Chit Chat Stocks - Investing Power Hour #44: FANMAG vs. Berkshire; Rebubble Stocks; Munger on Crypto

Episode Date: February 5, 2023

The CCM Investing Power Hour is a live-streamed show every Thursday at 9:15 AM PST. 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 Subscribe to our newsletter: https://chitchatmoney.substack.com/ ****************************** This episode is sponsored by Stratosphere.io, a web-based terminal for financial data, KPIs, and more. Try it out for FREE or use code “CCM” for 15% off any paid plan. Sign up here: https://www.stratosphere.io/ ****************************** Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. This is the Chit Chat Money Investing Power Hour number 44. My name is Brett Schaefer, and I'm joined by my weekly co-host, Ryan Henderson. These live streams are done

every Thursday at 12.30 PM Eastern time on YouTube, which means do your math for wherever you live in the world. I know we have such a global audience with the 100 people that tune in every week. You can also watch the replays on our YouTube channel as well. Or as many of you do, listen to the audio wherever you get your podcasts. This is really just a podcast recording in live stream format, but we know some people like to watch online as well. Before we get to the episode, two quick housekeeping items. If you're a regular listener, you've heard us talk about this before, but if you listen to our Not So Deep Dive episodes or watch them on a regular basis, you're going to want to subscribe to our free newsletter and get

our weekly recap on Sunday mornings, plus our notes, charts, everything else that goes along with our written analysis for our Not So Deep Dive stock analysis shows. You can get those through the link in the show notes or by searching Chit Chat Money on Substack. And if you enjoy the show. Give us a review on either Spotify or Apple Podcasts. That is the best way you can support us as we are a free show. It's the best way to help us grow. Okay. The Investing Power Hour, as many know, or any new listeners might not know, we have a few topics that can be investing, business, finance related, and we can go in any direction possible. There is no script. Ryan, what do we have on deck today for you? Okay. So

So I got a couple of things. We've got the Adani Group, more news, I guess we could say about that. There was a rebuttal, if you want to call it that, and then kind of a rebuttal to a rebuttal. So we're going to talk about, I guess, the Adani Group drama, which for those of the people that don't know, is potentially the biggest fraud in world history. And then I'm also going to talk about, we made a bet, I think, two years ago. Someone brought this to my attention, a listener, Max Mazzetti, I believe, brought this to my attention via Twitter DMs. Totally forgot about it, but he brought it up. And so it was, it was a big tech versus Berkshire bet essentially. So I'll give a little update on that. Other things worth noting, Google had some chat GPT stuff.

And then I've got another book report because I, a couple of weeks ago, I pledged to do a book report every two weeks publicly, which is my way of kind of holding the feet to the fire to make sure I actually do my casual reading. So I've got a brief book report on one of the richest men in American history who may also have been a bit of a bit of a fraudster or potentially in today's world. He would certainly be considered one, but still a wise man. Nonetheless, what about you? I got the re-bubble as people on Twitter are calling it. We're going to talk about Carvana, Opendoor, Peloton, a lot of these stocks of 100%, 200%.

And I think it'd be fun to explore some of those businesses. And then I have a paper that was shared around on the internet. Was the great resignation all just home price appreciation? Plus, if we run out of time, I have a story on Munger on crypto, and then meta earnings as well if we run out of time, although I don't think we're going to get to that. Before we get to our topics, though, today's episode is presented by Stratosphere.io, our investing home screen or fundamental research. Stratosphere's dashboard tool lets us easily track our investments in stocks we're researching with a nifty newsfeed, SEC file aggregation,

and a fundamental charting tool to compare companies. And there is plenty more that Stratosphere has to offer. And you can try it for free by going to stratosphere.io. That is stratosphere.io, and you can use promo code CCM for 15% off any paid plan if you are a more professional user. Either way, try them out. Tell them we sent you. Okay. We're going to be using them throughout the episode as well. I think it's a perfect episode, especially with this fan mag versus Berkshire update. Ryan, why don't you get into that and maybe I'll load up some charts that could be interesting for the listeners. Yeah. So I got the date on this wrong initially, but you corrected me and then max also corrected me in the dms um he on december 31st 2020 we

essentially made this bet public that um i don't even remember if it was a bet was it a bet i it was a poll and i'll tell i'll say what when you go through what the poll was i will tell everyone what uh everyone voted on it was a twitter poll okay it was twitter Twitter poll, basically, which would perform better, Berkshire Hathaway? I believe we classified it as the B shares for some reason. It doesn't really make a difference. Berkshire Hathaway or big tech described as Facebook, Amazon, Netflix, Microsoft, Apple, Google. it would at the time it was fan mag today and i know this this acronym hasn't caught on yet it would be man mag because facebook is now meta um people don't seem to be calling it that anymore that's fine um we'll start it here so man mag versus berkshire um who would perform better over the next three years either that cohort that man mag cohort or berkshire and what were the what

were the results of the poll 80 said fan meg as probably you know not a surprise at that time period that was right what was it december 2020 right near the peak of that growth bubble so yeah no surprise and i'm looking at the results so far keep in mind there's still a year left um and ironically i mean now we own some big tech personally and in our fund so So we are kind of positioned on one side of this trade now. But the man-mag two-year total return, and I believe I've done the math correctly here. I just took the average of the six. It was negative 23.3%.

