Investment Strategy: Tobias Carlile emphasizes the value of investing in small-cap stocks, which have been underperforming for over a decade but offer potential for significant returns as they are currently undervalued compared to large caps.
Market Dynamics: The discussion highlights the concentration in the market, with the top 10 companies in the S&P 500 accounting for a significant portion of returns, driven by massive investments in AI and technology.
Historical Comparisons: The current market situation is compared to the late 1990s tech bubble, with large caps trading at high premiums, suggesting a potential for mean reversion and opportunities in neglected sectors like small and mid-caps.
Sector Opportunities: Carlile identifies opportunities in sectors such as energy and homebuilders, which are currently undervalued and have potential for future growth as market conditions normalize.
Investment Philosophy: The focus is on finding companies with strong cash flows and management teams that are making strategic buybacks, which can provide a floor for stock prices and limit downside risk.
Economic Outlook: Despite current market challenges, Carlile maintains an optimistic long-term view, believing in the potential of technology and innovation to drive future growth and improve living standards globally.
Contrarian Perspective: The podcast underscores the importance of a contrarian investment approach, buying undervalued assets when they are out of favor, and being patient for the eventual market correction and recovery.
Transcript
[Music] Hello and welcome to the Stansbury Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and the Ferris Report. Today it's just little old me. Cory's off, so I'm going to talk to my old friend Tobias Carlile. Tobias runs a couple of funds that trade publicly that we'll talk about. He's a very well-informed value guy who's gonna have a lot to say on all kinds of things. So, let's do it right now. Let's talk with my old friend Toby Carile. Let's do it right now. Mr. Tobias Carile is in the house. Welcome back. >> Yeah, >> thank you. Good to see you. >> Good to see you, too. Um, as we were talking just before we hit the record button, it's been two years. Way too long. We need to have you on at least once a year and I think probably twice. >> Um, that's very kind. >> We're going to we're going to fix that. We're going to fix that. >> Um, >> well, it's been a little bit sad because, you know, I'm a small value guy and small value's been dying on the vine. So, I've been I've been trying to keep my head down >> and yet at the same time I I I hear you on returns. Okay, I hear you. But um on finding stuff that you can't find above, you know, whatever market cap you want to delineate, uh there there's plenty to find. Plenty to find. >> Yeah, >> I couldn't agree more. It's a very happy hunting ground at the moment. >> Yeah. I mean, >> yeah, >> I was going to say I'm I I characterize myself as small and midval, >> but my midvalue is now small, too. So, I'm I'm small cap across the board. My small is micro and my my mid is small. >> Right. So, without giving away too much, we want to we want to hide some secret sauce. But, um, as we record this, the day we're recording this, small caps are actually, uh, a couple hours ago when I looked, they were doing pretty well today. It was like somebody, some CTA somewhere was buying the Brussell 2000 or something. >> Fat fingered it. >> Yeah. Like for two days or something. It's It's like whoa. you know, on the chart it's likeip two days. So, who knows? Your time is coming. I'm convinced of that. >> Let's hope. Yeah, I I track that series pretty closely, as you can imagine, like on a daily basis. So, I can tell you that two days ago was the all-time low from the the peak in 2011. That's a very long way down. >> Wow. Peak in 2011, he said. Folks, did you catch that? It's 2025. >> Yeah. This is not an old recording. This is a >> This is 20 >> It's a 14 or 15 year underperformance of small against large. >> O yeah. >> Wow. Okay. Well, you know, and large like lately um the largest, the mega has actually rather than reverting to the mean, it's done the opposite in the past several. If you look at a chart like it's pulling away from the rest of the pack, the top 10, I think it was from the S&P 500 is pulling away. I mean, how >> the market's really narrowed down. And if you look at I look at you know you can take the of the 500 >> Mhm. >> 490 of them are basically flat since 2022 and it's 10 that are the beneficiaries of the AI capex spend >> and are accountable the whole return since then is accountable to them. >> That's right. >> And it's not it's not nothing. The return is not nothing. >> Right. It's extraordinary sums that are being invested in that AI capex. I talked about this a little bit. It's like $500 billion. >> Yep. >> Which is like that used to be quite a lot of money, but evidently not so much anymore. And it's not like I I characterized it as being something like the late 1990s when we were building cable. It's building a fiber optic cable. >> I'm glad you brought that up. >> Yeah. >> Because I the and but the difference is that fiber optic cable's got a useful life of like 25 years. >> Mhm. >> Whereas the GPUs have got a useful life of 3 to four years. So this is a >> right >> we're just going to spend like this all the time >> right now >> where it comes from. >> Yeah. Yeah, I mean the infrastructure around them maybe longer useful life but yeah um the thing is it is different there are similarities and differences like we all see the massive capex right that's obvious and as you say the useful life is different also though I wonder how like in in the in the late 90s that thing was always destined to crash and a lot of us talked about it a year or two or more before then because they were borrowing money and not making a dime. I mean, they were levered up to the sky and not making a penny. These guys are gushing cash flow like they make more free cash flow than any 10 companies ever have in the history of 10, you know, the top 10 of the S&P 500. I'm not just talking about the hyperscalers. Um, but you know, and they're the ones spending the hundreds of billions, but um, how I mean, they can keep this up. They're spending half of it. They're spending half of the cash flow on this. like it seems like they could keep that up for a while. >> It's I think that the only the only the only limit on it, the only feta on it is that you have to earn a reasonable return on that investment >> at some point, right? >> It's not clear how they're monetizing yet. I mean, I chat GPT, you get your $20 a month subscription to to one of the AIS. >> How or if they're monetizing? I mean, it's, you know, I I wouldn't be surprised to learn that nobody's really making any money off of this yet, >> right? I think that's the case. >> Yeah. So, but you understand what I'm saying though? Like I I believe me, you and I are, you know, we're we're birds of a feather and I'm a value guy and I'm skeptical about all this, but the maybe I'm just um you know, I'm succumbing as we all do in a bull market, right? We all succumb at the end. and and but but I look at it and I look at it and I think I I just feel like they can keep this up longer than World Common Global Crossing could ever have kept it up. >> That's certainly true. And I don't think these are scams. I don't think these are scams at all. These are real businesses and they're making lots of money. >> That's right. >> There isn't going to be any any you know WorldCom Klowski you know whatever >> whatever he did. There's some there's some talk around the edges that maybe Nvidia is financing some of the some of its customers. Um there's I saw a little rumor today that China makes up 40% of revenues because of the they buy the older chips through some of those uh countries that you know like Vietnam buys a lot of chips and then it's probably not Vietnam, it's probably a front for China, right? >> And at some point that gets cut off. I don't know what how true all of that stuff is. I just sort of raise it as a something worth considering if you're long. But the thing that really stands out to me when I look at the the market is that the large caps are trading now at a huge premium to mid and small. And that's historically unusual. From 2000 to 2020, small and mid traded at big Ford PE premium >> to large. And you have to go back to the late 1990s to see this sort of large PE premium in large uh sorry in yeah in large caps it's really the pandemic flipped it in the pandemic large took off small and mid have struggled since and I think that if the reason is it's not it's not hard to figure out why when you look at the earnings the earnings for large are going vertical right now whereas the earnings for small and mid have been mid is flat since 22 smalls are down so I think that excluding those top 10 companies, the other 490 and then the 400 mid and the 600 smalls all in the S&P universe >> um have been in a little recession since 22 I think and that might be working off some of the co stimulus. All of that demand got pulled forward and we've sort of right sizing and figuring out what's happening and as a result all of these companies are pretty reasonably valued. I like buying. You know, there's a contrarian aspect to being value. You got to buy these things when they're unloved and they get unloved because their earnings look terrible and the multiples compress. But if you're a full cycle investor and you can see, you know, these things mean reversion still exists, right? >> These things probably will recover again and then the PS are too cheap and I think they will do quite well. I don't know when the bottom is. >> Yeah. Gosh, that's my favorite old song you just sang. I I love it. I sing it all the time. It's It's >> I've been I've been picking the bottom for 14 years. >> Yeah, that's right. Some of us have been. Yeah. >> Oh, >> I feel pretty positive. I think that you know it's the this is always the problem for value guys, right? That you can see the opportunity, >> but you don't have any timing. There's no catalyst. And as soon as the catalyst becomes >> visible, >> the opportunity is gone. >> It's gone. Right. >> You got to buy before the catalyst, right? And so I like smalls and mids. Yeah, I think that their their trough earnings, trough cycle earnings. So I think you probably see some improvement in their earnings over the next few years and then their their pees will follow suit. I think it's a tale as old as time. I'm not concerned about it at all. I just think it's a matter two, three, five years. I'm I'm I'm sure we'll be back to normal. >> All right. elephant in the room is I wonder if you know what I'm gonna say. >> I don't >> passive. I think I saw it's like 60% now of of I think of flows maybe. So, you know, people basically mindlessly buying the S&P 500, which means at this point they're putting more than ever into the top 10, more than 40% at this point. Um, and that the source on that I think is um I think it might be Charlie Blo who's pretty good, right? Um, wow. So every, you know, every time you contribute to your 401k, 40% of your money goes into those 10 companies, those 10 that, you know, we think are going to mean revert to poor returns that we've been thinking that for years now. >> But I I I mean I just there's two things here. One is that that's that's Mike Green's thesis that passive um sort of sucks all of the oxygen out of the room for small and micro. >> Yep. >> I I agree that that phenomenon is occurring right now. I don't agree with his conclusion that it means you get a crackup boom and a crash. I mean that's that's what every market cycle looks like. So, >> but of course people invest in the thing that has been working, which has been >> the S&P 500 >> and the S&P 100. >> Yeah. >> Mega caps, mag 7, whatever you want to call it. >> That that makes everything else in the world international value, small, everything else looks bad compared to the S&P 500, which you can get for basis points now. So, it's a no-brainer that there's a whole lot of money flowing in that direction, but that's always the case. people always pile into the things that have been working and as soon as it breaks down everybody hits the panic button and goes the other way. I don't think that those mag 10 I mean they may have they may have like a a little stumble along the way. I don't think I think those businesses are pretty solid and they'll probably keep on doing fairly well >> but again in the late 1990s you know you would have had Microsoft uh GE like G has got its own problems. It had leverage and some >> earnings manipulation going on. But >> Exon Mobile, >> there were all of these big companies >> were trading were and they were trading at very high premiums, very high pees. And from 2000 to 2015, they continued to be excellent businesses. Microsoft continued to be an excellent business. Walmart continued to be an excellent business, but because the stock prices got too far ahead of the businesses, the stock prices were flat for 15 years. In 2015, I was buying Walmart leaps and worried that the LEAPS weren't going to and a LEAP is a two-year contract to to buy these things. >> And I was buying them basically at the market. >> And there was no volatility because they'd done nothing for so long. So, the calls were very cheap. And so I I just I'm just using that as an illustration of like how how unloved they were just 10 years ago, the large caps. >> And so I think that it that that could easily happen again where we have a decade or more of large caps still doing very well as businesses, just the stock prices don't perform as well because they get too far ahead of themselves. And in that period of time, people will look around for better opportunities. >> That's the next song. My favorite album. It's inevitable. It's happened countless times before. >> Yes, it has. And every time at this moment, people talk about it like everything's different now and it'll never happen again. >> I post it on my Twitter. I post these charts on my Twitter just saying, "Look how many times this has happened before." And there's inevitably someone saying, you