We Study Billionaires - The Investor’s Podcast Network - TIP299: Mastermind Discussion 2Q 2020 (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. On today's show, we bring back our investing mastermind group for the second quarter of 2020 to talk about our favorite picks in the market. The way the mastermind works is each person brings an investment idea to the table, and the rest of the group helps that person refine their assessment of risk and opportunities. We also try to determine a good valuation for the pick. So if you're curious what that process might sound like, these are the perfect episodes for you to listen to.

Starting point is 00:00:25 Tobias Carlisle is a deep value investor from Santa Monica, California, and he's the founder of the acquires fund. Harry Ramachandra is a Silicon Valley executive with lots of experience in tech and he has a blog called bitsbusiness.com. So without further delay, let's go ahead and dive in. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Hey, everyone. Welcome to The Investors podcast. I'm your host, Preston Pish, and As always, I'm accompanied by my co-host, Stig Broderson. And boy, we're pumped to have our good friends, Toby Carlow,

Starting point is 00:01:15 Hari Ramachandra here with us for our mastermind discussion, second quarter, 2020. And let's just get this thing rolling. We're going to talk about our stock picks in this crazy, crazy macro environment. Who wants to go first? You usually go first. Are you willing to go first in this crazy time? Of course, yeah. I love getting mine out of the way so I can...

Starting point is 00:01:36 Got bombs on everybody else's? No. It's been a really uneventful quarter, as I'm sure you guys know, we, after the first quarter that lasted about a thousand years, because it ended with the market bottoming on March 23. And it's just been straight up since then. Unless you hold value stocks, value stocks sort of, they started running and then fall back asleep. And a lot of the value stocks have now got back close to where they were on March 23. And that includes Berkshire, which I know, Harry's. going to talk about. And Markell, which is my pick. Markell is one of those names that it's well

Starting point is 00:02:11 known in the value community, but it's probably not as well known outside because it's an insurer. And I think people get nervous when they hear insurance because they're a little bit black box. So really the key to investing in insurance is you want to be very comfortable with management. You've got to like management and trust that they know what they're doing. And so that's one of the nice things about Markell. It's run by a gentleman by the name of Tom Gaynor. He's 58 years old. He's very much a Warren Buffett style investor and operator.

Starting point is 00:02:47 And so he's built Markell to be something like a miniature Berkshire in the sense that it's an insurance company that has this investment arm and the investment process that they follow is very Berkshire-like. The returns have been extraordinary since it listed in 1986. it's done about 15% a year. Over the last decade, it's a little bit higher than that. It looks like it's more like 35% a year. It's still quite a small business.

Starting point is 00:03:14 So Berkshire is a $420 billion market capitalization company. Markell, which is smaller and not as good, but still a very good business, is an 11 or 12 billion dollar market capitalization company. So it's got a much longer runway ahead of it. On kind of any measure, it's very, very cheap. For whatever reason, all of these companies, they've got a little bit of a conglomerate discount or a bit of an insurance discount. Or for some reason, all of these are pretty beaten up. So if you look back over the history of Markell, it's only been as cheap as this on a price to book basis on a handful of occasions. And one of them was right at the very low in 2009.

Starting point is 00:03:54 It got cheap again in 2011 when it undertook an acquisition. But it's basically not being this cheap almost ever. So it was cheap on March 23. It's a little bit more expensive than it was then, but it's phenomenally good value where it is. It's a bulletproof balance sheet run by a really high integrity, high performance manager, very good set of assets, a very long runway for growth. So I think it's one of those things that if we go into another market breakdown, this is the kind of thing that you want to be in. If the market rockets from here, again, this is the kind of stock that you want to be in. So I feel very comfortable.

Starting point is 00:04:31 Markel, Corp, the tick is MKL. That's my pick for today. I have to say I would support your pick this time. I feel Markle is one of those companies that is not well known, even though they are well-run. For me, another positive about Markle is my dear friend, Sauru Madan, joined Markle a year and a half back. So for me, that gives me more confidence. And also have seen Tom Gainer operate, have attended multiple annual meetings. I think they are probably Baby Berkshire, as they're well known.

Starting point is 00:05:04 The only question I have for you is, one of the things that they have been trying to is to get into wholly owned subsidiary, like instead of just investing in equities. How are they doing there, Toby? And what are their chances of becoming like Berkshire? I haven't seen them having their cease candy moment yet. So what are their chances? Well, let's talk about Sir Rob a little bit.

Starting point is 00:05:28 I met him only virtually, unfortunately, but when he was at Google, Sir Rob was the guy who was getting a lot of the value investors to come and talk about the books that they had written at authors at Google. And so I was part of that group. And I went there in 2014, along with Guy Speer and a group of other guys, Monish Pabri, who did it too. Unfortunately, Sir Rob was out the day that I was there. So I didn't get to meet him. And now he's left Google and he's gone to Markle. I understand that he's there to help with this kind of initiative, more techie acquisition type. things. So I think that they've moved in the right direction to try and find somebody like that who's able to assess those opportunities when they come in. But they're always going to be very rare and unusual. And anybody who follows that part of the market knows that it's extremely expensive at the moment. So if you look at, you know, it's sort of halfway through this bare market, I don't know if it's over and we just rocket to brand new highs and everybody ignores what's happened. I find that a little bit difficult to believe, given the kind of destruction that's going on in the real economy. But the stock market is its own.

Starting point is 00:06:28 animal, it can be completely divorced from reality for a really long period of time. In 2007 and 2009, when we went through that bust, energy had been very strong going into 2007, 2009. And the first half of that bust, energy was unaffected by it largely. And everybody said, well, this is good news because it means that the bust is probably not going to be as bad as we initially thought it was going to be. And then there was a second half in 2008 that took down all the energy names. This time around, I think tech has been energy. Tech has been largely unaffected through the first half. So it's no surprise to me that if that is their focus, that they haven't been able to do anything through this period. And I think that like

Starting point is 00:07:10 Berkshire, which I'm sure you'll talk about in the moment, they're a little bit front run by the Fed. The Fed stepped in to provide that role that Berkshire has typically done in the past where Berkshire has all of this cash and they sit and they wait for opportunities like this to deploy into companies that need liquidity that are otherwise pretty robust companies. So they did that with Goldman, did that with a few other investment banks last time around. This time, tech was strong and the federal government stepped in without giving Berkshire that opportunity. And Markell equally didn't get to take that opportunity.

Starting point is 00:07:41 So I think there's a very good chance that they do do something in a not too distant future. But it's no surprise to me that nothing happened has happened so far. Also, because just these things are going to be rare and one-off. Although you would have thought that through some weakness like that it would have happened, but I think that the reason that it didn't is for what I've just said. I really liked your pick, Toby. Actually, just earlier this week, not only did I snack up more Berkshire. We're going to talk about that.

Starting point is 00:08:07 Here shortly, I put in a new bit on Mikel too. I think the valuation is very attractive. But I think now that we also are going to talk about Berkshire, I think that we also need to talk about some of the differences. people have been referring to Markele as the baby Berkshire for a lot of good reasons for a long time, but also think there are some distinct differences. You mentioned Tom Gainer before, a very interesting person, and unfortunately he doesn't do a lot of press because every time he talks about how he managed his equity portfolio has been

Starting point is 00:08:37 outperforming the stock market for a long time, as long as the Mackell track record. It's always interesting to hear. He is not as concentrated as Warren Buffett. Whenever I look at this aroma, which is I tend to look. just a few value investors, like five, seven people. And Tom Gaynor is always one of those people that I check out every quarter. But his method is a lot more quantitative, at least it seems, compared to Warren Buffett. His two biggest holdings, that's Berkshire Hathaway. And the A shares and the Bsias, and that's only with 5.7, 5.3%. He picks stocks differently. That's one thing.

