Description:
On today’s episode, Clay breaks down his best quality stock idea for Q1 2026: Visa. What you’ll learn here: 00:00:00 – Intro …

Transcript:
(00:00) With each debit or credit 
card swipe all around the world,   they collect a small fee for helping facilitate 
digital transactions. Visa’s mission is to connect   the world through the most innovative, reliable, 
and secure payment network, enabling individuals,   businesses, and economies to thrive.
(00:21) Digital payments is something that   I feel like we all sort of take for granted 
because it’s something that has just become   so central to all of our lives. And because it’s 
something that’s so ingrained in our daily life,   it’s easy to overlook its importance and the 
potential opportunity that awaits for investors.  (00:39) Over the years, we’ve seen this shift 
globally to electronic payments. And this has   been a very positive tailwind for Visa. 
Before [music] we dive into the video,   if you’ve been enjoying the show, be sure to click 
the subscribe button below so you never miss an   episode. It’s a free and easy way to support us 
and we’d really appreciate it. Thank you so much.  (01:03) Hey everybody, welcome back to the 
Investors Podcast. I’m your host KlayFink   and today we’ll be doing a deep dive on Visa. 
I’ve been interested in investing since I was   18 years old. And over the years, I’ve become 
more and more interested in individual stocks.   As one manages their portfolio, you 
gradually learn, not just from reading,   but from making mistakes and learning some of the 
most important investing lessons the hard way.  (01:30) One lesson I’ve picked up is to take note 
of what some of the best investors in the world   are doing. Now, that’s not to say that you should 
just copy what the best of the best are doing,   but maybe at least take note of it. Back 
in January 2023, my co-host Stig Broers   and I were going back and forth on Alphabet.
(01:48) The business fundamentals looked great   and the valuation looked compelling. And one of 
the things that Stig brought to my attention was   that Leelu from Himalaya Capital was adding 
significantly to his position in Alphabet.   Now, Leelu is without a doubt one of the great 
investors of our time. So, this is something worth   considering when buying a company like Alphabet.
(02:13) Not only does Leelu look for limited   downside when running such a concentrated 
portfolio, he’s also looking for the potential   for asymmetric upside as well. And the bet on 
Alphabet has played out quite well for him. But   this isn’t a bulletproof way to find ideas. 
For example, many people followed Charlie   Munger into his Alibaba trade, and that case 
proved to not be a great bet, at least so far.  (02:32) So, you might be wondering, what 
does this have to do with Visa? Well,   the first thing I would mention is that 
several of the great investors of our time   have major investments in Visa already. Many 
listeners have been asking me to bring Dev   Kasaria back onto the show as a guest.
(02:51) Consaria’s firm, Valley Forge   Capital Management, they have over $4 billion 
in AUM and according to their most recent 13F,   over 7% of assets are invested in Visa and 
around 20% is invested in their competitor,   Mastercard. Czech Ore’s firm has a stake in 
Visa that’s worth over $1 billion or 10% of   their portfolio. Terry Smith, who my co-host 
William Green featured on the podcast last year,   he has around a 6% position in Visa.
(03:18) And most notably, Chris Hone from TCI   Fund Management has an 18% position in Visa. And 
given that he manages north of $50 billion, this   makes his Visa position worth over 9.5 billion. 
Hoen is an investor worth following because he’s   showcased compounded annual returns of more 
than 18% peranom for more than two decades.  (03:42) That’s around 9 percentage points better 
than the overall market. Furthermore, Hone added   to his position in Q2 and Q3 of 2025. So, with 
shares of Visa today trading at around $330 per   share, Hone was likely buying shares in the 330 
to 350 range just a few months back, potentially   making Visa an interesting buy at today’s prices.
(04:07) On the topic of network effects,   Hone stated, “We found other barriers to 
entry, such as network effects. Payments   is one. We’ve been a shareholder of Visa a 
long time where it has this huge ever-growing   network connecting every customer in every bank 
to the world and as this network grows it becomes   ever harder to replicate. End quote.
(04:29) So when analyzing companies I   think it can be helpful to revisit what 
exactly the best of the best investors   look for when investing in companies. Dev 
Concessaria has been kind enough to share   his investment approach here on the show so we 
can potentially get a glimpse into some of the   things that he’s seeing when he’s looking 
at Visa since he currently owns a position   in the company as of the time of recording.
(04:49) One of the first things that Kasaria   looks for in a business is predictability. If 
he can’t predict where a business is likely   to be in 10 years, then he’s probably not 
interested in owning that company regardless   of the potential for growth that lies ahead.
(05:08) So he would rather sacrifice growth to   ensure that he isn’t likely to lose money over 
the next decade. In my interview with Kesaria,   he stated, “We define quality as finding 
the perfect intersection between growth and   predictability. You could have companies that are 
growing very fast, like a young software company,   but you’re not sure of where it’s going to be 
5 or 10 years in terms of the market share or   industry dynamics. Or you can find a 
company that’s extremely predictable.  (05:33) We’re trying to build a portfolio that 
on a weighted average basis can grow in the   high teens to low 20s over the next decade, 
but can do so in a very predictable way. End   quote. Another thing he looks for is a dominant 
business with pricing power, preferably companies   that are in a monopoly or duopoly position. And 
as we’ll discuss, I believe that Visa does have   a pretty dominant position in the market.
(05:58) Lastly, Constasaria wants to   purchase businesses that are capital light, 
meaning that they don’t require massive R&D   expenses or capital expenditures. He wants 
businesses that print cash that can then be   distributed to shareholders through buybacks 
rather than making a splashy acquisition.  (06:17) He doesn’t want to risk buying a business 
that prints a lot of cash and then decides to   use that cash in a risky manner that ends up 
getting them into trouble. That’s one reason why   many big tech companies don’t fit as well into 
Kisaria’s framework. While big tech companies   like Alphabet and Meta generate enormous cash 
flows, they reinvest heavily in R&D and data   centers and infrastructure simply to maintain 
their competitive position, which also makes   the future of these businesses less predictable. 
In in businesses like Meta and Alphabet, capital   spending is not optional, but it’s actually a
(06:51) requirement to stay relevant,   which reduces the durability and predictability 
of free cash flow over very long time periods.   That dynamic also increases the temptation 
for large transformative acquisitions or   ambitious internal projects that can introduce 
significant capital allocation risk. Before we   get into where Visa sits today, it’s important 
to understand how the company came to be.  (07:16) The story of Visa began in 1958 with 
a bold and almost reckless experiment by Bank   of America. They mailed 60,000 live credit 
cards to unsuspecting residents in Fresno,   California, in an attempt to jumpstart a payment 
network out of thin air. This was the birth of   the Bank America card, the very first consumer 
credit card with a revolving credit feature.  (07:40) While mailing unsolicited credit cards 
is illegal today, this was the creation of a   new financial ecosystem and it was the very 
first time that revolving credit started to   become widespread. Usually when a consumer 
took on some amount of credit in a purchase,   they had to be paid up by a certain date.
(07:59) But with revolving credit, which is   how credit cards work today, essentially you’re 
able to keep a balance and acrue interest. So,   the launch of the Bank America card was 
really the first time that consumers had   access to this. As the program’s popularity 
exploded, Bank of America began licensing   their system to other banks across the US.
(08:22) And by 1970, the network had grown   so complex that it separated from Bank of 
America to form National Bank Americard,   Inc. This transition turned the network into 
a cooperative owned by many banks that issued   the cards. Now, the shared ownership model was 
crucial as it allowed the network to scale rapidly   without being controlled by a single bank.
(08:43) In the early 1970s, Bank Americard   automated much of the process that 
needed to happen in a transaction,   such as the authorization and interchange, 
and this made it significantly easier and more   efficient to make transactions. As a result, 
transactions could be processed at any time.  (09:04) Authorization times dropped from 5 
minutes to 50 seconds, and banks cleared and   settled transactions overnight instead of taking 
a week or more. To conquer the global market,   the company underwent a major transformation 
in 1976 by rebranding as Visa. The name was   chosen because it’s simple, memorable, and 
sounds exactly the same in every language,   signaling their ambition for universal acceptance.
(09:25) Now, at this time, let’s assume that we’re   a bank that works with merchants and you want 
merchants to start accepting credit cards from   tourists. I’m sure many people in the US travel 
to London, so we can use that as an example. So,   let’s assume that the banks work with merchants in 
London. In order for a transaction to take place,   the banks in London, they need to have a way of 
communicating with each of the tourist banks so   that the transaction can be approved and money 
can be transferred. That means that software  (09:56) needs to be developed that is 
integrated with every single one of   the tourist banks and every single one 
of the merchants point of sale systems.   There also needs to be support for hundreds of 
languages and currencies and compliance with   thousands of local laws and regulations.
(10:16) And the entire process needs to   be automated, fast, and operate with zero 
failure or downtime. This whole complicated   process is what Visa managed to put together. 
The most significant turning point in Visa’s   modern history that arrived in 2008 when the 
company transitioned from a private bank-owned   cooperative to a public company. Its IPO was 
one of the largest in history, raising $19.  (10:40) 1 billion, reflecting the massive value of 
its global network. Since then, Visa has continued   to expand, acquiring Visa Europe in 2016 to unify 
its operations into one global powerhouse. Today,   it stands as the dominant toll booth on 
global commerce, facilitating trillions   of dollars in transactions every year.
(11:02) So, Visa has recently been in   the headlines due to President Trump urging 
US lawmakers to pass legislation to limit   credit card interest rates to 10%. In order to 
help Americans save on the amount of interest   they’re paying on credit cards, Ironically, 
Visa’s stock was down 6% in the days after   the announcement. But the irony is that credit 
card interest rates do not directly impact Visa’s   business because Visa doesn’t lend money.
(11:25) They don’t set interest rates or   they don’t earn interest income. Visa earns 
fees based on transaction volume and payment   processing. However, a hard cap on interest 
rates could indirectly affect Visa if it leads   to banks tightening credit standards, reducing 
credit issuance, or lowering credit limits,   which would reduce their transaction volume.
(11:51) Credit card issuers might also pull   back on rewards programs or marketing, slowing 
spending growth in credit cards relative to   debit cards or alternative payment methods. 
In a more extreme scenario, some high-risk   consumers could lose access to credit cards 
altogether, further pressuring volumes. So,   while Visa isn’t exposed to credit risk, 
regulatory changes affecting issuer economics   can still ripple through to its growth outlook.
(12:15) But with that said, I think it’s pretty   unlikely that a cap on interest rates 
would get passed as it would require   congressional approval and would likely face 
strong opposition from banks, card issuers,   and industry lobbyists. Even if legislation 
were introduced, it would almost certainly face   significant legal and constitutional challenges, 
making implementation far from certain.  (12:42) So, in my view, it’s a classic example of 
the market acting irrationally based on investor   sentiment. Even if the fundamentals haven’t 
materially changed, the market can move stock   prices in directions that just don’t exactly make 
sense, bringing potential opportunities for us as   value investors. So, diving in here to discuss 
Visa’s business model, the easiest way to think   of Visa is that together with Mastercard, 
it’s a toll booth on the global economy.  (13:08) With each debit or credit 
card swipe all around the world,   they collect a small fee for helping facilitate 
digital transactions. Visa’s mission is to   connect the world through the most innovative, 
reliable, and secure payment network, enabling   individuals, businesses, and economies to thrive.
(13:30) Digital payments is something that I feel   like we all sort of take for granted because it’s 
something that has just become so central to all   of our lives. And because it’s something that’s so 
ingrained in our daily life, it’s easy to overlook   its importance and the potential opportunity that 
awaits for investors. Over the years, we’ve seen   this shift globally to electronic payments.
(13:49) And this has been a very positive   tailwind for Visa. Tying back to Hone’s point 
about network effects, Visa is connected to more   than 4 billion card holders, 150 million 
merchants worldwide, and nearly 14,500   financial institutions. By the looks of it, if 
anyone is interested in trying to disrupt Visa   starting from scratch, that ship has just sailed.
(14:12) It would be incredibly difficult to build   the network that they have built and steal market 
share from them. But as I’ll touch on at the end,   there are a few potential threats 
and cases of competitors gaining a   dominant position in different markets globally.
(14:31) While today Visa is known for its logo   on credit and debit cards, they do not actually 
extend credit or issue cards themselves. They   leave it to the banks to issue the cards and take 
on the credit risk. Think of players like Chase,   Capital 1 or Barclays. Visa on the 
other hand operates as the payment   network that operates behind the scenes.
(14:49) So we can think of them as the   payment rails that facilitate transactions. If 
we think about all the payments happening all   around the world every second of the day, 
Visa in addition to Mastercard are like an   interstate highway system that collects a 
tiny toll fee for every car that drives on   it. So to understand how Visa plays a role in 
the payments industry, let’s walk through an   example of what happens when you make a purchase.
(15:15) So first I’ll mention that there are five   parties involved in every digital transaction. 
Let’s say you walk into your local Chipotle,   order your bowl with chicken and guac, 
and go to checkout, and you decide to   use your Visa debit card that you got from JP 
Morgan Chase. So, you the listener would be   the first party, which we can call the consumer.
(15:40) You ordered your bowl at Chipotle in this   example. So, we can call Chipotle the merchant. 
You then swiped your debit or credit card that was   issued by JP Morgan Chase. That party we can call 
the issuing bank. And then we have Chipotle’s bank   which in this case we can just say is Cityroup 
in this example. And then lastly we have Visa.  (16:00) Once the card is swiped, Visa is 
transmitting the data necessary between   banks to ensure that you are good for the 
payment in a matter of less than a second.   So Visa sits in the middle of this process of 
making digital transactions and they help ensure   that this process is just entirely seamless.
(16:19) The two banks involved in this example   along with Visa are collecting a fee on each 
transaction and that fee tends to be around   2 to 3% in aggregate which is paid by the 
merchant and not paid by the consumer. One   of the reasons that these payment rails are so 
deeply entrenched in our modern economy is that   consumers get paid rewards for using these cards.
(16:41) The card I use the most is actually an   American Express card. I just love it because 
it pays a solid reward most of the times that   I swipe it and use it. But I also have 
a Visa card in my wallet that I like to   use as well. American Express is a bit of a 
different conversation, but they operate what   we can refer to as a closed loop network.
(17:02) Since American Express implemented   this closed loop model, this led to 
their market share relative to Visa   and Mastercard being much lower. But anyways, 
on many of these credit card transactions,   the consumers are getting a reward for using that 
card, and that’s ultimately paid by the merchant,   but the merchant needs to have a payment method 
available that consumers are accustomed to using.  (17:29) So, it’s a bit of a chicken and an egg 
problem. the merchants don’t necessarily want to   pay 3% on every transaction they accept. But if 
they only accepted cash, that would likely lead   to significantly less sales volume since people 
are so accustomed to using these cards and there   just hasn’t been a way for a new entrant to enter 
the market and take substantial share from Visa   and Mastercard because of the rewards that keep 
customers coming back and using those cards.  (17:58) So the network effect that these payment 
networks have are just substantial. So there’s a   very strong incentive for merchants to accept 
these cards and utilize Visa’s network because   the banks and Visa do the work of ensuring that 
the consumer is good for the payment. And in this   process, Visa is going to earn around.1% or 2%.
(18:22) So if we’re looking at a $100 purchase,   they’re getting something like 13 cents, 15 
cents. and it’s a relatively small amount of the   value captured. So, to put this in perspective, 
I like to get my gas at Costco. Let’s say I spend   $100 on gas there. My Visa card actually uh 
pays me 5% cash back on that purchase. So,   I’m getting $5 in rewards. I’m not sure what 
the agreement is between Visa and Costco,   but perhaps they’re getting.
(18:49) 1% in that agreement due   to Costco’s huge bargaining power. So out of the 
$100 spent, Visa would receive just 10 cents for   helping facilitate the digital transaction. The 
main strength of Visa’s business model is that   network effect that they’ve built up over decades.
(19:10) And for a new entrant to truly disrupt   this network effect, they wouldn’t just 
need a better app or a faster chip.   They would have to convince tens of millions of 
merchants and thousands of financial institutions   to abandon a system that already works perfectly.
(19:29) Imagine that you built a new payment rail   and you needed to start getting partners 
on board. If you walk into your local   coffee shop and you told them all these 
reasons why your payment rail was better,   they just wouldn’t care to use it if no 
