Practical Lessons from Chris Davis

[00:00:00] [SPEAKER_01]: Growth Managers have a shortcoming that when they own a stock at 60 and it goes to 30, they want to sell it.

[00:00:06] [SPEAKER_01]: Value Managers have a shortcoming when they own a stock at 30 and it goes to 60, they want to sell it.

[00:00:11] [SPEAKER_01]: Both are stupid because where a stock was has nothing to do with its value.

[00:00:18] [SPEAKER_01]: I used to say for every dollar David Swenson made for Yale, people are going to lose two dollars imitating him.

[00:00:25] [SPEAKER_01]: I'm going to say something that may alarm at first blush might alarm the sort of consultants out there,

[00:00:31] [SPEAKER_01]: which is I really think that the sector concentrations as they're defined have nothing to do with risk.

[00:00:39] [SPEAKER_02]: Welcome to Two Quants and a Financial Planner where we bridge the worlds of investing in financial planning to help investors achieve their long-term goals.

[00:00:44] [SPEAKER_02]: Join Matt Zeigler, Jack Forehand and me, Justin Carbonneau, as we cover a wide range of investing and planning topics

[00:00:49] [SPEAKER_02]: that impact all of us and discuss how we can apply them in the real world to achieve the best outcomes in our financial life.

[00:00:54] [SPEAKER_00]: Jack Forehand is a principal at Validia Capital Management.

[00:00:57] [SPEAKER_00]: Matt Zeigler is managing director at Sunpoint Investments.

[00:00:59] [SPEAKER_00]: The opinions expressed in this podcast do not necessarily reflect the opinions of Validia Capital or Sunpoint Investments.

[00:01:05] [SPEAKER_00]: No information on this podcast should be construed as investment advice.

[00:01:08] [SPEAKER_00]: Securities discussed in the podcast may be holdings of clients of Validia Capital or Sunpoint Investments.

[00:01:12] [SPEAKER_03]: So Matt, we are going to continue our series here of lessons from people that are much, much, much smarter than us.

[00:01:17] [SPEAKER_03]: This is basically like cock soup breakfast with cherries.

[00:01:20] [SPEAKER_03]: This is fantastic. I'm really loving to our thieves.

[00:01:22] [SPEAKER_03]: So we've done Jack Schwedner, we've done Osloff de Motoren, we've done Michael Motwissen.

[00:01:27] [SPEAKER_03]: And now today we are going to do Chris Davis.

[00:01:31] [SPEAKER_03]: And we're going to spend... you're going to hear a lot more from Chris Davis or at least as much from Chris Davis as you are from us today.

[00:01:36] [SPEAKER_03]: What we're going to do is we interviewed Chris Davis earlier, January of this year for X-Files Returns.

[00:01:40] [SPEAKER_03]: And there were some really great lessons in there.

[00:01:42] [SPEAKER_03]: And one of the things we're trying to do is we're trying to break down those lessons,

[00:01:45] [SPEAKER_03]: pull out the most important lessons via clips from the episodes.

[00:01:48] [SPEAKER_03]: And then you and I are going to talk about what we think the average investor can learn from that.

[00:01:51] [SPEAKER_03]: So we've got eight of them today.

[00:01:53] [SPEAKER_03]: Well, the first one we're actually going to get lessons from two people at the same time here

[00:01:55] [SPEAKER_03]: because Chris was... he talked in the interview about how Charlie Munger changed his life.

[00:02:01] [SPEAKER_03]: And he goes into more detail than we're going to put here.

[00:02:03] [SPEAKER_03]: But there were two really key...

[00:02:05] [SPEAKER_03]: There were three lessons in the interview he talked about that he learned from Charlie Munger,

[00:02:08] [SPEAKER_03]: but there were two that really hit me pretty hard.

[00:02:10] [SPEAKER_03]: And so we're going to go through each one of those.

[00:02:12] [SPEAKER_03]: And so this first clip is Chris talking about what Charlie Munger taught him

[00:02:15] [SPEAKER_03]: about the importance of behavior.

[00:02:17] [SPEAKER_01]: Charlie changed my life.

[00:02:19] [SPEAKER_01]: I met him. I was young enough.

[00:02:21] [SPEAKER_01]: I was trying to sell him a business that belonged to my...

[00:02:26] [SPEAKER_01]: In my grandfather's firm, a securities lending business.

[00:02:30] [SPEAKER_01]: And about five minutes into the conversation, Charlie said,

[00:02:33] [SPEAKER_01]: I have no interest in that business.

[00:02:36] [SPEAKER_01]: And but, you know, I'm curious how you came to think

[00:02:40] [SPEAKER_01]: Berkshire would be a good acquirer of that business.

[00:02:42] [SPEAKER_01]: And I was probably 26 or something.

[00:02:46] [SPEAKER_01]: And but we ended up having a three hour conversation.

[00:02:51] [SPEAKER_01]: And I was just in awe.

[00:02:53] [SPEAKER_01]: And he he just built into me so many sort of powerful,

[00:03:01] [SPEAKER_01]: powerful lessons that have shaped not just our firm or investment philosophy,

[00:03:05] [SPEAKER_01]: but really shaped my life.

[00:03:07] [SPEAKER_01]: So, you know, if I was to put them into categories,

[00:03:11] [SPEAKER_01]: if I start with the easiest one, which is around investing,

[00:03:15] [SPEAKER_01]: I would say Charlie was the first person that I ever spoke to

[00:03:18] [SPEAKER_01]: who really deeply understood the nature of behavioral finance

[00:03:22] [SPEAKER_01]: and how different that was from what was pedaled in business schools

[00:03:27] [SPEAKER_01]: and, you know, efficient market theory and modern portfolio theory.

[00:03:31] [SPEAKER_03]: I don't know about you, but I mean, I would probably say

[00:03:32] [SPEAKER_03]: this is my biggest lesson of my career to some extent

[00:03:35] [SPEAKER_03]: because I'm a quant guy.

[00:03:37] [SPEAKER_03]: I came into this thinking like, I just got to build my models

[00:03:39] [SPEAKER_03]: and my spreadsheets and I got to have the best ratios and everything.

[00:03:42] [SPEAKER_03]: And then you realize like real people are using these things.

[00:03:45] [SPEAKER_03]: And you realize like even people who aren't using managers like me,

[00:03:49] [SPEAKER_03]: the biggest things people do that damage their future financial

[00:03:52] [SPEAKER_03]: returns are behavioral things.

[00:03:53] [SPEAKER_03]: They're things they do themselves.

[00:03:54] [SPEAKER_03]: You know, it's not it's not necessarily pick the wrong strategy to follow.

[00:03:57] [SPEAKER_03]: It's that they're constantly changing the strategy

[00:03:59] [SPEAKER_03]: and chasing the ones doing well.

[00:04:00] [SPEAKER_03]: So like to me, and to hear someone like Munger,

[00:04:03] [SPEAKER_03]: who is one of the greatest investors of all time,

[00:04:06] [SPEAKER_03]: who certainly is incredibly good at picking companies,

[00:04:08] [SPEAKER_03]: talk about how important behavior is to him above even stuff like that.

[00:04:12] [SPEAKER_03]: You know, really hits home for me.

[00:04:14] [SPEAKER_04]: One of the biggest one of the biggest things both in

[00:04:18] [SPEAKER_04]: and to be fair, like Chris Davis was like a really great gateway

[00:04:21] [SPEAKER_04]: into this stuff because I think I got my first copy from Davis funds

[00:04:25] [SPEAKER_04]: of the broken down Warren Buffett letters.

[00:04:28] [SPEAKER_04]: Like I'm pretty sure that's where that came from years and years ago.

[00:04:32] [SPEAKER_04]: This this entry point into the Munger presentation,

[00:04:36] [SPEAKER_04]: the errors in human humanless judgment.

[00:04:38] [SPEAKER_04]: I know I'm positive I'm getting out late out there.

[00:04:40] [SPEAKER_04]: But this this point of Buffett and Munger saying like, go read Chaldeany.

[00:04:44] [SPEAKER_04]: That came to me in like the financial crisis era.

[00:04:48] [SPEAKER_04]: And that's the thing that got me to actually go and read Chaldeany.

[00:04:51] [SPEAKER_04]: And the first time you read Chaldeany,

[00:04:52] [SPEAKER_04]: you're like, why the hell is Munger and our people

[00:04:54] [SPEAKER_04]: like this talking about this stuff because he's he's following,

[00:04:58] [SPEAKER_04]: you know, fire alarm insurance salesman around.

[00:05:01] [SPEAKER_04]: I can't remember which was in the like all sorts of weird stuff.

[00:05:04] [SPEAKER_04]: Sales practices of like used carts and wanted ads.

[00:05:07] [SPEAKER_04]: Who what's going on here?

[00:05:08] [SPEAKER_04]: And then you realize why Munger and Buffett and all

[00:05:11] [SPEAKER_04]: them are obsessed with Chaldeany's output is this simple idea

[00:05:16] [SPEAKER_04]: that behavior influences everything.

[00:05:18] [SPEAKER_04]: And it's not just these.

[00:05:20] [SPEAKER_04]: It's not just the stuff that we saw

[00:05:21] [SPEAKER_04]: Kahneman go on to cover and everything that came out of that.

[00:05:24] [SPEAKER_04]: It's also this click were idea.

[00:05:26] [SPEAKER_04]: It's the status ideas.

[00:05:28] [SPEAKER_04]: It's the way that we

[00:05:32] [SPEAKER_04]: philosophically understand scarcity.

[00:05:34] [SPEAKER_04]: And not only does that help you make errors

[00:05:36] [SPEAKER_04]: in when you're allocating capital,

[00:05:37] [SPEAKER_04]: but it's a way to judge errors or

[00:05:41] [SPEAKER_04]: conceptions or process protocol procedure

[00:05:44] [SPEAKER_04]: for the managers of these companies.

[00:05:48] [SPEAKER_04]: It's everything.

[00:05:49] [SPEAKER_04]: There's nothing where there are humans involved.

[00:05:51] [SPEAKER_03]: So I just love the way that Chris put this and I would

[00:05:53] [SPEAKER_03]: for anybody who hasn't read Chaldeany, I would definitely recommend it.

[00:05:56] [SPEAKER_03]: You know, I think to some people who haven't looked at his work,

[00:05:58] [SPEAKER_03]: it gets a reputation of like tactic salespeople might use

[00:06:02] [SPEAKER_03]: to get me to do what I want.

[00:06:03] [SPEAKER_03]: But there's so much more to it than that.

[00:06:05] [SPEAKER_03]: Like all of us, whether we like it or not,

[00:06:07] [SPEAKER_03]: are trying to influence people throughout our day.

[00:06:10] [SPEAKER_03]: What we do and Joe O'Shaughnessy has always talked about

[00:06:12] [SPEAKER_03]: like we're all salespeople to some degree.

[00:06:14] [SPEAKER_03]: I mean, even if you're selling yourself,

[00:06:16] [SPEAKER_03]: you know, if you're trying to jother interview,

[00:06:17] [SPEAKER_03]: we're all salespeople to some degree.

[00:06:18] [SPEAKER_03]: But even if you don't use the techniques Chaldeany talks about,

[00:06:21] [SPEAKER_03]: they're being used on you all the time.

[00:06:23] [SPEAKER_03]: And it's important just to understand that,

[00:06:25] [SPEAKER_03]: I think from both sides,

[00:06:26] [SPEAKER_03]: that was a really eye opening book for me when I read it.

[00:06:28] [SPEAKER_04]: Really eye opening, especially in the context of why

[00:06:31] [SPEAKER_04]: are so many great investors obsessed with this book?

[00:06:34] [SPEAKER_04]: And it didn't click for me first.

[00:06:38] [SPEAKER_04]: But that click word did happen as I started to go through it.

[00:06:40] [SPEAKER_04]: I was like, oh my God, I now see this and I get why

[00:06:43] [SPEAKER_04]: somebody like Munger would be so obsessed and then so influential

[00:06:46] [SPEAKER_04]: and people like Chris Davis and his family because it's just

[00:06:48] [SPEAKER_04]: you start to see it at all of the layers.

[00:06:51] [SPEAKER_04]: And my God, is that a powerful thing to do?

[00:06:53] [SPEAKER_03]: Is this the point where I should remind people

[00:06:55] [SPEAKER_03]: that all their friends are listening to excess returns?

[00:06:58] [SPEAKER_03]: Yes, social proof them.

[00:07:00] [SPEAKER_04]: They're all they're all listening to it.

[00:07:01] [SPEAKER_04]: And youth, you are a very, very bad person

[00:07:04] [SPEAKER_04]: if you're not caught up on all the upsets.

[00:07:07] [SPEAKER_03]: My poor attempt to use the principles of Chaldeany.

[00:07:10] [SPEAKER_03]: But but anyway, so let's move on to the second lesson here.

[00:07:13] [SPEAKER_03]: And this is one of the people you hear used publicly about

[00:07:15] [SPEAKER_03]: Munger a lot, but I don't know if people totally understand it.

[00:07:18] [SPEAKER_03]: So this is Munger's idea of inversion.

[00:07:19] [SPEAKER_01]: But I think beyond that, I would say the big things he taught me were

[00:07:24] [SPEAKER_01]: oh, and another sort of technical was just that notion of inversion.

