Chit Chat Stocks - Investing Power Hour #74: Best Buffett Investments, Amazon + ESPN, and Banking Downgrades with Jason Hall

Episode Date: September 3, 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 a recommendation. Now, please enjoy this episode. We're live. This is the Chit Chat Money Investing Power Hour. We've got no Brett today. We instead have our substitute here, Jason Hall. He is one of the co-hosts of the Smattering Podcast

and frequent guest of the show at this point. And I guess maybe I should give some context for the show, for anyone that's tuning in for the first time, these are not drinking power hours. They can be people, that's your individual choice. Right. But it's just one hour, anything that's going on in the investing world, anything we want to discuss, we go live on YouTube at 9.30 Pacific time, 12.30 Eastern time, and love to answer any questions people might have. I think it's about it. We got a newsletter and stuff. And if you're listening to this on the podcast, please give us a review. It always helps. But with that, Jason Hall, welcome to the Investing Power Hour. How's the morning been?

How's your life and markets going? Things are good. We're coming through earnings. We're going to talk about it here. A couple of tech companies reporting here kind of at the end of the quarter. So I got homework to do after, after the show to really start digging into some of these companies. Things are, things are good though, in general. And Ryan, if it makes it easier for you, feel, feel free to call me not Brett. Not Brett. Okay. Yeah. Either one. I'm here for you, buddy. Yeah. It's been, it's been a little dry this week, but we do have some news um jason you mentioned a couple of things we briefly talked about it last time the berkshire bought some home builder stocks um brett and i are now i would say baggies or bag holders when

it comes to our real estate takes we are just like we we hate the price of homes because we're non-homeowners and then every homeowner is like yeah you know it's not gonna crash so we uh we have this we have this running take that the home prices will crash right when we need to buy one so um that's every non-homeowner that that feels fomo feels the exact same way i've been there yeah i asked my i was like gosh these home prices like these homes are so expensive and i was like talking with my family and my parents like yeah i mean we were thinking the same thing 30 years ago when we bought our home i'm like oh yeah it's yep no we're not i'm not the first one to think of it Okay, we're going to talk homebuilders. You mentioned also some of the rating agencies are downgrading banks. That'll be fun to talk about. And then I've got a couple things here. ESPN, potentially rumors here for an Amazon Disney partnership. There's also Grayscale got approval for Bitcoin ETF, which is kind of a win for the crypto industry.

and then we can really talk about anything we got our mount rushmore we've been doing a mount rushmore theme so i'm going through all of it but where do you want to start here jason anything pop out to you yeah let's talk about i just i really think this is really interesting i want to talk about the potential partnership between disney and amazon okay sorry i was on mute there all right yeah um well i mean it still feels like rumors but we've got essentially something came out last week that said amazon is in early talks with disney about a potential espn streaming partnership the there's also the rumor that Amazon could be purchasing a minority stake in ESPN.

Iger has been pretty vocal that they're looking for a partner with ESPN. He even said, there was like this quote in an interview with CNBC where he's like, the real magic happens or the real, I guess, business prowess kind of comes when it comes into managing a business that's no longer growing, which is he was really in like referencing espn um and so it is kind of this interesting idea like right now they have espn plus which feels like it's getting sort of just drowned out in the competition i don't know what this partnership would really look like in like its end state but the idea that whatever espn's content rights are potentially come to amazon prime video

feels like, I don't know, for me, it feels like a win for Amazon. It depends obviously how much they pay for it, but what are your thoughts here? What do you think about the potential for Amazon Disney partnership? And then who do you think would benefit more? Yeah. So after, after we like, I think this is just like a really good thought exercise in general. So beyond just the idea of like how it could be good for an Amazon, you know, who would it be better for but thinking about it from the perspective of of disney and like what's really like disney's core and like what's the real flywheel there and what's maybe not so much of the core anymore i think it's useful but like here's here's kind of the way i've been thinking

about this broadly because with with espn there's really there's kind of two challenges right and they're tied to the same thing and that's the changes with linear tv um just it feels like there's a lot of scrambling to figure out how to value sports content, you know? Um, because if you're a network and you, I think for the CB, CBS is NBC's Fox's, um, ABC's two of those are part of, of, of, uh, of Disney complex. Yeah. It's, it's, it's still really important, right? Because it does bring a lot of, it's kind of the mini ecosystem, right? So it's still, it's still pretty important. But if you think about Disney's core business and the decline of linear TV, which of course cable is a big part of that, which is the major driver of ESPN, because so many

non-sports interested people have been subsidizing ESPN for the rest of us for 30 years, basically, the math is starting to change and it's becoming less and less important for ESPN as far as a profit driver and more important for ESPN to figure out how to recapture that, right? So for Disney, it's about making money from ESPN. For Amazon, Amazon wants to sell you diapers. They want to sell you electronics, right? They want to sell you stuff. And again, I'm thinking about Amazon outside of AWS, right? Because you really have to think of it as two different businesses. That's all they want to do. And they want that ecosystem to be as broad as it possibly can. And being the streamer to capture the most popular cohort of sports in the US would be immensely valuable to keep people on the platform, right? people can be really dismissive of prime video um because it has some good content it doesn't have any of the great content um and it feels free right so it feels like it's just a loss leader and to a certain extent that's kind of true but bolting espn on um to to like an amazon

is like the modern cable package kind of thing could be enormously valuable to amazon at the same time, if the numbers make sense, it could be a huge win for Disney, right? Because they're trying to find that other revenue that's not the declining cable companies. And something like Amazon could be at least part of that revenue picture. Today's episode is presented by the Science of Hitting Investment Research Service. The Science of Hitting was founded by Alex Morris, who spent a decade working as a buy-side equities analyst before launching his own service in early 2021. You've heard him here on the show a number of times, but Alex produces really, really high quality equity research. And in addition, he provides a hundred percent