customers have the means of using that   payment. And no customers are going to want 
to use it if merchants aren’t going to accept   it. So again, it’s that chicken and egg problem.
(19:54) Even the most well-funded fintech giants   usually find it cheaper and easier to simply 
ride on top of Visa’s rails rather than trying   to create their own. So ultimately, Visa and 
Mastercard are the trusted networks, making   the cost of switching away from their network 
prohibitively high for the entire global economy.  (20:18) What’s also really important is that 
Visa operates globally and they receive higher   fees through crossborder transactions. So 
the last time I left the US was back in   2021 when I visited my co-host Stig Broers 
over in Denmark. I recall one evening I was   going on a walk keeping an eye out on a spot I 
could grab dinner and I realized that my phone   was about dead and I did not have any cash on me.
(20:41) In times like this, when you’re exploring   a foreign city you don’t know, well, Visa can 
sometimes feel like a savings grace. I ducked   into a small cafe, ordered a sandwich and an iced 
tea, and I tapped my Visa card to pay without even   thinking. I didn’t need the local currency.
(21:00) I didn’t need to necessarily do the   math on currency conversion, and I did not 
need to wonder if they accepted my Visa card.   The transaction was approved in seconds. 
The receipt popped out instantly and I was   back outside walking the Danish streets. But 
without Visa, I would have needed to use cash,   which means hunting down an ATM, paying 
egregious fees, and hoping that I don’t   misjudge the amount of cash that I would need.
(21:30) With Visa, the trust is already built   in between me, the merchant, the bank, and a 
global network that’s just quietly working for   me in the background. And crossber transactions 
are actually quite an integral part of Visa’s   business. Because of the increased complexity, 
risk, and the currency exchange involved in   crossber transactions, Visa is able to capture 
a higher fee than a domestic transaction. It   tends to be around three times higher.
(21:56) Despite crossber transactions   making up just 10% of Visa’s payment volume, 
they account for more than 1/3 of revenue.   Are you looking to connect with highquality 
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(24:23) I mentioned a bit earlier that I do use   an American Express card. So you might be thinking 
what prevents American Express from stealing share   from Visa and Mastercard. The primary barrier 
for American Express is its closed loop model.  (24:42) It requires the company to 
act as both the network and the bank,   limiting its ability to partner with thousands 
of global financial institutions that work with   Visa and Mastercard. And because Amxed, they 
historically charge higher merchant fees to   fund their premium rewards. So many smaller 
or many international businesses just simply   refuse to accept American Express in their stores.
(25:05) While MX’s rewards are pretty attractive,   they’re financed by these higher merchant costs. 
So, it’s a strategy that works for luxury travel,   but it struggles to compete with the lowcost, 
high volume utility model that Visa and   Mastercard provide for everyday essentials.
(25:24) Additionally, Visa and Mastercard’s   openloop system allows them to scale exponentially 
by letting banks like Chase or Bank of America,   they’re doing the heavy lifting in terms of 
the customer acquisition and the credit risk.   Due to the business model that AMX selected, 
Visa and Mastercard own a lion share of the   overall market. So, when we exclude China, Visa 
is estimated to have around 60% of the market.  (25:50) Mastercard is estimated to be at 
around 25% and American Express is just   over 10%. While MX lacks the universal reach 
of the others, it compensates by intentionally   targeting affluent consumers who spend more 
and are worth significantly more per swipe   to a merchant than the average consumer.
(26:11) So, by positioning itself as a   status-driven club rather than a basic 
utility, AMX creates a virtuous cycle   where higher-end retailers are willing to 
pay those higher fees just to gain access   to the deep pockets of the MX card holder.
(26:30) And these retailers are certainly   paying for more access to these types 
of customers as the fee they charge,   it tends to be around.7% higher for in-person 
transactions. And much of this, of course,   goes back to the consumer in the form of higher 
rewards. And when we look at the banks involved,   they also have an incentive to work with players 
like Visa and Mastercard. So, one of Visa’s most   popular cards is JP Morgan’s Chase Sapphire card.
(26:54) JP Morgan Chase has an incentive to issue   those cards and push a lot of payment volume 
through those because they will get these big   financial incentives and rebates from 
Visa which is also just difficult to   disrupt because Visa is operating on such 
a massive scale. In 2025, Visa facilitated   over $16 trillion in volume. That’s 16 with a T.
(27:21) And you can of course see some competition   between Visa and Mastercard attempting to steal 
these banking partnerships from each other,   but in reality it just does not happen very 
frequently. Another segment that investors   should be aware of is what Visa refers to as 
new flows. This segment is going to be less   familiar to most people as it includes 
B2B payments, peer-to-peer transfers,   and government dispersements.
(27:53) Visa is building the tools   to digitize and route those flows over its 
network and they are just beginning to tap   into this market opportunity. So according to 
Visa, this segment addresses a $200 trillion   market opportunity and currently Visa handles 
less than 1% of that volume. And then Visa’s   third business segment is its value added services 
which accounts for around 1/4th of their business.  (28:18) The value added services suite 
of offerings. It goes beyond just basic   payment processing. These services include 
things like real-time fraud detection,   risk and security solutions, digital checkout 
tools, analytics, open banking capabilities,   and advisory or consulting services.
(28:41) This business is important because   of Visa’s global network, and the unique insights 
they have access to. With their massive database,   they can provide insights on trillions of 
data points and transactions. In addition   to helping diversify their business, this 
segment is also high margin and helps deepen   their customer relationship with banks.
(29:04) What’s also really interesting to   me about Visa is how some investors view Visa 
and Mastercard essentially as one and the same.   This perspective stems from the fact that both 
companies seemingly operate these identical   toll booth business models where they provide the 
underlying infrastructure for global payments, but   they aren’t taking the credit risk with the loans.
(29:26) So, because they share the same secular   tailwinds, investors often treat them as a 
singular bet on the growth of the global economy.   So, I wanted to be sure to take some time to 
compare and contrast Visa and Mastercard to   just better understand their differences. 
So, to compare these two giants, it’s best   to start with their global footprints and scale.
(29:45) Visa is just the undisputed heavyweight.   They’re capturing around 60% of the market 
excluding China. Mastercard, as I mentioned,   was at 25%. Geographically, Visa is more 
dominant in the US where it processes over   double the volume of Mastercard.
(30:06) However, Mastercard has   historically maintained a slightly more balanced 
international presence, particularly in Europe,   where the market share is closer to a 50/50 
split. Despite these differences in scale,   their business models are almost identical. Both 
operate these openloop payment networks that don’t   issue cards or don’t take on the credit risk.
(30:24) They both generate high margin revenue   through transaction fees, crossber services, 
and an increasing focus on value added services   like fraud detection. So, it’s easy to view 
them just as a duopoly that grows in tandem   with the global shift from cash to digital 
payments. So, from an investor’s perspective,   the choice between the two often comes down 
to a trade-off between Visa’s sheer size and   Mastercard’s potential for slightly higher growth.
(30:52) Visa’s massive scale and high margins make   it an incredibly durable cash 
flow machine. And meanwhile,   Mastercard is often seen as being slightly 
more aggressive in pursuing the new flow   segment and non-card payment technologies.
(31:12) And because they share the same regulatory   tailwinds and risks, many investors just simply 
choose to invest in both to capture the entire   industry’s growth. Historical shareholder returns 
align with this view as well. So since the start   of 2017, shares of Mastercard grew at around 20% 
per year while Visa grew at around 16%. But it   also depends on which time frame you’re looking 
at because if you look at the returns since the   start of 2022, shares of Visa have actually 
outperformed which also makes sense because   Mastercard’s valuation was a bit higher at that 
time at the start of the period. While Visa and   Mastercard are fierce competitors in this payments
(31:47) industry, they’re viewed as what we can   refer to as a rational duopoly. The two players 
prioritize maintaining high industry margins   rather than engaging in these destructive price 
wars. So instead of cutting fees to steal market   share from the other, this would just erode their 
margins that both companies certainly enjoy,   they instead focus on expanding the total 
addressable market by converting the world’s   remaining 11 trillion in cash transactions 
to digital payments. This cooperation   ensures that while they compete on innovation and
(32:24) security, the underlying toll they collect   remains stable. So it effectively is treating this 
global commerce as a shared infrastructure that   rewards both players for its continued growth. 
One of the most impressive things about Visa’s   business is just its financial profile. Gross 
margins are 80%, operating margins are 60%.  (32:51) And [clears throat] when you look at large 
cap publicly traded companies, that is just some   of the best margins you’re going to find. One 
company I can think of that has an even better   margin profile than Visa is the company I 
covered last quarter on episode 768. That   company is Interactive Brokers. So in fiscal year 
2025, Visa generated around 40 billion in revenue.  (33:15) Around three4s of that is what you 
can think of as revenue generated from the   fees on transactions and the remainder came from 
value added services. However way you look at it,   Visa’s business has grown quite nicely for 
a very long time. So over the past year,   revenue grew by 11%, non-GAAP EPS grew by 14%. 
The US business is the more mature business for   Visa while the international business is growing 
faster due to card adoption catching up with the   US especially in emerging markets. Furthermore, 
the value added services segment is growing   faster than the core business as in Q4 2025 it
(33:50) grew by 25% and it’s been critical in   helping Visa continue to diversify just beyond 
transaction fees. And Visa’s business model just   scales incredibly well. They’ve built out their 
network and infrastructure. So each incremental   transaction that flows through the top line is 
it comes at a very small additional cost. So   this drives powerful operating leverage over time.
(34:19) So, as global payment volumes continue to   rise, Visa is able to convert a growing portion 
of that revenue directly into free cash flow for   shareholders. To help illustrate this, over the 
past decade, revenues have compounded at around   11% and earnings per share has compounded at 17%.
(34:40) Since the growth in earnings per share can   be a good proxy for the increase in the intrinsic 
value of the company over that time period,   we shouldn’t be surprised to find that shareholder 
returns with dividends included are also around   17% peranom. So assuming that you can purchase 
Visa at a reasonable valuation, then you should   continue to see long-term returns coincide with 
the continued growth in earnings per share.  (35:04) And a lot of investors talk about 
finding companies with a big opportunity to   reinvest and grow the business. The thing about 
Visa is that they just don’t necessarily need   to reinvest to continue growing. So when 
you look at the cash flow statement over   the past year, they’ve made over $1.5 billion 
in investments through their capex line item.  (35:28) When you compare that level of capex to 
a company like Meta, which I recently purchased   for my own portfolio, it’s practically nothing 
considering that Meta is guiding for over $100   billion in capex in 2026. Visa invests heavily in 
its global transaction processing network, Viset,   to ensure speed, reliability, and nearperfect 
uptime. This includes spending on data centers,   servers, storage systems, and network equipment.
(35:52) And these investments allow Visa to handle   ever growing payment volumes securely across 
thousands of financial institutions worldwide.   They also invest significantly into hardware 
and systems that are designed to prevent fraud,   manage risk, and protect sensitive payment data.
(36:13) Given Visa’s scale and the importance of   protecting its brand and reputation, these 
investments are critical for banks and their   customers to maintain confidence in using 
Visa’s network. According to caner brand   study on the most valuable global brands, 
Visa ranked number seven on the list in   2024. So Visa is obviously done a great job 
protecting the value of their brand as the   uptime for the Visa network is around 99.999%.
(36:38) So consumers have a reason to trust   using their Visa card whenever they need to 
make a digital transaction. With that said,   the vast majority of the cash flow that Visa 
generates is deployed into share repurchases.   In fiscal year 2025, Visa generated over $21 
billion in free cash flow, and they deployed   more than $18 billion into share repurchases.
(37:06) As a result, Visa retires nearly 3%   of their shares outstanding each year. Visa 
also has strong future prospects to continue   their growth trajectory. As I outlined in 
the beginning, Visa gets a small slice of   each transaction that they are involved with.
(37:24) The World Bank estimates that global   personal consumption expenditures or PCE, 
which is a fancy way of saying global spending,   it consistently grows at around 2 to 3% per 
year. If we tack on around 2 to 3% inflation,   that gives us around 4 to 6% growth for Visa, 
assuming that they just maintain their current   market position. Because Visa’s fees are largely 
set as a percentage of total transaction volume,   the company acts as a natural inflation 
hedge since their revenue increases   directly alongside the cost of goods sold.
(37:55) This structure allows them to capture   the upside of a higher priced economy without 
the burden of rising raw material costs or   significant capital expenditures. Furthermore, 
their dominant position in a global duopoly   provides them with significant pricing power 
and the ability to maintain 60% operating   margins even during periods of economic stress.
(38:20) While the US remains the most mature   market for the company, its trajectory through 
2030 will be increasingly defined by higher   volume growth in its international segment, 
most notably in emerging markets in Asia,   the Middle East, Africa, and Latin 
America. Visa is benefiting from the   global shift from cash to digital transactions.
(38:41) Believe it or not, today there is more   than 11 trillion in consumer spending still 
happening in cash or checks. And Visa is well   positioned to benefit from more of that spending 
transitioning to digital. This shift is being   driven by the convenience of digital payments, 
the growth of e-commerce, and the rapid adoption   of smartphones and internet access worldwide.
(39:00) As the global economy shifts further   towards digital storefronts, Visa stands 
as a primary beneficiary because e-commerce   transactions are almost exclusively 
electronic, eliminating cash from the   equation entirely. But looking towards 2030, a 
more radical shift is occurring with the rise   of agentic commerce where autonomous AI 
agents navigate the web to negotiate and   execute purchases on our behalf.
(39:26) For this to really work,   these AI agents require a secure programmable 
identity to authorize payments without a   person being present for every click. Visa is 
positioning its network to be the underlying trust   layer for these machines, ensuring that an 
AI can hand over digital credentials that   are just as secure as a physical card swipe.
(39:49) This essentially transforms Visa from a   tool used by people into an invisible financial 
operating system for the entire AI economy by   building these machine-to-achine rails. Now, Visa 
is ensuring it remains the toll collector even   when a human is not involved in the transaction. 
Governments and financial institutions are also   encouraging electronic payments to reduce tax 
evasion, improve transparency, and lower the   costs associated with handling physical cash.
(40:21) When considering the growth in spending,   inflation, and this mega trend towards 
digitization, Visa is expected to capture   around 9 to 10% topline revenue growth for 
the foreseeable future. And you can already   see that in the numbers today. Over the past 
five years, which excludes 2020 since that’s   really an anomaly, revenue grew by 13 
a.5% on average over that time period,   and each year was around 10 to 11% growth.
(40:46) But 2022 was also a bit of an exception   because they had a post-pandemic rebound in 
global travel and crossber spending. Their   value added services segment is also a key 
area for future growth. Visa shared in their   investors presentation that the broader 
value added opportunity could be north of   $500 billion annually for just this segment.
(41:12) As payments are becoming more complex   globally, demand continues to rise for services 
that enhance security, support the continued   digital transformation, and meet evolving 
merchant and consumer expectations. So as   digital payments continue to grow worldwide and 
businesses look for integrated solutions, value   added services is a key growth engine that could 
help generate strong returns for shareholders.  (41:32) When we consider the secular 
growth for the core business and then   layer on value added services and their new 
flow segment, Visa should be growing their   top line in the low double digits, perhaps 11 
or 12% and grow their bottom line earnings per   share by around 15% after factoring in 
operating leverage and share buybacks.  (41:51) Share buybacks don’t effectively grow the 
business, but they do grow earnings per share due   to the lower share count that occurs over time. 
Visa has historically traded at an elevated   valuation level and as long as their moat remains 
intact and there aren’t any unexpected structural   changes to the industry, I believe the elevated 
multiple is justified due to its dominant market   position in the durability of the business.
(42:15) Not many companies can continue to   grow earnings in double digits year after 
year and do so with relatively low risk.   When we look back over the past decade, Visa’s PE 
