VALUE: After Hours (S02 E49): High-Growth Reinvestment, Active Investment, And Magic Numbers

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In this episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle chat about:

  • High-Growth Reinvestment
  • Magic Numbers
  • Active Investment
  • Create A Buy List
  • Stunning Valuations $TTD, $PTON
  • $ZM Fatigue & Growth Forecasts
  • $SPOT v YouTube
  • $DISCA Streaming Wars
  • $BABA Subsidiaries
  • Bundling The Food Network & $QRTEA
  • Superforecasting – Philip Tetlock
  • Phil Ordway – Valuation Distortion
  • The Fear & Greed Index
  • Bill’s Upcoming Podcast With Greenbackd

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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Full Transcript

Tobias: We’re live. It’s 10:30 AM on the West Coast. 1:30 PM on the East Coast. 6:30 AM Australian Eastern Standard Time, which I think means it’s 6:30 PM UK time. How you doing, fellas?

Jake: Living the dream. Happy to be here.

Bill: Fine.

Tobias: Confined to quarters again in California?

Jake: Oh, yeah.

Bill: What’s up?

Tobias: We’re confined to houses again in California, but my little fella’s finally had his first day of school yesterday, my five-year-old.

Bill: [crosstalk] -you guys are locked in again. I didn’t realize that.

Tobias: I don’t know how it works.

Jake: Tell you the truth, I don’t really notice a difference yet. I don’t know if you–

Bill: Yeah.

Tobias: No, there’s no difference.

Jake: People are still just going about their lives.

Tobias: Congrats to Donald Trainer, who got released from Guantanamo Bay and is now in Carlsbad, California, just in time for lockdown in California. [laughs]

Jake: Oh, gosh.

Bill: It’s probably better. Anyway, whose turn is it to introduce the episode?

Jake: I feel like I haven’t done it in six months.

Tobias: Probably JT. Yeah.

Jake: Maybe I should do it. I try to hide from that. Welcome, Value: After Hours. I’m one host, Jake Taylor. We’ve got Toby and Bill. Toby, what do you have on deck for today?

Tobias: I’ve been looking at a few of the more interesting names out there just in terms of their reinvestment rates and what the kind of future might look for them as a group. I just want to talk about capital allocation with you guys a little bit just banter back and forth and see what you think.

Jake: William?

Bill: I’m going to talk about why I invest actively.

Jake: Ooh.

Bill: Big thoughts.

Jake: Big and deep.

Tobias: What do you in, JT?

Jake: I’ve got a little segment prepared that I’m calling Magic Numbers.

Tobias: Ooh.

Jake: We’ll see if it’s worth the shit or not, but I guess right after this.

Bill: Doo doo doo doo doo.

Tobias: Who wants to take it away today?

Bill’s Upcoming Podcast With Greenbackd

Jake: Hey, real quick, though before that, dude. I think everyone who’s listening, if you guys are fans of what we do on this, three bozos, you’re going to love two bozos. [crosstalk]

Bill: Shout to the main homie, Greenbackd.

Jake: Yeah, you guys are going to like this. I think you’re going to get a taste and a view of Toby that you’ve never probably had. You’ll enjoy it, so looking forward to that one.

Tobias: Bill and I did a three-hour interview, and the first hour, I was able to maintain professional cover.

Jake: Decorum.

Tobias: And then you just forget– two hours in, I forgot that I was on a podcast. It’s very dangerous.


Bill: I was listening to it, and the amount of times that we refer to each other as “dude,” I was like, okay, we sort of duded out on this.


Active Investment

Bill: I mean, I might as well take it because it’s actually a reasonably good segue. I’ve been struggling to work lately, like, pretty hard. I know that a lot of people are like, “Yeah, dude, everybody is, shut up.” There’s something about coming up with a really good idea that takes a lot of creativity and real energy, and I have not had the motivation to really pursue that. I think this podcast has a fair amount– this is my passion project right now. My attentions diverted. I found myself thinking, like, “Well, the S&P is racing, and what am I doing? I’m going to fall behind, and I’m going to outperform it,” and then I underperform. Then I took a step back, and I was just like, “Why am I doing what I’m doing?” I guess I’m in a different position than a fund manager. Fundamentally, the reason that I do this is I really, really enjoy life as an investor. Right now, I’m just taking a pause from that.

I realized that maybe putting the pencil down for two weeks to pursue other stuff, or let your brain rest, really isn’t the end of the world. I found myself feeling like I had to work, not all the time, because I’m obviously dicking around on Twitter and stuff, but my brain was always stimulated all the time. I think that taking this time off, I don’t know, has been like a real brain rest. Having this podcast side project has helped. It’s not exactly a brain rest, because I’m obsessed with that thing, but it’s been nice to have something else to do.

Jake: Would you say that if it was March 2020, maybe it’s not– the opportunity cost of taking a break would be pretty high, but where we find ourselves today might be like, “Eh, I’m going to go for a walk instead of really trying to force it?”

Bill: Yeah, I would say that. March was so adrenaline-driven that I didn’t even want to walk. I think it is the culmination of a big year– I don’t know if it’s New Years and just got me thinking about, like, “What the hell am I doing? Maybe just relax for a bit instead of doing whatever.” I don’t know.

Tobias: This was a dramatic drop off in the amount of email that I got after Thanksgiving. Since the last week in a bit[?]. I think people are tired. People got to thanks– people are like, “I got to get it all done by Thanksgiving.” Then after Thanksgiving, they’re like, “Ooh.” That’s 2020 done, 2020’s in the can. See you through in 2021.

Bill: [crosstalk] –family stuff I’m working through too. So, that diverts some attention, but as far as what’s going on the market, I just could care less.

Tobias: Yeah, I mean, it’s– everything’s so expensive at the moment. Anything I think is interesting that I look at in a discretionary sense, is just 60% overvalued, 60% to any kind of conservative valuation for good stuff.

Bill: Melt-up.

Jake: [unintelligible [00:06:04].

Tobias: Here’s the thing, so if we melt up, then, what are you going to do?

Bill: Then, I’m going to sell everything and just hang out.

Tobias: Yeah.

Jake: What if I told you that we already melted up, Bill?

Bill: Then I’d have to hold some stuff.

Jake: Okay.

Bill: I’m fine. Whatever. If you want to sell some of the stuff I have, I don’t really care, which is the nice thing about owning some quality shit.

