Episode 107: June 2024 Mailbag

Note: All transcripts are edited for clarity. We may earn commissions from some (not all) links. Thanks for the scratch.

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Jason Hall: Hey everybody, welcome back to Investing Unscripted where we ask The hard questions about investing personal finance. And we answer those questions too. I'm Jason Hall joined as usual by my good friend, the voice of the people, Jeff Santoro. Hey Jeff. Hey, how are you? I'm I'm, I'm wonderful.

I've, I've, I've dried up spent the weekend soaking in one of those giant indoor water park kind of places. Not too far from you actually. But, uh, 

Jeff Santoro: yeah, you're almost, almost near me. I give you a lot of credit, man. That is not a, uh, that's a thing you do for your kid that is a little bit enjoyable for the adults, but mostly not.

So, good on you. 

Jason Hall: And we went over the top, too. We met some friends that we are only able to see, you know, once or twice a year. They have a younger daughter. So we did like [00:02:00] the cabana that they have there. And it's a lot of money for like, it's a lot of money for those things, but it's nice because you have your own little place for your stuff and they have servers that come to use.

You don't have to wait in line for that kind of thing. So it was nice. And it's once a year, it's like, let's do it. And we did it, but it's so loud there. And I realized that in, especially these indoor ones. It's basically like a factory that makes wet synthetic clothing and angry parents like that's what they manufacture 

Jeff Santoro: I did one of those one time several years ago, and that was that was enough.

Jason Hall: We're going back next year 

Jeff Santoro: Yeah, I did have, I have to be honest, I did have fun. 'cause I do like water slides. Like even as an adult, I think they're fun. So they are, they're, I had a good time. But yeah, after a while, like the, the chlorine and the and the loudness, it gets to you. It gets to you. Anyway, that's, we are not here to discuss your, your weekend away.

We are here to answer mailbag questions. We [00:03:00] got, uh, a bunch that came in. Via email, via YouTube comments. So we're going to get to a bunch of those today for our June mailbag. 

Jason Hall: Yeah. And a few, a few of these, we got like a day or two after we did the last mailbag. So just a reminder, you don't have to wait for us to ask for questions, send them to us whenever you think of them, that is the best time to send them to us and we can start filling, filling out our sheet, getting ready for the next one's always a good time to get us more questions for mailbags.

So Without further ado, what's the first one, Jeff? 

Jeff Santoro: All right. First question we got from Jesse, and this came to us via email. And Jesse writes, 

Jason Hall: Email is at [email protected]. 

Jeff Santoro: So Jesse writes, I just finished doing some homework on my portfolio tonight that made me think of this question that I would love to get your opinion on.

I have been having a go at this fun journey of personal investing for a little over five years now. I would certainly say that I lean heavily on A Charlie Munger styled structure, which is trying to buy companies at good prices and then plan to hold [00:04:00] long into the future. My question comes in regarding a few of the companies I bought early on, maybe just added to my position once or twice, but for the most part have been idle for several years now.

The positions aren't losing. Aren't losing my overall thesis of the companies hasn't changed, but they're also not quite keeping up with the overall market either. When you are evaluating your positions, what criteria do you use or what differentiates the stocks you would still leave alone to continue compounding and growing slowly versus the ones you decided to sell and move those funds to quote unquote better ideas.

I enjoy the podcast and appreciate the work you guys put in to providing some great content. Keep up the good work. So I, this is a good question because this is something I think you and I have debated a little bit back and forth as it pertains to my investing strategy. A little bit, but yeah, this is something I think about a decent amount and I've handled it in various ways over time, but I want you to dive in first here take a shot at Jesse's question.

Jason Hall: Yeah. So, so [00:05:00] Jesse, maybe you're just a, not a very good stock picker. I'm kidding. Jeff is shaking his head for that. 

Jeff Santoro: That is not nice. 

Jason Hall: Those of you, it's probably not true. I'm just teasing. 

Jeff Santoro: I might even cut that out in editing. That was, that was cruel. 

Jason Hall: Yeah. And the only reason I said it is because your name starts out with J E and then two more consonants, like my cohost, Jeff. 

Jeff Santoro: This was not an email from me, or I changed my name. This actually came from, 

Jason Hall: no, I do think it's a great question, Jesse. And I'm just teasing. I, I think the fact that you're continuing to hold those companies. You know, and not getting impatient because the stock hasn't gone gangbusters, right?

It's because the episode we did how to be a good stock seller last week, Jeff talked about that, right? Stock go up, we sell, stock go down, we sell, and maybe this isn't, the stock hasn't gone down, it's just kind of. Done. Okay. We get impatient and we sell. So kudos to you, Jesse, for that. Number one. I, I'm either an excellent example [00:06:00] of how to really act and be long term or a terrible, terrible example, because I do tend to, I'm glacial almost when it comes to selling stocks that I've had for a long time that don't.

That are just kind of there because you just, there's a lot of factors that can come into play that if the business is performing basically as you expected that it would you know, I, I think there's not necessarily always a lot of reason to sell because there can be a lot of factors that keep the stock price from going up.