[00:07:28] [SPEAKER_01]: How important it is, you know, right outside my office

[00:07:31] [SPEAKER_01]: I have hung a letter that Warren wrote in 1965, I think it might have been

[00:07:38] [SPEAKER_01]: a lot might have been 66, but I think it was 65 where he outlined

[00:07:44] [SPEAKER_01]: what he considered the major reasons that that institutional

[00:07:48] [SPEAKER_01]: money management firms underperform.

[00:07:52] [SPEAKER_01]: And he said there are five reasons and see if I could remember these

[00:07:55] [SPEAKER_01]: as well as I remembered Amazon's cash flow.

[00:07:58] [SPEAKER_01]: But it was, you know, group decisions.

[00:08:03] [SPEAKER_01]: It was the asymmetry of risk and reward.

[00:08:06] [SPEAKER_01]: It was the desire to conform your portfolio and policies

[00:08:09] [SPEAKER_01]: to what other large well regarded firms are doing.

[00:08:11] [SPEAKER_01]: It was over diversification and inertia.

[00:08:14] [SPEAKER_01]: And we could go deep on any one of those five.

[00:08:17] [SPEAKER_01]: But I blew up that section of the letter, framed it and hung it

[00:08:20] [SPEAKER_01]: in the center of our research department because I said, if we just

[00:08:24] [SPEAKER_01]: avoid some of this, we should have an above average result.

[00:08:27] [SPEAKER_01]: Well, that's a Charlie way of thinking.

[00:08:29] [SPEAKER_01]: So instead of thinking about what do you do to outperform?

[00:08:32] [SPEAKER_01]: Think about what you do to underperform and try to avoid it.

[00:08:35] [SPEAKER_01]: Try to structure your firm so you don't have group decisions

[00:08:38] [SPEAKER_01]: and you don't have that asymmetry and you don't have over diversification

[00:08:41] [SPEAKER_01]: and you fight inertia and you fight the tendency

[00:08:44] [SPEAKER_01]: to conform your portfolios to what others are doing.

[00:08:46] [SPEAKER_01]: So inversion was a big part.

[00:08:49] [SPEAKER_03]: So I saw Matt, what we were doing is I saw that ask Claude

[00:08:51] [SPEAKER_03]: to explain Munger's idea of inversion to me because I'd understand it.

[00:08:55] [SPEAKER_03]: But I thought maybe Claude would do a pretty good job and you can

[00:08:58] [SPEAKER_03]: tell me how the Claude did.

[00:08:59] [SPEAKER_03]: So Claude had like a four step process here.

[00:09:02] [SPEAKER_03]: Stop one step one is identifying a golden problem.

[00:09:05] [SPEAKER_03]: Step two is what would cause the worst outcome?

[00:09:07] [SPEAKER_03]: Step three is think about how to avoid the worst outcome.

[00:09:10] [SPEAKER_03]: And then step four is develop a better strategy based on that.

[00:09:13] [SPEAKER_03]: So how did Claude did?

[00:09:15] [SPEAKER_03]: I think I think Claude did pretty well.

[00:09:17] [SPEAKER_04]: It's it's just it's addition by subtraction, right?

[00:09:20] [SPEAKER_04]: Quick, this is the idea.

[00:09:21] [SPEAKER_04]: No, it is a root be Jacobi.

[00:09:24] [SPEAKER_04]: Yaka, we how do you say the guy who originally came up with this thing?

[00:09:27] [SPEAKER_04]: We first know there's a source of the alfadas.

[00:09:30] [SPEAKER_04]: This is a very simple idea.

[00:09:32] [SPEAKER_04]: It's just that asking the opposite just as a way looking for another

[00:09:36] [SPEAKER_04]: entry point into a problem, flipping it around to the negative

[00:09:39] [SPEAKER_04]: and asking if it's also true.

[00:09:41] [SPEAKER_04]: It's a very basic scientific principle, but it can be applied so so broadly.

[00:09:47] [SPEAKER_04]: Do you feel like you beyond asking Claude or not asking Claude?

[00:09:51] [SPEAKER_04]: Do you do apply inversion in your regular life or as an investor?

[00:09:55] [SPEAKER_03]: I think so.

[00:09:55] [SPEAKER_03]: I mean, I don't necessarily say, oh, I'm going to apply inversion now.

[00:09:58] [SPEAKER_03]: But I think I think I do all the time.

[00:09:59] [SPEAKER_03]: Like I thought the example Chris gave about the money management industry

[00:10:02] [SPEAKER_03]: was a good one.

[00:10:03] [SPEAKER_03]: Like if you think about what would lead to a bad outcome

[00:10:06] [SPEAKER_03]: in terms of you not being the money manager you want to be,

[00:10:09] [SPEAKER_03]: you know, you would follow the herd, you would over diversify,

[00:10:11] [SPEAKER_03]: you would just own the market and charge high fees, whatever it is.

[00:10:14] [SPEAKER_03]: So it's a good way to think about it to say like, all right,

[00:10:16] [SPEAKER_03]: this is what I don't want to achieve.

[00:10:18] [SPEAKER_03]: And how can I set myself up so I can do better?

[00:10:21] [SPEAKER_03]: You know, to not fall into those pitfalls.

[00:10:23] [SPEAKER_04]: Yeah, it adds nuance to your thinking.

[00:10:26] [SPEAKER_04]: I think inversion is just one of those things.

[00:10:27] [SPEAKER_04]: If you can train your brain to never just ask one question from one angle,

[00:10:32] [SPEAKER_04]: that's the problem.

[00:10:33] [SPEAKER_04]: Like if you just ask, how do I do this well?

[00:10:36] [SPEAKER_04]: And you just approach it from that one angle,

[00:10:38] [SPEAKER_04]: you're going to miss out on all the variants and inverting whether or not

[00:10:42] [SPEAKER_04]: it's a completely like literal 180 degree approach

[00:10:45] [SPEAKER_04]: or flipping of one word and a question from a positive or negative

[00:10:48] [SPEAKER_04]: or whatever else.

[00:10:49] [SPEAKER_04]: Just figuring out, do I have multiple approaches to this same answer

[00:10:52] [SPEAKER_04]: that I'm trying to get out is just the best practice for any time we're making decision.

[00:10:56] [SPEAKER_03]: Yeah, you know, another thing for me is it ties back to the hater a little bit

[00:10:59] [SPEAKER_03]: because if I'm thinking about what would lead me to not be what I want to be

[00:11:02] [SPEAKER_03]: from a money manager standpoint, like what are the things would be

[00:11:04] [SPEAKER_03]: running a crazy focused 10 stock portfolio that no client could ever stay with?

[00:11:09] [SPEAKER_03]: So like it ties into like your understanding, like that would

[00:11:12] [SPEAKER_03]: that would achieve a very bad outcome for me as a money manager.

[00:11:15] [SPEAKER_03]: We never did anything like that.

[00:11:16] [SPEAKER_03]: But certainly earlier in my career, we ran much more focused things

[00:11:19] [SPEAKER_03]: that were based on what was an Excel spreadsheet and not thinking about

[00:11:23] [SPEAKER_03]: well, what could lead to this not achieving the best goals for our clients?

[00:11:26] [SPEAKER_03]: And that would be like thinking about that there's this behavior thing

[00:11:29] [SPEAKER_03]: between my strategy and what people are actually doing with it.

[00:11:32] [SPEAKER_04]: Yeah. And again, I want to tie this back because I think

[00:11:35] [SPEAKER_04]: Chris Davis is uniquely skilled at leaving these little like threads of stories out

[00:11:40] [SPEAKER_04]: and he's it's easy not to pull on them.

[00:11:43] [SPEAKER_04]: It's another version of Munger Buffett referencing the Chaldeany book.

[00:11:47] [SPEAKER_04]: It's easy not to pull on it or only pull on this thread a little bit of way.

[00:11:50] [SPEAKER_04]: Like things like inversion leads you to things like understanding

[00:11:53] [SPEAKER_04]: business principles and best practices.

[00:11:55] [SPEAKER_04]: This is the kind of stuff that makes you go

[00:11:57] [SPEAKER_04]: like the drive through window at McDonald's.

[00:12:00] [SPEAKER_04]: Do you and your family ever frequent or visit the drive through at McDonald's?

[00:12:03] [SPEAKER_04]: Much, much more than I should be frequenting.

[00:12:05] [SPEAKER_03]: I got the app of special codes.

[00:12:06] [SPEAKER_03]: I've got the whole thing.

[00:12:08] [SPEAKER_04]: Well, OK, but this is even more brilliant because this is one of those

[00:12:11] [SPEAKER_04]: things where just selling like come to a window and get your food instead of a

[00:12:15] [SPEAKER_04]: restaurant, think back in time, like that's a pretty crafty value proposition.

[00:12:19] [SPEAKER_04]: But when you can start to articulate these ideas of how we can make this

[00:12:23] [SPEAKER_04]: convenient of not having to worry about coming in, sitting down, finding a

[00:12:26] [SPEAKER_04]: table, your kid throwing a fit, the wrappers being on the floor,

[00:12:30] [SPEAKER_04]: the disaster of what do they want or not want trying to pick it off the menu.

[00:12:33] [SPEAKER_04]: There's all those little things are actually inversions inside

[00:12:36] [SPEAKER_04]: of the McDonald's formula for getting parents to go like this is just easier.

[00:12:41] [SPEAKER_04]: The logic is everywhere.

[00:12:43] [SPEAKER_03]: What's interesting is how much you missed that.

[00:12:45] [SPEAKER_03]: So Chick-fil-A just came into my town and the people in my

[00:12:47] [SPEAKER_03]: town are crazy, they basically fight anything that attempts to come in here.

[00:12:50] [SPEAKER_03]: So they fought Chick-fil-A for a very long time.

[00:12:52] [SPEAKER_03]: And the compromise to allow it in was they couldn't have a drive through.

[00:12:55] [SPEAKER_03]: So like the worst thing in the world, like I'm going to the food.

[00:12:58] [SPEAKER_03]: I've got to keep walking in because they were worried about traffic.

[00:13:01] [SPEAKER_03]: So if like one of the few Chick-fil-A's I think

[00:13:03] [SPEAKER_03]: that even exists and doesn't have a drive through.

[00:13:05] [SPEAKER_04]: I don't think I've ever heard of a Chick-fil-A without a drive through.

[00:13:08] [SPEAKER_04]: And I very much remember that was one of those places kind of like when

[00:13:12] [SPEAKER_04]: Krispy Kreme all showed up like in the rollout where the rollout was extra,

[00:13:15] [SPEAKER_04]: extra obnoxious and you're like, oh no, they're putting a first.

[00:13:18] [SPEAKER_04]: It was a Krispy Kreme that is like, oh no, the Krispy Kreme has been replaced by a Chick-fil-A.

[00:13:22] [SPEAKER_04]: And it's like, I just can't drive down that street for the next eight months or whatever.

[00:13:26] [SPEAKER_04]: But hey, good for your town way to stand up to big, big chick.

[00:13:30] [SPEAKER_04]: And he's unfortunate.

[00:13:31] [SPEAKER_04]: I don't like it very much for they do do it.

[00:13:32] [SPEAKER_04]: But that's another thing too.

[00:13:33] [SPEAKER_04]: There's another that's a brilliant Chick-fil-A in the inversions

[00:13:36] [SPEAKER_04]: and the advertising principles.

[00:13:37] [SPEAKER_04]: I love their, I love the cow ads.

[00:13:41] [SPEAKER_04]: You've seen those like the billblowns, like the cows on the war chicken.

[00:13:44] [SPEAKER_03]: Exactly. Great, great inversion to buck the fat food train.

[00:13:49] [SPEAKER_03]: So before you and I get into every fast food company in the country,

[00:13:51] [SPEAKER_03]: we probably shouldn't move on to the next one.

[00:13:53] [SPEAKER_03]: And this is one that I think everybody struggles with.

[00:13:55] [SPEAKER_03]: And I particularly do because I'm a value guy.

[00:13:57] [SPEAKER_03]: But Chris is talking about here about the challenge of folding your winning position.

[00:13:59] [SPEAKER_01]: I would say that if you wanted a mechanism to deal with it,

[00:14:03] [SPEAKER_01]: what I would say is to recognize that fair value is a very broad range.

[00:14:09] [SPEAKER_01]: And if a company that you own is within that range of fair value,

[00:14:14] [SPEAKER_01]: you don't need to take any action.

[00:14:17] [SPEAKER_01]: All action should take place at the extremes of that.

[00:14:21] [SPEAKER_01]: And I think that as a portfolio manager,

[00:14:24] [SPEAKER_01]: you can sometimes try to narrow that range of fair value too tightly.

[00:14:28] [SPEAKER_01]: And then, of course, you begin to anchor on where the stock used to be.

[00:14:33] [SPEAKER_01]: So, you know, growth managers have a shortcoming that when they own a stock

[00:14:38] [SPEAKER_01]: at 60 and it goes to 30, they want to sell it.

[00:14:41] [SPEAKER_01]: Value managers have a shortcoming when they own a stock at 30

[00:14:43] [SPEAKER_01]: and it goes to 60, they want to sell it.

[00:14:45] [SPEAKER_01]: Both are stupid because where a stock was has nothing to do with its value.

[00:14:52] [SPEAKER_01]: Right? It doesn't matter that something was at 30 and now it's at 60

[00:14:57] [SPEAKER_01]: or something was at 120 and now it's at 60.

[00:15:00] [SPEAKER_01]: Where it was before doesn't matter.

