Yet Another Value Podcast - Cliff Sosin from CAS on Carvana and a bunch of other stuff $CVNA

Episode Date: May 8, 2025

In this episode of Yet Another Value Podcast, host Andrew Walker welcomes back Cliff Sosin of CAS Investment Partners for his second appearance. Known for his concentrated, long-term investing approach, Cliff discusses the unique characteristics of Carvana's lending model, the intricacies of subprime finance, and why he believes Carvana's comeback story deserves a closer look. The conversation explores Cliff's investment philosophy, alternative data use, and risk management, while diving deep into market misconceptions around subprime lending, inventory valuation, and self-driving cars. Tune in for a data-rich breakdown of one of the market's most discussed turnarounds.Links:YAVP with Aaron Chan on CVNA: https://www.yetanothervalueblog.com/p/recurve-capitals-aaron-chan-on-theCAS Investment Partners - ⁠https://www.casinvestmentpartners.com/⁠Yet Another Value Blog - ⁠https://www.yetanothervalueblog.com⁠ See our legal disclaimer here: ⁠https://www.yetanothervalueblog.com/p/legal-and-disclaimer⁠_______________________________________________________[00:00] Intro to the podcast and guest, Cliff Sosin[01:38] Cliff on his podcast return[00:02:11] Cliff reflects on past public exposure[00:05:26] Cliff’s focus in subprime and securitizations[00:12:17] Carvana’s lending model and performance vs peers[00:24:29] Alt data, trading signals, and Carvana[00:30:58] Evolution of Carvana’s operational resilience[00:34:03] What keeps Cliff up at night about Carvana [00:38:11] Risks from used car market decline[00:40:08] Potential disruption from low-cost EVs[00:47:00] Threat of autonomous vehicles[01:01:50] Stanford, Google, and Carvana[01:10:10] Tail Risks[01:13:00] Getting better with expert networks[01:18:00] My trite Cliff saying[01:19:00] What is Cliff researching now

you're about to listen to the yet another value podcast today's episode is cliff sosen it is episode 310 clip was one of the first five people on the podcast he returns for his second appearance it's a super interesting conversation about carbana and a whole lot of other stuff on investing before we get there a word from our sponsor alpha sense and then cliff sosen this podcast is brought to you by alpha sense those of you who've been following the podcast and the blog know that i've been doing a lot of work recently on shareholder engagement particularly these busted biotechs. You know, I've done recently a podcast on Sage and KROS. You guys can go and look in the show notes. I've posted a lot on the blog about busted biotex, why this time is

different, all of these companies that are trading at enormous discounts of cash. So given my focus on corporate governance and shareholder engagement, I worked with AlphaSense and they said, hey, let's do a free webinar. We'll get you in touch with the corporate governance experts. Let's do a free webinar and kind of bring some information and get you a little smart on it. So we did the free webinar. It was really excellent. It was with a professor at the University of Chicago who actually teaches corporate governance, has been on 100 boards, including almost 20 public company boards.

We had very different views, but it was really interesting to get his insights. As someone who's been there, his insights and kind of his differentiation from how I'm viewing corporate governance. So you can go check out that webinar or include a link in the show notes, or you can just go to Alpha-Sense.com slash YVP to get a free trial and kind of show them. Thank you for the support of this podcast. all right hello and welcome to the yet another value podcast i'm your host andrew walker with me today i'm happy to have on for the second time my friend cliff sozen cliff how's it going very well thank you for having me look super excited to have you uh before we get started disclaimer remind everyone

nothing on this podcast and investing advice uh there's a longer disclaimer at the end everyone can hop into it so cliff look i'm super excited to have you back on you were one of the first podcast guest back when i literally had no clue what i was doing just a fog-induced covid It's been five years. Happy to have you on for the second time. I'm going to send you an invite for the 2030 pod at the end of this thing. But we're talking today, all sorts of stuff. Carvana, anything. Where should we start? Well, first, I might be interesting to talk about why I came back after all these years. Go ahead. Is it because I'm so handsome? It's actually because I like you so much, believe it or not. So the history here, because people don't know, is that. Um, over the last five years, Andrew and I have chit chat all the time. And I count him as a friend. And, uh, so I make fun of it mercilessly for his incredibly slender, you know, like his inability to lift anything heavy. Um, but, um, you know, I, I, there was like, I had a bit of public exposure, um, which I created for myself back, you know, three, four years ago. And, you know, it's, it's sort of a one way ratchet. And as you do it, um, it sort of feels good. But then, um, what I learned, um, um, was that like it's really not helpful it's not helpful in a variety of ways having people follow you into ideas makes it harder to buy things makes it harder to sell things you suddenly

feel like you have to explain yourself and and also like you know when things go wrong it really sucks to have like a big crowd like rooting for your demise and so I you know deliberately decided that you know I wasn't going to do any more of these and so that's what I kept telling you every time you'd ask and but then you know the whole Carvana saga unfolded And it was just such a crazy thing. And I could feel it disappearing sort of gradually into the midst of time. And I wanted to memorialize it. And so I reached out to my good friend and very successful podcast host with a big audience, Patrick.

But I couldn't, you know, do Patrick's pod. And then after all of our, you know, relationship, not do yours. So here I am. And my hope is that, you know, we'll find great stuff to talk about. This is a different audience. is one where we can get into the finer points of, you know, like the details of, you know, retail margin or something. And so it'll be exciting. Look, I was there in college and I've never had a problem with sloppy second. So I'm completely okay with that. So look, you did, I listened to

PrEP. I read a bunch of things. You did a podcast on Invest Like the Best with Patrick. The people can go listen to that for the whole Carvana story. I've got some unique takes on in everything that I'm going to go. Let's, let me start with a broader. question, though. People can go cast partners. They can go review your 13F over the past, call it 13 years or whatever since you've been following 13Fs. I have a question. When I look at your 13F history, I would say somewhere between one-third to one-half of your investments, and there are not a lot. You're in a very concentrated portfolio. In some way, relate to one of two things. Securitizations, you know, Carbana, a lot of securitizations, a lot of auto loans,

that type of stuff. Securitizations, and there are other. their companies, or subprime lending. You know, I think about world acceptance and credit acceptance, which I don't believe you are along now, but you've been historically. Capital One, which I think you are along now. There are others. So I just want to ask, when I look at that, is it, is there something in your skill set that screams securitizations subprime loans are just right up your alley?

Or do you think there's a fund, there's a systemic mispricing in those types of opportunities? Good question. Maybe they're both. I certainly spent a lot of time thinking about subprime lending over, you know, gosh, gosh, I first started thinking about it back in the financial crisis. When you were worried that you would be a subprime borrower, so you know, it's a thing. No, I mean, the first financial crisis, this is 08, I'm old now, I'm dating myself. This is this is back, back in 0708.

That was the first time I was thinking about it. No, that's what I meant, yeah. Yeah, yeah. And I've sort of been. around it for a long time. I think it's a fascinating industry to study. You know, it's distinct from, you know, one way to frame the world is you can broadly divide. So the role of lending, right, you're trying to give loans to people who deserve it. And there's sort of a broad swat of people, we call them prime. And they basically have a reputation that they pay their debts, which is,

you know, you call it a FICO score, credit score, something like that. And lending to them is really fairly straightforward. You know, you sort of identified that they're prime. And that means they're likely to only borrow what they can afford to pay back and make every effort to pay it back. And barring loss of a job or death or divorce or disease, you know, they will pay it back. And so that business generally is about distribution. It operates on thinner margins.

it, you know, tends to run with more leverage because the loans are, you know, in many ways safer than loans that aren't crime and people certainly perceive them as such. And those are challenges, those businesses get by that, by virtue of sort of being easier to do, actually in many ways more competitive. And by virtue of the competition, people tend to run them with more leverage. And in some sense, you're sort of selling a disaster insurance. you know, when there's a recession, these prime borrowers lose their jobs at the same time and you're stuck. Non-prime lending is different in that you bring information to markets and you find the good borrowers amongst the ones that were thrown out by the prime market. And you also then bring behavior modification to the market.

You do things to engage with them in a way where those borrowers are more likely to repack. And in doing that, you actually produce a lot more value by finding the deserved borrowers amongst the many. And you get paid for that because you're able to charge a much higher rate. And so these businesses can have very good economics. They come with some risk, and there's a variety of types of that risk. One is that in general, it's sort of an information business. And Capital One would talk about itself as an information business.

