Chit Chat Stocks - Top 10 Moats of All Time

Episode Date: May 18, 2021

Brett and Ryan take turns listing out companies with the best moats of all time. After the break, Brett and Ryan will share their favorite stories from the week. Listen closely to learn about anything you may have missed from the financial world this week. Let's go! 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 Top 10 Moats | (2:08) Muddywaters | (31:32) Marqeta S-1 | (37:30) Ransom Tax Write-Off | (41:32) Druckenmiller Op-Ed | (44:32) Elon Starts a War | (49:12) Softbank Vision Fund | (54:37) 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, May 18th. Today we have no interview. Sorry to disappoint. So it's just Brett and I. We have an interesting segment though. We're going to talk best moats of all time. We've ranked our top 10. We're just going to rattle them off back and forth, kind of give a little commentary on that. And then we have our traditional sort of more show notes, commentary from the week. But before we get to that sales pitch time, our flagship sponsor our partners at seven investing you can use our code ccm it's officially been what a year and a month now like getting there yeah they're they're heading into yeah a year and two months heading you know they're cruising into their second year there's

been some market volatility recently and some of the high growth names as we know so some of those prior recommendations or recent ones may be at a better valuation right now or they might not be We don't want to spoil anything, but there's opportunities abounding. I might also add that this is when having a service feels more worth it to me because those tech companies that usually, I mean, I guess they have a wide range of sort of expertise. But Simon's very good with tech. Max is good with tech. I guess Matt's good with tech as well. Steve and Honorbon also are.

Dana, too, I guess. Most of the whole team, yeah. A lot of them have had premium valuations. And so I really look forward to this upcoming month of Rex. But that's all for that. Just use our code CCM to get $10 off. Without further ado, let's get to the show. 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.

All right, welcome in. We're going to kick things off with our moat ranking. So we've ranked our top 10. We're going to start from 10. We're going to alternate. Do you want to go first? Do you want me to go first? Yeah.

go ahead and go first I kind of just have them listed out and then I have just like two or one bullet points of why so okay I'll list it out and give a quick reason why it'd probably be good we can take up like 15 minutes or so something like that my 10th which lowest on the totem pole here and I couldn't necessarily characterize why and so you've kind of done have you done old ones or newer ones uh I got I mean they're all around today some of the moats may have been better in the past but yeah they're all they're all relevant today so okay it's kind of hard to call it a great moat if it's not around today if it eroded today that means it wasn't actually as good as people thought yes you're right uh but my 10th one is chipotle uh kind of a shocker here obviously

that's a wild card i did not think of that one all right what do you why i don't know i think the uh as far as restaurants go if you had to pick one to have any moat i'd pick mcdonald's and domino's But I think Chipotle is up there. Yeah. Like I said, I couldn't characterize why. But when I think about the ones that have the largest lock-in with me as restaurants, Chipotle is one. Probably the top one. Yeah, they got brand equity, I guess.

That's a real thing, I guess. They built it up over even past the E. coli thing. That is an interesting start, though. When I put it down, it just kept going lower and lower on my rankings because I realized I couldn't exactly categorize why it has a moat. but it's the company's done quite well and uh it's the ingredients yeah i think special recipe the secret formula yeah i don't know if it's a secret formula for rice and beans but uh i think they are i guess you could argue they're building it up over time in five years it could be a lot stronger than it is today i think there's an argument to be made there yeah okay what's your

10th? My 10th is going to be Home Depot. I'm thinking strong decades of brand equity and economies of scale is really strong here. You know, I kind of think of it as similar to Costco, which is higher up on my rankings, but Costco kind of executed in building that moat a little better. I mean, Home Depot is one of the top performing stocks of all time. I think it was a it's like a 500 beggar since inception or probably higher now from my last look. So the execution was obviously strong versus like almost every other business but the moat you know of like all right low prices good you know brand equity with consumers we're going to treat everyone well the employees are going to be paid well and they're going to actually provide value to like

the shoppers at the store that experience that people have i think it's very similar and it's really really hard to penetrate that mode i mean there there's a second player there that lows but it seems like kind of one of those duopolies that at least in the united states is very rational and i think that's because they both have really strong modes yeah uh that was definitely one i considered putting on my rankings i thought you'd have that one my ninth though is nintendo i guess we are biased share talk yeah talk on our book with this one yeah but uh the ip i think is pretty timeless um no matter what system you put it on as long as gaming is a large part of life i think mario they own part of pokemon uh companies like that are always going to be around

it's just a staple of gaming yeah ip stuff entertainment stuff's very simple i mean you have to you know the mo can be there and you might not be good at it kind of like with the i think the company i think it was fox with that dc comic stuff really you know big comic book business just like marvel but disney executed a lot better with marvel uh but the other thing i or go ahead the other thing i'd add is it's that uh you extract all the oil the whole buffett quote you extract the oil and then it seeps back down into the ground every five years or so because you can just repeat the same game how many mario karts have there been uh eight it's a good selling there's been eight or ten well if you don't count the mobile ones yeah the yeah i mean it's clear

the ip ones the entertainment ones people overlook them i think uh because they're so simple but it's really just black and white either have it or you don't and it's built up over decades so all right what's your ninth okay my ninth one i think this is the all the only other one that we own so it's going to sound like we're just talking our book on this ninth one uh but autodesk uh and you could probably argue this for a few other of those workplace software things basically the whole thesis on why this software like autodesk and their products which if you don't know basically provides the you know design tools for the manufacturing world and the architecture engineering and construction industries there's competitors as well but the argument is that

