Bank Stock Phobia

What first, a special announcement from Charlie Pellett. Vill Donna is off this week, So this week's mystery co host is Police Morons. Felice is an editor for Bloomberg Markets Live Blog. She's a native of Newark, New Jersey, a graduate of Yale. I'm the founder of Bloomberg News is first bureau in Israel in the nineteen nineties. That's back when Reagan had hair so long he looked like a member of the spin Doctors. Least, that's that is absolutely

true about my hair. I don't believe you started that bureau in the nineties. You must have been a teenager back then. Well, thank you, Mike. But what was that like starting the bureau in Israel? That was that was an exciting time to start a bureau in Israel. That tell us a little bit a bit about that. It was incredibly exciting. Bloomberg News had very few people, and the what was then called the Peace Process was unfolding, and Israel was becoming more of a focus both politically

and for businesses. The high tech boom was yet to come, but it was just starting, and Bloomberg really wanted someone on the ground in Israel, and I was lucky enough to become that person and then to eventually open and build the bureau. That's pretty fast s nating. Yeah, what a pretty historic time, I guess, uh, to be starting

a bureau. But least also, I know something that excites you as much as those glory days is uh bank stocks earnings Week kicking off this week, and Uh, We've got a great, great guest to help us break it down what to expect, what to look for in bank earnings. He is a portfolio manager and chairman of Davis Advisors. His name is Chris Davis. Chris, welcome back to the show.

Thanks so much, Michael. It's good to be here. So we're recording this on Wednesday, just so our listeners know we won't have all the earnings in our hands to to dissect. But we did get JP Morgan's earnings, which are usually a pretty good indication of what to expect. And I'm curious how you look at it from your perspective, because you know, earnings in general can be noisy. The last couple of years with all the you know, the boom and bust from the pandemic, I feel like financials,

especially have a lot of noise in the numbers. You know, JP Morgan had a huge release of loan loss reaeser HERVs UH two point one billion dollars. They had a strong m and a quarter really strong I p O quitter. It seems like the stock market's a little disappointed, though I guess it's it's focusing on the loan growth um. But talk put specifically, Uh, you know about banks in general, what you sort of look through for when you go

through these reports? Uh, given sort of you know, you can have a booming trading quarter for a bank one quarter and then it's back to you know, normal the next quitter, What are sort of the underlying things you look for as a long term buy and whole type of investor. Well, the nature of bank stocks in particular and financial stocks in general is that there is so much noise in any one quarter that it really doesn't matter.

And it's part not just uh because of the long term nature of the businesses, but it's because so much of the earnings reflect estimates. So a nefarious management would have lots of flexibility to goose short term earnings or or a sandbagged them. You see it in insurance companies with reserves, and of course in banks and so on. So what really matters over time as a financial stock investor, and I started our financial funds more than thirty years ago,

it's sort of hard to believe. And what's amazing is that that that fund is is it's not just outperformed the financial index, but it's outperformed the S and P five hundred. Because within financial services there's such a range of business models and positioning, and what we look for in quarterly earnings are signs of culture, signs of culture, because financial services is an industry where culture, a conservative

cultural culture is actually a sustainable competitive advantage. Right when companies have made conservative decisions in the past, it gives them more flexibility in the present, whereas when companies have been aggressive in the past, they end up being really strained in the present. So what you saw in JP Morgan, for example, was a wonderful sign of a conservative culture. Right. It was a company that had overreserved in the past,

they had been too conservative. That is a hallmark of Jamie Diamond that goes back not just you know, one quarter or one year, but goes back all the way to his first and your report, which people should read that he wrote when he became the CEO of Bank one. Uh. It's a culture of we'd rather take the hits up front. We want to be transparent, we'd be conservative. We don't

want to be playing catch up. So with all of the noise around current quarter earnings, the real story is this is that for more than a decade since the financial crisis, everybody was terrified that banks are risky, risky businesses, and people were unable to recognize that the financial crisis wasn't a recession. It was the sort of thing that's

happened once every fifties, sixty years. It was a one time reset and the companies that came through that were safer, more regulated, better capitalized, more conservative than any time in my career. And yet for the next decade, even though these banks built their profits, you know, the bank percentage of SMP earnings has grown for a decade, and yet the market caps as a percentage of earnings have fallen

