Animal Spirits Podcast - Talk Your Book: Growth Stock Concentration

Episode Date: June 24, 2024

On today's show, Ben Carlson and Michael Batnick are live from Charleston, joined by Kathleen McCarragher, a Portfolio Manager for Jennison Associates and Harbor Capital to discuss market concentration within the S&P 500, how growth managers combat high-flying stocks within the index, how interest rates affect valuation, and much more! Find complete show notes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com https://www.harborcapital.com/news/2024/06/animal-spirits-podcast-live-at-harbor-activate Past performance is not indicative of future results. The material discussed has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed.   Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by Harbor Capital. That's harborcapital.com. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ridholt's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Bridholt's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben.

Michael, we've done a handful of live podcasts now. Dare I say, this was my favorite one we've done because of the location. I'll like that you. I'm kidding. No, this was, it was great. Harbor Capital put on an awesome event in Charleston at a great venue. They did. It was an intimate group of people.

You know how, like, comedians talk about how. They go to, like, do a show at Madison Square Garden versus the small comedy show. They'd rather do the small comedy show. We had a little intimate group of people here. It wasn't a huge ballroom. It was, I don't know, 80-some financial advisors and people from Harvard Capital. It's the first time we've done an event like this for advisors. So we talked to Kathleen McCarher, who is the lead portfolio manager for their growth strategy.

And it was pretty good timing because we've had the run in NVIDIA and all these other growth stocks. So we talked about stock market concentration and Vidia and AI and dealing with drawdowns in these kind of companies. So I thought that the timing of this talk was actually really good as well. Perfect. In the interim, Nvidia took the crown, number one stock in the world. That's right. We spoke about all the growers, how she became a growth manager.

It's sort of the, most people are value managers. It's rare that you meet somebody who identifies as a growth manager, but we found that person. That's true. So this is, again, this is our live talk from Charleston a couple weeks ago, and enjoy. Thanks everyone for having us. Kathleen, I want to start off here. You are a large-cap growth manager. I've heard a ton of stories from people over the years about their value existence, how they became a value manager.

I read Intelligent Investor by Benjamin Graham. I was a Warren Buffett, Decidful. I read all those books. How does one become a growth stock manager? What is the background there? I would say I start with being an optimist. I love opportunity that companies create and that we as investors are able to envision as we look forward.

So it takes curiosity and creativity. And it takes a willingness to go at risk of being wrong Because when you're looking at companies creating things and there's no protocol for how to value it, how to see how it will evolve, you're not always going to be right. And so we're very publicly arguing for a point of view where sometimes we're right and it becomes magnificent and sometimes we're magnificently wrong. You've been at Jensen for a while. Well, just maybe a quick plug for what's kept you there and what you love about the role that you're in. Well, Jenison's a fabulous firm at which to work. We have amazing client base.

And the reason I start with that is because as investors, we are charged with and privileged to do what we believe is right for clients. And so we do not have business risk or pressures that lead us into investments that otherwise we wouldn't take. So, number one. Secondly, we've got what I've considered to be a very strong and self-reinforcing culture, this idea of taking risk publicly. You can't do that everywhere. And yet it's so important to be a successful investor that you learn from your mistakes and go forward. And that's what we do.

The third thing is I will cite one of the founders who I had the privilege of working with for nearly 25 years, Sig Sig Segalis. And he always said, I'm only as good as the people around me. And so what he did very successfully over decades is he put good people around him. And so if you've got people who make you better and you make them better, that's a great environment in which to work. I'll say one last thing. I mean, I could pitch Jenison all day long. But I will say one last thing, which is we are the kind of investor that companies like to have as shareholders. We care about the same things they care about.

We invest with managements who are developing and leading through various environments. And so we really do get to meet with talented people in all kinds of industries, creating new and exciting things. And that's just a great thing to do all day, every day. I'm curious what it's like to be investing in the best performing space in the market for the past. I don't know, call it what you want, 10, 12, 15 years. There was an 18-month window there where large-cap growth was out of favor. But for a long time, the majority of the time for this cycle, large-cap growth has been in favor and outperforming just about everything else.

