Chit Chat Stocks - Investing Power Hour #79: SBF and Michael Lewis; Spotify Audiobooks; Google Pixel Gains Share

Episode Date: October 8, 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/ ****************************** Chit Chat Money is presented by Interactive Brokers. Switch the best brokerage in investing today: ibkr.com/info ****************************** Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. This is the Investing Power Hour number 79 on Chitchat Money. My name is Brett Schaefer. I'm joined as always by Ryan Henderson. We're chugging along here until earnings season happens, but it

Looks like we have plenty of news this week. So, Ryan, I guess we'll get right into it. Any topics you want to hit? I know you made a lot of notes this week, so you basically put in all the big news stories, and I think there's going to be some fun ones. Yeah, it's almost earnings season again, which is nice. Give us a little news. There have been some recent earnings, which are interesting.

Costco reported earnings. and maybe showed us a little sign of the bottom, the market bottom here. We'll talk about that in a second. There was Michael Lewis, the famous author of The Big Short and Moneyball released the book Going Infinite, I think is what it's called. And it's basically this autobiography around sbf or sam bankman freed and the ftx well originally it was meant to be kind of this yeah and not about him kind of a hype book describing the genius that he was and then right as he was finishing up ftx collapsed and so he's had to i think backtrack some of the stuff but he's been very much a public defender of sam bankman freed in i would i would say he's been a

public defender throughout a lot of interviews and kind of had a lot of skepticism and there's concerns that people kind of think he might be throwing his reputation out the window so there's that as well spotify's audio books let me be clear for the listener not an autobiography a biography but yes it should be very fun to discuss all that stuff there and then there's a new Michael Mobison, some people call him Malboson paper. Not really sure which one it is, but he released a new paper and there was, I haven't read the whole thing, but there was some interesting tidbits in it. And on page 37 of this, I mean, it's a long presentation. There was this list from Morgan Stanley of wide moat businesses. And I think it's kind of fun to comb through some of

those and see what they consider to be wide moats. Honestly, just looking, we've studied some of the businesses that are on this list and looking at them, it looks like a great place to potentially do some fishing for new stocks to own because there really are, I don't know all of them, but it looks like some really high quality businesses in that segment. So we can get to all of that. Do you have anything? I was going to talk about the Google Pixel. Well, he had some of the stuff I wanted to talk about as well. So it kind of depends who gets to the sheet first. But yeah, I wanted to talk about Google Pixel market share gains.

It's been pretty impressive. And they just launched the new one this week, or not launched, but did their whole, as every tech company does today, the bring out some vice president and try to do a Steve Jobs thing for an hour. No way I'm going to watch that presentation, but I guess we can talk about the specs there and how maybe they're trying to attack this market and gain some shares. So, yeah, I think some of that could be some other stuff. There's plenty, I think, for us to discuss this week.

We do have an early comment from John Gallagos talking about Nelnet. Yeah, we own Nelnet and the price has been coming down over the last, I'd say, two weeks. And he says he's loading up and buying more shares. I don't think we can really say what we've been doing actively as of late. But now that's our largest position. Yeah, everyone do their own thing. Now that's our largest position. And yeah, it is kind of interesting.

We've been trying to peg why it's kind of coming down. And I think probably the most realistic reason is just around interest rates rising and potentially tightening the spread on their loan book. But there's always a million reasons that something could be going down. So it's been fun to guess. the good thing is they got a management team that buys back a lot of stock and does so opportunistically so chances are you're not john you're not the only one buying i imagine management is as well yeah i think we dig in yeah go right go right ahead what do you want to hit first i kind of want to start with costco all right that's a fun start yeah it's it's more

whimsical right or maybe you can hit the earnings as well but the first thing you have here is a little more fun. Yeah, I really didn't. I didn't take a deep enough look at the earnings, but apparently this kind of came out during the conference call because I didn't know this existed, but apparently Costco now sells gold bars. On the conference call, the CEO said, I've gotten a couple of calls that people have seen online that we've been selling one ounce gold bars. Yes. But when we load them on the site, they're typically gone within a few hours and we limit to per member. You can only see the prices of these if you're a member. According to some member online, they cost just under $2,000 for a one ounce bar. I had no idea. They are

literally selling just pure gold bars online and they're selling out quickly. Is this a sign of the market bottom? No, I don't think so because everyone has loved gold forever and right there's always a certain section of the population that absolutely loves gold and they can do that and i'll be fine but you know it's not going to affect me if they want to buy gold go right with them and if costco wants to sell that to drive more customers and retain their subscribers to the the membership plan hey that's all right with them too it is interesting yeah no one's it's not hurting anyone right it's just it's just there people want to spend all this money on some metal it's it's good with me it's funny that costco can just list this stuff and

just instantly everyone buys it like it's just cold bars i'm sure there's other places you can buy it too well i'm sure they're selling it for unless they say they're selling it at a fair price yeah they're selling it at a good price that's where a lot of other places you have those fees and stuff at a metal shop or wherever you would go it's interesting though how much what do you I wonder if the other retailers will copy them. Something tells me Walmart's not going to be offering gold bars. Well, the shrink issues, yes. What do you think of how gold is still so enticing to so many people?

