Berkshire Hathaway (BRK.B): Presented as a defensive, lower-volatility compounder and cash placeholder, with strong culture, insurance float, and disciplined buybacks supporting downside protection.
Valuation & Structure: Simplified sum-of-the-parts view (operating earnings plus equities/treasuries) suggests modest upside versus the S&P 500, with potential future dividends if excess cash persists.
Leadership & Incentives: Discussion of Greg Abel’s compensation (base-heavy, no options) and alignment through personal share ownership, reinforcing Berkshire’s prudent, decentralized culture.
BellRing Brands (BRBR): Spun out of Post Holdings (POST), pitched as a cheap consumer staples play in protein shakes/bars with strong distribution and brand awareness despite GLP-1 overhang and customer concentration risks.
BRBR Valuation & Catalysts: Trading at a double-digit FCF yield after a large drawdown; potential buybacks, private equity interest, or strategic takeout via POST provide upside optionality.
Moody’s (MCO): Oligopoly credit-ratings leader (with S&P) pitched as a high-quality toll-bridge business; resilient investor services and a sticky analytics franchise face manageable AI and regulatory risks.
MCO Risk/Reward: Premium business with valuation risk; base case targets low double-digit EPS growth and mid-to-high single-digit to low-teens returns, supported by buybacks and dividends.
Market Outlook: Noted rotation toward Small Cap Value and equal-weight outperformance; continued caution on momentum-driven segments and emphasis on downside protection.
Transcript
(00:00) It continues to surprise me how long high quality companies can continue to compound. They're priced at 30 times plus price to earnings and then they just continues to give you double digits returns and it's so difficult for at least for me to invest in those companies because they always look expensive. (00:20) But the best companies they just tend to always look expensive and they still outperform and it's so painful. Before 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. Welcome to the Investors Podcast. (00:46) I'm your host Dick Broen and today I'm here with my friends and fellow investors Tobias and Hari. How are you today, Jens? Hey, Stig. Hey, Harry. Good to see you. Good to see both of you guys. Yeah, good to see you both. Thank you for having us today. It's always great and and with Burkshire coming up, you know, I can't help but pitch it. I know that's not an unknown gem. I know it's sort of like a bit of I feel like it's a cliche. (01:08) I mean, we're talking about a company that's more than a trillion dollars in market cap. And I guess everyone knows it, especially followers of this podcast would know it. Toby's podcast for sure as well. So, so why am I talking about Brixie Haway? I should probably do the whole disclaimer thing first. I am long bricksway myself. Uh, surprise surprise. (01:28) And I added this recently as January 22nd. So, I have all the biases you can possibly imagine. Anyways, I'm still going to pitch it. So, I felt it was a good time to talk about it. Not just because the meeting is coming up, but also because with Buffett transitioning out, a new sheriff in town, a bunch of moving parts here at Burkshire. So, I'd be really curious to hear, especially from you two gents, how you see it. (01:55) But for those who are not familiar with Brooks Hellway, I kind of feel I should give a business overview. If we go all the way back, Buffett took control of Brooksshire Haway back in 1965. And at the time it was a textile mill struggling and certainly seen better days. And then I can't help but mention this fun fact. (02:14) Buffett was not the CEO in 1965. It was actually Ken Chase who was president of operations which would be equivalent to the CEO role. Buffett was chairman at the time and took over Capital Location and he became the CEO in 1970. And so you might be thinking, does that really matter for today's pitch? No, not at all. It's my way of being a super burkshire nerd and I can't help but mention he was actually not CEO. (02:39) He was someone else, but he took over Buffett in 1970. But you can say he had control since 1965. Now, how do you give an overview of a massive conglomerate such as Berkshire Haway? Well, you know, you can look at it as having, you know, 70 plus major operating businesses. I think legally it's more than 300. (03:00) Uh or you can also take a similar approach and view it as two buckets. Uh you can say one that's operating businesses and then you have one with public equities and treasuries. So that could be a way of looking at it. And of course, you know, you have the bucket here of operating businesses that can be broken further down. You have insurance and non-insurance. (03:20) And yes, you can break that down, of course, again. So, you have BA Energy and BNSF, they occupy Elachi of the insurance. And then you have Geico, that's roughly half of the group's premiums in insurance. So, I won't go further the time being because I kind of feel like we can go on and on and on, but you know, that could be a way of sort of like get a a quick business overview. Now, at the time of recording, we're still waiting for the Q4 numbers. (03:46) This episode would actually be published 12 hours before they published the Q4 numbers, so we can't turn an episode around 12 hours. But I kind of felt it was it was a nice segue into talking about how much in this day and age and everything's just moving so quickly. (04:06) There's still such a high degree of predictability when it comes to Brixie Haway. So it shouldn't change anything material that there's a new quarter coming out which is the case for some companies certainly not for Brixie Haway. Q3 numbers closed out with 267 billion public equities. We can typically extrapolate that quite well until what it is today. (04:25) you know, you you can get chat TBT to help you with that if you want to. You typically don't see a lot of big changes and especially with what is going on right now with Buffett transitioning out. I wouldn't expect there to be any kind of big movements and also in many of the the larger companies, you know, Burkshire, they're also considered an insider. So, if there were bigger moves, they would also have been have to disclose that. (04:44) Of course, you have the massive cash position. And I also just want to say like for a company the size of Berkshire, they don't hold cash in their account just like you and me. They would use short-term treasuries to make sure they get a bit of yield. And then it it's short-term. It's usually around four four months. (05:01) That's the average maturity. Uh so they're not sensitive to interest rate fluctuations. And then of course you also have to deduct debt there. So whenever you do that, make sure you're doing an ablesto comparison. You have some debt that is interest bearing, some are not. Some is on the parent level and some are not. And you know, you also have to back out the minority interests. (05:19) Mona once said, "If you're not a little confused about what's going on, you don't understand it." And uh to be fair, he was actually speaking about derivatives at the time. He was after the whole J thing, he made he had this wonderful quote and then also after GFC, he restated that quote. But the accounting for Burks Helaway quickly becomes a bit of a mess. (05:38) I'll get to a shortcut later here in my pitch. You can be really really detailed if you want to but I think for a company like Berkshire Haway you can also do as you mentioned a few shortcuts and you can sort of like look at as in bigger buckets so and not think too much about you know the decimal points you know that that sort of like will take care of itself. Now let's talk a bit about the competitive advantage. (06:04) You know back in the day whenever book value meant a lot perhaps a bit more than it does today people spoke about the Buffett premium. And so you can think about it this way. How much would you pay for a million dollars? And well, you might say a million dollars. That doesn't seem that seem to be is this a trick question? Why are you asking what do you want to pay for a million? Well, if I then rephrase the question and I said, how much would you pay for Buffett managing that million dollars? And then is it worth more? And most people would say yes, it's actually worth more because, you know, we we believe that Buffett is going to invest that money. wisely. So, (06:39) we're going to put a premium on top of the book value. So, that was how some people saw it for quite some time. And I could then ask the question now with Greg Gable coming in as the CEO, how much would you willing to pay for a dollar invested by Greg Greg Gable and and the team at Bergkshire now? And so, of course, some bulls would then say that Greg might be the perfect guy for a trillion dollar market cap company. (07:04) You know, it's it's a very different company than than the company Buffett took over in 1965. It certainly required a very different skill set at the time. And I should also say it's we're talking about trillion dollar market cap. We're not talking about trillion dollar in in book value right now. (07:21) And of course, Ael gets a lot of tailwind because of its track record so far. And also I would say that I think right now the trust in Greg Ael is high just from Buffett and owning him. And you know for at least us shareholders and I can't really speak for all sharehold of course a bugway but I can probably say that Buffett's work carries a lot of weight until proven otherwise. (07:44) And then of course if you're an uber nerd like me you can't help but think about David soal and everything that happened with lubers uh scandal and I think most people would also agree that he was the one who was widely expected to take over for Buffett. So even the mighty fall and it's very very difficult to to be the next guy. (08:04) Anyways, in my eyes, if we're talking about competitive advantage, Burks's competitive advantage is the strong culture of prudent capital allocation and this ethical decentralized approach to running a company. And it sort of like takes me to the next point because if we're looking at the risks of such a company, what are those risks? And you know, capitalism is brutal and you know, Burks competes in the same market as everyone else. And if we look at it very broadly and we're saying, hey, if you have a castle, someone's going to storm it. (08:32) Yes, there is of course a risk there, but some people would then also turn the tables and say, well, you have roughly 2/3 of the market cap that's backed by equities and and treasuries. Uh, and then you have a great selection of diversified highquality operating businesses. Not the biggest risk perhaps. (08:52) Now, Toby and I had a episode recording here not too long ago and and we talked about Toby's latest book, Soldier of Fortune, and we talked about whether Bergkshire was safer than the S&P 500. And it's sort of like a bit of an probably intellectual discussion, but I kind of like felt it was it was interesting because over the next 100 years, I would like to make the statement that the SP500 is probably safer because the worst companies are being replaced by new good companies. So you only have to think about I don't know AI threats because you know (09:23) whatever happens you know you you have that recycling of people who benefit or not and if it's a big you know if nothing happens then you also sort of like gets them directly from only the S&P 500 but then what Toby and I also talked about was that over the next decade at the current valuations perhaps one would pick Burkshire because of the downside protection and strong culture. You should probably go back and listen to the entire entire episode. (09:46) I don't think I did it justice just from that paragraph alone but I sort of like wanted to use that as talking about his competitive advantage talking about risk and you know Buffett is still the chairman whenever Buffett is no longer with us his older son Howard would be the non-executive chairman with sole responsibility for ensuring that the culture remains intact but of course there is a butt here uh somewhere and I so I wanted to talk about Greg Abel's compensation sort of like to start off to the conversation And to talk about (10:16) culture, in some Burksia circles, people were talking about that perhaps Greg Ael would take the $100,000 pay package that Buffett had. And he was actually paid 21 million before. So I was a bit I don't know. I didn't really believe that he would. I think he would probably get a lot of browner points if he did. But he's now making 25 million in base. He's not making any bonus. (10:39) Uh no stock options either. And so you can look at this many different ways. So, uh, Toby, how do you think about this new conversation structure for Greg Aable? What does that tell you about the new culture that's or perhaps the continued culture that's going on at Berkshire Haway right now? It's a funny number, isn't it? 25 million cuz that's a fabulous sum of money particularly to be earning in one year for any person. and it's not incentive driven. (11:09) So he gets that for showing up, but in the world of very big businesses, that's probably the lowest compensation package around. And he has put his hand into his own pocket and bought a very material sum. I think it was like $70 million or something like that initially, which would be worth more than that now. Yeah, I I have the proxy here. (11:37) He has 228 Assas and 2,363 Bishas. So you can just quickly do the math, Toby. I don't know. It should be one of those ready set cook shows like oh yes and the this is how much it is and probably he bought it on on his own like you know Burkshire doesn't do stock auctions or RSUs. They don't give shares to their executives. They're supposed to buy it on their own, isn't it? Yeah. (12:03) Yeah. But I think I think he had a decent size share in Burkshire Haway Energy. It was probably called Mid American at the time. Uh some even more Uber nerds would know that about Burks, what it was actually called at the time whenever he did that. But that was certainly uh where a lot of his net worth came from. (12:22) But for what it is worth, the salary of IBM CEO is also 25 million. and their market cap is around 243 245 billion compared to Berkshire which is 1 trillion. So the salary of Oracle CEO for example is 138 million. So if you see the coms of CEOs and Oracle market cap is 460 billion so half the size company. (12:54) So if you look at that from a competitive landscape, it is much different and it probably is also unfair to compare Greg Gable's uh salary package with Buffett because Buffett is the owner. Burkshshire is his company. He was uh he didn't really need the salary as such and that was the difference. Many owner executives also pay themselves handsome salary. So Buffett is one of a kind. Very hard to kind of replace Buffett. (13:23) That's the other challenge. So I looked it up. His holdings are 170 million to 175 million. He cashed out 870 million when Burkshere bought Birkshire Energy. So the salary is not material to what he's worth, what he holds in Birkshshire, but still a solid amount of money and not incentive driven. So it is what it is. (13:46) Yeah. What would you have preferred Toby to align interests? And I'm not insinuating that it's higher or low. I'm just I'm guess I'm just asking like what do you think would be the best way of doing it? I think a base salary and I don't know where you would set that but a base salary and then the same way that the two investors were compensated where you get charged on the capital that you have under your control at whatever the 10 year. So you get charged 6% on that capital and then what you earn over and (14:16) above that you get some portion of that. So you're incentivized to focus on return on invested capital and you do it over like a rolling 5year period so you're not making short-term decisions to to pump it up. That's how that's how I would structure it. I think that's the fairest way to do it. Yeah. (14:36) You know, I think it it's incredible challenging apart from Amonga themselves and and with all the discussions that they had about how terrible stock options were and you know, I I tend to agree with them. There have been a terrible number of of compensation packages and still in place today in so many companies. (14:55) They have talked about how it may make sense for some CEOs to have stock options, but they also talked about that was probably only the case if you were like the guy who were in charge of of everything. you know, it probably wouldn't make any sense for a lot of people, let's say VPs, who couldn't influence the entire organization. (15:13) And so, I was very curious to see what would happen. I don't think I ever thought he would take something like $100,000 pay package. You know, going to to Har's point, why would he do that? And of course, you you could say something like, "Hey, his net worth is so and so much money, so does it really matter if 100,000 25 million?" No, it probably doesn't. (15:34) But I think everyone wants to be well paid and I think you know I I don't really have anything against that. I generally think there's a lot of different philosophies whenever it comes to compensation. Now I I remember I was uh I was reading one of the Netflix books uh No Rules Rules and they talked about how and I don't know if this has changed but they talked about how they wanted to find people with the right character and then pay them a a very nice base and then the rest would sort of like be sorted out. And I was quite influenced by that at the time and I've tried it out and that (16:04) did not work at all. Uh but perhaps that was there was just because it was a different organization and and whatnot. It might work with Greg Ael. I can see why it would work with him and I was actually we're going to get to your stock picks later and I actually had a chance to look up management compensation. It was kind of interesting. (16:22) So in comparison, it's actually you could say Greg was actually not well paid and most compensation packages in the US are being handed out is that much of it is in in equity and then this they sell it as oh but it's very much in line because you get it as equity and it vests and so on and so forth and there is a ring of truth to that. (16:46) It's very difficult to do perfect because it is a bit of a participation trophy, right? Like oh but the base salary is this and this low. Yeah, but as long as you, you