Betting on Tesla & the Power of Disruptive Technology w/ Christopher Tsai (RWH045)
(00:00) the way I have minimized the chance of selling great compounding machines too early is to have a fair number of positions so I'm very concentrated with respect to how most people would think about the portfolio but I'm also pretty diversified with respect to some other managers so we have about 21 holdings today if I had all of my money in one stock it's going to be a lot harder to not interrupt the compounding process than it would be if you had 21 companies hi everyone I'm very happy to be here today with Christopher Tsai (00:40) Christopher is the president and chief investment officer of Tsai Capital he's a prominent art collector um good friend and a wonderful human being Christopher it's lovely to see you thanks so much for speaking with us William it is so wonderful to see you we've had wonderful memorable open conversation in the past and it's just a privilege for me to be here with you I'm so grateful for this time with you William nice to see you thank you I'm really delighted to be doing this I wanted to stop by asking (01:12) you about your family because you have this fascinating family background including an immensely successful father Gerald Tsai who was a famous iconic investor and a a a CEO but it's extraordinary I think what your family actually went through that led you to be here today in the US and I wanted to start really by asking you about your family's tumultuous experience in China and what your grandmother Ruth lived through and how you all end it up here well that's a that's a long long history um it was very fortunate for my (01:49) grandmother her name was Ruth she gave a speech to her church when she finally made it over to America she lived in Scarsdale New York and the title of her speech was reminisces of her time in Hong Kong China in the United States without that speech I would not have known as much as I know today what I know is as you alluded to my grandmother and my grandfather went through a lot to get my father to America his sister to America and I'm truly grateful for all the sacrifices that they made to give you a couple of (02:39) examples it was I guess in the late 1930s when Japanese troops took over Northern China my grandmother really wanted to get my father out of the country and it wasn't easy it was wasn't wasn't easy to get an exit view up nobody knows this but she forged my father's passport so he was born in 1929 and somehow she made the nine look like an eight got him out of the country one year early um but it wasn't an easy process and she needed money as well to help pay for the tuition so she started Trad tring real (03:31) estate because you didn't need a license at the time apparently to trade real estate and she was fairly well connected from what I understand so she started in that area she made some money traded real estate eventually became um a Trader of stocks bonds and commodities on the Shanghai stock exchange she was a Pioneer in the sense because she was the first woman to trade on the floor of the Shanghai stock exchange this was all happening when um various International concessions in China were being formed so there was the um the Dutch settlement (04:12) the Portuguese settlement the Italian settlement the British settlement and in order to keep my uh father and his sister in school they had to move around from different settlements so it's hard for us I think to understand that but from what I've read in this spe speech was that it was incredibly humiliating to be forced to move around within your own country then you know after she had accumulated some money she bought a farm in um in China not far from from Shanghai I believe in in sucho and one night there was a knock on (04:54) the door and the was the Communist authorities and communist authorities said you have uh like a an a night to vacate a day to vacate the property we're confiscating your land so she was stripped of her possessions after she had accumulated money and she had to kind of start from scratch so they went through a lot and um my grandmother and my grandfather were separated for multiple periods of like 10 years each uh she was separated from her her children once the kids made it over to America so it's a long long long history of um (05:35) separation of being interrogated by Chinese authorities she had this kind of connection with America because uh her husband Gerald Tsai not my father but my father's father Joe side worked for Fort Motor Company so there was already this connection uh to an American company then my father went over to uh the states and so Grandma Ruth was then interroga ated for three hours a day for over a year by the communist authorities it was a little whole whole ordeal and needless to say like when everybody was eventually reunited uh it was a just a (06:13) joyous joyous occasion and that was years years later it was an extraordinarily intense time I I I was reading about it the other day and there there was this period I guess of two and a half three years where your grandmother Ruth was trading stocks and gold and other Commodities on the stock exchange and then basically the the Japanese invaded the Shanghai International settlement which was kind of an autonomous region at the time I guess it was it was more or less controlled by the British and the Americans uh and so even though the (06:47) Japanese had occupied Shanghai a few years earlier in 1937 you'd had this kind of Oasis where you could just about live normally and then and then trading just gets halted completely and so it's a fascinating example where you you realize when you study history just how tumultuous things are just how much we're subject to uncertainty and change in every era and I was wondering how that sense of your family's history the sense of of uncertainty the sense of external circumstances that can come up and and (07:25) and ruin markets ruin economies OB seat families overturn everything how that's affected your view of uh of the world of Life of how to invest well a couple things on that so it's important to remember my father was born 1929 and this was all happening when he was roughly 10 years old right so he was old enough to remember that you know if you're born in tumultuous times and you're too young you're not going to remember certain things he was old enough to remember remember that and consequently he was old enough to talk (08:05) to me when I was a teenager about his life in China of course growing up in a much more privileged stable environment even today like I'm not able to fully grasp what he spoke about but I think I have enough knowledge to understand that my grandfather my grandmother my father they've made Extreme sacrifices to allow me to live the kind of life that I'm living today uh where I'm wasn't uprooted in my childhood I wasn't forced to move from home to home I didn't have to worry about a bomb (08:50) dropping or what was going to happen I