[00:15:03] [SPEAKER_01]: What matters is what is 60 mean relative to the stream of cash

[00:15:07] [SPEAKER_01]: it will produce between now and Kingdom come.

[00:15:09] [SPEAKER_01]: And so, you know, the fifth thing in Warren's letter

[00:15:13] [SPEAKER_01]: that money managers tend to underperform was inertia.

[00:15:17] [SPEAKER_01]: And that idea of being imprisoned by your past decisions

[00:15:22] [SPEAKER_01]: is one of the most important things all investors need to work,

[00:15:25] [SPEAKER_01]: whether they're, you know, in the growth category of value.

[00:15:29] [SPEAKER_01]: You know, you just you, you know, you bought it at some price

[00:15:32] [SPEAKER_01]: and because your past action is having an irrational influence

[00:15:36] [SPEAKER_01]: on your current decision making process or you didn't buy it

[00:15:42] [SPEAKER_01]: and it went up a lot.

[00:15:43] [SPEAKER_01]: So now you don't even want to look at it.

[00:15:45] [SPEAKER_01]: You know, that was that was me and Apple for you.

[00:15:48] [SPEAKER_01]: You know, I couldn't even look at it.

[00:15:50] [SPEAKER_01]: I was so upset that that I hadn't known it.

[00:15:53] [SPEAKER_01]: So that's another example of inertia.

[00:15:55] [SPEAKER_01]: So every investor can get, you know, I would say that inertia

[00:16:00] [SPEAKER_01]: fixing that fixing the way that Pat the past performance of a stock

[00:16:07] [SPEAKER_01]: and your actions in response to that performance

[00:16:10] [SPEAKER_01]: distort your current thinking.

[00:16:12] [SPEAKER_01]: That is a very, very good thing to try to work on fixing.

[00:16:16] [SPEAKER_01]: And I got a lot of room to fix that one.

[00:16:18] [SPEAKER_01]: That is so I love what you say.

[00:16:21] [SPEAKER_01]: And it did help us own Amazon, but, you know, Meta is a more recent example.

[00:16:26] [SPEAKER_01]: We bought a lot of Meta a year and a half ago.

[00:16:30] [SPEAKER_01]: You know, is it nine times earnings excluding the metaverse

[00:16:34] [SPEAKER_01]: investment, probably 14 times, including that.

[00:16:37] [SPEAKER_01]: It was at its lower market cap than Home Depot with two and a half

[00:16:41] [SPEAKER_01]: billion customers, the number of customers growing and engagement

[00:16:44] [SPEAKER_01]: still growing despite what everybody said about TikTok.

[00:16:47] [SPEAKER_01]: And so it was a hell of a great buy.

[00:16:51] [SPEAKER_01]: But, you know, the thing triples in a year and a half.

[00:16:53] [SPEAKER_01]: And what are we doing? Oh, sell, sell something, sell something.

[00:16:56] [SPEAKER_01]: So, you know, we trim, but we are trying to get better at that.

[00:17:01] [SPEAKER_01]: But, you know, again, it was one of those things.

[00:17:03] [SPEAKER_01]: If it had been in my personal account, I probably would have just left it

[00:17:06] [SPEAKER_01]: there and not looked at it.

[00:17:09] [SPEAKER_01]: So anyway, that's that's overly maybe I don't think it's overly self

[00:17:13] [SPEAKER_01]: critical, but it's certainly self critical.

[00:17:15] [SPEAKER_01]: And I do think it's it's an area every single investor knew.

[00:17:19] [SPEAKER_01]: And I'll give the exception, you know, the exceptions are Warren,

[00:17:22] [SPEAKER_01]: Bill Ruane and Bill Miller.

[00:17:24] [SPEAKER_01]: Those are the three investors I can think of that were absolutely

[00:17:28] [SPEAKER_01]: comfortable having something run up to 20, 30, 40, 50 percent

[00:17:33] [SPEAKER_01]: of their portfolio without worrying about it.

[00:17:36] [SPEAKER_01]: And that is takes enormous resolve.

[00:17:39] [SPEAKER_01]: And that's still an area we need to work on it as as

[00:17:42] [SPEAKER_01]: Dan said to me, you know, it is an area we need to work on.

[00:17:45] [SPEAKER_01]: But, you know, the tail end of a long bull market is probably not

[00:17:48] [SPEAKER_01]: the right time to work on it.

[00:17:50] [SPEAKER_01]: So, you know, you don't want to learn the wrong lesson at the wrong time.

[00:17:52] [SPEAKER_03]: So I like this because I kind of asked him to help me when I ask the question.

[00:17:57] [SPEAKER_03]: I'm like, I can't hold these winning positions.

[00:17:58] [SPEAKER_03]: What do I do?

[00:17:59] [SPEAKER_03]: And the answer was, you know, this is something I struggle with a lot too.

[00:18:02] [SPEAKER_03]: It's really, really hard.

[00:18:03] [SPEAKER_03]: I mean, you everybody has trouble to some degree.

[00:18:06] [SPEAKER_03]: If something goes down a lot, it can be hard to hold it.

[00:18:08] [SPEAKER_03]: But I'll believe her that it's actually harder to own positions

[00:18:11] [SPEAKER_03]: that go up and I'm not talking about positions that go up 20, 30 percent.

[00:18:13] [SPEAKER_03]: I'm talking about like Amazon.

[00:18:16] [SPEAKER_03]: Like if you think about the experience of holding Amazon,

[00:18:18] [SPEAKER_03]: you did have the 90 percent drawdowns at Amazon, which nobody would have been able to do.

[00:18:22] [SPEAKER_03]: But you also have the tens of thousands of a percent of return.

[00:18:25] [SPEAKER_03]: And like, as somebody who thinks that all about value, like I do,

[00:18:28] [SPEAKER_03]: it is really, really hard to see that degree of return and not at least

[00:18:32] [SPEAKER_03]: trim the position or do something.

[00:18:34] [SPEAKER_03]: And he talked about how he struggled with the same thing.

[00:18:36] [SPEAKER_03]: I think anybody, even the best managers struggle with this idea,

[00:18:38] [SPEAKER_03]: like these winners are very, very hard to hold and like having to sell

[00:18:42] [SPEAKER_03]: strategies is very, very difficult.

[00:18:44] [SPEAKER_04]: It's super difficult and it's really hard as a planner and allocator.

[00:18:48] [SPEAKER_04]: Like especially on the planning side, you worry about concentration risks.

[00:18:52] [SPEAKER_04]: And it's less common for somebody to go, well, I, you know, oops,

[00:18:56] [SPEAKER_04]: I bought Amazon at six dollars and they know, 1999 or whatever it is.

[00:19:00] [SPEAKER_04]: And, you know, I didn't sell it all at 18 or whatever the story Chris

[00:19:03] [SPEAKER_04]: says in the interview.

[00:19:04] [SPEAKER_04]: But it's not uncommon for people to like work out a company

[00:19:07] [SPEAKER_04]: and get extra concentrated in the company that they work for

[00:19:10] [SPEAKER_04]: because of stock options, grants and whatever else, especially if you're

[00:19:13] [SPEAKER_04]: on a rocket ship.

[00:19:14] [SPEAKER_04]: So then like what do you do is that position froze?

[00:19:18] [SPEAKER_04]: And I think this is where having some core philosophy about how you assess

[00:19:22] [SPEAKER_04]: this thing to either let those proverbial winners run, especially

[00:19:26] [SPEAKER_04]: if you're not running a 40 act range or will fund or use some constraint

[00:19:29] [SPEAKER_04]: or you have to sell some stuff.

[00:19:31] [SPEAKER_04]: But this idea of like, what does this mean to me personally?

[00:19:34] [SPEAKER_04]: And then do I think this business is still here?

[00:19:37] [SPEAKER_04]: And I think it's really important to make this point.

[00:19:38] [SPEAKER_04]: It's really important to also point back to the as Wath Demonduron

[00:19:42] [SPEAKER_04]: interview to where he talks about knowing the age of the business.

[00:19:45] [SPEAKER_04]: And one thing that I think is a like a brilliant realization inside of this

[00:19:48] [SPEAKER_04]: is just understanding how old do I think this business is?

[00:19:52] [SPEAKER_04]: Where in this business is overall life cycle?

[00:19:55] [SPEAKER_04]: Do I think it is?

[00:19:56] [SPEAKER_04]: What are the patterns of behavior it is currently exhibiting

[00:19:59] [SPEAKER_04]: to make the case?

[00:20:00] [SPEAKER_04]: Am I still comfortable holding this or do I need to scale it down or get out?

[00:20:04] [SPEAKER_04]: And the company is still in like growth, make the occasional mistake,

[00:20:07] [SPEAKER_04]: take on new ventures and can't almost do anything to not expand mode.

[00:20:11] [SPEAKER_04]: That's probably where you want to say, let it grow up a bit.

[00:20:14] [SPEAKER_04]: If however you find yourself at the other end of the curve

[00:20:17] [SPEAKER_04]: and it's like this company can't do anything right, all they can do is

[00:20:19] [SPEAKER_04]: sell assets and there's no growth prospects.

[00:20:21] [SPEAKER_04]: That's probably the case where it's so time to go like, OK,

[00:20:25] [SPEAKER_04]: it's I can put some of this or all of this to bed, even though

[00:20:28] [SPEAKER_04]: I've had a great run over, you know, probably decades of that point.

[00:20:32] [SPEAKER_03]: And Chris mentioned is this is easier to do it's hard to do anywhere.

[00:20:35] [SPEAKER_03]: But it's easier to do in your personal account because as he said,

[00:20:37] [SPEAKER_03]: if he manages a mutual fund like at a certain point, he has to trim

[00:20:40] [SPEAKER_03]: these positions because of rules.

[00:20:41] [SPEAKER_03]: Even us like as an investment advisor, we manage separate accounts.

[00:20:44] [SPEAKER_03]: We don't have any rules, but we got common sense.

[00:20:47] [SPEAKER_03]: I mean, if we actually had sat there and held Amazon in some 20

[00:20:49] [SPEAKER_03]: stock portfolio at a certain point would be the entire portfolio.

[00:20:52] [SPEAKER_03]: And you have to trim along the way.

[00:20:54] [SPEAKER_03]: So and that gets back to what I think is probably the most important

[00:20:57] [SPEAKER_03]: point on this stuff, which is we talked about this a million times

[00:20:59] [SPEAKER_03]: in the podcast is like with anything avoid the A B decision.

[00:21:03] [SPEAKER_03]: Like if you're not sure what to do, you always can make minor changes.

[00:21:05] [SPEAKER_03]: And I think that's like with selling winners.

[00:21:08] [SPEAKER_03]: That's probably a good compromise is like you can sell some of the winners,

[00:21:11] [SPEAKER_03]: but you can't liquidate the entire position.

[00:21:13] [SPEAKER_03]: I think that's probably a better way to settle on it.

[00:21:16] [SPEAKER_03]: It's hard to figure out exactly how much to sell and when to sell it.

[00:21:18] [SPEAKER_03]: But I think little moves is always better than trying to make these

[00:21:21] [SPEAKER_03]: binary decisions that a lot of people try to make.

[00:21:23] [SPEAKER_04]: You heard it here first for folks.

[00:21:25] [SPEAKER_04]: Jack forehand invert always invert.

[00:21:28] [SPEAKER_03]: Exactly.

[00:21:29] [SPEAKER_03]: That's going to be our theme I guess today.

[00:21:31] [SPEAKER_03]: So let's talk about this next one, which is this is very cool.

[00:21:34] [SPEAKER_03]: Like so he's talking about this idea that whenever there's any and

[00:21:37] [SPEAKER_03]: this is not just an investing, this is probably life.

[00:21:39] [SPEAKER_03]: Whenever there's any innovative idea or anything that does really well

[00:21:42] [SPEAKER_03]: or sells really well, like everybody's inevitably going to come and copy it.

[00:21:46] [SPEAKER_03]: And it's never as good as the original thing.

[00:21:48] [SPEAKER_03]: So he's talking about David Swenson here, but this is the idea I used

[00:21:51] [SPEAKER_01]: to say for every dollar David Swenson made for Yale, people are going

[00:21:55] [SPEAKER_01]: to lose two dollars imitating him.

[00:21:58] [SPEAKER_01]: In other words, David Swenson sort of popularized and magnificently

[00:22:03] [SPEAKER_01]: executed what I would call the alternative asset management strategy for an endowment.

[00:22:09] [SPEAKER_01]: He basically realized that you could invest in all of these different asset

[00:22:14] [SPEAKER_01]: classes with these high fees, but you could get diversification and higher returns.

[00:22:19] [SPEAKER_01]: And, you know, he did great for Yale and he was an unsung hero.

[00:22:24] [SPEAKER_01]: And in a way you could argue dramatically underpaid relative to the value

[00:22:29] [SPEAKER_01]: he created. But what he did is he basically popularized this view that so,

[00:22:35] [SPEAKER_01]: well, what endowment should do is buy a lot of high fee leveraged asset classes

[00:22:43] [SPEAKER_01]: because that's what works for Yale and David Swenson.

[00:22:46] [SPEAKER_01]: And of course the charlatans have lined up to sell that sort of illiquid

[00:22:49] [SPEAKER_01]: high fee stuff to all sorts of endowments, state colleges and others.

