Strong Jobs Report, Bond Market Signals, Scale Economies Shared, and Questions from X

Summary

Macro & Rates: A strong jobs report and rising long-term yields despite recent Fed cuts point toward a steep yield curve, with implications for bank earnings and market expectations.
Airlines: Spirit (SAVE) exploring Chapter 11 after the blocked JetBlue (JBLU) merger raises consolidation questions, equity wipeout risks, and potential buyers with less route overlap.
Southwest (LUV): Detailed discussion of its low-fee model, activist pressure, operational differences vs. legacy carriers, and valuation context amid industry headwinds.
Scale Economies Shared: The Nick Sleep-inspired model was explored via Costco (COST) and Amazon (AMZN), highlighting culture, structural advantages, constraints, and the risk of overvaluation (particularly for COST).
Semiconductors: Intel (INTC) cited for deteriorating gross margins and competitive lag, underscoring margin trends as a key signal in chip businesses.
P&C Insurance: Insurers may benefit from slowing inflation and repricing, while Florida homeowners’ insurance presents regulatory and solvency risks; Frontdoor (FTDR) used to illustrate inflation pass-through dynamics.
Tesla (TSLA): Discussed price cuts’ impact on used car markets and governance issues surrounding the court-blocked compensation package and reincorporation decisions.
Overall Perspective: Favor founder-led scale models early in their runway, scrutinize culture and margin trends, and be selective as mature incumbents face constraints and higher competitive parity.

Transcript

welcome welcome welcome how's everybody doing hope you are doing well my name is Andrew with Focus compounding on air live with Jeff Ganon Jeff how's it going today it's going very well Andrew how's it going with you it's going great we hope it's going great with everybody else as well if this is the first time you are tuning in with us thank you so much for joining us be sure to check out all of our content that we push out into the investing Universe the best way to do that is to follow me on a at Focus compound if you're watching us on YouTube or listening to us on a podcast app hit the Subscribe button that will notify you every time we upload a podcast and of course if you're interested in our Money Management Services you could go to focus compounding dcom to get more access to that or reach out to me directly Andrew at focused compounding tocom so in today's podcast Chef we are going to be uh first starting with the jobs report it's been a few weeks since we had uh reported the podcast and uh today is October 4th and the FED released their uh non-farm payrolls and we added 254,000 jobs last month this caught a lot of people by surprise I think a lot of individuals were expecting these numbers to be a little bit softer especially because the FED had cut interest rates by 50 Pur points and projected being worried for the future and recession risks and uh they came in pretty hot 254,000 jobs were added uh something that is interesting to me is the bond market and what's going on in the bond market talk a lot about banks on this podcast so obviously we we have exposure to Banks so we uh follow the yield curve fall what's going on in the rate environment and on this news rates started to rise uh interestingly so the FED cut interest rates like what about a month ago now and we areally flat or maybe a little bit higher uh from where they cut that at least like the 10year and the 30-year Bond uh interestingly to think about when they originally Cut Rate started to run so what does that mean that's the the bond market saying they are worried about uh inflation researching right um so that's you know currently what's going on so uh strong jobs report today now people The Narrative changes all the time but okay maybe we're not actually going into a recession one jobs report is uh probably not indicative of a trend but want to hear your thoughts on that because it seems to have caught a lot of people off sides something that you know just monitoring price action for so long there's a lot of geopolitical going on right now especially overseas and it just it seems like bonds can't catch a bid to be the flight to Quality that they traditionally have been so I just think the Bond Market's fascinating right now because it seems like it's just not acting how it has acted uh over the past handful of years so why to get your thoughts on that yeah some people asked because of a previous podcast where we talked about I think I said that all the rules of thumb were pointing to a recession and I did mean that literally um but I didn't mean that that means that there will be a recession just that this time I think most people are expecting there not to be a recession and for that to be in violation of normal rules that they would use to judge whether there'll be recession we talked about that like inversion and then on inversion of the yield curve we talked about change in unemployment rate you know um and then even when we've talked about certain stocks some of the stocks that have not done as well depends are stocks that wouldn't do as well because of fears of uh a recession or credit contraction or something along those lines whereas those that are in the same categories but not exposed to that kind of stuff have done better um you mentioned Banks Banks in particular you can see that if a bank benefits from um lower rates but doesn't have a lot of credit risk it's done really well this year as a stock whereas if it has a lot of credit risk it hasn't done so well what do you think about that when the FED cuts it just rates uh shortterm and then the longterm end of the curve start to rise on that what does that signal to you are we going back to a very steep yield curve environment where banks are going to be able to make a again lend out you know at much higher rates and then obviously have their deposits paying short-term rate or uh smaller amounts so the curves can be incredibly steep what does that tell you how do you think about that I mean as of this report coming out and everything it looks like that's kind of the consensus view I would say but it's very fast to know that because I think expectations for cuts in the short term were reduced now to being expectations that feder will cut rates by 25 basis points or something but that they're basically pricing in less rate cuts and then they're pricing in more um economic growth so that's what would happen if that's the case um but expectations have changed a lot uh throughout the year for when rate Cuts would happen and all that so I I don't know if that will actually be what happens but yeah that's the expectation the expectation isn't for a recession but it is for them to cut rates so um yeah pretty steep would be the expectation if you're cutting if you're still expecting them to cut rates and you're expecting that this kind of jobs report is what you'll see normally and everything yeah do you ever think the FED is uh maybe doing it also to bring down the interest payments on the debt because the amount of debt we have and what those interest payments would be which just contined to balloon the uh national debt you ever think they think think about that I mean they claim they're not political but do you actually believe that to be true well I think that they think sometimes about fiscal policy and whether their policy is able to achieve what they want it to because of the importance of fiscal policy um but I don't think that they would think that that's a good idea because being particularly loose could not be a good thing to do I am not sure that that would be great unless there was also coordinated with restraint at the same time you know uh but if you're asking would they like budget deficits to like would they like a balanced budget and the ability to cut rates more probably but they can't coordinate I mean they're an independent part of the government that isn't able to work together on that interesting well we will continue to monitor uh but lots of interesting interesting things going on in the yield Market currently uh want to revisit our old friend Spirit Airlines never a friend in the sense that we actually own the stock but we have talked about it on the podcast a bit uh news came out yesterday after the close that spe Airlines was exploring a bankruptcy filing uh exploring chapter 11 so not a full-on liquidation chapter 11 would be more of a restructuring of the company Equity holders typically get wiped out debt holders get converted over to equity uh is usually what happens uh pretty interesting situation though right so obviously Jet Blue was trying to buy out Spirit Airlines it was blocked that merger was blocked and here we are what not even six months later and spirit AR is now exploring bankruptcy so is this those are argument for why they should be allowed to murder they did say that right they did say that we were going to have to go into bankruptcy people thought that that was just bankruptcy or you know negotiations you know talk trying to gain that leverage why they should close and here we are like I said not even six months later so I guess if you're first thing if you're Jet Blue do you say okay let's try to re-explore this right and try to buy him in Banky or do you not you know re explore because it was blocked uh but yeah want to get your opinion your take on what's going on with Spirit Airlines and we could of course pull it up through quick FS um gosh you know the airline industry just continues to always be a very tough industry for investors to make money but Prov it time and time again yeah I mean I think it's tough right now for the companies that focus on the um lowest fairs Southwest is having trouble Spirit like we talked about [Music] um but you know from the government's perspective this doesn't necessarily matter because if they they aren't going to liquidate you know you know what I mean so they blocked a merger of something happening and then if they're able to prevent that kind of merger from happening that kind of consolidation then it doesn't take capacity out in the long run so it's not like it necessarily increases fairs for anybody so they make you know the they may get what they want it's not like their job is to protect companies from going into bankruptcy no but also it just suck if they blocked it and they were saying that going to go into bankruptcy and then that happens that's unfortunate and it's likely that they'll consolidate in some way with somebody it's just that it will be somebody where there's less overlap maybe and a less advantageous price for the the owners of the company right for Bond holders in this case basically what's left there's some value in the stock right now in the market but who would be a likely takeover if not Jet Blue well Frontier was the one that wanted to merge with them originally right and that's true actually anyone would be likely if Allowed by the government it's not impossible not Southwest but others would be why not Southwest they don't have the same planes mhm are you following what's going on uh Southwest yeah I mean I Fly Southwest all the time probably you are fre yeah you are I only fly American for me yeah everyone has your thing right I only fly American you only Fly Southwest yeah yeah I fly a lot from Dallas to New York and there's multiple airports in both places and it's highly competitive and Southwest offers very frequent flights at low prices and I also don't travel internationally and I do travel domestically so it's very convenient um and I don't care where I sit so that's convenient too so um and they're you know historically they have been likely to board on time and leave on time and everything turn the planes pretty fast that you know at least the airports that I have been going to I had been going to some of the busiest airports which I think is more the problem but what are the issues with Southwest you want to give a summary of what's