It would probably be a little higher if you excluded meta. But in terms of performance, it goes Microsoft number one, basically up 10% over the last two years. Alphabet is number two. It's actually up 1.3% over the last two years, which kind of surprises me. Apple's number three, essentially flat. This is total return too, not just price appreciation. So it includes whatever dividends they got back. Fourth best was Netflix, down 45%.

percent. Amazon was fifth, down 48% roughly. And then Meta was the worst performer, down 56%. So in total, the average was minus 23% for the ManMag cohort. Berkshire, two-year total return in that timeframe. 33.2%. So Berkshire has drastically outperformed big tech. And that's total, 32% was total return. Yeah. If I'm looking on Stratosphere, they don't have the two-year chart, but they have the three-year chart and they're up 41%, which is pretty good because we're really right at that pre-COVID peak for the stock market, or we're getting close, I guess, maybe a month away. And they had a compound growth rate of 12%.

Not bad for the old, I don't want to call him, I don't want to disrespect him, but for the senior residents of the investor community, why don't we, well, here's, I guess, first, are you surprised? And then I kind of want to look at, we haven't looked at Berkshire in a long time. I don't look at him, see what we think.

Am I surprised? I don't remember which side of the poll I took. I'm surprised the discrepancy is this large. I mean, it would take absolute heroics for big tech to get back to Berkshire levels or to win this bet within the next year. And it's maybe gotten a little better in the first kind of month of this year.

It definitely has. But this is a massive spread that I wasn't expecting. Testament to the old Oracle of Omaha. He's done. He wins yet again. But I am surprised to, I guess two years ago is kind of peak mania, right? Close to it. Yeah, very close to it. So, seeing some of these numbers, I remember, so at first I thought we were, at first I thought we did this at the start of 2020. So, that would have been the three-year timeframe. And Berkshire basically doubled ManMag's performance over the last three years. It was even better, right? Yeah. Well, not quite because big tech did better. So Berkshire did slightly better than their most recent two-year performance, but big tech did a lot better. If I'm not mistaken, they were slightly positive over the last three years. But to see some of these numbers, like Netflix, Meta, Amazon, all down 45% or more, it's just kind of staggering. I would not have thought. And I think probably for every one of those businesses, if you told me at the time, what would you buy it at? I would have said, I mean, 50% drawdown from here, I'd certainly buy it. And a lot of them basically got there and not all.

We actually, we do own one of those, but most of them, we do not. So, I don't know, pretty astounding. I also find it surprising that I did not know Alphabet had positive returns over the last two years. But over, yeah, that would have surprised me. Their drawdown hasn't been as bad as a Meta or a Netflix or an Amazon. It's been fairly steep, at least, well, this week it's recovered quite a bit, and we are recording this as a note Thursday morning, so we have no idea what Google and Alphabet are going to do. If they surprise something to the upside or downside, we are in the dark. I should also mention that I put this on the time frame of January 1st, 2021 to January 1st, 2023. Big Tech, if you include the month of January, would have much better performance because it's been basically just ripping this month.

So it's going to be a tight race through the end of 2023. I think it's going to be a fun one to track. We're going to have to, it's going to be hard for us to remember. We might actually have to put in a calendar update for ourselves. We got to remember to look back at the end of 2023, because it's going to be a tight race, but I want to look at Berkshire.

And I think what's underestimated and I'm not, I think all these numbers, right. We're looking at stratosphere here. Berkshire is so hard to track because of how complicated it is, but either way, their earnings numbers, basically, when Buffett first started, it seemed like a lot of it was common stock investing, at least under the Berkshire umbrella. They had a few operating

businesses. But as they transitioned and got even larger, they acquired tons of operating businesses, as we well know, Geico, General Re, BNSF, the railroad. And the amount of EBIT or operating income they generate now is pretty astounding. I think because of how the new GAAP rules were on marking your public investments, that's screwing up the numbers here. But if we look at, say, December 2016, which again, their businesses are very steady, so it's not going to change much from there to now, they generated EBIT of about $30 billion, i'm seeing here and back in the early 90s it was basically zero so i think that transit transition for them is quite impressive to becoming not just a holder of common stock but a holder of

or an owner of business they have full control of it might not have been actually zero it was probably right more like three or four billion and even but uh well no no it was i mean go to It started from 2000 because that was the point in time when they were saying, basically, we're much larger. Expect us to. Yeah, 2000 was about $8 billion. Let me look at. Go to 2000 just so we can see the CAGR. Okay.

Because that was when they were saying we'd be happy with a 15% return from here. let me just do I'm going to do revenue because the EBIT number is getting screwed up by that mark to market stuff but I will

change it to 2000 revenue would be a good proxy yeah it should be fine revenue is 33 33.8 billion about a 12% growth rate annually

yeah they have done so much though and I don't know I'm not sure particularly on that accounting thing you mentioned

but yeah They've done so well on their public equities book that it's like, I'm not sure revenue even encompasses how impressive the performance has been. Yeah, let's look at the cash and equivalents. Really high, I think. Basically, 14%, 15% since 2000.

