Chit Chat Stocks - IPH #85: Buffett's Personal Trades; Falling Compounders; Apple Gets a 36% Cut From Google?

Episode Date: November 19, 2023

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Welcome to Chit Chat Money. On this show, hosts 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. Anything discussed on Chit Chat Money by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. This is the investing power hour number 85. My name is Brett Schaefer. I'm joined as always by Ryan Henderson and special guest host of the new J-Row show, which I see he has another guest there. This is Leo. Yeah, it is John Rotante. John, how are you doing today? And I guess, How is Leo? Hey, Ryan and Brett, always glad to be on with y'all. Leo is great.

So my girlfriend and I are living in Missoula, Montana, just for the three last months of this year, just having some fun up in Montana. And the Airbnb that we're renting has a dog door. And so we've opened that and just Leo gets to go out whenever he wants and like explore and hunt. and he has brought in a live bird and a live mouse so he keeps it interesting hey that's montana for you yeah all right well as as i did say uh you have just started the j-row show um and it's been three episodes uh one of them just came out today for anyone that doesn't know who's listening on sundays we do these live every thursday morning so how has the experience been. And it's kind of interesting because you kind of have the idea when you start the show,

you're like, all right, it's going to be like this. But then when you get into it, things evolve. So how is it going? I'm loving it. I'm grateful to everyone that is listening and supporting me through it. Grateful to you guys for editing it and doing all of the back end stuff on it as well. Yeah, so we dropped the third episode today with Kwok Tran. The entire premise of the podcast is to study processes and frameworks and mindsets that people put in place to maintain winning performance. And Kwok just wraps himself in process. And so I think the third episode is good because it's shorter than my first two. it's not even an hour and you know quack's got three bucket of stocks that he invests in and

he's got a three-stage research process and he's got three layers of risk management and he just added in the last few years to process improvements and every year they do an annual remote trajectory review and all of their holdings and all of their watch lists uh companies and then every year they also do a uh they dig through any sectors or industries that just got smashed to see if they can find any hidden gems and so everything he does is about like process and stages and layers that's uh i like that i like that idea of just going rumbling through the garbage or rumbling through whatever got destroyed from the year before yeah I guess we're going to talk about some of the news from the week, but before we get

to it, I want to ask a couple more questions about you and your show. For anyone that's listening right now who hasn't listened to your show, maybe give a little bit of an explainer on what it is and who your target audience is. So, yeah. So, as I said, I'm trying to explore the processes, frameworks, guardrails, structures, and mindsets masters put in place, what it takes to achieve mastery. And because I'm an investor, most of the episodes will be focused on investing. And as far as target audiences, I can think of maybe three groups. One is allocators. So RIAs, financial planners,

certified financial planners, wealth advisors, stockbrokers, anyone that is putting their clients into mutual funds or separately managed accounts. I am trying to pull back the curtains as far and wide as I can on what the internal investing processes look like at these firms. And I think through the first three episodes, we've done that. We've achieved that. you know, a second audience would be investors that have an investing firm, you know, founders that have an investing firm or that are thinking about starting an investing firm that are looking for best practices to implement. Either they're looking to start a firm or they currently already own a firm and run a firm, but they're looking to level up and, you know, put better processes

in place? And then the third audience would be analysts looking to get a job at some of these buy-side firms. And what it's like to work day in and day out with Bill Nygren at Harris Associates at Oakmark, with Dan O'Keefe on the Artisan Partners Global Value Team, or with Kwok Tran at Tran Capital, which is a boutique based out of San Francisco. What's it like to work with these master investors day in and day out. I got to say, the way we do this is Brady does a lot of the editing. So sometimes Brett and I get to hear it for the first time when it actually goes live and gets published.

And if you are an analyst and you're aspiring to join a fund, I cannot, especially the Bill Nygren one, because I haven't gotten through the whole Dan O'Keefe one, but you got to listen to that because he goes through basically literally your daily tasks of what your job will be and how to do it well and if you're thinking about applying to anything like that just i can't express it enough that's that's a must listen yeah and here's what uh yeah exactly and for anyone we know our audience falls into that bucket as well and we don't do this type of stuff so anyone we know that our audience would would love that uh one more question what is kind of the next plans for the shows you kind of launched it's been a little over a month or so what were the

next plans maybe for 2024 maybe just the next few months you know i've i've got um i've got three interviews lined up and i'll just say that all three like i'm so excited for these like um i don't want to give away two of the names one i'll give away so i am going to be interviewing Todd Alston, who is Chief Investment Officer at Parnassus Investments. Parnassus is the largest pure play, like sustainability or ESG mutual fund in the US. Todd is also, he's a five-star manager according to Morningstar, but he's also on the Barron's Roundtable. And the reason I mentioned Todd is because a couple of weeks ago, I posted on X an article, a research report that he published on the semiconductor manufacturing cycle, where we are in the current cycle.

And he started off as a semiconductor analyst. He has lived through eight semiconductor cycles. This guy gets it. And that post, for me, went viral. Based on my metrics on X, it went viral. It had like 300 likes and 50 reposts in like less than a day. And for me, that is a lot. And so I promised my Twitter followers that I would get him to come on the show. And he has agreed to come on the show. Um, but you know, the two others are that I have lined up are, you know, top respected, revered, admired investors on the planet today. All right. That's a perfect tease. And again, that is the J-Row show.

