Big Tech Stocks w/ Adam Seessel (TIP686)
(00:00) Google Charlie Monger said himself is the best business ever invented it is literally the toll road on the information superhighway anytime people go to search the internet they go through Google it has more than 90% share it is the ultimate toll road uh which is a term Buffet used to describe a great business so this is the very textbook definition of a business that has a moat right where people come at it hard not just any companies but like huge smart Titans like Microsoft and Amazon they come at it hard and they (00:32) can't dislodge it right that is the very definition of a business you want because talk about certitude and Net Present Value well theoretically Google has a mo but let's put it through the ringer and see if it actually does have a mo right let's battle test it so it's been long battle [Music] tested so for those who aren't familiar with you Adam or they missed uh your previous appearance on the show you're the author of the very popular book where the money is and you know it received High Praise from Legend (01:08) investors like Bill Amman and Joel greenblat and I really can't recommend the book enough and it's certainly one worth reading and rereading so I wanted to start today's discussion Adam by talking a little bit about your career and your background which you know eventually turned into this book you launched uh gravity Capital Management in 2003 but you you weren't the technology investor let's call it that people might think of you as today so talk about some of the pivotal moments that you had throughout your career that (01:40) helped shape who Adam is here in 2024 sure well uh thanks again for having me and I hope this is beneficial to you and your listeners you know I started my career as a journalist clay I was a newspaper reporter and then got into investigative journalism in my 20s and got people convicted of crimes and one Awards which is all very exciting and rewarding but when I was turning 30 my wife and I were you know starting to expect a family and journalism the hours were terrible you were always chasing stories I didn't think that was good for (02:14) a family and the money was terrible and this was in the mid 90s even before the internet so um I just said you know what let me take my research skills onto Wall Street so I did and I was lucky enough to get a entry level position at Sanford Bernstein a very good uh Wall Street firm and they trained me up I met some legendary analysts there like Weston Hicks who uh taught me about insurance and Warren Buffett then I sort of progressed onto the buy side with a couple of well-known firms Baron Capital Ron Baron and then Chris Davis Davis (02:51) selected advisors and about 20 years ago I said I'm ready to go off on my own I don't not a very good employee pretty strong willed and stubborn so I thought it was better for me to start my own business so I started gravity capital in 2003 so generally speaking it's been a good run the records been good although it's really been three distinct records which gets into your question about tech it's the first decade or so was excellent versus the S&P after my cut I was investing sort of in the classic value way old economy stocks cheap (03:27) valuation and everything was going great and then around 2014 my performance started to flag and that continued into 15 and well into 16 and after 2 and a half years of bad performance I said what am I doing wrong you know either I'm wrong or the Market's wrong so it was one of those good binary questions where you know either I was doing things wrong or the market was seeing things wrong and I decided that I was doing things wrong that a lot of my old Ben gram cigar butts um just weren't working anymore you know value investing is a (04:02) great construct because there's a lot of discipline around it but in the digital age what I learned was there's no more reversion to the mean a retailer Who falls off the pace is not going to kind of come back like the way they used to um because e-commerce is eating brick and mortar retails lunch and you can put that you know you can spread that across all sort of sectors manufacturing Health Care financials you know those have all been poor Investments over over the last 10 or 20 years generally speaking because (04:34) the best years for a lot of these companies are behind it so whereas before you could invest in a fallen beaten down stock that was cheap and trust that it would come back that's not happening anymore because Tech has disrupted so much of the economy so maybe you know a little less than 10 years ago I started What I Call Value 3. (04:55) 0 investing actually I don't call it that a friend of mine coined that term I steal it from him and so I'm inv ing in much more high quality businesses whose best years are ahead of them and a lot of those happen to be Tech so what I've been trying to do in the last eight or 10 years and the reason I wrote the book is to try to codify or formulate a way to think about tech in a value framework because Tech and value investing historically haven't gotten along but I think they can get along so this is my way of reconciling or synthesizing the old school value Concepts which I (05:31) learned which are still useful with the new realities of the digital age so that's it in a nutshell so looking back it really makes a lot of sense to go through the transition that you did but one of the most difficult and important parts of investing is recognizing when you're wrong and figuring out how you can fix that so I really deeply admire that you came to that realization and focused on delivering results rather than protecting your ego or protecting their previously held beliefs well clay the two are related you know delivering (06:05) results uh does tend to help the ego so and the other interesting point you made there is uh you know you're now looking to invest in companies where their best days are ahead of them whereas it's just flipping this old approach on its head in a lot of ways where you know some of these old economy businesses saw their best days behind them it's certainly not ahead yeah I mean the world has changed right I mean in the 80s when Buffett invested cocacola you know they had all sorts of great opportunities ahead of (06:34) them you know um they had uh per capita consumption increasing in the third world they had per capita increasing here in the states New Coke was introduced and customers rebelled because they didn't want change you know that's the best kind of business you can have selling sugar water and people love that red can or the glass bottle and the growth was ahead of them but per capita consumption of soft drinks the United States peaked in 1999 and uh it's been declining so in their Core US market they have a a real (07:08) problem and internationally health concerns sugar concerns about sugar and diabetes is growing so I'm not even sure about the growth overseas but in other words it's a business that used to be great