Chit Chat Stocks - Todd Wenning | Investment Philosophy

Episode Date: March 16, 2021

Todd Wenning from Ensemble Capital joins Chit Chat Money this week. The group discusses different investment philosophies and the different ways they come across new investment ideas. Before the interview, Brett and Ryan share their favorite stories from the week. After the interview, Brett and Ryan discuss this week's hot water, buy-sell-hold, and anecdotal evidence. Let's Go! Follow Todd Wenning on Twitter: https://twitter.com/ToddWenning?s=20 Follow The Science of Hitting on Twitter: https://twitter.com/TSOH_Investing?s=20 Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Subscribe to our YouTube channel: https://www.youtube.com/c/ChitChatMoney Follow us on Twitter: https://twitter.com/chitchatmoney Visit our website to see more from your hosts Ryan and Brett: https://www.chitchatmoney.com Email us: [e-mail] Timestamps Stories | (3:04) Fintwit | (25:20) Interview | (29:24) Hot Water | (1:17:15) Buy-Sell-Hold | (1:24:40) Anecdotal Evidence | (1:26:34) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. 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. Today is Tuesday, March 16th, and today we have an interview with Todd Wenning. He's a senior analyst at Ensemble Capital. Didn't really talk about any companies specifically. Maybe we did briefly, but it's more oriented around portfolio management, sort of position sizing, how to think about the businesses you're analyzing. I don't know, it's really sort of portfolio construction as opposed to just business analysis. Yeah, we definitely look up to how Ensemble works here, and I think any investor that's looking at a way to build a strategy, allocation stuff, trimming, when to, all that stuff that goes into actually managing a portfolio, they have a lot of, I think, great insights on it, and yeah, that's what we talked about during the interview. Agreed, and what is your story for the week? by the way we are kind of trimming down or we thought we were trimming down a little kerfuffle

on our end uh we thought we weren't going to do current state of fin twit so i don't have one but brett has one i think we're going to start trimming that down potentially come to consensus on it just because our shows are running long we haven't really got any complaints about it but either way so i'm missing a currency of fin twit but story for the week i'm talking the hindenburg short report which was delicious it was good uh and you haven't read it yet so um it'll be a little more entertaining that way but what are you talking about uh there was that news report that facebook has 10 000 people working on ar vr projects so augmented reality and virtual reality very interesting um thought that number was huge and we're gonna have a discussion around that

okay and then uh we have our hot water buy sell hold anecdotal evidence but before we move on sales pitch time yeah and the orders have been coming in good using seven investing well that's great that it's an easy product to sell because the team over there is so great uh when we talk about investors we respect i mean the the ones we know the best are you know simon erickson who is the creator of seven investing and matt cochran uh we respect their investing styles a ton and the whole the rest of the team yeah they have six people right now and they're gonna have their seventh because they do love the number seven. So they have seven advisors, seven picks a month. But yeah, I mean, if you want, we say it every time. I mean, there's no reason not to try it

out, at least with our promo code CCM, $10 off at checkout. Yep. All right. There's our sales pitch. Here we go. Welcome to Chit Chat Money. On this show, hosts 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 guest is not formal advice or a recommendation.

Now, please enjoy this episode. Okay, welcome in. I'm going to kick things off with the Lordstown Motors Mirage. So Hindenburg released a short report on a pre-revenue SPAC called Lordstown Motors. And this was an actual short report. So they do have a short position. There have been times when they do stuff where it's like they try to uncover a fraud or something like that. And they don't actually short it.

I think they did that with Clover Health. But anyway, Lordstown is, like I said, a pre-revenue SPAC. It's an EV company, so you've seen this story a million times, I guess. But they created a rendering of an all-electric truck that some people thought would sort of mirror the F-150, the Ford F-150, and it could lure some truck drivers over to sort of this electric – to an electric vehicle future. But the CEO is named Steve Burns, and he was the former founder of Workhorse, which, as you know, has been in trouble recently. Workhorse is, yeah, I see that. Is that that ticker that gets floated around that's had some contract not renewed? Or am I getting that wrong?

Yeah, no, you are getting that right. But he was removed. I guess he voluntarily stepped down. But apparently the board pushed him out. Yeah, voluntary step downs from positions that pay millions of dollars are typically not voluntary. His former employees described him as a con man. So as soon as he was removed from Workhorse, he started this EV company. And these are sources saying that they described him, that Lord, or that Hindenburg, they got

So Hindenburg talked to recent employees or old employees over at Workhorse, and they basically said, some of them were like, he's got a good vision, but he never actually follows through with anything. And then some were just like, yeah, he's a con man. Anyways, but Lordstown, the whole big thing they had going for them was that they claimed there was a bunch of demand. So they had 100,000 pre-sold vehicles totaling over $5 billion in revenue. So pre-sold is just basically orders, like people that said they would buy it.

So like RPO, remaining performance obligations, or theoretically, or something like that? No. It's different? There is no deposits. They say it's very, the CEO claimed it in quotes as very serious orders. Exactly, because we have very serious orders for a bunch of investors, right, to come onto our firm. We have commitments for commitments. They're going to commit to commit soon.

That's literally what it is. I'm not joking. That's what it is. But that was sort of the big driving force behind the stock. And so Hindenburg discovered that most of these orders were fictitious. So a recent 14,000 truck order, which represents $735 million in sales, was sold to a company that operates out of a residential apartment in Texas. They have no business. They operate in a fleet.

i mean it's literally like if you don't have enough money to buy a house in texas i don't think you have 735 million dollars to buy these ev trucks yeah that's uh i think i'm sorry maybe i'm taking a leap there but it seems that makes it was just an average residential apartment i think you might be onto something anyways uh another 52 and a half million dollar order came from a two-person company operating out of a regis um if you don't regis is like a we work yeah it's like a cheaper we work and the owner of that company literally told hindenburg it won't order any vehicles in that the pre-order was just for a marketing relationship so that owner wasn't in on it they were like yeah we'll do it but i'm not controlling whether you count

this as quote sales kind of like that well yeah so apparently these agreements are non-binding so So it's just if you have, you basically give them this letter of interest that says, if you guys produce or manufacture this car, we will consider ordering. So it's a commitment to consider an order. Yeah, commitment to commit later, to potentially commit later. And so these like two-person companies are like, we would consider a $100 million car purchase, sure. Well, we get enough stimulus checks and we might be in business. anyway so uh yeah the orders basically mean nothing and most customers said that they were just they wouldn't order them even if they were manufactured but it was something maybe they'd

consider and so when lordstown so there was all those problems with the orders so they were basically fake and then lordstown apparently was having some production difficulties as well as you might imagine so lordstown attempted its first road test drive and the car burst into flames in 10 minutes and they had to call 9-1-1 um since the spac in october executives and directors have sold more than 28 million dollars in stock damn not as they gotta bump those numbers up it's not like uh who is it trevor milton what is he worth he's still he sold his nicholas stock correct or maybe he still owns part of it well you can't just sell it you can't sell too much or else people will lose faith well that's true that's true you got to keep the cult going or

you can have a backup plan where you sell it to fund a quote trip to mars but that's for other people anyway so this is all basically fictitious and the ceo seems like a scummy guy uh no surprise do you think this is the tip of the iceberg for the ev frauds the ev pre-revenue stuff yeah uh yes well okay i guess you know i wouldn't be surprised if there's 10 more of these yeah seems like okay you know what ones sound legit and it's basically because i trust the investors rivian is definitely legit amazon is backing it with billions of dollars that seems totally legit because i mainly because i trust amazon's judgment and they have a a legit order for a hundred thousand trucks and then to quantum scape now that tech you know now that one's the

like it's worth 50 billion dollars it has no revenue and i would never invest in it right now but jeremy grantham that's the one he talked about on the latest invest like the best they invested in because the technology's so great and they were talking about how well yeah i mean it's still kind of a vc bet there's no reason it should be valued at 50 billion dollars that one seems legit but if i'd still never invest oh yeah no no no but it won't be surprised if 80 of them out there are zeros and total frauds the thing i find the funniest part like the funniest part is the production stuff like even if you get all these apparently they were he was paying commissions to consultants for every pre-order that he got so if not a good look i mean i think people are

