TIP837: Adobe, Lululemon, PayPal – Are our Biggest Losers a Buy Now? w/ Daniel Mahncke & Shawn O’Malley

Daniel Mahncke and Shawn O’Malley take a trip down memory lane and look back at the pitches of the last year and a half – especially the ones that didn’t work out as hoped. Many companies that were seen as best-in-class businesses not too long ago experienced massive drawdowns in the last year. Some of them were covered on this show, and others even made it into the portfolio. Daniel and Shawn discuss the patterns of the stocks that lost most in value, what one can learn from that, and how the market shift towards AI changed how they invest. The companies discussed today are Adobe, Lululemon, PayPal, Trade Desk, and CoStar. IN THIS EPISODE YOU’LL LEARN: (00:00:00) Intro (00:04:33) Why Lululemon had to leave the portfolio (00:20:11) What made us sell PayPal (00:36:08) About Adobe’s downfall and future outlook (00:58:40) Why Trade Desk never made it into the portfolio (01:06:53) Whether Daniel’s and Shawn’s conviction in CoStar is broken (01:16:37) What Daniel and Shawn learned from the companies above Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join the exclusive ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Mastermind Community⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Track ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Portfolio⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn more about how to join us in NYC for our ⁠⁠⁠⁠Intrinsic Value Conference⁠⁠⁠⁠. Portfolio Review ⁠⁠⁠Submit Tool⁠⁠⁠. Pitch on ⁠Adobe.⁠ Pitch on ⁠Lululemon⁠. Pitch on ⁠Paypal⁠. Pitch on ⁠Trade Desk⁠. Pitch on ⁠CoStar Group⁠. Related ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠books⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ mentioned in the podcast. Ad-free episodes on our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Premium Feed⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. NEW TO THE SHOW? Get smarter about valuing businesses through ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Check out ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Investor’s Podcast Starter Packs⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Follow our official social media accounts: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠X⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Try our tool for picking stock winners and managing our portfolios: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TIP Finance⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Enjoy exclusive perks from our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠favorite Apps and Services⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn how to better start, manage, and grow your business with the ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠best business podcasts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. SPONSORS Support our free podcast by supporting our ⁠⁠⁠⁠sponsors⁠⁠⁠⁠: Plaud Plus500 Netsuite Scribe References to any third-party products, services, or advertisers do not constitute endorsements, and The Investor’s Podcast Network is not responsible for any claims made by them. Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

• 0:00Speaker 00

  You're listening to TIP.

• 0:03Speaker 01

  Welcome back to the Investors Podcast. Today's episode is number 837 and it's also a little anniversary because it's the 19th episode of our stock research episodes. And the last stock I pitched to you, Sean, was DeLco.

• 0:17Speaker 02

  Yeah, you tortured me with another payments company, but I got to admit for this one, it was a brilliant business, growing something like 50% plus, high returns on capital, massive cash flows and all that for a very reasonable price with a mid teen multiple.

• 0:30Speaker 01

  Well, today I have something different to talk to you with, and instead of looking at a single stock, I want to go through a couple of stocks that we covered here on the show at some point. And some of them we used to own, but then we sold them. Some we still hold, but I feel like we should give an update because it's been some time and some we have covered here on the show, but we never owned them. In fact, I only picked out stocks that tanked a lot since we looked at them and we'll sort of analyze why they tanked, what we all can learn from those situations and whether those stocks are worth buying at today's prices.

• 1:02Speaker 02

  Well, if you enjoy laughing at our mistakes, this should be a fun one for you.

• 1:10Speaker 00

  Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly and sharing everything we learn with you. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own and they may have investments in the securities discussed. Now for your hosts, Sean O'Malley and Daniel Manca.

• 1:56Speaker 01

  In case you don't follow the Investors Podcast for too long yet, on this show, my co-host Kyle and I alternate on pitching you Sean, our favorite new stock ideas each week. And the end goal is to basically find great businesses that we can integrate into our intrinsic value portfolio of stocks. Today though, as you heard in the introduction, we'll do something slightly different by looking back at stocks that we covered in the past and especially the ones that unfortunately turned against us. And I'm honestly not quite sure where we want to start here today, because if we first discuss the companies that we actually own or owned in the intrinsic value portfolio, we might get into a bad mood, but if we cover them last, we end on a bad note.

• 2:36Speaker 01

  So I would say we just start with the companies that we used to own, but sold sort of our biggest mistakes. And then we go to the companies that we covered, but wisely decided against owning. And who knows, perhaps they are more attractive at today's prices and we can discuss them looking at it from today's angle.

• 2:54Speaker 02

  And I want to say that on Saturday, we'll do an episode on our biggest winners too. So hopefully you don't get the feeling that we have no clue what we're doing here and we can have a sober reflection on the mistakes we've made.

• 3:06Speaker 01

  And speaking of Saturdays, why don't you also tell the audience where they should be on Saturday, the 19th of September?

• 3:14Speaker 02

  It's a great point, Daniel. We hope that many of you will join us in midtown Manhattan on that day to attend our intrinsic value conference. Obviously the two of us will be on stage alongside Kyle as well. And we have some of the brightest minds of our mastermind community of investors that will be giving presentations. So it should be great. If you want to join us and network with a really thoughtful group of value investors, people are calling it the value investing event of the year. That's just the rumor on the street. Head to intrinsicvalueconference.com to purchase your ticket before they sell out.

• 3:49Speaker 01

  I'm excited already, I gotta say. Obviously it's also my first time in New York City, so we have a great venue and also a lot of great people that I look forward to seeing again. I would be surprised if there are not a lot of people showing up there we also saw in Omaha earlier this year. But enough of that, I would say we should get into it. And I want to actually start by giving another introduction to how exactly the intrinsic value portfolio works. And I think this will be particularly important today because there will be positions that we discuss, which one of us is or was more bullish than the other ones. So the basics, basically the intrinsic value portfolio is a shared portfolio that Sean, Kyle and I manage. And the way we handle this is basically by a simple rule. So the portfolio is obviously a paid portfolio since we don't give any financial advice,

• 4:34Speaker 01

  nor do we actually manage money. However, each of the positions owned in the portfolio has to be in the personal portfolio of at least one of us hosts. Some are obviously in all of our portfolios, but the main rule, one of us has to own the company. So for the stocks in our intrinsic value portfolio and the ones that we discussed today, you can be sure that we actually lost money on them. Okay. How about we start with the most recent seller of portfolio, which would be Lululemon. And for context, the stock entered our portfolio at an average price of about 200 bucks and left it at $116 per share.

• 5:09Speaker 02

  I should probably be the one to take the lead on this one since it was my pitch. And I should say, I still haven't fully given up on the idea that Lulu will turn around. I think there's a good chance that looking back five years from now, especially at the current valuation, it will have looked like a pretty good entry point and will probably have been peak pessimism, but there is definitely an opportunity cost of holding a stock in your portfolio that is already down more than 40%. And that played into our rationale for why we decided to remove it from the portfolio. And so just for context, the thesis was that you could buy this really high quality retail

• 5:50Speaker 02

  brand with industry leading margins, 35% returns on invested capital, 20% Kagers on historical growth and a very, very strong athleisure brand, really the pioneer of athleisure, all for what seemed to me like a very reasonable price of 15 times earnings while they're buying back stock massively and all those sorts of things. And obviously you don't want to pay a premium for those historical growth rates, right? Just because a business has done well previously, doesn't mean that it's guaranteed to continue to do well. But I believed and to some extent still do that Lululemon is not a brand that's just going to come and go.

• 6:30Speaker 02

  And if anything, it's a brand that can continue to thrive while being mainstream. And so like I said, it basically invented the athleisure style. And I thought that that might help them more than it seems to have, at least when you look at what's happened to the business in the last year.

• 6:47Speaker 01

  I gotta say, I probably have the same sort of hesitations toward fashion retail companies that you have towards payments companies. I think it's also fair to say that we both have been proven right. I mean, we will speak today also about a company that's called PayPal and that didn't do too well for us. But generally I agree with you that Lulu might be trading higher five years from now, although I probably have a lower conviction on that than you know, you have. But I think when you say that Lulu survives the mainstream, that certainly means that you know, they are staying cool while being worn and seen all the time, right? That's what you know, a retail brand like Lululemon wants to achieve. And it's basically what brands like Nike and Adidas have already achieved and they are, you know, the exception, not the rule, I should say that.

