Chit Chat Stocks - Investing Power Hour #1: Lessons From Great Depression, Zillow, Robinhood 24/7 Trading

Episode Date: April 2, 2022

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Welcome to Chit Chat Money. On this show, host 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. It is 10 a.m. Pacific time, maybe 10.01, 10.02, 1 p.m. Eastern time. This is the Chit Chat Money Investing Power Hour. Basically, we are just trying to riff for an hour,

kind of a random talk anything we want to talk about any topics are fair game uh we're trying this out as a new show we're going to do we're going to go live on youtube and then we're also going to i believe eventually here start publishing the audio to our podcasts as well so if you're listening to this on podcast form feel free to check us out live uh and throw some questions in the chat uh it's 10 a.m on fridays 10 a.m pacific time on fridays but i think that pretty much covers the intro do you guys have any topics top of mind anything happened yesterday i was traveling all day so let's start with that how is mexico what's the verdict on the because there's a there's a mexico thesis going around that they're like then that uh they're due for

sort of a economic boom here um well they need an infrastructure bill that is number one they they could use an infrastructural week um it's hard to tell i mean i was in a kind of like a beach town i wasn't in like you know mexico city or another one of the giant cities but it seems fine um it's not like you know the cartels aren't taking over everything or anything like you know how those narratives might be out there it's kind of like the united states but with more smog and worse roads and worse utilities. So potential, maybe. I don't know.

All right. Any investing takeaways? The only one is that they love Coca-Cola. I think everyone knows that already. And that there's these things called OXOs that are spelled O-X-X-O. They're like 7-Elevens on steroids. I believe Coca-Cola actually owns part of them. and they're on every corner it's like every almost every convenience store at least where i was

so if anything those are open all night everyone's going to them constantly that seems like a good business i don't know if it's publicly traded not investing advice i have no idea what the business looks like but anecdotally that was the only thing that kind of piqued my interest any sort of like infrastructure thing though it's tough it's tough out there some of the companies are a little bit... There's a lot of state-run stuff that's hard to... The customer service is quite poor, even compared

to some of the stuff in the United States. How is your Spanish? I learned a bit. Un poquito. I can't... They talk very fast, so... Yeah. There was no intro period. You kind of just went

like right into the thick of it yeah i gotta say uh do a lingo help no i tried that at first but i churned so sorry any any investors out there i'm gonna hurt your numbers um but you're telling me brett that like i would have expected that as soon as they saw you they were like oh man this guy knows how to speak spanish yeah well they know that they know that but I'm not someone that speaks Spanish at all. You look at me right – yeah, they would know, like, oh, I got to deal with this guy. I got to do something where I find someone

that can speak a little bit of English, but, you know, it was fun. All right. Markets. Any changes to your portfolio this last week? Anybody? I don't know. Was there any news? it felt like a no news week it was kind of honest week yeah all right i just got the tweet out so

maybe some people will start watching this we'll see let me go uh let me do some news snooping here i mean there's we can always we can always talk the fed fed okay well raise rates question mark yeah the uh the there's a lot of talk about deflation or maybe that was just from people that i was following on how there's some leading indicators that deflation might be coming i have no idea if that's true but that'd be quite the round trip yeah i feel like there's a potential though because if there's this there's this giant and again it's really hard to have no one has a crystal ball with this stuff but i feel like if everyone's building up inventories and every business has all these worries i mean there just could be an inventory glut coming yeah over the

next year definitely possible did you guys read the or listen to the restoration hardware conference call no but i i was told by everyone on twitter to to listen to it i hadn't no i didn't read it either but it sounds like the american consumer my first mine like i my gut instinct was to think like maybe maybe someone running restoration hardware doesn't have his finger on the pulse of like the typical american consumer but uh i heard he's been quite the ceo so yeah i don't know no you go ahead ian i was just gonna say i know over the last number of years you know the stock's down a bunch in the last year or so but it's been a big winner and i know that there's a lot of people who like doubted it for a while and then kind of came along and went oh wow this

guy's a genius and they're going in the right direction and uh you know now the stock is taking another hit but it always seems it seems like i always see like these crazy headlines with restoration hardware where they take these big bets about changing up the business model or um i don't know i don't i don't follow it real close but it just always seems like i always um i'm kind of intrigued by what's going on because it just seems a little out of the box like most people running restoration hardware have learned they've been running it uh in this way but um i don't know it's hard to like i think since see since 2019 it's about uh up about three three times or so a lot of that coming kind of from the the bottom in 2020 but

still kind of an impressive chart to look at when retail was supposedly going to be dead yeah it's up like almost basically 10 times since mid-2016 so have you guys done a uh uh any reading lately that's worthwhile to talk about um reading like books or any anything anything anything's fair game uh i finished a book on the history of oil which sounds boring it's called it's the one that lawrence hansel was tweeting about a while back so i decided to pick it up it was pretty good he it goes through it's like a thousand pages so it was a bit of a slog it took me a long time but it was definitely it wasn't super dense or anything well i mean it was kind of dense but it's like it has storytelling and there's always you know big characters