for a decade. Right, So nobody believed it, right that nobody believed that they somehow they were stronger, that they weren't risky. COVID was the ultimate test, and the banks banking sector as a whole past it with flying colors. They were part of the solution. They were providing liquidity, they were working with customers. They were doing just what banks are supposed to do and by the way, have done for most of the last hundred years, just not

during the depression and not during the financial crisis. Those were one time huge resets. So I think what we've seen here is the beginning of a change in the perception investors have towards this sector. So any noise around the quarter is just going to be noise. The real bottom line is that people are going to recognize these

are fortress institutions. Enormously resilient, enormously well capitalized, enormously profitable, conservative in nature, and therefore dramatically undervalued relative to other sectors where investors have that perception, like utilities or consumer products or something like that. So I think we're gonna have a decade of changing perception and we're only in

the second inning. I think Jamie Diamond would be really happy to hear what you have to say that, Chris, that was an excellent case for bank stock rallies, but also for culture. And you know, I met Jamie when you know, I started my career thirty two years ago. I've invested with him all along the way, from commercial credit to Primerica, Travelers to Travelers ATNA, Traveler Solomon Smith Barney to Travelers Solomon Smith Barney City, you know, uh,

and then to to bank one. Um. He he really embodies what I mean when I talk about culture as a competitive advantage, because there's a whole culture in financial services that can evolve based on one very simple fact, which is you don't know your cost of good sold when you sell your product, and therefore it's an estimate. And therefore, if people want to make their numbers and they want to look good. They can report whatever they can,

and that filters all the way through an organization. And when you have somebody at the top that says we're gonna do things the right way. I understand your business. I'm getting into the weeds on it, it begins to build a culture. You see the same thing at Bertuer Hathaway.

You see the same thing at places like but a One where you have very defined cultures, where the people at the top speak the same language as the people in the trenches making those estimates, and therefore there's a credibility and a thoughtfulness about how they approached the business. And there's a deep understanding at the top that the

CEO must be must be the chief risk officer. Somebody else might have that title, but you're in big trouble if the CEO of a complex bank is not and does not think of him or herself as the chief risk officer and really understanding the nuance of risk, whether it's in derivatives, whether it's in interest rate curves or forward yield curves, or swaps, or or credit concentrations or correlated risks. UH. If you don't have a CEO that understands that, you're you're going to be in a world

of pain sooner or later. And so I love the financial sector as a whole, but it's not a sector I would want to in decks. It's one where you really want to be looking for those companies where cultures a defining advantage, where they're what we call growth stocks in disguise. Lately I would say their utilities in disguise. Uh. It used to be an insult to call a company or utility, but last night, check the utility indexes at

twenty times earnings. The banking indexes at like twelve. And I would much rather own the banks because for one thing, many of them are still under earning based on interest rates. Uh, they have huge excess capital, and their dividend payouts instead of being sixty seventy fifty six as they are in a lot of utilities that diffen in payouts, might be thirty five. So it's it's it's a wonderful time to

be in this sector. But it's again not one that you want to throw a dot, you know, Chris, I think bank earnings are interesting regardless of what you're invested in, just because they give you a good lens into sort of a lot of macro trends, you know, and I wonder, you know, are there any takeaways. Obviously it's early in the season with with only really JP we're gonna look at,

but are there any takeaways from from you? And specifically I wonder, you know, when you think about sort of the health of the corporate and the consumer balance sheet coming out of this recession, both are really strong. You know, a lot of companies raised, you know, money to sort of gird against the downturn. Consumer savings rate went through the roof, so there's a lot of money just sitting on deposit. I mean, does that in a way boat

ill for for the prospects for loan growth? You know, if there's all this cash in people's accounts, is there less of a need to borrow? And is that a risk at all? In your opinion? Oh? Absolutely, I I it's hard to see a lot of evidence of surging UH loan demand. And you know, we can say, okay, well that's a negative. If somebody is barishly inclined, they're

gonna beat that drum. And my feeling is, if you own a company that's generating ten percent of its market cap in distributable capital, every year you're going to get a ten percent returned with zero growth. Now, zero growth companies don't have zero profit growth simply because they don't have loan growth. Right, they could have very slow roan growth, and they could have much better profit growth because spreads begin to widen after a decade of compression, for example,

