TIP776: Stig Brodersen’s Mental Models & Portfolio Update

25:20And I'll be the first to say, like everyone else, Tesla. That's the one thing everyone wants to talk about and whether or not it was a major threat to Uber. And I wonder if I was too... Well, the jury is still out. I went into my analysis is thinking, Tesla probably isn't too big of a risk. And then I started it more. And now I actually think that Tesla is even less of a risk than what I originally started, which probably sounds completely off because people listening to this would be like, no, no, no, no. That's the big one. That's the one you have to look out for. I guess I just see all the risks.

25:54Who knows? I might just be ignorant. It might be the confirmation bias that I'm susceptible to. But most people look at Uber as a ride-hailing company. And delivery is already half of gross bookings, and they're growing faster than the ride-hailing or mobility, as this segment is also called. And so I wonder if even if mobility, they have competitors that are better positioned than Tesla to compete with Uber. I think that's one thing time would tell if I'm right, but I have to invoke the terrible evolution investment once again and rub my nose in it. As you can tell, I'm far from always being right.

26:27And I also want to say that if you dare to look into my share side account to check, I would be surprised if my betting average were higher than 60%. And even I would say that if you define a winner as something that outperforms the S &P 500, I would say that it's probably lower, perhaps by a significant margin. And I think that's very interesting whenever you go into the track record of the so-called super investors. What you would find is that it's dollar weighted. It should be dollar weighted where if you make a 1 % position, it carries a one-tenth of the full weight of a 10 % position, for example.

27:01And so it's very important whenever you are making your investments that you have high conviction in what you invest more in. I know it sounds very simple, but it's actually, at least to me, it took me years to figure that out, how to size things. And I probably still haven't figured it out just yet. So I think looking at super investors' portfolios, And I kind of feel like I don't really answer your question at all. I think that's so important. And you're seeing like, are they right or are they wrong? And are they right and wrong with the biggest bets? I think that's something to consider. So anyways, let me throw it back over to you, Clay.

27:37Yeah, you're certainly right that betting bigger on your higher conviction bets makes a lot of sense, makes a huge difference because the great opportunities that seem obvious are quite rare. And the other thing that's difficult with betting big on these big mispricings is figuring out how to fund that position right. If you look at the tariff tantrum earlier this year, the stock you're looking at might be falling by 20, 30%, but your other holdings are probably falling as well. On the other hand, not too many people have the confidence to hold a lot of cash to wait for those opportunities either.

28:12And I feel like you've struck, I think, a good balance with this, holding some ETFs in your portfolio. Because if you look at some of the ETFs you hold, it's very likely that they didn't fall near as much as say an Uber would fall during a time like that. When Uber might fall by 30%, maybe a world value ETF would fall by 10%, something like that, just using generic numbers. And when I look at Uber's financials, it's easy to see why one can appreciate their level of operating leverage. This is a business that generated nearly$50 billion in revenue in the trailing 12 months,$16 billion in net income.

28:48And in the meantime, their CapEx line item is only$300 million. So every incremental ride that they generate is directly generating more profits for shareholders. Whereas in years past, each ride would only add to the negative side of the income statement as Uber had to dilute shareholders and do things to figure out how to pay for all these rides. And since it has so little CapEx to keep the business running, this allows them to also repurchase a significant number of shares. When you look at their three major segments, they've seen strong growth, at least in the big two. You have the mobility and delivery, that's the majority of their business, and then they have the freight revenue as well.

29:29And as I've learned more about these tech businesses, I've come to just better appreciate the value of owning the platform. So you look at Amazon, for example, they own the rails by which e-commerce flows. Regardless of different trends, different fads, they benefit from the continued growth of e-commerce. And they don't take the risk that many companies are taking by risking going out of fashion or a competitor just eating their lunch. Now, in the case of Uber, one could say that they own the rails for ride hailing. And in your case, also looking at delivery as well in many countries, which tends to be this winner take all dynamic where the biggest player establishes a network effect that's essentially impossible for other players to dislodge, which helps explain why they have consistently had around 75 % market share here in the US and looks to be significantly more profitable than their main competitor, Lyft.

30:26And if we assume that Uber won't be disrupted by autonomous vehicles? How do you think about just their core drivers of growth going forward? As they've seen just significant growth in recent years, what do you think that looks like going forward? Stig Brodersen Yeah, it's such a great question, Clay. And I just want to say for the record that I do think there will be a disruption of autonomous vehicles, but I think it would take long before it happens. Let's say in the States, that's very much at the frontier, perhaps aside from China. But even in the States, it was still just very, very far from it to be a standard mode of transportation.

31:02And then the other thing is, perhaps I'm sidetracking way too much here, but I do think that whenever these are going to be more of the norm, at least more significant than today's, I think one of the biggest corporate beneficiaries would actually be Uber. But much of the growth, I think you will see from Uber, it's just from higher frequency. And you mentioned Amazon before, thinking about Amazon, we all used it for a very long time. Just think a decade back compared to today. And a decade ago, I can't speak for you, Clay, but I certainly thought of Amazon as a very established player. And then think about how much you use it today.

31:36And so whenever it comes to Uber, I think we're just in the very early stages. And Uber will in the future be even better at matching the delivery of people and goods at your convenience with a much wider selection. So while they're certainly entering new markets, both with mobility and delivery, it's just, I think frequency is going to be the major growth lever. Robert Leonard Yeah. As I mentioned with Uber, we all come to this stock with our own biases. And I'm based in the US and the US is a major part of their business today. You're based in Denmark and interestingly, you actually don't own a car.