Stunning Valuations $TTD, $PTON

Tobias: I went through some of the names that people have thrown out on the podcast, on my other podcast, just to sort of see, some of the names that people more deeply researched and I had a look at Trade Desk. Have you guys seen the chart on Trade Desk?

Bill: Yeah.

Jake: No.

Bill: I’ve seen a lot of these charts, and I’ve seen that chart.

Tobias: Here’s the thing. They’re all very similar. All these stocks basically take off in 2018. They all go from probably being undervalued in 2018, to being very overvalued now, but Trade Desk is the most egregious one that I could find so far, like for the ones that I’ve looked at that I’m interested in owning. Trade Desk is– if you guys pull up the chart on that one, just set your faces to stun, that’s pretty impressive.

Bill: Well, it’s a lot of them. Look, if all of them do the same thing, I just don’t buy that every company has gotten that much better. I just don’t.

Tobias: Well, the underlying hasn’t done that.

Bill: Now, technical– what?

Tobias: The underlying hasn’t done that, it’s just the price.

Bill: Yeah, that’s right, in the perception. To be fair, they did accelerate a lot of adoption of tech, and that is a big barrier to adoption, and now people are more integrated to it. I don’t deny that. I’ll tell you what, I am tired of Zoom and I am tired of Peloton. Those two things, I’m just bored of.

Tobias: The stocks or the things?

Bill: No, the things.

Tobias: Oh, yeah.

Bill: Somebody asked me the other day, “Do I want to get on a Zoom call?” I was like, “No, just call me on the phone. I don’t want to see your face.”

Tobias: Yeah, that’s right. That’s the thing. The fatigue of having to stare at people all the time.

Bill: Yeah, if I want to–

Jake: Are you tired of riding your Peloton now too?

Bill: -pick my nose on the other side of the phone, I don’t want you to see it.

Jake: Are you not riding your Peloton now?

Bill: I just did.

Jake: Oh, I thought you said you’re tired of it.

Bill: I am a little tired of it, but I rode it. I’m missing the gym.

Tobias: What we need is a subscription service for a bike that you can take outside. It’s like $2999 a month, we’ll sell you the frame. Anytime your tires get flat, we’ll give you tire.

Jake: And it goes places.

Tobias: And it goes places, that’s outside. Incredible scenery, so realistic.

Bill: I want music and I want a trainer, that is what Peloton, that’s the– [crosstalk]

Tobias: We’ll throw in some AirPods.

Jake: Yeah, we’ll tape an iPad to it, don’t worry about that.

Tobias: [laughs]

Bill: Yeah, that’s fine. Yeah, just charge me $2,000 and you got something. The thing about it that– I was thinking about this today, could you bring Peloton to the gym? I think you could. I think it could travel, but I do think it’s going to be weird to have your phone and your trainer with you at the gym, [crosstalk] odd.

Tobias: There’s a Peloton in the hotel and you log in as yourself?

Bill: Yeah, but there’s actually an app right and it’s on your phone. It’ll have your workout, strength workouts and whatever. It’s a personal training program as well as a bike. It’s just the personal training is–

Tobias: Not that personal? Impersonal?

Bill: Yes, it’s more of like classes through a screen.

Jake: It’s arm’s length.

Bill: Yes, it’s COVID-appropriate training. Anyway.

Tobias: Where’s Peloton trading now? In terms of valuation.

Bill: It’s got to be–

Jake: [crosstalk] –sitting down. [laughs]

Tobias: I’m about to be.

Jake: Yeah, make sure you’re sitting down first.

Bill: Oh my God, this thing’s a $35 billion company. Get the fuck out here.

Tobias: What’s it making?

Bill: What a ridiculous valuation. I’m sure somebody is like, “I got my whole fund in it, you don’t understand.” All right, whatever.


Bill: You may not. Anyway.

Tobias: What’s it make?

Bill: What, in cash?

Tobias: Yeah.

Bill: I don’t know, dude. You’re going to make me go through all this stuff. Valuation is screamingly high. That’s the answer. People are underwriting some big, hairy, audacious goal of 100 million users. All right, we’ll see how we’re doing in two years. It may work, like it may.

Tobias: 100 million users globally?

Bill: Yeah, look, dude, all I’m saying–

Tobias: Not the States? [crosstalk] -hassle.

Bill: This is the same thing. I think it’s global. I don’t even care. At the end of the day, you’re paying $35 billion for an in-home gym. When have they ever stock?

Jake: For a future coat rack.

Bill: Yeah.

Tobias: Yeah, that’s right. The most important thing is that it has to fold up to go under your bed. That’s the most important feature.

Bill: Oh, and by the way, here we go. My man, ValueStockGeek, 186 or 126 times EV to EBIT.

Tobias: That’s expensive.

Bill: Now people are going to be like, “Well, EBIT slow, and they’re investing through the income statement is still a subscale.” I get it. That is crazy.

Tobias: It’s only 200 times EV/EBIT.

Bill: Dude, if that’s not crazy, the whole basket is 100% crazy, if that is maybe the one that I’m wrong on. There’s not a chance I’m wrong on all these. Whatever, you think I’m wrong? Bet it. I could care less. I have no exposure and I could care less. Enjoy your life.

Jake: [laughs] What phase of loss is this in the seven phases? This is like bargaining or–

Tobias: Kübler-Ross.

Jake: Yeah.

Tobias: Stages of grief.

Jake: Where are we at? I mean, we’re close to anger.

Bill: I’m really not angry. I guess the only thing that I’m angry about is– I don’t know. I’m angry about what a bad name not owning some of that stuff has gotten. But then again, that’s sort of the two camps of investors and that’s fine. I do want to own one, one day. If I could find one that I could call, MinionCapital. I’m looking forward to talking to him. He’s a smart dude. If he said fish here for this reason, and start learning, I’d be open to that. I’m just not finding the name on Twitter. [crosstalk]

Tobias: Somebody here says you need to take boxing class. [laughs]

Bill: [crosstalk]

Tobias: I think they [unintelligible [00:12:28] hand out the punches.

Jake: Yeah, they just want to punch you in the face, I think is what he’s saying.

Tobias: Lots of aggression to release.

Bill: I don’t have aggression. Do I sound aggressive?

Jake: [crosstalk] -in the value.

Tobias: What innings are we in?

Bill: Probably two.

Tobias: Two.

