Chit Chat Stocks - Clean Energy Investing - Maxx Chatsko

Episode Date: June 29, 2021

This week we are joined by Maxx Chatsko to discuss investing in clean energy. The group discusses where the industry is at today and what is hype versus what is real. Listen in after the interview as Brett and Ryan cover their favorite topics from the week. Let's go! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Maxx Chatsko on Twitter: https://twitter.com/7MaxxChatsko?s=20 Subscribe to our YouTube channel: https://www.youtube.com/c/ChitChatMoney Follow us on Twitter: https://twitter.com/chitchatmoney Visit our website to see more from your hosts Ryan and Brett: https://www.chitchatmoney.com Email us: [e-mail] Timestamps Interview | (2:40) Interview Continued | (32:03) Show Notes | (56:30) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome in. This is Chit Chat Money, and it is Tuesday, June 29th. If you're wondering why it's me, Brett, talking on the introduction, it's because we have Ryan remote. He is in headphones and across a Zoom call, so his audio quality might not be as good today. But Ryan, how are you doing? Are you ready to get to our interview with Max Chatzko? Yeah, good. I'm doing great. The interview with Max was a lot of fun because he understands all the areas of the market that I have no understanding for. So it's always good to have those kind of interviews. And then we actually have some more fun segments. I'll be talking about the Peter Thiel drama after the interview.

What about you? And then I got, or what else do you have? There was an interesting thread on Twitter that I'll talk about. There's 50 companies with over a 20% rate of return over the last 15 years. So I'm going to talk about those, sort of what drove them and any shockers, I guess, in there. All right. And then I have some SPAC and IPO. I'd say excess, maybe not ridiculousness, but it feels like February again. And then I got a fun new segment called Taking Stock. Don't want to spoil that, but that should be really fun. But I guess we should talk about our sponsors now, 7investing, in conjunction with our interview with Max, who works at 7investing as well. So if you want, I mean, I don't know how to describe it. He knows clean energy and biotech like the back of his hand. His expertise, you can hear it in the interview. We learned so much about the industry and it kind of makes me realize that I cannot be investing in clean energy or the energy sector in general on my own right now. and his research that he's putting out on 7investing.com can really help out. So if you

use our promo code CCM, you can get $10 off your first month introduced to the service. Prices are going up really soon. So go in now, if you've ever been thinking about it, the time is now to strike. Picks are coming out in two, three days now. Did I miss anything, Ryan? No, I think that's it. All right, let's get to our interview with Max. Here you go. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital,

and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Today, we're welcomed by Max Chatzko, Lead Advisor at 7investing. He's been on the show before and you guys are all familiar with 7investing, but the goal today, we wanted to talk about clean energy and I would call Max an expert in the area. So, he hopefully has the answer to a lot of our questions. But before we get into it, and I think we maybe asked this before but i wanted to get sort of your background uh and i guess why you chose

the world of investing because you're if i remember correctly your uh education was not finance oriented yeah well hey first of all thanks for having me guys really appreciate it a big fan of you um yeah so my background uh is in engineering so um i have a degree in bioprocess engineering so that's in scaling up fermentation like beer and wine and vaccines and all kinds of fun stuff, cell culture. Um, and then I have another degree in, uh, material science and engineering. And I kind of focused more on, Oh, I focused on both, uh, the biology side of things. So like tissue engineering applications, and then also in energy storage. Uh, so I have a foot in kind of like two very interesting parts of the stock market, right? I've, uh, biology and then,

uh, you know, the energy markets as well. Um, and yeah, so how did I get into investing? Uh, man, I fell into it in college, which I think will resonate with you guys. Right. And obviously I didn't intend to go into finance as my career, but I just kind of fell into it that way. You know, I started writing about stocks and learning about it that way and building frameworks and learning how to invest. I made a ton of mistakes, by the way, in the beginning. And now, you know, I get to do this for a living. So I get to, I bring my own, you know, like a technical understanding to a lot of the businesses I cover, which I think, you know, a little bit more unique than some other analysts out there. So hopefully that's what I'm bringing

to the table. Yeah. And we're talking clean energy today, but we're going to have to get you back on sometime in the future and talk biotech because I'm sure a lot of listeners have questions they want to learn about that industry. But you work at 7investing, which is one of our partners. Everyone who has listened to before probably has heard us spew on about 7investing because we love it so much. But how are things going at 7investing? And then what is your role there right now? Things are going great. You know, it's I don't know when we launched march 2020 so uh we've been in business for like uh less than a year and a half i guess right and uh it's great we have a great team so we have the full seven analysts now uh each with different

domains of competence different parts of the stock market well-rounded team each has really good experience in each of the markets they cover um and you know we're a small company uh so everybody wears a lot of hats we're doing we're really busy all the time but uh it's really great it's really great to see you know the engagement we have too with uh with investors and with our members. So things are going absolutely well. All right. And then we're going to hit clean energy today, like we said before. So let's kick things off. I mean, what is the state of the clean energy industry right now? What are the big trends, stuff like that? Yeah. So, you know, clean energy is one of these terms and it's kind of like genomics,

right? And it kind of means everything and it means nothing at the same time. So I think if we want to drill down one more layer, what is clean energy? And there's different ways to organize it and different industries that that touches. So, I'm going to shamelessly copy an analogy from Drew Endy. I did a podcast with him on synthetic biology, but he talked about grouping things into joules, bits, and atoms. So, joules, J-O-U-L-E-S, would be energy. Bits would be information, software, things like that, right? And atoms is the physical stuff. So, we think about clean energy in those three buckets, then we can kind of see the opportunities a little more clearly, right? So you have things like the power sector, so that's selling electricity. So that

would be the jewels, quite literally the jewels, right? For the whole economy. And then you have atoms, different types of atoms, right? So we have electric vehicles, that's transportation markets. It's a very large market, obviously. And then you also have things like solar panels or wind turbines, materials production. So maybe lithium or other materials that go into batteries, right? Rare earth metals that go into turbines, things like that. We don't have so much of that in the United States, of course, but maybe that will change over the next decade as we onshore some of our strategic supply chains and invest in those more carefully. And then there's software, which is kind of a newer area, right? But there's a lot of

interesting companies using maybe artificial intelligence or selling software services and subscriptions for customers that have to manage on-site energy production, or maybe eventually there'll be app stores for electric vehicles, right? There's going to be more software opportunities in all of these. So, Jules Bitts and Adams, I think, is a good way to kind of organize the clean energy opportunities broadly. In terms of where we're at, I mean, we're in the middle of the, at the very beginning, I should say, of the energy transition. So, that is transitioning from a power sector that's mostly dominated by fossil fuels. So, things like natural gas-fired power plants and coal-fired power plants, and transitioning that to cleaner power

sources, which would be onshore wind, utility-scale solar, and small-scale solar as well. So, things like solar panels on the top of Walmart or your own house, things like that. Eventually, that will open up opportunities as well in transportation. Again, moving transportation from liquid fuels to electric fuels, which would be much cleaner all the way around. So, you can see why there's lot of excitement, right? There's a ton of growth ahead. These markets are established. We know the economics are there and we'll get better over time with more investment and more competition. So you can see why a lot of investors are really excited about clean energy opportunities. Which of those clean energy areas do you find the most exciting or do you think has the most

potential? And then I guess on the flip side, which of those do you feel might be overhyped? Yeah. So right now in the market, it's a little too easy, right? Everything kind of goes up almost, it seems. I would say the most established and obvious opportunities right now, maybe like the quote safest, would be electric utilities. They are slower growing, obviously, but they're guaranteed growth because of how the industry works and they're highly regulated. So they do sell at a premium, but you know, they're going to grow over time. And those in the best regions in the United States are going to, if they execute, almost certainly beat the S&P 500 over time. So the companies that are managing the energy transition well have access to great, you know, geographic potential, access to great like solar and onshore wind potential, right? And that's different by different region.