they could have real earnings growth. And I think maybe the most important topic we should spend some time on is fintech, the risk of fintech to banks, what it means for the big banks, where the risks are. But what I would say is that my first takeaway is that you can have an enormous amount of earnings growth from a reduction in the cost structure that comes from

the intelligent application of technology. Now we could be crass and say, oh, it's closing branches and reducing people with computers and so on, but it's much more elegant than that. You're providing a solution to a client or a customer that is more satisfactory to them. It's more flexible and cheaper to deliver. So I think you could have long term growth from a reduction and a lot of operating expenses, so you have interest rate spreads, you have a reduction

in operating expenses lots of different ways. But when you start at a ten percent earnings yield, you don't need a lot of growth, And I think that's what people are going to begin to internalize. So we'll wait a minute. When I own a utility, I don't have a lot of growth. A lot of consumer products companies are you know, trumpeting if they get four percent growth or three percent growth. I mean, I think the banks have done much better at half the multiple and a willingness to return that

capital to sheruld. So your per share growth is going to be a lot greater even with no loan growth. So you know, with bank investors there's always something to worry about. But if you look at the big category stories of risk, regulatory risk, liquidity risk, interest rate risk, credit risk, regulatory risk, I mean, these are all about as low as we've seen in the last decade or two. So we have a lower risk profile with a gap in the valuation of banks versus the SMP that's just

about as wide as it's ever been. Uh yeah, the bank stocks are up a lot, buts over the earnings because the earnings were so depressed last year. Uh, and so I think that that, you know, if people want to hate on them, they can hate on them, and it doesn't matter because there can their valuation is sort of with an advantage that gives them control of their own destiny. The lower the valuation, the higher the return

on the share repurchase. For example, so banks are worth more at twelve times earnings than they'd be worth it fifteen times earnings. I do think that there are a lot of very interesting macro takeaways in bank earnings. JP Morgan was faced with a bunch of questions, including a heated discussion about inflation, supply chain dynamics, and bank regulations with the FEDS. Randall quarrels. Stepping down, I wondered if

you had any particular thoughts about any of those broader issues. Well, Pulice, it's it's it's a good question. You certainly inflation in the specter of inflation, and whether it's transitory or whether it's is going to be an issue that's going to occupy all investors for the next twenty four months or so.

We just will get more data. I I would saying I am inherently a warrior that invests because I feel that when I manifest all of those worries and I think about what do I want to do, the answer is not whole own cash or bonds with you know, two percent yields and things like that. I want to own businesses that have a proven record of resiliency and

of adapting to different macro economic environments. I would say, without getting overly promotional about banks, that I can imagine a scenario where investors, short term investors, start saying, wait a minute, banks are one of the few sectors where we don't have to worry about supply constraints, Like we don't have to worry about you know, oh my god, they couldn't get parts, so they're gonna have to ship fewer cars or fewer iPhones. Uh, they're gonna have to

cancel flights, or they can't get labor. Right. So I actually can imagine a scenario where people say, wait a minute, banks are kind of in a suite spot where we don't really have to worry about their earnings. The way we suddenly have a lot more unpredictability in the earnings even of companies that had been viewed as very reliable like Apple. Uh, because of some of these supply constraints.

So I actually think that the macro question that they were tussling about, that JP Morgan are going to be with us for a long time. Because it's a parlor game. It's like predicting who's gonna win the Super Bowl. I'm not a sports fan, so I couldn't even name likely contenders. But but what I would say is nobody knows, and yet a lot of time is going to be spent discussing it, and then you know, we'll flip the coin in some time down the road. Somebody's gonna say I

was a genius. I knew all along. Nobody knows, nobody. There's no period in history we can look at for what will be the outcomes of this incredibly aggressive monetary policies. You know, as I say, I'm by nature conservative. I don't like people borrowing beyond their means. I don't like governments spending our grandchildren's money. I don't think it's a sensible idea. It may work out fine, Uh, I don't know.