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investment research service today at thescienceofhitting.com. Yeah, it is. I mean, it's interesting because ESPN still has, I would say it still has a ton of brand value, brand notoriety, like people associate ESPN with the world of sports, sports on like sports TV. the first name that probably comes to mind is espn but when it comes to sports streaming it seems like over the last couple years the market has proven that brand value really doesn't matter that much because it's whoever can pay the most for the content like whoever can pay the most for the rights gets it so and people go where the sports are they don't really go for you know what's his name scott van pelt or whoever the espn hosts are nothing against scott van pelt but uh i mean when you've got and maybe i don't know if this is like a new concept but when you've

got companies like google companies like apple just bidding ridiculous amounts or higher than espn can for these content packages it feels like espn is kind of stuck in no man's land where they've got this valuable brand, but none of the valuable sports, maybe they probably have some of the college football games here, but they're losing a lot of, maybe they'll have an NBA. I think they still have the NBA deal, but I'm not a hundred percent sure there. I don't know. It just, it feels like it's in this weird kind of limbo period for any of the companies that are straddling the line between streaming and cable. If you started on streaming and you're funded by another offering, whether that's Google with YouTube TV or Apple with Apple TV or Amazon with Prime Video, you're in a better place, I think, than the ones that are having to transition.

Well, what you're measuring the success of a deal like this by is very different than if you're Disney, right? This is part of how you make money. And if you're, again, Amazon and, you know, Apple the same way, I think Apple maybe looks at a little bit differently than Amazon in terms of like, it needs to be a profitable part of the whole, right? But for Amazon, it's really about that ecosystem of feeding the core, like they want this to be part of the top of the funnel, right? And they want it to be as broad as possible. And, you know, if this is a way to get more sports fans that maybe aren't big Amazon shoppers to start participating more in that ecosystem, things get sticky. So, yeah, I think that's the key is how they value and what its importance is, is really, really different. Yeah, I am genuinely curious what the, what do the economics look like for the Amazon Prime subscription?

Because I think about, okay, they're selling free shipping. I mean, the costs for shipping aren't really included in Prime. So that would make a high margin because they're included somewhere else. But then they're subsidizing all these other services, like paying ridiculous amounts for content on Prime Video. There's no way they're making money on Prime Video. But because it's a part of the subscription, maybe there's something there. I'm trying to think of all the other stuff that's included there. I think you get like a year of free delivery on Grubhub.

I think you get, there's like a new medication subscription that's included there as well. I think it's like Prime RX or something like that, where it's an extra $5 a month and you just get kind of your, I can't remember, but there's basically all these offerings within the Prime subscription. Yeah. And I think like, all I can think is like, they have to be hemorrhaging money on this, But at the end of the day, it's so many different benefits and you're still, for the most part, leveraging the spend of other divisions in your company that maybe the subscription is still profitable. Here's the number.

This is the number that jumps out at me. I'm thinking about how Amazon versus Disney would think about this. Amazon generated eight times as much operating cash flow as Disney over the past 12 months. Now, Disney, of course, is spending a ton of cash on streaming and stuff like that. So that's not a perfect measure. But like, it hasn't even been close, like how much more cash flow Amazon kicks off than Disney. And Amazon has not been necessarily in profitability mode either. They've had their fair show troubles. Right. So it's interesting, but the key to me is like thinking about how different organizations depend on what they're trying to build and trying to do will value these sorts of businesses differently based on what they're trying to build. yeah yeah i 100 agree it's just i think the sports rights industry as a whole is just so fascinating because i've got no idea where it's gonna go and i can't help but think that

unless you sell something else so unless you have iphones as your primary business or you're trying to lock in like a bigger services package like with you know with youtube tv buying what is it sunday uh nfl ticket uh right they can cross sell a whole bunch of stuff within youtube tv not to mention youtube tv itself is probably kind of break even but um there's advertising in there as well and they're kind of advertising behemoths and it if you're just a sports streamer i'm thinking particularly of espn or fubo i have a hard time imagining you're going to be okay on on your own yeah no i agree absolutely agree okay there there was this fun exercise well actually let me ask you a question do you own uh are you an amazon prime subscriber oh yeah

have been for a very long time i have a kid yeah i was gonna say with all the benefits that are included there because i'm like well there's no way they're making maybe they're making money i don't know. I don't remember ever seeing them talk about the economics on crime subscriptions, but there's all these kind of loss leaders that they might have in there, but they could just raise prices at will. And I think people would just continue to pay because- I don't even know how much I pay for it. Yeah. I imagine a lot of people in the symbol- I should know that just as an investor, but I couldn't tell you how much I pay for it. Yeah. I think the free delivery is just such a

huge component. Well, now they're doing things like overnight delivery, which is smart because it's like helping them leverage their assets better. Like literally they'll deliver something like 3 a.m. Really? Yeah. Yeah. Yeah. It's a Starbucks problem. So think about Starbucks. Like they sell coffee when people want coffee in the morning, right? They've always had trouble expanding their day parts. Amazon, their delivery drivers load up in the morning and head out, right? So there's this throughput issue. So it's a way to start expanding throughput. These guys are really smart so huh that's something coupon which is one of the e-commerce providers in south korea i think there's a couple south korean e-commerce providers that do the same thing

