We Study Billionaires - The Investor’s Podcast Network - TIP352: Mastermind Q2 2021

Episode Date: June 6, 2021

In today’s episode, Stig Brodersen speaks to Tobias Carlisle and Hari Ramachandra for the Mastermind Discussion of Q2 2021. Together, they discuss where they see value in the financial markets. They try and shoot holes in each other’s stock picks and help each other as much as possible. IN THIS EPISODE, YOU'LL LEARN: Whether now is the time to invest in gold miners Why Hari is long Splunk Technologies whereas Toby is shorting the same pick What social commerce is and how it will be the new form of shopping Whether Pinduoduo that is trading at 40 times Free Cash Flow is very expensive or very cheap BOOKS AND RESOURCES Join the exclusive TIP Mastermind Community to engage in meaningful stock investing discussions with Stig, Clay, and the other community members. Mastermind Discussion Q1 2021 Stig and Trey’s discussion of the Berkshire Hathaway Annual Shareholders Meeting 2021 Our interview with Robert Cialdini  Tobias Carlisle’s interview with Adam Mead about Berkshire Hathaway  A video explaining How Pinduoduo works Acquired podcast episode about Pinduoduo Tobias Carlisle’s podcast, The Acquirers Podcast Tobias Carlisle’s ETF, ZIG Tobias Carlisle’s ETF, Deep Tobias Carlisle’s book, The Acquirer's Multiple – read reviews of this book Tobias Carlisle’s Acquirer’s Multiple stock screener: AcquirersMultiple.com Hari’s Blog: BitsBusiness.com Our FREE stock analysis resource, Intrinsic Value Index Subscribe to our FREE Intrinsic Value Assessments NEW TO THE SHOW? Check out our We Study Billionaires Starter Packs. Browse through all our episodes (complete with transcripts) here. Try our tool for picking stock winners and managing our portfolios: TIP Finance Tool. Enjoy exclusive perks from our favorite Apps and Services. Stay up-to-date on financial markets and investing strategies through our daily newsletter, We Study Markets. Learn how to better start, manage, and grow your business with the best business podcasts.  SPONSORS Support our free podcast by supporting our sponsors: Bluehost Fintool PrizePicks Vanta Onramp SimpleMining Fundrise TurboTax HELP US OUT! Help us reach new listeners by leaving us a rating and review on Apple Podcasts! It takes less than 30 seconds, and really helps our show grow, which allows us to bring on even better guests for you all! Thank you – we really appreciate it! Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

You're listening to TIP. Once a quarter, we sit down in the mastermind group and discuss where we see value in the financial markets. In this episode, Toby is pitching gold miners. Hurry is long-splonged technologies, a pick that Toby has been shorting. And my pick, that's Pindu-a-Doo, the fastest company ever to reach $100 billion in market cap. It's a company that takes the best from Google, Amazon and Costco. So without further delay, here's our mastermind group discussion, Q2, 2020. 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 Bruterson, and it is time for the Q2 Mastermind meeting. Preston will sit this one out, but as always, we have Toby in a hurry with us today. Gentlemen, as always, welcome to the show. Good to see you, Stig, good to see you, Harry. Good to see you, Toby, and Stake. Harry, before we jump on this call, we just talked back and forth about what was going on. And you mentioned that you wanted to talk about the Berkshire AGM.

Why don't you kick it off with that? Thanks, Jake. Since this is the season for Berkshire AGM and this is our first mastermind after the most recent one, I wanted to know your thoughts on what was your key takeaways. And for me, one, it was a more interesting one because Munger was there on the stage this time compared to the last one. Buffett looked a little bit upbeat, but some of the things that stood out for me from the AGM was one, Buffett's talk about inflation and he's seeing that in his business. And for the first time, I saw Buffett being a bit more candid and share

some of the details from his business. I'm not sure whether it was just a casual mention or he wanted to send out a message. But anyways, I am interested in knowing your thoughts on the inflation aspect that Buffett covered and also in general about the AGM. I couldn't agree more that that was going to be my takeaway as well. That was the first thing that sprang to mind when I thought of that meeting. The other thing was that, you know, on the softer side, the discussion about hosting it in Los Angeles so they could be close to Munger and then talking about the contribution and the relationship that they have had. I thought that was touching. That was really nice to see. But on the business side, the inflation stuff was the thing that stood out for me too.

I've seen a lot of the commentary. I've had the opportunity now that the meeting has gone past a few weeks or almost a month now, a few weeks. So I've been able to see some of the reactions to his comments. I interpreted what he was saying as it was probably a little bit of a warning too, but mostly he was just saying, I'm a man who controls a business that has very wide diversification across this country and other countries. And across the board, we're seeing rising prices. And I just felt like he was saying this is just something that I'm seeing, and I'm obliged to tell my shareholders and probably obliged to tell the wider world. But he's not necessarily making any, he's not an inflationista. He's not sort of, it's not necessarily some,

Like, he's not making an argument for gold or for Bitcoin or anything like that. He's just saying we're seeing it. And then he leaves it to everybody else to interpret it. And then, of course, everybody else grabs it. And so there are people who say there's no inflation and they say he doesn't know what he's talking about. There are people who want to sell you some gold. And they say that they completely agree with him and the Bitcoin guys are the same.

So it's funny that he just made a comment about his own business and it gets, everybody else gets to twist it and use it for their own purposes, which I'm going to do in a moment. I love that you're saying that, Toby. And I couldn't help but notice the 4.2% inflation year, a year that came out here in recent news. So also going to say the inflation piece, oh, God, it's so boring. But that's sort of like, must be right. Yeah, that was really stuck out to me. And I couldn't help but think, oh, my biggest equity position, that's Berksia.

And I was like, oh, my God, they have so many capital-send expenditures. They have so much equipment. I think Buffett even mentioned it in the annual letter, like they're number one and their AT&T is number two, and that's not necessarily a list you want to be at the top of, especially in times of inflation. And then you might think, well, I should go into the Googles of the world because we want to have an inflation-proof business. But then you're like, well, if the Fed is going to increase interest rates, that means that all those future caseloes are being discounted back on a higher rate, which means that they're dropping value too. So this is just a very interesting

dynamic that you see going on right now. So that was definitely also my key takeaway. And And then you can't mention that without saying, you know, the slip that Munger did, what, Greg's going to keep the culture. That was just, I don't know, it was just a fun one. They just loved the way that you're looking at Robbins' face and he's like, hmm, what happened there? So I guess that's how I'm going to remember the 2021 meeting. It was a much nicer one than the 2021 where he was alone in that gigantic auditorium with sort

of with the COVID haircut that we all had at the time. So it was a much better one, given that they were in Los Angeles. Angeles and kind of paying tribute to Munger among the others. Trey and I did our own breakdown of the meeting a few weeks ago. It's episode 350 if anyone wants to check that out. And Toby, I know that you did one on your episode too. Yeah, on the podcast with Jake and Bill, we just gave our impressions of the meeting. Jake and Bill have both been longtime Buffett Watchers, so there's some good takeaways.

