GameStop Saga ContinuedThe Prof G Show with Scott Galloway
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- 4 Feb 2021
Whitney Tilson, the founder and CEO of Empire Financial Research, joins Scott to discuss the learnings from the WallStreetBets short-squeeze and the markets more generally. We also find out why Whitney is bullish on Transportation as a Service (TaaS). Follow him on Twitter, @WhitneyTilson.
Scott opens with his thoughts on the latest developments involving GameStop. Scott also explains how Apple CEO Tim Cook discussing the importance of privacy is an example of “laddering.”
This Week’s Office Hours: angel investing, why Apple should acquire Peloton instead of doing a product partnership, and Gap’s brand strategy. Have a question for Scott? Email a voice recording to email@example.com.
Algebra of Happiness: Marshall Plan for Moms
Reading Recommendation: Innovation & Recasting Your Life
Opening joke credit: Simon Holland
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Episode 47 47 is the atomic number of silver, I'm going to stay away from the whole silver thing. Good idea. The 47 thunderbolt was a fighter plane and World War Two at the age of 47. No joke. I bought a leaf blower and I would turn it on to make all the rival dads jealous. That's on the dog rolls. Go, go, go. Welcome to the forty seventh episode of the show and today's episode, we speak with Whitney Tilson, the founder and CEO of Empire Financial Research.
We discuss with Whitney the current state of the market sectors he's bullish on and his investing advice. So, OK, what's happening? A lot. But let's stick with the GameStop and Wall Street bet's news, which has gripped all of our attention for the past week and is now being turned into a Netflix movie. All right, then. Now we know it's real. Now we know it's a permanent part of the Zaide guys. So I want to highlight a couple of key learnings from our conversation with my colleague.
Asked what the motor and specifically the notion of long term investing and identifying your end game, as was said that you as an investor could have been 90 percent of active moneymakers on Wall Street by just buying index funds over the last decade. There's also research showing that 80 percent of day traders lose money. My experience has been whenever I paid too much attention to my stocks, I end up losing money. And there's research showing that the more time you spend trading stocks, if you aren't in that business full time, that you lose money now.
Now, is it a great way to learn? Sure. And if you approach it that way, fantastic. Are the markets a wonderful way to make a living if you commit to getting the credential and getting the training? Absolutely. Do young people have a reason to try and better themselves? Should we in any way scold them, which quite frankly, I did unintentionally about trying to better themselves? No, that's totally inappropriate. Is a dopamine hit good?
Yeah. Just keep in mind a dopamine hit is a dopamine hit and that I love to gamble.
I go to Vegas and I know Joe put on a kilt in a canary yellow blazer and I gamble. I take a thousand bucks and I expect to lose it all and it's worth it. And it's consumption. I think a bunch of young people are just going to get smoked here. And it's already happening around some of these stocks. Stocks go up for a few reasons. One, the fundamentals change. Or two, there's a some sort of technical reason, some sort of momentum play, a short squeeze.
In this case, we saw, as Aswath described it, a crowd squeeze. Then there's some sort of coordinated attack. This is nothing that hedge funds or short funds haven't done for a long time, where they try and figure out a way to surround a company and create a ton of negative or positive energy around it. And if you don't believe the narrative thing or kind of momentum, look at every Wall Street bank that is magically decided that every the Tesla's stock is their price target, for it is magically 20 percent of wherever it is at that given moment.
And then the new one here is that it's a movement or it's part of a movement. I was thinking about Tesla. Tesla is sort of a movement.
Right. And this is the argument for why maybe this movement has more sustainability or more staying power or more long term sustenance.
And that is and I was very much bearish on Tesla. Tesla was able to attract a lot of people who are passionate about the climate, the company, the product. It's a great product. Elon Musk himself, who is arguably and I think legitimately has been called the Edison of our generation. And that passion that translated into a very healthy, if you will, stock price, gave them access to cheap capital to pull the future forward. So I think, who knows, maybe there's a narrative that GameStop could issue stock when it's a it's a fully valued level, so to speak, and go build their future and pull it forward.
The problem is, I don't see the narrative has any link to the underlying fundamentals here. You just don't hear the term GameStop or the business in this narrative. And the narrative has evolved or has emerged is it's time to go after, quote unquote, the establishment. And I think on a macro level, there is legitimate rage here. Absolutely legitimate rage.
Billionaires had one point nine trillion dollars in wealth in 2010. Now it's four trillion. The percentage of wealth that people under the age of 40 had in 2000 excuse me, in nineteen eighty nine was nineteen percent. Now it's nine percent. I even think the stimulus is essentially the great Grif transferring wealth from young people to old people. It seems like everything we do in our economy is to try and keep asset prices high. Who owns assets? Older people.
Who is in their current income earning years? Young people, of course. We tax current income higher. We exploded the cost of education. And what do you know? Young people are fed up. The question is, what is the movement you're buying into? And I think movements are worth buying into. I think there's righteous movements. I think the Black Lives Matter, the civil rights movement, equal rights for women. These are all powerful, righteous movements.
But when you send a hundred bucks to Bernie Sanders, you send a hundred bucks to Bernie Sanders and you should expect it to go towards the movement, if you will. I don't you don't expect one hundred and ten bucks back. And my fear around this is that the people who are waving the banner of a movement. Are oftentimes maybe not as committed to the movement as they are their own financial well-being and using the movement as a call sign to try and get other people to come in behind them.
And I think this is an age old construct that is unhealthy, if you will. And or let me put it this way. You want to know you want to be very suspect of who exactly is calling for the movement and what are their intentions. And I think we're going to find that. Well, a lot of people, they think they stuck it to the man. They were actually the man stick here. And when I think about who's really going to make billions of dollars here, I think it's one the people who own read it.
I think Reddit has grown dramatically in value as a new medium of power. And to a certain extent, Wall Street bets has become arguably the largest hedge fund in the world, which is an interesting way of looking at it. But what I want to know is who are the general partners? Who are the people in charge here who are benefiting and who are the investors and what are the general partners telling the limited partners? I just don't I don't understand who is actually calling this a movement and what their what their motives are.