So, for example, if you bought a real estate investment trust in 2019, you probably. Paid a pretty full valuation for it. It wasn't cheap. Interest rates have skyrocketed. A lot of different parts of commercial real estate have gotten kind of rattled. Over the past few years, there's some bright spots like industrial and that kind of thing, but by and large the, the news and the, the perception of those businesses have been negative, right?

So. That could be an overhang for some of those [00:07:00] businesses that you're dealing with. It could be like, I'm going to name a couple of stocks that have been huge winners but went through periods where they just kind of went through doldrums. Um, NVIDIA has definitely gone through periods of time where, because maybe just take all the AI stuff about NVIDIA and just throw it out the window and pretend it doesn't exist.

Because you go back to 2010, 2012, 2013, like early 20 teens. Yeah. AI was being talked about, right. Because of being able to. Process lots of things at one time and large amounts of data at one time, but really it was, it was video gaming, autonomous driving machine to machine stuff. That's what it was back then.

And if, if one of those industries was going through a cyclical downturn, their business results weren't great. But it was still one of the most innovative computer hardware companies in the world with some real competitive advantages operating in industries that were growing. Right. It's just all of the factors at play.

We're preventing the stock necessarily from doing, from doing well. What's the big video game [00:08:00] company 

Jeff Santoro: Activision Blizzard. 

Jason Hall: Yeah. Thank you. Thank you, Jeff. Um, Activision Blizzard after the merger of Activision and Blizzard, their largest shareholder, a big French conglomerate I think owned a controlling stake in the business.

Basically we're squeezing a dividend out of them that soaked up a lot of their extra cashflow. There was like a idea that eventually they were going to sell off that steak, but it really held the business back because it was a very profitable business and it was growing quite well, but it's always stayed cheap because there was always concerned that this.

Parent company was just going to continue to, to, to dread the, to, to, you know, bleed the business dry. But Bobby Kotick led a group that bought the, bought it, bought the shares away from the, the parent company and the stock exploded. All of its economic results were released into the wild. And it was a huge winner for investors.

So if you really understand the business and you kind of figure out, make sure, you know, like, Is there [00:09:00] something that's preventing the stock from running up and it's staying undervalued then that can help you be patient. But, and I was teasing when I first said it, Jeff, but maybe, maybe as an investor, the thesis is just too conservative and if it's not meeting your longterm goals, And it's performing as expected.

Well, maybe it is time to move on. 

Jeff Santoro: Yeah. There's a lot of information we don't have about Jesse's age, place in life, investing style, investing horizon composition of portfolio. Like I, I don't know. So. I would say, I agree with what you said, what popped into my head was kind of the same thing in the sense of like, you really have to understand why, why you owned it, own it and why you bought it in the first place.

And then I think you just kind of have to ask yourself, like you said, is there is the reason it's not beating the market because of anything with the business or is it a market sentiment kind of a thing? And I think [00:10:00] if you're, if it's not a huge amount of money, if you're able to still contribute regularly to your investments and you don't need that cash, because let's just say you're at a point where you're not putting more capital in and you can't really buy anything without selling something like assuming none of that's the case.

I think, yeah, you can just kind of afford to be patient. Yeah. That's why I'm a. I spent a lot of time trying to not have as many stocks as I used to. I mean, there was a point where I had over a hundred when I was brand new and just buying everything that was shiny. Right. And that was just too much to keep track of.

Like I wouldn't have known if something in my portfolio was worth adding to versus just holding onto cause it got lost in the shuffle. So, you know, one thing I thought of as you were talking, Jason is maybe go through some of those. stocks that fit this criteria that Jesse gave us.

And and ask yourself that question. Like maybe the question is what would, what would this company need to do? Or what would I need to see to tell me that the thesis is on track or what could possibly happen with this business that could make the stock [00:11:00] pop in some way? I've. I have one more 

Jason Hall: thought about this.

This is probably just how most of our stocks, Jesse, you're not alone in this, are going to perform, right? This is, this is most stocks. They they're okay. They're fine. They do. Okay. So it's almost like a feature of the reality of most people's portfolio. The outliers are the ones that fall by a lot or the ones that go up by a lot.

So maybe you just kind of have to accept that too, that, you know, here's one, a lot of people don't realize this. Warren Buffett, he's not a monger, but still pretty good. He's also still alive. Loves to talk about Coca Cola and like, it's very associated with him as an investment. It's been a mediocre investment for, for Berkshire.

It's underperformed the S and P 500 by three or 400 percentage points over the 30 years it's been in the portfolio. But it's been a multi bagger, like by a lot and it's created a lot of wealth. [00:12:00] So even the also rands probably still going to do better than bonds and other stuff that you could buy.

So don't, maybe don't diminish them too much. 

Jeff Santoro: Yeah. And the other thing too is, you know, we did that episode on your goals versus your incentives and I get that there's this ethos out there that your stocks need to beat the market or else why, why bother? And I think I understand that. The reason people say that, it's obviously less work, and less thinking and time to just buy an ETF that tracks the S&P 500. But on the flip side, if you're investing, goals are on track and you're on pace to meet those goals, then I think that that kind of adds to what you were saying, Jason, like some, some of the stocks along that route are just going to be okay. And what will really pull your portfolio forward is the small minority that really doesn't Go, go crazy and, you know, multi bag over, over decades.