Do you think it's because there's such an industry around it with the perma bears and the quote-unquote buried in my backyard people that it's just perpetuated? There's so many ads around it. there's so much money to be made selling gold what do you think keeps it around and so relevant even though it really does nothing well i mean it is pretty shiny like it does look cool that's true i think that is true i mean people wear jewelry gold jewelry i think there is like a literal like optical appeal more so than yeah i guess beauty's in the eye of the beholder but you know yeah i don't think people are looking at it well a lot of people are but i think a lot of people are just attracted to it because of its whatever optical appeal and then maybe then why are they

the doomers what then why are they buying the bars what which what i would say yeah i mean the gold bars still look pretty cool it's just like i don't know i don't think that's the sign of the bottom honestly it could be the sign of the top because there's too much access too much excess yeah exactly maybe but what did you did you look at costco's earnings at all or maybe i'll pull them up while you're talking no i really didn't it's one of those i just really haven't followed because the multiple just has always kept me out yeah well here's here's a question i put out this week after seeing costco report strong earnings again now if you it's hard because the Amazon is a part of a bigger business. So we don't exactly know how profitable it is,

right? Stuff like that. But let me give you one business. You have Costco, the full business that you could buy, or you could buy Amazon retail, which could include the first party, third party business, Amazon Prime subscriptions, but just exclude Prime Video, right? Because the majority of it is subscribing for the shipping services, and then add on the advertising business as well with the sponsored listings, because that's a big part of the retail segment as well. From an earnings perspective, what do you think deserves a higher multiple, which I guess would mean, what do you think has a better combination of competitive advantage

plus potential growth? I think it's a tough question. I think they're both pretty darn strong here. Chit Chat Money is brought to you by Interactive Brokers. Designed for active traders and sophisticated investors, Interactive Brokers offers trading assets in 150 markets with 27 different currencies. They charge USD margin loan rates from 5.83% to 6.83%, rated the lowest among margin fees. The ability to trade stocks, bonds, options, futures, commodities, and more with high interest rates paid on instantly available cash balances, plus the ability to lend your eligible

stock shares to earn passive income all on one single unified platform that is why we at chitchat money use ibkr and wouldn't use anything else restrictions apply for more information visit ibkr.com slash info member sipc open an account with ibkr today i think costco still ranks a little higher for me in terms of competitive advantage they it's not that obviously the infrastructure provides amazon with a massive like logistics advantage and ability to deliver things quicker but we're seeing to some extent at least just purely in the news and the buzz they still have to win online like they still have to win customers on google search they still

They'll have to win against other online competitors like low-cost providers like Timu. And I don't know. Costco seems unbeatable because of their physical footprint. And the advantages have just been self-reinforcing for four decades now. Maybe it's just more proof of durability at this point. But it feels like there's pretty much nothing that could disrupt Costco. costco whereas you could maybe come up with a case of something disrupting amazon sorry for anyone watching i hopefully put myself on mute obviously the growth potential is higher

at amazon just because of penetration market penetration yeah clearly both are really solid but i think i'm gonna edge amazon here simply because the growth rate's more attractive to me e-commerce is still only in the United States at 15% of retail. And if you look at some of the other markets, well, I guess every geography, it's not guaranteed to hit where every other geography is, but given how popular it is among younger people, I would expect it to be probably 30% to 40% of the market over time. And I don't think Costco has that runway for growth just from that industry perspective of where things are transitioning, but both are clearly solid and Costco still has a lot of potential left internationally as well.

It's a tough one, though. They both have very, very strong boats, so I don't think you can go wrong with either, but both, I think, deserve a pretty high multiple, I would say. Everyone complains that Costco trades at 38 times earnings, 40 times earnings. I don't know if I would pay that much for it, but I don't think I would be selling it if it was trading at 30 times earnings, 32 times earnings. There's a reason Munger says he's never selling it. Now, if we look at the earnings, it wasn't earnings, it was they do their monthly updates. So they gave out their comparable store sales for the five weeks in September.

Comparable store sales in the US up 3.2%, Canada 6.7%, international 10%, blended company 4.5%, and then e-commerce 3.7%. So e-commerce, not really gaining share, probably losing share if I'm thinking of the Amazon and Shopify numbers there. But everything else seems solid, even as we're going through a bit of a bullwhip on the consumer, you know, consumer spending compared to 2022. Yeah. It's, I mean, it's a fantastic business.

Do I think it deserves 38 times sale or excuse me, 38 times earnings? I don't know. I'd rather, I think I'd rather buy. Maybe it deserves it, but, but that just means the expected return is going to be lower. Should be. It might deserve it, but I don't want to be a shareholder in this situation. And I think if Munger were put in the situation now, yes, he's continuing to hold it, but I don't think he's buying it. There's kind of that concept of, I think Munger was the one that talked about it with marriage.

Before getting married, have your eyes wide open. But once you're married, you can squint a little. You can let things go. but be looking for red flags prior to it, that's kind of the same with like the company. Be looking for all the red flags prior to owning it. But once you own it, you can let the multiple run a little bit.

Like just continue on. Yeah, I agree. And the way I would look, okay, it's going to grow, right? Obviously. But from, I say, opportunity cost perspective from a, hey, I could maybe find something else.

There's a lot of optionality there, especially if the broad market falls, Costco is likely going to fall as well. I'd rather at this price own short-term treasuries over buying it, but I agree with you. If I'm holding Costco and I've owned it for 10, 15 years, here's a good question. Because eventually you have to sell something if it's trading at 100 times earnings, something like that, super extreme, assuming normalized earnings. What multiple would you sell Costco at today? And I think it would be around, and again, this is not buying. This is if I bought it before and I'm selling

simply due to valuation. I think it's probably in between 45 and 50 times earnings. What do you think? Yeah, I was going to say north of 40 times. For me, I'd probably be selling it because sometimes when you get a company that ratchets up to a 40 times earnings multiple or even above that you can kind of rationalize some case where they grow into that but for costco it's really hard without just extending how long you're going to hold it it's really hard to like increase your expected growth rates unless inflation's insane so right right yeah okay i think north of 40 times it doesn't feel very attractive to me right all right new uh anything else there i think we can move on to what I may call the sexy topic of the week, which has been all the talk of the investing

