MI325: Tech, Stocks, and Entrepreneurship w/ Braden Dennis

27:24I'm really excited about FinChat being task-based. And what that means is that today, it's very retrieval-based. And what that means is, give me Uber's total revenue by year over the last... Since they've been public or since their S1 data is available. Or give me Airbnb's take rate over the last four quarters. And it's really, really good at taking that, chunking it up, giving me the right answer and summarizing it. And that's retrieval. That's retrieval of information that exists. I think summarizing is also another retrieval type prompt. Task-based is what we're just starting to scratch the surface on, which is build me that DCF, build me this screen, build me a report for my clients, build me a graph that has Netflix subscribers compared to Disney Plus subscribers and make the Disney color blue and the Netflix color red and put my logo on it and make a summary of why to my clients, or at least the start of a summary to why my clients on why we own Netflix compared to Disney.

28:43Actually, I had the average revenue per user globally. Let's also put that on the graph and as a line chart. And today, FinChat can do all of those things, but not all at once. And so if it could do all of them at once, now it's actually done my job for me instead of been a tool to do my job. Do you know what I mean? Right now, it's a really great tool to do my job, but I really want it to do my job, especially if it's something that doesn't add value to my business or I could use that time to go get new clients, go to a conference and get my name out there. If I'm an investment advisor, meet with my...

29:21Go have lunch with them instead. right? Things that are actually going to move the needle for your business instead of like, ah, it's going to take my job. It's like, ah, it's going to take all the stuff you don't want to do in your job first. Let's start with those first. So let's look at the mixing of quantitative and qualitative analysis. What's the best way that long-term fundamental focus investors can utilize technology and AI to help them become better long-term investors? Let's look at an example I was doing today, which is the company Uber. Uber is a company that we all know well. Uber is a company that probably is in the app is probably on the home screen of your phone.

30:05And it is a company that for the first maybe two years of it being publicly traded and giving the S1, that initial filing, a real shot and trying to understand it. I thought to myself, this is a terrible business. This is a venture capital phenomenon. This is a zero interest rate phenomenon. How on earth is this thing losing$5 billion a quarter at this scale? At what level of scale does this work? You know what I mean? That was my initial thought. A superpower for an investor is to be able to change your mind when the facts change. That is the number one most important trait in my mind to investors, both on the companies you own and the companies you don't own, is to be able to change your mind when presented new facts.

31:01And since then, Uber's competition has mostly died. Since then, their take rates have gone from mid-teens, low-teens to high 20 % without a blink in growth. And that is material. That is absolutely material. If I triple the amount of money I'm taking in this transaction, Kyle, and you start using my service more, there's something very valuable to the service I'm offering and something very valuable to the moat that I'm building and how defensible it is. And so I think that this is a perfect example of the data we have and how I'm able to graph it. So I graphed total trips on the platform, which in the lows of COVID went from 737 million in the June quarter to 2.5 billion in the most recent September quarter.

31:54While the take rate went from mid-teens to 27.5 % during that time. And for me as an investor, a fundamental investor, I scratch my head and go, hmm, something's changed massively about this business. it's actually spinning off real cash. I told myself I'd never touch it with a 10-foot pole. It's at the top of my watch list today, Kyle. It is. It's maybe one of top three names on the podium at any time right now. And so I think that that's a kind of perfect example of something I was just using it for like 20 minutes before recording this conversation as a really useful example. So I like how you use quantitative metrics to start the investing analysis process.

32:38In a recent conversation you had on the Millennial Investing Podcast, you spoke about the importance of a growing business. This is aligned with what I also look for in a good investment. My question is, what specific benchmarks are you looking for in specific quantitative metrics? I always find this interesting when investors really try to complicate things. And I always say, well, stocks you own, they're growing so fast. It's like, what, do you like companies that don't grow? Like, it's fascinating to me. I think this goes back to the Warren Buffett quote about being a businessman and being an investor is I couldn't dare want to own privately a company that's declining or like what is a cigarette butt you're just trying to get a few last puffs out of it.

33:29I couldn't imagine wanting to own that privately. Publicly, I have so many options. There are, what, 57 ,000 active global listings today. No one's holding a gun to my head and saying I have to own crummy businesses when some of the best in the world happen to be publicly traded. And let's just reverse engineer this. Return decomposition comes from free cash flow per share growth. And so if I know that, that's probably a pretty good place to start. And it's not so much that I own growthy names. I own a few, but more of them look like Visa than Tesla. Visa is not a growth stock by any means, but it has a wide moat.