um so we think about like you know in the southeast for example uh not any like zero uh onshore wind potential uh so we've seen them like there's no turbines in like an 11 state uh grouping there from like florida all the way up to like tennessee and north carolina south carolina and over to maybe like uh mississippi or so no wind turbines at all that whole group of states. Um, now if you go to, you know, West Texas and just go straight up all the way to North Dakota, and maybe even a little bit, uh, further East to, um, you know, all the way to Illinois, uh, that's the American wind corridor. So that's some of the best onshore wind potential in the entire planet. Uh, so that's where most of the country's wind potential is

based. Um, so you can see like electric utilities are operating there are going to have much better opportunities and can move much more quickly to, you know, cleaner energy sources. And obviously, I mean, solar is an obvious example. I think most people can understand, right? If you build that in the desert, like a 100 megawatt solar farm in the desert, you're going to be doing pretty well, right? In Arizona, New Mexico. But if I design that exact same 100 megawatt solar plant and put it in upstate New York, it's going to operate a lot differently. You're going to have a lot different economics. It's going to have different energy output. So, I think that's a good way to visualize that you know renewable energy potential is really dictated by geography then you also have

to take into account the demographics of the different regions right the southeast actually has really good demographics uh younger faster growing populations some major population centers as well like atlanta is one of the you know fastest growing metropolitan areas um conversely if you go to like new england that's the oldest part of the country so slower growth um there is more economic opportunity or activity i should say um but also you know constrained by more limited renewable energy potential it's harder to get solar there it's harder to get onshore wind um so i think eventually we'll see like the coastal regions transition to you know offshore wind opportunities that's going to come in the later 2020s and then the 2030s it should go

gangbusters we have a lot of potential here in the united states uh even though we're behind maybe other parts of the world like europe or some parts of asia in terms of our offshore wind industry but that has the advantage of uh they can operate actually with the same efficiency in terms of uh how much energy they produce compared to their capacity it's called the utilization rate or the capacity factor uh so an offshore wind farm can operate almost uh you know can actually beat like a coal-fired power plant or a natural gas-fired power plant the winds are stronger offshore, uh, for most of the year. Um, and obviously, uh, in the United States, most of our population centers are on the coasts, right? A lot of major cities are there,

metropolitan areas. So if we can get offshore wind cranking and rolling, um, you know, that's going to have a big, uh, you know, that's going to be a source of a lot of progress in the energy transition. Uh, cause we would immediately offset like a lot of energy use for where most people in activity occurs. So, electric utilities are, you know, one of the safer bets. It's easier to kind of see, you know, 10 years into the future, 15 years into the future for how they're going to navigate the energy transition. And you can also see which companies in electric utilities are not well positioned, right? Maybe it's by different region. Maybe they're straddled with debt. Maybe regulators in their regions are slower moving to encourage and adopt renewable energy. So,

that would be electric utilities. Then, of course, I think what everyone's really excited about is all these other opportunities right you have battery makers and new electric vehicle startups and uh maybe even some software companies right that are kind of playing in both of those areas and a lot of these companies have gone public recently through SPACs so um it's a lot easier to kind of you know hype yourself up with a SPAC than if you went through the traditional IPO route because there's different SEC filing requirements between a SPAC and an IPO um you know a lot of SPACs. I don't even think of their file and S1 filing that's really that detailed. So I've personally stayed away from SPACs because really like, what do we have, right? We have companies

issuing investor presentations and they're just like, yeah, we're going to have $10 billion in revenue in three weeks. Don't worry about it. It's all going to work out. And that sounds really good. And I think, you know, just in the market we're in right now, investors have responded well to that, even if maybe they don't understand the challenges and limitations to those business models. So I think you have to be careful. And again, a lot of those opportunities are still very nascent. You know, energy storage is going to be a major market opportunity, but it's hard to identify who's going to be the winners there. You know, other than like Tesla, obviously, which is already kind of dominating the market from its energy business. But the

smaller players, you know, they'll have a role, but it's, it's still kind of tough to see how that happens. We still need, um, you know, a little bit more penetration from like solar energy, I think, um, for small scale solar installations in order to make batteries really kind of viable. Um, it still doesn't make sense residential, uh, for residential customers. If I was going to buy a power wall, I don't think I would actually make any money. I would just get to brag to my friends that i own a power wall right uh so it doesn't make good economic sense necessarily um but yeah there's definitely opportunities there um and then again with the software that needs all those other things to happen and you have to consider like the regulatory limitations as well again you know

these things are regulated by region for the most part um and some regions and states are are you know more willing to uh have a vision for the future than others and a lot of times these are decided by like a five person board so it's not really uh it's can be very slow and frustrating i think but um so you don't understand like the limitations there you know market and non-market opportunities and the challenges um but uh but yeah those are the things people are most excited about i have a bunch of follow-ups because this is yeah an area i know very little about but uh if i'm ranting on too like just interrupt me so uh no that was a that was a great overview all right you mentioned like uh i guess solar uh solar just putting solar panels in the desert

and maybe this is sort of a naive question but why what's stopping someone from just building a massive solar plant in a desert is it just like the capital intensity to do it and there's also what about the energy is there some there are limits on the energy transportation you can't just put up a big like electric line right and get it everywhere is that a problem too yeah that's a good question this gets to one of the biggest bottlenecks right now for renewable energy so when we were first building onshore wind uh which was really like the first source of renewable energy that that uh made a lot of sense and made like a big chunk of the country's energy mix you know it was like the 2000s right and early 2010s so we built a ton of

wind farms and then like in texas is a good example built a lot of wind farms in west texas and there wasn't any transmission infrastructure to get the energy produced to where it needed to be consumed which is the population centers which are on the other side of texas um so it's easy to forget like you know um i mean you guys are old enough like i mean we grew up the grid was dominated by like coal natural gas nuclear but all those power assets were built decades ago and we just built the transmission infrastructure to the coal-fired power plant to get to the population centers and then we you know it was kind of like not a whole lot of investment necessarily in newer power plants so we're building a wind farm or a solar farm again

it's dictated by geography so we can't just say hey the city of houston we're going to put a big wind farm there if there's no wind potential then that's not going to work that's not going to make economic sense so you have to erect and build these power plants for renewable energy uh where the geography dictates and then you have to go and build the transmission lines to get the energy out so this is like completely new infrastructure all the way around and a lot of times uh that is lagging in certain parts of the country and it also is also shifting like where energy is produced if you have a thermal power plant we can just you know if i build a nuclear power plant in new mexico and i design that exact same facility and put it in maine it's going to operate exactly the

same because i have complete control over all the processes but that doesn't work for solar or for wind right obviously um so where the most wind potential is in the united states is not where all the population lives so we also have to make transmission lines like high voltage transmission lines are going to get like hundreds of miles away to where the population centers are located So, transmission is a huge bottleneck. And right now, actually, in Congress, they're thinking about providing a production tax credit, or I'm sorry, an investment tax credit, an ITC, for transmission lines. So, we've had like the production tax credit and the investment tax credit for wind and solar, respectively. And that's been hugely successful in catalyzing investments in renewable energy projects.

But now I think there's a realization that if we're going to keep this thing rolling, we do need to support transmission projects because we need to accelerate the build out of these things. So if we can have a tax credit for transmission lines, that'll encourage more investment and, you know, make it easier to build those things as well, make more projects economically viable. And then, you know, years from now, we can actually build even more wind and solar. So it's kind of, you know, we got to do wind, you know, you got to invest in the power assets

and then you got to invest in transmission. Then you've got to invest in more power assets and then more transmission. So, that is a big limitation there for at least, you know, the power sector. But I think there's a realization that it's something that needs to happen. And again, why can't we just build a big solar facility in the desert? Well, there's environmental concerns. I know it seems like it's just a desert, but those are ecologically active areas. So, there's sensitive wildlife there, a lot of protected species.

And out west, I mean, a lot of that is actually federally owned land. So, it's mostly like, you know, state and national parks. Sometimes it's harder to get building permits out in the deserts. And also, as much as people support renewable energy, they don't want it, you know, necessarily next to their house. You know, nobody wants to live next to a giant wind turbine or a big solar farm that spreads for miles and miles. That kind of ruins your view. Same for transmission, actually, right? There's a lot of obstacles to you can't just build a big transmission line that goes right through the center of a lot of towns or farms or things like that.