But what I know is that no matter what, in an uncertain world, I want to own a folio of businesses that can adapt our own businesses that adapted to stagflation, businesses that adapted to recessions, businesses that adapted to you know, the geopolitical chaos of the sixties and seventies. Uh. So, resiliency and adaptability is I think what should be at top of mind for investors and as they start thinking of those characteristics. Of course they're wonderful businesses like applied

Materials or Intel or uh. But businesses like Raytheon. It's hard to imagine a world where Raytheon doesn't have a lot of value. I don't I don't care if they're if we're buying you know, missile defense systems and seashells or bitcoin or uh. There's huge value for what they sell, and it is going to be resilient as a business model. And I think what people are coming to realize is really the same as true of banks. You know, a lot of our banks are in their second century, some

of them are even in their third entry. Uh, basically providing the same service, selling the same product, with the same business model. You'd be hard pressed to name any other companies with that record of longevity, and yet here they are is the cheapest sector in the SMP fun you know, Chris as far as predicting the Super Bowl, I will predict it probably won't be the Jets, I'll go that far as tell you. But but I wanted to, you know, get back to as you said, Uh, you

know your funds are actively managed. You you don't believe, uh, financials is a space the place to get passive. I did notice a Capital One a big holding in both the David's Financial Fund and the h and the Davis New York Venture Fund, which I believe is your your biggest fund right um and I know part of that is obviously just because Capital One has been appreciating in value,

like outperforming everything in the space. You know, on the other hand, you're clearly not reducing the steak or removing it as your as your top weight. So so what's it doing so well for such hot performance and what what has you comfortable enough about that company to to keep it with a pretty heavy weight in both funds. It's funny I spent a day with the co founder who has since retired of Capital One just last week.

Um well, Capital one is one of the only major banks in the US that's still run by the founder. Now we talked early about culture, but what's really extraordinary about Capital One is from its very beginning, Capital one was not a bank. It was a data science company. It always has been. It had no branches, it had no customers, and yet somehow managed to become one of the largest credit card companies in the country. No branches,

no customers. How well they used data, They target marketed, They customized offers to consumers based on characteristics that they were able to surmise about consumers based on their occupation or their zip code. And they would say, you know, why on Earth the banks offer one credit card for all their customers. Some customers are very interested in revolving, some are very interested in points, some are very interested

in prestige or affinity. People have all different considerations, and yet every bank had a one size fits all credit card. So Rich Fairbanks and Nigel Morris come along. Uh. They launched Capital when I was early in my career. Uh. They were a division of another bank. Then they were spun out. Uh, and they were still a data science company when they started buying buying branches. Uh. Not all

that long ago relative to their history. And they did it because they realized that core funding had a huge advantage. They had relied in their historic history on securitizations to finance growth. But what they learned in some of the securitization crises is that that market can be fickle, so they went the other way. They went into branches. So we think of Capital One, A lot of consumers think of Capital One because they see the the bank branch

on the corner. But that's an accident of history. It is fundamentally a data science company. And the analogy I would give you as Progressive in auto insurance, right, Progressive sells a commodity product that they have to file for the rates in states by and large historically through the

same distribution channel as many other companies. In fact, I'll pick on one which was always a very high quality company, Ohio Casualty, because they were headquartered just about in the same town, selling a lot of the same products through the same distribution channels, and over a twenty year period, one compounded at one compounded at six is that possible? Well? Culture culture, and it wasn't just a culture of conservatism.

It was a culture of innovation and using data and using science and how can we predict what is the likelihood of you having a car accident based on the type of car, your occupation, or your credit or all sorts of other things, and how can we give you a better deal, how can we customize So we're a

data rich company. First, that's Capital One. So when I talked about all of the traditional risks facing banks, liquidity, credit regulation, UH, interest rates UH and so on, UH, I would say all of those risks are as low as I've seen in most of my career, but certainly in the last fifteen years. The one risk that is

the most important risk is disruption. It's technological disruption. So as you invest and you think about risk and reward, part of Capital ones model is that they are a very profitable institution because they are wonderful at generating high yielding assets in a way that is difficult for others to imitate. And they have low cost core funds, so they have a good core business. But then that's the

opportunity the risk. If banks have the biggest risk is financial UH is technological disruption, then I would say among the major banks, Capital one is one of the lowest because it's baked into their DNA to innovative. If they said tomorrow, you know what, we're gonna have no branches. We're gonna be entirely in the Internet bank, uh Internet, using media and data to market to come. That would

be perfectly consistent with their culture. So that mindset, I think is another reason that I think Capital One is a good one. Now, in full disclosure, we have trimmed some Capital One in part because while it's always been a core holding, we bought so much during the COVID crisis that the appreciation. We think it's important to run a diversified portfolio. You know, one of the dangers about the Financial Index that people don't realize is the index

