Chit Chat Stocks - Power Hour #7: Rule of 40, Twitter vs. Elon, Debating Disney's Strategy

Episode Date: May 22, 2022

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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. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Okay. This is the CCM Investing Power Hour, the Chit Chat Money Investing Power Hour. We are live on YouTube. I'm going to switch to gallery mode. Excuse me.

In that bug there. There we go. Oh my gosh. Such a pain. We mess this up every time. Wait, wait, wait. The podcast people probably think we are. Okay, there we go. There we go. I think we might want to change the name of the show. And you can talk about what the show is in a second. To Growth Stock Grievance Hour?

Maybe. That's not bad. We'll talk about that offline. All right. Yeah, we're still working out the kinks. Going live on YouTube takes a lot of button clicking in rapid succession. But yeah, this is the CCM Investing Power. I'm here with Ian Gray.

and Ryan Henderson, as always. I guess we'll just go to both of you guys. Ian, first up, how's your week been in the investing world? How are you feeling? It's been an interesting week. It feels like every time I look at my brokerage account, it's either up 5% or down 5% plus. So one of those weeks, but it makes it more exciting, makes it a little more fun. I feel like there's a lot of interesting ideas that I'm kind of flipping over almost every day so um yeah it's it's a good time to be an investor not necessarily the most most uh profitable time but maybe we'll look back on and say it's a profitable time who knows yeah ryan yeah it never feels like a good time but uh i do it's more fun like for sure we

are i swear every company it's no longer like well maybe if this was cut in half i'd consider it it's more like, all right, now you're having to make decisions between do I add a new position or do I add to an existing position? And that's a lot more fun because you're actually weighing your opportunity costs as opposed to just adding to stuff you already have potentially. Yeah. And I think anyone listening, I don't think we have many energy guys in our sphere of the investing world, but they're probably thinking, well, there was that a few months ago when we were all saying everything was expensive, but that's just not what we look at. Any earnings reports you guys looked at this week? I guess maybe if not, if nothing comes to mind, I read

the Target conference call, which I don't know if we have any thoughts on that because the stock totally tanked, but I thought it was a bit of a reaction. They're having inventory problems. They're having inventory buildup and they basically miscalculated that and they're guiding for, I mean, it's positive comps and they're saying that there's been a whole transition from people buying home goods to now buying stuff like luggage. So luggage was up 50% year over year and they just miscalculated a bunch of stuff on that. But the stock totally, I mean, I think it was down like 25% or more, but there's still, the business isn't totally harmed. Ian, did you look at that one at all? I didn't look at that one, but I know that it kind of pulled down a couple of the retail holdings I own. And so I think that's going to be somewhat of a common story as these retail numbers come out, just that people, I think the inventory thing is a real issue.

I think even in the best of times, companies have a hard time with inventory management. It always seems like the thing that will tank, particularly the retail stocks. But I've seen that happen with a number of my holdings over the years. And I think in a time like this, where you've got some supply chain problems on one hand, and then you've got just uncertainty about demand on the other side, it's just a really unpredictable environment. And so I think it makes some sense that, like I said, I had a couple other... I don't own Target, but I had a couple other retail holdings that were pulled down because

of the Target report. At least I assume that's what it was related to. And I think it's going to be a common story for the next few months. We do have a question in the chat that asks if we use the rule of 40 for softwares and service companies. If so, what do you use for the profitability metric? EBITDA, free cashflow, net income. I don't.

I mean, and it's not the worst rule in the world. And I'm curious to get your guys' take. as for the profitability metrics of any company we use free cash flow that's i mean that's ultimately what matters for any shareholder is the cash that a company generates over time so um i don't know there's ways to manipulate like the rule of 40 i think well with adjusted yeah yeah and just yeah definitely with adjusted but like i don't know if you have zero profitability and 40% revenue growth, don't you break the rule of 40?

That's what really resonates with me. Wait, sorry, say that again? If you have zero, if like you have no profitability, but you have 40% revenue growth, isn't that, don't you pass the rule of 40? Yeah, I think it's a good concept. Yeah, it's not terrible.

I don't want to, I don't like to get locked down on the 40%. I kind of like to use that number of, okay, we have our profitability margin and then how fast are we able to grow on top of that? I kind of like that concept in general saying what that number is. 40% just seems like a number someone threw out of a hat and decided that that was going to be it. And a lot of people focus on that, but it could be just any number. Just adding that into your metrics and kind of tracking that

over the years can be helpful to see how much operating leverage a company is getting or not, what their unit economics may look like while they're scaling. And I think the ones that can put up, you know, 50 to 60 range are quite impressive. And those are some of the top in the industry, whether it is from those, you know, really fat margins of 30% plus, which a few software mature software companies can do while also growing 15% or having 0% to 10% margins while growing 60 to 70%. That's, or maybe the math's wrong there. Negative 10% to 10 positive 10% while growing like 60% to 70%, that shows pretty good sales efficiency in my mind as well. But yeah, I mean, I would never take the rule of 40 in isolation because it completely ignores

valuation, which how many of the companies that absolutely crushed the rule of 40 over the last year are down more than 70% or at least more than 50%. It's a good indicator of quality i think it's maybe not the best indicator in the world but it's a decent indicator of quality but you have to balance that with what the market's expectations are yeah that's yeah i think that's totally different discussion um ian any thoughts on that yeah i think i don't use the rule of 40 to make like buy or sell decisions but it kind of gives me a i sometimes kind of use it as a first pass just to get a general idea about the quality of the company um and if i'm looking especially at those sas companies if it's if you've got above the rule

