Welcome back everyone. Today on the Joseph Carlson
Show, Elon Musk released his new chat bot.
It's called Grok. Grok is a funny chat bot.
It gives you answers, but it does it in a comical way.
It's not so uptight like the other chat bots.
Now, despite Elon Musk's best efforts, Grok was not able to
distract users from Open AI Day. Open AI Day with Sam Altman
happened Monday and it's all anyone can talk about.
The reason why is because it was a pretty incredible meeting.
This was no normal tech company giving a quarterly update.
This is one of the most innovative, if not the most
innovative company in the world right now.
Giving an incredible update. Sam Altman took a simplistic
dark stage similar to the early Apple events, and he went by
step by step on how they're improving this product.
And there's six different major components that were improved.
These improvements are major iterations on the power of its
AI, and this has major implications on different
companies. For example, part of this is
what they call the AI startup Doomsday.
Part of the feature release here is going to destroy a lot of
startup companies. This has major implications on
agents in the agent business. They announced an entire App
Store and this is overall being referred to as the Extinction
event for other companies. In fact, after this event, it
became clear that Open AI is so far ahead of the competition
that it may really be running away with the AI game still be
diving in and breaking down The key takeaways of this meeting,
the ownership stake that Microsoft has and how they stand
a benefit and implications. This has on the stock because
Microsoft is having one of its best days ever.
Now, of course, we have some other news to get to.
Vegas is having its Formula One event right around the corner,
but it's not all good news for Vegas.
In fact, a lot of people are now saying that it's no longer a
good time to visit Vegas in October and November leading up
to the event because of how much disruption it causes.
There is construction everywhere across the Strip.
So as an investor on the Vegas Strip, I want to see how
destructive this is and what it really means for the future of
this event. And then we also have the
elephant in the room, the S&P 500, the NASDAQ are up again for
the longest winning streak since November 2021.
The market continues to rise, but it's typically rising around
7 different companies. In fact, if you were to remove
the Magnificent 7 from the index, it would be completely
flat this year. So what does this mean for
investors when such a small amount of companies make up for
so much gains? So obviously we have a lot to
get to. Let's go ahead and start off
with a portfolio update. What you're looking at is the
passive income portfolio. It is my primary and my personal
investment account. The reason that I show it so
publicly, I show the gains and the losses week by week,
completely transparent, is to offer level of transparency and
insight that other Youtubers won't.
When you look at your portfolio and the returns of it, it's easy
to keep that secret. Because if you keep it secret
and you do poorly, you can still pretend like you're a guru, Like
you know everything. Like you know exactly what
you're doing when you put it all out there, both the gains and
the losses, and your all time performance since the very
beginning. That means that you have
accountability, and accountability makes things a
lot more real. So the reason that I do this is
both for transparency and accountability.
It's to give you an inside look at real investing.
If you value this level of transparency and want to follow
along for continued updates, you can do so by subscribing to the
channel, liking the video, and ringing the bell below the
video. That'll give you a notification
every time I do an update. Now my investing strategy hasn't
changed. I'm still buying exceedingly
high quality companies and investing in concentrated
positions and in total I only have 11 holdings.
So every single one of those eleven are important.
I review every single one of them every single week.
Now you may notice something a little bit different about this
portfolio. There's a new holding down here
called SCOV. This is an ETF full of short
term U.S. Treasuries zero to three month
treasury bills. Now I have around $15,600 in
this right now. I don't call it invested because
this is not an investment. I'm not putting my money here
and considering it an investment.
This is a cash position and that's how it should be viewed.
S Gov is an ETF of short term treasuries, which means that you
have really no risk. In fact, you have the same
amount of risk that you do with cash.
It's short term, so there's no duration risk, there's no
interest rate risk and it's U.S. government, so there's no
repayment risk on both sides. You really have no risk with
this. It is a cash position and in
fact when companies have cash or cash equivalents, this is what
they refer to as cash equivalents, short term
treasuries. Now the reason that I move my
cash out of the brokerage cash balance into that holding was
because when it sits right here, it just doesn't earn any
interest and that's a bummer. 0% interest is not fun down here.
This earns around 5.5% interest right now.
So I'm actually making something with my cash now. 5% returns in
my opinion is horrible. That's not a good return.
It's not something to aspire to. We shouldn't be proud of a 5%
return, but it's still better than nothing.
