Chit Chat Stocks - Investing Power Hour #26: $GOOG Drops Stadia, Making money vs. Being Right, Is Housing Doomed?

Episode Date: October 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 recommendation. Now, please enjoy this episode. We are live on YouTube. If you're listening on the podcast, this is the CCM Investing Power Hour. This is the 26th one we do, and we do it live on YouTube every Thursday, 12 p.m. Pacific time,

3 p.m. Eastern time, right as we head into the end of the trading day. And the only rule is that we have no preparation. So we come in, we know we're going to be talking investing, we know we're going to be talking business, financial markets, whatever, but we cannot have any formal preparation, just stuff we've seen in the last week. Ryan, how are you doing this week? Are you ready to talk? I guess we have no idea. So any fun topics on your mind right now? well google is studying shutting down stadia i find that kind of interesting um for anyone that doesn't know stadia was google's cloud gaming initiative that they were working on um and they are not i think most people most of our listeners are probably our age and are like

familiar with the gaming landscape but if you're not familiar with the gaming landscape um they are not really a big part of it in any way or they haven't been historically and so this was kind of a random push i guess you could say yep and we'll get into it but first we need to talk about our new sponsor for the rest of the year and hopefully even longer and that is seven investing the presenting sponsor an exclusive sponsor on chit chat money uh seven investing members get the first of each month, seven research reports. As you can tell, they like the number seven at about 1,000 to 2,000 words. They write ups on an individual company and giving mostly a buy recommendation and why the analyst likes them. They have seven different analysts

that each write one up each month. If you want to learn more, I'd go back to some of our interviews with some of the team, check out their website. We're actually going to be doing a segment this week. We haven't named it formally, but basically just maybe talking about some of their free stuff they offer and making it a little segment that will be fun to discuss because they've put out some great free content as well. So check them out at 7investing.com. And if you go to the subscribe page, make sure to use our promo code money. That is M-O-N-E-Y. If you for some reason cannot spell money, it's in the show notes. But yeah, use promo code money and get $100 off your annual subscription for

life. That is a 25% discount on their premium subscription and we're going to be talking about them more throughout the episodes for the rest of the year so you get a great overview of what their offering is and we'll surely have some of the Sound Investing members on the show. Yeah, and

I'm looking at their August recs, which I thought were a fun bunch. One of them is something that we've been buying. Okay. I can't say what. We can't say either. Yeah.

So maybe that's the tease that listeners need. But yeah, the code is money. So interesting, Rex. Rex will come out. Shoot, they will have come out. Their October Rex will have come out by the time this airs on a podcast. That is correct. So check them out.

Perfect timing. And if you try them out, make sure to use their code money. All right, let's get to the topics today. Stadia. Start out with Stadia, Ryan. keep you on with that if you want yeah so the news this morning is that they are going to start to wind down uh the the stadia business apparently there were thousands of employees in this stadia initiative which is shocking to me i did not know they had that many people working on this

um i'm just kind of reading through it now i mean i saw the headlines basically they're going to like officially shut it down on january 18th um there was a lot of people that there was kind of stadia i think was eating its words probably now like the head of stadia was saying no we're really committed to this this is like google is really committed to getting into gaming and then you know three years later they're they've shut it down um and then stadia themselves three months ago was like, no, we are not shutting down, blah, blah, blah. We're really committed to this. Lo and behold, three months later, they are shutting down. So kind of interesting. Google's stock is down today. And that might just be correlation to the market generally,

because the market's down when we're talking. This is Thursday. So I think the NASDAQ's down like three percent but three point six but who's counting i guess everyone but they uh yeah so i don't think investors are reacting to the stadium news but what it does kind of tell me tells me two things first of all there's a duopoly in the console business well i guess you could call it what is that a triopoly but oligopoly if you include switch yeah oligopoly is oligopoly three all right well it's an oligopoly then oligopoly is it's many so that's how that's what you call it is there one for three uh i mean usually say oligopoly monopoly duopoly oligopoly is three or higher okay so i guess you could call it an oligopoly but really within like

the triple a games like i would say there's a duopoly pretty much switch is kind of its own thing um it's sort of its own you're just playing a different set of games on the switch um and so it for me confirms how much of a moat those two businesses have and how hard they are to disrupt because there's just no way like if any company were to do it to try to like be an entrant into the market today i think google would have the capability to do it and they're or they're at least doing it from a position of power there's really no way for them that they've basically thrown in the towel they said we were not a lot we weren't able to get enough users on stadia system that totally makes sense to me i don't know why anyone would be on stadia

over playstation or xbox so uh yeah they are shuttering it but it also tells me that perhaps google's core business right now is suffering a bit because they're trying to hit their numbers probably their profitability numbers and maybe the next year or maybe they think that the next year is going to be tough and so they are shuttering some of their more speculative operations to make sure that they meet their guidance does that am i reading too much into the tea leaves or do you think that's realistic uh it's definitely possible that they're doing that but i'd also hope they just saw that if they had all these employees and no users that it was just hemorrhaging money. And like they mentioned, the last few months, they're

doing some cost restructuring or however they call it. Basically, getting rid of bad expenses that are not really getting a good return on them. And this seems like a great candidate, especially if the expenses were much higher than we thought. You got thousands of employees, let's say it's like 3,000. You're each paying them healthy salaries because they're in that field. probably everyone that's in a technical role is, I don't know, $150,000 at least, probably closer to $200,000. That's expensive. And there's also the cloud costs. There's also the just game acquisition costs where the rumors were that they were paying, say, Take-Two Interactive, I think an upfront cost of like... I mean, it's not that relevant for

either of the businesses but like tens of millions of dollars just to get Red Dead Redemption onto the streaming service because no one actually wanted to bring their games on there so it kind of shows the network effect of the Xbox and Playstation ecosystems

where yeah Xbox and Playstation don't even have to pay anyone to get on there maybe they pay people to do exclusives but they're paid they're paid for that distribution on their platform. I mean, no, yeah, I'm saying they don't

