We Study Billionaires - The Investor’s Podcast Network - TIP302: Investing During COVID-19 & Intrinsic Value Assessment of Intuitive Surgical w/ Arif Karim (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey, how's everyone doing out there? I think you guys are going to really enjoy today's show. We have the talented Arif Kareem, who's the senior investment analyst from ensemble capital management with us. And in the first part of the show, Arif talks about how he has adjusted his portfolio based on the impacts of COVID-19. Then in the second half of the show, Arif provides an intrinsic value pitch for the fascinating

Starting point is 00:00:22 medical technology company, intuitive surgical. Finally, at the end of the show, we filled a question from the audience about how the market can possibly be attempting new highs, even though we're seeing all-time unemployment numbers and a devastated workforce. So without further delay, let's get started. 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. Welcome to The Investors podcast. I'm your host, Dick Bromero. And as always, I'm accompanied by my co-host, Preston Pesh.

Starting point is 00:01:09 Today's main topic is investing through COVID-19. And in the second part of the interview, Arif is also pitching a stock for us, intuitive surgical, which I think you will find very interesting. Arif, welcome to our show. Hey, thanks, Dagan. Thank you for having me. I appreciate having a chance to chat with you. I can't help but kick this episode off by talking about all the volatility that we

Starting point is 00:01:34 have experienced, especially since February, but it has been a almost unprecedented time just looking back. It seems like it's been decades, but it's only been a few months. I have to ask, how has it been for you and your team to manage a billion dollars? And then you see the size of that portfolio just plunge, and then only to see the market having the largest 50-day trading rally ever. And now we're close to an all-time high. Can you talk through some of the emotions, that you've gone through all the past few months? It definitely has been an unprecedented time to have pandemic, kind of the first in our careers to live through, has been really interesting and dramatic.

Starting point is 00:02:17 This pandemic obviously started in China, and one of the things that perked up my interest was when I saw after Lunar New Year, you know, the second largest economy in the world basically shut itself down. That was an amazing thing to see. and while very few were concerned about it here, that got me interested. Twitter is an amazing platform. So I started following frontline workers in China to the extent they could say anything. Their report's coming out of Taiwan and Hong Kong about people hearing things out of China.

Starting point is 00:02:48 Epidemiologists started tweeting about things going on there. And virologists were interested. So I was trying to find the people who would understand more about what's going on in China on the ground and try to get data from them. I just kind of follow what happens there, how the dramatic steps that society took, the government took, and then kind of follow that into Italy as well, right? Kind of saw how the spread there happened. So long story short, we were following what was going on, and the market here took about

Starting point is 00:03:16 a month after sort of China shut itself down to react. And so going into it, we were to some degree prepared. We had thought about how our portfolio was positioned, what kinds of implications we would have under certain scenarios. And so although we are long-only, we don't generally take macro bets, we can make tactical changes in the portfolio to make it as resilient as possible to whatever may come. And so, you know, while we generally position the portfolio that way for all seasons, of course, when you have spiging information about an impending storm, you try to mitigate

Starting point is 00:03:52 damage from the storm by best positioning your portfolio for that storm. Having said that, I mean, you know, in general, as we think about investing, we're humble to the fact that the world is complicated. Lots of surprises happen on a fairly regular basis, right? Each surprise might be new or a black swan or new in our lifetime, but the collection of surprises happens. And so we're always prepared emotionally for ourselves and we prepare clients as well. That there are surprises that are the upside, the good things, and there's surprises of the downside. and we have to kind of take them as they come, but all the while remembering that our portfolio has to be positioned in a way that survives and thrives post any sort of crisis.

Starting point is 00:04:35 And so the drawdown was large. It was fast. It was dramatic. Obviously, it's not easy to see. But at the same time, we entered it in a way where we're very confident about the positioning of companies that we own and the portfolio. So, Arif, talk to us a little bit more about this. You're not shorting the market.

Starting point is 00:04:51 The timing is very tricky. but how did you specifically change your portfolio after COVID-19 hit? For us, our perspective is that over the long arc of time, the market has returned something on the order of 9% a year. And that's, you know, with big up years and big down years, right? That's to be expected. So to the extent that you can have a long-term focus on the value being created by the companies that you own and their resiliency, that's really important, right?

Starting point is 00:05:19 So when Warren Buffett talks about never lose money, never lose money, never lose money. In other words, from a permanent loss of capital perspective, that's a perspective that we take, which is that we only want to own companies where we have strong sense for their resilience and competitive advantage so that going through episodes like this, we have a very strong conviction, their ability to survive and then thrive afterwards. Having said that, in front of any crisis, and we were to some degree fortunate that we read the T-Leaves right and saw this what looked like potentially a big tsunami heading our way. We did the things that any normal investor would do,

Starting point is 00:05:56 which is we thought about our companies, how their balance sheets were structured, what kind of financing they would be needing in the next three to five years. They have access to the markets. What would their revenues do? I mean, one of the companies that we own in our portfolio is booking.com, which we think is a great business and a very resilient business. But obviously, it was going to be in the heart of this pandemic, right?

Starting point is 00:06:19 the travel industry just gotten clobbered. And so one of the stress test scenarios that we ran with booking was how much of a revenue decline would they have to see for them to start losing money? And our conclusion was that it would have to be somewhere on the order of 70%. They would be able to survive. They're resilient enough. And they would survive. And then out of this, hotels would be even more dependent on booking to help them gain

Starting point is 00:06:42 customers again. So their competitive advantage to be strengthened. In addition, you have to look at other things such as what is the probability that company would be able to access the financial markets, right? Because a big part of this was going to be that there would be a big shock to the system potentially, right? And that's what ended up happening with shutdowns and, you know, global economies. And in that shock, you've got a liquidity crisis, right, at the heart of it, which is they have bills to pay and either they have a balance sheet or they would need to access capital in order to make it through the trough of that sort of

Starting point is 00:07:11 going into the pandemic and then at some point we'd be coming out of it, right? So we sort of thought about all those factors, the resilience of the income statement, resilience of cash flows, liquidity of the balance sheet, ability to raise money. I mean, one of the things that we came out of this analysis was that larger companies would be at a relative advantage over smaller companies in terms of access to capital and resilience. And so we pruned within our portfolio companies that we had the lower conviction and added to the companies that we thought we had a higher conviction in going into this. So that really helped us emotionally be resilient to it.

