Chit Chat Stocks - Power Hour #12: Thoughts on $POSH, Juul FDA ban, Investing in Homebuilders

Episode Date: June 26, 2022

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Restrictions apply. Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chitchat Money by Ryan or Brett or any other podcast guest is not

formal advice or recommendation. Now, please enjoy this episode. All right, this is the CCM Investing Power Hour number 12. We're getting rolling with a lot of these. They're very, very fun. But the only rule is you have no preparation when you join. So yeah, we have nothing on the docket and we're going to see what gets rolling. My name is Brett Schaefer and Ryan Henderson is joining as always.

Ryan, how are you feeling about, I hate asking this question, but it seems like a boring week in the markets, earnings season's over, Fed stuff's kind of eh for now. We had the Fed hike last week, I believe, and now it's just kind of a bunch of talk. Calm before the storm. yeah it seems like there's always a fed official talking or someone talking every day and it's kind of the same old stuff right now we gotta wait till next earnings season to see what the true impact is yeah i i don't know maybe there'll be some sort of just random sporadic action there's always news that pops up i always get a little antsy whenever it's like too calm

like what's about to happen because those periods seem to not last for very long but i don't know it's kind of fun to not be thinking about stocks 24 7 sometimes no that's exactly right you have to you have to have some other hobbies even if investing is a hobby you got to have some other things whether it's going to the gym uh i don't even even simple things you got you got to mix it up or else you're just going to burn yourself out agreed the uh we do want to i'll say this now if you're listening to this on the podcast we go live every thursday at 12 o'clock pacific time three o'clock eastern time so when you hear us like typing and trying to figure everything out and then you hear like background noise that's us trying to go live

so we apologize to the podcast listeners i don't think it's i don't think it's too bad but yes the first few minutes is kind of the the scramble to set things up um yeah i don't know i'll look through some of my likes on twitter see if there's anything interesting before we get anyone joining uh to ask any questions last week we had plenty of questions the uh i don't know i've been it has been kind of a quiet period but i've been getting a lot of like individual company research done like it feels like and it's kind of it's more rewarding now than it used to be because you get to the end of like i usually wait till valuation last and i would get to the end And I'd be like, wow, I like this business. It's got some promise. It's like the valuation was so ridiculous for the longest time that you couldn't do anything with it. And it wasn't even, some were so ridiculous. I was like, all right, I'm not even going to put it on the watch list right now, even though I should have.

But now it's like you get to the end of your research. You're like, okay, I can make the numbers work here. I could see how this would – I could see not only how this would work out as a good investment, but how does it fare against my current – the other opportunities that I have. So it just feels like a better time to be researching stocks. I know that's kind of a cliche. I hear people say it's a stock picker's market, but it's more fun for stock pickers in this kind of market, even though it doesn't feel like it. Does that kind of make sense?

No, that does make sense. It's more fun to not look at stuff and say, oh, wow, that's trading at 45 times cash flow or heck, 40 times sales, which is what you had some stuff last year. what's you probably can't share anything if you've been researching stuff we own but anything any notable stocks you've been researching on your mind maybe can ask a few questions on stuff that's piqued my interest lately i'm still hung up kind of on poshmark i was looking at that used clothing sales during the Great Recession or the Great Financial Crisis. And the used market saw a great increase in sales during that time.

And they interviewed a lot of used goods sellers. And they're like, yeah, we know it's a tough time for a lot of people, but our industry is doing great. and that to me like you've got Poshmark who I'm going to get the numbers probably roughly right I think 60% of their market cap is currently in cash they generate positive cash flow I don't think it's a perfect user experience far from it but people can buy used clothing on there And they continue to grow their user base. So my thought is even if they have negligible cash flow, let's say 10 to 20 million over a year, they could literally take out half of their stock and still be self-sustaining and be trading at a decent multiple. So it's like, I don't know, that's something I'm keeping an eye on. I don't think they'd be that prone in a recession to some sort of a demand downturn.

Okay, I have three questions then. So you're saying it's potential for it to be counter cyclical. Is that true? Not really affected by any sort of recession, inflationary pressures on consumers, stuff like that? I've been trying to think through that. That's my gut reaction, would be more people would be inclined to buy used goods instead of new goods. Some of the data points from the Great Recession support that, but a lot of that was not e-commerce transactions. A lot of the shipping costs on Poshmark greatly increased the cost of these items. And it isn't Amazon. You're not getting

your shipping for free. It's kind of a pain, that part. And so I don't know. I would think that it's counter-cyclical. Okay. Second question, do they have a buyback program with all that cash? It seems like a strange situation. No, they haven't. From everything I've seen, they don't have a buyback program. And some big investor came out recently with a letter that said, basically, please buy back your stock. I think the CEO owns a lot of the company, a lot of the voting power. So it might not be a situation where outside investors can have great influence. But the stock jumped after that letter was sent and I still haven't seen anything. It seems like a no-brainer. And it honestly is a bit of a red

