#142 - Todd Ahlsten: AI, Moats, and Quality

23:25Todd Ahlsten:And now that I think about it, I don't think I've ever heard a manager say, we focus on buying low quality businesses because they're cheap. There's always a different narrative. Alex, I've said that in meetings that especially when someone's flown a long way and you all know there's bags and Ubers and hotels and a lot of chaos traveling, you're not going to travel 3 ,000 miles and say we own low quality businesses that are cheap. Is there an opportunity or potential opportunity to find higher quality businesses that meet all your criteria that may be temporarily mispriced because perhaps of short-term concerns that are being over-extrapolated?

24:02I think that's becoming an increasing opportunity. I'm sure we'll get into AI in a moment and I want to be super humble about prediction here. But when you think about the focus of AI and you think about the kind of air it's taking out of markets, it's going to leave a pretty vast swath of businesses that aren't getting the attention for capital because at this point in time, they're not growing earnings 30 % to 50%. The old algorithm of a good business that's growing revenues 10, bottom line 15, maybe earnings higher teens with capital return. Maybe those type of businesses aren't attracting the same capital that they used to because of other businesses growing much faster.

24:49And at the same time, if you just have a quarter that's a little bit off, are you getting disrupted? Is AI taking your business? So you get the lack of attention in the market in the short term is attention. And if there's a short-term miss on a quality business, the first thing people are asking a lot now is, are you an AI winner and loser? And those narratives start to reinforce. So I think there could be a remarkable time here to find some quality businesses that maybe are getting mispriced, but are, again, second and third order winners with AI adoption, but you might not be seeing it in the numbers yet.

25:24And so I think that could be a great opportunity in the next few years.

25:28Todd Ahlsten:And how do you determine whether a difficult period for a company is creating opportunity or if it's potentially revealing a permanent impairment or some other issue? One of the first things we look at is, is the business missing numbers because of a cyclical or secular issue? And so obviously if it's cyclical, that's more comforting. And then there's a question of when does the cycle come back and is that inevitable? If it's a secular issue, then there's potentially an impairment. It's always described as a cyclical issue, right? It is. And I'll just give you like an example. Say you're investing in the agriculture equipment cycle, right?

26:07And you know that farmer profitability goes through cycles with corn prices and wheat and such forth and ethanol. And so if you have a precision agriculture company that's selling ag equipment and the stock is cyclically down due to the cycle, but it's gaining share, it's innovating, and it's used equipment is holding value in the market. you can see other signposts that would say the stock is down with the cycle. It's equipment that's used as holding its value. It's maintaining its dealer network. And at the same time, it's holding share on new, exciting precision agriculture developments that are turning, say, combines into data centers on wheels.

26:53That would be pretty intriguing in a down cycle that you have three to five years out recovery. On the flip side, if a company is not losing share in a cycle, but it's got more fundamental demand issues, that's the key thing where you can really run into trouble. So the key thing is cyclical versus secular, share gainer, company and customer retention, and the supply chain, and making sure those are really footing for long-term value creation. And that's really what makes our job a kind of a beautiful mystery where you don't want to have too much prediction, but you want to be kind of investing on some foundational truths.

27:35Todd Ahlsten:I know you also have to evaluate management teams. Are there any subtle signs of the soft things like integrity, stewardship, and long-term thinking that may not necessarily show up in financial statements? I've flown over a million miles on United out visiting companies and great customers. So does my team. Our team is, believe me, it's not just me. It's our team. And what I would say is when you go meet with executives, there's body language, there's looking in the eyes of an executive, there's how they treat employees down the hallway. there's a lot of subtleties on culture you get at companies but a couple questions i love to ask is where have they made mistakes and i love seeing humility and i love to see if they they blame other people or are hard on themselves you know there's little subtleties of and these are sometimes mistakes that are out in the public you know out in broad daylight and just how the sense of humility and also a question i love to ask is just you know where are they spending their time I always love to say, like, if I could just open your Microsoft Outlook and I looked at your meeting schedule, where do you where do you spend your time and what's what's top of mind?

28:51And, you know, maybe if a company is having elevated turnover or talent retention or just those things. So, like, there's softer things that aren't in financial statements. And then finally, it helps you understand what the time frame they're solving for. What, you know, what's on on their minds. And also just finally, I could go on and on because this is super passionate area because I think meeting people running the companies is really important. Does information in the organization, does that, because what I find even every company is guilty of this, is like good information flows up quickly.

