[00:03:07] Tobias Carlisle: And I think that’s true of many things. I think the inflation spike that we’ve seen does have a big, there’s a big secular component to it, which is one of the reasons I’m very sympathetic towards the view on Bitcoin. I’m not anti Bitcoin in any sense. The bitcoin maximalist who say it’s, a way to escape the money printing.

[00:03:24] Tobias Carlisle: very sympathetic to that view. It’s just, I don’t have any particular ability, when I sit down at that table I’m the patsy. I don’t know whether 20 thousands a good price or two thousands, a good price, or two hundreds, a good price. So I, for that reason, I just avoid it. But one of the really telling indicators for the underlying economy is the treasury yield curve, which is they just take, there are treasuries that run out to 30 years.

[00:03:49] Tobias Carlisle: So we issued 30 year treasuries and we can see short dated treasuries that are issued. So we can take it anywhere from one month and we can look at the yield on the one month. We can look at the yield on the three month, on the six month, on the one year, two year, five year, 10 year, every single year out to 30 years.

[00:04:06] Tobias Carlisle: And what ordinarily happens is that you get paid a lot more, you get a lot more yield to hold the 30 year, for the obvious reason that you don’t get that money back for a very long period of time. A lot can happen in 30 years. You’re going to have a lot of inflation, you’re going to have a lot of changes in the stock market, changes in interest rates, and so that’s called duration.

[00:04:25] Tobias Carlisle: You get paid to hold duration and ordinarily you don’t get paid much for the very short dated T-bills. They turn over very quickly. You get a lower interest rate for holding them, and that’s called backwardation. Where as the, as you go further back into the yield curve, you get paid a little bit more.

[00:04:43] Tobias Carlisle: Now, every now and again, something very odd happens in the market when it gets spooked. And people don’t want to hold the short dated paper because they think that something bad is imminent. And that means that when you don’t want to hold an asset in order to find the next best person who, or the next person who wants to hold it, you gotta pay them a little bit more.

[00:05:02] Tobias Carlisle: And so we’re in this very unusual period, and it doesn’t happen very often, but it has happened on occasions where all of the dates that you hear, you’ll recognize these dates where the front months, so the three month is typically what people look at. And then they compare it to the 10 year, which is the typical, know, you might think about, that might be the rate that you might use to discount a company.

[00:05:22] Tobias Carlisle: That’s people thinking sort of 10 years, that’s about the right amount of risk and duration for a company. And so the three month currently yields more. Than the 10 year. And so that’s called an inversion. And so when the three month yields more than the 10 year, typically what that indicates is that in the short term, like in the next six months inside the year, that’s got a very good track record of predicting recessions.

[00:05:46] Tobias Carlisle: And so what it’s indicating now, well Cam Harvey is the gentleman who did this research. He published in 1986. He looked at all of the inversions pre 1986. And so we’ve had that as a live signal that’s been working forward since 1986. And it’s got a fantastic record. It’s not had any false positives and it’s had no false negatives either.

[00:06:10] Tobias Carlisle: So it’s been quite a good predictor of these things. And it’s currently inverted for Cam Harvey’s signal to work. It needs to be inverted for 90 days and it’s only been inverted for about a. So it hasn’t triggered Cam Harvey’s signal, but you can pull this data up. It’s all available free on the Fed’s website, on the Alfred website.

[00:06:28] Tobias Carlisle: I direct link through to this, so I couldn’t tell you exactly how to get there, but you can look at these inversions. And there was an inversion. An inversion in 2000 7, 8 9. There was an inversion predicted in 2000. There was an inversion just before March, 2020, which is really odd, like that ten three inversion predicted the covid crash, as funny as that sounds.

[00:06:47] Tobias Carlisle: But that is, that’s the case. And we’re currently inverted now, so the signal’s not triggered, but that inversion is typically pretty bad news for the stock market as well, because the stock market sort of has these two types of crashes. They have a valuation driven crash, which ordinarily it pulls back about 20% when that happens, which that’s the technical definition of a crash.

[00:07:06] Tobias Carlisle: But they happen reasonably frequently. And then they have these much deeper versions, which is like a 2000, 2002, 2007, 2009, where it can be. 40, 50, 60. I think the average in that period is about 40 to 45%. We’re currently down a little bit over 20% since the start of the year. I have this other metric that I like to look at where I say I look back 12 months, so it’s year on year.

[00:07:30] Tobias Carlisle: And I say anytime the market is down 20% year on year rather than from the peak. That’s what I define as a real crash. And so that was triggered in 2000, 2002, 2007, 2009. And as of today, that is also triggered. So what that indicates to me is that there is some real weakness in the underlying economy for the very obvious reasons.

[00:07:49] Tobias Carlisle: We’ve probably at the end of a business cycle, we’ve also gone through a very unusual period where, Industry was shut down, industry was restarted. There was a flood of money that went into the market that just created this explosion in asset prices, explosion in commodity prices, and a lot of that is coming back, explosion in house prices, and a lot of that is coming off now.

[00:08:07] Tobias Carlisle: When people look at how you sort of determine a housing market, oh, sorry, a determiner, a recession that have this acronym, H O P E. So the first thing to go is housing. Housing is the first valuation to roll over. And I think housing prices have come off pretty significantly from the high, which you could say that was a sugar high from all of that liquidity that flooded in, plus people being locked down in their homes, all that sort of stuff.

[00:08:32] Tobias Carlisle: And so now we’re coming off that comp, so that might be an unusually high comp. It might not really count. And then the end of that is employment. So when employment actually dips, that’s sort of the real teeth of the recession for most people. That’s when most people know that there’s a recession going on.

[00:08:49] Tobias Carlisle: At the moment, employment hasn’t rolled over. Here’s the really sick thing about the stock market because it’s a Ford looking metric, the, it’s a Ford looking sort of mechanism. Rather the stock market tends to fall over at the very beginning of, it’s like housing. It’ll go when housing goes, but the stock market will take off when employment finally rolls over because that, because it looks into the future and it can see that once employment starts coming down, then we’re near the end of that cycle and there will be another up cycle that comes after that.

[00:09:18] Tobias Carlisle: But because we haven’t seen employment roll over yet, I think we’re right in the middle of what, in the middle of like an air pocket where because we’ve got the ten three inversion, the stock market is down 20% year over year, all of these other things are rolling over. I think there’s a very good chance that we see sort of a near term volatility that will lead us into a quite a nasty draw.

[00:09:40] Tobias Carlisle: And potentially a nasty recession. I take no glee in that. It’s just that’s what happens. There are business cycles. We go up and we go down. I’m always very careful as an investor because these things aren’t really predictable and I’m sort of, I’m adding a lot of narrative to this. It probably doesn’t really exist.

[00:09:55] Tobias Carlisle: They’re a lot more random than I’m making it sound. But I think we’re going to go into this period where probably asset prices are going to come down a lot. Housing prices, stock market prices, everything else that’ll clear the decks. We haven’t seen any big blow ups yet, but I’m sure that there are anybody who’s heavily leave it into this is going to get hurt badly.

[00:10:14] Tobias Carlisle: And that’s why when I invest all the time, I’m always worried about this kind of scenario because if you can’t survive this kind of scenario, then you don’t get to play on the other side when it becomes very good. And so I’m always hyper focused on just making it through to the other side.

[00:10:29] Tobias Carlisle: That’s why my picks, you’ll always hear when I say something when I’m picking it. I would rather something that has no downside. And a lower upside in something that has an enormous potential for upside, but also an equivalently large downside. So my picks and today will be another example of that. It’s just, I think it’s a solid business that will muddle through and it’ll do okay, and there’s a little bit of optionality embedded in it, but I think the downside is virtually zero.

[00:10:52] Tobias Carlisle: So that’s my 2 cents. Thank you for that kind intro there.

[00:10:56] Hari Ramachandra: So thank you Tobi. That was very well summarized. Observations. I was actually taking notes while you were talking and few things caught my attention. Number one, you talked about business cycles, and first question is how much of it is fed in used versus general organic business cycle in play?

