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The 100 Year Thinkers: Chris Mayer on SpaceX, AI Reckoning, and Why Early Is Overrated
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Chris Mayer
I am selling the building.
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Chris Mayer
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Matt Ziegler
No, stop. Or not.
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Chris Mayer
We are outgunned and we are outmanned. But we have each other. FX's the Bear the final Season, all
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Podcast Host/Announcer
The SpaceX IPO has been a major story in markets recently, but much of the story has been about the short term. In this episode of our new show, the 100 Year Thinkers, Chris Mayer joins Matt Ziegler to look at it from a different angle. They discuss what its valuation means, the story around its business, and what we can all learn from the experience about the characteristics of great growth companies. We have included this episode in the Excess Returns feed, but if you want to keep receiving new episodes, you can subscribe to the Hundred Year Thinkers on all major podcast platforms or our YouTube channel using the links in this episode. Description thank you for Listen, Google was
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Chris Mayer
trading at what you said seven times or something like that. It was definitely less. You know, it was less than 10. So SpaceX is trading at like when it hit 2.6 trillion, it was like 145 times revenue. 82% of those stocks lost more than 50% of their market value. And the, and the average decline of the, the average drawdown was 65% and yet those companies had returned 533 times on average from their starting point. It's the latest greatest thing and everybody wants to have it whether it makes sense or not. And so I think at some point there's going to be some sort of reckoning. If it is the real deal, you have plenty of time. So you know, there's a lot of urge with investors, like they want to get in like really early, you know, and there's not necessarily any need for that.
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Matt Ziegler
You're watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use when where better questions lead to better decisions. I'm Matt Zigler and 100 Year Thinkers. They're dropping like flies. I mean this is, I don't even know what to think of this. How you doing?
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Chris Mayer
We're the last men standing, Matt. Last guy standing.
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Matt Ziegler
We, you know, Lord of the fly style. We are the survivors Battle Royale. We have come out on top. We are the hundred year thinking tag team is at least going to venture to have a little bit of a conversation here with, with everybody else on different versions of vacation. So Chris Meyer, ladies and gentlemen, resident hundred bagger explainer, co founder, Woodlock House Family Capital. New book. New book is officially out yet or not just yet?
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Chris Mayer
Not yet, but any day now. I hear books have been printed and are in transit, so should be any day.
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Matt Ziegler
Bated breath.
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Chris Mayer
Yeah, with bated breath and a timely book, I should say. Very useful for this market, let's say.
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Matt Ziegler
All right, well, let's give me that. Why is the new book timely? By the time this is out, it might even be available. Say the name and why is it timely?
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Chris Mayer
Well, the name is called the Investor's Odyssey and it's about the subtitles, resisting the sirens and playing the long game. So yeah, the book is about getting past all the noise and the concerns of the moment and trying to getting the proper framework for owning businesses for a long time. So that's why I think it's timely because we're in a time where, I don't know, seems like a lot of stock prices have moved around an awful lot for reasons of the moment and we're in the middle of an AI fueled boom, which I'm sure we'll get to. We've just seen the initial public offering of SpaceX for not just 1 trillion but 2 trillion.
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Matt Ziegler
The ultimate.
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Chris Mayer
Really historic.
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Matt Ziegler
Yeah, really historic. The sirens. The sirens, Pete, I want to come back to that. Let's, let's start off here. If anything says siren call, it's. It's freshly minted shares of equity of shares of a company. It's big market certainly would,
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Chris Mayer
you know, first thing I always think about though, because I've been in financial markets now for 30 plus years is, you know, I've got a lot of scars and that induces a lot of humility. So I remember for example, when Google went public and it was in 2004 and I remember being on stage at a financial conference basically mocking the valuation at the time. So I don't have the numbers right in front of me, but if I remember it was something like 20 billion or so market cap and it was trading, I guess something like 80 times earnings, something like that. And it popped on the IPO and ran a bit. So I think at One point it was, you know, it was trading over a hundred times or 120 times earnings, something like that.
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Matt Ziegler
And like which, I can't remember which one. It's in between three to five times in revenue. Because all Google, Apple, Facebook, the whole nine were all five times or less in revenue versus the SpaceX 100X.
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Chris Mayer
Yeah, I think at IPO Google was not quite 10 times revenue. It was less than that.
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Matt Ziegler
Yeah, that's what I'm saying. I think it was less than 5, but it was still less.
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Chris Mayer
I think it was more than 5, but less than 10. But it was, it was still a big healthy number. Sure, yeah, yeah, still a big number. And of course, you know, we know what if you just bought Google and left it alone, you did fabulously well. So although people like me at the time were saying it was overvalued, you know, over a fullness of time, look like fools. And so now we look at SpaceX with that context in mind still. You know, it's like in sports when they say the athletes get bigger and stronger and faster. It's like in finance the bubbles get bigger. I don't know, because now you're looking at SpaceX and it's trading at, you know, we just said Google was trading at what you said seven times or something like that. It was definitely less, you know, it was less than 10. So SpaceX is trading at like when it hit 2.6 trillion, it was like 145 times revenue. And you know, we talked about, I think Google again, I think it was like 80 times and went to 120 times earnings. SpaceX doesn't have any earnings, so we can't even really talk about that. So it's trading at, you know, 140 times, whatever sales. That is a gigantic number. I mean, for a financial person like me, looking at, who focuses on things like returns and I just, it's way beyond beyond me now, you know, I don't know, you know, I hear people like Ron Baron out there saying me worth 10 trillion, 20 trillion, 30 trillion. So. And he's made a bunch of money on Tesla, so maybe he'll be right again here. But you just think about it in broad probabilistic sense. I think it's probably not going to be a good deal here. And knowing the way markets work, you will probably get a chance to own SpaceX at a fraction of this price. I mean, all these big winners go through huge drawdowns and Amazon is one that always comes up 90% drawdown from peak to Trough, who's to say? Maybe we'll talk about it a little later. But there was another interesting study that came out about 100 baggers or companies that returned more than 100 times and the drawdowns they went through. But I think you can anticipate it'll at least be cut in half at some point in the journey, and then maybe it'll be interesting.