• 7:28Speaker 01

  And most retail brands experience these short hypes with exceptional economics when they are still pretty niche and in the growth race. And when they do reach the mainstream, the business looks more successful and more profitable than ever. But in reality, the trendsetters used to wear it when it was still small, they stopped wearing it and the mainstream only takes over for so long because they go on to the next big brand when it's, you know, a hype surrounding that brand. There's a hotter brand outside, right? There's not a lot of loyalty in this business and you find that out sooner or later and that could be two years, it could be three years, it could also be 10 years. And that's sort of what you never know. I mean, we looked at Crocs and Crocs is a business where that seems very likely to me that at some point, you know, this hype is sort of dying. Funnily enough though, it was so incredibly cheap last year that I, you know, the guy

• 8:12Speaker 01

  who doesn't like fashion retail, still pitched it to you. And I should say that we only had a small position and we made a pretty good profit, although we might've sold too early because if you look at the price now, it is almost doubled from our price. And I think we sold it for like a 50% profit. Anyway, you know, you can say a lot of things about a company like Nike and they certainly have made their mistakes, but they have also proven that they are what I call mainstream resilient. So that means, you know, they can fail and they currently in the process of doing so, but it's just much harder, at least in the long run.

• 8:42Speaker 02

  I generally would agree, but for me, Lulu has actually been in the mainstream for such a long time now, but I do still believe it has these kind of resilient mainstream qualities, right? Fashion is a really fast paced business, of course. If your collections are unpopular for a season or two, you can get in trouble quickly and then you have all this excess inventory and that can really destroy your cash pile quickly. But things can turn around just as fast when collections go viral again. And so Lulu is definitely going through the painful process of transitioning from a rapid growth business to a more mature business excluding maybe China, but we also don't know how durable growth in China is going to be anyways.

• 9:24Speaker 02

  And so they definitely have a few product releases that have fallen flat in light of more and more competition from brands like ALO and Viori in particular. And then at the same time, you've had this dispute where the founder of the company has been openly critical of the board for some time and you've got the CEO stepping away right as the business starts to underperform. And then now for the rest of the year, you have interim management in place. And so that's a lot of volatility for any stock to process in one year. And from my vantage, when I still wear Lulu all the time and I still think it's a really, really strong brand and a really high quality product, which is why I could probably talk myself into buying it again if it gets cheap in the way that Crocs was, where we're talking

• 10:08Speaker 02

  about trading at like five or six times free cash flow per share. But when you have people just temporarily filling in at the management level at such a critical inflection point in the company's history, without a really strong leader paving the way, it's just not a bet that I felt was appropriate for us to continue holding on to, given how much had changed in the thesis from when we first invested in it.

• 10:32Speaker 01

  There are many brands that go out of style for a while and then they come back many years later. And I guess the problem for me is that I just have a hard time seeing that turn into a compounder at any point. And I have an even harder time sort of anticipating when to jump on and off the bandwagon. And the idea with Lulu has been to buy a company that doesn't have these typical fashion cycles. And it's just a tough game to play. I think the time to make money on these companies is just very early on in their lifecycle. I mean, our co-host Kyle has had a phenomenal run with Aritzia, for example, but you know, this was or perhaps is still the expansion phase. I guess if you would ask Kyle, would say they still have a long runway left. And as soon as these brands enter the mainstream,

• 11:14Speaker 01

  it's just a constant game of getting in and getting out of style. And it's not so much about how old the company is, but more about how big it is. I mean, Aritzia, for example, was founded in 1984, but as far as I know, it only started really pushing internationally in the last decade. So I assume that at some point, it will hit a similar block to what you know, Lululemon is currently currently seeing. And apart from luxury companies, there's just very few brands that can escape that cycle for good.

• 11:42Speaker 02

  It is a bit different when you're talking about with companies like Nike, where they're not necessarily by definition trying to be premium or luxury. But like with Aritzia and Lulu, there is this paradox of growth where the more you become mainstream, the less premium and luxury you're likely to be seen as. And so the reason I thought Lulu could perhaps be different is that for pretty much my entire teenage and adult life, it has continued to be extremely popular. So it's not like this is a brand that shot up in popularity for two years and then you bet everything on it. Since 2010, it has really been a very strong brand nationally, at least across the US and Canada. And it

• 12:21Speaker 02

  did have these compounder-like growth economics for 16 years or more, while they also began really gaining traction internationally. Forty percent, 30% year-over-year growth in places like China or some of the recent numbers. And so unfortunately, though, the business in North America decelerated and then declined much faster than I anticipated, admittedly. And no retail stock is going to survive a slowdown in its core market without a significant revaluation of its market multiple. So even if Lulu is a brand that still boasts industry-leading sales efficiency per square foot, customer retention, returns on capital, and all these other kind of metrics, they just aren't going to be able to survive that without a massive

• 13:06Speaker 02

  cut to the stock price. And so after actually resisting a handful of different brands as competitive threats throughout their rise into the mainstream and beyond, the pressure, I would say, from ALO and Viori, and also these cheaper knockoffs on sites like Amazon, has just become too much in their core markets. Especially in the US, things have just gotten really saturated in athleisure. And what really gave me pause in particular was seeing all the discounts that they were offering in recent months. And originally I had said that if we saw Lulu rely more on discounts to drive sales, that would likely mark the end of its era as being perceived as a premium brand. And that would destroy their margins

• 13:48Speaker 02

  and their earnings over the following years. And that was always my big concern. And so when I had been shopping on the Lululemon site recently, I really, I had to admit, I was shocked by how much apparel was on sale. And again, I've spent many years visiting the Lululemon site for myself and for my wife and for gifts for friends and stuff like that. And it really felt like there was an extraordinary amount of stuff on sale. And then when I did some deeper digging, I did find data, I think it was from CNBC, that supported the claim that Lululemon has in fact been doing an unusual amount of discounting. So it wasn't just totally anecdotal speculation. And the thing is with discounting is that it's a very attractive, short-term solution because you can boost sales and clear out

• 14:32Speaker 02

  old inventory, and it looks really good for your cash flow numbers. But the problem is that it conditions your customers to wait for discounts to shop and buy your products. And so it diminishes the brand's perceived value. It's no longer, hey, I'm willing to pay $100 for these leggings, I'm going to wait for them to sell at 70, or maybe 60, or whatever it is. And that just erodes the brand over time. And what had made the business so special in the first place begins to fall off where, again, they had actually industry-leading rates of full-price sales, which refers to the percentage of their inventory that they would turn over without needing any discounts in the past. And as that reality has started

• 15:14Speaker 02

  to change, especially in the last year, that is what made me really begin to doubt the thesis.

• 15:21Speaker 01

  Whenever you try to figure out whether a stock is a value trap or not, you sort of look for these leading indicators, right? You know, a lot of times you see the headline numbers, they still look great, you know, revenue margins and all of that. And something that you can look at for these retail companies is discounting. How much of their inventory is getting discounted and how does it sell? And it would still, you know, not be visible in the revenue numbers, perhaps in the margin, but it doesn't have to be immediately. But you will figure out that over time, if they just keep doing that, and the perceived value of the brand is going down, they will not be able to take the same amount of money for their goods and services as they did before. So over time, you will see sales decline, you will see margins decline. And that's where you look for these, these sort of leading indicators. And I believe that a huge part of the problem for Lululemon at least, is

• 16:06Speaker 01

  that they do have a management team that's not built for the future at now. It's much harder to make decisions that hurt in the short term but benefit in the long run, when the person responsible for those decisions won't be there anymore.

• 16:18Speaker 02

  I fully agree with that. And just to clarify again, what you're referring to, Daniel, that the company is currently led by interim co-CEOs, which is even more complicated when you're having two short-term leaders instead of just one. After their former CEO, Calvin McDonald, left the company. And so in part, I'm sure that decision was due to pressure from the founder of Lululemon, Chip Wilson, who made his discontent with Lululemon very well-known. And even the departure could have probably been an opportunity for a bit more optimism and maybe a new direction for the company. But it did not help things when Lulu announced that Heidi O'Neill from Nike would be their replacement. And so

• 16:59Speaker 02

  just given the massive challenges and mistakes that Nike has made in the last few years, there's definitely more exciting news to get than hearing that someone from that company is coming to rescue Lululemon. And as I told you and members of our mastermind community, when I sent out an update a few months ago on our decision to sell the position, I could probably stomach a lot of this uncertainty for my personal portfolio because of the conviction I have in the brand. And I have such a long investing time horizon that I don't mind really stomaching a lot of volatility. But it's really another thing to keep it as a holding in our intrinsic value portfolio, where I'm forcing the conviction to some extent

• 17:42Speaker 02

  on to you and Kyle, if you don't feel as enthusiastic about the brand. And then we're also constantly comparing all the positions in our portfolio against the new stocks that are being pitched each week on the show.