they've always done it and you look at the gross margins on their retail business and it's pretty pretty impressive for an e-commerce for an end-to-end integrated e-commerce provider yeah i mean they've got really solid economics i think you're right leveraging that same asset base. And you're just making more frequent use of your fulfillment centers and your trucks and your employees. So, okay. I wanted to try this new exercise. So I saw this on, who was it? Clark Square Capital is the one who tweeted it out. And it was an interview of Lee Ainsley of Maverick Capital Partners. And basically they were talking about this test they do or this exercise they do, I didn't see how often they do it, but he said, basically at the company,

they'll have everyone every once in a while, start with a fresh piece of paper and just say, if you were to build your portfolio from scratch today, what would be in it? And then I'm sure people are aware of what they already own, but if they don't, they pile it together and say, what are the differences here? Why do we still own something that you want to buy today? Why do we not own something that you would by today and kind of try to reconcile why, why they shouldn't change it. And so I was curious if you were starting your portfolio from scratch today, is there anything you own now that you would not own?

Yeah. So these are talked about the Disney thing is the ESPN thing is kind of a thought exercise. That's interesting. I think this is interesting too, but you have to be careful about finding something, whether it's actionable or not, because I own some NVIDIA, but I own some NVIDIA that I bought a very long time ago that I've sold some over the year, but I'm not selling what I hold. If I owned a zero NVIDIA today, I would not buy NVIDIA today, right? So I think it's one of those things where the conclusion, I would not buy it today, is not the same thing as if I wouldn't buy it today, why do I have it?

You know what I mean? So I think that's one of the challenging things. But I do think it's tough. If I was 100% cash today and I was looking around the market, banks, I think I would still be buying banks. you know i'm about 15 banks now um yeah i i think yeah because it raises a good point just because you want to buy it today doesn't mean selling us the right decision because taxes are a real repercussion here and you don't want to have to yeah maybe you don't want to have to incur those and maybe you have to consider too like if you're getting what's the

long-term capital gains tax rate these days? 15% for most people. It's 21, 22 for the highest earners, which is still substantially lower than your short-term, your marginal tax rate. I guess is the right way to think about it. Would you be a buyer 15% lower? Yeah. Yeah. And maybe if the answer is no in that scenario, it's worth discarding. I think there's a few, and maybe i'm sure there's some bias that's uh that you can label maybe this is endowment bias i don't but there's companies i own where if i was watching it from the outside i would say like oh gosh that's just been it's been poorly run i would not be touching that but now because i own

it and i've owned it while it was poorly run my first thought is well it's it's a hell of a lot cheaper and maybe they can turn things around two of the ones that come to mind are match group for one spotify hasn't necessarily been poorly run it's just been not optimized they've just been loose with their costs yeah but those are two where if i were looking from the outside i don't know if i'd be a buyer and i think you were hitting on something interesting there and and And maybe this is where, when I was initially thinking about this, when we were putting the outline together, it's maybe the way to think about it is, would you buy this business? Do you want to own, not the stock, but the business? Do you want to own this entity?

Would you buy this entity today? And then you think about, well, okay, yeah, yes. Now, does the stock pass all of the reasons I would buy or not buy a stock? Valuation, all those sorts of things. Yeah. It's maybe a good rule of thumb that if you bought initially for the business first, like you bought because of the business initially, and now you're holding because of the valuation first, maybe that's a time to reconsider your position. You mentioned banks. we actually just did a show on discover financial have you ever looked them a little bit a little

bit they're they're interesting right so discovers like the the poor man's amex i guess you'd say yeah and honestly that's a great way to describe it the business model just you can't use the card in as many places yeah well their merchant acceptance in the u.s is on par but internationally it's not there um and then the other thing is they had a bunch of compliance issues lately so they kind of um i guess they weren't they were understaffed on their compliance side and i think the sec kind of came in and said hey like you need to add some additional staff here and then they also apparently had been upcharging a bunch of merchants over the last like decade and so the ceo resigned like three weeks ago they've got an interim ceo in place stocks kind of

collapsed since but it does trade at six times earnings which i mean there's a lot of banks that are cheap but it's one it's one of those where it's like and i wish i had more data on uh success investing in banks when there's compliance problems because i've you've seen to go both ways where they shore up the compliance issues, they earn more in two or three years, and all of a sudden you've got great returns. Or you've seen, okay, what they've told you on compliance is not the whole story and things get a lot worse. I'm thinking like Wells Fargo, Salomon Brothers, probably a whole bunch of banks during the crisis. So I don't know. I came away thinking that if the company does not completely implode

within the next two or three years, it's going to be a good investment, but I was not sure that the company won it. Well, and Discover and Amex are banks, right? But they're different banks because the way their deposit structure is set up versus most banks and their lending is essentially a rounding error

from being all unsecured personal loans, right? Credit card debt. And then Amex has some business loans and that kind of stuff. but the vast majority of the stuff is unsecured. So it's like the leading edge of like, this is the stuff that starts defaulting first when people stop having money.