and is no longer as great and you can say that about a lot of classic late 20th Century Investments you know whether it's well Fargo or Exon or Bank of America these are businesses that used to be wonderful but aren't wonderful anymore on our call the other day we uh chatted about you know your track record and how you've done since you started in (07:48) 2003 and you explained how from a big picture you had outperformed the S&P 500 over the entire tenure but you were doing that anyways at the say the first decade or so and then you came to this realization when your strategy wasn't working as well as it once was and it reminds me of Buffett in a way where he's had to evolve his strategy over time and adapt so yeah please talk more about that Ben Graham was value 1. (08:16) 0 this is my buddy Chris beg's construct Ben Graham's value 1.0 which was balance sheet based and very negative I would say in some ways in the sense that he wanted to see what the liquidation value of a business was that was Ben Graham it was great cuz it was a discipline but it wasn't great cuz it didn't really care about what the business did in the future what of Grahams old analyst used to say if you ever started talking to to Ben about what the business actually did he would get bored and look out the window he (08:46) just wanted to know the assets and the liabilities and what it could be sold for and he wanted to buy it below that liquidation value so that's the framework Buffett inherited and he revered Ben Graham but in the 50s when Buffett was a young man and starting to invest America was a very different place than Ben Grahams a generation ago when it was in the depression and businesses were beaten down in the 50s you know America had won the world war and and we were ascendant and business was growing and stable and we had the (09:17) Securities and Exchange Commission and generally accepted accounting principles so the rules were standardized and you could understand financial statements and businesses had great growth ahead of them Decades of growth you know cocacola Disney Geico all these wonderful Buffett Investments so I call that value 2. (09:36) 0 you know buffet pivoted with the help of Charlie Munger away from his mentor's defensive somewhat negative stance to a much more positive optimistic view on businesses so in many ways value 3.0 is just a continuation of that except we're widening the aperture to include Tech you know which Buffett aside from Apple has missed you know he missed Google he missed Amazon he missed Microsoft he's missed all of them uh and his performance has suffered as a result so I'm just suggesting that just as he pivoted from Graham while retaining many (10:12) of the critical variables of Graham's philosophy we do the same with regard to Buffett and value 2.0 so you recently pulled data on how
much of the Market's value creation came from Tech versus non-tech over the past 20 years what did you find on that yeah well this was a fun exercise I did with one of my analysts and I've been saying rhetorically speaking hey how much of the value in the economy going forward is going to be created by Tech you know as opposed to say Industrials or retail or healthare or any of the other sectors (10:48) financials and it's intuitive to me and I think to most people that most of the value in the next 10 or 20 years will be created in technological or technologically related fields right that's where the value is being created on the margin but I thought let's quantify this let's go back last 20 years and say how much value has been created by Tech so what I did is I took gixs has these 11 sectors you know S&P or I think it's msci or one of the the data services has 11 sectors for the stock market in the S&P 500 so I took the gixs (11:23) information technology sector and then the gixs communication Services sector where Google and a couple other big tech companies are and then I put Amazon and Tesla in that bucket because they uh for various reasons have been put into the consumer discretionary bucket but they're really tech companies so I said well in 2004 the market value of those four buckets the it sector communication Services plus Amazon Plus Tesla represented 19% of the US Stock Market Value that was 20 years ago and today those same four buckets represent a (11:59) little under half of the US Stock Market Value so 46% to be precise so the stock market over the last 20 years has gone from less than 20% Tech to almost half Tech which intuitively makes sense and if you further quantify it 60% of the delta in market value I can't remember the numbers but the market cap of all US Stocks was X and then in 2024 it was y 60% of that Delta was created by Tech by these four sectors that I'm talking about so that was interesting to quantify 60% maybe a little shy between 55 and 60% of the value Creation in the (12:41) US market was intact and I think it'll probably be at least that much going forward because you know whether it's AI or driverless cars or virtual reality or Quantum Computing I mean pick the you know the mega Trend dour they come in and out of fashion which I find somewhat amusing but you pick whatever the mega Trends are they're all Tech Trends so Tech is where the money is as the book title says and Tech is where the money is going to be so it's foolish for us as investors not to tune into the technology sector and understand how it (13:20) works because it does function as a business and it functions just like any other industry you just have to understand the particular ways it functions so you mentioned a bit earlier the reversion to the meme concept and uh I've thought u a lot about this and one of the things I've learned is that you know the mean isn't a real concept you know that's actually out there in the world it's something that we sort of make up in our heads and I recall during our last chat you explained how there isn't a mean that you know but as you (13:55) mentioned the brick and mortar retail there isn't a mean that they're going to revert to when they're being disrupted by Amazon and with that said the intrinsic value is also a number that us value investors the number we try and come up with and ensure we're paying below that intrinsic value but like the reversion to the mean it's also a number we kind of just come up with ourselves and I guess there's not necessarily a law in the universe that states that a price has to revert back to that intrinsic value and you shared one (14:24) example in your book of a company called uh Avon products so you bought this at $12 a share believing that it was going to revert back to fair value and a knowledgeable private buyer offered $23 a share but that ended up not going through I believe and it the stocks slid down to $9 so how do you reconcile these Concepts and mental models that are simply in our head versus just reality well thanks for uh bringing up Avon products that was one of my signature failings back in the mid decade of 10 years ago so always stings (14:58) a little bit