flag that they aren't, not in the sense that whatever management's capital allocation is poor, but in the sense that they think they might need that cash despite them generating cash flow over the last 12 months. It's either a negative, like they're going to need the cash and the business isn't as healthy as maybe investors are thinking, or their capital allocation skills might not be the best. Both are not good. All right. Here's the last question I have from Poshmark until we get on to another topic. Have you tried the app? I have not transacted, but I've explored and I've thought about buying some goods. I don't buy clothes off. And I know you've tried it from the seller's perspective, right?

I did. Yeah. As a little bit of anecdotal evidence had something I wanted to get rid of, not the best experience. Um, I ended up going to Craigslist. It's a bit spammy and it wasn't the best user experience. I had to turn off notifications actually, because they were coming every 10 minutes, which was a terrible user experience. so i just said all right i'm shut it down i tried to sell something for like 25 bucks and i would have had to go to the post office figure all that out get the you know the label send it off to the person and then there's the take rate and there's the shipping costs and i would have netted i don't know 15 bucks or something like that and i was thinking it's not really worth it but i'm not the core audience and they clearly have people transacting on there i just first impressions from spending a little bit of time on there the experience could be so so much better yeah you're probably right i think they are more trying to cater to sellers that are

like like fashionistas almost like they are like they have like a social following so me right yeah so you exactly and so there's like people those kind of people that are getting rid of stuff in their closet like they can sell to their audience um a few other things that i saw or one that i'm kind of interested in is the joint corp this is going to be this is a shameless plug to our our own podcast next week yeah next week we interviewed a uh a portfolio manager who runs basically his own fund. I believe some other people might work at the company, but he's owned the joint corp in size

and it's basically this chiropractic franchise that's done really, really well in terms of growing their store count and their same store sales. And it's an industry that is just completely overlooked and it trades at a reasonable price. So that's one that actually, sometimes we get those on our deep dive shows,

if you're not familiar listeners on our deep dive shows, we basically get investors that come on and it's not necessarily a pitch, but we invite them on to discuss a certain stock. Sometimes it kind of feels like a pitch. It's a pitch if they want it to be. Yeah. And occasionally on those, I will come away saying like, all right, that was a great pitch and I'm almost like sold on it. And usually it takes a while for me to sort of internalize the idea but i would say joint corp was one of those where it's something that automatically went on the watch list and i'm gonna like actually keep reading on it yeah yeah it was like typically i shy away from um retail concepts just because of the risks of there's a lot of risks they can't

control on their return on invested capital given you know supply costs blah blah blah labor costs all that stuff but the joint corp it's even though they're trying to you know grow locations a lot and some of it's a franchise model um it seemed fairly asset light because as a chiropractor you don't need much besides a small amount of equipment the tables and the locations don't have to be that large so yeah the way he laid it out it's very interesting concept that one is definitely on my watch list to research for sure. Here's a question though.

Wait, I've got one. All right. Is it about Joint Corp? Because I've got two more things. Oh, yeah. Stay on the Joint Corp and then we can move to another one. Okay. It's not on the Joint Corp, but the other two things I was going to say. Roku, Ted Sarandos, I think he's either the co-CEO or CEO

now of Netflix, shot down the idea of the Roku acquisition. He said he's not sure where those rumors got started. So we did an episode on that a while back. Not an episode, but we kind of talked about it on one of these power hours. Sounds like it's not going to happen. That's a bummer. That was on my list of acquisitions I want to see. They also said, we don't need it, which that's kind of a bummer as someone who's fairly optimistic about Roku's business, but it's kind of a humbling moment. And then the other one.

This episode is brought to you by KPMG. As a business leader, how can you innovate, build trust and move forward in a digital era kpmg can help by bringing together the right talent and technologies generating insights that spark opportunities to explore their thinking visit reed.kpmg.us opportunities jewel oh yeah i mean let's talk about that uh why don't we talk about that right now yeah what so that it's getting banned permanently like they're gonna to be out of stores yeah and they just i think ordered people to stop selling so you can't you can vape other uh stuff right you can vape those chinese knockoffs that look terrible that some of my friends use uh but you can't use jewel uh and you can't smoke cigarettes if you're over the age

of what 18 or 21 i can't remember what age is this so confounding uh thing there we used an Altra, so I know it fairly well, which is the company that owns a giant stake in Juul. Stock got totally hit, but... Giant stake, but a diminishing giant stake. The stake stays the same. The value of that stake has

decreased by like 90... Well, I guess it's going to be 100% here soon. It will be 100%. Yeah, it's going to be 100%. Yeah, I think they bought in like $10 billion for something 30-40% stake. Those are rough numbers and it was valued at like $1.5 billion.

