WEBVTT - T. Rowe’s Rizzo on Finding Technology Winners 0:00:16.000 --> 0:00:18.880 Welcome to Inside Active, a podcast about active managers that 0:00:18.960 --> 0:00:21.560 goes beyond sound bites and headlines and looks deeper into 0:00:21.560 --> 0:00:26.240 their processes, challenges and philosophies and security selections. I'm David Cohne, 0:00:26.280 --> 0:00:28.920 i lead mutual fund and active research of Bloomberg Intelligence. 0:00:29.480 --> 0:00:33.080 Over the past decade, investing in technology has largely meant 0:00:33.159 --> 0:00:36.720 owning a small number of dominant companies. Passive strategies have 0:00:36.760 --> 0:00:40.280 made that easy but also highly concentrated. At the same time, 0:00:40.360 --> 0:00:43.080 we're entering a new phase of innovation driven by AI, 0:00:43.240 --> 0:00:46.479 where the next set of winners may look very different. Today, 0:00:46.479 --> 0:00:50.120 we're exploring what it means to actively invest technology in 0:00:50.159 --> 0:00:53.720 that environment to help us unpack that. I'm joined today 0:00:53.760 --> 0:00:56.800 by Dom Rizzo, a portfolio manager for the Troll Price 0:00:56.880 --> 0:01:01.560 Global Technology Fund tick our PRGTX and the trow Price 0:01:01.640 --> 0:01:05.559 Technology Etf tick your t Tech. Don thanks for joining 0:01:05.600 --> 0:01:05.960 me today. 0:01:06.640 --> 0:01:09.160 Thanks for having me. David really appreciate being here. 0:01:10.720 --> 0:01:13.800 So let's start with your process when you're invaluating a 0:01:13.840 --> 0:01:17.160 new investment. What does your research process actually look like 0:01:17.319 --> 0:01:20.160 from you know, first look to an actual position in 0:01:20.200 --> 0:01:20.880 the portfolio. 0:01:21.920 --> 0:01:24.800 At TIRO, we have so many great investors right, and 0:01:24.840 --> 0:01:27.280 I'm going to add TIRO for over a decade now, 0:01:27.360 --> 0:01:30.000 and I always say, you have to find a framework 0:01:30.040 --> 0:01:33.959 an investment process that really fits your personality. So when 0:01:34.000 --> 0:01:37.600 I talk to our young folks coming out of college, 0:01:37.640 --> 0:01:40.480 I always say, you know, t s Elliott's got this 0:01:40.600 --> 0:01:45.000 great line. Good author's borrow, great authors steal, and I've 0:01:45.040 --> 0:01:48.640 stolen so much of my framework from the great investors 0:01:48.640 --> 0:01:51.560 at TIROW, whether it's a David Eisweer or Justin Why 0:01:51.880 --> 0:01:57.240 or David Jeru, David Wallack, or our MidCap value PM. 0:01:57.560 --> 0:01:59.680 So I think you have to kind of come up 0:01:59.720 --> 0:02:02.760 with your framework and cobble it together through making mistakes 0:02:03.520 --> 0:02:06.200 and building it out. So kind of with that background, 0:02:06.480 --> 0:02:09.200 you know, over time at TRO, I've been really fortunate. 0:02:09.240 --> 0:02:13.840 I've covered hardware stocks, software stocks, payment stocks, small cap, MidCap, 0:02:13.919 --> 0:02:16.920 large cap, megacap us, Europe, Asia, and so I had 0:02:16.919 --> 0:02:19.679 to find a framework that kind of could do all geos, 0:02:19.720 --> 0:02:23.280 all regions, and all subsectors attack and that ended up 0:02:23.320 --> 0:02:27.400 being you know, looking for four things. Number one is 0:02:27.440 --> 0:02:31.200 what I call lynchpin technologies. These are the technologies that 0:02:31.200 --> 0:02:33.960 are mission critical to the success of their customers or 0:02:34.040 --> 0:02:38.440 make their users' lives dramatically better. The second, they have 0:02:38.520 --> 0:02:42.240 to be innovating in secular growth markets. What does that mean? 0:02:42.280 --> 0:02:45.160 That means taking share and fast growing and markets. I'm 0:02:45.160 --> 0:02:48.360 sure we're going to talk about AI today. Probably the 0:02:48.400 --> 0:02:51.280 biggest secular growth market that I see is AI chips. 