Chit Chat Stocks - Coupang, Sea Limited, & Investing in Southeast Asia - Eugene Ng

Episode Date: May 25, 2021

Eugene Ng joins us this week to talk about investing in Southeast Asia. We discuss companies like Coupang and Sea Limited. Listen in after the interview to hear Brett and Ryan discuss Buffett's investing approach, the new ByteDance CEO, and even some cryptocurrencies. Let's go! Follow Eugene Ng on Twitter: https://twitter.com/EugeneNg_VCap?s=20 Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ 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 1st Half | (2:05) Interview 2nd Half | (29:06) Punch card method, ByteDance, crypto, and more | (50:31) 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 to Chit Chat Money. Today is Tuesday, May 25th. Today we have an interview with Eugene Ng. Good interview. I like his portfolio. I like his style. He's based in Singapore. Yep, and we cover Coupang and Sea Limited. I don't think there's anything else to say on that. Got a little boots on the ground research for Southeast Asia. He knows these stocks well. He talks about the landscape as well and kind of investing in that area and how it's a little different than the West. And he knows growth investing well. So, I mean, not much else to say. Really smart investor.

Happy to have him on. Hopefully we can get him on again sometime. And before we get to the show, we have a word from our friends, our sponsor, our partners, 7investing. Getting close to the new month, which is exciting. Kind of eager. But if you use our code CCM, you get $10 off. So it's only $7 for your first month. We've been raking in the signups.

So just keep doing that. That is good. It's great for us. Yep, that is good. And it's good for you, too, because you get seven stock picks a month all across different asset classes. Or not asset classes, excuse me, industries. Yeah, I think they're all stocks. Yeah, asset classes is not the right word.

It's definitely industries within the stock market. And they're always great. It's really helpful when building your portfolio. Good idea generation. Definitely. Yep. All right. Without further ado, here we 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 a recommendation. Now, please enjoy this episode. Today, we are welcomed by Eugene Ng. I think I'm saying that right. He is the founder. I guess, I don't know the exact title, but he runs Vision Capital. We met on Twitter, I think,

through the Fintwit Summit, actually, and we connected through that. But before we dive into some of the companies that we're going to talk about, why don't you give us a little bit of background about yourself, kind of how'd you get into finance, and then how would you describe your strategy? First of all, thanks a lot, Ryan and Brad, for inviting me to cheat at mine on the podcast. Thanks. I think it's a great opportunity to connect with you guys and your audience. A little bit of background for me, I started my career, I mean, I started my education in Singapore. I did economics and finance. After that, when I graduated, that was back in 2008. It was actually in the financial crisis. I actually joined Citi as a management associate

there for three years. After which, I moved to J.P. Morgan. I was there for eight years, covering largely on the foreign exchange sales to corporates, so all your large, I'll say your top Forbes 1-200 names, those are the current companies that I covered. So from there, I think investing really sparked on about, I would say, eight years ago, where I actually had an accident. So it was an accident where it was one fateful night in November, the eve of Christmas. I was having a lot of drinks at a beach club,

and I decided to do a somersault into a very shallow swimming pool. So the top of my head hit the bottom of a swimming pool, and before I knew it, I heard a very loud pop sound. And I realized my neck had broken. So fast forward, I actually broke my C1, which is the C1 in the cervical spine. And they actually call it a Jefferson fracture. So how serious it is, if they actually hang you, you don't actually die of suffocation. You die because the C2, the bone actually presses against the spinal cord and you die

right away. So that was how close it was to that. And the doctors would say, you're actually a living miracle because 99% of the people who get this who have died and the 99% of them who have survived this

who have been paralyzed in some form of fear so for me to be actually walking here it's actually a living miracle

and actually the back part of it is joined but the front part is still open even to this very day and the doctor is saying

my neck will probably never get healed so I'm living with a broken neck and that's how to me I guess from that really I think every day

it's very meaningful it's very it's very purposely driven because I'm here to live a part of my life you know to

to give back to do something for for you know for the world and and everything so I think that really is

the biggest thing I think and that also I think sparked a change in my life where I need to do something with it and I was and I've always been very mathematically inclined

and that's where I kind of realized okay you know I'm kind of good at numbers I always look at equities I had did, you know, stock equity research internships prior. So research had always been kind of my forte, but I never really liked writing.

But that's when I realized, okay, I'm kind of good with investing. So I think I kind of like, that's where my passion was. So I started on this journey, on this quest to really learn from the best investors in the world. I want to find out. I want to make this game, you know, really work for me, right? So I started reading Warren Buffett and everything. And I started on a quest and I realized,

oh, and I actually chanced upon the Motley Fool. And that's where I spent almost, I would say, three years trying to understand investing and trying to find out what are the success factors in investing, both on selecting stocks and also myself as a mindset that I need to adopt to make it right. So after doing all of that, I actually wrote a book just last year. It was actually right during when COVID started. And of course, when your portfolios are down 30%, 40%, it's really a true test. and writing that and trying to get it published. I was like, oh, wow.

I mean, if I could get it published, it was really a true testament because I could feel that whatever I was writing was going through into my investing strategy. So Vision Capital is something that I've been investing in the market

since the March of 2017. So almost next year, we'll hit five years. And that's really kind of been the strategy. Obviously, it's outperformed the market every year, not this year so far, year to date.

but you know we will see I think we're playing a very very long game so the way if I think about investing right investing

if you if you look at it in the US stock market it always moves from the bottom left to the top right over a very long run if you look

if you take about if you take a hundred year horizon it always it's almost that right and investing to me if you think about it on any given day

when you buy a single stock you probably have about 51 49% chance so 51% chance of making money because the stock market goes up over the long term.

Now, when you go up to about five years, that probability of winning goes up to about 65%, 70%. Now, when you stretch it out to 10 years, that probably goes up to around 80%. And when you go to 20 years and beyond, you have 100% probability of making money, effectively not losing money. Now, by just holding for the long term,

you've already shifted the odds of success 100% in your favor. Just think about that math really for that moment, right? So when they say really about thinking about holding long-term, I wanted to go there and be very statistically driven. Why do you need to hold for the long-term? And when understanding that math behind it, make sure that I really needed to invest for the long-term. And then after that, it was really about finding stocks,

finding companies. And what I realized is that in companies, this is three things that always happens. We have rising revenues, rising profits, and rising cash flows always result almost in rising stock prices. So fundamentally, we're all trying to figure out, okay, if that is the case, and I'm trying to find winners that ultimately beat the stock market, I need to be finding companies that are constantly growing revenues, cash flows, and profits over the very long run, and better

if their profit margins can continuously increase, which means profits and cash flows grow even faster than revenues. with those other companies that I really, really love, which means the stock price will go up, right? So if you find me a company that is growing 100% year on year for five years or 10 years, it is almost very difficult for the company to not beat the stock market.

And consequently, if you have declining revenues, profits, and cash flows, the stock prices is going to come off. And it's a natural consequence. It might not happen in one day, one week, or even one year, but over the three to five years, that will happen. So my investing strategy has largely dominated around just finding

that way of finding companies. Now, when we talk about revenues and cash flows and profits, we're really finding durable companies because in the stock market, there's been a study that's been done, right?

25,000 companies. About 4% of the companies account for about 100% of the stock market returns over the last 100 years or so. And of that, 0.4% of about 100 or so companies accounted for about 50%

of the entire returns. Now, if you think about it, we have a very large pond of stocks to choose from. But a very simple fact, only a very small percentage of companies are really worth investing and for us to be holding for the very long term to be generating that.