Starting point is 00:09:14 The other thing is, you mentioned that before, Harry, about the Kell Ventures. Reading through the last annual report, it was interesting that they talked about whenever they started. So just to give you a few numbers, late in 2005, which is the first full year of McHale Ventures, whenever they created that unit. They had $60 million in revenue and $5 billion in EBITDA. Here in fiscal year of 2019 revenues now stand at $2.1 billion in EBITDA is $264. So I would agree in many ways with Horry that they haven't had their seized candy moment. Like, whenever you reach through the type of businesses they have, there are value companies. But I think it's just one of those very, very long place. I mean, I don't see any amazing catalysts materializing over the

Starting point is 00:10:01 next year, whatever. It's just one of those. Hey, look at the track record. They've been underwriting with a decent profit 16 out of the last 22 years. Hey, we like that. Equichita portfolio has outperforming the market, not by a lot, but it's been outperforming the market. That's something we're like too. So as much as whenever we look at the growth rate of the book value has been slowing down here over the past 10, 15 years compared to what it has been, some of that is just due to size, some of that has to do with the interest rates too. But I know this is significant precision for me already. This is a stock I really like. So I love this pick. I think this is a very strong pick. I'm coming up with an IRA of around 11% at the current market price, which good luck finding that

Starting point is 00:10:44 on a lot of companies based on how this market's been bid. So as far as performance against the S&P 500, I think it's going to strongly outperform the S&P 500 on a long-term scale. I just want to throw out here. So Toby had mentioned he did a Google talk. We're going to have this in our show notes. Toby, I'm serious because the first time I was introduced to who you were was through this Google talk. I watched this on YouTube and I was thoroughly impressed. And I just want to share that with the audience. I know you did the talk a long time ago, but it was a really, really good video for people to watch about deep value investing. So we'll have a link to that in the show notes. I want to talk a little bit about Hari's question that he asked about wholly owned operational

Starting point is 00:11:24 subsidiaries versus non-operational owned subsidiaries. And that question has a lot of learning in there. And so that's why I want to kind of explore it a little bit. And just if you guys have any comments you want to add to this, please feel free to chime in. But Warren Buffett and Markell now are both trying to wholly own companies opposed to owning a 10% stake in a company. And the reason why you see them wanting to do this is because there's tax implications when they receive dividends from a non-operational owned subsidiary. So let's take, for example, one of their smaller position sizes relative to the amount of equity that exists.

Starting point is 00:12:03 You could call it Apple. They do not operationally own Apple. They do operationally own GEICO. They own 100% of the equity of that company. So when you look at how they receive the earnings of a GEICO versus the earnings of Apple, when Apple makes a bunch of money, that money sits on the balance sheet of Apple and then Apple pays a dividend. And when Berkshire receives that dividend, they're taxed not only as the dividend goes out the

Starting point is 00:12:31 door at Apple through the valuation of Apple, but then when the money hits their balance sheet over at Berkshire Hathaway, they get taxed again on receiving the income. of the company that they own because it's non-operational owned. When it comes to GEICO, none of that tax implication occurs. And so they can treat it as a sweep account. They can pull the money straight up onto their balance sheet or they can allow the money to continue to remain down at the GEICO level, which is typically what they do. And they allow the managers of GEICO to allocate that capital the best way that they see fit. So that's why you see Berkshire and Markell trying to buy wholly owned companies opposed to 10% owned.

Starting point is 00:13:09 ownership here and 10% ownership there. Now, where it gets hard is when you get to the size that these companies are, and they're trying to do an acquisition of a $50 million company, well, think about it from the company's perspective that's being acquired. They're saying, well, we're not going to be wholly, we're not going to be completely purchased by Berkshire Hathaway unless there's a large premium attached to the market price. So we want 20% higher than what it's trading for on the market right now. So they get themselves in this predicament where they're bidding the price because they want to be wholly Berkshire and Markell are trying to wholly own these companies. And they could get a much better price if they didn't do that, but then they

Starting point is 00:13:48 get the tax implications of receiving dividend payments because they're non-operational owned. That's really important. It's interesting to see and it shows you the challenge that they're up against as they're trying to increase their free cash flow. And every one of these target companies that they're trying to buy knows that. And they use that to their advantage in the pricing of the company. And so it's really hard. And it shows you why when you go into the shareholders meeting, Buffett, and I don't know that the leadership at Markell has voiced this all that much, but I know Buffett says it all the time, we're a victim of our size and our success because we're so big. And so all those implications kind of play out. So kind of a neat learning point for maybe some of

Starting point is 00:14:28 the younger people that aren't real familiar with either one of these companies and what they're up against is they're trying to do this. Something else that I want to talk about is capital intensive companies when you look at the balance sheet. So when you look at a company like Berkshire Hathaway and you look at like their railroad company, these companies are extremely capital intensive because when you look at the assets on their balance sheet, they're tangible assets. So if that machine breaks, now I got to go out and I got to buy another machine that is a physical asset that's now going to sit on my balance sheet. The companies that, in my opinion, have performed extremely well under the environment that we're in right now, and let me define what that environment is.

Starting point is 00:15:06 environment is central banks printing a bunch of money and inserting it straight into the economy and going into the bond market and then coming into the equity market. Under that environment, from what I've gathered, companies that have intangible assets on their balance sheet have performed extremely well because they're able to adapt to that environment much faster. So if you're a company that your assets are brand power that are like Google, they're able to just manipulate a little code and then all of a sudden they're able to. capture these different bidding rates for advertising. All of those are intangible assets that have extraordinary value. And in my opinion, have led to the outperformance of capital-intensive

Starting point is 00:15:49 type businesses that have a lot of tangible assets on their balance sheet. So when I look at Markell and I look at Berkshire, I see companies and subordinate companies that are underneath of the corporate veil of Berkshire and Markell that are capital-intensive businesses. And I think that might be one of the reasons why you've seen some underperformance. So if we expect that environment to continue to play out and we see that dynamic of companies that have large amounts of tangible assets continue to play out, maybe we see these perform less well than we're expecting based on the valuations. I don't know.

Starting point is 00:16:24 And I don't know how long that's going to continue to persist and how long this dynamic's going to continue to play out. But in my opinion, that's what we've seen over the last 10 years. So with that, I love the company. I think they've got an extremely strong earnings, really strong balance sheet. I think the valuation on it is a sweetheart price based on the free cash lows and I'm estimating. So, yeah, I like it. That was a lot easier for YouTube than use to this, huh?

Starting point is 00:16:50 Yeah, that's great. I'll pick ones that you guys like all the time. Hari, why don't you go next? Let's talk Berkshire after we just talk, Markel. It'll be perfect. The reason I'm on this mastermind is Berkshire because I met Kristen in Omaha in one of the annual meetings. And what I'm seeing is what happened during 2000s when a lot of people lost their faith in Buffett and started also criticizing him, we are seeing it in a meaningful way.

Starting point is 00:17:21 There are a lot of like institutional investors who sold Berkshire. One of them wrote a famous open letter as to why he sold. Berkshire because Buffett missed a lot of opportunities to invest in tech and also he did not pay dividends or buy back stocks at the right time. So there's a lot of criticism going on right now. On top of that, there are other news like Buffett or Berkshire was tricked, basically it was precision cash parts. They acquired a company for 900 plus million, but those guys were cooking the books and that has come out and the litigation going on right now. So, One of the reasons I'm picking Berkshire is that there is a lot of bad news baked into the price.

Starting point is 00:18:05 So that's always a good opportunity. That's number one. Number two, in this environment, as Kristen said, as the capital becomes cheap, companies like Berkshire and Markle, they are struggling to find value because there are a lot of private equity funds who compete in the area where they want to buy a company outright. And also the public markets are also not cheap. and Fed is stepping in and making it hard for Berkshire to play its game the way it did back in 2008. So those are the headwinds.