learning how difficult it is to not only build an electric vehicle but to scale any sort of manufacturing yeah manufacturing business i mean it burst into flames in 10 minutes that's yeah i mean i don't know these maybe yeah i don't know the people have been doubting the traditional car makers i think if you're just one of those people that doesn't know anything about the business i mean we don't know anything about the business really at hand or like uh you know hands on experience or anything neither do the ceos and yeah apparently these ceos didn't either but you gotta have respect for what i mean it takes tens of thousands of people lots of robots lots of automation so many moving parts uh for like gm toyota ford i mean it's tough to build it takes

decades and decades does tesla's success or sort of marketing style that uh you know big events big launches then you take pre-orders and you have sort of this eccentric ceo do you think that's given rise or given way to a rise of sort of snake oil sales salesmen who are just going where the money goes let me answer that with another question do i think that the ceo who became the richest man in the world committing fraud every year has enticed more people to commit fraud i think so sorry tesla shareholders if you're listening i mean we figure you probably don't listen well yeah if you if you listen uh if you still listen uh kudos to you for having holding you know two ideas in your head at the same time but there's if you don't think that

tesla committed fraud i mean you're just uh i'm sorry like what part the solar roof tile okay well i mean that was five years ago so apparently it doesn't matter but yeah i mean that that was known in court now to be to be a lie but sorry do you ever worry about the incompetence of the sec because this one like it didn't take much digging he they just called they looked up the companies that ordered yeah literally almost a billion dollars worth of cars so they looked up these companies called them figured out where they were headquartered they had a ups shipping address how are you like like at a mailbox and it just i mean it was a residential apartment in texas ordering a billion dollars worth of cars uh yeah i mean the scc are they

just not looking or do they have too much to look at at once yeah they you can't really blame them too much i mean there's some things that they seem to be laxing upon the last sec commissioner I didn't really like it seemed like there's a ton of things that were obvious but there's just so much out there I mean you kind of gotta investigate yourself this is why I really hate investing in don't you think I mean pre you know anything that hasn't been audited as a public company you know what do you think kind of tough for me what do you think about larger barriers to entry to going public I know it's like this friction that everyone's talking about reducing which seems weird i think you should have barriers to entry reducing friction like yeah having the idea

that always reducing friction yeah like always reducing friction i don't think that's something that's you should always try to do you know what i mean sorry that sounds i don't know if i'm articulating that well but yeah you're not changing the world investing in the SPAC you're giving money to steve burns i know it's uh these SPACs seem like a great way to take money from poor people and give them to rich people i'm sorry to say yeah but that's what it feels like and it makes me feel bad but the sec i hope they get more funding and can really actually do their job well but it seems like they're just overwhelmed right like yeah just there's too much there's too much yeah take care of all right uh facebook ar now yeah this might be a little more optimistic

depends well you might think it's a little dystopian but it seems like some cool technology so we'll get into it. It was a big story, really, that I think could have a lot of implications across many different industries. I think it'll make investors ask a lot of questions, which we'll probably talk about at the end. But quick backstory, Facebook has a history over the last few years of trying to get into the AR. And when I say that, it's augmented reality and virtual reality stuff. So they acquired Oculus, which is kind of their VR gaming thing. And they acquired control labs which is that one company that had the thing on your wrist where you could control like a computer with your fingers because it connected to the you know nerves in your nervous

system and connect to your brain it's pretty cool uh that one was the technology was just was that the josh wolf thing yeah did they back that yep yep that was them you didn't want them to sell the facebook but yeah you're thinking of that correct and they have a you know they have a lot of history of investing in that with R&D. Right now, apparently they have 10,000 people or 20% of the company working in VR, AR, and hardware, which I thought was extremely interesting. And Facebook wanted to buy Unity in 2015. So clearly management, Zuckerberg wants to, this is where all of their R&D is focused. And now it's a complicated topic, so I'll try to sum it up quickly oh i misspelled something here one second sorry uh but they they wrote a post on it about

what their vision is uh but to understand that you know there's a ton of moving parts so facebook labs has like a 10-year vision to create an ai-powered contextually aware interface for ar glasses combined with wrist based motion sensors which is the control lab stuff to become the next computing paradigm i guess is kind of the you know the actual correct word here um does that That all makes sense because I basically took those words from their blog post. Yeah, it makes sense. I'm thinking about the discussion questions, so just go ahead and ask them. Yeah, so there's no doubt Facebook's one of the few companies with the technical expertise

and the money to build something like this, however long it takes. But as an investor, will consumers adopt it if it's from Facebook? Because I think of the example of the portal, which was the one, those things, even the ones that people seem to like or was another one that Amazon one that they have with, you know, the Alexa with the video call thing. You know, the portal is kind of like that with the video thing. The text seems super cool or you kind of follow you around so you can talk with people and they can always see you. But that one totally flopped because people didn't want Facebook cameras in their home. Do you think that brand image of, you know, the bad brand image that Facebook has, do you think that could stop any of this from happening? I think they have to be very clear that they won't harvest data.

And if they will, then no, I don't think they will. Because we saw what happened with the WhatsApp thing when they said we're going to start collecting data. And they had to issue that release to everyone that was using WhatsApp. up and they had to peel that back yeah because everyone sort of there was like this ban whatsapp type of protest going on so no i don't think if they are collecting data from these vr or ar type of glasses or this human interface where it's that close to your body people will not accept it but if they it has to be like a full business model pivot yeah they have to go from they have to become apple facebook has to become apple before yeah before apple kills their entire

business yeah it seems like apple's really trying to there's i it's less invasive apple is definitely not friendly to facebook i guess let's put it that way but i think you have to ask the question maybe if you're a facebook investor thinking about it whether even if facebook comes up with the best thing or their first i mean apple is clearly working on something like this why won't they win because one they're the best at designing things that look good which matters for something that's going to be you know part of people's style yeah and two uh you know i mean it's it feels a bit like samsung where samsung creates whatever the best technologically sound products for smartphones but people will still buy

iphones for 400 bucks more yeah if apple gets it like if we were picking between apple and facebook i think apple would have better success with it but facebook's tech is better i mean it's not an easy solution like people can't like come not both companies can do it obviously if facebook was able to do this in-house they wouldn't have gone out and bought control labs that's oculus that's true And the thing is, like, maybe it's so good that it doesn't matter. But I wonder, like, I don't know, is it really something that people are looking for? Or is it a problem looking for a solution? But the other question I had, so Eric Sufert, I hope I'm getting that right.

I don't know who he is, but he seemed a lot more knowledgeable about this industry, which is something we are not that knowledgeable about. But he had a good article outlining why this recent push into AR as kind of the story Facebook is telling, because there, you know, you have to think when a company, you know, leaks news or news gets leaked, typically it's intentional. So he says that the reason that this, you know, new AR stuff could be because of the growing advertising restrictions being worse for the business than we thought. Now, do you agree with that? he had this quote here, the acceleration toward a consumer technology market that hasn't yet materialized is potentially a capitulation on the business advertising that has guided Facebook to a $750 billion market cap. Would that concern you if you were an investor in Facebook? This advertising, the whole thing might, there might be a few cracks there. That's what's keeping me

sort of uninterested. And Facebook has become cheap for that reason, is people are genuinely worried about the future of ad revenue for facebook and if you listen to the q4 conference call it was basically like mark's tone was that apple is ruining his business that's what it sounded like yeah he i think he clearly said apple is our largest competitor now they're yeah or like they're inhibiting them they seem clearly bitter and you have to remember that it's 98 of their revenue currently or something along that line so yes i think the pivot is almost existential to facebook to to move away from the data harvesting ad algorithms and you can make the claim that it's bad for small business that facebook you know facebook kind of gives them

that advantage which i haven't read up on enough but yeah it's gonna hurt their business model and And if it's really hampered, like if the ad revenues say you take 50% of it away, they've got a lot of bloat. 10,000 employees on AR and VR, they have a lot of costs that they're going to have to trim down. Yeah, and it reminds me, people are like, well, is Facebook the future sin stock? And that means that they could be, you know, people hate them, but they could be, you know, I don't know, do well over time. their earnings do a lot better, similar to an Altria group. That's kind of the number one I, you know, people think of for the sin stock. But the thing is that multiple has got to come down to a sin stock level before it can be considered. I think people might not have thought about that.