So when we ask as investors, we really want to outperform and beat the market, you've got to be really fishing that, the very small pond of that very big pond and constantly be finding that. When you're finding that, those winners, right, then those winners will naturally

take your portfolio basically in the right direction so that has really been my investing strategy so I try to find companies that

you know that are basically disruptors they are trying to change the market I like companies with network effects you know

strong competitive advantages I like obviously rising revenues rising profits rising cash flows I like ultimately very durable companies

I like platforms I like companies with network effects I like yeah so I mean the way also like founder-led companies

I prefer founder-led and founder-owned with high insider ownerships because they have skin in the game but not necessarily also they can be very top you know top-notch managers

they can be professionally managed as well so I think that's always a kind of good mix for me so really finding all of those and I think the one thing as well the way to think about it is

companies the balance sheet also has to be strong because if they have high debt and when something happens the companies fall and what I don't like

is I prefer my companies to be net cash, or preferably have much lesser debt versus cash, such that if anything happens, the companies don't collapse. So if you can think about it, every step that I take in my investing philosophy is really trying to eliminate the downside, trying to remove anything that doesn't work, and just be invested in companies that basically the way it only goes is upside. So if you think about it. Yeah.

That makes total sense. You're, you're based in Singapore, right? And I think that's an area or Southeast Asia broadly is an area where a lot of investors are fascinated by. There's some prominent companies that have come out of there. I think seed limited is one that a lot of people on Twitter at least love. So why don't you talk a little bit about sort of the infrastructure there? How has that kind of evolved over the last decade? I guess the infrastructure and the economy. Yeah, I think Southeast Asia has been growing, has always been there. I think it is, but yes, I think over the last 5, 10, 15 years, it started taking place because I think it's

largely driven by China. China has had that growth over the last 20, 30 years, right? And I think now that shift after China has been growing, it's now shifted to, the next focus has shifted to Southeast Asia. I think in Southeast Asia, you really got to think about it as probably the six largest countries, and the largest is Indonesia. Indonesia's population is roughly half that of Southeast Asia, around 250 million or so, followed by Vietnam and Thailand.

And then after that, you have the smaller countries like Philippines, Malaysia, and then lastly, Singapore, right? Slightly different as you compare to like the EU zone, because every country, they're also separate. In the EU, every country is kind of beside each other. You can take a real-world network and you can just get to one country within a matter of hours. In Southeast Asia, it's not landlocked like in the EU.

You have to travel overseas, I mean, on ships or on flights to get from one country to another. They also culturally, they speak different languages, culturally very different, politically very, very different, and economically, obviously, very, very different as well. So I think Southeast Asia itself, it is extremely different. But I think the way you think about it, I think it has grown tremendously. Infrastructure has been a play, and I think specifically,

I think the internet itself has been a large key driver of enablement for individuals to get access. So when I look at an internet driving, right, I think three main things that I'm seeing really on, on the spaces, largely e-commerce payments, because we have been using a lot of paper money, but I think e-commerce payments has specifically been growing massively. And I think logistics obviously supporting the e-commerce bit has also been, been growing. So I think Southeast Asia itself,

I think has taken a bit more of the spotlight, and you can see some of the unicorns that have come in from Southeast Asia are specifically really addressing this. And when you can see them addressing in these segments, they've actually grown along those lines as well. Right. And speaking a bit more on that, we're going to be talking about two companies, one, Sea Limited that you already mentioned. We're going to be talking Coupang as well, which is in South Korea, but rumored to be

moving into Southeast Asia. But before we do, Hayden Capital had a good write up that Southeast Asia, he was arguing that they're at a positive tipping point where historically when GDP per capita in a region hits 4000 US dollars, probably inflation adjusted is the numbers he's using, then you hit a tipping point where everyone gets, you know, excess income, and you can start reinvesting into more services. Do you see that happening over there? I know Singapore is a little different than other countries, but yeah, I don't know. Or just looking maybe for some boots on the ground research. Yeah. I think Southeast Asia, it's really, I would say it has been turning. I think that it's really on the, on the tipping point has been growing.

So I do share very similar thoughts with, with, with him. I think directionally we are definitely correct. I think the real biggest growth in Southeast Asia is the growth of the, of, of the middle class. Because if you think about it in China, for example, The real growth of China was the growth of the middle class, where you have massive consumption coming in. And when massive consumption coming in, you drive growth of a lot of businesses, of e-commerce, of everything across the street. And I think in Southeast Asia, specifically in Indonesia, Thailand, Philippines, and Vietnam especially,

these are the countries that are growing massively at high double-digit, like almost 20% to 30% year-on-year kind of growth. When you're growing that massively, I think this is really the inflection point that I think in Southeast Asia will be really a space to look at. Right. Okay. And then now let's go into, I think, what a lot of people are looking for, a company that I believe you follow. I'm not sure if you own it. You don't have to disclose if you don't want to, but it's Coupang, new IPO out of South Korea. So, to kick things off, we tend to think Coupang is building a strong moat with the Amazon-esque, JD.com-esque model with e-commerce. Do you agree or disagree with that? And then what sort of competition do they have in South Korea? Yeah, I think Coupang is a great company.

I think specifically, I do agree with you. I think they are really trying to build a strong moat. The e-commerce play is very interesting. Largely, in e-commerce, it's split between 1P and 3P. 1P is very similar to, I would say, like your Amazon and your JD.com in China, in which you own the end-to-end from a logistic standpoint. And basically, you carry in, you sell to the buyers and sellers. Whereas 3P, basically, you're just merely a platform,

supporting buyers and sellers on the platform, right? I think Coupang itself started off primarily as a 1P with holding all the inventory. and that's why they can do it overnight fast deliveries and everything so if you look at

JD.com for example when you own the infrastructure and when you can deliver goods you have an unrivaled advantage

over any of the e-commerce players so I'll give you an example if I order something on JD.com in China you can easily get it within a day

or two even right whereas you order something on Alibaba's platform it takes you days

if not weeks so it's a tremendous advantage and where people are trying to buy, they value time over for the item to deliver over anything else. So when you think about it,

when you really own the end-to-end chain, it's extremely valuable. I think that's where coupon really comes in. And that is clearly evident, right? So if you think about it, because they own the entire chain, when they're doing deliveries, then they can actually deliver it

in that reusable packaging, the bags which are delivering the groceries. They can do next-day dawn delivery, ordering something before midnight, delivering before 7 a.m., and they can even process returns without packaging. Now, if you're doing a 3P delivery type of infrastructure, you'll never get to that kind of depth and doing it. And I think really that's where their moat is and that strength. And as you can see in coupons growth rates, that's where over the last, I would say, three,

years, all their growth rates over the rest of the competitors in South Korea has just taken off tremendously. And that's where they've actually started off way much smaller, but they've actually now became almost the leader across most of the platforms. Now, if I think about it in competition in South Korea, it's actually largely domestic and very hyperlocal, you know, with close to very little foreign competition. and the way I think about it is I'll split it into

largely four different main segments the first one we have kind of the incumbent open market platforms which is if you think about it eBay eBay Korea is basically G market or very auction market which they're trying to sell by the way you have of course SK Telecom's 11th street

then you have the second variation which is logistics and obviously 1P driven which is coupon and you have the third one kind of like the mega platforms, super app players like Naver, Line, and Kakao Commerce. And I think you have the fourth one, which is like a bit on like, not say a big box, but more like a big retailers online mall, such as SSG, Lotte, and the fifth one, individual mall apps, Musinga, ZigZag, and Market Curly. If you think about it, it looks fragmented, but I think when it comes to an e-commerce platform,

seemingly seems to be quite fragmented a lot, right? And I would see this drastically changing over the next, I would say, 5, 10, 15 years where it becomes almost like a winner's takes most kind of scenario rather than a fragmented. Because I think that tends to be the case when you have network effects and it comes into it. So, I think directionally, I think coupon, I would expect coupon to start taking market share. If they don't consistently over a couple of quarters and even years, that would definitely concern me. But, you know, I think getting the market share and growing faster

than a lot of the competitors. And if I look at the overall landscape, they have actually been growing faster than all of the competitors and taking market share. And that gives me a lot of comfort because clearly they have been doing it very well, right?