of 40 then i'll probably be a little more interested in looking at if it's below the rule of 40 you know i'm going to be less interested in looking at it um fairly self-explanatory but i think like you guys i use free cash flow if i'm calculating that type of pretty much any time calculating profitability i'm looking at free cash flow um yeah i think you guys covered it pretty well. Yeah. If it's 39%, Ian, you're out. You can't. Deal breaker. Doesn't matter if it trades at a 50% free cashflow yield. If it's just has to break 40. No, I think just in general, it's bad to have any hard rules in investing. So I don't know, just be flexible, I guess. I think that's actually something maybe we should explore a little bit. What do you think about

hard rules because I tend to, I have tended not to have very hard rules and I've kind of explored lots of different areas and I kind of see it sometimes. Sometimes I probably invest in things that are outside of my circle of competence. Um, but I invest in, I'm kind of hoping to grow that, uh, piece of knowledge, um, that kind of area of knowledge. And I don't have, I probably am less disciplined in a lot of ways and it's something I've considered, but I'm less disciplined about checklist and, um, always making sure everything fits into like this box that I know how it works. I'm kind of part of it. I'm still young and still trying to figure out exactly how I want to invest over the next 30, 40, 50 years. But, um, I don't know,

what do you guys think about that? Do you, do you like having certain rules or certain checklists as you go through, or do you kind of, and is there like stuff that's just a hundred percent off limits or do you take a little bit more of a, I don't even know the right term, but maybe more organic approach and kind of, you know, do you research things in the same way? Do you have different methods of research? What's kind of, what's your process like? Go first. I think the big, the only checklist I have, or there's only one point on the checklist is it's got to be within the circle of competence with a little bit of margin of safety. There's some businesses that are kind of near the border looking historically at maybe some stuff I've researched.

I've thought like MongoDB or something like that could be kind of close to something I can understand, but it's on that borderline. So I want it to be really far within the circle of competence. I think that's the only checklist I have. And then besides that, I try to be pretty flexible on a lot of stuff. And I think over the last two years, definitely to our detriment being flexible on something like valuation, we do not have any hard rules and that I still believe like a lot, we've obviously made some mistakes. Everyone makes mistakes, but maybe having some hard rules on valuation could be helpful because while it might keep you from investing in something that is the best business in the world growing super, super quickly has so

much potential to be a hundred bag or 10 bag or whatever. It can really help you from buying something at 20 times sales that goes down to three times sales, which without giving out any names that happened, basically happened to us with one of our holdings in the last year. And having that maybe as a part of the checklist could be a way to improve it. But either way in general, I think keeping the checklist short is nice because we, because you don't want to artificially restrict yourself from saying, Oh, I only buy stuff that's growing revenue at 30%. That feels artificial to me and just keeping you out of stuff that may be,

you know, a good, a good investment. I agree. I think it might've, yeah, I think it might've helped us to have a little more price discipline, like hard rules. And it's just like, And it's so easy to rationalize or justify that a company could have a better growth rate. For that company you really, really love, it's like, okay, maybe this could compound the top line at 30% for the next decade. And it's like, most companies are not going to be able to do that. Very rare, very occasionally, there's the outliers. So it's like, having a hard rule around that would prevent you from making that mistake and letting your love for a company impact your returns. At the same time, it's, I don't know, it's just not as fun to have a hard rule.

yeah it's it's tough i think it's personal too everyone's got their own some people may want more stricter rules and that's just how they go and you should like people i was just gonna say i think some people because i've thought about this before it's not the way i have invested over the last five or six years or whatever but i think there are some people who do really well and saying i'm gonna fish in this small pool and whether that's based on you know these limits on valuation or whether it's based on only, um, you know, oil and gas stocks or only consumer discretionary or only whatever it is. Like there are certain people who do that. And I think there's people who have success doing that. Um, because there are, it's not always true,

but there are, there's lots of great companies to invest in. Like if we look forward 10 years from now, there's going to be a variety of people who have good returns and from a variety of different stocks, right? It's not going to be all the same stocks that lead to all the best performing managers over the next 10 years. And so like, I don't think there's one strategy to rule them all necessarily over the last 10 years, maybe you could make the argument that it was FANG, but there's lots of ways to make money. And so I always kind of have this internal debate about, do I try and focus in an area that I think there's particularly, you know, that there's there's enough fish that i can i can earn my way in this in this smaller pond and i can get really

good at fishing this small pond because i know it really well um or is it better to just be in the ocean and you know kind of go where go where it seems like there's some uh you know where people are having luck and kind of find some find some good spots for me but not be like super tied down to one particular pond because i do think some of those people sometimes when you constrict yourself a lot. Sometimes there's cycles where you just have a real hard time making any money. And maybe that's not a bad thing if you're making it over the long term, but I think it does lead to situations where it's a little more difficult to earn returns. Yeah. I think like a lot of the, it's a good point. Like let's say someone that's like only oil and gas, like that's their

struggle of confidence right now. This episode is brought to you by La Quinta by Wyndham. Here you are miles from home and ready to start your vacation. Good thing you're staying at La Quinta by Wyndham. 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. that are like cyclical being or if you're if you're somehow good at the timing right and you can just say i'm gonna i'm gonna get in when things are cheap and i know that it cycles and

i'm gonna hold cash when things are expensive and just you know kind of take that make that trait like say i'm willing to hold cash for years at a time and then make my money when the cycle is right and then hold cash again and then make my money when the cycle's right like that's not really the game i want to play it seems too too involved but you gotta be right a lot couldn't Couldn't you make more money elsewhere being like a generalist during those downtimes instead of like netted out over 20 years? Like even if you're right and you hold the cash and the down cycles and then you're right and you get long whatever the stocks are during the up cycles, do you think you'd do better just owning like a broad basket of stocks over that time period? It depends how good you are at fishing in that small pond, right? If you're super good at timing it, then potentially finding the good opportunities.

