Straw Mattress to Steel Bumper (MGA): QAV America #54

Beschreibung

QAV AM 54 [https://qavamerica.com/wp-content/uploads/2026/05/QAV-AMERICA-54-art-optimised.jpg] This week Cameron (with guest co-host Phil Muscatello from Shares For Beginners [https://www.sharesforbeginners.com/]) runs a full QAV deep dive on Magna International (MGA), the Canadian-born automotive giant that quietly makes everything from your car door to the entire vehicle itself. He covers the wild founder story of Frank “Straw Mattress” Stronach, the EV overreach that cost the company over a billion dollars in writedowns, the tariff headache courtesy of Trump, and why the numbers are now looking good enough to add to the portfolio. Plus a quick look back at how previous stock picks from the show have performed, with NBR up 31% leading the charge. This week’s full episode is for QAV Club members only. The free episode is available below. Also check out our podcast archives link and our pages on Apple Podcasts or Spotify or watch clips on TikTok [https://www.tiktok.com/@qavinvesting]. Or visit our homepage [https://qavamerica.com/home/] to learn more about QAV and how it works as a value investing system that you can learn and apply to beat the market. Free Podcast Archives [/listen/] TRANSCRIPTION QAV AMERICA 54 – MGA 2 [00:00:00] Corrected Cam-PC-01 (1): Today, Cameron from QAV America joins me to unpack MGA Magna International, a major Canadian-based global automotive supplier and mobility technology company founded in 1957 and headquartered in Aurora, Ontario. It ranks amongst the world’s largest tier one suppliers, I don’t even know what a tier one supplier is, but with 156,000 employees across 28 countries and 327 manufacturing assembly facilities. And do you think I can get a headlamp that will work in my car, Cameron? Not for any longer than about eight weeks is my experience, and then you have to replace them again. Yeah, yeah, that’s right. So hi, Cameron. How are you? Good, Phil. Machinations of Magna, is that the title? The Magna Machinations. Is that what you’re doing- Yeah. Yeah, that sounds good-. to me today? I like that. Yeah, yeah. Yeah. Is it machinations or machinations? I don’t know. Uh, whichever you choose. Um, and a tier one supplier is a company that supplies lots of tier ones, I think, Phil. They just. They have like a, a, a [00:01:00] warehouse stacked full of tier ones. Um, what does Magna mean in Greek, Phil? You’re, you’re an erudite, uh, educated, literate person. Uh, great, isn’t it? The great, yes. Yeah. Like, uh, Magnus Carlsen is the greatest chess player of all time, and that’s why he has that name. He lived up to his name. Mm-hmm. Um- And, um, who was the, um, Roman history, who was the enemy of Caesar? Uh, Pompey the- Pompey the Great. Yeah, Pompey the Great. Yeah. Pompey, Pompeius Magnus. Yeah, good one. MGA Magna International: So, uh, Phil, Corrected Cam-PC-01 (1): uh, I thought before we get into this week’s deep dive, uh, I, I just went back and had a look at some of the others that we’ve done on the show over the last few months. Do you ever go back and look at how they’re performing, all the stocks that you talk about, or you have your guests talk about on the show? No, no, I haven’t, haven’t done that. Uh, just, um, are, are, are we going to have one of those, um, um, snapping your braces with pride moments? Uh, well, some of them have done very well. Couple haven’t, but that’s normal. You know, [00:02:00] Tony and I always talk about having a 60% success rate, which I think is what Buffett, uh, aims for as well. So I think we’ve done five stocks on your show over the last few months, and three are up and two are down. So the three that are up are NBR, Nabors Industries. It’s up 31% since we did it a couple of months ago. I think, like, early March we talked about NBR. 31% in a couple of months isn’t bad. EC, Ecopetrol is up 18%. DB, Deutsche, which we did last time, I think, is up 8% since we talked about it. The two that haven’t done so well are PAGS, PagSeguro. They’re down 13%. And SHG, Korean energy company, I think. They’re down 7%. So three good ones, two not good ones. Eh, it’s about what you expect, you know. Things happen in the market. Wars happen. Tariffs happen. Can’t predict the future. It’s worth, it’s worth noting though, isn’t it, that it’s a, it’s a numbers game as well. It’s [00:03:00] not, you’re not gonna get everything right, you know? Um, we, we- Well, that’s why I said, like, a 60% success rate. Yeah. And it’s why we have rules to sell the ones that go the wrong way. You know, uh, we don’t stick around and wait to see what happens. We have hard rules to sell them and keep the winners. Anyway. Yeah. What’s that, what’s that old- I thought that was- what’s that old joke, you know? Uh, yeah, sudden- a short-term trade which suddenly becomes a long-term holding. Right. Yeah. Yeah, that’s, uh, I take the same approach to stocks that I did to my first few marriages. Like, you cut your losses and you keep going until you find the winners, and then you stick with the winners. A trail of broken hearts. MGA Magna International: Oh, Corrected Cam-PC-01 (1): well, I hope not. I hope they’re all doing very well. Anyway, let’s talk about Magna. Uh, so as you said, company’s been around for nearly 70 years, market cap of roughly 18 billion US dollars, 156,000 employees. MGA Magna International: Well, as Corrected Cam-PC-01 (1): as you said, one of the biggest auto parts suppliers, but, uh, I also read that they like to call themselves a mobility technology company, which I think sounds way sexier. Uh, I think [00:04:00] their, their share price went up, like, 10%. Uh, it sounds sexier than auto parts supplier really, doesn’t it? Mobil- no, no, no, we’re a mobility technology company. Oh, okay. Sure. Right I don’t know. I was thinking, I was thinking old people on mobility scooters. Oh, yeah. Yeah. It’s not as sexy. Well, unless you’re into that kind of thing. Who knows? Um, like lots of companies that appear on our buy list, particularly in our US buy list, by the very nature of value investing, it’s a bit of a turnaround story. It’s had a couple of rough years, bit of a founder scandal going on. I don’t think that’s affecting the business at all ’cause he’s been out of the business for some time. But it’s sort of a classic value stock in it’s a brand that most people have never heard of because they’re behind the scenes, but they’re running a great business. Been around a long time, very deeply embedded in their industry, which is part of the reason they had a rough couple of years. We’ll get into that. Listed on New York Stock Exchange and also the Toronto [00:05:00] Stock Exchange. Price today is around about $64.58 US. That’s on the New York Stock Exchange. Founded in Canada, as you said, Aurora, Ontario, sort of north of Toronto. So Tony. It’s a shame Tony’s not, uh, with us today. He, there’s a couple of things he’d like about this. One, he lived in Toronto for, I think, five or six years. Uh, he probably knows Aurora well. Probably might even know Magna. Uh, maybe he MGA Magna International: played Corrected Cam-PC-01 (1): golf with people from there. I don’t know. But, uh, also the, uh, founder of this is into thoroughbred horse breeding and, uh, Tony’s not with me this week because he’s buying and selling horses on the Gold Coast. According to their website, Magna is one of the world’s largest automotive suppliers and a trusted partner to automakers in the industry’s most critical markets, North America, Europe and China, with a global team and footprint spanning 28 countries MGA Magna International: So Corrected Cam-PC-01 (1): So they’re a big deal. The founder [00:06:00] is a guy called Frank Stronach. MGA Magna International: Now, he Corrected Cam-PC-01 (1): he was born Franz Strosack. MGA Magna International: How’s your, how’s Corrected Cam-PC-01 (1): how’s your German? I know your Italian’s pretty good, Phil. Not very good, no, no. How’s