Pitch Summary:
Danaher Corporation is nearing a $10 billion acquisition of Masimo Corporation, a medical technology firm known for its pulse oximeters. This acquisition represents a significant premium over Masimo’s nearly $7 billion market capitalization at the previous Friday’s close. The deal, if finalized, would be Danaher’s largest acquisition in over five years, following its $21.4 billion acquisition of Cytiva. Masimo’s stock has seen a 32% increase in premarket action, reflecting investor optimism about the acquisition.

BSD Analysis:
The acquisition of Masimo by Danaher is a strategic move to bolster Danaher’s portfolio in the medical technology sector. Masimo’s expertise in non-invasive monitoring technologies, particularly pulse oximetry, complements Danaher’s existing capabilities. Despite Masimo’s stock declining by 27% over the past year, the acquisition premium indicates Danaher’s confidence in Masimo’s long-term potential. Furthermore, Masimo’s ongoing patent dispute with Apple highlights its innovative edge in the medical device industry. This acquisition could provide Danaher with a competitive advantage in the healthcare market.

Description:
Value: After Hours is a podcast about value investing, Fintwit, and all things finance and investment by investors Tobias Carlisle, …

Transcript:
Don’t waste all the good stuff. >> You’ll just hear it again. It’s fine. >> A hamster is running as hard as he can. I think we’re live. Hang on. >> Hot start. >> We’re live. Yeah. This is Value After Hours. I’m Tobias Carlile joined as always by my co-host Jake Taylor. Our special guest today is Gwen Hoffmire from Maiden Financial. How are you, Gwen? Good to see you again. Good to be back. It’s uh feels very full circle. You you inspired me to start my first ever blog eight years ago. So, it’s uh it’s a pleasure. >> Oh, I’m glad. >> Do you have a voodoo doll that your stab of Toby now for? >> You caught me. That’s that’s exactly what I was doing before this. >> I I’ve been feeling pain. Don’t worry. >> Yeah. Is that why your back hurts too? Yeah. >> Um, tell us a little bit about Maiden Financial and then let’s talk about Malaxisus uh your most recent uh report. So, let’s talk talk about Maiden Financial first. >> Yeah. So, Maiden Financial is my my research company. Um, I started it because I published a couple reports last year. one on a regional bank in the US called Hangingham Institution for Savings and another one on Engles Markets and both reports took about 300 to 400 hours and the market response was pretty overwhelming and I think it affirmed this kind of theory that I had that there’s a lot of volume uh there’s a lot of research volume today but there’s not a lot of of research depth, especially on the cell side. Um, and that’s typically because cellside research is viewed as a bridge um to kind of capture the economics of other financial services. It’s sort of seen as a means to an end. So, a lot of it is surface level, a lot of it stays at the rapport level. And I sort of identified that need to go beyond and to do the work that managers just don’t have the time to do because they’re wrapped up in the minutia of running their fund. Um so yeah, we do in-depth research on companies across the developed world. Our reports average about 50 pages or longer. Um, and we research the way that we do with the intention of acquiring an owner-like understanding of the companies that we research. Um, I find in my eighth year now being in the industry that the more that I know about a company, the better that I behave. And so I think that instead of you know looking at the forest um and forgetting about you know the few diseased trees that are within the forest I feel more inclined to go inside the forest and to analyze every tree inside the forest and to say truly you know I know which areas are healthy which areas are not. And I find it very behaviorally grounding when the tide pulls out to stay focused on business characteristics and and not on the movement of of their respective share price movements. >> Well, tell us a little bit about your most recent research report, which is in a firm called Mlexus, which I confess I had not heard of before and know nothing about. So, yeah, >> you’ll start from the start. >> Toby Toby knows more than I do. So, >> yeah. Yeah. So, it’s one of the more recent reports um um technically second most recent that I published. It’s on a Belgian sensor producer. So, Alexis is a a Belgian sensor producer mostly for automotive applications. So, about 90% of the sensors that they make um are for automotive and the rest kind of go into white goods, um robotics, various other kind of consumer goods. Um, >> and Quinn, can you give the ticker for people so they can >> Yes. So, um, it tra it trades on the Euronext exchange under the ticker MLE. >> Okay. Thank you. And so um what drew me to the company is uh earlier in the year especially around the announcement of liberation day tariffs um industrial inventories were quite high at the OEM level and also at the supplier level and they remain fairly elevated. So a lot of OEMs as well as their suppliers were seeing quite notable declines in in the share prices of their stocks. And so I I am fairly interested in analog sensors just because it’s kind of a lagging edge technology that I can wrap my head around. You know, there’s sensors that are just taking data about some kind of physical characteristic of the environment, whether that’s heat or um current, electrical current or pressure, and they’re transforming that into a digital signal um that can be used for various applications across many different mechanical um wares, whether that’s a car or a blow dryer. They’re they’re in everything basically uh that we used um that require micro electronics um to assist their function. And one company that I noticed in particular, so one thing that that we do at Maiden is when we’re thinking about analyzing an industry, we just take every company in that industry, put it into a spreadsheet and figure out uh just kind of almost chart like an archaeological dig site around the whole industry. like what have the economics of each respective company been on a 20-year basis and how has that changed over time and what where are the difference in the capital structure and ownership etc etc um and Malaxus really stood out because Malaxus produces returns on capital and returns on capital employed that are um about double the average of its named competitors and the only company that bests it on a return on equity basis over the past 10 years and the firm has about 45% debt to equity. So I think it’s relevant to cite that figure um is Texas Instruments. So Texas Instruments slightly best them but return in terms of return on capital employed. So, capital efficiency, Alexexas bests Texas, which is really surprising because Texas is one of the better companies in the world in my opinion. And that was particularly odd because Alexis generates about a tenth of the revenue of its named competitors. So that you know begs the question how is it that a company that generates a tenth of its you know revenue of its peers and those peers are 10 times larger and it’s generating you know returns on capital that are double that peer average. I mean you know economies and scale blah blah blah why isn’t that showing up in those in those larger peers? And so in my experience, when you get a smaller player or even a larger player that shows really high profitability, it’s typically because they have a niche um they’re focused on one particular area of the market. They might dominate that that area of the market or they might just be optimized in a way that other firms are not and there’s just a lot of inertia and there’s maybe not the incentive to streamline in the same way. And so, um, immediately I developed the theory that, uh, Malaxus was very likely focused on the production of just a few types of sensors. But you would be misled to be thinking that because when you look at the company’s website, um, they offer 13 different types of integrated circuits. And so, from the face of it, you would think, oh, they’re kind of a diversified player. They’re offering a bunch of different products. But there are over two dozen different types of sensors that are sensing completely different environmental phenomena. And so if it was the case that they were focused on just a couple different types of sensors, um it would be explanatory for their upper profitability um if they’re dominating smaller markets. And so we looked at all 991 of Malaxus’s products. And if you do that, um, you’ll notice that about 45% of their products are magnetic position sensors. And so that was a big kind of aha moment where it’s like, okay, yes, it seems to be that our thesis is correct. Uh, another 25 30% or so are magnetic latch and switch sensors. So 75% of the product inventory that they offer are just magnetic sensors. And so this is like, okay, well, this is significant. Um the next question that follows is how many of these things um are being sold by competitors on major distributor websites. So we went on uh to distributors like LCSC which is the largest micro electronics distributor in Asia and Mouser Europe which is a top five distributor in Europe. And we basically just filtered for these types of sensors to figure out what share of distributor inventory did Alexis hold. And so on Mouser Europe, Malaxus uh dominates um position sensors. They have 85% of listed inventory on that distributor site and about 67% on LCSC. On LCSC, it’s likely higher. And it’s the reason why I say that is a lot of the fact sheets that are on LCSC are in Chinese. And so we didn’t have the time to go through unfortunately thousands of fact sheets to translate them all to kind of figure it out. But a lot of named competitors of Alexis it turns out are really doing completely different things. So, in the case of, for example, um, latch and switch sensors, which I’ll get into the details of what they are and what they do, um, over 50% of Texas instruments um, latch and switch sensors on LCSC are not slated for automotive applications. So even though a firm might list a magnetic position sensor or a magnetic collagen switch sensor, it doesn’t mean that it’s being used for the same um applications that axle sensor would be used for. So um confirmed that the magnetic position sensor um dominance was real. Then when we looked at latch and switch sensors um on Mouser Europe, Malaxus has about 3540% of the inventory and has the number one position. Algro Micros systemystems is the next largest kind of pie of that. Both of those have over 50%. But on LCSC, um, Algro Microsystems had a higher share and it was really Algro Microsystems, um, Malaxus and Texas Instruments. And so they have 13 or 14 named competitors and those were the three that really had any kind of material share of uh, of product that Millexus produces. So the next question was okay well micros systemystems is also producing a bunch of these magnetic latch and switch sensors um are there differences between some latch and switch sensors and other latch and switch sensors and the answer is yes. So um Alexis mostly produces what are known as three wire latch and switch sensors whereas micros systems produces two wire latch and switch sensors. So a two-wire um latch and switch sensor basically the signal input line and the signal output line. So the the lines that power the sensor share the same line as the signal transmission line. And so any variation in the voltage of the current that’s passing through that sensor can disrupt signal quality and um can reduce the sensitivity of of the reaction time of of you know that signal being sent to an electronic control unit. and um and an action taken in response to that to that signal. Whereas a three-wire sensor segregates the signal input outline input line from the signal output line. Uh so you you have your power input line, you have your power output line and you have the signal line. So all three are kind of separated from each other. So you get faster response time, higher reliability and no risk of of kind of disruption of the signal quality. So automatically um that kind of raises a suspicion that Malaxus is more focused on producing a higherend product. Um and that seems to be the case from Allegro’s disclosure. They do produce sophisticated sensors, but it seems to be that they’re more focused on producing a kind of just good enough sensor. So, lower-end automotive applications, I don’t know if you’ve ever driven a higherend car versus a lower-end car, but the responsiveness of the steering, of the the shifter, of um windows going up and down can be quite different. And so, those are some of the applications of of where magnetic sensors are used. Um, another distinguishing qu charact characteristic is that Molexus uh really dominates three axis mag uh magnetic latch and switch sensors whereas Algro is mostly focused on two axis uh latch and switch sensors. And really the only firm that has a kind of material share of threeaxis sensors is Infinine. Um but Infineon largely is doing completely different things. So it’s it’s like 10% of a much larger pile that Malaxisus is totally dominating. And so they came out with this sensing technology in 2005 called Triacis. So they’ve been focused on it for 20 years. And basically what it is is um a magnetic sensor senses the presence absence or variations in the flux of a magnetic field. So if you have a magnet has a north and a south pole um naturally that creates a magnetic field and lines of flux create that magnetic field. So if you take one magnet and you push it against another magnet you create resistance and what’s happening is is the one magnetic field is is interacting with another magnetic field. And so an application where a three-dimensional sensor would be helpful. So that’s what three axis means. It means that the sensor can sense changes in the flux of a magnetic field in threedimensional space whereas a two axis sensor would only be able to measure it in a two dimension on a two dimensional plane. So for things like ride stability where you need to be sensing the distance of a vehicle’s suspension from the road in threedimensional space to ensure that your vehicle doesn’t, you know, go off the road or fall over, tip over or something, that’s where a three-axis uh position sensor would be used. They’re also used in steer by wire technology, which is basically instead of having your steering wheel attached directly to the rack of your vehicle. It’s actually separated. It kind of faces an actuator um with a magnet attached to it. And so when you move the steering wheel, um it it interferes with the flux of of that magnetic field and sends that positional data to electronic control unit and you turn the wheels of the car and it’s just safer. you can just add um more sensors. You can add a lot of redundancy to make sure that steering doesn’t fail. Um a two axis sensor is used for kind of north pole south pole applications. So, you know, putting a vehicle from park into neutral and putting it from neutral into park. It’s kind of measuring simply measuring the presence or absence of a magnetic field. Um, another good example would be um pressing your window button up and down. You know, you press it down for a second, it goes all the way down. You pull it up for a second, it goes all the way up. And that would be, you know, it would be programmed to be, okay, north pole, window goes down, south pole, window goes up. And there would be some kind of time delay on that, too. So, if you only pulled the button up for a second, it might just go up a little bit. And so, those are the differences. And I’m pontificating, so you know, feel free to to interrupt me. >> How much how much does one of those units cost? Out of curiosity. >> Yeah, so Alexis sells about two billion sensors per year. They’re they cost 50 cents on average. So they’re a very very low cost in terms of um when uh for for OEMs. Um so it’s typically something that doesn’t see a lot of price cuts. It’s pretty easy to have price stability and to increase prices when demand is present. Um and um >> it’s pretty amazing that as a species we’ve figured out how to like have something measure, you know, those types of things for for 50 cents. I mean >> Yeah, exactly. Yeah. Yeah. It’s pretty awesome. And and it’s um they’re getting quite involved in China. though um which is quite different compared to uh like a Texas Instruments which is kind of seeing like a almost like a pull out of China in favor of the US. um which is unfortunate because EVs have m much more sensors in them and so Alexis has kind of really been taking that market >> in recent years. Um and they have been sort of positioning design testing of their sensors to be self-sufficient within China as well. And they haven’t said this verbatim, but that would protect the company from sanction risk if China were to invade Taiwan. they could effectively just, you know, um have the entity function independently, source materials domestically, and they’d still probably be able to keep the subsidiary. They just wouldn’t be able to invest in it from Europe, which is what they don’t want to do anyways. They’re very they’re very utilitarian people. Um they’re very either want decisions to be going from Belgium to China. they want decisions to be made in China um to have speed to market and yeah so all that to say is Alexis is kind of the dominant player uh in the magnetic sensing space for automotive applications and those two markets together are worth about 1.6 6 billion. And so it makes sense um when you look at Alexis’s sales, which are just under a billion um that that kind of verifies that that is the case. But if you look at market share disclosures, um like if you look at Infinion’s investor presentation, they’ll rank Malax’s fourth or fifth in the industry because they’re measuring, you know, um sensor revenue as a percentage of total sensor industry revenue. even though there’s literally over a dozen sensors doing different things and yeah. >> So do then do you think you know they listed 13 or whatever competitors and maybe only two real ones and do you think that there is there a reason that they might be obiscating you know what the competitive dynamics actually look like? Is this a you know is it like Peter Teal said about you want to hide a monopoly? You know, I spoke to the IR rep and because interviews is something that I like I like doing just after I research a company. It’s great to get the executive on the phone and to share that with members. Um, but I spoke with the IR rep and it seems that they ended up sharing their report with management just because it’s I don’t know if they were necessarily fully aware the extent of the dominance that they have. I think they’re just so focused on well this is what we do and this is what we do well. You know, we don’t need some kind of like high-end strategy to do well in the market. We can just be a pick and a shovel and we can do it better than everyone else and we can maintain strong relationships with tier one suppliers and make sure that they have what they need when they need it and stand out in that way. And it’s just so I think I don’t think that they’ve necessarily I don’t think that they’re necessarily trying to obuscate their competitive position. I think that they’re just so busy that um they haven’t had time because otherwise the the IRF was grateful for the report and I don’t think management would want to read it if they didn’t have anything to gain from it. So you’re welcome Alexis for the free consultancy work. Um you can send my bill to me >> at a later date. Um but no it’s I I’m not sure. I think there there is evidence of companies that I have analyzed where that was obvious that they were trying to I think not draw attention to their competitive position. I don’t know if that’s the case with Alexis because you know what’s the point of Infinine with the company’s whatever 10 billion plus euros in annual sales going after a small little niche market where there’s a really strong incumbent. it doesn’t make any sense, you know, why why spend all that money and do all that R&D just for a small slice of the pie that’s barely going to move the needle. So, I think there’s a lot of business to go around and the industry is very fragmented in terms of the types of technologies that you can look at. And >> how do you think about that trade-off between uh disclosure and transparency to investors versus revealing, you know, corporate strategy perhaps uh to competitors that might hamstring yourself? >> Yeah. I mean, I think that I think that it’s a good thing. I think that the the less that that companies disclose in terms of their competitive position, the better. And the reason why I say that is twofold. I think for one the amount of work required to verify what we did was you know a 300 hour plus project and on the buy side you definitely see that level of work being done at some firms but on the sell side it’s it’s not as common and so I think with the advent of AI and I think um with global funds shifting to passive in a majority way I think it’s an advantage to investors who are more active um to do the really deep work that is increasingly not being done to to become a shark uh in in an industry where sharks are facing endangerment. Um, so I selfishly I think it’s a great thing and I and I and I it might even be better in a way, you know, if there’s less people doing that work to verify the competitiveness of of various companies, then it could also benefit the companies themselves. Um, >> so Gwen, just two two quick questions. One is, so these guys make a small a reasonably inexpensive component in a much bigger, more expensive end product. >> Yeah. uh how hard is it to copy this and to compete with them directly and then after that let’s let’s talk about the valuation a little bit. >> Yeah. So um I think like China would be a good example. So their team in China it’s it’s 100% Chinese except for one token Belgian. And the reason the token Belgian is there is because the Chinese actually don’t have a lot of knowhow for um sensor technology and they they currently you know like not to be demeaning or anything they’re just not in a place where they’re really self-sufficient with understanding the technology and understanding how to develop and design the technology to be better. Um so I think that I think that it it is certainly it is certainly easier than Leading Edge. It’s not that it’s not horribly complex, right? Like you’re you pretty much have a magnet, you know, with micro electronic components that are just collecting data. And I would I feel like the knowhow is limited in China mostly because China just isn’t particularly interested in investing in leading edge technology. There’s not a lot of that happening. And a big reason for that is um is academic institutions are simply not sponsoring it. Like they’re basically taking it out of they’re taking electrical engineering and that micro electronic sense out of the academic curriculum. So that’s a problem in Europe and it’s also a problem in China. Um the jobs don’t pay as well. They’re not sexy. Um it’s not something that it’s exciting to talk about. like it’s pretty much, you know, I don’t know. It’s it’s like um >> I want I wanted to say something that was maybe controversial to say, but it’s maybe appeals to a a mind that has a specific interest in in the particular mechanics of niche devices. Um, so yeah, I think I think there there are barriers to techn to the technology being understood and developed on the academic side. Um, and I think that that’s showing up with their for into China. So it’s I would say there are barriers there and there’s even a concern within Europe itself and within Mlexus itself. Um the um I always forget her name. It’s it’s Francois Shambar Franis Duchal. There’s a lot of lot of Belgian names going on at that company at the executive level. But she’s the chairwoman. Frantois is the chairwoman and she goes on road shows all year trying to encourage people to get into STEM specifically uh on the micro electronic side of the business just because they’re starved for for talent. Um and so even within Europe I think there’s just not a lot of desire to go and compete with the incumbents. Um, so I think that their position is relatively insulated and and um yeah, >> how about valuation? >> So valuation, yeah, I mean they’re I haven’t looked at the I think they’re trading at about 67. So their for last high was around €110. So I guess they’re about 40% off their prior high. Um, it’s in a position where it is higher than when we published it at we published at about454, but I think that it’s still in a position where you can probably beat it up and get a satisfactory rate of return. In fact, I’m looking at it every single day. um because I have uncharacteristically cash on my in my portfolio right now and that always makes me sweat because I I don’t like cash um on the books and so looking at it every day and thinking about the valuation for sure um but I would say yeah base has probably gone from 12% to around 10% and so that’s something to consider um and the upper end’s probably gone from about 25% % to about maybe 20%. But there is this kind of there is this potential for um I guess a bird in the bush to be captured um in the sense that they’re kind of in the same position as they were with autos 25 years ago where there was this real opportunity to carve out a niche within um magnetic sensors but specifically speifically with robotics. So robotics in terms of articulated hand functions and things like that would be using threedimensional um position sensors which is Alexis’s specialty >> and they have a lot of interest from China and they have prototypes that they’re developing and so they really want to be in that industry. Um and I think that that’s a potential boon for them over the long run. It’s not something that I have put any thought into because I don’t know, but it is um you know, you’re kind of getting the cake, but you also might you also might get the cherry as well. So, it could be it’s kind of a position where you know, heads you make a satisfactory return, tails, you make a a really exceptional return. But, um but in the end term, I mean, the shares shares have effectively gone nowhere for 10 years. like it’s very compelling. The firm is being discounted relative to peers where in the past it would have a premium over peers um just in terms of their upper profitability. the IR spokesperson um described