wasn't cut off from from the news I wasn't cut off from my friends right so I'm totally grateful for for the everything that they've done for me and and I understand like how hard it was for them to create that initial kind of plot of capital that allowed the whole family to kind of do what they what what it's what it's done and this idea of like Capital preservation it was instilled in me very early like how important it is to preserve Capital um and we can talk like (09:34) a lot about preservation of capital and compounding and the importance of you know um not having to go back to go um in life and in in in with not just your life but with money but this idea of capital preservation was instilled in me at a very very early age and and and and certainly through these stories that my father uh told me about his life growing up and the difficulties that him and his mother and and father faced I thought it was fascinating also as I started your family's story to realize how incredibly (10:07) adaptable they had to be so there there was this amazing story that you've told before about what your what your grandmother did for example with the top soil in the farm where can you tell that because it it's such a it's such an interesting example of how um feisty and formidable and resource ful she had to be really to get you in this position that you're in today yeah totally um one quick story before we talk about the top soil story and I actually just learned about it today I must have read it (10:43) before but as I Was preparing for our talk I was reading this speech that I had mentioned that my grandmother gave and um I came across a little section about how when she was just a child you know she really wanted to to go to boarding school and get because the boarding schools were the best schools in in in Shanghai around Shanghai at the time but her parents didn't want her to go and her grandmother said to her that um um if you're too educated you'll never find a man you know can can you believe like (11:24) how different the times were then but she fought to go to boarding school and how did she do that she locked herself in her room and refused to eat until she was given the okay wow so this kind of feisty oh and and and she she she got her way and she wound up going to the same school that Madame uh shankai Sheek uh went to the very prestigious School in in China but that kind of feisty mentality uh stayed with her so to the top soil story so the Chinese authorities knock on the door one night they say you know you have to vacate the (12:06) the property that she had been saving up to buy for years the most valuable part of the land is the top soil so she didn't put up a fight with the authorities she said she'll do as she's asked but what she also did was that the night before they they they uh were going to confiscate the property she hired a bunch of guys to strip all the soil off the top soil and sell it so she could recoup some of her investment and um this nobody knows but um apparently she took that money she bought jewelry which she eventually put in her (12:55) hair when she left from China and event got her exit visa to go to Hong Kong so she was able to take the money the money with her to Hong Kong amazing amazing and you spent a fair amount of time with her as a child right because she died at 93 so I was wondering what when you look back on the influence that she had on you and the things she taught to to you as a kid is there anything that you've carried forward with you that's been helpful to you either as an investor or in life beyond investing not that there is life (13:30) beyond investing well she was a great cook and I must have been maybe like 10 or 10 years old or something like that maybe even younger and I'm sitting around her she lived in a very modest apartment by the way like she could have had any home she wanted my father had already made plenty of money by the time she was living in Scarsdale but she chose to stay in her modest apartment in Scarsdale um as actually part of the projects they weren't like the the worst apartments in the world but they were part of the projects I was there many (14:06) many times so I'm sitting at this her little dining table and uh it's a a square one and she was making some of my favorite dishes um and she looked at me and she said you know look at this table I should have bought a round table she said in life why be a square table when you can be round one she was talking about I think what I mean she intuitively knew Dale Carnegie right she knew how to deal with people she knew that it didn't make sense to be abrasive and that kind of mentality that understanding of how to deal with people (14:56) actually helped her get her exit Visa so just a quick example when she was being interrogated I mentioned earlier that she was being interrogated for like 3 hours a day for about a year from what I understand well one day the uh one of the guys in the room apparently said you know there there are rumors about the Chinese children not having access to food what do you think about that and so she pulls out photos of her plump grandchildren and she says look at my look at my children I sorry her her children look at my children do they (15:29) look skinny to you and apparently they shut up huh so she was very good with people and that lesson about you know why be a a square table when you can be around one the lessons of Dale Carnegie and how to Wi friends and influence people I think they're all very good lessons to you know appropriate and apply it in one's own life so she's was totally influential to me and and how I think about you know dealing with intera in with building relationships with people she also had a huge impact obviously on (16:04) your father Gerald s Jr and I I wanted to talk about him in some dep because he's such a fascinating figure and for for people who don't know just a brief snapshot of him he he was born in 1929 as Christopher said and died in 2008 he was the first Chinese American to become the CEO of a Dow Jones Industrial Average company and he did things like he bought Smith Bond and changed the name to Primerica turned it into a financial services JN that was sold to Sandy W who eventually turned it into City group but I'm actually so he did (16:38) over a hundred deals I remember Christopher telling me once but I'm most interested actually in his investment career that ended sort of his public investing career I guess ended relatively early probably in his early 30s but he was such an iconic legendary figure and in some ways with sort of the Kathy Wood of his time um and so both both the good and the bad I mean it's like a really complex interesting Nuance story can you tell us about his investment career and how he came to be in some ways the first celebrity fund (17:10) manager in the country I think yeah I mean it's it's hard to think about like real celebrity fund managers today uh to the same degree I mean he had apparently like