And you know, you're sorting the good borrower from the bad. It's a process of sort of figuring out a mechanism to do that. And so false or misleading signals can really screw you up. And so if you look at the big blowups in subprime lending, the 1998 blowup in auto and card, the 2008 financial crisis, these were situations where in the 90s, what was happening was the, well, these are situations where the signals. screwed up. And so the way that happened was in the 90s, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the end-secured, um, uh, lending markets were growing. And people were essentially refinancing their debt with one lender, with another lender. And, you know, if this was just one lender, constantly rolling lenders into more and more debt, they would obviously be able to see that, um, the borrowers weren't

actually able to pay them. They were just rolling them into bigger new debts. But in this case, because it was being hand, each borrower was kind of being handed off like a hot potato to one lender after another. It looked to each borrower like their, like their borrower, like their borrower's were performing. But in fact, they weren't. They were just rolling their debts. And as long as the industry, and that meant that the lenders had great returns because the borrowers were performing. And that drew capital to the business, which in turn provided the money to roll the borrowers. And you can see how this doesn't works great until it doesn't. And that's exactly what happened. In 2008, what happened was the, or in 2004 to 7, what happened was the same thing,

but with house prices. So if house prices rose, you know, that meant that created a false signal that these borrowers were repaying, which in turn created incentives for them to, for people to lend to them, which in turn made it possible, which for them to buy houses, which in turn helped to drive up home prices and created the signal. And so if you get these feedback loops, it can be very, you know, dangerous. But, you know, there's a lot of really good businesses in the mix. Because if you find a way to build relationships with borrowers, where those borrowers, you've found the good borrowers amongst sort of

bad ones and you've established a relationship with them and they are performing, you know, that can be, that's very valuable because you're providing them loans and, you know, these people are often operating, their income is very roughly equal to their expenses. And so if they, if they're disruptions to their income or unexpected expenses, they need to borrow, and the ability to do that is very important. And so as long as, you know, you've underwritten that correctly, you can be a valuable sort of partner for them and get paid for it and make good money and make their lives better for it as worth.

I think it's very noble business. And so my sense is that that is the blow-ups of the past in different sectors and sort of the complexity of it has generally kept people out. There's a lot of things you have to be cautious of, but it's a space I spend a lot of time in and it's also just interesting. It's human behavior, it's finance, it's, you know, it's banking.

There's a lot of things that come together. But yeah, you're right. I've found myself in that space. In part, it's one of these things. You build a circle of competence and you keep kind of growing around it. But, yeah, it probably is an area. I have a bit of differentiated. I think what I heard from you there is the market paints all the subprime lenders with a broad brush.

And you think given, you think there are some hidden gems in there based on, everything you just laid out. You know, there's alpha to be generated by the companies if they can figure out a way to lend to someone who the market paints a subprime who might be slightly better than subprime. And you think you've got the skill set to figure them out. Let's bring it to Carbana. You know, a frequent point of bare contention. And again, I did, you did the podcast with Patrick. I did the podcast earlier with Recurve. A frequent point of bare contention over Carbana is the lending stats, right? They always say they're going to blow up. And I think you guys say, hey, look at the stats.

Their ABS is actually better than the kind of other subprime lenders. What is Carvana's unique niche? Because I understand everything about the Carvana cycle. For those who haven't listened again, I'm just going to point to all the previous podcast. But I understand a lot of the pieces of the Carvana flywheel. I don't understand why their borrowers would be particularly better than your average subprime borrower. I actually kind of think it would be worse because you're buying over the Internet versus going in person and like getting that old crisp handshake when you go buy a car in person. Yeah. There's a lot there. So first, you know, Carvana's whole financing business, it generates a couple thousand dollars of profit per units. It's sort of nearly $2,000 profit per unit. And that when you say nearly 2000, are you saying that in a dismissive way? Like it's not a lot. Are you saying that in a, hey, it's an extremely important way? Because I have my view. Well, I'm going to start by describing the,

that there's a prime mix and a non-prime mix, and there's a part that all dealers get and so forth. So, you know, all dealers generally get paid. You can go look at the financials for, you know, any car dealership, and they get paid to originate loans. And so a lot of the profits that are in Carvana's financing business are, you know, more similar in character to the, typical, you know, gain on sale you would get, if you look at CarMax. Now, CarMax doesn't

sell the loans. They hold them and collect the money. But if CarMax would just sell its loans, they would get a gain on sale. And that gain on sale is sort of more typical, similar in character to a Carvana guess. Frequently hear Carvana skeptics say Carvana is a subprime originator in a online car sales platform. Like, it's really a subprime originating business. Well, and it is, but it's also a prime originating business. So Carvana does overendage and subprime originations, but it depends on where you draw the line between subprime and prime, and it depends on when exactly you look.

But something on the order of two-thirds of Carvana's loans are prime, which is just, I'm just pointing it out, the sort of level set. And I'll take another moment here. In the prime business, Carvana does make more money than Carnax, you know, and some of that, a lot of that is actually because they charge a bit higher rates. and some of that that's basically the bulk of it there's other things too

maybe that are in the margin but that's the big piece there's a piece of Carvana's business which is a lending business which is the non-prime originations and in the case of Carnax those loans still get made

they just get made by I think it's Westlake And so that's not totally unique, just Carvana is vertically integrated into doing that, whereas most dealers are not. And, you know, you can go get from Kroll or whatnot, the performance data for Carvana's non-prime ABS issuance. And you can see, you know, what they earn in interest and what the charge-off expectations that Kroll has for those pools of loans and what they pay in service. and what the cost of funds are that they borrow at, the residual of that is excess profits, and you can see how much that is.

And if you know that the average length of these pools is about two years, you can capitalize that on a discounted basis and work out that the sort of 9% gain on sale that Carvana gets on these loans isn't out of line with the economics of the loans. Now, your question, though, is more about, like, why would these economics be any good? The first is that if you look at any subprime originator, they do produce loans that of economics.

So some of it's just that. And Carvana is vertically integrated into that. And Carvana does have, you know, if you were a subprime originator, there would be certain costs you'd incur. And, you know, if you're a dealer, there's certain costs you incur to facilitate. Those costs occur for Carvana,

but they're within SG&A. But I do think that Carvana's loans do perform better than the rest of the industry. So the reason I keep pointing this out is we're getting the point of debate down to a smaller and smaller piece of the total pie. So we started with $2,000 profit per loan. We probably reduced that to circuits of 800. And now we're talking about some subset of that 800, which is Carvana's ability to outperform the industry and generating these loans. Well, it's good because, look, the whole Carvana thesis is Carvana because of their scale, because they're online, because their business model, everything, they're so much better than your local use auto dealership.

So they're going to literally, and they have been, you know, 2020 excluded, eat the market, right? It's a superior value proposition. And part of that is, yes, I agree with you. The $2,000 per loan, I think if you went to the used Alderman dealership across the street, it be 1,300, 300, but that 800 difference is material. And I'm wondering why that's the one place of it where it jumps out to me. Like, I'm not sure why Carvana should be literally, almost literally 50% better than, that's more than 50% better, actually. Yeah, so let me answer that in brass tax. So in, for one, most, so Carvana's vertically integrated into the whole lending stack.

So the dealership's typically selling the loan, and then there's a finance code that's making money. And there's a finance code that's making money there. There's also a lot of efficiency actually that's created by being vertically integrated. Think about the loans that the finance go evaluates, but doesn't actually originate. They go to a different finance co. The other one is that in the prime part of the business, Carvano does. charge a bit more. Now, their prices are lower, so it's still a better deal for consumers all in, but there's, that's worth pointing that out. And then in the non-prime piece, I do think the loans

perform somewhat better in the end. And some of that is just going to be better underwriting from the fact that Carvana's, you know, just very good at this. And they have, you have a lot more data available to you when you're originating loans on the internet versus when you're, you know, originating them like in a store. But a lot of it's also going to be, some of it's also going to be that Carvana's cars are in great shape and somewhat lower price, and the experience is really great. And so there are, you know, the primary reason people default on their subprime loans is that the car breaks down.