in the oil business so it wasn't a boring read um i don't know if i have any takeaways yet because i'm not like an any sort of expert on the energy industry but it definitely gave a nice timeline of like how we got to where things are today um what's your now you got to place a bet on oil futures oil futures yeah reading that book uh well it only went up to like the persian gulf war or sorry the first gulf war in uh like 1991 whenever the one over kuwait when iraq invaded kuwait but i think the big takeaway for me is when the middle east was like they hadn't really in the 50s kind of post-world war ii they hadn't like modernized much of their society at all and that was just kind of their own choice but then when they discovered oil they got so rich so

quickly that chaos just started and then sometimes these dictators would rise up like in um well in iran well in most most of the most of the places and then places like iraq and iran and uh well saudi arabia is more calm but they would get very confident because of all the wealth they had with their oil and all the strategic you know importance they had and that's kind of how a lot of the wars started and then venezuela too as well we get it get in the mix and it was interesting to learn how opec started in like the 19 early 19 or no i don't know when exactly it started but they they really asserted their dominance in 1973 that was kind of the big one of the big things that kept that inflation going in the 70s but then it was also interesting to learn about how they overplayed

their hand in 1979 i forget all the details but basically they kept trying to restrict supply raise prices and then a lot of the western countries started doing exploration other some other places like outside of norway and the north sea and alaska stuff like that so pretty fascinating book but definitely definitely a slog yeah it sounds interesting i just uh i finished upon i think upon your i don't know if it's your recommendation brett or not but i read that diary of the great depression it was that guy's like journal entries like every night it was kind of not every night but um basically he was just like detailing the depression and uh it's fascinating to see the way people think and how similar it is to today

um just around like the the markets broadly and he he also i i thought he was a really good writer um it's it's interesting that they had like he recognized that stocks were cheap um but no one had any money so it's like what are you gonna do and at this it was like four years of just a standstill like apparently he kept saying that like america was just marking time like there was no uh there wasn't like no jobs being created like the new deal came in and it like tried to spur growth and there was just nothing that could happen to like change anything like the war pretty much just brought us out of it like it just gave jobs it's kind of fascinating did you read through that brett yeah a while ago i think it was before code so i'd probably

have to look at it again i don't think i finished it but i'll have to pick it up um yeah i remember it being pretty good and it's not like it's more of like what someone's thinking so it's kind of nice it's different than an historian looking back in the 21st century to then and trying to pick up sources and you know how that can be not great sometimes um so yeah the thing that the thing that surprised me was like i think it was 1932 they broke through like their 1890 90 numbers like the average yeah the industry or the whatever market average um and then they'd never it was like flat from 29 to 49 or 50 or something like that so it was like i believe

it was 53 or 54 so yeah it's like 25 years of no no returns is insane yeah and now every five years since someone's been predicting it we could be you know who knows it could be happening right now i i could we could never know but it's so funny how everyone predicts that like as throughout since that time every year probably every year someone has predicted that the next you know great depression is coming except for and even in the bottom of like 0809 at the top while we're climbing out every bull market every bear market someone's predicting the next one and i think it's kind of i don't know it's just interesting how we'll look back at one data point and a really terrible time it seemed like there was such a confluence of factors that all came together

to cause the great depression and there's a lot of mistakes made by the government that they've learned now that i don't know predicting that again it's just like all right you had one data point why why do you think that exact same thing is going to happen again now i don't know that's always what comes to mind when i first read the those things would people write about it the the big theme for our one second and the the big theme for me was that he kept writing about he's like in the new deal there was like all this um basically stimulus and he was like well this is gonna it's a 30 billion dollar deficit which is insane like inflation's coming and it just made me like i don't want to grow up and be like the inflation guy like oh great the deficit's

larger like here comes inflation like what like 30 billions a rounding error today yeah using no denominators or whatever i don't know if it's the dom denominator numerator but not having as a ratio it just doesn't make sense i don't know reading the history of financial market stuff it can help you understand how some of the things that people might say out today or some of the clickbait headlines that someone might write about the deficit or something are just nonsensical sorry i interrupted you there and no you're good i was just i've been thinking and it kind of dovetails off both what you guys are saying but i've i have been thinking a lot recently about how most investors it seems like not everybody there's people who have strategies against this

but most people implicitly in their investing assume america is going to have a great economy um and that it's going to continue to be a world dominant economy um just like even even looking at you know to break it down into numbers right that if you've got a dcf you're assuming you know three percent to five percent growth um on a terminal basis in those cases because you're like oh we're going to get between you know that's going to be somewhere around gdp growth um and it just you know you look at these periods like the great depression i think one of the crazy things about that is that is how america was able to rebound out of that right of going through a 20-year period of um no returns in the stock market and then to have the returns since 1953 or 1954 is pretty

