Full Transcript: Chris Mayer on SpaceX, AI, and the Long Game
Valuations, Drawdowns, and the Patience Behind 100-Baggers
Matt: You’re watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use, where better questions lead to better decisions. I’m Matt Zeigler, and 100-Year Thinkers, they’re dropping like flies. I mean, this is... I don’t even know what to think of this. How you doing today?
Chris: We’re the last men standing, Matt. The last guys standing.
Matt: We, Lord of the Flies style, we are the survivors, battle royale. We have come out on top. We are the 100-Year Thinking tag team that is at least gonna venture to have a little bit of a conversation here with everybody else on different versions of vacation.
So Chris Mayer, ladies and gentlemen, resident 100 bagger explainer, co-founder Woodlock House Family Capital. New book. New book is officially out yet, or not just yet?
Chris: Not yet, but any day now. I hear books have been printed and are in transit, so should be any day.
Matt: Bated breath.
Chris: Yeah.
Matt: With bated breath.
Chris: And a timely book, I should say. Very useful for this market, let’s say.
Matt: All right, well, give me that. Why is the new book timely? By the time this is out, it might even be available. Say the name and why is it timely?
Chris: Well, the name is called The Investor’s Odyssey, and the subtitle is Resisting the Sirens and Playing the Long Game.
So the book is about getting past all the noise and the concerns of the moment and trying to get in the proper framework for owning businesses for a long time. So that’s why I think it’s timely, because we’re in a time where, I don’t know, seems like a lot of stock prices have moved around an awful lot for reasons of the moment.
And we’re in the middle of an AI-fueled boom, which I’m sure we’ll get to. We’ve just seen the initial public offering of SpaceX for not just one trillion, but two trillion.
Matt: The ultimate bagger explainer.
Chris: Really historic. Yeah, really historic.
Matt: The sirens, the sirens. I wanna come back to that. Let’s start off here. If anything says siren call, it’s freshly minted shares of equity, of shares of a company. That’s a big market—
Chris: Certainly would. Yeah. The first thing I always think about though, ‘cause I’ve been in financial markets now for 30-plus years, is I’ve got a lot of scars, and that induces a lot of humility.
So I remember, for example, when Google went public, and it was in 2004, and I remember being on stage at a financial conference basically mocking the valuation at the time. So I don’t have the numbers right in front of me, but if I remember, it was something like 20 billion or so market cap. And it was trading, I guess something like 80 times earnings, something like that.
And it popped on the IPO and ran a bit. So I think at one point it was trading over 100 times or 120 times earnings, something like that.
Matt: I can’t remember which one. It’s in between three to five times in revenue, ‘cause all Google, Apple, Facebook, the whole nine were all five times or less in revenue versus the SpaceX 100X.
Chris: Yeah, I think at IPO Google was not quite 10 times revenue. It was less than that.
Matt: Yeah, that’s what I’m saying. I think it was less than five, but it was still—
Chris: I think it was more than five. Well, maybe five earnings, but less than 10. But it was still a big, healthy number.
Matt: Okay. Maybe it was sales.
Chris: Sure. Yeah, yeah. So still a big number. And of course we know, if you just bought Google and left it alone, you did famously well.
So although people like me at the time were saying it was overvalued, over a fullness of time looked like fools. And so now we look at SpaceX with that context in mind still. You know, it’s like in sports when they say the athletes get bigger and stronger and faster. It’s like in finance, the bubbles get bigger.
I don’t know, ‘cause now you’re looking at SpaceX and it’s trading at... You know, we just said Google was trading at, what did you say? Seven times or something like that. It was definitely less, it was less than 10. So SpaceX is trading at like, when it hit 2.6 trillion, it was like 145 times revenue.
And we talked about, I think Google again, I think it was like 80 times and it went to 100, 120 times earnings. SpaceX doesn’t have any earnings, so we can’t even really talk about that. So it’s trading at 140 times whatever sales. That is a gigantic number. I mean, for a financial person like me looking at, who focuses on things like returns, and I just...
It’s way beyond, beyond me. Now I don’t know. You know, I hear people like Ron Baron out there saying it’s gonna be worth 10 trillion, 20 trillion, 30 trillion. And he’s made a bunch of money on Tesla, so maybe he’ll be right again here. But you just think about it in broad probabilistic sense, I think it’s probably not gonna be a good deal here.
And knowing the way markets work, you will probably get a chance to own SpaceX at a fraction of this price. I mean, all these big winners go through huge drawdowns, and Amazon is one that always comes up, 90% drawdown from peak to trough. And who’s to say? And maybe we’ll talk about it a little later, but there was another interesting study that came out about 100 baggers, or companies that returned more than 100 times, and the drawdowns they went through.
But I think you can anticipate it’ll at least be cut in half at some point in the journey, and then maybe it’ll be interesting then.
Matt: Talk to me about cut in half in price versus cut in any way in valuation, because I think that’s another part of looking at companies, and you can separate this from SpaceX if you want to, but cut versus — cut in price versus cut in valuation.
Chris: So how do you mean?
Matt: Separating those out. So basically a company could lose a bunch of its value in price and now be cheaper, or earnings, revenue, whatever could actually accelerate and it could get cheaper that way without responding in price.
Chris: That’s right. So yeah. So sometimes, you know, a company like, I know Airbnb when it went public was at again, big premium.
And even though the business did very well over time, the stock price hasn’t gone anywhere, but the stock has gotten cheaper and cheaper and cheaper every year as earnings and cash flows continue to grow and expand. So you can certainly get cheaper that way. And the price can just come down, and I’m sure earnings and cash flows will grow.