I don't know the exact number, but it's this season of value after hours. it's a few weeks ago, 3, 17 or something like that. Perfect. We're definitely going to link to it. So, Toby, I'll throw this over to you here in a sack, because as per usual, you will kick off your pick up your pick first. But I also really like what you said before about all these guys. They're like talking about Buffett's inflation prediction, and they're just using for

their own good. But then you also like, but I'm going to do the same. So with all of that said, let's kick that over to you. The way that I run my business is it's mostly a, we're mostly systematic with some other additional effort put on after we find this position. So just one thing that I have noticed over the last, so we're bottoms up rather than sort of trying to make any kind of macro call. So to the extent that I talk about inflation or the gold price or other things like that, just to preface where I'm going here, you should know that their portfolio is always constructed

from the bottom up. So it's not, I'm not working backwards from something that Buffett said or anything like that. It's not, it's not me trying to predict where I think inflation's going. It's not me trying to predict where I think gold is going. But that's, the theme of what I want to talk about is, is gold. I have just noticed that my screens have started filling up with gold miners. And there's some, there's some interesting names in here. I don't own any of these things. And I may not ever own any of these things, but I think that there's a very good chance that we do end up owning some of them. We're sort of going through that process now, trying to work out which ones we like. I have, just want to talk about gold a little bit and gold miners. So we, the last time that

gold had this great run up was in the first decade of this millennium and it was part of that commodity super cycle where China was going to buy a whole lot of commodities. So everything sort of ran like crazy and they were the sort of sassy tech stocks of the first decade. And if you weren't in commodities, you sort of missed out on that run. At the end of that in 2007, and when the market fell over, where people might ordinarily think that gold miners or gold might provide some sort of hedge or might perform a little bit better through a market crash, they all performed worse. But the reason for that, in my opinion, was that going into that crash, they were all very expensive, including gold, because it was the end of that cycle. Now we're at the other end

of that cycle where it's been a long period where values underperformed, gold has underperformed. More recently, gold has sort of run up, but if you think about the conditions that you would like to see for a good gold run, it's probably fairly similar to the conditions that you would like to see for a good run in the cryptos or something like that. The only difference is that cryptos have had a very good run and gold is sort of where it was around about in about 2007, which is a long time ago now, and there's been a whole lot of money printing over that period of time and not a whole lot more gold discovered. But in fact, there's about the same amount of gold in the world as there was in 2007, maybe like a marginally larger amount, but not much. So with all of that said, I think that if you just go through the list of gold miners, there's some very interesting names in there. And the one that stands up to me is Barrett Gold.

And the reason I like Barrett Gold, and the ticket for that is G-O-L-D, just so you folks know. The reason I like Barrett Gold is twofold. One is that I think that all of the gold miners have got religion about their capital structure, and about their costs. So their margins are great, and their returns on invested capital are sort of getting towards acceptable points, which is interesting given where the gold price is. So it has run up to about where it was in 2007.

And it looks like it's, if Buffett is right about inflation, that's likely to be a place where there will be some protection. Gold has traditionally operated in that way. It's an inflation hedge. So I think that Barrett Gold is one that Berkshire has owned very briefly. in a very small amount. It's very likely that it was Ted or Todd who bought it. It wasn't a Buffett position. It was never big enough to be a Buffett position. And they only held it for about a quarter or so, maybe a year, and then they spat it back out again. Take from that

what you will. The only comment that I would make is that it's difficult to value gold companies because that commodity input, that gold commodity input means that you're very much tied to what the performance of the underlying commodity does. But I think this is an unusual period of time because we've had, you know, a very unusual year with COVID and the shutdown. And then we've had very accommodative printing from the Fed. Plus we've got now the federal government, the fiscal policy is as accommodative as it has ever been. So there seems to be a lot of money going out to a lot of different people. And those are the conditions that create inflation. So there's a big debate whether it's transitory or whether it's here to stay. I don't think that anybody has really

ever predicted it properly in the past, so I don't think that anybody's predicting it now. I just think it's a risk, and if you've got a portfolio and you've filled up with Bitcoin and software-as-a-service-type stocks, lots of tech probably doesn't hurt you to have a little bit of exposure to the gold miners. So why gold miners rather than gold itself? You just get a little bit more leverage in the miners. They tend to go up a little bit more when the gold price moves up. That cuts both ways. They tend to go down a little bit more when the gold price goes down. So I think that if you were to look around for some safe companies with a good balance sheet, good cash flows that would benefit from gold going on a pretty strong run here, then I think

your list would include Barrett Gold. I'd also look at things like Alamos Gold, which is the tickers AGI there, and Kirkland Lake, similarly the tick is KL. All of those companies have got net cash balance sheets, good margins. I think that they're well positioned and sort of big enough and broadly diversified enough that you get some safety if it doesn't work and you get a pretty good ride if it does work. That's my pitch, fellas.

Hey, Toby, that's a very interesting pitch true to being a value investor and a contrarian. I had two questions. One at the macro level about this Bitcoin replacing gold. How do you see it? Because that kind of plays into your pitch at the macro level. And at the company-specific level,

barric gold, one of the issues with gold miners is, as you said, like discipline in terms of their capital allocation, which I think you have already looked into. But the other one is access to safe minds, are operations in safe geographical areas. I was curious to know about those two aspects. Well, that's the nice thing about those guys is that they are pretty well diversified around the world, which is sort of why I prefer the bigger ones that are a little bit more diversified. You might get less lucky in the sense that, you know, we're not necessarily looking for discoveries here. We're looking for miners who are.

are already producing across a variety of geographic regions. So if there is any strife in any particular region, and I know that Chile has traditionally been an area where it has been quite a good location just jurisdictionally. And they've passed some recent laws that might change the way that royalties are treated on gold or the way that gold is the way that minors are treated. It's true also in Peru. It's true also in a few of these, many of these South American countries. So there's always geopolitical risk with gold, which is why I, you know,

I just think diversification is the easy answer. You just look for companies that have got diversification throughout. They all look pretty good to me now because they've had such, anybody who's survived over the last 14 years, court now, has had to get religion about their balance sheet and about their costs. And so they all look much healthier than they did in 2007. I would say that if we get a big run from gold here, you would need to start watching that stuff because it's a feature of gold miners that their margins don't really move

much over the cycle because their costs go up exponentially as the gold price runs up because it just gets you need more people to mine it. They want to get paid more. The mines become more expensive. So when they buy a new mine, it becomes more expensive. They're not rate businesses all the time forever and ever. They're just at a cyclical low relative to where the gold is. And I think that if we see some inflation, then these things will perform very well. 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. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are

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So one thing that I can't help but ask you, Tobias, do you see any kind of of pressure coming to gold miners here soon? So for those of you who are not familiar with this, ESG is like the new black in finance.