[00:22:55] [SPEAKER_01]: And I think likely we'll end up having very mediocre returns or worse.

[00:22:59] [SPEAKER_01]: Because they are imitating somebody that was exceptional at it.

[00:23:02] [SPEAKER_01]: Well, similarly, I think, you know, what Jeff sort of said was, look,

[00:23:07] [SPEAKER_01]: I believe that I'm going to create way more than a dollar of value for every

[00:23:12] [SPEAKER_01]: dollar I'm investing now. And so just trust me, it's about getting fast.

[00:23:19] [SPEAKER_01]: It's about create habits and there's going to be a huge waterfall of cash

[00:23:23] [SPEAKER_01]: down the way, but you're just going to have to trust me with it.

[00:23:26] [SPEAKER_01]: Well, you would be crazy not to trust Jeff.

[00:23:29] [SPEAKER_01]: I mean, my God, you look at the size of that man's brain.

[00:23:32] [SPEAKER_01]: You look at his history at D.E.

[00:23:34] [SPEAKER_01]: Shaw and, you know, that's a man that understands return on capital

[00:23:38] [SPEAKER_01]: and is hyper rational and driven and brilliant.

[00:23:41] [SPEAKER_01]: But it opened the door for this idea of lots of companies saying, oh, yeah,

[00:23:46] [SPEAKER_01]: we're in the customer acquisition business and we'll figure out how

[00:23:49] [SPEAKER_01]: to monetize that customer later.

[00:23:52] [SPEAKER_01]: And of course, then the charlatans line up and come up with business model

[00:23:57] [SPEAKER_01]: after business model that will never be profitable, but just could raise a lot

[00:24:01] [SPEAKER_01]: of capital and spend a lot of capital, probably culminating in the insanity

[00:24:05] [SPEAKER_01]: of we work and some things like that.

[00:24:08] [SPEAKER_01]: But they were all based on that model of, hey, the profitability

[00:24:11] [SPEAKER_01]: of the business today doesn't matter.

[00:24:14] [SPEAKER_01]: Look at what Jeff did.

[00:24:15] [SPEAKER_01]: It's all about customer acquisition and building the customer,

[00:24:19] [SPEAKER_01]: building the habits, and then we'll make all our money later.

[00:24:22] [SPEAKER_01]: So for every dollar that Jeff created for Amazon, it wouldn't surprise me

[00:24:26] [SPEAKER_01]: if a dollar or two was lost for all the investors jumping into models

[00:24:30] [SPEAKER_01]: run by charlatans or at least people that had no real plan to get to profitability.

[00:24:36] [SPEAKER_01]: But we're able to raise a lot of capital and burn a lot of capital

[00:24:41] [SPEAKER_01]: imitating or at least professing to imitate him.

[00:24:44] [SPEAKER_03]: You see this all the time.

[00:24:45] [SPEAKER_03]: And we have a, at Lydia, we run a model based on Warren Buffet.

[00:24:49] [SPEAKER_03]: We're running a quantifiable model based on Warren Buffet.

[00:24:52] [SPEAKER_03]: But we talked about this idea with Ocelot the motor in is like everybody

[00:24:55] [SPEAKER_03]: want the copy Warren Buffet.

[00:24:56] [SPEAKER_03]: And if you look at the actual things Warren Buffet did, nobody can really

[00:25:00] [SPEAKER_03]: copy Warren Buffet.

[00:25:02] [SPEAKER_03]: I mean, I don't have insurance float in my, you know, ready to read like

[00:25:05] [SPEAKER_03]: investment, you know, it's the same thing with David Swenson.

[00:25:07] [SPEAKER_03]: Like David Swenson had a very unique strategy.

[00:25:10] [SPEAKER_03]: He had access to a unique set of managers.

[00:25:13] [SPEAKER_03]: He had a huge amount of capital.

[00:25:15] [SPEAKER_03]: He had things going for him that other people, like not just the individual,

[00:25:18] [SPEAKER_03]: but the person selling the money made it in strategy, who's saying

[00:25:21] [SPEAKER_03]: like I have the David Swenson strategy.

[00:25:23] [SPEAKER_03]: They can't do what he did, but they're going to sell it as it break in.

[00:25:27] [SPEAKER_04]: Do you remember?

[00:25:28] [SPEAKER_04]: I know I'm positive I told this joke just because of the good

[00:25:30] [SPEAKER_04]: proof of portfolios.

[00:25:32] [SPEAKER_04]: Do you know why we use the word grew instead of charlatan?

[00:25:36] [SPEAKER_04]: Are you familiar with this?

[00:25:38] [SPEAKER_04]: I know that you filled this before.

[00:25:39] [SPEAKER_04]: No.

[00:25:40] [SPEAKER_04]: Oh, OK.

[00:25:40] [SPEAKER_04]: OK.

[00:25:41] [SPEAKER_04]: The reason people use the word grew is because Charlotte did

[00:25:44] [SPEAKER_04]: it so hard to spell.

[00:25:45] [SPEAKER_04]: But I think that's it if put in less in here.

[00:25:48] [SPEAKER_04]: There's lots of copycats to these things.

[00:25:49] [SPEAKER_04]: I love his point about for.

[00:25:51] [SPEAKER_04]: I think he said it for every dollar Swenson made copycats

[00:25:55] [SPEAKER_04]: will do these two dollars to bad decisions and for whatever.

[00:25:59] [SPEAKER_04]: There's there's the actual idea of like the story of why something

[00:26:04] [SPEAKER_04]: makes sense, of why it's a profitable business, of why it works

[00:26:08] [SPEAKER_04]: and why it should work.

[00:26:09] [SPEAKER_04]: But then there's the repackaging in sale of that thing

[00:26:13] [SPEAKER_04]: with the exclusive profits being like the sale that it's going to generate.

[00:26:17] [SPEAKER_04]: And you have to be asking enough of question, enough questions

[00:26:19] [SPEAKER_04]: to be able to tear apart.

[00:26:21] [SPEAKER_04]: Is this the reason this thing is being presented to me?

[00:26:23] [SPEAKER_04]: Because it's actually like a unique and smart and good idea.

[00:26:27] [SPEAKER_04]: Or is this thing being repackaged and sold to me because like I'm

[00:26:30] [SPEAKER_04]: the sucker on the thing they or they can extract some dollars off

[00:26:32] [SPEAKER_04]: the top of and hey, our industry is full of the ladder.

[00:26:36] [SPEAKER_04]: But get used to it and get smart.

[00:26:39] [SPEAKER_03]: I thought that we asked what the motorist said.

[00:26:40] [SPEAKER_03]: This was very good.

[00:26:41] [SPEAKER_03]: Like he talked about like I've learned something from Warren Buffett.

[00:26:43] [SPEAKER_03]: I've learned something from Peter Lynch.

[00:26:44] [SPEAKER_03]: I've learned something from George Soros.

[00:26:46] [SPEAKER_03]: You can definitely learn something from David Swenson,

[00:26:48] [SPEAKER_03]: but you can't copy any of them.

[00:26:50] [SPEAKER_03]: Like you can take principles of what they did and say there's absolutely

[00:26:53] [SPEAKER_03]: things like with respect to diversification that anybody could learn

[00:26:56] [SPEAKER_03]: from David Swenson.

[00:26:57] [SPEAKER_03]: But that doesn't mean you can run the type of strategy he ran

[00:26:59] [SPEAKER_03]: and generate the type of returns he did because he was in a very

[00:27:02] [SPEAKER_03]: unique situation where he was able to do it.

[00:27:04] [SPEAKER_03]: And also back then like nobody was doing it.

[00:27:07] [SPEAKER_03]: It's much more it's much harder now.

[00:27:08] [SPEAKER_03]: Like even the you know, the guys running tensions and stuff

[00:27:10] [SPEAKER_03]: to one do what David Swenson did.

[00:27:12] [SPEAKER_03]: Like there's a lot more competition than these types of managers.

[00:27:15] [SPEAKER_03]: David Swenson was hiring.

[00:27:16] [SPEAKER_03]: It's just not an easy as it seems to be on paper.

[00:27:19] [SPEAKER_04]: There's this there's this funny thing in the music business,

[00:27:22] [SPEAKER_04]: in the music industry, the recording studio issue specifically

[00:27:24] [SPEAKER_04]: with and granted some of this is changing with AI now.

[00:27:28] [SPEAKER_04]: But up to a point in time, it was like, how the heck did

[00:27:31] [SPEAKER_04]: like some of these guys get these sounds from these eras?

[00:27:34] [SPEAKER_04]: And one of the dominant theories was a lot of those rooms.

[00:27:37] [SPEAKER_04]: It wasn't just like having the rooms and the this specific

[00:27:40] [SPEAKER_04]: microphone and this specific mixing console.

[00:27:42] [SPEAKER_04]: It was like, OK, you actually had to have the room.

[00:27:44] [SPEAKER_04]: You had to have that shag carpet on the floor.

[00:27:47] [SPEAKER_04]: You had to have that old sofa in the corner.

[00:27:49] [SPEAKER_04]: You had to have all the cigarette smoke in the air,

[00:27:51] [SPEAKER_04]: like corroding off the electrical component parts and everything else.

[00:27:56] [SPEAKER_04]: You had to I mean, there's a great old story about like one of

[00:27:58] [SPEAKER_04]: Prince's mixing consoles and like Prince and Rick James used this or something.

[00:28:02] [SPEAKER_04]: Somebody buys it years later and they're like, what's that sound?

[00:28:05] [SPEAKER_04]: And it's full of cocaine or something.

[00:28:06] [SPEAKER_04]: It's like all these little things are part of the experience.

[00:28:10] [SPEAKER_04]: And to say you've been just go in and copy a Warren Buffett

[00:28:13] [SPEAKER_04]: or just like create these things in isolation.

[00:28:15] [SPEAKER_04]: It's no others.

[00:28:16] [SPEAKER_04]: There's a ton of inputs that you can't understand in the mix here.

[00:28:20] [SPEAKER_04]: And it probably is the shag carpet and hopefully not the elicit trucks.

[00:28:23] [SPEAKER_03]: And another investing podcast, so you got to get Prince's mixing equipment

[00:28:26] [SPEAKER_03]: full of cocaine that is something you're only going to get here.

[00:28:29] [SPEAKER_04]: I'm going to have to get that story right.

[00:28:31] [SPEAKER_04]: It was probably Rick James, but I feel like they both.

[00:28:33] [SPEAKER_03]: They seem like we're rich.

[00:28:34] [SPEAKER_03]: James definitely seems like some rich James story.

[00:28:37] [SPEAKER_03]: I think it's fair to say Rick James did some cocaine in his day.

[00:28:41] [SPEAKER_03]: I think we have facts.

[00:28:42] [SPEAKER_03]: So we're going to have to read James and cocaine to our next thing.

[00:28:46] [SPEAKER_03]: This is really interesting to me because this is something I use all the time.

[00:28:50] [SPEAKER_03]: And I love when I ask a question in the podcast

[00:28:52] [SPEAKER_03]: and someone kind of turns it around back on me.

[00:28:54] [SPEAKER_03]: So like as a quantum investor, we're always thinking about

[00:28:57] [SPEAKER_03]: like what is our sector concentration?

[00:28:59] [SPEAKER_03]: And we're using that as a measure of risk.

[00:29:00] [SPEAKER_03]: We're like, do I have too much money in financials?

[00:29:02] [SPEAKER_03]: Do I have too much money in technology?

[00:29:03] [SPEAKER_03]: And so Chris explains here why maybe that I had the wrong question.

[00:29:06] [SPEAKER_03]: My sector concentration may not be the best measure of risk.

[00:29:09] [SPEAKER_01]: I'm going to say something that may alarm at first blush,

[00:29:13] [SPEAKER_01]: might alarm the sort of consultants out there, which is I really think

[00:29:17] [SPEAKER_01]: that the sector concentrations as they're defined have nothing to do with risk

[00:29:23] [SPEAKER_01]: or even anything to do with concentration.

[00:29:26] [SPEAKER_01]: What really matters is the degree to which you are positioning the portfolio

[00:29:32] [SPEAKER_01]: to be extremely vulnerable to a single exogenous or macroeconomic event.

[00:29:39] [SPEAKER_01]: So what I mean by that is if I had a portfolio that was 100% in financials in 2007

[00:29:48] [SPEAKER_01]: and you would say, holy cow, that is super concentrated and you're going to get killed.

[00:29:53] [SPEAKER_01]: Now, if I had a portfolio that was in three different sectors

[00:29:57] [SPEAKER_01]: at three stock portfolio in three different sectors versus at three

[00:30:01] [SPEAKER_01]: stock portfolio in financials, you would say, well, that's going to fare much better.

[00:30:05] [SPEAKER_01]: But if the three stocks were countrywide toll brothers, home builders and,

[00:30:18] [SPEAKER_01]: I don't know what, Lehmann, you would say, well, you actually have an enormous

[00:30:24] [SPEAKER_01]: exposure to a single macroeconomic variable, which is residential real estate pricing.

[00:30:30] [SPEAKER_01]: Now, if my three that I owned were Bank of New York,

[00:30:36] [SPEAKER_01]: you know, AmEx and Berkshire, which bizarrely is classified as a financial,

[00:30:44] [SPEAKER_01]: you would say, well, you are 100% in financials, but you were way more diversified.