29:25So as a CIO of a company, if it stocks up 10 % after hours, believe me, I'll have an analyst sometimes come in and mention that because good information travels up quickly. and bad information or uncertainty travels up slow to the C-suite. And sometimes that's by design. I don't need a lot of noise versus signal, but just how does information flow in your organization? Are you in denial? Are you open? Are you listening? Are you flexible? There's just a lot of soft skills you can get that, you know, I think over time can be material. And so that's important getting into the intelligence being what is value versus judgment.

30:01I think those things are still going to be important for a long time.

30:03Todd Ahlsten:Things like culture, governance, it's not really data, right? It's almost like it's a feeling that you get when you're meeting with the senior leadership and maybe even some of the next year down. And that, in some sense, gives you some insight into what the future data may show, but may not be in today's data. Yeah. I'd also just love hearing the soft side of an executive of like, how have they worked up in the organization? Or if there was a search, how did they land there? There's just like soft questions that can give you some insight. So I think that's going to be important for a long time.

30:40Because if you're a long-term investor, it's going to be really important to know what your management team's timeframe is. And also, Alex, it's really important to know what the succession plan of these companies are. So if I'm telling you that we're looking to invest in companies for three, five, 10 years, and we've owned some companies, you know, MasterCard, Lindy for a long, long time, waste management, you kind of want to think about who's going to run this company in 10 years. Is that talent here? Do they have to go to the outside? Is the governance of the company like fertile to bring in talent?

31:10So, you know, in a humble sense, you don't know all those answers, but you've got to be thinking about those things if you're going to be a longer term investor.

31:18Todd Ahlsten:One way to filter noise from signal is to ask whether a piece of information will matter sometime in the future, let's say a year from now. How has that type of discipline changed the quality of your decision making? Okay. It's really important. I could take up whole podcast on this one point. I won't do that, but I'll just mention how important it's been for me. And I still do it with a pen. I write in cursive still, I guess I'm a child of the eighties. So I do that, but I journal every day. A good friend of mine was generous to give me a journal that has 10 years on one page, and it's got about seven lines per day.

31:57And I journal every day. There's a short form journal. Then there's a longer form journal. And where I'm getting at with this, Alex, I can't stress this enough, is I'll write what was on my mind that day and main decisions I had to make or challenges. And what you find now, this is, I started this journal in 2017 and it's now 2026. So I'm getting, my friend just told me he's giving me another journal for the next decade. You get to see like three, four, five years ago, what was on your mind. And what you realize is 90 % of the things that maybe you were stressed about end up being noise. And the signal versus noise starts to really become apparent in broad daylight.

32:38And a stock being down 4 % after hours on some short-term noise had nothing to do with industry structure. I'm going back to this again. It was just a blip. And so I can't stress enough. And it doesn't mean you have to write or write in cursive. If you can be on your phone or type it on your, on a commute, just document what's on your mind every day. And it's almost like swimming in the ocean. When you get through the waves, the first couple of days, you're like, what am I going to write? I don't know what the right, but actually the mystery is unfolded after a few months and years about what you learned and what you, it then is, is that aligning with your investment process or not?

33:16Am I even working on the right debates? And sometimes I was realizing I wasn't even asking the right questions because I was too focused on short term. So getting into that, it's setting the tone then for the team as a CIO. And our CEO, you know, Ben Allen, who's a phenomenal investor. Just are we having the right big picture debates? It's so easy to get in the forest from the trees and that conversation. So long story short, journal every day. It's de-stressing. It documents what's top of mind. You can see over months and years where your time was and are you on the right debates on everything we said.

33:53You can have a really attractive investment philosophy. But if you don't actually do it, you're not going to be successful. It just holds you accountable. And signal versus noise in a 24-7 world is more difficult. But when you journal, there's a calming factor to it. And the minute you get anchored more on the right debates, you realize if I sum it all up, you don't have to be perfect on predicting things. You just don't. I think like whether it's AI and peak and open and closed source models and circular financing, there's tons of debates around all this. But just try to invest kind of all weather executing your process.

34:32And it's a bit freeing when you realize you don't have to be perfect predicting the future. Just be consistent on having the right debates. Just be thoughtful. And that's like a very freeing, de-stressing moment. So anyways, please journal. It's really good for you.

