The Compound and Friends - High Conviction Stocks

Episode Date: March 29, 2024

On episode 136 of The Compound and Friends, Michael Batnick and Downtown Josh Brown are joined by Dan Davidowitz of Polen Capital to discuss: Sam Bankman-Fried's prison sentence, equity valuations, the problem with Apple, the bull case for Amazon, how Netflix became the king of streaming, potential challenges ahead for Nvidia, remembering Daniel Kahneman, and much more! This episode is brought to you by Rocket Money. Cancel your unwanted subscriptions by going to: https://rocketmoney.com/compound Sign up for The Compound newsletter and never miss out: https://www.thecompoundnews.com/subscribe Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

We had an emergency meeting with my interior decorator. She insisted we come down and see swatches and samples. Like this was like a DEF CON 2 situation. Yeah. So we did a night and we went to Louis Bossy. Yeah. That's good, right? Solid place, yeah.

And then we went to the Lobster one. What's that one? Chop's Lobster Bar. Chop's Lobster Bar. That is good. I mean, both were good. Expensive. Well, Chop's is expensive.

But I'm from New York. Yeah, not New York expensive. Florida, Boca expensive. Okay. But very solid. Are those like go-to's for you? Those are definitely like… What are your spots?

Give me your spots. Did you grow up there? No, I grew up in New Jersey. I was born in Queens. Okay. Grew up in New Jersey. But I've been in Boca now for… Or the area in Boca for 18 years.

You look healthy. I don't think you and I eat the same thing. But like give me some recommendations. I own a gym in Florida too. Oh, so that'll help. Where do you go? Well, I love those places. Those are two good places.

I'm a little bit of a pizza person though. Okay, say more. I have a couple, two favorite pizza places in Boca that you have to try. One, not far from where you're talking about. There's an East Boca called Tucci's. Okay. Very, very good.

Kind of like a wood fire. Slices or pies? I think you can do both. Definitely pies. I'm not sure about slices. Oh, like a wood-fired oven? Like a wood-fired New Haven style a little bit, but not too burnt.

Tucci's, got it. Tucci's. And then in West Boca, my friend owns Aunt Lulu's Pizza, New York style. It's the only good New York style pizza in South Florida. Yeah, it's fantastic. Okay.

And just reviewed by Dave Portnoy. I gave a really nice review. What did he say? He gave her a high sevens, which for a New York style pizza in Florida is actually quite high. Especially if you're claiming to be New York style and you're in Florida, you better put up. She does an amazing job. And all of her other Italian food there, it looks like a pizza place.

She calls it a pizza place. But the Italian food there is unbelievable. Okay, here's what my friends who live there said. The sushi is problematic. Well, versus New York. How could that be though? Honestly. No, there's some pretty good sushi.

That's what I said. There's got to be something. Yeah, you just can't go to any old sushi place. Right. Because there's a lot of them. That's where it's probably, like in New York, pretty much okay no matter what. Yeah.

Like for the most part. Yeah. It's not that way there. No. With most food in South Florida, you got to be a little more selective than you would have to be here. What's your sushi spot? Sushi-wise – see, I actually live a couple towns north. Yeah, you got to be careful.

Yeah, exactly. You got to be careful. All right. I'll give you a couple places. But, exactly. You got to be careful. All right. I'll give you a couple of places, but they're not— like, pizza is my— that's my thing. I'm with you. I'm with you. All right.

We'll figure that out. We'll figure all that out later. One thing I will say, every one of my favorite restaurants in New York or on Long Island is now open in South Florida. In South Florida, yeah. If it's not in Miami or Fort Lauderdale, it's in Boca. It's somewhere.

We're getting an H&H bagels in Boca coming soon. We're getting all of the New York stuff. Dude, I have El Molino around the corner for me. I don't need anything else. I'm good to go. You don't even have to go to Miami even now. You can just be Boca, Del Rey, Fort Lauderdale. So last question, when I come down there for the winters,

can we hang out? Of course we can hang out. All right, enough Florida Jew talk. How often are you in New York City? I'm actually up here quite a bit. I still have a place up here. I have a place on the Upper West Side. My daughter goes to NYU, so I'm actually up here quite a bit.

Okay. Took her out for sushi last night. What is she studying there? She is studying musical theater and film acting at NYU Tisch. Duncan's a director. What were you credited on? You have directing credits.

Can you put his daughter in your next film? 80 directing credits? 80 assistant directors. 80, 80? Shout out to Duncan. Any help you can be for my daughter. You know, NYU is expensive. It's a very good school.

It's not expensive enough. That's probably the issue. You know what I'm finding now? Because I have a son who's about to go to college too. NYU is not as expensive as I thought compared to a lot of other schools. Oh, it's worse. Oh, yeah. Have prices stopped going up?

I don't know, honestly. Because I don't know what they were before my daughter went. But it just feels hot. I mean, I'm 50 years old now. So, like, I remember what I went to Rutgers State University. Yeah. Really cheap. And I was an in-state student.

So, it was really, really cheap. It was probably like $6,000 a year. Probably something in that range. Yeah. So, the prices are not going down because the pool of applicants for colleges have exploded because the unemployment rate for college graduates is like 1%. And the lifetime earnings is like 600% higher. And we haven't done a great job with vocational – promoting vocational schools in this country, which is what we should do because we need people who can actually do things, not just think and talk all day. So the prices are higher than ever

and only going in one direction. And arguably, student loans have a really big role to play in those high prices. It's like extra money. And so people are like, oh, so let's spend it here. It's not surprising that the federal loan level, that tuition often is just about that. Corresponds to tuition rising.

I went to the Harvard of Long Island. I spent $4,000. That's Queens College. Yeah, yeah. Queens College. That's it? You have a kid applying to schools now? No, yeah.

He's a junior now in high school in Boca. And we started, you guys were just in Colorado, weren't you? Yeah. Because I was just in Colorado. You looked at Boulder? Yeah, we looked at Boulder. Sick school.

I think I'm going to go there. I don't care if he goes there. But you have- I never spent time there. Really nice. It's gorgeous. But you guys have the Bright Scholar program

where effectively if he gets into like Gainesville or something, it's free. Yeah, with good grades. There's like a whole bunch of, you know, wickets you have to get past. But if you have good grades-

But it's a lot of kids get that. Yeah, if you go to Florida State School, it's actually a pretty sweet deal. But it sounds like you want him to have a different experience. Well, he likes, so far he likes FSU, so there's a chance he'll stay.

And, you know, but that's a tough school to get into. That's the other thing that's changed since I... Where's FSU? Jacksonville? Tallahassee. Yeah, Tallahassee. You know, like, I couldn't get into Rutgers today. I don't think my test scores... That's true for everyone. Yeah. All of these name brand schools

have gone way up in difficulty. Yeah. There are schools that people used to joke around about because it was a party school that are now denying 70% of the applicants. So it's not like that anymore. Yeah, it's very different. Right.

I think that's what it is. They create this difficulty, right? They raise the hurdles so much that it becomes a very competitive school. That's just a function of more kids going. Yeah. It's very different. Right. I think that's what it is. They create this difficulty, right? They raise the hurdles so much that it becomes a very competitive. That's just a function of more kids going. Yeah. It's because the schools can't grow commensurate in, in like actual geographical size. They can't get big enough for the amount of kids that now apply. It's just, it's crazy. It is. And there's, there's international competition, which we probably had less of right when we were in school. And there's international competition, which we probably had less of, right, when we were in school. And so, yeah, it's just tougher. When I see the SAT scores that he needs to get in order to get into like an FSU, it's very, very high. Well, so one of the things

that exists now that might not exist by the time your junior applies, and I have one in ninth grade, is the test optional stuff might go away. Yeah, yeah, yeah. It's already starting in some places. Some places are already saying, how about not test optional? So now if you didn't have to do like a SAT prep, now you have to, you have to throw a lot more schools. I think it was Yale that recently went back to it. Right. And they, and they had said there was no better correlation than the SAT on

the future. I don't know if it's graduation rate, graduation rates or success rates of their students than the SAT, which is surprising. I'm surprised by that too because I would have thought grades, like the consistency of four years worth of, not that that doesn't matter, but I guess. I was surprised.

So we didn't have to do testing this time. So we had my daughter just lean into academics. She's like in 10 AP classes. Yeah, yeah. So the and she's a, uh, she's like in 10 AP classes. Yeah. Yeah. Oh my God. So the college advisor was like, look,

just lean into your grades. The most important thing right now. And, and thank God it worked. And you do get like, uh, you get a boost if you take, uh,

AP credits, right? Of course. Boost your GPA and all that. Yeah. So I'm, I think when I was in high school, there was maybe one or two available AP classes.

now it's like the high schools are now like college. Yeah. So it's a whole different, now they have to choose their curriculum in ninth grade. And they basically have to decide what they want to major in when they're 14. It's pretty amazing. Yeah.

All right. Thank God that wasn't my experience. I don't know if I would have made it. Hey, John, how we doing? We're good, man. All right. Three cups. Come on in.

Hey, John, what episode is this? The Compound and Friends, episode 136. Welcome to The Compound and Friends. All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Today's show is brought to you by Rocket Money. Rocket Money is a personal finance app that finds and cancels your unwanted subscriptions, monitors your spending, and helps lower your bills so that you can grow your savings.

Duncan, one of my favorite emails that I get is, large transaction detected. Oh, what's that? Or even better than that, large refund issued. I go to Rocket Money, see what's going on, make sure everything's copacetic. If I want to cancel anything, I could pretty much do it right in the app. Rocket Money has over 5 million users and has saved a total of $500 million in canceled subscriptions,

saving members up to $740 a year when using all of the app's features. So stop wasting money on things you don't use. Cancel your unwanted subscriptions by going to rocketmoney.com slash compound. That's rocketmoney.com slash compound. Episode 136. Man, we have

some show for you. Guys, I'm so excited. We haven't talked stocks in a long time in the show. We talk about the stock market more than we talk. I was just telling Dan. Ladies and gentlemen,

our guest today on The Compound and Friends, Dan Davidovich. Dan is the lead portfolio manager of Poland Capital's focused growth strategy. Poland Capital is a global asset manager running active, high conviction, growth equity, and high yield credit strategies for clients. Dan, welcome to the show. Thank you, James.

Thank you for having me. We're so excited that you're here. I'm excited to be here. So, dude, you have a tan. Thank you, James. Thank you for having me. We're so excited that you're here. I'm excited to be here. So, dude, you have a tan. You're in shape. I'm going to look and feel like you five years from now. That's Florida. It's just Florida.

I know that. No, I know. But it's a whole thing. People that go down there, then you see them again a year later. They're like good. I didn't look this good when I worked in New York. You didn't? I know you're not even joking though, right?

I'm not joking. Okay. You know what I didn't look this good when I worked in New York. You didn't? I know you're not even joking though, right? I'm not joking. Okay. You know what I did like five minutes ago? I had a slice of cold pizza in the rain on the way to the office. I like that. Because I was sitting in traffic for an hour. You don't do that in Florida. On the FDR.

Who's doing that? And then because that wasn't enough, then I had a blueberry muffin. Nobody's doing it. Duncan, edit out the muffin. We don't need to hear about the muffin. The muffin was on top of that. Nobody's doing this in Florida. No. People are relaxed. They're taking their time. Yeah muffin was on top of that. Nobody's doing this in Florida. No.

People are relaxed. They're taking their time. Yeah. Well, you're going to learn this, though. Florida drivers are actually worse than anything you've seen up here. Meaning like too slow or too reckless? There's too slow. There's too fast.

There's too young, too old, and everybody's texting at the same time. So it's just a confluence of terrible. Well, I don't plan on driving. I plan on rollerblading. There you go. Wearing jean shorts. I don't give a shit. I plan on rollerblading, wearing jean shorts. I don't give a shit. So Dan, how long have you been with Poland?

