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Tag: volatility

Watch for the Bounce in Equities: Brent Kochuba, Spot Gamma (Szn 4, Ep 7)

Brent Kochuba of Spot Gamma joins the podcast to discuss his view that there will likely be an equities rally into the March 18 options expiration.

This podcast was recorded Wednesday afternoon, March 9, 2022, and made available to premium subscribers that same day. Become a premium subscriber today by visiting Contrarian.Supercast.com or our Substack. There are many benefits beyond getting podcasts a few days (or more) early and not having to deal with annoying ads or announcements.

Content Highlights

  • Stocks have been selling off with the Nasdaq now officially in a bear market. But the guest is short-term bullish for reasons that can be traced to market makers hedging counterparty risk (2:39);
  • What about all the uncertainty with Russia-Ukraine? (5:57);
  • Stocks are up since the start of the Russian invasion on Feb. 24, likely because markets were hedged going in due to Fed tightening concerns (9:28);
  • What to make of the March 9 rally? A brief primer on gamma, vanna, and charm aka delta decay (11:02);
  • Similar gamma squeezes caused rallies in the past around options expiry (15:20);
  • Background on the guest (21:31);
  • The hedges investors have put on ahead of the FOMC meeting next week should lead to more risk-off. The lower bound for the S&P 500 is 4,100 (24:36);
  • Recent days have seen a change in options flow: Nvidia (NVDA) and crypto names such as Coinbase (COIN) have benefited along with Amazon (AMZN) and the Financial Select Sector SPDR ETF (XLF) (26:50);
  • Liquidity is important and recent months have seen some of it leave the system (30:06).

More Information on the Guest

Video Highlights

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Szn 4, Ep 6: The ‘Bad Times Are Already Here,’ With Acquirers Funds’ Tobias Carlisle

Tobias Carlisle of Acquirers Funds rejoins the podcast to discuss the stock market’s latest dramatic reversal, this time over Russia’s invasion of Ukraine, and why investors may be a bit too bullish at present…

Content Highlights

  • How to take the huge reversal last week with Russia-Ukraine? (3:11)
  • Every war starts with “the boys will be home by Christmas,” but most tend to drag on longer than anticipated. Sometimes a lot longer… (5:13);
  • Growth stocks have been in correction territory for some time. Are they in a bear market? Probably… (8:52);
  • The interest rate cycle has not started tightening but inflation has the Fed caught between a rock and a hard place (15:53);
  • Energy and energy stocks are still cheap. Then there are defense contractors. Lockheed Martin (LMT) has benefited from Russia-Ukraine and Carlisle is a holder… (21:25);
  • Facebook aka Meta (FB) is also cheap (23:20);
  • Non-fungible tokens, or NFTs: Dead as Disco (30:12);
  • The aim of investing is to survive the bad times and they are “probably here” (37:18).

More From the Guest

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Szn 4, Ep 3: Picking Stocks for the Long Term, With Alex Morris, The Science of Hitting

Alex Morris of The Science of Hitting Investment Research joins the podcast to discuss his views of markets, asset allocation, and a couple of stocks he is particularly bullish on at present. The conversation also includes a discussion of the just-announced buyout of Activision (ATVI) by Microsoft (MSFT).

(The host has a bit of a throat issue and is hoarse for this recording. Apologies for the inconvenience.)

Content Highlights

  • Thinking about asset allocation in a structural manner — with 90% or more invested in equities (3:32);
  • How then to invest the equity portion? The first filter is business quality (7:43);
  • Disney (DIS) has been one of Alex’s favorite stocks for some time with Netflix (NFLX) a more recent favorite (12:26);
  • Background on the guest (22:18);
  • Other portfolio holdings and the Microsoft-Activision (ATVI) deal. Full disclosure: ATVI is/was part of the Contrarian Investor’s portfolio for reasons that are briefly discussed (27:31);
  • Could Facebook (FB) be forced to spin off any of its holdings? (32:20);
  • When to sell a stock (36:18);
  • Lastly a short discussion about our favorite soccer/football team (38:50).

More on the Guest

Highlights from our YouTube Channel

Transcript

Nathaniel E. Baker

Here with Alex Morris, and an individual who needs no introduction for people on Twitter, the science of hitting, you have this website, TheScienceOfHitting.com, a very active substack, I believe one of the most popular sub stacks, actually. And we’ll get into your background later. But for now, I want to talk about your views here. It’s a pretty chaotic time in markets, a lot of volatility, tech stocks have been getting beaten up, bonds are selling off as well now. And it’s just been kind of a difficult time and investors could be forgiven, perhaps for keeping some of their holdings in cash during this time. But you have a contrarian view on this, and you believe that people should be allocating, and you have a specific view on a stock, certain Mickey Mouse stock related to that character that we’ll talk about in a minute. But for starters, let’s talk about this whole allocation thing and why you think it’s a better idea now, to put money, I’m assuming into stocks than to hold it in cash.

