WEBVTT - Horizon’s Stahl on Letting Winners Run 0:00:15.760 --> 0:00:18.720 Welcome to Inside Active, a podcast about active managers that 0:00:18.800 --> 0:00:21.400 goes beyond sound bites and headlines and looks deeper into 0:00:21.440 --> 0:00:25.880 their processes, challenges, and philosophies and security selection. I'm David cone, I, 0:00:25.920 --> 0:00:29.319 lead mutual fund and active research at Bloomberg Intelligence. So 0:00:29.480 --> 0:00:33.280 active equity funds can take many forms, some concentrated, some 0:00:33.400 --> 0:00:37.080 highly diversed, some momentum, and some with a contrarian strategy. 0:00:37.520 --> 0:00:40.519 In today's episode, we'll be speaking with a portfolio manager 0:00:40.520 --> 0:00:43.920 whose strategy adheres to the latter. I'd like to welcome 0:00:44.000 --> 0:00:47.360 Murray Style to the podcast. Murray is chief executive officer, 0:00:47.479 --> 0:00:50.879 chief investment officer, and co founder of Horizon Kinetics and 0:00:50.960 --> 0:00:55.280 a portfolio manager for the Paradigm fund ticker WWNPX, which 0:00:55.280 --> 0:00:57.320 we will discuss in a little bit. Murray, thanks for 0:00:57.400 --> 0:00:58.080 joining me today. 0:00:58.480 --> 0:00:59.240 Thanks for having me. 0:01:00.760 --> 0:01:04.280 So let's start with your investment philosophy. Your long term 0:01:04.360 --> 0:01:08.160 contraying value philosophy is central to Horizon Kinetics. Can you 0:01:08.200 --> 0:01:11.240 describe how this philosophy originated and how it's evolved over 0:01:11.280 --> 0:01:11.720 your career. 0:01:12.560 --> 0:01:16.080 Well, the firm is called Horizon for a simple reason 0:01:16.920 --> 0:01:22.320 that it was my observation that people in the professional 0:01:22.560 --> 0:01:27.720 cadre of investors are really intent on finding investment opportunities 0:01:27.760 --> 0:01:30.640 within a less than a one year time horison. But 0:01:30.720 --> 0:01:33.520 a simple reason that the year or the calendar year 0:01:33.560 --> 0:01:37.160 if you like, is the grading period. So the utility 0:01:37.480 --> 0:01:42.880 of some return beyond the momentary grading period is much 0:01:42.959 --> 0:01:46.440 less than the utility return within the grading period, So 0:01:47.480 --> 0:01:50.800 things get overvalued in the short run and there are 0:01:50.920 --> 0:01:53.240 limited utility therefore undervalued in the long run. 0:01:53.760 --> 0:01:55.840 The equity yield curve is mentioned as part of your 0:01:55.880 --> 0:01:59.640 firm's investment philosophy, is a way of understanding return expectations 0:01:59.640 --> 0:02:03.320 over time and why certain opportunities are overlooked. Can you 0:02:03.400 --> 0:02:05.800 walk us through how you think about the equity yield 0:02:05.800 --> 0:02:09.360 curve and practice and how it influences your investment decisions. 0:02:09.919 --> 0:02:13.480 Sure? Well, the equa yell curve, if you could draw it, 0:02:13.520 --> 0:02:15.840 would look no different than the bond yield curve, with 0:02:15.919 --> 0:02:21.240 the salient exception that the equityal curve is very very 0:02:22.560 --> 0:02:26.680 steeped unlike the bond yield curve, and the reason that 0:02:27.120 --> 0:02:31.960 relates to long term horizon investing. So let's say you're 0:02:32.000 --> 0:02:35.960 not a professional investor, you had your own company. It's 0:02:36.000 --> 0:02:39.480 a private company, and let's make believe it was in 0:02:39.480 --> 0:02:45.239 the field of biotechnology and you made some incredible discovery. 0:02:45.280 --> 0:02:50.920 It's going to benefit greatly mankind. And for a variety 0:02:50.960 --> 0:02:56.320 of reasons, you can't make the announcement of your discovery 0:02:56.560 --> 0:03:03.480 on December sixteenth, because if you had planned a vacation 0:03:03.639 --> 0:03:07.639 with your family, so you decide you're going to make 0:03:07.680 --> 0:03:12.680 the great announcement on January sixth. Well, if you own 0:03:12.720 --> 0:03:16.200 a company and it's a private company and you happen 0:03:16.320 --> 0:03:21.280 to profit immenseally on January sixth, it's a little concern 0:03:21.320 --> 0:03:25.120 to you. However, if you're in the