they have extremely high switching costs i would argue one of the highest switching costs of any software or product in the world and that is because it takes hours and hours and hours to learn the software and now on top of that they have strong brand equity with a few of their popular products that gives them phenomenal pricing power. Now, you could argue that you don't want to squeeze the moat so much, or I don't know what the analogy would be, where you anger your customers by using that pricing power too much. Mortgage the moat. Mortgage the moat, yeah, thank you. And then also on top of that, there are network effects because of the steady cross communication between teams of software products like this. So, you know, different people within

the AEC industries, architecture, engineering, construction, and manufacturing, they're sending files to each other um and there's definitely other companies besides autodesk there's you know ansys i'm thinking i'm just off the top of my head i don't know that company that well but there's just so um i mean you can also argue stuff like adobe is similar to this niche though yeah and i the reason i put autodesk is it seems like they within especially the number one product they have revit that one specifically has one of the strongest modes in the world it's like 90 market share right yeah i think they have high switching cost great brand equity because everyone loves the product even though if they sell it for a high price and there's network

effects from all the communication people have it's the david you know the david gardner quote where it's like if this company disappeared tomorrow what would happen uh the construction the construction industry would slow down as part of the supply chain of it really right and i think a lot of uh customers wouldn't be able to operate for probably a good two to three months. All right. My eighth one, waste management. This is sort of a regulatory moat because you have to get stuff for landfills. And not to mention the barriers to entry is just that it's not attractive. No one wants to be. It's not, there isn't a lot of venture dollars going into collecting trash. And I guess it's just a less sexy industry to be in. And it requires

There's certain regulatory approvals that they already have. Yeah, limited licensing. Regulatory barriers to entry are usually like, I mean, it's not necessarily the company I would own, but it solidifies the moat pretty strongly. Yeah, just because you identify a moat doesn't mean the company is a good investment. And I guess Lockheed Martin, I forgot about them. I may have put them on the list if I thought about them. They have the ultimate one of these, I think, very similar to waste management. Yeah, Boeing.

Maybe they have a lot of government contracts. Yeah, Boeing as well. Yeah, and waste management also has economies of scale, potentially. Small one, just because it's hard to get all that stuff, you know? It's hard to get it all up and running, that whole system of waste management. Definitely requires, I mean, they have quite the fleet. The fleet, the landfills, all that stuff. All right, what's your eighth?

Okay, eighth is Philip Morris or premium cigar cigarette makers. So the regular court capture here relates well for what you just said. It creates that barrier to entry, and then there's that restriction on advertising that kind of embeds the incumbent. So it's really hard to enter the market if you can't tell your consumer what your product is outside of the limited stuff within the stores. Does that encompass Altria, your Philip Morris pick? Well, yeah, Philip Morris is Altria. I mean, yeah, just all of these cigarette makers. I mean, this is obviously huge durability concerns with this one.

There's, I think, Focus Compounding, which if you like our show, you probably like some of the stuff they do. They do a lot of writing on philosophy of investing, stuff like that. They talked about the difference between a moat, which is what we're describing today, versus durability. The durability of the cigarette industry is obviously a huge concern. and this is kind of a unique situation not very repeatable where it became the ultimate sin industry everyone hated it but the moat is in is almost impenetrable at this point it's just the worry about the actual demands and the cultural things and you know the moat of the cigarette products are huge but there's the vaping stuff and all the innovation and other ways that can

chip away at this moat or not even chip away at this moat just take like the markets take the consumer somewhere else yeah my this cracked my list as well i put it down as altria but it's i mean same thing yeah market share within the cigarette industry marlboro's has been north of 40 for the last decade it's been longer probably longer yeah i don't know if it was above 40 prior to that but now it's at 43 yes there is it's hard to refute that their moat within cigarettes is basically impenetrable but obviously the the underlying trends of the industry as a whole aren't that promising so you might have a moat within something but if don't miss the forest for the trees yeah durability i guess is something you know you

always have to think about durability as well yeah all right uh is that me now yeah you're seven seventh uh disney kind of the same thing as nintendo yeah disney's on my list i think buffett's talked about this it's the uh they can tap into that same ip they've always had uh it's hard you can't it feels like you can't just manufacture that sort of ip that share in the customer's mind i don't know it's a big one that buffett's always talked about and uh it just it's timeless yep i agree i have a few other things but i'll save it for my ranking or when i when i bring it up all Right. My seventh is going to be Coca-Cola. Again, boring. Everyone knows this one. But I would argue they have the number one brand equity in the world, which people kind of that's kind of a vague

one from a moat standpoint, but it is real. And you can maybe argue Nike, Apple, a few others are close. But I think over the last it's been over a century, they've been at this peak where, you know, Apple and Nike has been a little bit of a less time, although it's probably, you know, they're obviously they're bigger companies i think nike's bigger i would uh or good yeah coca-cola is obviously the one that comes to mind because that's sort of the uh you hear buffett talk about the mode all the time when you listen to the old shareholder meetings and stuff like that but i think they might be going through i guess i don't have the data it's durability concerns the same thing as altria yeah durability concerns market share is fine but how's the

underlying category doing yeah and the thing i had here is the if you're thinking about okay well well, I'm confused. Why would Coca-Cola have a moat? I think the proof is in the simplicity of the product. So they've ingrained the world through a century of advertising about what a bottle of Coke means. And they basically try to make it mean happiness in broader terms. And the simplicity of the product, it's very easy to copy. But why have they stood the test of time? It's because they have that brand equity built up over decades and decades and decades. And, yeah, you could argue, okay, soda consumption is going down. But, you know, when people are drinking soda, it's most likely going to be Coke or Pepsi, too, I guess.

Yeah. All right. Sixth for me, Autodesk, similar to you. It's something that I think the customers couldn't live without. Yeah, talk on our book, yeah. I mean, you can kind of tell by the pricing power, which you hope they don't. And at one point, I believe, one of the customers just wrote an open letter like, hey, basically the management. They got a group of architects together, yeah.

