Chit Chat Stocks - Power Hour #9: 50% GDP Growth, Portfolio Concentration, Ideal Stocks For Inflation

Episode Date: June 5, 2022

The CCM Power Hour is a live-streamed show every Thursday at 3:00 pm EST. On the show, Ryan, Brett, and a rotating list of guests have an unscripted discussion on a variety of investing topics.  You can watch the show on our YouTube channel here: https://www.youtube.com/c/ChitChatMoney  Follow the show on Twitter: https://twitter.com/chitchatmoney Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

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 recommendation. Now, please enjoy this episode. Welcome in. This is our Chit Chat Money Investing Power Hour. For those of you that are watching live, I've got to silence this real quick. For those of you that are watching live,

feel free to get some questions into the chat. But the only rule for this is no rules, really. anything goes there's uh we're supposed to come with no prep usually we have ian on but today it's just brett and i and we can talk about anything um whether that's uh macro micro um really really anything and uh am i forgetting anything nope it's just going to be us two for the time being um we're looking for it has to retire or we're fielding some prospects right now no we haven't really done anything in that regard but yeah hopefully you know we get some more people on here in the not so distant future anything that you've been looking at this week that's piqued your interest um i want i read through uh chewy's earnings report the other day and

it seems it kind of just got me like pessimistic about the market as a whole and it was actually a decent report, but it made me think they pretty much hit their revenue line. Active customers was down quarter over quarter. So their active customers declined, but their revenue was up pretty strongly because of price increases. And it just kind of got me thinking about how inflation is like this self-reinforcing thing where they can increase prices, consumers have to pay more. And then I think, well, how do the consumers pay more? They get higher wage increases. And then that's a higher expense for the companies and the companies have to raise prices again in order to pay those expenses. And it just becomes this horrible

cycle. And I don't know, it just got me thinking, how do you stop it once it gets going? You got to cause a recession. That's the only way. Is that the solution? You just raise rates to like, you pull a Paul Volcker and just raise rates to whatever the inflation rate is? Yeah. Well, it's a really difficult question. I don't think anyone knows the answer because there haven't been that many of these scenarios in modern history. So it's not like anything statistically significant. How many periods have we had like post-World War I, post-World War II, 70s? That's like three examples there. So it's hard to get a good read, but I think the only conclusion you can draw is that it it's hard to put back the genie in the bottle

and if there's a good way to do that that's a trillion dollar quite like if there's a good way to do that where like 100 of the time you you you do this as a say fiscal policy person working at the treasury working at the fed if you do that and it works um then i mean that you've solved a lot of the world's problems, but I don't think anyone has a foolproof answer except for blunt forcing a recession, which is never fun. That's doesn't have all positives to it. So what happens in a blunt force recession, just bankruptcies, essentially like a greater amount of business failures. I'm not sure you're asking the wrong guy. We, I think that is a way out of my depth i imagine unemployment goes up and i imagine a lot of companies fail because

financing is too costly that's that's kind of what my maybe that's first order thinking but yeah and then hopefully people hope that consumer spending might go down the thing is wages are way more sticky so it's kind of if um so i guess the whole thing is if prices don't keep inflating and maybe there's some disinflation or consumer spending's down, blah, blah, blah. Wages at a lot of companies are not going to revert back if, say, there's some deflation or something like that, which I guess has been rare. But if there is any deflation, that just can be tough on margins for companies because wages are tougher to revert back or really basically impossible because no one's going to say, yeah, I'm going to go back from $100,000 to $80,000 now that CPI is down.

but yeah but either way i don't know the alternative is unemployment i think you will well it's really hard historically companies have not been able to do that um but we'll see who knows who knows yeah anyway that was just like it's been like a reading the earnings reports has made me just bearish all week um I don't know. It feels like every company is not performing optimally. Yeah. We've talked about margins before margins for like the broad margins for the

S and P 500 or the market indices. And I've been kind of the camp that there has been a secular growth because of since the start of the internet that in, you know, broad-based profit margins. And you've seen that in the charts, except for in the recession of 2000 and the recession of 2008. And a lot of people have said that they're going to revert back to the long-term trend of say, 6%, which is what it was, I think is what it was in the 20th century. And I've been kind of the camp that doesn't make sense given the different

unit economics of a lot of these firms. But I think if there's a heavy inflationary environment and a recession, we, how am I trying to say this? We could revert back, but I still think if you look at the long-term charts in the 08, 09 recession, margins went down in the 2000, 2001, 2002 recession, margins went down, but then they reverted back to that long-term trend. So I'm still optimistic that this is only going to be in the short term and that the secular growth and margins will stay there just because of the, you know, you didn't economics of a lot of basically Fang and a lot of those software stocks, but it's hard to tell. It's a really, really, it's really, really difficult. And I don't have any sort of conviction one way or the other.