pretty remarkable but i always look at those charts of you know japan from the 80s and 90s and and then how i think even today it's never reached the levels it was at back then um and it does make me it does give me some pause every once in a while and i don't know what like i don't know what the response is like i think for me i if i'm if if america implodes and i'm imploding with it but um like i don't know that there's like i don't know that there's like a good thing a good way to hedge that having the portfolio that i want right i don't just want portfolio full of like international companies only um and i don't really want to make a bunch of bets on china which would seem to be the other the other major bet you can make but um

it just it does every once in a while you know i've been thinking about it more recently just with some of the geopolitical turmoil but there can be long periods and then there's also no guarantee that after those long periods of no returns that there's that there's an uptick at some point right there's always like there's other economies around the world that and i think america is exceptional but it just is that question of is america always going to be exceptional and um yeah which like i said i don't know what i don't know if there's it's even a worthwhile discussion to have because i don't know what the response to that is but um i think it is something that people should be aware of that in most of the time most cases when they're investing that that's

that's kind of an implicit bet that they're making yeah i mean so much would you guys agree with that yeah it's a bet you're making yeah but i don't know if it's something that's worth focusing on because i don't know if it's at all predictable right also i don't know if there's anything like if i make if i'm long stocks and a depression comes like if if there's a great depression like scenario that happens i'm not going to capitalize on it either way like it's just not going to happen and i that's kind of the perspective i got reading through that guy's diary was like some people like detecting the irrational exuberance in 1929 wasn't hard like everyone could tell but then they thought they bought the dip when it dropped 65 70 percent and it dropped two

thirds from there and it's like and these companies earnings got wiped out like the the dividends were eviscerated like the only stock i remember performing okay i don't even know if there was any stocks that performed okay the only thing you could do was be long u.s treasuries that was like it that was the only way to play it and i don't really i don't know if that's the way i want to i don't know if i want my portfolio to look like that it's interesting yeah the gosh i don't know like it's hard to make them like a bet like that is really hard to make i kind of just think no matter how good a business is doing the stock market could fall as much as it wants and it can rise as much as it wants depending on people's sentiment

i kind of think today and now this is always famous last words so whatever clip this in 30 years and laugh at me uh doubt anyone will do that but the i think this time might be a little bit different because there's the complex of retirement accounts and vanguard blackrock 401ks whatever all that stuff fidelity whoever that has a permanent flow of buy demands i just as long as people don't get spooked out like in a total reversal and think that the stock market because now generally like what 50 of the united states population i think is invested in the stock market and i believe that many you know have a 401k so they're contributing to a buy bid and everyone's you know that's i just think that sort of demand is going to be there plus

with um all this might change if interest rates rise because it'll be harder to do buybacks but buybacks also as well can really help with that that sort of financial engineering can help if your stock price falls 90 and your business is still fine if you can buy back all your float I think a good example of that was Dillard's recently where all investors had given up on them, except for a few, like who was it? The Buffett, not Buffett, but one of his protégés, Weschler, it was either Ted Weschler or Todd Combs. Plus like David Einhardt were the only big investors and Dillard's was

basically forgotten. And everyone said it was going to shit and they kept going down and down and down, but they bought back all of the outstanding stock that people were willing to sell. And then once that happened, the stock went up 4x. I think buybacks can also be helpful in a scenario because that sort of thing just wasn't possible. Well, maybe it was, but it was way, way harder in 1932 to do that. I just don't think the economy, as long as the infrastructure we have, digital and analog, stays afloat, I think that's not a huge concern to worry about. But again, I don't really like focusing on the macro stuff in general.

So I think it's kind of just the uncertainty we all have. and move forward in a digital era. KPMG can help by bringing together the right talent and technologies, generating insights that spark opportunities. To explore their thinking, visit read.kpmg.us slash opportunities. This episode is brought to you by La Quinta by Wyndham. Here you are, miles from home and ready to start your vacation. Good thing you're staying at La Quinta by Wyndham.

They have free high-speed Wi-Fi to stream all your favorite movies. and in the morning get fresh waffles with their free bright side breakfast or squeeze in a workout at their fitness center either way you're ready to conquer the day tonight la quinta tomorrow you triumph book your stay at lq.com interesting tidbit here uh so i i tweeted this out but it says in one of his like diary entries he says as i look back over the record of the stock market since 1932 many remarkable results can be seen so there it was like there was sort of a like like 1932 was like a low low like it never dropped below that for the next since then like it just hasn't dropped below that number um he says stocks that sold at

receivership prices are now selling at substantial values here are a few extreme examples showing quotations in 1932 and 1936. Philip Morris went from 50 cents a share to $90 a share in four years. Yeah. Which is, that might be the best returns on a single

security in that short of a time that I can think of. No, well, 19, okay, I have Radio Corporation of America, which is the bubble stock of the 20s, was went from one to 500 in a decade.