so it was already valued way way less and such a small part of the business it's not even part of the operating revenues is that the worst capital allocation decision in the history of the tobacco industry oh i don't know the history well enough but since 2000 you gotta say yeah um right i mean there can't be anything worse and it's not even tobacco nicotine industry just to be clarified Yeah. They did. They essentially, what was it? $10 billion is how much they put in. Something like that. I think it was higher, but I just wanted to say $10 billion because I don't have the numbers in front of me. Yeah. Basically incinerated that cash.

Yep. And they took out debt to do it, which they have leverage, which is fine because their cash flows are pretty steady. but they could have used that leverage low, low cost debt to buy back stock, really juice their free cashflow per share, reduce their dividend liabilities, all that good stuff that they're still doing right now. And the stock doesn't, I mean, I think the stocks are like an eight and a half percent dividend yield. If you believe that tobacco is, I know a lot of people just ignore tobacco in general i don't mind that but if you believe that the industry is even stable like eight and a half percent yield with nicotine powders growing uh i don't know it's here's my thing it was at an eight and a half percent yield two years ago

So that 8.5% yield is different than today's 8.5% yield. I liked that a lot more than opportunity cost. I think I can underwrite to the return that we would get with Altria or investors would get with Altria. I can underwrite that more comfortably and a lot more other investments now than I could then. That, to me, just it still doesn't quite excite me enough. I know it's that the cigarette business that they have is probably going to be stable. And I think about this a lot. Like, what do you do from a regulatory standpoint? People will find a way to get nicotine. if they're yeah if they're addicted yes and there's the i guess i i think the rule on lowering the nicotine uh content is probably smart just because it it'll be easier for people to quit if you know what i mean but i just do not understand the banning of jewel if the goal

is harm reduction if you're gonna ban something why not ban cigarettes am i crazy i read the fda ruling and it wasn't that they have recognized any harmful effects yet but jewel was unable to determine all the possible risks associated with their product like they weren't able to give enough sense of surety i guess i can't imagine cigarettes are that much better but well i can give you some assurances that cigarettes are pretty bad um because i they've killed millions of people and nicotinas or these jewels have killed i i think it rounds down to zero really on a percentage basis yeah i don't think well i wouldn't give jewel the benefit of the doubt in terms of harm to users because I just don't know if it's been around

long enough for us to see some of the long-term impacts. And that's probably a lot of what the FDA was concerned about. The first thing I thought when I saw this was why on earth did Swedish match have to go and sell itself. If all those people jeweling, which I don't think jewels were that popular anymore anyways. No, that's incorrect. Numbers tell a different story. Still number one. In the e-cigarette category? Yeah, I believe so. Does that include disposables though? Because disposables seem to be the primary consumption. All the numbers I saw did not include disposables and those seem to be among people I know that do it.

No, but I've seen a lot of older people, they don't use disposables. I bet if we went and asked someone that's running the counter at a convenience store right now, whether he sells more Juul pods or disposables, the answer would be disposables. That's fair. I don't know the answer. I don't know the answer. But either way, there's so many now that I think the industry has largely been commoditized. And Zin, assume all those or even 50% of those e-cigarette jewelers decide to go to a different nicotine substance, it's probably going to be Zin. I mean, it was a goldmine, and it was better for you than those products, than inhaling those things. so way better yeah it just feels so dumb now i wonder if it'll influence the vote

uh i uh yeah it just says um yeah gosh swedish match do you think that will do you think that would have any sort of impact on let's say like management management's thinking around the deal maybe if they see an uptick in material uptick in demand gosh they all i can think of like whenever you know the acquisition with philip morris for swedish match just makes things so messy all i could think of is just keep your just keep your business going as it was and it was just yeah it was just such an easy business to run uh what are the guy that owns one percent of the company. He said that pretty vulgar way of, you know, their private parts got kissed and they didn't know what to do. Um, that is fairly how I would describe it as well. They kind of fell

into this gold mine and they're giving it up so early. I can go on a rant about this on every power hour. Um, I don't know. There's so many moving parts though. We, we don't know the full outcome. There's a lot of different scenarios that can go down. Okay. Macro talk. This isn't really macro talk, but what are your thoughts on home builders? Have you done any research into any of the companies within that sector? We looked at Lenar. We did a non-so-deep dive on them last fall. Since then, nope. I know that there's some different business models. so i would have to understand the basics first but i would have to understand this might be a dumb question but i'd have to understand how housing prices affect margins you know all that

