Welcome back everyone. Today on the Joseph Carlson Show, Elon Musk released his new chat bot. It's called Grok. Grok is a funny chat bot. It gives you answers, but it does it in a comical way. It's not so uptight like the other chat bots. Now, despite Elon Musk's best efforts, Grok was not able to distract users from Open AI Day. Open AI Day with Sam Altman happened Monday and it's all anyone can talk about. The reason why is because it was a pretty incredible meeting.
This was no normal tech company giving a quarterly update. This is one of the most innovative, if not the most innovative company in the world right now. Giving an incredible update. Sam Altman took a simplistic dark stage similar to the early Apple events, and he went by step by step on how they're improving this product. And there's six different major components that were improved.
These improvements are major iterations on the power of its AI, and this has major implications on different companies. For example, part of this is what they call the AI startup Doomsday. Part of the feature release here is going to destroy a lot of startup companies. This has major implications on agents in the agent business. They announced an entire App Store and this is overall being referred to as the Extinction
event for other companies. In fact, after this event, it became clear that Open AI is so far ahead of the competition that it may really be running away with the AI game still be diving in and breaking down The key takeaways of this meeting, the ownership stake that Microsoft has and how they stand a benefit and implications. This has on the stock because Microsoft is having one of its best days ever. Now, of course, we have some other news to get to.
Vegas is having its Formula One event right around the corner, but it's not all good news for Vegas. In fact, a lot of people are now saying that it's no longer a good time to visit Vegas in October and November leading up to the event because of how much disruption it causes. There is construction everywhere across the Strip. So as an investor on the Vegas Strip, I want to see how destructive this is and what it really means for the future of
this event. And then we also have the elephant in the room, the S&P 500, the NASDAQ are up again for the longest winning streak since November 2021. The market continues to rise, but it's typically rising around 7 different companies. In fact, if you were to remove the Magnificent 7 from the index, it would be completely flat this year. So what does this mean for investors when such a small amount of companies make up for
so much gains? So obviously we have a lot to get to. Let's go ahead and start off with a portfolio update. What you're looking at is the passive income portfolio. It is my primary and my personal investment account. The reason that I show it so publicly, I show the gains and the losses week by week, completely transparent, is to offer level of transparency and insight that other Youtubers won't. When you look at your portfolio and the returns of it, it's easy
to keep that secret. Because if you keep it secret and you do poorly, you can still pretend like you're a guru, Like you know everything. Like you know exactly what you're doing when you put it all out there, both the gains and the losses, and your all time performance since the very beginning. That means that you have accountability, and accountability makes things a lot more real. So the reason that I do this is both for transparency and accountability.
It's to give you an inside look at real investing. If you value this level of transparency and want to follow along for continued updates, you can do so by subscribing to the channel, liking the video, and ringing the bell below the video. That'll give you a notification every time I do an update. Now my investing strategy hasn't changed. I'm still buying exceedingly high quality companies and investing in concentrated positions and in total I only have 11 holdings.
So every single one of those eleven are important. I review every single one of them every single week. Now you may notice something a little bit different about this portfolio. There's a new holding down here called SCOV. This is an ETF full of short term U.S. Treasuries zero to three month treasury bills. Now I have around $15,600 in this right now. I don't call it invested because this is not an investment. I'm not putting my money here and considering it an investment.
This is a cash position and that's how it should be viewed. S Gov is an ETF of short term treasuries, which means that you have really no risk. In fact, you have the same amount of risk that you do with cash. It's short term, so there's no duration risk, there's no interest rate risk and it's U.S. government, so there's no repayment risk on both sides. You really have no risk with
this. It is a cash position and in fact when companies have cash or cash equivalents, this is what they refer to as cash equivalents, short term treasuries. Now the reason that I move my cash out of the brokerage cash balance into that holding was because when it sits right here, it just doesn't earn any interest and that's a bummer. 0% interest is not fun down here. This earns around 5.5% interest right now. So I'm actually making something with my cash now. 5% returns in
my opinion is horrible. That's not a good return. It's not something to aspire to. We shouldn't be proud of a 5% return, but it's still better than nothing. So as long as I have cash waiting to be put into a company, I'd rather have it earn at least 5% over nothing. So again, I don't view this as an investment. I don't view it as a holding. This is my cash position. Other than that, My Portfolio has remained largely the same.