[00:11:19] Hari Ramachandra: Number two is how much of it is being controlled by Fed? What I mean by that is if Fed pivots or loses at all. Do you think economy will just snap back or you think that it’s beyond fed control right now? And number three is what are the risks of a liquidity crisis like 2007 happening again in this environment?

[00:11:46] Hari Ramachandra: We saw credit fees and Bank of England having issues in general England or UK having issues with their guilds market. So what’s the risks of another Lehman brother?

[00:12:00] Tobias Carlisle: If you go back pre the introduction of the Federal Reserve, there used to be a lot more, there used to be a lot more business cycles. We used to have a shorter business cycle, and there used to be a lot more crashes.

[00:12:13] Tobias Carlisle: And so that might sound bad, but they tended to be a lot shallower. And what that meant was that businesses tended to run holding more cash than debt. They just tended to be more robust because they had to be because they were regular business cycles. It happened every two or three years you had. Little burn, little bust.

[00:12:28] Tobias Carlisle: Never got too far away from kind of the underlying true growth of the economy. Since the Federal Reserve has come in and they’ve managed that, we’ve tended to have much longer business cycles, but they’ve also got much, much further away from what you might call the underlying kind of valuations. I don’t know if that’s good or bad.

[00:12:47] Tobias Carlisle: I think that it’s bad personally, but there are lots of other smart people who think that’s good. So I don’t really know, but I would say that there is a natural business cycle, certainly, and I don’t really know what drives it. Animal spirits, something like that. Cooling weather, warming, weather imports, exports.

[00:13:02] Tobias Carlisle: There’s such a, it’s such a complicated engine. The economy are a complicated organism. Any little thing, the butterfly flaps its wings, and then you have the tsunami on the other side of the world. I really do think that happens in the stock market. You never really know, or the economy, you never really know what is driving it, which is why I think the interventions without understanding what is happening, is just lunacy.

[00:13:23] Tobias Carlisle: but that’s the scenario that we have. So what the Fed was set up to do initially was bank. Banks run heavily leave it. So, and they don’t have cash on deposit for everybody who wants to pull their cash out on any given day. So if there’s a line down the street of people who want to pull their cash out, banks used to fail for that reason.

[00:13:39] Tobias Carlisle: So the Federal Reserve was introduced to make sure that if they all got together collectively and there was a bank run, you could have liquidity from one, there was no problem anymore. You get rid of the bank runs. Unfortunately, we gave the Federal Reserve, it’s two mandates are full employment and stable money.

[00:13:53] Tobias Carlisle: And I think they’ve failed miserably on both. So why we continue this experiment is sort of beyond me. They don’t follow any algorithmic rule. There’s no sort of, the tailor rule. It’s like an idea that they should follow to set rates. And I know that Greenspan used to follow the gold. They don’t seem to do any of those things.

[00:14:09] Tobias Carlisle: Your guess is like, there are lots and lots of intelligent people out there who understand all this stuff, who watch what the Fed does and they don’t, it doesn’t make any sense to them. Like they set interest rates too low for too long, in my opinion, and now they’re ramping. I don’t know how the federal government’s going to be able to afford to pay.

[00:14:22] Tobias Carlisle: I don’t think they can. So it’s not going to be ramped for very long. It’s going to come back down. But there is an underlying weakness in the economy beyond what the Fed is doing. Typically what we’ve stopped hiking when the Fed funds rate have exceeded inflation and we’re way below inflation at the moment.

[00:14:35] Tobias Carlisle: But there’s a cyclical component. There’s that bump in that inflation that’s going to come down at some point. And also we don’t really know because we’re kind of measuring this stuff looking backwards. So nobody really knows what’s going on. So the answer to your questions is, I think that there is some, there’s going to be some cyclical weakness that’s just genuine.

[00:14:52] Tobias Carlisle: That’s, that has to happen. What the Fed can do to deal with it. I really dunno. Like hiking into it seems silly to me, but they’ve got no choice because they’ve been, trading rates have been so low that they’ve gotta give themselves headroom in order to pull it back down. In due course. I think that what will happen, and if you look at 2000, 2002, 2007, 2009, when they started cutting, that was right near the top of those crashes and they cut 10 or 15 times in each scenario and the market proceeded down.

[00:15:21] Tobias Carlisle: However, the first time they cut the market did spike. So there’s a chance that they cut. Market goes up 15% and everybody says, wait a second. All the prices are, everything’s much more expensive and the underlying problem’s still there. And so that’s when the market really gets loose. And that’s the scary, that’s the chaotic time, which is the scariest time in the markets.

[00:15:40] Tobias Carlisle: When that chaos starts though, the thing you gotta remember is that it is pretty short lived, and that’s when you get the really best prices. The disaster is to sell out. At that point. You’ve just really gotta understand that you’re going to look dumb. Whatever you do, you’re going to be second and you’re going to have the adrenaline running whenever you’re looking at the portfolio.

[00:15:58] Tobias Carlisle: You’re now in the part where the Ford returns getting good and Ford returns are now much better than they have been for a long period of time. It’s just that I think we’ve gotta go through this moment. To answer the final question, I don’t really know. That’s been I’ve asked that question to a lot of different people and the answers, everybody seems to think that the banks are in a much healthier position than they were in 2007, 2009.

[00:16:19] Tobias Carlisle: So that’s a good thing. They’ve got a lot more capital. They resisted because 2007 and 2009 was so bad, they resisted any of the silly loans. Although those loans, those low covenant light, all those sort of really leave it loans they did finally emerge right near the very end. So all of that’s probably a done, I don’t think that the banks are going to be quite as badly affected, but they do hold a lot of residential real estate and residential real estate’s probably going to come back a lot.

[00:16:44] Tobias Carlisle: So they’re line to asset ratios. More gnarly. So I’ve seen statistics like we’ve had as many big down days in 2022 as we did in 2008 and 2000, which were sort of the worst few years in the last 20 or so. And there’s really no panic. There are a lot of vulgar out there who are struggling because there’s been no vault.

[00:17:05] Tobias Carlisle: Like they’re basically a long vol to tell risk guys. They’re waiting for that to happen, and it hasn’t happened. They kind of think that market’s broken. I dunno I viscerally, anecdotally, I don’t feel any panic either. And here we are off 20 something percent since the start of the year. That’s pretty gnarly.

[00:17:22] Tobias Carlisle: But I think everybody was just like, well, we were up so much last year in the year before, and it’s just part of the cycle. And so here we go. At some stage though, there must be some body that floats to the surface. There’s somebody out there who’s heavily leveraged, who’s got assets that have been cut, the smither ends.

[00:17:39] Tobias Carlisle: Hopefully it’s not systemic. I don’t think it’ll be systemic. Could be famous last words, but I don’t think that’s going to be the problem. I think that this is basically just a plain old, it’s not a credit crisis so much as it is just a plain old overvaluation plus slowing business cycle leads to a pretty big draw down and then you come out the other side and you keep on going.

[00:17:58] Tobias Carlisle: So we’re probably, once this actually kicks off, and I think we’re kind of, I would say now it’s just when we’re really kicking off. Once it does it’s sort of 3, 6, 9 months of chaos. And then it’ll all be good. But I think I’m, I, our next few quarters will be quite interesting cause I think we’ll be, I think we’ll have something to talk about.

[00:18:15] Stig Brodersen: Tobi, what a way to kick this off about recording my conditions. Perhaps we should start looking at the different picks. Hari, let me throw it over to you.

[00:18:26] Hari Ramachandra: Yeah. I’m actually just flying right into the eye of the storm with my pick stage and Tobi, because my pick I. I was kind of, I had a different pick before I came in.

[00:18:37] Hari Ramachandra: I, I think I emailed you guys like, and I have two not able to make up my mind, but today I have made up my mind. It’s going to be meta, it’s in the news, it’s in the eye of the storm. The stock is beaten down. Zuck is a pariah now in the Wall Street. So some feel he has lost his mind and Facebook’s stock is down significantly.

