Chit Chat Stocks - Investing Power Hour #71: Buffett Behind the Scenes; More Disney Woes; Strong Earnings Reports

Episode Date: August 13, 2023

The CCM Investing Power Hour is a live-streamed show every Thursday. 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/ ****************************** 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 recommendation. Now, please enjoy this episode. This is the Investing Power Hour number 71. As we chug along during the dog days of summer here, I'm joined as always by Ryan Henderson. On these episodes, we talk about whatever we want,

really, about the investing world. Probably going to be a lot of earnings this week. I know I got a good thing from a sub stack called necker value, uh, about behind the curtains of Buffett's life. So a little bit of Buffett could be fun. I saw some good tidbits there, Ryan, anything on the docket for you? uh i've been swamped this week in earnings and just work in general so i haven't had as much time to kind of do that much reading but i saw i don't think last last week we didn't speak about amazon's earnings right because no we didn't yeah because i was late yeah that'll be interesting and then icon enterprises after the short report um they ended up having to cut their dividend by 50 so looks like i mean that's not really all i know about it so i guess that's my whole story but we're gonna have to cover the poster in my behind me here uh yeah for those that don't know for

those that are listening brett has a poster behind him with buffett munger and carl icon so it aged poorly it did it has well you know the story's not over yet but it seems like they're in a tough situation and kind of strangely got ahead of their skis there but ryan why don't you want to talk amazon first why don't you go first on that one what were your thoughts well i thought it was a really good quarter same as everyone else um it's one of those them and google it just feels so easy to own and it's funny like we were non the magnificent seven we kind of avoided owning for a long time not necessarily on purpose but we just i don't know maybe it was just because they were so big we kind of thought what's left in terms of like

edge there what kind of like what's can it really grow that much and i gotta say switching teams and moving to the the cheerleaders for the magnificent seven i am all on board because now I look at all the takes that are like, you can't beat the S&P owning the Magnificent 7. You got to be in small cap and special situations. And I'm like, no, that just isn't true. Here we are. Amazon had a great report.

And it just kind of reminds me how well some of these companies are really run and kind of the vast resources and the advantages that they have now at this point. amazon's retail business turned to profitability i question whether or not i mean advertising is included in there and that's 22 that's 41 billion dollars of pure margin pretty much so i question how profitable the actual retail like delivery business is probably not very profitable um but it's i mean advertising is a part of that business so um in aggregate it was profitable both between the international segment and the North American combined,

which is a huge improvement from last year. They talked about the cost savings that they're generating, moving to like these new smaller regional hubs instead of one big national delivery network. AWS re-accelerated, I guess, or it's like stabilizing. Stabilizing.

Stabilizing, re-accelerating. It's not the right term, but I guess it's stable. re-accelerating relative to their expectations from last quarter yeah the third derivative is is coming into play there no it's uh no okay i mean willis cap on twitter had this take that i think he was semi-joking but also not yeah it was when amazon was i think it's like in the 90s $90 a share area. He basically

said, fast forward one year, AWS has re-accelerated. Retail is profitable again. Amazon's a $200 stock. Now, it's not a $200 stock, but I think he may end up being right on both those two big

assumptions. I'm kind of bummed because we size the position pretty small. We own it, I guess, for anyone that doesn't know. And to be honest, it was my, my caution that ended up leading us to sizing it too small because I was worried that retail just wouldn't be able to just turn the corner to profitability dead wrong.

I think when you, when you got a fast pitch bet big, and that was, I mean, hindsight, clearly a fast pitch or a fat pitch. Yeah. You know, we'll, uh, we'll let it slide or I guess the other, I'm the only other person on the investing team. So we've talked about it's important to not, you know, everyone's going to have mistakes. I've met plenty of them. I think the one thing I'd push back on you there is that I don't think it's that retail

is necessarily unprofitable. It's that they're still profitable despite the fact that they're investing a ton in Alexa. They're investing in a ton of these generative AI things for whatever reason. They're investing a ton in this healthcare stuff, Project Kuiper. the list goes on and on and on. We actually did a giant... We tried to compile every single other bets they were doing during one of our not so deep dive episodes. I think we did that right at the beginning of 2023. And it was actually much bigger than I even thought. So when you combine the fact that third-party sellers are growing at close to 20%, advertising is growing

20%, subscription services are growing at a double-digit rate, I think it's pretty clear that retail could grow its profitability for a long while if they wanted to. But I think the big concern still is going forward, whether they waste a lot of money on these things or some of the stuff like Alexa, everything outside of the retail and AWS segment or the core retail and AWS segment never really materializes and gets a positive return on invested capital. Yeah, I guess that's a good point. the retail is definitely got to be profitable if they're losing money and all

those other segments, because, I mean, I don't know, I guess you kind of forget about them just because the way they categorize their revenue, North American, international and AWS. And so I always think like, I guess I just paint it as North American retail, international retail and AWS, but it's really kind of a lot more under that hood. So yeah, Third-party seller services growing like a weed advertisers are advertising services growing like a weed.

Those two both have to be pretty good margins, higher margins than their core business. So yeah, I think if it's third-party sellers and advertising is growing at more than 10% or close to 20%, like they have this quarter, it'll be pretty hard to lose money over the longterm as long as AWS isn't dead.