But last one before we move on from an investment perspective. So you mentioned this, you know, we are, you are worried, I think we're in consensus that it is worrying that advertising stuff will face major headwinds, but can the growth of stuff like Facebook and Instagram shops, You know, they seem to be doing really well with that e-commerce stuff, this AR, VR platform, or even payments through WhatsApp. Counteract that. Does that, you know? Actually, the more that I think through this, I think 2020 was the peak year for Facebook. Hell, you're coming on that train, huh?

I think the events that sort of, the political events that happened because, and everyone sort of reacted to, look what social media has done. And I think you guys, if you're listening, you probably know what I'm talking about. I think that would be kind of fitting if that was sort of the peak of the demise of Facebook. And the competition seems so much stronger than ever before. The stuff about the arguments about them being a monopoly I think will be over soon because the competition is so strong. I mean, Roblox has taken over the younger audience. And just the business model just doesn't fit anymore. it's like it's echo it's putting everyone into an echo chamber it's got everyone siloed into

whatever they believe with confirmation bias and then i mean you're it's not even just the ads it's not taking data and serving them ads it's taking data and serving them the feed that they want to see that's the problem and we're we're big users twitter uh so uh we're not like but the fact that morally but the fact that twitter is so bad at it is yeah it's how it helps them it's been a benefit to them and and the fact that they i mean they've been slow to take data which everyone's like gosh you know that was everyone's big knock on twitter was they should be able to monetize their user base better but i think waiting and looking for other ways to do it has been good yeah i mean twitter yeah or maybe they're just ineffective but yeah and i think you know the

e-commerce stuff sounds very promising but betting on this vr ar platform when one you don't know who's gonna win two you don't know if the tech can actually be mastered on a short enough time horizon i think in 10 years it's clear that probably something like this will happen but three you have to worry that is this something like voice technology where it's you know cool and you know something like that but it's not really a whole new paradigm like the iphone It's not like people need this. It feels a bit like Google Glass. I don't know.

Maybe. But the problem is you are now, if you are an investor in Facebook, you are betting on a pivot. You're betting that they are successful doing something other than just running ads because it's becoming very difficult for them to do that. And they're easy to hate. They're easy to go everyone against Facebook. Yeah. Which is a prop Yeah

We could We could definitely Be wrong here You could definitely Look at it In this time period And say like Wow

That was a total bad call Maybe the advertising Headwinds aren't as real As we think It might be One of those cases Where You know

It's how we think it is Versus how it actually is And from whatever bubble We're in But I don't know It's keeping me out of it Two years from now

You'll see Alright Will I am calling the demise This is the top i am not the top i am uh i'm in your i'm in your camp but i am not this is and this keeps me out of investing in facebook in general with the i'm not 100 certain with any anything that's gonna happen with the company yeah no i have no money invested on either side of it but uh

current sort of fin twit kind of pivot there uh what do you have because i totally forgot to have anything for this yeah it's it's okay i think this one will be quick but a good conversation so we've been making fun of nfts uh as most people have clearly um again i'm a non-fungible token yeah i am uh you know nothing's 100 certain but i'm 98 certain that the top shot stuff will go down as the peak of the bubble i mean it's clear well fun fact one of the investors we respect uh chris bloomstrand he changed his background on twitter to the the people thing i honestly haven't kept up with all this people and yeah so that one's the big one that got sold the the picture or whatever got sold for 69 million dollars but you know he's kind of trolling him by putting it

as his twitter background if you understand what i'm saying good subtle joke there but i think i found something that might be useful so there's this newsletter called the generalist they raised funds through an nft structure for the group that's going to cover the coinbase ipo so like random people can participate in owning this newsletter i think uh very confusing could have stuff wrong here but it feels like something is actually getting backed so like they have a share in the maybe the revenue here i don't lost me i don't get it so like it's a way for people to invest in this newsletter don't know why it needs to be in that structure but that seems more real still a big doubter but yeah you still have lost me i don't understand why you need to invest

in a newsletter in general about a cryptocurrency by a cryptocurrency no no that part you don't have to worry about what the content's about but it's yeah it's again it it always feels like a problem searching for a solution wait no a solution searching i get that wrong it's a solution searching for a problem excuse me all right but more fun one that i think we can understand coupang the south korean amazon that looks legit read the s1 stock is trading at a really a valuation i can't get behind but it feels to me like a jd.com and a market i can trust which got me pretty excited i know i stole that from dennis hong but yeah i didn't look into it and i just saw everyone basically posting their victory uh of all the private investors like

so proud of what we were able to do which makes it sound like the investment is over so proud we did this that's usually not inspiring for public investors well like we finally got it out it's over like it's the top yeah that uh well yeah you're not building up incremental demand that way yeah the um the valuation is definitely rich but i remember there was a quote in the s1 from the ceo and he said something along the lines of we want to optimize long-term free cash flow per share maximize long-term free cash flow per share while minimizing shareholder deletion. So I was excited.

You're sold. Oh, yeah. Well, is that it? Is that it? Okay, next we have our interview with Todd Wenning. Any favorite parts, highlights? I would say, so we talked about a bit of a cliche topic about working from home.

I know people are probably tired about that, but Todd, I honestly, he's been working from home for three years. He did it before it was cool. Yeah, he is the hipster for working from home. But there is a lot, I don't know, he seems really knowledgeable about that topic and they have some insights into how they've worked with ensemble and how they look at it from an investment perspective.

So I thought that was cool. Cause I know that's something a lot of investors are kind of weighing right now where it's like, Oh, I, what if management decides to do this sustainability of it? Yeah. Stuff like that.

That was my favorite part. Yeah. I kind of enjoyed the discussion around transparency with holdings because, because we do that. Well, yeah, we do that. But also, he talks about the impact it sort of had and how it helps them be able to bounce ideas off of each other.

And I thought that was really interesting. But without further ado, here you go. 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 okay today we are welcomed by todd winning todd is a senior investment analyst at ensemble capital i believe you've been on the show before like a while back when we were yeah when we were uh not as we were inexperienced maybe and uh yeah the show may not have been as high as quality as it is today hopefully but we thank you for doing that helping us uh start out a bit yeah but uh welcome to the show yeah it's good to be back thank you uh so we're probably going to talk usually we talk more about specific companies but this is going to be more sort of philosophy process based so i wanted to start out with kind

sourcing ideas. How do you personally find new ideas? Is it just through the Twitterverse? Do you have screeners, that kind of thing? Is there one unified way, or is it just from anywhere? I think our concentration at Ensemble, we have between 20 and 25 companies at a given time. You know, we can range anywhere from 15 to 30, but the kind of our sweet spot is 20 to 25. So we have to be really selective about sort of companies that we bring into the portfolio. And one of the things that we've talked about is just our lack of using screens. and one of the reasons for this is as sean points out and in his other commentaries you'll hear is that's just um companies with targets on their back right you know so if you're screening for a

high returns on invested capital it's you know that's where their competitors are gunning for you know so if you're screening for 30 plus returns on invested capital all those companies have something other companies want then that's always the case but um you know companies with really outsized earnings and profitability are companies that, um, competitors want a piece of that business. And so we tend to take more of a, um, a general approach to finding ideas. So we'll, I mean, we're on Twitter. We see people talking about companies. Um, you know, there are, um, you know, we read blogs, we have other investors that we kind of keep an eye on who, have a similar approach to us. And so we just, it's not like we take that idea and we say,

yeah, I mean, so-and-so likes it. So we have to like it too. It's really, we see that as a kind of step one filter. And so we'll look at that and say, so-and-so likes it. That's a great sign that there's something here. Let's dig in and build our own conviction. That's something that we have to have. We're not going to use the fact that Warren Buffett owns a stock or something and say, yeah, Buffett likes it. It has to be great. It might not be. It might not fit our philosophy. So even if we find an idea from another investor, whether it's on Twitter or 13F filings, whatever it might be, we have to do our own research and dig in. And we have other people in the industry who we've gotten to know over the years and we respect. And