Alex Morris

Yeah, well, first of all, thanks for having me. It’s criminal. Who are people who are listening who don’t know, we’re both Tottenham Hotspur fan?

Nathaniel E. Baker

Yeah, let’s not talk about that.

Alex Morris

But thankfully, we don’t even talk about that too much. Because it’s been a little bit of a rough season. And so we’ll talk about something more fun, like the stock market crashing. Yeah, my view on my view on allocations and, and asset allocation broadly, is really been formed by what I saw in the investment advisor world, dealing with individual clients, which I was on the buy side for about a decade, at first at a very small firm, and then at a at a larger firm. And what I saw over time was people basically introduced a lot of unforced errors into their investment process by constantly tinkering with their allocation and, you know, effectively trying to market time, and I saw many people try it, and I saw very few do it successfully. And when you do it successfully, once, there’s always that next question, and then what? So personally, I’ve taken the approach that the most intelligent way for me to approach it is to think about the allocation in structural manner, you know, what’s your ability and willingness to bear risk. For someone like myself who’s younger, and I plan to be a net saver for a long time, it makes sense to me that, you know, that level should probably be somewhere around 90 or 100%. In equities, given the return profile expect over a period of decades relative to the alternatives. So as I think about cash, as part of that, if you told me the baseline is 90 as a starting point, you know, if you want to go 10 points above or below that, I wouldn’t argue with it too much. I think that’s kind of a behavioral thing that some people, it makes them feel good to know that they took, you know, five points off the table, basically. And I don’t think you should beat yourself up too much for that. But when I see people start doing things like saying, the markets heated, I’m going to go to 20 3040 50% Cash, I just think you start to get into a really dangerous place and you and you kind of take your eye off the ball, to be honest, you stop looking at the quality of the businesses and the quality of the investment ideas you can possibly generate, and you start focusing something that in my mind is much more difficult game. So I like to keep the focus on the opportunity cost of whatever the most attractive equity I can find relative to you know, what’s in my portfolio. And I think if you keep it at that framing, you can really eliminate one of the biggest errors that people make as part of the investment process.

Nathaniel E. Baker

Very interesting. Now 90% equities, that’s a pretty aggressive, you know, Jack Bogle, thing was always take your age subtracted by 100, subtracted from 100, put that percentage in bonds, right? And then the rest in equities. So and now, are you talking about this? Would this be for a younger person where they do somebody in their 40s or 50s? Or closer to retirement? Or that?

Alex Morris

I mean, age would only be one part of it too, right? I mean, it also depended on you know, let’s say you have, let’s say you have 100,000 in savings, and you’re and you’re making 200,000 a year, well, then, you know, obviously, your ability to to have a higher equity waiting is obviously influenced by that versus if you’re, you know, have 5 million in savings and you’re only saving 20 grand a year that, you know, that’s obviously a very different setup. So I think it’s, it’s the numbers of your age and your how much you have in savings, how much your income is and then very importantly, you know, what your ability and willingness to Bear risk is, you know, there’s some people who would say, buy a $5 million. Why would I have any inequities, I can just live off that. And that’s one way to think about it in my mind, if you’re, you know, 30 years old, that’s, that’s not the right framing, but I can understand why someone who can’t handle seeing that 5 million mark down to 3 million, they, they should not be aggressively allocated in that query. So, you know, a lot of it’s very personal. And this is this is honestly something where, you know, as I said, I was in the RA world for a while, I personally struggled a lot with the way that they approached a lot of the investment decisions, the actual security selection, things like concentration, etc. But I do think there really is a value added era world from just the basic financial planning and behavioral the ability to make intelligent investment decisions over the course of a cycle. I really think advisors can add value in that regard. So

Nathaniel E. Baker

interesting. Okay. Yeah. I was gonna say, if you’re 30 years old, and a 5 million in cash, you’re either doing something, right. Yeah, we’re very much parents or have inherited a bunch of money. And either way, yeah, yeah, right. Okay, for me, the same here. That’s why I’m assuming most of our listeners, if not all of them, but Okay, so let’s talk about this now. equities. So how would you divide it then? In there? Yeah. Once you Yeah, how would you divide it?