world of public equity, 0:03:25.440 --> 0:03:28.440 there's a very big difference between any event that happens 0:03:28.440 --> 0:03:32.840 on December sixteenth, one year and January sixth of the 0:03:32.880 --> 0:03:35.760 following year, because not only your bonus is paid and 0:03:35.800 --> 0:03:38.520 the evaluations are made on the one year grading period 0:03:38.880 --> 0:03:42.280 is also a very small matter of the performance fees 0:03:42.800 --> 0:03:47.880 that people get. So of course, if you don't achieve 0:03:47.920 --> 0:03:50.800 it in the calendar year, you may or may not 0:03:50.960 --> 0:03:53.480 achieve it in the following year, and that, I would 0:03:53.600 --> 0:03:56.440 argue strongly motivates people's behavior. 0:03:57.240 --> 0:04:01.720 Interesting. Now, you also emphasize fundamental research on can we 0:04:01.760 --> 0:04:05.320 say like less trafficked opportunities. What criteria makes a company 0:04:05.360 --> 0:04:09.280 compelling to you even when it's misunderstood or always say 0:04:09.360 --> 0:04:09.960 out of favor. 0:04:11.400 --> 0:04:17.640 Well, it's I wouldn't say necessarily that they're always misunderstood. 0:04:18.200 --> 0:04:21.440 It's that people don't take the time to understand them. 0:04:21.800 --> 0:04:25.239 So let's say it's under scrutinized. And you could see 0:04:25.279 --> 0:04:28.440 why if you just think about the world of liquidity. 0:04:29.120 --> 0:04:34.000 So the idea is people want to manage huge amounts 0:04:34.000 --> 0:04:38.360 of money because they charge a fiant So in order 0:04:38.360 --> 0:04:41.040 to manage huge amounts of money, you have to have securities, 0:04:41.080 --> 0:04:46.360 to have a liquidity characteristic that would accommodate that kind 0:04:46.400 --> 0:04:50.080 of management. If you have less sums of money, or 0:04:50.080 --> 0:04:52.599 you're longer term oriented and you don't trade a lot, 0:04:53.120 --> 0:04:56.200 you can accommodate the company that's underscrutinized that might have 0:04:56.279 --> 0:04:58.799 a lot of liquidity attached to it. In other words, 0:04:58.920 --> 0:05:01.839 you can wait and be patient. So it's a question 0:05:01.920 --> 0:05:04.320 of what you'd like to do as an investor. I 0:05:04.360 --> 0:05:08.640 would like to be more patient and traffic in the 0:05:08.680 --> 0:05:11.680 world less scrutinized. So that's how it characterize it. 0:05:12.240 --> 0:05:14.279 Okay, And if we kind of zero in on the 0:05:14.320 --> 0:05:17.120 Paradigm Fund, which kind of looks at these type of companies, 0:05:17.720 --> 0:05:21.080 you know, long product cycles, high barriers to entry. How 0:05:21.120 --> 0:05:23.800 does that play out in day to day portfolio construction 0:05:23.920 --> 0:05:24.760 with the fund. 0:05:25.080 --> 0:05:30.680 Well, it's very hard to find companies that have a 0:05:30.720 --> 0:05:33.520 long product life cycle. So I'll just mentioned text specific 0:05:33.800 --> 0:05:38.000 since you would have mentioned it anyway. It has the 0:05:38.080 --> 0:05:42.719 virtue that it's the Texas specific land company. There's only 0:05:42.760 --> 0:05:45.880 so much land on this planet, and the character land 0:05:46.240 --> 0:05:49.080 is not changing. You're not going to make land technologically 0:05:49.120 --> 0:05:54.280 obsolete by whatever scientific developments you have. Matter of fact. Conversely, 0:05:54.880 --> 0:05:57.560 you can make the land much more valuable, but not 0:05:57.720 --> 0:06:01.400 less valuable, by scientific bands and those are things that 0:06:01.440 --> 0:06:06.279 are happening to that company right now. So land under 0:06:06.279 --> 0:06:11.720 the American Accounting Convention is not marked to market anywhere 0:06:11.760 --> 0:06:15.800 else in the world. IFRS accounting, it is marked to market. 