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Matt Ziegler
Then talk to me about cut in half in price versus cut in any way in valuation, because I think that that's another part of looking at companies. And you can separate this from SpaceX if you want to, but cut versus cut in price versus cut in valuation.
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Chris Mayer
So how do you mean?
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Matt Ziegler
So basically, a company could lose a bunch of its value in price and now be cheaper or earnings, revenue, whatever, could actually accelerate and it could get cheaper that way without responding in price.
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Chris Mayer
That's right. So, yeah, so sometimes, you know, a company like I know Airbnb, when it went public, was at a, you know, again, big premium. And even though the business did very well over time, the stock price hasn't gone anywhere, but the stock has gotten cheaper and cheaper and cheaper every year as earnings and cash flows continue to grow and expand. So you can certainly get cheaper that way. And you can, you know, the price can just come down and I'm sure earnings and cash flows will grow. So you'll, you'll, you know, it could, it could step down quite a bit. So, yeah, there's two different ways to get there, I guess you could say. What do you think about, you know, just falling in price is okay if the other part of it's growing? I mean, that happens, right? You know, when you look at, again, look at a lot of those, even from my own study, the Hundred Baggers, you look at these studies and these companies that have grown their revenues and sales and cash flows over time, you know, went through multiple times where they were cut in half or cut in third, and, and for those windows of time, the multiples get more compressed than usual. But all along, the business is continuing to grow.
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Matt Ziegler
So, so I feel like I had the general semantics literature at, at, at arm's length when I was reading the S1 for this thing. And when we talk about the wave of hyperscaler IPOs and equity issuance here, it's labeling things. This is AI, this is quality, this is safe. This is what this TAM is. This is a musk company. What are those labels are actually doing work here? And how do you see them?
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Chris Mayer
Yeah, I mean, they do a lot of work, right? Because SpaceX is like three segments. There's the space business, which everyone thinks of, but they also have starlink and then they also have their AI business in there, data centers and so on. So, I mean, it's a lot of things. And so, you know, getting back to general semantics and Kybski and maybe people are tired of hearing it, but, you know, the idea of that is that those labels should not do the work for you. So you want to overcome that. You don't want to just put a label on it and let that label do your thinking. So I think, you know, have to look at it like you'd look at any other business. Start taking apart the segments and assessing their competitive position, looking at their growth rates, looking at how much capital is they're going to need, what kind of returns potentially on that capital. And you start building it that way. And try not to let the labels do the work for you. It's hard to do because as investors, we often think in terms of analogies. You know, this is like that and it helps us understand it. X company is kind of like Y. And then you, you know, but you have to be very careful about that.
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Chris Mayer
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Matt Ziegler
What about just the laddered thinking that happens here when we have. And I'll pick on AI in particular as one of these terms. It feels like AI means something different to SpaceX, that it means to Google, that it means to IBM. Yeah, so we see, we see that variable inserted in all these places.
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Chris Mayer
Yeah. What does it mean? I mean, it confirmin. You know, people say AI and they're talking about large language models, so they're talking about Chat, GPT and Claude and. But you're right, I mean, then you have AI that's added onto different products and things. And I don't know, I think it's a term that covers a lot of stuff, let's put it that way. I should say there's an interesting little anecdote. We use these expert networks and trying to get an idea. So there's a number of software companies and people trying to understand and grapple with how they deal with AI. And so, you know, they're all adding AI features to their products. And there's one company, I won't name it specifically, but one of the customers, large customer, said basically that their AI product was a waste of time, that it was. Didn't really add anything at all, they weren't going to cancel their software and they would keep it. And they were kind of like, well, hopefully they'll figure it out or something. But it didn't really add much value. So that's an interesting story. And then a smaller story is, I tell you, I have this app called an app I use for golf and they added an AI feature to it. And it's supposed to. It basically summarizes your round that you just played using all these stats. And then it's supposed to like give you recommendations on what focus on your practice. And I think it's completely useless. I mean, it adds. No, it actually detracts. If anything, I think we're going to see a lot of this. Like people are just going to be adding AI features because it.
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Matt Ziegler
Yeah, it's because they can.
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Chris Mayer
Because they can. Because it feels like the thing that they have to do that they should do. It's the latest, greatest thing and everybody wants to have it, whether it makes sense or not. And so I think at some point there's going to be some sort of reckoning. Like right now there's just this tremendous amount of usage of AI and people are using it, figuring it out, trying to play with it, add features, but the returns on all this is not going to be there. And then at some point there's going to be some rationalization of this and saying, okay, well this is another tool, but do we really need to apply it here? Does it solve a problem? Not just to sort of be a solution in search of a problem, actually fix a problem. And at that point you'll probably have some sort of pause in this whole thing and then a lot of those equities will get crushed. And then, you know, those were. People were a Little more value minded and maybe swoop in and pick off some of the long term winners. There certainly be some sort of shakeout. I mean it happens with all these technologies. And so I don't know why AI would be any different in that way.
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Matt Ziegler
Can we talk about the pause? Like the pause and the shakeout? Because I think you're label it, if you have a good poetic label for it, as you so often do. But that part where we're on this crazy adoption curve, we're doing crazy things because the money's available to do crazy things to make your golf app tell you a bunch of information that you look at and go, this is worse. I would rather you not tell me any of these things and try to tell me these things. But then there's a part where all of a sudden some actual utility happens or value accrues. The whole situation gets reset around, oh, we figured out the. And then a new story starts to take form. Any prior cycle stories that come to
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Chris Mayer
mind on this 100%. I mean it makes me think of the, the whole.com era. I mean when everybody was opening up a dot com business to do everything right, just throwing all kinds of ideas against the wall. And of course, you know, a lot of those.com businesses did not work out, but some, you know, stuck around and created enormous value. Whether it was like an ebay or, you know, it actually did work or, you know, I, I don't know, I'm thinking of like, you know, there were a lot of pets.com and things that didn't work at first, but now you still have chewy.com and they've sort of figured it out. I think that, you know, as a working business. So yeah, I mean it's. You're absolutely right. There's a certain amount of experimentation that has to come with this and you almost have to try and fail to figure out, you know, the real solution. So that's really interesting. And I also think, you know, part of this is you're gonna have to expand what you think of as an AI play. Some of these big wins may not come in technology companies as you think of them. It may be H Vac company that figures out how to use AI in their business that creates some massive, you know, gain or yeah, it might be the, who knows, it could be some ordinary business that has figured out a way to harness AI and make their business a lot better. So that's really what I'm paying attention to also. And I think we talked about this in a prior podcast where we're both kind of looking for use cases or these, these businesses that are really using AI and have, have found something that, you know, really enhances their productivity in some crazy way. And you know those stories are going to happen.