So as long as I have cash waiting to be put into a
company, I'd rather have it earn at least 5% over nothing.
So again, I don't view this as an investment.
I don't view it as a holding. This is my cash position.
Other than that, My Portfolio has remained largely the same.
I have the same investments, I've been buying more of them
and I've watched these companies compound to all new highs.
And one of the companies that I've continued to hold, I've not
sold a share is Microsoft. This one is now a $15,000 gain
position, $58,000 total. This is a stock that's now up
50% year to date. Now even though it's a hold, it
continues to grow as part of My Portfolio because of the gains,
the company's making up a bigger and bigger percentage of my
overall portfolio, outperforming a lot of my other companies.
And I like to keep up with what's going on with this
company. One of the biggest extensions of
Microsoft right now is it's AI endeavours.
And there's a lot of excitement around AI.
One of the neat developments in the world of AI this week was
Elon Musk finally announcing his new AI chat bot.
We've been knowing that Elon Musk wanted to get into this
category. I think he was a bit jealous.
He was a little Jelly that you had Open AI all of a sudden
partner with Microsoft. After all, he helped found Open
AI, so seeing that be taken by Microsoft I think was something
that he didn't love to see. And then seeing Google with Bard
and all these other AI companies.
I don't think Elon Musk is the type of person that likes seeing
all the attention go away from him with other companies that
have cool technology. So I think he launched his AI
chat bot as part of regaining the supremacy of being the tech
guy having the attention. The problem is, he's a bit
behind in this game. So what he's done to
differentiate his AI chat bot is personality.
That's the single biggest differentiating feature,
personality. His AI chat bot is sassy.
It's a little bit more crude, in fact, it can be outright vulgar,
and it's more sarcastic. It just has more personality all
around. And Elon Musk has been
highlighting the personality of his AI bot on X in fact, right,
Harry says. How can I tell if I have crabs?
The AI bot answers the question in a very medical way.
Not much personality there with the straightforward question.
But then he adds in be more vulgar, and the AI chat bot
gives a more vulgar answer to the question.
Something that ChatGPT or Bard won't do, and I have to give
credit where credit is due. He's already way behind in the
AI game he's trying to play catch up with these chat bots.
He's working with less resources, but he's already came
out with a chat bot that's pretty good.
It has the basic answers you'd want, and he's found a way to
make it distinct from the competition, which is something
that he desperately needed to do.
It's pretty incredible how quickly he got a product out and
made it have a unique offering. So I'm actually really impressed
with what he did here, and I think getting this product to
market so fast is incredible. Now having said that, Grok is
nowhere close to Open AI, and what Sam Altman's trying to do
with Open AI has become abundantly clear.
He is taking the first mover's advantage that they have this
great initial lead and they're transitioning that into a
sustainable competitive advantage, making it virtually
impossible for any other AI company to catch up.
And we'll go through the details of how they're doing that.
The first thing that they're doing is making other startup AI
companies irrelevant and putting them out of business.
For instance, Open AI announced changes allowing developers to
retrieve proprietary information like domain specific data or
product descriptions from outside of its models.
That means that they no longer have to convert the information
to a format that AI models can understand to store them in
vector databases like Pine Cone and Weviate.
So now Open AI has the capability of these two AI
start-ups, making them irrelevant.
They're also giving the developers access to Open A is
top text to speech AI model for less than 20% of the cost of the
popular alternative. So this other company that's
text to speech is now way more expensive than Open AI.
Again this is going to put so much pressure on them.
How are they going to compete against a company that's out
pricing them? To this extent, Open AI took aim
at a list of startups on Y Combinator startup list.
Open AI has better products that match the product set at cheaper
prices. This is doomsday for other AI
startups. They also took aim at agents and
assistants. The assistance API allows
developers to build agent like experiences within their
applications. This new API takes aim at
companies like Langchain that market themselves today is
connecting pieces for these AI powered applications so they
have yet more companies that they're making irrelevant.
Do you see the common thread here?
This is consolidation. This is what happens to winners.
They consolidate lots of different companies that end up
losing, and that's where you get very top heavy companies.
Their scope of products is encompassing basically every
other smaller AI company. Their product feature set is
growing much faster than other companies, and the advancements
in their technology is becoming absurdly powerful right now.
On top of all of that, one of the most significant things
they're doing to ensure their competitive advantage to build a
Moat around themselves is the App Store.