it as what he’s been calling the tyranny of the few where if you’re not a large company um you know you basically just don’t matter uh in terms of sponsored research and he’s just he’s kind of beside himself at at why the business is being valued the way that it is. Um, but there are inventory issues still and and that will probably take I don’t know maybe 12 or 18 months to to kind of even out and and that’s the great that’s a great time to get interested in cyclicals in my opinion is is when you see that supply blowout and you see demand that kind of supply demand mismatch because um the market fears lower forward earnings and naturally sells off the stocks and um That’s kind of like the equivalent of rain, you know. And I think I think cyclicals, some almost every company is cyclical to some degree, just some are more cyclical and some are less cyclical. Most of Warren’s businesses have periods where they overearn and under earn. Um, you know, there’s very few Microsofts in the world. Um, and so with a kind of more cyclical business, um, like Malaxisus where it’s tied to to autos, um, I kind of I kind of picture it as when they experience that supply demand mismatch as it being as it being raining outside. So, um, the cyclical can almost be thought of as like an umbrella. Um, when it’s raining outside, umbrellas are valuable and uh and when the sun comes out, they it’s time to put the umbrella away. And that’s how I feel about cyclicals is is the value is is when they’re in a period of of um opacity with regards to for future earnings. Um and the attention kind of shifts away from okay well what are earnings going to be you know next quarter or next year or whatever and towards okay well this is a product that is driven by necessary demand which means that it’s very likely that demand will be higher in the future or at least as strong and that kind of almost makes it easier for an investor in the sense that they can shift their attention away from what is broadly unknowable which is forecasting the economics, future economics of a business and they can shift their attention towards the balance sheet which is you know asking questions like can this company survive? And with cyclicals a lot of them if you survive you get free market share for the most for the most part because um a lot of firms are short-term oriented. They will lever up, acquire, mimic the herd mindlessly in a way that ultimately um detracts from their ability to invest in those kind of downturns. Um Alexis is one of those companies that continues investing throughout the cycle. And they actually they the last repurchase they did was at 65 per share, but they initiated buybacks between about €50 to €65 per share. And the company’s majority owned by by the the founders and this is the first time that they’ve done that since the Euro zone crisis. So when share prices were significantly lower. Um so that’s a huge huge buy signal. they have stopped which suggests they’re not willing to purchase at a price above 65 but um I don’t know I mean I think it’s it’s up for an investor’s interpretation but it’s an excellent company to to learn about and um I think a lot of a lot of the opportunity comes from doing preparatory work in investing um you often don’t have time to do the work when the opportunity presents itself. So even just learning about companies with without any kind of expectation of immediate reward can be very very valuable over a long time horizon. >> Let me do a quick shout out to the folks at home and then JT you want to do some vegetables? >> Sure. >> Peditikva Israel what’s up? Winter Park Florida. Tallahassee Valareereeso what’s up Mac Belleview Boisey Cromwell New Zealand. Savland of Finland, Cincinnati, Ohio, Tampa, Florida, Jupiter, Florida, Andrew Pradesh, India, Austin, Texas, Monique, Jamaica, Breton, and Toronto, Snomish, JT, what have you got for us? Goththingberg, Sweden. Last one in the house. >> Uh, yeah, today’s going to be a little bit more artistic than normal, so buckle your seat belts. Yeah, this could be this could blow up on the launchpad or maybe it’s fun. We’ll see. But uh this is a um a friend of mine, Adam, recommended that I read this book called The Screw Tape Letters, which is quite an odd title for a book, but um it was this it’s written in 1942, and it’s really like a satirical masterpiece by CS Lewis. And you know he was CL his Clive Staples Lewis better known as CS Lewis was a scholar of medieval and Renaissance literature and a professor at Oxford and Cambridge and he was quite a prolific author uh as well and he’s perhaps best known for the Chronicles of Narnia which a lot of lot of everyone read when they were a kid but he had a lot of non-fiction things he wrote as well especially in in like around Christianity and that it remains often a bridge for a lot of readers today between reason and faith uh at at once one point he was an avowed atheist and then he underwent a profound conversion in his early 30s and was really heavily influenced by one of his close friends who was uh JRR Tolken who wrote the Lord of the Rings. So uh the premise of the Screw Tape Letters is both very simple and quite brilliant the way that it’s inverted. Uh the book convict is a bunch of letters written by Screw Tape who’s a senior demon in hell and he’s they’re written to his young nephew this uh demon named Wormwood and he’s a junior demon who’s just getting started on learning how to corrupt human souls and you know it’s very Charlie Mungerlike in the in its inversion of you know showing how to create a miserable life. Uh and that’s really what what makes the book really powerful is its voice. Uh, and you know, they’re written entirely from the demon’s perspective, and it really flips good and evil on its head. So, you know, God is referred to as the enemy, and hell is this like very bureaucratic place. You know, it’s kind of like dry and corporate almost. Uh, but you know, it’s great satire. Uh, but it’s also a bit of a mirror mirror like spiritually. Um, and each letter off offers tips on how to exploit human weaknesses. you know, distract the subject with small pleasures, cultivate spiritual pride, distort love into possessiveness, encourage vague anxieties. Uh, and the brilliance is not really in like demonizing sin in the usual sense. It’s it’s much more about like he’s not like encouraging them to turn them into murderers. It’s rather more about like become this like loop lukewarm, complacent, you know, too busy to be thoughtful. Uh, and really like kind of losing your mortal soul from that. Oh, in an act of profound hubris, I attempted to rewrite a Screw Tape letter in a financial context. So, uh, the following is a letter from Abyismus, who’s a senior financial demon, to his eager nephew, Tickworm. So, uh, away we go. Uh, my dearest Tickworm, I read your latest report with something approaching satisfaction. Your patient, I gather, has opened a brokerage account, downloaded two trading apps, opened a crypto wallet, and started referring to himself, without irony, as early stage capital. Excellent. You now stand at the edge of your first real assignment. Not merely to ruin him, but to ruin him in the most elegant way possible through the rituals of self-diluted financial sophistication. We do not wish to keep away from keep him away from markets. That’s outdated thinking. The more delicious path is to let him in fully but wrongly. Let him study enough to be confident but never enough to be correct. Begin with speculation disguised as investment. Encourage him to chase stories, not actual financial statements, momentum stocks, spacks with vaporists forecasts, hot tips that feel like privileged information. Anything trending on social feeds. He must believe he’s early to the next wave, though he’s simply the inevitable bag holder arriving for the rugpull. Let him believe risk is merely a byproduct of cowardice. Caution, you’ll whisper to him, is attacks on ambition. You only need to get rich once, so why not do it quickly, boldly, and with an extra helping of excitement. A man of his caliber deserves good stories to woo the opposite sex, not boring business fundamentals and monk-like patience. Next, initiate him into the cult of macro obsession. Whisper to him that every CPI release, every Fed meeting and dotplot, and every unemployment print is a tactical moment. He must trade on this data. Let him believe he’s interpreting signals that even the professionals misread. Was that a twitch in Pal’s eyebrow that only he saw? The market isn’t ignoring him. It’s simply not enlightened yet. He’s ahead of the curve. And now the algorithm will deliver him to one of our favorite weapons, the Tik Tok financial influencer. Let him follow 21-year-old prophets who preach conviction while leaning against rented sports cars. This coin will 10x, they declare, and your patient obeys. He’s not reading. He is scrolling. He’s not evaluating. He’s imitating. This is what we call user generated misfortune. And it’s a favorite of our dark fathers. From here, elevate him into options trading where ignorance and leverage embrace in holy combustion. He he will say gamma and theta as incantations while sacrificing premiums weekly. When he wins, let him feel chosen and smarter than all the other dumb money neopights. When he loses, tell him he was simply early. We want him addicted to the idea of mastery while remaining functionally confused. Finally, when he grows weary, offer him the false comfort of diversification. He must not know what he really owns as he scatters his holdings across crypto, uranium, distressed real estate, leverage ETFs, money losing spacks, pointless NFTts, and vintage wine startups. This, he will say, is strategy, but it is clutter, and it is our free lunch to his torment. The high fee burdens and of these complex instruments help ensure his road to ruin. Let him spend a decade in motion and call it growth. Let him perform diligence without discipline, conviction without clarity, and action without understanding. The delicious tragedy is not that he will eventually be financially devastated. It is that he will think he was smarter than average the whole time. That eventual bitterness of his broken spirit is the sweetest fruit for a financial demon. And by all means, never let him write anything down, lest he learn from his mistakes. Steer him away from systemization that will lead to self-awareness and ine inevitable improvement. Keep the idea of a business-like approach far from his mind. That is too boring and pedestrian for someone as smart as our man. Yours in infinite churn. Abysmas. >> Bravo. >> Amazing. >> Thanks. >> Wow. I feel honored to be to to have just borne w bear witness to that. That’s uh >> I think that’s one of your better better uh better segments. Jake shake. Clearly, I have too much time on my hands is I think the takeaway have >> Is that your Is that your commentary, JT? On the state of the markets currently? >> Uh there it’s a touch autobiographical perhaps? Uh I’m a little skeptical of uh some of the current behavior that I see. Yes. >> What do you think, Gwen? Do you feel does it feel a little bit toppy to you or what where are you at? I mean, I I guess this is where I’m sort of disappointing because I don’t think about the market at all. I really don’t, you know, it it has no bearing on, you know, my understanding of companies. So, it’s just it’s just, you know, we’ve had industries that have gone through multiple recessions over the past few years that were completely disjointed from the market. and it would have been a complete waste of time to be thinking about oh well the market is is at a P of X. Um but to comment on the behavior of that I’m observing in the market yet it’s very concerning. It’s concerning um on multiple levels. Um >> I was h happy to see that we checked the box on hot IPO uh you know which is always a telltale sign of every bubble we have which we with Figma. Yeah. which we haven’t had that really in this most recent uh rehash of of uh you know financial mania, >> right? You know, is it because the assets already exist to spur the mania and that IPOs are maybe not as sufficient. I mean, you’ve got Bitcoin, um, you’ve got crypto, you’ve got things that are maybe, um, >> yeah, there is outlets for that. I think there’s also something to be said about, um, you know, the indexation, like where did that money come from really, like who’s gotten fired in the course of this transition? And a lot of it is small and midcap managers and who bought IPOs. It was small and midcap managers. Um, so it’s quite difficult I think to get an IPO interest in an IPO going because they’re simply like the indexes aren’t that’s not really their business. Um, so it’s it’s kind of an interesting dynamic there and and you know there’s what is it 12,000 plus private companies at this point in private equities hands. Um, which is a huge number compared to Russell 2000 or you know S&P 500. These are really big numbers. Um, and they they’re they tend to be much much much smaller. Like I think the average PE company is like onetenth the size of the Russell 2000 average company, >> right? >> So who’s going to buy if you tried to IPO one of your private equity of those 12,000 private equity companies? Like who’s left to buy this? It’s it’s not clear. >> Yeah. I mean it’s do you think that there’s going to be some kind of you know um end to the kind of like Pavlovian dog >> paradigm that we are in where the overarching thesis that is driving markets is basically just give up and get rich. um which is a very powerful um a very powerful sales pitch and I think I don’t know if passive funds can be compared to the mortgage back security but you know the mortgage back security was a one of the better financial inventions you know in financial history. It was just abused until it became malignant and and not good. And I wonder if that’s where passive is headed as well is there’s this very attractive, easy sales pitch. Um I wonder if there’s an end date to that. I wonder if there’s a way where that can be abused to the point where it actually becomes harmful. >> What do you seek when that that uh concerns you? Um, I think I I think I am concerned about AI to some degree, which may be controversial. And I’m concerned about AI from um, I guess for a few different reasons. So, recently I have been just researching industrials and I don’t like Inquisitive companies. I really don’t like them. I don’t like them because it just creates a lot of opacity in the financial statements in a way that makes understanding an inquisitive company’s true profitability very difficult. And so I kind of going through this list of 412 industrials um above 400 million market caps in North America. And so many of them were inquisitive. I was just on Capq looking at the M&A history and I was like I was like okay you know I’m just going to ask chat GBD and I’m just going to say how like of all industrial categorized companies in North America with 400 million market capitalizations or more have made at least three acquisitions since 2017 and Chat GBTA Gemini Perplexity none of them had the answer which is really interesting because all of that information is public. And so I went through all 412 companies manually and just figured it out. About 75% of them have made more than three acquisitions uh since 2017. About 25% of them have not. And so the 25% bucket is what I would be interested in because it’s really difficult to ignore the herd. It’s really difficult to ignore social proof bias. Um, and >> I’m surprised I’m surprised the AI didn’t write you a haik coup but with the wrong answer in it. >> Yeah. Yeah. You know, me too. But, uh, maybe next time. Um but uh it’s um yeah it was uh just kind of made me realize that AI might have the unfortunate consequence of incentivizing research that might not necessarily be proprietary be proprietary um becoming proprietary. So becoming private and becoming increasingly captive um because there are just so many AI platforms that use information that Maiden has shared publicly for profit. So they’re selling a subscription and part of what powers that um that platform is information that’s been scraped from the web. And so I think that there’s the potential negative consequence that the most thoughtful um investors in the market, not saying that I’m one of them, um may become increasingly private with the information that they produce, not wanting it to be kind of swept away into some kind of large AI uh database or whatever. Um I guess the other area that I worry about is um passive investing I think is reducing the incentive to work hard. Um and I think that AI might serve to compound that trend. And I think that the most valuable characteristic that an investor can acquire is self-reliance. um an ability to analyze a company from A to Z without reading any analyst report without getting you know any kind of prior information and from that A to Z method acquiring an understanding where they can determine on their own if a company is or or isn’t worth investing in. So, I’m picturing the scene from like demolition, man, where like you have the AI powered, you know, fancy everything and then you got the people like living under the bridges and, you know, in their old clothes and they’re like, you know, doing actual real work around companies. >> Yeah. Yeah. I mean, it’s uh I I I worry I worry dependency is not a good skill. It is not a good >> trait >> trait in investing. And I think being dependent on AI models without verifying is a concern. And there’s a lot of in almost every study that I conduct, there will be maybe a dozen or so data points where it’s just not necessarily clear and you have to kind of interpret a little bit. And those data points might be significant. They might have a material impact on the overall visualization of the end uh data set. And so, and I think there’s also just this there’s this urgency to kind of latch on to speed in the in the market. >> And I and investing is is not a race, it’s a waltz. So, I just don’t think that it’s necessary to I don’t know to I don’t think it’s necessary to kind of give up the old school manual way of just reading through every line of accounting and discovering the nuance because at least with my use of it so far, it’s been mostly unhelpful um in terms of the type of work that I want to do. So, you don’t need to find all the opportunities immediately. If you can acquire information that’s high quality and you can use that over time, you’re going to do just fine. Um, >> Toby, what are you seeing that’s uh anything concerns you? >> Uh, general overvaluation. M >> just before we we go on to get too deep in my macro thoughts though. >> Do you want to give us two updates Gwen on for imprint and Engles market which I think we discussed last time. So just maybe >> a quick update on where we’re at with those two. >> Yeah. So for imprint group um last time I talked about it probably irresponsible. >> What’s the ticker on for imprint? Just >> uh so it’s it’s on traded on the on the London stock exchange. So LSC4 fur. >> Oh f. Okay. >> Yeah. Good one. >> Yeah. And um so basically last time I talked about I hadn’t analyzed the company since 2019. So maybe a bit irresponsible of me, but share prices declined uh in the wake of the liberation day tariffs to um 2019 prices. And so I did a full expose of the company and um it’s a pretty special business. I definitely suggest people take a close look at it. um I analyzed it’s it’s kind of I almost want to call it an intermediation platform because its e-commerce platform is just an intermediary um entity that just connects suppliers with uh with customers for print doesn’t actually really hold any inventory uh but the company is trading at 2019 prices and the business generates higher cross cycle returns on capital than the mag 7. So, it’s an extremely profitable business, no debt, 150 million cash on the books, and that cash position is maintained specifically to position the company to take advantage of downturns in the market because promotional products is a cyclical business. And when you have a management that optimizes their balance sheet to invest across the cycle, um it’s unsurprising that foreign print has grown at 20 times the rate of the overall market organically over the past 10 years. >> Wow. >> So, um really well-run company, very thoughtfully well-run company. Um you don’t pay withholding taxes on UK dividends. That’s a nice thing as well. So when you look at the dividend, um I would normalize it because their profitability doubled in the wake of of the pandemic just because um the average selling price of their products went up above the rate of new orders. So, um, but normalizing that completely back to pre- pandemic and assuming effectively no growth, um, you’re looking at a pretty decent return. I think um, in my view, a at least a 10% return base. Um, assuming like pretty abysmal performance over the next 5 years or so, which is what I like to do. You know, the key to happiness is low expectations. So um my way of valuation is all about can I get a good profit if forward economics are below what management would like them to be and below historical uh historical performance levels. >> Good one. And um the only other one is Engles market. >> Yeah. So Engles is also compelling just because the food cycle is kind of in a downturn and um >> people are eating less Yeah, there is actually some demand contraction. Yes. Um, >> from GLP1s, is that >> maybe GLP-1s? Um, but fuel prices >> American eater finally takes an L. >> I I wonder if uh yeah. Yeah, I actually haven’t thought about that too much, but um maybe there is some impact there. But um fuel prices are also lower, so that has impacted the business as well, and it’s impacted Kroger. I use Kroger as a onetoone comparison just because their their store formats are so similar which is why you don’t really see Kroger competing in uh Engles uh markets um just because um it it would be redundant and they’re typically operating within smaller towns in the southeast where there’s not really you know at most you kind of get like a a Walmart and an Engles and then maybe like like a Publix or like an an Aldi or something like that. It’s usually smaller markets. Um, but I mean it’s it’s gotten cheaper and that’s what I expected would happen after just a ginormous runup of of inflation and margin expansion um post pandemic. And it is now at the um lowest price to tangible book that it has ever been. >> Wow. at least since 1992. And the kicker is that the business has about 658 million in um property value that isn’t recorded in the balance on on the balance sheet. So, I went through over a thousand county tax record searches, identified 445 owned properties, was able to um conduct depreciation calculations on each property that wasn’t land cuz land doesn’t depreciate, of course. And yeah, but 658 million in value is not we estimate is not on uh is not on the books. >> So, what’s that make like Gwen’s adjusted price to book today then? about 0.52%. So about half book >> um for a very very competitive and very incumbent um regional ger. And if you look at the consolidated uh numbers, it’s it’s fairly disappointing. They’re dealing with damages from Hurricane Helen. Um three stores remain closed. Um four stores were closed for almost a year. So that had a big impact. Um, also just cleanup damages and things like that. Even still, their net margin is is is with a 50% decline in in net net margin this recent quarter. It’s still higher than Albertson’s. So, um, and and >> two instead of one is that for grocery. >> Yeah. Yeah, it’s low. Yeah, you’re right. But, um, the company isn’t supposed to be a cash machine uh just because they have so much so much >> return. Yeah. >> Uh, so much property and but the the big kind of exciting piece of Engles is is their leasing business. So they own a shopping center leasing business which is like it’s not malls. It’s like it’s like you know um like a plaza like you go in there and there’s a grocery store and like a super cuts and like maybe you go get your nails done or whatever and there’s like a discount store. Um, and sometimes there’s a dollar store and that’s kind of the the model that they go for. Um, so things that are e-commerce resistant and sort of one-stop shops when as far as kind of shopping centers are concerned and they produce 85% FFO margins um in that business. So it’s significantly more profitable than the grocery business. And what you were seeing prior to the pandemic is a shift towards away from investing in the supermarket business and towards investing in the leasing business. >> And so margins were steadily ticking up every single year. And so the leasing business has continued to do well. Um base rents are up 16% year-over-year. you pretty much have this staple, consumer staple funding um without a REIT. So, it’s this kind of exciting, I don’t know if you want to call it a canary in a coal mine. I don’t know if that would be the right saying, but it’s this thing that is bubbling and that will that has contributed to upper margins over time. And I think that will show again as the supermarket business normalizes um and the helen damages get resolved. But um it’s going to continue to contribute larger and larger and larger share of overall uh profit and and will likely increase the margins of of angles broadly over time. Um and yeah, I mean if you look at ROIC that was acquired by Blackstone, that’s the largest um grocery anchored um operator shopping centers in the United States. They were acquired at an enterprise value of about 6 billion. I think Engles is at an operating as an enterprise value of about 1 and a half billion. So um and Engles is producing slightly higher IBIDA than than uh ROIC was. >> Thanks for the thanks for the update. We’re going to we’re going to run out of time a little bit unfortunately. >> Yes. >> If folks want to uh get in touch with you or follow along with what you’re doing, what’s the best way of doing that? >> Uh so just follow me on LinkedIn. Uh just Gwen Hoffmire, you’ll find me. Um or you can send me an email. um visit my website uh maiden financial and you can get in touch with me through there via email. Um and yeah, those are the two two best ways to do it. >> Well, thanks very much for the update. Uh we’ll have you back on in the near future to to uh give us another update, learn about what you’re up to. Uh Gwen Hoffmar, Maiden Financial. Thank you. >> Thank you very much. >> JT, any last words? >> No. Enjoy the rest of your summer. >> Nothing to add. Bye, folks.

