Unlocking Investment Strategies with Daniel and Shawn from the Intrinsic Value Podcast

23:27So those are small caps and mid caps. And I think what I've come to appreciate is by looking at all these large caps companies, just how inefficient the market can be there as well. And that kind of ties back to the point that I mentioned earlier or that I made earlier. When you look for a company where change is happening. We talked about Uber right now. And Uber is a company that just hit an inflection point with the profitability a couple of months or basically years ago. And at that point, you could see, well, this is a company that beforehand, many people thought Uber will never make money.

23:55They never made a dollar of free cash flow and they never will. And at some point it does. And that changes the narrative of the company. And if you spot that relatively early on, I think with Uber, you had quite a couple of months to figure out this is a profitable company and will be significantly more profitable in the future. So those situations exist in large caps. And I think I did believe that the market is not efficient when I was at university because I still had all the value investing stuff on my bookshelf at home and I read all of that. So I knew about it, but I still felt like I would want to look at places where the inefficiency is even higher.

24:30And what I come to appreciate after looking at all these companies is the inefficiency in large caps is pretty high. And you also just have fundamentally better businesses. If you look at smaller companies, we just looked at Remitly a while ago, and it's a company that I personally like a lot. But if you compare it, it's also at an inflection point where it's currently in the process of becoming a profitable company. But if you look at the range of outcomes for this company, it's so high that most of the time you have a survivorship bias where companies that are at an inflection point and they start to make more money, they only do so for a quarter or two.

25:03Then afterwards, they're going back to loss making and it stays that way. If you have companies that have these huge flywheels, like Uber, for example, you have a company that's at an inflection point and it's sustainable. So it just gets better and better. And I think that's what we come to appreciate looking at all of these companies. And if you want to limit the amount of money you can lose in an investment, it does make a lot of sense to look at companies where you know the flywheel is working and you either have a CEO change, an inflection point, you just know the company is getting better.

25:31And I think most of the companies we own are those companies. And just funnily enough, if we think about the companies we own and them being on Sean's phone, I think those were the most successful companies we own. Reddit, for example, is a company I didn't really believe in because I'm not a user of the company. I think it's a 3X since we invested. Uber, just like you did, just like I said, did phenomenally well. So yeah, that's something I come to appreciate after joining. What if you could get a 25 % match on every dividend you earn? Well, now you can. When you earn dividends on the Plink app, you'll receive a 25 % cash boost up to$250 bonus per year.

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28:17Those are some, those are some great insights. And I totally agree with you guys. Buffett is obviously a great example of buying companies that you would think, okay, what new information could there be out there about Coca-Cola, for example? And I think that's done okay for him. American Express the same and on and on and on with the companies that he's bought, but he's obviously a unicorn. So if you look at our three of us, we all own Alphabet. I was buying it when it was 80 or$90 a share. And so I'm quite happy with that investment. So as you guys have been doing this now, you've studied 40, 45 companies.

28:57How do you feel like you're like, how do you approach the idea of the whole circle of competence? So I'm going to pick on Sean here just for a second. Whenever you guys talk about payments companies, Sean is always making comments about how he doesn't understand them. They fit outside of his circle. He's not comfortable with those business models and such, but you guys talk about them and you've invested in some of them. So I'm curious how you work past that and how you kind of try to conquer things that are outside of your circle or maybe on the edges of them. And Sean, I would argue payments better than you think you do.

29:35I don't know. I still feel I'm not smart enough to understand what's going on behind the scenes with these companies. But no, it's a really great question. And actually, I think a lot of people like to feign confidence and mastery in the investment world. And to be honest with you, that question points to one of my biggest insecurities of where do I actually know? What is the boundary of when have I drifted too far away from things I can actually understand? And I think sometimes you have to burn your hand on the fire a little bit. And fortunately, we're still pretty new to this game of really seriously, consistently valuing companies.

30:14And I'm confident we will get badly burned at some point, but we've had decent luck so far. But yeah, I think circle of competence is another way of saying just your comfort zone. And for me, I have used the show as an excuse to push outside of my comfort zone. So we kind of frame every company we cover as like we're pitching, Daniel on the bull thesis for this company. And sometimes I know going into it like, okay, I don't really love this company. But kind of like a lawyer, you're forcing yourself to make an argument to push yourself outside of your comfort zone. And so the trade desk is a great example of that, where digital advertising across the open internet is just so unbelievably complex.

31:00It makes payments look simple. And I knew that it was going to be painfully complex. I have a hedge fund friend who was basically, it took me four months of just only learning about this company all day, every day. And I still feel like I don't know what's going on. And so I was like, yeah, I'll give it a week or two and I'll dive into it. So that shows you a little bit about some of my maybe naive optimism that I have. But that was a company that I dove into and we didn't end up investing in it. And fortunately, because it ended up crashing 40%, I think two days after we published the episode.

31:31And that wasn't because we had some brilliant insight, but it was just because I was like, I can tell pretty clearly this is well beyond my circle of competence. And I have no business investing in this because I think we said this in a call on the other day with the community, but there's definitely an intuition to it where there's companies where it's not to say that you're certain about the future, but there's no information that somebody could tell you that you would fundamentally be shocked and go, oh, I didn't know that. That changes the thesis. So for like Lululemon, for example, that's a company we like.