Yeah. hey radio is the future it was everyone was everyone was going to get one and they did mfts are the new radio no well i'd say there might be a certain electric field company that is the uh the radio corporation but that's that'll open up a whole can of worms um i think we probably just lost half our audience well i'm seeing here there's three people watching and i think two of them are me and ian looking at the chat so good well we got a we got a good uh we're staring at the mountain and we can we can climb up you know we'll keep going uh i was gonna say something else or ask another question about uh 1932 oh oh there's an article from ben garan

during the time about how i think like half of stocks publicly listed were trading below it's it was either working capital or cash so there was like i think maybe they had both stats So like a good portion of stocks on the market were trading below their net cash position, which that it feels like it would be very difficult giving the buybacks now for that to ever happen. But you get close, I guess. Anything's possible. Yeah. I think the article was like titled like the stock market's worth more dead than alive right now or something like that. But it was, there were so many scenarios like that where they were trading below net cash and it was like a positive earnings company that they simply had no product demand anymore and their earnings got wiped out.

So it went from like net cash to cash burn, or, I mean, if you had the long enough time horizon, you were going to be fine, but. Like with no one able to buy stocks. You rarely caught, like, I feel like it was hard. It was probably pretty demoralizing for like four years or eight years at one point of like, just no returns, despite like value being accreted. yeah well yeah that can happen eight years yeah i mean it's been longer for some companies right what was it at the bottom of 1921 was the same as like 1906 the peak of 1906 that's pretty long

time too like that can happen could it have been the top in 2021 maybe probably not but it's always possible yeah i think like i think that is an interesting question though because what do you do like in a in a situation like we are now you never know what's coming next and i tend to be uh pretty fully invested um at all times sometimes i have a little bit of cash for a month or two as as it comes in but um but it like you know hopefully you know knock on wood but we've got 60 plus years for all of us still on this earth um and so i look at it and i think you know once i started hitting 40 50 60 70 that i probably would be making some different decisions about my uh allocations and maybe and getting a little more of a preservation mode than

than a growth mode but which is probably a reversal for me i would have used to think that i would have stayed fairly aggressive all the way throughout and who knows i've got a lot of time between now and then but i do look at those periods of those long periods of just nothingness and the odds are that you're going to be in one or two or three of those throughout your lifetime and um it would really really suck to get one of those at the wrong time right a hundred percent i see what so many like older people and i like two years ago i would of thought like when i was looking at like older people's portfolios i would thought like the only thing that matters is total return and then it's like you know what no like if you can take a like

a fixed five percent after a certain age take it yeah yeah at least with a portion of your money yeah everyone's portfolio makes sense when you learn like what they're well i wouldn't say everyone's but a lot of people's portfolios make sense when you understand what when when they tell you their goals and that's the market too yeah yeah the past experience helps a lot too but i'd say that is the beautiful thing about the market is you can with all of the products that are out there today and even just different stocks and diversifying you can set up all sorts of different you know you can pretty much find every point on the risk and return curve right if this is how much risk you're willing to take here's going to be your you know expected return obviously that

doesn't always correlate to what your return is going to be but um on an aggregate on average that the the points on the line are very dense right it's not like you can either do you know all bonds and no stocks or all stocks and no bonds and like there's there's all sorts of mixes and other um other instruments that are in there and it just it feels like a great day to a great age probably the best time ever to be an investor in terms of availability of options. So you can really find something that matches your risk tolerance and kind of the things you want to achieve in your life. I think it's probably, there's never been a better time to really match your,

like I said, your risk tolerance and what you're looking for with a product in the market. There's definitely more options. There's definitely more options to go. There's more degenerate option trading. oh okay i mean options like not like not like puts and calls oh okay i thought you're making that joke i i'll make that joke yeah well to maybe take it in that direction one piece of news this week was um gamestop announcing their their stock split and rising you know like right it's value creation but i think the last i saw it had risen like

10 and after hours it looks like it's down a little bit today or not down a little bit today but down off of its early day highs have you ever heard about have you ever heard of slicing a pizza i mean come on yeah any any yeah any thoughts on that it is i it is just a strange phenomenon that's happening i think because wow it's this weird thing where now it's getting like priced into where people expect it to go up and it's always that expectations game so when there's enough people that are expecting it to go up it finds a way to

find a way to go up I want to make a video of like a pizza with eight pieces and then like slice a ninth and then be like value creation yeah I want yeah

gosh I don't know I don't really have any thoughts on GameStop oh that was a slip their game stock i know people call it game stock by accident uh was that like this week they announced that split is it just yeah that was yesterday i think okay well here's something that tails into that robin hood announcing extended hours saw that that's a good story it's a good idea for like once people are at the bar on friday nights like being able to like risk it all on out of the money options this will be huge for the industry of embarrassing