Does that make your job easier or does that make your job harder? Because you have to keep up with a bogey that is doing better than everything else. Well, first I'll say that's a very gentle characterization of 2022. You know, it never seems easy while you're doing it, and sometimes things seem obvious with hindsight. Things that seem obvious in advance often are not. The concentration in the benchmark is certainly a topic of conversation today. We don't look at benchmark construction as the starting point of portfolio construction. So we're bottom-up stock pickers, and we build portfolios in the way we think we should.

So when you've got a benchmark that's gotten as concentrated as the S&P or even worse, Russell 1,000 growth, where after it's rebalancing at the end of this month, 48% of that benchmark will be in five names. I mean, that's a really tough bogey if that's what you're trying to manage to. Russell 1,000 growth. So what we do is we look for companies we think deserve shelf space. So let's talk about concentration. You were talking about the Russell growth. I'll just brought it now to the S&P 500.

InVIDIA, Microsoft, and Apple are now 20% of the SMP 500. They're 25% of the NASDAQ. And they're 15% of the total U.S. market cap, of every listed company. And that, that last statistic, that's the highest since the 1960s, just for three companies to have a 15% waiting. That hasn't happened in a long, long time. I know you're an optimist. Does this worry you, or do you think that this is just the natural evolution of the tech giants, just crowding everybody out and that's nothing to worry about? Where do you stand on this hot topic? Well, we've, in contemporary investment careers, we've never seen anything like this.

So at some point, we do expect it to change. And what will lead to that change, I think, to some extent, all of large numbers, when companies get to the scale that we're talking about, at some point growth slows, and the market valuation of future growth will, you know, compress a bit. So that's some of the natural piece of it. The other elements, though, is, you know, we've seen such a shrinkage in the number of public companies in this country, peaked at 8,000, now roughly 4,000. So companies want to stay private longer if they can, and then there's such an active PE world

that that's another place for companies to land. So our shopping basket has certainly shrunk. But when I look at growth investing, what we get to do is we get to find companies creating things that don't exist, that are innovating, and that are creating their own growth. So I think there's still ample opportunity for us to find portfolio names. The poster child of what you just mentioned, growth and innovation right now, is Invidia.

We believed that the GPU was creating a new way of compute that would grow in importance. But in 2016, it was all about gaming. So two-thirds of the company was gaming. and it had just come off of a down cycle in gaming. But what we saw that we liked at that time and is a very important piece of why we've stayed is it had become important to data centers. So the massive increase in compute power,

the cost advantage of that was allowing cloud and, you know, hyperscalers to do things to process volumes of data in ways that they couldn't. a much more economic cost, which allowed them to do even more. So we saw data centers actually doubling at that time, even though it was only about 15% of their business. And then as you move it forward, gaming, of course, has become a much smaller piece of what they do because all things AI, i.e. data centers, hypers, and generative AI, have taken

over in terms of the utility of this architecture. Sure. So this week on the podcast, Michael mentioned that he went and saw Godzilla minus one at the theater before anyone else. You guys are both early adopters and these kind of things. I haven't seen it. Should I? You absolutely should. It's on Netflix. So I'm curious, if you have a contrarian bent at all, and you mentioned the benchmark, even being underweight these names as contrarian, let alone just selling them completely, do you worry at all about missing the term? Michael always says with Bitcoin that, listen, I want to sell this thing late. I don't want to. to be early because it could keep rising and growing. Do you view a company like NVIDIA or any of these big, huge companies that have garnered so much concentration? Is there any part of you that wants to be contrarian and say, I'm going to be the first one who goes underweight these stocks and tries to outperform that way? Before your answer that, just one piece of data that I think would help that. So, NVIDIA reported earnings 10 days ago, trading days. And in that time,