Jake: Back to two. We’ve rolled back an inning? Shit.

Bill: Yeah, I think we did. Didn’t we correct the last two days?

Tobias: Did we? I don’t know. I thought we were at all-time highs. If someone says, “Where are we?” If you just say all-time highs, there’s like a 50/50 chance that you’re right in this market on any given day.

Bill: I don’t mean to sound that angry. It’s just when I look at Peloton and it’s a $35 billion company, that’s insane to me.

Tobias: Here we go, Peloton for boxing. Boxing as a service. [laughs]

Bill: That boxing as a service is basically mirror.

Tobias: How’s that mirror? Yeah. All right.

Bill: Yeah.

Tobias: Of course, somebody already thought about it.

Bill: They’re good products. I’m not a product hater. I just don’t understand how you can spend that much money on that product if you want to own the equity.

Tobias: I don’t like Zoom.

Bill: And you’re probably going to face dilution.

Tobias: I’m a product hater. I don’t like Zoom.

Bill: Yeah, that’s different.

Tobias: I log into it five times a day to get my kids into school, so I’m tired of it. There’s got to be a better way to log in.

Bill: Yeah, I don’t know. We’ll see, man. Maybe all this makes sense. It’ll be an interesting 10 years from here.

Tobias: Let’s turn this back into an investing podcast.

Jake: Oh, okay– [crosstalk]

Bill: Is it not?

Jake: Random gripe session.

Bill: Whatever, you guys take over.

Jake: Toby, you want to talk about your topic?

High-Growth Reinvestment

Tobias: Yes. I’ve been looking at some of the better-performed businesses out there, just try and back into some of the valuations and see what’s interesting. Basically, the way that I did it, I just went through a list of the guys who’d been on the podcast and the names that they had thrown out. Got a really interesting one coming up with Elliott Turner where he talks about Twitter. I don’t want to talk about that one too much, but I think that he’s found something super interesting in Twitter, because it’s been– I love the product. I think lots of people love the product.

It’s just been hilarious how badly managed it seems to have been, part-time CEO– the lesser of the two companies that he’s part-time CEO of. He’s clearly very smart guy, though, he is probably still doing quite well. The business behind it has been, what looked like a bit of a shambles and it sort of turned into– Maybe with Elliott, who’s a very scary hedge fund, and Silverlake, who’s a very smart kind of private equity, VC tech, kind of private equity firm, probably something good is going to happen there. Elliott demonstrated I think that that’s the case. I don’t want to give too much away there, too.

I went through the list of names, like Trade Desk was one of the ones that I was just sort of– Trade Desk is interesting, but, wow, it’s expensive. We’ve talked about this before. The question I have is, do those base rates continue to apply to the sort of businesses that in networks? Is this time different? That should make everybody really nervous when they hear those words. I think you introduced to JT on a podcast a few months ago, where we were talking about Mauboussin’s base rates, that he brings out– it’s like revenue growth, return on invested capital. What proportion of companies can sustain these?

If you’ve got $50 billion in sales, what’s the likelihood that in one decade you continue to have extraordinarily high growth rates? It’s hard when you look at these things, because they’re all expensive, but they are all very good businesses, too. If you assume that they can maintain their rate of reinvestment, and they’re very high rates of reinvestment on very small capital basis. Even though they’re expensive, they can continue to grow very rapidly. If you just assume that there’s no fade in any of those rates, then they’re probably going to be– you’re going to make a lot of money out of these businesses. But if you assume any kind of fade rate, so they don’t continue to be exceptional businesses in a decade.

Basically, if you assume 25 years, that’s no fade. There’s no fade at all in the margin. So, there’s somewhere between 25 and say a decade, do these fade to kind of reasonable businesses. I just found that basically, the entire decision rests on how quickly these companies fade to average. That makes me a little bit nervous. Some of them are clearly going to last the 25 years. I mean, I don’t know which ones. Amazon is still a beast, even at the size that it’s at. I don’t know if it can continue to grow at the rate that it continues to– it’s still got a very high return on invested capital, it’s still an exceptional business, it’s hard to see how anybody really competes with it, other than maybe Shopify doing a– Shopify has.

Jake: Rebels against the empire.

Tobias: Yeah, the funding the rebels against the Empire. I think that Shopify has a very, very robust approach to it. Shopify is growing rapidly, massive returns, again–

Jake: [crosstalk] –so expensive.

Tobias: –like crazy expensive. It’s hard to see how you make much money out of that over the next decade, even if it keeps on doing what it’s doing.

Jake: You got to get rid of that limiting belief that valuation matters.

Tobias: Well, that’s entirely true. If I just ignore that, the returns will be much better over the last few years. There’s a good question on the board. How long before cloud becomes a commodity? I don’t know the answer. It’s not forever, 25 years, that would be a long time. 10 years?

Bill: I just don’t know what you’re bitching about-


Bill: –because I have this up here and it’s only trading at 22.7 times 2024 gross profit.

Tobias: Shop?

Bill: No, the Trade Desk. You just need to extend your time horizon. That’s the problem.

Tobias: Well, we’re always a little bit facetious about this, but you put interest rates to zero, it’s probably not entirely unreasonable to think that you bring all that forward without discounting it.

Jake: Okay, let’s actually go into the constituent parts that make up that number. How do people get comfortable coming up with a revenue number that far out? And a margin, that’s even harder because a lot of that has to do with competitive dynamics, right?

Tobias: Yeah.


Jake: You’re just like know what the number you need to get to and then you solve for– “Well, I need 80% gross margins.” All right, plug that in.

Bill: I think that I can almost understand the 2024 number. It’s the 2030 number that you have to believe in that I really can’t get to.

Tobias: I think you can see it– not see, but there’s probably not much diminution in a business over five years, or there’s not much of a change, it’s just assumed some models fade over five years of. After 10 years–

Jake: None of these numbers work if you do that.

Tobias: That’s right. Well, after 10 years, they certainly don’t. That’s the problem. 10 years, I think it’s pretty modest.

