Late August 2026 Random Ramblings

0:28This episode is brought to you by Indeed. All right. Hello. Welcome to the Yet Another Value podcast. I'm your host, Andrew Walker. And with me today, I'm on for, well, I say my monthly random ramblings for the month of August, but I did one earlier this month. I had a lot on my mind. I said at the time, hey, this will probably be the first of two. So I figured I'd come on for my bonus random ramblings. I'm going to talk about four topics today. First, we're going to talk about, I published a post today on the blog, yetanothervalueblog.com. What a great blog. you should go check it out. I published a post there talking about the equity risk premium and markets today.

1:02So I wanted to elaborate on that a little bit. Then I want to talk about public CEOs using weird capital allocation. Then I want to talk about sticking with the CEO's trend. I want to talk about how would you know if someone was the next great CEO. So we're going to get there in one second. But first, two things. A, disclaimer, remind everyone that nothing on this podcast is investing advice. That's always true, but probably particularly true today. because it is just me rambling around with things that are randomly popping through my mind. So just remember, I'm rambling full disclaimer at the end of the podcast and in the show notes.

1:32And the second thing I wanted to say is this quick shout out to our sponsor. This podcast is sponsored by Trotta. Trotta is two by setters talking to each other. Trotta records it, anonymizes and publishes on the web. I think it is just such a fantastic, fantastic way to get up to speed, follow any new name because it's two by setters who really know what they're talking about because they're following the company. They follow it closely enough that they say, hey, I want to spend an hour of my time talking to someone else who follows it closely. So I think it's just such an awesome product. And if you follow this podcast, I think you're going to like it too.

2:05So go check them out at Trata. That's T-R-A-T-A.com. And with that said, let's get to the rambling. So first thing I want to talk about is the equity risk rating and bonds going up over time, how that implies equities. So very broadly, again, publish a post on this. You should go read the post. But very broadly, my post this morning was talking. Oh, I should mention it is Wednesday, August 26th, as I am recording this. So very broadly, my post this morning was talking about, hey, in the mid 2010s, let's say, treasuries were trading at about 2 % annualized. And, you know, stocks should have been trading at like a 25 times price to earnings.

2:42If the way you generally measure stocks is an equity risk premium. So this is the added kind of risk, the added return you get for investing in equities. And there's lots of math doing that. You have to estimate cash flows, all this sort of stuff. But you can kind of say, hey, if the outlook for equities is to 9 % and outlook for treasuries is to 5%, then the equity risk premium there's 4%, right? Historically, the equity risk premium has been about 4%. A little bit more, but about 4%. treasury bills had traded from, you know, historically about 5 % over the past 60 to 70 years. They traded from 5 % to 2 % in the 2010s.

3:19So just on that, you know, equity should have traded down to, let's say they stuck with a 4 % equity risk premium. They should have traded for a 6 % versus that 2%, right? 2 plus 4 or 6. That would have implied, you know, based on growth rates and stuff. And again, lots of assumptions should have implied stocks should have traded for about a 25 times price earnings, but they did not. Stocks hovered in the mid-teens, which is kind of where they have it historically. The way you explain that is the equity risk premium blew out and went from 4 % to 6%. So I've been thinking about that a lot. Why?

3:49That's the 2 ,000 cents. Well, today, treasury rates, they've been all in the news for especially the past month as treasury rates have screamed higher. The highest they've been in 20 to 30 years. The 10-year is in the the 4.5 % range, if I remember correctly. The third year is even higher. The Treasury Secretary is intervening and buying the long end to kind of suppress rates. And the reason I've been thinking about that is I've been thinking, hey, what if you have a reversal of the 2010s right now? Now, hindsight is 20-20, but from the early 2010s till today, stocks were on an absolute tear.

4:27And part of that is earnings growth has been very strong. Earnings are very important here, obviously, right? But another part is they were starting with a kind of suppressed multiple versus interest rates. So as earnings growth picked up, the multiple also expanded, and you got this beautiful double whammy of strong earnings growth plus a multiple expansion, and stocks do like low teens annualize for 10 to 12 years from the mid-2010s today. And that's very, very good performance, obviously. So I've been thinking about today. Now, The equity risk premium is not that high. It's at about 4.5 % right now.

5:01So it's kind of in line with averages. What's really happening is earnings are super strong. So maybe I should be worried about an earnings wipeout recession, all that sort of stuff. Anyway, all that's in the article. Here's what I wanted to elaborate on. There's two specific things. The first is the equity risk premium. I have been thinking if historically stocks traded for about bonds traded at about a 6 % yield, right? And the equity risk premium was about 4%, then equities would – the implied math, the implied rate is that they would do 10%. Now, when treasury bonds trade down to 2%, if the equity risk premium stays at 4%, and remember, in the 2000s, it went up to 6%, but if the equity risk premium stays at 4%, then equities should do 6 % annualized, right?