So that's less common with a Carvana car. But once someone does default, obviously the lower LTVs on Carvana's loans, you know, means that the loss given default is lower, and that's function of Carvana having lower prices as well as a higher down payment mix in their subprime book. Can I go back to one thing you said that's just like, why does originating a loan online have better statistics than originating a loan in person? well to be honest i that's i'm not a hundred percent sure of that i think that's true and i think it's just because you get a lot more information about like it is generally true that you get a lot more information about people when you do something online so um i'll give you um like a concrete example um in in originations one of the things that you're always trying to balance is the the greater the amount of verification you make a borrower go through

Yep. The more you're certain about the features of the loan, but the more adverse selection you're going to face in that the good borrowers will just borrow off. Yep. And because Carvana has this really sleep experience and everything's really efficient, and because they're already doing the whole loan transaction,

they're able, I think, to get more verification done more easily, like in a click, and as a part of the whole transaction than other lenders might be able to do because they can do that more conveniently. And so I would imagine that would be the sort of thing on the margin. But there's also great examples.

You know, I don't think it's, you know, for example, if you were to take a loan applicants, and this isn't a Carbona example, but in general in the subprime lending industry, and you were to examine the amount of battery life left on their phones when they apply, you would find that the ones with little battery are underperform the ones with a lot of battery. Do you want to know what?

I've heard stuff like this before. Do you want to know why this is concerning to me? My wife, every time I look at her phone, 4% battery. And I am a, if my phone goes below 60%, I'm like, we got to charge this thing. We got to get this ball. So I know I'm trustworthy. I'm a little worried about her. Well, it's kind of about people's sense of like responsibility and their sort of discomfort with, like,

like the risk that things could kind of go wrong, right? And so there's a lot of these things that are correlated. There was a long time, I don't know if it's still the case, there's a long time where people used Internet Explorer were worse credits and people used Chrome. Why? Because you had to download Chrome. It was a sort of person who knew about this and bothered to do it.

And so there's many little things, you know, like that, where Carvana's knowledge about your whole journey and, you know, and their vertically integrated stack should give them more information to make better underwriting decisions. In fairness, that is a tough thing to assess, and I'm not 100% sure that that's the case, but I'm giving you a lot of reasons why, I think collectively between price and underwriting,

and, you know, in general, when you give non-prime borrowers a prime experience, which is what Carvana really does, you get positively selected for. And consumers are more likely to stay with the transaction if you give them a great card a great price than if you treat them well. than if you don't.

And so I think all of those things play a role, you know, in addition, of course, they're vertically integrated, and that helps. And then some of it's just like what you get paid for doing the work. Let me switch to a completely different track. I have two things where I'll give you like little puff pieces during this. I had trouble prepping for this episode. And one of the reasons is, you know, when I was prepping, I was going over and every now and then when you you and I would talk on the phone and I take notes on Carvana or I reread your letters or listening to Patrick.

And in hindsight, it sounds so easy, right? Like for those who don't know, Cliff basically rode Carvana from 300 to 3 and back to let's round it up to 300 right now, though I'm sure you prefer the actual 300 than the rounding 300 right now. But it was hard because in hindsight, like I look at my notes and I look at your letters like, damn, it seems so easy. It was so obvious. I know it was not obvious or easy at the time.

But I guess one of the things that jumped out to me is, you know, when I listen to Patrick podcast or when I read your letters, I see a lot of alternative data with how Carvana is performing intra-quarter, intra-week. And I've heard from retail investors, some of whom have made a fortune on Carbana. There'll be like a literal quote I've heard from one is, the easiest money I've ever made is trading Carvana alt data. I guess my question is, we're taping this May 6th. Tomorrow is May 7th.

Carvana's earnings. If you want to spoil the earnings, we can. But my question is, you know, when I see all this alt data on Carvana that people are using to talk it, how was the easy money? And like, how are you using Alt Data with Carvana? Why was there this easy money on the Alt Data available? Because a lot of the people who I've heard say this, they rode Carvana from 200 to 300 to 300. I'm kind of like, well, why didn't you avoid the 200 to 3 with Alt data and then, you know, take the 3 to 300. So like, I kind of think, hey, you were a Carvana Bowl and great, congratulations.

You were absolutely correct. you made a lot of money, but don't tell me it was like easy money trading to Alt Data when you wrote it down 95%. Like the Alt Data should have helped you avoid that a little bit. Does any of that make sense? Yeah. It's interesting. You know, we have, there's a lot of Alt Data people can buy.

We, I have a team that a consulting firm that I've hired that's built a lot more. They may be coming on the podcast at some point in your future. I'll send this particular clip to them at some point. Yeah. And so, I mean, yeah, I have a lot of visibility, you know, Carvana rends itself particularly well to this sort of analysis. But it turns out, you know, one, I think other people like have a lot of this information. And then two, you know, it's always very difficult. You know, you know, this week's sales are light.

You know, what does that tell you about next week's sales? It's sort of like nothing. And it's very, you know, like, you know, like, you know, the company's going to grow up to sell sort of eventually, you know, kind of all the cars, then the fact that this week's sales are a little off is sort of immaterial in the scheme of things. And it's not obvious that this week's sales, we're predictive of next week's sales, you know, being off. In many cases, there's a meaningful amount of variation in sort of high frequency data because of weather or, you know, there's there's all kinds of nuance seasonality that you discover when you start

like really stressing over every day's, you know, sales. And so, Um, it, you know, I find that the most useful thing for the alt data is, is really more to step back and to validate, um, the broader hypothesis. So, you know, uh, we did an analysis. We should ask the question, um, suppose you're looking for a particular make model trim and year and mileage, um, you know, uh, and, you know, what are the odds that, you know, Carbona could have it. And then let's say that you find that on. on, you know, Carvana and CarMax. And you live in a randomly selected, you know, MSA. Once I factor in shipping times and such, or shipping fees and such, if I need the car within two, three, four, five days, whatever the number is,

which one provides me like a cheaper, all-in solution, right? And, you know, you can imagine that that's, there's a bit of doing instead of doing that analysis, and then you could imagine doing that, dragging over time and producing metrics, you know, and the answer is Carvana, you know, varies over time, obviously, as Carvana moves its prices around and Carmex does the same. But Carvana wins, you know, the vast majority of, you know, of the time. But that's the sort of analysis you can do.

But, you know, the experience during, during 2022, just to go back to the all-data thing, was that, you know, sales were weak in the beginning of 22, for the very good reason that the Omicron, you know, part of the pandemic, had screwed up their whole logistics system. And, you know, their delivery lead times, you know, which are sort of three days now, on average, three and a half days. And that reflects a pretty healthy system. We're sort of like seven days, which is super long.

And they were only showing people like half of the inventory, whereas now it's like 90%. And that's, again, sort of a healthy system. And so unsurprisingly, they had very low conversions. And so that was the explanations. Like once Amacron goes away, this will get, you know, better. But it turned out that Amuron was also masking a decline in underlying demand. And so as Amhercon, as they kind of fixed their logistics system, you know, demand like didn't, you know, bounce back. And then you're like, okay, well now, by this point, of course, stocks don't down a lot, you're like, well, now, you know, demand has is clearly softer. They've got to work through, you know, this issue, whatever is something of a lost year. But, but then what happens is, you know, every week, like demand was like a little lower. And, you know, I could see why.

Like, I mean, not exactly why. You never really know exactly why, but I had a bunch of reasons that made sense and kind of you could back test. Like, we could see that the interest rates that the competitors were charging made no sense. You know, but, and we could track that.

But, you know, then you're like, well, sure, but that should go away, right? So how do you trade that? Do you sell your stock because something that shouldn't be happening, you know, that can't last, is screwing things up? Or do you, you know, do nothing or do you buy more on the theory that the thing that's been around for a long time that shouldn't ever have been there in the first place, you know, is going to go away. And so you sort of find yourself, you kind of, what ends up happening is you end up getting some resolution.

But then in terms of the short term, like the next thing down is actually sort of harder to predict. And then you also get weird stuff. Like the company, you know, was doing, you know, like the company beat a number of times in 2024. and each time I was expected it or whatever. You know, we said it had, we should have had a reasonless sense of what earnings would be, but there's this difficult thing of like knowing, okay, great, like, you know, that's likely to be the company's doing really well, but, you know, I'm reminded that this person, I remember reading a blog, someone like hacked a law firm

and they stole all the, you know, the earnings releases and they were like trying to trade on that. And I think that their trading history was they got like, you know, 65% or something of their trades right. So it turns out that even if you have a reasonably good sense, you think, of what earnings are going to be, because you've done all this analysis, it's not obvious necessarily, like, how the stock's going to react. But their Q4 results were quite good and the stock went down. The Q3 results were also quite good, and the stock went up. So, you know, it's quite tricky. So I don't buy this idea that the alt data makes life easy.