I have the same investments, I've been buying more of them and I've watched these companies compound to all new highs. And one of the companies that I've continued to hold, I've not sold a share is Microsoft. This one is now a $15,000 gain position, $58,000 total. This is a stock that's now up
50% year to date. Now even though it's a hold, it continues to grow as part of My Portfolio because of the gains, the company's making up a bigger and bigger percentage of my overall portfolio, outperforming a lot of my other companies. And I like to keep up with what's going on with this company. One of the biggest extensions of Microsoft right now is it's AI endeavours. And there's a lot of excitement around AI.
One of the neat developments in the world of AI this week was Elon Musk finally announcing his new AI chat bot. We've been knowing that Elon Musk wanted to get into this category. I think he was a bit jealous. He was a little Jelly that you had Open AI all of a sudden partner with Microsoft. After all, he helped found Open AI, so seeing that be taken by Microsoft I think was something that he didn't love to see. And then seeing Google with Bard and all these other AI companies.
I don't think Elon Musk is the type of person that likes seeing all the attention go away from him with other companies that have cool technology. So I think he launched his AI chat bot as part of regaining the supremacy of being the tech guy having the attention. The problem is, he's a bit behind in this game. So what he's done to differentiate his AI chat bot is personality. That's the single biggest differentiating feature, personality. His AI chat bot is sassy.
It's a little bit more crude, in fact, it can be outright vulgar, and it's more sarcastic. It just has more personality all around. And Elon Musk has been highlighting the personality of his AI bot on X in fact, right, Harry says. How can I tell if I have crabs? The AI bot answers the question in a very medical way. Not much personality there with the straightforward question. But then he adds in be more vulgar, and the AI chat bot gives a more vulgar answer to the question.
Something that ChatGPT or Bard won't do, and I have to give credit where credit is due. He's already way behind in the AI game he's trying to play catch up with these chat bots. He's working with less resources, but he's already came out with a chat bot that's pretty good. It has the basic answers you'd want, and he's found a way to make it distinct from the competition, which is something that he desperately needed to do. It's pretty incredible how quickly he got a product out and
made it have a unique offering. So I'm actually really impressed with what he did here, and I think getting this product to market so fast is incredible. Now having said that, Grok is nowhere close to Open AI, and what Sam Altman's trying to do with Open AI has become abundantly clear.
He is taking the first mover's advantage that they have this great initial lead and they're transitioning that into a sustainable competitive advantage, making it virtually impossible for any other AI company to catch up. And we'll go through the details of how they're doing that. The first thing that they're doing is making other startup AI companies irrelevant and putting them out of business.
For instance, Open AI announced changes allowing developers to retrieve proprietary information like domain specific data or product descriptions from outside of its models. That means that they no longer have to convert the information to a format that AI models can understand to store them in vector databases like Pine Cone and Weviate. So now Open AI has the capability of these two AI start-ups, making them irrelevant.
They're also giving the developers access to Open A is top text to speech AI model for less than 20% of the cost of the popular alternative. So this other company that's text to speech is now way more expensive than Open AI. Again this is going to put so much pressure on them. How are they going to compete against a company that's out pricing them? To this extent, Open AI took aim at a list of startups on Y Combinator startup list.
Open AI has better products that match the product set at cheaper prices. This is doomsday for other AI startups. They also took aim at agents and assistants. The assistance API allows developers to build agent like experiences within their applications. This new API takes aim at companies like Langchain that market themselves today is connecting pieces for these AI powered applications so they have yet more companies that they're making irrelevant. Do you see the common thread here?
This is consolidation. This is what happens to winners. They consolidate lots of different companies that end up losing, and that's where you get very top heavy companies. Their scope of products is encompassing basically every other smaller AI company. Their product feature set is growing much faster than other companies, and the advancements in their technology is becoming absurdly powerful right now.