Superforecasting – Philip Tetlock

Jake: Phil Tetlock who’s a guru when it comes to forecasting. He’s done all the forecasting research. He says that anything past five years in a forecast, you can pretty much laugh it off because they’re never accurate. More than five years– he ignores anyone who says anything that’s more than five years out, and it’s safe to ignore that. I don’t know, how are these people getting comfortable with numbers that are 10, 20 years out? I just find the whole thing to be a little laughable myself, but much to my–

Tobias: Poverty. [laughs]

Jake: –detriment. Yeah. [laughs]

Bill: You’ve got to believe a lot of things. And you’ve got to believe that a lot of things are winner take all. I guess that there’s an argument to be made that data is the new oil or whatever, and there’s going to be some– [crosstalk]

Tobias: What, it’s a commodity that sometimes you’ve got to pay to give it away?

Bill: Ooh. Dang. Hot take.

Jake: Fire.

Bill: Yeah, I don’t know. I mean, you just got to believe a lot of rosy stuff. That’s how you get there.

Tobias: I mean, the counterargument is– because I know there are folks out there just pulling their hair out listening to us talk about this, the counter-argument is that these are good businesses, they’re probably still going to be pretty good businesses in five years’ time, and you get another– if you just think, “Well, I’ll just look at five years,” and then in five years’ time, “I will look at another five.” In five years’ time, they’re probably still going to be pretty good businesses, they probably haven’t faded to the average business by that point.

Jake: I’m very curious. I mean, Microsoft great business in 1999. It took you, what, 13 years, 14 years to get to start making money again in it? Are all these people that long on their horizons where– they’re going to sit in something for 14 years before it starts getting into positive territory again? I don’t know, we’ll find out.

Tobias: Yeah, that’s right. You also had to foresee that they became a software as a service. I mean, the thing that made it really hard, when everybody was pitching it in 2011, 2012, 2013– when it was like, all the Value Congress, pitched a few times at the Value Congress. The problem was that they had their first year of revenue dropping. I think in the life of the business. Then the question was, do they keep growing again? Can they sustain their margins if the revenues coming back? I take my head off to Alex, Science of Hitting because that was when he bought, and he hasn’t sold. He just said, it’s good enough where it is as a value stock, and then he’s caught the ride as it’s become a growth stock and held on the whole way through, which I think is hard.

Bill: It sounds like a much different skew than that– but what do I know? I’m a noob.

Tobias: What do you mean it sounds like a different skew? It sounds like his was a good bet.

Bill: Yeah, that’s right. It’s a completely different conversation.

Tobias: To where it is now.

Bill: I’m looking at the free cash estimates on Trade Desk. You’re looking at one-and-a-half-time free cash flow yield 2024 consensus free cash flow. One and a half percent, that’s tight. What happens if that goes to three?

Tobias: It’s not paying out that free cash flow, but it’s reinvesting. This is the difficulty that you have with these things. From the top of my head, free cash flow is like 125 million, is that right? Something like that.

Bill: 132, yeah.

Tobias: 132.

Bill: Well, yes, but that’s inclusive of share based, okay. Just so we’re on the same page.

Jake: [crosstalk] -telling me there’s a chance.

Tobias: But then, you have a look at their financing cash flow line. They’ve also raised like– that might have been 128, something like that, but I just looked at that, and I was like, “Well, there’s no real free cash flow here.” That’s reinvesting, so it might be a great thing. They’re clearly reinvesting at a very high rate. It’s going to grow very rapidly for a long period of time. I’m not criticizing the stock, I’m just criticizing the assumptions, or thinking about the assumptions that I want to make to get comfortable, buying something like that. I want to see it down 90% before I think–

[laughter] [crosstalk]

Tobias: That’s why I’m a deep value guy.

Jake: Oh, I don’t know, man.

Bill: I’d be interested in LS values take. That guy’s been pretty right on this name for a while if I recall correctly, but I don’t know, man. I mean, there’s just a lot of dilution and it’s a long time to wait. I saw a lot of people panic in March. So, we’ll see.

The Fear & Greed Index

Tobias: Yeah, I think that’s the really the better way to do it, is to get your list of things that you really want to own, and then you’re going to get some– This is ValueStockGeek pointed this one out to me, thanks very much ValueStockGeek. You get this fear and greed gets on the 20 once a year. Take your shopping bag and go and pick up a few things off the shelves when they all go on sale once a year. You don’t have to fill up, just get your little startup position, and then we’ll get some and keep some cash.

I think you can kind of squeeze your way into these things overtime at pretty good, at least a better valuation. I just don’t think now is the time to be going and doing it. If you go look at fear and greed, it’s the other way. It’s telling you to be very, very careful. If things are expensive, fear and greed is off the charts, put call ratios off the charts, this is as bold up as anybody gets. This is February 2020.

Bill: Here’s what I do think is sort of interesting. When you start to get the put call ratios off the charts– I’ve been listening to more of these market guys. A lot of people are saying liquidity is just not there. I mean valuation is the next price that somebody has to pay to get the shares out of your hand, at least in the short term.

Tobias: Say that last line again, valuation is the–

Bill: Well, price is just where something trades.

Tobias: Right. It’s just the– yeah.

Bill: You got this shareholder base is just one and one and one and one. They have like– I mean, you cannot deny the Trade Desk shareholders have made a ton of money. So, now you got a huge run-up in a stock that you like on a business that you think is going to dominate for a long time. If you bought early, you’ve got to incur taxes to just sell that. I understand why the shares are hard to acquire and why the price would go higher, but that’s a supply-demand dynamic. That’s not a valuation dynamic.

Tobias: The shares are trading– [crosstalk] I mean, that’s– Yeah, sorry.

Bill: Yeah, I understand.

Tobias: State the blindingly obvious. There’s clearly some marginal seller there at each price, because they are actually going through. There’s quite a lot of volume.

Bill: Yeah, you’re right. I just think that the incremental– I mean, it’s obvious by the price. The incremental demand exceeds the supply of sellers, but it just seems to me that we’re closer to trading on that dynamic than we are valuations.

Create A Buy List

Tobias: That’s the one thing that I found going across all of these stocks are better businesses. The one criticism that I have that is fair about me is that I just haven’t looked at these because they’re so expensive, I’ve just ignored them because they’re not things that I would buy. I thought I should go through and have a buy price for all of these stocks, so I just went through and created, not completely, but creating my list of like, where I would buy these things, where I would feel comfortable that you’re going to get about a 10% IRR to their fade over a decade, just to give you an idea of how I’m doing it. Every single one of them is 50% to 60% over where I think you can get there, which means that you’re almost– I mean, what that means is that you’re basically not going to get much return for the next decade over these things, even if they keep on doing what they’re doing.