And then you think about this medium has gained so much power. Read it. And I think Reddit has done their best at their threat of pretty narrow needle here. Reddit is owned by, I think, several investors, including the family that owns Condé Nast or advanced publications. I think Robinhood probably gained ten billion dollars in value over the last week.
Supposedly a couple million new accounts were signed up just this week alone. There was a conspiracy theory that the people clearing their trades, the people financing their margin, whereas a hedge fund that had an investment in the hedge fund that was getting killed through shorts and that the hedge fund that was financing Robin Hood basically pulled their financing such that they could stop selling stock to people driving the stock up and hurting the fund, that this the financier Robin Hood, also had an investment.
And I don't buy that conspiracy. I don't think it's true. I think they simply got caught in a capital crunch because the people who lend the money for margin or pare their trades did some analysis and said, OK, 50 percent of your account holders own one stock and the stock is very volatile and we need greater capital reserves. And I think in about 48 hours, Robinhood was able to solve that problem and begin trading in those stocks again. So I think Robin Hood has dramatically escalated in value, probably ten, maybe twenty dollars billion in value.
And by the way, I've been critical of of Robin Hood. I think any platform that tries to keep your attention such that they can mine your data and then sell that to a third party usually leads to bad places, i.e. Facebook and now Robin Hood. But look at who's getting rich as Robin Hood explodes in value. Obviously, those are founders, but the biggest shareholders are Andreessen Horowitz or New Enterprise Associates, NEA or Sequoia Capital. So it might be frustrating, but who are you really sticking it to?
And I wonder who ends up, you know, as as Ottowa said, to what end? OK, you storm the castle, you own the castle, you've hung Melvern Capital or the Melville capital.
Now what? And does the guy or gal next to you, are they so committed to the movement that when they see people starting to exit out through the door and be clear, a stampede through the door can absolutely be a pretty chaotic stampede out the door? Are they going to sneak out in the middle of the night and leave you with your movement and a great deal of capital destruction? I know that over the course of my life where I have lost money, has been around trading and where I have made money is trying to find a good company and then ignoring it.
Anyways, Whitney will say more about this, but this is an unfolding conversation. I do believe that it doesn't end well for a lot of investors, a lot of first time investors.
Hopefully it inspires a lot of learning. Hopefully it inspires a lot of people who get excited about the markets. And maybe you find traction in a career in the markets or at a minimum, hopefully they're just enjoying it. And who knows, maybe some will make some money. But my sense is there's going to be enormous capital destruction under the auspices of a quote unquote movement.
OK, and other news, Apple and Facebook are fighting over privacy. That's a shocker. Essentially, Mark Zuckerberg isn't a fan of the new privacy features. iOS 14 is bringing the spring Apple iOS 14 will give users more control over their data and offer more transparency. Facebook believes this will undermine the ability of small businesses to reach their audiences through targeted ads. Last week during Facebook's earnings call, Zuckerberg said that the company increasingly sees Apple as one of its biggest competitors, specifically citing the fact that I message is a key linchpin of Apple's ecosystem.
The day after Facebook's earnings call, Tim Cook leveraged something I referred to a concert called Laddering as a means of positioning or competition. I'll come back to that in a minute. But during a virtual computers privacy and data protection conference, Cook gave a keynote speech stating that open, quote, an interconnected ecosystem of companies and data brokers, of purveyors of fake news and peddlers of division of trackers and hucksters just looking to make a quick buck, he goes on to say, and has never been so clear how it degrades our fundamental right to privacy first and our social fabric by consequence.
Cooke did not address Facebook in the speech. He didn't mention by name, but you get the sense that he's referring to companies that profit off rage, for example, Facebook and also Twitter.
So why is this laddering? Laddering is an attempt to position a competitor by highlighting one of your strengths, which just happens to be your competitors weakness. You can cast yourself in a positive light while at the same time casting a negative light on your competitors. So, for example, for example, in politics, when you begin playing up your own viewpoint on gun rights, what you're really trying to do is highlight the other person's track record on gun control.
If you think that's going to be a winning issue, basically brands don't do it as much as political parties. But every time someone brings up a point, you not only bring it up, bringing up in terms of say, hey, look at me, but you're saying, hey, now focus on this specific issue relative to my competitors and example of how this changes strategy. If they went to Apple, if they went to that spaceship headquarters and said, all right, what attributes you really want to lead with in your communications and your branding and your messaging from your CEO, who's kind of become the the most important advertisement in a world where we personify companies?
I don't think people would have said privacy. I think that people if they'd done a survey of their key managers, they said, well, let's talk a bit about design. It's about elegance. It's about being the person you want to be. It's about thinking different. They wouldn't have said privacy, but really, Apple's messaging over the last twenty four months, specifically from Tim Cook, has been around privacy. Why? Why his biggest competitors, Google and Facebook, just can't go there.
They just can't go there. So when you're laddering a company, you want to go where this they're this and you want to zero in on the attribute where that clears three hurdles. One, are we truly differentiated on this issue? Yes. Yes. Apple is truly differentiated. They pull two hundred data points a day from your iPhone. Android devices pull twelve hundred. Facebook is obviously in the business of pulling thousands of data points from your action to two.
Is it relevant to people care? It appears that privacy is becoming more and more relevant. I've always felt that privacy was sort of over rated, that there was consumer dissonance, that people wanted their privacy violated as long as there was utility or a coupon at the end. But it does appear to be a more and more relevant issue. And then finally, finally, is it sustainable? Let's assume you are truly different on this attribute. Let's assume it's important to the end, stakeholder or consumer.
Then how do you own it? Can you own it? Well, in this instance, Apple can't because their business model, their business model is not as much violating your privacy. It's selling you apps or selling you an expensive phone, charging you twelve hundred dollars for five hundred and fifty dollars of chipsets and sensors, whereas everybody else, or specifically Facebook and Google are in the business of basically giving you the product for free, whether it's a social network or an Android phone, and then pulling that data and using it for an ad model.
So. So what's going on here? Is this a case that Facebook is in fact a menace, deploying algorithms of amplification that divide our society? Or or is Tim Cook just talking his own book and that he would like the ad model to go away such that more apps had to charge?