So it could step down quite a bit. So yeah, there’s two different ways to get there, I guess you could say.
Matt: When you think about—
Chris: And just falling in price is okay if the other part of it’s growing. I mean, that happens, right? You know, when you look at, again, look at a lot of those, even from my own study of the 100 baggers, you look at these studies and these companies that have grown their revenues and sales and cash flows over time went through multiple times where they were cut in half or cut in third, and for those windows of time, the multiples get more compressed than usual.
But all along the business is continuing to grow, so...
Matt: So I feel like I had the general semantics literature at arm’s length when I was reading the S-1 for this thing. And when we talk about the wave of hyperscaler IPOs and equity issuance here, it’s labeling things. This is AI, this is quality, this is safe, this is what this TAM is, this is a must company.
What of those labels are actually doing work here, and how do you see them?
Chris: Yeah, I mean, they do a lot of work, right? ‘Cause SpaceX is like three segments. You know, there’s the space business, which everyone thinks of, but they also have Starlink. And then they also have their AI business in there, data centers and so on.
So it’s a lot of things, and so getting back to general semantics and Korzybski, and maybe people are tired of hearing it, but the idea of that is that those labels should not do the work for you. So you wanna overcome that. You don’t want to just put a label on it and let that label do your thinking.
So I think you have to look at it like you’d look at any other business. Start taking apart the segments and assessing their competitive position, looking at their growth rates, looking at how much capital they’re gonna need, what kind of returns potentially on that capital, and you start building it that way, and try not to let the labels do the work for you.
And it’s hard to do because as investors, we often think in terms of analogies. You know, this is like that, and it helps us understand it. X company is kinda like Y, and then you, you know... But you have to be very careful about that.
Matt: What about just the laddered thinking that happens here when we have...
And I’ll pick on AI in particular as one of these terms. It feels like AI means something different to SpaceX than it means to Google, than it means to IBM.
Chris: Yeah.
Matt: So we see that variable inserted in all these places.
Chris: Yeah. What does it mean? I mean, it can... You know, if people say AI and they’re talking about large language models, so they’re talking about ChatGPT and Claude and...
But you’re right. I mean, then you have AI that’s added onto different products and things, and I don’t know. I think it’s a term that covers a lot of stuff, let’s put it that way. You know, and I should say there’s an interesting little anecdote. I use these expert networks and trying to get an idea.
So there’s a number of software companies and people trying to understand and grapple with how they deal with AI, and so they’re all adding AI features to their products. And there’s one company, I won’t name it specifically, but one of the large customers said basically that their AI product was a waste of time, that it didn’t really add anything at all. And they weren’t gonna cancel their software and they were gonna keep it, and they were kinda like, “Well, hopefully they’ll figure it out or something,” but it didn’t really add much value. So that’s an interesting story.
And then a smaller story is, I can tell you, I have this app I use for golf, and they added an AI feature to it, and it’s supposed to... It basically summarizes your round that you just played using all these stats, and then it’s supposed to, like, give you recommendations on what to focus on in your practice, and I think it’s completely useless. I mean, it adds no... it actually detracts, if anything. And I think we’re gonna see a lot of this.
Like, people are just gonna be adding AI features because it’s, yeah, it’s—
Matt: Because they can.
Chris: Because they can. Because it feels like the thing that they have to do, that they should do. It’s the latest, greatest thing, and everybody wants to have it, whether it makes sense or not. And so I think at some point there’s gonna be some sort of reckoning.
Like, right now, there’s just this tremendous amount of usage of AI, and people are using it, figuring it out, trying to play with it, add features. But the returns on all this are not gonna be there. And then at some point there’s gonna be some rationalization of this and saying, “Okay, well this is another tool, but do we really need to apply it here? Does it solve a problem?” Not just to sort of be a solution in search of a problem, but actually fix a problem. And at that point, you’ll probably have some sort of pause in this whole thing, and then a lot of those equities will get crushed, and then those who are a little more value-minded and maybe swoop in and pick off some of the long-term winners.
There’ll certainly be some sort of shakeout. I mean, it happens with all these technologies, and so I don’t know why AI would be any different in that way.
Matt: Can we talk about the pause, like the pause and the shakeout? Because I think you’re... label it if you have a good poetic label for it, as you so often do.
But that part where we’re on this crazy adoption curve, we’re doing crazy things because the money’s available to do crazy things, to make your golf app tell you a bunch of information that you look at and go, “This is worse. I would rather you not tell me any of these things than try to tell me these things.”
But then there’s a part where all of a sudden some actual utility happens or value accrues. The whole situation gets reset around, “Oh, we figured out the problem.” And then a new story starts to take form. Any prior cycle stories that come to mind on this?
Chris: Yeah, 100%. I mean, it makes me think of the whole dot-com era.
I mean, when everybody was opening up a dot-com business to do everything, right? Just throwing all kinds of ideas against the wall. And of course a lot of those dot-com businesses did not work out. But some stuck around and created enormous value, whether it was like an eBay or it actually did work, or I don’t know.
I’m thinking of like there were a lot of pets.coms and things that didn’t work at first, but now you still have chewy.com, and they’ve sort of figured it out. I think that is a working business. So yeah, I mean, you’re absolutely right. There’s a certain amount of experimentation that has to come with this, and you almost have to try and fail to figure out the real solution.
So that’s really interesting, and I also think part of this is you’re gonna have to expand what you think of as an AI play. Some of these big wins may not come in technology companies as you think of them. It may be an HVAC company that figures out how to use AI in their business that creates some massive gain.
