← The Synopsis
The Synopsis
Dialogue. Private Credit Unraveling, Taxes & Investing, Key Insights from Investor Interviews
00:52:06
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- [00:00]
Drew
Foreign.
- [00:06]
Alex
Welcome to the Synopsis, a business and investing podcast. Today we have another installment in our dialogue series. And I know, you know, Drew's been trying to replace me again with a series of interviews, but back by popular demand, the people get what the people want, and. And they want me, Drew. That's all I'm gonna say. And I. I think a lot of
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Drew
people don't know who you are. You want to throw an introduction in there?
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Alex
No, no, no, no. I remain anonymous. I'm the anonymous host. Some people call me Alex. But I think the main thing is, is I'm back. And I know you try to replace me with, oh, the CEO of Shift4 and some legendary investors or whatever, but they don't have the perspective I have. And let's just be real.
- [00:44]
Drew
The perspective of Alex, who is anonymous.
- [00:48]
Alex
Exactly. And, you know, I want to stop talking about me for a moment, and we really need to launch into some serious accusations that are being thrown at speed. Well, you position yourself as the anti sell side researcher, the individual who's not asking, you know, the dumb questions, not being bogged down by, you know, the Wall street mantra. And here I am listening to the Shift 4 interview, and you said, quote, unquote, can we double click on that? And after you said, can we double click on that? I threw my phone out the window. So I will be invoicing you for the destruction of my phone. And also, the listeners of this podcast deserve an explanation for the horrible corporate jargon, sell side research terminology. That is the cringe we try to avoid. So what do you have to say for yourself after that scathing review?
- [01:41]
Drew
Can we circle back on this?
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Alex
Can we circle back on this? Let me double click on this. No, it's okay, Drew. You know, listen, you showed your true colors there, you know, when you had the CEO on. You just. You really.
- [01:55]
Drew
You know what? Next time you're interviewing CEO, we'll see where your priorities are.
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Alex
No, I kid. We. We'll let. We'll let that one slide. Just don't let it happen again. And, you know, we. We won't. We won't shed that much light on it.
- [02:09]
Drew
You'll totally throw me off on an interview because I'm going to be, like, just flowing, and I'm going to say it by accident or about to say it. It's just going to stop me in my tracks, and that's just going to be the end of the interview.
- [02:19]
Alex
The end of the interview. They'll be like, we broke him. I don't know what happened. He's broken. Um, but why don't we do a little bit. You know, I wanted to touch about one reflection of. Of those three weeks of interviews. I think some pretty interesting stuff. And then I also want to touch a little bit about private credit. We've been hitting kind of the company episode updates you've been doing on the YouTube quite a bit. And honestly, I'm sick of talking about software and AI. I can't do it anymore, Drew. I'm over it. I. I need. I need a little break. No, no, we did like three times. I need a month break before we talk, before I hear the word vibe coding and you know, I can't do it. So why don't we talk a little bit about starting with shift four. So you have the CEO and the CFO on. I mean, first high level takes what, I don't know. What were your thoughts? I mean, any, I guess, question.
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Drew
What are my thoughts?
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Alex
I don't know. I mean, I'll get you. I'll get more specific. And it was kind of a technical interview, so hopefully you listen to the company episode about shift for. I know a little bit something about it. I mean, I guess. Did you find out any incremental information? I mean, you were really trying to get some of the unit economics. How are these acquisitions being thought about? How was Global Blue being integrated? And you know, they were trying to. I don't know. For me, I felt candidly and I, you know, have a lot of respect for management there, but it did seem like very much sticking to their talking points. And I'm more of a Gary Friedman fan, you know, which is he's off the cuff. He's going to say what he feels like. Having said that, that hasn't really trans related into any success for the company or the stock price.
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Drew
But a lot more entertaining, though.
- [03:48]
Alex
It's a lot more entertaining. So I'm not going to judge people based on, you know, how off the cuff they're going to be, but I don't know. I mean, there's a lot of questions in there. Why don't we start with what was your overall take from management? Was it nice meeting with them? I mean, what were your thoughts?
- [04:01]
Drew
Yes. I mean, the interview was nice and all that. It provided, I don't know, maybe a little kind of incremental insight. I think the problem is when you have a business that ultimately still has to prove itself in some respect, it's not like what you say really matters that much, but if you say the right things, you could definitely build investor Confidence more. And just in my opinion, they weren't quite saying the right things. And again, it doesn't mean that they can't do the right things. It's just, it's a framing thing. There was like one question I had that I kind of tried to set them up a little bit for this where I was like, you know, if I were to give you $5 billion or whatever the market cap is of the business, would you be able to recreate the same thing? And I really wanted him to on that point, kind of harp on the fact that a lot of the assets they acquired were acquired at lower valuations. You would not be able to recreate the sort of payment system that they have, the customers that they have, their embedded POS systems and hotels, restaurants, all that with whatever the enterprise value of the business is right now. You wouldn't be able to recreate it. So there's some sort of ode to the idea that the amount of capital you would need in order to recreate the business would be more than as it's currently valued at, which does suggest some degree of moats and all that. Again, that on its own doesn't mean it's a good investment or anything like that. But that was kind of what I was hoping it would do. Kind of talk about that really what's hard to replace what you can't buy in this because they did a lot of acquisitions that were like these one time acquisitions of gateways. Once you convert them, you can't do anything like that ever again. And once there's an entrenched player in a certain business, because it is really hard to displace, you know, your payment system, to displace your pos, all of that, your payment processor and provider, if it's all integrated, then that is just a lot harder to replace them because it is very hard to replace all those aspects. It does, you know, suggest, you know, a moat that maybe there's something there worth paying up in for all that. And to be honest, Shift four is a little bit complicated of a business for me to really fully analyze, even though I spent so long looking at it. Just because I know the assets they own are good quality assets, I know that it's mission critical, I know it's hard to switch out a payment provider. I know all of these things. But ultimately, and this was kind of the couple of the questionings I had towards them on the roic and I had this in my report too, and I'm not sure, but I think that's one of the reasons why they actually put out something in the last investor relations quarterly update where they actually showed a return on invested capital calculation because I was not able to get good numbers for that. And ultimately the return you're going to get as an investor is going to be the return the business gets on their investment, at least over the long term. And all of these acquisitions and stuff, they would kind of show these different shorthand valuation methods to kind of say, oh, you know, it was accretive or oh, we had a payback period of this. They had this one figure where they talked about cumulative cash that they've been able to collect versus like the total cash outlay. That to me it doesn't really mean anything. I need to know the actual ROIC calculation for a single year because if you're adding up five years of cash flow, yeah, of course that number is going to be higher than, than a single year. It doesn't really tell you the same thing. And so all of that was like what I really wanted to get clarity around. I didn't quite get that. I did get clarity around. When I asked them whether or not they stood by their billion dollar free cash flow targets, it sounds like the answer to that was basically no. And the CFO now is a newer cfo and so he wasn't one that kind of laid those out. So it sounds like they're backing off from those targets and that's only a quarter or two after they set them out. And so it's just another kind of thing where if you're looking at management's ability to kind of think about what this business could look like in the future, and you said a billion dollars, even though it was an aspirational target, but then years later you're kind of rolling back on it. Maybe you could have like haircut it, maybe you could have put out a different target, a different time frame or something, but kind of just removing that altogether. I know that that makes some investors lose confidence and it's probably the main reason why the stock was down so much.