know, I think people are a little bit self-aware. They're like, "I hate saying that it's different this time, but it is different this time." But, you know, railways were transformative. The internet was transformative. All of these things, the telegraph was transformative, the steam engine was transform, all of these things were transformative >> and they had a similar sort of impact, a lot of capital flowed towards those opportunities. They traded a very high pees. We overestimated how quickly really that would change. Like the internet's the most recent example. The dotcom 1.0 there was a lot of hype and a lot of interest, but it didn't really deliver on it. It took 20 years to deliver on the promise. And probably the same thing happens with AI. We've built it out. We've got the LLM as probably as close on current technology as we can to like as smart as they're going to get. From here on in, it's going to be the business of integrating it into the rest of business and the economy, which is a much harder, longer >> process, 15 or 20 years. >> I'm optimistic, but takes a while. >> Yeah, it does. And another aspect of that that people like to talk about every time is everybody's going to be put out of work. No, but this time we really mean it. You know, like we, you know, pin making machines, weaving machinery. >> That's where I was going to get to. >> Yeah. I mean, right. Pin making machines, weaving machines, you know, all of it. All of it. And uh >> since the dawn of the industrial revolution, there have been people smashing the weaving machines. >> That's right. because that was putting people out of business back then, like taking away jobs back then. >> But as Paul Andre, he's the um the Netscape Navigator now VC a uh a >> a 16Z. Yeah. >> A6Z. Thank you. >> Yeah. >> And uh yeah, he says all of these thousands, hundreds and thousands of different types of jobs were created by every one of these innovations. That's what people are ignoring now. There are going to be lots of different jobs that we can't possibly conceive of just as there are jobs in the last few years that we couldn't have conceived of 10 years ago. >> Right? And look at look at the internet. Look at um all of the people who seem to possess very little in the way of a working brain cell and they are online selling you perfume and whatever else. I mean, they're making an awesome living, some of them, and you know, there are many more in existence than that. Um, it it it's nothing like what what is feared. The fear is always the first thing out of the gate, >> right? >> You know, first out of the gate, oh, it's going to kill jobs, you know, and it doesn't happen that way. every time we take a leap forward like it benefits all the people it was purported to you know hurt the most >> the thing the things that and it's funny because the things that hurt those people are the things everybody's sure is going to benefit you know like the welfare state no problem we're taking care of people on the lower end well we're also supplanting heads of household with the state >> and giving a huge incentive to do nothing and be unproductive and etc etc. I mean you I don't want to get into all that but they it's always the opposite. It's always the big expectations big promises. We know how to we know how to engineer society. This is going to work. We know it and it doesn't work. And then on the other end it's this thing's new. We're not sure what we can do with it. Ah we're terrified it's going to ruin our lives. I mean, >> I couldn't agree. I couldn't agree more that, you know, there's a podcast engineer on this on this call that, you know, there wouldn't have been a podcast engineer 10 years ago. You know, this is a this this is its own little business, the podcast and previously existed. And I I just think that there's just because you can't imagine how the techn is going to be used to help somebody else doesn't mean it's not going to help somebody else. Like clearly it does. >> I'm exc I'm I'm incredibly excited about the prospects for AI in my own business and my kids it will just be it'll be native to them. They grow up with it >> using it all the time and >> to to them it's just another tool. it is. And and the unknown people don't appreciate the the the fact that you don't know the future and you don't know what's going to happen and that that unknowableness is necessary, right? Because if we knew the future and we could design a society with, you know, bureaucracy, you know, from the top down, we wouldn't we wouldn't need freedom, right? We need freedom. We need political freedom as much as possible. you know to maximize the benefits to everyone, right? Because all the because things happen by people accidentally sort of bumping into each other and ideas that come from out of nowhere and we just we don't know how good it's going to be is the truth. We think we don't know how bad it's g we think we know how bad it's going to be actually but the truth is we just don't know how good it's going to be. This is a the more I read the people like you know Hayek is the one really the more I appreciate this that we can't design society we can't engineer the future we have to allow it to come to us >> one of the reasons that I love America and I live in America is that America really you know America is imperfect in many ways and it could be more free but compared to >> yes >> you know even even places that are like liberal western democracies in in Europe the UK like that. What goes on there terrifies me. All of that sort of censorship of >> Yeah. >> Um people just expressing like pretty anodine benign beliefs. Getting a visit from the police. That's that's online. That's you know that sort of stuff is crazy. >> I hate to say it but not to mention your home country >> and Australia too. >> Little little sketchy there too. >> I couldn't agree more. It's it's it's uh it's a little bit sad. It is sad. which is not to say I I mean I def I agree with your earlier statement. America is not perfect. I was like far from it and and you know we're we're under assault by our government in a similar way but it seems like they're a step ahead of us in those other places. >> America has a bill of rights which makes it at least you have one little thing to fight back with. you can get yourself to the Supreme Court and you can argue that it's a and a constitution, but the Bill of Rights uh I think has the most important part gives you the last like little bit of protection against an over uh overreaching federal government. >> Yeah, we have something else too. 120 guns for every 120 guns for everyund population and 15,000 hunting licenses. >> Yeah. God bless America. Yeehaw. >> Yeah. I grew I grew up in the country. I grew up in the country, so I grew up firing guns, so they don't they don't bother me too much, but I get that there are a lot of people who are a little bit squeamish about them. >> Sure. Sure. >> Yeah. I mean, they're they're deadly, so you know, it's nothing to nothing to be careless with. Um, maybe we should talk about investing, though. >> Let's do that. So, uh, just let's since it's been two years, let's remind folks, um, about exactly what you do and how you do it. Let's do that for a little bit. >> I run two funds. Um, they're both ETFs. Um, one is the Midcap ETF, which is the ticker is Zigg. It's the Acquirers ETF. And then I run deep, which is a small and micro. It's the smallest of the small. you really they're really small uninvestable companies which may or may not be appropriate for an ETF but we'll find out if they ever get some flows. Zigg and Deep are the two funds that I run and I look for the acquirer in the name is based on a book that I wrote called the acquirer's multiple and the thesis is basically that you can find a financial value for any company which is basically what it's worth in a negotiated transaction and I say because I was a corporate lawyer and I worked in private equity and transactions from 2000 to 2008 that um the private equity valuations are based on operating income on one hand which is uh a more full version of the the earnings. It includes interest and tax and other things that are more discretionary that depend on the capital structure. And on the other side, there's enterprise value, which is a little bit more, which is the price, but that's it's market capitalization plus debt minus cash plus anything else that's like a a minority interest, uh, preferred stock, anything that an acquirer would have to take on. >> So, I look at that as a more full, it's like a more it's a souped-up PE really, and it just includes all of the things that an acquirer would consider. And so that's really tells you how expensive something is. And then you want to see what are you getting for how expensive something is. And so you look at the return on assets, just its ability to generate operating income on assets, you know, controlling for the leverage. So I'm scanning the entire universe of stocks >> ranking them all on this basis and then finding the ones that are doing the things that because I cannot get control of these things and do anything about it like an activist or a private equity firm could then I want uh a management team that's behaving as I would behave if I was in control of one of these things which is to say that if they're undervalued and they're generating lots of free cash flow they should be buying back stock and so my portfolio tends to be characterized by these businesses that generate lots of operating income trade at a reasonably cheap valuation against the total enterprise value which includes all of the debt and all these other things not just looking at the market capitalization and then I want a management team that's doing sensible things and it's either I like acquisitions but acquisitions done at a sensible price and I want buybacks done at a cheap price. So my portfolio is filled with these companies where one example is um I don't know if you know uh Bed Bath uh I'm not saying Bed Bath. I'm having a little having a little brain explosion at the moment. The U Bath and Body Works. >> Bath and Body Works. Yep. I know. We know it. We Yeah, >> we took a run at it. >> It's one of the stocks that I hold. >> Okay. I I like Bath and Body Works because spun out of Brands um not that long ago. They generate pretty good returns on on assets. Um if you walk into a mall and malls around here are pretty dead. >> Yeah. >> And I I was doing a little I just wanted to see I'm not This is not the way I invest, but I wanted to just go and see. So I was there with my son. We walked around and I found a Bath & Body Works and I walked in and the few things that really stand out. It's not a huge store. It's got a fairly small footprint, >> but it was crammed with people. There were more people in the Bath and Body Works than there were in the rest of the entire mall. >> And it's basically they sell fragrance, which sounds like it's not obviously not the kind of thing that my son and I would ordinarily go and have a look at, but we we walk past and it was full of people. >> Yeah, it is. >> And they're doing a $500 million buyback right now. It's a $5 billion market cap, $750 million in free cash flow, doing a $500 million buyback. These are the kind of things that to me, >> yeah, >> that's that's a sort of situation that I don't I can't see the future for retail and I can't see the future for this kind of company. But all of those things together tell me that management thinks it's cheap. I think it's cheap. They're buying back stock. And this is what creates flaws for these sort of businesses. your downside is reasonably limited because management's doing the right thing. I have a portfolio filled with these. We've got some energy >> uh home builders that I think have been smashed to smithetheriness. Now, I know that homes are home home house building is a funny business. Yeah. >> And >> it is >> one of the reasons that you should be concerned is that clearly homes are unaffordable for for the median home price is unaffordable to 80% right of Americans. And that's a problem. that is >> and the solution is going going to be a combination of lower interest rates and house prices coming down. That's not a disaster for the home builders because they make their money on transaction volume. So they want lots of houses being sold rather than lots of houses being sold at these premium prices, >> right? >> So when the I think that and all of these all of the home building stocks are off 40 to 50%. >> Yeah. >> From their peaks. Yeah. >> And if the if the the um you know the prices come down, they'll still make plenty of margin. from here, right? >> They'll make that that's that's what I think too. They'll make lots of margin >> from we had a similar scenario in 2001 where you know lumber got very expensive. Home bu home builders sort of stopped doing business for a little bit there >> and they their stock prices were similarly beaten up and then they had a very good run and I think a similar thing happens around here. I think it's I think it's already started honestly. It's been the last month or so home bills have sort of come back to life. I I for you know for the rest of the US and for for younger people in the US I really do hope that home prices come down but it certainly seems to me that we're getting close to that kind of scenario. There's a big buildup in inventory. >> Yep. >> It is starting to build up. That's right. People want to sell for longer. >> Yeah. >> Yeah. >> They don't they don't want to and they'll do it. you know, they'll, you know, if they list for 900 and they're not getting it, they'll sell it for, you know, eight or seven or whatever they need to get. As I don't mean to be rude while you're talking, but I I you can see I've been doing something here. What I'm doing is I'm running the Bloomberg screen of um BV over EIT for >> Yeah. >> Um I didn't specify market cap. I specified US traded, US doiciled. Okay. >> Yeah. Um the the universe is 144 names and I'm happy to see among the top 10 or so uh Devon Energy which >> Oh yeah, >> I've recommended. >> Um >> it's one I hold too. >> Yeah, really great well-run energy company. >> Actually, I think