We Study Billionaires - The Investor’s Podcast Network - TIP496: Mastermind Q4 2022 w/ Tobias Carlisle and Hari Ramachandra

Starting point is 00:00:00 You're listening to TIP. In today's Q4, 2020 Mastermind episode, I invited Tobias Kyleyle and Heidi Ramatandra. As always, we talk about the most interesting stocks on our radar, but we kick off the episode with our thoughts on the current mild conditions. Toby is pitching a stock with a solid downside in uncertain times. Harris pick is down 70% yet to date, and we're discussing whether it's a falling knife or a bargain opportunity.

Starting point is 00:00:25 I only have four individual stocks in my portfolio, and I'll be pitching the most recent stock I bought last quarter. I hope you'll enjoy this episode as much as we did. 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.

Starting point is 00:01:00 We're here for the Q4-2020. And as always, I'm your host, Dick Broderson, and today I'm here with Tobias Kyle. and Harry Ramatandra. Gents, how are you today? Very well. Thanks, Stig. Thanks for having us. Good to see you, Harry. Hey, good to see you, Toby, and Stig. Thanks for having us, Stig.

Starting point is 00:01:18 So, Harry, we usually bring a pick to the table, and we're also going to do that today. But you suggested just before we hit record that we should talk about the current market conditions. And a great idea. I mean, what a market we're in right now. Let me throw it over to you to begin with. What are you seeing in the market right now? this is Toby kind of a market. So I know, yeah, I know Toby is very restrained today, but I'm pretty sure he is enjoying this market.

Starting point is 00:01:50 And I would love to hear his take on what does he see? And like, for example, I know Toby you have been skeptical about Bitcoin and the hypergoat stocks for a while. what I really appreciate is your grit and your patience that you took a stand and stuck to it. So first of, I wanted to kind of, you know, get your thoughts on what do you see and in a way you're vindicated on many, many issues. So I would love to know how you are seeing the market today. Well, thanks, Harry.

Starting point is 00:02:28 That's very kind. I think about it in two terms. one is the stock market and one is the underlying economy. So in terms of the underlying economy, there's a lot of moving parts to it. We had the COVID shutdowns and then the COVID restart and all of the stimulus that went into the economy. And I think that that created, well, that's got this, it's had this twofold effect that there is still parts. And my pick today is going to be about a company that has been impacted negatively by all of the things that have happened, you know, supply chain issues and the rampant inflation cost of raw materials. And on the

Starting point is 00:03:06 other side, I think that we're sort of moving through that now. So for this company, I think that the near term looks better because it's going to work through those things. And I think that that's true of many things. I think the inflation spike that we've seen does have a big, there's a big secular component to it, which is one of the reasons. I'm very sympathetic towards the view on Bitcoin. I'm not anti-Bitcoin in any sense. The Bitcoin, the Bitcoin maximalists who say it's a way to escape the money printing. I'm very, very sympathetic to that view. It's just I don't have any particular ability. When I sit down at that table, I'm the Patsy. I don't know whether 20,000 is a good price or 2,000's a good price or 200s a good price.

Starting point is 00:03:45 So for that reason, I just avoid it. But one of the really telling indicators for the underlying economy is the Treasury yield curve, which is they just take, you know, there are treasuries that run out to 30 years. So we issued 30-year treasuries and we can see short-dated treasuries that are issued. So we can take it anywhere from one month and we can look at the yield on the one month. We can look at the yield on the three-month, on the six-month, on the one year, two-year, five-year, ten-year, every single year out to 30 years. And what ordinarily happens is that you get paid a lot more, you get a lot more yield to hold the 30-year for the obvious reason that you don't get that money back for a very long period of time. A lot can happen

Starting point is 00:04:27 in 30 years. You're going to have a lot of inflation. You're going to have a lot of changes in the stock market changes in interest rates. And so that's called duration. You get paid to hold duration. And ordinarily, you don't get paid much for the very short-dated T-bills. They turn over very quickly. You get a lower interest rate for holding them. And that's called backwardation, where as you go further back into the yield curve, you get paid a little bit more. Or every now and again, something very odd happens in the market when it gets spooked and people don't want to hold the short dated paper because they think that something bad is imminent. And that means that when you don't want to hold an asset in order to find the next best

Starting point is 00:05:08 person who, well, the next person who wants to hold it, you've got to pay them a little bit more. And so we're in this very unusual period. It doesn't happen very often, but it has happened on occasions where all the dates that you hear, you will recognize these dates where the front months, so the three month is typically what people look at and then they compare it to the 10 year, which is the typical, you know, you might think about that might be the rate that you might use to discount a company. That's people thinking sort of 10 years, that's about the right amount of risk and duration for a company. And so the three month currently yields more than the 10 year. And so that's called an inversion. And so when the

Starting point is 00:05:45 three months yields more than the 10 year, typically what that indicates is that in the short term, like in the next six months inside the year, that's got a very good track record of predicting recessions. So what it's indicating now, well, Cam Harvey is the gentleman who did this research. He published in 1986. He looked at all of the inversions pre-1986. And so we've had that as a live signal that's been working forward since 1986. And it's got a fantastic record. It's not had any false positives and it's had no false negatives either. So it's been quite a good predictor of these things and it's currently inverted. For Cam Harvey's signal to work, it needs to be inverted for 90 days and it's only been

Starting point is 00:06:29 inverted for about a week. So it hasn't triggered Cam Harvey's signal. But you can pull this data up. It's all available free on the Fed's website, on the Alfred website. I direct link through to this so I couldn't tell you exactly how to get there. But you can look at these inversions and there was an inversion in an inversion in 2007. 789, there was an inversion predicted in 2000. There was an inversion just before March 2020, which is really odd. That 103 inversion predicted the COVID crash, as funny as that sounds,

Starting point is 00:06:58 but that's the case. And we're currently inverted now. So the signal's not triggered, but that inversion is typically pretty bad news for the stock market as well, because the stock market sort of has these two types of crashes. They have a valuation-driven crash, which ordinarily it pulls back about 20% when that happens, which that's the technical definition. of a crash, but they happen reasonably frequently. And then they have these much deeper versions, which is like a 2000, 2002, 2007, 2009 where it can be 40, 50, 60. I think the average in that period is about 40 to 45 percent. We're currently down a little bit over 20 percent since the start of the year. I have this other metric that I like to look at where I say, I look back 12 months,

Starting point is 00:07:39 so it's year on year. And I say anytime the market is down 20 percent year on year rather than from the peak, that's what I define as a real crash. And so that was triggered in 2000, 2002, 2007, 2009. And as of today, that is also triggered. So what that indicates to me is that there is some real weakness in the underlying economy for the very obvious reasons. We're probably at the end of a business cycle. We've also gone through a very unusual period where industry was shut down, industry was restarted. There was a flood of money that went into the market. That just created this explosion in asset prices, explosion in commodity prices. And a lot of that it's coming back. Explosion and house prices and a lot of that is coming off now. When people look at

Starting point is 00:08:18 how you sort of determine a housing market, sorry, determine a recession that have this acronym H-O-P-E. So the first thing to go is housing. Housing is the first valuation to roll over. And I think housing prices have come off pretty significantly from the high, which you could say that was a sugar high from all of that liquidity that flooded in plus people being locked down in their homes, all that sort of stuff. And so now we're coming off that comp, so that might be an unusually high comp. It might not really count. And then the end of that is employment. So when employment actually dips, that's sort of the real teeth of the recession for most people. That's when most people know that there's a recession going on. At the moment, employment hasn't rolled over. Here's the really

Starting point is 00:09:02 sick thing about the stock market. Because it's a forward-looking metric, it's a forward-looking sort of mechanism rather. The stock market tends to fall over at the very beginning of, it's like housing, it'll go when housing goes, but the stock market will take off when employment finally rolls over because it looks into the future and it can see that once employment starts coming down, then we're near the end of that cycle and there will be another up cycle that comes after that. But because we haven't seen employment roll over yet, I think we're right in the middle of what, in the middle of like an air pocket where, because we've got the 10-3, free inversion, the stock market's down 20% year over year. All of these other things are rolling over.