going on with the company the activist yeah so we talked about it a long time ago Southwest the gap between Southwest and other airlines closed over time because other airlines became more efficient and what they did and Southwest became more like the Legacy Airlines but it still was doing well and then you had the problem of all these upcharge and everything which Southwest doesn't participate in at all so Southwest advertised Fair might not seem that low but why I say it's pretty low for me is uh you get um well first of all if you pay I think it's $25 now used to be like 15 or something you basically can pick your seat because you get to board the plane before other people and it's you know self Ser seating and um you get two bags checked bags for free so basically there's no reason why anyone would pay more than the advertised fair that you see plus $25 to get everything they need unless they're flying with more than two check bags per person or something which is a lot um whereas other airlines are all these up charges for everything else so I mean because for business things that we've done I have flown other Airlines and it's a much more involved process of both checking out and then also um boarding the plane because it's separated into groups and there's all sorts of different charges that you have so the gap between the original fee that you pay for the fair and then what you end up paying is bigger at other Airlines and that's working well because we're in an environment where people want a lot of upgrades and things so it's worked very well for the other airlines that way I mean I think Southwest would have benefited if there had been a recession faster I don't think it's an accident that Southwest has underperformed other airlines during a very long period without recession in the industry and the activist what what's his uh main gripe with the company I don't know what his main gripe is with the company but I mean it is underperforming other Airlines and they're going to make the changes that you know that they they're going to make other changes I think to look like other airlines my guess is that Southwest will look like the other Airlines at the end of this but we'll see if that's true and you think that's going to ruin the customer experience then it sounds like no I think I'll make it the same as the other Airlines and just will eliminate some choice that people had you know it's interesting because from an antitrust perspective and everything the Southwest making these changes is a much bigger deal in terms of competition than any of the spirit stuff but the government has no ability to set policies and stuff yeah it doesn't have I mean if you merge and stuff it has control over that but it doesn't have control over whether you all choose to price the same way I mean it has control over that if you explicitly do it but airlines are so transparent that they can coordinate whatever they want to do um they can all set their prices the same or whatever without talking to anybody so it's very easy for them to know what they're doing and to all adopt the same sorts of policies and everything so but from a consumer Choice perspective more diversity in the industry in terms of pricing models and stuff is is generally what would lead to more innovation in terms of different options that you'd have and I think we'll have less of that from the both of the things we're talking about changes at Southwest will make it look like the other big Airlines Southwest is a huge Airline domestically and then also you have on the um real low end like Spirit um with being a choice of all those add-ons you know Spirit probably 50% of their revenue or something comes from things that aren't the base fair so you have two completely different airlines that way one which is all about the base fair and one which that's very small part of it and both of them are changing in some way so it's you know it's making it more commoditized that everyone's going to look like the other big Airlines mhm I felt like a fish out of water the first time I flew Southwest yeah yeah it was definitely a different experience I was like okay I'm following the herd right here uh let's look at South Line or Southwest Airlines and uh get your thoughts on the valuation 17.7 billion market cap 12.7 billion Enterprise Value uh price of sales is7 I think we've looked at airlines in the you know past couple of years and at one point weren't they at like3 or point4 uh price of sales about 0.5 e sales okay um 10-year ker Revenue 4% assets 6.6 uh e to free cash flow on a TTM basis 14 and a half times uh yeah what are your thoughts on these levels yeah I mean you see the entire chart you can see from 2000 to today Southwest hasn't done that amazingly versus other airlines so I mean as a stock I think it would underperform the S&P probably or has not done well for 25 years and would have been amazing stock performing from its founding through about 25 years ago and you know you have change in the model and change in leadership over time um it's typical of what we see with a lot of these amazing founder-led companies you know it's like a Walmart to me same thing Walmart had a model that was different from everybody's it worked for a long time and then eventually you know kind of isn't anything special now and there's no room for them to deploy Capital at better rates same thing happen to Southwest eventually but we did do a podcast I don't remember what we called it but we went back to looking at what the airline industry looked like say in 1995 and everything and showed the consolidation you had so many new entries yeah I mean when I was growing up on airlines you wouldn't there um most of the airlines I flew for the first so like Trump Airlines no but I would have flown um let's see the only major airline that I would have flown that people would know about and its name has kind of been erased at this point is Continental which became United Continental um and you know that's major but we're talking about probably twice as many major players at that time and then most of the other ones were airlines that came in flew for a few years and went away um and no one would recognize the names and some of them would be flights from particular places without coverage on the rest of the country um and there's different reasons for why that might be we talked about loyalty programs and all that and the importance of that but also just you know slow down in growth I mean when growth in industry is too high in terms of Passenger numbers increasing all the time um you get new entrance all the time too so as you've seen growth is really a lot lower in the United States certainly Southwest you can really see it because they focus on domestic us um there just hasn't been a huge growth in that industry and so you know people don't pile into an industry with 6% % growth or 4% growth or something but they do if it's 20% and that's also helped that they're just you know it's a very mature industry in the United States it'll be interesting what do you think will happen with uh spirit do you think they'll just uh eventually get purchased do you think well I don't know I mean process what do you think I don't know it's it's too detailed for me to know that in terms of could be possibilties for people to make money and things in in debt that we're talking about um because you don't know the exact way that it'll shake out right because it could end up in a way that has some value there for a lot more value um depending on if there's some deal of you know that it's somewhat attractive to people to consolidate stuff right I mean some of these things are attractive to people um I mean there were two biders at one time you know two different biders that want to offer a lot more money for the company than what it'll end up being but that's also when we talked about us steal right there I mean there people want to pay more for that company but will they be allowed to so it's the same sort of thing now dish and Direct TV is the same sort of situation so they've been blocked to go to merge blocked you know and then um basically sold for like a dollar so basically like a bankruptcy it's not much different they're just assuming the debt to merge the two together but that's a change in the industry where the feeling is okay um satellite TV is such a small part of the overall options now that it's okay for them to merge but for a long time it was blocked on that interesting so we could talk about our topic and uh the topic for today is going to be um from an email that someone sent in and it's an investing business model topic and I don't know if we've ever directly talked about it on the podcast so I thought it' be great to chat about it and uh this email says it's about scaled economies shared I've heard scale economies shared I've heard scaled economics shared um so semantics uh but this concept comes from Nick sleep at Nomad and he owned Costco and Amazon and I thought this email right here lays it out well and uh then we can get your thoughts on it so the email says for people listening my question is concerning the scaled economy shared business model this is regarded as an excellent business model by some investors essentially if a business benefits from economies of scale they share those benefits with their customers through lower prices this enables the business to increase market share in turn gaining further economies of scale reducing prices again and the cycle keeps repeating it seems this business model inherently traps a business into growing Revenue without much profit growth due to constant price reduction and if the business ever wants to earn higher profits they will need to increase margins thereby opening up an opportunity for competition a business that struggles to increase profit without losing market share doesn't strike me as ideal I'm curious to hear your thoughts on all this a few examples of the scaled economy shared business model or possibly Costco Amazon and maybe Ford around 100 years ago so just put a like a illustration on that yeah did some Googling around I think people listening generally understand it but Costco lower prices better value prop uh increased scale and efficiency which gives them lower cost per dollar of Revenue which gives them cost savings returned uh increased scale lower prices in the circle or the cycle all works together uh Amazon similar fly flywheel right low prices great customer experience experience better traffic more sellers uh better selection yada yada yada right we all know the story so was the same idea there you go the exact same idea so and and there's others too it's it's not it has nothing to do with whether it's technology or not technology Western Union was similar what we're talking about is uh there's a Jeff Bezos quote on this but basically it's any company which Cuts prices ahead of time when it can't prove that the increase in volume will exceed the uh decline in the prices initially but believes that it will over time so in other words you know you're in some commodity business and you figure this happens all the time where you figure okay I can reduce my prices from $100 a ton to $95 a ton but the increase will be like greater than 5% of my volume so I should do this but that's a projection for this year what Amazon would do is say we can't prove that the increase is going to be bigger but we should cut our prices now and so they talk about it why I mention Western because Western unit always called them pricing Investments but it's the exact same idea they would cut their prices over time and so the cost of um what's essentially like a wire sending these uh money from one place to another um fell all the time now there's others that did similar things and didn't share that right so that's where you get your really good businesses your like visas and Mastercards and all those things where they they get a lot more scale and yet they don't have this idea of cutting