a g Jane as a managerial decision and my luck in finding Charlie Munger as a one-of-a-kind partner personal advisor and steadfast friend and I like this line mistakes Fade Away winners can forever blossom just just the thing of compounding right and that’s the best description of what’s happened at Berkshire because I you know he’s talked a little bit about he doesn’t want to call it out but it’s not like their batting average is tremendous in terms of um Acquisitions either in stocks or in um wholly owned businesses it’s good it’s really good uh there’s not a lot of big mistakes where you lose money those are incredibly rare but it’s not that he’s been able to find um dozens of businesses or dozens of stock over the whole career it’s that he’s you know had a good batting average with the occasional home run that gets held forever and so that compounds in a really nice way and that’s T you know the mistakes are tended to be smaller deals and then he starves them of capital and everything so they don’t become worse you know it doesn’t dig into a worse hole that way and that’s been the Burkshire secret that it is carrying this weight of some not so great businesses over time but it doesn’t matter because they become a smaller and smaller percentage they’re in like the other C category you know um over time that becomes a footnote because of the success of the big businesses like Geico um you know and then he talks about CEO selection and how he never looks at where a candidate went to school and he says Never explanation point he talked about basically like the spectrum of it uh Bill Gates who dropped out of Harvard obviously one of the best schools in the country and then Ben Rosner um who he says was a retailing genius and never went past sixth grade yep yeah and he says I was luck enough to get an education at three fine universities and and I avidly believe in lifelong learning I’ve observed however that a very large portion of business Talent is innate with nature swamping nurture yeah that’s interesting that he says that I think that’s 100% true and I’ve noticed the same thing but I think people went like to say that um it’s something you can’t change most of the skills that are necessary are you know very early personality skills drives things like that you know um you read the Les Schwab book right um you know or Sam Walton or any of those things and those are not unusual and the thing even with the really good schools sure a bunch of people went to a bunch of CEOs went to excellent schools although in the United States I mean outside of tech things and stuff there’s probably as many Big Time CEOs that want to like you know University of Texas or some big state school or something as went to any Ivy League school um which is not true in other countries I mean if you look at most other countries they all all the CEOs went to the same school basically um you know smaller countries in Europe and everything um but it’s also that which I think he would know and Charlie would know if they’re amazing genius individuals at an early age in the United States they could probably end up getting into good schools and the school didn’t provide anything that helped out that way um so you know if Bill Gates could go to Harvard graduate from Harvard and um found Microsoft he could drop out of Harvard or he could just not go to Harvard and probably the reason he was at Harvard is because of things that already existed in him before he got there right and probably that’s more important to his success later on than his time at the school so it’s kind of it can be a a stamp of approval but it’s just approving what you already have as an individual before then you know he goes on to talk about last year’s performance and again bringing it back to what did he say about this quote uh mistakes Fade Away winners can forever blossom so this idea of like compounding and how over time um the winners really make up for the losers he says in 2024 Burkshire did better than I expected though 53% of our 189 operating businesses reported a decline in earnings I thought that was a really good line that’s a very great line talk about it and I was like is this more of a barometer on the overall economy yes because obviously Insurance did great right like knew everyone knew insurance was gonna do good um and that’s such that’s I mean one of the main businesses at Berkshire but when I read that I’m like oh I think that’s more of a a pulse on the US economy more so than anything yeah and I think so this gets into like the reporting and stuff because if you just read this letter there wouldn’t be a ton of things saying that um Berkshire had a really good year in terms of operating earnings right um which is the metric that they want people to focus on or their reported earnings basically which other news sources will talk about and say how great it was so you would expect a letter that’s really optimistic and talking about how great the performance was and everything and he doesn’t go into that at all which is also helpful if you have bad years in other periods that he doesn’t make a big thing like we were the ones responsible for why things got so much better and we can continue to do this you know um because a lot of it is you know some of it cyclical things for instance Geico’s improved um in terms of its relative performance but it also is just that insurance has gone through a better period and insurance is Big to Burkshire and then the other Factor that’s really big for Burkshire is um short-term interest rates increased and they hold a lot of short-term um uh treasuries yeah he says we are aided by a predictable large gain and investment income as treasury bill yields improved and we substantially increased our Holdings of these highly liquid short-term Securities but then it’s good that he goes on to talk about like so last year’s performance you know so for instance Geico I mean he doesn’t break out Geico’s there’s the full annual report and there’s other reporting that you could figure out Geico’s things but they have insurance underwriting Insurance investment income a lot of companies that are just Geico and if if Geico was a standalone company it would look most like Progressive would be talking about how great the results were and all these things and you know he says basically uh in was a leld gem that needed major repolishing that Todd’s worked tirelessly in getting the job done but it’s not complete so the Improvement was spectacular but he doesn’t talk about it in much more than that and a lot of people would say a lot more than that when talking about it because if you just look at the percentages you know the I mean I don’t know I’d have to check but underwriting and insurance investment income probably went up I mean it could it wasn’t 50% but it could have been 30 40% um results from those which are huge increases so most businesses that have their earnings jump 30% to more would be talking about how great they are and that’s not exactly what he did yeah I was glad that he wrote about Todd combes and Geico in this I wonder if he would because I knew insurance is obviously it was a great year for insurance but we would always talk about in the podcast how Todd Colmes was sort of like it was like almost like I don’t want to say a secret but it was just kind of like oh yeah Todd Colmes is running Geico and then you just like never heard anything else about that um so that’s nice to hear that that uh Geico is doing great what do you think about this one berkshire’s Railroad and utility operations are two largest businesses outside of insurance improve their aggregate earnings both however have much left to accomplish is that just Buffet just saying you know we got to always look to improve what do you think I mean what does that look like you just continue to grow I mean what is it I don’t think they’re great businesses I think they’d have been better off if they never got involved in Utilities in railroads probably I mean railroad was a really good deal deal and and it’s done well for them but it takes up a lot of capital it’s a huge portion of Berkshire overall now and it’s going to be under new ownership the same thing just because the deals were so big so I can’t think of any other areas of Berkshire that are so big and that have you know I I think modest type return prob possible for the long term in the future you know um so they’re some of the least good really really big deals um you know they’re not as good business is Geico or something really probably for the long run but we’ll see I mean railroads were for a time and and BNSF was and everything but uh I don’t know if that’ll always be the case in the future they’re they’re highly regulated and take up a lot of capital so um they were getting a lot of improvements but you know the period of the golden age of investing in them had really low inflation not a lot of concerns about the regulation of them um like that they were over you know that we should regulate their earnings more basically and um then they were having all these actual improvements in terms of physical efficiency and everything like they were just becoming more efficient you know take the railroad for instance so you know in the two let’s say from 2000 to preo or something um that period would have been really good for railroads versus trucks and all that but since then I I don’t see the future necessarily looking as good as the past um it’ll be not as great if there’s a lot more if there’s a lot more oversight from society government Etc and if there’s a lot more inflation and just if Capital costs are a lot higher too to some extent because that’s actually the only ones um well no there might be some mortgage thing or something but that’s one of the few areas of Berkshire that would actually be borrowing on their own borrowing ability those are not General Obligations of Berkshire BNSF issues its own debt so it talks about 47.4 billion in operating earnings in 2024 that’s the measure that they constantly write about on how they Benchmark themselves and how shareholders should think about it our Horizon for such commitments is almost always far longer than a single year and many our thinking involves decades um so again hitting on that uh thinking about Berkshire from an operating earnings perspective because of how Gap accounts for swings in the portfolio MH yeah and as you can see there where they break out the big businesses they they all mostly look better and then the smaller ones the other controlled non-controlled don’t look as good and so that’s why he was able to say that most businesses didn’t have a game um in earnings from year to year but their big ones did and insurance was huge and then Railroad and energy were fine uh energy was good um so you know if the really big units do well then obviously their operating earnings do well and the focus has shifted to that as opposed to remember years ago where was Book value and all that so this particular measure makes it look even better for Berkshire this year than it what if they use the old Book value measure from years ago you know but they all work out in the long run pretty much the same stock price book value operating earnings probably won’t be wildly different over time so taking a Victory lap as he should on how much uh they paid in in taxes um he said berer last year made four payments to the IRS that total 26.8 billion that’s about 5% of what all of corporate America paid in addition we paid size amounts for income taxes to foreign governments into 44 States um so and he talked a little bit about where they came from and how we um shouldn’t have got involved in Berkshire and uh it was a mistake but that’s where they’re at now yeah he’s talked about these the size of their tax payments and things basically since they got involved in the regulated businesses um you’d think it would be something that like all companies who pay a material amount in taxes would talk about a lot I mean I mean it seems like the best thing to do to say that the way that you support uh Society government Etc is through um all of this funding you know because it helps make it sound like you are giving a lot of money to it you’re important that way and then not uh talking instead about all the different initiatives you have you know the different things that you do um Berkshire can’t talk a lot about that because it at the corporate level doesn’t do those things like it used to have a charity program but then it didn’t so um but you know when you read most companies an report s they don’t talk about paying taxes as a good thing to do but they do talk about charitable things uh ESG initiatives whatever things is being what they’re doing for society so they have a whole sections about what we’re doing for you know uh the planet people around us whatever and it usually doesn’t include we pay a lot in taxes now a couple giant companies can’t do that because they don’t pay a lot in taxes but you know says Burkshire shareholders during the same 1965 to 2024 received only one cash dividend on January 3rd 1967 we dispersed our sole payment 1,755 or 10 cents per a share and he says I can’t remember why I suggested this action to berkshire’s board of directors now it seems like a bad dream he’s always joked about that like oh I think I went to the bathroom when they voted on that or something like that but what do you think like why do you think they did pay a dividend then like what what happened there was he just not thinking or what was that all about or could it have been just too many I don’t know what do you think I’ve never heard um he had only been in effective control of the company for a little while at that point what is that two years year and a half something like that um you know I haven’t heard commentary that I can remember my guess is that someone mentioned that with that much retained earnings and things that they back then in the 60s um they shareholders could sue or something over the fact that you were hoarding um money or that you should pay a dividend or something there were I don’t know if there were any successful lawsuits with that but there were companies that paid dividends sometimes out of an expectation that if you have a lot of retained earnings um a lot of earnings that you can’t just not pay anything dividends were much more normal then than later on um so I think if it was 1997 instead of 1967 that we were talking about then there wouldn’t have been anyone on the board or something that said we have to pay some kind of dividend my guess is it was just that someone was like we got to pay some kind of dividend so okay fine um and then regretted it but it was so rare for a company like burshire not to pay a dividend that that’s not as weird as it sounds like the it would have been a really really weird thing to not pay a dividend so that’s always been my guess is that for some reason it happened because of just we need to do a token dividend for some reason but there’s they’ve never talked about it he’s just always joked about it I have no idea I don’t think he just out of the blue suggested or something I don’t know why that happened uhhuh uhhuh uh he talks about where bur’s money is um um and uh the Common Stocks that they own says our partial ownership Holdings were valued at 272 billion um and there is one interesting line there really interesting um household names do you see that part where he says we own some household names um yeah it’s like the second sentence okay so do you see the four that he said said Apple American Express cocacola and Moody mood interesting about that when he says household names is it’s natural to say apple and Coca-Cola for a general audience whatever if you’re saying household names you have to do that but he includes two companies American Express and Moody’s and he doesn’t say Bank of America so yeah which what’s funny about that is Bank of America would be more of a household name than Moody oh way bigger so the inclusion of American Express and movies without Bank of America definitely makes it sound like we’re going to sell our Bank of America down I don’t know if they are they AR or whatever but he definitely thinks it’s in a totally separate category he’s not saying it but I think he’s thinking Apple American Express Coca-Cola and Moody correctly sized could be permanent positions is my guess is what he really means by that why do you think like what what’s his gripe with Bank of America well it’s not as good of business as American expressor Moody’s um definitely uh and uh I don’t know that any of the giant banks are great businesses since uh since the Great Recession you know um and then there’s a question of price he got a really good price on that I’m not saying they’re bad businesses but it’s the same issue that we talked about with like the utilities or something you got to think of them somewhat like utilities those big giant Banks um so I mean a lot of people are more concerned about something like American Express in its future um than Bank of America because of all the payment things now right with all the different um online payment uh things uh new bank things whatever things that are focused a lot on that I mean I I think what was it last year zel processed like a trillion dollars of uh um payments or something yeah yeah um now that’s what you know three 4% or something of GDP or whatever so it’s not shocking a lot of money gets transferred but um but that gives you an idea and zel is kind of like the way that um you know the the card um things that competed with American Express being formed from the banks themselves um kind of happened you know um same sort of thing so I could see where people look at that and go oh um American Express has less of a clear future than Bank of America but I think that he expects um well I mean look those three companies those four companies sorry should have very high Returns on equity in the future and stuff I can I’ll actually just check because I think for a portfolio these are extremely high quality companies and are expected to be that way if we just look at like how quick iest reports return on in equity yeah so so Moody’s is in the 50% range last few years um let’s see American Express has been over 30% for the last few years um and these aren’t uh tangible you know uh 40% for Coke and then everyone knows apple and you know Apple has been in the triple digits so how would you like that as a long-term portfolio something where I think I said the lowest has been that it’s been averaging a 30% return and the highest is over 100 and that’s pretty each of them is pretty conservative you know like like I said that includes Goodwill on those and all those companies are as conservative or more conservative than their peers probably I mean even like American Express if you look what they’re in and everything he says we are impartial in our choice of equity Vehicles investing in either variety based B upon where we can best deploy your and my family savings often nothing looks compelling very frequently we find ourselves kneep in Opportunities Greg has vividly shown his ability to act at such times as did Charlie so again talking about Greg again I really getting the impression Greg is is really the Deo CEO at this point and Buffett’s more so uh like the chair chairman of the board you know um let’s see he did talk so this is interesting about uh well there’s one thing before we leave that is the partial owned business ownership was interesting because of how big the number is I think he said it’s valued at 272 billion and I don’t know exactly all the ones that are partially owned excludes because he’s doing it from a reporting basis so like I don’t 100% know if that includes accidental and it probably doesn’t it might include Devita which is not a big position but it definitely would include craft hindes right because they don’t those have to be carried differently they’re not Mark to Market those are the three I mentioned are they hold more than 20% but less than 50% but they don’t control the business um so I don’t know if the treatment of all three of them is the same I really don’t know about Dita especially but um that’s basically their you know their stock portfolio is what he’s saying and so um that’s that’s a huge number because if you try to add up well what’s you know what do we say were the biggest businesses for them Geico um BNSF and Berkshire pathway energy are the subsidiaries that are the biggest well look at what their earnings were it’s shown there on that table multiply that by whatever you think is the right multiple for them and try to add that up you know the stock portfolio really is worth as much or more than their biggest subsidiaries so even though they get a lot more attention things like apple um are right up there in terms of importance to the company as BNSF and Berkshire hathway energy probably unless it’s a crazy multiple you put on those things you know he used to do look through earnings which made that more obvious you know to compare the two sets um because I think that’s what he was trying to do in the letter somewhat is to say like um look we own a ton of comp I’m not selling any of our wholly owned businesses I’m just selling some of our marketable Securities and you should marketable equities and you should take the two together as our investment in business basically talks about selling how they R rarely sell uh control businesses he says unless we face what we believe to be unending problems um even with equities he said it’s easier to change course when I make a mistake Burg Burger’s present size it should be underscored diminishes this valuable option we can’t come and go on a dime sometimes a year or more is required to establish or divest an investment I mean he’s been buying Ox downal for like over a year right um selling off Bank of America for a very long time yeah it’s interesting because those paragraphs is the most evenhanded or neutral I’ve seen him be about saying like you know what owning giant marketable Securities positions has as much advantages as owning controlled businesses you know years ago two two decades ago for instance he’d almost talk about it like well if we had the same business we’d really prefer to own it outright and now he doesn’t really say that he said compares the two possibilities you know because he can sell Bank of America but he can’t sell the utility for instance if he’s worried about things that way you know so you can exit some things and he was able to trim apple when it was at a crazy high valuation so um but they’ve usually used selling a giant position as they don’t like the CEO or the direction they’re going or something I think more and it’s easier to do that than to deal with it yourself inside a business that you have you know um like Net Jets he probably would have just sold if it was a stock right I’m sure he would have MH he says uh taking a shot at the commentators despite what some commentators currently view is an extraordinary cash position at Berkshire because you know it’s like apple well I guess Apple’s different but Burk every time oh burk’s at 300 you know every quarter it’s 200 250 whatever in cash uh he says the great majority of your money remains in equities that preference won’t change yeah and so it depends um how you look at Burkshire but it is holding a lot of cash and he did actively sell and not buy so much in the last year so I mean as far as what Behavior we’ve seen Burkshire do in the past and what they’re doing now it’s you know as beish a sort of actions if you’re not listening to what off is saying but just what he’s doing in the stock portfolio you know it’s as bearish as ever right like that that he doesn’t normally take that kind of action of that size in actual selling and not replacing with buying that’s rare they did do it at times to fund other things early in their history they did it um but but he doesn’t make the argument here but insurance is a really big part of the business and if you analyze Burkshire either in its long-term history of its balance sheet or really even better like against other insurance companies he could make the argument that they don’t have an extraordin as extraordinary cash position as people think versus what insurance companies do uh of the giant insurance companies I think Berkshire is the only one that I can think of that like retains like truly 100% of their business they don’t see it any other business to others so they the size in terms of like their premiums and everything they’re holding more risk basically like themselves than other insurance companies do um although there are others that are close in percentages to that so you would expect to hold a lot and then generally what berkshire’s kind of done is that cash is sort of like taking up a lot of your float your liabilities from your insurance that you haven’t paid out yet and um it’s really like your Equity your retained earnings over time that gets invested in the stock portfolio stuff it’s not like he’s always done where the moment money comes in from insurance things they just buy stocks with it they still have a very high allocation to stocks if you think of their portfolio no one none of the websites do this you know that track berkshire’s portfolio but if you said okay take all the own businesses aside and put them aside and look at Berkshire as if it’s two companies one is a conglomerate that owns non-insurance businesses and has no invest M um Holdings so you know it’s BNSF and it’s uh Berkshire hathway energy and it’s all the small companies there and all that the other one is an insurance company that owns a ton of cash and also has stakes in American Express and this and that and the other thing that insurance company would look like it’s holds a lot of stock right so it’s they’re still very heavy into equities compared to other kinds of companies so it is totally true that Berkshire is more of an insurance company than people think but most insurance companies are not very exposed to real business performance the way that Burkshire is they own businesses entirely and they they have an allocation to to stocks um but there’s no way that he sold those things because he wanted to have more cash because of the risks that insurance was taking or something he sold it because he rather have t bills and those stocks for some reason like some investment reason he decided on that he says bur shareholders can rest assured they will we will forever deploy a substantial majority of their money and equities mostly American equities although many of these will have international operations of significance Berkshire will never prefer ownership of cash equivalent assets over the ownership of good businesses whether controlled or only partially owned and then he kind of gives a statement here says paper money can see its value evaporate if fiscal Folly prevails in some countries this Reckless practice has become habitual and in our country’s Short History the US has come close to the edge fixed coupon bonds provide no protection against runaway currency yeah absolutely true and as a that’s the one thing and he talked about this even going back to the 70s and everything but that is the one thing that’s really strange about insurance companies they will not write coverage for 30 years at some fixed rate or something um they’re very aware that once in a 50-year type events happens that you can’t see in the recent past but then when it comes to their portfolio they’ll fill them up with long-term bonds and they’ll do that without thinking that oh what’s the risk of of you know runaway inflation you know if you analyze it like a um catastrophic risk that’s caused by a hurricane or something or an earthquake then you go oh this is pretty common and all the country you know we put together a database of all the countries that have issued these kinds of bonds and uh have had paper money and how long they’ve operated and how often does it happen it isn’t a once in every 500 years event that your currency depreciates by you know astronomical amounts it’s actually a lot more frequent than that in a lot of countries and even like you said the United States I mean he lived through a period where it got very high in the 70s he talks about capitalism he acknowledges its faults and abuses and he said in certain respects more egregious now than ever uh but it can also work wonders unmatched by other economic systems America is exhibit a our country’s progress over its mere 235 years of existence could not have been imagined by even the most optimistic colonists in 1789 when the Constitution was adopted and the country’s energies were Unleashed yeah I thought it was really this is a common thing for him to say and people always forget that with his politics and everything but he is very Pro capitalism um the thing that’s interesting is I do not remember and I’d have to go through every letter to figure it out but I do not remember him in the moment of actually living through the time adding the part about more egregious than ever you know right now um that part was interesting um because that’s not normally how he talks how he talks normally about it is you know yes there are lots of things that are wrong with it but we’ve made progress over time we’ll continue to make progress um that sort of thing and it’s a long time uh for the people who suffer from those things but you know things are better now than they were um 50 years ago 100 years ago you know and all of that kind of stuff even when when he talks about um slavery the uh he’s mentioned that sometimes he’s certainly mentioned women’s position in society at times you know talking about that when he talks about the very long-term past sometimes I can’t remember a time where he said you know that they’re you know as obvious are more now than these what did he say he said abuses and faults and abuses what was the term that he used about um let’s see yeah faults and abuses yeah he said this system is called capitalism it has its faults and abuses in certain respects more egregious now than ever but it can also work wonders I don’t remember him using that in certain respects more egregious now than ever that’s really unusual yeah so talks more about America um savings and he says uh in a very minor way bir sholders have participated in the American Miracle by foregoing dividends thereby liking to reinvest rather than consume originally this reinvestment was Tiny almost meaningless but over time it mushroomed reflecting the mixture of a sustained culture of savings combined with the magic of long-term compounding what’s really interesting about that and you know he breaks it down by section with those uh page break things you know that little Aster type things that you see there um so it can make we don’t know how the letters put together and maybe there isn’t a natural thing about the flow but if you think about it that he laid it out to have that flow intentionally and that these sections weren’t just created separately and stuff which is what I think is most likely it’s very interesting that they go from that talk about don’t consume save Etc to immediately talking about uh the um government basically and the you know receiving tax payments from them and everything so it’s just interesting that he’s connecting that idea of what made Burkshire great over time was that they didn’t consume more than they um then saved and over time they were able to snowball you know that way he doesn’t ever use that term but but here we’re giving you these tax payments and you know if you look at what things are doing right now they’re getting large tax payments from Berkshire and everything but you know as far as we can see right now in projections the expectation is for the government to spend the federal government in the United States to spend quite a bit more than it takes in so so it’s the position of those uh sections is kind of an indirect criticism if if it was laid out that way because so that MH any thoughts on the PNC business uh yes let’s see so this is one that’s really really important to birkshire and um he used to I mean most of Buffett’s talks about insurance are either from the annual meeting or from back in like the 70s to the 80s when it was a really important part of the business and and the investment side was going well but the uh the underwriting side was not going well at all and so it was a lot of you know down things that he would say that way now it’s going well but he does include this and I think that um the it’s always good to remind Burkshire shareholders and the press and everything how big a part of the business it is um to to be involved in that that you know that to be involved how involved Berkshire is in Insurance things and so how much that affects their results especially since they moved to the operating um earnings reporting of it um you know uh I think most all of it is things that he said before um and so it’s just a good summary of what makes Insurance a different business that’s basically what that section is it’s how is Insurance not like other businesses if that’s kind of was the title to it that would be a good way of thinking about it how they take the money in upfront you don’t know your cost the risks of all of that stuff and um and then of course he talks about a Jeet because that a je is the most important hire that Berkshire had you could argue that Buffett and you could argue that Munger was as important I know people do argue that Munger was as important um you know as uh or more important um but a je would be right up there I don’t know how much more important Munger was than a je in terms of what really happened in the business and he’s much less well known uh to the record of birkshire um [Music] burshire increased its Japanese Investments so what’s funny is I mean before uh Japan was I guess became more people were looking at it obviously Buffett was like the first mover there right I mean back in what was that 2020 when they bought into those companies and he says that they’ve just bought more over time yeah Brer made its first purchase involving the five in July 2019 yeah so as we simply looked at their financial records and we’re amazed at the low price prices of their stocks it’s the years have P our our admiration for these companies has consistently grown Greg has met many times with them and I regularly follow their progress both of us like their Capital deployment their managements and their attitude and respect to their investors yeah I think it’s a good basket of stocks and they were lucky to be able to put that in what do you say that the the AG cost was almost 14 billion 13.8 so and they hope to increase that a bit so that’s actually it’s spread out across those companies and everything but if you had found one thing to buy that was that amount you know people would have made a big deal about it it’s because it’s in Japan it’s not included in the um stock portfolios you know that get pulled from the SEC reports so it gets overlooked a little bit what they’re doing every year with that and then I think just because it wasn’t one big private purchase you know but if he went out and said I’m buying a 14 billion doll Japanese company that would have really gotten a lot of attention whereas now I think he got attention when he did it but since then it’s kind of like yeah he keeps holding them okay I think it’s it’s really interesting that every time he he does actually go into more detail on this sort of um in that he makes kind of three points about it first he said the stocks were cheap when they bought them okay um but the other points he makes is that they’re kind of a little like Burkshire um you know in terms of their business model yeah it says Opera in a manner somewhat similar to Berkshire itself yep two which I’ve always found really interesting is he basically says the five companies have better Capital allocation and payment for themselves and everything than big American public companies now so it’s a section where he says each of the five companies increase dividends that’s a really important paragraph I think each of the five companies increase dividends when appropriate they repurchase their shares when it is sensible to do so and their top managers are far less aggressive in their compensation programs than their us counterparts yep and then the last one that he said and this is where he’s given a little more detail I think than we’ve normally heard he’s he may have touched on a little bit but it’s always been a really big part of people’s commentary on it which is that they fund it through borrowings in Yen and so he’s he’s currency neutral that that paragraph is kind of I was impressed that they have that or actually it’s a cou it’s a couple paragraphs but um I was really impressed that he has that because you know over the years I think if you read the really early letters to today um I think he’s tried he has an awareness that a wide audience reads this and so he does avoid getting overly technical I don’t think that Buffett today would include the like was it Scott Fetzer they bought I forget which acquisition it was but he did a comparison of the of different of what uh the purchase looks like under um the business you know beforehand and after the adjustments are made to because of the acquisition accounting for it so it adjusts things like Goodwill and there’s lifeo and whatever things it was but he like went and actually put it in appendix there uh whatever that acquisition was you know kind of like uh Ben Graham would company a company B well they’re the exact same company um so it’s kind restated you know for that so he I just don’t think he would do that kind of technicality thing today so to hear him saying approximating currency neutral and no floaters and all this this is like unlikely to get picked up by the press and be riveting to non Burkshire shareholders or non-financial people right but it’s kind of the things that I imagine Buffett actually is thinking in his head and worrying about and stuff in his actual investment decision and like how he comes to it he’s like okay so I don’t have to take currency risk I can borrow at low rates there I actually get a dividend he mentions that which people have always talked about the dividends that are paid on this the yield is significantly higher than the um interest charges on the debt so um they’re basically able to borrow money to finance these Japanese purchases and the actual cash flows off of these are higher than the um interest on the debt and then you also have the Capital the principal you could think of it as which is that they’re you know invested this 13 billion or whatever which is now carried at you know 24 billion or whatever um so yeah you can go over that part I just meant so people know like this is really interesting but I’m surprised that he would include this um technical thing about talking about the the fixed rates and everything um let’s see where is it um all our fixed rates no floaters Greg and I had no view on future foreign exchange rates and therefore see seek a position approximating currency neutrality but then he talks about Gap rules which is true so that is the weird very weird part about it that I’ve talked many times with people um you know Berkshire never really goes up against this but because they report in dollars and they’re an American company they have to restate all these things for um the currency things all the time so it’s much more normal to see this with other companies that are big multinationals and Berkshire has almost no outside the US Holdings that really matter in that way so um it was just very technical I think it meets completely with what people have said of why he made these purchases but it’s a really good insight into like a decision that he made recently and it may have been one of his smarter decisions more interesting ones like apple is another one you know of the last few years it was a really one that stood out I love this little section right here I expect that Greg and his eventual successors I thought that was interesting will be holding this Japanese position for many decades and that burshire will find other to work productively with the five companies in the future that was an interesting one like he’s really thinking about it like a permanent position basically saying to Greg and future CEOs do not sell this yes I think that that is probably aimed at knowing that the Japanese CEOs will read this letter and it’s aimed at Japan so you talk about him and his successors that they’re going to hold it for many decades and that they will find ways to work productively that means they’re not going to criticize the Japanese companies or tell them what they should be doing but they’ll work out of cooperation for a long term that goes through multiple people that’s very something that the Japanese companies would probably like to hear and would let him buy more of their stocks it’s probably a plea to like keep raising my limit I think uh then he goes on to talk about the annual meeting so Omaha May 3d um talks about the book that will uh be there this year we will offer 60 years of berer hathway um talks a little bit about the person that uh wrote the book and put it together how she did it for free um and then I think he Don she he donated that amount to a charity um let’s see what else we got here Becky quick we’ll cover our somewhat re-engineered gathering on Saturday gives praise to her um here’s something interesting we will not have a movie this year but rather we convene a bit earlier at 8:00 a.m. I’ll make a few introductory remarks and we will properly get to the Q&A alternating questions between Becky and the audience sounds good um you know having one person controlling it that way I thought the Becky ones um always worked well actually yeah she’s really good at doing that yeah so pre- sorting it to make it make sense not repeating the same things all the time and that’s a good you know in between thing to do and it’s not someone who’s a Burkshire person or whatever so people believe oh a real uh news reporter from a real Outlet will you know take the job seriously in terms of asking even the questions that they don’t want asked and everything it’s not like here’s our uh U PR person or something will be you know asking the questions um I let’s see um yeah I I don’t know about the movie thing other than that might be the time change remember they got special permission for the movie to be able to show it um you know on TV and stuff but when Charlie died uh you know so that was big I don’t about aunti but that to let it be seen outside of I shouldn’t say that to let it be seen again when it was intended to be seen you know whatever the rights were one time and all that so that was a special thing for it so I don’t know if you know what the deal is with that but he makes a few jokes he talks about the Brooks run on Sunday morning he says I will be sleeping uh talks about his sister’s good looks and how they flow down only to the female side of the family he says Saab um talks about his sister who is 91 years old now um and then that’s when he had wrote about the fact that he has a cane um to help him from uh falling on his face this is I believe how he wrote about it and it’s been pictured I mean you know I think I think there’s been pictures of the fact that there’s a cane that people have seen a cane when he’s next to him and things like that before you know that’s basically it so I thought it was a a great letter biggest takeaway is just again how Buffett is just trying to teach the art of thinking long term or encourage I should say the art of thinking long term both about America both about investing both about learning um you know all sort of stuff like that that’s really the the key takeaway uh that I have from this LGH but it was definitely a great LGH I would say yeah so have they gotten shorter recently I’m trying to think I believe the last few have been shorter than they were running into the 20 Page range at one point right I’m not crazy that was happening like before Co or something I feel like they’ve slowed down since around the co timesh and and I mean he did say when he was talking about um disasters that happened in insurance and he was said like think wild uh fires so I’m like oh so maybe he was writing this letter you know like what a month ago now or something like that a couple weeks ago but that’s true yeah and he could add things like that of course with the utility business he’s had to deal with fires from that stuff for a long time um they mentioned the uh meeting in Omaha do you want to say that we will be there to meet with people like we won’t say anything about where we’ll be in all that but just that we will be in Omaha for a few days before the annual meeting and on that day we will be so if anyone listening uh reach out to me Andre Focus compounding tocom we will both be there y any other thoughts or any big takeaways from the letter Jeff uh I’m curious what what have you heard about other people’s reactions to it um both you know the people who really follow Buffett and the um news things it’s kind of I don’t want to say it’s been more silent but I do think it’s kind of been more silent than past ones I mean um yeah I mean it’s I don’t really have anything to report on that honestly what about you yeah well I don’t feel like we’re um I don’t remember the Barons was it Barons one of them did a what’s wrong Warren or do you know what I’m talking about like you know at the doc one I forget the headline but um I don’t feel like it’s like that right now you know that he’s just respected as being someone who’s has such a good long-term record and not that he’s out of touch or whatever but I do feel like uh Burkshire is not the kind of I mean if you look at the portfolio berer has like nothing in it that people want to talk about you know the I mean do people want to talk about insurance utilities and railroads because that’s the the private business you know the holy own businesses they have um and then uh I feel like and then the even the um their Holdings in their portfolio you know they’ve owned Apple for a long time and the other ones that he mentions um you know with the Moody and American Express and Coca-Cola are just not the things that people want to talk about right now so I do think that it’s kind that the Burkshire letter is kind of a little out of step with um uh the things that the conversations that people are having about stocks and everything I do feel like they’re more on the speculative and macro side right now I feel like probably the peak for people being really interested in Buffett stuff was right around covid basically you remember the annual meeting time that they had you know not long after that right because they had to have the one where there was no one there and all that I feel like that kind of thing was when people really wanted to hear from him and in the 2000s it was really right after um you know in the Great Recession and Co were probably the two big times so maybe they only really get interested in in Burkshire when some terrible thing is you know happening in the world or something but even like the Japan stocks I mean he basically said the Cub veston are very much like Berkshire but yeah I mean it’s not really in Vogue you know that’s just not that interesting to people it’s interesting to birkshire shareholders of course but yeah and we’ll see over time if the people who are there um who succeed him will have some differences that way I know people commented on oh there’s a few like you know small positions little grow more growthy whatever positions higher multiples and stuff on some of the others um but those are probably just smaller Ted and Todd positions and might even be because they maybe are trying to be more fully investing their um portfolios you know we we don’t know exactly but if they are pretty fully invested those are not very large positions even within their own portfolio probably so I don’t see anything in the top positions of Berkshire that are that are very new age um of this time period that we’re living inh got it cool well I want to thank everybody so much for tuning in with the both of us on the focus compound podcast if you are going to be in Omaha that weekend um you are interested in meeting up if you are u a potential investor and want to learn more about our Money Management Services uh reach out to me at Andrew at Focus compound.com we could set something up and get that on the calendar uh wherever you are watching or listening to this podcast be sure to hit the Subscribe button uh to be notified every time that we upload a podcast and follow me on X if you are not at Focus compound that is the best place to go to get access to everything that we push out into the investing Universe I thank you every so much for all the support we will see you in the next podcast take care

Description:
00:00 – Introduction 02:40 – How Buffett’s Investing Style Has Changed Over the Years 11:30 – Industries 14:15 – Buffett’s Early …

