Chit Chat Stocks - Investing Power Hour #77: Lesson From Big Buffett Buys; Tobacco Debate; IPO Market Opening Up?

Episode Date: September 24, 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/ ****************************** This episode is sponsored by Manscaped. Use code "CHITCHAT" and get 20% off your first purchase: https://www.manscaped.com/?gclid=Cj0KCQjw06-oBhC6ARIsAGuzdw2jyUBdVYzBUmBJ7RIWMO57zQUiIkk9m8jAd2eLsmGOSOidXPxxmyYaAnQDEALw_wcB ****************************** 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 77 on Chitchat Money. My name is Brett Schaefer, and I'm joined as always by my co-host, Ryan Henderson, who, a little tease, has a special

t-shirt on today, but we won't get to that until 15 minutes later when we do our fun ad read for this episode. On these episodes, we talk about whatever we want in financial markets. It could be earnings reports. It could be philosophy. It could be recent news reports, basically anything. And we go for an hour live on YouTube every Thursday. If you want to join live, you can or watch the replays or listen to the replays Sunday mornings, wherever you get your podcast. I think that just about covers it. Ryan, we just covered a great interview with Speedwell research uh drew cohen and it's going to be on floor decor that's coming out next week we just had an interview with on sofi with brad freeman who has used to come on the show regularly but

now does his newsletter full-time the stock market nerd so that was great and then we got some stuff coming out next week on hawaiian airlines and then addy in the week after so a lot of good stuff uh but we're not going to talk about all those today how are you feeling the market is i guess down, but don't know why. The Fed seemed to be doing what they said they were going to do, but the Fed is hawkish. I've never heard the term hawkish so much, but everyone just loves to call J-PAL hawkish, but I'm feeling good. Yeah, I mean, the stocks are down. It's honestly, this whole quarter has been a little just like ever since earnings season, a little boring, to be honest. Prices have generally moved, I don't know, maybe a little bit lower,

but nothing too crazy. So I don't know. Some boredom here. I do have some good news stories for the week though. IPO markets are back. We've talked briefly about this in some other episodes here, but IPO markets are really officially back. Instacart went public, R went public and Klaviyo went public. Klaviyo. Klaviyo. Klaviyo. They're like some, I think like a marketing automation platform company and it's $8 billion market cap. So around the same size as Instacart, all of them had successful first days above where they were expecting to price their IPO. So generally pretty solid. And I think for us, that means iac my ipo tarot at some point that's really what we're interested in yeah exactly rescue that stock

which i will say has been a bit of a dog for us but we'll see yeah that's going to be interesting end of the year i think for ic and tarot because they've it's a bit of a boy who cried wolf situation where they they've dropped stuff to the wall street journal or bloomberg where they're like oh they're thinking of ipoing in the next few months and they said that for the last year and a half. So I guess until it actually happens, I'm not going to believe it when they start going on their roadshow, but I would assume they're going to do it pretty shortly here, just given the success of these, I wouldn't call them maybe brave companies entering the public markets, but we've had some three big ones the last few weeks, and then Birkenstock will be another

solidly big one coming up shortly. And it's a cult stock, most likely. It's a cult company, not a cult stock yet i guess i don't know yeah there's some cult companies that don't turn into cult stocks right away but i could see it being one it's sort of like one of those where they're like oh we want chick-fil-a to go public and it's like yeah you probably do but it's going to trade it 100 times earnings and you're never going to buy it yeah they have insane gross margins don't they it's like 50 plus for birkenstock or birkenstocks don't know i was looking at crocs though yeah have you looked at them after we had the interview with jacob franklin a little while ago on them i was trying to dirt cheap earnings multiple really strong margins

still growing it's a tough barely tracked it it's a bit of a conundrum it still seems people have been saying it's people have been saying it's like uh it's a fad for like the last 15 years so it does get me kind of intrigued to potentially want to buy it but and the returns have been good probably partly because investors seem to think it's a fad i don't know have they had a decent buyback program are they they have they have that's actually a part of it which can be very helpful and they are expanding into sandals so not just they're expanding a little bit outside you know kind of with the same material right the plastic material but a little bit outside of that core shoe so i think that might help them from a risk perspective but

the brand seems really strong and they do these very unique some might say tacky but i think they work really well they do these brand partnerships with like the recent one i saw was shrek and taco bell and then uh not two separate ones and then you know they're making these unique shoes right for for these collectors and these people that really love those type of things they did stuff in conjunction with the barbie movie which i will say they priced up at like 90 bucks which is nice and their cost of materials is so low, but we don't need to go through a whole pitch on that. We'll probably, maybe we'll do an episode on them sometime next year or something like that. But why don't you get into your topic? What do you want to hit first?

Why don't we start with this? So I, to be honest, I remember making a pledge to myself at the beginning of the year. I was like, I'm going to read a book every two weeks. Yeah. That hasn't panned out. I'm not a New Year's resolution keeper, but I started reading Made in America, I think kind of before the summer, and I just put a pause on it and I restarted it last week. And there was a quote, and Made in America is Sam Walton's autobiography, kind of talks about his management philosophy in some ways, as well as kind of how he grew Walmart into the company it was when he passed. There's this quote from him towards the end of the book where he talks about bloat. He says, a lot of bureaucracy is really the product of some

empire builder's ego. Some folks have a tendency to build up big staffs around them just to emphasize their own importance. We don't need any of that at Walmart. If you're not serving the customer or supporting the folks who do we don't need you i think that is like you see that so much today and i have a few companies that come to mind initially you mean a lot of back office administrative stuff below is that what he's referring to here kind of just like managers vps whatever yeah just hiring for the purpose of like expanding the empire yeah Just so you could say like, a thousand people work for me, or I have this big team and it makes you, the more people that work at your company, kind of the bigger your empire is. And you kind of judge your size, you judge your importance by the amount of people that work at the company.