And like you read every headline right now and like all the money from the pandemic, all the STEMI monies spent, we're seeing like the highest auto and personal loan default rates, like 10 year highs. it's like all that stuff starting to creep in it's like if there's a bank that's kind of scary to own in that time when those times happen it's the ones that their entire loan portfolio is

is unsecured debt right yeah and i think with the amex at least the cohort of or your audience high debt to income or head height yeah all all the ratios yeah right they check them off Yeah. And so also their credit card fees, if I'm not mistaken, are a lot higher than a lot of other credit card providers. So if you have carried balances, you're encouraged to pay Amex's off first, because especially if you have multiple cards, because you don't want to be incurring the higher fees. Not to mention people's, I think one of the biggest things is just like egos for Amex cardholders. Like they don't want, they want to be perceived as wealthy to put the card down for the check or whatever. Well, they have some great rewards programs too. So it's not even just the ego part of it, right? But it's what they give you, especially if you travel a lot and do this, like it's pretty lucrative.

Yeah. I think I'd be more inclined to buy Amex before I bought Discover today. Although Discover trades at like half of the valuation, if there is any sort of really kind of rough economic environment in the next couple of years, Discover will be in kind of a more difficult spot. We do have a question from Tyler Ferris here. He says, I'm seven minutes behind, but do you guys think the Amazon Disney ESPN deal would be more about transitioning ads and data from generic TV watcher to a more targeted individual ad base? The CPM would go up. So I think maybe I'm sure that's part of the revenue calculation for them is you're getting higher CPMs, but there's still a lag from advertisers to switch right now. And maybe it's just a different advertiser base, but I think what you're getting is a lot more, I think you still get a lot more brand advertising on cable and more performance marketing on streaming. So maybe, maybe it's, they'll still make the transition, but I just think like, I think more of the, more of the thought process from Disney here is how do we

salvage ESPN in a world where everyone's pay, everyone can pay more than we can for the content. Yeah, this is a have to kind of move. I mean, and I don't mean like emergency room patients dying on the table have to, but it's like cable is dying, right? You have to do it. So, but part of, I think part of the greater calculus, I'm just going to paraphrase Jeff Green. you know all advertising is becoming digital programmatic ads are the future of all of this kind of stuff even for these like live tv kind of linear things 10 years from now the vast majority of the ads that are served on those platforms are still going to be or are going to start being programmatic whether or not it's like the big event stuff the tentpole stuff like the super bowl right the world series you're talking in sports where a marketer wants to capture 20 million people 100 million people at one time right and like you said the big brands they're

going to buy those those ads but everything like it's definitely part of the calculation at some point whether it's happening now or not it's a different different story yeah the other thing that's interesting is a lot of these i don't think this is appreciated enough but a lot of these cable companies, the marketing isn't all self-serve. A lot of it is the cable companies or whoever runs these channels have big sales staffs that are going out and trying to get companies, whether it's the chief marketing officer or some vice president of media acquisitions or something like that. They're trying to allocate a big budget and they're locked in. They'll say, We've committed to a year worth of advertising on CBS or whatever it is.

So there is a lag that's going to happen. And there is like an actual real relationship a lot of the time between the advertiser and the channel they're buying from. So I don't think it's going to move over as quick as people might think, but maybe that's just, maybe I'm wrong on that. We do have another question, but I want to get to some of the stuff you talked about, which is the ratings agencies downgrading the banks. Were there any banks specifically?

There were a ton. I'm just going to kind of leave it there. But we saw a few weeks ago, I think it was Moody's first downgraded, like a half a dozen banks. Maybe it was 10. And then they put like a half a dozen more on notice that they were basically going to review them. And then they went negative outlook on like 11.

And then we saw S&P, I think it was last week, downgraded banks. And these are mostly, these are the mid-sized banks, right? These aren't small regionals. These are not the too big to fails, the SIFI banks, the G-SIFs as they call them. they're the ones kind of in the middle, right? Like the, coincidentally, the ones that happen to be within orbit size of Silicon Valley Bank, First Republic and Signature Bank, right? So what's happened in the short version, Ryan, and then there's some new news that's happened in the past couple of days that's pretty big and maybe like the long-term implications could be pretty significant. But basically what the ratings agencies are saying is, look, interest rates have skyrocketed. Most banks rely on real estate debt as a big part of their loan books. Almost all of the loans that happened in 2020, 2021, 2022 were fixed rates. Most of them are less than 3%.

I could log on to one of 20 online banks right now and get three and a half or 4% yield on my cash. So these banks are seeing pressure from depositors who are either leaving or moving their money into short-term CDs or whatever money markets to try to capture that higher yield. At the same time, these banks have this massive encumbrance of a large portion of their loan book that's less than other banks are paying in deposits, right? So their margins are getting squeezed a ton. And oh, by the way, you've also got a lot of those regional banks. They're the ones that own a lot of commercial real estate. I've been, yeah, I was surprised how many companies just have,

how many banks that I wouldn't think have real estate exposure really do. Oh, no. Yeah. Especially those small and medium-sized ones. Yeah. I mean, Ally, we own Ally and it's one of the It's one of the leading automotive lenders, mostly used cars, but they, even they, as a part of their asset book, they've got, I think 10% of their assets are just in mortgage backed securities that yield like 3% and they're paying out three and a half percent on their deposits right now. So yeah, I think all those, every company that bought mortgage backed securities is

underwater, at least on those. On a big portion of their portfolios, right? That's, I mean, that's, that's, it's a tough position to be in. Now, here's the thing that's happened more recently. The, there's basically three, I don't, I'm not going to give the acronyms, but I'll give OCC, Office of the Control of the Currency and the FDIC. And there's one other, I can't remember their acronym. These are basically the federal government bank regulators. They regulate essentially every bank in the US. And they propose some new rules that basically would require a massive cohort of the large banks that have more than $100 billion in assets to take on debt to raise capital. So not the bank loaning money, the bank borrowing money to raise capital to protect against deposit losses in the case of a bank failure. Right. So with the bank failures that we saw, the two this spring, it cost the FDIC's deposit insurance fund billions of dollars because they used a systemic threats exception to cover domestic depositors above the insured limits. Right. If you remember, but that was kind of a big deal that they did that. they can't do that all the time. They can't, right? They just can't do that all the time.

