You're listening to Teip. All right. Hey, everyone, welcome to the Investors podcast. Today, we bring back our mastermind group with Toby Carlaw and Harry Ramachandra, where we go around the room and we make a pick in the stock market and we talk about why we think there's value. We help troubleshoot each other's picks. We poke holes through it. We talk about what we do like about it. And in general, it's just a fun thing that we do every quarter to just show people were thinking about what we think is valuable in the market and the thought process in the mechanics behind how we do our analysis.

So with that, this is the fourth quarters mastermind discussion. And let's get started.

You were listening to the investor's podcast. When we study the financial markets and read the books that influenced self-made billionaires the most, we keep you informed and prepared for the unexpected. Hey, everyone, welcome to the Investors podcast, I'm your host pressed ambition, as always, I'm accompanied by my co-host, Stig Brotherson. And Boy, oh, boy, we got Toby Carlisle. Harry Ramachandra here, guys.

Welcome back. What's going on? What's up, fellas? Hey, guys, good to see you. Just feels like we get crazier and crazier every time we record one of these things. The backdrop, the backdrop just gets crazier and crazier.

It's kind of like, what is this going to let loose? I mean, I don't know. Do we have anyone who wants to go first? I'm always happy to go first. I felt bad pushing to the front of the line, but I got it out of the way. Gary. A few weeks ago, we launched a new Deep Valley ETF focused on small and micro stocks, and the tick is deep. And so the pick is one of the holdings in Deep.

It's called Diamond Hill, the ticker's DHL for the thing that I'm picking. It's a Diamond Hill. Is there a value investor, funnily enough, and that this is the very simple overview. They run about 20 billion dollars and the economics of an investment manager are quite good.

They have very high return on equity. They've sustained it for a long time. They're very good investors. They have long only funds and long short funds and they earn fees on the funds. And basically they've suffered along with every other value investor out there, both in the, um, and their performance, but also in the underlying the company that owns all of these businesses. And it's listed. So I think it's a phenomenally good business and it's phenomenally well-run.

It's the sort of thing that I like to find because it's a phenomenal business, very free cash flow generative, very high returns on invested capital, but suffering because it's going through an industry downswing. And that's just that value has sucked for a long time. So value managers have lost some assets. Their performance doesn't look right, and the equity in the value manager has been punished along with their performance. So I think Diamond Hill, they're very good investors.

When value gets a little bit more tailwind, they're going to do very well. They're in no danger of anything happening to them in the interim because they're making so much money, they just don't go free cash flow negative. It's just that kind of business where it's a good business all the way through. So it's really small. It's a four hundred and twenty million dollar market cap at the most recent close PEs tiny piece, about twelve for something like this, which is a phenomenal business, and its return on equity, about three per cent, pretty much the whole way through.

They're paying out a special dividend because they've had too much cash on the balance sheet, but they've constantly got a little buyback going on. I think it's one of those things that it's a simple business, it's well executed, it's at the bottom of its business cycle and it's cheap relative to where it is now. It's likely that the fortunes of this business turn around with value. So if you believe in value, you're going to get three ways to win in this and it's going to grow.

Their performance is going to get better. The stock is going to follow along with that. And then because it's undervalued, the stocks also going to close up.

So for me, basically a perfect opportunity. So, Toby, you know where I always go, which is to the top line, and when I'm looking at the company and this is something I've been doing more recently, is when I'm looking at the top line on a company, I'm particularly looking at this the how did they perform in the third quarter and how did they perform in the second quarter? Because I'm looking at that from the previous second and third quarter for these companies just to try to maybe use the numbers as a gauge for covid.

And what I'm looking at, where they were at and I think my numbers right here. So thirty one million here in the for the third quarter. Twenty eight million for the second quarter compared to a year before. And they were down 10 percent and they were down approximately 10 to 15 percent for those two quarters when you compare it to the previous year. So it seems like maybe there's some type of covid thing that's impacting their top line. Do you know what that might be?

Yeah, they're an asset manager, so their fees are earned on the assets under management they have. So when their assets under management go backwards, their fees go down. So that's where they were impacted. But as I said, the really telling part for this business is not so much what the top line does.

It's how their gross margins go through the hole when their gross margins are fat and they're able to you know, it's basically it's a very scalable business. It's all basically income that they can control their costs. They're not going to foot cash flow negative as a result of having a backwards few quarters. And then, you know, that kind of Kovar drop as it goes away, their fortunes are going to be tied to their performance and the performance of value.

I like this pic in many ways, and I mean, what an interesting way of making a value investing in the value investing company. It's better, isn't it? Yeah, it is. And so I like a lot of things, you know, whenever you read about them, what they do, whenever you read the shareholder there from the brilliant, the CEO, a lot of good things. And she's saying all the right things. And to me, that's good.

But it's also a bit of concern. So let me elaborate a bit on that. In the latest annual letter to shareholders, she addressed the issue of passive investing head on. And like she's saying, you know, it's good for investors and, you know, but that's not our game. We're alpha seekers, right? So we we want to outperform the market. So. So let's talk about that. Can they outperform the market? And I think one thing that's really against this business, with all the good things that that you guys just mentioned, there are a lot of good things, a lot of the tailwinds.

But the main issue is really the interest rate. The way I see it right now, I mean, back in the day, you know, Buffett and Buffett as Buffett, he had this zero six twenty five system, you know, hey, just pay me on performance. You know, it's all about performance. Those days are just gone. And they've gone for so many reasons. You know, back whenever he was like, yeah, I can always do more than six percent.

But guess what? If the risk free interest rate, the 10 year Treasury is six percent, it's a lot more easy to be compensated on performance. So you are in the world right now where I look at the product. You know, I look at the Global Mutual Fund, I look at the all cap us. I'm looking here at expense ratios of eighty five basis points or eighty seven basis points respectively.

And I'm like, well if the US price is three percent, the world is priced less than five percent. I pay a lot of that performance, a lot of that potential alpha. I'm paying a lot of that just front up in fees and I'm paying that to someone following a strategy that has just been, you know, punished year over year and with no sign of any change. Right. Because that's not how the world thinks. You know, they're looking at how value has performed in like, hmm, OK, they're not really giving me any kind of yield.

And I still pay a percentage. And I mean, this company is not going anywhere. I think in the latest update, they have twenty two point four billion dollars on the management.

I mean, it's not going to go away, but it is having that value investing, mutual fund, high fee structure. I don't think it's made for the world right now.

More than half of all that's passive investing. So I kind of feel those headwinds are a bit concerning. But let me try to be a bit more positive. I like the valuation. That's what I was just going to say. What do you think of the valuation? I think the valuation is good, I guess, but I would be concerned about is what's going to happen next time whenever the market drops four percent, what really worked out well for as many as this time was that the stock market just bounced back.

What if it doesn't know it's not only four percent that's just gone? Think about how many people like, I don't know, even want to be in stocks. But if I am going to be in stocks, it's definitely going to be big tech. It's not going to be value investing. And so just keep that in mind whether I'm going to pitts' my awful, awful pick.