[00:18:59] Hari Ramachandra: It’s, I think at the levels of 2015 something. So it’s essentially wiped out six, seven years of its market cap. So today it is 235 billion market cap. It was flirting with 1 trillion not so in distant future, the past, I mean, and when I look at their earnings call transcripts from the earnings call, their most recent earnings call their fundamental business that is Facebook, Instagram, and WhatsApp.

[00:19:34] Hari Ramachandra: Overall, there’s no red flags. Their monthly users, daily users are healthy, their engagement is healthy, their overall revenue. If you are just for the currencies, it’s actually slightly higher, one or 2% higher. And they are also innovating. Like I know that TikTok is a great threat to Facebook, Instagram, ecosystem.

[00:20:04] Hari Ramachandra: Snap is also coming at them, but reals is picking up and they’re also experimenting with WhatsApp to become like WeChat or what Elon Musk would call as the X app that he wants Twitter to be eventually. But I think Facebook is actually further along in that process. In fact, they’re very successful in India.

[00:20:25] Hari Ramachandra: They’re actually piloting that concept in India first, and it’s speaking up. A lot of e-commerce is happening on WhatsApp or they’re also introducing monetization in WhatsApp. And in fact, anecdotally, I can tell you, a lot of international calls now just happens on WhatsApp. A lot of business happens on WhatsApp and the Facebook ecosystem, so they’re tying up the two.

[00:20:51] Hari Ramachandra: So if you, but there are headwinds like Apple’s data privacy policy. And in reaction to that, they’re investing heavily in AI to make their algorithms better for at targeting without Apple’s data. But I guess what spooked the markets is the on metas and what spooked them even more is actually the metas when they look at the product with Zuck and his associates walking around without Lex and the graphics and what people are asking is billions of dollars and this is what you’re going to get.

[00:21:31] Hari Ramachandra: I think that’s a, that’s actually a very good question because when you look at many of the games today, which are played on desktops or any of our gaming console, Have a much more sophisticated graphics, which almost looks real, but what we fail to understand is that Meta is actually trying to build on a new platform, which is the VR system.

[00:21:53] Hari Ramachandra: Hence, it is in a much earlier life cycle compared to what we have in the 2D graphics that we see on most of the gaming console. But having said that, I’m myself not sure what is the use case or business case for matter worth yet. The way Facebook is projecting like Zoom replacement doesn’t sound that exciting because now people are going back to office even though not all days, but it’s more like a hybrid situation right now.

[00:22:18] Hari Ramachandra: Gaming, again, having to wear it. There were folks who did that experiment to kind of wear it for extended period of time. They felt nauseating was not a pleasant experience wearing it as you feel disoriented. So the business case is not yet clear for, maybe it’s too early to say. But when you have a bet that you’re making, if you look at any of the companies like Amazon or Google, when they’re betting on a new project, they won’t bet their company on it.

[00:22:50] Hari Ramachandra: I think that discipline somehow is not being displayed by the management at Meta and they want to continue to double down on Metaverse. I think that is the biggest tail risk, in my opinion, that if we are putting good money coming out of their traditional platforms into something that might not work out in the future.

[00:23:11] Hari Ramachandra: And with the dual share dual classes in the shares, we nobody has any say in the company’s direction. I think that is the tail risk, that if they don’t listen to markets and they don’t listen to what the MA, the customers are saying and they continue to pulling money into this matter worse, and it results in nothing.

[00:23:34] Hari Ramachandra: Some estimates is that next 10 years they might have, they might blow in 250 billion into this experiment. So that’s the biggest risk. So I hope I’m not shooting my own pick, but , I just want to lay the risks. But having said that, right now, it is trading it. Last time when I look close to two times sales, two times revenue, their revenue is around 118 billion and their market cap is two 35 billion.

[00:24:02] Hari Ramachandra: And if you compare it to any other peer, like Pinterest or snap, they’re all trading at much higher price to sales, even though they’re less robust business, if you discount s completely just the traditional Facebook, Instagram, and WhatsApp platform. So with that valuation in mind, it’s almost selling like a classic buffet style values talk.

[00:24:24] Hari Ramachandra: Maybe not, but I guess ST. And to, I would like to get your opinion on meta.

[00:24:29] Stig Brodersen: So to your point Hari, I like the valuation. I don’t like the company spoken like a true value investor. I guess it looks very appealing. Like we are looking at what high single digit price to free Tesla or something like that.

[00:24:42] Stig Brodersen: It looks attractive, but I also think that there’s a reason why it looks attractive and that’s typically how the market is doing it. I remember that we had, we talked about meta a few times before here on the show and we talked about that it was probably the weakest of the big tech companies and I do think we have it on record because it’s always easy to, to be a Monday morning quarterback.

[00:25:02] Stig Brodersen: But I do think we talked about before and it seems like even though all the big tech companies are in a lot of pain, that may as the one most in pain. And I think there, you can paint some color around some of that. If you look at online advertising right now. I know that Alphabet or, or Google, they just went alpha, their quarterly reports and they also was punished by the market.

[00:25:24] Stig Brodersen: And I’m of course biased because I invested in Alphabet, but they’re just holding up a lot better. If you look at the increasing competition in online marketing, or sorry, online advertising, we’ve known for quite some time that Amazon continues to grow fast and they are now Apple and Microsoft doing the same, even though it’s still very low.

[00:25:44] Stig Brodersen: We have to talk about TikTok, how big a moves they made just two years. And it’s mainly from Facebook or from MAD platforms. It’s not so much from Google. I think it comes down to that. Facebook’s platforms are just not good. And I, sorry, I keep on using Facebook and meta interchangeable here, but meta’s platforms are just not as good and I’m sure a lot of people use them all the time and they would disagree with me.

[00:26:07] Stig Brodersen: I think there is just a different stickiness to something like alphabets Google’s platforms compared to what Meta is doing. Even though that, we talk about the engagement and all that is good and I see some of that in, whenever I look at financial statements for meta, whenever I look at the margins, not so much at the gross margins, I can’t help.

[00:26:25] Stig Brodersen: But compared to Google, like they have the company X or they call the moonshot division or whatever they’re calling it and they have, one that graduated like Waymo. That’s not how Mark soccer berg is playing ball. Like it’s, we got bet on black or red or, it’s just a very different format, which I don’t think that they’re necessarily leaving online advertising cause that’s how they make the money.

[00:26:46] Stig Brodersen: But like they’re getting beaten up right now. And so continuing on that note, I would like to talk a bit about cognitive biases, because I’m going to talk about a stock here a bit later that has continued to drive price and still going to pitch it. And HARDI is doing the same thing. So I hope you don’t get offending kind of way hard.

[00:27:05] Stig Brodersen: I kind of feel like I’m talking about my own cognitive biases and I kind of feel mea is a good example of that too because, or perhaps it’s a good example of that too. It’s been, it’s down at the time, we’re recording 73% this year, , and the pig that I have is also down by quite a lot. But the reason why I wanted to bring this up is that I listened to the episode that, that William here on this feed did with and Duke on his show, Richard Weiser.

[00:27:30] Stig Brodersen: It was episode 15. And Duke talked about this study from the Water School of Business where they looked at analyst earnings predictions. And what the study found is that whenever a stock analyst had made a consensus forecast and earnings came out differently, they had no problem updating the forecast.

[00:27:48] Stig Brodersen: But if the forecast was not a consensus forecast, they did not update their own forecast, they decided to double down on that. And the reason why these stock analysts were so susceptible to that was because they’d done that in public. What we are doing right now, I can’t help but just bring that into the mix right now because later on I’m going to talk about Chinese tech.

[00:28:09] Stig Brodersen: And as we all know, that’s going extremely well right now . So I think it’s, I think it’s, I have a few different points about this. I’m saying it because I’m worried that I’m susceptible to that. I wanted to bring in for Har to consider if he’s also susceptible because he’s been on record talk about me before.