32:03I don't know if that investment will work out. I like it at the current price. But there's probably nothing that you could say to me about the company that I'd be like, wow, not only did I not know this, but this fundamentally changes my perspective on the company such that I no longer want to invest in it. And maybe those insights come at some point. But the point being, there's no lurking black swans. When we talk about NewBank, that is a company that I've admitted is probably pretty beyond our circle of confidence. And at the same time, I still wanted to bet on it because I just saw so many great things to love.

32:36But I've never been to Brazil. I mean, this is a Brazilian fintech company. I barely understand how banking regulations in the US work. I can't pretend to fully understand how it works in an entirely different country and the nuances of that culture. And so that is probably an example of a company where there is a bit of this nagging feeling of, man, there are probably some things I don't know about NewBank that I should know. And that's a little scary. And like I said, it's a little bit of a gut feel of like, how deep into this territory are you? There are these lurking monsters of like around every corner, there's some major variable that I don't understand of.

33:15This is some bank regulation that changed in the 60s in Brazil and it rippled across. And if that law gets changed, the whole business model falls apart. There are things like that. And so I think to some extent, it is kind of a gut feel that you build up over time of, okay, are there just too many of these monsters lurking in the shadow where I'm swimming in the open ocean and I could get snapped up by a shark at any point. Whereas I feel like with Lululemon or Nike, we're swimming a lot closer to the shore. We're taking on some risk. We're taking on some uncertainty, but I can get back onto the beach if I have to.

33:50And really, there's not a simple answer to it, but the further out at sea you are, the further out of your comfort zone and circle of competence you are, the more at risk of just being prey and getting eaten alive. I don't know. Maybe that metaphor works, but I think it does. I guess sometimes it's so easy. I think people who listen to this probably want this niche insight that's helping them a lot and they've never heard it. But most of the time, you get back to the basics. And Sean and I often joke about, I'm not necessarily a joke, but just say, could we sleep well at night if we own this company?

34:20And I think as an investor, you have a lot of things that you can do to basically manage risk. One of it is position sizing. So whenever we feel like there's a company where the future is more uncertain, you will just reduce the position size of that company, right? When we entered Nike, for example, it was a company that came down a lot if you look at the stock price. So you might think it's a value play, but the valuation was actually pretty high. So what you did have there was a bet that the company will actually have a turnover or a turnaround basically. And as Buffett said, turnaround is a certain turn.

34:50So you know the brand, you might be thinking, okay, well, the athlete portfolio that they have, it's just, you cannot replicate this. This is a great brand and I think they will turn around. But do I actually bet 5 % of the portfolio on it? So you probably wouldn't do that. And we actually started out only betting a 2 % position on that company. So I think there's a lot of things that you can do to mitigate the risk, even if you feel like you might be a bit out of your comfort zone. And yeah, I think that's what we try to do. And then there's different things. For example, PayPal is a company we own.

35:19It's a payment company. But I think a lot of the characteristics that PayPal has, especially what you see in all of the other companies that we own, it's a huge brand name. They have 400 million active users, 200 million monthly active users. Everybody knows this company. And even in the US, I mean, when I pitched it, I got so many comments from Americans who say, we don't use PayPal anymore, I use Venmo. And I'm like, well, if you use Venmo, you basically use PayPal, right? So a lot of the time, people just don't fully understand a company to an extent. And I think if you do the work, if you do the deep dive, and then you feel comfortable with the company, you can start betting.

35:52And if you do not feel comfortable with it, if you feel like you don't understand it, either you reduce the size in the portfolio or you don't invest at all, which we have seen with TradeDesk and many other companies that we passed on. I think from the 45 episodes we did, we only accepted like 10 positions in our portfolio, something like that. So it's not a high hit rate. Yeah. And it's been a collaborative process too, right? I wouldn't have gone into, I would have probably never touched PayPal. And I still in a vacuum, don't entirely feel like I would understand it enough to blindly invest in it myself.

36:26But I come to trust Daniel a lot and we are kind of partnered together in running this portfolio. And so if I can get to a certain level of confidence where I'm like, all right, a little far out at sea, but Daniel knows this better than me. He's going to pull me back to sure if I need to. So I don't know not to put too much pressure on you, Daniel, if the PayPal investment doesn't work out, but I just think there's a certain level of trust of, yeah, if I were on my own, I don't think I would be invested in PayPal, but we are doing this together. And Daniel's trusted me with companies that I've had conviction in like Reddit and Uber.

36:58I trust him with the names that he's had conviction in like Nike and PayPal. Yeah, that's awesome. I agree with a lot of those ideas that you guys were putting out there. And I guess one of the things that I struggle with, and maybe you guys can help me if we can do a therapy session for a second. One of the things that I struggle with is how much do you feel, how much do you really need to understand maybe the technology? And I'll throw out a couple of companies. So let's think about a company like CrowdStrike or Cloudflare. I don't think anybody will argue that internet security, as we get more and more online, is going to become, is and will become a bigger and bigger thing because unfortunately there are a lot of bad people out there that will do bad things because they have incentive to do so.