On top of all of that, one of the most significant things they're doing to ensure their competitive advantage to build a Moat around themselves is the App Store. As we know, having an App Store with a lot of developers, it creates a very powerful Moat for a company. This was the initial Moat of Apple. They had the App Store, they had all the developers on it. They made great apps, which enriched the customer experience. We have here open a eyes App
Store moment. Paid users of ChatGPT can now build their own custom chat bots and share them publicly in a GPT store. And they also mentioned there's going to be a revenue sharing program. The other things this company announced are also great features. In fact, one of them is a little bit of a side feature, but it gives customers more incentive to use them over competitors. If you use an AI bot to do anything with your company, you may be concerned about
liability. If that bot generates content that is copyrighted, that could put you in potential legal trouble. So Open AI said that we'll cover the bill if you ever get sued for copyrighted content from our system, anything that happens will cover the bill, and they can do that. They can cover anyone's legal bill because they're backed by a very large company.
Most AI startup companies don't have Microsoft as a backer, and without Microsoft's pocketbook, they can't guarantee that they'll back any copyright claims. So this is another unique advantage that this company has. And then finally, in an effort to grow that App Store and get more customers on their platform, they're out pricing their major competitors specifically. Anthropic. They announced a number of price
cuts across different products. I believe that's going to put a lot of pressure on Anthropic. Overall, the stuff that Sam Altman talked about in the presentation he put on in this meeting was objectively impressive. In fact, I would consider this one of, if not the most innovative presentations I've ever seen. These are truly ground breaking technologies that are going to change the world, being revealed by a single person on a small stage, and it does remind me of the early days of ale.
And this is not just some niche product that tech nerds like. This is going to be added in to virtually everything we do. In less than a year, Open AI has hit 100 million weekly users and over 2 million developers that are currently building on the company's API. This is insanely fast growth. I look at Microsoft and again, I'm just wowed by either their genius or luck in investing in this company.
Whoever had the foresight to make that investment should get a raise at Microsoft. Microsoft invested $10 billion into the company, raising their stake to 49%. So they own roughly half of Open AI. And when this investment was first reported, it got keywords like a buzzy AI tool. Yeah, just a buzzy tool. Something that's exciting but doesn't really have real numbers. Well, not anymore. Open AI is not just a buzzy tool, it's now generating over
$1.3 billion this year already. Now, all of this seems great for Open AI. The company's way ahead of the competition. They have better AI technology than anyone else, and they're building out a substantial Moat to give themselves a competitive advantage. But that's great for them. What does that mean for Microsoft? And what does that mean for us investing in Microsoft? How much can we actually stand to benefit from this relationship?
The partnership started in 2016. That's when Microsoft became first interested and formed a partnership with them. They strengthened it in 2019, and they also, importantly, transitioned Open AI from a nonprofit to a hybrid model where the L called Open AIL would be in charge of commercializing the products developed by Open AI Research Lab. Microsoft has since placed more money in the partnership, enabling them to develop its Microsoft Azure AI, a supercomputing technology.
This is the infrastructure for training ChatGPT models. Microsoft is integrating Open AI's models and technology into basically all of their products. GitHub, Copilot, the entire office suite being everything, all of it's going to have integration with Open AI. So they are using this small company that they made this small investment in to dramatically improve every aspect of their entire offering. They also benefit with a lot of insights and learning.
Simply put, their learning how to build AI supercomputers to support the computation intensive task required by large models. This helps bolster Microsoft ahead of the competition being the leader in AII believe that right now Microsoft is the leader in AI because of this relationship with Open AI, they happen to partner with the best company in the industry. Now there's other important players and I don't want to discount what Google's doing.