[00:28:25] Stig Brodersen: But I also want to say to try and save ha and myself that we have to consider like what’s the valuation? I don’t know about how you invested Aria, didn’t buy Chinese tech at the top or made at the top or anything like that. We have to think about what’s the valuation, what’s the price today?

[00:28:40] Stig Brodersen: And that’s the discussion that we are having. So Hari to going into to you guys.

[00:28:46] Tobias Carlisle: Full disclosure, I hold meta and I’ve held it, I bought it this year. I dunno exactly what price I paid for it, but I think it was about $160. So I think we’re down almost half on that position. I thought when we boarded it at 160, that if we just, if you just took all of the labels off and you just looked at the financial statements, which is essentially what I do, the underlying financial statements show that is an incredibly good business.

[00:29:14] Tobias Carlisle: It earns an enormous amount on the capital that’s invested in it. It’s growing like a weed. A lot of it falls through to the bottom line. A lot of it falls through to free cash flow. Zach’s got so much money there to play with because they make so much money, and Zuck has been an absolute machine at buying stuff.

[00:29:29] Tobias Carlisle: He bought Instagram for a billion dollars, which seemed like absolute lunacy to me at the time, and I think that he clearly underpaid by some monster margin for it. He, it was a genius acquisition. WhatsApp stupidly overpriced when he bought it. Now, one of their biggest proper. So I think Zuck is super smart.

[00:29:49] Tobias Carlisle: He’s got all his skin in the game. The underlying financial statements are incredible. I think when I first bought it, I thought it was worth 300. I think it’s worth a little bit more now. Could be 3 30, 3 40 could get to three 90. If I was being silly, I not, I wouldn’t value it on that basis, but I could get there.

[00:30:04] Tobias Carlisle: I might not sell it before it gets to there. So I think that the business is very, I think that Zuck is very smart and he’s had some wins, but I do agree that the risks are, and I should say always, all of these positions in my portfolio are about 3%. So I never size anything very big. So if I’m right, doesn’t really do much for me.

[00:30:19] Tobias Carlisle: If I’m wrong, doesn’t really do much for me either way. I’m sort of relying on the overall performance of the portfolio to generate the returns and that’s sort of a quantitative, systematic approach to investment, which is the way that I do it. So I’m never going to be as far into the weeds as someone like Hari is.

[00:30:33] Tobias Carlisle: So I’m, I like sitting there and listening to Hari talking about it. It forces all of my priors, hammers that in further, I run the screen, it’s still in my screen and I still think it’s super cheap and it’s a cash flow beast. The problem for every investor is I’m investing on the basis that the future looks like the past and I’m very not very good at working out where there are going to be these pivot points.

[00:30:53] Tobias Carlisle: And clearly there’s TikTok is incredibly addictive. I had TikTok on my phone for a week, used it just to test it out. I had to delete it off because it’s like incredibly addictive. I don’t think it’s doing great things for the minds of the youth. In the States, but you knows to free country do whatever you want.

[00:31:09] Tobias Carlisle: I do have Instagram on my phone and I use that and I love it. I like looking at my friends kids photos, stuff like that. Like that’s, and I like sharing my own kids photos and that’s sort of what I use it for and I use it for other things too, like checking UFC fights, scores and other things like that. I think it’s a great tool.

[00:31:25] Tobias Carlisle: I think Twitter’s a great tool. I use WhatsApp all the time. The Metaverse looks really junky to me. I don’t know how they’re going to get there with that. I dunno what they’re going to do. Zach seems fully embedded in it, but he’s got, there are some cool things. He’s got this little wristband that you can put on that it’ll see your gestures.

[00:31:41] Tobias Carlisle: That stuff’s super cool. There are lots of cool little ideas in there. I wouldn’t want to bet against suck, but you’ve got no choice because you kinda welded into the cockpit with him there and there’s nobody who’s going to get him out. His share holding’s too big and he’s got different voting shares, so you’re stuck in there with him.

[00:31:57] Tobias Carlisle: I like Facebook quantitatively and I think it probably does work out given a three to five year. Timeline. Having said that, all of the reasons that people have identified for why it could fail, I think are absolutely real risk factors and probably does, explain why it is going to trade a discount to those valuations that I said earlier.

[00:32:18] Tobias Carlisle: However, at 90 bucks where your upside could be 300 plus, I think you just to have a bet on suck. And that mind control machine that he owns, I think you’re almost paid to take it.

[00:32:31] Stig Brodersen: Just to piggyback on that, Tobi, it seems like everything in tech is just being beaten up and a lot of it for good reason.

[00:32:38] Stig Brodersen: And as we all know, we talked about it before here on the show also that with interest rate go up whenever you discount the cash flows back to today, that’s why you see all these tech companies be in a world of pain because a lot of those cash flows are out there in the future. But to your point before Tobi, like this is really at attractively priced like we are looking at free cash flows of what, 2012 months?

[00:32:58] Stig Brodersen: Like almost $10 fiscal year of 2021, like close to 14. Like this is, we’re not talking about cash flows that are way out in the future. We’re talking about cash flows that we have right now. Whenever I’m worried about meta, I’m worried about way out in the future. I’m not worried about the next three years. So I think that’s also really important to understand whenever you are valuing this company and other big tech companies that might start to look more reasonable.

[00:33:23] Stig Brodersen: Whereas some of the beatings that you’ve seen on tech companies without almost no revenue or at least reducing a bunch of money, yes, it makes a lot more sense why they’re getting beat

[00:33:31] Tobias Carlisle: up. They are doing a buyback too, which I should mention, that’s one of the things that attracts me to it. And I think that the only complaint that I would have, and I, I can’t second guess the operational guys who can see that the horizon in their own business is better than an investor who’s outside has no idea.

[00:33:46] Tobias Carlisle: But I would say that if I could redirect that two 50 billion towards buybacks, that’s what I would be doing.

[00:33:53] Hari Ramachandra: Thank you Tobi, and I really appreciate you, me on and to Tobi’s point, so my position in meta is also very small, insignificant that it doesn’t impact either ways up or down. So it’s part of my kinda what I call it as my private index.

[00:34:14] Hari Ramachandra: And the reason I brought it up today is not just as a company, but. I’m more focused on the valuation because I do see a lot of headwinds for in, I think,

[00:34:39] Hari Ramachandra: but at service for that to that segment is a direct competition to YouTube, not to Facebook or Instagram. So it’s a different genre and a different use case. But having said that, I think your point is valid. It’s a, it’s kind the way I see it. It’s a sum game because advertising doesn’t grow faster than GDP for the past 50 years.

[00:35:03] Hari Ramachandra: If you see the ad share of GDP has been stagnant, it’s like some percent. So all these companies are kinda, fighting for the same advertising money. The first losers were newspapers and television channels because these companies took away that money from them and now they’re fighting among themselves for pool of money.

[00:35:27] Hari Ramachandra: So, yeah, so I think that is the risk here, and I think Zach is trying to get outta that trap of just being stuck in advertising with meta, like whether he’ll succeed or not. So I think I’m, my reason for picking up for discussion today is one, I wanted to know what you guys think, obviously, and at this price.

[00:35:49] Hari Ramachandra: Point two is the question is, has the market discounted all this news and all the risks? Like the way I see is I see at DC of 10 years from now, right off hundred or 200 billion of meta worths, fantasy Z Zach has. And then value it to current levels, like am I getting fair value?

[00:36:11] Stig Brodersen: Right. Let’s talking about the next stock. Would you mind Tobi, if I go next? Just that we in that Absolutely not. We are in that genre with beaten up socks that just continue to drop. So I’m going to pitch my own stock here. So I think I mentioned in the previous mastermind we had, I think at the time it just you and me, Tobi, I think Ka was stuck somewhere in India at the time.