is like forty percent in like four stocks. People when they buy an index think, well, at least I'm getting diversification. You're not. In the financial index. You're getting more concentration than in our financial sector fund. So I think that's a little too much risk from my blood. So we do tend to tamp things back as as they get very large, and we have a little bit of Capital One, although, as I say, still being run by the founder with that mindset is an extraordinary band. Plus they have a

pretty funny TV commercials. I'll give them that, Chris, I don't know if that plays in your thinking. You know those data scientists. What's impressive is they didn't vet the commercials for their humor. They vetted them based on this is what works for and that they're very much inn a b testing mindset. I know a number of people even in the mid level ranks there, and they are

math geeks and analytically inclined. It's a very different thing than the cigar chomping you know, three piece shuit banker uh mindset. So it is a very different culture. Please, you got one more good question for Chris before we go to crazy things. Sure, your emphasis on fintech reminded me that Jamie Diamond had said the bank was willing

to spend whatever it takes to compete. Do you think that JP Morgan can actually be more agile, more nimble, throw more money at fintech and really uh dominate or do you see a different kind of disruptor coming to really shift the whole financial system, including with defy and other sorts of technologies. Well, it's the right area of focus on police. I think it is amazing though, to think about the amount of disruption that has been thrown

at the banking sector in the last thirty or forty years. Now, let me just give you a good example. The money market fund was invented. Now, if you can imagine a more dangerous innovation, then the money market fund to the banking sector. Wait a minute, I can offer customers higher interest rates with no risk because I'm only in government bonds. I don't need any branches. All of a sudden, you would have thought a vast sucking sound out of the

banking sector. Of all of their liabilities, all of their deposits. Now you know these you know, cigar chomping uh, pizza eating bulligans at Solomon Brothers. You know, gin up the mortgage backed security, right, and so all of a sudden you've got the mortgage backed security. Asset back securities are invented. Well, there go all my assets. Another huge innovation, you know Mike Milken and Bosky, you know they dream up the high yield market. You know, there goes a lot of

my corporate business. You know. Then you get the A T M. I don't even need branches. Customers can come anywhere, and non bank financials you know, uh G E and so on. So you've had a massive amount uh the credit card banks we mentioned Capital One, you know these from the standing start. These three or four companies take the entire credit card industry, and yet here is the banking sector earning more money than it ever has in the past, and by the way, with as big or

a bigger market ship. So they have been amazing at sucking innovation into their core. Now they do it partly by adapting. And I think Jamie is one of the best examples of somebody who has his eyes over. Brian moynihan has been amazingly masterful Bank American rolling out their digital products. Venmo is a great technology. We all love Venmo. Zel comes along, well, you know, in technology, we think, oh it should be winner take all. Venmo should win.

Zell's bigger than Venmo today, right, So banking has not been that sort of winner take all Google model. They've been amazing. Now, if you wanted to be cynical, you'd say they also use regulation, right. Certainly, we saw that in China with aunt financial Right, regulators get a little touchy when the financial system gets too unregulated and people start going cowboy. We saw it ad ap peer to

peer lending, for example. So there have been a lot of cases in financial services history where that innovation is absorbed in I would say the biggest thing that banks UH that positions banks well for withstanding the onslaught of fintech, is this. In the classic innovator's dilemma, the large, lumbering incumbent faces some innovation, and the trouble is to compete, they have to screw up their existing business, and they don't want to do that. That's why it's called the

innovator's dilemma. What do I do if I'd have to cut my prices, I'd have to change. In the case of banking and Bank America, there's no institution that can demonstrate this better than Bank America. Pulling their customers onto a digital experience is significantly reduces costs and enhances the customer experience and enhances customer stickiness, which reduces UH turn which further reduces costs. So unlike the typical innovator's dilemma,

the incumbents are economically incentivized to jump right into the innovation. Meanwhile, when I look at the valuation of a lot of fintech companies, I think a lot of them are gonna end up selling to banks because there's no way they can earn their way into their valuations. So a lot of them are now providing their services to the banking sector. Uh, they're becoming back engines for them, or they're helping them

work their customer targeting mechanisms. And the banks have been very open to bringing it in, so we're watching it closely. You could see disruption. Schwab obviously lead with a single product of discount brokerage back in the day and has become a financial juggernaut that was a disruptor becoming a blue chip. Uh. It's possible some of these single product companies Chime Rocket, uh, some of the by now, pay later, Affirm and so on, that they'll be able to parlay

