Chit Chat Stocks - Investing Power Hour #29: $NFLX and $TSLA Earnings, Reflecting on Mistakes From 2021

Episode Date: October 23, 2022

The CCM Power Hour is a live-streamed show every Thursday at 3:00 pm EST. On the show, Ryan, Brett, and a rotating list of guests have an unscripted discussion on a variety of investing topics. You can watch the show on our YouTube channel here: https://www.youtube.com/c/ChitChatMoney Follow the show on Twitter: https://twitter.com/chitchatmoney ****************************** Interested in becoming a member of 7investing? Subscribe with code “MONEY” and get $100 off your annual subscription for life: https://7investing.com/checkout/ ****************************** Learn more about your ad choices. Visit megaphone.fm/adchoices

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. All right. It says this meeting is being live streamed, so we are live. This is the Chit Chat Money Investing Power Hour. This is number 29. Nothing special really with number

29, but we keep chugging along and doing one of those each week. The only rule for this show is that there are no rules. We're going to explore whatever investing or financial topics we want. And they are live on YouTube every week, every Thursday, 12 p.m. Pacific time, excuse me, three o'clock Eastern time. So if you want to join, ask us questions. We hope we'll get a few in the chat today to explore some new topics. And we got earnings this week, which will be fun to discuss. I'm sure we're going to talk some of the big ones, although this is kind of the teaser week with Netflix and Tesla and a few others. And next two, three weeks will be the big one. But first, let's talk about 7investing. Our friends, our exclusive sponsor, presenting

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before we get into the topics on seven investing? I don't think so. All right. It's well worth it. They do the videos. They do videos as well. Well, I think we'll maybe talk about that for the middle or ad as well.

Thanks for the little tease there, but yeah, use code money, get a hundred dollars off your annual subscription for life, support our show, support them. they have a great service over there alright Ryan any topics this week

that you've seen Philip Morris raised its offer for Swedish match see this yeah or not confirmed yet right rumored yeah I don't know I'm reading the first paragraph here this Wall Street Journal

article it says the offer is going to be Thursday oh 116 Swedish Krona what was it 1.0 I think it was like a 16 billion dollar

valuation but they're gonna apparently up it god but the original was 1.0 what was it 1.06

to 1.16 I mean that's not that big of a difference because the Kronos devalued that much especially if you're a US investor it's not

not really that different yeah interesting time over there though Tobacco Land over the last two years I think I've grown an appreciation for how difficult it is to find a business that's like

truly a compounder in any environment and now it just irks me that's what Swedish Match was and now it's getting taken away they took it from us yeah smart move over there by

philip morris international they seem to have a good head on their shoulders um netflix earnings netflix earnings you want to hit that yeah i guess yeah i don't i don't know that's pretty boring quarter yeah i mean it's slightly concerning that the show about like a ruthless serial killer was more popular than the house of dragons but well isn't house of dragons just a bunch of ruthless serial killers all right if you if you'd watch the jeffrey dalmer documentary you might you might be eating your words i mean they're yeah they're both you know they're very i mean i don't know how's the dragon like a light show do you think it's yeah sure but it's not okay whatever it's not real it's not based on true story the

You think it's bad To like Have shows like that What just in general Yeah Nah it's fine If anything it scares people Too much because

Right Maybe Yeah the stats are probably more Likely to it's like the flying on the plane Stuff versus you should be way more scared about driving your car to work every day than you should be about a serial killer

no I mean maybe it inspires copycats yeah potentially yeah but I think we would see that in the data but I do think it's impressive that that show which there was never that much demand for that

show like before it came out did better on its first week than House of the dragons and house of dragons has been this like heavily anticipated thing i think it's a testament to netflix's distribution where they can really come up with something that's maybe it doesn't have to be like super valuable ip that already exists for them to do well they can make anything work just because of their sheer scale yeah they definitely have that advantage right now i think that's the clear the big bull case

the quarter though honestly was fine that was fine yeah i don't know what people were expecting if the stock was up that much but maybe the expectations were extremely low what do you what do you think about the pricing on the ad supported to 20 to 40 percent less than the premiums i'm not exactly sure how many people are going to subscribe here's okay here's kind of my thought like everyone knows that netflix exists right so what and they said they're not doing it for existing subscribers to switch over because the price difference isn't that much it's really for people that have been gone for a while and are coming back or prospective subscribers if you weren't going to subscribe for the single tier

at what is it 10 bucks should i confirm that is it 10 bucks for the single in the u.s the single i think it's not okay in the u.s yeah it changes in every other country are you going to subscribe with ads for seven or what is six or seven i think it's seven i just don't know what the uptake is going to be on that. So if they really want to drive the advertising business to a sizable amount where it actually generates tons of value,

I think they, maybe this is just dipping their toe in, but I think, I don't know how this is going to work because I feel like you need to take a little bit of a bigger plunge with advertising if you're going to make it work.