Starting point is 00:07:45 Arif as investors, we are always on the lookout for secular trends whenever we consider our current portfolio and also with stocks that we have on our watch list. And some of the secular trends that we've known for a long time, one example could be the shift to e-commerce and retail and could also be the shift towards renewables in the energy industry. Also, they are, to a large extent, priced into the market. Which secular trends have you seen coming out of COVID-19, if we can even say? that we're out of COVID-19, most investors are looking for secular trends to find undiscovered value. But you have a different approach.

Starting point is 00:08:23 Could you please elaborate on that? So I have a little bit of a different view that I think the way most people view how you make money via secular trends. So I'll give an example. I think the notion of undiscovered or underappreciated secular trends while it's very romantic, I don't think it's necessary. I don't think it's necessary. I don't think it's to bet on things that other people haven't seen. And I'll give you an example of that, e-commerce, right?

Starting point is 00:08:47 I mean, obviously, that's accelerated in the U.S. quite dramatically since the pandemic has hit, and we have the lockdowns here. That e-commerce trend has been around for, what, 20, 30 years now, right? 25, right? I remember the last recession, e-commerce was maybe in the low to mid-single-digit sort of penetration of retail here in the U.S. And Amazon, of course, was one of the leaders in that. Amazon's still one of the leaders and maybe even a stronger leader today.

Starting point is 00:09:12 Yet to say that you could have said 10 years ago that, oh, e-commerce is a known trend, it should be discounted, but yet Amazon has way outperformed market returns, right? Which goes to say that although there are trends that are in place that are appreciated by seemingly everybody, it doesn't necessarily mean that you can't keep making money on that trend in a way that outperforms the market, right? I don't think the market necessarily fully discounts things that are well known. And so there's ways to basically capitalize on those existing trends. Another example I'll give you is the trend of cash to digital payments, right? MasterCard and Visa have been around for what, 50 years, probably, right?

Starting point is 00:09:53 My colleague Sean was on your show a while ago, and he talked about MasterCard. And that's been a phenomenal stock, although the premise of the company has been around and in place for so long. So I don't think you necessarily need to bet on undiscovered trends or new trends. of course, you have to understand what the secular trends are because they will be wins at your back or headwins ahead of you. And you'd prefer a tail win rather than a headwin. But having said that, I think the most important part of investment analysis from our perspective is being a business analyst and understanding that those companies that are competitively

Starting point is 00:10:27 advantaged in the way that they're trying to capitalize on secular trends. Are they creating value for their customers? are they creating value for their stakeholders in a way that competitors potentially may not be able to, right, so that they can create outsized returns from a RIC perspective and eventually be able to also, I guess the other part of it is growth duration, right? So to the extent that the secular trend is within a very large market, so call it payments, right, from cash to digital, you can have decades and decades of outsized returns in that kind of a market, provided the companies that you're betting on have the ability to create a different

Starting point is 00:11:06 Sheated competitively advantaged business in that market. So, Reeve, prior to this pandemic, I think very few investors had this kind of situation built into their model. I know I personally did not have pandemic built into any models that I ever considered. Moving forward, how do you treat this in your model? Because we might have a second wave. We might have something else completely. Tell us some of your thoughts on this.

Starting point is 00:11:28 I think that's why people get paid and equity risk premium. But having said that, one thing that I personally, having worked 10 years, years going into the great financial crisis 10 years ago, one thing that coming out of it, we learned was that people have what's known as recency bias, right? Which is we focus on those things that we personally experience. And so the last 10 years, everyone's been worried about another financial crisis company. Yet the financial systems have been made more resilient. And central banks have become much more aggressive in the way that they'll act. It's interesting. we saw in this crisis, the Fed step in very, very aggressively, very long. Before anything

Starting point is 00:12:10 it happened, nothing had happened. And they were already, that's not entirely true because the credit markets were starting to freeze up and they saw that happening. But the pace at which they acted and the magnitude that they acted was unprecedented. And in a way, I think that's what's behind the massive recovery that we saw both in the credit markets and the equity mark. Bernanke had to develop these unprecedented tools that came out of his study of the Great Depression. But he also had to convince politicians that they would be okay with the Central Bank taking these very large, unprecedented steps. He sort of set up the framework to dealing with this sort of a crisis, right?

Starting point is 00:12:49 And it's some degree we're lucky having gone through what now with the great financial recession 10 years ago seems like a preview kind of of this much bigger type of crisis that we're going to, this bigger shock that we're seeing. all Jay Powell had to do was basically reboot that playbook that Bernanke had and then just turn up the volume to 11, right? He threw in not just the kitchen sink, but the whole kitchen and the bathroom at it. And that to some degree has, I think, supported financial markets at this time around. I think going forward, like, we definitely are worried about a second wave. You know, most epidemiologists expect this as a given.

Starting point is 00:13:24 We're no experts, but we're following the experts. It's hard to predict exactly how things will react. One thing that seems clear is that human nature being what it is, the initial wave was a shock to societies. And every society has reacted differently, right? China has reacted differently than the U.S. or Germany or New Zealand. You know, everyone's reacted differently at various levels of success in containing the pandemic. And so the second waves are likely to look very different in different societies, different countries. Having said that, you have to be prepared for the worst.

Starting point is 00:13:58 And until there's a, what's being said by the experts is until there is a effective, durable vaccine available and deployed, basically all around the world, we're going to be facing kind of a new normal or a next normal living with this virus. And that could very well be two, three, four years, we hope, and not longer than that, in which we're sort of dealing with this. But having said that, we are strong believers, and I think history proves this, that humans are resilient and adaptable, right? So what takes us as a shock and a surprise as tragedy that we're facing, we generally figure out ways to deal with them, we figure out ways to overcome them,

Starting point is 00:14:38 we figure out ways to outmaneuver the challenges that are presented to us. Ari, one of the reasons why we really wanted to speak with you here today is that you are a hot micro guy. But like the rest of the world, we're also micro guys like looking individual stocks. we have to factor in all the crazy macro environment that's also happening around us. So I think it's been interesting after speaking to different macro guys who look at very much as equities as an asset class, more than specifically stock pick, to have the complete opposite here, like someone who really focus on the individual companies, but typically don't look at stocks as just one broad asset class. I know I'm making it very simplistic, and I think

Starting point is 00:15:22 you and Preston and me, like we all on that space. one way or the other between macro and micro. But knowing where you're coming from, I'm very curious to hear your thoughts about the trillions of dollars in stimulus packages that we've seen and we have the Fed announcing repurchase of both investment grade and high yield corporate bonds here recently. How can our community as value investors best navigate the stock market? That's an interesting question. And it's obviously one that all investors have had to deal with in trying to understand, you know, that macro landscape or the past 10 years at the very least, right? Like you mentioned, we're much more micro-oriented than macro-oriented,

Starting point is 00:16:03 but so we spend 95 or more percent of our time looking at companies understanding competitive dynamics and such, but you have to understand the macro context in which you live in, and that feeds into some of your overall sort of assumptions about the way the world looks today and going forward. Having said that, you know, I think it's, I'll just give you a little anecdote. I just like, many, many people in the world, many investors in the world was really perplexed by, I think it was 10, 12 trillion dollars in negative yielding sovereign debt. I think this was back in 2015 or 16. And I have an economics background. And I remember one of the key tenants of economic theory, as I had learned it, and this was over 20 years ago, so things have probably changed since then.