0:06:17.200 --> 0:06:21.120 So something that's not marked to market, it's not going 0:06:21.160 --> 0:06:25.240 to be well understood. Each portion of land, whatever is 0:06:25.240 --> 0:06:28.839 located in the United States, is unique. So land is 0:06:28.880 --> 0:06:34.080 that type of asset class where the individual the individual 0:06:34.200 --> 0:06:41.200 plot matters a lot, and it's not studied as an 0:06:41.240 --> 0:06:44.480 asset class. Even though there's a lot of wealth globally 0:06:44.560 --> 0:06:47.080 tied up in land, and you won't find an ETF 0:06:47.360 --> 0:06:51.599 or a fund dedicated to land because generally speaking, it's 0:06:51.600 --> 0:06:54.320 not marked to market and it's not traded heavily. It's 0:06:54.320 --> 0:06:56.520 a perfect investment for the fund. 0:06:57.680 --> 0:06:59.800 So if we kind of dig a little deeper and 0:06:59.839 --> 0:07:03.719 just talk about positioning, has the funds positioning sizing kind 0:07:03.720 --> 0:07:06.320 of or your philosophy about it changed over time, or 0:07:06.440 --> 0:07:09.560 you know, do you increase position as conviction grows or 0:07:09.840 --> 0:07:11.600 kind of try to spread it more broadly? 0:07:12.320 --> 0:07:17.920 No, I, when I start, I take a relatively small position, 0:07:18.040 --> 0:07:21.800 meaning in my parlance, less than five percent. Of course 0:07:21.960 --> 0:07:25.560 you'll observe VI positions greater than five percent. So what happens. 0:07:26.560 --> 0:07:31.160 Let's create a hypothetical portfolio. I will buy twenty names 0:07:31.240 --> 0:07:34.640 and let's make believe purchase this discussion that they were 0:07:34.680 --> 0:07:38.880 twenty names equally weighed or twenty five percent positions. What's 0:07:38.920 --> 0:07:41.640 going to happen over time if you're long term investor is, 0:07:42.400 --> 0:07:46.600 even if they're all successful, the returns are going to 0:07:46.640 --> 0:07:51.600 be normally distributed to Galssian log normal. Something is going 0:07:51.640 --> 0:07:54.600 to be your best investment, even th they're all wonderful investment, 0:07:54.680 --> 0:07:56.520 somethings to be your highest rate of return. What you'd 0:07:56.560 --> 0:07:59.880 like to have happened is you would like your highest 0:08:00.120 --> 0:08:03.640 turn to be your biggest position. The only way to 0:08:03.720 --> 0:08:06.640 achieve it is to leave it alone. If you leave 0:08:06.680 --> 0:08:10.280 it alone, because you can't know perspectively what is going 0:08:10.320 --> 0:08:13.840 to be your most successful investment. You can only know 0:08:13.920 --> 0:08:18.160 that retrospectively. So if you wish your best investment to 0:08:18.160 --> 0:08:20.960 be your biggest investment, need to leave it alone. And 0:08:21.160 --> 0:08:23.960 leaving it alone, it will become, in the fluence of time, 0:08:24.200 --> 0:08:28.480 a disportionately large position your portfolio. And that's how it happens. 0:08:29.880 --> 0:08:31.640 So if we kind of even go a little deeper, 0:08:31.640 --> 0:08:33.760 and so if you have a one position or even 0:08:33.760 --> 0:08:38.079 two positions that are very heavy concentrated in the portfolio, 0:08:38.559 --> 0:08:42.240 how do you wait, I guess concentration risk in terms 0:08:42.240 --> 0:08:45.559 of you know, versus diversification. Is that something that clients 0:08:45.600 --> 0:08:46.240 ask you about. 0:08:46.640 --> 0:08:48.720 Oh, they're asking me about all the time. And the 0:08:48.920 --> 0:08:52.120 conventional of you, of course is you shouldn't let anything 0:08:52.440 --> 0:08:55.960 be concentrated. And the reason is because if it becomes 0:08:56.000 --> 0:08:58.720 a disproportioned large position, what if it has to draw 0:08:58.800 --> 0:09:00.840 down and if it has a draw down, it will have, 0:09:00.960 --> 0:09:04.520 of course, a disproportionate impact on the portfolio. That's the 0:09:04.520 --> 0:09:07.719 conmensial logic, and it's very hard to argue with the 0:09:07.800 --> 0:09:11.319 logic except for one small item, which I'll bring to 0:09:11.320 --> 0:09:16.000 your attention at the moment. The funds are designed for 0:09:16.200 --> 0:09:22.959 taxable people. So in preventing a company or a position 0:09:23.240 --> 0:09:28.640 becoming disproportionate in size because there might be a draw down, 0:09:29.080 --> 0:09:31.600 you need to sell down some or maybe all of it, 0:09:32.000 --> 0:09:35.880 and when you do, you expose your client base to taxation. 