Right. So these are all things that are kind of have to be navigated here. But, you know, I think the overall conclusion, like the energy condition is well underway. It's really just a matter of how quickly it happens now. So two areas that I think people talk about having a ton of promise are, you know, nuclear and geothermal. geothermal but it seems like the applications haven't really come through yet uh or i guess nuclear was and now it's kind of falling off so what what's holding back nuclear is a more of a political thing and then what's stopping you know geothermal from taking um taking some market share too yeah yeah so uh we've kind of screwed up ourselves with uh with the nuclear industry

right um i think it was after like three mile island in the 70s the united states just kind of stopped investing in nuclear power so all the nuclear power plants we have well i mean there's a new one out in the southeast right um but most of the reactors are decades old like um i think we're talking about having licenses renewed now maybe up to a hundred years and that's actually pretty safe because we there's a lot of maintenance that occurs for nuclear power plants so that does seem feasible if we want to do it um but there's definitely not a much willingness to uh start building new nuclear powered plants right in most parts of the country a lot of places are actually shutting them down um here in pennsylvania where i live um you know they didn't want to the state

didn't want to provide any financial help for some of our reactors on the state level so some of those are shutting down uh illinois is encountering the same issue now and it's kind of interesting because uh you know uh pennsylvania and illinois actually generated like close to 50 percent of all their electricity from nuclear power it's a lot of jobs it's a big part of the tax revenue base and for them to for the states to like not try to support it is actually kind of uh insane to me um at least here in pennsylvania we have more natural gas than most countries so we'll be okay illinois has a lot of wind but the problem of course you know nuclear power is the most efficient energy source we have um so when we turn off one power plant one nuclear power plant

uh that's a lot more we're going backwards right that's a lot of zero carbon energy we're taking off the grid it takes a lot of solar or wind to uh bring you know replace that can you explain uh what like nuclear and geothermal energy is i guess i'm kind of a novice so just kind of the basics of it oh man uh the basics that that'll take for nuclear that's uh that's a whole seminar oh is that tough i'm not an expert either but uh you know so nuclear power is just a fission process so it's a contained reaction there um and we're just making uh steam so we're trying to get a lot of heat out of those reactions and make steam and then steam spins turbines and that's how we generate electricity so it's a clean energy source but it's just like natural gas

and uh and coal where we're trying to make steam i guess there's some natural gas facilities that don't necessarily make steam but uh so we're trying to spin turbines though and make electricity right um geothermal is obviously you're using uh some of the natural uh heat and and uh geology uh provided in that region uh it's just you're sending water down and getting it when it comes back up it's steam right so that's kind of a controlled process but that's more uh obviously dictated by geography so nuclear power right now is about 20 percent of the country's total energy use. Geothermal is much smaller. I think it's 0.8% or maybe it's 1.8%. I don't remember the exact number, but it's a very small number because it's limited by geography. Now, I think

it's going to change in the future, but with two different technologies for each nuclear and geothermal. So right now, I think in this decade, we're going to have a rapid rollout of wind and utility scale solar. So hold on, I have a graph here somewhere. So there's some estimates here where, you know, from 2023 to 2030, the United States is going to add between 12 gigawatts and 15 gigawatts of wind every year for the eight year period. And in that same eight year period, we're going to add 18 gigawatts to 20 gigawatts of solar. So these are by far grabbing almost all of the investment in new power sources, right? So this decade is just going to be let's build as much wind and utility scale solar as we can. And by 2030, I think it's actually possible that

utility scale solar and onshore wind are generating between like 30 and 40% of the country's total electricity. So that's up from maybe, you know, around 10 or 11% today. So that's a huge increase in a very short amount of time. And I know that sounds frustratingly low, right? 30 to 40% by 2030. But the United States is a huge country with a lot of energy consumption. Transitions like this never happened. They've never happened before this quickly. So this really is, we're already doing like quite a bit of investment and making a lot of progress. So I think we have to acknowledge that progress. Now, it's going to get trickier, you know, in the 2030s onward, because, you know, coal is going to be on its way out. We're not going to use a lot of coal 10 years from now. And we'll have a path to retire all of those facilities. And that's good from a climate perspective, because that's the dirtiest power source. Natural gas is going to be a lot stickier. um you know a lot of those facilities are newer the economics are better for the most part and

we have a lot of natural gas as a country uh so natural gas prices if we wanted to could always be pretty low but you know getting rid of those is going to require more than onshore wind and utility scale solar and this comes back to the nuclear and geothermal question um so there's some newer advanced nuclear designs that are being studied and actually supported by the department of energy. So, these advanced nuclear designs are smaller reactors. So, they're called small modular reactors, SMRs. And, you know, we still have to work out a lot of the technical details of these, but we're actually making a ton of progress. And the DOE is supporting two different demonstration scale facilities. So, that's the step right before commercial

rollout and making this commercially viable. And they've targeted, you know, 2030, maybe the early 2030s for having those projects completed. So, a small modular reactor has a lot of advantages, right? They have different designs. So, these completely different technical processes than existing nuclear reactors. So, some of the cool features is they can burn different fuels, so they can be cheaper. There's actually a design from the joint venture of General Electric and Hitachi. It's called GE Hitachi. And they have a design called the PRISM reactor. And it's a fast breeder reactor which means it can actually consume used nuclear fuels so it can consume nuclear wastes and make electricity from that i think that's actually on the back burner right now

but they've estimated that if they rolled out a fleet of those globally they could actually power the whole world using used nuclear wastes for 200 years so like the technology is there we just have to the willpower to build it again i don't think the prism is actually being advanced right now but they did a lot of work to support it but these advanced these advanced reactors you know they're smaller so we can actually build them at a factory and then just like transport them to the site and install them so it takes a lot of the construction costs down they can also be turned on and off more quickly or like to you know in in relation to what the grid actually needs existing nuclear usually operates for 9 to 18 months non-stop and then we take them offline to

do maintenance so you know that's the problem with like uh nuclear and it's when people say it's not competitive you know it's because you have to operate for 18 months and there's really no you don't have an option so when like the wind is blowing in october and it's like a really great year for wind and you have a nuclear power plant in that region you might be paying people to take your electricity that has happened in certain parts of the country so these big aging old massive facilities just aren't really you know weren't designed with you know the realities of 2020 and 30 in mind so advanced nuclear has a lot of potential i think um and also some of those have did i say passive safety systems so they can be no so they that's the last cool feature i'll

talk about for that but they have um meaning like the the architecture of the reactors um means that if something went wrong and the process went off the rails you wouldn't actually need a human operator to shut it down. It would just shut itself down. So, a lot of these are, I don't want to say meltdown proof, but it's pretty close. So, the risk of disasters, which is already very, very low for any nuclear power plant, are almost non-existent for some of these newer reactors. And because they're so small, you can actually build them on existing nuclear power sites. So, that would take a lot of the regulatory and siting and permitting processes off the table, right? So, we might retire older nuclear facilities and then just replace them with

the same location with some smaller designs. So, that's kind of cool. And then with geothermal, there's actually a newer technology. It's still being advanced, also supported by the Department of Energy. No one really talks about it, but it's called Enhanced Geothermal Systems, EGS. So, geothermal today, you need conditions. What do you need? You need heat, you need rocks, and I think you need pressure or fluid or something. So, you need like three different metrics to make geothermal work. That's why it's very limited and it's mostly out in the West, right there's some places in california that use it um in other parts like in that region right nevada and arizona maybe further north a little bit um but enhanced geothermal systems actually

you only need uh one of those um conditions and you can engineer the other two into the system so it's actually based on the same technology we use for fracking so we can drill holes um you know engineer the permeability of the rock and and the pressure systems there and actually engineer in geothermal so we can use this to make geothermal viable in much greater parts of the country it's pretty much all over the country right not quite that way but yeah i forget what is maybe the u.s geological survey was that usgs um they've estimated that maybe there's between 100 gigawatts and 500 gigawatts of enhanced geothermal systems potential in the united States. So, that could actually supply about maybe, you know, 20% of the total country's

energy use. We could get geothermal in much broader parts of the country from coast to coast. So, that's kind of interesting. No one's really talking about it, but again, that's maybe out in the 2030s timeframe, but we could start to see that. And that's, you know, borrowing the exact same technology we use from fracking. It is important to know geothermal does emit a small amount of carbon dioxide um i think it's one-tenth of that of natural gas but uh so it's not completely clean energy but it's a very low low low carbon source so all right well we have plenty more questions but we're gonna hit a quick ad break before we get to the second half