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Alex
I also think that, you know, a good investor base, and again, I do understand the sentiment of, you have Wall street and their estimates and they got to be very cognizant of that. But I do feel like if you're trying to have a solid investor base, I don't think it's the end of the world to say, look, you know, the dynamics change, the business has changed. We don't really have as much, you know, foresight into that billion dollars of cash from the time period that we want. So we want to reevaluate it because at the end of the day it's not like the reality is going to hit. We're going to, investors are going to see that you're not hitting that either way. So you're either going to hit the. And it's already kind of inferred you're not hitting that right based on the answer. So I don't really understand what the dance, you know. And again, sometimes I think management teams get so caught up in the investor relations and Mark Leonard will talk about the litigious nature of the US stock market and how shareholders, holders, I mean, you say the wrong thing, you're going to get class action lawsuit. And again, that creates kind of an environment where I do have sympathy for management and that they probably would like to be more transparent but are just terrified of saying anything because they don't want to get sued. So. But again, you know, so I get that's probably where they are, but I think, you know, reevaluating a target is not the end of the world. And it seems like that's been priced in to a degree that they're not hitting that.
- [09:13]
Drew
Yeah. And I, I think that's why we like, you know, figures like Gary Friedman, you know, even though they've been wrong about a lot of things, at least like they're honest. Like, I do honestly believe that Gary is saying things that he believes they can do and if they miss him, he'll say the reason why he thinks they missed him. It doesn't mean he's always accurate or right. It doesn't mean his predictions can't be a little fanciful sometimes doesn't mean any of that. But I do believe he's genuinely telling people what he actually believes. And I much prefer that in, you know, a company I own and a business partner too. I don't want them to dance around, you know, anything. I just want them to tell me how it is. And I think the thing with shift four, again, it's like kind of going back to this thing where I know a lot of their businesses are high quality businesses. I just don't know what, how it really works together when you aggregate them all together. And then you do have a couple question marks around these newer acquisitions like Global Blue. I'm not so sure how that cross sell is going to work. I do think we got a little bit more clarity around that on this last call, but there was kind of like a couple times where the CEO Taylor Laver would Kind of talk about the things they were going to do. And I remember he said this phrase. He said, it's a very disruptive offering for Europe, this, you know, global blue thing. And I'm like, what does that really mean? And then I. I can't remember if this was on the interview or before we talked about this afterwards, but then he said, what that basically means is that it's going to be a lot cheaper for us. The total cost of ownership is lower. I do think this was in the interview, actually. And that, to me, is such a better way to frame this, to say, you know, the total cost of ownership is lower if we have these two items together and go to market with it than some of, like, corporate jargon that a lot of people, you know, kind of prefer saying something is disruptive.
- [10:54]
Alex
Yeah. To echo that. And again, I think that Shift four, good company. We're grateful that. I think management came on. But, you know, like I said, I think some. Some CEOs have different ways of communicating, and management has different ways of communicating, and you got to be able to kind of see through each types, you know, and again, it's not always that, you know, talking like Gary Friedman is better. It doesn't always yield better results. So it's not.
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Drew
No, it doesn't. You know, and on the other side of it is that just because you're really good at communicating doesn't mean you're a good operator. These two skills do not necessarily go together. And so that's ultimately why, you know, you kind of just got to look at the results and all that. But it does help if someone is able to very clearly articulate why they have, you know, a value prop. And, you know, to be fair, though, that I gave them some hard questions, too, where I was basically like, why is Toast more expensive than you? Doesn't that suggest that they're better than you? Right. And so, you know, there is some aspect of that, too, where some of these questions were just a little bit kind of hard to answer because there are some aspects of the business that are a little substitutable with competitors.
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Alex
Yeah. So, you know, again, I think overall, interesting interview. We've done a lot of work on. On Shift four, so I kind of want to, you know, a little shift gears here. Not much. I think that I.
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Drew
Was that a pun?
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Alex
Had to say. Oh, telling me.
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Drew
I can't. I can't say double click. But you could do puns.
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Alex
I mean, puns are way, way more innovative and take a lot more.
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Drew
You're leading A defensive puns. I don't know.
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Alex
I'll lead a defensive puns. Yeah, listen, double clicks, indefensible puns are very.
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Drew
I think I just backed you into a corner that you will never be able to get out.