I think a lot of companies do that, or they try to fill it with, I don't know, maybe a Matthew McConaughey in the boardroom. or in certain meetings, they try to pay for these expensive board members that maybe don't need to be there. I see it so much where companies brag about hiring and maybe they don't do it in the public sphere, but I think you see it a lot probably with people in their personal lives where they judge the success of their enterprise by how many people work at the company. And I think just having this quote from Sam Walton, it kind of, for me, it sort of reiterated my belief that companies headquartered in the Midwest or the South have a more frugal culture generally. I know there's outliers here, Enron, have a more frugal culture than a lot of the Silicon Valley or finance hubs of the world. yeah and this excludes florida the south florida different but yeah or maybe ireland is a good

choice there it reminds me of ryanair i think it has a lot of those they probably learned some from walmart learned from southwest has a similar culture where the ceo and this is the biggest airline in europe i think says he only has four levels it might have been five might have been three, I think it's four levels from him down to the customer checking desk. So that's, I think, a good example of the opposite of what we're not looking for. And it reminds me of every big tech company except Apple, maybe. Apple seems to be pretty good at not doing this, but they probably still... I mean, if you get large enough, you're going to have some of this. I'm sure Walmart has some of this just because they're so large nowadays. But basically, every large cap tech

company reminds me of this if you're a technology company with a market cap over 50 billion dollars i think odds on our odds are that you might want to look at this quote and look at yourself in the mirror if your stock hasn't been doing well but dbd all right we have a question here question first oh okay who does this remind you of like the opposite or the the the bureaucracy filling up your company just to fill up your company any companies that come to mind oh specific ones i mean like i said every big tech company except apple and then if you're a tech tech company with a market cap over 50 billion i think that's all of them basically yeah that's fair salesforce for me

Yeah. And that's, that's in my criteria there as well. All right. We have a question here from John says thoughts on a FinTech basket, Addy and PayPal. So far. Well, I do like Addy and stock has gotten a lot cheaper. We're going to cover that in depth in two weeks, two weeks from this Tuesday, PayPal don't like too much, but it's just a little, I feel like it's a bit of a falling knife, but it could easily work out. SoFi, I like them as well,

but I think I'd rank Adyen as the one I'm most comfortable with. One, given I like the management team and two, his strong track record of profitability and three, I do think they have a long-term competitive advantage. SoFi is a bit riskier, but I think has really big potential.

I listened to the interview with Brad Freeman that we had today and then PayPal put last. But Ryan, what are your thoughts there? Yeah, I don't know. The, I have mixed thoughts about PayPal specifically really with, it feels like the company has been mismanaged and it feels like what we just talked about. It feels like, honestly, there's a lot of bloat there. The resources are scattered. They don't have any sort of real

strategic direction. There aren't like the priorities. They don't seem like they're focused on any one thing. It feels like they're honestly spread too thin, which is probably a byproduct of them acquiring what 20 companies over the last 10 years well hey they just launched paypal usd on venmo so do you know what that is i got a good idea it's their stable coin a little late to the party on that i imagine yeah i'm sure so many of the venmo users care yeah but continue i don't know and i have some concerns over paypal's core branded checkout out, which I've kind of talked about that on this show a number of times, which is just, there's going to be a lot of competition from Google Pay and Apple Pay. So I have some concerns

and that's really still kind of one of their big cash cows. So concerns there. Sofa, maybe you could take a basket approach here, but I look at all these companies very differently. Sofa, I love the deposit growth and I'm seeing it anecdotally a lot where friends are hearing about the savings rates at SoFi and they're like, yeah, why not? I'll take SoFi and I'll go there. And I've seen a number of my friends move money over to a SoFi account and get that really attractive savings rate. The only difficulty is SoFi, I think, has the highest savings rate I've seen of any of the digital banks in the US, the big ones I can think of. I haven't looked that closely at like Chime, but for me, I think it's high.

I mean, it's higher than Ally and Ally is kind of similar in terms of the banking side of things. So you're taking a little bit of risk when you have that high of deposit base or a high of cost of capital on your deposit base. So that savings rate that we talked about. and i think just generally as a bank risk taping has some it can be slightly concerning so so if i am i'm really on the fence brad freeman gave a really good pitch about it last week uh in our podcast feed if you want to check it out he's owned it for a while and i think there's a case to be made that this could be a substantially larger business but obviously there's some risks there. Add in, I think it checks out still a little expensive. Last I looked, I know it's

still come down a lot, but kind of above where I wanted to, uh, where I was targeting my initial purchase. Yeah. Add in is an interesting one because the margin is so strong, but you know, the numbers start looking a little uglier if the margins compress. I think that's the big question for me. Got some comments here saying that a SoFi book is very risky. Yes, that's true. Um, We have something from Fuhat. I don't know what that's referring to, but can we talk about the best bank, J.P. Morgan, Wells Fargo, or Goldman? And if you like growth, why not U.S. Bank? I don't know much about any of those, to be honest, so hand up here.