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okay welcome back in uh i have a quick question just to follow off that first discussion what's what's the fastest way to accelerate that transition uh is it financial incentives from the government like what we're seeing with like uh subsidies or tax credits is it uh credits for using it i know like big tech has signed on as a customer for some of this more clean energy consumption what's like how do you get people to pour money into this yeah so to accelerate it's already well underway and that's because the economics are coming down uh or you know coming down the cost curve the economics are more viable to accelerate it i think some of the lower hanging fruit would be extending tax credits

so extending the ptc and the itc for wind and solar maybe even extending it or adding new ones for specific other components right like energy storage or again transmission there's actually some talk of just consolidating it so instead of having it be based on energy source such as hey if it's clean energy what you know here's a tax credit because it does get annoying like um you know well the tax credit for batteries expires next october and then the one for solar phases out next june and the it's very confusing and hard to keep track of um so extending tax credits however they want to do that obviously um would just make a ton of sense for encouraging more investment um big corporate purchases can help some projects be more economically viable

so i think it's amazon when they go around and buy power purchase agreements they'll go talk to projects that wouldn't be built unless amazon agreed to buy the power so they're trying to help you know it's not just like hey this is in new mexico it's going to be the lowest cost energy source in the world for solar amazon's not interested in that it wants to go and support projects that wouldn't exist without Amazon's help. So there's some examples of like larger corporations maybe stepping in and providing some of the, using some of the financial burdens for some of these projects. And that can help to accelerate to some extent. And then, you know, for transportation, I mean, I don't know if it exists still. There used to be a tax credit for

buying an electric vehicle. That's kind of a no-brainer to bring that back if it has phased out or maybe even juicing it a little bit to offset some of the costs or just really make it easy for consumers if they're buying their next vehicle it's just going to be an electric vehicle and again there's still some things we need to do like supporting charging infrastructure some of that has to be publicly owned some of that's going to be privately owned so figuring out the details there and some of the newer business models or arrangements so there's still some work to do on that front as well and then uh yeah i don't know i mean it's important to point out as well, like, electric utilities are already incentivized

to use renewable energy, right? So, there's an electric utility called Xcel Energy. And they have this program called Steel for Fuel. And that means that they're replacing coal-fired power plants with onshore wind. And onshore wind is cheaper than coal for a lot of reasons, right? And this is true for, increasingly true for utility-scale solar. When you build, you know, a wind farm or a solar farm all the costs are up front for the most part and building the thing there's some maintenance and things like that and operations but there's no fuel expense right the sun shines and the wind blows you're good that's much different from thermal power plants you have to constantly buy fuel for decades and decades and decades so it doesn't matter like you

know the price of coal or the price of natural gas doesn't matter if you buy wind and solar so you can actually pass on those savings to your customers. And it also makes the economics of projects better. So in certain regions, again, it just, and this is why we're seeing so much investment. You know, I mentioned earlier that stat about, you know, how many gigawatts of wind and solar we're expected to build as a country for the next, you know, eight years. You know, it's because there's nothing better than wind and solar. The economics are just obviously better. um so there's already a lot of incentive for these projects to be built um it's just navigating all those other obstacles like transmission and um where can you build it right some people don't

want to live next to that or uh you have to route it through towns it's it's a little more complicated in 2020 to have these massive infrastructure projects but yeah so does that mean in general for these electric utilities whether it be excel others or i guess berkshire hathaway energy is a big one now. Oh, that's a, that's a subsidiary. And they've mentioned that they're going to be investing tens of billions into this stuff over the next decade. Does that mean their profit margins will rise? And then outside of utilities, are there any industries or areas that look promising from an investment perspective? What was that last part again? I'm sorry. Are there any areas outside of utilities that look promising from a, you know, investment

perspective okay um so yeah when you're investing in renewable energy if you're an uh electric utility um you're highly regulated like most utilities not just in electric utilities in the united states are regulated fully regulated so i think that caps the profits you can actually make but it does lower your fuel expenses and other expenses for maintenance right um so you do end up making more money for the same, uh, investment. So, um, everything's determined by something called the rate base when you're an electric utility, right? Uh, so that takes, um, there's a, a legally mandated, like a rate of return on your investments. Uh, and you multiply that percentage by your rate base. Um, so your rate base is all of the utility related assets. These

of things like the power facilities, the transmission lines, you know, the distribution lines. So that's like getting it to people's homes and businesses. And eventually it might even include like electric vehicle charging infrastructure, right? And then you add to that something called qualified expenses. So the most important number in that calculation, and that determines how much money you can make as an electric utility, right? So that's how we set like, you know, how much you and I pay per month to our electric, you know, on electric bills. It's determined by that calculation. And that's a little oversimplified, but that's kind of the gist of it. So the most important part of that calculation is the rate base. So again,

companies are incentivized to invest in their rate base, build more transmission, build more solar, build more wind, because that's how you juice that number, right? And this is like tens of billions of dollars large in assets for these companies. So even if that guaranteed rate of return doesn't increase, you know, you still can offset that with tax credits, right? So that helps you be more profitable. And that other number you add to it, the qualified expenses, well, if you're spending less on fuel and maintenance, then you get to collect the most, like the rest of that, right? So, that number or that calculation is used to determine what companies can make. So, just from that, there are limits on the profits that electric utilities can

make because they're highly regulated. But it does make a lot of economic sense to, if you can reduce the right expenses you are more profitable you do have more cash flow and then you can turn around invest that and grow your rate base even more uh so like over years you're just going to keep growing and growing and growing uh and the the rich get richer the big get bigger when it comes to electric utilities insofar as outside of uh electric utilities yeah there's way more exciting investment opportunities than electric utilities those are kind of boring right i mean geez um so yeah i mean look batteries electric vehicles um some of the software comes like stem inc is one of the more popular stocks i think right now in the industry so they make like

they use artificial intelligence uh to help manage um you know energy loads and distribution from battery projects right um so you can like subscribe to their software and they'll help optimize your system for your house or your business or whatever it might be um there's some limitations to their business model because they mostly just apply what they do on top of the batteries which mostly come from tesla and tesla also offers the same energy management services and you know i wouldn't want to bet against tesla so if uh you know and it's like i don't remember the number but it's a significant amount of stems overall business is built on top of tesla batteries so uh if tesla or its customers are like screw this we're just gonna you know stay

in the tesla ecosystem stem's going to be uh not in a good position there um and then of course there's other exciting things right like solid state batteries obviously the future right um i studied these in grad school when i was uh you know at carnegie mellon and um in in in when it comes to electric or electrochemistry and energy storage uh you know there's some jokes among material scientists because there's a lot like i don't know six different metrics you have to optimize when you're designing a battery cell and you might have a chemistry or design that just blows like five of those six metrics out of the water but then that sixth metric is just it makes it like completely non-viable so you're like damn it again thwarted um so this has really been the

plight of material scientists energy storage for for decades solid state batteries are almost like too good to be true they just uh are way better on a lot of different metrics and i expect that you know in the back half of this decade we'll start to see those enter the market and be commercially viable and that makes so like they just have much higher capacities for a smaller footprint so there's more density so you can have maybe a battery that's half the size but it has like double the capacity so that makes a lot of sense for mobile applications right whether that's like phones and laptops or other devices such as that or quite truly mobile applications like vehicles. You know, you could have a vehicle that's powered by solid state batteries and has

a thousand mile range, like that's completely feasible. It also has fast charging capabilities due to the architecture and the materials used. So, charging a vehicle, you know, 10 years from now that has solid state batteries might take you about the same amount of time as filling up a gas powered car today. So instead of like hours and hours, you have to do it overnight. And if you forget to plug it in, you can't go to work, which maybe isn't such a bad thing. You know, in the future, you can just charge it up in minutes, right? So pretty big advantage for solid state batteries. So we've seen companies like, you know, QuantumScape was one of the big ones that came public recently. There's another one going public. I can't remember the name, another solid state

battery player. So there's a lot of excitement there. But again, I think you have to be realistic about how early this is. So quantum state, quantum scape is public, but it's not gonna have meaningful revenue until maybe 2026 or 2027. So I support long term investing and encourage people to do that as well. But that's not what I mean. I don't mean wait six years for a company to have any revenue at all, really. That can be dangerous projects can get delayed. And it's important to remember as well for energy storage i mean it really is kind of a commodity right it's such an important component um for all of these these uh industries right and then electric vehicles um but there's going to be a lot of different manufacturers of batteries there's

going to be a lot of different solid state battery manufacturers today we don't even know what chemistries or designs might be optimal um you know it might be possible that quantum skate doesn't have the best design uh or there's companies that at least match it right there's a ton of investment here um all the major auto makers are really invested in um you know different companies or different technologies or even developing their own uh other you know traditional battery manufacturers are investing in it new startups uh there's still new research going on at universities that will probably become startups um you know dyson you guys know dyson like uh in the uk they make like vacuums and things like that right yeah like they're they're they're

researching solid state batteries right so like everybody's in on this um so it's possible in the future it's just like a commodity product everyone does it and that maybe there's no obvious investing opportunity i would say maybe there's some parallels to like solar panels right solar panels are important but it's been very hard to make money investing in uh you know solar stocks for you know solar panel manufacturers really um so it's it's one of those examples it's very important but maybe there's no investment opportunity there um so so i have like a follow-up question that might be a little tough to answer but a lot of these uh a lot of the excitement has given rise to what some might call crazy valuations so i think uh or even in sometimes

bad behavior you think like nicola uh or who's the one that just went lordstown uh do you think that coming public early prior to having a viable product is a net positive since these companies get access to capital and maybe have longer life cycles or do you think it's a net negative because it creates a lot of bad behavior well i think i hope bad behavior is more of a uh a smaller component of all that right hopefully most companies aren't doing unethical things um but that is a good example of um you know you you it's hard if you if you don't understand like all of the challenges and the opportunities um you can get burned right if you're just focusing on the opportunities and you know