Or yeah, it might be the... Who knows? It could be some ordinary business that has figured out a way to harness AI and make their business a lot better. So that’s really what I’m paying attention to also, and I think we talked about this in a prior podcast. We were both kind of looking for use cases, or these businesses that are really using it, AI, and have found something that really enhances their productivity in some crazy way.
And you know those stories are gonna happen.
Matt: Yeah, those stories are coming, and I think about... Well, I think about the app example you just gave. I think about all the different types of businesses and entities. I think of Kai Wu’s work, where he was like, “The companies that are showing this in earnings reports, where they’re not only saying AI will fix this, they’re pointing at incremental margin earned, were storage facilities or something, something random where you wouldn’t expect the value to accrue.”
Chris: Right.
Matt: That’s part of the tech adoption life cycle of it. It can’t all be tinkering and early adopters. At some point, it has to reach a mass market in a financially meaningful way to keep going.
Chris: Yeah, and it’s harder to make it into a business, or get people to pay for it. So sometimes you...
Yeah, I mean, I’ve talked to certain software companies, and they’re running these experiments, and they have lots of anecdotes of... It’s kind of cool stories of things that they’ve figured out. But still early, and they’ve got to roll it out, and maybe it’s worked in a small segment where there’s lots of other companies, and they’re gonna roll it across those segments, and then you’ll really see.
And those could be pretty exciting stories.
Matt: Investor allocator, Chris, when you’re hearing the growth pitch and you’re starting to see some of those problems take hold, how do you start to assess, I guess, the look-through towards, “Hey, we found something that we think is working, that we think is getting traction,” and where you say, “Oh, this is what carries the business on to next,” versus, “I don’t really think you understand this yet”?
Chris: Yeah. Well, for me, part of it, as I always frame it, is thinking, well, if it is the real deal, you have plenty of time. There’s a lot of urge with investors, like they wanna get in really early, and there’s not necessarily any need for that. Again, this is something that I learned with that 100 bagger study, is that if it is the real deal, you’ve got...
You’re gonna have a lot of bites at the apple. So don’t feel like you have to figure it out right now. And if you have to wait a few months or quarters to see if it really does have traction, it’s not gonna kill you. Even if the stock doubles over that time, it’s fine. You know, you’ve got time.
And you can start small, and then there’ll be drawdowns, and you can add to it during that. So there’s always... I don’t really feel like... I feel... I get the sense like a lot of people feel like there’s an urgency and rush, and you have to figure it out now beforehand.
But it’s very rarely ever the case.
Matt: Yeah. Well, and I think that was a big part of... I mean, we’re only a week or so into SpaceX even trading, but this is part of the massive run-up you saw post-IPO.
Chris: Yeah, exactly. Everyone feels like they have to own it. So everybody in the world who wanted to buy it has probably bought it.
Matt: Yeah. And now sitting back and going, “Whoa.” “Somebody else didn’t want it a week later.”
Chris: Yeah. That’s right. And now it’s come back down. So human emotions still drive a lot of it, and that fear that you’re gonna miss out still drives it.
Matt: What do you think — you can use SpaceX if you wanna use SpaceX as the framing for it, but with companies as they start to accelerate on that curve, the types of signposts that you look for in the quarterly reports and the calls, the indications of we have money, we think we can get a return on that money at the company level, and now how investors actually assess that progress.
Chris: Yeah, I mean, this is where it gets somewhat difficult because a lot of these will start off just as anecdotes. And that’s... I would say that’s where we are now with many, if not most companies, at least the ones that I follow. You know, they talk about it. Some of them have really nice anecdotes they can tell, but it’s not yet visible on the financials.
There’s no impact. You can’t look at it and say, “Oh, look at that. Organic growth went up another point,” or their margin went up another point. But you kinda sense that’s where it’s gonna go, you know. So again, this is kinda in that gray area we talked about where you don’t have to act on it just yet.
You’ve got the anecdotes, you’ve got... They’re talking about it. So I still wait until I actually see it because I’ve just seen so much talk then not materialize in financials. And for me, as a filter, that’s kept me out of a lot of problems over the years. Companies have had great stories and have these great anecdotal sort of unit economic stories, but then they never really...
The financials never look as good as they should because there’s a lot of other noise or expenses that are between the anecdote and the final bottom line. So, but again, this is a stylistic thing, and for me, I still wanna actually see it. And if I can see, okay, look, they’ve been telling us these anecdotes for three quarters now, and now finally we’re seeing it.
You know, this organic growth idea popped up almost 100 basis points from what it is, and then you start to think, wow, now if that carries forward, and then you can really get interested. Now, of course, you’re giving away something there because the market’s gonna have figured out probably before you actually print, but it also cuts out a lot of risk, a lot of the stories that don’t ever get to that point.
‘Cause everyone now wants to tell that story. But I guarantee you, they’re not all gonna carry that ball all the way through.
Matt: And that right there is once everyone wants to tell the story, number one, it’s a risk reduction exercise, and I think I wanna take it here next. Seeing the numbers validated reduces a whole portion of the downside risk because now you have a real business.
Chris: Yeah.
Matt: Thinking about companies catching up to the growth curve versus mature, steady, boring, stable state companies like, pick your blue chip of choice, your Walmart, your McDonald’s, your whatever. A little company becoming one of these big companies, basically progressively getting more and more boring with less and less risk over time.
How do you think about that, like maturing into that mature boring company versus staying on the we’re a sexy exciting company forever? Which I feel like they’re trying to tell us these companies exist.
Chris: Yeah. I mean, my preference is to find the ones that are more on the side of becoming rather than the ones that have already gotten there.
I have a few companies who I would consider large, but large for me would be like $20 or $30 billion market caps, which in the context is not necessarily that big. Although again, when we’ve talked about this in prior podcasts, I know we’ve said you can’t just look at market cap, right?