Like people say, Which I think was interesting, the context there, again, we really give ourselves a big handicap on AWS because we're not experts in that industry. We really keep ourselves off-footing there. So we really wanted to invest in the stock when we could buy cheaply a business that we do understand, which is the retail arm. But the note they had on AWS was that they tried to put into context for the investors where they said that everyone's pulling back, they're optimizing spend for their customers. And so they're decreasing costs for a lot of their customers that were existing, but they still grew revenue 12% on a giant revenue base. So that means they're trying to hold everyone's hand and say, hey, look, we're still attracting a ton of new customers that are going to eventually start getting a nice dollar-based whatever. They don't give out a dollar net expansion rate number, but they're going to eventually start spending more and more with us as they grow over the next five, 10 years.

We do have a question in the chat from Mark USA. He says, can't stay for the live show, but we'll catch up later. If you guys could give your quick view on now net earnings, it would be appreciated. Yeah, we'll keep that note. But yeah, that'd be fun. We haven't talked about it yet. What were your thoughts from the quarter? Yeah, well, do we have anything else on Amazon?

I think that was all for me. Pretty steady, no big surprises. Anything else before we go to Nellet? No, I thought it was a pretty dang good quarter across the board. It's fun to have Andy Jassy on the calls. You kind of quickly realize how competent he really is. I golfed with a random guy in Seattle who worked with him and said that he was the smartest guy you ever met.

And I guess it's probably true listening to how smart he is. Yeah, and I've kind of been looking at the numbers, revisiting them for some articles I've written about Amazon. And they spent $41 billion in CapEx in 2020, $61 billion in 2021, and $63 billion in 2022.

I just don't know any. And now I'd say probably half of that, maybe 60% of that has been like fulfillment network, delivery, and the other half, and there's other stuff in there as well. But the other half is kind of a server space for AWS. I don't understand how companies could compete with that. I mean, Microsoft may be on the cloud front, but there's no delivery business that's going to be able to invest that much money. As long as they have the right people in there and they're willing to invest that much money, they're just going to deepen their moat every year. Okay, when I sell my business, I want the best tax and investment advice. I want to help my kids and I want to give back to the community.

Ooh, then it's the vacation of a lifetime. I wonder if my head of office has a forever setting. An IG Private Wealth Advisor creates the clarity you need with plans that harmonize your business. your family, and your dreams. Get financial advice that puts you at the center. Find your advisor at IGPrivateWealth.com. You've got to try breakfast at A&W. You've got to try breakfast at A&W.

And what better way than with a delicious Pret Organic Coffee? Starting at just $1 all day, every day, now until December 31st. Yeah, I think one concern in the near term is that the UPS contract got revised and the salaries got raised a ton. So that could maybe put a lot of pressure on the wages over at delivery warehouses, that type of stuff. But, you know, they get a lot of flack for that. they get a lot of did you see that thing about that what did they deliver

five packages an hour did you see that tweet or whatever no I didn't it was one of our I guess idols Jason Kalakniss

and we don't usually I'm not criticizing by name because I he's had some takes that I like takes that I don't like I have nothing he's definitely not

there's nothing out of the all yeah of the all in pod he's maybe the one I like yeah you know he gets a bad rap sometimes i think but um some of that's probably self-inflicted he had this like tweet he's like can't believe ups drivers are making this much money he's like he tried to

do the math to like what's the revenue per package they deliver and he's like what are they how many packages are they delivering an hour what five oh boy everyone's like okay so he's never worked a labor job yeah well that's how it goes i think they should get paid i do think sometimes they want than they do but yeah i think it's a hard job they make everyone feel great whenever the people see them their package is getting delivered it's fantastic and it is a hard job but the uh i think sometimes all their tweets it's like okay this makes sense makes sense and there's one crazy thing and then it's just engagement bait and it works that's true well now you get paid for that yeah that's true what do you think you're going to do for engagement bait i i always do well

with stock-based compensation stuff but it never really goes fully viral it's too niche i might do uh just big tech like oh and just you know cheerleading yeah i did like a tweet about like google's cloud operating margins and how they've improved and it just like goes viral because i mean those have the biggest shareholder bases and people just want to like you know cheer for their company so yeah i think maybe we've got to start hopping onto the tesla you know and if you tweet positive things about that it's another big shareholder base you just gotta buffett quotes gold crypto tesla even if you don't have any investments in them just tracking them and tweeting stuff about them you're gonna get

more engagement yeah sorry our now net tweets don't really seem to do a whole lot that's true there's about 10 of us on there that follow the company but that's a good segue ryan what do you think of the quarter seems pretty standard to me except they're just getting compressed uh their net interest margin is getting compressed like a lot of other financials so to hopefully work through that yeah it's kind of hard to have a whole lot of takeaways from this because first of all there isn't always that much color provided there's really not a lot of color provided at all like why why did it happen why did anything happen they don't tell us yeah and so you kind of it really is and i hate saying this but it's just a bunch of trust and management

