We Study Billionaires - The Investor’s Podcast Network - TIP374: Mastermind Q3 2021 W/ Tobias Carlisle

Starting point is 00:00:00 You're listening to TIP. On today's show, I invited expert value investors to buy us Kyle. In the first part of the episode, we talk about the value that Tobias sees in homebuilders, and we also talk about what we think the true inflation is and how it has changed our investment strategy. In the second part of the discussion, I'm pitching at a Baba. This is a stock that Charlie Monker, Moniz Pop Rai and Guy Speer have recently bought, and since then, the stock has dropped like a rock. Is this a falling knife, or is this a major value?

Starting point is 00:00:30 value opportunity. You don't want to miss out on this mastermind discussion. So without further delay, let's hop to it. 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 Broderson, and I am sort of here for the mastermind meeting, if I can call it like that. So, So Preston isn't here because Preston is doing all his thing with Bitcoin, so he hasn't been a part of the group here for the past, I think two times now. Hari had a last-min family emergency.

Starting point is 00:01:19 And so if you can call Toby and me the mastermind group, what do you think, Toby? Can we call the mastermind group, meaning just you and I? I think we should call it the mastermind group, but we should just point out just the two of us. Right. But we're still doing the same format. Like we both had a pick repaired, something we wanted to talk about, and then perhaps we had something afterwards, we had a chance now, have time to chat about.

Starting point is 00:01:42 Now without Preston, Harry, taking up all the talking. So, finally. Right. Finally. Yes, we waited. Waited since 2015 to have this conversation, Toby. I think you always been good starting out, you know, the rest of us being too nervous to get started.

Starting point is 00:01:58 So I know you want to talk about home builders. So I want to throw it over to you. Most folks will know that in the States there was a home building boom through the first decade of the millennium. And that then resulted in a monster bust. And so there have been lots of movies made about that, you know, Mike Burry being featured in the big short because he was trading the derivatives off those things. But basically, the bust was so devastating that the last decade, which is the second decade of the millennium, everybody has underinvested in home starts have been well below average and we're only now. So we've got home start data going all the way back to 1959 in the States.

Starting point is 00:02:44 And you can look at that and it's easy to see what happens. There's this sore tooth pattern where the market gets too hot probably and then it crashes and it starts from a low base and it runs back up again until it gets too hot and then it crashed. And that pattern has occurred pretty consistently since 1959. What stands out about the most recent bust, which was the 2007-889 bust, was that the new starts fell to the lowest number that is in the data running back to 1959. And then the starts have run up at this much lower rate than they have in previous booms. So this boom has been going on for a little while, but it's still really only back to about the long-run average.

Starting point is 00:03:28 So the June data that we have is about 1,643. I think that's 1,000 starts. So I've been invested in the Acquiris Fund, which the tick is ZIG. We've got exposure to a number of home builders, Pulte, DHA, which is D.R. Horton, and MTA, which is Meritage. I'm just going to talk today about Pulte for a variety of reasons. I think that it's the best of the three on some measures, the other two, very good opportunity. as well. I sort of think this is an industry that's got a secular tailwind behind it for the foreseeable five or ten years. And if you're in the better, safer names, I think you're going to do

Starting point is 00:04:11 pretty well. So my pick is Pulte and the tick is PHM. Pulte is about a $14 billion market cap as of today. It's de minimis net debt. They've got some debt, but they've got some cash balancing that debt against that. The company itself has been around for about 70 years. and it's got this nice geographic diversification, and it's got a nice price point in the homes that it builds. So half of its homes it builds for less than $400,000, or half of the homes that it sells for less than $400,000. 75% of the homes sell for less than $500,000, which is around the median, a little bit north of the median in the state. So they're selling to a very broad market of people. Last year, they did about $12 billion in revenues. And if you

Starting point is 00:04:57 look back over the last, sort of since the 2009 low, they've grown very consistently through that entire period. They've got a very solid balance sheet. And so the things that I really like about it, that very safe balance sheet, I think it's got one of the best balance sheets in the, in the industry. And it's also got these great gross margins. They make a lot of money, and they keep a lot of money from each home that they build. So they've got the lowest debt to capital ratio in the industry. So just for those reasons, I think it's the safest, it's the safest bet. I think it's one of the better builders out there. They know what they're doing. They're making lots of money. They've got this great geographic diversification. And I think that the industry

Starting point is 00:05:35 tailwinds mean that these, you can almost pick whichever one you want, but I just pick the better, safer ones. I think that it'll do pretty well. For all of that, it's trading on a P of nine or below, depending on where you look, acquire is multiple, which is my preferred measure, around seven. So I think it's a reasonable bet. It's got a little dividend yield of about a percent. They're reinvesting in, in land and so on. So it's a business that I think will continue to grow, particularly if they get these, if these secular tailwinds, so we've underinvested in housing for a decade. It looks like now that's starting to kick off as millennials transition into wanting suburban houses and they start having kids. We're short quite a few homes and we're going to have to build those over the

Starting point is 00:06:15 next five or ten years. For me, I think the industry is likely to do well. I think this is one of the safer, better options in the industry, along with Meritage and D.R. Horton, And so I think that it's suffered from that. So they have had this overhang, there's a record of people getting hurt in the equity. So I think that's part of it. I think the other part of it is just, you know, the market has been a tech software as a service, high growth market for the last decade. So anything that is like this, that's, you know, reasonably capital intensive has

Starting point is 00:06:49 suffered as a result. For those two reasons, I think that it's sort of, it's been overlooked. but for some other reasons, I think it's sort of at this inflection point where it still looks reasonably valued. Even though you can have a look at the last decade, it's done on a stock price basis. Since 2011, I think it ran from $3 to about $53, $52 today. So it's done pretty well over that decade, even though there hasn't been the sort of supply, there haven't been the sales of these houses that you might expect given the underlying demographics.

Starting point is 00:07:21 So I think it's just one of those times where you can't necessarily see it in the historical data. You just have to understand the underlying demand growth and the supply picture, the current supply picture. And what that means for the next five or 10 years is that there's going to have to be a lot of supply. There are a number of companies that are going to be beneficiaries of this. Palti, I think is one of them. And my bias is always towards the safer, better companies. You know, there are lots of different ways to play. You could play the marginal, the more expensive ones, that tail, the end of the whip will sort of

Starting point is 00:07:56 crack a little bit harder. But I just think that this is the safer, surer option, Pulte, any of these, any of those sort of three, but Pulte being my preferred one. So whenever I look at the numbers, I can't help but think whether or not this is at the top of the cycle. And in all fairness, you know, this is your pig. And I'm sure you, and look at the top line and see how it's grown. Also keep in mind that we have this huge bust.

Starting point is 00:08:21 I can see that the gross margins are slowly creeping up. It looks really really nice. They're starting to pay out this dividend. It's a small dividend, we call it 1% of so, but that's training upwards two, strong balance sheet, all the things you want to see. And then you're seeing at the TTM or the training 12 month, you have $6 in 18 cents. It might look like it's slightly more here whenever you do the next financial year. And then you're like, hmm, I wonder what the stock is trading at.

Starting point is 00:08:51 You know, it should probably be trading at, I don't know, 100 bucks or something like that, probably north of 100 bucks. And today here's 17th of August, it's trading in 54. The market just opened. And you're like, huh. And so sometimes whenever I've seen things like that, and I can tell that from bitter experience, sometimes I've seen numbers like this and perfect as I am with timing. Everyone else, it looks like knows that this is a cyclical stock.