37:44But I struggle with how much do I really need to understand the endpoint security and how it exactly works to invest in a company like a Cloudflare or a CrowdStrike. What are your guys' thoughts on that? Well, I think it depends. I know that answer is never the best one, but I think it depends in terms of, I talked to Sean about it. When you think of Uber, for example, it's a company where I don't think they will have a huge competitive advantage when it comes to software, just saying, I think many companies could do what they do. But then you have to think about, does my investment thesis, or is it based on their software solution?

38:20And in Uber's case, for example, it's not really the case. You think more in terms of like, everybody knows Uber, everybody uses Uber. And then you have this dynamic in the sector where it's like, if you order an Uber, and let's say there's an NFL game, and 20 ,000 people want an Uber at the same time, there's a huge spike in demand for Ubers. So now you would think about, But if you want to have, because AVs are a huge narrative in that market, if you want AVs to cover that spike, then you would basically need 20 ,000 cars. But whenever that spike is gone, and you only need 500 cars, where are the AVs supposed to go?

38:51And then you can think about, okay, well, how much do I need to understand the software behind Uber for an investment case, where most of the problem, I would say, is how do you manage supply and demand? That's the dynamic that you have with Uber. And for other companies, I would say it's similar. If you look at PayPal, for example, a lot of companies can do and a lot of companies do what PayPal is doing. But there are reasons why people use PayPal and not those other companies. And I think if you can figure out those reasons, then I'm fine with owning a company where I don't understand the tech that well, because it's not that big of a part in the investment thesis.

39:23So I feel like it's a big part with Quaid Desk, for example, where I felt like they need the better algorithms. If they do not have better algorithms than the competition, then the business model is not better than any other company. And if I don't understand the tech there, which I think I can speak for both of us who didn't really understand the tech, then it just gets difficult in that case. Yeah, I agree. I would say that going back to the earlier question of maybe the biggest lesson or thing we wish we knew when we first started. And I think that for as brutal as capitalism is, I always thought, and it seems kind of innocent in hindsight.

40:04the best company, the best technology, the best soda wins. And that's really not entirely true. There are a lot of reasons why. For example, I use the ESPN app every day. That's another app on my phone that I look at. It's terrible. I hate it. It's like the worst app I've ever used. I still use it every day. And so that is just one illustration of the point. Like Coca-Cola, for example, I think this is not entirely a tech phenomenon either. Like you could sit there and say, if you could have talked yourself out of investing in Coca-Cola because you're like, oh, well, I don't really know how these beverages are manufactured and what's the secret formula and can't anybody just make the same drink?

40:49And it's like, no, you're missing the point for why this has worked and will continue working. If you go to the grocery store right now, there'll be 20 knockoffs of Coca-Cola that in a blind taste test, for most people, it would probably taste pretty dang close to Coca-Cola. But that's not the moat of Coca-Cola. And honestly, it's as simple as Coca-Cola has been around for a long time. And when you say the name, everybody knows the name. And it's something Charlie Munger talks about. If I am backpacking in Peru and I go into a convenience store and I see five different soda options and four of them are local and they're in a different language, and then one of them is Coca-Cola and I'm really dehydrated and I really need something refreshing that I know that I can trust, I know exactly what I'm going to get with Coca-Cola.

41:39And so I'm marginally more likely to buy it. And then across millions of people, you get a business that's hundreds of billions of dollars and continues to compound. And that's not to say that Coca-Cola isn't doing anything special, but also I don't think that they have some incredibly superior technology that underpins their moat. I'm going to be a more interesting conversation of how they got to be the big player that they are. But from the perspective of today, if you were going to try to argue that there is some superior cola technology, it's yeah, but is that going to overcome the fact that everybody in the world has heard of Coca-Cola before?

42:12There's a hundred years of paid marketing and brand awareness that has gone into that. And so if you realize, well, the moat is not the technology. It sounds funny to say technology with a soda company, but that's really just kind of trying to illustrate the point of every company to a degree has technology. or some sort of proprietary secret sauce. And the point is, what is actually the advantage? Is it actually the secret sauce? I think that's what you're talking about, Daniel, like with Trade Desk. There are some companies where, and this is like with semiconductors, the competition is just so intense.

42:45There's no brand advantages. Nobody cares what brand your computer chip is. It's just what has the fastest processing power. So if you're competing truly only on performance metrics, that's where it starts to become like a commoditized business and the tech is what's most important. And then that's where I start to say, well, this is just not the type of industry or business I want to invest in. And so I guess that's a weird way of saying, we look for companies where the advantages are not necessarily just the technology. Can they continue to be the biggest winner for some other reasons? And for Uber, the app is already downloaded on your phone and you already have your credit card installed.

43:23And so if their tech falls off and everything else starts to go wrong, Still, there's an advantage that they can make up for there of like, all right, if I got to download another app and I got to put my credit card in, maybe I'm just going to use Uber because there's an inertia there. That is a very legitimate business advantage. And that can get squandered away. But it was like what you're talking about with Nike, Daniel. You don't want to bet on every turnaround turning around. But at the same time, for a company like Nike, I mean, everyone on the planet's heard of Nike. We've all seen the ads.