articles I think it was in the cover of of business week he was in Newsweek uh the Press spoke about him as this kind of celebrity figure he had a ponytail by the way oh so uh he had his he had kind of crafted his own image um his bit of a of of a bad boy within the world of fund management because you have to understand back then uh you know the institutions the (17:53) Pension funds the trust Departments of banks were super super super conservative I mean their their their kind of focus was on electric utility companies gas companies railroads you know very very stable kinds of businesses and here my father comes in and he um focuses almost entirely on growth companies and the way he trades them was unique so there's a guy by uh uh one of his close friends was John rosenal um John rosenal was vice chair of be Sterns he's currently Vice chair of JP Morgan uh I'm still in touch with John (18:39) today John spoke at my father's funeral uh but John and my father did the first real block trades so they would go in and they would buy uh huge blocks of these growth companies and really really move markets and when news got out that uh that my was moving into one particular company these companies would would soar and conversely when he news got out that he might be selling these stocks would would plummet so he he really moved markets and he shook up this institutional conservative mindset about investing just in kind of (19:20) utility companies and more stable um more established businesses and he did that at it capital fund first so Edward Johnson Senior um gave my father when he was I think 29 or so around that time the role of running the Fidelity Capital fund Fidelity Investments was pretty small at that time maybe like I don't know the exact figure but I'm guessing maybe 50 million 100 million in AUM something like that compared to maybe four and a half trillion today so this is really early right this is so he I mean Chris Christopher's dad basically (20:00) leaves Boston University um where his parents had sent him and and joins Fidelity in 1952 as an analyst and then it starts this aggressive growth fund that Christopher mentioned the fidelty capital fund at the age of about 29 and it's tinier it's like $12 million and then grows to 340 million and he becomes the president of fidelity and then basically leaves Fidelity around 1965 and launches a thing called The Manhattan fund I think with encouraging from Ruth and so this is kind of at the peak of the bull market can you tell us (20:33) what happens cuz in a way it's like it's it's a sort of really important emblem of the go- go years that were not dissimilar I guess to the late 90s when you and I were starting to become fascinated by investing actually you were fascinated by it from Bas basically the womb but when I was getting fascinated by it in the late 90s yeah so tell us the context of what what happened to your dad at the Manhattan fund well before we get to Manhattan fund just quickly so why did he leave fit that that was always a question that I (21:02) had for him because from what I understand he was a 25% owner of fidelity wow which you know back then when they had 500 million under management sounds it's it's less impressive than it is now right but um he wanted the the top role and Ed Johnson the you know senior uh was he he approached Ed Johnson and Ed Johnson said you're never going to have the top role because my son Ned is going to take over that's that's what I understand to have transpired and you mentioned my grandmother being influential in these (21:35) decisions and he spoke to his mother about almost every decision that he made these 100 plus deals particularly this this role at Fidelity and my dad always wanted to to to run the show and so that's really why he left plus he had circled the country I mean countless times going to all these Regional broker dealers traveling to you know hundreds and of cities building his reputation while he was at Fidelity getting to know all the Brokers and broker dealers throughout the country so when he was ready to leave (22:17) Fidelity to start his own thing he had already the kind of network so he leaves Fidelity launches Manhattan F and so as you're driving into Manhattan today you go over the um the tri B Bridge onto um just before the FDR which is now renamed um and there's a big billboard and and and um and you know these big Billboards that align the highway so my father had that big big billboard as you come in from when I was sing he had you know advertisements from a patent fund and he advertised all over the place so (22:59) the advertisements plus his relationships allowed Manhattan fund to launch with a huge amount of capital so they launched um with about 250 million of capital which was multiples of what he expected to raise and was the most successful offering in American mutual fund history at the time so he launched his Manhattan fund after a great performance record at Fidelity into a bull market um and he was always very good at timing his purchases and sales whether that be skill whether it be luck whether it would be uh whether it was a (23:50) combination of both which probably was a combination of both um regardless he was very good at that and more Capital flew into the fund and he decided to exit by selling the management company which was s Management and research that was a management company from Manhattan fund he sold it to uh CNA Financial right at the top of the market and of course we know what happens afterwards there were other momentum types of managers because he gets labeled with the momentum crowd the two Freds the Fred Carr um and and they (24:37) they disappeared but my father was unique in the sense that he took his um capital from the sale and he went into an entirely different direction which was building businesses but the the the reputation kind of dogged him in a way that obviously kind of plagued him and I I wanted to read something by one of my favorite writers um this is Joe Nera who when when I was a young journalist I before I would write a feature story a long magazine feature story my ritual was always to read stories that Joe had written for Fortune because I could kind (25:15) of get in my mind oh here's how a good story is written so he was sort of my model of a great magazine writer um in my late 20s and early 30s and he actually edited um a a sort eight or nine page profile Bill Miller that I did uh for Fortune back in about 2001 and um so when your father died in 2008 um The New York Times always does this annual feature about basically the greatest people who died that year and so Joe was brought in to write a piece called The Goo investor and he talked about your father as this symbol of an (25:51) era the great goo years of the 1960 bll market and he he described him as becoming this symbol in much the same way that Michael milim became the symbol of the junk bond fueled excesses of the 1980s and Henry blet the symbol of the internet bubble and