• 17:55Speaker 01

  Zooming out, I think there's a debate here to have on how we generally make decisions for the portfolio, because I think we differ from most of our listeners, simply because of how many companies we deep dive per year. You know, you look at 12 companies, Kyle and I'll look at more than 30 companies each. And at some point, at least that's what I noticed, it simply becomes very difficult to say, you know, company A is better than company B, and you know, company C is better than company B. And I just found myself in a sort of decision paralysis, where you know, the overload of options made it so much harder for me to pick a company that I actually feel good about investing in it. Another downside of that is also that you tend to double down too much on companies where you have already made a decision. And that's mostly just because you feel so good about having made a decision

• 18:40Speaker 01

  that you keep putting more capital into those positions because they sort of outcompeted the others. And I've done this even more in my personal portfolio than in the intrinsic value portfolio, which I think is better balanced overall. And also part of that is we're three hosts, you know, we constantly debate whether we want to hold a position, whether we want to make it bigger, whether we want to make it smaller. I do think that helps. And I'm not even sure if any of this makes sense to you, if I'm just talking gibberish here. But when I reflected on my process, especially in the last few months, I certainly counted multiple of these cognitive biases. And obviously not to even mention of, you know, the commitment and the consistency bias that comes from sharing your opinions and also just your pitches online for hundreds of thousands of people to see, which definitely adds some difficulty to the process.

• 19:23Speaker 02

  I think it makes a ton of sense. And there is for sure an anchoring bias here where it can be so hard to come to an investment decision in the first place. There's so much work that goes into it, that you tend to defer back to decisions that you previously made when things look uncertain. And so that doesn't necessarily have to be a bad thing, but it does complicate things when we're spending so much time looking at newer stock ideas and maybe not as much time as we should, monitoring these ideas that we've already looked at previously. So that was one of my biggest lessons from this past year. And having kept an even closer eye on the discounting and inventory trends at Lulu than I did,

• 20:05Speaker 02

  I probably wouldn't have been able to erase the failed bet, but we definitely could have probably cut the losses sooner than we did.

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• 23:22Speaker 01

  Speaking about cutting losses, let's go to our second loser that has actually just staged somewhat of a comeback, at least a small one. The average price of my personal PayPal position, which is the company that we're talking about, has been in the low to mid 60s. So I would actually be close to break even right now after the Stripe and Advent takeover offer. Unfortunately, I'm not break even. I sold at a significant loss and also wasn't a small position for me, especially in my personal portfolio. And it's quite interesting because I think this one carries a lot of lessons, at least in my opinion. And I learned a lot personally from this investment. We sold our portfolio position after earnings in February of this year. And it was only partly due to earnings and the numbers. It was also just because they fired the CEO, who was actually a big part of my thesis.

• 24:07Speaker 01

  And in the end, I think you can say that there were just too many red flags around the company. So to just maybe quickly recap the thesis, because it has been quite some time since the pitch and it might also not be as straightforward as a Lulu pitch. PayPal is basically still the household name whenever it comes to payments companies. And that's sort of the baseline, right?

• 24:28Speaker 02

  And you see that whenever we look at how many companies have copied the PayPal model. MercadoLibre's payment arm, for example, is commonly called the PayPal of South America for a reason.

• 24:39Speaker 01

  It's always good if your company name is chosen to be an example all over the world. I mean, we sometimes talk about how Ubering is a verb in pretty much every market in the world. But being a household name in an industry that is subject to just constant change also means you're probably quite outdated and that was certainly the case for PayPal. So when I looked at the company for the first time, pretty much exactly one year ago, I think, I thought I would look at it to sort of figure out, well, it's an outdated business that would slowly deteriorate and that's why it's cheap and thus I wouldn't make it part of our portfolio. However, and maybe that's where the mistake started. I liked the business much more than I initially thought. I mean, PayPal had a new, somewhat new at least, CEO who came in just one and a half to two years earlier.

• 25:25Speaker 01

  And he had a much more modern idea of what PayPal is supposed to be or should become. And he first made sure that the low margin business was cut and that the core of the business, so the branded checkout, also B2B to some extent by now, and also Venmo, which is sort of a new bet, they go back to being profitable. And at the same time, he grew the buy now, pay later business quite fast and began building new initiatives like an ads business. And all of that seemed to work quite well. And after the cost cutting measures, revenue growth began to accelerate again, while margins also went up.

• 25:57Speaker 02

  There was also a lot going on with the agentic commerce side of things too, I believe. You had deals with Perplexity and OpenAI where PayPal became the first payment provider to be integrated into those LLMs and all that sort of news. That was very exciting.

• 26:13Speaker 01

  It was exciting back then. And this also when the stock reached new multi-year highs and it actually looked like the thesis was playing out even earlier than I expected. But then we slowly but surely started to see some yellow flags. And since I want to do this episode to sort of evaluate why and when things actually went wrong, I think this is where I would start. So on paper, things still look pretty great. And perhaps I would have made the same decision of buying PayPal today, under the same circumstances of last year. I honestly don't really know still to this day. I think on one hand, I didn't go for a value play like PayPal since that. I focused more on these quality compound of companies, perhaps in an earlier stage. So talk Melly or talk D-Local, which we covered just a couple of weeks ago.

• 26:57Speaker 01

  On the other hand, though, many of our previous value plays that we did buy for our portfolio. So I'm thinking about companies like Crocs, but also Ulta Beauty and even Nike, where we also made a double digit return, they worked out quite nicely. So I'm still not quite sure whether I just totally want to turn my back on those sort of opportunities. But getting back to PayPal, between Q3 and Q4 of last year, several things made me question what exactly is going on. So the first one was the biggest one, communication. When you follow managers that were responsible for specific business units, they were always very enthusiastic and they had plenty to say. So Mark Ritter, for example, was responsible for the ads business. He was very outspoken and talking about how the world, things are going.

• 27:42Speaker 02

  Well, and Mark is also the one who built the highly successful ads business at another one of our portfolio holdings, Uber.

• 27:49Speaker 01

  And also for Amazon. So he certainly knows what he's doing. But weirdly enough, the C-suite of PayPal just stopped talking about the ads business at some point. And after enthusiastically announcing it earlier and while Mark Ritter was still giving pretty promising updates, that was not only the case for ads, but it was also the case for many, many of the initiatives that they just announced, you know, a couple of weeks, a couple of months earlier. And at the same time, you had a CFO who still goes on my nerves actually, and who repeatedly said in interviews, saying how bad the macro looked and that it was basically a tough environment for the business to operate in. And if that's the honest assessment, I think that's great. And thanks for saying that and being honest to shareholders.

• 28:31Speaker 01

  But why do you agree to do what felt like half a dozen interviews back to back? When you don't have to say anything about that. And mind you, most competitors back then, they didn't seem to have the same problems with the macro. And if you're the only one struggling with macro, well, perhaps it's not the macro after all. And maybe this should have been the moment to sell the position. I mean, it was still trading in the 70s to any dollars range at that point. So we would have even made a nice little profit. But PayPal was still valued so attractively with buyback yield of, I think even back then about 10%. It just had a good Q3 earnings print and also reasonable catalysts for the future because of all those initiatives that I just felt like overlooking some of those yellow flags.

• 29:11Speaker 02

  And then Q4 came and not only were the numbers a negative surprise, but an even bigger negative surprise came and the CEO, Alex Chris, being fired. And so I took that as an admission that the new initiatives weren't working out as planned.

• 29:28Speaker 01

  Yeah, I think that had to be the message to our shareholders. And in hindsight, it's always easy to label these yellow flags we mentioned as red flags. But I don't know, I feel like selling could have easily been an overreaction too. I mean, when a company is as cheap as PayPal, news always skews negative, right? Just like analyst estimates, for example, they should give you usually an idea of what's to come. But if you actually look at them, most of the time, they just run behind the stock price. So when it goes up, they raise their price targets. And when it goes down, they lower them and you see all sorts of negative news coming. And that's also what you saw with PayPal. That's what we saw with Adobe, Lululemon, all of those companies. And still, when the PayPal CEO got fired, it was clear that things didn't go well behind the scenes for at least a couple of months and the management team just...

