Matt Cochrane - Moats and More

 


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[The Business Brew theme]

Bill: Ladies and gentlemen, welcome to The Business Brew. I'm your host, Bill Brewster. This episode features Matt Cochrane. Matt is a self-taught investor and got his start on Motley Fool message boards, ended up writing for them for a while. Covered payments. He's just an all-around good guy and I enjoy talking to him. So, I figure to invite him on the show, see if he says yes. He said yes. I enjoyed the conversation. I think you'll enjoy the conversation. As always, none of this is financial advice. All of the information contained in this program is for entertainment purposes only. Please consult your financial advisor before making investment decisions and do your own due diligence.

Matt Cochrane joining The Business Brew. Matt, nice to have you. It has been very fun getting to know you over the years and I felt this is a great time to catch up and chat. How's everything going?

Matt: Everything's going great, Bill. Thanks so much for having me. And yes, the feeling is mutual. I consider you a good friend and I always enjoyed chatting with you.

Bill: We were chatting Google before we got on the podcast. I don't know how to look at anything other than to say that's a hell of a business. If people are going to sell it on deceleration or macroeconomic weakness, that's not a game that I know how to play well.

Matt: No, this probably is a good segue into our conversation. But Alphabet is one of those businesses where I don't think you have to play that game well to make money or even probably beat the market, just holding a great company like that.

Bill: When you say that, obviously, the entry price matters. I think that if the last 20 months have taught anybody anything, hopefully its evaluation does matter eventually. I do wonder how much we're taking that lesson. I don't know there's a lot of dunking on things right now on social media and I'm not sure how much of its warranted and I'm not sure how much of it is. I think there's probably a little bit of truth and a little bit of shot and fraud. But how do you generally invest and where was your philosophy started for lack of a better term? Where did you learn and where did you develop your philosophy?

Matt: Well, I think you mostly know the answer to this.

Bill: I do, but my listeners may not.

Matt: [chuckles] That's fine. There're probably two primary origins to my investing philosophy, which if you really wanted to boil it down to two principles, I think you'd say buy stocks with wide economic moats and hold for the long term, like #neversell and all that. I'm mostly on #neversell's team. But the genesis for my investment philosophy came from, one, it was Peter Lynch's books like Beating the Street and One Up on Wall Street, just amazing books, and The Motley Fool. Basically, those two books and then learning at The Motley Fool, a lot of that was just on their discussion board, which back in the day were incredibly robust and incredibly helpful. Think of all the good stuff on FinTwit with 80% less negative stuff that was probably like how you could have the Motley Fool discussion boards.

Back in the day, they were just great. There were some wonderfully patient investors on those boards. I was a new investor in starting to ask annoying tedious questions and they would just always help me out. I remember talking about free cashflow and asking this guy, "Well, how do you figure out that?" "Well, operating cashflow minus CapEx." I'm like, "Well, what does that mean? When you look at this 10-Q how do you get that from there?" And just almost walk me line by line through a 10-Q for stuff like that in those boards, I feel like a lot where I grew up.

Bill: Yeah, I guess that would be a little bit nicer place, because they've got moderators and I'm sure that it's a little bit more of probably a polite community and I think also and I don't know what I'm talking about here, but I suspect that it's a little bit more of a common ground where people are approaching problems from whereas FinTwit, you bump into a whole bunch of different people thinking a whole bunch of different ways and sometimes, people get talking past each other. I wonder if there's a more common discussion going on in a more like-minded community.

Matt: Yeah, I would say it's more common and more like-minded. Not perfectly homogenous community, but by and large it was definitely politer than Twitter can be. You can't have thin skin on Twitter, right?

Bill: No. Yeah.

Matt: If you're going to engage on Twitter, a lot of it is just going to be like, well, you just need to have a thick skin and not get distracted by all the noise because it's almost drinking from a firehose. So, sometimes, the volume of posts on Twitter, well, for entertainment purposes it can be great. Maybe for learning, sometimes a lot of noise gets in the way of the signal.

Bill: Yeah, I think that's fair. I'm really grateful that I found FinTwit and it's funny. When I went there, I had just left the job and I was thinking like, "Well, should I ever need another job? I don't want to tell people while I was in a hole somewhere like doing work." It's arguable whether or not some of the things I put out helps me professionally or not, but I think on average it's probably a good thing.

Matt: [laughs]

Bill: It's led me to this podcast and stuff and that's been really fun. But it has opened my mind to a way of thinking that I otherwise would not have had-- Ironically, I wonder if some of the stuff that I trafficked in in the beginning would have outperformed, but I also think that's a function of where we're at right now. I liked commodity companies back then and I think I would have gotten really lucky rather than being good in that particular area.

Matt: Sure. Yeah. I hate to say something like this because it sounds so generic, but I feel we're in a very interesting place in the cycle. Like COVID was such a disrupter. It is such a crazy event. I still don't think we've worked through that craziness, especially the sales comps, the inventory shortages, the supply chain crunches, the growth that was pulled forward, et cetera, all that stuff. I feel there's high tides and low tides to investing. There're lots of ways, let's say-- Like I said, my philosophy comes down to buying stocks with economic moats and holding for the long term. In no way, do I think that's the only way to make money in the market. That's what I think is best for me and I think that's best for probably a lot of retail investors, who can't live and breathe this stuff every day like professionals in like, "Hey, it's easy to tell them, hey, buy Alphabet. Hold that stock for a long, long time and just maybe even try to dollar cost averaging to it every year." You're talking to a retail investor, "Hey buy $1,000 of that stock every single year and you're going to probably be okay in the next 5 to 10 years. You're probably going to do very well." So, I like that philosophy for myself and for retail investors, but it's not the only way to make money.

Bill: Yeah. No, I think that's fair. I think that the thing that dollar cost averaging does for people is you mitigate the risk that you're overpaying in the very beginning. If that's the strategy, you got to make sure that you're not taking outsize position sizing in the beginning, because you've got to be able to have the dollar cost average work its way through your waiting. If you come out of the gate too big, then you really got to buy a lot more in order to buy down if you overpay.

Matt: That was a mistake I think I made early on.

Bill: I think it's a common mistake.

Matt: Yeah. Well, you make almost arbitrary rules for yourself like, okay, your position is and when you are starting off small sums. So, it's like $1,000, or $2,000, or whatever it is. You put all your money into it. When I first start investing, I remember this vividly. My wife and I, we had $6,000 that we put into stock. When that goes down, even if it's a great company, which when I started, they were not great company.

[laughter]

Matt: But even if you like, "Okay, Alphabet." You take some savings $5,000, $10,000, whatever that amount is and you put it into a company like Alphabet, and you bought it six months ago, a year ago, and right now you're like, "Ah, crap. What did I do? I'd already bought-- Alphabet was this one stock I'd bought last year and I need to buy something else now. I want to diversify. So, I think taking smaller bites and just averaging into positions is a way to like one, psychologically hack yourself to keep from getting too down into these periods we're experiencing now the market. It helps you with volatility because instead of buying $10,000 of Alphabet last year, I bought $2,000 of five stocks. I'm making up numbers.

Bill: Yeah.

Matt: Okay, now I want to put another $2,000 into Alphabet. There's part of me that can get excited that I'm getting it at a cheaper price. And so, it helps yourself like stick with that long-term holding by doing that. And also, helps yourself like if you got the valuation wrong, if you've got the intrinsic value wrong, it helps yourself to alleviate some of those mistakes. Now, at the same time, look, granted. If you got it at a great price last year, well, I don't know if anybody got anything at a great price last year.

Bill: Yeah, 2021 wasn't the time to buy anything [crosstalk] sale.

Matt: Right.

Bill: Now maybe.

Matt: Right. You got at the bottom of COVID and then the next year, you're buying another $2,000 like, "I should have bought more." And that's of course, like of course.

Bill: Yeah.

