The Compound and Friends - IPO Rundown With Aaron Dillon, Why the Bull Market Isn’t Finished Going Up

Episode Date: September 5, 2023

On this TCAF Tuesday, Aaron Dillon joins Downtown Josh Brown to discuss what's going on in the IPO market. Then, join Josh and Michael for an all-new episode of What Are Your Thoughts and see what they have to say about the biggest topics in investing and finance! On this episode they discuss: seasonal corrections, SEC vs private capital, the ERC bubble, recession mentions, and much more! Thanks to Rocket Money for sponsoring this episode! Go to https://www.rocketmoney.com/compound for more info. Watch this episode on YouTube: https://youtube.com/live/resSxsu2Rfc 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. Wealthcast Media, 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

Ladies and gentlemen, welcome to the Compound and Friends. Hope everybody had a magnificent end of summer. Hope you all had a great Labor Day weekend. I hope the beach, the barbecues, the boating, everything starts with a B, the bike riding. I hope it was all that you hoped it would be. And welcome back, back to school. All right, so tonight's show,

I wanted to talk about IPOs. Out of everyone I know on Wall Street, one of the most knowledgeable people about the pre-IPO venture-backed startup market, Aaron Dillon joins us. Aaron's going to tell us about Klaviyo and Arm Holdings and Instacart and SpaceX and Starlink and all of the companies that conceivably could be approaching an IPO in September, October, et cetera. And I think it's important that we have the IPO market back. I think as a signifier that we are back to business as usual, I think as a gauge of risk appetite, we don't want to see the IPO market

too hot. We don't want to see a thousand companies come public in a year, which is what 2021 looked like. But we also don't want to have a complete freeze, which is pretty much been, let's say, the last 18 months or so. And there are a lot of reasons for that, and it's totally understandable. But now there's a thaw. I would not say the IPO market is roaring back. I would just say it's gradually sort of tiptoeing back. But these are some pretty big deals. And Aaron's going to tell us all about the valuations, the players behind the deals, the structure, what investors in the public market should expect, et cetera. So stay tuned. You're going to learn a lot about that. And right after, another all new What Are Your Thoughts? starring

myself and Michael Batnick. And another great run of topics there, some stuff that we've been wanting to get to for a while. So we're going to do it all today. I hope you enjoy the show and stick around for my talk with Aaron Dillon. 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 Redholz 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. Okay, we're here with Aaron Dillon. Aaron Dillon is an IPO subject matter expert. I'm so excited to have you here, Aaron. What's up, man? How's everything? I'm good, man. Thanks, Josh. Appreciate you having me. Let me just do your official bio real quick. Aaron is the founder and managing director of

AG Dillon & Co., a venture capital firm for independent wealth management firms. You work with both RIAs and independent broker-dealers. Basically, what you're doing is bringing access to venture capital backed companies in different structures for the wealth management market so that clients of these firms can be invested in these types of companies. That's right. 100%. That's what we're doing. And so last year was not a great year, but the future looks brighter. And this is just the nature of the asset class. You have recently closed two different venture capital funds.

You're doing like these dedicated one company funds. And I want to hear why you're doing it that way. But you just got $5.8 million into a SpaceX only fund. That is like one of the hottest venture-backed startups right now that everyone wants access to. And then you got 3.6 million into OpenAI, which is probably the second hottest. So somehow you're getting access to this.

How are you doing that exactly? So all the funds, so these funds that we're referencing are AG Dillon funds, quote unquote, right? And I buy the shares in the secondary market. All the funds. So these funds that we're referencing are, you know, AG Dillon funds, quote unquote, right? And, and I buy the shares in the secondary market. So there's this, there's this very robust kind of, I call it, you know, advisors called pre IPO stock secondary market, and that's where I'm buying the shares.

Okay. And you, so you have an interesting background because you've been on both the tech side and the ETF side, but then you've also been inside of wealth management. You were a vice president, Morgan Stanley wealth management on the investment products team. You were a co-founder of crane shares involved with a FTSE Russell indexes. So you have seen the industry from a lot of different perspectives. Do you think that that's part of why what you're building is resonating so

well with, with all those different constituencies? Definitely. I mean, one, I think the tech aspect helps with just the venture capital ecosystem. A lot of those companies are tech-backed, tech-focused companies. And then I think the time of crane shares and also being inside the broker-dealer just helps structure the funds. Like I kind of, you know, this company that company that I have, it's really a, it's really kind of a Venn diagram of building a product that works with an investment structure that works and then kind of taking care of the advisors. So I was going to say, we, Michael Batnick and I know dozens of people who are raising money right now and have come to us and they've said, all right, we want to quote unquote democratize investing in Silicon Valley

startups. Like, all right, it's great that you want to do that democratize investing in Silicon Valley startups. Like, all right, it's great that you want to do that. Do you know anything about regulatory compliance? Do you know anything about FINRA, the SEC? Have you ever worked at an investment company? And it's like, no, dude. But my cousin was in the pre-IPO of Uber. And so you're closing that gap. you know, was in the pre-IPO of Uber. Right.

You know, so you're closing that gap. I want to talk about the market in general. So my take is a little bit of a thaw, but we're not back in action yet. Right. So a 40% rally in the NASDAQ this year is going to do a lot for sentiment in the IPO market. Agreed. Yeah, agreed. Okay.

So you have this like 18-month freeze. Let's say it starts sometime fourth quarter 2021 when investor appetite for any of this stuff just goes away. Yes. 2022 is a horrible year for publicly traded stocks. Bad for pre-IPOs. As a result. Yeah, bad.

As a result, there's no window for IPOs. Right. But it's not as though all of these venture-backed startups just took a break. They've been working. Oh, they're kicking butt. A lot of them are delivering double-digit, triple-digit revenue growth. So tell me where we are. What's the state of the pre-IPO venture-backed startup market? Yeah. So look, there was definitely a pullback in pre-IPO stocks too, right? In fact, it was going back and looking at the charts, it pulled back and pretty much along the same lines as the public tech market did, but it did not come back in the same way

that the public tech market did. NASDAQ did kind of the second half of- You say come back, like the valuations have not rebounded at all. Correct. Not in the same magnitude that we've seen in the public markets, right? So it's still a little bit of a lag. There's a lot of reasons for that, right? I think. But yeah, it hasn't quite caught up. So it's super interesting to see some of these IPOs that are coming down the pipeline and how they'll do once they hit the public market. So you say that pre-IPOs that had a primary financing round in the last 18 months have reset to market expectations, which it's not that they had a choice, but that's just, okay. So you're talking about Stripe, Klarna, eToro. These are companies that have raised money

relatively recently and you could see that that valuation we'll call it an adjustment that's right that's right yeah i mean like if you well a lot of folks don't know this right but the way the venture cap like these tech companies startup tech companies the way they raise money is there's usually the venture capital firms come in and there's like different rounds so it's a seed round then there's a series a a series b a series c and there's a methodology or a thought process to how that works, right? Usually like a pre-seed round is like two kids in a garage, right? A seed round is like you got to have a proof of concept.

So it's like Angel is like, this is probably a zero, but just in case it's not, here's $100,000. You got it. You got it, right? So if you get in early, you're taking a lot of risk because that is not not a that's pre revenue company, pre product company. Right. And you're you're you're like investing on a next on a PowerPoint presentation. So see, so see, there's something there, but not much. Series A, you have a you have a lead investor who is primarily the person or fund setting the price. Yeah. And I would even say it's more than that, Josh, because usually by series A, they have this thing called product market fit. That's a big term in kind of venture capital land, right? So usually by series A, you have to have product market fitter. You can't raise the series

A, right? Right. So there's got to be like a minimum viable product. And there's got to be some determination that, hey, people actually want this thing that we're doing. You got it. You got it. So that kind of, you know, lives through. And then these companies that you mentioned, the Stripe, Clarnas, eToro, they're on like series H, I, J.

I mean, they're like late stage, right? eToro has been raising money from people I know since like 2008. Yeah, man. So these companies, but this is this whole mantra, like, you know, companies are staying private for longer, right? I mean, you know, companies are staying private for longer, right? I mean, you know, Stripe is like a $50 billion valuation.

These are big, big companies. If they were public, they'd be in the S&P 500, right? Well, so I don't know, because I can think about it the other way. Like, if eToro had come public a month after Robinhood, that would be a single, I would guess that would be a single digit stock. Fair point. If Klarna had come public around the same time as Affirm and some of the other buy now, pay later names, it probably would have had a really exciting debut and then they would have thrashed it. 100%. 100%. Okay. So to some, like I've always thought of the private markets, I know this is not fair or general. I know it's a generality. It's not across the board. True. But I've always thought

of it as kindergarten and the public markets are high school. Sure. Like, like, you know, you, you, you do not get the same level of scrutiny and you, there's definitely a lot of people that are, are like willing to believe a lot of what you say, just because they want to see you succeed as badly as you want to succeed. That's right. A lot of that goes out the window. Once we're talking about institutions, hedge funds, activist shortsellers, like it's just another world. That's right. Well, and I would say, well, access to information in the public markets or the private markets, excuse me, is tough, right? It's tough to come by. And you know, I think a lot, and also by. And, you know, I think a lot and also to like, you know, to what we discussed earlier, like if you're in really early,

most venture capital firms invest like seed series A round, right? Where you get some of the hedge funds and other, you know, kind of private equity players coming in later and later stages. But, you know, it's you don't know how these companies are going to perform. A lot of it's like you're living on it. It's a dream, right? On how we'll kind of plan out. But I will say this, the reason that I'm kind of focused on this late stage place, and that's where we do a lot of our research, is the risk adjusted return is very different in the late stage space, right? So like, what's the probability of SpaceX going bankrupt, right?