It feels like the pricing strategy here was designed around not wanting people to trade down. Like making it a price where if I'm a subscriber for $10 a month, I don't feel compelled to trade down because it's only $7 and you get ads. But I'd be surprised if it's that successful attracting new users. Right, because so many people already know Netflix. I would, well, I guess I would be surprised in the United States and maybe some of the wealthier areas if it attracted new users. i don't like is it going to be a term reduction reducer i don't know i just i find it hard

i just don't know what's going to happen like maybe i may i just shouldn't own netflix but it seems like there's a lot of things that need to go right i also would be worried about what the demand is overall to scale this up to a i don't know 10 billion dollar revenue business because if i'm an advertiser why would i go to netflix over youtube or video ads now you want to the well i guess content that youtube doesn't have well it's not about the content it's about the person watching right and wouldn't YouTube have better

oh you're talking about from the advertiser's perspective advertiser's perspective yeah from a viewer's advertiser's perspective spending an ad I mean potentially Netflix the Netflix

viewing experience is more passive passive right i would say active no not necessarily active more immersive like if i'm watching something on netflix like i feel like i'm generally really watching it i've never had an ad on youtube like work you know a youtube what i've never had an ad where like you're pretty much just dying to skip through them uh well maybe you don't want i watch on the tv and it kind of just flows through 15 seconds um and i don't know i saw a stat that 40 of youtube is on tvs now which i was

shocked to hear that but yeah netflix definitely yeah the less skippable uh people understand that there's ads on television. Just add a market cap of what is it today? Let me pull it up. That's like a hundred billion. I think it's slightly more now because of the jump. Maybe a buck 20.

Yeah, I don't know. Yeah, 120 billion. Enterprise value, 130 billion. What are you underwriting, I think, on the advertising business from zero like how big does it have to be and how quickly for this to be meaningful i just i don't think it's gonna be that big of a deal but i could be totally wrong and i don't think it has to be that meaningful for you to generate good returns from here

i think the core subscription business potentially i think you're paying essentially for that right now yeah yeah we'll see how the cash flow looks once that starts ramping up they made good progress in that regard um yeah yeah you can be right the margins come through the thing i don't understand is their their gaming strategy like honestly what the hell is going on it's so incoherent churn churn reducer right no it's just like and now they're talking about like exploring a cloud gaming offerings. This isn't going to work. There's no way this is going to work.

Yeah, they're not going to. Well, let's see. We should say that nothing, you know, only Sith steal and absolutes, but the likelihood they succeed seems very, very low compared to Microsoft and Sony. And maybe, well, Steam, I guess,

is different. You don't really know. Really, Microsoft and Sony. It would just help if they, like, explained maybe what the ambition is because they're like all right we've got a bunch of mobile games we're gonna develop more mobile games and we kind of like what we saw okay like what the hell is the strategy like is it just gonna stay on mobile and there's there's no in-game ads there's no in-game transactions so it's literally just a part of your subscription

like let's say you get a little bit of engagement from kids is that going to tell you like oh they won't unsubscribe exactly who's actually paying for those adults so the only way to make something accretive is if you get the games that adults want to play which take giant budgets to make and you're competing with again we've gone over this i think on previous episodes you're competing with the activisions the eas the take twos uh nintendo's different but there's others i'm forgetting to name with decades of experience thousands and thousands of developers and existing brands and uh consumer like bases customer bases in the millions for different parts of their franchises with the live services offerings that will make have a network effects

it's hard to understand how they're going to win in a way that generates value so if they're investing all this money i don't know where the roi comes from it just and i've heard the term churn reduction before but come on the kids if no one under the age of 21 is paying for netflix you whether yeah right you know yeah apparently they also at tech crunch disrupt the netflix vice president of gaming said they are exploring they're seriously exploring a cloud gaming offering they said he also said it's a value add we're not asking you to subscribe as a console replacement it's a completely different business model the hope is over time that it just becomes Is this a very natural way to play games wherever you are?

Well, here's what happens there. Is the value of the content in games is even higher. Sorry, the value of the content, which is the games and the distributor is much higher in games than it is in television. So the value should accrue to the publishers as it has historically. So unless you're creating the games that people want to play, right? Yeah. Are they going to be the publishers? I don't think so.

Well, they'd have to acquire. I think maybe if they acquire, things get interesting. If they're talking AAA games, they're going to have to acquire. Yeah. I would think. Yeah. If they acquire someone, things get real, real interesting. Real interesting.