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 at focusedmpound. Uh if you are watching on the screen right now, this is focuscompounding.com. If you want to get access to investment writeups from Jeff going all the way back to 2005, you can click that blog section to get our archive. Um so much information. You could type in a topic on your mind in the search bar right here. click find and you will find a bunch of different writeups that Jeff had uh wrote through the years um and basically be able to get his thoughts on that topic. I guarantee it whatever you are interested in investing wise especially if it has a value investing bent you could type it in and you will find something um related to that topic at our website focuscompounding.com. Be sure to hit the subscribe button too wherever you are listening or watching us here today so you will be updated every time we upload a podcast. So in today’s podcast, Jeeoff, I want to talk about uh how to spot a business that Warren Buffett would like and really talk about through the years how Buffett’s investing has changed. Um tailor it to perhaps the individuals that aren’t investing. What do you think, Jeeoff? think there’s some individuals listening that have, you know, over hundred billion dollars to invest. Yeah. You think it’s it’s probably likely not. So maybe we could, you know, talk through different stages of Buffett’s investing and relay it back to the individual. Uh but stick with this Buffett theme as we uh come up to the annual meeting, which of course we will be at. So if you are going to be in Omaha uh the week before, I mean the meeting’s May 3rd, which is on a Saturday. If you’re going to be there leading up to it that week and you are a um interested investor, like to talk about stocks, uh reach out to me at andrew@focuscompound.com. We’ll see if we could set something up on uh the schedule. So, email me andrew focuscompound.com if you are going to be uh at Omaha. So, anyways, yeah, let’s just talk through how Buffett uh you know, how he thinks about things. You know, I think now more than ever, Jeff, it’s a great time to be talking about these sort of stuff. You know, I don’t think this is like the.com uh era where he’s at the uh the conference and he’s being laughed at by all the the tech wives and all, you know, everybody. Oh, this crazy old man from from Omaha. He’s off his rocker, right? And basically my entire life he’s been known as the old man. Uh but he just keeps living, so whatever, right? Uh 29. So, but um yeah, let’s talk about that. So, you know, just generally, why don’t you talk through Buffett’s investing style and how it’s really changed through the years. And just because Buffett invests a certain way today does not mean that that’s the way that everyone listening should invest. There’s one subsack I do want to shout out. What is it? Uh, is it dirt? I say I should probably know the name if I’m gonna, you know, shout him out. Uh, is it dirt value stocks? Dirt cheap stocks. Yeah. Yeah. He’s a dirt cheap stock is a substack. I know. Yeah. Let’s see. Yep, there we go. Dirt cheap stocks. So, great place. Like I think the stuff that he talks about, it’s like Buffett 1.0 type of stuff that he focused on. um you know he gives these little tidbits here that link to his substack. So yeah, why don’t we just start uh you know from Buffett 1.0 and go through how it’s changed and we’ll just go from there. So there’s this book Buffett’s Early Investments and that Brett Gardner is the author and this published in the last year and that one has let’s see Marshall Wells, Grief Brothers, Cleveland Worsted Mills, Union Street Railway, Philadelphia and Reading, that’s a big one, British Columbia Power, American Express, Studio Baker, Hot Child Cone, and Walt Disney Productions. So several of those are not um uh like netnet type stuff. American Express 1964 is obviously high quality business. Walt Disney Productions 1966 is high quality business. I mean the most high quality in the entertainment industry although at the time it was the cheapest probably. Um Hot Cone and Steu Baker are are third rate in their industry. British Columbia powers an arbitrage. Um, some of them still exist to today, right? So, uh, the Cooper Company that’s still around and just different containers now 70ome years later. And then Union Street Railway, that’s covered in the snowball a little bit. Philadelphia and Reading is probably the most important one because that gave him the idea for Bergkshire Hathaway to turn into a holding company everything because Philadelphia reading is a Graham Newman controlled company. it they didn’t own a lot of it but they controlled it effectively and they did a lot of things to change how the capital was allocated over time. So it’s a mix even from the early years of having an importance of business um quality but the really important thing is a low enough cost too. All of those are pretty cheap. I mean an interesting thing to say today is can you invest like Warren Buffett? Uh he’s not buying anything. So we can see his filings. He is buying the Japanese net the Japanese um trading companies trading houses. Yeah. Mhm. the other day. Um, which he and you know said in the annual letter that he would buy more of them. Everything else except accidental is probably not a purchase by him. Uh, I mean he could be buying VeraSign or Sirius, but those are less likely. I think those are much more likely not him. Constellation Brands, unless it’s going to be some huge purchase over time, that’s not him. Pool Corporation, I don’t see that being him at all. um and Dominoes, but I also don’t see that as likely being him. So, they’re either very very small changes or he didn’t do them. So, and he has been selling Bank of America still and he was selling Apple. So, he’s buying some a small amount when it gets under a certain price um of accidental and that’s it right now. So, for the last and he’s buying the the Japanese trading companies. That’s definitely true. That’s a big investment. So today he would be doing nothing you know because we know that he is doing nothing. Um so that’s a difficulty for people. I mean how do you do that if you’re managing money or something? How do you do that today? I don’t know. He left the game once before and I guess he would maybe would have had to do the same thing in the 1990s or today. Um, you know, that’s why Bergkshire is a vehicle that he could use continuously and stay in the game all the time instead of if he was managing money or something. But individual investors could do the same thing. I mean, you don’t have to buy anything. You can hold treasury bills and things and buy what you want uh over time. You don’t have to allocate money every year. Maybe there’s some years where you buy no stocks like is kind of the case with him sometimes. Um, so I I think you know the Japanese trading companies for instance are not that different than some of the things in the book about his early investments. I think you would make the same sort of investments then and now. They haven’t really changed. Um, the companies that you see at the top of that list, your Apple, your American Express, Coca-Cola, skip the oil companies, you got Moody’s, Craft, he did buy Chub, that was almost certainly him. Um, so all those if we do everything from that point up are just too expensive. I mean, he probably like some of his businesses, but they’re too expensive, you know? So, there’s not a lot of cases. I mean, it depends on the tax rates, but I would say there’s not a huge number of cases in his history where he’s paid more than probably 10 times or so what he thinks uh pre-tax profits are on a company, which in his early years might be 20 times and then other times like 15 times PE. So he’s probably not buying at a P PE adjusted for cash and things like that more than 15 very rarely in his career. Even if you hear that he bought Coke at 18 times or 20 times or whatever, you have to look to see how much it was growing and what kind of the forward number is on that. He paid a really high price for Buffalo Evening News, but he expected to be able to save a bunch of money right away on that. You know, Sees Candies, they expected to raise prices right away. And it wasn’t a huge price. It was more in line with what I just said. Um, so the biggest one is, you know, lower pees than than the market has. So that’s obviously a problem for today more so than anything else, I think. Not only that, but think of all the the pod shops where they don’t care about valuation. They’ll just short it because it’s going down or or buy it because it’s continuing to go up in momentum. It’s just so different that way. You know, I even think I I uh that is true about Buffett. He’s probably never paid or or not often more than 10 to 12 times pre-tax profit. I remember actually I think he has said that before as well like publicly like on how he thinks about valuation because everyone’s always trying to trail everything down everything down to a formula. So I don’t know if they asked him that at Omaha or what but I do remember when I started learning about Buffett I I distinctly had that in like my valuation notes on how he thinks about valuation. Yeah. That was like 10 to 12 times operating income or pre-tax income. Yeah. Yeah. He doesn’t buy the cheapest possible companies of all, but he only shops in the basically the half that’s lower pees normally. There’s some exceptions. Coke was not a below market PE or something when he bought it. But around market level PES and below. So even if he buys, you know, what’s perceived to be a high quality company, something’s going on with it at the time that he buys it that is not at a unusually high PE ratio. Um, and that can happen with a company where it has good past results, but for whatever reason at the moment the PE isn’t very high. Um, but no, he he’s never done kind of um, so those would be I guess you could call them growth at a reasonable price or whatever type things. So valued boarding on growth at a reasonable price, but he’s never really done the Phil Fisher thing of paying up for stocks in terms of their P ratios and things like that. And then he’s usually stayed in I mean the big thing is avoiding technology things. Um he has bought as I just mentioned he has bought things in retail and some other things that change over time uh and not always done well. So he has been in some rapidly changing industries that maybe he didn’t intend to be in, but he certainly avoided technology things almost exclusively um throughout his career. Why do you think he sticks to certain industries like banking, insurance, consumer, all that sort of stuff? I mean, he still does. I mean, he’s done energy. He has done pretty everyone acts like he doesn’t do anything that’s really um like sexy, but he has he does go into all these different industries. I guess it’s just really he’s not buying like social media companies and and mag seven, which should probably be changed to bag seven um and and stuff all like that. I don’t think he cares that there is a public market for stocks and um in terms of how he evaluates whether he would buy it or not. And then I think he makes all the big big difference between him and everyone else is he makes all of his decisions completely himself. Doesn’t rely on other people at all. Occasionally Bergkshire has bought a stock with Buffett doing it that was clearly someone else wanting it. Like they, you know, Charlie and everything really wanted BYD for a while and him to get it. Um he bought a little Costco and Charlie probably wanted to buy a lot of Costco but that was his one uh concession to doing that. So because Costco was too expensive. So I think um that that to me is the biggest one. If you have analysts, if you have if you pay for research services and read a lot of things and rely on that stuff in terms of making your decisions or you’re looking at it over a shorter period of time, uh kind of having other aims besides just, you know, objectively trying to buy things that you think are cheap whether they were publicly traded or not. I think those are the two differences. So complete independence of thought that he has and the idea of treating it as if there isn’t a market because that’s why he talks about Ben Graham things all the time. Um those are very much the basic philosophies of Ben Graham. Although people like to talk about things like the formulas of the netn nets and the different things that’s not what he stressed in his teaching so much. Um what he really stressed is complete independence of thought and acting you know the Mr. market um type analogy there of of looking at it as if there isn’t a market at all really and he did talk about margin of safety and all that too but those were the really big ones. Um so the simple answer is like for anyone there should be things you don’t understand and he feels he doesn’t understand technology. Um, other people may say they don’t understand banking things or energy things or political things of different countries or whatever, but there’s just whole areas of businesses that if you were just buying businesses without being in markets, there’s whole things you probably would never invest in. And so there’s whole areas that he doesn’t invest in. Were there any investments that stood out in the Buffett’s early investments book? There’s no investments in there that I didn’t know about. Um, but the most interesting one is Philadelphia and Reading. Um, but I knew plenty about it because it it is the example for Birkshire Hathaway. And then actually he buys um later in his career he has another experience with it when he buys Fruit of the Loom actually. But um Philadelphia and Reading uh let’s see [Music] um okay let’s see okay Ben Graham first bought P&R stock at $18 per share from Baltimore and Ohio Railroad. He increased his position in 1954. So that’s what we’re talking about. So this is near the end of Grim Newman. And um then what happened from that is they decided to change what they were invested in over time and to buy into other companies, acquire them entirely and in some cases entire them acquire them entirely and leave the um uh current manager in place. So um for instance they signed a good example is one of the first ones that they uh it this is basically Fruit of the Loom. It had the Fruit of the Loom license that was producing for it but it wasn’t actually Fur of the Loom um like it was the Lency. It’s kind of the same story that happened with um Tempropedic or the Tempropedic which is the US company eventually took over the Tempropedic which is who it was licensing from. Same thing with Union Underwear. So, um, when they signed when they bought Union Underwear, they signed a 5-year management contract with the CEO was already in place, and then they gave him a bonus of 10% of the, um, operating profits. Mhm. And so, that idea of buying these companies and leaving people in place, and that had been basically a coal company. So it’s just like the Phil deal that we just talked about from the annual lead uh annual letter. Yeah. The way he incentivized them. Yeah. Yeah. So that’s what he would do over time in terms of finding different things about capital allocation. I mean the big thing with Buffett, I mean this is really really obvious because of the Burkshire Hathaway thing, but in most of his investments they have a strong capital allocation aspect to them. So a ton of them are industries that have shrunk or consolidated. So, um, Union Street Railway in there is, um, it’s a street car company, but it’s actually a bus company. Um, because that had shrunk dramatically. That was a boom industry into, I don’t know, maybe the 1920s or something, and then it plummeted from there. So, the industry didn’t really exist before the 1900 or something, then grew for 25 years, and then plunged down to almost nothing. And that’s because as people got cars and everything that got rid of them using uh and to some extent buses that got rid of people using um street cars which you could see in an old movie or something but now you know a trolley business basically. Um and they were really big form of public transportation for a brief period there. Same thing here with like the coal industry because that was a coal that was tied directly to railroads. Um so a lot of these we saw that with whether it was um airlines when he made those investments in airlines or railroads um is you know did the capital allocation rationalized and all of that kind of thing and would it be better going forward but even when it’s individual companies KO he you know he bought them when they stopped acquiring things and started buying back stock and doing all of that and so that’s very common for his changes into different things is that he expects he expects an increasing return return on capital over time. So, he expects it to get even better than it appears to be, which is something he’s talked a lot about with the um Japanese trading companies, right? It’s not just that they’re cheap and everything, but it’s that they’re cap allocation. Y changed. So, what was weird about that though, did it already change? like there wasn’t really a long-term record of that capital allocation when he bought in which is sort of unusual from how these other companies are. It’s ve very very obvious that it changed dramatically and it’s Japan like their attitude towards it. Oh, they had extensive things in all their annual reports. all of them do even the smaller ones um uh that go on and on about it and even like a reg from a regulatory perspective if you could recall during that time it it changed as well like they were almost incentivizing or encouraging uh managers to think a certain way about capital allocation. I believe all the companies you invest in have a section uh I think where they would at least say whether they trade below book value and why they trade below why they think they trade below book value and what they’re doing to get above book value. Yeah. Which is not done in the United States. So but if every company had to do that that was trading below book value that might improve capital allocation right. So, so some of it is regulatory things and then other ones are just the companies copying each other. So, you know that that’s a big thing for that. So, I mean I they have very very extensive annual reports generally as compared to American companies. Not so much in terms of describing the business and giving you actual financial data but more in terms of describing their corporate governance philosophy and a lot of a lot of things about their their board and their management and things like that. So, let’s talk about Buffett 1.0. I know uh as it relates to banks and financials. Well, we we’ll talk about banks first and then insurance. What do you think he would look for in a bank? Well, he did buy some banks uh when he was both in the partnership years, which has been covered in some places although it’s not in that book um because there’s not a lot about it. It is covered a little bit in one of his partnership letters and you can find those in places. And then also uh when he bought Illinois National on the Rockford Bank, Rockford Bank. Uh so in each case there’s a few interesting things. One, they were good banks. Two, he got a special deal. And what is uh Wait, first off, what does good bank? What does that mean? Like good efficiency uh ratio. Yeah. So I mean I’d have to check, but the Rockford Bank was probably one of the most efficient banks in the country when measured on a return on assets basis, you know. Um, it’s covered in capital allocation, the Jacob Mcdana book. It’s covered a few other places where you could find it, but that actually has year-by-year financials that would give you return on assets. And certainly in terms of now return on equity might have been fairly normalish in that it was in the low double digits even though return on assets was very very high. But that is an issue. So a bank that grows quickly but has a low return on assets and has a decent return on equity is somewhat more risky sometimes. And so something like um I could pull it up I think. Well actually I don’t think I can because it’s no longer public company but I was going to say if I could find the history of first republic that was a bank that had only so so return on assets but much faster growth. Here’s the we got the history. So through quick it’s a point4 PE. Oh yeah. Yeah. Too soon or what? Yeah. That was a wild situation when First Republic failed. That was quick. Happened quick. So it never had a return on assets from 2017. Not fail, but was eventually purchased. But yeah, you know what I mean. Mhm. So it it never it um and this was like the compound bro’s favorite stock by the way, First Republic. Yeah. Well, I think we and many others do business with them, right? Uh, yes we did. We did. We don’t. We did. Yeah. So, I mean Yeah. I mean I I think I don’t know but I mean I think that helps Interactive Brokers as a stock or something too, you know, and and other things things that people are familiar with as opposed to ones that they don’t know anything about. But yeah. Yeah. Like they have the firsthand experience of being a customer. Yeah. Mhm. So they they probably on a return on assets basis or something had like the exact same kinds of numbers as Frost, which we’ve talked about before. Um yeah, pretty much. Uh and yet, you know, loans to deposits for them were generally twice as high, right? So Frost was going at 4550% and they were going at 9500% or more. And they’re growing twice as fast. So I mean, if things get better, it works out for you eventually, I guess. But what I meant is the efficiency um was very high in terms of the um return on the assets. Um in their case, Illinois National, it was like you said, an expense-based thing. They’re very good at controlling expenses and then they were pretty conservative in terms of what they were um what they held. Uh and then you know as is talked about in that book and I think Buffett mentioned before in like some annual meeting or something you know there there was a law that was in effect in Illinois at the time which meant that they really could only have one location in the state. So they weren’t able to just merge them and to have um banks across states but not just even that but have a bank that kind of um had many different branches across the state. So, it was a matter of having a lot of deposits per that one branch and being very, very frugal. Um, and then just not making bad loans. But as long as you made, you know, I mean, because it was a bank, it made loans, but honestly, if it had just owned any sort of interest yielding thing, um, that, you know, that they hadn’t selected badly, they just had a kind of normal um, experience in it compared to everybody else. they would have done great because their cost of capital was below other people’s because of how um how cheap it was uh for them to gather the deposits on like an exp operating expense basis, you know, and so there’s I I think the snowball talks about that or certainly I think Charlie Mer talks about that that you know um that he did not want a hightouch service kind of bank and everything. He wanted to keep expenses as low as possible, have as few employees relative to customers and everything as possible and really get costs down and then he could, you know, make more money while paying the same or higher for people’s savings. Um so, uh it wasn’t a super fast growing bank actually if you look at it even while Bergkshire owned it and it didn’t have it had high but not you know impossibly high returns on equity but it had some of the highest returns on assets in the country. Um and and then when I said that he had bought into something in a in a situation with a um bank and the partnership years, that’s a similar thing in that there’s a large owner of the bank and the bank didn’t pay dividends initially and so he he had reasons to think that the stock might be undervalued, but that if he looked at it as an entire business, it looked cheap. I mean, that’s what’s common to all of Buffett’s things. I mean, he likes good management, good cap allocation, but he’s willing to buy on any sort of valuation basis. Um, so he likes it cheap, but he’ll sometimes buy things that are um earning nothing. Berkshire Hathaway was earning nothing. Um, the uh uh street railway that I mentioned was earning basically nothing. Um, but in those cases they are super cheap compared to assets. Like they could be liquidated probably for close to what they were selling for initially. So, yep. So, there you go. That’s another one. Um, now that was a bit of a problem because a lot of it was in inventory. So, then, you know, he had uh Harry Bottle get involved with that that to have to turn that around and that came close to going under for that reason because the company kept getting more and more and more inventory. But whereas in Bergkshire Hathway he more quickly once he was able to get control had someone or I should say Dempster Mel there’s a period where he was influencing but not really controlling and I think they hired someone that he wasn’t wild about and then they didn’t enforce things as hard as he wanted whereas in the case of Bergkshire with um Ken Chase there um I think that they you can see that they quickly brought down inventory and stuff really really fast. uh in the first couple years he was at Bergkshire, even though profits weren’t amazing or something, cost uh I mean revenues weren’t amazing, what they did with costs were good and then what they did with with cash was even better. So they slashed um some expenses and they really slashed like working capital that they didn’t need out of the business. Um so turned things to cash. So kind of what you can get out of a net if you have control or something. Um, so that’s the other thing I think that that’s a huge difference between Buffett like 1.0 or whatever we’re talking about and 2.0 uh that people don’t appreciate is that he’s trying to do the same thing. He it’s always been about get something cheap but good and a good manager and then have the right capital allocation. When he was younger, the easiest way to achieve that laws were a little bit different. he was working with less capital and he was just willing to put up with a lot uh was to go activist on these things, take control of them and then to do it himself and that’s the most effective way because then he controls it and everything and that’s the cheapest because we’ve talked about that before with other companies. People ask why is this company traded this or whatever and you say well there’s someone incompetent there and they control enough to block smart things being done. That’s the most common reason why like a micro cap that is actually pretty good business consistently trades at not a good price today would be there’s something in place that stops someone from being an activist in it and the capitalization isn’t that great. Just stopping someone from being activist is not a problem. I mean if they’re doing a good job then it doesn’t add anything to the value of the stock that people think there will be activism in it. it’s only in cases where there’s no chance for activism and the people running it are the cap allocation is poor and things like that. So he always had the same sort of strategy that way. But then he became middle-aged and decided I never want to do a dumpster mill again. I never want to be hated by the whole town, you know. Mhm. And he didn’t want to have to pull out his wallet and look at pictures of his kids during the board meeting because he was so angry. Yeah, that was the same board map. Yep. Yep. What were they? Smoking cigars. They So they they owned almost no stock in that one and he was hoping for them to, you know, to to um basically do a big buyback or to distribute the the cash that they were sitting on basically the investments that they were. So that’s a pretty famous one. Sort map D. Those are not in the Buffett’s um earliest investments uh early investments. Um so I think that’s more the big change than people realize. I think it’s a change in terms of personality and I think it’s for durability because he would he did quit the business. So it’s just like he’s not going to keep doing this forever. So to be able to stay investing for all that time he changed. Um he’s never said that that was kind of optimal in terms of getting the best returns. But it was optimizing for longevity because no one else stays in that long. You know, you can have the approach of um well, take like Phil Fischer versus um Peter Lynch. The the Peter Lynch approach of owning a million stocks and meeting with every management and doing everything you can and being aware of everything and putting in all the hours and doing all that. Great. But he didn’t last that much longer than a decade doing that. And then he was like, I have to stop. If you have a portfolio of half a dozen stocks or something more along the the Phil Fischer approach and know each one really deeply, then maybe you could do that for decades and decades. And with Buffett, if you just give up on things that are hostile investments and things like that, then you can last longer that way. Um, so I think that’s that I actually think that what he’s aiming for has stayed remarkably the same. Um, it’s just what he’s been willing to do to achieve that has changed. And then the size, the opportunity side. Yeah. And that’s changed mostly because of size, but also I think somewhat because of changes in um investing, mainly private equity for him. He’s become a major competitor. So we hit on I mean capital allocation, the way he thinks about that. What about growth? How do you think he thinks about growth? Doesn’t care. Yeah, that’s his big advantage because the focus on the cap allocation because growth is I don’t want to say growth is never undervalued in the market. There’s probably times where it is, but um but what’s what I mean what is growth like define it. I mean if it’s growing at GDP, do you consider that growth? Yeah. Yeah. But I mean some of the he doesn’t care if it shrinks. I mean that’s the point about if you have if you take over a company if you have that kind of but then it becomes much more of a capital allocation story. I mean it always is but if it’s shrinking you need to be pulling things and moving things reinvesting things right returning it to shareholders doing stuff that’s different. Yeah. Otherwise the profitability will decline if you just focus on the return on capital and everything. If you put more capital into a business and doesn’t grow then the profitability will decline. And on the other side, if you um if you don’t add capital and yet profits go up, then your profitability increases and profitability ratios. We just went over uh the other week um when we talked about the letter what he kind of talked about. I was saying almost as if they’re permanent holdings. They all have really high returns on equity and really high returns on capital. Um I mean, I looked at lots of things about does growth as a strategy work and eh probably not. I mean the the issue is here growth has two aspects to it. One is asset growth which is pretty negatively associated with returns and then profitability which is pretty positively associated. So obviously if you have a good business you want it to grow. If you have a bad business you want it to shrink and so growth as a strategy is a little difficult that way. I think everything that’s growth captures normally in terms of people’s returns and investors who say they’re growth investors are really profitability investors. Now, they might be profitability quality investors in terms of future quality. That is, it’s not showing up in terms of profits today, but the customer economics are so good that I know that it will later, but you’re betting on it being a high quality business. There’s no such thing as like growth, and I love businesses that grow really fast, but aren’t great businesses. We just talked about First Republic. That was a very average for a bank business that was growing faster than most banks, right? So, it had the same profitability as Frost and yet it had higher, you know, it was pushing the capital harder, but also it was growing twice as fast as as Frost or something at that time. Yeah, we could compare the two. So, 10-year Kager earning assets 20% return on equity 10.3. Look at Frost. Yeah, I mean, look at the difference there. 10-year Kager earning assets 6.4. the return equity was better 12%. Yeah. So, if we look at um what have we talked about before? Let’s see. [Music] Um I mean, look, if you look at a company like um over the counter markets, right? Or Copart or I don’t know, there’s a lot of other ones. Uh you know, um Copart, it’s been a while. Yeah. So Cobalt’s a little bit harder because there’s a physical aspect to it and everything but it’s not a big part of it. So it doesn’t matter. Um growth there is really good but growth there is really good to a large extent because return on capital is really high. So one return on equity is very high which is the thing that really matters you know to the owners what matters is the return on equity nothing else. So if a bank or insurance company or whatever is in theory super leveraged but has a really high return on equity that’s okay. If a real estate company’s that’s okay. you would just have to know that you could continue to achieve that and you kind of have to know the industry and all that to know if that’s going to be the case. But what matters and Buffett’s always said that he said he likes businesses that earn a high return on equity without unusual leverage or you know undue leverage he said at times. So that’s the number that really matters and if that number is high then growth you know is good. Um if the average return in the stock market is let’s say 10% a year historically or something then as long as you have a return on equity that’s sustainable um that is say 11% or higher then growing is good but otherwise growing isn’t necessarily good and companies often not not always but sometimes companies shrink and then grow and sometimes companies pivot from doing one thing to doing another and a lot of times s that’s where they become affordable. And so many of the cases that is in the early investments and that you can just see from what Buffett has done is cases where there’s some sort of change around the business that has to do with that. Um where there’s a fear that growth will slow down, but he doesn’t think profitability will slow down. They’ll start paying out or something like that instead or they’ll start doing other things. um or there’s a lot of fear about growth, but it proves that that isn’t the difference between a um how do I put this like um so as an example he had two investments in there in the ear Buffett’s early investments book and in that one is a coupage which is a it makes containers for shipping basically what those containers were changed over time um so it’s a barrel maker originally And then there’s different kinds of barrels, but it went into different things from there cuz that’s what it is for. And um there’s fear about growth in that case. And then something like um Hot Cone, which was a uh department store in Baltimore, there’s concerns about growth there, too. Um the difference is that one of those which you bought in a big way the the department store did not do well and it’s because of competition and that’s a profitability issue. So a couple things happened. One big cities decline versus um suburbs. Two, the company had three other competitors right in the middle of of Baltimore there. And then also Baltimore as a city declined in importance um in desiraability for people to come into the city to to shop and do other things. So um you know that was just a competitive issue and that is more important to him than other things. I mean when he sells something it’s often he doesn’t like the capital allocation risk profile whatever of that he sees management doing or he sees a change in the competitive situation. I don’t see a lot of situations where he just sees a change in like growth as being his reasoning for doing that. Mhm. Did you see uh reports this week that he’s selling their real estate business to Compass? What’s that all about? He I mean because we were just actually talking last week how he doesn’t really sell anything. He just kind of just put won’t put more capital into it and just kind of let it run off or whatever. Right. So I thought that was kind of that was kind of weird, right? Unusual that way. Yeah, it would be one of the first cases where he sold something um an entire business. Uh I haven’t seen confirmation that they’re doing that. I also don’t know what the relationship is there and with um the energy company and everything where that’s housed and all that but because part of the real estate business was originally um part of a larger business um but that they actually bought something else after that so I’m not sure um some things have changed in the brokerage business over time um but you know that was actually a couple years ago so or yeah a couple years ago. I don’t you know I don’t know how many of the decisions that are being made now are made by him and how many are made by others right so we might see more of that but that is very unusual to sell an entire company if that’s really what he’s doing although I guess it would just be combining it with another very large um company but that’s also like I said I mean I think I saw the same articles you have but that’s you know was several days ago and not confirmed a different things so but yeah he hasn’t done that and that obviously has hurt Bergkshire’s returns over time, the abil, you know, you don’t have any ability to exit things. Um, so that’s another thing with the like 1.0 versus 2.0 we were talking about is that, you know, I think we we did talk about this with the letter, but I noticed that he went on and on much more about how buying entire businesses gives you some advantages, but some disadvantages versus owning a stock. And so that was interesting that you don’t have to own things forever. That sometimes that’s a mistake, you know. Yeah. Yeah, he did highlight that. Yeah. And one and I think one reason is psychological which he kind of laid out which is it’s very easy to deal with a management change because with a stock he just sells the stock when he doesn’t like the management but it’s hard for him to make a management change when he owns the company. Now other owners of businesses think that that’s one of the advantages. They get to change the management but he’s very reluctant to do that. Do you think that’ll change when Greg is CEO? from like an operator standpoint be much more willing to cut bait or do you think that culture will continue? Um, yeah, I think he probably will and I think people will be they’ll be more likely to quit and everything too and leave and go to other places too. Um, you know, I don’t know how much of an advantage it is after the first person that you bought from leaves. I think it’s advantage. I mean, he’s often buying from a founder. Not always, but often. And until recently with really big companies, he was that was pretty common. Um, you know, I don’t know that there’s huge advantages to like having a second generation person or whoever was picked as the successor stay in place. And that has happened with Bergkshire because he’s owned some things for so long, Buffett, that they’ve gone through a few. Um, I mean, we know he has change management a few times in some things, but it doesn’t seem like it’s very common. Mhm. Mhm. How do you think about how do you think he thinks about like the competitive position then? Right. He’s that’s the thing he’s most worried about in companies is probably competition. Um so when we talk about like shrinking industries or industries that are are in decline um well if an industry is in decline, there’s probably not a lot of competition, right? It’s not like Nvidia or uh AI where there’s every company in the world competing for that market share. It’s like a land grab and spend as much capital as possible, right? Mhm. So, how do you think he thinks about that? I think that’s the biggest reason why he doesn’t own technology things. He said that before where people say like, “You don’t understand it. What do you mean? You don’t understand if people consume it. You don’t understand if um how it works.” And no, he means he doesn’t understand the future economics of it. I mean that that um talk that Alice Schroeder did about um the tab card company was a really good one for understanding that in terms of when he did not invest and then later when he would invest in it. Do you want to lay that out refresh that in people’s brains? Yeah. So they’re coming so there’s there’s some complexity with this but there are some things with IBM where um basically uh the company’s making punch cards basically which are like um for they were consumable that went into computers computers here are making calculations of things that aren’t things that personal computers and stuff like that and so they’re literally making calculations but they used this and um they needed in high volume produced and then also So there’s an issue of the location, how quickly you can get to them and everything. So um he was worried at first that they’d be put out of business by IBM figured that they put them out of business right away. And then within a year or so, it literally was only just about a year of seeing their financials, he realized how high their returns on capital were and how willing people were to buy from them instead of from IBM. Um and so then he was willing to put in money and it actually turned out to be an incredible investment over time. Um very very small investment though, but a huge part of that was the turnover in terms of how high sales were versus the capital in it because they basically just needed like a card press. Um I don’t remember what the equipment’s called, but um which you know and and then you had a tiny tiny amount of inventory probably um and just putting these things out and sending them out to their clients. Um so and you had a huge installed base that they had nothing to do with, right? So, you know, um, and so he was willing to invest in that. And I think Apple’s the same sort of situation. Probably looked at Apple a lot and then you can see at what point did he decide to invest in Apple where he decided, I’m not worried about the technology stuff. I’m willing to invest in it now. And it’s not crazy because when um, let’s see. Okay. So, he’s actually ironically one of the best tech investors ever. Well, in terms of how much dollars he made. Yeah.$100. on a dollar for-dollar basis for sure. Okay. So, he first bought a stake in Apple. You know, the AI here tells me in the first quarter 2016. Maybe that’s true. Maybe it’s not. Is that Gemini? Did you Google it? Uh I just did it through a browser. That’s that’s none of those things. Um that anyone’s heard of. I don’t know who they’re using. So um uh that is 9 years uh a little less than 9 years from when the iPhone was first released, right? His iPhone would have been like 2007 or something. So and it wasn’t I mean I’m sure they sold a lot, but it wasn’t obvious that it had huge market share until a couple years later. We could see find like Blackberry’s market share and whatever things of other whatever pass for a smartphone at the time plunging and them going up. That probably took two three years. So it had complete dominance for you know I don’t know seven years or something um when he bought in and in tech things that seems like oh that’s so so slow whereas you know with Coke you could buy in you know be an early investor and it decades and decades into it but I don’t know at what point did you know I mean a few things had to happen one we know Steve Jobs talked to him so Steve Jobs had to die because of the cap allocation right and then he had to be sure that Apple was really um uh dominant in terms of the iPhone basically. Yeah, because Steve talked about what he should do with all the cash. Yep. Yeah. So, those are kind of the two things. And then the price had to be kind of okay. And the price was I believe we could look this up and um well, it only goes back to 2016 now. I was going to say you could look I mean that you can look back further on quickfests but actually it had been there was a couple years where it was quite reasonably priced on a PE it was coming down and pretty good price for a few years there you had like a threeyear or so period at least of having a below market PE in Apple even though it was still growing and everything at the time um although it was going to slow down a lot I guess. Yeah. He bought actually at a time when it really slowed down right it actually that was like a terrible year for them. Yeah. Yeah. So, yeah. Um, but in terms of we can see things like margin that stayed stable, but things like return on capital actually got better while he owned it probably. Um, yeah, it did. Mhm. So, he bought actually at pretty much the bottoming out of the return on capital, maybe one year ahead of it bottoming out. Yeah. So, great timing, right? So he timed it to have one of the lowest possible pees that the stock would have and to have one of the lowest possible returns on um capital at the time too. I mean was that something that just happened or is that something that you thought you think he thinks or he thought would happen like with return on capital improving? Um yeah well what’s interesting is so Apple’s a really really good example of something that Buffett would buy. I think what’s really attracted to him is Apple almost never makes meaningful acquisitions. Um it’s like a cultural thing. We’ll see if they ever change that up. But because of that, he could have a lot more faith that as they piled up a lot of cash and everything, they were going to um have to uh do what he wanted basically in terms of what the returns would come from. So, if we look, they’ve bought since he got involved, shares outstanding have declined what, 5% a year, 7%, 3%. 3%’s the lowest, 7%’s the highest. Um, and then they’ve also paid a dividend. But more importantly than that, like the stock uh the number of shares outstanding going down, yeah, that’s important, but we shouldn’t just look at a corporate basis. The other thing is they’ve really really not expanded that much beyond the iPhone franchise. Like they make a lot more from services and all that, but it’s all connected to his exposure to profits from that same ecosystem of that Apple name there is just gotten bigger and bigger every single year and that’s where most of the money has gone and then some has gone to pay dividends, right? But otherwise, whereas he was in some other businesses where even if they bought back stock, that wasn’t always true because they expanded into other things and sometimes they diluted to buy other things and that was a big problem when he was in some consumer products ones. Um, you know, Bergkshire ended up with Duracell and different things happened with Gillette, but you know, and then Gillette merged with PNG, but um, you know, I I don’t think he wanted Gillette to to own Duracol probably. I don’t think he wanted what was it? Um, what did Coke buy? There would have been a few different ones. I guess there was a Let’s see. Um, was it one of the was it Gatorade acquisition? probably he was a KO shareholder when that happened. Probably. Um so, you know, they just get away from the main brand that way. As much as he likes Coke, you know, Coke has expanded to all sorts of different things um related to their core brand as their core brands declined that way. Um instead of just buying back all their stock and everything the way that Apple has. So, you know, he his I mean, we can look on uh what his I mean, he it’s actually it’s really easy to look um if we go to Data Roma and look at his biggest investments. The thing that stands out to me is these are not necessarily the biggest companies in the world that he owns stock in. He would have to own because they’re really big, but these are some of the biggest brands in the world. Apple is not just a big company of big tech companies. It is most dependent on a single brand. American Express is very dependent on a single brand. Um Coca-Cola, Moody’s, it’s one business basically. You know, Craft Hinds is a couple businesses, but those are really where we end the Buffett investments probably. you know, I mean, he owns some things down below, but you know, that’s because he’s either selling them or he didn’t get as much as he wanted or whatever. But when we look at the things that are $10 billion and up, they’re also really really they’re high return businesses that are really dependent on one thing and not widely diversified usually. so he can understand the competitive situation and like what their returns will be if they return either to him or they invest more in that dominant brand. [Music] Um that’s why the capital allocation thing is so important in the different stories that are told in books like that one the early investments book because you can see when he gets involved and what direction they’re headed in from then and that’s true with all I mean American Express was going through change the he invested in a few different times but uh the if we go back 30 some years when he invested most of what you see in that stock now um they were going through changes in a direction he liked getting rid of other things focusing in on the American stress brand. Coke was doing kind of similar things in terms of taking, you know, buying back stock and not diversifying. Um, you know, Moody’s was a spin-off actually. He got as a spin-off. Um, because it was originally part of Dun and Bradstre. So yeah, it’s more of like a pure play, which is much easier from like a when you’re underwriting or thinking about it, the competitive position, what the business could look like. It’s much easier to understand if it is a pure play that way. Yeah. And I think that’s one reason. I mean, they said, you know, Charlie and and Warren had both said that they should have invested in Google, that they knew about its advertising strength from buying things for Geico. But I think that’s a big reason why they didn’t invest in Google Alphabet and probably a big reason they didn’t invest in Amazon. Um, Amazon’s alo retail thing, but that they, you know, did so many other things and it’s hard to evaluate whether those things will be successful or not. So he likes very singly focused businesses um where he can understand the the math and everything pretty simply. Um I mean he puts a very high priority on being able to do everything in his head without it writing anything down and having a high degree of confidence in it. I would say you know in terms of when we compare him to other investors. So that means forming opinions about things like Apple and American Express and stuff and not you know Nvidia or not some of the others. Even when you ask about things like oil companies, he just talks about the price of oil and the cap allocation like so if he thinks the price of oil is going up over time and he likes their cap allocation and then they’re cheap compared to like what they own. He doesn’t talk a lot about you know getting into complex analysis of them. Mhm. Um, we’ve always talked about that. I was like, do you think he goes into a complex analysis like that? Do you think it’s different where he’s not writing a blog or a Substack or putting out investor presentations, you know? Yeah, I think that’s kind of a big advantage that he has. Um, if you’re inactive enough, if you’re pretty active, I think it can help to blog or to write things up or whatever. But in general, I think that, you know, when I’ve written things up, I try to do it a little differently that way. But it’s not good to try to kind of pitch your investment. Um, for a few reasons. One of the biggest one is you spend an incredible amount of time on things that don’t really matter that much to show, oh yes, I know about that and everything. Oh, yes, I know about the carbon capture at the whatever place. Is that really going to matter? You know, he probably puts an expectancy, you know, um, on it. That’s how I think it he kind of value expectancy and all sorts of things and it’s like well could this work out? Yes. What’s the chance that doesn’t work out? What’s the chance that you know it um actually like loses money some of these things, you know, that’s part of it. When anyone does a write up, they they always say, you know, it’s a lottery ticket. They say, “Well, let’s just put it at zero and it’s a lottery ticket for whatever.” But a lot of times it doesn’t work out that way. Like if you own six different money losing internet things on the side, it’s true that one of them could take off and that’ll be great. But in many cases, you pump in additional money into them to lose a bit over time. And so it’s even worse than that. On projects that are more like, you know, engineering type things or or things like I mentioned, carbon capture or something, people always say, “Oh, it’s a you know, um like let’s put a value of zero to whatever on it.” But the first time that someone does something with the technology, they often lose an incredible amount of money. So like the first person to try, the first company to try to put in this new boiler to do this thing at this plant, I mean, it probably will not be good. Um, but they’ll figure out how to make it, you know, successful in further technologies, you know. Um, I mean I I guess my point with that is just like I think he does an analysis that way, but it’s very easy to be like, “Oh, he should have seen Apple early or something, but he has to see Apple, but not falsely see Blackberry or something like that.” And that may be harder than people think without hindsight on it. Like yes, at some point you could see that with Apple, but when is that point? Is it really immediately or is it a few years down the road? You know, I mean, go back to BlackBerry and how hard that would have been. Honestly, it’s like the saying that they have massive market share. It’s enterprise, right? So corporate, they have their own niche that way. And then the iPhone comes out and even at that point, I mean, I remember when the iPhone came out, everyone’s like, “What? Who would want a touchscreen? What’s the point of all of that?” Blah blah blah. People were still against it. and then just completely plummet. Completely plummet basically like what within a year. Read that book losing the signal or whatever. Yeah. Yeah. Yeah. And if that’s the kind of thing with the magic formula when people ask does the magic formula work or something. I mean the magic formula is like Buffett without judgment that way though. So it catches both Apple and and Blackberry and you know I mean Boba talked about in the letter though your winners do more than make up for that if you’re willing to hold. So if you get into good businesses at least if you get into ultra cheap businesses like incredibly below liquidation businesses or really great businesses if some of those are in the mix and then you hold on to everything you can afford to have some losses in other things because you get many times your return in the things that you keep as long as you keep them long enough. you’re not like saying I’m going to sell everything when it goes up 20%. Um, but yeah, that’s that’s true. The median return in like we’ve talked about nets or something. The median return in nets is like a market type return or something, but the return is higher because if as long as people will hold some of them for a little while, they’re so cheap they go up so much. It’s the exact same idea with great businesses. Um, if you just bought a sampling of everything out there and held it forever, then obviously that’s not going to work the same way. But as long as he buys things like apple and coke and all those and then things that are much smaller. So you have a seized candy that pays for a lot of things, you know. Um and then at Bergkshire they starve the other things for capital which is the other part of it. So you don’t recycle it. So that’s kind of you know a really big thing there. He’s very good at that. He’s um does not sell his winners and then buy more of the losers. Yeah, that’s true. He definitely does not. Yeah. No. and and he does it in the businesses he owns just because that’s easy to do. The winners will grow and then the losers they just don’t let grow because they’re not earning enough return on capital and everything. And then in his own portfolio, he does that mainly by, you know, long-term holding things and so not just selling something because he gets bored and wants to buy something cheaper or whatever. So he’s selling a winner to buy a loser. But in both parts, he’s very good at that as compared to most investors. Yeah. So I mean I think yeah, he would buy smaller companies. People always ask that and think, “Oh, is that really not true or whatever?” But he’s always he’s always said that and said the things about how you could earn high returns and things. Um I mean the other thing is he does follow the you know um book I would recommend is a man for all markets. he follows the Ed Thorp kind of approach of um he only invests in things where he has an edge, you know, and so that’s true of the early Buffett, that’s true of later where he, you know, he he just doesn’t do anything where he goes, “Oh, well, I’ll just, you know, I’ll do this to diversify or I’ll do this to have that.” He doesn’t look at it at portfolio thing at all that way. He’s not buying oil for any other reason than he thinks oil companies have. he expects them to do better than your average business for each individual investment that he makes and then by doing that he kind of thinks it will work out whereas most other people are trying to do something else you know so yeah so man for all markets fortunes formula other things about the Kelly formula Kelly criterion one of the key takeaways for investors I think is not so much I mean bet sizing is important Buffett buys bets big when he has an advantage but the other key thing is to really, you know, um the difference between that and a lot of finance theory stuff is do not invest in anything where you don’t have an edge. Um so, you know, the bet itself is on expected value basis not more attractive than other things that you could do. Let’s put it that way. So, um and a lot of investing is doing things where that’s not the case. I mean, it’s, you know, saying, “Okay, I’ll be underweight certain stocks that are in my benchmark or something.” Okay. But part you’re now making a a small bet, but part of your bet is a small bet that has nothing to do with edge. It has nothing to do with what you expect the value to be or something. It’s just setting aside part of your portfolio to do that. So, people are doing that to diversify. They’re doing that for all sorts of other things. And it’s kind of like buying insurance on different things or tamping down on it’s using money capital that you have access to to not put it to its best use. Whereas Buffett’s always directing it to where do I have the highest, you know, mathematically where do I want to put it and not thinking about anything else. I don’t think he’s ever thought about like diversification for instance in terms of like um diversification in terms of I need to own a few things because of risk. Yes. But not diversification in terms of um I should own some oil or I should own some Japanese things or something. Not like taking a barbell approach. Yeah. No. Mhm. So I mean and that and he’s in the insurance business and that’s you know natural way of thinking about that. I mean, he said that in things like annual meetings straight flat out where he said, “Look, we we’ll make any bet where we think that were we to get a hundred chances to do the same thing, on average, we would make money on it, you know, and we’ll reject anything where that’s the case, too.” So I think there’s I forget what one is from but there there was some annual meeting where he literally says something like look if you give us a coin that pays 7 to5 you know we might bet a couple percent of Bergkshire’s net worth on that you know um because we have an advantage and it’s not a risk to you know you’re not risking the company whenever you’re doing that but most people wouldn’t say oh I can bet hundreds of millions of dollars or a billion dollars something on a coin flip where I have a slight edge you know, but you don’t get that very much is his point. Like it’s not very often that you have a fair coin flip with that happening. So I just think the main things that he has that the problem that I have with most things is it’s not very mathematical. We did talk about one which is like well we talked about high return on capital but the other one we talked about was um like let’s call it EV to EBIT or PE or whatever. he does pay a low price versus earnings. But the other stuff I just think is higher return on capital over time is what he expects, you know. Um, and then the problem is how to apply it today. I don’t know because he’s not buying anything today. And I think there’s other factors for that with his age and stuff, but I think the market’s big factor with that. 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’re going to be in Omaha for the Bergkshire meeting, uh, reach out to me, Andrewfocusedcounting.com. Make sure you hit the subscribe button wherever you are watching or listening to us here today. You’ll be notified, um, whenever we upload a podcast. Eight years strong, Jeff. Crazy. Um, crazy, crazy. Um, and of course, if you’re interested in learning about our money management services, you can reach out to me at andrew focuscompound.com. I want to thank everybody so much for all the support and we will see you in the next podcast.