What's your story? I've been at Poland over 18 years now. I originally, as I mentioned, I went to Rutgers University across the river. I was a public health major, believe it or not. I wanted to work in hospitals, hospital administration. But as I was working at Sloan Kettering Cancer Center right out of college, not too far from here. And this was during the tech bubble. And all of a sudden, I started to get interested in stocks for all the wrong reasons. Yeah, all the wrong reasons. And so I ended up going back to

school at night. I ended up getting my MBA at Baruch College right here in the city and decided I was going to pivot into equity research. And this is, I graduated in 1999. It was like, you know, perfect. Right. Yeah. And, but nobody wanted to hire me. I wasn't coming from NYU. I wasn't coming from Columbia. I didn't have any real relevant experience. So I ended up working. Do you guys, I don't know if you're even old enough to know ValueLine. Of course. You remember ValueLine, the one for tear sheets? Yeah. That's where I got my first job in the industry.

That's how people did research. They went to the library and got the quarterly ValueLine. Yep. Literally. Flip the pages, right? This is pre-internet shit. Yeah. It would match your green books over there.

Yes, absolutely. It's actually right down the street here, ValueLine, like a couple blocks from here. And I worked there for a year just really learning how to research companies. The funny thing, in hindsight, it was funny. At the time, it wasn't so funny. I took a massive pay cut to go from a not-for-profit hospital to Value Line. But I needed to do it. I needed to restart my career. And so I learned how to research companies there. The wonderful thing about Value Line is with all their turnover, they have a ton of alumni too. So one of them hired me to work at a deep value investment firm in New Jersey, which is where I really kind of learned how to do

research. And that was after the bubble burst? Yeah. So you guys probably killed it. Yeah. Well, they did well enough, but not great. And part of the problem was that this place that I went to, which no longer exists, was it was just so deep value, like low PE, low price to book. Was this Stratton Oakmont? No. But these are guys that kind of learned from David Dream in the contrarian style. That's cigar butt stuff. Cigar butt. That's too contrarian.

Too contrarian. And they ended up just buying a whole bunch of crap too. And this is kind of, I'm still learning like what I want to invest in at this time. And I was recommending companies and this is like, date me a little bit. This is like 2002, three, four. And I'm recommending like Harley Davidson, United Health, which at the time were high quality growth compounders. But they had a PE of 12.

So they were wildly expensive. Too high, right. Yeah, yeah. It's like the market's only 15 or 12. You can't have a 15 multiple, right? Right, right, right. So I realized I needed to kind of find something that was more aligned with what I was thinking.

So like, God forbid you buy a decent company. Right, yeah. You just hope it's not as bad as what the market thinks it is, right? And that was just not for me. So I started to study some investors that did more of what we would call today quality compounders. And Poland Capital was one. A friend of mine was interviewing at Poland Capital. And he decided he wasn't going to move to Florida. So he took himself out of the running. I kind of jumped in. And luckily,

David Poland, who was our founder, he really liked me, but I think he liked the idea of me a little bit more than me. What do you mean by that? He wanted to hire a Jewish kid from the Northeast. There's not that many of those in finance. It's like a needle in a haystack. But Polin Capital didn't have many at that time, believe it or not, even though we were in Boca. And he loved ValueLine. So the fact that I worked at ValueLine, he was like, oh my gosh. So you checked a few boxes. I checked some boxes, yeah.

Okay. Not a lot of analysts can make the jump from researching companies to portfolio management. Yeah. Did you know you wanted that to happen in your career? And how did that opportunity first arise? I wasn't sure. Well, I wasn't really sure, I guess. I knew I loved research. And when I was working at that other firm in New Jersey, it didn't seem like a big leap because most of the researchers were portfolio managers. I was one of the few that was just a researcher. And then when I got to Poland Capital, David, he was the only portfolio manager. We only had one product. The one that I run today, Focus Growth, was the original Poland Capital portfolio. It's the only one that we had.

So I didn't think there was going to be an opportunity. He was the one running it. So I was just going to be a researcher for him. But after I got there, within a year or two, a lot of clients, we were small back then. We were only managing about a billion or two in AUM. And a lot of clients were insisting that he have a succession plan because at the time, he was in his late 50s, early 60s. And you need to have some sort of succession plan. So he decided he was going to have a co-portfolio manager and he picked me to be his co-PA. That's so cool. That's awesome. How much money is in the strategy now? Today, it's a little over 50 billion. 50? In the one strategy. And we have a whole

bunch of other strategies and teams now. Very good. Let's start here. Today, Sam Bankman Freed, who is totally innocent, was sentenced to 25 years in prison. The prosecutors were asking for, I think, 40 years, which would have put him in jail until he was 70 years old. He's 32. Yeah, he's young, right? So that would have been,

he would have come out of jail at 72. Not that anyone actually finishes a sentence. But just like that sounded too much, like even to me. And I'm not like a defender of scam artists. He didn't kill anybody. And I think pretty much most people, even though it's been a horrendous few years, are going to get their money out. I also think a lot of the victims I would put in quotes because there was a lot of greed and a lot of people who should have known better that these returns are not

realistic or possible. No, wait, hold on. This isn't made off. What do you mean these returns? What returns? If you had your money at FTX, you got white payout. No, the returns of the asset class itself. No, they're victims, man. If you had your money at FTX. I agree, most are victims. No, but you used air quotes. They're victims. Do you think firms like Three Hours Capital…

I'm not talking about them. Okay. All right. So, I am. So, that's where we disagree. No, hang on. Hang on. The retail people who had their money at FTX were victims.

We 100% agree on that. Okay. But they're going to be okay financially, even though it's not great. Well, I think what you're getting at is why is anybody surprised that greed in markets leads to frauds? Investors should know this to some degree and do some

diligence, but the reality is they don't. You almost could not have done diligence on him because he came out of nowhere and immediately some of the most well-known and respected venture firms were in business with him. And then he was naming stadiums and then he had Tom Brady. And it's like, so a retail person is supposed to look behind the veil and find something that none

of these other people found? No way. No. It's crazy. No. And like, these are proof points, right? You get somebody with a— Yeah, social proof. You get legitimate backers and you start to put your name on things. People think you're substantial. If it's good enough for Tom Brady. Yeah. I mean, look, not that Tom Brady should be the extent of someone's due diligence, but it's not just Tom Brady.

It's like huge. Private equity firms and venture firms. The social proof for the average investor is that, too, though. Even Tom Brady. It's like, well, you assume Tom Brady's people did research, right? 100%. You assume he's got caretakers

that are doing it. Meanwhile, he like played golf with the kid and they wrote him a check. Anyway, he got what he deserved. You think so? 25 years? What, you think it's too harsh?

I think he's going to do 12. The guy from WorldCom did like half a sentence. What was it? Bernie Evers? Throw this chart out, John. Oh, you're talking about Bernie Evers from WorldCom.

Yeah, yeah, yeah. The president, Jeffrey Skilling from Enron did 14 years. Wait, this, oh, this is everyone's Sam Waxell. Remember that one?

Elizabeth Holmes, she was doing some pretty bad shit. She got 11 years. She got 11 years. We don't know if she'll serve. Right, right, right. These are the sentences. Oh, that's interesting.

Elizabeth Holmes got 11 years while pregnant, which is Right, right, right. These are the sentences. Oh, that's interesting. Elizabeth Holmes got 11 years while pregnant, which is pretty, right? All right. So look, I'm not saying was it just or not, I guess, because who knows? Well, so here's- I guess the question is, are you surprised? That he got 25?

You sound like you're not. I'm not, no. I guess I'm confused, like sentences in general, like for awful things sometimes, like where people do die or something very harmful. Sometimes the sentences are not nearly long enough. The judge said he's convinced that if given the opportunity, SBF would do it again. And I think the judge is right. So that's why he didn't get the max, but he also didn't get a slap on the wrist. Because he spent the trial lying.

His lawyers wanted six years in prison saying – this was in a journal – saying he still had much more to offer to society, LOL. They pointed to his autism, his deep remorse, and his charitable works as a reason for his lenient sentence. There was – somebody uncovered this a couple of weeks ago that like his document for like playing out what his defense should be, like should I go full Republican? Should I say this? Should I say that? No, I shouldn't do this. Should I lean into the autism? Like it was wild.

Really? more than $11 billion in financial penalties, said he weighed, quote, the enormous harm he did, the brazenness of his actions, his exceptional flexibility with the truth, LOL, and his apparent lack of any real remorse. He's not remorseful at all. He's pissed that the bubble blew up before he could put all the money back that he misappropriated.

He's not like, he doesn't, I'm sure he feels bad that people lost money, but that's like an abstraction to him. He doesn't talk to him. He might've escaped. He might've escaped. He might've gotten away with it. If, um, three hours didn't blow up, he might've escaped. If the dominoes didn't start falling. I a hundred percent agree. And I think there's probably no remorse there. And there might not even be 10 years into a sentence because it's a personality type. Um, do you see a picture of the parents in front of the courtroom today? So they're mortified. You think about from their perspective, and there are people who say that they're partially at fault for raising a psychopath. I couldn't comment on that. All right,

let's talk stocks. Best start to a year since 2019. Should I start buying puts right now? How do you think about the big picture before we drill down? You know, because I deal in equities and mostly large cap equities all day long. Yeah. I don't have a whole lot of places I can go, right? This is all I can do. But what I can tell you is, does it feel expensive or not? And it does.

Everything feels pretty expensive right now. Just start buying regional banks. It'll be fine. Well, I was having this conversation with one of our analysts today. We were talking about Costco, which is a fantastic business. We do not own Costco. What's that, 35 times? 44 times.

That's nifty 50-esque. And it's a 10% grower. It's a wonderful business. We think it's fantastic. But you're going to pay 44 times. You know what kind of multiple has to – we think about expected returns and how much growth are we going to get in the next five years, what kind of multiple has... We think about expected returns and how much growth are we going to get in the next five years? What kind of multiple would have to sustain? Well, what is the buyer of that thinking then? Besides the index fund, what is the active

manager who's overweight Costco relative to the index? I wish I could tell you. Well, it's only 30 times 2027 earnings. Maybe that's it. I don't know. They like the reliability. You're not going to embarrass yourself in Costco. Okay. But for every one of those two, we have like a Zoetis, right? Which makes animal pharmaceuticals. They dominate that industry. That is one that we own. It also –

Pfizer spinoff. Yeah. Pfizer spinoff years ago. It's a wonderful business. It trades at a high 20s multiple, 28, 29 times earnings, which I would say is about reasonable. That's nice. It's a nice multiple. It's not too high, not too low. It's going to grow faster than a Costco.

But there's no real comparison there for a manager who is looking for names in a certain sector. Well, if that's the way they do it, right. Maybe that's what it is. Maybe there's just so much crap. No, no. Our portfolio is a highly concentrated portfolio. We have 23 companies in the portfolio today. You know, we've always had between 20 and 25 companies, basically. Do you have somebody telling you, you need to own one consumer discretionary by Costco or by Target? Or nobody's doing that with you? No, no, no.

We go wherever we think the best companies are. So I love this chart. I grabbed this from Michael Melbison. It's a distribution of forward price to earnings ratio for the S&P 500. And for the listeners, it shows, all right, there's a couple of stocks trading for less than five times, a few more trading between five and 10. And the bulk of the highest number of companies, the bucket that they fall into, it's between 10 and 15 times and 15 and 20 times. So everybody talks about how the market is expensive, but I think this does a really nice job showing where we are. What bucket are you most likely to play in? So yeah, we are most likely in the higher buckets, right? Because

we're dealing with companies that have pristine balance sheets, tremendous competitive advantage. Higher multiple bucket. Yeah. Higher multiple. Because that's where the best companies are. They just are premiums. Yeah. These are premium brands. Yeah. These are companies that have mid-teens or better consistent earnings growth over time. They tend to dominate industries. They're going to grow for decades, essentially. And they have no debt on their balance sheet, tons of free cash flow. This is what we spend all of our time on.