And any ideas that we hear from them, you know, we'll pay attention to. So that's how we generally think about sourcing ideas. And they kind of come out of research and other companies, you know, whether it's a certain industry we've been looking at, we'll see a competitor in that field and say, that company is actually better. Let's look at that. So, well, you know, it's hard to really pin down exactly how we find of our ideas, but it's just kind of turning over as many rocks as we can find. And because we have such an

established philosophy and strategy, we can tell pretty quickly whether or not the company is going to fit. Right. Yeah. And I think with the screener, that's important to look at. If you're just doing a simple low multiple, high returns on invested capital or strong margins or whatever, well, you have to ask, well, aren't thousands of other people doing that? And if so, like, what advantage do I have here? And I think it may have been you guys, or it may have been some other, you know, firm that does, you know, written commentary and stuff like that. But they talked about, we don't want companies that have, you know, 30% return on invested capital now, or high margins. Now, we want a company that's going to develop that over time that may not look

as good. Do you agree with that? Is that kind of the look at it a bit or? Yeah, I mean, so there are a couple different scenarios where that can work. You know, we want to see companies where the moat will be at least as strong in 10 years as it is today. Ideally, the moat gets stronger with time, and the returns on invested capital improve. But you can still do fine with a company that is, you know, 30% returns on invested capital, and it's going to kind of hang on to that 30% over the next 10 years. I mean, that's still a winning opportunity at the right price. And so it's just a different type of business.

So we talk about legacy moats and reinvestment moats, legacy moat being a company where it's returning high returns on invested capital that's been done in the past, whereas reinvestment moats are situations where each incremental dollar the company spends on its invested capital is going to generate high returns on invested capital. And so there's more reason for them to hold on to their extra cash and plow it back in the business. And so between the two, we prefer the reinvestment moats. And the other category is the capital-like compounders where they don't have to reinvest much at all and the business grows. And Buffett talked about that in his latest annual letter, which is just,

those are the best types of businesses that they don't require this constant high amounts of CapEx. Right. Do you guys, you said you hold like 20 to 25 companies. Do you break them out into sort of like, these are Todd's companies that he knows really well, or do you know sort of all 20 to 25? well all all three of us so sean standard stockton rf kareem and myself are the three analysts on the portfolio and so all of us should be able to talk about any company in the portfolio

each of us is a lead of certain companies but all of us should be able to have intelligent discussions about any stock in a portfolio right and how does that work do you like okay so i know for example one of the new companies i think you may be the lead on uh you can correct me if i'm wrong but that is nintendo that's one of you know you discussed a lot uh does that happen where you find that idea however you found it and then you end up presenting it to the team and then how does that work do you have to like convince them uh to you know agree with you do you guys all have to have the same conviction going in how does that process work from you finding an idea to maybe presenting it to Sean and Arif or yeah the um the process is um so with Nintendo for example

um I got initially interested in the company as an investor from reading Ryan O'Connor's great write-up on uh Nintendo from I think it was 2018 investor letter which is great Crossroads Capital. You can search for it online. It's great. And that got me interested in the business. And while our thesis isn't exactly, you know, what Ryan's is, you know, I took it to the team and we all read it. And I said, you know, here's where I think this could go. You know, I think, you know, Nintendo's moat is pretty apparent, right? It's really hard to get the ip that nintendo has right just you know mario they can release a new mario game no advertising and sell 10 million copies i mean it's just unbelievable how how strong that intellectual

property is and um and how passionate fans are so to us the moat was kind of clear you know we started out with nintendo as what we call an emerging mode because even though it had typically when we're talking about emerging moats these are companies that are trying to work towards a moat so you know a classic example would be like a netflix early on where you know it was the rule breaker for a while it was the one breaking the rules of traditional media and then eventually it became the rule maker and that's where it would have switched from an emerging mode to an actual moat type of business whereas with nintendo there was we were confident that there was a moat we We just felt it was dormant, that management had not monetized the moat well enough.

And we saw an opportunity for the path management could take to make the business a lot more valuable. And so we wanted to see more confidence or more evidence of that happening before we upgraded Nintendo to a full position. And so in that conversation, it was really just talking about management's history, the relevance of the IP, thinking about how confident we are in forecasting this sort of business. And that's kind of where the discussion went. There's just kind of talking through the business and then they would ask questions. We had lengthy conversations about Nintendo with mobile, Nintendo in other countries,

why this isn't just a normal cycle, why Switch is different than the DS or Wii was. So we had really deep conversations about all parts of Nintendo. And over time, we build confidence in our understanding. And that's how we, and we can touch on this, talk about like conviction stages, you know, going from initially like a starter position where we think, you know, we feel like we've got something here, but we're not, we don't have what we consider like a full understanding of the business. You know, so we're not going to make it a full size position just yet. We have, we need time to kind of follow this company. We recognize a pattern that's very promising, but we need to do more work before it gets in the portfolio and gets a bigger weight in the portfolio. Okay. Makes sense.

And so you kind of just touched on this. You have those sort of small starter positions. Is that usually the way you go about building positions? Or are there times when you're like, oh, this could just be 5% right off the bat? I would say normally we start as a starter. unless it's a business that we've either already owned or we're already very familiar with um we just we don't want to jump into a company where there's risks or opportunities that we should have known um you know starter positions don't get weight in the portfolio it's just that they're

approved and you know once we upgrade our conviction and understanding then they can get in the portfolio. Okay. And so the worst case scenario in that situation would be, you know, we put a company that we didn't really understand in the portfolio right away. And then Monday morning, we wake up, turn on the computer and see this risk happened that we had no idea was possible. You know, there's always unknown unknowns and you can't always account for those when you buy a stock but you know there are some known unknowns that you should be aware of and kind of be able to eliminate or at least understand and talk about all those risks you know before you make it a full-size position right and uh you guys wrote a i think it was like a 10

page sort of paper on position sizing and you talked about how you sort of try to quantify the different parts uh whether it's conviction i forget what the other two elements were but do you ever worry that maybe you could anchor to those numbers um even as maybe your view on the business changes over time yeah so um one of the one things that we do is we look at uh different categories so moat would be one relevance would be one the customer the company's customer attention, the stakeholders, the shareholders, our understanding of the business. These are all things that we quantify. And importantly, these are relative to our own portfolio. So one way to approach it is just to say that, especially because we're so selective

that we have to have moat, we have to have management, we have to have forecastability. Those are the three things that we must have confidence in before we make any investment. And so right away, you know, those companies that fit that mold are already in the top 2%, I would say, of all companies out in the market. You know, it's very rare to have all three of those things. Right. So we're already talking about a high caliber company. And so you can rank those on an absolute basis.

But what you might find is that you're grouping everything towards the top because that's where they are. This company has a great moat. Yep. But what really matters in terms of once you've cut off the rest of the universe and you're focusing on that 1%, 2% top of the pie, then we found it more valuable to compare those ratings across our portfolio versus doing against the absolute market. Is MasterCard's moat stronger than Starbucks? We rank each category and then based on those categories that feeds into based on the the average and the sums of those convictions um that helps inform our portfolio size along with valuation and so each of us sean r if myself do it independently and to your question about um anchoring you know we

try to reset our scores as frequently as possible. It takes a lot of work to think through those things. Why do we think Starbucks modes stronger than this company? And so thinking through all those things and then ranking them takes a lot of time and effort. And we do it whenever something changes. If we learn something new about a business and we say, they are better at stakeholder than we thought and we might swap it with another company and that happens kind of an interquarter but usually it's like once a quarter we'll take a fresh look at our our ratings and that way you know we're not looking at each other's ratings we're just looking at ourselves and then we compare with the group um so you know things can change and we talk through

where we have material differences in opinion that makes a lot of that makes a lot of sense i feel like uh i want to steal those ideas from when we do discussions uh so uh i was going to say what so on the flip side then what would be sort of a red flag where you really really like the business but now you're kind of changing your mind about it for the for uh not for the better so like what would be um what would lower your conviction in something is there any type of event whether it's management change something like that yeah i mean that's that's an example of management change um especially if and that's one of the benefits of having you know being explicit about your conviction across categories is you can say you know i see the moat slipping or i see