prices as being the way to drive further volume um and then there's lots of other businesses is where if you did a comparison over time you realize oh they haven't really gotten much more expensive um if you look 100 years ago a candy company soda things whatever you might think oh they're raising prices all the time they're not because they've changed how they package things and so their price actually stay pretty low because they have so much scale they're not thought of the same way as focusing on keeping costs really low and giving it to customers but actually their profit on each unit is like in real terms it's down over time they're just doing so many more units right so it's normal in a scaled business like that uh cruise lines are also similar but with each of these you have the problem that you have a constraint I talked about Village Supermarket Village Supermarket would have the same model but they can't keep opening up new locations and everything so there's a limit to how many people that causes overcrowding in one location you can't it's very hard zoning rules and all that get approvals get all this to open up a new location it's not like what you have with the Costco or even better in Amazon where they don't even have to worry about those things so you run up against that Southwest had it for a time but eventually you've taken away much of their competition was bus stuff early on that's who they're taking the business from you fill up all the gates you do all that you end up starting to be in highly congested airports and all those things and you run up against a constraint again um you know I don't know that Walmart was able to do this kind of model too much after they got out of rural areas and in other sorts of places but some of that was also there facing tougher competition because then you're competing Grocery and stuff with people who are in Suburban areas as good or better than you whereas they would never face that in rural areas there's very inefficient grocery operations in rural areas so I think it's a model that makes a lot of sense up until a point that you will reach constraint with that and this was about those that can get really really big in a huge Market the other thing about it though is the model is built on the idea of faster turns so your margins could be lower but if you have good turns if you have lower Capital intensity you have to invest less yourself then this model makes a lot of sense you know and then we get from that we could talk about Dell computer whatever where they're basically operating because they're on negative working capital cycle is how they got started and so they're able to do that on what looks like low margins but they're not investing any money in the business you're usually squeezing the other side in some way either by getting them to extend you long payment terms or um you could be doing it through getting them to to accept lower margins right so you know you're helping your customers out a lot and hurting your suppliers a lot do you agree with him that this sort of traps the business I think it it's a very specific system it will work for a period of time and have great returns and then after generation or two or whatever someone else will will overtake you and and the problem is that it's so such a um integrated systemic advantage that you have that that will unravel like we saw with Southwest right and so then you'll fall and the question is how far will you fall if you're an airline or retailer you could fall to really bad places so you know I think I would like a business with this kind of thing especially to the extent that the founders around so it's really like a thing right it's great if you want to try to go get market share well it's interesting because like Southwest never focused on market share whereas others did but they did keep cutting their prices um and they didn't raise their prices when they could have made more money in some cases early on they just basically like Costco like were kind of just saying let's not raise prices on certain routes Costco would say let's not raise prices on certain um things that we do because I think this was even a discussion behind the scenes in Costco was yeah we could do this and no one would ever know because we got it a ridiculously cheap price some for some reason on some products but um it would look like we're doing our normal markup but then if we let people inside the organization do this kind of markup then that means that in other cases you'll come back to me and say I want to do the markup on this and this this and soon there'll be 100 SKS a thousand SKS that we're doing this on and we won't have the same model anymore um yeah so I think it's it's very powerful I think most of them though are highly associated with a single founder usually in the period where they're successful and I don't know how many last more than 30 years or something of success that way but it's possible there's a lot of them in really smaller companies that you just don't know about because they they top out at a much lower level and so the thing is with a Costco or with Amazon with these retailers that cover all sorts of things then it's a really really big market and so they can keep repeating this in place after place there are other ones in other Industries but the industries are just so much smaller that you want to notice this and then they top out somewhere but if some point you will reach constraints on your growth which will be a problem because you've been using that to improve your price Cuts basically you've been using that to always be a step ahead that way at some point the engine will kind of stall on you mhm right because things like Costco and Amazon stuff haven't invested let's say in advertising or in doing other things to increase anyone's desire to use them when their prices are different or their convenience is different than someone else right so that's kind of the problems that you face um gosh Costco's valuation 390 billion 52 time earnings 58 time fre cash flow you to sales 1.5 but for a uh company like that that's still pretty high it's just crazy very expensive do you have any thoughts on Costco's valuation I mean they're going International right yeah the stock price is too high but you know there's always the argument that if you're in the business and it's working then why not keep holding it I don't know that I would tell people to sell something like Costco if you thought that nothing was changing with it you know MH the reason to get off the train and Costco Amazon Southwest when I mentioned that or Western Union or Cruise Line things I talked about or whatever is when you think that the there's something about the model that isn't working anymore and that's why you have to get out of there but it's just a question of like how far will you fall I mean the thing that worries me with some of these is you know if you look at say Intel right Intel probably has half the market or more there's a leader let's say at least in many of the things that they were the leader in a long time ago you'd be surprised in terms of how many you know PC how many um home computers and things still use Intel stuff how many things in an office would still use it and yet the company makes literally no money now and hasn't really made money for like two years um why is that um there's so there's a lot of problems going on Intel you can see most clearly in the gross margin generally you know that's why you want to get out as as soon as you're seeing that I mean has a gross margin even ever increased in the last 10 years or something no it increased once I guess for a little bit right MH yeah it did increase once from 2016 to 2017 increased but in all other periods um gross margin has been decreasing which is would in this industry would be a warning sign probably if you had to measure one thing that would be helpful an improvement in gross margin in that kind of business is good a decrease in gross margin is bad that's your prob your best signal in a semiconductor type thing um why is that you would think with scale and bargaining power and all that sort of stuff that that would not happen but they did top out you know like when we talked about with the so like on relative scale I don't know where I was saying that they're still very big which is true but on a relative scale basis it's not like they kept gaining relative scale I mean one thing when we're talking about Amazon Costco Etc is they have historically even now been gaining relative scale m um if you look at Costco even though they're much slower the last 10 years or whatever they're still growing faster even in just an item like Revenue than the industries that they're in right so they're a little bit bigger versus competitors every year um and in all these things actually it's generally relative it's not generally it is relative scale that matters it's not very important what your overall scale is how big you are although companies talk about that it's not really that important if you have 50% market share and everyone else has uh you know I I if you had 50% market share and someone else at 45 that wouldn't be better than you having a 10 and everyone else has two um it's really your market share divided by the other person's market share the next closest competitors really that's what we're talking about and so gaining scale that way is helpful um but it's also when we talk about scale it's also based on I mean an individual Costco is pretty big we it gets complicated because we can talk about individual planes individual stores Etc um individual lines that you have in certain things is where the scale might come from you have to really look at what things a company is doing and what it's actually saving money on versus others you know having a I take the semiconductor example having a highly Diversified semiconductor group I don't think would provide benefits of scale but having a single Blockbuster product uh would definitely you know drug companies a single Blockbuster product would provide a lot of scale but there would also be some scale from from having a portfolio of many different drugs so there's some benefit to that too I don't know that there's much benefit from that for others um so it depends on are you talking about like the manufacturing function is the most important thing of doing it yourself is the design things that you're doing yourself is it the amount of buying that you're doing like Costco of a single product in a certain quantity is it where's the scale coming from you know I think it's always important to talk about not just how big something is um yeah that was your tell with the gross margins aren't they uh likely going to get bought out or something like that yeah there there's a few different possibilities of people there's a few different possibilities of people trying to buy them they're also trying to Pivot into other things but it's not like you really would have had to look at gross margins people who follow these industries know that Intel has been I mean we only go back 10 years in that it's been long ER than that that people who are following technology things have been saying that they're lagging other people and that it's a stock to avoid in everything it's more the value investors who would have been investing 10 years ago in [Music] Intel interesting what are some other good businesses that have this concept of scale economy shared well mainly it's going to be um very broad retailers like you have Amazon and Costco and Walmart are the best examples because they're also similar to doing the exact same thing um it's also going to make sense as a retailer more than other things because there's some issues with doing it in other Industries so the benefit to a retailer is that doing this to shop with us is really something where you can capture all that benefit for yourself and you don't necessarily improve things for the industry overall uh the problem