That's a very classical value, peg afterwards.

So, I mean, just keep that in mind, guys, but that's definitely a concern that I have. And but I do buy into some of the good things you're saying. There were the margins, Toby. You know, the biggest expense to have is whenever they do perform well. So you have the hats there. They have no CapEx, more or less. So it is a great business. And when am I look here, I could probably find a generous eight to 10 percent return again.

And that's vary depending on do I think value investing takes off? If that's what I think, you know, it's much, much higher. If we continue being in this environment we're in now, I can easily see that return go lower simply because there's no takers for that.

Let's talk a little bit about valuation, about how our value has performed, so the valuation of this thing is one hundred and forty dollars, paying a 12 dollar special dividend for stockholders on record November twenty five, it pays a dollar quarterly dividend as well. On top of that, they just throw off so much free cash. And it's just the nature of that business. You can't reinvest it. It's going to be a very cash generative business where the cash is reinvested in the business or not is sort of that's not how they drive their growth.

Their growth is driven by the AOM going up, which is a matter of performance in a matter of, you know, to some extent marketing. It's a business that I understand fairly well because it's my business as well. So I'm very comfortable with this business and I think that they're doing a very good job. The question that you're talking about is a little bit more macro. What happens if Daddy doesn't start performing again when I look at value now?

So this is the extraordinary thing that's happened. The way that I think about evaluation is you basically get the dividend, you get the yield. However, that's manifest in either stock buybacks or special dividends. And then on top of that, you get any underlying growth in the business. And the way that I look at growth is I just look at what does this thing return on invested capital? How much capital is being reinvested in this business? And then how does the market treat that money that it's reinvest that incremental growth?

So that's how I think about when I look across the value portfolios now. And I'm shocked at some of the names that have been squashed down into the small and micro, because I know these names when they were when they were bigger companies. It's just the valuations have fallen so far. They're now regarded as small and micro companies. The portfolio has a greater yield than the S&P 500 index and the Russell 2000 index and the Russell 3000 index. The yield in value portfolios is much, much higher with the 10 year yield across some of these portfolios, just like three to four percent.

And then on top of that, the return on invested capital is higher across the portfolio. They're reinvesting more. The growth rates that manifest out of that are higher, too. I just think it's a matter of time now before the rest of the world wakes up to the fact that these portfolios are much better than anything else that's out there, including big tech. And when the performance comes, then the multiple expansion comes to. But without the multiple expansion, this thing I still think will likely outperform.

So terbium with Steg on the valuation, I think the valuation is screaming by. Right. I'm getting double digit returns based on the earnings and it's kicking off for the money. I think the dividend is massive. It's a six percent based on the current price. Right. It's a dollar a quarter at the current price, 140 bucks, they're paying about a dollar a quarter, but they're also paying a special dividend since 16 bucks and 140. Yeah, that's crazy, and you know, what's interesting is you're still seeing their book value for the business grow payout ratio is like fifty six percent last year.

Right, and the business growth is almost independent of that, too, because of the nature of the business, they can scale assets at almost no cost. All they need is a little turnaround in value. You know what I'm blown away by, I'm looking at our momentum indicator and this thing still red and it's up 70 percent since March. I look across my portfolio when I look at Zig, it's scores high and everything except for momentum. When I look at deep, it scores high on everything except for momentum.

This is an interesting pick. The numbers are screaming, there's value here, no doubt. I'm just concerned, like Stig's concerned, that there is so much momentum and so much more expectation for more printing and more of the same of what we've seen to date. That that's my concern, is it almost seems like value investing has been penalized based off of policy. And it seems like the policy is getting ready to be doubled down on, which should, I guess, in the back of my mind is suggesting that values is going to get punished even worse if they continue to do what they've been doing policy wise.

As an investor, I don't really care so much about what the stock price has been doing because I think about the stock price is just a marginal buyer and seller getting together. And the way I think about returns, the return that I'm going to get is, as I described it before, it's going to be the yield plus whatever underlying growth plus whatever.

But, you know, when, say, underlying growth, it's going to be whatever yield they pay out, plus the return on equity multiplied by the amount of money that they reinvest in that business, multiplied, by the way that the market treats that reinvested capital. And so you can look at it's a very simple calculation to do. I really never care about the actual trajectory of the stock price. I think that that's something that you just that's out of your control.

The only thing that's in your control is your own analysis of the business.

And when I do those things, the returns to value are as good as I've ever seen them to small caps and micro surpluses, which is what's happened in small and micro world.

It's all crushed. So one quick question to you here, Toby, about the asset management industry as a whole, that's one thing I can't help but ask. Now we are talking about this piggin and we're talking with you with everything that's been going on, those low yields we have now.

I'm looking at some of the old, well renowned value investing company. Doesn't the cell have to be value investing? But for the sake of argument, let's just say this. And they're all built around doing close to one percent in fees and they're not performing. And even if they did perform as the benchmark, you know, it's like three percent. And with all that money just going into passive, it's ass from Vanguard. Seven basis points is a company like Diamond Hill Investment Group.

Are they seeing if they can get the same investors and board or is it just a completely different ballgame who are not so much interested in fees and perhaps the selling products for banks and and like different type of investors who are just not looking into this whole, hey, why don't we just index? If you looked at the index and you did the same calculation that I did, which was a yield plus a return on invested capital multiplied by it, and so I just thought that I was describing what you'd find looking at the index is that the return over the next decade is likely to be between zero and two per cent, including dividends.

And I think that that means that it's negative on a real basis. So the amount of money that we're going to print over the next decade, probably that's going to dwarf anything that's ever been printed before. And you'll go and get a big discount to that if you're in the index. So it really doesn't matter if you're paying seven basis points or zero basis points. I don't think you're going to get any return there in order to get a return.

You're going to have to buy things. I mean, this is what the Fed does that push guys out on the risk spectrum. You're going to be down in small and micro-cap value world to get some decent return. And so I don't mind all that money flooding into the indexes because it distorts prices. It distorts valuations. I'm a value guy. That's the best thing in the world that can happen to me. I love that kind of stuff. And you plan on holding it as in the long term, so your opinion is that it's in the markets and eventually realize what the real value is, which we're all looking at this and saying there's value.

The numbers are screaming.

I don't need the market to recognize the value in these things because I always calculate the return without the market having any. Yeah, and if I can get a return that's bigger than, you know, sitting in a 10 year or whatever the comparable kind of might of a cash alternative is, then when I look at these things that like 10 to 15 times the 10 year, the return is enormous. So I'm very comfortable holding these things. Well, Toby, it's the dividend alone is double the return you get out of the S&P 500 based on its P.

Let's take a quick break and hear from his sponsor.