business finance world. And that is the new Michael Lewis book, Going Infinite. I guess he doesn't need any more marketing on SPF and the trial starting this week, which is exciting. Did you see the courtroom case drawings or sketches? He got a haircut. He looks like more criminal now i think that was a mistake by their their lawyers uh i did not i saw some pictures i think of him coming out of the courtroom yeah right was it the same stuff he got a haircut i didn't do it i didn't check out his haircut too closely to be honest the uh it there have been a lot of interesting pictures coming out of it there have been there's been good coverage from the wall wall street journal there's honestly there's a podcast out that's uh called the trial of crypto's

golden boy that's i think kept up with everything pretty well and it kind of shares interviews from sbf from back in the day and i've been listening to that for probably most of my coverage and i it's pretty entertaining did you see the list he made for for dating the ceo i i did not look at it but i saw people were discussing it it's he's a strange yeah he's a strange character i don't think we can really you know you're not guilty for being strange i think you're guilty for being a ethical compromised and hurting other people and stealing their money okay so let's talk about the stuff yeah what the book's out he's on the press tour what has he been saying for any of the listeners here well there's been a couple

interviews now where he kind of he basically says unlike bernie madoff which was a ponzi scheme this was the the ftx segment the exchange was a real legitimate business and so was the hedge fund And he kind of defends him in saying that if it weren't for the run on customer deposits, they'd be fine. And if it weren't for him to make risky bets in the hedge fund, he'd be fine. And he even went as far in a recent interview as to say the lawsuit against him kind of makes no sense. but what doesn't what bothered first of all bernie madoff there was there was a legitimate operation they were one of the biggest market makers as well his sons ran that on the on the floor below so not entirely a ponzi but bernie madoff's operations yes ponzi the he there's a moment

in one of the interviews with i can't remember who it was it wasn't the 60 minutes one but there's another interview where he's like, they're really, he was making big, bold, risky bets, but they're the, the lawsuit kind of makes no sense. And then he says, yeah, but you know, he was kind of, he was transferring money. That wasn't his, right. The interviewer asked him, he's like, well, yeah, yeah. But that's not like, he shrugs it off. I'm like, okay, well, that's the biggest part is that he's making risky bets with money.

that wasn't his right and he seems to just kind of ignore that my like the cynic in me thinks that he's getting paid a pretty penny to write the book the i'm trying to figure it out and i think here's was actually you finish and then maybe i'll go through my thoughts yeah like i i can't understand his perspective i really i'm having a hard time doing it matt Levine lays out a pretty good case throughout his writing that it's going to be hard for SPF to get out of this. And Michael Lewis is kind of just omitting the lawsuit and he's really defending him publicly. And I don't get it. People have said maybe he's trying to sell more books by having a different spin on things. If he wanted to sell more books, he would go out there and say,

oh, the fraud is so much worse than you know. And he would pander to the audience, which is most Americans at this point that already don't like him because he stole people's money. He wouldn't go out and defend him because it's made me a little more reluctant to read the book. I don't want to get 50 pages through this thing and just be shaking my head like, why are you defending him? I'm not going to buy it. I am going to be buying or reading Number Go Up Inside Crypto's Wild Rise and Staggering Fall by, sorry to the author, but his name is Zeke Faux, Z-E-K-E-F-A-U-X, F-A-U-X is his last name. I'll be reading that instead, as I think it's a more measured take on the crypto industry, although it might just

be confirming my bias but i am very curious on why he is so well yeah why was he so defend uh why is he defending him so much because it's pretty clear to everyone else that there was a big crime here unless other evidence comes to light okay from every from all the coverage i've seen from the wall street journal there was a direct literally just a couple lines of code written to direct payments from FTX to Alameda. Boom. That was not their money to bet, right? Isn't that it?

End of story. And they're gambling it. They're not only gambling it, but they're paying $15.7 million to Kevin O'Leary for 20 hours of work, paying $55 million to Tom Brady for a week's worth of work. Well, that in itself is not a crime. They were giving away.

Using customers' money. Using customers' money to E-write. I mean that's in itself not a crime but it doesn't matter exactly what they're giving it away as that would be just bubble behavior from a company right if they got it from a VC but what I'm yeah but what I'm saying is it wasn't theirs to

give away so not only gambling but essentially giving it away to make Sam Bankman's freed lifestyle better to allow him to be in better social circles maybe you could call it marketing budget

but But there was so much ethically wrong with this, and I don't know how Michael Lewis is just ignoring it. Yeah. Looking back to those Super Bowl commercials, pretty wild stuff. Pretty wild stuff there. Do we, first of all, shout out Taylor Swift because she turned down money from FTX? Yeah.

I heard that that was maybe not true, that that was a fake story. It's confusing. yeah yeah i think so i think that's something that like a lawyer intervened or something and was like asking if these are registered securities or something maybe it was a big story but to the people that pandered this stuff kevin o'leary already uh didn't really like him to begin with but tom come on well actually 55 million i don't know man i think it's i think i think anybody would i would do that give up a week for 55 million yeah but that is insane amounts of money for marketing really was it even marketing i don't remember the commercial

so maybe it was more just to hang out with tom brady for a week now remember it was the commercials where they're saying don't be like x and don't be like all these people everyone you know you got to get into the future start using ftx yeah i think what's key here for especially the people that were collateral damage that kind of maybe leads to my michael lewis take here is that it's it's pretty unless you follow this closely try to research it a lot like we do i don't think it's crazy hard to understand but if you're just on the outside you can go well this is super confusing i don't really know i'm just going to trust the industry people to tell me it's okay right so i don't really blame all the celebrities right maybe kevin o'leary because he