Yeah, pretty darn impressive. Let's see if they have any sick. They got some KPIs here. That's the best part. again we're using stratosphere here the best part about stratosphere is that they have segment revenue for complicated businesses like berkshire so let's look at the old bnsf railway let's see how that that was one of their best acquisitions let's take out the cash and equivalents i mean pretty darn consistent because they acquired that at a very very cheap uh multiple and as we've seen

And yeah, the railroad industry can be a bit cyclical, but really, really darn good. And anything else here that's interesting? Hmm. You see anything, Ryan? Investment income? Eh, they don't really care about that. BNSF profit before taxes? Let's do that one.

That might be a little steadier then. Yeah. I mean, yeah, the profitability at some of these railroads, they really time that well, I think so. what year did the acquisition close like 08 09 no it was post gfc so 2011 i think was when it closed maybe 2012 not exactly sure but i know it was announced around that time and yeah they they bought it for actually let's confirm that i'm gonna stop sharing the screen uh i remember going to uh i went to the berkshire annual meeting there was some wild bnsf protesters you know what they weren't the wild protest there was kind of a worker uh there was a group of

workers that were kind of protesting i don't know if it was conditions or i don't know if it was like a union or something but they were outside the auditorium protesting and then the uh people that don't like buffett because he donates to plant parenthood oh yeah well they were yelling at us pretty viciously. Yes, that is. Yeah. Thank you, Ryan, for being up the topic. Everyone is on the same page on. Okay. Here's Buffett paid 34. Well, Berkshire paid $34 billion in what was announced in late 2009. Not sure when it closed, but that was near the bottom, but maybe six months after that March bottom in 2009. So $34 billion. And now that business is what, what do we just look at. $8 billion

in profit before taxes last year. Pretty darn good, and that shows how well they're doing on the operating income side. What would you say is his best investment of all time? That's a hard one. Probably it's very hard.

I'd go Apple. It's probably Apple just because when you've using a poker analogy, when you have your chips stacked up that high over 50 years each one becomes more important than the succeeding ones because you're making the bet after making all that money in the past you could ruin it by making a 40 50 billion dollar

bet as they did in apple and have it totally fail and they were quite successful so yeah i'd say that back to uh back to the last question before we figure out or go to the next topic who are you going to take VanMeg or Berkshire over the next year through the bet so through the end of the bet oh Berkshire it's going to take some serious roads

and you know it's probably helped a little bit this morning by Meadows earnings release but I'll take Berkshire yeah and at this point they're level they're kind of levered to Apple's performance too now in some ways yeah so they're gonna be uh it's like people buying the index in at the start of

december to make sure they lock in their their performance yeah the i think both will be good bets but i would go i think i go fan mag i lead fan mag but i think it's gonna be really close All right. What's the next topic, Ryan? Let's talk about the re-bubble. Okay. That is prescient. That is something. Why don't you pull up the share screen and maybe pull up any sort of charts we can talk about? I'll go through some of the re-bubble stocks. And if there's any that you want to look at on Stratosphere, go ahead and maybe Opendoor and kind of take a gander at that business. But here's what I mean by the re-bubble. And it's the stocks that soared in 2021 and 2020

2020 without much of a business model and more of a just revenue compounding, or they could have been big time beneficiaries of the pandemic. So these stocks really collapsed last year, as many are well aware of. And if you were a shareholder, sorry to hear, that's a tough time, but it happens sometimes. But year to date in 2023, we've seen a resurgence in these. And quite aggressively, yes, some of it could be a short squeeze, some of it could be whatever, but we have Carvana up 200% year-to-date. App Harvest, which is my favorite bubble stock, I think. Ryan, you enjoyed that one as well.

Up 230%. Open Door up 120%. Peloton up 100% year-to-date. And this is all year-to-date. So really the month of January plus many, many others that I'm sure Ryan is thinking of. Those are kind of the four that popped up into my head. Here's the big question I have that I think will be fun to discuss.

Do these companies all make new lows, or has the re-bubble happened? Or maybe not all of them, but do a lot of them make new lows as it doesn't seem like the business models have really changed all that much? Boy, let's take it one at a time. Peloton, I heard they had a decent report. I heard things are... And you know what? We probably should have recognized... We really like that guy

who stepped in, Barry McCarthy. Did they just report? Let me pull it up. Yeah, I think they reported like two days ago. I would not bet against them to improve over time. To generate positive cash, to grow their subscriber base.

I think Peloton could do it. I assume that means that the stock would... improve as well just guessing i don't know i don't know the valuation today open door i think there is something structurally flawed with that um if keith rabboy is listening then i'm sorry but i'm not a believer um i heard stuff too that like during well first of all new data came out that in arizona they lost money on like 80 of the houses they flipped which is like before that's literally before all costs. So it's literally like they bought the house

and then sold it for less, which I haven't been an investor for that long, but I would think that that would be a difficult business model to scale. So I just don't see how Opendoor does it. And also, if you've ever read their financial reports, they're a mess. Just adjustment after adjustment,

you cannot get a real read on when this thing's like how much true cash they have left oh right right right because of the inventory stuff and all the adjustments yeah the open door as we're seeing here this is a classic as we talked about just going for revenue without really underlying profitability um if anyone's watching don't look at that revenue tagger on gross profit it's misleading because they went negative. The revenue has really grown, I think. And yeah, we don't have all the data going back years because they only went public in 2020, but their quarterly revenue in December 2020 was only $250 million. And then it soared in March 2022 to $5 billion. You're like,