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All right. Back to the show. All right. Let's go to another one. Do you have anything for Tobey's or you want to roll to the next thing? This is way out of my circle of competence. Very interesting. I'm going to go next, if you don't mind, stay. Please go ahead. It's not that I have two pics, I just want to emphasize my pick on the first quarter of twenty twenty was Bitcoin. It was at eight thousand six hundred back then.

Today, it's at fifteen thousand two hundred and sixty four seventy seven percent gain over the last two hundred and fifty days. If you analyze that, there'd be one hundred and thirty one percent. I am doubling down on that right now. I think that the next twelve months are going to not just be better but way better than what we've seen since the previous selection. Back then I suggested that I was looking for a price of around twenty thousand by the end of the year.

I think that that's still possible. I kind of suspect that might be pushing into the first quarter of twenty one for that previous all time high to get hit. It might get there by the end of the year. We'll see what happens. My expectation for the end of twenty one or twelve months from now is I think it's going to be at one hundred thousand, maybe even higher. So I really like this pick, I like the direction this is going.

I like where the fundamentals are going. I like the people that are entering the Paul Tudor Jones of the world that are now starting to pile into this talk about it on CNBC. So I do want to emphasize something that I think is really important. It's extremely volatile to the point where if you don't have the temperament to own something that's very volatile, it's probably going to scare the bejesus out of you. So if you do want to take a position, something like this, for all the technical reasons, and I'm not going to get into all the technical reasons here unless you guys got questions about something specific, I can talk it because I've done plenty of interviews that people can kind of go to if they want to hear my opinions on on all the deep reasons why I like this so much.

But I would recommend that a person, if they do want to take a position in this, they're worried about the volatility, do it through dollar cost averaging where you say, I'm going to I'm going to buy a little bit over this period of time, call it three months, and I'm going to buy a little bit each week in whatever position size you want to get to, whether it's one percent of your portfolio, five percent of your portfolio, which Fidelity has sent out an email recommending that people have five percent of their portfolio in Bitcoin, surprisingly enough, which I wouldn't have never expected something like that from a company like Fidelity, but they're on board.

So my whole point in bringing this up is if you do want to take a position, I recommend that you do it through dollar cost averaging, probably over a three month period of time to get yourself into the position, even though it's super volatile. And, yeah, I'm very excited about it. I hope you're right. So don't get me wrong, whenever I'm saying this, one of the things that you're so engaging on Twitter is also that you want to hear, like why you are wrong.

And so I'm sure you had a lot of people tell you why the wrong some of them had good points. Some of them didn't have good points. But I don't necessarily know if the mastermind group is the best place for you to get a lot of pushback and sort of like provide the back. So I'm going to give you a very ungrateful question. I'm going to ask you could you tell me what is the best argument, why you are wrong on this?

Call it seven X return that we're going to see within 12 months, like there must be a really, really good, bad case. And as you know, Preston, we really like here on the show to argue from both sides to please be your own devil's advocate. So the best argument that I've heard of it not being able to do what I'm talking about is if elected officials become fiscally responsible because then the dollar and everything, you know, all these fiat currencies aren't going to be debasing at breakneck speed.

And so there would be no reason to own Bitcoin. So it really comes down to your opinion on what you think's going to happen with the alternative, your opportunity costs from a currency standpoint. Do you think that governments around the world are going to continue to debase at a breakneck pace? I think that they will. So I'm looking at something that can't be debased and saying that's going to do really well, especially when you look at the market cap.

So that would be the counterargument. If you don't buy into this narrative that, you know, I buy into, that might be an issue for you if you own this.

That's a very good point. What I'm curious is why is there a divergence in terms of price increases in gold or bitcoin? And the follow up question to that is, is Biden going to be better for Bitcoin then Trump? The reason I'm asking that is usually supporters of Biden are in Silicon Valley, many of them, and they are on huge backers of Bitcoin. Supporters of Trump traditionally have been goldbugs and then they lose trust in the government, the goldbugs got to go when the Silicon Valley folks lost trust in the government, they go to Bitcoin.

Now, there is that might mean the White House. So will they now go easy on Bitcoin or will they go let's go more into gold. I look at this question as being really straightforward. So when you look at gold, the market cap on gold, most will argue, is around 10 trillion dollars. When you look at Bitcoin today, it's at around two hundred and fifty billion. So when you're looking at something that is literally 40 times less in its market cap but can serve the same purpose and I would argue even more than what gold can serve, simply because you can actually put this on your smartphone and go to a store and spend it, unlike carrying around ounces of gold and making them divisible in order to conduct transactions.

So I look at the utility on this as being way, way more superior than gold. Not only that, when you look at gold, you have to conduct a purity test. Like if I deliver a lot of gold to you, you have to somehow determine whether that's actually real or not. This is really easy. You just run a full node and you can see that it's authentic and it's part of the protocol. Right. So when I'm looking at that and accounting for the upside of where this is potentially going, this is like a slam dunk as far as why the upside is there.

And it really kind of comes down to market cap and utility. When looking at the Biden portion of your comment, you know, the thing that Biden has said that he's going to do way different than Trump is taxes, specifically capital gains for high net worth people.

So when you look at where this is going right now, Bitcoin is treated like anything else and you have to pay a capital gains for any type of gain that you have on it. So I would argue that if you increase taxes on this, that is very bullish for Bitcoin because people aren't going to want to sell it. They're going to want to hold it longer, which then reduces the supply that's being put on the market for buying, which makes the number go up.

So, yeah, I think that that aspect of it is probably how I'm viewing it just from a numbers and mathematical standpoint. I think the higher that they put the taxes on this thing, the less you're going to see people dropping it onto the market. So the question is also, do you feel the president's argument really like what's the best guess? Do you feel that this time is different? Do you feel that we will go back to a period like we happen where there will be more or less no inflation or is what you see now?

Is that here to stay? And I guess that's up to people for themselves to decide. Yeah, well, I think the inflation piece is really important to talk about because in my opinion, ninety nine percent of the people I've ever talked to in finance don't even understand what inflation is. They say the word and there's really no meaning behind it.

So whenever I think of inflation, I've got to break it out into monetary inflation. Are we talking about how many more dollars we're adding into the system? Because if we are the the dollar was debased by 20 percent this year based on printing alone. Now, did we see that show up in the price of oil? Did we see that show up in the price of, you name it, commodity that's measuring this basket that everyone likes to call inflation?

Because, you know, it's published by governments? No, I would tell you that all that printing pretty much went into the capitalization of assets. Right. Because, I mean, think about it. Most of it's going straight into QE, which is beating the bond market. So when you're looking at something that's massive and it's getting printed like that, I would challenge people to, especially when you look at how we're valuing things. Right. Because what we're doing is we're valuing things based off of a 10 year, quote unquote, risk free rate in a premium above that based on inflation.

Right. That's all risk free rates are priced. Is there accounting for, quote unquote, inflation? I think that a lot of that is getting mutilated and destroyed in such a way that it's not even making sense for a lot of economists until they actually take their paradigm and flip it on its head to fully understand what the world is actually happening. And I think that that also makes it a extremely bullish case because most people don't even know what inflation is.