Starting point is 00:09:43 I think there's a very good chance that we see sort of a near-term volatility that will lead us into quite a nasty drawdown and potentially a nasty recession. I take no glee in that. It's just that's what happens. There are business cycles. We go up and we go down. I'm always very careful as an investor because these things aren't really predictable. And I'm sort of, I'm adding a lot of narrative to this that probably doesn't really exist. they're a lot more random than I'm making it sound. I think we're going to go into this period where probably asset prices

Starting point is 00:10:12 are going to come down a lot, housing prices, stock market prices, everything else. That'll clear the decks. We haven't seen any big blowups yet, but I'm sure that anybody who's heavily leave it into this is going to get hurt badly. And that's why when I invest all the time, I'm always worried about this kind of scenario

Starting point is 00:10:29 because if you can't survive this kind of scenario, then you don't get to play on the other side when it becomes very good. And so I'm always hyper-focused on just making it through to the other side. That's why my picks, you'll always hear when I say something. When I'm picking it, I would rather something that has no downside and a lower upside than something that has an enormous potential for upside, but also an equivalently large downside. So my picks, and today will be another example of that.

Starting point is 00:10:55 It's just, I think it's a solid business that will muddle through and it'll do okay, and there's a little bit of optionality embedded in it, but I think the downside is virtually zero. So that's my two cents. Thank you for that kind intro there. So thank you, Toby. That was very well summarized observations. I was actually taking notes while you were talking and a few things caught my attention. Number one, you talked about business cycles.

Starting point is 00:11:22 And first question is, how much of it is Fed-induced versus general organic business cycle in play? number two is how much of it is being controlled by Fed. What I mean by that is if Fed privates or loses its resolve, do you think economy will just snap back or you think that it's beyond Fed's control right now? And number three is what are the risks of a liquidity crisis like 2007 happening again? In this environment, we saw Credit Suisse and Bank of England. having issues and in general England or UK having issues with their Gyrid's market. So what's the risks of another Lehman Brother?

Starting point is 00:12:11 If you go back pre the introduction of the Federal Reserve, there used to be a lot more, there used to be a lot more business cycles. We used to have a shorter business cycle and there used to be a lot more crashes. And so that might sound bad, but they tended to be a lot shallower. and what that meant was that businesses tended to run holding more cash than debt. They just tended to be more robust because they had to be because they were regular business cycles. It happened every two or three years. You had little boom, little bust.

Starting point is 00:12:41 Never got too far away from kind of the underlying true growth of the economy. Since the Federal Reserve has come in and they've managed that, we've tended to have much longer business cycles, but they've also got much, much further away from what you might call the underlying kind of valuations. I don't know if that's good or bad. I think that it's bad personally, but there are lots of other smart people who think that's good. So I don't really know. But I would say that there is a natural business cycle, certainly, and I don't really know

Starting point is 00:13:10 what drives it, animal spirits, something like that. Cooling weather, warming weather, imports, exports, it's such a complicated engine, the economy or a complicated organism. Any little thing, you know, the butterfly flaps its wings and then you have the tsunami on the other side of the world. I really do think that that happens in the stock market and never really know or the economy, you never really know what is driving it, which is why I think the interventions without understanding what is happening is just lunacy.

Starting point is 00:13:37 But that's the scenario that we have. So what the Fed was set up to do initially was that, you know, banks run heavily leave it. And they don't have cash on deposit for everybody who wants to pull their cash out on any given day. So if there's a line down the street of people who want to pull their cash out, banks used to fail for that reason. So the Federal Reserve was introduced to make sure that if they all got to, together collectively and there was a bank run. You could have liquidity from one. There was no

Starting point is 00:14:00 problem anymore. You get rid of the bank runs. Unfortunately, we gave the Federal Reserve. Its two mandates are full employment and stable money. And I think they failed miserably on both. So why we continue this experiment is sort of beyond me. They don't follow any algorithmic rule. There's no sort of, you know, the Taylor rule is like an idea that they should follow to set rates. And I know that Greenspan used to follow the gold price. They don't seem to do any of those things. Your guesses, like there are lots and lots of intelligent people out there who, understand all this stuff who watch what the Fed does. And it doesn't make any sense to them. Like they set interest rates too low for too long, in my opinion. And now they're ramping.

Starting point is 00:14:34 I don't know how the federal government's going to be able to afford to pay. I don't think they can. So it's not going to be ramp for very long. It's going to come back down. But there is an underlying weakness in the economy beyond what the Fed is doing. You know, typically what we've stopped hiking when the Fed funds rate have exceeded inflation. And we're way, way below inflation at the moment. But there's a cyclical component. There's that bump in that inflation that's going to come down at some point. And also, we don't really know because we're kind of measuring this stuff looking backwards. So nobody really knows what's going on. So the answer to your questions is I think that there is some, there's going to be some cyclical weakness. That's just genuine. That has to

Starting point is 00:15:09 happen. What the Fed can do to deal with it, I really don't know, like hiking into it. Seems silly to me, but they've got no choice because they've been trading rates have been so low that they've got to give themselves headroom in order to pull it back down in due course. I think that what will happen, and if you look at 2000, 2002, 2007, 2009, when they started cutting, that was right near the top of those crashes, and they cut 10 or 15 times in each scenario, and the market proceeded down. However, the first time they cut, the market did spike. So there's a chance that they cut, market goes up 15%. And everybody says, wait a second, all the prices are, everything's much more expensive

Starting point is 00:15:47 and the underlying problem's still there. And so that's when the market really gets loose. And that's the scary, that's the chaotic time, which is the scariest time in the markets. When that chaos starts, though, the thing you've got to remember is that it is pretty short-lived, and that's when you get the really best prices. The disaster is to sell out at that point. You've just really got to understand that you're going to look dumb, whatever you do. You're going to be sickened and you're going to have the adrenaline running whenever you're looking at the portfolio.

Starting point is 00:16:13 But you're now in the part where the Ford returns getting good. And Ford returns are now much better than they have been for a long period of time. It's just that I think we've got to go through this. this moment. To answer the final question, I don't really know. I've asked that question to a lot of different people and the answers, everybody seems to think that the banks are in a much healthier position than they were in 2007, 2009. So that's a good thing. They've got a lot more capital. They resisted because 2007 and 2009 was so bad, they resisted any of the silly loans, although those loans, those low covenant, covenant light, all those sort of really leave of the loans,

Starting point is 00:16:54 they did finally emerge right near the very end. So all of that's probably done it. I don't think that the banks are going to be quite as badly affected, but they do have a lot of residential real estate and residential real estate is probably going to come back a lot. So their loan to asset ratios are going to look more gnarly. So, you know, I've seen statistics like we've had as many big down days in 2022 as we did in 2008 and 2000. which were sort of the worst few years in the last 20 or so. And there's really no panic.