Description:
00:00 Intro 01:12 Massive Sell-Off Sparked by Tariffs 07:15 U.S. Dollar (USD) 08:18 Interest Rates 10:25 Yield Curve 12:37 Is the …

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 are 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 Focused Compound. If you want to get access to investment writeups from Jeff going all the way back to 2005, uh go to focuscompound.com, click that blog section, and you’ll be able to search different topics and sift through a bunch of different topics on our website, focusedcompounding.com. If you’re going to be in Omaha this year, Jeff and I are going to be there. If you’re a prospective investor and you’d like to meet up uh learn about what we’re doing at Focus Compounding or just meet up to talk about stocks, uh reach out to me at andrew focuscompounding.com. We will be there the week of uh the uh meeting in Omaha. So reach out to me, andrew focuscompounding.com. So Jeeoff, I don’t even know where to start today. I mean, goodness, there’s just been so much that’s gone on in the market since we last recorded. Um, everyone listening is obviously very familiar with what has gone on. Uh, I guess you could say, are we in the middle of a a trade war, would you call it? Is this an embargo? Is this just a short-term thing? I mean, what’s going on? I mean, you could see on the screen right now, Russell’s down uh 17%, the NASDAQ is down 11%, the S&P 500, uh, 9%. Um, and then the Dow is also down a good amount as well. uh crude oil. Last time we probably talked on the podcast, uh we’re probably down about 10 bucks since then to right around low 70s. Um I’ve been seeing and hearing reports of uh shale companies um laying off people or, you know, being very shaky about, you know, what’s going to happen. uh drill baby drill. Interesting concept, but break evens for a lot of these oil companies is probably in the 70s, right? Slap on some inflation that’s come from tariffs and I think maybe the uh those break evens are a little bit higher. But yeah, just want to get your opinion, right? There’s so much going on right now both in the market, in commodities, with interest rates. It’s been truly fascinating. So yeah, let’s hear it. Jeeoff, what are your thoughts on everything going on? Um well so as we’re recording this some things today is the 11th we should probably say yes the 11th of April. So you see a lot of things up on the screen. Um the you know uh in terms of the stock market and everything the the moves were like you have some when you have like a bare market or something right so they’re similar to things that people saw to some extent 2008 but more than that.com um and so yeah I would expect large moves including large up moves your biggest up days usually happen in a bare market so that’s you know that will be common to have days that are up a lot as well as some days that are down a lot too I guess although we already had a few of those to start with. Um and then some of the other ones uh I mean oil that’s a little more complicated. So like for instance um uh not a lot of stocks are all that cheap compared to where they were you know a year or two ago or something but something like Oxy Chevron those things that you know are Buffett type buys are are down a lot from where they were before because some of these things were already not you know they they hadn’t gone up recently at least and then things that were sensitive to recession were already down a lot before this and actually didn’t drop necessarily as much as you would have expected versus other stocks many of the stocks that dropped recently are not so much economically sensitive. It’s not so much pricing in recession as sensitive to like we talked about tariffs or just things that are higher risk or very expensive prices. Um some of the things in transport, travel things, all that stuff was already down 30% or something before and so it hasn’t been down as much recently. So I wouldn’t say there’s so much pricing in of a recession right away except for what you talked about with oil. Yeah, accidental petroleum since uh all this uh started is down about looks like 27% 28%. Um so I imagine Chevron is uh very similar as well. We could look it up right now. I mean oil’s down from like I said 70 to about 60 bucks. We were under 60 for a little bit there. Um let’s see if I could pull this up. Yeah, 21%. So, interesting. And it was funny like the uh Treasury, I’m sorry, the uh let’s see, US energy secretary, he said that the sell off in the oil market is overblown. He expects American crude uh producers to keep increasing production. And I’m like, yeah, I don’t think that’s the case at these uh prices. seeing lots of reports of people that are like, well, they’re either slowing production or they’re not going to go through with the project or something like that. Just kind of sit in wait mode. Um, things happen pretty quickly in there. So, yeah, very interesting. This this meme came out. I thought it was funny. The last stance, Buffett sitting there, you know, sitting on his 300 billion in cash. But yeah, do you have any thoughts on oil in general and everything else? I mean, are we pricing in a recession? Is this because of the tariffs on, you know, China and what could happen from there? Uh, what’s going on? It’s hard to know with the oil. I I don’t think this is that expensive. Um, it’s pretty cheap compared to where we were at the start of other recessions, you know, in the pa past. Um, when I talk about 2008 or something, in real terms, it would have been really expensive in 2006, 2007. Um, and then also the dollar declined against other currencies. It’s probably down 10% or something this year. So, um, the oil prices that you see for that is, you know, like you have WTI there. So, that’s pricing oil in the United States in US dollars. Um, so it’s pretty big move in terms of oil, um, and what it actually costs around the world. So, that’s big. Uh, this, you know, it’s kind of like a tax cut for people when that happens, you know, in terms of consumers and stuff. So, um, you know, we’ll see, but it wasn’t very high going into this. um whereas it had been sometimes in the past. So it is different you know um from that from you know the 2008 experience but you know each one is a little different than the one before. So um obviously though not as cheap as like say co but there was actually a huge change in demand at least short term for that that everyone knew about. Mhm. What are your thoughts on the US dollar? You are right it has come down a bit. Expensive. Yeah, it was really really expensive coming into this. Some of it’s crazy. I was looking at the Japan company handbook. I have the last edition they decided to stop publishing it. And um uh the the yen going into this was very very cheap versus the dollar. Like if you were an American taking your dollars going switching them over to yen in Japan, everything would have seemed really cheap to you. Um so yeah I mean we know that US stocks certainly um but just assets in the US were pretty expensive uh and that actually even added to people in other countries investors you know returns over time is both that US outperformed their home markets usually but also the dollar did fine too and now both of those things have reversed where um other countries foreign markets are doing better than the US and then the dollar isn’t doing well either. So for people investing in other countries into the US, it’s not good. Mhm. Do you have any thoughts on yields? I mean, the 10ear is basically, you know, kind of where we were when all this first started. A lot of people were speculating that, oh, they want to, you know, crash the economy or or, you know, have a recession or crash stocks to uh, you know, get yields lower so they could refinance a huge chunk of the debt that’s coming due. in July, but yields have been going the opposite direction and even it was what was it Sunday night or maybe Monday night uh yields were basically kind of blowing out overnight and then Trump uh added that 90-day pause the next day. It was funny you had Bessant come out and say, “Oh no, you know, it wasn’t because of the bond market why we’re doing this 90-day pause.” But then you had Trump come out and be like, “Yeah, I was watching the bomb market last night and it was a little bit queasy. people were a little bit queasy or whatever. Um, so you know, curious about all of that. So, usually when you have some sort of crisis, uh, everyone tries to get to their home currency and cash. So, if you have a lot of people investing in the United States, and that could be mort mortgage back securities, it could be all sorts of things other than just um, US treasuries, uh, then it would go from being investing in long-term things to investing in short-term things. and to investing it basically at home. Um, and that tends to happen regardless of their actual beliefs about where’s the best place to put the money. It doesn’t mean that they believe that home is the best place for the money or that um, short-term is, but that’s what they do. In World War I, Europeans pulled money from the US, for instance, and it’s clearly wasn’t because they thought it was better to have it in Europe. that just want it in their currency and in a bank account basically, you know, and the equivalent of that here is like, you know, three month treasuries instead of 10 and 30 years. Um, so I wouldn’t s be surprised if, you know, when you have that kind of thing happening, the the um yield curve changes that way where people are less inclined to to own long-term things. Yeah. You have price of gold um breaking out. If you want to talk about the yield curve, we have it um up here right now. Of course, Trump came out and you know, he was saying that the Fed needs to cut interest rates and JPL immediately was saying that we’re not going to cut interest rates at least right now based on everything that we’re seeing and that tariffs are inflationary and in in their minds basically inflationary inflation comes number one. Um, so yeah, I mean are you is the yield curve kind of signaling anything to you? Do you think uh you know yields are going to go higher? Do you think the curve will be steeper? What do you think? Well, depending on how things develop, steeper would be pretty normal. I mean, depending on where things are headed, but yeah. Um, but that’s not hard to predict if we were saying that they’re completely flat and for a surprisingly long period of time. So, um, yeah. Yeah. And then on ter in terms of the um the market has expectations for some cuts coming up and you know other than inflation expectations and inflation data to some extent but only things that change quickly in price um would they not cut rates? I mean by any other measure you would cut rates. So, um, and I mean, yeah, I I I don’t Yeah, I also don’t know how, you know, um, I mean, tariffs could be inflationary, I suppose, in some ways, but so could, you know, that’s kind of like Japan introduced a um, like a consumption tax, like a sales tax at one point, and so that’s inflationary. Yeah, it it is, but it’s not the same thing as like what we saw during CO or something. I don’t know that that would lead to sustained higher prices over time um because it’s not very stimulative. It’s exactly the opposite to the economy. So in the long run, I don’t think that you know tariffs are why you have a lot of inflation or something. I think that you know having large deficits and having a lot of money uh growth over time is more what would cause inflation. Um and you know optimism people to spend that money and everything. But if they expect everything to cost more in the future, then theoretically that means that they have to spend the money now. Mhm. I mean, do you think this is I mean, so today, China, they uh they put another they raised their tariff on us, but then also said that they aren’t going to raise it anymore because it’s kind of a joke at this point and that, you know, there’s basically no market for things at at this high of a price. So, I do wonder if that’s sort of the ceiling and going forward, you’re only going to get good news come out of uh Washington as it relates to, you know, tariffs and settling with countries and probably walking down China uh the tariffs there. So, I imagine, you know, my thinking of it was maybe we’ll start to get a bounce because there’ll be more certainty going forward. Um, and you’re probably only due for better news. Of course, barring that, you know, Trump doesn’t just wake up one day and tweet something else kind of on a whim, which is a big if, of course. But um yeah, I mean, China basically said they’re not going to retaliate by raising the tariffs even if the United States continues to do it because at this point there’s just there’s no point in doing it. Um and like I said, they called it all a joke. Um so personally, I kind of think we’re towards the end of this. casino you know markets are forwardlooking and I think if they have the certainty that tariffs aren’t going to continue to go up supposedly there’s 75 countries that are you know willing to negotiate with the white house um so I imagine you’re only going to get positive news that comes out of that um so you know we’ll see what happens but I guess you know the real question is Jeeoff what happens on you know going forward is this a new world or a new regime regime that we’re going to be living in. Um, you know, Trump clearly wants, you know, manufacturing and US jobs and everything to come back on shore. He’s been talking about that for 40 years, but I just don’t know how much of a I don’t know how much of that is realistic. You know, of course, this is just pretty obvious, but it’s incredibly hard to open up a new factory and all that. You know, it could take five plus years to to bring all that back home. I don’t even know if we live in that world anymore and what would that do to prices here and you know there’s a lot of debate around that but I don’t know I mean at this point how do like what happens with everything on the back end of all this or do we eventually just kind of get back to where we were and all this chaos was just chaos for nothing maybe I mean I don’t know that if there’ll be a lot of trade between the United States and China in the future ever again. Um, there might be, there might not be. Uh, it’s a little tricky. China doesn’t have really friendly relations with a lot of countries and they don’t have a lot of support in the United States from either party and America’s not very popular in China. So, uh, there’s other issues as to why those two countries might not do much that way and it’s not in a lot of other countries efforts not to try to take advantage of China during this time. So it it I mean it’s not a huge huge item like I don’t know if you know US imports and exports are maybe I don’t know low double digits of GDP or something and of that you know I I don’t know cuz there’s probably data where you have to include Hong Kong and China as separate things but you know most of it 80% of it or something is probably with other countries so I I don’t know that it’s terribly consequential in the very long run you could see a world where the US and China don’t trade with each other other countries all trading with the United States and with each other um is more of an issue and there hasn’t been any sort of trade war looking that way I mean there hasn’t been a lot of singling out of other countries except China and other countries haven’t mostly singled out the United States except for China too so that seems to be the one that would be most likely to be the long-term consequence um how much of you think the reason why there hasn’t been any sort of major world war in a very long time is because our economies have become so intertwined with each other where you could fiscally harm somebody or hurt their economy if you know they were a threat to you just by you know that’s a theory tied to the hip right yeah that’s that’s been a common theory uh I I think you know uh it’s unlikely just because on the eve of World War I the world was extraordinarily globalized and it took it a very very long time to get to similar levels again. So um it only is in the last I don’t know 30 40 years or something that it would have exceeded those levels. Um so there was a ton of trade before World War I that changed everything. Um I think the two major factors for that are nuclear weapons and democracies. The number of democracies in the world went up a lot and they’re not very likely to go to war with each other. It’s pretty rare. And then uh countries with nuclear weapons tend not to go to war with each other. So the that combination um is a big factor. Um so there have been though smaller wars between countries one or more of which are not democracies and that don’t have nuclear weapons or that are not you know both sides don’t. So it’s not impossible. It it has happened. Interesting. So let’s talk about Buffett. So he’s sitting on 300, you know, plus billion of uh cash. Saw this come out yesterday. Uh Bur Hathway raises 90 billion yen from bond sale. Um you know I don’t know if you saw this come out. Um what do you think he’s doing? I it’s not a terrible amount of US dollars but it was interesting that he did do it. Well he’s kept trying to borrow to buy more of the companies in Japan that he has and he’s kept saying that he’d like to buy more of them. So you know he mentioned both of those in his letter that he wants to buy more of them and that he wants to finance it in yen. Mhm. With all this volatility, I mean, where are you seeing opportunity? Take people through it. What are you seeing currently? Well, mostly I’m not seeing a lot of opportunity because things were very expensive and then it’s a question of what things dropped and what things did not. There was a day or two where some things were interesting in that they would drop by you had some things drop like 15%, 10% in some countries too, not just the United States. Um maybe because they were in an index or whatever. I mean, you know, you had three days with really big moves that things just had, you know, people may not have even known what they were buying and selling with particular stocks in that, you know, um so there are interesting things there. We talked about oil, you know, that’s one that’s interesting in terms of it was not that expensive going in and it’ll be interesting to see what happens. um it’s pricing in a scenario that if uh oil is that affected um then a lot of other stocks are too expensive relative to oil companies probably. So on a relative basis it’s attracted that way. Um and then there were other things that were already pricing in recession type things whether that’s you know consumer discretionary type stuff or airlines like we said you know travel related things stuff like that. Um, some of those things were already down quite a bit, but there’s lots of others where it’s, you know, this is not very uh enticing. You know, uh, Walmart imports a lot of things from all around the world and is, you know, probably 30 times record earnings or something after um, these declines. So, you know, there’s a lot of stocks like that. We talked about the mag seven type things. I’m surprised that advertising things haven’t fallen as much. Uh so you know that’s the interesting thing with oil being affected so much and other ones. Yeah. I mean some of these are down but they just haven’t been down by a huge amount. And they were down some of them I don’t know how much they’re down now versus the market versus what they were you know in the few months before. So I I would just think that they’d be particularly sensitive if people were pricing in a recession immediately. But Mhm. there were some days where you know banks were moving a lot. Lots of things are moving as if they were predicting um you know recessions certainly. Yeah. I mean advertising I don’t feel like has dropped as much as things that are exposed to oil. I think you even saw that with like fear with Apple or something but not necessarily fear with some of the advertising supported tech things you know that make a lot of their money from advertising. So which is more your meta and stuff like that. Um so uh you know I mean we were predicting basically no growth before the tariffs happened you know and um some things were a little worried about a recession. We’ve talked about the yield curve and all those things. So it’s not like you were in the middle of a boom at the time that this all happened. There was already concerns about that stuff that showed up in terms of what things were performing badly and what was doing well. Um, so I mean I don’t know the numbers, but like Mag 7 type stuff probably was not performing that well relative to the market before the whole market started dropping. So yeah, I mean Tesla’s been getting uh taken out to the woodshed as well. Yeah. I mean that that could be tied to con I mean we talked before about how there’s issues with um electric cars in general like supply and demand but I think that the Tesla specific thing is brand concerns right because it relies so heavily on one brand. Yeah. Mhm. Yeah. I’m sure it’s more protected with that. Yeah. It’s more protected than other automakers in terms of um production and everything but yeah the brand would be a concern. Mhm. Yeah. Mhm. So I guess at at these levels, do you think uh looking for value in in oil related things could make a lot of sense or you know I I pulled this up as you were speaking the rig count came out today and uh down by total rigs down by seven um over the week. Like I said, I’ve been seeing a lot of reports of people just being like, “Yeah, I guess you know, I’m getting laid I follow a lot of people or whatever in in the energy space and and follow it and um I don’t know how much they’re going to be producing at these low oil prices. Yeah. So I mean I think there’s some things that will turn faster than other things. So yeah, if you’re right about you know being able to predict things about a recession when it would end and everything then yeah owning things like oil and airlines and things will do better initially than other stuff. um they’ll they’ll start going up when news is bad because they’ll already be anticipating recovery and everything. Um so um yeah and but it does also depend on the financial situation of each company because if they own a lot of assets and don’t have a lot of risks in terms of being able to service debt and everything then lower production over time you know will lead to higher prices and they’ll be around for it. So Mhm. That’s what’s different though in the energy space. I feel like I I’ve come across names before where they look cheap, they scream cheap, but if the macro backdrop isn’t pretty, these things can get cheaper than you could ever imagine. Yeah. And instead of being a company specific thing, but there’s plenty of like I could name stocks in other things that are cheap, but there’s a company specific reason that people are concerned about. So like um uh we talked about David Busters that’s cheap but that’s because I didn’t like you know sort of the direction they were going. Now they replaced the CEO and the interim chairman interim CEO or whatever kind of said although well-meaning they made a lot of mistakes and we’re going to change what they were doing and stuff even though they’re probably their pick to be CEO. So that might mean that they’re going to pivot that way. So that’s not a macro thing. I mean, I think the stock’s also down for macro reasons over in that most of those entertainment things are down, but it’s down even more. Um, Sleep Number is another one, very cheap. Um, but that’s one that also is partially macro. No one’s going to buy a, you know, an air a very expensive air mattress in the middle. I don’t think I’ve ever I don’t think I’ve ever looked at the stock Sleep Number. Yeah. So, both Dave and Busters and Sleep Number have real credit risk though and everything. Ton of Look at that. a billion enterprise value, 109 million market cap. Yeah. Well, but they don’t have a ton of debt versus what they were once making in operating income. They probably looked like a normal amount of debt. So, if you go back in the last 10 years, they probably had years, what’s their high operating income years? They probably had years that were not that far from Yeah. Like they would give them the peak of 194 million. Yeah. Yeah. So, but you know, until recently they were making 75 to 150 million or whatever every year. They probably thought, “Oh, you can have a few, you know, I mean that’s a lot of returns.” Yeah. Of debt. Um, and the same thing with Dave Busters. They even borrowed money and bought back stock at the same time that they have, you know, leases. Um, and they they did sale lease backs too and stuff. So, they added financial leverage on top of a lot of operating leverage. And both of them have that where they have high gross margins, right? And then you have a lot of fixed costs and then you added financial leverage on top of that, right? Um so Cracker Barrel is cheap but that’s one that is you know since co has been company specific issues because it hasn’t been raising prices and all the things that people um consume at those restaurants are really expensive for them and then those going up. So they got real value conscious customers and then they’ve got, you know, they’re basically serving eggs and and meat and stuff and that’s where that’s our place. I think we at Cracker Bro about 10 times when we’re together on the road. Yeah. So look how before co they were doing 250 300 million a year in operating income. They have not done that for five years and the stock you know reflects that. But um if we look at revenue, gross profit, it’s kind of the same size business that it was not that long ago. So all of those have those things, but unlike oil that you’re talking about, since these aren’t commodity things, there’s a very specific story with each one about why it’s not working. So it feels different that way. But if any of those things turn around, then the stocks would do really well, you know, and oil is just they don’t need to turn anything around except have the price turn around for them, you know, for things to get better usually because it’s a commodity. Yeah, I’m just looking up because we’re talking about this company uh because I remember seeing a couple days ago that Bigalari he um made an offer to buy El Po Loco Pou Loco. Yeah. Less successful. Texas Place. You’ve been there, right? Mhm. Yeah. A lot less successful past history than Crocker Barrow, but yeah, it’s been cheap at times. Yeah. What was his price for? Let’s see. Yeah, I’m not finding it right here in this article, but I do remember seeing that. So, I thought that was interesting because he’s done a lot of things in restaurants. Yeah, that was his big area. He’s been a very successful restaurant industry historically, I’d say, before most of the things he diversified into, but he’s also been a real activist in those things and they’ve mostly been able to stop him from doing much in that, you know. um received an unsolicited non-binding indication of interest from Mclari Capital Corp. to acquire all the companies issued an outstanding shares of common stock that it does not already own. Interesting. So, this AK doesn’t have a price. Yeah. Entered in a confidentiality agreement that contains a customary standill. Okay. Got it. anywhere else you’re seeing uh anything interesting? Well, the other issue is that the rest of the world things are cheaper than the United States. So, the problem is more that the US was kind of expensive versus other countries and not everything there. There are, you know, tech things and stuff can be expensive in the rest of the world. There’s just less of them. Um, so I think there’s more that was interesting in other countries that way. And then the main thing though is that we’re just because we had such good last two years or so. If you look at charts, you’re only for a lot of stocks that you would want to buy because it’s good business. You’re only back to where you were a matter of months ago basically. I mean, some of some things for a day or two there. We’ll see how long this lasts. They’re making 52- week lows, but they’re not often making fiveyear lows. Yeah. Um Yeah. What about uh China? So, they’re they’re floating the idea of, you know, delisting or basically doing uh taking these these ADRs in these Chinese companies off our exchanges. Mhm. That’s very scary if I owned any. I mean, we’ve looked at things in China before and we’ve never purchased anything. But let’s say you owned some security that had, you know, was either listed there or had an ADR or exposure to China. Would you be uh is the the cat risk through the roof here with that? Well, it does happen in some countries. I mean, it’s happened to a bunch of companies recently in the UK if they were listed on AIM because they’ve some companies have taken advantage of that situation to be able to basically take the company private without buying it out, just delisting it. And they know that given the shareholder base and everything that will basically get people to to um uh give up on the stock that way. So, they can basically just delisting. You could continue to hold your shares in those cases. But you know that’s in like the micro sometimes almost borderline nano cap type stuff that wouldn’t get reported on the same way. This would just be that kind of example but in giant companies but it’s because of the relationship between the countries. So it it does happen in like those kinds of things. That’s an alternate exchange thing. So it’s not used to people ever seeing that happen on things that are listed on like NASDAQ or something. Yeah. the price usually collapses and people don’t want to hold it. But and I don’t know how easy it’ll be to invest directly into China for people and Hong Kong has changed a bit from what it was before. So I mean if we looked at things in China in the past, we never looked at we looked at businesses that operate in China. We wouldn’t be looking at something that was listed here that threw a variable interest entity or something and um stuff like that. It would be a more normal sort of situation out of Hong Kong. But even that has changed. So I guess I mean what are you looking at Jeff? That’s what people want to want to know. Any anything interesting you’ve come across? No, like I said, I’ve I’m looking at lots of things, but the the changes that we’re talking about. I mean, we talk regularly about I mean, what’s a high quality company that’s come down a lot in price and was not a really expensive price to begin with is the issue. If it was 30 or 40 times its earnings, stocks are down a lot, but that’s still not really a very cheap stock, you know. US Lime’s come down a bunch this year. Yep. But it is also many many times still pretty uh in terms of the multiple of what it was at any time in the past. I mean, that’s the issue. So this is a stock that now having come down is 16 times DVD when probably it was routinely under eight all the time that you could buy it six seven times all the time for years and years. Um and I’m not saying that it’ll necessarily be bad but they are tied to you know activity in Texas and and other places potentially. you know that eventually construction activity and other things some of the stuff will stay the same but there’s a part of their portfolio that the volume will drop a lot even if the price doesn’t um yeah I mean volume was huge drops for these companies in um the great recession I wouldn’t expect something like that to happen as much to this kind of thing because I don’t think you would have as much an effect on actual construction activity or something like that um it might be hard to sell houses and home builders might have problems and things like that, but there’s just not been a huge amount of new activity lately in the last few years the way that there was right before the the um housing bust before. So there’s not this like buildup of over supply the same way. Yeah, because like we mentioned uh um at one point we had talked about there was a company that made um things for flattening for mainly for warehouses and things like that for making um flap flooring basically through machinery. It was actually I believe aim listed stock but but it would have gotten much of its business in in China and stuff but um that drop those orders drop to like nothing when something like this happens but then they make a lot of money at other times. So, you know, those kinds of activities do drop off. Um, so you have less warehouses and things being built. Now, there’s roads that are still being built and whatever, but uh you probably see a big volume decline at some point in something like this, but not a big price decline. It’s just, you know, uh I don’t know, years and years ago, Buffett was talking about insurance things. He’s probably said the same thing before. And he said, you know, we price to exposure. We don’t price to recent experience. And that’s the issue with a lot of these things. Yeah, I mean it’s it is down a lot, sure, but if you wrote it up before COVID or something, people wouldn’t believe you that it would get to 16 times even. Now, some of that is also is smaller and then once a stock gets bigger and it just takes on a life of its own. That way you kind of get rid of the discount of a high quality really small companies sometimes trade kind of cheap and high quality medium-sized companies don’t just in in terms of being really easy for people to invest in it. It it quality eventually gets high multiple if it gets big enough you know. Mhm. Yeah. the the peak EV to Ebida looks like it was 30 times and I don’t even remember when it was 30 times even the you know people I know that owned it were like why is it becoming so expensive I mean it would just it was very richly do you know what it looked like before the uh oh yeah it was always like nothing yeah I mean let’s see we could go back I mean it was always this has always been one of those uh see cheaper companies we could go back to 2020 and Looks like the peak evid ibida before then was 10 times. Yeah, if you look at right here, looks like in 2017 it hit 10 times. In 2019, end of 2019 like 10 to 11 and then yeah, it just shot up. You got more than double from multiple expansion. Yeah. So, I don’t know if people are predicting a recession right now, but they’re probably not predicting that the economy is better than it was before COVID happened. You know, 2019. people weren’t that optimistic on the economy, but they’re probably not thinking we’re materially better than that. And it’s, you know, what is it 50% 60% more expensive than that on the multiple now after I assume coming down a bit? Um, yeah, actually you can see it came down a lot. What about financials through all of this? Banks specifically. [Music] Yeah. Well, are there banks that people are interested in that are the right uh sort of um multiples on that? So, I mean, the ones that I know people like a lot are the very big ones. You know, JP Morgan, I guess, will be reporting earnings or has, you know, basically did this morning. They did today. Yeah. Okay. So, um and I’m sure and I know his letter came out and everything. So, they do all that around the same time, right? Um, so I’m sure there’s probably news things about him saying something or people at the company at least talking about the future. Um, yeah. I mean, for a giant bank, it’s a good business. Yeah. And it’s very detailed the information he gives in the letter that you can learn about comparing each segment to the quality of those businesses and other um each of his segments to kind of standalone businesses in each one. And you could also look at the peers for that, you know. So if he says Northern Trust is the best that we compete with in that area, then you can go and you can look at that one or whatever. Um yeah, so on a earnings basis and you know some of the banks look attractive. Sure. On a price to book basis, you know, they’re doing better now than they were before. So this is why sometimes you want to buy ahead of that because, you know, I don’t know that return on assets will necessarily go up as much at these places as they used to. uh I mean as as they are now at sorry so like um you know you might only get a move from 1% return assets to 1.5 or something like one time you’re you’re probably not going to keep benefiting from that um I I haven’t seen a lot of things about financial conditions tightening a lot or a lot of banks right now so um there was maybe a day where they were declining by large amounts but that was about it I didn’t see like super dramatic selling in banks that you wouldn’t expect. Some riskier banks, yeah, you did see some things, but I don’t know if that’s just more everyone was dumping everything that was kind of risky and stuff, you know, so we won’t single out what those are, but just like in general um things that are not the JP Morgans and stuff of the world. Yeah, there was a little bit more on those or at least tied more to economic activity do really well in a boom and not as well in a bust. Say that. Mhm. I do wonder how much, you know, of the moves recently have just been the deleveraging of a lot of these pod shops and funds that run 10 to one levered or or or more than that, quite frankly. So then you get this outsized move and then their chief risk officer is just cutting it all, right? Just just selling it and and just massacring the the stock. Um yeah, there were some odd moves and things. Uh the things that’s most noticeable to me like I said was index related things. But that’s too complicated for me to even understand in that like when your moves are that big are there movements in underlying stocks just purely because of what’s happening with indexes that everything in the index has to move like that. So occasionally you had things like we were huge upday. There were a few stocks that went up to levels that was higher than they had been before all this happened. And that’s just because presumably they’re in the index. It can’t be that anyone actually really wanted to buy that stock that day. And there were probably lots of short covering and stuff at that time. But even if people were short individual stocks, they probably weren’t picking those individual stocks to be short for that reason. We mentioned ones like Sleep Number and stuff. People are probably short that specifically because that company or the investors, whatever, they would be short that for that reason. There’s other things where they probably just short a bunch of stocks as some sort of hedge across different things. And some of them might be betting on one economic outcome versus another, too. I mean, I guess like you said, um I mean, I don’t know. It depends on It’s hard to tell from just like reading news reports of guesses about this, but I would guess that professional investors were more optimistic um about things going into it and more pessimistic during the declines, whereas individuals probably buying during the declines. They were I saw reports on that. Was it Friday was was a huge flush and and retail basically bought the dip. So there’s been no capitulation by retailer yet uh retail yet through all of this. Mhm. Which sometimes makes me wonder, right? Like we don’t bottom until they capitulate. Um but yeah, I mean all the reports show that they’ve been buying all along this entire move. Yeah. Well, it’s worked for a I mean very long time. uh for the I mean and it’s more the issue I think of time than the size of the moves. I I’ve never seen situations where huge down moves or something just causes people to go okay I’m out I’m out of the market and stuff. it’s that a bare market takes a year to a couple years or whatever and it’s that experience you know um you know probably I don’t know probably was eight nine years of multiple expansion after the the 2008 period like every year probably would have been like the multiple getting kind of better and stuff you know on average for a lot of things so that it’s that feeling that builds up a lot of confidence over time and on the reverse it’s multiples contracting for a few years in a row that caused that. So, um I think it’s usually that that was my experience in com time and also 2008 just talking to people and everything. It’s just the experience of not going up for a long period of time. And I mean, I shouldn’t say not going up. You actually have lots of really big up days and then really big down days, but on average, you’re not moving in an upward direction for a long time. And that’s more what gets people to give up on the market or something and focus on other things. Mhm. Mhm. I guess the the the question to ask is I mean is there a particular industry or sector or anything that you know you’re you’re kind of excited about and then is there one that you’re like oh no I would definitely