seems to be supposed to be right a shark on a tv show that i would not watch if you were a serious person but the other thing or go ahead that i found funny about the coverage and this doesn't really have to relate to the michael lewis stuff but from the wall street journal coverage something they talked about that was interesting is when ftx collapsed they realized they had whatever eight billion nine billion dollar hole which they've been paying out customers money to tom brady the they created an eight billion i think was the final number whole and first of all they were using quickbooks there was money that was unaccounted for they had a hard time figuring out how much they owed he sends a message to cz at binance like fine you won

i'll allow you to buy us and cc's like uh okay we'll send our lawyers in and our accountants or our auditors he's like and he determined pretty quickly that this is unbuyable there's so much unreported here there's a way bigger hole than people are accounting for and cc had called it off like there's no way this is happening sam and confreed had no idea for like a while that binance had called it off that like that cz was like no we're not buying you and so he sends a message kind of before it's supposed to close like hey there's been a lot of rumors that he might be backing out just want to double check he's like no like we're not buying you yeah cz is a let's say well we'll let the courts decide but he's been alleged of a lot of crimes as well

And I would think he is, I would lean on the side of being guilty, but it's also TBD, we should say here. But at least he seems like he's professional, right? And he actually is trying to run some sort of business operation here, but we'll see what the hell happens with Binance. What I want to talk about with Michael Lewis, though, is I think looking back on all his different books now, if you look at Moneyball, okay, if you kind of look back on it and you follow baseball, I honestly don't think it had that big of an impact. The teams didn't actually do that well. It wasn't some sort of miracle thing. Yeah, you're using stats. Crazy. If you look back at the blind side, there's actually been stuff that's come out recently saying that the family screwed that guy and were actually terrible people, which, again, we'll see actually what comes out to be the truth, but not really good for Michael Lewis's investigative journalism there. then there's flash boys which when you read it you don't understand the industry you go dang that's

crazy that's evil we should get rid of this actually i think the high frequency traders are providing a lot of value once you actually understand what they're doing and now this i just don't think he understands the the stuff and he's just being very gullible i think that's the key here does write a good story though i not since the big short it's not maybe not i haven't liked any of his books since the big short they're not i think i haven't read any of them since he's half assed every the big short screen what's come out since the big short tons of stuff there's like one covering government and agencies like the department of energy um flash boys this one maybe one flash boys was after yeah the big short also the big short michael berry you could have

talked about how he was crazy maybe he wasn't crazy then but the guy right like that that also has come out as he's a little politically insane yeah hasn't come out he's just he just started tweeting and it was like oh my god this is not the this is not christian bale yeah exactly so the portrayals like right like i think that lines up where okay maybe we shouldn't trust this author that was put on a pedestal for these type of stories anymore. Yeah, I think that's fair. All right, we got a question here

from John again. Thank you for being one of the few joining us here. He says, look forward to listening to your podcast on Adyen. I would say that that is out. So go check that out wherever you're listening.

Could be on the YouTube channel, Spotify, Apple, wherever. But he has a question on Boston, Omaha. Omaha as one of their co-founders is also on the board of Nelnet. Do you see similar success in Boston, Omaha? Both are companies that are kind of the baby Berkshire model, right? They're trying to be a conglomerate. They're trying to just provide value to the shareholders, right? They have a very open mandate on what they want to do. What makes us like Nelnet over Boston, Omaha is the track record. Nelnet has a 20 plus year track record of compounding shareholder value,

of growing their book value per share, which is probably their most important metric as a financials company. And Boston Omaha, like I wish them all the best. I hope they do provide value for shareholders. They don't have a track record and their performance hasn't been that great.

So with these conglomerates, it's all based on the track record. And when you're small, like if you looked at the early 80s with Berkshire Hathaway, yeah, like, or even earlier, You could have said, hey, they have a pretty good track record here. I'm going to bet on them.

You still have a lot of runway left. I think betting on someone before they prove stuff isn't – I don't know why I would do that. What is attracting me there when they don't have the track record yet? I just don't understand. Yeah, it's – I think I like Adam Peterson and Alex Rozek. We went to a shareholder meeting for Boston Omaha. I thought it was solid. They answered a lot of the questions the best they could and they seemed to run their business pretty well. But to be honest, there were some red flags. We didn't even talk about the fact that that SPAC has basically amounted to nothing. Right. The free revenue company, that was a little bit scary.

Yeah. People gave a lot of flack to everyone else that took all the SPAC fees on these pre-revenue companies that weren't really legitimate operations yet. And Boston, Omaha, I mean, granted, I'm sure they got some nice fees from it, but they did a lot of the same stuff. And they really sold it. They really tried to like, I don't know, they tried to sell like the story of the founder and stuff like that. And it kind of came across weird to me. But the other biggest difference that I see between Nelnet and Boston Omaha is that I like Nelnet's core businesses better. I like the student loan servicing. I like the business software specifically a lot better than the billboard business, which is really Boston Omaha's, I believe their biggest cash cow. So for me, I think they have more predictable cashflow moving forward that management has done a good job reinvesting in the past and should continue to do a good job reinvesting. Whereas Boston Omaha might just not quite have those same levers or the same, I just don't have as much optimism about the businesses under their portfolio. I still, like I said, though, I'm

wishing the best for Boston Omaha and a lot of friends are shareholders. So I don't want to hate too much on it because there's a lot to like there and they seem like honest management, but it just wasn't. I think there's differences between them and Nelma. 100 all right we had a comment here from andrew marshall over at capital mindset said saw your guys's segment with john rotanti liked it a lot john we do have a interview out with him today and he is launching his own podcast we have been i would say try to promote it because we're working on it with him but it is called the j-ro show let me just put a quick advertisement in there and it is a fantastic podcast covering,

he's basically going to be interviewing masters in their field, going to be kind of people that have put in their 10,000 hours. For example, the first episode is with his longtime friend, Bill Nygren, a legendary value investor who has been in the industry for decades.