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Matt Ziegler
Yeah, those stories are coming. And I think about, well, I think about the app example you just gave. I think about all the different types of businesses and entities. I think of Kai wu's work where he was like the companies that are showing this in earnings reports where they're not only saying AI will fix this, they're pointing at incremental margin earned were storage facilities or something, something random where you wouldn't expect the value to accrue.
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Chris Mayer
Right.
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Matt Ziegler
That's part of the tech adoption life cycle of it can't all be tinkering and early adopters. At some point it has to reach a mass market in a financially meaningful way to keep going.
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Chris Mayer
Yeah. And it's harder to make it into a business or get people to pay for it. So sometimes you. Yeah, I mean I've talked to certain software companies and they're running these experiments and they have lots of anecdotes of it's kind of cool stories of things that they've figured out but still early, you know, they've got to roll it out and, and maybe it's worked in a small, you know, segment where there's lots of other companies and they're going to roll it across those segments and then, then you'll really see and that could be, those could be pretty exciting stories.
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Matt Ziegler
Investor allocator Chris, when you're hearing the growth pitch and you're starting to see some of those problems take hold, how do you start to assess, I guess the look through towards hey, we found something that we think is working, that we think is getting traction and where you say oh, this is what carries the business on to next versus I don't really think you understand this yet.
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Chris Mayer
Yeah, well, I mean for me part of it is I always frame it is thinking, well if it's, if it is the real deal, you have plenty of time. So you know, there's a lot of urge with investors like they want to get in like really early, you know, and there's not necessarily any need for that. I again, this is something that I learned with that hundred bagger study is that if it is the real deal, you've got, you can have a lot of bites at the apple. So you know, I don't feel like you have to figure it out right now. And if you have to wait a few months or quarters to see if it really does have traction. It's not going to kill you. Even if the stock doubles over that time, fine, you know, you've got time and you can start small and then you can, you know, there'll be drawdowns and you can add to it during that. So there's always, I don't really feel like, I feel, I get the sense like a lot of people feel urgent, like there's an urgency. You rush, you have to figure it out now, you know, beforehand. But it's very rarely ever the case.
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Matt Ziegler
Well, and I think that was a big part of, I mean we're only a week or so into SpaceX even trading. But this is part of the massive run up you saw post ipo.
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Chris Mayer
Yeah, exactly. Everyone feels like they have donuts. Everybody in the world who wanted to buy it has probably bought it.
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Matt Ziegler
Right. And now sitting back and going, wow, somebody else didn't want it a week later.
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Chris Mayer
Yeah, that's right. And now it's, you know, come back down. So human motions still drive a lot of it and that fear that you're going to miss out still drives it.
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Matt Ziegler
What do you think in. You can use SpaceX if you want to use SpaceX as the framing for it, but with companies, as they start to accelerate on that curve, the types of signposts that you look for in the quarterly reports and the calls, the indications of we have money, we think we can get a return on that money at the company level. And now how investors actually assess that progress.
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Chris Mayer
Yeah, I mean this is where it gets somewhat difficult because a lot of these will start off just as anecdotes. And that's, I would say that's where we are now with many, if not most companies, at least the ones that I follow, you know, they talk about it, some of them have really nice anecdotes. They can tell, but it's not yet, it's not yet visible on the financials. There's no impact. You can't look at it and say, oh, look at that, you know, organic growth went up another point or their, you know, margin went up another point. But you kind of sense that's where it's going to go, you know. So again, this is kind of in that gray area we talked about where, you know, you don't have to act on it just yet. You've got the anecdotes, you've got, you're, they're talking about it. So I, I still wait until I actually see it because I've just seen so much talk than not materialize in financials. And for me, as a filter, that's kept me out of a lot of problems over the years. Companies have had, have had great stories and have these great anecdotal sort of union economic stories, but then they never really, the financials never look as good as they should because there's a lot of other noise or expenses that are between the, you know, between the anecdote and the, and the final bottom line.
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Matt Ziegler
So.
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Chris Mayer
But again, this is a stylistic thing, you know, and for me, I, I still want to actually see it. And if I can see. Okay, look, you know, they've been telling us these anecdotes for three quarters now and now finally we're seeing it. You know, this is organic growth. It popped up almost 100 basis points from what it is. And, and then you start to think, wow, you know, now if that carries forward and then you can really get, get interested. Now, of course you're giving away something there because the market's going to have figured out probably before he actually prints. But it also cuts out a lot of risk. A lot of the stories that don't ever get to that point because everyone now wants to tell that story. But I guarantee you they're not all going to carry it, carry that ball all the way through.
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Matt Ziegler
And that right there is. Once everyone wants to tell the story, number one, it's a risk reduction exercise. And I think I want to take it here next. Seeing the numbers validated reduces a whole portion of the downside risk because now you have a real business.
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Chris Mayer
Yeah.
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Matt Ziegler
Thinking about companies catching up to the growth curve versus mature, steady, boring, stable state companies like pick your blue chip of choice, your Walmart, your McDonald's, your whatever, a little company becoming one one of these big companies basically progressively getting more and more boring with less and less risk over time. How do you think about that? Like maturing into that mature, boring company versus staying on the we're a sexy, exciting company forever. Which I feel like they're trying to tell us. These companies exist.