essentially is what you have to have and um they've proven that it's worth trusting them but the gap numbers are kind of yes the net interest margin was getting compressed so it's bummer plus i mean just the student loan book is shrinking and then on top of it the student loan servicing the it's not going to factor in the what do they call it the end of the moratorium which is going to be september i think it's official this time it's going to be september yeah so that'll kind of help the loan servicing segment and then i don't know the the really the headline numbers looked kind of bad but if you look at the underlying businesses everything looked pretty good i thought they were yeah their gab net income is always choppy yeah they were

lending a lot at the bank although it's still a small part of the business they were they grew the nail net business services quickly revenue was up operating income was up there and loan servicing is kind of in a weird uh middle ground right now but all in all i mean i didn't really have a whole lot of takeaways i think a lot of the shareholders are the same here where they see it they're like i don't know what to do with this and the stock just barely moves yeah i saw this down a little bit i think people may have been surprised with that margin compression but But yeah, I kind of throw my hands up whenever there's a quarter for Nelnet. It's more of kind of looking at the long-term trend.

I like to track maybe book value growth. I think that's not a bad thing for a company like this. They're also making investments. I like to track what they're investing in because they kind of give that out. I think they made a decent amount of new solar investments this quarter, which is interesting. So keep tracking that. But besides, there's not really much else. The loan book's going to do what it is.

The loan servicing is kind of paused. Well, another KPI I really like to look at is the, you said business services, but it's just that education software and payment stuff. I really like to look at revenue for that because that is high margin. That is one that's pretty easy to understand what the margins can be for them there. So the fact that that's growing pretty quickly was probably the biggest highlight for me. yeah sorry if we don't have any more exciting takes and sorry if you've already left by this point because i know you for the whole live show but um i guess what else do you have what uh

i think other news wise i did see you know i guess no one cares about inflation anymore but it came out today can you guess what price were was inflation lower in july or is it july yeah lower in july than june or higher in july than june what do you think brian i have not seen it So I'm going to go ahead and guess higher. It was higher. Prices rose 3.2% in July from a year ago, outpacing June's inflation rate of three. Yeah, I felt that. I felt that in the bank account.

Yeah, the 0.2% change. Yeah, I don't have any other takes on that. It seems like that's pretty boring right now. I do have- US reported. Coupang reported. and we just had our show that came out on them came out three days ago

yeah would check it out I highly recommend it and that quarter was another good one it's one of those things that doesn't where all my concerns from the episode I was like I don't really know if I believe the margin expansion story and then two days later they crushed

expanding margins they expand again it's a little frustrating but I think the thing that really stood out to me was they doubled their capex i think it was like 160 million last year to 320 million this year and they still took free cash flow margins from negative i want to say four percent to let me double check i wrote it down somewhere it's like negative four percent to eight percent

1,200 basis point improvement for cash flow margins while doubling their CapEx. Yeah, what do I like to say? A working capital advantage will give you capabilities some people may consider unnatural. That's the meme I like to draw. A Star Wars quote. Yeah, but it's totally true.

And it seemed like a great quarter. Yeah, we're still on the watch list for us. We'd like to get it at a better price. Maybe it's one like Airbnb that's just going to be on the watch list forever because everyone just keeps at the premium valuation. But yeah, I think it's a great company. They're investing in Taiwan, which I think is interesting. They said that they're seeing good results there, but there's still, you know, it's going to be early days. So that's impeding margins as well.

But they're doubling, I think, their investment there. I can't remember it on the numbers in front of me. I'm sure it's a great sign. Overall, good quarter. Yeah. Not much else. All right. Oh, we got a...

uh comment from oh mad's capital on he's a fun twitter account glad you guys are on board the shift from first party to third party and ads were the main reason i flipped bullish in may 2022 historically they've teased margin leverage after investment cycles too uh he says need something to create engagement for finn twit that now that can't lol thank you for the show yeah well you have to start calling it he's he's great at that he just did the value trap basket and just did a whole bunch of very popular tickers that's true it's it's bound to get engagement i think if we called nelnet the next berkshire that's what i always do for the motley fool so honestly that could work i just feel so crummy when i say that sometimes you have a deal like getting

article bonuses ryan or not yes the uh what's he gonna say here yeah i mean that i couldn't find the quote, but I thought there was a time when Bezos was still around where he's like, kind of said something along the lines of buckle up. This is going to be a huge investment period. That was right at the start of COVID. First quarter earnings call after COVID. It was during the call? I think so. Or the letter. I didn't find it in the letter, so I think it must've been in the call. But he said that and everyone's like, oh yeah, okay, here we go. Big investment period. And

then the investments happen and everyone's like what's going on what why are we unprofitable yeah and then they blame jassy you know like like bring bezos back we need him yeah do all this yeah mad's capital says i'm sorry for that guys match will make a comeback soon he put that in the value trap basket it's all right i think i'm through honestly there's a couple quarter there's a couple companies this quarter spotify iac that were pretty disappointing match really not so i'm feeling good about that one thing maybe that's you know it's a trap kind of thing yeah there was there was some bummer quarters you know what's funny this match i thought had a good quarter yeah i would have i would have guessed the stock would be in the 50s

but i can never predict it yeah the other thing that i found kind of ironic is if you look at the I see she had the letter. He's like, he said, Joey Levin says something along the lines of we're up on our buybacks. Oh yeah. Like, he's like,

not that that matters, but it's, it's better. It's nice to have a nice to have it positive instead of negative. Just because they, they bought shares at like, I don't know. It was like average of $52 or something like that.