Starting point is 00:17:23 There are a lot of vol guys out there who are struggling because there's been no vol. Like they're basically a long vol, the tail risk guys, they're waiting for that to happen and it hasn't happened. They kind of think that that market's broken. I don't know. Viscerally, anecdotally, I don't feel any panic either. And here we are off 20-something percent since the start of the year. Like, that's pretty gnarly. But I think everybody was just like, well, we were up so much last year.

Starting point is 00:17:47 in the year before and it's just part of the cycle. And so here we go. At some stage, though, there must be some body that floats to the surface. There's somebody out there who's heavily leveraged, who's got assets that have been cut to smithereens. Hopefully it's not systemic. I don't think it'll be systemic, as could be famous last words, but I don't think that's going to be the problem. I think that this is basically just a plain old, it's not a credit crisis so much as it is just a plain old overvaluation plus slowing business cycle leads to a pretty big drawdown. And then you come out the other side and you keep on going. So we're probably, once this actually kicks off, and I think we're kind of, I would say,

Starting point is 00:18:25 nowish is when we're really kicking off. Once it does, it's sort of three, six, nine months of chaos and then it'll all be good. But I think our next few quarterlies will be quite interesting because I think we'll be, I think we'll have something to talk about. Toby, what a way to kick this off about recurring mild conditions. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer.

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Starting point is 00:22:45 Go to Shopify.com slash WSB. That's Shopify. com slash WSB. All right. Back to the show. Perhaps we should start looking at the different picks. Hari, let me throw it over to you. Yeah.

Starting point is 00:23:02 I'm actually just flying right into the eye of the storm. with my pig stig and Toby, because my pick, I had, I was kind of, I had a different pick before I came in, I think I emailed you guys, like, and I have two, but not able to make up my mind, but today I have made up my mind. It's going to be meta. It's in the news, it's in the eye of the storm, the stock is beaten down, Zuck is a pariah now in the Wall Street. So, some feel he has lost his mind, and Facebook stock is down significantly. It's, I think, at the levels of 2015, something. So it's essentially wiped out six, seven years of its market cap.

Starting point is 00:23:46 So today it is $235 billion market cap. It was flirting with $1 trillion, not so in distant future, and the past, I mean. And when I look at their earnings transcripts from the earnings call, the most recent earnings call, Their fundamental business, that is Facebook, Instagram, and WhatsApp, overall, there's no red flags. Their monthly active users, daily active users are healthy.

Starting point is 00:24:21 Their engagement is healthy. Their overall revenue, if you are just for the currencies, it's actually slightly higher, one or two percent higher. And they are also innovating. I know that TikTok is a great threat to Facebook, Instagram, ecosystem. Snap is also coming at them, but they have reels is picking up. And they're also experimenting with WhatsApp to become like VChat or what Elon Musk would call as the X app that he wants Twitter to be eventually.

Starting point is 00:24:56 But I think Facebook is actually further along in that process. In fact, they're very successful in India. They're actually piloting that concept in India first. and it's speaking up. A lot of e-commerce is happening on WhatsApp over there. They're also introducing monetization in WhatsApp. And in fact, anecdotally, I can tell you a lot of international calls now just happens on WhatsApp. A lot of business happens on WhatsApp and the Facebook ecosystem.

Starting point is 00:25:26 So they're tying up the two. So if you, but there are headwinds like Apple's data privacy policy policy. and in reaction to that, they're investing heavily in AI to make their algorithms better for our targeting without Apple's data. But I guess what spook the markets is the bet on metaverse. And what spook them even more is actually the metaverse when they look at the product with Zach and his associates walking around without legs and the graphics. And what people are asking is billions of dollars and this is what you're going to get. I think that's a, that's actually a very good question because when you look at many of the games today,

Starting point is 00:26:15 which are played on desktops or any of our gaming consoles, have a much more sophisticated graphics, which almost looks real. But what we fail to understand is that meta is actually trying to build on a new platform, which is the VR system. Hence, it is in a much earlier life cycle compared to what we have in the 2D graphics that we see on most of the gaming console. But having said that I'm myself not sure what is the use case or business case for Metaverse yet, the way Facebook is projecting, like, Zoom replacement doesn't sound that exciting, because now people are going back to office, even though not all days, but it's more like a hybrid situation right now. Gaming, again, having to wear it, there are folks who did that experiment to,

Starting point is 00:27:02 kind of wear it for extended period of time. They felt nauseating was not a pleasant experience wearing it as you feel disoriented. So the business case is not yet clear for Metaverse. Maybe it's too early to say, but when you have a bet that you're making, if you look at any of the companies like Amazon or Google, when they're betting on a new project, they won't bet their company on it. I think that discipline somehow is not being displayed by the management at meta. And they want to continue to double down on Metaverse. I think that is the biggest tail risk in my opinion that if we are putting good money coming out of their traditional platforms into something that might not work out in the future and with the dual share,

Starting point is 00:27:52 dual classes in the shares, nobody has any say in the company's direction. I think, I think that is the tail risk that if they don't listen to markets and they don't listen to what the customers are saying and they continue to plow in money into this Metaverse and it results in nothing. Some estimates is that next 10 years they might have, they might blow in $250 billion into this experiment. So that's the biggest risk. So I hope I'm not shooting my own pick, but I just want to lay out the risks.

Starting point is 00:28:26 But having said that right now, it is trading at last time when I looked close to two-time sales, two-time revenue. Their revenue is around $118 billion, and their market cap is $2.35 billion. And if you compare it to any other peer, like Pinterest or Snap, they're all trading at much higher price to sales, even though they're less robust business. If you discount metaverse completely, just the traditional Facebook, Instagram and WhatsApp platforms. So with that valuation in mind, it's almost selling like a classic Buffett-style value stock,

Starting point is 00:29:04 maybe. Maybe not. But I guess Stig and Toby, I would like to get your opinion on meta. So to your point, Harry, I like the valuation. I don't like the company. Spoken like a true value investor, I guess. It looks very appealing. Like we are looking at what high single-digit price-free cash flow or something like that.

Starting point is 00:29:23 It looks attractive. but I also think that there's a reason why it looks attractive, and that's typically how the market is doing it. I remember that we had, we talked about meta a few times before here on the show. We talked about that it was probably the weakest of the big tech companies. And I do think we have it on record, because it's always easy to be a Monday morning quarterback, but I do think we talked about before. And it seems like even though all the big tech companies are in a lot of pain, that META is the one most in pain. And I think you can paint some color around some of that.

Starting point is 00:29:56 If you look at online advertising right now, and I know that Alphabet or Google, they just went out with their quarterly reports, and they also was punished by the market, and I'm, of course, biased because I invested in alphabet. But they're just holding up a lot better. Like, if you look at the increasing competition in online marketing, or so online advertising,

Starting point is 00:30:18 We've known for quite some time that Amazon continues to grow fast and they are. Now Apple and Microsoft are doing the same, even though it's still very low. We have to talk about TikTok, how bigger moves than made in just two years. And it's mainly from Facebook or from META's platforms. It's not so much from Google. I think it comes down to that Facebook's platforms are just not good. And I'm sorry, I keep on using Facebook and META interchangeable here, But META's platforms are just not as good.