your German? No. We don’t like Germans in Italy. Well, my wife, uh, speaks German. She tells me that Strosack means straw sack in German, which is what people used to live on, like a sack full of straw. So his name is literally straw mattress. Have to imagine that somewhere in his genealogy there was a, the local guy in the village that made beds for people. He was born in 1932 in- And, and I just wanna, and I just do wanna. I do love Germans, okay? I do love- Oh, okay. Nice backpedaling there, Phil. Born in 1932. Well, we know, you know, Mussolini and Hitler got along famously for a little while anyway. Long, long history- Yeah. of the Italians and the Germans getting along. Born in 1932 in a little village called Kleines [00:07:00] Semmering in the Austrian province of Styria MGA Magna International: Working Corrected Cam-PC-01 (1): class family, left school at 14 to become an apprentice tool and die maker. Precision metalworking. You make the metal molds, cutting tools factories use to stamp out metal parts at high speed. Incredibly skilled work, and stood him in good stead when, in 1954, 22 years old, he moved to Canada, arrived in Montreal, gets on a bus to Kitchener, Ontario, gets a job as a dishwasher. Nothing to do with making metal parts at first, but built his first company from a rented garage in Toronto only two years later, 1956. He’s 24 years old. Company was called Multimatic Investments. Slept on a cot in the corner of the shop. Classic Silicon Valley startup story, but [00:08:00] in Ontario, not Silicon Valley. Gets his f- In, in, in greasy overalls. yeah. Gets his first automotive parts contract in 1969, so takes a, takes a while to get to automotive parts. Then he merged with a company that he had a contract relationship with, I think called Magna Electronics, and in 1973 the whole thing gets renamed Magna International. MGA Magna International: So he Corrected Cam-PC-01 (1): So he was making actual metal parts in his garage and selling them to car companies. And what’s fascinating, among many things about this guy, is real- like it’s a real classic sort of, uh, story of a guy who built an enormous business. Still alive, by the way, in his 90s. He, his management philosophy is what he called fair enterprise. He was a bit of a commie, I think, by the sounds of it, very suspicious about how companies treated their workers, so he built a formal system in [00:09:00] 1971 where a fixed percentage of profits every year was pre-allocated to employees, management, investors, and social causes. 1971 MGA Magna International: it’s Corrected Cam-PC-01 (1): It’s written into the corporate charter, 10% of profits go to employees every year before anyone else gets their cut. MGA Magna International: And Corrected Cam-PC-01 (1): And this was the thing that made Magna different, because employees and management had skin in the game. They produced better parts. They worked harder. They had more incentive. There was less waste, less industrial action, and it turned into a $40 billion company. So MGA Magna International: Based on that Corrected Cam-PC-01 (1): on that- So you can do, you can do good and make money? Yeah, that’s what I was gonna say, but wait till we get to the sex scandals before you, uh, pass judgment on how much good MGA Magna International: he Corrected Cam-PC-01 (1): he did. Um, still going through the courts, uh, as it turns out. But the m- anyway, the, the [00:10:00] mechanism of how the employees get paid seem to be changing. I tried to figure out where it’s at. It’s, it’s a little bit murky. So 10% of pre-tax profits, pre-tax too, to, uh, to employees, still technically embedded in Magna’s corporate constitution. It can’t be changed without management and shareholders and employees all coming to a consensus about the change, so it’s pretty interesting. You weren’t here. Um, oh, we haven’t done the show about Germany, speaking of Germany. I don’t think you and I did that. No. Tony and I. Oh, well, I, I did a, an American show, uh, a couple of weeks ago. We were talking about Deutsche Bank. Oh, we did do Deutsche Bank. No, we, we, we- So it must have been Deutsche Bank. we’ve done Deutsche Bank. Yeah, that was the last one. We did do Deutsche Bank. Yeah. Yeah. Mm. Remember they have that system in place where the, there’s two boards, and the employees get to vote for one of the boards? Yeah, that’s right. Well, this is a bit, bit like that, but different. Um, so they, they, they have to all agree, uh, if they’re gonna change this, uh, structure for how the, the profits get divvied out. The full original formula was 10% to employees, [00:11:00] 7% to management, and a minimum of 20% of net profits returned to shareholders as dividends. MGA Magna International: And Corrected Cam-PC-01 (1): And because changing it requires employee consent, it makes it quite hard to just unilaterally remove as the company started doing well. Still in the corporate constitution, but how it plays out in practice is a little bit hard to figure out. So it’s like there’s deferred remuneration and shares and a share structure and all this kind of stuff. I really didn’t have time to break it all apart. But I did note in one of their corporate documents that they crow about the fact that for eight consecutive years they’ve been named one of Fortune’s World’s Most Admired Companies, and for four consecutive years, one of Ethisphere’s World’s Most Ethical Companies. So they’re doing something right, however it works. I also like this, talking about management. There’s a statement in this, one of the corporate, uh, reports I read. “We believe it is [00:12:00] important that each director be economically aligned with shareholders. We try to achieve such alignment in two principal ways. Equity maintenance requirement. Each director at large is required to hold a minimum of $825,000 of Magna common shares and/or deferred share units, DSUs, within five years of joining the board. Each committee chair is required to hold a minimum of 900,000 of Magna common shares and/or DSUs within five years. The board chair is required to hold a minimum of 1.5 million of Magna common shares within three years of becoming chair.” MGA Magna International: So Corrected Cam-PC-01 (1): So we like to see skin in the game. When we do our Australian checklist, we actually score companies based on how much of the company the board holds. The owner/founder metric we call it. Um, Warren Buffett’s always been a big fan of seeing directors have skin in the game. Uh, we don’t do it in our American show because it’s hard to get that number programmatically out of Stockopedia, but it’s something I am [00:13:00] planning on MGA Magna International: coding Corrected Cam-PC-01 (1): into my process at some point. I didn’t actually get a number on these guys at the end of the day, how much of the stock their s- their sh- directors own, but at least they’ve got the right policy in place. MGA Magna International: A Corrected Cam-PC-01 (1): A couple of things on Stronach, straw mattress. Um, so he became extremely rich and also extremely controversial. He, uh, by the early 2000s, he had a dual class structure in place, Rupert Murdoch-esque, uh, classic founder king succession style thing where there were Class A shares, which the, uh, general public could buy, and then a special share class that he controlled that gave him dramatically more power in the voting than his economic interests warranted. In 2010, shareholders pushed back hard enough that the dual class shares were eliminated. He got a massive payout in compensation, billions of dollars, and stepped away from operational [00:14:00] control of the business MGA Magna International: So Corrected Cam-PC-01 (1): So he’s been gone for, mm, decade and a half. MGA Magna International: um, and Corrected Cam-PC-01 (1): and has had quite a complicated later life. As of right now, May 2026, he’s 93 years old. MGA Magna International: He’s Corrected Cam-PC-01 (1): mid-trial in Toronto on sexual assault charges, 12 counts involving seven women, allegations going back to the ’80s and ’90s. He pled not guilty. Verdict is expected in the next couple of months, and then there’s a second trial after that which has been delayed to 2027. MGA Magna International: Uh, Corrected Cam-PC-01 (1): another sexual, uh, assault allegation. So, um, not great. You don’t wanna be going through that ever, especially in your early 90s. MGA Magna International: But Corrected Cam-PC-01 (1): he’s been away from the company, as I said, for a long time, so has no impact really on the business, but just part of the, uh, messy story surrounding Mr. Straw [00:15:00] Mattress. MGA Magna International: So, Corrected Cam-PC-01 (1): uh, this is a MGA Magna International: very Corrected Cam-PC-01 (1): very interesting business in terms of the shareholding. There’s no controlling shareholder. Pren- Pe- uh, no, Pzena, P-Z-E-N-A, Pzena Investment Management’s a value investor. They own about 10%. Vanguard own about 9.8%, but it’s broadly held. There’s no single, uh, person or company now that owns a controlling interest in the company. Aside from all that, as I mentioned earlier, Stronach is into thoroughbred horse racing, which Tony would love. Uh, breeding and racing. Started a business decades ago with his daughter MGA Magna International: And Corrected Cam-PC-01 (1): And then ended up suing her for mismanagement. So, you know, there’s all of that kind of Succession-esque stuff. Did you watch Succession, Phil? No, I never, no, I was never into Succession, I gotta say. Oh. Yeah. Great show I should give it a go, but I’m just, I don’t know, I’m just not trying not to spend my evenings, um, you know, sitting in front of the idiot box too much. Yeah, no, it’s ’cause you’re doing kung fu and reading annual reports. No, [00:16:00] wait, that’s me. Um, so four divisions of the company. So imagine you’re a car company, um, BMW, Ford, Stellantis, whoever. Every year you decide you’re gonna build a new vehicle model. You design it, and then you go to Magna and say, “Build this for me.” That’s basically it. Um, either the parts or in some cases the entire car. They basically go, “Yep, we can make everything that you need for your car.” So a lot of times these companies, these car companies don’t actually make their own cars anymore. They just design it and then outsource the manufacture of it to somebody else. MGA Magna International: Uh, we’ve Corrected Cam-PC-01 (1): we’ve seen that a lot on this show over the last couple of years. It’s sort of the very common business model. You do the marketing, uh, you, you own the brand, but you outsource the manufacture or the maintenance, whatever it is, uh, the underlying hardware part of the business to people who specialize in doing that.[00:17:00] So they’ve got- However, however- Hmm. on that point, um, I believe that companies like Tesla, um, do all of their own manufacturing in-house. They don’t outsource anything, and that could possibly be a risk in the future of, uh, car manufacturing in this business. Yeah, I think, you know, Elon’s big on getting efficiencies from. He does it with SpaceX too. I think he has vertically integrated all of that side of stuff too. He’s MGA Magna International: a Corrected Cam-PC-01 (1): A different cut, as we know, as, as a businessman and as a human being. How many kids has he got? 14? He likes to vertically integrate population control as well. Just do it all myself. I can’t wait for other people to do it for me. So they have a couple of, about four different divisions essentially. Body exteriors and structures, that’s the biggest division, does about $16, $17 billion a year. Everything on the outside of the car, so door panels, bumpers, hoods, the structural pillar that goes up beside the windscreen. If you bump a shopping [00:18:00] cart into a car door, you’re probably bumping into something that Magna made. This is the bread and butter side of the business. Margins are about 6.7%. They were in Q1 2026 anyway, from what I could tell from the report, so solid little business. The second biggest is power and vision. Uh, good David Bowie, uh, album from the mid to late ’80s, I think it was. Uh, no, that was Sound and Vision. Sound and Vision. Yes. Sound and Vision. Close. Close. It was a compilation really of stuff from, uh, the Berlin albums, I think, wasn’t it? And some other stuff. Yeah. Yeah. Anyway, uh, this is about $15 to $16 billion a year. This is where it gets more interesting. They have cameras, driver monitoring systems, mirrors, also transmission systems and eDrive systems. That’s the electric motor and gearbox combinations in EVs. They also used to get into the lighting business, but as I’ll come to in a minute, they [00:19:00] sold or they’re in the process of selling the lighting bit off. Margins for this division jumped from 3.4% to 6.5% in the last year, which is a big improvement. The, the current CEO’s been doing a lot of work to, uh, streamline the business. But this is also a division that caused them a lot of pain and angst over the last few years, so I’ll get to that soon, too. MGA Magna International: The Corrected Cam-PC-01 (1): The third division is seating systems, about $5.5 billion a year. Seats, that’s basically it. They, they make seat asse- full seat assemblies delivered just in time to a car assembly line. That division was losing money a year ago, but now it’s back to positive, so that’s good story. And then the fourth division is complete vehicles, about $4.5 billion a year. This is the weirdest one. This is where they actually assemble entire cars, soup to nuts. MGA Magna International: You Corrected Cam-PC-01 (1): You say, “Hey, uh, got this BMW we wanna make. Can’t be bothered. Volumes aren’t big enough for us to get involved in any aspect of it. Just make the whole thing for me.” “Sure, no problem. Can do it.” And that’s what [00:20:00] they do. So bit like, MGA Magna International: I don’t Corrected Cam-PC-01 (1): I don’t know, who’s, who’s a company that doesn’t make stuff? Coca-Cola just outsourcing the manufacturing of all of their Coke to somebody else, and they just own the brand. So that’s it. Total revenue for the first quarter of 2026 was about 10.4 billion annualized, doing sort of $41 to $43 billion. Guidance for the full year is 41.5 to 43.1 in fact. So why are they a value buy? Well, the share price has dropped a lot, uh, in the last four or five years. I think it went from like 98, 99 bucks in 2021 down to 33 by April last year. So that’s a haircut and a half. MGA Magna International: And Corrected Cam-PC-01 (1): And it’s doubled though in the last year because it’s sort of in a turnaround. So I mentioned the part of the business where [00:21:00] they do, uh, power and vision, the David Bowie division. MGA Magna International: You know, Corrected Cam-PC-01 (1): You know, the, MGA Magna International: everyone, all Corrected Cam-PC-01 (1): all the car manufacturers got excited about EVs, uh, four or five years ago and, you know, I think Tesla put a fire underneath them and they all decided that was the future. So ’21, ’22, ’23, everyone was in a frenzy, “Oh, we’re gonna need all these EVs. We’re gonna be selling all EVs.” So Magna went and spent a ton of money building out EV manufacturing capability, battery enclosures, electronics for EVs, e-drive systems. And MGA Magna International: as Corrected Cam-PC-01 (1): as you can probably guess, we actually. I don’t think we’ve done Ford on your show, but Tony and I did a thing on Ford a while back, maybe a year ago now, and the same thing happened with Ford. They built out a huge EV division and then they took a multi-billion dollar haircut on it. These guys, same thing. The EV programs ended up getting canceled or deferred or scaled back. [00:22:00] Ford pulled back, GM pulled back. They went, “Oh, you know what? People aren’t actually buying EVs. They want big petrol drill baby drill