It’s market cap relative to a TAM. So a $30 billion market cap company can be tiny considered against its opportunity, or a $30 billion company could be completely mature and not gonna grow at all hardly after that at all. So it really depends on where you are. The other thing I always think about, one of my favorite little Warren Buffett-isms was when he talked about how if a company earns a 15% return on equity and there’s no payout ratio, and that CEO is responsible over the next five years, that CEO will invest more capital than that business has at that point in its entire history, no matter how old it is.
So it’s always, what a company does with its incremental capital over the next two, three, four, five years is huge. And that’s why that capital allocation piece becomes so important. So some of it, like I can say, like I’m very confident in, say, a Constellation Software, which has this ingrained culture of return on investment.
You know, they’re not likely to just spend a lot of money on, say, AI initiatives that don’t pay back something. So there are some organizations that have that discipline already. They talk about the return on capital. It’s something they think about and they focus on, and those are the kinds of organizations that I would be much more comfortable with in this environment that we’re talking about.
And there are a number of companies that I can think of whose management teams talk about those kinds of things versus a management team that doesn’t necessarily consider that, but they’re saying, “We wanna grow, we wanna capture market share, we wanna be among the first leaders.”
You know, they talk different language, and that return doesn’t really come into play, ‘cause those ones I think are more at risk of, yeah, they’re gonna spend a whole lot of money and not gonna get much return from it. And that’s more the corporate history, and it’s not just technology. I mean, just regular ordinary businesses can make these mistakes all the time.
Matt: I was thinking about that specifically, and I think it’s come up a couple of times with SpaceX where defining the company by the TAM, defining the valuation by the TAM, I forget what the numbers worked out to, but it was like basically our TAM is space and time, and space and time we think is worth $27 trillion today, and we think our company is therefore worth $27 trillion because we’ll own the TAM.
Creative. Give them bonus points for that one. But it’s still this idea of we have to own the whole TAM to earn the valuation. What’s interesting to me on what you’re saying there is, like, being aware of the size of the company relative to the TAM itself, and then what market share is available to capture.
And there can be a lot of return earned in not owning the whole TAM, being a smaller player, but having a very profitable growth profile in that.
Chris: Yeah. By the way, when you were talking about SpaceX’s S-1, I can’t help but... It was a heck of an S-1. I would recommend people just read at least some of the beginnings.
Matt: Absolutely.
Chris: It’s crazy. And I do love the incentive comp piece where he gets a certain bonus if they establish a one million person colony on Mars. Did you catch that part?
Matt: So good. So good.
Chris: I think he gets, like, an extra trillion dollars or something. Whatever it is. But—
Matt: I’m going to the Excess Returns Leadership Committee meeting armed with some new incentive comp plans.
Chris: Yeah, I think that takes the cake as far as I’ve never seen any incentive comp scheme at all like that before. Not to take us off topic there, but...
Matt: So this idea, though, of size relative to TAM, and then how you think about that, because most people think, “Oh, I wanna own the biggest player in XYZ market.” And you’re saying, “Maybe four or five or seven if the situation is right.”
Chris: Yeah, I think you could almost ignore the numbers. You just ignore the size and just think in terms of what’s the market cap of the company?
What’s their TAM, and how much of that realistically can they capture? And there it doesn’t really matter then. Then a $3 billion company or a $30 billion company, it doesn’t really matter. You’re getting away from thinking in terms of this is a big company, this is a small company, and then you’re reframing it entirely on the opportunity.
And to your point, absolutely, you could have a wonderful business, great returns, in a smaller TAM if you can capture a decent part of that with good returns.
Matt: A good dental practice in a modestly affluent neighborhood is not gonna be the total dental market in the United States.
Chris: No, usually, like, when you look at local millionaires, there’s similar businesses, right? It’s always some local distributor who has the exclusive for that area. He’s printing money. Or it’s a local dealership, a guy, he’s got the Toyota dealership for the region or whatever it is.
You know, it’s those kinds of people. They’ve got an exclusive for a certain area and, very secure high return business.
Matt: How do you think, if at all, about the benchmarks? It’s interesting from last time we talked, we found out the S&P inclusion wasn’t gonna be a thing. They were gonna stick by their original rules.
Somewhat surprising for how much everybody seemed to be bending over to making adjustments. Does that matter to you? Is any of this interesting to you at all, or is it just noise?
Chris: Well, I guess it was more interesting to me back when I used to think more about the S&P and being in the S&P, but I don’t know.
I sort of got away from, and I think most people know or have a sense that the S&P is being dominated by a smaller subset of companies now. I think there was an interesting note by Torsten Slok, who’s the chief economist at Apollo, and he said that if you backed out AI companies and energy companies from the S&P 500, the rest of the S&P is down for the year, which is pretty striking.
And so I think that he had identified 84 companies that were AI related, and that includes semiconductor companies. And so all those... Some of those returns have been incredible. You know, this company’s up 200, 300, 400%. SanDisk’s, I don’t know, what, 600% year to date or something. So obviously that pushes the index, can push the index quite a bit.
So I don’t know. I think the S&P is its own thing. It’s certainly a hard benchmark to beat, and I know a lot of active managers have been beaten by it in the last couple years especially. And it’s always gonna have those issues where people are gonna question the construction of it. And so I don’t worry about it as investor.
I don’t think it changes what I do based on what the S&P committee decides to put in their index or not put in their index. But it’s interesting to watch it, and so much of people’s retirements and things are tied up in the S&P. It’s kind of... Yeah, it’s interesting to watch it, but I don’t think it...