that's one of my that's one of my I think that's one of the best that's one of my favorite positions. I It's probably my favorite position out of all of the 130 that I hold. >> No kidding. What a coincidence. It's one it's it's um I have it in a portfolio of nine names and you've got to spend like a whole bunch more to get my newsletter um at at what they call the premier level so that you can get these extra nine names and that's one of them. It's it's brilliant. But but >> yeah, I think it's a superbly well-run energy company. >> And uh the oil price is currently trading as cheaply as it has been in the last 25 years. The only two times that it's been cheaper than where it is now is 2000 and 2020. >> Mhm. >> And those are famous dates. So I think that >> Yeah. >> I I think energy I don't know when energy turns around. This is the same old problem that value investors always have. I don't know where the bottom is and I don't know when it turns around, but the values here are pretty good. And so >> you might lose some on a marktomarket basis between now and the resolution of this problem. But I think that even the positions that you're putting on now will work out uh over a three to five year horizon. >> Yeah. Love it. Love keep singing it, baby. Love it. Um there's actually quite just you know appropo of nothing just glancing at the screen here. Um there are like the top name. Let's see if I go. Okay. the the sorry the cheapest name is something called is actually something called circle internet group because that's a new new company it just IPOed because it's negative 46 times I didn't specify a positive EV over eBay um I think they probably have a bunch of cash and something called Eventbrite but then you get into you know something called well and these are all tiny market caps too so if you go descending on the market cap You get General Motors, Ford, Synchry Financial, you know, Ally Financial, Perian, Borg, Warner, and lots of energy. Expand, Devon, Couter, Perian, APA, you know, it the the mar the the screen is trying to tell us something here. >> Yeah, I've got a lot of energy. I have I have some I'm up to my risk limits on the energy. I I won't put more than 20% of the fund into any industry. >> Um just because, you know, you could be it could be for-profit education. I don't think energy is for-profit education, but that was, you know, when the Obama administration decided that for that people were spending too much on on useless college degrees that they wiped out all the for-profit education. I think they missed the the main the main villains in that story, but they've they've got they got a lot of the uh they got the for-profit guys at least. I think I think an interesting an interesting stat is um Buffett is lagging the S&P 500 >> by uh the widest margin since and the only the only ones that have been wider are 2020, 2009 and 2000 >> which again they're all famous dates like obviously there's him stepping down has created some selling pressure on that stock but >> sure >> I I think that >> all of the indicators that I see suggest we're in late 1990s sort of bubbish, you know, market for >> large growth and the things that are left behind are small value and I think that that's where the opportunity lies probably for a decade or so. And so I'm I'm incredibly excited about uh the opportunities that we're seeing right now. I think it's a good time to be a small value investor. >> Yeah, man. Yeah, I agree. I I own um you know, of the individual stocks that I own, I have just a small portfolio that I actually pay a lot of attention to and active advantage because I you know, I just want it that way. And um aside from leap puts on index ETFs, um that's the smallest part obviously. I hope that's obvious. Uh it's it's really natural resources and and uh and treasury bills is really what's in there. You know, those are the >> natural resources have been left behind. >> Yep. >> As they were in the late 1990s as well. >> Yeah. I mean, talk about, you know, Yeah. That's that's another chart that's got some suspicious dates on it, right? You know, like, wow. Okay. Every time people get really excited about some new technology, they stop paying attention to the stuff that is that they are surrounded with unless they're out in the woods. And even then, if they dig far enough, they'll, you know, it's like you can't get away from the need for everything that is mined and extracted from the earth um and you know, then processed, manufactured, etc. Like you can't escape it. It's there's no way. Like there's a a book I like to uh cite called um I think so how the world really works by Vaklav Smith. >> Yeah. Yeah. >> Yeah man. And he cites cement, plastics, um uh steel and ammonia as the four ingredients of every modern city. >> And it's true like you can't get away from those things. And even and the plastics of course come from petroleum. So like you can't get away from the extractive nature of things. And um yet here we are again, you know. >> Well, well, under under under Biden, remember, there was that the stimulus under Biden was the inflation reduction act, which was really a a green >> uh infrastructure building. >> Yeah. >> Uh stimulus and the concern like at that point in time, coal was trading very cheaply, which is just crazy because if you think about how you go and build a whole lot of green infrastructure, you need a whole lot of steel. And the way you make steel is you get a whole lot of coal and you burn it really really hot. >> Y >> and so all the coal mines at that time are trading very very cheaply. I think they're still reasonably cheap but they're not as screamingly cheap as they were then. >> Right. They're four they're three four 5x and still cheap like 10 times or something like cheap and gushing cash >> just gushing it you know. It's just it's like it's like the the gold miners, you know, they're cheaper at 3,300 per ounce than they were, you know, whatever 50 or 100% ago at whatever it was 2,000, just call it an ounce. >> What What do you The gold miners I I haven't I don't hold any gold miners and I haven't um I haven't seen them in my screens yet. So, I'm I'm sort of curious to know what why do you think the gold equities haven't kept up with the gold price? You know, my first answer to all such questions is I don't know, >> right? No, I'm serious. And I think it's important to do that because like just this morning, I was on Twitter and and uh somebody put up that chart of the Russell 2000 I mentioned with the small cap screaming for the past two days. And they and the the next post was, "Why do you think that's happening?" And I and I immediately said, "Who knows? If you're all honest, you don't know." And you don't, >> you know, especially two especially a two-day move, right? >> As far as not not keeping up with um with gold, um you know, smarter people than me have thoughts about this, but I I don't know that it's all that important to know it. I just know that opportunities are made on such divergences >> and Yeah. and that I don't think we're I think we're gonna keep mining gold and I think we're going to keep using it and I think it's I think at 3,300 an ounce it's very obvious that people are going to keep holding it as a very very important store of value. >> I think it's amazing that gold has now outperformed the S&P 500 I think since 2000 or something is >> yeah this century. That's right. >> It's amazing. It's incredible. It's >> it's it's funny. I remember that Buffett letter that he wrote, I forget the date, but like the 70s, something like that, where he said, you know, for all of the blood, sweat, and tears that I've poured into this portfolio and the people working in this, the yellow rock has beaten me for, you know, whatever it is since inception or something like that. >> And then sometime later, he, you know, he talked about how silly it was to pull the stuff out of the ground and pile it up over here and pull it out of the ground over here, pile it up over here. But there's obviously a lot more to it than that. I mean, it's really um he should just admit that he missed it and he does not understand gold. I don't expect him to know everything. I don't expect him to get everything right, but I expect him to know when he's really wrong about something, you know. >> Do you think do you think it was something like his old man was a, you know, libertarian uh hard money >> Oh, sure. >> guy. And do you think that that's the maybe there's a little >> there's something psychological going on there? >> Could be. Could be. I don't, you know, Buffett's um he's a he's inscrutable. Who knows? >> Truly. >> Um but >> I got another good I've got another good data point for you. Um >> Russell 2000 hedge fund shorts >> were as high a few days ago over the weekend when I checked it as they were in 2021 at the peak. >> Oh, >> so hedge funds are as short the Russell 2000 >> as November 2021. Yeah, >> as they were at 2021 at the peak. >> All right. >> So, I don't I don't really like timing tools so much. I don't use any timing tools. I just sort of collect these data points to share on podcast. It's not part of my investment process. But I think it's an interesting data point because I think that you want to be fading hedge fund concentration. The hedge funds are all sort of performance chasers and so they will all pile into a trade right before it stops working. >> Yeah. They're Yeah, that's right. >> To me, that says hedge fund long is the is the place to be, >> right? That's a that's actually a good data point. I I like those data points and I agree it may not necessarily be about timing, but is certainly about sentiment and it's certainly a decent way to look for the crowded trade, right? There's there's no there's no, you know, there's looking for the crowded trade versus the uncrowded. Those are good things to look for. I I agree. It's not about timing. It's about knowing the state of things and and that's a great way to do it. I mean, you know, the the um commitments to traders looking at that whole thing is kind of interesting. It can be very interesting, right? Just because you want to know what everybody wants to buy right now and what everybody seems to want to sell right now. So, I >> I got another good data point for you, Dan. I picked it up from one of my favorite Twitter accounts, D Ferris 1961. Uh >> oh. number of listed companies per million people in the US trough in 1979 which was the death of equities cover and peaked in 1996 which was irrational exuberance. >> Yeah. >> And we're back now to where we were in 1979 getting close. >> Yep. So, you know, by that it would suggest uh that it's time to get um it would suggest that it's time to get bullish maybe, but it also, you know, there's also the issue of concentration that we discussed. I don't think people I don't know the I don't know the statistic, but I I I know that it wasn't um 40%. The top 10 of the S&P 500 weren't 40% in 1979. That much I know and I would be surprised if it was 20 or or much more than that. >> I think Nvidia has set a record at 8%. For a single stock, the single stock concentration has been sort of 6% previously. So I don't know if >> 8% is that much bigger and that maybe deserved. They seem to have done very very well. But >> the performance for the number one stock after it becomes the number one stock hasn't been great historically. Med Faber had some good research on that. >> Right. >> I'm glad you used the word deserved because that reminds me of something that I wanted to say earlier that I wanted to run by you, which is um you know the dotcom bubble and its aftermath speak for themselves, right? They speak for themselves. But I think what's also been noticed, I've noticed it, others have noticed it. I'm sure you have too. Um, the market was basically right, I mean, it took 20 years to, you know, well, it took the NASDAQ till 2015 to make a new high, but but it, you know, it took 15 or 20 years for it to all sort of work out the way everybody expected it to at the peak in, you know, 1999, early 2000. But they were right. And if you'd bought like Amazon at the top at the top and held it until today, you'd have made tons of money, you know. So, um, of course, if you'd have bought Cisco at the top, you'd still be underwater, right? You can't I mean, you know, >> Cisco's been doing better recently, though. >> Yeah. Better recent. Yes. >> It got cheap a few years ago. >> I think >> the there was a study done by I think it was Jeremy Seagull. He looked at the Nifty50 >> Mhm. >> stocks. >> Yeah. I know what you're going to say. This is good. >> And the Nifty50 did have like have eventually altogether how they have collectively outperformed or they've they've earned about a market return since then which is >> which is pretty amazing given how uh expensive they were at that time. >> The problem is that and and you know it's probably true also of the large caps from the late 1990s, Microsoft and Walmart and Yep. >> I don't know if Costco qualified at that time but like you could probably take that list and they probably all done pretty well. Mhm. >> Uh I I do think that the current crop of businesses are are similarly they're very very good businesses. >> The problem is that you get very very good businesses at the absolute best time of the cycle and then you project that earnings growth forward into the future and you overestimate how well these things are going to do in the short to medium term. So they get too expensive in the short to medium term. >> And it's not so much that their business stumbles. It's just that the valuation has departed from all rationality and has to come back to earth at some point. And that process is a long slow process. >> It's the That's right. It's the disconnect between that massive optimistic expectation baked into that massive PE, that massive price versus what actually plays out. Rob Arnett from Research Affiliates wrote about top dogs. I've cited it many times because every 10 years the top dogs are different and the you know every now and then you find an unusual one that hangs around in the top 10 biggest market cap companies those are the top dogs and and you know like a GE hung around for