Starting point is 00:09:17 Sometimes it look really cheap, the airlines or whatnot, and then you see that bust, and then you sort of like see that turn around. So I'm trying here to show, so for those of you who are not following this on YouTube, it doesn't really make any sense whenever I'm like drawing things in the air. But I was trying to like draw the boom and bust here. So how does the cyclical then play into your thesis here, Toby? Certainly is cyclical. There's no question about that. The driver of the cycle is home starts. and you can pull this data is from the Fred, the Alfred website.

Starting point is 00:09:49 If you just Google F-R-E-D Fred Home Starts or Housing Starts, it'll pull up this chart. And you can look at it, the data going back to 1959. And you can see this very distinct sore tooth pattern, as I was referring to earlier, that at the very peak, so in 2007, I think we were doing, just from memory, we were doing something like 2,700 or 2,800 starts. And now, as of June, we did 1600. And it bottomed at 478 starts in April 2009, quote. And it's crept back up really, really slowly.

Starting point is 00:10:25 If you look at the other boom periods, they ramp much more quickly and they top out at a much, much higher number. To my eye, it looks like we're about mid-cycle. For those reasons that I identified before, I think that there's a little bit of an overhang because the GFC is still, global financial crisis, is still very, fresh in their minds of a lot of investors. And it's just a capital-intensive business. It's not software as a service. It's not as great a business as that. It's not a spectacular business like that, but it is entering into the second half of its cycle where it will become much more

Starting point is 00:10:59 profitable and it's going to look like a much better stock over the next few years. I just think you're in this sort of little period now where you can get it at a reasonable valuation before it really does start to run. And then you've probably got five or ten years to sort of enjoy that. I still think these are very good businesses. I don't think you necessarily need to buy and sell them. I'm just saying at this point, it's a pretty good risk reward. One thing, and you know me, Toby, I always like to play devil's advocate. Even whenever you bring these awesome pecs to the group, you're like, hmm, why are so negative? But we always wanted to like figure out the negative before we make that major investment. But how about inflation? Does that

Starting point is 00:11:38 play into your thesis in any kind of way. I would imagine that it's a relatively capital intensive being a home builder company. Having your profits, you know, save it up in old dollars, having to pay a new dollars. Could you talk to me about like the cash flow, the inflation? Do you even see inflation being an issue? The sensitivities for home builders are interest rates. So as interest rates go up, home prices have to come down because people can't borrow as much to pay for the homes. but that's why it's important that this has two important qualities to it. One is that it's got the geographic diversification, so it's not concentrated in any particular market that might be hot

Starting point is 00:12:14 or might miss out completely on what's happening. And the price points are material to it, under $400,000 for a little bit over half of their homes and under $500,000 for 75% of their homes. They're in that part of the market where there is a great deal of demand. And if you work out the interest rate, impact on those homes, interest rates going up a few percent, maybe running back to like the long run average, it adds like $50 to $75 a month in terms of cost of owning the house.

Starting point is 00:12:47 So I think that millennials, you know, I've gone through this experience over the last five years where one kid, you can live in an apartment, two kids, you can't really live in an apartment and three kids, you have to have a house. I'm not saying nobody's rushing out there to get to have three kids. That's a lot of kids. for two kids probably need a house. And I think millennials are going through that, that process now where you discover that you can't stay in an apartment, you need to move out into the burbs, you need a backyard. And I think that that demographic shift as they start buying

Starting point is 00:13:16 houses. And that, by the way, that has an impact on a lot of other industries too that will show up in furniture and it will show up in places that supply stuff for the home like William Sonoma and those kind of businesses, which is another interesting one that I like to. I remember, you know, back in the good old day, the good old day here, two or three mastermind groups ago, and we were like four people and, well, we're still recording, but we took that out afterwards. You know, you and Preston were like going head to head in terms of inflation. And, you know, at the time, you know, Preston was saying, you know, he looks very much

Starting point is 00:13:47 at the money supply. And you're like, yeah, I don't think inflation is that high. I think in relation to your pick, it's really important to understand since it's so interest rate sensitive. And so we can probably just lead out by saying, you know, you know, you know, If you have a high inflation, then generally you would like to increase rates if you're the fat because you want to put a damper on inflation. And so that would have detrimental effect on a company like Gietam.

Starting point is 00:14:13 So the 10 year at the moment is about 1.3%, which is historically quite a low yield. Longer on average is about 6%. Recently, though, that is a reasonably high yield over the last 12 months. I think it got under 60 bibs, which is 0.6% through the middle of the, the 2020 drawdown. So it's run up quite a bit and that has coincided with value stocks doing much better. So this is why I watch it so closely because value will do better as inflation kicks up a little bit because the underlying cash flows become much more valuable as inflation kicks up. Now you look at inflation estimates. So the last print that I saw was 5.4%. You contrast that with

Starting point is 00:14:52 1.3% on the 10 year. That means that the real yield is negative 4.1%. It's very hard. for bondholders. Bondholders are losing 4.1% a year. If nothing changes, they go on to lose one. But 4.1% a year, which is chewing up a lot of capital year on year, you cannot sustain that for very long. So one of two things has to happen. Either that inflation print is completely wrong, and it's all transitory, and it's as a

Starting point is 00:15:22 result of a low base in 2020. It's going to look much different when everything calms down and the supply all goes back to normal because we also had that quarantine. The shutdown, everything stopped and got rebutted and it's had this crazy prices and lumber, which is an input into housing, has gone absolutely bananas. It ran up and then it's run back down again. A lot of commodities look the same. Or rates go up. Very hard for rates to go up because the government, the federal government here is carrying a lot of debt. So there's a point at which interest rates start impacting the government's ability to make its payments. So I don't think the Fed's going to be like the Japanese central bank.

Starting point is 00:15:59 They're not going to let the rates run up, but it may mean that we have this very high rate of inflation and interest rates pinned low. So I have no, that's a scary kind of thought. That's like a 70 stackflation style environment, which I think is that there's a reasonable chance that we are in that or going into that. 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 actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo

Starting point is 00:16:40 Freedom Forum is entering its 18th year bringing together activists, technologists, journalists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people. using Bitcoin to survive currency collapse, using AI to expose human rights abuses, and building technology under censorship and authoritarian pressures. These aren't abstract ideas. These are tools real people are using right now. You'll be in the room with about 2,000 extraordinary individuals, dissidents, founders, philanthropists, policymakers, the kind of people you don't just listen to but end up having dinner with. Over three days, you'll experience powerful mainstage

Starting point is 00:17:23 talks, hands-on workshops on freedom tech and financial sovereignty, immersive art installations, and conversations that continue long after the sessions end. And it's all happening in Oslo in June. If this sounds like your kind of room, well, you're in luck because you can attend in person. Standard and patron passes are available at Osloof Freedom Forum.com with patron passes offering deep access, private events, and small group time with the speakers. The Oslo Freedom Forum isn't just a conference, it's a place where ideas meet reality and where the future is being built by people living it. If you run a business, you've probably had the same thought lately. How do we make AI useful