• 30:12Speaker 01

  I don't know, them not mentioning the initiatives anymore, you know, macro is blamed, although competitors don't experience the same headwinds, the CFO is talking in another book than CEO. It just all looks so different from, you know, a couple of months back.

• 30:25Speaker 02

  But what probably makes the PayPal case so interesting too, is that the bear case has always been that even if these catalysts didn't work out, these new initiatives for the business, that would be a possibility, but still you had a cash printing machine buying back 10 to 15% of shares per year, and that is another way you can grow earnings per share. And, you know, still had some of the best assets in all of payments. So either they would become a share cannibal and that would drive some baseline earnings per share growth, or they would be bought out. And the second option is now a very real possibility. You have Stripe and the PE firm Advent put out an offer to buy PayPal for $60 per share.

• 31:08Speaker 02

  And at the time of recording PayPal has already declined that offer, but that is maybe part of a normal negotiation process. So they may still be willing to sell, but only at a higher price. And considering that we could have recovered a relatively large chunk of our losses if we had held on and waited for this offer, would you say it was a mistake not to hold on to the position? Cause I mean, the idea was basically that this very scenario playing out would be the margin of safety. And that was baked into the model and it did provide a layer of safety.

• 31:41Speaker 01

  Yeah, I think it's a tough question. There are two ways or perhaps concepts to consider in my mind. So the first is the idea of opportunity cost, right? I mean, capital invested in PayPal cannot be invested in any other stock. And it sounds quite simple, but it's also consequential in, you know, investing. And since it not only makes you question whether any given stock will outperform the market and therefore presents a better opportunity than just buying an index, but also whether there's another stock with maybe a similar risk profile, but a better potential return. So opportunity costs have essentially been why we did decide to sell PayPal. And I had a clear thesis in mind when buying the stock and I sort of knew which metrics and business units mattered most to me. And I had an idea of the progress that I wanted to see.

• 32:25Speaker 01

  And that thesis slowly deteriorated and eventually it broke, you know? And while my margin of safety scenario, which you just mentioned, the PayPal acquisition is now playing out, or at least it's in the process. I also knew that this would be much more of a gamble than my original thesis, because as you mentioned, PayPal just rejected the bid value that $60 per share. So perhaps it can get much more, but perhaps Stripe will just, you know, distance itself from the deal. And then you need to find a completely new buyer and there might be one. But I think the point is this has turned into a gamble now of when and at what price PayPal will be sold. And with that uncertainty, I felt like we probably have better opportunities to allocate capital to.

• 33:04Speaker 02

  And just for the sake of giving the whole picture, the argument for why you should hold on to positions like PayPal, but also Lululemon is to trust that you bought the asset at a cheap enough price that in the long run, you will make your money back or make a profit one way or the other. And so it could be through M and A, it could be buybacks, or it could be because the business actually turns around with new management. And so the premise to some extent would be that it's incredibly difficult to compare one stock against another, and you might just be better off to simply try and trust your margin of safety outcome. And to be fair, what decision is the best also can depend on your personal situation, right? Daniel and I are in a position where we research dozens and dozens of businesses each year.

• 33:49Speaker 02

  And that means there's a high likelihood that we can find a business with better prospects and then redeploy capital at better returns. So there's very significant opportunity costs. And if you don't have the time to look at that many stocks, it might just make sense to hold on to the position rather than diversifying into something for the sake of diversifying and maybe de-versifying your portfolio, as they say. And then another factor is position size. In my personal portfolio PayPal was really, really small bet, smaller than yours for sure, Daniel. So I kind of just kept holding on to it because the stakes were a lot lower. And then I actually sold on the news of the takeover offer, meaning I was able to recover a chunk of my losses.

• 34:33Speaker 02

  And that was simply dumb luck. And sometimes that's just how investing goes.

• 34:38Speaker 01

  Another factor that also comes to my mind is whether you still add capital to your portfolio. I mean, the portfolio we built here on the show doesn't get any new capital. So if we have 5% invested in a stock, it is quite literally always competing with new businesses that we look at, because adding to them means we have to sell another current holding. And that's sort of the nature of what we do in our portfolio here and my personal one. Of course I do add new capital every single month. So by just not adding capital to one position while generally adding capital to others, I can't change my portfolio composition quite substantially. And we can't do that with the intrinsic value portfolio. So we need to actually sell one position to add to another.

• 35:19Speaker 01

  And on that point, one position that kept winning all of these capital allocation wars in our intrinsic value portfolio has been Adobe. We added to our Adobe position and I had to look it up four times already. And I can also spoil that the first lesson we need to take from this is only double down when the stock is at least down 15 to 20% from our entry price. Because we kept buying in the range from 380 to 315, which looking back at it might've been a bit too expensive.

• 35:49Speaker 02

  It was probably early in hindsight and I agree that we could have done a better job at dollar cost averaging into this company. To be fair though, Adobe was one of our first additions to the portfolio. And we started the portfolio with a hundred percent cash and only wanted to add to companies that we covered on the show incrementally. So we had this situation where we were sitting on a lot of cash for a while in the portfolio. So there's definitely some subconscious pressure, I think, to allocate capital and not just sit on 80% cash or more for half a year or longer. And so when a company that I considered to be very high quality kept getting cheaper, I saw that as a better opportunity to allocate capital than to invest into other mediocre businesses

• 36:33Speaker 02

  that we didn't have the same conviction in. And so that is what I would argue for to you. It's another one of those difficult realities of trying to manage a portfolio publicly and showcasing the entire process. You wouldn't necessarily feel the same pressure allocating capital quickly if it's just your personal account. But of course, if you're managing money for clients, you might feel the pressure even sooner. So I think I'm a bit more bullish on Adobe than you are, Daniel. And Adobe seemed significantly undervalued to me, even when it was trading at above $300 per share. And at that time, the setup was that we were looking at a company with a price earnings ratio in the low twenties, an incredible margin profile, high returns on invested capital,

• 37:17Speaker 02

  a very substantial chunk of the business coming as recurring subscription revenue, and then double digit revenue growth. And nothing about that has changed for the record. The only thing that changed is the multiple the market is willing to give to Adobe and the narrative surrounding Adobe, right? It went from 22 times earnings to 11 times earnings. And that's a great way to have the value of your position. So I think you've actually bought in in your personal portfolio later than I did, but you've also sold most of that position. So I'm curious to hear how you, you think about it and whether you disagree with my thinking here, Daniel.

• 37:55Speaker 01

  I generally don't. I think what changed for me is looking at so many different SaaS companies and just realized that perhaps all of them belong somewhere on the two heart pile, at least the ones that I couldn't understand because I don't have an insight as a customer, for example. And obviously we use Adobe almost on a daily basis, but also believe that we are not the sort of company that Adobe, you know, banks on for the next 10 or 20 years. We're not, you know, this huge sort of enterprise customer that they need to sort of keep as a customer to still make, you know, their returns, their investments worth it. And also just where they have an advantage over what AI can do. I feel like a lot of the tools that we use, at some point, it might be only 10 years ahead, there will probably be an AI tool and maybe Adobe is the distribution for that, but maybe it's not.

• 38:39Speaker 01

  And I feel like there are so many just unknowable things about the future that it's a more difficult bet to make than just a year or two ago. And that sort of goes back to the point of understanding what the market sees in the company and whether one has a different view on that. It's a much better business, obviously than PayPal and probably also Lulu ever were. And compared to those two, you don't see the disruption that everybody talks about when you look at the headline numbers. I mean, you just talked about it was basically only the multiple. If you look at both Lulu's and PayPal's stock chart, then you just layer the top line growth over it. You will see there's a pretty strong correlation there for both of those companies. And that's just not the case for Adobe. Adobe has grown at about 10% per year over the last four years, while this stock is down 70% since then. Of course, you know, top line growth is not everything, but you know, studies have actually shown

• 39:24Speaker 01

  that revenue growth is the best predictor for where the stock will be heading in the long term. So over a 10 year time horizon, about 70 to 75% of the stock performance can be explained by revenue growth. And the main fear, obviously with these businesses, is that exactly that revenue growth will slow down materially in the future due to changes that AI brings. And when that fear exists, the multiple collapses. And that's exactly what we have seen with Adobe, as you just said. And by the way, multiples are the best predictor for stock performance. If you just look at a one year performance chart. So probably that explains most of, you know, why SaaS companies this year have been going down, although technically, you know, the headline numbers just didn't change.