trucks.” MGA Magna International: And Magna was Corrected Cam-PC-01 (1): was left sitting on a pile of EV manufacturing assets that weren’t gonna return them the, or generate the returns that they had hoped. MGA Magna International: So in Corrected Cam-PC-01 (1): in 2025, they took a $591 million writedown. That’s US dollars, real money. And then, uh, then Q1 2026 last month, they took another writedown of $485 million, this time on the lighting and rooftop business that they’re selling off. So in the last 18 months, they’ve written off over a billion dollars of asset value. Then MGA Magna International: President, uh, Donald Corrected Cam-PC-01 (1): Jesus Trump came into power and, uh, whacked tariffs on a- anything coming in from Canada and Mexico, and guess where all of their [00:23:00] stuff gets made? Oh, Canada and Mexico. So big tariff hit on them. It was like 25% tariffs on everything that they were, uh, manufacturing that had to go to America. So that knocked them around a lot. I think the $33 low in April 2025 sort of aligns perfectly with peak tariff uncertainty and madness. As we know, though, the Supreme Court has told Trump, “No, uh, you can’t do that. You have no authority. Roll them all back. Pay them all back.” Not sure how that’s going, but that’s probably corresponded with a little bit of an uptick in their business, apart from the fact that they’re selling off some of these divisions and done some major write-offs. Uh, interestingly, no major executive turnover as a result of all of this loss, but the CEO, Swamy Kotagiri, been there for decades. He’s an [00:24:00] engineer by background. He took over as chair in 2021, right at the peak of EV frenzy, and he’s the guy cleaning it up now. MGA Magna International: So the Corrected Cam-PC-01 (1): the Q1 results actually show the business is running better than it has in years. Uh, the EBIT was up 58% year on year. Margins are expanding, as I mentioned earlier. So the operational business is recovering strongly. Balance sheet is still absorbing the costs of the EV disasters. But, um, you know, it, it’s a business that’s getting back to core focus and seems to be run as well as it’s always been run. I think at heart, it’s a very good business. A lot of really big, well-entrenched customers. They’re dominant in their space, MGA Magna International: and they Corrected Cam-PC-01 (1): they just, MGA Magna International: uh, you know, had a Corrected Cam-PC-01 (1): had a bad run with this EV/uh, tariff stuff in the last four or five years. So I told you they’re selling off, uh, the lighting and rooftop [00:25:00] stuff. That’s bringing in about $1.1 billion, MGA Magna International: which they Corrected Cam-PC-01 (1): they can use to, uh, run the business or pay off debt or whatever they wanna do. Um, that’s basically all I have to tell you. It reminds me of some of the other companies that we’ve talked about on the American show over the last couple of years. The most, uh, common, or the most obvious one is one that I didn’t do with you, but I did with Tony. A company called Commercial Vehicle Group, CVGI. They make inside parts for truck cabs. I called them the, uh, the sausage in the truck bun, I think. Um, so you make a truck. It’s basically a, a hotdog bun, and these guys make all the stuff that goes in. It’s just like it’s an empty template until they come in and they put the very, very plush seats. And, and apparently truck cabs are like MGA Magna International: Uh, deluxe, Corrected Cam-PC-01 (1): uh, rock and roll- Yeah. The Hilton. The Hilton on the Gold Coast Yeah. Hotel suites. Yeah. Uh, but I, I talked about them on our show, [00:26:00] uh, at the beginning of April, uh, this year, and they’re up 40% then. So, uh, fingers crossed they continue to do well. MGA Magna International: So, Corrected Cam-PC-01 (1): uh, the scorecard, let me get into that. I’m gonna scroll down my notes here ’cause I think it’s down the bottom. Here it is. MGA Magna International: So Corrected Cam-PC-01 (1): So as you know, and as people have heard me talk on your show before know, the way that QAV works is Tony built a, a spreadsheet checklist. Over 30 years he’s been refining it, and we take all of their fundamental data and we run it through this checklist, and it provides a bunch of scores for us. And- It’s all about the published numbers as released in, uh, reports MGA Magna International: Yeah. We d- Corrected Cam-PC-01 (1): We d- we don’t really care much about the story. We don’t try and predict the future. We do look a little bit at, you know, what analysts are saying about future EPS and that kind of stuff. It’s a score and a whole suite of scores, but we’re looking historically. The, the questions that we’re trying to [00:27:00] answer really are, does this seem to be a business that’s being run well? Is it generating cash? And do we think we can get it at a discount to its intrinsic valuation? And we have a number of ways that we create intrinsic valuations. We have a current IV, we have a future IV, and we have a, a bunch of other metrics that we score it on. Then we add up all the scores, and the stocks with the highest score are the ones that we tend to look at buying. MGA Magna International: So Corrected Cam-PC-01 (1): So these guys, when I did my analysis on them a couple of days ago, share price was about $64.58. Average daily trade, by the way, is about $120 million, so big enough for most of us to buy, even Tony. MGA Magna International: Uh, Stockopedia Corrected Cam-PC-01 (1): stock ranks 99, which is pretty good. Stockopedia quality rank was 86, which is pretty good. The Piotroski F-score measure of financial health was seven, which is pretty good. MGA Magna International: Their Corrected Cam-PC-01 (1): Their price was not less than our IV number [00:28:00] one, so I couldn’t score it on that, but it was less than our IV number two, our future IV, so I could score it for that. The price wasn’t less than the book value or book value plus 30, so I couldn’t score them for that. Their price to operating cash flow was 4.22. That’s really quite good. We, we won’t buy anything that has a price to operating cash flow over seven. We, we use that instead of PE for new, uh, listeners. Um, we think price to operating cash flow is a cleaner metric than price to earnings because earnings can be toyed with and manipulated a little bit more easily than operating cash flow. So 4.22 is good. Basically means you’re gonna get your money back in about four years if you just look at operating cash flow. So that’s a reasonable amount of time to expect your money back. Um, the yield, their dividend yield is about 3%. It’s not better than the bank rate in the US, so I couldn’t score it for that.[00:29:00] They do have a new three-point upturn, so we look at sentiment charting, and if a stock has recently turned around since its last financial reporting, we’ll score it for that because we think that’s a good early indicator that the market might be getting behind it. And it does have positive book value growth, so we could score it for that MGA Magna International: So all Corrected Cam-PC-01 (1): all in all, I gave it a QAV quality score of 76.92%, and we really like anything over 75%, so it got over that benchmark, and a final QAV score of.182. We look at anything over.10. So it wasn’t at the top of my list, but it was not too far. I think it was in, like, the top 10, and I checked it again before we came on the show this morning. It’s still in buy territory for us. Current price is $65.20 this morning, so it’s up a little bit since I d- did my analysis on [00:30:00] Monday. MGA Magna International: And Corrected Cam-PC-01 (1): that’s it. I’m gonna add it to our portfolio this week, and we’ll see how it goes. PREVIOUS PULLED PORKS Here’s the performance of the “pulled porks [https://docs.google.com/spreadsheets/d/16WHwMalQodhxUO9h1T-7suVtfwjrXq057fFHhcLXFWk/edit?gid=0#gid=0]” (eg deep dives) we’ve done on the show in the past.