Starting point is 00:18:04 in the real world? Because the upside is huge, but guessing your way into it is a risky move. With NetSuite by Oracle, you can put AI to work today. NetSuite is the number one AI Cloud ERP, trusted by over 43,000 businesses. It pulls your financials, inventory, commerce, HR and CRM into one unified system. And that connected data is what makes your AI smarter. It can automate routine work, surface actionable insights, and help you cut costs while making fast AI-powered decisions with confidence. And now with the NetSuite AI connector, you can use the AI of your choice to connect directly to your real business data. This isn't some add-on, it's AI built into the system that runs your business. And whether your company does millions or even hundreds of

Starting point is 00:18:51 millions, NetSuite helps you stay ahead. If your revenues are at least in the seven figures, get their free business guide, demystifying AI at netsuite.com slash study. The guide is free to you at net suite.com slash study. NetSuite.com slash study. When I started my own side business, it suddenly felt like I had to become 10 different people overnight wearing many different hats. Starting something from scratch can feel exciting, but also incredibly overwhelming and lonely. That's why having the right tools matters. For millions of businesses, that tool is Shopify. Shopify is the commerce platform behind millions of businesses around the world and 10% of all

Starting point is 00:19:34 e-commerce in the U.S. from brands just getting started to household names. It gives you everything you need in one place, from inventory to payments to analytics. So you're not juggling a bunch of different platforms. You can build a beautiful online store with hundreds of ready-to-use templates, and Shopify is packed with helpful AI tools that write product descriptions and even enhance your product photography. Plus, if you ever get stuck, they've got award-winning 24-7 customer support. Start your business today with the industry's best business partner, Shopify, and start hearing... Sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB.

Starting point is 00:20:20 That's Shopify.com slash WSB. All right. Back to the show. So whenever you say inflation is understating, you know, we had this, just recently, I had this interview with Colin Roach, our master class in inflation, and we talked a lot about how he defined it. We had multiple really, really smart people, including Colin Roach on the podcast,

Starting point is 00:20:43 to talk about how they were going to inflation. how they define it, and it's very different. Most people agree that it's not CPI. It's not what comes out, but you would have people who are saying, you know, M2 or like, it will be all over the place. I'm curious to hear like, what are your thoughts on that, Toby? What is the inflation number? Not necessarily a specific number. If you can say 2.23, that's fine. But like, how do you look at that? The CPI is the consumer price index is one measure of inflation, but it is not inflation itself. So that's the way I think about it. So the CPI is this chained basket of prices where they look at from period to period and compare to the last period and look at the change in the price of the goods in that basket to give you a sense of what inflation might be.

Starting point is 00:21:38 And it's geographic. I think they drill down to the city. level, at least the state level. The problem that I have with it, and I think a lot of other people have with it, is these hedonic adjustments that they make. I think in some instances, the hedonic adjustments are fair and other instances they are not. So the hedonic adjustment is if state gets too expensive, well, there are substitutions. If state gets too expensive and you would substitute mince for steak, which might be cheaper, then that reduces the CPU doesn't reflect that increase in stake price, which just seems insane to me that it does.

Starting point is 00:22:11 is that it also excludes energy and it excludes housing, which are two pretty big price, cost centers in most people's lives. And then they make these hedonic adjustments. So televisions have got, you know, better resolutions and bigger. And televisions that were extraordinarily, were $20,000 televisions 20 years ago, you probably just about get them for like a hundred bucks now. And a really good big TV might be a few thousand dollars. So that the CPI has to adjust for that. Somehow computers get more expensive. cars get better, TVs get better. And so they make these hedonic adjustments for those things.

Starting point is 00:22:45 Whether all of that is warranted or not, I think it muddies the picture a little bit, makes it makes it a little bit. I don't know why the Fed gets the benefit of the technological advances that folks make to pin down the CPI. The CPI is an imperfect measure of it. And it seems to always sort of slightly understate the true rate of inflation. And the reason is that there are a lot of government prices that are chained to CPI. And so they don't want to, they want to reduce their payouts for various of these things.

Starting point is 00:23:15 And so keeping a low CPI, understating CPI is to their advantage. And so that's why CPI tends to be understated. So I think CPI is a true reflection and inflation. There are other competing services out there like shadow stats, which uses the 1970s definition of inflation. And they've always got it running at 10% plus. There was this MIT billion price project, I think it was. And for a long time, that showed it was running really, really hot.

Starting point is 00:23:40 So then they went in and they fixed it with air quotes so that no longer runs really, really hot. And then there are some other woods like slightly mangled this name, but there's a Cottonwood Index, Chetwood Index, which is now gone from the internet and scrub from the internet. But the Chetwood Index tracked for each city, the amount of money that a family spends, actually spends on various things. And it was running very, very hot. It was sort of like 10 or 11% a year. So it's a very political argument.

Starting point is 00:24:07 So basically your politics determine which index you. you prefer to believe. And if you say that you like Chatwood or Shadow Stats, you're making a declaration that you're sort of outside of the mainstream. And if you prefer the CPA, you're very inside the mainstream. I just sort of, I don't know which one's true. I think CPO's probably understated. The other ones, maybe they're slightly overstating it. I'm not sure. Probably somewhere in the middle. It doesn't really change. The real measure of it is ultimately probably going to be the 10-year or something like that because just bond buyers won't sit in stuff that's constantly chewing up their capital. So I think that you probably see the 10-year has to run up

Starting point is 00:24:43 a little bit through here. And I think fair value for it's probably 1.5% now, probably look more like 2% at the end of the year. And if it does that, that's going to be interesting to see the impact on some of the tech stocks. You know, it's always a lost cause to talk about what the fat's going and, you know, where do we see the interest rate going? You know, there's so much at play here. We talked about entitlements and, you know, perhaps why the government wants to peck the inflation low. Do you see interest rate going up because of inflation going up here as people have been talking about for a long time now? Knowing obviously also that the inflation number you see now is because of the base effects to some extent from last year. Base effect

Starting point is 00:25:23 meaning that you saw these deflationary pressures in 2020 because of COVID. And so there have been a lot of talks on those two hikes in 2022 perhaps already instead of 2023. Like how do you see that discussion whenever you look at your own portfolio, whenever you look at your time, is that something you pay attention to at all? Not really, honestly, because I just think it's too hard to predict. There's that Peter Lynch line where he says that 15 minutes spent worrying about macro is 15 minutes too much or something like that. I like talking about it and I like thinking about the impact that it could potentially have on the portfolio, but I don't make any investment decisions based on it because I just know that I'll be wrong and I don't want it to influence what I do

Starting point is 00:26:04 in the portfolio. Portfolio is always going to be concentrated into the cheapest things in the market. Because I think that that's an evergreen strategy, just makes logical sense to me that if you can buy cheap cash flows, then you should do that. And overtime, if they do other things like buyback stock over time, that will be reflected in the value of the share price. There will be better times for that strategy and worse times for that strategy. And it turns out that when the market is very bullish, when there's a lot of capital around, that strategy doesn't do very well because the sort of the constraints that I impose on it, which is that they don't raise a lot of external money. They're sort of internally funded for the most part buying back stock and they tend to be more

Starting point is 00:26:42 mature companies. They're not at that very fast rate of growth. They're still very good companies, I think, very good businesses, but they're at that slower rate of growth. And so they're just less attractive to people who are actively searching for growth. And you know, I've written some books about it. It's a little counterintuitive that if you really want portfolio growth, place to find it is not necessarily in revenue growth. It's in slower growing businesses that can pour other levers and cause their earnings and cash flow to grow very rapidly, buyback stock, which causes the share price to grow very rapidly. That's sort of the way that I approach the problem. And then the interest rates, just the only impact of the interest rates is