yourself trying to pick up women it'll be amazing um the uh i don't know i just want to see this put call spread yeah like look like the market's closed but robin hood's opening it's saying i'm up a lot we're doing this thing it's called a uh short squeeze or game of squeeze you ever heard it's like those you know talking to the talking to the girl memes but uh uh i think it's good robin hood's business model which is just based on volume really but i feel like it's terrible for people you i would honestly want it to be in the i would argue in the opposite direction and shorten trading the day trading day by four hours and only have the market open for two hours from like i don't know uh 10 a.m eastern to 12 p.m eastern we don't need any more how are they doing

that like logistically uh they're just gonna like you know they have their partner citadel or two like whatever the market makers and we'll just yeah themselves yeah so those people just route orders uh robin hood should have enough liquidity i would think given they have like 20 million users right so it's almost worth like i almost want to buy them as like an emotional hedge since i hate them it's like at least if like they do well it'll frustrate me but i'll make money yeah i feel like the real and the real thesis there is to buy the publicly traded i believe it's virtue i might be pronouncing that right virtue yeah virtue financial financial they're a market maker that i feel would benefit from robin hood and they said robin hood said they're

going eventually to 24 hours a day trading which i mean which like you said is great for robin hood's business model at least in the short term that they're getting more volume through there but like i think it's it would arguably be better for most investors you know obviously not for anyone who's skilled in trading but um for most investors i think it would arguably be better if you could only if you could only uh i was about to say vote on your stocks but uh buy stocks and sell stocks uh four times a year right if you had it on on your your quarterly your quarterly dates and they report earnings and then you get to make up your decision about when you want to buy or sell on that that quarter it'd probably be pretty crazy but yeah and it does eliminate the liquidity

where you can just get your money whenever you want it and all those types of things and maybe you still could do that but and i think that a lot of people's returns would be quite a bit better if um if and i'm not saying this is what we should do i don't think the lawmakers or anything like should come in and do this but i just think as an interesting thought experiment um i think most people would find their returns were better if they were just touching it four times a year less yeah here's another oh go ahead trade on saturdays in like the in like the 20s 1920s yep shortened shortened day a little morning then get up you know hang out with the fellas down on the on the street you literally like you had to go down and do it yeah make your make your

little uh saturday night money yeah all right i have a question what do you guys think of zillow today now that it's x i buying are you more or less interested in the company without it i just i don't know about growth i i just don't i don't know i guess that's the biggest i don't know yeah i would i would echo that sentiment but i would say i think when a company makes a big move like that to say well first of all to get into i buying and then second to be post i buying um like especially to be post i buy it is kind of counter counter narrative with a lot of what's going on in the real estate market and so i think that intrigues me just because whenever someone takes kind of a counter position like that i'm curious why and whether they have some sort of

insight um in this case it was i think the insight was we're losing a lot of money um but uh you know Zillow is obviously like a great platform. You know, lots of people use it. You want to go check your, like the idea of being able to check your house value would capture the imagination of so many people to be able to get a live, a live estimate of your, of your house value. And I think that's still kind of the primary, I don't know, I'm not an expert in Zillow,

but I think that that's still kind of a primary reason why the platform has value. And it's just a question of, can they add, you know they thought it was going to be eye buying but what's what how can they use all that data that they gather and all that those eyeballs think it's actually yeah make a significant amount of money and i think that's the thing that was not an expert so they may have a good plan but i i just haven't seen anything from them that i think is particularly intriguing in terms of a new plan yeah i was kind of i used it for to find like a new rental and i thought like while i was season i was just thinking like this is like the single destination i'm going for search and

discovery whenever i'm moving like if they can find a way or if they can be more involved in the transaction process uh it seems like a huge thing i think it feels like they can monetize better i honestly found it it sold off so many people sold it because they were getting out of i buying and i thought like this is the right thing to do like yeah i like them better than open door i can tell you that's probably the only thing i can say for certain i like them better than open door it just doesn't feel i don't know i buying just there's so many it's problematic yeah and i think i'm looking at their financials right now i don't someone can do a gotcha here if they have some sort of debt i'm not looking at

but and the gross profit could have been muddied from i'm fairly familiar with the like entire situation now i've been looking at it for a while and it's i mean what's their gross profit looking like annual like two billion two billion buying or yeah x i buying like two billion they have 32 percent ebita margins on their imt business which is like the internet which is like their connection basically like the advertising business and then they convert a little over half of that to free cash flow i think if you x'd out i buy and i was reading some value investors club write up on it it's like five percent little sub five percent free cash flow yield on the imt business yeah that makes sense looks to me like they're returning between six and ten times gross

profit just eyeballing it here so i mean the valuation doesn't seem crazy but uh i think there's some stuff that looks the same that i'm very confident can grow at 10 plus a year just from a secular tailwind and zillow like they gotta market what's interesting about them is market share came to them with the platform but now they got to take dollars from other places in real estate and it's not one of those nice businesses where demand is just going to come to them if you kind of get what i mean like yeah i don't think outside of the i don't think the real estate industry wants them to succeed which is strange because it feels like a lot of lead gen for them but yeah uh i just i think it's so uncertain it's like one of the

most uncertain industries over the next even five years like what if i'm wrong and open door is totally the answer um i say that's a slow probability but i think they're just powerful i think at this point they're two very different businesses the yeah but you know that's true it's a giant market but what if redfin's the answer i guess it's probably a better question are they going to be the big winner i don't know i think it's still two very different businesses like there isn't at this point zillow is really just a lead gen place for real estate agents like and how valuable is that demand for the agents the agents are going to bid on that i think that's pretty important and then where's the growth that's the only right isn't that saturated or

i'd say ancillary products like um more like being like a mortgage market uh like not market maker but like not necessarily an originator but uh taking people from okay you're interested in this home to here's how you get in touch with the agent. Let's set up a tour. Let's get all the closing services done in-house through Zillow. And then you can also find mortgages, not necessarily originated by Zillow, but through Zillow. I think if they can just be across that entire transaction chain, there's a ton of value. I spend time on there and I think there's really no, it feels like the google of real estate and there really isn't a close second yeah i mean that's where i go but i feel like it's also susceptible to just like the swings of the real estate market

in general like if demand i don't see this happening but if demand were to like fall i think they they'd see probably some dip in their top line as well but yeah i i think the hard thing about the real estate market is there's and this will be the hard thing for zillow if they like they've got the advertising businesses you talked about but if they really want to make some other leap that's not i buying um where does it come from where does kind of the the big pivot or revolutionary part of the business come from um and maybe they like like i said maybe they don't need it but i think i don't know the real estate market is just so hard to to digitalize kind of in all its aspects and i'm not sure that we're getting like i always believe that technology

can make things better but i i don't i think we might be getting close to bumping up against at least the the low-hanging fruit um technological advances that help real estate because i don't know i just i watched some stuff going on in phoenix like i know some people who in phoenix is one of open doors big markets but i know some people who sold a house recently through open door and just um like the location was fine and stuff like that but the house was just a like a beat-up house like garbage house like just totally like everything needed to be gutted on the inside open door buys it without ever doing uh interior inspection right they make their offer they say they set some they did like an exterior inspection and maybe they have their

numbers all down and they know hey this is what it cost to gut it but they had i think you know well they have ai in so right exactly and maybe it all evens out over over the span but it was one of those types of things and it like i'm not saying there's a huge bubble in the real estate market or we're back and you know i'm not trying to to go like all big short on us here but but it was just one of those things that troubles you seeing it you're like okay these people are buying this house sight unseen and just spending a ton like putting in the most competitive offer of anyone like any of the investors who are looking at the house didn't want to put up this type of money for it by a fairly you know it was 10 higher at least than what the investors were willing to

pay um so anyways there's just there's just some weird and i don't know how you get around that right because then you start bringing in more of the human costs to go do inspections or you know negotiate more do stuff like that grow slower getting gross slower right you grow slower and your and your margins are worse yeah right so maybe it's maybe if you're just buying up these big part maybe if you're just i'm just not convinced that like maybe if you're buying enough of them it all evens out and you get you hate your margins right then it's just about the volume and you're just you're just knowing that in aggregate this block of houses we're buying is gonna is gonna be enough but but what if you keep those what what if you buy too much

and then you've the re like what if you can't resell them like what if you can't recycle them fast enough and you've got all those assets on your books like and interest rates are going to rise yeah i mean so that's what they did like in at the beginning of the pandemic i don't know if you guys remember this but they bought like open door positive buying they said hey we're pausing we got to see what's going on here which i think was probably like the prudent move it turned out that that wasn't really a real estate crash and you know like i said i would never i'm not in the business like predicting crashes or anything like that but i think the real estate market is still going to reset at some point it always does um and whether that's a big crash or a little crash

whatever um but it hasn't really like home values have just been going up and up and up for years now it's like at some point if they if like you said if they've got all that on their books um it's going to be a problem it's like trading against someone who has inside information who has the inside information the homeowner the homeowner oh yes you don't go looking at it buying the house from like if they know any potential flaw in that in what they're selling so it's like oh you didn't see the you didn't know about all the rats in the walls like well yeah i left you for two years you didn't know about the mold in the attic it's like spreading sucks yeah i have to have an inspector yeah yeah i mean who like well i think that's the question i

think if you're going to invest in opendoor i think the question that you'd want to answer is do they as a machine and you know make you know their ai models and all this type of stuff but as a company where they're getting all this data and have this kind of overarching view of the market do is their information better and more valuable by having all this aggregate information and all these data points more valuable in total than each of the individuals insider information and selling them their house you see what i'm saying there maybe dude is there advantage is their advantage in total more than the like the disparity the information disparity they're going up against in each of the individual home sales the thing is okay there was so the the write-up