And I think potentially there's – I think there's examples of people who have done that. I think it's hard and it's arguably – I think there's – like any stock picking, it's arguably luck and not skill. But I think there are people who have done that for somewhat extended periods of time. I think more people, I think you see more of that type of success in bear markets because it's less of, I think it's less the generalists doing well, but also, I don't know, like even whether it's your circle of competence or your hard rules that you have, all of those should, if you're a good investor, evolve over time and change. And I feel like the best investors have changed their strategy as they've grown. Yeah, most likely, most of the time. Yeah. I think on a broader note, the way I see some people either positively or negatively constrict themselves is the easiest one is someone that says, I only invest in growth stocks. Okay, this business has to be growing 30% or whatever. Or if not, I will not be investing in it. And during certain time periods, that can be a great strategy. hard to tell exactly which, but during other time periods, that can be a terrible strategy. And then conversely, there could be someone that says, I only invest in things that trade at an

earnings or cashflow multiple below the long-term S&P's average of like 16. And sometimes that can be a phenomenal way to invest, say starting over the last two years. I think that would have been just maybe we're biased to what's done well in our own portfolio, but that, uh, sort of strategy probably has done well the last few years, but sometimes it's not the strategy to go. And if you artificially constrict yourself, you just got to be comfortable with being, you're going to go through more, um, periods of underperformance, but you have to know that stick with, if you're good at your strategy, you have to know how to stick with it. and you have to be comfortable with that underperformance

because if you stick with that certain area, sometimes it's just out of favor. Does that make sense, guys, or am I kind of... That makes sense. I think we're kind of going in circles around the whole thing of hard rules can present... They can be artificial barriers that you don't need that could prevent you from earning returns in another way.

yeah or conversely it's tough because it can prevent you from making bad mistakes yeah um all right let's talk let's talk let's talk okay yeah question here have you guys uh kept up with doximity no we did well i don't know if ian you were on that episode that we did the not so deep dad but we did it back in the summer when i was trading like 50 times sales healthcare platform right for doctors yeah like kind of like a social media it's almost like a linkedin for the medic like medical professionals in the u.s they have 80 plus of all the physicians in the united states on the platform they just acquired something first of all they generate 50 this quarter was basically 50 free cash flow margins which how much is that what about what

was their operating they crushed the rule of 40 yeah well it's an automatic buy now what uh what's like sometimes sometimes people over earn like pinterest was last no it's generally uh they're generally quite profitable that's interesting 50 i mean that's that's fantastic it might have been like a little high this quarter but it's usually i mean it's it's pretty pricey if i remember correctly it was something like i want to say it was evita sales of like 10 uh we're back up i think it's well it's up 10 percent today i think that's because this week it must add good earnings and eva sales back up to 16 so bargain total bargain now but hey if if it's 30 times cash flow and they are uh they're they're growing like a weed

maybe it is but the uh they just acquired a company that's kind of that like uh physicians they dictate physicians schedules or not dictate but it's like a platform for physicians scheduling and they acquire them i think it's called amion.com and my whole gripe with doximity was like all right they've got 80 of the physicians in the u.s are they kind of like saturated like how are they going to grow but they continue to just tack on that level of scale has helped them tack on like new revenue streams over and over so like at first it was the advertising with pharmaceutical companies then it was hiring with hospitals so hospitals could go in there and like use it as a hiring platform like linkedin and now they're doing like they acquired and part of that

is like they're generating a ton of cash flow they have the money to acquire companies they're acquiring companies that just kind of just bolt onto the platform i don't know i guess i don't know that like space that well like the medical professionals day-to-day like what their daily workflows look like but it just seems like an interesting platform they also announced a 70 million dollar buyback and the ceo was like we're using this essentially to offset dilution uh from thumbs down from from the ipo till uh from the like all all of the stock that was issued from the IPO till now, plus any, any issuances over the next year, we're using it to offset. I don't know. It's not the end of the world. If you have like, we do it with our companies. They just don't

say it. They're just not candid. Yeah. You can live with it, but I just don't like when they buy back just to, to offset some of the greatest companies do it. Microsoft does it. So it's Google does it. It's not the end of the world. Do you guys want to guess what their peak EBITDA sales was now when we looked at it it was like 50 times ian you had a guess uh i'm gonna say 60 times 74 now it's down to 16 it's been it looks like their stock chart but yeah interesting company it feels a bit like good rx though where not the same type of company but it's one that like okay that's interesting they're serving a need but it's in that industry where you where you just might not have a grasp on some of the risks or something like that where and i think

that's happening to get rx if i'm not mistaken but it's just tougher to understand so it's that might be one that's on it feels like a very different model it feels like a very different model that good rx but yes i'm not talking i'm talking the understanding of like where it's where it's at in your circle of competence. Yeah. Potentially just not like ever, like never experiencing the product firsthand and not knowing like whether what they're telling you is really how their customers see the platform. Yeah. And it's so hard to just talk to doctors unless you know them. Well, I just don't like talking to doctors. No, you can't just call up their office or go visit them and say, Hey, I have some questions.