If anything, like when stocks kind of go crazy and there's no connection to underlying data, it makes a living with it. easier. You feel more connected to the business. You sort of understand things are fine, and you can just deal. If you have some extra money around, you can buy more. But where it's tricky is when, you know, in late 2022, the company really wasn't doing well, right? I mean, the sales were weak and they kept getting weaker. And it was like every week, it was like a little worse. And, you know, it was like water torture, right? Because instead of having to suffer through just one bad quarter, you know, a quarter, one bad release a quarter, I had to, you know, every day. It was like another drip of like weak sales. So anyway, that's.

That's kind of a long... People can listen to Patrick Podcasts, but I think the impressive thing with Carbana is... Obviously, again, it was hard for me to prep for this podcast because I had you telling me at 20, at 40, at 50. And, you know, the stock today, it's at 20, except it's just got an extra digit in there that Carvana had turned, or Carvana was a great opportunity.

Well, on the way up, actually, so the story there, right, is that I couldn't buy more. Yeah. And on the way up, because of the poison pill, by the way, but so one thing you can look at is the average

delivery times you can kind of track them and in general they sort of trend down as the company gets more and more efficient and there's there's all kinds of noise in it but think about that as like the line to buy a car

so when the company sort of each period the company builds to a certain amount of expected demand like for each month or each week and then demand happens And if it's more than expected, one of the things that happens is essentially that the lines get a little longer because people have taken up the delivery dates that are closer and are sort of pushed to the delivery dates that are further out. And conversely, if the man's a little soft, the land gets a little shorter because of the opposite effect. And so what you could see in 23, we also have a way of tracking like a pretty good estimate of head count. So we could see that heads were falling, that units had finally stabilized, although that part, you know,

know, we're always unsure because they'd unstableize next week. But that for the first time, it looked like there was a line, basically. And then in addition to that, you know, the banking crisis of early 23 meant that we didn't have data on yet, but it was a strong supposition that the lending markets were no longer. Jim Carmer real fast. We're going to normalize. And so that, you know, that was why, you know, set up at that point. And I couldn't do anything about it, but I did tell you.

And then you didn't do anything about it either, but that's okay. No, well, I was going to say it was hard for me prep because, hey, I was thinking about that the whole time. But the thing I'd give you, I was also thinking, hey, this is a company that tap their ATM, which I just hate ATM tapping and is down 99%. I was like, hey, the base rate for anything tapping their ATM or going down 99% is not exactly great. But the thing I would give the followers for is you had done all the work. And I think people can hear that here on the Patrick Potterfka's rather, and you had the conviction. And like, those are the two most important things. Like I talk all the time to people.

I'm like, hey, investing is not an idea, a game of original ideas for the most part. Like, you can go steal someone's ideas in half a second. It's generally the ability to develop conviction. And sometimes when a stock goes down, that conviction lets you know, hey, I need to buy more of this. Or, hey, the thesis is completely broken. I need to get the fudge out of this. So, yeah, let me ask you a different question. You can go look at your 13F.

You've got a huge concentration in Carvana. What keeps you up the most at night right now with Carbana? Yeah. You know, it's interesting. I sort of think that from a risk-adjusted return perspective, perspective, you could make the case, and I have made the case, that Carvana's never been a sort of better investment, more straightforward investment. Why don't you walk us through the upside?

Well, the upside is self-evident. There's, you know, 40-some-up million cars a year sold in the U.S., and the vast majority of that market is addressable for them, and as Carvana gets bigger, gets better, and there's nothing like it. And so they're, you know, and then there's also the new, new car opportunity. And so they're going to sell many, many millions of cars. It's 10, is 20, is 30. You know, these are tough questions to answer, but like many, many millions. And the company already has margins, you know, that are well in excess of, you know, to two and a half, three times that of the rest of the industry, despite growing at a fast pace. And they have, you know,

and they have meaningful fixed costs that they can leverage over time. And, and so it's not, and there's plenty of opportunities still to improve the core unit economics of the transactions, to be smarter about exactly, you know, which parts on which vehicle you, you know, replace in the recognition process so as to manage like warranty and vehicles and, and vehicle service contract expense versus, you know, versus, you know, cost of goods, you know, for example. And, and so, so the upside is, is, enormous, right? If you just do some math, you could work out for yourself that, you know, they could maybe make, you know, in today's money, you know, three or three thousand or

$3,500 of net income, you know, per car. And you multiply that by, you know, pick your number $20 million, and that's $60 billion. And that's in today's money. And that's in a future year that's a ways out, but maybe it's 10, 15, 20 years out. But if you discount that back, it's tremendous investments. And of course, they generate lots and lots of cash along the way. But the point I wasn't going to make was the upside. The point I was the upside. The point going to make was the downside production because um the i think the company's resilience now is great far greater um than it's ever been and and this is why i i feel you ask about what keeps me up and i actually find that it doesn't i don't find myself kept up a night about it very

much um certainly you know you can worry about stock or whatever that's just that's just wasted energy in terms of the business, when you have margins that are so much higher than everybody else's, your ability to absorb, and of course you compete with an industry where people don't have vast resources to operate at losses over long spans of time. They have to make money, or at least break even. And so to the extent there are shocks to the industry, provided their shocks are roughly, evenly apportioned, you know, Carvana should be able to really manage its own economics by by choosing how it trades off between um you know volume and price and um and you know

that that makes the business very resilient um because you know anyway things go wrong they can they might make less money or grow less but they won't they won't lose money and they also well capitalized and all that because when i was when i was going through three possible things that might keep cliff up at night number one is Andrew fitter than me. Obviously, that's what's going to keep you up at night the most. Number two, actually, number one, hey, Carbana in 2022 faces as you've laid out,

like literal, you know, triple snake eyes, like roll the dice, snake eyes three times in a row, just complete, complete crazy, unlucky. I was thinking, hey, use car sales go down 30% for an 18-month period for, choose your reason, right? Carbana, while they do have higher margins, absolutely. a lot of the margins are based on fixed cost leveraging, right, that a lot of their competitors do not have. So I was thinking, hey, could you have a scenario where use car sales are down over the medium term?

So Carvana's, like, leveraging of their fixed costs actually goes in reverse, and that's actually the disaster scenario. Now, as you pointed out, balance sheet, way better, all this sort of stuff. But that was one of the three things I thought might keep you up at night. Well, I mean, first, the use car industry is far more stable, I think, when most people realize. It's the 20% decline that we experienced in 2022 was the worst decline on record. And the decline in the Great Reception was teens. And so 30% would be bigger, but sure, let's go with that. You know, I think we've done a lot of work to try to estimate price of elasticity of demand for Carvana,

and we certainly don't know it, but I don't think it'd be crazy wrong to guess. It's sort of negative 7 to negative 8. So one thing you could imagine is that if there was a 30% decline in demand, you know, if they lowered their prices 4%, you know, all else equal, they would arguably, you know, take that back. Now, maybe, of course, the industry prices would be lower, but industry margins are generally pretty thin, but maybe industry prices come down another couple hundred basis points.

So you have to give back, say, in that scenario, I'm making up six points of price. That's no fun. but, you know, their margins are, you know, going to be 11 and change, you know, percent this year. And so they would still be, you know, they would actually still have margins comparable with the average competitor today. And obviously that would be in an environment where all of their competitors would be, I mean, the outline, the scenario I just outlined, all of their competitors are losing lots of money and disappearing, you know, at breakneck speed. Other tail risk I could think of, and again, I was trying to think of till risk. You know, China, the EVs in China look incredible.

I can't claim to have personally driven one, so I don't know. But the EVs in China are sub-25,000 for cars that to me look better than a lot of the 50,000 gas guzzlers that we're doing. I don't know if it's, hey, the U.S. lowers auto tariffs and China's importing EVs for, you know, that could, you can label that the tail risk for national security and trade reasons, everything that's Probably not it, but what if I told you Tesla comes out with a, you know, $20,000 just killer electric vehicle? And the reason I point this out is, you know, electric fuels are cheaper to make because there's just a lot less parts than gas. And the reason I think it'd be bad for Carvana is twofold. One, in this hypothetical world, Carvana stuck with a heck of a lot of old gas guzzling inventory that is just like completely stranded. You know, it's higher cost and worse than this hypothetical $25,000 to $25,000.

a brand new electric car that's killing it. And number two, eventually Carvana, you know, they take a one-time hit. Hey, we're writing off all our legacy inventory. But if the new cars are kind of priced at $20,000 per unit, you know, the used cars, there's not a lot of margin left for Carvana step in and sell used cars in this world. So I realize I'm dreaming a different world, but, you know, there are good cars getting sold in China for around the price and costs. That's the other risk I was kind of thinking of.