that i read on value investors club he kind of talked about three big pitfalls of eye buying And one of these isn't really attributable or Opendoor doesn't have this problem, but it was mostly for Zillow. And so the first was adverse selection, which is you're buying from someone that knows more than you on pretty much every transaction. The second one was that throwing a bunch of lowball offers out tarnishes your brand, at least in Zillow's case, where it's like if you were thinking about using any of Zillow's services, like mortgages or closing services, anything like that. and they gave you like 15% under asking, you kind of feel like they're going to jip you on something else too. So it kind of like tarnished their like brand in the consumer's eyes. Open door doesn't have that problem because they're maybe not cross-selling a bunch of services. But then the third one was you're essentially setting out a bunch of bids, like a bunch of

low bids. And those bids are going to be met at the least opportune time. So like you're going to be buying more houses when those houses aren't getting better bids, which is kind of saying that like demand for housing is slowing more, your bids will be met. And then you're buying, then you've got more houses on your books in sort of a housing down market, which I guess is more, that's kind of like a macro thing, but, and maybe you can turn it off, like turn off buying quicker than that, but it just feels difficult like just a really hard business to get right yeah i don't think opendoor has a path to success because right now they have an optimal option the well you could argue whether housing supply i don't know what sort of end of the spectrum like too much supply

too little supply is their optimal environment but right now i think we're on the way way too little supply, right? And interest rates or mortgage rates were plummeting. They were all time lows. Okay. And financing in general, interest rates, whatever, all time lows. They finance their business by doing this. They basically buy a house, they finance it with short-term debt, and then they sell it. Right now, their gross profit is barely covering their interest expense. And interest rates were at all-time lows. Mortgage rates are skyrocketing. So they have two problems. If interest rates skyrocket, their financing costs go through the roof. But mortgage rates also go through the roof,

or basically follow the same trend. They're going to go up as the Fed raises rates or whatever, as treasuries go up, blah, blah, blah. And we've seen that. Mortgage rates, you know they're they're anticipating the fed uh raising rates um but that just means the housing prices will go down in general if that sustains so open doors inventory is going to get written down so there's just no path i don't think there's a path forward and they're in the most optimal operating environment right now and their gross profit can't cover their interest expense or barely covers their interest expense i mean what are we like where's the end game well i'd love to know just one more point on that i'd love to know and i don't think they

break this out of their financials because probably wouldn't look too good but i'd love to know what percent of their gross profit can be directly attributable to just a general rising market right that it's not that they're buying particularly well or they're making any value add improvements like how much of it is just by holding the house for a month or two um and just so high in value that it just goes up and and what would happen in the alternative environment right that like like rest of this seems to be in a lot of ways a very optimal operating environment for them so um yeah let me get some numbers there because i interest expense i may have been exaggerating it a tiny bit uh in 2021 they had 730 million in gross profit

544 million in sales and marketing 620 million in gna 134 in technology and development and 143 million in interest expense so the interest expense basically if you do gross profit minus interest expense which basically which gives them the room to you know reinvest you got about 500 right now 600 million in gross profit while interest rates are at all-time lows so if they're going to grow at all say they're going to 5x this business while interest rates are rising i mean that interest expense is just going to soar and what if housing prices go down at the same time it is not a capital light business either like it's pretty asset intensive because you have to you kind of have to renovate these homes in a lot of cases so whether you're doing

that in-house or you're outsourcing it you're going to be paying for renovations it's not like you've got 500 million of just like free money to throw into research and development like yeah let me give you another number here real estate inventories on their cash flow statement so this is from going from net loss to cash flow from operating activities they invested are the net basically gain in real estate inventory sitting on their balance sheet last year was 5.6 billion they financed that through non-recourse asset back debt i don't know the details of that of 11.5 billion last year and repaid that non-recourse debt or repaid $6 billion worth last year. So again, that just highlights in my mind, the short-term financing here. I mean, I've said it

three times, but those interest rates are going to rise on that, correct? I guess I'm not a credit guy, so I could be totally wrong, but I would think if interest rates are rising in general, credit is harder to get in general, that's going to make this business just way, way, way tougher. all right what did you guys think of uh the bloomberg article are you guys i know brett you must lentil the lentil one yeah well i like music uh yeah uh how are you combating inflation um that's a that's a good question i hope you're not i hope you're not having to use a nicer dog not yet but i'm i'm trying to uh you know just dig a hole in the ground and cover myself with a rock and live my own hermit life so that so that inflation doesn't matter right i can make

my own my own currency the uh well thanks for the bold case on bitcoin the uh um the i mean the article i didn't ever read it but it seemed like it was poor taste right like he was kind of you know really poor written poorly timed by someone like him one of the richest men in the world but i gotta be honest people get really upset about meat eating you don't have to eat it it's a choice lentils are pretty good for you i don't know and flavorless well well you gotta eat some of my cooking yeah you just gotta put the right seasoning on it yeah i gotta eat some of my indian indian doll uh that i made i mean i have nothing against lentils but now i do i like i didn't have anything against lentils but now it's like how dare you