34:15It's a wide moat that I understand well. They have sustained growth in the double digits, long runways of growth to disrupt cash in emerging markets, world-class margins and return on invested capital. So more of the companies I own look more like Visa than Tesla when it comes to growthy. I don't think that they're too growthy or too meme-y, but they certainly are growing. And if they weren't, then I frankly don't want to own equity. Let's take a quick break and hear from today's sponsors. Hey, it's Sean O'Malley, just popping in with a quick message. If you like this podcast, well, I've got great news for you.

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38:01That's theinvestorspodcast.com slash tip-finance. All right, back to the show. So you've stated that you currently don't own CrowdStrike, but that it might be a business that you add to your portfolio due to its growing EBITDA margins, growing recurring revenue, and impressive revenue growth rates. Now, while revenue growth is impressive, it does seem to be dropping each year. How do you factor in these decreasing revenue growth rates as part of your analysis of this business? CrowdStrike, Cloudflare. This is a long list of companies I keep on a watch list and dashboard of being in the tech space, knowing how important they've become, knowing how amazing their product is, knowing that they have a lot of pricing power built in, probably under-earning.

38:52Cloudflare for sure under-earning. I look at these names and I think they're pretty amazing. The growth is solid. Investors have done extremely well owning them. But if 2021 taught us anything, you got to learn something from 2021. 2021 taught us anything. You can't just pay any price. There is no enterprise in the world that is worth infinite money. And so if I know that and I reverse engineer that, I have to be disciplined. And for those two names in CrowdStrike in particular, I think I was tweeting, I was like, I might just YOLO it and buy a share at this point. The annual recurring revenue growth is fantastic.

39:35The product's amazing. 140 % dollar-based net retention rate. So their current customers are spending like 40 % more than their previous year without even gaining any new customers. just world-class type numbers. But I've never gotten a point where I think I understand the company enough. I would never be able to go do even a five-minute presentation on why they're better than their competitors. I've never been able to tell anyone what the product does beyond very, very basic understanding of it. So I'm just not in a position to own the stock. And it's not that I'm never going to be in a position to own the stock.

40:17I want to learn more about this company. I want to learn a lot about a lot of companies. I think that's just kind of my infinite curiosity. But until I am in a position where I understand the company extremely well, no called strikes in investing, right? You don't get killed by it sitting on your watch list. You get killed by the stock getting crushed and you make a bad decision because you don't know what they do, let alone how they're going to sustain a competitive advantage. So you brought a really good point there about not being able to just even like a five-minute presentation on what this business does.

40:52And I really like that as at least a stepping stool to understanding a business. But there's also something to be said that when you actually own equity in a business, it kind of forces you to better understand a business. So how do you like to balance those two. Do you need to know 100 % of your target amount of knowledge before you ever buy a business? Or are you willing to make a starter position and then build up that knowledge base over time? Look, I'm going to ruffle some feathers here. I think starter positions and incentive to learn more about the business, I'll buy a small position here and then I'll figure it out later.

41:29I'll figure out what the company does later, that's not investing to me. That's my opinion. Of course, many people do it. It works for a lot of people. I never try to knock on anyone for their investing style. I think that that's both immature and irrational. However, for me, it doesn't make sense to me. It doesn't make sense if my capital is at risk. I actually only define my capital being an immense risk by I don't really know the company well enough to be a shareholder. And so what's the point of being half in? I think that it does a couple of weird things portfolio allocation wise too. You end up with a bunch of companies, you end up with shiny object syndrome with all these companies you don't really understand.

42:13Kyle, if I ever share my portfolio and there's more than 35 names, you grab me, you go to my brokerage account and we go together and we sell all of them and own a diversified, low-cost basket of stocks like the S &P 500. If that ever happens, you promise me that is exactly what we will do. Because I just don't think that that's a way that makes sense as an investor, from my view of the world. All right. I'll make that promise to you. So I was browsing your 20 stocks that you own on X, and I liked what I saw. One observation was that you have a good mix of market caps in your portfolio, ranging from small caps to mega caps.

42:55What adjustments do you make to your analytical process based on the growth stage of your stocks? Yeah. Well, thanks for saying that. And that tweet got tons of engagement because people always want to know what people actually own. What's the portfolio behind the profile picture? And it's 19 individual names today, but that is a bit misleading because if you look at the spinoffs that have generated, I don't sell any of those. There's multiple duplicates in the tickers. So it's actually really around 13 individual companies. And that's a materially different amount of concentration that people think about.

43:34When it comes to how I think about small caps versus large caps versus thinking about the growth stage versus mature stage, I don't really think about it that much. If a company happens to be a$6 billion in market cap, I don't look at it as a different investment thesis than if it was$600 billion in market cap. And you can certainly make the argument that the ceiling for upside is much better for a company at only$6 billion in market cap. But if I'm trying to compound my money, not lose money, and do this for a really long time, both ideas can work really, really well. Both ideas can work exceptionally well.

44:18And it's something I think about, but it's not like the be all end all. I'm not going to put myself in a box and say, I only own things over 10 billion in market cap, or I only own micro caps under 500 million because that's where there's going to be the most opportunity. I want to limit the amount of companies I'm looking at by quality instead of a screening metric. And if a screening metric helps me layer down what that quality is, I know I'm going to want to buy companies that are growing free cash flow per share. Maybe that's a good place to start. But I want to start with my universe of this is the 150, this is the 100 greatest companies on earth.

45:00Let's go from there. That's how I like to think about investing and how I feel confident owning something for 10 years. Because when something trades sideways for five, six years, it is not fun at all. It's almost worse than trading down. Like that's just the worst. It's terrible. But if I know that company really well, and I know it's going to continue to compound, and I feel good about owning it, then I'm going have a better time. So you brought up an interesting point right there about inefficiencies in the market. So I'm interested in knowing where do you think the most inefficiencies are today in the market?

45:41After saying all that, it is very clear that small cap stocks are at historically low multiples compared to large caps. There's never been a larger discrepancy. It's not so much that small caps are so beat up and mid caps are so beat up. It's that large caps have done so, so well. The Magnificent Seven make up like 30 % of the S &P 500 market cap weighted. Year to date, if you remove those top seven companies, the S &P did like 4 % or 5 % year to date. If you include them, it did like high 20s. It's a gigantic disparity. That being said, you have to wonder to yourself, are those companies a lot materially better?

46:25Are they so intertwined. I think both of us are staring at a collection of suites of Google, Microsoft, and Apple products right now. I know I am. I think you probably are too, both software and hardware. The margin profile is exceptional. They're going to produce a few hundred billion in free cash flow. Those are not just numbers we just kind of throw around. And so, when it comes to opportunities, there's always opportunities if your time horizon is long enough, right? Like if you were to ask me what's a stock that I think is going to go up this month, I'd say, I don't have an answer for you.

47:07That's not an answer that I can possibly give you with any degree of confidence. And if anyone can, run away. It's not good advice. Guys, if you have a time horizon long enough, which many of the listeners of this podcast do, then your opportunity is now. Look back. Stocks have climbed the wall of worry for over 100 years. And we're now at all-time highs, despite all the worries. The only thing that is consistent in this world, in a guide to things that never change, to steal Morgan Housel's new book title, worry never stops. It is never going to stop. And there's never going to be a world where you go, everything's great.

47:50It's time to put some money to work in the market. That doesn't happen. It won't happen. So what do you do? You deploy capital and you invest it for a long time. So I think you can learn a lot about someone's investing philosophy by asking two questions. One, what's the most concentrated position in your portfolio? and two, what's the longest time period you've held onto a stock? So I'd like to pose those two questions to you. How well do you know my portfolio? Because this might be a shocking answer for many people. Constellation Software is roughly half. So anywhere between half and 55 % of the portfolio.

48:25If you include the spins and the mothership company, this is ticker CSU on the Toronto Stock Exchange. We're talking about inefficiencies and opportunities. I think outside of US markets, you have less eyeballs, less analysts, funds are arbitrarily constrained, and I think you can find really good opportunity generally. Constellation Software is a giant conglomerate of niche vertical market software companies headed up by Mark Leonard. And so when someone says, how do you feel comfortable with 55 % of your portfolio being in one stock? And I go, one, didn't start that big. It certainly did not start that big.

49:08Look at the stock chart, and you'll understand what I'm talking about. And two, if a handful of the companies they own go to zero, I probably won't even notice as a shareholder. One, because they're 950 companies strong as of the latest quarter, I think, based on estimates. Deploying capital into new companies at all-time highs, deploying capital at all-time highs in terms of the number of companies and the size of companies. That's a really important metric for a serial acquirer of niche vertical market software companies like Constellation. And I don't have any plans to sell a single share unless something changes.

49:46Because you never want to just say, never is a long time, right? If I was to say, I'm never going to buy a share of Uber when I read their S1. And now here I am thinking about, wow, this is actually impossible to replicate because of those reasons that I thought it was a terrible business. Then you're on to something there, right? So never is a long time. And is CSU also the longest tenured stock in your portfolio? I'm looking at the names here. It's certainly one of them. I'd have to look back on my brokerage, but I'll give you a couple names that I've owned for closest to 10 years. I've been investing for 10 years.

50:26I bought a low-cost index ETF shortly after my 18th birthday, turning 29 this year. So it gives you an idea of how long. I've owned Constellation for a long time. I've owned WSP Global and Engineering Rollup for a really long time. I've owned Autodesk, the architecture, engineering, and consulting construction software company for a really long time. Those are a few names that come to mind. Visa and MasterCard, owned in size for a really long time. These are what I call core positions. If I was to sell everything else off, I'd feel just fine owning these at night. So a question I often ask myself is, what's the best business out there that I don't own today that I will probably regret in the future?

51:13It helps me look at opportunity costs of what I currently own and highlights any risk associated with owning it at current prices. So I want to pose this question to you. What do you not own now that you think you should, aside from CrowdStrike? And what's holding you back from owning it? Oh, it's an easy answer. It's Costco. I don't even have to think about it. Why I like the idea? Well, the company is obviously fantastic. The membership model was brilliant. The metrics around that are brilliant. The efficiency is brilliant. Basically, no working capital because the inventory turns are so high, the customers basically finance all of the working capital.

51:54There is an actual network effect. There is a flywheel with the membership. There is a compounding of the quality of what they serve their customers. As they have more customers, prices get lower. Lower prices bring more customers. And then the loop continues. Now they have more customers and lower prices. You have this never-ending kind of amazing feedback loop that has created a phenomenal business. They have flipped the idea of stakeholders on its head. Wall Street and most public companies act in the interest of shareholders first. Costco flipped that on its head. They said, we're going to treat customers and employees, the other two stakeholders in this three-legged stool with utmost priority.

52:40As a result, shareholders will get handsomely rewarded. And that has been true times a million. Why I don't own it? The answer is I can't wrap my head around paying basically 40 times earnings, a company growing high single digits on the bottom line, top line. It's undisputably probably one of the greatest business of all time. It is arguably the most defensible business of all time. It is going to be around when I'm on my deathbed. I can say that with complete confidence. And so that's probably why I'll regret not buying it today is because if those things are true, and in 40 years from now, Costco stock is not a lot higher than it is today, I will be very surprised.

53:35But I have rules around what price I'm willing to pay. And sometimes that's just as simple as a valuation that I cannot compute as making any resemblances of sense. The problem with Costco today, in my opinion of the thesis of the stock, and trust me, I'll be wrong on this and that's why I should own it. The problem with it is they only open around 8 to 12 to 14 new stores a year. And that number has been very, very steady. To justify the growing market cap and to justify the growing multiple on the stock, there needs to be some sort of acceleration. And I get why they're very deliberate about store openings and grow slow.

54:25But if they just accelerated the pace, just like Constellation and Mark Lennon are accelerating the pace of the point capital to justify the growing multiple and the growing market cap, then you can actually make a case of market beating returns. Of course, just as you laid out in the question there, I'm probably going to regret not owning it. And I probably should smarten up and own one of the greatest enterprises the world's ever seen. Yeah, I completely agree with you on that pick. That's a really good one. Brayden, I just want to say thank you so much for joining me today. This was an awesome conversation.

55:00Before we say goodbye, where can the audience connect with you and learn more about FinChat? FinChat is at finchat.io. It is a complete investment research terminal and AI product for fundamental investors. And I am on a weekly podcast called The Canadian Investor. And for those in Canada, there's lots of content for you, but you will be pleasantly surprised if you're not in Canada that about 90 % of the conversation is about US stocks. So that is a weekly podcast that The Canadian Investor, you can find anywhere on your podcast player. Okay, folks, that's it for today's episode. I hope you enjoyed the show and I'll see you back here very soon.

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