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Chris Mayer
Yeah, I mean my, my preference is, is to find the ones that are more in the eff. More on the end on the side of becoming rather than the ones that have already gotten there. You know, I have, I have a few companies what I consider large, but large for me would be like 20 or $30 billion market caps, which in the context is not necessarily that big. Although again, when we've talked about this in prior podcasts, I know we've said you can't just look at market cap, right? It's market cap relative to a TAM. So a $30 billion market cap company can be tiny and it's considered against its opportunity. Or a $30 billion company could be completely mature and could, you know, not going to grow at all, hardly after that at all. So it really depends on where you are. You know, the other thing I always think about, one of my favorite little Warren Buffett isms was when he talked about how, you know, if a company earns a 15% return on equity and there's no payout ratio and that CEO is responsible, over the next five years, that CEO will invest more capital than that business has, you know, at that point in its entire history, no matter how, how old it is. So it's always, you know, what to your point about kind of the growth curve to what, what a company does with its incremental capital over the next two, three, four, five years is huge. And that's why that capital allocation piece becomes so important. So some of it, like I can say like, you know, I'm very confident in like, say like a Constellation software which has this ingrained culture of return on investment. They're not likely to just spend a lot of money on say, AI initiatives that don't pay back something. So there are some organizations that have that discipline already. They talk about the return on capital. It's something they think about, they focus on. And those are the kinds of organizations that I would be much more comfortable with in this environment that we're talking about. And there are a number of companies that I can think of that, you know, his management teams talk about those kinds of things versus another management team that doesn't necessarily consider that. But they're saying we want to grow, we want to capture market share, we want to be among the first leaders. You know, they talk different language and that, that return doesn't really come into play because those ones I think are more at risk of, yeah, they're going to spend a whole lot of money and not going to get much return from it. And that's, you know, more of the corporate history. And it's not just technology. I mean, just regular, ordinary businesses can make these mistakes all the time.
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Matt Ziegler
I was thinking about that specifically and I think it's come up a couple of times with SpaceX where defining the company by the TAM, defining the valuation by the TAM, I forget what the numbers worked out to. It was like, basically our TAM is space and time, and space and time we think is worth $27 trillion today. And we think our company is therefore worth $27 trillion because we'll own the TAM Creative, give them bonus points for that one. But it's still this idea of we have to own the whole TAM to earn the valuation. What's, what's interesting to me and what you're saying there is like being aware of the size of the company relative to the TAM itself and then what market share is available to capture. And there can be a lot of mark, there can be a lot of return earned in not owning the whole tam, being a smaller player, but having a very profitable growth profile in that.
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Chris Mayer
Yeah. By the way, when you were talking about SpaceX's S1, it can't help but it was a heck of an S1. I would recommend people just read at least some of the beginnings.
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Advertisement Voice
Just.
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Matt Ziegler
Absolutely.
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Chris Mayer
It's crazy. And I do love the incentive comp piece where he gets a certain bonus if they establish a 1 million person colony on Mars that you catch that part so good.
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Advertisement Voice
It's.
- [27:25]
Chris Mayer
I think he gets an extra trillion dollars or something.
- [27:27]
Matt Ziegler
Whatever it is, I'm going to the Excess Returns Leadership committee meeting armed with some new incentive comp plans.
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Chris Mayer
Yeah, I think that's Inc. That takes the cake. As far as you know, I've never seen any incentive comp scheme at all like that before. Not to take us off topic there,
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Matt Ziegler
but it's so this idea though of size relative to tam.
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Chris Mayer
Yeah.
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Matt Ziegler
And then how you think about that? Because most people think, oh, I want to own the biggest player in XYZ market. And you're saying maybe 4 or 5 or 7 if the situation is right. Yeah.
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Chris Mayer
I think you could almost ignore the numbers. You just, you know what, just ignore the size and just think in terms of. Yeah. What's the market cap of the company, what's their, what's their tam and how much of that is realistically, you know, can they capture? And there it doesn't really matter. Then, then, then, you know, a $3 billion company or $30 billion company, it doesn't really matter. This absolute, you know, you're getting away from thinking in terms of this is a big company, this is a small company. And then you're reframing it entirely on the opportunity and to your point. Absolutely. You could have a wonderful business, great returns in a smaller, a smaller tam, you know, if you can capture a decent part of that with good returns.
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Matt Ziegler
A good dental practice in a modestly affluent neighborhood is not going to be the total dental market in the United States.
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Chris Mayer
Now the local, you Know the local, the usual like when you look at local millionaires, there's similar businesses, right. It's always some local distributor who has the exclusive for that area. He's printing money or it's a local dealership. You know, the guy, he's, he's got the Toyota dealership for the region or whatever it is. You know, it's those kinds of people there, they've got an exclusive for a certain area and very secure high return business.
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Matt Ziegler
How do you think if at all about the benchmarks? It's, it's interesting from last time we talked.
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Chris Mayer
Yeah.
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Matt Ziegler
We found out the S and P inclusion wasn't going to be a thing. They were going to stick by their original rules. Somewhat surprising for how much everybody seemed to be bending over to making adjustments. Does that matter to you? Is any of this interesting to you at all or is it just noise?
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Advertisement Voice
Well,
- [29:50]
Chris Mayer
I guess it was more interesting to me back when I used to think more about, you know, the S P and beating the S and P. But I don't know, I sort of got away from it. I think most people know or have a sense that the S and P is being dominated by a smaller subset of companies now. I think there was an interesting note by Torsten Slok, who's the chief economist at Apollo and he said that if you backed out AI companies and energy companies from the S&P 500, the rest of the S and P is down for the year, which is pretty striking. And so I think that he had identified 84 companies that were AI related and that's, you know, include semiconductor companies. And some of those terms have been incredible. You know, it's coming up 200, 300, 400% SanDisk. I don't know what's 600% year to date or something. So obviously that, you know, pushes the index, can push the index quite a bit. So I, I don't know, I think the S and P is its own thing. It's certainly a hard benchmark to beat and I know a lot of active managers have been beaten by it. I'll ask couple years especially and it's always going to have those issues where people are going to question the construction of it. And so I don't worry about it as investor. I don't think it changes what I do based on what the S P committee decides to put in their index or not put in their index. But it's interesting to watch it. And so much of people's retirements and things are tied up in the S P. It's kind of. Yeah, it's interesting to watch it, but I don't think it doesn't change. It shouldn't change your approach as an investor unless you're invested in which case by all means, you may want to pay attention.