[00:36:30] Stig Brodersen: And because we were talking about this small thing company called North Media at the time and I said, oh, I have like four stocks. And then you were like, what? Why you only have four stocks? That sound silly and it probably is. I’ve recently taken a small position in a company called Process, and I do mean small.

[00:36:49] Stig Brodersen: It’s, I think it’s like 1% and change something like that. But I am considering doling down and I am aware of, I hope I am aware of my own cognitive biases because it’s continued to. Which either means that now is really cheap or I’m just making one stupid decision after another. But it’s this company called Process.

[00:37:08] Stig Brodersen: It’s a big Dutch company at the Mark have is 93 billion Euros, and despite the size of the, one of the biggest European companies, it is not that well known. It’s a global consumer incident group and one of the largest technology investors in the world. It is majority owned by the South African multinational company called Naspers.

[00:37:27] Stig Brodersen: That’s probably a bit more known, and they have this weird ownership structure. So they’re they have a cross ownership structure, that’s the way it’s called. So sort of like the they own each other process is probably best known for the investment in the Chinese company, Tencent, that Naspers originally made.

[00:37:44] Stig Brodersen: They have made the investment back in 2001, they bought and hold on, 46.5% of 10 cents for $32 million. It was not billion, it was a million dollars I said. So it’s widely known as one of the best, most successful venture capital deals all time. That being said, I just want to underline that it would be an or simplification to say that an investment in process is just a more, call it accessible investment in Tencent.

[00:38:11] Stig Brodersen: There is so much more to process than meets the eyes. And I just wanted to preface that before you go, like, oh, are we going to talk about Chinese tech again? Haven’t heard that broken record before. So the way I would phrase this is that I would look at process three different ways. I have three different components to my bold thesis of this stock.

[00:38:29] Stig Brodersen: Number one, the stock is trading at a heavy discount whenever, say nav. It’s a net asset value. Number two process is actively making sure that it’s trading closer to nav. And three, the nav are trading at a significant discount to intrinsic value. And so, Those are my three old thesis for that. So let me just try and break those three up.

[00:38:49] Stig Brodersen: So the first one was that the stock is trading at heavy discussion nav. And so as of today, the stock is trading at 46 euros and the nav is 82 euros. And we have to keep in mind the three quarters of process assets are listed assets. So in other words, it would be more expensive for you to buy this list of stocks that process own.

[00:39:08] Stig Brodersen: And so you can more think about it as that you bought process stocks. You would in addition get, private assets on top of that. And the list of assets is, as I mentioned before, three quarters of that. So it’s something that the market has already priced for you. The second thing I want to talk about is that process is actively making sure that it’s trading closer to nav process is very well aware of this discount and it’s a wide discount.

[00:39:33] Stig Brodersen: NAV is 82 Euros time recording and the price is only 46, so it’s very big. So what they’re doing is that they’re selling tenent stock to buy back, own their own process stock in the open market. And effectively also means that if you own, say one process stock, you would actually own a larger share of Tencent, even though the company is selling off Tencent.

[00:39:54] Stig Brodersen: It’s just, yeah, it’s just math really. And also, of course, own a bigger part of the unlisted assets too. And if you had to break down the third component to my both thesis here is that Bin Nav is trading at a significant discount to intrinsic value. So in other words, I think that the intrinsic value of the stocks you’re going to hold are just a lot higher than what the market pricing at right now.

[00:40:15] Stig Brodersen: So if we look at the, of the assets of the balance sheet process, it’s 110 billion in net assets we have, and this is Euros 83 that is enlist assets. And of those 70 billion is in 10 cents, the remaining 26 in unlisted assets, and then the rest is in net cash. So, Doing an intrinsic value of Tencent is just a bit beyond the scope of this pitch.

[00:40:40] Stig Brodersen: I kind of feel it would be a very long, and perhaps if it continues to drop, I will of going to talk about Tencent in the next mastermind. Who knows? I would say that Tencent is trading at least 50%, if not more discount to intrinsic value, even given everything that’s happening in China. Of course, I could be completely wrong on that assessment that, but that is my thesis going into this.

[00:41:01] Stig Brodersen: But it’s also very important to emphasize that even if I’m wrong about what’s going on in China, even if Tencent is truly worth as little as it is right now, giving all the beat that’s been getting this year, I’m still very much bull on process. It might be a, call it smaller double gig return. You will get not a, I don’t.

[00:41:22] Stig Brodersen: 30% return, whatever, depending on how you want to make your assumptions. But like we don’t have to be right about Tencent trading at a lot discount to their intrinsic value for this thesis to, to pan out. I also wanted to put some words on the unlisted assets that process have. And so it comes in various categories.

[00:41:39] Stig Brodersen: Classify food delivery, payment, FinTech, et tech. Those are the bigger categories. I am a bit, I’m a bit cautious about how I value that. The way that they list it is that it’s the sell side valuations and then the average, it says like, it’s the average consensus of the sales si analysts. But even in my assessment I just marked that down with 30% just giving the current environment we’re in and just wanted to be cautious.

[00:42:04] Stig Brodersen: That’s not really where the value is process. Have a good track record. They made more than 800 investments. 120 of them are unicorns. I do want to say that we have to consider that with a grain of salt because they’re really the two to that pretty proudly. But I’m also thinking. The size of the company and how much money they’re swinging around.

[00:42:23] Stig Brodersen: They have to invest in relatively big companies and in a low interest environment. A lot of them, by definition, would just be unicorns. So, or turn into unicorns pretty fast after that. So if you follow the venture space, you just have to consider that. It doesn’t mean that, they did the seed funding, they definitely did not do the seed funding for those companies.

[00:42:41] Stig Brodersen: So it’s not like those companies necessarily did like a thousand x, but they obviously have a good track record.

[00:42:48] Tobias Carlisle: I love the idea of the triple net discount. I guess the question is just going to be how likely are they going to be able to get any value out of that tenent holding? Isn’t it the, like the big risk here for any of these China stocks is that they just sever relationships with the West and you, I don’t know how realistic that is.

[00:43:06] Tobias Carlisle: So, that sounds insane to say it, but I it’s definitely a, that seems to be the predominant risk for all of these positions, doesn’t it? Is there any way to handicap that? How reliant are they on it? Are they, do they have those other holdings? Are they enough to kind of value out?

[00:43:20] Stig Brodersen: I think that they are, and going back to the point I had before, like if you look at, lemme just pull it up right now here as we’re talking.

[00:43:27] Stig Brodersen: So yeah, we have net as a value of 110. And this is millions, sorry, this is in billions of dollars. So Tencent is 70 out of 110 right now and it’s proportionately becoming less every day because they’re buying back stocks in the open market all the time. But you are right you need to have a relatively good grasp of what is Tencent worth before you might see this.

[00:43:53] Stig Brodersen: I do like that they’re bringing in their own catalyst and I guess I’m just beating that drum, but that they’re selling Tencent stock to buy back their own stock. So to me, other than just looking at valuation as its own driver, having that catalyst in itself is just very valuable to me. If we look at.

[00:44:09] Stig Brodersen: Well, sorry, let me go to that point about how they’re being suffer from the West really to start shooting myself in the foot here. I wanted to throw it back over to ha because one of the things I wanted to talk about with this pick is what has been happening with what came out here October 7th, whenever the bite administration came out talking about that, we had to ban the export of microchips.

[00:44:28] Stig Brodersen: I’m trying to understand the chip market a bit better. It doesn’t work that well on a podcast here, but I have the Chris Miller’s book, chip War, still can’t say. I mean, I understand the chip market that well, but it is interesting that China spends more money importing chips than they do on oil. I just kind of feel that’s a fun fact.

[00:44:47] Stig Brodersen: So I guess my long winded question here to Hari is how big a problem is that for China giving that China is also and Chinese companies, that they’re fighting for supremacy and ai, but also in turn that in a way they are competing with the west. In a way that they’re not, because that’s just not the markets, I don’t know what this would mean for the cloud business, but I can’t see regardless of how good their chips are that you have Western companies want to store the data in China and vice versa.