Bill: Or you’re fading too quickly, right?

Tobias: That’s the other thing. Well, that’s what I’m trying to get an idea whether I am fading too quickly, and we should be looking at– maybe we should be using slightly different metrics, but I’m also aware that– I’m asking that question right at the very top– well, not at the top, but in a very bulled up market.

Jake: Third inning.

Tobias: Third inning, yeah. [chuckles]

Bill: Yeah, I mean, look, I think my sense is that these will probably outperform what the base rates are. We’ll probably have a step change up in base rates. That said–

Jake: So, the previous, if we use Bayesian updating, the previous base rates are not applicable as a population to this new batch, so this time is different?

Bill: Yes. For the revenue model that these companies have, and for how quickly they can land and expand, I think, yeah, it’s very possible. I also think, a lot of these valuations require believing in– and people being able to have product extensions, and people being able to land and expand. This is why I always say is a bucket, or as a basket.

It seems to me that once you start to get to this aggregate valuation, they have to all succeed bumping into each other. Maybe that’s way too simplistic and maybe the TAMs are just way, way bigger than my pea brain can ever fathom. I guess why I’m so skeptical on it is, you’re forecasting so far out in the future, and we’re still early in a trend.

I just think that those two combinations combined with human greed and groupthink, lead people to have a huge bias towards the upside of that because motivated reasoning comes in and then price fulfills that reasoning and then it becomes destiny, and then you get stories of how reflexivity is reality. The story just gets bigger and bigger and bigger and bigger. When the share prices are going up, very few people say like, “Guys, this is bullshit.”

Jake: But you get to feel very smart, too. You saw something that no one else saw and now you’re getting paid for it, and you’re getting paid like every day [crosstalk] talking about a wiring.

Bill: Yeah, [crosstalk] paid a lot. You know what, they’re playing– I mean, I don’t know that it’s a smarter game, they’re getting richer than I am. I’m doing fine, whatever. I’m here talking about not working this month. So, it’s not like I’m crying.

Jake: I think you’re right, though about– I mean, we’ve talked about this, the total eventual supply of all of these things that they’re supposed to be doing in a b2b or a b2c kind of way, like, how do they not run into each other and start competing? I mean, it doesn’t make any sense to me.

Tobias: I mean, the other thing is, you don’t have to do anything with these companies at this price either. It was only 2019 that they’re all trading pretty cheaply. It could easily happen like in the next few years.

Phil Ordway – Valuation Distortion

Bill: I think Phil Ordway on John [unintelligible [00:31:15] podcast said it the right way. He was like, “I don’t want to start talking about these companies’ valuations, because I think it distorts how people think of things. I’m just interested in learning about these companies.” That I think is the right approach. I just get super nervous when I read about how great CrowdStrike is, and then the one guy that I call, like, I really trust is like, “Stay as far away as possible from that thing.” It’s like, okay, I mean I trust him over Wall Street 10 out of 10 times, even [crosstalk] wrong–

Tobias: On the basis of the business or on the basis of valuation?

Bill: He’s just like, “Look at how long they have to do what they’re doing for the valuation, the implications, and then find me a cybersecurity firm that’s done that sustainably over time.” It’s a terribly difficult space to grow in. This guy worked in it, so what I’m going to believe your research report? [chuckles] No way. He might be wrong. It’s possible. But if I’m going to risk my own capital, I’m not fading somebody that I trust over something I read in a document. No way.

Jake: Dude, I read it on Twitter. It’s got to be real.

Tobias: It’s got to be true.

Jake: It’s got to be true.

Tobias: Let’s do JT’s, we’re going to run out of time for questions at the end.

Bill: People are going to hate this episode, and we’re going to get so much hate mail.

Jake: I know, I feel like–

Tobias: Which part?

Jake: –that the bar has been raised too high for these veggie segments. I can’t–

Bill: I don’t know, just a bunch of grumpy value guys railing on growth.

Jake: You just don’t get it, man. It’s a new paradigm.

Bill: It’s possible.

Magic Numbers

Jake: It’s called Returns on Scale. I titled this one Magic Numbers. I noticed in different contexts, the physical world biology that there are occasionally these weird numbers that just pop up randomly. And it’s like, “Well, why the hell is that the number that shows up consistently?”

The first one is, in a river, the meandering of a river has this mathematical function that is called sinuosity, like a sine wave. In both simulations and empirical data, this meandering process self-organizes the river’s morphology. A river will evolve into a certain shape and length. The bends in the river are caused by erosion. What happens is the outside of the river on the bend is moving faster than the inside, and it will erode the dirt and keep moving further out. What ends up happening, the water that’s moving slower on the inside, will deposit dirt there, and so you get these turns of the river.

Well, balanced against that eventually, if it gets too kinked, the water will basically cut through that line and will take the shortest direction and will create what are called an oxbow lake. It takes the straight path shortcut and it makes like a little lake out of it. You have this tension between the erosion and the oxbow lake effect. What’s weird is that there’s this mathematical relationship where the river’s total length, like if you followed it along, and the source to the mouth length, when you divide those together, you end up with pi, 3.14 roughly. Why the hell is that a number that just shows up? I don’t think anyone knows the answer to that based on– I couldn’t find it looking for– well, what’s the causal explanation for why we get 3.1 out of this? This is on average–

Bill: It’s not 3.1, sir.

Jake: What?

Bill: Pi?

Jake: Well, okay–

Bill: It’s a very specific number, sir. Don’t round it off.

Jake: I was rounding a little bit.

Tobias: He did say pi.

Bill: Yeah, you could say pi. You should give the respect it deserves. It’s like the Fibonacci sequences. Sorry, continue. People don’t like this when I do this.

Jake: [laughs] That’s okay. Yes, there are variations based on geography and topology of the land that will change that, but when you average these things out, you end up with pi, which is like, “Why the hell is that the case?”

Tobias: I thought you were going to say they all sort of roughly follow the same shape, and I was going to say, “Well, that’s just because water is the same viscosity roughly.” But now pi, that was a little bit unexpected, I’ve got to say.