- [31:29]
Matt Ziegler
You might want to pay a little attention. It's curious too because I think for the first time in a while I heard regular people talking about that decision not to include it and the idea of just having some profitability metrics and other basic things of you should be producing a positive economic return before we consider you. There's actually some portfolio construction rules that were nice reminders I think for people to have. Did you follow any of that stuff I was rolling out or in the conversation, the ether.
- [31:59]
Chris Mayer
No, but go ahead.
- [32:01]
Matt Ziegler
Well, an interesting standard to basically say, and this goes back to the Tesla inclusion of saying you should be able
- [32:08]
Chris Mayer
to purely size, not just purely size
- [32:11]
Matt Ziegler
and we're going to make adjustments for you on the size of your free float. That was another thing too. Just because you raised this money doesn't mean this is what you're actually.
- [32:20]
Chris Mayer
Of course this is another interesting thing about SpaceX which is it absolutely tests the corporate governance boundaries to the limits. I mean. Yeah, and nobody cares about this. I mean it's a boring topic and only if you're a very long term investor. I think you care and even then in this case maybe you, you would accept. A lot of people obviously accepted it. But I mean this is basically Elon's company. He can appoint the board. There's clause in there, you know, Sherlo can't sue him. So you know, you got to go into this knowing that basically he can do what he wants and you're either, you're just along for the ride. So I don't know, I feel a little, I feel a little old school about that. I mean I, I still don't like even to see dual class stock. I mean I have, you know, some that are like that and it's unavoidable. But if you have very good stewards and partners that you're. You trust, then you, you know, overlook it. But you know, I prefer to have a more open process. On the other hand, you can see why it might make sense because then you can have, you know, founders lose control of their companies because of reasons that don't make a lot of sense either. You know, there, there are rules, institutional rules about boards that don't make sense. Like having independent director and an independent director and corporate speak means somebody doesn't, doesn't own a lot of stock and isn't really engaged in the business at all. I mean, that's not who I would want on the board. Have a company invested. I'd love to see, you know, a board full of owners, a lot of, you know, owners of the stock and then. And then people who add value or to the business in some way. Like, I remember when I was in banking a long time ago, you know, I worked for a small bank that became, you know, kind of a regional bank. And who we have on our board, we'd also invite some of our largest customers. So we'd have like the largest general contractor in the area, you know, the largest auto dealership, the largest title company, you know, he would be on our board. Why? Well, because those people can funnel business your way. You know, it's. It's useful. So they don't a lot of stock, but they're useful to business somehow. And that's how I would think. When I think of boards, I think, okay, well, I want to have stockholders. You know, I want to have, if there's four or five large stockholders, let's put them on the board. And then you want to have people add value somehow. But that's not the case with a lot of these things at all. They're. They're just kept boards. And, you know, as a shareholder, you have very limited rights, very little say in what goes on.
- [34:50]
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- [35:47]
Matt Ziegler
when you think about the size and the scale and ambitions of some of these companies, do you think, do you think if that size scale, if that TAM is the goal, that that's a reasonable thing to be done? Meaning could you have A board govern the way that you just described it and have goals as lofty of an ambition.
- [36:06]
Chris Mayer
I think probably not. That's why I think it's a little bit of a. You know, it's a tough spot.
- [36:11]
Advertisement Voice
Right.
- [36:11]
Chris Mayer
Because be very on to be an Elon Musk and let's. You know, he got where he is. He has enormous tolerance for failure, let's be honest. Yeah, he pushes things to absolute brink. You know, I think it's pretty well known with SpaceX where they were almost broke, came down to that last launch and it worked and voila. But if you had a board of lots of rationally rational people, you don't even get to that point, you know, so there's absolutely, there's this tension which makes it fascinating. You know, as an investor you, you want to back talented entrepreneurial people. At the same time, you know, you like to. At the same time you've seen lots of places where that's been abused, let's put it that way, where corporate insiders have enriched themselves at shareholders expense and you don't want to put yourself in that situation. So sussing out who's what. I think it's particularly tough now where that entrepreneurial energy seems particularly important when you have a new technology like AI changing the landscape so dramatically.
- [37:22]
Matt Ziegler
When you think about that and the investment implications of how much run basically to give these entrepreneurs and founders what the investor hat on. How would you gauge trust? I don't have another better word for it. Trust in the vision of the leader who has less checks and balances, probably a more ambitious goal versus no, these are my red flags. This is not a SpaceX specific question. This is just a. How do you read through that? Like you just said, you have some dual share class companies. You, you've vetted some version of this before. How do you think through it?
- [38:00]
Chris Mayer
Yeah, and I think there are some clues like just getting a sense for what kind of people they are. So. And that that means also looking through their compensation, you know the compensation of the company that I'm thinking of where I have, where there's A and B stock is not. They're not, they're not. They don't compensate themselves richly at all. It's very modest. And you just get a sense of dealing with them as, as business people and how other people have stories and tell you things that these are just normal grounded people and most of their compensation and their value is going to be added in increasing the value of their stockholding in the business. Not by extracting you Know, pay and options and all the other goodies. So that's kind of one clue. Sometimes you, you know, you get a culture like that, you know, Buffett famously taking no salary. There are some other companies like that where the CEO doesn't really take much of a salary, doesn't need it. I'm on a board of a public company myself, and I think like, you know, the CEO, the top management there, you know, they're very, they're trustworthy people. You know, I've gotten to know them. They're not going to screw you over. They don't, they don't pay themselves successfully either. They're, you know, they're so it's, it's more like your intuition comes into play. Is this a good, solid, trustworthy person, or is he. Or do you get the feeling that it's a little slimy, like a little bit of show? There's too much of that going on. So, yeah, I mean, I think it's just a human skill that we all, we all have. Whether you're your own internal bullshit detector, as Hemingway said,
- [39:39]
Matt Ziegler
the, the idea of vetting that too is vetting the story that they are presenting. The BS detector, the dragon in the garage, the great Carl Saganism.