then he talked about how basically from between 1958 to 65 your dad had was on this incredible hot streak and I'm just going to read you a few sentences he says people were dazzled by his swashbuckling fores into the glamour stocks of the day like Polaroid and LTV which seemed only to go (26:24) up and up and his seeming ability to time the Market's every move it was a beautiful thing to watch his reactions Edward Johnson then the F owner of fidelity said what Grace what timing glorious nobody had ever run a fund like that before and the press in particular portrayed him as an investing genius Gerald s Jr wrote Newsweek at the height of his Fame radiates total cool he was the first fund manager to receive celebrity treatment in the Press which probably made what happen next inevitable after dazzling 1965 set SII (26:56) set out on his own seeking to raise 25 million for his new Manhattan fund he wound up with 10 times the amount his investors clamored to get into the fund Etc and so then he says um that in these books by people like John Brooks and Adam Smith who are both these Legends after your dad's fund had gone down 90% he said Sai was a figure of scorn in their books he says Brooks in particular portrayed size fall as a kind of deserved come up and for his investing style a metaphor for the excesses of the age little did the authors realize that (27:25) one day thousands of mutual fund and hedge fund manag with copy size investing strategies buying hot stocks primarily because they were going up which works in good times but not in bad ones only they called it momentum investing so it's just wondering what what do you think what what what does that raise both in terms of your sense of unfairness or or fairness or any other thoughts that you have let me first start with the side that would be most favorable to my father and then I'll I'll give you (27:56) another perspective um from what I understand that is that my father stopped managing that fund um he was he was still the the management company was still involved um it was the sale wasn't completed but my father had stepped back from the portfolio management of of that fund and all of his friends who were in that fund had left so when my father announced the the sale all of his friends like blar Tish who became my sister's Godfather and Harold Janine who eventually ran it and um all these brilliant businessmen who (28:45) were invested with my father immediately left so unfortunately yeah the the public lost whatever was 90% or uh and I spoke to my father about that and says well the number was less than that because there was a dividend and but regardless it's you know it's it's it's it's it's a lot of money and the reason why they lost that is because um underpinning these Investments that were in the fund like Polaroid and LTV as you mentioned um had probably you know very little intrinsic value relative to the market value of (29:25) the holding so um his approach was very much uh momentum B based as you as you said uh it's certainly not my Approach and but um you have to also keep in mind that look this was a very now I'm trying to be fair to him this was a very um small part a small but meaningful part of his career in other words these 10 or so years in fund management it at Fidel at Manhattan fund maybe a few more than 10 years but not that many more than 10 years that allowed him uh he was smart enough to capitalize that he was early (30:09) to this kind of momentum trade he was smart enough to raise a fund raise $250 million and during the period when the commissions by the way the load was like six s or 8% or something like you know something huge like that so they just raped in this money the management company sign management research was extremely Prof profitable he was able to sell that for something like 30 million dollar from what I understand in present value terms that's a lot of money right and he used that as the seed Capital to (30:46) do everything else that he he did in life it was a small part of his career but a very meaningful one in terms of uh being able to have that seed Capital now to go on and do many many more things it's also just so interesting in terms of your your own life because in some ways you're totally different from that as an investor and so I'm really interested in we'll talk more about your investing philosophy but I'm really interested in in the similarities and differences because in some ways I mean (31:17) I remember your father talking about how he had this fairly concentrated group of of very high quality growth stocks but then he he wants it to you you know something about um you know you shouldn't feel like you have to stay with a stock it's like a wife you know you don't have to stay uh and so he wasn't um you know he didn't have the long-term perspective that you have but he also did have a respect for quality and so can you just talk about how having this background of this father who is an extraordinary and kind of (31:52) iconic figure shaped your own investing philosophy yeah I mean it's is the more I realize in life like people are full of contradictions right they're just full of full of contradictions and they say one thing they behave another way what I learned very early because I I did work for my father in my teens and which he was probably one of the hardest bosses I had I had two internships one with Mario gabelli one with John Levan who was a partner with Michael steinhardt those were tough bosses and and I'm still in (32:29) touch with them today and but my father was a really tough boss and um I was looking at a company once and he you know I was it was a Medical Products company and he said you know do some research come back to me let's talk about it in those days you know you couldn't just go online and just download everything at least I didn't have that access so you call up the company i' get the 10 Q's the 10ks do all my research I came back to him like couple Weeks Later three weeks later and I said I really like this idea we should (33:03) we should buy some for the foundation because I was help I was involved with his foundation and on the investment side and he said don't don't worry about that I sold that stock already so he had already bought some which I did not know and then he already had sold it so I realized that this is like this is not the way I want to think about investing uh and I learned that very early that is not the way I want to think about investing that is not the way I want to spend my time in my life and fortunately I was reading Ben (33:37) Graham and Peter Lynch and Phil Fisher and a bunch of other you know invest books by other managers and I just gravitated to call it the world of value investing and so we went in very very different ways but to answer your question like I learned some very very important things from him I learned not to dismiss a company's a company as a potential investment just because on the surface its valuation looks expensive the best