Starting point is 00:27:19 whether that will then make my portfolio take off, whether it'll be this sort of this part of cycle where it's been a little bit more expensive. The recent, you know, the 2020 drawdown and that sort of seems to have signalled a return, I think, over the last six to 12 months to a more traditional value strategies do seem to be working a little bit better in this market. And you can look at Arc perhaps as a representative of, that's Kathywood's A, RKK, as a representative of the flashier techie stocks has struggled since February and is down pretty materially since February, whereas Berkshire Hathaway perhaps as a representative of a collection of value stocks has done much better over the last six to 12 months. Interest rates and inflation going up will tend

Starting point is 00:28:03 to benefit value stocks. So I'm probably a little bit biased that I'm always looking for that in the market, even though I do think that's sort of manifesting now. I do think you can see that in the market. I'm just sort of one person. What do you think? Do you see inflation? Is it understood? Well, it depends on which number we're looking at. I think you're right. It's probably higher than those 5.4 they came out last month. Which is a hot print. It is. It is. Is it one to one with the money supply? With a lot of people, especially in the Bitcoin space, they're talking about, you know, you're chasing the same goods and you're pulling that lever. And I don't know if that's necessarily the case. I can easily see why you would make that argument,

Starting point is 00:28:46 because it does sound intuitive. I think it's also important to understand that it's at interest rate zero. And so you have to pull all the levers. And so it's a derivative. And so it's a derivative of that number. So there's a lot of money effect put out into the system whenever you lower the interest rate, which might just look different from an M2 perspective compared to all the quantitative easing that you're now seeing. And so you see these crazy numbers and you're talking about, oh, that you mean X, Y, C for the asset prices. So I don't necessarily see that as the case, but I do want to say that inflation has had an impact on how I invest. I don't know if it's just a natural progression of getting more experience with investing.

Starting point is 00:29:25 But I would say that probably in 2017, 18, I sort of started to think differently about holding my cash position. Before then, you know, I've learned for Warren Buffett, just like I guess most people listen to this podcast. And him, especially Chinamonger, they talked about having cash lying around and, you know, always be ready to pull the trigger on something that's really cheap. And I did that. I did that for many years.

Starting point is 00:29:51 And of course, lost something in I'm tuned to cost. I also hit a few home runs, so it wasn't all bad. But whenever the market just rallied and you're like 30% in cash or whatnot, everything else equal, that's just not beneficial for you. And so whenever I saw that inflation, whenever I was probably around this 17, 18, like you, whenever you're saying, oh, and two, that's probably like, you know, oh, a statement and, you know, CPI is probably understatement. I would agree with that.

Starting point is 00:30:18 I quickly came up with the conclusion that even if it was 5% or something like that, which it wasn't at the time, but even if it was 5%, that's a huge opportunity cost that I had to beat. And it just made sense for me always to be invested in, quote, unquote, something. Obviously, I wanted to be something that was cheap, something that was a good investment, all that stuff. But it always made sense for me not to have cash around. One of the things that you told me, Toby, really, at the time where I remember we talked

Starting point is 00:30:48 about, you and Warren Buffett, you and I, like, how we talked about, oh, being 70% in one stock, what's wrong about that? If you have a high conviction, you know, put 70% into something that's a really good business and that's cheap and you'll make a lot of money. And you said, we always have to think about, is this statement true? And you said, for Warren Buffett, yeah, perhaps it is true. It's true for me, Toby? It's not. I might paraphrase. So please tell me if I'm like putting work. That's right. So I thought a lot about that. And I was like, yeah, Buffett is right and Toby is right and I don't any way think that I'm as good an investor as you and I'm sure not as good an investor as Buffett. So I was like, yeah, I probably shouldn't be

Starting point is 00:31:31 70% in anything, which it wasn't at the time, but it really made me think and become really humble about not understanding macro to the extent that I wanted to. And I would also say not understanding micro to putting something like 70% into one pick. At that time, as with, I guess, many other investors had some hits, I had some misses. And it was just one of those where I pivoted to this, I always wanted to, I don't want to build positions more than 10%, but also let it run if a right on that pick. And so it also made me realize now that I'm putting myself where I would lose some of the potential upside in not putting more than 10% into one pick, assuming that it was the right one. Well, I would also lose some of that just from

Starting point is 00:32:15 not being Warren Buffett, a great investor. Because that opportunity cost for me is much more expensive, not because I can't make more buff returns, but because I can't pick the same stocks. And so I was like, okay, let's say, let's say worst case, 5%. Okay, you lose 5% with, when you know 30% of your portfolio, 1.5% you're losing every single year. I guess that's sort of like how I'm looking at inflation and sort of like why I'm now thinking about opportunity cost in I'm missing out of some of the best gains, but not being as aggressive as it used to be, but I also feel that it's been quite profitable by not, by always being invested. And of course, you can argue, well, you know, the last four years won't be like the next four years,

Starting point is 00:33:00 but just from doing that, you know, that's 1.5%. Assuming that's, you know, you have 5% inflation. And the market has a lot more than that. So let me throw it over over to you again. That does make sense to me in the sense that, yeah, so you've got this 1.05% of whatever cash you're holding as being, purchasing power of that is going down year on year. The only thing that I'd say is that the last, it's been a very long time since we've had a genuine bear market. And the market is expensive at the moment.

Starting point is 00:33:27 It's a historically high. Really the only times it's been higher than this is the dot-com boom. I'll right at the very top last few months, where at 39, I think on a shillopee last time I looked, it's been as high as 44 at the very peak in 2000. And then the market didn't do anything for a very long period of time. So having said that, I've done lots of testing about what strategies tend to work. Carrying cash just does tend to reduce your returns, just to the extent that the lower your exposure to the market, whatever return you're getting, you're going to get a lower return

Starting point is 00:33:59 than that over time. And you're assuming that you can deploy it all when the market goes down. You have, you know, it's scary when the market goes down like that, that you'll have the presence of mind and the fortitude to get fully invested. I just know myself that I don't have that. And so I have a different approach to money management, to holding money, waiting for those sort of times. I run a short book as well as a long book and I carry some cash.

Starting point is 00:34:24 And just by virtue of the fact that that one side of the book is working and one side of the book isn't, I'm always rebalancing towards the thing that's not working. So I'm putting more money to work either long or short as the market's moving around. And that's how I sort of get around it. But I have some sympathy for that view that it really is an opportunity cost to holding cash, particularly when the rates are so low. You know, we're previously in 2000 rates for it 6%. If you didn't want to participate in the market at a 44 times shillacate, which the inverse

Starting point is 00:34:51 of that is about 2%. You know, you don't want to get a 2% yield and go and get 6% in the 10 year. And that's something that tends to rally if there's a crash. So you'll pay it to wait and you had this tail risk protection holding that. Now, that's a different story. You've got 1.3%, which is below the rate of inflation. So you're compelled to be exposed to equities in that market. that's the explicit policy of the Fed is to induce risk taking by investors, which is why we have

Starting point is 00:35:17 a stock market where it's at and we have interest rates where they are. You can't get enough return from the safe stuff and you're forced into the market. And so that creates, I think, this sort of crazy behavior in the market where, you know, we've got these tokens and the NFTs and those sort of things. I don't know that the use case for those has been fully proven out. There may be one eventually. I just at this as where it stands now, I don't want to I want to go and put my money into those things when I can find a company that produces goods and makes a profit, generates free cash flow, and pays that out to shareholders. That just seems to me like an easier way of doing it.