Anyway, yeah. other than that, I thought the Netflix quarter was kind of a, yeah, not that great. Not that entertaining, honestly. 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 podcast or spotify or through the link that will be in each one of our show notes it is only five dollars a month you heard that right five dollars a month perfect to try out if you like what we have to offer we hope you'll subscribe tesla quarter pretty good it looked like yeah i mean expectations on that stock are probably the only one that's insanely

high still so not surprising to see it down i guess but they came you know i'm a doubter on them we're both doubters on the company they generating cash um well hold on don't you're a doubter you're a doubter on the company what do i doubt on the company go on we discuss this all the time ryan don't pretend don't drag me don't drag me under the bus with you i am you're oh come on come on i think i no no the the only thing i doubt is that there go that any auto provider is going to have a sizable chunk of the market share i don't think people yeah i don't think it's going to get to the point where everyone's driving a tesla i think consumers like having something different which it's been the case for like forever i don't think that

changes which i imagine ends up being a headwind to tesla now yeah i don't buy any of the other stuff like it that it's a solar business or that you're a doubt yeah you're a doubt don't hide don't hide that doesn't make me a doubter of the business i think they'll sell more cars over time it's just i think they can generate cash i just don't think they'll i don't know if i'm buying at this valuation. I think they could sustain their current cash flow for many quarters to go. Now, do I think the buyback was useful?

No. Well, that's going to be value destructive. That's almost certain. But let's play it out the other way. So what did they do? Three point something billion in cash this quarter. Last 12 months has been what? It's like 10, say 10.

Let's say they're doing 10 billion a year. Is it so bad that they buy back? I think they could probably do $10 billion a year for the next five years. Is it so bad that they buy back? Well, at a current price, that offsets about, what, a quarter of dilution? Yeah, it's not that meaningful, but what else are they going to do with it? If they invest into expanding fulfillment or production capabilities, they've done really good with that, it seems like so far,

but that's potentially more value destructive if this like if it ends up being too much excess production capacity because well if you're saying that there's too much excess production capacity at these levels then you're saying the stock is 10 times overvalued i'm not that's not what i'm saying i'm saying that if they invested that's not what i'm saying so hold on i'm saying if they used the money that they generated to add production capacity and and competition came in where that ended up being excess, it would have been better for them to return that to shareholders and form repurchases.

Well, what I would argue is that if the mistake, if the money is not useful to go into production, then the stock is pricing in way, way, way too much growth and therefore the buybacks are also value destructive

as well. I'm sure there's some room internationally for production capacity, for more production capacity, but It seems like they have the ability to do both. If they buy back $5 billion, add $5 billion in production capacity. The thing that I don't like about the buyback is the whole thesis for a lot of the retail investors that are buying Tesla is that it's not this standard capitalist company that's just out there for the shareholders. It's for the environment.

Like he's trying to save, he's using all that excess cash that he generates to save the world and go to Mars. And I know that's maybe degrading some of the bull thesis because I know there's like good arguments on the bull side. But a lot of people think that way that are like on the retail side. Wouldn't this kind of piss them off? Yeah, I saw some comments, well, some funny comments. Some people are like, I've never been in a company that buys back. This is strange. I was like, hmm, hmm, maybe, maybe.

What's a buyback? Yeah, exactly. Been there before, kind of, you know, shows the novice attitude. Look, yeah, the buyback's at, what, $700 billion market cap for a company that is going to, in a cyclical business, you know it's probably not smart i think it'd be way way smarter to it i mean come on it's going to offset dilution for like a year at best and what would you have we need that cash for rainy day i mean the things look

yes yes things can get south fast how much do you sit on business what how much would you sit on well look a good amount look what's a good amount we've seen a good amount i mean a good amount is a lot because what every auto business in history except for ford and tesla have gone out of business i wouldn't use that as a positive i would say that as a warning sign that the business is tough and if things go south for a few years in the economy or whatever the the car market you want the funds there for rainy day it's not you come on it's not useful to buy back stock it's at these prices i mean that's value destruction destroying and like i guess if you could get let's say what's the what can you buy bonds at

three or four percent if you can get three three or four percent interest that's probably more valuable than buying back at a half percent cash flow yield yes uh go on yeah but literally sitting in cash yeah i mean cash is not cash is treasuries but yeah okay there's a difference no well i mean what i ca on a balance sheet cash should if it's cash sitting for rainy day it should be treasuries but yeah it's it feels strange

it feels buying back but alright I wanted to play this game with you so quarter who

we've used before used to be an old sponsor they had first of all I love their like they always have funny tweets

good memes great memes they had earnings called bingo card bingo did you look at this uh i think i saw it but i didn't look at it uh is it on their twitter basically it's got yeah it's got a bunch of quotes

from what analysts always say on a conference call what do you think is the most annoying that you hear frequently okay let me find it up where's the the bingo uh there's a recent tweet i'm assuming yeah i got it which of those is the most annoying too all right i'm gonna have to have a pause here maybe you can screen share for anyone for any of the youtubers no it's on it's on a different it's on the side computer maybe if we uh we'll figure that out someday uh thanks for I think I'm going to do the top three here. This is a two-part question. That's the first one.