ratio has been around 30 or so. From time to time,   we’ve seen this metric dip below 30, but 
usually it’s been short-lived, either   because the earnings continue to march upward or 
because the market re-raised the stock higher.  (42:40) Today, the PE multiple trades at around 32 
with a $330 share price. For investors interested   in adding shares of Visa to their portfolio, 
I could foresee two ways to get exposure.   First is to view today’s price as fair and 
not try to time the market and just let the   compounding process start to work for you 
immediately. But you also have to accept   the potential for a multiple contraction.
(43:03) If in 5 years the business continues   to execute, but the earnings multiple rerates 
from 32 to 27, for example, then you won’t lose   money as an investor, but you may have been 
better off allocating your capital elsewhere   where you didn’t see this multiple contraction.
(43:22) For example, investors who purchased   shares of Visa in 2021, they were paying 
north of 45 times earnings as everyone was   excited about the structural shift from the 
analog world to the digital world. But shares   of Visa underperformed the broader market 
since that time frame because the shares   were overpriced with the benefit of hindsight.
(43:40) Of course, the alternative would have   been to patiently wait for the market to give 
you an even better price. As I mentioned earlier,   shares of Visa have occasionally traded 
below 30 times earnings. So waiting for   a better price can help minimize the risk of a 
multiple contraction in the future, increasing   the odds of getting a return of say 10% or more.
(43:59) The other consideration in purchasing a   company like Visa is the holding period. If you 
potentially need to sell shares within the next   2 or 3 years, then that can increase your risk 
as an investor because the market can just do   some crazy things in a short period of time. 
The longer your holding period when holding   highquality companies, the lower your risk 
because time is on your side as the intrinsic   value of the company grows year after year.
(44:25) When we look at the share price of Visa,   you can clearly see that this is a compounding 
machine. The underlying business continues to   increase as the earnings per share increase pretty 
much every year. and the increasing earnings acts   like a gravitational force that lifts the share 
prices higher over time despite any temporary   headwinds or narratives the company faces.
(44:46) When we look at the risks for a company   like Visa, the main risk is the one that many of 
the best companies in the world face and that is a   regulatory risk. The best companies experience 
regulatory risk because their business models   are so good and their moes are so wide that 
it takes regulators to step in and try and   prevent them from earning excess profits.
(45:10) And the same goes for merchants   as they do whatever they can to try and 
minimize the fees they’re paying to the   banks and to Visa and Mastercard. However, it 
seems to me that regulation might even be a   source of competitive advantage as they’ve 
spent decades building relationships with   regulators and securing the licenses needed 
to operate in nearly every major economy.  (45:30) Although Visa doesn’t disclose its total 
litigation fees, estimates suggest the company   often spends hundreds of millions of dollars per 
year and in more contentious periods, that figure   can climb to more than $1 billion annually 
when settlements and reserves are included.   A major driver of these fees have been merchant 
antitrust and interchange fee lawsuits where Visa   has repeatedly faced claims that its network 
rules unfairly inflate costs for retailers.  (45:55) One high-profile example is the 
long-running US merchant interchange litigation,   which ultimately resulted in a multi-billion 
dollar settlement and ongoing legal provisions,   which highlights how regulation and litigation 
are persistent cost of doing business for Visa.  (46:14) This regulatory pressure doesn’t 
necessarily mean that Visa is price gouging,   but rather its scale and market 
position naturally attracts scrutiny.   Visa’s fees are largely set as a percentage of 
transaction volume, meaning its profits grow   alongside global commerce, not because it’s 
arbitrarily raising prices. Regulators and   merchants often focus on interchange fees 
because they’re visible and widespread.  (46:39) Even though Visa itself doesn’t directly 
collect most of the fees in a single transaction,   still when a network touches nearly 
every transaction in the economy,   even small fees can look enormous in aggregate. 
That makes Visa an easy target during periods of   political or economic stress. Although Visa’s 
MO is in fact strong, it does face competitive   pressure in different markets around the world.
(47:03) For example, some governments have shown   a preference for local payment networks which 
could keep Visa at a certain markets. In India,   the government launched the unified payments 
interface which is a realtime system that   moves money directly between bank accounts. 
We see something similar happening in Brazil   where the central bank’s payment system now 
accounts for nearly half of all payments in   the country despite only launching in 2020.
(47:29) And I haven’t even mentioned China   yet. Both Visa and Mastercard are practically 
non-existent in China as the statebacked network   Union Pay holds a legal monopoly in China. China 
also took the leap by bypassing plastic cards   entirely, opting instead in favor of super apps 
like Alip Pay and WeChat, which now control over   90% of the digital payments market in China.
(47:59) Despite Visa’s attempts to enter the   Chinese market, it’s largely kept out due to 
regulatory barriers. Europe has attempted to   launch their own governmentbacked networks 
as well, but they’ve been less successful in   rivaling both Visa and Mastercard at scale as Visa 
and Mastercard still process the vast majority of   card transactions across Europe. So, in Visa’s 
major, more mature markets, they are deeply   entrenched and consumers overall benefit from 
using both Visa and Mastercard’s networks. But   even in the more mature markets, new solutions for 
payments are popping up and Visa is well aware of  (48:33) this. One is the rise of accounttocount 
payments which let consumers pay someone   through their bank account directly which 
bypasses Visa entirely. I actually didn’t   know that this was a real option for making 
payments. But it turns out that adoption has   been slow in their more mature markets.
(48:58) But if the user experience and   technology around it improves, then that 
could pose a headwind for Visa. But again,   we need to understand the incentives. If consumers 
earn rewards by swiping their card or simply   use their Visa card out of habit, then why use 
another tool that doesn’t offer such an incentive?   But Visa is actually on top of the industry 
trends here as they’re actively building their   own rails for ADOA transactions which is called 
Visa Direct and they also acquired a company   in Europe to further expand this offering.
(49:29) Since government-backed competitors   offer these basic transfers for free, Visa 
monetizes these flows by layering on value   added services like instant fraud screening and 
global interoperability that a local banktobank   system just simply can’t match. They’ve turned 
a commodity service into a premium one by adding   these security protocols that consumers 
expect from a standard credit transaction.  (49:55) and the idea of a new entrant 
just generally entering the space and   competing directly with Visa and Mastercard. 
I think just generally it’s just not going to   happen. Companies like Apple, Google, Stripe, 
Square, and PayPal, they’ve all been involved   in this payment space and their solutions are 
built on top of Visa and Mastercard’s rails   rather than competing headto-head to them.
(50:20) I don’t use Apple Pay too often,   but I know a lot of people do. And Visa 
helps make the payment process through   your phone just seamless and easy. So, if 
I happen to not have my wallet with me,   or I just want to have the convenience of using 
Apple Pay, like I’m taking the subway in New York,   for example, it’s it is a nice option to have.
(50:41) And then Visa has also enabled other   convenient options to make payments such as tap to 
phone and payments based on QR codes. Just prior   to recording this episode, Visa also released 
their Q1206 earnings report and that actually   ended at the end of 2025. So that’s a fiscal year 
Q1 2026. The company continued to showcase strong   operating performance. Revenues were up 15%.
(51:04) Non-GAAP earnings were up 15% as well.   And during the quarter, the company generated $6.7 
billion from operating activities. And just 370   million was deployed into capital expenditures. 
And that illustrates what I was talking about   earlier, how this is a very capital-like business.
(51:26) And this has allowed them to send the vast   majority of their cash flow back to shareholders 
in the form of buybacks and dividends. The company   also provided guidance for fiscal year 2026 for 
both net revenue growth and earnings per share   growth. They forecast this to increase in the 
low double digits. Given the operating leverage   I highlighted earlier, I personally would 
expect earnings to grow faster than revenue.  (51:44) But I think this illustrates that Visa 
is doing some reinvestment through the income   statement in developing new offerings, enhancing 
their current offerings, and you just don’t find   a lot of companies that can grow at a double-digit 
clip in a relatively low risk way like this. So,   of course, every company has its fair share of 
risks, and there are no 100% certainties, but we   do our best as value investors to find companies 
that offer attractive riskreward profiles and are   trading at good prices. So, if you’re an investor
(52:15) who underwrites returns closer to 20%,   then you might need to look elsewhere 
in the market. But if you’re satisfied   with say a 10% return, maybe closer 
to 15% in the bull case, then Visa   might be a company worth considering. 
or perhaps you put it on your watch   list and just wait for the next market panic.
(52:33) Visa is one of those companies where   it’s certainly a great business, but the biggest 
problem is that the market already knows that. So,   a lot has to go right to get solid returns from 
here. So, while covering Visa, I thought it’d   also be a good opportunity to talk a little bit 
about one of their main competitors, American   Express. I know I highlighted them a bit earlier.
(52:52) So they operate the closed loop model   and then Visa and Mastercard of course have the 
openloop model. Interestingly Berkshire Hathaway   has American Express as their second largest 
position in their public equity portfolio.   Bergkshire initiated a position in AMX in 1991.
(53:14) This means they’ve been holding the stock   for more than 35 years bringing the value of 
the position to over 50 billion. And similar   to Visa and Mastercard, AMX’s stock has performed 
quite well over the years, beating the market over   about any time frame. While shares of American 
Express might seem more attractive on the surface,   as they trade at a lower PE ratio, it’s not 
really an applesto apples comparison since   AMX is also in the business of extending credit.
(53:38) So AMX acts both as a payment processor   and a card issuer. So, they take on 
credit risk as consumers swipe their   MX cards and take on loans. The card 
I use more than any other is actually   the MX Blue Cash card. It gives me 3% back on 
groceries, online retail purchases, and gas,   and then 1% back on most other purchases.
(54:00) However, I wouldn’t be able to get   by with just my MX card. Occasionally, I’ll go and 
shop at Costco. I prefer to get gas at Costco, but   Costco only accepts Visa credit cards for instore 
purchases. So, that essentially forced me to sign   up for their Costco anywhere Visa card, which 
I don’t necessarily mind since the card gives   5% cash back on gas and 2% cash back in store.
(54:25) And, you know, that helps me cover the   cost of my annual Costco membership fee. AMX’s 
primary focus is on premium cards for higher   income individuals. The business was started all 
the way back in 1850 and they’ve really built a   reputation for premium customer service, exclusive 
membership benefits, and a strong presence in the   payments industry. Today, MX accounts for roughly 
4% of credit cards in circulation in the US.  (54:51) But since they target more affluent 
consumers who tend to swipe their cards more   and make larger purchases, they account for 
around 20% of the total purchase volume among   the major US card networks. Although AMX 
competes directly with Visa and Mastercard,   its strategy is pretty different.
(55:14) With their closed loop model,   they intentionally focus on these more affluent 
consumers by issuing cards that require high   annual fees. And that’s designed to attract these 
consumers who spend more, prioritize luxury,   travel, and these exclusive perks. and AMX users 
have around two times as high of incomes than   the average American and spend twice as much on 
flights and accommodations on an annual basis.   Although merchants might not like the higher 
fees that AMX charges on each transaction,   it can still turn out to be a win for the merchant 
because if those consumers tend to spend more   and enjoy using their MX card, then the bigger
(55:46) shopping cart can more than make up for   the additional fee that the merchant is paying. 
With this model, MX positions itself to benefit   from higher transaction fees, more control, and 
a much closer relationship with its customers.  (56:06) And since they issue the cards themselves, 
they not only earn fees on each transaction,   but they also generate revenue from the annual 
fees on their higher-end cards and from interest   on the balances for those cards. Despite charging 
some of the highest annual fees in the space,   they are the top rated credit card company based 
on factors like customer satisfaction and trust.  (56:26) And this has given them room to hike 
their annual fee significantly over the years   as they update a card levels benefits every few 
years. So since 2019, the average fee per card   has compounded at 12% peranom. And there 
are additional benefits of issuing cards   to wealthier cohorts of society. These consumers 
tend not to change their spending habits as much   even during the tougher economic conditions.
(56:51) And they also have lower delinquency   rates, meaning that when they acrew a balance on 
their credit cards, they’re more likely to pay   that balance off. And despite AMX being around for 
more than 175 years, there is still an opportunity   to grow and expand its business. Today, over 75% 
of AMX’s revenue comes from the US, which leaves   room for them to grow internationally.
(57:17) Over the past 10 years or so,   management has taken steps to grow outside 
the US. And the primary challenge was just   gaining the merchant acceptance. And they have 
managed to gain traction as there’s around 80%   acceptance in their top international markets 
and more than 90% acceptance in top tourist   attraction areas. Similar to Visa and Mastercard, 
AMX also sees the benefits of operating leverage.  (57:43) Since 2020, AMX has increased its number 
of cards issued on average by 6% per year,   which now totals 152 million cards issued, 
generating $1.6 6 trillion in payment volume.   While revenues have grown at 8% over the past 
decade, earnings per share grew at nearly 12%.   AMX expects the credit card payment industry to 
grow at around 8 to 9% per year through 2034.  (58:09) And they’re confident that 
thanks to its favorable positioning,   they’ll be able to grow revenue at a double-digit 
rate, outpacing the broader industry. However,   with all that said, with AMX issuing the 
credit cards themselves, they operate in   just a brutally competitive industry, as there are 
several companies marketing to consumers, trying   to capture their attention and issue them cards.
(58:29) It seems that half the time when I check   out at a local retailer, I get asked if I’d 
like to get a credit card there, whether that   be a sports retailer or just when I’m shopping 
for clothes. So AMX’s advantage comes from that   closed loop model of likely having the ability 
to offer the widest breadth of rewards and from   their brand name that’s globally recognizable.
(58:52) It’s trusted and it’s associated with   prestige and exclusivity in many people’s minds. 
Overall, I would expect all three of the payments   giants to continue to perform well as the world 
continues to shift toward digital payments.   All three benefit from this secular tailwind and 
shareholders also benefit from the prudence of   management, the benefits of operating leverage 
and they see their share ownership continued   to increase through share repurchase 
programs. To wrap up the discussion,   Visa just checks all of the boxes for me
(59:27) as an investor. The business is   wellrun. It has high returns on capital, 
generates recurring revenues that increase   alongside inflation. They have minimal 
need for reinvestment and it’s riding   these big secular mega trends. However, the market 
recognizes the advantageous position they’re in.  (59:46) So, the stock is close to priced to 
perfection. It’s not a stock to get rich quickly   on, but assuming that their entrenched 
position doesn’t significantly change,   then I would expect it to continue to compound at 
a good rate going forward. That wraps up today’s   discussion on Visa and the payments companies.
(1:00:04) Thanks a lot for tuning in and I   hope to see you again next week. 
Thanks for listening to TIP. Visit   the investorspodcast.com for show notes 
[music] and educational resources. This   podcast is forformational and entertainment 
purposes only and does not provide financial,   investment, [music] tax or legal advice.
(1:00:21) The content is impersonal and   does not consider your objectives, financial 
situation or needs. Investing involves risk   including possible loss of principle and past 
performance is not a guarantee of future results.   Listeners should do their own research 
and consult a qualified professional   before making any financial decisions.
(1:00:38) Nothing on this show is a   recommendation or solicitation to buy or sell 
any security or other financial product. Hosts,   guests, and the investors [music] podcast network 
may hold positions in securities discussed and may   change those positions at any time without notice. 
[music] References to any third party products,   services, or advertisers do not 
constitute endorsements, and the   Investors Podcast Network is not responsible 
for any claims made by them. [music] Copyright   by the Investors Podcast Network.
(1:00:56) All rights reserved. Their   culture of being highly focused on reducing costs 
and increasing the level of automation has created   a strong competitive advantage that is just really 
difficult to replicate. Now the question is how   long will interactive brokers be able to grow. 
Pedy has shared that he sees strong potential   for growth both in the US and internationally.
(1:01:23) Today around 34s of the revenue does   come from the US and Pedy sees the number 
of accounts growing substantially well   into the future. So right now they have 
their sites set on reaching 20 million   accounts up from four million today. 
But they certainly don’t intend to stop