But let's go to the pic. So I need your help on this. I'm not an expert on Oracle. Everyone knows what Oracle is. They know it's a business to business type company. And and so that's why I think we're just not intimately familiar like we are with Apple or Amazon or something like that, because behind the scenes, when you look at their revenues, sixty six percent of their revenues comes from cloud services and licensing support. Another 19 percent comes from cloud licenses and on premise licenses, only eight percent comes from hardware and seven percent comes from services.

So, I mean, this is all about their intellectual property for software and on site labor, it appears looking at their numbers from twenty nineteen to twenty twenty, their numbers are slightly down. And I want to start off by saying that I'm bringing this pick up because it is showing up in our value filter, not at the top of our value filter, but it's demonstrating that it is kicking off a decent amount of profit and the momentum on this is good.

When you look at the long term of this thing, clear back to the two thousands.

This thing has just really had a very steady climb just year after year. When you look at their margin in a per share kind of way, it's very high double digits. When I'm doing an intrinsic value assessment and doing it in a conservative way, I'm getting in excess of like six or seven percent on an annualized basis for the company. So not nearly as good as what Toby had, but decent numbers. I really like the network effect in the fact that they're in this technology space because that really kind of seems to be where all this printing is manifesting itself is in anything with a network effect that's tech related.

So I'm looking at it from that vantage point. But I'm kind of curious to hear your thoughts out in the valley of what people think of Oracle. From a valuation perspective, I do agree with you that this is not something that is on the radar of many investors, at least in my opinion, about Oracle. Is that just to give context, their main strength is the relational database. This is like how IBM had the mainframes or mainframes was basically they were a system of records for many companies, so it was really, really at the core of many businesses that it's really hard to replace.

I have been in many companies. I'm not going to name them. I think you can guess where we had attempted to replace Oracle. And these were companies with good technical talent. It was a Herculean task, really, really tough. Took many, many years. In fact, Amazon has their own databases and databases, and only last year is when they were able to get out of Oracle. And even then they had a lot of trouble doing so.

So it's not easy for people to get rid of Oracle database. So having said that, the challenge I see with Oracle is the same as IBM. They have a cash cow which is deeply entrenched in some of the existing businesses, but they are not able to innovate like Microsoft and get good at other stuff that is relevant today for most companies and businesses. And that has shown up in the way they have been able to capture the cloud and how they are slow.

In fact, I put IBM and Oracle in the same bucket. They both are old, soggy companies, which none of the brand new top and not even talk like if you can get into any of the companies, you'll probably join Oracle, IBM, if you are from Oracle and IBM. I mean, I'm talking today. I mean, Denny is back 15 years back, 20 years back. Really good. Engineers used to go to Oracle. So I'm not saying people in Oracle now are bad or bad engineers.

It is just that today, if you ask any college grad, Oracle will probably not be on their list at all. So I'm worried about that is number one. Number two, they made a couple of investments which were like buying sun really didn't pan out. And then your numbers, you just said like seven percent of their revenue comes from hardware. Basically, the sole sun and sun was already like in the hardware business was not great. Java was not making money.

So it was not really apparent why the Sun Microsystems, but it really panned out for them. So it's like IBM makes some acquisitions that really didn't pan out well for them. So I just put them both in the same book. Actually, in the short term, yes, they are a cash crop. In the long term, I would be worried about their ability to execute. And also we had to keep in mind Larry Ellison, the founder and CEO, he's gradually disengaging because of age and his tenure there.

And I believe Mark Hurd was one of the CEOs who passed away. So now the leadership issues as well going forward. So when I look at their ability to attract talent, when I look at their product portfolio, which I bought from RDBMS, that is their data base, they don't have much to show. And when I look at the competition, they're slowly eating away at the fringes. And this is exactly what happened to IBM, basically because their ERP solutions is not the best of the breed.

A lot of companies like Workday, Salesforce and other ServiceNow, Amazon with their suffering and Microsoft, of course, they're all eating away Oracle's lunch on the fringes, but getting to their core and especially the new companies are not going to Oracle database because most of them will. The software on the cloud and Oracle is nowhere in the cloud. I like how you're comparing it to IBM. The only thing that I would push back on with that comparison is when you do look at the top line between IBM and Oracle, IBM's top line is withering away.

It's getting eroded. When you look at Oracle, it appears that it's been holding steady. I mean, just as an example, in 2011, their top line was thirty five billion. Today it's thirty nine billion. And when you look at the trend through those last 10 years, it's just been this really slow, gradual, like climb up. It hasn't it's not very volatile when you look at their top line and it goes to this network effect that I think that we're both agreeing they have.

So that would be the only thing that I'd push back on. This is not a sexy pick. This is not an exciting pick. I get the same impression as you that they're just riding this IP, that they have this digital intangible IP. And I just don't see a lot of creativity of like how they're going to take their company to the next level or how they're going to take market share from anybody else. And the valuation isn't great, but it's not terrible with it's a lot better than you'd see in the S&P 500.

So I think it's going to do fine. But it's not something that I'm real excited about. I don't own it. I'm just, you know, pitching it to kind of see what your thoughts would be. In the short term next year, I wouldn't be worried about Oracle. They're not going to go anywhere. And I'm thinking longer term, if I want to win in for the long haul, they will have their moat eroded or we're out of time.

I think it's an interesting pick also because we spoke with Evan, the CEO of NetSuite here on the podcast, if this pick and I think they're up like 30 percent.

Right, organically. And that's why if this was NetSuite in itself, like, you would just see that rocket fuel growth that you see with cloud computing right now.

And then you see Oracle and well, it's not let's call it flat or slightly positive. It's not what you would expect with a cloud computing company. The margins are great, but it's one of those where we go like it generates a lot of cash. You probably much rather hold it than cash. It's just one of those where I'm like being in that middle range. If we can call Oracle with that, you know, with the huge market cap, if you can call a company one hundred and seventy billion dollars like a middle sized company, it's not.

But, you know, if we compare it to like the huge cloud computing companies, those who actually do have access to top three, who would that be? You know, that's Amazon. Microsoft and Google can even compete in that space. And I guess so to send them back to you. And you talked about a bit about, you know, big tech, eaten their lunch like this relationship thing that obviously has a lot of stickiness to it and won't go anywhere anytime soon.

With all the investments that go into cloud computing right now, why won't the take on that as the next thing for those big three in tech? Why would that still be with Oracle?

I'm not completely sure understand that. There's a very good one, I think one of the difficulties in removing the database from any application or workflows for companies is that they have to refactor or reimplement most of their software to adjust to that. So you, for example, somebody is watching from there on, prem to cloud. They would still prefer to keep their database to see they don't want to change too many things at the same time. So they might move to, say, NWS, but they would say, I still need Oracle database and we need to be unusual.

