Don't Try to Beat This Market — Here's What to Do Instead

26:32And I just wonder what you make of that and how it affects your faith in markets and this game of investing that we have dedicated our careers to. I read the same articles you do, so I don't have any insight into what happened, whether or not it happened in the first place. I think one of the reasons you like me, and I think one of the reasons I like you, we're a little bit of a yin and yang. I think where you're very idealistic, I'm extraordinarily cynical. And I think, well, I'm just, this is like my 28th year on Wall Street. I just think this stuff goes on, whether we're aware of it or not, everywhere around the world all the time, Republicans, Democrats, old people, young people.

27:20It's human nature where people have an information advantage. They will seek to do something about it. And we have no idea. So it doesn't upset you? Well, upset me to the point of like, I can't carry on with my day. Not really. That's not what I'm saying. Does it upset you at all? I mean, I would prefer it if it didn't exist, but I think we have to acknowledge, unfortunately, this is the world we live in. And the problem is this instantly becomes politicized. So there will be people that look at this and say, the MAGA world, they're tipping each other off and they're trading on war developments.

28:02And maybe there'll even be congressional investigations. I have no idea. but the problem is the other side will say well oh you're talking about my team what about your team why is Nancy Pelosi a better trader than Stanley Druckenmiller 100 so you almost like it I don't want to say it's a waste of time even talking about it I think the way I would phrase it is like you're you're not going to if you're on the red team you're not going to convince the blue team that they've ever done anything wrong and if you're on the blue team you're not going to convince anyone on the red team i'm on the green team why can't we just agree that that both sides are doing it and agree that it's bad and agree that i will strongly agree that there are people who are willing to do what you know whatever it takes to get rich on both sides one side maybe one side maybe pretends a little bit more um that they don't but i'm on the green team i need to focus on my job, what I have to do, the people I'm responsible for.

29:03Um, it would be great if we lived in a world where like nobody was trying to get away with things, but you know, that's not this world. And I know that's not this world. And I think, uh, it could become a distraction if you let it, um, make you feel that you can't win or the system is rigged or why even bother investing. It's all, you know, it's all fake. A lot of people look, a lot of people after the great financial crisis never came back to investing again because they saw a lot of the people who were responsible for the crisis really not suffer any consequences. And in some cases be issued bonuses the following year.

29:42And they just looked at that and they said, this whole thing is a joke. I'm out I don't like that that's that's negative I think that's negative for the U.S. investor's psyche and so I'm not for it and I'm not dismissing it and I'm not telling you I don't care about it I think what I what I try to get across is like okay fine that's a sideshow um for most of us we need to focus on ourselves yeah fair enough I mean I I think the takeaway being just because there's cheating doesn't mean that you shouldn't play the game. You got to play the game if you want to get rich and if you want to build economic security.

30:19But if the system is rigged in a big way, I mean, you want to fix that in some way. I mean, it's not a good thing that people woke up after the financial crisis and said, this is rigged in a lot of ways, which was true. Right. And if that becomes a very widespread sentiment, you could knock out a whole generation of investors who come to the conclusion that this whole thing is stacked against them. And I do think that that's a negative sentiment that we need law and order, we need securities regulation, we need cops, we need people who are keeping everyone honest, but you're not going to get everyone.

31:00And not everything that looks like a scandal actually turns out to be one. Yes. Yeah. I think one thing we can take away is this should not make you not want to invest anymore. If that's your takeaway, then you're getting into real trouble. And expect more of it in the future. Yeah. Yeah. Yeah. Fair enough. We'll be right back. And for even more markets content, sign up for our newsletter at ProfGMarkets.com. Thank you. portfolio. Right now, you can get fixed rates starting as low as 4.24 % APR with SoFi's discounts. And the best part, there are no penalties or fees required. It takes just two minutes to check your rate with SoFi, and checking your rate won't affect your credit score at all.