32:11So I'm not sure how often you use Uber, whether it's every day, once a week or not. What's the use look like for you? I'm just curious. Trey Lockerbie, Ph.D.: Yeah, I think I probably use once or twice a month, but I don't think I'm the best representative. So I have a bit of motion sickness. So I don't mind like walking for an hour. And I know to a lot of people, it probably sounds absolutely ridiculous, but I love audiobooks, I love podcasts. So if I'm going somewhere and it's like five kilometers away or whatnot, I would just walk and then listen to, I don't know, you or someone else. Trey Lockerbie, Ph.D.: So I don't know.

32:43But it is sort of like, Especially if you live in a city area, it's not too uncommon not to have a car here. It's kind of just the landscape. I think for whenever I'm in the States, I can see many places why it would be, I don't know, outright dangerous because there are no sidewalks or whatnot. Everything just looks a little bit different. And you've visited, Clay. It's a little bit different here. So I don't have a car and I'm perfectly happy with Uber. So that's my mode of transportation, I guess. It is certainly interesting. the city you live in is very walkable. So you could easily go walk and get coffee, go walk and get groceries.

33:18So it's not really a big deal. Where I'm based in Nebraska here, having a car is a non-negotiable. If you don't have a car, you're kind of crazy. But when you look at Uber, investors quickly find that the biggest cities capture a lot of these Uber rides. If I lived in London, for example, owning a car would probably be a big headache. And I could see why in many of these cities, people would use Uber to commute to work or use Uber to Uber Eats to get lunch and whatnot. So there's a lot of nuance in looking at a stock like this as always. And on earnings calls, Uber's management team has also talked about their continued reinvestment and innovation to expand their offering to users, which brings me to mention Uber One.

34:01So Uber One's their paid subscription service that combines the benefits for both rides and deliveries. A standard membership is$9.99 per month or$96 per year. And many of these big tech companies are turning into the subscription model. You look at Amazon, Netflix, YouTube, for example. With Uber One, members get discounts and credits on rides, $0 delivery fees on eligible Uber Eats orders, priority service, and just more exclusive perks. And for those who utilize their ride-hailing service often, it just seems like a no-brainer to pay for this membership. And for Uber, it really allows them to lock in customers who might otherwise explore different apps, such as Lyft, from time to time, and also incentivize them to utilize the offerings that they're paying for.

34:51Similar to how we're all incentivized to order off Amazon or visit Costco because of the monthly or annual fee we're paying. of their 189 million monthly active users, it's estimated around 15 to 20 % of customers are Uber One members. An Uber One member spends around three and a half times more money than non-Uber One members. I think they're doing a pretty good job of converting many of their users to Uber One. I actually booked an Uber just the other day. As I was booking the ride, they offered 6 % cash back with a free trial of Uber One, asking me to join essentially. What do you think of this membership program of Uber One?

35:35No, I love it, Clay. And I also just want to say for the record that, so I'm working from home now. So for that reason, there's so many other reasons I don't take an Uber for work, but I actually used to take a cab for work most days. And it probably sounds extravagant to some, but I think it also really depends on where you live and taxes and a bunch of other stuff. And certainly in some cities, buying a parking spot, it's almost like buying a condo. It's just so ridiculously expensive that it's just unbelievable. So there was actually a time whenever it wasn't Uber for the record, but it might as well have been Uber, where I more or less used a subscription service to bring me back from work.

36:15But anyways, I think Uber One is wonderful. And I would generally say that everything they do to have a somewhat recurring revenue and increased frequency of use, it just makes a lot of sense. I know that's probably not the most detailed feedback I can give. I'll try to be a bit more specific, but sometimes whenever you're looking at a business and you sort of take a step back, there's something very powerful about thinking, does it really make sense? Can you as a user and shareholder say, this makes sense. And so before we hit record, Clay was asking me what was going on. And of course, nothing is going on in my life.

36:53I do have someone from the TIP team that's visiting me here over the weekend. And so I set her up with an Uber account. So it's tied to my account. So whenever she's navigating here in the city, she would do an Uber. Camille from our team, whenever she was doing the event together with you guys in New York City, she was on a similar arrangement where she would just book an Uber and then she would just go with a company account. So I know that having a company's subscription, like Uber didn't invent that. So that's not what I'm saying. What I'm saying is that Uber is doing a really good job, whether it's in the Uber One membership or not, to make it very easy for you to use their service in the way that's most suitable for you.

37:33And it's very easy for me to see how they discriminate on the different service. And I don't mean discriminate like any kind of negative way, but it's so intuitive in terms of, okay, you're going to the airport, you probably should have the reserve function. Does it make sense for you in whatever kind of life situation you have that you now have the team function? Does it more make sense for you to have the share? All of it just makes a lot of sense. And Uber One also makes a lot of sense. It's more than a billion dollar runway and more than 60 % year-on-year growth. And it's kind of interesting that you compared it to Costco's membership.

38:05I think that's a good point. The margins of the memberships are great, but then also to what you said before, some of that would come out of the margins of the core product. let's say the 6 % cash back there. But anyways, they're really, really good at driving that frequency. And it's just a major win both for delivery and for ride hailing. I don't know if I'm just talking up my own biases, but we use delivery all the time. And I don't know if it's just me, but I have all these intentions of I'm going to do more home-cooked meals, and then I always find myself ordering in. It's just very powerful in terms of increasing frequency.

38:39It's a bit like, I don't know if I should even make this comparison, but the gym membership, I used to pay for it, but I never used. But anyways, the membership program Uber One has historically been geared towards delivery, but we see it now lean more into ride hailing or the mobility segment. And I think that's a very powerful combination. Back in 2018, the CEO said that ride hailing was like books for Amazon. And he described Uber's ambition as being the everything transportation store. So this was the analogy to Amazon being the everything store. I'd say that even as a shareholder, I don't think I completely share his enthusiasm, but I think I'm directionally in the same camp.