Alex Morris

So I come at it from the framework of thinking. And I’ve written about this a lot, this idea of my first filter, as I think about the investment processes business quality. And, you know, that takes a universe of X number of stocks and cut it down potentially by 90 or 95%, which is a huge, you know, limitation. But I think what I’ve found for me is that those, those are the kind of companies that you really want to own. And I’ve, I’ve been sucked into value traps too many times by taking evaluation first approach. So I think about that remaining five, or 10%. Obviously, I haven’t looked at all of them. And I don’t understand all those businesses, but the ones that I do understand and have looked at, I just think about the opportunity cost of owning those, you know, call it 50 or 100 businesses, maybe I think at any given time, what’s the appropriate allocation weighting amongst these may be 50 businesses that I understand, and everything else is basically off the table. It’s not like, well, you know, levered energy companies are really cheap, maybe I should stick my toe in there. And I just completely remove that from the equation. And then as I think about the weighting, and you know, diversification, I tend to hold fairly large position sizes, I kind of to rule for myself, I won’t buy anything unless we make it 5%. And, you know, my larger holdings are in the call at 15% range. But the businesses that I own, they’re also very different from one another. So in my mind, I think about it and kind of the Charlie Munger framing of you know, if you really owned three, four or five businesses outright, and you were thinking about them from the perspective of being a long term owner, and they didn’t have, you know, they didn’t operate in the same city or, you know, whatever things that make the risk similar, that feels sufficiently diversified to me to own 10 truly different businesses that are well financed, and I think have bright futures.

Nathaniel E. Baker

And these are large caps, you said, like the 10, or 15 bucks, it’s 50 largest large caps in the

Alex Morris

US a lot of a lot of them happen to be right now. And I think that’ll change over time I, as I’ve thought about that, I really think a lot of that was just the world that I was living in, as in the RA world, we had to look at these larger businesses, given the amount of money we were managing. So I think my, my professional, you know, what I was looking at my watch list, and then that just became my personal watch list as well. It just became so much of that mid and large cap stock universe. But I think that’ll change over time now that I’m operating on my own. And as we were saying a minute ago, I don’t have many millions of dollars to worry about. So I can buy things that are pretty small and still get a decent sized position.

Nathaniel E. Baker

What type of stuff would you be looking at them to expand?

Alex Morris

I mean, it always just start with what I can understand and what makes sense to me and where I can really see. You know how the future’s bright like something like good RX I looked at relatively recently, I don’t totally have my arms around the business, but it’s something where I can I can appreciate as I look at that business, how the stakeholder holders really do benefit from what they’re doing, or a company like Spotify, it’s just so clear, as a user that what they do is so unique. There’s a reason why they’ve, you know, go back 10 years when they were a very small player, there’s a reason why they’ve out run these these massive tech companies that they’re competing with, and I think there’s reasons to believe that will continue.

Nathaniel E. Baker

So yeah. And sort of looking at that first and rather than devaluation and trying to time and try and all that.

Alex Morris

Right, so thinking about valuation, but not being you know, I think you can really get tripped up I build models, but I think you can get tripped up being overly focused on the numbers from a modeling perspective and a pay is that 92% of fair value. You know, being being so precise in that thinking. I think it really is a limitation when you when you go too far.

Nathaniel E. Baker

Is there anything you wouldn’t invest in because some of the Things I mean, think about financials, for example, like some of the balance sheet is pretty hard to get through. And who knows. Right? So is there anything that yeah, that you wouldn’t go any stock yesterday?

Alex Morris

There’s probably more than what I would include in the list currently, I think I’ll have, I’ll have to go. Yeah. You know, a period like the financial crisis, I was a very young investor, I was investing them. But I was such a novice that I basically, I wouldn’t even consider it a, you know, experience that I had as a thoughtful, knowledgeable investor. So I think I’ll probably have to go through periods like that to, to make some really painful mistakes to tighten that up a little bit more. But yeah, like, like you’re saying something like financials, it’s always, it’s always difficult to get your arms around exactly what you’re exposed to. And you really have to have confidence in the management team. So it certainly feels more risky than something like, you know, Pepsi or something.

Nathaniel E. Baker

No doubt. All right, that takes us to this idea that you presented that you gave me, Disney. And you are bullish on the stock. And it’s interesting, because I don’t know exactly how the revenues break down. But this is a company that does a lot of the theme parks, and movies, and entertainment, especially in in cinema movies, these are things that have been beaten up with COVID. And along with theme parks. And one would think that that this is kind of a weird thing to be bullish about, which is why I think it’s such a great idea. And not as investment advice, but just as an idea. So yeah, talk to me about that. Are you bullish on Disney?