Well, that's been the right place for the last few years. Well, it's been the right place for 30 years. We've been doing it for 35 years. But you get to some points in time where things feel like they're a little expensive. Now, I think if you're looking at this chart, it doesn't look like that. But it's because it's a smaller group of very large companies that's pulling up the market. Like in my opinion, a company like Apple is very, very expensive, right? It's trading at 30 times earnings.

It is not growing. Apple has not grown in two years. We're going to do that later in the show. I feel like just looking at this bucket, I'm a little bit surprised. I guess I would have expected it to be more of a skew to the right. Well, first, it's the S&P 500, right? So it is a pretty broad universe. If you look at it on a cap-weighted basis, it would be a lot more skewed to the right. But there's also a lot of bad companies in the S&P 500 that don't- I was going to ask you, what are the stocks in the 5 to 10 times earnings?

Financials. Those are all banks. It's got to be regional banks. Mostly. Mostly banks. So let me set the table. The S&P 500 total return as of today for Q1, so effectively in the books, up 10.5%. Top three sectors on the year, a little bit of a surprise.

XLE up 13%. It's energy. Communications up 12.5%. Top three sectors on the year, little bit of a surprise. XLE up 13%, it's energy. Communications up 12.6%. Thank you, Alphabet and Meta and Netflix. XLF, third best sector, financials, up 12.25%. Most of the heavy lifting insurance companies up until the last couple of weeks when the big banks came alive.

Here's your bottom three. Not a surprise. XLRE, real estate sector, negative 0.65%. XLY, consumer discretionary, only up 3.42%. XLU, utilities, only up almost 4%. Yeah. Kind of makes some sense, but you got,

but you got a horse race now. It's not tech, tech, tech, tech, tech's not even in the top three. now it's just in videos, tech,

right? And videos all by itself in tech land. And then everything else is kind of more normal. Do you like a tape like this better than 2023 though, for what you do? Honestly, I don't really care, you know,

cause we're, we're doing- Thanks for commenting. What I mean by that is any environment changes very quickly, right? So we have a very long-term time horizon, right? The portfolio, I've been running it now for 16, 17 years and Poland Capital has had this portfolio for 35 years. We think in like five and 10 year time horizon. So we know whatever's working now is probably not going to be next year. What we're trying to do is dial in the portfolio's earnings growth.

So we're not really targeting returns. We're targeting portfolio weighted average earnings growth. And if we can get that to maintain a mid-teens rate and just be careful not to pay too high multiples for any of the individual companies, the returns tend to track the earnings growth over time. And that works for indexes too, by the way. I'm glad you said that.

There's not like this gigantic disconnect between the economy and the markets. And yeah, the markets are maybe, maybe you could say, not maybe, you can definitely say there's some froth. Things seem to be a little bit extended in the short term, fine. But today we learned that the fourth quarter GDP

was revised up to 3.4%. Current dollar GDP increased 5.1% at an annual rate or $346 billion. That's just the increase in the fourth quarter to a level of $28 trillion. Kathy Jones at Strobe tweeted this morning. This is also from the BEA release. Corporate profits rose to a new all-time high

in Q4 of 2023. What should the market be doing? Yeah, I agree with you. Things have been a lot stronger than I think everybody predicted. Last year, everybody thought the recession was inevitable. It never really happened. We're in a fairly good place. We have some pretty good view on the economy when we look through some of our companies. So we own Visa and MasterCard. We own Amazon, we own Nike, we own businesses that are real world, you know, good read on the consumer, especially because that's the most of the economy. All of them are saying, you know, relatively strong, right? Visa and MasterCard spending, you can see it quite clearly,

even though it's slowing a little bit, it's still pretty good growth. I mean, doesn't this look sort of like the stock market? It's a chart of US corporate profits. The market is not disconnected from reality. No. And the funny thing is, though, if you were to trace that profit chart to the individual companies, it'll explain the skew in market cap PEs as well. Because most of that increase in profits is coming from a relatively small group of companies. Top 100 stocks. Yeah. It's probably top 20. John, put this S&P price earnings next 12 months. This is the forward PE.

It's at 21. This is from the Wall Street Journal. So Michael's chart is not – nobody is surprised that that's what corporate profits look like. And from my perspective, that's why PEs are creeping higher because profitability is like the right thing to be betting on right now. Yeah, but I wonder, is that why? Or is it everybody's super excited about rate cuts coming and think that that's… Or AI. It's both of those things.

It's both of those things. But my question… You guys know more about this than I do. My question on rate cuts is, does it even matter for equities? Because the equities are really valued off of where the 10-year is, not where the short It only matters if there's a huge need to roll debt in the next 18 months amongst the top 300 companies in America, and there isn't. Right.

But if you're thinking about a risk-free rate for equities, and we don't do discounted cash flow models with BS academia stuff behind it. But if you're pricing risk assets off of a risk-free rate with some long duration to it, you'd probably be looking at the 10-year more than you're looking at the Fed funds rate, right? Yeah. So it's at 4.2. Right. And if the Fed cuts three times, six times, whatever they're going to do, is the 10-year really coming down? I don't know. From these levels, how could it?

Yeah, I don't think so, right? So why would equities be rallying? But everything I hear about that 21 multiple is because rate cuts are coming. Yeah, there might be some of that. I also think it's a composition question. What are the biggest stocks in the index? And they're Apple and Microsoft, and they're not going to sell at 12 times earnings right now. Which is kind of amazing, by the way, because we owned Apple from Microsoft, and they're not going to sell it 12 times earnings right now. Which is kind of amazing, by the way, because we owned Apple from 2009, the very beginning of 2009, to the end of 2016, which was a really good period. It was like a year and a half into the first iPhone, maybe, and for a long period. And when we sold it in 2016, from that whole period,

2009 to 2016, the PE multiple was never above 15. You also had to hold it through the death of Steve Jobs, which a lot of people were not willing to do. It was a hardware company. That's how it was valued. Because everybody thought eventually, right, someone would compete with them. Well, they said, look, the magic man is gone.

Now what? The COO is in charge? Yeah. And you're going to bet on visionary technology? Right. Which, by the way, they still have never brought any visionary technology since then, but it doesn't seem to matter. No problem. But now the company's in market cap. Right. Which, by the way, they still have never brought any visionary technology since then, but it doesn't seem to matter.

No problem. But now the company's not. In market cap. Right, right. But now the company's not growing and it's trading at 30 times earnings. So it's hard for me to explain that. I don't really have a good view

on why that is, other than it's considered now like a, almost like a utility, almost a consumer staple. I was going to say luxury goods. Yeah. But is it considered luxury?

Yes. You think? Well, here's a test. What kind of phone do you have? An iPhone. Okay. What if I told you, here's a thousand dollars.

You could go buy yourself a free phone. It could be anything but an iPhone. Yeah. You're not buying it. Yeah. I tried. I tried to untether myself from the ecosystem. What if I say,

here's $10,000. Warren Buffett did this exercise. Yeah. Here's $10,000. No strings attached, except you can never buy another Apple product again. Okay.

But tell me, this is like a simple question. But that's why it's a luxury good. That's all I'm saying. Okay. Say it is. Yeah. Okay.

Luxury goods, pre-financial crisis, luxury companies. So I had an LVMH and Herm Okay. Luxury goods pre-financial crisis, luxury companies. So I had an LVMH and Hermes or, you know, you name it. Most of the good luxury companies are European ones. They didn't trade at these multiples pre-financial crisis. They weren't as powerful as they are now. They didn't have a 30% break on everything on the app store.

Okay, but Apple's not growing. Even with that rake, even with Google paying them $18 billion a year and growing to be the default search engine. So LVMH was selling to a potential customer base of maybe globally 5 million people. Right. It's a smaller – And now it's a billion people. Yeah. There's an emerging middle class in places like Singapore and South Korea.

They didn't exist. So arguably, LVMH's TAM has absolutely exploded in the last 25 years. Sure. Which means the multiple that you would pay for a luxury goods retailer 25 years ago is not relevant to how big these companies are today. Okay, I buy that. That's all I would say.

I buy that. But if you look at an LVMH, they still have wide open addressable market opportunity. Apple does not. True. Vision Pro? Yeah. What if everybody wants to wear a watch on both wrists?

You know, by the way, years ago, today this is obviously still stupid, but even years ago, if you looked outside the iPhone, Mac, iPad, Apple Watch. AirPods. AirPods. AirPods. Each one of those by themselves would be a Fortune 500 company. Oh, yeah. Wild. But none of them move the needle inside of Apple.

So just getting back to the state of just things in general and how the economy and market are entangled. This morning, we got news. Las Vegas strip gambling revenue rose 12.4% year over year. That doesn't happen if things aren't pretty okay. Yeah, I agree. It's like the last place you spend money. Yeah, no, I think you're right.

We are seeing that overall spending is still very, very strong. We are starting to see consumers make some choices, though. It's not broadly strong anymore. Like, you can see that people— Mikey caught a strap now. Yeah. So, we are seeing a little bit of concern on, actually, it's on the lower price footwear.

So footwear below $100. We're seeing consumers are a little bit stretched. If there's not something really new or highly discounted, they're not buying it. The affluent buyers who are in the over $100 price point, still strong. We saw companies like Align Technology, which we own, which makes the Invisalign clear aligners. They're going through a really tough period right now. That's a $5,000

to $8,000, very discretionary product, mostly for adults. So we are seeing people pick and choose. They're still spending money on their vacations, their holidays, their Airbnbs. They're still spending money on travel, but they're being very selective now on what products. Delta, the Cruises, both just have the same thing of like record. Yeah. Records. Yeah, travel is still, I mean, I think that COVID,

you know, where we were locked down for so long where we couldn't travel, people are saying, I'm not doing that again. I thought that was going to wear off like two years ago. I thought there'd be a lull.

Like we'd have this like balloon and lull. It's not slowing down. But not only that, not only that, they said because of Zoom, corporate travel was not ever going to come back.

I bought that. I did too. It is through the roof. They cannot believe the demand for corporate events. Yeah, I mean I'm a testament to that. I travel more today than I did pre-COVID. Yeah. I think that's true.

Yeah, and people are saying yes to more things than they did previously because now it's, now it's like an experience that you look forward to. And you can tack on, even a work trip, you can tack onto it and still work remote, right? And still, you know, Airbnb talks about this all the time where you have these kinds of combined, you know, work and leisure things because you can plug in from anywhere. You can, you know, your family could be off in a theme park and you're in your room. you can plug in from anywhere. You can, you know, your family could be off in a theme park and you're in your room.

That's a huge part of this where business travel and personal travel are blending together. And yeah, so a lot of things. So I would just say like where you see some of the big bifurcation is the high end versus the low end. So if we say the high end

is the top 10% of income earning households, there's zero evidence that anyone is slowing down on anything. No. And they're more resilient anyway. Right. Up to and including whatever the credit card companies are saying. The guy from RH who loves to talk, Gary Friedman. Okay.

He had a lot to say about that market. He's been bearish. He's been bearish because of what interest rates are doing to mortgages. But he's like, you know what, actually? We're doing pretty good. But Dan, when you see something like this, so this is Discover Financial Services. Is anything more sensitive to the consumer?

And you look at- Well, they just got acquired. I know, but fine. But fine, look at the acquirer. Wait, is Capital One buying them? Yeah. Yeah, right? So Capital One too.