Jake: Yeah, pretty random, kind of a magic number. The next one is, I think we’ve talked about this a little bit, maybe not. Geoffrey West, who’s this– He’s a physicist, and a bunch of other stuff, pretty polymath guy. He wrote this book called Scale. You can watch the TED talk that gives you most of what’s in the book, it’s quite interesting. But he’s talking about how like–, if you gave West some census data about your city, he could tell you how many gas stations you probably have, how many patents you produced, what the GDP of your little area was. It’s all based on these mathematical relationships. It actually emerges from the topology, the structure of the networks in a city. The human element spread across this, this topology leads to these mathematical relationships that are repeatable throughout, doesn’t matter the culture, which is quite interesting.

In the case of patents, and even crime as well, there’s this super linearity that’s demonstrated. You have for every doubling of the population, you end up with 1.15 as much of– over and above what a doubling would be. It’s not a perfect, like, “Oh, well, we doubled the population, we get twice as much crime.” No, it’s 1.15. Across different domains too, it’s like, “Well, why the hell does that happen?” [crosstalk]

Tobias: What’s the reason? We don’t know?

Jake: Well, I mean, I don’t know if we know exactly which way the arrows point in these things. There’s sort of these emergent phenomena based on when you have interacting networks or nodes in a network.

Tobias: Can you work backwards and–?

Bill: Macro laws of sort.

Tobias: Yeah. Can you work backwards and see– if you know that you want some sort of outcome, you see the university in somewhere, and you get–?

Jake: I mean, maybe it’s that–

Tobias: It hasn’t been considered, wasn’t part of it.

Jake: Is that what China has been trying to do? They’ve got, how many, 100 cities that are more than a million people? I don’t know. There’s this other interesting mathematical relationship. That’s called Kleiber’s law, and it has to do with– in biology, with the metabolic rate of an animal compared to its mass. There’s this relationship where the bigger the animal, the slower its metabolic rate, the slower its heart rate. Blue whale, its heart will beat, I don’t know, four or five times per minute. Whereas the pygmy shrew is like 10,000 times a minute or something like that. Has a much, much higher metabolism than the blue whale. There’s another number there that emerges.

All right, we’ve demonstrated this in sort of the world of physics, there’s these weird numbers that come up, in the world of biology, there’s these weird numbers that come up. What about in human, and in the investing context? Couple interesting things. One is Jeremy Grantham talking about how profit margins are the most mean-reverting data set, and it’s like 6%– [crosstalk]

Tobias: Until recently.

Jake: Well, until recently. Although, I just looked and with COVID, the trailing 12 month, I think, is something like 7.1. Whereas before, I think we were up at 12 or something for a while, so maybe we are– [crosstalk]

Tobias: You think we’re mean reverting?

Jake: Well, I don’t know, maybe. Even though everyone says that relationship is broken now. Yeah, we’ll see. I don’t know.

Tobias: Because I’ve been quoting-

Jake: Maybe Jeremy’s right.

Tobias: –Grantham, Buffett, Hussman, all saying exactly the same thing for about the last 5 or 10 years, and that’s been not true.

Jake: And you’ve been called an idiot.

Tobias: Repeatedly.


Jake: Yeah, Buffett has a pretty good quote where he says that– and I think he must have been talking about this in 1999. He’s saying that some people tell him that there are more lawyers than there are people in New York, like the base. One component is somehow going to grow and be bigger than the aggregate. It just doesn’t make any mathematical sense, but he’s talking about how– you have to be wildly optimistic that corporate profits as a percentage of GDP can for any sustained period hold much above 6%. Why is it 6%? Why does that number pop up here? I don’t really know the answer. Something about capitalism puts you at like 6%. It’s probably no accident that some number– I’ve seen different numbers for this, but one of the numbers I’ve seen for long-term returns on stocks are– it’s somewhere around 6%. It’s similar to what the business can produce.

Tobias: It’s the inverse of the long run. Shiller P/E is 16.

Jake: That’s right. That’s a good observation.

Tobias: It falls out of the same number.

Jake: Yeah. What was interesting to me was, I was sitting around trying to wrack my brain, like, “Why aren’t there more of these sort of emergent magic numbers in the investment world?” I think what it tells us is that there’s less logic to this maybe and less like physics sort of certainty. Then it’s a lot more random than that, that we don’t have more real numbers. I know some guys are going to say like, oh, what’s for net waves? I think you’ve talked about that before, Toby. Or is it [unintelligible [00:42:04]. Then you got Fibonacci numbers and things like that. I find it interesting that there are not that many magic numbers that emerge out of the world that we like to spend our time in, and then maybe that tells me, dude, this can get crazy, and there’s no physics as much to keep it tethered to a reality, and you just have to accept that that’s the domain that you’re living in.

Tobias: There’s also actors in it that aren’t economic. The Fed, and you have regulation as well, that can bias those numbers up and down maybe for a period of time, maybe for an extended period of time, it could be decades, but I think that the very long run means are probably closer to physics than–

Jake: Yeah, I think that 7.1% right now profit margin, dude, that’s what they’re shoveling how much money out the door into all of these companies. Wow.

Tobias: Plus, interest rates are very low, which means that your consumer’s got money to buy.

Jake: The whole thing is goosed to stay at 7. I find that to be a little bit frightening.

Tobias: Then pin rates down really low, which will bias up your multiples.

Jake: Value, now we figured out– [crosstalk]

Tobias: Now we know where we are where we are. [chuckles]

Jake: It’s Why we are where we are.

Tobias: The only problem is that if that figure if it comes off the scale, and I think we go back to stasis. Maybe it goes back anyway. I don’t know.

Jake: Well, what if you have to live some time below the mean, ever?

Tobias: I mean, it’s happened in the past, like, that’s literally why it’s the mean. Not in the last 25 years, but before then.

Bill: Well, a lot of people are living below the mean, they just don’t own assets.

Tobias: Well, we’re talking about the average valuations, but, yeah.

Bill: Yeah, but maybe that’s the answer. You just get higher and higher, maybe the risk is not in the capital markets, maybe the risk is societal.

Tobias: I 100% agree with that. Yeah. If you put your hand on that scale too much, then you bias the asset owners, and you heard the folks who don’t have assets, and then it shows up in consumer inflation. It really hurt the people who don’t have much money. And then you get a revolution. And then the people at the top lose their heads and you start the cycle again.

Jake: So, you’re saying that risk can’t really be destroyed–

Tobias: There you go.

Jake: -it’s just transmuted into a different form, which might be in this case, maybe societal risk.

Tobias: I got to give that to Corey Hoffstein, unless someone has an earlier version of that, but that’s the Hoffstein. Is there an early version of that?