No, this is a good one. Um, so, but, and by the way, you know, just for the people listening, I, I specifically asked Andrew to try as hard as he could to come up with the hardest questions he could. So, uh, I, I hope you guys, uh, appreciate that. So, um, the, the, um, there are two things that you said there. One was sort of the shock, some sort of price shock to use car prices. And the second was, um, uh, the risk of lower, uh, vehicle prices. I'm not going to disagree. It's, it's not just a price shock, though. In this case, like you're left with stranded inventory, right? You know, 30,000 used gas guzzling car. New cars are now 20,000, and they're way better EVs.

Like, all of that's right off. So that, so that, I guess that I find that to be fairly implausible, um, for, for the reason that, um, you know, there's, um, there's, I think the number is 300 million cars in the car park in the U.S. And, um, no matter how great Elon Musk is, and he's, Great in a lot of ways. The ability, or the Chinese, the ability to produce cars to replace, you know, even a meaningful portion of those over any span of time, you know, that's shorter than many years is constrained because cars are, you know, they require a lot of stuff. And so, you know, even if you had some new car that you introduced that was, you know, obviously way better than every other car, you know, it would take many years even before it could get the majority of new car sales. And in many, many, any more years before that would filter meaningfully into the overall, you know, used car market. So I'm not particularly worried about that.

There are obviously some price volatility to use cars based on a bunch of stuff, but, you know, and that could drive them down on the margin over time or whatever, but that's not. Can I push back there? I don't disagree. Like, it's not like you're going to replace the use park overnight, but if for some reason, you know, Tesla introduced a 25,000 killer EV and it was new, yes, they can't sell 100% of them, but isn't that going to destroy the demand for use? Like, everyone's going to be saying, hey, my first choice is to get this new, much cheaper EV

car, and only if they're, only after every last drop-up that has been bought, am I going to go even think about getting a used car? And by the way, it's got to come down because if not, I'll just wait on this, you know, Tesla killer EV that I'm framing. Yeah, a lot of people in these car market, they really can't wait, you know, five, 10 years. True, sure, sure. Tesla to ramp that much. Certainly, you know, I think if people saw, you know,

you know, a Tesla, you know, ramping some super low-cost car at some high rate, you know, they might have rational expectations, and that would probably drive down the price of used cars on the margin, but nothing, you know, like sort of some sort of calamitous decline. And to put in perspective, you know, Carvana, for every car they sell for a year, they have to hold about $4,000 of inventory because they turn the cars, you know, about six times a year. And so, you know, if you think about, you know, if you think about, the risk, right, a 10% shock, you know, to car, to car prices instead of $400 a car for Carvana in the context of a $4,500 incremental margin per unit or, you know, mid-3s, eventually going to four

overall EBDA per unit. So I'm not particularly worried about sort of the one-time shock. Now, your better question is, you know, let's just say that there's significant deflation in the price of cars over, you know, a span of time due to technological innovation. And I think that's fair. I think that, you know, if cars are cheaper, you know, all else equal, you know, the used vehicle market will be, you know, smaller. Some of that would be offset by people, you know, having more of them and some of that might be offset by people being richer and therefore more likely to exchange cars.

But, you know, in some limit case, if you drove the price of cars down to a few thousand bucks or something, then they could be disposable or sort of, there would be no used market in the sense, the way we treat like cell phones or, you know, I don't know, old TVs or whatnot. However, you know, at least, you know, in the sort of work I've done, it doesn't seem likely that, you know, use car prices are going to go so low that, you know, the new car prices are going to go so low that, you know, people would still not be interested in a discounted, you know, used car. It may be that that lowers the price and shrinks the market somewhat over time.

And offset also would be that as people get, you know, the history has been that while we've gotten ever more efficient at making cars, people have asked for more and more out of them. And so even as you lower the, you know, the price of manufacturing an ice engine, people wanted more horsepower and air conditioning and everything else. So it's not obvious to me that there's a future where cars are all like $5,000 a pop, but that would be bad for Carvana. A future where cars are new cars are $30,000 a pop,

you know, would be sort of marginally not, not, not, but it would be like a marginal hit to the industry size. And keep in mind, it wouldn't just be the, there'd be a price of car offset by a number of cars. So it would be, the net effect would be smaller than regular price deflation. Yeah, I mean, look, cars, I think. they're pretty much at the, not at the curve, but they're close to the curve of efficiency given the limitations of union contracts and all that sort of stuff.

I'd be surprised if you were talking about, hey, new cars are going for, you know, mid-30s today and 10 years from now, new car costs $5,000 just because there's so much metal in there, right? There's so much metal, so much energy. Like, it's hard for me to imagine that world. I think a lot of people who haven't read your letters or listened might wonder, hey, Andrew and Cliff haven't talked about the, haven't talked about the, haven't talked about the risk of the driverless cars, right? And you've actually, this is like, I remember 18 months ago I was in New Orleans and talking to you on the phone and I was like, driverless car risk and

you broke it down, you broke it down beautifully for me. So you can break that down now if you want to. I do have a follow-up question on driverless cars, though. I guess might as well, okay, we're on a podcast. Might as well not leave the listener's hanging. Let's do it. It's fine. So I, this is a long answer. So I think people- You have to try and keep it within a reasonable time limit because I do have a couple more non-carbonic questions I want to ask you. Okay.

And by the way, you don't need to limit this to an hour. You're welcome to, but I don't have anything until four. I don't have too much, but keep it for us. We'll keep it. Okay. Keep them. So, people are worried that, in general, the concern with self-driving cars, I think goes something like this.

If you look at a car, it spends a lot of its time, I don't. And while it's idle, it accumulates depreciation and capital costs. And if you could increase the utilization of cars by sharing them because they're self-driving, you could materially reduce the cost per mile driven. And the theory would be that if we introduce self-driving cars, what will happen is we'll all end up ultimately not owning our own cars, but participating in basically large, shared self-driving fleets. And without car ownership, of course, there's no need for a used car market.

And that's a valid perspective, but I think it has a number of mistakes. So the first is it is correct that if you imagine a pooled system of self-driving cars, that such a pool would have lower average. cost per mile drug. But what that misses is that by introducing a pooled system, you would add deadhead miles into the system. And while a car sitting idle incurring capital and depreciation cost is costly, a car driving empty is very costly. And if you look at the portion of miles driven in Uber's that are empty or New York City attacks, that are empty or even long-haul trucking, you know, that are empty, you get numbers like 30 to 50 percent

is the portion of miles driven that are empty. And the reason why this is so high, you know, there's a lot of them, and this doesn't go away. As the system scales, you might think this gets denser, you might think these go away, but it doesn't. And the reason is that, one, people live a certain distance apart, and cars have to travel a certain distance in order to get to their fares. The other is that there are net flows of people. People travel, you know, in certain directions on balance. And that creates a need to have basically empty cars drive back in order to make repeated trips kind of in the same direction.

An example, I mean, look, people live in the suburbs. They want to drive into the city in the morning. They want to drive out of the city at night. So you can imagine everyone goes in in the morning, out at night. There's your flows. Exactly. To the central business or home and all that stuff. And so, you know, if you try to factor that in, what you discover is that there's

other said overhead costs for a shared system, you know, cleaning and, you know, the sort of payments or whatever, but when you try to fact, the biggest is deadhead loss. When you factor that in, what you discover is that a shared system's cost advantages largely disappear. So, so, you know, obviously there's a lot of assumptions as you're doing this sort of analysis, but, you know, what it may, a shared system might be a little more expensive or might be a little less expensive. It's not obvious, and there certainly aren't like large savings. Um, but that actually doesn't begin to capture kind of the problems with the theory. And the reason is that in doing these analyses, people often will think about, you know,

buying a new car and using it over its life and comparing that to, you know, cost of shared vehicles in a shared system. But the reality is, and so they compare the sort of average cost per mile of driver faces versus some sort of shared system. But the reality is there's enormous amounts of heterogeneity in the cost per mile driven that most drivers face. Many drivers face, like if you want to have a car that has no capital costs and no depreciation costs, that is basically available to you.