Starting point is 00:30:48 And I'm sure a lot of people use them all the time and they would disagree with me. I think there is just a different stickiness to something like alphabets, Google's platforms compared to what META is doing, even though that we talk about the Gaysman and all that is good. And I see some of that in whenever I look at financial statements for META, whenever I look at the margins, not so much of the gross margins. I can't help but compare it to Google. Like, you know, they have the company X or they call the Moonshot Division or whatever they're calling it. And they have, you know, when they graduated, like Waymo, that's not how

Starting point is 00:31:21 Mark Zuckerberg is playing ball. Like, it's, we've got to bet on black or red or, you know, it's just a very different format, which I don't think that they're necessarily leaving online advertising because that's how they make the money, but like they're getting beaten up right now. And so continuing on that note, I would like to talk a bit about cognitive biases because I'm going to talk about a stock here a bit later that has continued to drop in price and still I'm going to pitch it and Hardy is doing the same thing. So I hope you don't get a fin-in-in-in kind of way Hardy. I kind of feel like I'm talking about my own cognitive biases and I kind of feel

Starting point is 00:31:59 meta is a good example of that too because, or perhaps it's a good example of that too. It's down at the time of recording 73% this year. And the pick that I have is also down by quite a lot. But the reason why I wanted to bring this up is that I listened to the episode that William here on this feed did with Annie Duke on his show, Richard Weiser-Habby. It was episode 15. And Any Duke talked about this study from the Watson School of Business, where they looked at analyst earnings projections.

Starting point is 00:32:28 And what the study found is that whenever a stock analyst have made a consensus forecast and the earnings came out differently. They had no problem updating the forecast. But if the forecast was not a consensus forecast, they did not update their own forecast. They decided to double down on that. And the reason why these stock analysts were so susceptible to that was because they done that in public, sort of like what we're doing right now. I can't help but just bring that into the mix right now, because later on I'm going

Starting point is 00:32:59 to talk about Chinese tech. And as we all know, that's going extremely well right now. So I think it's, I have a few different point about this. I'm saying it because I'm worried that I'm susceptible to that. I wanted to bring in for Harri to consider if he's also susceptible because he's been on record talk about me before. But I also want to say sort of like to try and save Harry myself that we have to consider like what's the valuation.

Starting point is 00:33:23 I don't know about how you invested. Ari, I didn't buy Chinese tech at the top or made at the top or anything like that. We have to think about what's the valuation, what's the price today? And that's the discussion that we're having. So, Harry, Toby, I wanted to throw a back or to you guys. Full disclosure, I hold meta, and I've held it. I bought it this year. I don't know exactly what price I paid for it, but I think it was about $160.

Starting point is 00:33:48 So I think we're down almost half on that position. I thought when we boarded it at $160 that if we just, if you just took all of the labels off and he just looked at the financial statements, which is essentially what I do, The underlying financial statements show that that is an incredibly good business. It earns an enormous amount on the capital that's invested in it. It's growing like a weird. A lot of it falls through to the bottom line. A lot of it falls through to free cash flow.

Starting point is 00:34:15 Zuck's got so much money there to play with because they make so much money. And Zuck has been an absolute machine at buying stuff. He bought Instagram for a billion dollars, which seemed like absolute lunacy to me at the time. And I think that he clearly underpaid by some monster margin for. hit. He was a genius acquisition. WhatsApp, stupidly overpriced when he bought it now, you know, one of their biggest properties. So I think Zuck is super smart. He's got all of his skin in the game. The underlying financial statements are incredible. I think when I first bought it, I thought it was worth 300. I think it's worth a little bit more now. Could be 330, 340. Could get to 390.

Starting point is 00:34:53 If I was being silly, I wouldn't value it on that basis, but I could get there. I might not sell it before it gets to there. So I think that the business is very, very good. I think that Zuck is very, very smart and he's had some wins. But I do agree that the risks are, and I should say, always, all of these positions in my portfolio are about 3%. So I never size anything very big. So if I'm right, doesn't really do much for me if I'm wrong, doesn't really do much for me either way. I'm sort of relying on the overall performance of the portfolio to generate the returns. And that's sort of a quantitative, systematic approach to investment, which is the way that I do it.

Starting point is 00:35:24 So I'm never going to be as far into the weeds as someone like Harry is. So I like sitting there and listening to Harry talking about it. It forces all of my priors, hammers that in further. I run the screen, it's still in my screen. I still think it's super cheap and it's a cash flow beast. The problem for every investor is I'm investing on the basis that the future looks like the past and I'm not very good at working out where there are going to be these pivot points. And clearly there's TikTok is incredibly addictive.

Starting point is 00:35:51 I had TikTok on my phone for a week, used it just to test it out. I had to delete it off because it's like incredibly addictive. I don't think it's doing great things for the minds of the youth in the States, but, you know, it's a free country, do whatever you want. I do have Instagram on my phone and I use that and I love it. I like looking at my friends, kids, photos, stuff like that. And I like sharing my own kids' photos and that's sort of what I use it for. And I use it for other things too, like checking UFC fights scores and other things like that.

Starting point is 00:36:18 I think it's a great tool. I think Twitter's a great tool. I use WhatsApp all the time. The Metaverse looks really junky to me. I don't know how they're going to get there with that. I don't know what they're going to do. Zuck seems fully embedded in it. But there are some cool things.

Starting point is 00:36:31 He's got this little wrist band that you can put on that it'll see your gestures. That stuff's super cool. There are lots of cool little ideas in there. I wouldn't want to bet against Suck, but you've got no choice because you kind of welded into the cockpit with him there. And there's nobody who's going to get him out. His shareholdings too big and he's got different voting shares. So you stuck in there with him.

Starting point is 00:36:52 I like Facebook quantitatively, and I think it probably does work out. given a three to five year timeline. Having said that all of the reasons that people have identified for why it could fail, I think are absolutely real risk factors and probably does, you know, explain why it is going to trade a discount to those valuations that I said earlier. However, at 90 bucks where your upside could be 300 plus, I think you just, to have a bet on suck and that mind control machine that he owns, I think you're almost paid to take it here.

Starting point is 00:37:28 Just to pick a back on that, Toby, you know, it seems like everything in tech is just being beaten up and a lot of it for good reason. And as we all know, we talked about it before here on the show also that when the interest rate go up, whenever you discount the cash flows back to today, that's why you see all these tech companies be in the world of pain because a lot of those caseloos are out there in the future. But to your point before, Toby, like this is really attractively priced. Like, we're looking at free cash flows of, what, $3, 12 months, like almost $10, a fiscal year of 2021, like close to 14. Like, this is, we're not talking about cash flows that are way out in the future.

Starting point is 00:38:05 We're talking about cash flows that we have right now. Whenever I'm worried about meta, I'm worried about way out in the future. I'm not worried about the next three years. So I think that's also really important to understand whenever you're valuing this company and other big tech companies that might start to look more reasonable price. whereas some of the beatings that you see on tech companies without almost no revenue or at least losing a bunch of money, yes, it makes a lot more sense why they're getting beat up. They are doing a buyback too, which I should mention. That's one of the things that attracts me to it. And I think that the only complaint that I would have, and I can't second guess the operational guys

Starting point is 00:38:39 who can see that the horizon in their own business is better than an investor who's outside. It has no idea. But I would say that if I could redirect that $250 billion towards buybacks, That's what I would be doing. Thank you, Toby and Stake, I think. And Stig, I really appreciate you alerting me on cognitive bias. And to Toby's point, so my position in meta is also very small, insignificant that it doesn't impact either way, up or down. So it's part of my kind of, what I call it as my private index.