I really enjoyed that episode. It's going to be longer form. It's going to be out every couple of weeks. So if you like our show, I'd say go to the J-Ro Show, either on Apple, Spotify, YouTube, wherever follow it listen to the stuff help support it also andrew says sprouts farmers market seems to be crushing it since we talked about it and for anyone that doesn't know we

went on the capital mindset youtube channel and talk sprouts farmers market which i believe will be released to the public shortly although that's all up to them or it might be out already i didn't check but that was really fun and yeah what do you think of because the russell 2000 you know a lot of small caps micro caps have gotten beat up compared to the magnificent magnificent seven as a lot of people are calling it right the big tech seven but sprouts is doing sprouts is doing really well i don't what do you think about that it seems like the valuation is honestly getting a little bit stretched how do you think about that when we don't have any of the numbers yet we're not seeing we're not people that are getting all the like alt data stuff like that i mean

any lessons there anything that's kind of coming to mind i don't know it honestly makes me a little bit wary just in that it's not really performance related because nothing new has come out since the stock went from 34 to 42. And buybacks were kind of a big part of our thesis. So it's going to be harder for them to buy back creatively. However, I do find it kind of interesting and this is good timing. They were buying back depressed levels partly because there was a lot of supply chain issues and they were getting the excess cash and they really didn't have anything to do with it in the meantime because they weren't able to build out those stores. So they couldn't put as much money into CapEx as they wanted to. So they were taking the cash, just buying back their stock

every week. Instead, now they're finally in the position where they can ramp up store count and their stock is getting stretched. So now they're going to get better returns putting money into new assets than to buying back their stock. So it's kind of working out at a good time. However, it does concern me just anytime I see a stock I own ripping and it's not performance related, it kind of concerns me. So I try to sell less and less. I think we've tried to be less active. And when stocks start ripping it, I don't know, it starts to encourage activity for me. Yeah, I agree.

i'm in that same camp uh sorry i'm just putting the link to capital mindset for anyone there is the link for anyone that's listening to this uh you can go look it up it's on youtube and i'm putting it in the live chat during the feed i want um or go i want to go over i want to go over this mobison paper unless you have anything else uh on sprouts yeah i mean we still got like 25 minutes. So should be plenty of time on sprouts. I think what's interesting is if no news comes out on a company and it's kind of going against its factor, my assumption is usually that someone's seeing something positive or if it's underperforming, way negative, right? If there's no external thing there. And for this one, it makes me think that someone's seeing something

positive here you never know could be just someone wants to buy it but uh yeah that's kind of what i think in general like because there's a lot of data out there that people can get on these things so i think honestly that's the most plausible thing it's funny that so for spouts stock starts ripping when everything else is stagnant i start to think wow someone someone must really know something that warrants this but when it starts to go the other way i'm like yeah brainless mr market is selling off goods good businesses as opposed to yeah they probably have some alt data that's showing bad results yeah well it really depends if it even matters because if someone's like oh they're going to beat i don't really care for sprouts

i guess if they're seeing traffic acceleration that would be a positive sign but it's more of okay why is it going up doesn't necessarily matter why is something going down doesn't necessarily matter. Although if it's going down, it could be beneficial because you can buy back at a cheaper price. I think the big lesson I have from a stock like this as one of the ones, I guess the few of the stocks that we've owned that have done well in the last couple of years is that when you buy a decent business at a very, very cheap price, it's hard to lose. And management just doesn't like the money they get on fire. Yeah, we do have some questions. Tony asks, did you guys already talk about Spotify audiobooks? No, we haven't yet. So maybe I'll just hit on that first. This week they announced, so last year they kind of rolled out this audiobooks feature on Spotify, but it was basically not that different from any other audiobook platform, which is you just buy each book individually, you know, a la carte.

So it wasn't bundled into the subscription at all. But this week they announced that they are going to be including audiobooks in the premium subscription. So it says, here's a quote from their press release. It says, to start, we're offering each premium individual as well as plan managers for family and duo accounts, 15 hours of listening per month, making more than 150,000 audiobooks available. I like that they're differentiating in some way, and this is probably the best way to drive real audiobook listenership and diversify consumption away more so from music streaming. So, I like it. I haven't thought all the way through it yet in terms of how it might impact Spotify's business. My initial thought is that it's going to take a while before this trickles through into anything financially. Yeah, I was making jokes that it's going to have low margins. It probably will, at least at the start. They're just trying to launch with some deals here, and it's not going to have any impact financially for many years. But I think it can be very positive from a churn reduce reduction standpoint

because, okay, who's their biggest competitor? YouTube Premium, right? YouTube Music, whatever you want to call it around the world. They don't have this sort of feature. And if I'm someone who's thinking, okay well i can get youtube premium for whatever the deal they have with uh you know you bundle in stuff that's not even the music for me this could i think provide a lot of value for myself and i'm just saying personally i i like i like that that service is going to be on there for premium

subscribers i think it gives them more pricing power which they're not going to make money on the audiobooks per se but they're going to make more money on the music so yeah i i like it a lot But I don't think it changes much, though. And they did talk about how it's been a long time coming. So it looks like they had to go through tons of negotiations here. So I think it's going to be similar to the music business. Low margin, got big suppliers. They have kind of the labels are similar to the publishers.