stay away uh from that during this like through this environment. Uh well so there’s a few different things happening at the same time. Um, one you have tariffs which change things a lot for certain companies in certain businesses and if those things continue um would be really negative for those companies. That doesn’t necessarily affect a lot of other companies though. On top of that, you then have what that means for say shorter term recession and all that. I would probably focus more on that personally on what things are down because there is more of an expectation for things happening in the economy overall over the next however long that’s harming them more so than trying to pick um stocks that depend in part on a kind of um which two countries that they they’re trading with that way. So, I mean, here’s the thing. The thing with the tariff thing, the really big reason why you don’t why this production isn’t in the United States is that it earns poor returns on capital. Um, so when you talk about things like contract manufacturing type stuff, it’s not impossible to have build that up in the United States and do it instead. If you want to make iPhones in the United States instead of making them on the other side of the world, you could do it. Uh, it would cost more. Um, but that’s not necessarily a huge problem. I mean, people will give up other things before their iPhone first, so they could pay, you know, that a few thousand dollars for an iPhone that’s not going to bother them. Um, the the bigger issue is that we would then have a bunch of companies in the United States that would have returns that look more like they did decades ago instead of the kinds of giant businesses that people love, which have no assets. People don’t like companies having these assets. So, these companies outsource their assets to the rest of the world. So you could have vertically integrated Nike, right? And it would be a good business, but it wouldn’t be the business that investors like that actually has someone else doing all the work and it’s a marketing company or, you know, Apple and it’s not actually assembling anything. Yeah. It wouldn’t be a Well, I guess this is only 20 times earnings, but Well, Nike, there are other ones that are like, oh, this wouldn’t be a 40 times earnings company, right? Yeah. Um and and some of them depend very much on where they’re the the places that they’re um like Nike is a good example where all their production for the most part is in really poor countries and all their sales into really rich countries. Um so they’re not generally producing things that are being sold in the same country to the same sorts of consumers and everything. So that does happen. And that would be the same thing if you’re exporting to you know uh whatever other things where you depend on one you know watch company is a classic example of that where they’re really just producing everything in say Switz you know luxury wash things in Switzerland or something and then they’re making a ton of profits in Asia and to some extent profits in Europe and a bit less in the United States and everything but they’re very dependent on producing in one place and then u making all their sales based on their reputation in another place. Those are the ones that are more sensitive over time because would these exist in this form if the world didn’t look the way it does in terms of there being no, you know, like really really low tariffs between places and also lots of other not being restricted things. No. Um I think that they wouldn’t look that way, but it’s fairly easy to obviously pick other things that are completely domestically based if that’s what you’re interested in. Um, but some of those also would be negatively impacted if there’s a recession or something. And the problem is more the price that they went into this at. The reason why I mentioned oil was that they the stocks oil stocks in general weren’t, you know, terribly expensive or anything. And oil wasn’t terribly expensive to start with. So that was why it was more attractive. And it was one of the few areas where you saw Buffett buying some things not that long ago. Mhm. He’s been buying accidental, right? I I don’t think No, no, he had been buying it as high as like 50 to 60 normally, right? Anytime under 50 he was buying. Yeah, under 50. Yeah. So, um Yeah. But so, but I mean, so it hasn’t drastically changed things. I said before like look, if I was managing just my own money and stuff, I would be holding more cash, be short things, whatever. And I said, I don’t know where people will do well. you’ll get a result that you want unless you are say short mag seven type stuffs or something like that if things go badly because what how else are you a lot of things will go down a bit over time because everything’s pretty expensive. We’ve talked about supermarkets. We’ve talked about movie theaters, things like that. They’re not affected by it. They’re okay. they were their earnings this year and next year and the year after that will probably be the same to slightly up or whatever depending on the company and their multiples are normal for like their long-term history. So it’s not like they’re, you know, they’re one of the few areas, each of those things in the United States, both supermarkets and movie theaters, they’re probably not that different since COVID, they’ve average these kinds of multiples for a while and their earnings probably aren’t abnormally high this previous year. Whereas some other things, you know, will have their earnings, some companies will predict their earnings will go down a bit or they’ll at least change guidance and do things like that, whereas these things are mostly not affected. Um, and they’re mostly, you know, okay, so I’m not saying they’re great businesses, but like the market often the way that people make 10% a year in in stocks long term is they own things like this where, you know, the multiple was what did we have here? EV seven or something or, you know, we have a EV to sales low ones and then them with that historical margin that’s, you know, 10 times pre-tax profits or something, right? So that’s what Buffett probably bought a lot of companies at. Both companies he bought the entire thing and the stock, you know. So I’m I’m all for looking at other industries that would be interesting. I’m not um all doom and gloom about what their future will be versus their current earnings. It’s just there’s not a lot of things cheap at Yeah. Not. It’s not even cheap going into this. There weren’t at a normal level for them. Most things were elevated, whether it was one and a half times or more, but most things were kind of elevated. And you know, um, I mean, we don’t talk about like junk bond things or even businesses that are or companies that are in those kinds of businesses, but the yields on those things and everything are really competitive with um, you know, investing in those things would be really competitive with with a lot of stocks if you really thought, yeah, there won’t be a terrible recession or something. And I mean it’s it’s hard for some to think that stocks would have better returns that you’re getting a lot more for taking more risk I guess is my way of putting it. Um so I can totally understand it when they trade at huge levels for Nvidia and stuff because it’s a rapidly growing company. It’s more just across the board that stocks that aren’t grow. I mean what Walmart’s probably grown 3% a year for 10 years and we said it’s at 30 times earnings. So that’s those are the ones that are hard to figure you know. Yeah you’re right. 10 year keer 3% EPS 3.7. Yeah. So it’s it’s at 37 times uh today. Where were we before? We’re down probably a bit. I mean yeah 20 times. Evid Ebida. So I’m not negative on it. But if you’re asking me could a supermarket or movie theater also have 3% a year for 10 years. Yeah. That sounds like 43 times earnings. That’s crazy. I mean, what sectors are there? What or I should say, what industries are there that are cheap right now? Um, energy. Yep. And some and in general, I mean, when we talked about energy, some of those things and I mean that’s oil, that’s natural gases, all those things. Um, yeah, the the commodity itself is not super expensive compared to the past and the the um the uh stocks are not that expensive. When we talked about banks, that’s a little different because before they were pretty reasonably priced and it seemed like rates could be higher in the f, you know, rates were lower than normal. Now that’s not the case anymore. So it kind of comparing them as a commodity thing. It’s as if they’re commodity isn’t that attractive. You know, it’s pretty normal priced. Let’s say that the price of money right now is pretty normal. Whereas before you kind of thought, oh, their earnings will get better and they’re kind of cheap. Now you’re more just like, well, they’re not too expensive. Um. Mhm. No, movie theaters are cheap. You just had a good week uh at the box office, right? Yes. Yeah. And this year won’t be that good. We talked about that. But, you know, next year will be better probably and better than We’ve said that for like the past couple of years for like, oh, next year’s the year. Oh, next year’s the year. Saying 2025. Yeah. They they were always saying that the theaters are always saying they need to make it to 2025. Looking at the schedule, I’d say it looks more like 2026 to me, but 2025 should be better than 2024, but 2024 was really bad. There was strikes and there there was just lack of product and everything, but um yeah, when the product’s there, it doesn’t seem like it’s uh doing badly. No. Um and you know, in the much wider thing, look, if you had really high tariffs across all sorts of things, there is everything competes with everything else. So the less attractive things are for actual stuff, um the more attractive it is for things that don’t have those tariffs on it for other experiences and things like that for people um in general. So it’s, you know, that’s the thing that I think is most misunderstood in the reporting that I see is like, oh, this is a price increase on this thing and this it’ll be, you know, they estimate here’s how much more a year consumers will pay on this and this is what it’ll cost. And for a bunch of the things they’re talking about, people will just buy a lot less of them. Um, but the ones I’m surprised by are like, do you have Hamilton Beach brands for instance? So there’s a ton of companies like this where everything would be imported. Now all their competitors would be importing it too. But the business, a world in which there’s even some tariffs changes things a bit and very large tariffs from some places changes a lot in that there’s no way people are going to buy as many things uh that these companies sell unless they’re incredibly cheap. It’s not like the iPhone. If you double the price of an air fryer, you’re not going to kind of sample and be like, “No, no one is.” Yeah. All right. I don’t need a $100 air fryer or whatever. Yeah. And people have three of them and they’re under the, you know, they come out with the new one, they forget they had this one, they switch and get into this one and say, “Oh, I’m going to do this forever.” No. Then that goes under the right and they pile up a lot of this junk over time for something super durable that people are going to buy and keep forever and all that. It tariffs don’t necessarily affect it to the point that the quantity would permanently be impaired, but there’s just a lot of stuff where the quantity would be so much lower. Um and and so when people talk about things like whether it’s I saw things about toy things and whatever it’s it’s if that was the long term that those are where tariffs will be it shifts things in a lot of ways. People would buy fewer of them. They would be more expensive. They would also be designed to be better in certain ways in terms of the markers of quality because you wouldn’t be trying to have the lowest price things that way and you’d have to focus on something else and reconfigure your business on the expectation of lower quantities of that. But it’s not just price that would move. you would have lower quantities of real stuff consumed if it is something that depends a lot on price. If it’s an as seen on TV type thing, it’s very important that that price look good. You know, that’s how you sell it. And you can’t ask people to to try a product at a premium price for the first time, you know. So, the the Hamilton Beach brands of the world, the ninjas, the whatever, those kinds of things, you know, they’re just people will have less of that in their kitchen if there were tariffs everywhere all the time. It’s because there isn’t that people, you know, buy those things. [Music] Can you think of any other uh situations similar to HBB? Well, we already covered like Nike and O toy things. Um those would be drastically affected by some of this because people have gotten so used to very low prices for some of those things and they would just the business would be completely different. Um then there’s other things that are complicated in terms of the whole supply chain, the kinds of um points around which they built a lot of suppliers and things. So that’s where you get into things that are complicated with like cars. Even in cases where the car is made in someplace where you know it’s being made, uh the actual making of it isn’t is really an assembly type job. It’s a lot of labor cost then, but there’s a lot of other things going into it that are all there because it makes sense to situate them there. Um, in the long run, the toy industry, fashion things, whatever, wouldn’t all be located in this focal point except that there’s some things about labor and stuff for some of the businesses that are there. And so, you’re there because your customers are there and you built it all around that kind of like Detroit with with autos in the past. You know, that’s the center of the world for that kind of thing. And so toy things, fashion things, whatever, they’re these places where it’s all of that going on. And you wouldn’t necessarily situate your business there, except you’re there because your suppliers are there, your customers are there, you’re all doing that together, but they’re there because of the the um price for them. And so they would change which countries, you know, would benefit and everything from that. Um and and you would just over time not focus so much on that. Um, but I just think the a big underestimate for some of the things that we talk about with these companies is just people won’t buy as much of it. I it, you know, Buffett’s talked about that all the time, but I mean, it’s hugely different whether it costs a lot more for an iPhone or costs a lot more for a um, you know, a rice cooker or something. Do you have any thoughts on coal? Trump’s very pro coal. Is it exactly route? got to do more produce more coal, mine more coal. Yeah, I I mean I it depends. Uh if you’re in the business of doing things that uh are new plants and new whatever things and stuff, then I guess that’s great compared to having like can I just find an AMR again in 2020? Yeah. Um I mean the thing with the with coal and oil and all these ones we’re talking about is like it’s not necessarily a good thing if there’s a lot of activity, right? Like you have to analyze the business. In a lot of cases, you’re better off if there’s a lack of supply, but you have what people need. That’s my favorite setup. Yeah. And so macro backdrop, demand, you know, staying constant or or increasing and supply is very limited. I think the best returns, at least on like a short-term view, you could print money when you find that set up. Yeah. Which is what we talked about with US Slime or something. Those businesses have that, so they benefit a lot in their area when there’s demand. Um now when their returns are not that great when there isn’t demand um but as long as they can survive that period and earn a decent return then they just make these huge profits in the times where where it’s short but in a commodity business you’re basic I mean there’s not a lot of commodity businesses where you basically you’re going to be investing on the expectation that you’re going to make a lot of money when the commodity is in short supply basically like there’s not enough of it and um so I don’t know that a lot of these things that the industry likes are necessarily good for the investors. It’s not a great news if you know it’s great for for passengers if they’re going to open up a lot of um new routes for for planes and things, but it’s it’s fine for the company if they just make sure that they’re running at nearly 100% of their seats full. You know, that’s that’s what they need to do. And so, it’s just different depending on that. And as an investor, what you care about is the high returns on capital and all that and not necessarily lots of opportunities to expand and definitely not that you expand the real amount of stuff that you’re doing. Um the coal stuff is like yeah some of it is what you talked about with government things because especially environmental regulations on that everything can be very costly um for the plans. So that changes it. But the big thing is there’s a substitution possibility and if natural gas is is affordable for people then that’s always a problem. Um and that it’s true either way. It’s true the reverse way. It’s you know you have other ways with energy of if there’s a cheaper way of getting energy then it’s going to be a problem for your energy commodity whatever it is if it can be substituted in some way. Got it. Any uh final thoughts of everything going around Jeff? any uh you know any uh acts of you know what’s funny every time there’s massive volatility in the market people always sent me this podcast that we did I think back in 2020 let’s see um let’s see somebody sent it and then I guess resent it again this guy um using volatility to your advantage I think we did this back in 2020 okay uh he said a friend just sent me this 5-year-old podcast and the quote was, “You’re thinking about volatility differently when you’re fully invested.” Yes. And every time there every time there’s a lot of volatility in the market, this podcast resurfaces. So, I think it was a positive message we gave where, you know, there was some uh calmness or wisdom of how to think about things, you know, when when things are going crazy. So yeah, any any final thoughts or anything that you could leave our listeners with? Any acts of, you know, any sort of encouragement? Well, there’s a few possible uh things of encouragement. One, if you have cash or if you own other things, uh bonds, other things that we talked about, then you can take advantage of volatility and it’s great. So, we didn’t talk about that really of just that whether there’s negatives, that’s fine. But prices moving a lot up and down is to your advantage as an investor. That’s a good thing for you to have happen. Now, what I don’t love is the corey letters that come out and say, “We took advantage of this to load up on this thing.” When they meant we sold another stock to do that, obviously. So, it, you know, it can’t help if you sold some Walmart to buy some Target or whatever. Usually, you were, you know, invested in one of them. But the you get but the opportunity to take advantage of um price changes uh to suddenly have something that you didn’t see before that you could invest in now. And also honestly if something you know if you own some relatively expensive things that can be a source of funds for for things that are relatively cheaper. So although we talked about as if it’s like it has to be absolutely cheap to move from one thing into another, it might not because you could be in things where you could sell them because you think that they are expensive now and exposed in some way to stuff that you’re worried about whereas you can now invest in things that you have a clear idea of the value of it. Um the the volatility thing is a plus. No, I mean if you could create a world in which it would be easy enough for you to predict things in the economy and everything, but there was a ton of volatility, that would be great. You know, it’s usually just that people are in the same boat with other people. So, when it’s very volatile, they also are feeling like they have a lot of uncertainty and can’t make predictions about the future. But I don’t think that’s true for some stocks. Like, we just went over some things. I don’t think that you should be there should still be tons of industries out there where it you haven’t suddenly changed radically what you think they’ll earn a few years from now. Well, with that said, I want to thank everybody so much for tuning in with the both of us on the Focus Compounding podcast. Be sure to hit the subscribe button wherever you’re listening or watching us here today. If you’re going to be in Omaha and you’d like to meet up with Jeff and myself, reach out to me at andrew@focuscompounding.com. If you’re interested in learning about our money management services, you can also reach out to me, andrew focuscompounding.com. I thank everybody so much for all the support and we will see you in the next podcast. Take care.

Description:
00:00 – Intro 00:00 – All-Time Highs 05:20 – Interest Rates & Financials 07:15 – Passive Distortions 12:45 – Thoughts on AI 20:40 …

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. Gosh, it’s been so long since I’ve said that intro that I have forgotten what the intro is. 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 on the internet, uh, going all the way back to goodness 2018 I believe 2017 2018 for this podcast and even further back um through investment writeups and blogs that Jeff had wrote which is on focuscompounding.com uh been doing this for a long time Jeff um so there’s a you know bunch of uh content online focus.com that if you want to go and read you definitely should you could go to our website if you’re watching on the screen right now and type in anything that’s on your mind and I guarantee you you will find a write up on it. I mean, let’s just talk about what’s going on here today. Um, you know, people keep talking about uh interest rates. Type in interest rates and oh wow, you can see a lot of stuff that Jeff had written through the years. First, the most recent one was 2016, the possibility of negative interest rates in the United States. Do you think that’s still a is that I mean is that still a possibility or what? >> Um so go to focuscupine.com to be able to do that. So uh Jeff, it’s been a minute since the last time that we >> uh recorded. I think the last time we recorded we were in the midst of the tariff tantrum is what the Cartoon Network aka CNBC was calling it. And um we’ve since roared back since then. I think last time we actually had spoken. I was saying it’s probably a good time to buy because it seemed like all the bad news was out. Um countries were coming coming to the table. At least that’s what was being communicated. You were getting news from the White House that they were putting going to put a a greater or a more extreme tariff on said country and the market was just kind of shrugging it off. You know, that’s the funny thing about the markets is market hates uncertainty and they hate uh you know, the things that just ain’t so, as that quote goes, right? But when the market starts to be able to digest and it’s been telegraphed, it’s almost like it just shugs it off is what this modern market uh does. You know, kind of the best case of that, I guess, was the Iran uh bombing, right? They kept talking about it in the market for a long time. >> Um and I think this is actually done purposely by the Trump administration. They’ll talk about it. They’ll say, you know, come to the table, otherwise we’re going to do this. Okay, no, actually come to the table, otherwise we’re actually going to do this. And then they do something and it’s not a surprise to anybody. It’s like the markets just kind of shrug it off, right? >> I think there was some volatility in oil. But, uh, that’s sort of the Trump MO because they obviously care a lot about markets. But, so, um, last time we recorded, um, the market was down a good bunch from those tariffs. We’ve since rode back. The S&P 500 right now. The price index is up 8.49%. So, of course, if you want to add in the dividend, um the Russell is about flat. Gosh, what a horrible index that Russell uh 2000 is. Uh NASDAQ up almost 11% on the year. I think the NASDAQ’s up like 30% off of the lows. Pretty crazy. Um and then oil is down 8%. Love to track oil, obviously. You know, it’s almost like Trump said recently that he loved uh oil at $65. So I was like, “Oh, okay. So 65 is the new 50. Um that’s the new floor, right? Anything above, you know, too much above that, he’ll just start to tweet and complain and blah blah blah.” But uh so wanted just to to give your thought get your thoughts on everything. I think last time we we had spoken the you know the Doge committee was >> front and center and the talk of the town in DC and how we’re going to cut the deficit. But then we transition to the big beautiful bill and it’s come apparent that they’re going to have to run this baby hot which is kind of what I always thought would happen. Um Trump and Elon had a very public breakup which was uh interesting. Um, and yeah, they’re going to run this economy hot is what their plan is is what it seems like. So, yeah, want to get your thoughts on just everything that’s happened since we’ve last recorded. People want to know, Jeff. >> Yeah, most of those things are not good and the market keeps going up with them. So, I think that’s generally the reaction. Yeah. >> There you go. That’s it. Are you surprised by where things are in the market or? >> No. I just feel like we’re get a a melt your face just just a melt up higher. Like that’s the pain trade, right? Is markets will just continue to go higher over time. It just seems like it that’s you know I don’t know. It almost is like mag seven’s become a national security that they just have to continue higher. He wants Powell to cut interest rates. What do you think that’s going to do to like financials >> if the if the Fed cut interest rates? >> Yeah. Um, I I don’t know. Uh, it’s a complicated issue. Um, I’m not sure how effective interest rate changes are necessarily if concerns about inflation and stuff are due to fiscal policy. So, um, it’s hard to say, but the inflation sticky type price inflation is high and, uh, highly variable prices are low. So economy is kind of globally kind of weak and yet there’s kind of a high amount of sticky inflation. So that’s not necessarily uh that effective to be able to like raise rates or something to cause that to come down. Um probably so what do you consider high like 3%. >> First yeah the I mean the the sticky price inflation is probably running something like that. Um, yeah, it’s probably been around 3 or 4% in in last most of the last year and the variable portion has been probably negative 1% to zero or something. So, they’ve netted out to be pretty um much the same, but they’re very different in terms of what is causing the inflation. >> What are your thoughts on the dollar? Do you have any? I mean, like Trump wants a lower dollar. >> Mhm. Yeah. Yeah, I don’t know. I mean, obviously that complicates things for tariffs is the same thing is that you have tariffs. You have both the complication of what tariffs are and what currencies are for affecting trade between countries. So, >> Mhm. Yeah. Well, we’ll see. I I do wonder um you know what will happen from here. Um but you know, it’s just so interesting. I feel like because twothirds of the market now is passive, you’re just going to get these these extreme moves like we had u back in April, you know, then it’s just then you just have this consistent bid when everyone like piles back in. Um >> it’s just it’s it’s it’s definitely different that way. You know, now as individual investors, when you’re going to get these violent swings, assuming you don’t have leverage and blow up or you have cash or or the ability to to put money to work, that could be an amazing buying opportunity. >> Mhm. Yeah. >> I think that things that are grouped together by category have been moving more together and less for individual stocks lately. um kind of what you were saying with that about picking out things specifically. So I think that is a bit of an issue. Um you know so we talked about Dollar General before, United Health, they’re these stocks that should be very efficiently priced. Tesla should be very efficiently priced. There’s a lot of focus on and yet they have trouble predicting you know things shortly uh that are about to happen with stocks. So I just it’s interesting certainly market’s very optimistic. I don’t know if it’s like a change in terms of efficiency from the indexing things that we’ve talked about. I historically would say that I haven’t seen much of a difference in how efficiently priced individual stocks are just from um indexes, but it could be causing overall higher prices across the the market. That’s possible. >> You think that’s due to like factors and and quants and whatnot? >> I don’t know. I think that there this it’s I mean it’s very psychologically driven in certain things about even what prices should be in that at you know when I wrote about now it’s almost 20 years ago about stock prices what they’ve been in the past what they should be in the future one thing I said is that they were too low in the past so there might be greater acceptance of people having a higher amount of their net worth in stocks. Um, but the other thing is it’s very US-driven. So, it’s not necessarily a thing that across the world they’re all incredibly expensive versus what they were in the past. There’s plenty of countries that are not the most expensive they’ve been um, historically. I mean, I could think of lots of countries that were had a phase that was a lot more expensive than now. And whereas with the US, that’s not really the case. So, it could be outperformance over a long period of time. It could be something unique to the US that people are willing to put a lot of money into stocks as opposed to what they kind of used money for in the past. I don’t know. But obviously if that changes as a society over time, then you know that will change the average level of prices. I don’t know if it should change what one stock is relative to another. But like you said with indexes, some things might be in or out for other reasons. So >> yeah. Yeah. I mean two I was reading a report. It said like twothirds of of markets are passive now. So it’s almost like you have this buyer that you know back you could even say like 15 20 years ago you had a lot of people that were going out to set the price right and find different you know securities and and buy up at certain prices and now it just it seems like it’s all on autopilot based on flows and all that other stuff positioning. >> Yeah. And so it’s it’s an interesting question. I mean my feeling on that’s the same as we didn’t we never um published it but we had kind of talking about AI stuff and I was more skeptical about AI things if it gets to a point where AI is being trained effectively on things that have already had AI input into them over time and the internet would just get less useful and that’s kind of my feeling on um indexing. I mean there’s no reason that you can’t be 80% passive and 20% active and have a really efficient market because as long as that 80% isn’t biased in some way in what it’s doing. Okay, you don’t need that many people. You could have a huge number of people actively investing in it and everyone else piggybacking on that or a really small number. Um, but when you start talking about things like factors and stuff. Yeah. And then are people betting on things that have been going on for 10 or 15 years or things that have worked forever, you know, then you start to is it are you having more and more things being uh not actively done that are tied to it? The biggest issue I think honestly is active investing being influenced by passive. So that’s what we talk about. So you were saying like the indexes and things those are used not just as a method for passive investing but also as a benchmark that other people might be compared to. If those were two separate things it wouldn’t be such an issue. But if they’re using much the same baskets of things and then that could be a really big concern because active investors will, you know, active money managers who are managing the largest amounts of money will look to more mimic like the S&P um for that very reason. And the S&P will be used for passive investing. And so you have this problem from that. >> So they’re they’re not kind of protected from each other that way. But in theory, I don’t see a problem with there being huge amounts of passive as long as sort of the active investors are blind to it. It’s it’s the fact that the active investors are aware of the passive decisions that I think causes the contamination in the information that they have and that can make things trickier. >> What are your thoughts on AI? So we did, so Jeff’s referencing, we did a podcast one time, which I don’t know if we had to scrap it because the audio or something, but I basically did like AI verse Jeff and I had asked the chat GPT what Jeff Ganon would say about like 10 different topics and and I I can’t remember, but it did get a few of them correct on what you would say. Now you’re like the best person to there’s so much material of like how you think and you’ve written about so many different topics and there’s transcripts online about stuff that we’ve spoken about so you know >> keep that in mind. Um but I can’t remember if they got like five of the 10 right or ority of it right. Yeah. and did really well. And where it had issues is just a general focus on getting confused about value investing things in particular confused about like Ben Graham type stuff versus like Warren Buffett or whatever, you know, because it’s heavily based on the concept of the idea that I’m I’m a value investor and all that. So, occasionally there’d be weird things thrown in there because of that kind of stuff, you know, because there’s different camps to value investing and so it could become confused about that. But yeah, it was good. Mhm. What are your thoughts on AI like Grock and I mean Grock is Elon’s AI, right? X AI and and he says it it should the new Gro 4 basically should do exactly what you should not do exactly what you were just worried about basically that it’s just spitting out answers that it’s used before in the past or has seen other you know AI things say uh to sort of propagate like disinformation. I mean, he claims that Grock could actually think and understand and, you know, solve engineering type problems. >> Well, that’s true. That’s very impressive. That’s not what I’ve seen for the things that AI generally does. It doesn’t seem to have awareness of its own um what it’s doing. Uh so, and then kind of rationalizing things after the fact. So, it leads to weird things that way. as an example like um store hours. I had a looked up a store and so I wasn’t intending to use AI but it just randomly generates it >> um as preference >> like at Google >> in a search engine. Yeah. >> And um it decided that the hours on Wednesdays were different than the other seven days. Now I know that the stores hours are the same all seven days. But then it went on for paragraphs about what that means about them being different, why they might be different, what that means for the Thursday through Tuesday and what and it’s just wrong. the Wednesday hours are the same as every other. So that kind of problem does happen obviously and you see some of that, you know, and like you said, you see things where there’s problems where there’s insufficient information. So there’s very little about something that gets confused. So, you know, I asked it a a question again trying to do a search or something just to see who was playing some part and it was had no information on it and the character’s name was Carl and so it started talking about Karl Marx. >> Wow. >> Yeah. >> Mhm. >> Oh boy. because there’s a lot more information about Karl Marx than there is about a character and something it doesn’t know much about named Carl. Whereas previously searching that is effective because I can just say IMDb this and I just didn’t do that. I typed it right in and so it pulled that. So >> it elaborates on nonsense and stuff like that. But um it I think you know >> it’s uh it’s it’s it summarizes some things fine. Yeah. >> Yeah. Yeah, that’s definitely scary. >> I mean, >> the hallucinations. >> I personally think it’s going to be I mean, it’s I mean, clearly I mean, there’s something like what what are the stats like 10% of the population is is on like chat GPT or something crazy like that. >> Um I don’t necessarily like the way that it’s that it’s going because I think it’s going to make people like really stupid, but um yeah, it’s it’s definitely like a breakthrough. I would liken it to like the internet in in a major way for sure. >> I think it’s more like smartphones than the internet. But I get your point. Um just because I think of how people will use it and what will be done with it. My feeling is mostly people are using it for from what I’ve seen to vomit up something that’s good enough that they can then fix. Um and so to get over the initial thing of like like people don’t like to write themselves get started on a blank page. People don’t like to make a a speech. They don’t like to have to do something with a resume. They don’t like first reaching out in a dating app. They don’t like answering um customer complaints. So, it can obviously do all those things. It can even do things with with programming stuff, which I’ve seen people use it the same way, which is basically to get it to do a bad version that they then fix, but they feel a lot better getting started with it. So, so I think it helps people get over their anxieties and things about that by making it seem like there’s a legitimate answer that they can then build a template off of, you know? But I think people have always done that to some extent. They’ve been like, “Can someone show me a sample of this?” Right? People have always wanted, “Oh, I want how do you write resume?” They really just want a sample and then I copied as much as possible. So >> yeah, as somebody that you that used to write with hyphens a lot in my writing and like to replace commas, I can’t do that anymore because that’s how the AI does it. That’s how you spot it, you know. >> And uh so I I I had to change I have to use more commas and less hyphens. >> Yeah. I don’t know how it does with grammar. Um, so that’s a big issue. The using hyphens and and and things with um, uh, commas and hyphens and translations into other languages is a big thing. I write that way to make the clauses shorter and not rely on other clauses because people get very confused with it. You know, people don’t have high enough reading level or experience with things or sentences that just go on too long or very confusing. And so simpler writing is usually very short clauses. And so that helps in in making it understood to both the reader, but it also helps a lot. The shorter sentences are and clauses are helps a ton for the writer, which also might be true for AI. Um it’s much easier to get confused writing a 30word sentence that’s using, you know, um all sorts of grammatical things that aren’t common in English versus um basically writing a series of shorter sentences or sentences that are formed from very short clauses. Um, translations have the same thing. Translations into other languages have problems with grammar severely. Um, when logic and grammar mix are mixed up together and the AI things I’ve seen in English that are weird are the same as what used to happen when I would ask for a translation from English to French or French to English or whatever, you know, same thing. As long as the clauses were really short and what it was saying was clear, it’s the connections between it that it had weird problems with where it would put things in the reverse of what they should be. They put the non-essential information in the wrong place and the essential stuff in a different place, stuff like that. Not knowing what to emphasize and how to do it for clarity. Mhm. >> You know, >> I saw a tweet, I don’t know if it’s true, that Value Investors Club, they’ve temporarily stopped uh submissions because it’s been there’s been so many submissions from people that are using AI to write like a write a pitch. So, they’ve temporarily like halted um you know, people to be able to do that. I don’t know if that’s like been solved or whatever, but I was just like that’s that’s pretty funny. Not surprising. Yeah, there’s lots of things already where I was saying, you know, I