That's my least favorite because then they ask six questions and then the CEO only answers the one they want, which it's always a mistake to ask the two-parter because then they can answer the question that they want to answer. And then maybe that most important one, they'll evade because it's the tougher question. And then they go, what was that second question? And we'll have our CFO take that second part.

Yeah, we'll take that offline. All right. Thanks. I like the quote, for my modeling purposes, which is just not helpful. Thanks, intern analyst at BOFA. I mean, look, that's the most. Yeah, I don't know how to stress to these analysts that no one gives a crap about their models. I know

these conference calls like you know they're out in the public right most people are reading through these things no one wants to hear about your model I know it's embarrassing I like also if you could just

double click on and it's always something that they've already talked about and they're not going to share anything else so it's like when they talk about gross margins or something and they go if we could just double click on gross margins and you're like all right they're going to say the same spiel that is give ask something else if you could convert these to what the analyst truly means when they say it just double if when someone says if you could just double click on something it's basically like hey

i didn't like your last answer so could you maybe restate it in a way that i like more yeah restate it so i can be more bullish or what are some of the other ones oh this this one i responded with but i see it all the time could you just walk us through the puts and takes on how you got to that number and it's like translation how on earth how the hell did you get to that number yeah because my model says something else i need to yeah my excel model says something yeah it's it's a weird industry almost all this brainpower going into how do we get this number work on this

Excel model and it's all is there I mean it's very useless extreme you know is there any use to it I fail to find any positives of who is benefiting here except for the

analysts you tell me or how about this we saw that the ally cfo resigned a day before earnings is that a giant red flag to you i know we've talked about ally before on the show we've talked about ally with friends and it's something we're interested in so keep that in mind any anyone that's listening yeah just a general but i mean this happens quite a bit executives leaving it was concerning when i saw that it was the day

before earnings because i was confused and why they just didn't announce it with earnings however they have a morning call so i figured i i guess when i went back and read and i was like okay maybe they just wanted to get out the day before so people could process it and then they talked about it on the call um when i read the call transcript i saw that the cfo was there and she had a nice little speech thanking the company and stuff and it seemed fairly sincere although i'd have to listen to it um and they weren't like they talked about basically her job a lot and how it was just a weird timing and how she they they wanted her to uh leave now because and it could have been a disingenuous excuse but i kind of read it as she was leaving and they wanted to do

it in case before the economy turned down if it does because then she wouldn't be able to leave and they wanted to set up that transition earlier. It didn't seem bad to me. However, in general, if we're taking this as a less ally-specific, I think you really got to look at those on a case-by-case basis.

But executive turnover is never good. Yeah. I think everyone loves to like... It's for the not for me thing or like executive turnover is bad

but in this case like she this was planned out she had somewhere to go that kind of thing and it's everyone kind of like makes excuses for it I'm kind of grown to have this maybe be my biggest red flag

yeah yeah I can get with that I kind of think you might even want to own a business where an executive leaving doesn't matter. I don't know if those businesses

really exist. I think they do. I'd rather own a business where the capital allocator is really damn good. Well, of course. But sometimes it can be best.

I mean, do I need to say the Buffett quote, ham sandwich? Yeah. I still disagree with that ham sandwich thing. All these businesses require it. Pretty much every business, unless it's some super diverse conglomerate that grows on its own, where the holding company doesn't affect the operations, the capital allocator matters. Yeah. okay what about Berkshire would you would you be any more or less inclined

to own Berkshire if Buffett weren't there anymore yeah I mean of course but that's not a business that can be that's not a ham sandwich business that's the opposite

of a ham sandwich business you think yes pretty much all those businesses are going to do the exact same thing day to day the insurance part

is yeah that's not buff that's not the buff dog well i guess that i guess the allocating the flow but you don't think what's his name can do it greg abel yeah well i guess that's as you it would be more separate and it's berkshire's unique case because they set it up where it's going to be like everything's kind of all those different parts are separate but in general back to like the executive turnover in general, yeah, it's not good. But what's also nice coming back to like a business that's easy to run is that it's really easy to be a good capital allocator in a business that's easy to

run. If you generate cash every year and it's no matter what the economy is doing and you just buy back stock, like just straight line, I'm walking through buy back a little bit of stock every quarter. things work out. I think I'd rather have someone who does it opportunistically and has a good track

record of doing so. Yes, of course, but those are few and far between. You don't have to buy every business. I guess, what is a name of business that's truly a ham sandwich business? Hershey. Coca-Cola.