- [12:29]
Alex
I don't see any, I don't see any people making puns on the fly like that. I mean, that's impressive. So I'll hype myself up. It's fine. I don't need Drew's confirmation there. Puns are cool. But let's get into the interview with Bill Nygren, who again, very cool interview. I don't want to get into kind of what I think a lot of these interviews with these quality investors, a lot of them say the same things, to be honest, which is we're looking for quality companies and high ROIC and reasonable valuations. And it's just kind of like I always equate this to how do you win a basketball game, score more points than the other team. Right. But there are some unique insights I think you can gleam a little bit from each individual. So I guess I want to start there. Did Bill Nygren say anything to you that. And again, I'm not dismissing him. It's always interesting to hear those facts, you know, reiterated. And obviously people are more successful than at others. You know, why is LeBron James better at scoring baskets than the other guy who knows exactly how? The same way. Well, the ball needs to go into the hoop, but some people are just better than at others. Can LeBron James really articulate that well? Why, you know, he's a much better player than someone of similar builder size to the guy to the right of him. It's natural talent, it's work, it's a lot of. It's pattern recognition. There's a lot of things that go into it. So. But did anything from Bill Nygren come as a surprise to you or something unique that he said that kind of stuck with you?
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Drew
I think there is a lot of unique insights, actually. And maybe that's also because the person asking questions was pretty good, I thought. But fair enough. No, what I will say, one of the really kind of big highlights I think we're taking away is when you are comparing these different long term quality investors, that kind of group of investors, he set himself apart by saying, like, no, I actually put a seven year time frame on a lot of these stocks. And so I'll look out, you know, three to four years and then after that another three to four years, but that's it. And it's at that point I want basically to know that whatever return I'm looking at, I'm able to pencil it in. He also kind of differentiated himself by saying, I do constantly value the stocks and if on the assumptions I'm comfortable with I can't get a good return, then I'm not going to keep holding the stocks. I'm not going to do the thing where it's like, you know, high quality investors just continue to hold a stock at a high multiple, hoping that a great company continues to do unexpected things and can compound earnings through that high multiple and eventually be worth it. You know, I think it was Howard Marks in one of his. When was it? 2021? I believe it was at the beginning of the year. He had a memo called, I think it was called of something of value. And in it he has this debate back and forth with his son about like, do you sell a great company? Oh, well, you know, a great company can continue to do great things for a long period of time and compound earnings. And even though, you know, the Nifty50 had a lot of overvalued stocks, if you bought Coca Cola at whatever it was, a 70 times multiple back then, then you still would have had a 16% return. So you can pay almost any price for a very expensive company. And I think Bill Nygren to that would say that's very much the exception. And it's my job to value these companies and if I cannot get a good return on assumptions I'm comfortable making in terms of revenue growth or something like that. The example we gave was Apple, where he held Apple when it was trading under basically a market multiple. And then as soon as it moved up beyond a market multiple, he sold it. And he could say, sure, did I leave some money on the table as a result of that, it did go up from a 20 ish times multiple to 30 ish times multiple during that period. So yes, I lost something in terms of a return there, but I also held it for, you know, over a decade and got a great return as Apple, you know, continued to compound earnings and be fairly valued. And so he is kind of very much of the opinion that an investor, if they're actually investing, is not holding these stocks with some sort of prayer that they are able to compound earnings through a very high multiple period. And so I know prayer was a strong word, but that's me trying to encapsulate his ethos a little bit.
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Alex
You know, I think it's pretty funny that you're heaping praise upon him for making Those types of sell decisions. Because if I recall, it wasn't so long ago you were making fun of a certain Oswald video where he was buying and selling Amazon every time it crossed his valuation threshold. And you go, ha ha, how silly of a decision making process is that? Or if you just held Amazon, wouldn't that be a good idea? So, you know, I think it looks good and bad in certain circumstances. Those decisions.
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Drew
I don't. Okay, so I don't remember exactly what video it. Aswath also is an interesting scenario. First, I want to say I really like Aswath. I think he's really smart and I've learned a lot from him. But he also says he's not trying to beat the market. He says that he is trying to have like a diversified portfolio of stocks and he doesn't want to like own the S&P 500 at current valuations. And so different investors have different sort of prerogatives and all that. But you are right if I do remember and I could be mischaracterizing honestly what he said, but, but either way, it still gets at the point as to whether or not you should be that sensitive to valuation where you are doing a constant DCF and you're looking at a discount rate and if the discount rate jumps to 11% and you know you wanted to get 12, then you, you go ahead and sell all your stock. I forget exactly the exact facts with this Aswath thing or whether or not it was really him. But again, it doesn't matter. The point is how sensitive you should really be on valuation. And so, so I think it's both, honestly. I think that you can't own a stock at a very high multiple where there's no possible way you can see it actually working and you getting a return from here. But then at the same time there might be some stocks, not unlimited, but a few stocks run by a few entrepreneurs where you really trust them to come out with something new. I know that's probably the case with a lot of Tesla investors where they are just trusting Elon Musk. And it's not just about, you know, the, the Model 3 franchise. It's really about, you know, if he figures out robots and he figures out AI and all of these other sort of abilities to create new technologies and revenue streams that don't exist today. I do think though, if you want to be a conservative investor and not put yourself up to potentially lose money, you just don't do that. You don't assume that those things can come to Fruition because the more often than not you're going to be wrong basically. And so I think you can't be that ultra sensitive on valuation. You should be willing to look out a little bit. And I talked about this too actually on the, on the interview with Bill Nygren, I called them air pockets where there's these moments where it's like a great company trades at high valuation, looks pretty expensive, and then all of a sudden you fast forward a couple quarters and they put up much higher numbers than you expected. And now you know, the valuation is more than reasonable, maybe even cheap. And so had you sold it, you, you kind of messed up because you, you missed that. And so I, I think if a company has this like air pocket, you could give them a little bit of a leash, not be ultra sensitive. So it's like the day it goes up on high valuation, you're out of it. But I do think if something's getting higher and higher and up there in valuation, my personal opinion, it makes sense to probably trim some of that if you can't see any way it could possibly make a return on that. There's no correct answer to this. And it's interesting to contrast this to Chris Meyer who says, I'm trying to make as few decisions as possible and the more decisions I make, the more room for error. So I don't know, I probably come out somewhere in the middle of that. The answer I kind of really would want to give though is I think the best kind of investing comes when you are looking at the most amount of opportunities and so your opportunity cost is the highest. And so it's a lot easier for you to be like, do I own Apple at 30 times? Or this other investment I like that's growing 10% at 20 times. That's a much easier kind of decision, I think, for someone to make than to just make the decision in absolute. Do I sell Apple at 30 times? What is this going to look like in the future?