You know, it's doing $8 billion a year, $5 billion. It's a huge company, right? Stripe is the same thing. It's got millions and millions of customers. This is a different risk adjuster return profile than an early stage Series A company. Right. This is a really important distinction. There's a tendency for people that are not in this world to lump all private market investments together. but obviously something that is on the runway a year to 18 months before going public and is doing billions in revenue, that'll get valued much more like a stock. There's much less likelihood of those being zeros. They might not be great investments because they could go public and get thrashed or

they could do three down rounds before finally going public because they're in an out of favor sector. But that's not the same calculus as an angel or a seed investor saying, I bet, you know, I'm going to invest in 20 of these and seven or eight of them are going to zero. Like that's not what we're doing here. So my best guess is that the returns are much lower, but the certainty of there being some return is higher. Yes. And that is, and that's, you know, it's an investor preference, really. You know, it's, it's what do you think you are as an investor?

I would, I would offer this like 10, 15 years ago. Okay. These companies, these, these pre-IPO stock companies would have come, they would hit unicorn status. That's another word that gets thrown around a lot in venture. Unicorn, right? There's a lot of unicorns now, but. It's a billion dollar valuation. Yeah. You get a billion dollar valuation. You go public, right? And if you went public at a billion dollar valuation, you're like firmly in the Russell 2000. Yeah. Right. And then, you know, public investors would be able to live

with that. You know, that's the Googles and the metas and all the, they went public early and you kind of lived with that through the Russell too. Then it bumped up in the S and P and you got, you got it through the S and P that's like not happening now. So you're getting a lot of these like tech growth engines that would, you know, 10, 15 years ago were public and you got to live with that in your ETF portfolio. It's not happening now. So I mean, I have 12 companies. I was going to say like the antithesis of that is like Airbnb coming public, which I guess was just before the pandemic. That's right. It was already so big.

You almost can't compare it to previous IPOs. That's right. Because it's not going to have the same trajectory. It doesn't have the opportunity. For it to double or triple, that's going to be even that much bigger of a company. It's like giving birth to a sophomore in college. Yes, 100%, 100%. So, I mean, I have, my research has 12 companies

that have over a $10 billion valuation, right? So from my days at FTSE Russell, that was the cutoff. From the Russell 2 to the Russell 1 was $10 billion market cap, right? So that's even after these depressed valuations, right? So, you know, ByteDance is in there at $206 billion. That's TikTok, right? Of course, that's a Chinese company, so that wouldn't be in the US.

But SpaceX is at $150 billion. Stripes at $50 billion. Databricks is $35 billion, right? So there's some big companies there. Open AI, current implied valuation, $31.8 billion. Yep. Here are some of the other names. Epic Games, which is Fortnite. billion. Yep. Revolut. Here are some of the other names. Epic Games, which is Fortnite.

Yes. Okay. Yep. Epic Games. And then they have Unreal Engine, too. That's their big product. Unreal Engine. Okay.

Consensus is on here. Klarna. Chime, which people have heard the commercials. It's like a neobank. Reddit, obviously, people have heard of. We're going to talk about Flexport, I feel like, has been a venture-backed startup my entire life. Yeah.

How long has it been? All right. Basically, to set the stage for what's to come and where we've been so far, secondary pre-IPO market. You took 30 pre-IPO stocks in your coverage universe, and you estimate, on average, they're down about 30% since their last primary funding round. Yeah, that's simple.

But that number was worse a few months ago. It was, yeah. So that's the thaw. That's right. Yeah, it's getting a little bit better. But I think to your point, though, Josh, and this is that dynamic, like companies that went out to market in 2022 and did that primary financing round, that was like a very institutional price. So you think about all the bankers going out now and talking with investors for this IPO.

They went out and did like a proper institutional round. It's happened. Right. I think they I think you can look back at that last primary round and be like, that's pretty much where this thing's going to go. Instacart is, as an example, is one of these companies that did not do that. So its last round, you know, its last round was in 2021, March of 2021. So it's going to be super interesting to see where this one, that one comes out at, right? Let's get into some of these names specifically. We'll start with SpaceX. So there was a lot of shares of SpaceX because it's big, but the shares are not as easy to obtain as they would otherwise be for various reasons. Could you explain a little bit about why SpaceX is so highly sought after

and why it's not that easy for people to get access to? Yeah. So I would say highly sought after. I mean, effectively, SpaceX has a monopoly on space, on getting to space. It's incredible. So I don't know if you've seen the videos, but these guys shoot rockets into space and then land them back on Earth. It's like watching a sci-fi movie. It's incredible.

But it's government contracts. It's the type of business that public market investors love. 100%. It almost looks like an aerospace and defense company. Yes. Just in terms of the customer profile. Yes, it's great. It's a lot of government business,

a lot of corporate business, you know, corporations sending satellites into space. And then of course they have their own satellite business called Starlink, which is quickly becoming a billion dollar plus revenue business for them. And a lot of people are talking about- Starlink is like internet access via satellite

and most notoriously involved with the conflict in Ukraine. Yes. It's basically the thing that is enabling Ukraine on the battlefield. That's right. To communicate. And Elon Musk has been asked by the US government and governments around the world to maintain it for that purpose. Because the United States government doesn't actually have a better solution than what elon musk has built it's incredible like this guy well so think about it this way

another way of thinking about this monopolistic aspect of it is about a third of the world's population has no access to the internet no access so not high speed access no access still i feel like i feel like it should be more like the world would be better if it was like two-thirds didn't it might be it might be but you know like world would be better if it was like two-thirds. It might be. But, you know, parts of Africa, parts of South America, parts of Asia. So, I mean, Starlink, there's more Starlink satellites in space. I was thinking more like if we cut off internet access to like two-thirds of the people in New York, Boston, Chicago, L.A. South of 96th Street, you'll be better off the site.

All right, but that's crazy. All right, so you have mentioned that Starlink could potentially be spun out of SpaceX and itself become a venture-backed potential IPO? Yeah, I think that's happening. I mean, I think there's a better than 50% chance. And that's just, listen, that's me having conversations. Does that financially benefit Elon to some extent where?

Oh, yeah. Okay. So, so it would give him, I mean, I would assume he would be a seller of some shares in an IPO. Or just do what he's doing with, with Tesla, right? He owns the shares and then he could borrow against them like how he did buying Twitter. So it would provide additional potential liquidity. Liquidity.

You got it. You got it. OK. That'll be interesting if Starlink itself comes public as its own IPO. And then I suppose SpaceX would retain a piece of that. Yes. Which maybe would make it easier to value SpaceX in the private markets because it would have this free trading wholly owned subsidiary.

Yes. That's regularly filing with the SEC, et cetera. So Josh, I got to tell you, SpaceX is actually really easy to value every six months. So these guys are 20 year old company. Okay. They're 150 billion valuation. As we mentioned the other day, they do a, they do a primary round every six months to give their employees liquidity. Cause you know, these employees stock option plans are like 10 years long, right? So if you go and join, if you go and join SpaceX, SpaceX you got 10 years and you have to exercise So they have these windows now every six months

So, you know like the secondary market knows exactly where SpaceX is gonna be because every six months they come out and do it Is this for 409 a valuation? That's part of it. Yeah, that's part of it. But well, that's a little bit different I would say I would say in this case with SpaceX, they literally just want to give employees the opportunity to get liquid, right? So they do this kind of proper institutional round. So you have ongoing trading in SpaceX all the time. So it's not a mystery what it should be valued at. You got it.

OK, can you get into 409A valuations and why that's important for investors in this space? Yeah, so I'm not a 409a valuations and why that's important for investors in this space? Yeah. So I'm not a 409a expert, right? But I will say this. Most of these companies, private tech companies, are corporations. And that's for tax reasons. Venture capital firms only will invest in the corporations. They won't do an LLC. If you have a corporation, you have an employee stock program, you have to do a 409a valuation. That's an IRS requirement. Basically means you have to have a third party come in and value your company at that given point in time. So you can't just make up a number and say, this is what we're raising money at. You actually have a valuation that's been conducted

by an accounting firm, and you have to stand by it. That's right. And it's also a good part of recruiting. That's very helpful. If you don't have a stock price that's trading, at least you have that to work off of. I mean, that's a double-edged sword, right? It could help or hurt. But I do think it's good for recruiting, too. A lot of these tech companies issue stock to recruits when they want them to come in. So if your stock price has changed a lot, especially if it's come down, it's going to be hard to recruit people if they have this really wild strike price on the option. You mentioned that secondary markets typically snap to these valuations pretty soon after they're announced. Yeah. And a good

example of that is with Instacart. So they were kind of chugging along. And then in December of 2022, they announced that they were coming down from that $39 billion valuation down to $10 billion internal valuation. They had a couple of steps along the way to get there, but the secondary market immediately snapped down. It was a dramatic snap down. All right. Let's talk about this. This is a wild ride. In March of 2021, that was the last primary round that Instacart raised. That's right. And that is at the height of the NASDAQ, SPAC, Bitcoin bubble. Yes. Instacart raises at a $39 billion valuation. Yes.

Who's in that round? The usual suspects? Yeah, I mean, so we got the big investors. I mean, these guys, it's like the who's who of Silicon Valley, right? So Y Combinator is like a really successful accelerator. They started there. Sam Altman, who's the CEO of OpenAI, he's participated in multiple rounds. Aaron Levy, the CEO of Box.

Fidelity, T-Row Price is in. D1, Tiger, and Code2 is in. Those are all those crossover funds, hedge funds. Those are the guys that usually price it up. So I'd have to go back and look at the specific round, but I wouldn't be surprised if it was one of those guys. So these are not idiots. The thing is, the logic of that environment,

paying that price, quote unquote, made sense because those were the type of situations that would lead to like 50 to $100 billion market value upon coming public. Correct. And then the environment changes, but the thing is, it's not a stock. So you invest at that level, and then the environment changes but the thing is it's not a stock so you invest at that level and then you're just kind of like oh shit we didn't get out yeah

but if that mania had gone on for another two quarters they might have had an exit higher they could have i mean the problem is josh like how do you get out so if you're like tiger and you do like a 300 million dollar round like, you could try and sell your $300 million stake in the secondary market, right? Or you just got to wait for this to go public, right? You need to get out with an IP. At that size, there's no acquisition. You're right. So you need a blockbuster IPO.

