Welcome back, everyone. Today on the Joseph Carlson
Show, we finally made it through the first six months of 2024.
Pat yourself on the back for making it through.
We're off to the second-half of the year, and I know we're all
excited, but I think it's good during times like this to take a
step back and look at how things went, to look at our portfolios,
the performance of them and the performance of our different
companies, to try to do some analysis and see what went right
and what went wrong. And that's what we're going to
be doing in this episode. I'll be going over My Portfolio
showing you what went right, what went wrong, the performance
of each company and the total performance against the S&P 500
and the NASDAQ. So we have a lot to get to in
this episode. I think it's going to be a lot
of fun. We also have some new stories.
We have another case where fund managers are underperforming.
They're doing poorly, but this time they have their new excuse.
The new excuse for underperformance is that they
don't own NVIDIA. Well, you can't blame me.
I just, I just happened to not pick NVIDIA.
In fact, this excuse is so common now that the Wall Street
Journal is reporting on it saying, no NVIDIA in your
portfolio, you're just toast. We're going to be going over why
this is an invalid excuse for underperformance and that if
your fund manager making this excuse, you should stop your
fund, you should stop investing other people's money, stop
making excuses and just invest in the index.
We also have a story here of the EU at it.
Again, doing what they love to do.
The EU is focused primarily on one thing, and that is
regulating not their own companies, but US big tech
companies. In this case, they're targeting
Meta, suggesting that Meta's binary choice they give users of
either having a paid plan that does not have ads or an ad plan
that requires some user data is unfair.
And the EU is demanding that Meta offer 1/3 option for users,
one where you can have a free plan that requires no user data.
We'll be going over how ridiculous this demand is from
the EU and what Meta's likely to do in response.
And then finally, we have the story of a company everyone's
used going bankrupt. That company is Redbox.
Remember the company you could go to and they had a vending
machine for DVDs? You just pick out the movie you
wanted and it literally dispense the movie.
Redbox is going bankrupt. They're not paying their
employees. They owe a lot of people a lot
of money. We'll be looking at what went
wrong for Redbox. So we're going to be going over
all of that plus much more. Plus one thing that I want to
mention, I think this is important.
It's the beginning of the month, which means if you join the
Joseph Carlson Show Patreon today, you will get the entire
month for free. That gives you time to give a
free trial for the service. The Patreon also
includesqualtrum.com, which is the stock analysis tool I use.
And we've added in new functionality.
We've added in what's called KPIs.
For example, if we're looking at Google here, we can see not only
the normal financial data that Google offers, like revenue,
free cash flow, net income, and earnings per share.
All of that is visually illustrated, but we can dive
into revenue segments. We can see how much comes from
Google Search, YouTube ads, Google Network.
These are KPIs. We can also see Google's cloud
operating margins. This is mapped out in visual
format so you can see the cloud of Google becoming more
profitable overtime. Most stock analysis tools do not
offer this information and we have KPI's for hundreds of top
stocks in the market, ones like Airbnb.
You can see their bookings and nightly experiences booked.
You can go over to companies like Texas Roadhouse for example
and see their amount of new restaurant openings.
We can see their average weekly sales.
We have the same thing for Chipotle and Wingstop and many
other companies. We have KPIs for hundreds of top
companies, and we have more added in every single week and
more and more features for Qualtrum as well.
If you want to try out Qualtrum and get access to exclusive
episodes and a Discord community, you can do so today
by joining the Patreon at patreon.com/josa Carlson.
And again, there's no risk. You get the entire month for
free. That's why I'm mentioning it.
I think it's a great opportunity to at least try it out.
Now let's go ahead and jump in to the portfolio and I first
want to do an update on the performance.
This is what it looks like right now.
The total value is $239,000 and we have $77,000 in the green as
of today. Now the first thing that we're
going to do is go over the first six months of performance this
year. So I'll filter things by year to
date. If we look at the year to date
performance, we are up 28% money weighted returns.