um Investments that he's made in his life and most of the money by the way he's made in Deal (34:21) making so I think that probably the public doesn't really understand that but most of the money that he's made uh was in dealmaking I think that if I looked at his his trades in in publicly traded equities not so good uh but he was involved early in some private companies that became public and then he wound up holding them for very long periods of time because he was friends with the the founder and the CEO and he just would not sell something that he was close to the the COO so that kind of forced him to you know stick with these (34:56) Holdings and I can give a bunch of examples but he made most of his money in these private deals I just wanted to stop stop you there because there such an interesting thing it's a little bit like um the realization that we often talk about that Ben Graham the the you know the patron saint of value investing and buying cheap as Charlie Munga would often point out made much of his money off Geico a really high quality stock and it's really interesting here that I just wanted to to pause and Ponder the (35:27) fact that that Gerald junor the great icon of momentum investing actually made much of his money from investing in businesses and then sticking with them for like what do you make of that it's such an interesting Insight like I said people are full of of contradictions and so Ben Graham was you know preaches diversification to students and yet he's highly concentrated in Geico personally right um the the businesses that um my father made money on were again the private ones that became public or in in (36:04) Deal making he made money there and he made a lot of money I mean not relative to the whole to the whole pie but he he did very very well in real estate and in art incidentally like really really well in art what I learned from all of that if I look at his mistakes and successes I learned a couple things uh the first is most of the money he's made by holding on to things the momentum trading that he was known for in in public equities and number two he made most of his money buying quality like quality is is was was very very (36:42) important to his success and that's something I've I've taken from him and I truly believe like the environment in which you grow up dictates the kind of person and mentality you will have in life so let me just quickly expand on that if you grow up during the Great Depression I would presume you're you're focus on saving every penny and looking for cheap cheap cheap and I think I'm just taking a guess that you're going to be much more focused on buying cigar butts in life then you (37:24) might be on buying the highest quality um asset you can find and maybe paying up for it um somehow my father figured out that the real money is in the best businesses and the higher quality assets and he instilled that in me very early and sometimes these things look expensive and so my point earlier is that he taught me very early not to dismiss something um that might look expensive on the surface before you do the Deep work and really understand what you're buying and what it's worth and the problem that a lot of (38:11) value investors have I think is that they all screen they all screen for low P ratios High dividend yields you know low EV uh cash flows what whatever it is they're screening and they will Miss because the the the kind of any value in that area is can get competed away and so I'm more interested in businesses that uh might look expensive on the surface but actually aren't and you have to be careful because a lot actually are expensive right and there's no margin safety there but there is Peter Kaufman said there is (38:53) um there's margin where there's mystery I I think that's so true there's margin where there's mystery and so sometimes the best investments are those that are misunderstood and might appear expensive and they're often quality kinds of businesses so I gravitate toward quality partly as a result of that influence he had on me if that makes sense so so let's jettison about four pages of my questions for you and go straight to Tesla which is really an important embodiment of of this and illustration (39:28) of this and tesra when when we were hanging out in Switzerland a couple of months ago was your largest position and your highest conviction idea and uh had gone up about sixfold since you bought it can you talk about how Tesla is in some ways a perfect illustration of what you do that it's it's something that maybe looked expensive has been regarded as overpriced by a lot of people it's been a favorite of short Sellers and you looked at it and thought actually no and this is much more dis disruptive Than (40:02) People realize it's a much it's got much broader potential Than People realize it's much more than a car company it illustrates so much in the way that you do things but if you could so so yeah let let rip tell us tell us what Tesla Illustrated about for a start something that that seemed expensive on the surface but actually maybe wasn't I wish I were smart smarter than I you know I wish I were smart in the sense that I think that I was late to Tesla um I started looking at the company in 2018 or so uh that had this huge huge (40:42) runup as it it turned profitable in 20 uh end of 2019 and so I missed this runup uh was interesting to me for a lot of reasons which I'll get into uh but then we had this covid selloff in February or we had a selloff the stock in February 2020 that's when we took our initial position we our average I think is about $41. (41:06) 66 a share so we've we've done very well uh since that time but I think it's it's early Innings and I could totally be wrong but I think that this company is is definitely uh one of the most most misunderstood companies that I've I've seen in my 25 years or so of managing money for others it's it's such an interesting um company and it and it's it's so misunderstood and I think it's misunderstood for uh a few reasons one you have this kind of overarching personality where people start to formulate opinions based on what Elon is (41:42) is is has decided to say during the day um they people think about it as a as a as a car company um and we can talk about that I don't think fundamentally that it it is and that might seem like a this crazy statement but I'll I'll get into that and third it is a um most people haven't actually dived in right they've not spent the hundreds and hundreds of hours on this company and they haven't um really gone through the financials to understand the the economics of the business so there are few things coming (42:24) together where I think that this this company still remain misunderstood but there's a reason why it's up whatever 15,000 or so since the IPO and there is a reason why it continues to go higher uh over time and because there are plenty of people that do get it right and that it's it's just getting more and more concentrated