Yeah. What about you? Have you, have you looked at anything interesting this week? Uh, I saw, I was reading the open sea, um, fraud security. I don't think it's technically securities fraud, but someone that worked at open sea, I believe a product manager would buy NFTs before they were about to get launched onto the homepage and then flip them after they got bid up because when entities were hot, you put something on open seas homepage and the price is going to soar uh and there was conviction on that for insider trading on these nfts so i think that's a positive to uh get some of that um you know bad actors out of there but it's also funny that that's what people are going after if you kind of get what i mean that seems

like a kind of small thing and isn't the whole thing that a lot of it's just really fake kind of gambling stuff anyways so what's the point but besides that earnings have been pretty quiet along our neck of the woods it's software these next this week is kind of software week right the first week of that yeah of the second month in the quarter is always software week and to be honest it's pretty boring to me but i've been reading some stuff on nuclear energy which doesn't really pertain to investing that much um that does in the end yes the uranium prices i've heard people give good pitches on that uh there's a good chart here's an interesting one though i'm kind of just going through my likes on twitter which is fake prep i guess for the show

and there was this chart that i don't know whether it's a chart crime or pretty um glaring about how a lot of the NASDAQ companies can't fulfill a lot of their interest expense. So the chart is called the zombification of the NASDAQ. And it is the NASDAQ composite EBIT divided by interest expense and is the percentage of firms. And it has basically, if your EBIT interest expense is greater than 10, 5 to 10, 2 to 5, 1 to 2, 0 to 1, or less than 0. And I think it is 70% are less than zero, which at first you're like, okay, repeat the, uh, the metrics, sorry, EBIT divided by interest expense. So how much your annual EBIT can you use to fulfill your interest expense on your debt? Does that make sense? Yeah. Okay. Basically, you're one of the metrics to fulfill your debt. And 70% have an EBIT to interest expense less than zero, which means they have interest expense to pay and have a negative

EBIT or negative operating income. Now, at first glance, I thought this was pretty bad. But on second thought, given the heavy SBC at a lot of these companies, I don't think the problem them a lot of the time is paying off debt because they have the cash there. They're just paying for it through the dilution and SBC. I know that might just be companies we've looked at personally, but does that make sense to you how this might be overstated in this chart? Just because EBIT, while it's probably a good metric for people to use to value the profitability of these companies, It's not really on the cashflow basis of any sort of liquidity concerns. Yeah. I mean, if you're looking at a giant pool of software companies, you'd probably want to do like cash generation before interest expense over however much their interest is since they use stock so much in their compensation.

Yeah, that makes more sense to me. An operating cash flow or a free cash flow, even if the free cash flow is- Because they're not going to, I mean, if they're getting cash in the door that exceeds their interest expense that allows them to pay it, the likelihood of bankruptcy is lower than the EBIT might indicate. No, yeah, I agree. EBIT, I don't think it's the right metric for any sort of liquidity scenario, or I don't know if liquidity is the right word.

the margin of safety of whether someone's going to go bankrupt without raising money, needing to raise money. Unless you're, and we've talked about this before, unless your employees stop taking stock. Yeah. Or stop wanting to, although I did see something that maybe we'll get to later. I, yeah. Oh, actually I have a question for you. The We're talking about Carvana tomorrow And in Carvana's Recent report The CEO is paying out

100 million dollars of his own Stock to employees He's like gifting it to them What do you think of that Because he It gets recorded as SBC but it's non-dilutive Yeah that was

Well yeah that one's A unique scenario just the merits of that i liked there was a lot of um governance concerns with carvana which i think anyone that knows carvana is well aware of um and as someone that's doing the management and ownership part of that or i guess but we're both probably looking at that it was a tough to understand all that stuff and i still don't think i get it yet but yeah that part specifically seemed like a nice positive um because yeah just gifting the shares uh i kind of like that um in general even though carvana there's a lot of governance shared type stuff that seems a little

dirty or tricky um but in general that strategy seems good if you've issued i guess i haven't looked at his i haven't looked at the proxies so i haven't looked at his compensation package but if he has been issued a whole bunch of shares and then he's just gifting them back to the employees it's almost like it's dilutive sbc anyways because it's almost like you're just paying them directly but you just instead are giving it to yourself first yeah i uh you may have seen my tweet so total shares outstanding that's like 10x in the last yeah i was gonna i was gonna do a quiz for you but but let's see what it was five years ago in july 2017 it was at 15 million And today it is at 105 million shares outstanding.

So yeah, they're financing through shares, share issuance, even though that seems nice gifting the shares to the employees. You know, it's not a negative at all. It's crazy. I don't think you can say that this is a friendly to outside shareholders when it comes to dilution. 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.