oh my God, this business is absolutely exploding. Yeah, it's trailed off since then, but still at $3.36 billion at the September quarter. And again, this is on Stratosphere. Gross profit, if I'm looking at the chart here, never... Okay, it got up to $500 million in the quarter of March 2022, which as we know, was the peak of the housing bubble. But since housing prices have totally collapsed, last quarter gross profit was negative $425 million, which gives up all the gross profit they had in that one big quarter. And they're likely going to be worse or the same this quarter. And that is before any sort of overhead expenses. So if we kind of pull up their operating income- I mean, this business was hardly working

when housing was soaring. In a bubble. And look at- That means their inventory was getting marked. It probably wasn't even getting marked up, but like they were probably buying from other home flippers and then their inventory wasn't declining oh right you just don't you don't get it's an algorithm they have they're they're they're using ai to buy houses i remember reading i remember reading one story of like someone was like i couldn't get any bids on my house and then open door came in and just miraculously gave me an incredible bid. I'm like, that to me sounds like a pretty bad business model. So here's for the listeners, their operating income was negative starting in December 2020,

it was negative. Throughout 2021, it was negative during the housing bubble. And then in the peak of the housing bubble in early 2022, they generated a whopping $200 million in operating income. and last quarter, negative $800 million. So I think Opendoor, unless they can take advantage of this short squeeze, because if we look at their year-to-date chart, they are up 158% as of this right, or excuse me, not writing,

that's Molly Foolbrain there, as of this recording. Unless they can take advantage of this and raise a ton of money, I think this one's gone. I think this one's bankrupt. Yeah, it's possible. Do you want me to pull up?

I got the Peloton up here if you want. No, it's fine. It's fine. I got a feeling I have an idea of what these charts look like for just about every shit co. No, no. I got the Peloton earnings. Earnings.

Do you want some numbers? Yeah, yeah. What kind of numbers? Okay. Subscription revenue up. Connected fitness products down. Basically, don't need to give numbers on that. Gross profit last quarter down to $235 million,

which is right around their sales and marketing spend. loss from operations is $331 million, which includes $49 million in restructuring cash flow over the first six months of 2022. It was a negative two of their fiscal year, excuse me, the six months ending in December 31st, 2022. So that's their first two months of their fiscal year. So the last six months of the calendar year, negative $291 million in cash flow from operations uh but last year it was negative 1 billion so i guess they're improving there and the big negatives on that would be in accounts payable i guess and then they spent 50 million on capex so they're in bad shape they're in bad shape still uh so they still

need to turn things around i i still think they're going to struggle but they're not in as bad a shape i just they need to start growing again the revenue just needs to these subscribers are growing if i'm not mistaken they're probably just not yes i imagine they're lapping comps when they were selling the bikes at ridiculous prices and i believe now they're just selling less i believe okay ending connected fitness subscriptions well they went from 2.97 million to 3.03 million um Quarter over quarter or year over year? Quarter over quarter, it was 2% growth, and I guess year over year growth, 10%.

So we'll see. And then their average net monthly connected fitness churn stabilized at 1.1%. So not bad there. This is just going to be a much smaller business than people thought. We'll see. I think they can still...

It's tough to make any sort of prediction on this one, but it seems like there's a path for them to stick around. I just don't know how much the stock is worth. All right. Let's talk. I feel like we've been spitting out too many numbers today, so it might be hard for people just listening to follow along. Let's talk about the Adani group.

Is that, you know, should we hit on that? Yeah, well, yeah, I guess that's fine going through. Yeah, I had some questions on the re-bubble, but this can be fun as well. we can come back to it if there's nothing left at the end all right uh for those that don't know hindenburg research released a report which was we've complained about this before it was really poorly structured just in terms of like ongoing bullet points but the content was good so um basically claiming that um this massive indian conglomerate um was quite fraudulent

And they had a lot of shell entities that were run by the brother of the CEO, and there was really no purpose to these shell entities. The only thing they would do was just buy and sell stock in the Adani Group company. So that alone is kind of its own red flag. And then a day later, Adani Group basically said, these claims are baseless, and we are going to potentially take them to court. And Hindenburg said, we would love that. Please do it in the US, because it would maybe be a little more fair. and then Adani group

released a 413 page response which number one red flag you don't need to do something that most people aren't going to read if you're trying to make it seem like well I'm innocent you don't need to do it over 413 pages

talk about the Alibaba 20F 1000 pages right that reminds me of the Alibaba SEC filings And some of this stuff was absolutely nonsense. So here's the second red flag. And this is the part that literally you open the document, you open the response, and you can instantly tell. In my opinion, you could tell that they're guilty. um so they on the first page i want to make sure i get the quote right i don't have the quote in front of me but they basically just claimed that this was an attack this wasn't just an attack on

the adani group this is an attack on the indian the the country of india and our uh our future trying to make it sort of this nationalist thing like um they're coming after us these like greedy americans they call them the madoffs of manhattan um which i've never heard that that's that's good they just like coined that term themselves uh wow well didn't and they just released a video i forget i watched it last night but they he released a video looking you could watch it with a body language and you could tell without the sound you could watch it was bad and they basically said our assets are good our balance sheets are strong don't worry don't worry don't worry and that's the complete wrong thing i think you want to hear if you're a shareholder and let