Go check that out. I'm excited to listen to the one that came out this morning. Get it wherever you get your podcast. Okay. Let's hit some of the topics. Ryan, you put a lot in here. so maybe i don't know ryan you choose buyers or you choose what do you want at first well i want to get this one out of the way because it's a little bittersweet uh the buffett trading

scandal did you guys read about this at all when it came out i'm getting some nods from john here yeah i did i read the yeah pro publica article okay well i'll kind of go through it maybe we can give some thoughts on it, but there was an article from ProPublica that basically highlights, you know, Buffett has, he's been very open about the fact that he has a personal account in that's run separately from his, you know, any Berkshire trading activities. And he's always kind of said that there'd be a conflict of interest if we were trading the same stocks. And so this ProPublica article says on at least three occasions, Buffett has traded in stocks in his personal account in the same quarter or the quarter before Berkshire

bought or sold shares of the same company. It's kind of interesting because he was oftentimes going against what he was saying in public. So sometimes even going against what Berkshire itself was doing. So in, I believe it was 2009, he did an interview with Fortune kind of praising wells fargo and you know this had a huge impact on wells fargo it seemed at least like the shares jumped 13 people assumed that a lot of that had to do with buffett's praise for the company but he privately that same day that he did the interview sold 20 million dollars worth of wells fargo shares now i'll save any any of my own personal takes for the end here the second occasion was it says over several days, he sold $35 million worth of Johnson & Johnson shares.

At that point, Berkshire had effectively revealed that it too had sold Johnson & Johnson shares. That's the one that kind of concerns me a bit. And then the last one here, it says in August 2009, Buffett appeared to move in his personal portfolio in the opposite direction of Berkshire's portfolio. He sold $25 million worth of Walmart stock in his personal account, even as Berkshire almost doubled its stake. Now, with the Wells Fargo and the Walmart one, I think he doesn't want to seem like he has a conflict of interest, so he's getting rid of them in his personal account. Now, I bet he might touch on this at the meeting this year and say, just give full disclosure on everything that happened. But the only one that concerns me

is selling out the same quarter that he sold out of Johnson & Johnson. What did you guys make of this? Does it feel newsworthy? Is it any tarnish on his reputation for you? We'll be right back. I think it was – the article also implies that he may have violated Berkshire Hathaway's own internal rules around ethics and trading. If it turns out that's the case, that he violated the own rules that he wrote, I think it was – I think it shouldn't have been done. I think it was a lapse of judgment in the very least. And the amounts are so inconsequential

relative to his net worth of $100 billion. At the time of these trades, maybe his net worth was less than that, but 50, 60, 70, 80 billion dollars. It seems inconsequential. Why even do it for $20 million here, $20 million there when you're worth that much money? Um, you know, it could, it could be just a lapse of judgment. It could be, um, you know, like a, just like a brain fart on some level. Um, it could be more than that. He hasn't spoken out about it. He hasn't denied it.

You can't really deny it. Um, I guess we got to wait until the meeting and to hear something like you said. Yeah, and I would say last year there were – is it the last year or the year before there were accusations about him potentially insider trading with Activision Blizzard because of his close relationships with Bill Gates and Microsoft. He shut that down though, right? Yeah, and he very – That one didn't make any sense. Yeah, he pieced through every part of it and said, here's exactly what happened. Here's how I traded.

Here's exactly when we bought, why we bought, that kind of thing. I would hopefully like to think that he'll do the same thing at this meeting and just describe what his actual thought process was behind the actions, because obviously the way ProPublica made it sound feels a little more malicious. But it doesn't – I'll let Brett talk here in a second, but it doesn't make a whole lot of sense just in the fact that, like you said, it's so inconsequential to his own wealth. And what he does in Berkshire's portfolio ultimately matters so much more on his net worth than what he does. And to his legacy. And to his legacy. Yeah. This – well, I'd say one he might talk about in the shareholder letter, possibly, which is before the annual meeting.

some of these don't look great what i can't remember which one he had here ryan but there's one that could maybe be explained like he bought in his personal account and then later they bought like that's not the end of i don't think that's the end of the world but the one where you sell before berkshire sells i think or i don't know some of these do look like if it is how pro publica outlined it it's exactly what happened i don't know if there's a good explanation there because i would note that they fired one of their long-time lieutenants what is his name david sokol sokol solix so yeah whoever was it was like in 2011 for buying lubrizol before they announced an acquisition of some sort related to that that was gonna you know boost the stock

price that's clear cut you know not that's violating probably every company you know you don't you have a rule against that that's probably that's maybe i'd say definitely worse than this but this is close to that if there's really no explanation here and could it be coincidental yes but i don't like that someone as like buffett has a personal account like this yeah like you're allowed to have it but if you're someone with his stature his legacy is whatever i'd rather have everything just be in Berkshire, especially because they have the investments there as well. I also didn't like, while the track record wasn't incredible when they had that story of one of the lieutenants today, Combs or Weschler, I forget who, has the $200 million plus Roth IRA