You just have to buy an eight or ten-year-old like Toyota because that vehicle, you know, it has virtually much, much lower cost per mile than a shared system could ever hope to achieve. So for drivers who are very price sensitive, a shared system would never be cheaper. than buying their own sort of older used car. Conversely, the buyer of a brand new BMW 7 series, they face much higher costs per mile than the shared system would offer, but they're getting something else for it, which is the quality. So once you factor in the sort of mix of costs faced by different users,

you discover that this would appeal to a much narrower set of people, maybe than one might think. Beyond that, there are significant, you know, hedonic reasons why people would prefer owning their own cars. And to be clear, I'm comparing owning your own self-driving car, you know, to owning, to participating in a shared self-driving vehicle fleet. And so, you know, if you look at how people use their cars, you know, for one, wait times suck. The average trip length, I think, is 15 or 20 minutes. And if you imagine one of these shared systems, for it to be cost efficient, you know, you're going to have wait times. Those wait times might have an average to say a couple minutes, but people need to plan around sort of the two standard deviation wait times or whatnot.

And so, you know, you can imagine, you know, users needing to sort of have factor in sort of five minutes of wait time or whatnot for a 15 or 20 minute trip. And, you know, you can work out that that actually, that's sort of wage, implied wage on that or whatever, more than eliminates, you know, any savings. I used to kind of be skeptical of that and then you have a kid and you're like, look, if I check out of the store and I've got a kid and you add five minutes to the thing instead of me being able to like walk right up to the car and put them in, to say nothing of, you know, I've got a young kid. You have to install the car seat yourself. But if you add five minutes to that, I might as well just go throw myself off this building right now like a hundred times a year. No, no chance. Good sir. There's going to be temper tantrum. It's going to be a bastard. Well, I also find the mental energy of me to remember. to, like, call an Uber is like, you know, just like this tax on you. For small-minded, for the small-minded mental energy, Uber, for the podcast, so, I mean, Colin. That's right. But the, you know, but then, the other hedonic reasons is that people,

your point about car season stuff is really, there's a reason why we have a variety of different cars. People own different cars to say different things about them and for different reasons. You know, you might, you know, the parents might own a minivan. They've got your kids' cars seats installed in it. They're leaving their kids' toys in it. You know, people who work in various trades might have a pickup truck. They use it to hold tools.

Some people might drive a sports car because they want to show off to the opposite sex. You know, there's like a lot of use cases for cars well above and beyond kind of just transit. And people leave stuff in their cars. They might, you know, go in the morning, you know, to the gym and leave their gym bag in their car while they're at work. or maybe they'll pick up their dry cleaning and, you know, and then go into the grocery store and come back. And there's just a lot of, like, use cases that really start to add up to make owning your own self-driving car, you know, far more appealing most people. And I actually think that with self-driving, you're actually sort of sitting unoccupied in this space. And the shape of a car might evolve, I suspect it will, to be less driver-centered.

But it becomes a room, like a personal room that you occupy. pie. And actually, I think that that will increase people's hedonic reasons for owning their own car. Nobody really loves sitting in like a shared waiting space, you know, in other people's space. People want like their stuff there. And so those are all, I think, strong hedonic reasons why people would be willing to pay a premium to have their own self-driving car. And in fact, across many markets, we see that. People own their own their own boats and they own their own RVs and they own their own evening gowns. And, you know, like, you know, they own their own second homes. There's just a whole host. businesses of industries where there's an economic argument like a you know i've always when i really

like think about this i think that the the argument that we're all going to have these self-driving vehicle like the shared pool of like you know homogenous self-driving cars moving us around you know is some like engineers vision of us all sharing like the same golf carts and it ignores the fact that we're people um and so anyway it flattens all of all of like our humanity so all that being said, I think that, you know, it won't, it wouldn't be much more efficient for Saul to have our own shared self-driving vehicles. It could be less efficient. And owning our own cars has a lot of advantages in many use cases. And I don't even make a somewhat controversial point, which is that if you survey people outside of, you know, a few big cities about why they use shared fleet,

such as Uber, by far the dominant answers are drinking, going to the airport, are concerned about parking. And if self-driving vehicles are available, you might make the case that in many of these instances, use cases for shared fleet would actually go down. Because I would, you know, instead of taking an Uber to the airport, I would take my own car and it would drive itself home at the end. And so, you know, the broad point of it is that there would certainly be use cases, right, for a shared vehicle fleet, you know, people who, it's a sort of auxiliary car type of situation, much the way people use Uber's in the suburbs, for example, for the other 10% of uses, people who live in cities where they don't want to park a car, although with your own self-driving

car, you can imagine having it park away and coming to get you when you want it. But, you know, there's reasons why, you know, a shared fleet would exist. But I don't say, see it as like threatening the sort of, you know, the family car as like a means of, you know, vehicle, you know, ownership. You actually, you hit most of my tangential questions on the things that keep you up on Oh, one more example, sorry, in India, in India, because wage rates are so low, you could make a case that cars are already economically self-driving, and people, wealthier families in India do not all share like a giant Uber system where they have their own car or their own

driver. Now, look, maybe it's different, you know, lower-dressed society, whatever. But like, my point is just that, like, I just don't see, I just don't see people giving it. People like to own things. Let me ask a different question. And I'll bring this back to Corvonne a second. But do you want to tell your Google Stanford story? Well, I mean, I wrote a letter once where I talked about how, you know, you might make the case that the people, Stanford, among them, who sold Google, you know, around the time of its IPO and shortly thereafter, in some sense made sort of one of the worst investment decisions, you know, ever. And the premise of the letter, you know, the theory at the time, was that, you know, treating your cell decision as seriously as you treat your buy decision. can it can be underappreciated.

And sort of a lot of the time, you'd imagine an enormous effort goes into making a buy decision. But then the sell decision can be sort of rule-based. Like, well, you know, we're done with this now. Yeah. And in the case of, you know, the premise of at the time, what I was talking about, you know, the investment in Carvana, and there's sort of good, sort of a lot of well-founded wisdom

in the idea that like once something gets to be a certain part of your portfolio, you should trim it. And, you know, I understand that that has benefits. But there's also, if you do that, then you will inevitably never own something that really does tremendously well for you. If, you know, another example would be if you, you know, if any of the people at the Berkshire Hathaway investor day who made, you know, hundreds of millions or billions of dollars on your Berkshire Hathaway definitely did not follow the rule of diversifying once something went over 30% of their portfolio. And, and so, you know, that's, Yeah, I just think, you know, one of the, as I thought about this question of, you know, if it's appropriate, you know, to own so much kind of on a, you know, that's been, you know, a framing that I found to be helpful.

So I love that framing, but I do a question on that. When you, if you told that framing, you said, hey, you know, hold the winners on, hold the multi-backers, the names that would most frequently come up would be Google, Amazon, Facebook, right? a few people who maybe bought Apple in the 80s but there are people who bought Apple in the 80s held it through the post Steve Jobs Crisis Days he came back, wrote it to glory. Berkshire, like those would be the ones that really jumped out. And the things that I would jump forward, four of those are like the greatest tech companies

that we've ever had and all of them evolved into businesses that if you bought them kind of originally, you would have never seen coming. You know, Amazon, you would have never seen AWS coming. Google, yes, the core Google is great. but you wouldn't have seen the incredible YouTube acquisition, tons of other business that created value. Apple, you bought it for computers in the 80s,

you never saw the iPhone coming. The only one that would qualify differently was Berkshire, where it was kind of just betting on the singular genius of Warren Buffett. So with the Google... Can I pause there? Yeah, I mean, Walmart, Costco, Home Depot, you know, just sort of thinking off the top of my head here

of, like, a fast and all. Those are not necessarily... Those are incredible winners, but with the exception of me, Walmart, I'm not sure I hear people say like, oh, you know, this group of the NeverSell bought Home Depot Walmart and rode it all the way to a cajillion. Maybe I'm just biasing myself when I instantly thought kind of the big, big for tech companies and Berkshire is like the prototypical examples of this. Well, maybe they didn't, but that doesn't mean that like someone couldn't have, I guess, is kind of my. And certainly the Walton's own, you know, a lot of Walmart whole way up. But, you know, but I guess I think you're trying to say these companies all had to reinvent themselves, and I selected those because I don't think those did. It's a great point.

