Podcast Summary: The Compound and Friends - "How Not to Invest With Barry Ritholtz, Dip Buyers Winning, Coreweave"

Release Date: March 25, 2025
Host: The Compound (Downtown Josh Brown, Michael Batnick, and rotating guests)
Guest: Barry Ritholtz

Introduction and Episode Overview

In this episode of The Compound and Friends, hosts Downtown Josh Brown and Michael Batnick engage in an in-depth discussion with investment guru Barry Ritholtz. The episode, titled "How Not to Invest With Barry Ritholtz, Dip Buyers Winning, Coreweave," delves into Ritholtz’s new book, "How Not to Invest," explores recent IPOs, examines current market trends, and analyzes the state of the stock market.

Conversation with Barry Ritholtz: "How Not to Invest"

Introduction to Barry Ritholtz and His New Book

Downtown Josh Brown introduces Barry Ritholtz as his business partner, friend, and mentor. Ritholtz's new book, "How Not to Invest," serves as a guide to identifying and avoiding common investment pitfalls.

Key Themes:

1. Avoiding Investment Mistakes:

   • Ritholtz emphasizes the importance of recognizing what not to do in investing.
   • He states, "The bad ideas, the mistakes, the things not to do naturally organize themselves" (07:29).

2. Behavioral Finance:

   • The discussion highlights how emotional reactions can sabotage investment strategies.
   • Ritholtz references Bill Bernstein, a neurologist and investor, stating, "If you don't learn to control your limbic system, you will die poor" (14:33).

3. Influence of Charlie Munger and Charlie Ellis:

   • The book is dedicated to Charlie Ellis and Charlie Munger, whose philosophies on avoiding unforced errors in investing significantly influenced Ritholtz.

Notable Quotes:

• Ritholtz: "We're just less stupid. Your goal is to just be less stupid." (12:23)
• Josh Brown: "Make less boneheaded mistakes and just stay out of your own way. And your portfolio will... take care of itself through the miracle of compounding over the decades." (12:23)

IPO Discussions: Etoro and CoreWeave

CoreWeave IPO Analysis

The hosts offer a critical analysis of CoreWeave’s upcoming IPO, highlighting several red flags:

1. Financial Concerns:

   • Revenue and Losses: CoreWeave reported $1.9 billion in revenue with a $900 million loss last year.
   • Debt: The company holds $10.6 billion in debt, which costs them approximately $944 million annually to service.
   • Customer Concentration: 77% of revenue comes from the top two customers, with Microsoft alone accounting for 62%.

2. Founders' Stock Sales:

   • CoreWeave’s three co-founders have sold off nearly $488 million worth of shares, reducing their ownership to less than 3% of Class A shares while maintaining control through Class B shares with 10 votes per share.

3. IPO Timing and Market Reaction:

   • Recent withdrawals and delivery issues with Microsoft contracts raise concerns just before the IPO.
   • CoreWeave is heavily indebted, raising questions about their long-term viability and reliance on continuous debt financing from private equity firms.

Notable Quotes:

• Josh Brown: "What you need to know is stuff like these are things that people should know." (50:35)
• Michael Batnick: "I'm negative, period, to be honest. Not at any price." (54:30)

Etoro IPO Analysis

The discussion shifts to Etoro, an Israeli-based cryptocurrency trading platform:

1. Financial Performance:

   • Reported $12.6 billion in revenue, with 96% derived from crypto assets.
   • Attempted a SPAC merger in 2021 at a $10.4 billion valuation, which fell through, leading to a much lower valuation at IPO.

2. Market Position:

   • Compared to Robinhood and Coinbase, Etoro faces challenges in sustaining growth outside of crypto trends.

Notable Insights:

• Both IPOs are seen as tests of investor appetite for AI and cryptocurrency-themed companies, with significant risks highlighted in their financial structures and market dependencies.

State of the Stock Market

Market Corrections and Dip Buying

Ritholtz shares insights from Warren Pies of 314 Research regarding market corrections:

1. Historical Corrections:

   • 76% of all market corrections play out within a 60-day window once a 10% drop is hit.
   • Moves from 10% to 15% tend to be more prolonged.

2. Current Market Sentiment:

   • The S&P 500 has recently entered correction territory, down 10%.
   • Dip buying remains robust, with nearly $70 billion pumped into US stocks this year.

Notable Quotes:

• Warren Pies: "Most non farm payroll reports are meaningless. It's only when you have a radical departure from the prior trend that matters." (25:13)
• Josh Brown: "Dip buying has been an essentially foolproof strategy for four of the past five years." (68:34)

Consumer Sentiment and Multi-Speed Economy

The hosts discuss how differing sentiment among CEOs reflects a multi-speed or K-shaped economy:

1. Diverging Perspectives:

   • CEOs like Ali from Bargain Outlet and leaders from Darden Restaurants report varying impacts of economic conditions on their businesses.
   • The conversation underscores the complexity and fragmentation of the current economic landscape.

