The Exchanges

Q And so in 2018, the reason Netflix was contrarian was, it was obviously a great product that people loved, but they were burning a lot of money, and so it was just not clear, was this like a classic tech company, or would they ever make money? Like, that's why it might have been contrarian without piece.

A Yeah, I think the, the issue is like, there's very few tech companies that are massively capital intensive, right? Almost every tech company loses money for a period of time. But the typical software company you're looking at, like, you know, there's operating losses, you leverage it, and then people are very used to that business model. Up until the LLMs are very few tech companies where it's like a huge fixed investment. And then the incremental, ah, margins on the sales are extremely high. And so, what that meant was that Netflix was investing heavily in content, which is a fixed cost, and then they were selling that to consumers. The next year, they were investing more in content and selling it to more consumers. But you're constantly investing more and more in content.

AI assessment note: “there's very few tech companies that are massively capital intensive, right?”

Q And you're judging this poor analyst, you know, and their job on the mock portfolio, which you're saying is like updated weekly. And so aren't you not actually looking at companies on a three year time horizon because they have to like perfectly perform at every step along the way and they can't be misunderstood for any short period?

A Yeah, the way I think about it is, any given time, we are planting seeds, and then we're harvesting. Like, there's some companies that we invested in a year ago, and our thesis is starting to play out, and you're making money, hopefully, on that idea, and, um, you know, maybe you're selling that idea at that point, and then you're putting in new ideas in the portfolio that might take another year to play out. And so, it's not like, if we started out with a bunch of ideas that all had three-year targets all at once, like, yes, but like, The portfolio is a living thing that, like, you have a range of positions, some you've had for a year or two, and you think the, you know, the business is going to turn the stocks into work, you know, and then there's other companies that you're buying now because they're really depressed and really out of favor, and you know they're not going to go up in the next, you don't think they're going to go up in the next three or six months, but over any medium term retirement they will. So it's like always.

AI assessment note: “The portfolio is a living thing that, like, you have a range of positions”

Q So is it because you're saying, like, the job is so pattern recognition oriented that you just need some time to build up the pattern recognition, and, like, is that what they're learning?

A Some people come, some people, like, Once in a while, people come in and like, you know, right out of the gate, you're like, wow, this person like sees it. You know, they see the ball really clearly. Yeah. But that is a very small fraction of the time. Most people get great over time, and they have to learn an industry. So when they come in, we will say, you know, you should cover, you're going to cover FinTech. And it just takes them a year just to understand FinTech, right? Then they have to see, you know, well, why is, XYZ stock trading at this multiple, and why is this stock trading at this multiple? What's the market saying? And yeah, I think it's like, the market is constantly giving you data points. Um, some of them are, you know, false signals, and some of them are good signals, and over the long term, they're all good signals. And the people who do great at this job, you have to have like some commercial sense, which I think is like, probably just, you're either born with it or not.

AI assessment note: “Most people get great over time, and they have to learn an industry.”

Q So you think the tech is very cool, but just fundamentally being an equity holder there is hard?

A I think tech is very cool. I just don't think it's progressing at the same rate it used to because a lot of the great entrepreneurs have left, um, because they felt like the environment for, Starting companies for, you know, driving new innovation that was going to make a lot of money. Like, that wasn't something that was, like, looked favorably upon by the government, so the best people left, a lot of them went to Singapore, and that, to me, like, I think that's a shame because, um, with the right government and with the right economic system, China should be, you know, uh, uh, the most important economy In the world, and it should be a technological leader, and I think the geopolitical tensions would be entirely different, um, and I have a ton of respect for, you know, what China did from the 19 seventies to twenty-twenty. Like, I think it is pretty much an economic miracle. But what we've seen the last five years is, like, governments matter, and, you know, it matters what your political system is, and it matters how the government intervenes, and the due process matters.

AI assessment note: “I think tech is very cool. I just don't think it's progressing”

Q What does the process look like for something like that?

A I actually started out, uh, my career as a financial service analyst, so I had looked at, you know, all the card networks, all the processors. It was pretty clear to me that the competitive set in merchant processing was, um, very mediocre at best, and that their technology was not conducive to most internet companies, um, and nor did they have the tech stack that would allow them to adjust To, you know, what was happening in terms of e-commerce. And, you know, look, at the end of the day, it was like, I think that there's going to be one, maybe two companies that actually can provide the technology for companies to enable e-commerce or any online transactions. And, um, you guys seem pretty smart. Um, so, uh, and, you know, we do a lot of work on managing teams and, um, You know, huge market, great management team, weak competitive set, uh, is like, you know, um, perfect recipe for making a lot of money.

AI assessment note: “huge market, great management team, weak competitive set, uh, is like”

Q You guys were long wheels, right? Yes. Right? Yeah. So, that's a good example of like, how do you, because every management team says- Yeah, right? Every management team says we're going to turn this thing around, and, uh, every management team has a projection that, like, looks good, and so, how did you determine that now, finally, they're going to turn it around?

A Okay, so let me start by saying, like, The U.S. and Europe are very different in this respect. I find that, um, if we, let's take a U.S. company that had like a turnaround, the industrial company, like, three M. Three M has been a horrible stock for a very long time. Wasn't well managed, um, New CEO comes in, puts up one or two good quarters, everybody, we owned it, everybody basically understands what's happening, and the stock kind of goes to fair value with the assumption that the margins are going to go to where they should go. Like, the U.S. is pretty quick at, like, seeing change happening, and then pricing in that change. In Europe, I find, um, you know, once a company, like a company like Rolls had underperformed for so long, I guess that European mutual funds, they just kind of got in their head that like,

AI assessment note: “The U.S. and Europe are very different in this respect.”