So the E is environmental. S, that's social and G, that's governance. So you see a lot of that right now. No mentioning Elon Musk or anything that's going on with all that. But I kind of feel like some gold miners probably have been under the radar. Do you feel like there's going to be a big pushback as more and more money is flowing in? And we might even see a green bubble. Who knows? But I guess there's some of my thoughts go into that. Yeah, my view is that all of that stuff really helps incumbents. If you've already got an operating gold mine, it's so much easier for you to continue to operate and you might have to make some

additional disclosures in your financial reports, which is what they all have to do. But contrast that with the position of someone who's trying to get a new gold mine permitted, that may be an incredibly difficult process. Particularly in some of these countries like Chile, they've just had an election about this. Peru has these ongoing sort of battles with these, the gold miners. I'm of the view that if you have an operating gold mine, you're at a huge advantage. And if they bring these ESG-type regulations in, if they just tighten them up. But if the world goes in that direction, then it makes your operating goldmine you get a real competitive advantage by virtue of the fact that it's already there and already working because they're not going to approve any new

ones. So you're going to constrain supply further or not allow supply to grow right when the demand sort of kicks off because we see inflation and then we might see some speculation. That's sort of the way that I feel about it that's potentially more of a good thing for them than a bad thing. You know, it's so interesting you're saying that. There's just so much money flowing into to these ESG approved funds. And it's just, I guess one of the things is a bit odd is that it really helps big tech right now, as you might even think that they have enough tailwind, simply because they're

disclosing what they're doing. They're typically not, you know, they're not mining company or anything like that, so that it's not like they have a lot of emissions and, you know, they're big. So since this market way it is G approved, you know, they would just have to buy a bunch of big tech as that money is flowing into it. So I just feel that's interesting. Yeah, I think that's an interesting one stick. I had another question to Toby about the cost of producing an ounce of gold. I think I had heard in one of the podcasts where they went into the detail, but I don't remember which podcast it was about what price at which companies are usually break even in terms of price or the cost. Do we do you have any insights on that? I'm just curious. It varies from company. It varies from mine to mine. It depends on how far away it is from

where you've got to get it to how difficult it is, how high up, because a lot of this, funnily enough, the gold is found at altitude. There are some mines that there's not a lot of oxygen around near the mine. So they're much, much harder to mine. That's sort of what I was referring to before when I said the margins on these things are good. They all have lower cost. They're all lower cost producers, which is how they've been able to survive through this period where the gold price has been pretty depressed. If you look now, the gold price is sort of run up a little bit over the last, I don't know where it is necessarily on a week to week or month-to-month basis. I just mean over the last decade, it is now back close to where it was

at its peak in 2011, but that's a very long run. That's 10 years now that it's been way down and running back up. I think that the bigger sort of threat or the reason that the takeoff has been a little bit delayed in these things is I do think that, so where previously it was hard to get exposure to gold itself, the proliferation of gold ETFs, particularly ones that are backed by the physical gold, the FIS expressly backed by physical gold and other things like that, have made it, you know, for people who are looking at a financial version of gold to invest in it, there are gold guys who want their gold ingots in their own safe. And so those guys aren't going to be affected by what happens in the financialization of gold. But there are guys

who maybe more like me, who, you know, it's just a way of expressing a view at any given time. I could look at GLD, which is the gold ETF, or FIS, which is the Sprott physical gold ETF, or one of the miners. And so you just have to know basically what you're buying and what you're doing. And then what your attitude is, if you're thinking that the entire global financial system could shut down, then none of that stuff is going to help you. I don't know necessarily that gold ingots in your safe are going to help you then either, but they're going to help you further along the path than having a unit in an ETF. But then again, there's this, you know, Bitcoin clearly is serving that function for some people.

If you're worried about inflation, there are people who are out there buying cryptocurrencies to get out of the financial system and to hedge themselves. And I think that's part of the reason why we haven't already seen a great run in gold and gold miners, that there are these alternatives out there. So it's difficult to know what's going to happen with Bitcoin. I don't want to really discuss it too much because I don't have any specific view on it, but I would just say that Bitcoin has had a very good run and gold has not and gold miners have not. And I sort of think that just the contrarian in me says that you sort of want to be where everybody's not,

which means that I think that you probably, if you have those concerns, then gold and gold miners might be a more interesting avenue. Let me ask you a question, Toby, that is impossible to answer. So that's going to be my disclaimer. Sounds good. Right on. What's the intrinsic value of gold? And please let me put a bit more call around that because I'm sure you're not going to be like,

you know, stick, it's going to be 2,323.8. I'm sure that's not going to be the answer. The reason why I'm asking is, you know, I'm sort of like, I guess I'm just wired that way. I'm looking at this as if this was an oil company. And if I were to buy a position in, I don't know, Exxon or Chevron, I would like to have a pretty good idea of what do I think the value of a barrel oil would be? And what do I think the price of natural gas would be? And then just sort of like headled back from there and figuring

out what's my potential, what's the short term implication, what's the long term implications of that. And so with that said, whenever you look at something like gold, you already laid out, inflation and some of the concerns you have with that. But how do you see the price of gold and relationship of your thesis? There are various methods for figuring out, not really an intrinsic value, but where the gold price should trade. I don't know how useful or how predictive any of that stuff really is, so I'm not, I just think it kind of over-complicates matters.

The only observation I would make in relation to the gold price is that it hasn't advanced since late September 2011. So we're basically where we were, or slightly below where we were at the very, very peak 10 years ago. It's sort of a meaningless statistic I get. It bottomed in something like 2015. It got down to a thousand bucks around about something like that. And then now it's sort of $1,800, $1,800 and it's run up a lot since then. But it's still below where it was in 2011. I think over that period of time, not much more gold has been discovered in the world and we've printed a whole lot of money. And so at some stage that inflation starts turning up somewhere.

And I do think that we're sort of seeing it now. Buffett's mentioning it. Gold price is going bananas. Every single financial asset is going bananas. Just in my life, I know that things are more expensive than they were, you know, from kids' childcare to the grocery bill. Just everything seems to me to be a little bit more expensive. So I'm anecdotally a believer in inflation is here.

I don't know whether it's here permanently, but I kind of got that feeling that we're at the very beginning of a return to inflation that's north of where the Fed has sort of targeted. They've been targeting two. I think it's going to be a long way north of that. And there are other weird things in this system, right? The 10 year is never going to get up over 2% because all of the federal government's revenues would be consumed by interest payments if that happens. So there's going to be a pin on the 10 year. That's going to have weird effects in the system. And one of them might be a blowout in commodity prices, which, you know, we're seeing it across lumber, seeing across just about all commodity prices. And we've seen

a little bit of it in gold. I kind of get the feeling that, gold's time has come, given where everything else is, and gold miners will be a big beneficiary of that too. It's fantastic, Toby. It's good to hear that a true value investor like you are not looking at macro. And I'm sort of just, I'm teasing you a bit here because I kind of feel the same way. Like, I'm taught like at the Church of Buffett and Monger. I'm not supposed to look at macro at all, but it's hard.

It's hard not to look at everything that's happening right now. You know, the people who say don't look at macro, the people who I've learned that from, mostly that's from Buffett himself. But the only thing that I would point out, you know, there was a period of time in the 70s when inflation really kicked off and gold did as well as Berkshire did for a period of, I think, 15 years or something like that. So you got the yellow rock that doesn't really do anything performing as well as the greatest investor the world has none. For a period of 15 years, that's a reasonable recommendation for it. Well set, Toby. Hari, why don't you go next with your pick? It's a very interesting pick. I'm really looking forward for you to present that to the audience.