Starting point is 00:18:36 But I highly recommend a podcast by Toby with Chris Bloomstrand. I hope I pronounce his name right. Fascinating. I really learned a lot about Berkshire. So when he talked about how Berkshire Energy and Berkshire Railroads are great investments and great investment vehicle even going forward. for Berkshire. And the area where they're struggling right now is the 25% part of it, which is where all their retail businesses are located, is what he said. And one more thing

Starting point is 00:19:09 about companies now is we have to ask, are you COVID protected and are you China protected? And Berkshire is largely insulated from any trades with China because a lot of their businesses are local. And one of the curious thing is, Munger has always been a strong supporter of China and Chinese companies, but Buffett never went into China in a big way. So I wonder why. But now he's proven right by not doing it. Are they COVID protected? Kind of, because most of their businesses like their Berkshire Energy, insurance and their railroads are not impacted that much, but their 25% of their retail is, which I think with their cash cushion and their ability to borrow, they can withstand. And finally, are they fed protected in the sense with cheap money?

Starting point is 00:20:05 How are they going to go ahead doing their business the way they used to? One example I would give is in Silicon Valley like Amazon, if Amazon is today's Berkshire, the reason being they can actually create businesses. Like AWS, they didn't acquire anything. They just created themselves because they could borrow money cheaply and they can create something. Berkshire model is not set up to create businesses except for their insurance business, which they created, for example, the Berkshire insurance for reinsurance.

Starting point is 00:20:38 They haven't really created any other business organically. So they will probably struggle in this environment where there is a lot of capital, near zero interest rate floating around. So I don't know where the growth will come from, but I feel safe enough to park my money there rather than keep it in cash. That's what I would say. I don't know about the IR going forward.

Starting point is 00:21:01 So I would love to hear from you, Toby, Preston and Stake. What do you guys think about the IRR and the opportunities ahead? That podcast with Chris Bloomstrain was great because Chris is an expert in Berkshire, he's been following for 20-something years, and he understands all of the intricacies of the deals that Berkshire has done over the years. And the one that I find most fascinating is the General Re deal, which we talked about on the podcast a little bit, but the significance of that was Berkshire had this phenomenal run

Starting point is 00:21:30 where Buffett bought Coke and various other things that had generated enormous returns. And Berkshire was holding these stocks that now had very inflated valuations. And Berkshire itself was trading it three times book valuations. And Berkshire's concentration in equities meant that book value was also quite inflated because it held expensive stuff like Coca-Cola. And so by acquiring General Rhee for stock, which he doesn't like doing, but he did it on this occasion for this reason, General Rhee's book tended to be treasuries and it was more like a cash.

Starting point is 00:22:07 So he merged Berkshire, which was this inflated stock portfolio, trading it three times that stock portfolio with an undervalued cash portfolio. And so basically what he did is he completely de-risk the portfolio going into what turned out to be a pretty nasty bust and gave him the cash to then reinvest and take advantage of that run through the early 2000s. I think they don't quite have that same problem now because the equities are somewhat beaten up. It's been a rough run for value investors like me. And Buffett's a better in value investor and a different type of value investor, but also been a very rough run for Berkshire and for Buffett. Not that they've done anything wrong. They haven't made any mistakes. They just haven't maybe IBM, but they haven't seen the

Starting point is 00:22:49 returns that these sort of stocks that typically generated in the past. There's lots of theories about that precedent. I can beat everybody to death with our Fed induced underperformance of value theories, but we won't do that. I think the Ford return on Berkshire, I think it's a little bit higher than most folks are giving them credit for. I actually think the Ford return could be something like 13% compounded for like five to 10 years. I think it's reasonably high at the moment because I think that they've got some of their holdings are a little bit and so Apple is a big holding. Apple is one of the, I think Apple's one of the cheaper of those fan mag, Facebook Apple, and of Facebook, Amazon, Netflix, Google, Microsoft, of those very high tech names.

Starting point is 00:23:32 I think that was a really good purchase. They got that right at the right time, put a lot of money into it. It's now their biggest holdings. Still, compared to those other. the tech name's reasonably cheap. I think it's got some room to run. I think that the wholly owned subsidiaries too have good prospects for generating a lot of free cash flow over the next short period of time. So if there's any weakness in the market, Berkshire is in a very good position to take advantage of it the second time around. My estimate for Berkshire here, from here on in, is a little bit higher. I don't know if it's quite, you know, it's hard to handicap Berkshire or Markell, because I think Markell just by virtue of the fact that it's smaller,

Starting point is 00:24:08 has more opportunities. It's hard to find. for Berkshire to deploy meaningful amounts of capital, just because Markel's a $12 billion company. Berkshire is a $420 billion company. There's just more opportunities for Markelle. Having said that, I wouldn't be surprised if Berkshire, just because you get the greatest capital allocator investor to ever do it, fully cashed up, probably going out to battle for the very last time.

Starting point is 00:24:32 I kind of like Berkshire, but Markelle could also have a good run for me. but I think that for both, the returns a sort of 11 to 13 to 15% compound for a little while. This episode follows two episodes where we're only talking about Berksa Hathaway, so I don't want to repeat too much of what I said in those two episodes. But as I mentioned before, I added to my position here just a few days ago in 172. And whenever I look at what's the valuation, I'm looking at cash, equities called $300 billion. So how much am I going to pay for the operating companies? To me, there's definitely worth a lot more than $100 billion. It's very difficult to make an accurate calculation on that, but

Starting point is 00:25:13 something that's spending off called it $20 billion annually, yeah, it's probably worth a lot more than $100 billion. So whenever I'm looking at the stock, I'm thinking, well, probably at around the 30% discount right now. So I would agree with the interim rate return calculation that you made before, Toby. It's not like the biggest discount. It's probably very similar to the discount that Mikel is trading at right now. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer.

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Starting point is 00:29:41 That's Shopify. com slash WSB. All right. Back to the show. Toby, I agree with your IRA. I came up with 11% whenever I did mine. And you were saying 13, 11 plus or whatever. But I got to say I wasn't accounting for the look-through earnings on the company. I was just

Starting point is 00:30:02 accounting for the earnings that you were seeing on the Berkshire financial statements. So for people that don't understand that term, look-through earnings, we've talked about it a couple times on the show. Buffett's talked about it in his shareholder letters from time to time. And all this is, is, you know how we were previously talking about non-operational subsidiaries paying a dividend to Berkshire, well, the rest of that payout ratio. So a payout ratio is, let's say I made $1 of earnings per share on a company, and 30% of that was paid out as a dividend. Well, 66% of that still remains on that company's balance sheet as earnings. And anyone who understands how the accounting works, well, that 66% of earnings remaining on your balance sheet adds value

Starting point is 00:30:48 to the share price of that company over time. So when you're looking at... at Berkshire Hathaway and they got such a substantial amount of non-operational subsidiaries on their balance sheets, that means they've got a lot of look through earnings that aren't showing up on any of their financial statements, but are there if you start digging into what those non-operational subsidiaries, the rest of the payout ratio that's not being paid to them. So I think if you account for that, I could easily see how you could get to 13%, maybe even higher on an IRR beyond what I came up with with 11%, just using the financials that are being reported by Berkshire.

Starting point is 00:31:24 The $20 billion in earnings, there's another $20 that's looked through, $150 billion, $137 billion in cash, $420 billion market cap. So the actual residue that you're paying for is cheap relative to the earnings that's currently generating, but including the look through, I think it's very, very cheap. You can look at Berkshire on a price-to-book value of a base. It's a very simple metric. People use it for investment companies and for insurance companies, so it makes sense to use it here.

Starting point is 00:31:49 I think that you can think about the price to book value as being the absolute flaw, or book value being the flaw of valuation for Berkshire, it's clearly worth more than book value. And Buffett himself has said that he will buy stock back at 1.3 times book value and north of 1.3 times book value. So he thinks that and he has done that, bought it back at a high price. So you're buying at a price below which Buffett will buy the stock right now because it's trading about 1.14 times book value. didn't get much cheaper than that at the bottom. I think it got down close to book, maybe, something like that. I wonder why Buffett is not aggressively buying Berkshire stock at this point. Do you guys have any thoughts on that?

Starting point is 00:32:30 Well, it was pretty clear at the measing. I think he's looking at, we don't know the scale of the disaster from the shutdown yet, and because Berkshire writes some big insurance, supercat insurance, you know, if a hurricane comes through and hits New York while they're going through this, that doubles up on that. disaster. So I think they're carrying cash for that. So they've sold down the airlines. They had a basket of airlines. They've sold down Bank of New York to get under 10%. Basically, all they've done through this period is sell, which is very out of character for Buffett. He's bought every dip.

