Running Oak's Seth Cogswell on his Efficient Growth Strategy | S07 E40
Summary
Strategy: Emphasis on predictable growth, strict valuation discipline, and downside risk control via a rules-based process that avoids overvalued assets
Mega Cap Tech: Guest warns of stretched valuations driven by passive and momentum flows, citing Apple and Microsoft as especially vulnerable despite strong businesses
Apple (AAPL): Flagged as significantly overvalued versus historical norms (P/E ~39 vs long-term mid-teens), with potential for large drawdowns even without being “cheap” afterward
Microsoft (MSFT): Viewed as richly priced (P/S near 14 and beyond tech-bubble levels), could see substantial downside; AI leadership acknowledged but risk/reward skewed by valuation
AI: Massive capex and infrastructure costs contrasted with modest current revenues; guest argues near-term value accrues more to non-tech adopters than to native AI providers
Industrials: Overweight positioning highlighted; seen as predictable, underappreciated, and immediate beneficiaries of AI productivity improvements at attractive valuations
Semiconductors: Concerns around chip useful life, heat, and aggressive depreciation assumptions; accounting choices may inflate earnings and raise future earnings-quality risk
Passive Risk: Critique of cap-weighted passive creating buy-high dynamics, momentum concentration, and behavioral risk in drawdowns; risk management deemed more important than fees
Transcript
Which one's better? >> I don't know. I don't know. >> But we don't we're debating when we start live streaming. I think we're live. So, one one side of my my dashboard says we're still setting up, but apparently we're broadcasting. So, I'm Tobias Carlile. >> As surprised as anybody. >> This is Value [sighs] >> I think. >> Let me try again. This is Value After Hours. I'm Tobias Carile joined as always by my co-host Jake Tail. I was going to say co-star. Good grief. >> Co-star. I like it. >> Our guest today, our special guest today is Seth Cogwell of Running Oak. >> How are you, Seth? >> I'm great. >> Thanks so much for joining us today. Let's let's talk a little bit about your investment strategy and your philosophy. Let's get going. What is your investment philosophy and how is that implemented in your strategy? So, if I'm going to describe our investment strategy in three words, it's consistently not stupid. That's that's based on a line by Charlie Mer. Charlie Mer attributed much of Berkshire success not to being geniuses or the or the smartest guys in the room. Is more just being consistently not stupid. and it fits our strategy so perfectly. So when I read that it just I was like, "All right, that's it. I'm I'm stealing this." Uh it's our strategy is clearly not stupid and that it's built upon three very simple common sense uh attributes. So the first is maximize earnings growth because you know if you're investing in companies that are growing in value, great. There's no arguing that that's not a positive. The second though is being very disciplined around valuations. Uh you know if you have a company that's worth this in the real world that's operating in the real world and then you have a stock which is the price of the stock is determined by price and or supply and demand which hopefully at some point is is equivalent to the company in the real world. We want to buy when the stock is undervalued. We want to sell when the stock is overvalued. And really, you know, so again, maximize earnings growth, discipline around valuations. It does not pay to own assets that should go down, let alone a lot over the long run. And then the last is a focus on downside risk for the very obvious reason that you know, you drop 50%, you have to double your money to get back to flat, which is very hard to do. As opposed to if you experience a 30% decline, which is never fun, you only need a 40% return versus 100 to be making new highs. So again, it's it's not stupid. It's super simple, obvious, common sense. And then that consistently our process is rules-based. So we do the the same thing over and over, which makes for a reliable portfolio or strategy. That's that again you can any any client or adviser can can plug into portfolios and and expect they'll have reasonable expectations for precisely what we will be providing over time. So again consistently not stupid. >> Let's talk a little bit about growth. How are you thinking about growth? How are you diagnosing it? What are the conditions for growth? >> Growth is tough, right? Because it's forwardlooking. Uh, one of the reasons why our strategy is a little more quantitative in nature and rules-based is because my my father who created our strategy started out in the 70s at a large bank doing discounted cash flow models, which anybody that's ever had a pleasure doing that, you're basically trying to predict the revenues of a company 3 to five decades into the future despite not actually knowing what those products are. So, you know, good luck on any of that. Um, and so the strategy was largely a result of going a completely different route and really trying to focus on what's known versus unknown. But again, growth is looking forward. So, it's certainly unknown. Um, that ends up being a a smaller part of our of our approach. But regardless, the way we look at growth, and there's a number of ways you could look at it, but we focus on earnings. Um, you know, earnings can be manipulated. So maybe one could argue that cash flow is a good good u good metric to look at. We choose earnings because again that's really what's coming back to the shareholders over time and and you know we measure growth in a number of ways. We look at the one-year expected return three and five. Um you know the goal is again it's inherently faulty but we want to position the portfolio in a way so that the so that it is consistently on average creating u more value for clients over the long run. So historically our portfolios averaged 12 to 13% earnings growth versus 6 to 7 for the S&P. So that 6% gap we would expect to provide value over time. So, do you think that um it sounds like you're looking often for predictability in the business and do you think that the market tends to overpric or underpric predictability? >> I would say underpric actually um predictability is boring. >> The really the sweet spot that we're looking for, the inefficiency is companies that are again growing at a at a good rate. They're high quality, which, you know, I describe as just well-run. So, they're profitable. They're um not taking on crazy amounts of debt, which u I think will matter a lot in the near future. Um in in that you can get them at an attractive value. Usually, if you're getting something that's relatively undervalued, it's because they're not exciting, right? You've got money flowing into the most excited names, whe whether it's the the Mag 7 right now, which everybody knows. Everybody either owns the product or uses the product or at least knows the company. Their hair stylist probably told them they should invest in it just last just the other day, right? And so you've got all this money flowing into these names, not because of numbers. It's flowing into these names because of popularity. And and that popularity takes those companies up. it takes the index up and then the companies that are less popular just sit there because they're not receiving uh you know an appropriate amount of money and so that creates that undervaluation but again growth is is inherently unpredictable. Trends are kind of unpredictable. That's not to say that we shouldn't pay attention to them but they but be hard to predict. Um, and so the things that are most predictable, such as let's say like industrial companies that are just just rolling along doing their thing, nobody cares about them. And so it creates that that relative undervaluation. >> Do you have any idea like do you have you modeled what your what growth you've actually received versus what growth you've expected? Do you find that you're on the money or does it fall short or do you sandbag it a little bit and you find that you're surprised? Like how have you have you tracked it? I wouldn't say that we've tracked it directly. Um, but I will say at least from ' 89 to 2013. So before I I launched uh Running Oak in 2013. Again, my father ran the strategy prior to launch. I actually ran it for five or six years from 2007 to 2013 or so. Um but regardless from ' 89 to 2012 2013 portfolio outperformed the S&P by roughly 3 and a half% before fees annualized just top 1 percentile returns or so but again that what we have tracked is that um on average our growth rate was 12 to 13%. So, you know, there is a a gap there between if we're outperforming by 6% on a growth, you know, as far as growth goes, but then outperforming by three and a half, which is still great. Um, you know, clearly there's a gap there. So, I don't really know how to answer your question other than to say there there definitely appears to be a little slippage there. >> Yeah, a little compression, which is about what you'd expect to see. That's what I would have expected to see. Anyway, let's talk about valuation a little bit. How do you think about valuation? From what I've seen, and there's it's a big world out there. There's a lot of people in our industry. Um, we value stocks very differently from most. Um, and and even just talking to you before the podcast, um, I would imagine you're taking a much more maybe discounted cash flow really, but certainly a much more fundamental approach or deep dive what we do as a relative valuation versus the S&P 500. So we actually look at you can think of it as two ratios where we we measure the wealth creation of a company versus the wealth creation of the S&P and by that I largely mean earnings growth. So you know over time and again this is five decades over time we have found that price will follow wealth creation or relative price will follow relative wealth creation. So, if we see a company that's, you know, creating wealth or earnings at 2x the rate of the S&P, we would expect over the long term for the stock price to do the same. Um, and then in between, you're getting, you know, again, cuz uh stock prices are driven by supply and demand. They're they're kind of swinging around that true value. And and one of the things that's really illustrative to me to give me uh you know confidence just that we're moving in the right direction is you can see that sort of relative price swinging around uh that relative value. Um so again it's it's different but we've been doing it for a long time and it seems to provide uh provide value or have merit. >> Is it like a you're looking for a like a market PE with a higher growth rate? Is that the way you think about it? >> Or better than market PE with a higher growth rate. Is that that kind of the mix? >> Kind of. I mean, PS have been proven to be absolutely worthless as far as predicting returns, but P's are also a helpful snapshot, right? Like it gives you they're backward-looking. Um, but it gives you a a chance to kind of see where things lie right now. Forward P you could maybe say is a little bit better. Um, but again, it's a snapshot, right? like it's just one year looking forward and and inherently it's faulty also because it's it's based on you know prediction. Um but yeah so it's that's a good way to sum it up. It's it's different but but that's still a good approximation. >> So do you favor a DCF type approach then? Is that is that you don't like the DCF or or you do favor a DCF? DCF is almost entirely prediction. Uh and so our strategy is is intentionally built on characteristics that we feel that we can rely on. So again, you know, companies that are increasing in value intrinsically in the real world, right? Never mind the stock market because that's going to do whatever it's going to do based on emotions and FOMO, especially right now. Um but then also being where does that relative valuation of the company lie as far as the stock price versus uh what we determine the value to be in the in real life and then again we focus on a number of things that that I'd say clearly lead to greater downside risk. Um but again those there there three very simple principles or kind of metrics. Again, the valuation part of it is a I don't really like the term proprietary because it sounds a little stuffy, but it's definitely like a a metric or a calculation that I've I've never seen anyone else doing. uh it's it's not DCF, but again it's a it's a it's a uh a more thoughtful way than looking at P's or looking at price to book and allocating, you know, just based on whatever has the lowest P or the lowest price to book. >> Okay. Um talk to us about downside risk. What what's what sort of things are you looking to avoid or what are you what red flags are you looking for in your downside risk assessment? So over time, I mean, if you go back to ' 89, again, our our portfolio has had basically 50% of the average draw down of the S&P, which for me, I feel average draw down is the best metric to really measure or gauge the discomfort that clients experience when a market goes down because it it measures both how, you know, how much you're down as well as how long you're down there. So for me, average draw down is a much better way to really again measure how a client feels risk than say downside capture or standard deviation or certino or anything like that. Um the biggest driver of that in my opinion is avoiding overvalued companies. Valuing companies is hard to do. A lot of people do it in different ways. A lot of them have merit. Some probably don't. But regardless, at least philosophically, you can't argue that owning a company uh or owning a stock at $100 when the company's worth 50 isn't begging for trouble uh at some point. There's a and there's a few great examples right now. There's probably a lot of great examples right now, but u you know, Apple's an awesome company. Two of my closest friends work there. I I wish it well. I love their products, but its current P is 39 or so. Long term it be is 14 to 50. That's kind of its average where it's at for a long time. That means Apple could drop 50% tonight and it would still be really overvalued relative to its historic norm. Same with again great company but same with Microsoft. Microsoft has a price to sales of almost 14 now. Uh, and one of my favorite quotes within the within the market is a quote by Scott McNeely, who is the former CEO of Sun Micros Systemystems. And and he said, I think