Yeah. These, like, I always default to, when I think the market's looking a little bit frothy or stretched or whatever, and I still think that, the market's not dumb. No, and to your point think the market is looking a little bit frothy or stretched or whatever, and I still think that. The market's not dumb. No, and to your point, credit quality is not bad either, right? You know, consumers are, you know, yes, their leverage is going up, but the bank delinquencies are not very high.

Charge-offs are not very high because people are still working. That's it, right? Well, when you listen to these calls, you mentioned Visa and MasterCard, they're all saying the same thing. Yeah. Well, as long as we know this, right? Americans spend money, right? As long as they're working, they spend money. So unemployment is still extraordinarily low. And until you see, and I think companies are also a little bit careful about laying people off. Cause remember a lot of them got caught a little bit during COVID

when all of a sudden they needed to hire back people and not everybody wanted to go back to work. There are no net layoffs next Friday on April 5 April 5th, we're going to get March non-farm payrolls. The consensus is like plus 216,000. Even if it misses by 50%, that's still 100,000 more people with jobs than the prior month. Let's go through your top 10 holdings. I will criticize each. As of the end of December. Yeah.

So like obviously whatever standard disclaimers normally apply to fund managers, just like pretend I said all those magic words. Amazon is 14.78% of your portfolio. So when you say high conviction, that's what you're talking about, right? Okay. Microsoft is 9% and they are growing in a way that Apple isn't. Correct. But are they growing that quickly at this stage in the game outside of? You'd be surprised.

Yeah. I mean, for an extremely large company, we still think it's a low to mid-teens earnings grower. It's incredible. Unbelievable. Unbelievable. And by the way, it's trading at the same multiple as Apple, which isn't great. Which is also incredible.

Alphabet, 7%. Yeah. Okay. Where are you finding these companies? This is incredible. They're secrets, right? They're like- No, but wait.

But there's two things that are very much noticeably gone. No NVIDIA, no Apple. Right. Yeah. Yeah. ServiceNow. What's the story on ServiceNow? Let's pretend-

It's the best software company that most people don't know anything about. Somebody has no idea. Why is that your fourth biggest holder? We keep hearing about them with AI, with respect to AI. Yeah, it's a little early in AI, but it's a good use case. So ServiceNow basically is a software platform that allows you to automate pretty much anything. So if you were previously doing things through email or spreadsheet.

Enterprise. Yeah, it's enterprise software. And it's mostly used, like I said, for things that were inefficiently done in the past. So for like a Poland Capital, if you wanted to open up an account with us, there's a whole bunch of workflows that would happen when someone would send an email,

like, hey, I want to open up an account. Someone would email this and that and whatever, kick off a bunch of paperwork and workflows. We've now standardized on the ServiceNow platform. Oh, you're a customer too. Yeah, we're also a customer. Our investment team brought it to our IT team. Okay, very cool.

But we end up now, everything gets automated. So once that first inbound comes in saying we're going to open up an account, it automates to kick off workflows that are all digital and all audited so that you can't make a mistake. So if something's filled out wrong, it'll stop you from doing it. So it makes it highly efficient, less prone to error. And you could do this across any company. But whose business did they take coming on the scene

and getting as big as they... Was that historically Salesforce or Oracle? I'm trying to think. There was almost nothing. It was stuff that you were... It was like Post-it notes, right? It was emails, spreadsheets. It was something inefficient.

It was something that it wasn't designed to do. $160 billion market cap. Yeah. Wow. Yeah, and it's been growing very consistently in the 20, 25%. Now, the founder of that is now the CEO of something else? Well, he was not the founder. The second CEO who scaled ServiceNow became the CEO of Snowflake.

Which is why people were – but then he's gone now. He just left. Slootman. Yeah, Slootman. Okay. Adobe, not having a good couple of weeks, but obviously an incredible company. Yeah. That gets brought up in the AI conversation all the time, but in a negative sense lately.

Well, yeah. So this Adobe position you're seeing here, 6%, it's half that now. We had trimmed it. Okay. Because one, Adobe is a fantastic company. Like for creation, amazing, right? It's a monopoly, basically. We used them to make the show. I bet. Yeah, I'm sure. Originally, they got some AI positive hype because they'd come out with a product called Firefly, which was essentially their gen AI, text-to-video, text-to-picture type, text-to-image.

And so when everybody was worried that generative AI is really going to hurt Adobe, Firefly was like, oh, OK. No, they got a product for that. So they're going to be OK. So that was about a year ago. And the stock started to really go with the AI hype. Now, we see a very balanced risk-reward when it comes to Gen AI with Adobe. There are risks.

You know, there are some real open products today that do kind of low-end stuff that Adobe can do. So we are a little concerned about that. But they do have this great product as well. So we thought it was kind of a balanced risk-reward. But then with the valuation kind of ripping, we just said, all right, time to pull it back. And the expectations with that valuation get ratcheted up. Yeah, because there is risk. It's not without risk.

When you saw that video, was it Sora with the dogs running in the snow? Yeah. That knocked Adobe Stock down, I think. Yeah, right. Because the thought process is if you can capably create these things very easily without paying a license. Just writing text into a box. Yeah, that's definitely a negative for them, right? Yeah.

But the reality is, for most professionals, even if you start with an open Gen AI product like that, you're probably going to still have to pull it into Adobe Tools to edit and make it exactly what it's going to be for. So I do believe it's probably a net positive, but we were open-minded enough to say, it might not be 100% positive,

so let's keep a smaller weight. We did the same thing with Alphabet, actually, because Google's got very similar type risks. Same way. You don't know if they're going to dominate or if this is going to be the thing that takes them down. Well, and for Google, even if they still win, even if their AI is better than ChatGPT and everything open-ended. They want a 90% market share like they do in search. But even if they did, is it going to be as monetizable as search, which is extremely monetizable, right? So that's the question. So we have, again, reduced our position there.

We still love the companies. We still own a lot of them, but, you know, taking them down and we've been reallocating, this is slightly dated. So we have, we've been reallocating to companies that have been kind of left behind because there's no AI story to them. So Thermo Fisher, Nike, even though current results with Nike are not that great, we see a real positive setup for Nike, Kame, companies like Zoetis. These are companies that are typically great compounders, mid-teens compounders, but don't have an AI component to them. Yet.

Yet, yeah. Don't have the hype around them. So they've kind of fallen behind. I like that idea. I've been doing the same thing. So I agree with that. I'm curious how you guys think about Netflix, which is a company, the stock that I own. It's a company that has been through three cycles

over the last five years, right? During the pandemic, everybody was chasing them. Finally, the legacy media companies got wise up. Maybe we need a streaming company. Obviously, they were way too late. And like Wile E. Coyote, they chased Netflix off a cliff. Netflix plummeted and they said, all right, time to get serious. We've got all these people that are just free loading. Let's cut that out. Let's maybe add in some advertising. Have you owned the stock the entire time?

We've owned it since 2000. So we bought it right around. Hit that. What's your cost basis? Honestly, we've traded it so much now, I honestly don't know the cost basis. We're in a good place on our cost basis. Talk about a compounder. I think that's one of the greatest compounders in the history of history. It is.

But I'll tell you what, we didn't own it before that because it was highly levered with no free cash flow. When before that? When did it come public? It came public 10 years before that. When it was shipping DVDs. No, no, no. Even the streaming. When they started to build their own stream.

Remember, they were first before they had DVDs. And then after DVDs, it was streaming of other people's content. They weren't creating their own content. They did a licensing deal with Disney. And Disney arguably built Netflix by accident. Yeah, they were just distributing anybody else's content. They were the only streamer that had Winnie the Pooh. Did you misspeak?

Because it said Netflix IPO in 2002. Did he say – he said 2000. Oh, I'm sorry. So, yeah, it was even a lot farther. Yeah. Did you misspeak? Because it said Netflix IPO in 2002. Did he say 2000? Oh, I'm sorry. It was a lot farther. Yeah, it did misspeak. So it had built itself, though, highly levered, right? So first it was through distributing those DVDs and distributing

other people's content, but you have to pay to be able to do that. And then they decided to make their own content, which really costs a lot of money. House of Cards was, I think, the thing they did first that caught fire. Yeah. And then they probably- Orange is a new block after that. Yeah. They probably internally said like, all right, big fucking deal. Give Kevin,

give, what's his name? Kevin Spacey $3 million and we could do what we're paying for. Right. So they did. And they did it in a big way. But in order to do that, they had to take out a lot of debt to be able to do it. There was really no free cash flow. In 2020 was really when they, but right before COVID, they started to actually go free cash flow positive. Everything started to look good.

That's when we started to purchase. And of course, COVID was a nice boom for them. A lot of new subscribers. And the fact that they couldn't really make any content at that time meant their content costs came down. So their free cashflow started to pile up. One of the other things that happened along the way was they scared everyone with the international push. It ended up being the right thing. It was hugely expensive to go into Europe and Asia and Latin America and not just go in with American movies, but locally produce.

Yeah. And now three quarters of their subscribers are outside the US, right? And but also the cross-pollination of international shows in other countries. Yeah, and their content does translate across borders, which is pretty amazing too. But to your point, Michael, when they all of a sudden, right after COVID,

they said, oh, by the way- We lost subscribers. No, they didn't. Well, they lost like a couple, a million or two. But that shocked the street. That shocked. But then at the same time, they said, oh, by the way. We lost subscribers. No, they didn't. Well, they lost like a couple, a million or two. But that shocked the street. That shocked. But then at the same time, they said, oh, and by the way, there's 100 million homes

that use Netflix that don't pay for it. That was a shockingly large number. We've been trying to find that number for a long time. It's a really hard number to find because it gets to the addressable market, right? Yeah. We thought the addressable market was about 400 million homes.

We thought they had a little under 200 million. So they're only about halfway there. But if you have 100 million that are just not paying for it, that means you're three quarters of the way there and you haven't convinced some of those people to pay for it. So you're running up against saturation of your addressable market and maybe not able to monetize it. So that changed. And that's why the stock sold off so hard at that time. We kind of hit the pause button at that time. It was the first time in my career that we've had a thesis changing event where we decided to not sell right away that we just said, hold on. It's just the swelling of 21 when it blows up on, that's when I bought it. Right. Okay. Well, that's a great purchase time. Well, it went down another 70 points first, but I bought that blow up for, I was on vacation. I was in Anguilla and I saw it

on the boat and I just, oh, I'm a points guy. I don't care about percentages. I saw Netflix go from 600 to 200 or 300. I said, I might be early. I don't give a shit. 300 points down is enough for me. Yeah, and you're right. I mean, for us, we needed to understand, like, how are they going to monetize these users?

Where are they first? Because monetizing a shared password in the US is a lot easier than in Peru. So you just have to figure out where are these people? How are they going to target them? If they won't pay $15, would they pay six and watch some ads? And the answer was yes. And that's more profitable for them. Yeah. The ads, right now, they're probably about even with what a regular subscription is. But over time, we think the cost per impression is going to be a lot higher. Let me tell you a question. Did you know that when they wanted to build the ad-supported, they went directly to Microsoft?

Yeah. And in an earlier generation, that's exactly what Mark Zuckerberg did. Microsoft built Meta's whole advertising business in that window between basically filing an S1 and going, like- You mean when they went mobile? Yeah. You're talking about the mobile transition? Microsoft built the ad thing with- Oh, interesting.

Yeah, with Zuckerberg. He didn't, like, build this thing by himself. Yeah, I didn't know that. But I knew Netflix was serious when they said, our partner is going to be Microsoft. Well, it's interesting because when they went with Microsoft, Microsoft had just bought a company that does connected TV ads. And so it was kind of, it was an existing company. It was a very small company. We were very surprised

that they went with that with Microsoft. Because it's a competitor you're saying? No, not because, yes, but not just because of that, because it was, it's a small player. You know, Microsoft is a very small player in this space. So, you know, and I think maybe that's the reason why it's been slow to roll out. It's way less of a competitor than Amazon or Google. You have Trade Desk as a potential partner. There's a few others that are in the space that are more connected. People said they were going to buy Roku.

That was the rumor. They invented Roku. They spun it out way, way, way back in the day. Nobody buys Roku stock unless they've been drinking. So Netflix has obviously been incredibly, the, the, the turnaround has been incredible, but you, you, you think the low hanging, you wrote low hanging fruit may already have been picked and pets are sharing efforts. So I'm curious. So my opinion, and I'm literally making

this up is that this could be a trillion-dollar company. I don't know how long it takes to get there. But they're complete. I mean, obviously, they're the winner. And they're completely- The only profitable one. They're cable. It's like mutual funds and ETFs, right?

It's only going in one direction. The Jake Paul fight's going to be huge. I just think there's a lot more runway ahead of them. You guys trimmed your position. Why? Yeah, really only on valuation. So we had added to it down at that point when we finished our due diligence

on how they were going to monetize those shared passwords. We felt very positive. In fact, at the time, we felt that they were going to quintuple their free cash flow just from monetizing 30% of shared passwords that they'd be able to increase their free cash flow fivefold. And that's exactly what happened, even though they didn't actually monetize a third of it yet.

They've probably only done about 15%. But the market has gotten smart on this. Like the market finally gets it. Back at that time, we doubled our position when it was trading at 17, 18 times earnings, similar to the time that you were adding to it or buying it. And now when we trimmed it, it was about 36, 37 times earnings. So it's not that all the fruit has been picked.

It's just the low-hanging fruit. I have this theory. I hate myself that I'm not in it right now. I have this theory that there's like a rights offering for the NBA comes up again and there's 20 different companies pretending to be competing and then Netflix comes in like off from the top rope with a crazy number. I hope you're wrong about that. Wait a minute.

Wait a minute. And the stock rallies on that news. If it does, I'm out entirely. But think of the signaling that that would be. I don't know. If they outbid YouTube, right? Well, it would just say that they're the gorilla, but I don't think it's going to happen.

It would say how serious they are about live content and sports. But I like how disciplined they're being on live sports. I really do. I mean, they've really only done F1. The raw deal was pretty huge. Yeah. I mean, but relative to the size of like NBA, NFL. I think the raw deal was bigger in what it signals

than in terms of the dollar amount. But they can't get the NBA. They can't get NBA, NFL. They could get Monday night. They could get- Yeah, they could do what Amazon's doing. Yeah, yeah, yeah. Nobody's getting all of either.

You have to just think about the risk reward of those things because they're generating a lot of good free cash flow right now by not doing those things, by blocking and tackling, by just having great content where you always want to come back and see what's new and what's different. You know, getting sports doesn't necessarily mean you have to do that. Is Turner choking on the NBA deals? Or is that keeping them afloat? I don't know because I haven't looked at the economics of the deal for them individually.

But I just think those big deals, those tent poles are just not necessarily. Can we go back to this chart? Yeah, yeah. All right. John, average large cap mutual fund is 672 basis points underweight, the Magnificent 7. This is as of the end of 2023. I assume it's still somewhat accurate.

I kind of wish Nvidia and Tesla were stripped out of this because I feel like- Explain what we're looking at. All right. So can I just give you my opinions on the Mag 7? Because I get asked about this like every meeting that I do because we don't own half of them. So can I just give you my opinions on the Mag 7 because I get asked about this like every meeting that I do because we don't own half of them. Tesla, Nvidia, Apple.

Right. It's such bullshit. Okay. So like the idea of- What is grouping them? Naming them. You know, we had this with, what did they call them before?

Fangs. Fangs. Then it was FanMag. Yeah. Why are those seven? Because, I'll give you the answer. Because they are tech. They might not all be in the tech sector.

They are tech giants with, historically. Tech-enabled, let's say, anyway. Huge revenue growth, huge profit margins. Usually popular. Famous people running them. That's it. And amazing stock prices. Okay.

That's why. I hear you. But when I look at those seven companies, what I see are companies with entirely different business models. Agreed. That are in entirely different industries. Sometimes. That have wildly different growth rates, wildly different profitability, and wildly different

valuation. So to me, they don't go together at all. If you wanted to talk about, okay, other fast-growing companies that are like that, why is Eli Lilly not up there? Eli Lilly's obesity drug is going to be larger than NVIDIA's GPU business at some point. So why is Lilly not in that group? Wait, you think so? Yeah, I do. We can get to that if you want. Lilly might go into that group. But I'm just saying these arbitrary groupings that then ETFs are created. No, you're right. Eli will never be lumped in with this group. It just won't be. Dan, what're right. Eli will never be lumped in with this group. It just won't be.

Dan, what if we say what all seven of them have in common is that they are the biggest winners as a result of cloud computing? Because that's really the driver of all the earnings here. It's Azure. It's Amazon Web Services. Well, three of those companies,

I would say yes to. Maybe Tesla is the odd man out, but there is no NVIDIA if there's not Web Services. Well, three of those companies I would say yes to. Maybe Tesla's the odd man out, but there is no NVIDIA if there's not a cloud. I mean, I guess tangentially, there's a cloud of something related to them, but cloud services, yes, Google, Microsoft, Amazon, right? They have these platforms that have- That's the driver of the earnings.

Yeah, yeah. For those three companies, those are, well, Google, not really, but for Microsoft- All right, so two out of seven's not bad. Yeah, for those three companies, those are, well, Google, not really. But for Microsoft. All right, so two out of seven is not bad. Yeah. Duncan, edit all this shit out. Hey, Poland Capitals, all of our infrastructure is on the cloud. Can we get lumped in with that?

Yeah, us too. Mag 8, Mag 9. All right, I like it. No, but my point is these artificial creations, which is a market thing, right? We all know that these things get created by somebody. It's good news stories and whatever. But the point of it is, if you're looking to invest smartly in individual securities, you really have to look at each one individually, not as a group, right? Which is obvious. I agree.

But when we look at them, we see completely different investment theses behind them and wildly different potential returns. Last thing on the Netflix before we move off of streaming. Yesterday, Paramount was cut to junk by S&P. Stock didn't move, which I thought was kind of interesting. Maybe tell us where sentiment is on that one. It's event-driven at this point. Yeah, I don't know that company that well, obviously,

but I would say it's probably that people weren't surprised. Well, exactly. But do you think the other streamers at this point could do anything? In other words, if you were, well, you do on Netflix. If Warner Brothers and Paramount

or whoever, whoever did something with that, would that impact your thesis at all? Um, at the moment, probably not, but I think what they all could do is figure out how not to be all things to all people, right? I think Netflix is the only one that's kind of surfed out far enough that they can kind of be all things to all people. Amazon can kind of do it because it's part of their prime offerings, right? And they have MGM now. Apple seems to be sort of going into the historical fiction thing. Apple is literally doing nothing. They're doing nothing.

They're literally like spending money, have a very small subscriber base. Like they're really not doing it the right way. Do you understand? They just spent $300 million on a World War II show. Yeah. Let's assume somebody loves it and watches eight episodes of that. What do you watch after? Right.

Manhunt. No, honestly, there is nothing there. It's f***ing crazy how little they're doing. But it's also kind of funny because you end up with like a Ted Lasso with Apple, which is a huge event. And then nothing. Nothing. Stay tuned for Ted Lasso season three in two years.

And maybe it's again, because Apple's so big that even having a Netflix-sized business inside of it is just not neat. I think what they thought was my guess. And I think Amazon to some extent, I think their idea was we're going to do just enough content that people are aware that we exist, but we're really going to be a portal to max, to this service, to that service. And we're going to be like the central experience to everyone's apps. The problem is they don't have Netflix in there. Right, right. So you can't be the portal

if you don't have the biggest channel. And that's part of the justice department. Imagine paying for cable, but like you can't get ESPN. Yeah. Nobody would do that. Yeah, I think streaming is interesting to your point, Michael.

I think that everybody realizes now that it's really, really expensive to do it. Right. And Netflix is the only one who, and by the way, Netflix almost went bankrupt a few times along the way. Like it wasn't like a sure thing they were going to win when they were going on this spending spree. And I think right now where investors really want profitability from companies, it's hard for anybody to do what Netflix has already done. And so they're all starting to pull back on that. Disney's pulling back on it. They're basically saying, all right, we need to get profitable. Disney had stopped giving any content to Netflix. And now they're relicensing some of their, not Disney Pixar content, but some

of their other content now back to Netflix. They all want to be profitable. So they all have to kind of figure out their niche. And probably the end game is it ends up being like the cable company. They put them all back together again. Yeah. It's so interesting. This is like one area

where the macro really impacted these companies. Yeah. Because markets didn't care. Just grow. Lose money. Who cares? Nobody was looking at it.

Just grow your subscribers. That was it. They had activist investors telling them, Dan Loeb at Third Point told Disney, stop paying a dividend and triple down on streaming. Like, it is very rare that you will have activist investors

tell a company to return less capital to shareholders. And that was the right advice at the time. Yeah, it made sense at the time. And he knows what he's talking about. He brought Sony back from the dead, basically, as an activist. Disney's got some incredible assets, but they also have a lot of crap. We do Amazon. So this is one of the last of the companies to get back to the 2021 high of that group.

It's almost there. I'm long Amazon. I just look at this company as invincible. I don't know why. I think so, too. But invincible, but now with- I don't know why. Yeah, well, I mean, it's got three amazing businesses in one. But you know what. I think so too. But Invincible, but now with- I don't know why. Yeah, well, I mean, I think you know why.

I mean, it's got three amazing businesses in one. But you know what my thesis was? Yeah. If the new guy screws up, what's his name is coming back off the yacht. Well, I'll tell you what, the new guy. Yeah, Jassy. Yeah, Andy Jassy is not a new guy.

He's been at the company for a long time. And he's, by the way, the guy who built AWS. He was the guy who built AWS. So he's- No, he's the boss. He's legit, right? Yeah, yeah. I built AWS. He was the guy who built AWS. No, he's the boss. He's legit. I think he gets a bad rap because of the timing at which he inherited the CEO role. Not his fault.

Jeff Bezos wanted to launch his rockets and do his thing. So he handed over the company. After the pandemic. Yeah. Remember what they did, right? They doubled the size of the company during the pandemic to handle the excess demand that they were getting. It went from a 20% growth business to a 40% growth business because

everybody was at home. They hired a million people. Yeah. It's crazy. They ended up doubling the size of a massive distribution and logistics center and built a truck fleet the size of FedEx or UPS at the same time. Yes. So, and remember, Amazon's not got the margin structure of Google, right? Amazon's margin structure pre-COVID was 7% profit margin, pre-tax profit margin.

All the profits were AWS for a long time, right? Like all of them. Yeah, Prime membership. Prime Plus, yeah, Prime Plus, right? Now, when they decided to double everything, right, to handle all the excess demand, but then all of a sudden the world reopens and people start going back to stores,

their growth went from 20 to 40 to zero. And then all of a sudden you have these massive diseconomies of scale in their retail business, right? So their retail profit margins went negative, deeply negative, hemorrhaging cash. And Andy Jassy inherits the company at that moment, right? So it looks terrible. Him and JPEG, poor guys. But we said at the time, there's one thing that we know, people are going to buy more stuff on Amazon. They'll get that scale back, right? And AWS was still humming.

Their advertising business is absolutely unbelievable. It's the third largest advertising business in the world now, I read. Yeah, it is. It is. Overnight. Yeah, and it's an amazing one. We can get into it in a second.