Starting point is 00:35:53 We probably talk like 20 times here on the show or something like that. We always talk about the market being expensive. It has been. It's expensive since 1996. Right. So it's unbelievable. And I think it was Benjamin Graham who said something like, yeah, I had a good track record. I only had four decades or something. I should have a much longer track record to prove. I can't remember

Starting point is 00:36:16 it was something like that. Perhaps it was five. But you're like, okay, right. I shouldn't be looking at the past four years or two decades or whatnot. It's unbelievable how long it's been expensive. And so one of the things I've been puzzled about is, you know, I've looked at different value ETFs and very often, most of them are US-based only, and some of them are international, and then in that case, it's typically only international. Why is it that if you have a value ETF, that you don't have a global value ETF, why is that not more calming? It would include the US and international. Probably that's driven by just the investment choices of US investors want a US-focused ETF and there are lots of US investors around. So you can make a business with a US focused

Starting point is 00:37:06 investment, with the US focused ETF. And then if you already have US exposure, when you go to set up your next ETF or your next fund, you don't want to double up on the US exposure, so you get international exposure to complete your own exposure. But I agree with you. It's an imperfect way of doing it because there are, globally the US has lots of really good consumer discretionary companies that just don't really exist anywhere else in the world. So you would, a global portfolio will be reasonably heavily weighted towards US companies anyway. And so an international portfolio just gives other countries a better showing in the portfolio. You get more exposure to if you just exclude like the 45% of the market, which is what the US S&P 500 represents. I think, well, the US market is

Starting point is 00:37:50 it's like 45% of the market. If you exclude that, you're just going to get a better concentration of international. But I agree. And this is this is why I'm pretty eager to talk about your pick. Buffett gave this great, at the last meeting, he put up these two slides and he said in 1989, I think it was, this is what the 20 biggest companies in the world look like. I think it was something like that. There were a lot of Japanese companies in there. There were a lot of U.S. companies in there and there wasn't much of anybody else. And then he replicated that slide as a 2021. And it was dominated by U.S. companies. There was maybe one Japanese company in there and there were a handful of Chinese companies in there. And I think if you wind that

Starting point is 00:38:26 for 30 years, probably what that will look like is it'll be dominated by Chinese companies. There'll be quite a few American companies in there, and there probably won't be much of anything else. And so I think if you're an investor thinking about the next three decades, say, you probably should be looking at China. When you do that, there are some phenomenal businesses in there, and this might be an unusually good time for it because the regulatory changes have resulted in all of those tech stocks getting absolutely smashed to smithereens. And so I know what your pick is. My pick is Alibaba.

Starting point is 00:39:00 And I'm not necessarily saying it's your traditional value pick. And so perhaps it was a bit misplaced whenever I asked you about that in terms of ETF. I guess just from being like a big universe like the US stocks, you can't obviously find value picks. But that's just how it is. But at the same time, you know, if we look at our tool, CHAP finance, we have 23 developed markets in there. The US is the most expensive. And so you're fishing whether fish are not. It's a big pond, though, like the US is the biggest pond, but they're not a good water to fish ratio.

Starting point is 00:39:33 I don't know if this is correct English. You're quoting a Charlie Munger. I know he's got a position in Alibaba too. So that's what, I mean, I've looked at quite a few of these stocks now. I think Alibaba's interesting, 10 cents, interesting JD.com. There's a whole lot of really interesting Chinese stocks in there. And you know, that's all specifically why I wanted to talk about Alibaba because it was one of the stocks that I find particularly interesting and I think I understand better than a lot of

Starting point is 00:39:57 the other Chinese picks. And that was actually too tied into back what we talked about before and having that in the ETF. And I'm not trying to say run out and start an international ETF after this. It's just one of those. I'm like, I just see a lot of value there, but it's hard to get to. Just never mind that I live in Europe and it has to be specifically certified here in Europe. So it's even harder here. But even in the States. That's the ETF. Yeah. Right. The Chinese value Chinese-less Indian value ETF for all of us who can see the value there, but can't access them and don't feel too comfortable about going into this huge, but to us, weird-looking

Starting point is 00:40:36 Chinese or Indian company. And so, anyways, I wanted to talk about Adibaba today. I actually already pitched that back in Q1, 2019. And at the time, Adibaba was training around 170, I want to say. It's almost back to that today, actually. And this is our one of the few loggy breaks I have here in my life. I sold it earlier this year and it was... Do you sell it pre-monger? Yes. Or post-monger going into it? Pre-monger. And so it doesn't make me feel good whenever I sell something that monger buys, except in this very specific case, it seemed to be fantastic. So I decided to liquidate my entire position. It was sort of like a few reasons. One of them was my wife and I were moving. Bought a new place, so I needed to have some

Starting point is 00:41:27 funds. And the other one was that I wanted to just liquidate the entire portfolio, because at the time I felt like Berkshire was probably undervalued by 30 or 40%. And so it was just one of those when I'm like, yeah, and I'm about a trading at 250, 300, whatnot. It actually didn't seem overvalued to me. But it just seemed like, yeah, it might be fairly valued. Definitely didn't feel like it was like undervalued at that point. So knowing that we have to release funds, text stuff, Berkshire being just slightly more attractive, I just liquidated it. And again, talk about Wall Lockland scale, because not only has Berkshire gone up, that's actually enough what I've been most excited about, but Adibaba just blew up. And, you know, it wasn't because Xi Jinping

Starting point is 00:42:10 called me and said, I'm going to crack down on Chinese tech. It wasn't anything like that, but it has just plummeted, right? The thing, it's like, what, 175 or something right now? the market just opened and... Did you sell it because it was expensive? What was the reason for selling? You just sort of had gone too far? No. At the time, it was just seen to me, it was fairly valued.

Starting point is 00:42:30 And then going back, I needed to sell some stocks for the down payment for a new condo. I could easily see myself hold on like if we moved next year instead. It was the closest to fair value in your portfolio. So you wanted to ship the thing that was closest to fair value. Since then, the Chinese government has just been hitting big tech hard. Educational companies, they decreed that they can't be profitable. So you can imagine what that had done to the share prices of those. And then you had investors like Charlie Munger who bought in in Q1 already.

Starting point is 00:43:05 I think Moniz Pop right did at the same time. Moni's Pop right added here in Q2, Guy Speer, built a new position. And they probably bought in the 210, 230, perhaps a bit higher, for Monger came in a little earlier. So, the bottom that range. So the stock training at call 175, I'm not saying that you go, just go buy it, but it definitely makes you wonder if there's, if there's a value there. And so I did take a very small position. I think it's one of the things I always like to put up as a disclaimer. I was thinking, actually, at the time, it was like lower than 200. And I was like, yeah, why don't they just buy a fuse? Yeah. So I have this thing where I

Starting point is 00:43:43 buy very little stock in a company, it's less than 1% just because I don't know if it's just me getting lazy or what's happening, but I have a hard time sitting through earnings calls and reading 10 Q's and 10Ks if I don't have a little skin in the game, even if it's very, very little. It's just like a mental thing. I just absorb things differently. And so I decided to do that. I kind of felt like a 200 or 198, which was I bought a very small, less than 1% position. It makes sense to buy a little bit. Because it's optically cheap and you've got lots of good signals. Charlie Munger owns, Lee Lu owns it.