I'm pitching a company from my backyard here in the Silicon Valley, and that is Splunk. Splunk is a provider of software solutions that enable organization to get operational intelligence by harnessing their data, indexing it, searching it, monitoring it, and analyzing it. And when I say data, it's mostly from machines, whether it is servers in a data centers, IOT, Internet of Things, manufacturing systems, or healthcare systems. All these machines are generating data. And now they're all hooked to internet. And Plunk provides a way to gather the data and makes it easy to search and makes it easy to analyze it and monitor it, which is very critical for business operations. And in that line, some of their main offerings include cyber security threat detection,

which is a growing field nowadays, ML and predictive analytics, application performance monitoring, IT, event management and operations management, and so on, which are all critical functions for any business. And their claim to fame, they were founded in 2003. I have been using Splunk in many of the companies that I have worked for, both startups and bigger ones. So they're pretty pervasive that way. And the key technology is what they call it as schema on the fly. And to put it in layman terms, what it means is that traditional databases like Oracle, for example, needs data to be in a very structured way.

So you've got to know how you're going to generate your data before you generate your data. That is, all these machines have to conform to a particular schema. And that's operationally almost impossible in today's world with diverse systems generating data. So it's all free form. And that's the whole genesis of big data. And you can think of Splunk as one of those early big data companies in that way. They basically pioneered along with other companies, there's scheme on the fly model where you can collect unstructured data, but they have somehow able to help you query it and get insights out of it in a easy-to-use interface. They say easy to use, but in my experience, it takes some learning curve.

And that's actually one of their more, a competitive advantage. So I see as two competitive advantages that this company has. One is that switching costs. So one, they are mission critical. So there are a lot of moving parts and a lot of tentacles that this software needs to have into your various segments of your operations or infrastructure. So it's not easy to just uproot and just put some other solutions. It will take a lot of effort.

There is a lot of upfront investment. And second, as I said, it's easy to use, but in order to really get good value out of their systems, there is a learning curve for employees. So there is a lot of training that goes in. So companies have to do quite a bit of investment to get best results. The second one is network effects. So as more companies get onto Splunk or start using Splunk, they will just. generate more data that helps fine tune and their ML systems that they have machine learning

systems, that makes them even better for new customers and so on and so forth. So it's like a cycle. Same cycle holds true for Google search, for example. Like more people search, Google gets better. And then more people will use Google. And the second network effect, or you can call it the platform effect as well, is that they have an app store, what they call Splunk Bays, where other vendors can develop apps on top of Splunk, and there are more than 2,000 apps now, which makes it very convenient for new customers because they can just pick and choose apps instead of developing their own solutions, which incentivizes more developers to develop apps on Spunk. So that kind of gives them that competitive advantage.

But there are other competitors in the space, like App Dynamics from Cisco, IBM is getting into it, And even the big cloud providers can also take a stab, but my presumption is it's so pervasive now and with all these stickiness, they can hold out. In terms of their growth strategy, apart from the organic growth by expanding into new customer base, they're really good at cross-selling. So, in fact, like in the past couple of years, their annual revenue per customers, like once a customer sign up, effectively doubles within a year. And then over a period of few years, three years or so, it goes up to six times. That is just from one customer. So their lifetime value per customer is quite high that way because they're able to cross sell. Because let's say you get into application performance monitoring, then you cross sell into security threat detection, IT event management and so on and so forth. And this reflects in their numbers. For example,

the number of customers generating over 1 million in annual recurring revenue went from 124 in 2018 to 510 in this year. So they're constantly increasing customers that are generating considerable revenue. In terms of year-over-year growth, revenue growth, they have been consistently upwards of 30% to 40% in past couple of years except this year, and I'll come to that soon, why they dropped in revenue this year. Cross margin has been averaging around 80%, which is typical of other SaaS companies. Their sales and marketing costs, as you can imagine in a high growth company, quite high at 63% of revenue.

But like every other company, the hope at least is that it will reduce. And today their adoption is quite good. 90% of Fortune 100 companies use Splunk for their monitoring platform. Their retention is also best in class, nearly north of 120%, which is you can compare it to any other. SaaS companies and their average revenue per user, and this is important in SaaS companies because adoption is the early indicator for retention or attrition. Their average revenue per user has been growing 12% over 12% for the past five years, which is quite healthy. And one of the things that they have been investing heavily is machine learning and their machine learning performance has been

growing quite significantly in the past couple of years. So that is something that's kind of under the hood. Its results are not directly known, but it keeps making them stronger over a period of time. Those are some of the key statistics that kind of show their growth and their moat. However, their stock recently took a big hit. They are now at $118 for share, dollars per share, and that's down from $220 per share in August 2020. So in less than a year, they have fallen quite a bit where their price to sales went from 11 plus to 10, 8.5. And if you compare it with other companies like Microsoft and Google, they actually have a higher price to sales than Splunk, which is a growth company with a small revenue base and has

the potential to grow quite high. The reason for this, I believe, is that they have embarked on a change to their business model, where in their transitioning from, licensing based revenue to cloud or SaaS-based subscription-based revenue. If you're aware of this, many years back, Adobe went through the similar transition and they took a hit in their revenue. So, in fact, today, as we speak, 50% of their bookings are coming from cloud or SaaS. And that's one of the reason why this year we see an impact on their near-term top line and cash flow. as term licenses see large up from payments are going and recurring revenue is increasing. So in the long run, this is good for the business.

When in the short to medium term, it will be something. So that's one of the reason why I am interested, because I believe that as companies digitize significant part of their operation, especially during COVID and post-COVID, as we are seeing the need for managing, monitoring, analyzing data, detecting security threats, making predictions, all that stuff that Splunk offers becomes more and more important for customers. And hence, their time is going to keep expanding for the foreseeable future. So that's the reason I am interested in Splunk. But I would like to hear from you about the valuation part, which I really haven't gone

into. That's the reason I brought it up here. In full disclosure, I have been short, Splunk, in the Acquirers Fund. The reason why is it has been a valuation short and a few other things. When I look in the financial statements, I think that, and this is not necessarily something that's specific to Splunk, although the reasons why I'm short are specific to Splunk. To be full disclosure to you, Harry, my wife has a Splunk T-shirt and she's been wearing around the house to troll me.

And I've been saying, because I've been short Splank in the past and it didn't work out, but this time it has worked out. And I think many of the conditions that made me want to be shorted when we put it on at the beginning of the year have sort of been fulfilled. And so it's no longer something that I wouldn't initiate a short here. It was initiated earlier on at a much higher price. And now I think that a lot of that obvious short has come out of it. So the reasons that I'm short, when I look at something like it has to be a high growth

company, and so that transition from licenses to a software as a service model or cloud-based model, that was always going to impact earnings in the short term, and that was going to frighten people out of the stock. But they also have this, when I look at the financials, it seems to me that the revenue growth is great, but I just don't see how it falls through to the bottom line of the business. How does shareholders benefit rather than insiders and employees? That is a good point, Toby, and there is a question for many celebrities. Silicon Valley companies, I guess, in some degree. And I agree with you because their net profit has net income has always been in the red so far.