- [39:49]
Chris Mayer
Yeah.
- [39:50]
Matt Ziegler
The burden of proof has to be there. Somebody has to deliver it to you. So it's, it's the regular exercise, what they say, what the financials say, especially once they're public company. It's that combined effort.
- [40:06]
Chris Mayer
It is. And then I'd say, so throw in like anecdotes you hear from people like, and sometimes they're, they seem meaningless, but when you start to accumulate a pattern of it, then it's worth paying attention, you know, Visa. Let's just say he doesn't automatically fly a business class. Okay, it seems stupid minor, but that's one thing among many. And you see that, you know, he has a free, modest office or he doesn't drive a fancy car, you know, et cetera, et cetera. These little things you start to get, well, what really motivates him. Maybe it's not those things, you know, And I'm not saying you can't have those things. Certainly I know CEOs, they drive fancy cars, live in great places, and they're still awesome CEOs. So I'm not saying you can't. I'm just saying there's possible clues there.
- [40:53]
Matt Ziegler
Stuff hides out in funny places. I think the anecdotes is really valuable because whether it's a footnote in a filing or whether it's a media appearance. And those can be tremendously valuable insights into the. There's still people running these companies.
- [41:08]
Chris Mayer
Yes. That's one thing you can't forget. You know, we just get lost in the world of tickers and financials. But they're still. People go in there every day to work. And what are they like? What are their mo. What's their motivation? What motivates them, especially the top people. And then, you know, I've learned to appreciate, to get a sense for that culture in the organization otherwise and the importance of that. And we've talked about this, too, on past podcasts, like, how do you do that? Right. Well, that's hard, too. But again, there are some anecdotes and stories and things you can collect if. And, you know, SpaceX is an interesting example in this, in that it also minted a lot of millionaires. You know, one thing Musk did was he allowed everyone to get stock. So I'm sure you've heard the story of the Mexican immigrant, the welder who, you know, who's now worth a million dollars or something close to it. Right. Everyone in that organization, they got some stock and they. So at least culturally is that. That's an interesting sign for what might be going on there. And, you know, so there are other stories of other companies where, you know, you hear about just regular people working there becoming rich because they had this policy of kind of bringing employees on, making them owners. And that's nice to have that.
- [42:30]
Matt Ziegler
It's a real nice thing to have. And it is one of those things that creates a. It has the potential to create a class of wealth, especially in companies where we hear the stories of, well, they had 100 employees.
- [42:43]
Chris Mayer
Yeah. And it creates a potential to actually carry a culture forward. So whatever made that business successful, you hope with all those people who have had such good experiences there and good success there and have their wealth tied in it, that they see and understand that and they want to preserve it and they want to keep it going. So those employees bring along other people and you have, you know, you can. That's when human beings collectively can create great, wonderful things and go for a long time. It's not just one person at the top. That's kind of a fallacy. You know, you need a lot of people.
- [43:15]
Matt Ziegler
I think that's been one of the interesting parts about the. Like go back to pets.com for a second. And related to a Chewy Chewy is one of the dominant providers of employment in the area I work in. I'm not saying it's good or bad
- [43:28]
Chris Mayer
jobs or whatever else.
- [43:29]
Matt Ziegler
I do not currently, I will disclose, do not currently work in a chewy warehouse. But what I will say is whether it's the chewy jobs, the Amazon jobs, there's this. These are employers, these have become massive, massive employers that were tech startups with a handful of employees with, you know, decks or old chairs on sawhorses 20 years ago. And now they are substantive employers in the economy with people who are tied into communities that are plugged into these. This is almost. It's another relationship to the. When you own a share of a company, you own a piece of a real business. And when you work for one of these companies, you are tied to a certain type of a community asset in this for profit enterprise.
- [44:11]
Chris Mayer
Absolutely. You know, we, there's that we are the Hundred Year Thinkers podcast, but there's that book Century Club and looks at companies that survive very long periods of time, centuries, even a thousand years. And, and one of the attributes is this continuity and we're talking about with employees and tenure and relationships, stuff like that. But it also to your point about community that exactly. Part of it as well, that they're part of a community and that they, you know, try to be good citizens in that community and they also have long term relationship with certain suppliers, with customers. So it's something that permeates an organization. You know, I really. A company that's built to last a long time can't just go it alone. So they have allies in a way. They have also strong relationships with key suppliers. They have strong relationships with their best customers, they have strong relationships with their employees and they're good relations with where they are, the community that they're in. So it's a lot of things that drive it. Yeah, it's really interesting and not so easy to find.
- [45:20]
Matt Ziegler
Not so easy to find. And it reminds us of the shareholder and stakeholder network as they fit together as they feed each other. Not just as two weird extraneous things.
- [45:31]
Chris Mayer
Right. Or worse adversaries in some way.
- [45:34]
Matt Ziegler
Or worse adversaries in some ways. The wealth effect is very real. And again, I think that's underappreciated. I've worked with a number of people who have climbed ranks in some of these companies and done things, become executives. And it's really interesting to think this is not the path that we would have. We were necessarily talking about 30 years ago. The person at the plant working for GM didn't necessarily have this trajectory. Talk to me for a minute about the idealism frustration, demoralization framework. Because I think a lot of, a lot of investors are sort of feeling like this in the, the cycle with where we are. Is there any tie in you would say to the average investor just in thinking about both that structure and the cycle we're in?
- [46:26]
Chris Mayer
Yeah. So you think there's, you think there's some disappointment? More disappointment now than
- [46:32]
Matt Ziegler
I think so personally.
- [46:33]
Chris Mayer
Yeah, me too. Yeah, me too.
- [46:35]
Matt Ziegler
Where do you see it?
- [46:36]
Chris Mayer
No, I, I do think so and I think it's a, it's, it's been a very strange market that way because you know, you look at the S and P index and it's chugging along just fine.
- [46:46]
Matt Ziegler
It's a positive number. It's.
- [46:47]
Podcast Host/Announcer
Right.