Why I think that's actually one of the better advertising models out there. But you have the retail business, which is, let's call it zero profit margin. Yeah. We think it could be a little higher, but it's going to be in the single digits. You have AWS, which is a 30% profit margin business. You have advertising, which is like a 60% to 70% profit margin business. So our original thesis on Amazon was just, if those three businesses grow the way that they're going to grow, the highest margins ones are the fastest growing ones. You're going to end up having margins back to pre-COVID levels and then a lot higher over time, just from the mix benefit. But what Andy

Jassy is doing and not getting any credit for yet, but he will, is he's being extremely disciplined on a lot of the pet projects that were under the Bezos regime. They were throwing a lot of money. Bezos bought MGM, right? Yeah. What were the pet projects like drones or same hour delivery? The fire, the Alexa. Yeah. Those are still there, but they're chasing down opportunities. They really want to do fresh grocery, right? That's why they bought Whole Foods. They originally wanted to figure out how they could get into fresh grocery. They shrunk the Luxe a lot. They've shrunk a lot. That's what Danji Jassy has been doing. He's been shrinking these projects

down and cutting out a lot. By the way, Amazon had hundreds of pet projects. Not all of them were big. And he's been cutting all of those. And he's been talking about very disciplined, only investing in businesses that are contiguous with the core, with the good ROI. This is a very different leadership. They also have to be ROI. This is a very different leadership. They also have to be huge. Yeah. Because. To move the needle.

Right. Otherwise, what are we, like, what are we doing? Science fair? So, but if you look at it now. Yeah. What you see is, so when we added, we made Amazon that giant size position a little over a year ago when their profit margins were 1.9%. That's where they bottomed out.

And we said, we can see them clearly getting back to pre-COVID levels just from their mixed benefit. And if they do end up being disciplined on spending even higher. So we said, all right, 1.9, we think by the end of 2023, they could be back to about 6%. And they actually hit eight by the end of last year. So they're back- 8% profit margins. Pre-tax profit margins. So they're back to just above the levels they were pre-COVID. Stock fell 56% or something like that. It got killed.

It got killed. Where do you think it – do you have price targets for these things in your head? We don't use targets. Or do you have a valuation? Well, right now it's trading at 25 times free cash flow. What should it be? That sounds high. Well, let it just stay there.

Let it just stay there. But let the cash flow grow. Yeah, we see it compounding at 20% to 25% growth over the next five years. So we see the margins going from eight today to the mid to high teams. Could this join Apple and Microsoft and I guess Nvidia as like just multi-trillion, like it's 1.75 trillion now? Yeah, I think it will. This could be three. Yeah. I mean, I wouldn't have a giant size position. So maybe Jassy starts taking some credit. I think Jassy is honestly a superstar.

We thought that before he was CEO. We've known him as the head of AWS. He's been at Amazon. He was like employee number 20 at Amazon. So Jason Delroy at Fortune wrote about their comp package today. So they're not giving a lot of cash bonuses because a lot of their comp is based in stock, and the stock is up 90% of the last year,

which is great for them. So Jason writes, the compensation update comes as Amazon leaders under Andy Jassy continue to look for ways to trim unnecessary costs and increase profitability while investing in growth areas such as generative AI. Over the last couple of years, Amazon has laid off more than 27,000 corporate employees

while he focuses on investing in fewer, bigger bets. Last quarter, they generated their largest operating profit ever, $13.2 billion. Yeah, I mean, that's the story, right? I mean, they're running much more efficient. And I think one of the reasons why it trades at a discount to Apple, right, is whenever Amazon has gotten to margins about here,

seven-ish, 8%, they go into another investment period, right, where they drive those margins back down again. That's what they did when they built AWS, which turned out to be a good one. And people are just worried that they're going to just spend money on things like grocery or... Regenerative AI, quite frankly. Which they are.

2.75 billion into Anthropic recently. Right, so they are investing there, right? But they're actually getting good leverage on their capital expenditures. Is it possible, though, for them to commit the gravest sin? Let's say the second gravest sin is to invest too much.

But for a tech giant, the gravest sin is to invest too little and lose. Yeah, I don't think so. Yeah, I don't think so. Because I think what Amazon is doing, they are spending a lot of money in generative AI right now,

not just in Anthropic. No, they're making chips. They're buying GPUs. They're making their own chips. They're investing very heavily. The leverage that they're getting is it's replacing all of that investment that went into the retail business when they had to double the retail business. Well, now that investment has come way down.

They're really optimizing the distribution network so it doesn't require that much capital. They built their own FedEx. They don't have to keep buying planes at that rate. Yeah, exactly. So now they can buy GPUs instead. Do we want to put this chart of Amazon's cloud computing empire?

Sure, fine. So Mayan from Markets tweeted, Amazon's data center and office space square footage have doubled since 2020. The company will be spending an additional $150 billion over the next 10 years as it bets on AI catalyzing the next cycle of growth

in the cloud. This is a pretty wild chart. This is 40 million square feet in Amazon's cloud computing business. That's data centers. Yeah. Now, not all of that is for AI, obviously.

They run, Amazon Web Services is a data center business, right? It's a data center as a service business, essentially, for anyone who wants to run their infrastructure

on AWS. So some of that is, and you can see that more linear growth. So that's what I want to get to. So in 2015, so that the listener has a reference, they had 8 million square feet, which probably seemed like a lot then. Now it's 40 million, and it started to hockey stick around COVID. Obviously, like, I can't picture what 40 million square feet is. And most of it

is not for humans to walk through. Most of it is like servers. Correct. And things to cool servers. Correct. Yeah. It's still mind boggling.

And not all that, that hockey stick was all, there was an acceleration in cloud adoption during COVID. Of course. And that's why the hockey stick. That last little piece, you know, where you're starting to get into 2022 course. And that's why the hockey stick. That last little piece,

where you're starting to get into 2022 and 23, that's only where Gen AI would have come into the picture now. So you're not really seeing a massive increase on that chart that's coming from Gen AI. That's more from the cloud, the shift to the cloud. Let's do the Apple antitrust story. Wait, hang on. Last thing, but just before we move on to Amazon,

you said that you think they may have the best revenue business in the world. Why do you say that? For advertising. Yeah. Yeah. The reason is because of when advertising happens, right? So if you're on Facebook or Instagram and you get an ad, right, that's a passive ad, right? You weren't out looking for something. It's just there and it's at the top of the funnel where you're just browsing. They're guessing what you might want. Yeah, and maybe they can lead you down the funnel, right?

If you're doing a Google search, you're probably looking for something. You may have some intent to buy, so you're getting now more narrowly down the funnel. When you're on Amazon looking to buy something. You're a buyer. Yeah, you're on the bottom of the funnel. You're putting in a term and then you're getting a sponsored listing right up top. That's right in your face. That is a very monetizable listing.

You can get 15, 20, 30% take rates on those, especially if it's an undifferentiated product, right? If I need a new iPhone charger and there's 30 manufacturers easily that sell them on Amazon. You know what's so funny though? How do they make this decision? I searched for flashlight.

The first result is either Amazon basics flashlight or a sponsored flashlight. Which one is more profitable for them to sell? They might not even know. It's a good question. It probably depends on the product, but I would, I bet the sponsored one is probably sponsored one is more profitable. They will tell you that it's, it's equal, right? Amazon will say it's the same.

They'll say that in court. I'm guessing that, especially if it's a very undifferentiated product, I bet the sponsored one is. I want to ask you about the Apple antitrust thing because I think this is a very big story for the second half of this year. Apple's been kind of able to get around things that we've been surprised at. With this antitrust ruling, one of the things that they highlighted was not allowing third-party digital wallets in Apple Pay. So PayPal being probably the most obvious, Venmo, Cash App not being allowed. And they have crushed PayPal as a result. Yeah, exactly. So you can't tap and pay with PayPal on an iPhone. You just can't. And we've

been surprised that they've been able to do that without any problem. In the EU, the Digital Markets Act already prevented this, and Apple's already opened up the NFC chip in Europe for other digital worlds. How is it that no American technology company

can operate freely in China except Apple? You know, we haven't figured out exactly why Apple has this kind of vaunted- You think they operate freely in China? Well, I don't know if it's freely, but I think probably. I think Foxconn making iPhones is probably preventing civil unrest, and that's the issue of the question. Yeah, I think that's the right answer.

But it's shocking how little problem they have operating in China versus any other company. Even Visa and MasterCard can't operate very effectively. Apple's in a 13% drawdown with the market. If the market was not doing so well, Apple would be doing much worse. So here's a ratio chart of Apple divided by the S&P. It's down to the lowest level since 2021.

Like it is- In relative terms, to your point, Michael, it's crashing. Yeah. It's partly because Apple has come down a little bit. The market's still going up. It's had its best start to the year, right? So it's a little bit both coming toward each other. But I think Apple is just way too highly valued.

When hundreds of billions of dollars come out of the market cap of a stock like Apple, that accrues to the benefit of NVIDIA or something else similar. For sure. Right. That money's not going into a money market. No, probably not.

Yeah, probably not. I don't think so, but I don't know for sure. Okay. So you think that this might be the one that gets them though? Like this might be the one. I don't know. They've been invincible. I don't think the antitrust in and of itself is enough. First of all, it's too slow moving, right? So like anything that comes from the FTC, the Justice Department, you're talking about years

before anything actually happens. And so I don't think that's going to be the thing. Although, you know, the ruling that's going to be coming down about the legality of Google's payment to Apple to be the default search engine on iOS devices, that would be interesting. That's anti-competitive behavior as well. Yeah, and it's actually interesting to think through. Is it positive or negative for Apple?

Is it positive or negative for Google? It's not obvious for either of them, by the way. Google's paying $18 billion? Google pays $18 billion a year to be the search engine provider on iOS devices. But don't they need each other for that? I mean... I don't know. If instead, when you

started your new iPhone and it said, you know, which search provider do you want to use? Do you want to use Google? Do you want to use Bing? Do you want to use DuckDuckGo? You know, probably most people still pick Google. I agree it's an expensive stock, but if I were sitting at Poland Capital and I were one of your analysts- When you live in Boca.

And you said, right. And you said, we're getting out of this stock because, among other reasons, in addition to it being expensive, the timing is really bad here for them to fight an antitrust suit. I would raise my hand and I would say, yes, but Mr. Davidovich,

don't you understand that in seven months time, Scott Baio is going to be running the FTC and none of this shit's going to matter? Yeah. I don't think the antitrusts is really that big a deal for them. Not within the next few years. But they're not growing. That's the issue. Yeah. They're not growing. They've tapped out the addressable market. By the way, most of their growth is in services today. What growth there is, that's Google's payment to Microsoft

is the vast majority of that. So if that goes away, then you're- Google's payment to Apple. Yeah, that's driving most of the growth. I don't know, you book travel on an app, Apple gets paid. You gamble on an app, Apple gets paid. You play video games on your iPhone, Apple gets paid.

Not always, no. If you book on airbnb apple don't get anything if you use the airbnb app yeah really they don't get anything so that's mostly coming from like gigantic google yeah what about netflix no net if you do anything in the netflix app you don't i don't believe that if i if i if i uh pay netflix on the app and I'm watching movies on the app, Apple doesn't like that because they're not getting paid? Well, most people don't watch anything on their phones. They don't watch streaming on their phones. Yeah.

About 80% to 90% of viewing time is on smart TVs or laptops. Okay. What would happen – excuse me. What would have to happen for Apple's business for you to reconsider buying the stock? I think if- Is it like the stock price or the business fundamentals? Well, it's kind of, they're always both together, right? Billion dollar share buyback. Well, they do buy back hundreds of billions of dollars. Yeah. No, it has to be some reason why we can see some growth

and an acceptable valuation. Those are things that we need. We need companies to be able to grow their earnings at at least a double-digit rate because we don't have to. Nobody says we have to own Apple. So will they ever get back there to mid-teens? No, probably not. How could they? If there's something amazing

that allows them to grow revenue again. You know, if the Vision Pro is $800 or whatever, $1,500. I don't know. I'm a skeptic on AR, VR at the moment. I just think it's not ready for part-time. When they came out with the watch or the, 1,500 bucks. I don't know. I'm a skeptic on AR, VR at the moment. I just think it's not ready for part-time. When they came out with the watch or the AirPod, did you think those would be big categories? No.