34:46Todd Ahlsten:That's good advice. The way I think about it is, to me, it's when you zoom out, you have a very different perspective of what's in front of you because you can see the bigger picture. But when you're zoomed in, everything looks really important. And so I think the practice that you're describing is one that forces you to zoom out because every day we're pulled in by our everyday work. by the news, but whatever is being talked about at that point. And having this perspective of knowing that you're zoomed in, zoom out, look at the same issue, same question, and you'll start to be able to see that there's probably a lot more noise than you may realize when you're zoomed in.

35:24Anything that's happening in your investment portfolio, there's price action and volatility. Just ask yourself, am I going to be talking about this in a year? And that makes you think about, is this a big picture debate or is it like a company missed earnings by some small amount? And it's like, am I literally going to be like, is this going to be top of mind a year from now? And if you're like, oh, no, no, no, no, it's not. Well, then you start filtering. That doesn't mean you're going to be perfect at predicting things. But if it's a big picture debate, then that's something you better think about versus like some very granular short term, like we said, short shelf life piece of information that's going to be distracting.

36:05And I think that's the biggest thing that I've realized in life. And I'm 54 now. I started at 22, but I've wasted a lot of time over the years on the wrong granular things and not enough on the big debates. That's what you realize. It's kind of a, it's almost a confessional that I go, wow, I've wasted a lot of time over the years on the wrong debates. And I can't believe I flew all the way across the country. Then you see these like compact, you talk about a mediocre business compounding. It's so important to guard your time, right? in this era. And like, I've literally seen in broad daylight where there was a short-term stock reaction.

36:41Alex, I went on a plane and I flew across the country and then I flew back twice and then sold the stock six months later and ended up wasting a lot of time on a short-term development. And that's how you get better and learn. But just guarding your time, connecting it with the process, signal noise, there's so much compounding of just how you spend your time, which is incredibly rich. I strive every day to get better at that. And I think signal noise, shelf life of information can do that for investors. And I can't stress that enough. Guard your time.

37:14Todd Ahlsten:You know, what's funny is you could probably ask the same question, but instead of a year, say a week, and most of what you focus on today, you probably won't even think is important a week from now. It's funny. One of the fun exercises I've done is I'll think about like, well, what was I doing on this day last week? And like, most of the time, if we're all honest, you're like, I really don't remember what I was doing on X, Y, Z day. And so I think it shows like how profound, and then what I realized is there's really only a few days a year where something really profound happens. It's the day you really sized up a position or you, you know, you had a really good meeting and like, what were the, what were the dynamics at work when you had that really big meeting or there was a regime change in the market and you find you were thinking big picture, you were relaxed, calm, focused, you boiled an argument down to two or three main things, not like a long readout of a 30 page report.

38:11The best ones are like one page with three bullet points. And you see where we're getting back to like focus, protecting your time. And I think just being on the right debates is so critical.

38:22Todd Ahlsten:What do you feel that periods of significant market stress have taught you about managing your own emotions and maintaining conviction through those stretches? I talked about the three words, stress, anxiety, fear. You know, stress destroys your productivity, can hurt your health. Anxiety makes you focus on short-term noise versus long-term. And then fear, you look to protect, think short-term, and not trust. And there's a lot of words that come out that are not good for active management. So I think back, I feel so fortunate that joining the company in the mid-90s, I got to live through the dot-com boom, dot-com bust, sadly and tragically, 9-11, 29-year-old PM when that happened.

39:05I remember the market had been closed three days, coming up the elevator, futures down, GFC in 08, COVID, and now AI. It's been a remarkable journey. And if I sum that up, it's just, first of all, I was like, it sounded temperament, just anything you can do to have the mental clarity every day. This business isn't about who has the highest IQ or even has the strongest work ethic. It's like clarity of thought, clarity of temperament, anything you can do to bring down the stress, the anxiety, and the fear, it trumps any investing book you're going to read out there. Because if If you don't have a clear mind, you're not going to execute it.

39:43That's number one. And number two is just to be really consistent about who you are as an investor. Don't pretend to be somebody you're not. And so for us, we were able to navigate the dot-com bubble and the GFC just being valuation moat, relevancy aware. Those cycles really came into us because either you saw unsustainable valuations without a business model and the dot-com bubble, or you had a GFC, which was leverage and debt. And that's something we look to avoid. COVID was just investing in durability. So there was shutting down the economy. If you had moat relevancy, that was a cushioning factor.