Pitch Summary:
Credo Technology Group Holding Ltd is positioned as a key player in the AI industry, offering semiconductors that address hyperscalers’ challenges in network infrastructure development. The company is focused on increasing data transfer speeds and reducing energy consumption, which are critical for data centers. Credo’s product lines, including SerDes IP, Active Electrical Cables, and optical digital signal processors, provide significant technological advantages. The company has shown strong financial performance with a 272.1% revenue increase in Q2 FY2026. Despite competition from companies like Astera Labs and Marvell Technology, Credo’s unique solutions and strategic partnerships with major hyperscalers support its growth potential. The stock is recommended as a ‘Buy’ with a projected 20% growth potential in 2026.

BSD Analysis:
Credo’s strategic focus on AI and energy efficiency in data centers positions it well in a rapidly growing market. The company’s transition to new standards and products, such as the 6.0 retimers and DSP ZeroFlap 1.6T, enhances its competitive edge. While competition is intensifying, Credo’s niche technologies and partnerships with major players like Amazon and Microsoft provide a buffer against market pressures. The company’s financial health, demonstrated by its positive EPS and revenue surprises, indicates robust operational execution. However, risks such as high customer concentration and aggressive valuation due to AI hype should be monitored. The anticipated increase in CAPEX by hyperscalers in 2026 could further drive demand for Credo’s products, supporting its growth trajectory.

Description:
Value: After Hours is a podcast about value investing, Fintwit, and all things finance and investment by investors Tobias Carlisle, …