And the stock was at 60. And then like you wrote that, And now the stock's got to trade back down to 52. Yeah, I think, let me pull it up right now. It's at 58, but still, it did collapse a lot right after they reported. Okay, when I sell my business, I want the best tax and investment advice. I want to help my kids, and I want to give back to the community. Ooh, then it's the vacation of a lifetime.

I wonder if my head of office has a forever setter. An IG Private Wealth Advisor creates the clarity you need with plans that harmonize your business, your family, and your dreams. Get financial advice that puts you at the center. Find your advisor at IGPrivateWealth.com. You've got to try breakfast at A&W. You've got to try breakfast at A&W. And what better way than with a delicious Pret Organic Coffee, starting at just $1 all day, every day, now until December 31st. You gotta try breakfast at A&W.

At participating A&W locations in Ontario. I mean, I guess it was right, but you just don't even need to put that in the letter. Yeah, I'm all for that buyback, but yeah. Okay. Well, do you want to talk about these interesting nuggets from interviews with Alice Schroeder, who wrote The Snowball? Yes. Okay. So, for anyone that doesn't know, she wrote the big biography on Buffett, the one that's the most popular. She spent, I think, estimated 2,000 hours with him over what had to have been multiple years profiling him for the book, interviewing everyone. everyone but when it got published buffett may have thought it got too personal or something

like that too much into his personal life so he kind of got really mad at her and hasn't really talked to her much since so she uh i guess is a little open about not just being positive about stuff he does uh so there was this interesting quote or article from necker substack uh the guy that writes it is frederick i can't pronounce your last name excuse me he's on he's on twitter i think he's german so hard to pronounce your name apologies frederick but there were some interesting quotes here so let me just find one about i gotta scroll down here okay the importance of charlie munger so basically she said that his biggest weakness this is a quote here his biggest weakness is the flip side of his strength he is very rigid and he doesn't really

listen he has incredibly firm convictions and is often right but when he's headed down a wrong track he tends to not pay attention to contrary information and that's one of the roles that Charlie Munger plays that is really important is he is one of the few people who can tell him no or actually say you're wrong and he'll actually listen to them I thought that was interesting but it seems what's weird is he always pray you know praises and talks about like all right you got to be open you got to admit your mistakes and stuff like that but in reality he has the same problems as everyone else is getting you know too much into your conviction i thought you were explaining munger at first when you said that i was i was thinking alibaba that's true

it's probably the same i mean we're all we're all the same so yeah i bet they balance each other out pretty well yeah here's another one that i thought was quite interesting where it made me i don't know if it's hesitant but kind of shows that his early stuff may not work today uh so she was basically asked would buffett not be as successful today um the first one was basically he would now do the work back then he would do the work that a lot of people still do today which is kind of you know talking to people filing finding all this stuff and the internet made it a lot easier to find all this information but the second thing that apparently he did is he was uncommonly good at going around and talking to management and getting them to tell him what their business

plans were. This used to be perfectly legal. In fact, the insider trading world has evolved a lot. And he was great at finding out if there was a tender offer coming or something like that. And you cannot do that anymore. So I don't think he liked, he probably did not like her explaining that to the public, but I guess this was legal back then. And he was a little bit more aggressive than I think a lot of people who just know him

as the Berkshire Hathaway CEO would present themselves as. Yeah, that, I mean, it doesn't paint him in a very good light, but it doesn't necessarily surprise me all that much. Reading Snowball, you kind of got that sense because, I mean, if you look at that scorecard in those early days, he was putting up numbers where it's like, you can't just pick lucky stocks

Like you have to have a sense of what management will do. And I mean, I think it was more accessible. There was just less competition back then. So maybe it was a little easier to get access to some of these management teams. Yeah. And some of the times he ended up being the controlling shareholder. Yeah.

Yeah. And what's interesting is it, it wasn't, it's the informational advantage that helped him a ton in the early days. Right. It wasn't the only thing, but that is slowly, slowly gone away. So I think trying to learn from him, it's kind of tough because, okay, the information now with the internet has just been democratized everywhere. And it's really choosing what information to look at.

There's the information overload that people talk about with investing. So it's honestly flipped like 180 degrees where now it's, and I talk about this in one of the quotes here was talking about how, and everyone knows this, he goes to the office, puts on CNBC on mute, and then reads with the blinds down. She made a joke that he doesn't need sunlight or something like that, where it's about not getting, you know, the wrong information and all this crazy information out there that you can just get an endless overload on. So it's the complete opposite as what it was like in the 40s, 50s, 60s, I think.

Yeah. And I mean, let's not pretend like he isn't putting up solid performance today. like his investment course yeah today there's no information he didn't have an informational advantage on apple he didn't have an informational advantage on coca-cola you know kind of some of those really strong performing investments that were kind of his second act those are still good and the other part is yes he adapted his style the way he needed to but let's not pretend And getting that informational advantage wasn't a byproduct of him working harder than most people because he worked way harder than most analysts, investment managers out there.

That's true. That's pretty clear from the snowball as well. All right. Here's one more. Or maybe there could be a couple. So she was asked, how is Warren different from other investors? Carter's first one is The Doc About Behavior, but I think the second, she gave a three. The second one is quite interesting.