the relevance slipping and that's kind of the red flag it's like you know something is going wrong here let's let's talk through a little bit more um you know if we lost confidence in the company completely in that category it wouldn't be eligible for the portfolio anymore so um you can see a new competitive threat um you might say like if you were you know like we used to own before i joined we owned time warner and in better understanding netflix we realized you know time warner is in in trouble and netflix is is gaining this momentum and so we we sean and the team before i joined you know they exited that position um and so that's just an example of a situation where you know we didn't have a system in place at the time but my my guess is that you know you

started seeing concerns about the moat slipping from a highest rank to the lowest rank and then it's you know the next step is out of the portfolio right okay and i guess bringing up netflix is a good example of i think you know if someone from the outside looked at your uh the holdings in your guys' portfolio. If someone's a traditional value investor, that's really hard set on buying. All right. We can't buy it unless it's super cheap. They might look at it and say like, all right, these companies are trading at high multiples, but you know, you guys still have a value investors mindset. So how do you weigh that with the idea that again, historically most exceptional businesses do trade at a premium valuation? Yeah, no, it's, it's funny. We'll, we'll get

people who look through our portfolio and go wow you know these are all great companies like what's up with netflix right yeah and so we get that question a lot and i think um you know one of the things that we have increasingly valued over time is insight alpha just having a differentiated viewpoint and that that we believe is correct um and that will help us you know as model we can model the business towards that and um that was that's been the case at least to present on netflix is you know rf is a lead analyst on netflix and had i said a very differentiated and what's proving to be so far pretty correct in terms of thinking about where netflix was going and we've modeled the business appropriately and the market's kind of catching

up with that um you know it's one of the situations where things the process has had a very good outcome and so that's one thing we we're trying to do a lot is you know trying to really understand the underlying business understanding the business better than the average investor and that really helped me especially i mean we were tested in this big time in march of last year when the market started falling you know we had a like a crash course meeting over i think two or three nights um you know i was up till you know midnight been beyond my time and um and just going through all of our companies and kind of testing all the different downside risks um you know how long could this company go without revenue right without you know until things the value of the

business becomes impaired and so we had really deep conversations about each of our companies and it was kind of neat because all of them came through, right? We were like, yeah, this is a great company and we understand it really well. And if we had not had conviction in those businesses going in, if we didn't feel like we had a good understanding

of unit economics, the culture, the business, the management team, we would have probably gotten shaken out exactly at the wrong time. So having that conviction and that understanding, a deep understanding of what the business is about and how it operates it really helps in those situations it is funny how uh like looking back now like a year ago everyone started modeling out like zero revenue for every company and i guess

looking back it seems like it might have been an overreaction but i mean to be honest i found what companies that i truly believed in and understood and then i found a couple that i was either following or like maybe had a position and i was like oh i guess maybe i didn't have as much conviction as i thought yeah so um i want to talk about uh the way you guys i mean you're very transparent about your holdings at ensemble so i'm curious uh what's the purpose of that because there are a lot of hedge funds don't disclose that and it's kind of their secret sauce if you will but ensemble has been very transparent about it so have you guys seen any benefits from that yeah i mean beyond what we disclose as an open-ended mutual fund um you know

we we update it every quarter um or maybe it's monthly every quarter um but either way and we have the whole portfolio out there and um it's kind of neat and this is we found this too with our blogging and being on twitter is you get connections you didn't expect right so you know people see that you own um massimo for example and um they'll reach out and you know we've we've been, we've owned Massimo for five years, seven years. Um, we'd love to kind of chat with you guys about how you're thinking about it. And so that's one of the benefits that, you know, accrue to us for that. Um, you know, maybe down the road when we get to a certain size, that might be disadvantaged to us. Um, I don't, I don't see that being the case. Um, but, you know,

we, uh, we like being transparent. Um, we like sharing our ideas. Um, you know, we've, We've been just amazed by the type of people who have written to us over time and said, yeah, we've been following you guys for years. We had no idea. And, you know, starting relationships with those folks. And then that just compounds the learning on our end and our insights. And that's just proven to be a great advantage to us. Yeah, you talked about how you follow other funds and you're like, well, we got to do our own learning. but it helps with, I don't want to say confirmation bias, but that's us towards ensemble.

Whenever we see a name in your guys' portfolio, it's always gives you a little more confidence. You can't. Yeah. And again, you said it before, but you can't like just take the conviction right away. You can say like, all right, well, we like these guys. They seem to, you know, they have a good track record, good process. And if they like something, you know, maybe we don't, but if we take a month, that seems like a great starting point to just get some research in.

But one more question on the transparency stuff. How do you deal with like the criticism and praise you'll inevitably get? Because, you know, not everyone's going to either agree with you. And how does it work with talking with either an outsider or a potential investor in the fund? I mean, like in terms of, you know, people on Twitter. Yeah, or maybe stuff like that. do people ever worry that there'll be like that you're just exposing the secret sauce i guess that like why can't i just copy your portfolio why do i need to invest with on

i don't know if you're really investor facing but uh yeah no that's it's a fair question and i think um you know people do do that i'm sure some someone out there does it um you know and i i would say that uh if you knew like the inner workings that would might you might be turned away from that because you know things happen in between the month things happen in between the quarters when we update we have discussions as a team convictions might change valuations might change our position sizes will change um and so you know if it's not real time you're gonna you're gonna have a difference you know in terms of our our performance and yours um you know so i i would really caution people from doing that um just because it's it's a

different different game right and it seems like that's the quick thought that everyone has like oh i'm a fund i'm not going to expose my ideas but i don't know i think the benefits from like people like you guys doing it it's just way outweighs any sort of downside but again we're all just in agreement here uh ryan i think you have the next question sure uh i wanted to talk about remote work so uh you you work remotely for ensemble but um i'm curious first of all do you think this is something that will last um do you think there'll be some sort of hybrid environment and then what sort of impact do you see that having on business expenses business costs and business at large yeah it's really one of the big important questions of our time um you know i like

you said i've been working remote for three years um with ensemble i'm based in cincinnati ohio and the team is all in california and you know it's been in terms of what we do and the research side of things um it's a pretty good fit uh you know when i've worked at other shops um you know the analysts tend to keep to themselves anyway we have we were trying to you know have deep thoughts and you know kind of work through things our models whatever and usually like you know being by yourself is benefit um not having made distractions and um so to that extent it's been a good fit and we have zoom and we have um our team messages you know like it's like a slack equivalent and um you know there's really you know and when i go out to california to see the team

um haven't done that since covet of course but when i was before it was like we just picked up we left off and there's really we haven't found really any reason to be you know working next to each other i'm sure there are certain conversations that might happen if we were next to each other that aren't happening but it's pretty rare um we think we're getting enough enough value out of that um so it's it's worked great for us um you know and i before covid i was kind of the outlier most people weren't working from home and then all of a sudden everybody kind of joined my world working from home and you see the benefits of it, you know, commute, it's more flexible in terms of your schedule. But on the other hand, there are downsides, right? You know, it's

sometimes in terms of the work-life balance, it can be challenging. You know, you have to be disciplined and you have to have, you know, your own space in your house where it's quiet and you don't have distractions. I mean, I've got two little kids and it's not always easy to, you know, have quiet right and i you know i'm fortunate to have my own room and separate and you kind of need that but other people may not work for them if they're in an apartment or close quarters with their kids it just doesn't work um so you know i think you know i've one of my one of my pet projects that i've been working on is um you know cincinnati history i'm looking at early cincinnati history um i'm i'm very proud of where i where i'm from and so i've been i'm a big student of

history and so uh i've been digging into cincinnati history quite a bit and one of the things i've i've noticed is kind of interesting was um when the railroads came to town the it enabled people to then move to the suburbs and commute to town before they had to live in the city because it would take them way too long to commute from 10 15 20 miles away and get into town and i think it's a very similar phenomenon happening with work from home it's it's almost like a transportation right in the sense that like you know the equivalent of me flying to san francisco every day right and being there i mean i'm i'm it's like i'm there right and so i think there's there's elements of that where it's kind of like a transportation revolution um it enables people

to to live further away and maybe you don't commute to work every day you are you know commuting two days a week instead of five days a week and i think you know companies that may been resistant to work from home especially a lot of kind of more established older companies there was kind of a resistance to work from home because you have employees who've been there for a long time and never got to work from home and they're like you know how come the young guys get to work from home and i don't and you know so there was always some kind of tension culturally about work from home but now that everyone's done it i think everyone gets the benefits of it and the downsides, really.