Starting point is 00:33:04 He's probably looking to buy a lot more. And I'm not just talking about why he bought stocks. I think there was one of the most stock he ever bought here in one quarter. I think he bought for $1.7 billion dollars Q1. And he primarily bought around 214, the BCS. And right now, it's trading 174. So the other thing is, if Buffett said, hey, it's so cheap, everyone go out and buy it. Like, that would be bad, right? Because it would mean that he would have to spend more money buying no stock. And I think that you also have to pay attention to what he's doing, not always what he's saying. And he has been scaling up share buybacks, even though not to the same extent as a lot of investors would want. because he talks about how their attuned to cost has really changed for Brooks Hetherway because

Starting point is 00:33:48 of everything that's been going on. But I also think a lot of the criticism, and you hinted at that before, Harry, I think a lot of that has also been a bit unfair. We talked about the Apple deal. That was the biggest position he built, you know, $35 billion at the time. He more than doubled that. And now people are criticizing him for not buying a lot more whenever he put in $35 billion. It was by far, by far the biggest position like he ever built. So it's very difficult. to make people happy if you are Warren Buffett. And I think that's worth noticing too. So on the big bets, he's usually the right. He did not perform well with Heinz. I just would like to say that. He makes mistakes, but he tends to do them whenever there's not as much money around. So

Starting point is 00:34:31 for it's worth, I think that's something to mention too. But I know I'm just talking my own position here. So I hope someone can give Harry a little grief. I don't know if I'm doing a good job coming from me. I mean, you can beat it up as much. you want, but you can't do anything about the free cash flows that this company's kicking off, which is enormous. And then looking at the price that it's selling for, and I mean, you get substantial IRAs. And when you see the rest of the market and the numbers aren't anything close to that, I mean, hey, whatever.

Starting point is 00:34:59 If the market wants to keep penalizing the price, well, then just buy more equity. I guess the criticisms are worth addressing. The criticisms of Berkshire are that's too big. There's a discount for being a conglomerate. and that now it's the only thing it can do is keep on getting bigger or break apart. And Buffett has said that he won't break it apart in his lifetime. And I don't think that he wants the managers who are on the board now. He'll pick the next generation of management.

Starting point is 00:35:23 I don't want to do that. And then there's the fact that Buffett is 90 years old. And he hasn't done as well over the last 15 years as he has in the past. And the most recent dip, he didn't sort of do anything. So the criticism would be that he's lost a step. He hasn't participated. And evidence of that is that he didn't participate in this most recent drawdown. That opportunity has now passed by.

Starting point is 00:35:48 That's the criticism. Why don't you address that, Harry? And then I'll address it afterwards just to save me getting any hate mail from Buffett. Yeah, actually, that's a good point, Toby. But again, like, I think what I remember is even in 2008, he didn't just jump in as soon as the market crash. That's number one. Number two, the lesson I learned from the annual meeting was you've got to be mindful as an investor when you're buying a dip.

Starting point is 00:36:13 You need to really understand the band of uncertainty. So what he essentially said was in the annual meeting that the range of uncertainty at this point is too high for him to really evaluate any investment. And that's pretty prudent, especially considering that even in his insurance operations, the range of uncertainties is also very high. So he's dealing with both. And at the same time, he is also dealing with a lot of his businesses not doing well. And he might have to shut some of them down and lay people off. So even from a PR perspective, buying back shares or may at those points while he's laying off might also have a lot of implications for him. I am curious to know your thoughts on why he sold Goldman.

Starting point is 00:36:57 Is it mainly because he just want to stay away from political hot potatoes? I believe even airlines, he might want to just be out of the. the limelight. So maybe, apart from financial consideration, he just didn't want to be dragged into public arguments about Buffett being bailed out by Fed or government. So that was a smart move too from a PR perspective, at least. I saw that too. I think the airlines is a little bit easier. He looked at the potential range of outcomes and now the range of outcomes included basically zeros for some of the airlines. If the coronavirus shut down lasts for a really long period of time. If you include a lower bound in your valuation shifts down the median point

Starting point is 00:37:39 of your valuation, maybe the Terry's thinking about it. He doesn't like to hold things. It can be zeros. Goldman, yeah, I wondered if that was just he had kind of got a sweetheart deal when he invested in Goldman the first time around. There's no criticism of him for doing that from me. But it was backstopped when Goldman turned into a bank holding company, bank stopped by the federal government, which drew a lot of criticism that Buffett had been bailed out. So yeah, maybe it was just an opportune time to realize that investment too and he just decided he'd rather have the cash than a holding in Goldman. When I look at the performance of Berkshire over the last 15 years, I can explain it in terms of what has happened to value kind of globally. I don't think that Buffett's done anything different

Starting point is 00:38:20 to what he has always done, which is try to buy undervalued high quality names. It's just that strategy hasn't been a great one for the last decade and only really on a relative basis. Berkshire's still done very well over the last decade. It's just that the market has bid these expensive stocks to a level that is unprecedented. Because the market holds those stocks, the market gets, you know, S&P 500 holds those in market capitalisation weighted holdings. That's the nature of it. When the biggest stocks are bid up and they run, it pushes up the whole index.

Starting point is 00:38:51 And so if you're a value investor and by definition, you're holding stuff that is smaller and undervalue, you don't participate. and I think that that's all that's happened. I think that what happens here is that we do get a second leg down as nuts as that sounds at this point because we've all bounced so high, but I think we're probably going to see a second leg. And I think that when that happens, Buff will become fully invested, and I think value's going to have a much better run.

Starting point is 00:39:17 I would much rather be a value guy over the next decade than someone who's just allocating to the S&P 500. All right. I'm going to go ahead and talk my pick if that's all right with you, Stig. Yeah, go ahead. After talking about very traditional companies like Mackell and Berkshire, I'm curious, Preston, what you came up with. Do you come up like with a really old-school value pick? I'm just teasing you because I know what you couldn't pick. I'm going to pig afterwards. So I've got a 1990s tech stock here for you. eBay, ticker E-B-A-Y. So this one here has really not had an impressive top line over the last. last 10 years. The free cash flows are pretty stagnant, I would describe them. I like this because I think the valuation for the free cash flows that it's kicking off is really strong right now. In

Starting point is 00:40:07 fact, I talked about this two weeks ago on our show. Since we talked about it two weeks ago, the stock is already up 15%. And I'm not saying that's because we talked about it on the show. If anything, it's definitely not that. But the momentum on this looks good as of recently. I liked the valuation. I did a free cash flow analysis kind of projecting what I think the free cash flows could look like into the future. And I did a very modest 4% growth rate on the free cash flows. And when I did that, I came up with an IRA of 9% on eBay. The reason I like this is because I guess I have a very bearish opinion of the global economy. I have a very bearish opinion of how the top 90% of people in the population are going to be dealing with the environment in the

Starting point is 00:40:56 coming three to four years. I think it's going to be a very difficult time in the coming four years for 90, 95% of people in the global economy. If that's a true statement, then I think a company like eBay is going to be a really hot company, specifically because it's selling your stuff. So if you want to go in there and you want to sell a use this or use that, you can log on the eBay, I think that's the first thing that people think about whenever they want to resell the things inside their house. And I think that that brand power is going to be huge for them. I think that you're going to find that the company obviously has good fundamentals or it still wouldn't be in business in such a competitive tech space that we're seeing. I think when people

Starting point is 00:41:37 think about selling their stuff, they think one of two things. They think Facebook and they think eBay. So I think it's going to do good. I don't think it's going to do great, but I think it's going to do good and I think it's going to continue to hold its own. And based on the price compared to what I think it's going to continue to earn, I think it's going to perform quite well relative to the S&P 500 or whatever that basket is that you want to compare it to. So that's my pitch. What here is it? I actually like it. I'm just teasing. No, I think the big competitor here is really Facebook, to be quite honest with you because I think I think you're finding Facebook is continuing to take a lot of market share in this space of selling your stuff. So I think that's the risk is if that trend

Starting point is 00:42:28 continues to persist, maybe that could wreck havoc on eBay long term. But I still think it has a pretty strong brand power. I'm kind of curious, Hari, what you think? Yeah, I think there's a very interesting question. Because one of the things that has happened is eBay has just fallen off the radar. And I remember back in the 2000s, eBay was one of the darlings and one of the growth stocks.

