You're listening to TIP. I always look forward to accordingly mastermind episodes with my friends, Tobias Carlyle and Hari Ramachandra. If you're not familiar with the format, it's when we once a quarter pizza stuck to the group and discuss both the bull and the bear cases. We cover a lot of ground in this episode. My pick is Microsoft. And at the time of the recording, it's the biggest market cap company in the world. And we discuss if we completely missed the boat, or perhaps there's more to the story than meets the eye.

Tobias' pick is a true value-advancing stock trading at only seven times earnings. Dev on energy. And if you're right about the timing, you're looking at a huge upside. Hari is pitching not only one stock, but two in this episode, and we'll shortly jump right into it. But before we do, I want to remind you to stick around for the second part of this episode, where my co-host Clay Fink and I discuss our upcoming TRP Summit. Our summit this year is an in-person event in Big Sky, Montana.

Only 30 spots available. The premise is to network with like-minded value investors, share ideas, create meaningful relationships, and of course, enjoy delicious food in a wonderful setting.

Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Stig Brodersen. Welcome to the Investors Podcast. I'm your host, Stig Brodersen. And today, as always, I'm here with Hari and Toby.

How are you today, Jens? Hey, Stig and Toby. Good to see you both, as usual, and doing good. Good to see you, Stig. Good to see you, Harry. Good to be back.

So, as always, we're drawing straws. Actually, I usually just put Toby and Hari on the spot, and then there was like awkward silence before we hit record. And then someone says, okay, I'll go first. So today, Hari was the one who budged. So Hari, you'll go first with not just one, but two pegs.

Yeah, I thought I'll give one more bonus. I mean, to be honest, I wasn't sure which one to pick. So in a way, I'm actually coming to you guys, the mastermind here, to help me get some perspective, just to give some background. I was following all the news, all the geopolitical tensions. A lot of it around is trade, the movement of capital. So I've been following a couple of fintech companies for some time now.

and there are two that stands out. One is in Euro and the other one is in US. I'm talking about Adyen and Block, formerly known as Square. And they both are very interesting because the approach they have taken is totally different. So if you look at Adyen, it's headquartered in Netherlands. It's a B2B payment platform. It focuses mainly on

big global enterprises like Uber, Spotify, Booking.com, McDonald's, you name it, like all the big players are their customers. And they have a vertically integrated stack. Most of the infrastructure is in-house. They don't like, you know, have third party vendors integrated into their system. And they have been able to control cost because of that.

And also more importantly, they have a lot more control on that latency, security and all of this from an investment perspective is reflected in their margins. Now, Adyen is growing in a very healthy way, like in it's almost like 23% year over year growth in the last five years. Currently at $2.3 billion in revenue.

while the EBITDA margins are above 50%. So this is like one of the highest margins you would see in any industry and not just fintech.

And the main thing is that the switching costs are really high in this industry. Companies don't really switch their payment systems because there's so much people integrated into their workflows. It's critical for their business. And Adyen has presence over 180 countries.

and supports more than 250 payment methods. So there is no other company that has that level of geographic coverage that these global enterprises need. And the switching cost, you can see the strength of the switching cost, their competitive advantage in the fact that 80% of their growth comes from existing clients. As existing clients expand, they roll out more features, cross-selling,

all the helps add in and that's one of the reason for the stability and consistency in their revenue and their margins and they're very good stewards of their capital like their return on invested capital is over 54% they're able to generate more than 1.7 billion in free cash flow with around 87% of conversions

and they have a lot of cash on the balance sheet as well like 10.35 billion dollars in cash while their debt is only 236 million essentially they're debt free so it's a very safe fortress of a balance sheet so highly capital efficient

and compounding consistently both their earnings and their revenue at around 20, 25, 30, 30% year over year and they have been doing it highly consistently and in the next 5 to 10 years with the digitalization of commerce expanding, real-time payments becoming a norm, this

model of integration between point of sale, brick and mortar and online commerce and focusing on big enterprises, doable enterprises will definitely work well for Adyen. Of course, everybody knows about it so they're richly valued. I think their P/E is quite high.

The price to sales itself is like 23. So that's what gave me a pause. Then I was looking at, okay, if they're growing at 45, 30, 35% annually for the next five years with consistent track record, would this be justified for somebody who's looking for a...

same consistent componder. So that's one. Now, some of the risk of course is the decline of globalization, country selecting barriers, all that can hit them hard because they focus a lot on these global enterprises transacting across multiple countries. So that's definitely a risk for them. Now contrast this with block.

If that was more like a stable value play, this one is more like a venture bet because they are into everything. Of course, this is one of the companies Jack Dorsey, the founder of Twitter, former founder of Twitter founded this company. In fact, he was CEO of both blog and Twitter for a while. They're like 10 times in terms of revenue

compared to add-in like 24 billion dollars in revenue but they are into multiple areas they mainly focus on small and medium businesses they have consumer vertical so they have a cash app that's quite popular they're also into after pay and they're also in

or big time into bitcoin in fact like their 24 billion in revenue is not really real in the sense that there's a lot of bitcoin pass-through revenue there so if you actually look at the revenue that's more closer to 68 billion so that's where we got to be careful here and but they're also growing at like 30 40 percent annually in in terms of their revenue but

it's much more volatile. Like any math, it's more cyclical in that sense. Like it works on the Epson flows of Bitcoin. So you've got to have a strong stomach for the volatility that this stock springs in. And also they're investing a lot and we don't know how efficiently they're investing. So that's the other thing because they're dabbling in multiple places. So it's almost like a venture bet. So their EBITDA margins are like 15%.

or 30-20% or less than 15-20%. So, in terms of competitive advantage or mode, of course, there is network effect, the cash app and small businesses using their square hardware and app. But I think in terms of fundamentals, the way I look at it is with the low margin return on investment capital of 9.2%,

a free cash flow of 1.2 billion they do have a good cash position too like 12.7 billion with debt of 5 billion but i think the strength is mainly the ecosystem but i am looking at the optionality because that price did just 1.5 sales compared to 23 for add-in and for right reasons because there is

a lot of investment that they are making which we don't know how they will pan out. So, there is uncertainty, there is cyclicality, volatility, but there is also a tremendous upside if they succeed in some of the ventures that they are looking into and their price actually accounts for all this uncertainty. So, that's a good thing. Whereas in case of Adyen, it's price to perfection. So, if Bitcoin becomes

And if Pristin was here, he would have supported this. If Bitcoin becomes much more acceptable across the world,

and becomes mainstream, they have a tailwind there from the Bitcoin adoption as well. But I think the way I look at it is there is risks there because somehow they're acquiring, they're investing, they're like a venture. So we don't know how they will pan out.

the way i look at it is add-in is a fortress minimal debt tons of cash and industry best returns whereas block is leverage for growth but enough liquidity to ride all the volatility so it's almost like you know adian is like coca-cola if like when he invested like study good growth but you are paying for the for that whereas

Block is more like American Express when Buffett invested in Netflix. It's a lot messier, but has a massive upside. So those are the two picks. In fact, I don't know which one is better. So I'm actually curious to know your thoughts on that. I guess the question is always the valuation for these things. I think it's been...

I think it's been more expensive than this. So it's off quite a bit from its peak in 22 or 21 when we had all that silliness going on. So they've probably worked off some of that overvaluation. But 22 times sales, there's not a lot of – like a lot has to go right for you to get paid, which is not to say that a lot's not going to go right.

What's the competitive landscape like for these guys given the valuation that you're sort of you're paying for these things? Is it a - are they going to win? Yeah, actually that's the point Bobby. Like I was - the way I was trying to justify the 23 times sales valuation is if they're growing like 30 plus percent year over year in the next five years,

It'll be around eight times it. So there's still more, it's quite expensive. Even after growing 25-30% a year for the next three to five years. So that's the reason I found it. It's a solid business, but that is priced into the stock.

it's really difficult for me to value these type of companies. I think it's all there for us to see how great a company that it is. You briefly mentioned Bitcoin there. I probably, not that we talk too much about here on the show, we have Preston's show for anyone who's interested in Bitcoin. Just to your point, perhaps it would just be a pure play just to hold the coins yourself. But whenever I'm looking at something like this and I'm trying to figure out, okay, so what is the competitive landscape

who has a competitive advantage, which I'm the first to say I don't necessarily think I would do a good job of. So I'm looking at how do they behave and what do I mean by that? So let's compare this to Visa and Mastercard, which I should say for the record, they don't compete with. They're sort of like more on top of their rails if you want, for example, for Eddie and so.