Pitch Summary:
Viromed Medical AG is poised for significant growth with its innovative PulmoPlas device, which addresses a critical issue in intensive care units worldwide: ventilator-associated pneumonia (VAP). The device uses cold plasma technology to eliminate bacteria physically, offering a safer and potentially more effective alternative to antibiotics. With a vast total addressable market, particularly in hospitals with intensive care units, Viromed is positioned to capture substantial market share. The company’s business model, which includes recurring revenue from consumables, enhances its financial prospects. Analysts project a dramatic increase in sales from €1.4 million in 2024 to €80 million by 2026, driven by global expansion and exclusive contracts. The recent scientific validation of PulmoPlas further strengthens the investment thesis.

BSD Analysis:
Viromed’s strategic focus on a niche market with high barriers to entry, supported by patents and clinical data, creates a competitive moat. The company’s collaboration with institutions like Hannover Medical School and Saarland University underscores its commitment to scientific excellence and regulatory compliance. The expected approval from the Federal Institute for Drugs and Medical Devices (BfArM) could act as a significant catalyst for stock price appreciation. Furthermore, Viromed’s partnership with the UMECO Group for Asian distribution highlights its global expansion strategy. The company’s valuation, based on a fair P/E ratio of 25.8, suggests substantial upside potential, making it an attractive investment for value and momentum investors.

Pitch Summary:
ASML is being reduced in the portfolio due to its high PEG of 6 and its dependence on the current AI CAPEX boom. The company’s monopoly in EUV lithography positions it uniquely in the semiconductor industry, but the growth projections are mid-single digits. The inability to deliver to China and the reliance on AI-driven demand pose risks to future performance. As part of a strategy to decouple from the AI CAPEX boom, the stock is being reduced significantly.

BSD Analysis:
The decision to reduce ASML holdings is driven by concerns over its high valuation and reliance on AI-driven demand. While the company holds a strong market position in semiconductor equipment, the current growth projections and geopolitical challenges limit its upside potential. By reducing exposure to ASML, the investor aims to mitigate risks associated with the AI CAPEX boom and focus on more sustainable growth opportunities. This move reflects a cautious approach to managing portfolio risk and aligning investments with long-term industry trends.

Pitch Summary:
Nintendo is being added to the portfolio due to its strong growth prospects with the rollout of its new gaming platform. Analysts estimate a 40% increase in EBIT, driven by the success of the Switch2 console. The stock has declined due to elevated memory pricing, but this cyclical factor is expected to normalize. With a PEG of 0.75, the stock presents an attractive buying opportunity, supported by a clear visibility of earnings growth for the next cycle.

BSD Analysis:
The addition of Nintendo to the portfolio is based on its strategic positioning in the gaming industry and the anticipated success of its new platform. The company’s ability to innovate and capture market share with its consoles and franchises positions it for sustained growth. The current valuation offers an attractive entry point, with the potential for significant upside as memory pricing normalizes and the new platform gains traction. This investment reflects confidence in Nintendo’s ability to deliver long-term value through strategic product launches and market leadership.

Pitch Summary:
Mercado Libre is being added to the portfolio due to its consistent growth and attractive valuation. The company has demonstrated a 30% annual growth rate over the past 22 years, establishing itself as a leading e-commerce platform in Latin America. Despite a recent decline in stock price, the current EV/EBIT of 34 and PEG of 0.98 make it cheaper than its historical range. The stock typically trades at a higher multiple, presenting a buying opportunity.

BSD Analysis:
The decision to add Mercado Libre to the portfolio is based on its strong growth trajectory and market leadership in Latin America. The company’s ability to sustain high growth rates over an extended period highlights its competitive advantage and operational excellence. The recent stock price decline offers an attractive entry point, with the potential for significant upside as the company continues to expand its market presence. This investment aligns with a strategy of investing in high-growth companies with proven track records and favorable valuations.

Pitch Summary:
CD Projekt is being added to the portfolio due to its strong track record and future growth potential. The company has developed successful franchises like Witcher and Cyberpunk, with plans to release new iterations in the coming years. These releases are expected to drive significant operating income, similar to industry peers like TakeTwo. The company’s current valuation is attractive, and the anticipated growth in operating income supports a higher valuation multiple.

BSD Analysis:
The investment in CD Projekt is based on its proven ability to create successful game franchises and its potential for future growth. The upcoming releases of new iterations of Witcher and Cyberpunk are expected to generate substantial revenue, positioning the company for strong financial performance. The current valuation offers an attractive entry point, and the company’s strategic focus on franchise development aligns with industry trends. This investment reflects confidence in CD Projekt’s ability to deliver long-term value to shareholders.

Description:
Kyle Grieve discusses how a series of unforgettable real-world stories reveal the hidden psychological traps that derail investors.