Starting point is 00:16:47 I hope things have changed. But one of the key tenets was that capital is scarce. And that's a fundamental driver of how entities, people, actors, companies decide how to allocate capital. You have scarce capital, so you put it to work at the most productive uses of that capital. And in exchange, there's a cost to that capital, which you can call an interest rate or an equity premium or whatever you want to call it, right? One thing that's become clear is that we no longer live in a scarce capital world. Starting in maybe it was 13, 14, 15, sometime then, I began to shift the way I had. I, thought about the role of capital in the sense that when you have zero one percent negative one percent yielding capital what that tells you is that there's plenty of capital around what there's

Starting point is 00:17:34 not enough of is productive uses of that capital so what does that mean that means in order to make your capital productive you have to find talent who is able to take that capital and create productive uses out of it. It's interesting that we as investors sometimes are inculcated with these tenets about what's true about the world. And there's no rule about it. It's just that this is we just believe, right? And our forefathers believed it and they kind of passed it on to us, right? But one of the tenants is that, oh, if I have money that I've saved up, I should be able to put in the bank or buy a treasury bond or a bond and get a positive return on it without taking me a risk. There's a risk for your rate. Well, who says your capital should earn anything without taking me

Starting point is 00:18:17 risk. If you remove that tenant, then it becomes really clear how you should be navigating the world ahead, which is that the central banks have basically taken the risk free rate down to zero across the world, for most large sections of the world. And so I think what that ends up doing is creating opportunity for us, as well as challenges for us as investment practitioners to find either directly productive uses of capital ourselves, right, where you can earn a good risk reward on a capital, a yield that's a good risk reward, or find the talent to do that. And so we want to find talented management teams running companies where they can earn outsized returns, right? So from our perspective, that's return invested capital and have the ability

Starting point is 00:19:05 to reinvest cash flows coming out of their business in new opportunities that offer outside invest capital. And so I think the challenge in today's world and going forward where basically there's an abundance of capital. The cost of capital is free. As investors, we're not going to get a free lunch anymore of getting some yield without taking any risk, right? And so our job, and I think this plays to our strengths, is to find those companies that are competitively advantaged with management teams and cultures that revolve around creating value for customers, stakeholders, and the world. And that in the end will end up paying us as shareholders a portion of that value. and hopefully an outsized portion relatively the risk that we're taking.

Starting point is 00:19:46 So, Reef, let's go ahead and transition to the second part of the show. I'm really excited to go through this pick because I think the technology that this company has is really quite amazing. The name of the pick is Intuitive Surgical. Their ticker is ISRG. Talk to us a little bit about their business. It's a really interesting business. It's a little bit of a sci-fi business, actually, you think about it. But Intuitive Surgical makes robotic surgical systems.

Starting point is 00:20:13 that surgeons used to perform minimally invasive surgery. So some of your audience may have seen the robot's cameo on some popular TV drama shows like Grey's Anatomy. ER might be too old for it. But basically, what you'll see is this robotic scaffolding hovering over a patient with four arms, these four large arms. These are remotely controlled by a surgeon from a separate standalone console. And what it enables the surgeon to do is it brings both new capabilities, but it also improves patient care from the sense that it allows surgeons to fix things within a patient, treat patients without having to cut their abdomen open.

Starting point is 00:20:58 It allows you to perform certain procedures in a minimally invasive way, which minimizes how much of the body is open to the air, which reduces both blood loss as well as infection and complications. complications. So it's really innovative from the perspective of both improving the surgeon's ability to perform certain procedures. And their start came from prostatectomies for prostate cancer, which is removal of the prostate, hysterectomies, which is removal of the uterus for uterine cancer. But since then, they've gone on to many more procedures, which is why the stock has done so well. And their procedure count has grown dramatically from a couple hundred thousand procedures, call it back in 2012 or so to about 1.2 million procedures globally done today. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:25:46 Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. Are if you've been following Intuitive Surgical since 2012, except from TV shows, perhaps, how did the company come on your radar and why did you decide to start building your position? So I have all sorts of friends, but many of my friends are engineers, actually. And every so often, an engineering friend of mine, you know, a lot of my friends are also

Starting point is 00:26:21 interested in investing, right? So we'll talk shop, my engineer friends and I. And so, you know, I learned from them about technology stuff and they learn for me about financial markets and investing kind of stuff. And so one of my engineering friends actually at Google mentioned the company to me and said, hey, have you seen this company? And this was back in 2012. Intoative Surgical, it's this really cool company that makes these surgical robots, right? And of course, you would expect an engineer Google to be very impressed by a surgical robot,

Starting point is 00:26:47 right? I'd heard of the name, but had never really looked at it or knew what they did. So I took a look and I was intrigued from my perspective as I looked at it. As I looked at the company, I think a, you know, we talk about mental models, right? Like this mental image came into mind, which is that of the bionic surgeon. This machine takes a human surgeon and makes them bionic. Just like most value investors probably at the time, I kind of looked at the financial metrics and was like, oh, this is, this looks really expensive, actually.

Starting point is 00:27:14 And 80% of their procedures were this prostatectomy in the urology, so prostatectomies and gynecology, mainly hysterectomies that they were being done. So it seemed limited at the time. But I followed it because I was interested. And one thing that I have learned over my career is that oftentimes if you look at the curve of technological adoption, there's a learning curve involved and an application curve involved. And so I followed it because I was interested. But what I saw was that with their fourth generation machine, which is called the Da Vinci X-I, they basically were talking about doing a lot more than just prostatectomies and neurological and then gynecological procedures. So the thing that got me, though, the key metric that got me.