where they just crushed it over the last 30 years. Yeah, that's great. But hey, look, why don't we put those, how much time are you focusing on your Roth IRA? How much time are you focusing at berkshire hathaway that's kind of how i think of it will it tarnish his legacy i don't know i guess we'd have to see um but clearly if he was gonna if someone in the company did this it's i think it's possible they get they would get fired if someone if one of his lieutenants did this exact thing at the time at the time of some of these trades there may have been someone else it was so cool might have been the one getting in and out of stuff too right because he was managing some money for them at the time so it's possible that there wasn't buffett

specifically but it should have been communicated the stuff were the ones where i think like who who really cares is if he's making if they're buying a big stake and okay so they doubled their position in walmart if he sells out of his own measly little personal stake in his own account i kind of think like who cares it seems like he was trying to get rid of it so there wasn't a conflict of interest but it's the one where he it's the ones where he buys and then they buy because he knows that if they buy something the price will probably go up um yeah for the most part if it's like a small position i don't think anyone really cares but that actually i think maybe leads us into uh the next question which is buffett filed his 13f did you guys take a look

13f season gotta love that there was some liberty they bought some liberty positions and then the other one the big one which i thought was absolutely hilarious was they asked to file one of their positions confidentially and everyone is just like it could be it could be my largest holding you know it's probably the stock might be palantir tesla and i'm like i just i just kind of doubt it but the uh any any thoughts on what the mystery stock could be or maybe better question why they chose to file confidentially i think they file confidentially because they're still buying yeah well it has to be it has to be a big stock it has to be a large stock then right it has to be look i i play this game every time every time buffett has a mystery stock and

i've been wrong every time um but to play you know schwab comes to mind um huge brand asset gathering machine and you know depending on what you come up with for normalized earnings, maybe trading at 10 times, 11, 12 times normalized earnings. For a brand that doesn't seem to go away, it's consumer-facing, things Buffett tends to like. Disney is another one that comes to mind. Once again, consumer-facing brand in that sort of used to be kind of blue Chip Stapley name down to 80. It was 80 recently per dollars per share. There are some activist investors there where Buffett doesn't have a history with, but he has bought after the activists have done their work. For example, Peltz was involved with Heinz years ago, and then Buffett

bought Heinz in a partnership with 3G, I think it was, or something. So Disney comes to mind, Schwab comes to mind. Those are the two that come to mind for me. Brett, what's your pick? I would say either financials or energy makes sense to me. It seems to be what they are targeting right now. And with financials getting beaten down, I'd say that makes a lot of sense to have Schwab. So maybe it's one of the banks that they sold out of, who wouldn't be Bank of America. I don't know. Let's say one of the energy companies. They have Exxon. It could be one

of the energy stocks they don't own, but yeah, I guess it might not make as much sense because they already own Chevron and Occidental. I'd go financials. Maybe it's JP Morgan or something like that. I don't actually know what those stocks are trading at, but what are the large financials that could have been beaten down? Schwab makes a lot of sense as kind of one of and they already own Bank of America so maybe it's I'd say JP Morgan then if it's one of those

could be Nelnet, could be my largest holdings yeah our favorite, our largest holdings yeah, alright let's hit I want to hit the, or Ryan do you have anything else on that? no I honestly have no idea I always think it's funny how everyone speculates when that stuff happens

but I bet it's something that everyone will be underwhelmed with like when he took a stake in hp or whatever it was i was like yeah all right not following you into that one but all right yeah definitely yeah that's that's do not just follow buffett he makes mistakes sometimes and you're not going to know when he sells or buys so i want to hit this topic though i think it's my favorite one of the week and it is the updated information we got on the maybe i'll call it the google apple microsoft kind of big tech search trial and this week we had a lot of stuff

on the apple google distribution deal have did you guys follow this at all some of the information that came out there yeah i mean maybe before i guess the big revelation was that apple pays or excuse me google pays apple 36 of safari search revenue and that was not supposed to be disclosed but someone accidentally said it while on the stand so now it's public information curious maybe john you go first you said you've been following this curious your thoughts here and what it means for some of these companies because i mean it's a lot it's a lot of money that could change and go to different pockets now i mean i just read the headline it was a shockingly large number um that's a lot of you know that's a lot that's more than a third and

And I find that regulators start to pay attention at a third, like when companies get a third of an industry, 30% of the market share in an industry, something like that. It's just kind of a number that jumps off the page that can get people talking. i'm you know i'm not saying regulators gonna look at this try to redistribute some of this money some kind of way but it's a big number i think we all assumed it was going to be large but not that large wait so this was of safari's revenue 36 comes strictly from google no no no no google's search revenue that i believe oh third their search revenue comes from safari they pay yeah you know like the i wouldn't call it blackmail they don't call it blackmail but they he or the bribe or whatever you call it the the deal that they have google pays apple apparently 36 of the

revenue that aired on google search on the safari browser or whatever you call it i don't know quite interesting i don't know if it's that interesting like if you're just thinking about how much of google's revenue probably comes from mobile and i think it's safari's got to be their number one number one i mean iphone users are the most valuable you don't think desk like chrome on the desktop is larger oh from a money-making perspective i'd say it's probably safari because i mean that it's one predominantly the wealthier countries japan us canada western europe china or maybe china i guess exclude china google's not there but and then also yeah i mean the most searches from mobile these days so i think it's gonna be quite valid i gotta say as