Jake: Chris Cole, maybe? I don’t know. If those two probably are close together, I don’t know who said it first.

Tobias: I think Corey gets there first.

Jake: Both very smart guys. If they can split the Nobel on that one.

Tobias: Yeah, that’s right.

Bill: [crosstalk] -appreciate TheCorporateRaider is saying that I don’t look very good right now. Sorry, sir. I don’t get dressed for you. Also, you changed your avatar from my man, Charlie Scharf, to something else, you and your kid. No one wants to see that. Bring back Charlie.

Tobias: Charlie Scharf. Throw your questions in, folks.

Jake: [crosstalk] -try to squeeze some questions in.

Bill: Somebody said how do we think about private investments? I don’t know. Private markets-

Tobias: Same way I think about public ones.

Bill: [crosstalk] –are much cheaper. Yeah. I had some private investments in real estate, but that’s just because I can’t do it on my own.

$DISCA Streaming Wars

Tobias: Do you have any thoughts on– so I want to throw this one up here. Discovery, it’s been in the Acquirer’s Multiple screen, a large cap, for a little while. We’ve talked about it offline quite a lot. I saw Malone sold a big chunk of it– Sorry, I don’t how– It was a lot of money, in an absolute sense I don’t know how much of it. For Malone, it might have just been some lunch money, some folding money, walking around money.

Jake: Couch, cushion.

Tobias: Couch money. You guys got any thoughts on Discovery?

Bill: I don’t know about his sale. He’s always doing stuff for taxes and stuff like that. I don’t really know. I personally don’t believe in that entity as much as I believe in some of the others. I just think that there’s a big risk in that entity where you have a lot of viewership minutes that are not active. They’re cited as people loving a program, but it’s very possible that it’s just a program staying on in a room that no one’s watching. If you start to get into a world where people have to sign up for your service, or we can start measuring eyeballs, I mean, if you think the odds are good enough about it, but that’s not worth my money.

Tobias: You got any thoughts on it, JT?

Jake: No, nothing to add.

Bill: The other thing is, like Zaslow lives in that big ass house. He throws all those parties and stuff. I don’t know, that rubs me the wrong way. Not that Maffei doesn’t, but Maffei also makes bank, for his shareholders that is.

Tobias: Yes. Discovery is a tough one because when you had the bundle, it was one of the things that you could put on. It’s the least objectionable program. I think that’s what we’ve talked about it before. You can put it on and you can just veg out and you can watch hours of that. But in a world where you’ve got everything at your fingertips, selecting that over other things. I don’t know, I think it’s probably– everything on demand, it’s tougher for that business. It’s not how hard is to go and make those documentaries. Netflix is running those nature-style documentaries, and they’ve got money for that. Amazon Gold Mining type stuff.

Bundling The Food Network & $QRTEA

Bill: Yeah, I just don’t know how defensible it is. I mean, they have good personalities, and they do have– I think the Food Network and Qurate together would be an interesting set of assets. I could see how those could work together, and they are forming a partnership.

Tobias: Targeting the same demographic.

Bill: Yeah. I think that it makes sense. If you’re watching a personality cook, why can you not buy from the show? That doesn’t make a whole lot of sense to me. I think that the–

Tobias: Don’t they sell the spices? Cooking with my–

Jake: In the Kitchen with David?

Bill: Yeah, but that’s on QVC. What about Food Network? Or Bill and Joanna Gaines or something? Why can’t you click some of the stuff in that room that they’re showing? Even, Bill, I dot know– back story, so you’re going to own more and more and more of the equity, you’re not getting your money out. I don’t know why you would assume that you’re going to get a bid on your shares when you haven’t. So, how do you get your money out? Then you’re basically owning it to the end, and I’m not comfortable with that bet.

$SPOT v YouTube

Tobias: Spotify versus YouTube, which is a better business?

Bill: From a business quality standpoint, probably YouTube. I mean, one gets everything for free and the other has to pay almost everything in royalties. It seems like I’d rather have the one that gets everything for free. Now, which is going to be worth more? I don’t know, because YouTube has not become what I thought it would become. They seem to fumble some chances over there.

Tobias: Where were you aiming? What did you think was going to happen?

Bill: It’s odd to me that Spotify is now the music discovery place for a lot of people, and their playlists. YouTube had a huge advantage in that. Singular focus can win. I mean, the podcasting that I was mentioning. Some woman from Anchor reached out to me and she was like, “Can I host your podcast?” I mean, over at Spotify, they’re very, very focused on winning that market. Now, I’m not going to go with them at the moment, but at least you can see how a singular focus. It took Google like 10 days to even approve my podcast, it just got approved on the Google Podcast thing. It’s ridiculous how slow they are on that because they don’t care.

Jake: There’s nobody there.

Tobias: Yeah.

Jake: How annoying is it too that if you’re trying to listen to a YouTube on your phone, and if you close your phone, it shuts down the YouTube>

Bill: Toby’s saying this forever. They’re trying to get you to sub.

Tobias: They’re trying to get you to buy the sub. If you buy the sub, you can continue to play it when you close it.

Bill: [crosstalk] –jam our podcast. If you don’t watch this podcast like the second we close it, it sucks and you get some weird ass ads too.

Jake: That’s just your browsing history.

Bill: Oh, that’s possible.

Tobias: What I find amazing is how often it gets demonetized. Anytime we say COVID demonetize, there’s $1 amount demonetization. Go on. Sorry, fellas.

Bill: There goes my lollipop.

Jake: Christmas is canceled, boys.

Tobias: Christmas is canceled. That’s it.

Bill: Speaking of which, a lot of people bitched and bitched about the merch, and then the merch just sits, order the merch, tell me you want more merch, but order the merch. I’ll put the link in the YouTube thing. Come on. Otherwise, I’m not going to invest in making more.

Jake: Do we have merch?

Bill: Yeah, we got– shut up. Get out of here.

Jake: Yeah. [laughs]

Tobias: Anybody want to take a swing at Alibaba?

Bill: No.

Tobias: Anybody know anything there?

Jake: Don’t have anything.

$BABA Subsidiaries

Tobias: The last time I looked at Alibaba, I played the Yahoo stub, when it went into Altaba, which meant that I shorted out the Alibaba. It did make money, but I would have made a whole lot more money if I hadn’t shorted out the Alibaba. But I took a look at those financial statements. You need to be a much better analyst than I am to understand what’s going in those things. As far as I can see, their main businesses creating subs, they create more subs than there are days in the year, so I don’t know what they’re doing that for. Seems like– subsidiaries. That seems like not subscribers. Subsidiaries.