Alex Morris

So I guess there’s a couple different angles to think about this from maybe let’s start with the parks in the theaters, as you just discussed. Disney’s parks business has been very, very successful over the past, you know, call it 20 plus years and Iger and Eisner both talked about this idea of the parks and the role they play in the pricing power. I think that’s all it’s all well understood. And I think those assets are just so unique, that it’s very, very difficult to replicate what they built, they continue to invest very aggressively expand the parks to make it a better experience. I just I just think that those assets are so well run that it’s inevitable that when we get to something closer to normalcy, and they’ve had a fairly significant recovery, obviously from the from the heart of the pandemic, I just think those assets will continue to perform very well, theaters is interesting, because we’re really seeing a bifurcation in terms of the demographics of people who are coming back to the theaters, you know, your older, older guests are not returning in the way that younger guests are, you know, luckily for Disney to their their key IP is, is focused on those younger demos. So on a on a relative basis versus their peers, they’ll probably shake out better in that regard. But I do think the general trend of theatres having problems is is something that probably will not go away. And I agree, even talked about this recently, which I thought was an interesting point for him to bring up. It’s not something people discuss very often, but he talks about affordability, and the idea of hey, you know, paying $11 A ticket or whatever it may be and take three or four people you know, 40 plus dollars versus subscribing to Netflix or to Disney plus and paying 1015 bucks, depending on what plan you’re on, and having a lot more than just one nights worth of movie watching as a result. So. So I think your the the ability or the attractiveness of the alternatives has improved so much with streaming that I think that probably continues to put pressure on theaters as well. Disney has to navigate. I think you have to start from the view, which I this is where I’m at at least a bit of the best IP in the world. It’s evident in the numbers. You can look at the astounding success that Disney plus had right out of the gates blew every estimate away by a mile. Even if you adjust for Hotstar, which is their acid in India, I think you have to think through can they intelligently figure out how to distribute these app, this IP basically, it is a challenging problem. I think one thing that really helps is that Disney’s exposure to the bundle is mostly a sports related issue. It’s not really entertainment programming, I mean, the Mandalorian, Boba Fett, any of these shows, they’re all going direct to Disney plus, so that it’s not an issue of them figuring out how to distribute to entertainment programming, it’s figuring out how to navigate mostly a sports distribution issue. So I think they can figure that out over time. But as we look at the entertainment side, but all you know, they’re on this path to hundreds of millions of subscribers. I think over time, you’ll see them figure out how to press the ARCU lever. And I think when you when you look at the numbers and really think out over five or 10 years, I think what you’ll find is that the DTC entertainment assets that they have are going to be vastly larger than what they had in the company or pay TV basically US business that they had previously. So that’s kind of the framework that I start from executions a massive part of this bad i think and i i do believe There are reasons to have some concerns on that front. Their ownership stake and and Hulu and Comcast remaining at part of that equation is really is really a problem in my eyes. And it’s something that I think they need to address. Now I don’t, you know, I don’t know how much you know about it, but they have a deal that basically adds in 2024. And I think the idea that they would wait to get that resolved would be a very bad idea. So my view on this space as a whole, is that Netflix and Disney are in such a good spot, that as someone who’s only on Disney in the past and has not on Netflix up to this point, I do wonder more and more if there should be some adjustments to that approach. So you might be hearing some stuff from me to the near future on that thing. Netflix also reports soon. So now that I just said that out loud in public was top of pago 20% When the report will become it’ll be too expensive again.

Nathaniel E. Baker

Nice. Yeah. And they’ve been raising that they’ve raised their prices now what is like 18 bucks

Alex Morris

They’ve raised prices consistently for years now. And it just shows the strength of their business and you know, you know, someone like Disney, I think a real problem they have is Netflix has that mindshare of being where people start their search for tonight’s entertainment. And Disney Plus is a is a narrower product that does not have that same mindshare for nearly as many people. And I think you’ve you can see data from people like Nielsen that pretty clearly shows that the engagement is nowhere near what Netflix has on a per household basis, either. So Disney has to address that. I think that’s because that’s a real problem. And I think the answer for how they address as they consolidate these apps, and they get ownership of Hulu, but these these things take time they take real execution. So we’ll see. And there’s also

Nathaniel E. Baker

the sports piece, you mentioned me, is there any chance they spin off ESPN or anything like that? I mean, that’s been talked about for a while. I mean, that’s kind of been an albatross for them