a safari user i think i'd be bummed if my default search engine switched to bing or anything else i think i'd be i think it was just download i i think a lot of people would end up downloading chrome which is kind of what i did because i just like to have all the google logins saved way more seamlessly um on an apple device but here's what my take is here is and i'm curious of you guys agree or disagree i think with this lawsuit there again some more stuff could come out so with the information we have today i think there is not that much risk to google slash alphabet from a investing perspective financial perspective you know losing profits but i think there's a lot of risk for apple what do you guys think i think apple tends to get the pass from

regulators always i don't know why but they do are you suggesting risk that google stops paying this in some sort of way that they're required to not do the yeah i call it the bribe but because i think in that situation google yeah okay there could be some uncertainty of market share and search but if apple is required to not take bribes here they can't just say oh well we're not going to take it from google we're going to take it from someone else the the only one that has the money to do it would be microsoft it doesn't make like i would be concerned because what is this 20 of their overall earnings i mean if that goes away it's not coming back and how much would they have to grow to get that uh back would be five six years maybe longer

to grow and to retain them probably apple's earnings i mean they earn like 100 100 billion or so so it's probably what half of the services revenue segment almost no a little almost all the profits almost all the profits i would say i don't know any thoughts john it seems i mean it's i own both of these um and i'm probably not so the question i always ask myself when news comes out is what do you do with it right and um i'm definitely not doing anything with my alphabet alphabet position um which is a top five position for me and i don't think i'll do anything here i i don't think i'll do anything with apple because of this news um i've been considering trimming my Apple position. But before this, it's almost 2.8 trillion. It's not growing

as fast as the other mega cap tech names are. And it's trading at, I don't know what it is, 30 times earnings or something like that. I'm not saying it's a sellout, but I've been considering trimming my position for that reason. So I'm not sure this news specifically is trade worthy for me personally. I wonder how many people, I wonder how many Apple shareholders just continue to hold because they just don't want to take the massive tax hit and they've been shareholders for a long time. Because I don't know a lot of people that are starting apple positions today no one sells it though i mean the indexes buffett's gonna be staying there he says it's a never sell for him i mean where is the sound like it's hard to see how it comes

down unless something material like i think if the worst case scenario in this situation where they lose all this money every year uh happens yeah the stock would go down but if it just remains a status quo it's kind of hard how that to see how that happens but i think it's a fast Fascinating trial. You add in the Microsoft stuff as well. I mean, these are the biggest companies in the world, some of those powerful institutions in the world, and we might see a big shakeup here. But also, sometimes there's a lot of noise in the regulation and the antitrust stuff, and nothing actually happens. I agree, Brad. I think what makes it most fascinating to me is just taking this trial out for a second and the revelations that came from this trial out for a second. It's the dominance of a handful of companies and how it's driving returns right now. the S&P is up, I don't know, it's at 16% or 18% this year, but the equal weight is up 2% this year. That's a big delta. That's a big, big, big delta. And I think that since I've been on I think it said I've been on Twitter, now X.

I've made two sort of like high-level calls that have been great in two and a half years. One was when home builders were trading at four times earnings and a discount to liquidation value, I tweeted 24 times that I thought home builders were the place to be, and all of them were up 100%. So that's one. It was a great call at a high industry level, sector level, almost macro level. The other was November of 2021. I tweeted out, I think the single most important question investors need to ask themselves, the single most important question is how i worded it is will mega cap tech maintain its dominance turns out that's pretty much the most important question because seven eight or nine or ten names

have dominated the market returns the the large market returns um that's a pretty good call uh and now when i made that call november 2021 mega cap tech was near a peak and then it kind of fell for a while. Amazon crashed, Google crashed a bit, but now they're at basically, they've recovered and then some. So now I think it's another time to be asking, is mega cap tech going to maintain their dominance or are these small caps that are just massively underperformed going to pick up some of the slack? Now, if we go into a recession, This is an if. Small caps for a period of time may struggle even more because they don't have 50 billion in net cash on the balance sheet. They don't have high enough credit ratings.

And so it's going to be more expensive for them to borrow. They don't have multiple lines of business across product lines and geographies. They're just a little more risky. But if you look out five, seven years, do small caps take the torch again? I don't have an answer necessarily, but I think it's an important question investors need to be asking themselves. Yeah, it's a big unknown. And I think another thing to ask, and I know this is something that is very hard to have a take on, or it's still too deep to determine. Some people argue really strongly for the impact of index funds. Some people say that it's vastly overrated. I mean, you got to ask, okay, if index funds continue to take market share, how do these

stocks, like, where is the selling pressure going to come from? And maybe that's just something you say when they're, you know, at the top. But yeah, that's a big question. I don't know. Like, right now, I don't know any big tech part of it's because we're kind of transferring some funds around at the moment. but it's a tough bet to make to have no mega cap tech exposure if you want to if you want to keep up with the index it's very tough yeah if you care about that yeah yeah exactly if that's something