Here's the quote. His knowledge of business history, politics, and macroeconomics is both encyclopedic and detailed, which informs everything he does. If candy sales are up in a particular zip code in California, he knows what it means because he knows the demographics of that zip code and what's going on in the California economy. When cotton prices fluctuate, he knows how that affects all sorts of businesses and so on.

So that's one that I don't think people can really learn from is just having a crazy memory. But I thought that was quite interesting where he talks about, again, he's like, oh, anyone can do what I do and anyone can do this. You just have to have a nice psychological temper. You don't have to get over emotional and you just buy a business at a cheap price. But in reality, I think a lot of what made him successful is that he was just incredibly smart, but he can't say that to the national audience at the shareholder meetings now. yeah i mean certainly gifted memory wise but once again i it does

like he will he read voraciously and frankly but i think like 90 percent of his waking hours yeah and but here's the thing it was like 12 hours straight a day and that's literally not possible for 99.9999 percent of the population like i can't do that i can only do a couple hours a day so and it's also i mean half the time people don't even have the opportunity to do that like you know they have other yeah i mean he did sacrifice basically anything else in his life family any sort of vacations whatever yeah i mean spent an incredible amount of time or dedicated an incredible amount of time to it but i mean he's still you know he still has relationships with all his kids and all that stuff so it's not like they're it's not

like he doesn't see him yeah it's true that's true i don't think we want to get into that all right here's another one the third part which said separates him is the way he looks at business malls this one i think to be replicable it's something to learn from the best way i can describe it is that if as if you and i see an animal and he sees its dna he isn't interested in whether the animal is furry all he sees is whether it can run and how well it will reproduce produce, which are the two key elements that determine whether its species will thrive. So I think that's a good one is kind of having that mental or muscle memory of looking at businesses, what ones are successful, having that pattern recognition of, okay, what are

the competitive advantages? How are they going to last? Blah, blah, blah. I think that's one that a lot of people can learn from. That's one that we try to continually get better on as we study businesses, you know, for the podcast. yeah i think i'd like to think that i've that we've improved on that over time getting a better sense of like the fabric of what these businesses really are and what what's important in terms of

driving their performance over the long run uh i think it's kind of interesting that we've looked at autozone today because we're going to be talking about that probably in a couple hours here for a not-so-deep dive. And it's one of those where how easily can they reproduce? I mean, it's replicable. It's a simple model. They grow kind of at just a consistent rate. A little teaser.

We talked about we've had a string of great management teams. Coupon, I was like, this may be the best managed team of new companies. AutoZone could be the best management we've ever looked at. yeah all right i wonder if he's ever been it seems like a buffett style yeah maybe he never got cheap enough i don't he i don't think he likes retail as much remember he kind of was hesitant on walmart you know and he should have bought that i think he would maybe say the same thing about autozone um maybe it's something he didn't understand as much maybe he didn't like the automotive market but i think he's just really hesitant on retail yeah he definitely

under can understand it he understood walmart but he's just hesitant compared to something like coca-cola or american express which are a little more capital light i think here's a lot or as i say it's funny autozone and walmart have very much a similar blueprint in terms of what made them successful i think they were actually friends sam walton and the founder of autozone i think pitt hyde was on the board of walmart for a long time so yeah it feels like i don't know It feels like a simple business that he would have understood, though. Okay. Yeah, I understand.

Or I agree. I didn't mean to say that. I definitely agree. The last part here, I think this is one that anyone can take away from any listener here. Three-step investment process for Warren Buffett. This is from her Reddit AMA. First one, I think we can all take away from this. We try to basically base our investments off of this kind of thing as well.

First, is it an addressable investment? He rules out a lot of stuff that has too much tail risk, or he has no edge on in the market. For example, thinking he can be smarter at buying Johnson & Johnson than everyone is essentially market timing. Warren rules that out unless he has some insight he is convinced no one else has. Example, probably Apple. He may not always be right, but his approach works over time. So basically, do you understand this one?

And is it understandable for you? So something like that. Second, downside protection. This is probably one that we would hopefully needed to learn earlier. He looks for multiple ways to avoid losing money. If you look at the preferred stock deals he did after the financial crisis, he fenced in these companies and built in so many ways to avoid losing money, it was almost funny. He will pass on huge upside opportunities if he can't get downside protection.

I think that's one a lot of people take away from, and it's hard to understand, and it's hard to do, but I think it's one you want to probably reiterate time and time again, and we try to reiterate yeah I don't think we're ever gonna I don't think most people can build in the kind of margin of safety he was able to do in the later years because I mean he was like

like you said I remember that was the Harley Davidson preferred like you basically structure it so that you're the first person to get paid kind of thing but it's yeah that's definitely something we've failed to do at times

Yeah. All right. Last one. I think this one is one that is really important when identifying an investment opportunity, especially if you're kind of in the same Buffett type buy and hold camp or buy and hopefully never sell, is capital generating power. His focus is on how much capital an investment can produce that can be either reinvested within the business or elsewhere. So what she means by this is either the company has a long reinvestment runway at attractive return on investment capital, or they're going to return it to you through dividends and buybacks. That one is so simple, but I think it's always underrated. yeah that i think the reinvestment runway is kind of an interesting one because identifying it's harder than de-identifying the moat i think it's pretty easy sometimes to identify when something is competitively advantaged but a moat isn't that good or isn't that useful if you can't like returns on invested capital is nice but you have to be able to invest

that capital. And I think that's harder sometimes to assess. Like, okay, I'm going to go back to the AutoZone example because we're talking about it today. Clearly, they generate good returns on the money they put into new stores, but they've got 6,200 stores in the United States. They've got 700 in California, 700 in Texas. Is there really room? I guess I don't have a good sense on whether or not there's still room to invest more capital in the U S and kind of put more stores down, or I don't understand the Mexican market, which is their second one. Yeah. Well, I'll hopefully help you out there as I was the one that's covering the industry. There might be a little more attractive than you think, or maybe the lay person thinks as you'd

probably think it's a more mature business, but I totally agree. The reinvestment runway is sometimes harder to evaluate, which is why I think the margin of safety with that is buying at a cheaper earnings multiple with a management team that will continue to buy back stock if the stock remains cheap, which that's where a lot of your returns can come from. If you buy a stock at a 10% earnings yield, they continue to buy back stock. It remains at a 10% earnings yield and business is durable so or growing you know flat or growing you're going to have decent returns all right here's maybe one other one and i think this is one people know a lot about is his disqualifying things his quick you know judgments on a business opportunity or an investment

opportunity and she said typically and this is not well understood although i think now it's understood uh his way of thinking is that there are disqualifying features to an investment so he rifles through and as soon as you hit one of those you're done so don't she says don't like the ceo forget it too much tail risk forget it low barge in business forget it stuff like that i mean that's one that a lot of investors can take away from where yes like if you don't like if you if the business looks great and the ceo you don't trust the stock can still do really well There's plenty of examples that we've had over the last five, six years of CEOs that make us nervous.

They've done extremely well. I think it's probably even more prevalent during this time period. But I think the key is if you don't trust the CEO, you're not going to be able to trust if the stock draws down over 50%. Yeah. I mean, that's where I think insider ownership is such a big part. And I guess how much are they getting paid relative to their actual performance? it's hard

if someone asks like what are the red flags for a CEO I can't tell I just don't like him I just don't like him I literally listen to them I listen to the AutoZone call and I was like oh this guy's legit he's not a liar like he's just honest

there's some I listen to and I'm like you are just trying to make yourself look good and then get paid yeah PayPal PayPal is a clear example of that all all no names there but the entire team yeah 100 i i'm not sure you kind of it's hard to describe like what what exactly makes one a good ceo but when you see it you know it and i think you just have to study a lot of them to figure it out but the autozone one maybe it was

did you listen to the recent conference call yes yeah i don't want to blabber over autozone too much but there was a like one of the analysts asked the pointed question and he's like that was a very interesting way of phrasing it but i appreciate your question yeah and he was like they were like well you lost yeah they're like commercials growing slower than one of your competitors right now is a bad quarter on commercial and he's like to be honest you are right like we need to be better and that's all he said and it's just a refresher because a lot of times management teams will try to spin it you know throw you through the spin cycle on that but i think that's enough buffett that was a fun segment ryan you had something else here disney

earnings maybe roblox could be fun uh but if you want to talk disney i can maybe pull up some roblox numbers because we haven't looked at that at all uh did i have that did i have that pulled up uh i thought you had disney in the file here oh never mind you had icon well no i thought it was we can talk about disney i honestly haven't looked at it okay do you want to pull it up Have you taken a look at it yet? Besides seeing a few charts on Twitter now. I think it was bad, but that's enough. Well, speaking of the spin cycle.

Yeah. I mean, Disney every time. I also, I literally just, I don't know. I just look for confirming evidence whenever I get Disney. Cause I'm not, I don't really like Bob Iger, but. Okay. I'm going through it right now. Sorry if you hear clicks in the mic.

No, I don't hear it. Revenues grew 4%. Okay. Let's just go to the segments because I don't know. Segment results. Entertainment, media, distribution. Okay. So basically streaming and everything else.

Yeah. Down 1%. parks experiences and products of 13 damn god it's so consistent they amortized what's tfcf no clue their earnings reports are hard to decipher honestly they i think you know what's funny this is another red flag they changed their segments again That is a big red flag. It really upsets me. Okay. Here's the other thing. Look at these adjustments. It's saying segment operating income is 3. What segment is this for? Total segment operating income, 3.6 billion. Actual operating income, negative 134 million. The adjustments here. Wait, what segment operating income? I think it's like parks or, or both combining parks and TV and movies.

I don't know. There's not, I think it's both. Yeah, it's both. Okay. So the segment is positive, but when you add in corporate costs, no, when you add in 2.7 billion and restructuring and impairment costs, 300 million in interest expense, 400 million in amortization of Hulu intangibles and TFCF, which I'm blinking on what TFCF is, plus $295 million in corporate and unallocated shared expenses. I never liked that because those aren't one-time.