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Alex
You know, I think my favorite answer to that question, and you bring up Chris Meyer, which is actually, I think where I land and it's not necessarily the decision. I understand his, you know, decision making framework, which is you're kind of playing with things more. You're more likely you did all this work on a company. How many great companies are there, great companies provided the ups And I get that logic. I think the most compelling argument is taxes, which again I can see how Bill Nygren, running a fund he's looked at not really on an after tax basis, maybe A lot of his investors own into retirement accounts and he doesn't care. But for the vast majority of people who are, you know, building wealth or whatever that is of that nature, they're going to have taxable implications. And so I always found it interesting where you would see a hedge fund, you know, whatever they put up, oh, I put up 11% this year. You look at the K1 they issue, it's all short term capital gains. You're in California, you're a high net worth individual. Now all of a sudden, you know, 11% treasury turns into five and a half year. What did I just accomplish there? So I mean taxes are a big implication and I think Chris Meyer framed it correctly, which is, you have to look at it. Not only is my next best idea better, but is it better after I take this big tax hit, which I thought was the most compelling argument in how I think about it. Really?
- [21:44]
Drew
Yeah. Well, so I had this video out where I was talking about how to think about taxes and investing. I actually used Apple as an example because what basically happens when you have a big gain on a stock is you have this deferred, basically future tax liability. You're going to eventually have to sell it when you sell the stock. But for now it's kind of like an interest free loan where the government is giving you money basically for free so long as it continues to stay invested in Apple stock. And in this example, and so you could do that math of what does having, you know, 40% more capital employed in this position mean? Oh, it means instead of a 10% return, I could get a 7% return because that extra tax deferred portion kind of acts as leverage. That gets me to a 10% so I'm willing to accept a lower return. Or you could just look at it on a multiple basis too and kind of say, okay, it's instead of really owning it at 30 times, it's kind of like owning it at 24 times or something like that. Because I do have this large deferred tax portion. So that is certainly an aspect of it that you should take into account. It depends though, because you could own it in a tax deferred account. And so then how does that change your calculus? But what you are basically saying if you think about it is you want there to be a friction to selling so you don't have to actually make a decision on this. And you are also inadvertently saying, I want the valuation of the stock market to be lower because more tax that you're going to be paying it's kind of like saying the valuation in truth, is going to be lower because if I sell it, I have to pay the tax. I get less money to go reinvest into something else. So I think that that all makes sense to consider, but I don't think it's actually answering the question.
- [23:19]
Alex
Yeah, I just think it's an important consideration. I do think, I don't know, for me, it's kind of. You live in a world with taxes and, you know, you could say, well, that's not my problem because I deal with whatever this, you know, sovereign wealth fund or this pension or whatever. And I'm tax agnostic. Again, most people, when you're running a fund, there's going to be a mix of both. And I always think taxes, maybe it's my CPA background, but I'm always very tax cognizant. And nobody likes paying unnecessary taxes. I think it's something that a good manager looks into. And that's why it's always nice where you can have, if you have individual accounts, you can, okay, this one may be tax deferred, this one's not tax deferred, and you can kind of make competing decisions. But unfortunately, a lot of people usually, like in a mutual fund, you're going to get. Get, you know, slopped into a mutual fund, and whatever happens in that fund is your problem, whether you're in a taxable account or not. So good luck, everyone. Yeah, good luck, everybody else. Right. So that's, that's kind of the strategy there.
- [24:12]
Drew
Yeah. I, again, though, I. It's, it's a consideration, but it's not going to ever be a reason to sell or not sell in and of itself. And I could also push back and say, I think a lot of times bad decisions are made when people are overly focused on taxes. They may have a stock that went up a lot, but I'm thinking of some of these software tech stocks that I know some people own that they had very, very large gains on and they might have been reluctant to sell any amount of it because they didn't want to pay the taxes on it. That, to me, should still be secondarily to whether or not you should own the stock, whether or not the valuation here makes sense. And again, you could just take into account the valuation with the stock price and exactly how you do that. I actually made a video on it. I'll link to it in the podcast description because I know I'm talking a little ambiguously right now, but the actual math of how you do that I'll link to it in the podcast description.
- [25:04]
Alex
Yeah, I think it's, you're right. People can, can make poor decisions. Again, it's one of those things where you're like, I wouldn't be an absolutist about it if it's, if it's too close to call. What do you do? I mean, for example, I think people have been, I think financial advisors around the country for, around the world for the last decade have been saying, people who have Apple for a long time, trim Apple, trim Apple, trim Apple. It's too big, it's too big. And then, you know, continues to improve and then you're also taking a tax hit. So I think it goes either way. I think if you, I say this
- [25:36]
Drew
as an Apple investor, right, because I, I phoned Apple now for, I don't know, over 12 years, something like that, roughly speaking. And when I bought it, it was around, you know, a low teens multiple, 13 times multiple or something like that. Now it's a 30 times multiple. Earnings are not growing that much. And you want to try to figure out what you need to assume in order to get, you know, a 10% return from here. Okay, well, if it's a 30 times multiple, that's, you know, a 3.3% earnings yield. You're going to need, you know, at least 7% ish growth. And where's that growth going to come from? Okay, is it going to come from price increases on the iPhone? Maybe to some degree. Is it going to come from more iPhone sales? A little bit. Is that going to consistently get you to 7% every year for the next decade or longer? Really? I don't know about that. So then you're assuming the Vision Pro. Is that going to be a success? What's going to happen with the App Store? Is it more likely the App Store continues to grow or that it actually faces pressures? Okay, now you're also assuming, you know, revenues from Apple TV and Apple Music and it's great they've been able to come up with these other things, but it's just very different sort of revenue drivers. And then of course, the big one is, you know, the Google revenue share on Google Search. And I don't know exactly how that's going to come out if all of a sudden everyone's going to AI chat bots too. That's another kind of, we're not doing
- [26:59]
Alex
a whole Apple breakdown here, but I get your point, which is there are risk. It's at 30 times earnings. But then you also have a big tax Hit. But, you know, I don't know what's a better idea. If you have an idea that's better than Apple and you have limited capital, then I think there's a reasonable.