That is a very interesting, almost duopoly. You can include UnionPay if you want to, but they don't compete in the same market. But for your payments outside of China, you're more or less, you have Visa, you have MasterCard, and then there are some very specific countries like, for example, Brazil, where they're doing their own thing. But you have those two, and they don't really compete with each other on price, which is probably not what you want to see as a customer, but it's 100% what you want to see if you're an investor. Stig Brodersen :

Stig Brodersen : Whenever you have an oligopoly type of competition, which is just a fancy way of saying there are only a few players, I'm trying to figure out, especially whenever you have high margins, how rational they are, rational from a shareholder perspective. One of the things that I can't help but notice is that they're going head to head with Stripe. Stripe being US-based, traditionally had a focus on the US and at the end,

focus on Europe being based in the Netherlands. So they're starting more and more to compete with each other. And one of the problems is that they're to some extent trying to compete on price. Stig Brodersen :

which is generally not what you want to see. Whenever you see a tech company and it's trading at 23 times sales, the value investor in us or the cheapskate in us are like, "No, no, no, that's just way too expensive." But then there are different things you have to break down. One of them is how fast can this grow? And we've seen multiple times, there's a lot of operating leverage. In other words, every dollar that comes in more or less drops to the bottom line. So you have that, and then you have the opportunity for explosive growth.

but you also need to be able to fend off that competitive pressure. Because all of a sudden, if you have 80% margins, you're like, oh my God, this is amazing. So perhaps you can justify 23 times earnings. But then if you start competing on price, all of a sudden those 80% margins might come down to like 40%. So the equation completely changes. And so

I don't really know how to best value this. That's a long way of saying I don't know. But it's also like whenever you had the big tech companies back in the day, and I don't even know whenever we should make the cutoff point whenever we say back in the day, let's say a decade ago or whatnot, the big tech companies to a large extent were competing in different verticals. And then they became so big that to continue to grow at the amazing pace that they are,

they had to start to compete with each other to some extent in some of the same business lines. And you sort of like, and I know you pit both stocks, but you sort of see some of that happening with Block too, where Block has traditionally been smaller companies, plug and play, and you didn't need any kind of developers, anything like that. It just worked out at Gates. And they're going more and more upmarket

upmarket in sense of like enterprise size, whereas Atty.In sort of like doing the other way and where you're like, "Oh, okay. So what does it mean?" And are there room for them? And of course, if you look at a company like Amazon, who started whenever they started cloud, and then you have Microsoft coming in and Google. So you can say that there's room enough for them, but it also sort of depends on how the actors engage with each other. Stig Brodersen :

I don't really know. It's a tough one. And I think you can probably come up with different kinds of arguments, like the whole fraud protection and why that's important. And there's sort of like a first move advantage and you build up more and more data and that data has been harvested and it's been very useful. But I don't know. Let me throw it back over to you, Toby, or you, Hari.

Harry, how do you feel about that? I know that the argument for MasterCard and for Visa historically has been that they have their own rails, they have their own system, and it's just hard to replicate that. You've got to build that out globally. It's not going to be easy to do. I was in Shanghai a month ago for a week.

and Alipay and the one that I used, which is just escaping me now, the other one. There are two payment systems that they have there. And basically, every vendor, every taxi driver, everybody has a little QR code, basically. And that's what you use to pay. So, they don't need a rail system because they've built it over the internet.

And so it's like a sticker and everybody has one of these things and you can give anybody money. And the providers for the vendors are the same as the provider for the customer. And so they don't even need to charge very much money. They charge basis points to do this stuff. And so it's a totally different system to the one that we're used to.

And I get that it's a little bit of a closed garden. So it's probably not the final solution either. But I worry a little bit about, and I think that payments is a difficult problem. Clearly, there's lots of different systems. You're in lots of different countries. It's a hard problem to solve. And so anybody who solves it is going to do very well for a long period of time. But it feels to me like the system is a little bit of flux. So maybe someone like Adyen, maybe these guys do quite well if the flux, if the system changes and MasterCard and Visa don't do so well.

but I just, I feel like this whole payment system is changing and I don't know how, I don't know what it looks like on the other side. It's not necessarily a criticism of Adyen. Adyen may be the ones who benefit from a system but is in flux because they've got so many different ways of processing payment. But have you thought through that? Like what do you think about payments globally, payments generally? Like what do you, how do they deal with this sort of

I think what is going to be a revolution in payments over the next five to ten years. Actually that's a very good point Robby and that's for those of pretty big risk like these payment systems are more like public good the way China or India are positioning it it's in India they call it the India stack

In China, I think UnionPay was another one. And then basically the way they're approaching it is they're going to make the rails a public good so nobody can monopolize it. So that's one of the challenges even Visa and MasterCard has in India because I'm not that familiar with the Chinese payment system. But in India, at least, the UPI, as they call it, is a public infrastructure. It serves around...

like you know billions of transactions per day but then there is google pay or any other payment app can sit on top of it that disenfranchises all these rails makers whether it's mizamashuka or addion or flock and definitely that is a risk if these payment system can start talking with each other right now they're all walled gardens that's where addion

brings in value because now they smoothen the payment system across multiple geographies for these businesses and that's where their lanes are. Now, in future, if we have a situation where there is an open protocol,

that these walled gardens can talk and they can do payments internally but they can talk with each other that's where add-in and block business model i think it's a very good point you brought that's a big risk they're basically they're out of business that's a part of time in a way even visa and mastercard to a great extent these payment system pose a big threat impact visa and mastercard we love it heavily in india i heard

not to open up UPI the way they did because that would impact their business. But I think in India, they anyway went ahead and did that. And I can see when I visit India now, like nobody uses cash. Everybody has a phone. Everybody has a QR code, including like street vendors.

and even beggars so they have a qr code not cash so and that's a big risk for top and not just for add-in and block but also for visa and mastercard if everybody is using cash apps i think google pay prefer google will benefit out of it i guess so that's something that we need to definitely keep in mind that if these walled gardens can start talking to each other

the business model of Adyen and Block are definitely under threat at that point. But it's also possible they're the ones that facilitate that conversation. So they may be the beneficiaries of it. Yeah, that's kind of, you know, so this is where, like, you know, it's very hard to figure out how the next five years will shape. And that's where Adyen, as you said, like, you know, price to perfection is the risk because it's not as certain as we think it is.

Whereas Block, I think, is not priced for certainty. It's priced for uncertainty. And that's where I'm slightly, if at all, I'm leaning towards Block because it has optionality and it is priced for uncertainty because they have the consumer cash app. They're not just dependent on only the payment systems. They have the consumer cash app.

they can easily participate in this QR code, UPI kind of a thing where Cash App is like Google Pay basically. They can participate in Bitcoin, they can participate in the rails for small business, the payment rails. So they have their tentacles in multiple things, whichever works, they can kind of adapt and grow. And their stock might not be priced for that optionality, rather I think the investors are focusing on the ROIC

and also the low margins and the recent disappointments because I think they're trying a lot of things. I think the way they are approaching is almost like how Amazon used to be in its earlier days where they're putting a lot of money back into the business rather than focusing on margin and they're throwing a lot on the wall and see what sticks. That's the reason their ROIC is also low.

But it might pay you back. It's almost like a venture bet at the bar of time. But, Tobi, that was a good point. That's a big risk actually. And it might not be just risk for these two companies. Many fintech companies including big loans like Visa and Mastercard might go through destruction.

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All right, back to the show. All right. Well, thank you, Hari, for bringing those two companies to the group. I kind of feel like my pick here is a little boring. I don't think you can call it a hidden gem whenever it's like a $3 trillion market cap. It's not really in the gem territory, is it? Well, it's Microsoft.

StockTicker MSFT, at the time of recording, Microsoft is the public company with the highest market cap in the world. So are we late to the party? Perhaps we are. I've never invested in Microsoft, and yet I feel like it's been hiding in plain sight. I don't remember ever using a computer and not using Microsoft products, and I've never looked at it as an investment before. It always seemed...

to be such a big company that was just like, you're too late to the party. So I forced myself this time to take a closer look at it. I want to share that with you guys. And typically in

Whenever we're presenting stuff, we talk a bit about the history. I don't know. I kind of feel like the history of Microsoft has just been told so many times. I don't want to spend too much time on that. But it was founded in 1975. And there's this wonderful story of how Bill Gates and Paul Allen, how they set up shop in Albuquerque, New Mexico. And the reason why was because that was where the only customer was, by the way. And there's all of these myths now.

I don't think it was a myth though. I think it was quite factual that Bill Gates couldn't, whenever he took out clients, he couldn't order alcohol because he wasn't old enough. Whenever he was visiting clients, whenever they had more than one client, they actually had to go to different states. He couldn't rent a car because he wasn't old enough. So anyways, Preston and I actually covered Paul Allen's wonderful book, Idea Man, back in 2016. I'll make sure to link to that. And then I want to recommend Bill Gates' new book, Source Code. I mean,

amazing title. It's the first of three books. And the first book sort of like talks about his childhood and then the very, very early ending of Microsoft. So anyways, I'm going to highly recommend that. But talking about Microsoft,

The easiest is just to break it into three segments. And of course, with a massive company like that, it's almost too simplistic, but here we go. So the first one is called productivity and business processes. That is 37% of operating income. Think Office 365, LinkedIn, Dynamics. Again, a lot more, but just for simplicity. Then they have the next one called intelligent cloud. You can think about...

Asire here, which I'm pretty sure I mispronounced. And I've checked out multiple YouTube videos and they all say different things. And then the last one is called more personal computing, 18%. I think Windows, gaming, search, news advertising. So that is an oversimplification, I should say, but they sort of like to give you an idea of where we are.

Stig Brodersen : If we talk about competitive advantage and the landscape, so it probably doesn't surprise anyone whenever I say that switching costs are just a massive mode around the business. I've been using Microsoft Office my entire life. I have no idea if anyone makes better spreadsheets than Microsoft Excel.