And so I think more companies will be more open to at least some work from home throughout the week. And I think that's probably, especially in areas where there's a lot of traffic, I think there's a great deal of benefit in terms of work from home. I think in terms of how it impacts businesses, each business will be different, of course.

One business that's really been interesting is Starbucks because Starbucks, their morning day part has been so important to the business right there's people commuting to to work picking up coffee um you know taking the train to town grabbing a cup of coffee going to work now they're not doing that and they're not getting their day started until 9 30 and that kind of cuts out a big part of the breakfast and so um what starbucks has has noticed is you know people have been going out later in the day, having larger group orders, ordering more food, and they're also closing and remodeling some of their urban stores to kind of fit this more

of a grab-and-go concept, less seating, more convenience. So I think that business has been changed, I think, as shareholders, and we think for the better um you know because of these these new dynamics and so um now that schools are reopened mostly across the country and you know parents are getting out of the house driving their kids to school you know they're passing starbucks and things are starting to normalize a little bit more but you know that's just a classic example of how work from home can impact a business and really throw off its uh its day-to-day operations right or god did starbucks once try to endeavor into like wine did i'm getting that right doing it right our producer brady's nodding i think

yeah yeah they had like and i think they still are they still have some stores out there um i know when i lived in chicago they had when i was kind of like starbucks late night or something where you could come and get like a cheese plate and wine or something um but i don't think that's scales you know nationally it's probably more just as like a you know it's interesting to see how starbucks has um evolved from its original approach of being a third place for people between home and work it's really becoming like a a beverage refueling station you know it's like you know people aren't going there and hanging out anymore they're going through the drive-through or going to take away i think it's i might have these numbers slightly off but in the u.s i think

only 10 of starbucks orders are dine-in and 90 are to go and so if you're starbucks and you've invested in all these you know retail footprints with seats and you know it's just you don't need that and so you're seeing more and more starbucks the ones that are opening are smaller indoor footprints and have drive-thrus and that's going to be more mobile mobile to go type of quarters and so it's just starbucks evolving then uh with work from home more in general do you care about what management is saying like i know for example netflix is kind of anti-work from home do you care what the philosophy is or do you kind of just think all right the management team if we trust say reed hastings or um ted sarandos the executive team at netflix if we trust their judgment they

know what's best for each individual situation yeah i mean that's something that each company has has to do i mean some businesses require in present um in presence um uh human workers i mean you need to have people there for whatever whatever reason um i i may not know why netflix needs to have people there but you know i trust reed and ted sarandos to make those calls um you know i would say i would like to see companies be more open-minded for this um and uh because there are certainly some employees that would be more productive from home um it just depends and again it comes back to like a cultural thing too i mean um some business cultures thrive on people being there and others not so much and so it's it's a case-by-case basis but you know i think

it's it's wrong in my opinion generally speaking to suggest that work from home is um not not an option. It's just, it strikes me that there should be an option in situations where it, it, it makes sense, um, for certain people, you know, I, you know, we talked a lot about my team, you know, people want to, I think, I think read, I think might've been read who said, um, you know, sold a line from Hamilton, you know, you want to be in the room where it happens, right? So like, if you're, if you're an upcoming, you know, analyst, something you want to be next to your PM and, you know, be in those discussions and be in person and get to know them on a personal level. And to an extent, that's absolutely true. But, you know, I've spent maybe a few weeks of my life

with Sean and RF in person, and we know each other pretty well. And so it's, I think there's a lot of change happening. You know, I would think that especially younger executives would be, you know, have grown up or spent more time in this sort of digital communication world and may be more inclined in generally speaking to, you know, work from home and remote arrangements. Right. And what do you think about how that impacts like, you know, cash flow margins or earnings margins, or sorry, profit margins, like whether if someone's doing work from home that could have a permanent impact like benefit or if they're going to have to invest in you know real estate is that something that you guys consider when underwriting

investment or is it kind of just a minor impact i mean so far it's been been pretty minor we haven't had any serious conversations about you know what happens to margins if people are working from home we haven't seen a lot of evidence companies that we follow haven't talked about that being a real benefit. But it'll be interesting to see how that works out because when you think about where Ensemble is located in the Bay Area, commercial property is very expensive to rent. And to bring someone on from Ohio and not have to add another floor to the lease is a big difference, right? So I think the more you can incorporate remote workers, There's less onus that the company has on, you know, expanding its commercial real estate footprint, which is certainly a cost in some areas.

But there are other parts of that, too, where, you know, that also means that the employee has to cover certain things that they wouldn't have before, like electricity and water and whatever it else might be. So, you know, but that's all baked. That can all be baked into compensation. Right. Are you going to mention Dropbox, Ryan? No. So the company we own is Dropbox and they, right before the pandemic, bought, what was it, a billion dollar lease for 13 or 17 years in San Francisco. And they're trying to sublease some of it now because they have gone to a basically hybrid work from home environment.

But they impaired it by, I think, that asset by $400 million. So, yeah, I think a quick tax write off, I guess. But that, I mean, I don't know. Yeah, that commercial real estate part is interesting as well. But that does make sense that the expenses might just flow to benefits because, you know, the employees need to be taken care of when they're working at their own place. But Ryan, how do you think about a hybrid environment? Do you think that's something that would work at, let's say, let's use Netflix as an example? I guess maybe that's a bad example because Reid doesn't like that.

But, like, people have cited concerns that there might be some favoritism shown to the people that work in the company or at the office more often. Do you think that's something that could work at most companies? Yeah, I think, again, it really depends on the company and the culture. Uh, you know, I think up in your neck of the woods, um, REI did something similar where they built out a recreational equipment, uh, company, um, built a shiny new, uh, headquarters and a year later after COVID sold it. And I think the Facebook actually, which is kind of interesting. Um, so I think there's, uh, certainly companies where, you know, being present matters quite

bit and will help you accelerate your career and that's really up to the employee to make that decision like if it was if it was you know you can work from home and realize those benefits but also realize that the risk of that is not moving up as fast as you might if you were working from here um you gotta make that trade-off and then this is this happens sometimes with companies where you know they'll say you know you should really like let's say you worked for a contractor who was in you know multiple cities around the country and let's say they were headquartered in one country and you were or one one city and you worked in another city and management came to you and said hey you know you can stay in your current city in your current

lifestyle but if you really want to move up and make a lot of money you need to move to headquarters and so it's kind of that same situation where it's like you know you have to think about the balance. Some companies, it doesn't matter quite as much. In others, it does. So it's really up to the employee in that situation. And you would hope that, you know, whatever the management team is aware of that. And so you don't want to lose employees who would have worked for you and could have been very valuable to you as a remote employee, but they don't want to be in the home office. So it's a, it's dynamic and it really depends on, you know, what the person's roles are and how important the in-person experiences. Yeah. It seems it comes down to, again, like from

an investment perspective, you got to trust management again and again. I think that's what it boils down to. Yeah. Should we hit the wrap up questions then? Yeah. Okay. We've asked for these, I think maybe we only asked one before, but yeah, I'm not sure if we had these in yet. We We were still in the startup phase. When we asked you for one piece of advice, I believe your answer was read, read, read. Do you have a change to that, or is it still sort of the same advice? I would just maybe add a sub-recommendation to that, and it's write. I think it's you read and you write.