Matt: By averaging into stocks, I think for this kind of philosophy and for retail investors, I think it can help one, just psychologically hack yourself and to not get too down when your stock is down because, "Hey, I want to buy more next year." So, if it's still down next year, great. Now I can buy more of it, I can average down into a great company. Perfect. If it's not still down next year, like it dips and then came up before I could buy more, well, then it really wasn't that big of a deal. So, the stock was down for six months, but then it rebounded. That's okay. Who cares about that six-month blip? Maybe it didn't exploit it perfectly. That's okay. We're not going to explain it perfectly. We're not going to buy the bottoms and trim out the tops perfectly. Never. So, that's definitely something I do and I encourage other people to do.

Bill: Well, I think you and I have pretty similar backgrounds in that we were trying to teach ourselves how to invest. The thing that I've come to appreciate is there's this philosophy of buying companies that are going to outperform expectations and selling those that are going to miss and trading acceleration and deceleration, and second order derivatives of growth rates, and all this stuff. I get all of it, but at the end of the day what resonates the most with me is-- Look if Google missed because their growth rate came in a little bit too low, their margins compressed a little bit because they were overearning and people are questioning their hiring decisions, I would much rather them run their business for the long term and buy into that weakness, which I'm not doing. But I'm just saying philosophically, I'd rather buy into that weakness and avoid when everybody's cheerleading it, everybody's saying it's great, and all that. I tend not to like that. But I tend to, I don't know, let's put it this way. If I was at Google and this may not be the nicest thing to say, but I would run it the exact same way. And maybe I don't know what I'm doing, but I [Matt laughs] would not worry at all about my hiring decisions and whether or not I'm going to make a quarterly number. If anybody wanted to sell my stock because of it, I'd be like, "Guys, look at the business we are creating, if you don't want to part of this, fine."

Matt: The fact that we're talking about Alphabet makes this an easier discussion, because I do feel it's one, first off, full disclosure, it's one of my largest positions.

Bill: I own it too.

Matt: Yeah. I've owned it for several years. I think it has a wonderful moat with it. It has this data network effect like Google search engine improves because users conduct more searches on it and websites optimize themselves to figure prominently in those search results. Then Google personalizes those search results making it more likely those users are going to use Google the next time they conduct an online search. The gap between them and their competitors just grows every day.

Bill: Well, let me ask you this though. How do you feel about their dependency and/or symbiotic relationship with Apple and what kind of risks that poses to the business?

Matt: So, that's probably the biggest risk. If you're not familiar with that like Alphabet pays Apple, a lot of money every year to be the default search engine on iPhones. So, I believe that if you took that relationship away, immediately the next few years for Alphabet would look better because they're not paying out Apple all that money. However, over the long term that creates an opportunity for competitor, whether that's Apple or Microsoft all of a sudden made a home run offer to let Bing be the default search, or Apple bought DuckDuckGo, or one of these other search engines to become the default, that obviously provides a huge opportunity for another competitor to come in and compete with Alphabet in their dominance in search.

What I would say is, Alphabet's dominance allows it, gives it the luxury to paying that huge tax or fee to Apple. Now, yes, could a company like Microsoft make the same kind of offer? Absolutely. They have deep pockets. I think Microsoft is doing a lot of things. I think they have a lot of money over there. And of course, Apple could run a search engine as a loss leader for a long, long time. They're doing pretty good themselves. But one, I don't think either one, Apple or Alphabet wants to test that out because if Apple made their own search engine and put a lot of money into it and stop taking money from Alphabet, there's a good chance a lot of people, especially in the beginning it gets that reputation for just not being as good as Google. I've tried to use Bing before. It's just not as good as Google. Two-thirds of it is as good. But when you try to get a real niche search for something like Google is just better. I don't think Apple wants to test that either because Apple is making a lot of money from just taking that check from Alphabet every year. Alphabet doesn't want to test out either. So, I think it's this mutually beneficial position where neither really wants to test who would become the winner in that scenario.

Bill: It's funny because you normally think about like a shark and a smaller fish. The smaller fish is symbiotic with the shark but this is like two sharks and they like each other.

Matt: Yeah.

Bill: I do hope if any listener listens to this and they disagree with what they're saying, please reach out to either me or Matt. I'm going to put Matt's Twitter handle in the show notes because I think both Matt and I are looking more to learn than to tell. I've been thinking about Facebook's recent results.

Matt: Oh, this is more in depth in conversation.

Bill: Well, hang on, because I think it goes to Google. So, the amount of money that Facebook appears in my understanding to have to pay to solve the problem of no longer being able to access Apple's data, we're talking about $30 billion of incremental AI spend, I believe was what they said. Google paid Apple what $15 billion, I think in 2021 somewhere around there, and maybe $17 billion and maybe $12 billion, whatever.

Matt: In a ballpark. Yeah.

Bill: So, I think Apple's free cashflow is $90 billion or so, which is eye popping. It's Incredible.

Matt: It's pretty good. It's pretty good.

Bill: Yeah.

Matt: It's pretty good.

Bill: Yeah. If you take that $15 billion out and you've got a shareholder base that cares a lot about free cashflow yields and you have customers that are very happy, I just don't know that it makes sense to try to upset the Apple Cart, huh, good pun, [Matt laughs] when it's a working relationship for all parties.

Matt: It does seem it works for everyone. Yeah.

Bill: I think Facebook may be a very instruct-- Look, Apple may come back to Google and say, "We need $20 billion next year. Look at what we did to Facebook." That's very possible. But I think right now and hopefully these people know how to interact with each other in a mutually beneficial way. I think it somewhat mitigates the risk how well the relationship works.

Matt: It seems like it's a win-win right now for both those parties, even if it's an uneasy relationship, a frenemy kind of relationship in that aspect.

Bill: Well, I think there are very few businesses that are frenemy types. There's natural conflict I think in many business relationships, but that doesn't mean that they can't continue.

Matt: Yeah, I think that's right.

Bill: You want to talk Facebook, Meta?

Matt: [laughs] Oh, man, well, this is a more interesting conversation. When Zuck started really investing in the Metaverse, and changed the company's name, and the ticker, and all that stuff. My line has always been like if the Family of Apps doesn't lose any users or engagement, everything else will be worked out or can be worked out. It's okay. All that stuff can be worked out as long as the family of apps stay strong and I'm like, "I'm wondering if I'm [crosstalk] now." Full disclosure-- [crosstalk]

Bill: And he gave guidance that's very scary.

Matt: Full disclosure, I also own Facebook. I've owned it for a long time, probably seven or eight years now. Bill, we've done work together on this in the past. We talked to our friends on the online advertising world, Kevin Ekmark and Milo McMahon. Check out their Twitter accounts.

Bill: Indeed. Shoutout to them.

Matt: The pace at which Zuck is burning through his cashflow is that unprecedented? I'm trying not to just use that word lightly, but I-- [crosstalk]

Bill: When you see total expenditures exceeding or projected to be $100 billion and let's say they're overstating it. So, it's $90 billion. That is a yearly spend that is unfathomable to me. That used to be a lot of money and I think it still is.

Matt: Yeah. Might be a lot of money [laughs].

Bill: [crosstalk] inflation.

Matt: $90 billion here, $90 billion there?

Bill: It starts to add up.

Matt: The P in the P/E ratio keeps getting better, but that E in that P/E ratio, not looking so hot.

Bill: Yeah. And also, the E understates the cashflow because you're outspending your depreciation amortization by quite a bit.

Matt: I haven't really had a chance to dive super deep into the quarter yet. I don't know when they plan to release this, but it was just this week when they reported earnings.

Bill: Yeah, it'll probably be next week.

Matt: But I will say like to me, Alphabet is a much clearer picture. To me, I can hold Alphabet with confidence and say, any volatility we see right now for what we're talking about their hiring practices or anything else, I'm pretty confident in saying like, "Hey, I'm not going to hold through this and I'm not too worried about this long term." Meta is a much murkier picture. There's something to be said that Zuck has led through some pretty big pivots in Facebook history and done very well there when he bought Instagram, now that seems chump change for a billion dollars. But for years, people were talking about how we overpaid for it still.

Bill: Yeah, I was one of those people. I was pretty wrong in retrospect.