The Bunker, the Billionaire, and the Bank That Cared (CARE): QAV America #58

This week we dig into Carter Bankshares (CARE), a tiny Virginia community bank that got itself tangled up with a billionaire US senator, a Cold War bunker resort, and nearly $800 million in dodgy loans, then somehow came out the other side with $80 million in cash and a story worthy of HBO. We also cover Alan Greenspan’s passing at 100, the SpaceX float wobble, the Iran sanctions waiver, and why Big Tech’s stock-based compensation accounting might be quietly fleecing investors. This week’s full episode is for QAV Club members only. The free episode is available below. Also check out our podcast archives link and our pages on Apple Podcasts or Spotify or watch clips on TikTok [https://www.tiktok.com/@qavinvesting]. Or visit our homepage [https://qavamerica.com/home/] to learn more about QAV and how it works as a value investing system that you can learn and apply to beat the market. Free Podcast Archives [/listen/] TRANSCRIPTION QAV AMERICA 58 new [00:00:00] Tony Kynaston AU: Nothing to talk about on the US show, is there? Cameron AU: Nothing to talk about. Welcome to QAV America 58. Tony Kynaston AU: chill, people Cameron AU: Chill, 23rd of June, 2026. Tony? I had an ex-wife who had a birthday on the 23rd of June. Trying to remember which. Uh, probably my first wife. Happy birthday, my first wife, if she’s listening. Tony Kynaston AU: You have so many ex-wives you can’t remember their birthdays. Cameron AU: Yeah, it’s just dates. You know, you go, “Oh, I think there was a date I was supposed to Tony Kynaston AU: You and Elon Cameron AU: wife’s.” Yeah. Actually, yeah. Yeah. Speaking of Elon, Tony Kynaston AU: How can afford his alimony? Cameron AU: how, how are your, uh, are your SpaceX shares going, Tony? Tony Kynaston AU: I don’t have any, but um, I hear they’ve been doing well until all the insiders sell out, but we’ll see Cameron AU: No, they’re down. They crashed. Tony Kynaston AU: Oh, have they? Well, they were doing well last time I looked. They’re up 50% over the weekend Cameron AU: Uh, they’re down. I don’t– I wouldn’t say crashed, but, um, yeah, they’re back down to where they started, I think. Um, as of today, they are [00:01:00] less. They’re below. Um, they f- they sort of floated at a dollar sixty– uh, $165, sorry. They’re currently $154. So congratulations to everyone who got into SpaceX. Tony Kynaston AU: And got out quickly. Cameron AU: you got out, yeah Tony Kynaston AU: Yeah. That’s amazing. It– That’s, I mean, that’s a huge float to be moving that, with that much volatility, isn’t it? That’s incredible. Cameron AU: Yeah. Well, Tony Kynaston AU: All sorts of rumors in the market that he’s gonna use the float to buy Tesla, and then he can, uh, become the chief exec or executive chairman of Tesla as well, which could have bugged him he couldn’t be chairman Cameron AU: I’ve been reading these, this Colossus, uh, series of books from the ’60s and ’70s. I’m on the third one. It was a trilogy. I’m on the third one at the moment called Colossus and the Crab, and this is where, uh, Martians come down and basically help the humans to kill Colossus and then state that they want, uh, their payment is they want 50% of Earth’s [00:02:00] oxygen to take back to Mars to re-replenish the oxygen on Mars. Tony Kynaston AU: Right Cameron AU: It’s, it’s, it’s, it’s actually not as wacky as it sounds. It’s pretty good, but it got me reading a lot of it ’cause the, the, the author. This one was written in 1977. He’s making a lot of cl- ooh, a lot of claims about Mars’ atmosphere and the escape velocity of Mars and why it lost all of its heavier elements and all Tony Kynaston AU: Mm-hmm. Cameron AU: of stuff. And so I’ve been going backwards and forwards with Claude just sort of fact-checking a lot of this stuff. But as part of that process I was reading about the, uh, cosmic radiation levels to get to Mars. Do you know, do you know much about that? Tony Kynaston AU: I have heard that’s one of the problems with colonies on Mars is you just get irradiated, you get microwaved Cameron AU: Even getting there. So, um, apparently NASA has a career limit for astronauts of 600 millisieverts of radiation exposure. Over your entire career as an astronaut, you can get six– anything beyond 600, and I think your, uh, [00:03:00] rates of getting cancer from radiation poisoning go up to, like, 5% or 10% higher than they normally would be, so they cap it at Tony Kynaston AU: Right Yep Cameron AU: A one-way trip to Mars exposes you to 1,000 millisieverts. Um- Tony Kynaston AU: And I can’t line the ship Cameron AU: No. There, there’s, there’s various theories, but n- nothing that would be, uh, um, effective. Um, in fact, if you line it with metal, it, it makes it worse because the radiation hits the metal and then fragments all of the particles out of the metal, so y- it actually increases your exposure of radiation. Tony Kynaston AU: Right Cameron AU: way to do it apparently is water, um, y- you’d, it’d be so heavy, et cetera, et cetera. It ruins your ability to get the ship up. Maybe if you, if you got Tony Kynaston AU: Close out the position, yeah Cameron AU: and got in another ship, you might be able to. Apparently, I asked if Elon Tony Kynaston AU: Yeah, well, you gotta get the water up there, though. You can’t. Doesn’t matter. You gotta still get the water up there, right? Cameron AU: [00:04:00] Yeah. Tony Kynaston AU: It doesn’t flow uphill. Cameron AU: Elon’s answer to this apparently so far has been, “Yeah, yeah, a lot of people are gonna die. That’s just how it is.” Uh, Tony Kynaston AU: Is he stroking a cat when he says that? Cameron AU: you know, his, uh, thing about l- you know, the, the rocket launches with SpaceX over the years has always been, you know, blow stuff up quickly. Tony Kynaston AU: Yeah. Cameron AU: apparently that translates into kill people quickly to get them Tony Kynaston AU: Yeah. Cameron AU: He said it’s gonna be volunteer only. Apparently, his answer is to get you, get you there faster. So if you get there faster, you’re exposed to less radiation. But of Tony Kynaston AU: But you’re still exposed when you get there, yeah Cameron AU: you get there, let– and then if you ever wanna Tony Kynaston AU: Unless you, Cameron AU: so Tony Kynaston AU: unless you build underground, I guess. That was the, Cameron AU: Well, Tony Kynaston AU: was the theory Cameron AU: Yeah, you have to build underground, Yeah. Tony Kynaston AU: Yeah. Well, I thought Elon’s play was to get robots to do all that when it was safe