Consuming information is great, but, man, it's important to also write. and synthesize those ideas and force yourself to be able to explain that, you know, what you just read. And, you know, that's, you know, to me, we were talking before the show about, you know, my experience at The Motley Fool, writing for them and how that was a great accelerant in my learning because it forced me to write what I thought. And, you know, as you write, you think, well, do I really believe that? Or, you know, what if someone challenged that point, I need to have evidence that supports that. So then that forces you to go out and do more research. And so that's all part of the compounding. So I think, you know, reading is the consumption, and then the writing

is getting it out and presenting it. And I think it's important to, for young analysts, especially to write, regardless of whether or not you think everybody already knows. And, you know, you've, there's a lot of writer quotes out there that are, that talk about how someone may not have seen it or understood it from another writer, but because you said it in this way, it strikes a chord with them. And so it's important to write in your own voice. And, and even if you think someone's already said this a million times, I mean, look, you know,

Ben Graham basically wrote everything there is to know about investing. Right. So what we're saying is just kind of layering on top of those foundational principles and writing them in different ways and thinking about different ways of interpreting that information. So never be afraid to hold back because you think, oh, someone's already said this before, because in investing, someone already has. Yeah, that intelligent investor example, I think, works perfectly for that point because everyone recommends that to read that at first, the intelligent investor. I think I got recommended that. I probably gave it to Ryan when I was teaching it or showing him a little bit, but it's a terrible first book. Oh, yeah. Terrible. Like, I should probably read it again, because now I can maybe understand it better. But that is, that is a good point that, like, it depends who like the level of skill of the reader, and then back to the, you know, synthesizing information, when you have to write down all those points, I, I've done it a few times where if I write something, I'm like, Oh, wow, I actually don't think this argument makes too much sense. Maybe the bear case has a couple of points there. right or it struggles to hold up under scrutiny i guess yeah yeah uh last question then you want

to hit yeah so we're doing oh okay what is one financial saying that you disagree with so something that maybe a lot of people are out there saying um and you think well maybe i don't know if that's really that that correct yeah i think one thing that we've really uh thought about internally that we disagree with is buffett's famous rule number one don't lose money rule number two don't forget rule number one because i think you know and this might you know i don't be unfair to warren but i think it's it's thinking about i think people interpret that the wrong way or um in a way that is not as useful perhaps as what warren was suggesting and so i think um you people look at that and say, well, only buy things with eight PEs, right? Or only buy something that

you think is super, super cheap. But if you thought that way, you never would have owned Costco at any point, right? Even as it generated 10% CAGRs over the past 10 years or whatever it is, because the PE was always looked expensive. And so you think, I don't want to lose money because Costco's got a high PE. And so I think it's, you know, if I had to edit that comment, it would be don't lose money, but then also make money.

And it's sort of like kind of a cryptic expression because it's, you know, people lose more money, you know, on cost of a mission, right? And so, you know, maybe it's like your principal doesn't shrink or whatever but it's thinking about you know you're you've missed out on this

this huge return and that's also a cost right that's that's also losing money in a way like you know something that you would have invested in but you were so worried about it being super cheap and waiting for it that you never actually invested in it um and missing out on the fact that you know stocks can go down by 100 but they can rise you know infinity in theory and so you know thinking about you know weighing those risks and thinking about opportunities um you know and uh you know you mentioned earlier we see ourselves as value investors even though you know if you look at us on like morning star box we're in the core to growth kind of side it's really we want to find businesses that we think are worth less or worth a lot more than the market

currently prices and that's the essence of value investing right and there's just different ways of of um approaching that you know there's like the traditional value investors who are you know looking at the balance sheet and saying well you know if this thing you know liquidates then here's the net asset value and so the downside is very low you know and you can make money in all different ways so this is no way a critique of value traditional value investment but it's just thinking there's there's more than one way to do to practice value investing and do Yeah, the margin of safety, I think that idea as well, maybe gets people in trouble because I think a lot of the businesses you own, I don't want to put words in your mouth, but I think the argument you guys may be making is that since the businesses are so strong, they have such a strong moat, they have great returns on invested capital that even if it's trading at, say, a quote, absolute expense evaluation, maybe at 30 or 40 times free cash flow, the company is so as is of such high quality that it probably deserves to trade at a premium

multiple relative to some of the other crappier businesses out there yeah and you know one of the things that we found and this is one thing that i think it took me time as an analyst to appreciate is that your intrinsic value of a company all else equal should go up every year right as the time value of money changes as you roll your model forward the intrinsic value of the business assuming no other change should go up right you know by the cost of equity minus the dividend yield if no other changes occur and great business and great businesses find ways to create value in ways that you had not even modeled and so you know i think earlier in my career i would would say you know i think the stock is worth 50 and you know is trading at like 25 or something

and i would sit there and wait to look at the 50 and say ha you know i got it right and then it'd be a really but in the meantime the stock kept going up and i'm like what's going on because the intrinsic value also went up and i was too static with my fair value and so thinking about you know how the business value changes and it changes every day you just can't see it um and And it's just thinking about remembering that fair value is dynamic. Yeah, businesses can surprise to the upside if they're high quality. All right, I think that's all the questions we have, right? Yeah, I got nothing else.

Todd, thank you for joining. Had a blast. Sure, happy to be here. Thanks a lot, guys. Welcome back in. Thanks again to Todd Wenning for coming on. Next, we have hot water. I just have three.

Okay. Kind of interesting. I'll go with the first one. This one's not as funny, but it's hard to come back from. So board meetings are in hot water this week. The CEO of Tegna, a $4.3 billion media company, accidentally mistook a black lawyer and professor for a car valet person who this guy later became a candidate for the company's board of directors, which board meetings are going to be awkward.

I mean, there's really no coming back from that for the CEO. That is not coming. Yeah. that relationship is gone sorry it sounds like but the second one for me uh justice is in hot water because elizabeth holmes trial was delayed due to her being pregnant yeah this was the test was the test accurate yeah that's the question haha but uh isn't i mean that was planned there's no way this this wasn't spontaneous yeah dude this this i well i can't trust anything she does yeah she's psychotic

alright whatever I thought that was kind of funny and then the last one consensus is in hot water our friend Ian Gray did a

multi-bagger madness tournament in October so multi-bagger madness it was kind of it was cool I'm glad Ian did it

and if you're not familiar with Ian he is on the show every Thursday episode and he put together this basically March Madness style bracket

where you vote on which company you like best and it was 64 different companies and the winner of it was fastly since it since fastly won the tournament it is down 41 oh i think yeah i mean that tournament was fun it was fun to watch but the consent it was almost like a uh it's a proxy for what's the most liked business among investors yes yes definitely is and yeah i can it makes a lot of sense that the top the most popular the winners of that will do poorly this is weird it's a little bit yeah it's funny but the uh it is kind of interesting that there's there is this idea that buy quality at any price

yeah um which is wrong by the way yeah no no no no it's not wrong i uh whatever style fits your bill but anyway it uh if everyone thinks the same thing on a company there's not really any inefficiency it's hard to gain an edge as an investor that way right yeah my favorite investment is when people think the consensus when i think the consensus is wrong that's what i love that yeah okay uh what do you have okay creators i think i have no idea who would be in hot water for this but i'm just gonna read this quote because i think a lot of people are going insane has been a kind of a theme over the last few months with these hot water so quote here from the new york times courtney smith the founder and chief executive of new new said the company

was quote similar to the stock market in that quote you can buy shares which are essentially votes to be able to control a certain level of a person's life quote we're building an economy of attention where you can purchase moments in other people's lives and we take it a step further by allowing and enabling people to control these moments she said what level of the black mirror dystopian episode are we in this is how there's what is going on i feel like an old man like what yeah i mean i didn't really understand what you just said so i'll be honest i'm so far behind in the nft stuff it makes no sense i've tried to keep up and i they're like let me every time i read something they're like let me explain how this works and it's like the fed just makes it

worse it's like someone's like let me explain how the fed works and then i go cool i'm gonna learn what the fed does and then after no same thing with same thing with nfts and yeah they're like well you get ownership in that like it's like digital art it's like but you don't own anything at the same time you don't actually own anything but you pay enough you pay money to own it yeah what all this stuff with all right anyway it's insane all right well the next one us the tesla haters as people know make fun of us we've been wrong blah blah blah blah blah but that techno king and master of coin stuff uh it was dumb and it doesn't matter but it got under my skin so congrats again they uh they you know i don't know why it should make me mad but it does it's

all right it was funny i'll admit it was pretty funny though objective yeah i don't mind it and it's not like i mean i just find it funny that bloomberg has to report it that's probably the That's the best part. Yeah, yeah. All right, next one is Morgan Stanley. So here's a job description. Quote, reporter banking in New York, New York. The Wall Street Journal is seeking a reporter to cover the most storied firm on Wall Street, Goldman Sachs.