they're busy with patients they're like hey i know you're operating on someone but could you talk to me about doximity like what do you think what do you think of amion.com in the surgeon room there you're in the you're in the operating room right okay okay oh we got someone's giving us some good notes stefan thank you good notes on doximity i think it might be steven steven or stefan yeah steven cod yeah appreciate he's yeah he's dropping us a whole bunch of information on there. I like that. Yeah, the numbers look good. Yeah, let's talk about the Twitter stuff

because I find it quite hilarious. I'm smiling because as an Elon hater, I am smiling. Well, I saw today that they're going to force the deal to go through, which will be, again,

interesting, and it's very entertaining. In Toronto, every arrival is a statement, and nothing says it better than this. Cadillac Optic was the number one selling luxury EV in Canada for 2025. Find your rhythm across a seamless 33-inch display and an immersive 19-speaker AKG surround audio system. This city demands agility,

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Like, give me a break that you didn't know how many bots were on the platform. Like, have you ever read the mentions on your own tweets? Well, as the Bloomberg columnist Matt Levine said it, he's 100% lying here because the bots were the reason he put out the acquisition bid because he wanted to get rid of them. So, he knew they were there. Like, no one's buying the fact that he didn't know the bots were there. Yeah, it's a total lie. I think everyone's like, come on, we read the comments on your tweets. Are you just trying to get a lower price?

What's going on here? And then I'm seeing the Tesla community like, it's not going to go through. Our stock's going to shoot back up. I don't think that's what's happening here. And I don't know. It feels... Well, Tesla's stock fell down because of China's retail sales, but those numbers look bad. It was funny to watch.

And you know what I'm loving is the rise of Bezos' Twitter. I mean, we're seeing this is like the greatest duel. No, it's not. Bezos is crushing it on his Twitter game. And you know what? I've always liked him. That's what I told him when I saw him that one time. I said, you got to get on Twitter.

Fight back. It is. It's validating because I've always thought I liked. But I'm always like, I would definitely. i feel like i'd like bezos like i feel like he'd be funny and now it's he's proving it out well he does have the crazy laugh speaking on the the twitter deal though the i really and this is always optimistic whenever something like this happens so like musk always gets into something new and then he totally pretends he knows what he's doing

and he's doing that with twitter and it seems like a lot of people are saying oh he's like oh this guy doesn't know what he's doing is he just a pretender and i'm like yes more people are understanding that he's been a pretender this whole way he's just uh whatever like no different than the other kind of you know i i think he's more similar to adam newman than people think um and adam newman also great inspiration of getting people to you know fight for a company and stuff like that but this always happens and then it just blows over and he evades the law and is still able to do whatever he wants i i feel like it's always false hope when i think okay now everyone will realize he's kind of a a bullshitter um what are you guys thoughts is he

gonna is he gonna blow over i don't know if that is the exact terminology i'd use but the uh it uh it's been a rough week for him. I think he's going to have to acquire it. I think maybe he might have made the bid out of spite

and then realized I don't want to do this at all. And now he's trying to kind of backtrack. I thought it was also funny that they were kicked out of the ESG whatever s&p 500 oh yeah that made me smile too on top of all and then it like it played into the whole like oh classic this is like this is just the leftist agenda trying to get us like trying

to shame me because i buy in twitter i'm like this is like completely s&p global they're they They are a leftist agenda corporation. They are out for... It's uncorrelated. Ian, I want to hear your takes. I want to pull up something that I read, and I'll talk about it after your take. Cox Panoramic Wi-Fi includes advanced security

to help protect all your connected devices. You'll get real-time alerts. Oh, like this one, so you don't have to worry about malware. Or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply i i don't know if i have any takes anymore

on this it's it's uh i think a couple weeks ago i said this was one of the more interesting and exciting stories out there and i think it sort of is like it's it's high drama and high finance right so you get you get a good mix and it's it's fun feels like a uh i don't know it it's shaping up and to be more dramatic than most things in high finance that you see out in public like i think there's a lot of drama in finance but it's often behind the scenes and we're going to see this all out in front of us um we've had a lot of that in the last couple years between uh the meme stocks and GameStop. And we might get into this later too, but Melvin capital announcing today. I don't know if you saw that there,

they're returning money. It looks like, so I'm kind of closing the doors, but I don't know. I think, I think if I had to guess, I think the deal does happen. And I know Brett, you were saying they're going to try and force them to do it. I think the deal does happen. And I think Musk will be okay because so much of it's going to get financed by wall street and not by him that you know he'll survive and they'll get through it and and honestly i think having someone i think it's funny i don't know if elon musk is the right

person he might be but i do think twitter needs someone to get in there with more of a founder mentality i'm using air quotes but just someone who's actually in there and wants to create a great service and isn't just like it feels like twitter for a while has just kind of been chugging along and not really treading water yeah treading water exactly to get someone in there to to mix things up a little bit i think it's probably a good thing for twitter and whether musk is the right person or not yet to be seen i don't mind prog i thought prog's done okay everyone hates him i don't know why but well i think musk is trying to fuel that a bit it well you just covered pinterest both of twitter and pinterest kind of product rollouts remind me