43:52We all think of Michael Jordan. And if anybody is in a position to be able to basically get the script working again, it's probably going to be them. And the brand value, I think, is something I really did not appreciate when I first started investing of how important it is of sometimes just the fact that people know the name of your company is the difference maker and why your company wins. And it's not necessarily about the secret sauce of your technology, at least for... I mean, That's mostly true for consumer-facing products. At the same time, though, I would add that we talked about Lululemon and Nike now.

44:30And I still think that with most of the companies we looked at, one other learning that we had is that retail is just an incredibly tough business to be in. So I think most of the companies, retail companies we would look at, we wouldn't add to the portfolio. And like I said before, there are many reasons or many options to manage risk. And one thing we do is position sizing. And obviously, you also have to look at the price. So Lululemon, for example, is a brand that Sean knows very well. I don't know it that well. At the same time, if I look at the price of Lululemon currently, I just think there needs to be a lot or a lot needs to be going wrong for this not to be a successful investment.

45:04At the same time, when we invested in Nike, it was in the 50s. So I think there's a big difference between investing in Nike in the 50s and then in the 70s, right? I think there's just a narrative that turns around at some point. And it's funny because it's pretty much what everybody knows if you look at large caps. But when you bought Nike in the 50s, there were all the downgrades and down ratings on Nike stock. And now it's 75. And I look at the ratings and all of them are buy ratings. So I think you'd also need to, not that you time the market, but sometimes we talk about timing the company.

45:34And I think that's even more important if you look at industries where we know competitive pressures are higher than in other industries. Okay. So you guys brought up the valuation name. So I got to throw a question out there about that. So when you're doing your due diligence, at what point does the valuation enter the chat room? Like, is it at the beginning of the process? So when you're looking at 20 pages of bullets of Robinhood, for example, are you doing valuation after you do the write-up? Or are you doing it prior to even acquiring 20 pages of notes? Like, where in the process does that fall?

46:15I do it at the very end because to me, valuation is, you have to have an opinion. I mean, there's two ways. You can do a reverse DCF where you can try to understand what's priced into the market. Otherwise, if you're going to create a valuation and say, I think they can grow this much and margins will expand, you're telling a story. I mean, this is something I learned from Azul off the motor. And this is why I continue to say investing is like writing. You are telling a story. You might not know that you're telling a story, but if you're projecting the company to go 20 % a year, something has to actually happen to grow 20 % a year.

46:49And so you need to have an opinion on what would be happening for that to be possible. And then you can look at the valuation and you just do some basic math and accounting and say, okay, well, based on their, this is kind of the structure of the business. If they grow revenue 20 % a year, operating margins stay fixed, this much will convert to earnings per share. And then in five years, they'll have$10 in earnings per share instead of five. And then if they use the same multiple as today, whatever, the business is worth X, Y, Z number of dollars. And that's obviously a super, super simplified way to do it.

47:15But with the point being, you can go through all of that. But if you don't know why you're saying the company will grow 20 % a year or will contract 10%, you're just playing with numbers and a formula. And so you actually really need to have an opinion on it. So that's why I say, I do all of the research and the reading and the writing before I get to the actual valuation, which is not to say I'm not oblivious to Robinhood's market cap, but a price-earnings ratio can be meaningful in some cases, and it can be completely meaningless in others. So I'm not looking at it and immediately saying, oh, this is too expensive.

47:50I'm not going to look at it. I'm going to say, let me try and understand the business. And then I'll probably do some reverse TCF of saying, all right, well, it looks like the market is kind of expecting for this, unless you're just counting on some ridiculous extrapolation of the valuation multiple in five or 10 years from now, which we never like to do, the company is going to have to grow at like 12 % a year to basically grow into the current valuation. And then you say, after you've done all that qualitative research, you might be in a position of like, okay, well, I don't specifically know whether they'll grow 20 % in the next five years or 10%, but I feel pretty confident that the market is being overly pessimistic or overly optimistic.

48:26And so maybe just a more tangible example of that was when I looked at Ulta at like 14 times earnings in the low$300 per share. And Ulta is this great diversified beauty retailer. And they have this incredible track record of almost 20 % earnings per share growth over something like the last decade, very, very high returns on incremental capital. And the business is so profitable and beauty is such a fundamental part of human experience in our society. It's not going anywhere. And I'm sitting there, I'm thinking, man, this thing is at the lowest multiple it's traded at in like a decade. And basically, they're so profitable that they're buying back 5 % to 6 % of the stock each year.

49:07I think the last time I was on, I think I talked about this, but that's how we started looking at share cannibals. You can compound earnings per share in two ways. You can grow the business or you can reduce the number of shares. You can reduce the denominator. And so Ulta was the first one where I was like, okay, well, if they're able to continually buy back 5 % of the stock. That means at a minimum, they're compounding earnings per share by 5 % a year. And then I'm looking at it and I'm saying, well, historically, this business has grown very, very consistently and it's been very, very profitable.