2. Investment Implications:

   • The disparity between consumer sentiment and specific sector performance suggests that broad market movements may not uniformly affect all industries.

Notable Quotes:

• Josh Brown: "Imagine a wealthy family where their wealth is derived from commercial office space... not fun for them." (87:20)
• Michael Batnick: "We're talking to 100 different CEOs and they're all talking like not past each other." (87:12)

Cybersecurity Stocks Performance

Top Cybersecurity Firms:

The episode highlights the resilience and performance of leading cybersecurity stocks:

1. Performance Metrics:

   • Companies like Palo Alto Networks, CrowdStrike, and Fortinet have shown strong year-to-date returns compared to other tech sectors.
   • The Cybersecurity ETF (CIBR) also outperforms broader software sector ETFs like XLK.

2. Market Position and Growth:

   • CrowdStrike received an upgrade from BTIG, citing its leadership in the SIEM market and robust growth prospects.
   • High P/E ratios reflect strong growth expectations within the sector.

Notable Quotes:

• Michael Batnick: "These stocks just in a sea of red tech, they really stand out." (81:07)
• Josh Brown: "These companies are acting defensive because they kind of are." (80:50)

Robinhood Investigation

Prediction Markets Hub

The hosts discuss Robinhood’s new prediction markets hub and the subsequent investigation by Massachusetts regulators:

1. Regulatory Concerns:

   • Massachusetts Secretary of State Bill Galvin is scrutinizing Robinhood for linking gambling events to brokerage accounts, particularly targeting younger users.

2. Industry Implications:

   • This move signals potential regulatory pushback against brokerages offering gambling-like features, despite their popularity among Gen Z investors.

Notable Quotes:

• Josh Brown: "These are people that cannot be helped." (93:47)
• Michael Batnick: "They're not going to lose this case, are they?" (92:52)

Leveraged ETFs: Risks and Performance

Performance Analysis:

Discussing the perilous nature of leveraged ETFs, the hosts present performance data illustrating significant losses:

1. Case Studies:

   • NVDO (2x Long Nvidia ETF): Down 30% since January.
   • MicroStrategy 2x Long ETF: Negative 83% year-to-date.
   • Tesla 2x Long ETF: Down 60%, while the underlying stock surged 160%.

2. Investor Behavior:

   • Many investors are unaware or underestimate the risks of leveraged ETFs, often resulting in substantial losses when trends reverse.

Notable Quotes:

• Josh Brown: "Nobody wants to buy all time highs for every time I buy stock." (75:50)
• Michael Batnick: "These are great business for the issuers. They're a terrible investment for people that think they're gonna get their money back." (98:47)

Make the Case: Kinsale Insurance Company

Kinsale Insurance as a Long-Term Investment

Josh Brown provides an update on Kinsale Insurance (KNSL), a small-cap insurance firm:

1. Business Model:

   • Kinsale offers custom insurance plans for niche markets, leveraging AI for better risk underwriting.
   • The company maintains a strong position in its specialized segment of the property and casualty insurance market.

2. Performance and Strategy:

   • Despite market volatility, Kinsale has shown resilience and is positioned for long-term growth.
   • Brown remains bullish, intending to hold the stock as a unique investment opportunity.

Notable Quotes:

• Josh Brown: "These insurance stocks have been a beacon in the storm." (103:19)
• Michael Batnick: "I would be very happy if we got that tempest correction and then went sideways." (64:08)

Conclusion and Sponsorships

Sponsorship Highlights:

• Betterment Advisor Solutions: Offers tools for financial advisors to grow their practices efficiently.
• Rocket Money: A personal finance app that helps manage subscriptions, monitor spending, and save money.

Closing Remarks:

Josh Brown and Michael Batnick wrap up the episode by encouraging listeners to explore their financial planning services and upcoming shows, including Animal Spirits with Michael and Ben and Ask the Compound.

Key Takeaways

• Behavioral Finance: Understanding and controlling emotional responses is crucial for successful investing.
• IPO Caution: Scrutiny of new IPOs like CoreWeave and Etoro highlights the importance of analyzing financial health and founder actions before investing.
• Market Sentiment: Current dip buying trends and consumer sentiment play significant roles in market corrections and recoveries.
• Sector Resilience: Cybersecurity stocks remain strong, serving as a defensive play amidst broader market volatility.
• Regulatory Oversight: Innovations like Robinhood’s prediction markets face increasing regulatory challenges.
• Investment Risks: Leveraged ETFs, while attractive for short-term gains, pose substantial risks for long-term investors.

Notable Quotes with Timestamps:

• Barry Ritholtz (12:23): "We're just less stupid. Your goal is to just be less stupid."
• Josh Brown (07:29): "Don't do this, don't do that."
• Ritholtz (14:33): "If you don't learn to control your limbic system, you will die poor."
• Michael Batnick (54:30): "I'm negative, period, to be honest. Not at any price."

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