that single product focus into a broad customer relationship. Uh. We're gonna watch it closely because it's a big risk. But I will tell you the spending and the effectiveness of the spending by by JP Morgan Chase in Bank America in particular, I think Wells is trying hard to get catch up. Um it has been. Uh, it's been really impressive to see and and the customers are using the products and they're all happy with them, and so I think it is a little overhyped at the moment,

but it is the area to watch. But the incumbent success in the economic models give me some confidence that it's not the classic innovator's dilemma of the incumbents facing a Hobson's choice of to compete, we have to give up our core stand clear of the craziest things we saw in markets this week, Police speaking of big umbering incumbents and new actile disruptors, I think I'm the I'm the big lumbering income incumbent on this podcast, and you're

the new innovative disruptor. So let's see if you can disrupt me with your craziest thing. What's the craziest thing you saw in markets this week? Well, my craziest thing actually parallels that in terms of Jamie Diamond calling bitcoin worthless. I thought that was completely crazy. With bitcoin trading at fifty five dollars, it's clearly not worthless, and there's an enormous infrastructure being built and everybody's using it and thinking about it. So I found that to be quite uh.

The the the lumbering incumbent dilemma right there, that's a that's a good way of saying it. I'm gonna pile on yours your crazy thing, because my my crazy thing is related. And then we'll see what Chris thinks about all this. But Back of England came out with a report pointing out UH cryptocurrency assets are now worth two point three trillion dollars UH, growth of more than two since the

start of the year. That makes them twice as big as the subprime market UH before the financial crisis, which is kind of mind blowing. Um knock on wood. We don't have a similar a similar resolution, but Chris, at least it makes me wonder, what do you think about this whole crypto economy and the potential disruption to centralized finance. Um, is it's something you're you know, you think a lot about or is it a fad? You know? How are you thinking about it? Oh? No, he studied it closely.

And in fact, I've had a long term close friendship of somebody I admire greatly with Bill Miller, going all the way back to the start of my career, and we hosted an event together at the Santa Fe Institute about six years ago on the nature of cryptography and the nature of currency and stores of value and so on. Uh. So it's an area that I'm very familiar with, and I think it's perfectly plausible that these currencies replace gold. Uh.

They digitize gold for example. Um, but I will take the other side just to pick a fight with police, which I think is a dangerous idea, but which is just to say that Jamie could be absolutely right that it's worthless and that it has no intrinsic value. You could say virtually you could say the same about gold. Now gold has some industrial value, but beyond its industrial value, you could argue it has an esthetic value, but it's

really worthless. It has value because values subscribes ascribe to it. So I think Jamie is right that the the value there is no value. It is worthless. Uh, it doesn't have it intrinsic worth. But yet it could be very useful, and it could be useful as a digitized store or value, or it could create a better transaction system. So I think in a sense both can be right. And it's dangerous. When anybody clothes is their mind off. But I think

in this case maybe the word choice matters a little bit. Uh, but I'm not certain so, but I do think it's an area that people should want. Now when people say, oh, how can you own bank in New York? I mean, all of that custody business could be done with blockchain. Do you know what Bank of New York charges for their massive trillions and trillions of dollars of assets under custody, their bonds, stocks, all that stuff. And you know what

they charge for that less than one basis point. So you know, for less than one basis point, I get all their systems, their regulation, their assurance. That's not a big fat disruptible pool. Now. Visa, on the other hand, I think should worry, and I think I think mortgage you know, I think real estate brokers should worry. There are lots of title insurance, so lots of things that have big fat spreads. Uh that probably should be competed away. But you know, in my lifetime I started a commission.