39:19I do think that Uber can include new vehicles, but comparing it to Amazon Prime is probably a bit of a stretch. I guess he's talking his own book and I don't fault him for that. And then the other thing I would say, because I think I was doing a bit of a knock there on Uber One previously, I think that it also makes sense. You have these partnerships that don't really disclose the results, but they're setting up a lot of partnerships right now. We talk about Delta, Kruger comes to mind, it was not too long ago. And so it's not 30 million members who deliberately chose to pay for that membership.

39:51A lot of that is baked into those partnerships where people are getting it, whether they want it or not. And it's not disclosed whether or not in their numbers that includes those memberships. I strongly expect that they do because they're talking their book. It's one of those things where, okay, we just now start to look more into details like that. What also really intrigued me about Uber and really caught me by surprise is that this is an advertising business too. They have an advertising segment that generates north of a billion dollars in revenue. And if we correlate Uber to Amazon again, Amazon can make little to no money from their retail business, but still be hugely profitable thanks to things like their membership of Amazon Prime or advertising.

40:36And I just can't help but see the similarities here with Uber as well, which really illustrates the power of optionality with a company like Uber, where you do own the platform and you have these other avenues of monetizing that platform. And with their Uber One membership, I wouldn't be surprised if they can continue to spin up new ways to create new business segments in the future. Yeah, that is certainly a part of the thesis. You see that with Spotify too. They just started with music and then they added podcasting and then audiobooks here more recently. So you might expect some kind of globalization, but really you just see more usage and engagement per user.

41:17So that has actually grown in total. I think Uber would do it even better than Spotify. Ride hailing, delivery, the conversation risk is just less, I guess. And also they complement each other really well and really lean into Uber's core service. And just matching on that last mile is just much more complicated than what it looks. But really, to your point, what you want, whether you're Amazon, you're Spotify, Uber, is that you want people to engage on your platform. And then once you use the platform, you can collect data and you can monetize them. And so one example that comes to mind is, this is a brand new business unit.

41:54They make very little money. So let's see what happens. But Uber are seeing themselves as a platform for gig workers. So whenever you're a driver and let's say you're not doing ride hailing or delivery that second, you can do something else like AI labeling or whatever on your phone while you're waiting. So you can always make money. On the consumer side, Uber just has so much data on you that they can use to deliver targeted advertising. And right now, it's a billion-dollar revenue business, but it's growing fast. And so it might seem like it's a small part of the overall business, but again, we're very much in the early innings and way earlier than for mobility and delivery in general, which again, I'm biased, but I also think we're in the early innings of that.

42:36And so just to throw some numbers said, you play. For delivery, they make 1.6%. And then overall, for Uber's business, it's 0.9 % of gross booking. And they want to get to 2 % overall. Let's see if that happens. But keep in mind that advertising typically offers margins of 70 % to 80%. So a dollar is not really a dollar. And just to give you something to compare it to, for mobility, there's a take rate of gross booking of 30 % and 20 % on delivery. Preston Pyshenko Let's talk about what you refer to as the elephant in the room for Uber, its autonomous vehicles. I wanted to present a thought experiment to you that isn't meant to serve as the bull case for Tesla or AVs or the bear case for Uber, but more so an exercise of destination analysis here.

43:24Elon Musk, as you know, has made countless predictions, some much more accurate than others. And regardless of the predictions he's made, what he's done in terms of producing vehicles to me is pretty amazing. So over a 10-year period from 2013 to 2023, their total vehicle deliveries went from 20 ,000 to 1.8 million. So I don't think it's a stretch to say that there's at least a possibility of them rolling out a substantial number of robo-taxis in the future, not necessarily in 2026, perhaps in 2030 or later in Musk's trillion dollar pay package. Part of the incentive structure is producing a million plus robo-taxis.

44:07And if Tesla or any company for that matter were rolling out many of these robo-taxis and providing the mobility service that Uber is providing and doing so at a much lower cost, or it became clear that a player was on their way to doing that. How would you think about your investment in Uber and how it's going to impact their business? Yeah, it's certainly a risk factor. And I hope it didn't come across like I don't think it is. Perhaps in my book, it's a little bit smaller than a lot of investors look, but who knows? I think the first thing I want to do is to challenge the premise a bit. Whenever I look at 2030, and certainly further into the future, I think delivery will be more important than ride-hailing for Uber.

44:50So that's just one thing. Delivery is so much harder to automate than ride-hailing because people are, well, people. They have eyes and they can move around and walk into a building and walk out again. And some of those things are just really hard for robots. Aside from some minor pockets such as your select college campuses, it's just very hard to automate delivery of various goods. And so if you look at, let's say, a shipment on a container ship from Asia to North America, it's very economical to do that per container, per mile. Really picking up food from a restaurant and then opening the door, stepping over the doorstep, getting the attention of the staff of the restaurant, ensuring you have the right food, dropping off at a house two miles away, pretty basic stuff for a human.

45:37It is surprisingly complicated to fully automate. And it's very difficult to do it economically. So you have the dumbest pits of the world who have shown that some of that can be automated. It's just not profitable on a wider scale. It's very, very complicated to do that. And delivery is such a rich topic. And the deeper you go down the rabbit hole, the more you see the power of Uber. For example, they created this wonderful two-sided restaurant marketplace in cities all around the world. And as a restaurant, you can advertise and you can offer users different incentives to buy from you. And the more competition you have in a marketplace, the more the users benefit.

46:15And so the restaurant, and you can essentially replace a restaurant with any goods or service that can be delivered by Uber, they're bid through an auction system, not only through impressions of clicks, but also gifts for users like buy this meal and get another meal for free. And so implicitly, you compare the marginal cost to the marginal revenue. And so if you see how effective that is on scale, and you automate that, and you have a lot of markets all around the world, it is exactly what Google is doing with their advertising business. The process is really the same. Every time that there is something called auctions, you should, as a shareholder, very much pay attention because you capture so much of that consumer surplus.