that you get paid to do it's it's a very tough decision i also yeah i also think from a competitive standpoint and i bet they've said this every time companies have become massive conglomerates or massive businesses, probably said this in the 80s, the 90s. But I look at the companies today and I think from a competitive standpoint, how on earth do you compete with them? Because you take a business like cloud and Google has been able to throw, well, I guess they were maybe early to it, but they've been able to lose and hemorrhage money for 10 years before getting to profitability and scale. Other companies just can't afford that. So it's really, I just, they have kind of the

unlimited resources and the willingness to go after a lot of those opportunities. We do have a ton of questions in the chat. So I feel like we should get to some of these. Brett, do you want to take any of these here? Sure. Yeah. Yeah. We got one from John First says, awesome guest. Nice to see you, J-Ro, on the podcast. John Gallagos. He says, how do you like an alternative asset management basket i don't know maybe just in general like sometimes we don't like to make recommendations but uh it just just thought on that sector in general um yeah i've i've got an alternative asset management basket in my portfolio um so yeah that would be a that would be a pro okay here's what i think is maybe i don't think

any of us are close followers of the company but i think it can it's like it can be a good broader question asked so he says this is teja i think that's how you pronounce it um thoughts on pbr which is petrobras not the beer uh nationalization risk seems low and is that and 45 percent of free cash flow as dividends is hard to pass up so i'm thinking he's saying it's at a 45 free cash flow yield. Okay. This is the Brazilian oil company. We don't have to talk about the Brazilian oil company, but maybe thoughts on international investing in general, emerging markets in general, like an achievement of price. Some of these seem to make sense to me, but man, they're incredibly risky. And I don't know, John, do you ever stray into that bucket at all?

Not much, but if you look at oil and gas in general, in my opinion, the majors in the U.S. are attractively valued, and the majors outside of the U.S. are trading at half the multiples the majors in the U.S. are. And so you could argue that they're, outside of the U.S., extremely attractively valued. It's an argument. And I think at a high level, I mainly focus on the US, so I'll talk about the US. But at a high level, we under-invested in oil and gas, drilling new wells for the last 10 years or so. And demand, I think, is going to hold stable or grow, especially in certain parts of the world, demand is going to grow. Demand is going to be around for a long time.

These are all my theses, my hypothesis, my premise. And so I think maybe prices stay in a $60 to $100 range. I know that's a large range, but somewhere in that range. And at $60, these companies are still highly profitable. And all they care about these days is not drilling, but just returning the cash to shareholders. And so you get these massive shareholder yields. And the yields are even bigger outside of the US. Or making huge acquisitions.

That's right. Since they're not drilling. Yeah, both. Yeah, both of those too. They're going to grow by buying proven reserves through acquisition. Yeah, those two- Now, I'll say there's one company that knows how to drill for oil organically. They know how to find it, and that's EOG.

This is not investment advice, but EOG, what separates EOG from everyone else is that they do it organically. They know how to grow organically. They have 10 plus years of inventory, easy. They're in the Permian, which is everyone in the US invests through a Permian lens. And we've been seeing consolidation in the US with three announced deals so far. Exxon announced a deal, Chevron announced a deal. I think that was a third. But EOG is kind of big.

I don't know if it's 50 or 60 billion in market cap. I can't remember exactly. So it would be a big chunk for someone to pay. But that's a unique asset because they do know how to find and drill for oil economically. And while everyone else has been growing through acquisitions, they're doing it organically. And as a follow-up on Petrobras, I was wrong on the 45% free cash flow yield. It is a mandate to pay 45% of free cash flow out as a dividend, which is nice. You get a little bit of a mitigation of the currency risk for at least US investors, anyone, I guess, that's not in the Brazilian market.

And I will say the big short guys, the actual big short guys, uh, not Michael Berry, but the ones that worked at, uh, what's it called? I forget. They're fun now, but two of the guys, Steve Grell's fund, Steve Eisen's old front point partners or something. Yeah. Two of the guys, they, they have, uh, they were on value after hours and they did talk about Petrobras.

So I would go maybe revisit that and the stuff they do. They know it way, way better than I think we do, but they are very bullish on it. Statistically, extremely cheap. Yeah. Statistically, extremely cheap. We have a teasing question from Travis Hoyum. John, what's your favorite cryptocurrency? But then he follows up with his actual question.

Are there once not profitable SaaS companies that have turned the corner to profitability that interest you? and i think he's implying that the last couple years you've been concerned uh over the unprofitability and valuation of these things yeah um i own um hubspot that one interests me a lot i don't know much about it but um smarter people than me um talk very highly about hubspot and so I own a little bit of HubSpot. I own Paycom, which was already profitable. Was it Paycom that just got destroyed this quarter? Yeah.

So I'm sorry. There's not many more. Travis, I appreciate the question. I think a lot of these are good business. I think Snowflake, it's hard to argue it's not a good business. It's very hard to argue. Hard to argue that Zscaler and CrowdStrike are not good businesses. It's just not where I'm spending a lot of my time, but I do appreciate the question.

But Ryan, this is the story I wanted to bring. It's not a macro story, but I think 2023 was the year compounders started to break. Let me give you what I mean. So I'm not talking about unprofitable. So I'm talking about companies that investors gave the compounder title to, okay? Dollar General broke. That thing was seen as invincible by a certain crowd. Addian broke.