No, you were going exactly where I was because we say, hey, Carvana, it's like dominating one-use car market, but, you know, everything else, either like tech giant who evolved into a new thing or the singular genius of Warren Buffett, who also bought a heck of a lot of things along the way, how does Carvana fit into that frame? But I think you very successfully jumped ahead of May. Yeah, I mean, I do think when I put on my sort of very long-term lens, I mean, it is interesting to contemplate what the company could be, Carvana, that is, over a long time. I mean, you know, just how much better can this system get, right? With self-driving trucks, maybe the introduction eventually of robotics, it does seem to me that, like, technology is working in Carvana's direction.

and that, you know, as all these things evolve, that it's likely, you know, it's more likely than not that, like, I think we're going to see that they're relatively more advantage than, say, your, their competitive set of dealerships as, you know, technology continues to evolve. And so Carvonne, of course, is going to, you know, achieve its goal of basically helping customers move cars between each other, helping people move cars between each other, you know, in different ways in 10 or 20 years. But I think that the role of doing that and their advantage in doing that, you know, should only get bigger, you know, based on what I know about how technology is trending. It completely different question, moving off Carbona. You know, and this is not a

specific commentary in this company. It's just something I think about a lot. And I think your history with the Carvona stuff and other thing. But if I looked at your 13S, herbal life used to be a huge position for you. I believe based on your 13S, exited in 2022. And, you know, that was a position. I think you did well. And again, it's not about that position.

But if you went to Herbalife today, the stock for a variety of reasons is far off where you sold it. And I always look at these companies where I sold. And then a year or three years later, however long, you know, the stock's down 50, 80, whatever percent. I think, oh, well, A, I dodged a bullet there, but B, what do I learn? from that

that kind of bullet dodging. Was I lucky to get out right before? Did I see, you know, famously Warren Buffett sold Fannie Mae and Freddie Mac like five years before the crisis because he saw a lot of kind of cockroaches creeping around. Did I see that?

Was I lucky to sell? Like, how do you, when you see a company like kind of after you exit crash like that, how do you think about that in your investing process and like just your ongoing investments? So Herbalife is an interesting story. So I invested in Herbalife. when Bill Ackman did his whole,

its pyramid scheme presentation. And I'll just take a moment to point out that at the time, Bill Ackman was wildly incorrect. He was entirely incorrect and remains entirely incorrect. He was psychologically short it for 10 years, though. Yeah. And it was manifestly simple to show that it was not a pyramid scheme. Never was.

Now, when I bought it, the company had grown in the teens for a very long time. And, you know, granted, I expected it might slow some. I kind of thought the past would be prologue. There's decades of teens growth, and it had penetrations in markets that were way higher than other markets. And, you know, it's a viral business in the sense you can think about that people that sort of multiplies.

And so there was sort of no reason if, you know, if they'd achieve some level of penetration in Los Angeles, why they shouldn't eventually get there in Minnesota. And what happened, well, a lot of things happened, but basically, you know, over the next number of years, five, six, seven, eight years, there was a whole series of like setbacks. And some of them were caused by Ackman's, you know, directly had people standing outside of like herbal life facilities,

telling them not to do it. And there was a lot of distraction, and then they made changes, and changes are always disruptive to these organizations. And so all this stuff kind of created all these seemingly one-time type setbacks, this global business. So invariably, there's always somewhere in the world where something goes wrong, all that stuff. But in general, for a while, you know, it looked like, you know, look, should we focus on the last year or two of poor performance or think about the 30-year, you know, sort of body of work? But by the time we got to 2021, I was increasingly of the view that, you know, we had more and more. time where over time

growth had proven to be elusive. The company, you know, wasn't necessarily shrinking. It was just kind of going sideways. Then it was generating cash and was buying back stock and the investment had been fine, like from a return's perspective or whatnot. But it did underperform it, I'd hoped. And to be honest, I don't really have a great explanation as to

why it was so successful for so long and then sort of became less successful after 2013. The best theory I have is actually that the gig economy that worked against them

that in the funnel if you look across multi-level marketers it's been a hard life since 2012 and I think this is a hypothesis which I can't really prove

or having been able to invalid be really prove but my hypothesis is that people who might have needed some side income or whatnot used to work their way into one of these MLMs and then some percentage of them

would ultimately be good at it and build a business and with the choice of, you know, driving an Uber or something, what happened was that got reduced a little bit. And one of the things about these businesses is that, you know, if the virality coefficient, a business is growing 2% is dangerously close to shrinking 2%. And in like a retailer or something,

if you lose 2% of your sales, you lose 2% of your sales, your store is still there, you keep going. With the multi-level marketer, if you lose 2% of your distributors, and they in turn produce 2% of your distributors, and so I, I began to worry about that. And still in general, I would say that my view of urban life by 2021 was that, you know,

I wasn't exactly sure why, but it was time to start thinking about the growth rate between 2014 and 21 as sort of maybe what I should think the company can do versus, you know, the growth rate from 1982 until 2013. And it turns out, so I was already, it was a smaller position where at that point, other things had gone up. It had been okay, but said a lackluster. And then it turns out that I'm just interested in health and wellness and biotech and whatnot. And I read the GLP-1, like, agonist results. And I basically was like, well, that's that.

And so I sold it. And in fairness, if you'd ask me in 2018, you know, what would have been something that would really change your mind? on Herbalife, I would say, well, if there was a really effective medical treatment for weight loss, that would be really bad. And it just didn't seem like that sort of thing. And then, you know, of course, I sold it. And then I had this intelligence to look at Novo and Nordisk and Lily. And of course, I didn't buy those because I'm just not that bright.

And so, but I got, I got half the right. I sold it. It's tough to pick the winner, though. It's tough to pick the winner. Now all of them won, but it's tough to pick up. Let me just pick up this question one more way. So you saw it Herbalife and it's great. Like what I heard there is, A, you reassess your premise and be one of the tail risk

that you had worried about came into fruition. You saw it early and got out. So that's like actually a really successful example. There's a lot of things. I mean, it turns out that the tail risk was in an area where I was constantly monitoring. You know, but. Which you shouldn't be for some, but let me ask just slightly, that's a great example. But have you like taken anything away from that example?

when you're researching your investments like i know one thing i've done is as these little tail risk of companies i followed or invested in and have hit like i start building out and be like hey does this company have xyz tail risk maybe i shouldn't be investing in or maybe i need kind of more upside if i'm investing in something with this tail risk that kind of kick me in the balls two years ago i don't quite understand the question so erbil yeah forget it whatever i i think you're asking the question basically like, you know, I mean, there are other examples I've had in the portfolio where, you know, I've sold things and the company has done lackluster afterwards. You know, in my very early days, I was invested in, you know, Selenese and, and Ashland. And I sold both

of those kind of for valuation type reasons, particularly like, you know, great reasons. And it turns out that they sort of, that they've underperformed. And it's really, they made some terrible mistakes in the last couple of years and really got themselves in the trouble. But, um, You know, I don't know. I think the game is hard. You know, and, you know, the reason why you need the margin of safety in your valuation is because, like, things will invariably, you know, kind of sometimes go right, sometimes go wrong. And so, I also think that, like, in the case of selling as in Ashland, I have a greater appreciation for how difficult chemicals companies, you know, kind of are

in a way that I maybe didn't, you know, when you're 27, you know, you have, like, you know, a little bit more confidence in predicting the future will be different than the past than when you're, you know, 43. You read it, when you're 27, you read a 10K and you read the business script and you're like, cool, I, the petroleum goes in, they put it through a thing and it goes up. I understand chemicals and then you follow chemical companies for five years and you're like, I understand 0.1% about chemicals. Like nothing else. This is insanely. It's the most complicated business. All right, I have two more questions. This is one of the reasons I do this podcast

is because I can ask questions I would be embarrassed to ask in person. Expert networks. If you had asked me 18 months ago, two years ago, probably before I met you, I'd been like, I use expert networks a lot. You know, I'd probably read an expert call on Tigis, Alpha Sense, pick your network every other day. I probably do, you know, when I'm researching investment, several calls. I'd probably average out to more than one a month. Now, remember, I'm not running like enormous amounts of money or something, so the budget constraint.

But I would have said, I'm a pretty frequent user, not as much as it used to be in my private equity and consulting days, but on the scale of public market investors, pretty frequently users. Then I met you and I learned how very, very wrong I am. I can ask you budget or anything, but what's one thing that, you know, when you talk to other investors as someone who's probably maybe the most frequent, user of expert networks in the entire, at least public markets, what's one thing that you think investors, like, fail to do with expert networks that you do, or one way that people

could kind of brush up or use expert networks better? Yeah. So, what's his name who wrote, there's an author who wrote these super long books, right? I can't believe I can't remember his name right now, but. Brendan Sanderson. No, no, no. They worked out power. It was,

anyway, but he wrote the Lyndon Johnson books, and he also wrote the... Yes, Robert Carrow's book, his first one about the guy you built New York. What's his name? Anyway. Moses? Yes.