So what they're telling these banks is we're concerned about how well capitalized you are. A big part of it is that interest rate thing, where now they have these encumbered loan books that they have to discount some of these mortgage-backed securities or loans they own 20% or 30% if they had a liquidity crisis, if that had run. And it would be so much that they they would be insolvent, right? So the FDIC and the OCC is basically saying, okay, you guys are going to have to, if you fall below these certain thresholds, you've got two or three years to go get some debt, raise capital with that debt. And then when you fail, there'll be money there that we can use to cover deposits and the lenders, this is mostly institutional lenders,

right? Now they're on the hook, right? So depositors get wiped out. The institutional lenders that bought the bonds that fund that extra capital, they would be the ones on the hook in the capital stack. So what's happening is the regulators are basically saying, okay, we want institutional investors in bank debt to help us hold these banks accountable to having strong balance sheets. If you're looking at investing in banks broadly, so let's say you're doing it as like a whole and not doing it company by company, like that's not how you're doing your research. What are the characteristics you want for a bank right now? Like what kind of loans? What kind of a depositor base? So I think first of all, understanding what their loan books

look like, right? So deposits are a liability. That's money you owe somebody else. The assets are the loans that they hold and the cash they have, right? And understanding the FDIC can give you this information. You can get a lot of it in their annual reports, some of it in their quarterly filings. It's like really trying to figure out how much is in commercial debt, how much is in real estate? What is the maturity dates on those different things? And how much is it yielding on average? You look at that and understand, and then look on their deposit side. What is the average yield they're paying on deposits? And chances are, if they're paying a really low yield, they're probably going to be in trouble because they're getting squeezed on that end,

particularly if they have a lot of that fixed rate debt. So I'm looking at those things really, really closely. And then when it comes to the depositor side and the loan books, I like banks right now that don't have a lot of mortgage exposure. So like Live Oak Bank, just as an example, they just do business lending and they're a variable rate loan. So they're in hog heaven right now. And their depositors are online CD and high yield savings. So they're paying a higher yield, but their net interest margin is going up because the way the levers affect their business don't affect... They're not getting squeezed on the margins like most of these traditional banks are. I don't think this is a big, scary risk sign for banks, but I think if you're looking at any

bank and you're like, well, their margins are going to get squeezed and their returns are going to be lower going forward, okay, that's fine. But if it's a good, high-quality brand like a Truist, right? It's a really, really good institution, great brand value. They're pretty well run. It's trading for 70% of book value right now. So you're being compensated for the risk of lower returns. I have a bit of a working theory that, and I don't know if it's really accurate or not, but there's a lot of these, I keep thinking that the online banks are well positioned because, you know, they can offer higher rates. They don't have to afford the costs of basically operating all these physical branches.

And so they're able to pass those cost savings in the form of higher deposit rates. And so I think generally they're on the right side of the innovator's dilemma. But the difficulty or what I worry about is, and I'm saying this as an ally shareholder, the people that move their money to ally solely for the higher rate might be so rate sensitive that they're not locked in like the kind of customers you get at a JPMorgan Chase. You're always reacting to keep the deposits. Yeah, I'm worried that – and this last quarter, Ally's rate was a little lower than some of the other ones. SoFi had a higher rate and they still attracted more deposits. But I worry that they kind of just have this huge deposit base of rate chasers, which might make it harder for them to, if they need to bring down what they're offering on savings accounts, they're not going to be able to do that without losing a bunch of deposit customers. Yeah. And that's the ones that, you know, I think Ally is a good example because a lot of their, like their auto loans, those are fixed. A lot of them are fixed rate loans, right? Yeah. Shorter maturity, but yeah.

Say that again? Shorter duration loans. Right. They're shorter duration, but if it's a five-year loan and it's a car you sold in 2021, your cost of capital has gone up. And again, they basically borrow the money short because they're borrowing it from depositors and then they lend it long. So you're borrowing short and that cost is continuing to go higher, right? So your margins are getting squeezed. So it's the ones, and again, I'll use Live Oak as an example

because the vast majority of their loans are adjustable rate, right? So they adjust up every year. And there are loans to businesses, to small businesses that use them to buy equipment to operate their business, right? So their interests are to continue to pay that loan so they have that thing that generates revenue for them.

So even though they're paying more on deposits, they're earning more on their loans too. So they ebb and flow together, I guess is the best way to put it. For an ally, you don't really have that same thing. SoFi, I think is an example of one that's really interesting to me, Ryan, because they're starting to try to be like a Bank of America or a US bank or Wells, where they're getting stickier, adding more financial services. So maybe you go there for the, maybe you started to get to refinance your student loan, right? You haven't done that in the past three years, but maybe you will in October, or maybe you did in 2019.