And that doesn't mean it's a bad business because the unit economics on music are, I think, much better than people think. But we'll see what the final product looks like. The other thing I'm just thinking through now is if you're only getting 15 hours and you get halfway through a book and you're halfway through a month, probably going to spur more audiobook purchases or a la carte audiobook purchases. So I imagine that helps drive some revenue as well. Yeah. And I believe you can add hours on a sort of a la carte basis for, I think it's like 10 bucks a month to add 20 hours more, something like that. i'm sure that's just what they had to negotiate with the publishers or whoever you call them i

forget you know random house penguin simon schuster the i think it's clear though that their goal is to offer unlimited audiobooks right that's what they want because that's what they would be once offered you know similarly to music but i guess they couldn't get there yeah but it's always it's like okay look look how much value we're adding to the subscription and this is really valuable i think from a consumer's perspective like you're just getting you're not paying any more and you're getting access to a bunch of audiobooks for free not free but included in the subscription so you think wow that's really going to raise potential pricing power and you just don't but they're very patient well they just raised so

but yeah they're very patient with that for the first time in forever 15 years 16 years since they launched they raised the price of their individual plan that is true yeah so i mean yeah you could argue okay there's a lot of pricing power left or there's just there's a lot of ways you can go about that you can think about that optimistically or pessimistically yeah you know who this helps probably warner music group and all the big labels yeah because it allows them to raise prices and if they're still getting that 75 percent chunk Well, I guess it's still prorated based on listenership, but maybe it doesn't help them that much. I wanted to talk about this Mobison paper because we got 15 minutes left.

Long paper, I think it was like 50 pages or something like that. On slide 37, there's this list of wide moat businesses from Morgan Stanley. And I think there's about 100 companies on this list. I'm not going to go through all of them. Maybe Brett can share the screen. Maybe some of the ones, maybe I'll just name off a couple, Adobe, Amazon, Altria, Blackstone, AutoZone, Autodesk, Danaher, Estee Lauder, FICO, Intuit, Intuitive Surgical, Philip Morris, MasterCard, all those. Something that stands out to me, because we were talking about this earlier on, is that Costco is not on this list. well

maybe they just didn't include it for some reason but it's one that you remember it's one that always comes to mind so I'm curious why they wouldn't include it yeah it seems strange to me were there any here that you see and you think

that might be a little premature I'm trying to look through one that pops up to me is Live Nation but well maybe they have a strong vote but I just don't know

if that business is that profitable I mean Tesla it's very they're still very early stage right sure the

evolution yeah evolution I think yeah like that's we looked at that a while back i'm sure the business hasn't changed that much extremely high profit margins but i'm not sure exactly because they've seen some customers go in-house right for that basically trying to do this themselves i'm not sure how much of a moat

that has but i'm curious i would love to have someone on here talking about it yeah i think for the most part these make sense i will note there's a lot of tobacco on here that makes sense to me there's a lot of companies that we've done recent episodes on auto zone did a show on auto desk how do you think this list of 100 companies performs against the s&p 500 over the next 10 years equal weighted i think it probably tracks because it's too big yeah this probably makes up majority of the sp500 anyways so i like seeing bolsa mexicana sap i believe that is the stock exchange in mexico seen some interesting pitches on that over the years i honestly wouldn't mind doing that i know no we we would love to do a mexico themed month but not sure how many people

actually care about that maybe anyone let us know honestly if you'd rather do a if we if you think think that would be fun because we don't know if we kind of get worried that people won't listen to that what do you think any any thoughts there in general on i think i think it'll take a lot longer to do the research because some of those investor relation pages are tough yeah i remember looking at the mexican airport operators and those investor relations pages are a disaster for for an english reader and sometimes the translations aren't exactly right so kind of makes it tough, but we do have some comments here. Fake Alia says, opinions on physical retail companies getting very cheap from shrinkage interest rates and recession narratives. Do

you think there are attractive opportunities currently, or is it a trap? I kind of don't know what to think about this shrinkage issue because for a lot of these companies, it's not really solvable a lot of it has to occur at kind of the local government level i would believe so i think if you're just bringing your stores out of there i think it probably helps the discount retailers that don't really operate in those spaces that are in like the big cities which it sounds like target who are the other companies that were pulling out of some of the big cities i know i know retailers that yeah just the big target as an example or target as businesses big box retailers that you classically see across all sorts of cities in the united

states i don't a little teaser we're doing some discount retailers for the month of october which will be fun and maybe we'll have a better conclusion at the end of the month but it's hard for me it's really hard to get any sort of take on okay is this problem gonna get worse or better i i don't i don't know same stuff yeah i haven't really looked at them as a bunch like as as a collection margin seems to margins seem to have compressed kind of across the category which feels like that might be kind of here to stay as long as the consumer remains a little pinched. It's been interesting to listen to the Dollar General, spoiler alert, we're going to be talking about them next week. Dollar General CEO commenting on the consumer and how difficult of

an environment it's been. So I worry a little bit, just given the consumer right now, that margins are going to be anywhere near what they were getting when discretionary items were so strong. Because 2021, electronics were one of the best-selling categories that a lot of these big box retailers, especially like the targets of the world, and they can really mark those things up on discretionary items where it's a lot more competitive when grocery and critical consumables or non-discretionary items are the major driver of traffic. That's my haven't done enough looking opinion. Yeah.