0:02:51.400 --> 0:02:53.400 You know, we're going from forty five billion dollars at 0:02:53.440 --> 0:02:56.640 AI chip spending in twenty three to five hundred billion 0:02:56.639 --> 0:02:59.840 dollars at AI chip spending in twenty eight to you know, 0:03:00.120 --> 0:03:03.639 a trillion dollars by twenty thirty or potentially earlier. So 0:03:04.160 --> 0:03:08.320 you've got to be taking share in fast growing and markets. Third, 0:03:08.840 --> 0:03:13.840 and this is really important for kind of tactical trading, 0:03:14.320 --> 0:03:18.560 is I think stocks move when they have improving fundamentals, 0:03:19.400 --> 0:03:24.359 and so that's revenue that's accelerating, operating margins that are expanding, 0:03:24.520 --> 0:03:28.480 or free cash flow conversion that's improving. And then finally, 0:03:28.680 --> 0:03:31.000 you want to make sure you have a reasonable valuation. 0:03:31.680 --> 0:03:33.880 So in tech, I think the way you get burned 0:03:34.560 --> 0:03:38.760 is if you overpay and you can't compound from those 0:03:38.840 --> 0:03:41.600 very high valuations. And so I would say, you know, 0:03:41.640 --> 0:03:44.320 twenty twenty one software stocks is a great example of that. 0:03:45.440 --> 0:03:48.680 Or actually, if you get pulled into a value chap. Right, 0:03:49.040 --> 0:03:50.760 So if you get pulled into a value trap and 0:03:50.800 --> 0:03:53.040 it's broken and it looks cheap optically, but it's never 0:03:53.120 --> 0:03:55.080 going to change. So I just want to make sure 0:03:55.120 --> 0:03:57.240 that the valuation we're paying is reasonable and that we 0:03:57.240 --> 0:04:01.200 can compound there. So those four things lynch technologies innovating 0:04:01.200 --> 0:04:04.560 in secular growth markets with improving fundamentals have reasonable valuations, 0:04:04.840 --> 0:04:07.400 and I use that framework across both my strategies. 0:04:08.280 --> 0:04:10.880 So what would kill an idea of like valuations? You know, 0:04:10.920 --> 0:04:14.360 you might find like a potential company, but the valuations 0:04:14.400 --> 0:04:16.320 just don't look great, and that would kind of prevent 0:04:16.360 --> 0:04:17.080 you from jumping in. 0:04:17.279 --> 0:04:18.880 I think in the short term the thing that actually 0:04:18.920 --> 0:04:23.200 kills ideas the most is not having improving fundamentals. So 0:04:24.480 --> 0:04:27.680 finding a great company is actually relatively easy. We could 0:04:27.720 --> 0:04:30.400 just put it in chat GBT and say, oh, find 0:04:30.400 --> 0:04:33.320 me all the companies with like high returns on invested capital. 0:04:35.320 --> 0:04:39.800 So so, and finding companies that are expensive or cheap 0:04:39.839 --> 0:04:42.440 is actually relatively easy. You know, when you go into 0:04:42.480 --> 0:04:46.040 Bloomberg and you say, okay, what is the average historical 0:04:46.080 --> 0:04:48.920 pe for a STOC and what is it today? Right, 0:04:48.960 --> 0:04:52.920 it's not that difficult to figure out those things. I 0:04:53.440 --> 0:04:56.279 think the thing that's hard is having this insight on 0:04:56.360 --> 0:04:59.840 improving fundamentals, which anyone who's hurt Dave Eyes were at 0:05:00.000 --> 0:05:03.080 hero Speak knows that I completely copied that from him, 0:05:03.120 --> 0:05:07.000 going back to this point about stealing, and that's the 0:05:07.080 --> 0:05:08.919 hard part. You need. You need to be able to 0:05:08.960 --> 0:05:12.360 have this great insight about revenue that's inflecting and why 0:05:12.520 --> 0:05:14.360 and so so right now, I'll give you an example. 0:05:14.839 --> 0:05:18.240 We really like the CPU eco ecosystem names like a 0:05:18.400 --> 0:05:21.360 m D or Inteler ARM and that's because of an 0:05:21.400 --> 0:05:26.920 agentic world. CPUs become meaningfully more important to the orchestration 0:05:27.080 --> 0:05:31.560 layer and how how all these different ais work around 0:05:31.560 --> 0:05:37.120 an organization. Basically, the CPU increases barely materially in spending. 