into what I would probably call um hands of smart money but um again I I could be wrong but the market seems to to agree that this is something very special so let let's break this down a little bit (43:02) so sure one thing that you've said is that the Skeptics and critics and the short Sellers and the like fail to understand that it's really not just an electric vehicle company so what is it and I'm I'm agnostic about all of this I'm just I'm just unpacking this I I don't have a um a dog in this race I'd say it's not just a car company it is very much an EV company but it's not just a car company so let me give you the framework or let me let me explain the the framework that I use at (43:33) least to uh rationalize my decision to be invested whether whether right or wrong in the early 1900s um you know there's this ice vehicle Henry Fort comes out 1908 with the with the the Model T and um people were really really skeptical about the Model T there was a magazine called Carriage monthly and editor-in chief of carriage monthly which was like the this was a very popular magazine at the time the editor and chief said that human beings have been carried by beasts by for thousands of years why would the future look any (44:10) different and of course it it it did um why were people skeptical well there were no paav roads Supply chains were very limited there were very few fueling stations there was very little Manufacturing capacity kind of sound familiar right to today in EV terms um but ice Vehicles Henry Ford disrupted the horse and carriage very quickly within 20 years which is happens to be pretty much the time frame um during which SC curves take formation is a 20-year disruption period uh with respect to pretty much all these transformational Technologies (44:56) going back to the guten per printing press and the steam engine and the spinning wheel it's all about 20 years so my point is that there's all of this skepticism and you had horse and carriage competing against this noisy ice vehicle both were forms of transportation both got you from point A to point B but one was fundamentally different it was fundamentally different because it was a much more efficient um process of getting you from point A to point B and that is the lens um from a kind of very high top (45:38) down level that I look at Tesla and electric vehicles in general they're just a much more efficient way to get you from point A to point B than ice vehicles and what I mean by that is the cost of ownership and cost per mile is just much lower and so then it's a question of what are the risks what are the competitive advantages does Tesla have over the rest of uh the competition in EV and how will Tesla um survive and thrive the ice vehicles are going the way of the dinosaur that that is a big assumption that I believe is is (46:21) true because I think that EV adoption is following the traditional s-curve adoption phase and there's not a lot of time left for um for ice vehicles to to exist so you've written a lot in the last couple of years about disruption can you talk a little bit about why why in a way we just have trouble as humans understanding disruptive companies it's an evolutionary um issue that we all we all have um because evolutionarily our brains are wired to think in linear terms they're not designed to think in (47:10) um exponential terms which is how disruptive um Innovations and Technologies take their for as as an esur and so there's typically in in any disruptive technology again going back to um the you can go back to the printing press you can look at the spinning wheel and the steam engine the adoption of um cable uh the adoption of ice Vehicles right the adoption of cable the adoption of streaming they've all happened within roughly a 20-year period And by all happened I mean they've gone to 90% adoption so typically you start out (47:54) pretty slowly and then um there's a Tipping Point where this s-curve formation really takes the exponential um component of the s- curve takes place and there's just massive very very fast widespread adoption and our brains are not uh wired to think like that and that's another reason why we can't understand the power of compounding like we have to sit down and actually take the calculator out and we can do the math and we can do the math and look at look what happens if you put $1 in have $630 today so you have 630 (48:29) times your money in 66 years like it's and that's 10% compounded so we just don't think like that I think the same thing is happening with um the adoption of of electric vehicles when you and I had dinner in clusters uh in Switzerland at the value X event that that gu spear hosted a couple of months ago um I remember at one point you mentioning the without Marcel PR who's my favorite writer probably you might actually not have invested in Tesla and it's a it's an unusual comment that was perfectly (49:06) designed to Peak my interest and approval tell us why what the um what the great Insight was from puce when he was writing around 1913 well I have this problem like whenever I read fiction I'm looking for little anecdotes of of what I can take from that fiction and apply it to the world of investing I should stop I should stop doing that but and just enjoy the fiction but in this case uh PR uh who was the Monumental French author who wrote In Search of Lost time uh as you said uh he he wrote I believe it was in you you'll know more (49:43) better than I know the the fourth or the fifth book within In Search of Lost time he said the real Voyage of Discovery is not in seeking new Landscapes but in having new eyes that is so was when I read that I said wow this is this is this is Marshall PR speaking about um asset light growth businesses that are reinvesting now penalizing their earning power now uh to create a higher intrinsic value later and Adam Cecil by the way gets it Adam Cecil totally gets that and um the thing to remember like with asset like grow (50:27) companies especially software companies the investment is often hitting the income statement fully so by that I mean that there's no capitalization of the expense so if you have a let's say if you're talking about a a drug company pharmaceutical company the the R&D is is is is is is flowing through the income statement and hitting the income statement uh when you have a software company the same thing is happening but if you have let's say a steel company or a very asset heavy company you're capitalizing that expense (51:07) over seven 10 even 15 years right and so um the the the consequence is like the multiple is going to be lower because just you're going to have a higher earnings power today if you're penalizing all of your your income statement now your earnings are going to be lower and your mul is going to be higher so that's often why uh rapidly growing asset light in particular growth companies uh have a higher multiple than other companies do and it's super important to understand that like and and that's