don’t know how big the difference is. If the if it was AI stuff from, you know, when the internet started, if there was AI stuff in the age when people who were writing had been writing for print newspapers and stuff, I think it would have been really big. But if you look at certain websites that are already like real SEO driven and everything, they were already being written by humans in ways that are much more similar to how AI does it. I mean they were stitching together a lot of stuff without a very clear viewpoint of what they themselves are bringing to it but that’s very effective in bringing a lot of traffic and everything and also kind of being able to get articles up really fast is another thing you know >> so we got to go back and talk about uh in May uh our Omaha experience we were in Omaha for the Bergkshire Hathway meeting we had an investor today there for parks Um, but what the magical thing that came out of that weekend weekend weekend was Buffett announced that he’s stepping down as CEO of Bergkshire Hathway. Was it at the end of the year? I believe >> um in typical Buffett fashion, >> supposedly uh uh Greg didn’t even know um that Buffett was going to uh make that announcement. So, he did it completely on his own terms and surprised him. Um, and yeah, want to get your thoughts on that. I mean, they cut to it. I remember they cut at the end of the meeting and Becky Quick ran back there and spoke with them and Greg was shocked by the whole ordeal, so he had no idea about it. Um, but not a surprise, I don’t think, to anyone. I mean, the guy is 94 years old. Uh, but want to get your thoughts on it. I mean, what a career. Uh, pretty amazing. And uh you know a year and a half after Charlie Mer passes away, Buffett announces that he’s going to step down. Now he’s still going to be chairman of the board. Um but stepping down as CEO of Burk. What are your thoughts? >> I think there was a feeling in the air being there that oh this might be the year but you know who knows if it was or not but that we were getting to that point obviously. Um, so yeah, I’d say from the people there, it probably wasn’t a huge surprise that way. But, um, it’s a good way of doing it. Um, surprising people with it and then gets all the big applause and stuff by doing it that way instead of how it’s normally done by companies, right? So, where they announce like over the next few years there’ll be transitions and this and that will happen and then sometimes they don’t even really leave. So, um, I think that it worked out well that way for him. I think actually even said, “Well, I’ll take that applause as there’s a couple ways you could read that applause, but I’m gonna take it.” >> I like when he I like when he smacked he went like doo and then like, you know, smacked my proper send off. It It was pretty cool. Um, you know, I mean, for for Birkshire, it’s been pretty clear over the past couple years that Greg has been very busy uh with the company and basically doing CEO type stuff. I mean, Buffett’s kind of said that and he says, you know, Greg gets a lot more done than he ever could at this point uh in a day just from like an energy perspective, right? Energy expenditure. And when you’re 94 years old, it’s harder. And Buffet talks about it’s, you know, even reading the newspapers now, it’s kind of blurriier and takes him longer and >> Yeah. >> Yeah. 94 is uh, you know, almost 30 years after when people used to retire as CEOs of things. So, >> yeah. >> Yeah. probably kept him alive longer honestly though. >> Oh yeah. Yeah. >> So now Bergkshire posts Buffett. What’s going to happen? Are we going to get a more efficient type of uh you know operation? Greg seems we’ve talked about on this uh podcast before. He seems more of like a meat and potatoes type of guy. Kind of more of a driver probably than Buffett would have been like with the managers and whatnot. So want to get your thoughts on that. Yeah, that’s possible. And some of the things that we heard afterwards like um I don’t know afterwards, but around the same time like that they might consider doing something with their real um real estate brokerage business and you know and the company’s rarely ever considered selling things and there had been some news maybe about what would happen with Craft Hind and and involvement of Bergkshire and that over time. Now there’s also been false reports. I think they they said that they were um thinking about merging the railroad and stuff and I think Buffett said that’s not true but um yeah there could be less longevity for the managers in the businesses that they have and you know shaking things up there. I don’t know how great the managers have been for the ones that weren’t there when Buffett first bought the company. You know, there have been some companies they’ve owned for so long that they’ve turned over to new cos over time. And uh I don’t know that those people will necessarily have uh as much of a handsoff and um job security as they had in the past probably. Yeah. I don’t know if it would affect big time like a purchase of some founder company or something though. That’s where I think I wouldn’t be surprised if it’s more similar to how Buffett used to do it. Mhm. Mhm. You know, the great debate is how what’s capital allocation going to be like um you know, going forward. I mean, could you ever see a scenario where Bergkshire pays a dividend or anything like that? >> Yeah, I think they’ll have to do that. >> Yeah. You look at the balance sheet, right? Securities and investments 612 billion. Cash and cash equivalents 42 billion. And just look how much it’s I mean, look at compare it, you know, to 2022. I mean, securities and investments 423 billion. I mean just continuing to pile it up and at what do you do? >> They even sold some stocks. I mean because here’s the thing Berkshire if they’re almost neutral like say I mean they’re different than other kinds of investment things a little bit more like other insurance companies but even more dramatic that way. Um that they have so much cash coming in would be like having a fund with constant inflows you know funding it all the time. And so even if you’re um or they don’t intend to look like they’re super bearish on something, they’ll pile up and then if they are bearish, it’ll happen really fast. Um so that’s kind of the problem that they’ve had. They most of that buildup in the past 10 years or so that people made a big point of wasn’t really due to conscious efforts to sell stocks and things. It was just not finding enough big things to actually buy. Um, so it’s only in the last couple years that we’ve seen anything where like, you know, when they say that he’s bearish and everything that there’s actual evidence for that, that he’s like, “Okay, we shouldn’t own so much of this stock or the price is too high or let me I’d rather have cash.” The other ones are basically just not adding new things until real recently. >> So, you could probably expect them to I I honestly wouldn’t be surprised. You see them become more of an efficient operation. They start to pay a dividend, continue to buy back stock. Um, you know, it’s kind of hard to could you make an investment case for it at these levels? I mean, price to book 1.6 times. Uh, price to earnings about 13 times. But, you know, you probably want I don’t know how you’d value it. What your thoughts are >> compared to other compared to other companies? Yeah. Yeah. I mean, I don’t think it’s amazingly cheap, but I think compared to stocks in general, it’s it’s quite reasonably priced right now. Yeah. you just I mean just take their biggest stock positions and their biggest um businesses that they have and kind of try to put a valuation on each of them. You don’t have to do some 100page report on it. I just mean like you know what are the top usually you don’t need to for doing a calculation for the entire company. It’s rare you would even need to think about more than about three stocks and you know maybe an equal number. You could do anywhere from the top three stocks, three businesses to top five stocks, five businesses, and that captures almost all the value, I would say, depending on the the uh exact date of it and everything. I mean, Apple before they started selling that down accounted for a huge part of the portfolio, right? So, you only have to go down a few stocks to to get to that. You don’t have to go 10 deep in in um those to kind of put a value on it. And then you have things like, okay, Geico and stuff. Well, Progressive is a public company. You have railroads, there’s public companies compare that to. You have energy, public companies compare that to. So, it’s not hard to kind of look at and say how reasonable is it if you put similar valuations to what those things are priced at by others. You know, now you could argue it’s not the best railroad, it’s not the best insurance company, etc. That might be true, but also that probably means it has the most room for improvement. And uh you know like when we did the report on progressive it was a low multiple stock and now it’s a popular stock. So those things can change you know it doesn’t it doesn’t mean that it’s forever that gap can close. The same with the particular railroad you know of the big railroads. One railroad improves versus another sometimes. So, it’s not the worst thing in the world to to look at it when it doesn’t have the best metrics in the industry because it just has to kind of get to the same levels as the best companies there um to cause a big improvement in the value. So, >> Mhm. Interesting. >> Yeah, I found a company recently like that. Um let’s see. You familiar with MEX Group? You can see the company offers execution and clearing services and metals, agricultural products, energy, financial futures and options. So, think about it like that. And they went public a few years ago. But you look at other companies that are in their same business like ICE, CME, and they all trade at just extreme valuations. And then there’s this company >> that, you know, trades at 12 times earnings and is growing like crazy. >> These businesses are really hard to figure out, though. I mean, you look at like their their financials and it’s just it’s complicated, right? Um, trades in the UK, uh, business is in the UK, which I thought that could probably be why. Um, but yeah, you compare it to like a CME or an ICE and, uh, the valuation is so different. >> Yeah, they’re a lot smaller. I mean, that with really high quality companies that usually happen. That’s kind of what I was talking about before of um the efficiency question of like okay so are smaller companies companies in less the markets that less likely to be in an index whatever will there be a discount for them between others now in the long run the business result drives a lot of your returns but people want to make money fast betting on what’s going to happen with the multiple is what matters yeah >> yeah I mean we’ll look at Apple though right okay so business returns been um good. They’ve been they’ve been okay. But when did Buffett I mean so we could compare this is from 2015 on quick FS and you could look at the the stock price since 2015 and it’s up you know almost 10 times >> and a huge bulk of that has come from multiple expansion. Now EPS has gone from $2.31 to $6, right? But the bulk of Buffett’s return he bought around that time frame, right? 2016 maybe 2017 or was it a little bit later? I can’t remember. >> Yeah. >> Came from multiple expansion. >> Mhm. A lot comes from multiple expansion even on pretty long-term investments. I mean I’ve I’d been a value in personal investing. I’ve been a value investor and um longer term holding than the average of the market by you know a couple times at least. And um I would estimate that a third of my return came from multiple expansion. Um and only two/3s came from the combination of uh growth in the business and uh dividends/byback type stuff, you know. So actual growth in the cash you were getting and going up if it was like a company that was quoted at the same price. So what you’re carrying it at, what the public views it at did contribute about a third. Um, which by the way, for like a really good performance versus meeting a benchmark, a third is like the difference. So someone that you think has this amazing record over 10 years or something could be due entirely to multiple expansion, whether it worked for them or against them in that versus someone who’s down a little bit. It you don’t you normally have a breakdown of that by investor, but that can definitely for up to a decade. I mean, you can use the rule of 72 and stuff and think about that. you could literally make good decisions for a decade. Buffett did because he was a long-term investor. You can see that it’s easy to track what things he was in. Some uh decades, the ‘9s or something, he might have particularly good results um just because of multiple expansion. And then some other decade, 2010s or something, he might have worse because his what he owned didn’t expand as fast as other things. I mean, if you look at ad agencies, um, media stocks and things like that that he owned, a lot of it was, for a long time, a lot of it was due to, um, uh, multiple expansion. >> Mhm. >> Do you think advertising companies are cheap? >> It’s tough. the advertising companies that are best positioned are incredibly expensive, you know, in terms of ad tech stuff and all those sorts of things and the traditional things that have the lowest um type future growth probably um are really cheap. Now, they could just buy back their stock and pay dividends. So, if you look at something like this, do I think that like Omnicom or something could be cheap and some of these things are merging and everything, but um yeah, can you look at um let’s see where does it have dividend for this? because that’s what I was going to point out for these is um yeah and so the dividend was 280 last year or something and what the stock what’s the stock out stocks at um yeah so and many of these companies Omnicon’s probably one of them probably do as much in buybacks as dividends so just a raw dividend you’re getting a yield that looks like a bunch of bonds and then you’re getting a buyback so I I mean you’re taking a risk it is equity and everything but it hasn’t had a lot of down years. So, if you’re asking, do I think they have a good future? Not really. But I think that they yield almost as much as bonds in cash at this point. And they also then buy back, which is effectively like giving you payment in kind of like more bonds, you know, um a similar amount. So, if you’re asking like, would I like to own something that yields 3, four, 5% and gives me 3, four, 5% more bonds every year and it could go up, right? I mean, the multiple is the multiple more likely to go to five than 20 or something. I don’t know. Probably equally. I wouldn’t say it’s at this point more likely to go to 20 than five, but um yeah. >> So, Buffett’s been selling down Apple, which I think is a a great move. I mean, it was a huge chunk of their equity portfolio. Can you think of another time in his career where he was super concentrated like the most concentrated? I mean, let’s take out you know when he was when he owned 100% of Geico, right? >> Can you think of any other times when you know his portfolio >> super concentrated >> around 1987? I don’t know the exact date and the time of that, but it would have been really really close. Um, now he might have owned some bonds at that time, like junk bonds and things at that time that I’m not remembering, but in terms of it was just marking common stocks. It had been really low then around the time of the crash and stuff. Um, and then actually in one of his first letters is I think the first letter that’s published under his name is the 77 letter or something in that neighborhood. So there’s a period in the 70s, but that is like you said that’s due to like Geico is heavily influencing that. the one I’m thinking of in the later 80s before they then got in big into he made a couple big purchases did convertibles and things like that. Before that they were big into like just a couple stocks. It would have been like Cap Cities, ABC. Um basically around the ones that he talked about being their permanent ones. Yeah. So if you add up all the the Geico ones, you see that’s big. Um and then you see uh so that’s very big. Then he was in cap cities, but he sold it really fast. Um, and then the other ones are different stocks, but they’re exactly in the same industry. Uh, we can kind of ignore Kaiser because that was like a thing that split out. The other ones are straight up newspaper companies that are like exact duplicates of each other and add things that are the same. So, Interpublic and and Oglev are like the same kind of company. Washington Post and Night Ritter are like the same kind of company, too. So he was and that and I think I don’t remember when they owned affiliated but that that’s Boston Globe that was also around the same time. So some of the other holdings might also be that he basically bought like every ad company every ad agency he could find that was publicly traded and every uh newspaper he could find that was publicly traded. So >> why does that take us back to that for people that aren’t familiar with that environment then? >> Uh because they’re good businesses but Bergkshire was already even then too big. So like they had some of them were family controlled and stuff but they wouldn’t want him to own more than like 5% things like that. So he seemed to have bought like 4% or something of a lot of things. Um to give an idea on Oggov you know David Oggov would introduce him as the man who made more money on Oggov and Mather than than I did. Uh cuz cuz David Oggovie would sell his stock all the time to support his lifestyle and stuff whereas Buffett didn’t sell his until you know I don’t know how long but let’s say a decade or more. um because I don’t know if we know exactly when he bought it because it was before you know it just shows up in these letters. I don’t know if there’s been much talk about when in the 70s he bought some of these things but um so again though some of those are the multiple things. So for instance in public not a huge position initially for him but because it quadrupled almost in price it could get big. What happened with Apple is it’s a rare one where he took a really big position and then it went up a ton which is kind of what happened with Geico but Geico then eventually became a intern you know they own the entire company but the the thing is on a lot of those he took the maximum position size that he felt he could. We know that because Geico we know he was backstopping it and so he got fewer shares than he wanted because the deal with Solomon for that and everything to do it. So we know that story. So he had put in for more shares than he got. And then um and then very quickly with that the stock went up a lot from where he was buying with the the preferred convertible there. And then um Washington Post, we know that story because he told um he he told Kathn Graham that I won’t you know I won’t buy anymore. And so that was that was the level that he stayed at. Um and some of the others we know a little bit of even the one I mentioned affiliated I think he got that in the IPO. So that also would just be trying to buy everything he could in those industries. Um, yeah, he kind of I mean he reversed himself on it, but he kind of did that with the airlines. He bought some of every airline that was possibly big enough to matter to Bergkshire at that point in the US. He just didn’t feel like he knew airlines outside the US, and he didn’t bother buying airlines that were too small, right, Freddy and Fanny. I mean, they basically took I mean, you know, they’ve talked they said, “Well, we could have done some things to get even more. We should have just like, you know, opened up a banking thing to get this uh opportunity to get in on it or whatever.” But basically, legally, they they were buying as much as they could in some of those uh GSSE type stuff, too. So, he’s gone with the literal maximum position size in a few companies that he felt he could have. Yeah. So you think the most concentrated that we know of Bergkshire has been you you resort to 1977? >> No, I think in the 80s around when I said I don’t remember the exact year when in the report would have been but around 1987 he would have had the fewest number of stocks probably although I think he owned other stuff. Let’s see. Yeah, there you go. Well, that’s permanent holdings. That’s where he breaks out their permanent holdings. Yeah, that’s uh Cap City’s GEICO. But he definitely started talking about permanent holdings in around that time. And some of it was I think to like um be willing to sell whatever else they had. Um but then shortly after, not shortly afterward, but within a couple years, he’s buying Coke. He’s uh American Express. There’s there’s other things that started happening, but I don’t know the exact date, but sometime between when he owned these um common stocks he liked a lot that he’s calling the permanent holdings here, Cap Cities, ABC, that was a special deal, but it’s basically just common stock. Geico and Washington Post. Then he started doing all the things that you know about with like Solomon and and uh what was it? Champion, Gillette, uh US Air. So those special deals and then also um buying like Coke was the next big really big investment. So he did do Coke. But in some of those years if you take out any preferred deals and any arbitrage, it’s highly concentrated. The question is just whether what do you want to count arbitrage and special deals and things that aren’t common stock as a different category or not? Um you know he was doing a lot of other he wasn’t buying a lot of long-term investments in common stocks at that time. So >> yeah, it’d be interesting to run a study on that and kind of, you know, go more in depth on it. Market conditions, what the multiples were, the multiples were of all the companies that he owned, what the balance sheet was, like uh from how it was invested in securities and whatnot. I’d like to see that. >> Yeah. And there’s there’s you can also see like the um there’s been some things where people compare what percentage the the big thing early on is that the amount invested in common stocks relative to the equity sort of because of the insurance part of it. It was more highly levered to his stock portfolio performance and the insurance business providing that float. Now the insurance business honestly had worse underwriting results during those years but that’s when people used to say it’s a close-end fund and all that stuff. Now they most people I think wouldn’t say that kind of thing because so much of it is businesses you know um and even the insurance stuff is is um you know I think people view like Geico and stuff differently as kind of insurance thing with the franchise um but in the early days it had a whatever kind of insurance business and a lot of his stock picks but it was providing a lot of the leverage there. So I think the most lever to common stock portfolio performance is probably like we just covered in the 70s and 80s. Mhm. Mhm. Interesting. Uh wanted to hit on uh the box office since we talk a lot about movie theaters here. Get your thoughts on where we currently are. Um and then we could look at um CNK and and MCS as well. Just, you know, I viewed this podcast since it’s our first time recording. Really just kind of hit off right right where we left off. Yeah. And then we have a lot of topics planned going forward. Uh so we don’t want this, you know, we don’t want the podcast to be more like news stuff all the time. We are going to do more topics, but I just wanted to catch up since last time we recorded was in April. So, uh, thoughts on, uh, the box office this year? Disappointed? Kind of in line with what you thought? What are your thoughts? >> It’s very mixed. Um, it’s similar to uh, what I thought in terms of maybe overall results so far through this part of the year, but the way it’s gotten there has been very mixed. What’s happened is that some some they’re not really very original ideas necessarily. I don’t mean that in some creative sense, but original movie things like Minecraft is totally untested as a movie, so it comes out as big. Um, things like that have hit bigger and then especially Superhero, but just in general kind of things that are on their they’ve had a lot of these um have not done as well. So um and that is more in keeping with the long-term past history of how movies used to do but not in keeping with movies in the last sometime in the 2000s. I don’t know 15 years 20 years since the start of the MCU certainly um which is like about 17 years ago or something but maybe even before then. So, you know, in the 80s and ’90s, you’d expect that sequels would make less money. Um, and then they started to expect them to make more money and um, you know, Marvel’s done like 30 movies or something. So, uh, it had a very long run. I don’t know if it was 15 movies or something that was really successful and then since then it’s been more in the pattern of what it used to be. So, we’ve had good performance from things like in the US at least from something like Sinners original type idea from Minecraft, not a franchise movie thing and all that and less good from things that are on their seventh, eighth installment or whatever. They’ve performed, you know, relatively worse and the other things have performed better and it’s come out as a mix um to look a lot so far like this year’s box office looks a lot like last year’s um up to this point. Mhm. I’m uh I’m sort of excited to see this movie, Happy Gilmore 2, but also very nervous because the first movie was like my favorite movie growing up, right? And you know how sometimes they they bring a movie out of retirement, they do a sequel and you’re like, they just should have never done that, you know? >> Yeah. >> So, I’m kind of I’m going to watch it. Came it comes out today. Um but happy Gilmore 2 for those that aren’t watching. Um, but I’m kind of nervous, not going to lie. Kind of nervous. >> So, uh, yeah. Uh, they have a whole category in the numbers, delayed sequels or like long gaps between an original movie and a sequel, you know, which is usually when the star or something like needs it now, you know, in terms of their career or something. So, or not always a star, some director, something like the the Matrix or something. Um, so I won’t do it. I won’t do it. And then they finally do it. And it’s a very mixed bag. A couple of them have been hugely successful and then a lot of them have failed terribly. So, this is a Netflix thing though. But yeah. Um, so it’s a that’s kind of the most mixed in terms of like something that was huge having no success at all versus you get on the other side something that happened like um Maverick, The Phantom Menace, Force Awaken, you know, things that have big gaps and then bring back a series that, you know, um those are sometimes maybe some of the biggest movies ever. So >> Cinear, it’s up on the screen right now. It’s currently trading about 14 times earnings EBIT to sales 1.5 10ear median margin on EBIT uh 12.3 20 times EV to free cash flow. Look at their gross margins. Uh it’s improved over the years. Um what are your thoughts on where movie theaters currently are trading? Um, I think you can see in the earnings and stuff that they’re more efficient. Like they could probably make more money on lower box office than in the past. Uh, but I also think that um the biggest issue is supply. Um, and this is a big big issue for movie theaters as compared to um studios. So you could look and like based on past trends of what it was before COVID and then you adjust for inflation or you use attendance date or whatever. We’re down a lot of weekends, a lot of months, a lot of whatever like 40% from what movies used to be, but like 30% of that is the amount of movies being released by major studios. It’s not uncommon for there to be one uh only one major release in theaters. you know, they’re the independent movies and small things releasing at the same time, but you don’t have a choice of a couple new things coming in and uh that used to not be the case. So cuz you just like mentioned Happy Gilmore there, you can look there’s almost no straightup comedies released by major studios at all and that used to be a genre that would bring in you know a 5 10% of the box office all the time and then now just all superheroes her superhero movies nowadays >> which have that as the sub genre for some of them. Right. So is Deadpool and Wolverine a comedy a superhero movie? both. Uh so maybe because it incorporates so much more of that, they don’t have those genres. But isn’t that’s not I mean there was this time when musicals were a big thing and then there’s been years where they’re nothing. So the genres that people watch do change. You know 25 years ago superhero movies were probably 5% of the box office and now they’ve been 25 or something. Um so I just mean movie theaters and movie studios have different interests. I think movie theaters are more profitable right now and better set up right now, but I think movie studios, you know, that’s kind of self-inflicted damage. They could stop doing that. What the theaters need them to do is to put out more stuff. And I’ve been surprised that’s the part that’s been the biggest surprise since co is how many are not putting out more movies in theaters, big movies in theaters. Um, so I mean an interesting one like so this wasn’t the biggest movie of the year or something but F1 is a um is a uh you want to call it co-production co-released thing where um it’s an Apple movie, right? So this could have gone just to Apple or they could have released it like some other things. I forget what they did with some of theirs wolves and some of the other ones. They they said they were going to release them and then they never released them or they did almost no release. But this one they actually released with Warner Brothers. So huge movie because of that. If it had just been Apple doing this, it would not have been a huge movie. But there was a choice to actually have the two studios working together on that. Um but it gives you some idea that they could like not do that. And the same thing when we saw what was it? Um Moana was one of the biggest movies. Uh, and that uh both Moana and Leo and Stitch, I think, were originally planned to be Disney Plus shows or movies or something of some kind in their first phase of development. And they’re two of the biggest movies the last few years. So, a studio could accidentally have, you know, not brought in $400 million or something because they could have just put it up on a network that probably isn’t going to grow a lot more just because it has that. So that’s the part that’s kind of shocking is the economics of it have been so much in favor of movies that are released in studios still do in theaters still do better on streaming than ones that are just straight as streaming and all that but they’re they’re definitely still favoring their um streaming things. So, but there is a shift in some of them. Like I saw that the um what is it? The Wheel of Time series has been cancelled. And so that’s a good example. Amazon, which owns um MGM, could probably do two uh two medium-sized and one big movie a year for what they were paying for that show. And I don’t think that show did anything huge for them. But they probably spent I would be surprised if they spent less than $150 million a year on that show and it’s not 30 episodes, it’s like eight or something, you know what I mean? So, it’s the value of what do you have from that? It Game of Thrones probably in its later season was worth more um to own that to produce that than a movie, but it’s rare for these these series to be worth as much as putting it out as as much as spending the same amount on a movie is. And yet, they’ve pursued it. But there’s a lag. So like Amazon and others might Disney’s been up front. I mean certainly Marvel part of Disney has been upfront that they plan to completely change how they do everything that way. They put a bunch of shows on Disney Plus and they said they’re not going to do that anymore. They’re going to cut the number of movies they’re making. It takes a couple years before you see the effects of it. I’ve just been surprised by how much is spent on streaming content and how little is spent on putting things into theaters given that the results for the studios look not good in terms of current earnings. So, I guess they’re still anticipating that it’s important for the growth of their streaming uh businesses online. Maybe um you know, I don’t think the market rewards it anymore. In the early days, you know, Netflix and Disney Plus and HBO and all that were how many subscribers do you have? They wanted to know that more than how much money did you make in theaters. I think that’s gone though. Like, I don’t think that’s the focus on the market anymore. So, it’s interesting that it keeps happening that we’re under supplied on things. So, so what does that mean long term? I don’t know cuz I don’t know the answer to it. It’s not econ, it doesn’t make any economic sense and they keep doing it now movie studios and things like this. I mean, Sky Dance Paramount will be a different situation, but you know, the managers own almost >> approved, right? >> Yeah. Yeah. >> Yesterday. So like the managers own almost none of the company uh who are the CEOs and stuff making certain decisions and how much is being allocated to one part of the business versus another you know I don’t know um something like Disney it’s a big decision should they put a lot more money into like theme parks and um uh movies for theaters and things and less into some other things probably but I don’t know if that’s like necessarily the only decision that a big um CEO of a company like that makes you know so um cuz those are kind of bigger like the people who are making the decisions that the studios say Warner Brothers or something who are actually saying let’s make sinners or let’s make this or that are not the CEOs um those are totally different people but how many you get to make and what your budgets will look like and all that is kind of a decision higher up in the organization and I think that’s the part that surprised me is how little is put into the um making movies and releasing them still in theaters. So, yeah. So, I’m less optimistic on like the studio side of things right now as on like the uh theater side, but theaters would be helped a lot if they could get more um supply. There’s entire portions of the year where there’s not a lot for not a lot of choice. There might be one thing for one group of people, but there’s just not things that appeal to everyone or a variety of movies there, which means you could go long periods without people going there. People don’t go there, they don’t see what’s coming out next. If they don’t see what’s coming out next or get in the habit of going all the time, then you’ve got problems, you know. >> Are there any upcoming movies that you’re optimistic about? >> Yeah, not really. Um, >> Freakier Friday. >> Freakier Friday. That’s an, you know, uh, >> bringing a movie back like that. Yeah. >> Yeah. From from um, Disney. But uh but that’s a good example of what I mean. So like um if you look at what comes out at the same time there there’s weapons and Frier Friday. Those are like um I don’t know great details on weapons, but those are appealing to completely different groups of people. Figure Friday being it has a nostalgia play to it, but it’s very kitty from what I could tell from the trailers. And weapons will play exactly the opposite way. And so neither of them will be ones that are like for general audiences um appealing to everybody. Then you have other movies that kind of appeal to everybody. Um, and there’s just fewer of them or, you know, but August isn’t a big month for releasing things generally. They they’ve they’ve done it sometimes, but usually you’ve already released your big movies by then. >> So, do you think movie theaters are cheap right now? You’re kind of making a case for for not being cheap. >> I don’t think they’re as cheap as they were. No. I mean, what was Cinemark and and Marcus at, you know, I don’t know. Um, couple years ago. >> Yeah. I mean, they haven’t, I guess, haven’t done great this year. The last calendar year, how their stocks do, I think, pretty well in the last calendar year, probably. >> They did. Yeah, they did do well. >> Yeah. So, I just think they’re another highly IMAX, which is also public. And >> IMAX is interesting. Yeah. >> Why you think it’s >> Well, I just mean the company’s very very interesting. So, on the one hand, it doesn’t make a lot of money. If you go to Quick Up, you’ll see that historically it hasn’t actually turned its business into a lot of profits and free cash flow and stuff. Um, but it’s like we’re severely severely uh need more IMAX theaters. Like if you’re going to build new theaters, you would have wanted lots and lots of IMAX screens. You want less and less of the smaller screens. It brings in so much money on uh opening weekend if you look the share that comes from IMAX is so big. Um, and so it has a big runway in terms of what will be built out and then it makes it money from different things kind of the systems of that, but it’ll have a bigger installed base basically. And so you can know that 5 years from now, 10 years from now, now there’ll be more IMAX screens. And if they can turn that into a lot of um profit through the different ways that the deals work on the screens and then the technology and you’d have to read the 10K, but it breaks down the four or five different ways they make the money. It’s kind of like a little ecosystem that they have that way. So, it’s not necessarily the case that just because someone’s going to put in a new screen that’s suddenly going to show a lot of profit, but over time having a lot of IMAX’s around the world. Um, uh, you know, but the US is the one that I’m thinking of in terms of what they really need. Um, is better for the company. And the business has changed over time because all these things now are for commercial theaters basically. Whereas, you know, you probably remember IMAX was mostly like museums and attractions and things in the early days. You know, it was special one-off type projects and things. And now it’s just become very um regular for the the movie theaters um chains, the big chains. And I just think the IMAX brand has an advantage um that we can see in terms of that versus what they because in the industry they call them PLFS um because they don’t want to say the brand name, but that’s kind of like saying smartphones versus uh iPhones or something. I mean it’s become almost a generic thing to the average person that an IMAX means a big screen that way. And they might know what a Dolby is, what this is, what that is, but um IMAX is the first thing that they’re going to look for, you know. [Music] >> Yes. This is a long runway for that company to convert over screens to the IMAX screens and >> there’s a tailwind that way. >> Big tailwind in terms of demand for like there’ll be a lot of projects and it’ll grow a lot. Downsides are historically not strong profitability of like actually converting growth into a lot of money for the shareholders. And then also like I said, just because you’re putting things in there doesn’t mean you’re immediately going to make a lot of money off of it. And the other thing is it’s not super cheap on a current basis. But if you want to hear that they’re expanding year after year, then I think that’s good, you know, and you want the like >> I think they would like expanding like actual earnings and things too, you know, right? Not not just like we’re put not just a lot of news articles saying we’re putting in more and more theaters, you know, but >> Yeah. where there’s some good business momentum if anyone’s looking for that. >> Yeah, absolutely. >> Got it. Cool. Well, I want to thank everybody so much for tuning in with the both of us on the Pocus Compounding podcast. Uh we’re going to be back to posting podcasts weekly. Uh so make sure you hit the subscribe button either on YouTube or the podcast side of things. Uh I think our release date is going to be Fridays. I always like Fridays for the release date just because the you know I don’t want the news to get stale or just stuff that happens, you know, stock prices and whatnot. Not like it really matters. Um but uh Fridays is when I expect to release our podcast every single week. Uh so be on the lookout for that. I want to thank every so much for tuning in with the both of us on the Focus Compounding podcast. If you’re interested in our money management services, reach out to me at andrew focuscompounding.com. Have a great day. Take care.