And they were? No. They're not? They don't move the needle. Well, they're not as big as phones. I mean, they barely move the needle. You're talking about 1% incremental revenue from those products.

But they keep people in the ecosystem. Yeah, it's good for the ecosystem. That's what it's good for. Yeah, all those things are good for the ecosystem. Is there another potential category out there as big as the phone? Well, that's why they were looking at cars, right? They were supposedly trying to develop a car.

I would say no. I knew they couldn't do a car because I couldn't have my battery in my iPhone last an entire day. I didn't think they'd be able to do that with a car. Are we hyping up generative AI too much? Is there going to be an earnings contribution coming from generative AI other than? Is there going to be an earnings contribution coming from generative AI

other than for three or four companies anytime soon? I don't know, but my hunch tells me that generative AI will be important, but it's not going to be as important as fast as what people think. Because you can look at what's happening with NVIDIA. NVIDIA is seeing real benefit today because in order to lay the foundational infrastructure

for generative AI, you need the compute to be able to do that. And NVIDIA is basically the only game in town that can do that. So obviously they're benefiting. Their customers like Amazon, Microsoft, Google, Meta, Chinese internet companies, they need to lay all of that foundation

in the 40 million square feet of space that they have. They need to lay that foundational infrastructure. And then they have it. They don't necessarily have to keep buying more of it. Eventually, they'll have to upgrade it. Well, there have to be enough use cases to justify continuing to spend at the rate they're spending now. Now, if you listen to Microsoft and you listen to Amazon, they're saying they are starting to see some real incremental demand coming from Gen A. How long do they have to actually be able to put up? I don't think it's coming that fast. We own Accenture in our portfolio. We've owned it for 18 years, 17 years in our portfolio. Accenture is the company that's going to help every company figure out how to use Gen A. Dan Dolev at Mizzouho on the show, pitching Accenture for exactly the

reason that you're stating. Yeah. I mean, everybody needs help, right? All these companies need help doing it. Accenture is the best way to do it. And when we talk to Accenture, they're like, yeah, everybody wants to. Everybody's interested in Gen A. Accenture is the best way to do it. And when we talk to Accenture, they're like, yeah, everybody wants to. Everybody's interested in Gen AI. But the reality is half of their customers, which are very large companies and governments, don't even have their data organized properly yet. They haven't even finished their cloud migrations yet. They have to get all of their data in the right places first.

Then they can organize it. Then it has to be scrubbed. Then maybe you can do Gen AI. So these things are coming, and I think it will be probably very, very meaningful at some point. You think there's a hiccup somewhere between now and the actual use cases materializing that surprises people? Now, some companies, you can see it, like we mentioned ServiceNow. ServiceNow has already got a module that allows for some of the automation to have Gen AI capabilities built into it. It'll be a modest revenue lift for them. These things are not going to change overnight. When I think about it, NVIDIA, which I think is

an amazing company, by the way, we don't own it. We know it very, very well. I think it's fantastic, but it's easy to kind of grasp back to the dot-com days and say, is this like something we saw back then? There's some things- Cisco com. Cisco Corning, actually, is the one that kind of bangs around my head a little bit. Because you had like the internet is going to, we need all this fiber, right? They were the monopoly of optical fiber. And then they laid it and it went dormant until YouTube came along.

And even then, there's still a lot of dormant fiber. Even today, there's still a lot of dormant fiber. But it wasn't that it wasn't needed. It just wasn't needed as rapidly as what everybody thinks. That's what makes me nervous because you don't have to be bearish on AI. You could just say to yourself, what if all of a sudden Microsoft and Amazon pull the reins back on orders? Which they will. And how many companies are double ordering GPUs

just so they don't lose their place in line? Yeah. Look, this is a cyclical business. NVIDIA is a cyclical business, right? We know that. They don't sell GPUs in a straight line. By the way, they don't just sell GPUs, right? They sell servers and interconnect products.

It's a whole system. It's a whole thing. By the end of this year, they're going to account for almost half of all data center CapEx globally, NVIDIA. Those 40 million square feet that Amazon has, it's not just GPUs and servers that go into that. It's the electrical equipment, the cooling equipment, the building itself, other chips and other servers that are not AI related. There's a lot of things that go into a data center. And so if NVIDIA is already almost half of that market, you know, there's going to be a pause.

The bulls would say the stock has gotten cheaper over the last three years, not more expensive. It's now, you say, 25 times forward earnings, which is cheaper than I would say most tech stocks. But how many years worth of GPU demand are we pulling forward into the four quarters of this year? So let's say they do $100 billion worth of data center business this year.

Which is bananas. It's bananas, right? And maybe even it grows next year. Let's give them credit and say $115, $120 billion next year. Would it shock you if they did $60 billion the next year? It would cut the stock in half. Yeah, but it wouldn't shock me. That's the way the business works.

We owned NVIDIA years ago when their data center business was a lot smaller. And it was growing 30%, one quarter, and then declining 20% the next quarter. So the cyclicality that you mentioned is something that every professional investor is talking about. Why?

You think it's just momentum has just taken over? You can't not own this? Well, because they're the only obvious winner of generative AI right now, you know? And they are. Well, that's a really important point. The menu has six items on it. Yeah, yeah.

Yeah, it's the juicy burger. I noticed that you're not an AMD either. Same reason, I'm guessing. Yeah, yeah. Partly, yeah, just AMD's never had that consistency to it either. It's just never been a consistent growth. So if NVIDIA misses, the stock trades down 30%,

would you be likely to buy it? If we think we can get it to a point where it looks like the fundamental growth is reasonable and the valuation is reasonable, we would own it. It's a great business. Yeah. So you mentioned earlier in the show that you think that Eli Lilly's GLP business can be bigger than... Provocative. Yeah. I think both Novo and Lilly could end up having $100 billion products in their GLP-1s. They would be trillion-dollar stocks if that were true. Yeah, they're already getting close. I thought there was a chart up of those two names.

So Eli Lilly a year ago was – is this a year? Oh, my God, it's a year. Eli Lilly was $300 billion a year ago, and it's $750 today. Novo was a little bit larger, and it's $580. So do is a little bit larger and it's $580. Do you think that these stocks are out of control expensive? I don't think they're out of control. I think they're reasonable for the growth because it's going to be

similar to the demand for GPUs. It's just going to be on a more linear path. That's sustainable. It should be more sustainable. Now, of course, these are drugs that have patent lives to them, so you have to think beyond. I was going to say this will be more competitive than GPUs. It will be, but they're so far ahead. Like the next, the next GLP ones coming to the market are coming in about two to three years and they already look inferior. I'm sorry. Novo is Wegovy. Yeah, Wegovy and

Ozembic. And Ozembic, both the same company. Yeah. And then Monjaro is Lily. And Zepbound, yeah. And Zepbound's the new hot one. Well, yeah. So they're basically the same.. And then Monjaro is Lily. And Zepbound, yeah. And Zepbound's the new hot one. Well, yeah. So they're basically the same. I take all four just in case. Just double that. How are these things priced? Felt and suspended. They're pretty expensive. There was actually, there was an interesting study that came out today saying it only costs about $5 to make WeGoV today. Now that, first of all, that's probably not exactly right, but the cost is low. All you have to look at is the gross margins for Nova. They have 85% gross margins, so it doesn't cost much to make the drugs.

But the manufacturing cost of a drug is not the biggest cost. It's the R&D that goes into not just that drug, but all the failures too. The people keep thinking about, are they entitled to these kind of profits? Well, unless we want to figure out which drug candidates up front don't work, how are you going to get people to invest in them? Isn't it a double-edged sword where you say like, okay, Medicare and all these things should pay for the cost of these things? Okay, sure. But then you're inviting regulators into the – so like once you get the federal government paying, you also are going to have the federal government saying what it should cost.

Right. Now, yes, absolutely. And this space is a little bit different because when you're talking about weight loss, Medicare is elderly population, right? When these drugs work, you don't just lose body fat, you lose muscle mass too. And so for elderly people, that's a problem, right?

Stop pumping your gym. Yeah, you should all come to my gym. We'll help you figure out that problem. I don't think most people truly understand what that means because when people started selling off stocks because of the GLP-1, some of the stocks they sold off include Striker, which is backwards. People are going to become more frail. You're going to need more hips, not less. Yeah, probably, right? In the short term. There's so many things about, there's a lot of misinformation in this space, unfortunately. And there's also a lot of social media garbage around this space too. But there's about a billion people on the planet that are

clinically obese. Why are you looking at me and not him when you say that? Why are you laughing? I'm out of here. All right, go ahead. Say more. Clinically obese. And you have very high risk of a lot of diseases when you're clinically obese. And we already know that. And the studies that were done, especially Novo did a study on Wego-V that showed that if you take Wego-V over, I think it was a five-year period, three to five-year period, you reduce your body weight by over 20%, but you also reduce your chance of heart attack, stroke, sudden cardiac death, progression of diabetes. Smoking, drinking. It's almost miraculous. Yeah. It has some interesting method of action that may actually reduce addictive behavior, which they're testing a lot of those things. We don't know if that works.

addictive behavior, which they're testing a lot of those things. We don't know if that works. But just from the real obese population, the people who should be taking the drug, and not for their whole lives. That's not what you're supposed to do with this drug. You're not supposed to take it for your whole life. That is easily a $200 billion opportunity split between those two companies and maybe some others that come along. What if the real opportunity is the thing that doesn't exist yet, which is the thing you take after to not gain back 90% of the weight that you've lost? Well, I mean, this is truly a problem. Yeah. I mean, I think the problem is our healthcare system is not put together to be holistic, meaning you have the medical side, right?

You have the drug, but you don't have the behavioral change, the nutrition, the fitness. It should be a holistic program that you do. And right now, you take the drug. It's kind of a blunt force, right? It's an injectable, self-injectable drug. And here's your dose. And you do it, and you do it, and you do it, and you do it once a week until you hit your weight, and then you come off it or until you can't tolerate it. It's not the way it should be. It should be a titrated down drug. As you get your BMI down or your weight down, down, down, you take a lower dose, lower dose, lower dose. Maybe a very low maintenance dose for a little while as you get your behavioral change done. And then eventually you come off it. So how many people do you know that are on this stuff?

A few. How many people do you know that are on this stuff? One. Just one? One who admits it. Yeah. I know a lot of people who are on this stuff. They have no intention of One who admits it? Yeah. Okay. I know a lot of people who are on this stuff.

Yeah. They have no intention of titrating. Well, it's not up to them. It's up to their doctor, but the doctors aren't going to do this. Yeah.

Come on. I'm from Long Island. You get a doctor to say whatever you want. My point is, there is no answer to how to get off for the people

who are currently on it, which is so far okay. I think they are way healthier. These people- So what's the trade-off, right? What's the trade-off? Yeah, I agree with that. So you're bullish though? who are currently on it, which is so far okay. I think they are way healthier. These people- What's the trade-off, right? What's the trade-off? Okay. I agree with that.

So you're bullish though? Yeah. I think the valuations are high enough that we have small positions in the two companies. So we're not like super excited about the valuations, but I am very excited about the fundamentals of both of those businesses. Okay.

Very cool. We got to do one more thing. We have to recognize the passing of Daniel Kahneman who passed away. I want to play something more thing. We have to recognize the passing of Daniel Kahneman, who passed away. I want to play something, if you'll indulge me. So are people overly outcome-focused to the detriment of process? What they are, we call that narrow framing. They view the situation narrowly.