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it is crazy that they have raised that much money through stock issuance and are still having liquidity issues inventory didn't inventory that's tough managing that inventory you were given i don't know they were given the basically a golden hand like you got pocket aces like there would have been no better environment for you to raise capital in than the last 10 years, you got the chance to do it. And now we're still left potentially with a bankrupt company. I don't think we've gotten far enough to know whether or not it's true, but they obviously have a lot of debt as well or an interest that they have to pay. Yeah. It's an example to me of why I don't like companies that have the need to manage a lot of

inventory. I'd rather have a company that just doesn't have any inventory. So I think that's nice. Yeah. In general, that's a negative to me. And it's why I think an important, personally, when I'm looking at a company for something that has as best as you can describe a permanent working capital advantage, three examples that come to mind, Amazon, the classic one, they were financing a lot of their growth through the permanent working capital advantage, Spotify, Airbnb, or some other ones. Yeah. But I'd much rather have that. Does Netflix do it? Sorry? Does Netflix count? I don't think so. Any subscription business where you're taking it up front?

Yeah. And in Amazon's, it's not, wasn't, it was a mix. Well, I guess the prime was some of it too, But a lot of it was people would pay for a product and then they wouldn't pay their merchants for 90 days or they pay them every month or something like that. So that gives them that advantage to manage growth. Yeah, but either way. All right. Here's another. I'm going through my like tweets from preferred shares.

And he asked, what is the ideal number of stocks for a concentrated portfolio that represents 100% of an investor's net worth? what is what do you think what's your answer there yeah i saw that one and i kind of thought about it for a while 100 percent of your worth i don't think you could go less than 10. yeah so i would say 99 of people should not go less than 10. i wouldn't go less than 10. i feel now if one of those 10 is an index or an etf you're fine no i think the rules for no index is no no holding codes so yeah you can't go i will go yeah 10 to 20 kind of depending on what your style is i think is is a good mix and it really depends on whether you're i think a key difference

is whether you're uh always rebalancing um to say if you had 20 you're always rebalancing to five percent or uh letting some run and maybe something that's a huge winner turning into 50 of your portfolio. I think that's a key difference as well. Also, if you're restricted, if you're unrestricted from any artificial stuff, that is also a key, but I think that was part of the assumption here where if you have a, if you're younger and you have an unlimited time horizon and no outside capital, that's, I think 10 to 20, more than 20, honestly, would be unideal because too many things to manage and you're already going if you have 20 stocks as long as they're not in the same industry as long as you don't own 20 oil companies or energy companies

you're already getting the majority of the benefits of diversification and you're actually probably going to have not a good like you're going to have a a negative effect for from having too many companies do you think speaking on that equal weighted equal weighted yeah uh we got a comment here on your, I think, complaints here from Eric. He said, it's all good. GDP is going to accelerate to 30% to 50% a year. Thank you for the joke there. I think that's going to be a classic joke from the ARK Invest projections there. But here's my question. That is, you know what? I would solve my portfolio. But here's the contingency. She doesn't say whether it's real GDP growth or not. She's an inflation truther. Yeah. So if it is pure inflation, she could be

right. Yeah. She's going to start dividing things by the Fed's balance sheet. We're going to start seeing that there. But here's my question. Do you think a lot of investors get into trouble or hurt themselves by owning too many companies? no no well they might not get the optimal performance that they could but i would rather see like the average investor even if i'm the average investor let's say it's a better safeguard than being too concentrated like i if if you're choosing between too diversified and too concentrated i would say pick too diversified well yeah that's not the the question isn't whether someone's going to be too concentrated the question is it do a lot of people hurt

themselves by owning too many companies because i see people that i own 50 companies and i kind of think that's just not it's just too much i mean if they're all equal weighted i don't know it's basically the index right assuming that they're like in different industries i say go crazy who cares at that point if if you're basically the index yeah but that's the point okay what's the point then it's more fun than the index it is more fun but i i because you can feel like you have a winner on any day well that's but that's not a positive that's that's you know i I mean, it's just nice. Let's say you own a basket of 50 stocks

and you like investing, you like the process of it. 50 good companies that are hopefully index components and you think could be, I mean, but honestly that is more risky than the index because those could all fail and the index could do really well. Right, right. You have to monitor those.