Nikola sounds really good, right? Or it did, right? Whatever, a year ago. I mean, how could you lose, right? You know, they have trucks and cool investor presentations and look how awesome it is. It's the future. And if you don't understand the hurdles there, the limitations of fuel cell technology or hydrogen, then, you know, you could end up, you know, holding onto a Nikola, right? Lordstown Motors, another good one, right? No operating history. Of course, they bought that facility in ohio i think right um from general motors or whatever um and then yeah like they just they couldn't get it together and you know obviously maybe the management had some things going on there that weren't so great um but yeah so you have to be careful investing in the space

and you just be realistic right i tell people when they're investing in biotech there's a lot of hype right every every biotech invention is going to change the world every battery and all this and hydrogen is going to change the world and the realities are often a little more uh more nuanced and complicated. So, um, be realistic, you know, this isn't, uh, this isn't the lottery. I know it's been, it's been like stupidly easy in the last year to be an investor, right? I mean, almost everything goes up. Everyone's the genius. And eventually that's not going to happen anymore. Like, um, companies that can't commercialize their technologies, you know, aren't going to be around much longer. Right. Um, so just cause it sounds

good. It doesn't mean it's going to be a great business. And conversely, uh, even great technology doesn't always become a good business. Um, sometimes industry leading technology just can't be commercialized or the price isn't right for the market. Um, so you can have like best in class technology and it just isn't a good business and then you can't really invest in that. So, and you know, what you brought up there actually is a good example, like hydrogen to me. I don't, I don't really understand why there's so much excitement around high. I mean, I get it, But I think there's way too many technical hurdles for hydrogen to overcome. So I know there's like governments and major companies investing in hydrogen or at least

talking about it. So it sounds like it's going to be a thing, right? It's this wondrous molecule and we can use it to power vehicles and transportation and maybe we can store excess solar or wind power for months and months at a time, you know, and preserve the energy potential or make it even more valuable for renewable energy. And the realities are, it's way more complicated, right? Like hydrogen is actually a pretty terrible fuel. You have to compress it, whether it's through pressure or super freezing, in order to get a high enough density to make it viable or to store it, right? So, it's not like a gas tank

underneath your gas station that you go to, or just sitting underground and you can just store like tens of thousands of gallons at a time um storing it requires a tremendous cost because you have to freeze it or pressurize it that's not a cheaper expense or a cheaper easy you know so it's like a constant maintenance cost if you're just going to store hydrogen forget using it um one of the problems again with like nicola or some other companies um fuel cells are actually pretty brittle still so the economics might look great if you're you know an 18 wheeler And you want to use hydrogen. But if you have to replace your fuel cell stacks every, you know, 20,000, 30,000 miles, that's a very expensive and important part of your vehicle, then the lifetime economics aren't so great. Another issue is you have to use your main competitor as your primary input. So you have to use renewable energy. I mean, that's the idea of green hydrogen. Anyway, you're using renewable energy to make hydrogen, where we could just use renewable energy, right? So you're like, that's not a great position to be in, I don't think.

And also, like, again, on paper, these things sound really good. We're going to use excess solar energy. I'm sorry, is there, do we have an excess of renewable energy right now in this country? You know, I think we have enough other things to replace before we start knocking out like hydrogen things. So I think the future of transportation is obviously electric. I don't think hydrogen has a great role to play there. there's also limitations like transportation transporting hydrogen i said storing it so

that's a main limitation uh it's the same for vehicles right you would have to have some crazy storage tank on your vehicle uh in order just to store hydrogen if you're using it for like a car or a truck um but there's also like if we made this in the desert in a solar facility how are you going to get it out of the desert you can't actually transport hydrogen in steel pipelines because there's something called hydrogen embrittlement. So it just causes weakness and deterioration in the materials over time, the steel, and eventually your pipeline's going to explode.

So we've had in the early, in the middle of the last century, we had airplanes would fall out of the sky and power plants would blow up and pipelines would blow up because of hydrogen embrittlement. So we understand that problem pretty well. And you actually can't transport hydrogen

through pipelines and very large volumes because of that. So, you'd have to build a completely new infrastructure all over the country just to get hydrogen anywhere. Similarly, you can't actually use, like, if we're going to use it to replace natural gas, well, we have to go and redesign all of our stoves and all of our furnaces and turbines because just there's different, you know, thermodynamic and chemical properties of hydrogen compared to methane. So we have to go and redesign and replace all of this infrastructure just to use hydrogen, which isn't even a good fuel to begin with. So there's a lot of hype around this, right? Like plug power and fuel cell energy and a couple others, right? And it sounds good. It looks good on paper.

But I think the destiny of hydrogen is still going to be like forklifts, you know, which is what it kind of currently does. and all these projects even though there's announcements of intention to invest in hydrogen most of it's a memorandums of understanding or like some really early uh uh development partnership so it's not a commercial stage partnership for the most part um so i think you have to be careful when it comes to to hydrogen some of those valuations got crazy right what did what did plug power get up to earlier this year it was like like some tens of billions of dollars it was uh nicolo was 50 yeah yeah so it's it's just uh be careful yeah it seems like investing in a nuclear fusion company it's like we got a lot of progress

this might be you know it might never be viable you know yeah exactly yeah all right ryan do we want to wrap up or do you have anything else let's wrap up all right yeah the first one okay yeah what's uh we may have asked you these before actually but if you have a different one what is one financial saying that you disagree with so this sounds counterintuitive but uh i kind of hate when you know let's say on like social media right somebody will have like a 10 tweet tweet storm and they'll maybe like talk about a stock or pump it up and then at the end they just throw it in there let's say as always do your due diligence and i hate when people say do your due diligence because first it's like yeah no kidding right obviously do your do your own

research. But most importantly, I think most people don't actually aren't equipped with the tools to do your own due diligence. You know, a lot of people don't understand a lot of the nuance of like biotech or anything, renewable energy, right? Like batteries and things, right? So if you can't understand the limitations and the challenges, and you're only investing on the opportunities, you're going to be biased, you're probably not going to have a very successful track record. So it's okay. Like you can have a different approach. You can do a bottom, I do a bottom up approach to investing. So I try to understand all the nitty gritties and then just invest in like the best one or two opportunities in each little part of the market I'm looking

into. You can also do top down where you're just like, batteries are cool. They're the future. I don't know anything. I'm just going to buy, you know, a basket of battery stocks and that's okay. But I hate when people say do your due diligence because, you know, most people just have degrees from google university and that's not really uh that's not gonna hack it so right right no that doesn't say which leads right into our disclosure this is not advice do your own due diligence yeah we have to do we have to uh we have to perfect yeah um all right last one what is one piece of advice you have for anyone considering a career in investing and maybe it's for anyone looking in highly technical areas like clean energy or biotech or other things like

that. Oh man. I don't know if I'm the one to give career advice. No, uh, I guess, you know, this is probably true for, for anything, not just finance, but, um, you know, you always want to ask yourself, uh, how do you add value? Right. So I didn't, I didn't start off thinking I was going to work in finance. Right. I didn't like, I wasn't like, you know, 18 years old and thought this would be what I was doing when I'm, you know, 30 years old now. So where do you add value? right um so i have a couple engineering degrees and um sure a lot of people like go work on wall street with engineering degrees um but you know i think that where i add value is like i kind of understand more at least of the details of some of these things um so i can maybe talk a little

bit more intelligently about some of these opportunities i'm not just like chasing momentum or what sounds cool like i can point out more of the limitations so that's made me more objective as an analyst as a writer as an investor um so that's why i'm always careful to say challenges and opportunities. I've said it maybe a dozen times already. Um, so where do you add value, right? Like, and that's going to be different for your upbringing, your worldview, your education, your experiences, whatever it is, but, uh, find a way where you're, you're, you're doing something different, you know? Okay. And, uh, for anyone that wants to find you, get ahold of you, what's the best place? Don't, no, I'm just kidding. Um, I'm, uh, on Twitter, I'm, uh, at

the number seven max chats go and i have two x's in my name because my parents couldn't spell so if you just go to at seven investing you'll see me there somewhere i'm sure so all right and that's all we gotta say sign up with seven investing code ccm help all of us out add a great service uh to your investing research process all right thank you max hey thanks for having me guys cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox

panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply okay welcome back in thank you again to max chats go i'll say it again just because he is at seven investing use our code ccm get ten dollars off ryan i mean you can hear it in the interview i mean if you're impressed by him there's no reason to not go to the service but enough on that ryan do you want to introduce your first story of the week yes there was kind of there was some news this week around peter teal who i mean he's not the newsiest guy he kind of typically some of the stuff he does is sort of in private but pro publica released a piece about him stating that he's exploiting the american tax system or basically using a tax haven that is the roth ira

and i i thought it was i didn't like the article but some people might have different opinions on And so ProPublica, if you're not familiar, is an investigative journalism firm, and they try to basically oust big public figures. They try to do these uncoverings like, oh, look, we got him. But this was less of a gotcha article and more of like, wow, that's really good returns. Anyway, so I'll get to the bulk of the article. So the subtitle stated Lord of the Roths, how tech mogul mogul Peter Thiel turned a retirement account for the middle class into a five billion dollar tax free piggy bank, which could be a finance book that I would buy. Yeah, I would. That's that would sell. Hey, we'll get to it. He is a bit aggressive with his tactics.