40:23This one is much tougher on AI. It's so exponential. It's taking so much capital. Business models are evolving so quickly. At the same time, moats are being compressed. This is a much tougher, I think, cycle to navigate because a lot of the moats weren't as questioned in the previous cycles as they are today. And as Jeff Bezos has said, you know, someone else's moat is my opportunity. So I think this is maybe the most ironically challenging of them because the economy and how we work is changing in a much bigger sense than the other cycles, which for really an equity bubble and a debt bubble, this is a change in the economy.

41:02So I think it's really important now to focus on, you know, not just having investments across companies you think can do well in AI that are durable franchises, maybe supplying compute that you don't have to be crystal ball predicting the future, but companies that are durable in it. But again, it's like the second and third order winners of companies that do everyday things that we need, but are going to have AI help their business models is really where we're focused the most. But you just got to, again, keep your emotions in check. And that's in some ways I was blessed as a father with an airline pilot.

41:39I heard stories about icy runways and engine failures and whiteout conditions and thunderstorms that my dad always said, you just got to fly the plane. And so I think he's now in his 80s and doing well. But I think about that every day. I got to fly this airplane and lead by example.

41:57Todd Ahlsten:One of the other challenges that exists today is the market remains heavily influenced by a relatively small group of companies. How do you navigate periods when market leadership becomes so concentrated? Ultimately, when you have this type of market concentration, we're going to have to ask ourselves, are those companies going to durably create that much value out of the economy and GDP? But ultimately, I think where the opportunity lies is that maybe you have, right now we got a small amount of the index, 35 % of the benchmark. They have to bring other companies along with them. So you have to be in a situation where, and we're seeing this now on the debates about circular financing and AI, open and closed source models.

42:45How is it monetized? Is it going to grow the economy or is it going to be productivity and we're going to lose jobs? All these debates are interesting and in some ways unknowable. But if this AI boom, which has caused concentration, doesn't create economic profits and cash flows for the companies buying the chips, then it ultimately won't work. And so I think that's the key thing is the first order effect is, we sell a bunch of compute into data centers and cloud and AI. And we all know the names of the companies doing that from NVIDIA to the hyperscalers to the frontier models. But ultimately, it's the companies that are buying those tokens.

43:26They have to create value with those tokens. And so my answer is concentration in and of itself isn't a bad thing, but it could be a leading indicator marker of value creation that's coming later for a lot of incumbents or other businesses that are going to take those tokens and create lots of value with them in their business. And if those large companies can't create value with their customers, well, then the market may not stay this concentrated forever. And we've seen that cycle before. So you can't really have it both ways. So in some ways, the concentration is exciting because it may be a marker of tremendous things to come for second and third order winners.

44:10Like you said, life sciences and tools and industrial automation, precision agriculture, data exchanges, payments. So there could be a lot of really good things in store because of that concentration. So we'll see.

44:22Todd Ahlsten:It does seem that the AI build out is real and transformative. What is your sense about what investors are broadly getting right about AI today? So let's, you know, first of all, be really humble in this. Predicting this is hard. I'll give you what the framework is telling us. First of all, first, this is going to be a transformational infrastructure investment theme for a decade plus. So I think they've gotten the market right. I think the market's gotten right that there's going to be an incredible, you know, adoption of a lot of models and companies. and it's a pretty remarkable productivity tool.

45:00And I think the market's gotten, you know, right that these things are going to create some new business models that go in a more exponential way. As we go agentic, these agents are 24 seven. They're not just, you know, human beings that, and that's going to lead to, you know, robotics wave. So I think there's a lot of things that the market is on. And I think that's going to be very, very big. Where I think the debate is going to lie, first and foremost is the physical world has to keep up with the digital world. And we're going to have to build a lot of data centers. And these are just incredibly large.

45:34I'm sure you and your listeners have been out to these. These are incredibly large facilities that take chips and power and shell and land. There's local politics. So I think we're going to have to be careful. Can the physical world keep up with the digital world? So AI is priced at a level to be affordable at the token level. That's a debate that I think the market, you know, is there's a wide range on on that. And there's politics. And number two is going to be just the job dynamic. I don't think the market knows, is this a productivity tool or is it going to we lose jobs or is going to grow the economy?