But I would say probably not Wells Fargo. They're just getting hamstrung by the government. and yeah there's a reason that Buffett sold all of these except Bank of America I think JP Morgan is always I think as long as Jamie

Diamond's there honestly it's worthy of owning who John Maxfield what did he say Jamie Diamond is a savant I like that and they I don't know they just continuously or go ahead

you probably get the Diamond premium I'm guessing you have to pay a little more for J.P. Morgan. Let's see. Let's see what they're trading at. This is going to be very scientific looking up on an aggregator. PE right now, 9.5. So I'm guessing they're pricing in a little bit of compression there, but not too crazy expensive.

Yeah, let me throw this question out at you. Student loans, how big of an effect on the economy do you think it'll be people having to repay those very easy question to answer i think it won't have much of an effect if you look at the payments it's i don't know if it was 100 billion or a few hundred billion the look the checkable the savings is like in the if you compare it from like 2019 so pre-pandemic period the xx savings on consumer balance sheets went from like a trillion to $4 trillion. So there's plenty of room for people to pay these back. In aggregate, obviously, there's going to be some horror stories as there always are with loans,

but that's just how it goes. I have another comment here that says, having looked at CEO of Wells Fargo, so I'm guessing the new one, he got praise from Jamie, or actually they did. So I don't know if it's a man or a woman. Wells Fargo needs the cap lift, but other than that, they're good. Yeah, I guess that makes sense. Yeah, they had this cap lift where they actually couldn't grow their loan book, which pretty much hamstrings you as a bank. So maybe once that gets taken out, there's an opportunity here because I know Wells Fargo has historically, or excuse me, in recent history, traded at a very big discount to its book value. But I do not know, and I know Ryan doesn't as well, the big banks very well. And you got to discount those accounts.

Yeah. Hopefully they have no more fake accounts. Since they may not be real people. yeah hopefully they do not have many or any more fake accounts there uh okay it is 10 45 so we have a new sponsor today so ryan this is going to be a fun one i hope but maybe uh you want to kick things over here to our new sponsor manscaped yeah can can people see that on the video yes they can if you're watching the video manscaped is our new sponsor and they gave us a here let me pull it out i bet this is just horrible for the audio but you gotta they gave us their performance package can you see that right nope it's blurring oh yeah you gotta take off your blurred screen there there we go that's right yeah as i say your balls will

thank you yeah anyway this uh sorry this is terrible anyway yeah so they gave us the performance package and i gotta say i am very delighted with the value that we got out of this we were talking to manscaped they said you know we'll give you some sample products and see what you think and i thought it was just going to be something small but there is a lot that comes with this performance package. So, um, it's got the lawnmower 4.0 trimmer, which is probably what they're best known for. It's got a weed whacker, ear and nose hair trimmer. It's got deodorants, toners, performance boxer briefs. And if you look under it's got like, uh, a really nice, um, travel baggie and stuff like that. But yeah, so I guess maybe to, to be a little more precise with this

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appropriate way to say it and as the t-shirt says here that they graciously gave us your balls will thank you i will yeah and just to kind of close this this little promo out if you're thinking about getting a brother a cousin uh a friend a christmas gift a birthday present this is honestly a perfect gift it's only i think it's like 130 for the performance package plus you get 20 off using the code chit chat and it comes with literally everything you could possibly need and then some so honestly i truly do recommend it but i think that just about covers it yeah Perfect Christmas gift. Yeah. The one thing I didn't notice, or I think a lot of people don't think about is you want two separate razors for your face and the rest of your body. It's just

cleaner that way. I think some people kind of forget about that. So Manscaped could really help that. But yeah, let's keep going on here. We have another question. Thank you for all the ones today. It says, have you looked into KKR and BAM, which is Brookfield Asset Management, And Morgan Stanley, given the exposure to investment banking. Well, maybe KKR and Brookfield. We have some good podcasts out on, well, not Brookfield, but we have them on KKR and Blackstone from our good friend, John Rotonti. Those episodes, people seem to enjoy a lot. So I would check those out.

But those sort of investment companies, private equity companies, investment banking companies, they're a bit of a black box to me. And I don't necessarily like that. Although KKR and Brookfield and Blackstone, you know, those assets just keep going up and to the right. Yeah, suspiciously. here's the kind of here's kind of the thing that i've thought and how my thought process has changed on kkr and bookfield asset management over time at the end of the day these are basically just sales organizations their job is to raise money from investors all sorts of different investors and what do they sell they sell performance they both both these companies

have wonderful performance to sell. They can also sell stability, stability, diversification themes that are hot, right? They can go to any of them, right? Okay. What's hot now? Infrastructure. They're all raising a ton of money across that. And it's just really easy for them to hop onto that theme. Like we have the infrastructure bill, right? A lot of money's pouring into this stuff in the United States and around the world. They're thinking, okay, people need funds here. we're going to hop onto this train. Let's raise $10 billion. People like this, the returns, well, the net returns, we'll see what they are. But for the time being, we're going to earn a lot of management fees here. And here's the other thing that I think is perfect about that formula