with something like Ford which I think he mentions in that email uh in that question is that of course then that creates some issues we're seeing that with Tesla which I've mentioned a few times the problem is that you then create a bunch of used Teslas and you also tend to create other things where unless you're fully integrated in terms of In-House doing everything yourself you're also creating a group of companies around you to support you that can also support your new entrance and your competitors in it so you know if you need um if you're doing some special things yourself in house then yeah you're gaining that advantage and that scale over time but if you are doing some things that are somewhat outsourced in terms of what's supporting you then there'll be more support for the next one that tries to come into the industry so generally you know Ford made it easier for others to come into that industry um but on a relative basis was making it harder because they were getting better faster than others were but they were also making it easier for others to just start up a business and have more support from other things and even something like Tesla or whatever does benefit from the fact that there was existing infrastructure for making cars in the United States um that weren't electric I mean Tesla the companies that they use for for um a variety of different accessories in the car and stuff are are just the same things that other major manufacturers use it has nothing to do with whether they're electric or not so you're not starting everything from scratch that way um the benefit from Amazon and Costco is to some extent to take a a cynical view of it they're not really helping the companies that they sell through them as much as others would right so they get to capture much more of the benefits themselves in other Industries you're helping the companies that you deal with closely a lot more um so Amazon and CoStar taking advantage a lot of a base of C of um suppliers that's pretty Broad and they aren't helping any one of them too much to get too powerful and where that to happen they might you know try to to get um to drop them and everything and still have a great deal of power over that it doesn't work perfectly all the time some of them have had problems with some of the Walmart wasn't able to get away from some private label things because they were using someone who ended up bigger than than they were you know um so there's some cases where there's a lot of bargaining power with them because on again on a relative basis they're not that big Costco had their problem I think with Coke right they hadp with Coke wanted to get rid of them and that's difficult because you don't have them many choices so many happen what happened with that situation I don't it was a long time ago so I don't know how it was resolved and they didn't publicly say this is how we resolved it but I would guess that it was resolved without being terribly in favor of Costco um so you know that's always going to be an issue where you have suppliers that are as big or bigger than you are there's a limit to how much you can do with that I mean they could try to say we won't cover we won't buy this razor brand we won't buy this brand of whatever but if you do to that too many times then people don't want to shop in your stores you know um but the Costco model is very good um and it works there's a limit to it though I mean I've shopped at Costco and I don't use Costco so it doesn't appeal to everybody um Amazon is more likely to you know be something that appeals to everybody obviously say is there technology aspect to it on where it could be very successful I mean technology allows for greater scalability of it but it isn't a technology specific thing um I mean it's usually so to do pricing reduction Investments there's a few ways that it can be done one you could have very large Stores um very large units two you could have a high degree of investment in capital three you could have high degree of investment in technology four you could have high degree of investment in advertising now accounting wise they're all going to look different but they're all telling you the same thing which is that you have to put a lot of capital UPF front into something and even a price reduction and has similar you know things that you're doing so you're basically saying that you're going to change the structure of the industry to benefit you more over time by doing this and you're increasing the fixed cost of what you're doing and decreasing the variable costs and in most Industries how the early leader gets a lot more power over it if they were to seek it out to be the one that would dominate the industry what you want to do is to greatly increase to turn variable costs into fixed costs to increase the amount of investment it takes to start something up to make it so that now you can't have a 5,000 foot store you need a 50,000 you need a half a million square feet whatever to keep other entrance from getting in you want to shift things from variable type stuff to fixed stuff right um you have to have a base level investment all the time you have to buy a certain minimum order size you have to whatever you're upping the stakes that have to happen all the time and then you're hoping that your subscriber base your customer base whatever is large enough to be able to absorb that um very high overhead that you have effectively because the commitment of someone like Costco or Amazon or whatever is really high compared to someone just trying to compete with them now you are you know and so you're trying to consistently make money that way but I mean I I think that works for as long as the system is effective that way but it is a question as to when that system breaks down um and it mostly happens because you you suck up all of the available business that you have that way like Amazon is a good example probably five years ago is when Amazon's share of my online purchases peaked right now I would have been a customer with Amazon for about 20 years before then but that's probably going to happen with all customers there's no reason to think that Amazon will have a larger share of wallet after they've had a customer for 20 years so if you were an early adopter of Amazon things you would have already topped out years ago and be using other places more often so it doesn't mean that I don't make the most purchases of anything with Amazon I probably do but it's definitely been losing share consistently since then losing share to what everything else a lot of direct stuff everyone has adopted many of the same things as Amazon so why not just buy from a manufacturer it's more reliable to go to their own website than to use Amazon to be like jet.com walmart.com I constantly hear people that like talk about how great that experience is other smaller retailers yeah it's easy I mean it was impossible we're doing a podcast right now let me tell you that when I started a podcast in uh what 2005 2006 or whatever it was really hard to do now it's easy no problem it's really easy to set up a a store and sell things to their web now it was impossible when Amazon got started yeah it wasn't just impossible for little sellers it was impossible for big comp compies to do it so Amazon created all that but now that's all out there for anyone to use yeah weren't we talking about uh recently privately because there's been Innovation a ton of innovation in the podcast industry even since we've been podcasting right we should have been the ones to do it we would have been the perfect entrepreneurs to use something know how it works understand what could be very helpful beneficial and go and create it and a lot of those tools are available now what we're recording this on right now uh streamyard uh it's a great platform I wanted this back in 2017 2018 um you know so it is kind of funny how that does happen yeah yeah so I I mean the leaders will and you'll get to a certain point where the leaders will lose share over time for a variety of issues including it's easier to get into the industry with some of these things when there's a big boom in terms of capex or whatever and there's Capital that you have that helps um and then the other thing that you have is like they become the experience that people don't want they will the things that people will complain about will start to be the things that Costco or Amazon or whatever does if that's the main place that they shop you know it's hard to be number one that way because then other people will be able to compete with that by saying let's take a different model that that people like better so generally sounds like you like this model if it's founder Leed owner operated I I think it creates lots of money for a generation or something but then probably over time yeah yeah so I mean the the thing with a I mean it did with Southwest why I I mean I'm saying why is Costco gonna be different than Southwest or something maybe that's a question why is that or why will not be just culture just culture as soon as the people aren't the same you know so there's already been changes in terms of literally who's running Costco but as long as they're committed to that then you won't have that problem but that's a problem potentially at people ask about Geico and Progressive it's a problem it is uh a retailer is very similar to like a a an auto insurer like that you know trying to do low prices and everything and it will work but I mean I think people think that retailers are a lot safer than those Auto insurers and I don't think that's necessarily the case um as long as that culture stays in place and they pursue that every day then that's fine but if you think that Southwest could half pivot to adopting some things that other airlines do and not others and stuff no but they already have you know Southwest has already moved a lot of other things to being more like the other airlines anyway so it's just it's different and has been for a long time but if Costco says we'll do halfway to what others do if if others you know Amazon any of these things that we're talking about start doing that overtime you know they'll get away from some of the things that they were focused on initially others will be able to come in and compete with that you know um I mean it is you have a model here which basically requires you to have volume growth to drive price reductions to drive volume growth to drive price reductions if you start to lose market share and have volume decline you know what happens and that would be the challenge that any of them face that way and so I I mean if we're asking in like a steady state is a retailer like this safer I mean you're in an industry in which you went from no market share to a lot of it by grabbing it over time by doing these things unless you somehow change the industry so that's not that's not possible again that's the problem it's the problem of social media things that did something by being very viral and stuff unless you made sure you seal that door very safely behind you you're in an industry where something could have incredibly rapid growth to compete with you because you did it so the same methods presumably exist for someone taking away a lot of business from you if it's the next thing [Music] got it let's hop over to some questions on uh X and uh first question that somebody had sent in PSU incentives based on stock prices like Tesla and HR thoughts uh so performance uh was it performance share units I believe is the acronym yeah performance stock units and you get certain Tres based on share prices do you have any thoughts on that I mean it's easy to calculate so it's easier for me to do than what most programs look like what you just showed me is a lot simpler um usually it's pretty hard to figure out what um to figure out what is actually being said about when things will be um uh yeah that's pretty that's awfully simple what we're reading there you know mhm if it maintains