Welcome back, everyone. Today on the Joseph, Carlson
show. The S&P 500 is off to a great
start in the year. And it's recently just hit a
rough patch, and we're headed back down.
And it feels like we're right back in 2020 to the market is
still difficult and that is the theme of today's episode.
The stock market is difficult, and it's not getting easier.
This is something that Howard marks just went on to Bloomberg
and he explained what he called a sea change, a profound and
fundamental change in the way that investors have to think
about. About investing because
investing is no longer easy. So, we're going to be going over
the sea change and what we can do with our portfolios to better
prepare for the likely future ahead of us.
Now, we also have some unfortunate news, layoffs are
never fun and big Tech is announcing a lot of them.
Microsoft announced 10,000 workers are going to be laid off
and this comes right. After Amazon announced, the
18,000 workers are going to be laid off 30,000 employees
between just two companies and there seems to be more layoffs
every single day and then lastly we have Amazing news here.
This Disney executive, he made eight million dollars in less
than four months of work will be going into this story.
What this executive did to earn this money and the broader theme
of Executives, pay executives are finally starting to take
lower and lower compensation? So as always, we are lot to get
to in this episode. Let's go ahead and jump in right
after a quick message from today's sponsor.
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in the description below. Now, let's go ahead and get
started. If you're new to the channel,
this is my personal portfolio. I share it every single week on
YouTube, with complete transparency.
So far this year, it's up to point 86 percent.
It's Come down a little bit as a markets traded down.
Now in this portfolio, I focus on buying high-quality
compounding companies that I think are very resilient.
They have Financial characteristics that are much
better than the average company. They have high, margins, High
profitability ratios. They have low leverage, they
have low amounts of cyclic. Ality, these are true,
Compounders the companies that are monopolistic or oligopolies.
They're highly entrenched in the markets, they compete in.
I've been building up position and Company after company that
meet these very high. And herds, I'm investing in
companies at very predictable and reliable growth.
So, when I look at my portfolio overall, even though most
investors are concerned by the day-to-day swings of the market,
and most investors get very excited when the market goes up,
and to become very discouraged and sad when the market comes
down, we don't do that at the Joseph, Carlson show.
We don't get excited. When the market goes up and we
don't become sad. When the market goes down, we
keep investing in compounding companies and let these
companies grow their free cash flows and earnings.
Now, what's Happened this year so far has been pretty
interesting. The market has raced up towards
the beginning of this year and investors were feeling good.
This lifted investors Spirits. It was a new year 2023 and we
are already up 5% then the market did what it has done
before. It went right back down, down
two and a half percent, giving up the majority of games this
year. And that's where the predictions
of Howard marks come into play. Howard marks, is the founder of
Oaktree capital and he's known for his extensive memos.
Recently came out and said that, what he believes is happening
right now, is called a sea change.
A profound, a notable change in the investing fundamentals, and
what Howard marks starts off with is how investing used to be
from 2009, to 2012 t.i. These things produced, what I
would call was an easy environment in the economy and
the markets. It was, we had the longest
economic recovery in history. It was easy to make money,
right? We had low cost, Capital was
easy to make a profit. We had very few default.
And bankruptcy, it was easy to stay in business who was easy to
access Capital. Everything was easy at that
time, the entire setup was easy for investors and the results
show that to be the case, look at the stock chart of the S&P
500 from 2009 to 2012 any, it's basically a money printer every
single year, just more and more games, you didn't really have to
time the market. You could just buy in at any
point and soon enough you'd be in the green and if you just
held through some minor volatility, you would continue
to make Money from 2009 to 2012. He could only be described as
easy. Everything in terms of
investing, the entire atmosphere Was Made Easy for investors for
the majority of this time. Interest rates were Rock Bottom.
They went down to basically nothing.
The cost of capital, the cost of taking out debt was incredibly
low. The Fed was also an ally of the
market, their balance sheet, grew substantially, as they're
doing quantitative, easing, making things easy for the
investor and this is the big fundamental shift that Howard
marks is pointing out that many investors.
Still don't realize Sighs things were not only easy during that
time, period, they were unnaturally easy.
Everything was easy at that time.
And in the last year, of course, with the appearance of the of
the inflation and the increasing of rates to try to Stamp Out the
inflation things have gotten harder.
I imagine people today saying, well, what are we going back to
normal? Like it was five, six, seven
years ago. And, and the important thing to
know is that, that wasn't normal, right?