to send humans, yeah Cameron AU: Yeah. Eventually you, you, it’s safe for humans to get in there. But, um, Tony Kynaston AU: Mm-hmm. Cameron AU: Well, before we get onto Elon, um, Iran, let’s Tony Kynaston AU: We just did. Before [00:05:00] we get onto Wieland, we just spent the last five minutes on it. Cameron AU: okay. Let’s move off of Elon. Tony Kynaston AU: Okay Cameron AU: Elon. That’s what all of his ex-wives said. Um, the Iran sanctions. So, um- Tony Kynaston AU: Yeah, it’s clown show number two. Clown show number one, Cameron AU: So the Tony Kynaston AU: in space. Clown show number two. Cameron AU: the MOU was finally released late last week, and it was the most fun I’ve had in, I don’t know, a long time reading through that. The 300 billion in reparations had been rumored for a while, and whenever I spoke to my Persian friend, uh, from Kung Fu about it and, or read about it in the forums online, the, the, the, the standard response was, “Oh, that’s just IRGC propaganda. They’re just trying to make themselves sound good. That’s never gonna happen.” Well, it was in the document. Yeah, $300 Tony Kynaston AU: Yeah. Cameron AU: in Tony Kynaston AU: Yeah. But who pays for it? Cameron AU: And [00:06:00] they’re, they’re not very specific on that. Tony Kynaston AU: No. Cameron AU: said, ” No, we’re not paying for it. Uh, the Tony Kynaston AU: Yeah Cameron AU: will pay for it.” And they might. Um, but it’s a big. And then the lifting of all sanctions on Iran is the other big thing. So then, uh, Iran pulled out because Israel kept bombing Lebanon. They walked out of the negotiations, or they said they were gonna, but apparently they didn’t, and I was reading in Al Jazeera this morning. It’s still the place where I go to for my news on this is Al Jazeera. It seems to be, you know, a little bit less, um, problematic than a lot of the Western news sources. But, um, they were saying that, uh, the US has partially lifted Iran’s oil sanctions for 60 days or 61 days maybe. Tony Kynaston AU: Yeah, so it’s basically a 60-day ceasefire, which we’ve had before as well, which didn’t last very long Cameron AU: But it says, uh, “The US Treasury issued a 60-day sanctions waiver on Monday, paving the way for the production, delivery, and sale [00:07:00] of Iranian oil to the US.” So, A, I don’t know how much oil they have sitting around now to sell to the US within 60 days. I don’t know what the situation is there, but. And it’s just like what it does to the oil price, who knows? But it’s just, uh, you know, fascinating that after decades sanctions on Iran Tony Kynaston AU: Mm-hmm. Cameron AU: how bad the JCPOA deal was according to Trump, they’re lifting sanctions on Iran and Tony Kynaston AU: I saw a, Cameron AU: billion. Tony Kynaston AU: I saw a cartoon of Trump copying Obama’s S on, on Iran. It’s like he’s just done the same thing Obama did Cameron AU: No, this is way more, uh, better. Way more better? I Tony Kynaston AU: It’s worse for the US, yeah Cameron AU: Way better for Iran is– and for the IRGC than anything Obama tried to put through. I mean, if Obama had if Obama had tried to [00:08:00] put up this deal, it would’ve been, you know, he would’ve been laughed out of the White House. Uh, anyway, Tony Kynaston AU: Yep Cameron AU: it’s, uh, as we always say, you got no idea what’s gonna happen any day, day to day. Uh, oil price is back down today. It went up a bit over the weekend. It seems to be back down. I think it’s around seventy-seven bucks last I heard. Tony Kynaston AU: Mm-hmm. Cameron AU: So hasn’t gone back up where we’re buying oil stocks again yet, but who knows what will happen. It’s all very fraught and hard to believe anything that gets said by any of the parties, uh, at this juncture Tony Kynaston AU: Yeah, exactly. And, and whether, um, even Israel will be a party to what needs to happen. They seem to be just doing what they want as well. Cameron AU: Yeah. Tony Kynaston AU: And then if you lift the sanctions on Iran, they’re gonna keep funding Hezbollah, which is gonna goad Israel. So it’s not– Maybe it’s a sixty-day circuit breaker, but that’s the, the best way [00:09:00] you can picture it, I think Cameron AU: I was listening to, uh, do you know, um, Switzerland? Um, Sw- Tony Kynaston AU: just mispronouncing Switzerland. Cameron AU: Nah, um, Son Tony Kynaston AU: recently on capping their population at 10 million? Cameron AU: There’s an Australian journalist, uh, Peter Schweizer, Tony Kynaston AU: Yeah. Cameron AU: he was the journalist, uh, his Tony Kynaston AU: I’ve heard of him, yeah. Mm-hmm Cameron AU: I don’t know. He does a, he does a good, uh, podcast that I check out a bit ’cause he has John Mearsheimer on a lot and guys like that. on, on a weekly basis, he has Mearsheimer and guys like that come on and talk about what’s going on in Iran mostly. you know, Schwei- uh, uh, John Mearsheimer is one of the guys that I’ve turned to for decades. I read his book on the Iran. uh, the Israel Lobby, sorry, that he did with Stephen Walt 20 years ago. been one of my go-to guys on international geopolitics for decades. I mean, he’s, he’s been talking just this week about how the Gulf, [00:10:00] uh, states, um, now have a different view about the United States defense umbrella and how it’s non-existent really. Tony Kynaston AU: Mm-hmm. Cameron AU: um, the- their whole relationship with Israel and their relationship Tony Kynaston AU: Mm-hmm. Cameron AU: has to change now because they can’t afford for the strait to be closed on a regular basis. So it’s really reshaping, it seems, the diplomatic relationships between all of these countries in the Gulf and, um, is becoming a global pariah. The Tony Kynaston AU: Yeah Cameron AU: a global pariah, it’s, it’s. and China’s just sitting there licking its lips. So it’s like hilarious really to watch the whole thing crumble. Not hilarious, that’s the wrong word, but it’s fascinating Tony Kynaston AU: Yeah, it is fascinating. I s- I think it was the Lowy Institute who came out in today’s paper saying that more people in Australia now, based on their recent surveys, um, prefer China to the US as a, as a ally. Thought it was interesting. Cameron AU: [00:11:00] Yeah Tony Kynaston AU: I think it’s also fun to speculate what could happen in the Middle East. I mean, you’d have to say that of late anyway, Saudi Arabia has a better relationship with the US than Israel does, and if all the US really wants is a, is an ally in the, in the region, so, you know, Israel might be on shaky ground going forward Cameron AU: Yeah, well, they’ve had a good