And by the way, who benefits from that? The App Store, because they can't charge companies for the advertising revenue they generate, but they can charge them for charging for apps.
Is this just him talking his book or is Facebook a menace? The answer is yes. Stay with us. We'll be right back for our conversation with Whitney Tilson. If you're a business owner, you don't need us to tell you that running a business is tough, but you might be making it harder on yourself than necessary. Don't let quick books and spreadsheets slow you down any more. It's time to upgrade to nutzoid. Stop paying for multiple systems that don't give you the information you need when you need a device, spreadsheets and all the old software you've outgrown.
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Welcome back. Here's our conversation with Whitney Tilson.
So, Whitney, I just don't know what we're going to talk about today. I can't think of anything. I know I know Wall Street about. And GameStop, your turn.
Yeah, well, look, I think what's happened with GameStop and depending on how you count it, maybe one to two dozen other stocks, AMC and BlackBerry and Express and a few others is sort of a classic short squeeze. And it's sort of comical seeing all these predators thinking they've discovered the wheel here or something. But, you know, anyone who's been around a while, saw a short squeeze, is going back to the nineteen fifties like Resorts International Piggly Wiggly, the mother of all short squeezes was Volkswagen.
I've seen this so many times and I always know how it ends. Naive individual investors get sucked in and then they just get incinerated. I called the top last Wednesday and I named two dozen stocks and I said, do not buy these stocks. And if you're lucky enough to own any of them, get out immediately and count yourself lucky in three plus trading days. Since then, the average of those stocks is down twenty five percent, led by GameStop, down sixty six percent as we're recording this right now in just over three trading days.
So I know it's not the professionals who got incinerated from four hundred and eighty down to one hundred bucks on GameStop and have lost 16 billion dollars. It's individual investors who who got sucked into Robin Hood, got sucked into the Reddit chat rooms. And it just breaks my heart because these are people who probably cannot afford these losses. Gabe Plotkin made four hundred million dollars or more last year running Melvern Capital. His hedge fund needed a bailout, but he's not he's not struggling to pay his bills.
Let me tell you.
And what do you think of the notion that, OK, I can tell you I've heard the term OK, Boomer about seven thousand times in the last 48 hours based on my comments, which is admittedly some some of pretty tone deaf. But what do you think of the notion that, OK, you know, we got ours, it's time for them to get theirs.
And if they want to come into a stock, you know, what do you think of the notion that this is this is a movement, if you will?
I'm just not buying it. Like I said, these folks think they've discovered the wheel and they haven't. This is just as plain old speculative bubble. And the fact that it's it's now turbo charged with social media and with the Reddit message boards and all means it's sort of happened faster, happened more violently. And there's no doubt and they're absolute genuine grievances that people have sort of about the financial system and about how the banks were all bailed out. But average Americans were bailed out back in 08, for example, in early 09.
They are legitimate grievances, but engaging in a speculative stock market bubble and a couple of dozen stocks that then just incinerates everybody is is not the way to express those grievances.
Who do you think is who do you think? Do you have any thoughts on who is likely behind this?
Is it hedge funds or is it just individual investors who legitimately think this is a movement against some of their justifiable intergenerational rage based on what you've seen before with kind of companies that are shorted? And by the way, hedge funds have been doing this forever, just feels like these guys have done a better job of it. But do you think there's something bigger here that did some of the who who who's your sense of who the actors are here?
Yeah, it's it's really hard to know. And I'll be very curious. I think it's worth I hope I'm not sure, honestly, that the SEC should spend a lot of time here. I'm not convinced there's anyone who's committed fraud here. People talk in their book and getting hyped up on the message boards. I'm not sure that needs to be regulated. I think the way Robin Hood you've talked, I completely agree with your take on this, where they've turned to investing in the game.
I find it using the psychological tricks and so forth to to encourage people to trade as much as possible and particularly to use options, which is another interesting statistic. This may be a little dated, but I read somewhere 80 percent of options expire worthless. I mean, it's just a it's just such a quick way to incinerate your capital. And so I suspect this started as best I can tell the GameStop in particular. I know Mike very personally. He did some good analysis.
The other two hedge funds that got in, one of whom is on the board, did good analysis, saw an undervalued turnaround situation, the guy from Chewey who got a medal. So they're all completely legitimate. Good analysis. And it was a very interesting turn around play that sort of was on my radar screen, should have done more work on it, obviously, but then, you know, so that maybe got the stock from four dollars to ten dollars or something, but then it sort of got some momentum.
It got picked up on the message boards and then the the stock price momentum in and of itself create it became a self-fulfilling prophecy. The higher it went, the more people it attracted, the more chatter. Then CNBC starts covering it. Twenty four, seven and draws more people in. And look, you saw it. You've seen it a couple of times with Bitcoin. You saw it with the pot stocks back in September 17. Remember, until they hit three hundred GameStop hitting 480 intraday.
You saw it on the 3D printing stocks maybe six, seven years ago when when 3D systems went from 10 to over one hundred. And what was the top when they had will? I am the musician. They appointed him chief creative officer. And I sent around an email to all of my readers saying, OK, this is this is the warning flag. This is the sure sign of a top. And sure enough, the stock was down 90 percent within six months.
So let's move away from the kind of the Wall Street bad stocks. Do you think? Do you see any similar signs or canaries in the coal mine around the market more generally?
Yeah, well, here's what's interesting. I mean, keep in mind, these twenty five stocks I identified what I call my short squeeze bubble basket that are down twenty five percent in three plus days. They have a combined market cap of one hundred and fifty billion dollars. For perspective, Tesla alone is approaching eight hundred billion. And so the market is clearly fully valued. But I do not think we are in an overall stock market bubble. The best analogy I can give to the way I'm feeling now is the late nineties when you had the tech stock blow off.
But what I'm seeing here in this little pocket of this short squeeze bubble basket is not the the final stage of an overall market blow off. In fact, it reminds me of the Globe Dotcom, which was one of the early dotcom stocks that went public in nineteen ninety eight in late ninety eight. And at the time when it went up six hundred and six percent on its IPO day was the highest performing IPO in history at that time. And imagine back then if somebody had said, oh, this is a sure sign of a market top, this kind of foolishness goes.