stuff right uh or interest rates how interest rates affect them how how everything fits in together because on the total i don't know i don't know anything about them but we need more houses and that just seems like a simple thesis even if we hit a small cyclical downturn in the next year or so which a lot of people are forecasting and it seems like could happen over the next decade if these companies are trading at like four times their current earnings if you have a good capital allocator at the helm seems like a good opportunity yeah the some of um i mean there's clearly a housing shortage and i always think like whenever i hear people say like real estate prices are going to tank first of all i usually hear that from somebody that wants to like wants to buy a

house and so they're just kind of saying it hoping that by the time they they go to buy it the price drop. If mortgage rates go up from 3% to 10% or prices will drop. Yeah. It will drop, but affordability. I think affordability of most of the housing market will probably stay fairly consistent just because we don't have enough homes. Unless we accelerate that, uh, there's going to be a big acceleration. And again, we're nowhere near experts on this, but just look at the charts it's bad yeah i think inventory aside from april numbers may was like the second lowest in a decade so it like we someone's got to build the homes and i and i see like anecdotal evidence on it all the time with people like just getting like 30 bids on a house or houses being on the

market for like two days like neighbors houses and it's baffling to me and maybe that's maybe that's a part maybe that's a byproduct of how easy it is to find homes now but true it's definitely a factor i don't it's just like every time i see that i think like why i want to go long home builders because there's only one way out of that is building homes. One company that I find kind of interesting, I looked at is DreamFinders Homes. Really good allocator at the helm. Started with a $300,000 loan, I think, or $200,000 loan and built three homes. And now they're doing like 7,000 homes a year. That was like 15 years ago or something like that. So he seems to be really solid. He writes a good shareholder letter and they're asset light. They don't buy the land

until a home is contracted to be built on it. So a lot of the other home builders will buy the giant plots of land, let it sit on the balance sheet, develop the homes, then sell the homes in the process they do just in time land purchases but they buy like option they buy option contracts on with the landowners saying like if we get the home contracted we'll buy it from you kind of thing that to me seems like a very sustainable model and a model that'll work plus i think boston omaha's got that stake in it and they always talk about how much of a great investment that's been for them i like those guys there's an event yeah they can they're partnering up to maybe give themselves a little bit of an advantage for that yeah it's it's interesting

it's not the best industry though in general so that kind of holds me back this seems like there's a lot of other better industries to go put your money in but at any at a certain price some things are you know attractive enough no matter how bad the industry is if you have a good management team so here's the other thing they uh yeah you're right it building a home is hard right now because of labor shortages and all the supply chain stuff i saw some stories of home builders waiting like a year to get a dishwasher shipped in so it's like yeah a lot of friction i mean remember the big apartment building by our office uh that i walked by it every day a year ago they said we'll be open in 2022 but you've seen it the progress on that is

just so slow i think there's just this these bottlenecks that are gonna have to alleviate themselves because this could just be our area of seattle but there's so much works in progress yeah i mean it feels like that's every construction project ever but but if they're yeah true there are delays but with anything home building related the supply chains really kill them one thing that has kind of been a shock to me was homes sold like their growth has kept up with what it was historically and beaten their own guidance i think it's like growing 40 year over year who are you referencing here dream finders homes in the in the market where they've had supply chain issues and labor shortage problems so it's

like i don't know they're doing something right i'm kind of watching it but and the the stock has come down a lot because of well not not a lot but your whole sector has right yeah kind of just because people are suspicious that the performance won't continue. Yeah. And what's interesting is that our solution to the problem seems to be, all right, the Fed's going to hammer interest rates, raise mortgage rates, decrease affordability, and then we will decrease demand. But if people want homes, shouldn't the goal be to increase supply? I just think our incentives, and this is not even, This is going from not an investing topic anymore.

Our incentives seem misaligned when trying to build homes for people, if you kind of get what I mean, where we should be trying to have as much supply, but, you know, a home builders, they got to have some sort of. It's too much NIMBYs. Yeah. Yeah. I guess that is, that is the big, that's part of it. That's part of it. But there's, I think there's other things of just people want their land values to be high.

And I think that just hurts people that are trying to just get a place to stay, if you get what I mean. There's a lot of variation. Yeah, there's also, I was talking to someone, a family friend who runs a real estate business, and they talked about when rates rise quickly, there's usually a disconnect. between the sellers and the buyers, where the sellers were quoted all these prices, whatever, six months ago. And they're not going to take a lower price, even though the buyers are giving lower prices because the mortgage rates are higher on them. Affordability is way too tough. Yeah. And so they're saying, this is the highest price I'll go. But the sellers are like,

well, I was quoted a higher price six months ago. I'm not going to sell for that. So there's kind of a lag in transactions during that period and then eventually the sellers kind of come to grips with the reality of the new prices but it takes time i want to be surprised that's kind of where we're at but the uh this episode is brought to you by la quinta by windham here you are miles from home and ready to start your vacation good thing you're staying at la quinta by windham they have free high-speed wi-fi to stream all your favorite movies and in the morning get fresh waffles with their free bright side breakfast, or squeeze in a workout at their fitness center. Either way, you're ready to conquer the day. Tonight, La Quinta. Tomorrow, you triumph.