Matt: Right. All that being said-- [crosstalk]

Bill: This a big pivot though. You're talking about hardware. You're talking about a new computing system.

Matt: It's a big pivot. $1 billion is just not $90 billion a year.

Bill: Yeah, how I think about this is I'm 85% sure that if you're just looking at the Metaverse spend and you say, "Well, I can add that back," that's the wrong way to look at it. I think 75% sure that it's an NPV negative spend. So, it has and will detract from the enterprise value. I don't know how long it will go on. I think it's risky when you're a minority shareholder and you're investing with somebody that is that wealthy. The incentives are not necessarily the same. Even though, he owns a lot of the company, I'm sure he's got a lot more than he needs in a couple lifetimes liquid. So, he's got control, you've got to sign up to be with them. Open letters or not, I don't think it really matters. I don't think that those things are going--

If I were him and somebody wrote me an open letter or was communicating with me and I disagreed, I'd just be like, "Okay, what have you done in your life?" That's maybe not somebody you want to invest with, by the way. But that would be my default position I think if I were him, because guys on top of the world, how can anybody tell him what to do. I think that's the risk. But to your point, I thought Family of Apps did a lot better than I thought maybe they would do and I thought there were some interesting disclosures on how big clicked-- I going to mess up what it's called, but Click to Messaging or whatever is.

Matt: Yeah, the Click to Messaging. Right.

Bill: Yeah. There were some interesting disclosures. I think a little bit about how he's thinking about WhatsApp and whatnot. So, we'll see but it's definitely a capital allocation discount.

Matt: [laughs] Yeah.

Bill: Or appropriately priced capital allocation. We'll all find out together.

Matt: My timeline's a little blurry here, but either earlier this year or last year, articles were out saying like, Zuckerberg in his mind was tying his legacy to his Metaverse vision.

Bill: Yeah.

Matt: I thought that was scary. And then, we heard about hiring freezes and some other things they said in the conference calls earlier this year and I'm like, "Okay, Zuckerberg is maintaining some hold on fiscal sanity here." I don't want this to be a religious vision for him.

Bill: Yeah, I think it is.

Matt: I want this to be business vision for him-

Bill: I think it's closer to religion.

Matt: -and fear. That's my big concern. This is almost like if he thinks his legacy is tied to this success, if he thinks this is something the world needs or for whatever reason that he needs to be remembered for creating this. I want to say there was an article saying, "To him this was his iPhone moment," for Steve Jobs. That's not good. [laughs] That's not what I want to hear.

Bill: No, it definitely isn't. I think the most important question, well, I think the most important issue on this particular topic is if it is his religion and it doesn't go well for two to three years, I think the market is certainly bearish on its prospects. I definitely question the probability of success. I wonder whether or not he can say, "You know what, I gave it my best shot and I lost and that sucks, but at least I'm not living with any regret and I'm going to shut down a lot of this and some of the tech that we built, we can license out or make some money on and we'll move on." But I think to expect him to do that within three years is a very unrealistic expectation. And three years is a long time to live through getting pelted with a negative stock reaction and negative surprises on CapEx. It's easier to said in a spreadsheet or theoretically than lived.

Matt: And with how much money they're spending on it to that threshold, that hurdle of what you can define success as is really high.

Bill: Yeah.

Matt: If you had said two or three years ago before they changed the name of the company and before this huge pivot like, "Hey, we're going to put a lot of money in Oculus, a lot. This could be the Xbox of the future. This could be like, "Hey, we think this has potential and there might be some other interesting use cases here."' That's something like, "Okay, that's cool. Try to be the Xbox of 2025 on or whatever." And then maybe there's optionality there for other use cases. But pouring this much money into it, your definition of success has to be so high. That's a very, very high hurdle to reach. Xbox, that's a nice business line from Microsoft. That's great. But it's not their core business by any means. For a long time, I just thought that's what this Oculus stuff was all about something like that and instead now it's becoming almost your entire digital experience or he wants this to be everybody's consumer digital experience. That's a really high hurdle.

Bill: Yeah. I think if I were him, I don't agree with what he's doing, but I think I can understand it. It's completely uneconomic though because if you think about how would you fund? If this was a venture capital company trying to raise capital to go do what he's doing, you're not raising debt. So, it's all equity funding. Given where rates are and your opportunity cost to capital, I have to think the hurdle rate if you were raising outside capital would be 20%. There's just no way it's going to hit that hurdle rate. I don't think. Maybe I'll turn out to be wrong, but oof, it's going to take a long time to get there.

Matt: It's going to take a long time. A long time and a lot of money to get there every single year. If you could see this more as like, we have to spend a lot of money this year and next year, but then it's going to rapidly decrease or these are onetime expenses, but they don't seem to be and that's a scary thing as a shareholder. So, we're talking about long-term buy and hold, #neversell, where I believe. This is where it gets hard, because now I'm looking at this company. You want to go back to the bigger picture, just investment philosophy.

Bill: Yeah.

Matt: What I used to do when I first started and I don't know why, but probably speaks my intelligence level. But I was looking at a long-term chart. Think of any great stocks, Johnson & Johnson, Coca-Cola, IBM, McDonald's, Walmart, just take your pick, I'm talking about those 50-year charts and you could find a time on any of those charts, where like, man, I'm making up numbers, if you bought Johnson & Johnson in 1972 at the peak, you didn't see any returns for six years or five years.

Bill: Yeah.

Matt: Any stock, a five, six-year period where if you bought at the peak right there for five or six years, it's easy to look on a 50-year chart and you'd be like, "Oh, that's nothing. That's a blip."

Bill: Yeah.

Matt: Of course, Johnson & Johnson is a great company, of course Coca-Cola is a great company and you shouldn't have sold it then. But if you bought it at that time, you're living through five years of like, "Why did I buy this stinker?" Johnson & Johnson, I bought at the peak and whatever happened to it at whatever time, something happened, maybe it was overvalued, maybe it's had a bad business, maybe it's the Tylenol recall in the early 1980s, whatever it was, it was seeing that downturn. But that being said, Johnson & Johnson, there's probably five where Polaroid or Kodak or eventually, maybe IBM is there now, where they started this long decline and never recovered. That's what If you're a never sell, you have to be careful of.

Bill: Yeah.

Matt: You have to balance out. Every great company will see downturns. Every great company will see volatility. If it's a truly great company, if you hold do that it's going to be great. If you average down, it'll be great, but even better. But is this the Kodak moment for Facebook?

Bill: Yeah. Or, when Buffett bought Coke? Coke didn't have great capital allocation and they were messing around in other tangential areas. But that's so much easier to say in retrospect like, "Oh, yeah, you should have bought it now. Okay, well, maybe," right?

Matt: Right.

Bill: But maybe not.

Matt: [laughs] Right.

Bill: So, I don't know. I own a very small amount. It's a lot smaller now. I've been reticent. Since we did our work, I have not added and I'm happy that that's the case, but we'll see how it goes out.

Matt: Yeah, I don't know the last time I added, but I have added over the years a lot to Facebook. This is where that dollar cost averaging gets you in trouble. My original buy is still below where it is now. Over the years, when I've averaged into it, I'm down overall on my position because of averaging it.

Bill: You're not alone, man. That stock has erased a lot of years of gains.

Matt: A lot of years.

Bill: But I do think and then I want to move on a little bit, but I do think that the narrative, I don't think truth is being told and what people are saying about that company right now. I think reality is, he's got the core business somewhat stabilized whether or not people want to believe that or not. I think that the data supports that statement. It's a question of whether or not how much you'll blow and how much you want to capitalize those losses that I think really matters and those are very hard questions to answer, especially when somebody has complete control.

Matt: Yeah, they are hard questions. Yeah. Is this a religious experience or is this a business venture that he'll eventually realize is not successful?

Bill: Yeah. Okay. I'm thinking of, you're very knowledgeable in payments and one of the things that I was curious about is, there's this juxtaposition of-- Well, I don't know that juxtaposition is the right word, but how do I say this company properly? Is it Adyen? Adyen?

Matt: Adyen, yeah.