Yeah. Yeah. And I think there's a huge difference between equal weighted and having some stocks being a giant portion of your portfolio, where a lot of people love to do the tracking stocks, not really my style, but a lot of people love to do a tracking stock where they just have one share or a small amount. So I think that's a big difference. If you have five stocks that are 50% of your portfolio and then 30 others, that's definitely still concentrated. yeah all right let's uh i actually liked eric's comment so let's go a little deeper what did you think of the uh of the claim well it's ridiculous i mean pat right isn't it i mean there's no

you just you don't believe in innovation let me let me run some compounds let me just get the compound interest calculator going out here on the old google let's let's get some let's put some numbers to back this up. All right. So let's see, let's go to the low end 30%. Right. Um, no, that's a bad calculator. Okay. Nerd wallet helped me out here. All right. Perfect. Let's say initial deposit. We're basically pretending this is GDP is a, um, it's just an investment account. So say, well, let's just pretend it's 20 trillion. I think it's like a hundred trillion, but let's just do 20, no annual contributions. And we're going to compound annually, right? Investment time horizon, 10 years so basically we're going to say what are uh what gdp will grow over 10 years

oh come on load nerd wallet don't do this to me dude it's like so like life can only get so much better like oh there we go okay 10 years and then estimated rate of return 30 i think that would be a compound annually future balance if we started out with keep in mind so let's take the medium or the middle i'm doing i'm doing do you want i'm doing 30 or do you want 40 40 okay that's their that's their base case all right okay we're saying we're saying world gdp is 100 trillion right and then we're going to do 10 years later growing at gdp at 40%, it would be $1,379 trillion world GDP. Divide that by world population, which is what, 7.7 billion? We don't even need to do the math there. Everyone would be absurdly wealthy in

real terms but it's relative like wealth is relative like if the population's the same our our lives didn't get it'll always be if you're a trillionaire and everyone else around you is a quadrillionaire no one cares that you're a trillion well no it doesn't your purchasing power hasn't actually changed i assume no well i think you're doing comparatives you're doing you're saying that In your scenario, you're saying inflation is running rampant because if there's real GDP growth, that means that everyone is absurdly wealthy and basically living the life of someone that, yeah, everyone's like, what, 100 millionaire, a cent a millionaire is living today. I know, but I don't think there's that much room for, like, improvement of life. Oh, yeah, of course. Of course.

How much better can it get? on that well on a long enough time horizon like our resources are finite yeah on a long enough time horizon sure but yeah it's not going to be 40 a year i think i think bill brewster talked about it the greatest gdp growth in a single year for the us was 1942 and what was it bombs and tanks i know i know i know what was the what was 19 19 i think was the number 19 oh yeah well that's Yeah, and that was a year where it was... If that's how we're getting 30% GDP growth, then... 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 well once we colonize mars and some tells

me it's not sustainable once we find aliens on mars we're gonna need to finance that war right it's probably factored into their their uh their bull case yeah i mean people their bear case I think, yeah, anyone just looking that doesn't follow, I guess, the finance economics world and they see 40%, they might not think that that's crazy compared to, say, 5%, a 5% prediction. But 40% over 10 years is, if that happens, I will give all, how about this? Let's make a bet. If that happens in 2032, I will give all my money to Cathie Wood. How about that? Something tells me she won't be managing money by that point.

Hey, don't count her out. Hey, there's a lot of haters on there right now. All right. Next, here's another topic. Call option trading among retail investors has fallen to the lowest level since December 2019. So basically reversing all the surge in activity since the pandemic began. And that's probably a good thing, right, for people just not trying to lose money. Yeah, I think the casino is beginning to run out of entrance.

I've never, I mean, we could even tell during the frenzy that call option activity was ridiculous. it was like the shoeshine boy indicator with all my friends that had never been involved. Like I hear call options are the best way to go. It's like, who are they hearing this from? I think it's gotta be the YouTube ads, right? Or the Tik TOK ads. I mean, who, how are people learning about this? Okay. Do you think the people that let's take YouTube, for example, I've got a feeling like 30% of their ad revenue was from crypto-related ads.

Oh, no, that's just- Maybe that was just hyper-targeting for me, but it seemed like every single video was a Coinbase ad. Well, I would say it's definitely not 30%. Maybe we subtract a zero there, and it's still a non-insignificant number. I don't know. Don't you think they should be held accountable? YouTube?

YouTube? If you were letting, like, let's say, I don't know if Luna ever did this, but let's say Luna was being advertised on YouTube. Do you think they ought to be held accountable? YouTube? YouTube? Probably not. But. I guess they're just digital real estate.

Yeah. Digital billboards. as a shareholder i'd say vote no all right well here's another one netflix is going to stop green lighting expensive vanity projects and start focusing on quality for their movies what do you think of this move i know everyone has everyone out there has a take on netflix but um yeah i don't know that seems like should have been the game plan from the start yeah that's like an obvious hindsight thing but i watched the irishman i think you and i may have watched it together actually but the uh no or we watched the departed or something no we watched

extraction which is solid that was like four years ago anyway the uh i had watched departed and i got all excited for the irishman i think i think that was the two movies and i was like it was terrible i mean the departed is not a netflix movie but yeah no i know i'm okay but the uh but it got me excited for the type of movie that the irishman would be right same director yeah and yeah it was trash yeah it wasn't very good which is disappointing i do feel like they've just gone after whether it's i mean the adam project was okay like okay but they went after ryan reynolds they've gone after chris hemsworth a lot for a lot of different movies all these stacked casts with just no it's like they pick the cast and then they're like all right let's