Now, one thing I want to point out that I think is important is
I have not added any new capital to this portfolio in 2024.
None, not a penny. There has been no money added to
the story fund in 2024. So these gains of 28%, they're
just gains. They're not from any additional
money. They're not from, you know, any
additional funding. They're just from the portfolio
alone. I know a lot of people think
that when you add money it increases your returns, but
that's not the case. That's not how this is
calculated. This is all from returns of the
portfolio. In fact, when I look at the
starting value and the ending value and we look at the simple
percentage increase, it is 29.08%.
Now let's put this performance in context.
We're up 28% this year in the story fund.
The S&P 500 is up 15% this year. So we've doubled the performance
of the S&P 500 year to date. When we look at this against the
QQQ, we can also take a look at the performance here.
Year to date, this is up 19%. Again, we're up 28% this year.
So the first thing I want to point out is some people mention
Joseph's portfolio is is good, but it's basically like the QQQ
or the S&P 500 because I have a lot of familiar names that you
see in the QQQ or the S&P 500. They suggest that I'm doing
something called closet indexing.
Closet indexing is a strategy that some fund managers use
where they act like they're actively investing, like they're
picking stocks, but in reality they're just mimicking the index
and their performance follows the index.
So their closet indexing this portfolio is not a closet index,
and it's not something I suggest that would follow the S&P 500 or
the QQQ. There's a lot of evidence to
prove that this is not a closet index, one of them being that
the makeup of this portfolio is nothing like the QQQ or the S&P
500. This is a total of 5 holdings.
There are 500 holdings in the S&P 500.
This portfolio does not even own NVIDIA or Tesla or Berkshire or
Pepsi or Costco or many other top holdings in the index.
This portfolio has 50% of it in Amazon and Netflix.
None of these metrics are anything like the index.
The weighting, the makeup, the number of holdings and the
performance is completely different than the index.
So it makes sense that the performance of this over the
last six months has been different than the indices.
Again, we have the QQQ going up 19% and we have the S&P 500
going up 15%. This portfolio is up 28%.
The reason that the performance is so different than the indexes
is because this portfolio is so different than the indexes.
Now if we look at this performance overall on a greater
timeline, we can see the breakdown here.
Here's from the very beginning plotted out against the S&P 500
as if I invested into either one.
Right now, the portfolio is up 52% overall.
Since the very beginning, the S&P 500 is up 37.9%.
It's around 38%. So it's now outperforming the
S&P 500 cents inception by a decent margin.
And my goal is to continue doing this.
I want greater and greater outperformance over the next
year. So we're up $77,000 overall.
If we can filter by the year to date, the past six months, we
can take a look at the individual holdings and see how
they're doing. Amazon is the single largest
investment here, making up 35% of the portfolio.
I intentionally overweighted Amazon because I felt like the
risk reward was so dramatic. This company had so much upside
and such little downside. I just thought it was one of the
most asymmetric bets in the market with predictable returns
in the future. This year Amazon is up 29% and I
think there's more to go for this company, but right now it
makes up 34% of the portfolio. So around 35% of My Portfolio is
in Amazon. We have $18,000 of gains and a
total position size of $82,900. When I look at the investment
case for Amazon, I outline things very simply here.
There's people that have very, you know, you can get really in
depth and in the weeds with your investment case in a different
company. But I also think it's good to
just have a simple, a simple graphic like this showing why
you're buying the company. With Amazon, they have the
dominant market share of multiple great businesses.
So if you're looking for companies that have great market
concentration in important industries, Amazon is one of the
top in this category. They are first place in cloud.
I love cloud. I think it's still going to
continue to be a huge money maker.
Amazon has the commanding share of cloud with AWS and I think
it's going to be very tough for even Microsoft to take that
place. They are first place in online
retail, so they have 40% of the market share of online retail,
which again I'm very bullish on. They can run a lot of different
applications on top of it. They can do a lot of different
things with their first place position in retail.