Bill: Do you mind explaining what is so unique about that company and also that company to me has traded at this valuation that makes my stomach churn for a while. The business results are excellent from what I can gather, but I obviously don't understand it very well. But how do you think about do I want to participate in something like that? It's trading at a very high valuation, but the business prospects appear quite good from everything I read.

Matt: Before talking about Adyen specifically, so this is a company that-- When there's a company like this, a lot of times and this is what I did in Adyen's case. It's a good example. A very small position, I mean, minuscule. Probably now, it fluctuates obviously. When it was going up for a long time, it probably rose above 1% of my portfolio and I was probably down below 1% of my portfolio, but I have a very small position in Adyen. What I like to do in cases like that is to buy a small piece and just to--

For whatever reason that psychologically just motivates me to keep tabs on it better than to say like, "It's all my watch list. Then it gets lost in the shuffle. It's up 50 times or down 50 times and I missed it or whatever." When there's a company like that that I think is overvalued, but man I really liked that company, a lot of times, I will buy a small position and just watch it. Buying that small position really helps me watch it.

About Adyen, so payments are all about scale and volume. You can become very profitable as a payments company where you're processing payments. The more you process, the more profitable you can become because you're taking very small slices of each transaction. So, if you have a thousand transactions coming to you for $1, you're taking a small slice. But if you can make that a million transactions going through you and you're taking that small slice, basically for the same infrastructure, all of a sudden-- [crosstalk]

Bill: Yeah, you have a lot of fixed costs leverage.

Matt: Right. So, payments can be very profitable and that's why MasterCard and Visa, tremendous business. Those are the networks. That's different. What happened for a long time is you had a lot of consolidation in the industry, because these companies figured out. When you look at Pfizer or Global Payments, I'm trying to think of all the legacy companies in this space. But they just started consolidating because they were basically buying volume and becoming very profitable. So, I'm going to explain this in my very layman terms without being technical.

Bill: Yeah, please do. Yeah, pretend I'm five because that's where my brain is and let's talk.

Matt: Well, it's good. We're on the same wavelength, so it's perfect. Basically, you're cobbling together all these systems and that might not be the most optimal solution behind the scenes. Your data is going to be very clunky and dispersed. It's very hard if you're a big multinational corporation to get a hold of all your payments data in one place to really see how the big picture looks at one time. Payments companies don't have that data, so they can't help you out so much because they're all these legacy systems where they cobble together and use duct tape to-- It's very profitable. Using these acquisitions is not ideal to build a global payment system infrastructure.

Adyen basically, these guys they were at Worldpay, I believe which was acquired by bank and then acquired by Global Payments. I might be getting that mixed up. There're so many acquisitions in this industry it's hard to keep track of. But they were at a good company, it got acquired, and they said, "You know what, we can do this better." They built it basically from the ground up and they've never made an acquisition. It's one system, it's modern infrastructure, the technical infrastructure behind it is very modern. If you go to Adyen, if you're a big corporation like McDonald's or Nike, I don't know off the top of my head who their customers are, but all of a sudden now you have a better look at your payments data than you ever have before. Adyen has this data and they can sell solutions using this data to these companies too. So, it's a very slick user experience, it's a comprehensive look at a company's data and so it's just better.

There're very few modern payments structures set up like that. PayPal with Braintree is probably one, Stripe is probably one. Stripe is a little different. Stripe is more for online payments and it's a slick way to make online payments. It might not be as comprehensive as Adyen is. How I understand, Adyen is better-- if you're a Nike or you're McDonald's and you have sales everywhere, Adyen is better for someone like that. If I'm making a website and I need people to subscribe and charge money to them, Stripe is a great solution for me to just plug in and have it to go. But there's very few modern payment infrastructures out there. So, Adyen just has this-- because they built it the hard way and built it from the ground up and again acquisitions are so profitable in this industry because you just find volume and more transactions. But because Adyen [unintelligible [00:40:34] did that. They now have this amazing modern infrastructure.

Bill: Hmm.

Matt: Does that make sense?

Bill: Yeah, it does make sense. If you are thinking about where this business is in 10 years, is this one of those type of businesses that? This is how I think about Netflix, people don't understand. I'm not talking about the stock. Forget about the stock. I'm talking about the business. I think it's almost inevitable that Netflix will be a lot larger in the future. I think a lot of the reason is that there's a lot of legacy incentives and structures that will prevent-- It's an innovators dilemma issue. Do you view Adyen as one of these companies that's just almost endowed with the right to gain share over time because the incumbents cannot react based on how they are set up in the incentive structure?

Matt: Yes. I think Adyen will be a winner. It's come down a lot. So, that's helped you with your-- [crosstalk]

Bill: Yeah. Well, I'm not talking about stocks. Forget about stocks.

Matt: Okay.

Bill: The business.

Matt: Yeah, I think Adyen is in a very good position to eventually win business. Okay, so now that being said, if you're on one of these legacy infrastructures, you've made it work for a long time. Something that these legacy companies can do because they have so much volume is charged a very small amount. And now, look Adyen is gaining scale. The more you gain scale, the more you can lower prices. But if you're at Walmart and you're looking at sheer volume, you're making this work. Could you look at Adyen and say, "Okay, this is a better system, but do we have to pay them more? Do we have to--? We're making what we have work." In this industry, what is the moat for these companies? It's switching cost, right?

Bill: Yeah.

Matt: The high switching costs. If I have a business and I have a regional supermarket chain or something like that and I'm on one of these legacy systems and it's working, do I want to go through the headache of switching and training all my employees to use the new cashiers, or the new payments, or how all that works, train all my people in the back office on this new way we're collecting data and the new way we're processing payments? God forbid, day one, when we're trying to install it, it doesn't work or something like that, do I want to go through all those potential headaches and pay a little more money for a better system?

What I'm trying to say is, yes, I think Adyen is in a great position to win, but it could be a very slow win. They're not coming in. In my mind, they don't have such a disruptive solution that they're just going to all of a sudden, all the big corporations are going to be switching over to it. These corporations, one, they care about how much they're paying, and they care about every basis point, and they're making what they have now worked. Do they want to go through that headache of going through another solution? So, it could be a very slow win is what [crosstalk]

Bill: Yeah, that makes sense. And then, I would think if you have a sales process, perhaps the answer is you give them a discount upfront because you want them on for a long time, but then you got migration costs and you're really investing a lot upfront for the backend relationship which can cost a lot.

Matt: In a lot of these companies, they want different solutions. They'll say, "This region, you use this system. This reason, you use this system, different systems." That way, you're not beholding to one of these companies that can start jacking up prices on you because if Global Payments are stacking up prices, you'd be like, "Well, I'm going to start getting more business the First Data or more business to these other legacy systems." So, a lot of them purposely will not just go to one system.

Now, again, that affects your data collection, that affects other things in the back office. But again, when you're one of these giants, Walmart, McDonald's, name your retail giants, every basis point matters. Every basis point matters, especially when you talk about that volume of transactions. So, Adyen's in a great position. I love what they have. I have a very small position. I probably don't watch it as closely as I should. I haven't done deep work on it in a while. It's a great company, but I don't necessarily think it's going to be a very fast win. Taking these customers off their legacy systems when it works and when they're paying what they consider a good price for it that's not easy.

Bill: Yeah. It reminds me a little bit of Guidewire. You've studied that.

Matt: I have.

Bill: I've been studying that it's one of those things, it's pretty interesting. It's funny how my natural thought is, well, they should win. That's how it should be. But there's the world that is in the world that should be and the world that is matters a whole lot.

Matt: [laughs] Yeah. The world that is matters. But then you will be bearer "in theory." Theory and practice are the same, but in practice, they're-- [crosstalk]

Bill: Yeah, they're completely different. That's right.

Matt: Yeah.

Bill: Yeah. It's like Buffett's, it's a bird in the hand versus two in the bush. But then the question is, when are the two in the bush? As a minority shareholder, when they're in the bush, are they going to go into the Metaverse or are they going to return the cash to me? There're a lot of questions here in this game.