I know that they're starting to recover, but broke. Dollar General and Addian were selling off every single day for two weeks, every single day. And you're just wondering when it was going to stop. Paycom. Paycom was one of two SaaS companies, I think, given that compound or SaaS, them and Viva, because they were soundly profitable and free cash flow generative. Paycom broke. NextEra Energy.

This was a utility that historically traded at 30 times earnings. Broke. I think that's the story of the year. I think 2023 is the year Compounder started to break. Paycom is one example. And I think that continues into 2024. And the one thing I'll add there is sometimes you look at a business and you love it. You absolutely love what the business is doing. You think it's going to be a bigger business in the future in terms of like customers, revenue, whatever you want to call it, and you compromise on price. This is a great, or compromise on multiple. This is a great example of if you

love those businesses, it might not come this year. It might not come the next year. It might not come the next five years, but you will get it at an attractive valuation eventually. I can't, other than maybe Costco, I can't think of any business that has perpetually traded at kind of a ludicrous multiple without ever coming back down. And maybe Costco has. Well, Costco is, I mean, Costco, I believe people turn, I'll pull up the chart, but I believe that's only been the last five or so years when people kind of fully came to consensus on that. But John, maybe, I don't know if you have the, I'll try to pull up the data. But when I say broke, break, I mean, the stock price broke, falling 50, 60,

70% in a matter of weeks. I'm not talking about the business, the business model, the mode. And that is the point though, Ryan. You can wait. You can wait. And no company is invincible. And valuation is going to come for every company at some point in time

in my opinion. Y'all know Illumina? Have y'all looked at this thing? I've seen a lot of people talk about it. I don't really know it. Not closely, but yeah, I just know. The general overview. 10-year low. Trading at the same price it did in 2013. This is a company that has a technology for gene sequencing.

I don't know much about it either, but it may, and this is not a statement on COVID vaccines, but it was impressive how quickly we were able to develop COVID vaccines. Well, that would not have been able to happen without Illumina's technology, just plain and simple. This is not a statement on whether you're pro or negative vaccine. The technology allowed it to be developed as quickly as it was. that seems like a unique asset stock stock is down at 2013 levels yeah and yeah it seems like from what i've read and again not an expert on it but people that are experts say that it's sort of

a monopoly it would be hard to disrupt and yeah they got an activist in there i think icons in there and it's been super messy i believe they made a bad acquisition that they're trying to break off again or force them to break out they made an acquisition after being told they shouldn't and they closed on it anyway and now they're being forced to divest it i think was yeah what's the most interesting part here is okay you can love alumina the narrative on is fantastic for 10 years and then you can say okay i'm gonna wait for the right price but the right price is only gonna show up when things look messy so i think you have to be prepared like okay maybe you have high conviction on Dollar General. Maybe you have high conviction on

Adyen. Maybe you have high conviction on Illumina. It's not going to feel as good, but you have to trust the work you did in the past and say, look, the price does drive narrative a lot of the time. You could probably see people talking about that with C Limited. That's another

compounder that seems to have broke, but that's been more of a two-year journey. Yeah. It is funny how you think like you know what if this valuation got cut in half i'd buy it and then it's like valuation gets cut in half you're like yeah the thesis is broken but yeah yeah uh you always have to ask okay why would the valuation get cut in half it's because a lot of people stop believing and you had yeah like yeah that's what makes it hard to answer to answer kind of travis's question a little more

there there are some companies that come to mind for me i think monday.com is kind of one where they've now turned the corner towards profitability and they've continued to grow kind of even through this sassmageddon. But a lot of the ones where profitability was visible and you had the sense that they could do that, it feels like they never really got as cheap as I would have preferred. It seems like analysts kind of knew like, okay, profitability is there. it's just a matter of choice or time yeah just because it's down 50 percent does not make it cheap um anything else on that guys because i think with john here as a guest that someone who interviews talks with all these i think i have a good topic that could be i don't know

maybe something that you could ask on the j-ro show there was this uh this was it was like a meme joke tweet about using alternative data i don't need to read through the whole thing but it's like asking what they're asking what alternative data even is like do other funds have access to it like what makes it alternative kind of like if everyone has it you know is there actually an edge there they're kind of poking fun out of it at it um so i guess we've talked about that before we're not really in the we don't have the budget for alternative data so we kind of just get snippets of people post stuff online or shared around but i mean john i don't know what are your thoughts on that because the way i look at it is if every single person is subscribing to one of

these things then it can't by definition that it's not going to be worth it and if you kind of look at a month data going into earnings season i mean it feels like it's just way too much maybe not way too much work but the juice isn't really worth the squeeze but again curious your thoughts on this type of stuff i think that information you know there's i think if you want to outperform the market you have to have an edge and i think the an information edge is the hardest type of edge to come across um it's possible because all you know all information is available to all investors at the same time right public and publicly available information but it's possible to have an information edge if you do what you mentioned the big short guys did um no one else

was going, very few people, maybe you could count them on your hand, was going mortgage by mortgage by mortgage by mortgage inside of these collateralized debt obligations. That was a clear information edge because they were willing to work harder, dig deeper. But I think an information edge is harder and harder to get these days. The second type of edge is an analytical edge. What are you doing with that information? I suppose there are some people, some firms that are better at interpreting alternative data, that are better at incorporating alternative data into their overall framework and process.