a while and Microsoft has hung around for a while so you know it's it's not perfect but it's pretty much pretty much right mostly right overwhelmingly right in fact you know so >> and there's a there's a little sampling bias this little error there too. You have to be careful of um because we look back with the benefit of hindsight to see the ones that have survived and in the moment I don't know if all of the Mag 7, you know, I think maybe Tesla is the weakest of the Mag 7. Tesla's certainly got some very real problems at the moment that, you know, people don't like the brand because it's associated with Musk who's become political. >> Um internationally it doesn't do very well because there the Chinese EVs are better and cheaper. And the only thing that keeps it sort of on foot in the states is that we've prevented any of those Chinese EVs from competing here. I went to Shanghai in March >> and walked a Huawei um showroom and I had a look at their SUV and the sedan and they're both like gorgeous leather interior screens everywhere. >> Charge in 15 minutes. They say the charge is going to be coming down to 5 minutes. >> Um like really stunning looking vehicles. Yeah. And they're $35,000 US. >> And we can't buy one because we live here, >> right? But the rest of the world can like and I was in I was in Santiago, Chile, >> uh, less than a month ago. And there every single car on the road is Chinese. Basically, there's a lot of Chinese cars around the rest of the world, just not in the States. So your your picture of what the EV market looks like in the states is skewed by the fact that these very dominant BYD >> uh Great War all these other car companies aren't here. All you see is the is the Tesla and the Rivians and I I live in a place where there are lots of there were people have owned like Teslas are like Corollas here. Every second car is a Tesla. But as soon as the Rivian got released, the people who were, you know, novelty seeking and wanted to show off got the the Rivians >> and then the Cyber Truck, there are bloody Cyber Trucks all over this hill and fluorescent yellow and fluorescent orange and black and like all of these people trying to like really stand out. >> Yeah. >> But I've noticed that there's there aren't a lot of the new Teslas. People have substituted the new Teslas for the Rivians because I guess there's some I live in a blue state in a blue area and a blue state. So it's nobody wants that Musk association. My wife drove our Tesla down to Santa Monica and got a this car supports fascism sticker put on the window. So there's a fair bit of push back to to Tesla in this place. >> Yeah. Yeah. That the protesting makes no sense to me. and you know the bomb the throwing Molotov cocktails at dealerships and all that stuff. It's just and and putting the sticker on. It makes absolutely no sense whatsoever. If people thought about what they were doing, they go, "Oh, wait a minute." You know, they say, "Well, wait a minute. If I believe all this other stuff, I can't do that to a Tesla." But, you know, >> it's silly behavior, but there's an enormous amount of social pressure to, you know, to not have one in certain parts of the country. It's just toxic for Mask because that's really the lifeblood of that business. Like they're doing a lot of other stuff there, but it's the >> the cars that >> that make the money and I think that >> they've got some real competition and there's some distaste for that brand. Real real competition. >> A lot of debt. >> That's right. Real competition. All the other stuff doesn't really make any money. And people like Dan Ies on Wall Street, I think he's like Wed Bush. I wrote about this recently. I just couldn't believe it. He says all the other stuff is worth a hundred times earnings and that they're gonna, you know, the stock's going to be whatever he said 500 bucks at some point soon. I was just like, no, no, that's that's not how it works. That's how it works maybe in the short term sometimes, but you know, there certainly isn't going to be any beat and raise going on anytime soon, right? Tesla's expensive. Like Tesla's Tesla trades at 150 200 times earnings and the earnings are basically non-existent. It's not like there's any switch that they can turn to like immediately become profitable. They're sort of at that break even level. And unfortunately, like that's the nature of these sort like metal bending car companies are they don't make a lot of money. >> Mhm. >> There's a lot of infrastructure. There's a lot of assets in there to make not a lot of money. I'm, you know, I'm more worried about the other car companies in the States than I am Tesla. But Tesla's that the other car companies are small caps now. They're not in the they're not in the MAG 7. Max 7's got to perform or it falls out and then I think it's it's a long way down for Tesla. >> Well, that's another that's a song I've sung before, too. I I'm I'm shocked that it's I'm shocked that it's where it is. I'm shocked that it's still, you know, trading for where it is, but we could probably name, you know, a hundred companies off the top of our heads that we could say the exact same thing about. I I have been shocked where Tesla is, too. But if you look at the performance of Tesla over the last five years, like they had a very they had a huge ramp in 2020. >> Mh. >> And by the end of 2020, they were trading roughly where they are now. And so it's really gone nowhere for 5 years. And I think that that's bad news for these sort of stocks where really it's a there's there's got to be a lot of excitement in these stocks. And if there's not a lot of excitement, then people move on and they sort of start trading more like what they're worth rather than all of this like blue sky that's built into them. There are a lot there are lots of companies like this that have that big blue sky with like they're really not delivering on the promise on a financial basis. They're just they're saying, "Hey, we got robots, we've got >> satellites, we've got all this other stuff and it's all going to be super valuable at some point." But >> there's no business Robo taxis. >> Yeah, robo taxis. >> Robo taxis have been coming since 2020. Like, >> yeah. >> And and you know it's worth what whatever he made that statement about it being worth trillions or something. I forget exactly what it was. I thought, man, >> you are >> Kathy Wood at ARC said the whole thing was like she I think she put a $6 trillion valuation. >> Yeah. Yeah. Yeah. Yeah. >> Yeah. And my my my co-host on the podcast, Jake Taylor, he went and had a look at the amount of money spent globally on transportation in any given year. And it was like it was nowhere near that amount. >> Yeah. I called her I think I called her what did I call it? I called her the Gerald sigh of the modern era once, you know. >> Well, that's that's that may not be unfair. to be she has recovered pretty well in this little whatever this is like I there's this 2021 echo boom going on right now which is >> all of the like cryptos back >> uh not the NFTts so much but >> that you know people seem to be able to launch these coins as they call them. Yeah, >> they're just shitcoins everywhere. Fatcoin all this sort of silly stuff. >> Yeah. I mean, I went >> you go on to like coinarketcap.com and there's like I I forget what the number is, but I was like, "What? I thought there was like a few thousand cryptos and it was some number like 10,000 or 100,000, something crazy." Um, I could pull it up, I guess, if I wanted to, but but I don't need to. It's It's an insane number. I mean, who knows of the existence of all these things? Like, who buys them? I don't understand how this Yeah, I don't understand how this works at all. Obviously, >> I think the meme stock have sort of largely gone away because there they've all moved into the crypto because the it's unregulated. So, it's not like you have to do it. It's not a security. So, it's not governed by the Securities and Exchange Act. So, therefore, it doesn't have to follow the IPO rules and it doesn't have to much easier just to spin them up. You can get a little bit of software that will spin it up for you and you can just launch one every 15 minutes if you want. just stick a name on it and see see what see what sticks like Fatcoin evidently that was the that got a lot of people's attention and did very well at one point their Fatcoin had a bigger market cap than the entire Russell 2000 ETF right >> IWM >> so on coinarketcap.com it tells you the number of exchanges 840 the market cap of the whole thing 4.1 trillion >> and it says cryptos like the Number of cryptocurrencies tracked by coinarket.com 19.45 million. >> Wow. >> It's just crazy, right? That's crazy. Like I mean look to me Bitcoin is actually really cool. I think it's cool. I do because it's um you know it's competition for you know it's it's potentially valuable. It's competition for currencies. Maybe it's some kind of new payment system. We don't really know yet. I don't, you know, I think it's worth a speculation though, a small one, just to see. It could be a 100x amazing thing even from here. Who knows? Who knows? But 19 million, I mean, you know, I don't know, maybe that's just the way it goes. You get one valuable thing and 19 and a half million unvaluable ones. >> Well, I think that's where all the speculation has gone this time around. I think that the the stock market is pretty well sorted. Like the better companies are attracting better valuations and the worst companies attract worse valuations. It's just that the spread I think is too great. They're not the better companies aren't that much better and the worst companies aren't that much work worse. And this business is a handicapping business. You you can take the second horse if you can get better odds than the first horse at worse odds. >> And that's how you make money. You want to be a handicapper rather than picking the best horse. if you have to overpay for the best horse. >> Now, that that point of view, that philosophy hasn't really worked since 2011, but over the very long run, when I look back with my quant hat on, uh, you know, small relative to large has outperformed by 20 times going back to 1926. And that's an extraordinary outperformance. Since 2011, it's underperformed by about 75%. >> So, you've got $25 when the guys who invested in the growth have got $100. But I think that the the points in time where we've seen this sort of level of under this is this is unprecedented, this level of underperformance, I should say, but where we've seen underperformance historically, it's always been around these notorious bubble peaks. 2000 2009 at the bottom. Um, and then you have to go back to ' 66 was an electronics boom was when trronics sort of came in. And then, you know, you go back, there are about six of these in the data going back to 1926. And every single one of them is a famous boom time peak. And then once the bubble sort of worked its way through the system, it went back to being the way that it always is where small and micro and mid, if you pay a reasonable price, you get a pretty good return out of those things because they grow earnings faster over the long run. They have grown earnings faster. So it's the place to be as ugly as it looks right now. >> Yeah, because it's ugly in in large part. All right, man. We have actually been talking for quite a while here and it's time for our final question. I'm sorry to say. I feel like I could do this for another two hours. And maybe someday we will. I I think um I I don't know. I like maybe I'd want too badly to be the Joe Rogan of finance, but I there's >> something about those long formats is just you just can go so much deeper and you're someone that we can do that with >> um very well. But anyway, so let's do the final question. It's always a little bit of fun um if not a lot. Same question for every guest, no matter what the topic, even if it's non-financial. If you've already said the answer, feel free to repeat it. And the final question is for our listeners benefit. If you could just leave them with one takeaway, if you could leave our listener with one thought today, what would you like it to be? >> It could be anything. I've had people say, "Go outside and breathe fresh air and get some, you know, all kinds of stuff." >> Yeah, that's a good Okay, this is I haven't really formulated it, but I I my thought is that uh you should be optimistic about the future. I think that we whatever it it's easy to get to see all of the um the negativity out there globally and domestically and become pessimistic about it. I think that regardless of the accuracy of your predictions, you should always be optimistic that they're going to work out because even if uh things don't work out, you're still better off being an optimist in that scenario because the optimists are the ones who are going to keep on pushing forward and like trying to solve the problem. And that's the best mindset to be in whether it works out or not. So I I'm forever an optimist. I got kids. I think they should be optimistic. think I'm optimistic about the US. I'm optimistic about the globe. I'm optimistic about AI, technology, value, small value. I think it all works out. I think there's enough good people in the world, smart people working on good stuff. We're standing at the absolute pinnacle of civilization. I think in 25 years time, we'll look back and it'll be, you know, it'll be a valley relative to where we are then and another 25 years after that. So that that's my that's my message. be an optimist because it's the best way to be and because it's probably what's going to happen anyway. It's going to work out. >> That's an awesome message. Thank you for that and thanks for being here as always. I promise you you will be invited back sooner than two years next time. >> Thanks so much for having me, Dan. I love chatting to you. It's always a good time. >> It It is. Uh and we'll we'll have it sooner again, as I said, rather than later. Thanks, man. >> My pleasure. Opinions expressed on this program are solely those of the contributor and do not necessarily reflect the opinions of Stanbury Research, its parent company, or affiliates.