a little bit it's like you look at instagram or you look at um well i'm no expert on tiktok but look at a lot of Facebook products and you're like, wow, they're cranking out these products quickly. Why can't Pinterest and Twitter? Yeah, they're smaller, but they still got thousands of employees. I'm sure it's the same allocation compared to their business size. Seems like, yeah, you can have someone on Twitter that has a better product strategy, but is Elon the right guy for a better product strategy? The guy changes his product strategy at all his companies. Seems like month by month so what's to me it seems like kind of the same uh as it was in the past where twitter's just been erratic and saying they're going to change to subscriptions or

whatever and we're going to be dorsey saying stuff about it being an open protocol out of his mind um i've given up on dorsey i've given up on dorsey well did you see the do you see the block investor day we're a network of networks that doesn't mean anything how's anyone supposed to take anything away from it? I was considering watching it until I saw it was five hours. And maybe I'll watch it if I'm super bored and I want to drink every time they mention Bitcoin. As soon as it turned to... It's like the bull market fueled his galaxy brain takes, and then the galaxy brain takes instantly fueled an 80% sell-off. Someone's got to get at what he says under wraps,

I guarantee the CFO is just fed up with all the Bitcoin stuff. They spent $140 million on it. I was looking at the last quarterly conference call on all these bullshit initiatives. It's okay. It's one thing. First of all,

there isn't a whole lot of clarity on what they're doing. Second of all, they can be earning, they have such a good payback on their cash app marketing why not throw all your money at that like why do you have to do all this like mining stuff it's weird and yeah risky i mean he literally lost i obviously he lost a bunch of investors because of it all right i wanted to pull this thing up from the related to why tesla

got dropped from the ESG index. So it says, and this is per Laura Kolodnoy, I hope I'm not saying that wrong. She said, while Tesla's stated mission is to accelerate the world's transition to sustainable energy, in February this year, it's settled with the Environmental Protection Agency after years of Clean Air Act violations and neglecting to track its own emissions. Tesla ranked 22nd on last year's Toxic 100 Air Polluters Index, compiled annually by UMass Amherst Political Economy Research Institute, worse than ExxonMobil, which came in 26th. The index uses data from 2019, the most recently available. In Tesla's first court of filing, the company also disclosed it is being investigated for its handling of waste in the state of California and that it had to pay a

fine in Germany for failures to meet take back, I'm putting that in quotes, obligations in the country for spent batteries. Meanwhile, California's Department of Fair Employment and Housing sued Tesla over anti-Black harassment and discrimination in its Fremont car plant. The agency says it found evidence that tesla routinely kept black workers in low-level roles at the company gave them more physically demanding and dangerous assignments and retaliated against them when they complained about racist slurs last year the national labor relations board said tesla had engaged in unfair labor practices as well that's esg right there that's right i feel like esg people focus too much on the e like there is so much like a lot of that is your your workplace like

i feel like everyone instantly thinks what's your like carbon out like carbon impact whenever you hear the term esg now having your cousin on the board is good for g the governance part no one cares about governance let alone like socials like a whatever like but they just hear environmental like governance might as well not be in there might as well be called es the es screwing the city of buffalo nah that's fine um okay all right enough enough elon hayes here's one this is this is different i got a little prediction about old jeff bezos um i'm seeing his you know he's getting into the political sphere i think within well before he dies he will run for president i'm making that this means nothing that you're making this prediction but i

what are you guys thoughts is it gonna happen or what i'd take the opposite side of that i don't think he's gonna we can have a little friendly wager i don't think he'll i don't think he'll even a howard schultz month-long fake push until he makes a huge mistake and then has to pull out yeah i think i think it's possible that he'll hint at it and i think he'll be involved in politics and back people and but i think i don't think he i think he'd rather be the richest man in the world and do what he wants to do than have to be president for four years or eight years you know i think he's at that level where doing that type of job like he didn't even want to run amazon anymore right like you know what i mean so yeah but it's only been a year he's complaining

about inflation he's gotta get he's gotta get back in the saddle so one thing the one thing that sucks is no matter who the president is you immediately will have roughly 50 of the u.s population that hates you and the oh well it's a lot of already hates pesos so i don't know i mean maybe just because he's on the net worth list but it's like he i don't know i don't think he deserves that hate it all and i'd hate to see him subject to like unfair criticism i know like he can take it whatever he's the richest person in the world but yeah he can take it yeah well you have to he's done so much on behalf of the american consumer and everyone hates him well also employees they are the minimum wage driver not to be a propaganda podcast for amazon but they are the minimum wage

driver walmart's been pretty evil about that in my mind and by minimum wage driver you mean They are They are the ones That forced the minimum wage up They basically forced Everyone's minimum wage Above $15 an hour Because they went up to $18

I believe It could be $17 They also pay for college For everyone But Alright So you guys are not on board When this happens

Bezos 2024 When it happens I could see it But Bezos Here's my Bezos Jassy ticket No no

Not Jassy It's gonna be a Bezos I have no idea some random politician yeah my prediction is that Bob Iger runs for president before Jeff Bezos Iger would lose so hard like I'm not a

he's more likable than Jeff Bezos in the minds of most people that's he's got a better public persona but I don't know hearing about all this stuff from the Disney like executive team over the last few years it sounds like Iger might have been

a little full of it on some of those stuff. Like maybe Disney's success isn't completely attributable to him. Yeah. Him and Schultz are micromanagers, it seems like, and they can't leave. And that's just a negative. All right. We've got some questions here. First, someone asked for thoughts on the Nelnet earnings report. I don't want to talk about that. You can DM us in person. We can chat about it. Maybe we're always happy to chat. Two, someone complimented Tesla. So thank you, that. Hold on, hold on, hold on, hold on. You got another thing on Bezos here? No, no, no. Just when we say we don't want to talk about it, we can't. Anything that's in the portfolio, we don't like talking about holdings because of whatever rules and just not being, you know.