46:11And I don't think the evidence is there yet because, you know, the economy is growing two percent and we're having these massive investments. So the GDP is not growing eight to ten. So I think the market is going to have to be on that. And third, it's getting back to the physical and digital world. Can we grow AI and not choke off the rest of the economy? If you look at memory chips are priced at a level where people can't buy entry-level PCs and phones are more expensive. And do we have capital for homes if AI is taking down capital in the trillions of dollars in the capital markets and the government needs money, Alex?

46:47Is there going to be capital left over for if data centers can underwrite returns to 15 % to 20%, but the mortgage for a homeowner can't, maybe interest rates goes up. So is AI deflationary, which is what sometimes we've been told? Or is AI going to be inflationary because debt goes up, prices go up, resource scarcity goes up? So those are wide debates. Finally, are we going to ultimately hopefully see great discoveries and life sciences? is it's got to have to give people quality of life for health care and affordability. And it can't just be about, you know, wealth and equality in a K-shaped economy because it'll kind of break itself at some point.

47:27So there's a lot of debates there. The first couple, infrastructure, big, check, use a lot of tokens, check, adoption, check. We're going to sell a lot of chips, check. That's in the bag. I think the other stuff is really debatable. And then that gets into, again, the second order of winners. They have to be there.

47:42Todd Ahlsten:we have to have life sciences winners and pharma winners and we have to have you know some sort of like a deflationary way but we have to have some some that some goodness that comes out of it in the k-shaped economy or else the the politics can get pretty troubling now one of the things that i think about and something that i've observed is technology can grow rapidly and exponentially in some ways, but people, systems, companies, they don't evolve as quickly. So you're probably going to hit some additional constraints on top of, you know, energy and regulation and so on, but just the society has to be accepting of that rapid level of change.

48:24A lot of us have learned and there's like a linear thinking. We're all like, we're kind of raised in a linear fashion, how society works. This is kind of exponential. I, you know, you look at some of the anthropic numbers. We've never seen this before. And I know there's been some extremely large numbers as S1s are getting filed about what numbers could be. And I don't know what they're going to be. So I don't want to like, you know, I don't have a prediction. So those numbers are just so large, but these are kind of out of the realm of what we've ever seen before. And that's also a pointer for change, right?

48:53If we're going to have at some point trillion dollar businesses, this is my prediction is just in the zeitgeist today, you're seeing some of these that's happening in such a rapid form, there's going to be change that's going to be very rapid for governments and people to keep up with. At the same time, we're going to have elections. And I think, you know, not being political, both parties are going to try to figure out how to navigate this exponential landscape in a way that the goodness that comes from AI is distributed or else, you know, we're going to have a pretty bumpy ride ahead. Yeah. At the end of the day, people are still in charge over computers, Right.

49:29That's right. And I think that's where at some point, if some of these businesses get as large as they are being implied to be, they become as large as governments and they have data and intelligence and compute. And if those are the new markers of power, that's going to be really interesting how that collides with voters to do voters win or who has the compute wins. Do voters win or who owns the model wins? Those are going to be some real debates that society is going to work out. And it doesn't have to be all bad. It's just I think we haven't had to sort this out in such an exponential like two years feels like forever now.

50:08I mean, like how fast we can barely keep up with these model releases. So, you know, politics runs in two year cycles and four year cycles. It almost feels like AI and models runs in a weekly. So let alone political cycles are different than these compute cycles. And that's something that, you know, is going to be pretty interesting in the years ahead.

50:25Todd Ahlsten:And how do you distinguish between this massive AI spending and how much of it is actually creating lasting economic value versus spending that is largely defensive in nature? If you're not spending to be leading edge on compute, you're going to be left behind, especially for the large hyperscalers. And we see open and closed source models that are these frontier models that are driving this and NeoCloud. So I think right now that's almost impossible to discern because there's such a massive drive for compute right now that so much of the spending is the minute you fall off that you can almost never catch up.

51:06So I think as much as there's a lot of exciting innovation coming, Alex, that if you're off the CapEx train, you risk basically the value of your entire installed base, right? I think that's the issue we have. So there's an argument to be made that a lot of this is actually defensive because if you're not staying leading edge, the investments you've made in the last couple of years also become uneconomic. So I think we're going to have to really see how these depreciation rates play out for GPUs. And when you look at the exponential rate that compute is accelerating in efficiency, and when you see Jensen, incredibly thoughtful, a visionary, putting together, is compute a new asset class?