46:55And so it is very hard to compete in low-margin businesses such as restaurants, which is your borderline commodities. And it's really difficult to make more money than your least disciplined competitors. But if you provide the tools to facilitate the competition, like Uber or like Google, you win either way. But really to your point, Clay, what if someone can do ride hailing and it must lower cost than Uber? I make no illusions. That would definitely break a core part of my thesis and certainly disrupt what I would expect to be the second most important business unit for Uber, because they're hardly in switching cost in choosing the imaginary Tesla network over Uber.

47:36You can basically just download a different app and then have your Tesla or whatnot, robo taxi come to your door. And why would you not do that if it's cheaper than Uber? Whenever I look at the numbers, it's still very expensive to build AVs. And as people continue to compete with AVs, the salaries will be pushed down to stay competitive, clearly not to zero, but globally, there's a lot of room. I mean, capitalism is just that brutal. And Tesla also faces other headwinds. I'll be the first to say that US is friendlier than, let's say, Europe. Don't even get me started in Europe. And US is probably aside from China, where they're most friendly, but there's still a long way before the regulatory framework is in place.

48:14And so I'll be the first to say it's usually not good business to bet against Mosque, and I don't think this is any different. That said, I'm not sure if Tesla is really going to be the lowest cost provider here. I'm not really only talking about the cost of making EVs, but also the need for the best metric technology to keep utilization rate as high as possible, because that is really what's driving down cost. And yes, you also need cheap batteries, and you need cheap materials in general, but utilization rate is really, really key. And so even Waymo, who are partnering some places with Uber, but also competing with them in other cities, they get the best utilization rate with Uber's matching technology.

48:56And so if you look at Uber, and I feel like I'm probably way too bullish and I'm way too biased, please take it for what it is. But they have famous stakes in competitors around the world where they could not compete with the locals. Grab in Southeast Asia comes to mind, Kareem in the Middle East, Didi in China. And perhaps what gets a little less publicity is that they're really recycling these equity stakes and then putting them into various AV providers that work together with Uber. And someone, I don't know who, but definitely someone will emerge as the winner in the AV space. I don't know if that will be Tesla, but even if it's going to be Tesla who's going to win, I think I see a pretty strong case why teaming up with Uber is going to be a win-win.

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53:28Of course, everyone has their eyes on the Magnificent Seven, but there's also this layer below that we can call it. Think the Ubers, the Spotifys, the Shopify's of the world. And I also discussed this topic a little bit with Sean O'Malley on last week's episode. How about you talk to us about how you view this framework. So you have this famous example in value investing circles about whenever gold was found in Southern Mills, California back in 1848. And then you have the massive influx of miners the following year. So you have the names of the 49ers. But anyways, really only a few gold diggers made a fortune.

54:07Most went broke. So the safer bet was really to be the one providing the picks and shovels. And many investors have naturally asked themselves, how can that be replicated in today's AI boom? And many have come to the logical conclusion that they must invest in NVIDIAs and TSMCs and ASMLs of the world, or perhaps the biggest cloud providers such as Amazon, Alphabet, and Microsoft. With that in mind, I've been thinking about, are there other ways we can place our bets? And so to your point before, I think there is a layer below companies such as Uber, Spotify, another example could be Netflix. They have a lot of valuable data.

54:47Now, they don't have the tech stack as the biggest players, but they can buy access to those resources. And then in their own niche, they can dominate it because they have the best data available. And so look at how Spotify collects data on you and how they in turn uses Google and Amazon's cloud to monetize that data on you as a user. And historically, and I'll say also today, you, and they have this vast amount of data of how you use their service. So for example, if you stop a song, they might be figuring out why is it that you did that, but now they don't even have to guess anymore. Now there's actually a feature in Spotify where you can speak directly with them and tell you, hey, I love this song, but I was just making breakfast, whatever.

55:28So whenever you see here the power of AI, it's really about who has the best data and who can use that data the best possible way. Then they can customize the product for you, and it gives it more pricing power. And so you're really doing that on steroids with that layer below, with the new technology that becomes available. So you'd certainly have companies such as Alphabet and Amazon that wins simply by providing the cloud computing, but it's still hard for them to compete with Spotify, Uber, Netflix, who have more need-specific data. And it's even harder for traditional businesses in the new world of abundant data and AI to compete with big tech, and then what I would call the layer below them.

56:09And so it took me a long time to catch up to that. And I had, for the longest time, it's probably because of my background as a value investor, but I've been focusing heavily on those multiples. This is not my way of saying you shouldn't be looking at multiples. I think that's probably the worst piece of advice you can give. But I think we've all been surprised by how long some of those businesses can grow, how much they continue to reinvest in themselves, and how much you need to normalize those margins. And so, for example, I bought Spotify back in 2020, I sold out again in 2021, and then I bought it back in late 2022.

56:47And I would be amiss if I didn't say it was an eight-packer sentence, but then I'll be the first to say that I invested so little, so please don't be impressed. You should probably be disappointed in me that now that I talked about why you need to swing back, I certainly didn't. But anyways, one problem really just follows the next year, because now I have much more conviction in the framework of picking winners in the layer beneath the biggest tech companies. Then at the same time, I'm also starting to doubt whether my conviction is due to what is called resulting. Is that because the stock market is telling me that I'm right, and I'm now coming up with excuses for continuing to investing in a really hot stock market.