• 40:07Speaker 01

  And I think to go on the more, the more positive side, the bull argument for Adobe is that most Of its business comes from enterprise customers that want to have full control over the creative outcome. That can only be guaranteed with Adobe tools and AI cannot do the same. So AI is always probabilistic, which we talked about a lot by now, and that won't change anytime soon, if ever, honestly. And the problems that I personally have the position, which is why I sold in the end, mainly come from two things. So first is, what about all the customers that are not Hollywood studios or big creative studios? I just mentioned, you know, the TIPs of the world and maybe also ad agencies. I don't think ad agencies have the same sort of love for the creative process. And if they can use AI for a fraction of the cost, that's what they will do.

• 40:53Speaker 01

  And then second, if Adobe loses the top of the funnel, which are, you know, young professionals, that would be a big hit for the company as well. So for years, that's what built the sort of skill mode where, you know, young professionals preferred working with Adobe, since that's what they have been trained on. Then lastly, and this is a point that one of our mastermind members actually made, and I think it's a good one. You've got to ask yourself whether you want to bet against AI right now in the first place. And that's, you know, the argument for me against most SaaS companies. I think there is a good argument to be made that you should just avoid owning stocks that the market is punishing because of a potential existential threat to either their earnings power, which then compresses the multiple, or their core product, which then goes to the revenue hit risk.

• 41:37Speaker 01

  And especially when that threat is driven by technological innovation and we know AI is here to stay and won't stop getting better.

• 41:46Speaker 02

  That last point is very much inspired by historically how Buffett has looked at tech investing and accepting that there are these unknowns that could destroy the thesis and therefore wanting to look for one foot hurdles elsewhere. It's sort of the mindset. And yet, that said, he just invested tens of billions of dollars in Alphabet. And we know that it was Buffett now and not Abel who was calling that decision, which is interesting. And basically he's called his negligence of tech companies a mistake. So even Buffett is now realizing that the world has changed in important ways.

• 42:25Speaker 02

  And although I would say investing in Google is probably one of the safest bets on tech you can make, prices are high. But boy, I mean, what a quarter we just saw from Google again. And so anyways, I'm glad that we will be able to talk about that one in our winner episode, because it's definitely more fun to revel in the successes. And we bought that one pretty close to the bottom and it made it our biggest position by far. And then it's worked out well. But looking at Adobe again, I mean, it's clearly not at the same quality caliber of Alphabet, of course. And yet it still is the market leader in its industry by a very wide margin. And as you pointed out, there has not been a significant deterioration in the financials.

• 43:08Speaker 02

  There hasn't really been any deterioration in the financials. And obviously this can be a slow process as it was with newspapers back in the day, where it wasn't just immediately obvious that those would go out of business. But I still don't really see any meaningful signs of disruption yet. Despite the headline numbers that look really great, you also have these AI native revenue numbers that have tripled year over year and Firefly's AI creative app is nearing $300 million in ARR. And so all that looks pretty good. And they're also fighting back on the lower end of things too, which you highlighted as a concern a minute ago.

• 43:48Speaker 02

  And so in their latest earnings call, they talked about this strategic shift to focusing more on freemium users, which comes with incurring more costs in the short term, because you're providing a lot of AI credits that you're not charging for. But it also shows that they're fighting to retain users on the lower end in the longer term. So basically they had shared some guidance with Wall Street where the market was expecting them to raise prices on freemium users sooner, and they've decided to push back on that. And again, I actually see that as arguably evidence of them thinking much more longer term than making short-term decisions that would help earnings next quarter or the following,

• 44:31Speaker 02

  but might ultimately undermine the funnel that they've created and the flow of customers into their business. And so we talked about the Alphabet comparison and I actually don't think it's a totally off comparison to make, because just like how I thought Alphabet as the dominant player in search was best positioned to integrate AI into search. And even though that wasn't a guarantor of success, it did give them a pretty competitive advantage. I also think that we shouldn't dismiss Adobe's positioning and their ability to deploy AI tools at scale too. They sort of have the first shot at doing so. And if they don't do it well, they'll definitely lose market share to competitors.

• 45:14Speaker 02

  And with the point being, new technology does not have to be a threat to incumbents if they manage it well. And again, that's not guaranteed. There's lots of illustrations historically of companies that have failed to innovate around new technologies. But again, you do have this distribution advantage when everybody is already using your products. So if you can figure out how to bake in the newest technologies and tools into your products, then the risk of competitive disruption becomes much more minimal.

• 45:44Speaker 01

  That's exactly what we talked about last week off the record, right? I mean, there are these probably huge advantages. It might be the biggest advantages in the age of AI, and that's simply distribution. And Adobe still dominates distribution in the creative space. And probably the problem is that Adobe feels more threatened by AI, at least I would argue than Alphabet ever has. But we could easily say that with the hindsight bias. Again, last year we bought Google and there were certainly a lot of people who told us that's stupid. Search will die and they have no clue what they're doing in terms of AI. So it might just be the hindsight bias of me thinking that Google has not been threatened to at least the same extent as Adobe has. And one guy who would probably agree with that is Dave Cantiseria from Value Forge Capital. He used to hold Adobe and he sold the position.

• 46:27Speaker 01

  And he said something that I thought quite interesting, so I just wanted to quote him here. He said, "For now, generative AI actually helps demand for Adobe as the initial AI images and videos still need to be edited using the company's sophisticated software tools. Over the long term, however, we see a future where Adobe is rendered obsolete, except for the very high-end use cases. Even if the impacts are many years away, we look to put our investment dollars elsewhere." And we could probably debate for a while, but as an investor, you've just got to make a decision based on your assessment of the future. And I don't know what will happen. And personally, I don't know anyone else with a crystal ball either. I think one last thing that I just need to get off my chest when we talk about Adobe is the management team.

• 47:09Speaker 01

  I talked about the mistakes I made with, you know, not acting up on the yellow flags I saw with PayPal. And now Adobe shows a lot of them as well. I mean, the CEO left recently without any successor, then the CFO followed just weeks later. And now you see this major shift towards freemium users you just mentioned. So perhaps I'm just personally too scarred right now from, you know, that experience to overlook those things. I mean, talk about personal biases, but I feel like all of that is looking somewhat odd.

• 47:39Speaker 02

  You know, what strikes me now that we've gone through all three of these companies is that I didn't really notice it until we said it back to back. But in each case, the management team is really shaping changes to the thesis, right? Lulu pushed out its CEO in favor of interim co-CEOs while the founder was publicly at war with his own company. PayPal fired their CEO and then had a CFO that was openly saying very different things about the strategy. And then now with Adobe, you have this legendary CEO retiring with no named successor yet. And even if that's perfectly explainable by something as mundane as the fact that he was just getting older,

• 48:19Speaker 02

  he's already led the company for two decades, the fact that you have the CFO leaving weeks later really couldn't have been worse timing. And so a while ago, we did a presentation at our TIP summit in Montana about the learnings of managing this portfolio. And we talked a lot about management teams. And again, this just reinforces how important those variables are to me.

• 48:43Speaker 01

  What bugs me is that in any of these cases, the trouble at the top showed up before the numbers actually took a turn for the worse. And again, keyword hindsight bias, it might've been that, you know, the business has actually performed well. And then the CEO left and it started to get worse after that. And it might be that this CEO goes because the business is already deteriorating and he sees it while we don't. So we don't know that, but what I do know is that it's difficult to act on that, because you would need to find these, what I mentioned before, alternative leading indicators to tell you in what direction the company is going. So for newspapers, such metrics were, you know, single corporate retail sales or maybe even household market penetration versus population growth.

• 49:24Speaker 01

  Because for a long time, newspaper penetration actually grew alongside population. When that correlation stopped, it just proved that younger generations were no longer becoming their customers. And it could be very far-fetched, I got to admit that, but I don't know. To some extent, I see some resemblance here with Adobe's problem of getting this new generation of creatives onto its platform. And then other alternative metrics to look at, although getting that data will be incredibly difficult, might be the divergence between, you know, total seats and actual design agency output volume. So the ratio of, you know, paid corporate seat licenses, which is how Adobe makes a lot of its money, to the volume of creative assets produced.

