Motley Fool Hidden Gems Investing - The Next Internet

Episode Date: February 11, 2024

Motley Fool CEO and co-founder Tom Gardner caught up with longtime Fool Contributor Brian Stoffel to talk through Tom’s fervent belief that AI is the next internet, but better. In this segment from a recent episode of our premium podcast, Stock Advisor Roundtable, Brian and Tom also discuss: The future of fraud detection. How to succeed at thinking clearly. The amorality of big tech companies. To gain access to all episodes of “Stock Advisor Roundtable” and get two stock picks each month, become a Motley Fool Stock Advisor member here: www.fool.com/signup If you’re already a Stock Advisor member, check out other episodes of Stock Advisor Roundtable here.  Tickers discussed: NVDA, TSLA, ABNB, SQ, NOW, EQT, META, KNSA Host: Brian Stoffel Guest: Tom Gardner Producer: Mary Long Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

You've got to try breakfast at A&W. You've got to try breakfast at A&W. And what better way than with the delicious Pret Organic Coffee? Starting with just one dollar, all day, every day, now until December 31st. You've got to try breakfast at A&W. At participating A&W locations in Ontario. AI is the next internet. It's just coming on faster and it's less expensive. It doesn't require a whole infrastructural investment to get all the pipes, to get everything connected.

We're already connected. So AI is just riding on the systems that we have. It needs more power to continue its acceleration, but it's coming on very, very quickly right now. I'm Mary Long, and that's Tom Gardner, co-founder and CEO of The Motley Fool. Longtime Fool contributor Brian Stoffel caught up with Tom on a recent bonus episode of one of our premium podcasts, Stock Advisor Roundtable. Typically, episodes of Stock Advisor Roundtable are only available to Motley Fool subscribers. But today, we're sharing a portion of that conversation with you, Motley Fool money listeners. In this segment, which was recorded in December of 2023, Brian and Tom discuss why companies

need to hire Group 3 talent, baking assumptions about failure into your portfolio, how to succeed at thinking clearly and why AI is the next internet, but better. There's a lot of excitement around AI, generative AI, like ChatGPT. And for members who might not be using ChatGPT or who may not ever use ChatGPT, for instance, I know my parents have never used as far as I know. What should members know about generative AI and investing? Because it might be really hard to understand how one could help improve the other. First of all, I would say in terms of the actual holdings in your existing portfolio, the most important thing that generative AI could teach you is how they're using it. So I would start by looking at the companies you own

and just doing Google searches and trying to understand what is their message about this new toolkit that's arrived. So that's number one. Number two, I would want to understand thematically what's happening in the world. So before I even was out there, of course, I like to learn by doing. So I do believe that anyone who can afford it should pay the 20 bucks a month to get GPT-4, the most upgraded version on OpenAI, chat.openai.com. I'll pay that 20 bucks. that'll be some of the greatest research money we've ever paid in our lives, I believe. This is such a powerful tool.

It's like YouTube. One of the best investments I made was just to pay to have the ads removed from YouTube so I could just click and start watching. And how many things have I learned from YouTube? It's been an amazing benefit to me as an investor and in other aspects of my life. But back to the key thing,

before even worrying about learning by doing is to see the theme, the major trend. So here's what I have to say about AI. AI is the next internet. Now, if you look back over the 30 years of the Motley Fool history, started in 1993 with a print newsletter, 94 with our first online site, 1994, most people, most were looking at the internet and saying, what's that? Oh, chat rooms.

Oh, there's hype. Oh, it's mysterious and anonymous. I don't even know what it is. My computer's not even networked. It was, there was a, it's cyberspace. We had an obscure word to describe it. It was not center stage for years. And then look what happened. Look from 1997, let's just say, and look at the capital raising, look at the bubble, look at the bursting of that bubble, look at the renewal of it, look at the diminishment of all non-digital assets as a class. If you weren't woven into the internet, it started with, what are the internet companies? And now you would never say that's an internet company. Everything is connected to the internet.