Starting point is 00:27:56 So two things. One was that as I studied it more, I realized that you paid a million to $2 million to turn a regular surgeon into a bionic surgeon, which is incredible, and the capabilities that could potentially bring was incredible. And this is both in the way they did their job to be a better surgeon, but also in creating new ways to treat or perform their surgeries on patients. So that humans cannot perform, right? You need to be inside the body and have sort of a,

Starting point is 00:28:21 reverse angled wrist in order to do some of these things. But secondly, which as a financial guy, this was really interesting to me as well as we're all familiar with the model of the razor blade model. So Gillette razors are a classic model for this, which is when I was in high school, like around 17, 18 years old, I got a free Gillette razor in the mail, you know, with one blade. You start using that. You go, oh, I really like this thing, right? Well, Gillette made no money. They actually lost money on that razor. They sent me, right? But then I went and bought these expensive razor blades. And that becomes an annuity that they make on. And so that model is one that the financial markets really like a lot, where you pay some small investment up front at low or

Starting point is 00:28:59 negative margin, and then you get this high margin sort of consumable that your customers will pay for a long period of time. Well, with intuitive, when I analyze their financial statements, it occurred to me, or my guesstimate, I came up as guesstimate that they were making something like 60, 65, 70% gross margins on the robot, on the razor. which to me was really interesting because you have hospitals paying one to two million dollars up front to become captive customers of intuitive and then paying them something like an 80 to 90% gross margin on the instruments that are the consumables on these robots. And so from a per procedure perspective, a robot which typically lasts something like five,

Starting point is 00:29:40 six, seven years, they're paying one to two million dollars for. And then they're buying these instruments that have to be replaced after every so many surgeries, and it roughly runs around 18 to 1900 bucks per procedure that intuitive receives for these instruments. And so that model was really interesting to me. The fact they collected such a high margin on their robots was really interesting to me, and there was no competition in soft tissue surgery. They were the only game in town.

Starting point is 00:30:05 And then finally, the thing that caused me to pull the trigger into taking a position was that competitive analysis, so there's a moat there from my perspective, but it was an early market, but it was a large market that they could go after. you know, low single digit percent of surgeries that the world does something like 300 million surgeries. Not all of them are applicable to something as complicated as a dementia robot, but some proportion of that is, and maybe it's 20 percent or 30 percent, but they were doing a very, very low percentage of that addressable market. And over time, I was confident that with a new machine, management talked about this kind of improvements on that, that there were new

Starting point is 00:30:39 procedures that they were going to try to ascertain for the machine to address, and that would layer on growth curves for them via those new procedures. And then you have that geographic expansion as well. At the time, something like 75% or so of their procedures were US. But the US, as we know, is only 4% of global population, a much bigger percentage of that, you know, healthcare consumption. But still, there's a large developed market out there that also could use this machine. I'll just add one last thing that really impressed me at the company, which is that when I talked to the company, I asked them how they decided what procedures to go about targeting for new instrument development, right? So you have this robot and it's got four arms,

Starting point is 00:31:19 one of which is a video camera, right, that allows a surgeon to see what's going on. It's like this 3D HD video camera. But the other three arms have instruments that you use to actually do the procedure. And that varies depending on what procedure type you're doing. So I asked the company, how do you know, they have to allocate the resources to creating the instruments necessary for certain specific procedures that they see as being these viable procedures for the robot. about the doctors will adopt. And I said, how do you target that? How do you decide?

Starting point is 00:31:46 And they were like, honestly, we have some ideas about what the machine can do. And our salespeople go and talk to doctors about that. And we maybe will introduce an instrument, you know, it's the market to enable a certain type of surgery. But more often than not, we get doctors coming back to us and telling us, hey, look, I took your machine and I tried this procedure. I think it's going to be great for this. And then we kind of test the market, talk to other doctors in similar fields and ask them

Starting point is 00:32:09 what they think. And they get this percolation of a demand that comes up. in organically from their user base. Their doctors that are saying, look, I use it for this thing. But this other thing is also applicable. And I'm really excited to use this machine for this other procedure. Will you develop the right instruments so I can do that? And that really impressed me that, you know, there was this inherent latent demand among surgeons

Starting point is 00:32:30 for certain new procedures for the company to develop because they're excited to use this machine on patients for that. So this is a fascinating market. They're doing around a million surgeries a year. and there's a potential for 300 million surgeries globally if intuitive surgical could capture that international market. So talk to us about the company's competitive advantage and what it takes to create intellectual property in this space.

Starting point is 00:32:55 You know, it's really interesting. As a patient and a doctor, you're not going to let the first new device that comes along into a patient's body or your own body. There's safety factors that are involved. So I'd mentioned that when I first looked at it, there was. wasn't much in the way of competition, but there's competition on the horizon. To your point, this is a large market and some of the larger medical device makers like Johnson & Johnson and Medtronic have taken notice. So I'll go a little bit into the history and kind of tie that

Starting point is 00:33:25 into your question about competition. So intuitive surgical, it started out of this group at Stanford Research Institute, SRI, that was working with the military in developing a remote telepresence surgical device that could be used on the battlefield, right, to help wound soldiers. That didn't go very far, although there was some, you know, money invested in that. And my guess is that it's probably because the communication bandwidth wasn't quite there yet, right? We weren't there technically. And so that project basically spun out into what became intuitive surgical. And initially, it was about leveraging this technology they had built in a way that would address surgery. And they obviously found that several versions of the device,

Starting point is 00:34:08 device that, and finally, I think it was in 2000, I want to say, or 2002, that they hit on sort of a product market fit in the form of prostate removal and then uterus removal. And it was kind of a niche market. And so medical device makers who had very high profit margin, laparoscopic rudimentary manual tools, weren't going to invest a whole lot of money in this fancy robotic machine for some niche markets. What happened was over time, intuitive got better and better, developed new capabilities, know-how, earned trust amongst surgeons that were performing these surgeries, worked their way to basically racking up a safety record over hundreds of thousands of procedures, right, and had trained thousands of surgeons on using a machine.

Starting point is 00:34:54 In 2014, I think it was, they came out with the Da Vinci X-I machine. And word of that machine leaked out before it was introduced or around the time was introduced. And that's when Johnson, Johnson, and Medtronics, who make laprocy. telescopic tools for general surgery, started to get worried. And so they then realized a potential threat, this robotic surgery created for their own very profitable businesses. And that's when they decided to invest money and develop their own machines. So long story short, I don't know if you've heard that story.

Starting point is 00:35:25 This is really intriguing to me, but that story when Jeff Bezos, I think I want to say it was in the last year, he was at the Economic Club of New York talking. And he mentioned that they hadn't talked about AWS, Amazon Web Services. which is our cloud computing initiative for many, many, many years, right? I think it was started maybe in 2005-06 in that time frame. And P said for something like seven years, they didn't have a single competitor. So they didn't talk about it because they saw how lucrative it was, how fast it was growing. They didn't want competitors to know.