Alex Morris

You know, there’s there’s a couple different ways to view it. I think there’s, there’s one view where you have this pay TV universe that was, you know, call it 100 million households, or 90 million plus, and it’s declined over time, not very significantly, but it’s at 75 million or so today. Still a very large number of people, obviously, and it’s a huge revenue driver for Disney. They’re trying to figure out now how this translates to direct consumer both on a standalone basis, but also as part of their broader Disney Bondo, which this also gets to that point of being the place where you start when you when you turn on the TV to watch something tonight. I think it could be incredibly valuable as part of that, as part of that bundle. And I think the asset on a relative basis, they’re still very well positioned versus companies like NBC Universal, CBS companies that still spent a ton of money on sports rights as well. Disney’s ability to live through this transition in my mind is a lot clearer. So when it comes to bid when it comes time to bid for that next big deal. I think they’re very well positioned relative to players like that. People have talked about the tech guys coming in and what they might do its, you know, there really isn’t much to show for it yet. I mean, Amazon has Thursday night football, but besides that, there’s there’s really not much. And it’s still so early in terms of this transition. Because sports is you’re watching something live and you need to be able to access it easily. You can’t have a ton of buffering it can’t be very delayed. And I think even for someone like myself, who really enjoys watching sports and really seeks out these DTC services, the experience is still so subpar relative just turning on a TV and turning on CBS. So I think there’s still years to this all being figured out. But if they effectively play their hand, I think they can translate a lot of the strength that they have in linear with ESPN into into something that would be really additive to their to their streaming strategy. Oh,

Nathaniel E. Baker

interesting. Interesting. Yeah. Yeah, this is off topic. But you mentioned that and as big sports fan myself, I recently had the bright idea of unbundling and getting on, you know, YouTube TV, and if you’ve ever watched sports on YouTube TV, you’re probably about five or 10 seconds behind. Yes. Yeah. It’s not. It’s kind of not cool. Especially if you’re testing with your buddies. And they’re like goal and you’re like what? Yeah,

Alex Morris

anyway, exactly. And it’s harder and harder. Just even I mean, you know, with with peacock, we can talk EPL, because you and I both know that. Well, you know, where’s the game even that now they shut down NBC Sports, the games are on USA Network, sometimes they’re on peacock and you get peacock streaming on your TV. Like there’s just a ton of issues still that need to be addressed in all across the value chain basically. Yeah,

Nathaniel E. Baker

yeah. All right, Alex Morris, let’s take a quick break here and come back and ask you a little bit more about yourself, the science of hitting and how you got to be at this stage of your career. But let’s first take a quick break. If you’re a premium subscriber, you do not get the break. And to become a premium subscriber. You can visit the website contrarian pod.substack.com and sign up I believe it starts at 10 bucks a month. free trials are available. But don’t go anywhere. If you are a pm subscriber. We’ll be right back. In fact, we already are.

Nathaniel E. Baker

All right, welcome back. Everybody here with Alex Morris have the science of hitting the science of hitting com website, very active on Twitter. t s o h underscore investing. I know Alex, you started this service a little while ago. But this is the segment of the show where we ask our guests about themselves and how they got to be at this stage of their career. So take us back a little bit and tell us how it all transpired. You touched on it at the outset. But yeah, maybe give us a little more details.

Alex Morris

Sure. So I won’t go back too far to bore everyone. But I started investing basically, when I was in college, I had really had no idea what I was going to do at that point in time. My dad’s a plumber. So I went to school for building construction. It didn’t take too long to realize I didn’t either have the passion for it, I wasn’t smart enough to do things like physics and the like. So I I managed to stumble upon the Berkshire Hathaway, shareholder letters became fascinated by it all. And really haven’t looked back since I started writing online. Around that time, because I was really struggling with how I’m actually gonna get a job. Every everywhere I applied to out of school was, was telling me things like, Well, if you have an MBA or CFA, that’d be great, then we can hire you. But I had to find a way to get from A to B. So I started writing a lot. So when I eventually did get hired in the RNA space, I kept writing, and I eventually had a change of a pseudonym, because I couldn’t write under my real name. So yeah, I kept writing over the course of the next decade, and started to build up a pretty decent following. So as my as my most recent role was kind of coming to an end, I thought, you know, should I go and look for another analyst type position trip? Should I try to start something on my own? Or is there maybe a way to parlay this, the writing and research that I do into a full time gig. So I decided to launch the TSO H Investment Research Service back in April 2021. The idea was basically taking everything I do as an equities analyst and making that available to subscribers. So I send an article every Monday and every other Thursday. And I do deep dives on individual companies that I give updates on the names that are currently in my portfolio, I have some investment philosophy type discussions. And I also decided to try to make a difference, I would just have complete transparency about everything that I do in my portfolio. So the portfolio that I showed people is all of my investable assets outside of a small amount of money and just in a checking account to pay bills. And anytime I make a change, I tell people before I do it, and I update every quarter on position holdings, and returns and all that stuff. So basically, it’s complete transparency. And it’s certainly done better than I expected. People have been very generous with their I know, it’s even just the time is a lot to ask for honestly, like you and I were just discussing a second ago. It’s hard when something’s hitting your inbox once or twice a week. And it takes a while to read. So not only is asking people to pay even I’m just giving their time to read what I have to say and to share their feedback. So it’s been I’m really grateful for the fact that it’s, it’s managed to work out.