Book your stay at LQ.com. The other thing I was going to say was I saw that there's 6 million, I believe unemployment levels in the US are at 6 million people. And there's 11.3 million job openings, I believe. That was the number I saw. Yeah, those will fill. No STEMIs, those will fill. My initial thought was those will fill. Then I started to think deeper. I don't think it's a very good sign that 11.3 million jobs or 6 million people are unwilling to work despite having two job offers on average per person. And I think a lot of that, a lot of those labor shortages are coming in the form of the food industry and a lot of the minimum wage stuff.

So wages are going to have to go up to match that. I mean, again, it seems like I'm just saying simple microeconomics, but if you're not able to fulfill that your supply of need for labor, I got a simple solution for you. You raise wages, your margins are going to get hit, but that's capitalism working in a positive direction, right? People have the freedom to not do it unless they get the proper wage. Yeah. We got a question from Bill in the chat. He says, general portfolio question. I have 25 stocks with roughly an equal weighting with more money to invest, which invest in

highest conviction or existing stocks or start new positions in new stocks. You have a thesis that it's easier theoretically than in practice that all else equal, like let's assume you think the return between an existing position and a new position will be the exact same and you have losses, let's say in the existing position, you should purchase the new position, the outside position, correct? And sell the other one and take the tax right off. There's always a lot of variables here in the specific situation, but it depends on what your goal is. Going into new stocks when you already own 25 can add to your busy work. It can add to complexity. Just tracking all the stocks can be a headache, I think, when you have more than, say, 20 to 25. And once you get into the 20 to 25 range, as long as you're not all in the same sector, say you're not all in energy or something like that, all in banks, the diversification benefits are there if you're equal weight. Now, if you're not equal weight, uh, could be a different story. You might want to rebalance

it there, but I think the question here is what would you invest in highest conviction of existing or starting new positions and new stocks? If you have the 25 you own, if you still think those are, uh, good picks and unless there's any tax loss stuff, which research on your own, talk to someone about that. It's not that difficult, but it's really hard to do when we're not speaking with you directly. I mean, I think the benefits of adding more are not really there. I would just equal weight across your existing portfolio if you still believe in those 25 names. And a lot of the times, going equal weight is better just because it's really hard to decide at a certain moment in time what are the best buys. If you equal weight across it,

Let Diversification do its thing And yeah you'll be right from there It's hard because every situation is unique Yeah And I will say I heard Oswath DeMateron talking about this in the recent

Best podcast he did But he hates the word conviction I think I'm with him on that I think Conviction can kind of give people Like a False false sense of surety, a false sense that your investment will do better because you know the

business better. The business I know the best of the companies I own has probably been the single worst performer nominally for me. So it doesn't actually, knowing it better than the previous ones doesn't actually, or knowing it better than the other ones doesn't actually give you any benefits it doesn't mean you deserve to have good returns and it can make you attach yourself to the company or the stock irrationally yeah i would say though it's you typically do have a better sense of the business when it's in your portfolio than when it's outside all else equal just because it's kind of you can do all the research you want through like prior to owning a new stock, but when it enters your portfolio, actually affects your P&L, you're probably going

to do a little more research and you'll probably learn more about the business as over the lifetime of you owning it. You'll keep track of earnings better, especially, and all the new information that's coming down the line. I think if you've got 25 stocks, equal weight, I'd just stick with that, um, potentially replace your ones where you think the businesses are performing the worst with new stocks where that you think, like, if you, you know, if you want to, if you want to add new ones, I usually say like 25 is probably enough, but, uh, starter positions, if you have a lot of cash, you know, can maybe be different, but if you're going to have 25, that that's enough diversification wise. And you're going to have losers if you invest in 25 stocks. I mean,

if you invest in 10 stocks, you're going to have some losers, probably a few each year where you realize it wasn't there. And you can like, don't be afraid to replace them if you know that it's a loser. Yeah. That's all I got to say. I think a lot of people are afraid to sell something because it has a loss. And I think that's just instinctual for me and all the psychology stuff. We do have a question in the chat from Eric M who says, what do you guys do for work? Well, we do the podcast and we have an investment fund called Arch Capital that we manage together. Um, both are treading, you know, both are startup, you know, not generating right now, but yeah. Um, but those are kind of the two things we do. And then we, we both do some contracting work for another company. You don't want to say we write for the Motley Fool. You don't want to say, yeah, I don't know if they want us to, yeah, I guess we can say it doesn't matter, but just search us. Yeah.

we write for the Motley Fool and that's how we make our living for the time being pretty not bad gig although it is lonely sometimes that's it always contract writers there's our honesty hour for you

Eric M I do I do like the portfolio question though I think it's always portfolio construction is such like you can never do it perfectly right i think people call it an art not a science so the diversification element is probably that's where your margin of safety is going to exist

and i think i know people always say like for 99 of people you should index or have some sort of a diverse set of companies. That's not true. I disagree. 99%? I disagree. 95%, you don't think so? Yeah, maybe 95.

Here's the thing. I think the 5%, I think a lot of the 95% or 99% of people, no one wants to admit they're into the 95% to 99%, but beating the index over time is really, really hard. And so that's always my one tip is have a certain percentage of your wealth that's tied to a diverse index. Sure. But you know what? Buying individual stocks is very fun and rewarding. Yeah, that's true. I don't think it's that big of a deal. Life is too short to index. Yes, that's a great, we did not, someone came up with that, right?

Yeah, I don't know where I heard it, but. I do like that saying life is too short to index. And if you underperform, who cares? You'll be fine if you do like compounding tickets, do its thing for 30 to 40 years. Okay, here's another topic. This is from Bill Brewster's Twitter. He's been sharing some stream by AlphaSense snippets, which they're one of our sponsors. So check them out.

It's great if you are a professional investor. it was talking about the iOS 14 changes. Here's what the experts said. I do not know what they were, but they're within the digital advertising industry. Here's the quote. It wrecked the whole ecosystem, not just Facebook, Facebook, TikTok, Google, everyone has felt it. I've seen businesses go out of business. I've seen multiple companies go under. I've seen agencies go under just because it was such a bold move by Apple's side and it's all fake. All they're doing is keeping the data for themselves to release whatever it is that they're going to release.

It's not about privacy. There is no privacy. That was pretty bold. And I think a lot of people are coming around to that where remember when Meta, Facebook, Google were seen as so evil because of the data privacy stuff, like two, three years ago.

I feel like, and maybe this is the investing bubble, people are realizing that Apple's just doing it to make money. 100%. I, they're doing it from a position of strength though, where they say what they have the reputable brand with consumers and they make the whole thing about privacy. Have you seen the recent advertisement? The recent TV ad?

Your privacy is not going to go to them. It's going to stay with us. Yeah. Yeah. Oh, don't worry. No, it's bad if other people have it, but if we have it, a company that, you know, yeah. Yeah. It's like a commercial where they're auctioning off data.

Yeah. And it's like, I don't, that's so, I've always thought Apple was scumming, but. Yeah. Well, let's get to the, we'll get into the question here, but I just want to say. Did Apple cause the recession? Good question. Was it Apple or the Fed? Think about it.

If Apple is the reason behind ad revenue falling off a cliff. Or ad spend. Not being as effective. Yeah, which I think over time will diminish ad spend. I think they are part of the cause. Yeah. Which in that scenario, as much as I hate to say it, you want to own Apple. Yeah.

I think they're adding a bit of long-term risk to their business model. But in the short run, it's going to be damn profitable. Kudos to Warren. man. Did he see this? I don't know. All right. Well, we got a question here. You want to read it off or you want me to? You go ahead. Lars Thorne says, people often talk about the number of stocks. I think that is the least important question when it comes to diversification, as long as you have at least five to seven. I think five very different companies are more diversified than 25 that are all high growth

tech, for example. Yeah. That's true. That's true. In that scenario, that's right. However, five, you're taking serious terminal risk with five companies. The thing about having the benefits of an index, not only is it, all right, yeah, all 500 companies that are currently in the index could one day fail. They probably will die one day, but they turn over those five or they turn over those 500 and replace. Whereas owning five to seven, if all those fail, the portfolio fails unless you're turning them over as well but i i think the comment is generally correct five diverse set of companies is better than owning a basket all in the same sector all with similar business models and similar valuations so i would yeah i would maybe move it up to 10

just because uh five always single digits scare me a lot of people underestimate yeah a lot of people underestimate what volatility will do to your brain, but the difference, if yes, again, if it's not all oil, if it's not all SaaS stocks at 25 times sales, the difference between 10 and 25, isn't that big a deal? And it's so much easier to keep track of 10 than 25. Now 10 is not very diversified. You are taking some of that risk based on the studies that have been out there, But you have to be ready for more volatility. But yeah, there's a balance. You have to have the right amount of companies.