They have never shown a profit. And the benefit of doubt I give them is that, okay, they're reinvesting in their business. But if you're a public company for a while, it becomes harder and harder to defend after a while if you're not generating any profits. Yes, I can see that particular aspect of it. I don't have an answer to you, apart from giving them a benefit of doubt. The EBIT has, with each year that the revenue goes up, EBIT gets worse. And this is, as I was saying before, this is not, and you acknowledge as well, it's not, it's not specific to these guys.

I realize that there's sort of a, there's a competitive advantage to building out and becoming the dominant provider of whatever it is that you do. And you have to spend to do that. And that means that your financial statements don't reflect the quality of the business. sense, and it's true this is a very high quality business, it's got high margins, and they could at any stage turn some switch and make this a profitable company. All that requires is sort of, you know, the will of the management to do that. And the problem, I can already hear the arguments on the other side that the moment they try to run this thing for profitability, they lose some of that advantage

in a business sense. I just sort of, some of these companies need the support of the financial markets to continue to survive the way that they burn money. And I just wonder whether a crop of these things, and I'm not saying it's necessarily splunk specifically, but if the market sale on the stock of these companies, which there does seem to have been a sort of tech wreck over the last quarter and a half or two quarters sort of mid-Q-4 last year to where we are now, and maybe it's turning around now, but that's sort of been my thesis for a while that you could be short these things because the valuations were just so stretched and that any sort of hiccup in the road was going to lead to a little bit of carnage, which I think has played out. But when I look

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All right, back to the show. Another question that I would have for you, Horry, you mentioned the networking effects before, you know, the advantages of having developer building on top of it. And I can't help, but think about whenever you're pitching Slack too. And you mentioned that as an advantage as well. And I'm not trying to be like, oh, you know, a year ago you talked about Slack and how did that go about. I guess my point of saying this also because of the pick that I'm going to later, you can

give the exact same criticism too, about do you have a platform? with networking effects, do you have something that's been copied? And so whenever I'm looking at something like Slack, you know, I love Slack, I use it every single day. And, you know, whenever you, whenever you mentioned it back then, I was thinking, wow, that's a great move to have. And you have people developing apps on top of that. And it's just networking effects, getting better and better. And then, you know, I realized what Microsoft were doing in Teams and how much of that that could be copied. And then, you know, Salesforce came in and took over Slack and everything that happened with that. But I guess I was a bit surprised of the network

effects weren't more, weren't better than they were at the time. And so whenever I look at Splunk, I'm just trying to make the segue into Splunk here, the biggest three times is lots of the next competitor Datadog and you had Norelic 2, that's even smaller. And these are the networking effects that might be sporting here. It's getting bigger and bigger. Your 90% of Fortune 500 companies are using it. How much of this can be copied and how much disruption can we see here? Is this truly a platform bet with networking effects or can someone replicate it? That's a great question stick. And in fact, when we talk about platform effect, it varies.

All platforms are not created equal. For example, Apple Store is a different kind of platform than Plunk-based App Store because of the many-to-manue relationship that Apple has, numerous consumers and numerous producers. Whereas Splunk is an enterprise business and the app store is much smaller in scale. So it's much harder to defend a Splunk app store compared to Apple App Store. So they're not equal for sure. However, within the enterprise world, once you get adoption to a place where there is enough

adoption among good customers, really a good engagement among employees and developers, it's really hard for a newcomer to replace them, having said that it doesn't mean that they can't be, but it just becomes much, much harder. And that shows in the statistics that you just laid out, like they're 3x bigger than the nearest competitor. So those things give me confidence about their platform effect, but where the risk actually rises for them as this big public cloud vendors like Google, AWS and Microsoft. Because they all All companies are moving to public clouds now. This is called the featureization of companies, right?

Like if products, basically, if Plunk becomes a feature in AWS or Azure or Google Cloud, because they can just give it away for free or for very little price as part of a bundle. So that's what I would be watching out for. Or there might be, they might be just an acquisition target for one of these guys. Thank you for your response, Harry. and remember that question because whenever you're going to hear my pick, you can give the exact same criticism. And I'm not completely sure what to answer to that either. And so I've been struggling a lot with which pick I should come up with here for you guys. I've been looking at Pindu-Doo,

which is actually going to my pick, and another company, Flanking Covey, which is also doing the transition from license to subscription-based. But I think you can only do one today. I actually I'm going to have a mastermind meeting, investing mastermind meeting, which is sort of a slightly different format with Toby Jagan-West here in a few weeks, and I'm going to pitch it then. So at least the Franklin Covey. Anyways, I've been buying into two stocks this year, which is very unlike me. I don't trade as much as that. I kind of feel I'm over-trading if I'm buying, what, it's 23rd of May, and I already bought

two different stocks this year, so. Profligate stick. Yeah. Prophlegate. It's horrible. It's, uh, I kind of feel I'm, one of those Robin Hood kind of traders. Like, I'm all over the place. So, crazy. It's crazy. And I've been looking at this company, Pindu or Do here for, oh, for a long time.

If I can just start sending Pindu-Du first, I guess. So that's my pick. The stock ticker is PDD, and it's a major e-commerce platform in China and has a market cap $160 billion with more than 78 million active users. It's a relatively new company. It was found in September, But already this year, it's projected to overtake jadjadcom as the second biggest online retailer in China. Number one is Alibaba's Taubao. This is a stock that I've known for a long time. As some of the listeners would know, I've been holding a position in Alibaba for quite some

time. And this company, Pindu-Doo has just always been coming up as a competitor. And because I've been trained so well in networking effects and platforms, I was like, no, that's just never going to happen. And how can anyone compete with Adibaba and Taubow and Jadhi.com? And here we are. And here we are and Pindu-Doo just did that. And so, and what's happened since, you know, just over the past years, the price is now 6x,

and I'm starting to slowly catch up, trying to figure out Pindu-Doo. And just for the record, I haven't taken a position in Pindu-a-Doo, which I probably should have a long time ago. I'm still sort of trying to figure it out, which is also why I'm bringing this to to the group here today. So the name in itself directly translated means together, more savings, more fun. And the company is just very interesting for so many reasons. It was the fastest company ever to hit $100 billion in market cap. Google took 12 years, Microsoft took 25 years, Pindu-Doo just short of three years. It's just an incredible growth story. And I think the easiest way

to think about the business is that it takes the best from Google, Amazon, and Costco with a twist. They said themselves their Costco meets Disneyland. To me, I don't know if it doesn't make really any sense. So I'm going to go with the Google, Costco, Amazon with a twist kind of thing. So they are Google in the sense that the primary business model is that they make the money on sellers promoting their products to potential customers. And you'll also notice that Pindu do almost have Google-like margins with gross margins nearing 50%, 60%. And the Google resemblance is no coincidence. The company was founded by Kuanquang, one of the lead people of Google China.