write a plot like yeah let's write a movie with these guys they had a good one they had a good one about what's the best netflix original movie the best one oh gosh i forget the name but netflix german movie world war ii movie what's it called what's it called uh munich edge of war that was really good it's the one where they have to like the guy almost kills hitler yeah yeah that one was really good i watched that one on the plan that was pretty good yeah so i think they're getting better but yeah they i don't know why this wasn't the strategy from the start and i kind of think they're opening it up an opportunity for hbo to you know this is kind of their territory quality over quantity have you watched obi-wan

no don't subscribe to disney plus yet um have you is it good i mean i think it's only i believe it was only the start it was like a two two episodes that they released um it was it was okay Disney's kind of pissing me off Yeah They're ruining They've missed being on all of the Marvel movies Since Endgame

And I don't know Not to get too Like Political But it seems very woke Like they've really adopted that mantra Oh yeah well that's not even a

I don't know if that's like a better like if I were a shareholder is that the better way to go really like there's no bigger audience for that actually like an honest question I haven't found that when watching stuff but maybe some people don't like it I just think they should

focus on making it good it is I mean it's like watching the obi-wan the it's weird to me that you could be almost 40 years is it 40 years since the like the original star wars movies came out 50 i think probably 50 now almost making almost lower quality movies yeah they're not only the acting but they're like i mean yeah the graphics are obviously a little better but well the stories are so much but this movie was so much better

back then yeah yeah the story is just the stories have been poor in my opinion um interesting though uh the video games have gotten a lot of praise though that the star a lot of the star wars video games so maybe that's the way that they tell the best stories now i was about to say that i do think that's my star portfolio though judging by my experience and i know this isn't an ea game but lego star wars incredible yeah i heard that that's my favorite probably interaction with star wars content yeah and then i was like 12 but yeah it was a while ago i mean those battlefront games were always good and then now the base the story-based ones um the jedi uh what's they made a new jedi for that game that came out in 2019 from respawn and they got

super great reviews and now they're coming out with a new one in 2023 that seems there's just people love that story and it seems like that's the most loved star wars story lately and there's been so much on linear or not linear video that we uh we did get another comment from achilles who uh has been a regular viewer of the show so always enjoy the questions i believe we've corresponded via dm as well he says thoughts on reits data center reads uh in particular do you have any thoughts don't know much don't know much although we are i we are nailing down an interview on i think that's the same tweaker eqix equinix we are nailing down an interview potentially in june so hopefully we'll learn more uh so stay tuned and then what do we have

this question on or do you have any thoughts on reits i've been looking at some reits recently There was one that was an industrial REIT, so like selling to a lot of like e-commerce companies. Warehouses, whatever. Yeah, like warehouses. I like the durability of the businesses, but I think the opportunity costs now, I think there's better opportunities elsewhere now than, say, a year ago. I know that's obvious, but like, I wouldn't want to be climbing into REITs when I feel like you can get a good return on other companies, like higher quality businesses. Yeah. I think in general, anything real estate is just lower quality for me

because I don't like the capital intensity. Maybe I don't understand why it's a higher quality business. I know capital intensity can be great sometimes, but just for me, I don't like capital intensity yet. So there's gotta be something pretty special if you're going to be capital intensive and maybe there are REITs that aren't, but. And a data center REIT like in theory sounds incredible. I think Brookfield asset management, their infrastructure side was they own a bunch of data centers and they

haven't been performing very well. Yeah. Let me look at, let me look at the old performance. I think there's more complexities to it than just like, Well, more people are going to use data centers over time. Yeah, I think so. I believe that. And who has all the leverage there? I believe, you know, AWS probably does.

Well, Equinix, I mean, it's up the last 10 years at 447% total return. Hard to tell. I don't know much about them. Let's move on to this other question, which we might know a little bit more about because we just did one on Hershey. And thank you, Achilles, for saying that Adyen episode with mostly borrowed ideas was good. not getting as much listenership as i thought which is fine but i think people really enjoy

that that was one of the best pitches we've ever had so if you're listening to this go back listen to that it's not even for us we didn't say anything he talked he talked the whole time which is great sometimes after a good interview or like a good pitch brett and i kind of look at each other like that was good yeah like we know that not only was it a good pitch but like maybe we got to keep that company on our radar and it was uh i'd say adian was in that bucket 100 okay here's the question though what is a reasonable valuation for staples like pg pretty sure that's procter and gamble low growth names like pg costco seem to have be way over stretched at the minute or no sorry in my opinion what kind of multiples make sense in your view