You can't just bet on one because there's always a chance you could be wrong. And you have to really track the sector diversification as well. I was kind of a concentration truther when I first really got into investing. I saw that quote of diversification is for idiots or whatever. And I was like, well, I'm not an idiot. And I kind of went along with that premise. But someone told me, an analyst that I really respect told me one time, kind of put me in check and said, you can always be wrong.

That's what diversification is for. And I think that's a good principle to have because I think we'll all learn it, that you could know every single thing about the company. The company could trade at a cheap trailing multiple, and you don't know what the future holds for it. So there's always a good chance that you're wrong. That's kind of what diversification hedges. We have another question here from Chucky. He says, going to last week's Power Hour on employee count, do you have any thoughts on using a metric like revenue per employee and watching to see if that grows? That's good.

Yeah, I think I'm going to start tracking that for sure. It's in every annual report, so yeah. Yeah, per employee metrics help. I would say just employee count. Just simplify it and track the employee count. If it's accelerating or decelerating, ask yourself why, maybe do a little investigation because they're adding a lot of employees, that's cost, and they got to get a return on that cost. Also, it's going to show up in increase in operating expenses or increase in payroll, whether that's research and development employees or stock-based compensation to employees, will show up in the profit margins. So you also kind of just track cash flow or cash flow XSBC, and you're going to see how much their costs are increasing because not all employee costs are equal.

Some employees are obviously paid a lot more. So if they have an element of their business that's like, all right, we hired 100 customer support people that are paid hourly, employee count might be increasing quicker, but the cost could still be decreasing as a percentage of revenue. So yes, I guess revenue per employee, if it's a huge outlier, it's worthwhile to look at, but ultimately it'll show up in cash flow or profits. That is true. There are some nuances there. I do think it's interesting to track though, especially if a company is bragging about how much they're growing

or comparing if there are very similar businesses that are also public, comparing the two companies, see who is more efficient on their employee base. We also had a comment from Lars, the guy that said that, made the five to seven example, just to show that there's probably people

that are like, that's crazy. He does say he owns 12 to 18. So just to make sure he doesn't get any bad comments there. That's kind of where I feel like the bread and butter, if you're investing or no, sorry, not the bread and butter sweet spot. If you're investing in individual companies, trying to get a little outperformance, trying to be a little bit concentrated is that 12 to 18 because you get a lot of the diversification benefits, but also some of the non-diversification benefits.

I got a question recently from a friend that asked, and I think a lot of people who are in the investing world have probably gotten this question before. He basically asked, I'm getting a lump sum. When should I put it in to whatever, let's say ETFs or an index? Do you have an answer for that? Because my answer was buy in thirds, like put a third of it in tomorrow put the second third in three weeks from now and the third third in another three weeks from now it depends on their goals depends on their goals the numbers that i believe it was the dollars and data guy nick julie i think is how you pronounce his name said that or ran a study that the majority of the time if you're buying for whatever the long haul say decades in an etf

index majority of the time it's better to just buy now all of it now that's how the numbers say i know people get worried that oh what if the market's about to drop 20 but that is that i don't know how to explain it it's not like you're just smart you're trying to market time at that point and that's almost always futile so and it's not relevant not relevant in the grand scheme of things. Yeah. If it makes you feel better, dollar cost average throughout the whole year, but doing that compared to a lump sum over a 40-year period, it's not going to be that different. And it's simpler to just do a lump sum. But it depends on your goals. It really depends on your goals, what you're investing for. Side note, did you see DocuSign's CEO resigned?

yeah i saw that any reason why i have well it's stocks down probably why honestly that's probably why but i thought they were something with a sales efficiency was terrible stuff like that well there was a lot of sales employee attrition so sales employees were leaving but i don't know if that's like entirely his fault they had a lot of low-hanging fruit during covid and i think a lot of those sales sales whatever salesmen saleswomen um sales people ryan there are i think they were basically acting like almost like customer support instead of sales, where they were getting all these inbounds like, hey, I need whatever, 10 seats for digital signatures.

I'm not sure if that's how they do their billions. But now they have to go out and try to add seats in an environment where there's probably less digital transactions per whatever group than previously. and they're trying to cross-sell these solutions with their agreement cloud-as-a-service stuff, that to me is, I mean, obviously that's going to be a harder job for salespeople. So they're just, I think a lot of them are leaving

and trying to find another place where it's easier to sell. That is a good indicator, though. We've been talking about employee count. But sales people or sales employee attrition is a good barometer for how many people, for how hard it is or customer demand. If they're having a really hard time and they're leaving, that's probably a good sign that maybe billings aren't going to look too hot for the next year. That is true. Yeah. Yeah. And they were just in a pickle because they had more than this, but if they only need 10 sales staff now and they needed 100 during the pandemic just because of the difference in growth dynamics, well, what are you going to do?