And you're like, well, they have this online checking account and they're paying 4% interest. I'm going to get that too. Oh, they have a trading account? Okay, well, I'll open a brokerage here. They have mortgages? All right, well, I'm shopping for a house. So maybe I'll buy a house and finance with them too. So it's the ones that are trying to thread the needle that I think are really, really... I'm 15% bank stocks right now, by the way, my portfolio. And almost all of them, I would say probably 10% to 12% of that was investments that I made between March and now.

yeah i've got we only own one like pure bank nelnet is a company we own and they have a bank but it's really not a huge part of their business um but i've grown more and more interested as of late just which which kind of concerns me because i'm i'm getting more interested in financials when all the people that know financials are leaving so maybe it makes me think i'm i'm the guy on the outside they're just dumping their shares too but um we've got a question here from mr dapper capper says any updated thoughts on evolution ab since you looked at it back in march of 2021 are you familiar with evolution at all it's no so i guess just to be totally honest company yeah they do the machines like the digital they power the for online gambling they

power like the software behind it i guess the digital picks and shovels for the online casino business yeah i feel like that's all i know that's the extent of my knowledge yeah i feel like i'm uh i probably shouldn't talk about it i haven't really followed it that much honestly i thought it was a really good business because the margins were like 70% or something like that, like EBITDA margins, which was pretty crazy. I hadn't seen anything that high. I might be even getting some of that stuff wrong, but no, I haven't followed it. Maybe it's something we'll have to look at again. I do want to move to our Mount Rushmore because happy birthday to Uncle Warren turned 93, which is, it's kind of mind blowing. I hope, I hope I'm still puttering

around and functioning when I'm get anywhere near that age. But yeah, happy birthday to Uncle Warren. So the Mount Rushmore for this week is going to be his top and what we think is some of his best investments were. And you can do this either on a percentage basis if you want, or kind of what is maybe more monumental, what maybe changed his philosophy, what people can have better takeaways on, because I'm sure he had some crazy activist investments in the 60s or something that were really good IRRs, but maybe it's harder to take away anything that's actionable from that. So what are our favorite Warren Buffett investments of all time? Mount Rushmore. Jason, you want to go first here? Yeah. So I'm going to do my first,

I'm almost going to have to do two Mount Rushmores. I'm going to do the first one really fast. And this is just, these are the big ones, right? If you're going to, the ones that matter the most, right? If you're going to go that way. And I think you have to start with Apple because even though this is a really recent investment in Berkshire terms, it's the most capital ever deployed and it's the most dollars in gains generated. So in terms of the actual economic value, there's nothing that's generated the same amount of economic return, especially in this short period of time. So that's gigantic. And then from there, I'm going to go with three whole acquisitions.

Wait, we alternate. What's that? Alternate. Oh, okay. I don't want you to take all mine. Okay. You got it. All right.

All right. Yeah. I don't want to. Yeah, you're right. You're right. I'll take all the good ideas if you let me go first. Okay. Yeah.

Geico is on my list too, but I'll let you have that one. No, no, no. Take it. Take it. We can have the same ones. It's okay. I know. I want to do this one because I think it's interesting.

Buying. So they bought Gen Re in 1998. Okay. I think my favorite part about this is that I've always thought the hardest part about being a manager of a public company is not when things are cheap. Because when things are cheap, that's kind of when it's easiest to allocate capital, right? You can buy back your own stock, you can issue dividends, your shareholders are happy. But when your stock gets really expensive, it's hard to keep shareholders happy because you know what forward, especially for a guy like Buffett, you know what forward returns are probably going to look like. You know that you're a little expensive and you don't want to just go out and say like, no, our shares are way too expensive right now.

And when shares are high, expectations are higher. Yeah, shareholders are going to be upset. And so at the time of the deal, Berkshire – I went back and looked at this on YCharts, and Berkshire's price-to-book value was 2.9 times. Its historical average over its whole life has been 1.5 times. So it was trading at double what it always has, and it's the highest book value it's ever priced a book it's ever traded at. And this was the only time I can remember where it bought it with equity. And so, I mean, I'm sure there's a lot of other companies that have just used equity to buy other businesses during bubble periods, but to buy more of a sustainable business, to buy something where you're getting more capital to invest further and using your equity to do it when you've previously been pretty against that, I think was just a really smart way to get your valuation back down. without having to just go out and say, yeah, we're selling more shares.

I don't know of a single investor out there that's been as mentally flexible as Buffett, right? And a lot of people think, this guy that spent years telling us how terrible the airline industry was, right? And obviously that didn't work out, but that's not the first time he's talked about something and done something different, right? He's also told that when the facts change, you need to change your position. I love that because he's used stock when he's had to and when his stock was expensive. He hates issuing stock. He doesn't pay dividends, but he loves companies that do pay dividends. He told us in the past that buying back shares means that I can't find any good ideas. Of course, they've changed that a little bit, but he's

always love companies that bought back share coca-cola as an example so it's always been interesting to me like and there's been a lot of the people that have gone to the meetings and be like will you issue a dividend that's like why would you want why do you own the shares if you want him to issue a dividend aren't you basically you're buying berkshire for his capital allocation skills and you want him to give the cash back to you like we're not better investors than him let him do it yeah if yeah if if you're if you're better than him why do you own shares in this company and why are you even here? Yeah. You know? Yeah. All right. What's your, what's your second one? So I was, I'm going to change this up. I was going to go with Geico. No, I'm still

going to go with Geico. All right. And I'm going to go with Geico because this was the first insurance company that Buffett really kind of like fell in love with. Right. And it was the model of insurance. It was so compelling to him. And Ben Graham introduced that to him through Geico actually in terms of the float. And you know, it's, it's a business that basically you get perpetual interest-free loans, then you can redeploy to earn money. And if you can actually earn money as an insurer, underwriting, and then earn money on the float, it's the perfect business. And then buying Geico, acquiring a full stake of the business was incredible. If I didn't go with Geico, I'd say National Indemnity, because that was actually the very first insurance company

that Berkshire acquired. And I think it might've been the first actual acquisition of a subsidiary was National Indemnity. Okay, I'm going to take, Geico is up there for me. I mean, it kind of shaped or allowed him or gave him the flexibility to invest in a lot of other things, but- Yeah, yeah.