- [27:17]
Drew
Yeah, I do think I have ideas that are better than Apple, but I also haven't fully sold out of it. So I'm honestly kind of a proponent of kind of taking middle grounds on a lot of this stuff. If something's not that obvious to you, if it's not what I like to call a Godfather offer where it's so crazy expensive it's just obviously something you shouldn't own, then I'm very much for taking kind of decisions in the middle. You're allowed to sell some. You're allowed to sell some more later. You don't need to do this one. It needs to be out of my portfolio today.
- [27:48]
Alex
I, I think that sometimes there's this notion, I know you've said, when do I sell the Godfather offer? It's kind of the same thing. Is a stock down for no reason? Is a stock up that much for no reason? You know what I'm saying? Normally there's something in the, in the environment that is making a stock that expensive that doesn't make it so obvious that it's a Godfather offer.
- [28:07]
Drew
There's been a couple more than a few opportunities where I've seen a stock's price and I really should have just like sold everything. I'm just not that quick to act on like a single couple day move. But one of them, I was thinking, is AppFolio over $300. I don't know why that thing ran up so much. And it was in the course of like a week or two. And I don't like talking like this because then it's all like, how do you prove that it's all exposed, you know, facto rationalization and all that. But it went up, you know, over 50% in the course of like less than a month. And there was no real reason why. And it wasn't coming off of like a super cheap price. It was probably coming off of, you know, whatever. Maybe fair to. Around fair, depending on what kind of assumptions you want to make there. Yeah. But no, that was a price at, you know, 320. I don't know exactly what it hit. Like the assumptions you would need to make, I probably wouldn't have wanted to make at that point and so probably should be sometimes a little more active. But then again, you know, there's the air pockets that I talked about before, but. But you Kind of also have to just be willing to not make that much money on some stocks and just say, I'm okay, if I don't make any more money on this stock, I'll make the rest of my money somewhere else where it's a little more obvious to me and I think it's a higher likelihood.
- [29:16]
Alex
This is where you need to hold conflicting ideas in your head and this is where you're just not going to get them. All right? And this is why people, I think, have absolute things which are like whatever decision making framework you go, you're going to get some of them wrong. So if you have the decision making framework, which is, oh, I'll take a godfather offer, you're going to sell Amazon in 2008. It just. Or whatever, not 2008, that's a bad example. In whatever time period where it looks expensive.
- [29:39]
Drew
2001 wouldn't have been bad.
- [29:41]
Alex
Would have been bad. And then I guess you could buy back. Yeah, I mean, theoretically. But long story short, you're probably going to sell, you know, Costco or Amazon or one of these good companies. You are way too early. You're gonna, that's gonna be the option,
- [29:53]
Drew
is that you accept that. Realizing that most of the time though, it's not going to be a company that's like Costco that just continues to trade at like 50 times 60.
- [30:02]
Alex
And then alternatively you're gonna sell Etsy when billion GMV is priced in. Right. And that's going to be good for you.
- [30:09]
Drew
That's going to be good for you. Well, so funny you brought up Etsy because that was the, one of the first companies where I really like owned. And I did the analysis and I was noticing like there's just some very sus things that were not quite fully aligning with my research a priori. And you know, because before I was at, you know, Capital Group, Goldman, so I was very restricted in everything I could own. So, so this was, you know, he made these comments about TIMO ad spend somehow impacting the ad auctions for Etsy, which made zero sense to me because if that was the case, then that was suggesting that the people who were buying TEMU ads and were being swayed by them were looking at Etsy products as being substitutable. And the whole point of Etsy is that it's homemade, which is like the antithesis of what TIMO is, which is like really cheap, mass produced stuff. And so if these two things were substitutable, that meant the value prop of what customers actually valued was not what I thought it was. I thought there were more people out there that wanted something that was unique, homemade, all that, and not just the same deluge crap. And so when he said that, almost immediately, I just was very uncomfortable holding that position. But I'm not so good at going from, like, hearing something like that to saying, I need to sell it all. So I sold half, and then, you know, a couple weeks later, I sold the rest. And so. So it was a little bit slower of a sale. And sure, it would have been great in theory to have just sold it all right then in that moment, but I think it's okay if your position sizing is kind of being reflected by your confidence in a position.
- [31:38]
Alex
Yeah. This has been a long, winding discussion of when you sell and buy, and it's complicated, which is why, luckily, Drew spends all day, every day, thinking about it, because there's no right answers. And I think, to me, my biggest takeaway from all these is to not have any absolutes. And I know Warren Buffett has some of his absolutes, but I just think that you need to be intellectually flexible about situations and not get pigeonholed. And, of course, except you're going to be wrong.
- [32:04]
Drew
That's just.
- [32:05]
Alex
That's. That's a fact.