Saying, listen, we all know we can't live without it. Just please stop pricing. Yes, don't be so aggressive or it's going to ruin our – basically their cash flow and profitability. So they wanted to make the – they were like, hey, keep the ecosystem better. And I guess that could be mortgaging them out, but it shows that it's there. Yeah, definitely. All right. What about you?

Okay, I have Disney here at number six. You talked about the IP, but I'd like to talk about the theme parks as well. That gives them economies of scale. People really underrate the amount of capital investment that needs to go into these Disneyland and Disney worlds. I mean, what did they spend on Galaxy World? That small Star Wars part was like $4 billion. I mean, the embedded PP&E is billions and billions of dollars there. When you can make that experience strong, it – I hate to use the word flywheel effect, but I think it keeps – it gives people a personal relationship to the franchises or the intellectual property that you have.

Yep, yep, yep. And then I also have the vertical integration through the three streaming services. This is kind of a developing moat because it's really early on. But that could – over time, there could be a lot of moat characteristics with those. I think those are pretty obvious. Yeah, I don't care how video consumption changes over time. The IP still translates. Yep, yep, for sure, for sure.

Five, you have five. Costco. Just – I mean the model is so – it's one of these idiosyncratic businesses that it's so unique in that you can buy all the – Everyone knows sort of the story of how they make very little money on the product. They make all their money on their memberships. Yeah, no gross profit dollars on membership. Yeah, we all know this. The story gets told, it seems, every month, but it's a good one.

Yeah, and they've also taken steps to – the corporate management of the company has been really, really strong. It's one where employees like working there, people like being there, and it's because they're paid well. and they're making investments in their employees. I don't think a lot of companies are in the position to be able to do that. Yeah, this isn't talked about much, and some people might argue it's not necessarily a competitive advantage or a moat, but I like to think about it a lot where building up not only the consumer brand equity but the employee brand equity can be huge.

You treat them well, give them good benefits, pay them whatever the average is at Costco. It's like $22 an hour, and that was three or four years ago. I bet it's like $25 on average now. So that can be a big advantage because it helps the consumers enjoy the process as well. Yeah, especially at a grocery store. I think the mood among employees gets passed through to the customers. What's your fifth one?

Okay, my fifth is going to be Google. No matter what, like, you know, there's a lot of hate on Google, I guess. You know, you're a big company. You're going to get a lot of hate from, you know, news outlets, stuff like that. And I guess it's because Google kind of disrupted a lot of their business. So you can see why they're angry. But I still believe Google has tremendous brand equity among consumers, among other things. And it also has, I believe, tremendous lock-in and economies of scale across a few of its products.

I'll exclude GCP here because that's going to be a, I guess, hint. One of my higher ones is going to be one of those cloud infrastructure players. But you look at YouTube, Search, Maps, Android, Chrome, and others I'm missing. I think they all have unique modes. Some have network effects, some have switching costs, some have economies of scale. I mean, search, you might not think, but I think it definitely has economies of scale. If you look at, you know, there's a lot of people, and we're victims of it, that argue, oh, they have a data advantage. And I think 90% of the time it's kind of like, eh, maybe they have a data, you know, like another company.

But at Google, I think they definitely do. You know, YouTube has one of the best network effects in the world, I believe. So, you know, overall, Google, I think, cracks my top five. Yeah, I will definitely agree with that here shortly. My fourth one, though, is going to be Altria, pretty much for all the reasons you just claimed. It's such a difficult industry to compete in. One, there is regulatory hurdles, not only in that you can't just manufacture tobacco without the licenses, But you also – it's very hard to market your product and there's literally customer addiction.

So they tend to come back. That reminds me of Starbucks too. I guess that's someone I never – I didn't think about them. I don't think it would crack – I thought about putting them on the list. But I don't know. It just didn't crack the list. Yeah, it might be in my honorable mentions if I had time to think of those.

So Starbucks is – I mean you can't deny the stock returns and the profits, but I don't think it's as strong as any in my top ten. I have Starbucks every day. It probably should have gone in my top ten. Yeah, I think I would argue it's stronger than Chipotle. I'm still going to nag you on that wild card pick. But I'm not – yeah, I guess maybe it could have been my ten. But I'm also having – it's the bags of coffee, not just the – I'm not going to the store. So I don't think I'm one of those.

I'm saving money. Yeah, Barbara Corcoran, if you're listening, don't worry. Ryan's on pace to become a millionaire by sending us three bucks each day. Don't worry. Okay, I'll hit my fourth one. It's going to be TSMC, Taiwan Semiconductor. I will think a lot of people would agree saying that they are number one in the world when it comes to economies of scale. Just, you know, framing it in the mind of their competitors, it is going to take Intel, basically the – oh, Samsung, I guess, does it as well.

So there's a bit of a duopoly, but TSMC is number one. And then you have some Chinese companies that have been trying to do that but really haven't gained market share. So it is going to take Intel, which is basically their only Western competitor, it's going to take them a few years and tens of billions of dollars to even try and catch up to their semiconductor manufacturing capabilities. And this is not guaranteed that they can. I just think the economies of scale with this business is going to be really, really hard to penetrate. Now, you could argue that Intel had one in the 90s, just like this. So there's a way it could get disrupted, maybe.

But at least right now, it's really hard to see how anyone could penetrate this mode. Yeah. Does ASML make your list? No, no. Look, they may have the tech, whatever. They have the best tech in the world. But I don't believe technology is a competitive advantage. Hot take?

I don't think that's a hot take, really. No, I mean, you know, tech can drive a good stock returns if it generates profit. I just don't think it's a long-term competitive, you know, it's not a unique competitive advantage. It just means that you may be more innovative, and that's great. It doesn't mean, like, just because a company has a moat or doesn't have a moat doesn't make it a good or bad investment. It's just, you know, might be a different reason. Okay. My third one is Intuit.