for 10 consecutive trading days and all the yep that's really simple mhm I guess I mean we talk a little bit about this before I don't think these things need to be overly complicated if you say that in some big upside situation we're going to give you a lot of um money then I think you've incentivized people um so but there's a lot of ways that effectively do the same thing and many of the things that they give to Executives it has the same thing which is if your stock price goes up a lot you're going to make a lot of money um this makes that really really plain oh it's like the court that blocked it though for Elon Yeah well yeah that's a complicated issue because you have the problem of that we could talk about you know with any of these things which is the problem of um uh you know should you pay someone a lot of money if they're not not going to leave you know I mean if if you're asking like should the company do the right thing and have paid him a lot of money to keep him because they actually believe that he could leave is a risk if they don't do that then yeah they do the right things for shareholders right but if that's the argument then in theory uh CEO or whatever could extract all the value that they create for a company from boards all the time right because they'd say you know why every doesn't Jeff bezo say when he was at Amazon well I'll just leave and start up another company and stuff I think it's worse than that I think they he negotiated that and it was voted on by shareholders years before before Tesla had the meteoric rise and then it hits and then they weren't able to pay it because of a Court ruling on something that the shareholders voted on that seems a little bit to uh like communism to me or something I don't know I don't know what it is but that's not capitalism in my eyes you know it's a bit bizarre and funny enough he reincorporated all of his companies in Nevada after that instead of Delaware yeah well that's what will re well that's what will really change it is that courts won't do that because of that reason you know if Delaware starts losing some business to Nevada or Texas also encouraged other companies to do that you know which who knows if they did that's this is what happens with regulatory things all the time is that they all end up going to the lowest it's a race to the bottom that way because everyone has to change all their their rulings and all of their legislation and everything to make themselves the most attractive venue you know if if there's nothing else keeping them there Delaware is a state of convenience anyway for them so they'll just go to another state of convenience so uh let's see any thoughts on PN uh PNC Insurance market and what investable opportunities there may be in that current market so thoughts on any PNC stocks um we've talked a little bit I guess let's see what do we talk about I mean I guess Berkshire at one point bought some chub shares we probably talked about um we I just mentioned Auto things but I know that You' mentioned things about you know how Geico is doing versus Progressive and all of that um um one that's not so direct if you could look at home serve um that one's the ones that someone may not have heard of because technically it doesn't describe itself as like a PNC um I'm sorry front door front door we'll look at front door Home Service fine too but we'll look at front door that's the U it's a US Stock so it's better um so this is just helpful in terms of understanding what happened so if you look here what this company does is they offer you know home warranty plans in the sense of I think they operate under the one that's probably best known in the US for people watching cable or something would be like American Home Shield something like that um so you know it's going to be that you're going to just pay like a one-time price um per visit or something for a repair plus some like max amount and so you've basically smoothed it out so if you need to have appliances fixed and whatever that are covered Plumbing things that are covered by the um uh policy that you take out then you know it Smooths it out and this is very attractive especially to senior citizens and all that kind of stuff but I just pointed out because it has some of the same it basically what it is doing is being a insurance company even though that's not how it's described and so if you look over a gross margin I think you could see this best of what happened during covid if you see a pretty stable margin historically right I mean not in all years but pretty stable and then you have this um big decline there and then improving from that but you see on that base that that generates a lot less gross profit than they might expect which drives Opera profit down a lot so you had almost it wasn't a 50% drop but what is that that's a very big drop let's see 40% probably yeah drop in operating profit in what's normally a company that doesn't have a lot of those kinds of declines and so that would happen for any kind of insurance thing when this happens where the the cost went up so much so is an issue where the frequency is normally more the issue so if you look at previous years you know with a company like this they'd normally say oh there was some storm in some part of the country that caused like all this higher frequency than we're used to or whatever but it's not usually that when we went out to we had to pay service people you know so much more money to go out there and repair things and the actual cost of these things went up so much during covid so um that's what happened and then as a result you know you have improving things as inflation slows down so if you're betting on look if you're betting on Lower inflation um you know inflation slowing down everything in the near term then I think Insurance things are pretty good they're not very economically sensitive and they do benefit a lot from having higher inflation in the recent past that's slowing down a lot that helps them push through higher rates in the past and then you know the actual costs come in lower what you don't want with insured generally is when you and or the insurer Andor everybody is expecting um lower inflation than actually happens that's the big risk and uh it hurt here with covid but that it really killed people in in the 70s they constantly predicted that inflation would slow down when it didn't so um here's something any other podcast recommendations what's on your uh your playlist Jeff I don't listen to a lot of uh podcasts and C mostly I listen I read um Business book things not listening to the podcast I did mention that I thought Founders podcast was a good podcast because I had avoided it for a long time thinking it was about um Steve Jobs Elon Musk uh whatever you know very very recent Founders and covering them you know 10 different times for that one founder whatever but it does cover people from the 1800s 1900s more obscure ones so it was much better than I thought it would be so I would recommend that because it's a way to find more books any P any podcast that can recommend things to you I think is a good podcast that you can use it to find other stuff so discussing books as podcast is always a good choice I think what about you Founders podcast um I don't listen religiously but sometimes every now and then I'll see it come up like oh yeah I'm actually interested in that person or if I do come across a biography or an autobiography about a individual I'll see if he did a podcast on it and often times he probably has uh even obscure people um so I don't really I do think his podcast is amazing though and he seems like uh he's doing amazing work uh David uh but I would say more so the podcasts I listen to are Market um related so I like uh me fav Faber uh for guidance although the guy that uh hosts that podcast I think he's doing something else now he just tweeted about that um let's see what else um I like value hiive um yeah I do listen to Allin the podcast uh now that's much more like I would say top down like economy and politics and like what's going on in Tech I do like to get the different opinions I think they have pretty cool guests on there um of course I you know I do uh I don't listen to every Joe Rogan podcast but every T every now and then when he has someone on that's interesting I like to listen to him like he had Peter teal L uh listen to that uh Lex Freeman I would say I don't listen to like every podcast religiously unless it's they have a guest on that I'm interested in or they're talking about something that I'm interested in um but no podcasts are definitely I do listen to a lot of podcasts but I I I listen to or watch a lot of YouTube that's like my for form of entertainment I guess is YouTube so Rogan on there Lex all in different podcasts um if I'm interested in an investor and they go on something I like to listen to it um I definitely watch and listen to a lot more YouTube than I do just on the podcast app okay yeah yeah and we on both some people can get us both ways that's right that's right um let me see let me pull out my podcast up because I just want to make sure I'm not missing podcast that could never I mean Joe Rogan I guess is technically not a podcast now because of that but podcast that can't take away YouTube They can they can that's their choice if they want to get rid of our channel one thing I'll do too is if I'm interested um here we go American history tellers that's like American history like that um but unrelated to investing um if I get interested in like a particular industry or sector or um commodity the first thing I do is I go not the first but one of the first things I do is I try to find a podcast on it so we talk a lot about entertainment right there are podcasts and in movie theaters there are podcasts that are dedicated to the box office yeah so I like to chime in and listen to that right if I'm interested in um energy or a different commodity uh grain this past summer I was just for whatever reason interested in corn and just kind of just seeing what was going on there because of floods that were going on and droughts or whatever I found a grain podcast I just like to listen and go and listen to like experts in their industry so it's actually part of a research process for me um but like I said I kind of hop around I go by if I it's a topic I'm interested in that that person or podcast is talking about so yeah but it's a good way to do it you know when we talk about like the box office or whatever there's people where it's basically like a magazine this is their entire life that's all they focus on right we kind of come in and out of these industries and we focus on a lot of different things and it's like these people this is all they focus on so it's good to go in there and get their thoughts and hear what they're doing I mean box office uh Pro I believe is the one that I listen to on uh as a podcast which is about the box office obviously and movies and all that sort of stuff yeah it's the podcasts are basically magazines I mean that's the real economics of them I mean when you're talking about Joe Rogan and stuff that's like a radio station that covers the you know Globe the country but um generally there are these Niche things that focus on what used to be what you're talking about there is like there used to be all these trade magazines and everything but there was also espcially interest ones you know I think Munger gets quoted on talking about how they were getting killed by this um Motocross one or whatever you know um because he was saying just the economics of of a magazine focused on one particular thing used to be really big that way and it's helpful if you're a hobbyist or whatever in something um so it replaces that kind of thing I mean look what was it what did I say yeah if we go back 25 years I would have read like PC Gamer magazine or something right so that's just focused on that one thing it's not a trade magazine that was more of a hobbyist magazine