Starting point is 00:39:14 And the reason I brought it up today is not just as the company, but I'm more focused on the valuation because I do see a lot of headwinds for meta in general. I think Toby, you brought up a very good point about, I think maybe it was dig, about other players like Netflix and Pulu getting into the advertising market because they are now going to have free but ads service. For that, Toby, that segment is a direct competition to YouTube, not to Facebook or Instagram. So this is a different genre and a different genre. different use case. But having said that, I think your point is valid. It's a, it's kind,

Starting point is 00:39:57 the way I see it, it's a zero-sum game because advertising doesn't grow faster than GDP. For the past 50 years, if you see the ad share of GDP has been stagnant. It's like some fixed percentage. So all these companies are kind of, you know, fighting for the same advertising money. The first losers were newspapers and television channels because these tech companies, took away that money from them. And now they're fighting among themselves for that limited pool of money. So, yeah. So I think that is the risk here.

Starting point is 00:40:32 And I think Zach is trying to get out of that trap of just being stuck in the advertising with meta words, like whether he will succeed or not is a bet. So I think I'm my reason for picking up meta for discussion today is one, I wanted to know what do you guys think obviously. And at this price point, two is the question is, has the market discounted all this bad news and all the risks? Like the way I see is if I see a DC of 10 years from now, write off $100 or $200 billion of Metaverse fantasy that Zuck has, and then value it to current levels. Like, am I getting fair value, basically?

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Starting point is 00:45:05 Why you only have four stocks that sound silly, and it probably is. I've recently taken a small position in a company called Process, and I do mean small. I think it's like 1% and change, something like that, but I am considering doubling down. And I am aware of, I hope I am aware of my own cognitive biases because it's continued to drop, which either means that now is really cheap or I'm just making one stupid decision after another. But it's this company called process. It's a big Dutch company. The Mar-Qa is 93 billion euros. And despite the size of one of the biggest European companies, it is not that well known. It's a global consumer incident group and one of the largest technology investors in the world. It is majority owned by

Starting point is 00:45:53 the South African multinational company called Naspers. That's probably a bit more known. And they have this weird ownership structure. So they're sort of like they have a cross-ownership structure. That's the way it's called. So sort of like they're always. each other. Process is probably best known for the investment in the Chinese company, Tencent, that NASPERS originally made, they made the investment back in 2001. They bought and hold on 46.5% of Tencent for $32 million. It was not billion. It was a million dollars, I said. So it's widely known as one of the best, most successful venture capital deals of all time. That being said, I just want to underline that it would be an oversimplification to say that

Starting point is 00:46:35 an investment in process is just a more, call it, accessible investment in Tencent. There's so much more to process than meets the eyes. I just wanted to preface that before you go like, oh, are we going to talk about Chinese tech again? Haven't heard that broken record before? So the way I would phrase this is that I would look at process three different ways. I have three different components to my bold thesis of this stock. Number one, the stock is trading at a heavy discount whenever I say NAV, it's the net asset value. Number two, processes actively making sure that it's trading closer to NAV. And three, the NAV are trading at a significant discount to intrinsic value. And so those are my three bold thesis for that. So let me just try

Starting point is 00:47:18 and break those three up. So the first one was that the stock is trading at a heavy discount to NAV. And so as of today, the stock is trading at 46 euros and the NAV is 82 euros. And we have to keep in mind, the three quarters of process assets are listed assets. So in other words, it would be more expensive for you to buy this listed stocks that process own. And so you can more think about it as that you bought process stocks, you would in addition get your private assets on top of that. And the listed assets is, as I mentioned before, three quarters of that. So it's something that the market has already priced for you. The second thing I want to talk about is that process is actually making sure that it's trading closer to NAV. Process is very very,

Starting point is 00:48:01 well aware of this discount. And it's a wide discount. Nav is 82 euros, the time recording, and the price is only 46. So it's very, very bad. So what they're doing is that they're selling 10-set stock to buy back own their own process stock in the open market. And effectively also means that if you own, say, one process stock, you would actually own a larger share of 10-cent, even though the company is selling off 10-cent. It's just, yeah, it's just math, really. It also, of course, only bigger part of the unlisted assets too. And if you have to break down the third component to my bull thesis here is that the NAV is trading at a significant discount to intrinsic value.

Starting point is 00:48:39 So in other words, I think that the intrinsic value of the stocks you're going to hold or just a lot higher than what the market are pricing at right now. So if we look at the of the assets of the balancheter process, it's 110 billion. In this assets, we have, and this is euros, 8 to 3,000. that is enlisted assets, and of those, $70 billion is in $0.10. The remaining 26 is unlisted assets, and then the rest is in net cash. So doing an intrinsic value of 10 cents is just a bit beyond the scope of this pitch. I kind of feel it would be very long, and perhaps if it continues to drop,

Starting point is 00:49:15 I'll go. I'm going to talk about 10 cents in the next mastermind. Who knows? I would say that 10 cents is trading at at least 50%, if not more, discount to the intrinsic value. even given everything that's happening in China. Of course, I could be completely wrong on that assessment, but that is my thesis going into this. But it's also very important to emphasize that even if I'm wrong about what's going on in China,

Starting point is 00:49:41 even if Tencent is truly worth as little as it is right now, giving all the beating it's been getting this year, I'm still very much bullish on process. It might be a, call it smaller double-gette return you will get, and not a, I don't know, 30% return, whatever, depending on how you want to make your assumptions. But like, we don't have to be right about Tencent trading at a lot of discount to their intrinsic value for this thesis to pan out. I also wanted to put some words on the unlisted assets that process have. And so it comes in various categories, classified food delivery, payment, fintech,

Starting point is 00:50:15 et tech, those are the bigger categories. I am a bit, I'm a bit cautious about how I value that. The way that they listed is that it's the cell site valuations and then the average, it says like it's the average consensus of the sales style analysts. But even in my assessment, I just marked it down with 30%, just giving the current environment we're in and just wanted to be cautious. That's not really where the value is. Procers have a good track record.

Starting point is 00:50:43 They made more than 800 investments, 120 of them are unicorns. I do want to say that we have to consider that with a grain of salt because they are really, the two that are pretty proudly, but I'm also thinking the size of the company and how much money they're swinging around, they have to invest in relatively big companies and in a low interest environment, a lot of them by definition would just be unicorns, or turn into unicorns pretty fast after that. So if you follow the venture space, you just have to consider that. It doesn't mean that, you know, they did the seed funding. They definitely did not do the seed funding for those companies. So it's not like those companies necessarily did like a thousand X, but they obviously have a good track record.

Starting point is 00:51:24 I love the idea of the triple net discount. I guess the question is just going to be how likely are they going to be able to get any value out of that Tentan holding? Isn't that the big risk here for any of these China stocks is that they just sever relationships with the West and you? I don't know how realistic that is. That sounds insane to say it, but it's definitely a, That seems to be the predominant risk for all of these positions. Is there any way to handicap that? How reliant are they on it? Do they have those other holdings?

Starting point is 00:51:53 Are they enough to kind of bail you out? I think that they are. And going back to the point I had before, like if you look at, let me just pull it up right now here as we're talking. So, yeah, we have net asset value of 110, and this is in millions, sorry, this is in billions of dollars.