Transcript:
I think we’re live. This is Value After Hours. I am Tobias Carile, joined as always by my co-host Jake Taylor. Our special guest today is Eric Cinnamon. We’ve had him on before. He’s a small cap value specialist and his firm is Palm Valley Capital Management. How are you, Eric? Welcome. >> Hey, Toby. Great to see you. Jake, >> always good to speak with you. >> Yeah. >> How is Small Cap Value doing? >> Awesome. Incredible. Um, >> objection leading the witness. >> I mean, there’s no better place to be than active small cap value. >> And then you you sprinkle on the absolute return tilt. And um, yeah, things couldn’t be better. Just it’s uh, >> well, there’s two things. What’s the opportunity set like and what’s the I know what the performance is like, but how’s the opportunity? >> Let’s not worry about the historical. How’s it look going forward? >> The past is the past. >> Yeah. Well, you know what’s interesting though about the past is the last four years, people don’t realize this, but small caps have gone nowhere. I mean, four years is a long time. I mean, that’s college, right? Um, have made no money. You know, maybe up one, it’s like 0 to 1% depending on the benchmark. Uh, meantime, the S&P 500 is up since that time, you know, 50%. The QQQs are up around 50 or 60. Uh so significant underperformance in small caps. uh we’ve been able to to hang in there and generate a you know small annualized uh return you know um I think since inception we’re up like seven which is around the same as the small cap benchmarks but as you know we really haven’t been invested uh too aggressively been very defensive especially with the cash on average um we’re only been about 20 25% invested since inception so you know macro perspective I guess or from the top down on performance you know, it has been great, but we’ve kept up, but definitely lag the larger cap, which I mean, I don’t know how you can keep up these days. I mean, the the uh Nvidia, you know, I heard is like 8% the S&P 500 right now. Um, if you have a 5% weight in that stock, you’re actually conservative, >> right? >> Might have a little too much tracking error to keep your job with a 5% weight. So, uh, things are a little nutty again. Uh, it’s not too dissimilar than the 1999. I I used to think it wasn’t like 99. Um small caps were much more inexpensive in 99, but lately I think year to date especially with the flows going more towards large cap or all towards large cap flows in small cap ETFs are actually negative now year to date. So we’re getting outflows and you’re getting this kind of this consistent drip of small caps. Occasionally I’ll have a really good day like today uh where they try to flip the narrative but without the flows you know it’s gonna be really hard for u for small caps to rebound. Why why do you think small caps have struggled so much over the last four years? >> Well a lot of it’s the flows and a lot of it’s the cycle and the mega caps of course have been where the earnings growth have been. The earnings growth for a lot of small caps have been flat. You know since 21 we had the boom in profits and stock prices. 22 stocks rolled over and since then it’s been hard to grow earnings for a lot of these companies. Uh you have a lot of uh goods companies that boommed during the COVID period because of all the stimulus money, the checks being handed out and now several you know a lot of the consumer names are now in in recession. Uh transportation’s in recession, energyy’s rolling over. Um there’s a lot of industries now that are in recession. That’s one of our themes is to buy businesses already in recession. You’re not we’re not waiting. We really love to buy cyclicals that are experiencing um declining earnings uh declining revenues and are in recession. So uh but but to answer your question, I think it often flows uh earnings growth and um buybacks too. I I think buybacks is a significantly underrated understated uh catalyst of asset inflation especially I mean obviously in the equity uh markets where that’s been more towards the large caps where you have profit growth you usually have you know the the the ability to or more likely to uh do buybacks. Buybacks now are you know four to five times greater than uh passive flows. You know everyone talks about the passive flows but the buybacks are are much larger. um on a flow perspective. Um so I think that’s helped the large caps as well. >> You think the large caps are Yes. So the large caps are doing lots of buybacks but at very elevated valuations and they’ve got the the cash flow to support >> isn’t like Apple’s get like planned to be like a hundred billion of the one trillion that are you know kind of scheduled or something like it’s a insane number. >> Yeah. The buyback for Apple I think’s 100 billion. You know their market cap now I think it’s trying to get you be the next one to four trillion. I think it’s three something. Um, so on a percentage basis, you know, the buyback, you’re like, well, it’s not all that, you know, relative to the float, but it’s a lot of their, if not all of their cash flow. So, so Apple’s balance sheet is, you know, and I’m not an expert on Apple, but just just by glancing at it, is really not that strong. It has, last time I looked, I thought it had negative working capital. Um, you know, I know they have some some securities on the on the balance sheet, but that’s offset by the debt now. It’s not the balance sheet everyone used to talk. Remember everyone used to talk about Apple’s balance sheet. It it it’s a lot worse than a lot of the companies we follow, you know, small caps. I mean, we do it on percentage basis. Um, so I don’t really get the Apple Apple balance sheet. And of course, now they’ve committed to investing, what was it, $600 billion of capital in in AI or chips or investing in the US. And I I don’t know where that’s going to come from if they’re going to borrow to do that. So, uh, yeah, Apple’s really interesting, but but again, I’m not an expert. >> You can just say those sort of numbers though, can’t you? You just say, “I’m going to invest 500 billion.” And they’re just like, “Okay, that means >> Yeah, we we were talking earlier about AI and you know, if it maybe the number is 500 billion a year in investment.” Um, I mean, that is just a crazy number. It’s just we just throw around these big numbers now because they’ve gotten so big. Um but I mean I remember back in the tech bubble we weren’t anywhere close to that kind of investment in the in internet and in telecom. Uh so this is a lot of money you know we go through the conference calls like we do last quarter I don’t think any company we we really follow uh said anything positive about AI are using it you know for to enhance productivity yet or and create revenues of course it’s very early um that’s a big capex number you know you have to hope at some point you get a return on that capital but it’s a huge uncertainty but it is one of the areas that is driving investment in capex you know that’s one thing I would day where we have a lot of industries now in small caps in recession. The ones that are doing well, a lot of them are doing well because of kind of that forced investment or the aggressive investment either in infrastructure because of government spending or AI infrastructure. >> It feels like 1.0 in the sense that there’s an enormous amount of excitement and investment in AI but no very clear path to generating much income or revenue out of And I wonder if you know I I I understand that the AIS are getting close to their limits of like how much we can improve them. And so the next part of the story is going to be making it useful and building it out which is sort of like what happened to the com post 2000 2000 to 2025 was building out all the >> I mean you know AI right now you know what you could do with it. It’s obviously a very good search engine but it also writes very good raps. I mean, if you like rap music, so if you’re a rap content provider, I think you’re toast. You know, you just you might as well find a new gig. Another thing it does and not too well was I asked AI what particular bat to buy for my son. He’s in 14U baseball and it told me to buy a drop. >> I can help you with that one. >> Yeah. Well, well, Jake, it said a drop five, but the rules for this league and I game specifically >> 14U, you need BB core. >> You need BB core. Drop three. So, I go out and buy the Drop Five. Well, AI cost me $300. So, there you go. So far, AI is not helping me. >> It does make a lot of mistakes. I think we’ve >> Well, it’s interesting with AI, you know, you you’ll use it and you’re like, “Wow, it’s very it knows a lot.” You know, it’s very interesting, but then you ask it about something you know a lot about, you’re like, “Wait a minute.” Now, >> the the other thing it does, like, you know, it’s trying to find the most likely word that follows the the word that came before. And so it gives you the most mid >> take on everything. It gives you the absolute mainstream take. Like if you want to say something interesting, which is like definitionally not the mainstream take. It’s going to be a fringe take. It’s terrible. I think of generating those fringe ideas. >> I agree. And the content is just like you said, it’s mainstream. It’s not very creative. >> Um I actually recently tried to ask it to write a blog for me using our content on our website. I was just curious and it, you know, it just was, it was almost like a highlight reel of what we had written. It just wasn’t very good. >> But, uh, but I mean, you do spend 500 billion. I hope it improves and I’m sure it will. Um, so so it’ll be interesting to see how that that plays out. But just like the tech bubble 99, a lot of those companies uh same path of the stock price eventually collapsed. Some many went out of business. Um, the ones that were initially benefiting. So, so we we’ll see where this all goes. I’m I’m sure something will come out of it, but how it affects asset prices and and the economy too. Uh cuz right now you’ve got you’ve got AI boom, you have government spending boom, you know, two trillion deficits, 6 trillion in spending. Uh you got credit spreads are tight, asset prices, stocks are at record highs, home prices are at record highs. They never came down. Um I think it’s really tough in this environment to be in a recession. So, we’ve been very critical of valuations, but we haven’t really said, you know, we’re in a recession because there’s just so much spending, so much stimulus, uh, to drive earnings and drive the economy. And even though they’re artificial, that they are having an impact. So, you know, we’re careful to extrapolate this environment. So, I think we’re more about we’re normalizing instead of extrapolating, which is keeping us out of a lot of these names. if if you use sort of more normalized profit margins. >> That’s one thing I did notice when I went through the uh Dennis site. They track the profit margins for large, mid, and small. And I published this on Twitter. And the large is at like I forget now, but it’s like 13 plus, could be 15, something crazy like that against the long run average of six. And mid >> mid is well down but it’s still higher than it was preco and so small which I found really shocking. The margins there are still higher than they were preco even though they’re they’re well below mid which is well below large but they’re still elevated. So I don’t know what all that means. I don’t >> I would have thought that I would have thought Russell 2000 margins look like crap with just based on the narrative. Yeah, we’re finding a lot of um have and have nots. You know, there’s some some businesses that are generating incredible margins. You know, those are the ones that have benefited from acid inflation and inflation in general where they’ve been able to pass on pricing. You know, you look at something like a Costco, um if you have 30% inflation over 5 years and you can pass all that on, which they have, their margins have been maintained. I mean, they they love that. They love inflation. um you know maintaining your gross profits and gross margins are two different things. You know they maintain their their gross margins. So inflation can be wonderful for certain businesses but it can be detrimental to others that are more price takers and don’t have that ability to pass on prices. So I think you’re seeing a lot of dispersion um from a bottom up on on margins and there’s certainly things that are skewing that number one way or the other. Eric, wouldn’t you say though that that’s kind of like a a short-term phenomena where >> your fixed costs were paid for with, you know, higher more appreciative dollars, but then when it comes time to start putting a new roof on a Costco or >> Amen. >> build the next one, it’s going to be more expensive to do that and eventually that’s going to show up in your margin, right? >> That’s a very that’s a great point. I don’t think that gets discussed enough, but frankly, when do fundamentals like this get discussed? I mean this is you know saying that your capex is the you know below average because of inflation. I mean that’s a great point. So so right so margins using you know historical depreciation are likely overstated. Uh great example are a new truck now for for the trucking companies probably 20 30% higher especially with the the new standards on on on fuel efficiency. So uh there’s a lot of that. So there’s a lot of deferral going on because they know and trucking is another good example. They are deferring purchases of new trucks. A lot of a lot of the public companies are that’s also because of trucking is in recession. But but nonetheless when they eventually have to go back in and rebuild their fleets, it’s going to be a lot more expensive. But that’s that’s across the board. That’s a lot of PP uh property plant equipment. >> Yeah. That’s like the next investor’s problem two years from now, >> right? >> CEO next CEO >> two three years down the road. That’s like three generations of investors. >> Yeah, >> that’s >> what do you think the uh the earnings of Smalls uh do you think there were there was consumption pulled forward through co and through all the STEMI that’s come afterwards? Cuz I’ve noticed the same thing that there’s a very definite peak around 22 in terms of margins, in terms of earnings, in terms of stock prices and then >> it’s run backwards since since then >> to today. I agree. So, so like an example would be Carters, right? They’re the uh market leader in children apparel, baby apparel. Um they were crushing it after co, you know, everyone was getting their stimulus checks and they didn’t really care if they were paying $10 or $12 for a pair of pajamas. Um so they were able to raise prices and and not only did they have some volume growth, they had the pricing power and all of a sudden they were they were making considerably more margin and and cash flow and profits. they start buying back stock in the 80s, $100 stock, you know, it’s just booming. They’re making$878 a share in earnings. Um, and then the the the COVID stimulus went away, the inflation hit. Now young families are having to decide between, you know, paying rent and buying new pajamas. >> Yeah. >> And the the decisions a lot more >> student loans they got to pay now where they weren’t before. >> Yeah. So now you’re like, “All right, I’m going to pay rent and now no pajamas for Timmy.” And um so now their earnings are probably $2 $3 a share. Stocks at 25. Um and a lot of companies did that especially on the consumer side. They extrapolated that boom. Uh transportation did it too. And now some have gone bankrupt. Uh most are in recession. And it’s an area of the economy that um I think illustrates what’s going on with the consumer. you know, the the the uh difficulty they’re having making ends meet and and especially on the discretionary spending, but even food. I mean, even staples now are getting hit by uh the I call it the affordability crisis. Everyone’s focused on inflation, but the companies will tell you it’s not inflation. It’s the inflation we already had. It’s the 30% p, you know, lower purchasing power or cut in purchasing power. And it’s affordability that’s the issue. And they’re not addressing affordability. I mean, the inflation rate’s at 3.1% now on the core. They reported today, and we’re actually talking about cutting interest rates when the biggest problem, if you do a survey, it’s the cost of living. And they’re going to cut interest rates in this environment. Stock prices are at all-time high. Home prices are at all-time high. Cryptos are 4 trillion market cap. Um, I could go on and on. Credit spreads are so tight, corporate bond markets on fire, and we’re cutting rates in this environment. I mean, it is insane, you know, and and I just I don’t get it. And it’s it’s like, what are you doing? You know, the the populist is going to vote everyone out. They’re going to give, you know, won’t say that. All right, I’m going to back up here. Um, but they’re going to vote him out, right? And they’re going to they’re going to bring someone in that’s going to um redistribute the wealth. And you can’t blame them. >> I said no rants, Toby. I’m sorry. >> Welcome to rants. Other than that, how was the play, Mrs. Lincoln? >> I love the Fed. The reason we love the Fed is they always screw up. You don’t know when, but when they do, it’s so bad. And the opportunities are so wonderful. And this is this is going to be one of the best cycles ever for patient investors and disciplined value investors, which we talked about earlier. There’s probably about 14 left. Um, it’s it’s going to be great. So, I you know, I like to I like to rail on the Fed, but at the same time, you got to appreciate what they do in the volatility they eventually create in in the aftermath that will help us and our clients um hopefully make some money. >> I think Pal’s done a reasonable job. I think that the problem was that the three lunatics who preceded him who have created the you know I think um Bernani certainly was probably the worst of the lot but then Yellen’s just continued everything that Bernani did and Pal’s been the first one to raise rates even though he’s probably done it too slowly but if I understand that people use the 2-year as a reasonable proxy for where the the Fed funds rate should sit and pal I think has tracked it more closely than anybody else even though he’s a little bit below through the entirety of the the 2020 recovery. What do you think? >> Well, I think you know in 2018 I thought the same thing and he started to raise rates and it looked like he was going to try to normalize the balance sheet and then stocks fell 20% and he >> he flipped so fast. >> Yeah. >> Um stopped raising rates started to QE again. and they called it something else. And um and then during co every company we were following practically was clearly clearly forecasting higher prices. Their costs were going up. We wrote about it a year before and it just was so obvious and I just we couldn’t believe the Fed was was still at zero and they were still printing money. I mean it was crazy. >> What are all these years doing there? >> Yeah. 9% inflation and then you know everyone says what’s going to bring down this this market cycle. I said well I thought 9% would have done it you know of an inflation but it but it didn’t. Um so I I think he started out with good intentions and I think all the central bankers probably have good intentions you know but no one wants and it’s not his fault that he’s in this situation you I agree. I think Bernanki was the godfather. I mean, Greenspan was he was horrible, too. But but at least he never printed money, right? Bernanki printed money thinking that was actually a solution to our problems. Uh which every central banker that studied history should know that is the last >> he studied history. He was an expert in the Great Depression. >> Yeah. When people talk about housing now and I’m like I would because we sold our house in the bubble and I would sell it again if I wasn’t if there wasn’t money printing, you know, but it’s so it’s such a big risk. uh to to sell and rent right now because of the fear or the real possibility of them resorting to QE. Um which they might probably going to have to do at some point. Um so anyways, I was a fan of Pal also first. I think he tried to do the right thing and then when he saw, you know, like whoa, you know, I can see how this could all unravel pretty quickly with me, you know, trying to do the right thing. He backed off and now he’s just trying to make it to the finish line and I think he’s gonna make it. Uh but just like Greenspan, Greenspan made it to the finish line and still got blamed for the housing bubble. I think I think Pal who printed more money than any US central banker in history will also get the blame when the >> on partial off a higher base. >> Yes. Yes. And but I agree with you on Bernanki and Yellen just kind of she didn’t want to do a whole lot of anything. She’s just like, “Whoa, I’m just going to not do anything and see if I can get through this.” And she did. You know, credit to her. So, uh, yeah, it’s it’s been a it’s been a fascinating central bank kick the can. Uh, you know, it’s just like a it’s just like an average banker. When you have bad loans, how do you how do you not let bad loans go bad? You write more bad loans. So, so it, you know, it it creates a perception that as a percentage that the loans aren’t so bad. Uh so so uh they’re just going to keep it going until something snaps. Do >> you know the thing that amazes me is we’re still we’ve still got a 103 inversion. You know that started in it’s started in 22. We got very inverted. We’ve been inverted for a very long time and then it’s been basically at zero or slightly inverted for the last like 18 months or something like that. So we’re now like three or four years into this inversion. >> Is that a record? It’s a record in the data that we h that that they have on the Fed website, but I’ve heard from uh I just I’m forgetting the forgetting the the firm name, but I Adam Butler and co said that um >> yeah, just has longer has a longer history that shows that there have been very long inversions in the past >> in the last likeund since since 1900 basically. Yeah, the long end’s interesting. You know, I think the 10 year now is a little over four and the the 20-year, you know, is like 485. So, you could still get a decent absolute return yield if you’ll take the uh maturity risk. You know, it seems 5% for the Fed is a scary number. You know, they every time we get close to exceeding that on the long end, you know, it’s like it seems someone seems to be on top of that making sure we don’t break out there. So, uh, that’s a hard number or interest rate for us to afford and I think the government’s very aware of that. >> It’s been up every single year since 2020. I’ I’ve plotted out that the curve since 2020 and it’s been up the long end has been up consistently every year by a point or so, including like 24 to 25. The front end has moved all over the place, but >> it’s the long end hasn’t looked back at any point. I don’t know what they do about that. if they need to do anything about it. >> I mean, what was the 10 year when the Fed cut last year? It was three something, you know. I think it’s up. I mean, I’m not positive. 50 75 beeps. I mean, I don’t follow the tenure too closely, but I know it’s up quite a bit. Um, so I think that may have caught them off guard where like, whoa, we lost control of the the long end here. >> Well, certainly mortgage rates haven’t taken followed their the the pi piper tune. And what happens if mortgage rates do fall? Uh what if they do cut rates, let’s say, to zero, and mortgage rates go back to 3 to 4%. I mean, you should see a million-doll home around here. It’s like, so what, you know, and then and now you’re going to drop rates, you know, and and and spur the housing market again. You know, that goes back to affordability. And I don’t think you’re doing anyone any favors uh except people with paper assets. But I don’t think it helps much either because there’s a lot of selling pressure that’s going to come through from the boomers downsizing or you know shuffling off this mortal coil over the next 20 years. >> There has to be Well, there has to be buyers on the other side. It’s not going to be Black Rockck. >> There has to be some young family somewhere, >> right? >> Thank God for Black Rockck keeping those young families out. >> Yeah. Well, going back to Carter’s, you know, one of the headwinds they’ve had is the birth rate. Um the younger generations can’t afford to have kids. I mean, it’s kind of sad when you think about it. If you want to talk about the consequences of easy money, I think one of them is clearly there’s less babies. Um, so that’s not cool, you know. So, uh, yeah, that’s that’s going to hurt a lot of things going forward. Population growth is is going to decline. Um, well, plenty of money and plenty of paper money, but fewer fewer people to make goods and services. >> Well, surely surely if you can print wealth, you can print babies. I mean, this is >> You would think. Well, AI might fix that somehow. We’ll see. They might not be humans, but >> what’s um what’s interesting in small cap land in terms of uh industries? What do you think about energy? >> Uh we bought our first energy stock last quarter, uh Cord Energy. It’s an EMP out out in the uh out in the Bakan. And um so, you know, we valued it about $139. We’re trying to value the uh the cost of the reserves in the ground, which we believe is about $15 a barrel, has over 5% dividend. You know, that one of the things I like about energy is how they’ve been so disciplined with cash flow. And um I thought at first cuz most of the time I’ve been in the industry, you know, since the early 90s drill, they all just drill drill drilled, you know, regardless they got paid on production growth. But over the past 10 years, they’ve done a really good job. Uh but when when oil prices got down, you know, in the 50s, a lot of the EMPS started to sell near replacement cost of the reserves. Uh so that was that got very interesting. We’re able to pick one up there. U so we like energy u not all of them, but we like certain ones, especially the ones with better balance sheets. Some of them because they have been paying out dividends and buying back stock don’t have the best balance sheets. So we’re we’re we’re really careful there. Uh we like transportation. We like the trucking companies. We own H Heartland Express. Uh that’s old school value stock that’s gotten absolutely destroyed. Um so we like companies that are already in recession and and that’s a great example um with with the trucking companies. This is the third year that they’ve been in recession. Uh the business and the industry and uh we’re avoiding companies that are doing really well. You know the opposite. >> Me too. That’s their stocks too. So it’s uh it’s been a it’s it’s been a lot you we talked about this earlier. It’s been a lot like 99 where we’re buying really out of favor names that the stocks are in decline, the flows are horrible. Um the earnings are declining, but you know, that’s actually when you want to buy cyclicals when things are bad and getting worse. Um because the stocks when you get them cheap, you never you’re not going to get an energy company cheap when oil’s at $100 a barrel. Uh you get it cheap when it’s at 50. So, uh painful operating results right now for a lot of these companies, but some are stabilizing. We also like companies right now that are intentionally shrinking. Hartland qualifies for that too. They’re actually shrinking their fleet. They’re getting very little in capex. Their depreciation is 160 million a year and their net capex this year is going to be 40 million. So you’re getting 120 million free cash flow by breaking even, right? And this is on a 600 million market cap. >> So they’re they’re generating plenty of cash flow. They actually bought back a million shares last quarter. U we own Monroe. They do uh auto repair shops. That’s another one that’s shrinking. They closed 145 stores. They have they have over 6% dividend. They’ve generated a ton of cash even in this period. But but the consumer is cutting back um on maintenance on cars. So, uh you know, just be careful out there. You see a car, you see an older car, it might not have brakes, you know, so might have bald tires. So, beware. Uh but people are deferring those. We can only defer those for so long. And uh but yeah, business has been poor for them, but again, that’s a consumer discretionary that’s not really discretionary, but that’s that’s when you want to own those, too. Uh but their comps have turned positive recently. So So we’re we’re hopeful there. So companies in recession, companies in recession that are stabilizing, even better. Companies in recession, stabilizing, they have good balance sheets, even better. So that that’s kind of what we’re focused on right now. >> Energy versus the market is as cheap as it’s been. only two times cheaper were 2020 and 2000 to >> in this environment. Wouldn’t you kind of want to own something that’s tangible at a discount to replacement cost? I mean, I I find that attractive. We we own a farmland re too farmland partners. M so uh if I can buy acreage of farmland at a discount or uh reserves in the ground at a discount or even a um you know some receivables we own uh Kelly services the temp agency the receivables are at a discount to market cap u yeah that’s great we love asset heavy companies right now too that that are selling a discount to to tangible book >> let me give a quick shout out and then JT you want to do some veggies >> yes sir >> senator Domingo, what’s up? Danny Valareerezo, what’s up? Mac Tallahassee, Dead Cat Gully, Andra Pradesh. Uh, Jupiter, Florida, Cincinnati, Boisey, Budgy Smuggler, Les Les Wan, and Budgy Smuggler Australia. Fairfax, Randall, Gerard’s Cross, Main Streets of Gerard’s Cross, emphasis on Main