that was proce (51:41) to me just understanding that you have to think about valuation with with new new eyes to align with the kind of world that we're living in a world that has moved away from Acid heavy to acid light hey guys it's Kay Fink here host of we study billionaires today I wanted to tell you about our show sponsor Vasa the dream of owning a vacation home can be daunting from finding the best guests to the maintenance to organizing the cleaners after every guest day with vassa they make that dream into a reality as a 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(52:57) com in a way it reminds me of what Bill Miller said to me back in 2000 and 2001 when he was getting pillared for buying 15% of Amazon and Bill was hugely influenced by philosophers like William James and Vicken Stein and that was one of the reasons why he could be so agnostic about these things because he could say Let Let me let me look at Amazon with new eyes let me look at it without bias and say well what really is this is it a money losing company that's doomed to fail and it's the embodiment of the excesses of the do era or is it (53:31) something that actually has this unbelievable CEO who's very longterm and is um deferring the rewards because he's incredibly patient and it has a cost advantage that's going to become apparent down the road and so because Bill is such a free thinker and had a different set of sources that he was drawing on philosophical sources that enabled him to see things more agnostically without bias he was able to understand Amazon and so it it seems to me and and I mean he he told me last year or so that basically he's the (54:09) he's the biggest single individual shareholder of Amazon who isn't called Bezos um this before Jeff bezos's ex-wife changed her name from Bezos because she's obviously a huge shareholder but so I think this gets at a really important issue which is which I think PR is getting at uh and Vicken Stein and William James got out in the field of philosophy which is that you have to try to actually Define like what is it that I'm looking at like and and if I look without bias and with fresh eyes um will I see something that the (54:42) crowd isn't seeing but it's complicated here in some ways because as you've pointed out in some of your writings we're in this age of incredibly rapid technological change and we've never really seen this happen and so it's very hard to see Tesla and be like well what really is this because as you point out it's is it a car company or is it a uh you know what are the other fields that that Tesla can actually revolutionize so uh so I gave you the first kind of like lens at which I'm (55:11) looking at Tesla as competing um as an EV company against ice vehicles and EV as a whole being much more efficient than than ice but the other lenss I should share is that um I don't think you can understand this company if you don't understand assuming that assuming that I'm right right it could be totally wrong but uh as assuming that I'm right I don't believe you can understand the company if you don't understand that um to me it's an advanced electronics manufacturer and software company (55:51) competing against a traditional automobile manufacturing company and so why is this important and and and and there's a reason why I believe that and I can and I can talk about that but why is this important this is super important it's an electronic software company competing against traditional Auto it's super important to understand that because there's certain things that kind of like come into play there's there was a um aeronautical engineer by the name of Theodore um Theodor Wright (56:23) and Theodore Wright devised this concept called rights law which states that for every doubling of cumulative production that costs Fall by a constant percentage and when you understand that Tesla is an electronic software company you understand like where is this company along this rights law curve Tesla is so much further along the curve than any of the ice vehicles that are constrained because they're not electronic in software companies they're traditional auto companies um and it's Tesla's so much further along the curve (57:06) with respect to other EV companies and so as ice Vehicles traditional Auto catches up Tesla just moves much further along the curve and so the the the spread between the competitive advantage of Tesla the other EV companies and traditional Auto is actually widening it's not getting more narrow it's widening because of its massive scale which allows it to push itself out along the the cost curve further than anybody else and so one of the major competitive advantages that the company has is that it's a lowcost producer like that is a (57:46) very important to understand and the street sees that the street sees that they spend a$7 billion for a factory a factory can produce a million vehicles and the gross profit per vehicle right now is about 7200 which means that they put up a factory for 7 billion and they're making their investment back in a year nobody else can do that Ford is losing 36,000 or so uh on each EV so while Tesla is making uh 7200 or so gross profit per vehicle I'm not a fan of like looking at unit economics in terms of CAC and and (58:35) and long-term value and and and blah blah blah but I am a huge fan of thinking about what are the unit economics of like the what they're selling you know if you're selling a a soda can how much is Coke making per can right if you have a McDonald's how much is it making per restaurant if you have a uh if you're thinking about Tesla well how much is it making for each Factory which really is its core product is the factories you know how much are they making per Factory that they they put up and what's that worth you know what's (59:09) what's the present value of that so I think it's super important to understand that this you know when you when you think about Tesla's an electronic and software company different things come into play like like rights law and second law of thermal dynamics is also super important to understanding this company so you've said that the there are a lot of there are a lot of things going for the company right I mean they um they're in the early stages of this massive migration towards electric vehicles (59:40) they're very formidable in power storage and Generation Um there are all these other kind of unique optional that you've talked about like you've you've said that it may be that they can eventually license their technology for self-driving Vehicles full s driving Vehicles so there's a lot of there's a lot of tremendous upside so let's say we buy that but then at the same time the market is telling us that there's something deeply wrong right there was an article in the New York Times (1:00:07) yesterday that was headlined Tesla's troubles raised questions about its invincibility there's this tendency obviously as the momentum in terms of perception of Tesla has changed