I think interesting about Coupang is they have been pivoting. When they started, they started as a very different business, pivoted to, they started more like a Groupon-like business, pivoted to an eBay-like business. And then after that,

you know, stop the IPO and then now pivoted to kind of like a 3P, 1P type of business. So I like it that, you know, when a company

keeps pivoting and is able to constantly pivot, it also shows me, you know, this is not the end goal. This is not the end state, right?

It can continuously grow and that's where I think it can continuously outperform its competition. Yeah, you've been seeing

the charts that I think you posted online. It's just coupons market share is going up and to the right and everyone else is going down. down into the right so i mean if they continue with that all things are golden yeah and when we

picture like when we were when we were reading that s1 and it was like all right well your deliveries as long as you order before midnight will be there before 7 a.m or you can just take whatever your returns are click a button and throw it outside your door that sounded so nice to us as consumers um and so that was kind of automatically pretty compelling but are there any other parts of their business that you like any other i guess growth opportunities that you think they can go into yeah i think the i think coupon right now the biggest opportunity where i see in terms of margins and everything they've been actually expanding to the 3p business and the 3b business tends to be high of that of higher margins and i think that the immediate play in over the next

you know couple of years will be the expansion from 1p to 3p that will bring higher margins and improved over profitability of the business make it make it make it even you know stronger cash cow because with any real e-commerce business, it's actually the negative cash conversion cycle, which is basically when someone buys an item, you get funds up front. And after they deliver the items, only then payments are then paid out to the suppliers. So because of that cycle, of that cash conversion cycle, you actually have the cash flow and you have positive cash conversion cycle, you know, working dynamics. So theoretically, the best e-commerce platforms

will never actually go bankrupt because you'll just have constantly that cash flow and that cash upfront. And that's what I really like and to see. And that is starting to be very, very clearly, you know, evident in Copal. I think leveraging on that logistics, supporting that three-piece, I think that would be key.

Next two things that I really like is advertising. I think they've been trying to grow the advertising pool, similar like Amazon, which also has been, you know, growing the advertising space on the end, supporting that. That helps to improve margins on the overall e-commerce business. I think payments, they're trying their best. Obviously, you know, in South Korea, there are other larger payment players. But I think leveraging on this and supporting the ecosystem, I think payments, you know, will help to overall support, I guess, the overall, you know, coupon and ecosystem.

Right, right. That makes sense. And there's rumors. So a lot of the people, you know, first glance, you're like, oh, they're only in South Korea that limits them on their market, right? Well, you know, the market in South Korea is pretty big, but there are a lot of rumors that Coupang is going to start expanding into Southeast Asia next. I know they had job offerings in Singapore, so people were thinking that was going to be their second headquarters. Do you see the model working in the region? I know each country is different, but, you know, what do you think about that? Brian, do you have some of that?

Also, I know population density is like a big thing for Coupang because they have to, it's speed of delivery and so many people live close together that it really makes their business model more effective. Especially in Seoul, right? Yeah. Do you think that would work in Singapore? I guess, to his point, do you think they can expand into other areas? yeah so i i think indeed uh they have definitely had some i think they're hiring they started hiring in singapore i saw their linkedin uh post i think they're hiring four main positions which was the head of retail the head of logistics the head of operations and also a senior finance engineer for coupon play i think latest positions that i'm also checking i think they're hiring for their desktop and smart tv platforms so the way i think about it right if i just try to draw

parallels and try to find patterns. I think in South Korea, indeed, it's very similar to Hong Kong in a very certain sense. It's also very similar to Singapore, where you have a large landmass, a very small percentage of the population living in that landmass because there are probably mountains and all. In Singapore, it's slightly different. We don't have that many mountains. Everywhere is probably flat. I think about it, very high population density areas. If I look at it, and if I look at it broadly in Asia, I think I think three countries or four countries

kind of come to mind. The first one would be Singapore. Next one would be Hong Kong. And I say the next one would then be Taiwan. Because if you think about it, South Korea has to kind of be neutral, right? In the S1,

they did mention that they have some China operations, but I don't think, you know, with JD.com, it's going to be very tricky if they're trying to expand into China. But I think Singapore will be the closest.

I think that's why they're also coming to Singapore. Now, if I think about Singapore, Singapore, largely on the e-commerce and grocery space, there's largely been just one main player, which is Lazada. Lazada is actually owned by Alibaba. And Lazada itself has RedMart, which they also acquired. With that, there are some other smaller players.

I would say the market is still fairly fragmented and it's changing. So I would love actually for Coupang to come because that in itself, I don't have to have boxes of which, paper boxes of which my groceries are delivered in plastic bags and I'll have them in recyclable packaging because that is so crucial because you save so much of the packaging and everything. So actually, I'll look forward to what Coupang is coming. I think if you think about it as infrastructure standpoint, it is also fairly similar, very dense, very high-rise buildings. Even if you look at Hong Kong, Singapore, Taipei, Taipei is slightly different, but I would say Singapore and Hong Kong are extremely similar,

very high-rise buildings, streets, easy for delivery. So I would say, yeah, I won't be surprised, you know, at some stage, you know, this could be some of the countries that they could be looking at. Yeah, it'll be fascinating to see what country they go to next. I remember them saying on the conference call, like, it wasn't that if they were going to go somewhere else, it's like when. But, you know, there's plenty of opportunity in South Korea. So it might be, you know, it might be a year or two or even longer. Do you think there would be any difficulties moving into Singapore? Would there be any sort of

problems? What kind of hiccups do you think they could potentially have? Yeah, I think the biggest thing is because when you're in such a dominant platform like Lazada, the one biggest counter action you would do is price war.

Try to price you off. But I guess Coupang has that strong balance sheet to try to expand. And I think the way to think about it is Coupang has that playbook, right, of adopting that same playbook that they did in South Korea out to Singapore. And the way tricky bit as I see it, for example, in Singapore is that, we will go shortly, if you think about it, it's like Shopee versus Lazada, which is Alibaba.

Again, Shopee has actually gained market share versus Lazada. And similarly, I won't be surprised if Coupang comes in and actually gains market share against Lazada and all as well. So, which could be very, very interesting. Right, because they're not building the end-to-end platform. Lazada doesn't have the end-to-end stuff, right? Yes, exactly. And I think that if you can build the end-to-end,

I think that would be really great. But again, you know, if you think about it, the Singapore economy, because the population is actually quite small, I think we roughly have around 7 million people or so, 6 to 7 million people or so. It's actually a very small population, right? Yes, we, you know, we do spend a lot more on average versus some of our neighbors, but, you know, the total time is small.

So I think when you think about coupon, I think they're really trying to be very cognizant about where they can compete best in with what they know best. So I think that's kind of, I think, how they're probably thinking around. Okay. All right. We're going to hit a quick break and then the second half, we're going to talk C-limited, but here's a quick ad break. 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.

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Next up, we're talking Sea Limited, which we briefly just mentioned before the break. And it's a company that a lot of people love. And so I want to talk first, I guess, about the e-commerce model. I know they grew, I believe, in popularity or the business model kind of stemmed from their big Garena Free Fire game. But Shopee, that's the e-commerce model, right? So, I guess, do you see them gaining operating leverage in that? Do you see them kind of growing profitability at scale there?