have to pay other, you know, they don't have to pay studios to bring their games onto Xbox. I know, I'm saying they get paid. Studios pay them to be on their platform. It's like the inverse. Yeah, so, yeah, I mean, Stadia was

one of those where everyone said at the start it was destined to fail, and it was pretty obvious it was. I don't even think we we weren't even in the industry i mean i think anyone could have looked at that that just kind of has played video games and knows that that wasn't going to succeed springboarding on that it made me think does this make you optimistic or pessimistic because i didn't really know how to think about netflix's strategy within gaming um because it's a little bit

different they're not going full throttle and it's it's it's it's not trying to replicate any of the other uh current platforms yeah i i don't really know what netflix's gaming strategy is honestly because they've kind of gone all over the place between buying like mobile studios developing their own games and and the games themselves there's no real like theme to these things like some of them are uh like licensing or leveraging their own ip to build new game for it, but then some of them are just random. Like PoinP, they acquired a game called PoinP.

What the heck is that? I don't know. It's one of those mobile, casual concept games. Maybe it's puzzle type stuff. It has no tie to their IP. The waiting in line and sitting on the toilet games. Yeah, I mean, pretty much.

So it's just like there's no cohesive and they haven't been very clear about what their strategy is. They said any content spent that they're going to have on gaming is just it's going to stay within their content budget so it'll just replace linear content or like video content so it's not like it's on top of it it's basically just to replace it so at least you know they're not taking like extra risk on top of it but i would like them to be a little more clear about what their strategy

is i don't think there's any world in which they can really be a winner in the triple a business or like the console game business or whatever ends up being cloud gaming without acquiring a studio yeah well or they gotta i mean they'd have to spend a lot more money um i kind of think there's a just a few different issues with netflix's strategy where it seems sound like all right? We're going to invest in some games. We're going to make them a behind the subscription and they get a lot of use. That's another reason to subscribe to Netflix, right? But given the high... Okay. So if you want to attract lots of players to games, you have to make them super interactive, given the high bar with all the other games out there. And in order to make them highly

interactive and constantly having updates and all that good stuff, which is what all the popular games do today, you have to spend a lot of money on development costs. And in order to get that return on the development costs, you typically have to monetize through multiple different strategies with the upfront game costs, microtransactions. Advertising is not as big, but has been growing, especially in mobile. And with Netflix's strategy of not having advertisements right now, maybe with their launch of the advertising support, it's here, they will do advertising. And then not having game purchases with any a la carte and not having microtransactions, I just worry

the return on the investment because there has to be so much upfront cost is not going to be high. And if they stay with the really, really easy to make mobile games, it's just not going to move the needle because those games are a dime a dozen.

Yeah, it's also harder to calculate the return on investment if there's not a la carte transactions or a la carte purchases or microtransactions like if it's just a part of the bundle or just a part of the subscription

you can see like yeah they played with it like they played point P or whatever they played your Witcher game but would that have kept them there like is that the actual thing that's keeping them there I think it's probably hard to tell

without any other form of monetization like how much they really value it so yeah and also that's kind of yeah so the monetization thing is the other part

that frustrates me about like they have not been clear about the strategy if it's just a part of the subscription it reminds me

yeah so you don't know whether like okay if someone yeah they can maybe see if churn improves and we don't know the numbers

they know better than us but you have okay let's say you have a world two separate worlds

one where Netflix doesn't do games and one where netflix does games and you see that someone plays like this ex-individual user is playing uh video games on netflix in this other world you don't know whether they would not churn if or excuse me you don't know whether they would churn if the games weren't there it kind of reminds me of the amazon prime where they're spending 10 billion dollars or whatever on content you don't know whether that's actually keeping people around if you get what i mean

or whether it's just wasted cost and the churn actually isn't down because of it. Scotland, which, thank you for the comment. I think we agree on this one, says Netflix should lean into first-party games about their shows like a AAA Stranger Things

title. Ubisoft also, oh, I guess we'll keep the second one in the acquisition here. What do you think about that? But it will require lots of more spending. That's kind of the big hiccup here, right? i think it's just a it's a totally different craft like it takes like five it requires totally different talent to have success with it at creator requires just totally different teams

and typically hundreds of developers but yeah beyond just the actual developers like it's a different district like there's a creative component to it that's just different and requires a different skill set than creating a show I would imagine and a mobile game and a casual mobile game yeah so I would rather just see them

license it like Disney does with its IP yeah but that's just not a needle mover especially maybe this if you have Disney's level of stuff but I think Netflix should either

do what you're saying yeah and not embrace it heavily on their own platform or acquire a studio or excuse me a publisher like Ubisoft is probably you know small like Scotland said here Ubisoft keeps begging to be bought I agree

they have some great IP that could be used you could have Assassin's Creed you know with Netflix would be a great pairing what are the other ones Tom Clancy Far Cry I mean yeah but they just got that 10 cent investment yeah it's just

it's not gonna you know it's who knows though 10% is you know they're an investment company for through and through that they could if they give the right you know the right price they would go

with that but the thing is if they're if you're going to invest internally on NAAA games you can't distribute solely through the Netflix subscription because it will be a failure unless they can

crack cloud gaming which can make which comes back to stadia there's just it's the mountain they have to climb to crack cloud gaming Netflix is

high it's just I think near impossible for them the only how would they even do it there's no way there's just like

well you'd have to go to one of the infrastructure providers that's not what I mean I mean there's no way that you'd have to get buy-in from all the publishers which we saw

Stadia's problem with that A lot of upfront costs on that. And they didn't even get the users because you can play them anywhere. Or it'd be so costly to develop your own games to build on it that it just isn't worth it. It isn't worth the risk. And I'd be surprised if there's a ton of overlap. Yes, Netflix is a huge user base,

but not that many of them are probably intense AAA gamers. yeah they have i think estimated yeah you know they have 200 some million subscribers but like 800 billion active users just because the family overlap and the the password usage password sharing excuse me a very few of those are gamers what probably 50 to 100 billion something like gamers yeah i mean the numbers yeah i guess it opens up the pie for more than console gamers but like you got to get a controller right

we're talking if Netflix was going to do cloud gaming right yeah you'd have to you'd have to get a controller yeah and that's easier said than done it's hard to make one that works well yeah I mean maybe there's a world in which they can do it but