0:05:37.160 --> 0:05:39.839 So that's an insight that's going to result hopefully in 0:05:39.920 --> 0:05:43.880 revenue that's inflecting and and and that that's the thing 0:05:43.920 --> 0:05:46.760 that in the short term definitely either gets an idea 0:05:46.800 --> 0:05:51.360 into the strategies or kicks them out. Valuation is always 0:05:51.360 --> 0:05:55.080 something we consider. The one thing I always caution the 0:05:55.160 --> 0:05:59.080 team is that you could have really outsized outcomes in tech. 0:05:59.200 --> 0:06:01.760 And I'll give you an example. You know, when I 0:06:01.839 --> 0:06:06.359 did the anthropic round in the Global Tech Fund in 0:06:06.360 --> 0:06:11.880 in the summer, they were, you know, run raining roughly 0:06:11.920 --> 0:06:15.919 five billion dollars of ar R. No, no one in 0:06:15.960 --> 0:06:18.400 their right mind thought we would be close to twenty 0:06:18.400 --> 0:06:24.400 billion dollars of ARR by March, right, So, so you 0:06:24.440 --> 0:06:26.799 could have these outsized outcomes and then all of a sudden, 0:06:26.800 --> 0:06:32.200 the valuation is actually far more reasonable. So, yes, valuation matters, 0:06:32.240 --> 0:06:34.279 but make sure you have an imagination and try to 0:06:34.279 --> 0:06:37.120 have an insight into that improving fundamentals. 0:06:37.640 --> 0:06:39.200 So I just kind of want to do a follow 0:06:39.279 --> 0:06:41.719 up to that. You know, is it kind of you know, 0:06:41.760 --> 0:06:44.720 other specific you know, signals you're looking for for improving 0:06:44.760 --> 0:06:47.240 fundamentals you know overall, or is it kind of differ 0:06:47.279 --> 0:06:49.280 from company to company. 0:06:49.600 --> 0:06:53.280 A difference for company to company. Sometimes revenue growth is 0:06:53.320 --> 0:06:55.760 the thing that drives the stock. Sometimes it's order growth. 0:06:55.880 --> 0:06:58.720 Sometimes it's operating margins that you know, I'll give you 0:06:58.800 --> 0:07:01.320 a great example that we're debating right now internally is 0:07:01.360 --> 0:07:03.600 free cash flow. So if you look at the mag 0:07:03.720 --> 0:07:08.520 seven stocks, they're very cheap on PE and they're also 0:07:08.680 --> 0:07:12.480 very cheap on a peg ratio, so PE to growth. Right, 0:07:12.520 --> 0:07:14.240 So if you look at the mag seven versus the 0:07:14.240 --> 0:07:17.440 rest of the market. The max seven of PEG is far, 0:07:17.600 --> 0:07:21.920 far less than the mag seven of the whole the 0:07:22.000 --> 0:07:24.680 peg ratio of the whole market. But what's the issue 0:07:24.680 --> 0:07:28.240 with the mag seven. Of the seven of them, you know, 0:07:28.720 --> 0:07:32.200 six of them have increased in capital intensity, either through 0:07:32.240 --> 0:07:34.640 capex on their own balance sheet or you know, in 0:07:34.680 --> 0:07:39.240 the case of Apple, capacks on Google's balance sheet effectively, 0:07:39.400 --> 0:07:43.720 right because of their geminideal capital intensity is increasing for 0:07:43.760 --> 0:07:47.480 those companies, and then dollars are flowing into the semiconductor 0:07:47.520 --> 0:07:51.240 and semi capital equipment and you know, foundry ecosystem from 0:07:51.320 --> 0:07:54.240 the balance sheets of the most profitable companies in history. 0:07:54.560 --> 0:07:58.360 So a debate we're that's raging internally right now. Is 0:07:58.400 --> 0:08:01.840 it revenue acceleration that matter, is it operating margin expansion, 0:08:01.960 --> 0:08:03.920 or is it free cash flow conversion? Which of those 0:08:04.000 --> 0:08:07.120 three is actually going to drive those stocks today as 0:08:07.160 --> 0:08:10.760 we sit here on you know, March thirtieth, it appears 0:08:10.840 --> 0:08:14.480 free cash flow conversion is what the market's considering. But 0:08:14.680 --> 0:08:17.640 you know, let's see after earnings in April, Yeah, makes sense. 0:08:17.960 --> 0:08:19.560 I do want to take a quick step back and 0:08:19.920 --> 0:08:22.800 just think about technology companies as a whole what do 0:08:22.800 --> 0:08:25.240 you think would make a technology company enduring in a 0:08:25.280 --> 0:08:27.880 space it seems to change so quickly? Is it really 0:08:28.000 --> 0:08:30.800 you know their modes, you know their ability to adapt, 0:08:30.920 --> 0:08:32.120 you know, is it a leadership? 0:08:33.000 --> 0:08:37.160 This is where I came up with Lynchpin technology. And 0:08:37.160 --> 0:08:40.679 and you know, the one thing I don't love about 0:08:40.679 --> 0:08:44.920 the word enduring is it implies some level of durable growth. 