is in times like the last two years, stocks have come down. Equivalent assets to what they own have probably been marked down because they're marked every day. And so since Brookfield and KKR don't have to mark those assets down every day, they don't have to deal with a market price every single hour, every second, they don't have to report as much losses. And that really helps in the fundraising process. And so they're raising funds at a time when assets are getting marked down in reality or assets are worth less. So they can raise more money because they can sell stability. They can sell better returns at a time when they're going to be able to generate better returns moving forward. I think I really did not appreciate enough how good these

organizations are at raising money, which at the end of the day is how shareholders are going to a return a hundred percent i mean yeah and it's not easy i mean raising money is not easy yeah and they do a wonderful job of it i mean they've got what trillion brookfield almost has a trillion in assets right in total uh yes no that might be blackstone i don't know if it's brookfield i think you're confusing it there the the companies that start with b they're always confusing but i think that might be blackstone again i think that's showing our non-expertise here on the the market um yeah all right what's your next topic because i think this will be a fun one everyone loves talking buffett everyone ever always has a hot take here

so you had a fun chart maybe i'll let you share it because i think it'll be fun for the audience here um if you want sure and i did see some more comments in the chat we'll get to that in a second And I got to blow this up real quick. I'm starting to really think this just destroys our audio quality. Okay. So here's Buffett's purchases. This chart was brought up on Twitter and it basically is all of Buffett's big purchases since 1988 and the pre-tax multiple that he paid to acquire these stakes or these companies.

And so the big ones, there's Coca-Cola, Amex, Walmart, Wells Fargo, US Bank, Burlington, Northern, San Jose, so BNSF, Lubrizol, IBM, Precision Cast Parts, and Apple. And so the reason this got brought up and the highest multiple paid on here was 14.6 times for precision cast parts, but every other multiple was pretty much below 10 times, 10 times pre-tax profits or around. Yeah. Yeah. He paid slightly more. He paid 10.1 times for Coca-Cola, 10.3 to 13 times for Walmart because he has to buy kind of over time. And then he paid anywhere from 9.3 to 14 times for Apple since 2016. So the point here is that a lot of investors say, or they quote the Munger, that Munger

kind of changed Buffett's philosophy, that he changed it from buying okay companies at ridiculously cheap prices to buying great companies at fair prices. The thing is, these are not the fair prices that I think a lot of investors that follow that philosophy quote. These are still very cheap prices. These are 10% pre-tax earnings yields on high quality businesses. I think most people that quote that typically say like, yeah, I'm paying 35 times earnings, but you know, like Buffett always says, better to pay a great price or a good price for a great company than a, you know. that's good context yes yeah i think his definite this is his definition of a fair price which is about 10 times earnings i feel like that's just his he likes to simplify things he likes to um yeah i don't he just he doesn't say like oh i'm gonna do some crazy dcf here which he can probably do in his mind but he likes to kind of hover around that 10 times earnings i think for his fair price but his definition of a great price is probably like three to four times earnings

depending on the company obviously so yeah i think that's a great example what do you think was the obviously best investment yeah obviously you know the numbers have played out so far but i think what do you think the like the the one with the biggest margin of safety and i'm gonna go seven times earnings american express in the early 90s because that was just really really i mean yeah it's easy to say that now i wonder what amex was like at the time i know when when he first bought amex in the fund which was in like the 60s people thought it was like the beginning of the demise of

Amex. I don't know what it was like in 94, but it feels like we always look back and say like, wow, I mean,

great company trading at seven times earnings. Like there was probably something up with that. What about Burlington

Northern at sub 10 times earnings under earning too because of the GFC? Yeah, they've jacked up prices

following that. Yeah. i mean these are all good purchases i i don't know burlington northern that well honestly i don't know a lot of these businesses that well i still stand by the i'm probably with you there that the amex and the coca-cola purchases that were made kind of in the late 80s early 90s were two of the most stellar ones because it wasn't it wasn't companies that were under followed or anything like that these were the hiding in plain sight people just got the narrative or the narrative drove the price too low and those are the ones that i really like

because it feels like those are probably the most replicable as as individual investors to what he's done i mean it's hard to do you know it's hard for people like us to do whatever convertible notes on harley davidson in 2008 or whatever he got true true okay i think anything else on that i i kind of think yeah it's just good context for anyone that says oh you know fair price 25 times earnings typically when he makes his big bets he wants a high quality company at 10 times earnings and i think that's just good it's just good for everyone to think about what's your typical threshold what's your what's your version of a fair price uh it depends what business it depends what business because he goes for lower growth right yeah that is the other thing is

these all these companies well maybe not but he doesn't they were mature businesses yeah more mature but can be growing yeah you're probably i'm guessing most reports from for these businesses maybe there's some outliers here we're forecasting probably mid single digit top line growth for these businesses probably at the time of the purchase which i don't think people are considering that really high growth but when you're paying 10 times earnings it's it's kind of warrants the price yeah yeah i think well for me unless it's so i have a few different thresholds for one if it's a low grower that I think a management's buying back stock or has good capital return strategy, right? I think an example for us that's resonant in our mind, and probably I use this as an example

a lot because it's been successful with Sprouts Farmer's Market, right around 10 times earnings, right? But if it's something that I think is a durable grower with a high competitive advantage, but maybe not crazy growth or a younger company, I'd say, and again, you have to make your own estimates, maybe 15 to 20 times earnings. And then for the maybe high quality company that I has very strong growth prospects, might be a little bit riskier, blah, blah, blah. There's always so many unique things and you have to sometimes estimate what the earnings could be because some of these companies aren't earning to their full potential. I think something around 20 to 25 times is reasonable. But again, it depends. What do you think? It's going to grow