We don't want any potential problems with the fund. Yeah. So, but again, I'm happy to talk about that privately. Second one, or just to comment, Tesla, thank you, BT8, and said Elon 2024. Love that. That's good commentary. We had one about valuing Brookfield Asset Management, to be honest, don't know how to value them. It's a total black box to me, but we got a good one here from Achilles. Great question. what is the right way of looking at PE multiples for different sector companies, say healthcare versus industrial or staples? What are some of the things that drive this? That's a tough question. I think PE is probably just cashflow, whatever. What are you guys' thoughts on that? Maybe Ian, we'll start with you and then just go around the room. Yeah. So I tend to, as we've talked about, I tend to value things on free cashflow rather than earnings, but that's neither here nor there. The concept still applies. So I think a few of

of things that I keep in mind is I'll generally just try and get a good sense of what the industry multiple is and what it's been, what it is now and what it's been historically so that I can kind of get the range. But then some of the things that determine that, I think, and as an investor, I think you should have an opinion about whether you agree with it or not in any particular industry is generally companies that have wider moats and industries that have wider moats have higher multiples. Industries that have more sector growth are going to have higher multiples. And so like internet businesses over the last 20 years have had higher multiples than traditional retailers, largely because they've had more sector growth potential. I think also some of

those industries that are just, and this kind of gets to the moat point, but some of those industries that are just safer or more monopolistic are going to have higher multiples. And the inverse of all of what I'm saying is going to have lower multiples, obviously. And so one of the things I think as an investor where you can find a little bit of an edge is if you see things, like I think over the last 10 years, there's been a number of retailers that people have looked at and said, okay, this is being valued way less than a lot of the internet retailers, but they actually have a good business and they're going to become more like an internet retailer. And so even though the market is valuing these types of businesses as low multiple businesses, eventually they're

going to value them more similar to these higher multiple businesses. And so I think that's one of the ways as an investor, it's not always the way that I invest, but that's one of the things when you're comparing kind of the multiples in different industries that I think if you have a disagreement with the general consensus about how safe a business is, how much of a moat a business has, how much sector growth there is within that particular sector, then I think there's some opportunities where the market may be misvaluing it

and you may have an edge. The last thing I'll say is I think the... Well, actually, I'll let you guys talk. Ryan? Yeah, I guess Ian pretty much said everything I was thinking. But I guess for any business, you want to value it based on the future cash that it will generate and your claims to those cash flows. I've never heard of that. I know that's an obvious statement.

But the reason I say that is because some industries, it's a lot easier to predict those cash flows that they'll generate, whatever, five to ten years out. So those kind of command, typically I'll hire multiple, whereas something where the cash flows could fluctuate wildly, either to the downside or the upside, you're probably going to see higher discrepancies between those and the more predictable ones. I think you'll usually see lower just because there's more risk associated with it for healthcare and stuff, because I think that was what the question asked, if I'm remembering correctly. Those are hypotheticals, I think, but yeah. I mean, I think industrials and staples, those are fairly predictable businesses. They'll probably get more of a higher multiple. Base cases, they'll probably get a higher multiple than something that has more fluctuating cash flows. I don't know. for how do i think about it it's just like what do i think they can generate and some businesses i know i'm going to be insanely far off some businesses let's take um like a google for example that's a little easier to predict i would think than some like small biotech because you

really have no idea uh whereas google is pretty insulated and that that moat is wider which kind touched on ian's point where if you have a wide boat and it's harder to disrupt the cash that you're generating or competitors can't disrupt it that that rewards shareholders should reward that with a higher multiple because in theory i'll just say this too in theory all of the like you don't care whether the cash is being generated like all lsql from google or the biotech right if you're getting a dollar from each of them this year, in theory, you should be happy taking both of those. But the reality is that those companies, there's a lot more risk associated with one than the other. And so you're willing to pay more for the certainty of getting a dollar from Google

than you are to the biotech just because you're worried about the uncertainty. Now, what ends up happening is sometimes those actually have higher multiples because there's a chance it earns you a dollar, but there's also a chance it earns you $20 and there's chance it earns you nothing. And so then those become much more volatile. These companies with more predictable cash flows then tend to trade within tighter ranges on some of these valuation ranges. And I'll say sometimes that's what gets me interested in a company is a company that I really like. We were talking about the rule of 40 earlier. A few years ago, I bought Apple. And the reason I bought Apple was, and you know, I'll be careful here because I don't

want to pump the stock and all of a sudden drive Apple stock price based on chitchat money. But no, I bought Apple a few years ago and that was kind of the thing that triggered it for me was, oh wow, this is trading at quite a bit of a lower multiple than it has traditionally traded at. And I think it's, I think it's still a strong business and I think it's got some good growth potential in the future and blah blah blah blah but the thing that got it on the radar for me was oh this multiple is kind of out of line with where both it's traditionally been where the

sector traditionally is um and i think i've got a little bit of a contrary view to what what the sector is because i i just didn't see it seemed like a fairly high high probability bet at that point i think it's important yeah that's that's where like i do think certain industries get uh misvalued like the especially like newer industries or industries that are changing a lot there's people don't like sometimes an industry the one i'm thinking of is video games that's become a higher quality business with digital distribution and more recurring revenue streams and even micro satya nadela said it's it's these are becoming much more software like sometimes you don't get the multiple you don't get the revaluation that could be kind of an

opportunity um are there any other industries you guys think are like not properly valued oh that's a tough one i mean i agree with you video games look at our portfolio you'll see that that's probably our largest allocation sector wise under underappreciated Content management systems Yeah I mean What's overappreciated Overappreciated okay streaming

I would much If we're going to do entertainment I just think The Well I guess now valuations have gone down Quite a bit but I think for the longest time People have underestimated constantly Video games and overestimated Streaming video in general

um i don't know why there's not more focus on video games and i think that leads into something where a lot of the times part of that reason why you think maybe the pe or whatever ratio you're using is too low is because the sector tailwind has been permanently underappreciated and if you looked back 10 years ago no one would have imagined that video games would be whatever $250 billion in annual spend around the world. Some people probably did, but if that is permanently underappreciated and you have those, if you have quality businesses within there, they can be fairly easier bets. And the last thing I'll add on this, and maybe we go to another conversation is you don't want to be say arrogant or overconfident, but sometimes when I'm looking

at a stock, I like to think, okay, what sort of earnings ratio or free cashflow ratio do I think this company deserves versus, and if that's way lower than the market expects or the market is giving it right now, there could be some potential there, but you also have to figure out why the market is discounting it versus what you think. Because then if they're wrong, If you can find some evidence that whatever the consensus is that's bringing down that multiple, the easy example was the iPhone, sorry, Apple in 2015, 2016, it was seeing iPhone unit sales stalling out. But they were about to, I mean, that was about to be fine, at least revenue-wise, it was going to grow. They had that pricing power and they're about to launch the AirPods and the

smartwatch to get that growth back, services, whatever. The reason that they were down is because the unit sales, and if you disagree that that's a bare thesis and that it actually deserves the higher multiple and will generate a lot of cash, that can be an opportunity to set things up. But there are few and far between. You probably might find one a year of those really juicy situations at best. We do have a question. Thoughts on Disney stock long-term.

We can hit that in a second. New topic. Martin Shkreli out of prison when SPAC. Well, he's too late. I wish he came out of prison a little earlier. I don't know. I could still save him money. It could happen.

I don't know much about him. I just know the tweets that people say. So he totally scammed people. He's kind of an dick. I don't know if he scammed people. I think he raised the price

of a... He probably scourged on an HIV drug. He raised the price by 5,000x or something like that, or 5,000%. It was overnight, and it was something that people really needed. I don't know. I have watched videos of him before. Apparently, it was a messy trial. I probably am not qualified to talk on it, but Disney stock long-term.

I want to hear your guys' thoughts on that. Ian, you're a shareholder, aren't you? I am a shareholder. That's actually one of my bigger positions. It's down now because the stock's been down, but I'll see actually where it ranks in my portfolio. But generally, I think they have a better model than any of the other streaming businesses

because they can make money in so many different ways. If they have success as a show, they make money in the parks and they make money on merchandise and on just all sorts of stuff, right? They just, they constantly can generate cash, basically. I think they also, which just makes them more profitable over the long-term for every dollar they spend on content.

They have many ways to tap into that and make money. And I think some of these other businesses are going to start trying to get more into that, right? I think Netflix has gotten a little bit more into the merchandise game in the last year or two, but it's still just a drop in the bucket. and I think some of what Netflix is trying to do with gaming is kind of going that direction too.

They're realizing that just making money in streaming isn't getting the most bang for their buck on the content they're making. That's generally one of the reasons I like Disney. I think the downside on Disney is The recent Doctor Strange movie sucked.

That's what I heard. I haven't seen it. All the Marvel movies the last since whatever that giant one have been trash. Marvel's like okay, maybe I'm just getting old. but it feels like it's going downhill. Well, Ian, bring your point up and then I'll talk. Yeah, I'll just say, I think as these companies get bigger

and Disney's experiencing this, is that they have to deal with more and more, whether it's social issues or government issues or all sorts of stuff, right? It's just as an organization grows and gets large and especially in kind of today's environment, there's just a lot more stuff they have to deal with, right? And things that they have to figure out

and determine their stances on and corporate policy and to have a leadership transition that maybe didn't go so smooth in the middle of that i think that there's some uncertainty right now around disney and how well like if if they can really like it's always tough because you sometimes some of these big businesses it seems like they can't focus on the business enough that they actually get to there's too much going on in the in the world that they that they get sidetracked from their main business focus and so i think that may be one of the the potential you know bear cases for disney there's yeah a lot of noise okay the real like easy bear case is china exposure especially the park there seems really tough right now their china exposure is just tough

it's just tough it's not open disagree i don't think it matters no i don't think it matters The Shanghai Park was open for three days last quarter, and it's not a big part of their international presence. I know, but it's supposed to be a big part of their growth, China in general. Parks had – obviously, it's an easy comp, but parks had really good growth internationally and domestically across – well, it's parks and experiences. but they saw really strong growth and it was almost like a drop in the water with the China stuff. Although the Hong Kong one wasn't like it was either the Hong Kong or the Shanghai one was it hadn't shut down yet.