51:59are we going to be able to bank all this in a rapidly depreciating exponential world? Is it an asset class like you lease airplanes that have 30 and 40 year lives? Can you lease real estate apartments? So I think ultimately the question will be asked, you know, the first order is, are we going to generate revenue from tokens and are we going to build new businesses and are agents going to build, grow GDP and create more jobs and lose jobs? But ultimately, to keep this all together, we're going to have to have these GPUs stay more valuable because we need an incredible amount of debt to keep the build out going.

52:32And so that's really, I think, where the answer is, is kind of keep tracking the rental rates for H100s and Blackwells and Verirubens. Because if all of a sudden those start depreciating rapidly, that circular financing doesn't really hold up. So I'm just trying to look at the super big picture is we just have to make sure this circular financing stays intact, that there's enough monetization because the leading edge will be what are these GPUs getting for per hour? I'm trying to go first principle. So super hard to see. But as we lever up, the stakes get higher and higher. You know, a lot's resting on those GPU investments being ROI positive.

53:14Todd Ahlsten:To me, it's fascinating because it's self-feeding. So you have companies that are facing an existential threat in some ways and have to spend and spend and spend. And you have the circular financing that kind of feeds on itself. But ultimately, value has to be created. And nobody really knows how that's going to play out or even who the winners are. And I'm sure we're going to have some big losers as well. Well, I think one thing that's so tough, and again, this circular financing part is complicated, Alex. Here's just like a thought exercise is that a lot of that circular financing is the chip you sold two years ago has to retain its value, right?

53:52Or else you can't bank it. You can't get the return. So if we hit a point where we just run out of power, right? What ends up happening is the least efficient chips, you have to almost unplug them because it's like taking that old airplane to the desert. because it's just uneconomic. You could have 100 % load factor and the old plane is burning too much fuel. So then if you had an asset class of these airplanes, the value just went to zero. Not because you can't fill the plane. You see the challenge is say tokens are the seats and the old airplane is filling up seats, which are tokens. But if the fuel makes the plane uneconomic, that plane's worth zero and that GPU would be worth zero or that ASIC is worth zero because it constraints in the physical world.

54:36So like part of this is, I'm trying to go on the big debates on like, I'm all, I think there's some remarkable innovation. And I think these GPUs have value, but if we hit a constraint, there can be knock-on effects where the asset class brings down a big chunk of the installed base because they're that memory chip or that GPU or that ASIC isn't economic because I have to unplug it, pay more for the next chip because the marginal cost of the tokens don't work because of power. So I'm not in that doomsday loop, but these are the questions we have to start asking. And what gets really hard is I don't know how to totally predict that.

55:13But what we're trying to do as an investor is, and this is one thing I think I mentioned earlier in the beginning, I've really admired how you look at the world of like, we try to be all weather and not put all of our eggs in one prediction because that's really tough. And there's parity of risk and a lot of things that I know you've talked about in past calls, but we're just really trying to invest in future compute and supply chain, that whether we hit a power wall or not, whether that GPU is worth a lot or not, whether circular financing does well or not, we kind of manage this risk and add value to clients.

55:48And that's where those second order winners, life sciences and industrial automation and payments and precision agriculture, that's where we're trying to create value, but also invest enough in compute to give our investors upside in this trend. Because those questions are so hard to know. So it's ultimately just trying to be as future-proof as you can. Or in other words, what stocks can you buy that are kind of the lowest cost insurance to the problem we just talked about? And that's what we're attempting to do with our portfolio.

56:21Todd Ahlsten:So is that another way of thinking about balancing AI exposure with resilient compounders they described earlier? So we look at the world, we have roughly 45 % of our portfolio and more direct AI infrastructure between semiconductors and hyperscalers that we think are durable value creation in this conversation. The 55 % that's not first order winner, the biggest chunk of that is in those second order winners. So again, it's a company with a strong installed base that it could be in, again, precision agriculture or payments or especially life sciences. I know you've had guests on in biotech and innovation.

56:59The picks and tools and shuffles, Like who are the companies that if we invent something in AI, it's got to go to a wet lab. So we need reagents and monocle antibodies and bioproduction of molecules. And we need instruments and microscopes. So that's the area that we're going to have to build pharmaceuticals for a long time. And if AI is going to compress R &D and put a lot of things in the lab, that's where we want to try to win. So even if the circular financing part has an issue, we hope there's life-saving medicines from the compression of R &D. So that's an area we see like life sciences tools or payments companies that might benefit from fraud protection when things go agentic.