It doesn’t change, it shouldn’t change your approach as an investor, unless you’re—
Matt: In it. In which case, by all means.
Chris: Then you may wanna pay attention.
Matt: You might wanna pay a little attention. It’s curious too, because I think for the first time in a while, I heard regular people talking about that decision not to include it, and the idea of just having some profitability metrics and other basic things of, “You should be producing a positive economic return before we consider you.”
There’s actually some portfolio construction rules that were nice reminders, I think, for people to have. Did you follow any of that stuff I was rolling out or in the conversation, the ether?
Chris: No, but go ahead.
Matt: Well, so it... An interesting standard to basically say, and this goes back to the Tesla inclusion, of saying you should be able to—
Chris: Not just purely size.
Matt: Yeah, not just purely size, and we’re going to make adjustments for you on the size of your free float. That was another thing too. Just ‘cause you raised this money doesn’t mean this is what you’re actually—
Chris: Of course, this is another interesting thing about SpaceX, which is it absolutely tests the corporate governance boundaries to the limits. You’re right. I mean—
Matt: Yeah.
Chris: And nobody cares about this. I mean, it’s a boring topic, and only if you’re a very long-term investor, I think you care. And even then, in this case, maybe you would accept... A lot of people obviously accepted it. But I mean, this is basically Elon’s company. He can appoint the board.
There’s a clause in there that shareholders can’t sue him. So you gotta go into this knowing that basically he can do what he wants, and you’re either... You’re just along for the ride. So I don’t know. I just... I feel a little old school about that. I mean, I still don’t like even to see dual class stock.
I mean, I have some that are like that, and it’s unavoidable. But if you have very good stewards and partners that you trust, then you overlook it. But I prefer to have a more open process. On the other hand, you can see why it might make sense, because then you can have founders lose control of their companies because of reasons that don’t make a lot of sense either.
You know, there are rules, institutional rules about boards that don’t make sense, like having an independent director. And an independent director in corporate speak means somebody doesn’t own a lot of stock and isn’t really engaged in the business at all. I mean, that’s not who I would want on the board of a company I’ve invested.
I’d love to see a board full of owners, a lot of owners of the stock, and then people who add value to the business in some way. Like I remember when I was in banking a long time ago, I worked for a small bank that became kind of a regional bank, and who we’d have on our board.
We’d also invite some of our largest customers. So we’d have like the largest general contractor in the area, the largest auto dealership, the largest title company, you know. He would be on our board. Why? Well, because those people can funnel business your way. You know, so they don’t own a lot of stock, but they’re useful to business somehow.
And that’s how I would think when I think of boards. I think, okay, well, I wanna have stockholders. You know, if there’s four or five large stockholders, let’s put them on the board, and then you wanna have people add value somehow. But that’s not the case with a lot of these things at all.
They’re just kept boards, and as a shareholder, you have very limited rights and very little say in what goes on.
Matt: When you think about the size and the scale and ambitions of some of these companies, do you think if that size, scale, if that TAM is the goal, that that’s a reasonable thing to be done?
Meaning could you have a board governed the way that you just described it and have goals as lofty of an ambition?
Chris: I think probably not. That’s why I think it’s a tough spot, right? Because to be very honest, to be an Elon Musk, and let’s... You know, he got where he is. He has enormous tolerance for failure.
Matt: Let’s be honest.
Chris: I mean, he pushes things to absolute brink. I think it’s pretty well known with SpaceX, where they were almost broke. It came down to that last launch, and it worked, and voila. But if you had a board of lots of rational people, you don’t even get to that point, you know?
So there’s absolutely this tension, which makes it fascinating as an investor. You wanna back talented entrepreneurial people. At the same time, you’ve seen lots of places where that’s been abused, let’s put it that way. Where corporate insiders have enriched themselves at shareholders’ expense, and you don’t want to put yourself in that situation.
So sussing out who’s what. I think it’s particularly tough now where that entrepreneurial energy seems particularly important when you have a new technology like AI changing the landscape so dramatically.
Matt: When you think about that and the investment implications of how much run basically to give these entrepreneurs and founders with the investor hat on, how would you gauge trust, I don’t have another better word for it, trust in the vision of the leader who has less checks and balances, probably a more ambitious goal, versus, “No, these are my red flags.”
This is not a SpaceX specific question. This is just a — how do you read through that? Like you just said you have some dual share class companies. You’ve vetted some version of this before. How do you think through it?
Chris: Yeah, and I think there are some clues like just getting a sense for what kind of people they are.
So that means also looking through their compensation. The compensation of the company that I’m thinking of where there’s A and B stock is not, they’re not... They don’t compensate themselves richly at all. It’s very modest, and you just get a sense of dealing with them as business people and how other people have stories and tell you things that, hey, these are just normal grounded people, and most of their compensation and their value is gonna be added in increasing the value of their stock holding in the business, not by extracting pay and options and all the other goodies.
So that’s kinda one clue. Sometimes you get a culture. Like Buffett famously taking no salary. There are some other companies like that where the CEO doesn’t really take much of a salary, doesn’t need it. I’m on a board of a public company myself, and I think like the CEO, top management there, they’re very trustworthy people.
You know, I’ve gotten to know them. They’re not gonna screw you over. They don’t pay themselves excessively either. So it’s more of like your intuition comes into play. Is this a good solid trustworthy person, or do you get the feeling that he’s a little slimy, like there’s a little bit of show, there’s too much of that going on?
So yeah, I mean, I think it’s just a human skill that we all have, whether... Your own internal bullshit detector, as Hemingway said.
Matt: The idea of vetting that too is vetting the story that they are presenting, the BS detector, the dragon in the garage, the great Carl Sagan-ism.