Yeah. I think C is a very, very interesting company and, obviously, Singapore-grown. Forestry has been quite instrumental. I think, if you look at C e-commerce model, it's been largely 3P-driven, almost the opposite of Coupang, which is 1P driven. C really tries to, it's a marketplace platform

that tries to connect really the buyers and sellers and through the logistic partners tries to deliver it. Obviously, the margins are higher, but the way of building any e-commerce platform

is at the start of it. It's always going to be, you know, your profitability is not going to be there, but if you do manage to ramp it up and get it right,

your profitability should be able to scale up, right? Because your fixed cost is there and the GMV just goes up and the profits just goes up, which covers way of fixed costs and that drives operating leverage. So, the way I think about it

is when we think about it as C-limited, what they have strategically always have done is they use Garena. Garena is a gaming business as a cash cow in every single country to subsidize and to grow Shopee. That always has been a strategy. So, they think basically a good business that's providing positive cash flows to support a growing business, which is Shopee. And Shopee, they know of that playbook because in a couple of countries, they are very often EBITDA positive. Sometimes some of them, they are shed on the earnings call. And it's just a matter of time where with continuous growth, they all start turning profitability. And you look at over the last quarters of earnings, for example, in the latest quarter, you see

improving profit margins. So, if I give an example, the gross profit margins for e-commerce actually went from minus 7% to plus 13%, one-three.

So, it's actually up 20% in terms of absolute margins, right? The adjusted EBITDA margins have went from a minus 100% to minus 54%.

You're seeing that tremendous growth overall in, you know, in just the profit margins of the e-commerce business. Now, when you think about it, the overall business itself,

you're seeing declining R&D, sales and marketing, and G&A and general and admin expenses as a percentage of revenues already. You can clearly see that when you see EBIT margins move from minus 37% to minus 20%. Net income margins move from around minus 40% to minus 24%. And now operating cash flow margins have moved from minus 9% to 18%.

The direction is clearly very evident. And I'm seeing that quarter after quarter when I'm doing year-on-year comparisons. And that operating leverage is definitely showing through their financials. And that's what I'm constantly looking at when I'm reviewing every C's earnings. Every C's earnings, I tend to post these four charts,

which I did on my Twitter as well. That is what I really am looking for to make sure that profitably and that operating leverage really kicks in. Okay. Right. And then C's third pillar is financial services. I guess I have a few questions on that

because it is a broad industry and a lot of people look at it and they're kind of like, well, financial services, I don't really know. Is it like a bank? Is it like Venmo? I guess my first question on that

is how are they attacking the market with financial services? Yeah, I think first I have to address kind of like the payments landscape in Southeast Asia. I think it is very fragmented. There's a lot of domestic players and I think consolidation will happen

in time to come. You'll find that kind of like, again, a winner's takes most kind of approach. If I look at most of the markets where I guess C-Money is or Shopee Pay is, it's largely been Lazada,

which is Alipay, again, owned by Alipay. Now, the difference between Lazada and Shopee Pay that works like this, Lazada tends to adopt more of a strategic investor approach and a third-party partnership approach. When you think about a strategic investor approach, you're investing in something,

but you're just letting them run on their own. And sometimes you also try to have this third-party partnership. which you're not fully integrating you're just trying to partner and when you have third party partnerships

most of the time you're working advantages you're working the advantages of the third party you're also working the limitations

of the third party right yes that could be great because you know it can get you ramp up to scale very quickly but the limitations

will eventually kick you and when you have six countries with six different third party partners with varying limitations it's going to eventually kick you at some stage

and limit your overall growth If you look at Shopee on the other hand, they're far more hands-on. They prefer the whole regulatory licenses to offer payments. They actually own e-money licenses in a lot of the core countries

that they're operating with, which in my opinion is far more crucial because you don't try to do third party. You try to actually build up the entire payments infrastructure on your own and ramp it up. And that's where I think that no one's strength is there

for I would say for C-Money and Shopee Pay they do work with partners right like for lending and insurance but you know lending and insurance

these guys these are the partners that way and they have strengths economies of skill and depth and demonstrated

expertise already so leverage on that but I won't be surprised eventually because they have all their data they can eventually do something like that

and pivot into those segments but obviously that's a much longer way of growth and I think overall

I think it's a very attractive opportunity and it complements the overall ecosystem payments definitely complements

e-gaming definitely complements e-commerce in which the space they are in do you have any more

questions is there a particular pillar of Sea Unlimited's business that you like

or you're most excited about I guess Gurin is kind of more proven so is it between uh which pillar do you like the best I like I like the e-commerce best because to be honest when I when I like when I look at Gurin's e-commerce platform it reminds me a lot of Shopify MercadoLibre uh Amazon I I draw a lot of parallels I see a lot of patterns uh and that right and that's why you know I see that I see those patterns in coupon as well it's like when I'm when I'm seeing them and I'm reading the financials and

reading see the scene the story seeing how they play out it's like almost a playbook that i've seen almost like three four five years ago right yeah so when you draw those parallels it's like oh wow okay you know it really it sings something to me it rings it rings a bell yeah okay uh i think grab uh if i'm not mistaken is a regional competitor as well and they kind of tout their services like a super app um do you think they're a big threat to sea unlimited i know they just went public and raised a bunch of capital. I think they've got like a billion dollars on the balance sheet or something like that.

Something like that, yeah. Do you see them as a threat? Yeah, I think the way to think about it is, you know, it's very easy to lump and say, okay, I think Grab will be a competitor to C. But I think the way Grab's positioning is trying to be, is trying to be an everyday super app. I think they're trying to leverage off

what they initially started off with right-hitting, which is equivalent of like Uber, branching out that to payments with grab payments, ordering food, groceries now, and also having insuring and investing, right? So I think they're trying to be the everyday app for, I guess, for everyone. So they probably want to be the app, you know,

in everyone's iPhone on the very first page, right? I think both can coexist. They are a regional competitor in a certain sense, but I think in a very limited space. Because I think right now the current overlapping is really just groceries, food, and I think community buying, which I think C is just trying to test its waters into. I think the overlap is actually surprisingly quite small.

Payments could be. I think obviously grab payments is much larger than Shopee Pay at this current phase because just of the GMB that they're passing through, you know, the right hailing and everything else, right? So I think both can exist. There can be multiple winners. And again, a winner ticks most market.

I think I won't be surprised if these two companies could be some of the largest in Southeast Asia. Do you think that can – do you like that super app model? I know we're more focused on seat limited, but do you think that can work with consumers where they're using one app for everything? Yeah, that's a very, very good question because I think the way to think about it is, you know, like in the U.S., I was looking at apps in the U.S. I don't think there is a super app kind of model because you tend to have

one app for one specific business case, right? Unless you look at it from an Asia standpoint, like in China, for example, when you have some of the super apps

like Meituan and all of them, they have apps that try to get you or like Alibaba's apps, right? You try to get an app or Tencent's WeChat, right? When one app does

literally everything. You can have social, you can buy payments and everything, right? I think because of us, we value in a sense, I think,

I don't know if it's an Asian thing we kind of value the sense where if convenience where everything is just in one app and that gives you the stickiness to that app

right so I think that makes a lot of sense for me because like to be honest if you look at your phone again power play rules right

you probably use only the 20% or 10% of our apps most 80% 90% of the time right and trying to just find that all the time

I think it just makes a lot of simplicity in that sense and I think that would be a powerful shift so I won't be surprised even you know

at some stage I think right now, if I look at it, even Shopee, payments is all in the same app, if I remember. Right, that makes sense. All right, so the one risk people think about with C-Limited, because all the business lines are growing rapidly, we're seeing the operating leverage come in, at least on an overall standpoint as well. But people talk about how the gaming studio has the potential to be a one-hit wonder. Is that any sort of risk where they're using that money to fund everything else to try to build out this ecosystem? I mean, so far, Free Fire has had a lot of stability, but is there that risk that it's a one-hit wonder with the games? You know, I think you brought up a very valid point.

I think for gaming, I think for Garena specifically, the power rules really apply. I think a large portion of your gaming revenues are really derived from very few popular titles. If I think about it, just in 2019 alone, 95% of the revenues, the gaming revenues were generated by Free Fire. which was coincidentally their first fully self-developed game

but I think Garena has largely actually been licensing games from third-party developers right

so I and I think the way to think about it is really two things one they have

China gaming giant Tencent which owns 25% of of C and they have

a first right of refusal from Tencent to distribute their PC and mobile games in their core countries

think about it if Tencent knows those games work and wants to distribute them out of China, they'll go to C. And what C will do, and through Garena, is basically, let's test these games, right?