• 50:06Speaker 01

  If marketing agencies use these external AI tools, you would at least get a sense of the potential future churn that you can't yet see, just because Adobe has a lot of these long-term contracts. But anyway, I'm just spitballing some ideas here. In the end, Adobe is still a holding. I'm conflicted on it, but I also believe it is good value, although the momentum is not in its favor. And I think we shouldn't be too affected by the price we paid for this company. I think we just got to view it from today's perspective. And if you do that, you have a company trading at a forward P of eight times. You still have phenomenal financials and many good reasons to believe it's a monopoly-like position on the creative enterprise market is actually sustainable.

• 50:46Speaker 02

  What we know for a fact is that the market, rightly so, is wary of turnover at the top of companies. And another yellow flag that we haven't pointed out today, but we should discuss is the lack of insider purchases too. Perhaps because you had these two at the top, knowing that they would be leaving soon, and that's why they didn't make any insider purchases. But as the stock has gotten torn apart, management has been happy to deploy the corporate treasury toward buybacks, which to some extent is reassuring. But again, they haven't been as inclined to buy shares with money from their own pocket. And so if Adobe's business does decline long-term, in this case, I probably wouldn't

• 51:27Speaker 02

  look back at the CEO's departure as having been the canary in the coal mine, or maybe even the CFO's departure, because he does have a background in the semiconductor industry, and that space has absolutely exploded thanks to AI. So it wouldn't surprise me if he just simply had some FOMO and wanted to go back to the industry that he had spent the rest of his career in. But really, the canary in the coal mine might be the fact that there's this lack of insider buying from the rest of the management team. That gives me some pause. And if I get really pessimistic for a moment, I could definitely see myself pointing that out as a learning lesson in a few years from now. And so I don't know if that's thinking with the end in mind, but thinking ahead about what we might see

• 52:08Speaker 02

  as a mistake. And so otherwise, though, everything is so far so good with Adobe. And by definition, I do think you need to have contrarian opinions about the market to outperform the market. And that might sound like sort of a lazy defense for clinging on to a company that we have some anchoring bias with. And I wouldn't necessarily disagree with that. But I think the indicators that are driving the stock down are so speculative at the moment relative to how the actual business has been performing. I certainly wouldn't feel good about heading for the exit at this point in time. But we'll definitely continue to watch this one closely. And if we see data that materially changes our assessment of what's happening with the

• 52:50Speaker 02

  business, as we saw with Lululemon, then we should definitely think about trimming or exiting the position. But for now, it definitely remains in the portfolio. Let's take a quick break and hear from today's sponsors. You know that sinking feeling when a meeting ends, everyone's nodding along, and two days later, you realize that nobody wrote down who was doing what. That's why I use Granola. Granola is an AI-powered notepad that makes your meeting notes useful. It captures what happens in your meetings, and it turns it into clean, structured notes with decisions and action items pulled out and made easy to find. On days with back-to-back calls, like guest prep and team check-ins, community calls, I used to spend the gaps

• 53:34Speaker 02

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• 55:02Speaker 02

  This September, I was in New York for the Intrinsic Value Conference. The talks were great, but what I kept thinking about is what happened around them. On Friday night, about 20 of us crowded around a long table at a family-style Italian spot near Times Square. Saturday, we did it again. And Sunday morning, a group of us were still debating Socrates over breakfast before everyone headed home. Many of the people at those tables had only known each other from our calls in the Mastermind community. That is the community I host with Kyle Greve and Daniel Manca. Each week, we get together on live calls to dig into markets and individual businesses. We bring in fund managers, operators, and authors as guest speakers. And a few times a year, like New York this fall, and

• 55:47Speaker 02

  Omaha every spring, we meet in person. If you want to think in decades alongside people who do the same, apply for free at theinvestorspodcast.com/mastermind. If your application stands out, I'll be the one to reach out to you personally. All right, back to the show.

• 56:05Speaker 01

  We'll talk about lessons and conclusions at the end of the episode, but I think I can still spoil one that I just had when I did the research for this episode. And I don't know why, but it seemed to me that by covering so many companies, but especially by doing it all publicly, you feel the need to stand behind your positions way more often. And that means that all the negative news that come out, that usually, as an investor, you might even should just ignore, at least when it's not fundamental, we still read through them, and we still have a stance on it, and we still publicly defend the company, or also just accept that this is bad news, and we might sell the company too early. So I feel like, and that sort of goes to our PayPal point, if we do have, you know, deep dives into a company, and we do that, and we know everything that's important, we might just get to put more trust into our decision-making. And the same might go for

• 56:49Speaker 01

  Adobe. So I still feel very good about owning it. And sooner or later, I also in my personal portfolio, will have a position again. It's more about what we mentioned today a couple of times, which is opportunity cost. I needed some capital, and I sold Adobe, allocated that capital somewhere else, but over time, I will buy into it again. Okay, but how about for a change? We switched to a company where the CEO has actually doubled down massively since the stock went down, instead of just leaving the boat, and where we fortunately also didn't lose a single cent, because we didn't invest in the company in the first place. Do you already have an idea of what company I'm talking about?

• 57:25Speaker 02

  Oh, I do. I do. You got to be talking about Trade Desk. And I'm very glad we didn't buy that one. I still remember when it dropped 40%, and literally the next trading day, after we published the episode on a Sunday. And while we decided against it for what we now know were seemingly the right reasons, it's definitely fair to say that no one expected such a sharp decline. I certainly didn't imagine that it would fall 80% from its highs.

• 57:54Speaker 01

  I actually listened back to the episode just yesterday, and the first lesson I want to do from all of this is really just to trust your gut feeling. And even more importantly, stay within your circle of competence. I mean, we primarily didn't start a position because we just felt like the business was too difficult to understand. And to be precise, this is what you said in the episode back then. I feel like we should just put it out there.

• 58:17Speaker 02

  TTD is just a bit difficult for me to get comfortable with. I'll be fully honest. I was expecting for it to be easier for me to wrap my head around the Trade Desk after already having gone deep on Alphabet and Roku. But ad tech is just so very messy and complicated. I just feel like the ad tech industry probably goes in the too-hard pile. And the Trade Desk, as a pure-play-on-demand-side programmatic advertising, you really need to understand the digital advertising ecosystem fully, and technically kind of know what's going on behind the scenes to appreciate what makes the Trade Desk valuable and what can make it less competitive in the future. So this is one of those where having some industry experience would be very helpful.

• 59:03Speaker 01

  But the second learning for all of us, including everybody who currently listens to this episode, is don't blindly trust valuation models. It doesn't matter what that outcome of the model is. What you need to look at are the assumptions that you made to get to the outcome. In the model from back then, we still assumed a 30x exit multiple because of the quality of the company. And the cash flow multiple today is just 10x. So despite that, the model back then still showed that the stock was overvalued at the time. But the decision not to buy it didn't come down to what the model said. It was primarily us thinking that we don't understand the company. And again, if you will trust the valuation model, despite having a way too high of an exit multiple and still saying

• 59:45Speaker 01

  it's too expensive, nowadays, just a couple of months later, the exit multiple is a third of what we assumed going out five years from now.

• 59:53Speaker 02

  And in preparation for this episode, I did go through our master file for the portfolio. And that's where we showcase our holdings and returns and have the links to all the models that we've covered for all the companies on this show previously. And one of the things I looked at was how much of a discrepancy there's been for many of the stocks we covered from over a year ago between our estimate of fair value and what the current stock price is. And so the only bigger difference to the downside than with Trading Desk, meaning where our fair value estimate was much higher than the stock price today, that was vital farms. And so that stock has come down a whole lot too. But to your point, when your model says one thing, but your gut says another, I would

• 1:00:38Speaker 02

  typically, not to be too cliche, say that you have to follow your gut feeling there. If it makes you stick to your stomach to think about owning a business and you're only doing so because the financial model says that the stock is undervalued, that's really not probably going to be a very good decision to make, right? If you can't make a good qualitative case for owning the business, then again, it just, it doesn't matter what the numbers can say because the numbers can change in an instant. A couple percentage points less growth or margin compression, all that can happen very fast. And so feeling comfortable with the decision qualitatively, to me, is the best proxy for whether you should own a stock generally. And then you use the models to kind of help guide your entry point and try to make an

• 1:01:20Speaker 02

  informed bet on, okay, the odds of success are really in my favor with buying this stock at this price if I'm going to hold it for the next five, 10 years or whatever it is.