- [32:06]
Drew
And, you know, Buffett has said he regretted not selling Coca Cola when it traded at whatever multiple it did in the early 2000s. And I would suspect the reason why he's trimming Apple today is because he learned from that lesson. I don't know for sure, but I think that he realized that, you know, as much as he likes just owning a great company and just accepting that return and letting it ride, he realized that, you know, if it sells at too high of a price, then you're just going to stamp time as the value takes a long time to catch up to where the price was. And you don't want to wait, you know, 10 years, sometimes 20 years, in order to kind of get back above water. It doesn't really make sense. So if you are owning a stock at, you know, very high valuation, the implications of what the business needs to do can just be too high, that you don't want to accept that. And I get it. You're going to miss sometimes, you know, the Teslas of the world or maybe even the Nvidia is like, you're going to have to accept that as a trade off in your investing style.
- [33:00]
Alex
I agree. And, yeah, it's. It's difficult. I think it's a humbling business. I'll tell you that it's a humbling business. So just a couple things on Chris Meyer before we get to the other part of the podcast, which is we're going to do a little bit of a dive into private credit, which unfortunately will touch on AI and software. I thought I was avoiding it, but I forgot that the private credit discussion will involve that. But I liked you and Chris Meyer kind of going both well researched in some of mutual names that you guys cover, specifically Constellation and Copart. I thought you were able to ask some hard hitting questions to him and how he thought about them. But you know what I like about I think guys who are very confident in their investing ability have of. They don't kind of ramble about what they, they're kind of like, yeah, that's a risk. That's a risk I've thought about. And yeah, you know, it could happen.
- [33:52]
Drew
Yeah.
- [33:52]
Alex
And, and I love those answers because it, it makes you feel very. People who are confident know the decision point and you land, you can land on one side of the fence or you can land on the other side of the fence. And landing on the right side of the fence more often than not is what makes you a good investor. But of course there's two sides of the fence, otherwise it would be too easy. Right. So well said, well said. I think kind of diving into that a little bit. Again, one question that I'm not going to say he had an exceptional answer to, but consolation, which is of course you do the math, they've got to keep compounding out and you pose the risk to consolation. Not that you're going to vibe code all these software solutions, but that the reinvestment opportunity into these vertical software companies will decline because of course it's very challenging. I'd like to actually Chris Meyer's answer to that, which is one, it's very highly decentralized, I think he pushed back a little bit that said, look, it's not that hard for these various operating groups that then have sub operating groups to deploy these three to five million dollars checks at an institutional level. And he's just like, listen, Mark Leonard built this machine of allocating capital and they'll figure it out. I think that was more or less his answer, which I don't think was a bad answer. I think they're pretty good at allocating capital and it's. If it's not vertical market software, I mean, I think there's a risk, which is why I think the valuation's been hit, that now you have a wider outcome, perhaps those Opportunities don't exist as much, but they have a good track record of developing people who can invest. And if it's not vertical market software, why not do something else? I mean it's not like the principles are the same. Is that fair or am I poo pooing at large risk?
- [35:26]
Drew
You asked and answered your own question.
- [35:29]
Alex
I know I'm getting good at this. Yeah, I don't even need you anymore.
- [35:34]
Drew
The only thing I would add to that is that they have been actually good at scaling up the size of their investments in the past few years. So I do think this has been de risked to an extent. They've done some of these mid to larger size deals. They've also done now public equity stakes in some larger businesses like a seco. So all of that allowed them to deploy more capital. But yeah, it's going to be a risk. But I think it's de risk now, at least for this level of capital. You Fast forward another 10 years and then it's another magnitude of capital we're talking about. But there are a lot of, you know, mid sized companies out there that they could potentially buy. Even dare I say, software companies.
- [36:13]
Alex
Dare I say. And then, you know, same thing with Copart you guys spoke a little bit about. Again, I don't think anything incremental but yeah, you know, like self driving is a risk eventually. You know, he had the same thing where it's like, yeah, it's going to take a while for the fleet to kind of actually once it gets there, I mean, I mean it's not happening in the next 10 years. I mean he had similar data. I don't know if he read your report or not, but he had pretty similar information to you about the replacement rate of the fleet. So maybe he, maybe he is a Speedwell reader. I don't know.
- [36:42]
Drew
I'm sure he just does his own research.
- [36:45]
Alex
But by buying Speedwell.
- [36:50]
Drew
Yeah, I think that that aspect of the severity versus frequency for Copart and for those that don't know what we're talking about. Basically when there's a car accident, the more severe it is, the more likely it is to be totaled. If it's totaled, it could go into Coparts volume so they could sell it and then the frequency is how often these accidents happen. So frequency has been dropping for the past four decades. Severity has been increasing. Severity has been increasing more than frequency has been dropping. At some point it's going to happen where this flips or where the severity is not increasing so much or maybe not at all. And frequency continues to drop. I don't know. Honestly, the more I think about this, I just, I don't know when you know when this is going to happen. And I think it could surprise people. I totally understand the math of all that. Doesn't need to be fully autonomous vehicles. It could be just, you know, vehicles with more anti collision features and all of that, sensors. And so what's been offsetting, you know, less accidents has just been it's more expensive to get these repaired. And it's kind of a funny thing. It's a little ironic, right, where it's like the, the more technology you put into the car, the less likely you are to get in a car accident. But if you do get into a car accident, it's more likely to be totaled. And so that's what's been going on there. But I don't know really how you have so much high confidence as to when the frequency flips. If I'm just being honest with that. I do think that these things take a while and that it'll take a long time certainly to replace, you know, the 300 million cars that we have in the US with new anti collision vehicles and all that. And I think they're also going out into Europe and internationally a lot more, which is much further behind the curve. But this is definitely going to be an issue for them at some point. And as soon as that flips, I know that, you know, the terminal value, the company becomes a little bit more specious and the thing that they might be able to do because what they've been doing is they've been going up value basically in cars. So even though when I say up in value, it's still relatively, you know, pretty crappy cars. But that's been expanding their auctions a lot. You know, going into rental car fleets, bank repossessed cars, even people selling them cars directly. And so that's become a larger and larger portion of their volumes. And so I kind of do wonder if that's going to one day offset most of it for them, if not all of it. And they could just get more and more into the business of selling higher end cars. That might be a way they kind of have to go. Even if this is something that happens slowly over decades.