[00:30:49] [SPEAKER_01]: You know, then you were in this portfolio that had a third, a third,

[00:30:54] [SPEAKER_01]: a third in three different sectors because you were tied in one case

[00:30:58] [SPEAKER_01]: to very different macroeconomic variables than you were in the other.

[00:31:03] [SPEAKER_01]: So we try to look through the portfolio and think about risk and concentration in those terms.

[00:31:09] [SPEAKER_01]: So when you think of financials in particular,

[00:31:12] [SPEAKER_01]: there are just so many vastly different models that fall into that classification.

[00:31:18] [SPEAKER_01]: Right? You think about, you know, Chubb is in a wildly different business

[00:31:24] [SPEAKER_01]: than Wells Fargo and Wells Fargo is in a wildly different business than Bank of New York.

[00:31:30] [SPEAKER_01]: And those are all in a different business than Julius Baer.

[00:31:34] [SPEAKER_01]: So there are four financial stocks that whose businesses are going to be significantly

[00:31:40] [SPEAKER_01]: uncorrelated, even though their stocks might be correlated, right?

[00:31:46] [SPEAKER_01]: The stocks will be correlated because people swing into the sector,

[00:31:49] [SPEAKER_01]: they swing out to the sector.

[00:31:51] [SPEAKER_01]: So we pay little attention to stock correlations or sector categorizations.

[00:31:59] [SPEAKER_01]: But we pay enormous attention to are we making unintentionally concentrated bets

[00:32:05] [SPEAKER_01]: on some sort of macroeconomic variable, residential real estate, interest rates,

[00:32:11] [SPEAKER_01]: the currency commodity prices, you know, recession.

[00:32:18] [SPEAKER_01]: You know, so all of those we try to think a lot about strange things

[00:32:24] [SPEAKER_01]: that can happen in the world and change in the world and then stress test

[00:32:27] [SPEAKER_01]: the portfolio to say, are we overly indexed to something like that versus OK,

[00:32:33] [SPEAKER_01]: you have a big chunk in financials, but the financials include Berkshire

[00:32:37] [SPEAKER_01]: and Bank of New York and Wells Fargo and Julius Baer and the Development Bank

[00:32:43] [SPEAKER_01]: of Singapore and Chubb and where you'd sort of say, well, that's Markel.

[00:32:49] [SPEAKER_01]: That's a very that's a pretty diversified portfolio.

[00:32:52] [SPEAKER_03]: Yeah, so this is, you know, it's really important to get down to what is actually

[00:32:58] [SPEAKER_03]: causing your risk. And Chris is right.

[00:33:00] [SPEAKER_03]: And he gave an example of a bunch of financial stocks and every one of those

[00:33:03] [SPEAKER_03]: financial stocks has a different rates.

[00:33:05] [SPEAKER_03]: I mean, we're about to have a hurricane here in the United States

[00:33:07] [SPEAKER_03]: is landing in Florida today like the risk of an insurance company

[00:33:10] [SPEAKER_03]: is very different than the risk of a bank.

[00:33:12] [SPEAKER_03]: And so he's pulling those all together and saying, well,

[00:33:14] [SPEAKER_03]: I've got too much money in financials because Chris does have.

[00:33:17] [SPEAKER_03]: He could be does have a lot of money.

[00:33:18] [SPEAKER_03]: I don't know if he does now what he did when we did the interview.

[00:33:20] [SPEAKER_03]: He typically has a big portion of his portfolio of financials.

[00:33:22] [SPEAKER_03]: He's a big believer in them.

[00:33:23] [SPEAKER_03]: But the idea is like, let's look at the actual financials and then let's look

[00:33:26] [SPEAKER_03]: at what actually could go wrong for each company.

[00:33:29] [SPEAKER_03]: And then let's say how are those tied together?

[00:33:31] [SPEAKER_03]: Because if what could go wrong for this company is very different than what

[00:33:33] [SPEAKER_03]: could go wrong for this company, then maybe I don't have to worry

[00:33:35] [SPEAKER_03]: about the fact that I'm concentrated in financials.

[00:33:38] [SPEAKER_04]: This is one of those cases where stepping back from the labeling

[00:33:41] [SPEAKER_04]: from the quantitative or like the the gix sector data stuff is really,

[00:33:46] [SPEAKER_04]: really important because it forces you to ask the question of what is

[00:33:50] [SPEAKER_04]: the primary and sometimes secondary or tertiary drivers of revenue

[00:33:54] [SPEAKER_04]: and or profits for this company.

[00:33:57] [SPEAKER_04]: Aswath Demeteran's framework is really useful here.

[00:34:00] [SPEAKER_04]: The framework Scott Galloway uses and any any marketing person's framework

[00:34:04] [SPEAKER_04]: can be really useful here.

[00:34:05] [SPEAKER_04]: Like what are they appealing to inside of the clientele that they're selling

[00:34:08] [SPEAKER_04]: to because it starts to get at the heart of this.

[00:34:11] [SPEAKER_04]: What's the relationship between, you know, toll brothers and countrywide

[00:34:14] [SPEAKER_04]: or whatever they're in two different sectors obvious to find until

[00:34:17] [SPEAKER_04]: the financial crisis happens and you go, oh crap, consumer real estate.

[00:34:21] [SPEAKER_04]: When you start to look at things not by what sector do they operate in

[00:34:24] [SPEAKER_04]: and create their business in, but what is the actual driver of that revenue

[00:34:29] [SPEAKER_04]: or driver of those profits?

[00:34:31] [SPEAKER_04]: And we're seeing it right now, like at the time of this reporting,

[00:34:34] [SPEAKER_04]: there's some great stuff.

[00:34:35] [SPEAKER_04]: It might have been Ben Thompson.

[00:34:37] [SPEAKER_04]: It might have been some somebody who was just writing about

[00:34:40] [SPEAKER_04]: the percentage of like Amazon's revenue that's coming from the prioritized

[00:34:44] [SPEAKER_04]: ad spend. And this is something that's been there for a long time.

[00:34:47] [SPEAKER_04]: But it's one of the most interesting things is like Amazon is reshaping

[00:34:51] [SPEAKER_04]: how consumers do search.

[00:34:53] [SPEAKER_04]: And that means advertisers are coming in and paying for that top

[00:34:56] [SPEAKER_04]: pole position in that search, not only what we saw Google years ago

[00:35:00] [SPEAKER_04]: and not unlike what we saw kill companies like Ask Jeeves off or get them

[00:35:03] [SPEAKER_04]: acquired or whatever that'll happen before Jeeves.

[00:35:05] [SPEAKER_04]: So it's really interesting to look at not just what sector does

[00:35:09] [SPEAKER_04]: something operating, but then what are those true drivers of revenue

[00:35:14] [SPEAKER_04]: of profits and how does that compare across the rest of my,

[00:35:17] [SPEAKER_04]: especially my equity portfolio.

[00:35:18] [SPEAKER_03]: And to your point, the technology sector,

[00:35:20] [SPEAKER_03]: that's a really good one to look at for this right now because not only

[00:35:23] [SPEAKER_03]: they break it up a little bit, say you've got communication services

[00:35:25] [SPEAKER_03]: and you've got all this other stuff, but like is there really a huge force

[00:35:28] [SPEAKER_03]: of the market is technology?

[00:35:29] [SPEAKER_03]: But is it really like a market has this massive risk and is one thing

[00:35:32] [SPEAKER_03]: because of all the know all the companies in technology?

[00:35:35] [SPEAKER_03]: No, I mean, these companies are doing a million different things.

[00:35:37] [SPEAKER_03]: I mean, so many companies today are technology companies,

[00:35:40] [SPEAKER_03]: even if they're not explicitly technology companies, they're all selling

[00:35:43] [SPEAKER_03]: to different people. They're some are selling to businesses,

[00:35:45] [SPEAKER_03]: some are selling to individuals.

[00:35:46] [SPEAKER_03]: So there really isn't this huge risk of like technology.

[00:35:50] [SPEAKER_03]: I don't think even like there wasn't the late 90s.

[00:35:52] [SPEAKER_03]: I mean, I think the risk technologies are more established industry

[00:35:55] [SPEAKER_03]: and it's so diverse now.

[00:35:56] [SPEAKER_03]: Like the risks aren't there like they were back in the 90s.

[00:35:59] [SPEAKER_04]: Yeah. And we have different types of

[00:36:01] [SPEAKER_04]: get no revisit.

[00:36:03] [SPEAKER_04]: Like none of the old business school books are per se bad.

[00:36:06] [SPEAKER_04]: None of the old accounting books are per se bad.

[00:36:09] [SPEAKER_04]: You just have to just like we've talked about ad nauseam, like priced a book.

[00:36:12] [SPEAKER_04]: You got to update the way you think about this stuff.

[00:36:15] [SPEAKER_04]: So we think about vertical and horizontal integrators

[00:36:17] [SPEAKER_04]: and mergers and acquisitions and all those things.

[00:36:20] [SPEAKER_04]: The tech company of the late 90s was very much like a siloed business

[00:36:24] [SPEAKER_04]: and maybe had multiple silos, but you had a real lack of conglomerates

[00:36:27] [SPEAKER_04]: inside of that space.

[00:36:29] [SPEAKER_04]: There's no way we can talk about it and just look at the name rebrands.

[00:36:33] [SPEAKER_04]: Just Facebook moving to Meta, Google moving to Alphabet.

[00:36:36] [SPEAKER_04]: These are all acknowledgments of a more conglomerate type nature inside of what they do.

[00:36:42] [SPEAKER_04]: And then understanding there's all these different drivers.

[00:36:44] [SPEAKER_04]: You can't just call them a tech company because.

[00:36:47] [SPEAKER_04]: Yeah, like compare Amazon to Walmart and Costco or something else.

[00:36:51] [SPEAKER_04]: And you're even still only describing a part of the beast.

[00:36:54] [SPEAKER_03]: And this is the thing I've been playing with in our portfolio

[00:36:55] [SPEAKER_03]: is because one of the things you can do is, you know, we do have

[00:36:58] [SPEAKER_03]: the price returns of all these stocks historically.

[00:37:01] [SPEAKER_03]: So I could throw out the sector thing and I could say, let's look

[00:37:04] [SPEAKER_03]: at what correlated with each other.

[00:37:05] [SPEAKER_03]: Let's look at what moves together and I could find measure my risk better

[00:37:08] [SPEAKER_03]: that way than trying to say, oh, I don't want to go over 30% in financials

[00:37:12] [SPEAKER_03]: or something like that.

[00:37:13] [SPEAKER_03]: I can get to a better conclusion using the actual data of how these

[00:37:16] [SPEAKER_03]: stocks actually move in the real world.

[00:37:18] [SPEAKER_04]: Yeah.

[00:37:18] [SPEAKER_04]: So these are these are very useful ways for people constructing portfolios

[00:37:23] [SPEAKER_04]: to actually think about what their risks of exposures are.

[00:37:26] [SPEAKER_04]: And funny enough, this is one of those things that I think

[00:37:28] [SPEAKER_04]: in some smaller sectors we get, like you talk to somebody who's

[00:37:32] [SPEAKER_04]: a utilities or an energy expert and the energy experts will take you back

[00:37:35] [SPEAKER_04]: and forth like, oh, no, there's an upstream downstream,

[00:37:38] [SPEAKER_04]: mainstream, we have all these flavors, these different with the

[00:37:40] [SPEAKER_04]: little commodity companies.

[00:37:42] [SPEAKER_04]: But like we somehow lose that nuance when we talk about tech

[00:37:45] [SPEAKER_04]: that always blows my mind.

[00:37:46] [SPEAKER_04]: Small thinking.

[00:37:48] [SPEAKER_03]: So the next one is something to talk about a lot in the podcast,

[00:37:50] [SPEAKER_03]: which is this idea that if you look historically from decade

[00:37:53] [SPEAKER_03]: to decade, the biggest companies in the S&P 500 change a lot.

[00:37:56] [SPEAKER_03]: So if you look at one decade, like 1980, by the time you get

[00:37:59] [SPEAKER_03]: to 1990, a lot of them are gone.

[00:38:01] [SPEAKER_03]: But a lot of people are questioning that now because the big

[00:38:03] [SPEAKER_03]: companies, the big tech companies are so dominant,

[00:38:06] [SPEAKER_03]: people are wondering whether this whole thing has changed.

[00:38:08] [SPEAKER_03]: So we asked Chris about that.

[00:38:09] [SPEAKER_01]: It's always hard with the top 10.

[00:38:11] [SPEAKER_01]: I mean, I often think that, you know, probably 10 through 50,

[00:38:15] [SPEAKER_01]: there was more consistency.

[00:38:17] [SPEAKER_01]: In other words, an interesting exercise would be to invert that

[00:38:22] [SPEAKER_01]: and say what are the characteristics of the companies that have

[00:38:25] [SPEAKER_01]: excelled in all decades or from many decades?

[00:38:29] [SPEAKER_01]: And so, you know, obviously you'd have a company like Exxon would

[00:38:32] [SPEAKER_01]: be at the top of that list.

[00:38:34] [SPEAKER_01]: Philip Morris would be high on that list.

[00:38:39] [SPEAKER_01]: You would end up probably over indexing to companies that were

[00:38:44] [SPEAKER_01]: in non-obsolvable businesses.

[00:38:46] [SPEAKER_01]: And if you wanted to do it based on good performance of that business,

[00:38:51] [SPEAKER_01]: it would probably over index to companies where the number

[00:38:55] [SPEAKER_01]: of shares outstanding didn't go up.