57:45So even if the circular part of financing AI goes south, but we still have agentic adoption, there's payment rails that are valuable. or I said precision agriculture a lot of times, and there's probably code word for that company being like a John Deere. But like I'm just saying like companies that are durable with a dealer network or companies that in some ways we love have like a triple moat around network effect. You own a pipe to the customer. You own a pipe to infrastructure of delivery. And you own a pipe to the ultimate end user being like a location that needs fulfillment. So triple layer network effects that benefit.

58:25So like how AI could win those. So it's looking at trying to be as resilient as possible, being investing in like monetization of AI, but not being all eggs in one basket that I'm a max long, a Neo cloud. That's, you know, there's some good ones out there, but this is not, you know, there's certain areas that we're just not going to invest in. We're like, it's too unknowable for us. And my humility is there's no way I can predict how they're going to play out. So I think second order winners are really the place that we see the most opportunity, given the risks that at least our shareholders are paying us to take.

58:57Todd Ahlsten:So effectively long AI, but spreading your bets across a range of types of businesses. Yeah. And I think just from a practitioner standpoint, the question would be probably have a little bit of a lower beta than one on the direct AI infrastructure. So just saying, hey, we think it's big, but there could be a lot of leverage around this. So be invested around a market weight, but like lower than one beta in that, and then have a little bit of above one beta in the second wave adopters. And so trying to balance where that monetization would go and then ultimately managing the risk of the portfolio.

59:33there's some super ballast in there that are companies we've owned for a long time in the tail that's not in those first two buckets. And so just where do you kind of place your beta in that and trying to be as risk aware as possible to think AI is big, but it's getting levered, it's getting circular. I don't know the future, but I want to be in second wave adopters that are going to be there for me in five to 10 years with humility and manage the stress down that you sleep eight hours a night.

1:00:00Todd Ahlsten:Let me ask you a different AI type of question. When you think about the future of active management, what capabilities do you feel will matter most in a world that's increasingly shaped by data and AI? Right. It's going to be, I think, judgment and temperament and being consistent. So in that subtly would be patience. so the ai model or active or versus passive model you are getting more price discovery on on we talked about this beginning short short termism and momentum factors and those can be right in the short term but i think what the ai model might not be able to do is have patience now the key thing is for the human being who has emotion and emotions to have patience that's why i keep coming back to journaling, stress, fear, anxiety.

1:00:50If you move those words into resilience, perseverance, and courage, but courage being based on a process, not just like I'm charging a hill like a gladiator, but like courage because you believe in your endeavor being a worthy, ethical endeavor, those things can be really magical. So if you wake up, I'm going to persevere, fear i'm going to have resilience and i'm going to have courage to act on our process so those we take stress anxiety fear which is human into those you know resilience perseverance and courage and do that around a long-term temperament around a process and do it with good people ethics principles performance i think those are the seeds to have you know a fighting chance in it and then finally just humility we said i can't predict the we don't know but we can't have a framework in it.

1:01:43And I think just being consistent on who you are, don't pretend to be an investor you're not. Understand the risks that you can take. Don't go home at night saying, oh, I own too much of that. Just size, position sizing is important. And just kind of living with that inner peace and tranquility. And also just being humble and learning from your mistakes. And you're kind of getting into mistakes that I've learned in the mid-2000s, 2005, I had a decent bet on newspaper stocks. Sounds like a confessional. Wide moats, advertising, and we were coming out of that recession of 0203. Housing market, ads.

1:02:23I mean, it sounds quaint now, but reading some reports I wrote years ago, in the same report that we got right, the housing market looked really risky. But in the same report, I wrote how we thought newspaper stocks were resilient. Oops. So what did I learn from that? Industry structure, relevance and moat, right? So in that, there's always a learning moment. So in active management, it's learning. It's like maybe the AI model recursively learns. We have to learn from the past. So what did I learn on newspaper stocks is, you know, there's a little thing, you know, Google coming up, but just relevancy, moat, industry structure, industry structure.

1:02:56And so if you do that and have that resilience and temperament, courage, perseverance, that could be a recipe for good things.

1:03:05Todd Ahlsten:Todd, you've been very generous with your time. I I appreciate all the insights you've shared with me and our audience. I really enjoyed the conversation. I hope you did and they did as well. So thanks so much. Honored to be here. You have a lot of great guests. Just thanks for asking the questions. I could really bring out the mystery of it. And that's an art form. And thank you so much.

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