I don't see them getting the buy-in from the publishers at this point I think Xbox and PlayStation are like the railroads essentially like xbox is trying to become more but those two consoles are like the railroads where yeah yeah what's their their relationship and like ea and activision are like the standard oil or like um kind of there's a lot who was it who was it those getting sweetheart deals of like all the railroads where it's like we we have this relationship we don't want to ruin it by letting

you get like having to build for a netflix game or a netflix infrastructure uh i don't know Standard Oil, US Steel, I forget. Something like that. It's sort of like that. It just feels really hard to disrupt that relationship between the publishers and the console systems right now. Yeah, the only people that can disrupt

them are themselves, what they're trying to do by building out... I mean, Xbox is a little more ahead, but Sony and Xbox are both trying to build out cloud services and subscription services or whatever with the cloud gaming stuff. And maybe that evolves beyond the hardware eventually, right? But

they're the only ones that can do that because they already have the user base that they can utilize right they're the only ones that can transition

their core users over and then expand their user base no one can come in and start it's just there's too many hiccups I think

you know I think I find it funny I almost think the more that I think about it I think the path to success in gaming for them

is is AAA before mobile for Netflix Explain your thesis. All right. Let's say they launched a gaming component within their Netflix app. So you could pick either games or movies, whatever.

Games or linear TV, video TV. And then you can go, and they already obviously do have the scale. They have tons of, what'd you say, 800 million active users. People could go to the games. If they've already reached that level of scale, I think there's not that much harm in assuming that the development doesn't change that much for like EA and Activision to release a game on Netflix as it does on Game Pass.

You know what I mean? Like, so if the cloud gaming, if the two basic games are the same. In a world where the infrastructure for cloud gaming is all sound, it's all ready. I think publishers would be willing to put their stuff on there. Netflix could basically replicate what they did with video

where they're using everyone else's content running probably a higher price subscription for gaming included and then occasionally releasing their own games as well and doing it gradually that seems more viable than this like

incoherent mobile strategy like I'm not sticking around on my Netflix subscription because I had a fun time on Point P or one of the best mobile games the Stranger Things mobile game yeah there's no ties other than roblox there's no like there's very little mobile gaming loyalty

i feel like like i am not going to you mean on platform or what so let's say if a game was only on netflix i couldn't get it anywhere else on my mobile phone and i didn't have a netflix subscription i'd probably just play a different game there's so many options yeah i agree with that also the here's the only hiccup with that say the netflix triple a strategy of you know licensing or whatever and then trying to produce their own and where it makes it way way harder than uh than what they would do in tv and movies is that in video games for triple a especially a few franchises dominate playtime and the same franchises seem to dominate each and every year uh well you know sometimes a new one comes out fortnight uh well valorant uh gosh i'm

forgetting a few other ones but it's few and far between apex legends um so if they were trying to produce their own triple a content it would be like you can't just say okay we're going to lose the office and that's fine it's basically like if the office had not just how popular was on netflix it was extremely popular netflix it would be like if the office was five times as popular from watch hours with how the comparison is to a game like grand theft auto fortnite fifa whatever yeah but i did see that once you if you're paying like a subscription to access to all these games like within game pass i've seen a lot of people say that they're more willing to try out new games because it's included in the membership so maybe that sort of

is an equalizer across engagement time. That could be true. I still think it would be when... It wouldn't make it as diversified as TV or movies, though. I don't think. No, I mean, you still have the...

On any games that are interactive, you still have to have the... You have to reach a certain level of scale. Here's a good point by Scotland as well that I think you brought up earlier, but forgot to bring up for the problem here. You have to make the games exclusive to Netflix and you can't do that and still be successful

because the only reason the big publishers are successful is because they're across everywhere. If a Netflix game was not on PC, Xbox, PlayStation, Switch is kind of its own beast, but still. Yeah, you're right. You know what I mean? You'd have to get such large scale to get that return on investment.

Yeah, it'd be inferior also to Game Pass. If they were exclusive, like if they just kept it all on there. Yeah. This episode is brought to you by ourselves. If you're hearing this now, we know you're a Chit Chat Money listener. But if you want to get more than just our free episodes, you can become a Chit Chat Money Plus subscriber. Within the subscription, members get access to our weekly Not So Deep Dive episodes, our monthly episodes detailing one of the holdings in our investment fund, Arch Capital, and

then they also get written work, so newsletters and research files to go along with each Not So Deep Dive episode. Am I missing anything? We should talk about the themes that we do each month. So each month we choose a theme based on whatever we want. So last month we did video games. This month we're doing housing. Next month we're doing engineering software.

I believe. And then the following month we're doing website and e-commerce software. We choose those because it's, you know, a great way to investigate a different industry. And if you want to subscribe to CCM Plus, go directly through Apple Podcasts or Spotify or through the link that will be in each one of our show notes. It is only $5 a month. You heard that right. $5 a month. Perfect to try out. If you like what we have to offer, we hope you'll subscribe. All right. Let's talk. I think we've hit 20 minutes on that. So let's do another topic. One more, unless you have final thoughts. Well, while we're on the gaming thing, apparently this Saudi Gaming Investment Fund is thinking about, they're apparently rumored to be acquiring a company for $13 billion like tomorrow. Well, what is that? Hopefully it's not.

I have no idea. hopefully it's not the two ones in our portfolio that are traded higher multiples it probably wouldn't do it I know

$13 is such an awkward like I can't think of any company that would be I pray it's not Take-Two well I mean that would be

come on that would not happen but because simply because Take-Two is trading like a $20 billion market cap however

it's probably private right it could be like the maker of Ubisoft Ubisoft oh yeah Ubisoft's a good choice. Maybe you're going to be eating your words there.