[00:45:14] Stig Brodersen: So, Hari, let me back at you. How big of a risk is that for a company like Tencent?

[00:45:19] Hari Ramachandra: It’s a very interesting pick for sure. Us trying to decide whether it’s a proxy for 10 cents or is it a baby soft bank based on their invest. So what we tend to forget is that the majority of the design of these chips happen in the United States.

[00:45:38] Hari Ramachandra: Even now, the manufacturing is mostly in East Asia, China, and. And if you look at the distribution, the high end is manufactured in Japan and Taiwan and US to some extent. Mid end is manufacturing in Singapore and Malaysia, low end in China. But the most important thing that most of us forget is there’s a lot of machinery that is required to manufacture this, these chips, whether it’s low and high end or mid end, all those machineries are mostly from United States.

[00:46:11] Hari Ramachandra: Companies like the name is keeping me right now, but they’re all in Silicon Valley and there are some in Europe especially. Some of the chemicals required in this manufacturing comes from European companies. None of them are in China yet China has not been able to manufacture or make machines that make these chips, yet they can operate well.

[00:46:34] Hari Ramachandra: And that on the low end, US restricting chip sales. To China for advanced chips is actually a geopolitical decision, which is the right decision to make from a geopolitical perspective, but may not be good for those companies. I think Peter Zion has this wonderful book, the End of the World. It’s just the beginning where he talks about how the last 20, 30 years was actually an operation.

[00:47:01] Hari Ramachandra: I think globalization was kind of an artificial state. An experiment that looks like is kind of winding down.

[00:47:10] Stig Brodersen: What a shame. Thank you, Hari. That was very insightful. Let’s look at the stock price of Prosus. It’s training in 46 euros. I would put the intrinsic value at least above a hundred. I could probably even make the argument why it would be 150 to 200 euros, but then we also have to consider the probabilities of that actually coming into effect.

[00:47:33] Stig Brodersen: We’ve seen some funky stuff happening in China. Recently, and one of the things that I’m looking for as an investor is when does the market confuse risk and uncertainty? Whenever I look at what’s happening with covid, like everything, every time something’s coming out with covid, it’s typically it’s something that’s negative in China and they’re strengthened the grip, like all the Chinese tech stocks just like taking a dive and it’s for good reason and it’s not The reason why it’s for good reason is obviously that it, and it’s not good whenever the Chinese economy is not thriving.

[00:48:04] Stig Brodersen: Also, you have to consider that Chinese tech companies are well tech companies. They’re not hit the same way by covid as other companies, even though it’s obvious not good for them. But it seems like whenever I’m doing my discount cash analysis, it’s almost like these companies, ten seven Alibaba, we can mention them, they’re almost priced for China, will shut down indefinitely.

[00:48:24] Stig Brodersen: I think it’s important to distinguish between that risk and that uncertainty. I would argue and perhaps unbiased, that it’s very uncertain whenever China would open up again. But it’s not uncertain that it will happen. If I look at more about some of the things that has happened where it just seems like everyone is just very embarrassed.

[00:48:43] Stig Brodersen: Xi Jing, the president, got reelected for the third time, which is a bit weird, and like the whole constitution had to be written for that to happen. But like I think above and tens went down like 14% and I tried figuring out why. Was the market surprised that he got the third period? No I think the market would be shocked if that didn’t happen.

[00:49:04] Stig Brodersen: One of the arguments that were flowing around was that Xining talked about carbon prosperity. I’m sorry, having, you just talked about that for two years now. Then there were other that said, oh, like the Paul border was sort of like the secretive committee that makes all the decision. He had continued to like put Yemen in there who would not all rule meaning kind of way.

[00:49:25] Stig Brodersen: And he was anti capitalist. And to me it was like, yes, that’s how the system works. Wouldn’t you be more surprised if he had put in business people who would actually have the authority to all reel his decisions? Like I guess I was just a bit surprised how something that to me seems so obvious just looking at an outsider into China, how that could spook the market like that.

[00:49:46] Stig Brodersen: And we also did see a bounce afterwards. It’s sort of like also to, to one, one of Hari’s points. Like has it been discount into the price or has it been like, or discount into the price? I just, I find it hard to believe that whenever we get bad news from China, that should continue to send down the stock, at least at the.

[00:50:03] Stig Brodersen: Magnitude as we’re seeing right now. And then I want you to go back to the PSET before about Big Tech. It’s very important that we don’t just call all Tech or it’s really important that we look at the individual. You’re not necessarily just discounting cash flow that’s going to happen sometime in the indefinite future.

[00:50:20] Stig Brodersen: You are discounting very real cash flows that are there right now, plus the other catalyst that we’re talking about. So, to me know, the company is not as valuable as it was beginning of the year, but the valuation and dis discrepancy between price and valuation is a lot more appealing than if we’re looking at the beginning of the year.

[00:50:38] Stig Brodersen: Let me live, throw it back over to you for a lot of bashing. I’m sure my, my pick deserves it.

[00:50:43] Hari Ramachandra: My concern in general is two things. One is about Tencent. I’m not really worried in the long term about how Tencent will do, even though they might have headwinds like demographic situation. China where by 2030 or 2040, their population is half of what it is today based on the latest types.

[00:51:02] Hari Ramachandra: In fact, China admitted that they over counted their population by a hundred million, and that means these are all child bearing age cohort. Basically. That means there’ll be even fewer children going forward. So I think that’s a serious problem for China, actually, from an economic perspective, which US doesn’t face comparatively, I’m saying it’s like it’s not as bad as scenario.

[00:51:23] Hari Ramachandra: So that might impact companies in China in the long run, but I’m not talking about long in the next five to 10 years. The concern is not about Tencent economic liability. The concern is whether western investors. Tobi said we’ll be allowed to hold any Chinese stocks. If there is a regulation that kind of, disallows any foreign investor from holding Chinese stocks, then process will in kind of, invariably have to write off that 75% holding.

[00:51:55] Hari Ramachandra: I don’t know whether that’s going to be a reality. Obviously that’s a farfetched possibility and most likely not probable. That’s number one. Number two, what would be interesting is if they liquidate all their 10 cent holding today, which is 75% of their holdings and entire asset base, and then just hold cash and invest in something else.

[00:52:15] Hari Ramachandra: Would that be something smart thing for the management to do? And in that case, would process be an amazing investment today. So that is something stick you might want to address and those are the things that kind of, comes

[00:52:25] Tobias Carlisle: to my mind. Go ahead. Yeah, I like everything about the pick. I just, in this sort of triple net or the, like, the derivative kind of arbitrage place, you just need a lot of patients.

[00:52:37] Tobias Carlisle: You need to be able to sit there for a long time and hold them without sort of knowing when they’re going to work out. That’s the only sort of downside to that kind of investment, but that’s true of most investments. I just think you’ve got that one art and handy capable risk and you’re probably getting the price now where it’s worth doing that.

[00:52:53] Tobias Carlisle: But then I would’ve said that with Alibaba too, probably a little bit higher than where Alibaba is, but never going to pick the bottom. I actually kind of, I like the pick. I just, and I like talking about that, how you handicap that risk with China, I’m probably, I think we’re probably at peak pessimism now and we probably, when some of that pessimism rolls off, people regret not having bought it when it’s kind of obvious that process is even doing something about it, selling it down.

[00:53:17] Tobias Carlisle: So I don’t have sort of much in the way to add to it, but I think the discussion’s a good one around it.

[00:53:23] Stig Brodersen: There might be some different concerns. We definitely see the SCC do a lot of things to regulate the Chinese companies. It feels different here in Europe whenever it comes to that.

[00:53:33] Stig Brodersen: And I did a little digging also because I have, I have a stake in Alibaba and like what would happen. It was still listed and all that. And it seems at least here, we don’t have the same issues in terms of if that were to happen that like three different, three different things that could happen. But in any case, like you as an investor won’t be without any money.