and it wasn't a small company way back then, it's added $607 billion in market. cap in the last 10 trading days. And it's now $3 trillion. It's bigger than Apple. For reference, JPMorgan is $560 billion. Now, of course, one has nothing to do with the other, but that's a lot of money. So in terms of being maybe early to sell on the way up, or would you rather sell late, or maybe that's like a good window into your process? Well, I would not characterize us as contrarian ever. But do we sit in a unique position? often. When we are buying a stock, we have a point of view that is not common to others. But there are numerous ones where we're getting in. We see something that is not, you know, sort of consensus

that's not fully reflected in the price of the stock. So we're willing to go with our deep knowledge, our deep research, and the conviction around that to take positions that are outsized relative to what our competitors might be doing, and certainly outsized relative to the benchmark when we initiate. But as its success is demonstrated, and as the market rewards that, the stock is running up, it's going up in the benchmarks. You were pretty quick to bat away the label of contrarian. I'm curious. Do you think are contrarians money losers? Or when you hear that word, what comes to mind? Why are you so allergic to that word? I don't know. I just am. Okay. So. No, I mean, I think of it as the need to apply.

oppose something, the need to oppose a point of view. And we're not opposing a point of view. We're crafting an understanding of something and hoping to build conviction in that scenario. Well, not even like a contrarian, but how do you view the difference between fundamentals and expectations? Because such a big part of growth stocks is expectations. And how do you try to, you know, it's almost a qualitative thing of how do we quantitatively manage these expectations so it stays within reality? How do you think about that? If like the expectation, of investors get way too far ahead? How do you determine what that point is? Well, it's an art, not a science, right? But I'd say a couple of things on that. One is, you know, if investors'

expectations are rising, it is because there's development in the fundamentals of the company. And sometimes those developments are even more positive than what we envisioned. So in the case of NVIDIA, we, too, were raising our expectations a year ago. Not fast enough. Yeah, we were way above anybody else's, but as they started to deliver, we too took our expectations up. We stayed ahead of expectations. Are we ahead today?

I would say not really, because the company is capacity constrained. So when you look at near term, we're probably sitting more or less where people are, maybe a little above, but not like we were. So now what we think about is the duration of that opportunity. Yeah, so where's the constraint? they are capacity constraints supply chain you know they are on allocation so you know they can't you I mean could they boost expectations again one more round they could but not of the magnitude that they have so we're in a place where they're executing to what I've considered be common

understanding and then what we believe we have a differentiated view on is you know multiple years into the future out years, how that will be managed. It's a semiconductor company at the core, right? And so it's classic in semiconductors for there to be cycles where there is great enthusiasm on the demand increase. When there's demand increase, there tends to be inventory build, and that drives revenues in the near term even more. That leads to, you know, valuation, expansion in the market. So you're layering these three things on top of one another in the market. And there's a always another side to that when you can fill demand. So right now, that is a worry that people are starting to focus on with NVIDIA. If they are successful in managing those allocations,

and if demand stays as robust as we think it will, we don't see that inventory problem. But there will be slowing growth rate. So how will the market take it when growth rates move from triple digit to high double digit to mid double digit. Probably not great. So we'll broach that one when we get there. I promise we won't talk about Nvidia for the entirety of the session. So the last question for me on this. When you think about or when you hear people say, oh, this is like Cisco, I've seen this movie

before, what do you think? What comes to mind for you? Oh, we've been thinking about that 2000 experience for a while. And there are similarities in their differences. That inventory build is one of them. The companies into which they're selling are one of them. Are they real? Are they not?

Is the capital that's funding them going to disappear or not? But the other thing is... Wait, I'm sorry, just on that last point, are the companies that are funding them. So a large percentage of their revenue is coming from the hyperscalers. When the music ended in it during the dot-com bust, the companies that were paying them, their clients disappeared. I mean, that is nothing like what's happening. It's totally different from that enterprise cloud, hyper-scaler layer. There are, there's a lot of capital that's gone into new company creation.

And some of those new emerging AI companies are customers of NVIDIA. So much smaller piece of the revenues going out the door. And I think much more well managed. But that's what I was referring to. I poo-pooed the 2022 bear market earlier, you said. No, I said you were kind and gentle in your description of it. But a lot of these large-cap growth companies did fall 40, 50, 60, 70, 80 percent in some cases. If you're going to be in the best-performing stocks, especially growth stocks, they are going to get hammered at times.

All of these stocks that have gone up in one of Netflix has had three or four different 70 percent drawdowns over the years. How do you handle that part of the process? Well, we certainly try not to be fully invested in the name on the cusp of those drawdowns. downs, right? So there are times where we see fundamentals are coming into question in the short or intermediate term. We'll cut the position size. We'll sell the whole thing and we'll come back to it. So it depends on what we understand around what's taking the prices down. Now, if you think about 22, that was a complete change in our investment environment. Risk tolerance went down, discount rates went up because of inflation and interest rates.

And so there was a repricing across the market. And growth stocks, in particular very high growth stocks with higher valuations, got hit harder. So when that change was taking place in the market, we sold a number of our names that had benefited from the free money environment where companies did not have to be disciplined about growth and profitability. When the environment was no longer going to allow that to take place, we exited those names. So it's a function of what's taking them down. There are times we've ridden a stock all the way down where we add to the position, you know, sort of at the bottom, if you will, if we really believe. But, you know, there are drawdowns and they hurt when they happen.

But if we can manage position size successfully around that to some extent, we will do that. Apple has been the largest stock in the S&P 500 for 99.96% of the time for the last decade. So it's been on top of the mountain looking down at all its competitors. Now, the company, the revenue, the top line has not really grown very much at all for the last several quarters. Obviously, there's troubles in China. They've been behind with the AI strategy. Does it make sense to you that the stock is near an all-time high, given some of the things that I just mentioned, or near an all-time high? we look at the valuation of those cash flows and think it is appropriately valued.

So the fact that it treaded water, it came down, it's done nothing relative to others, I think has rebalanced its valuation versus those that are growing more rapidly. So not so much focused on what its market cap is, but what's the valuation of the cash flows and what is the rate at which we expect them to grow? And then what is the persistence of those cash flows? And with Apple, certainly the services business and the relative impact of that on their profitability is very significant to how we look at duration of cash flows there. Apple used to trade at a harder multiple. It was four-time sales, give or take.

It was, I don't know, 13 to 15 times earnings for a long time. And then there was a clear break where the stock got re-rated higher. And it's to your point about the margins on services are much higher than hardware. So it's enjoyed the benefit of that. When you're thinking about valuations and fundamentals and multiples, not every stock trades off of the same valuation levels, right? Some trade on free cash flow, some trade on other things. How do you think about in general, and you can be a specific valuation multiples when

you're looking at some of these different companies, do you adjust for growth? Like, what's the process look like? We absolutely look at the companies the way we would value an industry, and they are not all the same. So for what I would call a stable quality compounder, we might use similar metrics across industries for companies like that. But if we're looking at companies that are creating something where we expect explosive growth, we are going to take 10-year discounted cash flow models, discount them back and utilize that as a starting point, fully understanding that every single number in that model 10 years out will be wrong. right, but, you know, being able to put best efforts forward on what this could look like

and using that relative to other companies with similar kinds of characteristics. But there are companies we really look at tangible book. So a Goldman Sachs, for example, we're going to look at tangible book rather than some kind of normalized growth rate to revenues. We'll look at PE, price to cash flows relative to companies' own history, relative to the market, and relative to others in their industry. You mentioned discounted cash flows, and of course, they're just models, but they are a starting point. One of the biggest inputs to the model is the interest of the discount rate.

And the discount rate is a very sensitive input, and the numbers could change dramatically, whether the discount rate is 3% or even 3.5%. And now it's a lot higher than that. So you mentioned 2022 being a very, very extraordinarily difficult year as Fed funds rate went from 0 up to 5%. How do you think about how interest rates impact growth companies? There's no doubt that our type of growth companies will be affected more significantly than a GARP or value portfolio if the value names aren't balance sheet constraint, right? But when we have rising rates, we do expect valuation compression in our names to be more significant than that of

lower growth and lower valued names. Are you surprised then that valuations have kind of returned with rates still staying high because it seems like investors had that rocky period and then rates didn't go down like everyone thought they would, but these stocks continue to charge higher? I would say most people are surprised at the strength of the market this year. And I would characterize it as being driven by earnings and around certain companies that have really material opportunities ahead of them rather than a market revaluation per se.

And if you look at the S&P at 19 times next year's number, it's a little bit above typical or traditional, you know, range valuation, but so are their earnings expectations. So it's not out of line. One of the interesting things about the interest rate hiking cycle is that it didn't seem to maybe have the impact that a lot of us feared. And one thing that I never could have predicted was the net interest expense of these companies

actually going down because a lot of them were fully funded in terms of their debt loads. They took out a lot of debt as they should have when rates were super low. And the cash balance now earning more money on their cash than the debt that they're servicing. So actually, like the higher interest rates have benefited them. Can you talk about how that filtered through to the bottom line? That's absolutely true. It's not a material part of any of our company's earnings expectations. So if it were, I don't think we'd be calling them the kind of growth companies we think they are.

So the tech stocks are sexy and easy to talk about. But what other companies or sectors are exciting you right now outside of the big tech names? Well, there's always innovation in consumer. And what we see there is kind of consumer, preference moving from place to place. So, you know, something like Mercado Libre, which is, you know, the largest e-commerce and payments ecosystem in Latin America, and they have 70 plus percent share in Argentina, 50 percent share in Brazil, and they are early in their growth in Mexico, I think is very attractive kind of secular opportunity. They have invested.

in technology and infrastructure, such that they have a real competitive advantage against anyone else coming into that market, Amazon included. So you're willing to go outside the U.S. borders? Because it's interesting, a lot of people have given up on international stocks in recent years saying, why do I need to own any international stocks if S&P 500 companies get 40% of the revenue from overseas, but you're willing to go outside the borders and own international companies? We do.

I'd say, you know, when we started looking at Mercado, you know, we utilized our expertise in what Amazon is and created to understand what Mercado could become in Latin America. So that's the kind of thing we'll do. We're not going to reach into, you know, kind of exotics, if you will. It's very much the type of name that reflects what we understand going on in the U.S. And the other side to that is something like Novo versus Lilly. One's a U.S.-based company and one is domiciled outside the U.S. They're both global companies. So that's the kind of name that we would look to if we're moving outside of U.S.

When you listen to earnings calls, whether it's from the credit card companies, the banks, the Walmarts and targets of the world, they're all saying the same thing, which is that the consumer is doing just fine. It's consistent. They're reliable. those are some of the words that they're using. But interestingly, you're seeing a ton of dispersion inside the consumer sector in terms of some of the stocks, whether it's Chipotle and Dix or Disney or Footlock or Lulu Lemon.

The consumer is now picking and choosing. We want to spend money here. No, we're not going to spend money there. And that's actually filtered through to the rest of the market. You're seeing the correlation of stocks within the ESP 500 going down in a bold market, which is very, very healthy and exciting. I would think from the point of a stock picker, fundamentals, are being rewarded. How do you think about the state of the consumer and with two-thirds of GDP?

It matters a lot. Well, employment is still pretty strong. So very important starting point. Higher rates, hurts some components of the consumer, helps some, right? So it helps those that, you know, sort of that aging baby boomer, higher income levels there. We have skewed to the higher income. consumer, they are not pressured by what we see taking place. They were benefited, but not nearly to the same extent as the lower income from payments going out through the pandemic. So those have

sort of dissipated and we're a little concerned about some of the other metrics we see about the lower end consumer. We're starting to see some credit card data suggesting that it's not quite as easy for them as it was six months ago. Luxury goods is, you know, sort of the issue there is not so much, you know, consumer strength, but its preference. Price increases across industries have pushed the bounds. Yeah. There's no question. Interestingly, you're starting to see, so listen, corporations work for their shareholders. They're, they're self-motivated. They're going to, they'd rather go over the line in terms of. of their pricing power and say, whoops, sorry, as opposed to not capture every last dollar

that they possibly can. And they did that. And Target is rolling back prices. Amazon is doing it. Walmart as well. Starbucks got into trouble. How do you think about inflation and raising prices like Pepsi, I think a year ago, their revenue or their bottom line, I can't remember which one was up 11 percent and then transaction

counts were flat, right? So they took full advantage of that. And that dynamic, it's over. So given that inflation is moderating a lot of areas of the economy, what does that mean for you, the portfolio manager? Well, we'd like to see inflation moderating. Absolutely. I thought it was a bit of an overreach during the pandemic era when supply constraints led to real need to increase prices in certain places. But what happened was companies did take advantage, and if their cost of goods was a third of their revenue line and cost of goods was up 10%, you saw them raise prices in many cases 10%. I don't think that's exactly, you know, sustainable. So we don't like to see behavior like that pushing to increase profitability in an unsustainable way. We like to see mix affecting profitability.

We like to see improvement in gross margins affecting profitability, you know, SG&A leverage affecting profitability, but we're not as fond of price-driven revenue or profit growth. One of the things that you got really right was being underway Tesla recently. Tesla's gone through a difficult period for reasons that are probably very well known to most people in this room. I was surprised I was looking yesterday that Tesla's underperform general motors by 50% over the last 12 months. Do you think that, no, listen, Tesla, it's not a car company. If it was, it would be valued like one. But how do you think about the general state of Tesla? Is Elon going to be there? The pay package? Like the whole deal. What are some of your thoughts?

Well, I think I'll refrain from speaking to Elon Musk and or his pay package. Today, it's much more what kind of shipments out the door are we experiencing, you know, how much, you know, add-on for full self-driving, will they attach? So the types of variables that we're monitoring and managing to have less upside optionality than what existed when we owned it in size. So now it's much more contemporary data sets around. It's the market to negative around what is taking place. So it came off of sentiment that was quite negative, you know, kind of recovered through those negative variables, sentiment improved. This is one where sentiment moves the stock price a whole lot more than many of our other names.

It's been 469 days since Tesla made an all-time high, which is the longest duration since it came public, and it's in almost 60% drawdown. Is this an opportunity, or are you just not excited by what's going on inside the company in terms of delivery, shipments, price cuts, and all that sort of stuff? It's probably an opportunity, but as we look out the next 12 months, we do think the stock should perform, but it's not the kind of revision to people's understanding what the company can be. So one of the charts we've seen go around is you can take the keywords in any quarterly

conference call among all the companies and it'll show, you know, this word was mentioned this many times, and AI has been one where back in the day it was nothing announced like this. I'm just curious how you and your team handle something like that where you have this new growing technology that seemingly comes out of left field. How do you get up to speed and educate yourself and your analysts and your portfolio managers on a new opportunity like that that not a lot of people are seemingly experts on the investing world? So I'll go back to this seemingly out of left field. Certainly generative AI and the user interface

brought it into the public domain in big way, November of 22. But we were focused on, you know, artificial intelligence slash machine learning prior to that and where it might lead to, you know, real improvements and productivity. So today what we're looking at are, you know, certainly the picks and shovels types of companies, so not just invidia, but others that serve that market cadence in, you know, design or AMD as alternative to NVIDIA, we certainly are looking at the cloud providers as benefiting right now. And then as we look out, you know, there are some sort of like service providers, the call centers, the type of interface where productivity can be improved, but it's not like changing the industry.

It'll be a benefit to those companies, but more of a, you know, model. kind of thing. And as we look forward, we say, where does it really play? And where does one get excited? And can that take the picks and shovels all the way through this, or will there be pauses? And that's where you talk about, you know, biotechnology, drug discovery. That's where you talk about understanding climate activity and technologies that can be brought to bear in that. So those are the open-ended things. And I think there's a maxim that. says, you know, when you've got change like this, you know, it tends to be overestimated in the near term and underestimated in the long term. And I think that applies here because it's easy

for us to name these things, but what is the shape and the form it will take? You know, we don't actually know that yet. And that's ours to discover over the coming years. But there's reason to believe it will have real impact. Early on in the conversation, you described yourself as an optimist. I'm curious where that optimism comes from. Well, take us way back. Gee, things seem to look better through rose-colored glasses than not. No, that's a really bad answer. Because that implies, that implies that I use rose-colored glasses. I'm a pragmatist. I look at both sides of things. and I'm willing to say yes, no, maybe so, right? Life certainly feels better if you have optimism about it.

So the reason why I ask that is because a lot of people in the investment management business, for whatever reason, whether they think that's what the audience wants or whatever they want to be heroes, they just tend to, I'm overgeneralizing here, but there's a lot of people that tend to lean negatively and can give you, like it's impressive to scare people. Like, wow, it's really, congratulations.

There are reasons to be worried. Of course, there always are. But if that is your mindset and you only focus on things that can go wrong, you're going to miss out on the opportunity to make a lot of money over time. So, yes, I agree. You know, there's like a basic truth that, you know, you can sound a whole lot smarter by, you know, pitching a name that nobody's heard of or an investment case that nobody's really thought of. about. But if I walk in here and say, I like Microsoft, I like Apple, I like NVIDIA, well, so do a lot of other people, right? So there's an element of the need to be smart and put it on display. My need is to perform for clients. Let's just call it what it is.

So that's what I care about. Accentuating the positive, we own names, you've all heard of three quarters of them, right? If it's successful and it has real duration, I have my poster child Costco. I love that stock, right? Everybody knows what Costco is. Costco is Costco today, is Costco tomorrow. Does that mean it deserves a place in the portfolio or not? Depends on duration. And if you think about the market, it tends to not fully pay for duration because it knows most growth companies don't actually deliver on that growth promise. So why should it pay fully? It's not a bond. It's not a guarantee. guarantee. So when a company does have that duration and deliver, you do tend to have an opportunity

to be rewarded. The other thing about being an optimist, I can't think of a better business to be in. What business do you know that has a 7 to 10% tailwind? If you think about the long-term performance of the S&P, of U.S. equities, that's our starting point. Now, of course, there are drawdowns. Look at the last 10 years. Brussels up 15.5%. Two years, one very painful, but including that painful year, you know, that's an amazing tailwind with which to work. So I've got optimism. I think that's a great place to leave it. I mean, just to that point, I think a lot of us take for granted the fact that we are able, because it's always been this way for us, right? It was not an invention of my lifetime. It's always been this way for us that we're able to

own shares, to be equity owners. People get excited about private companies and, ooh, I get an opportunity to invest in this grown company. You can invest and be an owner, an equity owner of some of the most miraculous companies that the world has ever seen and have professionals like you overseeing it. So I think it's a great place to leave it. So thank you very much. Thank you. This has been fun.

Thank you. Thanks again to Harbor Capital for hosting us in Beautiful Charleston. Thanks to Kathleen for coming on, sharing all her wisdom. Harborecapital.com to learn more. Email us Animal Spirits at the CompoundNews.com. Thank you.