But they just had the Tencent investment, so... It feels like they wouldn't... It feels like they wouldn't have done that Tencent investment if they had this one, if they had Sacrosysion queued up. The other thing is, like, maybe... That's true. How big was Capcom?

Capcom's not going to sell, given their philosophy, though. Capcom also was much smaller than that. Much, much smaller. If we're looking... Let me just give a quick look on... yeah I went to the US it's like 5 billion dollars

I just don't that would be quite the investment I'm guessing it could be forgetting I think it's Riot Games makes PUBG that's very very popular Riot Games I think that could be it could be private if you get what I mean

you know not a publicly traded company is it PUBG I have no idea there's so many games no League of Legends and Valorant I mean yeah So that's legal edges of Valorant are very, very popular. All right. Well, that could be exciting. Good news or not good news, but just something to follow. Seen a tweet from an hour ago that says Meta CEO Mark Zuckerberg just told employees the company is implementing a hiring freeze and warned there will likely be more restructuring and downsizing to follow. Okay. Hear me out. Could be good. Could be good there. That's that could be.

is this does Oculus turn out to be Stadia in two years oh the user adoption has been better because we've seen the numbers on the hardware purchases

however the surveys on whether people leave them and don't play them after like two months are fairly high so I think there's a chance but not as high of a chance because they do you know they are convincing people

to buy the hardware but if it's like what is it 95% leave them sitting on the shelf after a few months of playing some bad games and they get some headaches yeah but who knows in October which I guess now

this month they are apparently launching the next gen so I guess if that's a huge leap forward and some of the headache the stuff all the problems of VR go away which I doubt they will but just this next generation I think

you could be right on Stadia I don't think they're going to let it happen though because of all the money they're investing yeah that's true alright let's move topics we've hit on gaming for a while we got a comment here about Spotify's margins let's

see thank you Sandeep Spotify margins are barely gap positive long-term forecasted to be less than 10%. What's the bull case at this price? Well, I think simply if you're bullish on music streaming in general, which has been a nice little steady tailwind, and you're bullish on their investments into podcasts where they've dominated market share over the last few years, or dominated, excuse me, market share gains

and are gaining on Apple Podcasts and other people, and then audiobooks and some other audio mediums on top, but that's really not important today. Those are very speculative. You have a market cap of $17 billion. Enterprise value is slightly lower. I think gross profit is about $3 billion. So we're at about five-ish times trailing gross profit.

And they can convert about 40% of that, I'd say, to cash flow. And if we look at gap operating margins, they will always be lower than cash flow because they have a permanent working capital advantage, similar to Amazon. So I'd say at their steady state, you're probably trading at 15 times to maybe 15 times, say, free cash flow here. Or say operating cash flow. Maybe they have some capex. Let's make it a little more conservative. Operating cash flow. If their revenue keeps growing, I think that's how you make money.

Sorry, that's a lot of numbers there. Keep going. Their guidance is for greater than 10% operating margins. Trying to see what he said here. To be less than 10%. Yeah, no. Long term, I believe they got it for north of 10%. That was operating.

So I guess net might be lower, but yeah. Yeah. If you go to their investor deck, I think they lay it out. They're a little optimistic, I think. Maybe even more optimistic than us. Yeah. They said $100 billion revenue and $20 billion. Or no.

Yeah. Did they say $20 billion in operating income? So they're trading at less than one times 2030 operating income. They hit those numbers, but that might be a bit aggressive. We got another comment around, hopefully that answers some of your Spotify stuff. We've also written up, and the financials can be tough to talk over on the podcast. So we've written up Spotify a couple of times on the Arch Capital website. and we just did a show on them for the ccm plus little tag there i know people will be seeing the

ad during this episode but ccm plus five dollars a month you can listen to that episode of why also i know i hate not i kind of hate doing this because it's like well if you want our full research you got to pay five bucks a month but within the ccm plus subscription thing uh there's our research files and our financial models in there and that pretty much lays out the uh the bull case in a quantitative way or on a spreadsheet. So maybe it's a little easier to digest looking at it on a spreadsheet. So if you want that, feel free to subscribe and,

uh, uh, do it on whatever your podcast player is. And then just, uh, email us and we'll, uh, we'll throw you in the drive.

Yep. That is, that is how it works. Uh, all right, here's the other comment. How do you guys think? I'm sorry.

I think you just missed the question. Caesar here. Thank you for coming back. Caesar, about the pundit calls for the market needing to fully capitulate. Basically, what he means here is that there's people calling for the market to go into that sharp downturn like there was in 2009, right at the end where everyone's totally panicking. He says, they, the pundits, seem to be obsessed with hitting a certain VIX number, but it seems arbitrary to me. I think you're right. Yes, that is having a lot with market downturns, but they're extremely hard

to predict if you're someone that has the more majority of investors are you know hopefully have a job and uh have income coming in uh if you see stocks at good prices just buy don't worry about timing the market it's futile um and yeah maybe you know some better opportunities will present themselves a couple months from now but maybe they won't it's so So it's a coin flip, really. So that's not how we think about it. Some people might think about it differently, but that macro stuff, the VIX and whatever,

I've yet to see. What's the good, like, has there been a... Is there the legendary investors that are macro traders are very few and far between? What is there, Soros, Druckenmiller? Maybe that's it, that I've had stand, stood the test of time. But even Druckenmiller...

has some of his calls have been wrong? Yeah, well, of course. You know. So have Buffett's. I mean, so have some of his. I mean, you can make money still, even if you're wrong sometimes,

obviously, but no, I think like everyone's saying like we haven't even, you know, we're not even close to capitulation yet. It's like,

who cares? Yeah, it doesn't, I don't. It feels a little pretentious to me when people say that. Like, I don't know you guys don't know how bad it can get

it's like I walked uphill to school in the snow both ways miles it feels like that like the old kind of old guy yelling at the clouds yeah the two things there the one the more irrationally bearish people get the

more you should think that it's a good time to buy also you probably should just ignore what other people are thinking because it just clouds your two oh shoot I forgot the other one Oh, gosh. It's always going to seem the most bearish at the lowest. That's what I was going to...