Well, AI is the next internet. Again, I'm speaking to people who are not following us. Many people may be like, okay, okay, move on. AI is the next internet. It's just coming on faster and it's less expensive. It doesn't require a whole infrastructural investment to get all the pipes, get everything connected. We're already connected. So AI is just riding on the systems that we have. It needs more power to continue its acceleration, but it's coming on very, very quickly right now. So that's the second reason. Now that you kind of have that context, what are my companies doing with AI and wow, this trend is a trillion, multi-trillion dollar making creation. There'll be a lot of hype, a lot of stocks get, oh, we're AI, whatever. And they'll get thrown down because

they're promotional businesses. But what's happening is real, very, very real, coming on faster, less expensive. And then pay the 20 bucks for GPT-4, take your largest holding and just start asking questions about it. And don't stop. Keep one channel open, take your largest holding and just keep prompting, asking questions. And one of the best prompts you can use is to ask GPT to write the prompt for you. Say, what should I ask about the leadership of NVIDIA? Let's say that's a company you want to learn more about, or we mentioned Tesla, Airbnb. Please write a prompt for me that explores everything that could be learned about the CEO, CFO, and founders of Airbnb. And then you'll get a prompt. You put that prompt in, you get the response.

now you're starting to read something that's a gathering of insights from numerous sources that you couldn't find on your own. Even if you searched it on Google, you'd have to click multiple articles to get it. And it is not perfect, but it's that unifying effort to bring insights. And then you start to learn more and more prompts to go deeper and deeper. And you might just uncover some patterns that help you find the best companies that we're recommending. I do believe, I will say this, the next big Enron, Madoff, Theranos, FTX, The next frauds are going to be discovered by people using generative AI to sort through filings, documents, interviews, and look for patterns that identify fraud.

So that's just one example. That's not a great value creating thing to go out and identify frauds, but it's just an amazing library for all of us. And it's important to learn by doing. So I think everyone should have a GPT-4 account. So Tom, I have two follow-up questions. You gave some really good examples there. Just to make this even clearer and more simple for the people listening who might not have

any experience, if they go to the website you talked about and they go to it, tell me in the last 24 hours, what have you prompted ChatGPT to help you with? Oh, that's great. I can actually bring it up right now and look at my channels. I have looked at the leadership teams of a few different companies. For example, I wanted to learn more about what's happening at Block with Jack Dorsey having returned, who's there, who's not. What was his performance as CEO?

It turns out Jack Dorsey, when he was the sitting CEO of Square Block, was something like a nine bagger over 10 years. I don't have those numbers exactly right. So I'm able to quickly learn things. I don't know how long it would take for me to study and learn about Block's leadership team, the stock's performance under Jack Dorsey. All of a sudden, I can ask those questions and learn. Yes, there are a number of other things.

And it does range outside of investing as well. But I wanted to learn more about natural gas prices, the history of natural gas prices through environments in the economic cycle where we are now, because I want to understand EQT better and better. I think we have a winner in EQT. I think we have a temporary knockdown to natural gas pricing with a warm winter on coming. But I don't think that there's going to be lower demand going forward. and we need a lower emission source of energy before we can really turn things over to wind,

solar. So I do think EQT is very well positioned. I can learn more about EQT on GPT-4 than anywhere else. That's really helpful. All right. And here's my follow-up because AI is what most people are talking about today. It's hard to do this because this isn't visual, it's audio. But the Gardner hype cycle says that you have a technology trigger, which I would say was chat GPT being released about a year ago. And you go all the way up to the peak of inflated expectations down the trough of disillusionment. And then you, and then you really see what they call the slope of enlightenment. And that's where the real benefits of a new technology come in. And the internet is a perfect example of that, where, you know, you could be

whatever.com 25 years ago, and people would pour money into you. And then it all crashed around 2000. Where do you think we are in the hype cycle right now when it comes to AI? Have we hit the peak of inflated expectations? Are we past it? Are we still getting there? I know it's an impossible question, but I'm curious as to your thoughts. I'm probably going to give an unsatisfying answer. I mean, I'd start by saying I don't know. Then I would say I think that there may be so many different little curves in this that it kind of depends on what you're looking for the application. So for example, if you're a developer, the cost of having a junior developer working with you has pretty much collapsed to zero now because you can utilize these tools to review your code,

write the basic code that you review, et cetera, et cetera. So that's a different experience than users that are now going to be looking at PICA. P-I-K-A, I recommend searching that. I recommend watching their trailer. And apparently now the first waitlist accounts have been released or some of the earliest waitlist accounts and the limited number of reviews that I've seen. And one person that I've spoken to has said, wow, W-O-W, it's text to video. Think about that. You could put a GPT script. You could ask GPT to write a script and you could then send that script to PICA and it can make an animated or increasingly like a photo reel film for you out of that script. So that's going to begin its own inflated hype site. We're going to go – that's going to inflate. I mean, someone who's been in the center of filmmaking for decades is Jeffrey Katzenberg. And what Jeffrey Katzenberg has said is that the cost of creating an animated film will fall 90% over the next three years. And the number of people employed on an animated film project will be reduced by 90% as well. He said there used to be a need for 500 artists for an animated film.

Now we'll need 90% fewer. and that's somebody who you think with his legacy in the industry might have been thinking oh no don't worry this is not going to be either but here he is letting us know how dramatic the changes will be in media and entertainment that's quite a remarkable statement he said it's going to happen over the next three years it's probably going to happen over the next 18 months because it's coming and we're moving up the non-linear curve so i think there's so many expressions in medicine and entertainment in technology that it's going to be hard to pin it to one thing and say, ah, now it's overinflated because I think there's so many new expressions

that'll be popping up along the way. All right. We're going to shift away from AI for a second. We're going to turn towards a question that you got from your October member event. At the time, numbers were one thing. I'll change them as I read it. The question was, with US treasury rates and corporate rates around 5%, and today they're around 4%, stock investors now have to earn 7, 8, 10, or 12% to beat that. So as the corporate rate increases tremendously, does your investment strategy change tremendously as well? And you can use hindsight to help you here as well, knowing that the treasury rates have come down since then. I have been pretty consistent in my belief that the rates are going to come down. I was not right on seeing the spike in rates. I completely missed

that. But what I see happening now is that a lot of the decline in inflation has come from untangling supply chain issues. So against that, we've been boosting rates, but now you get the core of the reductions coming from improving supply. Now we have new technologies entering the field that are extremely deflationary. The layoffs at large technology companies are not because they need to fix their balance sheets. The layoffs are happening at large technology companies and i said this very early on because a lot of the capabilities that we bring to the table now can be automated and how companies address that will be interesting say a lot it will be a societal issue we already know that and of course i favor the companies like service now

that have said we have a people pact and our people pack says we're not going to replace you with a tool you just need to be using the tools if you're not going to use the tools that will be problematic but if you're going to go out there and use utilize all these tools we're not looking to say ah that one took you out because it's a calculator so we don't need you to run small math for us anymore right so that is so deflationary and so i don't think we're going into a high rate environment now all the decoupling and geopolitical issues that's a big unknown but my primary concerns are around the the decoupling and around our national debt those are my primary concerns but i actually think at the core we're not going to see a high rate environment here and again i

I could be completely wrong about that. And I'm not knocking Jeremy Grantham because I love Jeremy Grantham. I think he's brilliant. But Jeremy Grantham is still out there with his 3,200 S&P 500 prediction. As far as I know, I don't know if he's corrected that. This is the problem with making these big predictions is we need to hold ourselves accountable to these because we're now at an S&P 4,700. And what the fool's pretty much consistently never doing is making a one-year or two-year call or a specific market call, but really looking five and 10 years forward and trying to find those major trends and themes. And I think we're going to be in a reasonable rate environment over the next decade. I may be an outlier on that.

All right. So I just want to parse out kind of what I just heard you say, because I think it's important. I think that the narrative that we hear a lot is that, hey, the reason there was a bunch of tech layoffs is because these tech companies overhired during the pandemic and they're correcting themselves now. What you're saying is that that might be true. They might have overhired, But these layoffs would have happened anyway, because this new tool we have in AI is rendering a lot of services kind of moot for human input. And then at the same time, you're saying, hey, look, the supply chain was a huge part

of this. To quote Nassim Taleb, he says, I've never seen a shortage not followed by a glut. And so what you're saying is, we're working through that. It's just this feedback loop takes a while to fix. And when you're talking about a global supply chain, so you don't see super high rates moving forward. So you're not going to be changing your investment process based on that assumption. True, true statement, true statements.

I think you nailed that and said it much more succinctly than me. Maybe I would add two other things in there. One of them is wealth inequality already is an issue. And for anyone who doesn't think it is, watch what happens in the next three to five years. think of the creation of Instagram, which was sold to Facebook for a billion dollars when they had 13 employees. So 13 people can create a billion dollars of value. Think how many thousands of people or hundreds of people would have to work to create a billion dollars of value in the past. Now that's an acquisition price, right? So, okay. Was it worth a billion? Yes, it was. It was worth

a lot more than a billion. Those 13 people created a lot more than a billion dollars of value. We could say, given what's happened since, but that is not going to be an unusual thing. That will happen more and more. Small teams creating a lot of value. I think smart companies will be making a lot of acquisitions of private, rising tech companies with true AI expertise, because there are three groups with AI, let's just say. Group one, eh, not really interested, don't necessarily love it. Group one.