- [46:48]
Chris Mayer
But I, but I think mo, what we hinted at before, most stocks are down year to date and many stocks have not done nearly as well. So it's been sort of a lopsided market in a way. And I know we've talked this before about the quality so called quality bucket that has gone through this drawdown where all kinds of companies from Hermes to Cintas to whatever, they've all had these drawdowns in their multiples. And so yes, I agree with you. There's this sense of disappointment and frustration I would say for the last year. And some of that is AI induced too. Of course anyone owns soft. Any software of any kind has been smacked. But it's not just that. I mean any knowledge. Seems like a lot of knowledge based industries have been smacked. I know I have like insurance brokers, they've all come down, you know, just a lot of different things have come down. So I agree. And some of this take it back to the ifd. So idealization, frustration. Right. So ideal people have this ideal and that's maybe where. Yeah, the framing and understanding that the way stocks work is there are repeated drawdowns and long stretches of disappointment. So yeah, actually this is where I was going to mention this to you earlier. There was a paper, short paper put out by Worldly Partners and it was called Generational Investing, the discipline behind 100x outcomes. And they looked at stocks that have gone up at least 100 times since 1972. And I always like this kind of stuff when people do their own independent study. And it sort of validates everything that I wrote about writing about in my book as well. I mean they found that yeah, the average 82% of those stocks lost more than 50% of their market value. And the, and the average decline of the, the average drawdown was 65%. And yet those companies had returned 533 times on average from their starting point. The other interesting thing to note about that is it was eight years between highs. So it's a lot of waiting. And again, this was the, the very best. So the very best performers. So you can have just a good performer and it may be, you know, even worse than this. Drawdowns worse, waiting worse, but still get a very good, good outcome. So I think you have to approach it by knowing this is the way stocks behave. And you can have price diverge greatly from the underlying value of the business. And you can do this with any stock. You can look at the high and the low for every year and you're going to see huge swings. I mean, 50% moves every year. And did the business really change that much in value in any given year? Probably not. So if you go in with that expectation that this is what's going to happen, you can avoid that. You know, that's part of the idea. You idealize. You have an ideal that doesn't match up with the reality. So people have this ideal that when they buy these stocks they're just going to kind of increase every year. Okay, you can have some time years where they maybe go down, but then they go up again. They don't necessarily have this idea that I'm going to get cut in half at least once and it might have to wait eight years before I get to my new high. That reframed things a little bit. If you knew that going in that was your expectation, you wouldn't worry about it so much. You know, I think that's where this long term mindset is very difficult to cultivate because everything in our culture pushes you the other way. You know, it's, they're measuring you every quarter. There's not much tolerance for that. And there's something else. There was a, I think his name was Wes Gray and he wrote a piece, I think Michael Mobison might have wrote about this though. It's called the, I think it was even God would be fired, something like that. And the idea was he looked back at stocks from 27 to 2016 and he looked at like rolling five year periods and he created the so called God portfolio, like the absolute best portfolio you could create. You know, if you could create a portfolio right now and knew this was these stocks are going to create the best return over the next five years, what happened to those? How did those portfolios behave? And of course what he, what he found was that even in that case, you know, These, these portfolios were suffering 35% drawdowns. Plus, you know, there are many times this happened. So yeah, so he was saying, you know, even God would be fired because investors would be like, that sucks. I'm not putting it with that.
- [51:27]
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- [52:28]
Matt Ziegler
Terrible CEO Terrible Governance. You're God, God, God Fund Terrible governance. No accountability whatsoever for investors now. And I'm curious, do you think I hate broad brush stroking? This in the sense of saying it's been a shift in markets, but it does feel like the COVID thing has been made. Like things have been weird since the pandemic with both new entrants and investors. Things have also been weird since probably right after the global financial crisis, like right after the GFC and zirp. That made things weird too. Do you look back on any period and say this is what got us to here or is that a pointless exercise?
- [53:10]
Chris Mayer
No, I mean, I do think it's weird. And you know, I'm sure, you know, people in the 60s thought their market was weird after Vietnam or what, you know, whatever. There were always people or after, you know, the Korean War or whatever it was. And you know that people. So things do change. And I think those points you mentioned are a couple of the big ones I think of. Yeah, the GFC certainly scarred everybody who lived through it and changed the way they invest and think about things. Covid just been weird ever since. And I think this AI market has also been very strange, you know, the way certain stocks have behaved. So it does feel weird. I think there's also this for our market. Now we're in. There's a lot of trading that is not necessarily driven by a human being making a decision, but it's following an algorithm or a rule. A lot of passive money. And I don't know if this is right, but I saw it in a CIBC note where they said like I think it was 2003, 80% of the trading volume in the market was done by human beings that were not following rules or algorithms. And now it's like, you know, 7%. I don't know how you figure out that 7% number of. That's just something people keep repeating and, you know, suddenly become true.
- [54:32]
Matt Ziegler
But now it's gospel.
- [54:33]
Chris Mayer
It feels like it's directionally right. Like it feels. Feels like there's a lot of volume that just washes in and out of stocks that doesn't really have. Not spending a lot of time or thought about the individual companies involved. And you just see huge amounts of money just sloshing in and out of sectors and they'll just all go down together. All go up together. Even though the companies themselves are. There's quite a bit of differences between the two of them. Nuance. And even though nothing in particular has happened, it's just a change of. Of sentiment. So that kind of stuff seems. Makes it feel like this market is strange.
- [55:10]
Podcast Host/Announcer
And
- [55:12]
Chris Mayer
so I agree with you. I mean, I guess some of this is an empirical question. We could probably look and see whether volatility is more or you know, in some way or. But it just feels that way. It does feel like something strange, weird, different.
- [55:26]
Matt Ziegler
Well, I think and to me it goes back to the way we talk about things. I had a moment in the SpaceX piece where I was thinking about post GFC. I was thinking about ZIRP. I was thinking about talking to pensions, endowments, investment committees for those types of vehicles and especially any of them that had a hurdle or a distribution rate and going we can't get that from bonds anymore. What do we do? And that was the advent of a lot of new entrants and like private, semi liquid private vehicles in real estate and then credit and then even some venture and other things at the margin. Well, if we're getting this return here, we can take this other risk there too. Yeah, and then you couldn't really chase crypto or meme stocks or whatever. You know, there was a lot of gamestop option betting going on by those institutions or at least not the ones that I talked to when that was happening. But now in this Like AI run up. It's a, it's a new class of comfortable awareness because hey, look, these are, these are big companies. These aren't little piddly things. These don't feel like the venture risk we didn't want to take all those years ago. But it's been this gradual training of the institutions of the boards to say we might be okay with this risk because size somehow confers safety. I, I don't know, I didn't invest through the 90s to see it that way. Is that new?