• 1:01:32Speaker 01

  Comfortable in the sense of understanding the business, at least. I think there was something to say about being uncomfortable when you make an investment decision simply because of the sentiment or the perception of the market of the business. And I think there are many investors who mentioned that the best investments were the ones where they actually felt the most uncomfortable. I think Howard Marks once said, "If it doesn't make your stomach churn, it's probably not a great bargain." The best buys are found precisely where the fear is the greatest and the future looks the darkest. You have to be willing to buy when doing so makes you feel physically ill. But then again, I think this is mostly going down to, you know, public perception, not about how comfortable you feel with the understanding of the business.

• 1:02:11Speaker 02

  So another interesting point in this Trade Desk story here was that there were actually massive insider buys a couple of months ago by the co-founder and CEO of the company, Jeff Green. And so in March, he bought stock on the open market at $25 for almost 150 million in total. And since then, the stock has fallen another 25%. And so it sort of complicates the signal we were pointing to with Adobe. A lack of insider buying is not guaranteed to be bad and significant insider buying is not guaranteed to be good, but generally though, they're pretty effective predictors. Historical studies have definitely shown that insider buys have pretty strong predictive

• 1:02:52Speaker 02

  power and the Trade Desk may very well just be the exception to the rule. And, you know, perhaps we'll look at it in a year from now and maybe things will turn around. That does happen. Carvana went from the worst performer in the S and P a few years ago to the best the following year. So it can happen, but I'm certainly not itching to start a position in the company today just because it still falls in that too hard pile.

• 1:03:19Speaker 01

  We definitely tried. I mean, since you covered it, we've been asked many, many times whether we do not want to revisit it and especially given the significantly lower prices today, whether it's not more attractive than it has been in the past. And another lesson that I've learned from my investing journey so far is that a lack of understanding mixed with deteriorating business fundamentals, which is certainly the case here, is the worst possible combination that you could find. If I don't fully understand every aspect of a company, but I get 80% of it and I add to that a mega trend or a major positive tailwind, it can still work out quite well. But in TTD's case, you have a business where top line growth is continuously coming down. I mean, in Q1 of 2024 was 28% and Q1 of 2026 was only 12%.

• 1:04:03Speaker 01

  Then answering the question of what that company is worth today is so much more difficult. The Trade Desk is likely a bargain today if we can assume that 12% top line growth is what we're getting for the next five years, assuming a similar margin. But how should I underwrite that assumption if growth more than halved in just the last two years? And if you're an ad tech expert, that might be totally different for you. Maybe you understand the business significantly better. I'm not saying that the Trade Desk is bad value right now, but for us, it's just in the too hard pile. It was there last year and it's still there today. And I have pretty high confidence of saying it will most likely be there next year too, even if it's at, I don't know, $5 per share.

• 1:04:40Speaker 02

  If anything, my surprise at how dramatic the sell off and the Trade Desk has been made me feel like I understood the business even less than I thought because it has been such a quality compounding for such a long time that I wouldn't have thought that things could go this bad this quickly for the stock. So anyways, that just shows probably how poorly I understand the business and that there are definitely easier hurdles for us to clear.

• 1:05:09Speaker 01

  We gotta admit, quality compounded growths did not have a good one and a half years recently. And we could just, you know, keep going in that direction and talk about another business that is currently in our portfolio and it's down about 25%. And that's CoStar Group. And I should say that for this company, it's not so much about figuring out any patterns today because it hasn't spent that much time on our portfolio. So, you know, I believe the price decline is mostly just volatility and momentum. It was going down the entire year, it continues to go down. And yet, maybe there are some things that have changed and that we should cover. So yeah, I figured we should just, you know, talk about CoStar, which you pitched about three months ago now. And since it might be a bit less known to our audience than some of the other companies

• 1:05:53Speaker 01

  we talked about previously, you might just want to give a quick pitch on why CoStar seemed so interesting to you.

• 1:05:58Speaker 02

  Yeah, it's still really early in the CoStar thesis. It'd be way too soon to write it off in one direction or the other. But really the way to think about CoStar is that it's the Bloomberg terminal of commercial real estate. So it's this data business empire built over 40 years of research and physically visiting and cataloging properties. And that gives them a monopoly-like grip on the comps and analytics that brokers and lenders and investors all depend on in this industry. And so that core data franchise carries about 50% margins and the business overall has a net cash balance sheet and then has strung together something like 60 quarters of double-digit revenue growth. So it really is an impressive business.

• 1:06:42Speaker 02

  And so the controversy and the reason the stock is down so much boils down to management having plowed billions of dollars into homes.com, which is this residential portal meant to challenge Zillow. And most people are probably familiar with Zillow if they don't know what homes.com is, but that investment has dragged the entire company's operating profits negative. And then actually it drew in an activist investor who was advising for change and Dan Loeb, who's a pretty famous investor. So the thesis is basically that the market is so fixated on the cash burn tied to homes.com that it's handing you this crown jewel, commercial monopoly, data business at a discount.

• 1:07:25Speaker 02

  And for lack of a better words, the expression is throwing the baby out with the bath water is really what it seems like has happened here with CoStar.

• 1:07:36Speaker 01

  The briefest explanation of what happened is it's a SaaS company and that might explain why it just can't catch a break right now. But I think the investments into homes.com had already slowed down when you made the pitch. So they are still burning money there, but at a much slower pace than they used to. And I gotta admit that when you first pitched CoStar to me, I was a bit overwhelmed by all the different business units and some other yellow flags, which were mainly about market share numbers that sort of seemed a bit weird to me. They were quite low, although it is technically a monopoly. And then there also very little ownership. And then the CEO also has a pretty low ownership stake. And also the fact that the CEO seems to have a history of massive spending in order to win market share. All of that didn't help, although to his credit, it worked out in previous endeavors.

• 1:08:21Speaker 01

  But that could also be why he is just too stubborn today to see that this fight is lost, if it is. I mean, even Dan Loeb, the activist investor who came in, has already left the company. And while the public statement was quite brief, I think it became clear that he just didn't believe he could have any impact on the CEO, Andy Florence, and/or the direction of the company.

• 1:08:41Speaker 02

  If I were to sort of assume the perspective of CoStar's CEO, I think part of what makes giving up on this bet so hard is that Zillow is such a dislikeable company. They really have some uninspiring business practices and have incurred lots of lawsuits for how they've run the company and lots of allegations of theft and stealing from CoStar itself. So there is a pretty bitter rivalry between the businesses. And actually, Zillow has not formed well as a company anyways. So it feels like things

• 1:09:20Speaker 02

  are really ripe for disruption, where CoStar should be able to come in and just take over that business. But of course, there's a massive amount of brand recognition working in Zillow's favor that makes it easier said than done. And so it does give me some pause to see somebody like Dan Loeb lose faith in the CoStar thesis, where he was primarily arguing to cut spending on homes.com. And there definitely is some thought of this maybe being an ego thing, where, like I said, there is a pretty bitter rivalry between Andy Florence and Zillow. And it may simply boil down to not is what is the best economic decision,

• 1:10:04Speaker 02

  but a sense of pettiness and wanting to take down sort of an enemy. And so, all that said, CoStar has decided to drop its net investment into homes.com from $850 million last year to what will be about $300 million this year. And then in 2030, it's supposed to come down another $100 million. So even if the cutback in spending was not to Dan Loeb's liking, there is a cutback occurring, which gives me confidence in not just writing off the entire business and definitely going forward, especially when the valuation stripping out spending on homes.com is so reasonable for a business with the data moats that CoStar has that are built literally by photographing thousands of commercial real estate buildings

• 1:10:49Speaker 02

  across North America over several decades. So we do know that the worst case scenario of them just blowing everything on homes.com is very unlikely to come to fruition, as they already cut back spending. And like I said, with this data mode that they've really built one building at a time, AI can obviously not replace that. And so the other thing that Dan Loeb has criticized that maybe deserves some attention from us is Andy Florence's pay package of $40 million a year. And I think he does have a good point there. It probably didn't help their relationship, though, that he was suggesting that Andy makes too much money. So in the end, to me, it comes down to this being a story about valuation.