and then you have other ones that are actually trade magazines like you said which is more like that's kind of replacing the Box Office Pro stuff is kind of replacing like variety and all those which printed all that the numbers yeah the numbers is a good place for data there's definitely places I go for data that I find very useful trust to at their publication their magazine that comes out monthly they have a business report it's 65 bucks 65 bucks a month or something and yeah yeah so the numbers that's the word the and a Dash then numbers.com is the best place for box office data really they are more famous ones that used to be good but I think people who really are interested in the data uh all use this even I've I've I think they're using it other sources that I'm seeing and stuff I think are actually probably regularly checking this because it's just better than the ones that are owned by the big companies now so um because I'm sure people know originally like Box Office Mojo was probably the first one that that was regular thing that that I think articles started citing and everything but that is a useful place if you want to see real data on all that stuff um yeah I don't listen to as much of the uh things that are let's see like I did in the early days of podcasting I listen much more to podcasts that would be similar to ours I guess um I talked about how I listen to the value guys that was the best podcast that I listen to because they did individual stocks every time and they used value line which I would be reading all the time then but that value got annoyed at them and you know the best marketing that was the best marketing for Value line too probably yeah to go to just go through uh industry groups right because value line is organized by industry groups so they would have to make picks through different industry groups and then it would you'd cycle through it once a quarter I do still recommend all I mean I can't recommend value line because it charges a lot and then has those problems like we said so I can't really recommend it as an organization but as a publication that kind of thing you're creating something like it for yourself is a good thing to do and that podcast was excellent yeah mhm okay let's see um can move on to the next question how will the possibility of more damaging storms impact the insurance Market in the short and long term uh I I'm not worried about it to be honest I mean the policies get repriced pretty quickly and everything so it's not something well okay so you have Universal there if you're talking about like how will it affect Florida and the politics there for things that individuals have to buy for their homes that's a specifically reference uh the Florida storm well yeah but I mean I think that that did a lot of damage outside of Florida North Carolina yeah that's specifically yeah so if we're talking about shifts in societal attitudes in regulation whatever yes I would worry a lot about Florida long term because of the um kind of political environment and everything yeah it's a really big kind of political issue it's it's effectively like having a tax in the state so could a could a state make bad tax policy and get into deficits and have trouble you know refinancing and everything yeah and they could do the same thing with like with homeowners insurance some states have with car insurance in the past I can tell you had problems with some of the policies they adopted just didn't make Financial sense for the the insurers and so the insurers withdrew from those States and everything and that's pretty normal um so I would worry about in aate where it's that important um outside of Florida I don't know how many states there are where all the voters are going to care so much about the issue that it leads to possibly irrational policym you know but you would know more about that Andrew what are your thoughts on that Florida I think they're going to go up yeah I mean Florida's insolvent basically uh or the insurance there and it's basically state ran is what majority the people are on citizens and premiums probably need to go up yeah and it's uh I mean they were talking about that at the Burkshire meeting too a g Jane and Buffett were talking about that in Florida yeah the things I worry about insurance honestly are not this makes the industry sound darker than it is perhaps but they're not really the actual natural occurrence of things that we can all agree really happened or will happen an increase in frequency they're how human beings will deal with those things what policies they'll set up what systems how smart or dumb that is uh what that can create in terms of Fraud and other sorts of things expanding um ideas of what risks are covered and just disagreements over that and um but if it's something as simple as you know how many storms of this kind name storms will occur an earthquake of this magnitude here whatever the policies are adjusted you know uh I mean I wouldn't worry more about those Insurance things than than like we don't talk too much about that when companies make long-term loans Banks and things and say how different will the interest rate environment be you know down the road these companies are much more Nimble for the most part the insurance things we're talking about to adjust to that than than all sorts of contracts and agreements that people enter into all the time so it can be adjusted for being more really bad storms I I don't worry about that and overall that would make the industry bigger I mean if people you know if we have self-driving cars that cause accidents to be nothing that's actually more of a risk to an insurer than we have a lot of terrible storms that cause them to pay out a lot in losses paying out a lot in losses is their business over time as long as they price it right so lots and lots of losses aren't a negative for the industry as long as it's priced right and whatever your thoughts about global warming or whatever it's not a question of things changing dramatically in a single year or two or three it's it's a trend that you can see over time so I I think that that's not potentially a problem but I do think certain States certain places yeah I think that it could be a problem because if that gets to be big number um then people are going to say this is something we want the government to be involved in and this is something I care as much about when I vote as the quality of my schools and what my property taxes are and stuff it becomes a top issue then yeah they're GNA it's going to be what people want which probably won't economically work that great next question cashtag Jeff really seems to have a great interest in entertainment companies movies Etc but I never really heard him talk about owning them just never cheap enough question mark that's a good question uh there are the let's see the Twitter handle there oh X excuse me is small cap value right small cap value yeah so I'm just mention that because yeah there are opportunities in small cap value entertainment things uh I think mostly it's because I wouldn't own the big giant companies to be honest um but we've talked about that with banks where I've said you know like look I probably wouldn't own Bank of America Wells Fargo um JP Morgan and I probably wouldn't own the biggest entertainment companies the biggest entertainment companies are super Diversified and I don't see a lot of opportunities in them either in terms of interesting Capital allocation that they do interesting leaders of the companies and just like pricing things but you know we point them out when we talked about cinar and Marcus so that's like a a they're both considered small stocks but Marcus is really small and sarks whatever mid or something that at this point um so or or I guess Marcus would be micro and Sark would be small or something but yeah there are opportunities in those kinds of things and we do have or have had exposure even if we just we don't talk about it on the podcast but yeah we do or have had either or no that's true it's just that it's smaller and less wellknown and stuff is generally the case yeah MH yeah I've own entertainment things before myself and over the years plenty of times MH how long do you wait before deciding if your thesis is broken or the company is just experiencing a temporary dip in performance um that's really hard to say so it depends on you try to be say here's what we know is happening and then try to come up with reasonable explanations for why that might be happening and in some cases that are pretty noisy you might want to wait a while I mean you could get out but basically you would think your thesis is broken all the time just because the economic environment changed a bit because whatever happened and so you'd be doing it all the time in things that are very very not noisy uh then it might be able to get out fast so like let's say um years ago Buffett was invested in anheiser Bush right if he's seeing volume declines in there that are more than he expects in that then you could get out right away there's very very little noise um in the actual if we're talking about actual consumption Trends if he had access to that data of what's actually being sold at to the end consumer and comparing market share right and he we know he was a subscriber to the um this one that covered the soft drink industry but not necessarily hard Beverages and stuff but if you had that kind of data you could get out on very small I'm talking just very small incremental loss of market share you should get out when I talked about Intel we said look at this gross margin stuffff if you knew the industry really well saw better gross margin at other places and worse at Intel then your thesis your original one would have been wrong it maybe would say okay but it's justified by the stock dropping and there's some other thing that's going to happen that's going to work out so I shouldn't necessarily sell the stock that might be the case but obviously you'd have to accept that they were in a worsening position over time um in other ones it's really really hard so fast changing noisy Etc so any economically sensitive thing it's nearly impossible because you don't know what we're seeing in terms of how much of that is macro type stuff so you're looking at and you're saying oh it all has to do with this company but it's macro type things that are happening so in most Industries we don't have the kind of data that we're just talking about with box office data with the numbers we can't compare each company to every other company at all times and see that oh they're not actually losing their relative position or something you know and that's on the negative side on the positive side where you could misunderstand that would be like AI or something right now where you could be making a lot of money but you don't realize that it's like well some places like they just are not even able to meet customer demand and so you don't have anything that's impressive but you're getting orders or something you know what I mean that would be the kind of thing in the opposite direction where it's noising you don't realize that a rising Tide Is Lifting all boats and that on a relative basis you're not looking that good but it's mostly if you have really clean data on a relative basis to be able to understand those things I think it would be that that would be the best way to do it it's just a question how much noise there is let's see how to think about companies that have hidden real estate value on their books if management has no specific plans to unlock its value yep um I don't know what are your thoughts on that one I think it depends on the management for one thing right yeah and then it's kind of soft signs of trying to figure out what you think is going on um I would say a lot of it is where the idea is sourced from normally if you got the idea because it was posted on places your value investors Club your whatever saying there's hidden value there and