relationship with the Saudis since, you know, um, what’s his face did the deal during the OPEC crisis. Um, who was the, uh, Nazi who worked for Nixon died a couple of years ago? Kissinger. When Kissinger did the open checkbook deal with the Saudis. Tony Kynaston AU: Right Cameron AU: down, and we’ll just back anything that you want, and, you Tony Kynaston AU: Yeah. Cameron AU: have basically open slather.” Anyway, speaking of, uh, American icons who passed away, Alan Greenspan died today, last night, Tony. Um, 100 years old he was Tony Kynaston AU: [00:12:00] He never looked all that healthy, so that’s amazing he got to 100 years old. Probably ’cause he was in a very stressful job Cameron AU: Yeah. What a, I mean, um, what a career. Uh, Tony Kynaston AU: Hmm. Cameron AU: read that, um, he was chairman of the Fed for 20-something years through, I think, eight presidents or something like that. Just a, an incredible career and, you know, not all good. Like, he copped a lot of, uh, blame for what happened after he left, um, the, the GFC. Uh, copped a lot of flak for that. So in the last 20 years, his reputation hasn’t been as strong as it was during his decades running the Fed. And I was always fascinated. I’ve always been a big fan of Ayn Rand, despite the fact that I’m left of Che Guevara. I’ve always, been a big fan of Ayn Rand and her writing and her thinking. I think she was [00:13:00] flawed in many ways, but I admire her, uh, attempts to provide a moral framework around free enterprise and capitalism. And, know, I’m, I’m one of the few people that can read Chomsky and Che Guevara and Ayn Rand and, and, and, and be happy, you know? My– That’d be my, my favorite kind of a dinner party would be to have Chomsky and Ayn Rand and Che Guevara and Fidel and, I don’t know, Tony Kynaston AU: I’ll be agreeing a lot of things I would’ve thought Cameron AU: Yeah, maybe. Alan Greenspan died. Uh, what are your Tony Kynaston AU: Well, you mentioned, well, you mentioned Ayn Rand because he was part, part of her circle, wasn’t he? Used to go to parties with Ayn Rand Cameron AU: his first wife introduced him to Ayn Rand, I, I learned in the New York obit. And, um, and he argued with her, and then ’cause, you know, he was, um, you know, sort of a classical, um, economist. uh, he– she ended up [00:14:00] convincing him that he was wrong and, you know, he changed a lot of his opinions on how the economy should work based on what he learned from Ayn Rand. So like that, when I first learned about that years ago, that blew my mind, that the guy that was running the Fed basically, you know, got his philos- his philosophical framework from Ayn Rand. Um, yeah Tony Kynaston AU: And that was used as a criticism when it became widely known that, you know, Peter has that money. Um, he. There’s a lot of good quotes about. that came out of the Greenspan years. Um, and, you know, apart from he presided over bubbles, I think is probably the, the main criticism. So you’d have years of market exuberance and then a crash, and that was largely put down to what was called the Greenspan put. Every time the stock market would get into trouble, you could rely on the Fed to cut interest rates and, and, you know, [00:15:00] give it a, a jump, a head start again. So the market bec- There was a bit of a moral hazard there with the way that he was operating or seemed to be operating. And he always. I mean, he famously said that his job was to, was to take away the punchbowl when the party was getting started, and, um, that’s how he saw what he should be doing. But, um, he kinda didn’t do that. He was always late to do that. That was the biggest criticism. But, you know, um, and he also, I think too, was shaped by the fact that I think he came after Volcker, who was, um, responsible for very big interest rate rises to, to, um, clean up, uh, the economy after the ’70, the early ’70s oil crash. But, Cameron AU: Mm-hmm. Tony Kynaston AU: sent interest rates spiking because the, the, the Fed chair before him was slow to put interest rates up. So Volcker went hard, interest rates went up, and Greenspan was kinda shaped by that history as well, that he had to be a bit slower in putting interest rates up to build the economy. So in the [00:16:00] course, that led to the market getting a lot of, um, a lot of, uh, hot air underneath it, and then, um, he was late to take the punchbowl away and rise, raise interest rates and the market crashed. So Cameron AU: Yeah. Tony Kynaston AU: a tough, tough gig Cameron AU: of other things I wanna talk about. Last week, I had to add a bunch of stocks to replace the oil stocks that we sold. One of them that I added was a business that I don’t know much about, LESL, a pool business. Leslie’s Tony Kynaston AU: You did a Pulled Pork on that one, didn’t you? Cameron AU: I don’t think I did Tony Kynaston AU: He did one on a pool maintenance business that, that, Cameron AU: Did I? Tony Kynaston AU: grew and grew and grew in the US. Yeah. Cameron AU: Did Tony Kynaston AU: Maybe a year ago. Yeah. Cameron AU: A Tony Kynaston AU: Anyway. Cameron AU: or so, yeah, I don’t remember. It’s Tony Kynaston AU: No Cameron AU: in my Pulled Pork list, but it maybe it predates that. anyway, I ended up adding them to the live portfolio last week, and they, they’re up 19% since Tony Kynaston AU: Oh, darling. Cameron AU: Yeah. Tony Kynaston AU: Must have been your [00:17:00] buying large leaks that pushed the price up Cameron AU: Well, you joke, um, but remember Zep? Tony Kynaston AU: Yeah Auntie’s watching Cameron AU: Zeppe & The Falcons, a good Tony Kynaston AU: Chinese watch Cameron AU: Yeah, Chinese watch, mother. The Chinese watch. Tony Kynaston AU: Boom. I watched that again recently, Ethel the Frog. It’s a great, probably one of the great Monty Python clips, yeah Cameron AU: Yeah. So, um, Tony Kynaston AU: Tonight on Never The Frog, we visit the violence of British gambling. Cameron AU: Focus, Tony, focus. I did, I did a Pulled Pork on Zeb Health Corporation back in July of last year, uh, when they were trading around about $3. And then they went up 1,500% pretty quickly, and, uh, you know, I took all the credit for it. Tony Kynaston AU: Mm-hmm. Cameron AU: they’ve, they’ve fallen down to $4.84, uh, which is still Tony Kynaston AU: Mm-hmm. Cameron AU: [00:18:00] 62% Tony Kynaston AU: Yeah Cameron AU: we talked about them. But I tried to figure out what happened. why did they go up 1,500% and then drop back down? Did something go right? Did something go wrong? I Tony Kynaston AU: Mm-hmm. Cameron AU: at the time trying to figure