Oh, sneaky but good, I think, yeah. Yeah. uh once i feel like once you get old enough to do your taxes and you use turbo tax once you're pretty much locked in for life it and they thrive on food fear uncertainty and doubt and whether or not you fear from whether you're doing it wrong that's the fear yeah yeah and those in crunch time i think everyone just turns to turbo tax um yeah i don't know yeah i mean it's definitely there definitely there people have tried to attack them out for years hasn't really worked out i don't know i do hate the business though i hate it but i use it yeah and i think most people

by default just kind of they're worried they're going to do it wrong and they just well let's just trust turbo tax yeah well is there government risk here if they ever decide to just kind of take everything in house maybe i mean they have concerns cited i don't know five ten years ago no that's the concern yeah i mean you know it seems like the most there but that is the concern with it it could just go away overnight but you know obviously that's just theoretical it might not actually be realistic and ever happening yeah i yeah i don't know if i don't know if that ever will happen i think that's hard to predict government should maybe own they probably i mean uh yeah they'd probably make shareholders whole you know if they ever did that

right what's your third okay my third is going to be aws but you could include the three big cloud providers here i guess google's kind of a little bit smaller but they're making their they're making their way here i think they have three of the core moat characteristics that people talk about they have brand equity uh you know you might not think about that with aws but among their customers they have tremendous brand equity they have a tremendous economies of scale and they have probably you could argue i bet you know we said autodesk and products like that have some of the highest switching costs in the world i think these companies do have the highest switching costs in the world you could imagine say okay netflix is like aws's largest customer

or at least one of them you could imagine it would cost netflix like a billion dollars in cash or more to switch from aws to someone else and that is not counting any of the non-cash expenses or the risk to the brand if the product deteriorates because you're transitioning to something else yeah spotify's if you listen to that spotify episode where they signed on with google cloud it's it's hell trying to switch it's hell and once you do you don't want to do it again yeah and it is also that's kind of why the adoption has been just kind of steady uh and i i realized it this year is why it's been just so steady and it just didn't just kind of happen overnight like people just switching to google chrome or whatever everyone seemed to switch within two to three

years time is because the legacy solutions have high switching costs so it does take you know the legacy solutions or whatever those are migration takes time yes the migration yeah and uh those but it's really tough to leave it's kind of like you can't almost once you get to a big enough scale and it's expensive to start one which is why microsoft google and amazon are the big and like people like ibm have really failed um maybe that's just i don't know they seem to fail at a lot of it execution these days but yeah all right my second one is ferrari um good one i think they're very it's really really hard to replicate what they've done um the history is something that's kind of ingrained in the culture um it's just you can't really repeat the they get

a lot of pricing power because of the events because of what the brand means uh the exclusivity helps make make people feel prestigious um that's really hard to replicate uh and not to mention they have uh the racing history has kind of become a huge part of them i haven't won in 10 years though so and it hasn't affected them now it hasn't i know that doesn't really matter i was just that that doesn't matter to them out but yeah the racing stuff is it's a part of it too um yeah i think it makes sense it takes it would take decades to replicate the model because it took decades for ferrari to build up their and i've used this 20 times so roll your eyes if you want but the brand equity with their consumers it takes decades to build yeah and then you know

once you uh you don't want to miss buying one if you're like a loyal user or not a loyal user loyal customer of that brewery club yeah so theoretically i mean some some members some some people might be one-time purchasers but yeah all right uh what's your number two okay it's going to be visa i think they have the ultimate network effect number one and i think it's almost undisputed number one network effect in the world i mean you have the most cross-use cases among both sides of the marketplace merchants and consumers you have embedded switching costs You have extremely high frequency of use, a low take rate similar to, say, Costco or something where they could, I mean, they have the pricing power there, but they really just

take those thin, thin margins, which basically makes it, I mean, it's, there's no way like to, you can put MasterCard here too. There's no way within the card space that you could disrupt these players. I think the proof is in the upkeep cost. Their core business basically has minimal operating expenditures, and it kind of rounds to zero, you know, since they're so big. I mean, it might be, you know, a few hundred million dollars, but to them, that's basically zero. And they have no capital needs, and yet they keep chugging along each year, and no one comes up to, you know, disrupt them. Now, there's a little bit of a durability risk.

You know, a lot of people talk about whether cards are going to go out of favor over the next decade, whether buy now, pay later is going to come in, crypto, if QR codes are going to take over, whatever. But that's not really what the moat is evaluating, like we're saying. Within the core card business, there's, I don't want to say no way, but it seems like it's 100%, not 100%, but pretty damn close for them to stick around. Yeah, it's definitely a top moat, and I probably would have had it on there. I thought I... You just forgot? I thought you were going to put it on there anyway, so I figured we'd talk about it.

