Chit Chat Stocks - IPH #90: Coupang Rescues Farfetch; Buying Quality At a Reasonable Price; Selling Winners Early

Episode Date: December 24, 2023

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Welcome to Chitchat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chitchat Money is a CCM Media Group podcast. Anything discussed on Chitchat Money by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. welcome in everyone this is the investing power hour number 90 on these shows we talk about anything in financial markets whether it's investing whether it's individual stocks philosophy looking at historical things earnings updates and today we got a great show for everyone lots of news this week lots of fun topics i think i have some i had a hot take i think it'll be fun

but I should say, my name is Brett Schaefer. I'm joined by Ryan Henderson. Ryan, let's get things started with this conversation. How, oh, I should say, how are things going at the old startup? How's that? Things are going well. It, I guess, maybe listeners do know, listeners don't know. I have recently started working with finchat.io, previously known as stratosphere.io. There was the FinChat, chat GPT for investors kind of AI assistant. And then there was Stratosphere, which has been a sponsor on this podcast before. They are both created by the same company. They merged into one. It's now FinChat and it's got the research terminal and the AI assistant kind of integrated into a unified experience. I like it. It's a lot of fun. I love

the platform we were users of the platform prior and the segments and kpis i think is probably my like main thing that i love the platform for because you get to have input on what kpis i saw that you put in a nelnet one i figured that was you i saw you make sure to tweet that one out That's my first order of business. Make sure the Nelnet KPIs get in there. Yeah, some input. I mean, they really have, at this point, I think they have 1,300 companies, more than 1,300 companies where they've got the company-specific data for it. So unless it's like a small cap that I follow, it's probably already there.

uh, the, so I don't really need to like, you know, be like, Hey, you should add this. Uh, maybe if I find something that's unique or whatever, then I'll, I'll mention it. But for the most part, they've, they've got them all. The one thing I have noticed, and I'm not on the data team, so I'm not the one putting in the KPIs, but it's gotta be so frustrating when companies regularly change what metrics they report. I mean, that's annoying as just a general investor, but when part of the value proposition is we track all these segments of KPIs and you can easily see them, God, it's got to be so annoying. Disney has had so many changes in metrics they report that it's impossible to track and follow. So it's kind of

a tangent, but yeah, that's a new red flag for me when we look at companies, changes in reporting metrics. Yep. That's something we've learned over the last few years and it's something a lot of smart investors that we try to learn from have talked about before and it's usually right. Okay, today we're going to be talking about a few things. There's Coupang acquiring Farfetch, or I put in the title rescuing Farfetch because we don't know exactly the details of this deal, which we'll get into how that's kind of strange. And Ryan has another topic here about Adobe and Figma, the deal breaking there. We have Nikola founder Trevor Milton getting sentenced, Amazon reportedly trying to get

into regional sports, which makes me love the company even more as someone who wants to watch those on streaming, and some data about economists and predictions. But before we get into it, a couple of housekeeping items that we should go over every time. If you want to subscribe to our newsletter to keep up with the show, the link is in the show notes. a special housekeeping item next week's power hour is going to be our first ever ask us anything show you can ask us anything about investing the podcast whatever for our year in review uh kind of episode uh you know a celebration for the end of 2023 as we move into

2024 but we are doing probably a classic growth hack here where if you want to ask us a question you have to do it by leaving a review on apple podcast so if you're listening on apple podcast right now you go to the review give us whatever review you want hopefully five stars we don't actually care that much it's more about getting the review in there and then ask whatever question you want in that review easy as that takes you a minute and it's the best way to support growth for the show to be honest if you ask us a question in some sort of other forum whether that's via twitter dms to brett or i or i don't know email chit chat money podcast at gmail.com we will probably take it but we would very much appreciate you doing it via review because it helps helps the

show grow so you gotta you gotta put in a review we'll prioritize yeah i was gonna say that yeah yep i was we're on the same page there okay then third thing scheduled for the rest of 2023 we have hermes coming out next week uh gonna be a fun one to close out the luxury one we're going to do our year in review show and predictions episode um which i don't know the exact things but we're basically going to finalize our plan for 2024 and then go through that and kind of look at last year's predictions and we'll hopefully do it with a fun twist we'll try to keep things interesting for that Tuesday episode is kind of the special in between or excuse me, the first week of New Year's. Fourth thing, we have an upcoming appearance on Investing Unscripted with Simon

Erickson over from 7investing along with Jason and Jeff. Go check that out. We'll be sharing that as well. And then lastly, as always, as we've added here, if you enjoy the show, tell someone about it even in person or messaging you know if you say hey my friend tony he loves investing he'd love this podcast let me send him a text and say hey you'd like this show check out this episode but let's get into it ryan we have a list of i forgot to copy one of these down i guess i we got six on the list here what i i didn't put the actual link in so what do you want to hit first? Let's talk the coupon news. And there are some questions from Tyler in the YouTube chat. So we'll get to those as well. We should maybe give a reminder too, that the show

is done live typically on Thursdays at 1230 Eastern Standard Time, 930 on the West Coast. If you want to tune in and ask questions, you can always do that. If not, we record it, we upload it to Spotify and Apple, wherever you get your podcasts. That's enough disclosures for today. The Coupang Farfetch news is really interesting because I've not seen, I've been a shareholder for Coupang, I want to say for like four months now, following it for a while. I did not think this was Bom Kim's playbook. This doesn't seem to really fit his MO, his ethos. He is acquiring, I put in air quotes, Farfetch Holdings. And it's more like, it seems like a bridge loan or a line of credit extended to Farfetch where they also get the

assets. So Farfetch was, for anyone that doesn't know, we actually did an episode on them a while ago. And I might pull up some of my notes from that, but basically it's online luxury. So luxury e-commerce, they had some brands that they acquired themselves. So a couple of luxury companies they had basically acquired and were putting on the platform themselves, but really it was third-party luxury companies that were selling across Farfetch's platform. They had a lot of success, at least in terms of driving demand. At one point in 2022, they had a $25 billion market cap. There was a lot of talk about them becoming this great cross-section between e-commerce and luxury and potentially having a good take rate. So they levered up. And frankly, it was one of

hardest balance sheets I've ever looked at to interpret. There was poorly disclosed debt. There was messy liabilities associated with the founder. And ultimately, that culminated in them basically, I guess, dying. I think three weeks ago, they said, we're not going to report our third quarter earnings. And then this Monday, we heard that there was a press release only from Coupang initially. Farfetch did not release anything that said, we are extending $500 million of capital to Farfetch. We will get the assets, we will get the business. And I think they have somewhere around like $900 million in net debt. So Coupang is going to assume that liability. But, and Coupang stock dropped on the news, Farfetch's stock was halted because there was no word on the equity. Essentially, it makes the equity worth zero in that case. Farfetch comes out with a press release a couple hours later and says, yeah, Coupang is kind of a buyer of last resort. However, we're looking for other options.

basically, we don't want this. We don't want this to be the take under, but right now it's all we've got. So it seems like Coupang is going to get Farfetch. And it kind of surprised me that Coupang stock traded down on this news. I guess the assumption here is that I think for a lot of investors, they just don't really know what's going on. They don't know everything under the hood at Farfetch. But my kind of thought here is that you've got a valuable website in Farfetch. You've got a valuable platform where luxury brands do sell goods on there. And there are a lot of people that buy luxury items through Farfetch. The difficulty in any e-commerce business is delivering those goods profitably.

I mean, I guess that and aggregating demand to your platform. This feels like it should have good synergies because Coupang is best in class, at least in South Korea. they are best in class at fulfilling e-commerce orders profitably and coupon or south korea i think has one second let me click on something here the highest spending luxury spending per luxury spending per like capita south korea does or it's like top three or something like that you go great great explosion yeah i have it uh it's in the press release south korea has the world's highest per capita spending on per personal luxury goods so even higher than japan or china

or taiwan or singapore so it's it's a big market in that country yeah i'm not sure what all the synergies look like but to take a flyer if you're the vertically integrated e-commerce player you've got the back end, you've got the infrastructure to deliver goods profitably, at least in South Korea. So take a rescue fund for a really valuable luxury platform. To me, I like that. At least we know they're not paying up, I would hope. At the most, they're losing $500 million and they do have have plenty of cash. So it's not a concern. I don't know. I guess I was maybe a little more optimistic than the rest of the market on this deal. I trust Bum Kim and he doesn't seem like the kind of person that would acquire something unless he really was getting it at a distressed

valuation. And it seems like that's the case. What are your thoughts on the deal? Yeah. I think overall, this is one of those where you got to trust the management team. you got to i'd say but that's one of our three tenets that we we look at when investing in things is do i trust the management team that's important for a kind of surprise deal like this where you it might be unexpected i know that's happened with people that follow take to interactive i think that was and when they made that big zinc acquisition but specifically on this deal i like that they're going probably for a deep value sort of distressed rescue here because they can get on the cheap it's much better than taking it out a 10 billion dollar

valuation during the pandemic and here here we have a quote from the founder bomb kim farfetch is a landmark of the luxury landscape and has been a transformative force in demonstrating that online luxury is the future of luxury retail i might disagree with that after doing this luxury overview it's going to be a part of it but it's not you know whatever uh further on the quote Farfetch will rededicate itself to providing the most elevated experience for the world's most exclusive brands while pursuing steady and thoughtful growth as a private company. So that's confusing to me.

So I don't think, and I also see. Yeah, that's messy. An investment firm called Green Oaks is quote from this press release, bringing substantial financial expertise to the transaction and his coupons investment partner in this acquisition. So I don't know if it's fully consolidated under Coupang, but I guess we'll eventually find out.

I don't know how much money is coming from Coupang or Green Oaks or whatever. So there was also, Coupang and Green Oaks, it sounds like combined mostly Coupang to build basically this takeout fund. So it's a separate fund that's owned by, or all the capital for the most part is provided by Coupang. So maybe the takeout fund is private, like it's like a private equity group, but the private equity group is just owned by Coupang. I don't know. It's a little messy. They have exposure here.

Yeah. I like how they're going to say rededicate itself because Barfitch had some decent traction and the customer acquisition was decent. You know, it's tough in luxury because you have the vertical integration from players such as Louis Vuitton and Hermes and stuff like that where they don't want to be on these sort of outsourced platforms. They want a controlled distribution,

but there is potential for that for more fashion-type brands and stuff, and the market is huge. So I think hopping on that, being in East Asia for Coupang is important. That, I think, helps. Having the operational expertise in e-commerce helps, and I think that is basically what Farfetch is looking for.

but when farfetch puts out that press release i didn't know that they did that because i guess the management team there is a bit strange and seems inconsistent and that was a big complaint people had and why they lost trust in this company they made a lot of mistakes and seemed to be overconfident and they put out that press release saying that well coupon is gonna buy us but we don't want to or whatever or it's like we're looking for other buyers and i always think of that uh it made me think of that steven a clip where uh it's like the one that people use a lot of the times where he goes i'm telling you right now we don't care and then he starts laughing super super i think that's probably what bomb kim is saying like hey we'll take you out your

everything you own all the equity is going to be worthless but we're going to get the assets because you guys are about to go under okay we want to take another pause today to talk about our friends, Interactive Brokers, otherwise known as IBKR. We love Interactive Brokers. Ryan and I both use Interactive Brokers on a regular basis for our investment accounts. And the reason we love them is because they have the breadth of asset classes and geographical diversification. You can invest in options, bonds, stocks, and in all sorts of markets that you can't find anywhere else, whether it's the Nordics, where we like to research, or down in Latin America, or we also like to research, or in East Asia, you can find stocks that are listed in all these

local exchanges and you can buy them on IBKR plus so many other features that we've talked about before. If you want to check out IBKR, make sure to go to ibkr.com, remember SIPC. If you are a professional investor, if you like doing a lot of research such as ourselves, which if you listen to our podcast, I think you do. You're going to want to check out IBKR and open and switch your accounts over there today. To go through some of the balance sheet, here were my notes from when we revisited them. So this was, I want to say early 2022, or sorry, early 2023, maybe late 2022. It says the bulk of their debt. So the bulk of their debt was not due for at least three years. That's obviously gotten a lot closer now. It says over the last two

years, Farfetch issued several rounds of convertible notes at various interest rates. They categorize these as borrowings on the balance sheet, but there are also associated derivative financial liabilities they have as well. So Farfetch reported 530 million non-current borrowings and then $330 million in derivative financial liabilities. There was also, so So Alibaba, Richemont, Calube Group, I believe is how you pronounce it, they all had, I believe, put options or call options on Farfetch. They all owned a bunch of options. And that basically got recorded as liabilities on Farfetch's balance sheet.

So in total, it was like $900 million roughly in liabilities from the convertible debt and the options. But then there was this item on the balance sheet called other financial liabilities, and it was not explained anywhere in their annual report. It was only mentioned one time. And between January 1st and March 31st, I believe, this must have been 2022, the number went from 13.3 million to 345 million without any definition. So they added a whole bunch of other financial liabilities without even summarizing it. I don't know. I'm glad when we looked at this and we said, okay, this balance sheet is a nightmare. it's makes it honestly untouchable despite the fact that it's a valuable platform we were right and our gut was was accurate on this one so feel good about that yep yep i i agree and i i don't think i have anything else to add but it's something it probably a story once we

get it finalized and i bet on coupons conference call which will be either in february or march we'll get an update on it and we can probably discuss it again because i think it's quite the interesting story this combination but let's go through some of the comments here don't think we answer all of these but we have some good ones from tyler and then from our friend dave in seattle so thank you for joining he says is tesla going to ten dollars i will say as a teaser for our 2023 predictions what's funny is to my one of my predictions was amazon one of my predictions was tesla for kind of a reckless predictions and the fundamental stories for both of them kind of at least somewhat were what i thought but the stock price what like one of them it just

shows how in one year time like you can't really predict what where stock is going to go because both stocks moon but i thought tesla was going to go down and amazon was going to go up but that's besides the point tesla to ten dollars that would be uh that'd be quite the drop but maybe we'll have to do an update on then sometime with with a with a fun guest in 2024 but we have some other one's thoughts on portfolio insurance sorry i don't know anything about that um do you guys think deep value signals will perform well if the economy takes off probably but i don't know i think the the the second part of the question will the economy takes off is the big question there how how predictable is that um wait so here's a fun one so it says portfolio insurance

via put options given the VIX being so relatively low. So I think, I don't know if he means like put options on the broad market generally or put options on our positions, but this is interesting. Would you at any point own puts or sell puts on positions in your own portfolio? i just hate the complication but i can see that how it makes sense i think selling it maybe to if i wanted to increase a position at some point at a certain price or something was on the watch

list and say it's trading at 65 but i'd rather buy at 40 i could sell a put at right because that's yeah because if you sell it don't you have to i don't know how options that you have to buy the shares if it's below whatever whatever it used so i i think that could yeah you know what i mean i know but it's just i just don't like i don't know i just don't care enough at this point in my personal like in my personal portfolio i just don't really care enough about the short term like i really don't so it doesn't like if the stock drops instead of capitalizing in that moment i'd rather just buy buy more shares if i still believe in the business as opposed to selling puts on it maybe you can raise like a little income in the money or in the interim but

i don't know if it's really worth it yeah it it adds stress you gotta it's a lot more management hey if it's yeah maybe if i knew more about options but um yeah okay here's another one what is the highest reward to risk company in your portfolio or watch list i think that's a good way to look at it it's like the spread from risk to reward is kind of what you're looking at as an investor but ryan anything come to mind uh yeah i've got this crappy airline regional airline which I've been a little of like, I've tried to avoid talking about it on here on the house because it's super illiquid. I don't want people like, if I'm a loser on this, I want to be a loser on my own. So it's this kind of really illiquid, small cap, really micro cap, I think

you could call it. And it only has one customer. So either they could be profitable and the valuation is super cheap and the reward is like two or three times your money in a short timeframe, or it could very easily be, I don't know if I'd call it insolvent, but they could stop operating as a regional airline. And regional airlines go under all the time. So it's not that uncommon. That doesn't necessarily mean you'd lose a whole bunch of money because I think they've got some assets they could sell, but I'd say that's probably the highest spread between

risk and reward. Yeah. Yeah, there's one that's also on the watch list. Don't own it today. That is a home builder in Mexico that's also a micro cap or maybe just a small cap. Always hard with the peso conversion, but that one as well. You know, I don't have boots on the ground down there. The market is much harder to understand because it's a foreign market and it's home building.

So there is a bit of cyclicality to that. Tyler also says for the Hermes show Can I count Hermes gift shopping as due diligence Yes that is some Expensive You know That's an expensive due diligence But hey

I guess they're investments You could probably outsource some research For the price of going to Hermes Buying a bag But one of the key Comparisons or similarities between Ferrari and Hermes and how we'll talk about what makes them special on the Hermes show

is that people can resell the high-quality Birkin bags and other Hermes products five to ten years down the road for potentially the same price or even a higher price on the resale market. So, yeah, I mean, maybe actually, well, like Rolex is a startup performer, although Rolex prices have... It's an investment. yeah uh okay uh comment here farfetch needs fulfillment by amazon yes well they need fulfillment by coupon um and then if amazon can sell hyundai's then surely coupon can sell some

handbags yeah i think so okay here's another one did you hear about this by the way amazon entering the auto market yeah that's an interesting one i i wonder what's going to happen it seems like they're going to move slowly here but tbd uh yeah i don't like it i don't like i saw like a lot of uh i didn't know this but i think there's some dealership networks that are publicly traded like it's just sort of an amalgamation of various dealership businesses and they all traded off really steeply on this but i don't really i don't know if be that hurt i i wonder what kind of position dealerships are in today because that's i know carvana saw a lot of success but that's the kind of business where i feel like having in-person

and in-person shopping experience is pretty pretty critical to getting people to convert to actual buyers like maybe you can shop around online or i guess the worst case would be that that you go to the dealership and you hop in and then you go out and buy it on amazon but i don't know i i think dealerships will be in fine shape yeah i don't know if there needs to be that much of an improvement in the car buying process except from possibly similar to how the real estate the residential real estate market evolved where you can check out inventory online but i still want to if i find some stuff i like i still you know want to go in person so i i think the in-person is going to be here for stay we have

someone uh named mo says finally catching this podcast live from beijing hey there we go international uh audience it's quite surprising we don't have a huge show uh but it's always surprising that podcasts really travel around the world but let's keep going through these questions i say this one was one of my topics as well so why don't we just hit it now I had a tweet this week that I knew it would be fun to talk about on the show because people got very intense in disagreeing with me. And I'm curious if Ryan disagrees or agrees with me here. From Mr. Dappercapper, thank you for the comment. You have criticized people who misread Buffett's quote, which is, buy great companies at a reasonable price. How do you reconcile that

with great businesses that never traded at 10 to 15 times earnings multiple? well i guess let me read the tweet first for more context and maybe i'll let ryan start and then i can uh add in some comments as well so the quote was and this is again it's always a bit of an exaggeration on twitter i said no single quote has lost more investors money than buy great companies at a reasonable price ryan thoughts on that and i'll shut up it And I think in the time that we have been investing, which is really pretty much 2018 and beyond, it feels like this quote got distorted to reasonable price seems to have been distorted in that timeframe, especially around the 2020 period where paying 40 or 50 times earnings or 40 or 50 times sales is not a reasonable price. And I think where it's true is that a lot of people love to focus on the first part. Buy great companies is more important than buying bad, buying fair companies at a great

price or whatever. But they don't really think about the reasonable price and maybe their parameters for a reasonable price is that they just don't really do the valuation work where it's just like, I'm focused on the first part of that sentence, which is buy great companies. But I think if you look out 10, 20 years and you are buying great companies based on long-term returns on invested capital, and I'm talking about the Microsofts or the – I don't know if you would have called Amazon a great company 20 years ago, but the ones that were hard to disrupt, the AutoZones, the O'Reillys, the Costcos of the world. I think over the long run, the quote would not be true. If you bought those companies, if you categorize those as the great companies, you probably could have bought them at pretty much any time and been okay. You still might have underperformed the market, but I don't think you would have been that hurt by it.

Yeah. But we see people use this in bad context. And I think it's more – yes, that's kind of what I was getting at with the quote. and maybe it's more true over the last five to 10 years where it's got people in trouble. And we have, I think an example I have is the follow-up question from Mr. Dapper Capper, which is a great pseudonym for your YouTube page.

Where do you feel you can still buy high quality companies like Costco, Visa, Hershey? Would you buy at a discount to historical multiples? Would they just never be a buy? I think you got to look at what returns you're expecting, what the risk you think to the business is. I mean, there's a lot of factors going in here. And I'll use Visa as an example.

During its peak, during kind of the bubble period of the last couple of years, it got up to a PE, I believe, and I'm looking at just an aggregator here, of like 50. But if we look at the post-GFC era, 2010, 2012, you could have gotten it for about 15 times earnings. So I don't think it's impossible For high quality companies to trade at a reasonable price

I should say I believe You'll never guess But when Buffett and Berkshire was buying Visa was in that period When it actually traded His definition for a reasonable price And I think what I'm trying to get at What I see at the Motley Fool

Someone who's writing kind of within that all the time and i mean how many subscribers do they have you know and we talked we talked with this friend i mean it was inspired by our friend jim gillies who's been at the motley fool and been in kind of the the garpy i guess side of the market for a long long time right where he's been in that world forever and he says look the biggest problem people have is they say i want to buy the best companies in the world but they ignore valuation And I think, yes, it's made a lot of people money, but I think today, I don't know. Buying Visa at 50 times earnings was not the right move.

You're going to lose money on that. Yeah, I think it's worth going and kind of backtesting your strategy and saying, And if I paid 30 times, like let's take Visa, for example, wonderful business. I'm sure your return still would have been good, but let's say you bought it in 2013. And instead of buying it at 13 times, let's say you paid 50 times earnings, like people paid in, some people may have paid in 2022. What would your returns have looked like then? If you exclude the multiple expansion on some of these really good businesses, what would your returns have looked like? Then I don't think it's quite as pretty. I think in general, it's useful to just go back and look at how much of the returns came from multiple expansion on your business because I never really like to factor that in to any of the investments I'm making.

I don't like to bet on a company expanding its multiple because that's unpredictable. Yeah, and I think that one of the things I get maybe frustrated with and try to learn with myself, and especially because I've made this mistake, is the point of like here with, well, this business never trades at 10 to 15 times earnings. So you got to just buy it now and everything will be fine. And that's the mindset that led us to have poor returns in the 2020, 2021 period. And that was the raw. I mean, obviously, there's other small mistakes. The only real mistake that we made. And it was a big one.

And I want to look at this because it would actually inspire me. Go ahead. Yeah, go ahead. Just look at it like you're buying the whole business. is if you're buying the entire business and you don't have anyone to sell it to at a higher price later on, like you're buying it purely for the cash flows that it's going to generate to you as the whole owner over the next, whatever, 10 or 20 years, what would you be willing to pay? And I'm willing to bet in scenarios like that, you're not going to pay 50 times earnings because

in the random scenario where earnings are going to quadruple, that's different. But for a Costco where earnings are probably going to grow in the range of, I would bet- Single digits, yeah. High single digits, at the best low single digits, you're probably going to have a hard time generating market beating returns paying 50 times earnings. So it's, I don't know. Yeah, I do think you're right that people have let that quote get distorted, but I don't think it's been the number one money loser. I bet by the dip has been a big money loser. Well, not A. We're at alternative, Brian, so not right now.

Not right now. Yeah, I'm sure there's a lot of other ways to lose money, but I think that is a good recipe for underperformance. what's funny is that and i should say this as someone who has a buffett poster in the background for the background of our show here no no investor has lost more people money than buffett buffett's quotes like right be greedy when others are fearful or like oh it just it just gives people excuses to make bad decisions without actually thinking for themselves and here's some data i have okay i do think using a buffett quote to justify any investment decision is lazy thinking but i don't know if i'd agree that he's lost more money than he's probably made people a ton

of quotes as well yeah of course of course but i'm saying like that's just the fact that he's the most popular yeah yeah i think it hiding behind buffett quotes is is a way to masquerade lazy thinking yeah and here we have a quote from tyler comment from tyler to be fair costco looks more interesting given a raised membership price or matching margins with competitors yeah there i think some people with that stock are definitely pricing in a membership uh price hike which seems inevitable and hasn't come in a while but the one data point or the what inspired me to put that tweet out was from Dan Rasmussen, who had another tweet at Verdad Cap. Very, very good at aggregating data for factors and stuff like that. And this is a pretty easy one.

He says, high valuations are not persistent. And this goes back to 1996. Only 50% of the most expensive stocks in the top quartile remained in the top quartile one year later. So that comes back to the, well, these high-quality stocks never trade cheaply. The data says that is incorrect. Yeah, and it always feels like it's never going to trade cheaply, but at some point the business will. I think people said the same thing for Dollar General. They've said the same thing for, well, they've said the same thing for Costco,

and that's actually worked out for them. but there's a whole bunch of businesses where you could say it's never going to trade at 10 or 15 times. And I've said that same thing. In 2021, we would do a not so deep dive every single week. And we look at a business and say, well, maybe I'd be interested at 10 to 15 times. And then we go, yeah, it's probably never going to trade there. They all traded there. And suddenly the thesis changes. Suddenly the thesis becomes, I don't know if I want to buy it here because the expectations are different of course that's that's why it trades down so the i remember we said it with match group we're like yeah okay yeah if this trades in the 10 to 15 times range i want to

like make it a huge chunk of my portfolio and maybe we did size up on the way down but it's the expectations in 2020 were that this is a perpetual growth machine with a wonderful network effect that's just going to keep growing as online dating grows. And now the thesis or the expectations are that for a bull case is that Tinder is not going to die. So expectations can change really quick. And when that happens, the multiple can change fast too. If we started seeing membership declines at Costco for two years or something like that in a row, what would the multiple look like that yeah true true true good point yeah and when the multiple is lower it's not going to feel as nice to buy it even though it is better and here's a good point from

mo says uh some guy from t row price has said that garp is the most undervalued segment because there is no natural buyer for the 12 to 15 pe range and that's a good point that's kind of where I think the sweet spot is for individual investors. One more thing from Verdeck. Do you consider 12 to 15 times GARP? And just for context, for anyone who doesn't hear GARP, GARP is growth at a reasonable price. I don't know. I think 12 to 15 times, for me, that's – when I think GARP, I think you're paying 20 times for growing business.

Well, I would say that's – and yes, every company is different. But Buffett would say that's misinterpreting his quote because what does he do? He buys 10 to 15 times for the high quality businesses or lower. Obviously, he'll take lower. So here's the data points from two other things here from Burdadcap, which I think is basically showing in the data how Buffett was the best at buying, you know, that quote, buy good quality businesses at a reasonable price. Here's the second data point.

low valuations are more persistent. About 75% of stocks in the cheapest quartile stay in the cheapest quartile. I think this means, one, there's a lot of bad businesses out there. Two, if you find a decent business with a really cheap multiple and you pair it with a management team that buys back stock, that is a fantastic combination because the valuation will stay lower you can actually take advantage of that. Then the third data point is that the 25% of value stocks that migrate out of the cheapest quartile generate a significant return, which I'm trying to read this chart here. Let's just say they outperform a lot. I think this shows that Buffett waits for that fat pitch when the rare quality business trades into that lower quartile range. And he

is that one it's a better business than two like we get that multiple expansion i mean the returns are just going to be fantastic look at the businesses he buys coca-cola american express apple that never sells in his portfolio are those categories he did not buy those at 30 to 35 times earnings yeah i mean the best returns are going to come from good businesses that people think are bad businesses in the moment right i think that's basically what you're getting at is multiple expansion does really help your investment returns over the long run. Now, obviously returns on capital are important, but it's rare. You think about the 100 baggers, in Chris Mayer's book, I believe one of the staples of finding the 100 baggers was obviously

having long run ways to reinvest, being able to do so at high returns, but part of it was also multiple expansion i think you saw that with monster especially that's probably why it's one of the reasons why it's enabled it to be the best performing stock in the us over the last 23 years so it's yeah it's harder to get multiple expansion when you pay up like plain and simple but the uh i don't know i think at the same time it's a lot easier to bet on just good company generating good returns as long as then a good company a company with high roic not i think you can make money easier by buying them than finding a company who is undervalued the average yeah i mean it's i'm saying that in a weird way but

but it feels easier margin of safety and the quality of the business before margin of safety in the valuation. It's kind of what I'm talking to the business quality isn't in question. Then they're probably, you know, it's less likely that it's actually going to materialize, but we have another question here. I think this will be a fun one. How do you maintain your conviction on companies that you invest in?

Do you keep an investment journal or speak with each other about your investments decisions how do you hold on to winners yeah we do talk about our investment decision i just keep a quarterly kind of notes file slash journal thing where read the earnings report or 10q and then just write down my thoughts and how do you hold on to winners i think the key thing for that especially as an individual is you got like i don't It might not make sense, but selling like we don't hold on to sell something asking the wrong people. You don't want to sell anything unless like the valuation gets extremely out of hand. So you you don't even if like it doesn't make sense where you're at a price where you wouldn't buy you wouldn't buy shares that unless you have a fantastic idea in your I don't know, in your on your watch list.

It's probably best just to hold on to the business if the underlying, hold on to the stock if the underlying business hasn't changed. Because like, it's hard to make so many decisions and be right. Like, you're probably still right about that company. The business is probably still high quality. The risk of keeping it, even if the stock goes down to a more normalized multiple and you're like, oh, okay. Like, like, all right.

Oh, man, I should have sold. It's fine. you're still going to be making money. It's not the end of the world, especially as an individual where you don't have to focus on a shorter term time horizon. Yeah. Tyler in the comments says, I practice the trick of just not having any winners. That's one way that we have really practiced. Oh, come on. You always sell it. You always sell yourself short. Well, yeah, but I think that's, it makes for better content. The other part is how many stocks do we have that are that we've held that are up 2x 3x sprouts basically spotify is like 150 i mean we're net

down on that but yes the break even so it's we have one winner i don't know what we have multiple we have one stock that's really doubled we and we ended up selling it so it's like i don't know i really do think that not selling having the never sell approach is great but it's just something we haven't practiced before yeah and successfully it's it's it's more important when you get into that 5 to 10x range and typically when you get those pretty good returns in a short time period or a short time period which if you get like a 5x in five years that typically means the multiple is expanding a lot and that's where your discipline is going to really be tested i think of okay look

hey like i could sell this thing you know there might be a better idea in the short run but yeah and i also might be the market talking at all-time highs and a 27 average pe for the s&p 500 but i also think it applies throughout the market cycle there's yeah i think if i had a situation like Nvidia, I would sell. I just would. And maybe the easiest way to avoid it. Yeah. I mean, we know some other investors who have bought Nvidia a long time ago and it's done really well and they're continuing to hold. And at any point in the last seven months, we probably would have said, that's ridiculous. And it's continued to perform well. So I don't know what the best way to not sell your winners is i think one way that i see a lot of people do

and it's probably like improper thinking is they just say i don't want to pay the taxes and that can work as a way to hold it i mean never sells great for tax advantage strategy yeah yeah but it can also hurt you yeah i think nvidia is a point where yes i would probably sell but it is when the valuation or the expectations in the stock gets so high and are just way way out of your own expectations and what you're comfortable with or where it makes sense to to take your gains and go home especially in industries where cyclicality can can come into play do you have any other news items you want to hex like we do have a question from harrison that i find kind of interesting he says oh it's fine i mean maybe amazon regional sports or do

you want to hit this question let's talk about this question real quick curious have either of you read expectations investing quite a few interesting frameworks that have made me question how i look at things yeah i read it a while back it's i thought it was a really good read i love Michael Mobison. I love his, I think he does just a really good job articulating kind of more difficult accounting questions and accounting concepts into easy to understand language. Have you read this book? I don't think I've read it the whole thing cover to cover, but read some of the other stuff that seems to be what he focuses on a lot. So some of the concepts, I guess, but no, I have not. I probably should read it at some point. It's interesting reading

the investing books because if you i feel like you kind of want to revisit them sort of like the buffett letters once you kind of get a little better and more knowledgeable and you're like oh okay yeah he was i just didn't get that at the start you know that's what i feel with something like the buffett and mabos and stuff intelligent investor yeah that is the biggest like that's lost do you think that's lost investors the most money is the intelligent investor maybe no no no no but But when you look up on Google best investing books for beginners, Intelligent Investor is one of the first ones that shows up. That is not anywhere near a recommendation I would give to a beginning investor. It's got a bunch of topics that would go right over my head when I was first starting.

Oh, yeah. 100%. 100%. I would start with that book maybe from Brian Feroldi. Forget the name. Well, I should know it. But look up Brian Feroldi book. that that's an easy one that type of stuff you got to start with the extreme basics

and then you kind of level up with more complicated things uh but yeah i'm sure i like expectations investing because it you have and i think we all kind of we we do this on every show is the bull case and bear case thing when we're analyzing a stock is we're okay what are the expectations and what sort of scenario could play out where this thing does well and what sort of scenario could come out where the stock does poorly. Like, what are the expectations here? I think that makes a lot of sense.

Yeah. I wanted to talk about this. Figma and Adobe. Adobe recently announced that they were going to pay, what was it, $20 billion to acquire Figma. The deal actually went up in value because I think part of it was like a stock deal.