like i told you you think you're a substitute screw you yeah well you know i'm not gonna eat meat i'm fine the you know you're protected but inflation can't get you yeah i don't know the dog stuff though or what the pet stuff i mean yeah no one's gonna not have pets but i gotta admit if egypt's starving because ukraine's in a crisis and we're spending what 100 billion dollars a year on pets in the united states i i kind of feel you know that's a tough one i don't know we could we could we could reallocate those resources to the humans that are that made me in need uh but selfish so what so you'll save the cows from the meat eating but you won't save the pets the pets will serve got you there he got you there fred you're

you know backed into a corner no i didn't say kill them i'm just saying that's what like where you know i mean maybe we don't you're just maybe we don't need subscriptions to chewy anymore but i'm just saying i feel like we're allocating a lot of we're allocating billions and billions of resources to pets that's fine with me i have nothing against that but people are starving around the world those resources could be going somewhere else i feel like tech or i feel like pet innovations have been pretty negligible pet you mean expenditures yeah what what have been the big expenditures oh just the food i mean it's just the energy for that food it's pretty like efficient in terms of like it's just kibble like i know i'm just saying the dollar i'm just talking

in dollar course meals i'm just talking in dollar amounts i have no idea about it yeah it just seems like whenever whenever there's a discussion like this for me like i like to 100 agree we don't want we don't want people starving in egypt obviously but i do find it kind of strange like to draw direct comparisons about like oh well if we just substituted this for that right we could just get rid of all the spending and do this right and and a lot of times these discussions like people talk about like oh we allocate or we allocate or to this or we allocate to that and like the reality is like the we don't really do anything right it's kind of like the market in general and individuals specifically um are you

know choosing where all this stuff goes and so like i don't know like i try and it's sometimes is difficult but try not to take these types of discussions at a um as a zero-sum game all right that we can that we can have these types of discussions and say hey how do we actually solve this problem and that it's not it's not really about all these other things that are going on it's not like just taking resources and moving them over yeah or else no one right because i have starbucks coffee right exactly where could that six dollar coffee have gone you could have compounded that for the next 50 years yeah right so yeah the uh i don't know it is it is ironic though and kind of funny when you realize the types of things that we spend

money on as society and the types of problems that are still out there um yeah just in the aggregate and kind of that that interesting an interesting piece of and like no one would say starbucks is more important than people having food but each of those individual decisions um you know adds up to where you're spending a lot more on starbucks than yeah it's definitely not what crosses my mind when i'm like ordering a coffee yeah i guess this is the downside of a market economy but there's plenty of upsides the yeah i mean you're not gonna go like convince some middle-class family to give up their pets i mean come on that's cruel like who would do that that's evil you're not gonna convince them to do that just

because people around the world are starving they got to take care of themselves but if you're trying to make a marketing message about that then you do you hit it the things that they care less about that they spend lots of money on and they care less about so what's the what's the uh people starving in egypt thing what's what's that about oh well that's just the theory that ukraine you know whatever all the wheat stuff egypt was the biggest exporter of ukraine wheat so importer you mean importer excuse me yeah import importer of ukraine wheat and russian wheat probably so they should uh washington state's got plenty of wheat if they're looking for some they do well one of the they're gonna be fighting all wheat fields over here on the east side yeah and and lentils

they're gonna be riding rolls royces to the lentil festival this year yeah one of the things i have read um is that some of those reports may have been may have been overblown in the beginning just because a lot of the a lot of the wheat production that's part of this ukrainian russian conflict is actually not really part of it that it's in parts of russia that are um that are far removed from this conflict and so shouldn't impact the growing season and there will be some impact is what i've been reading but that it shouldn't be um hopefully it shouldn't be devastating that there's there's still a lot of wheat production going on in russia and even in parts of ukraine that aren't going to be impacted by this conflict that could be that could be great so it it is uh

it's 11 o'clock do we do we wrap up here yeah we finished on a fun topic thank you whoever all right we gotta we gotta take a hard line on the timing here trying to make it a power hour a power hour and a half um so do we wrap this up with the disclosure is that should we do that uh yeah we'll have that in the beginning but i would do a disclosure and just kind of give you know do the podcast for whatever ratings yeah feel free to give us a review if you're on spotify because uh we're getting up there and that actually helps sort of uh new people find the show which would be great uh but without further ado uh brett and i are not financial advisors anything we say or discuss here on chit chat money or during the chit chat money

investing power hours, not financial advice or recommendation. We are, however, general partners of Irish Capital, so clients may have positions in the securities discussed in this podcast. Thank you guys for listening. We'll see you next week.