But my number one is going to be Google. You already mentioned it. Search. if i had to bet on any big tech piece of big tech or whatever to be here in 25 years it'd be google search what about maps you put there too uh no no how would that how would they go i don't think google maps has as much markets market share as google search i don't think it's that differentiated than apple maps apple oh i would argue apple max is pretty bad google maps a lot better you don't use apple maps i have an ipad i've used it before it's pretty bad

i use it on the go and every day it's fine it does the job well i said google maps probably google searches market share is like 80 i think maps is probably similar no because bing is surprisingly high market share you'd be surprised at how much it has but i don't think so i don't think maps has it's not that much i don't feel a difference i've downloaded google maps i've downloaded apple maps is pre-installed i still use apple maps i don't know i don't know i guess that's just i think most apple users i know use apple maps i don't know there's a lot i mean the product doesn't seem that much better but search i think is basically the most impenetrable mode of any offering maybe in the world i don't know sir i mean i think maps embedded on the net

whatever the market share on android phones is i think no i think it's gonna be the same but agree to disagree agree to disagree all right what's yours okay uh costco i have for number one you already talked about most of this yeah i mean they have basically everything about network effects economies of scale brand equity built up over decades the extremely thin margins act as a as well um you know i think the question i kind of like to ask if i'm thinking all right what does this company have a competitive advantage you kind of like and basically with all these companies you kind of ask like all right if you're given 10 billion dollars right now or maybe a little higher for bigger companies or smaller for a smaller company like if i were if someone gave you 10

billion dollars right now how would you go about dethroning this business with the same business model like or a similar model you know attacking the same customer with a similar product like not trying to just innovate with a different you know way of going about things like with crypto or something for visa if you can't come up with anything i think the mode is likely strong that's kind of the question i have with costco like how would you do it you can't and so i yeah that's why it's atop the moat list and that's probably why it tends to trade at a premium over its entire life it has so yeah well i guess hindsight it is a premium but yeah the feels like a premium in the time that's true that's true yeah and i guess that's the question yeah look

yeah when when looking at this top 10 don't think like all right i'm gonna listen to this this is the top 10 these are obviously all good investments you know a lot of the times i think most of these here traded a premium valuation and for good reason is because the moat has developed over time yeah all right well that's our top 10 uh just so everyone knows we don't own most of them so obviously not recommendations but uh we're gonna maybe we should maybe we should now We should. We're going to have a quick break and then we've got our traditional show notes on the second half. 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. All right, welcome back in. I'm going to kick things off. Muddy Waters released a short report on lemonade this week. Fascinating one, kind of a battleground stock. I guess you could say there's passionate shareholders and then there's people that obviously don't believe in the business as much uh but muddy waters opened their letter or i should say uh video right was it a video

it was a letter it was a letter to dan schreiber but they released a video afterwards that showed what the problem was uh but he opened his letter with uh dear mr schreiber who is the ceo of lemonade muddy waters llc is short lemonade because it is clear that lemonade does not give a you guys can fill in the blank about securing its customers sensitive personal information i thought that was a hell of an opening uh that's not really how i opened my letters um well yeah these sure i mean a lot of this times you know we've seen it with the lobe letters in the past the third point letters yeah i mean this how they there's kind of the typical tactic is to you part of it is to try to get under people's skin make them act irrationally and get angry

that's kind of and it may have worked because uh well i'll talk about the basis of the report which was that Lemonade's website contains, and I have this in quotes, an unforgivably negligent security flaw that exposes personal information. So Muddy Waters basically said that Lemonade should take its website down because it's exposing personal information, and they have notified the various regulators, which I always find funny. Like, that was a mistake we told on you. Yeah.

But, you know, that's their job. Anyway, I don't really understand the complexities or the intricacies of the security problem and what sort of they violated. It sounds like it was just a security flaw on personal information. But Shai – I think it's Shai. Shai. Is it Shai? Definitely Shai. Who's an exec and I believe a co-founder at Lemonade followed the short report up by stating that the quotes – or the quotes as in like their insurance quotes that they found were shareable.

And they said it wasn't a vulnerability but it was by design. and so he's basically saying this was like i hope you and he said i hope you don't didn't spend a lot of time on this because it was like a blatant error but muddy waters came back and said this was a big mistake we see through this lie response forthcoming and then i invited them on to cnbc for a debate which i did not see a response to this came after a secondary raise from lemonade uh and the ceo has sold 48 million dollars worth of stock now i don't know if this is a security issue but uh do you think i mean how would you respond if you were a ceo and a short report came out what do you think of shay's response how about

that i don't i tend to in this golden age of fraud i tend to not believe you know i side on the fact of not believing the executives just because there's been such a history of negligence among regulators right now that seems like there's a lot of potential fraud going out there and i don't know anything about lemonade uh but uh it seems like the ideal thing is to either just do kind of a one letter that's short back like two three pages make it short and then not like a short report but like short in length refute it respectfully and say we'll execute over the next three years to prove you wrong uh the business is going to be fine and then just go about your business and ignore them because you know whatever that's all you can control you think when people

I don't get personally – no, I don't know. I don't know. I don't know. If you don't respond and the stock collapses, why don't you just buy back the shares if you think it trades under its value? Yeah, that's kind of the thing here. I was surprised Muddy Waters didn't just go for valuation concerns because valuation is – Sure, because it feels overvalued. Yeah.

I mean that's not much of a headline I guess. But the – right? Isn't lemonade – the big argument isn't really – the big argument is that the business model isn't special. special it's that it's just online and that they're trading at a crazy multiple so something that tends to grind my gears a little bit is when sometimes i feel like short reports come out with like some harsh thesis about like whether like management is malevolent or fraud or stealing or yeah when in reality it's overvalued yeah uh and they know they can kind of uh take advantage of that but who knows they might be right though i don't know who's right i will see yeah that's

true the other thing i would say and maybe i don't understand the problem enough but let's say this was a problem and it was bad and they just took the site down and changed it real quick and then put it back online does that really change the business that much no is it worth being short just because of one security issue yeah yeah the yeah i don't know maybe it's worse maybe it's worse than we think yeah i i was surprised i i watched a little short video and i was like huh i would have thought you would have just said 50 times sales yeah that's all you know 50 40 times sales you know this gets cut in half it's at 25 times sales uh that's it that's all we need guys um yeah but that's not as exciting i don't know there's been a lot of accusations against