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33:48We're back with Profity Markets. While all of the chaos with the war has been unfolding, it's been hard to focus on anything else. And the headlines are sometimes changing by the hour. But one trend has been consistent through this whole year so far. Tech stocks are getting hit hard. Microsoft has fallen more than 20 % year to date. Oracle is off over 26%. Salesforce is down more than 30%. As a whole, the IGV, which is the software index, is down more than 22 % this year. Josh, this is really interesting for a lot of reasons. Mag7 has lost nearly$2 trillion, or actually, sorry, more than$2 trillion in market cap year to date.

34:34And you actually went in and you bought IGV. You bought software stocks. I believe it was last week. So give us your views on what's happening in the tech sector right now. And why did you buy? Why are you bullish? I don't know that I'm insanely bullish on software. I looked at a full-scale panic and just indiscriminate selling of these names for months. And at a certain point, I said, this looks carried away, stepped in. But that's on a trading basis. And I'm up a little bit from there. But I just look at the top 20 holdings of the IGV. These are some of the best companies in the world. Salesforce, Microsoft, Palantir, CrowdStrike, Palo Alto Networks.

35:16And it's not that I don't think that these companies are at risk of AI-related disruption. Some of them are at more risk than others, but they're all going down. They're all down anywhere from 25 to 50%. It's not as though saying, oh no, AI is going to eat their lunch. That's not a unique point of view. That's the consensus. So I just looked at it one day and I just said, you know what? This probably bounces. I don't know that that bounce is sustainable or it turns into a noble market. But I do want to gently correct something that you said about tech stocks getting killed. It's actually not true.

35:56Software stocks are getting killed. Tech stocks are doing great. I know people are like, wait, what? What's happening? away from the hyperscalers that are currently pursuing the biggest CapEx spending cycle of all time and away from software, SaaS, enterprise software, tech stocks are doing great. And what the tech stocks that are doing great have in common is they're benefiting from this AI CapEx wave and they are physical technology companies, halo, if you will. They have heavy assets and low obsolescence risk. I'll give you some examples. Sienna is a company that makes networking equipment, switching routers, Cisco, servers, racks, et cetera, Dell.

36:50These stocks are all at or near all-time record highs. Corning, Vibropto Cables, also part of the data center CapEx build out. Then you look at some of the chip companies, Jabil Circuit, they call it Jabil these days. You look at SanDisk, you look at Micron, you look at Broadcom, NVIDIA. These are all companies that are benefiting from that CapEx spending cycle that's been hurting the Mag7 tech names. So one half of that equation are the spenders, the other half are the recipients. The recipients are going up, straight up. Some of these charts look like the Empire State Building. So it is not true that tech is getting killed.

37:38It is true that mega cap tech is not having a great year. But even within mega cap tech, there's a pretty big separation between, for example, Meta and Apple. Apple is not having a great year, but Apple is more on the hardware side and significantly more halo. They will benefit from all of this AI CapEx without having contributed to any of it. Their CapEx is actually negative versus last year. Meanwhile, if you log into ChatGPT, log into Claude, Apple's getting paid the Apple tax. It's 30 % in the first year, 15 % thereafter of the revenue coming from the usage of these products in the iOS environment.

38:24So Apple is halo. It's physical. It's the devices themselves, phones, AirPods, iPads, watches, MacBooks, etc. So it's tricky, the technology market. It's tricky to say it's all doing this or it's all doing that. There's an extreme bifurcation. It's interesting because on the halo point, it does seem as though the momentum, so just so everyone knows, you create this term, heavy asset, low obsolescence, that describes these more physical companies that you're describing here. And it describes a wave that was emerging and developing over the past several months. And it has become a very, very popular and actually crowded trade, as you point out with those charts that look like the Empire State Building.

39:14Meanwhile, the software names, the application layers, have been getting absolutely battered. Companies like Salesforce and ServiceNow and even some of the cybersecurity names, you mentioned CrowdStrike, those companies have been getting destroyed. And so I guess the question becomes like, at what point does either of those trades become overplayed? And when does it get old? And it does seem, my view, i mean you you bought igv uh you're saying it was more of a trade play than a real long-term investment maybe you can elaborate yeah because you know why because these things these things in the short term get overdone like the like uh thematic thematic trades that become popular and crowded in the short term in the short term you're right like they get carried away and then there's a correction that's what appears to be happening in the software market yeah so so look let's talk about those software companies that i mentioned um the sales forces the the uh the microsoft it's not like anthropic is launching all these products and they're they're they're sitting at salesforce eating crayons like they are very much aware exactly they are very much aware of how much time, energy, and money they need to put into their response to this.