Streets, Brandon, Serbaton, Madira Island, Portugal, Toronto, and John Battle gave us a $50 tip. Thanks, brother. Appreciate you sponsoring the veggies. >> That’s >> today’s veggie sponsor is John Battle. That’s a brand new thing we’re doing just today. >> Yeah, we just thought of it. Better give him a rebate. [Laughter] Corvalis Oregon last one and then we we’ll come back to the question. JT four is yours. >> Yeah, you guys did an amazing job uh team things up with the first part of our discussion as you will as you will see totally unbeknounced. Uh so imagine you’re standing on the deck of a wooden ship in the Arctic and the air is stinging your face. It’s so cold. It’s the spring of 1674 and you’ve been sailing for weeks through this shifting ice. Your supplies are running low. You probably have scurvy. The men aboard are restless. And Ernest Shackleton won’t be born for another 200 years. Then someone shouts, “Land hoe.” And you squint toward the horizon. And there it is, an island fortress rising high above the sea, complete with jagged cliffs and snowy mountain caps. It looks so close you could almost throw a rope to it. And the crew cheers, of course. At last, we found salvation. You steer towards it for hours and yet as you’re getting closer, something strange is happening. The island doesn’t grow larger. If anything, it seems to be drifting further away. And eventually, you realize the terrible truth. There is no salvation. What is going on here? Is this just a sailor story like mermaids or the kraken or a superstition like you should always step onto a boat with your right foot? Uh, no. The reality is the sailors did see land, but it was actually a mirage. And in fact, you guys might not know this, but there are two types of miragages, superior and inferior. And you’ve no doubt seen the desert image, which is uh you know, the desert mirage, which is that shimmering pool of water on a hot road. That’s the inferior mirage. The superior mirage is different. And and here’s how the physics of this works. Light doesn’t always travel in a straight line. In in uniform air, yes, but the atmosphere is rarely uniform. Cold air is denser than warm air and density changes how much the light will bend and a property that’s called refraction and this is why things look closer underwater when you’re viewing them from above the surface. So under normal conditions warm air sits near the surface and cool air above it. You know think about the temperature up at the mountain top compared to down in the valley below. In these normal conditions, the cold layer is above the warm uh and that light then bends only slightly and the world appears where it really is. A temperature inversion which is not to be confused with Toby’s rates inversion uh flips that layering. Uh the cold dense air is then near the surface and the and then on top of that is the warmer lighter air. And when that light from a distant object enters this inversion, it curves downward towards the denser air before it reaches your eyes. So your brain, which is assuming that light moves in straight lines, interprets this as the object being higher than it really is. So this temperature inversion is common near the Earth’s icy poles, right? Because it’s very cold air uh off of the snow. Um and the result is these superior images is that objects are hidden by the curve of the Earth. They seem to float above the horizon. You’re actually can see things like over on the other side of the horizon. So mountains that are hundreds of miles away uh you know appear to be rising into the sky in front of you and phantom ships may be sailing you know beyond where you could see like there they are and even coastlines you know seem to be hovering in midair and and the images actually aren’t fuzzy sometimes they’re often sharper than real life because the air acts like a lens uh and like zooms in a little bit and this is most dangerous part uh is that it’s incredibly believable that this is actually there and historians speculate that the Vikings ventured to North America sometime around 1000 AD after spotting a superior mirage of the mountains of Baffan Island from the coast of Greenland. So they’re almost like peeking onto the other side of the earth uh because of this uh and it looked to them like the land was much closer than it actually was. So then like okay let’s set off and go explore that. So of course you know the the cousin in in the desert of the Mirage is is the in the inferior one and it works in reverse. And here, heat near the surface bends light upward, which makes the sky actually reflect off of the ground, and that creates the illusion of water on a scorching road or or pools shimmering in a, you know, a a false Sahara oasis. So, let’s see if we can torture this analogy into something useful. In the Superior Mirage, your eyes aren’t really lying. They really are receiving light from something that’s real. The problem is your brain’s interpretation of it. And that bending of light through layers of air makes the horizon look much closer than it truly is. And the closer you think it is, the more confident you feel steering toward it. So I can’t help but think that that might be where AI is today. So uh the cold air is the hard, you know, measurable progress. These frontier LLMs are scoring higher than 90% of humans on specific tests. Automated uh coding assistance helping, you know, save weeks of development time. these AI agents that are boosting productivity in narrow domain domains. Um, and those are real tangible wins. Like that’s the island on the horizon. The warm air might be the capital markets and the media layer kind of above that. You know, the trillion dollar TAM slides, the breathless coverage about AI replacing entire industries next quarter. Uh, stock market pricing in decades of compounding before any cash flows arrive. Half the workforce is being laid off by Christmas. uh you know that speculative heat refracts our expectations bending the arc of reality so that 20-year payoff looks like it’s two years uh you know away isn’t an inevitable thing. So uh you know these these mirages are then precise enough to tempt people into misallocating their resources. So they set sail they burn precious time and fuel and and when the illusion fades the true distance finally is it real reels itself as being greater than than ever before. So, who knows like maybe the real breakthroughs might be uh you know a decade away but the Mirage convinces us to act and spend as if the miracle is right around the next bend. Um and so just like those those Arctic sailors like we might get there eventually but and the land is real but the timetable probably isn’t. So that’s why, you know, I when I’ve recently was reading a headline that Meta is tapping Pimco and Blue Owl for I think it was $29 billion of debt for data center projects. Like that that’s a little concerning. Like you tapped your balance sheet, you took a bunch of cash out, now you’re going to, you know, lever it up to keep going. Well, that that implies then that there’s a time period that you need to reach shore by. And that that can be difficult. Uh, so I don’t know, Eric, is there are there any signs that you see today that kind of rhyme with the.com period when it comes to this, you know, the future being out there beyond the horizon, but it looks closer than it really really is. >> Yeah, of course. I mean, u it’s feeling more and more like 99, you know. I remember 99 still very well. I was a young manager. Um, and and it just felt the same where you just felt like an idiot, you know, and you’re missing out. It was very hard. Uh we were talking earlier about that’s when I went and enrolled to graduate school because I I thought, you know, I I didn’t know what I was doing and my career was over. Um but of course it all and this was what I don’t think people really appreciate. Uh the the internet bubble popped without warning. Uh you know, I think everyone thinks that there’s going to be a bell that rings. They’ll have time to reallocate capital. And even though they probably know right now they’re they’re checking, you know, chasing a speculative bubble, they think they they won’t get hurt because they’ll be, you know, smart enough to get out. But I remember one day just coming into work. It was March of 2000 and it just crashed. I mean, these internet stocks crashed. So I think there’s a lot of similarities right now, but uh investor complacency is probably the biggest and and the feeling again of of when you’re not participating. uh you know I was a lot younger then so I I I thought I was a lot smarter then you know so it was I think it was harder for me than the 99 bubble um because I went from feeling so smart to so stupid that was that sort of transition was really hard for me personally but this time around I mean it still is horrible I mean I I hate I hate not participating it’s you know we we want to be fully invested you know we really do we want to be making money we we would love to be making 20% a year on the QQQs and compounding that. I mean, just for one second, try to imagine being invested in the Mag 7 over the past few years. You go to bed, you’re so happy about making how much money you made, and then you start thinking, well, how much are you going to make tomorrow? I don’t know. I can’t wait. You know, it’s going to be so awesome. So, >> and they’re great businesses, too. >> Yeah. They’re such great businesses. It’s so easy to be invested in. >> Yeah. And take that feeling, Toby, and then the inverse of that is what we’re experiencing. >> And they’re terrible businesses. The businesses that we’re invested in deserve everything they get. >> But here’s the bright side is when it ends, and it will u the feeling of being an idiot, uh, and then transitioning to to feeling the that vindication feeling. And you know, you know, we don’t really care about relative performance, but when you outperform by thousands of basis points is pretty cool, you know. So, the the other side of this is uh is amazing, but making it all in one piece and maybe with a business, maybe not, you know, maybe with some clients, maybe not. >> Um it can be wonderful, but I I think at this point in the cycle, um there’s there’s fewer and fewer professional managers willing to do it. And one thing I would note about 99 too, this is very important. A lot of value managers portfolios did their own transition to try to participate somehow some way and they they did it by buying those stocks that maybe were they tried to classify its value. They tried to still hold a value category but still cheat kind of on the side. not cheat’s probably a wrong word, but give in a little bit on principle to participate and you can understand that, you know, to try to to keep your job and and keep assets. Um, so you can still be value but not really be value. So you be really careful right now if you’re a capital allocator, look under the hood and if you see a value fund doing really well right now, uh, especially on the small cap side, it might be a red flag. uh might might not be it might be an incredible stock selection, but a lot of the the uh genuine small cap values we believe uh have horrible charts right now. You should see when we when we’re looking for new stocks and we see a horrible five-year chart, we’re like, “All right, that looks awesome.” You know, that’s what we’re looking for. Look at this. >> Yeah. Oh, give me an ugly fiveyear right now. Um but a good a really strong performing fund right now will have some really pretty fiveyear charts. So, I think you want to be careful of those. Do some do some research, deep digging there, and make sure that there wasn’t a shift in philosophy or process and strategy. Eric, if you were an allocator right now, how would you how would you try to untangle luck versus skill, especially if you had a 10-year track record to look at, let’s say, which sounds wrong, but >> yeah, but you know, even a 15-year uh Jake, now uh 10 and 15, 5, 10, 15 all tell you to allocate to the S&P 500. Um, and how are models made? How are capital allocations modeled made by looking backwards? So, everyone’s like, you know, oh, small caps are going to come back. are so much cheaper. You know, I don’t know if I would agree with that because if you look backwards, uh, all the numbers tell you to buy large cash and that’s how these capital allocations are made. The pretty pie charts that you get when you go to an advisor and they tell you how they’re going to chop up your portfolio and where it’s going to be, the the numbers will tell you to be in large caps. And until that changes, and that this is another thing that was similar to the late 90s uh 2000, until the large caps get just destroyed and those backward-looking numbers don’t look so pretty, the small caps are going to lag. But once that happens in 2000 to 2002, small cap value stocks had very very good gains. U but the uh large caps, you know, in the NASDAQ was down what, like 80%, something crazy. Uh so you were able to make money in a severe bare market by by doing exactly that kind of buying what’s out of favor before the bubble before the bubble pops. So so you want to be very careful right now because I think most allocations would suggest to to to go with what’s done well and it hasn’t done just as well for a few years. So they can justify it easily by saying it’s been 10 15 years. Uh that’s a hard number to dispute versus a 2 year 3 year four year number. Because the cycle’s been so long, you really want to be careful because we haven’t had a real recession, a real bare market over that period. You want to be really careful now using long, this sounds weird, but you want to be careful not to use long periods of time to make investment decisions. And Eric, when you have a when the world is such where you know buying every dip has worked um the belief in the superpowers of central bankers and governments to do whatever it takes to you know uh keep keep corrections from happening. What does it take like an 80% down to disabuse people of the this kind of Pavlovian dip buying that they’ve been, you know, so wired to do over the last 15 years? >> I think so. And and there was an article in the Wall Street Journal, I think it was yesterday, talking about younger investors and how they’ve been able to u buy the dip and have been rewarded. And um it really was a this time is different article. Another one. I haven’t had enough of those. Um, so I I do think, you know, as I learned in in the ‘9s, you know, that wasn’t that smart or wasn’t as smart as I thought I was. I think that’s part of growing up as an investor, especially for the younger generation. But right now, you can’t blame them for thinking they’re invincible and, you know, they can they can make money so easily. I mean it really if if if we wanted to make money even in our fund right now I think we could do it and I think we could make a lot but I also think we would be setting ourselves up for losing a lot of money you know so uh and you can’t I’m telling you you cannot you will not be the person that gets out first I mean if you do you’ll be very exceptional timer and we’re not market timers but uh you know the risk right now especially on the large cap side and I’m not promoting small caps I don’t we don’t think small caps are particularly cheap u but they are getting cheaper and there are more things to work on now which is great but as far as the large cap side of the market I mean and back in the ‘9s too you had Gillette Coke you know 30 50 times earnings those got destroyed and people people they they think because they’re in high quality they’re protected that’s not true you know Costco at 50 times earnings could easily lose half of its value easily um so people need to be be aware of that as well that that quality is not panacea >> a perfect a perfect way to control risk. It’s valuation is much more important. >> I got a good stat uh from Twitter. This was a Bank of America global investment strategy. US large cap annualizing $419 billion for 2025, which was the second highest ever to 2024. US small cap annualizing $80 billion in outflows, which is a record. Go small cap. I was amazed that they had that much to lose. >> Yeah. They’re all that’s just all wiped out. >> Well, what what is the Russell 2000 ETF? It’s like 10 billion maybe. I really don’t know. But but the but the uh >> I had a look at IWM. IN. >> Yeah. One of the NRM. There’s two of them. There’s a value in >> it’s 4.4 billion. >> Oh, it’s embarrassing. and the and the uh the Vanguard or you know whatever it is and >> Vio >> what is that I mean it’s several hundred billion I think >> and you know in in the big active funds now you look at let’s let’s and I don’t want to get sued here so I gota be careful let’s the contra fund there’s a there’s a fund out there called the contra fund I won’t >> who knows what what what does contra imply to you maybe contrarian >> you know on Twitter a contra is someone who you trade against But >> it does it does sound contrarian. That’s right. >> Back in the day it meant contrarian. I don’t know what it means now because if you open the hood of that portfolio, it it’s like the mag seven fund, you know. Um so so even the active managers I think have figured out, you know, if I don’t own the big weights of these names, you know, we’re going to risk uh underperforming and risk losing assets. And the fund has done incredible but and so is the assets under management. So, uh, I think if you overweight some of these names doing really well, like we said before, you can there’s a way to make money right now. It’s pretty easy and that’s to play along. And if you want to leverage that up, which, you know, we have the leverage ETFs now, we have options. A lot of people are doing that. So, it’s not just buying the S&P or the QQQs. They’re uh they’re going even further than that. So, uh, it’s and those flows are huge, Toby. I mean, I remember back in the in the ‘9s when we had your 2000, there was like 50 billion inflows and everyone thought that was nuts, you know. Yeah, now you know now we’re talking hundreds of billions um going into these ETFs and passive funds. So >> there are a lot of companies that have stumbled over the last even in even in large cap land. I think it’s kind of interesting that that it is so concentrated into a handful of names that are performing. I don’t know if it’s 10, but it’s it’s certainly in the top 100 and then the 490 or the 400, however you want to break it up, they they really haven’t done very much. They’ve been basically also flat since two 2022. >> It’s really only a handful of names that have been a beneficiary of that capex AI spending. >> Yes, exactly. >> That have done well >> through this period. And a lot of that is like >> as we were talking about it’s hard to they’re deploying so much money like the returns that they have to get out of that money that they’re deploying are becoming like they’re equally astronomical on the other side to justify it otherwise. and the the I I sort of equate it to like a 99 uh fiber optic cable buildout. And that’s not that’s not an original thought, but it’s but it’s a common kind of analogy to make. The difference is that the fiber optic cable goes in the ground for 25 years. Whereas the useful life on these chips like 3 or 4 years before you get another like are we going to be spending at this sort of rate all the time? Like is that just what we’re doing now? >> And yeah, how’s that sustainable? You know, I always joke about the tech bubble. You know, at least we got the internet infrastructure for that. That was cool. And then the housing bubble though, I go, what do we really get out of that? And then I was like, granite countertops. Everyone got new granite countertops. >> Yeah, it does feel like there’s a obsolescence like, you know, I mean, let’s rewind even further back like railroads, the you know, huge capex boom. I think it was something like 6% of GDP was being spent on capex during the railroad boom. Well, you know, some of those rails obviously they’ve been replaced, but the rideaways are the same as they were 150 years ago, right? Like that’s right. >> That’s really you you advertised that cost. Well, >> but yeah, chips at, you know, let’s be generous and say five to seven years even, which I think is what they’re they’re doing. >> Yeah, but but the ones they’re putting in now will probably be obsolete in 18 months, right? >> Yeah, maybe. >> It’s great for Nvidia for >> Yeah. I don’t know if the customers can keep up with them. >> Well, and in fairness, my understanding is that those those chips they then sell on to like the inference side where you don’t need quite as much horsepower apparently. So, it’s not like a total like you write zero. >> Well, yeah. I don’t know. So, they’re not like zeros, but like yeah, the the training chips have to be quite the most powerful apparently. So, those are the ones you got to replace every three years. Are we getting >> this is why we uh we we we do avoid a lot of technology stocks and not because they can’t do extremely well, but because they’re just hard to value. I mean, we’re talking about this right now and none of us can really quantify what cash flows are going to be in year five, you know, let alone year one or two, right? So, it’s just so hard to value and u you’re not buying a perpetual bond. You don’t really know what you’re buying. um it’s just a tremendous amount of investment with with uncertain returns and that’s more of speculation and it could work great. But for us, you know, if you’re just kind of discounting a long-term bond sort of investor, those are really hard to uh plug in a model. >> Yeah, you want some steadiness. It seems like energy is not going away anytime soon. I think energy is a reasonable bit. I also saw healthcare is doing underperforming the S&P 500 by the most since 2000. >> We just bought our first uh healthcare device company um maybe I mean in a decade maybe since we since our inception I know but yeah you’re right those have been under pressure uh so that’s interesting you bring that up we’ve noticed that as well. Um, one thing I want to talk about which we haven’t is is tariffs. You know, we had the CPI number today come in and I I think the the main number was lower than expected and the core number was a little higher. But a theme I wanted to talk about in the quarter was a lot of the companies we follow are uh haven’t um reported a lot of impact from tariffs at this point, but it’s coming. You know, I mean, it’s definitely going to I just want to be aware of this. Well, we should set a little context too, uh, Eric, that, you know, you do a ton of bottom up reviewing of >> I think hundreds, right, of earnings calls that then like give you kind of a bottomup economist viewpoint of the economy. >> Yes. Sorry. >> Exa Exactly. Thank you. So, so we we’ll get a feel for what’s going on with the companies. And I remember in in, you know, kind of 2021, uh, we were seeing inflation coming, I mean, straight on. And uh it was very obvious to us uh and this is another one of those moments where we see it again. There’s going to be a lag, but it it’s coming. Uh you know, there’s there’s three things companies are doing. One, they’re raising prices. Uh two, they’re trying to pass it on to vendors in the supply chain somehow. And the third thing is they’re cutting cost. But almost all the companies we follow intend to mitigate 100% of the tariffs. So they’re not going to absorb it. um they’re going to use prices and someone else is going to absorb it a and they’re going to do productivity cost cutting. So this will have an impact I think late this year definitely by 2026 inflation numbers will go up especially on I mean it will go up on goods and goods for sure we we believe uh so so just keep a look even though we haven’t really seen it yet it it’s in the pipeline u companies when this all started happening in April they kind of all froze none of them really knew exactly what to expect or the real numbers to use so they couldn’t do anything but now they have more clarity they’re taking action u and this could affect jobs as well uh later this year, early next year as again they’re going to cut they’re going to cut costs or try to improve productivity. Another thing I like too is a lot of them are going to uh re-engineer their products. So they used to call it lightweing, you know, get less, you know, and then the whole strengthflation theme came out and people made fun of it on the internet and so now they no longer call it lightweing. They call it re-engineering, which sounds a lot better, you know. Hey, I’m not getting ripped off. the the re-engineering that’s gonna make it better. But uh >> we re-engineered this bag of chips to have uh eight chips in it instead. >> Exactly. So, you know, we follow an apparel company. They’re re-engineering shirts to have less cotton and and they and they they spin it. Oh, it’s it’s much bre it’s more breathable now. >> Yeah. At some point, we’re all going to be naked because of all the re-engineering. But so that that’s another thing to watch for. uh you’ll see changes in packaging and and product offerings and how they were made. So uh so yeah, it’s coming. So so there’s no free lunch. >> The thing that I don’t understand that seems like you know if you just think about like you ask yourself and then what you know one time on this okay we’ve got like huge margins um known cost pressures coming from tariffs just even having to just write the check to the government for to get something inside the the the the borders of the country. Okay. And they’re all saying they’re going to be passing this along. But isn’t there one company, two companies that would defect and say like, well, you know what? I want market share. I’m not going to I’m going to eat my margin that I had. I’m going to pay this and like I’m going to pass this savings on to the consumer, which at some point that’s what technology has meant like it’s, you know, we we all have more from doing with less input. um you know at some point like where is the game theory of the competition of between businesses to lower or not raise their prices commensurate with the tariff expense? Well, you know, especially with small caps, a lot of these companies are already under margin pressure uh with with rising costs. You we talked about trucking earlier. It’s not just demand, but they have a lot of their costs, the labor especially, and the equipment cost, replace equipment that’s going up, insurance is going up. So, you have a double whammy right now with the costs are rising. So, now you throw the tariffs on that too. It’s really going to be hard for them to uh to eat it right now. Just the way things are going for and Toby, you talked about this earlier with the S&P 500. you know, the 400 or less, you know, are actually not growing very very well right now. So, it’s just a hard time to ask someone to a business to eat it. Um, but in aggregate, you’re right. I mean, the profit margins you would think would would somehow come down and but um that’s being skewed by the mega caps. Um, one thing real quick on inflation I want to discuss too, um, is a theme we’re seeing too with companies and that is a premiumization where they are selling more towards those that have benefited from asset inflation. And I think that’s really um something that, you know, we talk about one times with the tariffs. Something that’s not one time until stock prices and home prices fall is this trend towards selling to the wealthy. and they are more uh lately been more impactful in setting prices than the lower end. Um so you have two economies. The high end that’s willing to pay anything and the lower end where where they’re where they’re buying less u trading down. There’s two things going on. But as the as the wealthy uh get wealthier, they’ve been they’ve been more willing to pay any price really for you know you we went to Panera and I bought my daughter a small mac and cheese and a breakfast sandwich. The breakfast sandwich was tiny. It’s like the size of an apple. The mac and cheese was this little bowl and it was $15. And I was like, “Are you serious? I How much is mac and cheese?” She said, ” $7. I got I go to Publix and get a whole box for $2. >> There goes our Panera sponsorship.” >> Yeah. But if But then I was thinking, you know, if I own the QQQ’s and Max 7, you know, that $7 Mac and Cheese, whatever. >> Yeah. So they’re setting the prices more towards uh the person that that is flushed with asset inflation versus the the small cap value manager. But so I do I do think that’s really interesting. Um the price setting right now that’s going on. You you saw it with Delta, right? Delta’s premium seating last quarter was up 5%. Um nonpremium was down 5%. I think that’s the perfect summary of the economy right now and the perfect summary of of what we’re seeing with prices. So there’ll be some discounting on the low end maybe. Uh but companies have figured out they’re better off doing less and making more. Uh it’s a theme they learned during co you don’t have to be at full capacity to make money. You can you can do less, charge people more, make more. It’s a lot easier. >> Hey uh Eric, we’re coming up on time. Thanks so much for spending time with us today. But if folks want to follow along with what you’re doing or get in contact with you, what’s the best way of doing that? Uh palm valley capital.com is our website. So uh if you’re interested, stop by and really appreciate you having me. I always enjoy our conversation. Um Toby and Jake. So uh until next time. Thank you. >> Sign up for Eric’s blog posts. I read every single one of them. >> Thank you, Jake. We appreciate that. >> Uh JT, we got a great great quarterly letter, too. Jamie writes that. So I always I always like to plug that. That’s my favorite quarterly letter out there. >> Q Q2 Q Q3 >> Q Y Yep. Q2. Check it out. >> No words of wisdom. I used all my wisdom already for the day. >> That’s interesting. >> We’ll see you next week. December time.