57:26So time will tell. But I think it's important to not think too binary about investing, as in either you're right or you're wrong. Today, I see this a bit more as a game of poker. In poker, you play probabilities and you play human psychology. So if you play no limit hold them. And you would love to go all in against your opponent with aces versus kings before the flop. And if you have no idea what I'm talking about, that's completely fine. But that means that you're going to win 82 % of the time. But you can still make the right decision, get all the chips in, and then still lose because you're going to lose 82 % of the time.

58:03And so you need to separate the signal from the noise. And you just can't control which cards the dealer is going to put on the board. And so investing, everything is on the spectrum from zero to 100%. And there are very few things that are either or. It's always somewhere in between. And so you make your investment decision based on probabilities, and then you size them accordingly because you can be wrong, you can be unlucky. And very often, it's hard to tell whether you've been wrong or unlucky, whether it's poker or investing. In poker, I have to call this out. I found it ironic how my friends and I back in the day, if we had a losing session, we always told each other, oh, we've just been unlucky.

58:44And then whenever we had a winning session, it was always because we're fantastic poker players. And I found that framework to be quite useful to have in investing. Well, not the exact one, I should say. I tried to figure out if I've been right on an investment. Have I really been right? Or is this like an 80 % probability that just due to resulting was actually a good decision. And so it's one of those where you have to stay humble if you're right, but also don't beat yourself up if you're wrong. It's all about probabilities at the end of the day, and that's the game we're playing. Technology has certainly enabled these mega winners in the Magnificent Seven to emerge.

59:22And I wouldn't be surprised if this new AI era enables the second layer of big tech to be a fruitful hunting ground. And in light of this discussion, it reminds me of something I've thought about in recent months, and that's the opportunity cost of investing in smaller companies versus these larger companies that are in the US, consumer facing, and everyone sort of knows about. So the case for small caps or small companies can be that there might be more mispricings, they might be less discovered, and there might be more room to grow since they're smaller. And you can oftentimes get pretty attractive valuations.

1:00:00But thanks to many of the people I've met in our mastermind community, I've come around to putting a bit more focus on these larger, more well-known companies like the Alphabets and Ubers of the world. I haven't been smart enough at least to add either of those to my portfolio. Although you've owned many types of companies in the past, I sense that you've gone through maybe a bit similar evolution. I know we didn't talk one-on-one back in the early 2010s, mid 2010s about some of the stocks you owned, but I hear stories about some obscure companies that you've owned. How about you talk about how you figure out what pond you want to fish in when it comes to investing in the market?

1:00:42Yeah, it's a good question. So if we start with the size of the company, I don't think too much about that. I used to. I used to very much be thinking about, if this is the biggest company, do they have scale advantages? If it's a small company, does it mean they have room to grow? I still think that's important consideration. But if you look at my portfolio, the smallest company I have, it has a market cap of less than 2 billion. And then I also have Alphabet, it's more than 3 trillion. So it really comes down to which companies I think I understand and then to the investment thesis. And another thing I've increasingly been considering, and that perhaps tells me towards larger companies, everything else equal, is that I tend to invest in businesses where I just find them interesting, and it's products that I use.

1:01:29And Alphabet and Uber fits well into that bucket. And so whenever I started my value investing career, I would invest in this obscure, offshore, oil and gas equipment company. And I once invested in United Therapeutics because I felt I had this solid thesis about pulmonary arterial hypertension medication. I don't, it turned out. But not only was it just far, top of the show of common sense, but it wasn't a topic I really cared to study. And if it wasn't for my investment, I probably never would study it, which also means that I don't really read up on it. And so that type of forced reading just hasn't worked out well for me.

1:02:10And I found myself studying the future of AVs and cloud computing. To me, that's just interesting. I read about it before I invested in it because I found it to be interesting. And so I do think that that curiosity gives you an advantage because at some point in time, you may be forced to sell or you want to sell. You need to have a lot of knowledge about the moving parts in the industry. And if you, or at least I probably just speak from my own painful experience, if you're entering into an area where you're not naturally curious, you would mainly be reading up about that specific company and not so much about the competitors.

1:02:47So you don't always get the same overview of what's going on. But again, back to a point about the size of companies, I also think it depends on what do we mean by that? So for example, in the last mastermind discussion, I was pitching Remedley. So it's a$2.6 billion market cap company. And so I think that they could become a large player in their mid-end space. And let's say you would take them to a$10 billion market cap. Is that a small or big company? Well, if it's in their mid-end space, it's actually a large company. And then they said, oh, we want to expand these traditional business transfers.

1:03:19And in that case, there might be a 30 billion market cap company, but then they're a small player in a much larger market. And some of you might be saying, well, does it really matter? And isn't like 30 billion better than 10 billion? Shouldn't we just be happy? And then we could take it one step further and say, well, what if they had to significantly lose shareholders to get to that 30 billion market cap? you might get a much better return if they stayed in the remittance space and they're going to get grew to a$10 billion market cap while they're paying out dividends and buying back shares.

1:03:50And so I can't help but think of one of the companies in your portfolio, your constellation software, who are buying near monopolies in niche markets. And those markets might only be worth millions or tens of millions of dollars. But then if you have enough of them and you have a moat around them, all of a sudden you have a market cap worth tens of billions of dollars. Transitioning to another one of your holdings, it's been a winner this year, at least. It's Alphabet. It's up 54 % year to date as of the time of recording. And Warren Buffett's Berkshire Hathaway joined the party by purchasing over$4 billion worth of stock in the most recent quarter.

1:04:25And as you've outlined many times in the past, Alphabet's a core position in your portfolio. And recently, as many know, Michael Burry hasn't been shy to call out the AI bubble and how big techs overstating their earnings by understating depreciation. What's your take on just the AI race, Alphabet's role in the AI race? And how do you think about the never-ending spend on CapEx that a few of these big tech companies are in a race? Their CapEx is just ballooning to unprecedented levels. How do you think about this? Definitely Alphabet looks well-positioned together with Microsoft and Amazon to be the backbone, the AI revolution.