lemonade right because they are kind of that disruptor it'll be interesting to see if they are successful over the next years over the next few years all right what's your story okay marquetta filed its s1 this is a fintech stock very interesting company i'm reminded of the latest uh bill girley quote i think we may have been discussing this offline but he basically said at some interview he's like you know what guys well if the public markets want fintech stocks trading at 30 times sales we'll give you as many as we can and he's a venture capitalist so he's kind of you know the one giving it to them um that reminded me of this so i think it's probably going to be one that's just going to trade a valuation that keeps us uh possibly out of there

but their mission it's an interesting business model is to be the global standard for modern card issuing so they work with other companies to issue cards and have these api plugins to add different features quickly that they can offer customers value prop seems to be speed versus legacy card issuing um but it feels a bit like a middleman some people are arguing that they could be easily replaced if say you know one of their largest customers like square just went direct to the bank partners here but who knows they're not uh so far they have more than 320 million cards issued customers include uber doordash affirm square and i wrote assuming after pay uh because they weren't listed but i think i confirmed that the after pay uses them to 103 sales growth last

year, $118 million in gross profit last year. So, Cy, we're probably going to get a $4 or $5 billion valuation, but that's okay. They take about 0.2% of the card transactions. That's their take rate. So, for the value they're providing, they're just taking some of that off the top, say when Square, the cash card or whatever, makes a purchase. But interestingly, 70% of their net revenue comes from Square so they maybe think Square's paying them all this money

could Square buy them out and save themselves a lot of money just kind of integrate this and make this part of their financial services go B2B with this why not? they probably could I think they just had a convertible offering today

interesting that could be exciting there you go In theory, it's acquisition money. Yeah, because people are talking about a firm, because Peloton uses a firm, and Peloton has similar, I don't think it's as high, but it has customer concentration, or firm, excuse me, has customer concentration with Peloton.

And people are arguing, like, all right, well, a firm is just kind of a simple, and they're the buy now, pay later thing. They're just the simple API connecting Peloton to the bank. Seems like a very simple product. It'd be worth that much, and people are arguing, you know, Marquetta is just an API for Square and Sutton Bank, their bank partner. But who knows? They're obviously providing a lot of value.

But I haven't looked at the full list one. I just kind of glanced at some of the highlights. But on this face, what are your thoughts on this business? It seems, you know, I don't know. I don't – yeah, I don't totally understand it. It feels like that 4% or whatever that comes off every transaction, how there's the banks. Yeah, 2.7. There's the cards.

Yeah. Then there's Marquetta. And then there's just like these 0.2, 0.1. It feels like that's getting pretty crowded. And I'm not sure who has leverage in that tiny little transaction space. Well, if we want to go earlier, it's probably Visa and MasterCard. Yeah. There's always some new avenue of fintech that I didn't know existed.

And I guess this is one of them. Yeah. I don't know. I thought it looked promising, but there was a few questions, yeah, on the durability concerns. I don't know. That sort of customer concentration, no matter, like, how bullish you are on, say, Square's prospects or whatever, I just don't know if you can – No, it's a serious risk. It's such a risk.

I don't know. Because you can hold them hostage. It's kind of what Microsoft did with Nuance Communications, right, where they're like, we're going to buy you out for this much. Or we're going to drive you. Or we're going to drive you from Azure or whatever, yeah. Oh, that wasn't publicly said. People were assuming that happened, yeah. um all right well my uh i found something interesting this week uh kind of came across

this i don't know how i saw it i guess maybe you'd call this a current state of fintwit or something like that but uh the title here is it's all about tax deductions so all these which is like a discount grocer it's pretty big on the east coast it's not very big over here but it was founded in 1946 in germany the ceo was named theo albrecht apparently in 1971 he was kidnapped and held for ransom for 17 days they asked for seven million german marks which is like equivalent i think it was equivalent to two million dollars uh in ransom money for his release apparently he was held at gunpoint the ransom was eventually paid uh he was let go um they half the money ended up getting being recovered they found the two people that uh kidnapped him

And afterwards, Albrecht attempted to claim the ransom money as a tax-deductible business expense. It did not go through. Is this the kind of frugality and cost-consciousness you like to see out of a CEO? I mean, I don't know, but it's a funny story. Should this have been a business expense? Should this be tax-deductible? I don't know. but yeah that is the kind of mindset i think you want from a ceo i don't know you know putting

yourself in a situation to get kidnapped is kind of tough i guess probably could happen to anyone but i don't know i mean that's weird it doesn't seem like he would be a big you know like target for this type of stuff maybe aldi's is bigger in europe than we realize yeah he could be because He was kidnapped in Germany. Okay, maybe they're like the big dog over there. Yeah, that's quite the story. It's almost weird. I don't know.

So apparently it isn't tax deductible. But doesn't it seem like if the company is paying that out to save their CEO, couldn't that be considered a business expense? Yeah, it should be an expense. I mean we were talking about that with the pipeline that paid the $5 million in crypto or Bitcoin. Is that tax deductible? I mean it should just be an expense, right, that goes against your net income. right i would think so wouldn't it the uh yeah i mean it reminds me this never happens anymore or rarely i guess uh but in olden days there was like the the you know the standard oil types kind

of the big trust sometimes there would be assassination attempts against some of the managers there because of all you know and that day uh we were talking about treating your employees well um in those days there was a lot of evidence that they weren't treating their employees well and that led to the rise of you know a lot of workers being upset for working 12-hour days in the horrid conditions and there was like the assassination attempts on these people and they almost die and it's almost like thinking about how say there's an assassination attempt on like sundar pichai or something like that that's how crazy that was and it was not like a normal occurrence but it happened like with decent frequency huh i guess it's kind of similar