30% for five years? Or do you think it's going to grow 20% in five years? Or four or five years? I mean, that's a huge question. So I think I like to bucket into a few different camps, but typically, and I know Ryan likes to do this too, because we both do this. We look at, okay, what do we think they can earn? Maybe a little bit conservative because things can go wrong. And okay, maybe one, two years out, can we buy this at 20 to 25 times the three-year radical earnings if it's a high quality growth company? But for the more durable stuff, I think AMX is a good example here. It's kind of getting around where we think it would be a decent opportunity. We want it more 13 to 15 times, something like that. Yeah. I think I've gotten to the point now where if I have to

forecast more than 20% top-line growth to make the numbers work, I'm probably just not going to buy yeah yeah yeah and i'm probably gonna miss i'm gonna miss on some because of that but i think we got hurt maybe i should say i got hurt doing that in 2021 with certain businesses that i liked cough cough spotify cough cough wix and i was dead wrong on it now spotify was maybe for other reasons too, but it's really hard to forecast that kind of level of growth. Yeah. Lakers in four, which is a good name there says TSM was incredible in hindsight. Yeah, it probably was. And I think that's a good example of how he wants to buy a high quality business at 10 times earnings. But I think after it got a little bit more expensive

and who knows what actually happened, but he was like, okay, well, this isn't, know given the geopolitical risk this is not something i want to own at 25 times earnings but if apple you know apple's pretty beholden to them so that's a whole nother question um yeah another guy here they says meta was trading at nine times operating cash flow i mean yeah that's that's the one there was for a very short time period but that's one where where in hindsight, obviously, that was a good buy. And also, this is pre-tax profits. Operating cash flow and pre-tax profits for Meta at that time,

I've got a feeling were, okay. I'm pretty sure they were very different because the CapEx associated with Metaverse and AI spending for the family of apps. So, I don't know. And operating cash flow, now you can easily say that paying nine times for Meta, nine times operating cash flow ended up being a good purchase. But I think at the time, there was a lot of uncertainty around what CapEx was going to look like and whether or not the CapEx was going to be worth it. Yeah.

I think that the, and this is why everyone knows this, why Buffett has been so good is his price discipline. But I think the key there is that once you get down to that 10 times earnings, you can get good returns, even if the business doesn't grow that much, even if they don't reinvest that much. And that is take the earnings, redistribute them to shareholders, buy back stock. And it's if you have a competitive advantage and you don't press for growth, it's such a low risk way to get decent returns. Yeah, I agree. Okay. Did you see this? So Instacart went public.

What? I don't know. Two days ago, three days ago. The day before, DoorDash published a press release announcing, it says, DoorDash broadens grocery selection with multiple new partners the day before the Instacart IPO. And you know what? To be honest, this is a bit of a nothing burger. It's like they partnered with a bunch of low-profile grocery stores, from what I can see, probably a bunch of regionals. It felt purely just like a petty shot at Instacart.

Yeah. They're competing though. I mean, they just won the deal with Sprouts, which is, we know just because we follow Sprouts so closely. So they're competing for customers, uh, for them. Like they're both distributing, but DoorDash just won that. Uh, and you said the deal, you mean like they both. Well, I mean, DoorDash, Instacart was the e-commerce partner for Sprouts for multiple years.

And now DoorDash just launched with them a couple of months ago. So I think it's both, right? yeah that's what i mean yeah so that's highly competitive yeah i mean i just saw uber's tossed me a ton of emails about 50 off groceries i mean it's going to be highly competitive i don't see what happens we'll see what happens yeah at least at this point it's not other than uber who's doing it on their own cash flow now and i'm not sure about door dash situation it's not just financed by unlimited capital capital from vcs yeah what was that one

That's a little more rational. Remember they just flooded the market with advertisements. Oh, go puff. Remember that one? Literally every single company. Yeah. No.

Do you remember go puff? They kept advertising everywhere. About 15 minute delivery. No, I must've missed that. There were so many delivery companies. Yeah. Let's look at the mobility,

the mobility economy. It was. Oh yeah. No, they didn't call it the mobility economy. They call it the mobility revolution. Okay. It's a revolution,

right? let's look at doordash walking is a time of the past it's a thing of yesteryear okay last three months doordash lost 273 million dollars on 1.61 billion in revenue let's look at the cash flow so i i mean yeah they might have a bunch of spc here uh first six months of this year 790 million in operating cash flow, but a lot of it is SBC. Oh, actually, wait, they lost $211 million on $2.1 billion in revenue. Do you think there should be a mandate that you either put like, it should go chronological from left to right on the income statements? Because some people do the most recent on the left, some people do the most recent on the right. I get confused and I

always make a simple mistake there because that can really ruin some things sometimes but yes the other thing i'll add to is it always frustrates me when i open one quarterly press release and it's like the income statement is the quarter this year versus the quarter last year and then they've got the cash flow which is the quarter versus the end of the year and i'm like oh yeah yeah i'm like you're really gonna make me go to last year's press release just and do the math here yet don't don't make us do the math you guys got all the numbers here uh yeah yeah all right well the grocery store i mean what are your thoughts on the the grocery competition i know we've hit on it a few times but well i don't know i liked instacart just the service i think