Starting point is 00:35:54 And over that seven-year period, they had all this time to keep developing more and more capabilities for AWS. Well, similarly with Intuitive Surgical, for basically two decades, they had no competition. No one was working on this. They have two decade head start on know-how and capabilities, reputation, relationships, and the record of successfully performed surgeries using their robots and 50,000 trained doctors with experience using their robot, which creates a really strong moat around the company and robotic minimally invasive surgery. What you've seen as a result is that Metronic and Jane J have both had initiatives.

Starting point is 00:36:33 I want to say prior to the excise introduction, but started sometime during the development of the XI when they heard about it because it targeted general surgery, not just these niche procedures, not two procedures. It was all surgery, basically. And so they saw they threat. They've been developing it since their own robots since then. J&J had a initiative. So they had their own robot. Then they created JV with Google, actually, Google's healthcare division called Verve. And so that was going to incorporate a bunch of machine learning and AI and data analytics into it. Well, a few months ago, J&J basically bought out that JV and they're delayed by, I want to say, one to two years on introducing that machine. So from my perspective,

Starting point is 00:37:09 that doesn't look like it went all that well, that JV with Google, and no word on when to expect that device. So I think intuitive surgical with the XI that's been out since 2014, they've been selling it, the majority of the machines out there in the field today, that's their fourth generation device. And it's going to be competing with a first generation device from Metronic and J&J. And in fact, I would speculate that by the time Metronic and JJ are out with their first generation device, Intuitive, will already have their fifth generation device out in the market at that point. So today they have something like 5,600, 5,800 robots out there in the field globally.

Starting point is 00:37:45 They've been growing their base by about 10, 12 percent a year. It's a very mission-driven company. And because they're focused on this one area, I think they're likely to continue exceeding their competitors' efforts in the area. So they've got a moat already, and I think that moat gets wider, especially in light of COVID, you know, the things that are going now. Let's talk about that. How do you expect COVID-19, if ever, will impact Intuitive Surgical's business, both short-term and long-term? So short-term, it's a negative.

Starting point is 00:38:15 They reported their first quarter back in April, and at the time China was recovering from its COVID-19 actions, having shut down the economy. but then also hospitals had reduced the amount of surgeries that they were performed because they wanted beds available for COVID patients. And this was throughout country. So, I mean, although the epidemic was contained within China for the most part in the Hubei province, which is about, I think, 60 million people or so. They were worried about widespread COVID infections and what that would mean for the healthcare system.

Starting point is 00:38:45 So any surgery, there's this term that's used in surgery called this term de-elective surgery. And so any elective surgery was postponed. And by elective, it's not plastic surgery where I want to look good. It's more like it's a surgery that's needed to be done, but it doesn't have to be done today. It can wait a couple of weeks, a couple of months, that sort of time frame. Half of all of intuitive surgical procedures are cancer treatment surgeries, right? So they need to be done, but the timing can shift. So in China, they saw a 90% reduction in their surgeries in February.

Starting point is 00:39:18 But by the time they had their conference call in April, that reduction was down to, I think it was, they were at 80% of their pre-COVID level. So it was a 20% reduction from a 90% reduction, right? And recovering. However, the rest of the world obviously got hit in mid to late February and then kind of ongoing to March and April. So they didn't really give guidance for the quarter because nobody knows. But at the time, they talked about their surgical procedures being down 65% in the US, down 60% globally at the time of their conference call, basically. I expect, you know, Q2 to be a terrible quarter from a procedures perspective and a revenue perspective, right? And Q3 may see some partial recovery, but it's not, it's going to be a

Starting point is 00:39:58 terrible quarter as well, most likely. What happens, though, is these procedures that have been basically delayed in anticipation of COVID cases, they're going to come back because most of them are things like cancer treatments or hernia treatments or other procedures that have to get done. They can be delayed, but they have to get done. And so there's this big backlog that's been forming. And that's going to have to come back. And to the extent that the gating factor really will be the care teams, the doctors and the nurses and surgical teams that are available to perform these surgeries, not only the backlog, but then the ongoing organic growth of the needed procedures, right? And so I think for in the post-COVID era, we don't know what COVID's going to look like

Starting point is 00:40:40 in terms of what normal looks like. But most procedural recover most likely. And then you're going to have this big sort of backlog to cover over the next call it three to five years, the demand for intuitive will have to be made up. Hopefully, we haven't lost too many people along the way, waiting to get treatment, but never getting to that point where they need treatment. But obviously, that'd be a sad outcome that adds to the devastating effects of this pandemic. Larger companies typically have all sorts of capital allocation priorities. So it includes dividends, it includes buybacks, it includes their earnings per share, they're going to print for the quarter, that sort of stuff just doesn't play a role for Intuitive Surgical.

Starting point is 00:41:18 It's a very singularly focused company on the core value they create for their customers. And so I think that ends in a time like this where you may see Medtronic and J&J pull back their investments across divisions. We've seen nothing like that at Intuitive Surgical where they're continuing to focus on extending their capability. So coming out of this period, I expect Intuitives, competitive advantage, difference relative to competitors to be even wider than it already is. Starting the different generations of Da Vinci Robot, I mean, you can't help but be impressed by the capabilities. And I would encourage everyone to go to YouTube and check out some of those videos because it is really sci-fi as you referred to it. It looks like something that almost shouldn't happen in 2020. And all audience, they're deeply rooted in the investment

Starting point is 00:42:07 philosophy of Warren Buffett. And Buffett always makes it very clear that you don't want to invest in a company that has to reinvent itself. And Buffett is often using the example of Seas Candy, because chocolate doesn't have to be reinvented and technologies are not going to change how we consume chocolate. How do you think about intuitive surgicals need to reinvent itself and the sustainability of the business? That's a really good question. I think there's a couple of points in there to kind of unpack.

Starting point is 00:42:38 Buffett is great at packaging these pithy little sayings that have so much wisdom. embedded in them. And in many ways, when you simplify things, I think it was Einstein maybe who said that simplify things as much as possible without oversimplifying it. Something to that effect, he said it much more eloquently than I did. I think that's a very simple message and it's an important one, but it is a little overly simplistic. And I'll explain why. So in the chocolate business, right, seize candy, you're right, the consumption of chocolate hasn't changed a whole lot. There's a lot of wisdom in thinking about sustainability. I mean, we do this all the time. sustainability of a business and its head of advantages. And there's a lot of wisdom in trying to

Starting point is 00:43:18 understand how much cash flows are thrown out by a business. And of course, the more capital intensive it is, the less cash flow comes out for the shareholders. And that very much is a core part of how we value businesses, actually, is what the capital intensity of the business is. So we're interested in the free cash flows. And of course, capital intensity plays a big part of it. What I'll say is that when you have any business, where it has to reinvent itself, it probably is not a great business. But the businesses that we find very attractive within the technology realm are those where the core part of the business is not being reinvented.