Bill: Yeah.

Tobias: You’ve got a legal department just churning out subsidiaries, why?

Bill: Why not, man?

Tobias: I don’t know.

Bill: To offset all the risks.

Tobias: Too complicated for me, too hard.

Bill: Airbnb’s IPO, I don’t know. I’m almost certain Bill Gates called it the best network effect he’d seen. It was in one of the old Buffett interviews. If you go back and watch the last three or four, three years–

Jake: No way.

Bill: Yeah, man.

Tobias: Airbnb, why?

Bill: Because it’s a two-sided network of really, really fragmented owners and a fragmented customer base. I’ll check it out. I’ll see if I can find it. I’m not going to spend too much time looking though, but the Berkshire interviews when he, Munger, and Buffett sit down is when I think he said it. One of those.

Tobias: Did anybody look at Zoom? Has anybody taken a swing at Zoom in terms of valuation?

Bill: No. They did have an incredible quarter, last quarter. They printed a lot of cash. [crosstalk]

Tobias: There we go. SEC doesn’t order the Alibaba financial statements.

Jake: I’m going to say best network effect? Catholic Church.

Bill: I mean, Zoom’s like– [crosstalk]

Tobias: How do I invest?

Jake: 500 years of data on it. One of the largest landowners in the world.

Tobias: Yeah. McDonalds [unintelligible [00:54:00].

Jake: [laughs]

$ZM Fatigue & Growth Forecasts

Bill: Here’s what I don’t understand on Zoom. Okay. You’ve got huge growth this year, huge. 262%, okay, to $2 billion, we’re trading in 117 billion, so whatever. Lots of time sales for those that want to figure it out. You got them growing consensus is like 40% growth in 2024. Okay, why? 40% is a big number. What’s going to happen in 2024?

I’m looking at it, you got 300% this year, okay, granted, everybody’s locked in. Then next year, we’re somehow going to grow 34% off that base, as if people aren’t using it like crazy right now. And then you come down to 21% and then you pop up to 40%. I’m sure they have some product that they’re releasing or something. I mean, these people aren’t stupid that are modeling it, but how are we going to grow 34% off of this space? Kids are in school on Zoom. You can’t do anything without being on Zoom. We’re going to go 34% of that base?

Tobias: It was one less as of yesterday.

Bill: I can’t wait to get the fuck off Zoom. You’ll see me zero times next year on it.

Tobias: Yeah.

Jake: [laughs]

Bill: Every corporate meeting is on Zoom right now. We’re going to grow off that base? I don’t know, man. I just don’t trust that. Maybe I’m the idiot.

Jake: Here’s the thing. It could work, but you don’t want to make that bet 100 times.

Bill: Yeah. I think that’s right. Your odds offered are really bad. Now, said the same thing last year. [crosstalk]

Jake: You said the same thing 200% ago.

Tobias: Do people get locked in– [crosstalk]

Bill: 200%, dude, it opened the year to $21.3 billion company, now it’s 117.

Tobias: Do people get locked into this– does this network effect eventually occur with everybody’s just on Zoom and it’s just easier to be on Zoom? What do you think–?

Bill: I’m sure a bull would tell you that, right?

Jake: No way, dude. Skype is just as good to me. Google Hangout or Google Meet or whatever, just as good. FaceTime? I mean, I don’t know, whatever, man.

Bill: Well, like all the people that are sitting at home that started a podcast now that are like recording on Zoom. I mean, think of how many things happened on Zoom, because nobody had anything else to do. We’re going to grow 34% off that base?

Tobias: It’s growing 40% between here and 2024. Or, it’s growing 40% in the year 20– 40% per year.

Bill: 2022. This is consensus of Bloomberg. 2022, the year ended 131. 2022, you’re looking at 34% revenue growth. The year ended 131, 2023, 21%. The year ended 131, 2024, 40%.

Tobias: Why does it take off?

Bill: I don’t know. This is what I’m asking.

Jake: Because you need that to get to this valuation.

Tobias: I think I see what I’ve been doing wrong. I’ve been fading[?] these things. I should have been compounding them, accelerating them, accelerating those metrics.

Jake: Yeah, rookie numbers. You need to bump up those rookie numbers.

Tobias: That’s what I’m doing [crosstalk] now.

Bill: If I was underwriting this thing, I’d be like, “Alright, so next year, we figure usage and everything falls off like 30%.” And I’d rebase my estimates from that.

Tobias: Well, maybe that’s what they’re doing.

Bill: I don’t know, you got 7.4 billion of sales, and the year ended 131, 2025. We’ll see, maybe it works. They are doing a lot in phones. I like their Investor Day, seems like a cool company. Better be, they’re selling a lot of dreams for $118 billion. If you don’t know how to sell it to the street, it’s crazy.

Tobias: Oh.

Bill: [laughs]

Jake: Sobering.

Tobias: How’s your Qurate-Zoom bet going? Let’s get an update on that.

Bill: I don’t know. I think I’m winning. Who cares? I got two and a half years, man.

Tobias: Yeah, that’s fair. I just wanted to say the inflection point.

Bill: I think I’m pretty certain that Qurate’s ahead.

Jake: I think you’re ahead.

Tobias: It’s going to be tough now. There we go, that’s good. Chalk one up for the old value guys. Not we can take a knee, two and a half years to run on it, but let’s keep going.

Bill: I think [crosstalk] going to have a really good quarter. The stock market being up helps the wealth effect of the consumer. She’s at home. She probably needs some retail therapy. I think they got another–

Tobias: Doing Zoom calls.

Bill: Yeah.

Jake: Between Zoom calls. [laughs]

Bill: She’s going to see David, forget about our pain. We’re just selling air fryers.

Jake: [laughs]

Tobias: All right, amigos. That’s right on full time. We’re all going to be here next week.

Bill: Yeah.

Jake: For better or worse.


Bill: That’s right. Yeah, maybe we will say something worth listening to next week.

Jake: Let’s redouble our efforts and come back with something a little better here.

Tobias: All right, fellas.

Bill: I had a great time.

Tobias: See you next week, folks. Ciao.

Jake: Cheers.

If you enjoyed this podcast, you may want to check out:

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