Transcript:
So, if you’re a long-term investor, your default state should be inactivity. If your portfolio is full of businesses that have high returns on invested capital, ample reinvestment opportunities, and are run by excellent management, and have a great culture, your best activity is just to do nothing. Chances are the business will continue doing really well for many years, and any short-term hiccups will simply be resolved due to the combination of the company being great and being run by a talented management team. Hey, real quick before we jump into today’s episode, if you’ve been enjoying the show, please hit that subscribe button. It’s totally free, helps out the channel a ton, and ensures that you won’t miss any future episodes. Thanks a bunch. We’re going to discuss a series of great short stories to help us make us smarter investors. We’ll be drawing wisdom from a book that I recently read called Trailblazers, Heroes, and Crooks by Steven Forester. Now, stories are the best way in my opinion to learn something. And that’s because a good story is vivid and memorable and I think really helps take understanding of key concepts and retention of those concepts to a whole another level. I try to tell myself stories about businesses and share them with you because it helps me remember some of these subtle nuances that I think can be integral to a thesis and I hope it helps you remember them better as well. So, let’s dive right into a story that helps investors understand noise. the ill effects of listening to the media and maybe how investors confuse correlation for causation. This one, oddly enough, comes right from the famous footballer Cristiano Ronaldo. So on June 16th, 2021, the Washington Post issued a headline article titled, “Cristiano Ronaldo snubbed Coca-Cola. The company’s market value fell $4 billion.” Now, to many people that might sound strange, and I tend to agree, but we live in a world where athletes can exert very, very significant amounts of influence. So, looking at Ronaldo, he has 668 million followers on just on his Instagram account, which is incredible. So, it’s not really surprising that if Ronaldo were to put his support behind some idea, no matter what it is, it could theoretically move markets. Now, let’s rewind to June 16th, 2021, the day the article was discussed. So during a press conference, you see Ronaldo approach a seat where there’s two glasses of Coca-Cola prominently displayed. He looks at them with a slightly puzzled look, reaches for both of them, and then moves them away from him, replacing them with a bottle of water. He then says, “Awa, no Coca-Cola.” The article’s premise was that because Ronaldo felt this way about Coca-Cola, select shareholders sold out of the company, as they thought that this event might be bearish somehow to Coca-Cola’s business. Now, was this true or was it just a matter of a media outlet maybe just looking for a story? To understand the answer to that question, we must first quickly break down dividends. So many of our listeners are probably very familiar with how dividends and X dividends work. But for those who aren’t, let me just give you a quick primer. So the X dividend date is simply when you must hold a stock in order to qualify to be paid a dividend. There’s a bit of a lag time between the X dividend date and the date that the dividend is actually paid. If you aren’t a shareholder on the X dividend date, you do not receive the quarterly dividend until the next one, provided that you hold shares until the next X dividend date. Now, generally, when a business has its X dividend date, the stock price will plummet by the amount of that dividend. So, the value of the company just kind of remains the same. So, let me just give you a quick example in case that doesn’t really make any sense to you. If a stock is priced at, say, 100 bucks and has a $1 dividend, then on the X dividend date, the stock’s price will drop to $99. And that’s simply because shareholders will receive the $1 dividend, which still provides the $100 value, provided no new information or developments occur. Now, June 14th, 2021 was the X dividend date for Coca-Cola, which means that shares were actually expected to drop in anticipation of that dividend announcement. And shares of Coca-Cola began falling even before that press conference with Ronaldo. So, here’s what Forester writes. Ronaldo removed the Coke bottles at 9:43 a.m. New York time. And through the remainder of the trading day, Coca-Cola’s stock price actually rose both in absolute terms as well as relative to the overall market. Now, while the Washington Post’s statement was kind of correct that Coca-Cola’s market value decreased by that $4 billion number, it was completely incorrect in the reasoning for that drop. Sure, you know, they could have pointed out that the X dividend part of the story actually mattered and maybe they should have mentioned that to the readers, but then the story just becomes a lot less interesting and juicy. So, what the author essentially succumb to if they weren’t paying attention to some of these other things was something called correlation bias. So correlation bias is a cognitive error in which an individual perceives a relationship between two variables or events when no such relationship actually exists or is much weaker than it was initially believed. So let me give you an example here. Let’s say that I go to sleep one day and I forget to floss my teeth and perhaps when I wake up the next morning I look outside and it’s raining. I could then maybe correlate that it’s raining with the fact that I didn’t floss my teeth. Now, obviously this is completely nonsensical, but it really just illustrates just how far humans will go to find patterns and connections where they just don’t exist. And correlation is a very real issue in investing. With so many people sharing their opinions on various topics, it’s really challenging to know who to trust. The best defense that you can have is to have a critical mind. Never blindly follow a statement without doing your own research and looking directly at source material. If someone says something, have a look at the statistics that back up what they say. Are they using the same source material or are they just going by hearsay? This is why it’s so essential to conduct your own due diligence on a business. Can you outsource some of this to others? Yes. And the majority, I think, of the market actually relies on the advice, opinion, and work of other people. However, the majority of the market also fails to achieve good results. So, craft your own thesis, utilize your own information, and draw your own conclusions. Otherwise, you risk correlation bias which in the markets can result in significant financial losses. Now, the next lesson comes from two very well-renowned combatants in human history. The first was a gentleman named Quintis Fabius, a Roman dictator and general, and the second, Muhammad Ali, the legendary boxer. So, Quintis Fabius rose to power in 2011 B.C.E. leading up to this point, a war raged between Rome and Carthage. Carthaginian general Hannibal Barka ravaged what is now known as Italy, winning minor skirmishes and significant battles alike. Rome was starting to get kind of fearful of Hannibal’s growing military strength and decided that they need to squash him to maintain power and order. So Fabius led Rome’s armies at this time. Fabius understood that Hannibal didn’t really care to capture Rome because Hannibal could simply just lay waste to Rome’s smaller cities and still have similar effects. So instead of focusing on protecting Rome, Fabius decided to venture out to some of these smaller cities and defend them against Hannibal while his own army could be reinforced. So his first stand was in Aikai, a town in southern Italy. When Hannibal found out that his army was camping there, he struck. But instead of fighting, Fabius’s armies just showed no response. And as a result, Hannibal’s army retreated to their own camp. Fabius was simply biting his time to allow his numbers to grow. Sure, he allowed for some minor skirmishes just to maintain morale with his troops, but he wanted to wait for the right time when he had the upper hand to make a full frontal assault. And as a result of this inactivity, he eventually found himself in the right battle that he thought he could win. Forester calls this masterly inactivity. Now, let’s fast forward a couple of millennia to October 30th of 1974. This was the date of an epic fight titled The Rumble in the Jungle between George Foreman and Muhammad Ali. At this point in Ali’s career, he was kind of past his prime, but he was still a very, very dangerous boxer. Now, keep in mind here that Foreman was the clear favorite. In 40 fights previously, he’d never lost, and he knocked out 37 of his opponents. So, going into the fight, Ali knew that he would need to get his strategy right in order to beat Foreman. So, what information could Ali obtain to help him design this strategy? Well, for one thing, Foreman’s fights were all pretty short. So, the book mentions that none of the opponents that Foreman knocked out made it past the third round. Now, that’s a pretty crucial data point. Perhaps Ali could have focused on the fact that Foreman wasn’t really the type of boxer to go the distance in a fight and win. So, as the fight began, it appeared that Foreman was winning. Foreman was pinning Ali against ropes and repeatedly hit him with hooks and uppercuts to Ali’s midsection. In the fourth round, Ali skipped resting on the bench altogether and handed up making a face to the ringside TV camera. This strategy continued for seven rounds while Foreman began getting more and more tired. In the eighth round, Alli took advantage of his intentional inactivity and hit Foreman with the flurry of blows that defeated him. So, the data on this fight was quite fascinating. Foreman threw 461 punches to Ali’s only 252 and he landed on 194 of those to Ali’s 118. So instead of doing what most of Foreman’s opponents had done and attempted to face Foreman in the middle of the ring, Ali realized that he had to be patient and wait for the right time to attack. So he accepted that he would have to play defense until Foreman got tired and then he would launch his attack. And it worked. The strategy that he employed here was what he called rope a doe because Ali spent so much time on the ropes before making his winning stand. Now the concept of intentional inactivity is crucial to achieving investing success. Buffett once said, “The stock market is a device for transferring money from the active to the patient.” Or written differently, the stock market is a device for transferring money from the active to the inactive. Now, the thing about inactivity is that it is a form of activity. Here’s what Nick Sleep and Kakario wrote about that in the Nomad Investment Partnership Letters. The research continues, but as far as purchase or sale transactions in Nomad are concerned, we’re inactive. An act of except perhaps for the observation seldom made that the decision not to do something is still an active decision. It’s just that the accountants don’t capture it. We have broadly the businesses we want in nomad and see little advantage to fiddling. So if you’re a long-term investor, your default state should be inactivity. If your portfolio is full of businesses that have high returns on invested capital, ample reinvestment opportunities, and are run by excellent management, and have a great culture, your best activity is just to do nothing. Chances are the business will continue doing really well for many years, and any short-term hiccups will simply be resolved due to the combination of the company being great and being run by a talented management team. So, where most investors make costly mistakes is in thinking that they must stay active to perform well. There aren’t many jobs where doing less actually yields better results. Now, when you think about athletes or other outperformers, you think of guys such as, you know, Michael Jordan who was not only super talented, but also had an otherworldly work ethic to continue to get better and better. So, that kind of hustle quality is just embedded in many of us and we erroneously apply it to investing as well, but it’s not necessary. All of my biggest winners occurred because the businesses performed exceptionally well, and I didn’t bother tinkering with them, taking profits, or attempting to time the market in any way. I just left them be and just waited around for the results to follow. Now, Bobby Bonia stopped playing baseball for the New York Mets in 1999, but to this day, he still collects $1.19 million from them, and that’s not stopping anytime soon. He’ll continue receiving these payments until 2035. So why on earth is he getting paid this way? So let’s go back to the year 1999. New York’s going crazy because tech companies are going to the moon daily and the levels of speculation are about as high as you can possibly imagine. As for the Mets, they had signed Bonia to a 2-year contract in 1998. In 1999, he agreed to have his contract bought out for the 2000 season. He was set to make $5.9 million in that season. However, Mets management along with Bonia and his agent devised a very interesting deal structure. First, Bonia had an agent who helped him bring this idea for the deferred contract to Bonia and to New York Mets management in the first place. The agent’s name was Dennis Gilbert. Now, you see, Gilbert was also a former MLB player, and he understood how many professional athletes were incredible at their sport, but not so incredible with their money. So, here’s what Gilbert said about Bobby Bonia in the contract. From the first day that Bobby became a client, all of our conversations were valved around saving money for the future. A lot of my friends from the minor leagues who went to the big leagues were retired and just broke. It’s just taking money out of the bank today and putting it in the bank tomorrow. While I’m sure Gilbert had his client’s best interest at heart, this was a deal that obviously also benefited him. If we assume Gilbert got say 4 to 5% of Bonia’s total of 29.8 8 million over 25 years. Then Gilbert walked away with1 to $1.5 million. So it was a very good deal for him as well. So Gilbert could wrap the deal with Bonia as a way to become more financially sound in the future while also enlarging his own pockets at the same time. After all, the fear of being a broke athlete in retirement is one that I’m sure is very top of mind for many players once they start reaching their Twilight years. But here’s the weird part. Essentially, the deal was an annuity from Mets ownership’s perspective. It allowed them to free up money today to spend on other things, whether that be operational or personal. The contract was delayed until 2011 when Bonia would begin receiving his first payment. The interest rate on that was 8% on the money for about 11 years when the deal was brokered and the date of his first payment. Then it was advertised over the next 25 years. So there’s a quiet force operating in the background here known as compounding. But this concept is directly related to the time value of money, also known as TVM. So TVM simply means that a dollar today is worth more than a dollar tomorrow. For instance, if you can compound cash at 8% a year, then a dollar today is worth about $18 a year from now. And you can see how money when invested widely today obviously is very valuable. This was why they applied that 8% interest to Bonia’s contract. Now the most remarkable aspect of this narrative is just how events kind of unfolded in different directions for Bonia and Met’s owner Fred Wilpon. So Bonia, you know, he kind of made out like a thief, but Fred Wilpon had recently achieved some incredible investing results from a fund that he was invested in. Wilpon was invested with Bernie Maidoff, and that fund provided 14% annual returns between January 1990 and June of 1999. So if Wilpon had invested that 5.9 million with Maid Off and it wasn’t a fraud, Wilpon would have made a lot more money investing that money today and deferring those payments to Bonia for a later date. Now, whether that decision actually affected his decision, completely unknown. But the true lesson here is that a carefully constructed contract can be used to improve your life if you’re willing to defer gratification. For those unwilling to defer gratification, you open yourself up like Mr. Wilpon did to investing with unscrupulous characters such as Bernie Maidoff. But I’m not here to pick on Fred Wilpon as Maid Off fooled everyone, including the SEC, into thinking that he was legit for a very, very long time. So what exactly was Maid Off doing that helped him fool so many people for so long? The problem was that Maid Off had a great standing in the investing community. In 1960, he launched Bernard L. Maidoff Investment Securities or BMIs. This was his legitimate business that was a brokerage. As far as everyone knows, this business was real and not part of Bernie scheme. So why on earth would Bernie launch a scam that ended up harming everyone around him, including his loved ones? The exact start date of Bernie’s Ponzi scheme is not known, but what we do know is that there were some very, very close calls. For instance, in 1992, the SEC received a tip from the customers of an accounting firm called Avalino and Bines. This accounting firm referred business to Bernie Maidoff in return for a referral fee. A&B was soliciting loans from their clients to be used with an unnamed Wall Street broker. This broker offered a too good to be true 14% return with nearly no risk. According to A&B, they wrote, “At no time is a trade made that puts your money at risk. In over 20 years, there’s never been a losing transaction.” Now, as part of the SEC due diligence, they actually ended up doing a site visit to Maid Off’s business to verify his security positions. But rather than gathering the data from a third party that actually processed and settled transactions, they used Maid Off’s in-house numbers, which we now know were fraudulent. A and B were then forced to shut down, returned $441 million of capital that they had borrowed from their clients, and during the sign, they basically refused to cooperate any further, and they were permanently banned from selling any types of securities. But this was actually 16 years before maid off was exposed. But, you know, Bernie was just not an ordinary thief. The way he did things was just darker. You know, he would take widows into his arms at funerals and tell them that he would help take care of them by managing their money for them. He was a true deviant who I think probably lacked empathy and had psychotic tendencies. Luckily, there was one person out there willing to expose maid off for the fraud that he was. So, in 1999, a gentleman named Harry Marcopoulos was working for an asset management firm called Rampart Investing Management Company. So, Harry was introduced to Bernie’s fund through an acquaintance. And when asked about what he was kind of doing, essentially it was just a hedge fund where he was buying stocks and then hedging it with derivatives. This isn’t really a novel approach. It’s been used for a very, very long time. It’s just not something that I personally find very interesting. But I think what really caught Harry’s attention was just how specifically Bernie was making it work for him. So Harry also wanted 14% returns with no risk for himself and for his company. So he looked at Maidoff’s trades, reverse engineered it, and tried to see if maybe it was possible to actually make these returns with no risk. And after about 5 minutes, he concluded that Maid Off’s numbers were completely fraudulent. So Maropoulos developed six red flags. So they were things such as how exactly he could generate those returns, how there weren’t enough derivative securities in the world to provide the purported hedging that maid off was going for and how it wasn’t possible to achieve maid off’s reported returns in the first place. Additionally, he pointed out that maid off didn’t allow any outside auditors to look at his books. Harry brought this up in 2000, 2001, 2005, 2007, and again in 2008, but the SEC, for whatever reason, failed to heed his warnings. Outside of Maropoulos, Maid Off was getting discovered by the media. This was an event that Maid Off was definitely trying to avoid as he would have known that any additional scrutiny on his fund would have exposed him to a lot of risk. So in 2008, due to the great financial crisis, Maid Off scheme was exposed. Ponzi schemes like this rely on new money coming in to pay for redemptions. When liquidity is completely sucked out of the market and no new money is coming in, maid off became unable to meet redemptions. He ended up confessing to his two sons that the hedge fund was a fraud and they told the FBI who ended up arresting him. So the lesson here isn’t that we should necessarily be smart enough to uncover overly complicated financial frauds. Had I been looking at this fund back in the 90s, I probably would have been really impressed with his results. But I don’t think I would have ever actually invested my money with someone who is so dependent on derivatives cuz that’s just not something that I find very interesting or safe. But also, you know, there’s no way that I would have concluded that this was a fraud either. But obviously, there’s less sophisticated investors that wouldn’t be worried about how the fund is getting the returns, just about what the results would be. And I think this is exactly what made off prayed on. The real lesson here is in due diligence. If you were to invest in someone, just make sure to take some time to understand exactly what they’re doing to make their money. And if you can’t figure it out at all, then perhaps it’s better to just skip them and try someone else. Some managers outperform, but never losing money is just something that doesn’t happen. It never happened to Buffett, and it’s unlikely to happen to anybody else because it’s just not rooted in reality. So, if someone tells you that they can make money for you with zero risk, run. Do not walk in the opposite direction. Now the problem with maid off is that when you earn good money for people word obviously gets out and when word gets out that others are making money then that piles more and more people into a fund or position and what you ultimately get is fear of missing out or FOMO and FOMO doesn’t only affect the unintelligent it affects absolutely everyone. If I asked you to think about Sir Isaac Newton here for a second what comes to mind? Probably something to do with you know his laws on thermodynamics. Here you have one of, if not the most intelligent person in the history of mankind, making some of the most boneheaded investing decisions ever. You’d think his intelligence would have helped him overcome the emotional problems that most investors face. Yet, intelligence is not powerful enough to save us from our own emotions. Which raises the question, if intelligence can’t overcome emotions such as FOMO, what does? So, let’s rewind to 1711 when the South Sea Company was formed as a joint stock company in Britain’s Parliament. It planned to reduce the cost of national debt in return for providing monopolistic trade with Spanish colonies in South America, Central America, the Caribbean, and a few years later, exclusive right to sell slaves in