know, have a pulse and you go to work, you're still getting tens of millions in equities and then you're sort of aligned with shareholders, but then you can also just sell it. (17:06) So, it's like it sounds good, but in reality, it's not really that aligned with shareholders and then you probably have to do some kind of adjusted debit that thing and then you get more equities than you can then sell and then so it's like it sounds good, but it's really really difficult to align incentives. (17:23) But then we can look at, you know, Berkshire Haway and Buffy will probably be the number one guy to understand how to structure that. And he came up with let's get give Greg Away a nice base and then the rest will figure itself out. And I I just I found that to be quite interesting. It's very simple. Has the advantage of being very simple. Y there's not much incentive in it though. That's the that's the problem. (17:42) So I guess you're relying on the fact that he's got a big he's written a check for 10% of his net worth at the time. that's now you know I don't know what his other investments have done but could be 20% of his net worth if it hasn't if he's kept it all in cash and also I think lately Buffett and Mer have been emphasizing that Burkshshire is a fortress in a way I take it as a cue as like don't expect outsiz returns from this business going forward and is gra able the steward to keep it safe rather than taking unnecessary risks and that's how probably the incentive structure also looks like. He's not being incentivized for growth. (18:25) It's uh basically keep it safe is kind of how I see it and maybe dividends in future who knows. So because if they can't grow there was a recent comment by one of the Silicon Valley investors Chamat Palhapatia in a podcast where he compared Buffett's returns before REG FD was implemented and after REG FD which REG FD had some unfair advantage for people with information asymmetry and REGG FD kind of eliminated it and he compared that and said hey look Buffett's returns preregg FD were way greater than S&P 500 at around 24% or so annualized. (19:10) But postreg his returns were on par with S&P 500. So even Buffett could not really beat S&P 500 and that was when Burkshire was still much smaller back in 200 later. Now with a trillion dollar market cap, with the size they are, it's also mathematically very hard for somebody like Greg to say, "Okay, now I'm going to beat S&P 500 over a long period of time. (19:42) " Yeah, thank you for your your comments, Jans. I just wanted to also mention that whenever you are comparing compensation, it it really really tricky to do that. And to Harry's point, I feel that Buffett should be applauded for only taking $100,000 in compensation and then he I think he had like $300,000 in other expenses or I think it's the proxies would say other compensation, but he's been famous for the 100,000. (20:10) I kind of feel like whenever you hear those numbers, it's really important to understand where that's coming from. You have all these high-fly CEOs, tech bosses, uh, and they're like, "Oh, I only get like $1." And you're like, "Yeah, but you also founded the company. if you reach these milestones, you're going to get like was it a trillion dollars or whatever. (20:28) And yes, I I know that's going to be really difficult to achieve and but it's like whenever you have so and so many shares, it's just it's a different game and I think you have to have to understand that as you're comparing conversation between different CEOs. Anyways, let's talk a bit about valuation. Perhaps the simplest way to value Burkshire is to break it into two categories. And Buffett did this this himself in the early letters. (20:52) So first you normalize operating earnings and then you apply an appropriate multiple. So if I use 40 billion here on the operating companies I use a multiple of 17 I come up with 680 billion for those businesses. I would like to think that is directional correct. (21:10) I'm definitely sure that some would use a different multiple and a different normalized number and I think that's perfectly fine. And then in the other bucket you can look at the value equities plus cash and and then deduct that. And of course, you can then make an adjustment to what you think the the uh intrinsic value is of those equities. (21:26) And so if you look at the top top holdings, you know, you have Apple, American Express, Bank of America, Coca-Cola, and Chevron, then you can be like, oh, you know, you probably want to start there. They're roughly like 70% of the value of the equities. And then you can make your own adjustments. But if we say that you have roughly 500 billion in equities and in cash net, uh then you end up with something like 1. (21:52) 2 two trillionish if you round it and you know who's counting uh when you're talking about decimal points of trillions of dollars but the back of of the envelope valuation gives you a number around $550 for Aishia at the time of recording Aishia is trading at $497 and so it sort of like goes to the point I had it there about risk there's a lot of high-f flyers out there lofty valuations burks is not one of Of course, the future is always uncertain and it's no different today, but you know that might be a good reason why you want to own Burks in the first place and Burkshire typically does well in bare markets. You also see that and and (22:30) sometimes the market is selling off and there are few companies that are not and some of them are burkshire and I attribute that to if you're looking at the investing mandates that in a lot of funds you know their equity zone or part of this equities and they have to be placed in some kind of equity and so it's very reasonable for a lot of s managers that if you don't really know where to put it some of them just put it into burkshire sort of like as a wait and see type bucket and the draw downs you see are typically not that dramatic (22:56) it's probably not lost on the listeners that Bergkshire had the capital to buy back a huge amount of stock if the price is attractive enough and I don't have any concerns about Greg Ael not being able to do that. I think he very definitely understands the value of the stock and then also Burkxia shareholders they've been trained for decades now how to think about intrinsic value so I'm not we've seen that multiple times whenever the market is selling off burks typically is not allowed to be at a huge discount for that long that also goes into my point here about perhaps for (23:26) some people such as risk averse people like myself also I'd like to think it might be a good placeholder for cash uh especially if you don't know where to put it or if you have a mandate where you you need to invest in equities I would imagine that if we talk about valuation you can probably expect to get something like a 10% normalized return moving forward uh of course that varies you know from year to year but it sort of like gives you a sort of a yard stick what to expect and then at least the way that I use (23:58) Birkshshire is that if I don't really know what to invest in sometimes I would just invest in Burkshshire and then if something sells off like you have a lot of a lot of software uh companies that are selling off right now and I guess we can talk a bit about that later but if something you really like goes on sale perhaps you want to trim some of your burks you're holding and start building positions something else so at least that is how I'm looking at it and also I do tend to run a pretty concentrated portfolio I currently only have five (24:22) individual stocks I also have a few other things in in the portfolio but whenever you you run a concentrated portfolio perhaps you want to have something that's somewhat anti-fragile in that portfolio and and Burkshshire could be uh one of those you know Buffett has famously said that you whenever you invest in utilities that's not the way to get I think he said that's not how you become rich but perhaps you will stay rich and I kind of feel like the way he's looking at utilities that is perhaps the way you (24:51) can look at Burkshire today it's it might be a stock you once held because it could make you rich that's not the case anymore but perhaps it could stay that way so anyways Jens I want to throw it back over to you guys Yeah, I've fallen about the same place with the expected return about 10%. (25:09) And I agree, it's 10% is still a pretty good return, but it's equivalent to holding the S&P 500 with maybe a slightly different characteristics as you point out. It's not going to draw down as much probably in a bare market. It's probably not going to run up as much in a bull market. (25:26) You're probably going to get a less volatile ride, but growth is certainly slowing and they've got a lot of cash there. So, they're going to have to figure out what they do with that at some point. It's hard to imagine that even in a crash, something big enough becomes available that they can really put all of that money to work. And buybacks aren't going to move the needle really either. So, at some point, there's going to have to be a special dividend or some dividend probably. (25:47) I don't know how long they can sort of sustain that no dividend policy, but 5 years later, maybe. Does a dividend become possible 5 years later? Probably something like that. It's definitely worth looking at. It's more, as you point out, the valuation is distinct from the S&P 500. (26:07) That's one big thing that we didn't discuss that in the compensation, but I always think if you're going to take over a business, you want to take it over when it's completely busted and the valuation is the multiple is as low as you can possibly get it. You don't want to take over a high flyer because then you're fighting the valuation as well as sort of help trying to run the business, which is why like measures of compensation that are internally they have some control over. You want them focusing on those kind of things. (26:30) So Berkshire is much much cheaper than the S&P 500 and I think that like we discussed stig that'll be the thing that has the most impact over the medium term 3 5 10 years beyond that it's the quality of the businesses and it's hard to know where they're going to be at that point but I tend to agree on the valuation and the return front. Yeah, I agree. (26:55) I think especially stick the point you made about a parking space for your capital till you find good opportunities is a good framework to think about workshare as because if I want to have it in my long-term bucket I would rather have S&P 500 where I don't have to really worry about okay I need to move this capital around but if I am looking at it as a placeholder then definitely yes I would definitely favor Burkshare both from a valuation perspective as Toby was referring to which is lower than S&P 500 and also from a downside risk protection perspective because if there is a draw down number one Berkshire tends to get (27:35) hit less harder on the downside but also they have the cash hold which can be an opportunity and a drag and maybe Buffett will get lucky again similar to what he did during the financial crisis that he can get some of those few elephants that he is looking for especially as we are seeing a crisis in the private equity funds. Now lot of private equity firms are struggling. (28:02) That means there is less competition in the private markets in the short to medium term which might present a good opportunity to Buffett. Even though he says he's not the SEA, I'm pretty sure he cannot contain himself from deploying that capital when when the right one arrives. Thank you. Uh Hari and and Toby, I think another stock that you definitely want to hold or consider holding if we do see a downturn in the market might be Har's pick, but that's going to be a cliffhanger because I know you're going to go next, Toby. I'm curious to to hear (28:35) what uh what you're going to pitch for us today. My pick is Bell Ring Brands. The ticket is BRBR. It was spun out of Post Holdings. So, Post Holdings is this um it's been around forever. Consumer package goods. They have everything from like cake mix to they used to have this business under its umbrella. (28:56) And it's kind of interesting because they talk about like they can see consumer behavior through various different events. So through co they saw everybody kind of went away from the healthy stuff and started buying all of the cake mix and all of the that sort of stuff and then everybody got too fat and decided they had to go back to the healthy stuff. (29:14) So what Bell Ring Brands does, their pure play protein. So their main thing is the premier protein. I see these things around. I I heard some influencers talking about these. It's just like a milk drink that you can find in any convenience store or supermarket. And they're very high protein per serving and low calories, low sugar. (29:42) And so they're the thing that I if I am out and need something that I'd grab one of these things and drink them because they're reasonably, you know, just help you meet all of your macros, do whatever you're trying to do. So I quite like them. That's not how I found this business. I found this business because financially it's very cheap. (29:59) It's not an unusually good business, but it's a good business. I like these kind of little industrial businesses that are very simple, like basically pure play. The problem with this one is it's very small. market cap's $2.1 billion in December 2024. So, a little bit over 12 months ago, this thing was trading over $80. Uh, it's currently trading around $17. (30:24) So, it's had a huge fall from grace. I can't really work out why that's happened. There's no there's nothing obvious to me why that has happened, but it's probably something to do with the GLP1 shots that folks are taking. I'm not sure that if you take the GLP1 shot, you wouldn't continue to drink this stuff because you still need to get a certain amount of protein every day. (30:45) If you're out and about and you can't get access to your protein, and this is probably the stuff that you're going to drink. The brand's pretty well known among folks, so that's that's important. They've got distribution, which is hard to get. They've got distribution in un like in the little convenience store near where I live. It's in there. Uh it's pretty well distributed. (31:05) So those two things like that's the old classic formula for consumer package goods pretty good brand pretty well-known brand and pretty good distribution position in aisles and all that sort of stuff that's less important now I guess I get that there's social media pushing different proteins and there's a lot of competition in the space so the business is good the business isn't great but it does earn pretty high returns on invested capital it's like 80% using the green blood measure because they don't do their own manufacturing. They outsource all of their manufacturing. That might be also be a risk, but it's worth sort of (31:41) mentioning that it's a very small business. I think the valuation is way too low for the quality of the business. I think that at $80 it was too expensive by two times. At $17, it's too cheap by about half. It's an 11% free cash flow yield here. EV it's 10. EV but does nine P is 12. (32:07) So on any sort of metric it's it's cheap. It's certainly over earning on its invested capital. Pretty good brand, pretty good distribution. And I don't really know why it's sold off as hard as it has. But I think that it's one of those things that it could easily be a target for private equity because it's it's got a big shareholder in post. (32:25) So it's not going to happen in a hostile way, but it's it's one of those businesses that it's pretty easy to run. It's the sort of business that attracts private equity. I think even if that doesn't happen, it they've got a pretty good track record of buying back stock. It's well managed. I like it as a business and I think it's a reasonable bet at $17. (32:42) Uh I think it's good riskadjusted bet. Yeah, Toby, very interesting pick. I don't know how you find these gems. It's like from $89 79 $80 to $17. That a big drop. I'm just curious like number one, why did post holding spin it off? Is it because it's too niche a player? Number one. Number two, does that factor actually protect them from somebody like Pepsi or Coke making a play into healthy drinks? Is it too small for them? because I don't understand their distribution and how it is compared to a Pepsi or Coke and would this be like one of the acquisition target for the giants one of those two I think there's a lot (33:28) of buying and selling in these kind of businesses I think there's a lot of like gin rummy played with these kind of businesses and I think what they've done is they've taken Premier Protein which is growing fast and they've combined it together with Datiz which is like a protein powder type business which is not a brand that I've heard of and I'm I kind of look at these brands a little bit. So that's that's a red flag. (33:52) And then they have this Power Bars like I don't know if you Power Bars were like the original protein bars way back in the day and they've discontinued that in North America. I didn't realize that there. It's a legacy kind of brand now. The sales have still been growing. Sales have been growing pretty well for an extended period of time. Pretty consistently pretty well. (34:10) So, I think they've put a good business together with a middling business and a bad business and then spun it off because that's the kind of shenanigans these guys like. They just like to do this stuff. They like to buy and sell the businesses. And um then it had a pretty good run when it came out probably because it was right on the heels of co everybody was trying to get fit and healthy again. (34:32) Stock price ran from 20 bucks in the in the spin to $80. Maybe that's just momentum. people just chasing momentum, but it was ahead of its valuation at 80, let's say. And I picked it up in December last year. I've paid 25 bucks a share or something like that for it. So, it's 17. I'm down a little bit on that. (34:51) It's down 30% this year. So, it's since the start of the year. It's been a miserable run just watching it fall because it's it's the worst performing stock in my portfolio and it's down a lot every single day. And it's kind of perplexing cuz I like the business and I it's a very simple business. (35:09) It's not a great business in the sense that as you say somebody could compete with it but it's so small and it's so profitable that I think that an easier way is to sort of acquire this thing rather than to just try to compete directly with it. That would be the simplest thing to do. I think yeah I think for a Pepsi or two plus billion dollar is not a big deal if they want to really acquire this brand. Post holding still has a big holding in it so it has to be a negotiated sale. (35:31) So, I would say that a negotiated sale happens a fair bit further north than where it is now, but like still we're talking $4 billion instead of $2 billion plus a billion dollars in net debt. Mhm. So, Toby, I I always like your picks and uh this is no different. I certainly like the price. I think my concern is a bit on distribution. (35:55) Uh at least that's one of the concerns I want to raise. So, three customers are 74% of sales. So you have Walmart, Sam's Clubs like 34%. Then you have Costco and and Amazon. So I can't help but wonder why wouldn't Costco say, "Hey, we have Kirkland. It's cheaper and it has even more protein." I don't know anything about protein, but it's even better. And here you go. (36:21) Don't drink premium protein. So that that would be my concern. And sort of like in continuation of that, are people asking for a protein drink or do they ask for a premium protein? And if I can sort of like, you know, extrapolate that, I would say some people ask for a soft drink, but a lot of people ask for a Coca-Cola. (36:39) And there's a reason why they ask for a Coca-Cola. So with that framework, I'm kind of curious to hear how do you see that brand strength? 