So I think even though it's possible that everyone has access to the data, it's how you interpret it that could possibly give you an edge. So maybe it's worth it for some firms. Yeah. It feels like whenever something goes down like between quarterly reports and it's kind of like on its own my instant thought is like

someone's got alternative data someone's yeah or their interpreting is bearish but what's interesting and i think this is a fun exercise for anyone to do anyone can do this is whenever i read an earnings release i try to sometimes i'll look at the you know you catch the the stock reaction or something like that but you read the earnings release and then you say okay do you think the stock's going to be up or down and you can do this without like you know i'm sure john is in this boat too of you're not, you know, if you're not tracking exactly what the earnings per share revenue estimate is, and you say, okay, you look at this earnings release kind of of your own internal expectations, was there any positive surprise or negative surprise?

And you go, okay, do I think the stock's going to be up or down after hours or up or down tomorrow? I, my track record is coin flip. So yeah, I have no idea what's going to happen. So I think that for the alternative data, I think you can get it. but the concern with me is like okay how do you interpret that as you mentioned john i also always think like you think there's those funds that pay for satellites to track like inventory in the yard or like how many people how many people are pulling up to the parking lot and i just think

like if someone showed me for that quarter how many cars were in the parking lot versus a year it go how many quarter how many cars were in the parking lot that quarter long term i have no idea what that's gonna mean it doesn't like maybe if you're just trading for that quarter like yeah i'm sure you'll get some edge there if you're the one with the satellites but if there's a little less cars in the costco parking lot i don't think i have no idea what that's gonna mean for the stock five years down the road yeah which is kind of well um so i have so many thoughts swirling around my head right now so yesterday i was talking to a um top 10 i think best known hedge fund manager in the u.s on the phone and i i didn't ask him if i could mention his name so i'm not going to

mentioned the name but um you know so at one point in time in the conversation and it was to try to get him onto the show that's why we were talking and at one point in time in the conversation um he talked about how doing things the way that he did them um required high velocity is how he put it. And it required maniacal focus on markets, business, and investing. Maniacal focus. And so he would go through all of these things that he would do. One exercise he does is he asks himself if he were to build up the portfolio from scratch every week, would the portfolio look the exact same way as it currently does, in the same size? Every week he asks himself that. It doesn't mean he's restarting his portfolio every week,

but he's re-underwriting the thesis in his head every single week for every single position in his portfolio, every single position. And he's connecting all of these different data points. It's not just fundamental data. He's looking at liquidity data, especially on the short side. He's looking at factor exposure, which is such a huge risk in the short term. He's looking at alternative data. He's looking at macro data points. He's looking at fundamental data points, valuation data points. He's got models built on every company in the portfolio. And it's constantly connecting the dots for all of these things every day and every week. And he's maniacally focused on his screens and on his names and on his watch list.

And hearing that made me think about how relative to that, I'm a pretty one-dimensional investor. I'm really good. Like no bullshit. I'm really good at, I think, understanding business models, understanding industry dynamics, understanding competitive advantages, and not just sources of competitive advantage, but having some sense of the durability and sustainability and trajectory of those modes. I think I'm really good at accounting and financial statement analysis. I think I'm really good at valuation.

The fundamentals, right? The fundamentals of stock picking. So I never think about liquidity because I'm not managing a short portfolio, a short book. I don't think about factor exposure as much as I should, but I'm starting to incorporate it in the last like 12 months. Maybe I'd care more about liquidity if I had more money. Yeah. Then I'm going to become a problem. I am starting to think a lot more about factor exposure, but I'm definitely not an expert at it.

Um, you know, alternative data points, like, like you said, Brett, you know, when I get access to them, when I see them, I try to think about it and I try to connect those dots, but I'm not doing it day in and day out like he is. Um, you know, if you're really managing a long short book and understanding the math behind gross versus net, um, how to, how to leverage up a portfolio and manage towards, volatility and beta exposure and all of these things. I'm very one-dimensional when it comes to that. And that's okay. For what I do, I beat the market. I enjoy doing it. I learn. But then there's people, there's levels to everything in life. And just hearing this guy,

I was like, oh my God, I am such a beginner. And I've been doing it for 25 years. I'm just so much so much more one-dimensional than some of these just true masters. Question for you. Do you care about some of those things? Not that like – I mean, yes, if you're managing for – if you're managing a fund, I think you definitely should care about some of those things. But for your own PA, your own personal account, do you care about the liquidity? Do you care about the factor?