Starting point is 00:43:56 Core value proposition is not being reinvented. What's happening is you're extending that core value proposition. You're extending the scope of it. You're expanding the growth runway for it. You're increasing the value you're creating for customers. So you can take a portion of that back, right, in the form of the, value that you keep for employees and shareholders in a way that's fair. So I'll give you a couple examples with intuitive surgical. What they're doing today is no different than what they did in

Starting point is 00:44:22 2000. The core value proposition is no different. What they've done via their investments is they have extended the number of procedures they can do. So the scope to which they can address. They've extended the capabilities of the surgeon creating value for the care team. They've extended what the surgeon can do. All that is value created. Right. And intuitive, who gets to keep a piece of that, which is what we see reflected in their revenues and their profit margins. Similarly, if you look at Google, for example, their core business still search, which is what they started, what, back in 2000 or whatever, like the late 90s, 2000. When I started using Google for search, that's predominantly what I use it for today.

Starting point is 00:44:59 That hasn't changed. But the investments they've made haven't reinvented search so much as extended its capabilities and the scope from the perspective, oh, now they have YouTube, so now search applies to video. They bought double-click and incorporated display. ads into their business, which leverages their AdWords platform, right, towards another part of their business. And then, you know, AI machine learning improves upon all those businesses they have. So the investments they've made have extended the capabilities of that core value proposition and the core technology.

Starting point is 00:45:31 And then the final example I'll give is, which I think is very interesting because I think this is a controversial name, but at the same time, I think it's very instructive in addressing this question about having to reinvest in your business. And that's Netflix, right? So we own Netflix and we've owned it for, I think since 2016 or so. And one of the things that, one of the first things I did when I came to Ensemble in 2015 was to look at the media industry and trying to understand whether it was an investable space for us. And the key question there was, how does the internet change the way media is delivered, consumed and the value created out of it? And it was on the verge of being uninvestable because

Starting point is 00:46:07 we didn't know, or not many people knew, how the internet would affect the media industry, right? in the process of trying to understand it, what became really clear to me was that Netflix had the right strategy, which is media, delivering media went from being something tied to a pipes, in other words, a cable company or a telephone company, wiring from their central office to your home and then delivering media to you to this virtual network that the internet brought to customers, right? So in other words, whereas most media companies were dependent on this wire. bringing their service to your home via distribution company. So, in other words, they ended up being regionally scaled.

Starting point is 00:46:48 What the internet did was a disintermediated connectivity of the customer from the actual wire that connected you. And some cases became wireless, right, with 4G internet. And so what that made me realize was that Netflix was going to supersede the existing media companies unless they changed their strategies from being a regional scale model to a global scale model. All of that meant that they had to invest. heavily in content in order to apply their service, leverage a service around the world to

Starting point is 00:47:19 billions of customers, all in different viewing habits, different languages, et cetera. What that entails in order to capture that market is investing capital to get to scale so that you're applicable to the global market. And once you're there, it becomes really hard to compete with you for the traditional media companies, right? Because that scale has scale dynamics. So, for example, whatever the top movie or show is today, whatever it costs more than any other media company.

Starting point is 00:47:45 Because at the end of the media companies produce this, but they are also acquiring talent, right, to produce a show. More than any other media company, Netflix can pay more than anybody else. And yet on a per subscriber basis, it costs it the least to deliver to that subscriber. And so that's the kind of scale economics that Netflix has studied because it invested in its scale,

Starting point is 00:48:02 its content catalog, attracted a subscriber base that's now growing 20% plus per year at a huge scale. I mean, they're closing out 200 million subscribers globally, right? And so tying the, that concept, back to the Warren Buffett concept that you mentioned, which is you don't want to be invested in companies that to reinvent themselves. You don't want to be in companies that use large amounts of capital. I would say that there's a nuance to that, which is that seize candy, maybe just $200 million a year in revenue state, maybe a billion, right?

Starting point is 00:48:31 But they fail to capture the premium chocolate market. Like Buffett often says that if you're going to bring your sweetheart a box of chocolates, you're not going to care about the price. Well, he's right. But guess what? My sweetheart, my wife is not. going to be like, oh, honey, you brought me a Seas candy box for my birthday. It's awesome. She'll be like, it should have been Godiva. Something else, right? Something higher end, right? Some European chocolate. And the fact that C's was unable to capture that premium market to go up there because it didn't invest enough. I think that's flaw. The chocolate market has become a much bigger market than it used to be. Hershey's bars at a dollar a bar are no longer

Starting point is 00:49:03 sufficient, right? You have all these $6, $3 candy bars that Cs could have been on top of, but they didn't. They didn't reinvest and reinvent themselves from a, branding and marketing and quality perspective to address that much larger, much more profitable market. And so the companies that we invest in, we want management teams to be actively thinking about how do they take, first of all, we want them to be thinking about their competitive modes, right? Thinking about return investment capital. How do they maximize that in a way that's also fair to their stakeholder, the employees and customers? And then thirdly, we want them to be able to reinvest excess cash flows in broader, preferably global scale opportunities. And so our best

Starting point is 00:49:42 Favorite ideas are, you know, MasterCard, booking, Netflix, Google. I mean, all these are global-scale companies, right? They address the global market, which gives them a huge and long runway for growth, which is an inherent part of valuation and value creation in total. 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.

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Starting point is 00:53:09 charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. So, Areef, the company, the revenues are growing like crazy. The CAPX is reasonable.

Starting point is 00:53:27 They don't dilute their shares outstanding. It's generating a lot of cash flows with minimal. the addressable market is massive. As you know, it all comes down to the price. So right now, the price is at $560 a share. So talk to us about how you're valuing this. One is that we don't slap a P.E. or price to sales multiple to come up with our targets.