5:48And I've been thinking, hey, that seems strange, right? Should the equity risk premium be compressing as treasury rates go down? Because 6 % is three times 2%, whereas 10 % in my example is what, 66 % more than 6 %? So I've been wondering, when interest rates are low, should you actually be getting the equity risk premium compressing and going down so price earnings multiples are expanding? Why is that relevant? Well, if interest rates are rising today, and again, they're not out of line with historical multiples, but if interest rates are going to keep rising, right, could you actually be looking at the reverse where everything I've said is on the historical average risk premium?

6:31Should you see interest rates continue to rise? Should the equity risk premium also rise, which implies if historically it's been 4.5%, we're at 4.5 % right now, should it go back to 6 % as it was in 2010? because if you see interest rates rising and the equity risk rate rising, well, P multipliers are going to fall a heck of a lot. So I've just been thinking about that. I'm not saying that's full, you know, this is more macro than I normally talk about, but I've just been thinking a lot about that because interest rates have been on the mind. The other reason interest rates have been on my mind is go back to the earnings number I talked about, right?

7:04Earnings growth has been unbelievable for companies in general for the past 10 years. You know, some of that is the Trump tax cuts from Trump 1.0, taking the corporate rate down from, I think it was 35 % to about 21%. I mean, that's fantastic for earnings growth, right? And it's not just, I mean, the big thing is the tax comes down, but you also get some added investment effects as things that are on the margin at a 35 % tax rate become very profitable at a 21 % tax rate. So you've had this strong earnings growth for the past 10 years. And for the past three years, you've had really strong earnings growth that's been driven by the AI trade.

7:37And the AI trade, I think, is interesting too, because a lot of it gets started in the kind of last remnants of interest rates being low, right? They're not as low as the 2010s, but a lot of these things are getting started and funded right before the big interest rate spike of the past, let's call it year, starts. And I have mentioned on this podcast a lot, the PowerShells, the data centers. I mean, a lot of these are former Bitcoin miners that flip to data centers, right? And if you follow these companies, the way they generally do leases when they lease out with a hyperscaler or NVIDIA or AMD or whoever, CoreWeave, whoever they're leasing out, the way they're generally structured is a 15-year lease with two options for the tenant at the end of the lease, five-year options.

8:20And the lease, if you do the math on the lease payments that the CoreWeave or hyperscaler, whoever's paying, what it kind of covers is it kind of covers the, you know, if the plant is going to cost$5 billion to build. The NPV of the lease kind of covers the$5 billion plus a little bit of risk capital for the developer fee, right? But so what the company is generally betting on, I mean, they will make a profit on the project even at the end of 15 years if there's nothing left in that data center, right? They will make a profit on it, but it won't be huge. The real thing the company that is developing these are betting on is the terminal value of that data center that they've built, right?

8:58They're betting that in 15 or 25 years, we'll get back to that if all those options are paid. They're betting they can release that. And that release is kind of quote unquote free for them because the build costs on an NPV basis was covered by the hyperscaler. Okay. Hopefully you're bearing with me. I understand I just did a podcast saying, hey, the story is the whole thing. And now I'm diving into numbers and DCF and it's whatever. But the reason I've been thinking about that is interest rates have been going up by, let's just say they went from three to 5 % over the past 18 months. And you can correct me around, maybe four to 5%.

9:28It does two things to the AI build out for these data centers, right? And these data centers are big, big projects. I mean, it's where we can talk about memory and chips and all that, but a lot of the money is going to the data centers and the power. If interest rates go from 4 % to 5%, it does two things. Number one, the lease payments that the company's making have to go up, right? Because a lease payment 15 years from now is worth one thing if interest rates are 4%, but it's worth less if interest rates go 5%. So in order to counteract that, you need to jack your lease up by somewhere between 5 % to 10%, the lease rate numbers to kind of counteract that effect of interest rates.

10:10So that's number one. And then number two, I just mentioned the reason all these companies are building the data centers is they kind of get that terminal value look for free, quote unquote. Now, there is equity cost of capital, or not equity costs of capital, but if you said, hey, I'm going to build you, you build something, it's going to work for 15 years, I'll cover your cost of capital for those 15 years, and at the end, you're left with the asset, and that asset's worth nothing, well, you're not going to do that, right? The person is going to do that. You need to have a view on the terminal value of these assets and that they're going to be worth something, or else you're not going to do it, or you're going to demand more in lease payments, right?