The way I kind of feel it resembles Costco is that the business model is built up around the cheapest prices. And just like Costco, the savings are being passed on to the customers. Like Costco, you also buy your more call it boring household stables here. and perhaps you're going to save some of your more exciting shopping for other platforms. Perhaps you even want to go out in the fiscal world and go out and shop with your friends. And so as much as Pindu-Du is slowly changing their approach, starting to selling more brandy goods, and they'll also go into the so-called Tier 1 and Tier 2 cities in China,

which is think of the Shanghai's and the Beijing's of China. Historically, the bread and butter has been the more boring products in Tier 3 and Tier 4 cities in China. So they're very big in the rural area as compared to JD and Anababa, which are not been doing as good a job in the more rural areas. So they also resemble Amazon to some extent because just like Amazon also give you tailor-made products, big data that define breakmend to you, you go to Pindu, do with the intention to buy, which is extremely powerful. Whereas if you go to Google, it's you have certain mind.

You will also get targeted with ads, of course, but it's, it's information. you're seeking typically. Unlike Amazon, though, Pindu and Do has no warehouses of stock, but products are shipped directly from the seller, and they also have to color shipping costs. So where does this twist come in? Well, the shopping on Pin Du Du is different than anything else I've seen here in the West. It's so-called social e-commerce, so even though you're sitting at home, you can to some extent get the same experience as you do whenever you're shopped with your friends. So what does that mean? Well, whenever you enter the app, you'll find that there is not a huge search bar as

whenever you go to Amazon.com. Rather, it's set up to browse. So it's more like if you're shopping around with your friends. And when you find a product you like, you see two different prices. So one is the price for one item that you can buy right away. And then a lower price that if you buy the product with a small team, you can then get a lower price. And this is one of the fantastic things about Pinduodoo.

No one is supposed to just do it yourself. That's the entire point. It's sort of like Tupperware. I think that's the best example I can come up with. You use and see friends and that's how the sales process work. And as we all know in business, doing the actual sales, that's the most important thing, and that's the hardest thing to do. So let's say I'm going to buy 10 apples.

I can buy them at click here now price, which is a higher price and it's almost like hidden that price. or I can buy it together with my friends. And that price is determined 24 hours later. The more of my friends who buy the product, the cheaper it will be for all of us. And Pindu-Du is then integrated with the Chinese super app, WeChat, owned by Tencent. And this is just such a important logistic advantage, you know. WeChat has over 1.2 billion monthly active users.

We-Tet users spends 82 minutes on the platform every single day. We-Chat users send 45 billion messages daily. it's all like incredible to think about how impactful Vechat is. And by the way, Tencent also owns stock and Pindu-Doo. So they have a very good middleman there to help them communicate and market their products. So after my purchase, I do have multiple options to ask my friends both on WeChat but also on QQ to go in and help me with this purchase. So we can all get a bargain. If you're not familiar with QQ, it's a Chinese platform, social games, music, shopping, micro-boggling, movies. it's a huge website. It's actually the fifth most visited website in the world. So I know it sounds

a bit odd because a lot of people in the West haven't heard about it, but it's pretty big in China. It makes total sense to me. It makes total sense to me. I think it's a really clever way of shopping. The way that I thought Groupon originally was going to work was something exactly like that where they say, look, here's the price if you just want to buy this thing immediately for yourself. But if you can get, because anytime a vendor wants to sell something, it makes so much more sense to sell more of it. You want to sell more of it and you're happy to give a lower price. That's how wholesale works and every sort of gradation along that scale. If you can get a whole lot of people together and buy more of them, we'll sell it to you for a lower price and it

works for both parties. They make more sales. So it seems like there's a virtuous sort of circle to it that should power something like that forward and that social is so powerful. If four of your friends are buying something and they need a fifth one purchased and you're the person who sort of makes up the five, it's very hard to say no. You know, you have to kind of go out there and buy So it's a brilliant business strategy for selling stuff. That growth is just absolutely bananas growth, including in the revenue line and in the stock price. I guess that's sort of the thing that is always going to be the tripping point for me is just that these, I don't know how you value something like this, and this thing looks sort of nosebleed,

eye-poppingly expensive. I don't want to derail you if you're going to deal with that. Yeah, so, Toby, it's a good point. How do you value it? It's around what, today, 40 times free cash flow, which I know it's a crazy world and we're sitting here three value investors. And we're talking about, well, is it cheap if it's like 40 times free cash flow? What you're looking at is a top line that just, oh, God, it's just growing so fast.

So in 2018, 13 billion yuan. The exchange rate is 1 to 6. It's about, what, 2 billion US dollars. Then it was more than doubled in 2019 to 30 billion. And then in 2020, it was 60 billion. So 100%. So how do you value something, you know, to Toby's point, how do you value something that grows 100% or more a year that's trading at 40 times three cash flows? Is that cheap or is it really expensive these days? That's very interesting.

Stick, that's an interesting pick. As you mentioned, they have a good platform effect going for them, but at the same time, the pattern that I have seen with Chinese companies is that there is a a much more faster rate of disruption than other markets. And as you said, Pendo just dislod JD. That might happen to Pendo as well. Because I think Chinese users seem to be more open to new ways, new habit formations than say the US or other markets. So that's number one. Number two is when we talk about any Chinese companies, it's hard to argue against their growth because of the huge market they have and the growth potential, ever expanding time, and then hence the high valuations.

However, one of the things I wanted to bring up, which is not in the conventional wisdom today, is the coming demographic bust in China. That means people aging faster, there being less folks in their 20 to 30s and 40s and more people in their 60s to 70s to 80s, which means their consumptions go down and savings go up. And China is supposed to be one of the fastest aging populations in the world today, even if you go by their official numbers. And some folks like Peter Zion, in his book, This United Nations puts it as much higher. than the official numbers. So that is one concern for the longer term investors. Like if we are looking for the next one or two years, I think that should not be a big deal.

The second one is their financial reporting structure, how much can we trust? That has been one of the concerns. Coilbase and other investors have been bringing up when it comes to Chinese companies. And we have seen Luckin, I forget the coffee, Starbucks of China recently accepted some of the misreporting that they did. So that's a huge risk we have to assume when we are investing in any Chinese company. And the third one is the heavy-handed government regulation,

and we don't know when that will drop on any of the companies. For what reasons? Like 10 cents, for example, got dinged for their video games being too addictive to children, so there were some regulations introduced, which they took a hit. Alibaba faced a lot of regulations and regulate, it and fines because Jack Ma said something in a speech. So it is safe to say that in China, regulation doesn't work like US. So these are some of the risks that I assume for any Chinese

company, any ADR from China that I'm investing in. So those are some of my key concerns. Great questions. You talk about regulation. I think that's very, very tricky. I mentioned before, I have a position in Alibaba. I've been tricky. I'm assuming that position and bought more Berkshire, but it's still a position that I have. I think you have around 3% of my portfolio in Alibaba. And, you know, that took a huge hit with everything that happened with the end financials and the regulation coming in. And lately what we've seen, we've seen Pindu.

It's trading today $130. And it was trading around $200, not too long ago. And a lot of that came from the regulation coming in for all e-commerce. Like the Chinese government wants to know all the data of these companies. That's something, like an investor, that's probably not what you want to see. So, yes, that's a huge risk. Not sure what to do about it, like knowing your limitations of your circle of competence, I would say that Chinese regulation is not one of them.