And to see if they get traction. And if you think, and what I've seen also is the second point, which is I've seen anecdotal kind of get feedback that I'm hearing, is that sometimes when Garena tends to launch games, they launch games actually without a name.

And only if the response is good, then they start publishing it under their name. Which in my opinion, that is amazing because they're trying to test and in gaming it's not like

I think this game works I launch it with a lot of fanfare and suddenly it just doesn't work because the moment when you see failures like that

come to you it also will affect investors' confidence in the stock that they're launching something that doesn't really work but what they're

actually trying to do is just quietly launching it at the back reiterating the process and when they see that traction coming in really massively they start marketing it big

And that's something that I think is a very nuanced observation that few don't see from that standpoint. And the way in gaming as well, the third point I think I would like to see is always that the QPU to QAU ratio, so the quarterly paying users versus the quarterly active users. And I think they have actually been increasing that from about 4% in 2018 to about 12% in recent quarter. They have been increasing this number, you know, quarter on quarter, year on year. And I like that trend, right?

Obviously, I think that number can continue to go up higher, but if that starts to decline, that also starts to look up. And also, I think there's some of the guys also, they track free fire in terms of the activity and how is it on the platforms. And obviously, it is because it accounts for the largest share of the revenues. And I think C-Limited knows it. And that's why they're trying to, I would say,

I would say take advantage of it and make as most values of the profits generating from that gaming business to develop

other verticals and that's why I like I guess the optionality that C has from that standpoint it's the ultimate optionality business

it's all it's like yeah I mean there's a reason a lot of people a lot of smart people like it so yeah

alright we're going to hit our wrap up questions I've got the first one what is one financial saying that you disagree with that we cannot beat the market, right? I think that fundamentally,

that is fundamentally very different, the way to think about it. I think Warren Buffett has a point when he says that, you know, if you can't spend the time to look at stocks and to do all the due diligence, you should be just investing in index. Investing in index makes a lot of sense because if you look at it over the last, you know,

there's so much feedback, right? majority about 70 to 90 percent of money managers fail to beat the market over five over three to five years consistently right so even the most professional managers cannot even beat the index why not just be invested in the index the argument rings right but i i really feel that you know because we have actually moved to etf investing and passive investing over the last 10 20 30 years which makes a lot of sense i think the money and the capital that we've been doing has gotten more stupid, more passive. I would actually love for the money

and investing to be more active. That's why if I go back to my own philosophy, it's that in vision capital, which is really to be investing in companies that reflect our best vision for our future, that is changing and shaping the world

for the better. I think we as investors, I'm trying to also introduce this new investing philosophy that ultimately when we're investing in companies, they kind of have this like i would say this no very nuanced esg uh thinking around it or uh and and and and and really just trying to get people to really invest better and make sure that the companies that investing really is what they want to own and and to drive that right there have been businesses that i know that could 3x 5x or even 10x and i i've passed right because of just for

example gambling right like my my family was torn apart my parents were divorced from a very young age because my dad was a habitual gambler so when i have anything that has gambling gambling stopped i i just don't look at it right like for example like fubo tv i was trying to look i was taking a look at it again and it started ending gambling and into that and for me that was out it became very clear yeah i know it can yes it can potentially go go up more but i know i just stopped i just stopped looking at it because it's something that i don't i don't i don't i don't wish to be so i'm very i would say also making sure that the companies that are owning is very clearly driven from their angle and that always helps so i think really by showing that you know

the world that that me as as a single person can can beat the market with with a methodology that obviously you know it's ever it's going to be ever changing right it's no it's never going to be one strategy that continuously and hence it's more principles rather than a specific way to think about it and and that's also outlined in the book that i wrote and i think this really just goes back to it so i think you know we as individuals i think the last year or so everyone started doing more buying more stocks

and that's great news right you know individuals are starting buying more stocks instead of going to ETS but I really wish

you know they adopted that investing approach where you try to learn and put that framework and consistently follow that framework right

not when market prices are high you know you go really happy and suddenly when they go low you start selling all of them

and suddenly moving to different things right just be consistent you know sell us our opportunities add to them you know

and just constantly let your winners run and I think that's always that's always great I I think Chris

from Growth to Value who's kind of a friend of the show he said something very similar which is you know he

the first time we talked to him he said I want to own companies where I'm proud to be a shareholder I think you you guys kind of think alike both see lemon in share

I guess lots lots to like They attract a certain type. Yeah. So you already gave, I think, a few things for advice there. But say you're talking to someone that's considering a career in investing, what's one piece of advice you'd have for them?

I think it's the ability to question, ability to find out more. Don't read what the media tells you. Right. Do your deep dive, you know, spend the time. Read about everything about what a company does, right? Don't read what people are writing and why you should be buying the stock. Read the annual report.

Read the 10K. Listen to the earnings call. Listen to the interviews of the CEOs. Not the ones where they are on CNBC. The ones where you have a proper one-hour interview where they're interviewing them from anything of why they started the business. Why is their childhood?

Why did they do this? You know, how did they come to where they had been? To understand about the founders, to be understanding about the businesses. I think when you do all of that, you really you understand the world better

and as that you gain a better framework of how you think about things and investing it's sometimes

not just you know reading annual reports or even just you know being on Twitter listening to listening

or reading what artists are writing it's really about doing your own due diligence having conviction I think it's conviction is

extremely important the stronger your conviction is you will never worry when the stock market falls yeah I give an example

right like you know I think like you know like so far you know we have underperformed the market

this year so the the colliery is that I've done this right I just looked at the companies that I own and my revenues

are actually of the companies on average actually growing about 50% year on year right and earnings and free cash flows

are growing on average actually around 30 to 40%. Now, when I know that if my earnings and free cash flows are all growing around 30 to 40% on any given year and the market is down 20%, I see that as an opportunity

because I know the businesses that I have are fundamentally very strong in their own right and they're growing. They're growing intrinsic value by effectively, you know, 30 to 40%. If the market falls,

it is an opportunity I will add. And I always keep a high conviction list and do that. So we keep doing that. as a career also be daring to oppose

when you think standard market thoughts could be incorrect I think that's always be able to challenge the norm okay that's perfect

that's all the questions we have for any listeners that want to find you where can they do that what's the twitter handle yeah

and maybe the name of your book too for anyone who's interested so you can find me on Twitter so my Twitter handle is Eugene

E-U-G-E-N-E N-G underscore V-C-A-P which is like Vision Capital you can find me at

visioncapital.group my book is Vision Investing it's available on Amazon worldwide you can get it on both the

paperback and ebook versions as well sweet alright thank you for joining us

Eugene had fun thanks a lot Brian and Brad alright Welcome back in. Thanks again to Eugene for coming on. Appreciate it.

Next, we have our show notes. So I think recurring listeners kind of know how this goes now, but we've basically broken down the show into just random back and forth stories that we found interesting throughout the week. I'm going to kick things off. This is kind of old news. I think it's been around for a long time, but I came across it this week and just found it fascinating. I think I initially came across it listening to that Berkshire Hathaway shareholder meeting podcast. Have you been listening to those? Yeah, I do it whenever there's nothing good to listen.

Usually there is, but if I don't find anything in the queue, I'll just toss that on. It's kind of my backup plan. I figure it might take me a few years to finish, but I'll finish them eventually. Yeah, I'm on, I think, 2004 at this point. I'm on go too. Anyway, there was a Buffett quote where he says, if you were given a punch card with 20 ticks on it when you graduated and those were the only investment decisions you could make

throughout your entire career, how would you use them? You would likely be very selective and probably very rich. This type of mentality will force you to be patient. I think this is something that Charlie's kind of harped on too at one of his college speeches. I think it's a worthwhile exercise to kind of put that punch card filter on before underwriting any investment. And I think just asking like if this company crossed out one of those 20 ticks, would you be happy with it?