Yeah. What's funny is that the Dollar General, they get constantly asked, what's the health of the consumer? And they're like, well, our consumer is always unhealthy. That's the point. So what's interesting is that the discount retailers tend to do well during a recession. It's just hard to tell what, yeah, I think a big question is given that they probably over-earned on a margin standpoint during the pandemic is what will the margins look like going forward given how expensive labor is now which is a huge part for them and given how you know some of the inflationary inputs blah blah blah the shrinkage how much is that actually going to affect them but i think yeah there's a comment here that says

we should look at thermo fisher or danaher have tried it's very tough i think i'll let some other people make money on that honestly i think that's too hard goes outside our circle of competence especially i think anything healthcare related i tend to just say no yeah it's too hard and there's so much innovation in this industry and there's so much right like it's just so much regulation so much like so much changing regulation yeah maybe thermo fisher and and her beneficiaries of that but i don't understand it enough to feel comfortable owning any of them the uh we do have tons of questions i guess in the chat here shoeless joe is talking about sofi he says for me the tech platform is what can transform sofi from an okay

bank to a great bank do you agree how long do you think it could take to see real results in this area. I'm not that familiar with the platform like user interface, but the people I know that use SoFi really just do it for the APY, the rate they get on their savings accounts, which by having a good tech platform and not having physical branches is a competitive advantage versus the legacy players, and they've done a really good job of attracting deposits, which I think is probably the thing that's most exciting to me here.

I wouldn't say it makes it, I would be if that theory makes sense, I would not have much confidence in it. Wait for it to play out. You should not, I would not have high conviction in that, but hey, it could work. I do believe in the I believe in the digital advantage for some

of these banks, but But I don't, I don't know. With SoFi, it feels weird because they report like a tech company, but they're really at its core bank. And so it's hard to get any sense. We looked at it and then we talked to Brad, who owns it, and looked at it again. And my biggest takeaway was that I have no idea what they'll earn. i like i really can't get a sense of what will be shareholder profits yeah it's just a big tbd i think it's a risky stock and you know maybe the reward makes sense because it could be a much

larger business someday it's one of those where if you want to make a small bet on it great but i have no thoughts it's how can i predict this at all there's no there's no sense of that maybe you can predict that deposits will keep growing but their profits and growing book value per share which i believe hasn't been very strong but let me actually just confirm that what do you think of the new uh what's his name how am i how am i blanking on this bill uh spackman bill spackman's uh sparkman sparkman yeah it's an interesting spec interesting concept and i should say that if our source here is correct which again we're not calculating this ourselves so far this book value per share has been pretty stagnant so i'd say look you got to see eventually

changing performance there the spark seems like a fine idea it's kind of weird but what would you I think if they took X public. Good luck. The business seems to have collapsed from an advertising perspective. So, yeah, good luck. No external links either anymore. Yeah. Ripped to promoting the podcast on Twitter.

Personally, I'm extremely mad at them, and we have made them a lot of money over the years. So, yeah, I think that's it, right? I think that sums it up. yeah just about what if you could have the spark spack whatever vehicle take any company public is there one that you'd really like to see that i'd like to see maybe a more mature business that's private trader shows actually it's all the public i guess that doesn't make sense because it's part of a larger business it's all what do you think right i think that and i'd love to see that yeah there is not a publicly traded company okay so trader joe's

no exposure but yeah there's was there was rumors a while back when ackman had a couple of spacks that they would potentially be taking bloomberg public that would be really cool i think it's probably one of the most sticky ecosystems that would be that would be on the wide moat business list i think yeah if uh if it were publicly traded yeah it's interesting there for sure for sure i like lego lego could be interesting can you not buy that i thought lego was like a public store is it and is it no i don't think so it is lego traded lego is not publicly traded according to google so trust that you will the yeah i mean those lego just has tremendous pricing power oh you know what that's what it was i saw a tweet this

week that was like if you would have bought legos like actual lego sets you would have tracked the the general index or whatever that would be that would be a great one to see exactly right nice pricing power matt h says internet would be fun yeah bad products getting a lot of buzz i guess right like the burgers are very that good and i'm a hater i'll say it i'm a hater sorry exactly any any of our california listeners but what's interesting is that i think that it sort of makes sense sort of almost like hershey right when we did a show on hershey people are well the chocolate's not very good it's like but that's kind of the point because it has one unique flavor and two even though it's bad it's so stuck into the cultural whatever it's so stuck

within society and blah blah blah that that's a moat within itself and i think in and out has this weird brand that i i don't get it but that could be a decent business as well everyone says everyone says chick-fil-a but that would trade an absurd multiple because everyone's like oh have you seen their average unit volumes it's like yeah but you're gonna buy this thing at 100 times earnings i already know what's gonna happen it's like just look at the tam once they start serving on sundays yeah exactly exactly okay do we have any other topic let me just scroll through twitter because i should have checked what i was interested in this week oh oh the google pixel i want to talk about that okay all right so here was a report

over in japan i thought it was quite interesting regarding the google pixel so here's the quote i'm just going to read it two paragraphs in japan which is the world's third biggest economy and an important market for apps and games sales of google pixel smartphones rose six times in the second quarter of 2023 compared to a year ago, according to research firm CounterPoint's findings published by Bloomberg. This increased the company's market share to 12% from, I'm guessing, about like two. While that's important news on its own, what makes it even more interesting is that Apple's market share declined from 58% to 46% during the same period, marking the first time in two years, the Cupertino Giants share has fallen below 50%. We just saw the Pixel 8 and