Starting point is 00:44:21 There are a few other investors in there, too. He didn't mention who I know, who are very well respected who picked up. It makes more sense to buy a little position than it does to go and buy your whole position before you've done your research. So you bought that's appropriate right. Buy a little position because those are good signals. It's cheap. Charlie Munger's bought it so on.

Starting point is 00:44:36 Now you go and do the real work to determine whether you're going to ramp it up to a full position or not. Let's take a quick break and hear from today's sponsors. No, it's not your imagination, risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform.

Starting point is 00:45:03 So whether you're prepping for a SOC or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. of chasing spreadsheets and screenshots, Vanta gives you continuous automation across more than 35 security and privacy frameworks. Companies like Ramp and Writers spend 82% less time on audits with Vanta. That's not just faster compliance, it's more time for growth. If I were running a startup or scaling a team today, this is exactly the type of platform I'd won in place. Get started at Vanta.com slash billionaires. That's Vanta.com slash billionaires. Ever wanted to explore the world of online trading, but haven't dared try? The futures market

Starting point is 00:45:48 is more active now than ever before, and Plus 500 futures is the perfect place to start. Plus 500 gives you access to a wide range of instruments, the S&P 500, NASDAQ, Bitcoin, gas, and much more. Explore equity indices, energy, metals, 4X, crypto, and beyond. With a simple and intuitive platform, you can trade from anywhere, right from your phone. Deposit with a minimum of $100 and experience the fast, accessible futures trading you've been waiting for. See a trading opportunity. You'll be able to trade it in just two clicks once your account is open. Not sure if you're ready, not a problem. Plus 500 gives you an unlimited, risk-free demo account with charts and analytic tools for you to practice on. With over 20 years of experience, Plus 500 is your gateway to the market.

Starting point is 00:46:39 Visit plus 500.com to learn more. Trading in futures involves risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500, it's trading with a plus. Billion dollar investors don't typically park their cash in high-yield savings accounts. Instead, they often use one of the premier passive income strategies for institutional investors, private credit. Now, the same passive income strategy is available to investors of all the financials,

Starting point is 00:47:09 sizes thanks to the Fundrise income fund, which has more than $600 million invested in a 7.97% distribution rate. With traditional savings yields falling, it's no wonder private credit has grown to be a trillion dollar asset class in the last few years. Visit fundrise.com slash WSB to invest in the Fundrise income fund in just minutes. The fund's total return in 2025 was 8% and the average annual total return since and 7% and the average annual total return since and is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, 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 let's revisit Elba here in Q3,

Starting point is 00:48:06 2021, massive company, right? 1.18 billion active customers. Just think about that. If we break that down into four different business units, 87% of revenue comes from co-commerce. So that's the primarily Chinese e-commerce through Taubo. You can think of Al-Iaba if you don't know too much about the company, perhaps if it's one of the first time you're hearing about this, just think about it as the Amazon of China with lots of localized tweaks. It's a lot of localized tweaks. It's different. But you can buy everything just like you can on Amazon. Eight percent of revenue comes from Elibaba Cloud. This is the segment you better what's out for. We've seen just last quarter year of year for the June quarter, 29% growth. And this was actually quite disappointing

Starting point is 00:48:53 growth because they lost by dance, the owner of TikTok. So if you adjust for that, we're much, much more than 29%. So if you actually looked at it and took that out and you look at it year year, we're close to 50%. So it's now a $10 billion business unit with a lot of growth ahead. If you look at the global market share for the Al-Baba cloud, it has around 6%. And that makes it the fourth largest market share in cloud computing. So it's trailing Amazon, Microsoft, and Google. I would also argue that for the time being Alibaba, it's not really competing in the West for cloud computing, just like you would say Google is not competing too much in China. I would rather say that you divide up between East and the West, and you might even just say to China,

Starting point is 00:49:37 and Eibaba is the most dominant player, and they have three times the market share as 10-cent cloud. If you look into some of the stats, Asian companies prefer Asian providers. I would imagine it's the same here in the West. We had to decide on just internally in company, on the cloud service. We looked at, I want to say, four or five, or the more American. It wasn't even like it was a conscious thing. It's just one of those things like, where do you want to store data? I don't want to store it in China. I don't think we even made that analysis. I think it's something that's a conscious.

Starting point is 00:50:06 I would argue that you would see a very, very high growth in Asia, specifically China, probably more than in the West, where Alibaba would just have that first mover advantages and the ecosystem around it. You can say to some extent the same for 10 cents. The cloud business, as much as it's 8% of the revenue, it doesn't make a lot of profit. It just turned a profit, though, but it's not the most profitable unit. It's all about growth right now. Now. Then you have 3 to 4% of the revenue. That's the digital platform, entertainment and video. So the crown jewel here is Yoku. You can think of it as a hybrid between YouTube and Netflix. They have more than a half a billion users, which makes it the third largest in China. It doesn't make it the biggest. Both Baido and Tencent actually have bigger providers. And then you have Adibaba pictures and other entertainment. They also have gaming. They have a few different things in this unit.

Starting point is 00:51:01 It's not profitable. It's growing a decent clip around 12% a year right now, but we do see some growth on that. And then they have less than 1% is something called Innovations Initiative and others. The best way to think about this is similarly to other bats for Google. So you can think of as a Baba has like a small army of companies that are not generating any revenue. They have a big risk of failing, but you have a lot of potential upside in that too. If when they become profitable, it would be broken out, just like Waymo was one broken out, YouTube was one broken out in Google's statements. The way that Alibaba operates is that they generally

Starting point is 00:51:43 take large or controlling stakes in acquisitions. And they do not consider themselves an investment company. So this is different than Tonset. They have a very mindset of investing in a bunch of different businesses and then they're an investor. They made a significant investment in Pinduodoo, Tencent here I'm talking about, and they then use their ecosystem. It's a way of growing too, but they're investors. Yes, they are on the board, but they're not operating the company. And Ababa has a different mindset. If you look at the valuation, and then we can perhaps after we go back and have a conversation about everything that's going on with the regulation, which is just a big mess right now.

Starting point is 00:52:24 If you look at the valuation, what is Alibaba worth? And it's a tough question. I can come up with a range between $250 and $350 perhaps. This is for a stock that's trading at called $175, but it's hard. And you can argue for an even wider range. It's trading at 20 times free cash low. Is that cheap for a company that's been growing earnings per share on average for the past three years of 30%.

Starting point is 00:52:55 Yeah, it's pretty cheap, right? And it's not 30% in total. It's 30% annually. You have a company here with revenue all the 30 months that is 40% and all the past five years, it's averaging 47%. Like 47%. You can argue that in the world where the interest rate is zero, this is a, and it's a company, we go back to the discussion about inflation.

Starting point is 00:53:20 by nature it has a inflation protection. Like that's in the nature of the business, meaning you don't have all those capital expenditures, you don't have to lay the tracks for your railroad or whatnot. Let's flip it. Let's say you have a company that's trading at 20 times free cash flow. You have an unpredictable entrotitarian government. Is that cheap? No, it's actually quite expensive whenever you have like a big unknown like the Chinese government.