All right, let's jump into the next question here. This one comes [00:13:00] from Tom via email. Great show guys. I've been following along since the beginning and have enjoyed the perspective of both a seasoned and, like myself, relatively new investor. My question for you both is, what are your thoughts on one CEOs stepping down at Boston Omaha?

For myself, I'm debating if this is thesis breaking news or not. I invested with the thought that this was a get rich slowly investment and both CEOs were on board and believed in the process. Can I really know or trust management with that mission if their partnership didn't last? So many questions about this.

I'm just not sure how I feel about it. I'd love to know your answers to these questions so as to help me find my own answers to these questions. Thanks for a great show. Keep up the good work. So we've talked about this a couple of times already, but. I don't think we've talked about it since the annual letter came out.

So we have even a more recent document with some information to base it on. So Andrew, first, I completely understand everything Tom said in this email in terms of questioning how much you can trust the thesis [00:14:00] and how much you can trust management's vision for what the company was and hopefully still is now that they couldn't.

Agree, and one of them left. I, I can see all three decision points making sense for, for someone. I could totally understand someone saying, this is not. This is thesis changing. This isn't what I got in for. I'm out. I totally could understand that. I could see someone saying, maybe this is the thing that was holding the company back.

Maybe the lack of performance in the stock price and, and the okay business results were, uh, but. Product of management, not seeing eye to eye, and maybe that held back some potential decisions that could have had the stock do better. And maybe they see this as a buying opportunity, right? Because it's still relatively cheap.

And I also could see the third route, which I think is where I am, which is just to wait and see kind of going back to our last question. So this is an investment for me that Yeah. I forget if it's up or down in my portfolio. I think it's down, but nothing crazy, like [00:15:00] something in the 15, 20 percent range over the whole time I've owned it.

So it's not like I'm down 90 percent or anything. And big opportunity costs though. Market's done well. Yes, that's true. It's also not an enormous position for me too. I mean that that I have to be honest that that's something to mention and take into consideration. If it was 2 percent of my portfolio, maybe a different story.

I'm in wait and see mode with this. I, I have a feeling in a couple quarters, we'll get a sense of whether or not. It's going to be more of the same, or if we see any, any difference in performance, whether it be good or bad, that might give us an indication about how things are shaking out with just the one CEO.

But it's really hard because they're, they're not super transparent. They don't do earnings calls. They don't answer analyst questions. They don't do interviews. The most frustrating thing for me from the annual letter was. The only thing they said about, the only thing Adam Peterson, the, the remaining CEO said about [00:16:00] transparency and giving information to shareholders was basically, yeah, we know we need to, we don't know what that'll be yet, maybe a few slides is what he said, which we already, but we already knew this, like this was already out there in the world that they acknowledge that this was a thing they wanted to change and that they were quote, not sure how to do it yet.

I don't know how long it takes. To like decide how to get more information out. Like, I don't know why this is like a four, five, six month discussion. So that was frustrating for me, but I don't know this is not a good answer for Tom I'm not saying I'm gonna hold that's my personal answer for this, but I could totally understand people losing patience 

Jason Hall: Yeah, so but the the question the thesis is broken I I don't care if you sell the stock if you hold what you have to watch or you've tripled your position the thesis Six months ago a year ago is absolutely broken.

Wait, hold on though. Let me challenge that thinking just a second. Sure And then I'll tell you why you're wrong If if 

Jeff Santoro: you [00:17:00] bought it six months ago, I could understand but if you bought it when it first IPO When did they come on the market 2016, 9 years ago? This company's 

Jason Hall: not yet So right, so if you bought it 

Jeff Santoro: if you bought it back then and it and if your thesis was mostly around Like the billboards and the insurance this is before they had the broadband it's gonna be a basis for generating cash to then invest in future things.

Right. Yes. Like, okay, then that's not busted, because that future thing became, that future thing was broadband, and then that future thing was the asset management, and now they've changed that future thing. So, I don't know, I, I see your, what you're saying, I just don't, I think it depends when you bought it, and what stage the business was in when you bought it.

Jason Hall: The  thesis has always been, until Alex Rozek left, The thesis has always been that we're going to look externally and internally. That we're going to look externally and internally. They're no longer looking externally now. For now. [00:18:00] I 

Jeff Santoro: don't think the door's closed on that. 

Jason Hall: No, but this is also the business that it's big wins over the past four or five years-

Jeff Santoro: Really have been external. 

Jason Hall: or external. Yeah. Yeah. The things that are not doing well or the internal things, the rate of return for those existing businesses are not great. 

Jeff Santoro: Well, the broadband could be, I mean, that's one of those, it's hard. Time will tell cause it's one of those capitally intensive businesses up front.

Right. That can generate very, 

Jason Hall: very high margins and stable revenues. Right. So that's, that could be great. But so, I mean, the bottom line is that the thesis is broken, right? Whenever you bought it, whether you bought the day of the IPO or you bought it first day in January that it was trading, this is an altered company than what it has been.

And what you would have, what you would have been expecting, right? That, that doesn't mean that you have to sell and move on. You just have to be honest with yourself. And I think that's really, really important. And that's kind of what I'm going through right now. I think [00:19:00] also thinking about the stock being cheap, you've got to be honest with yourself.