You know, they might not be to the letter of the law exactly, but pro publica, you know, they got to get the clicks going. And they got to get the clickbaits on there. Yeah. And so it also goes on to say, over the last 20 years, Thiel has quietly turned his Roth IRA, a humdrum retirement vehicle intended to spur Americans to save for their golden years, into a gargantuan tax-exempt piggy bank. And so for anyone that's unfamiliar with how the Roth IRA works or what it is, it was established thanks to William Roth Jr. I think he's a Republican from, gosh, I'm blanking on what state, maybe Vermont, Delaware. And in 1997, that's when he basically established it or helped establish it. And it was intended to help work in America and save for retirement tax-free.

And the contributions now are capped at $6,000 a year. At the time, it was $2,000 a year at the start. And you had to be below a certain threshold. I think it was $110,000 a year, maybe $120,000 for couples, or else you couldn't contribute to it. But this was at the time where Peter Thiel was founding PayPal. And we'll get into this in a little bit. 10 years later, Congress allowed everyone to shift money from traditional IRAs or some a portion of their money from traditional IRAs to Roth IRAs for a one time tax. A lot of people use that. I believe Peter Thiel did as well. But anyway, once the money is in the Roth, it's investable like other money. uh and i think a lot of people hear roth ira and they think index funds like instantly because it's just like the non-risky money but you can invest that money in pure stocks public equities if you structure it right you can as we'll see uh invest in private uh enterprises as well

so anyways the gripe that pro publica appears to have with peter teal is that he was able to make an investment in a private company early on with that roth money which a lot of typical investors don't have access to. You technically do, but it takes legal structuring that costs money. And Peter Thiel had that money. But Thiel's income in 1999, when he was starting PayPal, was under the threshold. So he was able to qualify for the Roth contributions because as the, I don't know if he's the CEO or what his title was, but he was only getting paid in salary, 70,000 or something like that a year. And so he bought his PayPal founder shares through his Roth IRA for $1,700. Keep in mind, this is literally basically a startup at the time. The following

months, they got a lot of money from VCs and whatnot. But I think just to be clear, I think I saw that on the old S1, they had to disclose that they did sell him the stock or like give him that whatever ownership state for significantly less than what they were appraising it for at the time but you know you're right it was a startup like a super early stage yeah and there is i guess some of the cash that they got from vcs indicated that it was worth more than what he bought it for but it's almost like who's to say what the true value is because it's not like you're not seeing the marketable security yeah just because the vc says it or whatever i'm not sure exactly yeah And I believe he also did it through, he put his Roth IRA into a trust, which helps him.

I believe that's the only way to become a limited partner in smaller private deals or for venture capital, stuff like that. I don't think you can do it directly within a Roth. So that was kind of one of the gray areas or one of the things that people didn't like or ProPublica didn't like. anyway uh within a year that 1700 had jumped to 3.8 million and then obviously they sold to ebay so he had even more money after that and he continued to make his use that money in his roth without being taxed on it uh to do uh more private investments so he that included palantir and facebook and now the account is worth more than five billion dollars uh they're all they also tried to sort of oust several other investors who have done tremendously well through their roth

iras uh including ted weschler who's sort of a buffett uh right-hand man i guess disciple yeah he's part of the two protege stock stock pickers him and him and todd jones and uh anyway he compounded his account by 35 for 30 years which is one of the most impeccable track records uh i've come across or i've seen and i think it helps being that you can sell and reinvest without taking cap gains tax on that um or income tax i guess um but he also tried that they also tried to oust buffett who had 20 million in his roth oh i love that stuff i feel like he's got to be hard to oust because all his money's just tied to berkshire i mean the last three decades he's basically said tax me more take my money i'm doing i pay that we pay the most taxes in america

i mean like yeah you could say you know whatever he's kind of a greedy guy and he's hoarding all his cash and not giving it away until he dies you know which may be like oh we're gonna wait three decades until you give this money away but i mean to try to dunk on buffett is tough and then the dunk on ted here is just ridiculous i mean there's really nothing you can say the guy he did it like the right way like anyone else would do it he just added money he took that transfer from the regular to the Roth, which was what, in like 2011? He did basically what anyone else could do, but he's just so much better at investing than everyone.

But the Peter Thiel stuff makes sense. I mean, that is a bit shady. And it wasn't like he was just using a Roth IRA like everyone else. He just kind of stuffed it with these, I wouldn't say can't miss investments, but the ones that really ended up working over the long haul. Yeah, but even then, like, let's say someone were able to structure it that way. that doesn't mean they'd be willing to stake their investments all on Facebook or all on PayPal. Like there's still true.

Like there's still investing skill involved. Um, and it's not like, uh, obviously there's the gray area with the value of his shares, but he read the rules. Like he didn't, he didn't break the rules. Yeah, it's true. He wasn't doing illegal. He, they found a loophole maybe this will expose that that loophole should be closed uh and that would be great maybe i don't know uh because you know i don't think it was it seems that i wouldn't call it ethical but it doesn't it seems like he shouldn't be allowed to do that if for what the

spirit of what a roth ira is supposed to be but with ted i mean that was just bragging for him and his response was like i don't know what to say guys i'm just i got i may have gotten a little lucky it's compounded ridiculously i don't know you can do it too this totally bad it had to backfire on pro publica because it just ended up being free marketing for ted what i would launch a fine if i were ted weschler well he's basically managing i think probably like 10 billion at berkshire uh he's gonna take over the investment portfolio and you can see why buffett stole him from wherever he was i don't know the history of ted but people have kind of been like oh or Taunton had a really quick to take over. I think this, you know,

shows that, you know, maybe the track record won't be that good because Berkshire is so large, but they got some good investing minds over there. I think Buffett knows what he's doing with sending, sending up a, you know, Berkshire for after he dies. Yeah. I guess, does this, does this make ProPublica look bad? Like, did you think this kind of backfired on them? In the end? Well, you know, they've been, they already did that one on,

they were trying to dunk on Buffett for not paying taxes on unrealized gains. And it's really just, it's a, whatever they call it, the Rorschach test where the people that are already like, guys, this isn't really a story. It's just how people do this. That's like the FinTwit people, the finance people kind of like us were like, yeah. I mean, if you don't know the rules, like that might seem weird, but just follow the rules and you can take advantage of it too. And then there's a lot of other people that, you know, maybe you,

The headline can make you angry if you're not, you know, you know what I mean? Like, I think they're going to do fine with 90% of the population or I don't know how big of the population would no matter what is going to agree with them just because the people are rich. But that gets into more of a political standpoint, stuff like that. I mean, I lost respect for them because it seems like they don't necessarily understand what's going on, but that's fine. And I think that Peter Thiel reporting was still pretty interesting either way. However, they were trying to frame it. Yeah, it was good, I guess, investigating on their part. But when I was reading through this, my biggest takeaway was like, man, I really need to start maxing out my Roth contributions.

Like, it was not, wow, screw the system. You could be more active in the Roth, too. That's kind of something that, you know, I got just a bunch of, mine's small right now, too. I just got a bunch of shares of Boston Omaha and I'm trying to just let that ride forever, but you can be more active and you don't get penalized for it, which is something, if you're ever going to want to scratch that itch, if you love, you know, That's the place to do it.