Of course that company later ended up collapsing and going out of business entirely. But it turned out it was indicative of a much bigger the entire Internet bubble, which then played out over the next 16 months. So we were still 16 months away from a blow off top and there was a still a melt up to come among tech and Internet stocks. So given the unprecedented both fiscal and monetary stimulus coming from the government, we're going to see some of the greatest economic growth numbers in the history of the world and not just here in the US, but across the entire world, because look at what we're comping against last year when the entire world shut down in February and March and April.
Right. So we're going to you're going to have extraordinary year over year economic growth numbers combined with unprecedented fiscal and monetary stimulus, again, not just in the US, but across the world. And then you've got just these crazy animal spirits that we've seen in this manifest most recently in this tech stock bubble, a short squeeze, bubble basket, I call it. So, you know, I don't like making short term calls. I have a colleague who's much better at it than I am.
But I think he's probably right that they're still across the market, but particularly sort of in the tech space. They're still they're still may well be a melt up to come. So the way we've been playing it is is where we've seen real blow offs in stocks where they become really disconnected from our estimate of intrinsic value. We've been telling our subscribers to take profits, but we're not issuing just a general. This is a top go to cash kind of call.
I have a feeling we're probably six to 12 months away from that.
Yeah. Reminds me again, history doesn't repeat itself, but it rhymes. The economist called the top of the dotcom implosion perfectly. They even described how it happened, but they called it in nineteen ninety seven.
And when when guys like I'll say you, you're much more sophisticated investor to me, but when generally the quote unquote experts say we're out of top, that usually means it's going to run another thirty percent or at least historically. And then about the time that everybody says, well maybe we're in a new economic paradigm, remember those are. Articles in The Wall Street Journal saying that this is potentially the Internet has unlocked a new economic paradigm when sort of people could just sort of throw in the towel and say maybe we're in a new model, maybe the traditional this time is different.
The four most dangerous words in investing look out below.
Right. That's when things. But there's been some interesting an economist out of Yale had a great article in The New York Times that it's going to be the Roaring Twenties. You look at the stimulus, you look at the prospect of a vaccination, and you look at the pent up demand emotionally of people who just want to get out there and spend money or go to Disneyland again, start having dinner with their partners at Red Lobster or wherever. It's hard to imagine the economy isn't going to like you said, Lapps, some incredible, some incredible numbers.
Talk a little bit about what you refer to as Tarsa Transportation as a service.
Yeah, it's a concept here that basically people a lot fewer people will own cars and they will simply have an app on their phone, like an Uber and Lyft. Except except these will be electric vehicles in all likelihood, but most importantly, autonomous vehicles. And I think most people are sort of thinking this is maybe 10 years in the future. And I think it's almost it's here now. It's already happening in Phoenix, for example, where Google through their wammo division.
There are people in Phoenix right now that it's a geo fenced area. So it's not full level five autonomous. It's what's called level four. But right now on there, ten or twelve thousand people. I think Google has revealed the details. They just pull up and open up their phone. They said like a car. One pulls up and sometimes there's a safety driver sitting in the car, but oftentimes not. And I have a friend in Phoenix who already tells me he's he's noticing the car or the most families living in suburbia in Phoenix would generally have two cars.
And those families now find they only need one. It just has enormous implications if this spreads as rapidly and as widely as I think it does, ranging the whole the whole parking, the amount of space and the industry of parking lots largely disappears. Cities like New York City that collect five hundred million dollars a year in parking tickets and or parking meters, you know, how are cities going to replace that revenue? You know, if you think about the concept, transportation as a service is drawn from software, as a service, where people, instead of owning something up front instead sort of do it on a pay as you go basis.
So Elon Musk has talked about this turning Tesla into a fleet of robot taxis. As usual, he was years too aggressive in in his predicted time and he was predicting there's going to be already have happened by now and that the average Tesla owner would have an asset that is now worth four times what he or she paid for it as a result of being able to have their car when they're not using it out there. Providing transportation is a service. His timing was completely wrong, but I actually think the vision is completely right.
So we came out with this about a year ago. We named five stocks. What are those five winning? I can't reveal all of them because they're for our subscribers. But we started with just by Google. And you're getting wammo is part of that and we don't think you're paying for it. So that was the easiest, safest one. The second most best known stock would be Invidia, which is making the chips, which, you know, as a value investor, I don't know, the stock was trading fifty times earnings at the time or something, but lo and behold it's doubled.
And then we should have, of course, just recommended Tesla. But we thought that was just sort of too obvious and too much of a cliche. But we recommended some smaller companies that make the picks and shovels for the miners. That makes some of the technology that makes autonomous driving possible. So just to try and take the other side of how this investment strategy doesn't always end in tears, you look at Tesla and I thought I said in front of 3000 people at South by Southwest, I don't know, two years ago that Tesla was overvalued at 50 bucks a share.
I think it's at 850. And the vision, if you will, not only the narrative, people saw it as a movement. I think they more saw it as a movement around energy or climate change than a movement around intergenerational rage or sticking it to the man, if you will. So I would argue that was probably more. More the movement was more attached to the fundamentals of the company or the prospects of the company. But you had the same bot's, you had the same aggressive people coming after you.
You had the same passion for the stock going up and the irrational exuberance for for lack of a better term that provided the company with enough cheap capital to pull the future forward and realize that vision. And so I Melvern. Capital lost three billion, I think.
And then shorts are there's been three billion in shorts excuse me. Shorts have lost about three billion dollars in this. I won't even call it a short squeeze, but a crowd squeeze shorts have lost seven billion in Tesla. Is there is there a 70 billion or more?
It's I don't know what time period you're talking about, but see that much await.
Somebody has 800 billion dollar market cap and it had a 20 percent short interest during most of the run up. So, you know, is it even more so?
But was the original gangster here, Tesla and his Tesla, a case study and how this actually can be a sustainable investment strategy? I have so many thoughts and swirling emotions on Tesla, but I will I will say this is a classic case of you don't have to be a hero. I know so many short sellers who just threw themselves onto the fire and I begged them not to because I was short Tesla from seven. This was split adjusted. So it was like thirty five to two or five.