Starting point is 00:52:13 So 10 cents is, 70 out of 110 right now. And it's proportionate of becoming less every day because they're buying back stocks in the open market all the time. But you are right. You need to have a relatively good grasp of what is 10 cents worth before you might see this. I do like that they're bringing in their own catalyst. And I guess I'm just being that drum, but that they're selling 10 cents stock to buy back their own stock. So to me, other than just looking at evaluation as its own driver, having that catalyst in the self is just very valuable to me. If we look at, well, sorry, let me go to that point about how they're being severed from the West. Really to start shooting

Starting point is 00:52:51 myself in the foot here, I want to throw it back over to hurry because one of the things I wanted to talk about with this pick is what has been happening with what came out here, October 7th, whenever the Biden administration came out talking about that we had to ban the export of microchips. I'm trying to understand the chip market a bit better. It doesn't work. that well on a podcast here, but I have the Chris Miller's book, Chip Boar. Still can't say, I mean, I understand the chip market that well. But it is interesting that China spends more money importing chips than they do on oil. I just kind of feel that's a fun fact. So I guess my long window question here to hurry is, how big a problem is that for China, given that China is

Starting point is 00:53:34 also in Chinese companies that they're fighting for supremacy and AI, but also in turn that in a way they are competing with the West in a way that they're not, because that's just not their markets. You know, I don't know what this would mean for the cloud business, but I can't see regardless of how good their chips are, that you have Western companies want to store the data in China and vice versa. So, Harry, let me get through a bag or two. How big of a risk is that for a company like Tencent?

Starting point is 00:54:00 It's a very interesting pick for sure. I was trying to decide whether it's a proxy for Tencent's or is it a Baby SoftBank based on their investment. So what we tend to forget is that the majority of the design of these chips happens in the United States, even now. The manufacturing is mostly in East Asia, China, and Japan. And if you look at the distribution, the high end is manufactured in Japan and Taiwan and U.S. to some extent. Mid-end is manufacturing in Singapore and Malaysia, low-end in China. But the most important thing that most of us forget is there's a lot of machinery that is required to manufacture these chips, whether it's low-end, high-end or mid-end.

Starting point is 00:54:49 All those machineries are mostly from United States, companies like the name is skipping me right now, but they're all in Silicon Valley. and there are some in Europe, especially some of the chemicals required in this manufacturing, comes from European companies. None of them are in China yet. China has not been able to manufacture or make machines that make these chips yet. They can operate well, and that too on the low end. US restricting chip sales to China for advanced chips is actually a geopolitical decision, which is the right decision to make from a geopolitical perspective,

Starting point is 00:55:30 but may not be good for those companies. I think Peter Zion has this wonderful book, The End of the World, It's Just the Beginning, where he talks about how the last 20, 30 years was actually an aberration. I think globalization was kind of an artificial state, an experiment that looks like is kind of winding down. What a shame. Thank you, Hari.

Starting point is 00:55:55 That was very insightful. Let's look at the stock price of process. It's trading in 46 euros. I would put the intrinsic value at least above 100. I could probably even make the argument why it would be 150 to 200 euros. But then we also have to consider the probabilities of that actually coming into effect. We've seen some funky stuff happening in China recently. And one of the things that I'm looking for as an investor is,

Starting point is 00:56:22 when does the market confuse risk and uncertainty? Whenever I look at what's happening with COVID, like every time something is coming out with COVID, it's typically it's something that's negative in China and they're strengthened the grip, like all the Chinese tech stocks, just like taking a dive. And it's for good reason and it's not. The reason why it's for good reason is obviously that it, and it's not good whenever the Chinese economy is not thriving. Also, we have to consider that Chinese tech companies are, well, tech companies, they're not hit the same way by COVID as other companies, even though it's always not good for them. But it seems like whenever I'm doing my discounted caselo analysis, it's almost like these companies, Tencent and Alibaba, we couldn't

Starting point is 00:57:04 mention them. They're almost priced for China will shut down indefinitely. I think it's important to distinguish between that risk and that uncertainty. I would argue and perhaps I'm biased that It's very uncertain whenever China would open up again, but it's not uncertain that it will happen. If I look at more about some of the things that has happened where it just seems like everyone is just very bearish, Xi Jinping, the president, got reelected for the third time, which is a bit weird, and like the whole constitution had to be written for that to happen. But I think Elibaba and Tenten went down like 14%. And I tried figuring out why.

Starting point is 00:57:41 Was the market surprised that he got the third period? No. I think the market would be shocked if that didn't happen. One of the arguments that were flowing around was that Xi Jinping talked about common prosperity. I'm sorry, having he just talked about that for two years now. Then there were other that said, oh, like the public boarder was sort of like a investigative committee that makes all the decision. He had continued to like put yesmen in there who would not, who would not all rule of

Starting point is 00:58:09 any kind of way. and he was anti-capitalist. And to me, it was like, yes, that's how the system works. Wouldn't you be more surprised if he had put in business people who would actually have the authority to all real his decisions? Like, I guess I was just a bit surprised how something that, to me, seems so obvious, just looking at an outside into China, how that could spook the market like that. And we also did see a bounce afterwards.

Starting point is 00:58:34 It's sort of like also to one of Harri's points, like, has it been discounted into the price or has it been like, or discount into the price. I find it hard to believe that whenever we get bad news from China, that should continue to send down the stock, at least at the magnitude as we're seeing right now. And then I want to go back to the point I said before about big tech. It's very important that we don't just call all tech tech.

Starting point is 00:58:59 It's really important that we look at the individual. You're not necessarily just discounting cash flow that's going to happen sometime in the indefinite future. You are discounting very real cash flows that are there right now, plus the other catalyst that we're talking about. So to me, no, the company is not as valuable as it was beginning of the year, but the valuation and this discrepancy between price and valuation is a lot more appealing than if we're looking at the beginning of the year.

Starting point is 00:59:26 Let me let me throw back over to you for a lot of bashing. I'm sure my pick deserves it. My concern in general is two things. One is about 10 cents. I'm not really worried in the long term about it. how tensens will do, even though they might have headwinds like demographic situation in China where by 2030 or 2040, their population is half of what it is today based on the latest stats. In fact, China admitted that they overcounted their population by 100 million. And that

Starting point is 00:59:55 means these are all child-bearing age cohort, basically. That means there will be even fewer children going forward. So I think that's a serious problem for China, actually, from an economic perspective, which U.S. doesn't face, comparatively, I'm saying. It's like, it's not as bad as scenario. So that might impact companies in China in the long run. But I'm not talking about long in. In the next five to 10 years, the concern is not about Tencent's economic viability. The concern is whether Western investors, as Toby said, will be allowed to hold any Chinese stocks. If there is a regulation that kind of, you know, disallows any foreign investor from holding Chinese stocks, then process will in kind of, you know, invariably have to write off that 75% holding.