me share the screen last time we talked we said that the share price hadn't gotten hit yet i don't know if you've got follow the company because we don't really follow what's happening in the united uh or in india and you can see there ryan adani enterprises yeah down year to date look at the chart down 60% so it's collapsing and if you look at that chart anyone watching it's really collapsed a lot of

those gains since over the last year if we look at the last three years though it's still up kind of in the in those bubble levels that we were talking about it's still up 600% over the last three years do you think is there any way this isn't kind of an Enron

situation now for India yeah It could be. Feels very similar because remember when Enron collapsed, the stock just cratered and then that killed everything. I wonder if that's going to happen here. Well, here's – okay, so here's a quote. On the first page, a note of caution to our stakeholders. We are shocked and deeply disturbed to read the report published by the Madoffs of Manhattan Hindenburg Research.

The document is a malicious combination of selective misinformation and concealed facts. And then it goes on to say, this is not merely an unwarranted attack on any specific company, but a calculated attack on India, the independence, integrity, and quality of Indian institutions, and the growth story and ambition of India. Hindenburg basically comes back and says, no, we believe in the success of India, and we're big supporters of the country, but this is specifically on you. And then within the 413 pages, there is stuff that is completely irrelevant. Okay, along with – there's 50 – okay, there was a page here, Case Study 3, that talks about how they source vegetables safely and they encourage female entrepreneurship. Boom, ESG. That has nothing to do with any of Hindenburg's allegations. Well, they're ESG, so they can't be a fraud.

The other part, and this is the part that makes no sense, and this was basically the crux of Adani's entire response, was the brother of the CEO having these entities does not count as a related party transaction. Really? That's what they try to say? Yeah. We don't see it as that. Basically, they don't categorize it as a related party, which simply doesn't… That's fine by them. They can not count it. Everyone else can. Yeah, that's like the perfect example of a related party transaction. So instead, yeah, here's what Hindenburg says.

Instead, Adani bizarrely argued that Vinod Adani, the brother of the CEO, is not a related party to the Adani Group and that there are no disclosable conflicts relating to the transactions that have collectively moved billions of U.S. dollars through Adani Group entities, largely through offshore shell entities. Here's the other part. Two days after the allegations came out, they were set to have a follow-on offering, a follow-on stock offering. They proceeded with it. Now, they've since come back a little bit on it. I believe they maybe stopped selling some of the stock. But if you're the CEO or you're the CFO, if you're the executive team there, and these allegations are completely false, they're totally baseless as you claim it's an attack on india would you really sell more stock

yeah well that would be bad timing it would it depends if it was planned beforehand it was i mean they knew it was planned beforehand but i would probably call it off if if your stocks dropped 20 and you believe that the value of your shares are still um yeah still high whatever the quota price was uh also they dropped 60 not 20 but yeah i think at the time it was a little less but yeah right right okay i think this is like i mean it was every textbook red flag in terms of a response 413 pages you don't need that um attack the accuser made us in manhattan that's a that's that's a real big one that everyone does oh these are the classic short sellers only out for themselves don't believe them don't worry about the allegations worry about them uh the third one

try to hide behind some sort of uh nationalistic thing like like it's an attack on your country yeah yeah yeah and then the fourth one sell more stock what would you do if you're the ceo of a public company you're you you know that you've run it as honestly and fairly as you could and someone comes out with a short report, what would your response be? Well, I think this is an easy question. You either don't do anything or you write a really brief thing that says, hey, look, they can be shorter stock, but we believe in our business and we believe in our strategy. That strategy might change, blah, blah, blah. You might use some corporate speak and then you just let it go because things should be fine.

And if you have a good balance sheet, you should just take advantage of it and buy back stock. So it's not like, what's interesting is you can tell when a company responds, whether they, whether the allegations are true, but most of the time when a Hindenburg or a someone else like that, I guess, yes, some short sellers are kind of the smashing grab type where they just try to write something salacious and then have the stock sell off 20%. But a lot of the time, the companies that are in the smash and grab stuff won't respond because the business is fine. So I think if a company even responds more than just, we acknowledge this is happening,

but we think our business is fine, that's a huge indicator that the report is true. The response kind of tells the whole story there. Yeah. I think Adani Group stock and shareholders would be much better off if Adani just said nothing, didn't say a single word. If that's what happened, I think they'd be in better shape. I probably would have just said like, well, I guess we have no idea whether those allegations were true or false. Maybe it'll go to court someday. Yeah. I think this will be a good timing for some, I don't know about the rules, about how infrastructure investments in India for Blackstone, KKR, Brookfield to start up some infrastructure funds in India and get these assets on the cheap once they file for bankruptcy. Yeah. All right. We got some questions. One person said, Ryan looks good today. Thank you, Sleepwalker. Sweet. Help with his ego there.