Starting point is 00:53:49 It's hard. What I would suggest that people would do is, I guess as with all stocks, come up with different scenarios, assign percentages to that, and then discount those cash lows back. That was my pick, Toby. I want to throw it over to you for any questions, thoughts on this pack. I really like it. I've got some real questions. The questions are, what is the impact of these regulatory changes on Barber?

Starting point is 00:54:14 That's the first question. It's not pretty. If you might remember, and financial, really something everyone talked about the financial world, which was not fully owned by Adibaba, but Jack Ma was a controlling shareholder, and I Baba had made a major investment. At the time, I think it was valued of more than $100 billion, and they had an IPO where I think the goal was to raise $37 billion and stuff like that. It was a massive, massive company, and all of a sudden, it just stopped. Like, the regulators just said, nope, you can't do that.

Starting point is 00:54:47 And since then, they've started to force and financials open up to some of that data. So all of that hasn't been played out, but the government wants access to that data, and they also want rivals to be able to purchase that data in a marketplace. And it hasn't really been figured out, and then what's the price, and is it all data, it's some data, but it's not ready. And so this is my long-in-way of saying, I don't really know what the entire impact is. and it seems like the market doesn't really know either, but they're not, they don't like it. I don't think that you won't see like they did with the educational sector, where they just

Starting point is 00:55:25 said, no, you know, you can't really make a profit anymore. I don't see that happening. Again, I would never have thought they would come out and say, no, these business can't make a profit anymore. It is definitely a major risk. Do you know what drove the changes? What was the rationale? What was the reason did the government give for the changes?

Starting point is 00:55:44 They said that the party line was something like, we want more social equality. They wanted not just social equality, but they also want better competition. They wanted to curb the market powers. And so this is something generally that people, and whenever say people, the population likes to hear. Like, just like in the West in China, they're also afraid of companies collecting their data and what they would do about it. But I think it also served a different purpose. If you look at, you know, the country is just so, so different, right? You have Xi Jinping, the president, who have

Starting point is 00:56:26 sort of changed the legislation in terms of how China is now ruled. And it seems like he's more or less giving himself infinite runway to steal the country in whatever direction he wants to do. I think one of the issues was that he saw potential rivals and he saw potential rivals that didn't necessarily like the Chinese regime. Jack Ma would be the poster boy for that. He sort of disappeared from the public eye for, called four, six months or so, and he came back a lot more humble. Like he was quite an open critic, especially for a Chinese prominent person.

Starting point is 00:57:03 And he came back speaking very differently about the Chinese government. Not long after that, I think it was only like within three or four months after that, you have two very prominent people in China that removed myself from the public. One of them was the founder of Pinduodu, Kong, but also the founder of Bightans, who owns TikTok. And so I think it was also a signal that he's in control. I think it's a power play. If you look at the legislative body, like you have so many wealthy people. But if you look at the 83 wealthiest from NPC and CPPCC, so you can basically look at this as

Starting point is 00:57:42 Laceda buddy, they're basically the delegates. They have an average wealth of $3.35 billion. And this is like, I wouldn't call them admin workers because that would probably be like the wrong thing to say. But like these are the people like on Xi Jinping's side who are running this country. They are determining the laws. In comparison, if you look at the U.S. Congress and don't feel sorry for the people in the U.S. Congress, if you look at the 83 richest members, they have an average wealth of $56.4 million.

Starting point is 00:58:17 That's still a lot of money. But whenever you compare it to, you know, what is that 60 times, what they were having in China. And so it's just, I think it was one of those power plays more than, I wouldn't say more than anything else, but I definitely thought that played in. Yeah, so that's sort of, the next question was, what does that mean for the regulatory landscape more generally? So it just means that probably it's a little bit more unpredictable. Is that fair or that there's potential for more of this? How does it differ from, you see in the States? If a company gets too big in the States, so Microsoft had antitrust legislation against it in the early 2000s or antitrust action against it, rather. and there's sort of rumblings now in the States, and there has been for about five years,

Starting point is 00:59:03 about the bigger tech companies here that they may have too much market power or they may be collecting too much data. They're exercising some censorship. How is it different from, you know, nothing's happened in the States? So it's purely theoretical, but what's the difference between the two? Speed and magnitude, I would say, let's take Google, for instance, sued last October 2020 by the DOJ and 11 states for monopolistic abuse, and it's only been for the search business, not for anything else. That will come before 2023. In comparison, if you look at what happened with

Starting point is 00:59:39 Adubaba, and not just like stopping and financials, like from one day to the next, like their IPO, it took less than four months to slap a $2.8 billion fine on the company and open them up to sharing data. And so I guess I see this differently than, I read through all my notes here from 2019. I typically, for these mastermind meetings, I typically prepare between like eight and 12 pages, something like that. Luckily, I don't go through all of them because I think people would be bored. But like, I was just at the time writing, this is what I'm thinking, this is the outlook.

Starting point is 01:00:13 I remember one of the things I wrote was thereby. Itaba has a significant advantage to the US because they are allowed to collect data and they can collect more of them and they will cooperate with the Chinese government. So they would have a leg up because it's a global power play to be the frontrunner in AI, for instance. And now, I guess I think differently about it. I still think that, you know, obviously the Chinese government will still like collect that data and figure out what to do about it. But I'm not sure that big tech in China have the same advantage as I used to think. I think they have the advantages in the sense that they are allowed to collect more data than the West.

Starting point is 01:00:55 the individual company probably wouldn't have the same mode as I thought they would. Chinese companies aggregate probably still have a mode compared to what's happening in the US. Simply to operate on the Chinese market, you need to give green light to different type of the updated collection and different type of IP, which you don't have to do in the States, for instance, if you come as a Chinese company, at least not yet. And so the Chinese government just have, and especially if they're not forced companies to share them. Like, they will merge one or two or how many winners who would then figure out what to do with that data. And so collectively, it might be an advantage for the individual company, in this

Starting point is 01:01:33 case, Eidaba. I don't necessarily think that the advantage is as big as I used to think. Whenever we look at this as investors and we're like, yeah, we might not care about, you know, politics or whatnot, but we're going to where the value is. I sort of like see it as the opposite of other bats. You have this other bets, which for Alibaba would be something like Ding, for instance, which is like a workspace cooperation tool. But you can think of this as what Google has with other bets with all these deep mind, and all that cool stuff, where you would say it's really difficult to value what all that

Starting point is 01:02:14 is worth. They're not generating too much revenue. How profit will be. They're actually just burning cash. But it probably has some value. It would be weird if it didn't have any value. So you might be willing to pay a bit more for the rest of the company. You would probably need to understand, say, in Google's case,

Starting point is 01:02:30 you would need to understand like the advertising space pretty well because that's how they make money in terms of search. And I would say to go back to Alibaba, just like I would pay more for the e-commerce and cloud business because that's clearly going to be profitable. And it's easy, especially for the e-commerce business to figure out what that's worth. I'd probably pay a bit more from that because, of other bets. Then I would also say I would pay a deal less because of these regulatory pressures.