i think the returns for coke shareholders would disagree with you what one of the best performance stocks ever i'm talking about lately hasn't it been uh well yeah i mean the last 20 years the earnings ratio got an absurd amount in the 90s but hasn't it also been like a management crisis like like the management's been extremely important over the last 15 years uh not exactly sure but even if that was the case they've also had some mismanagement in the 70s and 80s and look at the all-time stock performance since 1970 however far coifin goes back stocks up 35 000 before dividends so and it's been mismanaged there's got i mean at some point in there that was

great management also yeah exactly so it doesn't matter how about a business that isn't retail or cpg let's say CPG and Hershey EA Sports EA Sports specifically EA Sports I think that requires

good management really I mean Madden pumps money and it's really not a good game well that's not true but

it's by far the best it would be the best sports simulation game like the best NFL sports or football-based sports simulation game.

I think that requires good management. Look what happened to all these publishers that maybe don't have the best management. Where's, you know, you got to inspire

your development talent in some way. Yeah, but specifically EA Sports, I think it'd be very hard to lose. Other businesses, Visa, MasterCard,

possible from this point i mean back 30 20 30 years ago probably different but at this point yeah um trying to think other companies out there would you rather own businesses where are you are you willing to invest in businesses where you literally just invest in the concept what do you mean the concept so let's say you like actually put like the ceo was a ham and cheese sandwich of visa would you still invest in visa at the right price sure i mean at the right price it's impossible to lose money on visa in my my opinion many people disagree if you look at uh let's look at an example i'm reluctant to invest in something that's solely based on the concept oh well like if

there's a bad manager but i love the concept i won't invest yeah i agree i mean that's part of our management all right sorry that's one of our three criterias for investing is do we trust management so but i'd much rather be in a position where like it's combination with a good business So if there's executive turnover, it's not as concerning where you're writing on, like, I don't like the jockey bet entirely. So, for example, we thought, okay, we looked at Swedish match. We owned it in the past. We thought management was good. For whatever reason, their buyback record, the launch of Zinn, the nicotine pouches and the spinoff of the cigarette business 20 years ago.

however with the underbid they got and accepted we kind of revised our thesis and we thought uh it was bad but the business was like the business is still doing great even though the business even though the managers are doing bad so what i kind of mean by that is and yeah maybe the manager not being as good as we thought we got uh a little less money or underbid on the Swedish match takeout, but it still did phenomenal for shareholders over the years. Okay. Yeah. But let's take another one of our holdings, Match Group.

That's a concept that I would think anyone can run that. Like that's a theoretical ham and cheese sandwich business, right? It's online data, it'll grow on its own. Network effect kind of sells the service itself. Bad management was detrimental to at least recent returns because it was bad capital allocation. Yeah. I mean, you can't argue with what the stock is right now. Or the hyperconnect acquisition.

I think you have to have a good manager. For me to invest, it has to be a manager, I believe. or else because it could be the greatest concept in the world but if they just throw the cash away it just yeah but here's the thing is it's I think very difficult to

evaluate a manager because we made mistakes everyone's made mistakes on that I mean two examples we just match match group of overrating the manager but the thing is the

same thing that comes back to and yeah look The match group stock price can't really defend that. The performance of the company through 2021 with the quote unquote bad managers was the best out of any company, maybe. 22% compound growth with 35% plus margins every year. so I kind of come back to where the business is

more important that's what I mean for what for them to go out and spend 2 billion dollars on a dying business in South Korea like all that good performance for that that's very no that's fair but I mean look the stock

it's impossible it's like an impossible question I just think the business is more important because you don't, it's a lot more durable and predictable in the right circumstances compared to the management team where you never know when that jockey

is going to leave next quarter. Usually ownership helps kind of alleviate those concerns. Potentially, yeah. You mean like stock ownership? Yeah, ownership of the business. um all right let's do it let's do a uh interview on molly full money with doomberg

and it's really hard to think the world's not ending well his name is their name is doomberg so yeah what do you think they're what do you think their stance is gonna be no they make good points over there yeah i mean much smarter than us especially when it comes to energy um but yeah just copy their tags really if any if all my energy takes just copy from them i mean that's not a bad way to go um all right anything else well let's hit up let's do let's do a little mid-roll seven investing organic ad remember code money get a hundred dollars off your annual subscription for life i saw this week that um and we're not going to spoil the pick because that's for subscribers only, that Simon wrote up a nice little article about why he chose