Chris: Yeah.
Matt: The burden of proof has to be there.
Somebody has to deliver it to you. So it’s the regular exercise, what they say, what the financials say, especially once they’re a public company. It’s that combined effort.
Chris: It is. And then I’d say, throw in anecdotes you hear from people. And sometimes they seem meaningless, but when you start to accumulate a pattern of it, then it’s worth paying attention.
You know, if he’s a... Let’s just say he doesn’t automatically fly business class. Okay, it seems stupid, minor, but if that’s one thing among many, and you see that he has a very modest office, or he doesn’t drive a fancy car, et cetera, et cetera. These little things, you start to get, well, what really motivates him?
Maybe it’s not those things, you know? And I’m not saying you can’t have those things. Certainly I know CEOs, they drive fancy cars, live in great places, and they’re still awesome CEOs. So I’m not saying you can’t do that. I’m just saying there’s possible clues there.
Matt: Stuff hides out in funny places. I think the anecdotes is really valuable, because whether it’s a footnote in a filing or whether it’s a media appearance, those can be tremendously valuable insights into the... There’s still people running these companies.
Chris: Yes. That’s one thing you can’t forget.
You know, we just get lost in the world of tickers and financials, but there’s still people going there every day to work, and what are they like? What’s their motivation? What motivates them? Especially the top people. And then I’ve learned to appreciate to get a sense for that culture in the organization otherwise, and the importance of that.
And we’ve talked about this too on past podcasts, like how do you do that, right? Well, that’s hard too. But again, there are some anecdotes and stories and things you can collect. And SpaceX is an interesting example in this, in that it also minted a lot of millionaires.
You know, one thing Musk did was he allowed everyone to get stock. So I’m sure you’ve heard the story of the Mexican immigrant, the welder who’s now worth a million dollars or something close to it, right? Everyone in that organization, they got some stock. So at least culturally, that’s an interesting sign for what might be going on there.
And you know, so there are other stories of other companies where you hear about just regular people working there becoming rich because they had this policy of kind of bringing employees on, making them owners, and that’s nice to have that.
Matt: It’s a real nice thing to have, and it is one of those things that creates a...
It has the potential to create a class of wealth, especially in companies where we hear the stories of, well, they had 100 employees.
Chris: Yeah. And it creates a potential to actually carry a culture forward. So whatever made that business successful, you hope with all those people who have had such good experiences there and good success there, and have their wealth tied in it, that they see and understand that, and they want to preserve it, and they want to keep it going.
So those employees bring along other people, and if you have a, you can... That’s when human beings collectively can create great, wonderful things, and go for a long time. It’s not just one person at the top. That’s kind of a fallacy. You know, you need a lot of people.
Matt: I think that’s been one of the interesting parts about the...
Like go back to pets.com for a second, and relate it to a Chewy. Chewy is one of the dominant providers of employment in the area I work in. I’m not saying that it’s good or bad jobs or whatever else. I do not currently, I will disclose, do not currently work in a Chewy warehouse. But what I will say is whether it’s the Chewy jobs, the Amazon jobs, there’s a...
These are employers. These have become massive, massive employers that were tech startups with a handful of employees with decks, old chairs on sawhorses 20 years ago. And now they are substantive employers in the economy with people who are tied into communities that are plugged into these.
This is almost, it’s another relationship to the when you own a share of a company, you own a piece of a real business. And when you work for one of these companies, you are tied to a certain type of a community asset in this for-profit enterprise.
Chris: Absolutely. You know, there’s that, we are the Hundred Year Thinkers podcast, but there’s that book, Century Club.
Matt: Mm.
Chris: And it looks at companies that have survived very long periods of time, centuries, even thousand years. And one of the attributes is this continuity in we’re talking about with employees and tenure and relationships, stuff like that. But it also, to your point about community, that’s exactly part of it as well, that they’re part of a community, and that they try to be good citizens in that community.
And they also have long-term relationships with certain suppliers, with customers. So it’s something that permeates an organization, you know? A really a company that’s built to last a long time can’t just go it alone. So they have allies in a way. They have also strong relationships with key suppliers.
They have strong relationships with their best customers. They have strong relationships with their employees, and they have good relationships with where they are, the community that they’re in. So it’s a lot of things that drive it. Yeah, it’s really interesting and not so easy to find.
Matt: Not so easy to find.
And it reminds us of the shareholder and stakeholder network as they fit together, as they feed each other, not just as two weird extraneous things.
Chris: Right. Or worse, adversaries in some way.
Matt: Or worse, adversaries in some ways. The wealth effect is very real. And again, I think that’s underappreciated.
I’ve worked with a number of people who have climbed ranks in some of these companies and done things, become executives, and it’s really interesting to think this is not the path that we were necessarily talking about 30 years ago. The person at the plant working for GM didn’t necessarily have this trajectory.
Talk to me for a minute about the idealism, frustration, demoralization framework, because I think a lot of investors are sort of feeling like this in the cycle with where we are. Is there any tie-in, you would say, to the average investor just in thinking about both that structure and the cycle we’re in?
Chris: Yeah. So you think there’s some disappointment, more disappointment now than—
Matt: I think so, personally.
Chris: Yeah, me too.
Matt: Yeah.
Chris: Me too.
Matt: But where do you see it?
Chris: No, I do think so, and I think it’s been a very strange market that way because you look at the S&P index and it’s chugging along just fine.
Matt: It’s a positive number. It’s great.