0:08:45.559 --> 0:08:48.160 And I think the point that you're making, David, is 0:08:48.760 --> 0:08:51.199 that durable growth is actually very hard to come by 0:08:51.280 --> 0:08:53.800 in an age that's changing so rapidly because of AI. 0:08:54.640 --> 0:08:58.440 You know, five years ago, anyone who studies software would 0:08:58.480 --> 0:09:01.920 say that one of the most durable, enduring franchises in 0:09:01.960 --> 0:09:04.840 the world is the Microsoft Office Suite. Well, guess what 0:09:05.000 --> 0:09:07.160 if you spend most of your day in chat gybt 0:09:07.520 --> 0:09:11.439 or Claude, is the Microsoft Office Suite actually the most 0:09:11.559 --> 0:09:15.400 enduring piece of software in the world or is it 0:09:15.440 --> 0:09:18.120 potentially chatgybt or a claud that may aggregate all the 0:09:18.200 --> 0:09:21.120 data that sits below it, and Microsoft Office may just 0:09:21.160 --> 0:09:24.160 be a pipeline into your AI that's walking around with 0:09:24.200 --> 0:09:27.439 you all day. So it changes so rapidly, and so 0:09:27.760 --> 0:09:31.760 that's why I love this Lynchpin word. And I kind 0:09:31.760 --> 0:09:35.720 of came up with birth it by covering ASML. So 0:09:35.760 --> 0:09:40.440 I lived in London from twenty eighteen until twenty twenty 0:09:40.480 --> 0:09:44.360 three and I was our European tech analyst for part 0:09:44.360 --> 0:09:48.080 of that. And I love this concept that I really 0:09:48.080 --> 0:09:51.559 thought ASML was the most important company in the world, right, 0:09:51.559 --> 0:09:53.520 and I think we're actually kind of seeing it now. 0:09:55.280 --> 0:10:00.320 You know, chips are so important to not just AI 0:10:00.440 --> 0:10:05.800 build out but consumers, PC sparphones, defense, aerospace chips. Like 0:10:05.880 --> 0:10:07.920 people say right now is the new oil. But I 0:10:07.920 --> 0:10:12.320 find it funny because you know, the memory stocks Samsung, Heinex, 0:10:12.640 --> 0:10:14.959 and Micron are going to generate significantly more free casual 0:10:15.040 --> 0:10:17.240 than all the oil stocks put together. Right, But you 0:10:17.280 --> 0:10:20.080 know they're they're bigger than oil, bigger than us deal, right, 0:10:20.120 --> 0:10:29.040 bigger than oil. But uh, the the lynchpin of all that, 0:10:29.240 --> 0:10:32.319 in my opinion, is this EUV machine from ASML, which 0:10:32.360 --> 0:10:34.440 I consider the most important machine in the world. And 0:10:34.480 --> 0:10:36.280 we don't have to get into the details of it. 0:10:36.720 --> 0:10:39.880 So so I think finding this Finding companies that are 0:10:39.920 --> 0:10:42.320 mission critical to the success of their customers or make 0:10:42.360 --> 0:10:46.480 their users' lives dramatically better, results in more enduring outcomes. 0:10:46.800 --> 0:10:48.480 But like you said right now, part of the fun 0:10:48.640 --> 0:10:52.200 and where I think active can really add, you know, 0:10:52.320 --> 0:10:57.040 tremendous value is figuring out which lynchpin statuses are becoming 0:10:57.080 --> 0:11:00.000 more enduring and actually which lynchpin statuses are becoming less 0:11:00.120 --> 0:11:04.560 enduring and why something into indices frankly can't really do 0:11:04.720 --> 0:11:06.640 and I think active investors can. 0:11:08.040 --> 0:11:10.679 Okay, So if you have, you know, a company that 0:11:10.760 --> 0:11:13.000 you want to put in the portfolio, or you know, 0:11:13.040 --> 0:11:15.640 either the ETF or the mutual fund, how does that 0:11:15.720 --> 0:11:18.640 translate into position sizing? You know what earns kind of 0:11:18.640 --> 0:11:21.080 a larger position versus small and you know, does it 0:11:21.120 --> 0:11:24.360 differ between the two fun rappers, Well. 0:11:24.240 --> 0:11:27.760 The position sizing and portfolio construction is a bit different 0:11:27.840 --> 0:11:30.680 between the between the two rappers. And and since you 0:11:30.800 --> 0:11:32.839 kind of led me there, I'll just quickly go through that. 0:11:32.920 --> 0:11:36.079 If you think about the Global Technology Fund pr gt X, 0:11:36.559 --> 0:11:39.640 the right ETF competitors for people to think about is 0:11:39.679 --> 0:11:42.000 something like an I X and a v G T 0:11:42.480 --> 0:11:47.440 or an XLK the traditional information tech services ETFs. You know, 0:11:47.520 --> 0:11:52.480 between all those there's hundreds of billions of dollars for 0:11:52.760 --> 0:11:57.880 t T eq T tech. The right competitive set is 0:11:58.080 --> 0:12:03.760 QQQ right and you know, we could get into those 0:12:03.800 --> 0:12:07.840 details a bit. How does the name get into the portfolio? 