Group two, learning, very excited. Group three, fascinated. The group three should be the decision makers. Companies need to hire group three talent as quickly as possible or contract it, find it as advisors. And in our own daily lives as investors, depends what you're doing and how you like to spend your time in life. But if one of your children or grandchildren, nieces or nephews, or somebody is in computer

science or has a friend who really knows AI, have them over for dinner, go out for coffee, ask them a lot of questions, ask them to explain it to you and to walk you through some examples. because AI is the next internet and it's coming faster and it's less expensive. So there's a huge incentive for companies because it provides capabilities that could present a richer experience for their customers and it's less expensive than making full-time hires. It's a reality. We're going to have to wrestle with it as society. I do think that what the large tech companies, and I excuse Apple from this because they have not gone through layoffs. I think that what the large companies are doing right now is amoral.

I won't say it's immoral, but I'll say it's amoral. It's societal neutral. Look, we don't really, we're not worried about that. We're going to optimize everything and get our operating margins up another 0.6%, you know, and, and if that costs, you know, 7,000 jobs or 14,000 jobs here and there, we're going to do that. And we're going to, so I think that, that they've shown their hand about how they're going to play this game.

And I don't think that's going to stop because exactly as you succinctly shared, Brian, I think this is more than just overhiring during the pandemic, a lot more. I think that's a small bump in the road. The much larger issue is these tools replace the need for a lot of legacy functions. Well, let me ask you this then. I know we're beating this topic to death a little bit, but the question from the member had to do with whether or not interest rates would affect how you might approach investing. Largely, I'm hearing, no, it doesn't.

But you pointed out inequality might be a big deal. Well, we could talk all day about how to handle that, but I know that taxes are going to come up as one of the ways to handle that. So my question is, if there are higher tax rates or higher tax rates for the wealthy moving forward, does that change anything about how you approach investing? Or is it one of those things where you just have to let it play out? For me, it's mostly letting it play out and observing it, trying to learn from it and understand it.

i'm not a i'm not a legislator so i'm not tasked with coming up with what the new rules should be i did watch an amazing interview which i i can't cite it right now because i can't remember the professor's name but it was a wonderful interview of what's happening with office real estate and all of the things connected to office real estate and essentially the suggestion that if you take, for example, New York City, it's going to lose 10% of its revenue because of remote work. You're going to see much lower commercial property, lower activity, lower sales taxes around those office space. Just think of office parks. I mean, there's a lot that's vanishing that was relied upon. So when you have a 10% cut to a city's budget, that has a lot of implications.

So I think we're going through a time of quite significant change. And I'll speak for myself, I'm only going to be right 55, 45, maybe, right? We know as investors, if we're right six or seven out of 10 times long-term as an investor, and we end up with a few big winners in there, wow, are we going to be very happy with our returns? But we have to emotionally be prepared and have a system that prepares us for three or four of our ideas out of 10 to be wrong. If you can't, if you haven't created, if we don't create portfolios with the assumption

that will happen, we're setting ourselves up for a narrower margin of safety than we should. We should assume that three or four are going to be wrong out of our investment recommendations, or in this case, our ideas around rates, macro issues that could impact the markets. So for me, my major themes, yes, are national debt, like geopolitics. When do we start unifying and come together? When do we find the common interests in conflict areas? I watched it happen and studied a lot Northern Ireland back in the 1980s and 1990s. And as you saw, the peacemaking process developed. So that's going to be a big theme, no question. And then wealth inequality, taxes, try to get the big themes on the page so that we can look at them.

And some of them will be the tailwinds for great investments. And some will be the headwinds that we really need to rethink our overall approach based on that. But I'm not going to be right more than five or six out of 10 times on the big themes. All right. Last question, last big question before we move on to the lightning round. There've been a lot of scary stories about an upcoming recession. I mean, we've heard about it for, it seems like 18 months now. And for every story, your recession is imminent in the next six months. So what should members take away from hearing that information? Or maybe it's disinformation when they tune into the financial media. Imagine a recession where the market rises or imagine an expansion where the

market falls. We don't think that those things could happen, but they can, and the timing of them and the market's reaction to them. There are cycles, there are patterns, but there's no certainty. So imagine that things in the business environment world went very well, but the market went down. The reason I say that is instead of trying to figure out how the loops match up, how the curves twist and turn, just go back to the historical data that shows that on average, the stock market falls 10% every 12 months. At some point, if you have $100,000 invested, don't be surprised if it's down to 90,000. That happens on average once a year. On average, once every five years, the market falls 20%. So when that happens, your 100,000 is going to be