I think it's one of those where I would just say, I'm just going to pay a little less because I just don't know really what to do about it, and I don't trust it that much. You're talking about the disruption before also, Harry, in one of your first questions. I think that's a great point. there's so much disruption going on in China, people form habits so much faster than what we've seen in the West, especially online. We used to talk about the big three, the big three being Adibaba, 10 cents, and Baidu. Now Baidu is almost not there, right? You're talking about Pindu, Du, and Mintu, and both the companies have just been tarnished here over the past few

weeks with all the regulation stuff that's been going on. I don't know. I can easily see the argument why you would buy an index fund. or buy a Chinese tech index or something like that, simply because it's so difficult to figure out. Another risk just to give the bear case to this, because I'm not, and people should definitely keep the bear case in mind. I was doing one page of my pitch. I actually wrote nine pages down with all my bulkcase, and I don't think I can cover all

of it today. It's probably way too long, but there are so many good things going on for this company. And the bad case to that is that this whole social e-commerce, this is really taken off. And what happened? Well, Adibaba and Tenet and said, let's try and do the same thing. Let's also try and subsidize our customers. Because one of the reasons why they're growing so fast is because they're subsidizing so much. So, like, they've been burning cash to a huge extent.

Actually, if you look at the financial statements, like the earnings are not looking pretty, the free cash are also looking a bit prettier. Colin Huang owns, the founder owns 30% of the company. And one of the reasons why he haven't been diluting more, because you'll be thinking, And competent that's been growing so fast and been subsidizing so much, it's because he's just burning cash and he has to raise capital all the time. It's because counterfeit products, I think everyone knows that that's a big deal in China. And Pindu has been struggling with it together with Alibaba and Tentan too. They've had those issues too. They have the so-called 10x rule where Elbaba has the 3x rule. And that is, that's the penalty for counterfeit products on the revenue basis. And so that's one thing. And then all the merchants who are, who are the platform has to pay a large fee to be a part of it, sort of like to, as a measure of, hey, we know we can deduct that fee if there's any kind of counterfeit issues that you're going to have.

So they're being flooded with cash. Like they have a really good cash cycle. And the other thing is that once they do the purchase, they already receive the cash even before the final price has been settled. They have a really good cash cycle. So it's not being diluted that much. But they're still on this growth spree. Now they're facing, you know, Adibaba and Sensen coming in and starting to subsidize

and building their own social platform. And that's sort of like where the test is really for Pindu or Duo, and I don't really know how this is going to go down at all. Is this a platform? Do they have the true networking effects? Or is it more something that just be copied because Alibaba have approximately as many active users. And if they're doing the same thing with the social shopping,

well, why not just stay on Alibaba and they already have the whole ecosystem there? I was just going to say that was one of the things that really stood out to me when I looked at the financial statements that free cash flow has been surprisingly strong and growing sort of commensurately with the revenues, which is something that you would like to see in a really strong company. And at 37 times free cash flow, growing at 100% a year, it's sort of, if those things all hold true, it's cheap. Yes, that's the thing. If that holds true, it's cheap. If they are going to see the same disruption as they've been put into the market, it's not cheap. You're buying something stupid at 40 times three cash with those. You don't want to do

that. Based on all the numbers, I agree with Toby and you that it looks very interesting, except that we got to know some of these unanswered questions very well before we can make it like a big part of our portfolio. And that's the thing, Harry. The reason why I would argue that it's relatively cheap. I'm looking through that lens that it's growing 100% a year right now. Of course, it can't continue to grow 100% a year. There's only so many Chinese people. But you see a high growth. And one of the, I guess one of the things that if you want to invest in this,

and again, I haven't made my initial investment. I probably should have a long time ago. But it's if you really want to wait for clarity and see what Elibaba and Tencent is doing, well, a lot of that gain is probably gone whenever you realize that, you know, Pindu-do is going to make it. But what I want to say is that one of the key metrics I really look into is how much merchandise do each customer spend on Pindu-Doo, because that's one of the issues that they had. So if you look at something like JD, they have around $6,000 a year, which is just short of,

what's called, $8 to $900, $900. For Alibaba, it's around, well, $1,300 a year. And now for Pindu, it's like $350. So people do not spend as much money on their platform as the other platforms. But it has doubled in a year. That's one thing. The other thing is that it's expected that you're not spending as much in merchandise with Pinduodoo because they have been targeting Tier 3 and Tier 4 cities in China.

Historically, it used to be women 25, 35 from Tier 3 and tier 4 cities in China. They just don't have the same kind of a budget. And for many of them, it's the first interaction with e-commerce. And then if you add on top of that, most products are commodity-type products and they're white-labeled. So it's not like El Baba and JD, which are targeting typically Tier 1 and TS2 cities, more branded goods. And so what's happening right now is that Pindu-D is targeting Elbaa and J-D's market and vice versa.

And who's to win? That's one of the things. Let me try and actually go back and answer one of your questions there, Harry, about demographics. You know, we have seen the new consensus coming out here that's been done every 10 year and it was first postponed and then they came out with the numbers and they were sort of like saying, well, we're still growing as a population. And as happened so many times, whenever the Chinese government is coming up with that, no one really believed it. A lot of people are talking about that it was actually shrinking, which is probably not what they want

to hear. But because of so many reasons, the one child policy and everything that came with that, that is what we're seeing right now. And so I think you bring up a good question. How is that going to influence a company like Pindu-Doo? The short answer is, I don't know. I would say that there's still a lot of runway, especially in the short term. Hindu-do is really big in the rural area. Internet penetration is actually still low in those areas. So short-term, that's something I'm looking at. Just in 2017, June, the number here I can pull up is 34%.

Internet penetration is in the rural area, whereas it was 69 in urban. Here, fast forward, three years, June 2020, we were looking at 52% for rural areas. So going from 34 to 52, now having internet. And then Urban went from 69 to 76. So there's just so much growth still. Obviously, whenever you look at markets when people don't have internet, that's not where the biggest orders are coming from. But it is something that's worth mentioning.

How that's going to play out over, I don't know, 20 years, 30 years with the demographic growth, how much the adaptation rate is going to be, as we see in aging society. I guess my shorter term worry of that would more be disruption, just in general. Like, can they still compete with JD.com? Can they still compete with Alibaba? I guess I don't know the answer to that. I think that it's such a commoditized base. I guess if you're going to see the full potential of a company like this, you want to

see it start spawning. Just like you've seen Elibaba start spawning into cloud and other businesses, like what you've seen with Amazon, I don't necessarily see this company doing like your 3rd. 3x or 5x if it's only online sales. I think the competition is too fierce. And I'm saying this even though you're looking at huge margins. If you're looking at Pindu, do for instance, the latest gross margins were 67%. It's incredible. It's not like the retail rates that you see for your Walmart's and Costco. There's just so many other things that there's really going on for this. I know I'm sort of like abdutching, I kind of feel some of the, some of the

a bad case, but if anyone is bare, I guess it's me, which is also why I haven't taken position. But a framework that I want to use whenever we're talking about sales, I've been focusing a lot of sales here recently because I kind of feel to, we need to understand the sales models of the companies that we're investing in. I talked before about Flanking Coe that we're going to cover a lot more, and like they're building up a sales force and the implication of that. And I've been thinking a lot about the sales process of this social e-commerce, and if that's going to be the new way of doing commerce. And so the framework that I used was Chaldean's book influence, which is just a wonderful, wonderful book. We also covered here on the podcast,