49:36And they're starting to expand internationally and they're looking into expanding into smaller footprint stores in small cities. So I'm like, it's not like they've run out of ideas to grow. So you're like, yeah, okay, well, if they can continue to buy back 5 % of the stock and if they can grow 5 % a year, that's a 10 % compounding of earnings per share. And then if you're like, okay, well, you don't have to be that optimistic to say, if we get a little bit of appreciation in the PE multiple, where right now the market's very, very pessimistic and thinks the company is burning down. And if that fear goes away and you get some return to the average historical multiple for the company, now you're talking about an implied return of 14, 15, 16 % a year.

50:14So that's just an example of how I thought through the process. And I don't think they can be entirely mutually exclusive. You're kind of continuously going back and forth of what assumption am I making in this valuation? And is this a hurdle that I can plausibly think the company can hit or not? And then trying to account for that story that's being told in the actual numbers you use in your valuation model. I think Sean gave the perfect answer. In most cases, you should do the valuation at the end. Also just to not get biased beforehand, because as we said, But mostly what we do is DCF or reverse DCF.

50:49And what we try to do is have all the qualitative factors from our research and then put that or quantify it in a valuation and then see where that gets us. Because as we all know, the DCF is not perfect by any means. But if you have done all the research beforehand, and then you can just plug that qualitative research into a quantifiable approach, I think that helps a lot. Having said that, though, there are some companies where I might do the evaluation beforehand or not beforehand, but like in the middle of the process. We looked at Dell recently, or I looked at Dell. And that was a company which was recommended to us quite a lot.

51:21I think it was mostly about the AI infrastructure deal and them building AI service, which was supposed to be this huge new thing that basically is, I often talk about it today, kind of like an inflection point for Dell and a new business unit that they can grow, which should be way more attractive. And only, I would say like in the first third of my research, I figured out, okay, well, the margins on that new business, they don't seem that attractive. So in that business, for example, I said, okay, well, let's assume we have the other businesses just growing in line with what they did the last five to 10 years, and then add this AI server part with the margins that I currently know they will earn.

51:55Then you quickly saw, well, there's not much this AI server business can add to that value in the end. So sometimes I just think, okay, well, if there's one major part of the thesis that you can quantify relatively easy, you can also go ahead and do the valuation maybe in the first third or the second third of the research process. But usually when I think, especially if it's a stock where there's a big narrative, I want to figure out the qualitative factors first and then go into the valuation. It's kind of like saying you shouldn't look at the stock chart before you even consider looking into the company.

52:27How realistic is it? I think at least in my terms, I would say it's not that realistic. I mostly look at the stock chart. And then even it tells you a lot, right? If you see the stock declining 50 % from its all-time high, that's just more interesting to me than if I see a stock chart that just went up. So probably in reality, I would look at it and I would also do the variation sometimes early on. But in theory, you should do the devaluation at the end and also not look at the stock chart. Easy to say, hard to do, right? Exactly. Okay, so it's time for some real talk. I have a serious problem with shoes, like legitimate, like my wife has opinions about a type of a problem.

53:04So when I find a pair of shoes that I absolutely love and they're$300 or$400, I don't just buy them outright. I always try to find them cheaper first, you know, to keep my wife happy. That's exactly what dupe.com is for. It's an AI-powered shopping tool that finds cheaper alternatives to the expensive stuff that we want to buy. Not knockoffs. They're not counterfeits. They're the same manufacturers, just different branding and way lower prices. Let's be honest. The white label game is real, and dupe is blowing it out of the water. and their brand new research for me tool is next level. Just describe what you're looking for.

53:40Type something like running shoes for trail running under$100 or workout gear that doesn't fall apart after three washes and it pulls from real sources, cuts out all that sponsored garbage and just tells you what to buy and why. Straight answers, done. Be prepared to save yourself a ton of time and money. Just go to dupe.com, that's D-U-P-E dot com and tell it what you're looking to buy. That's D-U-P-E dot com to finally feel confident about what to buy. Evening. Buyer's remorse. Buy a new car? I'll be moving in. Let's get started. Sorry, I think there's been a mistake. I bought it from Carvana.

54:20You what? Yeah, great price. I even have seven days to love it or return it. So there's no... No, no buyer's remorse. More like buyer's rejoice. I guess I'll let myself out. Congratulations. I mean it. Buyers rejoice. Buy your car today on Carvana. Limitations and exclusions may apply. See our seven-day return policy at Carvana.com. Very easy. So how do you guys think about competitive advantages slash modes? You guys were talking a little bit about some of the companies earlier. And obviously, we all want to buy these huge wide-mode businesses. But sometimes they just aren't available or they aren't available at attractive prices.

54:59So how do you approach that idea? And how do you also think about monitoring a company? So we talked about Uber and Reddit and Lululemon, for example. Those three companies, you could argue have wide moats, but maybe one or two of them, well, particularly Lululemon, has been under some criticism about their moat maybe deteriorating. I know nothing about the company. I am the least fashion forward person you're ever going to meet in your entire life. So that definitely falls outside of my circle. So I guess, how do you think about those things? Do you have any like maybe practical examples you could give that could help people understand that idea?