Description:
00:00 – Intro 02:00 – Palantir at 118x price-to-sales 06:49 – Gross profits vs. gross margins 08:45 – Gross profit per share 13:14 …

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 are tuning in with us, thank you so much for joining us. Uh, be sure to go check out all of our content that we push out into the investing universe. Best way to do that is to go to focuscompounding.com, click that blog section and have the ability to type in any topic that’s on your mind and get access to information going all the way back to uh the early 2000s. Um, if you want to follow me on X, which is the best place to get everything that we push out regarding the podcast, you could do that uh by following me at Focuscompound. All the information is in the description below. So today’s podcast, chef, I want to talk about um gross profits, gross margin, and almost their predictive ability on future stock price movements. Um not only that, but also on analyzing the business. Talk about different scenarios where you could have companies that look like they are uh left for dead. And it’s cool. you could go back and look at and be like, “Yeah, you know, things looked a little bit on on edge here and that, you know, they didn’t look so good.” However, if you sort of go up that income statement, you could see that the overall business was improving, right, from a gross profit uh perspective. A lot of investors focus on gross margins. Um, but, you know, that doesn’t always tell a case, right? Like you could look at a company like Amazon for example and say oh you know at a certain point in their their um you know history they had low gross margins um because they’re just looking at that actual number um and it may not tell the full story. So um before we do that though Jeeoff we were talking about this um off air recently. Palunteer Technologies. Have you ever seen a company trade at a 118 times price of sales? Right. So, as a general rule, you always talked about look, you can go your entire investing career and be perfectly successful never investing in a company trading 10 times sales. So, what about something that’s 10 times your uh, you know, general rule? Are you really playing with fire here? I mean, what’s going on? Hey, I don’t even know what this company does, right? It’s sort of the black box. Government contracts, AI. Supposedly, the government can’t run without it. You could put the tinfoil hat on and say, “Oh, Peter Teal and blah blah blah.” Right? But, I mean, goodness, 116 times, >> yes. >> Sales, 118 times price of sales. What’s going on here? Have you ever seen >> Yeah. Yeah, I don’t think I’ve ever seen a chart that even calculated how many companies were selling above 20 times sales. That’s the most I’ve ever seen is like tracking a bubble. 10 is what I’ve used, but you know, they’ll sometimes be charts that are like, are there any companies over 20 times sales? Um, yeah, I’ve never seen it in the this is a $370 billion market cap. So, I’ve definitely never seen it with a big cap stock that it’s been at this price. I mean, because you compare by revenue to other things and uh obviously they’re much much smaller. They’re much much bigger companies that are normally that size or the market cap of companies that have three billion in sales are often a lot smaller. You could if you kind of comped to what those are. This is not a large company that way. But, you know, some things do grow rapidly. We talked about Celsius on this podcast, you know, years ago. And that did grow rapidly. So, it kind of grew into being more the same size as uh what you would expect from a high price to sales. Um, this one does have really high gross margins. doesn’t have super fast growth right now, but I guess it’s expected to have super fast growth in the future. >> Yes, definitely. Yeah. And and and on the topic today, yeah, gross margins have improved. Um but, you know, it’s like you’re getting into this point now at at these valuation levels where it’s like, okay, like what percentage of the economy is this company, you know, going to represent or like what could it grow into? And at some point, isn’t there sort of a ceiling there or is this just like an infinite ham? Well, I mean I I guess the addressable market is any, you know, um well, it could even be beyond what I think. Um you know, it could I mean, no one would have thought an addressable market. You mentioned Amazon for that, you know, involved Amazon Web Services and stuff eventually. So, you can go into other things, I guess, for the technology that, you know, you didn’t know you were going to originally, but yeah, it’s it’s big anyway because technology used by friendly governments and stuff could be huge. So, it could be big. Yeah, it’s one of the top spending areas for most uh well, not most, but for it’s a large spending area for several governments. >> Yeah. Are you familiar with their CEO at all? He’s a bit of a sataric guy. >> One thing that stood out to me, one thing he said, he he doesn’t drive, so he doesn’t have a driver’s license. And they asked him why, and he said because I was too poor and then I was too rich. So, he never got his driving his driver’s license. Um but yeah, obviously large language models and they do a lot of stuff with the government and uh yeah, crazy though. Look at that. 119 times 118 times price of sales. So um >> yeah, but it does revenue growth you the revenue growth like yeah it’s a lot but I mean it’s not like it’s 100% per year. >> No, it looks like a great it looks like a great business. Yeah, it has the right margins for for having really high gross margins and they went up for uh at small size and it has really good revenue growth. Um but you know we talked about so it looks like a FICO or something but we talked about FICO at one10enth the price to sales I thought was you know a lot. So but it it has the things that you would need which are very very high gross margins and increases in revenue without necessarily having to have increases in assets and things. So it it has a business model based on the numbers alone that would make it a really great business. Uh this one that we’re talking about is just size issue. So that could be true for any of the ones we talk about. We can talk about how good or bad a business it is, but then there’s the issue of how big can the business get. And those are two separate things. Some businesses can get really big but don’t have the economics that they’re going to make a ton of money. Some look like they’ll make a lot of money but you don’t know how big they’ll be. um this price is just on a handicapping basis it’s just hard to make the stock make sense even if the business shows quantitatively really attractive things which it does. >> So before we jump into gross profits I wanted to pull up a article that you had wrote uh back in 2012 from the Ganon archives um which obviously is on our website focuscon.com and you’re talking about gross profitability matters more than most investors think. You said it’s not necessary for a company to have high margins and certainly not pricing power to achieve truly remarkable returns on capital and it’s definitely not necessary to have high net profit margin from the business’s earliest days. But you do need some basic evidence of a strong business model and you say what is a strong business model? There are countless qualitative ways of looking at a business model. Gross profits divide by receivables plus inventory plus PP&E minus payables plus acred expenses. This number should start looking good and keep looking better pretty early in a company’s history. Look, Amazon is an expensive stock and it’s got low margins, but it also doesn’t tie up capital in the business. >> Yeah, this is a long time ago. This is not this stuff isn’t true anymore. The business changed from that. Yeah. So, it might be a much less attractive business in the future, but it was that was true at the time. So, when it was growing then, it would have been able to fuel a lot of fund its growth and everything. Now these companies today the you know it’s a different story. The the Amazons, the Microsofts, the Metas they are investing huge amounts of capital which they weren’t doing before. So they that changed but that article is from when the business different than they are today. >> It’s it’s a good way spotted earlier though is what I’m saying. >> Yeah. No, agreed. But I just mean the the the business models of all them might are changing dramatically. So they may no longer, you know, have very high gross returns on on the assets they have because they have a lot higher assets. Um they shifted from being like asset light and doing work for other people to investing in their own assets. Um which is fine. A lot of companies do that later in their life and their profitability declines, but obviously they funded themselves from the part where they had really high returns on capital. So >> So you’ve talked about like gross profit per share before as a um interesting metric to follow. Most investors don’t follow that. So can you take us through, you know, your line of thinking there and and why that’s something that you think people should track and what it means to the company? >> So in the long run, return on equity and things like that are really important to stock returns. And one reason that countries like the United States have historically had higher returns is how they are funded. So they’re funded through retained earnings. The companies become profitable early on in their life. they are then um don’t have heavy borrowings that they have usually and then they also don’t issue a lot of stock once they’re public. So they go public and people get rich on IPOs usually in the United States but once the companies are public they don’t except issuing some stock to insiders all the time they don’t fund their operations a lot through a lot of stock issuance um and you know borrowing a lot of money and issuing a lot of stock are kind of the two things that cause a problem in some places where the country has good growth but the owners don’t get it. So like you take China or something. Great amazing growth for the economy and the workers who live there and everything but not necessarily great returns for people who just own stocks there as opposed to countries that have almost no growth because of that reason. And so you know Buffett talked about um ad agencies as a gross profit royalty. So what he meant by that is that basically advertising is funded out of gross profits. is kind of like a selling expense they would have, but you need to have a profitable business on that basis before you can invest in trying to grow the scale and all those things. And there are accounting issues about why this could be misleading because if you just focus on this but didn’t really understand the business, things could look better or worse on gross profit because of how it’s kind of calculated. We took an extreme example. I had mentioned FICO. We just looked at a stock. The gross profit thing is kind of complicated because there’s probably almost no variable cost to them. So they invest in a platform of some kind to do something and then they basically probably are using most of the same thing for one customer after another after another. The investment is really in having a capability and then they’re providing that capability to the customer and it would not radically change if they have one or 100. Now their selling expenses might they might need a lot more salespeople on commission doing this or that or whatever but like the actual direct cost of providing the service is is not high. So you invest in something and then you hope to sign up enough people right to like make it justified. So those are hard to judge as opposed to the ones that are more easier for people to imagine the gross profit is like your supermarket. That’s very easy for people to understand. Okay, it has a 25% gross mark gross margin. That’s because it’s marking up this amount and then it costs this much to run the store. You know, that kind of thing. But it helps a lot with scale because early on in the history of a company, a lot of companies people will say are not profitable. Why are investors investing all this in this company that isn’t profitable? But the business model looks like it is profitable, but it hasn’t scaled up enough. And in some industries they might even seek for competitive reasons especially to try to grow even when it’s kind of dangerous to do that um funding wise because they want to be no I mean like we talked about big tech things they felt they had to be number one that there wasn’t going to be a lot left over number two three four so they have to get big fast to do that and there’s other industries where it would be similar where they’re concerned about competition splitting things up um and then there’s other ones where they’re just people really want to get rich really fast and they think the business model works and so they open up a lot of um new locations and everything before they actually show the profits from it. Um so and companies invest a lot in that all the time doing that. Um you know Buffett’s talked about like Geico, they don’t make money when they first sign someone up but they have good retention over a long period of time. Anything that you look at from a Home Depot to whatever probably when they first open the store doesn’t make sense. But the the point is that it’s not this year’s earnings that they care about. It’s that for the long term it makes a lot of sense. Um and so when you can analyze that other ways besides the financial statements but if you’re going to do it in the financial statements the best way is to look at gross profit. Um the other way is to understand the business model the kind of like uh you know store level economics and all that kind of stuff but there’s no unbiased information about that. That’s a management presentation that’s you can’t reliably check yourself usually. How do you think about like so when you’re talking about Home Depot, is that more of like thinking about it from like a customer acquisition and Geico customer acquisition costs? What is that to the company? How can you retain them? And then how does that math work out over time? >> Right? So it’s investment. So all these things involve an investment. And the best business is usually well we talked about ones that are different big technology things and stuff are different in that they invest a lot in capability that then they don’t customize to each customer but a lot of other businesses invest a lot in the customer relationship and almost always that doesn’t make you money in the beginning when you have that it’s not worth it. So, um, and sometimes it’s not captured by the financials, but like if banks want to attract commercial deposits or something, it could take them three, four, five years of calling on that um, prospect trying to get the business and then they finally get it. Uh, you don’t see that in the financial statement so much, but obviously that’s what, you know, that’s business development type stuff we’re talking about. And so, they have to do that to then make it make a lot of money for them. for stores and things like that, it’s usually um investment in the area and then you have to grow awareness, but it depends. Um so take restaurants. Uh Cheesecake Factory when they open a location, they get almost everyone that they’re ever going to get right away. Historically, like that wasn’t their problem is awareness. They had high awareness. Um other places, a mom and pop thing that opens up, it’s going to take it a little while to build awareness in the in the area. And so then it’s just a question of getting up to capacity. Um there’s other things that could take years to do that. So you build out a new warehouse. You know, we talked about this with like distribution companies and stuff. If um you know something decides that it needs a to be able to have more capacity, then when it first adds it, it adds it in a big chunk. There’s no way for them to add 1% capacity to what they have. They have to choose to add 20% or something if they only have, you know, four or five warehouses. So then to that’s not going to be profitable till it absorbs that capacity. um you know and uh and then like uh theme parks and things it would take them five or six years to get full awareness. So they’re they’re not going to get their money back until later on those things. Um and and the gross profit part of it is a lot of it goes to investment and selling expense. Usually it’s what can justify it. If you have good gross profit, then you can justify a lot of selling expense, whether that’s salespeople or spending a lot on advertising or something. If you have poor gross profit, it doesn’t make a lot of sense to spend a lot on advertising. Mhm. Why do some companies then like sometimes they’ll they’ll have a negative gross profit and they’re they’re scaling that? Is that just purely like for the customer relationship and and scale advantages and they think over time that they’re going to just grow out of it? I mean I’ve seen companies do that before and it’s like I mean I think about gross profit as hey does this business work right? Is there a business model here? But I have seen situations where they have a negative gross margin and it’s like, wow, you’re kind of two feet, you know, deep or or in the ground and trying to claw yourself out. It’s a really hard way to make money because you can’t. >> So, there’s two possible reasons why that would happen. Uh, one is if you’re middleman type business and you expect that you’ll eventually have scale, which will give you bargaining power over others, and then you’ll be able to use that. So, Movie Pass thought that that’s what they were going to do. Now, it didn’t happen and they went out of business and then the movie theaters who really did have the power just implemented the same plans and stuff for themselves. Um, >> good idea. >> Yeah. >> Uh, so their idea was like we’ll just give we’ll have pay people and then take a loss on that, you know, people will pay us less than tickets are worth. we’ll buy the tickets, we’ll lose money on it, but we’ll grow to a big enough base where I think of really their hope was like advertising and stuff, but um we’ll have this customer list and we’ll be able to use this both to say to movie theaters, oh, we won’t, you know, you have to give us a better price and so we can bring this down or to like advertisers and things that we have this list of people and you can, you know, use it. Um and then on the other side of that, you have um so let’s give an example with like tech things for instance. So it’s a bargain power thing between the two of what I mean with a middleman. It isn’t lit. It doesn’t just have to be like distribution or something. So a good difference on that is why is YouTube so profitable and Spotify not because Spotify has to buy content that it has to use and it isn’t in a strong position to bargain for it and everything whereas YouTube doesn’t. Um so YouTube can make a lot of money to the detriment you know relatively of the creators whereas the creators can’t really be taken advantage of in the same way versus Spotify. you could say the creators taking advantage of them or whatever, but basically you have people who create things who then have um you know publishers, agencies, things that that are able to sell entire cataloges and things and uh so you’re not going to make a lot of money in music for instance, but you will by you know these videos that we put up, you know, uh uh Alphabet can make a lot of money off of them from us because we’re not in a position to get as high rates for ad time or something as as we would if we were part some group that that bargained on our behalf for that. Um so basically people will give them free content you know. Um so some idea that that will change. Then the other possible reason is uh highly volatile inputs and outputs. So that happens refiners and stuff can just completely lose money in a year. Um or like uh um bare if it’s very short cycles fine. So uh eggs are the traditional example of that. That’s a super short. Yeah. So, it’s fine to lose money in a year to have no gross profit because it’ll rationalize quickly. You know, um hens that lay eggs don’t live for that long and you can produce more of them really fast. So, it’s not like uh something that if it’s in an imbalance where you have over capacity or um shortage that’s going to last for too long. So, you know, every 18 months or something, you’re going to see this violent cycle that when it’s really profitable, people should start having doing things that causes the profitability to come down and vice versa. So, it’s okay to have years where you just go, I’m going to lose money because it’s so cyclical and so but so it’s a short cycle. I’ll get back out of it. Yeah. I mean, for people listening, you you could have years in um negative or you could have years that are eight figures in operating profit. Uh but then you could have years that are in the billions or or close to it in operating profit for um called the short cycle nature of it just swings all over the place. >> Yeah. And so like in their defense so you have a year there 2017 it says their gross profit was 4% margin which meant that their gross profit in dollars was $46 million. So obviously they lost a huge amount of money because it cost a lot more than $46 million to run the business. Um, in their defense on that though, it could have looked perfectly fine. I don’t remember everything about 2017, but um, because you could say, well, people are always going to want to buy eggs at some price, but, you know, supermarkets going to want to give them to their customers, you know, have them available there. So, that makes sense. And they might have known that competitors were losing even more money than them, you know, like they might have had competitors who had a negative gross margin or something. So, if you knew your relative position was fine, it would be okay. Now, if you are the highest cost producer or something, then that would be a different story because yes, people will need eggs, but they don’t necessarily need your eggs. But if you’re the most efficient way of getting them eggs and just there’s no money in eggs in one year, then that’s life. And you know, uh there used to be a 100 years ago a lot more businesses like that in the United States that were in businesses where you might have to accept that you would lose money in some years because it’s a pure commodity. And even if you’re the lowcost producer, um, supply and demand, you’re going to have boom and bust years. You’re going to make a ton of money in some years with amazing gross margins, and then you’re going to have some years where your gross margin is nothing. >> I want to talk about um like gross margins and and how they drive the multiples in in some stocks and businesses, right? So I guess before we jump into some examples, why do you think I mean I’ve read some quant studies that show the the best indicator of future momentum in a stock um is gross profit momentum, right? So growth in growth profits. Why why do you think that is? >> Well, so there’s a few possible reasons. Uh one, moving up the income statement is good for getting closer to the actual business realities, right? So that’s one part of it. Um, I think that the the issue with quant things that we’re talking about is that obviously they wouldn’t know or they seek not to know. I mean, you could see it other way. Um, things about the business that would be helpful that aren’t captured in the financial statements basically. So, I mean, they might look at some other things that are in the financial statements, but basically they’re looking for publicly available information that is comparable and quantifiable to everything. So, they don’t have color on things. Um, so the gross profit is probably the best number for that. It would become a less good number if people paid too much attention to it because you could definitely manage it from from a management perspective. Management probably does goose sales and probably does goose uh income or or in a lot of cases ibida uh because those might be things that people are looking at but is less likely to be focused on gross profit. Um and then in terms of the things that you know it it does with what we were talking about with um the indicators that it has. If you imagine putting those aside the the biases of what management could be doing and how the number works just if if everything was prepared properly without the idea that they knew they were public company. It’s really helpful because there was a book um that kind of talked about the it’s one of the better books on investing stuff in terms of explaining the where value comes from which is basically that you have to be able to charge more than others for your product and you have to be able to pay less which there’s all sorts of different ways that that could be. You could pay your labor less. you do whatever, but um that that gap is what makes businesses profitable. And that is captured earliest in in gross uh margin. And so an improvement in that is kind of like an improvement from the perspective that you’re getting an indicator that customers value this more highly than it cost you to produce it, which is what you need to know. Um, but you know, venture capitalists and stuff maybe don’t need that number and can kind of speculatively say, “Oh, I see what you’re doing and this is going to be really valuable to customers when it’s out there and everything and so they can do it earlier.” But a quant can’t do that. So, you know, that’s that’s the underlying truth you’re trying to get to is whether you can take something that costs you a low amount and charge a lot for it. And gross profit is the first indicator and like public statements that’s the case. So you could think about um couple different scenarios that could drive a multiple right in a stock. So it could be consistency, right? And we’ve spoken about before how Costco is probably like the purest form of that, right, of consistency. So I have it up here on the screen. So I mean gross margin obviously it’s not high, right? Back to our earlier example, but it’s it’s incredibly consistent over time and Costco trades at an insane multiple, right? Um and then the other factor that can um drive uh you know a multiple rate or multiples higher is just of course the growth in in gross profits. And you know we could talk about like a company like US lime uh for example where you know gross margin went from call it you know low 20s to over the past handful of years um you know we’re we’re close to 40 on average right if you average that out. Um and the multiple rerated I mean basically more than doubled I believe which we could pull up uh key ratios and let’s see um you could see price to earnings. Yeah I mean basically have doubled over the past five years um another example of that could be a company like Buckle um which is an interesting one. this company always came up on like screens like magical formula screen or or other like high quality screens. Um and you could see that you know revenue growth hasn’t been anything spectacular right.5 u so less than 1% 10-year ker on revenue. Um but gross margin ha hasn’t has you know held up and and only improved or or done okay over time and return on equity has done good as well. And um you know the stock price movement in buckle has been okay. So want to get your thoughts on you know sort of the difference in um you know from a consistency level right you used to write the Mer newsletter of guru focus or you’re part of that and things that you screen for. Um but then actually the growth in gross profit which could drive that multiple. >> Yeah. Maybe that’s where more of our our listener base is going to focus because I don’t think a lot of investors that follow us are probably um going to buy like a Costco at 50 times earnings. So maybe if you’re going to get that multiple expansion, it’s it’s more of the improvement side of things. >> Yeah. And so but we could but again with the the thing of looking at just the numbers versus knowing a little bit more about the business helps in these cases. So if you take the gross margin at Costco, you know that their strategy is they don’t want the gross margin to expand. They actually want if if they could plan perfectly, they want the gross margins to to stay the same. Their goal is to take on the benefit that they would have that they could have a higher gross margin and then pass on to customers which will drive greater revenue growth which you know and then through that cycle. That’s that’s their model. Other companies might not do that. If you talk about buckle or something, they don’t think that they could sell more and more um you know jeans or whatever fashion things they might have because there’s a limit to that. Whereas Costco wants to sell everything possible in huge quantities to the people who are members. Right? So it’s a different model that way. Whether you want to make sure that you keep pricing high enough, you know, your profitability high enough or whether you want to have something where you’re driving as much value for the customer in terms of just like um low cost, which is their model. Um so theirs looks more like, you know, uh I mean I don’t I think in recent years progressives doesn’t look like that, but if you could see things that would kind of be the goal of both a Costco and a progressive or something. Their goal is not to make wider and wider margins over time. They feel that they miss if they price too high and actually had too big a margin. Um they would rather that that be be similar um over time. They feel like >> scale economy share model >> that everyone will buy one auto insurance policy and they will they could you know if they pray if they had too much profitability it meant that they could have had more market share than they do basically right so they’re balancing those two things against each other whereas someone who who’s you know Rolex or something is not going to think they could sell to everybody so they want to make sure that they have a certain amount of profit on everything that they sell um and are okay if that gets wider over time probably. Um that’s not the case with with the ones that we just saw there. Um but in terms of like what would cause it to widen out, that’s pretty easy for some companies. The question is how early you would be. So US Lime, you could predict that um it could have an explosion in gross margin if you researched the industry, the company, etc. or even just read some things the company said because it was operating at so much less after the the um financial crisis. Uh it was producing so much less output than it was capable of. Right? So when something has capacity utilization basically of like 60% or something but is making good profit well that means you know if if it goes to 95% uh it’s going to be making a ton. Or the other thing is whether it’s like monopolistic in the sense that um people won’t necessarily uh its customers won’t necessarily be able to to get um any relief in case of inflation and things like that, right? Um a good example of this I think is uh I think they still have a quick app. It’s no longer a public company, but Encore Wire W is that it what it was? Yeah. So this is a good example because you can see it through 2023 knew this company knew it was a super lowcost very efficient producer deliveries on time at really low cost and it had like the model that worked the best that way. But if you can see after um the commodity boom kind of busted right around the time of the financial crisis all the way till almost COVID in that graph there uh being the best producer in the United States got you like a 10% return like uh so most assets in the industry probably weren’t even justifying you know being public or or you know using owner money. this company was maybe barely doing that and it was doing it at being very efficient in terms of cost and everything. Now what that meant is that it exploded once um the price of copper went up basically and and other things but once there was and especially an expansion and it not just like it being a high level but if it was going upwards that would you know have a dramatic increase kind of like when we talked about banks or something like they’re they if they’re very efficient but they depend a lot on the net interest margin then it’s only once the uh rates are higher for some banks and then for others the yield curve is is steep that they make money. We talked about that basically Frost in the case of higher interest rates and I think we talked about Hingham in the case of steepness of the curve. Uh if you you you’re kind of a lowcost producer of money, but you just make all your money on the the other side of it of um of what you get paid. And if you don’t get paid a good price, then you’re not going to be making money. But you could tell in each case that if the value of the commodity as an output that they were had that they were positioned for happened, then they they’d suddenly be making a lot of money. and vice versa that if it collapsed they wouldn’t be. >> I want to go over like growth versus profitability and just different um three different scenarios right and we could talk about it. It’s Elite Corp. If you’re a micro cap investor, I’m sure you’re familiar with this company. Um, but you know, strong revenue growth over time. Um, but gross margins decline and you know, the stock underperformed, right? So, look at 2015 right here. And again, people listening that may be more familiar with the business, maybe you could say, oh, where they did this or they did that. I’m not, you know, here to debate that, but just looking at this from like a highle overview right here. Um, you know, gross margins in 2015 went from about 52% uh to 40%. Even though revenue went from 18 million in 2015 to 44 million in 2024, right? And the stock did not do well. Um, another example, we could look at Boston Beer right here. um grew revenue much faster uh but failed to grow gross profit per share and and the stock you know drastically has underperformed. That’s an interesting chart we should pull up. Sam >> Boston beer is a really good example because I wrote the stock up like 13 years ago and everything that I wrote up about it turned out to not essentially not be true. It would have been true if the business and the company had stayed the same, but as an investor, you invest in a company and if they change their product mix, pivot into other industries, whatever, that’s the return you get. And so, they ended up being a much faster growth, much lower profitability company because they went into things that were different from what they were in initially. when I was talking about them, they were primarily really really primarily um just like a Sam Adams like a what they call better beer type category, higher priced beers and um then you know you talk about spike and all that. I mean they had twisted tea and stuff by then and and angry or stuff but like that expanded and they became in a lot of other categories that were different and had much faster growth um in terms of volumes and stuff. they were probably selling a lot more but in terms of um gross profit you know like we talked about not so great and certain I mean you know they grew but not amazing for all those years and then gross margin obviously declined. Yeah. >> Mhm. So for people >> turn on capital declined. Yeah. >> For people listening on the podcast. So in 2015 revenue was 960 million and gross profit was 52 million 52.3% gross margin. In 2024, revenue basically doubled was just over 2 billion. Um, but gross profit was uh 894 million and it was a 44.4% uh gross margin. And even years before that, a few years before that, it was actually a lot less. So operating profit, which is interesting, even though revenue doubled from 2015 to 2024, operating profit was basically the same uh 10 years later at 152 million. >> Yeah. Yeah. And if you look at this one, and you’d only see this in the video, but um it’s the really key part is the 2018, 2019, 2020, 2021 fiscal years, because what’s interesting about those are the difference in the revenue growth, which looks quite strong and my memories that caused the stock to go up during that period um actually that it the multiple expanded during the 2018 to 2021 period. >> Oh yeah. >> But was that like the Seltzer cris? Yeah. >> People get thrown here a metric >> and it really high. >> I mean, yeah. >> Yeah. >> Yeah. Obviously that changed everything. But if you look each year they have like double digit type revenue growth, but each year they have fairly dramatic drops in in the gross margin where the gross margin is going from like 51% to 38% at the end of that. But every year gross margin is coming down. >> Yeah. people listening in 2021 it looks like price of sales was like nine times >> which is interesting because >> today >> yeah as we said the gross margin contracted from 51 to 38 so we don’t have the calculation here but price but but like enterprise value or market cap to gross profit actually went up even more than price to sales because sales was justifying that kind of gross that kind of growth but gross margin wasn’t um and then after that period actually they probably you know I don’t have a lot of details on the company know everything about it but in the period after that it actually looks like it returned more probably towards what it had been before that part probably shrank the other part probably grew and if it hadn’t been for that period in between um it if we had just had a snapshot of the company before and after that 2018 to 2021 period it might actually have looked much more the same though they ended up in a worse position obviously um you know operating profit in 2024 was the same as it was in 2015 which is not great usually unless you bought back a lot of stock or because there was a lot of inflation. So in real terms it’s about 2/3 actually it’s probably a little le 2/3. Yeah. So it kind of contracted by about 30 35% as a company in terms of how much money it was making in real terms probably. So as an investor, what is the the scenario that you would prefer to invest in? Sort of the lowcost producer where maybe it’s more about scale, scale economy shared, customer satisfaction, and more of like a volume play versus maybe less volume, higher prices, more of your craft beer, more of your Rolex verse, you know, name your favorite cheap watch company. >> That’s a great question. uh the way to make tons and tons and tons of money as we’ve seen recently is in the lowcost huge total addressable market. I prefer the opposite. The number of things that historically that have survived for long as on the lowcost approach is not high. Uh so you know we’ll see. >> Do and just just so I ask do you do you believe though with the high price point model right you have to be much more familiar with uh you know consumer and customer tastes and and sort of the behavior there right and and feel comfortable with that and feel comfortable with it not changing verse the other side well the customer and consumer preferences is cheap prices and it’s you know everyone’s always going to like that that’s never going to change. Uh, no. So, I disagree on that point in that I think that usually how you have very very low prices is you have an extremely fit system that will be wiped out as soon as there’s a change in how something’s delivered. So, the problem that you have is you develop this thing that is the absolute lowest cost way of getting things from here to there, selling them, organizing them, whatever, and then something changes where people actually have another method of getting that and your system no longer benefits you. And so, that’s really dangerous. So like if you were offline and you had this extremely elaborate system for how to have the lowest cost in stores once online comes in that that can potentially change that. If you had an approach that that was based on reaching customers a certain way in terms of um advertising and selling to them and then that changes then you have a real problem. So I do think that low cost you can it depends if you have lowcost you know deposits of some mineral that’s going to last you 50 years then then that’s very safe but usually it’s lowcost distribution systems that it really could have a problem pretty dramatically you even see that in things like um GEICO versus progressive I mean Geico had a model that was based on uh attractive customer acquisition and then um some things within that about to some extent selection and Progressive had one that was based on pricing correctly to uh risk and you saw pretty dramatically how quickly Progressive was able to not to profitably take a lot of market share from them because certain things changed in terms of technology and stuff that made that ability scalable in a way that suddenly you could take a much bigger advantage of it. Um and so that worries me. So like yes it I I know that that people feel like say uh Google or something right let’s put YouTube part of it out but the Google part is very safe compared to like I said a Rolex um but AI and stuff if people get AI answers instead of typing something into a search thing if people go directly to Amazon and have an AI suggestion of what to do to as they’re shopping instead of going through Google if they do different things with travel with whatever They’re dependent on a lot of those things for advertising. It might not be valuable to people anymore once that happens. I mean, there was there, you know, newspapers were once a very cost-effective way of getting your news and then they no longer were. And there are not many. So, you take the most extreme examples, retail, where efficiency is what matters the most. They have an incredibly high extinction rate. Um, so there’s people who’ve gotten rich off them, then sold them, and then put their family’s money into something else. But if you just like kept your family’s money in something um and that’s all you owned and stuff, you you didn’t create something that was wealth forever that way as opposed to brands and things which have a much much longer existence um that are more agnostic in terms of distribution. So, um, but you know, so if you’re asking like like just what are your odds that you’d be able to survive forever when we’re comparing, you know, this is happening in streaming things? Netflix did better than Disney. But which was more likely to survive and everything? Disney because of the content, everything. It could be agnostic about that. Eventually, there’ll be some way to distribute it. Someone will pay you for it. You can create your own channel. So, it’ll work out. Um, Netflix had to race to make sure they got big enough, fast enough to survive, and then they’ve done great since then. Um, but also everyone who tried to do another Netflix lost money. So, I mean, if if it’s a home run if you’re right about it. Um, but the other thing is if you are on the lowcost one, you you there have been examples where it’s been reversed, but you probably want to get out pretty fast once that starts going the wrong way. Like, you wouldn’t want I mean that happened with Southwest. We went over that in one podcast where he said, “Look how big the gap was and then look how it went away.” If that’s an insurer, if you used to be able to save people, you know, you had 10 points of advantage over other insurers or something or you had a better operating ratio on things with a uh airline because airlines a lot like insurance that way. Um you could pass it on to customers and you could do great but as soon as that gap closes, you don’t really have anything to offer. Um and you know that has a tendency to happen. Um, so most of the lowcost type businesses, you know, don’t last forever, I would say. Uh, they have a tough time that way. Um, and even ones that do are often single sight or something. Like even when I said retail things, the retail, honestly, if if certain department stores and stuff had never expanded to owning other stores outside of the original ones they had, some would have done okay if their location did okay. Nebraska furniture or something is different than like Walmart. It’s a bit safer. >> Mhm. uh final example that we can show here uh waters right so sort of the opposite story of the first two that we spoke about uh slow revenue growth so the first two were you know high revenue growth um but solid gross profit per share growth and the stock I mean it did okay I mean not necessarily I don’t know if it was market beating right now the past few years obviously the markets have been super strong but the business itself um did did pretty good pull it up against the S&P S&P crushed it but let’s see over the last 10 years. Yeah. So, opposite story though. >> Ones like that. Well, one problem that you have with that I don’t know that was always an expensive stock. So, I’m not sure that it was even cheaper 10 years ago. Um, but the other factor that you have there is actually just that the gross margin is very very consistent. So, you have a situation in which this is where we’re going to with profitability. So the quant stuff like quality is often profitability quality are often considered the same and then growth is somewhat separate. This is a company that has strong quality um uh numbers but not growth. The the best situation is a high quality company that is high growth. Um high growth without quality is rare and dangerous. um it doesn’t usually last that long unless you have some funding source that that’s um uh you know that isn’t your >> ownized. >> Yeah. But but any company that that grew really fast and got really like any company that’s giant today usually has something in its past in the United States at least p you know businesses that were private sector and everything. Um there’s something in its past where it had a really good run of making a high returns on capital otherwise it wouldn’t get to be the size that it is. um the actual business, not the market cap. Right? We started this off by talking about a business that’s a $300 billion market cap, but it’s only a $3 billion revenue business or whatever. If you’re a $300 billion revenue business, at some point in your history, you were a really good business because you somehow funded a lot of growth. Um now there is one other exception that we should bring up, which is the return on capital thing. There’s a weirdy thing which is some businesses don’t have moes around them necessarily, but people think they do because they have high return on capital, which could just be you’re the first one in or they’re shortage or something and it could last for a few years and then go away. So, it’s a longer term thing of that. And then the other weird example we have is some have funding advantages which are probably not they’re good to have, but they’re probably not as attractive as having good gross margins in terms of what it means. So somehow you’ve been able to like um whether it’s lease the thing or get the customer to fund you or something which is always a good thing but it isn’t as strongly indicative of a good business even though it has really high returns for owners as like having gross profit. Um because gross profit basically means that you know you have some you’re doing something right in terms of what value you’re able to get and give on the supplier and and customer side so that there’s a gap there that you know you can make money off of. >> Make money. Yeah. >> Let’s talk about gross margins or gross profit and gross margin as um like an early signal, right? You’ve always said that you worked for a guy that uh was, you know, he would do a lot of stuff in technology and like internet of things, right? And he would always tell you that whenever if he was ever in a company and their gross margin dropped like quarter over quarter, he immediately got out. >> Yeah. So for his own investing stuff. Yeah. Because you invest new technology things invested in that and just knew from technology stuff that you only want to be in a tech company when its gross margins going up and as soon as it starts to go down you have to sell it. Yeah. >> Why is that? Explain that logic like play it on what usually happens after. >> Sure. So there’s a few different things. So so one is with tech things. So we talked about like supply and demand. It’s no longer in like short supply. Um, so there’s enough of it to go around, which could be that other people want to, you know, could be that things are changing technology in terms of how it’s being used. It could be the competitors getting better that way. It can also be companywide. You’re selling less new stuff and selling more old stuff, you know. So this is the Phil Fisher type stuff. The other way of doing it from the quant side is how many of your products are you came out with this year, five years ago, whatever, you know, and Phil Fischer that depended more on getting honest answers from people in the company and around it and everything to build the same sort of thing that we’re talking about. Whereas um some people’s feeling is just whatever the companyy’s saying doesn’t matter. If it’s a tech company and there’s a decline in gross margin, it means that those things are happening even though they’re not telling you. Yeah. it’s not as hot a product anymore. You know, tech and fashion have some similarities that way. The hope with tech is that it’s not a short-term thing that it keeps being the case, right? That you have this great technology, you’re going to keep that edge. Um, but whether it’s a same thing with like fashion merchandising edge, you know that because we think of a fashion cycle as that happening. Um, it’s the same sort of idea. You know, you want that to continue. You uh it has to be the thing that people want, the fashionable thing. >> Yeah. It’s like Blackberry when when the iPhone came out. You could cut prices to keep revenue coming in, but if no one wants it, margins are going to absolutely collapse. >> And that gives you a good idea of the technology thing because while that company uh was incredibly profitable and had like, you know, magic formula type stock and all that to like losing money was a very short period as opposed to most businesses. That’s why I mentioned fashion. You only see that in like tech and fashion things, you know, like you have a people can’t explain why some teen retailer or something went from being the most profitable to like losing money in two years and you don’t understand it. Same thing happens in in um tech things too like happened with iPhone and Blackberry and everything. Yeah. Same idea. It’s a huge switch. Everyone switches from one thing to the next. >> Let’s talk about Carvvada. So, you know, basically looked