Starting point is 01:02:59 And so it's a bit more odd than science. I think that's what the late runs with we call it in known unknown. We definitely know it's an issue with tech and the installation you're seeing right now that's being taped around it. It's just too hard to tell how bad it would be. When I look back over where it has traded over the last five years, this is about as cheap as it has traded over that period of time. I don't think the question is so much. I mean, it's optically cheap and you're probably getting the right odds for a bet on it just continuing to do roughly what it has done or maybe just a little bit worse than that. If it does that, you're going to make out really well in this position. If there are material changes to it, then all bets are off

Starting point is 01:03:42 and who knows. But I think it's a good opportunity potentially to grab something that is spectacular because the upside is huge. If it does go back to doing what it had been doing and you get some of those other bets paying off, the risk reward is good. The risk, if anything, has sort of been priced into it here. And so I think that it's a, I like the position. I like a few of these sort of opportunities just for that reason that, you know, where previously they had a lot of, there was a lot of, you had to be right on what the underlying business did because you, you're paying up for it. Now the valuation is to the other side. You've got this opportunity. nobody really knows what's going to happen, but at least you're getting the right odds to take the bet.

Starting point is 01:04:23 You know, I came up with this, what is it worth? And I said between 250 and 350. And you can really make an argument that that range is just not wide enough. But do you dare putting some numbers on how you look at the intrinsic value for Baba? It's too hard. I do think that you can look at it on a ratio basis. It's as cheap as it's been in the last five years. It's clearly the underlying business is spectacular because it's got massive returns and equity. It's growing incredibly quickly. They've got lots of other little businesses that aren't even included in that that are still burning cash. That might be opportunities down the road. All of those things like the cloud is very early days still. And that's been a monster business in the States for Google and AWS and for Microsoft's

Starting point is 01:05:03 as well. So I like the opportunity. The thing that you've got to get comfortable with is the regulatory regime. That's true everywhere in the world. This one might be a little bit more arbitrary and a little bit more aggressive, but then, you know, I think regulatory regimes global are pretty arbitrary and pretty aggressive, too. Oh, boy. Yeah, I definitely agree with that. Again, I'm trying to be my own devil's advocate. So not only with my good friend Toby, I actually try to take myself down if I, if I can. I guess one of the things where I look differently today here in Q3, 20, 21, than I did in Q1, 2019, whenever I built the initial position, which was at the time, I think it was, in like 7% or something like that. So it was quite significant bad for my portfolio. I think where I

Starting point is 01:05:48 looked at this differently was that I really looked at them having this massive moat in e-commerce. You know, they have this, their own ecosystem. Like you have to go to, it might sound odd that it can be a mode that you have to go to the website and you can't find anywhere else. So let me just tell you a bit more what I mean by that because, for instance, like Baidu, like called the Google of China, right? So what Al-Baba is doing is it actually blocks Bidu spiders from indexing of both Taubal and T-Mal, which is the two primary sites. And so you actually have to go directly into Al-Aababa to buy.

Starting point is 01:06:23 They have the whole ecosystem around where you need to enter the ecosystem. And then it's very easy to buy and it's very convenient for you to make any purchase. And that also makes search a lot more valuable. That makes the advertising dollars go up really quickly because it's very efficient for Yababa. And I saw what Tenson were doing with their ecosystem. And it seemed to me that it made sense that would be like this duopoly and would be really, really hard to get into that market.

Starting point is 01:06:49 And then Pindu-D comes in. Like, in this year, they're probably going to sell more than JD.com. Not more than ABA, which is still a significant first, but like, I was surprised how fast that happened. And so I guess one of the concerns I have with this pick still, I see great value. But one of the concerns I have is just the disruption that I see in Chinese habits. and how I've never seen that coming with Pindo do. So just one more thing to be cautious about and look out for if you want to invest in this. I can ask you one question, Toby, about this,

Starting point is 01:07:24 because this has been like a, it looks like a falling knife. It looks awfully whenever you look at how the price has moved here this year. I read this book by Stephen Swordsman. I think the book was called What It Takes. And he talked about billing Blackstone and talked about how he made money in Blackstone, and he talked about how he would never catch a falling knife. He would always look for the bottom, then want to see at least a 10 to 15 increase from any button before he would make a position, because otherwise he could get really, really ugly. And you would pay a high opportunity cost from having to wait, even if you think the intrinsic value is on your side. Do you think there's anything to that? Is that something you looked into at all? Just curious to

Starting point is 01:08:09 your thoughts on that? The way that you can deal with it is by, you know, you combine some sort of momentum measure. I don't know that it necessarily changes the, you know, so you look at, when I say momentum, you just, like you say, it bounced up from some point. It's not still falling. I think that statistically across a number of positions, it doesn't really improve your chances, it doesn't really improve your returns on a basket of positions. I'm sort of valuation only. I don't really care so much what the stock price is doing because these things bounce too. they can bounce really hard and really high, and then you miss your opportunity. I think you look at a stock price chart and it's joined together in time,

Starting point is 01:08:45 and it looks like it's got this sort of momentum and movement to it, but really what it is is just people transacting at different prices. And so you get the opportunity that you have based on the market price where it is and what your assessment of the value is. And then your timeline is long enough. Like if you're thinking in a three to five year, 10 year timeline, Does it really matter whether you get it here or up 30% or down 30% probably not? So I think you just take your opportunities where you find them.

Starting point is 01:09:13 So don't worry so much about where you think it's going to be in the future in the short term. You just buy it here. And then if you're worried about it continuing to fall, don't buy as much as you want by half a position or a third of a position. And then if it bounces 10 or 15%, and that's your signal to buy the whole position. And if it falls another 30%, then you know, you can buy a little bit more and maybe you go to a half position at that point. I think it's kind of impossible to know. You just got to look at the odds that you're offered at each stage and make your decision based on that rather than where you think the stock price is going to go. Makes sense. And what does he know, Seymour's Swarthman,

Starting point is 01:09:47 just because he built Blackstone. He's a private equity guy too. I mean, probably knows quite a lot, but he's primarily a private equity guy. I don't think that he's doing that when they're buying things privately that I go in and say, what price are you going to offer? And they say, well, it's a billion. And then they go back next time and he says, what price are going to from there, say 500 million. He says, oh my God, it's, it's a falling knife. I can't buy it here. I'm going to come back and when it's 600 million or when it's 575 billion that I'm going to buy, that's a 15% bounce. Exactly. Cool. I'll let you go here, Toby. But before I do, I would like to give you an opportunity to tell a bit more about where people can find you.

Starting point is 01:10:26 What else you're doing other than being on this podcast? Yeah, I run two ETFs. The first one is called the Acquirers Fund. The ticker is Z-I-G. It's long and short, U.S. domestic companies, Deep Value, and I run a small and micro version of it that's just long only and a little bit more diversified called Deep, D-E-E-P. I also have a podcast called The Acquirers Podcast and a website called AcquirisMultable.com. And I'm on Twitter at Greenback. It's a funny spelling, G-R-E-N-B-A-C-K-D. And I've written some books. Most recent one is the Acquiris Multiple, which came out in 2017. It's available in all good bookshops, including Amazon.

Starting point is 01:11:06 That's amazing. And so for the rest of you out there listening to this, or perhaps you're looking at this in YouTube, make sure you're to subscribe or follow us on Spotify, a podcast, whatever you're listening to this. All right, guys, that was all that we had for you for this week of the MSS podcast. We will be back next week. Thank you for listening to TIP.

Starting point is 01:11:27 Make sure to subscribe to Millennial Investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only.

Starting point is 01:11:43 Before making any decision consult a professional, this show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP374: Mastermind Q3 2021 W/ Tobias Carlisle

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.