Starting point is 01:00:44 I don't know whether that's going to be a reality. Obviously, that's a far-fetched possibility and most likely not probable. That's number one. Number two, what would be interesting is if they liquidate all their 10 cent holding today, which is 75% of their holdings and entire asset base, and then just hold, cash and invest in something else, would that be something smart thing for the management to do? And in that case, would process be an amazing investment today. So that is something stick you might want to address. And those are the things that kind of, you know, comes to my mind. Go ahead,

Starting point is 01:01:16 yeah, I like everything about the pick. I just, in this sort of triple net or like the derivative kind of arbitrage place, you just need a lot of patience. You need to be able to sit there for a long time and hold them without sort of knowing when they're going to work out. That's the only sort of downside to that kind of investment, but that's true of most investments. I just think you've got that one unhandicapable risk and you're probably getting the price now where it's worth doing that. But then I would have said that with Alibaba too, probably a little bit higher than where Alibaba is, but never going to pick the bottom. I actually kind of, I like the pick. I just, and I like talking about how you handicap that risk with China. I'm probably, I think we're probably at peak pessimism

Starting point is 01:01:58 now and we're probably when some of that pessimism rolls off. of people regret not having bought it when it's kind of obvious that process is even doing something about it, selling it down. So I don't have sort of much in the way to add to it, but I think the discussion is a good one around it. There might be some different concerns. We definitely see the SEC do a lot of things to regulate the Chinese companies. It feels different here in Europe whenever it comes to that. And I did a little digging, also because I have a stake in in Alibaba. And like, what would happen? It was delisted and all that. And it seems at least here, we don't have the same issues in terms of if that were to happen. There were like three different

Starting point is 01:02:37 things that could happen. But in any case, like you as an investor won't be without any money. They like can be forced to buy it back and you can get holdings or we can be transferred to another broker where you would then get it. Like there are different ways where you still get that. It sounds really bad whenever we talk about, oh, can you then even own it? But whenever you do the digging, you still can. not about valuation risk. I think it's, I feel like, you're right. Like, you know, maximism has been built in. You might be getting it for a really good value. The only thing is regulation risk. I think that can just, your share of the company will be zero. It doesn't

Starting point is 01:03:16 matter what the company is doing then. So that's the risk I'm talking about. To be fair, you have that in the States, though, too. There's this windfall profit tax. They're going to bring in on energy companies. Look at what energy companies have earned over the last 15 years. They haven't made much money and we're underinvested in energy. Yeah, I agree. Regulatory risk all over the world. Yeah. And also, you know, what you said about policy makers looking out for themselves,

Starting point is 01:03:42 I'm sorry to say that's not a, I do agree that's a huge issue in China, but I also have to say it's, you also see that in Europe, and then I won't make any comments on the States. So I'm going to go to throw it over to you. Toby, you also want to hear from your pick. I will do this fairly quickly. My idea is Colgate. Everybody knows what Colgate is.

Starting point is 01:04:04 I'll give you the headline and then I'll get into the detail a little bit. But the main idea is that we discussed at the start of this program. Colgate is a consumer staple, very consistent. It's a $60 billion market cap, $68 billion in enterprise value, which means it's got net debt of about $8 billion. Revenues are about $17 billion this year. Gross, profits are. about 10, operating income about four, and then the bottom line's about three. So on an

Starting point is 01:04:34 EV EBIT basis, you're paying about 22 times. Sounds reasonably expensive, but gross profit margins are about 60%. It's under-earning a little bit at the moment. It's about 16% return on invested capital in 2017. It was about 23%. So it's declined quite a lot because it's had these headwinds and particularly so over the last few years where all of its input costs are, its raw materials are expensive. Transport's been expensive. Wages have become more expensive. I think it's had everything thrown at it at an operational level. And it's still a pretty good stock having seen all of that. You know, all of the brands are all very well recognized. They've got great pricing power. They own about 22% of their revenues in the States. They get about 16% in Asia, which is a much

Starting point is 01:05:18 more fragmented market and looks like they've got quite good growth proceeds. It's there. I think if you looked at, it's got about a 3% dividend as well. All of the of that taken together on a sort of quantitative basis looking forward, assuming that it sort of goes back to what it has historically earned on its assets. I think that over the next three to five years it'll do id teens kind of returns compounded from here. And I think it's very defensive. I don't think you'd downside as much. People tend not to steer away from these sort of low cost, relatively low cost, even though they're high margin. They're all relatively low cost purchases for them. The businesses in four parts, there's oral care, which everybody knows. They have home care,

Starting point is 01:06:03 personal care, and this pet nutrition business, which is the more exciting part of it. And so I have owned Colgate for a while. I owned it before Third Point took their position into it. I knew that this business was inside Colgate and growing pretty, because this is a material part of their business. But this is the sort of optionality that's built into something like this that moves it from being potentially a mid-teens compound return to being quite a bit more. I kind of don't, I don't, third point, you know, they're an activist firm. What they want them to do is to spin this business out because they think that there are very high multiples being paid for like a 25 to 30x for this pet care, pet nutrition business.

Starting point is 01:06:49 Financial engineering, I used to find that really fascinating. Now, I'd, I'd, I think it's probably just as good inside this business as it is outside this business, but you might get a bump if they can persuade. If Third Point have been a very effective activist, very good firm, very good investors, very effective activists have had quite a lot of success, although I think the Colgate board is unlikely to take too much notice, but you never know anything could happen. So there is this sort of optionality built into it.

Starting point is 01:07:14 But the idea is that this is third point's idea. There's this, it's called Hills Pet Nutrition, and they own these two brands that. that are doing very well, Hill's science diet and Hills Prescription Diet, I see them advertised all over Los Angeles. They make up about 20% of Colgate sales and an equivalent amount of their profit. But given that Colgate itself trades on a 22 multiple and you could get, if this is spun out, it might come out to 25 to 30 times multiple. That's where they're saying is this sort of found value in this thing. So you get a little bit more on about 20% of their business. If you add,

Starting point is 01:07:51 well, they've been investing in this business pretty consistently. They've bought three pet food manufacturers around the States. They've been reinvesting to all of the problems that they've had with inflation and the strong US dollar and supply chain issues and all of those sort of things. They've been working on these problems and they've been investing in the business to sort of ameliorate these as best as they possibly can through some product innovation and other things like that. But the idea is that this thing, this business is worth about $20 billion. dollars and spun out is sort of close to found value you'd lose about 20% in profits to find 20 billion so that's that's some that's some upside I am happy to hold this thing at a mid-teens return

Starting point is 01:08:34 given that the downside is is virtually nil but there is that sort of optionality built into it so just just to summarize it's like a mid-teens return 3% dividend optionality in this hills business all of the other businesses are very their consumer staples their things that people don't spend a lot of money on but buy very consistently, and they're hugely profitable for Colgate. And Colgate has a lot of non-US growth potential for the foreseeable future. So that's the pitch. It's a very simple one. It's a high cash flow generative business. They've got a lot of levers to pull sort of from a financial engineering perspective. They've also suffered through sort of pretty substantial headwinds. And at some point, those will reverse and they'll have the

Starting point is 01:09:19 tailwind. And so that's the piece. pitch. I don't think it's going to be as racy as the other two, but potentially there aren't as many sort of hairs on it either. What do you think, Jens? Yeah, interesting pick, Toby, and it does feel like a classic Toby pick

Starting point is 01:09:34 too. But when I was looking at your thesis, is it fair to say the catalysts that you're looking at or one, the pet foods, that's an optionality that it might grow, bring in some revenue growth. Because when I look at the revenue

Starting point is 01:09:50 it's almost flat, it's not growing. The last three years, if I look at their last three years of revenue, like it went from around like 15.7 billion to 17 billion, but their net income is actually down, like from 2.3 or 2.4 billion to 2.1. So I think, so I'm assuming that you're thinking your thesis is that the pet food business will bring in some growth, and because of the activist investor,

Starting point is 01:10:19 they might actually increase their EPS. That's right. I think there are two things going on. My thesis was originally before I saw, before third point initiated their position, was they had had all of these headwinds. And you can see, I would say it's since 2017 to date the last five years. Return on invested capital has fallen from about 22, 23% to about 16%,