[00:53:52] Stig Brodersen: They like, you can be forced to buy it back and you can get holdings or you can be transferred to another broker where you then get it. Like, there are different ways where you still get that, it sounds really bad whenever we talk about, oh, can you then even own it? But whenever you do the digging while you still can.

[00:54:07] Hari Ramachandra: It’s not about valuation risk. I think it’s, I feel like, you’re right. Like, maxism pessimism has been built in. You might be getting it for a really good value. The only thing is regulation risk. I think that can just, your share of the company will be zero. It doesn’t matter what the company’s doing then. So that’s the risk I’m talking about.

[00:54:28] Tobias Carlisle: To be fair, you have that in the states though too. There’s this windfall profit tax they’re going to bring in on energy companies. Look at what energy companies have earned over the last 15 years. They haven’t made much money and we’re under invested in energy. Yeah, I agree. Regulatory risk all over the world.

[00:54:43] Stig Brodersen: Yeah. And also, what you said about policy makers looking out for themselves, I’m sorry to say that’s not a, I do agree that a huge issue in China, but I also have to say it’s, you also see that in Europe and then I won’t make any comments on the states. So, I’m going to go throw it over to you Tobi also want to hear from you.

[00:55:02] Tobias Carlisle: I will do this fairly quickly. My idea is Colgate. Everybody knows what Colgate is. I’ll give you the, I’ll give you the headline and then I’ll get into the detail a little bit. But the main idea is that we discussed at the start of this program. Colgate is a consumer staple, very consistent.

[00:55:19] Tobias Carlisle: And it’s a $60 billion market cap, 68 billion in enterprise value, which means it’s got net debt of about 8 billion. Revenues are about 17 billion this year. Gross profits are about 10, operating income about four, and then the bottom line’s about three. So on an EV EBIT basis, you’re paying about 22 times.

[00:55:40] Tobias Carlisle: Sounds reasonably expensive, but gross profit margins are about 60%. It’s underearning a little bit at the moment, it’s about 16% return on invested capital. In 2017 it was about 23%. So it’s declined quite a lot cause it’s had these headwind. And particularly so over the last few years where all of its input costs its raw materials are expensive, transport’s been expensive, wages have become more expensive.

[00:56:03] Tobias Carlisle: I think it’s had everything thrown at a, at an operational level and it’s still a pretty good stock. Having seen all of that, all of the brands are all very well recognized. They’ve got great pricing power. They earn about 22% of their revenues in the states. They get about 16% in Asia, which is a much more fragmented market and looks like they’ve got quite good growth proceeds.

[00:56:24] Tobias Carlisle: It’s there. I think if you looked at, it’s got about a 3% dividend as well. All of that taken together on a sort of quantitative basis, looking for, assuming that it sort of goes back to what it has historically earned on its assets. I think that over the next sort of three to five years, it’ll do it.

[00:56:42] Tobias Carlisle: Teens kind of returns compound. From here, the which, and I think it’s very defensive. I don’t think you downside as much. People tend not to steer away from these sort of low cost, relatively low cost. Even though they’re high margin. They’re all relatively low cost purchases for them. The businesses in four parts, there’s oral care, which everybody knows they have home care, personal care, and this pet nutrition business, which is the more exciting part of it.

[00:57:08] Tobias Carlisle: And so I have owned Colgate for a while. I owned it before third Point, took their position into it. I knew that this business was inside Colgate and growing pretty, because this is a material part of their business. But this is the sort of optionality that’s built into something like this that moves it from being potentially a mid-teens compound return to being quite a bit more, I kind of don’t, I don’t.

[00:57:36] Tobias Carlisle: Third point, they’re an activist firm. What they want them to do is to spin this business out because they think that they’re very high multiples being paid for. Like a 25 to 30 x for this pet care, pet nutrition business, financial engineering. I used to find that really fascinating. Now I, I think it’s probably just as good inside this business as it is outside this business, but you might get a bump if they can persuade if Third Point have been a very effective act activist, very good firm, very good investors, very effective activists have had quite a lot of success, although I think the Colgate Board is unlikely to take too much notice, but you never know anything could happen.

[00:58:11] Tobias Carlisle: So there is this sort of optionality built into it. But the idea is that there’s, this is Third Point’s idea. There’s this, it’s called Hills Pet Nutrition, and they own these two. Brands that are doing very well, Hills Science Diet and Hills Prescription Diet. I see them advertised all over Los Angeles.

[00:58:27] Tobias Carlisle: They make up about 20% of Colgate sales and an equivalent amount of their profit. But given that Colgate itself trades on it, 22 multiple, and you could get, if this is spun out, it might come under 25 to 30 times multiple. That’s where they’re saying, is this sort of found value in this thing? So you get a little bit more on about 20% of their business if you add, well, they’ve been investing in this business pretty consistently.

[00:58:53] Tobias Carlisle: They’ve put, they’ve bought three pet food manufacturers around the states. They’ve been reinvesting to say all the problems that they’ve had with inflation and the strong US dollar and supply chain issues and all of those sort of things. They’ve been working on these problems and they’ve been investing in the business to sort of ameliorate these as best as they possibly can through some product innovation and other things like that.

[00:59:15] Tobias Carlisle: But the idea is that this thing, this business is worth about 20 billion and spun out is sort of close to found value. You’d lose about 20% in profits to find 20 billion. So that’s some upside. I am happy to hold this thing at a mid-teens return, given that the downside is virtually nil.

[00:59:34] Tobias Carlisle: But there is that sort of optionality built into it. So just to summarize, it’s like a mid-teens return, 3% dividend optionality in this hills business. All of the other businesses are very, they’re consumer staples. They’re things that people don’t spend a lot of money on, but buy very consistently and they’re hugely profitable for Colgate.

[00:59:53] Tobias Carlisle: And Colgate has a lot of non-US growth potential for the foreseeable future. So that’s the pitch. It’s a very simple one. It’s a high cash flow generative business. They’ve got a lot of levers to pull sort of from a financial engineering perspective. They’ve also suffered through sort of. Pretty substantial headwinds, and at some point those will reverse and I’ll have the tailwinds.

[01:00:15] Tobias Carlisle: And so that, that’s the pitch. I don’t think it’s going to be as racy as the other two, but I potentially, there aren’t as many sort of hairs on it either. What do you think, Jens? Yeah. Interesting. Pick

[01:00:26] Hari Ramachandra: Tobi and it does feel like a classic Tobi pick . But I, when I was looking at the, your thesis, is it fair to say that the catalysts that you’re looking at are one the pets, that’s an optionality that it might grow, bringing some revenue growth?

[01:00:44] Hari Ramachandra: Because when I look at the revenue, it’s almost flat. It’s not growing. Last three years, if I look at the last three years of revenue, like it went from around like 15.7 billion to 17 billion, but their net income is actually down like from 2.3 or 2.4 billion to 2.1. So I think. So I’m assuming that you are thinking the, your thesis is that the pet food business will bring in some growth and because of the activist investor, they might actually increase their s Is that how- (crosstalk)

[01:01:18] Tobias Carlisle: That’s right. I think there are two things going on. I, the, my thesis was more, was originally, before I saw, before third point initiated their position was they had all of these headwinds and you can see, I would say since 2017 to date, last five years, return on invested capital has fallen from about 22, 20 3% to about 16%, which lowers the valuation sort of commensurately From my perspective, it goes from being worth, that differential is about a 25% haircut and I can see that reversing, they should get back to earning on their invested capital what they have in the past, the main the margins have been like surprising gross margins have fallen to just below 60%, which is kind of extraordinary that’s the quality of that business.

[01:01:59] Tobias Carlisle: But, All of the, they have been operating in a, in an environment where they’ve had all those headwinds and that when those headwinds reverse, a lot of that will fall to the bottom line pretty quickly, and they have various leaves that they can pull to sort of maximize that valuation, buying back stock and so on.