And then also I think it also kind of puts in how meticulous you're going to be in your due diligence. Meticulous or like critical or, you know, like really have a high filter. Yeah. I also realized like a few weeks ago, someone tweeted out one of those 13F pictures. Everyone is doing that at that time of the year. There was this one hedge fund in Florida with – it was like a little more than $300 million in AUM and it consisted of three companies, 41 percent Ally Financial, 37 percent Berkshire, and 22 percent Winnebago Industries. The name of the fund was Punch Card Capital. Finally drew the connection.

But it presents kind of a problem. Let's say you really did adopt this 20-punch card system or 20 ticks, whatever it is. Do you think you might pass on a lot of things because you're too selective? I mean this is a fund with three companies. Yeah, it's interesting. It's got to fit the mindset of the investor. There's a worry that you can do this. Is this going too far?

Yeah, it's a worry that this system takes it too far. I think it's probably a good mindset to have when adding something new. But I really think like, all right, maybe trimming something or adding to a position that in the real world, I don't think that would count. But maybe like you only have 20 new ideas that you can actually execute on over a certain time period or a lifetime. Yeah. That feels kind of right. But I think 20 is just kind of a made up number. it could be 40, it could be 30.

You just kind of got to think to yourself, all right, how many good ideas are there really? You may only have one or two a year. I think it also eliminates starter positions. Yeah, and starter positions, I don't have a big take either way. I think they're fine. You also may not need them. They can be helpful kind of keeping track of things,

and they can also be helpful if it's a more riskier position where you're not sure what the downside is, but you think the upside is pretty high, something like that. I don't know. It depends on the mindset of the investor for sure and your philosophy. And it kind of comes around that question, should you get paid to own Berkshire? And I think Tobias asked that maybe or something.

They talked about that on Value After Hours. I'm not sure. It is kind of, but yeah, it feels a little weird to have your name be punch card capital like a Berkshire Saint and then you're diversified with three companies. and one of them is Berkshire. One of them is Berkshire. It is strange.

I think as long as you do well, you have to have the conviction to hold that in size and most people aren't. So it's not like everyone can just do that and it's not like every individual investor is doing that. You know what I mean? Yeah. It's not the same as holding the SPY.

Okay, your story. What is it? All right, this is going to be not an investigation but more of a... This is something that's been floating around for a while, and it's gotten pretty big, and it's stable coins. Now, if you have any confusion, please pipe in because it is a convoluted, complex system. So I thought it would be interesting to dive into these things since they fell off their pegs recently. That's kind of how they describe it.

So quick explanation. A stable coin is a cryptocurrency that potentially offers better price stability because it is, quote, pegged to a fiat currency or commodity like gold. What does pegged mean? Peg like one to one, you know, it's pegged. It's going to be one of these is going to be equal one dollar. So the most popular of these are USD coins, US dollars. Essentially, this means you are supposed to be able to trade in one USD, US dollar, excuse me, for one USD stable coin and then reverse it in the future at the same exchange rate,

hence stable coin. The biggest stable coin is Tether, which is USDT and has a total value from what I was looking it could be a little different or a little higher lower now of around 60 billion dollars so the big question is why would you want this because it allows for unrestricted trading with other crypto market participants while theoretically still being able to exchange for dollars one to one at the end now i'm pretty sure i'm 80 right there or sorry i'm 80 sure i'm right there but if there's any more nuances i apologize for not getting it right does that that all makes sense you know you don't want the volatility of say like oh ethereum goes down 50 i can't exchange it out

it's going to totally hurt this if i use it as some sort of you know way to invest in something it's all kind of magic beans at this point you know what do you mean how's that possible if you exchange no so theoretically and this is where the problems are going to come in later you take your one u.s dollar someone's paying you switch it right well no you just switch it with you know you give it to say tether or whatever like the company they're supposed to hold the dollar for you the u.s dollar and then you just reverse the transaction when you're done because when you get the you know crypto like the only reason you're going to do this is because it allows like unrestricted trading with other crypto market participants you know so like if you had a u.s

dollar you wouldn't be able to it would be too regulated to do some of these things but what's the point of the trading because at the end all you get is a dollar no well you can use it to make bets on other things and then exchange it you know for more dollars if you get more but i thought when you pulled it out you got one us dollar yeah but for one of the usdts all right you lost me so you can use the usdts to make unrestricted trading on other crypto marketplaces so you could theoretically make some money there and then exchange it for more u.s dollars when you're done but the guarantee supposedly is that it's pegged so like if you make a bet with bitcoin you get more bitcoin maybe the the price in dollars went down a ton

and nothing really happened it's supposed to be you know stable and make it more of a real currency i mean there's problems and stuff but does that make sense at all i hope people can understand And you're just kind of exchanging it one for one, almost like they're a bank. Sure. So why does Tether do it? Yeah, well, that's a good question. I mean, there's not really any real use cases right now. And there are a lot of issues.

And what do they do with the money? They just invest like the float or what? Well, okay. Well, it's an unregulated entity, so we'll get to that. So it sounds great, right? You just trade it one for one, and then you'll be able to do whatever you want in these crypto markets. you know, it's kind of weird. I know it knows it really goes on in there. But there are some potential issues. And we'll focus on Tether here. But there's one associated with Coinbase

that is doing some, you know, you might call them interesting things as well. But we don't need to focus on that one. So I'm going to list off some suspicious things about Tether that have convinced some very smart people that there is a high chance that it does not actually have the dollars. It says it does. I'm not sure if they do. But I'm just going to read off what people have found. So they did not have a bank account anywhere in the world for six months, yet still printed $400 million worth of tethers in the period, which is interesting. They have failed to complete an audit, a real one, not just an internal one. They had HSBC as a bank, a bank that financed drug cartels. That bank fired them. So it kind of shows you the, you know, one of the

banks that kind of does a little bit of the dirty business there, they weren't going to have tether as a client. And now they're using a bank from the Bahamas. And there's fairly solid evidence that Tether holds crypto on its balance sheet as assets. So when it issues the USDT, DT, excuse me, it's affiliated entities buy crypto, pushing the price of the coins up, making its assets that the loans are backed by go up, and then allowing it to issue more USDT, sorry, just Tethers without having dollars which if this is all true is kind of a ponzi scheme because they're trying to create a perpetual motion machine here and then there's also some defy things which would add another twist to the tale but i don't really fully understand that and that would probably take

a lot more research so maybe save that for another week any for one obviously it's crypto so it's as confusing as hell. Yeah. But any takeaways? Does that seem troubling? I mean, what could happen here to end it? Yeah, the very, I mean... Well, they don't necessarily do anything.

The concept of it is troubling to me, and then it's not surprising that there's all these back-end issues. Well, yeah, there's no regulations, and there is a whole investigation by the Southern District of New York that has basically said that Tether is not doing what it says it's doing. um i don't but it seems like why people are getting frustrated they're like you know why aren't they cracking down on some of this ponzi scheme stuff it's like they probably don't understand it like the rest of us it's really hard to understand i don't understand it all for sure

and it's also like all right if they're just some they're not in you know a lot of it's not hosted or some of it's outside of you know it's international stuff like that you know you You might be in some country or region that's not really like – Here's what doesn't make sense. It's all unregulated, so why – they might not be able to do anything. If you're looking for stability by anchoring to the US dollar, but your case is that the US dollar is going to die and that's the rise of crypto. Well, there's a lot of – And that would present a problem.

There's a lot of contradictions, I guess. But say you're not someone like that. I mean, the whole point is that it basically is theoretically supposed to give you a safer way to exchange your money for crypto, to make these crypto bets. And which, again, are not really betting on anything else except other magic beans at this point, right? If you kind of get what I'm saying. Like, if you're doing this, you're not, like, investing in a company. But another question, if they're acting like a bank, basically, which these people are accusing them of, this isn't bad. It's the fractional reserve stuff.