I'm going to- It's like banking without the risk of a run. Yeah. I think the ones I like the best that he's acquired are the ones that are hiding in plain sight. The ones where anyone could have bought it. And it was just the wrong narrative at the time. And so I'm going to repeat what you said here, Apple, because it's crazy how five years since that investment, everyone says like, well, yeah, I mean, if Apple was traded six times, of course I'd buy. but no one was or what was it eight times yeah no one was doing it everyone was like oh this is the demise of the iphone like it's it's those ones where i'm just he he feels i come away thinking like gosh he's so good like he just lets the narrative pass by and he just sees right through it but uh so i'll take apple there john john ratanzi talked about before he's i helped john

write up this research report when he was still at the motley fool um talking about buffett's process. And when he came on, um, the, the smattering podcast with me and Jeff a few months back, he's like, you know, Buffett talks about this, you know, paying fair prices and all that kind of stuff. But like, if you go back and look, it's like, no, he still buys like when he makes the big buys it's when stuff is cheap. Right. That's when he does it. Yeah, sure. It's great businesses, but it's still when stuff is very, very cheap. So, all right. For my fourth one, I'm going to go with, um, Burlington. What?

No, I'm not. I started to, I started to wait. Am I doing my third? Is this my third? Yeah. Okay. Yeah. I'll do, I'll do BNSF.

I'm going to say my last one, my then for you, you might get the last one. So BNSF railways, they owned a pretty large stake in the business for a lot, a number of years before acquiring the whole thing. And it's not one of the big four, right. Just in terms of the cash that it kicks off, the timing, part of it was just kind of lucky with the U.S. oil boom, when there wasn't a lot of deployed pipelines to where a lot of new oil was being developed and the amount of money they made shipping crude oil around was enormous. But owning one of, what is it? What are there? Four, three or four class A railways in the U.S.?

I mean, talking about owning irreplaceable assets, it's just such a wonderful, smart move and a business that's going to be just as important in a century as it was, frankly, a century ago. I fully firmly believe that. Yeah. When I think about businesses, that would be pretty much impossible to disrupt. Maybe there's some huge advancement in trucking, but I think railroads are probably one of the biggest ones. Good luck building a new railroad because you probably aren't going to get the permits and you're probably not going to be able to build it capital wise. So, um, yeah, that's, that was a good one. I, I've got a couple that I've been thinking of that are all kind of in the same category, which are the hiding in plain

sight, obvious, but bad narrative. Um, I think I'll take, I think I'll take Moody's where I think everyone knew Moody's was a pretty good business, but it's been, he's owned it for 23 years and And it's been a 34 bagger for him. I mean, he just, it's one of those where it was a decent size for him too. I think it was like 230 million at cost. So not that big, not as big as Amex or Coke, but the returns have been there. And it's one of those that everyone already knew was good business. And he just bought it at the right time.

I've always been blown away by his willingness to wait. yeah i mean there's i mean there's no there's it's the the discipline and the patience i guess when you when you when you live to be 93 you've you've proven your ability to wait a long time for things there's a yeah i read something that there are companies where he's like yeah i'd love to own it and i read the annual report every single year for like 30 or 40 years and i never owned it and then the right price comes along and he owns it and it's like he has a longer he's probably the most patient investor of anyone I could think of out there. Yeah. He's seen it all. He really has.

All right. You got one more. I do. MidAmerican Energy. It's not called MidAmerican Energy anymore. It's not called Berkshire Hathaway Energy because of other acquisitions that have happened along the way. It's become one of those pillar cornerstone businesses in terms of the profits that to generate. But here's the thing that's so powerful, Ryan. If you own a utility business, whether you're owning shares of a publicly traded one, or it's a subsidiary of your business, you're doing it because it kicks off the cash flow. And then you take that as a dividend and you can do other stuff with it. They've never taken a dividend from MidAmerican Energy. They

give it back. They let MidAmerican keep it. And they're in the middle of this like 22 year long capital project to build transmission, to connect the middle of the country, they call it the Saudi Arabia wind to the coasts to continue to deploy more and more wind and now solar. It's pretty interesting what they're done, but here's the actual reason why I'm putting it on there. Do you know who was the president of MidAmerican Energy when it was it was acquired oh what's his name right uh yeah he has a name so um the the um the apprentice the name that's right the apprentice the named replacement as ceo greg abel yeah i came to berkshire because it acquired mid-american energy and i think that's really

really important you know yeah so wasn't there something i think someone asked him like what were your best investments and he just said like it was that one of his one of the meetings and he said like uh buying or uh acquiring what's his name the uh the insurance guy uh g jane agi yeah yeah he's like getting him was the best investment yeah yeah well and the funny thing is like when when he hired jane he had no experience in the insurance business like that yeah that's right It was just, I think it was recommended through a consulting group or something like that. But anyways, I think that's all.

I'd say maybe my fourth one, I'd take like Amex or Coke. I really liked those Heidi and Plain Sight ones. And it's, those are the ones too, where it's like, it feels very actionable for people, the individual investor that follows them to just find businesses you think are really high quality. And when the narrative for a short time goes against it, So that's usually an opportunity to buy as opposed to buying a full-on entire energy subsidiary or a giant entire insurer. It's really hard to do that.

We've got four minutes. I want to ask some questions to you, some discussion questions. first of all, I guess, when did you start investing and how do you think you've changed over the years? So really like focused on actively picking individual stocks, 2008, 2009, right around there, pretty decent time to get started picking stocks. And it was simply just a matter of, I was fortunate to be in a job in the financial crisis when I was earning a lot of money and needed something to do with it to generate growth, realized I was way behind in my savings and retirement goals. So that worked out really well. I already kind of had the long-term bent, right? That was already there. But I spent years kind of flailing around, like trying to

figure out what kind of investor I was. I end up owning 60 or 70 stocks. I'm like, that's just way too many. And then I sell half the portfolio and like, okay, I'm just going to. And then a year later it'd be like, okay, I own 45 stocks and I'd try to, and then I just started to embrace like who I am. Like I like to own small amounts of companies to start. And then as my conviction grows, as the business earn it, throw more money at them, right. And grow those positions over time. I've also learned that I need, I need to keep a certain amount of cash. So I don't meddle with good thing because there's nothing worse than me selling a big winner, selling half of it to raise some cash to go do something else with and talking myself into doing it because, oh, it's gotten too

big. It's like, it's 4% of your portfolio, dummy. Just leave it alone. It's going to be five times bigger in 20 years. So now I keep cash. I keep 5%. I'm not starting to grow to go to higher percentages as I get older, but those are a couple of things that I've learned. I've embraced the that i'm fine owning lots of stocks and i need money to keep me screwing with the rest of my portfolio what about you yeah i started buying individual stocks in college so like 20 2018 2019 um and i think i've kind of gone through we started the fund at sort of a crappy time and ended up being sort of basically the top of the bubble we were planning to start it earlier but there's a lot of friction involved with actually getting that kind of stuff off the ground and

it went from us i think having that bubble burst right at the start as shit as it was has really kind of helped shape my view of markets and realizing what cheap actually means because there were times when it's like, I just felt like I had to do something because the stock was down that I owned. And now, like you said, just letting things sit and actually really reducing the amount of action you take, I've kind of taken that to heart a little more. I'd say I'm less tolerant of red flags than I have been previously. And the longer I've been investing, the more I care about just who runs the, like, there's a, there's a couple of companies where it's like, I don't care who runs it because I think it's just such a good business and the manager is doing fine, but really who runs the company?

what do they do with the capital at their disposal? And do I think they're high integrity and smart? And if they really don't check those boxes, it's really hard for me to own it. And the longer I've been investing, the more I've thought that's where my biggest mistakes were, where people that were... I thought it was an innovative business, but the manager isn't really focused on the minority shareholders as much. So So it's probably where I've lost the most. And I don't know, maybe that's just the bear market, I guess, over the last two years talking to me.

But yeah, I'd say I've gone more that side of things, less tolerant of bad managers. Yeah, I like that. All right, we've got, let's give it one more minute. I want to ask one more question. Worst investment you've ever made. Do you know what it is? Yeah. I'm going to say I've had other stocks that have fallen more, which is pretty bad when your stock is down 81%. But I'm going to go with Clean Energy Fuels specifically when I bought the first time. It was March 2012. That's 14 years ago now, or 13 years ago now, 13 and a half years ago.

What was the idea initially? So it's an idea that I think is still there and it's a totally viable business, but natural gas for transportation is cleaner than diesel, domestically available. Some of that's kind of changed, just a ton cleaner. And now it's become renewable natural gas. So it's like from landfills and dairy farms and that kind of stuff. So like green initiative, it actually makes sense. The economics are pretty decent. Technology is there for it. The problem, Ryan, is it has just been a value destroying business. And Andrew Littlefield, I know the CEO, nice guy, super a nice guy. Boone Pickens, one of the co-founders. I met Boone because of following the company.

Here's the thing. So it's down 81%. S&P is up four fold since then. So that's a five fold loss opportunity cost over a very long period of time, a dozen years. So that's it. it's yeah it's you really don't notice the opportunity cost until you look back after a couple years you're like oh crap all right yeah yeah the uh all right well it's been an hour so i think that's gonna do it i there's one comment in the chat that just said one of them one of the best buffett picks has to be apple yes totally agree i think jason and i both agreed on that one um that is gonna do it though if you want to hear more of jason or uh our friend jeff santoro the co-host of the smattering, go ahead, check out the smattering podcast, wherever you get them.

Or if you want to hear more of us, obviously you can go to the chat money feed and check out all the other shows there. Jason, thanks for doing this. Thanks for having me. It was fun. Yeah. I'm going to throw a disclosure on this before we go. I'm not a financial advisor. Jason, are you a financial advisor? No. Jason's not a financial advisor. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. I am, however, a general partner at Arch Capital, so clients may have positions in the securities discussed in this podcast. Thank you all for tuning in. Thank you for all the good questions in the chat. don't you wish you could just hit skip on the worst parts of your life you know the same way

you can skip an ad i get it i'm siaya and i live in ice cove i've made some questionable decisions that didn't end up the way i planned and today i'm still figuring it out somehow things usually get worse before they get better. Apparently that's how I roll. So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem.