Chit Chat Stocks - IPH #91: 2023 End of Year Ask Us Anything

Episode Date: December 31, 2023

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Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. 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 91 on chit chat money welcome into the show everyone i like to ramble a little bit as we get started because i don't know exactly when the live stream actually begins but again welcome into chit chat money we're doing our special year end power hour and we're trying to get a little bit of an ask us anything show although sometimes these shows

turn into that anyway. So we have a couple of questions we want to hit. Thank you to the few who asked some fun questions here. I think we're going to have a great show. I'm joined as always by Ryan Henderson. Ryan, how are we feeling after the holiday season? We're in limbo period in between Christmas and New Year's here in the United States. yeah first of all happy holidays to all the listeners and to you brett we it's kind of like that dead week in financial markets where it doesn't seem like there's any news no companies report there's very little going on and kind of a time for everyone to relax so we are doing like you said, our year end shows, this will be released on, I believe it'll be the last day

of the year. I believe this will be coming out 31st on podcast form. If you're listening on YouTube, this is coming out on a Thursday. So before that, but yeah, we're doing an ask us anything, which sometimes I don't know if this is like a problem people will always face, but I consistently feel underqualified to do an ask me anything. Like I don't have the answers, but that's, that's okay. We've got questions. Yeah. We don't have to pretend to be any sort of experts over here. We're learning part of our shows. We try to learn along with any sort of listeners that we have, whether you're more of an advanced investor or someone just starting out. And yeah, we're not going to pretend to just give advice to everyone, but we're just going to give

our opinion maybe, or if anyone has any sort of insights or wants any behind the scenes, look, this is the time to do it. I will say the next episode after this is going to be our New Year's. We have some changes coming, some slight changes coming for 2024, and that'll be coming out on Wednesday. We, you know, little teaser there. We are changing one of the dates that we release our episodes, and we're going to do some form of 2024 predictions-ish, but we don't want to make it cliche as that it's a very popular thing to do so yeah i think that really gets right into it thank you to everyone that gave the reviews on apple podcast for the questions here and if you enjoy these please the best way to thank us is to give us a review on either spotify or apple ryan

you have something to add before we get started a little foreshadowing here for our new year's episode i believe and i haven't verified this i believe all my new year's predictions last year came true oh well little tease well maybe one of yours inflation adjusted yes which one i honestly can't even remember the the housing one the housing one and i can't remember if yours was new housing or all home prices because those had a big difference in 2023. But I guess we'll figure it out next week. We're going to give that out of the report card.

Mine, one of mine, it's one of them I bet that a stock was going to go down a lot and one I bet that a stock was going to go up a lot. And they were both in the Magnificent 7. So you can tell which one I got more correct than the others. But let's roll right into it. We should probably hit this first one to the priority ones on Apple Podcasts. I think that's it, Ryan. I guess we'll cover any sort of housekeeping items in that special kind of launch for 2024 show.

This is from Pharmacy Joe. Really appreciate the review putting it on Apple Podcasts for the question here. He's got a couple, so maybe we'll divide it up, but I'll read it all out at the start. what do you do when you are fully invested and a great company that you had planned to buy one day falls below your desired buy price? Where do you raise cash from? Sell your worst idea, sell a percent of everything equally,

use margin to establish the position and pay that back with dividends from your other investments. And these are all questions. So I think it's essentially, and he was kind of giving us a bunch of options here. If you're fully invested and something falls on your watch list say something that we were watching this year was

adyen and when it fell 50 that's when you might want to kind of do a little bit of investigative work and kind of get looking more at the research you did in the past and think if you think okay is this this i think this is a good buy now well what do i do do i go on margin i'm already 100 invested ryan since i asked the question why don't you go first because i'm sure we have similar opinions but probably slightly different too yeah i mean there are there's a lot of ways to go about it i would say for starters i never use margin and i would like i don't see what the attractiveness is usually about margin um unless you're doing some sort of a constrained strategy that where you kind of have put limitations on your upside and downside so

you know a lot of long short funds implement it they use margin that kind of thing but for the average person if you're just talking about buying a stock when it comes down using margin to do so i think it's a really bad idea first of all you are going to have to pay interest on it and there's no guarantees that just because it got below your butt i mean our buy prices are arbitrary they're they're it doesn't the stock doesn't care what your target price was so it could continue to come down i mean these are this is a stock market it's random especially in the short term so i i would veer a ways away from using margin typically it really kind of depends what account it's been in so in when we were running the fund which we are no longer running

the fund this was a big issue and it was something that came up a lot and i'm glad you i'm glad pharmacy joe asked the question we would constantly have to sell our remaining stocks in the portfolio whether it was trimming them down or selling entire positions just to get into one frankly we were, what is it? Cutting the flowers to water the weeds on a number of occasions. So that was kind of frustrating. And typically what we'd do, it varied, but I think it was usually trimming, trimming stocks that we thought were kind of highest on their valuations, or maybe it was ones that where we had huge chunks of the portfolio in. But in my personal account, And I guess just for context, the reason it's hard to do that in a fund, the reason it's hard to just add new money in is because you have to go out and raise capital.

It's not like you don't have a consistent income stream that's just pouring into your investment account. But in my Roth IRA, in my personal investments, I generally tend to hold cash for a little bit until I see an idea pop up. And then if nothing pops up, then I'll add it to something I already have. It's a lot easier to, I think, just transfer new cash. That's usually the best solution to the problem. And so I'm always kind of holding some cash. Typically, it's more in my bank account than holding it in my investment account. If it's in my investment account, it's probably invested in something.

But if I really see something go down, I tend to just transfer cash instead of trying to sell something, at least in my personal. Yeah, that makes sense. And you did talk about some maybe mistakes we made when trying to find in a 100% invested portfolio how to add something you think is an extremely good idea. One thing we did that was, I think, smart and I'm going to keep doing, but on a less regulated basis, is force ranking all of my portfolio at an existing time period. So we would do this once every two weeks. but I think you don't necessarily need to do this that frequently as an individual investor. I think once you get another idea, maybe you can do the research on it. And then when you say, okay, I think this is a good idea. You force rank all your existing holdings. You could just do it

as a, if you have 10, you could just rank them one through 10 and spend a little bit of time doing this. Might take you 20 minutes or something like that. Maybe get a little bit of an update on all the companies you own. Yes. If you own a ton of companies, well, this is going to be different. But I think we're speaking to the audience that is in a similar boat as ours, trying to own 15 to 20 companies, maybe a little bit more, maybe a little bit less. And then if you have the one that's on the lowest in your rankings, you compare that to the one you want to buy. And I think if there's a huge difference in, and it's not necessarily valuation, obviously that plays a case here. it's more of okay going forward if i didn't know either of these is there a huge difference in what one i think is much more attractive and if the one that you don't own you think is like there's a big

difference in the risk reward or how attractive you think it is at that price then i think you you switch it in but you want to have some sort of barriers or you want to add a little bit of friction to yourself so you don't start over trading and it doesn't if something you think is extremely even but you give a slight nod to the new stock i don't know if it means that you should sell the old one maybe you can i don't know it's it's kind of an art more art more art than science but it's and i think it's more personal like okay what works well for you for me in my personal account i tend to and i think a lot of people can relate to this because most people listening to this are probably don't have their own personal account even if they work

in the professional, you know, professionally on the investing side. When I add for me a couple hundred bucks, you know, a month to my account, I go, okay, what do I think is the best idea right now? And I'm going to buy it. I mean, that's the best way to do things. And if you have a new idea as an individual, I don't think it's the end of the world to be patient and say, okay, I'm going to have income coming in this year. Maybe if I already have a fully invested portfolio, say it's $100,000, and then I have 10,000 in savings coming in, I can put that all this one stock I think is cheap. And if it's cheap the whole year, okay, then you've built out the full position there. 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, where 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 member 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. Yeah. And I think if you're going to force rank your holdings, it's important to do it on a regular basis because one week it might be ranked a little more poorly than other weeks you know maybe there was some news out maybe the stock jumped a little bit and you know your sentiment for that week is kind of maybe it's worsened on a stock if you and this is something we did that ended up i think being beneficial for us is that we ranked it every two weeks we ranked all our

holdings, basically just what we think the best risk versus reward is in the portfolio for each stock. And the ones that continuously ended up on the lowest of our rankings, first of all, they're in our portfolio. So it's not like we think they're going to perform poorly, but those are the ones that tend to get trimmed, not the one that just showed up being the worst in the most recent week. It was the ones where we continuously thought, ah, maybe the valuation's a little stretched here. Maybe we don't look for the past six months. We've thought that this business is, is there's some problems are showing up. And so I think a force ranking every two weeks is, is a really helpful exercise for it. Like you said. Yeah. And I think the biggest

thing is when you consistently have something dropping, I think that's more of an indicator of something is kind of lower on your rankings and sticks there. It might not just be the best idea but it's still a consistent idea but if something's dropping in your rankings and we would have times when the same company for probably obvious reasons was dropping in our rankings and we would say okay this is probably something we need to invest or investigate and most likely the best idea was to sell all right ryan do you want to hit the second one here unless you have something to finish on last thing and this is probably one of the most important ones to think about is just the taxes. So if you're talking about which one to sell and it's November and

you have one that's down 40 or 50%, you can help your tax bill by selling that stock. And you're kind of taking a risk here if you want to buy it back in a month, but you're going to have some tax loss harvesting that way to kind of offset your capital gains. And so that was also something we did on a number of occasions, especially with Spotify. We decided to cut the position, even though we thought still positively about the company. And we ended up actually a month later getting it back at a very similar price, and we were able to offset our taxes by a lot. So keep that in mind as well. That's maybe a time when it's worth kind of trimming some of your losers.

But let's go through these other two questions, which we got from Firm Returns. Once again, thanks, Pharmacy Joe, for the review and the question. Firm Returns sent this to me over DMs. He's been on the show before, or we've been on his show before. Maybe it was both. But he asks us two questions. So first one, this is a little more broad, but he says, what are your career slash life goals? I'm going to read the second one, and then we can come back to it.

And the second one is, as the converse to your question last week on holding when a stock gets expensive, how long do you wait when a stock remains cheap? So why don't we hit the first one here? Brett, what are your life goals? What are your hurdles? Yeah, that's always a tough one. I feel like I'm on a date with firm returns here. But the, I mean, right now for career goals is definitely building up the podcast business. We have some goals within that.

I don't know if we want to get into the details there, but essentially it's producing what, you know, thank you everyone in the live chat here saying we have a great show. Appreciate all that. And we want to keep doing that in 2024 and beyond. And we also want to grow the audience and we want to build a little advertising business within the podcast. I think that is the number one career goal at the moment. And then life goals, it's pretty standard, you know. I don't think we have to get into anything too personal. But I do like traveling around, I guess, maybe to share something personal there.

I do with the, you know, we do this on Zoom. I do writing for The Motley Fool for the other job, kind of the main job. And I can do that just from my laptop. And as some younger person without a family yet, I just kind of want to travel around. So that's really it. I don't know how much I want to share here, though. But Ryan, your career goal, I guess, and I think it's always hard to answer these questions. The career goal, I think, is quite similar.

I want the podcast to be in a place where we can, well, frankly, generate significant income from it. and build a we've we're already kind of building this but build a community around it where it's an easy way to bounce ideas out there it's kind of like a club in a way where it's just especially now that we don't have the fund and we're not having these structured meetings where we look at our holdings together it's a way to just get my investing thoughts out there and get feedback So I love having that and hopefully making it bigger over time. Career goal would be that it could be an income stream entirely on its own, like a significant income stream. And then I guess I work for FinChat now.

I have no plans of stopping that at any time soon. I actually really, really enjoy working there and they are flexible enough to allow me to do the podcast at the same time. So, so far it's been great. life goals uh i don't travel quite as much i would say just have a daily routine that i'm i'm happy or i tap dance to work or whatever i know i work out from home so it's not a long tap dance but it's like just something where i actually wake up uh uh excited about the the work itself and feel intellectually stimulated by it so um so far i have that between the podcast and the FinChat job. I think I've got that. So to do that on

maybe a greater scale would be probably long-term life goal. Yeah, I think that is, yeah, I agree with that one too, is having the freedom and to do, whether it's work or in your spare time with your family and friends, just do stuff that you actually enjoy. I think that's a good North Star that we've both had. We have a follow-up here. We're talking about building the podcast into a business from James Goodwin, who also says,

best investing podcast out there. I think that's what we should put on our tagline. So thank you, James, for the kind words. He said, add a premium tier for $10 per month, not an Apple podcast. I will say, yes, don't do that. An Apple podcast exists extremely frustrating and you'll have my money.

We did try this actually late last year. We did have some people take it up, but I don't think we're large enough yet to build out a tier like that where people can support us because we're still trying to grow the audience. And when you add in a premium tier, it makes it harder to grow. But I appreciate the idea. And I know that with these investing type shows, you can have that. And then the other thing with that is we don't want to make this seem like it's some sort of, you know, newsletter or premium service that you're just subscribing to to get actionable investing advice.

We like to talk through ideas, but we want it to be more of investing entertainment and hopefully spur ideas and conversations with other people. But I think the free route is the best way to go, especially because within the investing and finance realm, our audience, the listeners, you guys are very valuable to advertisers since you guys typically have quite a few bucks out there to spend. But yeah, I think that's it. It sounds good in theory, but it doesn't work as well in practice. Yeah, there are some limitations to it. I mean, first of all, the actual infrastructure around doing a podcast subscription is not great. So for example, if you go through the distribution platform, let's call it, I think it's Spotify

for podcasters now is what we use. It's got a pretty intuitive signup process for Spotify itself, but you have to go and build your own one on Apple. It really gets messy on Overcast, if I'm not mistaken. And there's some other channels everywhere else. And Spotify is only a quarter of our listeners, right? So it gets messy. And the actual signup process is not that intuitive.

So I think that probably that friction people, people weren't like, okay, this is something I have to have. So I'm going to, uh, I'm not going to go through all this friction to sign up. The other part is when you have less people listening, you only have your subscribers listening, there isn't as much sharing going on, which kind of limits the growth of the podcast and less shows up in the organic search and stuff like that. So it's harder to grow once you put that paywall up, but I'll kind of leave it there. We do appreciate the idea. Something we have been thinking about for people like you, James, Tyler, anyone who is MarkUSA51, who's another person

that threw a question in the comments page here we're thinking about doing some merchandise whether it's mugs hats shirts so if you really like those we'll probably do some giveaways as well as maybe have some available for order or something like that but uh what we'll try to and encourage our we'll try to reward the people that have been listening for a long time by doing that yep and it's a great way to grow tech by asking for reviews on apple podcasts and Spotify. I will say tentative timeline on maybe the first one would be late Q1, early Q2. We have some stuff that we're working on, which you'll be able to hear on the Wednesday episode, kind of the full overview, but we'll be working on that for the first month or so. So let's get into the second

question, Ryan. I'll just read it again. As the converse to your question last week on holding when a stock gets expensive, how long do you wait when a stock remains cheap? I think I have some interesting thoughts here and it first it's different for every company but i think the main thing is it this is where management comes into play because if a stock remains cheap and you haven't seen anything change with the business but management is essentially taking the cash that's coming in and for however they're doing it is just wasting it,

whether it's buying up other companies, just making poor capital allocation decisions, which when the stock is really cheap, it basically means not buying back shares. But if a stock remains consistently cheap for a multi-year period and the company keeps buying back stock,

eventually things will work out. we always come back because this is to the sprouts farmers market example i think dropbox is another similar one here where it was cheap for a long time but if the company is consistently generating cash and buying back stock i don't think there's any problem with holding something that remains cheap for many many years the problem is if you're holding something that's cheap and man you don't don't have that management team kind of in your boat with you it seems you know like most of them out there they're not they're not thinking of the shareholders uh except for themselves yeah it's a really good question so thank you firm returns for uh asking it the

way i like to think about it if you're getting this is cheap is up to beauty is in the eye of the beholder here, which is like, you can qualify cheap as however you please. But the way I think about it is, if something trades at, let's say, a 10% or 15% free cash flow yield, so out of their market cap, they are generating 10% to 15% of it in free cash flow every year. That's cheap to me, by the way. if they are deploying all of that or 90% of that free cash flow to you in the form of either repurchases or dividends, I'm getting my return there. And it might not, especially with the

dividends, it's very clear you're easily getting that money back. With the repurchases, it might not show up for a while, but if I can see that that's going to continue for a long time, I really don't care. I'm going to keep continuing to hold it because it feels like I'm getting my return, even though it's not tangible yet. So as long as they are returning that capital or doing something that I think is intelligent with it, I'm willing to wait for a while. It's when, like Brett said, you start to notice that even though their profit numbers are showing up and it looks cheap based on the profit numbers they report, if that cash is not getting returned to shareholders in some way, or it's not being deployed in what you think is an intelligent manner, then maybe

it's not as cheap as you think it is. That's kind of the problem for me. And I think we see that a lot. I think we've even seen that with Match Group to some extent, where they report free cash flow, but it's not the only number to look at because of the stock-based compensation. So maybe they're getting 60% to 70% of their free cash flow in true owner's type earnings. That's when I think you got to be realistic about all the costs that business has and see how much cash could be returned to you.

And what does management think about that? Do they talk about returning that cash? If a lot of the cash that they generate could be returned, or a lot of their market cap could be returned to you, I think it's worth holding as long as management said they're going to do it. So I'm willing to wait, like Brett said, depends largely on management. I agree. I don't think there's anything for me to add there. So let's move on to another question. We got one from Mark. Oh, Ryan. I'll just add one more. Just because it was cheap when you underwrote it or just because it was cheap when you bought it does not mean it's going to be that cheap forever. If you start to see a decline in earnings or even what you believe is the earnings power

of the business, it might get more expensive over time despite the price not moving. So I think it's important to kind of keep updating your expectations for the business as well. That's true. That's true. Okay. Mark USA here. Hey, guys, thanks for all the stuff this year.

It has been terrific. I appreciate it. And we have some great ways to even improve on it in 2024. Can you give a 2023 scorecard to Nelnet? Disappointing for it to be down year to date. Is your confidence still strong going into 2024? I should say, full disclosure, still my largest position. And it probably will remain that unless, as I'm sure the long-term listeners know,

there's three things that matter to me is it cheap uh is the business high quality and is management high integrity i think it remains the same for nelnet the problem is i think in 2023 they are affected by interest rates at least slightly they have some hedges in there on the on the asset management business um which is basically just their student loan book and they definitely face that headwind but i think they got tossed into the bucket of companies that were affected negatively by rapidly raising interest rates. But if we look at their earnings this year,

they still generated a profit. And with interest rates, hopefully, just plateauing here from the Federal Reserve, I think that headwind will abate. And if we look at the other businesses, student loan servicing, it's fine. I know there's an article every week of people complaining about it.

But look, that doesn't mean it's a bad business. It's a solid business. That's kind of locked in as their earnings power. The education technology, or excuse me, education, software, and payments business continues to grow. And I'm sure that's generating lots of cash and they're reinvesting into that. They still have the huddle stake. There is, what am I forgetting, the Nelnet Bank seems to be doing well. I'm forgetting some of the other stuff.

But once the annual letter comes out in February or so, I think they release that right around when they do their Q4 earnings, which will be in February. We'll get an update. They're very frank about how the year went and their long-term plans and what worked and what didn't in 2023, or excuse me, in any year prior. So I'd read that. We'll get an update then, and I'm sure we're going to do an update on the podcast. but ryan anything to add because i don't think i've changed my opinion much and i i think this frankly the stock is quite cheap right now no i i'd say maybe i'm a little more i'm a little less optimistic than i was this time last year just purely because we haven't gotten

that much killer on the solar business which is where they're allocating a lot of the cash flow from their loan book. So like Brett said, this is one where they don't give out that much color until the annual letter. So I really hope that they provide some information on that and kind of how that's progressing. The other thing that's important to, I think, remember is that if you go back and you read the early Berkshire letters, and I'm not saying this is early Berkshire. But when you have a smaller set of businesses, and even today, there are years when the businesses themselves just don't have a good year. I mean, they could be making good capital allocation decisions at the executive level, and those aren't going to bear fruit for

a while. But the big operating businesses, they might have a down year. Student loan servicing had a down year because frankly, they had a lot of employees and a lot of people weren't paying back their loans because of the moratorium so hopefully that changes next year but when you go back and you read some of those berkshire letters buffett sometimes would just be like this business did not perform to expectations and that didn't hurt the long-term returns they have to make decisions coming out of that but you just kind of have to be willing to wait and be patient with those situations because these are i mean like it's not google like they're they're going to be years when they can't grow at will they have to you kind of have to wait you have to

wait for that cash flow to come in you have to wait for uh don lap and uh what's his name nordic to kind of deploy it where they see best fit so um yeah i'd say not the best year a little underwhelming wish we would have got more context on the solar business and some of the businesses didn't perform as great as i would have thought but i have no plans to sell anytime soon because i think you really have to look at this with a long-term horizon because that's the same way the management team looks at it yeah and if you're not just talking to ryan here for anyone that owns it if you're looking for lots of disclosures and updates this is the wrong business for you to own uh but i think that's it we'll probably do something more comprehensive

once we get the full year numbers because on the annual letter that's when they give the most disclosures since they don't do conference calls but i want to hit one more we got from twitter this morning and then i think we have some others in the chat here but it is oh yeah i got two of them okay it's from cardio capital nice little pseudonym there first one at present valuations if you had to where would you put your next one dollar to work well i will say last week i did buy something and it was coupon and i would go listen to the podcast we had on that going over the potentials and whatever we you know we try to be we're not going to pretend we're not very bullish on something but we do try to go for a full

comprehensive thing we're not just going to say something is a buy and we we can talk an hour on that on that podcast that we did back i believe september august but yeah that's the one that i like the most at the moment and i think that's the one as i mentioned earlier with the personal account we get some money coming in say every month as i try to do things like that that's the one i'm buying for the time being yeah i actually um as we've kind of been moving money over from the fund to our personal accounts the i haven't really had i didn't just do it as like one big buy everything at the same time we kind of talked about this earlier where i'm buying like individual stocks kind of averaging into them so but a big chunk now on that but one of our

smaller caps which i don't really want to talk about and then bought coupon last week as well when it traded down on the uh farfetch news so bought about that one as well and i think given the valuation today i would probably if i had a new dollar it'd probably go to that same spot so i uh i to answer the question yeah i think coupon would be my first pick uh but there's a lot of options out there i'm seeing tons of questions flood in here so this guy had another one uh i think it'll be easy to ask it's more on the broader watch list type of things what are one to two companies that remain high on your watch list that would be easy additions evaluations were more favorable i have two that come to mind right away and it's because they're two that i'm frustrated

uh have not remained cheap in december but they i think were extremely cheap in october and that is american express and adyen i think those are two that remain high on my watch list american express is up there for me i'd say amazon that was one that i've told myself i'm not going to do this anymore but i'm thinking about just biting the bullet just inching in at current valuations even though i don't think it's as attractive as it's been over the last year but it just feels like such an advantaged model and i constantly think about what are some businesses that have moats that will be bigger in five years and amazon's one of the first ones that come to mind so i i amazon would probably that's pretty high on my watch list

and i would love for some something terrible some terrible news that people overlook and where people read too much into and we buy it that'd be great yeah that was the start of this year hey you know we took advantage we took advantage um but yeah it would be nice to just continue holding from that price but that's you know not how it works sometimes i will say a little teaser for the nice interview discussion we had this week with justin ruiz and brad lyons from bwg strategy we did an hour plus long discussion on the changing landscape in advertising technology and were did it get you more bullish on amazon's advertising potential yeah just because they have so much first-party data which is something that our two interviewees

talked at length about is the advantage of first-party data as we move into this cookie world so yeah it it makes a ton of sense that they would be pretty advantaged in that way and for some people it is their search engine like not search engine but it's where they do their search queries is directly on amazon and we're seeing so many different mediums pop up where they can kind of drive ad revenue that i think they're in a good spot so i imagine ad revenue will continue to grow and it's basically i'm guessing like 80 or 90 margin i mean they build the ad inventory slots they got to pay pay developers to do that but on the on the actual amazon website i mean there's pretty much zero incremental cost today to have

an advertiser pay for sponsored listing or a promoted placement or whatever yep yep i agree i agree nothing to add there all right what do we want we hit the nelnet one what was the next one the banking one right let me just read that off yeah disclosure okay you go you read it off you read off i was also gonna say that tyler says he tried to review the podcast today on apple it does take a while to show up and he didn't have any questions on it so not a big deal but appreciate the uh appreciate the review he says what do you guys think banking looks like in five years do you think jp morgan eats all the small branch banks and the only other banks are neobanks like ally and nelnet i would why don't i start by passing this to brett while i think of my answer

i think there is a lot of opportunity well i don't know if there's a lot of opportunity but i like looking at the banking sector outside of the mega banks because i think there's going to be a bit of a kind of the opposite of here or well yeah he mentions okay the key here is JP Morgan eats all the small branch banks, so to say the physical ones. I don't necessarily think that is going to happen because there is an advantage of being a local bank for business purposes. But I do think they're going to probably struggle to grow. I don't have any other hot take about that, but I think the neobanks, look, they're just attracting more deposits. So if they're smart with it, like we think they are over at Ally, SoFi is one that attracts a lot of deposits, but I think it's unclear whether they're being smart with their loans.

Look, they're attracting deposits, and that's the key starting point to building a banking business. It's a tough one, obviously, because predicting what some industry or sector will look like five years from now is not an easy task. But I think five years from now, the neobanks are bigger. That's the one thing I'd be confident about. The ones that don't have, because branches for individuals are currently have no use. They have no use to me. They have no use to Ryan. They have no use to anyone under the age of 40.

And I think that they will continue to grow because they don't have the overhead costs. And that is an advantage for them. yeah it's the physical branches are becoming less and less important to people i will say i had to get a cashier's check recently for a property owner who refused to use technology which was frustrating but those are situations when it's nice to have a brain a branch that you easily show up to i see it being i see them attracting more deposits but i don't think the customers will leave the regional banks so from my situation for example i think i'm going to end up using ally or uh probably not so far but one of the neobanks

that offers you a high savings rate and i'm going to use it simply just to for the cash i have that that I don't think I'm going to need almost as a proxy to bonds. Maybe I'll just end up putting it in like treasuries with the Schwab or something. But the deposits will go out of my regional bank that I use, but I'll remain a customer there. Like I'll always have that if I need, because there are edge cases when it's helpful to have that branch to go to. Same with me with Bank of America.

I think that's essentially that you could think of those as the same banks in this regards from our just basic checking account perspective. There's no difference. but here's the thing i keep coming back to is i have been saying that for four years i don't know if i were will ever actually go through the hassle of transferring the money out changing which bank income streams go into like there there is friction and annoyances with switching banks which when i don't really use it for like earning interest because i mean the money that's in my bank account i'm not really thinking about as an investment the

it's almost like why bother so and i think a lot of the big banks jp morgan bank of america that is like it's so there's so much friction to switching that there's just really no point for a lot of people so or it's just cumbersome and kind of annoying so i i i would say i'm here Let me have some pushback there. So I'm at Bank of America for my first checking account I've had. And it pays very, very low interest. And most of the savings goes to the investment type accounts, which, again, used to be personal and the fund.

But now it's just going to be the personal account, the Roth IRA. But I was not happy with the interest rate they're paying on that. And I decided to look at the American Express checking account because I remember after researching that company, they were trying to get into this and push that more for whatever their business needs. And I got to say, it took me approximately five minutes to transfer the money over. Do you transfer it every time money comes in? Does money still go to your Bank of America and then you move it over? Yeah, and that'll take about 10 seconds. Really?

Yeah, and they pay a much higher interest rate. That's the only reason it's over there, is they pay a much higher interest rate. Five years from now, Bank of America, J.P. Morgan, Wells Fargo, do you think their deposits will be higher or lower than they are today? Higher, higher, just because inflation. Yeah. But I don't know why you buy these, though, unless they get it really, really cheap

because they're just going to grow out of the small. Maybe they're safe. I guess they're safe, but they're just going to grow at a slow rate for a long period of time. Yeah, I mean, with J.P. Morgan, there's the investment banking side that grows quite quickly over time,

and it's really well run. the loan book is seems to be i think they've done a phenomenal job managing themselves with a lot ever since diamond stepped in let's look at uh i would be surprised if they didn't if they grew low single digits book value per share i think they've got a good chance to grow high single digits maybe double digits let's uh well i think why don't we just do a total return versus the S&P? I don't know the answer to this yet, so it's not going to be trying to dunk on Ryan. I could be dunking on myself here.

Let's take up J.P. Morgan. This is total. We're in the max versus the S&P? Yeah. I guess we're doing max. I don't know what the answer is. Back to 1993. What year

do you want to go from? Since Diamond took over. Okay. All right. What was that? How about you answer another question while i research before the financial crisis i think that was like i'm pretty sure it was early 2000s all right well i'm gonna figure that i'm gonna do the math on this and then okay let me take some of these other ones yeah um given the similarity to sprouts farmers market are you guys interested in kroger post the albertsons acquisition i would say no i don't

think Kroger and Sprouts are really that similar. To me, something that's valuable about Sprouts is it's pretty niche in the customers they serve, which means it's probably not going to catch on everywhere, but it's why they're able to have 35% plus gross margins while the Kroger's of the world have 25% gross margins. And a lot of that trickles through to the operating income line. So I think I like sprouts. I don't know if I like grocery in general, but I do like sprouts because they are differentiated. They play into the whole diet specific customer demographic, which is, you know, the increasing amount of people that are either vegan or vegetarian or have some sort of dietary specification. they that seems to be growing that that population seems to be growing and sprouts has been there to really kind of serve that demographic and do so at a significantly higher margin than a lot of other peers so i think sprouts was kind of an edge case i wouldn't say that i love grocery in general

yeah the one thing that's good about grocery is durability everyone's got to get food and at the right price, you know, a durable business that generates cash is a pretty easy buy. But yes, I think it's much, much different than Kroger and Albertsons. I would go to, if you live near all of these, go to a Kroger or an Albertsons type store. I'm sure they're, they're at every area. So go to one of those, go to a Sprouts and then go to Trader Joe's and tell me which companies you'd want to own. I mean, seriously, people enjoy going to Trader Joe's and Sprouts farmer's market and it is a terrible experience at a kroger store and i think that look that it's not the end that's not the end of the world but kroger and albersons is just not something i'd

want to buy maybe the merger are but i don't see why they're going to do well at all i love this last question from will arnold because it it's about something we wanted i wanted to talk about Anyways, you posed a question. Well, first of all, do you have the answer to? Yes, I do. And you're going to like it. So January 1st, 2006. So pre-GFC.

So we're even hitting that there. Total shareholder return, J.P. Morgan, 587%. S&P 500, 441%. So I'd say pretty good results for a mega cap, sort of. Well, I guess large cap at the start there. Can't really expect too much outperformance. So maybe that slight outperformance continues, but I don't think you're going to get much better than that over the next decades, but no reason to sell, I guess.

You asked this week via tweet, what is the best signal you can get that a management team is high quality? Conversely, what is the best signal you can get that they're low quality? And there's a lot of good answers. Most of them, basically, high quality was around honesty, stating targets and hitting them, being just candid on conference calls. The signal thing for high quality is probably the toughest. With low quality, it's pretty simple. They pay attention to shorts.

if they get paid really well when the business isn't improving um if they i don't know there's a bunch of things for me that are just giant red flags now look at that you see that okay anyway the uh uh what was i supposed to see i wasn't even looking i'm looking at our list of our watch list i got some zoom update and uh whenever i do a thumbs up on the screen there's like a bubble that pops up with a thumbs up anyway anyway okay and so we have a question from will arnold that relates to that right yeah he asked who are your personal top five management teams that you've researched interested how management teams you praised before such as autozone coupon netflix add in and airbnb stack up when i was looking through

what are the kind of like the highest best signal for a high quality type management team i could not help but come back to AutoZone. There was something about, and this is a hill I think I'm going to die on. Midwest management teams are better than other management teams. It's the honesty, the rationality, the very candid nature that they have that makes me feel like, okay, if there's problems with the business, they're going to be honest about it. How do they deal with hard questions there was a question on the auto zone call which was like you know you guys are losing share but what's going wrong and he's like well you know i'm not sure i you know that's a tough question i'm not sure that's exactly how i put it but you know i appreciate it anyways and

it's like there's times when analysts ask tough questions and the ceo if it's a bad ceo or one that doesn't want to deal with it we'll just shut it down evade the question and probably not come back to them ever again on conference calls. So I really like the way AutoZone's management team conducts their business, handles analysts, handles tough questions, and really just actually cares about the business itself beyond just being a conduit between the company and investors yeah i agree and he said he mentioned the question some of the ones we praised in the past are probably this year even autozone coupon netflix addy and airbnb yeah i think all of those management teams now some people don't like airbnb's management because the guy is a bit

eccentric but i think his track record is quite strong and he is honest when things aren't going well for them. And I think that's a good barometer for all of these. They talk pretty frankly about what's working and what's not, and they're going to lay out their long-term plan. They're not going to talk in weird braggadocious, like, I don't know. They just focus on what matters. They talk to investors about what matters. They talk clearly to investors. They're not trying to use fake terms, although Coupang isn't a just to deep it's a culprit but that's okay the

other companies I would say I'm rolling through can I just have a big file of notes I take on when we do any research and then there's quite a few that are bad you know we got Tumia in here we got Fubo, Farfetch

first of all it helps when it helps when the business is good because when the business is good you don't have as much to lie about you don't have as much to make up for as an executive so when you have a truly good business it's a little easier to be a good executive the other thing here american express was solid i like their new team a lot yeah you know i like executives in the financials area generally that's kind of a not all of them but i found that with the financials companies, they understand the drivers of investments a little better than some of the

tech executives. And maybe it's just because they're dealing with it on a regular basis, especially companies that have an investment banking arm or something like that. But the executive or the skill set that's required to run a coupon or an Adyen or an Airbnb is different than the kind of executive I'd want running an AutoZone or an O'Reilly's or a Discover or something like that. It, I think you need really, it's a different kind of manager, someone who's like, if you're Airbnb, you need someone who's innovative.

AutoZone, you don't really need anyone that's that innovative. You need someone that knows how to take care of their, their existing customer and has known the business for a long time. I think it's different types of quality. So it's hard to rank those two against each other because like, I don't think the CEO of AutoZone would do a very good job at the helm of Airbnb and vice versa. So,

but they can both be very good for their respective businesses. Yeah. I'm rolling through the notes again. Ninja, I think he's good people don't like him uh Ryanair I think is quite high quality let's see quite a few bad ones Sprouts Farmers Market I think is high quality as well wow I mean you can see why we get frustrated because a lot of these management teams I mean my gosh well one of the i mean a lot of management there's six that i like

a lot of the management teams are not like they aren't significant shareholders maybe they are in some ways but typically it's probably through gifting of options and it's earned based on metrics that don't matter so one of the best ways to alleviate situations like that is just to have someone who owns a big chunk of stock and that's fair yeah you know it's hard to find those situations but coupon is a great example of this where bomb suit kim even though they do the adjusted ebitda stuff it doesn't matter to him and he knows that because he owns 75 percent of I think it's like 75% of the stock where all he cares about is the long-term and they make investments today that are going to bear fruit way down the road because they, you know, that's

what's going to ultimately matter to him. So obviously, yeah, if you can find a, if you can find a owner operator, that's kind of the ideal situation. Yeah, that's true. That's true. Okay. We've got another question. Maybe we got a couple of minutes. This could be a fun one to end on because it's the macro. It's always fun to talk about from fake alias here. End of 2023 run mostly based on anticipated rate cuts. So I think he's talking about this December rally. And then his question is,

thoughts on if inflation just hovers over 2.5% for an extended period and cuts just stay the same for most of 2024. I'd maybe ask for a follow-up here because I think you're saying that interest rates stay flat and don't come down? After the cuts

I think is what he's trying to say after the cuts that they've said they're going to make to like 4% or 3.5% yeah do the interest rates not change in that scenario I think housing prices housing is not a good investment I think

like it stagnates kind of on a real basis they might go up nominally that would be my take because he says it rates no matter what happens to rates no matter what happens to rates no i thanks housing the script well no if they go to zero it'll probably be a good investment again but i mean the math still won't work there for a lot of people from an affordability perspective i think on a real basis which we've seen because a real basis housing prices are down the um it's just

gonna like people are gonna start there's gonna be a normalization in buying and selling and unless we get a lot of immigration it's just not really gonna work unless interest rates go down a lot because of the leverage in in housing obviously certain areas certain areas will do well as always but on a whole i think it would just make it really really tough and i'll be interested to know about that but i think the financials do well in this scenario some financials but a lot of that i think it's priced in yeah it feels like a lot of that has been priced in over the last month i'd say that if if we don't get further rate cuts in 2024 i imagine that the nasdaq will not perform great it feels like a lot of those have traded up

based on the assumption that rate cuts will continue as of late so all in all i think it would it would not do so well yeah i will say these are impossible questions that we everyone almost always gets wrong and you should not listen to economists because while they're smart people we would do just as bad as them it's just an impossible job to have the yeah the only thing is would you rather own i think you're meeting some of the smaller nasdaq companies but would you rather own amazon and google or in a high interest rate environment or would you rather own companies with really low quality balance sheets because i want to avoid if interest rates stay high you want to avoid that the number the number

one thing is to avoid companies whose balance sheets are we're not great in low interest rate environments and are going to have to refinance because a lot of that's going to come due over the next couple years and the refinancing is going to be huge for some of these companies i think cruise lines specifically that kept me and it's not a good business in general but yeah there's a lot like i mean i think the commercial real estate gets really rough but again these are all speculations and not how i invest i look for a couple of companies that i think uh uh have any sort of advantage but ryan what what are your thoughts on that well i think it was a leading question i i don't i'm not sure it's ever the best time to invest in the companies

with really low-quality balance sheets, but the... True, true. I don't know. I mean, if you look at the NASDAQ today, it's more... The bulk of it is Apple, Microsoft, and almost Tesla and NVIDIA now still, right? They outweigh Meta, Google, and Amazon. Yeah, I know.

Those ones still seem fairly cheap. I get what you mean. Are you going to get better returns if, say, 10-year treasury goes back to 5%? Would you get better returns earning that or big tech at 30 to 35 times earnings? The reason I say this is that the low-quality balance sheets, if inflation is high, interest rates are high, yes. You probably want the companies that are going to weather it no matter what. However, I think the stock prices have reflected that now, where the low-quality balance sheets that survive are going to give you better returns, most likely, in a shorter time frame. So that's why I say it seems like a lot of these have – the prices have now just reflected that rate cuts are going to be this consistent thing.

I don't know. I really hate talking about rates, and it feels like we've been doing it nonstop for the last year. Well, people ask about it. Yeah, I think we're better than most shows. Where we talk about maybe for a little bit, but it's just a little tease at the end. And I will say, you mentioned that a lot of that has been priced in, but the perceived low-quality balance sheets

that are perceived to be in trouble but you think aren't, is where the opportunity might lie. And that's, I'll say, why we liked Ally Financial in the spring and the summer. That's a good example there. I think that's 61 minutes. All right. Well, let's get through the disclosure here. Thank you, I guess, everyone who asked questions. I think it was a good end of year show. We're going to do our 2024 launch show. I don't know what we're going to call it. We'll come up with a fun title. Always got to get a little tease there for the listeners. But let's hit the disclosure. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan, I, and any podcast guests may own securities discussed in this podcast, may have owned them in the past, and may buy, sell, or hold them in the future.

if you like the show give us a review on apple podcast or spotify that is the best way to help us grow and if you like it as well tell someone about it share it share with somebody you think would like this podcast all right thank you everyone for all the questions and we will see you next week You