there's all this criticism sales growth is the sales growth rates are slowing the there are all these Brands like BMW and byd that are flooding Market with electric cars musk is obviously an incredibly divisive figure and people always say he's too thin stretched and unfocused and uh I guess his his pay package for over $50 billion got struck down by a (1:00:40) judge recently and the New York Times is complaining there have been no new models of the car since 2020 what do you make of all this is this just an opportunity to buy more at a reasonable price or is there something that's gone wrong here well first of all we we actually did buy more uh around current prices and um it these arguments most of them at least except for the 50 billion compensation package most of these arguments sound like the same arguments you could go back and read since the company went public they're probably (1:01:21) probably less negative articles today than there were around 2011 2012 13 but they seem very very similar and yet the stock continues to go higher up 15,000 or so percent since its IPO and what is um what's the case with pretty much every Growth Company from Amazon to Microsoft to any any great Growth Company there are always periods when the stock is not going up right there have been so many massive draw Downs in Tesla since its IPO like there's about to be couple dozen at least 40% draw Downs since it's IPO for at least 30% draw (1:02:15) downs and that's just part of investing in growth companies no no businesses and I and I wrote I wrote a paper called power and challenges of of compounding which is on our website but growth companies just don't go in in straight lines they they move more like in a in a step formation and if you look at the kind of longer term um chart of Tesla Tesla's just kind of in a step formation just like Amazon was and Microsoft was let's let's talk a bit more about that paper on the power and challenges (1:02:53) of compounding you you mentioned um the statistic in there that you you talked about before that over 66 years $1 invested in the S&P 500 in 1957 would have grown 630 times and so then you raised this very important question where you said why then are there not more millionaires or even billionaires and you said the answer I believe is because the vast majority of investors interrupt the compounding process unnecessarily and you quote Charlie manga saying nervous money never wins can you talk about the importance of (1:03:24) simply not interrupting the compounding process because it seems very Central to to your philosophy in of investing whether it's in Tesa or anything else well I can tell you that uh I've made so many mistakes mean I've been investing since I was 11 years old and um I use the term investing Loosely you know when I was 11 years old I I invested like $100 and but when I was in my late 18s I actually had a fairly sizable chunk of uh United Healthcare for whatever reason I was spent a lot of time on um managed care companies (1:04:07) publicly traded managed care companies and I put quite a bit of money uh for me at the time in United Healthcare and uh they had this they had a massive selloff like shortly thereafter and I panicked and I sold everything and that stock must be up hundreds of times I decided not to look because I had too painful but that stock must be up hundreds of times since I sold that um I've sold many other companies over my you know over the years the three decades plus that I've been involved in in equities I've sold many (1:04:45) companies prematurely and what I came to realize that that's the real cost um Peter pet Peter Keefe who I had this wonderful conversation with recently at at lant's work calls it the silent killer right selling great compounding machines too early so I've made that mistake many many many times in my life and I've come to the point where uh I realize like that's that's a huge huge huge cost so you don't want to interrupt the compounding process unnecessarily but that's easier said than done so like how (1:05:18) do you do that and I have my own system for for doing that and it's an evolving system uh but that's not easy and you're talking about all of the negative press regarding Tesla but there's plenty of negative press regarding other Holdings and the longer you hold something the more you're going to come across negative articles uh you're going to come across friends who will try to influence you and but at the same time you have to be totally open-minded right you don't want to get um just in this (1:05:54) commitment consistency uh by you don't you don't want to have commitment consistency yet you you you also don't want to interrupt the compounding process unnecessarily just not easy right and as Charlie said why should it be easy you you asked a an important question to Peter Keefe who's a I I would really encourage our listeners to learn more about P Peter was a guest on this podcast and it's it's just an amazing long-term investor incredible investor and very thoughtful person I I'll (1:06:20) include our interview in the in the show notes but when Christopher was interviewing him I was listening I was list to a recording of the interview last night from the ltis work conference and you said to him how do you resist the temptation to sell compounding machines and to what degree are you comfortable letting market value exceed your estimate of intrinsic value and I wonder if you could answer that yourself because that seems to me an immensely difficult challenging question what to do when these companies that you (1:06:51) love that a great business is become really pricey and how do you think of that because I've seen you in the past in your letters to shareholders blaming yourself for selling TR panion before it quadrupled again um I've seen you kind of holding on to some of these great growth stocks that people complain about and then at the same time you know you could say that in a way you're guilty of the same thing that your dad was guilty of of buying these very high price stocks that were beloved and and having (1:07:22) a concentrated portfolio although you stay wedded to them for much longer how do you unpack that for us yeah so I think investing is a super super personal journey and you have to figure out the style that meshes or lines with your own personality and your own approach to investing the way I have minimize the chance of selling great compounding machines too early is to have a fair number of positions so yeah I'm I'm I'm very concentrated with respect to how most people would think about the portfolio but I'm also pretty (1:08:14) Diversified with respect to some other managers so we have about 21 Holdings today I have found that having more Holdings it allows me to be able to hold on to businesses that might be experiencing difficult times or might be in periods of overvaluation if I had all of my money in let's say you go the opposite direction all of my money in one stock it's
2024-05-31 07:16