So Robert Carrow, who wrote the books about Robert Moses and Lyndon Johnson, he did a book where he talked about, you know, writing and interviewing and in it he used to describe how how important it was to um be quiet and let other people talk when you're in when you're interviewing and how he would actually sit there and he would write um stf you over and over in his notepad while which

being shut the fuck up while he, you know, was waiting for awkwardly for the person to eventually kind of throw that last fact out that they've been debating, saying, but haven't. And I have found, like I'd say that when I was younger, I used to go into interviews, I had questions, and I asked them, listen to the answers, and I asked my next question. increasingly now I have questions and I want to get the answers to them but I will generally start by trying to ask sort of open-ended questions and let them talk

and shut the fuck up and it is a little bit tough to do because it makes you seem like you don't know anything and people like to think like they know things but what happens is they talk about things that you didn't know about and you get to learn how they're thinking about things. And then you write down your follow-ups. You don't ask your follow-ups.

You write them down. And then after they're done, you go through your list of follow-ups and you ask a follow-up. And as you do that, you'll follow that thread for a while. And eventually you'll get to the end of the call. Unfortunately, this makes your calls take longer, which fortunately I have the budget for this. But eventually you get to the end of your call

and then you look at your list of questions. And lo and behold, if it was a decently run call, You've covered them. If not, maybe there's a few and you throw them up the guy or gal. And by the way, this also works really well for management teams where, you know, because what you learn with the management team in addition to learning the things you didn't know to ask about with the experts, you also learn, you know, what they're thinking about because Lord knows if what they're thinking about isn't what you're thinking about. That's a really interesting thing to know.

And so I think that's kind of the biggest thing. I certainly read Teague's transcripts too. And, you know, they're very mixed. And there's a lot of people who go on these things who, you know, they do a lot of talking. It's funny because the whole time you were saying the STFU thing, I wanted to jump in and interrupt you and tell you. But you've sent me the audio of a few of your expert calls. And as you were saying it, I was like, the cliff who I talked to on the phone is so much different than the cliff who I listen to in the expert interviews. because you do you let the person you let the person just go on and on and on so let them go on well

past like let like they're gonna they're talking it's just it's tangent like just let that like it's it's weird because around the clock and it costs money but like just let like eventually at some point like you you can read you know you can redirect them but like you know you'd be surprised how you know like they're rambling on and on and then they're like and of course you know everyone hated the people at ops and blah blah blah blah blah you're like do tell me more why everyone hated the people with the options, right? They're like, oh, you know. Oh, everyone knows the CEO made that decision because his wife was divorcing him and he needed a quick inflow of cash. You're like, what?

Last question. Here's my second puff thing for you. I do this thing, I call it my trite munger series and my trite buffet series because they'll say something. And when I first read it, I'll like groan. It's so corny. It's so obvious. It's so hokey. I'll grown. And then five years later, you know, I'll have a couple extra grays in the beard and the hair. And I'll reread and I'll be like, yes, it's really hokey, it's really silly. But there's a lot of wisdom in there. And I think you're the only person I know who's got what I'll call a trite cliff saying. You're the only other person I, friend I've talked to, he's got the trite saying.

And it's every now and then when I call you, I think it happened like two years ago, like, hey, what are you up to? You say, I'm waiting around for my stocks to go up. And the first time you said it, I groan because it's so silly and so arrogant. And it is probably both those. But then when you think about it a little bit, you're like, what is any, investor who's long-term concentrating investing doing aside from buying their stocks waiting for them to go up and you know probably reading a lot to make sure that the stock's a great opportunity or there's not the glp one risk that we had it for life so there's my trite cliff saying right there

here's my question right now what are you researching while you're waiting around for your stocks to go up oh well i mean i i i think investing is such a great business because you know in order to be a great investor, in order to invest successfully, you kind of like need to understand everything, right? And so there's virtually nothing that's like off limits that isn't relevant in some way to, to like understanding how the world works. I've actually, I mean, of late, I've spent a bunch of time studying, you know, health insurance companies. I thought you're going to say that, yep. I've actually been, I have found that with, with AI tools now, like seemingly old, historically inscrutable life science and biotech companies.

now feel more approachable. You know, and so I've spent, I'm less interested in the biotech stuff, you know, although I thought you were, they're more interesting than they used to be, but like, I'm more interested in the life science stuff, you know, who knows if I'll get there or whatnot.

But, you know, you, you know, I spent, I spend a fair bit of time keeping abreast of changes in AI. You know, it's obviously super interesting. You know, and then it's one of the nice things about being involved in these companies, you know, for a while, you know, you get, you become kind of, you get kind of into the industry.

And so, you know, it turns out that I've got, you know, after this, there's a really talented executive who owns a timeshare company that, you know, I have a relationship with and he and I are going to catch up. And, you know, we don't really have an agenda, I don't think. But, like, it's just, you know, it turns out that, you know, this is, you kind of, this morning. I had a call with, you know, related to the auto space. You know, it's just things that you get, you get to further your network and, and just keep learning. I think it's, you know, I think that sort of top of my funnel is very unstructured. I spend a lot of time looking at a lot of different things. And sometimes, I mean, there was one investment I, you know, I forget which one was right now, but I remember, I didn't actually make it,

but I got really interested in, especially time on it. and it was because I accidentally had downloaded the wrong 10K but I was on the plane so I read it anyway and so like it really can be very happenstance and so the key I just find that all I try to do is like every day as long as I've learned like learned things incrementally

then I feel like I'm doing my job and you know yeah it's it's actually I mean I've never been in this position where where I have so much invested in a single stock and I'm sort of waiting for so long. And it is actually harder, I think, than maybe people appreciate. It is really rewarding and fun to, like, do new things. And it certainly makes you feel useful, you know, and, you know, it's exciting.

And so not doing them is actually harder. But yeah, so what do I do? I spend my time, like, learning stuff, you know, across a wide variety of things and hoping that the next thing will be the next big thing. But these things are all cumulative, right? So what happens is hopefully, even if it isn't something useful, it'll be useful in another context. And you know, that's the same job you do every day.

No, look, I've drilled some dry wells before. And then like 18 months later, you know, the company has a hiccup. Their main plant explodes or something. And all of a sudden, the dry well turns out to have been a very fruitful well in hindsight. But I was just asking. I was maybe asking what you're researching.

Yeah. Or even just like, you know, you study a company and you learn about it and it ends up being analogous to another situation, right? And or you learn about an industry and then like later on you're talking to a friend and they're doing a, you know, a supplier in that industry. And at least now you have some context, right? You're not just starting from scratch. It's just it's all, it's all, you know, one brick at a time. I've argued a lot of investing is like being able to quickly recognize parallels and, you know, you can apply it overly broad, cool. Cliff saw the parallels between Carvana and Amazon when he invested it.

But, you know, there is, hey, you find a company in distress, Buffett American Express distress. Like, you can kind of see how it is. And every hole you drill gives you another parallel to do. Cool. Clip, anything else we should be talking about? No, sir. I really appreciate you taking the time. It's been fun, I'm sure.

You're an in-demand, man. I really appreciate you coming on. It's good to know our friendship besieged you to come on after the Patrick Pod. I'm going to send you an invite now. Look, May 15th, 2030. I've gotten a plan. So we'll have to do it, May 16th or May 14th, 2030. But I'll send you the invite now and we'll go from there.

And this is it. I go back into hiding after this. Five years, for five years. And then that's why May 14th or May 16th of 2030 is when you've got the invite. And by the way, I said this before we were recording, but you're looking strong. You're looking good. You've lost some weight. I see held your arms up and there there's something on there for the first time.

This is silly. I wanted to lose weight for a lot of reasons. but like on his 2% of the reasons was I saw Cliff a couple months ago and he's like do you even lift and I was like Cliff the next time you see me I'm going to have dieted so much you're you're not going to be able to you're not even going to be able to joke you'll know that I lift my friend all right hey Cliff it's been great we will chat soon here's back a quick disclaimer nothing on this podcast should be considered investment advice guests or the host may have positions in any of the stocks mentioned during this podcast please do your own work and

consult a financial advisor. Thanks.