Nathaniel E. Baker

Cool. How did you go about building an audience? Before you went on? substack? Are it before you even on Twitter going on on Twitter? So I tweet out for a couple years?

Alex Morris

Yeah, for a long time, I was just just writing on guru focus. And the readership was not very long. In hindsight, it probably wasn’t very large. I think Trevor Scott, who’s on I’m pretty sure it was him who’s on Twitter told me one day he’s like, Dude, you got to make a Twitter account. And I didn’t really know why I would do that. But I decided to do it. And then over time, I realized, Oh, this is the way you know, this is how you can actually meet people who are like minded and how you can kind of share your stuff and get out there. So yeah, I’ve just been plugging along at it for a couple years now. And I have these things, I’ll send these, I’ll just post these charts that I update over time that I think have interesting data. And every once in a while they get shared pretty good. So yeah, it’s just kind of built up over time. I just posted I said, I think I would find interesting.

Nathaniel E. Baker

Very cool, very cool. Yeah. And so then the substack and use it to transition to this full time last year when you when you left your position, and that’s been going okay, so far, and you have the full this year all in on this, right?

Alex Morris

Yeah, I’m all in on it. It’s been you know, it’s funny, it’s spent a ton of obviously research and just my, what was my nine to five, I just do a lot of the same work, obviously, less subscribers, but I’ve had to I’ve had to learn a new muscle in terms of some of the marketing and even you know, basic stuff, like if somebody signs up what the email that they get sent, what does that say? Is it just a generic message? Or do you you know, try to make it useful and helpful for them so, so things that I did not expect to be doing or that I’m not very good at or that I’m uncomfortable with, especially marketing and trying to get my name out there and you know, feels a little bit pushy at time, but it’s the kind of thing you you have to find a way to do it somewhat if you’re if you’re going to get a new audience and potentially subscribe to the service. So it’s been an interesting learning experience. In that regard,

Nathaniel E. Baker

okay, well, let’s talk about it. Can we talk about your portfolio a bit? And how this summoner? Yeah, how this all breaks out other than Disney.

Alex Morris

Some of my bigger holdings are Microsoft and Berkshire, which I’ve owned for a very long time. What else is up there? I own a good sized stake in Spotify now. Pretty good sized stake in Disney. I own Bank of America and Ally financial. So those are those are high dollar general. So those are some of the bigger positions. I can talk about any in particular, it’s been the I don’t know if you saw the news today, Microsoft just announced that they’re trying to acquire Activision for I think it was 70 billion or something like that. Yeah. Pretty big deal. So I have not got my arms around that one yet. But that sounds like a major game changer for their for their gaming strategy.

Nathaniel E. Baker

Yeah that’s a big one. And full disclosure, I’m actually I’m an ATVI. shareholder. Yeah, I got lucky on that one I bought on the dip. You know, when there was all this scandalous stuff, and yeah, but basically, it was also because it was all bad. All this some kind of front page news about the various issues they were having about toxic culture and stuff. I figured that companies don’t actually really care about that they say that they do. But that that will be something that would end investors probably don’t either. But if everything else is running smoothly, which seems to be so that seems to have worked out. But other than that, I don’t know really much about I know there’s a huge breakup fee with this deal, I think $3 billion.

Alex Morris

So yeah, they seem to be pretty competent, they can get this across the finish line, which, you know, I don’t know what’s funny, Microsoft has a different in my mind, at least, maybe you see it differently. I just feel like they’re perceived differently than, I mean, particularly if Facebook but even emotional reward, or Google or an Amazon. They’re just they’re kind of seen in a different light. And I think yeah, I think some of that is well reasoned, actually. But I’m also hugely biased. As a Microsoft shareholder. So yeah, yeah. Interesting company. Because I mean, they were unloved for so long. And then switching to this SAS model, whenever it was that they did it kind of did it. Did it for them or not.

Nathaniel E. Baker

I mean, they had a huge cash Hoard. I guess so. So it’s kind of is a cash? Is it stock? I don’t know the deal.

Alex Morris

it’s an all cash deal is all cash. Okay. Yeah, I didn’t look this morning. But they had they’ve had, I mean, their gross cash is something north of 100. Right? Well, north of 100. I think on a net basis, even they were almost positive, it’s still north of 50. So I mean, the balance sheet is incredibly conservative in the context of their financial results. And, yeah, I guess this is, you know, holding a ton of cash isn’t a ton of fun when you see a company do it for a long, long time. But you know, when something like this comes up, it also gives you the flexibility to do it

Nathaniel E. Baker

Exactly, yeah. So from that seems to make sense, but it may potentially transform the company a little bit. And what are your thoughts on that? Like? Yeah,

Alex Morris

it’s funny because gaming has always been, you know, Xbox is obviously a decent sized business and Microsoft’s gaming strategy has always been in the last couple years has been I think it’s been unique and I think they’re going to an interesting place. There’s a lot execution involved with getting there particularly race related things like Game Pass. But in the context of Microsoft’s businesses it’s also a bit of a sideshow. I mean, it’s it’s it’s not that important, you know what I mean? So So I’ve never followed it too closely, or, or even very well understood what a deal like this could mean for them because I don’t think you can take a property like Call of Duty exclusive tax box. I don’t think that would that would be a very interesting call if they did that. And it would obviously upset a lot of a lot of gamers around the world. So I’m not sure I need to I need to think about it some more and read about it some more. But I You can definitely see obviously with Minecraft was kind of the first deal that that they did under Satya Nadella his leadership in the space and they’ve done additional deals sense. But this is the biggest one by far, obviously. And yeah, it’s a massive opportunity, a massive market. And I think if you know, based on what they’ve done in other spaces, I think Microsoft has shown a real ability to think strategically to find smart deals to do to make their position stronger so they can manage to get this done. It certainly is an attractive asset.

Nathaniel E. Baker

Yeah, yeah. Very interesting. I wonder if there will be any antitrust concerns? Probably not off the top of it? Maybe unless, yeah,

Alex Morris

I don’t know. I mean, just the size alone is enough to I’ve argued frequently. That goes on on Facebook as well. I’ve argued frequently that the idea that they hold a ton of cash just doesn’t make any sense. And because I think they can get I don’t think they could ever get a deal done. That’s, you know, $50 billion, even if it has nothing to do with their core business regulators just won’t let it happen around the world. I don’t think maybe I’m wrong on that. But yeah, Microsoft just a bit different. Hmm.

Nathaniel E. Baker

Very interesting. Do you have any thoughts about it speaking of antitrust about because there’s been some speculation for a long time but Microsoft would be forced to spin off, you know something, or that it would maybe not Microsoft, because they’ve already had they had to deal with Facebook. Right? It might be forced to spin off like WhatsApp or Instagram or something.

Alex Morris

Right? Yeah. I, I don’t know, I’ve never seen anything compelling enough to see what the justification for that would be. You know, I can, I don’t know if you read Ben Thompson’s Ritek. Or he makes the case. He’s a very good thinker in terms of the business and strategy of tech companies. And he makes the case that they should not be allowed to do deals like this going forward, which I completely agree with Facebook should not be allowed to buy something like Instagram or the next version of Instagram. Right. But to go back now and say that a deal they did, you know, a decade ago shouldn’t be undone because it became so successful. I just think there’s a ton of hindsight bias in that conclusion. And I just don’t know if it makes a ton of sense. I don’t I don’t, I don’t know the details of how these things would actually work in practice, but that seems like a really difficult thing to get across the finish line.

Nathaniel E. Baker

What are your thoughts on the metaverse because Facebook, obviously, I mean, that’s literally the name of the company now. And Disney now also people are not Disney. But yeah, Microsoft. It seems like you do have a lot of minutes, maybe Metaverse exposure, especially now with this deal. Yeah. Because our seats here some reports that Microsoft I think somebody said they were they were potentially a big winner for the metaverse show. Yeah. What do you think about that?

Alex Morris

Well, my significant exposure to the metaverse was was not by design. It was not by I somewhat ended up here. I don’t when Disney talks about the metaverse, I’m not quite sure what they envision happening, especially for a company that has historically struggled with gaming in a pretty significant way. So we’ll see what that means. In terms of the metaverse generally, and, you know, Facebook’s massive investments that they just broke out here recently, I, I think it’s really interesting, I think it’s somewhat certain that the world heads in this direction in terms of things being more immersive. And the experience just being more real, for lack of a better term, how we get there, and what that looks like, and how long it takes, it obviously is up in the air. Microsoft hasn’t disclosed any numbers, as far as I know. But Facebook’s disclosure that they’re going to lose 10 billion this year, I think that’s net have probably three or 4 billion in revenue, so call it you know, 13 or 14 billion of investment. And it’s very clear that they’re going to ramp that and you know, that number could be 20 billion in two or three years, I struggle to understand how you can possibly spend that much money at this point in time. But I also think in the context of a business that is, you know, the core business probably is going to earn something like $60 billion this year, on an on a needed basis. And, you know, in Zuckerberg defense, he’s been watching this space very closely for a long, long time. Now, the Oculus deal was, you know, well over five years ago, I think he has a view on where the world is going. I think he’s probably right on where the world is going. And he’s using his position as a founder, CEO to bet the company on, on where he sees things going. So I think it’s hard as a shareholder to really knock him for that I can understand why someone would quibble with the the amount being spent, but we knew it was billions of dollars, that was already apparent. So we’ll see. I’m okay with that as part of as part of the broader investment in Facebook, specifically, just because that was so glaring, the amount of money being spent. The math still works for me at this point. But it’s also something where if the price reached a level where I thought it was starting to price in a lot of a lot of value for something like the metaverse, I just don’t know how to how to think about that there. Yeah.