Starting point is 00:53:48 We do bottoms of evaluation analysis based on what we believe to be good, free cash flow scenario. And that balances kind of the tail ends of the risk, right? It could be upside to how the company performs. They could be downside or the long term. But from our perspective, it's sort of like in this probabilistic range, about 700 is the right place. There's not many companies that are able to durably sustain something along the lines of 80% return of rest of the capital. And that's hard to do in a competitive market. But what we've seen with

Starting point is 00:54:17 intuitive surgical is that because of their focus and their two-decade lead in this market, it's going to be hard for competitors, even large ones, to be able to take market share from them. Now, having said that, there will be incremental market share that will go to competitors, but the markets we think is going to be growing fast enough for the next couple of decades that there will be space for competitors and intuitive to have great growth. I'll just say one last thing, which is that if you look at about the million or so, I think they did about 1.2 million procedures in 2019 relative to the entire surgical space and where the opportunity is for robotic surgery, it's very clear to us that the penetration

Starting point is 00:54:55 of the available market is something in the range of mid-single digits for intuitive surgical. So there's a long ways to go for this market. And finally, I'll just add that our intrinsic value is based on the long term, right? We all know that we're living in an unprecedented time, one that we haven't seen in a century. And so it's very likely to be volatility along the way, short term, in the medium term. Intrinsic surgical basically withdrew their guidance after reporting Q1. We talked about the Q1 trends and they didn't look very good for the near term, right, because of the healthcare systems in many different countries being overwhelmed by COVID.

Starting point is 00:55:33 And so from our perspective, it's going to be probably another year or so. We have this lack of visibility because the world is dealing with COVID until some sort of a vaccine is here and deployed across billions of people. Could be longer, right. But if you have a long-term time horizon and if you're able to take the advantage of the volatility that we're likely to see in the sort of call it, one, two, three, four quarters, you can be set up for great prospective returns on a company as high quality as this. Fantastic. Ari, thank you so much for coming on our show and talk about investing through COVID-19 and

Starting point is 00:56:13 bringing so many different case studies, not just from intuitive surgical, but so many other case studies in terms of how you think about stock investing. Where can the audience learn more about you and Ensemble Capital? We've got our website, Ensemblecapital.com. There's a bio of me there, but also ways to reach me and my colleagues in research and wealth advisory there as well. We're also very active on social media. So we post blogs where we're talking about, you know, ideas, both high level ideas as well as company specific ideas. It's a way for us to communicate with clients and also just peers and interested folks that are interested in talking to us. So that blog site is interesting investing.com. And then finally, we're on Twitter. Our handle is intrinsic. InV. So intrinsic. invest, but just intrinsic I-NV, is our Twitter handle, and we're very active on there. So all various ways to reach us and learn more about what we're doing. And please, we welcome feedback and sharing of ideas and everyone that we interact with that we continue to learn and grow.

Starting point is 00:57:09 And I stick, I also want to say thank you for having me on your podcast. I'm a big fan of your podcast. You guys do some great interviews, great guests, and I'm really honored to be invited to chat with you and Preston about what you guys are doing here. Thank you so much for your kind words. I hope we can invite you back on the show another time, Arif. I would love that. All right, guys.

Starting point is 00:57:28 So for this segment of the show, we'll play a question from the audience. And this question comes from Tiroir. Hi, Preston and Stig. This is Tiodore from Philadelphia, Pennsylvania. As you've already discussed, the market has rebounded for the past month and half to two months from its low of late March, early April. I guess the question I have is the market is, the market is, left me a bit confused. I don't know how to make sense of the unemployment that increases

Starting point is 00:58:01 every week in the stock market that goes up. I've heard you mention that the stock market doesn't necessarily reflect the sentiments of the actual economy. And in my opinion, that's never been sure than today, period. But I'm very curious if you can really spend a bit of time kind of giving me or given us your opinion as to what do you think is going on with this market that in my opinion is schizophrenic. You are surely not alone to your door. I think we're all looking at the stock market and the economy and wonder what's going on right now. Now the first thing to understand is that the stock market is not the economy.

Starting point is 00:58:47 It rhymes, but it's not the same thing. So let's first talk about what the economy is. The economy is the sum of all goods and services that Americans in aggregate produce. Before COVID-19, the economy was around $22 trillion annually in the U.S. And so everything else equal, when you have high unemployment, it won't be good for the economy. For the simple reason that unemployed people don't produce as many goods and services as employed people does. So everything else equal, you absolutely right. when you don't understand why the stock market should be going up when the economy is going down.

Starting point is 00:59:26 But let's talk about what the stock market is. The stock market is the value investors put on the earnings of listed U.S. businesses. That's also why the Schillard PE that we talked about a bunch of times here on the show is such a problem metric because it measures what price all investors put on the inflation adjusted earnings over the past 10 years. and implicitly in this number is also the opportunity cost of other assets and the growth potential of US equities. If the SHLPE is high, it means that other asset classes are less attractive. It could also mean that the growth potential for US equities is really high, or it could

Starting point is 01:00:06 downright mean that the stock market is overvalued, and typically it is a combination of the three. But going back to the original question, it's really important to understand that the US stock market is not the same as the U.S. economy. Let me give you an example. So Apple has more workers abroad than in the U.S. Apple also has more revenue international than in the U.S. However, Apple is still considered U.S. stock. But in theory, even if the U.S. went into a slump with declining revenue and declining margins for Apple as a result of that, the market would still rationally value the apple stock higher if the international business more than offset that.

Starting point is 01:00:46 And that would in turn result in the U.S. stock market being priced higher. So, while I just used Ample as a generic example, I hope that it really showed why the economy and the stock market is not the same thing. And there are many other reasons why the stock market has just recently raised the 2020 loss. One reason is that the economy is generally backward-looking, whereas the stock market is forward-looking. So when you hear the latest unemployment numbers and the market, and the reason, you hear the economy

Starting point is 01:01:15 numbers and GDP numbers, it's something that has already happened. The stock market is trying to price in what's going to happen and what's going to happen to the discounted cash flows of the remaining of the lifetimes of US equities. Now, the stock market does get indication of what's happening at the present, but in nature it's forward-looking. And then you also have the Fed manipulating the market big time. So whenever you have an enormous buyer bonds in the market that has pledged more than $2.6 trillion and just so far, who know what's going to happen in the future, it presses

Starting point is 01:01:51 down the yields of bonds, which makes stocks in comparison more attractive because the opportunity cost of holding bonds changes, and that forces the stock market to go up. Now, given credit when credit is due, Preston mentioned this already when the market was changing back in March, and this was when everyone was talking about the 1929 stock market dropping 85% from its all-time high. And Preston talked about how dependent the stock market is on the printing of the Fed. And given that, he wouldn't be surprised if the stock market hit all-time highs. So I think it was really interesting call that he made back in March.