They are third place in advertising.
You have Meta, you have Google, the two biggest advertisers, and
then you have Amazon right in 3rd place.
They almost don't get talked about that much.
They're like not in the conversation for advertising as
much, but Amazon has, I believe, the best advertising business in
the world, not the largest. They're third place, but I think
they have the best. They're second place in video
streaming, which I believe is a great market.
I'm invested heavily in Netflix and I believe ultimately all of
this will lead to great operating leverage where their
revenue out scales their expenses, they should scale to a
large influx of free cash flow. My estimate is $70 billion of
free cash flow this year. Now that could vary by like 10
billion. Maybe it goes down to 60
billion, maybe it's 75 billion. But I think they're going to
have enormous amounts of free cash flow, which based on this
analysis, makes the company not that expensive on a
forward-looking basis. Amazon is still trading at a 3
1/2% free cash flow yield. So even though the company has
gone up a lot this year, I still see upside.
I still see the 35% position in My Portfolio as 20% undervalued,
so I'm not going to be shocked if Amazon races above $200.00 a
share goes at 2:10 or 2:20. That won't be surprising at all.
And no, I won't think it's overvalued if it does that now.
Amazon has outperformed this year by a large extent, but not
as much as Netflix. This is also a massive position
in My Portfolio. It's now 29% of the portfolio.
Netflix is now a $20,000 gain and $70,000 overall.
So this one is just shy of Amazon because of how well it's
performed. If we look at Netflix and we go
over the investment thesis here, it's just five different bullet
points. It's already a large,
established, profitable, and growing streaming business that
is extremely difficult to replicate.
I've said this many times, a Moat is not only a lack of
competitors, but a Moat is a difficulty in replicating what
you've already created. To try to replicate what Netflix
has created is near impossible at this point.
The only companies that can even come close are ones maybe like
Apple and Amazon, which already have so much cash flow they
could technically burn the amount of money, but even they
don't really want to do that. Netflix is in a very unique
position. They're a massive streaming
company with an already massive amount of free cash flow and a
large and continuously growing total addressable market.
I can't think of many companies in the world that are better
positioned and more advantage than Netflix at this point.
I think it's nearly indisruptible.
I think the company will continue growing with some
volatility. Now there's YouTube.
YouTube is competing with Netflix in a way, I guess for
attention, but people love scripted long form
entertainment. This is unlikely to change even
with social media and YouTube. And YouTube has tried to compete
directly head on with Netflix. Remember Cobra Kai, the
different series that kind of started on YouTube?
They were successful on Netflix, not on YouTube.
But YouTube doesn't compete well in scripted entertainment.
And I believe that Netflix is going to own that category and
profit dramatically from it. Wall Street has been way off
with their estimates. They've continually
underestimated the amount of operating leverage in the
business. And that's a place where
analysts often get things wrong, underestimating operating
leverage. And I think they're continuing
to do that with Netflix. And then with Netflix, there's
also a lot of opportunities for AI to enhance engagement and the
interface, they control the interface.
They've been at the top of their game with this, and I think
they're going to improve it over time.
These two companies, Netflix and Amazon, make up 65% of the
portfolio. So the majority of this is being
driven by just two companies. And I believe that both of them
have very bright futures. Now, I also own Google and
Microsoft. Both of these companies are
cloud winners, I think very predictably.
And then we have S&P Global, which is a data play.
So all of these companies play a role, but the biggest ones by
far are Amazon and Netflix. If these companies do well and
prosper, then this portfolio will dramatically outperform the
S&P 500. If these companies do poorly,
they underperform, they run into problems, this portfolio is
going to suffer. So I am aligning the future of
my performance with Amazon and Netflix, and I personally feel
very comfortable doing this with this high level of
concentration. Because of the research I've
done into these companies, I have a high degree of confidence
that they're going to do well with their risk and reward.
So there's your update on the first six months of the year.