So maybe, maybe it'll be worse next quarter, but I don't think it's a huge part of their business. Yeah. Also I'm less concerned about the, the piece of it, but it's the content piece and just the market. And like Brett was saying, the growth piece of it, they're not as dependent on China growth as like, I think someone like a Starbucks or a Starbucks or even an Apple. Yeah.

But I think it is, it is a big piece of the story. I would just be worried about the business going away, especially because entertainment with a propagate with a socialist nation like that is just razor thin. I, I just worry, but flew into the bullish side.

I mean, the parks business is, I think it's one of the best businesses in the world. It feels idiosyncratic. it feels unbeatable, really. So, man, Europe and I mean, even Japan, too, and some of those other non-Chinese Asian markets and the United States, that just seems like a phenomenal business. People are going to continue to go with their families. However, I do not like their strategy with their content assets.

I think they're trying to wring all of the dollars out too quickly, and they're not going at it in a high-quality way, especially Star Wars, Marvel, whatever. I would much rather have them go a hybrid Nintendo route of being a little more patient about bringing out high-quality things once or twice a year with their big assets and yeah they're supposed to create shareholder value and they got to pump out some movies at least and they got to get content for disney plus but i believe their reputation with marvel

and star wars is going down slowly steadily i guess would be a better word and that would be the biggest concern for me i think yeah sorry finish your thought uh like ian said the advantage disney has is combination of streaming plus parks plus cruises plus whatever so i don't think you need to be generating that much uh gosh just this overabundance of stuff from marvel because you can utilize a lot of that ip at the parks and it it just feels like too much in general i do think Yeah. I think if you do, if you try to do too much, it can kind of dilute the brand, but just, I mean, Buffett's the one with the famous quote about how they can just,

they have the most timeless intellectual property in the world aside from maybe actually I would put them above. Nintendo's higher. Well, not in the top, not of all the top 10, but the, and the you can kind of just tap into that same franchise over and over every five years that is a really good model i think it is to to to this date it's been a wonderful business and the a lot of that is attributable to the wonderful ip that they have however i worry that all the value that they get from their parks and from their uh like theater business or entertainment side that's not

streaming it's going to be poured into streaming and i worry about that that industry as a whole like it feels like auto manufacturing in the 19th early 1900s like everyone's pouring capital into this yeah you might have the best but that doesn't mean the returns are going to be worth it there And I don't, I'm not, I'm just not sure Disney Plus is like, they have to do something to make that business lower churn for people above the age of 15. 12, really? 12. Yeah. Yeah. Like integrate, whether it's integrating Hulu. I know, I think Comcast has a 33% stake, so that might be a hiccup, but. Integrating ESPN Plus. ESPN Plus, like.

Well, they do the bundle, but it's like weird There's still separate entities And they triple count those subscribers Wow, they gotta do that for the numbers They have to The subscriber numbers All these All the money being poured into streaming concerns

Maybe because it seems like It makes all these things More disposable I feel like we've talked about this before Where it's very easy when times are tough To just kind of switch off of one Switch back later switch off like i don't know like is any company is streaming really that good of a business

yeah that's that's a good question i there was a quote this week from the new warner brothers whatever it's called discovery plus time warner merged company uh he was telling the like content managers basically he was saying what i think a lot of people say when they watch something is like why can't you just make all the content good like hbo and that's my question for disney why can't you just wait until it's good something tells me it's a little harder than that they knew nintendo misses nintendo misses rarely and hbo doesn't miss they're like 90 success rate for their core target they're yeah why can't why why can't other people replicate that what's the special sauce at hbo because it's the same thing there's hiring actors

they're hiring directors and they're making stuff what's the big difference i thought disney and pixar too i guess actually maybe disney just has a different target like they have such a range of targets that like for us were like oh that content sucked but it wasn't designed for us and so they have to please they have to please all these different target customers like hulu has some good content on there. I was a target customer for Star Wars and everything's been thumbs down. Everything? There were some

good movies. What about the... Rogue One. Rogue One. I thought the Solo movie was pretty good. Only thing that was good was Rogue One. Solo. What about The Mandalorian? I didn't watch that. The Mandalorian was good. I haven't signed up for Disney+. I haven't signed up for Disney+.

That's on you. You're missing out on some decent content. Mandalorian was pretty good. Yeah. Well, I think in general Is I worry about their Their Not having a stricter

Barrier Of like Okay this is not good Let's put this on hold Because that ruins brand quality Over the long term Marvel I'm not watching those movies

Because Everything's been bad And maybe that's for It's for 12 year olds But I'm out All right. Sorry, I was on mute there. It's almost, it is one o'clock, I think. Okay. All right.

Gotta sign off here. Yeah. Good discussion today. As always, we'll see you guys next week. You can watch them on YouTube. It'll be easy to find our channel. Just look up Chit Chat Money. And if you're watching on YouTube, you can always listen. We'll come out a few days after Sunday morning for the same episode on any podcast feed you can find. Thank you all for listening. Thank you.