like roadkill, but gross profits did, you know, keep improving, which is obviously what you would want to see if you’re ever looking at a turnaround situation or where you’re extremely worried about, uh, you know, an impairment or something like that, right? Um, saw this tweet. So, we had obviously wanting to talk about Carvana on the podcast and then I woke up and I saw this this morning and I thought it was funny. Carvanao was down 98.99% from 2021 highs. It’s now up nearly 9,000% from the lows. And you said the stock market is wild. I mean, that’s pretty crazy. Think about that. >> Yeah. Although that’s that’s flat if you owned it before and after. We have to do the math of that for people so that 9,000% it’s in the same place. Yeah. >> Yeah. >> Um, yeah. So, I mean, let’s look at the companywide things because I just know something about the unit economics from years ago, but which is kind of why I mentioned it um to you a while ago is that um this is one of these cases where it was interesting because the company’s basic economics seemed like it wasn’t impossible that this could make sense, you know. You know, so I’ve looked at companies like this, Chewy, some other ones where you go, I really say just uh management saying one thing, you could look at it one way. It might be possible to make money on each order, but it’s it’s hard to know. It’s very attractive for customers if this is true. Um, and Carvana is very very good deal for for customers, good experience for customers. I mean, people should sell their their used cars to Carvana. Definitely, I would recommend it. But I would recommend Movie Pass and I took advantage of Movie Pass. that has nothing to do with whether the business is any good or will survive. I mean you could obviously it’s very easy to offer people something that they would prefer um than to make it a profitable business. So um but the problem of that was was scale right was always the question of how quickly would it scale and keep getting better and that’s the point that I was mentioning before where you asked like why would something have a negative gross margin or in Carbon’s case I don’t know if it was negative but in 2015 161 17 has a gross margin of 1 to 8%. um like the I mean car dealers might have something almost as low as 8% if it’s like a fleet thing and something maybe on like actual car sales I guess. So like you know they don’t make a lot of money on new cars but this is companywide. So the reason why they would sell you a lot of new new cars or something is because then they get your business for service and other things. you know, in those years, what Carvana was doing is not something other dealers would want to copy because they would just think you couldn’t make any money off of it. Um, you know, that’s too low on amount of uh that’s too low in terms of how much profit you’re trying to generate. Um, and then, you know, as you go on, you can see, let’s see the gaps there. So, that till they eventually have um, uh, a big improvement into the operating to actually operating profitability in 2024. Mhm. I mean, what happened during these years? We’re familiar with car prices and and in and dealerships and what happened. Maybe take our listeners through that. >> Okay. So, some of it’s complicated because of accounting rules. Some of it is is somewhat misleading. Um, if we looked at cash flow things, the the economics were were worse and they were closer to bankruptcy than those numbers would suggest. Um, they’re probably very very close. Um, because I mentioned this once about Tesla. there’s a period where like margins expand or something people were impressed during co uh if there’s lead time between when you make something and when you’re selling it and there’s inflation uh that margin doesn’t exist. So there’s a period here where there there’s a gross margin that’s it’s just it’s phony. Um there’s no if you went then went and replaced the car, you know, you you sell a car and then you turn around and you have to replace the car, but you don’t have enough money to cash to replace the car. Now, if you’re being if you have certain credit arrangements and stuff, which you know, dealers do and stuff, then it’s a little more complicated than that. You only have to replace part of the value of it because most of it’s being provided by the the the dealer and by the um like floor plan financing and stuff. But um basically, if it’s an allcash business, there’s a period there in which you are selling inventory and you don’t have enough money to buy more inventory because cars have gone up in value more than your markup on the car. So that’s an initial period there in COVID that’s happening that uh let’s try looking at the cash flow thing to get an idea of what I mean on a cash basis the business wouldn’t have really been generating at that point. Um and so because you can see yeah so um yeah cash from operations is significantly negative in fact the most negative ever right from 2019 to 2021. Yeah, the story went from oh, we’re improving and then in 2021 2022 it went boom like just completely. >> Yeah. Let’s see. But we have net income. So we can compare to some extent I mean net income is not the best measure for this but you can compare to some extent the what I meant about the cash in relationship to the income and everything in that it’s significantly worsening because before all that let’s say take 2017 as a clean measure um you know your net income was negative 160 million and your cash from operations was a use of 200 okay a few years later your net income is not that different you know it’s like report -3654 -287 but you’ve now tripled or or worse your cash flow from operations in terms of um the the burden that’s happening there. So the the quality of the earnings has deteriorated during that period. um you know and that’s a weird thing to say because they’re reporting losses but it’s even worse than the losses they’re reporting at that time the reality of the business and then later it changes and then you have positive cash flow from operations in uh the last couple years two years basically >> and significant cash flow yeah >> and the stock is up 9,000% off the bottom >> but back to >> yeah well it yeah we talked about quant things if you quan could come up with a way to predict when the market will think something’s about to go bankrupt and yet there’s a high probability it will not even probability there’s some decent possibility it won’t go bankrupt that’s the best thing in the that’s the best inside information you can have in the market you know people always talk about like oh there’s going to be a choir or something the best thing you could have is like you know ahead of time that someone’s going to restructure a loan or something and everyone else thinks they’re about to file for bankruptcy on Friday or whatever um which is what happened here yeah if if you could tell the difference between things that are going to be bankrupt and uh you Chapter 11 and and those that are going to recover in some way, even if they never get remotely back to where they were, that’s going to make you a lot of money. >> Let’s talk about uh you know, to close this out. Um I mean, don’t want to bring it too much back to fashion because I know that that’s harder to judge, but um Crocs, this is a company that’s talked about a lot recently. Um gross margins obviously very good, have improved over time. Uh trading like a home builder. So, you know, what’s what’s going on here? Is this a fad or or is it a trend? What is it? >> Yeah, I think that’s a good way of putting it. And I think that’s the same sort of thing that you see with home builder. Same idea. So, I mean, you wouldn’t you’d say, oh, um, what does Crocs have to do with a home builder? But, it’s kind of the the theme of what we’ve been talking about today is that what does technology have to do with fashion or something? The issue is how do people differentiate between this is a trend? So all these things when you have good margins and expanding gross margins there’s a trend and that’s kind we talk about the quant things momentum wise the business momentum is great let’s not even worry about the stock price momentum we’re all agreed on this the question is are you too late is it about to turn those sorts of things is it sustainable the best thing would be if you have you know business momentum that’s expected to be sustained for a period of years or something um because even if you’re not going to own the stock for years they’ll just be good news the whole time that you do own it and then sell it you know um but here you see the multiple is low Right. And so people have downs. Um it has, you know, good revenue things. There’s been years where gross margins higher, but it has very high gross margin variability. So I wouldn’t worry that much about that. Um there’s no trend towards worse gross margins in the last few years going into this. Now there might be now we could look at quarterly and stuff. Um but that would be the obvious thing would be people’s concerns about that, you know. Um yeah. So, I mean, yeah, quarter to quarter there’s declines, but seasonally there isn’t really. Um, so yeah, you basically I mean I won’t tell you whether you should buy the stock or not, but I think you can tell in the case of Crocs. I think you can tell in the case of homebuilders um that there’s an expectation that the future is going to be worse from a supply demand case. So, in other words, like this is kind of a there’s maybe a uh they don’t expect crocs to become an even bigger trend, let’s put it that way, than this right now. And they don’t expect uh home building in terms of inventory and stuff probably to be a better situation than it is um been recently. I mean, because otherwise they would put those multiples much higher if you just look at what the results are. Mhm. Mhm. And then Deckers, another popular uh company, hookah brand name. That’s what I wear. Uh got a pair of hookas. >> Kind of could see in your just everyday life how much that brand has taken off, right? Seems like everybody wears those. Um >> but uh another example of, you know, so revenue growth has just been incredible. Um but also growth margins and gross profit growth has been incredible. And you could see right how much that has scaled uh from like an operating margin perspective. So probably SGNA is a percentage of revenue uh has gone down right and that’s what you want to see when you see companies growing a lot. >> Yeah. And you can see there the multiple is much higher. So presumably people are more optimistic about that one. Yeah. We could we have like first Nike or one of those because those are the ones that are the losers to you know um Nike in particular I think. uh has been the loser to some of the trends that you were talking about about that people are probably more concerned about um some of the more recent ones in the running shoes type space. I don’t know if people are really running with them but you know that look >> yeah we got Nike pulled up right here um you could see you know revenue growth 10-year keer 4.2% but gross margin has been falling 46% in 2016 to 42.7% in 2025. Yeah, I don’t know the business. This is always one that amazes me in terms of the price that it has and versus what its results have been recently. Obviously, it’s it’s famous as a amazing business long term. Um, yeah, because you’re looking at something that’s I mean, you know, let’s see. Um, well, okay. Yeah. No, no, no, that’s right. So, the the Okay, so the peak profitability was the last few years, not not this most recent year. So if you price off of that, it’s more like 20 sometimes like record earnings probably 20 times or something. So the P isn’t as bad as it looks that way. Um you know, so it could bounce back to where it was just a few years ago. But what’s the market cap on it? The EV, if you could just >> EV 112 million. >> Yeah. So I mean even if you look at peak, it’s probably it’s certainly over 15 times uh and more like 20 times pre-tax uh what it kind of peaked at in terms of profitability. So, even it got back to where it was just a year or two ago. Um, you know, that uh it’s not a cheap stock. I mean, it’s it’s it looks kind of expensive for a stock that’s only grown sales by 4% for 10 years and and hasn’t grown EPS at all, although it did until this most recent year, I guess. So, >> I mean, Deckers versus Crocs, I mean, what’s the difference here? Why does Decker trade at a higher multiple basically double what Crocs trades at? >> That was my point. My my feeling on that is the same which is why I mentioned homebuilders and stuff is that value investors look at these things and go >> oh Crocs is so much better than Deckers or oh this particular home builder is so much better than the other one. Where you want to be careful is we could say it’s clear that something’s priced into the differences in terms of people who think they know something about fashion, let’s say, or think they know something about particular home building markets or whatever that there’s concern and that could clear up. They could be thinking, “Oh, things are about to be really lousy and and uh you know, they’re not.” I mean, like four months ago, no, maybe like five months ago or something, you saw things in the stock market that indicated things around travel, uh yeah, anywhere from three or five months ago, uh travel, tourism, um spending by certain things like that were all like there was concern about it. And then the kind of as the year went on the it seems like the market’s not concerned about that kind of consumer spending. So the same thing can happen with any prediction here. They’re probably concerned about one things um fashion versus another. And I’m sure that that’s why we mentioned the home building thing. It’s the same thing. People there’s certain markets where people are concerned about what they see in terms of inventory or something. Mhm. I mean, it’s hard to, you know, I mean, you look at like Crocs and you see that they’re selling like charms for for their shoes and be like, “Huh, that’s kind of interesting.” Um yeah, that’s a really big part of it of the whole um thing I think over time for them that’s helped them is creating that kind of uh like um like Pandora the jewelry company and stuff, you know, building up a whole thing around what it is for the um uh for people to buy more of them and to be more loyal customers and to be a certain kind of uh buyer versus some of the other things that we’re looking at. So I always find that hard to to analyze. Yeah. >> I I just wonder if they look like do or do investors look at Crocs and say, “Oh, it’s sort of, you know, single thing.” And then maybe they look at Hookah and say, “Oh, they’re trying to become more of like a platform company, right? You got UGG, which is obviously super popular.” Um, shut up. Um, and I will say this, um, honestly, >> there will be a strong tendency for investors to overvalue something like those shoes that you’re seeing there, uh, the running shoes and stuff company and undervalue a Crocs. Uh, this is something I’ve noticed across my whole time investing and it’s definitely very pervasive. If you have something like AI or something, investors don’t understand it, don’t whatever, you know, but they can or it could be biotechnology, it could be all sorts of things. If they don’t understand it, but it’s not something that’s just not to their taste or fashion or whatever, then uh they may give it a high multiple. If it is something that’s very appealing to a group of people they are not, uh it it tends to have a low multiple. So that’s one thing that you just notice. Um that’s almost universal. If investors tend to be from urban areas and things and this is a rural thing, the rural thing will be undervalued relative to the urban. If they’re male and uh it’s almost exclusively bought female, then it’ll be that way. I mean, there’s just one thing after another where I’ve seen that generationally there’s all sorts of things. So, um yeah, and that’s what I mean about fashion type things. So, when it gets into things like this, there’s an idea of like uh this makes sense to me that people buy this product. it doesn’t make sense that they would buy that product. And that’s fine, but the one thing you want to ask is like, well, does that reflect your tastes, right? Because that’s the important thing uh there is to make sure that, you know, um it isn’t affected by that. You know, >> maybe these two should just get a room and merge together, solve everyone’s problem. >> Well, yeah. The interesting thing about it, and this gets the gross profit thing, is um does that solve it? So, there’s companies that have done this. You put together lots of apparel things or you put together lots of um shoes or whatever, right? Uh what was the one the uh the best example that was? Um well, actually, there’s a couple examples in in apparel. Um but I was going to say like um which is North Face and all those things. And then um uh you know and so the point is as you get each of these brands um they often you’re often buying it happens a little in restaurants too. You’re buying a brand that’s supposed to be faster growing have better more attractive things at the time you buy it and then over time as they mature in what you own they don’t look like that anymore. Um you know what I mean? So like a mature brand isn’t as profitable in terms of being able to charge a lot for and stuff as a hot brand. And so you have a tendency to put together things that are hot brands at the time that you bought it. And uh but over their whole life cycle they end up looking like the brands you already had, you know. >> Very interesting. Very interesting. So I guess what I mean this scenario right here, right? I mean, Crocs because of the price you think would be more interesting to you or is this more of a bad? >> Uh, no. I I would think that anything that I think I would have these sorts of quantitative numbers that look good and then I think I have some edge that’s not quantitative in would be something that would be attractive. And then in the vice versa cases where I think other people who are buying the stock know more than I do about it. Um, yeah, but I wouldn’t just be contrarian to be contrarian on something like that. But I did mean that seriously because like when you were talking about the charm things and stuff. Yeah. For people who have the the shoes, they know all about that and that’s a big part of it is being able to do that as an expression of things that they’re into and stuff to put that all in the in there which other shoes don’t have and don’t seek to have. So it does differentiate it in a important way. Um it doesn’t mean that it’s not a fad, but I just mean it’s different. It’s a highly differentiated product certainly. Yeah. It’s kind of like Keely’s, right? Yep. which was a fad, but a highly differentiated product. Yeah, water beds. Highly differentiated product that no one uses. I mean, >> bring them back. Bring it back. Water beds. My grandparents had one. >> Awesome. >> You know, so >> I think my grandma developed back problems because my grandpa was heavier, so it shouldn’t be down. It should be like up in the air, you know? >> But whatever. Mattresses are a really good example that way because we’ve cycled through so many different ones where we have to come out with a new technology, new way to market it, >> new business model on it, >> negative gross margins. >> Yeah. And so whether it’s purple or tempropedic or sleep number or um you know where we talk about going back to water beds and things like that, it does allow you as a technology slashfad to have high margins at the time that you’re selling them then. And then once it becomes mature and it’s just like everybody else has a knockoff of this, those margins go away. And so we have to kind of reinvent that, you know, sort of thing. It’s like if it’s kind of like if you had a drug and it was a under patent and stuff and then it’s a uh generic now you got to go find the next that’s not a generic to, you know, fix up the portfolio. >> Would it worry you to be like we have a new way of distribution, a new way of marketing this product that’s been around for a long time and has just like always never worked from like an investor standpoint? Yeah. Yeah. So I mean this is where we talked about. So so you know I don’t >> like Carvana was not that Carvana. Okay. Like dealerships have worked and are very profitable can be very profitable and this was a different way for that. >> Yeah. >> Verse mattresses. >> I mentioned venture capital things before. Don’t do any venture capital investing. Don’t know anything about it and stuff. But if I had no numbers to go off of overwhelmingly it would be is this a product that sells itself and doesn’t have good distribution now versus is this something that has good distribution. I’d be much more interested in something that the product is seems to have a good sales proposition but has really bad distribution. And the question is just can we get it in certain doors? Can we get an affordable way to sell this thing to people and bring it to them but when they see it they’ll like it. But if you’re talking about oh everything’s great but in a focus group they really don’t like this product. Um then that would be the one that I would avoid. I would much rather uh you know it it just has really good um uh well like we were talking about uh movie things before, right? So Princess Bride got one of the highest ever scores with exit audiences and it didn’t do that well in theaters, right? But it had a long life on on a distribution after that and stuff. That’s the kind of thing that someone in the industry would be like, “Oh, I’ll buy this from you.” Like even though it it opened poorly and stuff because we know that it had one of the best ratings by people who actually saw it. So the problem was just marketing. Um, marketing is really important, but if you have a product that that people really like, but just doesn’t have good marketing or we talked about Celsius just wasn’t in a lot of places. And so, it’s just a question of getting to more places, will it sell more? You know, you’ve already had it proven. That’s the Peter Lynch kind of thing of like I feel like these companies don’t um go private at such an early st go public at such an early stage when he saw them, but oh, it’s in a town, it’s got eight locations, they’re doing great. It wants to raise money so it can then go to the next town in the next state and uh you know whether that’s a linto or a fast food thing or whatever the that’s yeah that’s the best it’s got proven um numbers on the really basic numbers >> unit the business model. Yeah the unit economics. Yeah >> and yet it’s not showing up yet in the the statements. Yeah. So what we talked about here it’s showing up in the statements but it’s showing up at a much higher part of it. So maybe you’re early compared to someone who’s looking at the bottom line by looking closer to the top line. >> Cool. Good job out of you, Jeffrey. Well, I want to thank everybody so much for tuning in with the both of us on the Focus Compound podcast. Make sure you hit the subscribe button wherever you are listening or watching us to be notified every time that we upload a podcast every Friday from here on out. Uh be sure to follow me on Twitter or X, formerly known as Twitter at Focuscompound. And of course, if you’re interested in learning about our money management services, you can reach out to me at andrew focuscompound.com. I thank everybody so much for all the support and we will see you in the next podcast. Take care.

Description:
00:00 Intro 00:45 Crox earnings — down 25% 05:40 Regulation vs. deregulation 08:51 Common types of regulation 18:58 …

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 to the investing universe. The best way to do that is to follow me on X at Focuscompound. Uh, go to focuscompound.com to get access to investment rights from Jeff going all the way back to 2005. Uh, and of course, make sure you hit the subscribe button wherever you are listening or watching us here today to be notified whenever we upload a podcast. Uh, so Jeeoff, I’m going to switch over to my screen right now. Let’s look up a company that we spoke about last week. >> Crocs. >> Talked a little bit about this on our gross profit and gross margin podcast. It’s down 25% right now. Uh they reported earnings and um I guess they guided lower and I think this is probably what spooked the market. I think so. Topline grew 3.4%. Uh but in the CEO’s remarks he said while we are pleased by this performance the current operating environment is uncertain and challenging to predict. Against this, we have chosen to focus on managing expenses, including the 50 million in cost savings we have already implemented, reducing our inventory receipts and pulling back on promotional activity to protect brand health in the marketplace. Although those actions will impact the top line of our business in the short term, they will position our business to win, drive margin dollars, and support continued cash flow generation longer term. >> It’s interesting at the beginning, they also say it’s the highest gross profit that the company’s ever had. So their problem is operating expenses below that which could be selling expenses too which are not part of gross profit but you know that’s the promotional part they’re talking about. >> Yeah. And then you could see what’s funny is so they break out the brands right Crocs grew 5% year-over-year but the Hey Dude brand uh fell about 4%. Um and then I highlighted this. So third quarter 2025. Given the continued uncertainty from evolving global trade policy and related pressures around the consumer, we will only be providing third quarter guidance for the third quarter of 2025. We expect revenues to be down approximately 11% to 9% compared to the third quarter of 2024 >> at currency rates as of August 4th, 2025. Yeah, I don’t remember if they get if they do everything from um China or China and Vietnam or Vietnam. I don’t really remember with the company where they source it from, but so the tariffs obviously what’s China at 30% or something and Vietnam would be lower than that. But that’s >> kind of weird that they said 11% to 9% instead of like 9 to 11%. >> Well, because they’re saying revenues will be down. So they didn’t put it in parenthesis, but I think what they’re saying is 11% is worse than 9%. You know what I mean? >> One thing that was interesting, too, so they took an impairment. >> Okay. >> And they ran it through their SGNA line, >> which you don’t typically see. I mean, isn’t I mean, it’s it’s it’s you you can do that obviously, but yeah, >> I don’t see that I don’t see that often that they run it through SGNA. Usually you’ll see like impairment, right? And they break it out. But I just thought that was interesting. caught my eye, >> right? They didn’t put in like other income net and those things. They put it in an actual category which is an extremely conservative way of doing it. So either they want to take a big bath on it, you know, to say this quarter was bad and put it in there with everything else or they’re, you know, I don’t know the management and stuff. That’s very conservative way of doing it. It avoids having to report next year, okay, we did an impairment this time but not this one that we did through that. You know, it would complicate the the uh statement a lot if you do that. And once you start doing it, it’s hard to stop. So, I mean, Bergkshire, I think, would do something like that. >> Yeah. >> Yeah. >> Funny. You never You don’t see too often uh companies have like the green accounting or or like uh I don’t know what you want to call these little lines right here. The only company that I remember would do that is Green Brick Partners, which I thought was funny because like their name was Green Brick, you know, and I’m like, “Oh, they’re keeping everything green.” Um but yeah, kind of just a random observation. No, I like that because uh the biggest problem when talking to people is they read across the wrong line. You know, when someone gives you a bad number, you can tell that the reason why is they can’t tell which row is which row. So, that’s good. >> Mhm. So, down 25%. Obviously, uh company was trading at a low multiple to begin with. So, um you know, that’s going to be down um to even a cheaper multiple. you’re gonna see growth slow down a bit, but yeah, I don’t know. I mean, it’s What is this? Is this a value trap or is this a value investment? What are your thoughts? >> Well, it’s cheaper versus sales and gross profit than before. Yeah. Um, it’s a very competitive market, probably more for Hey Dude, for Crocs. Um, but just because it’s like a lot less differentiated probably, but we kind of talked about that before. There’s a lot of these um uh brands, right? um that are all spending a lot on on advertising and things like that. Um so >> yeah, interesting. Anyway, so in today’s podcast, Jeeoff, we’re going to be talking about investing in regulated industries and perhaps the the opportunity that comes from investing when deregulation comes to specific industries. We could talk about Buffett, his experience doing it. we could talk about current themes of deregulation that we currently see and then also just uh companies that we’ve come across in the past where they do operate in a regulated industry. Right? So, but before we jump into that, maybe it’d be good to sort of give like a uh a backdrop of, you know, how you typically think about, you know, regulation, how you think about when you see a particular industry go through deregulation. And you know really it’s something that investors should pay attention to because especially on the deregulation side that could be like an inflection point in the industry in the business where perhaps maybe uh the company wasn’t able to advertise in the past. We could walk through a bunch of different you know things there. Um or perhaps maybe they were taxed more and now they’re not going to be taxed more or you know a common theme that people are familiar with could be like gambling. Now they’re able to do it. They’re out of prohibition. So let’s start from the beginning and and talk about how you think about regulation and and maybe more importantly deregulation. >> Yeah. So all company a lot of companies will say we operate in a highly regulated industry. The question is what do they mean by that? So some of the regulations for things are just um regulations for safety things how they operate um whatever that don’t have big economic impacts. some do uh some that you said actually like um regulation of some kinds um can be beneficial to incumbents that are large specifically people listening to this podcast know financial services type stuff so a lot of additional regulation that usually benefits the biggest companies I mean that’s one of the biggest issues when we talked about like um um your uh western unions and things like that the biggest barriers to getting into that is just how much do you want to be sued go to prison etc if you put in place any um rules about you know so that you’re just not wiring money for cartels and things is what you do. So the bigger companies can obviously have much bigger compliance things and stuff like that. So sometimes regulation can you know reduce competition and improve things for for a com some of the companies and then deregulation like you said is a question of what is being deregulated. So the ones that you gave examples for like providing a product or um promoting it or something could be really big. But on the other hand, you have ones where there was price regulation and then that was removed and you know most airlines are out of business, most brokers are out of business where they lived in a world of fixed prices that were set in part with government approval and then you know you can just charge whatever you want and then it’s a race to the bottom and a lot of them that were less efficient went out of business. So it could increase like extinction rates for a lot of companies too. Um and then have winner take all type things for that. So >> I think it depends on which one we’re talking about that way like what kind of regulation. But the problem what I was saying is that you look it up and in 10Ks 10 Q’s they’re not going to make big distinctions between ones that are really seriously regulated and ones that aren’t. You know they all kind of have the same sort of language in them. Mhm. So we could talk about we group together five common regulations that you see um and you have price controls, you have advertising, you have product bans, quotas like specific quotas and then tariffs, right? It could be like a form of regulation. So let let’s go through that, right? And we could talk about different examples of uh each specific thing. So like price controls for example. Mhm. So formerly in the United States going way back uh insurance generally was price heavily price controlled to not give the best price to um insurance buyers but to ensure the safety of the insurers that and then not long after like not that long after that Bergkshire when they started going and everything that was changing um banks having you know until you had SNL stuff where they were allowed different rules and whatever a lot of them were not allowed to pay as much interest as they might want to again to avoid that kind of thing where they could be failures. Um so sometimes you’re not allowed to compete as heavily on price for that reason. Um you could have price controls going the opposite way too. Um that causes a scarcity issue and that happens sometimes too which then you can’t when you have price controls the other way then you can’t necessarily supply the quantity that you want. So, I mean, when you have a control from a government or anyone, you can usually pick either the quantity that can be provided or the price. But if you set one, then it’s going to set the other one out of whack with what would normally be what you know people want. So, if you say you can’t charge more than X for gasoline, you’ll have lines for people to fill up with gas because you’ll run out. If you say there’s no limit to that, then you can supply on quantity freely, but then price is going to be at a level that governments wouldn’t want to see. So um so it works both ways on that >> um advertising. So I mean you have even certain cannabis companies right now they can’t advertise um that at least the way that they would want. You can think about like tobacco and liquor at once upon a time they couldn’t advertise um you know and and sometimes if you get deregulation right now you can advertise now you could do all these things that could be that inflection point that happens at the company right um can you think of any other >> yes the are there examples of US companies and other companies but especially US that continued advertising their product when they couldn’t provide in a foreign country with the assumption that eventually the rules would be changed back so that they’d be able to get their product in and then they’d be able to make money off of it. And that was very successful versus stopping your advertising completely because then if you have a product that you can advertise but people can’t get then when that changes you’re able to um uh be the leader in that right and then the other one is dual use stuff. So that’s other way that some got huge advantages. So like uh I think we’ve talked about Turning Point brands before. The Zigzag brand is because dual use. Um certain other things like that are the same because it’s allowed to be able to do whatever it wants because theoretically it’s roll your own cigarettes and so it was able to be >> installed that way. Yeah. And so it’s free to do that whereas others who were starting out from scratch wouldn’t be able to do that. Right. So you can get in with that. There’s plenty of that. I mean you know big one for that is drugs, right? They advertise the drug is advertised in only one way for what it’s good for. But if you do talk to your doctor about it and everything, then there might be other uses for it that are further off label from what it was originally tested on. >> And sometimes those are bigger than what actually was originally. Um, you know, so being able to do some advertising and stuff can help that way too because the big thing with the deregulation regulation that we’re talking about is having an advantage versus others at the time that the big, you know, bang happens in terms of either regulation slimming things down or deregulation allowing things to be open. Do you have a kind of first mover advantage, something there already? >> Um, that that’s kind of the big thing. Mhm. So like being maybe like the lowcost producer or having the business in place where you’ve been waiting for that deregulation and now it’s like go time basically. >> Yeah. So gambling things is to just already have any other form of gambling even it’s really small in a state so that when it changes to allow other things >> mind share. >> Yeah. So uh horse racing tracks getting sports betting you know I mean they got the sports books and things first. Uh we talked about some other racing things where they let them put in slot machines and everything. So you know there’s a tendency to not once you have that now that’s a little bit like permitting too. So licensing or permitting is a really really big one. It’s the same thing which is that once one is granted um it’s much more like it almost always is the case that that’s gets expanded instead of granting a new one almost always. So, even if you can get permission to have a small operation, that’s something that people don’t really want, small strip club, small uh disposal of, you know, landfill type stuff, small junkyard things, whatever. Um, we talk about lime things, you know, anything that pollutes or is dirty or whatever. Once you can get that, then of course you could just, it’s usually easier to get permissions to expand that than to have local governments and things agree to put another one in. So you might overpay to get in that first time so that you can be part of it when you do expect that to change so you could have something more profitable. >> I mean the big thing like local ones is there’s towns where the liquor license is worth more than the the entire operation of the restaurant because that’s all that someone wants to buy. >> Sure. Why do regulations get implemented and then I guess like why do they get implemented in the first place and then eventually get rolled back? like what happens from point A to point B there? >> That’s a good question. Uh it’s totally different in different countries. I mean we’re thinking of p mostly from a US perspective which I think is pretty different from most countries. So um there’s a few reasons. uh one sometimes that we could talk about is which are the ones we tend to think of as the regulated industries are that they want a monopoly type outcome or it’s natural for a monopoly type outcome but they want to not have excess profits to that. So they want something which would dominate and earn really high returns on capital to earn only normal returns on capital that would be the present in a competitive industry right so that’s you can think of utility water things whatever things like that other kinds of regulations can be much more complicated they want to kind of pick the winners and losers there’s things about fairness popularity there could be all sorts of different reasons um and sometimes the regulation might not necessarily I mean a lot of times the regulation will be because of something sens ational in terms of news things sort of like popular crime kind of causes the same thing where something about it gets people’s attention and stuff so you know the obvious one recently is the United Health and stuff right so that kind of thing then can lead to just regulation because there’s just a focus on the industry for whatever reason uh you saw that with financial crisis and all that it could be reasons to fix those things and Ron Sarbain Oxley to fix those things but it also could be that it’s just people are paying attention to that for for the first time you know if if 60 Minutes doesn’t run something about Luxodica or something, no one’s going to pay attention to how much money you’re making in eyewear things, right? So, it has to be something like that. Um, and actually a really big reason tends to be it’s picked as a popular thing for either an individual person to get a lot of attention as a politician or a party. So, there’s a push. Um, yeah. So like you talk about prohibition and that was huge and prohibition was pushed by a different kind of party system in the United States than otherwise. It was a huge political movement that got a lot of votes and everything. So it was a really big deal. Um and so it was a big political type movement. Um more so than the the people who had already been elected and everything weren’t likely to support it, but people who could get elected on that platform really changed things. >> It was basically a feminist movement. >> Yeah. It was a femin so progressivism means something different today than it did back then and stuff. But it was a progressive movement. Um which has to do with a bunch of things that were considered liberal things but liberal means something different today in the United States than it did then too. But yeah, it was a reform movement for a lot of change from what it had been before. Yeah. >> I could tell you who did not want um you know alcohol to become legal. Probably the mob, right? >> Yes. Uh so that so that is the other side of it which is this has huge implications for organized crime and stuff like we’re talking you know like you were saying and and the same thing happened with um a lot of the drug things that people don’t want to think about. So even drugs that are pretty soft, drugs that people, you know, are like the well, you know, who cares that it’s being used and it’s illegal, but we’re not really enforcing it makes a lot of money for um organized crime and then goes into a lot of other things. Whereas then it shifts to more acceptable economy. Who makes the profits completely shifts, right? So someone’s going to make profits if there is some gambling, some drinking, some whatever. But if it shifts over into more legitimate things, then who makes that changes, right? So I mean you can look at Las Vegas for that. You can look at anywhere shifted who there was profits before but who is making those profits has shifted. Yeah. >> Yeah. Like I mean pre uh gambling coming legalized in you know pretty much all states right? Um I mean who was the bookie before? I mean that whoever that was obviously is is out of business today. I think with cannabis, you can make a case as well, like if you want to go against the cartel, what better way to do that than to legalize cannabis. >> Yeah. Well, they have lots of profits and and it it dropped a lot now. They make money from other things now. Things that basically function like heroin but aren’t heroin. That’s their big profit center, I think, now >> imports of those kinds of drugs that are technically legal drugs, but they control. Yeah. >> So, uh product bans slashrestriction. So, cannabis, gambling, crypto. I mean, even think about since even doing the podcast, how much the tone has changed as it relates to crypto and like tokenization and the blockchain and the SEC and most people like Brian Armstrong, Coinbase, they’re like, “We want to be regulated. Just regulate us and tell us what we should do.” And oftentimes there’s sort of uh blue sky between you know waiting for that to actually happen because you you know you look at like I think about when we were talking about first movers look at what Airbnb and Uber did. So they were this new concept first mover and they sort of made the regulations or or the regulations were made around them because Airbnb for example in some cities couldn’t operate. Uber was the same thing. they fought them and and you know >> it’s exactly so what you said is kind of true but also from them is kind of disingenuous. They need to be the first ones to move and to do that and then once they’re in a position where they’re leading when there’s questions about whether it’ll be banned or anything then they need to have the regulations come in. So it’s very very similar to the history of Southwest Airlines. So Southwest Airlines was deregulation which was allowed similar to like crypto and these things through a loophole which was intrastate travel. So, the United States because the Constitution, the way it works, federal government doesn’t um basically doesn’t have it. It’s changed a little bit for some things, but it doesn’t have uh the ability to really regulate commerce that occurs only within a single state that has no effect in other states, but as soon as it crosses state lines, then it’s able to have the federal government do that. And all the regulations for airlines was federal government stuff. There’s a company in California that operated just in California. And then they realized that there was another state that would be even better for an airline to operate in because it’s the size of a country with the population of a country and economy of a country which is Texas. So you could then compete without the regulations there. But it took them years to be able to um actually take off, right? Because they were sued by every incumbent airline there. Uh there was a lot of political support for those things and not for them. And then they basically had to just go ahead and do it and violate rules. I mean, you can listen to what was it I think uh how I was it called how I built this. One of those podcasts that that had Herb Keller on it, but that’s if you want a really simple example of that. And so they had to violate all sorts of things. There was a rule that caused them a problem with um being able to discount and stuff. And so they gave people free alcohol because that was allowed with it with the pricing on it because they didn’t want to change their price when other people came in to price underneath that. And there are other things where they’re just like, I don’t care what the court says. if if there’s a sheriff out there trying to stop us, just take off. So, um, that you have to get going and then once you have it, then people won’t want to take it away. And I think that’s what it’s much harder to roll back something either whether you put in a new government program or something or a regulation than the reverse. So, it’s much harder to get it going in the first place. Once you have it going, taking it back is really, really hard to do. >> So, all these companies, they just need to get the service up there and going at the risk that they’ll be sued a lot and stuff. Um, and and then they just are betting that once everyone is using Uber or something, it won’t then get banned. Tik Tok, you know, >> you can see what happens. If you try to ban something afterwards, people would get upset about it. But if you try to ban it before they use it, no one will care. So, you got to get everyone using it first, even though it’s not legal. >> Yeah. Yeah. I mean, so let’s say you you can now do like interstate commerce. That could be a great way for a lot of these companies to make money. I mean, even cannabis companies, right? That’s sort of a topic right now because people are like, well, is Trump going to change it from schedule one to schedule 3 because schedule one is is your like heroins and and and those sort of drugs for schedule 3 is more like for medical use like um Tylenol, for example. And uh people think he could reschedule it which would then allow safe banking which then will would allow uh interstate commerce and um you know ultimately hopefully change because a lot of those companies in the cannabis industry they’re taxed on gross profits. So you you talk about that restriction, right? They can’t really deduct they can’t deduct I mean everything below the gross profit line in most cases. I think there’s ways around it but the effective tax rates of a lot of these companies are like 70%. So >> yeah, you look at you look at their earnings are very high, very very high. So the it depends on how they report them, but honestly in things the government controls that they want. It’s both oil around the world and also um gambling, cigarettes, alcohol in many cases is really taxed at extremely high rates either as a consumption tax um with or as taxing the company after they’ve actually collected it. either way, you know, but the effective rate of like what you pay versus what the company gets is huge in those things. That’s tends to be how governments deal with things that they want to collect revenue on and allow but actually don’t approve of. >> Yeah, people are hopeful that Trump will um reschedu or declassify and that could change things for uh cannabis that way. Um but no advertising I mean any other like so like advertising restrictions, right? Obviously that that could be a huge impediment to a company. You have any thoughts? >> Well, advertising is so critical. So, you were talking about like Coinbase. So, Coinbase is the one that did the um uh Super Bowl ad, right? That was the QR code. Was that Coinbase? Who did that? >> I’m I’m not sure, but it sounds like something. >> Yeah. Yeah. So, being able to advertise even if no one can use your product. So, like that’s a good example. So, >> what did they do? Just put up a code? >> No, there was a QR code that bounced around the screen. I don’t remember if that was Coinbase, but someone in crypto did that. Um, so that’s a good example though because you so years ago this one happened, but like the NFL, the networks, etc. would allow advertising. They’ve allowed now political advert like uh issue advocacy type advertising and stuff which used to be rejected. Um, it is possible in the United States to basically advertise things vaguely that the public can’t yet buy in many of the states that the advertising is going out to. Not everywhere. Um, we basically can’t. Um, there’s SEC rules about about things like that for like money managers and stuff, but there’s a lot of industries where that’s not the case. So, you could advertise something and just be like not available in the following states. And that gives you a huge advantage to pump that in. I mean, when GEICO wasn’t was not permitted to write insurance when I was growing up in New Jersey, Massachusetts, and maybe the District of Columbia, but a few places where they pulled out and they just say it, but they kept running the ads. And so once they came back into those states, they could sign up 10% of the people. It’s huge. So that’s allowed in a lot of cases that you could keep pumping in advertising. And so having big scale and being able to advertise helps. The