You need to put the CEO on Squawk Box with Joe Kernan. Yes. And you need a couple of investment banks to really get behind the story and not take it out. I got to tell you though, man, this is the stuff that, this is why things are different now than they are 10 years ago, right? Because to your point about Instacart, these companies are so big now, the only option they have is to go public. Who's buying a company for $10 billion? There's maybe a handful of companies that can do that, right? Right. So anyway, Instacart's a wild ride. So it's $39 billion March of 21. By March of 22,

they do one of these 409A, and it's $24 billion. That's a huge step down. Huge drop. But that's in keeping with what was going on in the stock market in early 22. It was just an absolute disaster. Then they're down at 15, the next quarter, 13. The low point is December of 2022. Last Christmas, 10,000. Now, as of March, they're saying 12.

And you think 12.8 billion behind the scenes. Yeah, so I have this thing, Corey, I call it secondary performance adjusted valuation. That's a little, you gotta have an acronym, right? So this thing, Corey, called it secondary performance adjusted valuation. That's a little, you got to have an acronym, right? So SPAV, right? Secondary performance adjusted valuation. So that takes the last primary round, the performance in the secondary market to today, right?

And literally simple math, right? So that comes out to about $12.8 billion. And then I ran that from the last 409A and also the last primary round. And they're basically, the numbers are sitting on top of each other. Okay. $12.8 billion on $2.5 billion in 2022 revenue. Not egregious. You know that their revenue growth year over year was actually like 40%. Yeah. It's pretty good. It's good. This is what's interesting to me. It's a profitable, somehow this business model seems impossible, but somehow it's profitable and not a little bit. Net income, you say, was $428 million last year. That's up from losing $73 million in 2021. So arguably, Instacart got the memo. They clearly focused on driving profitability

last year, which is what you had to do to be taken seriously this year in 2023. Yeah. I think the days of going public with these massive negative net income numbers, I think, are over, right? At least in the near term. My take on Instacart is all the stuff they're doing with the supermarket and the delivery and it's Uber for groceries or it's Amazon Prime for same day groceries. All of that stuff is great, but the actual business is advertising revenue. So they have this whole ecosystem. They have millions of people on the app picking out items, and then they go to a packaged foods company like Pepsi and they say, how much is it worth to you to come up as a primary logo on the app when people are looking for beverages? And Pepsi says, we'll pay this.

The biggest one surprise you noted was that Instacart reported 740 million in advertising revenue, which is 30% of total revenue. That's a lot. I don't know this business model that well. I could picture that becoming half of revenue. Yes. A hundred percent agree. Okay. So is it an advertising business? I think it's an advertising business. They call themselves grocery tech. They might be the first in history. I know. Okay. I know of one other grocery tech business. It's a European company that makes picking and sorting robots for physical groceries. Do you know that stock?

I don't, but I mean, not a super exciting space. I mean, it's great for the city. I live in New York City. It's the card they deliver right to your door. It's better than schlepping it around the city with bags, carrying bags a couple blocks, right? Right. The city's a huge pain in the ass, and all these delivery services work really well in that context you got it i don't think though that they have the same legs

outside of the city uh you know suburbia is tougher the it's further miles to travel it's you need more drivers you know it's a it's a it's a challenge um so what do you think happens gun to your head uh instacart comes public. Let's say roughly $12.8 billion valuation. How much stock are they selling? I mean, look, so this I think is, you probably have a better opinion about this than me. I definitely don't. The sentiment of the market, right? I mean, this is a great company. The net income's moving the right way. It's growing really fast. To your point, they got the advertising revenues coming through. I think, Josh, it's more about where this valuation falls out,

where the bankers price it at. I think if they're at this 12.8 number, I think it does well. I would say, gun to my head, I think it does better. If they try to be goofy with it and they're up in like the 20s, I don't know. That might be tough. Well, that's the dance, right? That's the dance.

If you're the banker, you have a two-sided market. There has to be some room for the investor. I mean, there doesn't have to be. There should be some room for the secondary market investors who buy the IPO or even buy it sometime after the IPO to make something. But the more of that you allow for, the more money you're leaving on the table that the company could have raised for its own purposes. So that's the dance. And I think we know who normally wins. It's very rare that they'll try to benefit secondary market investors over their actual client, which is the company. That's right. Well, and listen, but I will say this, though. The bankers have done a nice job because they got a nice pipe.

I'm calling it a pipe, right? But they got TCV. They got Norges Bank, which is the Norwegian central bank. They got D1, Sequoia Valley. ED HARRISON Break this down for us, Alan. This is a private investment in a public equity. The reason why all of these big institutions come in and do a pipe, which happens in concert with the IPO, is what?

I think it supports the stock price once it kind of goes public, right? So it's like you got this big institutional money that comes in alongside the retail money that now the shares are available to trade. But that kind of immediately when it hits the market, there's good institutional ownership, right, of those publicly traded shares now, which can be- So there are sophisticated, savvy investors who are also now part of the public cap table. That's right. And that theoretically should, A, increase liquidity, and B, I guess, act as some sort of imprimatur on- Well, hopefully there's less volatility.

I think ultimately, that to me is what it means, right, Josh? There should just hopefully be less volatility, less major swings in the stock price, you know, over time. But let's do Klaviyo. My understanding is that this is, I mean, this also a profitable company. Do I have that right?

Just turned profitable like very recently. But to your point, they got their act together. Klaviyo is data management, email, and SMS marketing solution. They have 130,000 business customers, 585 million in trailing 12-month revenue, 9.5 million in trailing 12-month net income, which is great. That was negative. And it just flipped positive first half of this year.

Negative. Oh, now 15 million. All right. You got it. The prior 12 months was negative 9. half. Now it's plus 15. You got it. Okay. So revenue up 57% over the last 12 months versus the prior. Excel is in this, Summit Partners, Accomplice, Astral. So a great pedigree of VC funds.

Yep. What is the business? They're doing text messaging for corporations who want to do marketing over text? Yeah, I would say they're pulling in data from all of your social channels, from your CRM, from everything. And then they're analyzing that data and then making smart decisions on how to interact with individual customers to kind of delight them and drive cross-selling and drive incremental revenue. So it's sophisticated. Do you know offhand, like who's a big Klaviyo customer? Do you know offhand?

I don't know. I don't have one or two offhand, no. Okay. All right. But they're basically saying like, we've cross-referenced this user of your service. And this is the best way to get them to buy more shit from you.

That's exactly right. Yeah. They actually had a couple on their website here. I can get you one or two, but I'll come back to that. All right. Also a unicorn. Also been private for a long time. Seems like eight years. Yep. So what do you expect here? This one's a little bit more tough, right? So they did around last year in 2022, pretty much the same. They did it around in 2021 and 2022. So to your point earlier,

that was kind of at the peak in 2021, but they maintain that same valuation. It was 9.4 to 9.5 billion in 2022. So this is different than Instacart. It was eight times sales, roughly. Yeah. 700 times earnings. This is different. But the problem that I have here, Josh, is in the secondary market, this stock has come way down since the last primary round. So I have it down 55% in the secondary.

Now the market depth in the secondary for Klaviyo is not super deep. So I don't have really high conviction. What is market depth? So that's how many trades are happening in the secondary. So it's bids, asks, and actually completed trades. There's not as much activity on something like a Clavio as there is on, let's say, SpaceX. Or SpaceX. Yeah. You got it. You got it. So not super deep market, but where we are getting activity, it's down 55%. So this one's interesting, like that secondary performance adjusted valuation. I have them at $4.2 billion. This one's going to be really interesting to see.

Yeah, it's a big drop. That's a big drop. Who is the lead? Is it like a Goldman, JP Morgan deal? You got it. All right, let's finish up with Arm Holdings. So the short history of Arm is that it's now a part of SoftBank effectively. They're the largest shareholder. You'll detail this for us. There was a deal on the table where NVIDIA was trying to buy Arm, I think, two years ago.

And there was enough of an outcry from antitrust organizations around the world that it just couldn't. I don't know if it was the US, if it was the UK. It seems like nobody wanted this deal to happen. Right, right. It would have been great for SoftBank. Ostensibly, they would have gotten some NVIDIA shares before NVIDIA went up another 1,000%. That's right.

So it would have been a great deal. All right. It didn't work. Now they want to bring it out. They want to bring it public. It really feels more like a cash out to me than any, like, in other words, there are some deals that come out because there's so much opportunity for the company that it just makes sense for the investment case just makes sense.

And then there were deals that it's like private equity, you know, hey, we bought this thing a long time ago, it's increased in value, and we actually need the capital back so we could do other things or we need to pay down debt. The latter is how Arm, but Arm is semiconductors, CPUs, a lot of wireless chips, and it's a huge, huge company. It's not growing at all chips, and it's a huge, huge company. Oh, yeah. It's not growing at all. No, it's not.

Okay. Yeah. Walk me through. What are the fundamentals here? All right. So SoftBank bought 65% of the business for a $32 billion valuation. That's when they originally came in, right? They bought another 25% at a $64 billion valuation in August.

So just last month. So they're kind of prepping for this IPO and they bought more. Wait, they uptick themselves? They uptick themselves. A little self-dealing. It's a tactic though, right? 100%. Because in doing so, they raised the valuation on the $32 billion.