I I believe he was getting a hard time for losing people's money. I'm sure he was sued for, you know, people investing at the peak of the tech bubble and then getting mad at him. But he was like, "Look, I'm running the company. You're the ones that paid 10 times price of sales. That means that that meant that over 10 years we had to return every single penny in revenue just for you to break even. Not make money for you to break even, which assumes that we have no employees. We're running a big company. We had a lot of employees. It assumes that we have no cost of goods sold or R&D. We're a tech company. We have to constantly innovate. And also assumes that you don't have to pay taxes. If you if you guys don't pay taxes, you go to prison. So don't come to me about you paying 10 times price of sales. And the and the thing is both Microsoft and Oracle are 40% beyond that. So 40% beyond the very peak of the tech bubble. Now we're in a dynamic time. I don't know how this plays out with AI. I have a sense of how it plays out, but regardless, I don't know how it'll play out. Um but the main thing to answer your question is that's just risk, right? like a of 40% beyond the tech bubble just maybe it works out but what if it doesn't right and so that's our goal is to really avoid that what if um because the what if almost always comes to pass it does very often and so Microsoft again awesome company seems to be like leading the the you know kind of the AI battle at the moment but it could drop you know 70% and it wouldn't be a big deal it would literally it would not be a steal if Microsoft drop drop 70%. Maybe on a PE basis it would be a it would be a lot more attractive. Um so again that that focus on valuations and avoiding companies that should go down let alone a whole lot is probably our biggest our our greatest value ad. But another area where I I feel will be very important over the next decade is debt. We all know that if we mortgage our, you know, max out our credit cards to go buy a boat or something that it's probably not going to work out very well. Like it's it's it's we're headed for some pain. And in the last decade, companies took on more debt than any time in history, not to build better companies that could then pay that interest, pay down that principal, and make profit on top of it. They just bought back stock. Buying stock has some benefits, but if you really think of it in its most simplest form, basically these companies mortgage their futures because they got to pay that back at some point and then they handed that cash to discerning individuals who were selling their stock. Um, and so again, it's neither good nor bad buying stock. it, you know, it's it could be both ways, but if you're mortgaging your future to do it, that's taking on risk. And they did that when interest rates were quite low. Interest rates are now a lot higher. So, more than likely, these companies are going to have to a lot of them are going to have to refinance at higher rates, which will hurt profitability. Profitability is one of the main arguments for better or worse. I actually think it's a dumb argument, but one of the main arguments for higher P's or higher multiples. So if you see property if you see profitability decline and you see multiples decline now you've got like a double whammy and contraction and and that just assumes the company is performing just as well as it always has right like that's that's not assuming any adversity that's assuming just reality and so avoiding that I believe will be a significant value ad going forward. starting to sound like us. Seth, >> I compliment. Other than that, though, it's all good. Yeah. >> What a what a crazy bear. >> Uh, let's talk a little bit about passive. Uh, you're not a fan. [laughter] I'm I'm trying not to position it in that way to say I'm not a fan. Um, I think one of one of the issues that drives me craziest in the world today, both in real life and investments, is this tendency to see everything in black and white, right? It's either my team or the other team, right? Most aspects of life are in the gray and passive is very much that. So, you know, I'd say that John Bogle had a very positive impact on the industry. Um, prior to to Vanguard, many fund managers were charging massive fees and providing no value whatsoever. That didn't benefit anyone other than, I guess, a handful of managers, right? But in the end, any any industry or any company that's not providing service or value to the end client shouldn't exist. They should just die quickly. in the investment management industry didn't seem to be providing a whole lot of value for the most part. Bogle u you know provide an alternative. He was like look if you're if you're not even going to get market returns or if you are and you're going to pay a high fee for it, why don't you pay little to none for it? Fine. There's no arguing that paying a lower fee for the exact same thing you were paying a high fee for isn't better. And that also had the benefit for investors of bringing fees down across the board. Um, so that's that's a positive. The other thing is a lot of people made a lot of money in the last 15 years being invested in in passive, which is a good thing. Now the issue is why did that provide so much value? And and that's my concern is that people aren't really considering context. So again, lower fees, good. Uh investing in a strategy that to a certain extent makes no sense, that's bad. Uh and so when I started in the industry, um you know, passive and active, that's really when this this this battle was really raging. And the idea of investing in a company simply based on size just seemed like the dumbest way to invest. I mean, if you're looking at two houses, you're not going to pay 25% more for a 5,000t house than you would for a 4,000t house without at least walking inside the house, right? You're probably going to do a home inspection. There's no investment where you would just be like, "Ah, this is bigger. I'm just going to pay more. I'm going to put more of my money in it." But that's the way that passive works. Now that said, as time has gone on, I've kind of, you know, that my view has evolved and and one of the things that I have become particularly upset upset about and and worried about is um whenever a manager, anybody in investments as well as advisors, whenever we speak with a client about investment, we speak about two things. What are those two things that we would talk about? The two main things. >> Oh, that's a question for us. >> Returns. Returns and fees. >> Got one of them. >> No. What's the No. Return fee matters. But what's the other one? >> Risk. >> Yes. [laughter] >> Yes. Which one matters more? I would argue that risk in the long run matters more because that money matters. People have forgotten that risk matters because we haven't experienced a true downturn in 15 years. But when you need that money that you've worked so hard for and it's not there, that is a whole lot worse than if you have more money than you needed. Um, and so passive has somehow gotten away with completely overlooking risk. The only way that the passive narrative addresses risk is they say, "Ah, market goes up on average. You'll be fine." That's that's absolutely ridiculous. What if you're retiring in the next three years and we go through a lost decade, which the odds look pretty high of at the moment and and you're having to pull out money after a big draw down, which absolutely destroys your cumulative returns over the long run. There's there's a lot of data points. There's no arguing that. Um, the other thing is that's conveniently overlooked is the behavior gap. Um, I I am not immune to making dumb decisions when I'm emotional. I've I've made plenty of stupid decisions. And when we as people are stressed out, if we see our net worth drop 50%. We are inclined to panic and sell because we don't want to experience anymore. So, yes, we've got the people who sold us passive. We got the S&P saying, "Oh, well, you know, it'll be okay. Just hold on. You know, are you going to want to pile more in?" No. And you might sell. And that destroys return. So, conveniently, completely overlooking that also bothers me. Um, sorry, I'm getting a little long-winded. I clearly am a little passionate about this. But the the other thing that I recently had kind of an epiphany on is, you know, I we'd have this act of passive debate and everybody brings up the data, which I would argue is as henpecked as most data is. um I don't think mo a lot of it's valid but regardless if you break passive into its simplest form so if we just look at it on a individual stock basis again you've we're going to use Apple because everybody knows it Apple is a company it's operating in the real world it's selling products it is worth this amount of money right if it's a private company we would work with a number of auditors to come up with a value that somebody would buy it for, right? It's a company. It has a value. Now, the stock is driven by supply and demand. So, if there's a lot of demand, it goes up. If a lot of people are selling, it goes down. Whatever, right? It's swinging around. Let's say at one given point in time, we used to think the market was efficient. That many would argue that it's just broken now. But regardless, let's say at some point the market's efficient. The price of the stock is equal to the value of the company. Somebody bought an iMac two months ago. They're doing some sort of doing something on it and they're like, "Man, my iMac is the greatest. I love it." And so they turn around and they buy, let's say, a million dollars of Apple. They're pretty wealthy. Buy a million dollars Apple. That demand is going to push the price of Apple up. Again, nothing changed with regard to the company cuz they bought that IMAC months before, but now the stock price is higher. Because the stock price is higher, it's now a higher percentage of the S&P. And anybody that invests in the S&P from here on invests more in Apple because it's overvalued. Then we were talking earlier about momentum. There's I can't imagine how much money is in momentum strategy at this point. But regardless, moment a moment, a momentum manager says, "Hey, Apple's flying. We need that." And so more is invested in Apple. That's going to push Apple up even further, that demand. So now, because Apple is even more overvalued, it gets an even higher percentage of the S&P, which means that everybody invests in Apple now buys even more because it's overvalued. And that keeps going, right? We hit the 99.8th percentile in history and momentum last year. That dynamic of paying more and more for companies the more and more overvalued you it gets is is you know historic. And the thing is that the S&P or passive never sells right. They don't sell unless it gets to a certain point where the committee that runs the S&P says you know what we should kick this out. So, it's literally the exact opposite of buy low, sell high, which as a value investor or as anyone that's even remotely thinking critically about investing, everyone's hopefully looking to get good value on the buy and to sell when the value is, you know, positioned to maybe work against you or you or you've realized that value. Passive is the exact opposite. Um, so again, passive is neither good nor bad. It's good in that it brought fees down. It's good in that it's it really simplifies investing. It's certainly better than chasing mutual fund returns or or day trading. Um but I do believe that there are far more thoughtful, far better approaches out there. Um and so it's you know it's in the middle. I would say too the abdication of responsibility of ownership of all of these businesses is actually adds a fragility to the future cash flows of those businesses. So you're kind of uh creating your own problem that you're going to eventually that chicken has to come home to roost. >> That's certainly a concern, right? You've got the you've got the investment side of it and and you know holding a momentum portfolio when momentum just hit the 99.8th percentile in history and not recognizing that you own a momentum portfolio that just had the hottest period in history and not selling if anything people are piling more and more. That's one thing and that that's a lot of risk. The other thing to your point is the real life implications. Capitalism, we can thank capitalism for the massive gains in um in our quality of living over the last 50 to 100 years. And a lot of at the heart of capitalism is capital being allocated intelligently into companies that have a lot of upside and allocated away from companies that should disappear. And that mechanism has been completely broken. Now, part of that I would say is passive, right? You got a lot of money going into companies for no reason other than size or no reason other than popularity in this construction. You also have a lot of zombie companies out there that should have died a long time ago, but have been kept on life support thanks to massive fiscal stimulus and 0% interest rates. Um but but yeah, I mean whether it's on the investment side or u you know in real life economy it it likely has some very significant negative implications going forward. >> I thought uh yeah I couldn't agree more but I thought the uh one of the interesting things that I looked at over the last I've had that running deep value I've had the stuffing kicked out of me for about a decade now >> and I'm quantity too. So, one of the things I like to do, I've run data back to 1926 in the French data, and you can, you guys can do this, too. It's just a French size series. Um, if you run the top decile against the market, which I guess is about the fifth decile, or you run the top desile against the bottom desile, you clearly get massive outperformance by buying small over large. Uh, and it's about8% a year relative to the market, 1.7% a year from largest to smallest since 1926. So that's a century of data. In that century of data, there are these six periods of time where you get this massive outperformance for size. And we're in one of them now. We're 10 years into one now. So I did a count. There have been something like 10 that have been 3 years long, seven that have been 5 years long, and there's like five that were 10 years long. >> What's the >> longest one was 1999 was I think it was 13 and 1/2 years. and we're currently or maybe it was maybe it was over 15 and we're currently in one that's 13 and a half something like that. This is the second