10:47Well, if interest rates go from 4 % to 5%, the terminal value of that asset goes down. Or sorry, the terminal value could be the same. The NPV of that terminal value goes down, right? Again, because it's 15 years out or 25 years out and you're discounting it back to today. And the other interesting thing is, a lot of these data centers, go look at what a Bitcoin miner, I mean, I believe the Bitcoin miners, because some of these Bitcoin miners did hosting deals with Bitcoin players. If you look at what one of these Bitcoin mining projects, and I keep using Bitcoin mining because that's where a lot of these data centers have come from, because Bitcoin miners need a lot of power.

11:21They were kind of the only people who needed tons of power for compute before the AI centers really started ragging up. If you look what they were charging on a dollar per kilowatt hour or whatever you want to comp it to versus what they're charging today to these AI players, I mean, prices are up like 10x, right? So the other reason I think about that is, hey, you're betting on that terminal value, but you're taking a lot of the risk that the AI buildout has blown up in the next 15 years, right? Because you're going to get hit in two ways if you're one of these data center players. If the AI data center, if there's still a race and all these data centers are still really in demand, well, almost all of them are contracting out with options for their tenant, right?

12:03So the tenant's going to be very in the money on that option, and they're going to pick it up. If it goes the reverse and the AI trade blows up, well, you're going to get hit in two ways. First, your AI tenant who gave you this 15-year lease, they might go bankrupt, right? None of these companies were here 15 years ago. So the company might go bankrupt. You might have built this big project thinking you had a great tenant for 15 years and in year six, they're bankrupt, right? So that's number one. But the other way it hits you is when you're releasing in 15 years, because now your tenant is not in the money on the option.

12:34When you're releasing this in 15 years, you know, everybody, whenever I value these or anyone values them, a lot of times they say, okay, well, we have a contract with AMD. It's for 15 years. It's for$100 million in NOI per year. So in 15 years, we inflate it up from 100 to 120, 150, 200, whatever it is, and we'll put a 10X multiple on that and then discount it back to today. That's what they do the term on value on. Well, my worry is if you have the AI bubble burst, and I use bubble in quotes. I don't think it's a bubble, but obviously it gets pretty pretty frothy sometimes. But if the AI bubble burst, well, that lease that went for 100 million to AMD or whatever, if it had to go to a Bitcoin miner or the next best player, I mean, go back to 2023, it would have been going for 10 million per year, right?

13:21So you could get hit doubly where, hey, that releasing risk really hits you. Why does that matter? I'm kind of tying it into the interest rates because if interest rates keep creeping higher and the data centers are a material portion of the AI build where the data centers are going to start crowding out some of this AI investment, right? Could it slow down just because interest rates go up? It's going to start crowding out. And if the AI, if it slows down, all of a sudden the data centers are going to start looking and saying, oh, we've got credit customer risk. Oh, that terminal value risk is looking a lot less attractive than we thought it was.

13:54So, you know, I don't think we're there yet, but if you took interest rates, just theoretically, if you took them to a hundred percent, obviously we'd be there, right? So we're not there yet, but I have been wondering, this is finance 101, right? But as interest rates go up, investment gets crowded out. Investments that you would have made when interest rates were at 2 % don't make sense at 5%. I've been wondering if the interest rate is going up, it starts to have some impact on the AI squeeze. And it's not there yet. I don't think it's going to get there if interest rates tick up another 20 basis points, but at some point it would have an effect.

14:30And I have been thinking about the cyclicality and circularity of this. It's very interesting to think about. Okay. I've been rambling. I've gotten really wonky. Let me go to the two other things I wanted to talk about. I did a post earlier this month, and there's been lots of coverage of this on UWMC. That is the company, United Wholesale Mortgage, yeah united wholesale mortgage their founder buys the he owns the phoenix suns uh the company is a wholesale mortgager they get in this crazy bidding war in q2 they come out and say hey we took this massive bath on a hedging loss and uh we took this massive bath on a hedging loss because of a deal that we they had lost they were not under contract at any point in q2 but they claimed they kept the hedges on took a massive bath they had to do distressed a distress raise like all this crazy stuff, right?

15:23I've been thinking about that because if you listen to short sellers, and I would put Hunter Brook has done a lot of coverage on this, and I think they've done very good coverage. But if you listen to short sellers, UWMC was running their capital allocation to pay out big dividends. And they were doing it not because they thought the dividends were sustainable, but because the CEO owned the Phoenix Suns and he needed the dividend payments to kind of pay for the Phoenix Suns, right? I don't know if that's true or not. Those are the allegations. I think some of it makes sense. But I also think when you've got somebody who takes a massive hedging loss in Q2 on an asset that they're not under contract for, I also think there might be a little bit of a cowboy to them as well, right?