[01:02:16] Tobias Carlisle: There is this other, this is only a reasonably new I don’t know when their letter came out. It’s only in the last month. The third point letter is only in the last month or so where they say, plus there is this found value and they say it’s 20% of the revenues, 20% of the bottom line, but potentially 20 billion on a 60 billion market cap.

[01:02:35] Tobias Carlisle: That’s very material sort of potential in it. I don’t know how you handicap it. I don’t think it’s particularly likely that it happens, but that pet food business is growing much faster. It’s growing. It sort of, I think it’s like 11% growth a year and that’s it. It has all the same problems that their other businesses have with those.

[01:02:53] Tobias Carlisle: Cost issues, which is why they bought the additional factories or pet food manufacturing facilities. And I think that you’ll see some improvement over the next few years and that should result in a reread and the stock as well. And then you have the potential for that upside from the third point spinoff.

[01:03:09] Tobias Carlisle: But I don’t think it’s a likely outcome.

[01:03:12] Stig Brodersen: I always like Tobi’s picks and if I can highlight a difference between Hari and my pick and Tobi’s pick, and I don’t want this to come off in any kind of wrong way. And I kind of feel it already is because I already started saying that is that Hari and I we invest our own money.

[01:03:28] Stig Brodersen: And I also know, Tobi, you invest your own money together with your investors, but your pick job is very much like an asset manager pick. And I mean that in the best possible way because you won’t get in into any trouble with something like Colgate. You just won’t. There, there is a reason why it only dropped, what, 14% year to date.

[01:03:46] Stig Brodersen: And something like meta drop, 73%. Now we’re talking about could we for our own money do that? And then if the thesis plays out, it could do like four x And don’t get wrong. I also know you have meta in your portfolio, Tobi, and you can diversify. You can have a lot of different things in your basket.

[01:04:00] Stig Brodersen: But I just kind of feel, I wanted to say that whenever you hear what might seem like crazy picks, like really understanding what kind of investor are you listening to right now? Investing their own money, someone else’s money. What’s their method of investing? I guess that was the first thing I wanted to say one thing that I wanted to touch on for Colgate was inflation.

[01:04:20] Stig Brodersen: We are looking at inflation being a real concern, especially for, well, for all of us and also for consumer goods company like Colgate. As a product group, you would probably say that the products are generally price in Elastic, which is just economist fancy word of saying that they’re not as sensitive to price increases.

[01:04:41] Stig Brodersen: That is as a group, like we still need food, we still need to brush our teeth, we still need, all the basic things that they’re providing. But in that category it can be very price sensitive, especially in a time of inflation. And so if you go through the earnings call and talk about, we are either number one and number two in all the categories and like it, it’s very fragmented, like all the things that they do.

[01:05:02] Stig Brodersen: And that’s probably true. I don’t know Colgate’s products as well enough to say how big the mode is. We just also know that consumers are hurt right now and they are very sensitive, surprising. So whenever I looking at the margins, you can already see that for Colgate right now. But the gross margin, it’s in the client, obviously the operating Martin R two and whenever you are looking at very price sensitive products, it’s very difficult to push that over to consumer.

[01:05:27] Stig Brodersen: Because everyone sort of has to agree that you keep the prices high. It’s illegal, by the way. And so that’s one thing that I would probably note. And so it’s not because I’m not optimistic about Colgate, I think they would do well as a company, but I would expect a lot of marking to be squeezed over the next few years whenever you look at the multiples.

[01:05:48] Stig Brodersen: So I’ll probably be a bit more conservative than some of the numbers than Tobi call out in terms of return. But Tobi’s usually right that’s what I used to say here and there, here in the show.

[01:05:57] Tobias Carlisle: Ah, that’s very kind. I dunno if I have been particularly right recently, but I think that a lot of the margin squeezing has gone on because there have been, there’s been this big transition away from people buying national brands in supermarkets and spending lots of advertising money and paying up to get the space in an line of sight.

[01:06:19] Tobias Carlisle: Getting the end caps in the supermarkets. And that model is a little bit old. We don’t really. Now sort of people will buy over Instagram and they’ll find things in different ways and they’ll, they’re prepared to put black charcoal toothpaste into all those sort of other things. But a part of that is, a little bit of that is the amount of VC that has flooded into these different areas.

[01:06:38] Tobias Carlisle: And that is now going to be going heavily in reverse. So I don’t think that there’ll be as much competition from new players. There’ll be that sort of established more gen teal marque to Queensbury boxing rather than the bare knuckle street fight that they’ve been in. I think that the main story for Colgate has been that cost pressure.

[01:06:58] Tobias Carlisle: And a lot of that has been, there’s two that there is, everybody seems now to think that the transitory argument for inflation has been sort of debunked and inflation looks a lot stickier and is going to be here with us to stay for a lot longer. And I do agree that inflation is much, much higher structurally now than it has been or has sort of seemed to have been.

[01:07:18] Tobias Carlisle: I think that inflation is always an everywhere monetary phenomenon. The amount of money printing sort of does eventually end up in asset prices and consumer prices. And now they’re going backwards a little bit. They’re quantitatively tightening, so they say there’s been a lot of quantitative tightening rhetoric and not a lot of quantitative tightening until very recently, but now it does seem to be there.

[01:07:37] Tobias Carlisle: So the cyclical transitory component of their cost pressures is going to go away. And for something like Colgate, which is run pretty efficiently and is run pretty close to the, about as tight as they can run it, all of that does impact them. They’re doing about everything right, that they can get.

[01:07:54] Tobias Carlisle: There’s not a lot of place that they can go when they find those cost pressures. So when they get them it impacts them. But when it reverses, it’ll have an equally sort of ameliorative effect on their ability to earn and generate revenue, sorry, ability to generate profits on the bottom line, almost regardless of what the top line does, the top line is going to be like inflation.

[01:08:15] Tobias Carlisle: The top line’s going to be like five or 6% for the next few years. I don’t think it’ll be particularly impressive, but it won’t be going backwards. And with that cost discipline and the cost pressure and that the inflation is across everywhere, transportation, raw materials, wages, that is going to keep on being an issue.

[01:08:33] Tobias Carlisle: We’re not going backwards. We’re not going back to where we were, but I don’t think that we’re going to see the same explosion in those prices that we’ve seen over the last two years. So I think the, you’re getting a reasonably good price to take that bet here, but I do acknowledge everything you said.

[01:08:49] Tobias Carlisle: I agree with that 100%.

[01:08:52] Stig Brodersen: All right, Hari, any comments? Anything you want to add before we round off the show?

[01:08:57] Hari Ramachandra: No, nothing to add from my side.

[01:09:00] Stig Brodersen: Well, guys, as we are rounding off the show here, as always, we would like to give you the opportunity to give a handoff to anything you do to the audience and where they can learn more about you.

[01:09:10] Hari Ramachandra: Okay, so I’m always around on Twitter. @HariRama is my handle and my blog, bits business.com. Look forward to engaging with the audience there.

[01:09:21] Tobias Carlisle: I run Acquirers Funds. The two funds are The Acquirers Fund, Zig, which is a mid and large cap deep value fund, and Deep, which is a small and micro deep value fund.

[01:09:32] Tobias Carlisle: It’s the same strategy in both, just divided between two different universes. And I have a website called the Acquirers Multiple, which has got a free screener for these sort of stocks. And I’ve written some books under my name on the Amazon page, but the most recent one is the Acquirer’s multiple, which is 10 bucks.

[01:09:47] Tobias Carlisle: You can read it in five hours. It’s written to a or two hours, it’s written to a fifth grade reading level. It’s really easy read.

[01:09:53] Stig Brodersen: Gents it’s wonderful always having a chance to go this back and forth on stock picks. Thank you so much for your time. It was a pleasure as always.

[01:10:01] Tobias Carlisle: Thanks for having me Stig. Good to see you again, Hari.

[01:10:04] Hari Ramachandra: Yeah, thank you. Stig and Tobi, always fun to hang out with you guys.

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