[00:38:57] [SPEAKER_01]: And so and we've done that exercise over 50 years.

[00:39:02] [SPEAKER_01]: And so I do think that there are characteristics of durability

[00:39:10] [SPEAKER_01]: that get a little bit misrepresented by the creative destruction

[00:39:14] [SPEAKER_01]: of the largest ones.

[00:39:15] [SPEAKER_01]: Sometimes those are driven by geography or particular bubbles

[00:39:19] [SPEAKER_01]: in the sector and so on.

[00:39:21] [SPEAKER_01]: But if you were to say, you know, what made Johnson and

[00:39:25] [SPEAKER_01]: Johnson great for the last 30 or 40 years?

[00:39:29] [SPEAKER_01]: What made, you know, Coke great?

[00:39:31] [SPEAKER_01]: What made, you know, Colgate, Pomaliv, some of the consumer companies?

[00:39:38] [SPEAKER_01]: And I do think that a lot of those characteristics exist

[00:39:43] [SPEAKER_01]: in some of the technology companies today.

[00:39:46] [SPEAKER_01]: And I would call them sort of the blue chips of tomorrow.

[00:39:50] [SPEAKER_01]: In other words, in the same way, basically the economy

[00:39:53] [SPEAKER_01]: has dematerialized.

[00:39:56] [SPEAKER_01]: If you look at how people spend their time,

[00:39:58] [SPEAKER_01]: how they spend their money, what are the habits that they do?

[00:40:02] [SPEAKER_01]: You know, it's not that's that long term legacy

[00:40:06] [SPEAKER_01]: that sort of said, oh, technology here today gone tomorrow.

[00:40:10] [SPEAKER_01]: Stay away from tech.

[00:40:11] [SPEAKER_01]: Obviously, the biggest example of somebody changing their mind

[00:40:14] [SPEAKER_01]: on that was Warren because you see Apple was his biggest

[00:40:18] [SPEAKER_01]: purchase in history.

[00:40:20] [SPEAKER_01]: And that was a company that, you know, he would not have

[00:40:23] [SPEAKER_01]: owned in a different era.

[00:40:24] [SPEAKER_01]: I don't think I can obviously speak for him.

[00:40:28] [SPEAKER_01]: But so something changed in the nature of technology

[00:40:32] [SPEAKER_01]: over the last 20 years.

[00:40:34] [SPEAKER_01]: And the question is, is that likely to persist?

[00:40:36] [SPEAKER_01]: Well, I would go and say something also changed

[00:40:39] [SPEAKER_01]: in the nature of consumer companies in the 1950s

[00:40:42] [SPEAKER_01]: that made them great for the next 50 years,

[00:40:44] [SPEAKER_01]: which was basically you had national advertising.

[00:40:50] [SPEAKER_01]: And before there was national advertising,

[00:40:53] [SPEAKER_01]: every city, every region had its own consumer companies.

[00:40:57] [SPEAKER_01]: You know, if you were in one region, you had Nehigh

[00:40:59] [SPEAKER_01]: and another region, you had Dr. Pepper

[00:41:01] [SPEAKER_01]: and another region, you had Pepsi

[00:41:03] [SPEAKER_01]: and another region, you had Coke

[00:41:04] [SPEAKER_01]: and another region, you had Budweiser

[00:41:07] [SPEAKER_01]: and another one, you had Stroze.

[00:41:09] [SPEAKER_01]: You had Old Milwaukee.

[00:41:11] [SPEAKER_01]: You had, you know, every city had its own beer,

[00:41:14] [SPEAKER_01]: had its own media companies, had its own bank,

[00:41:17] [SPEAKER_01]: had its own consumer companies

[00:41:19] [SPEAKER_01]: and and its own department stores, for example.

[00:41:24] [SPEAKER_01]: And so with national advertising,

[00:41:27] [SPEAKER_01]: something changed dramatically.

[00:41:28] [SPEAKER_01]: And you got the idea that that you got winner

[00:41:32] [SPEAKER_01]: take all brands and the economies of scale

[00:41:35] [SPEAKER_01]: that came from being able to advertise on television

[00:41:38] [SPEAKER_01]: meant that ivory soap just became dominant

[00:41:40] [SPEAKER_01]: and Coke became dominant and Budweiser became dominant

[00:41:44] [SPEAKER_01]: and all the little regional beer companies, regional.

[00:41:47] [SPEAKER_01]: And and there are in financial services, it's related,

[00:41:51] [SPEAKER_01]: but a little bit different in retail.

[00:41:53] [SPEAKER_01]: It's related, but a little bit different.

[00:41:54] [SPEAKER_01]: But you got Walmart

[00:41:55] [SPEAKER_01]: replacing the regional department stores and so on.

[00:41:58] [SPEAKER_01]: I think the same is true in a way of technology

[00:42:02] [SPEAKER_01]: that you basically have had a shift

[00:42:06] [SPEAKER_01]: where it is a bit of a winner take all business

[00:42:09] [SPEAKER_01]: where the scale advantages are self reinforcing.

[00:42:13] [SPEAKER_01]: And so I think, you know, it's hard for me to imagine

[00:42:18] [SPEAKER_01]: what displaces, you know, Instagram,

[00:42:23] [SPEAKER_01]: Facebook, Google, Amazon, AWS, Microsoft,

[00:42:32] [SPEAKER_01]: Apple, it is a hard thing to play out a scenario

[00:42:36] [SPEAKER_01]: where they're displaced in the next 20 years.

[00:42:38] [SPEAKER_01]: And, you know, I used to think

[00:42:40] [SPEAKER_01]: Apple would be the easiest one to displace

[00:42:42] [SPEAKER_01]: just because they're so dependent on this little box

[00:42:46] [SPEAKER_01]: that is obviously this is obviously not the technology of the future.

[00:42:50] [SPEAKER_01]: We're going to look back and say, this is the craziest thing ever.

[00:42:53] [SPEAKER_01]: We're all looking at this little screen.

[00:42:55] [SPEAKER_01]: Of course, it's going to be a heads up display of some kind,

[00:42:58] [SPEAKER_01]: whether it's going to be these crazy goggles

[00:43:01] [SPEAKER_01]: or whether it's going to be just eyeglasses.

[00:43:03] [SPEAKER_01]: But this is a crazy medium.

[00:43:07] [SPEAKER_01]: And in the same way this displaced the PC,

[00:43:11] [SPEAKER_01]: which displaced the mini, which displaced the main frame,

[00:43:14] [SPEAKER_01]: you know, there will be another transformation.

[00:43:19] [SPEAKER_01]: And that in some ways I've thought makes Apple vulnerable

[00:43:22] [SPEAKER_01]: in a way that it's harder for me to imagine how you displace,

[00:43:26] [SPEAKER_01]: you know, what Amazon does or or in some ways,

[00:43:30] [SPEAKER_01]: the network effects of things like Instagram and Facebook.

[00:43:34] [SPEAKER_01]: But they aren't bulletproof.

[00:43:36] [SPEAKER_01]: But I do think that the analogies of what it meant for Proctor and Gamble

[00:43:41] [SPEAKER_01]: to sort of swell up and just dominate

[00:43:43] [SPEAKER_01]: a section of consumer products or what it meant for Cove to do that

[00:43:47] [SPEAKER_01]: or what it meant for Anheuser-Busch to do that in that in the consumer economy.

[00:43:52] [SPEAKER_01]: I think the same thing has happened in the digital economy.

[00:43:55] [SPEAKER_01]: There are these digital giants have established

[00:43:58] [SPEAKER_01]: scale advantages where it's hard to imagine guys in a garage

[00:44:01] [SPEAKER_01]: trying to figure out how to displace that.

[00:44:03] [SPEAKER_03]: He had a nuanced take on this, which is kind of what I have as well.

[00:44:07] [SPEAKER_03]: You know, at one point on one side, he talked about the fact

[00:44:09] [SPEAKER_03]: that this has happened in the past.

[00:44:11] [SPEAKER_03]: We talk about, well, there's something new about these technology companies.

[00:44:14] [SPEAKER_03]: He said in the past, you know,

[00:44:15] [SPEAKER_03]: there's been something new about the other companies that were dominated in the S&P 500.

[00:44:18] [SPEAKER_03]: But he also acknowledged at the end that there is something different

[00:44:21] [SPEAKER_03]: about these companies and it is very possible.

[00:44:24] [SPEAKER_03]: You know, it's hard to even imagine.

[00:44:25] [SPEAKER_03]: And I wonder like if I put myself back in 1960,

[00:44:27] [SPEAKER_03]: would I've been able to imagine those companies being overtaken?

[00:44:30] [SPEAKER_03]: But because of the edge these companies have and because of like,

[00:44:34] [SPEAKER_03]: if you look at AI, the amount of money there to be able to throw at AI

[00:44:36] [SPEAKER_03]: relative to everybody else, it is hard to imagine them getting overtaken.

[00:44:40] [SPEAKER_03]: But I do wonder if I went back to previous decades,

[00:44:42] [SPEAKER_03]: maybe I would have felt the same way if I was sitting there in 1960.

[00:44:46] [SPEAKER_04]: It's a great question.

[00:44:47] [SPEAKER_04]: And I mean, quick rich James call back, you know,

[00:44:50] [SPEAKER_04]: cigarettes are a hell of a drug.

[00:44:52] [SPEAKER_04]: The idea of these companies not just staying in the top 10,

[00:44:55] [SPEAKER_04]: but staying in the top like 50 or the top 100.

[00:44:57] [SPEAKER_04]: And you start to get this flavor for the biggest companies

[00:45:00] [SPEAKER_04]: sometimes might drift out of that top 10,

[00:45:03] [SPEAKER_04]: but it doesn't mean they've completely lost relevance.

[00:45:05] [SPEAKER_04]: If I'm going to invert this, there's a lot more to be learned

[00:45:08] [SPEAKER_04]: about like the top chunk of companies by size versus probably

[00:45:13] [SPEAKER_04]: like that bottom chunk.

[00:45:14] [SPEAKER_04]: And then if I look in that top chunk and willing to expand it a little bit,

[00:45:17] [SPEAKER_04]: I start to see, yeah, who are the really durable businesses

[00:45:20] [SPEAKER_04]: because the most durable businesses might drift up into that top 10

[00:45:23] [SPEAKER_04]: once in a while.

[00:45:24] [SPEAKER_04]: But there's some really incredible companies

[00:45:26] [SPEAKER_04]: who have stood the test of time and hung out in maybe that top 50,

[00:45:30] [SPEAKER_04]: if not top 100 for, you know, decades in some cases.

[00:45:33] [SPEAKER_04]: That's pretty wild to step back and acknowledge

[00:45:35] [SPEAKER_04]: when we're so caught up in the top 10 to be.

[00:45:38] [SPEAKER_03]: I don't know where it ranks in the SFB 500.

[00:45:40] [SPEAKER_03]: But whenever I think about this idea, I always think about Sears

[00:45:43] [SPEAKER_03]: because like growing up Sears was everywhere.

[00:45:45] [SPEAKER_03]: Sears was like a huge part of life.

[00:45:46] [SPEAKER_03]: You know, the family would get together and go

[00:45:48] [SPEAKER_03]: appliance shopping at Sears.

[00:45:49] [SPEAKER_03]: And like I think about how big it was like in life.

[00:45:52] [SPEAKER_03]: And then I think about it just being completely gone.

[00:45:53] [SPEAKER_03]: And I always think about that when I think about any company

[00:45:56] [SPEAKER_03]: that I'm looking at today and saying like something could really,

[00:45:58] [SPEAKER_03]: really change that you just can't imagine

[00:46:00] [SPEAKER_03]: when you think about like a frame of decades.

[00:46:03] [SPEAKER_04]: Another one where it's again, back to that as well.

[00:46:06] [SPEAKER_04]: Demeter on idea of putting an age on these things,

[00:46:08] [SPEAKER_04]: like understanding when something is firing and diversified

[00:46:12] [SPEAKER_04]: and has lots of ideas that all seem to be working

[00:46:14] [SPEAKER_04]: that are basically tied to the consumer.

[00:46:16] [SPEAKER_04]: This is why I pushed back so hard

[00:46:18] [SPEAKER_04]: on trying to label excess returns as the craftsman's

[00:46:21] [SPEAKER_04]: tools of, you know, podcasts.

[00:46:24] [SPEAKER_04]: That idea and I love the Sears idea is like you got to bend

[00:46:27] [SPEAKER_04]: in shape with the times and you have to be finding things

[00:46:30] [SPEAKER_04]: that your primary drivers of both revenue and profits

[00:46:34] [SPEAKER_04]: are going to keep you in business.

[00:46:36] [SPEAKER_04]: Sears getting murdered by commercial real estate

[00:46:40] [SPEAKER_04]: and the credit stuff and everything else that crapped in.

[00:46:43] [SPEAKER_04]: It's it was the retiree trying to go get like a facelift

[00:46:47] [SPEAKER_04]: and you know, a day to 20 year old and drive a convertible.

[00:46:50] [SPEAKER_04]: It just looked bad for a while and you know, it's going to end worse.

[00:46:55] [SPEAKER_03]: So the next one we talked about when we did our

[00:46:56] [SPEAKER_03]: the best answers to our closing question, which is if you could

[00:46:58] [SPEAKER_03]: teach one lesson of the average investor, what would it be?