that region. In January of 1720, the stock rose from £128 to nearly £1,000 by August of the exact same year. Now, what precipitated this 8x in its share price? Were there massive increases in revenues, profits, or dividends? No, not at all. So when I looked a little deeper into it, it’s kind of hard to not call this a fraud, similar to what we just discussed with Bernie Maidoff. The South Sea company didn’t have any revenue to speak of, let alone profits or dividends. It was pure speculation with a lot of financial engineering and false promoters. The difference between this and made off was that it was perpetrated by the British government and not a random rich person. So here’s how it worked. The government helped the company by allowing it to take over national debt. The company, backed by the government, emphasized the company’s upside to the public to help increase its value. Part of the reason that the government wanted it to do so well was to entice holders of government bonds to convert those bonds directly into South Sea stock, which would eliminate the government’s need to repay bond holders. So, the director and founder of this conversion scheme named John Blunt was driven by two things. The first was to drive up the stock price by any means necessary and the second was to create as much confusion in the conversion process as possible. Note that there’s no mention of actually creating value. So you can see how with the government’s help, it would be even easier to manipulate the price of the South Sea company. The more people who converted their bonds to the stock would add additional demand to the stock, further increasing its prices. And to stoke the fire, Blunt even allowed leverage to acquire shares in South Sea, allowing new investors to subscribe to shares for only 20 cents on the dollar. Blunt took it even a step further due to the connections that he had with the government. There were, after all, many members of Parliament who owned South Sea Company stock. So Blunt encouraged Parliament to pass something called the Bubble Act, which made it illegal for other businesses to try to take advantage of public markets. You could argue that he was just trying to dissuade competition for fund inflows. If you have one company, then all the inflows go there. If you have 30, then you have to distribute the inflows, albeit unevenly, among all of them. Blunt knew exactly what he was doing. Unfortunately, all this fiddling ended up backfiring right in Blunt’s face. Instead of dissuading other businesses to try out the open market, ended up scaring investors who were already invested in the market. And that started a domino effect. Margin loans were called in, forcing more selling pressure. International owners sold their stock. Then Southseas company owned lender, Swordblade Bank, failed. So Newton’s involvement was pretty interesting. He actually bought it pretty early, made some decent money, and then he sold it. But as a stock price rose, he actually re-entered the position. Then even as the stock was in freef fall, as a bubble popped, his conviction in the business encouraged him to purchase even more shares. Had he just held all of his shares and sold near the peak, he would have had £250,000. Instead, he lost nearly everything. So, a 2013 paper titled Computers and Human Behavior had a great definition of FOMO, calling it a pervasive apprehension that others might be having rewarding experiences from which one is absent. And that pretty much perfectly defines exactly what happened to Isaac Newton and scores of other investors during the South Sea company bubble. And that’s why protecting yourself from FOMO is just so essential. So here’s five quick ways to avoid FOMO. The first stay disciplined. If you have an idea for an investment, execute it and don’t change it because others are making money while you aren’t. The second is to take advantage of dollar cost averaging. If there’s a position that you like for the long term, add small amounts of money to it over time. This will help you avoid taking excessive concentration risk. Third is to just simply, you know, avoid hot tips from people that you know who are not investors. Fourth, if you think that you’ll regret selling a stock if the price increases, then avoid tracking an asset’s price after you sell it. And fifth is to just focus on the long term. Do not check stock prices daily if you know that large fluctuations are going to cause you to make errors. Now, Hedi Green is one of the best value investors that you’ve never heard of. Probably because she was a value investor before Benjamin Graham was even born. And it also didn’t help that she was a powerful woman in a time when men ruled financing and investing. Hedi made her forge him by leveraging the money that she received from her inheritance into investments that paid off. The investing part was nothing that would probably surprise you. She owned things like railroads and not just the company’s equity, but also their bonds, giving her a very detailed look at a business’s fundamentals. And she invested in railroads during its heyday along with some of the best railroad titans in American history, such as JP Morgan, Andrew Carnegie, and Commodore Vanderbilt. But Hedi had her hands in all sorts of asset classes. She owned mortgages that paid regular dividends. For instance, she owned property from Boston to San Francisco and between Maine and Texas. She owned steamboats, gold mines, iron mines, and even churches. She is the original value investor. Here’s what she said regarding value investing in real estate. I would advise any woman with $500 at her command to invest in real estate. She should buy at an auction on occasions when circumstances are forced sale. If she will look out for such opportunities, she will surely come and she will find that she can buy a parcel of land at about onethird of its appraised value. I regard real estate investments as the safest means of using idle money. Here you can clearly see that she had a very firm grasp of price and value and could clearly understand how price and value were likely to converge over time. But she was also a bargain hunter by nature. So at one point she found a horse carriage that was cheaper than the one that her husband had just purchased. She secured the discount by first finding someone who held a grudge against the seller. She then learned from this person all of the faults in the carriage. Then when she proposed buying it from the seller, she listed off all the faults and bought the carriage at a reduced price. So Hedi was also ridiculously frugal. She was actually in the Guinness Book of World Records for that. So she reportedly bought sacks of broken graham crackers just to save money. When she went to the butcher, she would ask for free bones for her dog. She bargained for incredibly cheap goods such as things like potatoes. She would move from boarding houses to hotels to avoid paying city and state taxes as she actually didn’t report a residence. Once she had a court appearance because she tried evading a $2 licensing fee for her favorite dog. Now, by the time she’d amassed a $60 million fortune, she was living in a $5 per week boarding house. Now, I think the main lesson from Hetty Green was that you can become very successful investing in incomeroucing assets. an area of investing that I admit I completely ignore. Hedi showed that leverage wasn’t necessary. She never ended up buying on margin and she believed that the secret to business success was to simply buy when nobody wanted the asset and sell when everybody wanted it. I’ll lead the section on Hetty Green with some of the lessons that she learned during the panic of 1907. I saw the situation developing 3 years ago and I am on record predicting it. I said that the rich were approaching the brink and that panic was inevitable. There were signs I just couldn’t ignore. Some of the solidest men of the street came to me and wanted to unload all sorts of things from palatial residences to automobiles. There had been an enormous inflation of values. And when the unloading process began, the holders of securities found great difficulty in getting real money from the public. I saw the handwriting on the wall and I began quietly to call in my money, making a few transactions and getting my hands onto every available dollar of my fortune against the day that I knew was coming. When the crash came, I had my money and I was one of the very few who really had it. The others had securities and their values. I had the cash and they came to me. They did come to me in droves. Moving on here. How did a series of container tanks holding very, very minimal amounts of oil and a lot of seawater help generate one of Warren Buffett’s greatest investments? First, we look at this anonymous tipster known only as the voice. So, this person reported that tank number 6006 in a warehouse in Bayon, New Jersey was actually not full of salad oil as it was supposed to be, but was also filled with sea water to give the appearance of being full. So, why did he report this? Was he bored, mistreated, or did he have a hint of guilt? Actually, none of the above. He did this purely for selfish reasons as he wanted money in exchange for more information. Now, this warehouse was owned by a gentleman named Tino D’Angelus, a brazen but, you know, kind of sloppy crook who had clearly been a criminal for probably his entire life and definitely his entire adult life. For instance, his business record included the following. being fined for $100,000 for exporting substandard cooking fat to Yugoslavia. Being fined $100,000 for selling inferior meat products. Being fined yet another h 100,000 for exporting inferior lard to Germany. Accused of falsifying documents, tax evasion, and falsifying inventories. So with all these infractions, you’d think that it would have been very, very hard for this guy to find business partners. But after all this happened, he ended up raising $500,000 to create the Allied crude vegetable oil refining corporation. So Tino created this business to help take advantage of the US government program known as Food for Peace, which was set up to help keep crop prices elevated when there was an excess supply and to provide surplus oil to countries with starving populations. Given Tino’s sketchy history, this was a perfect hunting grounds for him. He took 22 employees with him from a past venture and paid them over $200,000 annually in today’s dollars to do pretty menial labor. So American Express at this time had a subsidiary called American Express Field Warehousing Company or AEFW. And AFW’s mandate was to generate approximately $500,000 in profits from the subsidiary. The problem was that it just didn’t perform very well. It turned a profit in only 10 of 19 years and had cumulative losses in 1962. AEFW had 500 client accounts, but only two of them actually generated the lion’s share of profits. And both of these companies were owned by Tino D’Angelus. So in 1962, Warren Buffett had recently consolidated his 11 partnerships into one creating Buffett Partnerships Limited, BPL. At this time, Buffett was very, very focused on cigar butts. You know, the cheap beat up small companies that nobody wanted to own. But Buffett felt were mispriced and misunderstood. So the crisis happened because eventually it came to light that the tanks were not full of salad oil as they were supposed to be. And to anyone looking at it, it was extremely obvious that it was fraud. First, D’Angelos bought oil futures pushing up prices. He knew that demand for oil would be very heavy around the world and that Russia had some failed crops which would disrupt supply. When regulars demanded to see Allied records, they immediately uncovered the fraud. But as Forester writes in his book, it wasn’t really that hard to figure out that this was a fraud. He writes, “According to Census Bureau statistics, AEFW’s warehouse receipts total twice as much vegetable oil as all of the oil in the US. By the end of 1963, warehouse receipts had been issued for 937 million pounds of oil worth 87.5 million, while actual quantities were less than 100 million. AMX CEO Howard Clark had decided to sell AEFW as he felt that the subsidiary was compromised due to the scandal. It was also discovered that the head of AEFW held ownership in one of D’Angelus’s companies, which obviously was a massive red flag and conflict of interest. So, here’s where Buffett went to work. He knew that AMX was a trusted brand, especially in their lending business. And he also followed the story that was unfolding and how it affected AMX’s stock price. So 8 months after the scandal had occurred, AMX was trading at a 45% discount. To see if the scandal actually harmed AMX’s core business in travelers checks and credit cards, Buffett and an acquaintance that he hired did their own boots on the ground research. They spoke to bank tellers, bank officers, credit card users, hotel employees, and restaurant employees to figure out if AMX was still being used to buy things. But the conclusion was very straightforward. AMX’s reputation was still completely intact. The rest is history, but there are many great lessons from the story. First is that trust is fragile. But the trust that is perceived by the market may not align with the trust that actually exists between a business and its customers. If the market thinks trust is broken and irreparable, then the stock price is probably going to be punished. But as Buffett showed here, if you can generate a valid counterargument, you can make an excellent investment. And the second big lesson is that scandals can sometimes make brands even stronger. Buffett’s experience with AMX showed him the power of a strong brand. He understood that a business might face a scandal, but if its customers still find value in the product and the trust built with the company over many years, it’s really tough to break that bond. And the third lesson is that you must do due diligence on the people that you do business with. D’Angelus may have had some unfair advantages as there were many people who believed he had ties to organized crime. In that case, he may have been funded by people who knew that he was going to break the law. But someone inside AEFW could have looked at D’Angelus’s laundry list of infractions and easily concluded that he was not a person to do business with. If you’re investing in private or public businesses, spend some time trying to learn about the past of the person leading the business or other key people involved in the business. And the final and most important lesson here is simply that greed can cause us to take risky shortcuts. Donald Miller, who headed AEFW, either knew about D’Angelus’s character flaws and chose to overlook them, or he decided not to conduct DD necessary to determine that D’Angelus wouldn’t make a good business partner. Either way, Miller, who was required to generate profits for AMX, saw D’Angelus as his ticket to continued employment. Now, what do you get here when you mix an AI craze with a spa? You might be a business like AI infrastructure acquisition, a spa created to advance artificial intelligence and machine learning capabilities. So a spa is a special purpose acquisition company. Basically, you can buy a ticker of a spa, but all you’re getting is a promise to buy a business within a certain time limit, usually 18 to 24 months. Now, one of the earliest spaxs was a business that we’ve already discussed today, the SouthC company. Remember I mentioned that this business wasn’t really an operating business as it had no revenue. You were basically buying a company that owned the rights to fulfill some sort of narrative at some point in the future. And because other people observed the hype of the South Sea Company, it attracted many, many cloners. Nearly 200 joint stock companies were formed around the same time as the South Sea Company bubble. These companies were initially in industries like, you know, insurance, fisheries, and finance. But as they saw the market successfully propping up prices, there was a second wave of companies that came that had much more dubious industries related to things such as, you know, services and inventions. These were businesses that purported to do things like improve coal trading, sell largecale funeral furnishings, or even pond brokers. One company carried a patent on heat resistant paint. Another manufactured swords. Another notable company was meant to carry fresh fish from a boat into the fish market, but the fish rarely made it to the market alive. Now, since many of these businesses were just pure fiction, investors back in 1720 were very, very hurt by owning their stock, especially once it was discovered that there was no functional operating business behind them. It’s similar to many of the spaxs that investors took part in in 2020 and 2021. They bought into an idea and when it didn’t pan out, the investors were the ones holding the bag. One story of investors getting especially taken advantage of was outlined in the great book Extraordinary Popular Delusions and the madness of crowds by Charles McKay. So in this story that McKay covers, there’s this business that he says is considered quote a company for carrying on and undertaking a great advantage, but nobody knows what it is. Sounds like a spack to me. Are you looking to connect with highquality people in the value investing world? Beyond hosting this podcast, I also help run our TIP mastermind community, a private group designed for serious investors. Inside, you’ll meet vetted members who are entrepreneurs, private investors, and asset managers. People who understand your journey and can help you grow. Each week, we host live calls where members share insights, strategies, and experiences. Our members are often surprised to learn that our community is not just about finding the next dog pick, but also sharing lessons on how to live a good life. We certainly do not have all the answers, but many members have likely face similar challenges to yours. And our community does not just live online. Each year, we gather in Omaha and New York City, giving you the chance to build deeper, more meaningful relationships in person. One member told me that being a part of this group has helped him not just as an investor, but as a person looking for a thoughtful approach to balancing wealth and happiness. We’re capping the group at 150 members, and we’re looking to fill just five spots this month. So, if this sounds interesting to you, you can learn more and sign up for the weight list at thevesspodcast.com/mastermind. That’s thespodcast.com/mastermind. or feel free to email me directly at clay@theinvestorspodcast.com. If you enjoy excellent breakdowns on individual stocks, then you need to check out the intrinsic value podcast hosted by Shaun Ali and Daniel Mona. Each week, Shawn and Daniel do in-depth analysis on a company’s business model and competitive advantages. And in real time, they build out the intrinsic value portfolio for you to follow along as they search for value in the market. So far, they’ve done analysis on great businesses like John Deere, Ulta Beauty, AutoZone, and Airbnb. And I recommend starting with the episode on Nintendo, the global powerhouse in gaming. It’s rare to find a show that consistently publishes highquality, comprehensive deep dives that cover all the aspects of a business from an investment perspective. Go follow the intrinsic value podcast on your favorite podcasting app and discover the next stock to add to your portfolio or watch list. The company’s prospectus stated that it was seeking to raise £500,000 by selling 5,000 shares at £100 each. Now, here’s where the craziness starts. So, the unnamed promoter promised that for each year that the shares were owned, the subscriber would receive £100 per year, meaning he was promising a one-year payback time. The promoter promised details about how he would do this within a month after it closed. The morning after the prospectus was released, the promoter opened his office to a crowd of potential investors waiting to just give him their money. In only one day, he ended up collecting $2,000, which was about $2 million today. He immediately left the country with all the money, never to be heard of or seen again. While this seems like a completely madeup story, McKay wrote, “Were not the facts stated by scores of credible witnesses, it would be impossible to believe that any person could have been duped by such a project.” But let’s revisit that McKay quote again. A company for carrying on and undertaking a great advantage, but nobody to know what it is. It’s vital to understand the meaning behind this. A spa really is pure speculation. In modern times, investors might invest into a spa as a form of maybe betting on a jockey. Perhaps there’s some sort of investor that you highly respect who you think is a really, really good and talented capital allocator. So, let’s imagine a hypothetical world where Warren Buffett gets a second wind and wants to purchase another company for $2 billion and just not include Berkshire Hathaway. I know bad example as the chances of that happening are probably close to zero, but just bear with me. So, if someone like Buffett were to do something like that, my guess is that he would be drastically oversubscribed because people know Warren would probably find it an insanely good business to invest in and people obviously trust him to do a really really good job. But someone like Warren would never do this because it’s antithetical to what he believes in. He wants to be a partner with these investors and spaxs create asymmetry between the spa and the shareholder. For instance, a spa creator gets access to a large percentage, usually 20% of the float, at drastically reduced prices. So why exactly should the spa creator get to buy shares at reduced prices? Doesn’t this really incentivize them to take larger amounts of risk? And in the case that the spa merges with another company and that company fails, then investors lose all their money and the spa creators may still be able to exit with a profit due to the discounted shares that they received. So whether you’re looking at 1720 or 2021, the story is the same. During times when the market is euphoric, scores of people will come into the markets with promises to make you rich. But in reality, they are mostly focused on just making themselves rich at your expense. Which is why I personally have never invested more than a few minutes into spaxs. And the time that I have was purely just to satiate my own curiosity. If there were someone I highly trusted to invest well, I would probably just wait for the spaxs merger to be consummated and find out at that point whether it’s a good investment or not. If it’s not an investment that I would find interesting, then I simply don’t buy it and it makes no difference to my wealth. And if it’s a business that I do find interesting, well then yes, I’ll probably buy it at a premium if I take part in that spec. But still, you know, I’m willing to pay up for that certainty that the business is something that I can actually understand and will have a good chance of creating shareholder value. Now, a few decades after the South Sea bubble burst, an even stranger financial derivative was created to gamble on the future, and it actually didn’t involve highly speculative companies, but children. Gianne Pictet tragically died at the age of four back in the late 1770s. And