Factor exposure, all the stuff. Exposure. I think it comes down to personality and emotional constitution. So my personality, my emotional constitution, the way I like to do things is I like to find one or two or three new ideas a year, like very, very sloth-like to the Buffett phrase. right? That's the speed. That's the velocity I enjoy working at. There are people who that's just too slow and boring for them. And their brains are too freaking smart. There's too much going on. There's too much synapses firing too quickly. Like, look, Druckenmiller, right? 30% annualized. None of us can do what he does. His synapses are firing so much faster than ours are. He's connecting dots from all over the world and all over these data sets

instantaneously. It's like Buffett says, Munger has the fastest 30-second mind in the world. That may be true. Druckenmiller's up there too. I don't know the man, but you look at how he thinks and how he acts and how he trades and how he talks you got to imagine he's got one of the fastest 30 second minds in the world i don't have that and i and i don't i just i'm just a much slower mover so so no um ryan it you know i i'm perfectly happy doing it my way doesn't mean i don't admire the crap out of someone doing it the other way though yeah and they uh for anyone that wants to listen to drunken miller he did talk pretty openly on a lot of stuff in an interview with paul tudor jones uh recently if you search that you'll find it um i will say another thing

that this reminds me of is when maybe i'll i like to throw out if i'm kind of interested in something you know throw out a couple bullet points on twitter and then just say okay where am i wrong here and then i always get a lot of responses or some people maybe not always but sometimes you get a response and it says oh well next quarter is going to be terrible for blank blank blank and like oh yeah they could be right but i i don't really you know it's like the time horizon mismatch can kind of get people to debate a lot of things and in reality you might agree with them but you just might not care because if you're not trying to trade in and out of this thing you know that's why that's why both sides can be long and the short can be right absolutely the long and the

short can be right depending on time frame i don't know that is it's funny like and it's kind of different between us and the fund versus like my personal account because you know you don't have have the consistent money coming in. So you have to care more about what happens in the short term because you have to report that. But in the personal account, people will lay out some of these reasons why something might get destroyed in the next quarter. And I think like, yeah, that's a really good point, but it doesn't really matter to me. It doesn't affect what I believe this business can do over the long run. But we do have a ton of questions here. Do we want to get to any of these yeah do we have do we have any other minutes left what would you see any

others from tasia said a couple and then there was also um there was a question from jay wheezing the snow i'm sorry if i'm getting that wrong but it says j-ro exclamation mark what's good fellows joining late have you shared your thoughts on the known that earnings from last week i think we did that next week maybe did we talk i think we talked about it last week what company did we nail net it's uh it's a jim gillies yeah no i know i know i i thought he was asking me about no net i i know y'all are in there now jim gillies loves it yeah i know it it's a little bit of a why don't we i think we could talk about it yeah it's always boring but we maybe talk about it next week actually maybe i don't think we talked about it last week there

was so many other earnings but we got one minute so i'm gonna ask one more question And to both of you guys, 13F season, probably otherwise known as confirmation bias season. Is there any 13Fs? Some good confirmation bias. Yeah. Yes. Are there any 13Fs that you follow consistently and care about? Absolutely.

I mean, I look at Berkshires, I'm not going to lie, but I tend to look at concentrated managers. You know what I mean? Yeah. So, Klarman one time said that Steve Mandel was the best stock picker of his generation. It's an incredible, incredible compliment coming from Seth Klarman. Well, so Steve Mandel is on Datarama, as you all know, but I don't even think he's managing the fund anymore. But regardless, he's got like 100 stocks in that fund, right? Like, I can't do anything with that.

So if I'm looking at Steve Mandel's stuff and I have the most respect for the man in the world, he's one of the all-time best stock pickers, I'm only looking at his top 10 holdings or the big, big moves the fund makes. You know what I mean? Like increases a position by 500% or 2,000% or something like that. That's something that will catch my eye. But if you've got a new buy in a name that's a 0.03 position, it doesn't really do anything for me emotionally. And so, but if a concentrated manager makes a new buy or adds big that I respect and admire, that's absolutely catching my eye. Yeah, I think one, what I like to look at is, okay, is it someone as a fund manager that probably follows a similar strategy that I'm looking for, which is like 10 to 15 companies, maybe even a little less, and basically buy and hold quality companies. one that comes to mind that i like to follow is valley forge which if i look at their portfolio

today they could have international six or six or seven or eight stocks or something i think yeah i see fico s&p mastercard moody's intuit visa aspen technology which actually i don't know what that is and then asml it's a software company software company they had zero activity last quarter so i guess not interesting and then i also look uh because i like coupon a lot i do in my personal account i look if drunken miller still has it as his largest position so i do look at that every quarter just for coffee why not man's a genius yeah i mean yeah if he's if he sold out of it like i don't know i think it's interesting though on that company that he's been in it for so long um but yeah i think that's really all i look at for 13s i don't think berries

is very important i don't think the ones that are like you know either deep value or or active traders are very valuable because it's on a 90-day leg so you have to be looking for ones i think where the the leg doesn't matter because who knows what burry's doing i look at einhorn you know religiously i look at cooperman religiously i think the valley forge guys are great girls um you know there's some i i look i get excited for 13 out season i'm not gonna lie but you know some are just more helpful to me than others yep all right well i think that's going to do it everyone i'm a couple minutes over but thank you for everyone that joined the live chat appreciate all the questions you can listen to the j-row show on apple spotify

wherever your podcast make sure if you do listen give it a five-star review uh i will as a disclosure so that we are not financial advisors anything we say on this show is not formal advice or recommendation. Any of us may own, buy, or sell stocks on this podcast that we talked about. John, thank you again for joining. Thank you. We'll see everyone. We'll see you all next time.