Small Caps Are the Smart Contrarian Play Today
Summary
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[Music] Hello and welcome to the Stansbury Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and the Ferris Report. Today it's just little old me. Cory's off, so I'm going to talk to my old friend Tobias Carlile. Tobias runs a couple of funds that trade publicly that we'll talk about. He's a very well-informed value guy who's gonna have a lot to say on all kinds of things. So, let's do it right now. Let's talk with my old friend Toby Carile. Let's do it right now. Mr. Tobias Carile is in the house. Welcome back. >> Yeah, >> thank you. Good to see you. >> Good to see you, too. Um, as we were talking just before we hit the record button, it's been two years. Way too long. We need to have you on at least once a year and I think probably twice. >> Um, that's very kind. >> We're going to we're going to fix that. We're going to fix that. >> Um, >> well, it's been a little bit sad because, you know, I'm a small value guy and small value's been dying on the vine. So, I've been I've been trying to keep my head down >> and yet at the same time I I I hear you on returns. Okay, I hear you. But um on finding stuff that you can't find above, you know, whatever market cap you want to delineate, uh there there's plenty to find. Plenty to find. >> Yeah, >> I couldn't agree more. It's a very happy hunting ground at the moment. >> Yeah. I mean, >> yeah, >> I was going to say I'm I I characterize myself as small and midval, >> but my midvalue is now small, too. So, I'm I'm small cap across the board. My small is micro and my my mid is small. >> Right. So, without giving away too much, we want to we want to hide some secret sauce. But, um, as we record this, the day we're recording this, small caps are actually, uh, a couple hours ago when I looked, they were doing pretty well today. It was like somebody, some CTA somewhere was buying the Brussell 2000 or something. >> Fat fingered it. >> Yeah. Like for two days or something. It's It's like whoa. you know, on the chart it's likeip two days. So, who knows? Your time is coming. I'm convinced of that. >> Let's hope. Yeah, I I track that series pretty closely, as you can imagine, like on a daily basis. So, I can tell you that two days ago was the all-time low from the the peak in 2011. That's a very long way down. >> Wow. Peak in 2011, he said. Folks, did you catch that? It's 2025. >> Yeah. This is not an old recording. This is a >> This is 20 >> It's a 14 or 15 year underperformance of small against large. >> O yeah. >> Wow. Okay. Well, you know, and large like lately um the largest, the mega has actually rather than reverting to the mean, it's done the opposite in the past several. If you look at a chart like it's pulling away from the rest of the pack, the top 10, I think it was from the S&P 500 is pulling away. I mean, how >> the market's really narrowed down. And if you look at I look at you know you can take the of the 500 >> Mhm. >> 490 of them are basically flat since 2022 and it's 10 that are the beneficiaries of the AI capex spend >> and are accountable the whole return since then is accountable to them. >> That's right. >> And it's not it's not nothing. The return is not nothing. >> Right. It's extraordinary sums that are being invested in that AI capex. I talked about this a little bit. It's like $500 billion. >> Yep. >> Which is like that used to be quite a lot of money, but evidently not so much anymore. And it's not like I I characterized it as being something like the late 1990s when we were building cable. It's building a fiber optic cable. >> I'm glad you brought that up. >> Yeah. >> Because I the and but the difference is that fiber optic cable's got a useful life of like 25 years. >> Mhm. >> Whereas the GPUs have got a useful life of 3 to four years. So this is a >> right >> we're just going to spend like this all the time >> right now >> where it comes from. >> Yeah. Yeah, I mean the infrastructure around them maybe longer useful life but yeah um the thing is it is different there are similarities and differences like we all see the massive capex right that's obvious and as you say the useful life is different also though I wonder how like in in the in the late 90s that thing was always destined to crash and a lot of us talked about it a year or two or more before then because they were borrowing money and not making a dime. I mean, they were levered up to the sky and not making a penny. These guys are gushing cash flow like they make more free cash flow than any 10 companies ever have in the history of 10, you know, the top 10 of the S&P 500. I'm not just talking about the hyperscalers. Um, but you know, and they're the ones spending the hundreds of billions, but um, how I mean, they can keep this up. They're spending half of it. They're spending half of the cash flow on this. like it seems like they could keep that up for a while. >> It's I think that the only the only the only limit on it, the only feta on it is that you have to earn a reasonable return on that investment >> at some point, right? >> It's not clear how they're monetizing yet. I mean, I chat GPT, you get your $20 a month subscription to to one of the AIS. >> How or if they're monetizing? I mean, it's, you know, I I wouldn't be surprised to learn that nobody's really making any money off of this yet, >> right? I think that's the case. >> Yeah. So, but you understand what I'm saying though? Like I I believe me, you and I are, you know, we're we're birds of a feather and I'm a value guy and I'm skeptical about all this, but the maybe I'm just um you know, I'm succumbing as we all do in a bull market, right? We all succumb at the end. and and but but I look at it and I look at it and I think I I just feel like they can keep this up longer than World Common Global Crossing could ever have kept it up. >> That's certainly true. And I don't think these are scams. I don't think these are scams at all. These are real businesses and they're making lots of money. >> That's right. >> There isn't going to be any any you know WorldCom Klowski you know whatever >> whatever he did. There's some there's some talk around the edges that maybe Nvidia is financing some of the some of its customers. Um there's I saw a little rumor today that China makes up 40% of revenues because of the they buy the older chips through some of those uh countries that you know like Vietnam buys a lot of chips and then it's probably not Vietnam, it's probably a front for China, right? >> And at some point that gets cut off. I don't know what how true all of that stuff is. I just sort of raise it as a something worth considering if you're long. But the thing that really stands out to me when I look at the the market is that the large caps are trading now at a huge premium to mid and small. And that's historically unusual. From 2000 to 2020, small and mid traded at big Ford PE premium >> to large. And you have to go back to the late 1990s to see this sort of large PE premium in large uh sorry in yeah in large caps it's really the pandemic flipped it in the pandemic large took off small and mid have struggled since and I think that if the reason is it's not it's not hard to figure out why when you look at the earnings the earnings for large are going vertical right now whereas the earnings for small and mid have been mid is flat since 22 smalls are down so I think that excluding those top 10 companies, the other 490 and then the 400 mid and the 600 smalls all in the S&P universe >> um have been in a little recession since 22 I think and that might be working off some of the co stimulus. All of that demand got pulled forward and we've sort of right sizing and figuring out what's happening and as a result all of these companies are pretty reasonably valued. I like buying. You know, there's a contrarian aspect to being value. You got to buy these things when they're unloved and they get unloved because their earnings look terrible and the multiples compress. But if you're a full cycle investor and you can see, you know, these things mean reversion still exists, right? >> These things probably will recover again and then the PS are too cheap and I think they will do quite well. I don't know when the bottom is. >> Yeah. Gosh, that's my favorite old song you just sang. I I love it. I sing it all the time. It's It's >> I've been I've been picking the bottom for 14 years. >> Yeah, that's right. Some of us have been. Yeah. >> Oh, >> I feel pretty positive. I think that you know it's the this is always the problem for value guys, right? That you can see the opportunity, >> but you don't have any timing. There's no catalyst. And as soon as the catalyst becomes >> visible, >> the opportunity is gone. >> It's gone. Right. >> You got to buy before the catalyst, right? And so I like smalls and mids. Yeah, I think that their their trough earnings, trough cycle earnings. So I think you probably see some improvement in their earnings over the next few years and then their their pees will follow suit. I think it's a tale as old as time. I'm not concerned about it at all. I just think it's a matter two, three, five years. I'm I'm I'm sure we'll be back to normal. >> All right. elephant in the room is I wonder if you know what I'm gonna say. >> I don't >> passive. I think I saw it's like 60% now of of I think of flows maybe. So, you know, people basically mindlessly buying the S&P 500, which means at this point they're putting more than ever into the top 10, more than 40% at this point. Um, and that the source on that I think is um I think it might be Charlie Blo who's pretty good, right? Um, wow. So every, you know, every time you contribute to your 401k, 40% of your money goes into those 10 companies, those 10 that, you know, we think are going to mean revert to poor returns that we've been thinking that for years now. >> But I I I mean I just there's two things here. One is that that's that's Mike Green's thesis that passive um sort of sucks all of the oxygen out of the room for small and micro. >> Yep. >> I I agree that that phenomenon is occurring right now. I don't agree with his conclusion that it means you get a crackup boom and a crash. I mean that's that's what every market cycle looks like. So, >> but of course people invest in the thing that has been working, which has been >> the S&P 500 >> and the S&P 100. >> Yeah. >> Mega caps, mag 7, whatever you want to call it. >> That that makes everything else in the world international value, small, everything else looks bad compared to the S&P 500, which you can get for basis points now. So, it's a no-brainer that there's a whole lot of money flowing in that direction, but that's always the case. people always pile into the things that have been working and as soon as it breaks down everybody hits the panic button and goes the other way. I don't think that those mag 10 I mean they may have they may have like a a little stumble along the way. I don't think I think those businesses are pretty solid and they'll probably keep on doing fairly well >> but again in the late 1990s you know you would have had Microsoft uh GE like G has got its own problems. It had leverage and some >> earnings manipulation going on. But >> Exon Mobile, >> there were all of these big companies >> were trading were and they were trading at very high premiums, very high pees. And from 2000 to 2015, they continued to be excellent businesses. Microsoft continued to be an excellent business. Walmart continued to be an excellent business, but because the stock prices got too far ahead of the businesses, the stock prices were flat for 15 years. In 2015, I was buying Walmart leaps and worried that the LEAPS weren't going to and a LEAP is a two-year contract to to buy these things. >> And I was buying them basically at the market. >> And there was no volatility because they'd done nothing for so long. So, the calls were very cheap. And so I I just I'm just using that as an illustration of like how how unloved they were just 10 years ago, the large caps. >> And so I think that it that that could easily happen again where we have a decade or more of large caps still doing very well as businesses, just the stock prices don't perform as well because they get too far ahead of themselves. And in that period of time, people will look around for better opportunities. >> That's the next song. My favorite album. It's inevitable. It's happened countless times before. >> Yes, it has. And every time at this moment, people talk about it like everything's different now and it'll never happen again. >> I post it on my Twitter. I post these charts on my Twitter just saying, "Look how many times this has happened before." And there's inevitably someone saying, you know, I think people are a little bit self-aware. They're like, "I hate saying that it's different this time, but it is different this time." But, you know, railways were transformative. The internet was transformative. All of these things, the telegraph was transformative, the steam engine was transform, all of these things were transformative >> and they had a similar sort of impact, a lot of capital flowed towards those opportunities. They traded a very high pees. We overestimated how quickly really that would change. Like the internet's the most recent example. The dotcom 1.0 there was a lot of hype and a lot of interest, but it didn't really deliver on it. It took 20 years to deliver on the promise. And probably the same thing happens with AI. We've built it out. We've got the LLM as probably as close on current technology as we can to like as smart as they're going to get. From here on in, it's going to be the business of integrating it into the rest of business and the economy, which is a much harder, longer >> process, 15 or 20 years. >> I'm optimistic, but takes a while. >> Yeah, it does. And another aspect of that that people like to talk about every time is everybody's going to be put out of work. No, but this time we really mean it. You know, like we, you know, pin making machines, weaving machinery. >> That's where I was going to get to. >> Yeah. I mean, right. Pin making machines, weaving machines, you know, all of it. All of it. And uh >> since the dawn of the industrial revolution, there have been people smashing the weaving machines. >> That's right. because that was putting people out of business back then, like taking away jobs back then. >> But as Paul Andre, he's the um the Netscape Navigator now VC a uh a >> a 16Z. Yeah. >> A6Z. Thank you. >> Yeah. >> And uh yeah, he says all of these thousands, hundreds and thousands of different types of jobs were created by every one of these innovations. That's what people are ignoring now. There are going to be lots of different jobs that we can't possibly conceive of just as there are jobs in the last few years that we couldn't have conceived of 10 years ago. >> Right? And look at look at the internet. Look at um all of the people who seem to possess very little in the way of a working brain cell and they are online selling you perfume and whatever else. I mean, they're making an awesome living, some of them, and you know, there are many more in existence than that. Um, it it it's nothing like what what is feared. The fear is always the first thing out of the gate, >> right? >> You know, first out of the gate, oh, it's going to kill jobs, you know, and it doesn't happen that way. every time we take a leap forward like it benefits all the people it was purported to you know hurt the most >> the thing the things that and it's funny because the things that hurt those people are the things everybody's sure is going to benefit you know like the welfare state no problem we're taking care of people on the lower end well we're also supplanting heads of household with the state >> and giving a huge incentive to do nothing and be unproductive and etc etc. I mean you I don't want to get into all that but they it's always the opposite. It's always the big expectations big promises. We know how to we know how to engineer society. This is going to work. We know it and it doesn't work. And then on the other end it's this thing's new. We're not sure what we can do with it. Ah we're terrified it's going to ruin our lives. I mean, >> I couldn't agree. I couldn't agree more that, you know, there's a podcast engineer on this on this call that, you know, there wouldn't have been a podcast engineer 10 years ago. You know, this is a this this is its own little business, the podcast and previously existed. And I I just think that there's just because you can't imagine how the techn is going to be used to help somebody else doesn't mean it's not going to help somebody else. Like clearly it does. >> I'm exc I'm I'm incredibly excited about the prospects for AI in my own business and my kids it will just be it'll be native to them. They grow up with it >> using it all the time and >> to to them it's just another tool. it is. And and the unknown people don't appreciate the the the fact that you don't know the future and you don't know what's going to happen and that that unknowableness is necessary, right? Because if we knew the future and we could design a society with, you know, bureaucracy, you know, from the top down, we wouldn't we wouldn't need freedom, right? We need freedom. We need political freedom as much as possible. you know to maximize the benefits to everyone, right? Because all the because things happen by people accidentally sort of bumping into each other and ideas that come from out of nowhere and we just we don't know how good it's going to be is the truth. We think we don't know how bad it's g we think we know how bad it's going to be actually but the truth is we just don't know how good it's going to be. This is a the more I read the people like you know Hayek is the one really the more I appreciate this that we can't design society we can't engineer the future we have to allow it to come to us >> one of the reasons that I love America and I live in America is that America really you know America is imperfect in many ways and it could be more free but compared to >> yes >> you know even even places that are like liberal western democracies in in Europe the UK like that. What goes on there terrifies me. All of that sort of censorship of >> Yeah. >> Um people just expressing like pretty anodine benign beliefs. Getting a visit from the police. That's that's online. That's you know that sort of stuff is crazy. >> I hate to say it but not to mention your home country >> and Australia too. >> Little little sketchy there too. >> I couldn't agree more. It's it's it's uh it's a little bit sad. It is sad. which is not to say I I mean I def I agree with your earlier statement. America is not perfect. I was like far from it and and you know we're we're under assault by our government in a similar way but it seems like they're a step ahead of us in those other places. >> America has a bill of rights which makes it at least you have one little thing to fight back with. you can get yourself to the Supreme Court and you can argue that it's a and a constitution, but the Bill of Rights uh I think has the most important part gives you the last like little bit of protection against an over uh overreaching federal government. >> Yeah, we have something else too. 120 guns for every 120 guns for everyund population and 15,000 hunting licenses. >> Yeah. God bless America. Yeehaw. >> Yeah. I grew I grew up in the country. I grew up in the country, so I grew up firing guns, so they don't they don't bother me too much, but I get that there are a lot of people who are a little bit squeamish about them. >> Sure. Sure. >> Yeah. I mean, they're they're deadly, so you know, it's nothing to nothing to be careless with. Um, maybe we should talk about investing, though. >> Let's do that. So, uh, just let's since it's been two years, let's remind folks, um, about exactly what you do and how you do it. Let's do that for a little bit. >> I run two funds. Um, they're both ETFs. Um, one is the Midcap ETF, which is the ticker is Zigg. It's the Acquirers ETF. And then I run deep, which is a small and micro. It's the smallest of the small. you really they're really small uninvestable companies which may or may not be appropriate for an ETF but we'll find out if they ever get some flows. Zigg and Deep are the two funds that I run and I look for the acquirer in the name is based on a book that I wrote called the acquirer's multiple and the thesis is basically that you can find a financial value for any company which is basically what it's worth in a negotiated transaction and I say because I was a corporate lawyer and I worked in private equity and transactions from 2000 to 2008 that um the private equity valuations are based on operating income on one hand which is uh a more full version of the the earnings. It includes interest and tax and other things that are more discretionary that depend on the capital structure. And on the other side, there's enterprise value, which is a little bit more, which is the price, but that's it's market capitalization plus debt minus cash plus anything else that's like a a minority interest, uh, preferred stock, anything that an acquirer would have to take on. >> So, I look at that as a more full, it's like a more it's a souped-up PE really, and it just includes all of the things that an acquirer would consider. And so that's really tells you how expensive something is. And then you want to see what are you getting for how expensive something is. And so you look at the return on assets, just its ability to generate operating income on assets, you know, controlling for the leverage. So I'm scanning the entire universe of stocks >> ranking them all on this basis and then finding the ones that are doing the things that because I cannot get control of these things and do anything about it like an activist or a private equity firm could then I want uh a management team that's behaving as I would behave if I was in control of one of these things which is to say that if they're undervalued and they're generating lots of free cash flow they should be buying back stock and so my portfolio tends to be characterized by these businesses that generate lots of operating income trade at a reasonably cheap valuation against the total enterprise value which includes all of the debt and all these other things not just looking at the market capitalization and then I want a management team that's doing sensible things and it's either I like acquisitions but acquisitions done at a sensible price and I want buybacks done at a cheap price. So my portfolio is filled with these companies where one example is um I don't know if you know uh Bed Bath uh I'm not saying Bed Bath. I'm having a little having a little brain explosion at the moment. The U Bath and Body Works. >> Bath and Body Works. Yep. I know. We know it. We Yeah, >> we took a run at it. >> It's one of the stocks that I hold. >> Okay. I I like Bath and Body Works because spun out of Brands um not that long ago. They generate pretty good returns on on assets. Um if you walk into a mall and malls around here are pretty dead. >> Yeah. >> And I I was doing a little I just wanted to see I'm not This is not the way I invest, but I wanted to just go and see. So I was there with my son. We walked around and I found a Bath & Body Works and I walked in and the few things that really stand out. It's not a huge store. It's got a fairly small footprint, >> but it was crammed with people. There were more people in the Bath and Body Works than there were in the rest of the entire mall. >> And it's basically they sell fragrance, which sounds like it's not obviously not the kind of thing that my son and I would ordinarily go and have a look at, but we we walk past and it was full of people. >> Yeah, it is. >> And they're doing a $500 million buyback right now. It's a $5 billion market cap, $750 million in free cash flow, doing a $500 million buyback. These are the kind of things that to me, >> yeah, >> that's that's a sort of situation that I don't I can't see the future for retail and I can't see the future for this kind of company. But all of those things together tell me that management thinks it's cheap. I think it's cheap. They're buying back stock. And this is what creates flaws for these sort of businesses. your downside is reasonably limited because management's doing the right thing. I have a portfolio filled with these. We've got some energy >> uh home builders that I think have been smashed to smithetheriness. Now, I know that homes are home home house building is a funny business. Yeah. >> And >> it is >> one of the reasons that you should be concerned is that clearly homes are unaffordable for for the median home price is unaffordable to 80% right of Americans. And that's a problem. that is >> and the solution is going going to be a combination of lower interest rates and house prices coming down. That's not a disaster for the home builders because they make their money on transaction volume. So they want lots of houses being sold rather than lots of houses being sold at these premium prices, >> right? >> So when the I think that and all of these all of the home building stocks are off 40 to 50%. >> Yeah. >> From their peaks. Yeah. >> And if the if the the um you know the prices come down, they'll still make plenty of margin. from here, right? >> They'll make that that's that's what I think too. They'll make lots of margin >> from we had a similar scenario in 2001 where you know lumber got very expensive. Home bu home builders sort of stopped doing business for a little bit there >> and they their stock prices were similarly beaten up and then they had a very good run and I think a similar thing happens around here. I think it's I think it's already started honestly. It's been the last month or so home bills have sort of come back to life. I I for you know for the rest of the US and for for younger people in the US I really do hope that home prices come down but it certainly seems to me that we're getting close to that kind of scenario. There's a big buildup in inventory. >> Yep. >> It is starting to build up. That's right. People want to sell for longer. >> Yeah. >> Yeah. >> They don't they don't want to and they'll do it. you know, they'll, you know, if they list for 900 and they're not getting it, they'll sell it for, you know, eight or seven or whatever they need to get. As I don't mean to be rude while you're talking, but I I you can see I've been doing something here. What I'm doing is I'm running the Bloomberg screen of um BV over EIT for >> Yeah. >> Um I didn't specify market cap. I specified US traded, US doiciled. Okay. >> Yeah. Um the the universe is 144 names and I'm happy to see among the top 10 or so uh Devon Energy which >> Oh yeah, >> I've recommended. >> Um >> it's one I hold too. >> Yeah, really great well-run energy company. >> Actually, I think that's one of my that's one of my I think that's one of the best that's one of my favorite positions. I It's probably my favorite position out of all of the 130 that I hold. >> No kidding. What a coincidence. It's one it's it's um I have it in a portfolio of nine names and you've got to spend like a whole bunch more to get my newsletter um at at what they call the premier level so that you can get these extra nine names and that's one of them. It's it's brilliant. But but >> yeah, I think it's a superbly well-run energy company. >> And uh the oil price is currently trading as cheaply as it has been in the last 25 years. The only two times that it's been cheaper than where it is now is 2000 and 2020. >> Mhm. >> And those are famous dates. So I think that >> Yeah. >> I I think energy I don't know when energy turns around. This is the same old problem that value investors always have. I don't know where the bottom is and I don't know when it turns around, but the values here are pretty good. And so >> you might lose some on a marktomarket basis between now and the resolution of this problem. But I think that even the positions that you're putting on now will work out uh over a three to five year horizon. >> Yeah. Love it. Love keep singing it, baby. Love it. Um there's actually quite just you know appropo of nothing just glancing at the screen here. Um there are like the top name. Let's see if I go. Okay. the the sorry the cheapest name is something called is actually something called circle internet group because that's a new new company it just IPOed because it's negative 46 times I didn't specify a positive EV over eBay um I think they probably have a bunch of cash and something called Eventbrite but then you get into you know something called well and these are all tiny market caps too so if you go descending on the market cap You get General Motors, Ford, Synchry Financial, you know, Ally Financial, Perian, Borg, Warner, and lots of energy. Expand, Devon, Couter, Perian, APA, you know, it the the mar the the screen is trying to tell us something here. >> Yeah, I've got a lot of energy. I have I have some I'm up to my risk limits on the energy. I I won't put more than 20% of the fund into any industry. >> Um just because, you know, you could be it could be for-profit education. I don't think energy is for-profit education, but that was, you know, when the Obama administration decided that for that people were spending too much on on useless college degrees that they wiped out all the for-profit education. I think they missed the the main the main villains in that story, but they've they've got they got a lot of the uh they got the for-profit guys at least. I think I think an interesting an interesting stat is um Buffett is lagging the S&P 500 >> by uh the widest margin since and the only the only ones that have been wider are 2020, 2009 and 2000 >> which again they're all famous dates like obviously there's him stepping down has created some selling pressure on that stock but >> sure >> I I think that >> all of the indicators that I see suggest we're in late 1990s sort of bubbish, you know, market for >> large growth and the things that are left behind are small value and I think that that's where the opportunity lies probably for a decade or so. And so I'm I'm incredibly excited about uh the opportunities that we're seeing right now. I think it's a good time to be a small value investor. >> Yeah, man. Yeah, I agree. I I own um you know, of the individual stocks that I own, I have just a small portfolio that I actually pay a lot of attention to and active advantage because I you know, I just want it that way. And um aside from leap puts on index ETFs, um that's the smallest part obviously. I hope that's obvious. Uh it's it's really natural resources and and uh and treasury bills is really what's in there. You know, those are the >> natural resources have been left behind. >> Yep. >> As they were in the late 1990s as well. >> Yeah. I mean, talk about, you know, Yeah. That's that's another chart that's got some suspicious dates on it, right? You know, like, wow. Okay. Every time people get really excited about some new technology, they stop paying attention to the stuff that is that they are surrounded with unless they're out in the woods. And even then, if they dig far enough, they'll, you know, it's like you can't get away from the need for everything that is mined and extracted from the earth um and you know, then processed, manufactured, etc. Like you can't escape it. It's there's no way. Like there's a a book I like to uh cite called um I think so how the world really works by Vaklav Smith. >> Yeah. Yeah. >> Yeah man. And he cites cement, plastics, um uh steel and ammonia as the four ingredients of every modern city. >> And it's true like you can't get away from those things. And even and the plastics of course come from petroleum. So like you can't get away from the extractive nature of things. And um yet here we are again, you know. >> Well, well, under under under Biden, remember, there was that the stimulus under Biden was the inflation reduction act, which was really a a green >> uh infrastructure building. >> Yeah. >> Uh stimulus and the concern like at that point in time, coal was trading very cheaply, which is just crazy because if you think about how you go and build a whole lot of green infrastructure, you need a whole lot of steel. And the way you make steel is you get a whole lot of coal and you burn it really really hot. >> Y >> and so all the coal mines at that time are trading very very cheaply. I think they're still reasonably cheap but they're not as screamingly cheap as they were then. >> Right. They're four they're three four 5x and still cheap like 10 times or something like cheap and gushing cash >> just gushing it you know. It's just it's like it's like the the gold miners, you know, they're cheaper at 3,300 per ounce than they were, you know, whatever 50 or 100% ago at whatever it was 2,000, just call it an ounce. >> What What do you The gold miners I I haven't I don't hold any gold miners and I haven't um I haven't seen them in my screens yet. So, I'm I'm sort of curious to know what why do you think the gold equities haven't kept up with the gold price? You know, my first answer to all such questions is I don't know, >> right? No, I'm serious. And I think it's important to do that because like just this morning, I was on Twitter and and uh somebody put up that chart of the Russell 2000 I mentioned with the small cap screaming for the past two days. And they and the the next post was, "Why do you think that's happening?" And I and I immediately said, "Who knows? If you're all honest, you don't know." And you don't, >> you know, especially two especially a two-day move, right? >> As far as not not keeping up with um with gold, um you know, smarter people than me have thoughts about this, but I I don't know that it's all that important to know it. I just know that opportunities are made on such divergences >> and Yeah. and that I don't think we're I think we're gonna keep mining gold and I think we're going to keep using it and I think it's I think at 3,300 an ounce it's very obvious that people are going to keep holding it as a very very important store of value. >> I think it's amazing that gold has now outperformed the S&P 500 I think since 2000 or something is >> yeah this century. That's right. >> It's amazing. It's incredible. It's >> it's it's funny. I remember that Buffett letter that he wrote, I forget the date, but like the 70s, something like that, where he said, you know, for all of the blood, sweat, and tears that I've poured into this portfolio and the people working in this, the yellow rock has beaten me for, you know, whatever it is since inception or something like that. >> And then sometime later, he, you know, he talked about how silly it was to pull the stuff out of the ground and pile it up over here and pull it out of the ground over here, pile it up over here. But there's obviously a lot more to it than that. I mean, it's really um he should just admit that he missed it and he does not understand gold. I don't expect him to know everything. I don't expect him to get everything right, but I expect him to know when he's really wrong about something, you know. >> Do you think do you think it was something like his old man was a, you know, libertarian uh hard money >> Oh, sure. >> guy. And do you think that that's the maybe there's a little >> there's something psychological going on there? >> Could be. Could be. I don't, you know, Buffett's um he's a he's inscrutable. Who knows? >> Truly. >> Um but >> I got another good I've got another good data point for you. Um >> Russell 2000 hedge fund shorts >> were as high a few days ago over the weekend when I checked it as they were in 2021 at the peak. >> Oh, >> so hedge funds are as short the Russell 2000 >> as November 2021. Yeah, >> as they were at 2021 at the peak. >> All right. >> So, I don't I don't really like timing tools so much. I don't use any timing tools. I just sort of collect these data points to share on podcast. It's not part of my investment process. But I think it's an interesting data point because I think that you want to be fading hedge fund concentration. The hedge funds are all sort of performance chasers and so they will all pile into a trade right before it stops working. >> Yeah. They're Yeah, that's right. >> To me, that says hedge fund long is the is the place to be, >> right? That's a that's actually a good data point. I I like those data points and I agree it may not necessarily be about timing, but is certainly about sentiment and it's certainly a decent way to look for the crowded trade, right? There's there's no there's no, you know, there's looking for the crowded trade versus the uncrowded. Those are good things to look for. I I agree. It's not about timing. It's about knowing the state of things and and that's a great way to do it. I mean, you know, the the um commitments to traders looking at that whole thing is kind of interesting. It can be very interesting, right? Just because you want to know what everybody wants to buy right now and what everybody seems to want to sell right now. So, I >> I got another good data point for you, Dan. I picked it up from one of my favorite Twitter accounts, D Ferris 1961. Uh >> oh. number of listed companies per million people in the US trough in 1979 which was the death of equities cover and peaked in 1996 which was irrational exuberance. >> Yeah. >> And we're back now to where we were in 1979 getting close. >> Yep. So, you know, by that it would suggest uh that it's time to get um it would suggest that it's time to get bullish maybe, but it also, you know, there's also the issue of concentration that we discussed. I don't think people I don't know the I don't know the statistic, but I I I know that it wasn't um 40%. The top 10 of the S&P 500 weren't 40% in 1979. That much I know and I would be surprised if it was 20 or or much more than that. >> I think Nvidia has set a record at 8%. For a single stock, the single stock concentration has been sort of 6% previously. So I don't know if >> 8% is that much bigger and that maybe deserved. They seem to have done very very well. But >> the performance for the number one stock after it becomes the number one stock hasn't been great historically. Med Faber had some good research on that. >> Right. >> I'm glad you used the word deserved because that reminds me of something that I wanted to say earlier that I wanted to run by you, which is um you know the dotcom bubble and its aftermath speak for themselves, right? They speak for themselves. But I think what's also been noticed, I've noticed it, others have noticed it. I'm sure you have too. Um, the market was basically right, I mean, it took 20 years to, you know, well, it took the NASDAQ till 2015 to make a new high, but but it, you know, it took 15 or 20 years for it to all sort of work out the way everybody expected it to at the peak in, you know, 1999, early 2000. But they were right. And if you'd bought like Amazon at the top at the top and held it until today, you'd have made tons of money, you know. So, um, of course, if you'd have bought Cisco at the top, you'd still be underwater, right? You can't I mean, you know, >> Cisco's been doing better recently, though. >> Yeah. Better recent. Yes. >> It got cheap a few years ago. >> I think >> the there was a study done by I think it was Jeremy Seagull. He looked at the Nifty50 >> Mhm. >> stocks. >> Yeah. I know what you're going to say. This is good. >> And the Nifty50 did have like have eventually altogether how they have collectively outperformed or they've they've earned about a market return since then which is >> which is pretty amazing given how uh expensive they were at that time. >> The problem is that and and you know it's probably true also of the large caps from the late 1990s, Microsoft and Walmart and Yep. >> I don't know if Costco qualified at that time but like you could probably take that list and they probably all done pretty well. Mhm. >> Uh I I do think that the current crop of businesses are are similarly they're very very good businesses. >> The problem is that you get very very good businesses at the absolute best time of the cycle and then you project that earnings growth forward into the future and you overestimate how well these things are going to do in the short to medium term. So they get too expensive in the short to medium term. >> And it's not so much that their business stumbles. It's just that the valuation has departed from all rationality and has to come back to earth at some point. And that process is a long slow process. >> It's the That's right. It's the disconnect between that massive optimistic expectation baked into that massive PE, that massive price versus what actually plays out. Rob Arnett from Research Affiliates wrote about top dogs. I've cited it many times because every 10 years the top dogs are different and the you know every now and then you find an unusual one that hangs around in the top 10 biggest market cap companies those are the top dogs and and you know like a GE hung around for a while and Microsoft has hung around for a while so you know it's it's not perfect but it's pretty much pretty much right mostly right overwhelmingly right in fact you know so >> and there's a there's a little sampling bias this little error there too. You have to be careful of um because we look back with the benefit of hindsight to see the ones that have survived and in the moment I don't know if all of the Mag 7, you know, I think maybe Tesla is the weakest of the Mag 7. Tesla's certainly got some very real problems at the moment that, you know, people don't like the brand because it's associated with Musk who's become political. >> Um internationally it doesn't do very well because there the Chinese EVs are better and cheaper. And the only thing that keeps it sort of on foot in the states is that we've prevented any of those Chinese EVs from competing here. I went to Shanghai in March >> and walked a Huawei um showroom and I had a look at their SUV and the sedan and they're both like gorgeous leather interior screens everywhere. >> Charge in 15 minutes. They say the charge is going to be coming down to 5 minutes. >> Um like really stunning looking vehicles. Yeah. And they're $35,000 US. >> And we can't buy one because we live here, >> right? But the rest of the world can like and I was in I was in Santiago, Chile, >> uh, less than a month ago. And there every single car on the road is Chinese. Basically, there's a lot of Chinese cars around the rest of the world, just not in the States. So your your picture of what the EV market looks like in the states is skewed by the fact that these very dominant BYD >> uh Great War all these other car companies aren't here. All you see is the is the Tesla and the Rivians and I I live in a place where there are lots of there were people have owned like Teslas are like Corollas here. Every second car is a Tesla. But as soon as the Rivian got released, the people who were, you know, novelty seeking and wanted to show off got the the Rivians >> and then the Cyber Truck, there are bloody Cyber Trucks all over this hill and fluorescent yellow and fluorescent orange and black and like all of these people trying to like really stand out. >> Yeah. >> But I've noticed that there's there aren't a lot of the new Teslas. People have substituted the new Teslas for the Rivians because I guess there's some I live in a blue state in a blue area and a blue state. So it's nobody wants that Musk association. My wife drove our Tesla down to Santa Monica and got a this car supports fascism sticker put on the window. So there's a fair bit of push back to to Tesla in this place. >> Yeah. Yeah. That the protesting makes no sense to me. and you know the bomb the throwing Molotov cocktails at dealerships and all that stuff. It's just and and putting the sticker on. It makes absolutely no sense whatsoever. If people thought about what they were doing, they go, "Oh, wait a minute." You know, they say, "Well, wait a minute. If I believe all this other stuff, I can't do that to a Tesla." But, you know, >> it's silly behavior, but there's an enormous amount of social pressure to, you know, to not have one in certain parts of the country. It's just toxic for Mask because that's really the lifeblood of that business. Like they're doing a lot of other stuff there, but it's the >> the cars that >> that make the money and I think that >> they've got some real competition and there's some distaste for that brand. Real real competition. >> A lot of debt. >> That's right. Real competition. All the other stuff doesn't really make any money. And people like Dan Ies on Wall Street, I think he's like Wed Bush. I wrote about this recently. I just couldn't believe it. He says all the other stuff is worth a hundred times earnings and that they're gonna, you know, the stock's going to be whatever he said 500 bucks at some point soon. I was just like, no, no, that's that's not how it works. That's how it works maybe in the short term sometimes, but you know, there certainly isn't going to be any beat and raise going on anytime soon, right? Tesla's expensive. Like Tesla's Tesla trades at 150 200 times earnings and the earnings are basically non-existent. It's not like there's any switch that they can turn to like immediately become profitable. They're sort of at that break even level. And unfortunately, like that's the nature of these sort like metal bending car companies are they don't make a lot of money. >> Mhm. >> There's a lot of infrastructure. There's a lot of assets in there to make not a lot of money. I'm, you know, I'm more worried about the other car companies in the States than I am Tesla. But Tesla's that the other car companies are small caps now. They're not in the they're not in the MAG 7. Max 7's got to perform or it falls out and then I think it's it's a long way down for Tesla. >> Well, that's another that's a song I've sung before, too. I I'm I'm shocked that it's I'm shocked that it's where it is. I'm shocked that it's still, you know, trading for where it is, but we could probably name, you know, a hundred companies off the top of our heads that we could say the exact same thing about. I I have been shocked where Tesla is, too. But if you look at the performance of Tesla over the last five years, like they had a very they had a huge ramp in 2020. >> Mh. >> And by the end of 2020, they were trading roughly where they are now. And so it's really gone nowhere for 5 years. And I think that that's bad news for these sort of stocks where really it's a there's there's got to be a lot of excitement in these stocks. And if there's not a lot of excitement, then people move on and they sort of start trading more like what they're worth rather than all of this like blue sky that's built into them. There are a lot there are lots of companies like this that have that big blue sky with like they're really not delivering on the promise on a financial basis. They're just they're saying, "Hey, we got robots, we've got >> satellites, we've got all this other stuff and it's all going to be super valuable at some point." But >> there's no business Robo taxis. >> Yeah, robo taxis. >> Robo taxis have been coming since 2020. Like, >> yeah. >> And and you know it's worth what whatever he made that statement about it being worth trillions or something. I forget exactly what it was. I thought, man, >> you are >> Kathy Wood at ARC said the whole thing was like she I think she put a $6 trillion valuation. >> Yeah. Yeah. Yeah. Yeah. >> Yeah. And my my my co-host on the podcast, Jake Taylor, he went and had a look at the amount of money spent globally on transportation in any given year. And it was like it was nowhere near that amount. >> Yeah. I called her I think I called her what did I call it? I called her the Gerald sigh of the modern era once, you know. >> Well, that's that's that may not be unfair. to be she has recovered pretty well in this little whatever this is like I there's this 2021 echo boom going on right now which is >> all of the like cryptos back >> uh not the NFTts so much but >> that you know people seem to be able to launch these coins as they call them. Yeah, >> they're just shitcoins everywhere. Fatcoin all this sort of silly stuff. >> Yeah. I mean, I went >> you go on to like coinarketcap.com and there's like I I forget what the number is, but I was like, "What? I thought there was like a few thousand cryptos and it was some number like 10,000 or 100,000, something crazy." Um, I could pull it up, I guess, if I wanted to, but but I don't need to. It's It's an insane number. I mean, who knows of the existence of all these things? Like, who buys them? I don't understand how this Yeah, I don't understand how this works at all. Obviously, >> I think the meme stock have sort of largely gone away because there they've all moved into the crypto because the it's unregulated. So, it's not like you have to do it. It's not a security. So, it's not governed by the Securities and Exchange Act. So, therefore, it doesn't have to follow the IPO rules and it doesn't have to much easier just to spin them up. You can get a little bit of software that will spin it up for you and you can just launch one every 15 minutes if you want. just stick a name on it and see see what see what sticks like Fatcoin evidently that was the that got a lot of people's attention and did very well at one point their Fatcoin had a bigger market cap than the entire Russell 2000 ETF right >> IWM >> so on coinarketcap.com it tells you the number of exchanges 840 the market cap of the whole thing 4.1 trillion >> and it says cryptos like the Number of cryptocurrencies tracked by coinarket.com 19.45 million. >> Wow. >> It's just crazy, right? That's crazy. Like I mean look to me Bitcoin is actually really cool. I think it's cool. I do because it's um you know it's competition for you know it's it's potentially valuable. It's competition for currencies. Maybe it's some kind of new payment system. We don't really know yet. I don't, you know, I think it's worth a speculation though, a small one, just to see. It could be a 100x amazing thing even from here. Who knows? Who knows? But 19 million, I mean, you know, I don't know, maybe that's just the way it goes. You get one valuable thing and 19 and a half million unvaluable ones. >> Well, I think that's where all the speculation has gone this time around. I think that the the stock market is pretty well sorted. Like the better companies are attracting better valuations and the worst companies attract worse valuations. It's just that the spread I think is too great. They're not the better companies aren't that much better and the worst companies aren't that much work worse. And this business is a handicapping business. You you can take the second horse if you can get better odds than the first horse at worse odds. >> And that's how you make money. You want to be a handicapper rather than picking the best horse. if you have to overpay for the best horse. >> Now, that that point of view, that philosophy hasn't really worked since 2011, but over the very long run, when I look back with my quant hat on, uh, you know, small relative to large has outperformed by 20 times going back to 1926. And that's an extraordinary outperformance. Since 2011, it's underperformed by about 75%. >> So, you've got $25 when the guys who invested in the growth have got $100. But I think that the the points in time where we've seen this sort of level of under this is this is unprecedented, this level of underperformance, I should say, but where we've seen underperformance historically, it's always been around these notorious bubble peaks. 2000 2009 at the bottom. Um, and then you have to go back to ' 66 was an electronics boom was when trronics sort of came in. And then, you know, you go back, there are about six of these in the data going back to 1926. And every single one of them is a famous boom time peak. And then once the bubble sort of worked its way through the system, it went back to being the way that it always is where small and micro and mid, if you pay a reasonable price, you get a pretty good return out of those things because they grow earnings faster over the long run. They have grown earnings faster. So it's the place to be as ugly as it looks right now. >> Yeah, because it's ugly in in large part. All right, man. We have actually been talking for quite a while here and it's time for our final question. I'm sorry to say. I feel like I could do this for another two hours. And maybe someday we will. I I think um I I don't know. I like maybe I'd want too badly to be the Joe Rogan of finance, but I there's >> something about those long formats is just you just can go so much deeper and you're someone that we can do that with >> um very well. But anyway, so let's do the final question. It's always a little bit of fun um if not a lot. Same question for every guest, no matter what the topic, even if it's non-financial. If you've already said the answer, feel free to repeat it. And the final question is for our listeners benefit. If you could just leave them with one takeaway, if you could leave our listener with one thought today, what would you like it to be? >> It could be anything. I've had people say, "Go outside and breathe fresh air and get some, you know, all kinds of stuff." >> Yeah, that's a good Okay, this is I haven't really formulated it, but I I my thought is that uh you should be optimistic about the future. I think that we whatever it it's easy to get to see all of the um the negativity out there globally and domestically and become pessimistic about it. I think that regardless of the accuracy of your predictions, you should always be optimistic that they're going to work out because even if uh things don't work out, you're still better off being an optimist in that scenario because the optimists are the ones who are going to keep on pushing forward and like trying to solve the problem. And that's the best mindset to be in whether it works out or not. So I I'm forever an optimist. I got kids. I think they should be optimistic. think I'm optimistic about the US. I'm optimistic about the globe. I'm optimistic about AI, technology, value, small value. I think it all works out. I think there's enough good people in the world, smart people working on good stuff. We're standing at the absolute pinnacle of civilization. I think in 25 years time, we'll look back and it'll be, you know, it'll be a valley relative to where we are then and another 25 years after that. So that that's my that's my message. be an optimist because it's the best way to be and because it's probably what's going to happen anyway. It's going to work out. >> That's an awesome message. Thank you for that and thanks for being here as always. I promise you you will be invited back sooner than two years next time. >> Thanks so much for having me, Dan. I love chatting to you. It's always a good time. >> It It is. Uh and we'll we'll have it sooner again, as I said, rather than later. Thanks, man. >> My pleasure. Opinions expressed on this program are solely those of the contributor and do not necessarily reflect the opinions of Stanbury Research, its parent company, or affiliates.