This is a marquee beat at the center of markets and finance. I thought you said this was Morgan Stanley. Right? That's the first paragraph. Next paragraph, not in the headline, you will also cover Morgan Stanley. Oh. Tough look from an old. Tough lay.

Yeah, from Morgan Stanley. They're a sponsor of the golf tournament this weekend, too. There's some cringy ads with Justin Rose. Last one. Okay, last one. Goldman Sachs workers. This is a tough anecdote for anyone that works in, is like a, you know. Banking.

IB. Yeah, or just anyone in general that, you know, sees their boss when they're on vacation. So this is from, I assume, a Bloomberg article. Few things annoyed Solomon, who is Goldman's CEO, more last year than an encounter with a junior employee in the Hamptons. The Goldman Sachs boss has told lieutenants how the underling walked up to a restaurant, introduced himself,

and pointed to associates with him in the middle of the workday. Now, probably not smart by the orker, but a little bit hypocritical by our DJing CEO at Goldman Sachs, because he had to be in on vacation, too. But he can do whatever he wants.

Well, yeah, that's true. Apparently, he doesn't like work from home or using that as an excuse to not go work from home i have this picture of investment banks in my mind and i never want to go visit one because i want it to stay the way it is what's the picture this corporate hierarchy where it's like floors above they take buildings and the junior employees are on level one everyone kind of talks down to them and then like the ceo is on the top floor and you just there's no intermingling you don't skip floors it's all based on margin call Yeah, essentially, yeah.

And they all have each person you're not allowed to wear. The junior employees can only wear, like, a $300 suit, and then you have to wear, like, that $2,000 suit if you're on the top floor. Yeah, and if you're a really, really good employee, you just leave. Hmm, yeah. I don't know, yeah. Hazing is rampant. It's something that I, yeah, I picture that in my mind as well.

It's like a cross between, yeah, it's like Harvard, a cross between a frat and super intelligent people. I don't know. Yeah, all right. That's it. That's all you have, right? Yeah, buy, sell, hold. Buy, sell, hold.

The theme this week is SPACs that I know you'll never touch. So Nikola, Lordstown Motors, and Virgin Galactic. Okay, you know, we just talked about the stuff with Lordstown Motors, but Virgin Galactic is, I don't know, that's just a never. They're all nevers, so good luck with that. Yeah, to buy one. Okay, Nikola has the investment from GM, right? Sure.

To be on it. I don't even know if they closed on that. Oh, that's another commitment to potentially commit. Possibly, yeah. It's a possible commitment to commit. Okay, I'll just ride with Nicola. Rationalize a purchase for a while. I'll ride with Nicola just because of the GM investment, Lordstown.

Yeah, no. We'll hold that. But we're selling Virgin Galactic because... You and Chamath both. Yeah, well, yeah, because Chamath is selling. You got to ride with Chamath. But, I mean, it's just – the EV SPACs are a bet on hope, but Virgin Galactic is a bet on just fantasy. Yeah.

I mean, it's really not that different. It's just that the people that were – It's harder, though. It's way harder. It's a lot harder. But they were taking those pretty – they were taking the orders that I want to ride, essentially. they were i mean how's that different than lordstown motors i guess maybe people were doing it voluntarily instead of being paid to do it but it's like it's all ridiculous it's i mean

i don't see how i could ever invest in pre-revenue business anywhere in any industry it's it's got to be it's not um something we're comfortable with i guess but hope hope is never an investment thesis never hope is never an investment thesis yeah okay uh i'll just that was the hardest one we've done in a while yeah it's hard to like some of those uh anecdotal evidence mine's kind of more serious uh but i saw a tweet that i thought was kind of interesting and so it asked why do people use enterprise value instead of market cap and at first my first instinct was because it you know it takes into account like the net cash and all that stuff but or investments anything like that But shouldn't the market cap price that in?

No, no. I think it's nuanced. I think it's nuanced. I'm trying to visualize it. That was kind of the idea was like, well, and everyone in his mentions were like, well, enterprise value includes net cash position. It's like, shouldn't the market cap? I mean, if you're buying the business, you've probably looked at the net cash position. Yeah, I think it.

I mean, it's kind of an efficient market theory, but. Well, no, I don't know. I mean, it's one of those where it really doesn't, like, okay, for example, when we look at, say, Altria Group, I bring this up so much just because it's something we actually own, but the dividend yield is based off of the market cap and whatever, the share price and stuff like, you know, whatever, that little connection. But the enterprise value doesn't come into play with that, so I think that can really cloud people's judgment Because when you look at, like, all right, we're investing at an enterprise value to blank free cash flow or operating income or whatever, that might make – I don't know. I might be talking – I might be just talking nonsense here.

Yeah, I've been thinking about it. Like, I don't know if enterprise value is that important of a metric. Well, yeah, yeah. I mean, you shouldn't – maybe it's not one or the other. Maybe there isn't one that's that much better. And it's coming from an enterprise value guy. I've been in the enterprise value camp, and now I'm starting to realize the merits might be less than I thought. Well, yeah.

If you look at market cap, I think you just have to look at it and then consider the cash position and consider the debt. Like, you just don't ignore any debt. A lot of the times, they're going to be so similar, it doesn't matter. But just don't ignore the debt. And, yeah, I mean, all that matters is free cash flow per share over the long term. That's all I can say. Sound like a robot, but all right. What do you have?

Okay, just one. So something I think we talk about is do we think the little mini-mania that we consider that's going on, we talked about it a lot this week again with the EV spec stuff, and we worry about is it just kind of in the Twitter sphere? Is it just kind of a niche thing where it's not going mainstream? But I have some anecdotal evidence, some real stuff that is not just the Twitter bubble. So I talked with someone the other day, someone who's not really in investing, and he was saying that, yeah, I was talking with my friends,

and they all were telling me how I have to invest in these electric vehicle companies. They're all like in the construction industry. You've got to invest in these electric vehicle companies, these battery things. They can't miss. I'm up 200% on these things. You have to get in on this, you know. uh and it's true i mean that's where i get most of my most bubblish feelings is when i talk to someone who's not

on twitter and it's like it's just i'm buying it because hopefully it's the future yeah the the this is real real anecdotal evidence i think that the uv stuff is just such a clear bubble or astounding yeah the one i find probably the most entertaining is when the rising price is its own justification to buy the shares. Yeah. Where you have,

where when you ask somebody, why'd you buy that? They're like, well, look what it's, you know, well, look what the stock's done. If I would have bought it two months ago, I'd be up 200%. Again, I like to flip that around when people are like,

dude, the shares haven't gone anywhere for five years. And I'm like, I don't, good. I don't care. That's good. If people are saying that. The intrinsic value is growing while the multiple hasn't. Yeah, as long as the business is doing well

on the underlying um but i'm gonna say yeah the two big themes are people that you know use nothing sorry the two big quotes i've been thinking about in relation to a lot of this stuff are one hope isn't an investment thesis and two uh forget who started it but nothing changes sentiment like price yeah uh that is clear but yeah i mean i think everyone kind of knows that but on that market cap stuff i'm kind of thinking if anyone has any like thoughts on that because we really weren't i could easily i probably should have prepared that one but if you have any thoughts if we're thinking that if you like one or the other please please let us know uh because we're kind of just now we middle right in the right in the middle i don't know all right well i think

that's gonna do it thank you guys for listening thanks to todd wenny for coming on we are general partners at arch capital uh so any limited partners or uh investors may have positions in the securities discussed on this podcast we are also not financial advisors so anything we discuss here on chitchat money is not formal advice or recommendation. Thank you guys for listening. We'll see you next time.