his top stock for October and shared the video that they did. And this kind of highlights the presentations they do alongside with their written up stuff. So if you're really interested in the business, this can be helpful. You go through the 30 minute presentation, maybe even longer, they have charts to go along with it. The analyst pitches the stock and then they get feedback from all the other team members can be very helpful to hear kind of maybe some feedback some criticism about what the thesis would be um and yeah i guess we'll tease it uh this is it was a risky pick from him a little biotech style i think although it's hard for me to get a graph from that industry uh but yeah ryan anything else on that well sometimes sometimes i like reading or listening

to those calls where they actually pitch it because when i read through some of these in my head i have things where i'm like like i'd ask questions here or like i'd respond here and so sometimes the analyst that that format gives them the chance to kind of do that yeah so yeah yeah all right code money uh get a hundred dollars off let's move to another topic uh or no you had you had you wanted to tease something no did i maybe i said tease something um all right here's another topic i think it can go into actually something interesting uh even though the first part is a little bit funny so pollen uh a company that was if i look at their website says vacations and destination experience is designed for you and it's got a bunch of concerts

around it um what is pollen let's go through it pollen builds curates and delivers experiences that pair world-class entertainment with exciting destinations okay right so they're going to do that they were a startup they raised 200 million dollars and currently they're looking to be sold for 250 000 for the recovery of all their assets now apparently this won't even cover the software vendors that they have to pay, which here's the summation. It's in UK, but I'll just say it's dollars. $515,000 to monday.com, $135,000 to Twilio, $105,000 to AWS, $50,000 to Datadog, $50,000 to Zoom, and the list goes on and on and on. While this is kind of funny to see a startup that just totally failed and really wasn't that large

spending this much on workplace management software do you get concerned that the growth in the software industry especially sass might have been well there weren't even many of these companies weren't earning money but over earning from a revenue perspective the last few years with the vc boom yeah i've always kind of juggled that in my mind like if if things got bad for companies, is this like a necessity or is it nice to have with a lot of these software companies? And I would say in almost like maybe 80% of cases, I say, oh, this would be nice to have, but it wouldn't be that hard to go back to a cheaper solution.

Everything except AWS and Zoom. I think Zoom saves money. For the business? Yeah, it's cheap enough. Same with AWS. AWS saves money. I think, from what I understand of Salesforce, it sounds like you can't really live without it,

some of these sales organizations. Salesforce has always been a mystery to me. Yeah, it does everything, apparently. I think certain businesses, you can't live without Adobe. Certain businesses, you can't live without Autodesk. like the creation software where you're where you depend on it at like for your job excel microsoft excel yeah those are good but when i think about the like slack uh asana monday at monday.com think about this they're number one at 515 000 to monday.com

That's it Whoever that Whoever that Monday.com sales rep is Give them a raise And they are I mean they're growing Like a week

There's a ton of these though Where it's like They don't Oh here's the ultimate You don't You don't need it to survive But it just Kind of

It It makes your business Run a little smoother Here's the ultimate Grammarly premium Yeah people don't need that Yeah. And if they do need it, you shouldn't employ them.

Yeah, because the free stuff's the editing. That's really what you need. What do you get with premium? Suggestions on style. I know. It makes everyone sound the same, which I think is actually bad. But off-grambling, more in general, it makes me nervous. And it kind of, I think it can help frame maybe a better or a healthier mindset when

investing in a software business is this has to provide a, what's the term? I'm stealing it from that other fund that talks about this constantly. A win-win-win scenario where when you add in this software, it benefits both the customer and the company that's using it. Non-zero-sum. And the employee that uses it. Yeah, non-zero-sum. i think that's really important to focus on as a software investor because one it can lead to

pricing power but also leads to lower churn in down markets um and yeah you can invest in something like i mean the other the question though is what companies are on that like some companies seem close to the fence what ones are those non-zero some ones for sure yeah i think it's kind of hard to determine what companies are non-zero some like it feels like every business is kind of NZS and theory they're supposed to be

in practice yeah like okay let's take let's take Calendly which I think is like a like that software business

it theoretically kind of helps its customers the business wins right more efficient with your calendar yeah

but that's great but like it You don't need to spend money on it. Yeah. I guess it's the combination of, does my business collapse if I lose a software program? It's honestly, it's that David Gardner test.