so I'm going to use it instructively to keep me on task but yeah that was not my finest moment as an investor um I would say that intrinsic value is different than reversion of the mean in the sense that it's still a valid concept let's just start with the very first principle of Net Present Value right a business's value or any Financial instruments's value right a CD or a loan or it's equivalent to the Future values of all its cash flows discounted back to the present you know if you had a time machine you could (15:29) travel forward and understand what the cash that Amazon was going to produce from now for the next 20 years say you would have an excellent understanding of Amazon's intrinsic value but as you say you know we don't know the future and so we don't know what the intrinsic value of Amazon or any other security really is that's what makes it an interesting business that's as they say why they run the horse race so you can't be certain so that's number one but you do have this excellent framework of Net Present Value because conceptually it's true (16:07) right it's not like reversion to the mean it hasn't been disrupted by any business or economic or social force a business is still you know theoretically worth all its future cash flows discounted back at an appropriate rate so then what do you do well then what you do is you start looking for relative certainty which is what Buffett did in value 2. (16:30) 0 you know he said Coca-Cola in the 90s or in the 80s what how could this miss you know Disney in the 60s how could it Miss uh Gillette has an 80% market share of men's razors how could it Miss Buffy used to say I'm only upset that you know Chinese and other Asian people don't have facial hair that's the only inhibitor of gillette's growth they don't have to shave every day um you know he used to call these stocks inevitables because wasn't 100% inevitable but it was as close to 100% inevitable as you get in the business of probabilities right (17:07) Gillette Coke Disney would continue to grow in compound value would continue to grow their earnings and so you could have a a reasonably high certitude that the net present value of the future cash flows was high right what is a current multiple you know the current price versus the current earning so if you have a high certainty relatively speaking of a lot of cash flow coming in the future then you should pay a relatively High multiple of current earnings right because the value is not in the current earnings the value is in (17:41) the tail so to speak so those things are still true but then we say well let's get our heads into the early 21st century economy what are the inevitables today like Amazon has 40% share of e-commerce 50% share of the eyeballs on e-commerce a delivery Network that's Second To None they now deliver more packages on a daily basis than either UPS or FedEx which is mindblowing so what's the risk that they're going to be disrupted you know in other words how inevitable is there continued Primacy in e-commerce number (18:20) one and number two also in cloud computing where they have a 40% share huge economies of scale right huge first mover advantage so those businesses to me look very much like the inevitables of the late 20th century like Koke and Gillette and Disney they're not going to be inevitable forever right Coke was an inevitable until it wasn't Disney was an inevitable until it wasn't so I'm not saying forever but you know for a long-term investor Horizon you know 5 10 15 20 years that's how you get comfortable with intrinsic value you get (18:54) uncomfortable by business analysis and say well what's going to disrupt this you know and if you can say almost nothing then you can start to estimate with reasonable certitude your estimate of intrinsic value you could be wrong things could change um but that's how you do it that's uh certainly well put and uh we'll be getting to chat a little bit about alphabet and Amazon and where they sit today but I wanted to make one comment with regards to Buffett and Munger so after Google was launched launched and it really just came onto (19:31) the scene in the 2000s Buffett and Munger they saw like right in front of their faces that gu was paying $1 or $1 per click and uh getting uh great returns from that very high spin for something that seems that you know just so minuscule and Munger actually stated that one of their worst investment mistakes was not buying Google and of course they bought apple and you know that was a home run play but part of me still wonders if they just have really missed the boat on a lot of these big Tech names you know these businesses are (20:02) some of the best businesses the world has ever seen um they arguably traded at pretty good prices back in 2022 um I'm curious to get your thoughts on Berkshire having over $300 billion in cash but they've still never managed to buy any big Tech besides say apple maybe like a little slice of Amazon but nothing that really moves the needle for them yeah I think about this a lot as you can imagine is I call myself a value 3. (20:30) 0 investor or a new value inv you know I have a mixed feelings about it um with regard to Berkshire sometimes I feel defensive towards them and sometimes I feel you know as you're suggesting more critical about them so let's see what do I start with I'll start with the critical part so I mean you're absolutely right that apps and apple they've missed Tech and if you look Apple they only started buying Apple when it became sort of a consumer product Products Company when it's you know Jobs died the risk of crazy moonshots was off the table you (21:05) know the new CEO was a supply chain guy very little imagination good operator keep the train running on the tracks massive Capital return right Carl icon launched a proxy fight and got them you know lit a fire under their butts to start buying back stock so of the mag 7 they are I think either six or seventh in terms of R&D as a percent of sales so they're relatively unambitious in terms of how much cash they plow back into their future so it became very much a sort of a value 2. (21:38) 0 investment harvesting the cash we got an iPhone you know we're going to crank share up we're going to raise prices on the phone we're going to P the Apple Store Services it's kind of like cope it does bother me that like in 2017 and 2018 I was at the annual meetings when they said gosh it was stupid we miss alphabet and Amazon see I don't fault them for when they ipoed because the battle lines were still being drawn right and Buffett used to say I didn't know whether Google was going to get leap frogged by Alta Vista and Yahoo but I seven or eight (22:16) years ago when they issued their mayaula it was clear that Google was the winner and it was clear that Amazon was the winner and uh those you know they said oh we missed it and at the time I was like you could buy it today and you know those stocks have doubled and tripled in those seven or eight years so and as you say in 2022 was another