Pitch Summary:
Kimco Realty is strategically positioned to benefit from the stable demand for grocery-anchored and service-oriented retail properties. The company’s properties are e-commerce resistant, ensuring steady occupancy and rental growth. Despite its strong fundamentals, Kimco’s stock is undervalued, trading at a discount to its net asset value. The company’s A-rated balance sheet and ongoing share buybacks further enhance its investment appeal. With limited new supply and rising occupancy rates, Kimco offers significant upside potential.

BSD Analysis:
Kimco’s focus on grocery-anchored and service-oriented properties ensures resilience against e-commerce disruption, providing stable cash flows. The company’s strong balance sheet and strategic share buybacks demonstrate management’s confidence in its long-term growth prospects. With occupancy rates at all-time highs and limited new supply, Kimco is well-positioned to capitalize on rising rents and property values. The stock’s current valuation offers a compelling entry point, with potential for significant returns as it approaches its net asset value.

Pitch Summary:
Rayonier Inc. is positioned to benefit from the increasing demand for timber due to the aging housing stock and the need for new housing construction. The company’s timberland assets are unlikely to be disrupted by AI, and the limited supply of timberland ensures its value. Rayonier’s strategic focus on better-use conversions, such as renewable energy projects, offers significant value appreciation. Despite these strengths, the stock trades at a 30% discount to its estimated fair value, providing a compelling investment opportunity.

BSD Analysis:
Rayonier’s strategic location in the Southeast U.S. benefits from strong population growth and opportunities for solar and housing projects. The company’s conservative balance sheet and shareholder-friendly management further enhance its investment appeal. As AI drives more people to rural areas, the demand for timberland is expected to rise, supporting long-term growth. The planned merger with PotlatchDeltic is anticipated to create synergies, boosting cash flow and value. Overall, Rayonier offers a significant upside potential, with a 40% increase needed to reach its net asset value.

Pitch Summary:
Vertiv Holdings has demonstrated strong financial performance exiting 2025, driven by robust demand for AI infrastructure solutions, particularly in North America. The company reported a 22.7% year-over-year growth in Q4 2025, with a record $2.88 billion in consolidated topline. Despite some regional challenges, Vertiv’s strong market position and a $15 billion backlog provide a solid foundation for continued growth. The company’s operational efficiency and pricing strategies have supported margin expansion, with adjusted EPS increasing by 38% in Q4 2025. Given its dominant market position and promising long-term prospects, Vertiv remains a compelling buy for long-term investors.

BSD Analysis:
Vertiv’s strong performance is underpinned by its strategic focus on AI-driven data center solutions, which are expected to sustain demand through 2026 and beyond. The company’s recent acquisition of PurgeRite enhances its liquid cooling capabilities, further strengthening its technological leadership. Despite some macroeconomic headwinds in China and slower recovery in EMEA, Vertiv’s growth in the Americas and other APAC regions like India remains robust. The company’s low debt levels and strong liquidity position it well for future strategic acquisitions, supporting its growth trajectory. While the stock trades at a premium, its valuation is justified by its growth prospects and market leadership.

Pitch Summary:
QXO, Inc. is positioned to benefit from the recovery in the housing sector as industrial activity picks up. The company’s role as a key supplier and distributor of housing materials positions it well to capture increased demand as construction and renovation activities accelerate. QXO’s strategic partnerships and efficient supply chain management enhance its ability to meet the needs of the housing market. As the economy transitions to a more production-driven model, QXO is expected to see significant growth opportunities.

BSD Analysis:
The housing sector is poised for a rebound as industrial growth drives demand for construction and renovation materials. QXO’s extensive distribution network and focus on customer service provide a competitive edge in capturing market share. The company’s ability to adapt to changing market dynamics and leverage technology to optimize operations will be crucial in maximizing growth potential. However, QXO must remain aware of potential supply chain disruptions and regulatory changes that could impact its operations.

Description:
Value: After Hours is a podcast about value investing, Fintwit, and all things finance and investment by investors Tobias Carlisle, …