0:09:36.760 --> 0:09:40.840 So in the effort to protect the portfolio against the 0:09:40.960 --> 0:09:46.680 draw down, you exchange that circumstance for the certainty of 0:09:46.840 --> 0:09:51.960 having a large draw down with regard to taxes, because 0:09:52.000 --> 0:09:53.839 if you live in the state of New York, as 0:09:53.880 --> 0:09:56.600 I do, you're going to pay the federal rate and 0:09:56.720 --> 0:09:59.920 New York rate, and that's going to be a prop 0:10:00.040 --> 0:10:04.120 roximately in round numbers, one third of your profits. And 0:10:04.240 --> 0:10:06.720 of course we'll leave aside whatever it taxes the City 0:10:06.720 --> 0:10:09.800 of New York might impose upon one. 0:10:11.320 --> 0:10:14.520 Okay, And if you get to a situation where you 0:10:14.960 --> 0:10:17.319 do want to sell, I mean your portfolio is very 0:10:17.440 --> 0:10:20.000 or I should say even ultra low turnover ratios in 0:10:20.000 --> 0:10:22.079 comparison to a lot of other funds I look at. 0:10:22.400 --> 0:10:24.480 So when it's how do you decide when it's time 0:10:24.520 --> 0:10:27.000 to sell the specific catalysts you look for. 0:10:27.360 --> 0:10:33.920 Well, there are two circumstances for selling. One circumstances just 0:10:33.960 --> 0:10:38.360 found something better to invest in it, which case will 0:10:38.400 --> 0:10:43.000 sell some of the security which is inferior and perspective return, 0:10:43.400 --> 0:10:48.720 and buy some security which is presumably superior. That's an 0:10:48.760 --> 0:10:55.359 obvious circumstance. Another circumstance, which is equally obvious, is sometimes 0:10:55.640 --> 0:11:00.400 your big position it just doesn't have the appreciation potential 0:11:00.880 --> 0:11:04.720 in once heead it's not the same thing negative about 0:11:04.760 --> 0:11:08.840 the company. But no company is an extraordinary company forever, 0:11:09.360 --> 0:11:12.120 and you may wish to gradually sell some and fund 0:11:12.120 --> 0:11:16.319 some other investments. Of course, you don't wish to sell 0:11:16.320 --> 0:11:19.880 the investment until you found something new. Or in our 0:11:19.960 --> 0:11:23.160 horizon parlance, we don't through out dirty water until we 0:11:23.200 --> 0:11:23.920 have clean water. 0:11:25.240 --> 0:11:28.559 That makes sense, good analogy. Another thing I wanted to 0:11:28.600 --> 0:11:30.520 ask you about the portfolio, because this is something I'm 0:11:30.520 --> 0:11:32.920 seeing starting to pop up quite a bit in equity 0:11:33.040 --> 0:11:37.400 mutual funds, is your exposure to bitcoin via ETFs, and 0:11:37.600 --> 0:11:40.160 you know it's a meaningful exposure. What was the original 0:11:40.280 --> 0:11:43.520 rationale for adding bitcoin to the fund and has that 0:11:43.640 --> 0:11:44.720 rationale kind of changed? 0:11:45.120 --> 0:11:47.640 Okay, so first tell you before I answer that question, 0:11:47.760 --> 0:11:52.240 is we only put a twenty five basis point position 0:11:52.480 --> 0:11:54.920 in bitcoin because at the time, this was more than 0:11:54.920 --> 0:11:59.280 a decade ago. Its prospects were, let us say, not 0:11:59.360 --> 0:12:03.920 as certain as at traditional equity would be because it's 0:12:03.960 --> 0:12:11.160 not traditional equity. However, the upside potential was enormous, so 0:12:11.320 --> 0:12:14.800 that was the rationale. We can go into what the 0:12:14.880 --> 0:12:18.960 upside potential is. It's still fairly large, so I felt 0:12:19.160 --> 0:12:24.120 the portfolio should have some Bitcoin, and there was the 0:12:24.200 --> 0:12:30.000 possibility that it would have returned that's outlandish relative to 0:12:30.040 --> 0:12:32.920 anything else in portfolio, which proved be true, and therefore 0:12:33.040 --> 0:12:36.600 it provides covariance to portfolio. The worst thing that possibly 0:12:36.679 --> 0:12:40.520 happened is it becomes bankrupt or worthless or nearly worthless, 0:12:40.920 --> 0:12:43.720 and it becomes worthless or nearly worthless, and only starting 0:12:43.720 --> 0:12:47.000 at twenty five basis points, so the damage to the 0:12:47.120 --> 0:12:49.400 portfolio would be rather limited. 0:12:51.000 --> 0:12:53.880 How do you communicate that to some of your investors 0:12:53.880 --> 0:12:56.800 that might be skeptical or you know, kind of only 0:12:57.040 --> 0:12:58.239 want to look at fundamentals. 