But there's been a five for one split in there. So call it seven to forty or something like that back in twenty thirteen. Now fortunately I was offsetting it with being long Netflix. Both stocks were owned by the same people and there's a lot of excitement. So to some extent a little bit of a trade. That's the best excuse I can get for being dumb enough to be short. Tesla and ever since I finally realized, hey, Tesla is a very open ended situation, my cousin, who's a Stanford engineer out there, introduced me to two of his Stanford engineer friends who were working at Tesla, this back in twenty thirteen who told me, quote, There is nothing Elon Musk and JB Straubel, who is that?
His right hand man in charge of the engineering team. There is nothing Elon Musk and JB Straubel can't do. And I was smart enough to realize, oh, I want to get out of this short. I unfortunately was not smart enough to realize, gee, I might want to be this right. Shame on me. My analyst was an early Tesla owner. He bought the stock back at about the time I was shorting it. He has made over a hundred times his money just finding and you only have to do that once in a career to retire, basically.
Right. So and getting back to sort of the bigger what should you do as an investor is is. Yes. Have some things like Berkshire Hathaway that's probably 20 percent undervalued in your portfolio is not exciting, but that's the foundation. But if you want to put try and find the next Tesla, the next Netflix companies that are really sort of breaking rules or whatever and owning them for a long period of time, like I owned I owned five million dollars of Netflix at seven dollars and change per share seven years ago.
And I thought I was so clever. I make seven times my money. Every time it doubled, I sold, it doubled, I sold, it doubled. I sold. And then I finally exited up seven times. The stock has since then gone up ten times. So it's been a 70 bagger. I went back and did an analysis of I owned Apple at a dollar forty to a share split adjusted twenty years ago. I owned Amazon at forty eight dollars a share.
I don't even want to tell you the prices at which I owned McDonald's, Home Depot, et cetera. But every time I was sort of trading and like you said, every my experience certainly mirrors the research that you have cited correctly, which is the more trading you do, the lower your returns are going to be and certainly any kind of rapid day trading and certainly you layer in options in there. So, you know, I've I've actually sadly, it took me twenty years to figure this out.
So I hope some of your listeners will listen to what you're saying and what I'm saying, which is try and find a handful, build a portfolio of, let's say, a dozen stocks companies. You're interested in that you know well that you think are high quality, that have a bright future ahead of them, maybe mix in a few smaller ones, maybe a little riskier, but have a foundation of some what I call style works, you know, and then and then try and forget about it, go about your life and build friendships and focus on your own, making sure your marriage is healthy and and that you're in good physical shape.
You're exercising properly. Are you getting enough sleep every night? You know, I used to I've become a total ever since seeing Matthew Walker's TED talk, he's done some innovative research on sleep. I now try to get eight to nine hours of sleep, whereas I used to deliberately set my alarm to get less than seven hours because I was so busy, had so much work to do. So your most precious commodity is is, is your time and how you made it.
So I'll just wrap up this sort of soliloquy by saying I completely agree with you. This is for the vast majority of people, like ninety nine point nine percent of people, it is a terrible, terrible misallocation of time to spend. They're looking at your You're Robin Hood app and day trading stocks.
So when you look at where do you see what's there?
Let's not talk. You talked about the market. Where do you see relative to the market the most, who did? What sectors do you think are the most undervalued or overvalued to speak specifically to sectors?
I do not see anything that's really screaming at me that's just really cheap and that I'm waiting in and buying. It's it's just sort of fully valued across the board. But that does not mean overvalued when I look at. 20 largest stocks in the S&P, five hundred, I see a collection of amazing businesses trading at sort of moderately high multiples, but in light of where interest rates are and the stimulus and so forth, I'd say fully valued but not overvalued with the possible exception of the fifth largest company in the US stock market right now, Tesla, which could easily I'm not predicting it and I've been saying for years, I don't think it's a good long I don't think it's a good short.
Just stay away from it on the short side. But that stock could fall 50 percent or more and still be wildly overvalued by any metric. Right. Whereas I would not characterize any of the other stocks in the top 20 the same way. So, look, I always tell people I've called Berkshire Hathaway America's number one retirement stock for years. It's probably 20 percent undervalued. It's compounding its value in high single digits, maybe 10 percent. So that's it has if you look at how it's done since the bottom in March of 2009, so you've now got almost a dozen years.
It's basically almost exactly track the S&P. Five hundred. But I would argue with a lot less risk. It's had a huge pile of cash and it's very conservatively financed and run and so forth. So I like that a little better than the S&P five hundred index. And by the way, I've got a big chunk of my retirement savings and I manage my parents retirement money, a big chunk of it just in the S&P 500. Just go buy spinn, forget about it.
That's my single biggest position by far been then I'd recommend Berkshire Hathaway and that I would put 50 to 80 percent of your money in in something like that. And then where where might that be looking? Take a little more risk. I still like Alphabeat. I think it's this sort of the cheapest of the big cap tech stocks. It's got some headwinds here and there, but it's still just an amazing growth machine. You know, Apple revenues, Apple is struggling to grow.
Its revenue is very low single digits. It's almost all of its earnings per share growth in the last five years has just come from huge share repurchases. I think Google's earlier on the growth curve. It's quite a bit smaller. It's growing, pushing 20 percent compounded topline, plenty of room to grow margins. And they still they've got a big pile of cash and they haven't even begun the share repurchase game. So, you know, I've been dead wrong on this for the last couple of years, but I prefer Google Alphabet over Apple for sure.
So you throw in Twitter something with a little more excitement. And, you know, I think, you know, right there you can sort of forget about him. By the way, I'm sitting on thirty percent cash right now. When the market crashed last March, I was sitting on a lot of cash from when I had shut down my hedge fund in late twenty seventeen. I poured money in and I went from sort of fifteen percent invested to eighty five percent invested over the course of four weeks.
Then the market rallied really sharply. Just being the value guy that I am, I should have just held, of course, given what the market's done since then. But I sold a little bit, trimmed a little bit, and today I'm actually really quite happy being 70 percent invested, 30 percent cash. And I have a feeling, you know, sometime in the next year or two, there's going to be another 30 percent pullback in the market and I'm going to have some dry powder to put to work.
So one of the good things that ideally will come out of this Wall Street bets or the threat of movement is that it will inspire a lot of people. They'll think, you know, I really am interested in the markets and I want to do this for a living. And you're a hedge fund manager. You've been in the markets your entire career. What advice do you have for someone who's thinking about this as a career in terms of training, best way to to build the skill set required to do this for a living?
I would characterize it similar to if you wanted to be a brain surgeon or a fighter pilot, for example, or a professor, which is you should first go get the absolute best education you have. And I'm parroting, of course, some of your advice, which is get credentialed and then move to a city. And unlike a big city where for for most careers, I actually think you're probably best off being in New York City, maybe a couple other cities.
But really, the center of the universe would be New York City, maybe London. Hard to tell what's going to happen with Brexit there and then get into a training program, just like doctors and fighter pilots, they go to school and they develop the foundation. Then they get very specialized training that involves an apprenticeship. You need to find someone who is more advanced in their career, who's where you want to be someday, and then persuade them to invest the time and energy to train you.
I do if you can get into a top three MBA program or top. I've MBA program that's probably worth taking two years off, but then ultimately you need to do at least five years, if not 10 years of apprenticeship under a master and really learn not just the investing side, but particularly if you want to go out and start your own fund, you need to learn the entrepreneurial side. And this is where I didn't know what I didn't know when.
I just hung out my shingle as the world's smallest, smallest hedge fund with having never worked in the industry back on January 1st of nineteen ninety nine. And I had a million dollars under management and I made a real good go of it. But because I hadn't had the training and experience, I made a bunch of investing mistakes. But worse yet, I made business mistakes. I didn't know how to build a business because I had never worked in this kind of business.
So most importantly, after you've gotten credentialed and gotten the basic training, go find yourself a great apprenticeship for five or 10 years and really learn the ins and outs and the inside scoop of the of the business. And only then do you consider starting your own fund to. By the way, the answer for 90 plus percent of people is, as you should never start your own fund, you should just be a senior analyst at a bigger fund or in a bigger firm, Sanford Bernstein or something like that, and build a great career coming up with three great stock ideas a year.
And that is worth millions and millions of dollars to a big firm. And you don't need the brain damage of going out and trying to start your own firm. It's like if you're a great chef, all great chefs should not run out and start their own restaurants. Most great chefs should work for somebody else's restaurant because then they can focus on what they love and what they're uniquely good at.
Whitney Tilson is the founder and CEO of Empire Financial Research, as well as the editor of Empire Investment Report and Empire Stock Investor. He's also the author of two books, The Art of Value Investing How the World's Best Investors Beat the Market and More Mortgage Meltdown. Six Ways to profit in these bad times. He was a contributing editor to poor Charlie's Almanac, the definitive book on Berkshire Hathaway. Vice Chairman Charlie Munger. He joins us from his home in New York is all right.
Are you in Manhattan's Upper East Side, Cyclone? Stay stay safe, my brother. Stay safe. Thanks for being with us, Renee.
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Welcome back. It's time for Office Hours, a part of the show where we answer your questions about the business world, big tech, higher education and whatever else is on your mind. If you'd like to submit a question, please email the voice recording to office hours at Section four. Dotcom question number one, high property.
I'm Evil. Final year high school student from Warsaw, Poland. Recently, he shared a prediction that Apple would buy Peladon. I'm curious why it has to be a purchase of a whole company rather than product partnership in which Apple is experienced teaming up with Nike or Airbus. Looking forward to hearing your opinion and thank you in advance. You are from Warsaw.
Thanks so much. I love Warsaw. I love Eastern Europe. I love the beer. I love the architecture of the vibe, the sense of enthusiasm of kind of I don't know these countries. I guess it's a little late to say the country coming online, but I love Poland anyway.
Now we asked about. So you're right. Apple doesn't necessarily need to buy the company. Typically, Apple doesn't want to be a venture capitalist. So if they were going to do an investment, it's usually to kind of kick the tires or sometimes pee on the hydrant to make sure someone else doesn't buy it. Oftentimes companies will invest in a company and in that investment or as a function of that investment, they'll they'll ask for a term called a roofer or a right of first refusal, meaning they want to make sure that if anybody else comes in and buys potentially a strategic asset, they have the opportunity to come in and buy it themselves.
So, for example, Richemont made an investment in NetApp, bought this online purveyor or retailer of luxury items because they wanted to get to know it. They wanted to be on the board and they wanted to make sure that nobody else bought it. And then I believe it was hers, came in and put in an offer for it, which effectively forces the hand of Richmond. Richmond says, we don't want to lose it. We don't want a media company to have this asset.
And boom, they go ahead and buy it. Roofers are, if you will, tempting as an entrepreneur to give away in exchange for an investment. But keep in mind, you're effectively just creating a stalking horse for other buyers, become a stalking horse for you to sell to that player, and they limit upside value. So if you're an entrepreneur and you're taking investment trying to avoid the roofer, it sounds easy and cheap at the time. But the net effect of it is it limits your upside.
Anyways, I got off on a bit of a tangent there. The market capitalization for peloton is forty three billion dollars. So let's assume that Apple would have to pay fifty or fifty five billion. I don't know if Teletón is worth that, but it's probably worth that to Apple as Apple would get another 30, 40, 50 minutes of attention from who I think are the most influential people in the world. Think about the people riding a peloton. It's everybody from Joe Biden to Oprah.
And so the having these people on IOC or what ultimately would be IOC connected fitness. Apple has incredible supply chain. So in some is is peloton worth fifty billion? Probably not. But is it worth two or two and a half percent dilution to Apple? Absolutely. Reminds me it reminds me of when jet dotcom was trading at a valuation of two billion and got purchased by Walmart for three billion. And I said there's no way this thing is worth three billion.
It was burning fifty million a month. It was basically a business invented to incinerate cash. What I got wrong, though, was it was worth more than three billion to Wal-Mart.
Was it worth three billion? No. But was it worth more than three billion to the biggest retailer in the world who had about 150 or 200 billion our market cap at the time and whose e-commerce growth was high single digits, that was Wal-Mart. They weren't growing their e-commerce very strong. And by making this three billion dollar acquisition, they immediately screamed into the double digits. They supercharge their growth, even if just for four quarters to lap really weak numbers.
Yeah, it was worth more than three billion dollars to Wal-Mart. So so let's circle back to your question. Yeah, they could do a partnership. I'm not sure they want to do that, though. I think they want to do their own thing and connected fitness. So I don't see partnering here. I see maybe an investment with a rover, which peloton probably wouldn't do. I see peloton stock if it in fact does decline and I'm not sure why it would, but I've thought this company was very fully valued for a long time.
But if it does in fact decline, I think Apple swoops in and buys peloton. Thank you for the question. Next question.
Hey, Prof. I'm Irvin from Seattle. I don't work for Amazon, though, but the company I work for has done well for itself in the last couple of years. So currently eligible to be an accredited investor. So I read a book on angel investing by someone I don't think you're a fan of, but I'm thinking of investing in startups through a syndicate or C to invest in other places. What are your thoughts on it? Do you think it's a good idea or it is something like SPAC and others that you're not into in general?
What would you invest in 2021 if you were in your late 20s and you are an accredited investor?
Thanks very much, Arvind. So I look at angel investing as part investing, part consumption. Angel investors are usually people who have had a very successful career. Want to learn more about a sector. They also want to make money. But I find that angel investing the very beginning kind of that seed stage, if you will, is a very dangerous part of the capital structure. Why? Because unless they sit on a fund and can take advantage of pro-rata investment rights, if the company does, in fact strike lightning and take off that, if you're an angel investor, you typically don't have a ton of strength in the cap table.
You're sometimes paired back to a bigger VC, comes in, pushes you out. But if you have pro-rata rights, can you even exercise those pro-rata rights? Do you sit on that kind of capital? And I think the early part of company formation is just fraught with risk. I think there's just so many risks to going from A to D.. So if you're going to invest, if you want to be an angel investor, I would suggest that you spread a lot of money around.
I think it is very difficult to pick which star is going to be a shooting star. There's just so much magic and alchemy and good luck and great execution that usually involves a pivot at some point to go from kind of letters a to do so. I find it on a risk adjusted basis. Angel investing is really, really difficult. Having said that, I think it's rewarding. I think it's it's good for the economy to be involved. I think you can add a lot of value if you think of yourself as someone who's hands on and can make introductions or advise them.
I think it's rewarding to mentor young people. So I've done some angel investing, but I'm clear that it is I have a lower return expectations and maybe I shouldn't, but I do have lower return expectations because I think of it as being somewhat, somewhat consumption, if you will. In terms of your question around, if you're an accredited investor in your late 20s, I would just invest in public stocks, if you like. I've never invested in bonds.
I invest in private companies. As I got older and had access to sort of later stage private companies that I knew were doing really well. Some of that, though, but to be clear, a lot of that is because I've reached a point where I have good contacts and because of the work I do, I get a lot of opportunities and you might not have those opportunities. I would suggest just a diversified portfolio of index funds, low cost, don't trade them.
We've been talking a lot about this. And then for fun, if you find companies that you're passionate about, if you want to put some rocket fuel or specific companies, dip your toe in there. Very difficult to time the market. But again, back to what Warren Buffett said that we keep talking about. You want to be time in the market, but the fact that you're in your late 20s and you're thinking this way means that I don't know if you're going to get rich fast, but I'm pretty sure you're going to get rich slowly.
But the great thing about time is it goes really fast, my friend. Thanks for the call. Thanks for the question. Thank you, Arvind. Next question.
Greetings, Professor, from the University of Montana in Missoula, Montana. My name is Mike Braun, strategy professor at our College of Business. My MBA students and I just kicked off our spring course on corporate turnarounds. And as part of the class, we analyze an ailing company, reasons for its decline and its potential for turnaround. This semester, we're looking at the gap at the six billion dollar apparel retailer that has been struggling for years. We would like to ask your expert opinion on the following.
Are a gap or any of its other brands leveraging into brand temples?
Should Gap follow innovations in KPG and consider regionalising or customizing its apparel and any other recommendations on how to breathe new life into this 50 plus year old brand? Thanks protg for serving as a lifeline for me and my students.
Thank you. That was a nice thing to say. And Montana is one of those. Montana is an amazing brand. I had never been there. But the promise of Montana is that they're just these incredibly nice people living in a beautiful place. It just sort of reeks of buffalo and incredible mountains and good Americans. And I went there and found all of that to be true. And it also did a remote class at Montana State, I believe. Anyways, anyways, thanks for the question.
So let's talk a little bit about the gap. The gap has a lot of headwinds and has for the last twenty years, I think it was one of the best performing specialty retailers of the 90s, 80s and 90s. An interesting story. So Bill and Doris Fisher had a record store and they started. Piling up, Levi's and then Mickey Drexler came in and said, I see that the future is no longer about advertising. Fall into the Gap was their big ad campaign.
It's about going vertical and putting in beach, blonde wood and bigger dressing rooms and controlling the environment, controlling the smell, and then designing and merchandising and manufacturing and supporting your own look, your own feel. And they brought a sense of flair, a sense of design and style to kind of affordable basics. And that was the gap.
It was. And it was incredibly powerful. Branding had moved to the store. It was no longer about Levi Strauss and Co., which was the biggest apparel manufacturer in the world, using broadcast advertising as a store that sort of got dollar in dollar and then branding moved to the store. As broadcast advertising got less effective and more expensive. Mickey Drexler realized his transition was taking place as it was at Starbucks and across a bunch of specialty retailers. And the Gap kind of kicked off this era of specialty retail of the limited Williams-Sonoma Pottery Barn, also owned by Williams-Sonoma.
And The Gap was sort of broke new ground here. Then then it kind of got stuck in the middle. Right there was the fast fashion guys, the czars of the world. Right. And arms that basically said we'll give you a kind of 80 percent of Old Navy, but more fashionable, and we'll create this unbelievable supply chain where we can get stuff from the runway to a factory to a store for a fraction of the cost and a fraction of the typical time, not as high quality, more consumption, but scarcity.
It's in it's in our store. We make less than demand and it creates a sense of urgency. Boom. Inditex, the founders of Inditex, are the second wealthiest family in Europe, just behind Bernarda. No where was the other side of the spectrum that was doing really well. And that is the middle got crowded out by the small guys, the fast fashion guys or or the doors.
Their Ima's the chanels of the world that have been killing it to a certain extent. It's sort of a larger indication of what's happened in terms of income inequality, where the middle class has less money, the wealthy have more money, or people either want extreme value or extreme value add. And the gap is kind of neither of those Old Navy Bass's zero to a billion dollar retailer in history by taking this axiom that is really powerful. Eighty percent of the gap.
Fifty percent of the price. JetBlue face is zero to a billion dollar airline. Eighty percent of Delta or, I don't know, 60, 70 percent of the price. I would argue it's 110 percent of the value of Delta.
I love JetBlue anyway. Anyway, what could they do? This is a difficult one. I think that if you look at demographics, the most exciting part of specialty retail and apparel and apparel is going to be resale specifically. Rental has been really interesting subscription rental. But I think the marketplace is moving towards resale and that is younger people are much more focused on ESG and sustainability and they're much more comfortable wearing other people's clothes. My generation does not like the idea of wearing someone else's suit or someone else's dress.
So sort of second hand resale, if you will, supposedly supposedly resale is going to be bigger than fast fashion by twenty twenty seven, which means in a short six years there will be more wealth created in that category than in fast fashion. So we're going to have an extraordinary explosion, including probably what will be one of the wealthiest families in the world that figures out resale. So there's probably nothing wrong with the gap that can't be fixed with what's right with it.
They attract fantastic human capital. They're very smart people. They have good brands, if not great brands. They're pretty good to real estate. They've been on the wrong side of trends for a long time. Old Navy, they were talking about spinning. But if you're asking me for a focus, if you will, I would say that it's probably around resale. Thanks for the question. Algebra of happiness, so on our other podcast, Pivot, we interviewed a woman named Reshma Saujani.
Reshma is the founder of Girls Who Code and has a new initiative called a Marshall Plan for Moms. And her viewpoint is that if we want to get the economy restarted, there is an opportunity to basically UBI for moms that if you look at that, would be means tested. But if you look at the cohort that has taken one of the biggest hits in this pandemic, simply put, its moms and a lot of us have seen this firsthand, that the dispersion, if you will, of education of kids from schools, a lot of a lot of which aren't open, has been dispersed to the home.
And the notion that an eight year old is going to be able to do remote learning without an adult next to him or her is just somewhat of a fantasy and is many articles are well publicized articles, as there are about dads contributing. And I don't, you know, counter the notion there are a lot of wonderful fathers out there who are contributing. The majority of the burden still rests on the shoulders of the mom. And as a result, you've had a lot of moms who have had to put their career on hold, a lot of women who were especially hard hit, part of the cohort lower income cohort that registered a 40 percent interruption and work from the pandemics of NetNet.
And this is a scary stat. The number of women in the workplace has declined to where it was in the 80s. And so we're going to see wage destruction and we're going to see a giant step back in terms of some of the gains that women have made. I registered or saw the impacts of this firsthand. I was raised by a single mother. Both my parents were talented in their own way. Neither had a very good education. They both were pulled out of school in the eighth grade.
But when my parents split up, my dad went on to make fifty thousand dollars a year and my mom went on to make eleven thousand dollars a year because back in the 70s, as a woman, if you didn't have a college degree, you could basically be a travel agent, a real estate agent or a secretary. You could even be a teacher. And our lives just got, quite frankly, just so much harder. And if you think about a productive society and it's very easy to say, well, it's all about the children, but is it are we really investing around children?
Because if you want to mess around children, you've got to invest around moms. And we keep waiting for companies, better angels to show up. And we talk about family leave and parental leave and what happens to companies with the best family. Leave the companies with the best parental leave. The companies that provide protection for women when they return to the workforce are the best companies, the most profitable companies, because they can afford to do these things. And those tend to be the companies that, quite frankly, attract people that don't need that much help because the double leave from MIT, she's going to be just fine.
The moms that need this help don't have access to that level of corporation or typically have access to do really well. So is there if we really want to make a great investment, our society is a Marshall Plan for moms, maybe a great idea.
And not only that, the wonderful thing about moms, especially those who aren't able to work or come from middle or low income households, is that if you give them money, they will spend it. It's just hard to imagine a better investment here. And we've been talking a lot about investments and basically basically saying that, OK, a small amount of money thoughtfully put away and I don't say ignored, but put into index funds or good stocks. Those small investments every day over time add up to something remarkable.
And when you ask her, you query people about the most important relationship in your life. The same thing is true. It's typically a function of whoever made the most small investments repeatedly over time. And for almost everybody, you know, that's your mom.
That's the person who woke up with you in the middle of the night when you had a bloody nose and did math problems with you. That's the person. They got your ass out of bed and got you to school. That's the person that, you know, sewed your clothes. That's the person that they had managed to get to work and to get home. I've always thought that there's really just two fundamentals to success in America, and that is having access to great education of Osada.
A great education was the upper lubricant and to having someone who's just irrationally passionate about your well-being. For most of us, that's our mom. And if we don't if we don't make an investment in mothers, I just can't think of a better place to invest. Think about all the money we put in small business. Seven hundred fifty billion dollars. Think about all the money we're putting towards airlines. We're investing billions of dollars to bail out airlines with the investment that foots most to to what's really important in terms of our our own lives, our own happiness.
Wouldn't that be the best investment being Moms Marshall Plan for Moms Dotcom. Our producers are Caroline Chagrinned, Andrew Burrows, if you like what you heard, please follow, download and subscribe. Thank you for listening.
We'll catch you next week with another episode of the show from Section four in the Westwood One podcast network.