1:05:06There are certainly other players joining the game. I don't see anyone competing with them, the big three right now. Who knows? We know that the mighty fall. If you look at the biggest companies in the world by market cap in 1990, eight of them were Japanese. Today, the biggest Japanese company is Toyota. It's placed 54. Capitalism is brutal. And so fast forward, If we look at the biggest companies in the world in 2007, you find four of the old majors in the top 10. You will find zero today. Then some might say, well, that's because all depletes and then data compounds, and then argue that this time it's different, and the AI titans will remain titans for a very long time.

1:05:51Perhaps that is the case. I think we're very susceptible to recency bias. I had a really hard time imagining ChatGPT or the iPhone before I started using the products, and now I can't imagine life without them. And I don't make any illusions that the big three won't eventually be dethroned. I mean, I've said it before, capitalism is just that brutal. Trey Lockerbie , And so the question is, how long would it take before it happens? How much money will you make in the meantime? And if the mighty fall, can you exit your position before the market realizes it? And it's definitely easier said than done.

1:06:24But recency bias aside, it's not lost on me that it's very hard to compete with someone who provides you with a service that's customized specifically for you at a very low or no cost to you. Alphabet is an expert in that. And I would argue with the rise of AI, it would be even more prevalent. I've been buying Alphabet since 2018, roughly a five-bagger from a starting price and a four-bagger from average price. Tying this to a question about the big to small cap stock question, you still see very high returns on your investment, even with these massive companies. I've certainly been surprised by that.

1:06:58And again, it's not just about market cap growth, even though that has been impressive enough with Alphabet, but it's really also in dividends and share buybacks. To your question about cap expense, in 2015, the guidance they've given has been$91 to$93 billion. And then for next year, they said significantly increase, but they haven't given the exact amount. And so one way is to ask how much of this is maintenance CapEx, how much of that is growth. And my best guess is that there's more growth than maintenance right now. You can, for starters, look at the trailing results and compare it to CapEx.

1:07:35At the same time, if Google wants to protect search and ads, it has to stay at the forefront. Unlike Microsoft, I should also say the brands And NVIDIA, Google is building their entire stack themselves, CPUs, data centers, modelers, and so on and so forth. So I'm inclined to say high rewards and perhaps high risks. Time will tell. I have a friend who buys companies for a living, and he jokes with me, and he says the worst line that he hears from brokers whenever he's looking for new companies to acquire is, look at all this high capex. It's going to give you a moat. And he's always like, oh, this is just painful because high capex basically just means that you're going to have high replacement costs later and not something we like.

1:08:16But I also think there is a nuance here. I'm not going to pretend that a lot of CapEx is awesome. That's not my intention at all. But at the scale that Alphabet and Microsoft and Amazon operates, the spending is so massive that it actually limits who can even show up to compete. Most companies simply can't afford to burn tens of billions a year. And so the mode isn't the CapEx itself. The mode is having a strong, a business strong enough to sustain that type of spend year after year. And so whenever it comes to AI, you can't really half compete. I don't know if I'm going to commit to that word.

1:08:54It's not like if you spend$5 billion instead of$50 billion or instead of$100, like, oh, now you just have a smaller Google. You basically just become irrelevant. So it is an economies of scale game where the winner gets cheaper computing and better models, and then the smaller players just get crushed. But then I also just wanted to preface that in saying, it's of course only a mode if the spending is going to give you a return. And some would say that's still left to be seen. You do make a good point that if Alphabet spends somewhere less than$90 billion on CapEx, it could be quite an expensive mistake.

1:09:31They don't really have the choice of half competing, as you say, in AI. And believe it or not, when you look at Apple, their capex has remained relatively flat over the past five years. So they've deliberately stayed away from this AI arms race. And yeah, it'll be interesting to watch it continue to play out. And I was tuning into some of the other earnings calls for some of these big tech companies, and they almost fear under-investing despite how much they're looking to spend in 2026, which is just amazing to watch. And I've heard you talk about another one of your mental models, which we can refer to as just simply having an unfair advantage.

1:10:09How about you talk more about this mental model and what it means when you're building out your portfolio? Yeah, it's an interesting concept. I was speaking with a friend the other day. Let me just take that one step back here. And he wasn't too happy with his day job. So he asked me which business he could start. And I use the same mental model here of unfair advantages. So together, we found his wife is a veteran, so they could buy a house with no money down. His father-in-law is a contractor, so they could get help and buy materials at cost. Both him and his wife are quite handy, so they can do a lot of the work themselves.

1:10:46And so if you add that, and then you also add they don't have kids, they are quite flexible, they can move around. If you live in your primary residence and you're based in America, you can fix it up and then sell it tax-free after two years. And so they had all of those advantages. And so that is what I would call an unfair advantage. And I kind of feel like, as I'm saying it, this is going to sound terrible because I don't want to make it sound like it's unfair if you're patriotic and you've been serving your country. That's not my intention. But what I mean whenever I say unfair advantage is that it's hard to compete with if you don't have those advantages yourself.

1:11:19Like if you're going toe-to-toe to them, you're just going to lose. Similarly, whenever you build and manage your portfolio, you should really lean into your unfair advantages. So one of the things that I would say that might be unfair, I don't know, but I've met a lot of people, whenever they have money, that money is just burning a hole in their pocket. And I, for whatever reason, don't feel the same way. And so I live on a relatively small part of my income. And so it makes some things a little bit easier in the sense of it allows me to be more long-term focused. I don't have to rely on Mr.