Starting point is 01:02:30 But if I can even add to that based on my point earlier, it's the expectation to the future more than what has happened already. And they have even been very local about printing as much as required. We know from earlier crisis in 2008, but also other crises that the Fed can talk the market up and down just as effectively as actual printing money and buying securities. And that is what you see playing out right now. So, Theodore, I think my comment might sound more cynical. And the thing that I think a lot of people are misunderstanding about the markets today is they're assuming that they're free and open. And I think that's a bad assumption.

Starting point is 01:03:13 I think that what you have playing out right now is just an unprecedented amount of manipulation happening in the market. And so that's first of all why it doesn't feel normal or feel right that you're seeing the things that you're seeing. I don't know what the real unemployment number is, but let's just say the numbers between 15 and 20 percent. How can you have those kind of numbers and the stock market making runs at all-time highs? and the only way that I can personally come up with how that's possible is that there is intervention,

Starting point is 01:03:45 there is manipulation happening in the market. So let me just give me an example. The Fed balance sheet before all of this went down in the February March timeframe was hovering, let's just say, close to $4 trillion. Just a hair more than that, but for simplicity, we'll just say $4 trillion. Today, it is now at $7 trillion. They printed that much money. They almost effectively doubled the size of the Fed balance sheet in a matter of three months. So when you think of it like, you know, and I know shares are not a fixed supply, but they're much more of a fixed supply than some other things that are going on right now.

Starting point is 01:04:28 So I think you could, if you want to say it's similar to gold, I guess you can try to make that argument. It's obviously not as far as the supply base and how much. you can actually increase the supply of the shares outstanding if you were looking at the market as a whole. But let's just say that that's somewhat pegged or fixed. What I think you're finding is that a lot of people in the market are looking at equities more as a form of sound money than they are looking at the earnings or the actual performance of the underlying security.

Starting point is 01:05:01 And so when you're looking at something that has somewhat of a fixed peg to it, the equity, the number of shares outstanding. And you're comparing that to the money supply that's, that went from $4 trillion to $7 trillion in a matter of three months. People do not want to be sitting there on the sidelines holding Fiat cash when you literally had a tsunami flood of fiat that was added into the system. Now, what this is all, in my personal opinion, what this is all coming down to globally is the dollar. And, And you have so much dollar-denominated debt all around the world. And what's happening is, as they print, as the Fed steps in and they print more and more and more,

Starting point is 01:05:46 and they add this into the system, what's not happening is the money is not making itself down into the general population. Where that money is going is going straight into the market capitalization of securities, primarily in the bonds. And so that's why your bond yields just keep getting pushed lower and lower and lower all around the world. So all these these countries that have dollar denominated debt, they need that servicing. They need more liquidity added into the system in order to keep the solvency of all these securities in check. But the problem is, is as the Fed keeps adding more and more liquidity

Starting point is 01:06:22 into the system, it's going to servicing that and it's going into bidding the market capitalization of those opposed to actually trickling down into the economy where people actually need this money in order to, you know, and if you check out the velocity of money, that's why the chart has been going down for year after year. So how do you look at this as an investor, I think is where you're really getting at it. And as an investor, I think that if you're heavily relying on valuation metrics, which is stigmatized bread and butter, you might find yourself in a tricky situation because so much of what's happening in these big, violent moves are based off of dollar liquidity in the system and it drying up and then them replenishing it. And then it drying up and then them replenishing it.

Starting point is 01:07:13 And so if you're trying to do the, when you're doing valuations and you're doing these Buffett style valuations, you're making an underlying assumption. And that underlying assumption is that you're dealing with sound money and you're dealing with a real cost of capital and economic calculation that's occurring in the economy. My argument is today you're not seeing that because all these interest rates are pegged to nothing percent. And if they're pegged to nothing percent, you don't have a cost of capital and you can't do economic calculation for the valuation of things. So this is where I think becoming or at least having more of a momentum style of investing in your approach can help significantly because it really takes a lot of the valuation piece out of it. and it's just looking at the pure statistics of the price action.

Starting point is 01:08:01 And it's saying, hey, historically, this volatility is uncharacteristic, therefore it's going up. Or this move based on the price action is uncharacteristic to the downside. Therefore, I need to sell it. And so the calls that our TIP finance have been making for the S&P 500, for the NASDAQ have been exemplary because it's heavily relying on just the price action. and it's looking at the statistical volatility and basically giving you a thumbs up or a thumbs down,

Starting point is 01:08:34 whether it's within trend or out of trend. So I really think that moving forward, that's going to be a really powerful tool for people because so much of what's happening, how can you come up with a valuation when interest rates are zero percent because every central bank in the world is manipulating their economy in order to have enough liquidity to service

Starting point is 01:08:55 all this dollar-denominated debt, and all these issues that we're now seeing playing out real time. So I think that as we move forward, I think you're going to see more violent whiplash like we have seen since the start of 2020. If we saw another leg down as deep as what we saw before and maybe even deeper, that would not surprise me in the least bit. If we made all-time highs, that would not surprise me in the least bit. And I know that doesn't sound like that helps anybody,

Starting point is 01:09:26 but I guess what I'm really getting at is your expectation moving forward should be that we are going to experience extreme volatility. The reason why I think you're going to continue to see extreme volatility is because we're in a major, major currency crisis. And as you have so much credit in the system, it contracts and expands as they're adding more and the contraction is happening because of all the issues that you have on the balance sheets for all these companies. in the impairment that you're having on the balance sheets and also in the derivatives market as you get into the supply and demand adjustments that are happening based on the expectation of the demand for for for for oil now all the sudden COVID-19's going away or people are saying it's going away so then all those derivatives get repriced well guess what all those derivatives are denominated in they're denominated in dollars so there's this surge for dollars as all this supply and demand contraction uh and expansion has occurred. So all those things are making this an extremely difficult time to navigate. So I would tell you to focus a lot on a momentum strategy. And if you can back it up with valuation metrics, I think that that's probably going to be the best approach moving forward.

Starting point is 01:10:43 So Theodore, for asking such a fantastic question, I'm excited to be able to give you a one-year subscription to our TEP finance tool where it has the momentum tool in there that will assist you with some of these things. So I'm really excited for you to be able to dive into that and to use it firsthand. If anybody else out there wants to get a question played on the show, go to Ask theInvesters.com. Real easy. You just click a button, you record your question. And if it gets played on the show, you get a free subscription to our TIP finance tool. All right, guys, Preston, I really hope you enjoyed this episode of the Ammasters podcast.

Starting point is 01:11:16 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. This show is copyrighted by the Investors Podcast Network. Written permissions must be granted before syndication or re-broadcasting.

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