And that is true in all domains. So, for example, we say that people are myopic, that they have a narrow time horizon. To be more rational, you want to look further in time, and then you'll make better decisions. If you're thinking of where you will be a long time from now, it's completely different from thinking about how will I feel tomorrow if I make this bet and I lose. I recall reading about a study, and I hope I don't mangle

this too badly, where they would take a photo of somebody and then using software age their face. And then when they would ask the people who had the current photo of their own face, they would get a very different answer than the group that were better able to imagine themselves 25 years after. Yeah, that's about saving. I mean, what actually happens is that when you show people a morphed image of their face as an old person, their tendency to save increases. So it's easier for them to identify with their future self. But in general, that's not what we do. People aren't especially good about that.

That is, of course, Barry Ritholtz interviewing Daniel Kahneman back in 2016. I'm not sure what prompted that because Thinking Fast and Slow, the book, had already been out. That might have been something to do with Michael Lewis's book on Kahneman and Tversky. Does that sound right? The Something Game, what was that book called? I love that. I wanted to ask you as a professional investor,

how important is behavioral psychology, if at all, to your research or trading? Is it something that you want to be studied up on so you can recognize some of your own cognitive issues? 100%. Okay, so talk about that.

Yeah, I have cognitive issues. The book is called The Undoing Project. What did you think it was called? The Something Game. I don't think I would have gotten that either. Did you say The Crying Game? I was thinking The Crying Game. Conrad Tversky in a different sense.

So tell us about that aspect of being a professional investor. I think Dan Kahneman, by the way, has added more to our profession. I would put him on par with Warren Buffett as far as the education that he's provided our industry. And even more broad, obviously, than that in just behavioral psychology in general. Our team is very, very versed on behavioral psychology. Kahneman is kind of the guru. I think it's exactly what you just said. You want to stop yourself from making some of those very, very human mistakes that we all do. And you never really stop making them. You just try to make fewer of them over time. I mean, I still- Or catch them sooner.

Yeah. Catch them a little earlier, undo them a little bit faster. The way we do it on our team also is we call each other's out. So if we notice in one another starting to fall prey to a behavioral bias- Your hindsight bias is showing. Yeah, exactly. Literally like that. How does that happen? You wouldn't do that over email work. No, we would do it in a meeting. We train a lot on communication and how to be very candid with each other, but not piss each other off and do it from a place of caring as opposed to- So what's the way to do that?

You would say somebody wants to hold onto a stock. You would say, you know, Kahneman would refer to this as the endowment. Yeah, well, yeah, something like that. Even a lighter Yeah. Well, yeah. Maybe. Yeah. Something like that. Even a lighter touch. Yeah. Okay. Even a lighter touch, but something like that. Like, is it possible?

When's the last time somebody called you on a, on a behavioral thing? Oh, like all the time. No, but. I'm trying to think of a good one. More recent. It's always recency bias. Well, the last time this happened. You have a coworker here.

I could find that in two seconds. Yeah. She's from the public. You know, the PR firm. All right. Yeah. I don't know. I'll come up with one for you. Michael and I do this to each other, but not about investing.

Really just more about how we talk to people. Yeah. And I'll check him and he'll check me. Yeah. But that's important. Like he'll call me up and say, hey, asshole, I really don't like what you just said to so-and-so about blank. Yeah.

And, you know, 90% of the time he's wrong. But I think it's important that you have coworkers that will tell you when you're doing something that should be obvious, but isn't. Well, and that's a Poland capital thing too. We believe in radical candor, but if you've ever read the book, Radical Candor, or if you haven't, it's a wonderful book. Is that a Dalio thing?

No, but it's somewhat similar, but Dalio does it like a little more aggressively, I think. But she is this former Google employee, senior person at Google who wrote this book about radical candor. And it's basically like, you need to be very open and honest with your coworkers, but you can't just be a jerk about it. You have to really care about them and they have to know that you really care about them. And then if you do, then you can be very open and honest with them and they'll take the feedback on board. So the context has to be, this is not my enemy. Yeah. Like it has to start with respect. This person really cares about me, is not trying to

undermine me, not trying to make me look bad, not trying to make me feel bad, but really wants me to succeed and is trying to help me. And if you can do that, that's fantastic. And there's a great, I don't know if you've ever read Adam Grant's books too. Adam Grant. I read originals. Okay. He has another book called Think Again, and it's basically how to not get yourself wedded to your ideas. And so if they're wrong, you can change your mind. You don't like ego on them. And he talks about in that book about making a presentation about Kahneman. And he's talking about, I think he had disproved one of Kahneman's theories, which is, you know. Apostate.

Unbelievable, right? So he's at a conference and he's presenting. And he realizes as he's presenting it that Kahneman is actually sitting there in the audience. And he's presenting it and he's nervous and Kahneman is smiling the whole time. And afterwards, Kahneman comes up to Adam Grant and says, that was an amazing talk. I'm really glad I got to hear you do that. And he's like, oh, I'm relieved to hear you say that because I thought you might be mad, you know, that I was disproving something that you had hypothesized.

And he said, why would I be mad? I'm not going to be wrong anymore. And I was like, think about how hard it is for anybody to just be cool with that. I think I saw him say this. I might've read it, but I think I saw him say this. I have no sunk costs.

So somebody asked him like, how does he change his mind? And that's what he said. Isn't that amazing? I mean, how many of us can say that? We have a couple of Kahneman quotes. Michael, do you want to read these? Sure.

A reliable, these are, okay. A reliable way to make people believe in falsehoods is frequent repetition because familiarity is not easily distinguished from truth. Authoritarian institutions and marketers have always known this fact. That's a great one. One more. Nothing in life is as important as you think it is while you are thinking about it. What does that mean? I love that.

Like just chill out. Yeah. Oh, so when you're thinking about something, you're making it more important than it really is? Yeah. I mean, everything he says is gold. Like those are, and they apply to life. You know, those are not just investments. Anyway, Michael Lewis wrote the book,

but The Undoing Project was amazing. Yeah. Also, well, we don't need to go there. Okay. Don't leave us hanging. Where are we going? Let's just wrap it up. Hey, did you have fun on the show today? I loved it. It's so great. Thank you for having me. Will you come't leave us hanging. Where are we going? Let's just wrap it up. Hey,

did you have fun on the show today? I love it. Yeah. So great. Thank you for having me. Can we come back? Of course. What are you doing tomorrow? I'm in Boca. Okay. I'm going to come back to Boca. Go to Tucci's. I'm telling you, I will be there very soon. Okay. Listen, this is so much fun for us. We really love talking about stocks with you. And I certainly hope we can do it again. I wanted to end the show the way we usually do, which is with a favorite. So we'll basically ask our guests if there's anything they're reading or listening to or watching or any exercise or whatever they're into.

No, seriously, whatever you're into that you think the audience, dozens of people are listening to this right now. So whatever you think people should know more about. So sound off, what do you got? should know more about. So sound off. What do you got? You know, I was thinking about it.

It's not one I just read, but I read, you know, maybe a month ago. So there's a book called Outlive by Peter Attia. Have you ever heard of Peter? No, I know Peter

through Patrick O'Shaughnessy's. Yeah. I think I saw him do a live thing with Patrick. There you go. Okay. It's a wonderful book about, he says it's about longevity, you know, but it's not about how to live longer. It's how to live healthier till you die,

basically. So it's not so much about extending your life, but not having those years of being very sick. And what I loved about the book was it's very holistic about nutrition, physical fitness, mental health, all of that. But what Peter Atiyah is very good at is when there's verifiable and reproducible fact, he will state it as that. But if it's stuff where there's a lot of confounding factors, which is a lot of nutrition, he will tell you that. Vitamins.

Yeah. There's no straight answer on vitamins. But he'll say like, look, this is what the hypothesis is. This is how your body works. So this is what's plausibly true. He'll separate out confounding factors. And as an investor, I appreciate about that because so much of what we look at, there's so many confounding factors.

It's very, very hard to separate the noise from the signal. So I love a book that's about a topic that we all have a hard time separating the signal from the noise from and him very clearly laying it out. Was there one specific thing that you learned from that book that you would not have otherwise known? Probably a lot. There was one, he talks a lot about nutrition, which I liked because that's always been the toughest part for me to get right and to really even know what I'm doing. But he talks about intermittent fasting, which I think a lot of us think is a very good thing. You limit your calorie

intake in the window and all that. But what he was saying that I didn't know is your body can't metabolize that much protein in a very short period of time. So if you're my age- It sounds like a dare. No, I mean, your body can take it in, but it's not going to use it very well. So it'll just flush it. So the idea that you need more than that window to consume the proper amount of protein, especially as you get older and you start to lose muscle mass, you need to have more and more protein intake. That was something I hadn't even thought about.

Oh, so extend the window during which you're eating as you get older. Yeah, he had thought, he was an advocate of fasting, intermittent fasting. And then he said he kind of turned around on it a little bit because he was thinking about, you know, it takes a while. You can't really metabolize more than like 30 or 40 grams of protein per hour. So you really need to kind of extend that window. So if you're going to have enough protein during the day, you're going to need more than four hours worth of eating. Yeah.

Yeah. I mean, I'm sure you can figure out how to do it. Yeah. No, I know. Yeah. That's why I only fast in my sleep. Michael, do you have a favorite for us? I finally started watching Tokyo Vice.

The season is done, right? Season is done? No. It's more than us? I finally started watching Tokyo Vice. The season is done, right? Season is done? No. It's more than episodes? Duncan, the show is audio. Yeah, I don't think it's done. Okay. Yeah, I think it's done.

You just watched the end and you didn't know? Anyway. Apparently the end is very anticlimactic. Yeah, jeez. Okay. I guess we're not sure the end is the end. I guess there will be a season three. I picked up right where I left off.

I love the show. Maybe I didn't watch the last episode. I wanted to shout out the state of Colorado. So Michael and I just spent like four days there. And I had been there before, like Denver on business. But this time we got out into the big country. Yeah. It's beautiful.

It's Michael's. We were driving on the road. Michael kept saying, this is a big country. Nobody knew what he meant. Big mountains. Yeah. We were driving on the road. Michael kept saying, this is a big country. Nobody knew what he meant. Big mountains. Yeah. Big mountain country. Anyway, we just had an incredible time.

The weather was not great, but it didn't matter. We visited this place called Garden of the Gods. Have you ever been there? No, I haven't been there. Are you to hike? Yeah. I was just in Colorado the same time you were, I think. Okay.

This is a good hike. It's like this 300 million-year-old rock formation that really looks as though it shouldn't be possible. There are things balanced on other things of wild dimensional variety. And it's just, it's like another planet. Neat. And it was really, really cool.

And we had a great time. We met an owl. We met a falcon. True, really true like real real shit uh the falcon grazed my it was a handler holding the falcon so people could take selfies with it so this this kid was like yo take a picture with me and the falcon i'm like which falcon is andre rising here he's like no just like trust me it'll be great so we put we pose next to falcon and then it lifts its wing and it grazes my shoulder like this. And I run.

All right. I'm good with the bird. But that's, I think that's why this is my favorite. Cause we did some stuff that I don't normally do. That's fun. Uh, as a New Yorker.

So shout to, uh, Colorado and a big shout to Dan Davidovich. Thank you so much for being part of the show. Gentlemen, I appreciate it. We had so much fun being part of the show. Thank you, gentlemen. I appreciate it. We had so much fun. I'll see you in Boca.

I'll see you at El Molino. Or Trattoria. Which one do you like? Yeah, Trattoria's good too. Go back and forth? Yeah, yeah. We'll do both. All right.

Dan Davidovich, ladies and gentlemen. Thank you. All right. Thanks to all the listeners. Thanks to all the subscribers, all the likers, all the commenters.

Thanks for listening we'll see you soon bye bye bye bye bye bye

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