Starting point is 00:42:57 And they were the Amazon of their time at that part of time. And if I wear my value investing cap, I think this is a compelling buy. At the same time, if I look at

Starting point is 00:43:13 eBay as a tech professional, what strikes me is that they are just having an enormous talent bleed. And the reason being, they have been going through a lot of challenges. And what I've seen in Silicon Valley or in the tech sector is either you're growing or you're sinking. You're not even shrinking. Basically, look at what happened to IBM. Unless you're growing, you'll not have the best talent join you.

Starting point is 00:43:44 And if you don't have a best talent, then you can't compete with the Facebooks of world or the Googles of the world. So that concerns me. I think Elliott Management is an activist investor. They took a stake. They came up with proposals. They made the CFO, the CEO. And obviously, when you do that, you're either preparing it to sell to someone and

Starting point is 00:44:06 looks like that might be one of the outcomes. And probably that's a good outcome for eBay. The management is now trimming eBay. I think they've sold off Stabha, many other subsidiaries. Looks like they're preparing to sell it to someone is how I see it. Maybe this is not the right time. But I think that would be my concern as to like, as you pointed out, that they're up against Facebook. If they're bleeding talent and their average ages ages in the 40s and their employees compared to Facebook, how will they compete with Facebook?

Starting point is 00:44:39 That's what would worry me. You know, when I think about the market that they're going after compared to Facebook, when I think about the market that they're going after compared to Facebook, when I think about, Facebook's resale, it's more for local exchange. So like if I'm in the market for a new used bicycle, I immediately think I'm going to go on the Facebook and search locally so that I can drive over to so-and-so's house. It's 10 miles from mine to pick up this bike that I just bought. When I think about eBay, I don't think that at all. I think I'm looking for a product like a baseball card or something that can be mailed from California to where I live many states away and I can receive that product.

Starting point is 00:45:21 I'm not looking for that on Facebook. I'm looking for that on eBay. The segmentation of the way they're selling, I think, is a little bit different than Facebook. But your comment there about them bleeding talent isn't something that I had heard. And I think that is concerning. And boy, I mean, you're seeing it with the companies that Toby had named earlier. I mean, these companies coming out of that crash, that we just experienced and the speed at which those specific companies rebounded off the bottom

Starting point is 00:45:53 was mind-blowing relative to every other company on the market. I mean, it was indescribable. We've never seen anything like that before. So, anyway, Stig. I was talking about Deseroma before where I always go once a quarter to check what superinvestors have bought. I mentioned like I follow five, seven guys, sort of like, depending on what I'm interested. like Warren Buffett, Tom Gainer, we talked about before.

Starting point is 00:46:19 Another person I really respect, that Seth Klarman. And what was interesting this time was that the stock that is now the biggest in his portfolio of 14.3%. That is eBay, and he added more than 60% to that position, which was very interesting now that we are talking about it. Now, eBay, as most tech stocks, has upperformed BSP 500 or the past five years, but has vastly underperformed tech stocks in general, which probably doesn't come as a surprise. whenever you're seeing what the fang stocks have been doing. I think the valuation is really

Starting point is 00:46:51 attracted and really like how much cash is spinning off, especially for this type of company. This type of company typically do not trade at those low multiples. And whenever I say these type of companies, I'm talking about tech companies spinning off a ton of cash flows. Obviously, one of the reasons for that is that they haven't shown this impressive top line growth, which we would like to see for these type of companies. And if you look a bit more at the fundamentals of the company, The buyback yield has just been very, very high for eBay. So one of the reasons why they performed well is that they're spending out a lot of cash, and they're putting a ton of cash into buying back their own.

Starting point is 00:47:26 I mean, we're talking double digits here. So I think that's also something that needs to be included in the discussion. Anything Preston do you want to add? So that's all the more that I have for eBay, and I think it's important for me to continue to disclose that I still have a very strong opinion that Bitcoin is going to perform well for the rest of the year. I'm just going to leave it at that. So I have eBay and my Bitcoin pick that I think is going to perform well. Preston, do eBay accept Bitcoins? I believe some of the companies have started accepting

Starting point is 00:47:58 bitcoins, correct? You know, I don't know that, Hari. I don't know if they do or not. Toby, did the Bitcoin comment scare you away? I did not. All right. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots,

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Starting point is 00:51:31 All right, back to the show. All right, guys, so I typically do very traditional value picks. I've been pitching AT&T here recently, Allstate, and, you know, I've just talked about how I had positions in Markell and Berksie Hallaway. So very stable companies, good track record, not a lot of exciting growth, perhaps, but a really, really strong downside protection. And because of that, I decided to challenge myself to a very, very, very difficult. different stock pick. A stock pick that's not making any money and a stock pick that does not

Starting point is 00:52:06 have a great track record. So I decided to pitch Spotify. So here we go. Spotify is a Swedish company. It was founded in 2006. For legal reasons, it's located in Luxembourg, but it's really a Swedish company. They have the headquarters in Stockholm. And I think that most listeners out there are familiar with Spotify, perhaps even listening to the podcast on Spotify, but it's a music video and podcast platform. And I have a few reasons why Spotify came on my radar. I've been a heavy user of Spotify for a long time and I just know how sticky the product is. And being in the podcasting space too, I can easily see why Spotify will be the platform in the future. And I think the growth potential for that is highly unappreciated. Whenever people talk about Spotify, the

Starting point is 00:52:59 typically refer to the music business, and that's also where they are generating the revenue. But I think that there's a lot of runway for podcasting. I think that Spotify is probably the best in the business in the podcasting space. Now, I've been following Spotify for years, and I always found it a bit too expensive. But again, it is also very difficult to value a company that's never made any money. So you always tend to feel that it is a little too expensive. Then down in March, it was training 120, and I thought, well, now is probably the time, and since then, it's really sore. Just a week ago, whenever I sent you guys to the pig, it was training 160, and today, Sunday, the 24th of May, it's training 190. So a lot of interesting stuff are happening with Spotify.

Starting point is 00:53:46 Let's talk a bit about the industry and business model. Spotify has a freemial model where you can use most of the features for free as long as you're online, but you'll also be. be served regular ads if you want the free version. And historically, that's how a lot of premium users have been starting using Spotify. 60% actually started that way before, including myself, before they bought a premium subscription. So let's talk about the two major segments. We have the first of all the music segment. So unlike physical and download sales, which pays artists a fixed price per song or album sold, Spotify pays role. is based on the number of artists' streams, and they typically distribute around 70 to 75%

Starting point is 00:54:33 of that revenue back to the artists. And then they have the podcast segment. They have been building the podcast business in many different ways. Partly, they've been buying podcast studios, Gimlets, probably the most famous, but they also bought Ringer, podcast, and they also bought Anchor here recently, which is how most podcast are getting started today that is through the anchor platform. And contrary to music, the margins here in podcasting are much bigger. Since they own the podcast content, they only have to pay for the content once.

Starting point is 00:55:09 And you can sort of like compare that to Netflix original. But it's actually much better than what Netflix are doing. Their productions are very expensive. Say the Crown, $156 million for two seasons. A really good podcast productions, that's typically in the hundreds of thousands of dollars instead, but you can still spread it out over all your listeners. And obviously, I know that the revenue can generate for something like the Chrome would be different for something like a podcast, at least yet, but it is something that's very interesting that they're

Starting point is 00:55:39 looking into because the markets are so much better. Other than that, they also have their own platform where you can upload your feed. They also have a bigger and bigger market share for people go and actually listen to podcasts. In less than two years, they went from zero to 20, And it really looks like, at least if you ask me, that they will dethrone Apple all the next decade as the biggest platform. And just a few days ago, they made it deal with Joe Rogan. There was no official stats on this, but there is probably the biggest podcast out there, or if not the biggest, then it's probably top three or top five.