Transcript:
looks 50. >> Yeah. Well, it’s funny. My my >> We’re live, fellas. We’re live. We’re live. This is Value After Hours. I’m Tobias Carile, joined as always by my co-host, Jake Taylor. Our special guest today is Gary Murus of Silver Ring Value Partners. How are you, Gary? Good to see you. >> Good. Thank you for having me. It’s been a while. Good to catch up. >> It has been a while. For folks who didn’t catch the first one, don’t know who you are, give us a brief rundown of your strategy and philosophy at Silver Ring. >> Yeah, absolutely. Well, as we were just talking, I’m originally from the former Soviet Union. That’s where the accent comes from. Uh from Leningrad, um you know, came when I was a kid, grew up in New York, started investing when I was at MIT, and uh Warren Buffett came to speak on campus and that was my first introduction to value investing. got lucky to get a job at Fidelity in equity research where I had a great mentor Joel Tillingast who managed the low price stock fund and that really kind of gave me my initial kind of direction as an investor I would say you know predictable businesses run by honest people you know with a big margin of safety and that I would say still probably captures like 80% plus of what I do so silver ring is a partnership it’s a long only um concentrated probably between 10 and 15 investments most of the time and um you know I am very focused on quality in the sense of being able to predict what the business looks like over the long term roughly obviously and uh you know I still demand a large value of you know margin of safety to the intrinsic value you know it’s probably evolved a bit in the sense that I’m not saying you know it has to be under 12p or it’s terrible or anything like that But I’m not new age enough where it’s like, hey, it’s 50p. It’s but it should be worth 75 and therefore it’s a great value. Not saying that’s wrong. That’s probably true for a small subset of companies, but that’s just not my circle of confidence. >> Can you give us an example of a holding that you have or something that you’ve owned in the past that sort of illustrates your strategy? Yeah, I mean I think uh you know there have been a number of these kind of you know little companies uh and I’ll give you quick recent example. There’s a recent spin-off that I bought uh a year or two ago I forget exactly called Finineia. He was an automotive uh supplier right during the peak scare of you know electric vehicles that internal combustion engine companies were all going to die and the stock was very very cheap. It was probably trading I want to say six times earnings or free cash flow. You know you know the research calls I read on expert networks you know suggested management was both honest and competent which is always good. you know, they had a very large, you know, what FineA did is they basically did um, you know, gasoline direct injection uh, stuff, you know, so directly related to the ice engine. So, obviously people thought, hey, this is a dying business, but I think what they were missing was number one, uh, that more than half the profits came from the aftermarket business is a very steady, predictable business. um you know low growth, moderate growth, but you know much more immune to changes in kind of where you know new vehicle sales are going in terms of electric versus not and the actual you know threat to the older business the actual new parts business was a lot less in my view than was perceived. So you had a business run by good people, limited financial leverage. I thought was probably a single digit growth business longterm. Plus, I thought the management had some nice tuck in capital allocation opportunities to add value and you could get it for basically, you know, 15% free cash flow yield and so forth. Now stock has rerated quite a bit. Um but you know I would still you know uh I still own a small position but that that’s a good example where there’s just a different I have a variant perception about the long-term cash flow stream of the business. So that that’s one maybe another complete you know happy to go in any direction but another quick one. Well, just before you go, let’s just talk a little bit about >> EVs versus ICE and [snorts] >> and then uh maybe self what self-driving does to to that market. So, let’s start with what’s your take on the evolution of that industry, electric vehicles versus internal combustion. >> Yeah. So, you know, look, obviously I didn’t know and I don’t know, right? So you kind of look at intrinsic value as a range as I’m sure you guys know. So I ran you know different you know when I kind of underwrote my intrinsic value range I said okay you know maybe the range of penetration is you know over the next 10 years is 30 to 50 or something like that and we were starting sub 10 I think at the time. Um, and I think I think it’s important like I mean this is like if you’re listening to this like one important idea is that something can be true but not material to your investment thesis at a certain price. So like when you’re paying six times earnings, you’re not so much worried about year 25, you know, or even year 20 because if you’re roughly right that earnings are not shrinking, you’re going to get all your money back and then some much sooner than that, right? So I don’t know and I didn’t know what you know year 20 you know electric vehicle penetration looks like but I was fairly confident that just mathematically it would be almost impossible for it to be much more than 50% over say a decade time frame um and uh by that point the rest was upside and as far as self-driving I think look it’s a risk but it’s in that same category right where sure you know self-driving if it’s successful ful reduces vehicle utilization. So presumably it decreases number of you know the car park shrinks presumably right I would imagine but again is that in the next 10 15 years maybe it starts to kick in you know towards the second part of that range but again if you’re buying an investment with a big enough margin of safety I don’t think you have to answer those kind of tough questions because let’s be honest like what do I know about EVs or you know self-driving that you or anyone else doesn’t Yeah, it’s a question. It’s an it’s an interesting question, but I like the I like the way you frame that. If you’re paying six times, you don’t need to think out much more than six or so years into the future because you get your money back in the short term. >> I mean, this is like a mental model that really hit me over the head probably. So, I’ve been doing this for 25 years now. About 10 years into this, I had this like realization which is kind of like shouldn’t be like it’s like an embarrassing realization because it’s like, well, Gary, why didn’t you realize like this day one? But the realization was the price asks the question. And so like I teach a value seminar you know uh at Babson and I always I go through this example with them and I say look okay you have a company it’s uh you know it’s been earning a dollar a share right being given you giving you a quarterly dividend of 25 cents. Okay let’s say the stock is at 25 cents. What is the question the price is asking? And a lot of times students are like, “What do you mean? What kind of question?” The price isn’t asking. It’s silence. It’s just a number. But the price is asking basically will this company survive long enough to pay one more dividend. Right now you bump the price up to a dollar. Well, it’s, you know, it’s saying, well, will survive for a year. You bump it up to $10. Now the price is asking maybe something like will this business ever grow again, right? 10 times earnings. you know, if it’s if the company grows, it probably should be worth more than that. And now you bump it up to $20. Now it’s asking, will this company grow double digits for five to 10 years? So at each level, right, the question, the price is asking is very different, but the company hasn’t changed. Same company, right? But the question being asked of you as an investor changes quite a bit. And so I think this is kind of an important mental model that you know you have to answer a certain number of questions to be correct on investment but those change and as Buffett says like it like a investing is like a multiple choice test but you get no penalty for passing on as many questions as you want to pass on until you find one or two or three you’re like yeah I’m pretty darn sure I have a good answer to this one. That’s I think Pineia for me was that like I don’t know the answers to the tough questions that you’re asking which are legitimate at a higher price but at that price I didn’t need to know that. >> Yeah. So you’re >> do the questions get harder or easier over longer time horizons. So I’m thinking you know um if you could say you know the culture of a company is leading it in the right direction and like 10 years from now you know it’s going to be a better business than it was today because that’s all the momentum are in place and it’s easier to make that bet maybe sometimes than what’s next quarter going to look like >> you know so this is like an awesome point you bring up because I’ve seen this chart uh floating around you probably seen it too where it’s like as time arise and approaches infinity like basically the only question you need to answer is management right >> you know and essentially like if you are thinking about a intermediate time frame let’s say 3 to five years which is a lot of value investors I think you know focus on that time frame you know and I think rightfully so because it’s long enough to get past most people’s kind of like the most competitive part of the market which is 0 to 12 months so I think like you know 24 to month two years to 5 years is pretty good for like special situations reversion to the mean all those kinds of patterns if you will then the question you’re asking is well is it easier to say okay I can’t answer the path there but I see this is an amazing culture it’s getting better and therefore I know the destination right I don’t know exactly how it’s going to wiggle there but I can just kind of you know I I think the answer is yes but I uh I suspect the degrees of difficulty is very very high and I think there’s a couple of things involved to unpack that. is so I I was mentoring one of my interns and we were reading rereading Nick Lee’s letters right they’re kind of classic now you know as he you know like many investors he transitions from this like cigar butt approach to hey Costco Amazon Berkshire you know shared economy scale great culture big mode fire and forget right and what I try to and I think that’s amazing great skill kudos no criticism whatsoever the challenge is how how many false positives are you going to have along the way, you know, right? Um, and that’s going to vary by whether you’re Nick Leap or, you know, me or someone else, right? Um, and also like everything looks more obvious in hindsight and could go and find a whole bunch of articles that were saying how amazing Kmart was and how Walmart would Walmart survive or something like that, right, in the early days, right? So I think I worry that your insight is exactly right. I think that and I think the huge wins like the 100x returns probably or 50x returns over decades probably come from or have to come from that kind of insight. But then the challenge is a is with is it within your circle of competence or you know your being whoever is doing the investing and also how many other ones are you going to pick thinking that they’re Costco but it turned out maybe they’re BJ wholesale or whatever right or thinking you have a Rio Automotive and you get advanced auto parts right um and also what kind of price are you paying for that meaning when you’re wrong on that inside what’s how much money do you lose right if you’re paying 40 50 times earnings like whatever Costco is at today you know and you turn out to be wrong either about the magnitude of the investment opportunities or the culture changes over time or whatever right um how much are you losing on the ones you’re wrong so I think the answer is yes true but I always encourage like people I mentor my stu students is like don’t try to copy people or clone people. Figure out your strengths and weaknesses and figure out what’s within your circle of competence, learn from a bunch of other people, but then put it through that filter of what can you do really well. So, I’m not sure I can do that really well, but I respect people who can. >> I think it’s a great just that just that it’s so competitive from zero to 12 months, but then also like it’s there’s no quantitatively there’s nothing predictive beyond 5 years. I can’t find anything that works in years six and seven and beyond. Like you get the bulk of the prediction is sort of in the early part out to five years. So that’s a it’s a good little I think two or three to five is the is the right sweet spot. Sorry >> JT. And I think the p it depends on like so I kind of have a collection if you will of investing patterns like uh that I try to find and I think the time horizon would probably match the pattern and like so to use an example that’s like if you use a turnaround as an example like and I I don’t say I specialize in turn turn around but it’s one of the patterns I’m comfortable with and I’ve made a lot of mistakes and learned through those mistakes and the turnarounds kind of follow this arc where you know new co comes in assesses the problem formulates the plan begins implement you know like blah blah blah blah blah and there is a certain natural timing to those steps that doesn’t matter if you have AI and robots or not the human component of that of changing culture changing behavior changing incentives there just a human element that paces that and I think that is a beautiful pattern because the turnarounds for example what I found is you don’t do anything in the early kind of 0 to 24 months. Most of the time you wait for the implementation. You wait for early evidence that it’s you know tracking and usually that means you have to monitor KPIs before they hit the bottom line. So you’re not looking for EPS change you or free cash flow change necessarily. You’re looking for whatever the intermediate metrics which going to lead down the road to bottom line success. And then you your probabilities shift drastically because you know most turnarounds 2/3 plus don’t turn once turnarounds start to turn very few of them go back down and so in that sense you can actually sorry I know it’s like I’m being like very wordy here but you can shorten your time horizon give up some of that initial upside because the stuff will be higher somewhat once you see that initial evidence but the beauty is that your probability I believe through experience strongly adjusts much higher than what you lose on that initial stock movement and your IRRa is much better. So that’s an example where you’re probably shrinking your time horizon because you’re waiting for evidence because in the early part of my career I would confuse the possible with the likely and say oh management is forecasting this turnaround this is what they’re going to earn $3 I’m going to take $3 multiply by some multiple 15 times 45 stock is at 20 awesome yeah but that’s a lot of times the best case and most of them never make it sometimes it makes sense to shrink the time horizon Again, not into the like a three-month window where you’re trading, you know, noise trading, but in a very concrete way of where you have specific I don’t say catalyst, but sometimes catalysts, sometimes business progress, sometimes, you know, actual events, you know, whether it’s, you know, reorganization, whatever, where you are shrinking the time horizon and that event acts as the catalyst to shorten the horizon. JT, do you want to continue on? >> Oh, I was just going to make the that we’ve joked before and we were talking about, you know, Nick Sleep and all these uh everyone not doing enough of their own matching of what fits their strengths and weaknesses. Um, but we’ve joked before that there’s likely to be more money lost trying to find the next Amazon than there ever was made on the original Amazon. >> Yes. But >> well you know I a few years ago before you know like AI was the hot thing you know I would give uh my students like the description of two companies and I would say okay so you have these two companies one uh and let’s say it’s 1999 you know one is a oldline retailer selling clothing and related soft goods no internet presence and no intent to have an internet presence the other provi is making kind of the plumbing of the internet you know switches routers and so forth. Uh, and let’s say you know that the internet is going to take off. You know that you know e-commerce is going to be amazing. Which of these companies do you think would make a better stock? And you know they kind of suspect it’s a trick question. Obviously it’s a trick question otherwise why would they be asking but they still don’t like and of course most people say well like the router company and it’s not even a valuation thing. So the the router company is JDS Unifase um and the clothing company is Ross Stores, right? >> Mhm. >> You know, and again you have this boring mundane business where you who who could have thought, right, that this is going to not only survive but thrive. But nevertheless, right, you have, you know, kind of a business that is been able to compound capital for a long time despite all these secular changes around it. So, I think like again playing your own game like it’s like in poker, right? You know, like you see, you know, like unless some people are experts at all forms of poker, but I used to play poker semi- seriously, it’s like, okay, I knew two forms of poker, you know, Texas hold and pot limit. So I’m not going to go play seven card stud you know because I just don’t know the game and and then I think in investing what happens is well there’s some guru you know that you know you know happens to come around they have ginormous returns for some three to five year period um you know that probably means their style is in favor you know they get on on you know they write a book they do interviews and they say a look at me I’m so amazing I figured this out this is so simple if only you do these simple things like a lot right now it’s like hey buy good companies managed by good people um and just hold them hold them never sell them right something like that and everyone goes rushes out and copies them but two things one is even if this person is truly skilled and telling you how they’re actually doing it doesn’t mean that you are going to be able to replicate that because your skills are different right and number two is there’s a very good chance that this person is just on a hot street and everybody is ascribing you know some mix of some maybe some skill but a whole lot of luck over that period of time and calling it all skill and the crowd saying it must be all skill because look he wrote a book he wrote this he has this you know and of course you know expost antie and you know you go and you look at their returns and not only the returns bad but the asset weighted returns >> awful they’re like negative you know I’m not going to mention anyone by name but you know I’ll I’ll imply you know I think Buffett always says criticize by category ategory and praised by by name. But back in the internet bubble days to get us away from the current set of folks in that category, you know, there was a there was a firm that was based in know Silicon Valley and their claim to fame in investing was that hey, they were closer to where you know the tech revolution was happening. So they had like an edge figuring out these technology companies. Yeah. No, I’ll cover all the magazines yada yada yada. of course, you know, haven’t heard from them for a while after the, you know, the bubble pop. So, I think the message is like just try to be a better version of yourself, not a secondary version of someone else. >> Gary, you were going to mention a second name. Do you want to take us through that second name? >> Yeah, I mean, Warner Brothers is a current example. Um, and I think it’s relevant because catalysts are important. Um and I used you know like I which is interesting because I used to I used to think catalysts are for momentum people you know like cuz like when I used to hear the word catalyst and I used to associate with hey someone needs expects the company to beat the quarter and that’s going to be the catalyst but that’s not what I mean because like you don’t know if they’re going to beat the quarter even if they beat the quarter you don’t know what was expected that’s a different game that’s in that zero 12 month kind of trading game that I’m I would be the pads at and I don’t know what to do. Um, I think there’s a category of catalysts and actually Seth Clarman made a good point in one of his letters several years ago and [snorts] he wrote something along the lines of like a a fully uncatalyized portfolio of equities has a very long duration and then he went on to explain certain implications of that. So if you think about you know equities as bonds right with no with variable coupons and no maturity like you know duration of a bond right it’s kind of the center of mass of those cash flows right for a bond it’s obviously heavily weighted by when you know the bond matures that’s the biggest cash flow for most of the bonds for equities it’s there’s no maturity so it’s like you know the cash flows and you kind of figure out where they are weighted so the central mass of a uncatalyzed equity portfolio is very far away and they had from the point current point in time. If you have a and his point was a better portfolio would be yes some maybe some in that category but some in the cataly catalyze category uh where there’s going to be you know a reason for the rerating or even better actual event that forces your thesis to be you know put to the test gain a and like probably the simplest example of that you know is a bond let’s say you buy a distress bond let’s say it matures was at 18 months you buy it at 50 cents on the dollar thinking it’s money good market says not really it’s that’s why it’s at 50 cents on the dollar 18 months comes around and again I’m simplifying there probably some in between cases where you have some debt for equity swaps or whatever but let’s just say there’s two scenarios either the bond they pay back or they don’t and and that’s a very hard concrete catalyst hard I mean it truly will like you’re either get your money back or you will not you’ll know if you will, right? And then there’s the second category of catalysts which are much more common in equities which are these I call like non-h hard catalyst. And so Warner Brothers was an example of that. So had a long history with Warner Brothers back to when it was Discovery Communications before they did the merger with Warner Brothers that been a disaster. Which by the way, as a quick side note, you know, you know, you know, there’s a lot of hate in the stock when some Gatfly shareholder is like screaming at how management is overpaid at a, you know, annual meeting, you know, which did happen here. It’s one of the signs. But she was probably right. Yeah. [laughter] >> Yeah. A little egregious there, wasn’t it? >> No, it is. It is. But the point is, if things are going well, nobody is going to bring that up, right? It’s only brought up when people are like frustrated, the stock is down, everyone hates what happened, what’s happening here. So, um, so there’s a a few mental models came together and I think like Charlie Mer likes to talk about La Palooa effects in the sense that if you combine multiple mental models and they all align, you get these like multiplicative effects, right? That all uh multiply the outcome many times. There were a few things like one common pattern that I common but intermittently common pattern that I found is there’s good company bad company combination right which is what we had here like the simple way to think about it is let’s say you have a company it has two divisions A and B A is earning $2 B is losing a dollar the company is has EPS of a dollar overall the market doesn’t look too closely assumes nothing is going to change and it says dollar times 15 times you get $15 share price. Good luck. Go back into the market. And let’s say hypothetically the company just shuts down the money losing business and all of a sudden it’s earnings double. Go from $2 minus $1 to just $2. And if the multiple doesn’t change, presumably it shouldn’t or go up with anything because the better business is what’s left behind. All of a sudden you have a $30 stock, right? So that’s a simple kind of model that I’ve seen time and time again. So you had that here because Warner Brothers was a collection of a few assets. You know the bad assets were the declining cable networks which we all know people are cutting the cord. They’re switching to data only plus Netflix or something like that and they’re canceling their cable bundle subscription. And so that business had you know high single digit topline decline in recent years. So the market assigned at very low value right and then you had very valuable businesses. um the Warner Studios, the HBO HBO brand and the libraries attached to those and those businesses had huge modes. And one good way of thinking about it from Buffett is just asking how much time and capital would it take someone who had abundance of both of those things to make something a bad business, right? And so here if like Microsoft or whoever has the most money today uh Nvidia I don’t know who it is these days you know decided they’re going to enter this business from scratch and they’re going to make this you know a tough business uh for Warner Brothers what could they do and the answer is not much or at least it would take them you know 10 20 30 a long long time before they could make it then right and even then there’s no guarantee that they would be successful so that’s one way like just a sand checker to set a business so they want to hide growth business but a very durable mode very long kind of early in my kind of origin story I talked about Joel and you know Chillingass and Fidel and predictable businesses so these are very predictable businesses not in a single year because the studio hit rate varies but on some kind of rolling five-year basis you can pretty much say hey these businesses are going to do roughly X and the market was focusing on the negatives and not giving much credit to the positives um and then you the company announced to reorganization and they basically said, “Okay, we’re going to actually spin off the batico or I think people use the less polite term starts with an S, ends with a T.” I’m not this is a family show so I don’t want I don’t know I don’t know how all the folks are listening so I’m not going to say it but I think you can imagine uh you know what’s in between the S and the T. and uh they’re going to get rid of the bad co and just keep the good co and they said and that like light went on okay this is a catalyst you had this potential energy right or what is the business theoretically worth that didn’t matter because the market is like I don’t care what you theoretically worth nothing is changing no one is forcing me to value it differently so I Mr. market will value it however the heck they want and right now I’m mad at the management I hate the industry they’re in I hate the decline in the cable network I’m going to value it like low you know and you can’t do anything about it management well actually we can we’re going to do it and so they announced these plans and that plan you know again I would say it’s in a kind of soft catalyst category because it’s not a hard catalyst like when the separation happens the market doesn’t have to change the price right it’s not like a return of capital or something like that. But it was a pretty good bet that once the main reason for the hate and negativity was going to be, you know, spun off separately with the love that by the way um that the main co or the good co would be valued a lot differently or perhaps would be attractive to other to a different set of shareholders and if nothing else the cash flow stream from that you know company would be very valuable and they could just return it and not if that valation didn’t change they could buy back shares. In this case you had Dr. Malone on the board, you know, so you had a pretty good guess that they were going to be smart about capital allocation, not just going to blow it. So you kind of put all those things together. And the last thing, I’m always hesitant to mention this because, you know, when I’m going to mention this, you know, people are going to think like this, you know, Gary sits and does this all the time. This is the exception, not the rule. you know, caveat mtor, you know, buyer beware, whatever, like yellow triangle warning attached, but occasionally, this might be heresy, like value investors can use options within a long-term value strategy. And again, when I started investing, I used to think all options were complete gambling. And I, by the way, think that if you never touch an option in your life, you probably are fine. You know, you can still do very well as an investor. But there are times um you know there probably four or five different patterns where you can use them well with an intrinsic value framework especially if your discipline have intrinsic value ranges and have processes and position sizing and all of that kind of dialed in. In this case there [clears throat] was an accelerated time horizon and uh which kind of made sense uh to align with option strategy because like what’s the biggest downside of options? It’s like time, right? You know, as an investor, you ideally want time on your side. So like the number one, two, and three terrible thing about like buying a call option is time is against you. Like if something doesn’t happen within the time frame of the option, you basically get nothing even if you’re right eventually in your insight as opposed to holding the equity, right? And like how do you offset that huge disadvantage? Occasionally the option is much much more mispriced than even the equity. And in this case my my rough estimate was the option was trading below 10 cents on the dollar of fair value for that option. And so you had like a catalyst. You had a pattern for where value is likely not guaranteed to be unlocked. You had this good cob badco situation. And so I actually expressed that position in um in options because I thought that was the most mispriced kind of security related to this event. So again hesitant to mention it because you know I don’t want the blurb to be Gary trades zero day options. You know I don’t I really don’t. But once in a while this is maybe the second or third time in 10 years I’ve done this. you can have a very big mispricing stacked on top of a already big mispricing. >> So you bought a call. Is that the >> Yes. And so the other thing the other thing I should have mentioned is I bought LEAPS, right? So So LEAPS, you know, if you’re listening, you’re not sure, it’s like just longer term call options, right? So in the US they probably go up to 30 months, but definitely 20 you can get them 24 months out. And so if you think about [laughter] how options are priced, you know, they’re in the market priced by something called the black schles uh formula, right? And that assumes basically, you know, random movement around the current price with a drift term at the risk-free rate. Uh meaning that the the price moves in time forward, you know, at whatever, let’s say 4% the current risk free rate. That’s about right for like a shortterm option. The longer the time frame of the option, the more wrong that becomes. But that’s still how it’s priced. And so the longer options are partially mispriced based on that. I don’t want to geek out, but essentially, you know, you it should be moving forward in time by, you know, something like 10% if they’re not paying a dividend, not by 3 4%. Right? So that spread added up over time. Um and also market makers who sell you these options, they’re not sitting there and looking at fundamental events, right? So if you have this, you look at black trolls, you have this normal distribution, right? Assume um and promise this is the most math I’m going to use in this conversation mostly because I’m despite my MIT background, I’m not that good at math. Um but here you have kind of a binary event that changes the probability distribution and you have this very binary uh situation where you could have a much higher price but that’s not priced in. So there’s a couple of these mechanics which makes essentially the way the market prices options in this case much less align with their fundamental fair value. I don’t want to say intrinsic values because in options intrinsic value has a very specific meaning. So just using fundamental value. So in this case, I bought leaps. They’re probably on average like 18 months or so. Um, and normally I wouldn’t be very uncomfortable with that because my time horizon is much longer than 18 months. But again, the event was supposed to be 9 to 12 months away. I had an extra cushion of six more months if they like the spin-off would be were delayed or if the reating would take time. And again, the price asked the question. I bought them between eight and 10 uh% of the of my intrinsic value. So I need to be right less than 10% of the time to break even. Right. And if I’m right right and I think you know I I can make many multiples of of my capital with a very precisely defined downside risk. So again for consenting adults only I would not recommend this to most people but occasionally if you know what you’re doing I think there is extra value to be added in that area which I think is pretty inefficient and rarely talked about. And in the spin did you take the spin cur or did you take the uh >> So the spin hasn’t happened you know so what happened was you know so so normal so norm in a normal situation I think you just want to reassess because like I everything is a price and a declining cash flow stream while it’s hard to value and [clears throat] there all kind of reasons for why you know to avoid declining businesses but if it’s absurdly price again that old example if it’s price of one times earnings and I just need to know that they’ll survive for a year I can maybe underrite like that and be comfortable with that. So, normally you want to see where the prices land, figure out which is the most the piece that’s still the most mispriced and reassess. Right? In this case, you the catalyst not only attracted you know public market interest but also you know the strategic value I talked about of these com these modes these irreplaceable uh assets um attracted biders. So you had Netflix come in, you had Comcast come in and you had um you know Paramount Sky Dance come in. Now when I wrote my letters to my partners about this position, so this is not like Monday morning quarterbacking. I literally wrote that that is a very strong positive optionality in the sense that these assets should generate an auction and they should be very strategically valued. Now I didn’t know it was going to be Paramount Sky Dance, but that’s not important. The important thing is it was very obvious that these are assets that are scarce and multiple people would want them. It doesn’t mean that there would definitely be a bid, but that’s a scenario as you’re thinking about the probability distribution of outcomes that makes the right tail better and probably truncates to some degree some of that left tail. So you have this auction dynamic and auctions are amazing because you know we all think of like rational investing and numbers. Auctions are like so irrational. So when I was a young analyst, if it >> you’re on the right side of the auction, it’s amazing. >> Yes. Well, so so I tell you this quick story. So I was a young analyst. I convinced them to pay whatever three grand to send me to Harvard’s behavioral finance seminar. And I was like 22. Everybody that else is there like like me. I’m 46 now. So they’re like my age. I’m half their age. And one of the Harvard professors uh Max Baserman did this uh auction I will never forget. and he took a $20 bill and he sold it at auction for $23 in front of us to like some grizzled investing veter. And I was like, WTF? What just happened? So I came up to him after class. I said, “Professor, was this just like a trick? Like is it like only you can do like how?” He’s like, “No, I’ve done this hundreds of times to MBAs to, you know, experienced professionals. It always works.” And you know there I wrote about in my Substack article. You can check out the mechanics of the auction if you want why it works. But the point is, you know, it always works. And then years later, I was a speaker at an investing conference like on a big stage in Vegas. I was invited to give a talk and, you know, inflation. So, I took a $100 bill and I sold it for 120. I was a little nervous. I’m like, “All right, >> Benjamin, don’t let me down here.” >> You know, so yeah. And and the thing is auctions frequently don’t have a stable Nash equilibrium. You know, again, geeks speak for they keep going, right? And I think in this case, the mental model is that so I’m a big fan of, you know, like intrinsic value is my true like north true north. I get it. But there but I think again this might be sacrileged to some, but it’s not the only model for markets, right? I’ll give you another very legitimate counter example George Soros and theory of reflexivity right and you know intrinsic value says okay there’s this correct value the private v value of this business it acts as the source of gravity pulls the price towards it right that’s the intrinsic value model the George Soros says well no no value doesn’t p drive price there are cases where price changes value and you first hear about this you’re like what that makes no sense how price change value. Well, perfect example was bear turns uh during the great financial crisis, right? So, you had this company, you know, there was some concern about it, you know, viability. Stock went down. Okay, stock went down. People noticed the stock went down. You know, some more clients left that caused the stock to go down further and that spiral continued until they eventually were acquired for a pittance by JP Morgan. So in this case the price was the mechanism that changed the value because it was a feedback loop. Again doesn’t apply all the time but there’s a subset of situations like allow run the bank kind of situations like bear turns where it does apply. So an auction model is a different model from intrinsic value because you no long the question is these guys are no longer sitting there the biders saying what’s the DCF intrinsic value of Warner Brothers? That’s not I mean yes that kind of someone is doing that but they’re saying we’re alpha billionaires. We’ve publicly committed we want to buy this thing. We are not used to hearing no uh for an answer you know or to quote Tony Soprano like please like you know but like they’re used to hearing like yes sir right and and they’re no longer buying just a casual stream. They’re buying, you know, redemption for their ego so they can look a certain way to others and have the assets they want so forth. So I’m not suggesting you should gamble and say, “Hey, if we get intrinsic value and just hope that the auction price will go insanely high, but it is just the reality of it is it changes the probability distribution of outcomes for prices.” And if you just ignore it and say I’m going to sit in library tower and say no I’m just going to run theoretical DCFS okay but then you know the scenar the situation has changed and I think you what I did you know when it happened very specifically is I’m very risk averse I have most of my c family’s capital in the partnership you know uh I’m not fooling around so I took most of the profits from the investment but what I did is I kind of created upside optionality through a tail position which was a relatively small amount of capital but very convex to the auction playing out and that was proved very successful because it’s been playing out now was that lucky of course you know like any good outcome has a component of luck like anyone who says that there’s zero luck in anything is just lying or selling but was a random luck like a lottery ticket no it was I thought I think it was a favorable probability ility distribution that happen to hit as opposed to just blind luck. So again, there are kind of if you combine enough mental models and you overlay it with your circle of competence of what you’re good at and comfortable with, I think you can do fairly well much better than just kind of trying to copy whatever is working lately. >> Good one. Um JT, you got some uh vegetables for us? >> I do. And uh this is the you know we had a little break and we’re back with is it season 8 Toby? Is I am I right on that? >> You must be. Yeah. >> I agreed everyone >> I agreed to do uh five episodes uh back in 2019. What the hell happened? Uh so first veggies of the season 8, the new year. Um so hopefully these are I’m setting the bar high for myself for the rest of the year. But uh so today’s episode starts with a random question that I was pondering one day as as one does. Are there any examples of the farmer’s fable that are actually found in mother nature? So if you remember, you know, longtime listeners will remember our segment we did on the farmer’s fable, which is basically that one farmer can have a great year and then a brutal one, and it’s all based on luck. But if you add a second farmer with a different luck uh and you pull the harvest uh you can then end up uh shrinking the swings that happen and that and this you get the same average but much less variance on the luck and if you add that second uh it’s almost like magic like you get a better geometric compounding return uh or harvest um and you you’re able to limit the downside through sharing. So I was wondering, mother nature surely has discovered this uh this and you know uh transformed random individual uneven outcomes into collective stability. And of course the answer is yes, she has. Uh and it’s it’s in ant colonies. And we’ve done lots of you know ant-based veggies over the years. So how about how about one more? Uh so [clears throat] it actually led me to a new term I hadn’t heard before which is trophylaxis. T R O P H A L L A X I S. And it’s the mouthto-mouth sharing of food among ants. So >> here’s the strategy. Like everything, ants live in a world of uneven outcomes. And one may may find a sugar cube when he’s out wandering that you dropped at the picnic. Uh another may find nothing. Another might be come lunch for an ant eater while it’s trapesing around. Uh it’s the same asymmetric return patterns that our farmers might face. When a forager ant finds food, they don’t store it in their own personal hiding place. They return to the nest and share it through trophylaxis, these tiny droplets mouthtomouth with their nest mates. And those nestmates then share it with others and so on. So it’s it’s really this variance reduction algorithm. It’s nature’s way of averaging. Um so you might be wondering why mouthtomouth? Why don’t they just dump everything into a big central vat? That’s what I was wondering. Uh wouldn’t that be a lot more efficient? Uh but there must be a good reason why they don’t do that, right? Uh and there is a good reason. It’s that a central vat actually destroys information. So when a forager ant shares a droplet of food, she’s not just feeding someone, she’s also sending a a little data packet to them. And that droplet carries chemical signals. How dense the food is, how fresh it is, how clues about where it came from. In other words, they’re not just moving calories, they’re also moving information when they do that. So, uh, if they were when it passes from ant to ant, the signal strength gradually fades, but that fading itself also has some information in it. And so, if it was all homogenized into a big vat, you end up losing that nuance. Uh, and so highquality nectar is would be blended with the lowquality nectar, fresh environmental cues mixed with old ones, and now the ability to infer what’s happening outside of the the nest would start to collapse. Um, plus there’s the the risk of that’s magnified of contagion risk. Uh, if you are putting everything into the same vat. So you could think of this as like a kind of a risk architecture principle. You know, the network is modular and localized failures and then you have centralized uh would be globalizing that risk, right? And I’ll let you guys kind of make your own analogy and jokes about central bankers creating fragility here. Uh but [laughter] so what what takeaways can we borrow from this as investors? Let’s see if we can try to land this. I I’ll offer four simple suggestions. Uh one, maintain a forager network and feed it small steady packets. So keep a a lightweight habit of swapping tiny idea droplets with a network of trusted people. You can help feed each other, which is essentially, you know, it’s quite helpful when you’re running low on targets. Uh you know, the goal isn’t to outsource your thinking. It’s to keep your pipeline non- empty and let the network’s uneven discovery rate kind of smooth out the dry spells of your own uh your own search through good inbound ideas. Two, share signals, but not full vat conclusions. So, ants don’t pour everything into one soup. They pass these packets along that that still carry a lot of context. You can copy that. Uh when you share, capture the source of new ideas and timestamp them plus where you uh where you got them from. Uh and and journalytic, by the way, is just put a plug in for that is great for this. Um it but it keeps information from getting homogenized and will help your future analysis of networks that you should trust more or potentially ignore. Three, build modularity so that bad ideas don’t go qu colonywide. So don’t blast every idea that you ever have to everybody. test it in like a small pod first, one or two people who think differently uh before you kind of bring it globally. Uh and this this preserves the independence and kind of localizes contagion of stupid ideas. You know, bad thesis can die in a corner instead of becoming this like group’s shared delusion. Uh and four, use a a quorum rule before an idea graduates. So the idea behind this is that you know ant colonies don’t commit until there’s enough independent ants reinforcing the same trail. And so you can copy that by limiting your deep dives until you maybe you’ve had two or three independent pings, different people, sources, angles pointing at the same name or theme. So you know, this can kind of filter out a lot of noise without maybe killing the serendipity. You only have so many deep dives that you can do in a in a given year. So you want to make them count. Uh and so so to wrap things up, yes, mother nature has solved the farmer’s fable. Uh ants pull this upside and then they limit this centralizing risk. They share in packets, keep information intact, stop single failures from going colonywide. Uh, and so you could take some inspiration for how you designed your idea flow network to more resemble the the evolutionary wisdom of ant colonies that’s been honed for more than 100 million years at this point. >> Good one, JT. >> Thanks. >> Um, Gary, do you know anything about the Magnum ice cream spin? haven’t been following it. >> I’ve eaten a lot of Magna bars. Does that count for anything? >> Yeah. No, primary research doesn’t count in this case, I suppose. Um, so the short answer is I it’s on my radar screen, but it’s obviously not at the top of my list. I don’t have anything useful to say. >> Okay, there was there was a question about that from the from the comments. So, what was it like uh working for Joel Tilling? What did you what did you learn from from him? >> Yeah, and again, not to overstate, you know, like I worked in the research pool. just that Joel happened to kind of click. Joel and I clicked and he became my mentor. I’m in touch with him to this day. Um I mean, well, a few things from Joel. He was super hardworking. Like I was there on Saturdays. Uh probably to the detriment of my relationship at that time. Well, definitely to the detriment. And he was there on Saturdays reading annual reports and 10Ks. But that was really I don’t say inspiring, but kind of inspiring as opposed to this like hierarchy of like I’m senior, you’re junior, I’m partying, and you doing grunt work. he was there rolling up his sleeves doing reading 10ks reading and reports. Um I also just uh thought that he was one of the few very few so I had about 45 PMs that the central research pool supported at the time domestic PMs they were more internationally he was one of the few probably a single digit number uh that were actual intrinsic value investors. So I think like it gave me the confidence that worked because he was a successful investor with a very rational approach um that worked and that used the intrinsic value framework that I was like this passionate young analyst. I just heard Warren Buffett. I’ve been going to Brookshire meetings and it gave me that push kind of in the sea of you know I don’t want to say anything bad about anyone but a lot of the PMs there were you know let’s say time horizon and more he had different styles definitely not intrinsic value oriented let’s put it that way >> um and I think the other thing that stuck with me Joel once told me were at lunch and he’s I said I asked him how did your style how did you formulate your investing style and one of the things he told me that resonated because he just said I wasn’t sure if I’m a good stock picker. So, I wanted the style that worked with it. I’m like, wait, what do you mean? Isn’t that what we do, stock picking? But I think I understand what he meant, which is he’s not he doesn’t consider himself particularly good at figuring out what new thing is going to go to the moon or what’s going to be the new this time is different kind of situation. He so he wants businesses that don’t change for the worse and that you can take where they’ve been and use as a reasonable prologue to where they’re going to be that and that resonates to this day. >> Did that lead to more or less uh concentration in names then? >> Well, concentration is probably a topic a long topic. I wrote an article for CFA magazine a while back on that. But I think it’s a natur it’s an outcome of your other dimensions of investing style. For instance, like Joel had this cartoon in his PM presentation where a guy walks into a store and says to the storekeeper, I want high quality and low price and the shopkeeper says, “Sure, I have both. Which one do you want?” [laughter] The joke being obviously that you can’t most of the time you have to pick in market. It’s like do you buy some secularly challenged overlevered POSOS you know uh garbage or do you buy buy you know the company that everyone is saying is amazing compounder but at 50 times earning right you know and once in a while you have some dislocation some insight some situation some c whatever where you can have things that meet your quality and also have a price margin of safety the overlap between those is not frequent or large. So if you want to maintain that overlap, you almost have to be a concentrated investor, right? And then there is degree of concentration. Um again, if you are following a Ben Gramian strategy of pure aversion to the mean or more pure version to the mean, let’s say you’re buying I know netn nets aren’t the thing anymore for the most part, but let’s say you were buying a bunch of nets. You want to package them in a large group, right? a large bundle because some of them won’t work out at all but on the average there’s probably excess return to be had there. If you if you’re buying Philisher style compounders where the point is you want you know before we start we’re talking about amazing cultures and you know how you know things evolving you know right uh you know culturally in the right direction that’s very rare. So if you want to escape from the mean in this rare situation where there’s a large reinvestment opportunity, great management, great culture and a big competitive advantage, you’re going to naturally have a lot fewer investments, right? So I think it’s a it’s a combination of things plus overly how much do you care about losing versus winning? Like I grew up poor. I’m an immigrant, you know, came here when I was 10. My mom, you know, uh raised me as a single mother. She stared welfare for a couple of months before she found her first job. So I’m just naturally very risk averse. So that probably makes me a little more diversified. If I were, you know, purely saying, well, Kelly criteria, this is what I should be doing. I should have these huge positions. You know, I’ve seen people have half of their portfolio in the stock and use Warren Buffett partnership days as justification. And I can tell you, you are not Warren Buffett and chances are this is not American Express during the salad oil days. So before you put half of your money like your portfolio into one investment, just be realistic, right? So anyway, >> long answer to a short question. >> I might be misremembering this, but I thought I read the update to uncommon stocks that’s written by with the intro by his son and I think he said that he had something like 800 positions when he died. Do you guys remember the intro like there’s a the preface to uncommon stocks? >> I don’t remember. I will check that. That’s not what because most of his returns came from a very small handful >> no doubt but >> all a couple few others >> the you know the you get that long right tail of performance and so you can put on lots of small positions and or over the lifetime you accumulate positions >> you can but then the the challenge becomes how do you manage that and I think this is very like again very fascinating topic because I’ve been thinking about the last few years is about how do you react to change in investing too Like I think value investors are terrible at updating their thesis to new information, me included. And I’ve been working on myself on like frameworks and mental models to force myself to be more attentive to change. Like especially if something is changing for the worse like I used to like automatically I bought a stock it got cheaper price drop. I’m like man yeah I’m going to show the market. I’m going to buy some more. Look at me. >> Look at my conviction. >> Yeah. Terrible way. terrible way to invest because you have to compare the new price to the new circumstances and know there was an perhaps apocryphal joke with Fidelity going around how a PM lost a quarter of his portfolio in a single stock you know it never having been more than a 5% position or something like that and it’s like how do you do it well you like goes down you reap it goes down you reap you know like and so I think that to your right tail to your 800 you know stocks kind of thing is if you are kind of as Petelinch put watering the flowers uh but then cutting or reversing what he said watering the flowers but then cutting the weeds then yes you could start with a very wide field but perhaps it’s it’s create like a detection mechanism for these truly exceptional outliers and once you get incremental evidence you kind of bet more I’ll tell you will do who’s the one of the other amazing investors I had the privilege of working with at Fidelity once told me he’s like I was watching Will and he was doing the opposite of what value investor was supposed to do. He would sell a stock when earnings were bad and the stock was down and he would buy more when the stock was up because earnings were good. And I’m like didn’t say that. I’m like bro what are you doing? It’s like calling momentum stuff like should work like why? And kind of I politely asked him about it in the hole one day he kind of turned to me said well Gary you play poker. I’m like a little bit. He’s like well what do you you know when I get two aces I bet right? I’m like, “Yeah, well, when I get a third ace come, you know, I bet more.” Right? And that that stuck with me because it’s like, okay, you can’t have a static view of value, right? Value is an estimate, number one, and a range. So, and it changes, right? So, you think something is worth a 100red. It not that’s not the truth. It’s your estimate. There’s a range. Maybe it’s 50 to 150. And that value can also change through events, right? competitors acting, you know, management acting, whatever. And so I think reacting to changes in value or events that could inform the value changing super important. So yeah, if you’re going to do that, sure, start with 800 stocks. But if you have a portfolio equal weight of 800 stocks, you you’re not doing the Philisher approach. I can almost guarantee you that. Um, >> at some point you have to have concentration in the in the winners because these are power law distributed type of investing approaches, right? Like BC >> VC is great by the way because you start with a very broad fund, right? But you feed the winners and you starve the losers, right? >> Gary, what was the the name of the ticker of the first the first stock that you were discussing with us? >> Vignia. P H I N. and um just we’re coming up on time so let the folks know uh where they can get in touch with you or how they can follow along with what you’re doing. >> Yeah, absolutely. Well, first of all, thank you for having me. But uh my Substack is a great place. So, I write the behavioral value investor on Substack, you know, basically talking about the intersection of long-term value investing and behavioral finance and how to use the two to become a better long-term investor. And I’m pretty active on LinkedIn, so happy to connect there as well. you know, just look for my name, Gary Mashurus, and you know, happy to connect that way as well. So, if you want to reach out, you know, please do. Happy to hear from you. >> Uh JT Journalytic, any updates there? Anything you want to >> Yeah. >> the folks know about? >> Two asks, uh, one, today is the sevenyear, if you can believe it, anniversary of the Rebel Allocator. So, that was >> Whoa. >> I know a long long time ago. um different person wrote it I think but [clears throat] uh so that’s kind of fun and then uh second thing is journal related and we need UI developers so if you or somebody you know is a is a UI developer and loves investing even better um check out I we have a LinkedIn post for or a hiring post for it so uh please send them our way they’re they will be put to good use and Um it’s a great team to join and uh we’re building some really cool stuff that’s going to come out this year that’s going to be really awesome. So so more stay tuned for that. >> Good one. Thanks folks. Gary Mashurus, Silver Ring Value Partners. Thank you very much for being with us today. >> Thank you guys. appreciate >> and we’ll see everybody uh same bat time, same bat channel