1:11:57Market whenever I sell my stock. Well, indirectly, I probably have to because I want a good valuation, but I'm not forced to sell. And so if you live within your means, you can argue that that is sort of like an unfair advantage, if you like, because you have that advantage that you decide whenever you sell because you're not forced to do it. And so the framework of unfair advantage is sort of like a cousin of Peter Lynch's invest in what you know, but it's certainly not the same. Being born in a stable doesn't make you a horse. And just, let's say you go every day to Starbucks with your laptop and because you know stuff about coffee, you can blind test whatever kind of blend they're using.

1:12:33And it's, yes, awesome. That's great. If you can't read the financial statements of Starbucks and you don't know what it's worth, you probably shouldn't invest in it. And so you still need to find something you really understand really well to lean into those unfair advantages. And then sometimes it's just hiding in plain sight. Sometimes you have to dig a bit for it. We had a guest in the mastermind community, and he was talking about how he didn't invest in luxury goods. And I kind of felt that he had an interesting point about he was just not interested in handbags. I completely understand what he means I'm not interested in handbags.

1:13:08What I am interested in is why is it that someone is willing to pay tens of thousands of dollars for a handbag? And I should just say for the record, I'm not invested in the luxury sector, but I find it deeply fascinating. And I think if you can look behind that and figure out why is it that some people are willing to pay that, it doesn't really matter too much. Is the product a Ferrari? Is the product a handbag? If you understand consumer behavior, and more importantly, understand the changes in consumer behavior, you can still find your unfair advantage. And so identifying your unfair advantages may take a little time, but once you find it, it should be quite evident.

1:13:47It's also helpful if you can validate it with numbers. Bill Miller shared with us that there are three types of advantages. There are the information advantage, which is basically getting important information before others. That's hard today because news out there is instantaneously, and of course, you have insider information, but that's illegal, so you probably shouldn't be doing that. Then there is analytical advantage, understanding public information better than the market. That's quite difficult to do. And then there's a temperamental advantage, basically having a better psychological profile than other investors.

1:14:22And I don't know if you remember this, Clay, but just a few years ago, or perhaps it was just in my echo chamber. This was a framework a lot of value investors were talking about. And almost everyone, including yours truly, kind of like had this idea that, oh, I have a better temperament than other people. And I'm hesitant to believe that is the case, including with myself, I should say, because it's difficult to measure. Like if you say, I have an information advantage, like the other person would be like, tell me about it, show it. Or if you say analytical advantage, okay, tell me how you read that 10K and why you understand it better than me.

1:15:01Most people don't really want to read a 10K. They want a good story. And so like, no, very few people actually want to tell you what they've written at that 10K. And so most people would say, I'm just more patient, or I'm not susceptible to confirmation bias or whatever it is. And it's kind of a convenient thing because it's really difficult to measure. And so I think it's important whenever you're looking at your unfair advantage that you can actually measure it. And that doesn't mean that you cannot have an advantage if it can't be measured. It just means that you should be a lot more suspicious whether or not it truly is an unfair advantage.

1:15:36Then I wanted to talk about something I call comparative advantage, which is not the same, but it's not too remote. For example, where I live and how I'm registered, I pay less comparative tax on gold than I do on stocks. Starting going through all of Buffett's writings, I would have sworn never to invest in gold, of course. But I found gold to be significantly undervalued in 2022. At the time, I built a 6 % position at 1842 per ounce. And again, I know that gold is like a no-no in value investing circles. And I'm wondering if I'm ring the horn too much, or I've just been lucky. But my point of saying this is that at the time, I felt perhaps I should add a bit more gold because in many ways, gold is sort of like an insurance that something hits the fan.

1:16:24Perhaps everything else equal, it would make sense for me to go a little deeper on that just because I have some tax advantages here, a comparative unfair advantage if you want. And so I think that the unfair advantage framework is so powerful in so many walks of life, and not only whenever it comes to traditional investing. You mentioned one of your podcast episodes that you're naturally a good saver. And so that gave you flexibility to join TIP. And this is not going to reflect well on me, which I think it's only telling. But you took more than a 50 % pay cut whenever you joined TIP. That just wouldn't be possible if you lived paycheck to paycheck like so many other people.

1:17:01And so that gives you a flexibility, that gives you an, let's call it an unfair advantage. I guess my point of that framework, and I know I've been all over the place here, is that capitalism is just very, very brutal, and often have to lean into one of your unfair advantages to get ahead. Robert Leonard Yeah. Some advantages are certainly, at least within reach, let's say, saving more money, while other advantages might just be as simple as being at the right place at the right time. Take Google search or Uber's platform, for example. If Uber started from scratch in 2022, we would likely be talking about Lyft or some other company instead today.

1:17:39Jumping to my next question here, we've been running our TIP Mastermind community for over two years now, and it's just been a great avenue for connecting with several high-quality people in our ecosystem. Talk to us about how the Mastermind community has contributed to your development as a person and as an investor. Trey Lockerbie Yeah, it has definitely been an unexpected blessing. And I know I can thank you and Kyle for making that happen. I mean, what you created is just absolutely outstanding. And it's, well, first of all, it's been interesting to reconnect with the guests of the show who sometimes journal calls and generate ideas for our portfolios.

1:18:19But also, it can be quite a jungle to get that feedback online or live for that matter on your portfolio. One of the things that I didn't expect was how the community is giving you believability-weighted feedback. What does that mean? It's like, well, for starters, Clay, I know that you vet all the members, and so that in itself makes a big difference. But also from interacting with the members, you learn who has an expertise in what. And so sometimes you listen to a podcast, whatever, someone can sound very assertive. But then whenever you run in the same circles. You quickly learn whatever one's true convictions are.