But I will keep my database as Oracle because that whole system has been working for many, many years. I just don't want a change immediately. But over a period of time, that might change for some of the non-critical flaws. And that's how it starts. Once a customer gets confidence that some of the non-critical flaws can go through non oracle stuff, they can replace some of the critical flaws as well. So that might be the reason why a lot of companies face challenges in migrating away from Oracle.

When you look at their margin, this has to be one of the fattest margins of a company for this size on the planet, I mean, their margin is twenty five percent after tax. After they pay their tax, they're banging out twenty five percent margins. This insane. They are popular for being extortionists because they know they have a captive customer. Toby, what are your thoughts? I'm just kind of fascinated listening to Hari's discussion, because I think I guess when I look at these big legacy tech companies, that is the concern.

That's always the concern that the reason that they're cheap and there's a few of them around at the moment, Cisco, eBay, slightly different consumers rather than businesses. But there are quite a few of these Odilon tech companies that have got to that mature stage that are ignored completely by the tech investors. That does make me a little bit concerned when I look at something like this. What does this look like over five or 10 years as competitors compete for those big fat margins and people who are trying to escape?

When you got that prisoner's dilemma type relationship with your customer, where you're gouging them every single time they're looking for an opportunity to get away. I just wonder what that does. Let's take a quick break and hear from his sponsor. This episode is brought to you by block by the preferred easy to use quick and secure cryptocurrency platform is available on the Web.

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All right, back to the show. Parker, you had mentioned that HWC had gotten away from them in the last year. When I'm looking at the numbers from twenty nineteen into twenty twenty, it seems like there might have been a little bit of an impact, but not nearly the impact of an Amazon Adewusi stepping away. So did they only rate themselves a little bit or you have more details on that. I don't know all the details, but what I meant by that was Amazon stepping away from that rather than anybody else, because it doesn't really control what their customers would be using.

They give them all the choices. So Starbucks uneatable, for example. They can still go ahead and use Oracle, so it wouldn't be a big impact, because my understanding is it's just Amazon related. So that's just one customer. All right, guys, so before we started recording, you just pressed on me talking for a few minutes before we dialed in Harry and Toby and and Preston's comment was, you have a very bold pick. And when president is saying bold, it sometimes means bold, most often mean stupid.

You know, he's just a very polite person. So just keep that in mind as we go into this pick. My pick is Footlocker, these stock Tagaris F l and I usually pitch one or two things here.

Either it's a stock pick with promising growth prospects that are just not having like high current earnings, at least compared to the price.

And I previously pitched Google, Spotify and Alibaba here on the mastermind group and the three of them have worked out pretty well. And this position that I still hold and then I also picked stocks that are caslen really well, but the prospects are just very modest. And the examples would include AT&T and all state companies with a very remote, just like Footlocker. We're riding 20, 20 and trading at a low price to free cash flow is just not in fashion anymore.

The promise of earnings in the distant future is really all what this game is about. So it seems so I really can't help myself, but I am still going to take one of those ugly picks and you can already criticize me for all the same things that I criticize Toby for before with like value underperforming and all the horrible things about value. But, you know, I am a slow learner. I have been keeping up with a few tech stocks. But at the end of the day, I like these ugly but cash flowing stocks like Foot Locker.

So most of you out there probably already know the company with thirty one hundred stores in twenty seven countries. It's a well known brand and there's still premolar footwear, but they also have imperiled all minor lines. Most of the stores are owned by foot lock themselves. One hundred and thirty nine of them are franchised businesses. The vast majority of products is from Nike.

Actually, up to 70 percent of revenue comes from selling Nike.

So I can already sense the someone saying, what about Amazon? At least that's what we've been talking here about GameStop before, Bed, Bath Beyond that very, very often it comes back to Amazon. So I thought long and hard about Amazon before making this pitch. And at first glance, it definitely seems like just another retailer that's going to be crushed by Amazon. Right. And, well, Amazon sure is a competitor with close to half of all marketing and e-commerce there in the States.

It seems like a company like, say, Nike would go to and then stop working with Footlocker. But I would argue that is not as dangerous as it may seem. Actually, Nike started working with Amazon because of this reason back in twenty seventeen, and after facing all types of problems, they actually stopped working with them in twenty nineteen. And the reason for that is actually pretty simple.

Amazon's platforms, with all the great things they can do, also have some issues, not just copycats and counter and fake reviews. But Amazon is not good at building communities. It's not good at building brand loyalty for the seller, especially not if that seller is a company like Nike. So I'm not supposed to to pitch Nike, so please forgive me for talking about it. But it is, after all, 70 percent of the revenue. So it's really important to understand that company, to understand Foot Locker.

And I think you should see Foot Locker to some extent as an extension for many footwear companies, because whenever you enter a foot locker, it's not a great experience. And I hope I don't offend anyone when I say that it's in many ways it feels like it's a supermarket for shoes. And that's great. And that's also the advantage for Foot Locker. It's a much more approachable showroom and distribution system for another target group that primarily would shop in Nike's own stores.

And so and you can even say that for the second most important part of that Foot Locker have, that would be Adidas and then followed by New Balance and Under Armour, you can really say that. And it's very much integrated. So just one anecdotal example.

You know, football is integrated into the Nike app. So if you have Nike plus loyalty program, you would get the benefits you can even access and pick up your shoes in the closest foot locker store. So it's very much an extension of that. All of that being said, Foot Locker clearly has a very remote. I think that's quite obvious. But I also think there are a few things that's a bit different to understand for something like footwear. And it's just controlled in a different way than, say, mass apparel.

It's not as fragmented. And the competitive situation is actually more fierce. It's just constructing a different way. You have a few huge producers and they are the price competition is not the same thing because the pricing of sneakers is very similar across many different distribution channels. It's tightly controlled by these massive companies like Nike. And Footlocker is the biggest in the. Sneaker sell in the US, and so whenever we think of size, we typically think, well, that means they have a lot of pricing power.

They can go in like Wal-Mart and go in and negotiate with the supplier.

Well, they can't do that with a company like Nike. But what is in that deal? Just using that as an example. But it's prevalent in that industries that you would not compete on the price. You would have a you have a store like Foot Locker that would target mid and low income families, not so much the fat margins that Nike can do in their own stores.

And a company like Footlocker get the preferred treatment, that they would get their own collections and they would get just after Nike. So if you have to if you're going to decs or finish line that's not being acquired by JD Sports, you won't get the same thing. So that most, if you like, comes from collection and selling and where to go. So whenever I look at some of the valuation, I try to justify this remote that I'm trying to like try to excuse in so many ways by saying that this is a company that's probably not going to grow a lot.

It has in the past.

It has also not taken the same beating as you see in many other retailers have lately. Whenever you look at the bottom line and even the profits, it's it haven't been shrinking. It's been a bit of a pain here during the pandemic, even though 2013 is still going to be profitable year, but it still sustains their top line and they're still making other decent profits. I find a double digit return for a company like Footlocker. If I just say flat growth, I come up with twelve point five percent.

I think you definitely can make the argument that it can be hard enough in itself, especially over the coming year. But that is my pitch for the boldest of value investing picks right now. So if I had to throw back to you what you're whenever I'm pitching these stocks, you know, and I don't want to put words in your mouth, but it often comes down to Preston saying, dude, we're in a new world, stop doing that.

And Tobi, who is like, you know, I really like the valuation, the cash flows on that one.

So I'm very curious to see, like, how this discussion is going to go. Yes, so that's roughly where I was going to go. I think it looks I just look at the shares that they've been pretty good at buying back stock. And as a result, the revenue per share has grown pretty well for like the last decade, which was kind of surprised by it's remarkably consistent, I guess, their engineering, some of that growth through buybacks.

It's a surprisingly good business on its financials, given what we know about it. It's retail. It's typically in malls. It's got a 70 percent customer or 70 percent supplier in Nike. Sometimes they get a little bit concerned with something like this. What if their interests become adverse to Nike's? What happens then? Does Nike need them? Great question. I would argue that Nike needs them because they can do what they can. It would be really bad for their brand if they start attacking the same people.

But there are a lot of people who are buying Nike products who just do not feel good about going into a Nike store. And I think it's quite evident whenever you walk past the Nike store and then another place in the mall, you have Foot Locker. I wouldn't call Nike stores intimidating at all. That's not what I'm saying. But how do you like to shop? And for most people who are not only brand conscious, but also price conscious, you would go to Foot Locker instead of Nike.

So instead of rebranding and having like a more approachable Nike products, I would say they would need a company like Foot Locker to do that for them. So to me, it seems like a win win to do that.

But you are right, this is now remote. They can't just flip the switch and say, you know what we going to do like 70 percent Adidas instead. I mean, that's just not how the business works, unfortunately. Stick, the thing I'm looking at right now is the management, because when I look at the numbers, to me, the numbers scream that you have very competent management in place and you've had it there for a while, especially for a business that, let's face the facts, everyone in the mall is getting clobbered.

And when you look at Foot Locker's top line there, they're doing great. I mean, the March event, the whole covid thing, that quarter was disastrous for them. They were literally down 50 percent. But this past quarter that they just closed out was right back to where they had been historically for the last 10 years.

So that tells me that there is some type of customer I don't get it. Like I personally don't get the whole sneaker thing. I know there's a lot of men that go out there and like this is like their thing is they collect shoes similar to, you know, like my wife does and they're into it. Right. I don't understand it, but I think that there is a fairly large market of guys that like to go to these Footlocker shoe stores and try on these new Air Jordans or whatever.

And based on the numbers, that doesn't seem to be getting impaired in any type of way, which to me just does not make sense. I would suspect that because the traffic at the mall, the foot traffic at the mall is down significantly, that businesses like this would be suffering. But the numbers are telling me that that is not true. That is false. When I look at the valuation on it, I mean, come on, it's price to perform.

There's no doubt about it. It's packing in a lot of profit for the price you pay. The margins are marginal. They're at six percent after tax. So I don't think that the margin is anything that's not exciting. But I do think that the market has penalised the price significantly. And that's where the value is as you're getting it, because the rest of the market has, I think, had the same opinion that I'm having at a superficial level without doing the deeper dive into the financials.

They're just saying, well, the traffic in the malls down to why in the world would you ever on this?

It's just I'm sure when people heard you pitch at Foot Locker, they were just like, are you even serious right now? Like, because intuitively it just doesn't seem like it'd be doing well. But I'm telling you, you look at the top line of this company and the top line is Rocksteady. So I do find it an interesting pick. I don't like it long term. Like, is this something that I think is going to do well ten, fifteen years from now?

I don't know. I'm not so convinced. But over the next three years, do I think the price could come back because it's just so cheap and for the profit that they're kicking off? Sure. I don't own it. I don't think that the momentum on it's that great, but it's a surprising one to me.

I think you know how I would describe this. If somebody listening to this and they're in like grad school or they're getting an MBA or a finance degree, I would tell you this is a really interesting pick to look into, into study from the financial statements, because you can see how well this company is being managed. You can see in my first point there about the CEO, the CEO has been there for a long time. He was the CFO from twenty twelve and has just basically climbed up the ladder.

He's now the CEO. He's been there for a long time. I think that this guy really has a good understanding of just business. So those are my thoughts. Well, I think you put it extremely well, Preston, and I definitely have the same concerns as you, and the reason why I do consider it is because of the same reasons as Toby talked about, you know, the financial just rock solid. We have a quick ratio, even close to one here during the pandemic.

So they don't even need to sell shoes. They're still cash neutral and obviously they will sell footwear. That's not what I'm saying at all, but it's rock solid. They have more than a billion dollars in cash. You know, it won't be the first one to go. And so to me, the reason why I found it so interesting was looking from the sidelines, everything that was happening with Nike and like to try it out. Amazon, it just didn't work.

Nike's not going back and trying out Amazon anytime soon. What's going to happen in 10, 15 years like you, Mr. Preston? I don't know. Will we see some major disruption here? Probably. Can I make my money back before then? I think you can. I think that Kobe has set this quite a few times for some of the ugliest pick that I've had here. And I had a lot of really, really ugly picks by basket.

You know, there are a lot of these stocks out there who think the market is around four billion dollars. You know, not major companies. They're generating a ton of cash. We previously talked about GameStop and thank God only I was stupid enough to invest in that. And we talked about Beth, Beth, John. We talked a lot of different companies, companies that are cash flowing, but just facing a lot of headwinds. Sometimes you see like crazy sauce in the stock price because of a Elliott management or someone like that would go in the like to get activist position.

That might be a approach for you. I think the volatility for a stock like this can be a bit brutal. And also, I think it's important to say whenever you do your intrinsic value assessment, that they're not going to be a huge growth potential for something like that. You know, whenever you read through the strategy, like how they want to grow, they talk about they want to target Asia and how to open stores up and they'll have a distribution center in Singapore.

They talk about the new loyalty programs pushing for women's shoes. I think all of that sounds good. I think in reality, it's like corporate cliche for we are supposed to say that we're growing. I think a lot of that would be really difficult. And we're also having been in Asia and know the brand, the Foot Locker, I'm sure they can rebrand and hopefully they can. A brand like Foot Locker is not going to be attractive almost any part in Asia, if you ask me.

So unless they've really, really good in terms of rebranding that. All right, guys, that was my pick, any other comments? Great. I think you're up next. It's been almost a year since I had pitched Reliance Industries, and at that time I didn't have all the information, but I do know that they had put in a lot of investment and effort into building out G.O., which has now become India's largest carrier for cell phones. And that's all I had that they had they were putting in effort.

So. But however, the major issue then, I think Dobe had pointed that out, it was their debt. So one of the major concerns we had then was there close to 20 or more than 20 billion in debt, that billion dollars, because the cash flow is the oil business and they were transitioning into being a technology business. And GEO was the technology arm and they were neck deep in debt because they had to build out those infrastructure. So what you has done is to have the cheapest data on as a wireless carrier in the world today.

And it also has an optical fibre across the country, unlike Beeton's and not just the major cities, but also the smaller cities that are basically becoming pretty much a monopoly in India. Now, last six months, there have been significant developments where Facebook played them close to nine or 10 billion, I forget like seven billion, I guess seven billion for a close to nine percent stake in geo business. Then Google came in, they bid on another for Qualcomm and the list goes on and on.

And many Silicon Valley venture partners also invested within a year. They have raised twenty two billion dollars or more. And just to give you a context, the entire we see funding in India in 2019 was 10 billion. This one company raised twenty two billion for India and they gave away twenty two or twenty four percent of their stake in GEO, their technology, and they are now making a fortune. The cheapest smartphone is what they're calling it with the help of Google.

And they are entering into a partnership with Facebook where they're going to use WhatsApp and make it into reach for India that's another. And that they want to compete with Amazon because they already have a retail arm, Ryland's retail, and they are taking a different approach than Amazon, but essentially trying to compete with Amazon for online retail. I thought I read something this week that showed that this was happening over in India where they were incorporating WeChat, where payment mechanisms so that you were going to be able to pay by phone through the WeChat app.

Is this the same deal that you're talking about, Hari? What's up? I mean, no, Richard is banned in India. That's what I meant to say, WhatsApp. Yes, that's the deal. So while the lands that entered into Facebook, I believe, has been trying to turn WhatsApp into which act monetize it. I don't think they have succeeded. Well, not much in us, but in India, WhatsApp is really, really popular and online payments are also very popular.

And then that's the deal that lands and Facebook enter. So just one last thing I'll say and then we can talk about your question, Mr. NES. As of last month, Reliance began zero that they announced they cleared. They are 20 plus billion dollars in debt. So that's why I wanted to bring it back in. It sounds to me like they're going to achieve a major network effect over their. Yeah, and also, I think in India, there is a lot of regulatory hurdles in building out wireless towers, laying out although optic cables, because a lot of permissions and regulatory approvals and stuff like that.

And the way I think about it is Facebook, Google it instead of the navigating all the regulatory hurdles. They're are it all to Mukesh Ambani, who is the CEO and plans to do that job for them anyway. And they are going to be partnering with him. And it's a huge network effect that we're. And you were saying that you only have the ticker on the Indian exchange, is there any way to get access to this on a US based exchange that you know of?

Yeah, the ticker symbol is Aurel and I, Iwai. Yeah, I just want to add one note here that last year when I talked about this topic, I had a hunch that trying to transform their business from being a oil and gas company to being a high tech company, but all the is what has given me more confidence is the execution and their ability to attract capital. And their ambition also has grown. A lot of analysts in India are now talking about they being the Alibaba of India.

And that's a long pending and awaited event to happen in India, where as the Indian market is growing, as the economy is now reaching three trillion dollars and projected to grow to five trillion, it really needs banks and technology companies that can scale and support that kind of an economy. And Rawlence is well positioned. And the past year off track record and their overall CAGR for the past 10 years has been up north of 20 percent. They have been without the support of all these investments that have been growing quite fast in terms of their top line.

That expensive, they're not cheap, but I believe that most market participants still don't appreciate the transformation that is happening and the opportunity in the market size. They have the total addressable market they have, and pretty much like a combination of Verizon, Amazon, and you add in Facebook like WhatsApp, basically a richer so that a combination of these three areas, online retail, social networking and the infrastructure, our wireless carrier. So that's what makes it interesting, because there can be a lot of networking because they are the tool to control a lot of traffic that can get into these destinations and they can leverage those relationships that have.

Heidi, whenever I look at the company and whenever you do explain we all networking effects, as you mentioned, you think of could this be the next Alibaba, just a lot cheaper. And you definitely see some moves there on the top line, even though you don't see the same consistency. And I can't help but think how much of this is what Alibaba did that mean? China had the infrastructure. I'm not necessarily talking about roads here, even though that also plays a role.

But like the digital infrastructure to make those moves, is India ready for a company like Lions to make the same moves?

That's a good question. See, what I see in India is, I think, somewhat similar to what China was in the 80s or the early 90s. So it's really hard for somebody to imagine that Alibaba like company can exist in India now. I think there's also the risk because it might not pan out. And that's the reason I wanted to bring it back, because one year back I was less confident. But I just had a hunch one year since I pitched this, I see those things out.

For example, Indians are leapfrogging landline. Everybody has a cell phone. Now, the penetration is humongous to the point where every street vendor has multiple smartphones. Everybody is using QR codes, which for folks in us, when you go and buy vegetables, you buy from a street vendor in India, unlike us. So Grass's, they'll all happen on the street. Earlier I had to pay cash. Now I have to just flush my phone. Can that QR code on his card and that's it.

I don't have to use cash at all and go. It has accelerated that. And then I was in India for some time now. Recently, Amazon and Flipkart, everybody was just relentless coming into that market as well. So the infrastructure is much better than it was. We used my friends and relatives back in Indigo's reliance for their cell phone as well as Internet there, if not better, at least. Same as us. So people are migrating to Google really fast.

So these are based on my personal experience out of there. Anecdotal obviously those things gives me confidence that the next five years their growth will accelerate. All right, guys, that's all we have for this mastermind. I love doing these, by the way. I'm going to throw it over to Toby. Toby, if people want to learn more about you, give them a hand off. I've got a website, acquirers, multiple dot com, which has got all the books and links through to a screener that's got some of the stock picks that I discussed, the two funds that I manage are the acquirers fund, its long, short, deep value in the US.

And the new one is deep, which is deep. It's a small and micro same process as the other stuff. And I have my own podcast to talk to various folks about value investing. It's called The Acquirer's Podcast on all good podcast platforms. Thanks. You can find me on my blog, Bicks Business Dogbone, our talk to me on Twitter about her grandma. Guys, we can't thank you enough for always making time for us in the community to come on the show.

I love being here. Thanks for having me. Now, same here, thank you both. All right, so as are letting Tobin hurry go, let's play a question from the audience and this question comes from Daniel. I prestage love the podcast when valuing companies, you often talk about the internal rates of return.

I was wondering how you decide the expected growth rate of the company's cash flows over the next few years and also how you decide on the discount rate.

Thanks. So, Daniel, the discount rate and the internal rate of return is sort of two sides of the same coin, and you can even bring the growth assumption into that. But I'll get to it here shortly. So let's just take the example of Footlong without a Pitstick in the episode. This stock today is trading at thirty six dollars. If you discount the future cash flows back to what the stock price is today, you have your internal rate of turn.

So if the stock price is high, say fifty dollars, the internal rate of return will be correspondingly lower, meaning your potential return will be lower. It's the same thing that makes sense because if you think about it, an expensive stock today would then yield a lower return because you're paying more for the same amount of discounted cash flow. And if the stock price then dropped to twenty dollars today, well, then your return would be higher because now you're paying a lower price for the same amount of discounted cash flow in the future.

So the question for you as an investor to ask yourself is, am I happy with the expected return for that stock compared to the risk? You can't put the same number on risk. So we have to make a qualitatively evaluation of that. How riskiest. And the other thing to consider is do I really think that Footlocker will continue to have a flat growth?

So when you ask about how we decide what the expected growth rate is, it's a tricky question.

Pressed on might be more or less concerned if Nike should stop working with Footlocker any time soon. Compared to my assessment and depending on those assumptions, we'll come up with different growth rates. So you have to make the decision that of all the stocks that you know how to value what we call our circle of competence, which in turn the rate of return is highest, meaning where are you expected return the highest. And when you do that, always consider how conservative you should be in your assumptions.

You might have learned to use a high disarrayed if it's a more risky investment. That's true.

The other side of that, which mathematically is the same to your question about discount rate and internal rate of churn, is if it's a risky investment, you can simply be more conservative in your growth assumptions or use a lower starting point for normalized cash flow, you will end up with the same result. I hope this was helpful, Daniel. And before I throw it over to Preston, make sure to subscribe to Tipi email that comes out once a month.

And I can even say that twenty, twenty one. You'll come out once a week and we graph the free cash flows and discount them back for stock picks that we found interesting. And I think that might complement the answer to right here. Sometimes when they see something being graphed out, it might be slightly more intuitive to look at. I also want to say, if you don't want a free newsletter in your inbox, which is completely understandable, you can just go into the Investors podcast ICOM and you can find all our intrinsic value assessments for free just right there on the front page.

So, Daniel, I really like this question, and the reason I like this question is because it really gets to the essence of what we talk about on the show all the time when we're doing these calculations. And for somebody who's not intimately familiar with the equations that govern these valuations, it might sound really confusing. It might just sound like a bunch of gobbledygook. So let me just try to explain this in the simplest way that I can. When you're doing these calculations to determine the value of a company, it really comes down to three main variables.

Three, the first main variable is trying to figure out what the future free cash flows look like. So if the companies make and understand to use really small numbers, so it's simple to understand, let's just say that a company has ten dollars of free cash flows, profit, they're able to retain that. They don't have to spend it on anything. It's all the money that they retain after they're after they pay all their expenses. So Stig and I are trying to make an estimate of what those future free cash flows look like.

If they made ten dollars today, are they going to make eleven dollars next year? Twelve dollars the year after that? Thirteen dollars the year after that, whatever that number is, we're trying to estimate what it's going to be and we're trying to do it in a conservative manner. So you're the root of your question. Was the growth rate right? So how much are those free cash flows growing? When we look at how the free cash flows have grown in the past, that can kind of give you a trajectory or an idea of where they could potentially go in the future.

But that doesn't mean that they are going to go there in the future. So it's really important that as you're making trend lines of saying, well, the last 10 years, it's kind of grown by about the free cash flows have grown by about five percent a year or whatever it might be. You can project that out and say that I think that the company's going to continue to do that. Now, if you say something like that and you project those out, you need to go into the qualitative analysis of are they remaining competitive?

Who are their competitors? Are where what does their top line look like? Is it descending all those kind of things or where you're going to go in and dig to to try to understand whether there's projections that you're making for the future, free cash flows should be growing, should be flat or maybe even descending, depending on what the company is and what it's doing. So when we were looking at the one that Stic was talking about with Foot Locker for me, I just I didn't really grow the free cash flows at all.

I just kind of kept them constant across the board because I just didn't really have a good feeling of saying that they could grow from here. Now, that's the first variable, is that estimate of the future free cash flows. The second variable, and this is the one I really like to talk about is the price. So.

When you go to grad school, they always want you to solve for this variable and for me, it's a little frustrating to solve for this variable because it's a given what you know, as as a person with an undergrad in engineering, the first thing you do when you're solving a problem is you say, well, what's my given's and what's my unknown's? And when you're dealing with publicly traded companies like Footlocker, for example, you know the price today.

So if I want to take a position and Foot Locker, I know exactly what I can buy it for. It's right there. It's published for me. So I treat that as a given. Why would I sell for something that I know what it is and I know what it's going to cost me in order to buy.

So that's where that's where I get a little frustrated with academia is because they're always making you solve for the given and it just doesn't make any sense to me. So that's the second variable is the price, the third variable is the discount rate, and we talk about the discount rate a lot. And so when you have these future free cash flows, everyone everyone has probably heard at some point in time, ten dollars next year is not the same as ten dollars today.

And what what we really mean by that is you have to take future money and you have to discount it back into today's value. And when you do that, you have to choose a rate. And so if you use a really high rate, if I if I take ten dollars next year and I discount it back to today's value with a 30 percent discount rate, what it's going to do is it's going to push the value today into a much smaller number.

If I use one percent, let's say I discount ten dollars from the future into today, it's going to make the valuation of that way higher. So what we do when we're doing an IRR internal rate of return is we're actually solving for that discount rate. OK, so we're saying this is what we think the future free cash flows look like. We're making an estimate of that. We're saying this is the price. We know what it is. Tell me what the discount rate is.

And when we look at that and we say, hey, the discount rate is seven percent, what we're really telling ourselves is if those free future free cash flows that we estimated are correct and they actually become that and I can buy it at this price that I know it is published today, my my expectation is that I can get a seven percent return by buying it. If all if those future free cash flows keep happening, that's how we're doing our valuation.

So it's those three critical elements. And so when we do a discount cash flow or when we do an IRR on a company and it's coming out with a 15 percent IRR, that's telling me that there's a lot of value to potentially be captured in a company if my free if my estimate of my future free cash flows are correct. So if I'm doing a really conservative estimate with those future free cash flows and it's coming back with a really high discount rate that tells me there's something there and there's something to dig into and so on, our tip finance tool, which we're going to give you free access to for asking this awesome question, we do all of this.

We make this all automated for you. We make this way simple so that you can just look at a chart of the previous free cash flows. You can just kind of draw it out graphically of what you think the future free cash flows might look like and what that growth rate might look like. And then it it'll calculate that IRR, it'll say it's a 12 percent or it's a seven percent or whatever it might be. And for me, you know, prior to us building this tool, which I use all the time, I would have to go in there in Excel and try to calculate all this stuff.

And it was very time consuming. And then you'd have to plaudit plot out the previous free cash flows to see what you think may be the trajectory in the future is and all that kind of stuff. So it's really helpful. You know, Stig and I are definitely eating our own cooking here with the tip finance tool, and we're excited to be able to give this to you for free for asking this awesome question. So, Daniel, thank you so much.

And, hey, anybody else out there you want to get your question played on the show? Go to ask the investors. Dotcom, there's a little button there. You can click. You can record your question. It's super easy. If it gets played on the show, you can get access, the type of finance, just like Daniel. All right, guys, Preston, I really hope you enjoyed this episode of the Masters podcast, we will see each other again next week.

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