55:38Well, I would say generally, Sean's probably even more focused on white mode businesses than I am. As you can see with some of the picks that I have, I think if I can pay or if I can get a business at the right price, and I think it can be, it's still there in 10 years, it probably is a better business. I'm also inclined to buy that business, whereas Sean would probably look at even more white mode businesses. Maybe as an example, you just mentioned Lululemon. And I think Lululemon is a company where the mode is definitely getting tested. And as I said before, in retail, it's probably significantly harder to have a sustainable mode than in most other industries.

56:10One thing, to just give one data point that you could look at is, for anyone who doesn't know Lululemon, that brand also came up by a lot of word of mouth for marketing. What they do, for example, is having these, I think it's yoga classes, right, John, that they have in their stores. and most of the time you have, for example, trainers or coaches wear Lululemon and they kind of act as a brand ambassador. And I think that's, if you look for like a niche data point, you could look at how many people act as those brand ambassadors, how many people show up for these classes. I think those are data points you could look at, which are not on the spreadsheet, but if you get kind of get that data, it gives you a great idea of where that company is.

56:47Is it actually, is it a deteriorating mode? Is it just trailing as it has been for the last couple of years? So I think depending on the industry, there are certain data points that you can look at, which you do not find in a 10K most of the time, not find on a balance sheet or anywhere else, that can give you a good idea of whether a company is still having its mode. I mean, for PayPal, for example, you can just look at oftentimes you hear these huge numbers, like 400 million users. A simple thing would be to look at, okay, how often or what's the frequency of the users actually using the service?

57:17What is the average revenue per user? How many people actively log in every single month? kind of just breaking down those big numbers and see what are the trends, especially in the short term, and where are they heading? I think those are data points you can look at. This is why I say Daniel's a more thoughtful and rigorous investor than me, because I just have the simplest ideas for things. For example, a company that I think a lot for is my case study on moats is Apple. I have had an iPhone since I was 13. half my life, I've had an iPhone. I have a Mac. I have an iPad. Every two to three years, I get a new iPhone.

58:02I've had AirPods. I have given Apple a lot of money over the years. All of my life's photos are stored on the cloud, the Apple iCloud in particular. And I think I pay $2.99 a month indefinitely to keep that there. And they could probably double, triple, quadruple that price. And what am I going to do? Get rid of... Yeah. I'm not going to... Look, I got enough going on in my life. I don't need to figure out how to take all my photos off the cloud and store them in some other cheaper way. I'm just going to... If they raise the price from$3 a month to $10 a month, I'm going to pay$10 a month. And to me, that is a moat.

58:40It is almost unconscionable for me to consider leaving the product ecosystem because everything is... I have an Apple Watch too. Everything is synced up. You text me, Daniel texts me. I get it on my watch, get it on my phone, I get it on my iPad, I get it on my computer. It's all there. Everything is synced up. I could not imagine a more seamless interface. And so to me, if you had asked me, like in 2018, 2020, 2022, I would have said, this is the epitome of why I think Apple has the widest moat of any company in the world potentially. But that's also not to say a wide moat is not guaranteed. So I think my initial threshold, when Daniel says I look at wide moat companies, for me to want to invest in a company, I need to feel like, okay, beyond a reasonable doubt, this company's moat is very, very well established.

59:33Uber has some serious advantages that keep people coming back to the platform. And it's very unlikely. It would be shocking if there were a significant downtrend in the monthly active users. And so that would not just be a data point for monitoring the moat. that would be fundamentally thesis breaking. If there was an extended period of time where there was a decline in the monthly active users on Uber or business that's been so growing so quickly and it's so entrenched in people's lives, I mean, it would be thesis breaking because you'd say this was not even on the table. I mean, this is not a question of monitoring the moat.

1:00:07If this has happened and there are two years of this consistently, there is something that I did not appreciate. Maybe ride hailing is not here to stay and the technology is changing in a way that I just didn't understand. and I got the thesis wrong. And it's really to me more about getting the thesis wrong or right, and less about like really zooming in on the data points and kind of hyper fixating on, okay, well, did the number of ambassadors at Lululemon increase this quarter or decrease, which you're not to pick on you, Daniel. I think that is a very thoughtful way to assess a company that has a word of mouth marketing brand.

1:00:38That's a very thoughtful way to do it. And over several years, the trend would be meaningful. And just to go back to the Apple example, I don't know if you notice, I'm not wearing Apple headphones. I'm wearing Sony headphones. Three years ago, I had Apple Beats headphones. I'm not wearing my Apple Watch anymore. Three weeks ago, I was wearing my Apple Watch. It's because the strap broke, but now I'm starting to think I don't need it. The new iPhone 17 came out. I have an iPhone 14. I went to the store, I looked at the 17 and I was like, this is no different than the phone that I have. And so I think for the first time, that is this kind of intuitive mode of I'm thinking about it of just as a customer, for the first time in my life, I don't own Apple headphones.

1:01:21I'm decreasing the number of Apple products that I'm using. And I still wouldn't say that I'm seriously ever entertaining switching from Apple. But for the first time, when I was in that AT &T store, looking at the phones, I was like, man, maybe what if I did get a Samsung? And I'm pretty far from doing that. But that is a thought that I would have laughed out of my head three years ago. And today, because I think of a lack of innovation and kind of a staleness of the products at Apple, I'm entertaining it in a way that I wouldn't have before. And so that's not going off any specific data metrics.