It's how banks do it. You know, you loan out money, right? Shouldn't they be audited like a bank if they're making out these loans? Like say Bank of America takes in your deposits. They're not holding 100% cash, but they're making loans that people know about so they know how creditworthy their customers are. Don't check my books, bro. Yeah, I feel like we've got to check the books. Right now, only 2.9% of their assets are in liquid cash.

It is unclear who they have loaned money to. So if they're just loaning money to say – so they're taking in USD, right? They're taking in dollars. If they're just loaning it to other entities to buy, say, Bitcoin or whatever, and then pushing those prices up, that feels so risky to me. If anyone knows how this stuff works, please let us know. I'm fascinated by it, and I just don't think there's a good way. I don't know how this ends, but I just don't see a way where it ends up well. I don't know.

Okay, well, I'm going to talk about something equally confusing, which is the Scion Asset Management 13F. So Michael Burry, his asset management firm, got talked about a ton over the last week. And the reason that I say it's confusing is because the way some of his derivatives get reported as holdings. Big headlines, yes. Yeah, and so there was a lot of misleading headlines, but I wanted to go over it a bit. Basically, remember whale wisdom, whatever the asset allocation is, if it's like a derivative, they report options as the total value and not the cost basis for them. um so take a take that with a grain of salt but um i believe most of the money is his own now so there's a lot of people that think this is a much bigger fund than it is before checking

kind of the aum remember he is not necessarily the most uh sociable well after the yeah after the gfc he kind of gave all his money back yeah yes in house i don't think he likes dealing with the pressure of other people. I think he likes the autonomy to be able to run the fund the way he wants. But he's big enough where he has to follow the 13 aves still. Yeah, which is kind of a brag. But anyway, so his largest reported position is put options on Tesla and it's 800,000 shares worth. So roughly 8,000 annual contracts or sorry, option contracts. And it puts exposure at almost 40% of the portfolio, but the strike and the price expiration of those are unknown. So it is not as big as 40% of his money, I don't think.

Most likely. He probably didn't buy a bunch of $600, $700 ones, you know, something like that, that were really short-termed. Yeah, so I don't think the 40% is correct, but it is not. There's no way that something with 40% sort of gross exposure is insignificant to his portfolio. This was an intentional bet. I think he was pretty vocal about it on Twitter as well. So there was a lot of backlash from the Tesla community on Twitter that I saw, as would be expected. As you'd expect.

A lot of people said, let's short squeeze this guy. That's right. But it's options. Yeah. So that don't really work out. No one's going to know. I mean, it's all – look, at this point in time, I've kind of realized no one knows what they're doing. And let's just embrace it.

No one is just – it's just kind of going to keep going until everything goes – whatever, keep going. Also, his next largest reported holding was put options on the iShares 20-year treasury bond ETF. This is – I didn't quite understand it, but this is essentially a bet that inflation is going to erode the value of long-dated government bonds. And then he coupled that with – Yeah, and interest rates might go up, which the value of those would go down. Yeah. Right, and he coupled that with call options on the ultra-short 20-year treasury ETF, which feels like they'd be getting sort of a similar result. Maybe I'm wrong.

Yeah, maybe he just kind of was trying to find, he didn't have enough, you know, like there might not have been enough demand for those type of things. So he had to spread it out to different styles just to make the same bet. And then he also had call options on Facebook and Google or Alphabet. And also a lot of people were like, this is the ballsiest portfolio I've ever seen. I don't think these are just naked options. They could also be long term, you know. Yeah, I just don't see a world where the guy who invented the credit default swap didn't put a hedge in place of some sort. Maybe he did.

Maybe. But anyway, I think he managed his risk better than what the portfolio projects. And then he also had some pure equity holdings. And his top five were CoreCivic, which owns and manages private prisons and detention centers. Ingalls Markets, which is a southeast supermarket chain. Zymworks, which is a biotech company that develops protein therapeutics for the treatment of cancer. Lumen Technologies. Yeah, that's that deep value play, huh?

Yeah, everyone keeps looking at that. It's deep value. I mean, it seems like a bad business, but it's deep value. It's CenturyLink. They just rebranded. Also, their management, I looked at the proxy. Their management got paid like 97% of their performance-based incentives and revenue, cash flow, and gap profits were all down sizably from the year before.

So there might have been – there might be some need for management change there. I don't know. It looks like Ingalls-Margaret, yeah, is trading at like three times operating income. I don't know how much debt they got, but that's another – he's deep value. That's his game. And then he had CVS Health, which is obviously the owner of the CVS Pharmacies. And then most of his other holdings were just oil plays. He had Occidental Petroleum, kind of the portfolio you'd expect,

but it's always the one that makes the most headlines. Well, yeah, Tesla, Burry, big headlines, big headlines you'd expect. Yeah, CVS, I guess, is less of a deep value play. I don't know. We'll see what he thinks there. He doesn't really share, so you probably never know. But it looks like those oil investments are probably – And he was pushed off Twitter.

He was pushed off Twitter or the SEC recommended it. It looks like people like Chamath have been asked to do that as well. They just didn't tell people about it because, you know, a lot of those people haven't been tweeting as much too. But, yeah, the oil thing definitely worked out for him, right? I don't really follow the space much, but these are older bets, right, that he made in the first quarter and prices went up, so good for him. He's very smart.

He's usually right. Yeah, he's definitely the picture of how hard it is to be a contrarian in the moment because when he was on Twitter, he really got the backlash, especially with the Tesla stuff. People were just harping on him all the time. He called the top though, didn't he? His hyperinflation takes, everyone was calling him crazy and now it's the only thing talked about. Yeah. I mean – I think we're still set to see whether that plays out correctly.

We're set to see if he's right on Tesla, too. So far, that one has worked out better in the short term. That's worked out better. We'll see. Obviously, if you know our history, we know we agree with him. But we'll see. We don't have any bets. We don't have the balls that he does.

Or the money. That's not how we invest. All right, that's your story. He's going to win. Okay, so this one is from Post Market. They shared on Twitter and called it a must-read, and it's called Confessions of a Capital Junkie. So I thought it would be interesting to look at it and look at an industry and how returns get generated, how returns on invested capital, all that stuff. So it is basically a summary of how the auto industry doesn't earn its cost of capital.

And it was actually, fun fact, shared from Fiat Chrysler. So they made this themselves, basically like, guys, we suck. I don't know why they made this, but I think- Transparency. Something about a merger I don't know enough about. I just read the slides. So from 2010 to 2014, CapEx and R&D spend combined went from 76 billion euros to 122 billion euros for major auto OEMs, so a ton spent on product development.

On average, it takes the auto industry, or took them during that time period, four years to reinvest their entire enterprise value into CapEx and R&D. now well with tesla today i guess maybe that enterprise value would be a little higher yeah but if you average across that over other industries the average is about 20 years which makes sense you know what i mean it kind of kind of makes sense on there if you kind of run the numbers quick in your head and then on average ebit margins barely get to around 10 for automakers in the good times and can actually fall to zero percent or lower when money or the economy gets tight. I mean, they just had the GFC as a one-time sample there, where EBIT margins fell basically on

average to 0% for a few years. And then the majority of development costs for these cars come from body, interior, paint, and general assembly, and then a few other things that are associated with those parts. That's where the majority of the cost comes for these things. And it's really hard to see how that could change. They're kind of saying like, look. Well, you just don't see the operating leverage. Yeah, there's no operating leverage in the bending of steel. So basically what they all added up to in the end of these slides is that their return on invested capital was less than their cost of capital. It's always a good sign.

These are estimates, but it's basically how they're not creating any shareholder value. Now, the big takeaway I had is, so, you know, commodity stocks, biotech, maybe clean energy stocks have kind of been my industries. and there's other ones that I've kind of identified as never invest no matter what, no matter how promising something looks for various reasons. Does auto belong on that list, at least right now? Yeah. I think it has to. I don't think the government EV credits would be issued if this was a super high margin business.