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. 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Go follow the Intrinsic Value Podcast on your favorite podcasting app and discover the next stock to add to your portfolio or watch list. (39:08) Yeah. So, I think that when you go looking for a high protein, low calorie, low sugar drink, they're actually reasonably hard to find. A lot of them have a lot of sugar in them. And so I heard about this brand through social media and then I sought out this brand particularly and I've bought it in California and I've bought it in Florida when I was traveling. (39:34) I found it in a few different places when I was traveling because I didn't want to eat junk food. I just wanted to drink something really quickly and keep going. And I think that that's the sort of the use case for this stuff when you're out and about and you don't have what you need. I am personally looking for the brand when I go in cuz it's, you know, the search risk that you have, the search time. You don't have a lot of time. (39:52) and there's a whole lot of brands there. You're looking for the one that you know fulfills the requirements that you need. It's not hard to recreate that that's simple to do. It would be not hard but also not trivial to create brand awareness around a new one but easy for one of those bigger bigger brands. As I say, the business isn't great. The business is not a deep moat. It's a thin moat but there is a little bit of a mode there. (40:20) there's a little bit of brand awareness and I think for the valuation all of that risk is already embedded in the discount that you're getting from that valuation. So I think I think it's like 40 bucks like 11% free cash flow yield they're using a lot of it to buy back stock pretty consistently at these at these levels. (40:38) I acknowledge that it's an imperfect mo but it's so cheap that I think that all of that is already counted in the discount. So, as often is the case with very attractive priced companies, there is a reason for it. And I think you're right, Toby. I think it's factored in. (40:58) I would probably be a bit concerned about the coverage ratio. You know, right now they're buying back a lot of shi and then that's great. Should they be paying off debt instead? Have like a billion bit more than a billion dollar in debt, which is a lot for such a small company. Average rate just a bit more than 7%. Have a Moody's rating of B1. (41:16) if one is so inclined to to look that up. Perhaps we can talk a bit more about that later. And so I like it. I like it because it's so capital light. You know, they they build up this brand. That was also why I wanted to ask about the brand strength and and to your point, they outsource manufacturing and so like yes, the return on investor capital is absolutely amazing. (41:40) It also looks a little vulnerable and I think it also comes down to how much of this is people are going to continue to focus a lot on protein or is it going back to quoteunquote normal whatever normal is because you know this is not a niche bodybuilding something product like this is like a mainstream product but it wasn't mainstream before everyone wanted to talk about protein and so I guess that would be my question to you being the fitness guru here in the in the group Toby no I'm ju I'm just kidding but like how much is this a secular trend into protein and the focus on that and how much is this a trend that's (42:18) going back to normal. So the the focus on protein is that's been around for decades in the bodybuilding community that the bodybuilders know that you get three macros fat, carbohydrate, protein. You need this amount of protein for this amount of body weight. You need to get that every day. If you do that, life is easy. if you don't, you're hungry all the time and you can't put on muscle. (42:45) That knowledge has seeped into the public consciousness more recently. I don't know how long, but like maybe the last 10 years or something like that. And it's more of a focus now. Like you walk through the supermarket, everything's got a bit of protein packed into it cuz everybody's kind of and it's the CPG firms, you know, that's the expensive part. (43:09) So they've kept it out so they could sell you at bigger margins and now everybody's sort of looking for it. they found a way to artificially stick it back into a whole lot of stuff. So, it's not ideal, but milk is a good source of, you know, protein for humans and this is good for you. So, I from that perspective, I think that the focus on the GLP1s, the fact that people are using these more and more, I think that that indicates that people are there is a desire to get fit. Like, no kidding, everybody has that desire. (43:34) And if there's an easy way of doing it, you hit the GLP1s and then you can't eat as much. So the next stage after that is get your protein first. I think there's a broader understanding that that's the way that you do it. So I think that it's around for a long time as a category. Is this brand around? I don't know. But you know the nature of this stuff is that they'll come up with something. (43:52) They do keep on coming up with something better. They'll say, "Oh, this has got more protein and less sugar." That's some no doubt that and tastes better, you know, more attractive branding, whatever. So that risk exists. But these guys are spending money on that stuff, too. (44:11) They're trying to compete and iterate as much as they can, new flavors or whatever the case may be. And they do have the distribution. So distribution is hard. They've got the manufacturing and they've got the distribution. I don't know how big the category can get to, but it's capped probably. It's not going to be huge. And so there's a finite amount of this production around and they've got they've got the manufacturing, they've got the distribution, and they do have a brand. (44:29) So they're the category leader and they're sort of out there in front and it's theirs to lose. Thank you for that context. One question I had was why such a significant drop and I was trying to look for reasons when I was looking at this pick. (44:47) It's like okay is it tariffs? You said there is a most of its production is outsourced. Is it like outsourced outside US? Is that one of the reason the CEO retiring? Is that the reason? I'm trying to come up with a reason why the drop and I'm I'm not really able to put my thumb on any specific problem for this significant drop. I looked at it too and I couldn't I couldn't find what the cataly moment for it was. (45:10) I've been saying this for a while. I just think there's this rolling speculative mania in the market that moves from crypto to meme stocks to NFTTS to precious metals. And for a little while it was in this thing at 80 bucks it was too expensive. It was two times what I think it was worth. was worth about 40 and at $17 it's too cheap. (45:37) I still think it's worth, you know, well at $80 it was worth 35. At 17 I think it's worth 40. So I think that it's um the valuation got ahead of it. And then the same behavior that makes it run up well past what it's worth. Makes it run down well past what it's worth. And that that's totally normal behavior in the market. (45:55) very common for stocks to go up three times or down to one/ird of where they were over the course of 12 months. I think that's like the average move in the business. So, I just try to pick them off when they get low like this and try to avoid them when they're high. I like the riskreward at this level in this stock. Fantastic. Thank you as always, Toby. (46:14) And to Har's point, I don't know how you do it, Toby. You you find these small gems and they always have really really attractive valuations. Hari, I'm very curious about your pick. Very high quality company. So, yeah, my pick is Modi. It's along the lines of Burkshshire. In fact, Burkshshire has Moody in its portfolio. (46:39) And this has been something that all of us who are followers of Buffett, Burkshshire, we have been looking at this business but always felt like okay, this is perfectly priced. There is no discount available for us to own this. Yeah. For those of you who are not familiar about Moody's, it's a credit rating agency. A simple mental model I have of Moody is like a toll bridge business. (47:07) So if anybody in the world whether it's corporations, governments or banks when they issue a bond they essentially have to pay one of the credit rating agencies in order for them to have issue their bonds because many of the pension funds or other financial institutions are required to have a rating from one of these approved agencies in order for them to buy the bonds. So they are called as NRSO status and only few have them. (47:42) In fact I believe between Moody and SNP together they control 80% of the global market not just US market. So Moody as a business has two broad streams of revenue. One is the one that I just talked about investor services which is basically credit ratings. They rate everything from AAA to junk and between them and uh S&P they control 80% of the business. 55 to 60% of Moody's revenue comes from this line of business. (48:15) The other one is their analytics business. Uh it's more like a subscriptionbased SAS style business basically selling risk models, KYC tools, credit research and data to banks and insurers insuranceances insurance companies and corporations. It's a recurring revenue. It has a very high retention rate because it provides a lot of value and that's around 40 to 45% of their revenue. (48:45) In terms of their mode, I think one is the regulatory mode because they're one of the few NRSO has been there for over a 100 years over a century. They're well recognized and everybody just go use their service. the issuer pays for their service for the credit ratings and when somebody like US government or corporations like Google recent uh 80 or$100 billion bond offerings when they're talking in billions for them the rating agency fee is not that significant that's why Moody can command a 51% operating margin and at the same time it is capital light and it also has a not just US but across the (49:28) world. So it's revenue split 50/50 which gives it diversification. But recently there are a lot of concerns about the business because of one is because of AI the other one is recently S&P had some issues that was specific to their mobility spin-off but still as Toby was mentioning like you know there is this wave of momentumdriven mindset that is going through the stock. (49:53) So Moody was also impacted significantly. I think both AI's fear and then the recent S&P guidance issues or a weak guidance by S&P together the stock is down 22%. from the beginning of the year and the AI fears are not completely unfound because especially for their analytics business if lot of companies are able to automate use AI they can do some of this analytics part of these services that Modi offers by themselves so I'm not too worried about their investor services or credit rating business because that is legally bound (50:36) unless there is regulation risk where we have liberalization in the regulation which probability is very low. So 60% of their revenue is pretty safe. The margins are pretty safe there. But the analytics part of their business which is 40% of their revenue can face headwinds in terms of pricing power because of the use of AI. (51:03) They can definitely leverage AI themselves with all the institutional knowledge, informations, source of records that they have but still it is a risk we should acknowledge for their analytics business. So that's why the stock is down. Just a quick overview of the business in terms of financials. Their adjusted EPS for end of 2025 was around $14. (51:28) 50 50 cents plus that is around 17% up year-over-year. Their Q4 EPS 2025 is expected to be around $346 which is going to be up 32% year-over-year. Their operating margin as I mentioned overall for the business is 51%. I'm pretty sure their credit rating business is much higher in terms of their operating margins. Free cash flow of 2 and a half billion. (51:53) They return a lot of their value through buybacks and dividends. They have been raising their dividend for 25 consecutive years. Their historic PE has been around 35 always. Now it is 34 after this drop. In fact, I think last year and right now even this year they have around 4 billion in new authorizations for buybacks which is around 85% of their free cash flow because they have the luxury of not having to invest too much but with AI that might change. They might have to adapt to AI. So we'll have to see and the risks if I have to see the risks in (52:35) the long term is as I said regulatory reforms that might take away that requirement for credit rating agencies the debt issuance cyclicality is also a risk because if the bond volumes go down which I don't think is happening anytime in the near future but that's a edge risk as well. (53:00) Third risk I see is they have been fortunate to be having a rich valuation 35p all the time as with AI and other things if the market decides that that's too high then we have a valuation risk uh that might happen in the medium-term to near term. So for me why am I looking into it is because of this is one of the stocks I have been following for a long term and it is experiencing a short downgrade or selloff for various reasons. (53:30) EI I don't think is as disruptive as the market is making out to be for them. So my bull case is like you know the management is projecting anywhere between say 11% to 14% as their compounded EPS growth uh in the next 3 to 5 years that's the base case if if they continue at around 12%. We are looking at around $26 EPS by 2030 and even if the P continues to fall and it's not at 34 let's say 28p instead of 34. (54:06) And even if we bake that in it is still a 70% upside from here which is around 11% annualized and the bull case is that if the P remains the same like around 34 not even going back to 35 between 30 to 34 then we are looking at a upside of around 100% like you know 16% annualized so that's kind of you know the upside downside is okay the P compressors comes back to around If I the growth multiple is not as good as we thought maybe it's below 10% and all but that's around 30% upside here. (54:43) So with the kind of business Moody is and the mode they have like how you're pitching Burkshshire stick I see minimum downside at this point a great place to park the cash even medium-term to long-term and enjoy the dividends that they pay. I would put them in my tax deferred fund to kind of you know avoid taxes on the dividend as well. (55:09) That's kind of you know the reason I picked this at this point of time. One is that there is a there are some stocks that are being thrown along with the bub whether it is Toby or this one because in general there is waves going on through the market and these guys are falling not just them like Schwab is down I was like you know S&P is down so a lot of tech stocks are also down JP Morgan Chase is down as well so I was actually finding it hard to pick one and then then I said, "Okay, this is this is what I would go with at least." So, that's my pick and look forward to your feedback. (55:48) I absolutely loved your pick, Ari. I kind of feel like it's um I'm probably going to be too hard on Toby here, but I kind of feel like it's almost the opposite of Toby where I was like, I'm not really sure about the business, but I certainly like the valuation. (56:06) And here with your pick, I'm like, I love the business, but the valuation, it's terrible that you can't get the best of both worlds, but I guess capitalism is just that brutal. Amazing business. Hi, you outlined everything good about that business. And I think you mentioned, you know, 80% just with Moody's and S&P global. Uh, I think Fitch is around like 15%. So, you have like Tropolley really. (56:29) And most would need both a Moody's and an S&P. It's more or less just a market standard and it's it's kind of like amazing the more you you look into it. You know, Moodis has been on my radar for similar to you like I don't know how long since I probably since I learned that Buffett invested in a long time ago and it's just it's such a such a good business and also because you you literally save money by getting a rating from Moody's. (56:54) And so what do I mean by that? If you don't get a credit rating, there's definitely a yellow flag if not a red flag. So you have to pay more in interest and no one wants to do that. So even after you paid Moody's or S&P Global, you still save money. (57:12) So it's not like whenever your wife is like, you know, buying a designer bag and she saves like, I don't know, a,000 bucks. It's like, oh my god, look at how much money you saved. Like you're literally saving money. like you you know so if you're paying them I don't know seven basis points whatever to get your rating like it's still a massive saving in terms of