I don't really care if they do, perhaps they do, but I've been using it for so long and I feel probably just because I'm lazy that if someone comes up with a better way of creating a spreadsheet, Microsoft does what Microsoft have been doing for such a long time, they're going to come into the game a few months later and then implement it and then they have your platform advantage there. Stig Brodersen :

I guess that's the way to illustrate the switching cost. I actually tried for the longest time. So back in the day, it used to be so you would pay for...

like a license. So you will have Microsoft Office, whatever. And then they changed it because they're very smart at business. So they changed it to the whole Office 365. And I tried fighting that for the longest time because I really didn't want to have any kind of subscription service. But it's just like, at least me, I just lost. At some point in time, you're like, okay, I have to convert to this. And I don't want to pay for it every single month, but otherwise I can't really use it. It's the way it is. And

There is a price for everything, of course, but it's just one of those paths of least resistant type of thing. It's like, I typed up here in my notes, fighting Microsoft is like fighting the Fed. Don't do it. I don't know. It's a bit of a nerdy joke here, but I kind of feel like talking about the switching cost, and I know that I'm going to come up with a bit of an ironic example because here on TAP, we actually use Google Cloud.

And I should also say full disclosure, I'm long alphabet. And so you might be thinking, why do you want to talk about Google Cloud now that we should be talking about Microsoft Cloud? What gives? So I want to talk a bit about the decision process that we had, which wasn't that sophisticated, to be completely frank, or at least not on my end. So we moved to the cloud in 2019. And the way it happened was that I spoke with our CEO, who happened to have a degree in computer science. So I kind of thought,

thought she would probably know which cloud to choose from. And I don't speak IT language. I call it IT language already. I'm like, you can tell I'm a rookie. So what happens whenever I speak with an IT person is that I'm going to ask a question such as, which cloud should we move to? And then in this case, she said something for a really long time that I didn't understand. And that's typically the time whenever I would smile and nod for a long time.

And then at the end, I would ask the question, so what do you recommend? And then if it's not too expensive, I'm going just to pay for whatever she would recommend because I don't really understand how it works. And so obviously that's a very, very bad way of doing business decisions. But I kind of feel like, I think this story is telling not just of my own ignorance, but of how a lot of decisions are being made where

I don't know what it would require for us to move away from Google Cloud. It is certainly an expense, but it's not a major expense that we have. And as long as everything works, and keep in mind, we're like 20 people working full-time on TIP, so the entire team has been trained on Google Cloud.

If Google came in and hiked the prices with 40%, I don't think they would care. But if you call them and they listen to this podcast like, oh, this sucker, let's hike the price like 40% for GAP, I would not change anything because I would have to train the entire team and myself. An expense that percentage-wise would go up, but doesn't really make a big difference to us. And I just don't want to do that.

And so let's go back. Let's talk about Microsoft here as a stock pick. What I find interesting is that if you look at the three big players in the cloud business, Amazon, Microsoft, and Google, to some extent, the market share has been set there by historical reasons of who entered the market and when they did. And there has certainly been movements in the market share of the three big ones, but it's not as dramatic as you might be thinking in something like cloud. So I think I wanted to

To talk a bit more about some of the risks, because I made it sound like, oh my God, this is amazing. It's so sticky. How is that not going to be perfect? Well, now that we're talking about Microsoft, there's this famous discussion that Bill Gates had with China Munger. And Munger talks about how

or actually Gates talks about how it's difficult to do something different. He was specifically talking about Microsoft here, but he was talking about the innovator's dilemma. You've done something for a long time and you're supposed to just disrupt yourself. And it's just really, really difficult to start disrupting yourself. That's just not the way that we are wired. Stig Brodersen : And of course, all businesses eventually get disrupted, even mighty Microsoft. They miss the boat on smartphones to Apple, search to Google,

But then, at least to some extent, whenever you have the networking effects that Microsoft have, you have a chance to catch up. And...

Whenever you have a company like Microsoft that's in tech, yes, but it's 50 years old, I do think that there is an element of the Lindy effect, meaning something that's been there for a long time has a bigger chance of a high probability of staying there for a long time. Stig Brodersen : I think that's very much the case for Microsoft where it's not just entrenched in tech, it's entrenched in just the way we live our lives.

And I do think that there is a certain risk in terms of valuation, opportunity cost. I'll get to that later. But I probably would say here at this point in time, famously,

Stig Brodersen : ... Microsoft that seems to been making new highs forever the past, I don't know how many years. They actually had close to 17 years before they made a new all-time high from 1999 until 2016. I had to look it up multiple times. Ironically, I looked it up on ChatDBT, very much Microsoft indirect product. And I was like, "Is it really true? It took almost 17 years to make a new all-time high?"

Yes, because whenever you have various threats multiples and the market is sort of like too negative on the sentiment, that is actually how long it's going to take. But anyways, I actually want to throw it over to Hari, and I see some risk out there. I don't think necessarily in the near future, but again, that's why I want to ask you, Hari. You know a lot more about this than I do. I need to figure out, because cloud is such a big part of Microsoft's profits, how do you look at their competitive position?

I don't think I have the capability to say, "Oh, this is better than Amazon's cloud," for example. And how much is AI a tailwind? I think a lot of people talk about making AI your tailwind, but on the other hand, there's also a lot of headwind from them spending so much money on all those data centers. And we haven't really seen the profits from that yet compared to the level of investment.

I don't really know what my exact question was there, Hari, but I wanted to throw those thoughts over to you. Hari Ramachandran: No, very interesting kick, Stig, and also a bold one because it's such a big company now that it's bigger than many countries in terms of the… Comparing to GDP, I think it's bigger than Canada, bigger than Russia, bigger than many other countries actually. So in terms of the way I look at it is Microsoft is

the not in the negative way but in a positive way the ibm of today because there was a famous saying in the industry that nobody got fired for buying ibm products that means like a lot of these id managers and cios who are making the decision i think microsoft is a proven

player, they are full stack so they have established themselves and I think under Satya's leadership as you said like you know they languished for a long time because they couldn't adapt to the change in the industry that was happening.

especially with mobile, with cloud, they were late to both parties. They missed one, which is mobile completely. Cloud, I think miraculously they came in late, but they're now firmly the second player. Last I saw, AWS is still the leading player with 30% plus market share, closely followed by Azure, but I don't know, like 20, 22% market share. But now there is another disruption coming, which is AI.

And we will have to see how they navigate this cycle. And that's the uncertainty. Because I feel right now it's not clear who will win, who will lose, who will be disrupted, whose business model will be impacted. That part is not very clear. Of course, they have partnership with OpenAI.

They have products in AI like Copilot, but none of them have proven themselves in the market. So that is the uncertainty. It doesn't mean to say negative, but at the same time, it's for the price that they're selling it, it's baked in that they're going to navigate it successfully. So if we have enough confidence that they're going to be

successful in navigating this then I think maybe it's worth paying this price but what I'm thinking is what will be the returns for you as an investor script like when you invest in this right now they're selling at 35 PE I think one of the highest in their history as well in terms of their valuation so the do we have more room for multiple expansion

they're growing it around 19 percent or 20 percent in terms of their eps growth revenue like 14 12 14 15 i think you might know better in terms of their annual growth rate of revenue so what will change for multiple expansion or will will their growth rate change for us to see an upside from here that's what i'm looking at maybe the downside

is not that much because if they continue doing what they're doing, we will continue to have the same multiple hopefully. And that's the other risk. If the market itself reprices multiples, will it impact Microsoft shares? So it's a very good pick from that perspective as like, you know, it's almost like the add-in

kind of consistent grower has navigated multiple trends or cycles how will they fare in this latest disruption the ai trend that's the one that we need to look at in fact in in one of the podcasts sabdiya himself said hey with ai coming in a lot of software might be completely disrupted with ai agents and whatnot if the paradigm itself is shifting

Now, what would it mean for Microsoft though? Because they are heavily into, you talked about spreadsheets. What if I can just ask questions and not use spreadsheet to analyze my data? So will I even need Excel at that point of time?

So, there are a lot of such questions that are being asked. And the base which models are making progress, they are becoming more intelligent, it will be hard. And maybe Microsoft can take advantage, but so can somebody else too.

and google has its own model too and we cannot discount google in this basically and they're the close third in the public cloud race so and so so is aws so microsoft didn't have these formidable competitors in enterprise phase before before 2015 2016 it was mainly microsoft and then maybe ibm neither aws i mean amazon or google were a formidable players

in the enterprise. So it's no longer that Microsoft is the leading player in the IT. Google and Amazon are making good progress in that and sometimes eating Microsoft's lunch. So it will be the battery between these three and in that how much Microsoft can afford to grow and keep up its growth rate. That's number one. Number two,

what's the investors appetite for a high mean market but if we go by the thumb rule as they call it like you know price to earning ratio is equal to growth margin plus a EPS growth rate or a profit margin plus EPS growth rate they are held within the range because their profit margin is 35 percent their growth rate is around 19 percent so they have

you can say it is justified at this part of time but that depends upon the investors continuing to afford this multiply of 35 plus so i think for me definitely business is not a risk it's a stable business it has a lot of diversification built into it but the risk is good

Stig Brodersen : Yeah. Hari, thank you for your feedback. Someone out there is probably tuning in and they're like, "Oh, is this like a value investing podcast? The first guy, he pitched something at 23 times sales. The next one at 35 times earnings. What's going on?" So there are quite a few things I wanted to point to here. The first one is about the multiple. I think you're absolutely right. And that is a risk. You're not going to see a lot of multiple expansion.

I would be greatly surprised at least at this level. At the time of recording, Microsoft is trading at what, 450, but just after the tariff announcement, it was almost touching 350. So that was probably the time that you should have made your move. And which is also why we talk about

stocks here in the mastermind episodes, and then we put different things on a watch list. So whenever something like that would happen, we can build our positions. So one of the many mistakes I've made, and I remember talking about Amazon so many times in this show, and we started in 2014. And I always had this idea that Amazon was just too big. It was just, how can you make money on a big company? And for whatever reason,

weird reason I took a position in Alphabet back in 2018. And I remember feeling sick to my stomach. And yet I still did that because I had this idea that, hey, you have to invest in small companies because if you don't do that, how can they continue to grow? And so I missed the boat on so many of the big tech companies because the multiples just seemed outrageous. And I was always thinking, there's no way they can continue to grow at that pace. Stig Brodersen

Now, whenever I'm looking at the past decade for Microsoft, highest market cap company in the world, we talk about 16% CAGR in operating income. It's amazing. We're dealing with a company who want 20% return on capital employed.

Now, how long can they continue doing that? That's going to be the question. And whenever you're going to sell, what is the exit multiple going to be? I'm definitely going to recommend anyone buying anything into 35 times earnings. That's not so much my point. I think your entry point has to be different. But I think I've been amazed to see, and there's probably something mental in terms of whenever the first company started hitting the $1 trillion market cap, like, oh, whew, this is

this is just a new ceiling. And then it just kept on going on. So what is it that Yoko Berri said? Something along the lines of, if it can't go on forever, it will stop. That's probably also the case here. What I would say is that

Stig Brodersen : I am very bullish on their cloud computing division. We're probably looking at something that is just short of a trillion dollars for the entire industry, not just for Microsoft. And that's probably growing with 20% CAGR right now and for the foreseeable future, perhaps a decade, perhaps longer. It's vast. And whenever you go through the earnings call and the same with the alphabet, they talk about how they're constrained by capacity. Stig Brodersen :

a bit to your point, Hari, about Addy, and there is this, yes, they do get new users on, but it's also about the customers just getting bigger. They grow so much from that, and it's not too different because with a company like Microsoft with their cloud services, then they need more cloud computing. So I found that to be quite interesting. Now, I'm not sure what to make of commercial 365.

that has been a massive tailwind for the longest time. And for obvious reasons, that growth has started to taper off just because there's only so many people that you can convert from one system to another, or from a license to

to recurring revenue, and there's only so many people out there. And I think you brought up a very good point, Hari, about do we even need spreadsheets in the future? I kind of feel that's probably a bit above my pay grade to answer that. I think you have a great point about software just general being disrupted, and whether it leaves Microsoft, are they going to be in the very infrastructure of handling everything and how they're still going to capitalize on that? I don't really know.

I very much like your analogy, Hari, whenever you said it's the new IBM. Let's hope that they look into a different destiny though, if you're long.

Stig Brodersen : I think you also asked, Hari, about valuation. I'd probably say at this valuation, single digits, high single digits, I'll imagine at 350, I did the modeling and there was a ton of assumptions that doesn't go well into doing a podcast you can then model. But I would say that 350, you'll probably see a low double digits, but probably not at this level. Toby? Toby Leonard :

You got a little bit unlucky, Stig, with it running up so quickly. I'm sure you were preparing for it at much lower prices. I think you make two good points. One is that you shouldn't ignore the very big companies just by virtue of the fact that they are very big and are very successful. I remember looking at Microsoft in the 1990s and thinking it was all over because it had run so far and so it's only up.

a few thousand percent, 10,000 or 20,000% since then. So clearly, that's not the right thing. And the other thing is that 35 times earnings or 20 times sales, these things are expensive. It's not necessarily the case. It may be that they are very, very good businesses. It just becomes increasingly less likely. Although for Microsoft, it certainly proved it over a very long period of time. I think your worst case scenario with Microsoft here is

is you just get below market returns because you're slightly overpaying. But I don't even know if that's true because it's clearly growing at a well above market rate. And maybe it's a little bit overvalued here, but like maybe 20% or something like that. And so you're still going to get, as you say, high single digit returns without knowing. And I don't think anybody's switching anytime soon from

like Word or Excel or anything like that. I think the challenge is, as you point out, the AI. If people just start interfacing directly through an AI chatbot and the chatbot is able to put together those spreadsheets more efficiently, you know, pull the data, now put together a table the way that I want to see it rather than you having to do it

Maybe it's able to back end into something that's a different kind of spreadsheet developed. Maybe you can do it itself. But I think that's sort of more of a, it's a little bit more abstract, that risk, and it's harder to handicap how likely that is. I think behavior changes really slowly. So I don't think it's happening anytime in the near term. I think there are folks who are early adopters of the AI. I think everybody is using probably a little AI chatbot to some extent, but

It's a long way from really having that become the dominant. I certainly still use - I use Google Spreadsheets more than I use Excel but if I have a thing that I need to use, it can only be Excel. And I prefer - I actually - I write in Google's version of Word too but I think that if you're going to produce something for production, then you have to use Word because it just has more functionality. I think it's a very safe pick and I think it probably delivers sort of slightly lower

returns because it's so safe, but I don't think that you can go wrong with something like Microsoft. And I think you're probably likely to be ahead in five or 10 years time. So I think it's a good safe pick. Yeah, I think that's it. Thank you, Toby and Steve. This is a very interesting pick. Steve, I am also curious, what's your expected return that we are looking for for the next five years at this price, current price?

Oh, that's probably high single digits. Call it 8%, something like that. It's not too interesting.

And on that note, I would also say that the average volatility of Microsoft is 33% compared to 18% for the S&P 500. And of course, that would change depending on the time period. But to Toby's point, yes, this was not the right time to pitch it. There were different time where it was perhaps a bit more appealing, but whenever you look up the volatility of a stock, and especially if it's significantly higher than the market,

you can also sit on your hands and wait. It's not like Microsoft's underlying

Microsoft, the underlying business model, are going to change that fast. And just revisiting this point here you said about spreadsheets, and this is probably my lack of imagination. We talked actually about Gemini here just before we started. I find right now ChatDVT to be a better option. Who knows? And I kind of feel like considering Microsoft investment, that what's going to happen, that's definitely above my pay grade.

Again, my lack of imagination. I've tried working with spreadsheet, because I would typically speak with Ted DiPietro about a lot of financial stuff. Spreadsheet functionality right now is absolutely terrible.

Stig Brodersen : This might be a bit of anecdotal, but whenever I look at other people's Excel sheets, like really smart people's Excel sheets, I have a really hard time understanding what they're doing. To them, it's like the easiest thing ever. We're not talking about complex problems, just my ignorance. But I guess that everyone who has seen everyone else's Excel spreadsheets, explaining what you want to do and how you want to do it and what you have imagined, explaining that to chatbot, it's just, I don't know. Again, my lack of imagination, but

Or I find that to be disruptive relatively late. But whenever I grew up, we didn't have internet, which makes me sound super, super old. What I find myself, even whenever I use ChatGPT, I would use it and then I would include whatever kind of write-up and then I'll put it into a Microsoft Word document and then I'll sit and edit it afterwards. That's probably not how young people do it today, but that's how I do it. So

A few more anecdotes here to Microsoft, if I can try to be my own devil's advocate, perhaps I read way too much into it. I really like to read the CEO's letters to shareholders, and I really like to see if I can feel the founder, or in this case, not the founder, but the CEO, I can really feel their soul for the last bit of words. Whenever I read Sadia's letter, it sounds very investor relations.

I don't feel I know who I'm speaking to. And I probably have way too high standards from reading Buffett's letters. But it feels like it's been...

gone through 10 IR people and it's been beaten up and it's like, we make the world a better place and everything should be sustainable. And I'm not against making the world a better place. It's just like, I'm inclined to say it feels like one of those AI write-ups from ChatDVT where like, oh, that sounds nice, but no one talks like that. It sounds so AI. And so I don't know how many people are going to offend when I'm going to say this, but to me, that's a bit

Again, the result speaks for itself. So I'm probably over-analyzing the letter, but there's something about that where I'm like, "Ugh, we need more soul whenever the CEO communicates with the stakeholders." Stig Brodersen : On the flip side, I like how

Of course, we all want strong balance sheet companies. I also like that Microsoft doesn't have $100 billion on the balance sheet. There's, of course, been a lot of money. They made the Activation Blizzard acquisition $75 billion, most of that in cash. And you can sort of see that on the balance sheet how they just exploded the goodwill. But I think it's good, especially companies of this size that actually do apply that capital.

Also, because they're not Berkshire Hathaway, they're not trained to allocate capital. It needs to be put into work in their own expertise. And of course, the jury is still out in terms of how good the acquisition was. Let's see. But I just wanted to note that if anyone's looking at their cash holdings and what's been going on. So anyways, Jens, thanks for the feedback. All right, Toby, you're up. Thanks, Stig. So I'm going to pick something that's totally different to what the other two gents have picked.

Mine is Devon Energy. It's an oil and gas producer. And I want to talk a little bit about my process for picking this, the stock itself, and then the oil and gas more generally.

So, I run two deep value funds, one focused on small and micro stocks in the US and one focused on mid and large. What has happened with my mid and large cap stocks is that they've all got so small that that fund is actually now categorized as a small cap fund as well. And my small and micro have fallen off the bottom of the Morningstar chart.

So, they're super, super small and they're as small as they can get and they are as deep value as they can get. And I think that's because the market has sort of done this thing where it's separated into the very, very biggest and you heard a pitch from Microsoft which was the very biggest of the very biggest and it's left behind a lot of the rest of the stocks in the market. One concentration of stocks that have really been left behind is oil and gas.

And the reason is very simple, the oil and gas price. WTI, West Texas Intermediate, topped out in 22, around 120 bucks, and it's been falling pretty consistently. Now it's around $60, so it's halved over the course of the last four or five years. Folks might remember in 2020 in the COVID lockdowns,

oil and gas went - well, the oil price went negative briefly because there wasn't enough storage for oil and then bounced out the other side and it's fallen back and that's been

driven twofold. One is that there's been a little bit more supply comes online when prices go up as high as that. And it also destroys a little bit of demand, which creates that downward pressure. And so that's how we find ourselves where we are now. The short-term outlook for oil and gas is for those prices to keep on falling. And so sentiment in the oil and gas patch is very negative at the moment.

Some of these companies are, so there's different types of producers and they have different costs of oil and gas. The higher cost producers when prices get down like this, and so I should say there's a global picture and there's a US picture. The US picture is US costs are a little bit higher, total cost and also marginal cost.

The marginal cost for oil in the States, for the most part, is somewhere between $40 to $50, which is expensive. The global cheapest are China and Saudi Arabia, and they're at like $20, so they're not destroying oil.

supply at this level. They're pumping as much as they can. They're making money at 60 bucks. But domestic producers, there are some higher cost producers and there are some lower cost producers. The higher cost producers suffer really badly when the oil prices are down like this and they're the ones that look ugliest. They are also the ones that come back the strongest when the oil price picks up but you have a little bit of a gamble as to whether they make it or not when nobody knows how long oil prices will stay low.

So, the safer pick would be something that is producing profitably even with oil prices at $60, but then the other side of having a more safe pick is that it won't respond as well when the oil price recovers.

And so Devon is one of the safer producers, Devon Energy. Their cost to produce oil and gas is about $30 to $40. So they are profitable at this level and cashflow positive. All of their acreage is in the US. So they're concentrated in the biggest shale in the US. Two thirds of their production comes from the Permian. They've also got some other holdings in Anadarko, Eagleford and Bakken.

They've got 2.2 billion barrels of oil net proved and production is 848,000 barrels of oil equivalent per day. They're producing 73% oil, 27% natural gas, which is not an unusual mix. They've been very efficient. They're able to engineer some cost savings as they go along, sell some higher cost acreage, focus on the lower cost acreage.

And so they are cashflow positive and profitable at these levels. For the most part, they've been buying back stock. PE is currently a little bit over seven times. EV/EBIT, what I call the acquirers multiple is a little bit over seven times as well, which means that they're producing about $3 billion in earnings and about $4 billion in EBIT cash flows about the same.

One of the risks for oil and gas is that you guys might recall, Buffett's got a holding in Oxy. He took a slide from Vicky Golub, who's the CEO of Oxy, from her presentation, which showed that they're going to be returning capital to shareholders. And that's been a criticism of many of the commodity companies and oil and gas companies as well, that they take whatever earnings they get, they put it back into the ground.

And there's no real return for shareholders. So, over the last five or 10 years, they've all got religion about this and they've all started returning capital. And Oxy has been returning lots of capital, which is why Berkshire, I think, has taken the position. So, I like

the oil and gas companies that return capital. Selfishly, that's what I prefer. But for the industry as a whole, it's not necessarily a good thing because it means that there's this sort of slight underinvestment in oil and gas infrastructure for an extended period of time now. And there are multiple reasons for that, but requiring a return on capital, which isn't unreasonable, is one of those reasons. But

What that means is that this sort of level of oil and gas price, $60 and looking like it's trending lower, destroys supply. Doesn't bring as many new oil wells online. There are reasons why they're not investing as much. Oil is getting increasingly hard to find to sort of make many of these new wells offshore and deep and more expensive as a result, or they're sort of

These shale supplies which don't return as easily as the old hole as you drop to the bottom of the - you just drill the big hole and then it gushed oil forever and ever. They have a shorter half-life, the shale oil. So, all of that destruction and pessimism in that sector, I think you are speculating a little bit here. We don't know what happens to the oil and gas price. The oil and gas price

For any commodity, the best guess for the price will be in a year is the price where it currently trades. And that's just to minimize your error because it could be lower and it could be higher. No one knows. The only time where that sort of becomes less true is when we get down to, we arrive at one of the extremes, either the extreme high or extreme low. I'm not saying that this is an extreme low. I'm just saying that this is a much lower price and a supply destroying price. And

There's a lot of geopolitical tension in the world, more so than there has been for a long time between some of the bigger players. If we have any disruption, we will see probably a spike in the oil and gas price. The only, well, not the only, but the risk to that is that it's also an input into the economy as the economy slows and weakens the oil price also, tends to fall alongside with it. So I like that.

Devon Energy here because I think that it's reasonably safe where the current oil prices are. It's unlikely to lose money. They're doing all the right things, reducing the share count.

buying back stock, trying to reduce the cost of rationalized operations as they currently exist, and return capital to shareholders through buybacks. In the event that the oil price does spike, they'll be a beneficiary of it. They should do quite well. There'll be other higher cost producers that the share price will move more.

But I like oil and gas as an industry at these prices. And I think Devon Energy is a reasonably safe way to supply it. So I'm interested in what you guys think. Let's take a quick break and hear from today's sponsors.

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That's shopify.com slash WSB. All right, back to the show. So I'm happy that someone finally brought in a real value pick. Something at seven times earnings. What's not to like? I think this is an interesting pick. And there is something to be said about whenever the world is just turned against you. That's whenever you need to

to start paying attention. With the oil price dropping like you mentioned, also with the tariffs and now equipment for drilling and casings are going up. So we're talking about seal here. And so a lot of the raw inputs that they need to use, and they're already not low on the cost curve, there's just so much pain right now for seal producers. Stig Brodersen :

But one of the wonderful things about investing is that whenever the market feels that there is pain, they typically sell out. And so sometimes you can still find something really good, at least compared to the price. So-

I will be the first to say, I love the price. And so with that being said, here comes all the negative things that, and some of that, Toby already alluded to. I'm always worried whenever I enter a commodity type business and you're investing in something that's where you're not the lowest cost producer. And of course, like you mentioned, Toby, you're well aware of that. I know I'm not telling you anything new. And

That's just the way it is. If you're not based in Saudi Arabia, you're probably not the lowest cost. But US shale is just higher up on the cost curve and you can't really, you can blame geology. That's just the way it is. And so it's difficult to make money at certain times. And one of them is right now. So you have a higher downside or at least you have to figure out, can they sustain themselves? Will they be issuing equity at stupid times

and where you would get diluted if this long period of all prices being low, if that extends. So you sort of have to figure that out as a part of the investment thesis. And so-

You want to make sure that you invest in companies that can withstand the winter. But if you are right, you typically also get a much bigger bounce up than compared to the Eximobils of the Chevrons of the world. Stig Brodersen : And so, Toby mentioned before that he might be holding them in a basket approach. And I kind of feel it's a little bit different whenever you have it in a basket. Generally, I'm quite bullish, especially at the current multiples with the oil and gas sector.

But there are a lot of things not to like for the company like Devon, where one of the things that they put on in their investor presentation is that you put in their credit ratings, like, oh, we are like BAA2. And you're like, is that good?

it's not. And so that's the Moody's rating. And so they're not borrowing at the same low rates as the competitors. They say that they have a low net debt to EBITDAX ratio, and you're like, "Did you just say EBITDAX? Didn't you mean EBITDA?" So EBITDAX is the axis before exploration. So it's not crazy that they would use something like that. It's just

especially if you're upstream, it's something that you would include. But even so, 1.0, I still want to say it's sort of like on the higher side. So even though they are relatively efficient, it's something I'm a bit worried about.

you have to be good at figuring out where you are in the cycle. And the cycle is by and large, well, it's controlled by the oil price. And it's really difficult to figure out what that is, even though you might make a somewhat reasonable estimate. So just before recording here, Saudi Arabia came out and they said that they want to punish some of the people who don't follow agreements in OPEC. And there's always a reason not to follow what they agreed on. And so they're all producing themselves and they're precious to the oil price. So

You're dealing with, this was just one anecdote, but you're dealing with so many different factors where you just have no control over.

And if you also then don't have a good credit rating, you're like, this is tough. You have to borrow. And so whenever you look at the share count, I kind of felt it was interesting to go back over the past 10 years. And so whenever you go back in end of 2015, you had 411 million shares. Then you went up to 524 the year after. I won't go through all the numbers, but then in 2015,

It was down at 383, and then the following year, it almost doubled to 677. And since then, it's been a bit like a roller coaster. Stig Brodersen : So going to Toby's point, yes, it's definitely true that they return money to the shareholders, like roughly one-third in dividend, two-thirds in share buybacks.

but also know that they're issuing shares to continue to make investments. Because it's shale, it's a little bit different than a, let's call it a normal oil well, whether you have like what, 5%, 10%, you have that initial declining rate, whereas for something like shale, you have the first year, it's like, boom, 60 plus percent. It goes very, very fast, or it's tired oil. Stig Brodersen : Again, you could just blame geology if you want to. But so

It's tricky. And so whenever you look at, for example, they made like a $5 billion investment here in September 2024, Grayson Mills, 3.25% was in cash and 1.75% was in stock. And so it is part of the business model. I'm not saying it's a bad business model. I'm just saying it's part of the business model.

And so it is something that gives me a little pause, but coming from the guy who pitched something at 35 times earnings, I very much like that the market has turned sour on Devon, and I can easily see the stock price explode if when the oil price goes the other way. So with that said, I'm going to throw it back over to the group. Stig Brodersen :

Yeah, I think it's an interesting pick, Toby. I think I see a couple of things here. Number one is it's attractively priced. As you said, low-cost producer with a stable dividend now at almost 3% dividend yield. So you get paid to sit and wait to see how things play out. And you're reasonably confident that their balance sheet is strong and their overall

productions are not impacted so because everything is in us so there are less risk of any geopolitical instability so a lot going for them it's like you just sit and collect a three percent dividend if nothing else happens if there is no catalyst and you're reasonably valued at this point of time so that's what i like about it it's like almost buying a bond with an option

couple of things in terms of changes that are coming in. Number one, with Trump administration being pro-drill baby drill, that means there will be less regulation within US for them to increase production. So that's number one. So that can be negative or positive because it can increase supply.

But at the same time, they might be also more open to more acquisitions in terms of regulations. So there might be less regulatory hurdle for say,

They want to acquire more reserves or oil fields or gas fields. So that can be expansion and we have to take it with a grain of salt because they already kind of paid 5 billion for one of the latest acquisition on Grayson. So we don't want them to overpay anything. So that's the other aspect I see as change coming in. So from a regulatory perspective. The third thing is in terms of headwinds,

If the Ukraine-Russia conflict is resolved, you have another producer coming onto the market. What will it do for the oil prices? Will it further push it down? So that's the other concern or uncertainty we have. Same with Iran nuclear deal, if that happens, now Iran also comes into the market. So now suddenly oil is cheaper, much cheaper.

and then it gets closer to their breakeven price of 35. It's highly unlikely but I think that's one other possibility. But I think where I'm also seeing an optionality for them is, we were just discussing about AI and if the US really wants to compete, it has to build a lot more capacity in terms of compute.

and that means it needs a lot of energy and there were like Eric Shinatina podcast was saying we probably need 90 gigawatts more which is like one gigawatt power is almost one city and then gas natural gas 30% of the reserves is natural gas and that's where there'll be a lot more demand because I don't think we can get all that energy from nuclear the like you know we might have to be like

50 60 70 nuclear plants i don't think that's happening in the in the short term we knew hydroelectric i think uh we don't have much there as well now solar and wind cannot pull the weight so it's natural gas most and coal is not the best option so that might be a tailwind for them because suddenly the the demand for natural gas will soar it's almost like 90

LAS or 90 San Francisco coming up online suddenly. So that demand for natural gas can help them and can be a tailwind and that's the positive. The negative is more demand, the more supply coming in because of Ukraine-Russia conflict being resolved or Iran nuclear deal. So that's the headwind.

So, these are the two, but the way I look at it is you get paid to rate. So, worst case, you will still collect your 3% coupon. Thanks for your thoughts, gents. I think the one other thing I didn't point out was that oil inventories are close to a five-year low. Now, that might be

folks planning ahead, seeing that there is going to be an end to the Ukraine conflict, which brings Russian oil back online and a few other things like that. So maybe that's an indication that folks aren't worried about the future. It's also possible that they've just been letting their oil and gas run down. But I think that when oil inventories get low like this, any change in the supply or demand picture is pretty quickly reflected in the market price because they have to go to the market to absorb that. So I

I'm guessing, I think, the move is or hoping that the move is up and hoping that

The valuations are sensitive to that move where they are, but it's a speculation rather than a real long-term investment. So I think that, thank you for, yeah, I agree with all of your perspectives on it. There's a lot to dislike about oil at these levels. And I think that the one thing that I think I have on my side is that the pessimism in the industry is so bad that folks are positioned that way.

so that the asymmetric move is to the upside if something unexpected happens. And I like those kind of positions where probably we're getting positively carried to hold a position where the asymmetric move is with us. And so, I like those sort of positions and that's the sort of stuff that I try to put in the funds. But I agree that there are, it's not a guarantee. There are certain things that have to occur for it to work out.

Yeah, I think I just wanted to clarify, Toby, were you referring to the strategic reserves when you said oil inventory of five-year low, the US strategic reserves? Inventories. Oh, inventories in general. Yeah. Even the US strategic reserve, I remember was depleted. I don't know whether it's back up to the original levels. Yeah, I haven't heard either. Here would be a good place to do it though, better than any time over the last five years. Yeah, you're right.

So, long-term, I'm certainly very bullish on the sector. There's no way to escape oil and gas as much as we probably want to.

But whenever we're talking about different investments, and some people would probably say, "Oh, if you're really bullish on the oil price over a certain amount of time, you can go in and buy a derivatives contract or whatever." And there are certain ways to go about it. I'd probably say that if you want to cap your downside and you still agree with the old thesis, perhaps you can go with some of the old majors. Think the Chevrons and the Exxons of the world.

First of all, they consolidated more of the shale market, and of course, they do much more than just shale, and also own their supply chain. So it's stacked a little bit different where you get a lower downside, but then you're

also a different upside. I think you would be just fine investing in a company like Chevron and then hold it for the next 10 or 20 years from a stock investing perspective. Whereas you can make a lot more money if you time it the right way with a company like Devon, but you can also on the flip side, if you don't get out at the right time. So Toby, any concluding remarks here on Devon? Toby Brophy :

No, just that it's one that I own as part of a basket. I do like the oil and gas industry here. This is one I own as a basket and I like reasonably efficient sort of businesses. I think this is one of the more efficient oil and gas companies. They are making pretty good money at these levels on the money that they've got invested in the ground and they are sensitive to the upside here. So, I think it's an asymmetric bet without knowing

that you get the upside, but if you get the upside, then you get pretty good performance out of this sort of position. So that's why I like these sort of positions.

Fantastic. Jens, as always, it's always fun to have these quarterly calls. Anything you guys want to chat about here before we end this segment of the show? Jens Nielsen: No, I think it was a great conversation, Stig and Toby, and also I think interesting picks and interesting markets as well. We didn't get time to talk about markets much this time around, but a lot of food for thought to think about. So thank you.

And thank you, Toby, once again, for being the value investor we aspire to be. I feel bad about, I can see this progression I've had for the different stocks I pitch where it used to be single digits. And all of a sudden, I find myself pitching all of those terrible valuation stocks. It's like, oh, just put it on my wait list and then I'll see what happens. So I feel like it's good, Toby, that you would bring that to the group. And Hari, thank you so much for

for teaching us about tech and all the nuance. So just thank you for taking the time as always. It's been a tough run for value. I had a look the other day

Just looking on various metrics on various simple price ratios, the cheapest versus the most expensive. And since 2011, it's been a pretty consistent underperformance for depending on how you sort of measure those price metrics, which is unusual. It's been pretty good outperformance over the full data set going back to 1926 or 1963 to however you measure it. So I don't know when or if it turns around, but I just don't feel like there's a lot of

very deep value guys left. I think that everybody's sort of gone up the scale towards a little bit more growth because that's where the returns have been. It's completely understandable. So, I think that if we do get a turnaround, then deep value, I think it'll do fairly well because it's just so underinvested. But it remains to be seen. As I said, my mid-cap, large-cap fund is now a small-cap fund because it's just so hard to find mid and large opportunities that are undervalued.

I wouldn't be surprised at all, Toby, if you have the last laugh. I hope so. I just hope I'm not 90 when it happens. Well said. Well said. All right, Jens. Again, thank you so much for making time. Toby, Hari, where can the audience learn more about you?

I'm on Twitter at Greenback, G-R-E-E-N-B-A-C-K-D. I have a website called Acquirers Multiple, which has free stock picks on it, free deep value stock picks on it, which is about what they're worth these days. No, I'm kidding. And there are two funds, Zig, which is my mid and large cap, now small cap, domestic US deep value, and Deep, which is small and micro stocks.

They really are very, very small companies and they really are very, very undervalued. If there's ever any interest that returns to that sector, I think they'll do fairly well. I've been surprised at the quality of the companies that have fallen into small and micro land. It's very tough for those smaller companies to catch a bid in this market, but I've got a collection of them. If anybody ever wants one, they're in my bargain bin.

Stig Brodersen : I love it, Toby. I don't think you have to wait until you're 90 at all. It has to turn. And I know we said that for the longest time, but that doesn't make it less true. Harry Sudock : How long have I been on this podcast, Stig? Since like 2015 or something? Stig Brodersen : Since 2015, yeah. It's a decade. And I kind of feel like we had this discussion, like deep value. Harry Sudock : A decade ago. Stig Brodersen : Right. Just around the corner. Fantastic. Harry? Harry Sudock : Yeah. I guess Moffat's cash stock point is on your side, Toby. So hopefully soon.

Well, thank you, both of you. And you can find me on X or Twitter. My handle is Hari Rama. I hang out there. So happy to catch up and engage in any conversations. Looking forward. Thank you so much for your time. Once again, Jens, I look forward to next quarter. Thank you. Thanks, Dick. Thanks, Hari. See you guys. So in this second part of the mastermind discussion, I'm joined by my co-host, Clay Fink. How are you today, Clay? Doing great.

I wanted to have this second segment here of today's episode because I wanted to talk a bit more about a mastermind community. We just had a mastermind discussion and we sort of like borrowed that name, tweaked it a little for a group of up to 150 members that we call our mastermind community. So this is a community we talk about stock investing, portfolio management, and increasingly there is also a life component to it.

And a thing that we talked about on that note is really this idea of meaningful relationships. And a part of me feels that it's a little ironic because our community,

our mastermind community, I should say, started very much as talking about value investing and talking about different stocks we're looking at. And we still do that, I should say. That's still the very core. But something that has happened quite organically is that, I guess, Buffett and Munger set the scene for us, right? Or at least I can talk for myself, where I found Buffett to learn about value investing. Then I learned a ton, but then I felt I was

sticking around to learn more about the life lessons. And I kind of feel like I can't help but say that I see some of the same thing happening in our mastermind community.

Yeah, definitely. One of the best things that just the value investing community overall has brought me is just several meaningful relationships in various shapes and forms. And those number of relationships has definitely increased drastically ever since we launched our TIP Mastermind community a couple of years ago. And I've just had this great chance to connect with so many thoughtful, high quality people, both online and in person. And I've been

pleasantly surprised by some of the people I've connected with and realized just how much I could learn from them that has nothing to do with investing. It's just a phenomenal place to surround myself with people who really are able to help me in many aspects of life and just serve as a sounding board at times. And meaningful relationships, it's one of those things that can be hard to define since each relationship is different, but it's one of those things where you really know it when you see it.

What does a meaningful relationship look like to you, Stig?

It's a very tricky question. I don't know. I should probably look it up and someone could define it better. And so as you can tell, I'm trying to buy some time here. But it's more like William would say something along the lines of it has its own frequency. And I think that's a good way of looking at it. But it's a bit like quality, right? Whereas you know it when you see it, to your point. And so

I think if you put me on the spot, I would say that

you have to both benefit from the relationship. I don't have a very scientific approach to this, but you should both leave the conversation that you have with a feeling of being heard, valued, and respected. And I think it starts with shared values. And I should also say that it doesn't mean at all that you have to agree on everything, but you still need to feel like you're heard and you're respected. And so

Another way I would look at this is to say that a meaningful relationship is whenever you feel

comfortable being authentic. Really, you have to be congruent. And the test I'm giving myself whenever I'm evaluating some of my own relationships is that I'm asking myself, can I ask why? And asking the word why, it can be such a loaded question. Because whenever you ask someone why or someone asks that to you, you feel like you need to justify certain things and you might feel judged. And so

You know, one way to talk about meaningful relationships is really this idea that you can explore certain or all topics together with your gut down. And to some extent, I would say that there's also an element of being in the same place in life and struggling with some of the same problems. And I also kind of feel like that's probably not the best example because

you can have a meaningful relationship with your child or with your parents. And by definition, you are not the same place in your life with a child or with your parents. And so

If you allow me to digress a bit here, I have these, at least, I'm going to say wonderful calls. I don't know if anyone else feels they're wonderful. To me, they're wonderful because once a quarter, I have these episodes together with William and the next one is coming out here the weekend after this one is going out. And it was quite interesting. So after the last one came out, I got quite a few people who asked me, so

what do you talk about after the episode? Which I kind of find to be quite an interesting question. I've never gotten that question before. And for whatever reason, I've got multiple people asking me for the first time ever. So what actually happens after you stop recording? And I hope this doesn't come across the wrong way, but we actually talk about what we just talked about. And we do that with a different level of transparency because

And I can't speak for William at all whenever I'm saying this, but I feel that whenever, not because it's William, if anything, William really gets me talking about a bunch of wonderful things, but I feel like because it's being recorded, I am holding different things back. And perhaps it's just because I'm too self-conscious, perhaps because I'm worried about being judged. I don't really know.

And so we actually talk about what we just talked about, and then we sort of feel like, I was then saying to William, "Oh, this person I talked about here, there's actually this specific person." So anyways, but I will also say that the things I struggle with today are just different than what I used to. And I guess some of it is just a reflection of being older. Some of it is also being in a slightly different financial situation.

I feel like, and now we're coming back to the whole self-conscious thing here. I feel like I can come off as such a jerk whenever I talk about some of my problems. And that's sort of like one of the things we talk about on those quarterly episodes, because for the longest time, my goal has been to do what I want to do with whoever I want for as long as I want, which is a concept I talked about a few times here on the show. And so

I once thought that that was a destination. Once you get to that destination, you're in Nirvana. You don't have any problems. Everything is amazing. And so the world just isn't that kind. And so

So there's sort of like that component where you almost still want to talk about some of the struggles, but perhaps you just sort of want to do it in a different format, I guess. And so before I paint myself too much into a corner, I think I need to transition to another thing here, talking from a purely business perspective. Another thing where I really enjoyed being a part of the mastermind community and continue talking about these meaningful relationships is that we can talk about these

your niche topics that only very few would have an expert knowledge in. Stig Brodersen : So one example I'll come up with is that I've been looking to acquiring private companies and I don't know what I'm doing. I like to think, I know a thing or two about public equities, but I certainly don't know anything about acquiring private businesses.

And that's a tricky situation to be in. I work with lawyers, I work with consultants, and for whatever reason, it seems like, I actually do know the reason, because it seems like the main thing they would say that I need is that I need more billable hours. I need more consulting. Apparently, that is what I need to be doing. And so I feel like with the mastermind community, I can be very blunt and I can be like, hey, guys, you're

sort of know what I know, but then you actually know a lot more than me. You actually know the game. So it's almost like having a support group. And I think it comes easy to us, even though in a way we don't know each other, it feels like we do know each other because we share so many of the same values. So it's sort of like you start from scratch, but then you also don't start from scratch at all. And

I feel like the advice I can give, especially because I'm such a rookie, is just more genuine in a way, because it's not like the mastermind community members, they're not lawyers wanting to give me billable hours. They're probably one step, two step, or three steps ahead of me in terms of acquiring businesses. So we have a different type of conversation about that. So anyway,

Anyways, there was a long rant and I've covered way too much there, but like meaningful relationship is a lot of different things. I guess that's what I'm trying to say.

Yeah, it's funny you mentioned talking about a private business. We just had a call the other week with a member who outlined a private transaction he did as a $2 million deal. And he just, you know, totally transparent, walking through all the details. And that happened to be, you know, one of our most popular recent calls. So it's funny you say that. And I really liked how you mentioned that, you know, a meaningful relationship is one where

You feel seen, you feel heard, and you feel respected. And you can really just be your authentic self. And I often catch myself telling others outside of TIP that, yeah, Stig's my boss. And it's kind of weird for me to say that because internally, I don't really view it or approach it quite like how I would approach my relationships with my previous bosses because I feel like I can just be myself around you. And I don't have to act like I'm someone I'm not. And I think that's a sign that they're

is a real meaningful relationship there. And you nailed it that each phase of life brings its own set of challenges. Each stage is different and still challenging in its own way. And it can be difficult to...

find people who can resonate with the challenges that you're facing. So one of the things I've learned since day one of launching the community is that just so many people have similar challenges, but they don't have others to, you know, bounce those challenges off of others. And, you know, many in our group have already experienced some of the things that people are going through. So I found it to be quite valuable for me personally.

And another challenge I have with my friendships is that I like to meet people in person if I can, which is one reason why I love hosting our events in Omaha and New York City. But there's many more months in the year to potentially get together with others. For example, one member invited me to go skiing with him in Park City, Utah, which I felt having that time together has no doubt improved our friendship and helped me get a better understanding of who he is. So I'm curious to hear...

Being all the way in Denmark, how important is an in-person component to you in a meaningful relationship?

Yeah, I think it's very important, even for an introvert like me, who tends to be a bit of a hermit at times and go out as much as I probably should. You know, I was on a call with one of my members and she said that online is kind of like what happens after you meet in person. And I think everyone's different, but I think for me, it's sort of like the opposite. And I think virtual meetings are great.

But I also think that there's almost a different state of mind. It couldn't even be as simple as the time of the day. So we're speaking morning for you, your central time, your seven hours behind me. And in other times, if you're speaking with someone from the West Coast, it's nine hours. It's almost like, hey, I just got up and I'm like, oh, I'm just about to have dinner. And so I think you bring up a

a good question. And if I can continue on this idea of state of mind, whenever I'm on a Zoom call or a Teams call, whatever it might be, very often those calls are scheduled for like 45 minutes or 60 minutes. And I would have a new call coming up at the top of the hour. So

I think part of it is just like, you're just restricted for time. There are just some things where you're like, oh, I'd really like to explore that, but I have 22 minutes left and then there's another call. So I think that's probably a part of it.

But anyways, I tried something new this year. So far, it's been a lot of fun. I don't know if I'm going to do it next year, but what I've done this year is that I've made an open invitation to our mastermind community to come here and visit me in Aarhus, Denmark, where I'm based. And so quite a few people, the first time I've said it, they actually thought I was joking. Stig Brodersen :

And joke, not in the sense of I didn't want to see them, but just more because, hey, dude, I'm in another continent this year. What do you mean? What do you mean? Like I would ever be around. And so like super nice people, like don't get me wrong, but I can see that. And then there are other people, they're like, oh, that's cool. How about this date? And you're like, okay. So I think it's also because we have quite a few members of our community, like they travel everywhere.

all the time. And so for them to swing by, which of course is a little bit easier if you're based in Europe than you're based in North America. But so for example, this year, I don't know how many I'm going to be hosting, but I'm going to have probably 10 people, perhaps even more from three different continents, which is absolutely amazing. Stig Brodersen : And so it's sort of like a way of trying out this new thing where I want to see if I can bring the world

to Aarhus, even though as digital as the world has become, nothing really beats meeting up in person. And he even had a friend and community member who just swung by for lunch, and then he flew back. And that was only to lunch, but even so, I'm like, "Wow, you weren't even here for two hours." That was really cool. Please, this is not my way of saying, "Come and visit me and don't see me for more than two hours." I was just like,

Wow, that's a first. That was pretty cool. But anyways, let me throw it back over to you, Clay.

Yeah. I mean, there's certainly a totally different element when you're hopping on a one-on-one call versus getting together in person. We just got back from our events in Omaha and people just tend to let their guard down. Many people tend to let their guard down when they get together in person. And just about every time we get together in person, one of my big takeaways is just how many wonderful people we have in our community. There's one gal who came to Omaha and

I think the big reason she goes to Omaha is just to surround herself with wonderful people. You're not going to find her talking about some individual stock with another person, most likely, if I had to guess. But yeah, I think a lot of people go to Omaha and are part of our community because they want to surround themselves with people that have shared values. And when I hop on calls with new members,

of our community. I'm often asked where I want the community to be longer term. And it's such a shockingly simple yet difficult question to answer. I've really come to realize that I really want the Mastermind community to be an outlet for just wonderful people in the value investing community to connect with others. Perhaps it's a place to talk stocks and share investment ideas, or perhaps it's a place to reach out to a fellow member to chat about, challenge your curiosity,

currently experiencing in your business. As a host of We Study Billionaires like you, I found it challenging to build meaningful relationships with others in our overall community since everyone's busy, you don't want to feel like you're bothering anyone. So we really put this group together as a tool to be used for networking with like-minded people. And we've actually limited the group to 150 members in line with the Dunbar Framework

And for those in the audience who perhaps don't want to commit to, you know, recurring group where we're getting together each year, we're doing calls all the time.

We actually put together our summit event where a small group of us are getting together in the mountains of Big Sky, Montana for a weekend in September. And selfishly, it's another way for me to just surround myself with more wonderful people. So I've been toying with this framework of trying to maximize the number of tasks where I'm just around people and doing things that

give me energy instead of drain me of energy. And the mastermind community and the summit have been excellent avenues for me to help solve for that problem.

Yeah. And, you know, Clay, I love that you bring up this point about selflessly wanting to attract high quality people into your life. I mean, I couldn't have said it any better myself. And it really goes back to this point about meaningful relationships. You know, there was something to be said about high quality people having high quality interactions, and you're just like left with this, you know, positive energy. And it's something I've considered quite a bit because, you know, I want, like, I'm

I'm sure so many others listening to the show, I want to make sure I have sufficient time for friends and family. But I also feel I owe a great debt to the value investing community and making sure to pay back for everything that I've received. So I used to think that one thing came at the expense of another. So every time I worked on something with TAP, I couldn't be with family and friends. And sure, there is an element of

truth to that. I'm not saying that everything is play and that's not at all where I'm trying to get, but I still think that I'm by no means very good at this, but I try to blow the lines a bit. And that's been a very good experience where you find friendships within the value investing community that just comes with a

It's just on its own frequency. And it's not like they're competing with your other friendships you have in life. It's not because they're better. It's not because they're worse. They're just different. And I think a part of it is that there are so many things between the lines, so many values that you have in common.

But I also think that there's something to be said about, or at least I can only speak for myself, but it's... And perhaps, again, I'm going to pull all men down to my level here, which is probably not fair at all. But I think it's quite difficult for many men, the older they get, to make new friends. It's not like whenever you're running around in the playground, you're like, hey, do you want to be my friend? Great, awesome. Let's go on the swings or whatever.

So we're busy with family, we're busy with work. And so it's sort of like tricky to find friends. And I think one of the wonderful things about

the value investing community at large is that it's almost like you've been friends for years whenever you meet someone because you read the same books and you listen to the same podcast or whatever it might be. So at least for me, that means something. And it's a bit like whenever you're flying and the flight attendants talks about, hey, you have to put on your own oxygen mask first if something happens. That's sort of like a bit how I feel about this where you're

you need to make sure there's room for you. And whenever you are in a good state, that's whenever you can help more people. And I just see that to be such a

thing for so many people in the value investing community. The other thing I want to mention, which is going to sound ridiculous, but I'm going to say it anyway. That has never stopped me before as listeners of this podcast would know. Anyways, I think that there is something to be said about creating friction. And it sounds negative because friction is sort of like a negative word, but I think you can make it positive if it's done the right way.

And so I have a very good friend. We traveled to many different countries together across four continents. And yes, it's definitely been wonderful to see a lot of different sites, but I've always met up with him and he's someone I became friends with as being an adult. It's always been for the conversations. And having multiple days, we would typically travel for a week at a time and continue on the same conversation. And so

It's almost that friction because it's kind of painful to go to another continent with all the hassle, all of that. There are certain friendships where you can crush the ocean. And so if I sort of translate some of that, and I don't know how this is going to come across. So my apologies if I sound too full of myself, what's going to come next year. But I would imagine similar to you, Clay, I have a lot of people who are

asking, "Hey, can we jump on the call and talk about a stock?" or whatever it might be. And all that is good. I often find myself saying, "No, I should say." There's just not enough hours in the day. Stig Brodersen : And at the same time, my calendar is generally completely open. So it's sort of like a chicken and egg thing, right? Because how can it be open? Well, it's open because I say no to so many things, so I can say yes to other things. And

I want to tie that into this idea about friction because it's sort of like a Zoom call is very non-committing. And sometimes it can just be a time suck, to be frank. And so I've sort of like tried turning the tables and I've said to a bunch of people like, "Hey, can we meet up for lunch? But here's the catch. Can we meet up in Aarhus, Denmark?"

Stig Brodersen : I know this is probably, again, two groups of people. One group is like, "It must be a joke." The other one's like, "Oh, that's great. How about next Tuesday?" So that's absolutely wonderful. And so it's really a question of between 12 and 5, that's whenever I would typically have meetings and I would typically walk for two hours if I can. And I'm going to have lunch anyway. So I'm like, "Can I put all of that into the same thing?"

have lunch with a wonderful person and talk in depth and have a five hour long conversation. Stig Brodersen : And so the thing is, and we're going back to this point here about friction, no one stops by Aarhus, Denmark, unless they have a purpose. You would know this because you visited me here late. The connections are terrible. The weather's even worse. The cuisine, subpar. Stig Brodersen :

An hour's drive to the airport will set you back a few hundred dollars. And the car that's going to take you here is not even nice because you have 180% tax on cars. So Aarhus is my paradise.

I don't make any illusions that it's a paradise for anyone else. And so I guess this is my very clumsy way of saying that I'm sort of like creating this friction with our community where if they want to meet me, I would absolutely love to meet them. And of course, there are hits and misses with everything else in life, but you sort of like let serendipity happen on a blank canvas. And what has been really interesting here trying it this year, and I have the next one coming in here

Next week, I got a message from another community member yesterday, and so he's visiting me too. And so a bunch of stuff, what has been an interesting twist to this, because it used to be so that I would say, hey, anyone just sent me a message. I'm bored out of my mind. I don't go out. So please just hook me up. So I tried saying, if they're clay approved, they're approved, because you vet everyone in the community. I was like, this is the best. This is the best possible way

filter one could get. And I mean that the best possible way. So this is something I'm trying and it's been a lot of fun. I kind of feel like I am all over the place here in this conversation, but I hope this doesn't come across as

too much, it's probably too late, but like me being a jerk for creating friction for other people. But it's really like creating a sort of friction to forge wonderful relationships. And so we have this summit here we're doing for our listeners, not our mastermind community, but for our listeners where it's Big Sky Montana. And so we call the TIP summit. I don't know how many downloads we have in Big Sky Montana. I want to say around zero. That's my best guess. So

you have to be very intentional about going there. But then once you arrive, it's for a small group, there are 20, 25 people, all of them are like, you vetted them, Clay. And so you're forcing those thoughtful conversations to happen. And so I guess the best way I can probably put this is that if you went on Twitter and you did ask me anything, you would get all kinds of

low quality questions and network with some low quality people. I know there's also some high quality people on Twitter, but a part of it is because there's no friction. There's no barrier of asking those questions. And so I've sort of like made 2025 the year where I'm sort of like trying to flip that. And I don't know, I keep you posted. Perhaps it's a terrible way of doing things, but I try to create friction in my life and see what's going to happen. Clay, I'm going to throw it back over to you.

Yeah, I mean, creating friction is an excellent way to frame it. And I think it's an excellent filter to try and

attract high quality people. There's just no friction to clicking send on an email, asking someone for 15 minutes of your time or sending a LinkedIn message or as many of those as we get. So yeah, friction is an excellent filter and it's why we have the application process for the community. And if you're not going to take 10 minutes to answer these questions, then why should I give you any of our time? So for those in the audience who are interested and

checking the community out. We actually just opened it back up. We have around 125 members. And again, we're capping it at 150. We're in no rush to get there.

So yeah, we're just looking to attract just wonderful people into our circle. And yeah, I think you'll find other wonderful people alongside us, hopefully, who are much better than Stig and I. And yeah, you can check it out on our website. We have a waitlist to join. It's at theinvestorspodcast.com slash mastermind for those that are interested in checking it out.

Thank you so much, everyone, for tuning into this lengthy episode. And thank you for staying with us all the way to the end.

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