40:43And what they have going for them is, and this is the truth is, they have not been disrupted yet. Most of these companies are reporting record earnings and revenue, and they have the cashflow that will support very intense R &D and CapEx as they formulate their AI strategy. They also have the relationship with the customer. So I don't think everyone can win, but it's never like that. It's always competition. Some of these companies grew, the Service Nows, the Workdays, the Adobes. In the last 10, 15 years, some of these companies grew almost without competition. Investors in those stocks became complacent like it's Adobe.

41:31What replaces Adobe? Nothing. What are you going to tell me about? Figma, give me a break, right? So people sort of had that. And then a year or two ago, that stopped because we have this new class of technology player that is speed running through their innovation cycle, anthropic and perplexity and open AI. And they're raising a ton of money and they're making partnerships and they have huge resources and they've recruited an unbelievable amount of talent. And now it's game on. And these software companies, they're not disappearing, but they're competing in a way that they haven't had to for a long time.

42:10So viewed through that prism, the multiple contraction makes sense, but it gets carried away. So I'll give you the day that I said, you know what, I'm stepping in. This is bullshit. There was a story that Anthropic was about to disrupt all of cybersecurity. like in other words companies were going to say oh let's rip all this palo alto stuff out of our network and uh we'll just vibe code something with claude and we'll give me a fucking break there's no board of directors at any public company anywhere in the world that would sign off on on that kind of cyber security plan uh if the cto came and presented it'll never happen And so that was the day where I'm like, you know what, this whole thing is nonsense.

43:01I run a business. I'm a Salesforce customer. I would love for there to be an AI-driven solution where I could take that six-figure expenditure off of my line items. I'd love to pull it out. the reality is it's a system of record for my business it's enabling secure sharing of data transmission of information um it's how it's the operating system of the firm if something comes along that's ai driven we're gonna look at it we're gonna look at it what it's not gonna be free oh it's free because it's ai what are people talking about literally what are people so so i I said, you know what? This has gone too far.

43:43Even Jensen Wang has made multiple appearances, including on his own earnings call, describing the extent to which this is stupid. So I'm willing to believe Jensen over the hedge fund analyst who's five years out of school, who's a disruption hippie and thinks all these companies are going to zero. I'm willing to trust Jensen. Again, it's difficult. it's not if we think the publicly traded software companies are under pressure think about the private equity backed software companies that everyone's worried about private credit yeah a 50 million dollar SaaS software company that sells to auto dealerships might have to face down an anthropic built product that comes in at a much lower price point and can do much more guess what that's capitalism you can't like it on the way up and not on the way down there's competition Like grow up.

44:38And here's what the market has done. The internal logic of the market this year, I identified this on February 9th in my article that I wrote. Everything that's happened since then has bolstered what I was trying to say, which is that the market's going to figure out we have been underpaying for companies with heavy assets and overpaying for companies that are capital light. Or asset light is how they called it. So we've been overpaying for these asset light SaaS software companies for 10 years. We've been underpaying for things that really fucking matter. Like companies that own power plants and pipelines.

45:21Way underpaying. Here's what that adjustment looks like. I'm giving you year-to-date sector performance. Energy up 36%. You think we're going to need energy? Okay. Materials up 10%. Utilities up 9%. Staple, seven. Industrial, six. Real estate, plus 5%. You want to guess what every one of those sectors has in common? Halo, halo, halo, halo, halo. These are all companies with heavy assets on their balance sheets, unreplaceable by a chatbot. These are not companies that sell data. These are not companies that are operating a layer on top of a cloud provider. These are companies that have metal And steel And timber and bricks And that adjustment Is what we're seeing Here's the other half of the market Communications negative 4 % Tech negative 7 % Financials negative 8 % Consumer discrash negative 10 % Those are not halo For the most part With some nuance which we talked about Healthcare is interesting not acting well this year, but biotechs are doing great.