so if you're interested, I'm a show to link to that in the show notes. He has six principles that are universal for making a sale or getting your way, which to most companies to make a sale. And that's reciprocity, commitment consistency, social proof, liking, authority, and scarcity. And I would like to talk about the business model of Pindu-Doo and how that ties back into that framework. So reciprocity, which is the internal poll to repay what another person had provided us, if I call you, Harry, and I'm saying, well, would you join my team, assuming that you like me? You know, it's, it might be hard for you to say no, or perhaps it's been the other way around last week. Perhaps I was supporting your team and now I'm like texting you and like,

oh, could you support my team? So that's reciprocity. Commitment. Concephemy. Commitment. consistency is another bias we have. So if we advertise a product for our friends, we try to talk them into it so we can all get a low price, we are susceptible to have confirmation bias and to continue to buy that product because we already put a name on it. Like, this is what we should be buying. We have social proof, another bias. Whenever we're unsure, we look to similar people, we look to peers, what do they provide us with in terms of getting the right action. So social proof is just, you know, fits right into Pindu-a-Doo's model, liking. Another thing, you know, going back to the Tupperware party, you know, you're inviting your friends. So the friends

that you're going to invite to your team, you know, that's people you like, that's your friends. Even if you don't want the product, it can be hard. And so authority, that's another thing. And this is actually a really, really cool thing for a Pinduodoo. So whenever you're trying to buy a product, like it's very interactive. So whenever you go to the platform, you can speak to the seller. You can actually literally speak to the seller, not just through promotional videos that they recorded, but actually just with like they're sitting on. online, talking to you, showing off their potatoes or whatever it is that they're doing. And they have a small army of social media influences too that are selling and getting paid

by Pinduodoo to do these things and getting commissions of that. So authority, that's another thing. And then one thing that's just amazing is scarcity. Like, the way they have, like, it's almost like casino algorithm whenever you use the platform. So I mentioned before, you have the whole 24 hours to close the sale. But whenever you log in, you can get. two-hour coupons. Think about two-hour coupons that you look in, you might just get a small present. That's one of the ways that's subsidizing and generating that growth. It's going to expire

in two hours. So you better go and find something and then recommend it to your friends. It's almost difficult to explain, but it's like you go in there, you get a few points. Actually, just to log in. The more you interact, if you share something, even if you don't buy, you get more points. And once you get more points, they activate different coupons. They also have roulette wheels that's spinning and you get different kind of awards, depending on how many points you get. All that dopamine is just being released over and over again. And so for those of us who read influenced and we talked a lot about psychology and how they play into the stock market, I kind of just wanted to mention that as one of the frameworks. Why I found Pindu

a do interesting. I'm not saying that a major platform like Taubau can replicate it. I still think there's a bare case for that. It's something I can definitely see why it's so effective and why they went from zero to a hundred billion dollar market cabin in less than three years. That's interesting stick. And I think, as I said, if I just look at it as a company without any of those caveat, it looks really compelling. And also, I think you mentioned it's a Google plus Amazon plus Costco. Maybe you should throw in Facebook because of the social aspect. That makes me think, why can't Facebook do something like this as a feature? in their product.

And again, that's the problem with the habit formation is where I have seen, at least what I've observed is in US, habits stick much harder than in China because for various reasons, the user seems to be, seem to be very dynamic and taking on new habit. Whereas in US, it's like much slower. Like Facebook, VChat hasn't happened with Facebook yet. It is still Facebook and WhatsApp. There's a lot of backlash. if they try to do something like VChat and WhatsApp.

So there's a lot of, of course, for privacy and security concerns, and those things are on top of mind for U.S. customers or consumers, whereas we don't have such barriers in China. So definitely I feel it's a compelling case. The reason I brought out my concerns was more at a macro level. They're not specific to this company. And I don't mean to say this company is, this company is cooking their results.

cooking their books. It's just that it's a base rate, right? Like, we have seen such companies, we have seen such scenarios. It's like, how can we make sure these guys are all not doing something like that? That was my only comment. I think you bring up a good point. And I don't have a good response to that. I don't know if they're cooking their books.

You know, I look through the financial statements. Those on the numbers that I look to, especially if I invest in foreign markets, I'm just a bit more cautious and I just want to pay a low multiple, which is also why I'm like is 40 times free cash flow, even though it's growing 100% a year. It's that cheap or not? I don't really know at this States. It is something I'm definitely keeping on my watch list. And I think you have a good point whenever you're talking about habits formation, how does it work, commerce in China compared to the US. Now, in China, 50% of commerce, that's online and that's growing rapidly. In the US, it's 13%.

Like, we all think, you know, that Amazon is taking over the world. And yes, they're like, what, 50% market share or whatnot of e-commerce. But whenever it comes to Toad Retail, it's just so different in the States. And it's actually a lot more fragmented than probably most people think, compared to China where they have like the big three. And that's just how they do commerce. And so I think it's only a question of time before we start seeing this in the West. It probably already has happened. I just haven't seen it yet. Because it's just so impactful because we just had these universal principles, and perhaps it is easier to do in China, which is probably also by seeing it there first, then in the West. But yeah, I wouldn't be

surprised at all if that's what we're going to see. Before round this show off, I just want to give a quick handoff to some of our friends or the Acquire podcast. They did a wonderful, they did a wonderful, I think it was two or three hour podcast episode about Pindu or Do. It's not so much in terms of having as an investment case, but it's more like what's the story, how was it formed, more about the founder, how who's been mentored by the biggest tycoons in China. And even as a part of one of the charity dinner with Warren Buffett, when he was 26. And you can talk about he's been mentored by some pretty big shot people.

And so a lot of interesting things in that episode. Now I'll make sure to link to that. Before we run up the show, as always, Harry, Toby, I'd like to give you the opportunity to tell the audience where they can learn more about you. I run an ETF called the Acquirers Fund, the ticker ZIG. I'm kind of the anti-Arc. It's very deep value.

And I tend to be short some of the frothier names. So if you've got a big exposure to ARC, you should take a look at Zegas. Maybe it's some sort of hitch to that. And I run a small and microphone with the ticker is deep. It's all US-based. And I've written some books. My most recent one is the Acquirers Multiple, which came in 2007. And it's available in Amazon.

I'm always around on Twitter at Greenback, G-R-E-N-B-C-K-D. Thank you, Toby. Always great to have you. Harry, welcome the audience. more about you. You can always reach out to me on Twitter, at Hari Rama is my handle and my blog, witsbusiness.com. Look forward to hearing your comments and engaging with you all. All right, guys. So that was all that we have for this week's episode of the MSDIS

podcast. Make sure to subscribe to a podcast on Apple Podcast, Spotify. We're also starting to pump out a lot of content on YouTube, so make sure to subscribe to that too. Harry, Toby, thank you so much for making time for us here today. Thanks, fellas. Good to see you both. 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.

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