16:01So who knows? But I've been thinking about that. Go back to Cogent. I've done several podcasts on Cogent. Cogent, CCOI, the company was paying a huge dividend even as their leverage was really starting to tick up as they integrated the Sprint deal. And again, you can go find the podcast with Aaron Chan, who I think has done a really nice job covering the company, though it obviously has not worked out well. But they paid a huge dividend long past the point of when paying a huge dividend makes sense. And I think there's an obvious explanation why. The CEO said it on their calls. He owned a huge Washington, D.C.

16:37real estate portfolio, and he was getting margin called over there. So I think he wanted Cogent to continue to pay big dividends so that he could fund tax payments on his cogent stock and his RSUs as they vested, and so that he had cash coming off the cogent stock so he could go and cover his DC portfolio. And I've just been thinking about what happens when public CEOs run a capital allocation that is designed more for their benefit and their personal balance sheet more than public shareholders, right? It is extremely rare. And I mean, look, the obvious answer is bad, right? Anytime someone, this is classic management misalignment, right?

17:17Management is doing something for the company that benefits them versus shareholders. But it is quite rare. And I've just been thinking of better ways. How can you tell? Because Dave Schaefer was, at Cogent, was very clear. I'm having trouble with my Washington DC portfolio. You know, they disclosed the margin loans. He was very clear about it, and it came back, go pull up the Cogen stock chart. Now, there were other issues with Cogen, but go pull up the Cogen stock chart. Doesn't look great. UWMC never said, hey, we're paying dividends to fund the CEO's NDA purchase, but it seems like what they did in hindsight.

17:53But I have just been thinking, how could you evaluate this? Because I just gave you two examples, and these things are blowups, right? It's a disaster. How could you find companies that are being run for the management team's balance sheet or the management team's need versus what makes the most sense for the company? I don't know. Because the other thing is companies do crazy things with capital allocation all the time. But there's two really clear examples. And I can think of a few more loosely. I'm just rambling. I don't want to go from them off the top of my head and claim something that's not true.

18:23But it's a pretty big red flag. And I've been thinking about that. And look, this is one of the reasons activists exist, right? Hey, hey, you're running a capital allocation strategy that's more designed for you than shareholders. Let's go. Let's get involved. Let's change it. It's not lost on me that Cogen and UWMC, there is something to – it was their founder. Dave is the founder of Cogen. Ishbia is the founder of UWMC. There is something to, hey, you have the founders who, whether they control the company or not, are going to carry a lot more influence with it. You have the founders doing something that benefits them personally.

18:58And maybe there's also an element of the founders look at the company and say, this is my company. This is my baby. I can run it the way I want to. But it's something I've been thinking about a little bit recently. And I'm going to keep an eye out for more places where management teams are kind of running the balance sheet for themselves. So another here and there. Speaking of great management teams, the last thing that I've been thinking about, this is based on a loose text conversation. I think my friend who I was texting with this, I think he listens to some of these, but even if he, It was such a loose conversation.

19:29I don't even know if he'd remember I was having it with him or not from this. But let's say – here's the text thread I'll give you for the background. My friend was talking about a company, and he was saying, hey, everyone in this company three years ago, five years ago, thought the CEO was the next Mark Leonard. Mark Leonard is the founder CEO over at Constellation Software, which is one of the best, if not the best performing stock of the past 20 to 30 years, right, the Canadian software company. Anyway, this specific company, three or five years ago, everyone was talking about the CEO like he was the next Mark Leonard.

20:04He was going to build the next Constellation Software. And my friend said, hey, I knew the CEO pretty well. Good guy. Really sharp. Anyone who thinks he's the Mark Leonard is completely crazy. In fact, he would say I would laugh at any time anyone said this is the Mark Leonard, right? And he's not saying the guy wasn't – he's not saying the guy was an F or a dope or anything. He was just saying, hey, this guy is somewhere between a B to an A minus. And, you know, Mark Leonard would be an A plus. So that's kind of where he's going. And I was thinking to myself, like, how would you know if someone was the Mark Leonard, right?

20:38Because the thing with Mark Leonard is he compounds this business over 20 to 30 years. A lot of times, you know, the person who was getting compared to Mark Leonard and a lot of the wannabes, they do start off with a great track record, right? And what it is is they're taking on – hit an enormous risk, right? In much the same way that every time someone puts somebody in a magazine and says, hey, this is the next Buffett based on the first 10 years of their career. I mean the fantastic thing about Buffett is he did it for 50 to 60 years, right? And a lot of times when somebody says, hey, this is the next Buffett based on the first 10 years of their career, well, the next 10 years don't look as good because they were investing.

21:18and they were, you know, a lot of times you can get great results in investing by assuming a risk that you don't even realize you're assuming or intentionally assuming a big risk, right? You can get great returns in one year by levering up and YOLOing something. You'll get great returns, but eventually it'll blow up if you keep levering and levering and levering. You know, I'm looking at you, situational awareness. How would you be able to tell early in someone's career if they're the next Mark Leonard? Again, with Buffett, at least you'd have the investment return track record. But with Leonard, like it's hard, even over 10 years, stock price, like the stock price could have started really low.

21:53It could get really inflated. Like these things are really, uh, these things are really volatile. So I've been thinking, I mean, one of the common things I talk about on this podcast is how do you judge management? How do you form relationships with the management? You know, managements are great salespeople. And as investors, I find most people can get sucked in. And I include myself in this. Most people can get sucked in by a management team, you know, hey, why was this court bad? And the manager says, hey, this was a one-time thing. It's all part of the plan, you know, and you say, oh, okay.

22:19I talked to the management. I looked them in the eyes and the manager teams are always just taking us investors for suckers. And, you know, I find what happens is you believe them until after a year or so you say, oh, these guys are liars. And anybody new comes in, you say those guys, you just can't trust them. So, uh, anyway, I don't know where I'm going with that. This is my random ramblings, but I've just been thinking about how do you separate out the track record for, for someone who's great. Because again, my friend was just talking about someone who's good and everyone else thought they were great.

22:47And my friend just kept thinking they're good, they're good, they're good. And I guess the other thing I would think of is, you know, a lot of the managers that people become enamored with in much the same way that, you know, a lot of the wannabe Buffetts just have one, one strategy or one risk they're just betting against and they just make a lot of money. A lot of the managers that people have become enamored with are actually managers who just found one great theme and wrote it, right? I think one of the interesting things about Brad Jacobs, who is kind of struggling over at QXO right now, the building products roll-up that he's doing, but he did multiple roll-ups in different industries and turned them into great successes.

23:25It's very rare to find somebody who does something multiple times in different industries and has big successes. I've been thinking like even Mark Leonard at Constellation, he bet on vertical software right and that was a great bet and it's done fantastically but that was great bet like how much do you say the mark leonard genius is mark leonard versus hey he had a good industry insight and if he had done you know if he had chosen coal wouldn't have been as great you know there were lots of guys who were brilliant geniuses at oil when oil was going up from 2000 to 2008 or from 2010 to 2013 2014 and then you never hear from them because it turns out, hey, they weren't operational geniuses.

24:06They weren't capital allocation geniuses. What they were was they had one bet on one factor. And once that factor stopped, it ended. Constellation, what would have happened if the AI trade, the SaaS apocalypse, had happened in 2014 instead of 2026? Would Constellation software have been the same? I mean, and now we're talking at the end of August, 2026, a lot of the SaaS companies are bouncing back, have bounced back and everything. I think the huge fears of April, and I had some of these at the time, the huge fears of, hey, everybody's going to hire one software engineer and Vibecode all of their internal software, I think those are moving to the sides, though there is some real terminal value questions there that I've still got a lot of questions on.

24:49For a Mark Leonard, if you have that SaaS-pocalypse fear 10, 15 years ago, does history look a lot different? It's just interesting how the dice roll of the world and the environment you're in can impact everything. So yeah, I think we've covered everything there. Those are the four things I kind of wanted to cover. Again, I'm just rambling. One of the great things about the post I put up about equity risk premiums earlier today, or anytime I ramble on about random things, listeners reach out and they tell me what they think. And sometimes I just say, hey, thanks for that. And sometimes their email is really thoughtful and we'll have days, months, years long conversations on the topic.

25:28So if anything in here struck a chord or you're interested in it, you know, always feel free, reach out, shoot me an email, shoot me a DM, and we can, uh, we can chat a little about it. So that is my second random ramblings for the month of August, 2026. Uh, got some great podcasts coming up. My buddy, your own name, Mark, I believe is coming on on Friday. Uh, one of the most popular guests hasn't been on in a long time. I think people are really going to look forward to that. So we'll, I'll, I'll see you for the, your own podcast in the near future. And we'll go from there. Talk to you soon. A quick disclaimer, nothing on this podcast should be considered investment advice.

26:01Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.