there's three other posts about this and everything I would be a lot more skeptical than if you researched this thing and found out that this is the case yeah I would say like so we use this example a lot Maui land and pineapple right this was a land bank for some time and the stock basically went nowhere right it shot up like crazy and 2007 came down 20 in 2008 and probably traded within a few dollar range for the next what 11 or 12 years um but now the stock is up a bunch and that's because they are making changes at the company right and or trying to do stuff with that land uh they brought in I think a new uh New Management I think they changed the board a little bit I'm not so close to situation but you could see the soft signs were starting to happen so um you know that's one end of the spectrum the other end of the spectrum are companies that we have visited in person where you're like wow the land value of this company uh would be many many multiples what the market cap is but it's controlled by somebody who has absolutely zero interest in doing that and you wouldn't want to be locked up in a situation like that so me personally how to think about companies that have hidden real estate value on their books if management has no specific plan to unlock itself I I think it's dead money honestly I think you should go find other things to do with your Capital but if you know you see the soft signs in place and you talk to them and you get a feel for how they're thinking about it then okay but you know because the other end is yeah it's good from a margin of safety perspective if they're going to do something about it you know your downside is capped which is great but you know sometimes I'll see um like a WR up on a retailer for example that owns a bunch of real estate and the retail business is horrible and the families operated the business for a very long time it's you know second or third generation and people make a pitch that oh you know the value of the real estate that they own even though the the retail business sucks the value of the real estate that they own is worth you know two times the market cap or something like that and I'm just not that interested in a situation like that how do you know that they're going to do they're going to close their family business and sell all of their properties and and you know do something with it for shareholders I mean you don't know that and I've consider situations like that just dead money honestly okay you want your money to work hard for you yeah I think it depends on which way that you're finding it I mentioned before Rex American resources which was re stores that's the one that sold off its land and went into ethanol it was a retailer and people compared it to like Circuit City and things like that well Circuit City leased everything they owned everything and they had a plan that they started going in that Direction the market did not respond very quickly when they started to sell some of the real estate and buy ethanol so that's such a strange pivot you know even if they're not communicating a lot of things that you know what they're doing and if you wanted to look into that and do that um you know back was that uh I don't know they may have started this process 18 years ago or something then you know the that's not something that the market would be focused on and you see this allocation a different way with something like Mau Lane and pineapple I'd be very careful because it's the opposite of hidden Real Estate Value it's the only reason why people own the stock the only reason why people talk about the stock um we've mentioned Marcus I think the market significantly undervalues the of how much Marcus owns in assets and how um little they owe versus others um probably at times the markets undervalued how much Southwest owns and how little they owe compared to others and they'll only realize that in the bottom of a bad recession or something you know so it is definitely a big factor to consider when you're actually finding those things if we're talking about actual hidden value um but I think it's rare for someone to come to me and say look I was analyzing this company no one talks about this but they own a lot of real estate instead it's the opposite I'm researching this company because they own a lot of real estate and this isn't baked into the price but it how is it not baked into the price if all the writeups and everything are about it m I would really start from that perspective and try to analyze it that way um I think it's very important to know where you got the idea from what ideas are circulating in what way and how things are being framed and if no one's framing this with the Assets in there then it's significant but if everyone's framed this as an asset play then I think it's not so significant you could find companies that are like under $50 million that own a bunch of land but the Val they've been they've been that cheap for like 20 years and yes I guess the value if they are going to do something about it there could be a lot of uh realized value there but you know I don't know yeah I mean look but I mean if something doubles in the last day of the holding period that's going to add 7% to a 10-year holding period right yeah I get so so I mean there are ones that have been followed for a long time where people did have that complaint I've seen ones that have been 25 years the stock ended up outperforming the S&P over the 25 years because when they sold it to a new owner it did go for a price you know of that amount so I think what is think a double over seven years or 10 years I just think that's not that attractive I think there's other opportunities out there oh oh no no no no I'm not saying that I'm saying if the stock the so there's a huge difference of what we're talking about if the stock isn't also turning money over time right but if a stock is matching the market and then turns out to be undervalued by half you're going to make a lot more money by that you know by it doubling at that point and so I think it's very important so banks are a good example of this right this happens a lot with banks people will say why would you ever own a bank with a five or 6% return on Equity or something well you would if another bank will buy it for twice what it trades at so if it can return to you that kind of number and then at the end of your holding period it doubles but many of these land things we're talking about are not like those Banks or insurance companies that are undervalued by half and that have decent returns but not great returns and that were they ever to be sold would sell for a much higher value I mean I think you have to do the math on it on how long is the possible holding period and how big is the discount usually the discounts are not big enough to me for it to make a difference I think what does get undervalued more is like holding companies that the net asset value is perfectly good but that because they're how they're valued in the market is not as good and so people say when will this value ever close when will you know and you're saying well the underlying value is matching the market and there's plenty of examples of that particularly insurance companies there's some there's it's rare but it can happen in closed end fund type things and and other things that are very similar to closed end funds and people say Well it always trade half times a book it won't trade on half times a book when the family sells not GNA sell it for half a book you know your risk is the family will buy from you which I've had happen but you still make money but that's actually the biggest risk is that you as shareholders will be taken out by someone else doing that so um I mean I would go with the Ben Grand thing which is I don't Ben gr would say like you know if there's a big net cash position that may be negative in terms of the efficiency of the company and everything is seeing that and you can dock them for that so you shouldn't value net cash on the balance sheet at 100% of what that cash is but it is always better to have the cash than not have the cash you should never value it at 0 perc and I would say the same thing with the real estate things um to have additional assets is a plus and you shouldn't value it at nothing but I think it matters a lot where you get the idea from because I think some of what we're talking about is the opposite of when I started in um investing where really it's a pitch about the idea of the sole reason for this is that it could be sold for twice as much that it has all this land or whatever as opposed to finding a business that was mostly about something else and it happens to have some land as a result um but there's no doubt that I if ever Marcus if ever that family was saying let's look at a um going private transaction an lbo thing an acquire looking to buy them whatever they would be looking at financing the transaction differently than if all the locations were leased so the final transaction will take into account that you own some real estate and you don't lease it and the final transaction for an AMC or something is that your all leases so it you know it should be captured somewhere in the value the way that we do Enterprise Value or whatever it does need to be adjusted for those facts mhm trying to find a DM that somebody read or sent me and I read to you uh a couple weeks ago which I can't seem to find uh because I I think it ties into this topic um but I do think the best answer is to study the company and keep it on your radar and to look for changes like we said in in anything that management was saying in capital appliation whatever you do run a risk that's maybe some offer comes out of the blue that you never knew about or whatever but okay so basically I read you the the DM so you remember I can't find it right now but basically the this individual dm' me saying I'm a super smart guy I probably have an IQ of this I did really great on my SATs I have been investing money for the past four years or three years myself and pulling a value investing strategy and my return is like a negative 3% kga or something like that right basically saying am I doing this wrong or you know should I stop investing should I change strategy should I index or whatever right and I you know my initial reaction or thought towards that is you know are you investing in a situation like this like we're talking about where from like an accounting perspective yes there's a huge discrepancy there right and if they're going to sell a company or someone's going to take them out yes you could probably make a ton of money but you know over a 3 to 5e period if nothing happens then nothing happens you know so is it you know is the individual focusing on a situation like that you know um I don't know that's what I just kind of thought about as we're talking about this I mean I think the biggest risk in that from what I've seen is that people adopt the idea of they're supposed to do things the way that it was described right so there's a big D that you just learned a lot about value investing and so now you're basically doing the things that you think value investing is supposed to be and doing that as opposed to making kind of Common Sense decisions about whatever things at a later um time when you had some distance between when you learned all these things and when you're doing it I think it is dangerous for people generally to go right from like textbook type learning to doing this and it would help most people to manage money for themselves as early as possible and not just be reading things all the time time so the fact that you have a high IQ or good at studying things or whatever isn't necessarily the same thing as practicing it because you could have a lot of thinking well I should check the boxes of what this strategy is you know now it's also possible that the strategy itself isn't doing well and I know from that one particular one you mentioned to me that's not