I think they're making incredible progress and they've positioned themselves to be highly competitive. But their product set, their future and the number of users in AI is not at the same range of Microsoft. Now when I look at Microsoft as an investment, the company in terms of fundamentals has never been stronger. It is the strongest fundamentally that Microsoft has ever been in its entire history. It has the strongest market position, the most resilient cash flows and its position for
future growth. Everything that you'd want to see with an investment. But in terms of valuation, there's many times where Microsoft is trading at a much better valuation. Right now it's not at a deep discount. And what I look for in investments are high quality stocks that are dislocated. That is what the investor Mark Mahaney refers to as DHQ's dislocated high quality stocks. That's a stock that's high quality, that's gone through a correction, it's gone down
2030%. That is when you buy a very high quality stock. And that's exactly what happened one year ago. If we zoom into one year ago, Microsoft is up 60% over the past year. In fact, it was trading at a price of around 2:20 to 2:30. This was a dislocation. Microsoft had sold off. It had given up a bunch of games. It was going through a huge correction and during this time period, in fact right here at $230 per share, I came out with
a video called I'm Buying hair. Microsoft was at $230 per share and I said it was undervalued at $300.00 per share. And I argued that Microsoft fair value was $350.00 per share. And again, at that time, trading at 2:30. That seemed improbable. It seemed a little crazy, but I believe strongly that it was an incredibly strong fundamental company at a dislocation. So if we're looking for DHQS dislocated, high quality stocks, Microsoft really isn't one right
now. It's a high quality stock, but it's not dislocated from its valuation. It's trading at a very low free cash flow yield, which means that it's at a high valuation. It's trading at a very high PE ratio, again, trading at a high multiple. It's a high quality company, but I don't see any dislocation with the price. So for right now, I'll consider it a hold and look for other opportunities. Now moving on, we have some news about Vici. Vici of course being my only real estate holding.
It's a great holding. It just pays out a dividend every quarter, a really big dividend and they own a lot of real estate on the Vegas Strip. As we know, Vegas is undergoing construction to make way for the Formula One race. This is a highly anticipated race, and conceptually this seems really cool. It's advertised as basically the Formula One cars racing down the street of the Vegas Strip. So you see all these iconic, incredible buildings behind the
cars racing down the street. And this reminds me of those racing games you play at the nickel arcade where you're racing down the street of this super busy city. Because the background looks spectacular. This is what they're doing in real life. Conceptually, this seems awesome, but in all practicality, it's running into a couple of snags. For visitors and locals, the construction has made navigating the city and exercise impatience.
Driving or walking from one resort to another can take much longer than usual. Many visitors are complaining that the construction has ruined views of popular attractions. Now, if this was any other street, maybe in the world except for the Strip, this really wouldn't be that much of a problem. What street is so important that people don't want their views blocked that people don't want
to walk a little bit extra? Well, there's some busy streets in the US, but literally none of them in the entire world are as busy as this trip. This is the most economically productive St. in the entire world, and you're making visitors, People that have spent a lot of money to fly out to Vegas, to have a good time to go to events and conventions, to go party, to do whatever they want to do.
Now they're being obstructed from enjoying themselves on their vacation of the most vacation spot in America. Repeat visitors and locals worry that obstruction will become an annual fall happening, especially since many of the structures built on the race are temporary. Las Vegas and F1 have agreement that they allow the race to happen annually for at least two and as maybe as nine years.
Some regular visitors are rethinking their future travel plans Now. You may think people are just being a little uptight or it can't really be that bad. Let me tell you, I went and visited in person just a month ago and it's bad. Here's a video I took right next to the Bellagio. This is the Bellagio iconic fountains and right there you have construction right on the Bellagio fountains. Now again, this was over a month
in advance of the event. So the Bellagio fountains and the iconic view you get there is obstructed from this event for around 2 1/2 to three months before the event. And this is a three day event. Not only is the view obstructed, but you literally can't even walk in front of the fountains. They blocked off the entire sidewalk, so if you want to go past this part of the strip, you have to walk through the Bellagio making a walk a lot longer than usual.
And as you can see, all the fencing and scaffolding and cranes obstruct all the views of the buildings around. So for months leading up to the event, you have disruption to the visitors. Formula One also actively is blocking the view of anywhere else but a paid seat. And I told you the next part they were going to do was basically like a fence here with a cover over the top because people were saying, oh, people are just going to stand up here and look over lots of this. Is to prevent.