Pixel 8 Pro releasing this week. They're actually going to be shipping for 700 bucks and 1000 bucks respectively, a $100 increase from the previous versions last year. So they're on their eighth iteration here. Whenever they talk about the specs of a phone, I get, I kind of just go, all right you got this cool computer chip i guess they have the tensor chip from google and they have all these features right seems like the camera's great seems like they pretty much from a spec perspective may finally gotten to the equivalent of the iphone and the samsung ones right so what do you think it seems like they're they're gaining a ton of market share here and that could be pretty darn good uh they're not gonna make much money from it but pretty darn good for keeping

the search the maps the youtube note why yeah i'm curious what the difference is between the japanese market and the american market in terms of why apple isn't or the iphone isn't sticking as much maybe they just don't maybe they don't care if their texts are blue i suppose well it's just one period right so we'll see but because it has similar market share numbers than in the u.s right for consolidated i know apple has much larger market share among younger people 20 to 30 is like 80 plus but in generally they're like 60 right in the united states from a consolidated basis so it was similar and i wonder what yeah made that hit maybe you know maybe it's just a one-time thing or maybe yeah maybe the pixels

were cheaper they liked it better and yeah they use whatsapp instead like most other countries do yeah that's true i didn't think about the uh whatsapp angle The, uh, yeah, I guess it's time to, uh, short Apple, huh? I mean, no, but there's some, what's funny is that I'm pretty not, I'm like worthless hardware company. Yeah. They're pretty neutral on them. And I don't really like the stock at all at, at a premium multiple, but it's funny as I'm

seeing a lot of people that are even more embarrassed than me. And I never really see that. There's always just the people that love it so much and hype it up. And I do think they have much more risks than a lot of the other big tech, excluding NVIDIA and Tesla, who are just at an extreme valuation. But for the core big five, I think Apple has much bigger risks from China market, the Google payment, which looks like it's going to get litigated away. But TBD, what happens on that lawsuit, market share losses in the non-US market, there's just a lot here. And I don't know why you would, I get worried a bit. What's interesting is the revenue hasn't really grown that much in the last few years.

No, no, it really hasn't. Now, if you reference it back to like 2017, when Buffett was buying a stake, revenues come up a lot. But it's been more of a mix towards services, which being that it's higher margin, I think you're getting higher quality revenue. But as far as the hardware goes, they've seen a lot of kind of volume ebbs and flows across pretty much everything but the iPhone. So I don't know. Yeah. I'm not nearly as optimistic. I find it weird that it trades at the best

multiple right or the highest multiple among big tech maybe not so much anymore but I think you're probably right PE 29 Google's like 20

yeah honestly they are the most capital efficient well maybe not Yeah. Maybe just efficient. I would agree with that. Whatever. Yeah. They are the most efficient with their cashflow. Yeah. They're frugal. They're very consistent. They're not, I mean, maybe frugal comparatively, you know, this isn't a dollar general company,

but frugal comparatively to the other big tech companies, they seem to have less waste, which honestly here's, here's what's interesting. And this is what fake alias here says. I know it's blasphemy to say, but i do disagree with buffett on his views on apple at this point i kind of am in that camp i think it's much more risky than he thinks because he thinks the way he talks about he's like oh people pay ten thousand dollars for this phone but it's not like i don't think that just applies to apple around the world right now they're the leader but i don't you know what i

mean right it's not it doesn't necessarily refer to apple it doesn't i think the functionality yeah i think the functionality for any smartphone is worth more than it's currently priced for but when you can pay it out over three or four years like the pickle pixel is probably worth more than it's selling for yeah and here's what i thought was super interesting i saw a take from someone else that i would uh say i'm completely stealing here is that with all these new ai stuff with all these new sensor inputs that are going to likely come for these phones, for these AI, what do you call them? The LLMs, I forget their acronym all the time, but everyone kind of knows what I'm saying here, right? The chat GPTs, the Google bars, et cetera, et cetera. As they're

advancing so quickly and as they're going to basically help people with their daily lives, you want the phone to have a good sensory input for a lot of this stuff, right? And I think Apple Is that a big disadvantage here versus, say, the Google Pixel as we go over the next five years, where you're going to want these inputs to come into your large language models? Apple doesn't have anything to help with that. And Siri is obviously terrible. I say fade the AI assistance, man. I don't know. I don't know.

Either way about the AI assistance. I think it applies to business. I think it applies to enterprises. there's good applications for it for spotify using the voice generative assistant from open ai that makes sense to me but this like idea that everyone's just going to be like oh i don't know what to do maybe i'll just ask chat gpt for every single search query of its life like that's just not going to happen i think chat gpt's consumer sentiment peaked a while back okay here's here Here is a take from NCS Capital's newsletter.

Maybe it's a bit of a take, but maybe not. Just kind of a thought. Says, it's covering kind of that AI phone that rumoredly OpenAI is trying to look into. Says, and this is a direct quote, The phone market is wide open for disruption as we move from multi-touch to a chat-based AI interface. Google is well-positioned with its LLM efforts, but Apple could be vulnerable. The phone itself needs to become more aware 24-7 with vision and audio, and it will need to interface with AR glasses

and provide more onboard processing. I highlighted this potential disruption back in April and last week news broke that OpenAI's Sam Altman and former iPhone designer Johnny Ive are potentially working on an iPhone of artificial intelligence. Status quo will be hard to disrupt, but for the first time in well over a decade,

there's a major UI transition opening a path for disruption. I'd say, not as a pun, be open to this possibility being a decent likelihood. potentially yeah matt h says watch yourself ryan this could become your krugman tax machine moment if you keep talking yeah i don't want to i know i kind of want to say anything too definitive we are uh we didn't go long i think we're four minutes over so let's wrap things up i think we'll probably be continuing to talk about the smartphone market share which is really fun but thank you everyone that joined we are live thursday mornings we went early this time but generally around nine

o'clock, 9.30, 8.30, depending on our schedule. Thank you, everyone, for listening. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. We are general partners at Arch Capital and clients may hold securities discussed in this podcast. Thank you, everyone, again, for the comments and questions. It was really fun this time. We'll see you next week. you