Like, if you snap your fingers and it disappeared tomorrow, what would happen? I'll tell you what, if Calendly disappeared tomorrow, I would just find a new way to schedule a meeting. And to be fair, anyone listening, we do not use them. We use Gmail. uh but and i'm sometimes a little sometimes i and i've heard this is like a real thing like when someone's like check my calendly like can you just tell me when you're free yeah i don't yeah you're too busy to tell me when what time works for you i know i could see uh that's like a russell wilson from football you know yeah like oh you want to talk with me it's my calendly um

Anything else on that topic? We kind of hit some really fun ones without having to go through all the Twitter likes this week, which is good, I think. Got some fun debate. I hope someone was dunking on Dave Ramsey. That's okay. It happens to the best of us. He tweeted in June 14th, 2022,

so this year, home prices are not, N-O-T, all caps, going to go down. My guy may have made a mistake there. happens to the best of us i saw something that i found kind of interesting i wanted to maybe i'll kind of pose this as a question to you but the uh there's some quote from a professional

fund manager who outperformed in bad times and he said like the greatest achievement of my career and the greatest i've ever felt in my career was generating great returns for investors when everyone else around them was losing money do you think it's better as a manager to position yourself for that or is it better to just ride the cycles

it's a harder game to play I honestly don't know if I like if you told me what was going to happen in 2021 2022 and you told me back in like 2019 2020 I don't know if I would have known

exactly how to position myself to benefit from that yeah i thought i think we would i mean we probably would you know some of the obvious valuation uh stretches that we made as a mistake we would have probably avoided but i would have said buy a lot of the stocks that we uh already did there's not a lot of pockets of the market that really did that well yeah i think coming Going back to that, though, from a marketing perspective, it'd be really nice if you outperform during a down market. And it also, I heard this one time, I kind of stuck with me and thought, okay, yeah, that's really important. Someone gave you the advice says, you're going to need to raise money. you're going to have to have the ability to raise money and still do well after you've had good

performance because the only time you can raise more money is when generally is when you've had good performance so you kind of have to set yourself up which that philosophy of okay we're just going to let our winners ride indefinitely you could see how a lot of people made that mistake in 20 uh late 2020 early 2021 when they raised a ton of money because their success was so strong but they were unable to pivot um i'm not saying that like we probably would have made the same mistake so yeah i think i don't know do you agree and disagree with that well yeah i imagine it makes raising money easy a hell of a lot easier and pretty easy in general because no ones it's like when times are good a lot of people are raising money when times are bad

not a lot of people are raising money to begin with but everyone's doing poorly also so you're you're one of the few that's able to really raise that money i think it's everyone's like looking for returns that are just positive in like these time periods so if you really outperformed and i've always thought of like man it would feel really damn good to outperform when the markets do poorly i don't think i appreciated that enough when i started i thought like well i'll just ride the good times you know investor 40 years you'll be fine no matter what after but i think it would just maybe it would just be the emotional satisfaction yeah the most i mean you could see how the emotional satisfaction would be high yeah i kind of agree i mean we're kind of we're

going through the march 2020 doesn't count we're going through a real first bear market right now um for anyone that doesn't know we were what 14 when we were in 2008 something like that 12 now it's younger yeah yeah younger than that you're really young 2008 so this is our real first bear market um which is good get out of the way um i think it's better we're talking with someone sees a new interview we got a really great interview uh next week as well uh someone who has decades of experience in the industry, which is really great that we got to land that interview. But besides that, we were discussing how

if someone started out in 2011, 2010, it's going to be difficult to change your mindset because there was that one thing worked for so long. And for us as someone, we started in like kind of the 2017, basically right before COVID is when we really started getting into investing. Probably the 2019 period is when we started heavily getting into it.

We don't have that luckily tied to what quote unquote worked since the GFC ended. And it can be tough. I mean, I don't blame anyone. It's just tough with that mindset. And I think what's really important is to just study financial history in general, because then it can help you like,

oh, this stuff happened before. Yeah. I mean, let's say you were like a predominantly a software investor in 2020. You look back and you say, okay, 12 years, 11 years of like tides going your way. Price doesn't matter too. I would start to think, and I probably would have started to think this even earlier. This is not a cycle. This is a secular trend.

And I was early and I'm going to keep riding it. And price doesn't matter. Yes. We do have a question here from Matt H, who I think is probably our most loyal viewer on YouTube. He says, do you feel you missed on energy? Well, yes. We definitely did because we avoid that market. But, or, and especially in 2020, yeah.

Or you just have no interest in that sector generally for structural reasons. It's not, I have interest in it. And it's more, do I feel enough competency to analyze the companies properly and assess the risks? I think for most of the businesses, if I looked at them in 2020, I would not have been able to do that. I would not have been able to forecast oil prices. I don't even know if I would be able to forecast it directionally. I probably wouldn't have. And I definitely, magnitude, in terms of actual price change, I would definitely not be able to guess it.