Remember I mentioned they're going to have lights so they reflect off this film so people can't see. The light's going to reflect. You're not going to be able to see out. Well, here's your lights. They're putting up fencing and lights to reflect off of the screen, so you cannot see the race unless you pay. And this of course looks ugly and messy to any visitors that are not here for the event. I think it'll be interesting to see what type of revenue this generates and what they decide
to do going forward. And I would not be surprised to see if Vegas no longer decided to do this because of the massive disruptions. Now moving on, there's an important phenomenon that's been happening in the stock market that I think needs to be pointed out, and that is that a few companies typically make up for the big majority of gains of the entire index. To illustrate this, let's go ahead and take a look at two different ETFs. The first one we have here is the S&P 500.
It's up roughly 15% year to date. Now that's not anything amazing, but that's a pretty good gain for the entire year, 15%. There's nothing wrong with that. Now the S&P 500 is a market cap weighted ETF, meaning the bigger the company and market cap, it has a proportionately higher weighting in the ETF. So the biggest companies like Apple, Microsoft, Tesla, NVIDIA, Amazon, Google, Meta with their big market caps, they make up a big part of this ETF.
The other ETF we'll look at is called the equal weighted S&P 500. This is all the same companies in the S&P 500, but instead of weighting them by market cap and weighting the bigger companies with a bigger weighting, they're all equal weighting and they're rebalanced as such. Now an equal weighting ETF is literally flat on the year. It's down .6% and again the market cap weighted one is up 15%. And the reason why?
It's pretty simple. The handful of large companies have outperformed the other companies in the index in aggregate. Companies like NVIDIA, Apple, Microsoft, Google, Amazon, Tesla, they've all done incredible this year and the rest of the index has not performed as well. Now if we consider why the S&P 500 market cap weighted is doing so well, there's a few things to consider. First of all, the S&P 500 is
difficult to beat. Anyone that says it's easy doesn't really know what they're talking about. It is not easy to beat it on a consistent 3 year rolling basis where you're always outperforming SPY. That is incredibly difficult and I'm sure that you've heard most fund managers who are professionals cannot do that, and I believe there's specific reasons why. One example is the S&P 500 makes different choices than a lot of
value investors. For example, the S&P 500 gives a greater weighting to companies that are doing well, meaning that they feed the winners. They lean into the companies that are outperforming. They buy more of the companies that have momentum, that have progress, that have higher cash flows and higher market cap. They weight these companies in greater proportion value. Investors like to do the
opposite. They look at their winners and they say, you know what, I'm going to sell these companies. I'm going to sell off Microsoft and Apple because these companies have already done so well and they must be overvalued. So value investors sell off their big winners and they reinvest that money into the losers. They buy the companies that are struggling, they buy them in disproportionately high levels. They add more and more to their losers.
They dollar cost average down on losing positions. They do this in the name of buying value, buying the companies that nobody else wants to buy. And while sometimes that can work out all right, if there's a true recovery in the company you're buying, in many cases focusing on the companies that are doing poorly is the opposite, the opposite of what we should be doing. Peter Lynch talks about watering the weeds and trimming the
flowers. That's what a lot of value investors do. They buy the companies that are struggling and they continue to struggle further. Meanwhile, the ETF that's beating all the value investors, outperforming all the hedge fund managers, outperforming everyone else, is buying all the winners, adding more and more to big
winning positions. Now, I'm not suggesting we ignore valuation or we only add the companies that go up, but I am suggesting that value investors have a little introspection with their strategy. When I invest, I am focusing on companies that I believe are strong winners. These are companies that have been strong winners for a long period of time. Because what I've observed is that the S&P 500 is difficult to
beat for a reason. It puts greater emphasis on companies that are doing well, and it sells out of the ones that are doing poorly. If a company starts to underperform, if it starts to have its fundamentals erode, the 500 puts it as a lower and lower weighting. It doesn't double down into a bad company. It doesn't try to get back even with the company.
And if the company does bad enough, the S&P 500 literally sells out of it. It gets rid of it completely and replaces it with a newer, promising company. So I think there's something we can take from this. One of the biggest temptations in investing is to sell out of high quality companies in the name of valuations. Sometimes that can work, but that is not the strategy of the S&P 500, and the S&P 500 has a history of very good returns.
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