Nathaniel E. Baker

When would you otherwise, you know, sell a stock.

Alex Morris

You know, I typically, I typically, hopefully, hopefully, I’m selling it because the stock price is just too expensive, not the pieces being broken. I think historically, for me, it’s been more of the latter than the former, it’s just situations where I was wrong, basically about what was going to happen with the business, it’s been pretty infrequent where I just simply paid too high of a price the company not to cover up the ball, but the price was just way too high. So I focused a lot on trying to avoid those value trap type situations, as I talked about the outset, in terms of how I think about price on something like Microsoft, for example, which is, you know, obviously done very well and the markets lot more optimistic about its future than it was five or 10 years ago. I just try to keep a long term view and think about that valuation in a wide range. And I’ve also told myself, not that I take the sell decision completely off the table, but I do remind myself that for a best in class business best in class management, management team very strong balance sheet. That type of situation should demand a similarly rare valuation. So I still quantify it. But I also, you know, give myself, I still keep in mind that you should be very thoughtful about selling out of a fantastic business.

Nathaniel E. Baker

By going back to activation real quick, I was wrong about that they’re 52 week highs, 104 bucks a share, and they were up in the 90s for a while. And so this deal is valued at at the way they say 95. So this is a share. Yeah, yeah. So this is so this, you can make this argument almost said they’re almost getting the Senate at a not a discount, but it’s not the price wise. It’s not a terrible deal. I mean, it’s not a huge premium.

Alex Morris

What’s that? You said it traded down to 60 or so.

Nathaniel E. Baker

So it’s basically a 52. Week low was 50-56. But it was 64. Right before the announcement 65 and 50%. Above the lows, but yeah, relative to where it traded before this all happened. It’s basically at that price are right around there. Or lower. Yeah, I mean, it’s one of the four now if they’re doing 95.

Alex Morris

So I’m sure there’s a lot of people who are bullish on ATVI. I think Microsoft probably paid a pretty, pretty attractive price. Right? So we’ll see. Yeah, it’s obviously an incredible asset in terms of gaming. I mean, there’s no questions are massive. So now what Microsoft Microsoft wants to do with them, I guess is the key question and Satya Nadella in charge I pretty competent, something intelligent.

Nathaniel E. Baker

Yeah. Cool. All right. Let’s switch to Tottenham Hotspur real quick just to keep our our friends and by the way, you are a member of the group that Jamie who is also on the on this podcast a while ago started. But if if there at the North London Derby had taken taken had happened a couple last week. What do you think the final score would have been? Tottenham vs. Arsenal?

Alex Morris

I think we would have one to one. I think okay, that was luck is that would have scored the first goal. Because the only guy is great against thought of it seems like or at least that’s by right. Yeah, that we get I guess Harry Kane would have to put too and I think Sonny still hurt, right. I can’t remember.

Nathaniel E. Baker

What’s your prognosis? Where do we finish this year?

Alex Morris

Um, I don’t know. Hopefully, we can get started top eight, right.

Nathaniel E. Baker

Oh, no, we should be that no, come on. More six now. And then if we put in all the points that we’ve lost, or the you know, the postponements were several we have several games at hand.

Alex Morris

Yeah, yeah. I don’t know. Yeah, we you know, we’re right on that. We’re right on the you might take offense at this, but I think it’s accurate. We’re right on that Westham. We’re right in their league right now. We’re right pretty. So the top class teams were pretty good distance behind. We play a team like Westham, they’re right in our wheelhouse to give more insight so we have we have a little bit of rebuilding to do it seems I don’t know if Harry Kane, is he actually enjoying playing for the team right now as he

Nathaniel E. Baker

says he is now he says yes, on the continent, but who knows?

Alex Morris

Yeah, he doesn’t look too happy at times.

Nathaniel E. Baker

No he doesn’t. Yeah, I guess a lot of it depends on what we do in the transfer window, which is, by the way, rapidly closing. Alright. Anyway, that’s it for Thanks so much, Alex, for joining the podcast. Thank you all for watching or listening. And we look forward to speaking to you again next time.

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