So on paper, they doubled their money. Listen, but this is where when it goes public now you gotta now you gotta so to your point like revenues down or profits down one percent net incomes down four and a half percent this is not a company that you probably want to take public right now right so i i think you're right i think what's happening is soft banks like basically like they have this vision fund and the vision fund has gotten just beat up yeah they made a lot of these investments liquidity they have tons of red ink yeah man i think well they're in their public so they got to report every quarter right so i mean you have this soft bank itself has to report this it's like a fully consolidated entity of soft bank yeah well but imagine the vision fund

plus they took money from some scary people oh well well but imagine the vision fund right josh so those are those were one of the primary drivers back in 2021 that was driving up the valuation of all these pre-IPO stocks. So they had a lot of entry points at these high valuations. Now the market's down 30%, 40%, 50%. Some of those names are down 80%, right? They got to get a win. They got to post a win.

That's why I think they're taking these guys public. To your point, it's about getting liquidity they need they need because they right like everyone like everyone else they it's a public company now granted masio shisan is like you know not in danger of losing his own company right but he has to talk to the saudis right that it so it's 40s. It's so funny. It's oil money driving up startups vis-a-vis the connection of SoftBank's Vision Fund using that oil money to pay whatever the hell they want for anything under the sun. Just to get in, yeah. That was... So he is the mechanism of the bubble, but he has people to answer to. 100%.

So needing liquidity is... It's a fund with a 100-year vision. But like, oh, shit, we actually need some cash. Yeah. We actually need. They just had another bankruptcy. We work. They've had disastrous things go on. OK.

Yeah. I understand that. Yeah. That's venture, though. So I don't blame them in total for that. But I just think they're trying to be portfolio managers. They got, you know, they have a lot of their portfolios down. They got to post a win, right, and realize a big gain. And that's what's happening here. I just think it

came out this morning, right? $52 billion is where they're looking to price this thing at. That is huge. I don't know, man. I just- Again, $52 billion on $2.5 billion gross profit? Yeah. Yeah, yeah. Well, so chamath put out this tweet right a couple weeks back and and he basically they got some text chat that him and his buddies go through right but they were basically saying like this a 36 billion dollar valuation would be a gift and the bankers have it out at 52 so this is this is one that could get just smoked once it so they

all right so in a deal this size so 52 billion, how much do they actually sell to the street? 10%? Yeah, 10%. It looks like it's going to be the target. Yeah, they're trying to raise $5 to $7 billion. So they'll raise $5 to $7 billion in capital by selling shares. SoftBank is still going to be huge into arm holdings. Right.

They're not getting that much liquidity. You got it. But again, it's a publicly traded stock now, so they can borrow against it. They can do other things like that, right? So that helps with liquidity. Yeah, if this thing doesn't hold its initial valuation, though, after coming public,

and they're going to have to sell some into the market, assuming they're doing this because they plan on selling, not buying more. Oh, yes, 100%. So they might be selling, though, into that $32 billion valuation that they originally bought at if the stock flops. I think that's conceivable. I think that's the case.

I mean, I'm really interested to see how this one does once it gets out there. So this comes public on the NASDAQ is what you think will happen? Correct. Is that announced? NASDAQ. Yep. Okay. But it's a company still based in Britain or not necessarily?

It's based in the UK. Yeah. It's a UK company. Yep. Okay. So it's not going to be in the S&P 500 even though it would be just in terms of size. That's right. Okay.

So this could be in the NASDAQ 100. This will not make, but it'll be Russell 1000, and it'll be in a lot of tech ETFs. Yes, that's true. Okay. Yeah. Okay. Is there like a silver lining to ARM just in general,

like for the future? Or is it like more like a Qualcomm, like a giant company where nothing ever happens yeah i mean well i think you know like chip chip companies are big right now with ai right obviously nvidia is like all over the news right this is a chip company so i mean to the extent that um that they kind of you know benefit from some of this ai craze uh there's potential for that and that's that might be why the reason softbake wants to do this now, right, is they're trying to capitalize on the AI kind of positive momentum that we're seeing in that.

Right. Semiconductor valuations are up. There's a ton of interest in the space for the first time in a long time. That's right. Let's just talk about the market itself, just to give people a little bit of an idea of what's happening in wealth management or people coming back to venture-backed pre-IPO startups. Like, where do you see the demand side of the equation? So naturally, I talk to advisors all day long about venture capital, right?

And really, alternative investing, right? What I've found is most advisors, frankly, are not doing alternatives yet. Those that are, in general, are doing private real estate deals and private equity. Private real estate is a longtime staple of the financial advisory world. Yeah, you got it.

You got it. So that's what I'm seeing a lot of. But there is a ton of demand for venture. And that's why I started the company. Naturally, I didn't want to start a company if there was no demand. But a lot of advisors are just now kicking the tires on venture and how it will work and what it looks like. So that's really what's going on. I think you got a lot of RIAs out there saying, OK, we're ready for the asset class, and we're trying to think about how to get exposure. Okay. So one of the important things, I think, for people to understand is that the problem historically with wealth management accessing the space is, number one, venture capitalists don't particularly care to talk to wealth management. It's not high on their priority list. Two, you're probably not able to directly invest in the same startups that Excel, Benchmark, Andreessen, Coastal. You're not getting into those deals because the venture capitalists don't need to call you. They can call pension funds. They can call endowments.

You got it. But if you're buying these shares in the secondary market, that is how you can get in on a deal that Mark Andreessen has recently funded, for example. That's right. That distinction is really important and I think not very well understood. That's right. So there's this concept called the power law in venture capital, especially in early

investing, right? And that's effectively like if you had a portfolio of 10 companies, five of them are going to go bankrupt. Three of them will return your money. One of them will give you a 2x return. And then one of them will be a 10x return. And that's your whole fund. So you're basically your whole performance, right, of venture fund where you're targeting

20% a year annualized return comes from one company. So that's hard, I think, for advisors to get their head around that, you know, five of the five of the clients can't do it. Yeah, it's tough. If you don't have a client with $25 million, there's just, there has not historically been a way that you can buy enough. Uh, you noted that minimums are typically North of a hundred thousand dollars per transaction. That's right. So, so if you come in direct, so Josh, I like two things. One, I like the secondary market. Cause that way you can get in later. You can already know that this company is a winner. It's about, is it a one X, two X,

three X? That's one benefit. Benefit two is fragmented. You can do funds. You can do funds. So that's like what I'm doing. And this isn't any different. This isn't rocket science, right? This is like why ETFs exist and mutual funds exist and everything. You pool investor money together to lower minimums and allow access for everyday people to access a market. And that's what I'm doing. And one of the other things that financial advisors are going to have to get comfortable with is a very small window, if any, to do due diligence. You almost have to rely on the wisdom of the market because if there are shares available in SpaceX, you probably have three hours to

make a decision. Yeah, it's true. Okay. So this is not a situation where you can deliberate and go out to lunch with a mutual fund company and talk to their portfolio manager. This is like, hey, we need to move on this yes or no. And RIAs are not comfortable pulling the trigger in that way. Here's my secret sauce, Josh. Here's my secret sauce. So I actually- You sure you want to give this out?

No, it's okay. It's okay. It's not- I love it. Keep talking. So here's the secret sauce. So I actually rate, I work with advisors and I go through the full process. It usually takes four months. So to your point, SpaceX shares are gone in a couple of days. I work with advisors four months to get them ready for SpaceX, talk to their clients, go through investment committee, do everything they got to do to meet their fiduciary responsibility. Right. We raise the money first. So this is important. If anyone wants to buy in the secondary market, have your cash in the bank account first. You can't start doing capital calls when there's a live deal. No way. You got to be real. But also, too, the people

in the market won't take you seriously if you don't have the cash and they'll give you a bad quote. They'll give you a bad price. They won't they won't give you an offer at all. Right. So you got to have the cash. So we raise the cash first and then I do a market order. So I call like, look, we were running Craneshares ETFs. We would call like three or four brokers to do every trade. Right. That's like normal public market trading. You're going to call around, see where the offers are at, make a choice, buy the stock. I do the same thing in the pre-IPO stock space. I call 20 pre-IPO stock brokers for every trade that I do and get offers. I get a really good insight into the market. I didn't even know those exist. I know the exchanges exist. I didn't know there were

pre-IPO brokers. Oh yeah, there's pre-IPO brokers. What are these people like? Are they like very good at lacrosse? How does one get into that line of work? Are you a former venture capitalist or are you like a former wall street guy who's moved to Palo Alto or like what? Well, there's a couple of different things. So, so there's, there's a lot of that, but I got to tell you, it's not always just buying directly from the companies, right? So there, the secondary market ecosystem you But I got to tell you, it's not always just buying directly from the companies, right? So the secondary market ecosystem, you can buy direct from the companies, right? You can buy from employees.

There's also venture capital funds. So they have like LPs, like investors in their funds that want to get liquid. And they want liquidity. That's a lot of that. There's a lot of activity there, too. So these brokers have like this network out there. So I like to call 20, because if you think about anybody who's looking to sell, if I can reach out to my 20 institutional brokers, they'll be able to give me transparency into the full market.

And then I can come back to my investors and tell them, hey, look, I call it a market order fund. So just like you go and open up Schwab.com, you open up order entry and you type in Apple, Schwab's going to go out and give you the best today's price, market price on Apple right now and do the best they can to get it. That's what I do too. Aaron, thanks so much for coming on The Compound and Friends. I want to let people know where they can learn more about what you're working on.

And I know you've got a show on YouTube and a podcast, and I want people to find out more directly from the horse's mouth. So you're agdillon.com. That's A-G-D-I-L-L-O-N. Yep. Dot com. We'll link to that in the show notes. You're active on Twitter, I suppose, Aaron G. Dillon. Okay. Yep. That's it. We're calling it X now. X, yeah.

I'm not going to do that. That's the name, man. All right. And you're youtube.com slash at this week in pre-ipo stocks all one word and we'll link that also uh all right you have fun today you're gonna come back this is the best man yeah you're the best josh i appreciate it dude it's it's been it's been a pleasure knowing you and learning from you all these years and now i want the the audience to to learn from you so hopefully the ipo thought continues. We'll have lots of deals, lots of cool stuff, and we'll have you back on to let us know what's going on.

That's great. I appreciate it. Anytime. Anytime. Thank you. We'll be right back. Happy September. Best time of the year? Ready for this? Did you take pictures of the kids going to school today? Best time of the year? Of course I did. You think this is the best time of the year? Is this your favorite? For me, it's my favorite. It's my number one.

Okay. I'm like a July guy, but I don't mind this. You know what I've been doing? It's still hot out. It's still sunny. I've been doing this on the call. I've got a Rubik's Cube in my hand. Don't multitask me with that thing.

I'll come to your house and throw it out. Just on Zooms. And guess what? I don't even know what I'm doing. Can't even do it. It's just therapeutic. I just like doing this. For the listening audience,

Michael's playing with a Rubik's Cube. Okay. I said a Rubik's Cube. I know about the listeners. I'll take it from here. Shush. We've got a sponsor. Very special sponsor.

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No, I'm just going to guess. Check it out and use our code. I love it. Yeah, I think it's a great idea. I should do it. Let me correct myself. I should have Sprinkles do it. All right, I think it's a great idea. I should do it. I should, let me correct myself. I should have Sprinkles do it. All right, I want to say a couple of quick hellos here.

Rob and Nicole are in the chat. Everybody say hi. Jack Rosenfield is here. Pam Hill, good to see you. Mike Waller. Saad Malik is here. MD, Drew Hickman. Roger's here.

Sean's here. All the regulars are here tonight. We appreciate you guys spending your time with us I think tonight's show is going to be great because

we did not do the compounded friends at the end of last week I just have a lot of things built up that I wanted to get out and I think the doc

reflects that but it's not overly stacked the main thing I want to say I think August's correction it wasn't really a correction.

The August dip mostly in tech stocks. Garden variety correction. Perfectly fine. I think we're going higher. I feel better about us going higher after that sell-off than I did in July even because I watched, this is how I operate, Michael. Yeah, July was dumb. I watched the internals like a hawk doing that sell-off. You could say I was stalking them because what I'm really looking for, how did the weak stocks weather it? How did the strong stocks weather it?

And I was like looking into different names in each sector and really trying to understand. And everything that I saw looked textbook, correcting an overbought market. We're going lower. You think so? Well, today wasn't great, right? Today was not good. Let's do Ari Wald. Ari is one of our favorite technicians at Oppenheimer. Ari agrees with me. He put this out over the weekend. Hang on. You agree with Ari. You're using his work, sir. Don't get it twisted.

Not solely, but sure. I'm using his work right now. I agree with Ari. The S&P 500 reclaimed its 50-day average last week following a two-week stint below the short-term trend. The key takeaway in our work is that whether or not the advance is resuming imminently, it should only be a matter of time. The Russell 2000's ability to uphold its 200-day average combined with risk-on leadership and bullish intermarket checks, those are those checks I told you I was doing, reinforces our view that a seasonal correction should prove temporary and an opportunity to buy

into a middle innings bull cycle. Corrective periods often develop in three waves, down, up, down, meaning a final less intense setback against late September headwinds would be reasonable. Put this chart up. So Ari's saying, we view our conviction to buy leadership versus sell laggards as a net positive for the overall market too. Still recommend buying weakness rather than selling strength. And he thinks 45, 65 resistance, 44, 70 support. What we're showing you here is the S&P 500 and the Russell 2000 as a proxy for internal breadth, meaning it's 2000 companies, they're smaller than the S&P.

And so long as they are cooperating with the rally and bouncing off important support levels as they just did, that's a bullish signal in Ari's favor. Chart off, Michael, what are your thoughts? You and I were talking with Dan Nathan and Guy Adami a couple of weeks ago that there was a lot of signs of short-term excess and that an orderly correction was in order. We got it.

The question is, of course, where do we go from here? Did we like almost nail the top with that? They were like, so you guys are always bullish? And we're like, no, actually not really. Things seem a little crazy, right? It was, I think it was late July. A lot of things. Yeah. We're not geniuses. A lot of things lined up. A lot of things happen to line up. So here we are on the other side of that. Yeah. I think, well, I've got some data not to jump too far ahead showing what happens after a very strong start of the year and a down August. And it's exactly, it's up, down, up. So let me do my seasonal thing. And then I want to get to that.

Ari notes that seasonals become a tailwind in Q4. So if you're around the market long enough, you'll hear the old timers referencing the stock traders almanac and talking about seasonals. And Michael doesn't like this stuff. And I mostly don't like it, but I sort of understand that there is a basis in reality. But it doesn't really help you. Like if somebody's like, oh, 75% of the time October is up. Okay, great. What tells me when we're in the 25%?

I don't know. So that's why like seasonals are like sort of bullshitty. But there is a basis in reality for why there is some like rhyme and reason. Anyway, Ari points out the S&P 500 continues to track its seasonal tendency too. Looking at the last 10 pre-election years chart on an average composite of the S&P temporarily peaks in July,

bottoms in late August, stabilizes through September, resumes higher in October. Based on this analog, the S&P typically rallies through the initial weeks of September. This is 10 years worth. So it's every four years since 1983 in the presidential cycle. This is the pre-election year. And what we're showing you is a composite of the S&P 500. And what you can clearly see here is August sucks. Okay, check. September, get a little bit of a rally at the beginning of the month,

get a little sell-off toward the end. And then bottom before October, off to the races, new highs by year end. I'm not saying that's going to happen. I'm saying historically that has happened enough to produce that pattern that we're showing you on the screen. So from that standpoint, I like the setup. And I do think that there is something.

It's not astrology. It's what I really want to say. I agree. I don't think it's all bullshit. I don't like – I mean there's a lot of seasonality that I would dismiss I really want to say. I agree. I don't think it's all bullshit. I don't like, I mean, there's a lot of seasonality that I would dismiss out of hand. It's not one of them. I think you don't like stuff where it's like,

uh, by Rosh Hashanah, sell Yom Kippur or Santa Claus. Like I know I get it. I don't like that shit either. Um, all right. So,

so this is from knowledge investment research. Uh, the S and P 500, when it's up 15% to 20% through the end of August, the rest of the year, and you probably can't see that, so I'll tell you the data. It's been higher. How many times is this? I don't know, 15 or so. It's been higher all but one time, and that was 1986, meaning the rest of the year. So the rest of the year was negative once out of 15 or so periods when the market was up 15 to 20% through the end of August. So information like this, I think is a little bit more than interesting. Mike, I'm sorry. Can you just not re-explain it? Because I understand it, but-

You know, you tend to do this a lot. Chart off, look at me for a second. When I explain something, you tell me to re-explain it for the audience. No, for me. No, I just explained it. It's very simple. You're a smart man. It's very simple. When the S&P 500 is up between 15 and 20% through the end of August. Okay. Okay. So from September through the rest of the year, it has only been down one time, not for the full year, just September through the end of the year. That's great. But what I want to ask you is how much was the S&P 500 up through August? 15.4%. So we fall within that threshold. Yeah. Just barely though. So listen, you're not going to bet the farm or mortgage your house, but

historically this has been really bullish. Why do you think that that happens? Just momentum. People tend to chase and stocks aren't going up for no reason. Within every one of these years, you could look back and say, you could offer a number of reasons why the stock market was up this year or that year. Do any of these years in the table correspond to a prior year that was horrible, such as the one that we just went through? Because throw that chart back on. I feel like 1966 was not a good year, but I don't know. I don't know off the top of my head. Yeah, I don't either. I mean, a good rule of thumb is this. If you're just going back to the very basics, there's a great book called It Was a Very

Good Year. Shut off, please. And what history shows is that very good years tend to follow very bad years. Why? Because investors do a very good job at over-discounting what could go wrong. And even if stuff does go wrong, it doesn't go all the way wrong as people bake into the market. So I think this is interesting because I think there's a lot of career risk in missing a year like this year and all years like this,

quite frankly, when the S&P is up 15% and the NASDAQ is up 40. And by the way, in most of those years you just showed me, the NASDAQ didn't even exist and it was never as important as it is right now. So right now you have this setup where for argument's sake, let's say the NASDAQ is almost as important as the S&P for a lot of asset managers. NASDAQ's at 42%. Continue. Yeah. This is my point. So you don't just have career risk based on the S&P anymore. If you're a growth manager, you have career risk against the NASDAQ. So now you have a setup where we're in September. And if you're trailing this shit by 10 percentage points, you might not be working next year.

What do you have to lose? Buy semiconductor stocks or get your resume ready. So that's what people are like, well, what's the fundamental reason for why? Doesn't matter, fundamentals. To me, it does. What's the scientific explanation behind why there's only once been a down finish to a year that went through August of 15% plus? This is the reason why. It's the agency problem. It's a principal agent problem. The people that are managing the money have the most to lose by not chasing for themselves. There's a selfishness here.

So this is why, this is the type of like, I know this is not seasonality. This is the type of data that I like because you said, what's the science behind it? Human behavior is the science behind it. And the patterns that are created by this human behavior tends to persist because that doesn't change. We're all human at some point. You got to chase, right? So, okay. What else do

we have in here? Oh, this is a great chart. Do it. A borderline chef's kiss chart. So this is from Grant Hawkridge and he tweets, my risk on risk off ratio is breaking out to fresh all-time highs. So on top, the risk on index is a composite of copper, high yield bonds, the Aussie dollar, semiconductors, and high beta stocks. And cocaine. That's the green line. And yeah, tons of that. The red line is gold, US treasury bonds, yen, utilities, and staples. That's risk-off. Now, if you take the spread between the risk-on and the risk-off, that is breaking out to new highs. So listen, today was a rough day in the market. It was mostly mega cap, but a lot of most, I think it was like 390 names

down in the S&P, 110 up, something like that. But whatever, that's one day. But generally speaking, risk-on assets, especially relative to risk off assets, are breaking out to fresh on. So hard to fight this. And then when you consider the fact that we just discussed that people are underinvested and most managers are not beating their benchmarks, certainly not the NASDAQ, barring something happening over the next, I don't know, a couple of weeks that derails the rally, they're going to chase. Can this thing reverse? Put this chart back up, though? Can these things can reverse really quickly, like risk on index, risk off index?

Like right now, it appears really clear where the money is going and what it's being bet on. And utilities are trash. Trash. I own that. Trash. And semis and copper are on fire. OK.

are trash and semis and copper on fire. Okay. But like, I feel like that's the kind of thing where don't get too confident as a result of this, because it could stop on a dime in reverse. Totally. And a lot, a lot of things, a lot of things can, but I just, I've seen it. So I just, but if we look at who are we talking with, who was throwing up all those equally trots, might've been JC. If you look like equal weight discretionary versus staples, all of the signs that you want to see, forget, just literally strip out everything that you see in the headlines. If you just look inside the market and the market is much better at forecast in the next six to 12 months than we are, than anybody is. If you look just at how the market's behaving, it's risk on and it can change at any moment. Yeah, I agree. I agree. And, uh, you know, it's frustrating because that's the thing you don't

know. Are you closer to the beginning or because that's the thing you don't know. Are you closer to the beginning or the end of the trend? Nobody really knows. So a lot of people have these secondary and tertiary confirmations that they seek. And some work, some don't. Sometimes the ones that work last year don't work this year. And that's why it's a ballgame. I want to move the, there was a op-ed at the Wall Street Journal that just was a scathing take on what regulators, mostly FTC and SEC, want to do to the private markets. Basically, there's been like this, and I don't really have that strong of an opinion other than to say, be careful what you wish for. Over the last couple of years, there's been a lot of stuff in wealth management and in asset management where, oh, we're going to democratize this and we're going to bring in – we're going to make such and such asset class available to mom and pop and we're going to level the playing field.

And be careful what you wish for because when you open the door to retail and there's a buzz, this is the inevitable result. The regulators are going to be like, wait, how much money is going into this stuff? And they take a second look. And they're going to see some stuff that they want to fix. And so that is, I think, the thing that seems like it's in its infancy. This could be a battle that takes place over the course of years. The article is The SEC Targets Private Capital. I just want to read the intro.

And oh, this was written by Hal Scott and John Gulliver. Scott is an emeritus professor at Harvard Law School, director on the Committee on Capital Markets Regulation. Mr. Gulliver is the committee's research director. These are not disinterested parties, obviously, but let's be that as it may. The Securities and Exchange Commission has finalized rules that will overhaul how the $27 trillion private fund industry, including private equity, hedge funds, and venture capital funds deals with investors. Last week, six trade groups sued the SEC seeking to block the regulations.

Private funds have been largely off limits for the SEC because only high net worth individuals and large institutions can invest. These sophisticated investors can protect themselves. The new rule will upend that 90-year status quo, and it's only the beginning of the commission's attack on private markets. What are your thoughts? I thought that some of the arguments made in this article were cockamamie. Okay. But one of the things that I think that they're right about is allegedly the powers that be,

the regulators, want to do away with different fee structures for different pools of money. But there's different share classes in mutual funds. I don't see that as a big issue. If you're coming with a larger pool of money, yeah, you should get preferential pricing. I don't think it's- This is the op-ed. The new SEC rule will require that certain fee arrangements be, quote, fair and equitable and ban private funds from offering their largest investors the opportunity to cash

in early. But I think that is fair and equitable. If you come to the table with $150 million, that's called pricing power. Shouldn't you have a better – Somebody said not cockamamie balderdash. That's a good one. Jay Luther, who's been, by the way, breaking our balls the entire, I don't know, 20 minutes now. He said I look like a giant Pepto-Bismol.

Thank you. That's good. Thanks so much for that. Why don't you go on Dan Nathan's live stream and break his balls. All right. Can I say one thing? Wait, hang on.

What do you think about what I'm saying about fee arrangements? I think you are falling into the trap of believing this argument, but this isn't really the argument.

The SEC is not saying larger firms shouldn't get lower fees. Okay. That's what this guy is twisting what they're saying. What the, I think. But they haven't published anything yet.

They're talking about, okay. Yeah, but you know, a lot of stuff goes on in the background before it happens. I think what the regulators don't like, and I totally understand it. They don't like where 20 different LPs are invested in a hedge fund and three of them are paying less than the others. And it's not strictly based on how big they are. It has more

to do with like, oh, I'm taking care of you on this because you're taking care of me on something else. They don't like preferential treatment. That's not codified. You absolutely can give price breaks. There's the whole, the whole economy depends on price breaks. Isn't that how the world works? Like. Yes. But again, this is rich people making deals with other rich people. So the regulators have not been in the middle of this, but now again, you're inviting retail

in. Well, be careful what you wish for, because this is what happens. Let me, let me do one more part of this. I do like the transparency part. Let's talk about that. The final rule of established quarterly disclosure requirements for fees and performance, annual audit requirement, which will second-guess the valuation of fund investments. The guy's complaining these compliance costs will be borne by all investors.

I kind of agree with that. Probably true. Yeah. Then he's saying the SEC's rationale for its new rule is that private fund markets are uncompetitive. That's simply wrong. Fees are going down, and the largest funds like Citadel and Blackstone hold small market shares. The five biggest hedge funds constitute less than 5% of total assets. That's erroneous.

That's a red herring. That doesn't even matter. Here's what matters. Not to me. I don't think it does wait last one performance net of fees has been strong

private equity funds have returned 12% since 1989 give me a break compared with 8% for the S&P yeah give me a break that was not

that's balderdash malarkey cockamamie nonsense wait how about this if they're going to go after private funds or private securities whatever

they should go after a lot of the fake the things that aren't marked that we know are bullshit. Real estate, for example. Real estate. Private companies that are basically public companies in sheep's clothes that are not being marked down even though their competitors in the public markets are down 90%. And they're still charging fees on the upmarked values. That's nonsense. Glad you brought that up. One of the conspiracy theories being floated here is that there are only half as many publicly

traded companies today as there were in the 1990s because the regulatory costs of being public are so high. Partially true. So the SEC, yeah, but a lot of the missing companies are penny stocks. Exactly. Which we've talked about. The SEC sees its domain shrinking, and this is part of a land grab so that they have more stuff to oversee. Here, this is a quote.

The SEC realizes that public markets are shrinking and private markets are growing. To protect public markets from shrinking further, it has scheduled in its fall regulatory agenda a full frontal attack on private markets. I'm sorry. I just don't buy that. That's hyperbolic. Here's a good one. Do you know what look through means?

Yes. Look through would be disastrous. Disastrous. A broker who holds shares in a private company on behalf of clients or a fund that invests in a private company counts only as one shareholder in the company. The SEC intends to look through brokers and funds so that each client or investor would count as a shareholder. What's the rationale for that? I'll finish. This would mean many private companies would exceed the maximum of 2,000 shareholders for a private company and have to register as a public company. The SEC intends to require all private companies to make public filings on their financial

statements for the first time. That's not going to pass. The idea is to almost force these companies to come public because it's too expensive to report on all of these shareholders if there's going to be a look through versus like an omnibus. It's not even just too expensive. If 2,000 was the limit and now you bust open all of these shareholders if there's going to be a look through versus like an omnibus. It's not even just too expensive. If 2,000 is the limit and now you bust open all of the separate vehicles that could have 50 people inside of them, then you're over the limit.

Then you're over the limit. Then you're de facto, you're basically a public company that hasn't done the right thing. To me, that seems like a big stretch. There's going to be a lot of money spent on this. How expensive that's going to be for compliance if private companies have to break out sub-fund level, how many LPs in each fund and who they are. So I'm obviously for investor

protection. There's a lot of things that definitely need to get cleaned up, but this has the potential to have negative impacts that the regulators aren't thinking about such as these costs being eventually passed through. They're going to get it right. They're going to get it right. You know, who's going to make a lot of money. Jay Powell, who? Lawyers. Right. Yeah. So much money either way. Either way. First they'll get paid for fighting it. And then when it finally eventually happens. And lobbyists. They'll get paid for fighting it. And then when it finally eventually happens, they'll get paid for- I guess lobbyists are the lawyers. Yeah.

Yeah. I agree. This is going to take a lot of play out. All right. Let's talk about two topics in one. We're going to talk about the mixed performance going on in retail. But before we do, there's mixed performance going on all over the place. And I love it.

There was a lot of complaints over the years that QE was distorting price discovery and lumped that in with index funds and that there was just this one trade. It was risk on, it was risk off. It was this sector going up and every stock inside of it. That is no longer the case. So I was inspired to create some charts with the help of Nick Maggiuli from this great chart from Goldman, which I think we actually shared a couple of months back. It shows the average stock correlation, the average sector correlation going down since, I guess, the last

year and a half or so. All right. So Nick Majulik recreated this chart. I had him go back to 2010. The average stock correlation with the S&P 500 over a rolling through month period has fallen dramatically. Now, this ebbs and it flows, but for 2023, the average stock has a very low correlation with the S&P 500. Of course, the irony in all this, Josh, is that still active managers will probably fail to beat the benchmark. Not probably, will, just given how top heavy the returns are. And then I had Nick Majuli break it down by sector. So how much dispersion is there within sectors? And the dots represent the cap size. And not terribly surprised in the three sectors that have the highest correlation or the least amount of dispersion is energy, because obviously crude oil or just oil in

general, energy is a huge input into energy companies, stock price, real estate, and then utilities. Look, yeah. So look at technology. I mean, we know what that dot is. We know that's NVIDIA. The communication service, that giant, that 150% gainer, that's meta, right? And what's the 50? Is that Google?

Alphabet or Netflix. Netflix. So it's exactly what I would have guessed. Like, Charloff, if you would have said to me which sector has the least dispersion between its components, I would have said energy. Yeah. These stocks all move as one block. It's a commodity trade. Yes. Were you surprised by any of these?

No. I really wasn't. I really wasn't. It's very intuitive. Yeah. Can we put up the chart before the last one? I like both, but I want to make a point here. If you would have asked Nick, do a shaded pink or green area where there was QE, you would actually see that those arguments held a lot of merit. Look at 2012. You had average stock correlation with the S&P 500 in 2012 was almost 1.0. It's crazy. And then look at 2020 during the height of the crisis. This is both periods

of time with a ton of stimulus. Well, I think 2020 was when every stock fell together. But in the early aughts, do you remember when the risk-on-risk-off ETFs came out? I actually think it was Gartman. Do you remember those? But seriously. And I think it was the early 20-tons because a lot of things didn't really move together. They really didn't.

No, no, no. They shut down pretty quickly. Gosh. I mean, if you were buying a risk on ETF, why wouldn't you just buy double S&P? Because ARK didn't exist. But no, point taken. So back to retail.

We were talking two weeks ago, a couple weeks ago. By the way, housekeeping. There's not one of your thoughts next week. We're going to be in California. All right. We can do that at the end. Where are you going? Just saying.

So we were talking about shrinkage. Maybe you were. Who was talking about it? Dix was talking about shrinkage. Take it easy. Walmart was talking about it. Target CEO was talking about it. And you made the case.

Like at some point, they're going to start begging the government to get involved. So Alex Morris tweeted, this is from Five Below, which stock was doing pretty well up until recently. Here's their comment on shrinkage. We view this as an external societal issue. It will require involvement from government and local leaders to fully resolve it. We've also noticed that traditional measures for mitigation around asset protection

are not as effective as they've been previously. Dude, the pendulum has swung too far in the big cities in this country. The politicians are smoking crack. They're all going to lose. It's going to come swinging back so hard the other way. Well, there's two choices. Either it gets worse for a really long time, in which case

there's a complete and total breakdown of society or new district attorneys, new attorneys general, new mayors, new police chiefs. We need Harvey Dent to get in there and do something. No, but people, listen, I understand that there's poverty and there's underlying issues, but you're only going to make these places worse to live in, not better for everyone if there's no rule of law. So this is – I think that the pendulum is going to swing back the other way. And I think that on a local level, you're going to see a lot of democratic politicians be forced to defend this bullshit. And I don't know what words you could use to defend this. Like nobody – poor people don't want this to be okay either.

Nobody wants this. There is no demographic that's like, oh no, yeah, this is good. Maybe there's like nine people from Brooklyn on Twitter, but there's no voting block that wants to see more of these videos on social media. There's no reason for Brooklyn to catch a trap now. Let's get back to the matter at hand. So show me these stocks. They look like trash.

Retail stocks. So you could add five below in here because that's in a 30% drawdown. So these stocks started getting smoked. Footlocker, Dollar General, Dollar Tree, Target, and Dix. And you would think like, oh, these are just companies with the same demographic, dollar stores, shoppers.

Well, I guess not entirely false, but not entirely true either because in the next chart, you've got, I guess not, not entirely false, but not entirely true either. Cause of the next chart you've got, and this was as of last week. So whatever home Depot, 52 week high Lulu, 52 week high Walmart, 52 week. Are there no, are there no flash? Are there no flash? I don't, I'm not as online as other people. I don't, I haven't seen like a flash mob hit a home Depot. It seems like it's department stores and it's like clothes. Like, like, yeah. What are you going to get at home? People are because it's stuff that you want to, because it's, it's, it's either really cheap stuff where people are just desperate. I guess that's five below, or it's like Fendi bags from

Nordstrom or whatever that are then going to be resold. Like if you steal handbags, you can sell them for thousands of dollars. It's like not a joke. Oh, Nordstrom was robbed. No, I know. I'm saying I haven't yet seen people taking like hammers and nails from Home Depot is my point. Speaking of bad stock, Nordstrom is such a piece of garbage. But anyway, it's not just luxury versus not because LVvmh for example is in a 20 drawdown yeah i you know i have like no interest in that whole sector i don't own any retail stocks i don't

understand the appeal i was debating somebody on tv last week and they were talking about like what stock were they what stock were they talking about? Some piece of shit. And I was just like, I own a business that like is growing 40% and has 20% margins. Why would I take the money I earn from that business and hand it to a company that's like 3% margins and 4% year over year growth? Like on what planet would an investor allocate their own capital that way? So I really just don't understand.

When you put it that way. Right. But anyway, my point is it's nice to be in a world where like it's not everything going up or down together. Target is not Walmart. Costco is not whatever. Home Depot is not Lowe's. They're different businesses.

That's right. I totally agree. All right. Let is not Lowe's. They're different businesses. That's right. I totally agree. All right. Let's talk about this ERC bubble. I get 1,000 emails a week. People trying to, I guess, get me to be a lead that they can then resell to this company, Bottom Line Concepts, which apparently has thousands of feeders who are sending them qualified business owners as leads.

And then they are offering consulting services where they're going to tell me how much the government owes me based on the earned retention. Is that what it is? Based on how much percentage of your employees that you kept employed through, I think 2021 was the deadline. All right. So let's do this. There's a Wall Street Journal 2021 was the deadline. All right. So let's do this. There's a Wall

Street Journal article over the weekend. Not exactly a bombshell if you're a small business owner, because you have been getting inundated with people calling you, LinkedIn DMs, emails. And they're on podcasts now. They're on podcasts. They're sponsored podcasts. So this guy is Josh Fox and I don't know him and I've never spoken to, and I don't know him, and I've never spoken to him, and I don't have anything personal against him. But he seems to be the kingpin of ERC, meaning most of the roads lead back to him. A lot of the people in this Wall Street Journal article are funneling potential clients to his firm, which is called Bottom Line Concepts. He's been around for a long time, but it looks like he really put his foot on the gas pedal after the ERC credit from the pandemic. So basically, his firm has helped clients pursue more than $6 billion

in ERC tax refunds. And his company could receive more than $1 billion in fees based on his pricing structure for the work that he does. So just to give you an idea of what the ERC is very quickly, it was created in 2020 to reward businesses and nonprofits for keeping employees on payrolls during the pandemic. Three years later, it has turned into a headache for the IRS and a bonanza for firms such as Bottom Line that help clients calculate and claim the tax credit. The IRS paid more than $150 billion in ERC refunds through early March, and the money is still flowing. Total payments through July could be $220 billion, with another $120 billion in the

pipeline. You're talking about almost half a trillion dollars total according to that estimate. So all of these people who own businesses and have employees, they're getting hit by salespeople who are like, we can help you figure out how much you're owed and do the paperwork for you. And listen, if it's legal, I don't necessarily have a problem with it. I asked Bill Sweet, our CFO over the weekend, like, how could this go wrong? So he's basically saying this is like a mill. Anytime you hear the word mill,

I remember all the mortgage refinancing mills and all that. Anytime you hear that word, it means shit is sloppy, corners are being cut, and a lot of people are shoving as much as they can into the channel while the getting is good. Because there's like a whole checklist of things that you need to prove happened in order to be eligible for this. Yeah. Right?

Like your business needed to suffer as a result. You need to keep all your employees. I don't know all the details, but it's not for everyone. Well, what's happening is a lot of the people who are pitching this are not the most scrupulous people because it's a gold rush. And think about how alluring this is like there are a million things you could sell in this world you could sell cars you could sell insurance free money right selling free money it's good like telling people like you're already owed this money like i'm not like offering you something that's not coming to you you just don't

know how to get it it's your money right that i? That, I mean, that is a, I mean, all right. So first of all, this whole shit should, should have been shut down. This should have been concurrent with the pandemic, not three years later, but that's a whole other story. The, the, the, the, the part of this that's scary is the gold rush aspect. And a lot of people just saying whatever they have to say to close a sale. My guess is that in the fullness of time, we'll see that a lot of small business owners got tricked into saying things that they wouldn't have otherwise said because they were told to by a salesperson just to get themselves through. No different than the ninja loans of 2005, 2006. This could be something of that magnitude given the amount of ERC credit filings there are and how much in a rush everyone seems to be. We asked Bill, like, how could this go wrong? He said it's that many businesses that apply do not qualify under IRS criteria.

The promise of quick, easy money leads to a lot of hand-waving and less than ethical salesmen are lying to tell businesses they qualify when they don't. He turned up this example of a tax firm in Teaneck, New Jersey. They filed $124 million worth of aggregate refunds. Quote, he allegedly told some clients that the government was giving out pandemic-related relief money and that they were eligible because they had a business. He told other clients that the money was a grant. So you definitely have salespeople out there bullshitting guys that own a diner and getting them millions of dollars that's not supposed to be coming to them. And maybe the IRS isn't catching this in real time, but it will be caught eventually. I mean that's how it seems like it could go to me. And I bet you Long Island,

I bet you Long Island where we live is a frenzy. Yeah, for sure. It's definitely a hotspot. Like South Florida, Long Island, these are definitely the places where you're seeing the most bullshit. Staten Island, right? Guilty as charged, always. All right, let's go to, let's talk about the recession.

Okay. Calls, or lack thereof. All right, so Goldman, actually, before we get to Goldman, chart from FactSet showing the number of S&P 500 companies citing a recession on an earnings call. And listen, this is straight from a horse's mouth, right? Companies were rightly worried about a recession that hasn't transpired yet. Of course it could, hasn't yet. It's coming. Well, it might be, but be that as it may, it hasn't.

And so therefore, the longer it goes, like, you know, companies are talking less about it. So maybe they'll be blindsided, you know? Maybe we get the, maybe we see the lag. So this is this quarter's conference calls, the number of S&P companies saying the word recession? Yeah, so it peaked at 238. Again, this is the number of S&P 500 companies. So basically half.

Then it went down to 184, down to 147, 113, and now 62. So, you know. Is there a baseline like for this that That's, that's normal chart back on. So just eyeballing this, you know, it looks like, I don't know, the average was 35 to 40, give or take, you know? So, all right. So Goldman to their credit, this is Jan Hatsias' work, has been well below consensus. It's kind of nuts, actually, that the Bloomberg consensus has not budged since, I don't know, what is that, December 22? So what we're looking at is 60% of economists that are polled by Bloomberg have expected a recession. And I kind of wonder if this is the

case of, I don't know if this is, I know it's not career risk, it's just people don't change their minds once their opinions are out in the public. But the data has changed dramatically. And there is good reason to suggest that maybe recession is coming, at least certainly not to the tune of 60% of people that are asked. So Goldman just lowered their forecast down to 15% on continued positive labor market inflation news. And I read the report this morning, and I want to pick out something that stood out to me. They said, we still strongly disagree with the notion that a growing drag from the long and variable legs of monetary policy will push the economy toward recession. In fact, we think that the drag from monetary policy tightening will continue to diminish

before vanishing entirely by early 2024. That's interesting. I feel like that's a contrarian call. Most people that I read are still saying that, well, it takes a while for the full effects of tightening to be felt. Matter of fact, Jay Powell keeps saying that. And Goldman's saying, well, actually, we don't agree with that. I don't even want to hear the word recession until unemployment hits 4%. That's my like, like that's my new answer. Like, okay, sure.

Maybe, maybe, but shut up until there's an uptick in people losing their jobs. Because until then, what are we talking about? Are you crazy? You cannot have a recession where everyone is working. You literally can't like you actually cannot. You could have GDP contract. Sure. You can have retail sales suck for a couple of quarters. You cannot have a recession if more people than ever are participating in the labor force and actively working in jobs. I'm sorry.

I'm sorry. So now you want to say, well, Josh, unemployment is a lagging indicator. Okay. I'm happy to lag. Because what's the alternative? To predict? To predict and then miss a market like what we've had this year? I'll take the lag. Give me the lag.

What are your thoughts? Yeah. You said that now. But by the time, I mean, the lag can be pretty punishing. Right? Stock market fall 30% before you know you're in a recession. But no, point taken. So glad you said that now, but by the time – I mean the leg can be pretty punishing. Stock market fell 30% before you know you're in a recession. But point taken. I'm so glad you said that. The stock market fell 30% last year before we knew we were in a recession.

So I'm going to have to deal with that reality anyway. So for those predicting the economy and predicting recessions, listen, all respect, all respect. Can you at least wait for net jobs declining in some way, shape, or form? And maybe it'll happen. Maybe you'll get lucky and you'll get it in the fourth quarter. It's just until it happens, I don't even know why this is something that we're talking about anymore. So that's my take on that.

Good take. All right. I'm going to make the case. I'm going to make the case for energy stocks. And I do own energy stocks. I bought IEO, which is- I'm with you. Yeah, I'm in that. I'm going to make the case for energy stocks. And I do own energy stocks. I bought IEO, which is- I'm with you. Yeah, I'm in that.

I'm in that. The oil and gas exploration production ETF. I bought it, I don't know, maybe two weeks ago or so. It's breaking out, technically. This is very simple. I don't know anything about macro or oil or Saudis or Russians or reserves. I don't know anything about that. But what I do know is that energy stocks are working right now. momentum is a real thing that I believe in. So, all right,

chart on please. These are the 11 sectors and energy is the best performing sector for the last three months and for the last months. And I respect trend. I do. Next chart, please. You're looking at energy stocks divided by the S&P 500 to show relative strength. So not only is it working, but it's working even relative to the S&P. So on the top pane is XLE, which is the whole shebang bang. I think the biggest holdings there are Exxon and Chevron and probably Conoco and then going down the list. The next one is OIH.

And these were names that were completely left for dead. Schlumberger, Transocean. These names, I don't know if there was an 80% drawdown here. OIH is like the picks and shovel companies, like the companies doing geological surveys. Baker Hughes is another one in there. So these names were just wrecked. And then on the bottom is one that I own.

This is IEO. This is ConocoPhillips, EOG, Marathon, names like that. And they're working. I'm with you on this trade. I think it's where the puck is going next. Crude hit 87 today. That's the highest level, I think, since November or something like that. Anyway, oil prices had a tough first half.

Oil stocks got hammered along with them. All of that is going away, all of that weakness. And August was a really good month for this space. Most of the market pulled back. These stocks, I think, bottomed in June or July and actually had a good last month. Yeah. So towards the second half of August, there was something interesting where there was like six out of seven days where they tried to sell these names and it closed at the highs of the day. And when you see just that sort of like resistance to selling, which is a sign it's like an oxymoron, but when you see so much buying intraday where they're trying to sell it down after a big

run and it can't even close near the lows on one day, that's bullish. And then here we are a couple of days later, it's breaking out. So we'll say it's been working. If you look at the IEO and I use Y charts to X-ray the holdings, you'll see that the, uh, you'll see that the, uh, forecasted dividend for the IEO next year could be six, 6% and change. And based on forecasted earnings, this, this portfolio trades sub 10, 10 times earnings. So if you're one of these people that is trailing the market and you don't know what to do and you don't want to buy NVIDIA, I feel you. The energy sector has single-digit PEs, high dividends, companies with growing cash flows, good governance.

It's kind of like a great place to be. You could be domestically focused like the IEO names. You could be global like the XLE names. And I think this is an area where you're not paying up because you missed out. These stocks have been in the penalty box for eight or nine months now. So I like the call. Let's do the mystery chart. Are you ready to win? I'm ready to win. Okay. Oh, cool. Looks like Josh just left us. That's how bad his charts are. He just decides

you know what? I'm leaving. I'm out of here. Hey, Duncan. Hey, I think we'll wait on him to join back here in just a second. No. I was going to have Duncan deliver it if you... No, let's not do that. My bad.

Duncan, I got it from here. I was trying to pull up the chart, and that's what happened. John, if you please. Somebody had a birthday over the weekend. We're going to celebrate with a mystery chart that is highly guessable. I am showing you the market cap of the company, not the stock price, which is 786.92 billion. And that's been growing at a 12% CAGR since 1996, which is highly impressive. And then I'm showing you book value, which is what this person whose company this is

frequently has pointed to as his measure of success to shareholders. $539 billion, growing at a 15% CAGR since 1990. Michael, would you like to guess today's chart for the win? I don't know. It could be anyone. Do you think this gets to a trillion dollars while he's still alive? I sure hope it does. But what do you think? Yes, I do. I mean, I don't know. He could expi-

How old, you know, how old he turned over the weekend? 93. I mean, that's impressive. So happy birthday, Warren Buffett. And speaking of Buffetts, rest in peace to Jimmy Buffett. True. Not like a huge Jimmy Buffett fan, but he's got some great songs. No, but when you're on the boat, you know, a little yacht rock.

Yeah. Absolutely. I feel you. We have one more image to show. Where is it? Oh, this is price. This is market cap. And then this is book value calculated quarterly.

You know, this is one of those things where you look at these three charts and they line up exactly as they should. There's no trickery. There's no, oh, but the Fed, there's nothing. This is just a company that has, and by the way, Buffett doesn't talk about book value anymore because of the way the accounting works. He actually thinks it doesn't accurately reflect the success of the company, even though it continues to grow.

He's been pushing people away from that metric. We have a picture of Warren celebrating. This is Warren Buffett with Jennifer Lopez. This is not this year's birthday. This is 2017, but I couldn't resist. Warren has lived quite a life. Uh, Warren has lived quite a life and at 93 years old, his stock, his, his stock made a new all time price high, uh, right alongside, uh, making, uh, right, right alongside his 93rd birthday.

That's pretty gangster. Love to say, like you have, you have to now it's not a new all time high in market cap yet because they have done buybacks. So there are less shares than there were a couple of years ago. Did you watch that video that I sent to you and Ben last night of him and Munger? No. You slacked it? You slacked it?

He just makes such basic points so eloquently. He was talking about like, well, how do you think about valuation and multiples? And he's like, listen, you're not buying a company for the PE today. I'm interested in businesses that are going to substantially grow their earnings in five years and 10 years. So I might've paid 13 times for Coca-Cola, but based on where it is today, I paid two times. Yeah, dude, he is the goadiest goat who ever goaded. And that's the final word on that.

Hey everybody. Thanks so much for joining us live for an all new, what are your thoughts? We, everybody. Thanks so much for joining us live for an all-new What Are Your Thoughts? We appreciate it. Thanks so much for listening. Over on the audio podcast version, if you joined us late or you prefer to listen, the entirety of What Are Your Thoughts? Plus a brand-new conversation with our friend Aaron Dillon on the state of the IPO market and all of the deals coming out this September and October. You'll learn a lot if you go ahead and listen. Thanks so much, Duncan, John, Sean, Rob, Nicole. We appreciate it. What about next Tuesday? What about next Tuesday?

What's next Tuesday? Oh, next Tuesday, we're at Future Proof. No new show, but stay tuned. Tomorrow, all new Animal Spirits. And at the end of the week, Michael and I are back with an all new Compound and Friends with one of the fan favorite guests that you know and love. Just reveal. We never reveal. Have a nice night. Whether you're just getting started as an investor or you're managing a multi-million dollar portfolio, Ritholtz Wealth Management has the solution for you. It all starts with building the right

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