for me it's got to be well there's some higher quality ones like costco but again if it's lower growth if something's going to be lower growth yeah this might sound crazy costco might be a little different but if something's going to be lower growth the the earnings or cash flow multiple has got to be close to 10 in my opinion i was thinking the same thing yeah it's got to be it's got to be something where in 10 years if the cash flow doesn't change i'm getting a 10 return each year yeah and that's taking a little more risk but teach his own if you're okay we just did one on her we just did a not so deep bevin hershey it's trading at i think about 20 times

earnings now which is a little higher than normal it's similar to maybe a lot of these high quality cpg companies but the growth is low so do i think you would lose money over 10 years total return if you bought right now at Hershey, most likely no, but there's a chance that you see some valuation compression. And I wouldn't want to take that risk for something that is a lower growth. It just, that combination always deters me. There's so many stocks to invest in, but- If you're getting, you should get, if you're paying sort of, if there's risk of multiple compression at all. And I would say that that tends to mean north of like, assuming this assumes earnings stability, it stays the exact same. If it's north of 15 times, I would say there's

multiple compression risk. For a low growth, yeah. For a low growth. If it's higher multiple, you should get paid to take that risk. yeah which means traditionally that there should be a bunch of growth in its future yeah and sometimes that can come from margin expansion so you know if top line's not growing that quickly if you have margin expansion plus a solid buyback program but the the thing is the buybacks are so much more creative at lower multiples so if something's low growth and a heavy repurchaser um that's just so much i mean it's just math it's so much better than a high multiple same similar apple is the huge example of that what's the biggest green flag

for a management team like let's say you don't know the management team at all you've never heard anything they've said never heard read or heard anything out of their mouths what's the biggest green flag that could happen i have mine in my head because i saw one I'll just say it. The one company issued like special dividends throughout its history. That to me is a green flag. That's a good one. You're giving capital back to shareholders when it's the right time to do it. And we don't, I don't, that's all, that's the only context I know of it. It could have been bad timing, but like you think it's good timing. It's not like putting it on the back burner yeah i think mine is an open repurchase plan with no limits

and a history of buying back intelligently well isn't that fun the uh right that's right that's come on here's an example yeah i mean definitely but the open i don't know what if it's the open repurchase plan but you're just repurchasing the same amount every quarter oh yeah well that's i would say that's like not thinking about it i'm not a fan of that that's why i said intelligently if you can if someone's been by you know someone's been around for 20 years you know whether they have been there's enough data there to know whether they've been you know buying back a track uh at um opportunistically at the right times, if that makes sense. All right. Let me, let me give a spiel on

Apple real quick. My computer died this morning. Computer died, crashed and burned. Don't know what's going on. Can't figure it out. I thought about it. I'm not, I don't like Apple that much. I kind of think of them as the evil empire because we own a whole bunch of companies that have to pay them fees and it always frustrates me but there's no way in hell i'm leaving that ecosystem for the rest of my life the there's the switching costs are too high there's too much hours that i've put in whether that's like files that are on the iCloud maybe there's a way to switch but it just isn't worth the effort oh have you heard of a thing any minute called a thumb drive and a google account

i mean see the google account helps but there's stuff that's like i don't know there's so much stuff on the computer that you'd have to go in and get well just so many different files you can't just but you can you can put them all you just drag them all over maybe i need to help you out here are you sure like all at once because what if i got to go into all these different areas to go find i think there's definitely a way and then i got to relearn over i don't know probably two or three months the nuances of this new computer and i'm slow with tech i mean i'm never going to leave yeah i will so window apples are way less intuitive than uh windows in my opinion the to learn like just where files go and how it's just yeah it's probably accurate the

and I don't even care about the interconnectedness I do with like the watch, which by the way, they're completely screwing Spotify on the watch. They're making it so painful to like. Yeah. I think there's, I believe that's part of the lawsuit they have against them. Yeah. They, they, there's a, they create friction with them. I don't know. Well, how big would the cost difference have to be for me to switch?

from go outside the ecosystem for my laptop had to be higher than it is now, I think. Well, you know, as a Apple consumer, not someone that doesn't like him very much, I think you would be pleasantly surprised if you switched, but me and do whatever you want. I think the laptop or computer part is the weakest link. Would you agree or disagree in the Apple ecosystem?

the weakest link yeah probably still pretty strong though yeah it's not bad though like they're having macbook shortages right now i'm pretty sure um so it's i don't know for anyone that's wondering mine has a utility company at this point like it's a utility it's not i would not call it consumer discretionary i cannot work without it yeah but you can get a different you can get a different brand yeah i mean it's a lot yeah i agree the general category is but um yeah i think there well there's the perception that people can't switch but i don't think it's that big a deal for any if for anyone that's wondering ryan did have a he's been working for the last two years last five years on a 13 inch what six-year-old apple laptop so we might

get a whole new put in a shift no doubt about that we might get a whole new productivity out of ryan once he switches to something with a real screen hey don't don't hate on the 13 inch it's it's it's done wonders through uh through university okay all right here's okay yours too big and clunky yeah i mean it doesn't fit in most bags hey if it's come on if it's in my backpack um all right here's another switching topics i this was a viral tweet so i bet you saw it but it's lending club says that one-third of consumers earning 250 000 or more annually currently live paycheck to paycheck and these high income earners have an average fico score of 758. Thoughts on that? Is the American a third? Yeah. Is the American, are people just, well, obviously people are addicted to buying stuff, but this shouldn't, unless you have like six kids in New York City, I mean, this seems a bit ridiculous, right?