I don't know. I mean, it's the same problem that it seemed like it started with. I guess here's something interesting. DTC revenues were growing 9%, so that's DC+. Linear networks declining by 7%. the raising price half a billion in dtc losses okay so it seems like yeah and i think the parks is fine right it's gonna be steady they're making a big bet here and they're raising prices on their streaming offerings they're also trying to push people into ad or separate the cost between ad

free and advertising supported so i think maybe pushing more people to the advertising side do you think they can raise prices like they have on Disney Plus, Hulu ESPN Plus because I don't think they really can at Disney Plus core

so excluding India so no Hotstar, no ESPN Plus no Hulu they grew subs 1% while increasing average revenue per sub by 2%. I don't know, it's such it's one that I flip-flop on all the time, frankly

because it's like obviously they have good IP but the value of that IP when people are producing when Netflix is producing new content every month HBO is producing new content every month and it's getting more and more competitive

I don't think the back catalogs really matter that much anymore. I know maybe it's different if you have kids, I get that but that's a small subset you're also competing with youtube in a big way and so it's just the streaming one is difficult to wrap my head around obviously parks is a good business but i just would have absolutely no way to forecast how many subs could they have how much would those subs pay and how much would it cost

to make those subs happy yeah there's no way to know for me and it's just going to get worse and worse or not worse and worse it's going to get harder and harder to make up for the losses in traditional TV because those that revenue

is just going to decline and decline and decline until it goes away sometime I don't know when it's a also ESPN Plus lost the MLS contract a bummer of a time.

Yeah, bad timing on that. I mean, that's not really relevant, but it may have been two paid subs. Yeah, for sure. For ESPN Plus paid subs, they would have probably boosted probably like $5-10 million, for sure.

Yeah, because Apple's getting they gave out some of the numbers and they said it was definitely helped by messy coming but the uh they're also paid a lot more yeah and so the business it wouldn't affect anything for disney overall absolutely yeah no way but or even apple absolutely not yeah i mean maybe it would make it's kind of a good example of having a business built on sports streaming rights is not good yeah or by itself like amazon can make it work because it's not it's a holistic bundle yeah yeah it's it's driving kind of a holistic advertising offering really yeah it's disney i don't know man i don't know i don't

know what they do i think they made the big mistake of putting pumping out too much stuff when they have to they had to have been more like high quality low quantity that's how they should it succeeded and yeah that gets you less revenue and earnings in the short run but it creates you up for much better because now when uh any sort of disney property comes out with something and i guess star wars is pretty uh on the movie side uh low quantity but they've been so bad that people don't like them as much anymore but when it's high quantity people don't think of it as an event and you don't really get it talked about like what if they made 10 barbie movies no one care anymore but when it's that one when it's a unique thing and when it's i don't know i think

they're just in they're in an impossible disney's in an impossible situation but i'm gonna give out some numbers on roblox i know this is one we've looked at before it's kind of been on the watch list but sort of not i'm gonna give you some numbers here and tell me if you like the quarter or not so bookings which is their revenue figure 781 million dollars up 22 year over year cash provided by operating activities barely positive at 28 million so kind of break even their uh free cash flow negative uh slightly negative but they got a big cash buffer so they're okay daily active users growing 25 year over year to 65.5 million look at da use by region they're growing across the board if you look at hours engaged up 24 so in line with da use they're

engaging with the product. Average booking per DAU is declining, I think, as they move into more international regions. What do you think, Ryan? Stock was down over 20% on this. And the market cap is currently just $18.5 billion. Still not super cheap versus that bookings number. But Roblox looks interesting. They continue to grow, continue to execute. seems like a good business uh well my only concern here is i thought last quarter dave bazooki kind of came in and said we're going to start to moderate costs yeah he said well we're going to slow we're going to slow spending or whatever and we're going to start to see the operating leverage and it does not sound like they saw that at all

yeah i think it's well it's tough to have that happen in one quarter because of the it's not a overnight thing but i believe they said it was going to happen within the next you know by early 2024 next few quarters start seeing it but i guess you can never that's a tough situation as we talked about the amazon it's hard to get conviction that margins will expand if they aren't because betting on margin expansion is hard for multiple reasons.

It's just hard to... How is the business model going to be structurally changed? There's a lot of friction in changing a company's cost structure. We'll see. Last quarter, cash flow on $770 million,

roughly, in bookings, cash flow was $174 million. yeah i mean i think it's just timing i mean q2 q2 is always low outside of the pandemic i wouldn't really i would take a trailing 12 month basis on that summer summer summer's week summer's always a week for them because of a summer break yeah it says we are entering an exciting phase of our business as a result of our hiring over past few years we now have a robust mature product development organization we believe that with the momentum we see in bookings we can now begin to slow our year-over-year

increases in headcount and compensation should see operating leverage yeah i guess it'll take time but i mean i do i like the business and my biggest concern when the company ipo was that there would be some sort of fluctuation in terms of engagement or that there maybe there was like maybe it was just kind of like the fortnight of the modern day because i know there's games within the games it's kind of its own little digital universe but at the end of the day people are clicking on roblox versus clicking on other games clicking on other apps choosing to spend their time there so i thought maybe something would have come along and replaced it but all the engagement trends have gotten better and they've

got like what is it freaking 70 60 70 million daily active users that spend like an hour and a half on there a day so yeah and this is one where i think the moat it's easy to track whether the moat is widening because if hours engaged are growing i think the competitive advantage widens because if there's more hours engaged that means there's more time for their developers to make money so yeah i think over the like it's 100 not to youtube's moat yet and i think youtube has one of the strongest modes in the world but i think their end state could be there 10 years from now i'm just not totally convinced it's going to happen yeah and they've gotten to older users too or they've aged up with their users as their users have gotten older i still don't think it's

ever going to be you know a 30 year old platform but they're starting to capture more of the teenage demographic and 16 and up we'll see though we'll see yeah which is interesting i don't know how like 14 year old versus a seven year old is there that much higher of a propensity to spend probably not but they generate plenty of bookings i know but they you think they're going to get to 30 year olds if there's 30 year olds on the platform they're probably not the 30 year olds you want yeah i don't know if they changed like it's there's a lot of stuff of changing not you know how it's like minecrafty little kid type stuff now but they're building a lot of tools for more professional style developers to build stuff on there so i think over time they can

build stuff where that's basically equivalent to what the publishers that 20 30 40 year old people are playing i mean i see i see no reason to play that happening yeah but it's going to take multiple years and they've seen they said their high their fastest growing demographic is 17 to 24 and as that age is up like they're slowly like they said their strategy is to slowly move up to older and older and older and i think that makes a lot of sense because the older people value the graphics better so it's not there yet because it's a lot of it's streaming a lot of it's third-party development costs and stuff like that or excuse me third-party development tools and they're not going to be able to create like a call of duty style game today or allow people

to do that but i think in many years or you know 10 years they could it's going to be a long time but i would say i agree with you in like a three to four year time span but i wouldn't count them giving their um stated strategy over the next 10 years yeah you know who else reported marketa do you remember them sure yeah why don't we go over them last we got about four minutes here i think so well the only thing that really happened so i remember block is like 78 of their bookings or whatever or their volume they renewed their agreement with the cash app which was like this big hang big kind of overhang on the stock but it looks like they got way worse terms so apparently blocks taking some of the payment volume themselves let me just go to

what this guy says okay marketa cash app renewal comes at a 40 percent lower gross profit well this new contract will confuse the algos revenue estimated to decline 50 percent but gross profit by 10% for Marketo. Not sure. I think those two are a little counterintuitive, counterproductive. I guess gross profit concentration

for Block will be at about 50% as opposed to revenue, which is higher. Yeah. That's tough. They're basically just an API to facilitate that facilitate uh crime so that's not a bad business to be in or excuse me the underbanked

right yeah the cash card I mean the cash out with that Bitcoin stuff is so like it would be so easy to do stuff illicitly and getting approved for a cash card is like there's no review there's nothing yeah and we've seen the kind of at the short reports they've done some investigations yeah this isn't just my feelings like i paid for that murder with cash app and then like cash up was like they're singing about us in songs it's like okay yeah marquetta never made sense to me i gotta say no i mean it's just an area i don't understand that well all these companies why why would i invest in you over a visa mastercard and amex i don't i don't get it i don't get it i would if you study all these businesses i don't understand these thoughts

and maybe it'll work it's uh it's 10 30 on the west coast i think it's time yeah we will we have two minutes left because we started early all right what else got anything um what'd you think of the, did you look at Airbnb? Yeah. What did you think? Good. Yeah, I mean,

it's good across the board. It looked like supply was up like 19% or something like that. Another acceleration. Across $7 million. Yeah, it feels like a platform that's just going to be, that's just going to grow in relevance over the years. I just can't get comfortable

with the valuation at all. you want to have a uh yeah you want to have a i don't know if this is a morbid thought it's not a morbid thought it's a morbid investing thought i i think i had a it was either in a tweet or a blog post or something or i said the two the three companies are most confident that are going to grow this is like in 2020 or one i said was i was like airbnb coupon and roblox and i haven't made money on any of them yet so yeah but i'm never gonna be down on coupe i'd be down you'd be down on roblox yeah you might be down in general i mean everybody had a hundred billion dollar market captain they what are they at now yeah but i think what's the frustrating part is that

like all three of these at one point you could have bought them for decently right coupon was close to ten dollars a share airbnb was well below 100 roblox let me check what its low point was roblox at one point was that it's getting pretty close to its low point maybe that was the time but yeah i'm a little more cynical about roblox or skeptical about roblox i should say than i know airbnb or coupang coupon yeah i agree i agree well that's a great way to end it. We'll be talking AutoZone this week. Check out that coupon episode. I think it was really interesting. We're talking share cannibals for the rest of the month. So Lowe's, Discover Financial, and then Sprouts Farmer's Market. Thank you all, everyone for tuning in.

Remember, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. We are general partners at Arch Capital and clients may hold securities discussed in this podcast. You can watch the Investing Power Hour on YouTube every Thursdays or listen Sundays on your podcast player of choice. Thank you, everyone, for tuning in. Thank you for the comments. Hopefully it was fun. We'll see you next time. Head back to the streets and FX is the drop, a snowfall saga. Watch Wanda Bell and Leon Simmons fight to reinvent themselves in 90s Los Angeles, where the fallout from the crack epidemic fuels the rise of West Coast rap. Ambition, loyalty, and survival collide as

everyone risks everything to build something lasting at FX's The Drop, a snowfall saga. Streaming September 9th on Hulu on Disney+. Click or tap the banner to sign up now.