the service i think has a lot of value but i'm starting to believe more and more in the competitive landscape that it's going to be tough for instacart to really grow because at first i thought well maybe it's just the economy overall that's leading to kind of the lackluster growth for instacart but now i'm starting to really believe that it's doordash and uber and i think one of the comments in here said postmates too i forgot they exist they're owned by uber so yeah oh really yeah anyway um and then amazon and walmart go vertical integration so don't forget about grubhub yeah grubhub what a sad state of affairs that is yeah i think it's bigger in europe no no grubhub is not or just eat takeaway which is like

i think they're combined now yeah either way i mean that's still do you want to look at that stock price pretty pretty pretty tough stuff just eat the hell just eat takeaway okay you want to you want to guess what their total return is over the last 10 years or five years minus 70 wow yeah minus 74 five-year returns okay question for you we used to ask our interviewees this all the time and we really haven't been doing it as much. And I think we even did it early days when we were back doing the old show. What is, what would you call your worst investment? Not nominally. So not what's like actually had the worst investment returns, but the one where you were like hindsight that was the most obviously wrong, or I should have been more careful.

for ever all time yeah all time didn't we just do this i don't know do we maybe uh try to think well you always say us i think we did it on someone else's show oh oh yeah yeah yeah that's right that's right well i always say us still because that was the first one i ever bought but how about this what was your most horribly wrong thesis uh probably intellicheck so i thought that good promise there and that small cap went down quite a bit so yeah what was the other one that was like the the botox replacer neveless yeah a lot of people still pitching that i think it's done decently well it hasn't let's see where that's trading yeah bread run where we bought it still so i guess you know not good not bad still about

nine bucks a share yeah that one's honestly just growing well but we had more concerns with the management team what about you what was your wrong thesis i might say wicks just because i remember because you just brought that up so it's top of mind yeah the thesis well my assumption for growth was a fair a fair bit off yeah a good ways that's the dangerous part about buying up or paying up yeah for sure yeah the i don't know that that one's probably up there there was a lot of companies i used to own that i would just like hear a pitch when i was like a lot younger i'd just hear a pitch and i'd buy it and i just really had no sense of what i owned i did that with what was that company that teledoc bought

lavongo yeah and my thesis was i wasn't even wrong it's just non-existent i was a tell i was a teledoc guy made money on it just because of the pandemic digital health baby revolution yext oh yeah that was off was that you or is that me that was like one combination we both looked at it and we're like well this is cool and then it's just been yeah i think i saw a tweet that sums up the the yext story is they got a it was like yext perpetually has a revolutionary new product coming next year which sums up that story pretty well yeah yeah i never really understood what they did that well because they were always trying to change what they did and i remember we talked about it and then someone like at the company was or i said i tweeted something bad about it i was

like yeah i sold it you know i had these concerns and someone at the company was like chewing me out on twitter like okay dude i'm like that's a red years old man just leave it that's a red flag uh not that they would do that okay mount rushmore of red flags i have red flags all right during your checklist um oh yeah well i do the read the proxy each week for us that's kind of my purview as we separate the research out so i think on the proxy statement it would be the biggest red flag for management i can come up with a few i mean if you listen to our not so deep drives i probably find one or two at least in all these just because it's gotten so egregious in recent

years first one though executive compensation but it's the perks that the companies get now if it's like healthcare or 401k plans, that's fine. That's usually what every executive gets, right? But if it's paid for by the company and it is something like gym membership, social clubs, a bunch of travel expenses, blah, blah, blah, blah, blah, that they're getting reimbursed for, and it's a huge amount of money, that's a red flag for me. Other red flag, this is the obvious one. It's the classic getting paid on adjusted EBITDA when you're a capital intensive business that uses lots of stock-based compensation it's a self-fulfilling cycle it really irks me it's just not aligning your uh goals with the goals of your outside shareholders i'll try to think of others

but what do you have for red flags on a company a lot of them are like the way management communicates with shareholders one big red flag for me is during conference calls talking about profitability on an adjusted basis like yeah that's all they focus on or never saying anything about per share yeah so just talking about like nominal profitability i've also got this kind of talks about what we were discussing earlier talking about the growth and workforce as a positive sure i've seen a lot of executives where they're like where we grew our workforce by 10 year over year what why are you why are you bragging about that yeah i'll have another easy red flag off balance sheet stuff see that

the proxy statement pretty easy to find they have to record it yeah and that's self-explanatory i would say another one if it's a small company and they have for example 13 board members and they're all getting paid two hundred thousand dollars a year you know it might not be the game changer there but i think it shows where your priorities lie which is paying your buddies, and not focusing on the best way to generate cash for shareholders. Yeah. The other one, and this is kind of vague, but I would say being a promoter, not of the business, but of the stock, trying to convince people to buy. If I'm an executive or if I'm a major owner of the business,