Starting point is 01:10:43 which lowers the valuation sort of commensurately from my perspective. it goes from being worth, you know, that differential is about a 25% haircut. And I can see that reversing. They should get back to earning on their invested capital what they have in the past. The margins have been, like surprising gross margins have fallen to just below 60%, which is kind of extraordinary. That's the quality of that business. But all of the, they have been operating in an environment where they've had all of those

Starting point is 01:11:13 headwinds and that when those headwinds reverse, a lot of that will fall to the bottom line pretty quickly and they have various leaves that they can pull to sort of maximize that valuation buying back stock and so on. There is this other, this is only a reasonably new, I don't know when their letter came out, it's only in the last month. The third point letter is only in the last month or so where they say, plus there is this found value and they say it's 20% of the revenue is 20% of the bottom line, but potentially $20 billion on a $60 billion market cap that's very material sort of potential list in it. I don't know how. how you handicap it. I don't think it's particularly likely that it happens, but that pet food

Starting point is 01:11:50 business is growing much faster. It's growing. I think it's like 11% growth a year. And it's, it has all the same problems that their other businesses have with those cost issues, which is why they bought the additional factories or pet food manufacturing facilities. And I think that you'll see some improvement over the next few years and that should result in a rereading in the stock as well, and then you have the potential for that upside from the third point spin-off, but I don't think it's a likely outcome. I always like Toby's picks. And if I can highlight a difference between Harry and my pick and Toby's pick, and I don't want this to come off in any kind of wrong way, and I kind of feel it already is, because I already started saying that, is that Harry and I,

Starting point is 01:12:38 we invest our own money. And I also know, Toby, you invest your own money together with your investors. But your pick, Toby, is very much like an asset manager pick. And I mean that in the best possible way, because you won't get into any trouble with something like Colgate. You just won't. There's a reason why it only dropped 14% year to date. And something like meta dropped 73%. Now we're talking about, could we, for our own money, do that.

Starting point is 01:13:03 And then if the thesis plays out, you could do like 4x. And don't get wrong, I also know you have meta in your portfolio, Toby, and you can diversify. You can have a lot of different things in your basket. But I just kind of feel I wanted to say that whenever you hear what might seem like crazy picks, like really understand what kind of investor are you listening to right now investing their own money, someone else's money, what's what's the method of investing? I guess that was the first thing I wanted to say. One thing that I wanted to touch on for Colgate was inflation. We are looking at inflation being a real concern, especially for, well, for all of us and also for consumer goods company like Colgate.

Starting point is 01:13:44 As a product group, you would probably say that the products are generally price inelastic, which is just economist's fancy word of saying that they're not as sensitive to price increases, but that is as a group. Like we still need food, we still need to brush our teeth, we still need all the basic things that they're providing. But in that category, it can be very, very price sensitive. especially in the time of inflation. So if you go through the earnings call,

Starting point is 01:14:13 they talk about we are either number one and number two in all the categories. And it's very fragmented of like all the things that they do. And that's probably true. I don't know Colgate products is well enough to say how big the mode is. We just also know that consumers are hurt right now. And they are very sensitive to pricing. So whenever I'm looking at the margins, you can already see that for Colgate right now.

Starting point is 01:14:34 But the gross margin, it's in the client. Obviously, the operating margin are too. And whenever you are looking at very price sensitive products, it's very difficult to push that over to consumers because everyone sort of has to agree that you keep the prices high. It's illegal, by the way. And so that's one thing that I would probably note. And so it's not because I'm not optimistic about Colgate. I think they would do well as a company.

Starting point is 01:14:59 But I would expect a lot of marketing to be squeezed over the next few years whenever you look at the multiples. So I'd probably be a bit more conservative than some of the numbers than Toby call out, terms of return, but Toby's usually right. That's what I used to say here in the show. That's very kind. I don't know if I have been particularly right recently, but I think that a lot of the margin squeezing has gone on because there have been, you know, there's been this big transition away from people buying national brands in supermarkets and spending lots of advertising money and paying up to get the space in a line of sight, getting the end.

Starting point is 01:15:38 in the supermarkets. And that model is a little bit old. We don't really, now sort of people will buy over Instagram and they'll find things in different ways and they're prepared to put black charcoal toothpaste and do all those sort of other things. But a part of that is a little bit of that is the amount of VC that has flooded into these different areas. And that is now going to be going heavily in reverse. So I don't think that there'll be as much competition from new players. there'll be that sort of established more genteel Marquis de Queensprey boxing rather than the bare-knuckle street fight that they've been in. I think that the main story for Colgate has been that cost pressure and a lot of that has been, you know, there's two, that there is, everybody

Starting point is 01:16:22 seems now to think that the transitory argument for inflation has been sort of debunked and inflation looks a lot stickier and is going to be here with us to stay for a lot longer. And I do agree that inflation is much, much higher structurally now than it has been or has sort of seem to have been. I think that inflation is always and everywhere monetary phenomenon. So the amount of money printing sort of does eventually end up in asset prices and consumer prices. And now they're going backwards a little bit. They're quantitatively tightening. So they say there's been a lot of quantitative tightening rhetoric and not a lot of quantitative tightening until very recently.

Starting point is 01:16:55 But now it does seem to be there. So the cyclical transitory component of their cost pressures is going to go away. And for something like Colgate, which is run pretty efficiently and has run pretty close to the about as tight as they can run it, all of that does impact them. They're doing about everything right that they can get. There's not a lot of places that they can go when they can find those cost pressures. So when they get them, it impacts them. But when it reverses, it'll have an equally sort of ameliorative effect on their ability

Starting point is 01:17:27 to earn and generate revenue, sorry, the ability to generate profits on the bottom line, almost regardless of what the top line does. The top line is going to be like inflation. The top line's going to be like 5 or 6 percent for the next few years. I don't think it'll be particularly impressive, but it won't be going backwards. And with that cost discipline and the cost pressure and the inflation is across everywhere, transportation, raw materials, wages, that is going to keep on being an issue. We're not going backwards. We're not going back to where we were, but I don't think that we're going to see the same explosion in those prices that we've seen over the last two years. So I think you're getting a reasonably good price

Starting point is 01:18:08 to take that bet here, but I do acknowledge everything you said. I agree with that 100%. All right. Harry, any comments? Anything you want to add before we round off the show? No, nothing to add from my side. Well, guys, as we are rounding off the show here, as always, we would like to give you the opportunity to give a hand off to anything you do to the audience and where they can learn more about you. Okay, so I'm always around on Twitter. Hari Rama is my handle and my blog bitsbusiness.com. Look forward to engaging with the audience there. I run Acquirers Funds. The two funds are the Acquirers Fund, Zieg, which is a mid and large cap deep value fund and deep, which is a small and micro deep value fund. It's the same strategy

Starting point is 01:18:55 and both just divided between two different universes. And I have a website called The Acquire as Multiple, which has got a free screener for these sort of stocks. And I've written some books. They're under my name on the Amazon page, but the most recent one is the Acquire's Multiple, which is 10 bucks. You can read it in five hours it's written to a,

Starting point is 01:19:11 or two hours it's written to a fifth grade reading level. It's a really easy read. Jens, it's wonderful, always having a chance to go this back and forth on stock picks. Thank you so much for your time. It was a pleasure, as always. Thanks for having me stick. Good to see again, Harry.

Starting point is 01:19:26 Yeah, thank you. Stay again, Toby. Always fun to hang out with you guys. Thank you for listening to TIP. 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 01:19:49 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.

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