Starting point is 00:56:14 190 million downloads last year per month of his show. And there's a lot of interactions with music to podcasting. they have in the vision that want to be the biggest audio platform. Just here last quarter, as you're reading through the earnings transcript, the interaction from users to also be listening to podcast went up from 16 to 19%. So a very interesting trend there. So I think that there's no question that Spotify is a very good business based on their historical financials.

Starting point is 00:56:45 They're growing very rapidly. I've looked at free cash flow over the last three or four years, 2016 year. they did $74 million in free cash flow, $2017, $143 million in cash flow. So that's almost 100% growth, 219 the following year. So very, very significant growth, like 50% growth, and then 438 last year. So basically double almost 100% almost exactly 100% from the year before. That's an extraordinary rate of growth in free cash flow. So there's no question this is a very good business.

Starting point is 00:57:22 and one that you would like to own at the right price. I guess the two questions are the valuation seems, so on the basis of that $438 million in free cash flow, your market cap and your enterprise value about the same number, $35 billion, seems sort of stretched because so you're paying roughly 127 times free cash flow. That's a very big number, particularly because it's in,

Starting point is 00:57:48 I think Spotify probably may win, but there's a lot of competition out there. there from Pandora, from YouTube, Red, from big, well-capitalized competitors, Amazon, Apple. I just wonder if at some stage this is a business that gets much more competitive and gets much more aggressive in their competition and then the valuation becomes much more of a concern at that point. I think it's a very valid concern and it is obviously very, very difficult to value a company. Also, a company that's been doubling every year in terms of free cash flow.

Starting point is 00:58:19 like, how do you do that in a plausible way? And you're right, there's a lot of competition. If you look at the music business first, the bigger players, the big four, that's Google, Amazon, and Apple, together with Spotify. So that's the four major players. And that's, I mean, they have a lot of capital. And it's very, very difficult to compete with them. What we can see so far is that Spotify has been doing a better job, not just because

Starting point is 00:58:42 they are the biggest now, but the user engagement is twice that of Apple Music and three ties to that of Amazon Music. And if you look at the churn rate, that's really where you can see a huge difference. The churn rate of Spotify, that's 5% for Apple Music, which is the second biggest, that's 10%. So there was just some of the metrics going into this. Following a podcasting, which I think is really going to be the big growth engine in many ways going forward, following this space really closely, it's just very easy to see why Apple Music has just been falling behind. Their platform has just been like standing still for the past 10 years, it seems. Whereas what Spotify is doing right now, it's just much better.

Starting point is 00:59:21 Spotify is making money off their own ads now. Why hasn't Apple been thinking about doing that whenever they had 90 plus percent of the market share? They still have more than half of the total market share. But it's like they're losing almost by the day. Like every time I see these statements about the podcast industry, they have losing market share. Two quick points. And so we had talked about earlier how some of these companies that have intangible balance

Starting point is 00:59:45 sheets had massive jumps after the most recent crash that we experienced, this quick flash crash that we had. For Spotify, it bounced 73% after that bottom hit. 73% bounce. That's insane. So what we're really talking about here is do we think Spotify is going to achieve the network effect that would cause them to have a dominant role in that? this space. And so far, it appears like that is going to be the case. So what we're really

Starting point is 01:00:16 talking about is whether we think that Spotify can achieve the network effect that was going to catapult it into a position that allows it to be the dominant player for this particular space of media. I'm curious, Hari, your opinions on whether that's possible. It's a very interesting pick, stick. One of the things Spotify has accomplished is the brand recognition and the network work effect for sure. And they're strengthening it continuously by signing up folks like Jim Rogan. And one thing that we need to keep in mind is they are using AI algorithm. It's almost like Netflix and Uber combined because the more content they have, the more listeners are creating playing lists, more artists or more broadcasters who are coming online helps them improve

Starting point is 01:01:05 their product better. So it's a very good flywheel that they have running so far. And it It would not be easy for anybody to dislodge it. If it were, I'm sure Google and Apple would have tried to do it by now. So it's not easy. What would be interesting is they say that they would have a 30 to 35% cross margin. Will they be able to accomplish it? Or can they have a runway where they can keep expanding their total addressable market and reinvesting their money, like how Amazon,

Starting point is 01:01:40 for a long time to grow or will there be a day of reckoning where investors will demand profitability at some point? I think that's where my questions would be. And the second thing, as Preston said, if it has run up by 73% already, are we jumping in the bandwagon when everybody is on board already? So that's something that will worry me at this point of time. It's just about the price, not about the company. A lot of things to unpack here and talking about how much can it grow.

Starting point is 01:02:09 And I think that's a really good point because whenever you're seeing a company that's growing as fast as Spotify, you know, just year of year here going through the last earning transcript, the total monthly active users grew 31% to 286 million. It's growing fast, but how big is the market? So what they would say, and obviously they would have probably because they'd even, but also because they have to say that, they would say that the addressable market is probably between 2 and 3 billion people. And the question is, who's going to? to win in that market. Spotify has talked about how they see themselves as if they can maintain a third of that market, which they're doing right now, right now they're doing 36%. Is that winning or not? And how much of that is really networking effect? That's the other thing too. Like, you mentioned some of the things before, Harry, but it doesn't have the machine learning effect. The service does get better, the more you use it. And being a heavy use of myself, I can definitely They testify to that. But they don't have the same networking effects like Facebook or LinkedIn.

Starting point is 01:03:10 I mean, they have the friend-to-friend messaging, the sharing, the integration with Facebook, by the way, the place creation and collaboration, all that. But to me, that's not really what makes it sticky. And that's where I would see more networking effects really coming in. It is sticky in the sense that those people who do quit the service, 70% of them are coming back within 45 days of leaving, which to me is just like absolutely mind-blowing numbers. So, and the other thing I also want to say whenever we talk about future growth, whenever I say, you know, yeah, monthly users, 286, perhaps the market is 10 times as big as that.

Starting point is 01:03:48 Clearly not all of that would go to Spotify. That's one thing, even though that, you know, if they kept their market here, they might be in that range. But you also need to think about, so which users do they not have yet? And how much money can they make from those users? So living in Denmark, I'm paying 50% more than you would do for the same service in the US, exactly the same service. In the US, you're paying twice as much as you're doing in Mexico.

Starting point is 01:04:13 So this is also my way of saying that whenever they have 286 monthly active users and they have 130 of them on premium subscription, that's also from money's perspective the most valuable customers. There's still some runway in North America. The market is much more saturated in Northern Europe. But a lot of those users that they're now going out to get, they're not paying 15 bucks a month. Like, they're paying a lot less for that service. And I think that's important whenever you look at some of those lofty projections that I mentioned

Starting point is 01:04:44 that before. Being in the space went to podcast movement back in February in LA, speaking to the people, it's very clear where, which way the technology is going in the podcasting space. And the big platform, at least the best, which I would say is Spotify, they're just making very interesting moves right now. So what's happening is that these platforms are beginning to make more and more sophisticated recommendations. So think about this. Think about you have something like Apple's platform who do not have their own production. And whenever they do, it won't be to the same scale as Spotify. Okay, so they will recommend podcasts that's owned by other people that they're not

Starting point is 01:05:21 monetizing. They're not making any money here. Compare that to Spotify. They're producing more and more show of extremely high-quality podcast shows with great budgets that spread our, all their listeners. And if you want to listen to those shows, you have to go to Spotify. Which show would they recommend? Say you've been listening to a podcast show about stock investing. Do you think that they want to recommend Toby's show or our show? Well, they're probably going to recommend their own show. And if that's the platform everyone is using, and they're making money from premium subscription,

Starting point is 01:05:52 and if you're not there, then they're making money from the ads. that, by the way, has amazing machine learning capabilities. The way they serve ads is that in the space right now, if you're interested in selling a mattress, you might try to find a podcast where it might be a good target group. That's not what Spotify is testing right now and what they've been improving on the past two years. What they're doing is that they're saying, okay, you want to sell a mattress, we have $10 million, target the right people.