I don't see the incentive to convince people to buy because the only reason I would be doing that is if I want people to buy the stock, I want the stock to go up in price, right? That's kind of obvious. The only reason I'd be doing that is to use it to finance costs, whether that's through stock-based compensation or raising money with equity offerings. If I own a whole bunch of the business, I would rather have it reasonably priced or even maybe undervalued so that I can return cash at reasonable levels. Right. Yeah. Yeah. Or red flag. This is a clear one. That's even more of a joke, but it's only a select few companies that have jumped out of this narrative is talking about the Vanguard BlackRock State Street conspiracy that they own

every company in the world i think that's a clear one but that's obviously rare i think another one that's more prevalent is combating short sellers talking about short sellers saying they're evil i mean that's going to keep me out of shopify forever i think i agree yeah tyler ferris here says related party transactions are a big micro cap red flag i would agree because some of these companies seems to, and from maybe the more the experts in the industry that I try to follow and learn from have said that

some of these executives use the microcap company as their piggy bank. I believe it. I mean, okay. You have any more? I think a lot of people, I don't know if this is how it used to be, but I

think a lot of executives today of public companies really whether they do it intentionally or kind of just as a default treat like treat the public markets as a way to finance their own personal lives the mckinsey evocation of america ryan i'm on this train okay we've got some comments you want to look at that ally one you have the ally one or you want to hit something else and there's some other ones too fuhat says y'all sleep on weed maps hey we interviewed the cfo uh a little while ago hopefully the audio quality that is good but

because we did that was before we upgraded our mics but we we actually interviewed the ceo cfo very interesting but i don't really have much thoughts on the cannabis space i have i declared it uninvestable i'm waiting for the brands to emerge that's i'm waiting for the coca-cola to emerge i'm waiting for the marlboro to emerge so that doesn't you know it's gonna be a while but hey if you're early it'd be big returns yeah it just feels like anything cannabis related is just constantly running into a regulatory headwind yeah and i think for the time being i just don't want to be i don't want to have that overhang there's also someone asked i don't see it now but Someone asked about Fabio and the capital mindset guys and answer.

Yeah. What'd they say? I think they, they said who had the better pitch. Both were good. I want to be a politician. There are different types of companies too. So there's a good mix of both.

One was growth here. One was, you know, very, very durable growth. One was a capital return story. So yeah, I will listen.

I'm glad we like, how do we, how do we get in touch with them? They got in touch with us, I think, on one of these chats here. Andrew said, get in touch with me. And we did. And yeah, they're great. Seem to have really, really overlapping on any listeners to our show should go check

them out. It's great. They have a YouTube channel, plus some other stuff. Go contact them. Listen to our interview. Email them. Whatever you want to do. Here's another question from Tyler.

This is a great one, I would say. what do you guys think about allies net interest margins in a quote higher for longer environment do you think that interest margins will compress back to pre-covid levels higher i think they believe it'll be higher now the big question is the auto market used car prices stuff like that but i think it can be higher or at least the same because if you look at how their loan book is pricing the new loans on their automotive stuff, which makes up the majority, is much, much higher. So if you, okay, they're lending out like, I think, 10%.

Let's just use 10% as an example. And they're paying their interest at about 5% on their deposits. And yeah, there's some other variables in play as we get to kind of the true what their earnings are going to be. But I still think there's plenty of room for them to earn a solid 4% net interest margin. Basically, if we stick at 5% interest rates from the Fed for two years and their loan book reprices, I think they can get their net interest margin higher from here. Yeah. So here's the way we look at it. I'm sharing the screen and we've got the

yield that they're generating on the earning assets versus the cost of funds. So as a percentage of their overall lendable funds that they have, consumer deposits is the lowest cost and it's gone up from, I want to say like 50% to almost 90% of their total funds over the last decade. Good point. Yep. So that, because the cost of those deposits has gone up lately with the rise of interest rates, you're seeing a quicker rise in the cost of deposits while earning assets, it takes a little longer for the yield to rise because you've got these old loans that are at lower yields. And so it's going to just take a little longer for those to rise.

And so you get that compression of the net interest margin, which you can see on this chart. It's kind of come down a bit. But over time, if you assume that their yield is going to grow kind of in sync with how cost of funds have grown, because the lower cost deposits are beginning to make up more and more of their funds, I think you're going to see a wider net interest margin than what they had pre-COVID. which doesn't it feels like either maybe that isn't getting accounted for or people just aren't really willing to wait because the risk associated with used cars right now just car prices in general people are concerned and so for us like we think yes they can return to higher net interest margins than they had pre-covid and if that's the case they're going to be earning a huge chunk of the equity value every year from their loan book, it feels really cheap.

Yeah. Here's why they're facing compression and why we think it's short-term. If you look at the cost of funds deposits, when they change that from a 2% interest rate to a 5% interest rate today, that reprices overnight. Then they had to pay 5% on all of their deposits. But their loan book takes about, given about auto loans, it takes about two years to reprice. So you're going to have, say, if interest rates from the Fed go up by 2%, 3% over a one-year period, as they have over the last, say, nine months, or I guess maybe that's even, yeah, whatever it's been, you're going to have a bit of a headwind for two years. But once you get to a period where it's been a year or two, when interest rates from the

aren't rising at an aggressive rate, then everything will reprice. And we think that as long as the rest of the business is doing fine, net interest margins will not be a concern. Yeah. They just really just need to basically bridge that gap. And I think a lot of it is going to, I think maybe even the United Auto Workers Union strike lately might honestly help bridge that gap where as long as used car prices can remain relatively high, it could even come down a little bit and they'd be all right. As long as they don't absolutely plummet to the floor, Ally's going to do okay on the loans they, or on everything they lent out.

So I think they're in a pretty good position, but people seem to be very pessimistic about the auto market. Don't take all your information from YouTube videos. i would say that which again that's a joke about us but also yeah yeah exactly it can be good information but i say don't base a thesis off of that there could be different information that isn't purely anecdotes have another question from lakers and four thoughts on the universe unity controversy i would say that not surprising with that management team yeah that's the old that's riccatello isn't it yeah the old it took the easiest business to run

in the world ea sports and somehow botched it so yeah and he can wipe his tears from us not liking his strategy with all the millions that he is paid so i think he'll be okay other question here from john's yeah million tens of millions tens of millions for sure here's a quick question from john thoughts on the capital allocator basket boston omaha berkshire nelnet markel i believe that's blackstone i know you guys are long nelnet yes we are i would watch the episode on that that is our largest holding so we are going to be biased there i think my philosophy on it's brookfield or is bn brookfield not blackstone i get confused i get confused too that should show that i don't know much about those businesses yeah brookfield but

my philosophy on the conglomerates the capital allocators is one i want a track record of a decent amount of time that's what attracted us and now that obviously that should attract you to markel and berkshire hathaway as well but two i want to look at something that is as small as reasonably possible within that basket because Berkshire, maybe not Markel, but they're closer to that than a Nelnet. Berkshire hits the law of large numbers. Nelnet's going to be much, much farther away from that.

That's why I think the sweet spot for us, and this is why we're attracted to these two companies, IAC and Nelnet. Nelnet's a little bit better track record. IAC has a decent track record, but it's been bogged down a bit lately. That's why I like both of those. Not too big and great long-term track records

of creating value for shareholders. Yeah. I mean, you can't have like a $10 million financial conglomerate, well, for once. Well, we looked at one of those and that was very risky, but it had- Part of the problem, and I didn't really appreciate this

until we went to the Boston Omaha shareholder meeting a couple of years back, but with the smaller guys, it's hard to get access to good deals sometimes. Like you just don't have volume of what they call deal flow because people whoever's on top of certain deals they're like you know what do you what can you bring to the table it's like well i've got like five million dollars that might not be it might

not be enough to kind of get access to some of the really valuable um transactions but i think in general i would say that basket's going to do pretty well would be my overall guess you're going to get probably solid performance out of that five everyone i think i would just do i have some concerns about boston omaha but i don't know what if you just do 20 each and then every year you rebalance the 20 not the worst strategy in the world they're not the worst strategy here's what i have is a crazy strategy that i've been thinking of i don't know if i'd ever implement this it's purely hypothetical this is not what i'm doing but let's say you have a tax-free account what do you think of this idea you put all your money in altria living yielding nine percent

right that's obviously crazy at the start right bad start no hey done it's yielding nine percent you don't reinvest you take the nine percent yield tax-free and each quarter right and you buy what you think is the best opportunity uh in the market I think that I think Ultra's dividend is going to see some pressure. Oh, let's bet. Let's make a bet because I disagree. The math, this doesn't, it's too easy for them. I just ran the math on this.

10% volume declines. let's say cigarette volumes decline by let's call it 8% a year for the next 10 years

well that would be that would yeah but that would be a quadruple of the long term the rate of the last decade it also has

accelerated in the last two years yeah let me show you a chart let me show you a chart

I would make I would make a bet that that's not going to happen. The articles do super well for when you write Motley Fool dividend yield 9%. So I like writing those and plus they're very fun to do. Let me share you a chart here from the investor day, which fairly recent, about a year old, but you could say there's that acceleration. I think we're not, and again, things can totally change. You could have a thesis for things changing and that would work it the number of adult smokers in the united states

is not too far off from its long-term uh linear decline here which has been about 2.5 a year i don't think there's too much to worry about i don't know ultra doesn't feel like a place i want to park my cash i kind of think i kind of think it's goodbye here but obviously we're not going to buy it in the fund because you seem to disagree but i think it's good i think it's goodbye which is philip morris at this point you have a business that's actually growing volumes again in the tobacco business i don't know i mean obviously ultra is nowhere near that yeah and you also like it's not like they don't have price and power they've got the

price and power and volumes are growing again i think they're in a position to start growing 10 earnings per share yeah it trades at a bit of a premium but you're still getting five percent dividend yield there too okay let's look at 10 year earnings per share who do you think over the last 10 years and yes philip morris is invested in other stuff so it might not be the perfect say since 2014 who do you think earnings per share is growing the quickest growing the most Altruist

I'm telling you I think the next 10 years is a lot different than the last 10 I know that doesn't mean past results do not guarantee future returns as everyone has to say we've been going for 62 minutes alright well that's a good one then because we didn't even

realize it so that's a good way to end it maybe we'll keep going on the Altruist one maybe Ryan has to buy me a share if their dividend's higher five years from now or something. We can come up with a bet, but we can find something fun. Sure. The share will be a lot cheaper. Hey, yeah, that could be a fun, that could be a self-fulfilling bet. But yeah, that's going to do it for this episode. This was a fun one. Thank you for everyone for joining. Those are some fantastic questions. Come back next week on Thursday, do a live show. Thank you to our

sponsor, Manscaped, that Ryan is showing off there. Full disclosure, we are not financial advisors anything we say on the show is not formal advice or recommendation you can catch these episodes live thursdays or catch the replays on your favorite podcast player sunday morning listen wherever you want we are at general partners at arch capital and clients may hold securities discussed in this podcast i think that's going to close things out thank you everyone again and we'll see you next time Thank you.