the only issue because that would just cause relative underperformance and that's just yes you could be a great investor and have relative underperformance if you happen to commit yourself to I'm only buying these value things and it's a big growth market for three years sure you could underperform now you wouldn't be likely to lose money that that would be unusual but you know if the Market's going up 20 or 30% in a year and you're not I don't know that you should quit after a year because of that um you know so first of all you would need at least three years to kind of Judge that at a minimum of anything um there there's no point in at least having three years um and of making any decisions without that and then the other question would be was your strategy kind of consistent through that period period and how much does it reflect your decisions um the more important thing is kind of what decisions you make that don't fit with the way you were taught and were those good or bad decisions those are that's going to tell you more about like your likely future abilities to do this you know to invest your own money and everything the stuff that's basically following a strategy by rot you know decision- making that's kind of like a computer could have done that for you you know so it's more the issues we're getting into is like what I would be concerned about is okay but did they teach in the textbooks and everything the difference between what I said is you discovered this hidden Real Estate Value yourself or did you find this by being on message boards because that's very different information and like the it's not always explicitly explained in investing books the way that it would be in in a book on poker or something about what other information you might have and what risks you might be at of information you don't know and different kinds of things about the way you have to make the decision with what information you have and so if it's not as explicit about that then it might not really have sunk in about how did I get this information and am I putting too much value on it you know did I not really consider is something changing that someone could do something different here from what was done before um because there could be signs that they are going to do something different now sometimes those signs turn out to be wrong none of them will be perfect but you could see signs that are different from the past so we're talking about the these real estate things or whatever you could look and look at the long-term past look for any evidence of these kinds of things happening in the past and say okay this is actually a big difference that so and so died or that they've refinanced this thing or they changed this contract or suddenly there's a change of control thing in here or whatever and that's never happened before or whatever the board did this there could be signs that you could take into account and when reviewing your performance you might not really be taking that like looking at that and saying oh I didn't see I how did I evaluate the information that wasn't just that financial information mhm um cuz that's I mean otherwise it would be I I wouldn't even suggest that someone invest on the basis that value investing beats other methods and then just stick to a value investing approach because that to me is the same mistake as like saying that I should just index well the reason why I think people I it would not be safe to just index forever is we don't know that that can end really badly and value investing's worked in the past but we don't know that the market might not become efficient in a way that it would incorporate value investing into it to a sufficient degree that that doesn't work anymore but there'll be some other way of making money you know what I mean we were just talking about that right Ed Thorp and a man for all markets going into different pockets of inefficiencies and then over time they become more efficient but what he was great at is going from different things and we've talked about this before I mean spin-offs used to be a great place for Value historically as in the past handful of years they haven't been right doesn't mean that you don't get a couple good ones a year it's still a great place place to look but they just haven't been um stocks emerging from bankruptcy or chapter 11 or reorganizations or restructurings they've been a pretty good place for Value I'm sure that's going to change too you know so I just think markets changed there's Cycles to all these sort of things when you you know you talk about uh buying FICO at you know whatever single digit or low double digit PE right W that market hasn't been here in a while so you've had to go and do other stuff I mean what they talk about with Buffett doing different things and M be like well it keeps you out of the bars you know like you just got to play the hand that you have based on it and of course not get caught up in the craziness of of the bubbles and things that happen or whatever um but I do believe there's Cycles to those things things comeing out of uh in out of like you know opportunity and that's okay you got to play you know uh the field yeah and what drives me crazy about that is when people say those things about those inefficiencies that existed before and now they say well they don't exist now but that was always that would have been the case back then too we just don't know it that Buffett would have been looking at and saying oh these things that Graham could do I can't do in this generation because the but I can do these other ones and there's just always things that it a lot of people will wait for kind of the academic paper to come out and to be vetted a couple times before saying okay I should get well at that point it's not even a question of whether it goes away because there's a paper on it it's like there was a lot of money to be made in this for a long time people have been kind of learning and training themselves on this there's people starting to specialize in doing this thing why should we expect that this same inefficiency exists and so when I tell a story about something from right after the financial crisis or in the.com boom yeah it was inefficient and you could see it really was it wasn't some crazy risk to do this but of course it goes away you know like yeah a people did learn some lessons from the Doom thing and so whatever things happen after that they'll be a little different some of it was crazy in a way that it won't be crazy that same way again and I don't know if people be as scared as they were coming right out of um the financial crisis of not touching anything Financial as they were then and so that created situations you know there will be other panics and people worried about that and and but it won't be exactly the same way and even when we're seeing booms this time with AI and all that it doesn't feel exactly the same as the the do one it's not as pervasive I've said you know like outside of the institutional stuff it's not pervasive in society and quite the way that it was in the dotc era and so like we do invest in small versus large but I would say if we started that in 1999 that would have been a better time to start the fund than when we did because it was more inefficient it was really more inefficient that people were just doing the Blue Chip giant stocks and not touching these other little things if they weren't Tech things if they Tech things than they were but if they were anything that was boring and small they weren't interested in now it is somewhat more efficient than that but that's cuz after 2000 value out performed for a while people wrote a lot of like papers and things all about value and you know like there was much more interest in it for a time after that there was no interest in value investing in in like 99 2000 so you know to be doing it yeah so I'm still okay with looking at the spin-offs and everything but I mean once we've book talks about this as an in if it's one of the if like your standard here are some inefficient things that you could have an advantage and it's one of the dozen or so that they mention I'd be worried but I'd be worried that way too about Factor things if they said here are the four or five factors that that will cause a um you know that are inefficient that are underpriced in the market that you could buy and make money because they're not really risks but they kind of are treated by people as if they're risks right um I I I don't know unless there's some reason why they should continue to exist for all times then you know you'll have to find other inefficiencies even things like that if they're so but if they're so primary like so inherent in the market they're going to last forever we did do a podcast where we talked about that that means that they have to be quite painful to people so like if value investing will last forever that way as a way to make money it's probably because it will significantly underperform in some periods and it may outperform performing periods where like say the market is down or something where that wouldn't people may not value that as much as consistently year after year doing well a strategy that that is likely to give you a small gain versus other things every year is something that people would quickly adopt right if I could Market a strategy that says you'll make 3% more a year every year forever uh everyone would swarm into that strategy but if I said here's a strategy that you'll match the market one year you'll underperform in a down in a up year but in the down year you'll you'll do so much better than it in the down year even though you'll also be down that you know over time you'll you'll make more money right that's like a strategy that could last that people could keep adopting right and so with those emails about the DMS about that kind of stuff I don't the issue is more like you're playing a game against other people you know and so I don't know I don't that's why I compareed to Poker or something I mean I don't know that completely text learning completely textbook play without a lot of practical applications of it would necessarily give you a good idea of how what you're doing varies from what a machine being taught the same thing you have is like here's the rules of how to do things would be doing otherwise you might just be it may be that you're diverging from the strategy that's suggested in ways that are bad and negative in terms of value or to add them you know most people that I talk to I would say there's some negative uh addition to the value strategy that is that they diverge from the straty to some extent in a way that's a bit negative still they may do okay but like their own personal decision- making it is a bit negative yeah so even if you were to follow a spin-off strategy and say spin-off still worked the little bit that they add to it tends to detract but there's a few people you're Warren buffets and those that what they add actually is very powerful F Peter Lynch he's a good example of that kind of thing he definitely um would be someone that would his addition to his feel for what things to buy and what not to buy and everything really added value so when people say let's just do statistically a Peter Lynch thing I'd be very scared of that because I don't think that really captures what he was about got it cool well I want to thank everybody so much for tuning in with the both of us on the focus compounding podcast if this is the first time you're joining us be sure to hit the Subscribe button and check out all of our work uh great way to do that is to go to focus comp.com uh get access to West WR UPS from Jeff going all the way back to 2005 information on us our money management services and everything that we are doing with focused compounding Capital Management I thank everybody so much for all the support and we will see you in the next podcast take care

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