46:35I actually think the world of proteins and molecules is extremely halo. I don't know how AI does anything other than help these companies speed up clinical trials, discover new compounds, enable all sorts of testing that normally would have taken lots of human subjects and years. I actually think AI is a massive tailwind for a lot of areas within healthcare, robotics for hospitals that are understaffed, et cetera, et cetera, et cetera, et cetera. So I think healthcare is halo, but not acting well this year. Maybe that's an opportunity. But I think the market has now organized itself in a very different way than what we're accustomed to in the post-financial crisis period.

47:18But there is also another distinction that should be made here, which I'm finding very interesting. Just so you know, I also went in and bought some of these names, but I did it in Sasspocalypse One. I went for Salesforce, ServiceNow, Adobe, and also Microsoft. And I think that the Microsoft self has been stunning. By the way, I'm not up on those trades. I was at one point in time, and then we had another Sasspocalypse. You never buy Sasspocalypse One. I don't know. I'm still actually quite optimistic because, to your point, I actually think a lot these companies are very well positioned for this AI revolution.

47:56And you think about what's happening. I mean, you made the point with Salesforce. I love what you say. They're not eating crayons. They're actually figuring out how to integrate AI into their systems. All day. This is all they talk about. It's all they do. They're actively growing those AI revenues. ServiceNow is reporting incredibly great earnings. They are also growing their AI revenues. But people say, no, it's all going to be a problem because the new companies like Anthropic and like OpenAI, they're going to ruin the whole game. They're going to ruin the party. And they're even going to ruin the party for a company like Microsoft.

48:32Why? Because yes, Microsoft makes a lot of money from Microsoft Office and that suite of products. But also, Microsoft is way overspending. They're investing all of this capex. They're plowing all this money. Same with Meta. Same with Amazon, etc. et cetera. The thing that just doesn't make any sense to me, that's exactly what OpenAI and Anthropica are doing. I mean, those companies are wasting, or not necessarily wasting, we don't know yet, but they are spending so much money right now. The unit economics don't make any sense. What would happen if they were publicly traded? Would they get destroyed by their own products?

49:09Really good point. OpenAI has a valuation of$852 billion as of the last round of funding, raising money from microsoft nvidia like the the savviest investors on the planet are investing into open ai probably comes public if not late this year early next year probably worth at least a trillion dollars they are they are committed to 600 billion in spending on compute that we know of like as of today that's one they said one and a half trillion out loud at one yes yes now they are also actively telling anyone who will listen that they expect to spend the rest of this decade burning, burning tens of billions of dollars, peaking at 85 billion in the year 2028.

49:57So two years from now, they're guiding to a burn of 85 billion dollars. Okay. They are talking about profitability in 2030. Okay. Maybe. The point is they're number three. Exactly. Anthropic is two. Gemini is one or vice versa, depending on if we're talking about enterprise, but that's the number three player in AI right now. And it's mostly consumer AI for ChatGPT. The number three player is going to burn$85 billion two years from now. This is the guidance. So That's one. Two, anecdotally, you probably have loads of friends who have sent you a text or an email or a DM. Yo, check this thing out I just built and clawed.

50:44It's so sick. Like that stupid website. It sucks more than an art project you made in fourth grade. And you have to, oh, so cool, man.

50:59That is 100 % true. Yo, yo, yo, yo, yo. Check this out. Check this out. I put all my playlists all my Spotify playlists are available on this website and you can search it by artist but I don't want to and it looks like garbage yeah but I made it what are you my son I don't give a shit you made it terrible so let's I'm not saying go buy every software stock I'm just saying like the narrative gets I invented this Halo shit but it gets carried away at times And I think we've been through a few of these. And it gets very, very confused, especially when you have this new paradigm where the biggest players in this market aren't publicly traded.

51:43So we don't really know what's happening. We don't really know what the valuation of OpenAI really is if it weren't being propped up by its vendors, the people from which it buys stuff from, i.e. NVIDIA, et cetera. We will buy compute from you and chips, and in turn, you will buy our stock. Exactly. So we don't really know what the actual market cap of these companies really are. We don't know if, I mean, these companies are projected, and this is the incredible stat that we got from Paul Kodrosky, who we had on the program last week. Anthropic, OpenAI, SpaceX, if they go public at what people expect, it's going to be$3.75 trillion in market cap.

52:23That is more than all of the inflation adjusted. that is more valuable than all of the dot-com IPOs put together. So it's an incredible valuation here that we're about to see. But again, if we saw the financials of these companies, if we really understood, if everyone really had a clear vision in their heads of, this is how much OpenAI is spending, this is what the unit economics look like, this is how much money they are losing every time you put a little stupid prompt in on your computer, what would the stock market actually look like? What would happen to that stock price? And how would people adjust their expectations of, say, Microsoft, which is down 20 % year to date?

53:05But we don't have that information. So I think the narratives are getting very confused. Yeah, what they need to do is continue to add users and show revenue growth. And so OpenAI has now introduced advertising. They want to get heavier into code. They want to be much more endemic to enterprise. They want to get ChatGPT and other open AI products into Fortune 500 companies, government use. You saw Anthropic had a dust up with the Pentagon and Sam Altman swooped right in. We have no – don't worry. We have no privacy. You can do whatever you want. Come on in. Right? So they – because they all have to show this kind of like breakneck growth.

53:53And if they do, everybody can rationalize the losses, the spending, because they understand that it won't be unprofitable forever. Someday it'll catch up. But they can't do it with Microsoft. They can't do it with the big tech names. I mean, it seems that we have different expectations, different standards here, depending on who you are. We're down with the incredible spending over on the private side. But in the public markets, ooh, we're going to get very nervous about that. So Microsoft's unpopularity as a stock coincided with a lot of questions about whether or not Copilot, which is their overlay on top of OpenAI for employees, for technical employees.

54:36A lot of questions about whether or not there was an ROI, if people even were, you know, like the product, you know, if it's sticky enough, even though it's Microsoft. And I think you saw that adjustment in Microsoft's multiple. Importantly, their numbers are still lights out. We look at a 36 % decline in Microsoft and they have not missed earnings. They have not guided down. They have not disappointed anyone in any way. It's all perception. And cherry on top, they own a third of open AI too. So that's also your risk protection. That's a good place to leave this. As a non-public company, OpenAI has the benefit of only reporting the things that are superlatives and make it look great.

55:25They don't owe the same level of transparency as a public company does for obvious reasons. And I think that's why we saw that story this week where Sarah Fryer is not as confident as Sam Altman is about the timeline of a go public in Q4. And you know, these are people, there are people in Sam's ear that he's listening to, that he's not listening to, but some of those people are saying, yo, once this thing is trading, you actually have to tell us everything. You have to tell the world everything. And they won't all be ready to do that. 100%. Okay. Josh Brown, let's take a look at the week ahead.

56:04We will see the producer price index for March. We'll see earning season kicking off with Goldman Sachs, JP Morgan, Wells Fargo, Citigroup, Bank of America, Morgan Stanley, BlackRock, Johnson & Johnson, ASML, TSMC, Pepsi, Netflix. Josh, we really appreciate this. Any closing thoughts, any closing remarks, anything you've got your eye on before we end here? No. Josh Brown is the co-founder and CEO of Ritholtz, a New York City-based investment advisory firm managing$6.5 billion in assets. It's like$7.5 billion. Come on. Managing$7.5 billion in assets for individuals, corporate retirement plans, and foundations.

56:43You can also check out his podcast, The Compound and Friends, for more. Josh, we always love having you. Thank you so much. And enjoy Coral Gables. I hope you have a good time. Cheers. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Jorge Carti. Our research team is Dan Chalant, Isabella Kinsel, Chris Nodonhew, and Mia Silverio. Jake McPherson is our social producer. Drew Burrows is our technical director. And Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from Prof G Media. If you liked what you heard, give us a follow.

57:19And tune in tomorrow for a fresh take on the markets.

57:37In kind reunion.

57:43As the world turns.

57:49And the dark flies. In love.

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