• 1:11:32Speaker 02

  And it's become pretty absurd how much negative value the market is ascribing to homes.com. The entire investment cycle cost CoStar about $3 to $5 billion, depending on what you consider as solely being an investment in homes.com. And yet, the market cap, however, has gone down from $40 billion to $11 billion. So it's done a lot, a lot of damage. And this is a very rough calculation, since you also have to account for the fact that CoStar traded at a premium multiple that the market is just simply not giving to SaaS companies these days. But again, the point is that this homes.com investment is not even remotely as impactful on the actual financials and prospects of the business going forward,

• 1:12:18Speaker 02

  as the stock market is probably making it seem, or at least, that would be my opinion.

• 1:12:24Speaker 01

  You mentioned earlier the presentation that we gave in Montana for our TIP summit. And part of that was also understanding the importance of the market's narrative about a stock or a company. And I can only feel confident in my decision about a stock when I do feel like I understand what the market dislikes about the company when I look at it, and then when I have a different opinion and have good reasons to believe that I'm right. And only then can I figure out personally whether that makes sense to me to invest into this stock. And I gotta say, in this case, it's clearly homes.com what the market is bugged about. However, I think the market is also looking beyond that, and it's just generally questioning whether they will ever see any of the cash flows that CoStar produces. So, and still, the more I looked at it, the more I felt like this is a massively mispriced

• 1:13:08Speaker 01

  opportunity. So I actually got away from, you know, my research here, feeling way more confident in it than I was just a couple of weeks and months ago. I've did some math, and you just pointed out some of the points. The value that, you know, CoStar lost just because of this homes.com bet, and the spend is not that massive, it's ridiculous. If you would have to give homes.com a negative value, just to make sense for the market cap to drop that much, it would be in the tens of billions, almost. So I do believe it's way more mispriced than I first thought. And I want to ask you about a week ago, you didn't seem to be worried either. So it was probably only me who needed more convincing anyway. And I think the fact that the stock is so much cheaper now, it certainly helps with that.

• 1:13:48Speaker 02

  If I were going to recommend adding more to either our Adobe or CoStar positions at current prices, both are attractive, but I would probably prefer CoStar.

• 1:13:58Speaker 01

  Oh, wow. Well, actually, then should we add to it? I mean, if you like it more than Adobe, it should probably be at least a bigger position than 1.5%. And again, like, part of why it's so small is that I wanted to get more comfortable with it. And I feel like I've done that. And especially now that it's lower. I mean, again, we've lost 25% from our entry price. I gotta say, I feel a lot better about the opportunity here. So what do you think about maybe pushing it up from 1.5% of the portfolio to maybe 3%?

• 1:14:26Speaker 02

  We've got the cash to do it. So I don't see a reason not to. And we are already learning some lessons from our mistakes in the past, right? With Adobe, I think we said not to double down on any positions, and so we've had at least a 15% to 20% loss, which was sort of arbitrary. But the fact that we're down 25% lower, and you're more comfortable with the business than when we first pitched it, yeah, I definitely would be happy to increase its weight in the portfolio.

• 1:14:53Speaker 01

  All right. Sounds like we have even made a portfolio decision today, which I didn't intended to when I started this episode. But having that and discussed most of the companies that I wanted to go through today, how about we go to some of the learnings from this? We already mentioned some of them going through the episode, but I still think there's some stuff that we can talk about. And I think that difficult thing about investing, and we learned that also in today's episode, is that every investment is just different. You can point out all the yellow flags of PayPal, and then you compare them to what we see with Adobe. And if the Adobe investment fails, you can easily say that it was so obvious, and we didn't learn anything from our PayPal mistake. But on the other hand, you can analyze a Google investment, which was also done doing peak negativity, and

• 1:15:34Speaker 01

  it turned out different. So I think it's very difficult. And that's why so few people can sustainably outperform the market.

• 1:15:42Speaker 02

  You just never know what'll happen in the short term. And that's why value investors try to buy companies where even the worst case outcome is still tolerable. I think PayPal is a pretty good example of that, with this potential acquisition now, and how that factors into what we thought was our margin of safety at the time. And I also wouldn't be surprised, again, if we saw something similar with Lulu, where if you actually held the stock for five years from today, I would not be surprised if things ended up being okay. But the question is just, are you willing to ride out those losses after things have already changed pretty dramatically? Or are you just going to hold on to something for the sake of, hey, I said I had a five-year time horizon, so now I'm, you know, absolutely

• 1:16:26Speaker 02

  going to hold on to it for five years, and maybe at the end of five years, I'll break even on it? That's not necessarily the best investment approach either. And so I don't know if it'll be an acquisition for Lululemon, probably not. But certainly, there could be a shift in sentiment, business fundamentals, especially as it continued to grow in China. And then that could all change the valuation dramatically. So it's not like, you know, you make the decision to buy or sell a company, and then time just stops, right? These businesses continue to operate and continue to keep trading. And so you're continuously having to make subconscious and conscious decisions about owning or not owning different businesses.

• 1:17:04Speaker 01

  I think what I like most about our discussion today is that it shows a bit more how conflicted we can also be about the positions in our portfolio. Just because we own a company doesn't mean there's nothing negative we can point out. And the two of us, and the three of us, if we include Kyle, can have different opinions on those companies, too. I mean, we obviously know you would have never bought PayPal, and I would have never bought Lululemon. But that's life when we manage a shared portfolio. And the same also goes for the winning bets. I always like to mention Reddit as an example. I wasn't sold immediately, and yet it turned into, I think, our most successful pick, and it's also part of my personal portfolio. So we just learn from each other. And I think something else that I liked about this episode is that it sort of made me reflect on all the decisions

• 1:17:45Speaker 01

  that we made as investors, but also as investors who publicly share their portfolio and their decisions. I learned that there's a huge difference between managing your personal portfolio, and then also putting it out into the public. And there's so many new biases that you have to sort of tackle, and so many mistakes that you can make because of that, right? I think one of the lessons for me certainly is to be maybe a bit less active. I think we had to do that to some extent in the last year, because we had to deploy so much cash. But now that we have a more or less finished portfolio, and obviously, it's never finished, it's always in process, but we have, you know, 15 to 16 positions, which is what we initially aimed to. And I think having that, we can just be a bit more calm about, you know, finding new companies, actually comparing them to the companies

• 1:18:30Speaker 01

  that we have. And then also, when in doubt, might just give a bit more credit to the companies that we own, and not react to all the negative news that are coming out. So there's obviously a lot to say about PayPal and Lulu and all of those companies. But we bought it because we researched it for a lot of time. We also learned more about them while we owned them. I think that's an underrated point, that you can only understand so much about a company when you actually do the research. You learn so much more when you actually own them for a couple of months in your portfolio. You sort of understand what news are coming out, how the shareholder base is communicating to each other, how the CEO is communicating, not only in earnings calls, but also in between. And I think personally, not reacting too much to negative news, trusting in the process, and also acknowledging

• 1:19:13Speaker 01

  that while we look at those companies again and again, we're building a portfolio for the long term, right? So having so much turnover in just one year also shows that we probably should sort of zoom out more often, and look at what actually is changing within these companies, and especially for the long-term thesis. And I probably also feel that we should do more of these episodes more often, not necessarily talking about our biggest winners or biggest losers, but just revisiting investments and discussing how our thinking evolves. Since we do that every day in the mastermind community, it can easily feel like we are already constantly doing it. But we're not doing it on the podcast. And I feel like that's a different thing for the people who listen, but also for, you know, the two of us, including Kyle.

• 1:19:53Speaker 02

  I definitely think we should have more of these reflections on our investments. And I'm actually working on an updated episode for Uber, which we fortunately didn't mention today. It wasn't one of our biggest losers, but it has also given up some gains from when we first invested in that position. And yet, at least personally, I'm as bullish as ever.

• 1:20:14Speaker 01

  All right. Sounds interesting. So with all of that, I would say we call it a day. I'm glad we got through this without feeling too bearish on our positions. Actually, again, came across many companies where I felt like we probably look at them a bit too negatively, just because of the price section, and they are way better businesses than we think. But with that, I think next time, again, Saturday, we'll look at the portfolio's biggest winners, which is a bit more fun. And I would say I just ended with a quote by Peter Lynch, who said, "In this business, if you're good, you're right six times out of 10. You're never going to be right nine times out of 10." And I would say cheers to that, and see you in the next one.