while her aristocratic family mourned her passing, the French monarchy ruled by King Louis I 14th was secretly rejoicing because her death saved them bundles of money. France had a financing problem for most of the 17th and 18th centuries. They defaulted seven separate times and the money that they needed was spent on wars. The trigger for the default followed a pretty similar path. The war ends, then France would then convert its highinterest short-term debt into low interest long-term debt. Then they debase their currency through recoinage or what we today refer to as money printing. The problem was raising additional funds through measures like taxes, which created all sorts of issues that the monarchy and regional governments preferred to avoid. As a result, a weird, brilliant, and ultimately dangerous financial instrument was created. It was called the Taene. So, you may recognize that word from Bill Aman’s failed spack named Persing Square Taine Holdings. Tantines at its core were very simple. They’re an insurance contract that provides the purchaser or anatant with lifetime income. It sounds similar to an annuity but with a twist. So there’s a very large gambling element to a taunt team. So for a life annuity the payments are fixed. In a taunt they actually increase in size as you get older. The reason for this was that your money was pulled with other investors into the taunt and upon passing their payments would be redistributed to the surviving investors. So the longer you lived the higher your payments would be. And once the last survivor passed away, there was no principal repaid to any of the investors. The government loved them. They got cash up front and quickly and didn’t need to repay the principal unlike a bond. The investors love them because they could essentially gamble the duration of their lives to generate future income. The taunt was almost like a protosp very very uncertain outcomes. But in 1770, tens ended up actually being nullified and converted to life annuities. So what happened was the royal government claimed that tontines were very costly and could just no longer be issued. This is where the Swiss came in with some brilliant ideas to capitalize on the conversion of tant. You see when a tanteen was converted to a life annuity at this time the holders of the tantine could appoint a new nominee for the life annuity and the best way to maximize the value of the annuity was to nominate someone young as they’re obviously going to have the most years ahead of them to collect those annuity payments. So, a Swiss banker named Jake Bowmont decided that he’d buy up a number of these nullified tant appoint new nominees for the converted life annuity. To reduce risk, he brought in other investors and essentially turned these life annuities into a form of securitization. Since he had other investors and the pool was large, it also created liquidity, allowing investors to get in and out of the investment. Bulman also did his homework on lifespans. Women on average live longer than men. So he decided that nominees should mostly be female. But you couldn’t just go with newborns because infant mortality rates were high. Small pox was rampant and your chances of living were much higher past the infant years. The sweet spot that the Swiss bankers came up with was girls aged between 4 and 7 who had already survived smallox and other health issues. But they didn’t just want girls who fit those criteria from any old family. No, they wanted the ones who had access to the best possible healthcare as well. So the nominees came from wealthy families who could afford the best possible doctors and treatment. These girls were known as the immortals. So when Gian Pik passed away at 4 years old, the government was able to save decades of annuity payments that it would have had a hard time servicing. But the need for government funding was still high. At the end of the 18th century, as the government continued to need money and investors became interested in future income streams, the life annuity rules changed. So to collect the annuity, you had to prove that the nominee was alive. This proved pretty inconvenient. So there was a workaround that was created which allowed you to just nominate anyone as your nominee. And a really good option was to just nominate a famous person. That way everyone would know that that person was not alive or alive. And so at this time famous people were people in the French royal family. Nominees included people such as King Louis the 14th, his wife Mary Antuinette and other family members. But then the French Revolution happened. The king and his family met the same fate, beheaded by the guillotine. And with that, the annuity payments promptly disappeared. This whole story reminds us that humans don’t really get smarter with time. They just find new ways to gamble. Now, everybody listening today has probably heard or taken part in take your kid to work day. It’s the harmless tradition of taking your kid with you to see what mommy or daddy does every day at work. and it tends to be completely harmless unless you’re 33,000 ft in the air in an airplane cockpit. This was a situation that a pilot found himself in on Aeroflot Flight 593 on March 22nd of 1994. So, one of the backup pilots named Yaroslav Kadrinsky brought his two children up into the cockpit. His 12-year-old daughter Jana and his 16-year-old son Eldar Kadrinsky first allowed his daughter Jana to take control of the plane and fly it for a bit. Jana flew the aircraft for a few minutes, moving a little bit to the right and a little bit to the left. Kadrinsky was taking advantage of the plane’s autopilot feature. So, even though Jana felt like she was flying the plane, the autopilot gently guided her in the right direction. Next up was Eleldar. Elar, being a 16-year-old boy, was obviously a little bit bigger than Jana. As he took control, he veered left, but as the autopilot tried to get him to veer back to the right to maintain direction, Elear overrode the autopilot by force. the plane’s autopilot was set up for whatever reason so that if the aircraft reached a 45° angle, the autopilot would disengage. So, this allowed a plane to enter, you know, things like a holding pattern above an airport while waiting for a runway to become available for landing. Lar ended up flying the aircraft into a 50° angle, and the plane began to descend. Because they were moving down so quickly, it made it nearly impossible to move inside the cockpit so that LAR could turn the controls over to one of the actual pilots. As the plane descended and the cockpit turned into pure chaos, the pilots tried their hardest to try to guide Eleldar into turning the wheel to stabilize the plane. But at that point, the plane was uncontrollable. They shouted commands to Eldar, but they were just misunderstood. Lights and sounds were going off. The aircraft was stalling and the plane was ascending very fast. At 1,000 ft, Kadrinsky was able to get into his son’s seat to try to stabilize the plane. The black box that was picked up caught him saying, “Everything is fine at this point.” A few seconds later, the plane crashed into the Kousnetsk Alatau mountain range, killing all 75 people on board. Now, autopilot for airplanes was created in 1912, but it was designed for simplicity rather than transparency. In the Aeroflot disaster, there wasn’t really a clear indication that the autopilot had been overridden. If you’ve ever driven a car with driver assist, you know the feeling when you change lanes. You know, the car may attempt to keep you in your lane, but you can override the autopilot simply by not allowing the car’s steering wheel to maintain your current lane. So, when Elar left, he inadvertently disabled autopilot, which caused the entire disaster. This is a case where if we trust our hardware and software too much, we can make very poor decisions. So, what does autopilot look like in investing? During good times, it’s easy to rely on just how well the market is doing, which can create complacency. You may stay on top of all your positions and actively look for where things could maybe go wrong. You don’t want to stay in a bad position just because your other positions and the market are doing really, really well. Hidden risks are still risks. You should take a look at your positions and determine what could really unravel them. Are those events happening today and you’re just not paying close enough attention? Overconfidence is incredibly dangerous. 80% of car accidents happen within 10 miles of people’s homes. Areas that theoretically they know better than anywhere else. So areas that you have navigated before always require your attention. The moment that attention goes elsewhere can be catastrophic. In investing, you can’t expect a market to continue going up just because that’s what it’s done for the past few years. You need to plan and strategize for different outcomes to protect yourself when the market turns. That might mean creating scenarios and then using thought experiments to strategize about what you’ll do in light of reality. The final lesson here is that when things go wrong, just take advantage of the black box. In the world of investing, the black box is our brain. We can access our previous thinking by tracking it in real time using things like journals. When you make a mistake, look back at your thinking process and why you thought that way. While you’ll never eliminate all mistakes, you can reduce the likelihood of repeating the same error, which will have a very significant positive effects through an investing lifetime. So, the last story was about the dangers of going autopilot systems that can quietly drift you away from your goal. And sometimes when you’re off of autopilot, there’s a lack of notifications and you drift just so far away that you lose all control. Inflation is very similar. It’s the financial world’s version of autopilot failure. You don’t really feel the power of inflation from day to day, but one day you wake up and the dollar that you trusted to help take you safely into the future has just rolled into a 45° turn. So in the late 1770s, the Revolutionary War was going very, very badly for the Americans. The British army had a series of excellent victories and the navy was blockading the east coast. Troop morale was low. They were freezing cold, poorly clothed, starving, and many were in need of medical attention. As a result, mutinies were a very real threat. And to make matters even worse, the soldiers had another worry. This time further away from the battlefield, and this was that money that they were being paid to fight this war was losing its value. If you think inflation is a modern phenomena, you’re dead wrong. From a buying power standpoint, the Brits weren’t the only villain. Inflation was a real threat as well. It just didn’t shoot guns. So, here was the problem. The soldiers were out on the battlefield in deplorable conditions and the money that they were being paid to was losing so much buying power that their families were having a lot of trouble. Food prices were skyrocketing but the soldiers weren’t seeing a corresponding increase in their wages. So in 1776 scholars estimated inflation at 14%, in 1777 22% and in 1778 30%. So in 1779, four entire battalions complained that due to the depreciating value of money, they were losing 7/8s of their purchasing power by taking part in the revolutionary war. Losing soldiers was a real problem as many were just deserting to go work on farms. So the government came up with an act to invent a crude type of inflation index. Today we use the consumer pricing index or CPI. Back then they use the prices of only four goods to determine how fast money was depreciating. So the four goods they used were corn, beef, wool, and leather. In 1870, when the act was passed, they looked at the rate of change in price increases for just those four commodities over the last 3 years. And the price for the four goods had actually risen 32 1/2 times over that period. To make amends for inflation, the army came up with an inflation index bond, the first kind in its history. So the inflation index bond would pay four interest bearing payments from 1781 to 1784. Basically, the sums were meant to cover five bushels of corn, 68 pounds of beef, 10 lb of wool, and 16 pounds of leather. These cost about 130 pounds of current money. If these goods continue to inflate in price, the payment would increase with inflation. So, this eased many of the soldiers mind because they knew that tomorrow wouldn’t be worse than it was today. So, CPI today is calculated monthly based on the price of 80,000 different goods and services. The Bureau of Labor Statistics or BLS estimates these numbers. The BLS does this by regularly contacting stores across the US to collect data. An additional survey is also sent out to 50,000 residents as well. So the major categories of modern spending are housing, transportation, food, recreation, medical care, apparel, education, and other goods and services. We moved a long way from bushels of corn and soul leather. And ever since the Revolutionary War, inflation has never left the US. So here are the US stats for each century. In the 1700s 6% 1800s negative.2%. 1900s 3.2% 2000s 2.5%. But each century has its own story and inflation has stabilized a lot in the 20th and 21st century due to the formation of the Federal Reserve in 1913. As Forester points out in his book, moderate inflation is actually manageable and is the goal of monetary policy because the opposite deflation is a much worse outcome. In a deflationary environment, consumers expect prices to drop, which delays purchasing decisions and leads to economic stagnation. Japan has gone through this basically since its bubble pop in the ’90s. If interest rates are at zero, there’s nothing that the government can do to drop prices further. If they maintain a 2 to 3% range though, they have more wiggle room, as we’ve seen here since CO 19. But no matter what, inflation is basically a silent tax that punishes savers. If you save $100 today at historic modern inflation rates of 3%, your money is only going to be worth $74. So, if we know that cash is a depreciating asset, the solution becomes pretty obvious to savers. Don’t keep your savings in cash. I think many of our listeners probably know this, but if you’re tuning in and have cash hoarded in tax sheltered accounts, please understand that that cash is not a good asset to hold on to. Cash seems neutral, but it’s a net negative. You can think of cash as kind of similar to, you know, leaving ice cubes melting in the sun. So, just like the soldiers who needed wages that rose with inflation, you need to keep your savings and appreciating assets. My asset class of choice is stocks, but there’s plenty of other choices out there. Bonds, real estate, commodities, private businesses, cryptocurrencies, or other assets that are tied to real economic activity. As long as you have assets that fight inflation, you put yourself in a great position to win. Now, nobody predicted inflation all the way back during the war for independence in 1779, just like nobody really knew the full effects of inflation that we’ve had since co. But the winners in modern times are investors who prepared properly. When you construct your portfolio, make sure you’re looking at a range of outcome. Ask yourself, will your portfolio be damaged by inflation or will it thrive in it? Along the same token, it’s important to have the humility not to rely on a single narrative because then you put yourself at a large amount of risk if you’re incorrect on that one story. Another vital lesson here is that real returns matter more than nominal ones. If you get a 5% return with 6% inflation, you’re actually poorer. If you get a 3% return with 1% inflation, you’re richer. So, your goalpost will move on a yearly basis. But if you choose to earn returns in, you know, the mid to high single digits or higher, you’re probably going to end up coming out on top no matter what. Inflation teaches us that money quietly loses value. And while that’s an outcome we’d like to avoid, other events happen on a regular basis that can cause us to lose money and not in a quiet way. Sometimes the market just simply plummets. If I ask you what events like this come to mind, you might mention something like the Great Depression. But I want to talk about an event that’s even worse which happened over two days in October of 1987. We start on the Monday, October 19th, 1987, the day known as Black Monday. So earlier that morning, Fed chair Alan Greenspan is boarding a plane from DC to Dallas. At this time, there’s no internet of course or mobile phones. So if you got on a plane, you’re basically completely insulated while on that plane from the outside world. Before Greenspan had boarded, the down was already down 8%. A very bad day. But when Greenspan landed in Dallas, he was horrified to see that the market had dropped 22.6% in that one day. Now, to understand a little more about why this happened, we don’t really need to go back too far. In 1986, the market had done well, and the Dow closed at 1,896, up about 23% on the year. On average, the index gained about 1.38% per day. By 1987, the year that Greenspan was sworn in as Fed chair, the market continued climbing to 2722. One of Greenspan’s first moves was to raise the discount rate. He felt that inflation was starting to creep up and this is generally not what the market wants. And to make things even worse, the market was also expecting the US currency to drop in value in the near future due to some kind of minor geopolitical conflicts. So on Friday, October 16th, this is the Friday before Black Monday, the market was pretty scared. The market was actually down 4.6% that day. On October 19th, 1987, the Dow, like I said, collapsed 22.6%. to 6%. The entire year’s gain was wiped out after Monday’s close. A pretty painful outcome for investors. Now, the interesting thing about Black Monday was that there isn’t really a consensus cause for why exactly it happened. There wasn’t some large event like CO that spooked the market and was likely to have a massive effect on businesses all across America. A few reasons that have been kicked around were the rise in computerized program tating, portfolio insurance, futures markets, and rising rates and inflation. But there wasn’t just one cause. It was a confluence of factors that happened that punished the market and it’s kind of impossible to blame them all on just one factor. Now, the lesserk known fact about Black Monday is what ended up happening on Tuesday, October 20th, 1987. So, one could argue that the pain was much less on this day, but the events were even more dramatic. So, on Tuesday, there were actually rumors that the New York Stock Exchange might close. This had occurred only four times in history. When JFK was assassinated, for his funeral, when New York experienced an electrical blackout, and for Hurricane Gloria. So, it was a very scary proposition. Forester writes, “By 8 a.m., credit markets were tightening. Not only were specialist firms rushing to borrow, but larger security firms were as well because they had grown their stock inventories by accommodating selling by major clients. Trading, borrowing, and government securities sweltered. Arbitrurers who were trying to take advantage of pending takeovers were forced to put up more capital on their borrowings. Banks were reluctant to settle trades, fearing they might not get paid. Now, sensing that Black Monday could trigger a collapse of the entire financial system, Greenspan got to work trying to ease investors tensions, he made a public statement that the Fed would reverse its tightening stance. The Fed would also act as a source of liquidity attempting to drive down interest rates. The market initially jumped, but then sellers took over once again. So, in the middle of the panic, a small spark emerged. Ronald Cash Maheenman at the Chicago Board of Trade, CBOT, noticed that the price of major market indexes or MMI futures were trading at a massive discount. At 12:38 p.m., a sudden wave of buying hit those futures, flipping them from a huge discount to a premium in just 5 minutes. And that tiny shift triggered arbitrage traders to rush in, buy the underlying stocks, and push liquidity back into the system. And it was a jolt of electricity that the market really needed. Within an hour, the Dow rallied by nearly 6%. So after Black Monday, some say the whole thing was a conspiracy. Doomsayers say that bigger firms coordinated the selling and the Fed’s reaction was just too quiet. Others say that it was just unlucky timing, but we’ll never know for sure. Crashes can happen fast, but recoveries can also be really fast. The Dow was higher than before the crash by June of 1989. So if you panic sell on these types of events, chances are you’re going to miss a lot of the recovery. The biggest draw downs are often followed by the biggest up days. You just never know when those days will actually happen. Liquidity is the market’s bloodline and this is more of a top- down view. But if the market doesn’t have liquidity, then situations like this can’t be solved. While I don’t really have a view on how to play this top- down view, I think finding individual businesses with little liquidity can be a giant advantage. When investors with deep pockets want to buy a business’s stock with low liquidity, that means that more buying pressure can move the stock up very quickly, and I like to be on the right side of that situation. Crashes can also appear to be pretty random. They aren’t always easy to identify, such as a tariff tantrum that we just had in April of 2025. Sometimes they come out of nowhere and wreak absolute havoc over very short periods of time. But the best investors prepare for these occurrences. Big corrections happen every year or so. So, if you know how to handle them without losing your patience and discipline, you put yourself at a major advantage. Having some spare cash can be a massive advantage. If you have cash during these times, you can take advantage of the four sellers by buying the stocks that they’re selling at huge discounts. This is a dream scenario for me. So, during November, Lumine has dropped nearly 58% from its all-time high. And to me, this was the market acting irrationally on the stock price, and I took that as an opportunity to add to my position. I love drops like these because Lumen was a business where I wanted to build my position, but it was spending so much time at all-time highs. Now, I get an opportunity to add it at a massive discount. That’s all I have for you today. I hope that some of these stories really resonate with you and stay memorable so that you can internalize some of their lessons. If you’d like to continue the conversation, please follow me on Twitter at irrationalmrts or connect with me on LinkedIn. Simply search for Kyle Grief. I’m always open to feedback, so feel free to share how I can make this podcast even better for you. Thanks for listening and I’ll see you next time. I often think of what Howard Marx talks about about longevity and wealth creation and that superior investment returns isn’t about ranking in the top 5% in any given year. It’s about consistency and steady returns over long periods of times. I mean, the message is simple. Avoid big losses and let consistency win. And for me indexing is exactly that average market returns but for a very long