[00:47:00] [SPEAKER_03]: We highlight Chris's there.

[00:47:02] [SPEAKER_03]: But I think it's worth highlighting again here because

[00:47:04] [SPEAKER_03]: it's this is such a thing that's predominant right now.

[00:47:07] [SPEAKER_03]: I mean, we're trading so much of the cryptocurrencies

[00:47:09] [SPEAKER_03]: and we're trading so many things where we're just looking

[00:47:11] [SPEAKER_03]: at the thing and how the price is moving

[00:47:13] [SPEAKER_03]: and we don't even concern ourselves with what's actually behind the thing.

[00:47:17] [SPEAKER_03]: So Chris, you were talking about the importance of thinking

[00:47:19] [SPEAKER_03]: about what you own as a business, not a stock.

[00:47:21] [SPEAKER_01]: Well, it would be that you own a business.

[00:47:24] [SPEAKER_01]: You own a business and this idea that you own a trading sardine

[00:47:28] [SPEAKER_01]: instead of a business leads to so much bad behavior.

[00:47:32] [SPEAKER_01]: And and really you guys raised it the best, you know, when Jack

[00:47:36] [SPEAKER_01]: was talking about selling those winners, you know, it if you just

[00:47:40] [SPEAKER_01]: think that that I own this wonderful portfolio of businesses

[00:47:44] [SPEAKER_01]: and I want to pass them on to my kids or my grandkids.

[00:47:47] [SPEAKER_01]: I think it keeps you out of owning stuff

[00:47:51] [SPEAKER_01]: because you think it has a quick double and it keeps you out of

[00:47:56] [SPEAKER_01]: selling stuff simply because it doubled and and I think that

[00:48:01] [SPEAKER_01]: everybody would do better, you know, if they could think and

[00:48:04] [SPEAKER_01]: and, you know, I had my first girlfriend was from Maine

[00:48:08] [SPEAKER_01]: and her father was worked at Bath Iron Works

[00:48:14] [SPEAKER_01]: and he showed me his portfolio and it was such a wonderful

[00:48:18] [SPEAKER_01]: portfolio. It was about eight stocks that he had bought over

[00:48:21] [SPEAKER_01]: the years very thoughtfully and carefully and it had just built

[00:48:25] [SPEAKER_01]: into this real source of wealth.

[00:48:28] [SPEAKER_01]: And I would guess that he had outperformed the market,

[00:48:31] [SPEAKER_01]: but even if he had just simply tracked the market over this

[00:48:34] [SPEAKER_01]: long period of time, but he did it with deep conviction

[00:48:37] [SPEAKER_01]: because he saw each holding as a business.

[00:48:39] [SPEAKER_01]: He didn't see it as a stock market.

[00:48:41] [SPEAKER_01]: He didn't see it as as a piece of paper.

[00:48:44] [SPEAKER_01]: And I think that, you know, really thinking about that and

[00:48:47] [SPEAKER_01]: thinking about what it is to be an owner of a business.

[00:48:51] [SPEAKER_01]: I think that would really improve a lot of people's returns

[00:48:54] [SPEAKER_01]: over a long period of time.

[00:48:55] [SPEAKER_03]: So I guess I got to liquidate the crypto portfolio here, Matt,

[00:48:58] [SPEAKER_03]: because unfortunately I have a trouble thinking about what's

[00:49:00] [SPEAKER_03]: behind the Dogecoin.

[00:49:02] [SPEAKER_03]: Besides Elon talking about it a lot, there may not be anything else.

[00:49:05] [SPEAKER_04]: Well, I don't know.

[00:49:05] [SPEAKER_04]: You can get any of that Sears catalog coin or any of those other

[00:49:08] [SPEAKER_04]: Jewe's tucked away, maybe.

[00:49:10] [SPEAKER_03]: And we even talked about this when Mobison, like last time

[00:49:13] [SPEAKER_03]: with the episode, we talked about GameStop with Mobison.

[00:49:15] [SPEAKER_03]: And he mentioned that, like at one point, GameStop, there was

[00:49:18] [SPEAKER_03]: a fundamental case to own GameStop and then just got out

[00:49:21] [SPEAKER_03]: of control because there were people who actually wanted to

[00:49:24] [SPEAKER_03]: own the company who look at the financials and said, I

[00:49:26] [SPEAKER_03]: own this business.

[00:49:27] [SPEAKER_03]: And then there were a lot of people who did not think

[00:49:29] [SPEAKER_03]: that way.

[00:49:30] [SPEAKER_03]: And they all came in and did the price up.

[00:49:32] [SPEAKER_03]: And it's hard as the guy who's sitting there thinking

[00:49:34] [SPEAKER_03]: about the business case probably to be on the other side

[00:49:36] [SPEAKER_03]: of that thing.

[00:49:37] [SPEAKER_03]: Oh, I've got a huge return here.

[00:49:38] [SPEAKER_03]: But now what do I do?

[00:49:39] [SPEAKER_03]: I was looking at this as a business.

[00:49:40] [SPEAKER_03]: But I think at the end and there's a lot of reasons to

[00:49:43] [SPEAKER_03]: think about people are not thinking about things as

[00:49:45] [SPEAKER_03]: businesses in there and even a lot of stuff now.

[00:49:47] [SPEAKER_03]: But I still think as an investor, if you are one

[00:49:49] [SPEAKER_03]: of those investors who buys individual stocks, you're

[00:49:52] [SPEAKER_03]: probably better off at least understanding what's going on

[00:49:55] [SPEAKER_03]: with the company behind the stock and not just thinking

[00:49:57] [SPEAKER_03]: I'm going to buy it today.

[00:49:58] [SPEAKER_03]: I'm going to try to sell it for more money tomorrow.

[00:50:00] [SPEAKER_03]: I don't even care what this thing does.

[00:50:03] [SPEAKER_04]: I know I've brought this up in other places before this

[00:50:05] [SPEAKER_04]: idea that we talk about a lot with business

[00:50:07] [SPEAKER_04]: owner clients, especially where we're saying how much time

[00:50:10] [SPEAKER_04]: are you spending working in the business versus working

[00:50:12] [SPEAKER_04]: on the business?

[00:50:13] [SPEAKER_04]: And those are two different things.

[00:50:15] [SPEAKER_04]: You could be pushing them off around the warehouse

[00:50:17] [SPEAKER_04]: that's working like in the business, but that's not

[00:50:19] [SPEAKER_04]: working on the business where you're like, how does

[00:50:21] [SPEAKER_04]: the warehouse actually grow, expand, make profits

[00:50:23] [SPEAKER_04]: all that stuff?

[00:50:24] [SPEAKER_04]: And asking with investments like what am I doing

[00:50:27] [SPEAKER_04]: like in this business?

[00:50:30] [SPEAKER_04]: Am I investing in the business?

[00:50:32] [SPEAKER_04]: Am I actually thinking about what the investment case

[00:50:34] [SPEAKER_04]: for this thing over some long time horizon is?

[00:50:37] [SPEAKER_04]: Or am I speculating on the business itself and going,

[00:50:41] [SPEAKER_04]: what do I think the outcome of this this quarters earnings

[00:50:43] [SPEAKER_04]: or the way the crowd is going to perceive this thing?

[00:50:46] [SPEAKER_04]: And you got to separate those things out.

[00:50:48] [SPEAKER_04]: My investing in this thing or my speculating on this

[00:50:51] [SPEAKER_04]: thing, and that's a really great way to just keep

[00:50:53] [SPEAKER_04]: you honest about what you're doing in that activity.

[00:50:56] [SPEAKER_04]: It's it's OK to do both.

[00:50:58] [SPEAKER_04]: There's nothing wrong, but a lot of your decision

[00:51:01] [SPEAKER_04]: problems happen when you're subconsciously flipping back

[00:51:05] [SPEAKER_04]: and forth between the two and not admitting this is why

[00:51:08] [SPEAKER_04]: I'm here because of them here.

[00:51:09] [SPEAKER_04]: And I'm invested in this thing.

[00:51:10] [SPEAKER_04]: It would be a lot more tolerant with the upstounds

[00:51:13] [SPEAKER_04]: and sideways is over time versus if I'm speculating on

[00:51:16] [SPEAKER_04]: then I should just be making those short term more

[00:51:18] [SPEAKER_04]: directional, more probably narrative and crowd focused

[00:51:22] [SPEAKER_04]: bets of how somebody else going to perceive this for me

[00:51:24] [SPEAKER_04]: to flip my position.

[00:51:25] [SPEAKER_03]: That's right.

[00:51:26] [SPEAKER_03]: This will apply to everybody like as a factor investor,

[00:51:28] [SPEAKER_03]: it doesn't really matter if I am betting on certain

[00:51:31] [SPEAKER_03]: factors and certain reasons those factors are going to work.

[00:51:33] [SPEAKER_03]: I don't really need to know the business.

[00:51:34] [SPEAKER_03]: Did you ever see that thing where Martin Minervini,

[00:51:37] [SPEAKER_03]: he's like a technical analyst who was on CNBC

[00:51:39] [SPEAKER_03]: and they asked him about upstart year of that video?

[00:51:41] [SPEAKER_04]: I this is vaguely familiar.

[00:51:43] [SPEAKER_04]: And I don't think I ever knew how to pronounce his name.

[00:51:45] [SPEAKER_04]: So what would you do?

[00:51:46] [SPEAKER_03]: OK, hopefully I just did it.

[00:51:47] [SPEAKER_03]: Hopefully I just did it correctly.

[00:51:47] [SPEAKER_03]: But it was funny because he didn't know he was talking

[00:51:50] [SPEAKER_03]: about upstart and they asked him like what the company does

[00:51:52] [SPEAKER_03]: and he had no idea.

[00:51:53] [SPEAKER_03]: And I guess it ended up being like an embarrassing segment.

[00:51:55] [SPEAKER_03]: But then like his response to it, which I think is what

[00:51:57] [SPEAKER_03]: all of us would do is he got he basically got his wife

[00:52:00] [SPEAKER_03]: out and he got his Ferrari and he drove down the street

[00:52:03] [SPEAKER_03]: and he had his wife tape him slow rolling in his Ferrari.

[00:52:06] [SPEAKER_03]: So like that was his answer to the people who were questioning

[00:52:08] [SPEAKER_03]: his skills as an investor of his wife,

[00:52:11] [SPEAKER_03]: filling him like driving in the street

[00:52:13] [SPEAKER_03]: and his Ferrari to show when he's gone.

[00:52:15] [SPEAKER_03]: That's that's fantastic.

[00:52:16] [SPEAKER_04]: That is the the Rick James mixing console dump

[00:52:20] [SPEAKER_04]: pride right there.

[00:52:21] [SPEAKER_03]: So it is a proper value investor.

[00:52:24] [SPEAKER_03]: I drive a Hyundai.

[00:52:24] [SPEAKER_03]: So if I ever have a problem on the podcast

[00:52:26] [SPEAKER_03]: and that's what you're going to see is you're going

[00:52:27] [SPEAKER_03]: to see my wife filming me drift on my Hyundai.

[00:52:30] [SPEAKER_04]: I'm down to Hyundai.

[00:52:31] [SPEAKER_03]: And as a value investor, that will prove everything

[00:52:34] [SPEAKER_03]: I need to prove. There you go.

[00:52:36] [SPEAKER_03]: So we have a little more to go.

[00:52:38] [SPEAKER_03]: This idea that this is outside of what we usually talk

[00:52:40] [SPEAKER_03]: about in the podcast, but I think it's really cool,

[00:52:42] [SPEAKER_03]: which is all these companies these days have boards

[00:52:45] [SPEAKER_03]: and Chris sits on boards.

[00:52:47] [SPEAKER_03]: He sits on Berkshire Hathaway.

[00:52:48] [SPEAKER_03]: He sits on Copacola or I guess it's called coconut.

[00:52:51] [SPEAKER_03]: He sits on all these boards and he has a lot of experience

[00:52:54] [SPEAKER_03]: with what makes a good board.

[00:52:56] [SPEAKER_03]: And so we asked him what he's learned from that process.

[00:52:58] [SPEAKER_01]: I think boards are are by and large.

[00:53:01] [SPEAKER_01]: And I'm going to say in 95 percent of cases

[00:53:04] [SPEAKER_01]: overrated in the sense that really

[00:53:08] [SPEAKER_01]: a good board cannot make a great company,

[00:53:13] [SPEAKER_01]: but a bad board can destroy a company.

[00:53:17] [SPEAKER_01]: And I've seen more examples of the latter.

[00:53:21] [SPEAKER_01]: I've seen bad boards really screw up companies.

[00:53:23] [SPEAKER_01]: And the way they tend to screw them up is in succession,

[00:53:29] [SPEAKER_01]: in not weighing in on significant M&A deals

[00:53:34] [SPEAKER_01]: in basically allowing distortions to happen,

[00:53:40] [SPEAKER_01]: allowing, you know, maybe viewing their job

[00:53:45] [SPEAKER_01]: as being company boosters

[00:53:48] [SPEAKER_01]: rather than shareholder representatives, if that makes sense.

[00:53:51] [SPEAKER_01]: So maybe not forcing the disclosure of bad news

[00:53:54] [SPEAKER_01]: or not demanding more accountability and so on.

[00:53:59] [SPEAKER_01]: I think they often see themselves in relationship

[00:54:02] [SPEAKER_01]: to the CEO rather than the shareholder.