0:12:08.080 --> 0:12:12.040 It's actually relatively simple. Does it fit my framework and 0:12:12.320 --> 0:12:16.439 is there huge alpha opportunities relative to risk? Right? And 0:12:16.800 --> 0:12:18.760 so that's how we do all of our bed sizing 0:12:18.920 --> 0:12:21.760 as well. Is you know, often you have companies that 0:12:21.840 --> 0:12:25.439 have stupendous upside and I'll give you an example, like 0:12:25.480 --> 0:12:32.160 the optical stocks, but they're very very high beta, so Lumentum, Siena, Towers, Demi, 0:12:32.679 --> 0:12:36.800 these names are have had you know, fabulous performance over 0:12:36.800 --> 0:12:39.959 the past nine months, but have come with very very 0:12:40.000 --> 0:12:43.200 high beta, and so naturally they were actually you know, 0:12:43.880 --> 0:12:48.400 small to middle size positions throughout this previous run that 0:12:48.440 --> 0:12:51.120 we've had also have a little bit of a shorter 0:12:51.200 --> 0:12:56.280 leash depending on that. So it's all risk adjusted alpha 0:12:57.120 --> 0:13:00.320 a risk adjusted performance, so it's all alpha potential that 0:13:00.320 --> 0:13:03.400 that that that really drives the position sizing. The other 0:13:03.400 --> 0:13:06.640 thing that I think about a lot is, you know 0:13:06.720 --> 0:13:10.160 your portfolio has stocks that are AI on, AI off, 0:13:10.679 --> 0:13:14.200 Semis on, Semis off, software on, software off, and you 0:13:14.240 --> 0:13:16.840 have to think about it in terms of overall construction. 0:13:17.040 --> 0:13:20.360 And I'll give you an example. Uh, Volunteer is probably 0:13:20.400 --> 0:13:24.720 My biggest mistake since I took over the strategy this 0:13:25.040 --> 0:13:28.000 either one I you know, I just I couldn't get 0:13:28.000 --> 0:13:31.600 around the valuation. But the acceller the fundamentals were accelerating 0:13:31.720 --> 0:13:35.120 so dramatically, and the way we were designing software was 0:13:35.200 --> 0:13:39.720 changing so rapidly. Now, the way I slept that night 0:13:39.920 --> 0:13:42.640 is I always thought to myself, Okay, well, palenteer will 0:13:42.679 --> 0:13:45.480 add to my AI exposure, and I already have a 0:13:45.480 --> 0:13:47.880 lot of AI exposure, so I don't need even more. 0:13:48.520 --> 0:13:51.120 So you have to always think about things in portfolio construction. 0:13:52.400 --> 0:13:54.720 But but you also have to go that and put 0:13:54.720 --> 0:13:57.600 it through the framework. So hopefully that gets me away 0:13:57.880 --> 0:14:00.480 to go. So I kind of want go back to 0:14:00.800 --> 0:14:02.880 valuation just a little bit. You know, how do you 0:14:03.080 --> 0:14:06.680 balance growth in valuation in a sector like this where 0:14:06.760 --> 0:14:10.400 narratives really dominate fundamentals And you know, I guess my 0:14:10.440 --> 0:14:14.040 bigger question is what does expensive actually mean in tech today? Well, 0:14:14.040 --> 0:14:17.880 it's really funny narratives versus fundamentals. The thing about narratives 0:14:19.640 --> 0:14:27.280 is so technology investing is reflexive because talent is elastic, 0:14:27.480 --> 0:14:31.000 it can move from company to company. Right. The beautiful 0:14:31.000 --> 0:14:33.640 thing about silicon values everyone lives there. And the bad 0:14:33.680 --> 0:14:35.760 thing if you're a company in Silicon Valley is everyone 0:14:35.800 --> 0:14:38.280 lives there, right, so everyone wants to go work for 0:14:38.280 --> 0:14:40.120 the winners. They want to go work for open AI 0:14:40.360 --> 0:14:42.640 or anthropic or data bricks right now because they know 0:14:42.960 --> 0:14:46.400 that that's a huge potential payoff for them. So narratives 0:14:46.400 --> 0:14:50.520 often become reality. And then you got to remember most 0:14:50.520 --> 0:14:55.000 of tech is not regulated, so things can change super rapidly, 0:14:55.160 --> 0:14:58.920 just fundamentally, right, and you could go from not being 0:14:58.920 --> 0:15:02.480 a growth asset to being growth asset. And then you 0:15:02.560 --> 0:15:05.960 finalize that with the fact that semiconductors, which are such 0:15:05.960 --> 0:15:07.960 a big portion of tech, maybe forty percent of the 0:15:07.960 --> 0:15:12.320 information technology services forty five percent of information technology services, 0:15:12.480 --> 0:15:17.080 are inherently cyclical. Right. You have periods of other ordering 0:15:17.080 --> 0:15:20.120 and under ordering. You have periods of lead time expansion 0:15:20.160 --> 0:15:24.000 and lead time contraction. You have periods where bookings growth 0:15:24.080 --> 0:15:28.240 is the thing that matters versus earnings. And so I'll 0:15:28.320 --> 0:15:31.200 kind of counting your question with a question, which is 0:15:31.200 --> 0:15:36.080 is Nvidia expensive at fifteen times street earnings? You know, 0:15:37.120 --> 0:15:39.720 I think the debate that's raging in the market right 0:15:39.760 --> 0:15:44.400 now is is that fifteen times earnings? Right? You know, 0:15:44.520 --> 0:15:46.560 are they really going to earn a double digit earnings 0:15:46.600 --> 0:15:48.280 number and is it going to grow from there? Or 0:15:48.280 --> 0:15:50.520 are we going to ask the cyclical pullback at a cruction. 0:15:50.840 --> 0:15:52.440 Now I know which side of the debate I end 0:15:52.560 --> 0:15:54.800 up on, which is very firmly in the side of 0:15:55.360 --> 0:15:57.800 not only are is the street earnings right? They may 0:15:57.840 --> 0:16:00.440 be actually be low, and I actually we're going to 0:16:00.520 --> 0:16:03.440 go higher from here in terms of earnings momentum. But 0:16:03.760 --> 0:16:06.120 the debate that's raging right now in the valuation is 0:16:06.120 --> 0:16:09.360 not whether fifteen times is expensive or not. Is that 0:16:09.680 --> 0:16:11.920 it's that is that the right number to be using 0:16:12.920 --> 0:16:16.120 for Nvidia? So that's one on software. Software is a 0:16:16.160 --> 0:16:19.600 little bit different. So software relative to SEMIS is at 0:16:19.640 --> 0:16:23.960 the cheapest level it's ever been historically today, right, I mean, 0:16:24.000 --> 0:16:26.160 there's never been a period you look at basically every 0:16:26.240 --> 0:16:31.680 metric EVY to sales, pe EVE to TROO free cash flow, 0:16:31.720 --> 0:16:34.320 which really matters in software because the stock based comp 0:16:34.440 --> 0:16:37.480 is so stupendously high. Software is cheap relative to SEMIS 0:16:37.560 --> 0:16:42.240 versus every single metric you can look at. Now, I 0:16:42.240 --> 0:16:45.320 think that software has got more terminal value risk that 0:16:45.360 --> 0:16:49.160 it's ever had at any other period too, because AI 0:16:49.320 --> 0:16:52.640 is becoming the aggregator of aggregators, could commoditize the name 0:16:52.680 --> 0:16:55.440 like a salesforce or a workday or an Adobe really 0:16:55.440 --> 0:16:59.040 really quickly, even potentially, like we said earlier, the Microsoft 0:16:59.080 --> 0:17:03.480 Office franchise, it's under threw. And so I think valuation 0:17:03.760 --> 0:17:08.640 manners and manners most and it's extremes again for dero listeners. 0:17:08.720 --> 0:17:11.960 Another Dave Ozer quote that I am blatantly stealing. And 0:17:15.000 --> 0:17:17.440 you have to have an imagination that can envision these 0:17:17.480 --> 0:17:21.879 different scenarios, have a cyclical framework, have an imagination and 0:17:21.880 --> 0:17:24.800 be able to do so. Yes, narratives do drive a 0:17:24.840 --> 0:17:31.480 lot of tech investing, but I'm actually not sure it's unjustified. Okay, no, 0:17:31.560 --> 0:17:32.080 fair enough. 0:17:32.720 --> 0:17:34.919 I've been actually writing a few different research notes just 0:17:34.920 --> 0:17:38.200 talking about large cap funds, you know, active lige cat 0:17:38.200 --> 0:17:40.960 funds kind of looking they're a lot more concentrated now, 0:17:41.000 --> 0:17:43.560 just because the indexes are more concentrated, and you know, 0:17:43.600 --> 0:17:45.520 obviously that's kind of big in tech. There's a lot 0:17:45.520 --> 0:17:47.399 of big names in tech that are kind of driving 0:17:47.440 --> 0:17:52.320 returns in each portfolio. How many names do you really 0:17:52.320 --> 0:17:54.280 think drive returns in a typical year? 0:17:54.720 --> 0:17:56.639 You know, it was a great question. So you know 0:17:56.720 --> 0:17:59.520 for listeners, Dave David prepped me with that question, and 0:17:59.560 --> 0:18:02.000 I went and I looked it up, so I can 0:18:02.080 --> 0:18:05.600 give you an exact number that it's ten roughly ten 0:18:05.680 --> 0:18:10.760 names drive the performance. It's a power law dynamic, whether 0:18:10.800 --> 0:18:13.159 it was twenty three, twenty four, twenty five. Ten names 0:18:13.240 --> 0:18:18.359 drive my relative performance and my underperformance. Now, what's a 0:18:18.440 --> 0:18:24.919 really interesting point you're raising is this concentration issue. So 0:18:24.960 --> 0:18:28.320 I'll give you t tech as an example. If you 0:18:28.520 --> 0:18:34.119 go buy the Russell one thousand growth index today, north 0:18:34.359 --> 0:18:40.880 of fifty percent of your funds are going into seven names, 0:18:41.160 --> 0:18:43.240 right Like if you just buy the rust of one thousand growth, 0:18:43.320 --> 0:18:44.560 I think the number off the top of my head's 0:18:44.600 --> 0:18:48.600 like fifty two percent. So you know, we went back. 0:18:48.720 --> 0:18:50.440 You know, I think you guys have had so many 0:18:50.600 --> 0:18:53.440 great conversations about passive versus active and why is active 0:18:53.440 --> 0:18:57.520 struggled historically in which active strategies have done well? And 0:18:57.640 --> 0:18:59.880 so number one, you have to believe, hey, I could 0:19:00.000 --> 0:19:03.000 generate alpha in these mags seven. I think it's completely possible, 0:19:03.040 --> 0:19:04.960 by the way, to generate alpha in the mag seven 0:19:05.640 --> 0:19:08.080 picking between those names. But that is a fundamental belief 0:19:08.080 --> 0:19:10.480 that you need to have Okay, So then I think 0:19:10.520 --> 0:19:13.960 a lot of people turn towards Nasdaq one hundred, right 0:19:14.480 --> 0:19:19.000 and QQQ. But that's still like forty two percent. You 0:19:19.040 --> 0:19:21.920 know these seven names, right, it's it's it's still forty 0:19:21.960 --> 0:19:23.600 two forty three. I forget the exact number off the 0:19:23.640 --> 0:19:27.520 top of my head. What I tell my clients is 0:19:27.880 --> 0:19:29.879 I want to look smell act like a tech fund. 0:19:30.359 --> 0:19:32.480 So I need to own enough max seven to keep up. 0:19:32.840 --> 0:19:34.520 You know, we don't want to own to have a 0:19:34.560 --> 0:19:38.439 situation where we don't own any in either strategy. And 0:19:38.480 --> 0:19:41.800 you know, obviously in the information tech strategy is more 0:19:41.600 --> 0:19:44.720 more infotech weighted, but like you have to have some 0:19:44.920 --> 0:19:49.000 strategy so you could do your asset allocation properly. I 0:19:49.040 --> 0:19:51.040 need to be able to pick between those seven names. 0:19:51.359 --> 0:19:54.200 But also I don't want my value to be derived 0:19:54.200 --> 0:19:56.600 from those seven names. So if you look at T tech, 0:19:56.640 --> 0:19:59.680 it's something in like the low to mid thirties is 0:19:59.680 --> 0:20:03.800 is MA seven. So that means seventy plus percent of 0:20:03.800 --> 0:20:07.479 the strategy is named outside of that. So you need 0:20:07.520 --> 0:20:09.000 to own enough to keep up. If you have a 0:20:09.000 --> 0:20:12.720 situation where an Apple or a Microsoft do really well, 0:20:12.760 --> 0:20:15.960 and those two stocks in particular have fabulous downside capture. 0:20:16.760 --> 0:20:19.919 It's usually in down markets, right, and so if you 0:20:19.920 --> 0:20:22.359 don't own any that's you actually get really beat up 0:20:22.359 --> 0:20:24.560 on the downside. So you have to have some level 0:20:24.600 --> 0:20:27.200 of exposure to those names, be able to generate alpha 0:20:27.320 --> 0:20:30.280 between those names, and then be able to find names 0:20:30.440 --> 0:20:33.719 outside of those max seven that could drive differentiated performance. 0:20:33.920 --> 0:20:36.480 And in my case that's it ends up being like 0:20:36.560 --> 0:20:40.679 ten ten stocks a year that end up driving it. Okay. 0:20:41.760 --> 0:20:44.600 And so say you have a position that's doing really well, 0:20:44.640 --> 0:20:46.760 a big winner, how do you decide whether it'll let 0:20:46.800 --> 0:20:49.199 it run or trim it? So I guess it kind 0:20:49.200 --> 0:20:51.480 of gets more into like your cell discipline. So what 0:20:51.920 --> 0:20:54.919 are your flowers, don't you know? Don't cut your weeds, 0:20:55.440 --> 0:20:57.680 don't water your weeds right, and cut your flowers. 0:20:59.200 --> 0:21:04.800 So I just personally find my instinct is to let 0:21:04.840 --> 0:21:08.520 my winners run and to cut my losers. Which is 0:21:08.560 --> 0:21:11.760 really funny because anyone who reads The Intelligent Investor, which 0:21:11.800 --> 0:21:14.800 all great, you know, college students who want to be investors, 0:21:14.880 --> 0:21:16.680 is the first book they pick up. And it actually 0:21:16.680 --> 0:21:18.520 shouldn't be the first pick you should pick up. It 0:21:18.520 --> 0:21:20.960 should be like the tenth book you pick up, because 0:21:20.960 --> 0:21:23.800 it's actually quite dense. You want to get excited, you know, 0:21:24.400 --> 0:21:26.720 pick one up, Pick one up on Wall Street first. 0:21:27.000 --> 0:21:29.320 I'm telling you, whoever's listening, One Up on Wall Street 0:21:29.320 --> 0:21:30.920 should be the first book, and then go from there. 0:21:31.080 --> 0:21:33.960 So I find myself letting, letting my winners ride and 0:21:34.240 --> 0:21:38.159 cutting my losers. That being said, the framework saves me 0:21:38.240 --> 0:21:43.400 from myself at my natural inclination. So Lynchpin technologies innovating 0:21:43.400 --> 0:21:46.800 in secular growth markets with improving fundamentals have reasonable valuations. 0:21:47.240 --> 0:21:48.760 I can have a stock that I love more than 0:21:48.800 --> 0:21:56.040 anything has been executing fabulously on my investment thesis, and 0:21:56.480 --> 0:22:00.320 either the team, the risk guy or increasingly the AI 0:22:00.000 --> 0:22:04.760 I will tell me, hey, fundamentals are getting worse. So 0:22:05.080 --> 0:22:08.600 Albert Albert and risk will say, hey, Dom, I know 0:22:09.680 --> 0:22:12.080 you know, but you have a very large position and 0:22:12.119 --> 0:22:14.960 the fundamentals are getting worse. Here the team will say, hey, 0:22:15.040 --> 0:22:19.000 it's decelerating, doesn't make sense. Or increasingly AI and we 0:22:19.000 --> 0:22:21.400 can talk about AI and the investment process too. Fundamentals 0:22:21.440 --> 0:22:23.679 getting worse is the best reason to sell a stock, 0:22:23.920 --> 0:22:26.560 and you particularly want to do it when when when 0:22:26.680 --> 0:22:29.280 growth rates, in my opinion, are peaking. That being said, 0:22:29.280 --> 0:22:31.360 you want to let your winners run too, And and 0:22:31.960 --> 0:22:35.640 the question like with all great frameworks and all great rules, right. 0:22:35.640 --> 0:22:37.640 I used to have a teacher. I used to want 0:22:37.680 --> 0:22:41.480 to start my sentences with butt. And then you know, 0:22:42.240 --> 0:22:44.280 I read a book I think it was Roaldall and 0:22:44.359 --> 0:22:47.639 he started a bunch of sentences with the word butt. 0:22:47.800 --> 0:22:49.520 And she kept saying, you can't do that, you know, 0:22:50.560 --> 0:22:52.240 you have you have to have a comma. And then 0:22:52.280 --> 0:22:54.439 but da da da da, And I said, well what 0:22:54.520 --> 0:22:57.240 about him? And she she goes, well, he knew the 0:22:57.280 --> 0:23:00.480