Uh the year I started was ten or twelve cents a share for an institutional investor. Now it's about, you know, round to zero. And yet somehow a lot of broker dealers are doing just fine. So you know, the financial system tends to adapt, and uh, I think Jamie Diamond will adapt, uh to if if if Bitcoin ends up digitizing gold, which after all Gold's market cappus something like ten trillion. I think, so there's a lot of shift as that ten trillion moves and uh and I think

that's what sort of underway. That's a great point about Bill Miller, talk about someone who made the you know, caught on early at the right time, and you know a lot of a lot back when a lot of people were still very skeptical and he he didn't catch generally, he would be the first to say, like we walked together, go from thirty to three hundred, and then it went to five hundred, and then it fell back to three hundred and and I think he would say that's when

he did. Really all of his buying was right after that conference that I mentioned. And uh So it is amazing how one of Bill's great gifts is his flexibility. For a lot of us. If you've missed a ten bagger, you don't want to look anymore. It's too unpleasant. It's an enormous gift to be able to look at you know, Amazon at e D after it's gone from eight to eighty and still see it as a value. Uh. And sometimes that's uh, you know, people confuse price and value.

They think if something's gone up a lot, it's more expensive, or sometimes they think it's more attractive because it's gone up a lot. The price has nothing to do the past, has nothing to do with the future of that. Very very interesting. All right, chrisy, have you seen anything crazy this week? Do you want to share? All right, I'm gonna give you one that that is it's not really this week, but I'm just gonna give it to you. When we think about, uh, how the idea of price

discipline has eroded. So I think the craziest thing in the market over the last several years has been dispersion. When you just get is crazy. See disparity and assets where you could you think there's rough comparability or visibility into their value, but they traded wildly different prices, so international versus domestic growth versus value. So here's my crazy

one for you. If I was to take Tesla, Squares, Shopify, Spotify, and Zoom their market cap today's around one point three trillion, for the same one point three trillion, I could buy a big lion share of our core portfolio. So I could buy a hundred percent of Capital One, Applied Materials, Intel Rate, Yeon JP Morgan, Chase, Chub Banking, or Melon in American Express one point three trillion, one point three

trillion equal price. The first companies earning nine billion. The second group of companies are earning nine Now you say yes, but those first group of companies, they're growing. This is the crazy part. Let's do a little thought experiment. Let's take that group of companies, tell us a square, Shoppify, Spotify, Zoom. In the next ten years, they grow as fast as Apple, Amazon, and Google grew in the last ten years. I think we'd all agree that's that's pretty good outcome. A decade

of growth as fast as those three. And then let's say at the end of that, instead of having these crappy profit margins that inaggregate they have, they end up with the highest profit margins of any of those companies, which is Google. So they end up with Google's profit margins ten years of growth as high as Apple, Amazon,

and Google. Now are boring group of companies. In the next ten years, they grow about They grow earnings about half as fast as they have in the last ten I think that would be a terrible outcome, but possible. So they only grow five percent, They only grow profits five percent a year for the next decade. Play that out over decade. In twenty thirty two, ten years from now, in our group of companies, you will have earned one

point three trillion dollars. You will have earned the entire market cap group too, even with those crazy assumptions of high growth, high margins, You'll have only earned six d billion, half as much. And in twenty thirty two they will still be earning less annually. They will still earn less annually. So to me, that's crazy. And it's not this week crazy, but it's this time of the market crazy. And I don't know when that gap is going to close. But I sure love what we own versus where the where

those crazy valuations are. Chris, that is the most thought out, crazy thing I think we've ever had. Fleece. You gotta check his math on all that, all right, Absolutely, I'll send it to you. By the way, they are group would be earning a hundred and fifty four billion, and that Group one would be a hundred and thirty billion. And I'm, by the way, giving some of them a little generous credit for uh, some of their more aggressive accounting,

but I'll leave that aside. That's fascinating. I was I was wondering if Chris was going to say he could buy a whole lot of bitcoin and bitcoin will still be earning zero and it will still be worth the less. Let's say, right, Well, we're gonna have to get Chris back in two and see how that turned out, see if his math was right. I'm guessing he's probably right though, Chris Davis, Police Brands, thank you so much for your time. Really enjoyed it and hopefully we can do it again.

Thank you. That's great. Thank you guys. I enjoyed it. What Goes Up. We'll be back next week. Until then, you can find us on the Bloomberg Terminal, website and app, or wherever you get your podcasts. We love it if you took the time to rate and review the show on Apple Podcasts. Similar listeners can find us, and you can find us on Twitter follow me at Reaganonymous. You can also follow Bloomberg Podcasts at podcasts. I thank you to Charlie Pell, to Bloomberg Radio and the voice of

the New York City Subway System. What Goes Up is produced by Too for Fourheads. The head of Bloomberg Podcasts is Francesco Levie, thanks for listening. See you next time than before.