Yeah. I mean, it's the best place for sure to do it. And 6,000 a year is huge for most people, you know, especially like us. Yeah. All right. What's your story? Okay. This one, you know, there wasn't any big stories that really we could talk about this week. So I went through some IPOs that I've been seeing and it feels a bit like February again, the SPACs and IPOs have become roaring back. I mean, there was like that six week period, right? In April, May, when everything kind of paused and they're like, oh, are we going into a downturn? And then for some reason, the last

month or so, we have gone back to, I don't know if I want to call it excess, but it feels hot in the market is probably a good way to describe it so here are some examples mr car wash went public last week market cap of six billion dollars uh for reference 719 page s1 i do not know why you would need that many pages whenever i see something that's like at least like a 300 page s1 or 300 page 20f or 10k doesn't that kind of you know what are they yeah i'm like what are they hiding here unless it's like a bank or something or like a 100 pages of uh what you would call it things that can go wrong but no it's risk factors yes risk factors yeah um so for reference they had 60 million in net income i think they have like 300 and some car washes 40 million in free

cash flow i i don't know what's going on here uh maybe it's maybe they're going to get to 2,000 car washers over the next few years. How many car washes do they have? It's like 300-something. So the value per car wash is huge. I mean, maybe people should be, instead of buying self-storage units, they should be buying car washes for what the market's valuing this at. Yeah.

Some of these IPO prices are, they've been so absurd, but i mean you're looking at a profit multiple you got to go to sales multiple i think they had low margins because of the you gotta look at the tan multiple oh my god the what's weird though is like who's owning this and it's like oh well it's just the insiders and it's kind of a weird game you play over the over the lockup period where everyone's like yeah that looks kind of ridiculous all right we can't short it we don't want to short it because of the low float all right i guess we're just gonna let it be for the you know like maybe some schmuck will buy it i don't know it's kind of weird maybe it'll turn into a meme stock

yeah you know it's funny a lot of like the ipos feel like they've really the stock has actually tracked like the lockup like the lockup has really mattered yeah because people are liquidating and we've seen these things come back down to earth as soon as that lockup hits or even before people are like selling it preemptively yeah it seems like that quote from i've been thinking about that quote from bill girley i think it was at the sewn conference where he's like if the banks are willing to take a fintech company at 30 times sales public we'll give you as many as you want and as long as that continues it just it seems like it's unsustainable but we'll see other ones that are a little bit more ridiculous, a little more funny is the metals company. Now this was

in the wall street journal, great article. Uh, it is an undersea mining prospector and it is going public in a SPAC being valued at $2.9 billion. And this is more than any mining company to go public with no revenue ever. So pretty hard, pretty high. And then even better, the metals company, which is mining the seafloor, is pitching itself as green to ESG funds. But biologists and oceanographers say the mining technique could cause, quote, irreversible damage to the ocean. And so that they are trying to get this technology banned until 2030, at least. And then what's even better is CEO Gerard Barron carries, you should look up a picture of this guy. It's very funny. He carries a metal lump from the seafloor in his pocket, and the company hired a marketing firm that is promoting him as, quote, the Australian Elon Musk.

I'd say the golden age of fraud is continuing, and we're just going along just fine. There's more fraudsters entering the market here. yeah it's I we say this all the time but the rise like Elon's success has given way to a wave of do good for you I'm putting that in air quotes even though obviously Tesla's a real company and sells cars but these are just essentially Ponzi schemes accessing ESG funds yeah yeah it it incentivizes more like look how well off trevor milton is like he never did anything oh yeah this gerard baron guy is set for life i mean i bet he has whatever founder warrants or whatever that shit is it's frustrating yeah it makes me want to makes me want to fall in their

footsteps yeah i mean which is the problem if you have no shame and man you could be rich right now if you have no shame you know what i mean yeah and you know how to write an s1 yeah yeah if you know how to write or you can hire someone to write one for you this i i don't even know i mean there's so the thing is like there's so much spack money sitting there what is it like 100 100 billion probably i'm just you know it's basically like a bank it's just sitting there looking for deals and the supply of deals of quality deals is basically zero now unless your company like stripe who isn't doesn't want to go public or something like that the you know you they need to fill this uh demand so the quality of these specs i feel

like it's just going to get lower and lower and lower and this feels like the lowest quality you could ever have yeah this is super low and the wall street journal wrote about this wall street journal wrote about this where spax are calling ceos asking them to please come public like that's a bad sign yeah i mean the spax i mean if the spax doesn't go through you just kind of sit on money for two years but you know i mean if the incentives though are to make the deal so like it's setting it the the uh the recipe or sorry no no the the environment is setting these deals up to be just the lowest quality as possible does that make sense yeah what's this next one that you have oh this one is really funny i i know it's just from a foreign currency or foreign

language translation here but we have a new chinese ipo and it's called ding dong cayman limited just went public chinese adr or it might have just dropped its s1 or whatever you whatever you have for a foreign company and is a leading on-demand e-commerce company in china i mean talk about a meme stock pitch right here everyone just wants to go long ding dong yeah i saw there was plenty of meme material on twitter for this i mean if you ever think that wall street bets is going to take some to the moon no obviously this is an investment advice don't do this but you know we live in this age of this ridiculousness i mean someone could just go yeah we're all just going to be long ding dong and then they just chuckle to themselves and then there was this

this is a real headline it looks like from cnbc uh ding dong man bang and miss fresh take ipos to the u.s i mean i know it's just a language translation but man that's a tough headline all right in all seriousness does this feel as frothy as it was in february maybe this is just an ongoing thing like maybe this has been happening now it gets more coverage because the meme stock craze but possible i just always think like does this have any variance on the market at large i got a feeling ding dong and scraping the ocean floor acts of trying to access esg funds is very little at their ends on the market as a whole but maybe esg based etfs stuff like that could get affected i don't know it's it's that's definitely above our pay grade but if

if if tens maybe not tens of billions but maybe if like 10 billion of these i bet this ding dong company might be legit or you know it sounds like they're kind of like a door dash or something like that but if 10 billion of basically pre-revenue or kind of startup-y stuff is coming to the public markets like each week eventually that will matter but you know if it's only about 10 billion a week i don't know it just seems like it's pockets of just stuff that is worth nothing yeah it might make for good i would love to be a long short manager or there's so much material to start it seems yeah i and this isn't something we do but it seems like from the outside that the opportunity is like you would salivate but it seems incredibly

dangerous at the same time yeah it's also true all right i'm gonna head to my next story so there was sort of a thread this week that came out from joe frankenfield from saga partners uh and i think saga partners put this together but there were 50 companies with above a 20 percent uh rate of return over the last 15 years so uh versus the s&p which had about eight percent rate of return and so i'll go to the top 10 and i'll give their 15 year returns so netflix was number one 38.7 percent booking holdings 35.5 percent amazon at number three 34.2 percent number four align technology kind of a surprise over here uh 31.6 percent so they do like 3d digital scanners and they're also the creators of invisalign oh incredible moat if you've ever looked at that

i mean it's expensive but man incredible moat there yeah and then five is transdime group 30.9 percent apple 30.9 percent market access was number seven i hadn't heard of this but it's an international electronic trading platform for institutional credit markets they've basically done 30 percent and then boston beer company actually 28.7 percent they're the owner of like sam adams and truly and a bunch of other uh alcoholic beverages then number nine is tyler technologies uh grew 20 irr 27.4 percent that's basically public sector software must just be like an overlooked area and something that's super sticky like super sticky software software and then number 10 was alumina which is a genetics company they did 27.2 percent so this list did

exclude all companies under 100 million dollar market cap at the time which i think is based up 2006 uh and of the 50 on the list only three had a market cap above 10 billion dollars seven had a market cap above five billion dollars so most of these companies were tiny or what you would deem to be a small cap now i guess that's not really much of a shocker yeah and also i mean under five five is kind of in the mid-cap range but depends what your definition is yeah and then only two of the 50 companies had a price to sales above 10 times and those are biotech stuff right that's like by you know pre-revenue almost stuff right one of them was more pre-revenue another one had like 360 million in revenue if i remember correctly but

that goes to show like i mean maybe these aren't the returns you want maybe you don't want 40 like a netflix or maybe that's not what you're striving for but goes to show that paying any price might not work so well uh or won't get you those magnificent sort of uh top top tier returns and then the largest irs i believe were byproducts of multiple expansion like lots of multiple expansion those were sort of the biggest ones so netflix for example their sales multiple went from 1.6 times to 8.1 times today uh that's where you're going to get a lot of because i mean if you think about it if you have sales double or sales i guess go up 20 times and you have multiple expansion four times you have a multiple or a hundred bagger yeah uh 25 right 25 that'd be 80

that'd be 80 but yeah same right um i guess and then most of the companies on this list uh achieve double digit sales growth annually some of these things were probably what you'd assume but what What were sort of the biggest takeaways for you? Yeah. I mean, everyone talks about this, but it puts it in numbers. If you want the home run stocks, you, you know, I mean, multiple expansion, uh, small cap, long, small, smaller. Yeah.