longest. >> So don't worry about it for a couple more years. >> So you're good to go. Close your eyes. Uh JT, we're coming up to the top of the hour. Let me do a shout out to all the folks playing at home. Then we'll do >> some veggies. >> Veggies. Tombble Texas Pitikva Bethesda Cottage 7. That's a new one. Welcome Philly L. Lewis Delaware. Thanks for the pronunciation last time. Toronto, Valpareo. Is there someone else in Valpareo besides Mac? Limmerick Island. What's up, Col Breenidge, Tallahassee, London? London, UK, Tampa, Florida, Dead Cat, Gully, New South Wales. Me too. [snorts] New London, Mayfair, London. Milton, KE, Men at Work. Nice, Les. Like, you got me. That's in Australia. Madira Island, Portugal. Hunter Valley, New South Wales. What's up, Boisey? It must be uh daylight saving in Australia. The Aussies are on. [laughter] >> Still pretty early there. >> Philly, Transylvania, what's up? Is that real? Pares Patel, Rididgewood, New Jersey. Transylvania. That's a That's a new one. All right, that's a good spread. >> Popular with the vampires. [laughter] >> When we score well with >> They're the only ones who've seen value working. JT hit us with some veggies make benefit glorious nation of value after hours. >> All right. So centuries ago Aristotle wrote a short essay called on memory and recollection. And in it he described memory as an imprint like a signant ring pressing into a soft heated wax. Uh experience he said leaves behind a trace not just an image but a kind of echo in the soul. And when we remember we're perceiving that echo again. And when we recollect, when we actively try to recall, we're searching for the echo in the wax. It's very elegant, but it's fatally flawed in that the wax tends to melt. Uh time, distraction, new sensations, all of them deform that original imprint. And memory fades because life keeps pressing new rings into the same surface. So that was the philosophy. And for nearly two millennia, memory stayed as this kind of mystery that was wrapped in a metaphor that Aristotle gave us. But then in the late 1800s a young German psychologist named Herman Ebbinghouse decided to do something radical. He started measuring memory itself and he turned this philosophical fog into actual data. Uh Ebinghouse was born in Germany and earned his doctorate at the University of Bon and he was inspired by this emerging precision of psychopysics that was bringing tangible rigor to all of these mental processes. uh and he ran exhaustive self experiments and gave us the first quantitative map of forgetting the curve that now bears his name. So Ebinghouse wanted precision and he wanted to quantify what happens between learning something and then forgetting it. So he became his own little lab rat and for two years he conducted hundreds of experiments on himself and to strip away the meaning and the emotion of the memories he invented these little nonsense syllables like z uh you know z a k w to ov uh they didn't mean anything but he was just trying to memorize them uh and that way it prevented him from having these associations that might influence the memory. So he memorized these long lists of all these these random things and then he'd retest it at 20 minutes, at 1 hour, one day and one week. Uh and he was measuring the rate of decay in in the loss of the memories. And what he found was that uh would become one of psychologyy's most enduring images. This sharply descending curve that's steep at first and then it gradually levels out. Uh and this is Ebingous's forgetting curve that's there famously now. and he discovered that within 20 minutes we forget about 40% of what we've learned. After an hour over half is gone. By the next day twothirds of the materials evaporated and after a week we retain only about a quarter. And that pattern is this exponential, right? Um but the same shape has replicated in study after study now over a century. So it's actually probably pretty good science. Um but it's not just really a grim reminder of how fragile our our memories are. It's also kind of a map to guide us on how to res resist that decay. So he found that if you review the material not consistently but strategically at certain intervals you fight that forgetting curve. Uh each repetition uh and each act of recall strengthens that trace in a memory. And he called this principle his savings method. Um so even if you know if a list seemed forgotten relearning it took less time. There was like a trace that remained that you could pick up the thread. Um so this insight became the seed of what's now called spaced repetition which is a very common learning uh tool where you just learn things at certain intervals to recall before you forget. So what's actually happening when we forget? Ebinghouse could measure forgetting on himself but he couldn't really explain it. We need neuroscience today to give us a much fuller picture. So that there's there's a few different theories on how this works. Uh trace decay suggests that memory traces these neural patterns form during the learning. they simply just fade over time kind of like footprints that are washed away by the tide. Uh there's also interference theory which says that new memories disrupt old ones and sometimes that old knowledge uh you know blocks new learning. At other times new information is overwritten by the old and there's also retrieval failure which is you know you had that memory but you can't quite find the right key to access it. It's like having the file in your brain but maybe like the label peeled off of it. Uh and then there's motivated forgetting and that's the mind's protective reflex to bury painful or or useless memories. And sometimes forgetting is not really a flaw but more of like a defense mechanism. So like mothers forgetting about the birth of a child uh then the pain of that or you know value guys eventually forgetting the last 10 years. Uh [laughter] so anyway let's let's fast [clears throat] forward to today and you know we live surrounded by infinite storage. you know, every photo, every note, every message is archived somewhere in the cloud. And we can search for our arch through these archives with a keystroke, but that's not really the same as carrying the knowledge in your bones. Like we forget faster than ever. Uh we outsource recall to our devices. We rely on technology to remember for us. Um but that [clears throat] kind of changes how we know things. Uh and we may have access to more information than than any generation in history, but maybe perhaps less internalization of that information. Um, so you know, and to remember something is to really integrate it and to like feel the pattern and not just recall the fact. And AI systems are becoming increasingly more of this external memory capable of of infinite recall for us. You know, they index and sort and retrieve without fatigue. Uh, and when we set these algorithms to hold our memories, we're kind of trading retention for convenience perhaps. So we know where to find things, but we don't really know what they mean as much as we might have. Um, so the real danger [clears throat] I think of AI assisted thinking is not amnesia but really atrophy like this slow erosion of the kind of interpretive subconscious work that connects memories to meaning and understanding. And we have to be careful in how we use these new AI crutches. At least that's the common refrain that we hear today. I'm going to try to like play devil's advocate and posit that perhaps man plus machine might unlock an immense intellectual bounty for all of us. So imagine an AI thought partner that doesn't just store facts uh but really trains your brain and your memory and your judgment. Um it watches your projects, builds personal knowledge graphs, schedule space rehearsals when forgetting risk is highest, turns notes into targeted retrieval prompts, surfaces contradictions and base rates at at opportune times. Uh you know, running little quick simulations, proposing alternative hypotheses for you to consider, raising red flags before mistakes are made. Um it's like a prostthesis for for your attention, not a replacement for thought, but you know raising perhaps both the floor and the ceiling of what a single mind might be able to hold. Uh we we humans will bring the aims, the taste, the ethics and like perhaps the risk appetite and the machine brings this relentless recall audit trails, sanity checks, uh you know some guard rails for us. And every decision that leaves a record has inside of it these assumptions and probabilities and ration. And later we can take those outcomes and and score them against you know calibration of improving and feedback loops tightening. So I think teams perhaps could become even more anti-fragile working together. Fewer forgotten lessons, faster learning cycles, more disciplined interactions. Um you know we're it's we don't outsource our thinking. We use a AI to help provide a scaffolding for it. And you know humans [clears throat] get to choose the ends and the machines really strengthen the means for us. So AI doesn't erase Ebingous's forgetting curve, but it turns it perhaps into a more viable training plan. >> That's brilliant. JT, is that journalytic? Is that what's coming? >> That might be something related there. Yeah, >> that's a cool one. I I I read once that if you sever a long-term relationship, like you get divorced or something like that, you've stored a whole lot of information in your spouse's brain. Like you just don't know where things are because you know that they know where it is. So you already use the external hard drive. So that's uh that's good timely advice. Are you getting divorced? No, >> I don't know [laughter] why I said that. >> I'm aware anyway. >> Uh, yeah, you've thrown me there, JT. >> Sorry. [clears throat] >> That was No, I love that. It was awesome. It was a very optimistic way to both optimistic and kind of I don't know, humanistic way to look at AI. Um, >> I don't know the right answer, but I think it's fun to try to just think through, you know, the positives and the potential negatives. >> Yeah, I'm an optimist for the AI. I love using I think it's incredible chat and uh the ones that I use. We're we're we're talking AI with Seth. It's one of the topics that he uh he suggested we take a look at. >> Yeah, let's hear your >> You've got this uh >> you think that most people are thinking about it in terms of first order thinking. you've got a secondderee view of AI that you think is being overlooked. >> Yeah, I didn't I didn't see it going that route that Jake just took, but I loved it. Um, yeah, one of the things that I would like people to consider that I feel that they aren't is and what led to this is we reconstitute our portfolio several times a year. We did it let's say three or four months ago and the result again our process is rulesbased. It's driven by numbers. It's not it's not our decision or subjective. The result was we ended up having less tech exposure than I ever remember us having. We had more industrial exposure and some other things. But I was very uncomfortable with having less tech exposure during what appears to be a tech revolution. Um and and since then, you know, tech obviously almost every dollar that's going in the market, it seems like is is is piling into tech, not into other things. And >> by the way, just real quick, I've heard a kind of funny uh apparently now some allocators have a they call it a completion portfolio, which is, you know, you maybe you have all your allocations and then you're like, "Oh man, I'm like not long enough big tech probably to like keep up with my benchmark. I need a completion portfolio which >> little spec filler. >> Yeah. You just need to like gaps fill it in. Fill in the gaps so you don't under by too much. >> Yeah. Yeah. I I've spoken with a number of firms that are maybe regretting not having that. But um >> but >> sorry I didn't mean to interrupt. >> No, [snorts] please. Um one of the things I mean right now if you look at just a quick snapshot of the costs and the revenues of AI, it's nuts, right? like you know let's say a somewhat conservative estimate is that a trillion dollars will be invested in infrastructure and AI in 2025 the native AI companies so the company's really specializing on bringing AI to the market currently have roughly 20 billion in revenue I think that's annualized so we've got a trillion dollars in costs which aren't those are just sort of infrastructure we're not talking about like the actual cost to generate the service like the the massive amount of electricity and whatever else, right? Um, so we've got a trillion dollars versus $20 billion in revenue, right? You've got this massive disconnect. What I feel that many are completely missing is that 20 billion in revenue has a reciprocal cost, right? So companies are paying $20 billion for that service which costs over a trillion dollars or so to provide, right? So the interesting thing about AI is it can be applied to pretty much anything to improve it. It's not a tech thing. You can apply tech to financials, industrials, real estate, utilities, definitely healthcare, right? You can apply it to almost any approach to ideally if you do it efficiently to actually provide value. And again the companies that have that are using that are paying very little while the companies that are providing are paying a whole lot. So everything around tech actually has the opportunity to immediately take advantage of AI and this the services that these companies are providing and they get this massive value gap and so people are piling into the things that are burning cash like nothing's seen in history and then they're completely avoiding the things that can most immediately benefit. It's pretty nuts. It's uh and who knows, maybe that's philosophical and I'm talking my own book, but I'll be it'll be really curious to see how that plays out. For me, it seems obvious. Um but then again, you know, I'm I'm not always right, but u you know, I that's one of the things I'm really trying to get people to to contemplate. I mean, we're all everyone's going to have pink slips by Christmas time or what's the >> where's the cost savings or >> productivity increases that are supposed to be justify all this spend? >> I I mean, look, I again the who knows um AI I mess around with AI. Tobias just mentioned that he's a big fan um in a number of ways, but you know MIT did a study. I don't I'm going to mess this up, but it was like 90 to 95% of companies pulled um have seen no return in investment