If this was profitable. They wouldn't need those if this was an ultra profitable business. because people would feel incentivized to do it naturally. Yeah, that makes a lot of sense. That does make a lot of sense. Yeah, it's weird. I mean, it's kind of no matter how promising something sounds, I always just resist.

The industry, it's just really hard to make money. Yeah, but I mean, that's been known for almost 100 years, right? Well, it used to be better. I mean, there used to be basically... Everyone used to... I mean, it's been a while, but yeah. Maybe I'm off on my time frame, But Buffett talked about this – he's talked about this several times that everyone knew cars were going to be the future.

And let's say you were – let's say you could see into the future and you could see roads across the entire continental United States and you could see cars driving on them. You'd probably want to bet your money on cars. Little to the investors who could foresee that, their investments would have turned out very poorly. Oh, yeah. I'm just saying, like, after, you know, when Ford and GM started dominating, I mean, when they basically had monopolies, they were, you know, those were good businesses. Probably still some par returns, right? I'm not sure, but I really doubt it for the amount of volume they were doing. I really doubt that.

But, yes, a lot of them went bankrupt in, like, the 10s and the 20s. But after that, post-Great Depression, I mean, they were cruising along until the Japanese, Toyota, Honda, stuff like that kind of came in and dominated. I mean Toyota has bucked the trend as well over the long term. It hasn't been a phenomenal investment. Did it outperform the index? Oh, I'm not sure. I don't know. I mean overall the industry is bad.

Your base rates are extremely tough. Yeah. Yeah? I mean, obviously there's going to be good outliers, but I think it sounds like the industry as a whole is not a good place to invest. All right. My story, my next story is the ByteDance CEO is resigning. So last week, the CEO of TikTok's parent company, that's what ByteDance is, Zhang Yiming. I think I'm saying that right.

He resigned. The head of HR is becoming the CEO. Interesting choice. Yes. Not usually a transition. You see a lot. Yeah. Big jump.

Big jump for HR there. Shout out to the HR community. But he wrote an internal letter to the company where he stated, the truth is I lack some of the skills that make an ideal manager. I'm more interested in analyzing organizational and market principles and leveraging these theories to further reduce management work rather than actually managing people. Similarly, I'm not very social, preferring solitary activities

like being online, reading, listening to music, and daydreaming about what may be possible. That's what the founder and the CEO, or old CEO, said. It sounds like the exact kind of person I'd want to be CEO, someone who's modest and built this massive tech company. Yeah, he said I lack some of the skills that make an ideal manager. I'm like, I don't know, man. You turned the business into like $300 billion. I think you've done pretty well.

I don't know. Seems excuse-y. He's 38 years old. ByteDance is apparently worth $400 billion. I can't imagine he really lacks the skills, but apparently he's taking a new role focusing on long-term strategy, corporate culture, and social responsibility. I don't know. Could it have been personal choice? It's tough.

I don't know. They have been under a lot of regulatory scrutiny. Yeah, that's true. If I was 38, had a net worth of $44 billion, I don't know if I'd want to deal with all that stuff all the time. You have no idea. I mean, none of us know if we were worth that much money. We have no idea how we were paying. I suppose, but it sounds to me like he just didn't want to deal with it anymore.

Maybe. I also get worried about all the basically big-time Chinese CEOs getting – Yeah, Pinduoduo. I mean, it seems like a coincidence. Pinduoduo, Alibaba, ByteDance, and then there's a lot of rumors about Tencent as well. They had another material that came out of there. But those are kind of the big four, I think, at least Western-facing. It's kind of tough.

It makes me – Yeah, it makes me resistant. It's not a bad thing. Right. I mean you can't – like there's no way to know what actually happened. Yeah, it's obviously he probably just left. But it just kind of tells me this is another example of how I don't understand that market and it's kind of tough to see what's going on. And I feel like I would be, as someone just over here in the United States, one of the last people to know what's going on over there.

And it just makes it so tough to be an investor in China if you don't have that – if you're not – you don't know the culture. I saw this morning that Alibaba – this might have happened a long time ago, but ByteDance stepped off of Alibaba's cloud computing infrastructure. Oh, they quit it as a client? Yeah. Wow. That's big. I think they're building their own, but – Everyone's building cloud.

We're big enough now to do it yourself. Yeah, we're building e-commerce capabilities. We're building cloud. We're building financial services. We want to be a super app. Oh, great. That's every company now. Yeah.

What's your story? Okay, this is another Chinese one. Fashion startup Shein. Have you heard of this? I have not. Might be Shine. What? Might be Shein.

It's Shein. Yeah, I know it's Shein. Okay. I have not heard of this. S-H-E-I-N is currently the number one top free app in shopping on the Google Play Store. I looked this morning. Yet very few people have heard about it if they're investing, you know, unless they're under the age of 21. I think that is really where it's taking off.

It is based in China and has doubled sales each of the last eight years, hitting $10 billion in 2020. It's crazy how no one kind of knew about this. It's trying to target Gen Z shoppers everywhere outside of China with cheap prices, and it's essentially going for ultra-fast fashion, cutting design production time down to three days. It usually was about three weeks for one of those other fast fashion people, like Zara and H&M, stuff like that. essentially what it does is it uses like it's algos data whatever you want to call it to forecast fashion trends in different regions around the globe and then gets them on the app as fast as possible and on the back end and all the suppliers on this internal software that keep everything super efficient there's a lot more to it but really too much for this show so and there's a

not boring article that big tech newsletter uh that you know you'd probably want to save if in case it ever goes public well first question does this type of app where it's kind of you know fast fashion cheap prices getting everything out quickly you know getting ahead of the trends based on these algos and stuff like that does that feel like the right model for 21st century fashion um yeah yes but it's getting crowded i would say it feels like there's we've covered so many different players in this particular space. Yeah, that's what I was going to say right now. We've done a lot of deep dives in the last few months on stuff like Poshmark, ThredUp, Farfetch, Stitch Fix, Revolve Group. There's others I'm forgetting. After learning about Shein,

which is apparently a competitor to these companies and bigger than all of them, I mean, doesn't fashion have to go in a lot of investors like us, guys that don't really know much about this industry? Doesn't that have to go into the too hard pile right now? I feel like everyone's reaching into these things and i think we're in this we don't know enough that's kind of what i'm concerned it might not be too hard to analyze it might be too hard to project who's going to win yes yeah because i don't i have no idea yeah the business models are pretty simple but uh oh yeah who's going to come along and be more valuable it's hard to say yeah it's like this it might be i mean 10 years from now it might be someone who doesn't exist it could be

Yeah, it could be Sheehan. It could be... I don't think it'll be ThredUp, but... ThredUp seems like a... ThredUp's... It's a little more niche. Yeah, there's some tough odds on ThredUp. We'll see if they can do it.

There was a few problems. Don't forget about Wish. What? Don't forget about Wish. Wish? There's a few problems with Wish, too, but we'll see. I think it's different. That's less apparel.

Well, it's some apparel. It's basically everything, right? Yeah, it's got everything. Yeah, we'll see. I don't know. it's so hard it's so hard to know alright well I think

that's going to do it thank you all for listening thanks again to Eugene for coming on the show we will see you guys next time but first want to remind you

we are general partners at Ars Capital so there we may have positions security positions and securities discussed on this podcast

I got to get better at that wrap up but we are not financial advisors anything we say or discuss here on Chit Chat Money is not formal advice or a recommendation

thank you guys for listening we'll see you next time don't you wish you could just hit skip on the worst parts of your life you know the same way you can skip an ad i get it i'm siaya and i live in ice cove i've made some questionable decisions that didn't end up the way I planned. And today, I'm still figuring it out. Somehow, things usually get worse before they get better. Apparently, that's how I roll.

So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem.