How Micro Informs The Macro | David Steinberg on Scott Bessent, Pet Investing, Semiconductors, Music Publishing, and Peter Lake
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this f***ing door.

I am about to have a conversation that I know will be a very special interview. I'm joined by David Steinberg, founder and chief investment officer of Marlowe Partners. David has an approach to investing that is very rare today, and his perspective is very welcome. David, welcome to Monetary Matters. Jack, it's good to be here. I haven't done podcasts, so

It's an honor to be with you. I think you're the only podcaster that I actually knew about. So when I had the chance, I was pretty excited. And thanks for lunch prior to this. And I had something to say about that as well. Lunch. David, I want to begin by introducing yourself to the audience.

I know you early on in your career, you worked Soros with George Soros, as well as with Scott Besant, who is a macro investor and is nominated by President Trump to be the secretary of the U.S. Treasury. So just tell us about that. How did how did you find yourself there? What was your experience like? Well, maybe before I talk about that, which will generally be about me taking taking that introduction down a few notches about me.

I think everybody should know that you're a tall, very impressive person in person. And I saw your podcast and I thought to myself, I don't know, I just assume average height. You're tall and you're like really cool. And if there was ever, God forbid, a physical situation, I'd be like, where's Jack?

And you'd probably put me on your shoulders and get me out of there. So I just want to say that. All right. Well, thanks for the introduction. I just want to put some context around that. I am probably, so working with George Soros, the way Soros was operated is you would have a CIO, chief investment officer. Probably the most famous of these was.

Stan Druckenmiller and so on. So my interactions with George Soros were quite limited to when he would be in the office and I would happen to be in the room. This is not, so it's not just to put it in perspective. I was hired when Keith Anderson was the CIO and then Scott took over. And I mean, I think most people got fired. There was a really good coffee machine actually on the 32nd floor, if I recall correctly. And I remember going up there and everybody was gone. So

That's when Scott took over and I stuck around and I was the senior analyst responsible for the concentrated strategy. So although Soros is known as a macro hedge fund, there was a part of the Kwon Fund which was run by a portfolio manager named Murat Ozbedar and I was his research analyst.

So my interactions then going to Scott, as you mentioned, Scott took over and that was a really nice period just because since our group,

Not a very big group. Our concentrated fund was doing quite well. Scott was very supportive of our work. We stuck around. And I think the nature of our strategy was that it is concentrated, so it becomes significant for the firm. And so there were some interactions, obviously, with Scott as a general analyst, but also specifically because of what we did. So, yeah, that was great. I really, really enjoyed that second little bit.

at Soros. And then I left Sizzle over 10 years ago to launch Marlowe Partners. David, so we'll get into your broad investment philosophy later on, but you like to have concentrated portfolios. You like to invest in individual companies, do a lot of work on them, research and hold them for a long, longish period of time. That strikes me at odds with

macro investing and people think of George Soros and Soros and Scott Fessett and Stan Druckenmiller as macro investors. Tell us about how you developed your investment philosophy of running very concentrated single stock positions and how that's worked within a broad macro hedge fund. And also, how do you think about macro? Sure. Well,

Yeah, it's interesting looking back. Sometimes you don't really get perspective until you have some distance. So we're talking over 10 years ago. A story comes to mind, actually. And to say it again, regarding Scott, this is being filmed before the vote is taking place. He'll be confirmed, I'm sure. And if...

My various AIs are telling me the truth. The fastest confirmation for a treasury secretary was six days after inauguration. That would have been during the financial crisis with Geithner. So I'm enjoying that I get to say something about Scott before they vote, and it relates to your question. So Scott and Soros is known as a macro place, and I think there's a reasonable assumption that

It's all macro, right? How could you look at an individual company? And there are various answers to this, but working at a place known for that really forced the issue on me. And I'll just tell you a very brief anecdote. Scott just took over and I guess the arrangement was that he still had an office in Miami while he was making the transition to New York. And so

At this point, we had quite a large position in a consumer staples company, and it ended up being a very profitable investment. But this was inherited to some extent by Scott. Can you say what the company is? I mean, it's been, what, 15 years, right? Oh, yeah. It's been a long time. Oh, geez louise. It's DE Master Blenders. Okay. What do they do? Ring a bell? No. No, it doesn't.

Master blenders. DE master blenders. Now, this became the first asset of a larger entity. But what I'll just say just about the story, this is less about the company, is that going to Miami...

This is the new CIO. So I think what really just left an impression about Scott, which is worth saying, because when people ask about references for people, it's like when my little sister was going to get married. I said, well, see how the person is when they're drunk, when they're angry, when they lose money. And how do they treat somebody a lot less powerful than you? Well, let me tell you, Jack.

You couldn't get less powerful than I was at that point. Okay. So I'm in Miami and I'm explaining this case, which was our biggest position. And Scott knew business. And that's what was the big kind of aha thing. Now, when I say no business, I mean, being able to go into the individual aspects of the cash flows of the business, the CapEx,

to the overall market. And there's one aspect about this case, which was that the company was still growing its sales, but they hadn't invested anything in marketing in, we're talking 40 years. And so he looks at me and says, that would mean it would look like a 1970s product.

That's like crazy. And like it is. And I just thought, what are the chances you actually want to know about this? But you know what, Jack, I actually came back from Amsterdam where I purchased a piece of ground coffee and I had it in my bag. Scott said, I really want to see this. So I took out the coffee, put it on the table and he looks at it and it looked like a relic from like the Smithsonian.

But the reason I want to tell that story is that Scott is the kind of person who'd want to see the product, understand the business side of it. And you just didn't see that with a lot of investors who frankly were even fundamental investors. So that capability of going like down to looking at the marketing, seeing the evidence of it, understanding the financials, and then trying to make me

tap dance to make sure that the macro would override the case. That was, that kind of was like, whoa, this is a, he is the real deal. So you can imagine that he'd, he'd been indirectly supportive of my career that when I saw him as treasury secretary, I was like, that is awesome because I think understanding business is just good. And let me tell you, this person is very good at understanding business. And I like to be able to say that about him.

I do want to say about him being fairly tall like you. He said there was no one lower than you. What did he mean about how people treat people? You can tell a lot about a person when people treat someone who's not powerful. I'm not intending to be self-deprecating. It's just the reality that I'm the senior analyst and he's the CIO, right? By the way, he's the new CIO and everybody just got fired. So I've got that on the back of my mind. But given all that context, we spent the day together in his office looking at all these things in intricate detail.

And some of the companies were probably things that he had maybe done some prep, but he could pick up on it and go right in into that detail. So when I say he didn't care what my title was, the fact that I was the analyst, senior analyst versus say the PM versus say anybody, it was just what is the thing at hand. And he was very just rational about the whole conversation.

So this idea of all these hierarchies and all this stuff, I really appreciated that. And so I

When I ended up leaving, it would have been very simple for him to just go, no. But there was a lot of support from both Murad and him for me to be able to move to this next level to launch my own fund. So he's a good person. He works hard. He does his homework and he understands stuff. Like he is not just a macro person. I don't know what happens when you're the CEO of, say, a multi. I could only imagine you're not into the cash flows of the individual entities.

And he can go right into that. And he's also a big guy in a positive way. I once had lunch with Volker, a former LP in my fund, who since passed away, God rest his soul, he was actually friends with Volker. And I got a call one day and I said, hey, do you want to have lunch with Paul Volker? And I said, yes, sirree, I sure do. So I had lunch in the Rockefeller Center with Volker, this individual, and it was me. And

Paul Volcker's a big guy. He is at your elevation, Jack. He was like 6'7". He said something to me that was like, it's good for the committee to get everybody in line. It's good. But just as a general matter, I think it's great. So I'm just glad that I could say I worked for him, not with him. I worked with him. No, I worked for him. Actually, I worked for Murat. And then because we were so big, I was the one who was like, yeah, let me explain it all to you.

And that was a great experience. Maybe I'll pause there and you want to ask about macro and things like that. But maybe I'll just stop there. Yeah. I mean, how much of the Soros fund, the quantum fund was individual companies and making money from I'm investing in this company and they're doing well versus macro, which is I'm shorting this currency. I'm shorting this bond. I'm going along this bond. I'm long a certain spread. Anything to do with commodities, current currencies, interest rates, everything.

derivatives, very different from the sort of single stock work that you are known for. So how much of that was in Soros as well as what is the overlap between those two fields? Something Scott always said is the micro informs the macro. You know, it could be cliche, but he really means it. And when I say I mean it is

The stock market will be a great predictor of the future. However, you have to see what the stock market is telling you. Those signals don't always work. So what I would say is like the Soros view on macro, sure, there's currency trading, there's capital flows. At the end of the day, you want to see how the businesses are doing because that's going to ultimately inform some of the macro. So I wasn't involved with the macro trading and things of that nature.

However, that was a very prominent culture of the firm in terms of what are the companies saying and how is business. Maybe for instance, I was still in diapers or whatnot, but there was a year where the market was flat.

And then if you were gone for the year, came back, the market was flat. And if you asked your friends, oh, what happened? They'd be like, oh my gosh, what a year. Oh no. And people are still talking about that year, right? And that was 1987. And so you had a run up in the market of 36%, something like that. And then one day declined to maybe 26%. But the point being that there was essentially a year of an unchanged market and yet the

We still talk about Black Monday because it's attractive psychologically to look at these dramas, but nothing was wrong. There was no recession. Business was okay. So there are situations where understanding the business fundamentals are key. And I think that was always kind of part of the Soros ethos. I think I may have heard George on one of my occasions interacting with them, or something to that effect. It started off as an equity fund and

Scott embraced that. How did you develop your philosophy of focusing on individual companies? And tell us about your investment philosophy, concentrated, hold for a very long time and really get in the weeds on companies. Why did you do that as opposed to, why don't you work at a pod shop where you're...

long 100 securities, short 100 securities, and you're factor neutral, equity neutral, and you're taking advantage of very short-term price discrepancies with earnings, economic data releases, Federal Reserve meetings, and the like. Why do you do what you do as opposed to the mainstream way it's done, which is very, very short-term trading? Why are you long-term focused? Why are you focused on concentrated portfolios? Yeah, well, to state the obvious, I'm focused on

making a lot of money for my partners, myself and my team. But you have to start, I think, Jack, with the end goal and kind of work your way backwards. I think that's always a good way to think about it. The goal is 100x return. And if you say that to somebody, they say, well, that sounds insane, right? How could that be? Well, if you actually work your way through it, mid-teens performance, if you can do that for about 32 years and a few months,

you could go from one to a hundred. Now I'll do the math just real quick because it sounds absurd and I don't mean to be like, this is just the truth is people ask me sometimes, what about a 10 bagger and stuff like that? So if you want to actually achieve that, you have to have a strategy that it has duration. And there are very few long-term track records that haven't required a change.

So if you're even look at Soros proper, right? When I read about the history long before I arrived, they were different periods of evolution. It was maybe one name, but different CIOs doing different things. Or maybe a really great example would be Steinhardt doing block trades.

If you did block trades, you had a great run where there were no banks doing block trades. So you buy a block, the discounts are crazy and you sell it into the market. But when that closes, that arbitrage closes, it's over. So what happens, I think, with a lot of the trading and stuff like that, this is just my point of view, is if you want to do well all the time, that's one thing. But if you want to...

get to that 100x, it's going to be pretty stressful. First, you have to be accurate often, and you have to have a strategy that will work when the rules of the game change. And the reality is that the rules of the game do change, right? And what works in one year or even five years can stop working. I think that some folks who are the older generation would point out that a lot of the signals, a lot of the information, the price isn't working anymore.

Now you'll see a sell-off on the S&P and the yield will be up, right, on the 10-year bond, right? And that's a bit of a worrying thing. But the point being that the strategy needs to match the mission. And if the mission is a 32 in a bid, it just happens to be from 1 to 100 billion.

But that would not work using high trading because you have to focus on being right so much. It's stressful and also leverage. So take away the leverage, take away the rapid trading. Then what's left for it for making a lot of money concentration to me. And then once you're concentrated, you're like, well, you better not screw that up.

So if you have an investment that has a capability of growing its value for many years, you could actually benefit from that one decision over and over again. And so from my point of view, that David, why? Sure. So look, I'm in an office here. We all want to do something right. You get to work. You want to work. Maybe I'll ask a question to the question is where are all the Walmart billionaires? The Waltons, let's say,

on the side. The family who made Walmart, they're billionaires, but where are the other people? Right. Well, Walmart went public and I think it was the early seventies and Microsoft, right?

And so what tends to happen is that there could be businesses that are able to maybe you have to take it in bits because you're not going to look at a company and say, oh, I have a 10 year thesis. That's not reasonable. But every couple of years as a thesis progresses, it might change. And you can make one excellent decision through a significant amount of research, make that concentrated, and I will not rebalance. Okay. So, and this is, I think,

a big deal right now because where the world is now is you have about two thirds of the entire stock market is passive. My son, who is now as a trading account to the chagrin of our compliance department, because he's being clever. He's not just buying Bitcoin. I'm like, just buy Bitcoin like everybody else. But he mentioned something like, oh, well, I'll just play it safe and just put it all in the S&P while I'm waiting.

That's the attitude now is that these indexes are almost like money market accounts, and they're certainly not. And so in a world where there's all the indexing, there's what we call the Marlowe equity yield curve, which is that where's the war? Where's it all going on? Do I want to compete against Stan Druckenmiller? Heck no. Do I want to compete against the smartest person at Citadel? No way.

Absolutely not. So how do I avoid all those folks? Right. It's by going further out in time. And as you go further out, there's just less of that competition and you can participate in the business's growth. And the stock market right now is prime for this because it's mega cap passive.

And nobody's there. And I actually want people to join me. The price discovery will occur. But it takes a few years. Nobody's there. Nobody's where you are. What is the pond that you're swimming in? The big ocean that everyone's in is Apple, Microsoft, the big stocks in the S&P. Where are you swimming, David?

Well, just to make sure I was not clear, I just meant time. I'm in the future. That's all. That's what I meant to say. So everybody right now, it's a natural instinct to you. Everybody wants to get rich quick. And that's speculation. You need that speculative element in the markets to get liquidity. Sure. But when I say I'm in a different place, it's that we're looking at where a business is in two, three, four years. And

What's happening? People are still aware of those businesses, perhaps, although we don't have a lot of overlap. There's something to say maybe about that, but we're just operating with a different timescale. So I'm saying what time space are we in, if that makes sense? David, I understand you operate on a longer term scale.

you want to be successful over 10 years, not necessarily this quarter. That I understand. But talk about the equity yield curve and about where you're focusing in the future of the actual company. I think what you're saying is that everyone's focusing on what Apple's

Apple or Microsoft is going to make next quarter or next year, you're thinking about the long-term value of the business, which you say a lot of people that the market is not focused on. I might disagree with you and poke little holes in it, but tell us, zoom in on that a little bit more, please. There's a concentrated portfolio for a reason for me. And maybe I'll address that a little bit and then maybe connect that to what we're talking about here with time. So

You could have a research team. I sometimes ask this. Why don't you add more researchers, cover more sectors, do more stuff? Ultimately, this has to come down to me as a portfolio manager making a singular decision. And I can't understand a company in depth. What I'm concerned about is the prospects of the business and how much it's worth.

To do that, I have to understand the business itself, its ecosystem, not its outputs, which are the financials. So I don't want to get too academic here, but if you see the sales results of a company, right, that's the output of something going on over the course of a year. And that's fine. Now, the market will react to that output. That already happened.

Once you understand how the company's operating, you're not necessarily going to know what sales will be, but you can understand this is a business model that should be within this range. And to understand what that is, you would have to spend quite a lot of time learning deeply about that company. Now, how could one possibly do that if you have 30 or 40 positions or you're looking at the prices? You have to think like an operator of that business.

Once you think like an operator, I can tell you that there's a lot of confusion sometimes between knowledge and expertise and like intelligence. I've been accused of being intelligent when actually I have expertise. So I meet with the CEO and they say, oh, you're really smart. And I say, I stopped correcting them recently.

But it's not so much that, but it's that if I was working with you, Jack, on a company and it passed some of our initial checks, we would start to learn about this whole ecosystem. And so when we're talking to the management team, we're talking much more about the operations. The financials provided the operations are doing fine are just going to be an output. And then everybody reacts to that output about what it means they project into the future.

But if you understand the industrial logic of it, you could say, like, I've had plenty of situations where I'm like, yeah, it'll probably be a bad quarter, but I don't trade around the position because if I'm wrong, you're really depending on the longer term outlook of those businesses.

Maybe that helps a little bit, but why don't you ask me something else? Do you really try and understand the business? And you probably, you do more work on the actual business, whereas the people at Citadel who, let's say they're long, you know, city into earnings, they're doing tons of work, tons of modeling, very smart people, tons of brain power and computer power into predicting the next quarter. But they're predicting, you know, what are loan loss reserves going to be? What is the net interest margin? They're not,

thinking about, you know, oh, actually they're building a new branch in Ohio and they've got this new technology. This AI technology is going to be really efficient. They're focusing on what you think is the wrong thing, not the business.

Well, I think it's not necessarily the wrong thing or the right thing. I don't mean to just generalize this, but people talk about, say, market efficiency. I don't believe in market efficiency. It's just a thing there, right? And it depends what part of the market you're participating in. And so I've been in meetings where it might be a shared meeting with a management team, and I've interacted with individuals from these different organizations, and they're highly intelligent, very, very good.

But for them, the efficiency and the price discovery that they're after is in a completely different segment of the market than where I might be participating. So it's not to say that I'm right, they're wrong. They have a very clever short thesis on one of my businesses that I've been looking at. I've heard some short theses and saying, yeah, that's probably right. That could be right. So.

Does that mean that I wouldn't own the company? No, because the business is still operating well, but maybe there's a hiccup on something with inventories of such and such. So what's the goal? What's the mission? And the mission of these firms is very different from my mission. And so I'll give you one example of like, just if there's a company that comes to mind and I said, well, why don't you just, if you look at the five-year, it would be like this. And I remember being told by this analyst from

One of the, a very sophisticated guy, he had been actually a specialist in the sector. I'm not a specialist, I'm a generalist.

And this practical sector, which is now very heavily discussed of semiconductors, but it was very early for me. And they were all talking about Internet of Things. Do you remember that, Jack? I don't know if you've heard of that. IoT, yeah. IoT, it was like, there's the Internet of Things. And I remember thinking, what the heck is that? My toaster. It was very vague. I mean, like, there might be AI, too. And at the time, I didn't really care. We don't know what the thing was, but we knew that these... I don't want to digress into the case, but I remember this analyst saying to me, well, that would be so easy.

what you're talking about and i thought to myself oh that's terrific it doesn't have to always be hard now what's hard based on my interactions is competing in this war to win the quarter to understand and to do well every year an annual assessment is completely embedded in the institutional mindset and it's completely contrary to how i invest so no wonder a lot of folks

Don't want to try what I'm doing or do it because anytime you have a quarterly or annual assessment, you will optimize for that. And so it's not so much. I'm smart. They're smart. Different point of view. I'm long term. I hate saying long term. So boring, right? The question is, what's happening in the company and where are the Walmart billionaires?

And I say to myself, OK, when we're looking at the perfect investment, I could tell you what that would look like hypothetically. But maybe I'll stop there. I'm not sure if I'm making sense, but that's how I would say it is that the market is not inefficient or efficient. It's just going on and people are going on in that market at different segments of it with different institutional goals. I'm happy with easy.

And I love it when some very sophisticated folks in these funds are like, well, that's a great investment case, but that's easy. And that'll take years. I don't even know where I'll be working in. They'll say to me, I don't know where I'll work in three years. I'm like, oh, my God. It sounds stressful. People in the investment industry have a short-term bias because, yeah, they'd say, oh, yeah, this will work out in four years. But I have two different jobs by the time four years comes around. I need to make money now. I need to be paid out of my bonus now. Yeah.

You've got some charts on or some data, I should say, on the average holding period and how what in the 1960s or something, people held stocks for 8.3 years on average. And now it's less. It's like seven months. Yes, that's right. And just imagine that eight years. Maybe it's five if you count it this way or seven if you count it that way. But this is also a problem with equity markets right now, because let's think of it this way, Jack, you know, like.

May I tell a brief story about my great-grandfather, about Kodak? So on my dad's side, he grew up in Connecticut, but my dad's mother, there's a great-grandfather from Rochester, New York. Mr. Eastman would go around, okay, saying, my company Kodak is going to go in public. Would you buy the stock? Now, could you imagine? Of course, we don't have the electronic distribution, but everybody in Rochester,

A lot, not everybody. He was a dentist, okay? And he got Kodak stock. And he put all his extra savings in Kodak stock. Mr. Eastman's a good guy. So over time, that Kodak stock was passed down. And when I was a little kid, my dad would get these annual reports. And this is like when they were like beautifully printed and all these things. I had no idea what it was, but I just thought this is amazing. Now, the reason I'm telling this story is that

Equity capital is intended for this business growth. And a lot of the time, the churn occurs. So very few people owned Kodak for the time when it was doing really well for happenstance reasons, because I wanted to go to college in the U.S. to my parents' surprise. We sold all that Kodak. Probably wasn't the worst idea. But the point being that

businesses can be significant if you can chart them over time. And if you have a business today, you can't go public, right? You have passive flows and then you have essentially private credit, which forces the midsize businesses to stay private because of the credit. So what I'm getting to is that

Public markets is a general thing from, if you look at all aspects, every KPI of human health capability, it is just a curve straight up. And it completely correlates to the creation of capital markets a few hundred years ago with the discovery of the new world and essentially capital projects from North America and other places. But what I'm getting to is that now,

That's actually gone. Nobody wants to go public. Everybody wants to go private. And the access to equity risk capital is limited. And that's also why there are no Walmart billionaires, because who are the people who are going to participate? So when I look at when I left Soros, I thought to myself, OK, on the one hand, we would look for opportunities that were like new pawns. And I do want to address that because you were talking about different pawns.

Spinoffs, demergers, these are very classic situations where the complexity of it, all else being equal, increases the chances of mispricing. Sure. And we were good at that. I take a lot of pride. I think we were one of the best at that at Soros. When I left and decided to start my own firm with OK, because it's important, I thought that's good for an entry.

But what about the big fortunes? Because if you look at the Forbes top 20, they're all basically investors who have one company, which is they're the entrepreneurs behind it. But the weird thing is that most of those companies have been public. So why is it that us as a sort of us being just like public investors, the public at large, why is it that we now lack vehicles to participate in this wealth creation?

Because it's also a self-fulfilling prophecy, right? To the extent you have funds that can start to do that, you have more companies that are interested in going public. So I like the idea that when I left Soros, I thought on the one hand, you have the hustle. I don't want to just buy a high quality compounder. The word compounder.

It makes me a little nauseous these days, no offense. It's just like, I read a compound or this compound or that, because you could buy it too high price. It doesn't matter, but there are those special businesses. You get it at a good price, but then you re underwrite the numbers for years. And you're like, wow, this thing is still making more money where it's growing its profits at double the stock market. And then those things that were like pie in the sky ideas. Oh, wow. Now they're actually happening in the sales.

Oh, now there's a thing called AI. It wasn't OIT. It was AI. Oh, okay. Well, I still need memory chips. So you continue to proceed. And then you have a story. And I like the idea of people being saying that, like, I want to be involved in markets. I like that my son's involved in markets, but it's completely abstracted from the businesses. And so the way we do it allows you to follow single companies. And so-

My kids, maybe I'll tip my hand on one of them. They're like, oh, daddy, we own a little bit of Fresh Pet. I'm like, we own just the smallest little bit of that. But you participate in that story. And that's Rochester and Kodak. And I think that is literally the opposite of the current state of affairs. And when you get to those kinds of extremes, they don't last forever. So I hope that we have a lot more competition in the future.

It works fine now, but this is the old fashioned thing. And it's also AI safe because you're a long, short fund with monthly liquidity or quarterly, and you're looking to make money in a quarter. Good luck to you. I think the ultimate investor is going to be our method with AI together. And I think that's the ultimate investor.

David, I know this has worked for you, but here's what I would offer as a rebuttal is that it makes sense why people are focused on short-term gyrations as well as they're focused on passive investing as Apple because, David, the fund manager who 10 years ago, five years ago even, would go on a podcast and say what you just said, they were likely to underperform.

perform the S&P, and they likely were invested in value stocks or cheap companies that are probably trading right now where they were five or 10 years ago, and Apple is up 20, 30 times. So people follow performance, and I'd say you are an outlier. A lot of people try and do what you do and fail. I don't mean to say that you're speaking about it improperly, but you're using the industry in terms of art, right?

So value stocks. What is this? What is this? If you want a place of dogma, it's called value investing. It's dogmatic and it's dumb. And what I mean by dumb is that like when I think of value, a value investment is something like this. I'm putting out some money to buy something and let's maybe use a bond as the analogy. I think this is a hopefully common device used about bonds, Jack.

They're important depending on the bond. So on the cover of that bond, it says you get $100 back from, let's say, the U.S. government. We'll pay you $4 a year. You can do it for 10 years. You know what you're going to get, right? So in the middle, that's where your podcast is. There's a lot of trade. But if you were just to hold that to mature, you would know what you would get, right?

Value investing is the same concept. We just don't know what that profit number is, but it has nothing to do with say book value or it has to be statistically cheap. The question is how much money is it going to make? And when you add it up together, is it going to be equal to more than what you paid for it? And that's it. That's value investing to me. But I think what's happened is that you have these, let's maybe I'll just maybe pick up. I'm not, I don't have a Twitter account, so I don't know how to pick a fight with folks, but

Colombia and all this stuff, there's a term, what is it? Ergoticity, maybe. Ergotic? Is that the right word? Yeah, ergoticity. It's a bit of a handful, that word. But here's the idea, is that value investing, there's a supposed idea, which I just find totally nonsense, Graham Doddsville, Mr. Market, that sort of thing. Yeah. It makes it. Securities analysis, you see that?

Oh, oh, you read it? Oh, no. No, I haven't read it. I have it. I mean, I've read like, you know, look, there is a technique to analyze. And that's true. But the idea of the dogma of value investing is that if you have all these even had this thing called Graham Doddsville and all this stuff, that if you have everybody operating the same method, they're going to reach similar results.

And that is not true. Now, ergoticity, if am I saying that right, means that if you were to take a sample of every single return to create a return profile and you randomly sample a year one, two, three, four, whatever, that return profile will match the return profile of each individual fund. The systems correspond. Does that make sense? Yeah. And that, of course, isn't true.

Right. So when we think about value, people mean different things as a idea that the stock will go up because the company makes more and more money. And if you add up the money in the bank account over time, that could be a lot. And that's the value. And if you're going to be concentrated, you have to invest in a company where the value is probably going to come from profits rather than the balance sheet. Yes, that makes sense.

Buying companies that are technically, on a mathematical sense, have a book value that is higher than the market cap, that is value. And half a century ago, people made a lot of money betting on that. But yeah, buying price...

Buying low price to book stocks the past 20 years has not worked at all. And buying, I think the average stock, you buy a stock with a PE of 10 has probably performed worse than buying a stock with a PE of 20, a price to earnings ratio. And maybe that's because the price company with a PE of 20 is correctly priced that it will grow faster and have a higher quality stream of dividends. I've been hinting, David, for the past 20 minutes that I disagree with you. I'll finally get to the point, which is I think right now there are many stocks in the market that

that people, compound bros, let's call them, have fetishized as well as they're very high quality stocks and they can grow their earnings at 10%, 15, 20% a year. And they have moats. They're very predictable, but they have price to earnings ratio of 70. So I think that there are stocks that have those features that you want to buy. It's just that they've been obsessed over by the investment community and all of the name of few like FICO,

As in a FICO score, a credit score, I'm sure they have it in most. People in the investment community think that FICO can basically raise prices by as much as they want. And maybe they're right. But does it mean that FICO deserves a price-to-earnings ratio of 100? I don't think the companies deserve anything. But I think you're coming on a very important point, which is all the stuff I said is completely obliterated by your entry price.

or magnified by your entry price, right? This relates to anything you buy. Like take ETS, for example, you know, as a, for instance, I've seen this table of, oh, you wait longer and longer, your chances of having, you know, a loss goes to zero, right? Well, whenever you have a data set and a starting point on your price, if you bought above that in retrospect, you did worse than the data series, right?

And if you bought below that, in retrospect, you did better than the data series. So if you have the most fabulous company in the world, you could make it the worst investment in history. All you have to do is overpay radically for it. So that amount of overpayment for, say, a company can offset all those wonderful profits I was describing so that it's a terrible investment.

Does that make sense? It does, but you have a chart in your piece of companies that if you bought them in 19, you could have bought them at a ridiculous valuation, but still have made a solid return. So if you bought L'Oreal, the makeup company or whatever,

Moisturizer. In 1973, if you bought that stock at a PE ratio of 281, which of course is ridiculous, then you still would have made a 7% annualized return, which is probably a little bit less than the S&P, I would say. But it's still solid. And so you can overpay for high quality companies and do fine, do okay in the long run.

So not what we do, but yeah, I think the point just to underline what you're saying is this idea that if you were to actually say with these businesses, I only want to, what would I pay for it so that I only get a stock market like return? The implied valuations are very high, but that's not a game I would want to play. The reason that I think this is

A bit of the history with my last, when I used to be an analyst, is that that entry point on the spin, on the special situation, means that you often can, once in a while, not often, it's often a good thing to do. I think those special situation funds, when done well, can be quite effective, actually. However, what I'm talking about is like a company that is of this nature

long duration quality or has attributes where it could be. There's a hypothesis there and you're buying it at a below an average valuation, not the 200, right? As soon as you are doing that, you, you have to make sure the business is doing beautifully. I think in probably that same chart, there's some other long-term businesses that maybe had an implied PE of a hundred, right? So you have to be very careful on price with the entry.

That said, it will converge on the returns on investor capital over a long enough time horizon. So I guess this is getting a little bit wonky here, but the simple idea is you're right. L'Oreal, all these things you could have paid 50 times earnings.

But we don't want to take that risk because every time you do that, if anything goes wrong and it's not L'Oreal in 1973, which sounds like it would have been a good one, you're taking on risk, which is you're overpaying. So you have to, on the one hand, locate those things and understand this ecosystem. And on the other hand, make sure that you are starting off at a low price and what you believe is on your analysis without assuming this and assuming that. So you have to do them both.

And if you can find an attribute where that Venn diagram lines up, it gets quite interesting because then you can have an investment that could do a five or 10 year run and you can really get a lot out of that one decision. And the intellectual property is like an edge at that point, right? Because you've been doing it for eight years or nine years in this company. So you,

I am very loathe to look at some of the parts, book value, because let's say a company that I'm not invested in, Vivendi, all right? Okay. Some of the parts, la-di-da. If you think there is an absolute value to the sum of the parts and the earnings are, let's say, growing in a mediocre way, the longer you wait, the more you just are flattening out your return and you're barely keeping up with inflation because you need to liquidate the sum of the parts. So...

Acid value, same thing. You buy 50 and it's going to be a dollar. Classic value investment, right? I'm paying 50 cents for a dollar. Well, you know what actually on my wall is Western Union because when the telephone came out, guess what? Western Union was a short because they did the telegraph.

And Western Union, we have our little inspirations. This is all for us to stay engaged. So Western Union, internal memo, 1878. This telephone has too many shortcomings to be seriously considered as a practical form of communication. The device is inherently of no value to us. Okay. So.

Western Union is a short because there's a disruption called the telephone. But here's the thing. Western Union is still around today. So just like some of the parts, it takes a long time. You're short or whatever. If you take a time period that's too long, your returns that are like an absolute number, 50 to 100 or 100.

Whatever that is to zero, you can spread it out over a hundred years. You're barely keeping up with inflation. Right. So I guess the point is that you shift from balance sheet stuff to earning stuff. Yes, that makes sense.

All right, David, let's get into specific. Let's talk about a stock that Marlo, you have been invested in. I don't believe you currently own it, but in the past you were and it worked out well. That company's name is Zoetis. Before you talked about this company, on a phone call we had, I knew Zoetis only as a company that when I would download a list of 500 or 3000 companies, it would be the company that would have, it would be by the Z column. So I'd always see it in the same way. It's like, you know,

AAA bagels that you always see that. What does Zoetis do? What alert you to Zoetis and how does your journey with Zoetis illustrate the principles we've been talking about so far? Well, Jack, I appreciate the question and the setup for me to

tell you how great I am about one of my very successful investments. Maybe if it's all right with you, just so I'm not just tooting my horn too much here, I could talk about that company and how it relates to our process about how we think of an ecosystem. But it does, and it is a general thing, but I'll take it.

is that when you look at a company like Zoetis, so by the way, this is the company that manufactures pharmaceuticals. Most of its money is now from companion animals. So we're talking about dogs and cats. Okay. So if you need a vaccine, something like that. Pharmaceutical company for animals. For animals. Yeah. Now, back in the day, if you were at Pfizer, I have to watch what I say when I talk about these public companies, but

This may or may not be correct, but sometimes if you got a bad review, let's say 30 years ago, they might send you to the animal division. It wasn't exactly considered the high prestige. And the reason for that, as I understand it, and I should just caveat that everything I say should be verified and I may change my mind on something, although not the principal stuff. So what happened is that the high science in a drug company is where the action is. It's the research and development. Really, really.

really complex stuff. The animal side of the business is actually commodity. And I remember when Zoetis was, Pfizer was essentially spinning off Zoetis. And let's call it roughly a tenth the size of its parent company. Now, this is a pretty typical example

thing you would see in a spinoff where there might be a market cap differential. So the pairing is big and the spinoff entity is small, right? And so what happens is that you wake up in the morning and, Jack, you look at your portfolio and you say, okay, I had my one share of Zoetis that was 100.

Now I've got a share of Zoetis that's 90 and this little thing called, sorry, but my Pfizer, excuse me, my Pfizer share that was 100. But now I wake up and my Pfizer share is 90 and I have this little thing called Zoetis that's 10.

Oh, and by the way, you run a mega cap so-and-so, and so you can't own this little tent thing, and you don't know anything about it, and you sell it. So, you know, this is a very classic spinoff situation. What made this more of a Marlowe-style investment is that when I started to look at Zoetis, and I don't know very much about pharmaceuticals. This is about 12 years ago, so I...

I still actually don't know a lot about R&D pharmaceuticals. But I do recall speaking to the head of pharma sell-side research at one of the largest banks. And I remember this individual said to me, I was commenting on how Zoetis' cash flows after about five years, the terminal value was like growing cash flows 2%, 3% a year, not even sales.

And I thought, that's odd because the business had been around for over 40 years, maybe over 50, and they had never had a down sales year. So they're at a year where their revenue was lower than the year before. Correct. Correct. They were like once a flattish, but that's a long track record. That's a bit wild. So I asked this sell side analyst and

The way I, by the way, this is a comment on the sell side. I think there's a lot of negative things people say about the sell side. It's again, just a different job. I've never been in that role in terms of writing research reports, but sometimes there's a lot of great knowledge there, just a kind of a lack of wisdom about what to do with that knowledge and probably a lot of constraints. So just to stay out loud. But anyway, I talked to this individual and she said to me, name me one company that you

In our coverage universe, this is the highest terminal value. Name me one company that could grow its profits more than inflation after five years that doesn't have patents. I thought, what? How about Nestle?

How about McDonald's? I don't know. Maybe I'm hungry right now. I'm not sure yet. I don't know. I don't know. They may have. But the point, the point being that in that universe, essentially the what I learned is that the valuations are just essentially looking at bonds.

They've got these drugs and they just discount it back. And then there's a patent cliff. This company had no patents. So how could it have any value? Well, of course, we know many companies that have wonderful businesses where they've been able to create a way to beat off the competitors without patents. That's certainly one competitive advantage, right? So I said that to her and she goes, oh, well, oh. And I think that's where you look at a case where we're like, okay, this is a different business model.

What's so special about this company or anything there? Why do they keep doing this? Because if you're the competitors, everybody's got an animal health part of their pharmaceutical company. Why are they winning? So you look around and I looked at this five years and it's sales up. It was like six to seven percent every year. But then it's the costs are flat. And I was like, oh, that's why the margins are going up.

And of course, of course, well, the thing is, it's a question. Why? Because normally when you sell something, there's more stuff that you have to spend. It's not always that you can just, it's not, not everything is software, right? So I, when I met with the CEO of the company, I said, what if you doubled your sales? How would you have to change your SG&A? Answer was, oh, I don't think much.

I thought, what? That's crazy. So that's a situation where we had a mispriced. So we had, I had the courage from a valuation point of view to begin. And then I have a thesis and we go through our checklist here. And the thesis was one thing. Well, one and a half. How about that? First is how the heck can the company grow like this regularly? And when they grow, why don't they have to invest more in their marketing and their other stuff?

Because if they can actually double their, grow their sales without changing that one line item, those profits are going to get higher and higher. And those margins are going to go crazy. And this company forget 3% cashflow growth. It's going to grow its cash flows at 20 plus percent for maybe 10 years. This is wild. And then it begins, right? So that's an example where then we check, okay, is this a big ecosystem? Why? Because we don't have a lot of areas of specialty here at Marlowe.

We don't have an opinion on most things. That's okay. But the things we have opinions on is when we begin the work, we say we're paid to play because there's a company that allows us to learn about a whole new sector. And it turns out there were vet clinics, there's dog food, there's all sorts of stuff. It's so exciting. I ended up getting a dog. My kids were thrilled. And so that was the beginning. And I had to prove out one thing, which is what's going on? Well, it turns out the sales force is the biggest part of that SG&A.

And it turns out that that sales force is global and they're direct. Nobody had that. So then I speak to the vets. Oh, they're like McKinsey consultants for us. And then on top of it, over that 50 years or so, although there's no patents, imagine if you're giving a drug or a vaccine for a cow. Now, folks, this is important. Maybe if it's a dairy cow, the dairy cow cannot be used for milk. But the cow shouldn't. For milk.

I'm talking about dairy cow. So let's say there's a dairy cow that makes milk, a milk cow, a milk. I'm just using, it could be a meat cow, but I'm talking about a dairy cow for a particular reason, which is that if you administer a vaccine for a dairy cow, typically it can no longer be, its milk can no longer be used. It's just a random thing. But what I want to just emphasize is, okay, what kind of dairy cow, what climate, what country? So certain types of dairy cows,

can have a vaccine has to be approved by normally maybe 20 to 30 different regulatory bodies so that it could be sold in say 100 plus countries.

And that totality of the market might be 50 million bucks for that one particular vaccine for that dairy cow. Nobody's going to come in and start a global business for $50 million, right? So then you start looking at the next one and the next one, and they assembled literally thousands of these individual drugs that are each too small really for anybody to do. So there's no patents here, but they have the approvals and a sales force of former veterinarians

that are going and helping the vet clinic or let's say the, if it's a livestock. So you look at this company and say, wow, this is a beast. I actually like it more than, I like this dynamic more than the, what do you call it? The patents, because that's everlasting, right? And so that's an, for instance, and then you look at that and that was the beginning of my entry into animal health.

Because, of course, learning about Zoetis, I learned about the competitors. I learned about dog food. I learned about dogs were in the dog house and then they're in the house and then they're in the bed. And if your dog is sick, you want to treat that dog and help it out. And David, why? What advantage does Zoetis have over the other Zoetis competitors in the companies that are making medicine and pharmaceuticals for animals? Two things.

more approvals and a better portfolio. Just think of it this way. If you're buying, let's say you're a Vets in it, one-stop shop is easier than lots of different ones. So they had the most

Probably, I don't think they really saw the value. I'm speculating because it's going decades back on that company, but probably a bit of a chance of history that they just really had such a good portfolio. So that's one aspect. And the second is that they have a direct sales force to distribute that portfolio and have a relationship and help out the vets. Sometimes they would literally help them out and say, oh, try this, try that. So when you go to Orlando, actually this month,

There's the, an animal health convention. And it sounds almost like a cliche to say, oh, you go to the conventions, but I can tell you that you go to the conventions and you're not looking for the shades of gray. You're looking for the thing that everybody just knows. Well, of course, everybody wants to work at Zoetis. And if you're a competitor and you want to rebuild, build a sales force, well, you have to find vets often who now do sales and they

I put myself in their shoes. Maybe, Jack, let's pretend we're both going into the sales business in animal health, you and I. We're both hoping to get offers from Zoetis because we know that it's going to make our job a lot easier.

Because we're not going to say, oh, we don't have that one. We don't have that one. And then, of course, we'll call him. I don't know. John comes in. We ended up at the wrong company. You and I. Oh, well. But John comes in or somebody comes in. Samantha, you name it, whatever. And they are from Zoetis and they just have it all. It's easy. So that's an example of a competitive advantage they have from Salesforce and regulatory approvals. Okay.

I did just look up Zoetis competitors. I found Virbac, Vitoquenol, and Idex Laboratories. I just looked them up. And like Zoetis, they also have absolutely crushed it over the past...

10, 15 years. I will say that from 2010 to 2021, their compounding, a word I know you hate, was incredible. No, I like it. I like compounding. Okay, from 2001 until now. I like compounders. You got to think about price. I think we covered entry price. Yes, yes. You can have a compounder that is a terrible investment. That's all. I think you established that with your comment about the mold. Yes, but a lot of animal health

Stocks have done well. I just looked it up. There's three. They have done really well. Do you like the entire space? Is it a thematic? Yeah. So here's the thing is that when you start off as an investor, you think, well, how do I become a special? How can I develop a specialty? Well, you start off normally with one company for us and that's land and expand into everything. And so you mentioned a few companies.

due to liquidity constraints, no Vatopanol, but in spite of liquidity constraints I've invested in, they're back, but they're not all good. So you could be in a situation where you're in a sector and the wind is blowing and you think you're on the right boat, but your sale has huge holes in it and just doesn't matter. And I will not name companies by name, but I'll just say that there are other big pharma companies that

saw what happened with Pfizer and Zoetis and thought, oh, we'll do that too to create shareholder value. But some of those companies didn't have the comprehensive portfolio. They were, say, too much livestock. They didn't have the sales force. So just because there is a very big trend occurring here with what we call the humanization of pets does not exactly... The humanization of pets? No, I mean, I go with the dogs, I get it. Yeah, I mean, they're like old yeller

Anybody who knows about that movie, you'd be in front of the Hague. So you know what I'm saying? It's just that's what's happening. So the wind is blowing. But if you're on the wrong boat, it doesn't matter. Right. It does depend on the company itself. So.

But what I will say is that that was the beginning of realizing that within the space of animal health, I was not a specialist in animal health. But by learning the way we learn all companies, I identified that

very astutely, there are a lot of other companies. Oh, wow. Okay. So if I learn this, I'm going to learn all the other ones. And now I can know this area. And this trend of humanization seems to be very persistent. And so this is a good place to be where I have my three box in my head, not our checklist, but our boxes in the sense that one, there is a very high quality asset that's being mispriced because of the special situation. Two,

It has long duration elements to it. Not totally clear what they are yet until the research is done. Three, it has a lot of stuff in its ecosystem. And we're talking about dog food, vet clinics. And then from there, we ended up investing in other animal health companies as well as dog food companies, Blue Buffalo Dog Food. I mentioned Fresh Pet.

It's not a very well-known thing, I don't think. In my world, of course, it's, of course, the Mars Candy Company, if I'm not mistaken, is now making the majority of their sales on animal health. Well, that's pretty interesting. And they own, like, Snickers. Mars Bars, M&Ms. Yeah, yeah. And they have an excellent reputation. You never know private companies, but the general reputation is that

The family doesn't take a big dividend, or I guess I don't know how big it is, but there's a very heavy investment in developing that company. And so a lot of reinvestment. So as a result, it is interesting. There's been a recent succession, and the first time ever the CEO of Mars is privately held Mars by the Mars family is coming from the animal side.

So we can verify that. I'm pretty sure because they keep it pretty quiet. But I think there was a Financial Times article, if I'm not mistaken, where this new CEO was announced and they allowed a little publicity about it. But what's happening is that if you look at who is the largest owner of vet clinics in the United States, it's Mars. Wow. Yeah. Banfield and a lot of others.

Sometimes, Jack, what happens is that the best assets in the world don't always make it to the public markets because if you own something really good, would you want to sell it to me? You'd be like, no, I want to keep the money. I want to keep the profits, right? So this ended up being a very rich environment. Now, I think as you're pointing out earlier, a lot of them are priced quite well, but there are some businesses in there. IDEX is one you mentioned previously.

that has some exceptional attributes, even though it's a totally different business model. The one thing these things have in common, as a testing company, the one thing they have in common is that the driver is demand to take care of your animal. That's the thing they have in common. And so you no longer own Zoetis, but you do own IDEX, yes? Well...

No comment. There are companies you always want. I'm always like window shopping. Yeah. Got it. Got it. Okay. Well, let's talk about a company you referenced earlier that your son owns that I also understand you've been involved in, which is Fresh Pet. Okay. Well, I own Fresh Pet. Okay. What is Fresh Pet? Why do you like it? Well, so here's the thing. You start off by saying, what is it? They make dog food. They make fresh dog food.

What is fresh dog food? Well, there are people who cook for their dogs. And this is the equivalent of sort of like, I don't have time to cook myself dinner, so I'm going to get a microwave dinner for myself. That's what this is for a dog. This is a company where I think, back to your point, which I think really needs to be underlined, because I think your point about price and valuation is very astute.

valuation will destroy any business if you buy it too expensive. It just doesn't matter. I just cannot emphasize that enough. It won't destroy the business. It will destroy the stock performance of the person. Sorry, it'll destroy the investment performance. Sorry. Yeah, no, that's, yeah, yeah. Still, you're right. Anyway, but yeah, so Fresh Pet,

What's interesting about that company is we specifically, I specifically did not invest in this company in spite of its wonderful attributes because it was too expensive. Now, it's a bit of a chicken and the egg with these things. How do I know it's too? What do I know about it? I have to know something about it before I can assess its valuation. So normally, something has to happen with an event for me to be able to say, well, I

I can pursue this line of research in more detail. So I invested in Blue Buffalo in the past and that had been quite successful and a lot of other things. But I can't just start the research because return on time here is the most important thing for us and in life really, right? So as a result, something had to happen as a situation. And this is not a spinoff. This is just the company. So

That business, they sell fresh dog food. And if you go to a Whole Foods and you open up this fridge, you'll see there's a fridge which says Fresh Pet on it. And what's interesting is that the company installs that fridge. That's their capital, actually. And several competitors that are better capitalized on Fresh Pet, including perhaps some of the places where you can buy Fresh Pet, they try to knock them out.

Couldn't do it. They couldn't do it. Why? Because people want them so much? Different things for different companies, but sometimes they're just errors. Don't place the dog food fridge where the human food is. Yeah, yeah. Believe it or not, that's a big deal. Anyway, but long story short is that this was an excellent business. And if you look at, let's say, Staples, right? You could look at all these alcohol companies that are

losing some weight on their stock price with they're all taking Ozempic, right? So they're all losing weight. They're going down real fast. And you think, okay, what is an area in Staples that's actually a growing area? And that's often something to do with dogs and pets and dog food is important. Within dog food, you have a blue buffalo, which is more high end, which was taken over. And that was a good one.

And then within that dog food, you have fresh dog food, which is like a new category within the category of dog food, within the category of consumer product. It's a new thing. It's kind of like spiked seltzer. You know, it's new. It's relatively new. It's new. And here's the thing. Is it a fad? Is it this? Is it that? So I've been observing this company for four years, five years, and something went wrong. And I could...

illustrate the thing is it comes back to the ecosystem. They couldn't sell enough of the dog food and they had stockouts. I'm going to really simplify this, Jack, because it also just gets a little bit, hopefully. It's just not good. So they were having stockouts. Stockout is like there's not enough. They can't make enough because during COVID they had supply chain issues. So lo and behold, they were growing, let's say, 17% a year. Oh, no.

Right. This is the thing about outputs. If you're looking just at a company that's growing 30 percent a year and then suddenly they grow 17 percent. If the first thing you do is you're opening your Excel model, you're done because you can make that Excel model equal zero. No problem. I could go to an analyst. Oh, what are the margins are like this? Whatever like this is going down more. Oh, my God. I got the stuff all made up. It's models. Yeah. Right. Right. But the model is just an output.

The question is why, right? And if you have done the homework, which is not that complex, but it does take time. Who has time to read the annual report? Well, most incentive structures in the pods or whatever, it's probably not feasible, right? I think there are some new tools that we've been using to simplify that. But anyway, we understood that there was a situation where they could not make enough stuff. And then the stock price goes down because the sales go down.

And as an aside, I find this very humorous that there was these baskets of unprofitable software to short. And some investment bank was saying, oh, here's some, we have a new, and I looked at the list and I saw a fresh pet. And I'm like, I didn't know it was software. It's like little nanotechnology and the dog food. But anyway, the point being that there was something else happening too, which is that they were actually building a massive factory to satisfy all this demand.

So their sales were declining and yet they then spent all this capital to build more. So if you're like sort of. Was this in 2016 or was this in 2021 or something? 21. Okay. Because I see I'm looking at their quarterly revenue and it's always been growing. Like it's always. Yeah. But, but, but if you look at, look at the annual and say, look at the stock chart on this one. Normally I'd say with stock charts, they kind of think, oh, if I can split my eyes and I see something, maybe there's something to say about it.

this one you can squint your eyes you'll see something is that it went up a lot and then it went down a lot and so the reason it was going down was because of this issue with the this demand was there but they didn't have enough product and then add insult to issue they're now building a massive factory well here's a short thesis it's well and by the way the short thesis worked i guess if you were early enough to it maybe you were wrong but about the log about the idea but it

Demand is lower. Actually, it's a decent short thesis, maybe. Demand is lower. Sorry, the supply is limited because of COVID and supply chain issues. Meanwhile, the street's expectations on profit are too high because if you look at just the depreciation of this big asset, it's knocking out all the profits. So imagine if you have a fixed cost thing that's really big, but it's not making any money yet.

Does that make sense? Yes. And I'm looking at the profit margins and from 2015 to 2020, it was negative. Briefly was profitable in a little bit of 2020 and then it was unprofitable from 2021. It was unprofitable software. Yeah, exactly right. And the reason for that is because you have this big plant they're building. But if you're looking at this as an outsider, little bits and pieces, you're thinking, okay, you're telling me your sales are decelerating. 17 sounds great, but the valuation is.

You need to sales things are going down. Sales growth was decelerating, still growing. So we're going for like 30% growth to like, let's say mid-teens growth or even a little lower. And then add insult to this even more. And they're building a massive factory. Are they crazy?

And then the third final thing, which got to the level, because normally, frankly, it's quite rare to have the companies that I'm pawning over actually get to my price. But you wait long enough. Things do tend to happen. And they issue equity. Oh, yeah. They want more cash. Why do they need equity? It's dog food. So they issue equity.

And then it breaks the issuance price. It goes down even more. Oh, we're so excited over here. So we start by a lot. And I'll tell you that the company actually offered to have investors come visit the factory. Almost nobody came. And what's happened is that when it normalized, the Ennis, the Ennis factory turns back on. They're now able to meet demand.

and do it more efficiently. And so now they have a new CFO. I feel as though maybe it was the timing of the equity issuance, but who could tell? It's not, well, anyway, I'll just, no criticism of it. It just is what it is. There was a new CFO after that equity issuance. And anyway, they're now in the process of having that plant ramp up. And I'll just say that we're very pleased with how this business is progressing. But stepping back, there was a failed proxy here.

The financials gave you an output declining sales. Declining sales growth. Yes. What you said, declining sale, decelerating, right? I was talking to my mother about this. She's like, what's the big deal when something is like 2% less profitable? I'm like, I don't know, mom. But yeah, declining sales growth. And you're like, okay, why? We know why. Demand is so high. Like you have Walmarts saying we need more product. Yeah. Problem to have.

You don't want the other thing where you have too much product and no one wants it. David, tell us, because it was an unprofitable company and now it's briefly starting to make money. Tell us about, you said that it was losing money because it was spending money on building the factory. Tell us about how that flows into the net income. I'm not an accountant by any means, but it-

Just because they're spending a lot of capital doesn't mean it's counted as a loss. So was it the depreciation? So you're saying it was profitable for the depreciation, but the depreciation expense was so big that that's why it was losing? Because generally, I don't like to invest in companies that are unprofitable. But it sounds like you invested in it when it was unprofitable and now it's profitable, which is the right direction. I think you nailed it. It said depreciation. Yeah.

It wasn't radically profitable because they were still growing above the fixed cost. Think of the fixed cost as already there. And they were investing in, unlike to be fair, they had marketing expenses, things of that nature.

But if you look at the value of the customer, it made a lot of sense. So I was very, as a shareholder, I'm very supportive of that approach. But then it got even worse because exactly what you said with the depreciation and essentially having this mega asset that's not actually generating sales, but is beginning to be on your income statement.

So I think you more or less said it right on. That makes sense. David, because you have learned about the pet and pet food industry, I want to ask you about other companies that maybe you don't own, but I want to get your take on them. So first off is Chewy.

founded by Ryan Cohen. He's now involved with GameStop. So a lot of the meme stock investors, you know, like him. But I guess I don't really know. They sell dog food online. They sell stuff on, you know, that sounds like an OK business, but the stock hasn't performed that well. I noticed something in the financials that it's, you know, historically, it's not been a very profitable company. Let's put it that way. What do you think about Chewy?

I know about it, but I don't have anything intelligent to say about it. I've never been an investor. Maybe one comment to mention is one has to distinguish between buying a sales channel versus buying a product. And sometimes there's a confusion about what the investment is. And so I always think to myself, well, if the product's really good, there might be different ways to sell it. The sales channel in itself can become obsolete. And that happens with a lot of businesses. It happens often.

We have things we pass on things regularly, not because they're bad investments, by the way, just because we don't see ourselves as being capable of making them good. But here's a sales channel. Tinder.

Sometimes these cheap technology companies, I don't mean to switch, but it just, for some reason, this reminds me of looking at match.com. Easy pass because not because it's a bad investment or whatever, but for us, it is a bad investment because the channel of sales is the format of the iPhone and the swipe. And I don't know. We have one question, which is, will this business be here in 10 years? I don't know. I know that there'll be matchmaking till kingdom come.

But what is the format of this? If it's dependent on a channel that could be disrupted or changed, who knows how we're going to be interacting in 10 years? That's a problem. And so if you're looking at something that's dog food branded like Blue Buffalo, that's different than

Selling it on Amazon or Chewy. I would rather be indifferent to that channel, but I don't know anything about Chewy as an investment. I couldn't really speak about it intelligently. What about Trupanion, pet insurance stock? Well, I have to keep my eye on that one, even though I don't know much about financial companies. Well, I wouldn't put it in our core area of competency. There's a global question with that company.

I was recently asked about this company and I wrote something about it. One thing about being the raising capital is that I work for free for all sorts of people. They ask me questions and I just write it up. So I didn't have a whole lot to say about it, but there is a interesting dynamic where in the U.S. health insurance exists. And so people as a consumer are very comfortable with a concept like this. However,

In other countries, whether I'm from Canada or whether it's the UK or Scandinavia, there's a different attitude about health care. And so the idea of paying a significant amount of money for health care for yourself or for your animal, that's a little harder to understand. And the other question about that company, it's very interesting. The other question, because I think it's positive for the sector in a way, right?

As a owner of a vet clinic, I would say that I like, you want customers to be satisfied, but the human body. So what I was explaining when I was asked about this is that, so Jack, you're human, right? I am. So am I. Nice to, nice to, nice to know you. They always say that's the only way for world peace is to get the aliens. But anyway, so what I'm getting to just to put you at ease is

There's a book that basically says in insurance companies, what is a very common injury? I was just speaking to actually another fund manager who unfortunately was injured. And there is a very defined code of, oh, if you injure your, break your arm, it's this type of thing. It's one, two, three, four. And this whole language is basically a standardization of the clinical things that occur for human health.

Once you transition to animals, it gets more complicated back to the idea that the physiology of a Doberman is different than that of a cat, et cetera, et cetera. So I think that there's something to do there. I'm not an investor in Chupanian. I would like to see that sector develop more. I think the only, the only kind of.

There are a lot of countries where health insurance is just not a commonly accepted idea. So that's a challenge. And then secondarily, to price things accurately, you do need some standardization. And that's a little more complicated with animals. I'm sure there is a way. And that's all I really know about that. Okay. The standardization point is interesting. Yeah. I say outside of the U.S., it is often accepted or believed that healthcare is a human right and that the government should provide for it. I didn't think about the fact that... I think...

know let's say 80 percent 90 percent of people in canada or france believe yeah the government owes uh you know to all the citizens health care for humans i didn't for every second think that they like people think that they're owed you know health and pet insurance as a human right like what would stop a hundred people put someone from buying a hundred you know french bulldogs that have a lifespan of seven years and just saying like the government should pay for all my veterinary bills that i i didn't even think about that but that's that's interesting david another name

uh genus plc i none of these stocks i'd say i i am pitching or have been involved with genus plc do they they make it's my understanding veterinary genetic material so they own patents on cows that generate a lot of pork and bacon or yeah they have a lot of a lot of cow sperm cow sperm that you know a very fatty a lot of ribeye a lot of lemon yawn what do you think of that stock

I don't have anything intelligent to say about it, except that I think their former CFO was quite astute. But I, unfortunately, can't play ball on that. Too many risk factors. Maybe the one thing to comment on is that Companion versus Livestock.

I know I meant, sorry, excuse me, companions. So the sector is divided up into companion, which would be dogs and cats for the most part, but it's like pets basically. And then livestock. Okay. The reason they call it true panion is because of the word companion. Okay. Yeah. But just when I get to, when you ask about genus is that livestock is a bit of a different animal in a big way.

There are a lot more uncertainties to me longer term. These are not by any means going to preclude investing in the company. And maybe I'm not intelligent for not doing the research, but it is different. And the trend in terms of a very straightforward consumer style profitability trend.

is more straightforward and companion side versus the livestock side is one general comment I would make. And the inferior competitors in vets are the ones that typically have a lot of livestock veterinarians. It's just bigger spaces, harder to see a lot of customers. Similarly, on the animal health side, there's a lot of commodity products. So the competitors to Zoetis, their portfolios are often just very livestock focused.

And there's a lot of regulatory questions. A lot of it depends on what's going to happen in China with something, and there's a lot of opacity. So I just don't think I could add very much intelligence to it.

David, we've navigated the world of pets, pets, pet food, animals. Let's move on to a... That's not very well covered, and maybe that's why there's a lot of opportunity, because you're not competing against the smartest people in the world. There's not 50 different analysts covering all these somewhat niche world. Let's move on to a much more well-understood world, a world that is on fire right now.

in a good way in the investment world, and that is semiconductors. Tell us what's your view in the semiconductor industry. How did you find opportunities? How did you get involved? Sure, sure. So that started about eight years ago. I'll tell you, Jack, what happens sometimes is like there's something really big and important. And for a while, I knew China was important and big, but I didn't know anything about it. And I thought one day I'll learn about it.

And around 2011, I started to learn about it. Now I know something about it. India, don't know, still. So semiconductors was like that for me in the sense that it kept on coming up in a lot of comments. And it was obviously very important because it was the basis of everything we're doing. So the question then becomes, well, how am I going to get paid to play with my research?

Because back to this idea that if we have quite an extensive question list, which is intended to pass, an example of something on the question list, just to give you a for instance, because I think it's worth saying, is the customer happy? And is there evidence of that? That's how you pass on Monsanto. The analyst who was looking at that said, oh, it's not bad. I look at my phone, wait, the farmers are suing them? That's not a happy customer. So you have a question list.

and the sector. So what happened is that as we looked at this, people, you know, you always want to say, well, what's the big picture? What's the hypothesis, which is the idea you can research and test out? And the hypothesis was that something that was totally cyclical, like this up and down and up and down, was becoming cyclical secular in the sense that there is a cycle to it, but it's higher highs and it's higher lows.

So what's going on here? It looked as though that there was a dynamic where computer chips are in computers, but soon they might be all over. Internet of things, et cetera. So you start to say, well, if there is a change here where we're needing to have more memory chips. So when we talk about chips, I'm going to just talk about it generically, but there might think about three kinds. There might be like, well, arguably memory.

Nvidia would claim this is a whole other kind, but there would be like logic chips. There's memory. See Nvidia bringing them together, but that's beyond the scope of this. And then there's like analog. Now analog is cool, by the way. Analog is like, how do you get weather information turned into digital?

So anyway, chips. Now they're made by these companies. Okay. Now, if you wanted to participate in this and learn about this, what do they all need? Well, they all need these manufacturers. Okay, but there are a lot of manufacturers. Is there anything that all the manufacturers need? Oh, yeah. They all need to buy these machines. Is there any machines that they have to buy? Depends on the chip. Sure. And then you come across...

a few companies and the one that everybody you know the one that was let's say highly valued was the one that was the high science asml which is so well taught it's a strange thing jack i haven't had that many things where it became like the public discussion point they're like podcast focused on this yeah the time it'll be general article is about just about asml which is you know uh yeah mainstream publication story about company is yeah it's just

And we invest in liquid stuff, but over time we've had, we had this analysis done for us by a partner. We have less than 1% overlap with other concentrated managers, which boggles the mind because it's not like we're investing in these like smallest of terror things. Some of these are big companies, but anyway.

The thing about this is you look at the conveyor belt of making these things. And regardless of what you're doing, you need certain types of machines. And I'm happy to explain how you actually make a semiconductor, but

Maybe we'll stop internally. Maybe you're yelling and saying, don't do that. So I'll just say that there's steps. Step one is to do steps. Now, ASML is a super special company because they were really part of Philips. And then they have this joint venture with TSMC, et cetera, et cetera. But there are a bunch of other companies. While ASML was in its own league for various reasons, there were other companies in step one.

this, where they're doing, they're basically chipping away at the excess of the stuff, or they're putting on the photoresistant layer, or there are all these different steps. And those companies were trading true cyclicals. So what I mean by that is you wouldn't have ASML trading, I'd call it 20 something times earnings at the time. And yet you would have a company that is critical for one step. It's not as advanced technology as ASML. It might have a little more competition. And it was trading at

on consensus numbers about seven times earnings with massive net cash. When I see that, I think, well, that's somebody's value trap that I don't want to participate in. But then I started looking at it and I'm like, hold on. The install base of these machines, they had already been installed. And if you look at making a semiconductor fabrication facility,

There's a big change. This is a big idea. So it doesn't sound like a big deal, but I'll tell you, this is big. Is that the capital intensity changed? Now, that's a fancy way of saying before you would make a fabrication facility. And if there was a down cycle, let's say your Samsung or whatever.

That fabrication facility might have a zero profit. Margins go to zero. So it's like a true cyclical thing. So you're going to be very wary of building out like a fabrication facility because it depends on the cycle. You build the fabrication facility and you build up a line and you buy these machines that are super expensive. That's the way it used to be. But what happened is that because these computer chips of various kinds became so important,

The fabrication facilities would cost more to build. There'd be like $15 billion to build one instead of 10. So they're like 50% more expensive. But here's the kicker. This is key. Even in the down cycle, they were still profitable. That was the thing. Still profitable to the people who were making the actual chips, such as Taiwan Semiconductor. So the design of the chip. Samsung has a big one or Hynex or whatever.

Well, Intel, when we talk about that, that's a whole separate podcast. The thing is that, yeah, the people who are making the chips for third party, mind you,

for the most part. So think about, just let's just summarize. You got the people who design, who leave it, NVIDIA or whatever, they are like their chip. F-A-B-L-E-S-S. They don't do that. When you have the actual fab, fab is produced, they produce Taiwan Semi, SK Hynix, and SK Hynix and Taiwan Semi, they buy stuff from, they buy machines from ASML. ASML, Lamb Research, Tokyo Electron, all this stuff. So when I'm talking, so people say, oh, NVIDIA is the,

picks and shovels to AI, I'm like, what? That's bonkers. Maybe for the time being, but whatever happens, they're all going to need to build whatever competitor is going to maybe be NVIDIA's competitor. They're all going to still need these machines. So what happened is that because these fabs were now profitable, they would continue buying the machines even in a so-called down cycle.

So I looked at the machines that were already installed for a company called LAM, it turns out. And if you actually looked at just the maintenance cash flows on those machines, which were 10, 20 year lives that were still running, just to maintain those, there's some profit to it. That was covering basically the whole market cap. And then you had excess cash. So that gave me the courage to say, well,

I'm going to be paid to play here. Maybe it turns out it's just an old-fashioned value investment and, oh, well, it's a 50% return and et cetera. But this was the opportunity where there was this down cycle and there was still this belief that, oh, that's the typical cycle for this and that, even though there was a total change in paradigm, which is that these fabs are still profitable because they're

The source of demand is now everywhere. It's not just your laptop. It's the cars. It's everything else. So when you did that analysis, I still think about the before the split. But I was looking at the lows at around 120 and it was like, whoa, like basically there's no value. It was almost like a distressed credit investment. Like this company is assigning zero value to incremental sales, period.

If they stop and just milk the cash flow of their install base, you would have a little more money than what you pay for the stock, plus the net cash. I thought, this is crazy. So thus began our adventure into semiconductors.

And maybe I'll just stop there. But that was the circumstance that facilitated that. And the industrial logic basically started to evolve, which is that ASML to me became a bit of an example of what they were all doing, but in a different way. ASML is special because it's just cool. The Trump lasers are

Not Trump, but T-R-U-M-P-A-P-F. You could shoot a laser. These are these crazy things. In terms of science, it's some of the most advanced you'll see. You could shoot a laser and it's so accurate that shot from here to the moon, you could laser through an apple core. Wow. They have lenses made there that are so smooth that if you made them the size of Texas, the biggest imperfection would be one millimeter.

It's just, it's insane. These, when we say two nanometers, oh yeah, two nanometer. We're talking about half the size of a COVID virus. This is just magical science. Put that aside. But one thing that was going on with all of them is they were naturally focusing their R&D into a more and more specified part of their step. So if you have two companies that say both did

The scraping away or the printing of the thing or the putting on the photo resistant layer, whatever it might be, they would kind of they just sort of organize themselves where I'm going to really focus on that thing. And then the other company says, well, there are indeed so focused on that. We're going to really focus on that. Now, if they coordinated that, I think you'd call that a cartel. This is not a cartel, but it is a natural kind of industrial logic of the sector.

But what happens is that as your market share grows in one particular step, suddenly, and as the demand is going like to the upper right, even though it is still cyclical, you are actually able to become more dominant in terms of your share and the number one specialist on that and leaving the competitors behind in terms of tech. And so although it began with land research, that's another reason why you study the whole sector. That industrial logic is playing out right now. And-

It's hard to imagine that you could say I'm buying a thing for earnings are close to cash flow. Reading a sell side report is pretty tough when somebody's saying this thing is a sell because it's worth. You don't see single digit PEs that much when a company is if it didn't exist. We have a question like how do we know it'll be there in 10 years?

Well, for some of these, you stopped having them and you wouldn't have a certain type of semiconductor for a while. That caused a lot of difficulty. So we felt comfortable enough with that. So anyway, that's the story to beginning. And as for Zoetis as well, that's a massive world here, right? Best of all, market cap is huge.

And so you got involved with the lamb research, as you said, at its lowest valuation, it was like a PE of nine or something. So that's already on their sell side numbers. That's the thing you learn is that the mindset, this is just psychology is like the mindset of this world was we were just transitioning to its cyclical to its secular cyclical. Eight years ago, that wasn't as common a thing.

And I didn't know if the growth would be because of general use, but they were like, oh, OIT is going to be a thing. I honestly couldn't tell you, but I do know they all needed certain kinds of stemming, if that makes sense. And you're saying that they had 9PE, you know, if the company's not going to be a disaster. It was like 7, they get 7. They're trying to back in. Yeah, no, I'm looking at trailing 12 months. So no estimates at all. Okay.

9P is already not super expensive, let's put it that way. But you're saying that they had contracts in place, they'd already sold machines where they're going to be servicing those in the future, and that was not factored in. I think if in the financial world, those contracts often are monetized, like mortgage servicing rights, like, oh, over the next 30 years or 20 years, we're going to be servicing this mortgage and collecting a few basis points here, a few basis points there. It sounds like that's not monetized, so that's not on balance sheets. But okay, so tell us, what do you do now that the stock has

up a little bit, the valuation is less cheap. What do you do now? Is this going to be one of those companies where you're trying to own it for a long time? And I'm just looking at other semiconductor companies, Applied Materials, KLA, ASML, as you said. How are you re-underwriting this position every day and said, I'm going to sell some of my lamb research to buy those other stocks I just mentioned? Why don't you do that? How do you have the confidence to just sit and hold and wait in lamb research? It's a challenge.

It's a reasonable question. It's a hard answer, which is that I wouldn't say the question is evidence to provide conviction versus confidence. So if you think about rough numbers at its peak, let's say we were, let's say if we're buying it, let's say a hundred, I'm going to be rough on these numbers here. So, but somewhere around the lows, let's say a split. So it's, I still think of the pre-split.

120, 130, whatever it might be to a thousand over, let's say eight years. This is very rough. So that's quite a successful investment. Now, why do I still own it? Well, now we have new sources of demand that did not exist before. And it comes back down to if you add up all those profits,

and you bring them back, I discount things at 10%. Why? Because it's easy. I'm not really like equity-weighted. Like I just use 10% for everything. So when I discount stuff back, it's still very valuable without even considering a lot of the build-outs that are still there. So it's a different investment thesis because had the AI not become so dominant, the need for, say, memory chips in particular would not be so high.

Now, I can't tell you what the paradigm will ultimately be for the neural nets, for instance. Right now, it's large language models. You'll add some aspects of physical data. There are sensors. But regardless of whatever the format is for the growth in AI, if you believe, for example, all the data for language has been used up and there's a block there.

it will all have to be remembered. And as you look at this massive scaling up of the data centers, the CapEx is there. People talk about the CapEx of the large companies that are building these things out. They're all been a neat memory. And that's not reflected in the stock price very accurately. And if you look at some very reasonable cases of the future and you bring it back to the present, you wouldn't want to sell it.

However, there's always the other one. There's always the grass is greener. So if let's say something happened in another area, like I have an interest in music, I invested in Warner at the IPO. And if let's say I'm not an investor, I'm not an investor universal, but if there was some crazy dislocation in an area where we had competency, that's a question because maybe we'd have to fund that investment with land.

So these are not easy decisions. But what I'll say as a general matter is it doesn't matter how high the return is on the other thing. If it's an area that you don't have the expertise, you're not just selling the stock to get money. You're giving up your competitive advantage that you may have built up over close to a decade on that company and its sector to then go into a place where there are other people who are selling you their stock, Mr. Market,

Mr. Market. Well, you know, my views on Mr. Market, Jack, is that my experience, I'm in like business school at Stanford. Oh, Mr. Market is this crazy person knocks on your door. My experience is that Mr. Market is pretty smart, richer than me, more powerful than me. And I get pretty worried. So if I'm outside of my area where I can go against Mr. Market,

I don't care how high the returns are, the probability, the chance of me being in and making a mistake or just being freaked out by the sheer magnitude of this incredible Mr. Market, I might make a mistake. So that's just something to keep in mind. And I don't have a perfect answer for that. You do your best. But I think over time, I've learned that I would rather...

I'm going to write something conservatively where maybe I'm getting a mere 15% on our base case in terms of probabilities and everything is working out quite well versus pursuing a new line of research outside. That may be really good, but I just don't have the conviction yet.

I'm not sure if that answers you, but... David, this entire time, you talked about why you want to have concentrated positions, why you want to know the stock. There's an aspect I think we haven't talked about, a behavioral component. Earlier, you said that sometimes a short seller will come to you and share a report or bear case on a stock that they are short, that you are long, and you actually like it. In some cases, you acknowledge it. I think if you weren't as familiar with these specific stocks and know the stock and the business cold, that

having a short seller issue a short report or share a big case would scare you and you might get scared out of the stock because short sellers generally do phenomenal quality research and they own the stock. They understand the stock way better and the company and the business way better than the median long holder. In some cases, he was an ETF. So I think that's really important. And also, let's say you make an investment and you half understand you buy a stock at 50, it goes down to 30. You might get shaken out at 30.

because you think the market understands. But if you really know the business, you could buy more. David, you talked about the music industry. How did you get involved in music? And what are your current thoughts on the music world? You referenced Universal. That's how I think Universal Music Group, which spun out of Vivendi, which you referenced earlier, which is a French utility, French water company.

And then there's also Warner. Those are, I think, referred to as music royalty companies, which they make money by any time it's played. And royalty companies in the investment community are viewed as high quality businesses because they don't have a lot of capital.

You don't have to spend that much money. They're very high profit margins, but they always have to reinvest in the catalog. And that's something you see from royalty music world to gold royalty companies. The profit margins come from always having to reinvest. Okay. And then the royalty companies, and then also a company everyone's familiar with, Spotify. I'm just throwing a lot at you, but how did you get involved in the music world, the business of investing in music? And what are your rough thoughts on the companies we just mentioned? I just mentioned. Sure, sure. So,

The companies you mentioned, I might just add one to the list. That's all right. I just add Sony as well, because this is a very large conglomerate. But just to say that within the publishing side, and I could maybe briefly say what the difference is between recorded music, but they're the largest owner of the publishing industry.

So maybe I'll just say something briefly about the financial aspect of this. It's a bit wonky, but it's hard to understand any of this stuff without understanding this. You look at Spotify, right? Maybe not as recently, but let's say years ago. Sales minus some big number, then it's no profits. Hmm. So an astute observer of this might say, well, who gets all that stuff? Who do they just pay all that money to?

Well, that's the labels. That's Universal, that's Sony, and that's Warner for the most part. And when you look at music, there are two parts of it. And then we all get into more some anecdotal stuff. But it's worth saying out loud. I think musicians need to be more aware of this as well. Is that when you, let's say, Jack, you and I just write a song. Like right here, right now, we just go for it and it's super catchy.

What it has to do is a little something about the yield curve. You throw in some macro, I throw in a little micro, and we're jamming here. If we write a song right here, right now, we created a copyright. David, by the way, do you know the song? Right here, right now. You know that song? Oh, yeah. Yeah, that's good. You just violated a copyright. I'm just kidding. Wait for your cease and desist. Probably Sony owns it. Anyway. We'll call your new album Cease and Desist.

Anyway, so, but what happens is that the copy is created out of thin air through an artistic endeavor. Now that copyright is, let's say, for the composition, and that means the lyrics and the music, roughly speaking. Okay? Now let's say you and I decide to take our jam that we just came up with here, and we go to Universal or one of the big labels, let's just say, and we say, we want to record this. They say, guys, you know what? We think you're really cool, but we think this professional artist

Female vocalists will do a better job. And I'm like, Jack, I think they might be right. And you go, David, I think they're right. So so we say, OK, that's fine. Now, what's happened here is that when there's a payout, Universal, let's say, owns the recording. So they own that hit song as it's played.

Every time there is a payout, though, the copyright owner who wrote the song, which could be different than the recorded. So let's say one person records it. Let's say we get, you know, well, I just I always I'm just being self-aware that I'm not just talking like in an office. It's like a podcast. So I'm scared of using any names like Miley Cyrus or who's who's that? Who's the biggest female singer right now? Taylor Swift.

Oh, yeah. I heard of her. Yeah. Yeah. Yeah. Dua Lipa. Yeah. So let's go Taylor Swift. Right. People know who she is. So Taylor Swift records it and she's super cool and all this stuff. I don't know what her arrangement is with the labels, but let's just say it's recorded. That recording is owned by is called the recorded music owned by, let's say, Universal or Warner or whatnot. That is not the copyright. So there are two different assets.

And every time it's played, you and I, we get a little money because we're the writers, we're the composers of it. Now, if somebody else records the song, we could do a recording. We are the copyright owners.

So what happens is that the assets in music, it's almost like a CDO back in the day. There's a lot of mixture. So you might have a situation where the song that everybody knows, here's a calm. I'm trying to think of something that you take Bob Dylan and,

Jimi Hendrix, okay? All along the Watchtower, okay? When I was a kid, it was a big song. So that was, I believe it was Bob Dylan, excuse me if I have this incorrectly, but I think it was Bob Dylan. Jimi Hendrix had a performance that really was quite a famous performance. Let's just say the copyright isn't owned by Dylan, but if Jimi then sells it to the Universal, the recorded is owned by Universal. So what tends to happen is that

When you look at the assets of these different companies, there is publishing, which is the copyrights. So Sony tries to buy a lot of the publishing and that's very, that's more maybe annuity-like. And then you have the recorded song, which they might also own too, by the way. And that's like on Spotify.

So the reason I mentioned all this stuff is that I mentioned in passing the swiping of the Tinders or whatever, that sort of thing. We have a format for music now, which is streaming. 12 years ago, I'm not sure if that was a given that would definitely be the dominant form. We had Apple and you were like buying songs and downloading them. For 99 cents.

Yeah. And it's like, how do I remember thinking to myself, how do I get room? My, my, I, my, however large memory and lamb research, it's like memory was expensive. So it was very different. Now in the future, I don't know what the format is going to be, but what I can tell you is that the providers of the IP who own the portfolios of songs are

They are the strategic important ones. Now, Spotify has done, I think, from what I understand, a very good job of monetizing it for everybody. But it wasn't clear that was the case. Perhaps one of the greatest private equity investments of all time is not well known, but Len Blavatnik.

made perhaps one of the most astute investments ever in maybe give or take 2010 buying Warner Music for say a couple billion dollars, maybe a billion dollars of debt. I don't know the exact financials. Taking out dividends for the last 10 years and now it's publicly traded. This was exceptional. But did anybody know how you would monetize it? Unclear. So nowadays, I think what's happening is that we take it for granted or I hear investors talk about say Universal and

I may have sent you a video, Jack, of a DJ concert where like people were dancing and there was like nobody playing music because the DJ walked off and it was pretty intense. Is that like we just don't we need when you have an intellectual property asset, you have to reinvest in it. And I'm getting somewhere with this. One, two, three, Bad Bunny. Is my saying that right? Bad Bunny. OK, so Bad Bunny. He's a very popular artist.

pop R&B Latin singer, but he has bangers. I was in, where was I? In Copenhagen and I will go past this nightclub and they're all singing Bad Bunny. It's amazing. And what I'm getting to is that when you have an intellectual property asset, you have to reinvest in that asset, even if you're not seeing the returns immediately. And what that used to be is what would be called artists and repertoire, A&R. So it's like, oh yeah, that person, we're going to sign them.

There was a golden period up until about two years ago where you knew who was successful because their Instagrams and their other things already demonstrated the popularity. So it was a lower risk way of signing an artist and getting them into your catalog. Here's the thing. There is a bit of a terminal value risk. And I'm not negative on these companies and I don't own any of them now. And I would probably be very happy to buy some of them at certain prices. However,

Terminal value. What do I mean by that? Well, how long do these cash flows have to go on for? And if you're, let's say, universal, as a for instance, it could be any of them. Let's say you have 30% of recorded music. It's got to be worth a lot. Can you imagine, Jack? Something in the order of magnitude of 30% of all recorded music? It's crazy.

But here's the thing. You need to always sign new artists to keep that current because you don't always really know. Now, here's how Bad Bunny connects. You have 50% of all the music in 1980 and you never reinvested. This year, you probably have 1% of music because, I mean, you know, there are some artists all on the watchtower. People still listen to that. A lot of Beatles, people still listen to that, you know.

Running Up That Hill by Kate Bush, the 1980s. People listened to that, but there are a lot of artists, tons of artists who were very popular in the 1980s that not a lot of people listen to now. And that's just how it is. That's how it is. And the only game in town really used to always be these record labels. Now, let's bring this back to Bad Bunny.

You now have a change where it's unclear how to break an artist. So for instance, what does it mean to break an artist, make them big? You put them on, was it Jimmy Kimmel or one of these things you, there's assets that the large labels have to essentially create awareness of the artist because it could be the greatest song in the world. But if you've never heard it, like there's so much available online and you're competing for time now, and maybe I'm just

This is just speculating here. A couple of years ago, give or take, maybe it was a little COVID, you start looking at channels like Instagram, YouTube, TikTok as well. And what starts to occur is you could invest, let's say you have a new deal for an artist. Maybe you're paid $100,000, which in the music world is like a trillion dollars. The people who do this are real artists and they're not in it for the money. If they are, there's a real mistake that was made early on in terms of their understanding.

But anyway, most of the money will be paid on marketing just to create awareness of the song.

Okay. Enter Bad Bunny and Rimas. Don't know much about Rimas, but there's an entity that essentially signed Bad Bunny, but they basically own part of Bad Bunny. They're not one of the big three. Maybe by now, one of the big three is bought a minority of them. And obviously that's something somebody should do. I hope I'm not speaking out of turn saying these things, but anyway, my, my, my outsider's take of who knows, but the issue is this, you could for $500,000, maybe you

do some clever YouTube ads, some very clever Instagram stuff, and suddenly you create a top 10 global artist that may not be signed by any of the majors. This is scary. This is scary stuff if you're a major because you need to make sure that you are owning the future in your catalog. And it's all well and good to overpay, well, pay for, let's say, a Bob Dylan catalog or Fleetwood Mac. I think it's actually super cool how they now

bring it to the next generation via a more contemporary artist like the Dua Lipa. However, like you do need to get new artists. And the more that the long tail of those new artists are essentially able to, for one-tenth the cost, create marketing of global scale, that creates a massive conflict. And Spotify is in the middle on this because I could tell you that as a hobby,

I write and sing songs, actually. Pretty odd. Five years ago, if there's an office birthday cake, I'd be like, happy birthday. And through some happenstance, I ended up writing a song just to see how it worked. And so I've been through that process now several times. And I can tell you that

if nobody's heard it it doesn't matter but it doesn't cost a lot to be able if you wanted to which i had not done i don't think it's necessarily a something that i would want to spend spend any time doing because it's it but it's available to you that you could actually do youtube ads other things like that and then people become aware of your song and let's say you're not signed what does spotify do because they have they have the new version of the of the disc jockey

Like this is like back in the day, there'd be like, we're going to play a new artist. It's a young man named Elvis Presley. Everybody, this is Elvis. It's like there'll be these famous radio shows and getting your song played is that's how people can know about you. Maybe before you were signed, right? So the new version of that is like the playlist on, let's say, Spotify. So imagine back to Bad Bunny. Imagine you're at a stage where not signed.

And by the way, maybe it's signed now, so maybe I'm out of date. But there was a while where it was going on, and if it hasn't been done yet, it should be done. If I'm at one of these companies, somebody's got to do it. And suddenly, Spotify's like, well, this is literally one of the most popular artists, but I have to do well

For my labels, because if Universal pulls a catalog of Warner's, Sony, you're done on Spotify. You need access to, I don't know what the market shares are off the top of my head. I'll say Warner's 16%, maybe Sony's 20, and I'll say Warner's, sorry, Universal's 30, but that's the intellectual property. So bringing this all together now, you think,

Is this intellectual property going to be valuable no matter what? Well, if you start having major global artists who are able to get global without a label, that to me is just a terminal value risk. Now, it's not to say it's a bad business. I would be, if you still told me Universal was at $10, I'd probably be like, well, something probably really crazy happened, but I'm a buyer, all else being equal.

That's a lot of investment advice, but it's going to start with a one for me. But my point is that it takes a while for intellectual property assets that are underinvested in to degrade. And you do need to have that. And now because media look, look at this podcast, right? You will probably get more views on your podcast than any financial TV show. This is the world we're in Mr. Beast with his, with his chocolate and in music, that kind of

displays itself with the capability of people being able to break through without a label. Yes. That needs to be addressed because else the terminal value of these catalogs will just start to become weaker over time. And that's interesting to me because

And I also think that, and then just maybe add one little bit of, this is fun talking about this stuff. I don't know. Hopefully it's not too boring. I just, it's fun to think about because people like AI. I was at a recording studio where this is a famous studio. Shout out to Quad Studios in off Times Square for anything that's more electronic. I'll do, I'll do it there. And RJ Passon, who is,

I used to be a sound engineer for my hobby that I do there. And he actually became quite successful in his own right. I think his monthly is on Spotify over 2 million now. He used to just do like essentially the engineering for me on a song I do. But anyway, what I'm getting to is that if you go over there, you say, oh, AI music, they don't really take it that seriously. And at this point, maybe not because it's just like...

parlor tricks oh drake's voice doing this but bringing it back down to maybe semiconductors jack the blackwell chips and everything else there will be truly creative creative songs where you're like this isn't just a derivative and oh it sounds like this whatever it's actually just new because if you believe that ai for example is

I'm coming to AI now. Sorry, we're on music, but I want to just connect these ideas because it's relevant everywhere. If you want to discover a new vaccine and AI helps you, do you think we could write an original song? Yes, we can. Okay, I can write original songs. I want to pause. So the music royalty companies, and there's a point I really like, is that it's so important that the way the hot artists are discovered today and they blow up and get billions of downloads,

20 years ago, definitely 40 years ago, they had to go on CBS. They had to go on Letterman. They had to go on T and they had to share their songs. And then they sold their their records in a record store. Now, like one of the hottest female artists we haven't talked about. And by hottest, I mean, you know, most popular, most downloaded.

Is Sabrina Carpenter. You know, maybe she's being invited on Stephen Colbert now, but that's not how she got big. She has 44 million followers on Instagram. A year ago, I didn't hear about her. And now everyone knows who she is. She got big probably on TikTok, on Instagram, Universal Music or Sony. They don't know that world at all. They know how to make calls and, okay, we're going to get Elvis on Letterman.

This is a totally new world. Talking about the presidential election, through an old-school media lens, the Kamala Harris campaign did a very good job. They got on MSNBC. They got on CNN. The issue is both of those networks' viewership pales in comparison to one show, Joe Rogan, and Donald Trump got on Joe Rogan. Now, I think Donald Trump probably still would have won if he didn't go on Joe Rogan, but Donald Trump dominated the podcast circuit, and it's just a...

It's just a fact that that's where the eyeballs are. And it's a fact that the music that they, you know, the ears are coming not from, oh, I heard this person on Stephen Colbert. It's just not. You're right on, Jag. Look, this is what's going on. And I think the interesting thing is you could relate it to almost any industry, but certainly on the creative side, it's lower. I could tell you that when I distribute my music,

I'm amazed if an analyst doesn't know this, but hello, analysts who are studying music companies. If you don't know what, say, TuneCore is or DistroKid, you're not doing your job. So go to it and tell your PM. I don't know what those two things are. But you're not a music analyst and you don't have a surly portfolio manager who's going to yell at you if they find out through another source.

Basically, what I'm saying is that TuneCore or DistroKid or any of these things, I use IndieMass, is a way where you can actually take your music

upload it. It gets approved. They do what I call a sort of like a reverse Shazam to make sure there's no copyright infringement. There's a lot of the data stuff and AI, which is good for that. And then you click on, you pay like a hundred dollars for a subscription. And then you, or that's confusing to say subscription, a fee to do this. You click on where you want to distribute it. You're like, oh, I didn't even know that existed. There's like, you know, 70 different avenues, including Spotify, Apple, enter, boom.

It's online. Call your mother. Mom, I think it's online. So I do mine under a pseudonym just for fun because I thought to myself, oh, what if I'm good at this? I'm probably the only potential musician in history ever had that passing thought. I just think to myself, man, I wish I was into music in high school. Maybe I would have had a girlfriend or something. But in seriousness, you can just put it online.

And so the way of physical distribution, that was a legitimate in the past, massive barrier. So how could you make money in like the 70s? Let's say when I speak to some of the old timers, what they do is they'd have a local concert and then they would have a bunch of vinyls that sell in the back.

But nowadays, you would put it online. And I find it very funny when some of the big stars complain about royalties, because I could tell you that for me, when I get a million streams on, say, Spotify, I make about $4,000.

And to me, to make a song is not very expensive. I'm pretty quick about it. It maybe cost me to use the studio. Maybe it's $1,200 or $1,000 max, max. And I have a lot of songs that have over a million streams. So it's like, it's funny. I was telling one of my LPs about it and they said, we're really glad you finally have a hobby. So I was like, thank you. I think I do have five kids, lots of rid of hobby. But, but the point being that

The long tail of musicians, not only do they benefit to the stuff you described, I think you put in a very succinct way. They also can monetize it. So a lot of the bigger stars, they're not getting a lot of money on their streams because they frankly don't even own a lot of the assets. But last year I was checking my account and I said, I think I broke six figures on my royalties. And I'm not even like- In terms of dollar amounts? Maybe like $80,000. $80,000, yeah, $80,000, not 80,000 streams. So how many streams have you had, David, in total?

On which platform? In total, there's a new software program that aggregates your streams. So my aggregated stream would include YouTube, Spotify, but you'd be amazed how many things there are. It's well over 100 million streams. Wow. So David, I think when people see...

You know, hedge fund manager on the side is a musician. Their standard, their expectations are extremely low. Like there are a lot of 27 year old VPs at, you know, Citigroup who like DJ on the weekends. And that's, that's cool.

But I think the best representation of that is probably the CEO of Goldman Sachs, who was a DJ. And I think it's fair to say that his banking accomplishments are higher than his DJ skills. And when Goldman Sachs was under trouble, he actually left music, which I think was a good idea. But I think, David, you actually are a successful musician on the side and no one really knows it. 100 million streams, that's a lot.

I've had 30 million downloads and views for my show, for my Curse Show, as well as my old show, Forward Guidance. People listen. It's a long show. We're over two hours now. So it's about like 10 or 15 million hours. And David, how many followers do you have on Instagram? This shot. So I don't have a personal Instagram, but under the Peter Lake Instagram, it's like maybe 2 million, maybe. Maybe it's like 1.8 million, something like that.

It's enough that I get offers saying, would you like to sponsor this plastic surgery clinic in Geneva for $10,000 if you do one story and one? And I'm just like, no, I don't have time for this. But yeah, it's a good example that if you actually look back,

I never do. I don't play any instruments. We talked about this, Jack. I don't play anything. But there are ways where if you can sing the thing, you could actually hire a session guitarist and make stuff. And music was always like that. If you go back before the gramophone, I'm showing my age here now. Before your time, Jack, before the gramophone, the music was a community thing. You would have people in households on pianos, often in places of worship, community centers, etc.

And it's actually interesting. I love this little factoid that when they first had recorded songs and they also had radio in the early days, they would have a disclaimer like for an earnings call. Just so you know, the music you are about to hear is not being performed as you hear it. It is recorded.

And it's like everybody was worried it was like fraudulent because it's like everybody had such a perspective of if you hear it, it's because somebody's playing it. So there's a whole evolution. There's no reason business even had to be a business at all. Right. So I think that the best singers, the best songwriters for sure, probably singers are probably working at Goldman Sachs. They're probably working at McKinsey.

in the sense that with respect to some outstanding songwriters out there, when you were in school, Jack, did you know any really good writers who were like, they just write very well? Maybe they write poetry or creative writing. A lot of them don't think of themselves, think, I want to go into music. Hopefully they listen to their parents. Even my parents call me once and they're like, Dave, we heard the song. Can somebody else sing it next time? It's like I'm back in high school. I wish that was earlier, but the point being that

There's no mystery to all this stuff. Frankly, with enough research, you can decode an industry like an investor. And also, I believe that a lot of the technology will lower the barrier to entry so that, Jack, you said you're interested in music. I think you should do a song.

It's not as complicated. You have to learn some stuff, but people can create music. It shouldn't be such a big deal. There are a lot of people who want to get into music, and they're focusing on music full-time. They're giving it everything they got, and I'm sure many of them are very talented, but they are getting a few thousand downloads on a song. What is your secret work? You're a hedge fund manager, and then on the side, you're just recording a few things, and you're working alongside people

some very talented people, some very well-known celebrities, and you have 2 million downloads, over 100 million streams. What is your secret? What are you doing that other people don't do it? I don't really give advice. I just give encouragement. But generally speaking, starting a business of any kind, music, whatever it is you're doing, it's just pure work and time. And so these channels, we talked about Rimas and all these things. If you look at any of the podcasts, let's say like a Mr. Beast, and he describes like

trying stuff out seeing what works and i was in the opposite position this is always the irony it feels like market it's like it's it'll do the opposite of your instinct and what you think and all this stuff so for me i was like i want this i've done things to make sure that at first i was self-conscious and embarrassed and i just wanted to make sure it was quiet so i i purposefully would not accept anything that would make it more well known maybe uncomfortable

But so that's don't do that. But it's not necessarily a place where you could make a living very easily right now. It's just not there. And so and there's no reason it should be necessarily right. When I look back at the history of music, so I actually provide a service to some new prospective LPs in Asia where if there is a granddaughter, a niece, a

I offer a free service. You don't even have to invest in the fund and then the capital raise where I will persuade them to not pursue music. So,

If you look me up on Instagram, I do it for free. And the reason is that it's so immensely hard. But if you do want to do it, you would start off by getting one person. First, you have to... Well, I actually have a thing online called Philosophy on Making Music by Peter Lee. Just because I got a bit annoyed because the qualities that will make a successful entrepreneur, a successful podcaster, investor, it will be the not giving up, the pushing and staying alive and...

building up gradually and using time to your advantage. The idea of poof, we all want to believe in the magic, but there is no mystery to it. Behind the output, back to this output, sorry to take it down a few notches in terms of interest level, back to that fresh pet output. What was behind that? So all the things you do, people fixate on the output. Jack, have you ever read a biography of a business person or somebody well-known and it's like,

In 1961, they so-and-so. By 1972, they were already this. And you're like, whoa, what happened? In 10 years, by the way, the Beatles started and finished. Napoleon, from being, let's say, an 18-year-old in Corsica, 15 years later, he was the emperor of France. Big stuff can happen in 10, 15 years. Anyway, so if you want to try to do it, you just do it slow. So how long have you been with Peter Lake? Five years, maybe.

Maybe. Here's the thing. If you're a good writer, you could write songs like easy peasy. So if you have young children, just a very particular cohort, you come up with little songs, brush your teeth, do this. It makes it fun. It's like a song. You learn about the structure of it. And it's actually not that complex.

And everybody could sing reasonably well. It's not a big deal. I actually can't sing reasonably well. I don't think so. I could tell by the timbre of your voice. No, no, no, no, no. No, no, no. It could be done by anybody. I really believe, unless you're a difficult person, which you're not. Because the more well-known you are, the more self-conscious you are. And there's a lot of sexism in this too. Do you see a lot of people being like, oh,

his voice is this. No, his voice isn't like that. All right. But I think there's some sexism, I believe, against women in music. It's implicit, but it's like, people are so judgy of women's voices. Yeah, yeah. But I don't hear that about men as much. If you hear about,

They just go find, you know, people like Bob Dylan has a very gravelly, you know, that is not conventionally beautiful, a beautiful voice, you know? Right. Right. And meanwhile, there are software programs that are available that I can tell you they all use to make their voice sound better. So when I even something like an ocean eyes or whatever, when there's a lead vocal, sometimes there's 20 or 30 recordings of that lead vocal superimposed to create the sense of aura.

Does that make sense? Think of it in Excel. This is how I explain it. Excel spreadsheet, right? Imagine you have one audio sound, right? You see the waves and you sing the exact same thing. Another one, another one, another one. When you combine those together, because they're not all perfectly accurate, right?

You create a thicker line, so to speak, of the sound wave, if that makes sense to you. And that creates this sort of more angelic voice for some female artists. You can't replicate that live. Actually, now you can. But just if on the spot, if you heard them sing it, it would sound like nice, but it wouldn't sound like that recording. So these tools are available to people. And I think it's going to actually democratize music. And I think a lot of people should do music just for fun. And it's a nice thing.

So Peter Lake, people should check that out. You don't need our help, but you know, the few people who will check it out, you know, go from a hundred million streams to a hundred billion and 10 or something. David, you say you're not, it sounds like you're not at these prices currently super bullish on the music royalty companies. Again, that's Warner, Universal Music Group and Sony, although Sony is a million other things.

But I'm looking at the performance of the stocks, and they haven't performed that well either. So maybe most people agree with you. Like Warner Music Group, you referred to it earlier as one of the best private equity deals. That was before. When it IPO'd or IPO'd again, I guess, in 2020, it was at $29.94. It's now at $29.99. So that's a return of 10 basis points over five years. Not so great. So why...

Why are these music royalty companies, which it seems like a lot of smart people think that they're good businesses, why have they not performed that well? I mean, I'm aware of some of the shorter-term news factors, but I don't have anything really negative to say about their business models. I don't know if this is—it just depends on—it goes back to the efficient market.

the market's just a thing. It's going on. People are participating with different goals. These are valuable assets, really valuable. What they're worth, I'm not totally sure. My view on it was more that I don't want to depend too much on the price in terms of believing the format of the music or some of the underinvestment of the catalog. But I

These are still exceptional assets. The question is just what are they worth? And I'm not sure about that question. So, and when, and what's embedded in the price. So I can't, I have to, for me to, and for us, the way we look at it is we don't want it. One of our questions on our question list for investments is does this investment very much depend on a non-market factor or something about consumer tastes or technologies? Because

I pass on Nvidia because I just couldn't make a prediction on whether or not there was Bitcoin mining aspects in gaming. I just, it's a technology bet. I don't have that competency. That's why I'm in the machine side of it, let's say. For stuff like this, it's does the price depend on you assuming that

let's say streaming is the dominant thing. Does this price require them to have all the new stuff as a catalog really being reinvested in? And what there are, there are problematic things, risk factors that I'd have to investigate. So it's not that these are bad businesses or anything like that. I think as a business model, they're actually probably some of the best business models where you have an intellectual property asset that you could just

get ass at turns. And what I like about them is that it doesn't depend on one format because let's just say that streaming is no longer the thing. Here's an interesting example. The largest concert ever in history was in theory on a video game. I believe it was February, February 2019, maybe a DJ marshmallow. It might've been surpassed since then, but there was a concert on Fortnite and the

You had 30, the reason I'm mentioning this one, there may be some bigger ones since then, but there was $30 million of merchandise sold for an eight minute concert, give or take. That's what I was hearing. This was a long time ago. There's no stadium in the world that could even hold the 10 million plus people who are watching. So in a way, it's like there are going to be new formats and new things happening. And you just want to make sure that

As somebody who owns an intellectual property asset, you're investing in that, even if it's not overtly producing a return in the near term, because you kind of always know. It's a bit like venture capital, maybe. So that's all I would say. And take advantage of the new channels. Has Peter Lake worked with, have you done any collaborations? I mean, earlier you were talking about Lil Uzi Vert, Busta Rhymes. Are you doing any collaborations? No, I have never collaborated with them, no. Okay. Okay.

Are you going to collaborate? I've met certain people over time. What happens is that if there's a European earnings call and I'm going to be up all night, I might go to Quad. I haven't gone to studio in a long time. What I did with, I was so self-conscious of this. We actually track my time, make sure it's less than three hours a week. So yeah, I'm not easy to collaborate with because I'm very efficient with what I do. And I actually just put out a thing.

I just called it Demo-itis because it's a bunch of demos I did in my closet when I couldn't sleep a few nights and I put together the songs pretty easy.

Sometimes I would say, Hey, there's some guitarists shout out to actually to Johnny Polonsky and Richard Forrest from Guns and Roses. Those folks are terrific. And they just sent me a piece. I was like, I would do my air guitar, which is like, and they sent me back the real one. I put it up there and boom, boom, boom. It could be like a couple hours. So it's, it's not hard to do. I just hope more people do it because I think with the AI, just like

One of my children was like, Daddy, should I not be a software? Should I not go into programming then because of AI? I'm like, I'm not sure. Because that's the last war, right? And that would have been great 20 years ago, but

We're going to be at a point where the technical piece of, say, music creation or computation, like creating a user interface, all that stuff is going to be pretty easy to generate. Just like here at Marlowe, a lot of the work that we previously would have an analyst do, we have our internal AI system called Mycroft.

And we've been working on that for a year and it's terrific. It's not going to give us the answer, but it will save so many hours of work. So when we have a pipeline meeting where we just go through all our questions, our Mycroft model and now agents will just basically give us that first analysis very rapidly so that I could calibrate quickly and say, yes, this fits the attributes. We should go to the next step of the process. So this is all to say that

Everything is going to get very, very interesting where things that seemed out of touch for people, like making a song or creating a really interesting computer program, it'll be doable through our own minds without the barrier of not playing something. With respect to stuff like Charlie Drayton, some of the great technicians, people who are just incredibly good, for the most part, when I see a musician, whether famous or not, irrelevant, they're often constrained by their instrument.

If they can't work it out on their guitar or the piano, I don't know what they're doing. I can't even understand it. I'm blissfully ignorant. But you could just have a sound in your head.

And soon we're going to come to the point where you can just turn that sound in your head and just sing it out and then make it as a guitar sound and make it this. And you could just create. And that's going to be super cool. Because I think that my little hobby of mine of less than three hours a week, it was just funny. It's like taxes or something like that. Tracking my time. I don't know why I do that still. But the point being that all these things that seem magical and unavailable,

are going to be available. And I think that's going to make it a great world. We're going to have people like Jack Farley making songs. And I can't wait. So I guess, yeah, when people get excited about the royalty company, they like the idea. The ultimate epitome of this is, you know, Warren Buffett and Charlie Munger at the Berkshire annual meeting. I saw a recording of it, obviously, it was many years ago.

Warren Buffett asked, "Charlie, what did you buy that royalty company for? How much money did you spend?" And he said, "$1,000." And he said, "And what did you get per year in a dividend from that royalty company?" And 50 years later, and Charlie Marks said, "$1,000." And that's the dream is you own something, you get a cash flow stream that it goes up over time and it doesn't diminish. But unfortunately, whether it's in the world of gold mining or in the world of music,

demands constant reinvestment in the catalog. And David, the fact that you're Peter Lake, 100 million streams, 2 million followers on Instagram, you got that through three hours a week just being on Instagram. You haven't been on Johnny Carson. You haven't been on any of the big networks. Well, that's a whole nother dynamic. Just to be totally clear. First of all, there's one thing to say is that when it comes to royalty stuff,

There has to be an enduring demand for whatever the thing is, right? So demand can really fall off. At one point, so like with music, I think the catalogs, there is enduring demand, but there has to be a way of monetizing it. So we know what gold is used for. We know people like it as a currency. I don't want to go too into the macro of this.

But nobody doubts that there is a price for it. That price you could look up on Bloomberg, right? Now, when it comes to other things, it's not clear what the price is.

And so I guess just to just to look for a little, maybe just to amplify what you were saying about when it relates to music is that it's not totally clear how valuable certain catalogs will be over time. Whereas other royalty things are given. You could just know that this data set is just going to be important. So I, so as a data company, that's one way to look at it as like an intellectual property. I place it as a business model, that model.

We'll see how the duration is with it. Yeah. And also the other thing about three hours a week, it was, I had a few times where it was like, it's like an average because sometimes I'd have a Sunday and I just spend like an afternoon doing it or whatever. But yeah, it's happenstance and it's not a lucrative thing. I don't recommend it as a vocation. Yeah.

My parents still don't like it. I feel like I'm a kid again. So up until now, Peter Lake has been an anonymous musician. It's your stage name, Dom the Plume. And so why did you want to be anonymous up until now? And why did you feel comfortable revealing, you know, on this podcast, you know, no less that, you know, Peter Lake is David Steinberg?

founder and chief investment officer of Marlowe Partners. Oh, well, I just don't think it's a big deal. Honestly, the only reason why I had an anonymous name is because I was just a bit paranoid. And I frankly don't want people emailing me and stuff like that. When I had these glasses I put on, it's very easy and it's a fun hobby. And I didn't like the idea of a hobby that wasn't cashflow positive. So that sounded pretty. Talk about

Talk about a mood killer for music. Some former partners of mine were like, oh, try tennis, whatever. And I like exercising, but like after I play a game, I don't have anything to show for it the next day. So I like the idea that I could have someone to show for it. And then it's also like a memory thing. It doesn't matter if it's good or bad.

And so I don't think there's anything to reveal. It doesn't really matter. I think what does matter is that catalogs are more important. When you look at your competition, you want to make sure that how do you win? You normally win. It's how do you beat Bobby Fischer? Don't play him in chess. That's for sure. Right. It's like, how do you outtrace Stanley Druckermuller? Don't try. Don't do it.

That's how I think about investing. I think that applies to everything you're doing. So for me, I just write songs, little ditties. I sing them, have a little track behind it. Boom, done. It's fun. It's a nice little thing. My kids are finally a little less embarrassed, which is nice. For them, it was like the stats got better, which I found funny or so consensus. But the point being that it's like this idea, like the self-importance, I just don't think it matters. And

Nobody really cares. You could say who Banksy is. I think I know Banksy is. I'm not going to say it here. It's not my business to say that. But if you ask around, people know in that world. But nobody wants to know. So...

like if people like it's a team of people obviously but but but generally speaking the human psychology is we want to believe in the surreal we want to believe in that now like a magic a great magic trick let's say might have 50 steps and it leads to an outcome that it looks so surreal and so amazing but really if you were to go through the 50 steps you might be like whoa i could probably do that in 40 steps it's like when we have a successful investment here it's

When you see the amount of work we do, it's unbelievable, right? I would urge anybody interested in music, look at a guy named Max Martin. He has more number one songs than anybody on earth. Who's this? Exactly. Max Martin. Max Martin. More number one songs than anybody ever. And you could spend a lot of time on it, but you don't have to. And you can stay invisible. Nobody cares. It's okay. It's not a problem.

And also the other thing to mention is that performance is a whole nother thing. It's kind of like, maybe I'll just tell, maybe I should just, I don't know if you do bathroom breaks. I might want to end with a story, a brief story. But just to finish this off on this whole music stuff is people can get very into the thing of the performance. And that's a whole nother skill set.

All I do is I just write a sort of okay-ish little poem and I sing to sing it like I'm singing a lullaby to my kids and put a drum beat to it. You learn over time and you want a deep sound, which would be a bass and a high sound. You clap your... If you've ever heard a song on Spotify, Jack, and you're like, oh, it didn't really do what I wanted. Has that ever happened to you? You're like, oh, it didn't really... Well, think of what you wanted. That's exactly what I... It's just the same idea, right? So...

this is going to be widely available. I don't think it's a big deal. And the people who make it a big deal, I think they struggle as musicians more because somebody like a Max Martian would say, I don't know this individual. I respect this person immensely. You know, when he would think this is me putting words in his mouth, but he said things to this effect, is that if there's a part of a song that's really catchy and it's, let's say, at the very end,

Why not change it around and see if you could somehow put it in the beginning? You know, and this might be like a real artist might be like, how horrible. What a horrible thing to do. And for me, when I'm doing a song, I'll think once the song is a personal thing, it's like a little poem or something for my kids and whatever. But then when I'm doing the production, it's like it's like scientific, like in the first 10 seconds.

It's not catchy or whatever. People won't listen to it, right? So you have to think that way. And there was a while where that kind of thinking was viewed as incredibly cynical. Even though he wrote these beautiful songs, it was like...

But that's a violation of art. And I think that too much of mediocre stuff is justified in the name of art. You do need to have that intensity about you. If you read about anybody that, you know, Picasso, there are plenty left over time. But Ernest Hemingway had this quote that I think is often misunderstood, where he says every first draft is shit.

And I think that that's misunderstood because if you look at it in context, what he's actually trying to say, I believe, in his writing is you look before what the before and after is he's saying, when you have an idea in your head, what you're trying to do is make it as actually close to what's in your head as possible. And you're not doing that. You're not really working as hard as you need to work.

So whether that's studying a company, if you're not reading that extra thing, if you're not going to the dog show where they're going to be talking about pet food, if you're not thinking, okay, I'm going to change this around. And to do that means you can't be too attached to it. So in the art world, if you apply just rational thought,

I always say to my wife, listen, for 24 hours, great. Don't talk to me. So that's my little thing. But after that, I would chop it off, whatever. As long as I don't spend much time and have fun with it. And that's maybe I'll, I'll end with that. The music thing. And I have a little story about volatility that I was going to share with you. Cause this is an original story, I believe very short. Okay. So it's about this man. I, some, a couple folks in Singapore might know the story, but I, I don't know if they watch podcasts. So,

So the man is extraordinarily wealthy, but he doesn't trust the banks. Okay. So in his house, he has all these gold bars and Rembrandt, Rembrandt. I don't even know if I'm saying that right. I don't think I ever said that out loud. Do you know how to say that, Jack? Rembrandt, Rembrandt. Him, yes. Yeah. They're on the side of all this stuff, but there, and he has this one thing though, is he's very scared of snakes, like snakes.

So he has a security detail, but people wonder why so much security? He's not that well-known. He's extraordinarily wealthy, but

They're actually checking for the snakes. So at night he gets a little thing on his cell phone. Oh, no snakes. So anyway, this old man, every night is a little anxious. Well, one night, unfortunately, this gang of thieves comes in and they wipe him out. We're talking a wipeout. I hope I didn't move my hand the wrong way these days. But wiped out. So everything is gone. And he wakes up. They knocked him out. Anyway, Jack, the story's almost over. He's sitting in a chair.

tied up and the house is empty and he's just sitting there and the police come, everybody comes and they say, sir, I'm so sorry. We're going to try to track him down. He's like, okay. But he's just sort of sitting there and they look at him and they think, what happened to him? Why is he smiling? So they say, sir, do they hurt you? Did they injure you? He goes, no. They put, why are you smiling? He looks around and goes, no snakes.

And I think the problem that I was using, I came up with this story to explain this to somebody that I was a sort of partnership. I'm discussing with somebody in Singapore that when it comes to this is like, oh, this is a real 180 jack. What we're doing right now is that when it comes to all the stuff with markets and all these things, whatever it is you're doing, make sure you're worried about the right thing.

If your goal is to win the war of the quarter of the year, so be it. Do that. But if you're trying to win a different kind of war in my part of the market where it's happening,

you have to not be worried about the wrong things. And the wrong thing, the snake for me would be the volatility. For other folks, it's something else. But this is my story that I use to just try to explain it. Like you got to focus on what really matters. And for me and Marlo, if we finish up the fundraise, billion, whatever, it's inconsequential. What matters is

1 billion to 100 billion. How could you possibly do that? It's by using a process that's about all the stuff I talked about that has to make you not worried about snakes and volatility. Because if I worried about my annual result, how could I possibly do what I'm doing? No way.

So, David, your philosophy of music can be found at PeterLake.com. But when it comes to your investment philosophy, is you like concentrated positions. You embrace volatility. You don't view volatility as a bad thing. You have a long-term time horizon. You're not focused on every quarter. You really get to know the businesses. And you see volatility as an opportunity to invest.

Not always, but you make it sound so easy. But yeah, it's just, yes, it's a concentrated investing and it's a rare thing. And I think it's going to change. I think it's going to change. I think people will start looking at single companies. And I actually really hope that we're involved with some of this with this AI stuff, but

In terms of like tools, I think that like when I look at people learning fundamentals, I don't think you should have to be trained the way I always say trained, the way I learned. I don't go to whatever the filing area to get the first copy of the annual report. Let's say Warren Buffett did when he's at River Graham.

We should have tools to do this. And I really hope that we start seeing more of those kind of Eastman Kodak like stories where the stock market could actually be a place to support businesses. This is like the thing. I like my job. I love it. I love learning. And I don't have some like insecurity where like I'm making the market more efficient or something. I don't I'm OK. But I do think there's something to be said for business people.

They need access to capital. And it should be more than private credit. And I think the stock market should help with that. So I hope that's where it's going to go. David Steinberg of Marlowe Partners, thanks so much for coming on. Thank you, everyone, for watching. A reminder, people could find Monetary Matters not just on YouTube, but on Apple Podcast and Spotify, where they can also find Peter Lake. Thanks again, Peter. Thanks again, David. All right, Jack. You have a good one. You too. One life is turning around.

is turning me upside down past lives can save me from the sad fate the other side one life is turning is turning me upside down past lives can save me from the sad fate turning me are you still awake at night something wrong in another life past lives haunting me somehow is it happening again

Tell me it was true through all those times. Is it even wrong? It's one lie.