0:12:59.440 --> 0:13:05.559 Well, bitcoin, believe it or not, has fundamentals, so everyone 0:13:05.640 --> 0:13:08.839 thinks it has no fundamentals. So this could be I'm 0:13:08.840 --> 0:13:11.480 going to cut it short because inches of time, but 0:13:12.120 --> 0:13:14.679 if you want to explore this, I'll explore it as 0:13:14.760 --> 0:13:18.640 long as you want. So Bitcoin is created by a 0:13:18.720 --> 0:13:22.760 process unfortunately known as mining. The reason I say unfortunately 0:13:22.800 --> 0:13:25.280 known as mining is it's really a bad term. We're 0:13:25.320 --> 0:13:30.240 stuck with it. Mining is just a process of validating 0:13:30.280 --> 0:13:33.480 the transactions on the blockchain. That's good. Mining is so 0:13:33.559 --> 0:13:39.319 in exchange for millions of servers, literally millions of servers 0:13:39.640 --> 0:13:42.199 validating the transactions, and if you post it on the blockchain, 0:13:42.600 --> 0:13:45.920 you get every ten minutes something called the block reward, 0:13:47.160 --> 0:13:49.959 and that block reward is issued in the chords to 0:13:50.040 --> 0:13:55.320 protocol that in theory, will give a reward every ten minutes, 0:13:55.400 --> 0:13:59.360 meaning a block should be written to the blockchain every 0:13:59.360 --> 0:14:03.439 ten minutes. Doesn't happen exactly every ten minutes, but a 0:14:03.559 --> 0:14:08.400 protocol is designed to equilibrate the process, so on average 0:14:08.440 --> 0:14:13.520 it happens every ten minutes. Okay, So the protocol is 0:14:13.600 --> 0:14:19.840 designed to raise, in the fullest of time, the cost 0:14:21.200 --> 0:14:26.920 of validating a transaction, so the cost of creating a bitcoin, 0:14:26.960 --> 0:14:28.960 if you like, because that's the process by which you 0:14:28.960 --> 0:14:32.920 create a bitcoin, you validate transactions. The cost is rising 0:14:33.000 --> 0:14:35.400 now if you consider a bitcoin to be a commodity 0:14:36.960 --> 0:14:41.040 and the protocol determines that the cost of creating the commodity. 0:14:41.440 --> 0:14:46.320 In other words, bitcoin is going to rise every four years. 0:14:46.840 --> 0:14:49.400 I'll explain why it rises in a minute, but for 0:14:49.520 --> 0:14:52.200 a moment, it's going to rise every four years. You 0:14:52.280 --> 0:14:57.640 can now forecast an extraordinarily robust return. Why is going 0:14:57.680 --> 0:15:01.000 to rise every four years because the block reward is 0:15:01.080 --> 0:15:05.960 reduced by half every four years, in an event called 0:15:06.000 --> 0:15:08.520 a having. They called it a having because the luck 0:15:08.560 --> 0:15:11.760 of ward's been cut in half, and every four years. 0:15:11.760 --> 0:15:15.880 This happens. Next having occurs on or about April eighteenth, 0:15:16.200 --> 0:15:19.880 twenty twenty eight. So if you want to be if 0:15:19.880 --> 0:15:21.560 you're doing the same amount of work and you want 0:15:21.600 --> 0:15:26.320 the same number of bitcoin to be issued, it's not 0:15:26.440 --> 0:15:29.200 going to happen. So if you want the same number 0:15:29.200 --> 0:15:31.880 of bitcoin to be issued, you have to do twice 0:15:31.920 --> 0:15:34.480 as much work, meaning you have to have twice as 0:15:34.480 --> 0:15:40.360 many servers baldaying transactions, thereby drawing more electric power. So 0:15:40.400 --> 0:15:45.240 it costs more So now if there were a protocol 0:15:45.560 --> 0:15:50.360 that said, every four years, the cost of creating an 0:15:50.400 --> 0:15:53.040 ounce of gold is going to double, what would happen 0:15:53.040 --> 0:15:55.240 to gold prices? If there were a protocol it's said 0:15:55.280 --> 0:15:58.240 every four years, the cost of creating a barrel of 0:15:58.280 --> 0:16:01.200 oil or a million bitter to you of natural gas, 0:16:01.560 --> 0:16:03.360 or a bushel of wheat or what have you, we're 0:16:03.400 --> 0:16:06.320 going to double every four years, what would happen to 0:16:06.360 --> 0:16:09.360 that commodity? That was the logic a bitcoin. So when 0:16:09.360 --> 0:16:12.760 I read the protocol, and once I understood that, I 0:16:12.800 --> 0:16:16.360 realized it was well worth doing that. Now, in point 0:16:16.360 --> 0:16:21.200 of fact, the return was even higher than which could 0:16:21.240 --> 0:16:23.840 happen and did happen in accordance with the protocol. It 0:16:23.920 --> 0:16:26.320 was even higher than that. So it was an extraordinary investment. 