- [56:51]
Chris Mayer
I do think that's something to that because like companies in the 90s were generally, they were not as far along when they went public. Well, I mean, think about it. We're going to have, if all goes according to plan, I think OpenAI and Anthropic will both go public later this year. So that will mean that within the span of 12 months we'll have seen three companies go public, all with valuations of at least a trillion dollars, which is mind boggling to me.
- [57:19]
Matt Ziegler
I mean, unicorns used to be fun. Do they have a name for these? Do we have another fictitious animal?
- [57:24]
Chris Mayer
I have to coin a new phrase.
- [57:26]
Matt Ziegler
Yeah, but hopefully not Demogorgons.
- [57:29]
Chris Mayer
Yeah, yeah. And companies in general. Just how much, how many trillion market cap companies are there now? I mean it was unimaginable like 10 years ago. I remember thinking, ah, you know, Apple is like 500 billion. I really think it could be a trillion dollars.
- [57:43]
Matt Ziegler
Right. It seems, it seems silly. It seems silly. Look at all that cash on the balance sheet. How are they going to grow to that? But here we are. And then what if it is even sustainable and that's not some bearish weird doomsday thing? But that's the, the same question then what would make, how do we have a bunch of these multi trillion dollar behemoths going around unless the TAM all of a sudden got bigger and includes infinite space, time and Mars colonies.
- [58:11]
Chris Mayer
Yeah, exactly. I mean, you know, I keep, you know, Alan GreenSpan died earlier 100 years and he coined that phrase or at least popularized it, irrational exuberance.
- [58:18]
Matt Ziegler
Yeah.
- [58:19]
Chris Mayer
So yeah, I have been thinking about that phrase of late because of that. And he, you know, he asked that question in, in 1996 and was the full quote. He had it as? Oh yeah, he said in 1996, how do we know when irrational exuberance has unduly escalated acid values which then become subject to unexpected and prolonged contractions? So yeah, I mean that's a, that's kind of the question on everyone's mind with this now, what do you think
- [58:56]
Matt Ziegler
rational exuberance would look like?
- [58:59]
Chris Mayer
Wow, that's a good question. Yeah, I think most investors have some measure of rational exuberance with everything they own. You know, there's a. I obviously don't know what Companies will earn 10 years out or, you know, but I make assumptions about companies rate of, you know, return and their investment rate. And so. And I try to build that based on either the company's own track record or what I know about, you know, the unit economics and as they scale, what should happen. So that's kind of rational is. I don't want to say it's totally built on numbers because you can completely have irrational, you know, built on numbers as well. And people hide in numbers maybe more than they should, but it has to. I don't know what rational exuberance means. That it makes some sort of sense and that it's grounded on something that's logical and you can think through and it's possible and. But yeah, I mean, it's a great question. Obviously I don't have a good answer to that, but put you on the spot. It's an interesting question.
- [60:07]
Matt Ziegler
All right, we're going to invert that.
- [60:09]
Chris Mayer
That's a rational exuberance. What's rational exuberance look like?
- [60:12]
Matt Ziegler
Bogomil and Robert, we're coming for them with that question. Next time we're gonna hide it in our pockets. Hopefully they don't listen to this episode and we can.
- [60:18]
Chris Mayer
Yeah, I'll give it some thought.
- [60:19]
Matt Ziegler
Too foisted upon them. I do think though, there is a part of a. It's part of the optimism bias that we all have as equity investors where we think, yep, these companies will figure out a way to turn the lights on. Do these things reward us over the long run with making good decisions and good decisions and good business lead to growth and we have the optimism that they're going to figure that out.
- [60:43]
Podcast Host/Announcer
That's.
- [60:43]
Chris Mayer
I think that's a pretty good encapsulation of what I think rational exuberance would look like. That's why I say like every investor is probably rationally exuberant about whatever they own because. Exactly the reasons you say we have this belief. But when does it cross over and become irrational? Exactly.
- [60:58]
Matt Ziegler
Yeah. Interesting. Interesting all around. So the book's out any day now?
- [61:02]
Chris Mayer
Any day.
- [61:03]
Matt Ziegler
Any day now. Available where all fine books are sold.
- [61:06]
Chris Mayer
I imagine that favorite phrase.
- [61:08]
Advertisement Voice
Yes.
- [61:09]
Matt Ziegler
All right, all right. And we're celebrating something when it comes out, so.
- [61:13]
Chris Mayer
All right.
- [61:14]
Matt Ziegler
Worship people. Worship people. Look this up. They want to track the book. They want to get in touch with you.
- [61:18]
Chris Mayer
Yeah, it's being published by Partners Media, so they have a website. You go to Amazon, it'll be definitely listed there, of course. So yeah, those are two spots to keep an eye on. And I'll put something out on Twitter when it comes out as well. Or X please.
- [61:34]
Matt Ziegler
I mean get the name right. Now that we've got a new parent company holding on to all the prized assets. Yeah, well, fantastic. Chris, thanks so much for doing this with me today.
- [61:43]
Chris Mayer
Yeah Matt, it's always fun chatting with you. Good questions and yeah, hopefully people found
- [61:47]
Matt Ziegler
interesting the most rationally exuberant channel on the Internet. Excess Returns Like Comment, subscribe all the things below and we are out.
- [61:55]
Podcast Host/Announcer
Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess returns network@excessreturnspod.com. if you have any feedback or questions, you can contact us@excess returnspodmail.com no information
- [62:14]
Matt Ziegler
on this podcast should be construed as investment advice.
- [62:18]
Chris Mayer
Securities discussed in the podcast may be holdings of the firms of the hosts.
- [62:22]
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