And so they would have been paying more. Anyways, the European regulating body and the UK Competition and Markets Authority, CMA, both apparently Adobe said they don't really see a path to getting past both those regulatory bodies to clear this transaction. so they're going to pay a billion dollar breakup clause to figma breakup fee and the deal will not go through i saw an interesting meme where it's like it was one of those like consent uh yeah it was probably i retweeted so it might have been funny yeah where it's like uh like how to get consent or whatever and it's like do they say yes and then it's like jesus in the corner and it's like the eu like it's a california tech company another california tech company yes yes and then it's like the eu's in the corner like have you forgotten about someone

have you forgotten to get consent from us and it's like i find it funny that the eu and the cma are just the biggest hurdle these days to clearing things yeah but this is definitely an anti-competitive deal i would say you're just taking out you're the you're the dominant player industry you're just going to take out the one of the only competitors i i think this deal will be good for society like not having this deal be good for society because you have the canvas and the figmas of the world that are using the sachi and adele quote gonna make adobe dance and hopefully improve their product and not just gonna um you know just raise prices and not improve anything. The fact that Figma is making them dance, isn't that proof that competitors can

come along and easily take share? Not easily. It's not this regulated industry where competitors are prohibited. Canva came along. Figma came along. Instantly, everyone started, When they announced this deal, everyone all of a sudden, and I remember even you saying it, well, does Adobe have as big of a moat as we thought? Obviously, they don't if they're acquiring Figma. So if they have to acquire Figma, I don't know. I think maybe the barriers to entry aren't quite as high as people assume in this industry. Well, maybe that's a different question, but I still think it's anti-competitive because if you're just going to try to – I think it's like, okay. It could be both.

We look at the rule books or whatever, the playbooks, and I'm like, okay, does it fit a specific antitrust thing? Maybe. But I think having Figma as an independent company is just better for competition. And that's just better for their customers and stakeholders and all that good stuff. I use Canva a lot now. I got to say I like it. Yeah, it's good. That's another competitor too.

What if they tried to buy it, take out Canva? I don't think it's that big of a deal the people complaining about it I don't know they're like there is some hot take that it's that like okay they're saying that

the I don't know Facebook IPO you know made all these people rich and then they invested in all these design startups and stuff like that and then that turned into all this stuff and they're saying oh well Figma could have cashed out for 20 billion dollars all these people would have been rich

and they would have reinvested into the society. And I was like, well, Figma can just IPO. That's a very long-term reason. They're like, we need more angel investors out there. Yeah, yeah, yeah. That's definitely the problem in society. We need more angel investors. But there's this other comment we had here from Tony

that says, basically he's gone the other thing, that it says, that's why I like the coffee can approach that Chris Mayer mentions in the Hunter Beggar book where you buy something and you say, hey, no matter what happens, I'm just going to coffee can it, never sell. And I think that is not the only reason. Obviously, you don't want to sell them short,

but it is the number one reason that David Gardner is one of the best investors of the 21st century. Yeah, 100%. he has a willingness to wait that most of us don't have and a willingness not i think willingness to wait a lot of people have that but a willingness to endure extreme valuations or perceived extreme valuations is a skill that i probably lack and or one that i my my itch and my gut tells me to sell when valuation is good extreme and david just seems to lack that entirely like he'll if he thinks the value to society from the bit that the business

provides is still there he will just continue to hold it which i commend him for yeah i have that same issue as well and i think the way to fix it is to buy companies that don't get overvalued and just repurchase stock yeah just to buy bad businesses not no no i know i know you're i know what you're saying but yeah i buy businesses that'll never be valued well it's like that's so i don't ever have to deal with that problem the uh well that's what munger said although he owns costco or did excuse me r.i.p uh where he said i buy stocks that generally don't get overvalued so i don't have this issue i think that is kind of a weird and interesting way to look at it where you don't have that if you buy stocks that are i don't know if you buy stocks

that just always get overvalued i i mean there might be like okay one they're going to be extremely volatile which is going to make you it's way tougher for on you psychologically emotionally stuff like that and if you buy stuff that just gets overvalued i mean maybe you're not in fishing in the right pond because there's going to be high risk for these companies that keep getting repriced like i don't know it just it i think i think there's something to it to buy stuff that isn't it's hard it's hard to explain there's a million ways to make money but for me i think the easiest way to invest is like you said businesses where my assumption going in can be that I will generate returns because they can buy back

a significant amount. So if it's whatever, 10 times earnings, and you know with some level of predictability that they're going to generate, whatever, let's say the market cap's a million dollars, you know predictably that they're going to generate $100,000 a year. You believe that. And the management team has shown that they will use that capital to buy back. That's a situation that I really like because I'm not relying on more buyers down the line. Reduce the uncertainty. I'm just relying on management to be rational with their capital. That's my favorite situation.

But I think they're also somewhat rare. All right. That's a good place to wrap things up. I put in the little teaser title that we were going to talk about, the Nikola founder being out, which there was some amazing quotes from his trial. The guy- Just mention it, four years in prison.

Four years in prison, should have a zero at the end of that. We're going to talk about Amazon regional sports maybe next week, but we're going to do the AMA and we'll see. We might not get that many questions, but let's hit the disclosure. We are not financial advisors.

Anything we say on the show is not formal advice or recommendation. Ryan, me, podcast guests, may have owned stocks discussed on this podcast in the past. We may own them right now and we may buy, sell, or hold them in the future. Thank you everyone for listening

and we'll see you next week.