what's your next story okay so we have drunk and miller but i put the n in there parentheses drunken miller as we jokingly like to call him he had his op-ed in the wall street journal did you get to read it or was it not in your paper version uh i must have missed it i think it was probably probably before then you got your paper version which i'll have to pick up if you kept any i'm gonna have to get your leftovers yeah i'll maybe give you a few of them they're starting to come in frequently what are you gonna keep any for uh memorabilia the inflation you're gonna keep inflation crisis of last week you're going to keep them all most as memorabilia you're going to stack it up like a collector well any one of them could have been the top and i want to save

that day all right okay well that's a little bit strange and upsetting but he had his op-ed and cnbc appearance and he basically came on to complain like he always does but he's one of the best of all time so it's kind of always interesting to listen usually has some interesting stuff and it's macro talk so way out of a league and i'll start by saying whatever he said i'm not confident either way that he's right or wrong but he had some good theories he called out the fiscal policy of the last year six trillion dollars in stimulus and then monetary positively which you know zero interest rates pushing everyone out to risk your assets um well i guess that's subjective if you want to call dogecoin a riskier asset but to each his own uh he called the

craziest policy he's ever seen this is a direct quote i can't find any period in history where monetary and fiscal policy were this out of step with the economic circumstances not one essentially his data and evidence was this 2.5 trillion dollars in qe post vaccine confirmation which has led to an absurd boost in retail spending and led to an asset bubble i think both of those are true. Like, really hard to argue against those. And all in the name of getting an arbitrary CPI number from 1.4% to 2%, which he deemed as nonsensical, where it's like, you know, these aren't exact numbers. What's the big deal about this 2% thing? We're going to mortgage everything else, you know, create all these other problems just to get to 2%. That's kind of what he

was yelling about. And I do think there's some nuances and whatever. There's some things that we don't understand uh but i'm pretty highly confident that he is directionally correct here uh what are your thoughts i do find it funny that uh everyone uh there's so much talk about how people like uh america's hasn't had the inflation that you we should it's like why not spending enough yeah it's why we want that inflation going well yeah i didn't think we had that many problems maybe i'm just tone deaf and not aware of them but i don't know if like i don't know if the 2.5 trillion qe is worth it especially post vaccine i think that totally makes sense i don't know like why why you look at his portfolio and it hasn't really changed

oh well he's yeah i mean long big tech yeah he had owned amazon and something else yeah he i don't want to speak for what he owns but i believe he had 30 in microsoft it kind of i don't know in his family office yeah he said he i mean he said he's been doing he had his best year in a long time he you know he blamed the policy but the yeah it seems like all right they have this target they're like all right we need this inflation rate we're gonna not stop until we do but you gotta think about the side effects right of like you know there are long-term consequences of asset bubbles and you know while it's likely not as bad as big tech or sorry not big tech uh the dot-com bubble or whatever it was i mean they still have consequences if some of these smaller ones

were you know they can that can hurt i don't know and there's other things like i don't know the debt counter matters at some point maybe i don't know a lot of people seem to think now the common sense now that never matters yeah the common sense seems to be a thing that it never matters I don't know People have been saying that for 30 years Probably longer than that Well now it seems that the common sense is that it doesn't It kind of switched strangely

I don't know We'll see Who cares I hope it's fine But it seems like maybe the Fed should listen to it Yeah I don't know It seems like everyone They don't have much criticism at the Fed

Where they're all on the same page And that kind of scares me It was like, yeah, you know, no one has any dissenting opinions, even if it was like some gold bug, which I kind of disagree with, too. But I don't know. Well, what's your next story? Elon started a war. So this is anecdotal. I was I will admit I was extremely happy on Sunday reading this stuff.

So if you're not aware, last week, Elon Musk, I guess I assume people know him, but Elon tweeted out a notice that Tesla won't be allowing Bitcoin payments anymore, citing environmental concerns. The reason that we find this so interesting is because when they accepted Bitcoin, started accepting Bitcoin, even prior to that, people liked Elon Musk and they liked Bitcoin. And then Bitcoin and Tesla basically became synonymous with one another. And they put that $1.5 billion on the balance sheet. Right. And now it's essentially forced followers to pick sides. And there was a lot of backlash this week on Twitter. I honestly felt bad for him, but he gets criticism all the time.

I should probably – I don't think he's a victim. I think he's okay. I think he's more of a predator than a victim or whatever. Sorry. That was bad. Not a predator. I think that might be the wrong word. Not predator like in the way that people are thinking.

Yeah, like – Yeah, I suppose. Predatory to people that believe in his product a lot. But I've seen a lot of – just even – it's more anecdotal evidence, but I saw a lot of tweets where people were like thanks a lot i'm canceling my cyber truck order it's like oh 100 bucks stuck it to him yeah you're gonna get that by 2027 and then also like for just friends that used to kind of you know praise him we're like you know i'm honestly not that impressed after his snl appearance and then this environmental concerns over bitcoin which you're like welcome

to the club yeah it just feels like he maybe uh maybe ruined his relationship with a lot of his followers which does in a way drive tesla i think you're seeing that today with the stock price i guess we're looking at it was down like what three percent this morning bitcoin if you think it doesn't matter it's been down like 20 since he tweeted this so yeah well the the core thing you know whether there's all these nuances of who likes what who's intellectually right or whatever um a lot of people have a lot of wealth built up in bitcoin and when someone can just say something and eliminate 20 of it i don't think there's any reason to think they won't all get upset i would be upset um because selfishly i think you know everyone would have to admit that

they are happy that bitcoin made them wealthy and they don't want anyone upsetting that yeah no big time um i don't know i have more i think it's more loyal to their holdings bitcoin uh owners or tesla shareholders bitcoiners for sure yeah i've never seen this quite a passionate crowd yes it's so passionate you have to really respect how now there's some pumpers out there that we can't name but they're you know you have to respect how dedicated yes uh yes sorry i think yeah i think yeah i understand what you mean there the but the the dedication they have you have to respect how how much they love it and it's a core part of their you know kind of belief system of how the world should work and whether you agree or disagree they're they're way more you know into