for you to go out and try to raise capitals on the public markets without that rating so very very powerful probably not like to your point not a lot of things to disrupt it would have to come from regulators where you know they have to go in and and say you (57:39) can't do that anymore then I'm like if that didn't happen after great financial crisis when is it going to happen you know with all the criticism that was, you know, for good reason that you saw back then. So, I don't really see that happening. (57:59) Like, you could theoretically say that, I don't know, the world's governments will go in and force everyone to use a domestic rating system, but you're also like, why would they do that? And also, if they did that, it's complicated then to attract foreign investors and provide that liquidity in the market. And so, like, it seems like everyone would lose. And I don't think necessarily regulators would try to do that. (58:16) I mean that they tried to do it in some jurisdiction but it hasn't really caught on and I don't really know why anyone would necessarily want to pursue that. I think there are so many other things you should you could probably pursue in the financial sector if you wanted to regulate it in any case. But if I have to find the hair in the soup and I can certainly find some if I really try to look uh private markets you see a rise here in in private markets and again I I should say it's it's very small but it's growing fast and so the game you play there is just different because if it's your private equity that's say extending private credit then you would have like (58:46) a small group negotiating with one borrower and like different you have their own team. So you don't need that credit rating because they would do that in-house. So it's sort of like, you know, if you had a I don't know if this is the best metaphor, but if you're trying to sell a house and you're trying to sell it in public, you need a rating, but it's like from one buyer to one seller, whatever price you could come up with sort of like works. (59:09) So if we were to assume that, you know, private credit we just take off and public credit not as much. There could be a risk there, but I don't I mean I'm trying to come up with a bare case. As you can tell, I'm not doing a good job. So anyways, I'm too excited about this pick even though not about the valuation. (59:29) Uh Toby, yeah, I like Moody's as well. It's a great business in an oligopoly. Buffett's identified it. It's got huge margins and so on. I think just to play devil's advocate, just to pick nits, just so there's somebody on the other side. I think the risks to Moody's are that it's a little bit more cyclical than it appears. It does depend a little bit on where the markets are. When the markets are up a lot, Moody's does very well. (59:52) There's a lot of issuance. So, they tend to be peak margins and peak multiple right at the very top of the market. And then as the market goes down and the issuance sort of dries up, then margins come in, revenues come in. And you can certainly see that in their revenue line that it's not that sort of tech growth path. (1:00:15) It's much more cyclical and then the margins are a little bit cyclical on top of that. Having said that, that's just how much it earns. That's not a risk to the business. That's just it's purely a valuation risk. So you have to find some way of sort of normalizing for the margins, normalizing for the multiple have some risk to the 40% of the business that's analytics. (1:00:34) I don't know yet what AI can do in that. But you're right, it's like this sort of existential risk for it. It's not not a direct risk just yet. And there's also the regulatory risk that if at some point the government gets upset with the way these guys are doing their ratings or there's enough lobbying so that they're some of their rating the rating requirements are taken away then that's a part of the business that's that's at risk. (1:01:00) But I don't think that the likelihood of that is very high but it's another existential risk. So business is great. Valuation is the is kind of the risk. I think the free cash flow yield is like 3.7% which is a little bit south of the 10 year. 10 years is probably coming down. Moody's is probably growing over 5 to 10 years. (1:01:18) I don't think the valuation's too far off here. So it's probably premium valuation for a premium business. What do you think that you earn at this level? What's your expected return, Harry, from from where we are now? Yeah, I think you both brought up very good points, Toby. I think there is definitely downside or risks. (1:01:37) I think especially in the regulation side apart from the private market that Stig mentioned and what you said about the US government for example having concerns about Moody. There is also a lot of movement from China standing up their own credit rating agencies and creating competition and as we head towards kind of a deglobalized world into fragments will say Europe still consider Moody or will they go with their own which as their for example the rating agency that they would approve in Europe and if the world heads towards a fragmented (1:02:16) rating agency uh situation then definitely it will hit Modi so that's the other risk I think I should have highlighted that is not a a trivial risk for them and I I agree that it's a cyclical business as well because the bond volumes is what dictates there uh revenues in terms of my expected return I think my base case is that the management is promising anywhere between 12 and 14 I would take the lower end of it uh say 11% annualized is the EPS growth over a period of time. If I say like an 11 12ish annualized growth in (1:02:53) EPS uh and even if I put a hel kind of you know less P multiple than what it is today just to kind of cover my downside I'm looking at an annualized return of 11%. From this it's slightly above S&P. That's what I'm looking at. I'm not seeing it like a home run with this. (1:03:16) It is definitely not something where the previous pick that you mentioned where it's so suppressed that there can be a coil spring effect. I don't think that's the case here. It's marginally low. It's kind of a 20 20% lower. Even if I look at it just kind of you know coming back mean reversion whatnot with the continual growth I'm comfortable holding it for the 5 years uh it's a safe bet and getting 11 to 12% annualized return. (1:03:42) It's interesting because the free cash flow yield is three 3.13. That's actually higher than it has been since August 22, July 22. But before then, it did trade at a higher free cash flow yield than that. So it was sort of above four before 2021. 2015 it was six. And then if you go back sort of further than that, I don't want to cherrypick too much, but there was some there were some higher peaks. (1:04:13) The highest peak here was a 10% free cash flow yield in 2011. So a lot of the return I think that's generated when you look at the like it's had a fantastic run. It's run from whatever 2030 bucks to 420 bucks. A portion of that is the valuation has three times more expensive, four times more expensive on a valuation basis since then. (1:04:37) Still, it's grown very quickly over that entire period of time. So, I think that there's a lot of businesses like this in the market where they have been fantastic businesses, but the valuations have become really compressed. And I think if folks look back and see the rate of growth, they have to make that adjustment in their mind for the starting price for a lot of these. (1:04:56) So, Microsoft, you know, a lot of these names, Microsoft was 11% free cash flow yield in 2011, too. A lot of these businesses, there's nothing in the rule book that says that even really good businesses don't go back to, you know, more long run free cash flow yields. It used to be that the old rule of thumb would be you don't pay, you don't want a free cash flow yield much north of the 10 year, you know, or much below the 10 year. You want to get the 10 year as a starting point plus some growth as your margin of (1:05:25) safety and so on. The valuation is the only thing that gives me pause, but the underlying business is great. I think the risk is just that if your holding period is long enough, 3 to 5 years, you just don't get enough return. Like that's the risk. It's not like you're wiped out or anything like that. (1:05:45) You just get, you know, maybe the valuation goes from 3 to 6% free cash flow yield and you get the growth as well. So you got a little bit of valuation headwind and the returns are a little bit north of a 10year through that period because the growth got a great I think that's a yeah but very good point actually Toby I think in fact for Moody if I have to kind of you know pick one risk it's actually the valuation risk which is the most critical one because it's 34 I mean it's priced like a max 7 stock so for a business that is just credit rating maybe it's because of Buffett stick that lot of people kind of attribute all the good qualities to this (1:06:27) business so that's they're not willing to let go of the valuation even if the business is not growing as fast as say any of the maximum so that's a very interesting point to which we should definitely consider so Hari I already said how much I liked your pick so I probably shouldn't continue doing so. (1:06:51) But I think to your point about the valuation, I've been in financial markets for I don't know how long and we've done these episodes for more than a decade together. It continues to surprise me how long high quality companies can continue to compound. and you're seeing this and it paints me as a value investor or a so-called value investor to say this and they're priced at 30 times plus price to earnings and then they just continues to give you double digits returns and it's so difficult for at least for me to invest in those companies uh because they always look expensive but the best companies they just tend to always look (1:07:24) expensive and they still outperform and it's it's so it's so painful I completely agree with you in terms of the AI threat I think it's probably overblown for their analytics part. The rating part is just it's just so strong and I don't see that getting disrupted anytime soon. (1:07:42) It's definitely not where you're going to make the greatest returns, but perhaps we are also in a market where you want to protect your downside even more than than you always want to do. Just a few fun facts is one is so inclined. The co pay of Moody's 16 million versus 25 million uh for Brixie Hway and Brixia is like more than 10 times as big in terms of market cap. And then of course this is also snapshot. They would say 94% is equity based. (1:08:06) Keep in mind though that the whole thing about being equity based and how it's based on performance for a company like Moody's it's difficult not to get paid in equities even if you do a terrible job. I think I can say that without offending the CEO too much. Uh so anyways another fun fact here with bell ring market cap $2 billion co pay 6.5 million. I can't help myself. (1:08:30) That was all I had to say about Moody's from back to you Jensen. I just want to talk a little bit about the valuation. I agree with you that it has been particularly for a deep value investor, it's been a frustrating period of time that high valuations have tended to get higher. (1:08:49) I don't quibble much with the way that the companies are sorted in the market. Like I do think that the Mag 7 are probably the best seven businesses in the market. And I don't think that Bell Ring Brands deserves much more than a $4 billion valuation. You know, I'm I'm not out of my mind in the sense that I dispute the rank. I just dispute the multiples applied to these things. (1:09:07) I I do think they're a little bit too expensive. And I just think that's what happens in some of these markets that if you don't get a shakeout, the valuation just keeps on getting increasingly stretched. I've been putting these charts on Twitter for an extended period of time, but just observing the one one really simple way to think about it is the equal weight version of the S&P 500 versus the market capitalization weighted float adjusted. (1:09:34) So what everybody the S&P 500 the SPY ETF the index is market capitalization weighted float adjusted which means that the bigger market caps with more float occupy a bigger part of the index all else being equal that means that the S&P 500 is essentially a momentum investor in the biggest in in the biggest companies and that's why the S&P 500 has done so well since 2015 particularly in relation to everything else the equal weight version just puts the same amount into the smallest business as it does into the biggest business. And so it's more of a proxy for small, it's more of (1:10:09) a proxy for value, and it's a little bit of a proxy for cyclicals cuz they tend to be in the smaller part of the business. Over the very long run, over the 100 or so years of data that we have, equal weight has massively outperformed market capitalization weight because small tends to outperform large, value tends to outperform growth, and so on. (1:10:33) If you look over that period of time, even though equal weight has outperformed market capitalization weight, there are many periods of time where you can see for extended periods of time, 10 or 15 years, where market capitalization weight outperforms equal weight. And it's always around these technological transitions in the market. So you can see it in the 70s with the nifty50. Same idea, the very best businesses. (1:10:59) And why buy the other 500, just buy the 50? just hold on to them, pay any price, don't worry about it at all. Work out. Then you look at the dot 1.0 that stands out. If you don't have this sort of global reach, you're not going to be able to make it. If you're not on the internet, if you're not in cyerspace, you're not going to be able to make it. And then again, now I don't know what you would call this internet 2. (1:11:17) 0 sort of become AI at the end of this long boom. But since Q3 last year, there's been this pretty significant turn, I think, in the markets that I haven't heard a lot of people talking about. But it has been small has started outperforming large value started outperforming growth. Equal weights now outperforming market capitalization weight. (1:11:37) You can think of it like the S&P 100, which is the biggest 100, now outperforms the 500. MAG 7 underperformed the S&P 500 last year. I think that these things are going to start happening. Like that's the ordinary course. That's what usually happens in the markets. (1:11:57) And it's unusual because people have been conditioned by what's happened over the last 10 or 15 years to think that the other way around is the way that it works. Which is why you look at those stocks and you say, "Gee, they're expensive and now they're much more expensive, but gee, the stocks up so much cuz they've caught the earnings growth on the way through there. (1:12:14) " that could easily reverse and we could go back much more to a market that's one that I like much more one that is much more like the long run average in which case valuation does become more important and business quality you know if you look from 2000 to 2015 very good businesses Microsoft Walmart they traded sideways for 15 years there was nothing wrong with the underlying businesses they continued to do what they had done before 2000 and after 2015 it was purely a valuation coming back into lawn and it could easily happen again. Yeah, that's a very good point about the valuation swings and I guess some of the (1:12:47) barometers of the mood of the market is like Bitcoin is also down now almost 50%. That is tracking some of the more speculative tech stocks. So they all kind of are going down and it's interesting to see that some of these companies like Moody's are still holding up their valuation. I don't know when their turn will come. (1:13:11) So that's the risk Toby because we don't know it's like you know every group of stock is being taken in a group and then fired at in terms of valuation and we don't know which group is the next. It's it's been funny to watch this rolling mania that's sort of rolled through lumber stocks rolled through. It's precious metals like a month ago was gold and silver going crazy. (1:13:29) Before then it was mag 7. Before that it was the NFTts and crypto. It's just it feels like it's been going on for a long time without any like it's never there's never been a systemic crash. There's been like a specific crash for the mania, but at no point have we had the clearing of all the decks and and restart. Yeah. All right, Jans. (1:13:55) Thank you so much as always. Hari, any concluding remarks here about Moody's before we round off the episode? No, I think this was a great discussion. Thank you for the perspective and I think for me the key takeaway is the valuation risk. Yeah, it has gone down a significant amount right now but what's next? We don't know whether Modi will be in one of those groups which will be taken to the woodshed. (1:14:21) So in terms of valuation so thank you that was helpful. Yeah, I I love that you say that, Har. I also love Toby whenever you talk about it doesn't it's not written anywhere that it's supposed to be these lofty valuations for such a high quality company. (1:14:38) With all of that being said, Jans, I want to give you uh the opportunity to give a hand off to whatever you want to to give a hand off to. Uh Toby, yeah, I run acquirers funds. We have two ETFs that trade US domestic deep value names. Zigg which is 30 names in midcap and large cap and deep which is 100 names in small and micro. It has a very distinct bet on in the market which is that small micro value. (1:15:04) Reasonable business quality turns around and midcap I think midcap is the sort of undiscovered part of the market which gives you the earnings growth of small with the volatility of large. So it tends to have quite a good mix better quality management and their better valuations for the most part. And I have a a website acquirersmultiple.com which has free stock picks on it like we've been discussing here today. (1:15:22) Fantastic. Uh Hari. Yeah, great to be with you guys today. You can find me at on Twitter. Hari Rama is my handle. Happy to continue the conversations over there. Thank you. Thank you Hari. Thank you so much for your time, Jans. As always, it's it's a privilege. Thanks D. Thanks Harry. Always great. Thank you guys. Thanks for listening to TIP. Visit the investorspodcast. (1:15:45) com for show notes and educational resources. This podcast is forformational and entertainment purposes only and does not provide financial investment, tax or legal advice. The content is impersonal and does not consider your objectives, financial situation or needs. (1:16:02) 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. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product. Hosts, guests, and the investors podcast network may hold positions in securities discussed and may change those positions at any time without notice. (1:16:21) 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. Copyright by the Investors Podcast Network. All rights reserved. I see vaccines very similar to software as a service. It's a subscription model. (1:16:42) It's something that everybody takes during the flu season. It's kind of a repeat business for them. So, it's a recurring revenue. So vaccine is really their core strength and a stable source of income while they have
Berkshire Hathaway, Moody's, & BellRing Brands | Stock Analysis & Valuation (TIP795)
Summary
Transcript
(00:00) It continues to surprise me how long high quality companies can continue to compound. They're priced at 30 times plus price to earnings and then they just continues to give you double digits returns and it's so difficult for at least for me to invest in those companies because they always look expensive. (00:20) But the best companies they just tend to always look expensive and they still outperform and it's so painful. Before 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. Welcome to the Investors Podcast. (00:46) I'm your host Dick Broen and today I'm here with my friends and fellow investors Tobias and Hari. How are you today, Jens? Hey, Stig. Hey, Harry. Good to see you. Good to see both of you guys. Yeah, good to see you both. Thank you for having us today. It's always great and and with Burkshire coming up, you know, I can't help but pitch it. I know that's not an unknown gem. I know it's sort of like a bit of I feel like it's a cliche. (01:08) I mean, we're talking about a company that's more than a trillion dollars in market cap. And I guess everyone knows it, especially followers of this podcast would know it. Toby's podcast for sure as well. So, so why am I talking about Brixie Haway? I should probably do the whole disclaimer thing first. I am long bricksway myself. Uh, surprise surprise. (01:28) And I added this recently as January 22nd. So, I have all the biases you can possibly imagine. Anyways, I'm still going to pitch it. So, I felt it was a good time to talk about it. Not just because the meeting is coming up, but also because with Buffett transitioning out, a new sheriff in town, a bunch of moving parts here at Burkshire. So, I'd be really curious to hear, especially from you two gents, how you see it. (01:55) But for those who are not familiar with Brooks Hellway, I kind of feel I should give a business overview. If we go all the way back, Buffett took control of Brooksshire Haway back in 1965. And at the time it was a textile mill struggling and certainly seen better days. And then I can't help but mention this fun fact. (02:14) Buffett was not the CEO in 1965. It was actually Ken Chase who was president of operations which would be equivalent to the CEO role. Buffett was chairman at the time and took over Capital Location and he became the CEO in 1970. And so you might be thinking, does that really matter for today's pitch? No, not at all. It's my way of being a super burkshire nerd and I can't help but mention he was actually not CEO. (02:39) He was someone else, but he took over Buffett in 1970. But you can say he had control since 1965. Now, how do you give an overview of a massive conglomerate such as Berkshire Haway? Well, you know, you can look at it as having, you know, 70 plus major operating businesses. I think legally it's more than 300. (03:00) Uh or you can also take a similar approach and view it as two buckets. Uh you can say one that's operating businesses and then you have one with public equities and treasuries. So that could be a way of looking at it. And of course, you know, you have the bucket here of operating businesses that can be broken further down. You have insurance and non-insurance. (03:20) And yes, you can break that down, of course, again. So, you have BA Energy and BNSF, they occupy Elachi of the insurance. And then you have Geico, that's roughly half of the group's premiums in insurance. So, I won't go further the time being because I kind of feel like we can go on and on and on, but you know, that could be a way of sort of like get a a quick business overview. Now, at the time of recording, we're still waiting for the Q4 numbers. (03:46) This episode would actually be published 12 hours before they published the Q4 numbers, so we can't turn an episode around 12 hours. But I kind of felt it was it was a nice segue into talking about how much in this day and age and everything's just moving so quickly. (04:06) There's still such a high degree of predictability when it comes to Brixie Haway. So it shouldn't change anything material that there's a new quarter coming out which is the case for some companies certainly not for Brixie Haway. Q3 numbers closed out with 267 billion public equities. We can typically extrapolate that quite well until what it is today. (04:25) you know, you you can get chat TBT to help you with that if you want to. You typically don't see a lot of big changes and especially with what is going on right now with Buffett transitioning out. I wouldn't expect there to be any kind of big movements and also in many of the the larger companies, you know, Burkshire, they're also considered an insider. So, if there were bigger moves, they would also have been have to disclose that. (04:44) Of course, you have the massive cash position. And I also just want to say like for a company the size of Berkshire, they don't hold cash in their account just like you and me. They would use short-term treasuries to make sure they get a bit of yield. And then it it's short-term. It's usually around four four months. (05:01) That's the average maturity. Uh so they're not sensitive to interest rate fluctuations. And then of course you also have to deduct debt there. So whenever you do that, make sure you're doing an ablesto comparison. You have some debt that is interest bearing, some are not. Some is on the parent level and some are not. And you know, you also have to back out the minority interests. (05:19) Mona once said, "If you're not a little confused about what's going on, you don't understand it." And uh to be fair, he was actually speaking about derivatives at the time. He was after the whole J thing, he made he had this wonderful quote and then also after GFC, he restated that quote. But the accounting for Burks Helaway quickly becomes a bit of a mess. (05:38) I'll get to a shortcut later here in my pitch. You can be really really detailed if you want to but I think for a company like Berkshire Haway you can also do as you mentioned a few shortcuts and you can sort of like look at as in bigger buckets so and not think too much about you know the decimal points you know that that sort of like will take care of itself. Now let's talk a bit about the competitive advantage. (06:04) You know back in the day whenever book value meant a lot perhaps a bit more than it does today people spoke about the Buffett premium. And so you can think about it this way. How much would you pay for a million dollars? And well, you might say a million dollars. That doesn't seem that seem to be is this a trick question? Why are you asking what do you want to pay for a million? Well, if I then rephrase the question and I said, how much would you pay for Buffett managing that million dollars? And then is it worth more? And most people would say yes, it's actually worth more because, you know, we we believe that Buffett is going to invest that money. wisely. So, (06:39) we're going to put a premium on top of the book value. So, that was how some people saw it for quite some time. And I could then ask the question now with Greg Gable coming in as the CEO, how much would you willing to pay for a dollar invested by Greg Greg Gable and and the team at Bergkshire now? And so, of course, some bulls would then say that Greg might be the perfect guy for a trillion dollar market cap company. (07:04) You know, it's it's a very different company than than the company Buffett took over in 1965. It certainly required a very different skill set at the time. And I should also say it's we're talking about trillion dollar market cap. We're not talking about trillion dollar in in book value right now. (07:21) And of course, Ael gets a lot of tailwind because of its track record so far. And also I would say that I think right now the trust in Greg Ael is high just from Buffett and owning him. And you know for at least us shareholders and I can't really speak for all sharehold of course a bugway but I can probably say that Buffett's work carries a lot of weight until proven otherwise. (07:44) And then of course if you're an uber nerd like me you can't help but think about David soal and everything that happened with lubers uh scandal and I think most people would also agree that he was the one who was widely expected to take over for Buffett. So even the mighty fall and it's very very difficult to to be the next guy. (08:04) Anyways, in my eyes, if we're talking about competitive advantage, Burks's competitive advantage is the strong culture of prudent capital allocation and this ethical decentralized approach to running a company. And it sort of like takes me to the next point because if we're looking at the risks of such a company, what are those risks? And you know, capitalism is brutal and you know, Burks competes in the same market as everyone else. And if we look at it very broadly and we're saying, hey, if you have a castle, someone's going to storm it. (08:32) Yes, there is of course a risk there, but some people would then also turn the tables and say, well, you have roughly 2/3 of the market cap that's backed by equities and and treasuries. Uh, and then you have a great selection of diversified highquality operating businesses. Not the biggest risk perhaps. (08:52) Now, Toby and I had a episode recording here not too long ago and and we talked about Toby's latest book, Soldier of Fortune, and we talked about whether Bergkshire was safer than the S&P 500. And it's sort of like a bit of an probably intellectual discussion, but I kind of like felt it was it was interesting because over the next 100 years, I would like to make the statement that the SP500 is probably safer because the worst companies are being replaced by new good companies. So you only have to think about I don't know AI threats because you know (09:23) whatever happens you know you you have that recycling of people who benefit or not and if it's a big you know if nothing happens then you also sort of like gets them directly from only the S&P 500 but then what Toby and I also talked about was that over the next decade at the current valuations perhaps one would pick Burkshire because of the downside protection and strong culture. You should probably go back and listen to the entire entire episode. (09:46) I don't think I did it justice just from that paragraph alone but I sort of like wanted to use that as talking about his competitive advantage talking about risk and you know Buffett is still the chairman whenever Buffett is no longer with us his older son Howard would be the non-executive chairman with sole responsibility for ensuring that the culture remains intact but of course there is a butt here uh somewhere and I so I wanted to talk about Greg Abel's compensation sort of like to start off to the conversation And to talk about (10:16) culture, in some Burksia circles, people were talking about that perhaps Greg Ael would take the $100,000 pay package that Buffett had. And he was actually paid 21 million before. So I was a bit I don't know. I didn't really believe that he would. I think he would probably get a lot of browner points if he did. But he's now making 25 million in base. He's not making any bonus. (10:39) Uh no stock options either. And so you can look at this many different ways. So, uh, Toby, how do you think about this new conversation structure for Greg Aable? What does that tell you about the new culture that's or perhaps the continued culture that's going on at Berkshire Haway right now? It's a funny number, isn't it? 25 million cuz that's a fabulous sum of money particularly to be earning in one year for any person. and it's not incentive driven. (11:09) So he gets that for showing up, but in the world of very big businesses, that's probably the lowest compensation package around. And he has put his hand into his own pocket and bought a very material sum. I think it was like $70 million or something like that initially, which would be worth more than that now. Yeah, I I have the proxy here. (11:37) He has 228 Assas and 2,363 Bishas. So you can just quickly do the math, Toby. I don't know. It should be one of those ready set cook shows like oh yes and the this is how much it is and probably he bought it on on his own like you know Burkshire doesn't do stock auctions or RSUs. They don't give shares to their executives. They're supposed to buy it on their own, isn't it? Yeah. (12:03) Yeah. But I think I think he had a decent size share in Burkshire Haway Energy. It was probably called Mid American at the time. Uh some even more Uber nerds would know that about Burks, what it was actually called at the time whenever he did that. But that was certainly uh where a lot of his net worth came from. (12:22) But for what it is worth, the salary of IBM CEO is also 25 million. and their market cap is around 243 245 billion compared to Berkshire which is 1 trillion. So the salary of Oracle CEO for example is 138 million. So if you see the coms of CEOs and Oracle market cap is 460 billion so half the size company. (12:54) So if you look at that from a competitive landscape, it is much different and it probably is also unfair to compare Greg Gable's uh salary package with Buffett because Buffett is the owner. Burkshshire is his company. He was uh he didn't really need the salary as such and that was the difference. Many owner executives also pay themselves handsome salary. So Buffett is one of a kind. Very hard to kind of replace Buffett. (13:23) That's the other challenge. So I looked it up. His holdings are 170 million to 175 million. He cashed out 870 million when Burkshere bought Birkshire Energy. So the salary is not material to what he's worth, what he holds in Birkshshire, but still a solid amount of money and not incentive driven. So it is what it is. (13:46) Yeah. What would you have preferred Toby to align interests? And I'm not insinuating that it's higher or low. I'm just I'm guess I'm just asking like what do you think would be the best way of doing it? I think a base salary and I don't know where you would set that but a base salary and then the same way that the two investors were compensated where you get charged on the capital that you have under your control at whatever the 10 year. So you get charged 6% on that capital and then what you earn over and (14:16) above that you get some portion of that. So you're incentivized to focus on return on invested capital and you do it over like a rolling 5year period so you're not making short-term decisions to to pump it up. That's how that's how I would structure it. I think that's the fairest way to do it. Yeah. (14:36) You know, I think it it's incredible challenging apart from Amonga themselves and and with all the discussions that they had about how terrible stock options were and you know, I I tend to agree with them. There have been a terrible number of of compensation packages and still in place today in so many companies. (14:55) They have talked about how it may make sense for some CEOs to have stock options, but they also talked about that was probably only the case if you were like the guy who were in charge of of everything. you know, it probably wouldn't make any sense for a lot of people, let's say VPs, who couldn't influence the entire organization. (15:13) And so, I was very curious to see what would happen. I don't think I ever thought he would take something like $100,000 pay package. You know, going to to Har's point, why would he do that? And of course, you you could say something like, "Hey, his net worth is so and so much money, so does it really matter if 100,000 25 million?" No, it probably doesn't. (15:34) But I think everyone wants to be well paid and I think you know I I don't really have anything against that. I generally think there's a lot of different philosophies whenever it comes to compensation. Now I I remember I was uh I was reading one of the Netflix books uh No Rules Rules and they talked about how and I don't know if this has changed but they talked about how they wanted to find people with the right character and then pay them a a very nice base and then the rest would sort of like be sorted out. And I was quite influenced by that at the time and I've tried it out and that (16:04) did not work at all. Uh but perhaps that was there was just because it was a different organization and and whatnot. It might work with Greg Ael. I can see why it would work with him and I was actually we're going to get to your stock picks later and I actually had a chance to look up management compensation. It was kind of interesting. (16:22) So in comparison, it's actually you could say Greg was actually not well paid and most compensation packages in the US are being handed out is that much of it is in in equity and then this they sell it as oh but it's very much in line because you get it as equity and it vests and so on and so forth and there is a ring of truth to that. (16:46) It's very difficult to do perfect because it is a bit of a participation trophy, right? Like oh but the base salary is this and this low. Yeah, but as long as you, you know, have a pulse and you go to work, you're still getting tens of millions in equities and then you're sort of aligned with shareholders, but then you can also just sell it. (17:06) So, it's like it sounds good, but in reality, it's not really that aligned with shareholders and then you probably have to do some kind of adjusted debit that thing and then you get more equities than you can then sell and then so it's like it sounds good, but it's really really difficult to align incentives. (17:23) But then we can look at, you know, Berkshire Haway and Buffy will probably be the number one guy to understand how to structure that. And he came up with let's get give Greg Away a nice base and then the rest will figure itself out. And I I just I found that to be quite interesting. It's very simple. Has the advantage of being very simple. Y there's not much incentive in it though. That's the that's the problem. (17:42) So I guess you're relying on the fact that he's got a big he's written a check for 10% of his net worth at the time. that's now you know I don't know what his other investments have done but could be 20% of his net worth if it hasn't if he's kept it all in cash and also I think lately Buffett and Mer have been emphasizing that Burkshshire is a fortress in a way I take it as a cue as like don't expect outsiz returns from this business going forward and is gra able the steward to keep it safe rather than taking unnecessary risks and that's how probably the incentive structure also looks like. He's not being incentivized for growth. (18:25) It's uh basically keep it safe is kind of how I see it and maybe dividends in future who knows. So because if they can't grow there was a recent comment by one of the Silicon Valley investors Chamat Palhapatia in a podcast where he compared Buffett's returns before REG FD was implemented and after REG FD which REG FD had some unfair advantage for people with information asymmetry and REGG FD kind of eliminated it and he compared that and said hey look Buffett's returns preregg FD were way greater than S&P 500 at around 24% or so annualized. (19:10) But postreg his returns were on par with S&P 500. So even Buffett could not really beat S&P 500 and that was when Burkshire was still much smaller back in 200 later. Now with a trillion dollar market cap, with the size they are, it's also mathematically very hard for somebody like Greg to say, "Okay, now I'm going to beat S&P 500 over a long period of time. (19:42) " Yeah, thank you for your your comments, Jans. I just wanted to also mention that whenever you are comparing compensation, it it really really tricky to do that. And to Harry's point, I feel that Buffett should be applauded for only taking $100,000 in compensation and then he I think he had like $300,000 in other expenses or I think it's the proxies would say other compensation, but he's been famous for the 100,000. (20:10) I kind of feel like whenever you hear those numbers, it's really important to understand where that's coming from. You have all these high-fly CEOs, tech bosses, uh, and they're like, "Oh, I only get like $1." And you're like, "Yeah, but you also founded the company. if you reach these milestones, you're going to get like was it a trillion dollars or whatever. (20:28) And yes, I I know that's going to be really difficult to achieve and but it's like whenever you have so and so many shares, it's just it's a different game and I think you have to have to understand that as you're comparing conversation between different CEOs. Anyways, let's talk a bit about valuation. Perhaps the simplest way to value Burkshire is to break it into two categories. And Buffett did this this himself in the early letters. (20:52) So first you normalize operating earnings and then you apply an appropriate multiple. So if I use 40 billion here on the operating companies I use a multiple of 17 I come up with 680 billion for those businesses. I would like to think that is directional correct. (21:10) I'm definitely sure that some would use a different multiple and a different normalized number and I think that's perfectly fine. And then in the other bucket you can look at the value equities plus cash and and then deduct that. And of course, you can then make an adjustment to what you think the the uh intrinsic value is of those equities. (21:26) And so if you look at the top top holdings, you know, you have Apple, American Express, Bank of America, Coca-Cola, and Chevron, then you can be like, oh, you know, you probably want to start there. They're roughly like 70% of the value of the equities. And then you can make your own adjustments. But if we say that you have roughly 500 billion in equities and in cash net, uh then you end up with something like 1. (21:52) 2 two trillionish if you round it and you know who's counting uh when you're talking about decimal points of trillions of dollars but the back of of the envelope valuation gives you a number around $550 for Aishia at the time of recording Aishia is trading at $497 and so it sort of like goes to the point I had it there about risk there's a lot of high-f flyers out there lofty valuations burks is not one of Of course, the future is always uncertain and it's no different today, but you know that might be a good reason why you want to own Burks in the first place and Burkshire typically does well in bare markets. You also see that and and (22:30) sometimes the market is selling off and there are few companies that are not and some of them are burkshire and I attribute that to if you're looking at the investing mandates that in a lot of funds you know their equity zone or part of this equities and they have to be placed in some kind of equity and so it's very reasonable for a lot of s managers that if you don't really know where to put it some of them just put it into burkshire sort of like as a wait and see type bucket and the draw downs you see are typically not that dramatic (22:56) it's probably not lost on the listeners that Bergkshire had the capital to buy back a huge amount of stock if the price is attractive enough and I don't have any concerns about Greg Ael not being able to do that. I think he very definitely understands the value of the stock and then also Burkxia shareholders they've been trained for decades now how to think about intrinsic value so I'm not we've seen that multiple times whenever the market is selling off burks typically is not allowed to be at a huge discount for that long that also goes into my point here about perhaps for (23:26) some people such as risk averse people like myself also I'd like to think it might be a good placeholder for cash uh especially if you don't know where to put it or if you have a mandate where you you need to invest in equities I would imagine that if we talk about valuation you can probably expect to get something like a 10% normalized return moving forward uh of course that varies you know from year to year but it sort of like gives you a sort of a yard stick what to expect and then at least the way that I use (23:58) Birkshshire is that if I don't really know what to invest in sometimes I would just invest in Burkshshire and then if something sells off like you have a lot of a lot of software uh companies that are selling off right now and I guess we can talk a bit about that later but if something you really like goes on sale perhaps you want to trim some of your burks you're holding and start building positions something else so at least that is how I'm looking at it and also I do tend to run a pretty concentrated portfolio I currently only have five (24:22) individual stocks I also have a few other things in in the portfolio but whenever you you run a concentrated portfolio perhaps you want to have something that's somewhat anti-fragile in that portfolio and and Burkshshire could be uh one of those you know Buffett has famously said that you whenever you invest in utilities that's not the way to get I think he said that's not how you become rich but perhaps you will stay rich and I kind of feel like the way he's looking at utilities that is perhaps the way you (24:51) can look at Burkshire today it's it might be a stock you once held because it could make you rich that's not the case anymore but perhaps it could stay that way so anyways Jens I want to throw it back over to you guys Yeah, I've fallen about the same place with the expected return about 10%. (25:09) And I agree, it's 10% is still a pretty good return, but it's equivalent to holding the S&P 500 with maybe a slightly different characteristics as you point out. It's not going to draw down as much probably in a bare market. It's probably not going to run up as much in a bull market. (25:26) You're probably going to get a less volatile ride, but growth is certainly slowing and they've got a lot of cash there. So, they're going to have to figure out what they do with that at some point. It's hard to imagine that even in a crash, something big enough becomes available that they can really put all of that money to work. And buybacks aren't going to move the needle really either. So, at some point, there's going to have to be a special dividend or some dividend probably. (25:47) I don't know how long they can sort of sustain that no dividend policy, but 5 years later, maybe. Does a dividend become possible 5 years later? Probably something like that. It's definitely worth looking at. It's more, as you point out, the valuation is distinct from the S&P 500. (26:07) That's one big thing that we didn't discuss that in the compensation, but I always think if you're going to take over a business, you want to take it over when it's completely busted and the valuation is the multiple is as low as you can possibly get it. You don't want to take over a high flyer because then you're fighting the valuation as well as sort of help trying to run the business, which is why like measures of compensation that are internally they have some control over. You want them focusing on those kind of things. (26:30) So Berkshire is much much cheaper than the S&P 500 and I think that like we discussed stig that'll be the thing that has the most impact over the medium term 3 5 10 years beyond that it's the quality of the businesses and it's hard to know where they're going to be at that point but I tend to agree on the valuation and the return front. Yeah, I agree. (26:55) I think especially stick the point you made about a parking space for your capital till you find good opportunities is a good framework to think about workshare as because if I want to have it in my long-term bucket I would rather have S&P 500 where I don't have to really worry about okay I need to move this capital around but if I am looking at it as a placeholder then definitely yes I would definitely favor Burkshare both from a valuation perspective as Toby was referring to which is lower than S&P 500 and also from a downside risk protection perspective because if there is a draw down number one Berkshire tends to get (27:35) hit less harder on the downside but also they have the cash hold which can be an opportunity and a drag and maybe Buffett will get lucky again similar to what he did during the financial crisis that he can get some of those few elephants that he is looking for especially as we are seeing a crisis in the private equity funds. Now lot of private equity firms are struggling. (28:02) That means there is less competition in the private markets in the short to medium term which might present a good opportunity to Buffett. Even though he says he's not the SEA, I'm pretty sure he cannot contain himself from deploying that capital when when the right one arrives. Thank you. Uh Hari and and Toby, I think another stock that you definitely want to hold or consider holding if we do see a downturn in the market might be Har's pick, but that's going to be a cliffhanger because I know you're going to go next, Toby. I'm curious to to hear (28:35) what uh what you're going to pitch for us today. My pick is Bell Ring Brands. The ticket is BRBR. It was spun out of Post Holdings. So, Post Holdings is this um it's been around forever. Consumer package goods. They have everything from like cake mix to they used to have this business under its umbrella. (28:56) And it's kind of interesting because they talk about like they can see consumer behavior through various different events. So through co they saw everybody kind of went away from the healthy stuff and started buying all of the cake mix and all of the that sort of stuff and then everybody got too fat and decided they had to go back to the healthy stuff. (29:14) So what Bell Ring Brands does, their pure play protein. So their main thing is the premier protein. I see these things around. I I heard some influencers talking about these. It's just like a milk drink that you can find in any convenience store or supermarket. And they're very high protein per serving and low calories, low sugar. (29:42) And so they're the thing that I if I am out and need something that I'd grab one of these things and drink them because they're reasonably, you know, just help you meet all of your macros, do whatever you're trying to do. So I quite like them. That's not how I found this business. I found this business because financially it's very cheap. (29:59) It's not an unusually good business, but it's a good business. I like these kind of little industrial businesses that are very simple, like basically pure play. The problem with this one is it's very small. market cap's $2.1 billion in December 2024. So, a little bit over 12 months ago, this thing was trading over $80. Uh, it's currently trading around $17. (30:24) So, it's had a huge fall from grace. I can't really work out why that's happened. There's no there's nothing obvious to me why that has happened, but it's probably something to do with the GLP1 shots that folks are taking. I'm not sure that if you take the GLP1 shot, you wouldn't continue to drink this stuff because you still need to get a certain amount of protein every day. (30:45) If you're out and about and you can't get access to your protein, and this is probably the stuff that you're going to drink. The brand's pretty well known among folks, so that's that's important. They've got distribution, which is hard to get. They've got distribution in un like in the little convenience store near where I live. It's in there. Uh it's pretty well distributed. (31:05) So those two things like that's the old classic formula for consumer package goods pretty good brand pretty well-known brand and pretty good distribution position in aisles and all that sort of stuff that's less important now I guess I get that there's social media pushing different proteins and there's a lot of competition in the space so the business is good the business isn't great but it does earn pretty high returns on invested capital it's like 80% using the green blood measure because they don't do their own manufacturing. They outsource all of their manufacturing. That might be also be a risk, but it's worth sort of (31:41) mentioning that it's a very small business. I think the valuation is way too low for the quality of the business. I think that at $80 it was too expensive by two times. At $17, it's too cheap by about half. It's an 11% free cash flow yield here. EV it's 10. EV but does nine P is 12. (32:07) So on any sort of metric it's it's cheap. It's certainly over earning on its invested capital. Pretty good brand, pretty good distribution. And I don't really know why it's sold off as hard as it has. But I think that it's one of those things that it could easily be a target for private equity because it's it's got a big shareholder in post. (32:25) So it's not going to happen in a hostile way, but it's it's one of those businesses that it's pretty easy to run. It's the sort of business that attracts private equity. I think even if that doesn't happen, it they've got a pretty good track record of buying back stock. It's well managed. I like it as a business and I think it's a reasonable bet at $17. (32:42) Uh I think it's good riskadjusted bet. Yeah, Toby, very interesting pick. I don't know how you find these gems. It's like from $89 79 $80 to $17. That a big drop. I'm just curious like number one, why did post holding spin it off? Is it because it's too niche a player? Number one. Number two, does that factor actually protect them from somebody like Pepsi or Coke making a play into healthy drinks? Is it too small for them? because I don't understand their distribution and how it is compared to a Pepsi or Coke and would this be like one of the acquisition target for the giants one of those two I think there's a lot (33:28) of buying and selling in these kind of businesses I think there's a lot of like gin rummy played with these kind of businesses and I think what they've done is they've taken Premier Protein which is growing fast and they've combined it together with Datiz which is like a protein powder type business which is not a brand that I've heard of and I'm I kind of look at these brands a little bit. So that's that's a red flag. (33:52) And then they have this Power Bars like I don't know if you Power Bars were like the original protein bars way back in the day and they've discontinued that in North America. I didn't realize that there. It's a legacy kind of brand now. The sales have still been growing. Sales have been growing pretty well for an extended period of time. Pretty consistently pretty well. (34:10) So, I think they've put a good business together with a middling business and a bad business and then spun it off because that's the kind of shenanigans these guys like. They just like to do this stuff. They like to buy and sell the businesses. And um then it had a pretty good run when it came out probably because it was right on the heels of co everybody was trying to get fit and healthy again. (34:32) Stock price ran from 20 bucks in the in the spin to $80. Maybe that's just momentum. people just chasing momentum, but it was ahead of its valuation at 80, let's say. And I picked it up in December last year. I've paid 25 bucks a share or something like that for it. So, it's 17. I'm down a little bit on that. (34:51) It's down 30% this year. So, it's since the start of the year. It's been a miserable run just watching it fall because it's it's the worst performing stock in my portfolio and it's down a lot every single day. And it's kind of perplexing cuz I like the business and I it's a very simple business. (35:09) It's not a great business in the sense that as you say somebody could compete with it but it's so small and it's so profitable that I think that an easier way is to sort of acquire this thing rather than to just try to compete directly with it. That would be the simplest thing to do. I think yeah I think for a Pepsi or two plus billion dollar is not a big deal if they want to really acquire this brand. Post holding still has a big holding in it so it has to be a negotiated sale. (35:31) So, I would say that a negotiated sale happens a fair bit further north than where it is now, but like still we're talking $4 billion instead of $2 billion plus a billion dollars in net debt. Mhm. So, Toby, I I always like your picks and uh this is no different. I certainly like the price. I think my concern is a bit on distribution. (35:55) Uh at least that's one of the concerns I want to raise. So, three customers are 74% of sales. So you have Walmart, Sam's Clubs like 34%. Then you have Costco and and Amazon. So I can't help but wonder why wouldn't Costco say, "Hey, we have Kirkland. It's cheaper and it has even more protein." I don't know anything about protein, but it's even better. And here you go. (36:21) Don't drink premium protein. So that that would be my concern. And sort of like in continuation of that, are people asking for a protein drink or do they ask for a premium protein? And if I can sort of like, you know, extrapolate that, I would say some people ask for a soft drink, but a lot of people ask for a Coca-Cola. (36:39) And there's a reason why they ask for a Coca-Cola. So with that framework, I'm kind of curious to hear how do you see that brand strength? 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. 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Go follow the Intrinsic Value Podcast on your favorite podcasting app and discover the next stock to add to your portfolio or watch list. (39:08) Yeah. So, I think that when you go looking for a high protein, low calorie, low sugar drink, they're actually reasonably hard to find. A lot of them have a lot of sugar in them. And so I heard about this brand through social media and then I sought out this brand particularly and I've bought it in California and I've bought it in Florida when I was traveling. (39:34) I found it in a few different places when I was traveling because I didn't want to eat junk food. I just wanted to drink something really quickly and keep going. And I think that that's the sort of the use case for this stuff when you're out and about and you don't have what you need. I am personally looking for the brand when I go in cuz it's, you know, the search risk that you have, the search time. You don't have a lot of time. (39:52) and there's a whole lot of brands there. You're looking for the one that you know fulfills the requirements that you need. It's not hard to recreate that that's simple to do. It would be not hard but also not trivial to create brand awareness around a new one but easy for one of those bigger bigger brands. As I say, the business isn't great. The business is not a deep moat. It's a thin moat but there is a little bit of a mode there. (40:20) there's a little bit of brand awareness and I think for the valuation all of that risk is already embedded in the discount that you're getting from that valuation. So I think I think it's like 40 bucks like 11% free cash flow yield they're using a lot of it to buy back stock pretty consistently at these at these levels. (40:38) I acknowledge that it's an imperfect mo but it's so cheap that I think that all of that is already counted in the discount. So, as often is the case with very attractive priced companies, there is a reason for it. And I think you're right, Toby. I think it's factored in. (40:58) I would probably be a bit concerned about the coverage ratio. You know, right now they're buying back a lot of shi and then that's great. Should they be paying off debt instead? Have like a billion bit more than a billion dollar in debt, which is a lot for such a small company. Average rate just a bit more than 7%. Have a Moody's rating of B1. (41:16) if one is so inclined to to look that up. Perhaps we can talk a bit more about that later. And so I like it. I like it because it's so capital light. You know, they they build up this brand. That was also why I wanted to ask about the brand strength and and to your point, they outsource manufacturing and so like yes, the return on investor capital is absolutely amazing. (41:40) It also looks a little vulnerable and I think it also comes down to how much of this is people are going to continue to focus a lot on protein or is it going back to quoteunquote normal whatever normal is because you know this is not a niche bodybuilding something product like this is like a mainstream product but it wasn't mainstream before everyone wanted to talk about protein and so I guess that would be my question to you being the fitness guru here in the in the group Toby no I'm ju I'm just kidding but like how much is this a secular trend into protein and the focus on that and how much is this a trend that's (42:18) going back to normal. So the the focus on protein is that's been around for decades in the bodybuilding community that the bodybuilders know that you get three macros fat, carbohydrate, protein. You need this amount of protein for this amount of body weight. You need to get that every day. If you do that, life is easy. if you don't, you're hungry all the time and you can't put on muscle. (42:45) That knowledge has seeped into the public consciousness more recently. I don't know how long, but like maybe the last 10 years or something like that. And it's more of a focus now. Like you walk through the supermarket, everything's got a bit of protein packed into it cuz everybody's kind of and it's the CPG firms, you know, that's the expensive part. (43:09) So they've kept it out so they could sell you at bigger margins and now everybody's sort of looking for it. they found a way to artificially stick it back into a whole lot of stuff. So, it's not ideal, but milk is a good source of, you know, protein for humans and this is good for you. So, I from that perspective, I think that the focus on the GLP1s, the fact that people are using these more and more, I think that that indicates that people are there is a desire to get fit. Like, no kidding, everybody has that desire. (43:34) And if there's an easy way of doing it, you hit the GLP1s and then you can't eat as much. So the next stage after that is get your protein first. I think there's a broader understanding that that's the way that you do it. So I think that it's around for a long time as a category. Is this brand around? I don't know. But you know the nature of this stuff is that they'll come up with something. (43:52) They do keep on coming up with something better. They'll say, "Oh, this has got more protein and less sugar." That's some no doubt that and tastes better, you know, more attractive branding, whatever. So that risk exists. But these guys are spending money on that stuff, too. (44:11) They're trying to compete and iterate as much as they can, new flavors or whatever the case may be. And they do have the distribution. So distribution is hard. They've got the manufacturing and they've got the distribution. I don't know how big the category can get to, but it's capped probably. It's not going to be huge. And so there's a finite amount of this production around and they've got they've got the manufacturing, they've got the distribution, and they do have a brand. (44:29) So they're the category leader and they're sort of out there in front and it's theirs to lose. Thank you for that context. One question I had was why such a significant drop and I was trying to look for reasons when I was looking at this pick. (44:47) It's like okay is it tariffs? You said there is a most of its production is outsourced. Is it like outsourced outside US? Is that one of the reason the CEO retiring? Is that the reason? I'm trying to come up with a reason why the drop and I'm I'm not really able to put my thumb on any specific problem for this significant drop. I looked at it too and I couldn't I couldn't find what the cataly moment for it was. (45:10) I've been saying this for a while. I just think there's this rolling speculative mania in the market that moves from crypto to meme stocks to NFTTS to precious metals. And for a little while it was in this thing at 80 bucks it was too expensive. It was two times what I think it was worth. was worth about 40 and at $17 it's too cheap. (45:37) I still think it's worth, you know, well at $80 it was worth 35. At 17 I think it's worth 40. So I think that it's um the valuation got ahead of it. And then the same behavior that makes it run up well past what it's worth. Makes it run down well past what it's worth. And that that's totally normal behavior in the market. (45:55) very common for stocks to go up three times or down to one/ird of where they were over the course of 12 months. I think that's like the average move in the business. So, I just try to pick them off when they get low like this and try to avoid them when they're high. I like the riskreward at this level in this stock. Fantastic. Thank you as always, Toby. (46:14) And to Har's point, I don't know how you do it, Toby. You you find these small gems and they always have really really attractive valuations. Hari, I'm very curious about your pick. Very high quality company. So, yeah, my pick is Modi. It's along the lines of Burkshshire. In fact, Burkshshire has Moody in its portfolio. (46:39) And this has been something that all of us who are followers of Buffett, Burkshshire, we have been looking at this business but always felt like okay, this is perfectly priced. There is no discount available for us to own this. Yeah. For those of you who are not familiar about Moody's, it's a credit rating agency. A simple mental model I have of Moody is like a toll bridge business. (47:07) So if anybody in the world whether it's corporations, governments or banks when they issue a bond they essentially have to pay one of the credit rating agencies in order for them to have issue their bonds because many of the pension funds or other financial institutions are required to have a rating from one of these approved agencies in order for them to buy the bonds. So they are called as NRSO status and only few have them. (47:42) In fact I believe between Moody and SNP together they control 80% of the global market not just US market. So Moody as a business has two broad streams of revenue. One is the one that I just talked about investor services which is basically credit ratings. They rate everything from AAA to junk and between them and uh S&P they control 80% of the business. 55 to 60% of Moody's revenue comes from this line of business. (48:15) The other one is their analytics business. Uh it's more like a subscriptionbased SAS style business basically selling risk models, KYC tools, credit research and data to banks and insurers insuranceances insurance companies and corporations. It's a recurring revenue. It has a very high retention rate because it provides a lot of value and that's around 40 to 45% of their revenue. (48:45) In terms of their mode, I think one is the regulatory mode because they're one of the few NRSO has been there for over a 100 years over a century. They're well recognized and everybody just go use their service. the issuer pays for their service for the credit ratings and when somebody like US government or corporations like Google recent uh 80 or$100 billion bond offerings when they're talking in billions for them the rating agency fee is not that significant that's why Moody can command a 51% operating margin and at the same time it is capital light and it also has a not just US but across the (49:28) world. So it's revenue split 50/50 which gives it diversification. But recently there are a lot of concerns about the business because of one is because of AI the other one is recently S&P had some issues that was specific to their mobility spin-off but still as Toby was mentioning like you know there is this wave of momentumdriven mindset that is going through the stock. (49:53) So Moody was also impacted significantly. I think both AI's fear and then the recent S&P guidance issues or a weak guidance by S&P together the stock is down 22%. from the beginning of the year and the AI fears are not completely unfound because especially for their analytics business if lot of companies are able to automate use AI they can do some of this analytics part of these services that Modi offers by themselves so I'm not too worried about their investor services or credit rating business because that is legally bound (50:36) unless there is regulation risk where we have liberalization in the regulation which probability is very low. So 60% of their revenue is pretty safe. The margins are pretty safe there. But the analytics part of their business which is 40% of their revenue can face headwinds in terms of pricing power because of the use of AI. (51:03) They can definitely leverage AI themselves with all the institutional knowledge, informations, source of records that they have but still it is a risk we should acknowledge for their analytics business. So that's why the stock is down. Just a quick overview of the business in terms of financials. Their adjusted EPS for end of 2025 was around $14. (51:28) 50 50 cents plus that is around 17% up year-over-year. Their Q4 EPS 2025 is expected to be around $346 which is going to be up 32% year-over-year. Their operating margin as I mentioned overall for the business is 51%. I'm pretty sure their credit rating business is much higher in terms of their operating margins. Free cash flow of 2 and a half billion. (51:53) They return a lot of their value through buybacks and dividends. They have been raising their dividend for 25 consecutive years. Their historic PE has been around 35 always. Now it is 34 after this drop. In fact, I think last year and right now even this year they have around 4 billion in new authorizations for buybacks which is around 85% of their free cash flow because they have the luxury of not having to invest too much but with AI that might change. They might have to adapt to AI. So we'll have to see and the risks if I have to see the risks in (52:35) the long term is as I said regulatory reforms that might take away that requirement for credit rating agencies the debt issuance cyclicality is also a risk because if the bond volumes go down which I don't think is happening anytime in the near future but that's a edge risk as well. (53:00) Third risk I see is they have been fortunate to be having a rich valuation 35p all the time as with AI and other things if the market decides that that's too high then we have a valuation risk uh that might happen in the medium-term to near term. So for me why am I looking into it is because of this is one of the stocks I have been following for a long term and it is experiencing a short downgrade or selloff for various reasons. (53:30) EI I don't think is as disruptive as the market is making out to be for them. So my bull case is like you know the management is projecting anywhere between say 11% to 14% as their compounded EPS growth uh in the next 3 to 5 years that's the base case if if they continue at around 12%. We are looking at around $26 EPS by 2030 and even if the P continues to fall and it's not at 34 let's say 28p instead of 34. (54:06) And even if we bake that in it is still a 70% upside from here which is around 11% annualized and the bull case is that if the P remains the same like around 34 not even going back to 35 between 30 to 34 then we are looking at a upside of around 100% like you know 16% annualized so that's kind of you know the upside downside is okay the P compressors comes back to around If I the growth multiple is not as good as we thought maybe it's below 10% and all but that's around 30% upside here. (54:43) So with the kind of business Moody is and the mode they have like how you're pitching Burkshshire stick I see minimum downside at this point a great place to park the cash even medium-term to long-term and enjoy the dividends that they pay. I would put them in my tax deferred fund to kind of you know avoid taxes on the dividend as well. (55:09) That's kind of you know the reason I picked this at this point of time. One is that there is a there are some stocks that are being thrown along with the bub whether it is Toby or this one because in general there is waves going on through the market and these guys are falling not just them like Schwab is down I was like you know S&P is down so a lot of tech stocks are also down JP Morgan Chase is down as well so I was actually finding it hard to pick one and then then I said, "Okay, this is this is what I would go with at least." So, that's my pick and look forward to your feedback. (55:48) I absolutely loved your pick, Ari. I kind of feel like it's um I'm probably going to be too hard on Toby here, but I kind of feel like it's almost the opposite of Toby where I was like, I'm not really sure about the business, but I certainly like the valuation. (56:06) And here with your pick, I'm like, I love the business, but the valuation, it's terrible that you can't get the best of both worlds, but I guess capitalism is just that brutal. Amazing business. Hi, you outlined everything good about that business. And I think you mentioned, you know, 80% just with Moody's and S&P global. Uh, I think Fitch is around like 15%. So, you have like Tropolley really. (56:29) And most would need both a Moody's and an S&P. It's more or less just a market standard and it's it's kind of like amazing the more you you look into it. You know, Moodis has been on my radar for similar to you like I don't know how long since I probably since I learned that Buffett invested in a long time ago and it's just it's such a such a good business and also because you you literally save money by getting a rating from Moody's. (56:54) And so what do I mean by that? If you don't get a credit rating, there's definitely a yellow flag if not a red flag. So you have to pay more in interest and no one wants to do that. So even after you paid Moody's or S&P Global, you still save money. (57:12) So it's not like whenever your wife is like, you know, buying a designer bag and she saves like, I don't know, a,000 bucks. It's like, oh my god, look at how much money you saved. Like you're literally saving money. like you you know so if you're paying them I don't know seven basis points whatever to get your rating like it's still a massive saving in terms of for you to go out and try to raise capitals on the public markets without that rating so very very powerful probably not like to your point not a lot of things to disrupt it would have to come from regulators where you know they have to go in and and say you (57:39) can't do that anymore then I'm like if that didn't happen after great financial crisis when is it going to happen you know with all the criticism that was, you know, for good reason that