1:19:00You might even know the track record, what is in their portfolio. And so I definitely think that's part of it. And then another part of it is beyond pure stock investing. I just take immense joy in being around high quality people. That in itself is actually enough for me, but there've been so many interesting conversations and I know there'll be many more. And I think respect is really the key word for me that we may not all agree on everything, certainly not, but there is an open-mindedness that is just very hard to find anywhere else. And I don't know if this is a good metaphor, so please take it for what it is.

1:19:35But being born and raised Dane, I've been told all my life, this is the best country, we have the best values, the world wants to be Danish. Of course, you then go abroad, no one knows what it is, and they think that it's a cake or whatever. And so I've noticed that people who say that typically also not the people who spent time outside the country to validate their beliefs. And I think in the mastermind community, we have people from all walks of life who are eager to contribute and share their experience. So they don't come from a place of claiming to know the truth, but they strike that balance.

1:20:08Strong beliefs loosely held, as they say. And so I really think that the best part has been meeting people with similar values. At least for me, I find it hard to make new friends. And starting with people who share values is just a really good place to start. And we do have a few live events. We have Omaha, we have New York City, and I'm not always good with lots of crowds like you and Kyla are. So we might have 30 or 50 people at a dinner, but whenever I do travel, I try to meet up with members in a bit more of an intimate setting. Earlier this week, I invited three of our Singapore-based members to launch because I'll be in their negative words before too long.

1:20:45Perhaps one of the most unexpected blessings is, this was very surprising, but I've started a company with someone I'm in now, Community. And I'm a bit hesitant to say this because I don't want anyone to feel like, oh, let me join the community and find a future business partner. I kind of feel like that's definitely not what we want to do with the community. But I think it's about the magic that happens whenever you start spending time with people online or in person. You share values, you know a lot of the same people, and then just magic happens. And it reminds me a bit of whenever I met Preston more than a decade ago, and we connected online first, then we met in person, and then we decided to start a company together.

1:21:27And you really can't plan for these things. Sometimes the stars align and you get lucky, but then there's also something to be said about luck is when opportunity meets preparation. Yeah, that is beautifully said. When you venture into our circles, I think serendipity can just be a beautiful thing. I think back just five years ago, if you told me that I would be talking with you on a call today, talking stocks, talking about our communities, I would have said that you're absolutely crazy, yet here we are. So perhaps nothing would come out of a trip to Omaha or a trip to New York, but you just never know.

1:22:07And investing in even entrepreneurship, as you know, can be quite a lonely journey. Many of our members have been eager to share their portfolios with the group, perhaps do it in a smaller setting that's more private, or even a one-on-one call, or sometimes just with the broader group. And this actually led me to personally question some of my own investing beliefs, such as investing in bigger companies. It's easy to assume that there really isn't money to be made in a company like Alphabet. But this year from low to high, the stock's up 100%. So the community for me has been a great avenue for me to question my existing beliefs and just hear from a wide range of different perspectives and what has worked, what has not worked for other people.

1:22:52And yeah, stock investing is just a lonely journey. So it can just be so easy to get caught in a silo and have a specific way of thinking. Admittedly, the community has just given me exposure to people much smarter than I. So they oftentimes have much more experience than me. So a community like this can just be an excellent way to see what companies other people like, how they go about portfolio management. And it's just been a great resource for me in adding more companies to my watch list, for example. So I think that just this community has just been an excellent tool for me personally to upgrade as an investor.

1:23:30Yeah, I very much resonate with that, Clay, and I think that as value investors, sometimes we tend to be investing in a silo, that problem that you referred to before. And I'll be the first to say, I still spend most of my time in front of a screen or reading filings. And I guess it's a force of habit mixed with just the way that I'm wired. But with the mastermind community, I think that there is a layer on top of that where I can do a reality check. And I also want to say for the record, it's not so much like which stock should I buy? That is on you. But it's a bit more, if this is a sustainable business model, what are my blind spots with this full thesis?

1:24:09And so to your point about upgrading as an investor, if you like, the group has really pushed me into different areas that I wouldn't explore on my own. We talked about luxury before. I still haven't pulled the trigger on that, but I'm still learning to get the community about that sector. It could also be new software, very local businesses. Things are just perhaps a bit off the usual beaten path. So this definitely expanded my watch list. And most importantly, to your point before, it gives you a lot of new mental models. Excellent. Well, before we let the listeners go, I just wanted to let everyone know that we'll be hosting a few live events in Omaha the first weekend of May during the Berkshire Hathaway and Shareholders Weekend.

1:24:49Since we're quickly approaching 2026. Now is the time to start planning your trip to Omaha since flights and hotels get booked rather quickly. We would love to have you join us if you're able to make it. We've included a link in the show notes that shares how you can get your credentials to go to the Berkshire meeting. And during that weekend, there's some more information on some of the events that we'll be hosting for our TIP Mastermind community. We're expecting around 30 or so members of the community to be at our events. And we're also offering a handful of spots to listeners of the show who would like to join us in Omaha.

1:25:20Many people go to Omaha not really knowing anyone. So joining us at our events would give those in the audience who would like to join us in a structured way to just get connected with some wonderful people, help make the most of their time in Omaha, and get plugged into everything that's really happening throughout the weekend. This is actually going to be the seventh meeting I've attended. And it's just been well worth the trip for me every year. And thankfully, I'm much closer to Omaha than you are, Stig. But the energy during the weekend is just simply unmatched and you just can't be getting together with kindred spirits in person.

1:25:57So to join us in Omaha or learn more about the weekend, you can click the link in the show notes or reach out to me directly at clay at theinvestorspodcast.com. So with that, I think we'll close it out there, Stig. Thanks a lot for joining me. Yeah. Thanks for having me, Clay. It was a lot of fun. Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only before making any decision, consult a professional.

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