Second one, I guess we can hit this one from Scotland. Was the meta earnings report really that good? I think this is an example of expectations because the report in a vacuum didn't look that great, right? Revenue flat, income expenses are still soaring, but I think people are looking through the rest of the year and saying that expenses are going to level out because of the layoffs and stuff they talked about. And revenue has stabilized and they're seeing a lot of green shoots with reels investing and um excuse me reels advertisements and the click to message advertisements through whatsapp and a lot of other things so people are seeing the tiktok threat going away and they're seeing a i think the expectation was that revenue was

going to decline a lot and then usage on the family of apps are doing well yeah reality labs is still a big pimple. And that is a big concern. And if anyone's interested, I'd recommend listening to our meta not so deep dive where we kind of had got to say, it wasn't really hard to get this, I don't think report right, where we were pretty confident that these businesses were in much better shape than maybe the market was anticipating. But the concern there is still the capital allocation where they bought back, I think $6 billion in stock last quarter, and then announced a new $40 billion repurchase program now. But yeah, they bought back stock last quarter, but I get a little bit frustrated. And it's a bit of a yellow flag when the CFO department does not

have the, how do I say it? The peanuts, the cojones to buy back their stock when it's shrinking. We actually had a company this week on the conference call say, we paused our buyback in the quarter because the market was tanking and stocks were going down. And that's just so frustrating to see. It's never like a sell signal for me, but it's really disappointing to see that from the finance department in a company or whoever's managing their balance sheet. I think there is that concern with Meta. But again, the report looked fine to me because people...

And I think the narrative around Meta was that it was dead in Q4 2022, and that was really not the case. Yeah, I don't think. I mean, it had to be expectations because I didn't think this was particularly strong all around. Earnings are still obviously declining off the peaks from last year. There's still not that much growth in the reality lab stuff. I still maintain a lot of the same skepticism that I had before, which is we don't know how much they're going to spend in that category or in that section. But I think the shining spot within this quarter was that they're eating back share from TikTok and that they're seeing a lot of growth with Reels. that leads to declining revenue for just for anyone that doesn't keep up with meta the the ads within reels or short form video doesn't monetize or doesn't have as high a value to advertisers or there isn't enough inventory yet as the typical scrolling feed so more time

that's spent on reels is actually like uh sort of a headwind to advertising revenue but they can increase the monetization, which they've done before, like they did with Stories. And hopefully over time, that means they also grow the eyeballs and then they are able to increase the monetization, increase the revenue. I think they're probably able to do that. But for the time being, revenue comps look rough or advertising revenue comps. I had poorly timed takes on Meta. I'll say it like I'm not a believer in the Reality Lab strategy

and I have no idea what kind of cash the business will generate in three years or how much they'll spend on Reality Labs. But this was a solid quarter in terms of maintaining the family of apps. There's no question. I think

after the rise of TikTok and seeing what the family of apps has been able to do, I have no doubt that they... are are a very durable family a family of apps isn't going anywhere yeah we had a comment here from elise i thought when snap had a bad report that that meant bad news for meta yeah snap i remember people used to look at that as an indicator where uh because they both were an average digital advertising business but i think it's clear now that snap is just well a really

great product for younger people and it continues to grow in usage, right? They're just not good at making money. Right, Ryan? Yeah. And there is like, people have kind of said this before, which is like, Snapchat's not a good barometer for the advertising market. And I saw a take the other day. It is a good barometer because it's the first thing on the marketing budget to get cut. So you can tell if Snap's growing really quickly, that means marketing spend is probably going to be really strong for the core products, the stuff where you actually spend money. However, if you're pulling back on Snapchat spend, it's probably because you're wanting to consolidate your advertising budget into the stuff that's working the best, which is not Snapchat. It's kind of the more speculative ads. So you can kind of get a good gauge.

I think if Snapchat's doing well, it's a testament to excess advertising spending. Sorry to Snapchat shareholders, but I would say that is a very difficult platform to monetize properly. Yeah. Well, monetize with advertisements. The way they're going about it seems a bit of a hodgepodge mess, if I'm going to be honest. I remember we haven't looked at them recently, but we looked at them, what was that, a year ago? and it didn't look yeah there's the concern at Meta about the Reality Lab strategy but the strategy

at the core products at Snap just seemed incoherent they talked about augmented reality and let's wait for the Snap Spectacles that's right Spectacles 4 they're gonna once those moons they're gonna solve all the issues

here's another good comment that I think is yeah just be fun to talk about intel had a bad report last week can't say i read it but i think it was pretty obviously some of the highlights that it was bad and they're struggling versus tsmc and samsung and all the others intel change and this is a comment from guido hendrix intel change some accounting and depreciation for five to eight years this gives them four billion dollars in extra income next year is this fraud or just some new um insight on how long stuff lasts yeah i guess it could be

You know, I think when I see something like that, one, you need to have a bit of a, it's kind of a signal indicator in my head that I need to track this going forward, right? When they change that definition. Second, I think it's a good example of when you look at a company, looking at the SEC filings, I think looking at a couple of them and comparing the definitions of costs, the definitions of depreciation is important. Not really looking at what is in it specifically. I know one time we looked at Peloton and we saw that they were misclassifying stuff, in our opinion, that kind of concerned us. But it's really, are they changing the definitions to make their earnings look better? And then just take it and compare it to cash flow. So are they taking that operating income and converting it to operating cash flow and free cash flow? and in Intel's case they can change the definition all they want but

and it might make sense but over the next couple years I'd really want to look is that actually turning into operating cash flow yeah the other thing is like if depreciation shrinks but CapEx continues to like constantly grow then maybe it's

indicative that they that the lifetime or the shelf life or whatever of whatever they're depreciating wasn't truly extended however i think you could probably look at first of all this this kind of stuff has to get typically if i'm not mistaken has to get passed with regulators you can't just like and that's a big extension well like they're auditors they're auditors um that's a big extension to go from five to eight so i i imagine that they actually think uh the useful life is

significantly longer this is just another reason as brett mentioned to pay attention to free cash flow yeah you gotta you gotta do that you know comparison operating income or net income to cash flow is it converting how consistent is the conversion yeah and the other thing is like it's even i'm not sure companies necessarily want to do this because well it depends on the management team but um so a lot of the cloud computing companies just extended the useful life of their servers from four to five years that increases their net income because it lowers their depreciation. However, when you're increasing your net income, I think barring any other changes, you're increasing your tax bill. Yeah. Well, you're saying you're at the end of it.

You're increasing your operating income, which is increasing your tax bill, which is increasing your net income, even though cashflow, sorry. Yeah. Basically your taxes are going up. So if you're a company that prioritizes free cashflow over the longterm, theoretically basically minimizing taxes in the short term as a way to grow cash flow over the long term. So some companies, I imagine, are reluctant to extend the useful life. If they're able to depreciate more, it's almost better. I mean, Amazon assuredly doesn't want to extend that because they want to minimize their taxes because they do talk about cash flow over earnings all the time. Right. So sometimes, and it's probably interesting to see how they talk about it.

Maybe they talked about it on the conference call. I think sometimes companies might be trying to boost EPS, especially if they think the business is valued on that from Wall Street or whatever. But I would say it depends how they talk about it. If they were kind of reluctant to do it, but they said like whatever – and I don't know what they were depreciating. I don't know if it was like chips in inventory or whatever. um i would look for an explainer on kind of what they saw and why they chose to do that yeah and if peers did it if like competitors or peers had to do something similar then it's probably i wouldn't think of it as fraud yep i agree but always something to track okay next topic yeah

we don't have no other comments on that okay i want to talk about this is a short one i think it's fun. This paper about was the great resignation, all home price appreciation. Here's a quote from it. I'll try to paraphrase it and explain it afterwards. So homeowners with stronger house or areas, excuse me, regions of the United States, this is kind of their abstract here. Regions in the United States with stronger house price growth tend to have lower labor participation rates, but only for homeowners around retirement age, so age 65-year-old or older, a 65-year-old homeowner's unconditional participation rate in the labor force of 44.8% falls to 43.9% if he experiences a 10% excess house price growth.

Again, that's a lot of numbers there. So basically, for older people in the United States from 2019 to 2020 through, say, mid-2022, I don't know when this paper was published, are they maybe the end of 2021. If home prices grew a ton, then we're seeing a decent chunk of them retire more than the national average. And yeah, you could have said this is correlation maybe, but they looked at different regions and it kind of lined up. So say the West Coast maybe had more house price appreciation and more people started to retire. And the way they use the numbers, they did a kind of a counterfactual. And they said that if housing returns in 2021 were equal to 2019 returns, so say there wasn't this housing price bubble,

there would have been no decline in the labor force participation rate. So there would have been no great resignation, no labor shortage, all that stuff. Does this make sense to you? And do you think the labor force problem that everyone's been talking about in the news and stuff is just going to solve itself as we get rid of this asset bubble where some people might have said, oh, my house is worth this much. Oh, my retirement account is worth this much. My crypto in some cases is worth this much. And now we're coming back down to earth and they're like, okay, I think some of us might have to do some work for society. Yeah. I think that some assets shouldn't have a value attached to them every day. I think it's dangerous to put a market on

or a mark to market every single day on certain assets. And Holmes is probably one of those. The Zestimate, your anti-Zestimate. Don't look at the Zestimate. Yeah, I think if you're determining your own personal wealth based on your Zestimate, just know that's a very risky thing to do, and I wouldn't make any drastic decisions based on that. if you've got bids for... I would not worry about what your house is worth until you're selling, until there's conditions. If you're not using it as an investment, until there's conditions for you to move, I wouldn't worry about what your house is worth. Yeah, that's a good point. Also, when you sell your house, and I think if you sell your house and it's up a ton, you're kind of in a bubble period, you got to live somewhere. And that probably means that

your expenses are going to be the same. So I really, I don't know, it concerns me. Yeah, you could have a giant payment if you sell your house. But I think that's a really interesting paper. And I wonder if they're going to be right, proved right over the next year or so, as some of this stuff has come back down to earth. Although I did see Ryan, and you're going to be very disappointed in this one. It was some Seattle newsletter this morning that of all the major metro areas in the United States, Seattle rentals prices are up the most since the pandemic. Percentage-wise, since the start of the pandemic.