- [39:21]
Alex
Yeah, no, I again, well said. We haven't done a Copart update in a while, but we have spoken a lot about Copart. I think it was a great discussion talking about IAA making a little bit of a comeback. We were kind of laughing at the Richie Bros. Acquisition I guess they're doing a little better than we anticipated.
- [39:37]
Drew
They are.
- [39:38]
Alex
Well, you give Richie Bros that. We kind of poo pooed that as a nothing burger. They're doing pretty well. So kudos to them. Obviously good operators and, and you know, through the channel checks, IAA is seems to be improving service and closing the gap, you know, a little bit with Copart. And of course, you know, the insurance companies always have the interest in having a duopoly rather than a monopoly. So you can, you know, keep them honest. But Copart's density of their auction network and things like that, you know, still advantages. But I don't want to get too much into the Copart tailwind. I think a great set of interviews. Always good having, you know, such renowned investors on as well as, you know, management of the companies we cover. I think it provides great perspective and always good to hear despite Drew slip up on the double click to actually hear some, you know, unique questions.
- [40:27]
Drew
You know, you're the one that said this three times during this podcast, so that's true. I've just been allergic to. Listeners would not know that.
- [40:34]
Alex
They would not know that. You're right. And I want to briefly transition here into the private credit crisis. And I think kind of a unique perspective you have or just a good explanation of what's going on because you hear a lot about it. And one thing I want to preface how to put it, these private credit crises, because you hear a lot, a lot through history. This is not the first time I'm actually reading the House of Morgan, which is the history of kind of the original JP Morgan and the foundation of that bank. And you talk about in 1907, which was one of the original banking crises, this was really perpetuated by again these trust companies that weren't technically banks but they were under regulated. Then they started lending into kind of speculative areas of the market. But of course they were very correlated to the banking system and that created a whole credit crisis. Again same thing, which is you have these kind of banks are highly regulated. We know that when banks make bad loans and people deposit money in banks and people lose trust in banks, runs on banks, cash crisis. And so banks become highly regulated. Good job government. And of course throughout history people pop up that are outside the banking system, which I think is good for capitalism. You kind make again loans that are perhaps too risky for a traditional bank to make. Perhaps there's less regulation, you're able to get lending faster, things of that nature. So I wouldn't say it's all Net negative necessarily. But you do have these kind of credit systems pop up that are outside regulators eyes. And then usually that can get a little ahead of itself, which is what we're seeing kind of right now. So what's going on with private credit? 15 seconds. I think the most one thing before you pass on, I think we talk about the growth of it. I love that stat where you were like the start with how big private credit has gone in the last like 10 years for the perspective there.
- [42:22]
Drew
Yeah. So the market's grown at like a 14% keg or very large asset class right now. There's kind of two separate things going on here. So let's just separate them. The first is more a liquidity issue with the fact that these are private investments and a lot of them were sold in kind of retail wrappers. And so a lot of these investments were sold to retail investors. And these investors now they want their money back. And so these funds are being forced to redeem. They're not set up to liquidate the entire fund that quickly because again, they're private investments. And so it's taking them a while to get their money back. And because it takes them a while to get their money back and it's hard to sell some of these assets, these investors want their money back all the more. And so that's just kind of a weird mismatch between the market they were selling a lot of these investments to and kind of maybe the expectations they were told about them. Now this though is. It is related though to the second thing, which is going to be an actual credit risk. And so within the actual credit risk, there's two separate things going on. One of them is kind of a concern with how much this asset class has grown and potential for very loose underwriting standards. What typically happens, at least historically, is when an asset class grows a lot. But Wall Street's very good at sort of creating the supply to feed the demand. And so in this case, creating the supply would mean creating more loans. And in some cases you lower your standards in order to do that, you lend to people maybe you shouldn't be lending to and maybe higher amounts than you should. You maybe go Covenant Light. You maybe put certain features in the bonds and all of that that otherwise wouldn't really be appropriate. So that's the one factor. And then, and what is kind of giving fire to the worry here is going to be the bankruptcy of Triclother and First Brands. These were two pretty big bankruptcies. And these were all going to be, you know, Kind of shadow loans basically, or at least a lot of them kind of involved in this private credit lending. So that's the one thing. The second thing has to do with a lot of these private credit funds investing a lot of money in software companies at kind of peak 2021, 2022 valuations. Valuations have come down a lot. Now we have all these fears of AI. We have fears on whether or not these software companies are going to be able to refinance and cover all of their debt. We have fears about their future cash flows. And it's also going to be at higher interest rates now. And you know, maybe some of these software companies go bankrupt because of AI or whatever. That's kind of the other fear going on. So you have all of these things kind of going on at the same time. And what it's kind of led to is a lot of investors saying, give me my money, money back. It turns out I don't actually really know what I own. I don't really trust you. And which should also be noted, there is a little bit of leverage in these funds. A lot of these funds are levered one to one, which is by no means egregious leverage, especially compared to like financial crash standards of, you know, 32 to 1, in some cases really crazy leverage. So 1 to 1 is not insane, but it's still leveraged. And if you are an investor in these funds, the person providing the leverage, which is the bank, is going to get paid back before you, you. So even if you do get, you know, a 5% loss, 7% loss or something, that's going to be amplified for sure. A lot of these do offer what seems like pretty attractive yields, maybe 10, 12%, something like that. But that is because the leverage, and that is because they're still invested in essentially junk bonds.