Yeah, exactly. It's always... Everyone, by definition, the lower prices go, the more bearish everyone is going to seem. Because if they're more bearish, the prices are going to go lower. They work hand in hand. It's not like everyone can be bullish

when the market was in the end of 2009. everyone was bearish so you have to say okay I think the right thing to do unless you're a David Tepper a Druckenmiller or whoever you have to just ignore that right like it's not it's just the

return on brain damage is too much you're probably going to make mistakes so we just ignore it fully at the same time those thoughts like the pessimistic thoughts certainly fill my head more so in these moments the uh but that's you have to fight them yeah it's weird you have to fight your own brain and be like but that means it's like but they're like okay let's say the recession gets worse right which is a very real possibility unemployment could go up from

here inflation could continue purchasing power consumer spending could get worse yeah but the Those already got priced in three months ago. I'm talking about for your individual stocks, though. For your individual businesses, the fundamentals could erode. Yeah. But that's got that, I mean, what I think, unless for some stuff that's still a pretty good valuation, I think that got priced in on average a few months ago. The market typically is pretty good at snuffing out these things.

And I think they're very... It is typically. i'm a big uh we're big uh like anti whatever uh efficient markets but usually it's fairly good at saying okay like there's a lot of bad indicators here there's a reason we're selling off and the numbers have looked bad six months now you know six months ago you're like why are we selling off except for outside the ukraine stuff you know things look fine but six months later you're like okay i get why we're selling off but when things are the worst is actually when like the market will how what i'm trying to say here poorly is that the market typically

can uh historically has recovered before the bad news ends so like using that as a proxy it's just not smart in my opinion okay i saw and this is kind of a shameless uh a shameless plug for our sponsors now but i read an article on seven investing it was one of the free articles and it was a good title basically said would you rather be right or make money um before getting into the article what what are your thoughts well there's a lot of ways that and this is by christoph uh sorry i can't pronounce your last name pia karski uh you might be laughing if you're listening to this christoph but one of their lead analysts yeah uh they might be going a few different ways here but i think that is correct like it's a it's a correct question to

ponder um but yeah continue in investing what would your answer be oh uh i mean make money but you have you want to be right but usually you have to be like usually the two go usually it usually goes fan it especially if you don't short yeah so what if you were completely wrong and made a bunch of money would you be fine with that uh yeah

but usually if you do that you're going to think you're right and then make even more make a bunch of mistakes like it is hard to be wrong and make money yeah well you can get lucky

you're right for the wrong reasons yeah I guess but yeah what did you think of the article I thought it was interesting I also think it's like applies to more than investing like

I think you see it in politics all the time and this is not on the making money part but it's like would you rather stay true to what everyone else around you believes or would you rather like face the truth and it's like it's like that monger quote of uh it's like if being right makes you unpopular with your uh with your peer group

then to hell with them yeah get new friends or whatever yeah yeah monger doesn't have many friends but he is right a lot he's lived that out no he doesn't care he's down in montecito hanging with oprah um here's yeah here's a quote from the article i thought was interesting again use our sponsor or excuse the user code for our sponsor uh money i get a hundred dollars off your annual subscription very cool to try out and you get that for life um and also if you're kind of just interested in their philosophy, they have a lot of free stuff like this article as well we're going through. Here's the quote. When investing in equities, being right often does not mean being profitable because of built-in expectations in terms of the market price at

which you can buy. Rather, it is the magnitude, thank you, Christophe, by which you're right that your wealth will be built on. And for there to be oversized returns, most people have to be betting the other way. Usually, that's how gaps between perceived value and actual value are made. That kind of goes back to the topic we were just talking about, where during the bear markets, when everyone's panicking, some stocks in the short run might look like they've been terrible investments. However, if you think it's a good investment and everyone else thinks it's not, that's likely where the best opportunities are. And the upside, if you're long, you know excluding shorts here this long only is theoretically infinite i mean

you know it's not just that you can double your money you can 10x your money over a long long period it's interesting we don't typically have that philosophy where make a lot of bets and they're higher risk but some of them work out extremely well but that can there's a reason that has worked for venture capitalists um you know people like seven investing stuff like that where it's hard to feel like, okay, we're taking that big risk on this company. And yeah, 70% of our stocks are going to be wrong, but you can only lose 100% of your money there.

And most likely you're not going to lose 100%. You'll probably get cut in half maybe if you're wrong on that stock. But the ones that are right are going to go up by 10X over say a decade. And that makes up for all the losses. So it's important to, I think doing that upfront,

if that's going to be your philosophy, I know a ton of individual investors have that philosophy. Having that, thinking through stuff like that or reading articles like this up front can be helpful because you know, like, okay, when two or three investments go poorly or five or six or 50% of your portfolio was duds, you know that that's okay. You expect that to happen and you move forward. Yeah, I agree. Um, we, uh, we had, well, there's two things.

We had a little bit of a debate yesterday around buying a home, which I think is worth discussing now. You think buying a home right now, well, I don't think, I wouldn't say you think, it's the least affordable it's ever been as a percentage of income, right? Yeah, my thoughts are, if you can wait, but here's the thing, people are. I retweeted something to hopefully you'd see it because I didn't think of texting you to prove my point. Oh, gosh, where is it? Where is it? mortgage applications for a home purchase are down 29% from a year ago, 43% from their seasonally adjusted peak in early 2021. So I think people aren't- Prices are still elevated?