I mean, under 10, you know, whatever, it can't be a hundred billion, uh, maybe not in this stage, but you know, it can't be, uh, ginormous. So smaller, multiple expansion, like long runway for either reinvestment or just sales growth. Maybe it's asset light and they don't need that much reinvestment. And then you need operating leverage or maybe you just need two or three of these. But operating leverage or a change in the unit economics, I think, can be really important because a lot of these on this list. I mean, Apple's margins went up and that was really just because the quality of the products went up and there was app stores, stuff like that. Amazon with AWS. Netflix is really easy

to talk about because they went from the delivering of DVDs to now what they are today. The unit economics are a lot better. I think identifying a change in profit margins or cashflow margins can be really, or predicting that can help, you know, that'll improve the returns on invested capital that can really help for long-term winners. Yeah. And like the sales multiple expansion, isn't just a change in market sentiment. Like you said, that's probably a by-product of the change in the unit economics, because now you're willing to pay more. The cash flow multiple might not have changed. I mean, obviously I'm guessing when they had a billion dollars in sales they weren't profitable if i remember correctly uh but the cash flow multiple

might not change that much whereas the sales multiple could yeah or even the gross profit multiple might not go as much as this something like that they could i mean the really the best businesses are ones that can grow gross profit at a faster rate than um their sales sales can grow free cash flow at a brass faster growth than gross profit and then they can buy back stock and return a lot of, you know, cash to shareholders. I mean, you know, some of the big winners on this list have just really reinvested into their business like Netflix and Amazon. But a lot of them, I mean, that you see on here, I think one of them was Activision Blizzard. They paid, I bet it was, I think it was total return. So, you know, they paid a decent dividend and really like buying

back stock and be a part of it too. So I don't know. There's a lot to take away, but in reality, i think the biggest one is if you're paying a high multiple for something which we're you know we're fine we do that sometimes you know you you can't expect um 20 irons yeah all right what's your uh new game here yeah so this i think this will be a fun game i'm calling it taking stock what do you think i think that name's good yeah good good uh so i'm gonna throw out either a finance take or topic that people have, and then I'll set a price and then we're going to decide either buying it or selling it, which means shorting it versus how popular the idea or theme will be in the future. So essentially it ranges from zero to $100 and then $0 is basically

equal, never talked about in like two, three months or something like that. And $100 is, you know every segment on cnbc they're talking about this all of twitter it's all anyone can talk about um for example you could do like value is dead um and you could set the price of 40 dollars and we could either go you know you could say i'm buying that everyone's going to be talking about this or i'm sorting it no one's going to be talking about that i'm stealing this from a sports podcast if anyone listens to that i know it's from a popular show uh so i am just copying that but doing it to finance does that make sense and then so i'll throw out some ideas here i understand the rules okay first one arc investing liquidity crisis i'm going to set the bidding at

i think it probably trades right now at 30 a share yeah i haven't seen it talked about too much recently um i don't know i'd go slightly more you're buying i uh yeah i buy yeah i'd say it'll go in and out obviously yeah well this is kind of just short-term trading there's no fundamental thesis here yeah uh i'd say i'm buying too you know it was like 100 in april in march and we were a part of that and it is definitely overblown i think looking back but i i when the thing is whenever you could see this happening over the next like three years whenever the market is just going to take a tumble or high tech takes a tumble people could be like is arc in trouble let's talk about this next on fast money you know yeah all right uh

next one is housing a bubble i'm gonna set the bidding at i'd say 55 it's getting talked about a lot right now yeah it's less even i would buy that because i'm not hearing the bubble talk as much as like the uh problems of the housing market right now like being a buyer how hard it is um i'm not really hearing as much bubble talk and maybe the interest rates make it seem more affordable to everyone but i don't know i i do hear a lot like just and housing's like the one market where it's always anecdotal yeah and i'm hearing a lot of people like oh my house has we just got an offer that's way above what we thought and it's like well what are you gonna do like if you sell it you got to go out and then buy one that's worth way more than you want to pay

yeah it it just yeah i think i'm definitely buying this because even if it is a bubble or not everyone if prices continue to rise just because of a supply and demand thing it's going to be talked about on cnbc and twitter and whatever all day all day all right this one i got next one this is a fun one dividing by the fed balance sheet i'm going to set the price at $20 a share. It's going down. Oh, it's going down. I'm buying this.

That stopped months ago, or I guess it came out recently, too. That should stop now. Don't. The rationality of it, I don't think. Talking about the Fed's balance sheet might go up, but putting everything in terms of the Fed balance sheet needs to stop. Well, yeah, it needs to stop, but so you're shorting this. You think it's going to zero, dividing by the Fed balance sheet?

Yes. I'm going to go long this one. We'll mark this down and see who's right. I think this is going to continue growing. It's an epidemic, but we'll see. All right, next. Okay, last one. All right, now this one I think is interesting.

I'm going to say the deficit. I'm going to put it at $15 a share because no one has been talking about the deficit recently. I'm buying. I'm definitely buying. Just America's debt? Yeah. Remember when that used to be just the story constantly and the last few months, it just kind of fell off the face of the earth. Everyone kind of got bored with it.

I think people are just immune to it. I think people are immune to it. Blumstrand talked about this where he's like, I've been calling on hyperinflation or like someone's got to pay for that deficit for 30 years and nothing's ever happened. So you think, what are you buying or selling the deficit? I think people are immune to it at this point. I think you can't surpass Ask what happened in 2020. I think that shock, like how much we spent and how much we were willing to spend has made everyone immune to like government spending.

I think, yeah, yeah. But I think it's going to reverse. I don't know why. It's just kind of something people love to talk about. But so you're going to short it. I'll short that. All right. Well, that's going to do it for that segment.

If anyone has any feedback on that, let us know if that was bad or good because that'll let us know if we want to continue it doing a few times a year or something like that. But let's move on. You have nothing else. Let's wrap things up with Berkshire on the move. There was a plane in Omaha, the Hershey company jet, which reminded me of the college football coach plane analysts, you know, that are tracking flights.

People do this with Elon Musk as well to see where his plane is going, uh which if you become that guy the the plane tracking guy no matter what it is you're in too deep i think um uh for sure whatever you're in i just you have to look yourself in the mirror and ask yourself why you're tracking these plants but uh another note is that buffett and munger are having an extended tv interview this week probably today when you're listening to this so it could be perfect timing uh hershey feels like a classic buffett purchase and if you look at the stock price it really is one that got away the stock has performed phenomenally over the long term almost a permanent part of a society you think i mean there's kind of the you know the sugar and

people don't like a lot of people don't like sugar anymore but uh you know people keep buying it uh looks like they do around 1.5 billion in free cash flow a year and the buyout would probably north of 40 billion maybe 50 uh what are your thoughts here does this feel like a buffett purchase uh is this better than buying back stock i don't know i think at this point buffett's just buying his diet he's gotten to the point where he's like i'm just gonna buy out the companies i digest um and so maybe that's a like a long thesis for mcdonald's or wendy's or something but dairy queen not wendy's i do think i do think uh yeah they don't do tv interviews randomly this is very usually they have something to say um so i predict just like very very right

yeah definitely gonna go out there and do that uh but no i yeah if he's talking to the public he's got something to say and hershey seems like yeah classic berkshire company i mean i would like that i don't mind that yeah i'm not invested in berkshire so i don't really care about the financial benefits um true it seems like buying back stock might be a better play but they can obviously do both the i feel like when he's calling like charlie and he's like you know we only got a few meetings left we could have hershey and reese's cups which hershey also owns you know at the meeting and charlie's like well i mean it's 25 times cash flow but But, I mean, now I'm in because we need the candy to promote it.

All right. I look forward to the TV interview. Yeah, always do. I mean, to be honest, they usually don't say anything. It's just kind of those platitudes they always say. But who knows? They could make some big announcements, stuff like that. It might be with that Gates stuff with the foundation.

Possibly. Yeah. All right. Well, do you want me to wrap up? Yeah, go ahead. All right. I've never done this on this show, but. Same.

I got it. That's going to do it. Thank you guys for listening. We are not financial advisors. So anything we say or discuss here on Chit Chat Mike is not formal advice or recommendation. We are general partners at Arch Capital. So clients may have positions in the securities discussed on this podcast. Thank you guys for listening. We'll see you next week.