1:01:54I mean, that's one of those gut feel things. And I do think one of the most important things investing is just learning to trust yourself and picking up on the signals that your kind of body and brain are giving you. And that's one of those signals of like, well, I wasn't intentionally trying to make an investment statement on Apple when I changed headphones. but the fact that I'm starting to, I got so integrated into their ecosystem and now I'm pulling out of the ecosystem. And for the record, I'm not a shareholder in Apple. But if I was, that's the kind of thing in terms of monitoring the moat where I would say, hey, maybe there's gotta be a lot of other people that are feeling this way.

1:02:28And maybe the moat is starting to untangle. And so, yeah, it's a very unscientific approach that I take. Maybe one thing to add to that, which I found very interesting. It's one thing that we learned from doing these episodes together is, how different countries are. Like when Sean talks about the ecosystem of Apple, I mean, Apple is pretty big in Germany. So probably most people could just, you could say that in Germany as well. Most people have a MacBook. I have a MacBook in front of me. I have an iPhone in front of me. I use Apple headphones, all of that. But not all brands, or let's say most brands, are not that geographically diversified and not that global of a brand.

1:03:03And oftentimes, at least I feel like that's why I like looking at data points. When I see for myself that a brand is useless, probably I'm because for example I'm not a fashion person so if I just go outside and I see how many people are wearing Nike how many people are wearing on shoes I'm probably not the first one to see those trends moving especially not if you talk about companies that are trillion dollar companies like Apple and then so many analysts are looking at the foot data in stores and then how much of or how many iPhones are getting sold how many MacBooks are getting sold so I kind of feel like you're probably behind if you would look at that although technically intuitively you're mostly right on those but I think especially if you look at it from a US lens, you kind of feel like this is the biggest market with most companies that are like the biggest in the world.

1:03:48So you kind of get a feeling for this is where trends are getting set. If I would do that, if I would look at just how many people wear Apple headphones or anything, I would feel like I'm six months behind because in the US, this trend has probably long happened and I'm just now getting to know this trend. I mean, we talked about Nike, which Sean said has a huge downtrend in the US and I never experienced the same here in Germany or just in Europe at all. So you kind of get a very different perspective on all of these companies and PayPal as well. PayPal is something that is just not used anymore in the US if you do not count Venmo.

1:04:19And PayPal in Germany is huge. It's like 30 million people who use it. Whenever you send money, it doesn't matter if it's people my age, if it's people the age of my parents, everybody uses PayPal. So it's interesting, especially with the people in the community who are from all over the world, just how different the perspective is on the same companies that we all look at. yeah those are all great insights well i think it can we're going to find out if it how this can backfire with with lululemon because i i like i said i use this kind of intuitive moat where you know i've looked at the per store foot traffic and compared aloe yoga stores with lululemon and oftentimes it's just like there's just so much noise in this data and i could spend so much time cleaning this up and at the end of the day if i go to the gym and everyone's wearing Lululemon still, despite CNBC saying that Lululemon's dead and the stock's down 60%.

1:05:11If I go to yoga class and everyone in there has Lululemon yoga pants on and men are wearing Lulu shirts and I visit my wife in her office at work and people are wearing Lululemon professional wear and pants and I'm sitting on the couch wearing Lululemon sweatpants and I'm thinking, I don't think that this business has faded in the way that the market seems to. And I do think there is just a, you can look at all the numbers all you want. And sometimes I think you can notice these things before they reflect in the numbers. And I think sometimes the market can get ahead of itself. Lululemon's business has not contracted in any way.

1:05:47I mean, we were just talking about this the other day, Daniel. I mean, it's incredible for a company to go from like 60 times earnings to 11 times earnings with industry leading margins, industry leading profitability, industry leading fabric quality, a very, very strong brand. That's not It's not like they bought a bunch of Super Bowl ads and then sales jumped. I mean, we're not talking about Lububus here. This is a company that built its brand one person at a time over two decades. And that strikes me as very fundamentally sound. It takes a lot to rock that foundation. And it's being rocked a little bit.

1:06:20But at the same time, I think I could parse through all the industry data on Lululemon. And that would give you some insight. I don't want to say it's not a good exercise to do. but at the same time as a consumer, if I'm like, I mean, I just went to the Lululemon store yesterday and bought some Lululemon and I buy, I know you can't extrapolate from your own sample size too much, but again, I'm just like, if I, as a consumer and continuing to want to buy the product, my wife is buying the product. Our friends are buying the product. People I know through work are buying the product. I go to the gym, people are wearing the product.

1:06:47To some extent, you have to say, how much is reality conflicting with narrative? Because we know that markets are very, very prone to narrative. And sometimes if you can just zoom out and say, yeah, I'm seeing other brands, there's more competition for Lululemon. This is not a company that should trade at 50 times earnings, but should it trade at less than half of the S &P 500, despite having whatever higher profit margins and much higher returns on incremental capital. And the fact that I go and I see the brand everywhere I go, you tell me. That's how I start to get an opinion on, okay, I think the market has taken this too far, but I could be wrong.