Yeah, it takes usually multiple, it's not like stocks. It takes a lot of time for price adjustments to flow through. A lot of people are the anchor to the high price. What if, though, there's just such a shortage that

they don't have to come down? Should prices be coming down significantly? Should they follow the mortgage applications? That's what I'm saying. They are, but it's going to a lagging effect? Yeah, there's a lag

effect. Here's just a thought that concerns me on just... All right, let me put you in a position. Let me put you in a position then. Or actually, all right, go ahead. Finish your thought. Is it from a broad economic perspective as someone who is not an economist,

if prices stay the same, so much more money and the number of people that are buying homes stays, say, roughly equivalent. so much more money is going to be going to mortgage payments than any other stuff. It just, I think, will crush the economy. And yeah, okay, a lot of people are locked into stuff,

but incrementally, when I say crush the economy, that's wrong. But what I'm going to say is crush the spending power of a lot of these people, where they're incrementally spending on whatever, consumer goods, anything, will be diminished because you're spending twice as much on your mortgage. Robert Leonard It's good. It'll make us more rational.

What? It'll make us spend on things that are important, not waste money spending on stupid stuff. So you think that shelter costs, we should aim for those to be higher over time? I don't think it's that crazy that shelter costs are, by and large, the biggest expense. oh that's not I mean no that's not crazy but I don't think

our goal should be for them to be higher I think our goal should them to be as low as possible yeah I suppose I don't know

I feel like these things have a way of sorting themselves out oh it'll sort themselves out yeah and I think the prices are going to go down either like

okay so that's a perfect question that's a perfect perfect leading to my question all right scenario you're married you have two kids young kids you're in let's say a two-bedroom apartment would you wait to buy a house you have the money you have the money to buy the house everyone's everything's very there's every situation's unique you don't know well how big you try to time it or would you try to like you know you're planning to have a bigger

family let's say would you you know how big is your apartment how what neighbor do you live in I mean all these situations are unique I don't think you can pinpoint you have to I don't think you'd wait I don't think like I know but that's a is that is this is a straw man argument I think that's I think that's what you like

I think you can't use the specific scenario straw man is opposing a position into an extreme belief and then arguing it no no it's not it's using just one situation I don't know what if this is strong using one specific anecdote to say the whole thing is wrong

I just think that that's the specific scenario. That's not everyone. And that when you're looking at the stuff, you just have to look at the macro data because every situation is unique. Yeah, okay, some people are going to want to buy a home because they have a big family and it means stuff for them.

But in aggregate, if mortgages are way, way more expensive and prices don't budge, that it's just something has to give. It's not sustainable. You had a tweet that said something along the lines of why would anybody buy a home

right now? Yeah. Well, it's a tweet. I mean, come on. I know, I know. But I'm saying if you were in that scenario, would you... In that case, it's kind of like a, oh, well, I'm going to wait until prices get lower kind of thing. If you were in that scenario, though,

would you wait? You can rent a home. I mean, you can rent a nice home. I know there's people that rent homes. You don't think... i mean yeah i guess you could rent it but what's wrong with renting i feel like that's probably correlated with whoever the owners is his payments that's true rent to the home would probably go up so yeah but if they locked in if they have lower mortgages then you would be paying now it can be lower if they're locked in at a lower mortgage rate yeah but at the same time

It's probably like, it's also correlated to the market around it. So like what rental prices are going for, you know what I mean? Which I think in general is probably correlated to affordability. Yeah. Yeah. So. So why, but. I'm just saying like, I would buy a home, not like the current home price.

if I'm buying this for 30 years and it feels like the right home and I can afford it isn't as big of a deal to me. If I think it'll go down over the next three years, five years, I don't really care.

If it feels like it's the right need. Look, if you can afford it, that's fine. But under the current conditions, lots more people cannot at the current price. I mean, yeah. If you can afford it,

yeah, why not? And you can still do everything you want to do. But it's just at the current price of people, well, not compared to when they were sub 3% mortgages versus 7%. It's just not like, where's the money coming from? That's just my question. Scotland says, what are your thoughts on Powell saying housing needs a reset? Correct. As two people that are not homeowners, yes, housing needs a reset. But don't you think every non-homeowner thinks that? Exactly. That was saying that as a joke. All right.

All right. Well, also, this is my thinking. The Fed, don't fight the Fed. I know that's a joke people use. But seriously, if they're going to crush housing, let them. Don't fight them. They want to crush housing because housing is such a big portion of inflation. Well, it's happening.

People are not fighting the Fed right now. Mortgage applications are down, what'd you say, 29%? 29%. 43% from the seasonally adjusted peak. Would you rather buy a house right now or go long open doors? Depends what house, obviously. Every house is unique, right? You could get a steal somewhere, but yeah, I'd probably rather buy a house than go long open door.

I mean, come on, that's a zero. so I guess the SBC is fake then that is true credit to gosh what's his name I'm blanking on his name Redboy or the comment Willis Capital on Twitter

we've had him on the show like a long time ago but it's been a while we should get him back on alright did you see this Netflix is going to have a show on the rise of Spotify yeah I saw that I thought it was strange because

one, it's not that exciting. It's not like Wii World. Two, is it just for the people that are bullish Spotify? I don't understand. I don't see what the audience is here, but I will I know we will be watching as people that are interested

in that business, but look, maybe they should take that content spend and put that on some video games. Maybe they could get better ROI. Who knows? It could be a good show. I know that maybe that moment where Steve Jobs... People like Spotify.

Maybe when... Yeah, it's a popular company. People either... Well, people like to hate on it too. They think it's evil. Which it's not, but that's for another time. Now, that moment in... Remember the story of how Steve Jobs called up Daniel Ek at like 1 in the morning

and then just breathed heavily into the phone. That could be a great moment. But I doubt... The rest of it is going to be boring as hell. It's them just like... If they get a good jobs character and they have that iTunes kind of competition type deal where they're the big bad ones and Spotify is trying to defeat them and then the labels are colluding, that could be interesting.

You could have the labels, you have some crazy... Maybe people will finally understand that Spotify aren't the bad guys. If they pin Spotify as evil in the show, as the big evil people, then the show will be bad because it's just hard to do. Because it's like, okay, you have some tech coders and they're the big evil people. it's not that exciting but if they have you know the labels you know you could have some like basically succession type characters at the labels the big you know i you know what sean parker is gonna be back in full effect sean parker will be in there i don't know if they

get justin timberlake again uh like in the social network um i think there could be yeah now that i'm thinking about it if they do it correctly with the labels and stuff that could be fun However, there's not that much there. I think it's maybe a limited series. It could be fun. I found it. Someone tweeted this out. Spencer Walsh, who I would love to get in touch with,

but doesn't have open DMs. So if you hear this, please open your DMs. He posted this sort of quote. I think it was from a conference call, but it's from the FIGS CEO. You remember Figs, like Scrubs? Yeah, she was on Invest Like the Best, so it could have been from there too. Okay.

Oh, yeah, it was from there. Patrick says, what else do lazy companies do? And she said, outsource too much. They look where everybody is. They go to the competitive market, not to the place where nobody is. They overhire. They have five times as many people as they need to actually build a business the right way. They look for shortcuts on the product. Funding Facebook and Google all day or meta and Google

all day is not the right way to build a brand. I was like, all right, I need to keep them on the watch list after hearing that because that sounds like a very sound, that seems like a very rational philosophy right there. Like, wow, that's just a breath of fresh air. Yeah. Hearing that made me, that was probably the most, like I was not that sold on the business because i don't see how scrubs could i don't understand the tam for scrubs but it's just yeah i mean it's just uh the what you want to call it it's just tough the retail but you know apparel stuff excuse me apparel um but i like that yeah that was great now on the flip side of bad expenses at a company

here's a tweet someone was exposing i think there's like an expose on mckinsey bad consulting practices um this is a tweet from mike forsyth don't sorry i don't know who that is but verified account i don't know here's a grab from a slide deck mckinsey prepared for altria around 2016 showing a mock-up of an iphone app for a loyalty program for marlboro cigarettes buy smokes get little prizes like bottle openers. What a waste of money, one, to pay McKinsey a lot of money for this really poor looking PowerPoint slide about how you can make an iPhone app to give your users a loyalty program. Wow. What an amazing idea, a loyalty program. Who could think of a loyalty program? Oh, wait, every business in existence has thought of a loyalty program. And second,

But I mean, you don't need the loyalty programs for cigarettes. They have a highly, like the whole point is they're highly addictive and you don't need a loyalty program. I saw that and I was like, the expenses that are going around at these companies is just, especially large companies, is just absurd. And that's a business with like 50% operating margins. Yeah, the businesses have to be so good that even the McKinsey fees, McKinsey fees,

excuse me, I don't even know if I ever say that. It's McKinsey, McKinsey, whatever. McKinsey. They don't even, yeah, you can't even see them. All right, we probably got time for one more topic. I don't know. We're doing housing this week, starting a new recording. Tomorrow, I guess on that new theme,

housing seems interesting. I guess we'll probably be discussing the housing market because all I thought about when we were looking at the first company we're doing at NBR is you have to have a little bit of thoughts of where the housing market is going to go when you do your valuation work on one of those. And it's tough. Even though we were both debating that, it's a big unknown. A lot of things could happen. And a lot of it is controlled by the Federal Reserve, which is out of your control.

Okay. Yeah, but I would say that the housing shortage, the supply of homes is more important than the price of homes for these businesses. Wouldn't you think? Sort of, but also what if

they're all, okay, other than Zillow, the rest of these are home builders that we're looking at. So I would think that They care more about volume than pricing. It's hard to double your volume in a short period of time. And if prices go down a lot, that'll affect your revenue and margins. I mean, the operating leverage will be there on supply costs.

So I think it matters. Yeah, I suppose. But we haven't. That is a tease. I know what you'll be saying about most of these businesses then. Hey, who knows? I like the one we were looking at first. Here's another topic.

that we can close off with. The mysterious ad slump of 2022, Vox article. Here's a quote from it. You can ask someone who runs a privately held media company off the record how their business is doing. I'm glad I run a private company, they said, which doesn't have to report its results in public. One of them told me this week. Seems like the advertising landscape as a whole is suffering and i think it's pretty easy to see why because there was such easy targets uh during the pandemic to advertise products when people had all this extra money and stuff like that and now the return on that is just so much lower um so i think just looking at like having that at like the advertising landscape backdrop or excuse me having that the dynamic

where the advertising whatever is uh just the overall spending is kind of slowing right having that as a backdrop when looking at earnings reports the next few quarters will be important um because some numbers might not be as bad as you think uh and some numbers might be actually a lot better than you think if you get what i mean all right we got two minutes two questions or two comments i guess in this in the chat the new domer show with evan peters is great on netflix other than that netflix hasn't made much of interest to me recently i agree i have not spent a whole lot of time on netflix lately yeah i wonder if the fantasy shows from and then the star wars stuff is kind of hurting them if you know what i mean amazon's hbo's that could

be hurting them currently because both those are getting gigantic audiences i'm assuming and or from star wars will get gigantic audience and that's time spent that could be on netflix yeah Rob McElhoney who is from the show Always Sunny in Philadelphia posted some picture

of like the most popular shows right now and it was okay yeah number one House of the Dragon

um number two She-Hulk Attorney at Law number three Lord of the Rings The Rings of Power She-Hulk

no way She-Hulk oh thank god yeah dang that Marvel the Marvel is uh still alive and well

even though we were haters I think this was before Andor and then for Welcome to Wrexham which is their show on he's talking in his book that's on FX

he's also at Apple I don't know if this is ratings or it just says most in demand breakout series so most in demand I would say that means Netflix is not on that list of those four but the Dahmer show is kind of interesting

I agree And then Cesar says, I feel like no one's talking about the political risk with Brazil's elections, but maybe I'm overthinking. That is correct. I had no idea there was a Brazil election or risk there. So, yeah, we have no thoughts. I mean, it might be worth looking into it. Yeah, I don't know a whole lot about it. I heard someone mention it, but I couldn't remember who. there was oh Rob Citrone runs some big portfolio

he was on capital allocators a while ago and I think he talked about it if I remember correctly is there an upcoming election is it this fall I'm not sure we can do that could be interesting however I might be getting the wrong country he might not be talking about Brazil also like what's going to happen

is their currency going to devalue that's already happening but it could get a lot worse. I might have shrugged my shoulders or something bad there. I don't know anything about it, but that's going to do it. Thank you all for tuning in.