Matt: Yeah. So, if you're not familiar with Guidewire, it's this platform specifically built for property and casualty insurers. It combines like core operations, and digital engagement, analytics, applications delivered as this cloud service or they still have on premise software. By all accounts, it's this great platform for these insurers. But when they're on their legacy system, whatever that is, so that can just be very old databases and they're making it work, that's a very hard process to move everything over to a more modern system like Guidewire, where you can do more with your data analytics. Maybe you can offer better pricing.

Data analytics, you think would be very important to insurance companies. I have a position in Guidewire. The great thing about Adyen or Guidewire, I think it's very similar. Once they have a customer, they're keeping that customer and that's what I really liked. I love those high switching costs. Oracle might be the best example of a company with a high switching cost. A couple of years ago Amazon wrapped up its project where they had this huge team dedicated to moving all of their data. I want to say they had a hundred petabytes, which is like-- Mathematically, I can't even get my head around the number that is, but have internally stored data on these thousands of Oracle databases. When they finally finished it took a decade for them to move off of Oracle on to their own servers. You're talking about the maker in origin of AWS. In this blog post, they celebrate it and they're talking about like, "Oh, we had this reduction of cost by X percent and latencies reduced by X percent, and admin overhead is down."

With all those benefits, it took Amazon. Amazon, like a decade to make that switch. If it's that hard for Amazon to get off Oracle, it is really hard for these-- If you're a PNC insurer going to Guidewire or you're a retailer going to a new payment system, when your system of truth is on a system, it's really hard to make that switch. That's a really daunting prospect. Not only is it hard, you're worried about like, "Hey, we're worried about business disruption during this transition." But then you're going to have employees who are basically working themselves out of a job because they work on these old databases and that's what they're trained on, you had to train all your new employees on the new system, there's just a lot of headaches that come with switching from these platforms that's ingrained in your business. But when you do make that switch and if you're a shareholder in Guidewire or Adyen, you're hoping like, well, that's how hard it's going to be for these companies to get off of them too.

Bill: Yeah. And I would imagine that the majority of the workforce is probably on a weighted average age north of 32. I don't think that once you get that old, I think that's young, by the way, but learning new systems is not the easiest thing in the world. I used to think that software was pretty easy to switch from and then somebody was like-- I think it might have been Rishi, but somebody was like, "When's the last time you learned a new software system?" I was like, "Yeah, that that's a pretty good point." It's not intuitive at all.

Matt: Yeah, 32 is a kid. Let's just get that straight. [laughs]

Bill: Yeah, no doubt. But I think a lot of your habits are ingrained by them at certain rates.

Matt: If your career is based on a system to make us change and it's easy for someone like me to say, "Oh, it's coding or whatever," that's your job. But if you're coding in COBOL or Python, and you got to switch to-- Yeah, I'm throwing out languages like I know what I'm talking about. But you had to change to another coding system. You got to change from Java to Python, or Python or COBOL, or whatever. Yes, of course, especially now if you're a company, "Hey, I have five of these coders or the programmers, computer engineers, software engineers who know this system."

Bill: Yeah.

Matt: Now, I have to have five who knows this system. Can I train these guys to switch over? If I don't train these guys and I'm telling them, I'm making this switch, they know they're working themselves out of a job. How do I keep them motivated? How do I keep them from making this a smooth transition? Do they want to be trained? So, now, okay, even if you're willing to train them to learn this new thing like at my day job when the administration tries to make a switch on something like people's schedules or whatever, there's a lot of critical feedback from the rank and file, right?

Bill: By critical feedback, you mean people that are really upset. [laughs]

Matt: Correct. If you're in a business, there's a labor crunch out there right now. These are all things like businesses have to go through. So, if your moat is at high switching cost, it can be hard to win new customers because usually something's inherent to that type of business that makes it hard to switch. But the good thing about a company, if you're a shareholder in Adyen or Guidewire, and I think even on a bigger scale that's what you talk about AWS, Azure. Once a company is on these clouds in these platforms, man, it's hard to get off, it's hard to get off.

Bill: You said earlier that you look for wide moats. How are you thinking about watching when a moat changes and monitoring that? It is very hard to figure out, right?

Matt: It's very hard to figure out. We were talking about Meta. That's what makes it so hard because I feel I cared about are still intact and then they're doing all these other things. But generally, the direction of the moat might be even more important than the moat itself. I mentioned Oracle about these immense high switching costs and I think those exist. But is that moat shrinking or expanding? I think it's shrinking. I think these other platforms that AWS, the Azure of the world are better and can offer more modern infrastructure and better applications, which comes with better AI applications, and better analytics, and better pricing because these companies like Oracle have basically abused their customers for decades. So, there's not a lot of love from their customers for these companies either.

I'm not in Oracle. I believe it has a moat. Moat is a mess, but I think it's shrinking. And because their customers don't love it. There's something to be said. Sometimes, when customers hate a company but yet they're still going back to them, that's probably evidence of a moat.

Bill: Yeah. Matt: And yet, when alternatives present themselves, those customers will be definitely looking at those alternatives as a way to get out from it. So, you have to look at a direction of a moat. A lot of my fellow advisors at 7investing, they like getting in those companies that are probably creating a moat than have a moat.

Bill: Yeah, emergent moats.

Matt: Yeah, whereas I'm probably more on the side of, I look for more established moats that I believe already exist. I don’t want to attribute something to Warren Buffett that he didn't say, but I thought he said like, "Anytime a moat is either shrinking or growing that's something to really look at." I don't know if Buffett said that, but somebody did. I think that's probably right. There're very few companies, Moody's is one or S&P Global aware, that moat just seems-- It would almost take an act of the regulatory Gods to disrupt it because I don't see how that changes in the private markets. I have a position in Moody's. One thing I like to look at is a moat attack. This is an idea I got from pulling capital, which is an act of money manager. Bill, I don't think they're too far away from you. But-- [crosstalk]

Bill: I think they are closer to you.

Matt: Yeah, in between us.

Bill: Yeah, that's right.

Matt: Yeah. They talk about moat tax being like-- Think about when Microsoft made Bing, right? This is a great example. You have this great company, Microsoft putting a lot of money into a product that's going to try to get a big share of the search engine market. They tried and it didn't work, which that gives me confidence that there is a real moat with Google Search business. If Microsoft can't do it, the maker of Windows, the maker of at the time the most popular browsers, if they couldn't distribute their search engine enough to disrupt Google's dominance in search engines, to me that's a great evidence of a moat that is strong.

Bill: Yeah.

Matt: There're constant examples. But a long time ago, ah, I'm going to mess this example up. But a long time ago, let's just stick with that. Home Depot tried to make a competitor to Tractor Supply, where Tractor Supply is this retailer in rural areas that sells feed to animals, and garden seeds basically these outdoor further-- We talk about retail investors. These are like retail farmers. You have a large backyard and you want to grow stuff. Tractor Supply caters to them and they do a wonderful job. Home Depot tried to make a competitor to them and it just didn't work. It fizzled out. That's probably an evidence like Tractor Supply has something really going. If a company like Home Depot couldn't compete with them, that already sells like a really similar product base, it's probably going to be really hard for somebody to disrupt them.

You can go back to like, we talked about Google's search engine dominance. But when they tried to enter the social media world with Google Plus and all these things, Facebook's moat stood strong. They couldn't disrupt that. I like to look for good examples of moat attacks where like, "Okay, there's precedence here for thinking that this company's advantage is strong." Microsoft tried to enter the search engine market. It just couldn't do it. Bing has, whatever it is, 2% market share or something after a decade of trying. You can get discounts. You can get coupons, and discounts, and gift cards for using Bing at different times. They're probably these promotions. I see that and I'm like, "That's smart idea" and I never use it. [chuckles] I just never use it because I use Google.

I want to look for moat attacks, I think it's a way to do it. Another way, something I think is a great mental model and this is from Buffett. I put your quotes all the time. So, forgive me. Buffett says something once like, "If you give me a billion dollars, could I disrupt Coca-Cola? Could I make another soda that competes with Coca-Cola?" I don't know the exact amount Buffett said. But I think that's a great mental model to use. Bill, if somebody gave us a billion dollars or $10 billion, we'll pick and figure to make a competitor to Chipotle. Oh, this market, this Mexican food, quick service restaurant market is huge and we want to get into it. And Bill in that, here's a billion dollars, or $5 billion, or $10 billion make a competing concept. With that much money as dumb as I am, we could probably come up with a reasonably competent restaurant that could potentially do well, it could do okay.

There's a chance we can make a profitable restaurant chain if we were given a lot of money to compete against Chipotle. But could I do that for MasterCard or Visa? Could I do that for Moody's or S&P Global? No. I don't see how I could. I think that's a great mental model to use too. I look for moat attacks, if a company is trying to get into a market and they can't do it, hmm, that might be evident that company, that legacy company there has a real moat and like, "Hey, could I make a Mexican quick service restaurant if somebody gave me a lot of money? "Yeah, I probably could. I know nothing about the restaurant industry. So, I'm probably overstating my ability there. But somebody could. Maybe if I hired a good person to do it, somebody could do that, I think. And Chipotle is great. I don't have anything against Chipotle.

Bill: Yeah. But that's the way you're thinking about it.

Matt: Yeah.

Bill: Yeah.

Matt: I think that mental model and I like the idea of a moat attack looking for that.

Bill: I'm super interested to see with Chipotle and Disney for totally different reasons. But I wonder if they weren't public, would they be making the same pricing decisions that they are and are these pricing decisions going to push the envelope just a little bit too far? But there are companies that I've been saying that about for a long, long time and every year they raise price, and every year people pay, especially Disney?

Matt: When you talk about Disney, you're talking about their park price tickets or the park-- [crosstalk]

Bill: Yeah, man, I think it's getting expensive. It's always been expensive. That's why they sell the [crosstalk] went broke. I don't know, I talked to some annual pass holders lately that are switching to Universal. I don't know, it'll be interesting to see.

Matt: Yeah, that's an interesting one.

Bill: The park experience at Disney, I will not say it's not joyful because when you look at your kids and they have this look in their eye, that's magic. But the other side of it, man, is messing around with the genie, waking up at 7:00 AM, two people have to be on devices, you hope that you can get on to a line, I don't know, man, it just feels nickel-and-dimey at this point and I wonder if Walt would be proud of where it's been taken.

Matt: The thing I wonder about them is, I think for making the parks profitable, if they were looking purely at the best way they can monetize the parks, they're probably doing a good job and they could probably even have more room to increase prices, because there's a finite capacity at those parks. Especially after COVID, there's this huge rush of people like, "We want to go do things." Obviously, Disney parks is a big idea, the top for a lot of families. But to me, if you're Disney and I know they know this, but sometimes I think they forget. Their park experience, it's not just about the parks. It's to forge these bonds. When you bring your eight-year-old there and they see Darth Vader, or they see Mickey Mouse, or they see whatever Woody, Buzz Lightyear, take your pick of a character, you're an eight-year-old girl and they see the princesses and Anna, Elsa, whatever that eight-year-old falls in love with those characters. They see Buzz Lightyear, they take a picture of Buzz Lightyear, then they go on the Buzz Lightyear ride, and they shoot the laser guns or they throw the rings around all the carnival things on the ride at Hollywood Studios and they fall in love with those characters. And then when they're 38 years old, they're taking their eight-year-old to the park because they're showing those same movies that they watched in 1992 to their kids in 2022 and then vice versa-- [crosstalk]

Bill: Sort of. I showed my kids the old Hook and I was like, "Oh boy, this is not okay to watch." But anyway, our Peter Pan or whatever.

Matt: Right.

Bill: Anyway, but yes, I do know what you're saying.

Matt: You just wonder, if they outprice the middle class from going to the park, you're losing all those people from forging those bonds with those characters.

Bill: Agreed and then the other thing man is-- [crosstalk]

Matt: The Toy Story movies and that's great. What reinforces that forever is going to those parks, and going on the rides, and seeing the characters and having this amazing day and that's just burned in your memory as an eight-year-old forever. If you price out the middle fast, then you're losing that generation. There's more to it for Disney than just monetizing the park experience.

Bill: This is where I think being a public company may be a problem in the long, long term. And the other thing, man is you pay all this money, you go to these like, oh, meet your person, whatever character breakfast and the buffet food is crap. Just invest a little, and give up a little bit of margin, and give me something that's good. It's fine for kids. But for those prices, I don't know. I would have said this a long, long time ago and I would have been wrong and whatever. So, I'm probably just the guy that's wrong again, but it just doesn't feel like that experience to me still exists for exactly what you just said. The middle class to go and have an affordable maybe not once in a lifetime, but you can't replace or replicate that experience. I think they get a lot closer to how do we hit our EPS and how do we jack up park prices that we can subsidize this? It makes me nervous.

Matt: That's a great question, if they'd be better off as not a public company because are they feeling the pressure to show margins at a park, 200 basis points higher than it should be or could be? But to please Wall Street instead of-- but lose the middle class.

Bill: Who knows? Maybe, they won't. Maybe the middle class doesn't care. It's offensively expensive to me.

Matt: Maybe this is just purely anecdotal, it used to be-- it was the best experience you could get though. It was just so much better experience than another amusement park, because there's more than the rides. They looked at the details so much better. And now, I feel to your point going to Universal, going to Busch Gardens--

Bill: Universal is a good park.

Matt: Going through these other parks if it's just as good, then for Disney to charge what they charge, then nickel and dime the customers with these additional charges, Genie lightning and whatever else they have, it has to be the best. It has to be the best and you feel it's not anymore or at least not by the same margin it used to be.

Bill: Yeah, and I think it's still the most unique for the reasons that you said, I can't go to Universal and get my connection with the same characters or whatever. But I can go there and have a whole lot of fun. So, we'll see. I don’t know.

Matt: And you can make connections with their characters. The Dr. Seuss' the Grinch or whatever other characters they have there.

Bill: Yeah, minions or whatever. I don't know, it's going to be interesting. I guess, how do you feel about being a public figure commenting on finance as somebody who taught yourself? I think we have that in common. I have mixed feelings about it, but on average the net benefits far exceed the costs, but curious to hear your thoughts.

Matt: That's an interesting question. It's probably just something I don't think about that much. There're parts of it that are annoying. You know this. I have two jobs. And so, sometimes like last night, Amazon reported and people are DMing me or messaging me and like, "What do you think of the quarter? What do you think of the quarter? What do you think of that?" I'm like, "Man, I don't know yet."

Bill: Yeah. It's probably the right reaction by the way.

Matt: I'm going to try and chime in in about a week and I'll let you know. Two hours after the call, I don't know. "I don't know yet. I don't have an informed opinion." That's where I get myself in trouble. I start scrolling on Twitter and I'm like, "Oh, my gosh, it was horrible" or the other way, when times are good like, "Oh, this is amazing." You start forming your opinion from these other people's takes instead of just doing the work and then you go into a corner with preconceived notions. That's something I need to guard against.

What I'll say is, I remember very well what it's not knowing anything about investing or anything about money. And thinking it was beyond me. Thinking like, "Well, I can't learn that." I grew up at a very working-class home, investing was something like rich people did, and it wasn't for are normal people. It wasn't for the working class. If I have a mission or if I want to let people know, that's not true. You can do this with a reasonable set of confidence. That could mean just whatever. That could just mean putting your money into an S&P 500 fund. And that could mean putting most of your money into an S&P 500 fund, but there's a couple companies you like and try to do some basic work on and you just inherently--

You know that Peter Lynch thing of like buy what you know. A lot of times people boil down his message to buy what you know. There was so much more to it than that. But he was like, "That's a good place to start." He didn't say that was the whole process, but that's a good place to start. If there's something in your industry where you work, if there's something as a consumer, I have a coworker at work, who like-- This goes back years. But yeah, she loved Lululemon. I didn't know much about it as a company, but a lot of people think it's a good stock. Why don't you put a little money into it? You love this company and she did. And obviously that worked out very well for her. I want to let people know you can do this.

These probably got people caught up in a lot of hype the last couple of years. I'm not accusing anyone or any one newsletter. I'm just saying the whole-- That's actually how I got into investing. I was up late one night and my wife had stayed home for years. We were having kids, and she was staying home, staying at home mother for a while, and I was a young cop. We were barely making ends meet. She was going back to work. And so, I'm like, "Wow, we're living on my salary." And something in my head was like, "Okay, I know enough that we should do something with this money, when she goes back to work. We shouldn't just increase our lifestyle."

She was going back to work. I was up really late when-- I was on the midnight shift. So, I was always up late and I saw this 30-minute ad for 3D printing stocks. I was completely enthralled with it. I was just completely like, "Wow, this is the future."[chuckles] I got so into it. I ordered on Amazon a few books on it and I was like, "Wow." One of the books said like, "When you move in the future, when you move from LA to Florida in the future, think about how inefficient it is to pack all your belongings in a truck and drive it all the way across the country. What you're going to do is, you're just going to scan in everything you have and when you get to your new house, you're just going to print it out."

Bill: Sure. I don't know what we're going to do with all the waste, but yes, I agree with you.

Matt: Right. Details, Bill, details. [laughs]

Bill: Yeah.

Matt: I was like, "Wow, this is amazing."

Bill: Yeah.

Matt: My small brain was like, "This is incredible. This is going to be so great." And so, I put whatever savings we had, at the time which wasn't much into 3D printing stock. For six months, I'm like, "This is easy." This is so great, man. I just doubled our money in six months. Like, "Oh, that was so easy." All you got to do is buy these stocks. And then this is 2013, 2014. If you're familiar with the story, those stocks absolutely crashed. It got to the point where like, "Okay, I started to like this idea of investing." I started reading books like Peter Lynch and I got involved in the Motley Fool community on discussion boards asking questions and I was like, "Okay, I like this idea of investing. But now, my wife's not going to let me keep doing this."

Bill: Yeah.

Matt: I can't say like, "No, I'm investing our money, but keep losing it, because these stocks were just cratering." And so, that spurred my learning in everything. That's what I don't want to do. I don't want to entice people to buy hyped stocks. I just want people to understand there's good companies out there and if you buy for the long-term and you buy good companies, defined very loosely as just like companies with economic moats like they have some kind of business advantage. You can do well with your money and that doesn't mean you're doubling your money every year. That's I think a trap people got into after the whole COVID thing with stocks cratering and then that meteoric rise they had in 2020 and halfway through 2021. So, it doesn't mean you're going to double your money or it's not gambling where you can just get this huge payout right away. But if you want your money to grow and compound, you understand compounding, which blew my mind away.

I remember one night like doing by hand, if you grow your money by 8% a year and what that means and you are 25%, I just couldn't believe. If you think long term and you think like, "Hey, a there's a way to do this." I'm going to channel Jake Taylor a little here. if it's okay with-- [crosstalk]

Bill: Yeah. I love Jake.

Matt: Okay. I do too. I love your podcast, Value: After Hours. I mean, Toby's podcast, Value: After Hours. It's my favorite podcast. and I love your podcast too. You know that.

Bill: Ah, well, thank you. I appreciate you listening to both.

Matt: I listen to both every week.

Bill: I think I have set people with my universal story on the last one.

Matt: I see. I'm a little behind.

Bill: Yeah. Well, you'll hear it on Monday. I raged a little bit.

Matt: All right.

Bill: Oh, well. Look, I think a legitimate knock, I was with somebody who helped me skip some lines. We paid for the FastPass for most of the lines. But on two of the lines, he not bended the truth. He lied his way into skipping the lines and I went along with it. Somebody got mad about the kids that got skipped. I have sympathy for that argument. But if that's my biggest transgression in life, I think I've done a pretty decent job.

Matt: Right. That's okay.

Bill: Honestly, it's thrilling. I've never skipped lines like that before. [Matt laughs] It brought me back to being a 14-year-old sneaking into a movie or something. I'm not particularly proud about it, but I also don't really regret it either if that makes sense.

Matt: If you have a fault, Bill, you're very transparent with your faults and with your doubts but that still makes you so great to listen to.

Bill: Yeah. Well, dude, here's the thing. I think if somebody's not willing to forgive that transgression, me and them probably wouldn't get along anyway. I can let people know like I still feel internal guilt on that, so if you know I'm not [crosstalk]

Matt: You are acknowledging and it might not be the right thing to do.

Bill: That's right.

Matt: Yeah.

Bill: But it's also not breaking the law.

Matt: But you did it. It is what it is.

Bill: That's right. I might have been a little intoxicated while it happened. But you know what, it was a hell of a day, I had great friends, it was great bond, and I was coming off of a super dad weekend. So, I deserved it. Anyway, I digress.

Matt: Okay.

Bill: Jake Taylor.

Matt: I want to channel Jake Taylor here a little bit. If you do listen to Value: After Hours, he has these veggie segments that he calls them and he always has this really interesting anecdote from outside the investment world and then analogizes it to make an investing lesson from it. But this is how I think of it. Pascal was the 17th century French philosopher and mathematician. There's something called Pascal's wager. If you're not familiar, Pascal argued that a rational person-- He was a Catholic. He's like, "A rational person should live as though God exists and they should seek to believe in God." Because if God does not exist, okay, that person has a very finite loss. They lose out on some pleasures in life maybe or some luxuries, etc. But if God does exist that person has imminent gains, because they're in heaven forever and they avoid going to hell. Pascal's wager was this argument that you should be a Christian, because what you stand to gain eternal life is better than what you stand to gain if-- [crosstalk]

Bill: Reasonable argument.

Matt: That's Pascal's Wager. I'll say like I don't have a good word for it, but the US investors can make a similar wager with the stakes not as high.

Bill: Yeah, yeah that's right.

[laughter]

Matt: Stakes might not be quite as high.

Bill: No going to hell if you don't do it.

Matt: Right. But for a hundred plus years, the US stock market has been the world's greatest wealth creation machine. By investing, you're just making the wager that's going to hold true for the next few decades. If I'm right by making that wager, I win a secure and comfortable retirement. I can leave money to my kids, I can give to my favorite charities and causes. And so, if I'm right, all those things happen. If I'm wrong and these are so bad that the US stock market tanks for good. The odds in that scenario, my biggest concern is going to be my portfolios returns.

Bill: Or you can hedge it and you can invest outside the US. You can police retirement bets, right?

Matt: Of course. 100%. Yeah, just investing in general.

Bill: Yeah.

Matt: You probably shouldn't just use US. But what did I really lose out on? Maybe a few left pleasures along the way, a less extravagant vacation here, a less nicer car there. So, I lose out on a few things. But generally, I've been blessed. I can maintain a US middle class lifestyle, so I have all the comforts I really need and want in life. If I can invest and win all those possible things, if I'm wrong and the US stock market tanks because of something really bad that happened, North Korea drops the bomb somewhere or another pandemic comes that makes COVID look like a cakewalk or whatever, really bad things happen in the world, I'm probably not going to be too worried about my portfolios returns. I have a bigger fish to fry. I believe it's rational for me to act as if the US stock market will always rebound even while understanding intellectually, that actually might not happen, because there are bad things that can happen that maybe--

Whatever has happened for the last 100, 150 plus years might not continue on for the rest of my lifetime. But that's what I want people to know. So, as a public figure, going all the way back to what you were saying, that's what I want people to know. I want them to get excited about investing. And so, all you can say this, look, if you subscribe to 7investing, our job, we want to provide you better returns in the S&P 500. I believe over the long term we're going to do that. I will say, we started in March 2020.

Bill: Yeah, not the best launch. Good launch, tough 12 months.

Matt: It was a great first year. The first year, we looked like geniuses. I even wrote a piece saying, "We're not this good, basically because we were beating the market by so much." Right now, we're not beating the market. But I believe long term we will and that is my job. But even if a person invests and they put some money in S&P 500, and then they invest other money elsewhere into stocks, because that's what gets them excited and it gets them excited about investing, and they don't end up beating the S&P 500 with their other money. By investing, I still think you're going to grow and compound your money unless bad things happen. If I can get people to do that then that's great. That's what I want people to know. You can invest your money in this.

Bill: And dude you could get people into investing and they could decide, "Okay, well, read some value books." Read some commodity investors. Read a bunch of different things and figure out how you want to place your chips and then place your chips. But at least, if something happens, you're in control. I think there's a lot of merit turning it over to computers and algorithms. I also think there's a lot of merit-- Well, let's put it this way. I fear, if something went horribly wrong and I had turned everything over to a computer and an algorithm because I was told that it was the rational thing to do and I ended up getting screwed because I gave up control over my own financial life, that would really be one of those things that I'm not sure I could look myself in the mirror. So, some of its regret minimization. I think it's Peter Kaufman says, "A happy life is more or less what you achieve over your regret." So, if you can reduce your regret to zero, your happiness can go infinite. I think that's a pretty decent formula to keep within the boundary of what makes sense.

I've always really appreciated talking to you, well, for a number of reasons. But one of them is, I know how passionate you are about what you do. Two, you've always been one of the people that has come from the Fool that I have-- We often have valuation discussions often. And sometimes, things make you uncomfortable and you're like, "But I don't know what to do with that, because I know that it's expensive, but also this is a great business that I want to own for the long term." And you're somebody that I have always found lives what you say you do. And to me, that's probably the most important thing. I find you to be a high integrity individual doing things for the right reasons. So, I'm very grateful that you said yes to coming on the show, I'm grateful that we chat off the show and I look forward to staying your friend for a while until both of us leave this Earth.

Matt: No, likewise, Bill. Yeah, I always enjoy talking to you, I always enjoy listening to you too, I almost feel I know you better than I do because I listen to you so much through your podcasts and everything. Yeah, I always enjoy chatting. If you're in the market now, it's not the most fun time, but again, I think it's rational to act as if the market is going to rebound. It probably will. For the last hundred years it has and yeah.

Bill: Well, look, I was getting destroyed in November of 2021 and nothing else was getting touched. What was funny about it is all the value stocks that I owned were the ones that were getting crushed and I was just like, "What is going on here?" I'm the one that's just taken on water. What I have found recently is the portion of my portfolio that is identified as value has been trading pretty strongly. I think that you can find some smaller SaaS companies or some of the names in the carnage that are starting to trade reasonably strongly. I think the generals get shot last. I don't know, I'm going to channel my inner Jake Taylor and just say to people that are starting in investing or sort of like you and I and trying to figure it out.

I would turn off the stock market and I would go pick up the financials of the companies that you're looking at, write them out, and look at what you own, and figure out if you want to own those things. I would not look to the market for signal because I think there's a lot of really, really sharp sharks out there that move things around that people like yourself or myself don't need to play that same game and that doesn't necessarily make us the dumb money either.

Matt: Right. Real quick. Morgan Housel once wrote this piece. He wrote it, I think in 2015. He was talking about the best performing stock of the last 20 years, from 1995 to 2015.

Bill: Monster?

Matt: it is Monster. Very good,

Bill: Yeah.

Matt: It was up in that time 105,000%, so you had owned this stock, wow. That's like $10,000 into $10 million or $1,000 into a million dollars. That's just like the once in a lifetime. Obviously not too many people held it that 20 years. But I'm just saying, that's like wow. That's just perfect home run. The name of the article was called The Agony of High Returns. You can google it. If you google The Agony of High Returns, Morgan Housel, you'll see this article. It was something during that time when Monster returned 105,000%, it traded below its previous all-time high on 95% of the trading days during that period. On average, it was down more than 25% below as high as the previous two years. It's had four drops of 50% or more. It lost more than two thirds of its value twice and more than three quarters once.

Bill: Morgan's awesome. What a good article.

Matt: That was the best stock to own over a 20-year period. If that's the best, the very best stock to own over a 20-year period and it traded like that. You have to understand, when you just have a good stock [laughs] there's going to be times you will not be trading at all-time highs, and they will be down and it's going to suffer losses, and you're going to be down a lot. Again, on average, it was down, I think it was 25%, 26% below as high as the previous two years. So, it could feel psychologically like you're down all the time on that name. If you were dollar cost averaging into it, it could be [unintelligible [01:29:22]. And yet, that was the very best stock to own for 20 years.

Bill: Yeah. No, I love it, man. I think that's a fantastic lesson. Now here come the FAANG stinks tweets and this and that. Look, Facebook, that's a different situation. I find it interesting that I pulled up a five-year chart of Berkshire today. Berkshire's returns 70% over five years. 13% a year, pretty freaking good. It has required Buffett to make the best investment of all time, I think. Toby is the one that said it first. I don’t know about first in the world, but I think he's right. Best investment of all time in Apple. I'm curious the people that-- Look, I just personalize this. I own Berkshire. Buffett bailed me out by holding Apple. But if there's cognitive dissonance to say FAANG is performing badly, and I own Berkshire, and FAANG's overvalued or something like, Apple is a big percentage of Berkshire at this point. I just think rather than getting caught up in what's going on today and what stocks moving-- Same thing with 2021. There was euphoria and I don't think this is not--

People say like, "Well, you don't bottom on." You need depression to bottom. I'm not sure. I know historically that's true and it may be true again. We may get some huge puke. I don't think we're depressed. It's just not a very fun time. I would say the tide is going out. I don't know that we're at low tide.

Matt: Right. You don't have to get the low tide, right?

Bill: Yeah, I don't know. Some market historian is going to laugh at this and say, "No, you got to puke to bottom." Maybe. But a lot of things got schlecht. The average does not tell the story.

Matt: The average does not tell the story. As an investor, what I meant to say, you don't have to buy the exact bottom to do well. So, I tweeted this out during COVID when everything just puked in March or April of 2020. If you look at when stocks hit their all-time high in late 2007, it didn't make that back for five years, 2012. I forget the average amount it was down during that time, but it was 20%. And yes, there was a bottom in November 2008 and March 2009, if you had bought those bottoms you did great. But you didn't have to buy those bottoms to do very, very well, if you bought at any point in that five-year period. If you're an individual investor, don't beat yourself up, if you don't buy the exact bottom. If you buy and it goes down more, that's okay. You're not going to buy the bottom. You're not going to buy the exact bottom or at least in my experience, I don't buy the exact bottoms.

Bill: Yeah. Well, I don't think anybody does. The other thing that's funny is, some of the conversations that I have privately-- Microsoft is a good example. I was fortunate enough to be gifted. It's a concentrated position for me now, it's run up. I say to people, "Well, would you sell it?" They're like, "Oh, I don't know that I'd sell it. You got to pay tax and then you may never get it back at this price." That sounds nuts. Meanwhile, publicly they're like, "Oh, Microsoft's crazy, overvalued." It's like, "Okay, well, which way do you want to have it?"

Matt: Yeah.

Bill: I think the longer I do this, the more I realized the questions are very, very difficult to answer and that's part of what makes it fun, man. If they were easy, it'd be boring.

Matt: It can be a very intoxicating and fun game.

Bill: Yeah.

Matt: Try to find fun in it, if you're investing. If you can't find fun in it, then just put your money in S&P 500. That's okay. You'll do okay with that. But if you find it fun, it can be a very fun game even if frustrating at times.

Bill: Let's say that people found this conversation fun. Where could they find you?

Matt: Well, you can find me on Twitter. I'm there way too much.

Bill: [laughs] Me too, man. Me too.

Matt: I just told you like how much, yeah, there's too much noise on Twitter and it's probably not good for you. And yet, I'm just there way too much @matt_cochrane7 or you can check out our services at 7investing.com.

Bill: Well, Matt, thank you very much for joining, man. You're one of the good ones and I look forward to speaking to you again.

Matt: It was a lot of fun, Bill. Thanks for having me.

[music]

[Transcript provided by SpeechDocs Podcast Transcription]

 
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