[00:54:05] [SPEAKER_01]: And I think so.

[00:54:06] [SPEAKER_01]: I've seen a lot of examples of bad boards.

[00:54:09] [SPEAKER_01]: I was going to say that if I could single out

[00:54:13] [SPEAKER_01]: maybe the most heroic, brave

[00:54:17] [SPEAKER_01]: and outstanding board of directors

[00:54:20] [SPEAKER_01]: that I've ever seen in my experience as an investor,

[00:54:25] [SPEAKER_01]: it would be the directors of a company

[00:54:27] [SPEAKER_01]: that sells a product that I don't approve of.

[00:54:31] [SPEAKER_01]: But it's just such a singular case

[00:54:33] [SPEAKER_01]: of representation of the shareholders,

[00:54:37] [SPEAKER_01]: even at the expense of personal reputation

[00:54:40] [SPEAKER_01]: that I think it's worth calling them out.

[00:54:42] [SPEAKER_01]: And that's the board of Philip Morris.

[00:54:45] [SPEAKER_01]: The board of Philip Morris

[00:54:47] [SPEAKER_01]: made a decision when there was an enormous amount of litigation

[00:54:51] [SPEAKER_01]: hanging over the company and when the CEOs

[00:54:53] [SPEAKER_01]: had all been hauled down to Washington

[00:54:55] [SPEAKER_01]: and there was this absolute, you know,

[00:54:59] [SPEAKER_01]: people were divesting tobacco stocks.

[00:55:04] [SPEAKER_01]: The board of Philip Morris made a decision

[00:55:06] [SPEAKER_01]: to split up the company to spin out Kraft,

[00:55:08] [SPEAKER_01]: to spin out Miller,

[00:55:10] [SPEAKER_01]: to spin out the international business

[00:55:13] [SPEAKER_01]: from the domestic business.

[00:55:15] [SPEAKER_01]: And that took enormous bravery

[00:55:18] [SPEAKER_01]: because the notion of fraudulent conveyance

[00:55:23] [SPEAKER_01]: accrues personal liability to the directors in that case.

[00:55:27] [SPEAKER_01]: So they had to believe that what they were doing

[00:55:30] [SPEAKER_01]: was legally correct

[00:55:33] [SPEAKER_01]: and they had to be willing to take that risk personally.

[00:55:39] [SPEAKER_01]: And I think it was, I mean, and of course,

[00:55:42] [SPEAKER_01]: Philip Morris has been one of the best performing stocks

[00:55:44] [SPEAKER_01]: for the last 30 or 40 years.

[00:55:46] [SPEAKER_01]: We owned it for some period of time

[00:55:48] [SPEAKER_01]: and have not owned it in a long period.

[00:55:50] [SPEAKER_01]: And that's been a mistake, frankly,

[00:55:51] [SPEAKER_01]: in terms of shareholder return.

[00:55:54] [SPEAKER_01]: But that act, you know, directors' number one goal

[00:55:58] [SPEAKER_01]: as far as I have seen is they often approach

[00:56:01] [SPEAKER_01]: the job with the view of not wanting to be embarrassed.

[00:56:05] [SPEAKER_01]: And that's a different job than trying to create

[00:56:08] [SPEAKER_01]: or play a part in the creation of shareholder value.

[00:56:11] [SPEAKER_01]: And I think the best directors are those

[00:56:13] [SPEAKER_01]: that ultimately are willing to, when it is called for,

[00:56:18] [SPEAKER_01]: take a stand even though reputationally

[00:56:21] [SPEAKER_01]: it may be difficult or risky for them to do so.

[00:56:25] [SPEAKER_03]: So I think this applies like in so many ways.

[00:56:27] [SPEAKER_03]: Like and this is something I would criticize myself for

[00:56:29] [SPEAKER_03]: like in my career is all of us want to,

[00:56:31] [SPEAKER_03]: it's very hard to make the hard decisions.

[00:56:33] [SPEAKER_03]: Like a lot of times avoiding being embarrassed

[00:56:36] [SPEAKER_03]: will let overcome other things.

[00:56:37] [SPEAKER_03]: And that's what puts board members in a hard situation.

[00:56:41] [SPEAKER_03]: I mean, they're talking to a CEO they have a relationship with,

[00:56:44] [SPEAKER_03]: you know, members of the company they have a relationship with.

[00:56:46] [SPEAKER_03]: And sometimes you've got to make a decision

[00:56:48] [SPEAKER_03]: that those people don't agree with.

[00:56:49] [SPEAKER_03]: Sometimes you've got to make a decision

[00:56:50] [SPEAKER_03]: that maybe even like a lot of the shareholders

[00:56:52] [SPEAKER_03]: won't agree with and you've got to stick yourself out there.

[00:56:55] [SPEAKER_03]: And he gave some examples with Philip Morris

[00:56:56] [SPEAKER_03]: in places where people did it.

[00:56:58] [SPEAKER_03]: But I've got to imagine sitting in that seat

[00:56:59] [SPEAKER_03]: is really hard to do.

[00:57:01] [SPEAKER_04]: It's important to remember and we work with a lot of people

[00:57:04] [SPEAKER_04]: who have board seats who act in that capacity

[00:57:07] [SPEAKER_04]: and people who are in on executive management teams

[00:57:09] [SPEAKER_04]: and whatever else.

[00:57:10] [SPEAKER_04]: And then obviously everybody in some form or another

[00:57:12] [SPEAKER_04]: is a share owner pretty much everywhere.

[00:57:14] [SPEAKER_04]: But this idea of the board exists

[00:57:18] [SPEAKER_04]: in between the executive management team,

[00:57:20] [SPEAKER_04]: like the CEO for this is going to make it really simple

[00:57:23] [SPEAKER_04]: and the shareholders over here.

[00:57:24] [SPEAKER_04]: And the board's job is to make sure

[00:57:26] [SPEAKER_04]: what the executive team is doing

[00:57:28] [SPEAKER_04]: is an alignment with the shareholders.

[00:57:31] [SPEAKER_04]: That means when there's a fire in one division

[00:57:34] [SPEAKER_04]: and the CEO is like, well, we can kind of paper over this fire

[00:57:38] [SPEAKER_04]: with this thing from over here to help solve the problem.

[00:57:40] [SPEAKER_04]: The board's supposed to be there to help keep them honest.

[00:57:43] [SPEAKER_04]: And Chris tells the story about Philip Morris

[00:57:46] [SPEAKER_04]: deciding a Jennison, you know, cores or Molson or whatever it was.

[00:57:50] [SPEAKER_04]: The Jennison craft to spin out these entities

[00:57:52] [SPEAKER_04]: when they're under all the regulatory scrutiny.

[00:57:55] [SPEAKER_04]: Now hard of a decision that was.

[00:57:56] [SPEAKER_04]: That's how easy it would be if the board was a bunch of patsies

[00:57:59] [SPEAKER_04]: to basically say to the CEO like,

[00:58:02] [SPEAKER_04]: we'll get through this problem.

[00:58:03] [SPEAKER_04]: Let's use all these profits from over here

[00:58:05] [SPEAKER_04]: to protect this thing over here, even though it's unrelated.

[00:58:08] [SPEAKER_04]: The board gets to sit in that seat and say,

[00:58:11] [SPEAKER_04]: that's not best for shareholders.

[00:58:12] [SPEAKER_04]: And there might be a better way for us to manage this problem.

[00:58:15] [SPEAKER_04]: And it's a hugely important function

[00:58:18] [SPEAKER_04]: to society as much as it is to free markets.

[00:58:21] [SPEAKER_04]: And I I actually really, really respect the hell out of him

[00:58:24] [SPEAKER_04]: for being there and being willing to take that seat,

[00:58:27] [SPEAKER_04]: even though you and I both know

[00:58:28] [SPEAKER_04]: from a compliance and a regulatory perspective.

[00:58:31] [SPEAKER_04]: That's typically a pretty challenging thing to do

[00:58:34] [SPEAKER_04]: because of the inherent potential conflicts of interest.

[00:58:36] [SPEAKER_03]: And this has to be harder in the tech world we live in today.

[00:58:38] [SPEAKER_03]: Like if you think about Facebook or Meta's board,

[00:58:41] [SPEAKER_03]: I mean, Marcus Ufferberg is basically all powerful at this point.

[00:58:43] [SPEAKER_03]: He's got his own class of stock he can't do anything about it.

[00:58:46] [SPEAKER_03]: So like trying to sit on that board has to be really challenging.

[00:58:48] [SPEAKER_03]: You're even harder.

[00:58:49] [SPEAKER_03]: Like think about Tesla.

[00:58:50] [SPEAKER_03]: Like Elon Musk is that company.

[00:58:52] [SPEAKER_03]: I mean, basically everything about that company is Elon Musk.

[00:58:55] [SPEAKER_03]: And now I'm a board member

[00:58:56] [SPEAKER_03]: and this came up with a pay package and stuff.

[00:58:58] [SPEAKER_03]: I have to stand up to him in a board meeting and be like, no, Elon.

[00:59:01] [SPEAKER_03]: Like how can you do that?

[00:59:02] [SPEAKER_03]: And then he leaves the company, the company's in massive trouble.

[00:59:04] [SPEAKER_03]: It's got to be an incredibly, incredibly tough thing to do.

[00:59:07] [SPEAKER_04]: And this is that gross thing where you have any time you have two

[00:59:10] [SPEAKER_04]: separate classes of shareholders and you basically have the executive

[00:59:13] [SPEAKER_04]: or the management team was a dominant shareholder with a different share class.

[00:59:17] [SPEAKER_04]: And basically the again, because the board's job is to solve for alignment.

[00:59:21] [SPEAKER_04]: Well, when I have two separate classes of shareholders,

[00:59:23] [SPEAKER_04]: how does the board solve for alignment in both directions,

[00:59:27] [SPEAKER_04]: especially if the alignment is the CEO with himself as a shareholder?

[00:59:31] [SPEAKER_04]: Like this creates genuine problems.

[00:59:34] [SPEAKER_04]: And look, some of those companies voted they amended stuff.

[00:59:37] [SPEAKER_04]: They've been funded that way.

[00:59:39] [SPEAKER_04]: I don't know how we undo some of this stuff.

[00:59:41] [SPEAKER_04]: Shout out to the courts in Delaware,

[00:59:43] [SPEAKER_04]: who have at least made a couple of good passes at this.

[00:59:45] [SPEAKER_04]: But but that's why this is a mess.

[00:59:47] [SPEAKER_04]: And that's why we're considering

[00:59:48] [SPEAKER_04]: positions or talking to people through stuff like this.

[00:59:51] [SPEAKER_04]: You got to point out that stuff.

[00:59:52] [SPEAKER_04]: Hey, there's there's two classes here.

[00:59:54] [SPEAKER_04]: This is what management is accountable to.

[00:59:55] [SPEAKER_04]: This is how the board is holding them.

[00:59:57] [SPEAKER_04]: This becomes an actual risk in investing in some of these entities that we have to

[01:00:01] [SPEAKER_04]: understand, and that's this is really important.

[01:00:03] [SPEAKER_04]: I really again appreciate the nuance that he brings to this conversation.

[01:00:08] [SPEAKER_03]: So I hope everybody found value in this.

[01:00:10] [SPEAKER_03]: And Chris is one of the deepest thinkers,

[01:00:12] [SPEAKER_03]: I think of anybody you've had in the podcast.

[01:00:13] [SPEAKER_03]: And I would recommend a number of you watch it,

[01:00:15] [SPEAKER_03]: but he did it.

[01:00:15] [SPEAKER_03]: He didn't know you Shane Parrish a while back,

[01:00:17] [SPEAKER_03]: which was like truly exceptional.

[01:00:18] [SPEAKER_03]: And it wasn't it was about investing,

[01:00:20] [SPEAKER_03]: but it was about a lot of other stuff.

[01:00:21] [SPEAKER_03]: But Chris is one of those guys that's come on the podcast that like

[01:00:24] [SPEAKER_03]: you can learn so much about life just by listening.

[01:00:26] [SPEAKER_03]: And he's thought so deeply about this stuff.

[01:00:28] [SPEAKER_03]: So I hope everybody enjoyed the lessons we came up with.

[01:00:30] [SPEAKER_03]: There's so many more you can learn from Chris and we'll see you next time.

[01:00:33] [SPEAKER_02]: Hi guys, this is Justin again.

[01:00:35] [SPEAKER_02]: Thanks so much for tuning into this episode.

[01:00:38] [SPEAKER_02]: You can follow Jack on Twitter at at practical quant.

[01:00:41] [SPEAKER_02]: You can follow me on Twitter at at JJ carbonam

[01:00:44] [SPEAKER_02]: and follow Matt on Twitter at at cultish creative.

[01:00:47] [SPEAKER_02]: If you found this discussion interesting and valuable,

[01:00:49] [SPEAKER_02]: please subscribe in either iTunes or on YouTube

[01:00:53] [SPEAKER_02]: or leave a review or a comment.

[01:00:55] [SPEAKER_02]: Also, if you have any ideas for topics you'd like us to cover in the future,

[01:00:58] [SPEAKER_02]: please email us at accessreturnspod at gmail.com.

[01:01:02] [SPEAKER_02]: We would like this to be a listener driven podcast

[01:01:04] [SPEAKER_02]: and would appreciate any suggestions.

[01:01:06] [SPEAKER_02]: Thank you.