Resilient market. It is, as we know, it's so painful. It's honestly shocking. That really surprises me, honestly. We'll see. In 2023, the layoffs just started. So fingers crossed. We do have a lot of comments. Sleepwalker says the bear market is over. Buy stocks with solid fundamentals such as Carvana, AMC, Bed Bath & Beyond. I'm sure this is sarcasm.

disinflation is here and the recession is just chinese propaganda good luck um yeah it's it's kind of an interesting period because i look at i look at my portfolio and i think like or i see i see like kind of really bad businesses or like just no businesses at all ripping um you know bed bath and beyond i'm pretty sure like filed a going concern that they they're going to go bankrupt um and the stock's ripping and i think like oh my gosh there's so much excess but then i'm like wait my portfolio is up a lot too like do do i own the shit goes like no mine are the good businesses that just happen to get traded in line yeah can't say we had a bad january um but i i would disconnect carvana and amc bed bath and beyond some of those from the

recession honestly who cares whether gdp was negative two percent or plus two percent um doesn't matter to me, but those companies are still in very, very tough spots. And as two of those, Carvana, we'll see. But two of those, I mean, one already filed for bankruptcy. The other one is guaranteed to go file for bankruptcy. Here's what I want to do. I want to talk about the Munger crypto thing, because this is the video we can break out that I think will get a lot of views. And it's also very interesting because he wrote an op-ed in the Wall Street journal. Here is a quote from the mung bean. In the US in recent years, privately owned companies have issued thousands of new cryptocurrencies, large and small. These have later become publicly

traded without any governmental pre-approval of disclosures. All this wild and wooly capitalism is much like that to Mark Twain, who was thought to have said that, quote, a mine is a hole in the ground with a liar on top. Pretty good quote. He then goes on to talk about how all these things are not a currency, not a commodity, not a security. Instead, it's a gambling contract with a nearly 100% edge for the house. And then he goes on to say, what should the US do? He says they should ban cryptocurrencies. So Charlie Munger said that the US should ban cryptocurrencies. And what did he say after that? He said, what should we do after we put a ban in place well one more action might make sense thank the chinese communist leader for his splendid

example of uncommon sense so one thing charlie munger hates cryptocurrencies second thing the man loves the chinese communist party more than uh it just it's crazy how much he loves them you know this kind of plays well into my book report uh which i was going to do so i uh i read a book this week called American Rascal, which it's this book about – I don't know how I'm blanking on his name right now. But basically, there was this really rich American – Jay Gould was his name. Sorry, it's kind of a forgettable name. He's kind of a forgettable guy, honestly, aside from the money he made. But he – at the time, this was kind of like 1860s to the 18 – maybe through 1900 that he was basically a trader on Wall Street, there were no rules around it.

And it genuinely reminded me a lot of crypto over the last couple of years. And he even had moments where his whole goal was to just manipulate the currency. And if you were able to get in charge of an actual business, it was much easier to manipulate it. So I'll pull up one quote that He mentioned in the book – let me find it. It says, being an insider was a dream come true for Drew, which was like a friend of Jay Gould's. As an outsider, he had to make up stories to manipulate stock prices. As an insider, he didn't have to make up anything. He just had to buy or sell ahead of corporate news. Even better, he could determine the news. He could raise the dividend or slash it on a whim. He could cut freight rates and scare investors, or he could raise rates and whip up prospects for higher profits. Erie's share price was a yo-yo in his hands. For extra cash, he could have Erie award contracts to businesses he owned on the side. These days, Jews' manipulations would put him behind bars. Back then, they were perfectly legal.

Markets just simply weren't fair. And I don't think – just kind of going through this, it bared a passing resemblance to early days crypto. So, I think either really strong regulation or, I mean, no, I mean, there are underlying businesses here, but they were essentially trading beans because no one knew the true worth. You didn't have to report your financials, that kind of thing. You could report false financials. So, like, yeah, I think, I don't know if getting rid of it, you know, whatever, like if you want to have a gambling market, that's fine. um but we got a comment here what is the name of the book you want to repeat it again yeah it's american rascal it's a pretty short read pretty quick by greg steinmetz i gave it i gave it an

8 out of 10 so i thought it was solid short and it's it's kind of like as if the whoever was greg steinmetz writing it felt like he was kind of along with jay gould almost as like a friend that was involved so i find it impressive that they're able to get that much information on someone who lived 170 years ago but um or yeah it was anyway good book solid book yeah what's what's interesting is the the crypto market reminds us reminds me a lot of that pretty obvious but the the j at least j gold is trading real businesses these cryptocurrencies are all air it's like all air which is just so amazing i think yeah the monger op-ed wasn't that good i thought because he focused too much on china but it is it is so uh it's just so crazy that

crypto was so big and it wasn't even that there was anything under it it was all just it is uh it is quite it is quite amazing uh okay see the future the uh as as we wrap up what is your what is your next book that you're going to do two weeks from now uh i started chip war um which is that one basically about the history behind silicon valley and the semiconductor or markets it's been okay so far but uh oh yeah you probably don't like your book yeah you're probably not gonna i'm not gonna say you're not gonna like the first 50 pages it's just u.s government military stuff from the 50s so yeah the uh the other thing whenever manga writes an op-ed it's always this battle of like thank you like that makes so much sense then he's like

just like the perfect chinese communist party it's like what like why'd you have to do that I know he's not a good take. I know he's not going to. Yeah, it's just like, how are those going to look 30 years from now? Either way, we're running up on time. That is 1030 a.m. Pacific. So that is it. As a reminder, we do these live.

We change the time. We're going to be doing them live. 930 a.m. Pacific time, 10, 1230 p.m. Eastern time on the YouTube channel. Check out money. The link will be in the show notes for the podcast replays can be watched as well. so you can watch it later in the day or really anytime. Thank you all for listening. Remember, we are not financial advisors. Anything we say on this 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 again for listening and all the questions, everyone. Have a good rest of the week. We'll see you next time. Thank you.