amazing buying opportunity so I do think that there's some validity to say that they have largely missed Tech and it shows in the stock price I mean Berkshire halfway stock price has been not much better (22:52) than average over the last 10 or 20 years in stark contrast to you know from 64 to 2004 when it was just a a moonshot but in 2004 to 2024 it's been quite quite average so I do think that they can be faulted for having largely missed Tech even when and perhaps especially when they admitted that they missed it it was like as if it were over you know and wasn't over now on the defending them side Buffett was 74 years old when Google IPO so maybe I'll be forgiven for not missing the next Trend when I'm 74 you know he doesn't use email he didn't (23:35) come of age in the tech era you know I'm a little older than most but my college class was the first class at Dartmouth to be required to have a personal computer so as a freshman I was required to have a PC so I'm young enough to have kind of gotten Tech I was still forming when Tech was nent yeah he was forming when there was one newspaper and every market and it was a mint you know Washington Post was a monopoly and Buffalo News was a monopoly and he was not he learned to invest when they had a very slow moving slow changing economic (24:12) environment to buy the dominant businesses that could kind of grind out slow market share gains like Koke like Gillette he did not come of age and he is not programmed for a disruptive age where things are moving very fast and it pays to invest a lot of money through the p&l and depress your earnings so if I miss a huge Trend when I'm 74 you know I hope people will forgive me hey everybody it's Clay Fink here host of we study billionaires one of my favorite things about being a host of this show is having the opportunity to (24:47) host live events for our tip Mastermind Community we just recently hosted our live events in New York City where I got to meet up with members from all over the US Canada and the UK we gathered to have great food and interesting conversations and also enjoyed seeing the city as we hosted a boat tour to experience all of what New York City has to offer for our Mastermind Community we host three Live Events each year we have Omaha during the birkshire weekend New York City in the fall and London typically in the fall as well what makes (25:20) the Live Events so special is having the opportunity to have authentic and real connections with successful people who come from all walks of life some members are entrepreneurs some are private investors and others are Equity analysts and portfolio managers but we all have one thing in common we're value investors and we're there to learn and engage with like-minded people in addition to our Live Events we also have a platform online where members can talk stocks and share ideas and we also host weekly live Zoom calls that we record (25:52) for the group one of the things I really appreciate about this mastering Community is that you meet like-minded people from all over the world and you have a chance to hang out with them have a ton of fun and also talk about investing so if you're not into meeting up in person we also chat online about our stock ideas what books we're reading we host q&as with special guests like Chris Mayer and gotam bade and members often times share their portfolios in the opportunities that they're currently looking at in the market one member Chad (26:21) recently told me that he is consistently Blown Away by the quality of the content and the members in the group and David who's been with us since the beginning has brought me one of the most valuable friendships I've ever had whether you want to talk stcs or simply just want to network with like-minded people I'd encourage you to apply to join our tip Mastermind Community today as we're capping the group at 150 members simply go to theinverseside Buy Low sell high it's easy to say hard to do for example High interest rates (27:05) are crushing the real estate market right now demand is dropping and prices are falling for many of the best assets it's no wonder the fundrise flagship fund plans to go on a buying spree expanding its billion doll real estate portfolio over the next few months you can add the fundrise flagship fund to your portfolio in just minutes with as little as $10 by visiting fundrise. (27:32) com WSB that's Fu ND i.com WSB carefully consider the investment objectives risks charges and expenses of the fundrise flagship fund before investing this and other information can be found in the funds perspectus at fundrise.com Flagship this is a paid advertisement all right so this
brings us to chat more about alphabet and Amazon so you chatted about these two names in detail in your book you still own both names in your fund uh so I wanted to bring you on to give a bit of an update on these two names especially (28:11) I believe it was 2022 your book was released is that right yeah okay so 2022 your book was released and that was a broader bare Market overall and alphabet and Amazon were beaten down and oh yeah when we look at January 2023 alphabet was priced as if chat GPT was going to destroy his business model which yeah that was a funny one which isn't necessarily true yet at least and the Stock's at 100% in less than two years since then uh how about you share just broadly some of your updated views on alphabet and if anything's changed much (28:45) over the past couple years yeah well alphabet Google Charlie Monger said himself is the best business ever invented it is literally the toll road on the information Super Highway anytime people go to search the internet they go through Google it has more than 90% share so if you're selling microphones or services to divorce attorney or running shoes or you know uh plumbing supplies you pick it you know you got to advertise on alphabet to be seen it is the ultimate toll road which is a term Buffet you know used to describe a great (29:21) business and people over the years have tried to take away their toll road just because it is such a wonderful business Amazon had a secret project called A9 and they hired the guy who literally wrote the first textbook on search algorithms a guy named udy manber and so he hired him to start Amazon search business guy tried for a couple years then quit and went to Google leading Bezos to say treat Google like a mountain you can climb it but you can't move it so and then Bing of course has been trying for two decades and has (29:57) spent tens of millions of dollars trying to take away Google search and and to me the ultimate proof point of Google's dominance came in the period you referenced almost two years ago now when Microsoft took a big stake in open Ai and said come on triy Bing it's now partnered with open AI it's going to be such a better search engine and Google stock declined and everyone was ringing their hands since then you know I tried it I'm sure you tried it and then we went right back to Google being search share of