It looks like it's cheap trading for less than 90 percent of book value. But they have 185 million in Goodwill on the books. That means they bought a bunch of stuff and they paid more than the book value of whoever owned it before was carrying it for, right? So you can say, sure, those assets have gained in value and they probably are more valuable than, than the book value, but it's no promise.

Think about all the write downs we see from companies all the time. I'm writing down Goodwill because they paid too much for something or it didn't work out. They're basically saying, Hey, This isn't working out. So to assume that things are going to just start working out going forward over things that they bought six months or five years ago, you've got to be very careful about that.

So, so, I just think investors, people need to be really, really mindful about that. Now for me, I mean, I've got almost 2 percent cost [00:20:00] basis here, so I've got a lot of skin in the game. I'm not doing anything right now. I'm not doing anything but watching. And I don't care, Jeff. If they start holding analyst calls every quarter and they have a beautiful 30 page slide presentation, because if they have that, they're probably paying somebody a hundred thousand dollars a year to do that.

And they, they're already not great at allocating capital so far. I mean, I'm, I'm being a little tongue in cheek there and all of a sudden that's more stuff that pulls them away from internal focus right now. And I would say right now, because it was Alex Rosak that was talking to our, our friend Matt Frankel and other investors.

He's gone. The Adam Peterson wasn't doing those things. So, Peterson needs to stay true to who he is as an investor and stick with what he's trying to do and just deliver good results. Because you know what? If the results are good, we'll forget about all this other nonsense. It won't matter. 

Jeff Santoro: You know?

Yeah, I [00:21:00] agree with that. It's, it's shown me time for them enough, enough saying what will happen and yeah, it's tough. I, I, I guess I, I guess I was just pushing back at the word pushback. Thesis being busted. Busted always seems like a word that means like, you know, irreparable.

Jason Hall: The business isn't broken, the thesis is broken.

Jeff Santoro: Well, yeah, I guess most people's thesis is. I'm still going to think, I still think that, never mind, it doesn't matter. 

Jason Hall: All right, we're going to move on to the next question here. I agree with 

Jeff Santoro: you. For the record, I agree with your point. A hundred percent. Hey everybody, we'll be right back, but first, a word from our sponsors.

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Jeff Santoro: All [00:23:00] right. This next one is from Alex. It's a little long, but I do think the context he gives us is worth it.

So bear with me here for a minute. 

Jason Hall: Play it back on two X folks and go. 

Jeff Santoro: If you're not listening to us at least 

Jason Hall: 1. 25, I don't know what you're doing. Hey guys, if you want to have fun, I've had a few people tell me about this, but I figured it out doing our editing. If you play us at 0. 5 X, we sound really, really drunk.

And some people think that's a lot of fun. 

Jeff Santoro: So this is a tangent, but I'm going to go, I'm going to go there anyway. I have found that because I listen to almost all podcasts at faster than 1. 0 speed, and I've noticed that people who are from the Northeast, I can't listen to them much past 1. 25, 1. 5 speed, but people who are from the Midwest or the South, I can listen to at 1.

75 just because the, the pace of, of speech is slower. So you're definitely like a 1. 75 kind of guy, Jason. I'm like a 2. 25. Who are you kidding? I know the truth. All right, let's get to Alex's email. Alex writes, I did my monthly stock purchase this morning and [00:24:00] was reflecting on the phrase that gets off repeated by people in the investing community, which is when the story changes.

It gets used as a basis for when to sell or not sell, especially by people of the buy and hold mindset. I think it's mainly used as a tool to guard against volatility, but upon reflection, I think it might have a flaw. And that flaw is. Isn't volatility partially or even largely driven by quote unquote, the story every time a stock, every time a stock moves, there's all this coverage on it, trying to ascertain where it fits into the story of a company's future to use a recent example when meta dropped down to 90 a share, it certainly felt like a change in the story based on the way people talked about it.

People are all over the Internet. We're certain that Facebook would no longer had a place in the future, whether that was concerns about tick tock or overspending on the metaverse. So this was the story changing. And if someone sold their position, they would have gotten absolutely screwed. And I think he's talking about the stock price change since then.

My point is, should we be a little more careful about [00:25:00] the story changing mind frame and use something a little more solid as a basis for long term holding. I will give a random example. When I first started investing a few years ago, one thing I read was that return on invested capital was an excellent measure of whether a business was worth holding for a long time, not a be all end all, but part of the picture for a quality business.

I think it probably comes down to how someone defines the story, but I could see a lot of people going astray without having the right tools to truly evaluate a business for the longterm. What do you think? I would love to get your thoughts. 

Jason Hall: So a couple of things. I like the examples here because we can, we can use the examples to talk about the difference between kind of signal and noise and what's material for businesses and what's just fodder for the, the gristmill.

Did I mix metaphors there? I think I did fodder for the gristmill. It doesn't matter. I'm rolling with it. It's our 

Jeff Santoro: podcast. We can do what we want. 

Jason Hall: That's right. That's exactly right. You heard that, didn't you, Vimal? So, to, to me, here's, [00:26:00] so here's how I, here's how I think about it. I want to start there first because I think that's the most important part for, at least for me, is that when I think about the story changing it's very much the words and the numbers, right?

So I think that's important. So going back to meta in the nineties, so that was late 2022, like October, 2022, November, early November, stop. That was kind of close to the bottom before this remarkable, like it's four X since then, right? It's just a remarkable run that it's gone on. And there are a couple of things were happening.

The story had, had certainly changed. Growth had slowed across all of the, the platforms. Instagram growth was slowing substantially. Facebook was basically flat. I think we saw a revenue decline a couple of quarters in there because the ad market was in an absolute mess. And at the same time as where business [00:27:00] had stagnated, right?

Business results had stagnated both user engagement and revenues because the ad value had come down. So two things that happened, the ad market was a mess, but also all of the cookies stuff with apple. Was compounding like the, the, the value of, of their, of their ad of their platform on a per ad basis, all of those things were happened at the same time that there was noise about other platforms like tick tock taking away user engagement.

And a lot of investors felt like we had Nero playing his fiddle as the CEO. Zuckerberg, you know, spending tens and tens of billions of dollars, burning tens of billions of dollars to build the, the the metaverse side of the business. So the story had changed. And the stock price to come down a tremendous amount along the way.

So it's easy now with hindsight to look back and say, Oh yeah, that was [00:28:00] completely wrong. But there were tons of people saying, this is a value right now. This is deeply discounted. And I think what a lot of investors have learned is that what has changed and because it's true is that the business still is not really growing that much.

Sure. They're adding a low single digit user base, very low single digit user base. But this ad cycle is better, right? It's a good time to be an advertiser with the largest social media user base on the planet. So sitting here at kind of the height of the cycle, I'm not saying the stock's going to drop from here because I don't, I don't follow the ad market close enough to really know what could happen.

But, but I do think it's important to remember the story did change.

Jeff Santoro: Yeah. And the other thing too, is Well, first of all, I, I was one of those people that thought the story had changed and that meta was going to really struggle. That's why I picked it in the unportfolio for last year's portfolio contest. I think I picked it like a month before he said this was going to be the year of efficiency.

Speaking of the year of [00:29:00] efficiency, they also made the business more efficient because they, they laid off a whole bunch of people. They brought some operating expenses down, which allowed them to. still burn cash on the metaverse and not see the business results get significantly worse because they cut costs.

And while that was going on, the ad market rebounded. So they kind of got, they got more efficient and got more income in the door because of that. Yeah, I, I like the first thing you said to answer this question. It's a, it's a story thing and a numbers thing. And I think the stock will move a lot of times.

Because of the story either up or down and I think the challenge for us as investors is to know enough about the business and know enough about the numbers to be able to see through and what is, what is the story versus what is the reality? Yeah, and I think you and I both have companies in our portfolios that we love the story on.[00:30:00] 

Neither of us have bought more of in a long time because the numbers are not. Backing up the story just to go back to the example, we just. Talked through with Boston, Omaha, if you listen to management, now the current alone CEO, he spins a good story about how Boston, Omaha is in this great position and that businesses are worth more than the market's giving them credit for.

And that's all well and good. I see the numbers too. And. You know, I, I've said this before, I, I really do believe you could probably be a decent investor not listening to a word of any management, any management team says ever just look at the financial statements every month because the proof is in the pudding in a lot of sense.

So I don't think they can be separated. I don't think you should make any decisions just based on the story. But I think the story. Can pull you in. And I think the story can make you interested and then it's up to the business to [00:31:00] execute and, and make the story happen. 

Jason Hall: Yeah. And it's so important as an investors, the story can be like the thing that brings you to the company, but it can't be the reason you buy the stock, right?

The underlying business still has to be the reason you buy the stock. 

Jeff Santoro: And it can be the reason you root for the company. It can be the reason that you feel good about investing in the company, but you, yeah, the rest has to be there as well. 

Jason Hall: I never answered. I never answered his question. I don't think I do think, I do think most people.

use the story as change as a BS reason to get out of a stock because they're scared about something. Yeah, I think it's true. 

Jeff Santoro: Or I don't even want to, I agree with you, but I also think not that they're scared about something, but because they've never done the work to understand the business to begin.

Even better. They're lazy. Or busy. They're just busy. Let's give them the benefit of the doubt, Jason. All right. You know things have gone awry when I'm the voice of optimism here. All right, moving on. We got an email from Craig. Craig says, Hi Jason and Jeff. Thank you so much for the show. I look forward to it dropping [00:32:00] each week.

My question is probably dumb, but so far I have not yet discovered the answer. If the S& P 500 Index ETF is probably the best investment option for most people, and given over time it averages positive returns, why isn't a leveraged S& P 500 ETFs, I'm sorry, S& P 500 Index Fund, such as SPUU, Or SSO even better 

when I chart the two against each other, the leveraged fund outperforms oval almost over any timeframe. What am I missing? Other than the rollercoaster ride and volatility? Why wouldn't one want to choose this option? So Jason, maybe let's talk first about what leveraged ETFs are and then answer. Craig's question.

Jason Hall: Yeah. So I'll start by saying these two particular ETFs that, that Craig lists, I'm not familiar with them. But in general, the way they work is they call it. So it's like a two X, like SPU is a two X leveraged ETF. And what that means is that their goal is to generate [00:33:00] double on a daily basis, what the S and P 500 does.

So if the S and P 500 is up 1%, their goal is to be up 3%. Cause it's a. 200%. I believe they say their goal is 200%, which is actually triple, right? So anyway, I'd have to look at it specifically, but directionally that's their goal. They're not built to be long term investment products. They typically kind of reset, they hit the reset button every day on like a lot of the leverage instruments and things that they use.

But the biggest reason why I would caution to, to really, but the number one main reason I caution investors from thinking about these as great ways to like steal some alpha, some market beating returns. Is because the way they use leverage they can really compound the losses too. Just for grins, I went back to the big downturn we had during the pandemic, February 21st was the peak in 2020, the peak before the crash.

And then March 23rd was the bottom. The S& P 500 [00:34:00] fell 34 percent round figures over that period. S. P. U. U. Was down 60 percent right? Because the leverage instruments, the downside of the way those work is they compound your losses to and the risk again, I'm making a general statement. I have not read the perspectives of these funds.

I don't know how the fund managers plan for. Massive downside risk that could potentially liquidate the fund. So I can't say with, with any definitive knowledge that there's a risk that they could completely blow through their liquidity and a massive downside event. But it could be seriously harmful.

to, to these types of, of, of ETFs. So in the one thing that's happened, sure. 2022 was a bad year, right? That was the bear market year. Am I remembering right? And the bottom was like January a year ago. And then we had a good year. My [00:35:00] guess is that the CTF probably lost a lot over that period, but again, the market is back to all time highs.

Now if you go back to the financial crisis from top to top, it was like five and a half years. Five and a half years, this, this particular, these things didn't exist back then. But I think we're talking about massive, massive downside risk that you would not be able to recover from, right? Because you can't hold it long enough to get through it because you don't hold stocks in a company.

You own shares in an ETF that a lot of what they're investing in is using clever leverage for like. Option trades to try to juice returns or buying futures and other things that, that they, you pay a price and there's a premium and an expiration date. And either it's binary, you either make money or you lose money, right?

There is no in between. You can't just hold long enough to get back to profitability. So I think that's a big, a big downside risk. 

Jeff Santoro: Yeah. I mean, just the little, I don't know anything about these. I [00:36:00] was just doing a little Googling to prepare for the show. And yeah, those are the two concerns that I would have is in the event of like a very quick downward crash.

You know, the leveraged part of these ETFs that gives you the upside and gets people excited is also there on the downside. The other thing that's worth mentioning is the expense ratios. So we've talked about this before when we've talked about ETFs, but ETFs have an expense ratio. It's just, it's usually expressed as, it is expressed as a percentage and some are higher than others.

So just as an example, the Vanguard S& P 500 ETF, which we talk about a lot, which is VOO, that has a operating, an expense ratio of 0. 03%. So that's what you're paying to own that ETF over time. One of the ones we referenced in this question, I think it was the SPUU one, I looked that up, and it was 0. 61. 0. 03 versus 0.

61. So, even if you, [00:37:00] things work out for you owning this leveraged ETF and the stock go up you're still paying a lot more in fees over, over time. So, Especially if you're using big sums of money, that's, that's another thing just to, to be aware of with, with these leveraged ETFs. 

Jason Hall: I went ahead and pulled the numbers.

So the S& P 500 from January 22, 2022 through the bottom was down 21 or 22%. This direction daily S and P 500 was down 45 percent and since, and again, I'm cherry picking dates here, but January 4th, 2022, which was roughly the pre market, the pre bear market peak the S and P 500 is up about 15%. This direction daily.

2x ETF is up like 6%, right? So there's a good chance if you buy near the top of a market cycle you're, you're, you're not going to outperform. 

Jeff Santoro: Yeah. It just, [00:38:00] it seems like a lot of work and a lot of expense to possibly make some money. And I guess the last thing I'd say about it, again, this is speaking from a point of not knowing much about it other than what I was able to Google.

To me, this falls in the bucket of if it seems too good to be true, it probably is. Yeah. 

Jason Hall: Yeah, 

Jeff Santoro: if, if, if getting rich were as easy as buying a leveraged ETF, everyone would buy leveraged ETFs and do nothing else. So, 

Jason Hall: right, because you're looking at this thing through a period of time where either the economy was great or there was massive Stimulus being thrown at it.

So you've never seen it through an actual recession or downturn. 

Jeff Santoro: Hey everybody, we'll be right back, but first, a word from our sponsors.

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All right next email comes from Andrew and his question is hey guys big fan of your show I love hearing about your processes warts and all I first heard about BEP and BEPC which is Brookfield Energy, right? Is that the Brookfield Renewable?

Jason Hall: Yeah. Brookfield Renewable. 

Jeff Santoro: Renewable. Okay. I first heard about them from Jason on the industry focus podcast, which is no longer in existence, RIP industry focus. And I've spent the last three or four months doubling my position as the yield evaluation were really attractive. It's now my third largest holding, and I love this.

Quote, unquote, sleep easy stock. Since I started my investing journey five or six years ago, I've always been intrigued by renewable energy businesses. And I was wondering if you could talk about F L N C other than cyclicality. What are the risks associated with this business and how does their technology stack up against the competition?[00:40:00] 

Good entry point today. 

Jason Hall: So F L N C that is Fluence Energy. It's a company that I recently started a small starter position. And before I talk about that, Andrew good job, Brookfield Renewable recently. I think it's pretty good. Valuation has been really attractive. So I like what you did there. I've done something similar to, uh, so fluence is interesting because this is joint venture creation between, um, AES and.

Oh, goodness. I can't remember Siemens. I believe yes, Siemens and a yes, and they make batteries and mainly they're looking at, like, in dust, like, big utility scale batteries for utility scale energy storage. So questions other than cyclicality. What are the risks associated with it? Number one, there's a ton of money that's being spent to build a battery capacity, right?

So it's, and largely been a race to the bottom. So as these things scale up, driving down costs, battery [00:41:00] costs have to continue to fall to be competitive for energy storage as wind and solar have gotten cheaper, right? But to combine storage with wind and solar to compete. As baseload energy against like natural gas the costs do have to continue to come down.

Right. So that's, that's a challenge to making a living. So big, big competitive risk here because capital continues to flow into it. Even as demand is going to be super large for many, many years to come. How does their technology stack up against the competition? So it's interesting what they do.

They actually, um, outsource a lot of manufacturing, like the battery cells and that kind of stuff. So they use third parties Because the chemistries have gotten really, really good. And there's already a lot of companies that are making cells. Really cheaply. So I think that's kind of smart. What they're trying to leverage is the way they combine the cells and in the battery packs.

So I have something that meets the hurdles for high reliability and doing it at scale to get those lower costs. And when you're [00:42:00] a product of big industrial companies like Siemens or AES, it has a big presence in the utility market already. You're in a position to kind of know what the needs are and to be able to, to participate.

But to me, I think the biggest thing is it's just. It's the kind of business where management just kind of has to keep the boat from hitting the shore, right? The, the, the, the current is running so fast. You don't need a fast swimmer here, right? You just need somebody that can keep the boat pointed in the right direction.

And I think it has a pretty good shot at being a pretty good investment. Entry point. Is it a good entry point? Yes, if yes, if they execute and I think that they, they're, they will obviously since I bought in the past couple of months it's not expensive if that's what you're asking based on where the business is likely to be in a few years, I don't think the stock's expensive unless they screw it up and then whatever you pay was too much.

Let me ask 

Jeff Santoro: a follow up question because I don't know anything about this industry or the stocks, but I [00:43:00] remember when I was first getting into investing in 2020.

There was a lot of excitement and talk around renewable energy generally. And one stock that I bought early on was next era energy, which I bought partially as a play on, I mean, I know it's a traditional power company, but they were doing a lot of renewable stuff. Right. And it seems like in the time since then, well, maybe it's always been this way, but, and I was just blinded by new investor excitement, but it does feel like there is now a realization that a lot of this renewable energy stuff is It's still going to come, but maybe come a lot slower and later than the most excited people were anticipating.

So I'm just curious, as you think about the renewable space, generally, not necessarily just Brookfield or Fluence, but all stocks in this area, do you think it's still. Is it still too early to go big into renewable energy stocks? Cause I like my [00:44:00] heart wants to go there. Like I want to live in a world where we burn less fossil fuels, but I'm also realistic.

And I know that we're not there yet. And we're going to have to burn fossil fuels for a while. Still, while we bridge that gap. So I'm just curious, maybe talk a minute about. How you see that whole industry right now. 

Jason Hall: Yeah, I think as a starting point the best thing to remember is that by and large, investing in renewable energy companies has been net bad for, for investors solar panel and equipment manufacturers.

And, and, um, there's not a lot of, uh, publicly traded wind companies, but In the aggregate, the ones that are not part of like the big conglomerates have not been great investments. The race to the bottom in solar and the anti fair trade tactics that China has taken to subsidize its domestic industry.

Have ruined it in terms of profitability. It's been net good because it's driven the prices down substantially and everybody's had to work harder and innovate more to get the cost per watt down, like the cost per unit of energy they produce down. Uh, it's been great for the world, [00:45:00] but it's been terrible for investors.

The interesting thing about like the, the Brookfields and the clear way energies of the world and the next era is. To a little bit lesser degree recently is they invest long term and they're buying the equipment, right? So they've benefited from lower costs and they know how to make money, right?

They know the regulatory environment. They know the legislative environment. They have access to capital. They have deep industry ties and they're value oriented buyers of. Uh, the, like to, to build, to build these projects, they're just really value oriented when it comes to not overpaying for these assets.

Cause they know what it's going to generate in cash flows over 20 years. They know, like it's literally in the contract. So, so those companies have done well for investors. It's, it's still, it's, it's hard because you're, you're taking like high tech and we know that like the software industry has been massively deflationary, it's. Productivity has gone up. It's driven the costs out of a lot of things. And the problem is that when you take innovative technology and you layer that over a cyclical highly capital [00:46:00] intensive manufacturing business, it's really, really hard, right? It's really, really hard. So by and large, I've, I've generally avoided more than manufacturers because of that.

Cause only a few have done well. But answer your question because of that, I don't think the environment's really changed a lot. You have to find ones that have. Carved out niches where they're profitable and have like been able to hold like in phase, for example, like they've done a really good job of holding margins, even though the cycle is terrible.

It's like, okay, they're really good. That's let's stick with them. Some of the other companies that might be able to do it like fluence. I didn't really mention it before. I should have been like there, there's software platforms, a big part of what they're trying to build too. To like to manage the batteries.

And maximize the energy that's stored in them, whether you're a utility and you want to offset peaker plants, which are really expensive to operate. Or you're trying to store solar when you can buy it cheaply, when there's massive amounts of it being produced and you know that somebody's got extra solar, they'll take a discount [00:47:00] to sell to you.

The software, you want software managing all that stuff. You don't want people doing it. So if they can build really good software. And have a platform that these utility scale operators like that can be a competitive advantage too. And if you can carve out a niche with a platform, then you can start getting margin through your services.

So, but yeah, I think it's still, I don't know that it's ever going to be too early or too late. It's just too hard to make that. I think for most people, a large portion of your, your portfolio. It 

Jeff Santoro: seemed like one of those, when I think about industries with huge tailwinds behind them, It seems like a no brainer, like, Oh, renewables, but it's been really bad.

Jason Hall: This is the industry that really like changed my process. So, uh, Andrew mentioned, uh, hearing about our processes and warts and all. And for me, adding that box to check, when you say you find the big market, it's growing, all the trends are favorable. The most important one, can it make investors money, [00:48:00] right?

Who is going to win in the aggregate? And we've seen with the exception of Tesla. EVs have been a terrible, the tailwinds have not been good for investors. Solar has not been good for investors. So I've learned a lot about it because of. Because of that big mistake. 

Jeff Santoro: All right. Last question comes from Brian and it was on a YouTube comment.

So that's another way that people can reach us. If you like our YouTube channel, you can leave us comments and questions on videos that we post. So this one is from Brian and he says, I enjoy the show and I've been listening forever. My investments in Brookfield have a lot to do with Jason's passion for the Brookfield companies.

My question, why don't I ever hear? Anyone talk about BDCs and then he goes on to list a few here. So Jason, I had, I have never heard the acronym BDC before, so I had no idea what this was. But why don't you tell, tell everyone what they are and why we never hear about them. 

Jason Hall: So BDCs are business development companies.

It's kind of like, uh, private equity, but a publicly traded company. And they have like a set amount of capital equity that they, when they go public that they raise. [00:49:00] And they're basically having to recycle that, that capital as they, as they make acquisitions. But again, the idea is they find something to invest in ideally cheap, ideally something that they can buff up and improve and then sell for a higher multiple.

One of the ways that they. Again, since they have their equity capital, when they go public, they also tend to use a lot of debt to fund deals. They use a lot of leverage. And when it goes well, it can go really, really well. Right? You can get really, really great returns. But it can also not go great.

And it can also go really, really bad. So we talked about leverage before. With those ETFs and it's destroyed a lot of value for a lot of BDCs. All it takes is one deal going bad and you can wipe out a lot of, a lot of gains from, from other deals. So, there's a lot of BDCs. They tend to be small and they don't get the attention of like the big PE firms, like the BlackRocks and the Brookfields that they [00:50:00] have some of their own money, but.

Mostly they're taking their two and 20 by managing money from investors that come to them and invest in their different funds. It's always a better business to take a fees from managing somebody else's money. Cause you're going to make money no matter how the investments do. Right. So, it's, these BDCs are just, they're tough businesses.

They're hard to evaluate because the stuff they're buying, you probably don't Unless you're in that industry, you probably don't know what the hell it is. So you can't really evaluate. I mean, you're, you're, you're betting on management being good, better at allocating capital than you are. And you're giving them some of your capital and then they're going to go allocate.

And they're, they're either going to make you money or not. So you don't hear from them because there's, it's not a great, hasn't been a great place for, for by and large, you know, you named a couple of companies off like Aries capitals. Done pretty well, but most of them are just kind of crappy, honestly. So yeah. 

Jeff Santoro: All right. So that brings us to the end of our mailbag and I will use the end [00:51:00] of our mailbag as the first point in our housekeeping here, as we wrap things up you mentioned it at the top, Jason, but just a reminder, if you want to have a question answered on the podcast next month, when we do the next mailbag, you can send them to us.

At any time in any way that you can find to get in touch with us responding to a newsletter post is an easy way to do it. Just sending us an email at our email address, which is in the show notes, social media anyway is fine. Little housekeeping on our schedule coming up. So The week that you are listening to this episode is a week that I am on vacation, so we will not be recording, but next week we have a really great show for you.

We're actually putting a episode from the Chit Chat Stocks podcast in our podcast feed. We did this once before and it was pretty successful. And it's a way for us to share the good work of our good friends, Ryan and Brent over at chitchat stocks. It's a really great interview or not interview.

It's a really great deep dive they did into Stan Druckenmiller. So that'll be in the feed next week for you to listen to. [00:52:00] And then we will be back with a regularly scheduled episode the week after that. All right, Jason, I think we did it. 

Jason Hall: We did it, buddy. Thanks for all the great questions, everybody.

We love to give answers to these hard questions about stocks, about sectors, about our processes, warts, and all. Hey, that's a good band name, warts and all. I like that. It's good. It's good. But of course our answers are not your answers. It is up to you to find your answers to these hard questions about investing.

You can do it. I believe in you. All right, Jeff. We'll see you next time.

Jeff Santoro: See you next time. 

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