down to 80%. And even less frequently, I won't go through the other expressions, but there are obviously 30%, 40%, 50% declines. The 50% declines are like twice in your lifetime, right? But we saw that in the financial crisis. We saw the NASDAQ go down 80% in 2000, 2001. It happens. If it has happened before, it must be possible. And if it has happened repeatedly before, we can look at the data set and say, oh, with this level of frequency, it will happen again. We should all build our portfolio with the assumption that the market could easily fall 10% at some point, starting today, perhaps, over the next two weeks. It could pretty easily fall 20% once every five years and 30% once every 10 years. We have to build our portfolio with that in mind. That data

helps us more than predicting where we are with regard to the threat of a recession. All right. Now we're going to move on to the lightning round. So I encourage you to give a one to three word answer to each one. And I'm very curious where you're going to fall on these. Number one, one investor outside the Motley Fool that I always think is worth listening to is? I'm going to say Ian Cassell, who runs the MicroCap Club. You can follow him on Twitter. He's a super long-term investor in a category we don't cover much in Stock Advisor, but MicroCap's a wonderful way to invest for the very long term with a small portion of your

portfolio, and he's a brilliant investor. All right. Number two, when considering a potential investment, the percentage of time that I spend evaluating leadership is? 25%. Okay. All right. This one's two-parter.

I think blank is the next blank. I'll repeat what I said before. AI is the next internet. It's just larger, faster, and less expensive. Think of those three combined to what we just went through with the introduction, the internet now happening. Larger, faster, and less expensive. All right.

Number four, as an investor, when I think autonomous vehicles, I think blank. Not here yet. Not here yet. Okay. All right. This one, I am particularly interested to hear your take on. It looks richly valued, but I think blank is just getting started.

Ooh, just getting started. I was going to say, when I heard that right after autonomous vehicles, I was thinking, I think Tesla is going to be one of the largest companies in the world. And I don't say that to say that I support everything that Tesla does or says, but I do believe that that business is positioned to become the largest company in the world in the next 15 years. But you said, is just getting started? Yeah. I mean, this is a small cap and we don't bring a lot of small caps into Stock Advisor, but I'd say Connexa Pharmaceuticals, KNSA, take a look at that business. Yeah, richly valued, but I think it's just getting started.

All right. One thing that is guaranteed when it comes to investing in 2024 is blank. There are no guarantees. Smart answer. One thing, one opportunity that excites me in 2024 is blank. Well, I mentioned natural gas prices and EQT and their CEO, Toby Rice. And if you're using GPT-4, just start prompting around Toby Rice, the Rice family, Rice Energy, their father's work as a money manager, their reputation. And you'll see that by putting some capital into EQT, we're putting our cash in the hands of a management team that does a great job of cost management, knows its category very well, and is likely to set us up for long-term success.

But even so, I think 2024 is an exciting year. Okay. Stock Advisor is for blank. Fools. All right. During an election year, because we are joyfully entering that time of the cycle, I do blank differently. Very little. As an investor, very little.

Okay. And my biggest question for 2024 is blank. My biggest question for 2024 is let there be peace on earth. and let it begin with me is it is it possible that we can learn to how to address disputes in every aspect of society uh more effectively you know we probably for all the ai right okay well hey let's hope ai delivers this we need mediation we need we need we need to be training tens of thousands of mediators because what do you mean by mediators i mean pick pick your most strongly held belief and and let's dedicate this short section to

charlie munger and the amazing life that he led and what he brought to us that in order to really succeed at thinking clearly you have to see the other side effectively so on whatever your most strongly held belief is how well can you articulate the other side like convincingly and and feel it and kind of own that experience versus reaffirming your belief. If you enjoyed this conversation and are ready to take your investing chops to the next level, head over to fool.com slash sign up to join Stock Advisor, our flagship investing service. As a Stock Advisor member, you'll get two new stock picks each month, rankings of a whole scorecard of companies,

and access to all episodes of our premium podcast, Stock Advisor Roundtable. That show is only available to premium Motley Fool members. It focuses on Foolish recommendations and takes a deeper dive into the businesses we cover, featuring Fool analysts you already know and love from listening to Motley Fool Money. Tom appears regularly on bonus episodes of Stock Advisor Roundtable to discuss what's new in the Stock Advisor universe and to answer questions sent in from Motley Fool members. If you're looking to sign up, again, you can go to fool.com slash sign up to do so. As always, people on the program may have interests in the stocks they talk about,

and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.