Starting point is 01:06:18 They have all the information and they're tracking right now every time people skip through this ad so they won't be served the same again. So they can charge much higher rates than other podcasts who have a somewhat look-alike audience to buy mattress. All of that is internally driven through the machine learning on Spotify, which no other platform is doing to the same extent. What you're describing right there is what Google and Apple salivate to because it's all about data.

Starting point is 01:06:45 And then they can harvest that data into their bigger architecture of a network effect of knowing exactly who everybody is and what they want and predict what in the world they're going to want in the future. So I'm with you. I think that this is pretty exciting stuff when you look at the network effect that they're achieving, how they're capitalizing on that. And ultimately, it's all about the data and how they can harness that data for other things other than what it seems it is just on the surface. So, you know, I don't see the competitor stepping into this and being able to. It's almost like Netflix, but five years ago where Netflix was at. It's kind of how I view this today. So I think there's a lot more

Starting point is 01:07:24 to this. And I think if you're looking at it with traditional value investing metrics and just looking at the numbers based on how much money they're making or their top line and all that kind of stuff, I think you're kind of missing the boat on how these companies market cap continue to balloon into these epic levels. And it's because of all those intangible things that we're talking about with respect to the data that's super important to understand. We can do like a traditional free cash flow and then it really depends on your assumptions and how much it grow and you can put in 20% or 30% of whatever and you can call with very different results. But now that you just made the comparison to Netflix,

Starting point is 01:08:02 Netflix has 182 million subscribers. And they have similar growth rates, especially if you look five years back. Right now they have three times as much revenue as Spotify. Now, Spotify has 130 million subscribers. And it's a similar price point right now, plus they have their free users. The enterprise value of Spotify is just above 30 billion. for Netflix is $208 billion. So I'm not saying that necessarily makes a sound. That can also just mean that Netflix is trading at an outrageous level. But I think you're right, Preston, like whenever you talk about valuation in the market

Starting point is 01:08:37 or some of these, that's not how the market, at least for the time being, are evaluating those stocks. So that's my pitch, Spotify. I don't know if you have anything else to, you know, bash me, especially in terms of valuation or what you guys are seeing right now. I think this pick is such a great example of what we're experiencing in the market as a whole, right? We're learning, and Jeff Booth talked about this a lot whenever he was on our show about the power of a network effect and the power of capturing data and then being able to intelligently use that in order to do all these other things that add value, but aren't relatively, noticeable on the surface. You really have to understand the deep strategic business strategy

Starting point is 01:09:31 of what it is that they're doing with this data that they're capturing through these network effects to understand the real value of a tech company. And I think for your casual value investors, they miss a lot of that. I think for like your Bill Millers and these people that are really, really deep thinkers, they totally get it. And I would challenge the value investing and community to really kind of dig into this and ask yourself why five times to really kind of get to the heart at what Stig is seeing in this pick. And I completely agree with them. I think that there's a lot to this pick way more than what is there on the surface.

Starting point is 01:10:07 And in your investing approach, I think it's going to require some of this moving forward. I think that what's worked 15, 20 years ago of just looking at the numbers from a financial standpoint, it might require a whole lot more than that to outperform the S&P 5 or the top 100 companies moving forward. And just to add to that, not to beating my own drum too much about this peck, having a platform that people go to where they have a lot of data, the way that you can make money of that, that's just absolutely amazing. Let me give you one example.

Starting point is 01:10:39 Spotify is sending me a so-called friendly messages about, hey, these artists that you've been listening to, they're having a concert close to you. Now, I would be highly surprised if Spotify is just doing that to be nice. I would imagine someone had been paying Spotify to send out those emails. And that's just like one of a million different initiatives that they can do now that they know everything about you and how you listen to audio. So I think that's very important to understand that if you do compare it to the bigger platform, you might say, well, compared to Amazon, Google and Apple, they're small companies.

Starting point is 01:11:13 Yeah, but like none of those companies are concerned about podcasting and music right now, at least not to the same extent. That's sort of like something they do on the side. Say Apple, like the biggest competitor with Apple music that has been falling way behind. They're worried about disruption on the iPhone. Like, what's going to happen when we don't use iPhones anymore? That's the main issue. They don't care about streaming music.

Starting point is 01:11:35 They don't care about podcasting. Whenever you look at what Spotify is doing, it's all about we need to be the number one audio streaming platform in the world. And so I think I'll just round off my pick with that. Guys, thank you so much for taking the time to come on the show. Toby, Hari, could you please give a handoff for the audience where you can learn more about you guys? Thanks, Dig. You can always reach me at my blog, business.com, or my Twitter handle at Hari Rama. I have some free screeners up on Acquirersmultable.com and run a firm Acquireasfunds.com.

Starting point is 01:12:14 You can find my fund, the Acquireus Fund. that's an ETF ticker ZIG. It has all the holdings up on the site. You can see performance data is probably best going to Morningstar. But it's been a good time for value, so it's worth taking a look at it. Yeah, same here. Love chatting with you guys. So as we're letting Harry and Toby go, it's time to play a question from the audience

Starting point is 01:12:37 and this question comes from Robert. Hi, Preston and Stig. I'm Robert. Thanks so much for the wealth of knowledge you've shared with the community. it's truly incredible. My question is about habits. I've read, listened, and deeply digested intrinsic value frameworks.

Starting point is 01:12:53 However, I, and other fans of yours, would love to learn how you put that into practice. You're both excellent investors yourself and have interface with the best investors in the world. Do you have insight on what your day-to-day portfolio management looks like? Do you check your screener every day? Do you spend most of your time reading like Munger and Buffett? Do you have go-to sites that you start your day off?

Starting point is 01:13:15 with. I know you study billionaires, but I'd love to learn a little bit more about you. Thanks so much. Wow, Robert, thank you so much for your question. I'm kind of excited that someone wants to study us, so thank you for the kind words. But to answer your question, I don't have a daily habit for managing my portfolio, and that is actually by design. I think if you had a daily routine, I would sometimes trade way too much. So far this year, I only bought one new stock. I've I really do what I can only to invest in my very best ideas, so I try to protect against myself, if you're like. How I apply this is that I've created my own database with my entire portfolio, including

Starting point is 01:13:59 the stocks I have on my watch list. And whenever I get new information on any of those stocks, I go in and put a note in. It could be after earnings call or after mastermind discussion like today. So whenever I say that I only bought one stock this year, it doesn't mean that I only use my cash flow to add to that one precision that I just bought. For instance, I've been a long-time shareholder in both Brexit Hathaway and Markell that we just cover here in the episode. And the fundamental value does not change on the picks, but as you might have seen for those two picks, the price have changed quite a lot. So what I would do is that I would put in a limit order quite far away

Starting point is 01:14:37 from the prices it might be trading at and utilize some of that volatility to add to the position at good prices. Perhaps that could even be your 10 or 15% of what it's trading now. I would highly encourage you only to invest in your best ideas and the best ideas are very often your old ideas. For instance, Berksa Heather way, at least if I'm right in my assumptions, is trading around 30% discount, which is not typically the type of discount that I like to have, but it has a huge downside protection, which I find very attractive and I don't want to be too much in cash. So I added to that position. And there's really an added benefit for you here because you already done your analysis.

Starting point is 01:15:16 And of course you have to keep track on what's happening. And you have to go ahead and update your analysis. But it's not as time consuming as if you are investing in a new stock pick. So rather than a daily routine, I have a monthly or even better a quarter routine. I put down different ideas and then make a decision how to allocate my cash. and very often that decision after thorough analysis is not to do anything at all. So aside from extensive reading, I often come up with more specific actions after earning season and after I got the latest information from super investors like Warren Buffett, Seth

Starting point is 01:15:54 Claremann, Monash Pop Rai, some gainer, and a few others. But I honestly don't have a set process. And perhaps one of the best examples is Spotify, because Spotify that I just pitched here in this mastermind discussion. It didn't come from reading specific books that made me more interested in Spotify, or it surely didn't come from following super investors. I couldn't find anyone who were actually investing in Spotify at the moment. And another thing I didn't do was to sit down for two weeks and then say, hey, I want to spend, I don't know, 80 hours on analyzing this specific stock.

Starting point is 01:16:27 I just don't think that's the right way to do it. It's a much lengthier and not as intense process. So sorry for digressing there. Let's go back to Spotify. It's been on my radar for more than a year. And the quantitative factors are publicly available, and I've been following that throughout that time period. But that's only a part of the analysis.

Starting point is 01:16:48 You also have to do a qualitative analysis too. So I've been speaking to the team at conferences. I've been speaking to other people in industry to hear what they're doing. I've been learning more about budgeting for the best podcasting shows, how you're paying royalties for music, and just learning how the industry works. Then I've been researching the studios that Spotify bought, and I didn't research them as an investor, but more as a business person. For instance, I was jumping on a call with Anchor not too long ago, which is owned by Spotify, and it's the main platform for new podcasters.

Starting point is 01:17:24 And at that time, they were interested in working with VMSD's podcast network for different reasons. Now, it turned out that the deal really wasn't that interesting, but since I did talk to them anyway, I had a chance to learn more about the business. And it was very clear to me that not only did they have the best production studios, for instance, in Gimlet, you know, that's one of the top studios out there. But what Anchor did was that they provided a very sticky service to new podcasters. I think as many as 70% of new podcasters are using Anchor are depending on Anchor, and thereby they're also depending on Spotify as they grow. And that's just something that, to that extent, I would have a hard time reading about that

Starting point is 01:18:03 from annual reports. I need to research that as a business person. And what better way than you're already doing business with them one way or the other? Another way that I was learning about Spotify was actually indirectly through another business. For instance, whenever we talk to Bill Nikrin about Netflix here on the podcast, I recognize that in many ways Spotify is Netflix just five years ago. and I could use a lot of that in my analysis and in my evaluation.

Starting point is 01:18:33 So really going back to your original question, no, I don't have daily habits of this is what I need to do with this point in time of the day and these are the five different sites that I visit. But rather, I would say that I do want to can to absorb information and then let my subconscious mind work out the details for me, more than just sitting down, typing up entire case from A to C. And then I always aim at acting on a larger scale just a few times a year. So, Robert, I love the question. I think this is a very important question for people to, if there's one thing you got to focus on, it's your habit. So you got to really understand what

Starting point is 01:19:12 they are and what you're trying to work them towards because so much of what you do is pushed into your subconscious, whether you want to admit to that or not as you're going through your So developing those habits and developing those protocols that you're using in your own life in order to manage where you're trying to go is so important. So here's some of the things. Here's some of my thoughts on that question. First, having a very structured way of investing is important. Having flexibility built into that is also important.

Starting point is 01:19:45 So I would tell people you can go hardcore. You can say, this is my checklist. I'm going to do this every single day and make it very. like you're writing lines of code. And for some people's personality, that works great. For other people, they would drive them absolutely nuts. So I think it's important for a person to think about how they work and how their personality works and then having some kind of flexibility in between not being too rigid, but also putting some

Starting point is 01:20:12 systematic steps into your day. So here's some of the things that I do. first and foremost, I learned very early on that Warren Buffett, these people that I admired early on for how they were able to invest so well, they had a common thread. The common thread was that they read like crazy. So for me, every single day, I try to at least do 30 minutes to an hour of reading, listening to an audiobook or something that is making me smarter, at a minimum, 30 minutes to an hour.

Starting point is 01:20:43 for me personally, and I think this just has to do more with my personal interests and the objectives that I have financially, I focus on a particular set of nonfiction books. I primarily read nonfiction. The obvious one are all the business books. I read a lot of macro. I read a lot of tech. I thoroughly enjoy learning about biology and physics. So I sprinkle in quite a few of those books as well. I also enjoy reading health books. It kind of goes along with a lot of the biology interests that I have. Recently, I would say, in the last four years, I've had an intense interest in how cryptocurrencies work, in particular, Bitcoin. And it's a very complex topic to understand, very complex topic to understand, way more difficult than I think a lot of people might give it credit for. So I read a lot of books on that.

Starting point is 01:21:40 but I think that that habit alone is, oh my gosh, just vital to a person's success. If you don't do 30 minutes a day on some type of audible or some type of book, I'd tell you, if you can add that type of habit into your day, it's going to have a profound impact on you, especially if you look at it five or 10 years from now. If you've kept that habit up, you just, I can't even tell people how much it's going to, add value into your life. The other thing that I have done recently is I've really replaced the news. So, you know, 10 years ago, I would log on to the various news channels. I'm really persistent on checking out all of them because I've always felt like a lot of the news media had their own

Starting point is 01:22:28 type of spin. So if I go to CNN, I go to ABC, I go to Fox, I go to all of them and I would filter them. Recently, though, I don't do that anymore. I've pretty much replaced all news outlets And I probably started doing this probably a year and a half to two years ago where the only thing that I used to capture news is my Twitter feed. And the reason I started doing this is because there are a few people on Twitter that I really trust when it comes to the messaging and the things that they share. And so what I've effectively been able to do is I've been able to use those people that I follow on Twitter as a filtering mechanism for the truth, or at least my, understanding of what I think is the most truthful way to represent an issue or an idea. And so if a person that I followed on Twitter starts to appear to have a very polarized way of reporting something, well, then I just stop following them. And I'm actively seeking people that I think are very balanced in the way that they view the world.

Starting point is 01:23:33 And so then I follow those people. And I try to add more people to my feed, but I also try to prune it pretty aggressive. if it appears like somebody is not balanced in their thinking. So that's something that I've got tremendous value out of from Twitter is by following the right people and only following a few people. Like if you have, you know, if you got 2,000, 3,000 people you're following, I would, I would argue that you're allowing too much noise to get into your feed. But that's totally up to people.

Starting point is 01:24:07 But that's how I do it. with respect to actual stock investing. You know, for years, Stig and I would have to go onto sites like Morning Star or whatever in order to try to filter results and just read up on various investors. What are they buying and then go in and look at that pick in more detail. And so Stig and I, we basically built the tool that we always wanted to have ourselves. And so that's with our TIP finance tool. I'll go in and I'll look at that. I probably look at the filter tool, oh boy, every other day,

Starting point is 01:24:43 every third day to see what new companies are popping up on the top of the list because it's filtering them by valuation. It also shows me the momentum status right there as I'm looking at the filtering. So for me, I'm able to go in there and you don't see too many changes every three days to every week. There's some new companies that are popping in there at the top of the queue. And so then when I see those companies, I then dig deeper on the tool that I can look at what are their free cash flows. What do they look like? And then I can conduct my own discount cash flow model right there on our tool. So it's much easier for me nowadays than it was years ago when I'd have to go into an Excel spreadsheet, conduct those.

Starting point is 01:25:23 I can do it real fast by just kind of looking at the tool. So it helps me sort through it. And I would say I do that every three days. So I'm sure I could give you maybe more habits that you might have an interest in. But for the basics, I would tell you those are the things that I find very important for me to do in kind of the operational tempo of how I'm looking at my week as I'm going through that. So Robert, for asking such a great question. We're going to hook you up with a one-year subscription to the tool I was just telling you about. And I hope you enjoy it as much as I do.

Starting point is 01:25:52 I think you're going to get a tremendous amount of value out of it. And we really appreciate you asking the question. If anybody else out there has a question to get played on the show, go to asktheinvestors.com. and just record your question there. And if you get it played on the show, you'll get a free subscription to our TIP finance tool. All right, guys. Preston and I really hope you enjoyed this episode

Starting point is 01:26:11 of The Amherstas Podcast. We will see each other again next week. Thank you for listening to TIP. To access our show notes, courses or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decisions consult a professional.

Starting point is 01:26:29 This show is copyrighted by the Investors Podcast Network. Written permissions must be granted before syndication or re-broadcasting.

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