you saw back then. So, I don't really see that happening. (57:59) Like, you could theoretically say that, I don't know, the world's governments will go in and force everyone to use a domestic rating system, but you're also like, why would they do that? And also, if they did that, it's complicated then to attract foreign investors and provide that liquidity in the market. And so, like, it seems like everyone would lose. And I don't think necessarily regulators would try to do that. (58:16) I mean that they tried to do it in some jurisdiction but it hasn't really caught on and I don't really know why anyone would necessarily want to pursue that. I think there are so many other things you should you could probably pursue in the financial sector if you wanted to regulate it in any case. But if I have to find the hair in the soup and I can certainly find some if I really try to look uh private markets you see a rise here in in private markets and again I I should say it's it's very small but it's growing fast and so the game you play there is just different because if it's your private equity that's say extending private credit then you would have like (58:46) a small group negotiating with one borrower and like different you have their own team. So you don't need that credit rating because they would do that in-house. So it's sort of like, you know, if you had a I don't know if this is the best metaphor, but if you're trying to sell a house and you're trying to sell it in public, you need a rating, but it's like from one buyer to one seller, whatever price you could come up with sort of like works. (59:09) So if we were to assume that, you know, private credit we just take off and public credit not as much. There could be a risk there, but I don't I mean I'm trying to come up with a bare case. As you can tell, I'm not doing a good job. So anyways, I'm too excited about this pick even though not about the valuation. (59:29) Uh Toby, yeah, I like Moody's as well. It's a great business in an oligopoly. Buffett's identified it. It's got huge margins and so on. I think just to play devil's advocate, just to pick nits, just so there's somebody on the other side. I think the risks to Moody's are that it's a little bit more cyclical than it appears. It does depend a little bit on where the markets are. When the markets are up a lot, Moody's does very well. (59:52) There's a lot of issuance. So, they tend to be peak margins and peak multiple right at the very top of the market. And then as the market goes down and the issuance sort of dries up, then margins come in, revenues come in. And you can certainly see that in their revenue line that it's not that sort of tech growth path. (1:00:15) It's much more cyclical and then the margins are a little bit cyclical on top of that. Having said that, that's just how much it earns. That's not a risk to the business. That's just it's purely a valuation risk. So you have to find some way of sort of normalizing for the margins, normalizing for the multiple have some risk to the 40% of the business that's analytics. (1:00:34) I don't know yet what AI can do in that. But you're right, it's like this sort of existential risk for it. It's not not a direct risk just yet. And there's also the regulatory risk that if at some point the government gets upset with the way these guys are doing their ratings or there's enough lobbying so that they're some of their rating the rating requirements are taken away then that's a part of the business that's that's at risk. (1:01:00) But I don't think that the likelihood of that is very high but it's another existential risk. So business is great. Valuation is the is kind of the risk. I think the free cash flow yield is like 3.7% which is a little bit south of the 10 year. 10 years is probably coming down. Moody's is probably growing over 5 to 10 years. (1:01:18) I don't think the valuation's too far off here. So it's probably premium valuation for a premium business. What do you think that you earn at this level? What's your expected return, Harry, from from where we are now? Yeah, I think you both brought up very good points, Toby. I think there is definitely downside or risks. (1:01:37) I think especially in the regulation side apart from the private market that Stig mentioned and what you said about the US government for example having concerns about Moody. There is also a lot of movement from China standing up their own credit rating agencies and creating competition and as we head towards kind of a deglobalized world into fragments will say Europe still consider Moody or will they go with their own which as their for example the rating agency that they would approve in Europe and if the world heads towards a fragmented (1:02:16) rating agency uh situation then definitely it will hit Modi so that's the other risk I think I should have highlighted that is not a a trivial risk for them and I I agree that it's a cyclical business as well because the bond volumes is what dictates there uh revenues in terms of my expected return I think my base case is that the management is promising anywhere between 12 and 14 I would take the lower end of it uh say 11% annualized is the EPS growth over a period of time. If I say like an 11 12ish annualized growth in (1:02:53) EPS uh and even if I put a hel kind of you know less P multiple than what it is today just to kind of cover my downside I'm looking at an annualized return of 11%. From this it's slightly above S&P. That's what I'm looking at. I'm not seeing it like a home run with this. (1:03:16) It is definitely not something where the previous pick that you mentioned where it's so suppressed that there can be a coil spring effect. I don't think that's the case here. It's marginally low. It's kind of a 20 20% lower. Even if I look at it just kind of you know coming back mean reversion whatnot with the continual growth I'm comfortable holding it for the 5 years uh it's a safe bet and getting 11 to 12% annualized return. (1:03:42) It's interesting because the free cash flow yield is three 3.13. That's actually higher than it has been since August 22, July 22. But before then, it did trade at a higher free cash flow yield than that. So it was sort of above four before 2021. 2015 it was six. And then if you go back sort of further than that, I don't want to cherrypick too much, but there was some there were some higher peaks. (1:04:13) The highest peak here was a 10% free cash flow yield in 2011. So a lot of the return I think that's generated when you look at the like it's had a fantastic run. It's run from whatever 2030 bucks to 420 bucks. A portion of that is the valuation has three times more expensive, four times more expensive on a valuation basis since then. (1:04:37) Still, it's grown very quickly over that entire period of time. So, I think that there's a lot of businesses like this in the market where they have been fantastic businesses, but the valuations have become really compressed. And I think if folks look back and see the rate of growth, they have to make that adjustment in their mind for the starting price for a lot of these. (1:04:56) So, Microsoft, you know, a lot of these names, Microsoft was 11% free cash flow yield in 2011, too. A lot of these businesses, there's nothing in the rule book that says that even really good businesses don't go back to, you know, more long run free cash flow yields. It used to be that the old rule of thumb would be you don't pay, you don't want a free cash flow yield much north of the 10 year, you know, or much below the 10 year. You want to get the 10 year as a starting point plus some growth as your margin of (1:05:25) safety and so on. The valuation is the only thing that gives me pause, but the underlying business is great. I think the risk is just that if your holding period is long enough, 3 to 5 years, you just don't get enough return. Like that's the risk. It's not like you're wiped out or anything like that. (1:05:45) You just get, you know, maybe the valuation goes from 3 to 6% free cash flow yield and you get the growth as well. So you got a little bit of valuation headwind and the returns are a little bit north of a 10year through that period because the growth got a great I think that's a yeah but very good point actually Toby I think in fact for Moody if I have to kind of you know pick one risk it's actually the valuation risk which is the most critical one because it's 34 I mean it's priced like a max 7 stock so for a business that is just credit rating maybe it's because of Buffett stick that lot of people kind of attribute all the good qualities to this (1:06:27) business so that's they're not willing to let go of the valuation even if the business is not growing as fast as say any of the maximum so that's a very interesting point to which we should definitely consider so Hari I already said how much I liked your pick so I probably shouldn't continue doing so. (1:06:51) But I think to your point about the valuation, I've been in financial markets for I don't know how long and we've done these episodes for more than a decade together. It continues to surprise me how long high quality companies can continue to compound. and you're seeing this and it paints me as a value investor or a so-called value investor to say this and they're priced at 30 times plus price to earnings and then they just continues to give you double digits returns and it's so difficult for at least for me to invest in those companies uh because they always look expensive but the best companies they just tend to always look (1:07:24) expensive and they still outperform and it's it's so it's so painful I completely agree with you in terms of the AI threat I think it's probably overblown for their analytics part. The rating part is just it's just so strong and I don't see that getting disrupted anytime soon. (1:07:42) It's definitely not where you're going to make the greatest returns, but perhaps we are also in a market where you want to protect your downside even more than than you always want to do. Just a few fun facts is one is so inclined. The co pay of Moody's 16 million versus 25 million uh for Brixie Hway and Brixia is like more than 10 times as big in terms of market cap. And then of course this is also snapshot. They would say 94% is equity based. (1:08:06) Keep in mind though that the whole thing about being equity based and how it's based on performance for a company like Moody's it's difficult not to get paid in equities even if you do a terrible job. I think I can say that without offending the CEO too much. Uh so anyways another fun fact here with bell ring market cap $2 billion co pay 6.5 million. I can't help myself. (1:08:30) That was all I had to say about Moody's from back to you Jensen. I just want to talk a little bit about the valuation. I agree with you that it has been particularly for a deep value investor, it's been a frustrating period of time that high valuations have tended to get higher. (1:08:49) I don't quibble much with the way that the companies are sorted in the market. Like I do think that the Mag 7 are probably the best seven businesses in the market. And I don't think that Bell Ring Brands deserves much more than a $4 billion valuation. You know, I'm I'm not out of my mind in the sense that I dispute the rank. I just dispute the multiples applied to these things. (1:09:07) I I do think they're a little bit too expensive. And I just think that's what happens in some of these markets that if you don't get a shakeout, the valuation just keeps on getting increasingly stretched. I've been putting these charts on Twitter for an extended period of time, but just observing the one one really simple way to think about it is the equal weight version of the S&P 500 versus the market capitalization weighted float adjusted. (1:09:34) So what everybody the S&P 500 the SPY ETF the index is market capitalization weighted float adjusted which means that the bigger market caps with more float occupy a bigger part of the index all else being equal that means that the S&P 500 is essentially a momentum investor in the biggest in in the biggest companies and that's why the S&P 500 has done so well since 2015 particularly in relation to everything else the equal weight version just puts the same amount into the smallest business as it does into the biggest business. And so it's more of a proxy for small, it's more of (1:10:09) a proxy for value, and it's a little bit of a proxy for cyclicals cuz they tend to be in the smaller part of the business. Over the very long run, over the 100 or so years of data that we have, equal weight has massively outperformed market capitalization weight because small tends to outperform large, value tends to outperform growth, and so on. (1:10:33) If you look over that period of time, even though equal weight has outperformed market capitalization weight, there are many periods of time where you can see for extended periods of time, 10 or 15 years, where market capitalization weight outperforms equal weight. And it's always around these technological transitions in the market. So you can see it in the 70s with the nifty50. Same idea, the very best businesses. (1:10:59) And why buy the other 500, just buy the 50? just hold on to them, pay any price, don't worry about it at all. Work out. Then you look at the dot 1.0 that stands out. If you don't have this sort of global reach, you're not going to be able to make it. If you're not on the internet, if you're not in cyerspace, you're not going to be able to make it. And then again, now I don't know what you would call this internet 2. (1:11:17) 0 sort of become AI at the end of this long boom. But since Q3 last year, there's been this pretty significant turn, I think, in the markets that I haven't heard a lot of people talking about. But it has been small has started outperforming large value started outperforming growth. Equal weights now outperforming market capitalization weight. (1:11:37) You can think of it like the S&P 100, which is the biggest 100, now outperforms the 500. MAG 7 underperformed the S&P 500 last year. I think that these things are going to start happening. Like that's the ordinary course. That's what usually happens in the markets. (1:11:57) And it's unusual because people have been conditioned by what's happened over the last 10 or 15 years to think that the other way around is the way that it works. Which is why you look at those stocks and you say, "Gee, they're expensive and now they're much more expensive, but gee, the stocks up so much cuz they've caught the earnings growth on the way through there. (1:12:14) " that could easily reverse and we could go back much more to a market that's one that I like much more one that is much more like the long run average in which case valuation does become more important and business quality you know if you look from 2000 to 2015 very good businesses Microsoft Walmart they traded sideways for 15 years there was nothing wrong with the underlying businesses they continued to do what they had done before 2000 and after 2015 it was purely a valuation coming back into lawn and it could easily happen again. Yeah, that's a very good point about the valuation swings and I guess some of the (1:12:47) barometers of the mood of the market is like Bitcoin is also down now almost 50%. That is tracking some of the more speculative tech stocks. So they all kind of are going down and it's interesting to see that some of these companies like Moody's are still holding up their valuation. I don't know when their turn will come. (1:13:11) So that's the risk Toby because we don't know it's like you know every group of stock is being taken in a group and then fired at in terms of valuation and we don't know which group is the next. It's it's been funny to watch this rolling mania that's sort of rolled through lumber stocks rolled through. It's precious metals like a month ago was gold and silver going crazy. (1:13:29) Before then it was mag 7. Before that it was the NFTts and crypto. It's just it feels like it's been going on for a long time without any like it's never there's never been a systemic crash. There's been like a specific crash for the mania, but at no point have we had the clearing of all the decks and and restart. Yeah. All right, Jans. (1:13:55) Thank you so much as always. Hari, any concluding remarks here about Moody's before we round off the episode? No, I think this was a great discussion. Thank you for the perspective and I think for me the key takeaway is the valuation risk. Yeah, it has gone down a significant amount right now but what's next? We don't know whether Modi will be in one of those groups which will be taken to the woodshed. (1:14:21) So in terms of valuation so thank you that was helpful. Yeah, I I love that you say that, Har. I also love Toby whenever you talk about it doesn't it's not written anywhere that it's supposed to be these lofty valuations for such a high quality company. (1:14:38) With all of that being said, Jans, I want to give you uh the opportunity to give a hand off to whatever you want to to give a hand off to. Uh Toby, yeah, I run acquirers funds. We have two ETFs that trade US domestic deep value names. Zigg which is 30 names in midcap and large cap and deep which is 100 names in small and micro. It has a very distinct bet on in the market which is that small micro value. (1:15:04) Reasonable business quality turns around and midcap I think midcap is the sort of undiscovered part of the market which gives you the earnings growth of small with the volatility of large. So it tends to have quite a good mix better quality management and their better valuations for the most part. And I have a a website acquirersmultiple.com which has free stock picks on it like we've been discussing here today. (1:15:22) Fantastic. Uh Hari. Yeah, great to be with you guys today. You can find me at on Twitter. Hari Rama is my handle. Happy to continue the conversations over there. Thank you. Thank you Hari. Thank you so much for your time, Jans. As always, it's it's a privilege. Thanks D. Thanks Harry. Always great. Thank you guys. Thanks for listening to TIP. Visit the investorspodcast. (1:15:45) com for show notes and educational resources. 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I see vaccines very similar to software as a service. It's a subscription model. (1:16:42) It's something that everybody takes during the flu season. It's kind of a repeat business for them. So, it's a recurring revenue. So vaccine is really their core strength and a stable source of income while they have