Pitch Summary:
Coupang is being added to the portfolio despite its high EV/EBIT of 48, due to its strong growth prospects. The company has expanded operations in Taiwan and acquired the Farfetch platform, positioning it for future growth. Recent improvements in operating income and margin expansion indicate a positive trajectory. Analysts expect a 90% improvement in operating income, but even with a conservative estimate of 50%, the PEG ratio remains below 1. The recent stock price decline due to a data breach presents a buying opportunity.

BSD Analysis:
The addition of Coupang to the portfolio is driven by its strong market position and growth potential in the e-commerce sector. The company’s strategic expansions and acquisitions enhance its competitive advantage and growth prospects. Despite the recent data breach, Coupang’s fundamentals remain strong, and the stock’s current valuation offers an attractive entry point. This investment aligns with a long-term growth strategy, focusing on companies with robust market positions and the ability to capitalize on industry trends.

Pitch Summary:
Spotify is being reduced in the portfolio due to its high EV/EBIT of 56, which is considered unsustainable. The company’s premium subscribers are growing at 11%, with related revenue growth at 13%, but the recent stock run-up was primarily driven by margin expansion, which has now stabilized. With a PEG ratio of 3.75, the stock is at an uncomfortable valuation level. The proceeds from reducing Spotify holdings will be reallocated to Universal Music Group, which offers a more attractive valuation and benefits from similar industry trends.

BSD Analysis:
The decision to reduce Spotify holdings is based on a careful assessment of its valuation metrics and growth prospects. While Spotify has experienced significant growth, the stabilization of margins and high valuation pose risks to future performance. By reallocating capital to Universal Music Group, the investor seeks to capitalize on a more favorable valuation and industry position. This move reflects a strategic approach to managing portfolio risk and optimizing returns by focusing on companies with sustainable growth and reasonable valuations.