And with the questions, Scotland and Caesar and others, Sandeep, thank you. Check out 7investing, Code Money. We're going to be talking about them a lot over the next few months. So if you want to support the show

and get better research in your portfolio, use Code Money, get $100 off your annual subscription. Remember, we are not financial advisors. anything we say on the show is not formal advice or recommendation. We are general partners at Arch Capital and clients may hold securities discussed in this podcast. Thank you all for listening or watching. Remember, 12 p.m. Pacific time every Thursday or 3 p.m. Eastern time, right before the market is about to close. Thank you all for listening. We'll see you next time.

Hey, Simon, we wanted to ask you a few questions about 7investing so listeners could get an idea of what they're getting. What inspired you to start the company? And what exactly is sub-investing? Well, hey, Ryan, thanks again for having me. From years of working in the investing industry, it was inspired by conversations with people that would just always have kind of the same negative perception of the stock market, right? It's too hard, or I don't have time for this, for this to stack against me. And those conversations kind of led to say, hey, we need to create a site that actually does inspire people to say you can take control of your financial future. You can invest in stocks. You can find good stocks to

buy and hold for long periods of time. And at the end of the day, too, we know that everybody is different. We don't believe that there is one stock that fits for everyone, right? Maybe you're a dividend loving, you know, paycheck cashing income investor that might want an option that's going to be a lower risk dividend paying stock, especially right now with the economy being what it is. And then other people might say, hey, I'm ready to hold on for 20 or 30 years. I want to take some swings for the fences. Let's go after those high growth opportunities. And so I said, this could be something that would be even more fun rather than just doing educational and by myself. I said, what if I brought together a team of seven advisors, all with a diverse background

and a diverse perspective of the stock market so we could uncover more stones and look at a bunch of different stocks with a bunch of different investing styles and a whole bunch of different industries. And so 7investing is kind of the genesis of all of those that we started in March of 2020. And we said, let's look at a whole bunch of different stocks. Let's do the legwork of the analysis. And let's present our seven favorite actionable ideas every month for investors to choose from. And let's start the conversation about which of these stocks is right for you and which one might be the right fit for your portfolio, knowing that investing is a very personal thing. All right. If you are a subscriber of 7investing, what do you get? Can you give an

overview of what subscribers get? On the very first of every month, Brett, we release our seven new recommendations. So we are coming up on October 1st here, at least in the recording of this. And on October 1st, we'll release seven recommendation reports. Some of them will be low risk. Some of them will be high risk. Some of them will be biotech. Some of them will be financial services, we run the full gamut. And as a member, you get immediate access to all of the new reports. But you also get access to all of our old recommendations as well. We track all of them in real time on our scorecard at 7investing.com slash recommendations. And we also provide company updates on all of those previous recommendations as well. We check in on how things are going.

And sometimes we even see red flags that we think people should be aware of. There's risks for any opportunity at the time that you recommend it. And sometimes it's really needed for investors to kind of understand the risk and reward relationship. And then the last part of it is in addition to issuing new recommendations and providing updates on them is we know that this is a long-term journey. We know that investing is something that we want to take years, if not decades, to accomplish whatever we want to get to as the end goal. And so we always, every month, make it a point to be very available for our subscribers to ask us questions. We have a members-only call right in the middle of every single month. We have a community discussion forum that we have available 24-7 to not only talk to our advisors, but also other investors. I think that's one of the key differentiators for 7investing is that, you know, we know

this is a long-term journey. We know it's a very personal thing. We know they're going to have questions along the way. We don't want to just broadcast stock picks and disappear. We want to be here with you throughout this entire journey. And you mentioned, so seven recommendations each month. Sometimes those might be repeats, but obviously there's a lot of companies now in the 7investing universe.

So how do members get a grasp on the advisor's conviction around certain ideas? Like which ones do they have a way of knowing whether advisors like certain ones more? That's the most common question we've gotten, actually, since we started is what's your favorite ideas right now? We've done the diligence on almost 200 unique companies now and put them on the scorecard and people would say, hey, this is too much to keep up with. How do I even know where to start? And so we've kind of evolved as a company.

One thing that we've started doing is best buys every month. Each advisor gets to pick any of their or another advisor's previous recommendations and put the flag on it that says, this is my best buy for October. And we publish those for subscribers. The other thing that we've started doing is issuing conviction ratings on companies that are also right there on the scorecard. So if you see a previous recommendation, we go everything from potential sell, which is the most negative flag we can put on a stock, to strong buy, which is the most positive

bullish flag that we can mark things with. And you can filter through all of those to really quickly see, here's some of our favorite opportunities. And we've taken this even one step further now, Ryan, which is we've created a strong buy portfolio, where every quarter now, we've gone ahead and self-selected as a team through pretty methodical process, our 20 favorite ideas, our 20 highest scoring companies that we've collectively come up with, our favorites of the entire scorecard. And we put these into what we're calling a strong buy portfolio that we publish each quarter. Also available as an added

benefit for no extra charge for seven investing members. All right, last question here. What does it cost to become a seven investing subscriber? And as we'll talk about, or we have talked about before, if you're a listener, use code MONEY to get $100 off your annual subscription. That's right. We do have a monthly option. You can come in and check out the entire scorecard for a month just to see what you're looking at for $49 a month. But our most popular plan is actually the annual option because it's at a discount to that. In fact, we've got a discount on the discount, like you mentioned, Brett. $399 for the year is our annual option price. But if you use MONEY, the Chit Chat MONEY promo code, it's down to $300. So you're basically getting

the subscription for half price, if you sign up for the annual offer with that promo code, that does not expire after the first year. As long as you remain an active subscriber, you get to lock in that $100 off a year benefit. All right. Well, as he mentioned, use that code money. Thanks for joining us, Simon. Thanks very much for having me. Thank you.