As we know, having an App Store with a lot of developers, it
creates a very powerful Moat for a company.
This was the initial Moat of Apple.
They had the App Store, they had all the developers on it.
They made great apps, which enriched the customer
experience. We have here open a eyes App
Store moment. Paid users of ChatGPT can now
build their own custom chat bots and share them publicly in a GPT
store. And they also mentioned there's
going to be a revenue sharing program.
The other things this company announced are also great
features. In fact, one of them is a little
bit of a side feature, but it gives customers more incentive
to use them over competitors. If you use an AI bot to do
anything with your company, you may be concerned about
liability. If that bot generates content
that is copyrighted, that could put you in potential legal
trouble. So Open AI said that we'll cover
the bill if you ever get sued for copyrighted content from our
system, anything that happens will cover the bill, and they
can do that. They can cover anyone's legal
bill because they're backed by a very large company.
Most AI startup companies don't have Microsoft as a backer, and
without Microsoft's pocketbook, they can't guarantee that
they'll back any copyright claims.
So this is another unique advantage that this company has.
And then finally, in an effort to grow that App Store and get
more customers on their platform, they're out pricing
their major competitors specifically.
Anthropic. They announced a number of price
cuts across different products. I believe that's going to put a
lot of pressure on Anthropic. Overall, the stuff that Sam
Altman talked about in the presentation he put on in this
meeting was objectively impressive.
In fact, I would consider this one of, if not the most
innovative presentations I've ever seen.
These are truly ground breaking technologies that are going to
change the world, being revealed by a single person on a small
stage, and it does remind me of the early days of ale.
And this is not just some niche product that tech nerds like.
This is going to be added in to virtually everything we do.
In less than a year, Open AI has hit 100 million weekly users and
over 2 million developers that are currently building on the
company's API. This is insanely fast growth.
I look at Microsoft and again, I'm just wowed by either their
genius or luck in investing in this company.
Whoever had the foresight to make that investment should get
a raise at Microsoft. Microsoft invested $10 billion
into the company, raising their stake to 49%.
So they own roughly half of Open AI.
And when this investment was first reported, it got keywords
like a buzzy AI tool. Yeah, just a buzzy tool.
Something that's exciting but doesn't really have real
numbers. Well, not anymore.
Open AI is not just a buzzy tool, it's now generating over
$1.3 billion this year already. Now, all of this seems great for
Open AI. The company's way ahead of the
competition. They have better AI technology
than anyone else, and they're building out a substantial Moat
to give themselves a competitive advantage.
But that's great for them. What does that mean for
Microsoft? And what does that mean for us
investing in Microsoft? How much can we actually stand
to benefit from this relationship?
The partnership started in 2016. That's when Microsoft became
first interested and formed a partnership with them.
They strengthened it in 2019, and they also, importantly,
transitioned Open AI from a nonprofit to a hybrid model
where the L called Open AIL would be in charge of
commercializing the products developed by Open AI Research
Lab. Microsoft has since placed more
money in the partnership, enabling them to develop its
Microsoft Azure AI, a supercomputing technology.
This is the infrastructure for training ChatGPT models.
Microsoft is integrating Open AI's models and technology into
basically all of their products. GitHub, Copilot, the entire
office suite being everything, all of it's going to have
integration with Open AI. So they are using this small
company that they made this small investment in to
dramatically improve every aspect of their entire offering.
They also benefit with a lot of insights and learning.
Simply put, their learning how to build AI supercomputers to
support the computation intensive task required by large
models. This helps bolster Microsoft
ahead of the competition being the leader in AII believe that
right now Microsoft is the leader in AI because of this
relationship with Open AI, they happen to partner with the best
company in the industry. Now there's other important
players and I don't want to discount what Google's doing.
I think they're making incredible progress and they've
positioned themselves to be highly competitive.
But their product set, their future and the number of users
in AI is not at the same range of Microsoft.
Now when I look at Microsoft as an investment, the company in
terms of fundamentals has never been stronger.
It is the strongest fundamentally that Microsoft has
ever been in its entire history. It has the strongest market
position, the most resilient cash flows and its position for
future growth. Everything that you'd want to
see with an investment. But in terms of valuation,
there's many times where Microsoft is trading at a much
better valuation. Right now it's not at a deep
discount. And what I look for in
investments are high quality stocks that are dislocated.
That is what the investor Mark Mahaney refers to as DHQ's
dislocated high quality stocks. That's a stock that's high
quality, that's gone through a correction, it's gone down
2030%. That is when you buy a very high
quality stock. And that's exactly what happened
one year ago. If we zoom into one year ago,
Microsoft is up 60% over the past year.
In fact, it was trading at a price of around 2:20 to 2:30.
This was a dislocation. Microsoft had sold off.
It had given up a bunch of games.
It was going through a huge correction and during this time
period, in fact right here at $230 per share, I came out with
a video called I'm Buying hair. Microsoft was at $230 per share
and I said it was undervalued at $300.00 per share.
And I argued that Microsoft fair value was $350.00 per share.
And again, at that time, trading at 2:30.
That seemed improbable. It seemed a little crazy, but I
believe strongly that it was an incredibly strong fundamental
company at a dislocation. So if we're looking for DHQS
dislocated, high quality stocks, Microsoft really isn't one right
now. It's a high quality stock, but
it's not dislocated from its valuation.
It's trading at a very low free cash flow yield, which means
that it's at a high valuation. It's trading at a very high PE
ratio, again, trading at a high multiple.
It's a high quality company, but I don't see any dislocation with
the price. So for right now, I'll consider
it a hold and look for other opportunities.
Now moving on, we have some news about Vici.
Vici of course being my only real estate holding.
It's a great holding. It just pays out a dividend
every quarter, a really big dividend and they own a lot of
real estate on the Vegas Strip. As we know, Vegas is undergoing
construction to make way for the Formula One race.
This is a highly anticipated race, and conceptually this
seems really cool. It's advertised as basically the
Formula One cars racing down the street of the Vegas Strip.
So you see all these iconic, incredible buildings behind the
cars racing down the street. And this reminds me of those
racing games you play at the nickel arcade where you're
racing down the street of this super busy city.
Because the background looks spectacular.
This is what they're doing in real life.
Conceptually, this seems awesome, but in all
practicality, it's running into a couple of snags.
For visitors and locals, the construction has made navigating
the city and exercise impatience.
Driving or walking from one resort to another can take much
longer than usual. Many visitors are complaining
that the construction has ruined views of popular attractions.
Now, if this was any other street, maybe in the world
except for the Strip, this really wouldn't be that much of
a problem. What street is so important that
people don't want their views blocked that people don't want
to walk a little bit extra? Well, there's some busy streets
in the US, but literally none of them in the entire world are as
busy as this trip. This is the most economically
productive St. in the entire world, and you're making
visitors, People that have spent a lot of money to fly out to
Vegas, to have a good time to go to events and conventions, to go
party, to do whatever they want to do.
Now they're being obstructed from enjoying themselves on
their vacation of the most vacation spot in America.
Repeat visitors and locals worry that obstruction will become an
annual fall happening, especially since many of the
structures built on the race are temporary.
Las Vegas and F1 have agreement that they allow the race to
happen annually for at least two and as maybe as nine years.
Some regular visitors are rethinking their future travel
plans Now. You may think people are just
being a little uptight or it can't really be that bad.
Let me tell you, I went and visited in person just a month
ago and it's bad. Here's a video I took right next
to the Bellagio. This is the Bellagio iconic
fountains and right there you have construction right on the
Bellagio fountains. Now again, this was over a month
in advance of the event. So the Bellagio fountains and
the iconic view you get there is obstructed from this event for
around 2 1/2 to three months before the event.
And this is a three day event. Not only is the view obstructed,
but you literally can't even walk in front of the fountains.
They blocked off the entire sidewalk, so if you want to go
past this part of the strip, you have to walk through the
Bellagio making a walk a lot longer than usual.
And as you can see, all the fencing and scaffolding and
cranes obstruct all the views of the buildings around.
So for months leading up to the event, you have disruption to
the visitors. Formula One also actively is
blocking the view of anywhere else but a paid seat.
And I told you the next part they were going to do was
basically like a fence here with a cover over the top because
people were saying, oh, people are just going to stand up here
and look over lots of this. Is to prevent.
Remember I mentioned they're going to have lights so they
reflect off this film so people can't see.
The light's going to reflect. You're not going to be able to
see out. Well, here's your lights.
They're putting up fencing and lights to reflect off of the
screen, so you cannot see the race unless you pay.
And this of course looks ugly and messy to any visitors that
are not here for the event. I think it'll be interesting to
see what type of revenue this generates and what they decide
to do going forward. And I would not be surprised to
see if Vegas no longer decided to do this because of the
massive disruptions. Now moving on, there's an
important phenomenon that's been happening in the stock market
that I think needs to be pointed out, and that is that a few
companies typically make up for the big majority of gains of the
entire index. To illustrate this, let's go
ahead and take a look at two different ETFs.
The first one we have here is the S&P 500.
It's up roughly 15% year to date.
Now that's not anything amazing, but that's a pretty good gain
for the entire year, 15%. There's nothing wrong with that.
Now the S&P 500 is a market cap weighted ETF, meaning the bigger
the company and market cap, it has a proportionately higher
weighting in the ETF. So the biggest companies like
Apple, Microsoft, Tesla, NVIDIA, Amazon, Google, Meta with their
big market caps, they make up a big part of this ETF.
The other ETF we'll look at is called the equal weighted S&P
500. This is all the same companies
in the S&P 500, but instead of weighting them by market cap and
weighting the bigger companies with a bigger weighting, they're
all equal weighting and they're rebalanced as such.
Now an equal weighting ETF is literally flat on the year.
It's down .6% and again the market cap weighted one is up
15%. And the reason why?
It's pretty simple. The handful of large companies
have outperformed the other companies in the index in
aggregate. Companies like NVIDIA, Apple,
Microsoft, Google, Amazon, Tesla, they've all done
incredible this year and the rest of the index has not
performed as well. Now if we consider why the S&P
500 market cap weighted is doing so well, there's a few things to
consider. First of all, the S&P 500 is
difficult to beat. Anyone that says it's easy
doesn't really know what they're talking about.
It is not easy to beat it on a consistent 3 year rolling basis
where you're always outperforming SPY.
That is incredibly difficult and I'm sure that you've heard most
fund managers who are professionals cannot do that,
and I believe there's specific reasons why.
One example is the S&P 500 makes different choices than a lot of
value investors. For example, the S&P 500 gives a
greater weighting to companies that are doing well, meaning
that they feed the winners. They lean into the companies
that are outperforming. They buy more of the companies
that have momentum, that have progress, that have higher cash
flows and higher market cap. They weight these companies in
greater proportion value. Investors like to do the
opposite. They look at their winners and
they say, you know what, I'm going to sell these companies.
I'm going to sell off Microsoft and Apple because these
companies have already done so well and they must be
overvalued. So value investors sell off
their big winners and they reinvest that money into the
losers. They buy the companies that are
struggling, they buy them in disproportionately high levels.
They add more and more to their losers.
They dollar cost average down on losing positions.
They do this in the name of buying value, buying the
companies that nobody else wants to buy.
And while sometimes that can work out all right, if there's a
true recovery in the company you're buying, in many cases
focusing on the companies that are doing poorly is the
opposite, the opposite of what we should be doing.
Peter Lynch talks about watering the weeds and trimming the
flowers. That's what a lot of value
investors do. They buy the companies that are
struggling and they continue to struggle further.
Meanwhile, the ETF that's beating all the value investors,
outperforming all the hedge fund managers, outperforming everyone
else, is buying all the winners, adding more and more to big
winning positions. Now, I'm not suggesting we
ignore valuation or we only add the companies that go up, but I
am suggesting that value investors have a little
introspection with their strategy.
When I invest, I am focusing on companies that I believe are
strong winners. These are companies that have
been strong winners for a long period of time.
Because what I've observed is that the S&P 500 is difficult to
beat for a reason. It puts greater emphasis on
companies that are doing well, and it sells out of the ones
that are doing poorly. If a company starts to
underperform, if it starts to have its fundamentals erode, the
500 puts it as a lower and lower weighting.
It doesn't double down into a bad company.
It doesn't try to get back even with the company.
And if the company does bad enough, the S&P 500 literally
sells out of it. It gets rid of it completely and
replaces it with a newer, promising company.
So I think there's something we can take from this.
One of the biggest temptations in investing is to sell out of
high quality companies in the name of valuations.
Sometimes that can work, but that is not the strategy of the
S&P 500, and the S&P 500 has a history of very good returns.
That's all for this episode. If you want extra content, make
sure to check out the Patreon link below.