1:07:19I could be preaching about this and Lululemon sales could fall 30 % in the next two years and I'll look like an idiot who doesn't understand leading data. And maybe that'll be true, or maybe the brand will be fine and the stock will bounce back. Yeah. Yeah. Those are, those are all great insights. And I liken it to, if you dribble a basketball, when you first start dribbling, everybody has to look down and all you focus on is what's right in front of you. But as you get more experience and you get better at it, you can dribble with your head up. And that's when you become, maybe not Michael jordan but that's when you become a lot better as you can see open players you can see what the other team is doing and you can react to that and so i i like it to investing when you first start out you're so focused on the numbers on the page that you kind of forget to see the forest for the trees you know to your example sean i went to mall of america at christmas which in minnesota is a horrible thing to do but it's packed anyway lululemon had a lion out the door you know no other retail store in the mall had that.

1:08:23So I'm not, again, I'm not a user. I don't invest in a company, but I noticed that and that struck out to me. And so those are things that to your guys' points are things that you can observe in real life that can help, I think, give you data points that you can react to and think about. And it goes beyond just the textbook for sure. Totally. Yeah. All right. So I guess last question for you guys, where can people find more about you and what you have going on online? I think this is our favorite question, Dave. So the name of our show is the Intrinsic Value Podcast, and you can find us on Spotify, find us on YouTube.

1:09:04You can go to theinvestorspodcast.com. That is the podcast network that we're a part of, and you'll find our weekly episodes posted there. You'll also see some of the great episodes posted by our colleagues on the We Study Billionaires podcast. You'll find our weekly newsletter. And yeah, the premise of what we do is every week, Daniel and I alternate, pitching each other on stock ideas. We try to value the businesses, and then we decide whether we're going to add them to the portfolio of companies that we invest in. And yeah, right now, we probably invest in like one in every five companies we look at.

1:09:34So that's us taking our best idea at a moment in time, and then still filtering that down to maybe one in five we'll take. And then obviously setting up those positions differently. So yeah, that's what we do on the show. The idea is that especially for beginner investors, you look around and everybody has a finished product portfolio and it's very overwhelming. It feels like, well, hey, I should have a finished portfolio and I should know how everything needs to be allocated. And it's like, no, no, no. You didn't see the 20 years that went into David Tepper building out his portfolio like this.

1:10:03It took a long time to get from 100 % cash to where it is now. With the point being, our show is meant to be, we started with 100 % cash and we've been trying to allocate that weekly. And basically imagining if we started a portfolio with a million dollars tomorrow and managed it over the next year, how would we actually do it? How would we actually allocate the money? How long would it... Unless we just felt like we had to just dump money into the first opportunity we saw, which I know some people do when they start hedge funds. We were actually going to be really careful about this and invest it like it's our own money, because we are investing our own money.

1:10:37Now, how would we do this completely starting from scratch with a blank slate? So that was the original premise of the podcast. We write newsletters that compliment the podcast we put out every week. In the newsletter, people can track the portfolio that we're building. And then we also have a community of investors that we talk about. It's called the Intrinsic Value Community. And we have about 70 members in the group right now. And there's an application process. There's an interview process. It's meant to be a vetted, trusted place that the best of the best in our audience can come together and support each other on this investing journey.

1:11:05So whether you're interested in the podcast, Intrinsic Value Podcast, the Intrinsic Value Community, or the Intrinsic Value Newsletter, you can find that all at theinvestorspodcast.com. Awesome, awesome. So I really appreciate you guys taking time out of your day to come talk to us and our listeners. I learned a lot. I always do when I talk to you guys. You guys are super smart cookies and I really enjoy talking to you. I like your insights, even the simple ones, Sean. Always remember that Albert Einstein said, take a simple idea and make it as simple as you can and no simpler. So he was a pretty smart guy and I think that worked out pretty well for him.

1:11:40So I think it'll work out well for you too. So I really appreciate you guys coming and we will have all the notes in the show notes. And a little side note, it's one of my favorite podcasts to listen to. I don't just like having the guys on the show. I learn a lot from them, from the show, from their podcast, from their writing. It's very educational. Even if it's companies that I may not invest in, it's still good education. And there's not a lot out there that is consistently as good as what these guys produce. So definitely check it out if you haven't before. So with that, I'll go ahead and sign us off.

1:12:09You guys go out there and invest with a margin of safety. That's this on the safety. Have a great week. And we'll talk to you all next week. We hope you enjoyed this content. Seven Steps to Understanding the Stock Market shows you precisely how to break down the numbers in an engaging and readable way with real life examples. Get access today at stockmarketpdf.com Until next time, have a prosperous day The information contained is for general information and educational purposes only It is not intended for a substitute for legal, commercial, and or financial advice from a licensed professional Review our full disclaimer at einvestingforbeginners.com Stitch Fix.

1:12:56Stop shopping. Get styled. Not today, sweatpants. Somebody's wearing jeans that fit. Wow! No photos, please. I'm just a regular dad who happens to have a stylist. I really look my best when someone else makes the decisions. Hey, we can all see you two-way mirrors. Just share your size, style, and budget, and your stylist sends personalized looks right to your door. Stitch Fix. Get started today at stitchfix.com. I want to hug you. I'm going to hug you. I'm coming in for a hug.