You're not going to stick with 10 during the pandemic because that would ruin all your growth. So it's almost an impossible situation, I think. yeah and that's okay that's almost like coinbase where although it seems like they just had too many employees in general nine thousand for a exchange that's really new what were they all doing yeah the problem is the more people you hire the more people you have to hire to manage the people you've hired exactly that's well what's the thing i well what's the thing i I've said to you before, we need all these people to manage all these people. That's, I think what a lot of businesses do. But Coinbase had such an influx of demand with new crypto customers.

Then it basically fell off a cliff. What would you do if you're the CEO? You have to hire to service the demand. Would you just hire and fire? It's tough to fire people, yeah. man, that's what they did. They hired and fired. I think there was some mismanagement along the way, but yeah, I'm coming around to, there was that Munger quote from either this year or maybe two years ago, recent one though, where someone was asking about overvaluations and he was like,

you know, well, he says it more cryptic than me, but he says, I don't, I own stuff that never gets overvalued and I kind of like it. And I think that's actually a good point because when something gets overvalued, it's because there might be inconsistent growth, something really accelerated. If there's any sort of inconsistencies and all that stuff, DocuSign and Coinbase, two examples here, it adds a lot of potential to make a lot of mistakes. And if growth decelerates a ton, you have to make a lot of decisions that are tough. And the companies that just have steady, durable growth seems so much easier to own if you get what i mean or not easier to own easier to manage easier and easier to own here's a question does a good ceo

stop its stock from getting overvalued oh by what selling a bunch of it it's tough i think it's tough because even even the people that try to massage that a lot berkshire hathaway that They got overvalued in what? I forget the year. Was it 98 or something? I think it was. Yeah. I don't think there's anything you can do about the stock getting overvalued, but typically it gets overvalued because the business is seeing a ton of momentum. And if that breaks, there's just some risk there because you have to manage it. Speaking of a soft landing, it's almost like you have to manage it like a soft landing in Fed speak. Like, yeah, it is tough to manage because you can talk it down, but we've seen that not work.

Elon Musk has tried. Well, he did it. He did it pretty tricky. I don't know if I respect it from a shrewdness perspective, but treating his employees, I don't know if I like it. He basically told them all they have to work in the office and was hoping people would quit instead of firing them. No, no, no. I mean, he tried it when he said stock price is too high. Oh, yes. Very blatantly tried it.

Didn't work though. Yeah, that's what I mean. Talking it down, it doesn't always have the effect you want it to have. The other thing you can do is you can issue equity. Now, I guess Tesla's done that on various occasions and they did a good job doing it. Shopify did it. Companies don't do enough though. they don't do enough they don't do enough recently if your stock is so overvalued like a shopify's or a tesla's or maybe i shouldn't say overvalued because don't upset anyone but if it is so premium valued like those have been in the past you gotta take advantage of it if it's just like if your valuation is insane i feel like you just

need to take advantage of it because even if you raise just a shit ton of cash 20 billion in Shopify's case of their $2,200 billion market cap or what it was at one point. If your stock gets to down where it is now, you can just buy it back. I know that's hindsight 2020, but having that work, maybe there wasn't the opportunity to do it,

but I just think companies are like, oh, we're selling high on our stock. We're going to raise some money here. It's a smart move. They never do enough. Do you agree or disagree? Let's say you're running a company. Chitchat Money is a public company. It's growing fast. And everyone in the world tells you how much you're worth. And you peg your intrinsic value at $2 billion. And Forbes, yeah, Forbes, whatever, on the Forbes list, blah, blah, blah.

But the world, the market, tells you you're worth $50 billion. Are you going to move your own intrinsic value? Probably. I don't know if I necessarily believe 200 times sales or whatever it was at, at its peak. I think it was like 60 times. 60 or 70, to be fair. All right, that's a bargain. But I think it's easy to get caught up in the hype cycle.

So I don't necessarily fault them. And they did raise money. Not enough companies did. But Shopify did. So did Tesla. And you know what they did? They just did it sneakily through stock-based compensations oh yeah that is correct that is correct as well yeah

but anyway all right i think we're we're running up on time here so yep ryan's got a whole uh commitment at the molly fool so we gotta get to our regular jobs here um that's gonna do it for this episode thank you all for listening if you want to watch on youtube 12 p.m. Pacific, 3 p.m. Eastern, every Thursday that we can do it, trying to get them every week. If you listen to the show and you like it, give it a review on Spotify or Apple Podcast. It is so easy. It takes you five seconds to do. Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. We are, however, general partners at Arch Capital and clients may hold securities discussed in this podcast. Thank you all for

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