Chris: Right. But I think, what we hinted at before, most stocks are down year to date, and many stocks have not done nearly as well. So it’s been sort of a lopsided market in a way. And I know we’ve talked to this before about the quality, so-called quality bucket that has gone through this drawdown, where all kinds of companies from Hermes to Cintas to whatever, they’ve all had these drawdowns in their multiples.
And so, yes, I agree with you. There’s this sense of disappointment and frustration, I would say, for the last year. And some of that is AI induced too. Of course, anyone who owns any software of any kind has been smacked, but it’s not just that. I mean, it seems like a lot of knowledge-based industries have been smacked.
I know I have like insurance brokers, they’ve all come down. You know, just a lot of different things have come down. So I agree. And some of this, take it back to the IFD, so idealization, frustration, right? So ideal, people have this ideal, and that’s maybe where, yeah, the framing and understanding that the way stocks work is there are repeated drawdowns and long stretches of disappointment.
So yeah, actually, this is where I was going to mention this to you earlier. There was a paper, short paper put out by Worldly Partners, and it was called “Generational Investing: The Discipline Behind 100X Outcomes.” And they looked at stocks that have gone up at least 100 times since 1972, and I always like this kind of stuff when people do their own independent study, and it sort of validates everything that I’ve, you know, wrote about, been writing about in my books as well.
I mean, they found that, yeah, the average, 82% of those stocks lost more than 50% of their market value, and the average decline, the average drawdown was 65%. And yet those companies had returned 533 times on average from their starting point. The other interesting thing to note about that is it was eight years between highs, so it’s a lot of waiting.
And again, this was the very best, so the very best performers. So you could have just a good performer, and it may be even worse than this. Drawdown’s worse, waiting worse, but still get a very good outcome. So I think you have to approach it by knowing this is the way stocks behave.
And you can have price diverge greatly from the underlying value of the business. And you can do this with any stock. You can look at the high and the low for every year, and you’re gonna see huge swings. I mean, fifty percent moves every year. And did the business really change that much in value in any given year?
Probably not. So if you go in with that expectation that this is what’s gonna happen, you can avoid that. You know, that’s part of the I, the I. You know, you idealize. You have an ideal that doesn’t match up with the reality. And so people have this ideal that when they buy these stocks, they’re just gonna kinda increase every year.
Okay, you’re gonna have some years where they maybe go down, but then they go up again. They don’t necessarily have this idea that I’m gonna get cut in half at least once, and it might have to wait eight years before I get to my new high. That reframed things a little bit. If you knew that going in, that was your expectation, you wouldn’t worry about it so much.
You know, I think that’s where this long-term mindset is very difficult to cultivate because everything in our culture pushes you the other way. You know? They’re measuring you every quarter. There’s not much tolerance for that. And there was something else. There was a... I think his name was Wes Gray, and he wrote a piece, I think Michael Mauboussin might’ve wrote about this, though.
It’s called, I think it was “Even God Would Be Fired,” something like that. And the idea was he looked back at stocks from 2007 to 2016, and he looked at, like, rolling five-year periods, and he created the so-called God portfolio. Like, the absolute best portfolio you could create. You know, if you could create a portfolio right now and knew this was, these stocks are gonna create the best return over the next five years, what happened to those?
How did those portfolios behave? And of course, what he found was that even in that case, these portfolios were suffering 35% drawdowns plus. You know, there are many times this happened. So yeah. So he was saying even God would be fired ‘cause investors would be like, “That sucks. I’m not putting up with that.”
Matt: Terrible CEO. Yeah. Terrible governance. You’re God. God, God fund. Terrible governance. No accountability whatsoever. For investors now, and I’m curious, do you think... I hate broad brush stroking this in the sense of saying it’s been a shift in markets, but it does feel like the COVID thing has been made...
Like, things have been weird since the pandemic with both new entrants and investors. Things have also been weird since probably right after the global financial crisis. Like, right after the GFC and ZIRP, that made things weird, too. Do you look back on any period and say, “This is what got us to here,” or is that a pointless exercise?
Chris: No. I mean, I do think it’s weird. I’m sure people in the ‘60s thought their market was weird after Vietnam or what... You know, whatever. There were always people... Or after the Korean War or whatever it was. And people, there, so things do change, and I think those points you mentioned are a couple of the big ones I think of.
Yeah, the GFC certainly scarred everybody who lived through it and changed the way they invest and think about things. COVID, just been weird ever since. And I think this AI market has also been very strange, the way certain stocks have behaved. So it does feel weird. I think there’s also this, for our market now we’re in, there’s a lot of trading that is not necessarily driven by a human being making a decision, but it’s following an algorithm or a rule, a lot of passive money.
And I don’t know if this is right, but I saw it in a CIBC note where they said, like, I think it was 2003, 80% of the trading volume in the market was done by human beings that were not following rules or algorithms. And now it’s like 7%. And I don’t know how you figure out that 7% number, or if that’s just something people keep repeating and it’s suddenly become true, but—
Matt: Now it’s gospel.
Chris: Yeah, it feels like it’s directly right. Like, it feels like there’s a lot of volume that just washes in and out of stocks that doesn’t really have... Not spending a lot of time or thought about the individual companies involved. And you just see huge amounts of money just sloshing in and out of sectors, and they’ll just all go down together or all go up together, even though the companies themselves are...
There’s quite a bit of differences between the two of them, nuance. And even though nothing in particular has happened, it’s just a change of sentiment. So that kind of stuff makes it feel like this market is strange. So I agree with you. I mean, I guess some of this is an empirical question.
We could probably look and see whether volatility is more or in some way or... But it just feels that way. It does feel like something strange, weird, different.