0:16:26.440 --> 0:16:29.080 But I had a logic to it, and that was 0:16:29.120 --> 0:16:31.120 the logic. It was based on mathematics. 0:16:32.240 --> 0:16:35.200 Okay, so obviously different than what a lot of folks 0:16:35.240 --> 0:16:38.240 on Twitter that I think everything belongs in bitcoin. So 0:16:38.400 --> 0:16:40.920 I'm definitely here, you know, happy to hear the logic 0:16:40.960 --> 0:16:44.440 behind it. So if we move in a slightly different direction, 0:16:44.600 --> 0:16:46.880 you know, I read your Q four commentary and it 0:16:46.960 --> 0:16:50.440 kind of it drew a contrast between strategic resource owners 0:16:50.480 --> 0:16:53.760 and shall we say, traditional IT companies. How do you 0:16:53.760 --> 0:16:57.120 think mainstream investors are kind of misgauging the long term 0:16:57.160 --> 0:16:58.840 potential for these different groups. 0:16:59.520 --> 0:17:04.800 Oh, that's easy to answer. So historically, as long as 0:17:04.800 --> 0:17:09.720 we had investments through the bulk of recorded economic history, 0:17:10.040 --> 0:17:17.639 hard assets were the bulk of people's wealth. Last quarter century, 0:17:17.800 --> 0:17:20.520 and I personally we dated not the quarter century. I 0:17:20.520 --> 0:17:23.359 personally we dated from June of two thousand and seven, 0:17:23.760 --> 0:17:25.800 So it's not quite a quarter century. Why June of 0:17:25.800 --> 0:17:28.440 two thousand and seven, Because June of two thousand and 0:17:28.440 --> 0:17:32.000 seven was creation of the iPhone, Although we might not 0:17:32.080 --> 0:17:36.680 have realized it at the time. Now there are clearly 0:17:36.800 --> 0:17:40.200 well in excess of five billion users of smartphones, all 0:17:40.240 --> 0:17:44.080 having access to the Internet and all that goes with that. 0:17:44.080 --> 0:17:49.359 That was enormous investment opportunity, And unlike what we all 0:17:49.359 --> 0:17:52.480 believed in two thousand and seven, even prior to two 0:17:52.480 --> 0:17:55.520 thousand and seven, with the advent of the Internet, we 0:17:55.600 --> 0:18:02.399 didn't nobody realized that the business was being custraed in 0:18:02.480 --> 0:18:06.359 a handful of companies, and those companies had extraordinary cash 0:18:06.359 --> 0:18:11.719 flow characteristics. Why extraordinary because the Internet runs essentially on 0:18:11.760 --> 0:18:17.760 the landline telephone system. So what people refer to as 0:18:17.840 --> 0:18:20.280 the magnetics in seven, or sometimes they refer to it 0:18:20.320 --> 0:18:23.680 at some other number of magnifs in eight. But those 0:18:23.760 --> 0:18:32.240 companies were using the existing telecommunications infrastructure, and therefore they 0:18:32.240 --> 0:18:36.640 had unbelievably great cash flow characteristics. In other words, for 0:18:36.720 --> 0:18:40.119 me to do one incremental search on Google and me 0:18:40.240 --> 0:18:43.359 to click on the right thing, and Google gets paid 0:18:43.800 --> 0:18:46.679 based on my response to an ad, there's no incremental 0:18:46.720 --> 0:18:53.040 capital spend or maybe even no incremental actual SGNA spend 0:18:53.080 --> 0:18:56.200 for me to do that. It had just enormous positive 0:18:56.240 --> 0:19:01.040 cash flow characteristics, enormous operating leverage, positive operating leverage characteristics. 0:19:01.240 --> 0:19:05.919 Nothing like that had ever been seen. However, it just 0:19:06.000 --> 0:19:10.480 can't continue forever. So now we're moving into the world 0:19:10.520 --> 0:19:15.359 of as most people say, artificial intelligence, which I say, 0:19:16.040 --> 0:19:20.600 it's high performance computing. Why is it high performance computing 0:19:20.880 --> 0:19:26.320 because the amount of data that's needed to be manipulated 0:19:27.119 --> 0:19:33.240 in order to serve the modern function. As a trivial example, 0:19:33.720 --> 0:19:38.119 that you and I could be watching the same YouTube video, 0:19:38.680 --> 0:19:43.240 but our interests are different and databases nowhere. Interests are different, 0:19:43.400 --> 0:19:48.840 and we will see different advertising. Can you imagine multiplied 0:19:48.960 --> 0:19:52.160 by now it's almost six billion people on Internet, how 0:19:52.200 --> 0:19:58.960 much data you really need? Well, that involves enormous capital expenditure. 0:19:59.680 --> 0:20:02.000 As you you can see from the most recent earnings 0:20:02.040 --> 0:20:06.919 releases and capital spending forecasts of Amazon, Alphabet, Meta platforms 0:20:06.920 --> 0:20:10.080 and all. You've seen the earnings, you've seen what the 0:20:11.200 --> 0:20:15.639 capital spending forecasts are. They're unbelievable, and they should be 0:20:15.640 --> 0:20:18.920 believable because when you think about if you were looking 0:20:18.920 --> 0:20:21.520 at a company like Nvidia and more power to them, 0:20:21.800 --> 0:20:25.399 have nothing against them, so you can calculate how many 0:20:26.640 --> 0:20:30.800 servers they're going to sell, multiplied by how much power 0:20:31.520 --> 0:20:35.439 is drawn by each server. It's enormous man electric power. 0:20:36.320 --> 0:20:38.800 We're going to have those a nation engaged in capital 0:20:38.840 --> 0:20:43.720 spending and build the electric generation infrastructure in order for 0:20:43.720 --> 0:20:48.160 that to happen. So we enjoyed almost unique in history, 0:20:48.600 --> 0:20:53.919 but not entirely unique, a period of time when a 0:20:53.960 --> 0:20:57.840 handful of companies had enormous cash flow positive cash flow 0:20:57.880 --> 0:21:02.800 characteristics that simply can can't continue because capital expenditures are 0:21:02.840 --> 0:21:05.760 going to be required, and it's there for everyone to see. 0:21:05.800 --> 0:21:09.159 It's not a secret. That's the change that we have 0:21:09.200 --> 0:21:12.399 to accommody ourselves to So, to make a long story short, 0:21:12.880 --> 0:21:17.359 we're returning, as we inevitably were going to, to the 0:21:17.400 --> 0:21:22.000 world of hard or tangible if you like assets. 0:21:23.440 --> 0:21:25.520 So do you think that will change you know, the 0:21:25.680 --> 0:21:27.159 you know, one of the things I look at is, 0:21:27.200 --> 0:21:28.800 you know, you've got as you mentioned, the mag seven, 0:21:28.920 --> 0:21:31.800 maggate or whatever. You know, they're calling these these companies 0:21:31.840 --> 0:21:33.919 these days. Do you think they're going to be less 0:21:33.960 --> 0:21:37.880 dominant in market indexes, you know, giving active managers more 0:21:37.880 --> 0:21:41.200 of a you know, chance to compete. 0:21:41.440 --> 0:21:45.040 Well, they're going to have to be for a simple 0:21:45.119 --> 0:21:48.400 reason that you work for Bloomberg and you know you're 0:21:48.440 --> 0:21:52.680 coming out shortly with the Bloomberg five hundred index, and 0:21:53.600 --> 0:21:59.719 so the the inclusion criteria for s TOB five hundred 0:22:00.640 --> 0:22:05.320 is different than the Bloomberg Index. So let's take an example. 0:22:05.400 --> 0:22:08.480 Let's say open ai to people borrows chat GPT. Let's 0:22:08.520 --> 0:22:11.520 say they were going to the IPO. Well, in the 0:22:11.560 --> 0:22:15.159 case of Bloomberg, open ai is probably going to be 0:22:15.359 --> 0:22:19.280 in the top five hundred mare capitalizations on day one, 0:22:19.359 --> 0:22:23.280 and therefore it will very quickly find its way into 0:22:23.320 --> 0:22:26.200 Bloomberg Index. There may be a day or two of transition, 0:22:26.359 --> 0:22:28.920 but it's going to be not immediately but almost immediately 0:22:28.920 --> 0:22:31.520 go into the Bloomberg five hundred index. The S and 0:22:31.560 --> 0:22:36.000 P five hundred index has different criteria the SID. First 0:22:36.000 --> 0:22:39.040 of all, there's trading criteria, which it might not meet 0:22:39.160 --> 0:22:43.320 in the beginning. But secondly, there's a seasoning requirement, so 0:22:43.400 --> 0:22:45.200 that has to be publicly traded for a certain period 0:22:45.240 --> 0:22:53.200 of time. So if SpaceX and open Ai, an Anthropic 0:22:53.600 --> 0:22:56.520 and other companies that were all familiar with, if they 0:22:56.520 --> 0:22:58.800 were to come public in a given period of time, 0:22:58.800 --> 0:23:01.560 which would happen because says an appetite for one, there'll 0:23:01.560 --> 0:23:04.359 be an appetite for others. You're going to have two 0:23:04.840 --> 0:23:07.720 large capitalization indexes. You're going to have a Bloomberg five 0:23:07.800 --> 0:23:10.919 hundred index, you have an S and P five hundred index, 0:23:11.240 --> 0:23:13.960 and they're going to look very very different in the 0:23:15.880 --> 0:23:20.960 largest capitalization portion of the index. And also interestingly, in 0:23:20.960 --> 0:23:26.159 a fundamental sense, Anthropic, open Ai and others are going 0:23:26.200 --> 0:23:30.080 to compete without that. So now outbed is going to 0:23:30.119 --> 0:23:33.600 go from a circumstance where it is a quasi monopoly 0:23:34.640 --> 0:23:37.960 to being challenged. Doesn't mean it's going to be defeated 0:23:38.000 --> 0:23:41.000 by the challengers. Of course, but it's going to be challenged, 0:23:41.240 --> 0:23:44.080 and it's going to be challenged. Usually when a company 0:23:44.160 --> 0:23:47.360 is challenged and has a lot of capitalist spending requirement 0:23:47.640 --> 0:23:50.920 to maintain its dominance, which means your free cash flow, 0:23:51.000 --> 0:23:53.359 not necessarily your cash flow, but your free cash flow 0:23:53.400 --> 0:23:56.760 is going to diminish. Generally speaking, the market would award it, 0:23:56.800 --> 0:24:01.200 we would reward it, so to speak, or price earning 0:24:01.280 --> 0:24:04.240 is multiple because there's higher risk because you may not 0:24:04.440 --> 0:24:08.520 be where this company may not be the dominant company. 0:24:09.040 --> 0:24:12.119 So it actually brings me to a different topic. You know, 0:24:12.119 --> 0:24:14.479 I'm glad you mentioned open Ai and you know some 0:24:14.520 --> 0:24:17.159 of these other private companies that we're looking at. Private 0:24:17.160 --> 0:24:19.040 companies is kind of like it's a thing we're really 0:24:19.080 --> 0:24:22.320 focusing on our team, and so, you know, you had 0:24:22.359 --> 0:24:26.280 also mentioned in your recent Founder's letter in January, you know, 0:24:26.320 --> 0:24:29.240 you defended private investments as kind of a natural extension 0:24:29.240 --> 0:24:33.280 of your investment philosophy. How do you think privates are 0:24:33.359 --> 0:24:37.399 private companies complement or contrast with, you know, more of 0:24:37.400 --> 0:24:40.440 the public stocks that are in the paradigm. 0:24:40.000 --> 0:24:45.080 Fund Well, for us, it's a natural extension for a 0:24:45.160 --> 0:24:49.879 simple reason that the the growth and eventually the dominance 0:24:49.920 --> 0:24:55.520 of indexation basically meant that for the last quarter century, 0:24:56.600 --> 0:25:01.119 the IPO market has been so to speak, there's been 0:25:02.000 --> 0:25:07.520 historical standards, not a lot of activity. And for private 0:25:07.520 --> 0:25:11.240 equity funds and for private companies in general, it's been 0:25:11.359 --> 0:25:14.840 very hard to attract equity capital. And for owners of 0:25:14.920 --> 0:25:19.399 private equity funds who require liquidity, there are a lot 0:25:19.440 --> 0:25:22.480 of people who can get liquidity and must have it, 0:25:22.840 --> 0:25:27.560 and therefore opportunities for people who wish to offer liquidity. 0:25:27.960 --> 0:25:30.920 There are opportunities that wouldn't otherwise exist. So in the 0:25:31.080 --> 0:25:35.840 historical context would never have seen this. Now we're able 0:25:35.920 --> 0:25:40.359 to buy pieces of private companies for valuations that would 0:25:40.440 --> 0:25:46.240 never have been possible historically, and it's only thanks I 0:25:46.240 --> 0:25:49.800 would argue to the dominance of indexation. Of course, the 0:25:49.840 --> 0:25:52.560 index fund could not have a private company and involved 0:25:52.560 --> 0:25:55.440 in it. So if you're going to be the non 0:25:55.520 --> 0:26:00.640