That was the easiest the best of times and I, My own belief is
we're not going back there. We're now in an environment of
more normal and right circumstances.
And we're going to roughly stay this way.
We're not going back to the way things were in the prior decade
and the investors that are still thinking back to the good times
Still Holding Onto hope that we just have to suffer through some
minor volatility until the market starts racing back.
Like, the way it was, they're mistaken and they're not paying
attention to the sea change to the profound.
I'll change that's already taken place in the market this special
time period between 2009 and 2012.
She wasn't only easy but it was unusual and it's unlikely to be
repeated. We are unlikely to go back to
this time period. And unfortunately when I look at
the demographics of my channel, when I look at the actual people
viewing this information, the majority of you are in an age
where that's really the only time period that we know most of
us started investing after 2009 and I think the big problem I
see with so many investment portfolios is there, gauged
around a time period that's unlikely to be repeated and the
market has taught a lot of very bad lessons, over the past
couple of years, one of the bad lessons that the markets taught
us over the past couple of years is that it's a legitimate
business model to sell something for less than the cost of making
it Uber is a perfect example of this.
This company is the quintessential company that
sells something for less than the cost of making it any time.
A company. Does this business model of
taking a product Act marking it down losing money on every sale.
Of course, they grow Revenue, that's common in all of them.
Uber grew its Revenue but what it doesn't have is any type of
profit, snowy betta. No free cash flow and no
earnings, this company is unprofitable.
These were the type of companies and investors flocked to over
the past five years with high amounts of liquidity, in with an
easy investing environment. But that was a wrong lesson that
we learned in reality selling something for less than the cost
of making. It is not a legitimate business
model and The company can turn a profit someday down.
The road is not a legitimate investing strategy companies.
Like, uber are not going to give investors good returns buboes,
another company that does this. It sells a product for less than
the cost of making it. That's why it has explosive
Revenue growth. It's great that they're taking
in lots of Revenue, but they're not actually making any money.
And this is where the market taught us.
A lot of bad lessons that these companies were worth a lot of
money, because someday down the road, they had turn a profit in
the meantime, they can just scale.
Land scale and scale, look at the price.
This company went up to $60 per share.
It's no longer at $60, a share, it currently trades at less than
$2 a share selling a product or service for less than the cost
of making. It is not a legitimate business
strategy. The go to excuse for buying
unprofitable. Companies is Amazon.
This is the go-to example of a company that's been unprofitable
for decade after decade, but has still given investors great
returns. Now it is true that Amazon has
given phenomenal returns over the Last 20 years but we're
investors get this wrong as an Amazon has actually been free
cash flow positive. It's been profitable for over 20
years since almost the very beginning after 2001 every
single year up until 2021 has been free, cash flow positive.
So ironically, as investors site Amazon as the go-to, excuse for
buying unprofitable companies, they're citing a company that
has been profitable for 20 years straight.
All of big Tech has been highly profitable for a A long period
of time. Microsoft's profits, go all the
way back to 1989. Google was highly profitable
right from the beginning from 2002.
The company was printing cash and it's scaled its business.
While being profitable, Apple has been a highly profitable
company ever since 2004, ever since then it was Off to the
Races. Good companies make profits and
they usually make them right from the start.
Bad companies are ones that always promised profits in the
future. They dilute shareholders and
they never generate Any amounts of meaningful profits.
So we need to update our thought process.
A lot of the lessons. We've learned over the past five
to 10 years have been very bad lessons.
Unprofitable companies are not good companies, they're not good
Investments. And if they are good
Investments, you can simply wait until they become profitable.
Part of the reason that my portfolio has held up relatively
well during this massive sell-off is because I'm only
focusing on highly profitable companies companies that have
high margins in a high Returns on Capital employed.
Lloyd. And of course, the problem is
during this time period that all these bad lessons were taught,
many investors are still anchored during that time period
they still have their thoughts and their investing strategy
centered around a time period that doesn't exist anymore but
this change has already happened and investors that don't update
their thought process are going to get hurt right?
Well that's what a sea change. Is is a complete transformation,
not just a minor cyclical fluctuation.
So I you know look I think Did the business world?
The economic world is not supposed to be easy.
It's not supposed to easy to make money, right?
It's not supposed to be easy for companies with bad business.
Models to stay in business as it has been for the last 14 years,
right? So, I think we go back to a
period in which we have moderate interest rates.
We have moderate availability of capital, we have a moderate,
default rate, and so forth. All of which will feel much less
accommodative I think than the last 14 years.
Sing the things will feel much less accommodating over the
upcoming years, is financial jargon for saying that investing
is going to get much harder. The reason I'm taking These
Warnings. So seriously is because I think
that Howard marks is accurate. I think this is a sea change
that's already happened and whether investors want to admit
it or not, the environment that we're going into is much more
normalized. Much more difficult than what we
had over the past decade, and I think that if investors still
try to employ the same crummy investment strategy they did
before, it's Li not going to work investors that are focusing
on companies with incredibly weak fundamentals that try to
bolster their stock price through various tricks.
It's simply not going to work. Another bad lesson that the past
10 years have taught us is that stock-based compensation really
isn't money. It's fake money.
It doesn't really count. You have a company like uber,
for example, that it posted a couple quarters of positive free
cash flow. That's really great.
That companies actually making money right now.
Well, not really if you Factor in stock-based compensation.
This is what the chart looks like.
Even today, the company still not profitable.
Unless, of course, you treat stock.
Like it's not real money. This 482 million dollars.
They pay their employees that's just Monopoly money, right?
Well, that's the way these companies want you to view it.
They try to hide this from the report.
They try to pretend like this isn't real money.
And this is something that is a bad lesson of the past, and many
investors are still believing this nonsense.
The companies that I'm investing in are ones that generate Real
profits. Even when you factor in stock
based compound, think the strategy that investors should
employ, is hope for the best, but prepare for the worst and
unfortunately, what a lot of investors are doing right now,
is hoping for the best and preparing for the best rates are
roughly where they can stay except that.
I think it's important to recognize that.
The the debate today is being dominated by people who are
optimistic by people who think that the recession won't be too
bad. Yeah, won't be too long that the
inflation will give way and that the FED will be able to turn
accommodative right soonish. Are you optimistic, not on that
subject sitting around with a portfolio?
Full of bad, business models, bad companies that are highly
diluted and unprofitable and then hoping that the FED will
turn around and that the FED will become accommodative and
that the FED will bail out. Your portfolio is not a
legitimate investing. Energy Ivan calling this out for
over a year and I'll continue to call it out investors that
continue down this path are going to continue to get hurt
and these little bumps of Hope once in a while these little
mini rallies along the way, they're not going to be
sustained because fundamentally a bad.
Business model is a bad business model.
I compile different watch lists of companies that I think meet
certain criteria is for investment.
High profitability organic growth low amounts of
stock-based compensation. Good pricing power world-class
companies that I think we'll do well over the next 10 years and
one of the things I notice, when I go through different
companies, is how many of them are built upon unsustainable
business, practices that are entirely reliant on low,
interest rates, some companies have to pay for growth.
So aggressively that they spend nearly all of their revenue on
growth. Monday.com, for example, a
company that's basically a task manager or to-do list for
different teams. This company did 308 million
dollars in revenue and 2021 308. Million this company, spent over
that same year 268 million on marketing and sales 268 out of
308. That means that this company
spent eighty seven percent of their total revenue on marketing
and sales. In that entire year.
It's reliant on an aggressive sales team to grow the company
at all. There's no organic growth and
there are so many companies in the market with very poor
business models that are being exposed.
Their stock prices are getting crashed.
Investors are learning hard lessons that they don't have to
learn through experience. Perience.
So I'm not going to tell you how to form your own portfolio or
what investments to make your investment decisions are your
own, but I can share with you what I'm doing with my
investments. I think the economy is slowing
down. The FED is pushing the brakes on
the economy, hard with an economic slowdown.
It's more difficult to find companies that can actually turn
a profit and finding companies that turn a profit will become
prized, possessions companies that are actually highly
profitable, will become more value, relative to all the
Swaths of companies that get exposed for being the bad
companies that they are. So when I look at the
probabilities of the future and see that things are slowing
down, I'm tightening up my portfolio into companies that I
think can turn out earnings growth and free cash flow
growth. Consistently over the next 10
years. Some companies that I've
highlighted before that are recent purchases of mine are two
of them in the financial category.
I bought into SP Global and MasterCard.
Now I can't say whether I bought the absolute low on these
companies, they might dip down Other than what they already
are. But I feel very good about these
purchases for very specific reasons between MasterCard and
Visa. They form an oligopoly of
payment rails. They're highly entrenched
businesses unlikely to be disrupted.
And even though these companies are incredibly high-quality
monopolistic and have long-term pricing power, they trade at a
28 forward. P/E, MasterCards expected to
grow earnings at a rate of 15 percent for the next three
years. And when I do analysis on this
company, I strongly believe it'll be able to grow its free
cash flow per share. At a mid teens rate for the next
decade. It's already done.
So, for the past 10 years and I see no reason, it won't be able
to do so for the next 10 years, SP Global's.
Another company that I think matches a lot of these
qualities. It has a decades-long Runway of
pricing power organic growth, low Capital intensity, and I
think that it looks artificially expensive right now, because of
its trailing metrics, the free cash flow yield over the
trailing. 12 months is only 2% which makes a company seem a
little expensive. But when I actually average out
the free cash flow yield, Over the past three years.
I see a company that's much cheaper than what it looks like
right now. So I think this company is much
cheaper than it looks on paper. In the meantime it is a
high-quality compounder with incredibly good pricing power, a
long Runway of growth and another company that I believe
can grow its free cash flow per share at a rate above 10% for
the next decade. So my view is, even though
investing has gotten more difficult and the future, looks
like a tougher road ahead than the previous decade.
I think it actually is a time of opportunity.
A timer companies are separated From the bad, good companies
will get rewarded, bad companies will get further punished the
investors that continue to buy bad companies, ones that are
unprofitable with highly diluted business models, poor cost
structures, High marketing costs, and inorganic growth.
All I can see is best of luck because I think you'll need it.
Now. Moving on, we have some news,
that's always unfortunate sometimes necessary, but always
unfortunate the hair which is people are losing their jobs.
We have layoffs being announced by Microsoft 10,000 so far and
my prediction. Uh, is this number will go up
over time. And the case of Microsoft, a
software executive, chief executive Satya, Nadella wrote
that the layoffs would happen before the end of March and
effect, less than 5% of the company worldwide.
So 10,000 is a massive number but then they cite a small
percentage 5% of the company. When we put that into
perspective this is what it looks like from 2021 to 2022,
Microsoft added, 40,000 employees and looking at it from
this perspective. It doesn't Seem quite as severe.
But in total numbers 10,000 is still a ton of people in a blog
post to employees. Mr. Nadella pointed out, the
shaky economy telling employees that companies globally have
begun quote to exercise caution as some parts of the world are
in recession. He added that the company would
be taking a 1.2 billion dollar charge and it's soon to be
announced earnings related to Severance costs.
So just laying off, all of these employees is actually an
expensive Endeavor to do for a company like Microsoft.
And the real truth here is, is that these companies simply
please / hired that's the bottom line they projected out too much
future growth and now they're starting to trim back.
There's other companies that haven't really been acting all
that prudent. Recently, we have Disney as an
example here. Disney had an executive that
worked at their company for less than four months and took in
eight million dollars in compensation or about 119
thousand, five hundred and five per day.
According to the calculations based on a proxy statement that
Disney filed Tuesday. And that's not even all of it.
When the payouts associated, with this termination agree, Are
taken into account that per day, figure jumps to one hundred and
Seventy-Six thousand dollars per day.
Disney also paid Morel about 500,000 to move his family to
Los Angeles from London and another 500,000 to move away
when he lost his job. So another million dollars in
moving expenses. Now, I don't know about you, but
I've moved locations a couple times throughout my life and I
don't remember it. Costing, five hundred thousand
dollars. I think it was a little bit
cheaper, is it really that expensive?
Rusev to fly from Los Angeles to London.
I know, plane tickets have gone up, but 500,000 to move, one
way, and then 500,000 to move back, seems a little high to me.
Now, of course, after he left the company, Disney bought the
4.5 million Southern California home.
That mr. Morel had purchased, according
to the Disney filings. So apparently Disney's in the
real estate business of buying private residential homes of
their Executives. When the board members moved
back home and they get fired, Disney will pay 4.5 million
dollars for their It's actually breathtaking how self-serving
some companies are with their Executives and their
compensation packages and I personally glad that there's
some investors that will try to step in and be a strong
scrutinizing. Critical force on the board.
I hope that Nelson Peltz does get his board seat.
I know a lot of you are confused of.
I still hold Disney. Why I have it in my portfolio
right now? I think the company even with
the mistakes, the leadership and board is making has such
incredibly valuable assets. So even though the management is
not Changing the company in a way that I would want.
I still think the company's undervalued relative to its
future outlook. That's all for now, I'll see you
in the next one.