Like people, how are we so immune to not saving money? Is that just kind of, does it feel strange to you? I do feel like the generations before were so much more frugal than today's. Hard to tell because we weren't living there, but most likely, yeah. The, yeah, I don't, I mean, it's absolutely ridiculous. Unless you have a huge family and you live in a super expensive area, $250,000 should get just about anyone by. And even like, say, going down since we're both single and no kids, going down to say, if it was just cut that in half to what, $120,000 a year to maybe X out the other expenses, being generous with that. i would be to live paycheck to paycheck i would have to be spending so much money on stuff i

didn't need right like how much all right well let's do the math i guess on a uh on the 250,000 how much do you get are we're assuming that's gross right oh right right that's gross so now let's say you get taxed i don't know let's say you deserve 150k yeah i can go conservative yeah yeah 150k you've got what are your monthly expenses let's say you live in new york city and you're in a couple just no no new york new york's too outlier new york's true outlier go like a suburb of los angeles austin how about that okay austin's fair that's fair austin your rent i have no idea what the rent looks like in austin but let's say it's two people i'm gonna assume 2500 if you're yeah sure living comfortably yeah how much is 150k a month

in income what like 12k sorry what how much is 150k 150 a month uh let me just confirm it quick yeah it would be like a little over 12k 150 divided by 12 should be able to do this in my head, but yeah, I assume it's like 12 and a half. Yeah. Something like that. Yeah. 12, 12 and a half. Yep. Exactly. 12 and a half, two and a half gone after rent and two and a half might be a little, but let's go ahead and say it's three grand. Yeah. I mean, that would be a nice department for sure. All right. Now you've got 9,000 left. 9,500. 9,500. How much are you spending on groceries? Let's say a thousand. Yeah, but this is one person. So is it one person? Do they say one person? One third of consumers earning 250K or more. So yeah. So this is like, what are you

spending i mean this is being super conservative in that survey it's insane yeah i think any way you cut it like even if you spent a thousand bucks on groceries and a thousand bucks on restaurants a thousand bucks on restaurants okay you have like a hundred thousand bucks on transportation 150 on utilities plus white plus wi-fi and then probably another hundred bucks for streaming or video games or whatever pretty much any way you cut it you're gonna have an extra five grand i'd imagine what what and what are what is everyone spending money on that i guess that's good for um owners of financial assets i feel like big spenders

are probably listening to this like what maybe maybe were too frugal well that's possible it is it's like i always think of the moment in the big short when he's like have you ever thought you were wrong dr berry and he's like i guess that's possible because he couldn't he never considered it even though he was right he was uh he was right again on the whole uh recession coming yeah well or bear market i guess we are officially in a bear market right uh nasdaq not s&p did not reach it let me confirm that the s&p got close but never reached it it's what 20 down spare market yeah year to date nasdaq is down 21 and that is after the recent rise s&p is down 12 and a half percent and got close but did not get 20 but you got to do

it from all-time highs yeah year to date is essentially all-time highs we only had one day where so that's kind of what i've been using just as a shorthand damn it feels worse always feels worse yeah uh let's let's go any other topics i think i scrolled by one oh you think chipotle's quality has gotten worse are you sure oh yeah these are all what all these comments are yeah thank you for everyone yeah does that matter though like i i've just been noticing that their quality seems lower even like the the employees say this might not seem like a big deal but i think it is just for the customer experience the the building of the burrito or the bowl has gotten sloppy and yeah i don't have to shop there like that feels a bit

pretentious but it's part of the experience if if i wanted something that was laid out bad uh i would just make that at home it does always feel to me it always feels like once a business starts making the in-store experience poor it erodes that companies like longevity even though like over the last year if you i've walked into a chipotle on multiple occasions and like, they don't serve me and they're like working on all these online orders and they're waiting. That's like a huge, that's a big turnoff to me. Well, I'm online. I've never, I never go. I'm online only get those points. Although I'm not going to use them anymore because I might be done shopping there, but, or getting food there. Like, here's the deal with me.