in AI, right? How many silly pictures are being created with AI? I mean, I I almost I kind of wonder if that's 50% of the the like usage of AI at this point is silly pictures or memes or whatever. Um it's great. I mean, I guess that improves life if you get some extra laughs out of it, but >> or targeted advertising. Hooray. >> Sure. Great. that's what we need more of. But um you know, so I'm I'm less positive on AI than I'd say Tobias is as far as the impact on humanity. I I think there's positive implications. I do worry a lot about This is getting really philosophical, but frankly, Jake, I blame it on you. You went you just went >> That's fine. >> You went you went straight on philosophy. I mean, you were quoting a philosopher, so u or a scientist. Regardless, I worry that um you know there's a a phrase by Echartoli that's once a human surpasses survival, meaning becomes extremely important. And I would say that more people have surpassed the needs of survival than any time in history, let's say, in the last h 100red years. And you've seen depression rates uh you know, significantly increase. we'll we'll just completely overlook um smartphones at this point. But just even in the last 100 years, you've seen that and and I think it's cuz people are looking for meaning. But what if you start even then sucking out all their time that's used to be productive, right? They they go to work. Maybe they do something of hopefully of value and now that's gone or it's even more efficient so they spend less time in that. Um, but I don't know, Jake. I I love the way that you like position that um in a in a way that could be positive that maybe enables people to find more fulfill fulfillment in lives or or maybe um you know increase the their capabilities. >> So be awesome. If you had the if you had to think about that meaning and lack of meaning perhaps would you imagine a world with UBI would have greater or less guillotine risk in it. So everyone's getting paid everyone's like can stay at home and watch Netflix or whatever like there's the machines are creating enough quality of life for all of us to survive and yet most people have no meaning in their life. Are they what are they going to do then? Are they angry about that or are they docile and happy to be in the zoo? >> I I think that'd be horrible. Um, you know, I have kids, but even pre-kids, I could probably quote Disney movies better than any any grown man. Uh, Wall-E, you know, >> let's not unpack that one. >> Pixar. Pixar. [laughter] >> Yeah. Love some Pixar. >> Pixar gets a post. Um, Wall-E, you know, you get to a point where everybody's just hasn't gotten up out of these like floating chairs where they're just being fed whatever. Um, you know, it certainly seems like that is not out of the realm of possibility, right? Uh, so and at least in that they were perfectly docile and not necessarily, you know, anarchist >> storming the best deal. >> Yeah. But if people don't have a purpose, life is empty. So I that's a that's a major concern of mine. >> Tell me what you think about that these days. >> Yeah, I couldn't agree more. You need you need a purpose otherwise it's there's there's a lot of there's a lot of things wrong with the way that we've set up. But let's let's just before we get too philosophical, I just want to go back to uh there's a few things on AI. There's a little chart that's been doing the rounds showing there's a whole lot of layoffs that coincide with the rise in AI >> and then that seems to be reinforced by the fact that there's a lot of uh excuses given by companies when they fire people saying that it's an AI related firing but there was a little research report out today that says that that's that's not true which is sort of the perspective that I have that they've already been they overhired during the the little 202122 STEMI sugar high and now they're just letting people go was sort of we're getting back to sort of where we should be in terms of long long-term unemployment. Do you do you have a view, Seth? Which way do you lean on that one? Is AI winning the race or is it something else? >> No, I I I completely agree. I think um I I completely agree without really numbers to back it, but I I think that um there's some numbers I guess to back it, but you know um it was next to impossible to hire people in, you know, 2020, 2021. Um you know, wage inflation was skyrocketing because it was just so hard to get really good people. And I and I do think that firms very clearly overhired then and and meanwhile they did so when profitability was at you know pretty much all-time highs which was partially driven by globalization which is now reversing. And so, you know, if we see a recession, if we see if we really see a meaningful change in globalization, if we see profit margins begin to decline, then, you know, there's you're going to see the opposite of uh I mean, you're going to see unemployment rise, right? um by pretty much by many metrics it appears like we might already be in a recession unless of course you look at the most u accepted metric which would be like GDP growth and you know I think half of the growth that we've experienced this year is strictly due to basically capex investment in AI >> keep in mind we have no idea whether that pays off anytime within the next 10 years but um >> well the chips won't >> [snorts] >> Yeah. Well, I I saw I saw a number recently where they estimate that maybe 80,000 jobs were truly um you know cut due to AI. So yeah, that to echo what you were saying to bias, it seems like that number, especially if you consider again the MIT study, 90 to 95% of companies, they're messing around with AI, but they don't really have any idea how to add value. So the odds are companies are making that decision, it's an expensive decision to let people go. So the odds of people are making that significant decision without actually having a plan in place seems doubtful. >> I saw that Mike Barry of the big short fame uh he released his or I don't know if it's come out of his 13F where he tweeted maybe I think he tweeted that something that I think I think Jim Chainus might have said something like this six months ago. I don't actually know where I got this idea from, but it's not something I've been aware of for a little while that if you look at the rate of capex, which is not then expensed, of course, it's depreciated. So, the lag is there's a little bit of lag when it gets recognized. And we're now at the point where the depreciation, amotization, whatever, it's going to run through the income statement. and the numbers are quite uh you know they're they're hard for them to overcome even in terms of revenue let alone in terms of so like we're just not paying back the the AI spend and you can already see it free cash flows falling off for a lot of these bigger companies they're very very expensive and at some point it starts running through the income statement so that's how you get sort of a normalization I don't I don't think it's going to I don't think it's going to collapse I don't think it's all over for those companies I think they're almost certainly bigger in 10 and 20 years time but I do think it's an interesting kind of data point. Do you have any >> just shift the useful life out another 10 years and that's not as big a deal. 50-year mortgages, not a big deal. Like this is just >> kick that can, baby. >> Extend and pretend everything can. That's the problem with the chips though, right? Like the useful life is so short. I think I saw some people who have been installing them in the centers and they say even 3 years is aggressive because they they run at such high heat. They seem to break down a little bit faster than people have been expecting. I it's hard to know how much is like FUD the fear uncertainty and doubt and how much is like a real take on these things. You got to I think at face value you got to accept that the useful life is as the companies are saying that it is but even then it doesn't the hurdle is too high for the revenue generation. They're going to be some diminition in profits anyway over the next few years. Do do you have a view Seth? Is that something that you're encountering as you're looking at companies? I have a I'm I'm really excited that you mentioned that because I think it's very pertinent. So Bur actually also he had a a post yesterday I believe and it um laid out the period of time or the the life expectancy for these infrastructure investments and the life expectancy has been growing. So if you track it from 2020 to to >> a lot of these companies the life expectancy has gone from 3 years to six years >> which means that as far as their income statements and the earnings are reporting at least according to him they might be 30% higher than they really are. So he's arguing that they are bas I don't know if this counts as fraud but certainly that they're playing >> aggressive accounting. >> There's some financial shenanigans going on. And what really backs that up exactly what you just mentioned, Tobias, although I'd say it's it's actually a little crazier, where these chips are improving in um capability so rapidly, at least what I've read, the the life expectancy is probably a year and a half to two years. Now, what you mentioned as far as the heat, that's a whole another thing. Uh and it's, you know, it'll be fine. And I'm sure that, you know, one other thing to think about is how many towns are going to be perfectly fine with turning waking up one morning to turn on their water and there's no water because a data center is uh sucking it up. I I find it hard to believe that that's going to be perfectly fine for everybody. Regardless, there's so many things that seem very unsustainable about all of this. Um, but the again it seems like especially according to what Bur said, he knows he clearly knows more about this than I do. There's what companies are doing seems I'm not unethical is probably not the right word, but there's definitely some tweaking of the numbers. Um, and that's what I I had someone the other day ask me what how this sort of all ends and and it's really just a realization at some point, right? It's it's slowly and then suddenly all at once, right? It's it's the realization by many that this isn't sustainable, that there are shenanigans going on, which it appears there very much are. Again, the life expectancy has according to their their um you know, income statements has doubled even though we know that it's actually shrinking, right? And that by saying it doubles, it has a very significant positive impact on earnings when we know there's actually a negative impact on earnings. It's crazy. Um so I I think you're right on. I think that uh it'll it'll be really interesting to see how this all plays out. >> It's entirely possible we go through like a a dot style um like we're just too far ahead of ourselves and we we crash. But the next 25 years like clearly the dot businesses have gone in directions that nobody we're so much we've done so much more than people I think even could have conceived in 2000 to get to this point. And I'm sure that AI will be the same. we've been using it for things that we cannot even conceive of now in 25 years. But that doesn't mean that in the interim that there's not a lot of volatility or that it all acrs to the companies like consumer surpluses are are a thing. It's entirely possible. It's a huge consumer surplus. But I will say that if we if the AI is going to consume all of that energy and fresh water, then we need nuclear because there's just no other way to generate that enough power and enough fresh water. Although Amazon has come out with a Andy Jazzy had a tweet today where he showed they had some innovation in the back end of the uh data centers where they figured out a way to cool the chips uh a little bit beyond me but they're getting cold directly on the chip and that separating the water away from it so it circulates it's it's quite water efficient. Sounds like a really impressive thing. >> I mean that'll be good but keep in mind how much money has already been dumped into data centers, right? So now we have to redo all of them to potentially provide that. Right. It's it's constantly evolving which again goes to your point that the life expectancy is getting shorter not longer because of innovation. Right. We're not at a point where there's a steady state. We're not at a point where we're not improving efficiency. Efficiency and innovation brings the current life expectancy down because of that trend. Um, I was at a uh a conference a few weeks ago and a gentleman was speaking that is very much in the know, like he's he's in the AI in the very thick of it. and he made a comment that I haven't heard anybody else really um focus on but it really stuck with me which was these let's say the biggest companies the mag seven companies in particular see AI as an existential crisis that's what he said >> which means life or death um if you are backed in a corner and you feel you're in life or death is there anything you're considering other than just purely survival. You will do anything to survive. And that if you actually take that perspective into account, then that begins to actually justify or help these silly numbers make sense. Because if these companies believe that it's either we either are all in or we lose and we're done, they're going to be allin in and profitability and and all these other factors don't matter. the only thing that matters is survival. Um, and so I just don't think any of these numbers for the most part make sense in the short term. And the problem is valuations are crazy. Valuations mean higher risk or more downside further to fall. And so it's it's a kind of a confluence of a number of factors that I wish people were paying more attention to. Um because it seems almost inevitable how this ends, but maybe I'm wrong. >> Uh on that cheery note, Seth, uh that's that's time. What if folks want to get in contact with you or follow along with what you're doing? What's the best way of doing it? >> Um feel free to email me at sethrunning oak.com. You can also check running oak.com, running oaketfs.com, and then u I'm begrudgingly I've begrudgingly been far more active on LinkedIn, so you can hit me up there as well. I' I'd love to talk to you or hear from anyone. >> Uh JT, any final words? >> Just uh >> embrace our AI overlords and >> I for one welcome and you AI overlords. Seth Cogwell running oak. Thank you very much everybody. We'll see you folks next week.
Running Oak's Seth Cogswell on his Efficient Growth Strategy | S07 E40
Summary
Transcript
Which one's better? >> I don't know. I don't know. >> But we don't we're debating when we start live streaming. I think we're live. So, one one side of my my dashboard says we're still setting up, but apparently we're broadcasting. So, I'm Tobias Carlile. >> As surprised as anybody. >> This is Value [sighs] >> I think. >> Let me try again. This is Value After Hours. I'm Tobias Carile joined as always by my co-host Jake Tail. I was going to say co-star. Good grief. >> Co-star. I like it. >> Our guest today, our special guest today is Seth Cogwell of Running Oak. >> How are you, Seth? >> I'm great. >> Thanks so much for joining us today. Let's let's talk a little bit about your investment strategy and your philosophy. Let's get going. What is your investment philosophy and how is that implemented in your strategy? So, if I'm going to describe our investment strategy in three words, it's consistently not stupid. That's that's based on a line by Charlie Mer. Charlie Mer attributed much of Berkshire success not to being geniuses or the or the smartest guys in the room. Is more just being consistently not stupid. and it fits our strategy so perfectly. So when I read that it just I was like, "All right, that's it. I'm I'm stealing this." Uh it's our strategy is clearly not stupid and that it's built upon three very simple common sense uh attributes. So the first is maximize earnings growth because you know if you're investing in companies that are growing in value, great. There's no arguing that that's not a positive. The second though is being very disciplined around valuations. Uh you know if you have a company that's worth this in the real world that's operating in the real world and then you have a stock which is the price of the stock is determined by price and or supply and demand which hopefully at some point is is equivalent to the company in the real world. We want to buy when the stock is undervalued. We want to sell when the stock is overvalued. And really, you know, so again, maximize earnings growth, discipline around valuations. It does not pay to own assets that should go down, let alone a lot over the long run. And then the last is a focus on downside risk for the very obvious reason that you know, you drop 50%, you have to double your money to get back to flat, which is very hard to do. As opposed to if you experience a 30% decline, which is never fun, you only need a 40% return versus 100 to be making new highs. So again, it's it's not stupid. It's super simple, obvious, common sense. And then that consistently our process is rules-based. So we do the the same thing over and over, which makes for a reliable portfolio or strategy. That's that again you can any any client or adviser can can plug into portfolios and and expect they'll have reasonable expectations for precisely what we will be providing over time. So again consistently not stupid. >> Let's talk a little bit about growth. How are you thinking about growth? How are you diagnosing it? What are the conditions for growth? >> Growth is tough, right? Because it's forwardlooking. Uh, one of the reasons why our strategy is a little more quantitative in nature and rules-based is because my my father who created our strategy started out in the 70s at a large bank doing discounted cash flow models, which anybody that's ever had a pleasure doing that, you're basically trying to predict the revenues of a company 3 to five decades into the future despite not actually knowing what those products are. So, you know, good luck on any of that. Um, and so the strategy was largely a result of going a completely different route and really trying to focus on what's known versus unknown. But again, growth is looking forward. So, it's certainly unknown. Um, that ends up being a a smaller part of our of our approach. But regardless, the way we look at growth, and there's a number of ways you could look at it, but we focus on earnings. Um, you know, earnings can be manipulated. So maybe one could argue that cash flow is a good good u good metric to look at. We choose earnings because again that's really what's coming back to the shareholders over time and and you know we measure growth in a number of ways. We look at the one-year expected return three and five. Um you know the goal is again it's inherently faulty but we want to position the portfolio in a way so that the so that it is consistently on average creating u more value for clients over the long run. So historically our portfolios averaged 12 to 13% earnings growth versus 6 to 7 for the S&P. So that 6% gap we would expect to provide value over time. So, do you think that um it sounds like you're looking often for predictability in the business and do you think that the market tends to overpric or underpric predictability? >> I would say underpric actually um predictability is boring. >> The really the sweet spot that we're looking for, the inefficiency is companies that are again growing at a at a good rate. They're high quality, which, you know, I describe as just well-run. So, they're profitable. They're um not taking on crazy amounts of debt, which u I think will matter a lot in the near future. Um in in that you can get them at an attractive value. Usually, if you're getting something that's relatively undervalued, it's because they're not exciting, right? You've got money flowing into the most excited names, whe whether it's the the Mag 7 right now, which everybody knows. Everybody either owns the product or uses the product or at least knows the company. Their hair stylist probably told them they should invest in it just last just the other day, right? And so you've got all this money flowing into these names, not because of numbers. It's flowing into these names because of popularity. And and that popularity takes those companies up. it takes the index up and then the companies that are less popular just sit there because they're not receiving uh you know an appropriate amount of money and so that creates that undervaluation but again growth is is inherently unpredictable. Trends are kind of unpredictable. That's not to say that we shouldn't pay attention to them but they but be hard to predict. Um, and so the things that are most predictable, such as let's say like industrial companies that are just just rolling along doing their thing, nobody cares about them. And so it creates that that relative undervaluation. >> Do you have any idea like do you have you modeled what your what growth you've actually received versus what growth you've expected? Do you find that you're on the money or does it fall short or do you sandbag it a little bit and you find that you're surprised? Like how have you have you tracked it? I wouldn't say that we've tracked it directly. Um, but I will say at least from ' 89 to 2013. So before I I launched uh Running Oak in 2013. Again, my father ran the strategy prior to launch. I actually ran it for five or six years from 2007 to 2013 or so. Um but regardless from ' 89 to 2012 2013 portfolio outperformed the S&P by roughly 3 and a half% before fees annualized just top 1 percentile returns or so but again that what we have tracked is that um on average our growth rate was 12 to 13%. So, you know, there is a a gap there between if we're outperforming by 6% on a growth, you know, as far as growth goes, but then outperforming by three and a half, which is still great. Um, you know, clearly there's a gap there. So, I don't really know how to answer your question other than to say there there definitely appears to be a little slippage there. >> Yeah, a little compression, which is about what you'd expect to see. That's what I would have expected to see. Anyway, let's talk about valuation a little bit. How do you think about valuation? From what I've seen, and there's it's a big world out there. There's a lot of people in our industry. Um, we value stocks very differently from most. Um, and and even just talking to you before the podcast, um, I would imagine you're taking a much more maybe discounted cash flow really, but certainly a much more fundamental approach or deep dive what we do as a relative valuation versus the S&P 500. So we actually look at you can think of it as two ratios where we we measure the wealth creation of a company versus the wealth creation of the S&P and by that I largely mean earnings growth. So you know over time and again this is five decades over time we have found that price will follow wealth creation or relative price will follow relative wealth creation. So, if we see a company that's, you know, creating wealth or earnings at 2x the rate of the S&P, we would expect over the long term for the stock price to do the same. Um, and then in between, you're getting, you know, again, cuz uh stock prices are driven by supply and demand. They're they're kind of swinging around that true value. And and one of the things that's really illustrative to me to give me uh you know confidence just that we're moving in the right direction is you can see that sort of relative price swinging around uh that relative value. Um so again it's it's different but we've been doing it for a long time and it seems to provide uh provide value or have merit. >> Is it like a you're looking for a like a market PE with a higher growth rate? Is that the way you think about it? >> Or better than market PE with a higher growth rate. Is that that kind of the mix? >> Kind of. I mean, PS have been proven to be absolutely worthless as far as predicting returns, but P's are also a helpful snapshot, right? Like it gives you they're backward-looking. Um, but it gives you a a chance to kind of see where things lie right now. Forward P you could maybe say is a little bit better. Um, but again, it's a snapshot, right? like it's just one year looking forward and and inherently it's faulty also because it's it's based on you know prediction. Um but yeah so it's that's a good way to sum it up. It's it's different but but that's still a good approximation. >> So do you favor a DCF type approach then? Is that is that you don't like the DCF or or you do favor a DCF? DCF is almost entirely prediction. Uh and so our strategy is is intentionally built on characteristics that we feel that we can rely on. So again, you know, companies that are increasing in value intrinsically in the real world, right? Never mind the stock market because that's going to do whatever it's going to do based on emotions and FOMO, especially right now. Um but then also being where does that relative valuation of the company lie as far as the stock price versus uh what we determine the value to be in the in real life and then again we focus on a number of things that that I'd say clearly lead to greater downside risk. Um but again those there there three very simple principles or kind of metrics. Again, the valuation part of it is a I don't really like the term proprietary because it sounds a little stuffy, but it's definitely like a a metric or a calculation that I've I've never seen anyone else doing. uh it's it's not DCF, but again it's a it's a it's a uh a more thoughtful way than looking at P's or looking at price to book and allocating, you know, just based on whatever has the lowest P or the lowest price to book. >> Okay. Um talk to us about downside risk. What what's what sort of things are you looking to avoid or what are you what red flags are you looking for in your downside risk assessment? So over time, I mean, if you go back to ' 89, again, our our portfolio has had basically 50% of the average draw down of the S&P, which for me, I feel average draw down is the best metric to really measure or gauge the discomfort that clients experience when a market goes down because it it measures both how, you know, how much you're down as well as how long you're down there. So for me, average draw down is a much better way to really again measure how a client feels risk than say downside capture or standard deviation or certino or anything like that. Um the biggest driver of that in my opinion is avoiding overvalued companies. Valuing companies is hard to do. A lot of people do it in different ways. A lot of them have merit. Some probably don't. But regardless, at least philosophically, you can't argue that owning a company uh or owning a stock at $100 when the company's worth 50 isn't begging for trouble uh at some point. There's a and there's a few great examples right now. There's probably a lot of great examples right now, but u you know, Apple's an awesome company. Two of my closest friends work there. I I wish it well. I love their products, but its current P is 39 or so. Long term it be is 14 to 50. That's kind of its average where it's at for a long time. That means Apple could drop 50% tonight and it would still be really overvalued relative to its historic norm. Same with again great company but same with Microsoft. Microsoft has a price to sales of almost 14 now. Uh, and one of my favorite quotes within the within the market is a quote by Scott McNeely, who is the former CEO of Sun Micros Systemystems. And and he said, I think I I believe he was getting a hard time for losing people's money. I'm sure he was sued for, you know, people investing at the peak of the tech bubble and then getting mad at him. But he was like, "Look, I'm running the company. You're the ones that paid 10 times price of sales. That means that that meant that over 10 years we had to return every single penny in revenue just for you to break even. Not make money for you to break even, which assumes that we have no employees. We're running a big company. We had a lot of employees. It assumes that we have no cost of goods sold or R&D. We're a tech company. We have to constantly innovate. And also assumes that you don't have to pay taxes. If you if you guys don't pay taxes, you go to prison. So don't come to me about you paying 10 times price of sales. And the and the thing is both Microsoft and Oracle are 40% beyond that. So 40% beyond the very peak of the tech bubble. Now we're in a dynamic time. I don't know how this plays out with AI. I have a sense of how it plays out, but regardless, I don't know how it'll play out. Um but the main thing to answer your question is that's just risk, right? like a of 40% beyond the tech bubble just maybe it works out but what if it doesn't right and so that's our goal is to really avoid that what if um because the what if almost always comes to pass it does very often and so Microsoft again awesome company seems to be like leading the the you know kind of the AI battle at the moment but it could drop you know 70% and it wouldn't be a big deal it would literally it would not be a steal if Microsoft drop drop 70%. Maybe on a PE basis it would be a it would be a lot more attractive. Um so again that that focus on valuations and avoiding companies that should go down let alone a whole lot is probably our biggest our our greatest value ad. But another area where I I feel will be very important over the next decade is debt. We all know that if we mortgage our, you know, max out our credit cards to go buy a boat or something that it's probably not going to work out very well. Like it's it's it's we're headed for some pain. And in the last decade, companies took on more debt than any time in history, not to build better companies that could then pay that interest, pay down that principal, and make profit on top of it. They just bought back stock. Buying stock has some benefits, but if you really think of it in its most simplest form, basically these companies mortgage their futures because they got to pay that back at some point and then they handed that cash to discerning individuals who were selling their stock. Um, and so again, it's neither good nor bad buying stock. it, you know, it's it could be both ways, but if you're mortgaging your future to do it, that's taking on risk. And they did that when interest rates were quite low. Interest rates are now a lot higher. So, more than likely, these companies are going to have to a lot of them are going to have to refinance at higher rates, which will hurt profitability. Profitability is one of the main arguments for better or worse. I actually think it's a dumb argument, but one of the main arguments for higher P's or higher multiples. So if you see property if you see profitability decline and you see multiples decline now you've got like a double whammy and contraction and and that just assumes the company is performing just as well as it always has right like that's that's not assuming any adversity that's assuming just reality and so avoiding that I believe will be a significant value ad going forward. starting to sound like us. Seth, >> I compliment. Other than that, though, it's all good. Yeah. >> What a what a crazy bear. >> Uh, let's talk a little bit about passive. Uh, you're not a fan. [laughter] I'm I'm trying not to position it in that way to say I'm not a fan. Um, I think one of one of the issues that drives me craziest in the world today, both in real life and investments, is this tendency to see everything in black and white, right? It's either my team or the other team, right? Most aspects of life are in the gray and passive is very much that. So, you know, I'd say that John Bogle had a very positive impact on the industry. Um, prior to to Vanguard, many fund managers were charging massive fees and providing no value whatsoever. That didn't benefit anyone other than, I guess, a handful of managers, right? But in the end, any any industry or any company that's not providing service or value to the end client shouldn't exist. They should just die quickly. in the investment management industry didn't seem to be providing a whole lot of value for the most part. Bogle u you know provide an alternative. He was like look if you're if you're not even going to get market returns or if you are and you're going to pay a high fee for it, why don't you pay little to none for it? Fine. There's no arguing that paying a lower fee for the exact same thing you were paying a high fee for isn't better. And that also had the benefit for investors of bringing fees down across the board. Um, so that's that's a positive. The other thing is a lot of people made a lot of money in the last 15 years being invested in in passive, which is a good thing. Now the issue is why did that provide so much value? And and that's my concern is that people aren't really considering context. So again, lower fees, good. Uh investing in a strategy that to a certain extent makes no sense, that's bad. Uh and so when I started in the industry, um you know, passive and active, that's really when this this this battle was really raging. And the idea of investing in a company simply based on size just seemed like the dumbest way to invest. I mean, if you're looking at two houses, you're not going to pay 25% more for a 5,000t house than you would for a 4,000t house without at least walking inside the house, right? You're probably going to do a home inspection. There's no investment where you would just be like, "Ah, this is bigger. I'm just going to pay more. I'm going to put more of my money in it." But that's the way that passive works. Now that said, as time has gone on, I've kind of, you know, that my view has evolved and and one of the things that I have become particularly upset upset about and and worried about is um whenever a manager, anybody in investments as well as advisors, whenever we speak with a client about investment, we speak about two things. What are those two things that we would talk about? The two main things. >> Oh, that's a question for us. >> Returns. Returns and fees. >> Got one of them. >> No. What's the No. Return fee matters. But what's the other one? >> Risk. >> Yes. [laughter] >> Yes. Which one matters more? I would argue that risk in the long run matters more because that money matters. People have forgotten that risk matters because we haven't experienced a true downturn in 15 years. But when you need that money that you've worked so hard for and it's not there, that is a whole lot worse than if you have more money than you needed. Um, and so passive has somehow gotten away with completely overlooking risk. The only way that the passive narrative addresses risk is they say, "Ah, market goes up on average. You'll be fine." That's that's absolutely ridiculous. What if you're retiring in the next three years and we go through a lost decade, which the odds look pretty high of at the moment and and you're having to pull out money after a big draw down, which absolutely destroys your cumulative returns over the long run. There's there's a lot of data points. There's no arguing that. Um, the other thing is that's conveniently overlooked is the behavior gap. Um, I I am not immune to making dumb decisions when I'm emotional. I've I've made plenty of stupid decisions. And when we as people are stressed out, if we see our net worth drop 50%. We are inclined to panic and sell because we don't want to experience anymore. So, yes, we've got the people who sold us passive. We got the S&P saying, "Oh, well, you know, it'll be okay. Just hold on. You know, are you going to want to pile more in?" No. And you might sell. And that destroys return. So, conveniently, completely overlooking that also bothers me. Um, sorry, I'm getting a little long-winded. I clearly am a little passionate about this. But the the other thing that I recently had kind of an epiphany on is, you know, I we'd have this act of passive debate and everybody brings up the data, which I would argue is as henpecked as most data is. um I don't think mo a lot of it's valid but regardless if you break passive into its simplest form so if we just look at it on a individual stock basis again you've we're going to use Apple because everybody knows it Apple is a company it's operating in the real world it's selling products it is worth this amount of money right if it's a private company we would work with a number of auditors to come up with a value that somebody would buy it for, right? It's a company. It has a value. Now, the stock is driven by supply and demand. So, if there's a lot of demand, it goes up. If a lot of people are selling, it goes down. Whatever, right? It's swinging around. Let's say at one given point in time, we used to think the market was efficient. That many would argue that it's just broken now. But regardless, let's say at some point the market's efficient. The price of the stock is equal to the value of the company. Somebody bought an iMac two months ago. They're doing some sort of doing something on it and they're like, "Man, my iMac is the greatest. I love it." And so they turn around and they buy, let's say, a million dollars of Apple. They're pretty wealthy. Buy a million dollars Apple. That demand is going to push the price of Apple up. Again, nothing changed with regard to the company cuz they bought that IMAC months before, but now the stock price is higher. Because the stock price is higher, it's now a higher percentage of the S&P. And anybody that invests in the S&P from here on invests more in Apple because it's overvalued. Then we were talking earlier about momentum. There's I can't imagine how much money is in momentum strategy at this point. But regardless, moment a moment, a momentum manager says, "Hey, Apple's flying. We need that." And so more is invested in Apple. That's going to push Apple up even further, that demand. So now, because Apple is even more overvalued, it gets an even higher percentage of the S&P, which means that everybody invests in Apple now buys even more because it's overvalued. And that keeps going, right? We hit the 99.8th percentile in history and momentum last year. That dynamic of paying more and more for companies the more and more overvalued you it gets is is you know historic. And the thing is that the S&P or passive never sells right. They don't sell unless it gets to a certain point where the committee that runs the S&P says you know what we should kick this out. So, it's literally the exact opposite of buy low, sell high, which as a value investor or as anyone that's even remotely thinking critically about investing, everyone's hopefully looking to get good value on the buy and to sell when the value is, you know, positioned to maybe work against you or you or you've realized that value. Passive is the exact opposite. Um, so again, passive is neither good nor bad. It's good in that it brought fees down. It's good in that it's it really simplifies investing. It's certainly better than chasing mutual fund returns or or day trading. Um but I do believe that there are far more thoughtful, far better approaches out there. Um and so it's you know it's in the middle. I would say too the abdication of responsibility of ownership of all of these businesses is actually adds a fragility to the future cash flows of those businesses. So you're kind of uh creating your own problem that you're going to eventually that chicken has to come home to roost. >> That's certainly a concern, right? You've got the you've got the investment side of it and and you know holding a momentum portfolio when momentum just hit the 99.8th percentile in history and not recognizing that you own a momentum portfolio that just had the hottest period in history and not selling if anything people are piling more and more. That's one thing and that that's a lot of risk. The other thing to your point is the real life implications. Capitalism, we can thank capitalism for the massive gains in um in our quality of living over the last 50 to 100 years. And a lot of at the heart of capitalism is capital being allocated intelligently into companies that have a lot of upside and allocated away from companies that should disappear. And that mechanism has been completely broken. Now, part of that I would say is passive, right? You got a lot of money going into companies for no reason other than size or no reason other than popularity in this construction. You also have a lot of zombie companies out there that should have died a long time ago, but have been kept on life support thanks to massive fiscal stimulus and 0% interest rates. Um but but yeah, I mean whether it's on the investment side or u you know in real life economy it it likely has some very significant negative implications going forward. >> I thought uh yeah I couldn't agree more but I thought the uh one of the interesting things that I looked at over the last I've had that running deep value I've had the stuffing kicked out of me for about a decade now >> and I'm quantity too. So, one of the things I like to do, I've run data back to 1926 in the French data, and you can, you guys can do this, too. It's just a French size series. Um, if you run the top decile against the market, which I guess is about the fifth decile, or you run the top desile against the bottom desile, you clearly get massive outperformance by buying small over large. Uh, and it's about8% a year relative to the market, 1.7% a year from largest to smallest since 1926. So that's a century of data. In that century of data, there are these six periods of time where you get this massive outperformance for size. And we're in one of them now. We're 10 years into one now. So I did a count. There have been something like 10 that have been 3 years long, seven that have been 5 years long, and there's like five that were 10 years long. >> What's the >> longest one was 1999 was I think it was 13 and 1/2 years. and we're currently or maybe it was maybe it was over 15 and we're currently in one that's 13 and a half something like that. This is the second longest. >> So don't worry about it for a couple more years. >> So you're good to go. Close your eyes. Uh JT, we're coming up to the top of the hour. Let me do a shout out to all the folks playing at home. Then we'll do >> some veggies. >> Veggies. Tombble Texas Pitikva Bethesda Cottage 7. That's a new one. Welcome Philly L. Lewis Delaware. Thanks for the pronunciation last time. Toronto, Valpareo. Is there someone else in Valpareo besides Mac? Limmerick Island. What's up, Col Breenidge, Tallahassee, London? London, UK, Tampa, Florida, Dead Cat, Gully, New South Wales. Me too. [snorts] New London, Mayfair, London. Milton, KE, Men at Work. Nice, Les. Like, you got me. That's in Australia. Madira Island, Portugal. Hunter Valley, New South Wales. What's up, Boisey? It must be uh daylight saving in Australia. The Aussies are on. [laughter] >> Still pretty early there. >> Philly, Transylvania, what's up? Is that real? Pares Patel, Rididgewood, New Jersey. Transylvania. That's a That's a new one. All right, that's a good spread. >> Popular with the vampires. [laughter] >> When we score well with >> They're the only ones who've seen value working. JT hit us with some veggies make benefit glorious nation of value after hours. >> All right. So centuries ago Aristotle wrote a short essay called on memory and recollection. And in it he described memory as an imprint like a signant ring pressing into a soft heated wax. Uh experience he said leaves behind a trace not just an image but a kind of echo in the soul. And when we remember we're perceiving that echo again. And when we recollect, when we actively try to recall, we're searching for the echo in the wax. It's very elegant, but it's fatally flawed in that the wax tends to melt. Uh time, distraction, new sensations, all of them deform that original imprint. And memory fades because life keeps pressing new rings into the same surface. So that was the philosophy. And for nearly two millennia, memory stayed as this kind of mystery that was wrapped in a metaphor that Aristotle gave us. But then in the late 1800s a young German psychologist named Herman Ebbinghouse decided to do something radical. He started measuring memory itself and he turned this philosophical fog into actual data. Uh Ebinghouse was born in Germany and earned his doctorate at the University of Bon and he was inspired by this emerging precision of psychopysics that was bringing tangible rigor to all of these mental processes. uh and he ran exhaustive self experiments and gave us the first quantitative map of forgetting the curve that now bears his name. So Ebinghouse wanted precision and he wanted to quantify what happens between learning something and then forgetting it. So he became his own little lab rat and for two years he conducted hundreds of experiments on himself and to strip away the meaning and the emotion of the memories he invented these little nonsense syllables like z uh you know z a k w to ov uh they didn't mean anything but he was just trying to memorize them uh and that way it prevented him from having these associations that might influence the memory. So he memorized these long lists of all these these random things and then he'd retest it at 20 minutes, at 1 hour, one day and one week. Uh and he was measuring the rate of decay in in the loss of the memories. And what he found was that uh would become one of psychologyy's most enduring images. This sharply descending curve that's steep at first and then it gradually levels out. Uh and this is Ebingous's forgetting curve that's there famously now. and he discovered that within 20 minutes we forget about 40% of what we've learned. After an hour over half is gone. By the next day twothirds of the materials evaporated and after a week we retain only about a quarter. And that pattern is this exponential, right? Um but the same shape has replicated in study after study now over a century. So it's actually probably pretty good science. Um but it's not just really a grim reminder of how fragile our our memories are. It's also kind of a map to guide us on how to res resist that decay. So he found that if you review the material not consistently but strategically at certain intervals you fight that forgetting curve. Uh each repetition uh and each act of recall strengthens that trace in a memory. And he called this principle his savings method. Um so even if you know if a list seemed forgotten relearning it took less time. There was like a trace that remained that you could pick up the thread. Um so this insight became the seed of what's now called spaced repetition which is a very common learning uh tool where you just learn things at certain intervals to recall before you forget. So what's actually happening when we forget? Ebinghouse could measure forgetting on himself but he couldn't really explain it. We need neuroscience today to give us a much fuller picture. So that there's there's a few different theories on how this works. Uh trace decay suggests that memory traces these neural patterns form during the learning. they simply just fade over time kind of like footprints that are washed away by the tide. Uh there's also interference theory which says that new memories disrupt old ones and sometimes that old knowledge uh you know blocks new learning. At other times new information is overwritten by the old and there's also retrieval failure which is you know you had that memory but you can't quite find the right key to access it. It's like having the file in your brain but maybe like the label peeled off of it. Uh and then there's motivated forgetting and that's the mind's protective reflex to bury painful or or useless memories. And sometimes forgetting is not really a flaw but more of like a defense mechanism. So like mothers forgetting about the birth of a child uh then the pain of that or you know value guys eventually forgetting the last 10 years. Uh [laughter] so anyway let's let's fast [clears throat] forward to today and you know we live surrounded by infinite storage. you know, every photo, every note, every message is archived somewhere in the cloud. And we can search for our arch through these archives with a keystroke, but that's not really the same as carrying the knowledge in your bones. Like we forget faster than ever. Uh we outsource recall to our devices. We rely on technology to remember for us. Um but that [clears throat] kind of changes how we know things. Uh and we may have access to more information than than any generation in history, but maybe perhaps less internalization of that information. Um, so you know, and to remember something is to really integrate it and to like feel the pattern and not just recall the fact. And AI systems are becoming increasingly more of this external memory capable of of infinite recall for us. You know, they index and sort and retrieve without fatigue. Uh, and when we set these algorithms to hold our memories, we're kind of trading retention for convenience perhaps. So we know where to find things, but we don't really know what they mean as much as we might have. Um, so the real danger [clears throat] I think of AI assisted thinking is not amnesia but really atrophy like this slow erosion of the kind of interpretive subconscious work that connects memories to meaning and understanding. And we have to be careful in how we use these new AI crutches. At least that's the common refrain that we hear today. I'm going to try to like play devil's advocate and posit that perhaps man plus machine might unlock an immense intellectual bounty for all of us. So imagine an AI thought partner that doesn't just store facts uh but really trains your brain and your memory and your judgment. Um it watches your projects, builds personal knowledge graphs, schedule space rehearsals when forgetting risk is highest, turns notes into targeted retrieval prompts, surfaces contradictions and base rates at at opportune times. Uh you know, running little quick simulations, proposing alternative hypotheses for you to consider, raising red flags before mistakes are made. Um it's like a prostthesis for for your attention, not a replacement for thought, but you know raising perhaps both the floor and the ceiling of what a single mind might be able to hold. Uh we we humans will bring the aims, the taste, the ethics and like perhaps the risk appetite and the machine brings this relentless recall audit trails, sanity checks, uh you know some guard rails for us. And every decision that leaves a record has inside of it these assumptions and probabilities and ration. And later we can take those outcomes and and score them against you know calibration of improving and feedback loops tightening. So I think teams perhaps could become even more anti-fragile working together. Fewer forgotten lessons, faster learning cycles, more disciplined interactions. Um you know we're it's we don't outsource our thinking. We use a AI to help provide a scaffolding for it. And you know humans [clears throat] get to choose the ends and the machines really strengthen the means for us. So AI doesn't erase Ebingous's forgetting curve, but it turns it perhaps into a more viable training plan. >> That's brilliant. JT, is that journalytic? Is that what's coming? >> That might be something related there. Yeah, >> that's a cool one. I I I read once that if you sever a long-term relationship, like you get divorced or something like that, you've stored a whole lot of information in your spouse's brain. Like you just don't know where things are because you know that they know where it is. So you already use the external hard drive. So that's uh that's good timely advice. Are you getting divorced? No, >> I don't know [laughter] why I said that. >> I'm aware anyway. >> Uh, yeah, you've thrown me there, JT. >> Sorry. [clears throat] >> That was No, I love that. It was awesome. It was a very optimistic way to both optimistic and kind of I don't know, humanistic way to look at AI. Um, >> I don't know the right answer, but I think it's fun to try to just think through, you know, the positives and the potential negatives. >> Yeah, I'm an optimist for the AI. I love using I think it's incredible chat and uh the ones that I use. We're we're we're talking AI with Seth. It's one of the topics that he uh he suggested we take a look at. >> Yeah, let's hear your >> You've got this uh >> you think that most people are thinking about it in terms of first order thinking. you've got a secondderee view of AI that you think is being overlooked. >> Yeah, I didn't I didn't see it going that route that Jake just took, but I loved it. Um, yeah, one of the things that I would like people to consider that I feel that they aren't is and what led to this is we reconstitute our portfolio several times a year. We did it let's say three or four months ago and the result again our process is rulesbased. It's driven by numbers. It's not it's not our decision or subjective. The result was we ended up having less tech exposure than I ever remember us having. We had more industrial exposure and some other things. But I was very uncomfortable with having less tech exposure during what appears to be a tech revolution. Um and and since then, you know, tech obviously almost every dollar that's going in the market, it seems like is is is piling into tech, not into other things. And >> by the way, just real quick, I've heard a kind of funny uh apparently now some allocators have a they call it a completion portfolio, which is, you know, you maybe you have all your allocations and then you're like, "Oh man, I'm like not long enough big tech probably to like keep up with my benchmark. I need a completion portfolio which >> little spec filler. >> Yeah. You just need to like gaps fill it in. Fill in the gaps so you don't under by too much. >> Yeah. Yeah. I I've spoken with a number of firms that are maybe regretting not having that. But um >> but >> sorry I didn't mean to interrupt. >> No, [snorts] please. Um one of the things I mean right now if you look at just a quick snapshot of the costs and the revenues of AI, it's nuts, right? like you know let's say a somewhat conservative estimate is that a trillion dollars will be invested in infrastructure and AI in 2025 the native AI companies so the company's really specializing on bringing AI to the market currently have roughly 20 billion in revenue I think that's annualized so we've got a trillion dollars in costs which aren't those are just sort of infrastructure we're not talking about like the actual cost to generate the service like the the massive amount of electricity and whatever else, right? Um, so we've got a trillion dollars versus $20 billion in revenue, right? You've got this massive disconnect. What I feel that many are completely missing is that 20 billion in revenue has a reciprocal cost, right? So companies are paying $20 billion for that service which costs over a trillion dollars or so to provide, right? So the interesting thing about AI is it can be applied to pretty much anything to improve it. It's not a tech thing. You can apply tech to financials, industrials, real estate, utilities, definitely healthcare, right? You can apply it to almost any approach to ideally if you do it efficiently to actually provide value. And again the companies that have that are using that are paying very little while the companies that are providing are paying a whole lot. So everything around tech actually has the opportunity to immediately take advantage of AI and this the services that these companies are providing and they get this massive value gap and so people are piling into the things that are burning cash like nothing's seen in history and then they're completely avoiding the things that can most immediately benefit. It's pretty nuts. It's uh and who knows, maybe that's philosophical and I'm talking my own book, but I'll be it'll be really curious to see how that plays out. For me, it seems obvious. Um but then again, you know, I'm I'm not always right, but u you know, I that's one of the things I'm really trying to get people to to contemplate. I mean, we're all everyone's going to have pink slips by Christmas time or what's the >> where's the cost savings or >> productivity increases that are supposed to be justify all this spend? >> I I mean, look, I again the who knows um AI I mess around with AI. Tobias just mentioned that he's a big fan um in a number of ways, but you know MIT did a study. I don't I'm going to mess this up, but it was like 90 to 95% of companies pulled um have seen no return in investment in AI, right? How many silly pictures are being created with AI? I mean, I I almost I kind of wonder if that's 50% of the the like usage of AI at this point is silly pictures or memes or whatever. Um it's great. I mean, I guess that improves life if you get some extra laughs out of it, but >> or targeted advertising. Hooray. >> Sure. Great. that's what we need more of. But um you know, so I'm I'm less positive on AI than I'd say Tobias is as far as the impact on humanity. I I think there's positive implications. I do worry a lot about This is getting really philosophical, but frankly, Jake, I blame it on you. You went you just went >> That's fine. >> You went you went straight on philosophy. I mean, you were quoting a philosopher, so u or a scientist. Regardless, I worry that um you know there's a a phrase by Echartoli that's once a human surpasses survival, meaning becomes extremely important. And I would say that more people have surpassed the needs of survival than any time in history, let's say, in the last h 100red years. And you've seen depression rates uh you know, significantly increase. we'll we'll just completely overlook um smartphones at this point. But just even in the last 100 years, you've seen that and and I think it's cuz people are looking for meaning. But what if you start even then sucking out all their time that's used to be productive, right? They they go to work. Maybe they do something of hopefully of value and now that's gone or it's even more efficient so they spend less time in that. Um, but I don't know, Jake. I I love the way that you like position that um in a in a way that could be positive that maybe enables people to find more fulfill fulfillment in lives or or maybe um you know increase the their capabilities. >> So be awesome. If you had the if you had to think about that meaning and lack of meaning perhaps would you imagine a world with UBI would have greater or less guillotine risk in it. So everyone's getting paid everyone's like can stay at home and watch Netflix or whatever like there's the machines are creating enough quality of life for all of us to survive and yet most people have no meaning in their life. Are they what are they going to do then? Are they angry about that or are they docile and happy to be in the zoo? >> I I think that'd be horrible. Um, you know, I have kids, but even pre-kids, I could probably quote Disney movies better than any any grown man. Uh, Wall-E, you know, >> let's not unpack that one. >> Pixar. Pixar. [laughter] >> Yeah. Love some Pixar. >> Pixar gets a post. Um, Wall-E, you know, you get to a point where everybody's just hasn't gotten up out of these like floating chairs where they're just being fed whatever. Um, you know, it certainly seems like that is not out of the realm of possibility, right? Uh, so and at least in that they were perfectly docile and not necessarily, you know, anarchist >> storming the best deal. >> Yeah. But if people don't have a purpose, life is empty. So I that's a that's a major concern of mine. >> Tell me what you think about that these days. >> Yeah, I couldn't agree more. You need you need a purpose otherwise it's there's there's a lot of there's a lot of things wrong with the way that we've set up. But let's let's just before we get too philosophical, I just want to go back to uh there's a few things on AI. There's a little chart that's been doing the rounds showing there's a whole lot of layoffs that coincide with the rise in AI >> and then that seems to be reinforced by the fact that there's a lot of uh excuses given by companies when they fire people saying that it's an AI related firing but there was a little research report out today that says that that's that's not true which is sort of the perspective that I have that they've already been they overhired during the the little 202122 STEMI sugar high and now they're just letting people go was sort of we're getting back to sort of where we should be in terms of long long-term unemployment. Do you do you have a view, Seth? Which way do you lean on that one? Is AI winning the race or is it something else? >> No, I I I completely agree. I think um I I completely agree without really numbers to back it, but I I think that um there's some numbers I guess to back it, but you know um it was next to impossible to hire people in, you know, 2020, 2021. Um you know, wage inflation was skyrocketing because it was just so hard to get really good people. And I and I do think that firms very clearly overhired then and and meanwhile they did so when profitability was at you know pretty much all-time highs which was partially driven by globalization which is now reversing. And so, you know, if we see a recession, if we see if we really see a meaningful change in globalization, if we see profit margins begin to decline, then, you know, there's you're going to see the opposite of uh I mean, you're going to see unemployment rise, right? um by pretty much by many metrics it appears like we might already be in a recession unless of course you look at the most u accepted metric which would be like GDP growth and you know I think half of the growth that we've experienced this year is strictly due to basically capex investment in AI >> keep in mind we have no idea whether that pays off anytime within the next 10 years but um >> well the chips won't >> [snorts] >> Yeah. Well, I I saw I saw a number recently where they estimate that maybe 80,000 jobs were truly um you know cut due to AI. So yeah, that to echo what you were saying to bias, it seems like that number, especially if you consider again the MIT study, 90 to 95% of companies, they're messing around with AI, but they don't really have any idea how to add value. So the odds are companies are making that decision, it's an expensive decision to let people go. So the odds of people are making that significant decision without actually having a plan in place seems doubtful. >> I saw that Mike Barry of the big short fame uh he released his or I don't know if it's come out of his 13F where he tweeted maybe I think he tweeted that something that I think I think Jim Chainus might have said something like this six months ago. I don't actually know where I got this idea from, but it's not something I've been aware of for a little while that if you look at the rate of capex, which is not then expensed, of course, it's depreciated. So, the lag is there's a little bit of lag when it gets recognized. And we're now at the point where the depreciation, amotization, whatever, it's going to run through the income statement. and the numbers are quite uh you know they're they're hard for them to overcome even in terms of revenue let alone in terms of so like we're just not paying back the the AI spend and you can already see it free cash flows falling off for a lot of these bigger companies they're very very expensive and at some point it starts running through the income statement so that's how you get sort of a normalization I don't I don't think it's going to I don't think it's going to collapse I don't think it's all over for those companies I think they're almost certainly bigger in 10 and 20 years time but I do think it's an interesting kind of data point. Do you have any >> just shift the useful life out another 10 years and that's not as big a deal. 50-year mortgages, not a big deal. Like this is just >> kick that can, baby. >> Extend and pretend everything can. That's the problem with the chips though, right? Like the useful life is so short. I think I saw some people who have been installing them in the centers and they say even 3 years is aggressive because they they run at such high heat. They seem to break down a little bit faster than people have been expecting. I it's hard to know how much is like FUD the fear uncertainty and doubt and how much is like a real take on these things. You got to I think at face value you got to accept that the useful life is as the companies are saying that it is but even then it doesn't the hurdle is too high for the revenue generation. They're going to be some diminition in profits anyway over the next few years. Do do you have a view Seth? Is that something that you're encountering as you're looking at companies? I have a I'm I'm really excited that you mentioned that because I think it's very pertinent. So Bur actually also he had a a post yesterday I believe and it um laid out the period of time or the the life expectancy for these infrastructure investments and the life expectancy has been growing. So if you track it from 2020 to to >> a lot of these companies the life expectancy has gone from 3 years to six years >> which means that as far as their income statements and the earnings are reporting at least according to him they might be 30% higher than they really are. So he's arguing that they are bas I don't know if this counts as fraud but certainly that they're playing >> aggressive accounting. >> There's some financial shenanigans going on. And what really backs that up exactly what you just mentioned, Tobias, although I'd say it's it's actually a little crazier, where these chips are improving in um capability so rapidly, at least what I've read, the the life expectancy is probably a year and a half to two years. Now, what you mentioned as far as the heat, that's a whole another thing. Uh and it's, you know, it'll be fine. And I'm sure that, you know, one other thing to think about is how many towns are going to be perfectly fine with turning waking up one morning to turn on their water and there's no water because a data center is uh sucking it up. I I find it hard to believe that that's going to be perfectly fine for everybody. Regardless, there's so many things that seem very unsustainable about all of this. Um, but the again it seems like especially according to what Bur said, he knows he clearly knows more about this than I do. There's what companies are doing seems I'm not unethical is probably not the right word, but there's definitely some tweaking of the numbers. Um, and that's what I I had someone the other day ask me what how this sort of all ends and and it's really just a realization at some point, right? It's it's slowly and then suddenly all at once, right? It's it's the realization by many that this isn't sustainable, that there are shenanigans going on, which it appears there very much are. Again, the life expectancy has according to their their um you know, income statements has doubled even though we know that it's actually shrinking, right? And that by saying it doubles, it has a very significant positive impact on earnings when we know there's actually a negative impact on earnings. It's crazy. Um so I I think you're right on. I think that uh it'll it'll be really interesting to see how this all plays out. >> It's entirely possible we go through like a a dot style um like we're just too far ahead of ourselves and we we crash. But the next 25 years like clearly the dot businesses have gone in directions that nobody we're so much we've done so much more than people I think even could have conceived in 2000 to get to this point. And I'm sure that AI will be the same. we've been using it for things that we cannot even conceive of now in 25 years. But that doesn't mean that in the interim that there's not a lot of volatility or that it all acrs to the companies like consumer surpluses are are a thing. It's entirely possible. It's a huge consumer surplus. But I will say that if we if the AI is going to consume all of that energy and fresh water, then we need nuclear because there's just no other way to generate that enough power and enough fresh water. Although Amazon has come out with a Andy Jazzy had a tweet today where he showed they had some innovation in the back end of the uh data centers where they figured out a way to cool the chips uh a little bit beyond me but they're getting cold directly on the chip and that separating the water away from it so it circulates it's it's quite water efficient. Sounds like a really impressive thing. >> I mean that'll be good but keep in mind how much money has already been dumped into data centers, right? So now we have to redo all of them to potentially provide that. Right. It's it's constantly evolving which again goes to your point that the life expectancy is getting shorter not longer because of innovation. Right. We're not at a point where there's a steady state. We're not at a point where we're not improving efficiency. Efficiency and innovation brings the current life expectancy down because of that trend. Um, I was at a uh a conference a few weeks ago and a gentleman was speaking that is very much in the know, like he's he's in the AI in the very thick of it. and he made a comment that I haven't heard anybody else really um focus on but it really stuck with me which was these let's say the biggest companies the mag seven companies in particular see AI as an existential crisis that's what he said >> which means life or death um if you are backed in a corner and you feel you're in life or death is there anything you're considering other than just purely survival. You will do anything to survive. And that if you actually take that perspective into account, then that begins to actually justify or help these silly numbers make sense. Because if these companies believe that it's either we either are all in or we lose and we're done, they're going to be allin in and profitability and and all these other factors don't matter. the only thing that matters is survival. Um, and so I just don't think any of these numbers for the most part make sense in the short term. And the problem is valuations are crazy. Valuations mean higher risk or more downside further to fall. And so it's it's a kind of a confluence of a number of factors that I wish people were paying more attention to. Um because it seems almost inevitable how this ends, but maybe I'm wrong. >> Uh on that cheery note, Seth, uh that's that's time. What if folks want to get in contact with you or follow along with what you're doing? What's the best way of doing it? >> Um feel free to email me at sethrunning oak.com. You can also check running oak.com, running oaketfs.com, and then u I'm begrudgingly I've begrudgingly been far more active on LinkedIn, so you can hit me up there as well. I' I'd love to talk to you or hear from anyone. >> Uh JT, any final words? >> Just uh >> embrace our AI overlords and >> I for one welcome and you AI overlords. Seth Cogwell running oak. Thank you very much everybody. We'll see you folks next week.