Matt: Well, I think, and to me it goes back to the way we talk about things. I had a moment in the SpaceX piece where I was thinking about post GFC, I was thinking about ZIRP, I was thinking about talking to pensions, endowments, investment committees for those types of vehicles, and especially any of them that had a hurdle or a distribution rate, and going, “We can’t get that from bonds anymore. What do we do?”
And that was the advent of a lot of new entrants in like private semi-liquid private vehicles in real estate, and then credit, and then even some venture and other things at the margin. Well, if we’re getting this return here, we can take this other risk there too.
Chris: Yeah.
Matt: And then you couldn’t really chase crypto or meme stonks or whatever, you know.
There was a lot of GameStop option betting going on by those institutions, or at least none of the ones that I talked to when that was happening. But now in this like AI run-up, it’s a new class of comfortable awareness because, hey, look, these are big companies. These aren’t little piddly things.
These don’t feel like the venture risk we didn’t wanna take all those years ago. But it’s been this gradual training of the institutions, of the boards to say, “We might be okay with this risk because size somehow confers safety.” I don’t know... I didn’t invest through the ‘90s to see it that way.
Chris: Mm-hmm.
Matt: Is that new or is that—
Chris: No, it does... I do think there’s something to that, because companies in the ‘90s were generally not as far along when they went public.
Matt: Hmm.
Chris: Well, I mean, think about it. We’re gonna have, if all goes according to plan, I think OpenAI and Anthropic will both go public later this year.
So that will mean that within the span of 12 months, we’ll have seen three companies go public, all with valuations of at least a trillion dollars, which is mind-boggling to me.
Matt: I mean, unicorns used to be fun. Do they have a name for these? Do we have another fictitious animal?
Chris: Gonna have to coin a new phrase.
Matt: Yeah.
Chris: And companies in general are just how much, how many trillion market cap companies are there now? I mean, it was unimaginable, like, 10 years ago. I remember thinking, ah, Apple is like 500 billion. Oh, they really think it could be a trillion dollars?
Matt: Right. It seems silly. It seems silly. Look at all that cash on the balance sheet. How are they gonna grow to that? But here we are. And then what of it is even sustainable? And that’s not some bearish, weird doomsday thing, but that’s the same question then. What would make... how do we have a bunch of these multi-trillion dollar behemoths going around unless the TAM all of a sudden got bigger and includes infinite space time and Mars colonies?
Chris: Yeah, exactly. I mean, I keep... You know, Alan Greenspan died earlier, 100 years, and he coined that phrase, or at least popularized it, irrational exuberance.
Matt: Yeah.
Chris: So yeah, I have been thinking about that phrase of late because of that, and he asked that question in 1996, and, what was the full quote? He had it as... Oh, yeah. He said in 1996, “How do we know when irrational exuberance has unduly escalated asset values, which then becomes subject to unexpected and prolonged contractions?”
So yeah, I mean, that’s kind of the question on everyone’s mind with this now.
Matt: What do you think rational exuberance would look like?
Chris: Wow, that’s a good question. Yeah, I think most investors have some measure of rational exuberance with everything they own.
Matt: Hmm.
Chris: There’s a... I obviously don’t know what companies will earn 10 years out, but I make assumptions about companies’ rate of return and their investment rate.
And so I try to build that based on either the company’s own track record or what I know about the unit economics and as they scale, what should happen. So that’s kind of rational. I don’t wanna say it’s totally built on numbers because you can completely have irrational exuberance, you know, built on numbers as well, and people hide in numbers maybe more than they should.
But it has to... I don’t know what rational exuberance means, that it makes some sort of sense, and that it’s grounded on something that’s logical and that you can think through and is possible. But yeah, I mean, it’s a great question. Obviously, I don’t have a good answer to that.
Matt: I’ve put you on the spot. It’s an interesting one to invert.
Chris: I really like that question.
Matt: All right. We’re gonna invert that too.
Chris: If that’s irrational exuberance, what’s rational exuberance look like?
Matt: Exactly. Bogomil and Robert, we’re coming for them with that question next time. We’re gonna hide it in our pockets. Hopefully, they don’t listen to this episode and we can—
Chris: Yeah, I’ll give it some thought too.
Matt: —foist it upon them. I do think, though, there is a part of — it’s part of the optimism bias that we all have as equity investors, where we think these companies will figure out a way to turn the lights on, do these things, reward us over the long run with making good decisions.
And good decisions and good business lead to growth, and we have the optimism that they’re gonna figure that out.
Chris: I think that’s a pretty good encapsulation of what I think rational exuberance would look like. That’s why I say, like, every investor is probably rationally exuberant about whatever they own, because exactly the reasons you say.
We have this belief. But when does it cross over and become irrational exactly?
Matt: Yeah. Interesting, interesting all around. So the book’s out any day now.
Chris: Any day.
Matt: Any day now. Available where all fine books are sold, I imagine.
Chris: That favorite phrase. Yes.
Matt: All right. And we’re celebrating something when it comes out, so.
Chris: All right.
Matt: Where should people look this up if they wanna track the book, they wanna get in touch with you?
Chris: Yeah. It’s being published by Partners Media. So they have a website. You can go to Amazon. It’s definitely listed there, of course. So yeah, those are two spots to keep an eye on.
And I’ll put something out on Twitter when it comes out as well, or X.
Matt: Yes, please. I mean, get the name right now that we’ve got a new parent company holding on to all the prized assets.
Chris: Yeah.
Matt: Well, fantastic. Chris, thanks so much for doing this with me today.
Chris: Yeah, Matt, it’s always fun chatting with you. Good questions. And yeah, hopefully people found it interesting.
Matt: The most rationally exuberant channel on the internet, Excess Returns. Like, comment, subscribe, all the things below, and we are out.