it and they're dedicated they put a ton of time and effort at tesla shareholders as well but that's less of a you know sometimes it's just like someone's big investment or something like that it's not like a core part of their lifestyle well i don't know some people are i guess i don't know i do think once something has made you fabulously wealthy i think it inherently becomes a part of your lifestyle yeah which for some of the people it has done quite well there's so many things i want to say about this but you know i don't want to upset our listeners yeah i gotta you know who was right all along and i guess we should have seen it coming michael michael burry yeah there was that thing about today about his inflation worries tesla puts yeah he put it in today was

he anti-bitcoin uh no i think he's pretty new you know i don't want to say i forget he had something i don't think it was crazy long or short but who knows read what he had to say uh actually he deleted all his tweets so maybe not but yeah in his portfolio it said notional value of his tesla put options were 40 of the portfolio which in reality it's probably like four or five percent but you know options you know whatever the contracts are usually a lot less than the actual notional value of the shares so 40 is a lot larger than it actually is but he made a big bet there and he also he's been right thus far i mean yeah he had put options on i believe tlt which is the treasury etf so that would be a bet on inflation he's been yeah he i

think he's like the pinnacle or sort of the peak example of how hard it is to be truly contrarian in the moment because you get hate from so many people he got a lot of hate yeah he did he doesn't care though yeah uh i think yeah i think being off twitter is probably good for him well it's probably yeah because i mean the reason we're on twitter is to learn and build up this show and get ideas but if you're someone that's kind of he's already an expert you know you would say i would yeah you kind of don't want that clouding of your opinions and people are going to be saying you're wrong constantly um i wish he was still on though because it's fun to have him on although he although he's a bit crazier than i thought from the movie he is a yeah it's damn

shame but he is a little crazy but you got to respect his uh his track record all right what's your last story okay yeah this one's a fun one the vision fund uh is back i guess this would have been a hot water for us so you know last one or two three years one or two three years ago everyone including us had written off the softbank vision fund everyone including us was making fun of those investment slides which are always great the unicorn trough um the the the arrows just pointing out that are very cartoonish but you know the we work stuff and the mobility investments look bad at the time but and i guess we'd also worry about the saudi investment fund that could get into a sticky situation uh i think he was probably sweating that one out given the history

of their actions when things don't go their way uh but however the they've had kind of a turnaround cumulative return of the vision fund which was a hundred billion dollars is now 1.64 times the original investment not phenomenal but you know pretty good return of 3.85 times on listed investments which is stuff that i believe that means publicly traded so that's 15 billion dollars to 60 billion dollars and they basically broken even on their private investments although some of the carrying values may be lower than what they would get in the public markets um you know investment deck they we made fun of it it proved to be true some of these investments worked out it's kind of crazy well yeah my only they were a big backer and grab right uh everything yes

grab and coupon grab coupon everything dd it's almost it's almost hard to be wrong when you have that much money because when you get something that's super capital intensive to scale and not many people can do it because they don't have the money and you back it yeah well they backed uber make it happen with your money they backed uber and doordash which like yeah we both won you know yeah but like coupon you know building out all those facilities they couldn't i'm not sure that coupon would be what coupon is today without softbank's money yeah i'm not sure how much what the percentage of their investment was but same with grab possibly yeah which i guess if you have that kind of money those are kind of the

investments you want to dabble in right because it's harder for people to reach that scale and if you have 100 billion dollars you can't be doing seed investments small deals on some pwb software company that has like a two million dollar or sorry two million customer base i mean yeah but i would take the private investments uh with a grain of salt since they probably do the syrup they they bit them up oh they have been yeah i guess yeah some of them i was saying the carrying value might be lower but i guess that might even out if they do some of that um it's like we work shenanigans as we might want to call them worth a billion today we're gonna a year from now we're gonna do another round at three billion yeah i don't know man a hundred billion dollars

Masa-san might be the best investor who portrays himself poorly. Yeah, I mean, his track record's pretty good. There's a lot of smart investors that pitch SoftBank, too, like the company as an investment, just because it's kind of one of those sum-of-the-parts things. Seems too big, though. But I would caveat the end of this, that all the excitement around SoftBank, everything,

it's been such a big story for five years. His LPs have likely, far likely, underperformed a U.S. index fund. that would just take them two minutes to do. All this stuff. Maybe it's exciting and it's fun, but you kind of think about that. We could have just bought. I've always thought if I was fabulously wealthy,

I would just index. Yeah, but it's not fun. It's not fun, though. That's true. Life's too short to index. That's true. No, that's the mindset. It's just not as fun,

but I think you look back at something like this, I don't know, I guess maybe $100 billion, dollars like you can't index that it's just too much uh for one person it would take years and years and years to do that but who knows i don't know good story i you kind of hope softbank doesn't implode because you don't want anything to implode right but there's there's still the worries the worries of that maybe less than they were two years ago though certainly all right well i think that's gonna do it thank you all for listening we do i believe we have interviews kind of coming up for that foreseeable futures a c limited and coupon discussion with someone with boots on

ground, right? Yes. So that should be exciting. Yeah. All right. Anyway, we are general partners at Arch Capital. Partners there may have positions in the securities discussed on this podcast. We are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. Feel free to get in touch with us wherever you can find us, Twitter or email, anything like that. Thank you guys for listening. We'll see you next time. don't you wish you could just hit skip on the worst parts of your life you know the same way you can skip an ad i get it i'm siaya and i live in ice cove i've made some questionable decisions that didn't end up the way i planned and today i'm still figuring it out somehow things usually

get worse before they get better. Apparently that's how I roll. So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem.