Present Value vs. Terminal Value: The Real Difference Between “Value” and “Growth”

29:02So let's say Amazon, for example, is investing a lot of money and EPS is only$1. And it trades at 20 times multiple, right? So then stock price is$20. But now if you can increase the margins because they have invested and basically the margins look lower than they should be. And suddenly you have the ability to double your earnings and you keep the same multiple. and maybe it even expands because you're growing faster and the margins are getting better, then suddenly you get from an EPS of$1 and a multiple of 20 and a stock price of 20, obviously, to let's say an EPS of$2. And just with the same multiple, you get a double in the stock price.

29:35And that's something that only happens to businesses that are not yet mature, where you have a lot of margin expansion going, where you can basically have the same multiple on the company, but on a higher earnings per share. And that's what you're getting in companies that have a lot more runway. So for example, a company that we discussed with Amazon, another company that we can discuss is Melly, where you just know they have a lot of investments currently. So the market is looking at it. It's also, if you just look at the multiple, it's not cheap. It's trading at about 40 to 40 times earnings.

30:03But you know that those earnings are significantly understated. So the optionality here is that you basically say this is a company which is operating in a market. I mean, you know, the market or the business model is very similar to Amazon. The only difference is that Amazon has AWS, which is a cloud provider, and Melly has a fintech arm. But technically, you could argue that maybe the fintech arm has a mature margin potential of 25 % to 30%. So this is also their main profitability leverage or the most profitable business segment. And that's where you get the leverage on the EPS in the long term.

30:37And what you would imagine is that this company is growing 20%. So that's the first engine that you get. then you might get multiple expansion not currently going from 40 to 80 but a more significant multiple on the adjusted earnings so if they stop investing and you don't only see again in theory i just assume one dollar eps because it's simpler for the math they get from one dollar eps to three dollars because they stopped the investments and then you keep the same multiple you just have a 3x and that's how you get over the long term when you have a company that has a long runway left to grow into these what, you know, Sean mentioned as generational wealth opportunities.

31:11And then you just have to figure out, well, why should it grow for the next 10 or 20 years? For Mercado Libra, for example, the main reason is that e-commerce penetration where they operate in Latin America is about 14%. If you look at the US, it's about 24%. If you look at China, it's over 30%. And there's a tendency that markets that are not yet developed or developing markets in general, they skip some steps. So they skip some physical infrastructure. So more people shop online, especially mobile. And so they technically have, that's at least what the trend is showing, a higher penetration for mobile shopping, for example.

31:46So probably Brazil, which is Melly's biggest market, at least in terms of revenue, is likely going to see more e-commerce penetration than the US and might be closer to China. So then you're talking about e-commerce penetration going from 15 % to 30%. And that may be over the next decade. So you have a huge tailwind for the entire industry. And then you kind of need to figure out, well, and that goes back to what we talked about in the beginning. If you have a lot of runway left and you have to have the business doing well for the next 10 or 20 years, then the competitive picture gets a lot more interesting, right?

32:19When we talk about Universal Music Group, it's an oligopoly. There are only two to three companies in the market and they're dominated. For Melly, you basically have to look for what we like to call these flywheels that are reinforcing themselves, that make the business better and better each year. Because if there's a competitor coming in and they steal market share and they basically outcompete Melly. And then you're betting on the fact that Melly in 10 or 15 years will make a lot of money. Then of course, that's the gambling part. And Andrew and I actually talked, um, talk before our call here about the gambling aspect on, in the stock market and with stocks.

32:49And I said, well, you know, in countries like Germany, you kind of feel like stocks are gambling, at least the, um, the generation of my parents. And to some extent, they're not wrong. If you think about this in terms of buying universal, which is a stock where you basically know what money you will get in the next five years then MercadoLibre where you just have to make a lot of guesswork a lot of assumptions and only if they those assumptions actually right at least directionally then you have a good payout with these companies so that's kind of how you think about it the longer it's out the more you have to think about competition what could potentially happen to your business there are all sorts of things that you have to have to pay attention to but if you're right about it there's a lot more leeway or a lot more runway to to grow the business and then you get these dual engines earnings growth um the multiple that can can expand and also top line growth yeah it makes a lot of sense um and i appreciate the way you describe that just because a company's at 15 market share for example doesn't make them the guarantee to go up to 30 percent um when it when a market's younger you have the higher growth they also have the higher chance of disruption so So what is Melly exactly?

33:56Like literally like amazon.com, but they have their own website? Melly is pretty much the Amazon of South America. And sometimes these comparisons are kind of lacking because again, Amazon is also AWS. And that's a part of the business that Melly does not have. They have a fintech arm. But MercadoLibre itself is an e-commerce player in mainly Latin America. The biggest markets are Brazil, Argentina, and Mexico. And that's what they are doing. They also have the same logistics infrastructure. Again, they have the payment arm. It's kind of interesting when you just look at the history of these companies and you kind of see why they are a bit different each generation in each geography.

34:35So, for example, you have Coupang in South Korea. You have Amazon in North America. And, for example, why was Amazon able to build AWS? Mostly because demand in North America was there for a cloud provider. That just didn't make any sense for MercadoLibre to have. But for them, it was important that they have a payment arm. Because if you build a marketplace, an online marketplace 20 years ago in Brazil or in South America, a lot more people use cash. So there were not a lot of credit cards. There were not a lot of debit cards. And if you use cash, you cannot pay online. So they figure that if they want to have more customers on their marketplace, they need, let's put another example out there, the PayPal of South America.

35:14And that was Mercado Pargo, which is their fintech arm. and it was kind of similar for the logistics network where you know if people get on your marketplace and they now have the opportunity to buy but they don't know when the package is ever showing up maybe it's in two weeks time maybe it's in three weeks time maybe it will never show up because the logistics infrastructure is not that great in latin america they also decided to build that themselves there are also some other quirks which are just interesting if you look at the business so for example um we all know that amazon spent a whole lot of money on their logistics network, Mali is doing the same or has been doing the same, but with a little different approach.

35:48So especially in the beginning, they mostly worked with third party carriers. So they did not immediately buy all the infrastructure. And the main reason is that Latin America is way more volatile. So it could be that you're in a market, Venezuela, for example, has been a huge market for them 10 years ago. And then suddenly the politics changed and the entire market was gone. You don't want to build billion dollars of infrastructure in a country where you potentially don't have a business anymore in 10 years time. So they did a fantastic job of just navigating that. Then over time, they saw which are the most important markets.

36:18And in those markets, they doubled down and invested billions. Interesting. So where does the margin expansion come from? Is that something that management talks about explicitly? Or is it more like, okay, we see what Amazon did, and then we kind of figure Mercado Libre can get there with maturity? Mally is pretty good at copying so they certainly saw what Amazon did and it's the basis the basic playbook is that you have these value-added services so I could get into the details of e-commerce generally I think that's a bit too far so there's 1p and 3p and it kind of depends on whether you have your own products that you sell on the platform or not I think the debate is not even that important because if you look at all the different players it seems that both of those 1p and 3p basically have the same margins so I don't want to go into all of that what you can imagine is that you want more people to buy on your platform.

37:12And then over time, advertising is a big thing. In e-commerce, it's mostly about advertising. There are three ways that you can make money. The first is that the sellers on your platform pay you a fee. So that's a big part of it. Then you have also logistic fees, which Meli currently does not yet use to the same extent that, for example, Amazon does. And then you have advertising. You don't want to take too much on the fees that the seller pay because obviously you don't do I have extra value for them. so if you if they pay you 12 fees then next year you're saying those fees are 15 but you don't have extra value you know they might go to the competition so that's why your biggest leverage is in advertising where you derive value they you know have their products in front of more eyeballs and at the same time you get your fees and obviously ads is a great business because it basically doesn't cost you anything as soon as you have the entire marketplace set up but you get a lot of money so that's mainly how you get to um to the margin expansion so just as an example amazon has about eight percent of gmv was merchandise value so the value of goods sold on your platform as um as ads or in advertising revenue mainly is only a two percent so technically if you would say they could reach the same level it's about a four x just in the advertising revenue which is higher margin you might have said that already but just to say that out loud again higher margin significantly you're right okay um totally makes a lot of sense um so i'm curious uh You guys have a newsletter that comes out and you're doing different write-ups on different stocks.

38:40Sometimes you're like, hey, this opportunity looks really cool. We're adding to our position. Sometimes it's like, eh, really fascinating company, but not really in our appetite. So I appreciate you guys bringing both of these companies and having it as part of a discussion. Where do these sit in the portfolio? are these companies you've passed on companies you've added what what kind of thoughts do you have on these yeah i might start with melly

39:13Daniel Mahncke:go first okay yeah i i was just gonna say yeah they're both uh they're both core holdings and maybe we could get into a conversation about despite the way that you think of the value of these stocks being very different in terms of distant cash flows and expanding margin profiles versus very tangible value today, but kind of a capped upside in how well the investment can do. That's something we try to balance. And so, yeah, for context, starting last year, so in early 2025, Daniel and I began managing a portfolio that we refer to as the intrinsic value portfolio. And so the premise of the podcast that we do is to cover a different company every single week.

39:59Daniel Mahncke:And now sometimes we do twice a week, which is exciting. But basically, we probably put, to be honest, 40, 50 hours of research into every single company that we cover. And then the idea is if we can condense that 40 hours of research into 60 to 90 minute podcast, for one, that's a great resource for a lot of people who want to get up to speed on different companies and business case studies. But also, too, when you have the obligation to explain publicly how a business model works, what you like about it, what the risks are, it forces you, assuming you take pride in your work, right? It forces you into really a deeper level of understanding.

40:41Daniel Mahncke:It forces you to kind of question things that you, you know, if it were just in your own mind, you'd be like, ah, that kind of makes sense. All right. But now you're saying, no, wait a minute. I got to connect these dots and explain this to an audience of people. So anyways, it's a bit of a selfish endeavor because we get really great practice articulating our investment thesis and sometimes debating with each other, sometimes agreeing with each other on different points of the investment merits. And so anyways, we cycle weekly between I will pitch a stock to Daniel. Daniel will pitch a stock to me.

41:16Daniel Mahncke:We actually have a new colleague named Kyle Grieve who's also in the rotation. And we're all pitching stocks to each other. with the premise of trying to find companies that are good fits for this intrinsic value portfolio that we've been completely 100 % transparent about publishing and try to talk about the rationale of this is a really high growth business, but there's a lot of uncertainty in it. And if it works out, it could disproportionately benefit us, but we want to keep it a small position, for example. So that's a company like Nubank or Reddit or even MercadoLibre at a time until we kind of built conviction in it.

41:50Daniel Mahncke:we want to keep those as small positions to minimize the risk to the overall portfolio. So we're not putting all of our money into, you know, one really speculative company where it could be worth a lot in the future. There's a lot of value being baked into the terminal value. But also, you know, that can change on a whim dramatically and the stock can fall 80 percent. And so anyways, it will be the first to say we have been learning in public as we do it, going week from week, trying to just honestly reflect on the fact of, yeah, we made Alphabet a 10 % position. In hindsight, should it have been bigger?

42:26Daniel Mahncke:Should it have been smaller? How do we think about that? Will we juxtapose it with a 5 % position? Does that mean we have twice the conviction in Alphabet? These kind of subtle things of portfolio management. It's been really fun to, to not only do that as an exercise or for myself, but also to do it alongside with a partner, uh, and Daniel and, and to have the, you know, the abominable no man, not that Daniel is that, but you know, in theory, having this person who can kind of like check and balance you, um, it's, it's, it's, it's a special thing to be able to do. And then, um, so anyways, we've, uh, we've probably covered what 60, 70 companies, uh, at, at this point, almost 70.

43:07Daniel Mahncke:Um, and I believe we have 12 holdings in the portfolio. So, you know, we've been reasonably selective. If you think of it as like, we've taken 70 of our best ideas, and then whittled that down to a little bit, you know, like, one in seven, approximately, actually ends up in the portfolio. And then, you know, there's different ranges of concentrations where, like I said, some companies are 10 % bets, and some companies are 2 % bets. And that sort of reflects our perception of the risk and reward, the current valuation, prospects of the business, right? Like you're buying Alphabet, you're paying a bit of a premium today compared to when we first bought it, but also you're buying these incredible, incredible businesses from Google search to YouTube and Google cloud that print billions and billions and billions of dollars of free cash flow every single year.

43:59Daniel Mahncke:So it's not exactly like a speculative investment. Whereas when we invest in MercadoLibre, for example, even though we have built the position over time as we've gotten more comfortable with it. We started out somewhat cautiously because you're looking at this and you're saying, well, yeah, it's the Amazon of Latin America, but that doesn't mean that it's guaranteed to have the same success that Amazon has had. Instead of having, for example, one singular market to operate in, like the United States, you're now operating in across a dozen different markets and markets that have been ripe with political strife and inflation and all kinds of other economic issues and have much less income per capita, which is difficult because the cost of delivering the package is the cost of delivering the package.

44:49Daniel Mahncke:But if the household income in one market is a quarter of what it is in, let's say, the US, you're competing on very, very, very tight margins. And so anyways, that is what we mean when we say that MercadoLibre in some ways is a more speculative business because you're speculating that things will continue to go smoothly in Latin America. They'll continue to execute the Amazon playbook in different ways. They'll be able to expand margins with advertising. Amazon is now one of the largest advertising companies in the world, incredibly. And then there's this concept of the flywheel that a gentleman named Jim Collins, he's a famous author, talks about.

45:33It's this idea of literally a flywheel.

45:36Daniel Mahncke:You imagine it spinning and you're pushing on it and you're pushing on it and you're pushing on it. And eventually it takes on a life of its own. It just spins faster and faster and faster. And it gets easier as it's spinning faster to keep pushing it and accelerating it. With the point being, once you hit a certain scale, then your e-commerce business becomes profitable. And then you have so many people using your e-commerce business that attracts advertisers and that attracts advertisers that, you know, that increases your profit margin. It allows you to reinvest in your e-commerce business and go from three-day delivery to two-day delivery to one-day delivery to overnight delivery, which makes that an increasingly better product, which increasingly attracts more people to pay for your Amazon Prime subscription or your Melly Plus subscription.

46:19Daniel Mahncke:And then what we've seen these companies like Amazon do is branch out into other areas. And so now AWS is, you know, Amazon, I think the majority of their profit is actually earned really through Amazon Web Services, through this cloud computing business that they've built. with the point being, you set up these almost monopolies in certain areas with a flywheel spinning so fast and creating so much cash flow, then you can start branching off into new directions to allocate that capital into. And so Amazon has proven how that can be done. And again, MercadoLibre is in the much earlier steps of doing that.

46:57Daniel Mahncke:And instead of going into cloud computing, they've gone more into personal finance and lending, which is maybe something you can talk about, Daniel, of kind of the different bets that they're making on growth and their terminal value. The first time I heard about Bitcoin, honestly, I thought that was a scam. I did not realize it was something that would last and I was wrong. Technology has made it so much easier to use these days, especially on Cash App. With Cash App, it was so easy for me to take the direct deposit I already receive, allocate a percent of that to automatically buy Bitcoin inside of the app, and I can use that as a form of payment in so many places.

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49:15I use this, and you should too. Check your health the way I do. Function provides 160 plus lab tests for$1 a day and member pricing on MRI and CT scans. Join at functionhealth.com slash beginners or use gift code BEGINNERS25 for a$25 credit towards your membership. Yeah, it's very different. It also comes with a totally different risk profile, obviously. And part of why the stock is also down is if you start a lending business and you do so in Latin America and you lend to people where the legacy banks have said, we don't lend money to them. Obviously, that comes with a lot of different risks that are also part of the thesis.

49:49again, talking about value in 15 years time, will Melly still exist in 15 years time if there's a huge recession in Brazil and suddenly your credit portfolio blows up? So those are the type of questions that you face. And what's also interesting about this entire journey, especially looking at Melly, is that you get this headline of like, you know, the Amazon of South America, but you see so many little nuances that basically tell you that no business is just a copy of the other one. So for example, what Sean and I do is when we cover a specific company, we oftentimes, at least over time also cover the competitors so for Melly for example I looked at Sharpie a couple weeks later which is a southeast Asian company again kind of doing the same but also being somewhere different and if you do that that also kind of explains why you look at 70 companies and then you are so selective in terms of which companies you actually want to have in your portfolio because a lot of these companies have the business or the the same business model and then you have to decide where do you actually want to put your money and especially for those bets that are like Mally and like Shopee where you have to bet that in 15 years time it's a significantly better business that's a lot more difficult so I think that's also why you could say that we are still value investors even though we have companies in our portfolio that trade at 40 times earnings because if you have a company like Universal we just have more conviction in how the earnings will look like in the next three to four years that obviously also matters for position sizing and for how certain you feel about putting your money there and how easy you can sleep in comparison to having companies where a lot of the value, again, is in the terminal value.

51:21And there are a lot of things that can happen in the meantime. And maybe just a quick glance into the fintech business. What both companies like Shopee and Melly do, of course, is taking higher interest rates on their loans, right? And obviously, there's also, Sean just talked about the flywheel, this huge advantage that you as a marketplace have compared to legacy banks, where a lot of the data they use to decide who to lend to is coming from their marketplace. And yet again, there are huge differences between, for example, Shopee and Melly. And why is that? Well, because Shopee has a lot of people who go onto the platform and they don't yet know what they want to buy.

51:55So they are impulse buy or purchases, right? Where you just see a bit of clothing and then you want to buy it. But this is not the same mental model or decision-making that helps you with actually planning out how good they would be in terms of paying back credit, because you don't actually know if there was a good financial decision to buy their clothing part. But if you are, you know, if you sell electronics, like high quality stuff that people actually think about before they buy it, your data that you get from the buyers on that platform is significantly better. And then you usually start, for example, with these buy now, pay later loans.

52:28And then you see, hey, who is actually paying me back? And then you kind of go from one product to the next. Then at some point you would start lending money to them. Another thing is that you usually only lend money for like three to four months. So those are basically the safeguards that are in place that if they see the economy going down, your credit portfolio, you know, is only three to four months. So you can kind of adjust who you now lend to. Again, those are kind of the safeguards. We can't go into the details, but those are the risks that you take with certain companies that you don't have with others.

52:57And those are especially the decisions that go into, is it supposed to be a 3 % position or a 5 % position or with Google, a 10 % position. And obviously, because we're value investors, what matters most to us is the downside risk. And that is simply higher with Mellee compared to Google. Yeah. And so it would make sense why that position size is smaller. I love that you bring up kind of these portfolio decisions you guys are having to make. If you don't mind, it'd be interesting to hear as kind of like co-directors of a portfolio. I imagine that's an inspiring model for some people out there who would love to think about managing a portfolio with somebody, you don't see it as often, I would say.

53:41So we'd love to get thoughts on kind of what's worked for you guys, what hasn't, and just like what you guys do behind the scenes, if you don't mind. Yeah. I would like to say, Sean, that I think we are both not only co-hosts, but also friends. So we talk a lot and I feel like maybe many people out there might have a friend of mine who they want to co-host or, you know, co-share a portfolio with. I do want to say that you spend so much time researching a company and you also get to know the other person, obviously. And still, when the other person is pitching a stock, I think we both kind of realized over time it's more difficult to get behind an idea that you didn't pitch yourself.

54:20And I like to think that it's not because of your ego, but simply because there's 40, 50 hours of research that you put in. And even though you want to do the best job you can in terms of putting it out there in just 60 to 90 minutes, of course, it is a huge decision to make to invest in a company. So I think there are advantages and disadvantages. Again, having the same type of conviction is maybe one of the disadvantages where it's a bit more difficult. But also you have the huge advantage that when I pitch a stock, I know that Sean, one of the smartest guys I know, will look over it and kind of think about, okay, well, are there any things that I've missed?

54:54or maybe has he looked at a company that's kind of similar and he sees some patterns and he says, wait a minute, I've seen that before. It didn't work out. So why do you think it will work out in this case, especially when you have these, for example, companies in the same niche that can help. So let's just say he looked at Coupang at some time, right? And I look at Melly, then he has some insights that I personally wouldn't have and that he can help with. And I think that's also where a lot of people benefit from listening to our episodes, that you kind of get both perspectives, right? And that you do not only get kind of one perspective and you're blindsided by anything else that you otherwise don't cover.

55:29That's at least how I look at it.

55:32Daniel Mahncke:I definitely have thoughts on it. Yeah. It's funny because I think we've obviously evolved in many ways, but one of the things that's changed the most is how we think about position sizing. We used to do this kind of awkward dance where it was like, oh, well, I really like this stock. And then Daniel was like, yeah, I kind of like it, but I don't know if I like it as much as you do. To your point of, of course, you're going to have differences in conviction when one person has done much more research than the other. And so we would approach position sizing of, if we both like the stock, it's a full position, which could be anywhere between 5 % and 10%, let's say.

56:11Daniel Mahncke:And if one of us really likes it and the other hates it, then we just shouldn't do it at all. If one of us really likes it and the other is on board, but a little more hesitant than the other, we might make it a two or three percent position. And so I'm not saying that these are the ideal approaches to like the perfect way to approach portfolio management. But it's it's work for us because there is that balance of you have a ton of respect for the other person. And so you recognize, OK, if they're feeling a little cautious about this, maybe I should rein myself in. They also can hopefully help you avoid catastrophic mistakes by pointing out like, yeah, I think you're just really totally off on this, which isn't something that has happened a lot.

56:56Daniel Mahncke:But there's definitely been, you know, Daniel's an 8 out of 10, you know, bullishness on a stock and I'm a 6.5. And even just that is enough to kind of like, OK, all right, let's take a breath. Let's think about it. And then I think we have this wonderful luxury of having the podcast where we're practicing communication with an audience of people. And so we're trying to explain the thesis to the world. And so in doing so, we're really going at a first principles level, explaining all the key points to each other, too. And so I just think that's an incredibly valuable exercise. And I feel like I always talk about it on podcasts, but I think the most valuable thing you can do is not everybody can have an investing podcast with their co-host who's a great friend and do that.

57:49Daniel Mahncke:Right. I get that. What you can do is at least keep a journal. And that's kind of a cliche thing to say. But, you know, when we write our newsletters that complement our podcast, you know, let's say we cover Mercado Libre, we do a 90 minute podcast on it. and then we'll do maybe a newsletter that takes like 20 minutes to read through. When you have to write out the whole thesis in a structured, concise, understandable way, it's very similar to going on a podcast and trying to articulate the thesis to an audience of people. You have to really clarify your thinking to a degree that it's sort of like working out.

58:34Daniel Mahncke:Um, you go to the gym by yourself and you're thinking, yeah, you know, I'm doing this, I'm pushing myself. And then your buddy comes along and you see his workout routine and it's, you're working like 50 % harder because somebody else is pushing you. Um, I, I find that a lot with investing of like, if I left my own devices, there's kind of like this intellectual laziness of like, ah, well, I guess I kind of understand that. So I take a shortcut. Whereas I go, ah, Daniel's going to ask me about that. So now I got it. Now I got to know how to explain it to Daniel. and if Daniel's thinking about it, the audience is probably thinking about it.

59:06And like I said, to an extent,

59:08Daniel Mahncke:you can mirror that with writing and you just write out, you know, pragmatically your reflections. And it's like, actually, this is something I didn't realize that I don't understand. And let me go back and see if I can explain this. And so the best thing you can do is have a great friend who is a thoughtful investor who can kind of work in parallel with you. And I think you can really compliment that by writing out your thesis. I know somebody who doesn't publish any of his writings publicly. He's a brilliant, brilliant investor. He probably does a 20-page write-up on every single company that he dives into.

59:45Daniel Mahncke:And that's how deep he goes. And he writes it in his journal, and he writes it by hand, which I think there's something special about that, too. It's ingrained into your memory in a way that isn't as tangible when you're clacking on a keyboard. But that's another tangent to go on. And so anyways, I was blown away. He showed me his journal and he really writes out his full thesis for every single company he looks at. And that sounds like a really high bar. That might be intimidating if you're a beginning investor. but also at the same time if you're active actively making stock picks and you're kind of veering away from let's say the safety of passive index funds i do think you have to kind of carry yourself to um like very high expectations of almost like excellence of i need to be if i can't write a 20 page report on this company and why it's a good investment while also simultaneously being able to give like an elevator pitch, or you kind of need to be able to do both, then I probably don't know enough about this investment to take a significant chunk of my personal portfolio and put it into that company.

1:00:55Yeah, I agree with that. Speaking of bright people, you guys are bringing Kyle Grieve on. So what's his background and what's he going to be doing for the show?

1:01:05Daniel Mahncke:Yeah, so Kyle is another friend of ours. Kyle hosts We Study Billionaires, which is the largest stock investing podcast in the world. And so we all work for a company called The Investor's Podcast and have kind of different shows under that umbrella. So for a long time, it was me and Daniel under an umbrella, under the show called The Intrinsic Dive Podcast. And Kyle was over on the We Study Billionaires podcast, interviewing some of the best investors in the world, people like Ray Dalio and Joel Greenblatt and Howard Marks and many other really, really great names. And so now Daniel and I are moving into the same podcast feed, kind of merging shows with Kyle.

1:01:48Daniel Mahncke:And Kyle is joining along and helping us manage the portfolio. And again, it's another great way to point out your blind spots in that we know we trust Kyle a lot. We have a lot of commonality. And yet, Kyle is a Canadian. I'm an American. Daniel's a German. Kyle looks at a lot of commodities and cyclicals and microcaps. Daniel has done that and also looked at large caps, and I've kind of increasingly pushed him toward large caps, for better or worse. uh but the point being um yeah we're hoping to form kind of a mastermind group uh with with the three of us um just to to be able to turn over more rocks uh i'll be the first to say like after you've pitched 70 companies not that i've done all the pitches you start to run out of ideas it's like wow there's a lot of companies out there but you know if i'm trying to pitch my best idea you know there's i can only come up with so many ideas and so anyways kyle is uh you know brings completely different perspective to the types of companies that he looks at, which will be great for at least my personal growth.

1:03:03Daniel Mahncke:And, you know, we've tried to cover the full spectrum of businesses, but there's definitely areas we've been a little bit leery of. You know, I don't look at coal mining stocks or railroads. Or Daniel and I kind of famously joke that, like, we never look at healthcare companies. and Kyle has been less afraid to venture into those areas and so he can kind of pull us out of our comfort zone in different ways. So yeah, we're really excited to be working with Kyle to add another person into this experiment, like this project of managing a portfolio together and seeing how it goes. And mostly we're doing it for educational and entertainment purposes.

1:03:48Daniel Mahncke:and why not bring in another great investor to learn from and work alongside. So when we said that we don't look at the stocks that are basically in the security analysis book, now Kyle joins us and he's looking at some of those. So if you look for them, you can now also listen to our show. I also think what's interesting, just one last point there, is how the challenges that you have building a portfolio evolve over time. So especially on the position sizing, in the beginning, our idea has really been to have a portfolio with 100 % cash, then just build positions over time. So at that point in time, it's relatively easy to just say you had a position and it's 5 % of the portfolio.

1:04:24But now that we basically have allocated almost all of our cash, it's not only that Sean and I have to think about, well, do we want to make it 5 % position because I have high conviction, you have a bit lower conviction, so maybe it's only 3%. Now these positions actually compete with the positions that we currently have in our portfolio. So now we have to think about, well, if Amazon is 10 % and we want to add to Mally, then perhaps we have to sell some Amazon to add to Mally. And do we actually want to do that? And those are, you know, challenges that change over time and that always make it kind of interesting.

1:04:54And even, you know, thinking about stock ideas, I know that we were at episode, I don't know, I think it was like 20. And at that point in time, I felt like, gosh, we covered so many companies. I don't even know if I find a good one to pitch next week. And now we're at 70. And I actually feel like there are more companies that I have on my list now than back then. So the more you pitch stocks, the more you look at the market, the more opportunities you will find. And it's also okay if it's cyclical. Like when, you know, SaaS sold off, there was so many companies that you could at least look at, even if you didn't end up buying them, but you could look at them because they sold off and kind of figure out, well, if it's a good opportunity right now, then maybe sometimes the market is just quote unquote overpriced and then you don't find any good opportunities.

1:05:32So maybe, you know, for anyone out there who feels like there are no good opportunities out there, what am I supposed to look at? Maybe you just wait two or three months and also, So, you know, don't push yourself. Don't buy into a stock because you feel like you have to, even though it doesn't fit your hurdle rate or maybe your intrinsic value target. Because at any point in time, Sean and I have seen that, and we only do it for a bit about, you know, one and a half years. Those stocks come down again. Even if you think that it will never do, you know, we looked at Ferrari at some point. We thought this stock will always be expensive.

1:05:58Turns out three months later, it wasn't that expensive anymore. So most of the time at some point, the market will give you an opportunity.

1:06:05Daniel Mahncke:The most extreme case was Trade Desk. We looked at Trade Desk and we were like, yeah, this is kind of a good business and it might be interesting to invest in, but we just can't wrap our heads around on it. And so we passed. The day after our episode was published, the stock fell 40%. Wow. You guys did an expose or something, huh? No, we didn't. We just got lucky. Yeah. So did you add that one? No, we didn't. Fortunately not. We passed on it. We passed on it. Yeah. Yeah. Are you looking at it now though? Yeah. I mean, from time to time, we have these episodes that we call portfolio review, also watchlist reviews.

1:06:45And we actually just posted one, I think two or three weeks ago. We also looked at TradeDesk. And obviously when the price changes, you look at them again. Because if you know it's a high quality company and it gets cheaper, of course you look at it. But they are just companies that you look at. And Sean kind of alluded to it right now where he said, we just couldn't wrap our head around it. It was going on our two hard pile, right? so we couldn't figure out the business to the extent that we need to to invest in it so even now when it's cheaper when it's usually the time where we like to buy if we just can't figure out the business that's kind of also what we talked about if you know sean pitched the company back then um and i said you know i don't really understand it to the extent that i feel comfortable with it and sean had the same idea and if even the you know person who pitches the stock doesn't feel like he fully understands it that's already a good argument to put it on your too hard pile and what we love adding to stocks at some point when they get cheaper.

1:07:35I think it hasn't happened yet that we put a stock on the two-hard pile and it actually got out of there and into our portfolio. So that takes a lot more work and a lot more deep understanding of that business model. So we looked at it again, even when it was significantly cheaper and yet we didn't buy it. It's not yet part of the portfolio and likely that won't change for a long time.

1:07:56Daniel Mahncke:The stock is down 85 % from its all-time highs, which is just absolutely brutal. But I think this is also why it's important to get practice covering so many companies. I think only until you've studied a lot of companies, we really understand what I mean by this. But sometimes there's a moment in researching a company where it's like all the puzzle pieces fit together. I'm like, I get it. I really, I get it. And I see the risks that they're talking about, but I also see how and why the business is able to grow. So like MercadoLibre, I can see very clearly the different parts of the flywheel that are spinning and why that is likely to lead to significant growth in the future.

1:08:37Daniel Mahncke:Same thing with Universal Music Group. It can very clearly paint a picture in my mind of everything that's happening that's contributing to their current earnings and why that is likely to continue and grow into the future. When I look at the trade desk, the business is a black box. Anybody who's ever tried to study programmatic advertising, if you understand it, you're probably much, much smarter than me because it is mind-boggling complicated. It's not quite rocket science, but it's ridiculously complicated. Somebody will tell you that the trade desk is the absolute authority on, you know, you know, the man side platform advertising.

1:09:20Daniel Mahncke:And you're like, okay, well maybe that's true. And then somebody else will tell you that Google's about the either launch and you're sitting there and you're like, I don't really know which is more true, which is scary. Like if somebody says, oh, well, universal businesses is screwed. It's, it's going to die tomorrow. I know a lot of confidence why that's wrong. You say that to me about the trade desk, I might have some gut emotional reactions, but if I'm being intellectually honest, I don't have a good enough mental map of how the puzzle pieces fit together for me to say with a lot of confidence, hey, this is why that nightmare scenario where the stock falls another 90%, right?

1:09:59Daniel Mahncke:Because the stock can fall 90 % and then fall another 90%, right? Why that isn't going to happen. So anyways, that's kind of like how I think about the too hard pile. Can I explain honestly why the bull case or at least like a pragmatic the you know optimistic case will unfold and do i also understand truthfully why the downside case is is limited or unlikely to to happen yeah no that's super super key so if people are excited they want to tune in to the new content you guys will be having with Kyle and the content you have now, what's the best place to go? Yeah. Just go to theinvestorspodcast.com.

1:10:47Daniel Mahncke:You'll find our podcast, our newsletter, our investor communities, and a whole lot more. That's awesome. Yeah. People should go check it out. Daniel, Sean, I appreciate the time. I appreciate all the research you guys do and for bringing it to the audience today. I know there's a lot of value in seeing things from both sides, right? And then seeing where you apply a mental model on this side and where you apply a mental model on that side. And like you said, it's not always right and wrong, but there are just different ways to apply different tools. So with that, we are going to wrap it up. Remember to go out there with a margin of safety, emphasis on the safety.

1:11:23Have a good one. And we will talk to you next time. Peace.

1:11:32Daniel Mahncke:You've been listening to the Investing for Beginners podcast. All show notes can be found on our website at einvestingforbeginners.com. To master the basics of stocks in seven days, sign up for our free email series at einvestingforbeginners.com slash newsletter. Until next time, have a wonderful day. the information contained is for general information and educational purposes only it is not intended as a substitute for legal commercial and or financial advice from a licensed professional the hosts may own positions in the securities discussed review our full disclaimer at einvestingforbeginners.com

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