same thing would be true with apps. There’s lots of apps for things that in some states you can’t really use the the product the way it’s supposed to be, right? but people know about it and there’s workarounds for it and everything and so the fact that you are very aware of it nationally would help you a lot. Um, >> another one we could talk about in the um around the 90s expansion limits, right? So like M&A restrictions in the banking industry. >> Yeah. >> So M&A restrictions. Yeah, there’s M&A restrictions on all sorts of companies and they have different effects for it. The the biggest one that we’ve talked about before on the podcast because of the unit banking rules was um in Illinois, other states had it too. A lot >> bank. >> Yeah. So, Berkshire bought a bank that had tons of deposits per um branch because it only had to operate one branch and could operate very effectively because it was limited in that state that the same bank couldn’t open multiple branches. Now, there was at least one person that I know of who, assuming that one day it would be deregulated, was involved himself in funding and being a big owner of many different banks all around the state with the idea that he could then put them all together once deregulation happened, and he did. Um, and so there are ways to kind of get around that, but they certainly couldn’t merge with something outside of the state or something like that. And actually, there are other ones where you could open multiple branches in the state, but not merge with ones outside the state. Um and there’s complexities with that too. There’s also most banks, most it’s a small difference now, but most public company banks are um bank holding companies because there’s a bank holding company act and everything which is different from individual banks although we actually have invested in banks which are just the bank which is very rare for a big public company now but we’ve done that. So so they be have slightly different rules. Um and actually that’s why Bergkshire got into insurance and not banking. they had to get out of banking because of the rules that that basically made it pretty impossible for a company to own both banks and insurers that time. >> Mhm. Quotas. So you could talk about like wartime and and like defense companies. I mean you could even look at uh GEO is a a prison company that owns um like tracking devices and they have contracts with ICE and stuff like that. Um things that just come up periodically that affect the companies, right? like if you have contracts with the government or or stuff like that. >> Yeah, there’s um so you have outright wartime rationing and things like that. Um so the United States basically durable consumer goods stopped being produced so you couldn’t really buy cars and refrigerators and things like that. TVs were new, but you weren’t going to be able to buy those either. Um and then there was pent-up demand for it after that ended. Obviously in other countries it last even longer. Um but then you also can have that in terms of caps on things. Also there’s related to that is you can have mandatory requirements for effectively for certain kinds of things that are theoretically private but actually everyone has to have. So we’ve talked about that in most specifically with car insurance. Well, title insurance is pretty much the same way in the United States. But car insurance, you’re basically that’s a unique industry because everyone is kind of legal pretty much legally required to have a certain amount of it at least the liability side and then um but is not required to have more than that in many states and uh has no need for having a lot of it. So it becomes this very kind of standardized product where literally you can advertise to everyone because everyone needs it. But you can’t advertise to some like super users who say, “Oh no, I want 10 car insurance policies.” Everyone wants the same amount, you know. So it’s very unique industry that way. And that’s part of Geico and Progressive and why they’ve been successful in that. Um it’s very different than other industries because in other industries, you know, some people have hamburgers all the time and some twice a year. In insurance, everyone’s kind of buying the same volume. Mhm. >> And then regulation on returns on capital or return on equity, right? I mean, Buffett’s experienced it being in the utility industry. >> Yep. Yeah. Those are very common in in certain countries and for certain industries, mainly utility type industries. Mhm. So sometimes when uh deregulation comes to specific industries, what it does is it actually frees these companies up to go from like declining returns on equity or like low returns on equity uh to pricing freedom and to the ability or to have the ability to be more efficient, right? And that can affect the industry, that could affect obviously the the stocks of the companies in the industry. Um, so we can look at a few different ones on the screen. So there was deregulation. Um, you know, that obviously came in, um, uh, Union Pacific, right? Um, I think what’s that what was that book with Hunter Harrison? Uh, I forget what it was, but they talked about deregulation in in the railroad industry. Um, that but you could even look I mean look at the the stock. I mean maybe we could look at like returns on equity. I mean so many of these railroad companies over time it just becomes so efficient. Um yeah well the interesting thing about the railroads the same as other ones what we talked about which is that it kind of fossilized the industry with a few leaders in it that was there weren’t going to be new entry and stuff and then you can make money off of the fact that it’s deregulated stuff. We should also talk about that with regulation of um because so examples are you talked about like gambling and and some of those sin things. Um there’s usually really high demand for that for um the customer for the product and it’s can be made at a huge gross profit to you if you’re the only one doing it. It’s kind of like Buffett has a quote about it where they were talking to him about some um Bergkshire actually didn’t consider buying a cigarette company. They considered buying a smuggler tobacco company, but he was referring to a cigarette company and saying, “Yeah, I know that it’s a good thing. You you it cost you a cent to make. You sell it for a dollar and the people are addicted to it.” Um but the problem in that is that cigarettes were not an amazing business always a hundred and some years ago when everyone was in it and could enter it. Once there started being restrictions for people coming in, then that’s what changed it. Railroads were not in good business when there were a lot of new railroads being started. Airlines were not in good business in the period we looked at. Remember when we looked at the number of airlines going up in the United States? That was a bad time. Uh so initially the deregulation was not good there. But then deregulation is something you want if you’re one of the leaders at the at the end of the process. you’re a lot more likely to want a lot of deregulation when uh when you’re one of the big leaders after 20 years of it being mature than the first phases where you just want to grow it. >> Yeah. You think about like the life cycle, right? So deregulation comes it’s it’s sort of a a um market share land grab bunch of competition comes in everyone’s competing on price people go out of business consolidation comes and then ultimately you know 20 30 40 years later you’re left with three or four main big players right that’s typically like the the life cycle of an industry and then it’s much more about you know consistency consistency in in in revenue revenue growth, returns on equity, consistency of pricing, stuff like that. Much more cooperative. >> Yeah. And the other issue that comes up sometimes is the safety of the companies and whether they survive. So often they may want deregulation thinking that we could raise prices or we could become more efficient in these different ways of being able to sell more stuff. But it could introduce serious price competition that will leave only a few with um being able to to um survive to make to make money and everything. So, they’re usually going to want to have a lot of freedom to set higher prices and a lot of freedom when dealing with, you know, their suppliers, their vendors, their their employees and customers. The one thing they’ll be afraid of is that people can charge any price. Um, and to some extent it helps you if also you can honestly it helps you a lot if you can stop advertising, if you can limit what’s allowed to be advertised. That’s hard to do in the United States, but that’s a big benefit to incumbent. anything they can do to make it so that it’s harder to have new advertising and new launch new things. That’s what happened in cigarettes. It just became impossible to launch a new cigarette brand. [Music] >> Uh we can hit on um we talked about it, we did a podcast on it, but 1978 deregulation act in the airline industry. Uh that was a huge opportunity for Southwest as a lowcost disruptor, right? And um Buffett obviously invested in US Air preferred stock and he’s invested in airlines a few different times. Um but yeah, do you have any thoughts on deregulation that came to airlines and >> Yeah, that’s why Charlie wasn’t much of a fan of that. I mean, it’s a preferred stock, so it was supposed to be safer. They liked the guy running it, but they had a high cost per seat mile basically versus the new ones coming in just in general. And so anytime um companies came in, it became a problem. The other thing that was even bigger issue there and this happens sometimes which is different from what I said about insurance is that you can grow demand significantly in those years uh by cutting prices. So Southwest actually wasn’t really competing so much with other airlines. That wasn’t their intent. Their intent was who takes buses and things like that and let’s get them all flying. And so the market’s way bigger than people think it is. And uh you can’t do that in insurance or something. you can steal from someone else but you can’t grow the market but so by growing the market then uh so that’s the you know the Amazon type approach the Costco type approach where you are willing to cut prices to stimulate uh additional volume even and so price reducing your price even further than you might think prudent right now actually will leave you in a better position next year won’t be as big a deal because volume will go up more than you think um when it’s a mature industry that doesn’t happen but that really can lead to a race to the bottom quickly when that happens when you can grow the industry that you you know that you’ll get more volume for the entire industry by cutting price by making more affordable. >> Yeah. And look at so I have 1978 up here on the chart and obviously the the Southwest returns at least in the early days were just extraordinary. >> Yeah. Uh their their returns from probably their founding till like 1999 or something were probably pretty good. I don’t know the exact year actually the I don’t know the exact years but certainly when I mentioned Herb Keller when he was in charge that entire run was probably very good as we saw the their cost advantage shrank over time um you know versus other airlines when we looked at how profitable they were versus how profitable other airlines were. Mhm. Um, banking, we hit on it a little bit, but in the 1980s and 1990s, we could look at the stock charts. Um, deregulation came, you had an M&A wave, um, regional bank growth, stuff like that. Uh, I have Croup up here on the screen right now. Looks like the oldest the charts going back is to 86 and you can see it in the decade following the deregulation. >> Yeah. The Sandy Wild period looks good, right? Yeah. Yeah. >> Uh the Chuck Prince period looks less good. Um >> yeah, Bank >> of America, too. >> Yeah. So, there’s there’s two phases there. >> Being able to merge with everything and combine and kind of horizontally to do like I’m sorry um vertic well actually it was really more to offer different options to the same customers I guess. So, it’s kind of neither. But um being able to offer a lot going into a lot of different products and stuff um was desirable M&A for those banks. They also became a lot more efficient with some technology things. The bad part is the part that people are probably very familiar with from the financial crisis. There’s also serious loosening of um leverage >> type rules. Yeah. So what it really is is the regulations. So regulation both in terms of the actual laws and rules of it and then how they were supervised and what they were doing themselves. So that’s all part of regulation how it all works together. But basically allowing companies to have a lot more leverage which is why those banks in the United States I wouldn’t be surprised if big banks are never as good a business as they were then is because I don’t think they’d be allowed to operate with that much leverage again. Um so which is interesting and and some smaller banks might it might be easier for them medium and smaller sized banks than for very very big banks um because of that. So it’s a little different because it’s not because what they kind of compete on is their return on their assets not really their margins and stuff. So it’s a little different than other other industries that we’re talking about where they control kind of what the amount of leverage that they’re going to use is. But yeah, um that’s what kind of happened there. And so that became dangerous, you said. Whereas like airlines, there was no rules about that. So Southwest kind of bought their planes outright, others leased them, but that if the government didn’t have a rule, they had to do one or the other. But they did for bank safety. >> What about when regulation comes and they break up a company? So obviously the most famous one, Standard Oil. A lot of the US-based oil companies are descendants of that today. Uh AT&T, right? >> I can’t think of bad. It seems to me like it’s pretty good. Um because they’re always afraid of I mean they’re afraid of that now, right? Like you know Google or other companies that they might be broken up. I I don’t know if it’s highly integrated in some way and they can’t work together in the future. I guess you could say that breaking them up is bad. But um most of the time breaking them up that way is is a benefit for the company, but the company should just broken themselves up, you know. What about uh natural gas deregulation? >> Same thing that we talked about. >> Yeah. So that’s a case where there’s just freedom to just price freely, which means that made it a super boom and bust thing in the United States, much like oil >> 1978. >> Yeah. Actually, kind of worse than oil because we’ve talked about this before. Natural gas can be a sort of unintentional byproduct when you’re looking for oil and so that makes it even worse. It’s kind of like ethanol with with corn and stuff. corn production isn’t being designed based on ethanol and so sometimes you have over supply and stuff and you don’t want it. Um yeah, so it would have been a better uh safer industry for people to be in before then and then it would have been a better industry in terms of making money when prices are high but it also probably led to lower prices than ever before in real terms sometimes. >> 1971 uh gold price was unpegged >> y >> the US dollar. >> Yep. And that’s been a good investment for that. Uh not as good as the stock market, but better than holding other sorts of things. Probably if you had owned gold on the the time that it it was um no longer the dollar was no longer um the gold price was no longer set at a specific dollar price. I mean, you could think of it the purpose of that was to set the dollar at a specific gold price, but you get the idea. Um yeah, so it became a non-convertible that way. um the dollars and then since then in real terms it’s probably been a better investment than a lot of income producing things although not as good as stocks. Yeah. So that freed up the money supply to basically go wherever it needed to. Yeah. uh energy policy act of 1992 um in the utility industry it shifted things from a single monopoly provider to independent power producers. >> So is this when Buffett got involved got interested? >> Good question. So he got involved somewhat after then he got involved in the regulated side but I had never thought about that about the extent to which that would cause that. Yeah, because you know when you think about it, there was a company that was basically built out of the parts that Enron wanted to get rid of that used to be the good regulated parts or very stable parts. Um, so it might have been that some companies were more inclined to the the unregulated parts and that benefited Buffett in the early years because I mean he didn’t start in those exact years, but you might be right within 10 years that that’s why he was doing that. Would you rather invest in you sort of the the change going from regulated to something getting deregulated or would you rather invest in let’s say an industry that’s heavily regulated where you have some main players within that industry so like Amoody’s um you know companies like that >> so the kinds >> yeah it’s really complicated so I’d be worried about ones that are considered great businesses and are monopoly type things that either could be regulated in some way. You’ve seen that like just people talking in the government about FICO at all has caused that stock to go down by a third and like instantly. And so that’s because it’s really really high price. And so if someone starts talking about that, that happens. We’ve talked before about title insurance things, other things like that where if if there’s any um fears about that, then you know the stocks will drop a lot. that that’s um I actually did buy into a company uh because of it’s a little more complicated but because of that probably some people were afraid of things for kind of Obamacare type things and stuff like there were two senators that talked about the company a little bit and so um that kind of negative press can be an issue but you don’t necessarily think that they’re actually going to do something or you think that the regulation they’re going to do is not really going to change things. Um the bigger issue with the FICO thing which you’re mentioning is so like there’s things in their filings and stuff which suggest that they kind of jacked up prices too fast um recently which was concerning to me and that probably contributed to getting attention for this and stuff. you’re, you know, the more you are a monopoly and uh subject of being harmed by the government, the more that you have to kind of um get along with regulators and do things yourself to self-regulate in certain ways to avoid even worse outcomes. And so you would have to be more careful about price increases and things in that case. If there’s a thousand farmers and they all charge more for a product that’s in short supply or something, no one is going to complain too much that they’re being ripped off by that. But if it’s like, you know, one company that has something in short demand and they jack up the price, then people are going to be really upset about that, right? So why are they doing that? you know, um >> Mhm. >> you know, people don’t normally blame the gas station operators and stuff for the price of oil being too high, but they blame a small number of oil companies. Um, so you have to be very very careful and I think that you know Buffett is aware of that and regulated ones and that’s why he’s talked about those things a lot and you now see that with a lot of companies you know with the Trump years that different from other presidents is you now have a lot of big companies trying to directly curry favor with the government in terms of like actually having their CEO say things and show up and do things which is not normally how you do that. >> So that’s obviously Cook see that yesterday? >> No, I did not see that. >> He gave him So Tim Cook was at the White House and he gave him like a a plaque for Apple. They announced they’re going to invest, you know, 600 billion or whatever it is in in the United States, Kentucky or something. And uh he brought a uh an Apple plaque and the holder of the plaque was 24 karat gold which is somebody did the math was like probably a million bucks. Small price to pay I guess to be on. >> That’s just the cost of doing business. Jeff. Yeah. So, historically, companies just kind of do that pretty randomly in the United States. So, like they make they say like, “Oh, they contribute to the inauguration fund or whatever.” If you look probably there’s companies that probably contributed to every single uh both parties, every single whatever just to check a box that yes, we gave you money when you want to have an appointment, you know. >> So, it was so funny when when Trump was elected, it was like, “Oh, Jeff Bezos donates a million. Tim Cook donates a million.” It was like all the the CEOs, they’re all donating a million dollars. I’m like, “Yeah, got to got to do it, I guess. Check that box.” >> But what has changed is cons so like for instance, Amazon quickly went out with the thing that was like, “Oh, we’re not going to show the effects of the tariffs versus not the thing and whatever like that is because that’s messaging from the government and stuff that we want to be in line with that, which is very normal in tons of other countries, like lots and lots of countries around the world. It’s very normal for large companies to be on brand for the country consistent with the messaging of the country of their government. The United States not that common for a lot of reasons. One is that you expect the other party is as likely or more likely to be in power in four years. So you’re cycle back and forth and they don’t like each other. So you don’t go too far in supporting one thing or another thing because you expect the policies like that to to be reversed a lot, right? So they’re more concerned with like the civil service type stuff of how they’re doing it. They don’t really care if what NASA or EPA’s policy or something is. They just uh, you know, because it’s Democrat or Republican that they care more about the non-political appointees below them and how they’re enforcing things and stuff, you know, because that’s the stuff that will stay the same for a long time. Um, so like the example, there was a company that was public for a long time, done in Brad Street. It’s been public a couple times and it benefited from the government putting in forms to use the the DUN. So the the D burners number as an identification thing for certain contracting things and stuff. So they’d be super concerned about that. Please keep putting us asking for us on the forms as a way of filling things out because then we become like uh standard, you know. Um but they’re not like do we care if a Republican or a Democrat’s in office, you know? >> Sure. >> Yeah. It’s funny you go down the list of some of Buffett’s investments. Geico, right? Obviously insurance state required. US Air um Highost Airline operated pre and post deregulation. Moody’s mandated by regulators. Burkshire Hathway Energy um there’s a regulation on return on equity. >> Mhm. >> Would you ever be interested in a company like that where there’s like a cap like that? >> Yeah. So this is why I think Bergkshire hasn’t done as well for you know the peak for Bergkshire was really from like 1965 to like 1997 or something. you know, I think that the stocks kept going up and stuff after that a little bit, but that was kind of the peak capital allocation period was about 30 years there. He had too much capital to invest and so those are alternatives to like what do other insurers do? Buy these long-term bonds and things. Yes, I think they’re better investments than that. Now, I don’t think they worked out as well as you hoped decades later, but investing in hard assets, more protected from inflation because even though those are return on equity generate, there’s there’s complications, but they’re more protected over time to be able to fix the uh issues with inflation stuff than literally going out and buying a 30-year bond or something. And um stocks became more expensive. But I don’t think he ever said that like he wouldn’t I mean, is CES a better company than uh Bergkshire Hathaway Energy or something? Yeah. And I don’t think he’d say otherwise. And so you should probably learn more from the seas example than the Birkshire Hathway Energy example. But he’s been involved in that even in other things. I mean, the media is not thought of as like a super regulated industry in the United States and everything. But consider that two of the biggest investments, very biggest investments for Bergkshire in media stuff. Well, actually there there’s another one too, but um we’re Buffalo Evening News where there’s a huge fight which would determine whether the company would go out of business or survive and it was all about a court case in that case um about whether there’d be one newspaper or two in that town and Washington Post remember that literally they were um uh although all media things were down he made that investment literally when the government was targeting the Washington Post. post for uh their TV licenses and stuff. So they were because they were very not welll liked at that time the Nixon administration with with Washington Post because of uh some things that they had done. If you haven’t seen you can watch the movie The Post I think it’s called. You could also read the her um autobiography and everything but the the post is specifically I think about publishing the the decision to publish the Pentagon papers or not. And that’s kind of related to the um TV license thing. So, you know, um they were literally like, “We’re going to take away some things that you have and whatever.” They were clearly a target of it and that and he invested at that time. Um lots of other papers are down too, though. But it’s interesting that that was happening. >> Mhm. Blue Chip Stamps was basically born out of DOJ consent decree, right? >> And when he invested, he didn’t know the outcome. they were just kind of betting on the outcome of that court case and everything which in theory was super bad for blue chip but was so much more priced into the stock than what it ended up being. So basically had to give away lots of pieces of itself to um people who were harmed to to retailers and stuff that were harmed by the their uh anti- competitive practices. they were became the dominant um stamp trading uh stamp company in basically one state. The the other um was bigger in the rest of the country. So it was kind of a one state leader in that. >> Mhm. What are your thoughts on how to spot and I guess invest in sort of this regulatory change or inflection in the business? Is it just you know if something’s super bipartisan? Um I mean what are your thoughts on on that? Is it is it lobbying spend? I mean what is there a way to spot it? >> So there are interesting aspects to it. So one is >> is it like with sports gambling? Well, everyone’s just doing it through like bravvada which was an overseas overseas website. So it just you know eventually I mean what do you think >> is it bo? Well so the skills right >> the skills are different right? So for instance um what do you look for in terms of a leader in those kinds of things? Probably a very different person in a regulated to deregulated industry. Um and what kind of things do you look for in terms of a company and its advantages versus others that are happening at that time? So I mentioned Southwest. was a lawyer who ran Southwest um and very determined uh and so um that’s probably someone else uh you know that versus uh you were mentioning Tim Cook and stuff that could be someone who is safer for people than Elon Musk right now if if being out of favor with the government is more of an issue Tim Cook is probably a much better person for being able to get along with anyone in you know any situation that So if it’s based more on the personalities than like the policies of those things in the past then who is running the company does matter a lot. Um and you see that a lot in countries that have um in less democratic countries in countries where one party or one individual you know has a lot longer political longevity. um you see that more as an issue about who they’re connected to and whether they can get along with things and the biggest risk being that they have a falling out over other things, right? So you tend to in certain countries avoid people who also have a political side to it. I’ll give an example. Many years ago, there was a company that was quite cheap that was in uh the west in like the United States and stuff sort of in terms of where it’s was doiciled and all this stuff, but its asset that it owned was a um general entertainment type asset that avoided doing anything political in Russia as a TV station. And so the question always was, will this eventually be the last thing that is seized in some way by Putin and stuff? And if you believe no, it’ll just like show game shows and soap operas and things and it’ll be fine. Um, then it’s very cheap and uh, you know, you can get your money out of the country and uh, it’s not actually a Russian company exactly the asset is, but you know, where it was set up and everything versus um, you believe that that will will um, be taken away and stuff. And so um, that was kind of the the difference there. But Buffett had even talked about that where he was more comfortable or maybe actually it was probably Munger that said it. I’d be more comfortable in China than Russia, which is a good insight about the political things that way. Whereas on the other hand, there’s lots of ones that are monopoly type things. We talked about um it’s now called ATN International, but which grew out of a basically one um monopoly service in a very tiny country in Central America. And the fear was always that it that it monopoly would be out. You could probably go back. I don’t know if value investors club. Do they still have writeups from like the very beginning or do they phase them out at some point? You can find somehow go back further than 10 years. >> Yeah, >> I think Yeah, further than 10 years for sure. Yeah. >> Okay. So, you go back the fear always year after year is that that would be taken and like 30 years later it was never taken. So, uh and so that’s why >> the Russian TV station was though, right? >> Oh, yeah. Yeah. Of course. >> Yeah. Because he was going to take out every Yeah. Everything overtime in that country. Yeah. It’s a totally different setup. I mean, it it’s just Yeah. Um, so it’s a different risk of whether you’re a monopoly in one place or another that way. Um, and then just how the regulations change and how they could benefit you. So like as an example, we talked about movie theaters and stuff, Paramount decision and all that. Banks a lot of times the advantage in that is you are less efficient, less strong position, but now someone can finally buy you and they weren’t able to before and merge with you and everything. And so those could be the ones that are a big advantage that way, right? So like that parent decision stuff happened um where basically the rules in the US were changed by a court from what it had been before because it had never been uh a law set up that way. And uh we saw like Sony buy an Alamo Draft House right away and there there were some other ones too. Um >> that’s what I think happens if if if cannabis does get descheduled or rescheduled or whatever. I I would imagine these other sin companies just go and buy them like the low cost producers or the people with the biggest market share. >> Yeah. So the question though is okay do you invest in the one you think is going to be um Standard Oil and the Rockefeller company or do you invest in all the little ones that he’s going to buy up that otherwise would be losing lots of money everything but now get to get stock in the new uh uh bigger company. There are some because I’ve looked at the industry recently that are doing they’re surviving even being in basically prohibition. >> Yes. But here’s the thing. Everyone thinks that like when you free up we can now meet all the demand there is all the rules are off that that will be good. That will not be good. Uh that would that that depends. Uh but there’ll be fewer winners. So like the more regulations are oh we can’t meet this demand we’d be selling so much more whatever. Absolutely true. But also, you’re being protected significantly from what competition will really feel like when it’s just all out. I mean, if you could just every ad on the buy cannabis ad, you’re there’s going to be a bigger brand that’s preferred and distribution for those. And like we could get I mean, it’s usually on the distribution side and everything, but more could be closed to you because someone else has better deals on those things and can figure out how to do that. And your best option is probably to sell out, you know, at that point. So then the question is like do you bet on a certain operator who you think is good that way? >> Do you bet on industry strategy? Yeah. >> And that’s another possibility with some that have really really big winners. I’ve talked about that before. You could do that and most things you buy will not work out but the few that do will be big hits. I mean, if you bought internet retail 25 years ago, u or a little 24 years ago or whatever when it kind of came down, most everything you bought would end in total failure, but you would have gotten some Amazon stock as part of that and stuff. And at the time, you might not have been able to tell that Amazon would be better off than eBay or whatever. That wasn’t deregulation, but that was a situation in which we had a massive extinction of a lot of the companies. So, it had much the same effect. The growth was just so fast that it feels a lot like deregulation. No, I think I think you buy the the the southwest of the industry. You buy the lowcost producer. >> But but here’s the thing. So that makes sense. But is being the lowcost producer particularly important in say cannabis or something? >> It is super important in airlines. It’s super important in in cruise ships. It’s super important in money transfer and in if you’re Walmart. Yeah. But is it the most important thing if you’re a cigarette? I mean, so like take cereal, cigarette companies, things like that is important, but what actually turned out to be really important is who could do the best advertising nationally the fastest to get known everywhere, to get on the shelves everywhere and to to be able to launch brands that way because it wasn’t deregulation, but it was the invention of national media, whereas it used to be local before then. So, it just allowed for all that advertising that way. Um, so is that the way is it distribution? We talked about like Celsius, you could see that people where it was available were buying it, but it wasn’t widely distributed at first and then it was just a question getting more doors. >> So, is it which place can get in the most states? >> Um, you know. >> Mhm. Uh, we could talk about there’s two books that I’ve read that are great sort of backdrops of this. The first one and one of my favorite books honestly, The King of Oil, Secret Lives of Martin. Yeah. I mean, if your cover photo or your your title or what your cover cover art is this, smoking a cigar, I mean, come on. That’s going to be a badass book. And it was a badass book. They should make a movie about it. But obviously, his career was um born out of deregulation of commodities, right? What’s the cover? >> Yeah. So, >> we should talk about Mark Rich because I don’t know, you’ve read the book. I don’t know that many honestly my guess is that most people listening to this podcast know him most for being pardoned um at one time and didn’t know about his actual business life and stuff that much. Um it’s literally probably the thing that he’s became most famous for. Um so I just think that yeah that if people read that book that would be the yeah he was f pardoned by part but >> yeah but at the time he was pardoned I would guess that most people had not heard of him most of the the public. Yeah. >> Yeah. He moved to Switzerland, I believe. So he they like >> he did that obviously extradition purposes. Yeah. I mean there’s complicated extradition things in different ones, but yeah. >> Yeah. I mean that it was alleged that there was fraud or something like that and I don’t I can’t recite it. I read this book in 2021. But basically he I do remember him referencing in the book that there was I don’t know three or four like accounting professors or experts in the field that looked at the case and basically everyone sided with him. It was something to do with like the gross profits I believe on how it was accounted for or something like that and it was the tune of obviously a ton of money and he was indicted by Rudy Giuliani for tax fraud and he was Rico was uh used against him. That was a big deal. Yeah. Yeah. So that’s a big deal in the United States. So RICO which is theoretically mostly what is it? Raketering events raketeering influence corrupt organization something like that. Um I mean it’s a backronym they admit they intentionally use RICO is a name of a famous thing for a mob thing. So they intentionally designed it to spell Rico >> or the mob. Yeah. >> Yeah. So but the some of the design of it was always intended to be used against companies too. Yes, its purpose was basically to try to bust up mafia families and stuff in the United States and it’s been used since then against companies in some cases and Giuliani was involved in that in the in New York cases against uh New York City cases against like five families type stuff. So um >> then using those same things. So yeah um but my memory is so yeah so in that case there was a lot of um deregulation well globalization and deregulation around trading of different things that you’re talking about commodity trading in general and stuff. Yeah >> it’s a good book. Uh and then the other one which is you know back to the Russia example Bill Browder’s book Red Notice right privatizations um and uh the oligarchs right so a lot of the oligarchs came out of this era and uh Bill Brder set up a hedge fund that invested in Russia >> and was very successful doing it and then of course he has a fight with Putin and this and that. It reads like a good spy novel which we’ve talked about before on the podcast but do you want to explain the voucher system and and kind of how the oligarchs um were born out of this era? >> Well yeah that’s all very complicated. So the biller thing in f first is that he started investing with like basically like they were effectively like netnetss and stuff in the first countries in Eastern Europe and even some that like East Germany and stuff like that that were some of the first ones to open up. So the order in which it happened is like Poland opened up a lot before the Warsaw pack kind of was breaking down and stuff. So those countries opened up first to this and then Russia was the former Soviet Union was kind of the last one. Um and then like you said with the voucher thing that’s basically like a shadow economy to try to it’s very complicated but by that stage in the Soviet Union um the the economy wasn’t functioning very well and so they had to adopt certain capitalist like things alongside a communist country’s operations to ensure that they would actually supply certain things and stuff. like they got really bad with like food distribution in the cities and stuff. It’s it’s covered a little bit in the corpion of it in the TV show The Americans, which is a fictional thing, but it does go into that actual thing in the 1980s, which is when this was happening. And so, yeah. So, but basically through all that, people who were very close and knew all the operations of the businesses and and all that kind of had an idea of how valuable these would be if oper or not if operated as actual for-profit businesses and that they were going to become for-profit businesses. So, they would know if this car factory or whatever was actually something a really valuable asset or something. And then through this process, they then did this whole auctioning thing and stuff which allowed basically insiders to to know that something had a lot of value that had been hidden before. And then you know other people did not know that at all. Um >> yeah, things were selling for literally or being basically given away for I mean pennies on the dollar and >> super market and then insiders are the ones buying. But, you know, like the same thing could happen in our markets if we didn’t put out any statements about a company and then we just let insiders bid for it. You know, I mean, you wouldn’t know what to bid. Yeah. >> Yeah. In Russia’s uh I don’t know what you want to call it, but let’s say the country’s morale was at, you know, all-time low. So you’d have there are stories in the book where they talk about somebody would could sell like their vouchers for like a bottle of vodka or food or toilet paper and and that ultimately could be worth a ton of money if you didn’t know what you were selling. >> Mhm. Yeah. Yeah. It’s like the um some of those really complicated spin-offs of the Joel Greenblat stuff um you know uh where they you know now we feel like when we have spin-offs and things that are so common but when they say here’s a contingent um rights thing here’s a um you know here’s this and that and so people are just like I just don’t want this get rid of this warrant for whatever and it actually turns out to be very valuable. Yeah. >> Yep. Like a John Malone deal or something. Yeah. >> Yeah. Very complicated. >> Yep. And then really >> and of course the other thing I have to say is like why he was doing this is because he understood the country a little bit and understood capitalism. The people in these other countries did not understand market things at all. So even when they had even well-intentioned things about the program where they actually thought at first that they were going to basically sell some of these things in part give some of these things in part to the public in a sense to people regular citizens and different ways of doing that. They did not have I mean the Soviet Union had no modern capitalist history at all. So we’re talking about it had started at that point it started 80 years ago as a communist country. And before that it was a fairly agrarian type thing outside of like the country the cities and stuff. So there was just no history of anyone and there have been all these wars that had just eliminated so much of the population just no memory of people to know things about business and there have been very small parts of industries that interacted with the outside world. Some did though like um some of the ways that they sourced their food things some heavy manufacturing. So those people would have known about how the rest of the world worked and understood what was likely to happen. Yeah. Then the weird thing about that though is they do understand that they make a lot of money and in just a matter of less than a decade or something then the country pivots in a direction with with Putin and everything where it closes down again from that and most of those people end up you know with with nothing or in prison or dead or whatever. >> Yeah. Uh the oligarchs is is a great book to read on that and then of course Bill Browder’s book as well. So what are some modern day uh versions of all of this? Well, there’s lots of ones we don’t know what’s going to happen, right? So, the ones that are fascinating to me recently that we talked about are the like I read a book on DraftKings, right? And so, I am stressing a little bit the things like uh your Airbnbs, your Ubers, your DraftKings, whatever, where it seems like you could say there’s a gray area. I don’t know how great it is sometimes, but there’s clearly very high demand for the product, but the product is basically kind of banned or not welcome here. So, how do we get into those markets and get a presence as fast as we can and assume that rules are going to change about it later? You know what I mean? Um and you know the big one uh right now in that is like though it’s complicated is many of the things around AI obviously um where you have that because because you take an example of that. So, how different really is like AI stuff versus self-driving cars or something? But AI is likely to move a lot faster um in social acceptance and rejection and new regulations and stuff than like self-driving cars because it’s something that’s incorporated into all this stuff that is not regulated that way. Whereas the problem with the self-driving car thing is it’s heavily heavily regulated in the United States in all these different ways. People always ask like, oh, you know, um I mean it hasn’t even moved as fast as I expected when I wrote a report on progressive over like a decade ago or something, but I we laid out in there, okay, here’s how long it is before new safety things and stuff get adopted. Here’s how long until most cars have them because then it’s like most new cars have them, then most cars have them. This goes so slow like we were saying like, you know, yeah, we’ll expect some different like this. you’re asking about an issue that we need to worry about in 15 years or something in the 2010s about self-driving cars, even if all that technology is great because of just the regulations that have to go through and stuff, you know. Um, giving people free things, tools that they can use online and then just having them incorporate into their work and you don’t know if it was generated by AI or something is just such a fast viral way of spreading it around and is so different from like a car or something like that. So it it just will is such a faster pace of what that is. It’s so much more like when the it’s most similar to the internet. That’s the one that it’s most similar to in which it was like early on it was like what rules will there be on the internet? What can you I mean it when the internet first started companies weren’t clear that can we just like show anything cuz like on broadcastings and stuff they can’t are we just free to do that you know um but it was growing so fast and that’s the kind of situation here whereas the other things you have a clear idea of what governments want and what the regulations are they’re almost ahead of you on that what are you planning to put into this and do with this car and do this and get approvals for that and AI things they don’t know what you’re doing until a while after. So I would guess that that’s kind of the area that’s most uh will be most interesting that way and it’ll have effects on some things. I mean the ones that are big to that that I think about are mainly like insurance type things and stuff about what that industry will develop into based on how much insurance will be sold related to AI activity and stuff like that. So that is an interesting thing for that industry long term. >> So how do you how do you express it make money from it? >> That’s a very good question. Uh it’s a very very good question. It’s experimentation early on and stuff. Um so I don’t know like one of the things with the AI stuff that I don’t know is which will be the winners and everything. So um I don’t I’ve tried different things but I haven’t tried the paid whatever things for it. I I don’t find you know radically different things about how good they are. Um and so that does make you wonder about why they’ll be a winner takes all type thing for it. Um, but in other cases it doesn’t particularly matter if there’s a reason why people are using that standard. Um, so like when I talked about Google or something, for a long time it hasn’t mattered if they’re any good at search um, better than other ones. Why would you say, “Oh, I’m going to find a better search engine than Google. It’s good enough and everyone uses it, so no one’s ever looking anymore.” Um, we can guess that, you know, I mean, yeah. So it’ll be interesting. Like Google’s a really good example as a company, right? Because on the one hand, they’re pursuing all the AI stuff, but it’s very likely to harm them severely. And so it might be better for them to uh have super restrictive policies on AI uh than that, but it may be too late for them to be able to get that. >> That’s already out of the bag. Yeah. >> Yeah. Um so, you know, we’ll see. But of course, you know, I mean, alcohol was banned and it had been um something that people were drinking copious amounts of for a very long time. And it has an effect afterwards. I mean, to be fair about the prohibition stuff, it it like although drinking resumed after that, in countries that adopted that stuff, it had a permanent effect in more people not drinking and and all sorts of things. I mean, it did change society in terms of volumes of what people were drinking and attitudes. They don’t have to worry about the bath bathtub gin and potentially dying, going blind or, you know, whatever. >> Yeah. Yeah. Um, but I just mean like the fact that it was banned for a period of time also had an effect on things too. Um, I mean that’s look that’s not to get um really unappealing here, but that is true for wartime things. uh countries that eat very strange things that we don’t find appealing is generally because they uh it was available in wartime and was banned at other times. So like parts of animals that never became popular in the United States were usually because those were the only parts that were allowed to be sold during the war or something and people got ded for it. So um you know patterns change that way. We’ve talked about that with with um COVID and everything. There was a period where you couldn’t do certain things that led to faster adoption of other things during that time. Um yeah and then the other ones are things that we talked about which are further along I guess like you mentioned about cannabis things gambling things are very obvious that way um that’s very obvious and then we don’t know about longer term things about societal attitudes changing there’s some places in which societal attitudes are out of line with laws sometimes so um those are tend to be the most likely that eventually there’ll be a change too. >> Mhm. Got it. Cool. Well, I want to thank everybody so much for tuning in with you both of us on the Focus Compind podcast. If this is the first time you’re joining us, be sure to hit that subscribe button wherever you’re listening or watching us here today. That way, you will be notified every time we upload a new podcast every Friday, every week. 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