search in the US market has (30:31) actually declined since the openai announcement which is an incredible stat and you know not one that many people know and the media certainly doesn't want to dwell on it because the media was wrong right the media said Google's way behind they're going to lose out on search and black George Washington and all this stuff remember the hallucinations and stuff for their Gemini product so this is the very textbook definition of a business that has a moat right where people come at it hard and not just any companies but like (31:04) huge smart Titans like Microsoft and Amazon they come at it hard and they can't dislodge it right that is the very definition of a business you want because talk about certitude and Net Present Value well theoretically Google has a moat but let's put it through the ringer and see if it actually does have a mode right let's battle test it so it's been long battle tested um and just think about it'd be interesting exercises how many hundreds of millions of dollars did Bing get from free publicity from all the media coverage of (31:38) open AI I bet you it's over a billion dollars of free advertising right headlines and news reports all saying go try being it's better implicitly right this was free advertising and it it didn't work so now Google is again under some pressure because no one in the marketplace can beat it so the government's trying to beat it right and uh so they had this adverse Court ruling this summer where the judge declared Google a monopoly and yesterday you saw the justice department came out with their proposed remedies which include (32:15) not paying Apple for search uh divesting the Chrome business divesting the Android business so you know I find it kind of amusing because Amazon couldn't be beaten in the marketplace so now the government's trying to beat it and uh I think we'll be fine but it's under some temporary legal overhang so one of the things the Department of Justice is sort of pushing for is for alphabet to sell off the Google Chrome uh segment in order to try and weaken their Monopoly position and then make it so they can't just simply (32:50) pay Apple to make them the default browser do you see any chance of any of this actually happening well sure it could happen right nothing's in itable right the intrinsic value is uncertain um I can't see how this chrome thing strikes me as a red herring I can't see how the judge would agree to it because I mean I read a funny comment by an analyst the other day saying that selling Google Chrome is like cutting off your left foot and trying to sell it like it's useful to Google Chrome but it has no value to anybody else like (33:25) there's no money to be made from chrome so I don't think going anywhere um Android I feel similarly about I I just don't see how that happens look there is a risk that intelligent people who know Google well have laid out this intelligent risk case which I find the most plausible risk case so I'll just lay it out for you and then I'll tell you what I think so the risk case is the judge agrees with the government Google can't pay Apple but other people can pay Apple okay I've talked to Legal Scholars and that's completely consistent with (34:03) antitrust law doesn't quite make sense to me but fine all right so so then Bing ponies up whatever billion dollars and SAA Nadella takes another hard crack head search so if that happens several things have to happen for Bing to succeed one they have to make a deal with Apple and pay them money that's fine they got the money second they've got to make sure that a material number of people don't leave because you know I don't know about you but I have my iPhone and uh as soon as that deal goes through it takes me 30 seconds to switch (34:39) back to Google right so hi and most other people will do that immediately because we love Google but the bare case is that enough people stay they're just lazy or don't know what's going on so they stay on Bing let's say 20 to 25% and the people I've talked to say that conceivably could give Bing enough critical mass of search queries to start training because it selft trins right it gets smarter the more queries it has that's one reason Google has its dominance so Bing gets better because there's enough people searching on Bing (35:14) right it becomes a credible second player to Google so instead of Google having 90% plus market share they have 70 so that's the bare case um they lose share to a competitor that a competitor finally comes through in the form of being on Apple's phones I don't think it's likely I think it's possible but I don't think it's likely because all of these things have to happen Google has to exhaust their appeals right first of all the judge has to agree then Google appeals to the Supreme Court that takes a few years then you know Microsoft gets (35:50) on Bing or gets on the iPhone and then by the way they actually have to execute right which is no small task they actually have to finally get being right right so is it possible yes is it likely I don't think so which is why it continues to be a major holding so I have one other point I wanted to make with regards to alphabet you know when you zoom in it's clearly an amazing business so despite the narratives that people say you look at search advertising you look at YouTube you look at the cloud segments these (36:22) just continue to grow and they're highly highly profitable businesses and we recently just did a deep dive on MasterCard here on the show and when I was looking at alphabet and revisiting it it sort of reminded me of MasterCard in terms of just how much volume these businesses are doing so listen to some of these stats so in the trailing 12 months MasterCard processed 9. (36:48) 3 trillion in payments and it's just like wow how is anyone going to disrupt this business and then I looked at Google search they've processed 7.1 trillion results back in 2023 and I think that just helps put into perspective just how powerful this business is with Google search but I say this knowing that you know behaviors can potentially change and Technologies and behaviors can change and whatnot and uh I'm almost curious what some of these numbers and growth metrics look like with chat GPT and um yeah has that been something you've looked at and you know (37:23) the queries that they're running over there I keep jet gbt on the out of the corner of my eye I just keep looking at you know search market share and it's as I say Google share is stable maybe slightly down but you know well into the 90s and uh you know the one I was really concerned about was Bing you know with all this free publicity with open Ai and maybe they have a better mouse trap and maybe they get traction because of all the free publicity but Bing share is down in the US so look I don't worry too much about chat GPT we can talk about (37:58) artificial intelligence if you like I have a very healthy skepticism towards it I think it's the hey dour you know you think about how all the hype the driverless cars got a few years ago and oh now it's turning out to be it's going to take a while longer uh virtual reality you know that was really hyped and that was going to be the rage and Mark Zuckerberg changes company named a meta now that's not doing too good so I love Tech but this specific Mania dour I tend to chule about so transitioning here to Amazon (38:36) this was another stock that got hammered uh around the same time alphabet did and has come roaring back and I think the narrative with Amazon is actually a bit different so they went through a capex cycle that depressed their free cash flow in 21 and 22 and they've since shown uh their highest margin and profitability levels ever so it's interesting that alphabet and Amazon today have roughly the same market cap at around $2. (39:03) 1 trillion so yeah um I'd like to just open it up to you to share any updated thoughts on Amazon that you might have yeah well I mean Amazon the various narratives make me laugh just like the AI narrative virtual reality narrative the alphabet narrative um my wife is from North Carolina which has one of the best state motos ever it it's Latin it's essay Quan Vere I don't speak Latin but I looked up it means to be rather than to seem which I think is a good motto for life but also in the stock market so you want to you have the appearance and then you have the reality (39:37) and so a good investor always wants to go for the reality and to the extent that the appearance distorts the stock price in our favor then that's great so Amazon's stock price is frequently distorted it went down by over 50% in 2022 the review in my book in the Wall Street Journal was horrible because 2022 is a horrible year for Tech cuz the rates were rising and he said the book should have been called Tech is where the money was uh because it's over basically he said it was written by a hedge fund guy and I you know really really irritated (40:11) me because like wait I'm talking about a 20-year generational period here man you know you're talking about one year okay Tech's having a bad year but as you say the stocks have come roaring back and everything's fine Amazon is funny because it can publish what whatever profit number it wants you know remember its advertising business run rate is $50 billion with a B after Google and Facebook it has the uh biggest advertising business online so I mean it's really kind of funny because it's a $50 billion business but you know the operating (40:53) income number that Amazon reports for just its e-commerce business X the cloud business is like10 billion so where did that $50 billion go cuz it's extremely high margin business right like let's say you had to employ $5 billion worth of Engineers to administer the PS business it's not anywhere close to $5 billion but even if it were $5 billion the profit margins would be 90% they should be making $45 billion a year on Advertising but it doesn't show up in the p&l so where's it going it's going into all these other ambitious (41:30) projects they're reinvesting through the p&l so they could publish a ton more earnings than they do but they don't so I thought it was funny in 2022 when the pandemic and by the way I was trying to look up a number on the fly it didn't work but in 2022 the um the pandemic was a huge shot in the arm for e-commerce and you remember Bezos and Company decided to dou double the size of the infrastructure Network into the pandemic and demand grew it turns out 90 to 95% so they slightly overestimated the demand growth versus the capacity growth (42:10) and I don't know if you remember but they were crucified for they overexpanded they overexpanded there's excess capacity well yeah I'm sorry people but you know e-commerce secularly is growing 10 or 15% a year so like they over expanded by less than one year of capacity like in 9 months the capacity was filled up so one analyst had a funny line he said this is the easiest problem ever in history to correct because if you expand by 100 and demand goes up by 90 and your underlying demand is going up 10 or 15% a year you fill that (42:48) capacity in a year but you would have thought that you know they had committed Murder By how much crap they got uh for overex expanding so these narratives they just get exaggerated both on the negative side and then on the positive side this the flip side is AI is way heighted you know in my opinion Amazon is terrible Amazon is terrible in 2022 oh I guess it's not so terrible stock doublet you know and I think we're in one of those moments now with alphabet you know oh regulatory oh legal it's just almost always not as bad as you (43:23) think it is and it's also almost always not as good as you think it is so this is a good old value investing Trope which is buy when people are fearful buy when the narrative is bad so it's in some ways it's not that hard you just have to train yourself to be on the other side of whatever narrative is being told so in your book you actually stated that you believed that alphabet has the better set of businesses that Amazon and you primarily pointed to their business model being more Capital light and software based and uh in recent years (43:55) we've actually seen uh the capital intent it of much of big Tech to be higher with these investments in infrastructure and Ai and whatnot um has your opinion on the business quality on a relative basis changed between these two it actually has yeah I mean people ask me sometimes what I would change in the book I said not much but but my estimation of Amazon's business quality has increased you know relative to Google because Capital intensity is bad in the sense that you have to plow your profit back into cash flow but it's good (44:29) in the sense that it's very hard for people to dislodge just take search for example the reason people can take a shot at search is because it's not Capital intensive so like you can never imagine a judge saying what's the remedy for Amazon's dominance in its infrastructure in e-commerce sell your e-commerce there's it's much harder to disrupt the e-commerce Network that Amazon's built than it is to disrupt Google search Network and the cloud aws's cloud infrastructure is likewise much harder to disrupt because of the (45:05) economies scale that they have so I take your point I think that Amazon's business quality is as good if not better than Google's and uh the last time we spoke you didn't own Microsoft and Apple and you still don't today so I was curious if you could share some of your general thoughts on uh why you aren't attracted to those businesses yeah I I respect those companies and happy to say that I've missed them you know I don't mind admitting that I wish I had owned them because their performance has been as good if not (45:34) better than Amazon and Apple or Google I mean Microsoft I missed because I just always thought it was kind of boring office tools I missed how deep you know they have their claws into the large American and international Enterprise large business and how that would allow them to Parlay that into a great Cloud business and I also missed what great executive Sai Nella was so missed that one and then Apple as I told you Amazon versus Google I've always have been predisposed more to software asset light businesses than asset intensive (46:10) businesses and apple obviously is a hardware business but you know I missed Mick shift as they sold more services I missed their pricing power um I admire both businesses and unlike Buffett and Munger I'm keeping them on my radar screen because I would like to buy them at one point and I also wanted to touch on Nvidia as well so many investors are likely feeling fomo with this one over the past year or so or if they do own it they aren't sure what they should do with their shares so yeah Jensen Huong he was on record for saying that the (46:46) unofficial model of Nvidia is that they are always 30 days from going out of business and that attitude in business is why they're such a successful company and dominating their field and the way Morgan howel put it on our show is that he thinks that their management team wakes up terrified every morning and that's why they're so successful and I can just imagine the alarm Bells going off in your head as I say this did you ever consider Nvidia for your portfolio never and I'm proud to say that that's one that I do not regret missing I watch (47:20) the stock but as I've said from in my earlier comments I'm more than a little skeptical about you know the AI craze and more specifically I hate the digital semiconductor business um I like the analog semiconductor business I own Texas Instruments but those are quite a different businesses for reasons too complicated to get into now but you know the digital semiconductor business was pioneered by Gordon Fairchild and Bill Shockley and Gordon Moore who coined Moore's Law which is that computing power doubles every two years you know (47:56) while the price has and um that's great for the economy uh great for Innovation great for America great for the world but horrible for a business because every two years there's a new product cycle every 18 months to two years so Intel for decades was the Beast they ruled the roost they had every product cycle they nailed it but yeah I mean Jensen Wong's comment about 30 days going out of business is directly descended from Intel's CEO's comment uh when he was on top you know he wrote A Memoir and it was called only the (48:34) paranoid survive so very similar to Long's comments and waking up terrified because the product cycle change I know enough about digital semiconductors to know that they probably have more than 30 days you know they've probably got a good 5 to 10 year windows but one day they're going to wake up and they're going to be have been outflanked through product Innovation they're the big dog now they displaced Intel fair enough but I have no conviction as to how long they'll be on top but my conviction is 100% that they (49:08) will be superseded at some point which you know go back to the Net Present Value right it's not an inevitable and Nvidia is an inevitable for you know I don't know 5 10 years I don't know enough about the markets but it's inevitable that they will be disrupted at some point by someone who figures out the next better digital semiconductor so I'm very happy to have not owned an video so an audience member uh passed along to me a number of questions related to the impact of AI on these big tech companies and how Fortune 500 (49:42) companies will change their spend towards Big Tech what are some of the major shifts you see in the next say three to five years with regards to AI perhaps it's AI agents uh will be made available by big Tech or we'll see these companies have you know all the AI infrastructure and AI highly becomes commoditized or maybe it's something else yeah I have no idea people ask me what's your AI strategy and I say I have no AI strategy which is actually a little disingenuous my AI strategy is as follows as I said earlier Tech is where the money is Tech (50:22) is where most of the Innovation and economic value will be added over the next 10 20 years so how do you play that so broadly speaking you can play it two ways you can try to find the next open AI or anthropic which you know hats off to you if you're an early stage investor VC guy good luck I play in probabilities right I play in Net Present Value and inevitability you know relative inevitabilities so to me it doesn't matter what the mega trend is whether it's AI or dri's cars or Quantum Computing I asked myself well (50:56) who's going to benefit from these Trends who's in a position to exploit and monetize these Trends and it's the big platform tech companies it's the big guys that we've been talking about and you know I did another stat I did a talk recently at the University of Virginia and so open ai's latest valuation Mark was 150 billion anthropic I don't know what I saw Amazon took another stake in it today but pre- today it was 40 billion so let's just say that's 200 billion combined let's say open AI is valued today at 150 billion and (51:32) anthropic at 50 billion right now if you bought at it a million or 10 million or 100 million or a billion you're doing great and hats off to you but I couldn't have figured that out but anyway now they're established players in the AI race their market cap combined or their valuation because they're not public is 200 billion well that's 6% of Microsoft's market cap alone and further why is open Ai and anthropic selling Stakes of themselves like if they're worth a trillion dollars what are they doing selling at (52:09) 150 billion and 50 billion so there's only two answers one they're complete morons which I don't think is true or two they need the resources of big Tech to get to the next level right the reason Sam Alman sold to Microsoft was not cuz he's a or a good guy it's because they needed Microsoft's cash and they needed Microsoft's Engineers to help them and Cloud infrastructure to help them get to the next level right and the same with anthropic and Amazon they're partnering with the big guys because only the big guys can monetize (52:46) these Trends you know cloud computing only three guys can monetize the the cloud computing by the only three guys have the resources to build these huge data set centers right driverless cars only a couple people can monetize driverless cars right there're going to be a couple driverless car startups and stuff but weo is going to be the leader in driverless cars it's almost inevitable so you just go down the list of Mega Trends if you think the metaverse is going to do great things then meta is your company there's going (53:19) to be lots of good little startups but I can't pick those but I know almost to a certainty that these big cap Mega cap companies are going to be the ones that are going to be exploiting these Trends even if they don't figure them out they're going to be the ones funding the guys that have figured it out and taking big Stakes yeah it's a great point I mean meta itself is a great example of a company that made these big purchases and these companies ended up being the Behemoth they are today and then alphabet for example buying YouTube and (53:47) it becoming uh much much bigger over time and I I wanted to be mindful of your time here but also get to one more company so uh you don't just invest in big Tech obviously and I uh wanted to touch on Progressive today so this is not a big tech company obviously and it's been a part of your portfolio for a number of years and may even be say a technology play so to speak so when I visited the uh berer meeting back in May one thing that stood out to me was that it seemed that Geico had been underperforming and it was delivering (54:20) this lack luster growth in recent years and then on the other hand you have a company like Progressive which is a stock you own it's been uh it's had significant market share gains in auto insurance and Buffett highlighted it during the meeting that uh Progressive is better at matching the insurance rates to the risks that they're insuring and uh my friend Alex Morris at the science of hitting blog he covers this these two companies well in his writings and he stated that Progressive is just running laps around Geico in recent (54:50) years and uh it's funny because insurance is just typically a very very tough business to be in and it's just so difficult because uh Insurance to a large extent is just a commodity you know to the consumer it's just you know which company has the better rate so what is Progressive doing differently than their peers I love Progressive and I love talking about Progressive because it ties into a lot of themes of you know new value investing or value investing 3. (55:21) 0 value investing in the digital
age so I've actually owned Progressive only for a year and a half clay I bought it last summer when it was under Under Pressure because their profitability was suppressed because covid related inflation had depressed was making them pay out more money than they thought they had to for claims and I thought well they'll figure this out this is a easily remediable solution they'll just raise prices and uh get their profitability back in order and sure enough that's happened so the stocks doubled I think in a year or so so it's (55:53) been a great investment for Gravity the reason I invested in Progressive was not because it was temporarily depressed CU remember version to the mean doesn't exist anymore but be precisely what you said it's got the better mouse trap versus Geon which is an incredible story and goes straight to the heart of Buffett not getting Tech terribly well because Geico was always the lowcost producer because it had no agents to pay right so if you look at Geico's uh selling cost versus Progressive selling costs Progressive selling costs are (56:30) maybe five or 600 basis points higher because half of progressives business is through agents so they have to pay commissions to the agents so their cost structure is higher so Geico was a great company because their cost structure was lower but what Progressive has done has become actually the deao lowcost producer of insurance because in a commodity business the lowcost guy wins right that's a rule R Geico used to be the lowcost producer but what Progressive did maybe 25 years ago was say well hold on our administrative costs or selling costs (57:07) are maybe 20% of our uh Revenue but 70 to 75% of our revenue is the actual loss cost that we have to pay on vehicles and medical bills and so forth let's use Tech to try to figure out to write more effectively uh to underwrite better and so they did and now as Buffett has said their loss costs are maybe 1,00 basis points lower historically than GEOS so even though their administrative costs are higher their loss costs versus Geico are even lower so they now write insurance at a much more profitable rate they are (57:49) the lowcost producer and as a result they're taking share that share gain accelerated into Co when you know first of all people weren't driving then they were driving a lot then we had inflation we had a lot of uh Body Shop inflation medical inflation and poor Geico which had not invested in its it which they have said they have 700 different it systems was like a pilot in a storm in a fog with no instruments whereas Progressive was had that same uh vehicle in the same storm but had you know an incredible heads up (58:28) display with readout and they knew how to price the risk so Geico has lost 20 to 25% of its policy holders in the last few years which is incredible whereas Progressive has added Millions so Geico which doesn't have the tech to match risk to um price as lost policies and Progressive as gain policies and Geico Progressive is now the number two Auto insurer they overtake Geico so they have this better mouse trap Tech enabled mouse trap which is what I look for half the companies's in my portfolio 50% of my portfolio is Tech and the other half (59:07) is not Tech but the other half that's not Tech those companies tend to be like Progressive they're using Tech to beat the competition so Progressive is a wonderful company yeah that's a great point I'm a reminded of other companies like a Copart or Old Dominion Freight Line that you know was one of these early movers in investing in these Technologies and then you know some of their competitors don't realize until 10 20 years later that hey they're really behind the curve on some of these Investments they should (59:36) have made long long ago yeah it's very hard to catch up this guy C is discovering yep like I mentioned I want to be mindful of your time here Adam and just thank you for joining me here again today so uh please give a final handoff to the audience on how they can uh get in touch with you if they like or learn more about the book well I always appreciate your interest claying you're always asking good questions Cutting Edge questions so thanks um investors feel free to hit me up on LinkedIn I talk to people a lot on LinkedIn um I (1:00:09) keep my firm small but I have a $5 million minimum investment if anyone's interested and by all means you know one way to get to know me and my investment style better either because you're interested in me and my firm or because you're interested in learning how to invest in a disciplined way in technology you know please buy the book you know it's uh where the money is by Simon and Schuster and as I say in one of my slideshows it's available on Amazon or any local book seller that Amazon hasn't already killed wonderful (1:00:42) well uh like I said at the top I mean I really can't recommend this book enough and I always enjoy uh picking it up and reading a chapter from time to time uh when I get the chance so Adam thank you again really appreciate the opportunity enjoyed it clay BMP for short business management price that's all that matters and really all that probably ever will matter when you're investing in anythi
2024-12-29 05:48