We'll check in throughout the year and see how things are
going, but so far, so good. Now, Speaking of portfolio
performance, we get to the first new story of the day.
This one comes from The Wall Street Journal.
And this story works as an excuse for fund managers to
underperform the market. It reads, no NVIDIA in your
portfolio, you're just toast. There are artificial
intelligence plays like NVIDIA, and then there's everything
else. As the second-half of the year
begins, investors are wondering whether something has to give.
NVIDIA reported sales and profits in May that blew past
Wall Street expectations for the 5th consecutive quarter.
The stock rose 37% in the second quarter and is up 149% this
year. Much of the rest of the index
has languished. The average stock within the S&P
500 is up 4.1% this year, while the broad index is up 14.5%.
This is the largest underperformance since at least
1990, according to the Dow Jones Market Data.
The Divergent has some value investors throwing up their
hands. So so far they're pointing out
that the index with NVIDIA is up a lot.
It's up like 15%, just like we looked at, but without NVIDIA.
If you just had an equally weighted index, it's only up 4%.
So NVIDIA is really carrying the index.
It's carrying it on its shoulders.
It's doing all the work and it, you know, Nvidia's up there
alone looking back at every other company saying you
slackers, I'm going to do the work for all of you.
So a lot of fund managers are upset that Nvidia's doing so
well and seemingly everything else is doing so poorly.
Quote, we can't keep up because we don't own NVIDIA, said Max
Westerman, Co founder and senior portfolio manager at Merriman
Capital. Quote, if you don't own that one
stock, it really hurts. Every day feels like a root
canal without Novocaine. We have other market strategist
saying the same thing. Quote, it makes sense to me that
we are packed into a lot of these AI plays because that's
where people feel like there's secular growth.
This is from Julia Beal. Even if you do a great job and
the rest of your portfolio, if you're not overweight in the
same place, you're just toast. So the message they're sharing
here in this article, and it gives more and more examples, is
there's many fund managers now stating that the reason they're
underperforming the market is because they don't own NVIDIA.
If you don't own NVIDIA, you can't keep up, you're toast.
You're out of the game. It's just that's the market.
And if you, if you just happen not to pick it, you're just
unlucky. It doesn't have anything to do
with your stock picking efforts. You're just unlucky that you
don't own NVIDIA. Now I get it.
Anytime you're behind in something, you want to make up
excuses, you want to point to something else.
That is the natural human tendency of all of us.
And I, I must have fallen victim to that as well, wanting to
blame other things from time to time.
But in this case, I just don't buy it.
Blaming the lack of owning NVIDIA for underperforming the
market this year is just an excuse, and it's not accurate.
There are many companies this year that have outperformed both
the S&P 500 and the QQQ. NVIDIA is not the only one.
Like we literally just went over in My Portfolio just minutes
ago. This portfolio has trounced the
market, trounced. The S&P 500 this year has
doubled the performance without NVIDIA.
Do you see NVIDIA anywhere here? I don't, and I've never owned
the stock in either of my portfolios, which are both doing
better than the market. Four of the five companies I've
picked in this portfolio have beat the market this year by a
lot. Amazon, Netflix, Google, and
Microsoft are all market beating picks.
So this isn't a case where NVIDIA is the market.
We can actually look at some data here to prove this theory
wrong. We look at the S&P 500
constituents and their performance this year to date,
so the past six months, and we look at what's performing well.
It is true that NVIDIA is right at the top.
It has 150% performance, but it's not even the best
performing in the index this year.
SMCI has beat it with 185%. VST is up 126%, CG is up 75%,
Eli Lilly's up 56%, GE, we have Micron Technologies, we have
Crowdstrike, NRGA NET. We have 19 companies here that
all have performance above 38% this year.
That is over double the S&P 500 performance.
And this goes on for page after page after page of different
companies that have outperformed the index.
We're now on Page Six. These are results number one
hundred 110. We have over 100 companies that
have outperformed the market this year.
So when you listen to portfolio managers make excuses for their
underperformance and you see the constant stream of articles
talking about market concentration and how difficult
it is for stock pickers, just keep in mind there's well over
100 companies that have dramatically outperformed the
market this year. And if you pick a few of them,
you'll do much better than the index.
There's always excuses made. Any time someone's behind,
they're going to make excuses. Now, moving on, we get to the
story of the EU at it again, doing what they do best, which
is regulating US big tech companies.
This time it's not targeting Apple.
They've moved on to Meta, one of their favorite targets as well.
This one is probably more absurd and ridiculous than the than the
demands they're making for Apple with their demands for Meta.
They're complaining about the way the company is monetizing
its content, giving different options to customers.
They say that EU has formally charged Meta with violations of
its Digital Marketing Act, making its second such charge in
many weeks. The European Commission writes
in a preliminary ruling that the pay or consent advertising model
that launched last year for Facebook and Instagram users
runs afoul the Article 5 two of the DMA by not giving users 1/3
option that uses less data for AD targeting, but it's still
free to use. Regulators found that their
investigation that Meta gives uses a binary choice that forces
them to either choose to pay a monthly subscription fee or
consent to the ad supported version.
So in summary, Meta is giving EU customers two different options
to use their platform. They can choose the free version
where you can just sign up and use it for free and it's ad
supported. And then you have the pay
version where you pay for the subscription and you have no
ads. Now with the free version, Meta
collects some of your data so that they can present to you
relevant advertisements so that their ads are effective.
And the EU argues that this pay or consent model violates their
laws, that this new law that they just passed says that there
has to be a free version, an advertisement supported version
that doesn't collect data. And this is how ridiculous these
claims are getting. According to the EU, Meta is
supposed to just offer to the EU customer base.
A free version of their platform that is ad supported that
doesn't track your data or have any data of yours.
Now how are they supposed to do that?
They're supposed to just blast you with ads, not knowing
anything about you, your tastes, your preferences.
They don't know anything about you at all, so how do they know
which ads to actually provide to you?
Well, they don't. According to the EU, Meta should
just launch any ads to any person.
Of course, that would render all of the ads on Meta's properties
completely ineffective. They wouldn't make any money
doing this. If they're launching completely
untargeted ads, those advertisement rates would go
down dramatically. People would stop selling
products on Meta because it would be essentially worthless.
So the EU is demanding that Meta change their business model to
become completely unprofitable in their territory and offer
that for free for their customers.
Again, the reason that these companies track your data in an
advertising based product is so that they can offer relevant
ads. If they can't offer relevant
ads, they're not going to sell you anything.
We've all seen cases of completely untargeted
advertisement. It's totally ineffective.
I'm sure you've seen it before where you get advertised a
product that you wouldn't buy in a million years.
That renders the advertisement rates so low that you can't
really make money doing that. In the case of Meta, the reason
this company makes money is because of how well they can
target advertisements. Now, that doesn't mean that they
have to violate your privacy. It doesn't mean that they have
to sell your data or become a data broker and share it with
different companies. It just means that they collect
some of the data that you give them by using their platform to
use an advertising. Amazon does the exact same
thing. When you shop on Amazon, Amazon
knows your order history. They know your age, they know
your spending habits. They don't share it with anyone.
They're not brokering it or selling it or doing anything
devious with it. They just know a bit about you
and they use that the further advertised to you to make the
product better for you. That makes Amazon more effective
and it makes your experience better.
So what the EU is doing here is a continuation of this constant
theme of trying to break the business model of American big
tech companies. And they're doing it again with
Meta. Forcing Meta to offer a third
plan that users don't pay for and they don't have any data
that they have to share with Meta and it's offered for free
is an absurd and ridiculous demand and it should be thrown
out. In this type of case.
I think it gets to the point where Meta eventually will have
to either dumb down their products so much in the EU to
render them completely useless. They've done so in different
smaller markets. They've removed different
features, they've disabled different parts of their
platform to comply with these onerous laws.
But I believe this constant over regulation from the EU
eventually will cause something to break.
There will be some extreme pushback at some point.
Now finally, we get to the story of the tragic ending for the
company Redbox. I'm sure you've used this
company before. Most of you are at least
familiar with it. I have, maybe I just watch more
movies than the average person. But Redbox was this company you
could go to. And it was on the side of
Walgreens and different companies that have it right
there out in the side. And it was a, it was basically
like a vending machine for movies and in some cases video
games as well. You could rent it and you'd pay
like a a dollar a day. So very simple business model.
You rent the movie, you return it.
It's convenient. And they had relatively new
movies as well in Redbox. But things have not been going
well with Redbox. Redbox's owner, Chicken Soup for
the Sole Entertainment, filed for bankruptcy protection
overnight. This comes at the tail end of
the month in which the DVD rental company defaulted on
loans, saw an order for its cars to be repossessed and miss
payroll for employees. Now, when your company is
getting its cars repossessed, you're in bad shape.
Like that is you have gone through layers of bad financial
moves to get to the point where the government is now taking the
the company's assets and just repossessing assets.
And if you're at a company that's missing payroll, unless
it's like a very small startup and you kind of expected that
going in, it's time to move on. If your company's missing
payroll, if they're not paying employees, you got to move on.
Get to a new job, get to something where you're going to
get paid. In many cases, you're not going
to get this money back without a lot of litigation and heartache.
The company also promised to reinstate health insurance for
its employees, which have lapsed in May.
So employees are losing their health insurance and they're not
getting paid. However, it's not certain that
the company will be able to secure such a loan.
Chicken Soups bankruptcy filing shows that the company owes
money to a number of retailers, including Walmart and Walgreens,
as well as major Hollywood studios like Universal, Sony,
Lionsgate and Warner Bros. So there may be some distressed
debt investor that may go in and give them a loan under extremely
harsh covenants. But I don't think it's likely to
get a loan in a company where you owe a bunch of different
companies a lot of money, where you haven't paid employees,
where your business model is obviously antiquated, I think is
a very difficult task. I can't imagine who would give
them a loan at this point. Other creditors include smaller
studios, streaming platforms, smart TV manufacturers with a
list of names including the BBC, Vizio, Plex, Redbox and Chicken
Soup owned Crackle have been operating their own free ad
sported streaming service on a variety of platforms.
So they're trying to follow in the steps of Netflix and Roku,
but they're too small to get to scale.
They're losing money. The company also owes money to
its landlords, the vendor it rents its car fleet from, and
others. So Redbox owes a dozen different
companies money and they're looking for a loan so that they
can owe one more company money. Chicken Soup took on
$325,000,000 in debt when it acquired Redbox in 2022 and has
since been sued over a dozen times over unpaid bills.
The company recently settled one of these lawsuits with NBC
Universal, but promptly missed the first agreed upon payment.
So they settled under certain terms and then immediately
violated those terms, leading to a court order to pay the entire
$16.7 million balance. Altogether, Chicken Soup has
$970 million in debt, according to the bankruptcy filing.
So I think it's safe to say at this point that we can all say
goodbye to Redbox and the memories we had picking up the
DVD with the little screen, when someone else walks up behind
you, you feel a little pressured, like you got to pick
really soon. We've all had those experiences
and it's going to be a sad point to move on from it.
This is an extension of the same business model that GameStop
had, renting, movies, trading and video games.
All of that is going away. It's all being replaced by
digital downloads and streaming. So that is the tragic end for
Redbox. Now, if you want to see more
content, exclusive episodes, and get access to qualtrum.com and
all of the KPIs, you can do so under the Patreon membership.
You can try it out free today and you get a full month free
trial, so try it out. If you don't, I think you're
missing out. Other than that, I'll see you in
the next one.