And like, no one knew what was coming with the, with the war, which is a huge part of that. So yes, I missed it. I wouldn't say I have like remorse over it. No, yeah. That's just a sector. The returns have been great the last year, but I don't understand unless you have very good experience investing in cyclicals or have, I guess that's really it. If you have a lot of experience investing in cyclicals, which is a bit of a catch-22 because you have to invest in them to have experience, I'm not beating myself up over that. What I am beating myself up for is valuation on some of the investments that we made. Avoiding missing energy and underperforming slightly because of that is not a big deal to me because that is such a hard industry. What do you think was your biggest mistake or our biggest mistake since starting the fund? Simply valuation. That's it. We've been pretty decent on what the businesses are going to do because we like to focus on the ones that are simple, durable, and we have to identify a competitive advantage and have confidence in it.

So we've been, obviously we missed on a few, but our batting average, I think, is good within that regard. However, the only, the reason about any sort of down stuff, it's just been valuation, not having valuation discipline. Yeah, that's, I think that's the biggest one. Yeah, I think the price discipline was, I mean, it was the biggest. But I also think I may have overestimated how many businesses are truly high quality through ups and downs, like durable. Are they going to see growth no matter the market environment? And they can consistently generate good returns on what they invest. I overestimated the amount of companies that could really do that in bad times.

So, yeah, I guess that comes back to a lot of it came down to easy money. Yeah, well, yeah, exactly. It comes back to the post-GFC macro environment. A lot of this will be a big test for a company truly has that competitive edge. And yeah, maybe over the next couple of years, maybe next year or two, more companies will get weeded out of portfolios because of it. Um, but yeah, I think the most important is valuation. Just looking at, I would much rather own something at 10 times earnings that I think is a good business, but not, uh, a Costco, I guess is a gold standard of a great business

than a Costco. Even though we didn't invest in a Costco, we invested in a Costco like companies a few times at 40 times earnings. and i would just yeah that's in my mind a lot now of that the valuation difference is can be if it's that wide it is very very it can be very influential in returns no matter you see this all the time on financial media twitter whatever wherever you're reading and interacting with other investors they go oh my gosh this quarter was amazing like wow great quarter guys great you know great core wow company whatever they list off five things like

revenue growth 30 blah blah this is amazing you see that someone say that on cnbc and you're like oh i mean and you're like why would you invest in this company that's barely growing it's like well the valuation and matters a lot and i think yeah we've like maybe it's a bit of resulting because we've seen a big downturn in kind of quote-unquote growth stocks since early 2021. And the stuff that's done well that we've owned is the ones that we were valuation disciplined on,

but I still think it matters and it can really help through the down markets if you're disciplined on the earnings multiples you pay because there's a lot more margin of safety if the business doesn't collapse. Yeah. Yeah. I think since starting the fund, it's been pretty formative in developing, honestly, almost some hard-line principles on valuation. It doesn't matter if you think earnings are going to see some rapid increase in the next two years.

i still like if you would have asked me two years ago am i willing to pay more if i think like the growth is more sure like i might have done it i'm less don't sell yourself short don't sell yourself short you would have done i would have done the same thing but we both now you you if if something's pitched to me that's more than and i'm not talking about like some lumpy period where earnings are messed up but like let's say more than 30 times normalized earnings i think i'm generally gonna say no even if it's like crazy high quality yeah or even if something's unprofitable you know you're looking at a gross profit multiple or something like that as well like yeah i'm tired of i'm tired of buying into like feet like operating leverage stories

well maybe that means that it's time to look it up you know maybe maybe i like to use myself I like to use myself as that where I'm like god I'm just sick of this type of stuff and I'm like probably everyone else's so but it's hard to balance I think most people I think that's where like

everyone references Amazon and that's where I think Amazon's rise has hurt more people than it's helped because people hide behind like they never saw that They never saw the margins. And then, you know, it'd be constantly compounded.

But I think so many companies, those margins are going to stay theoretical forever. Like just show, you don't have to bet on that. Bet on the ones that already have it. Yeah. Or if you're going to bet on that, you need, I think the big difference in, we're not afraid to invest in those that have the theoretical earnings, but with the mistaken ways we want,

you want an even bigger discount because of the uncertainty. yeah alright well that's one o'clock thank you all for listening and the few that watch on YouTube remember to use our code money get $100 off your 7investing subscription each year for

life this video is out every 12pm Pacific 3pm Eastern live on YouTube you can watch the recordings there as well but we'll have it on every Sunday to listen to the podcast format too follow us on Twitter at chitchatmoney

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