They're raising prices, right? To combat inflation. But you would have thought that they would stick with their high quality items fresh really fresh and that was the whole thing it tasted like something you know a fresh item you'd make at home for you just think the ingredients are bad or what yeah and there's a lot of people without now this is twitter without sources but a lot of people saying that a lot of restaurants have done this now where they've had to get their quality ingredients have gone down um their sizes have gone down and it's just because of these supply chain things food costs all that stuff and they don't want margins to be hit so and they're having a tough time with labor so a lot of the employees might not be as high as quality as they used to be

you know you know what i mean i just if chipotle is supposed to be the better and better for you fast casual they i think it's a mistake to go for these short-term margins uh because over the long term they're just losing so much customer trust all right let's say the supply chain shortages or problems persist chip shortages persist labor shortages persist inflation super high for the next five years where's the optimal place to be for your portfolio oh well that's a that's another million dollar question right i'm going to say this without putting much thought into it companies that live entirely digitally right with minimal employee needs it's got to be it you don't have impacts from energy existing

i would add the caveat that you have to have exit like already high operating margins because i think i think payroll is going to uh rise as a percentage of revenue well okay then i will take a consumer i will take a software or consumer internet company with that does not impact about energy prices and does not have much need for uh the lower end of the wage spectrum with positive operating margins i think that's the ideal hunting ground because so visa well that's a good but yeah Something like that. I guess Visa is a great example. But I kind of invert the situation and say, okay, how do I avoid any impacts from oil prices or energy prices or commodity prices as best as I can? Or looking at a company, are they going to be able to avoid these or does

matter to them are they going to be able to avoid wage inflation better than other companies and if there's shortages in food supply chain stuff does that matter to them i think that's kind of i think that's not every company that's what i think it hits every company well Well, second order. One way or another. Sure. Sure. What about, well, I don't want to.

It doesn't hit every company equally, obviously, but I don't think any company is completely immune other than literally maybe like MasterCard or Visa. No, but they're not immune because of spending. Spending's down because people can't get stuff. Yeah, but if inflation's up, spending's up. Yeah, but if people, if purchasing power's down. well purchasing power's down and inflation's up and i think we've got bigger problems

well i still think i'm sticking with my answer there are companies like that i think there's companies in our portfolio that are like that i hope i hope so i hope you're right all right we've got like two minutes left any closing yeah any closing arguments what closing arguments what are we arguments what's the uh what's the macro look look like what's your it looks confusing and i don't really honestly given the way we try to invest i don't care and i'm very comfortable because we try to make it we explicitly i mean this is true we explicitly try to make decisions and this was before the macro stuff went all haywire where macro doesn't matter. Like we, we try to, and I think that's kind of the way to do it. And to be honest,

I don't really care. Here's one though. I saw a good interview with the guy that does, he's got the passive flow thesis. He's the, not the head of that, but he started that kind of thesis, Michael Green. And he made a great point that I think is kind of relative to if you're an investor trying to understand why markets are moving in, say, a certain week or why they're up when a lot of the economic metrics seem bad. So there's so much money in these passive, they're not even passive, it's just, say, they're in a target date fund of a 60-40 allocation. I'm sure it's more complicated than that, but in a month like May when stocks were down

a lot, your allocation of stocks are underweight, what you want to be. So at the end of the month, there's a bunch of passive buyers from Vanguard, State Street, what are the other ones? Schwab, BlackRock, yeah, Fidelity, T. Rowe Price, that are buying up stocks in these 60, 40 portfolios or whatever it is, index funds, blah, blah, blah. and they need to rebalance to get from, if they're down to, say, 55% up to 60%. And that is just a massive amount of flows coming in. And I kind of think, and this is without any evidence

and this is something outside of my league, that's what happened at the end of May. Does that make sense to you? Yeah. I mean, it makes sense in theory to me. I'm not sure... I don't know if it's completely accurate, but like that,

that theory would make sense that all these things are underway. So what they sell bonds. No, not necessarily sell bonds, but when, well, potentially, but you'd have to,

right. If you're 60, 40. Yeah, I guess, I guess, but yeah, I don't know the exact dynamics.

That's a good point. I think it's a plausible explanation though of what's happening. Yeah. Potentially. All right. One o'clock. That's going to do it. If you tuned in, Achilles, Eric M, everyone who asked questions, thank you. And tell the podcast listeners when they can watch live and join the few that are asking

questions here. Yeah. It's Thursdays at three o'clock Eastern time, 12 o'clock Pacific time. We are on then. Just go to YouTube, check out our page. Next week's going to be Wednesday because I'm traveling on Thursday, but yeah. All right. Well, next week's Wednesday, 12 o'clock Pacific time. Um, I think that's going to do it. Do we throw disclosures on this? Yeah, just, yeah, that's what I've been doing. All right. Well, let's, let's remind listeners that, uh, Brett and I are not financial advisors. Anything we say or discuss here on chitchat money is not formal advice or recommendation. We are

however, general partners at Arch Capitals. Clients may have positions in the securities discussed in this podcast. Thank you all for listening. We'll see you next time. You