- [45:41]
Alex
And you know, again, you talk about, I think people talk about democratizing private investments to retail as some type of home or helping the little guy. Obviously this is highly incentivized for private equity to expand the fee bearing capital that's out there. And I really feel like these funds, I mean, Blackstone's real estate fund, Blackstone's credit fund, I mean again, they're all, they're all being kind of copycats here, but they call them semi liquid. They're like, oh, you can redeem any quarter as long as it's not 5% of NAV. And again, the reason behind that is because when you're investing in private markets, you don't have a market available and you don't want to be a for seller of assets against a private it very vulture side of the other end of the market. And what you're seeing happening is of course when people want to get out, you're going to all want to get out at the same time. Something normally bad is going to be happening. So if you look at like B reit, when they had to gate their fund, it was because rates were going up a lot and their 5% yield didn't look that attractive compared to traditional Treasuries. And people were concerned about, you know, office leases and kind of the underlying floating debt. And then everyone was kind of running for the gates. And then of course they're like, oh, we gated. And of course that's what's going to happen. Same thing that's happening with private credit. So then you get all these people who are like, oh wait a minute, it's really not that liquid or you have to keep selling these loans at discounts and the people remaining in the fund get left holding the bag because now you have to go sell your assets to meet the nav. So it's not really a good situation. And of course you mentioned all the leverage, all the traditional quote unquote, big banks that are regulated are the ones lending to these private credit funds. So of course the big banks are on the hook for it. So if all the private credit funds did go down, it would be kind of a contagion and it would be a problem, you know, I don't know
- [47:19]
Drew
because again, they have a lot of kind of equity. The bank has equity. Right. So if it's in a credit fund, you're an investor in the credit fund that's technically, you know, speaking equity that could, you know, go south before the bank is actually going to have to take a discount on their loans. So the bank has a lot of kind of equity before that. They're actually going to potentially have to take a loss. So you know, the, the Federal Reserve, they did a stress test with whatever it was, a 7 or 8% loss for a lot of these private credit funds and they didn't find contagion to a lot of the traditional financial system. Having said that, when there is actual, you know, crashes and crises, these happen. Things kind of interact in ways we can't predict ahead of time. But at least so far they, they've kind of looked at that and said that it's not that intermingled. But yeah, I think we should be rightly skeptical of that.
- [48:08]
Alex
Yeah, and you're right. I Mean, that's a good point. And I do remember that coming out.
- [48:13]
Drew
So we'll see leverage again, it's 1 to 1. It's not like 32 to 1. It's not the same sort of leverage we had during the financial crisis.
- [48:21]
Alex
And again, I don't mean to be draconian about it, because I do think you're right. I mean, a lot of people. How do I put it? Paint these very negative pictures about AI could go, and these are all being lent against these data centers and it could all come crumbling down, which. Which I guess is always the risk. Right. But I do think one thing about the doomsayers, and it kind of reminds me of Ray Dalio's book, the World Order or the New World Order, where he's talking about the decline of civilizations and he's saying like, America's and all these metrics. But then you look about it, it was like the decline of the Dutch empire was 378 years. So I'm kind of like, well, that's not very helpful, Ray, because, you know, if like America's in this decline cycle for 400 years, what am I going to do with that information?
- [49:00]
Drew
I'm sorry, I don't know. This wasn't relevant, but we have to bring this up.
- [49:03]
Alex
Up.
- [49:03]
Drew
He was also like, here's these three different countries and all of like the signs of like a country that's going to become like a dominant superpower. And he listed a couple of them. One of them was like Germany. And then he's like, and then, by the way, they didn't become like a dominant superpower, but like, we're not going to analyze why. And then it was like, wait, but if your whole point is that China is now going to become the dominant one, why aren't we analyzing the reasons why where the obvious country that was going to become a dominant superpower didn't become one. Anyway, having read the other book, the Fund, which is all about Bridgewater, it sounds like he does not like actual disagreement, despite the fact that him making a lot of his brand around radical transparency, radical transfer.
- [49:41]
Alex
Exactly. And again, I bring that up because the doomsday outcome is very easy to always sound the alarms to. But if you're not on a timeframe, when is it happening again? You can always beat the drums of the bear case and be terrified of all times. There's always a reason to be scared, I'll tell you that.
- [49:56]
Drew
Yeah, and I think the big thing here too is that, that these were sold to a lot of investors. That didn't really know what they were getting into. And so they were kind of very quick to flee when things changed and they were kind of sold this big yield, not understanding they're basically buying leveraged junk bonds. So I think with that kind of context, they probably was the wrong market for a lot of these investors. And, you know, if you were sold something as a fixed income alternative, which a lot of them were, and then you're saying a 20% mark to market loss, at least on the ETF versions of them, because those do publicly trade. Of course, the private ones won't actually mark the losses. That's another.
- [50:33]
Alex
You mean the private ones are flat, aren't they?
- [50:36]
Drew
They probably are. I don't know for sure, but yeah, they're going to be flat. Even though there's some suspicion that, you know, if software is down this much and there's some bad loans, you probably should be taking some marks. J.P. morgan, by the way, did take marks on their software portfolio, which further gives credence to the fact that they should be taking marks. So. So if this was sold as like a safe fixed income product and then all of a sudden you have, even if it's like a 20% loss, something like that, that's a big loss for a safe fixed income product. So there's a lot more we could say in private credit. Maybe if people have any questions or anything, we could hit this more in the future. But there's also the video on YouTube I did that covers this in more detail that I'll link to below in the show notes. But anything else, Alex?
- [51:16]
Alex
I think that's all we got. And you know, again, we can touch on private credit a lot. It does, of course, come back around to that effect. All these loans are made to SOFTW companies and software companies are dead. Because now AI is going to vibe code everything away from the software companies. And whether that thesis is true is unclear. And I think Drew's made it clear that he, he disagrees with that vehemently.
- [51:35]
Drew
Yeah. But if this sounds rushed, you know, it's only because Alex has a very important pickleball appointment. So, you know, get what we pay for with these. Anonymous host.
- [51:44]
Alex
You know, I could never win out here, but, you know, we're back for a while. Drew doesn't have any interviews in the hopper, so you're still.
- [51:51]
Drew
Oh, is that what he thinks?
- [51:54]
Alex
So we'll keep it moving and I think next time we'll cover a few more company updates. So until next time.
- [52:00]
Drew
Until next time.