out and they, they had, they had announced some pretty good results, and they’d done a deal with Amazfit. they were selling stuff on Amazon, these, you know, like health trackers and their digital watches kind of stuff. But then I. So I jumped into Claude and, and it sort of did an analysis on it. And its conclusion, based on a lot of evidence, but its conclusion is it was something called a gamma squeeze. Now, I, I assume that it’s something to do with the Incredible Hulk, Tony Kynaston AU: Uh-huh Cameron AU: ’cause that’s the only thing I know about gamma radiation, is that it turns you into the Incredible Hulk if you get hit by them. You know what a gamma squeeze is? Tony Kynaston AU: Uh, you don’t make them angry? Will you get squeezed? Cameron AU: I’m angry. Yeah. Tony Kynaston AU: No, I don’t. Never heard of a gamma [00:19:00] squeeze Cameron AU: a gamma squeeze, according to Investopedia, is a rapid, often extreme surge in a stock’s price triggered by heavy trading in call options. forces option dealers, market makers, to aggressively buy the underlying stock to hedge their risk, creating a self-reinforcing loop of buying pressure So the way that Claude decided this is what happened is it could actually, it, it couldn’t find evidence of puts, but it could find o- evidence of shorts happening Tony Kynaston AU: Yep Cameron AU: on. So its theory, and again, I’m saying that this is a theory, I don’t have any evidence to back this up, but its theory is that the price started to go up as a result of. It’s a fairly thinly traded stock to begin with. Um, share price started to go up as a result of, uh, some of the announcements, the profit. You know, the reason they ended up on our buy list is they announced some good numbers, [00:20:00] and then the share price massively went up as people were buying options on it and the market makers, as the price kept going up, the market makers needed to buy shares to cover themselves in case people exercised those Tony Kynaston AU: Right Cameron AU: and it just had this self-reinforcing loop that the price kept going up and up and up and up and up, then eventually it all unwound itself and the price came back down, down, down, down, down to where it should’ve been in the first place. So it’s up 60% in a year, less, little less than 11 months. So not complaining. Not, not sure if it’ll stay there either, but that’s where it seems to have stabilized Tony Kynaston AU: That sounds like a good business model. We find a family trade in stock and take out lots of options on it. Cameron AU: And Tony Kynaston AU: could go wrong? Cameron AU: yeah, yeah, yeah. I think Warren Buffett’s had a few things to say about that. So yeah, by, uh, you know, as I said, we paid about three bucks for it. Well, no, we didn’t buy it. We didn’t actually add it to the portfolio. But when I did the Pulled Pork, [00:21:00] it was about three bucks. It went up to $61 and, uh, has come back down to about $4.83. So there you go. So that was fun to drill into and try and get my head around that. Um, the Leslie’s pool business I already mentioned. And then, um, before I get into my Pulled Pork for the week, Glenn, one of our Australian and US subscribers, sent me this article in The Wall Street Journal. “How Big Tech’s Financials Obscure the True Cost of the AI Build-Out.” uh, a pod- it’s a transcript from a podcast, WSJ’s Take on the Week podcast. Um, they sit down with Kevin Kohaki, principal at CAE Consulting and professor at Purdue University, to pull back the curtain on the opaque world of tech companies’ financial statements. They dig into why the massive infrastructure spent on AI data centers might be obscuring other fundamental [00:22:00] corporate costs, specifically stock-based compensation. Kohaki explains why tech giants like Meta, Microsoft, NVIDIA, and Google’s parent company, Alphabet, need to provide clearer financial reporting. He breaks down the challenge investors face in distinguishing between necessary AI capital expenditure and other underlying costs, and why greater transparency is critical to accurately valuing these businesses in the current market. So I didn’t spend a lot of time on this ’cause I’m not investing in these businesses, and so I don’t really care. But, um, my take is, from the quick read that I did of it, that there might be stuff hidden in the financials for these companies that investors aren’t getting transparency on, and it could come back and bite them on the ass. Did you get a better take on what’s going on here, TK? Tony Kynaston AU: Yeah, look, I, I think it was great of, um, Glen to point it out. It’s something that which I knew about, but it skipped my mind. But it will have implications, I think, for QAV in America because [00:23:00] the accounting standards are different over there compared to Australia in the area of stock-based compensation. So, uh, in Australia, if you– or anywhere around the world, if you pay someone with stock, you’ve got to account for it as a cost somewhere. In Australia, that comes out of operating cash flow because it’s like paying your workers. You think of the coffee shop analogy, paying the barista. If you pay him in stock or if you pay him in cash, it should be treated the same way under account, under accounting standards and go into operating cash flow. Doesn’t work that way in the US. They don’t have to put it through operating cash flow. Um, so it goes much lower down the P&L than operating cash flow. So what that article on the Wall– or the podcast on The Wall Street Journal was saying was that, um, if you look at a company like Meta, uh, a lot of the stock-based compensation isn’t appearing in their operating cash flow. So their top line looks really good, and operating cash flow is [00:24:00] strong, and it flows down to a healthy profit. But if you factor back in the stock compensation, which is, I think, being accounted for on the balance sheet in the US and not going through the, the profit somehow or goes through the profit much lower down, um, it basically Meta doesn’t make any money because it’s got to someday account for all the stock that’s been issuing to its staff and to Zuckerberg and all that sort of stuff. So you’re right in that that tends not to be the case for value stocks. They tend not to have lots of stock-based compensation for whatever reason. But, um, uh, we should really try and put it back into operating cash flow if we can find it. But I’ll have to do some digging to work out how to do that for QAV in the US Cameron AU: Hmm. Well, I’m not sure with the sorts of businesses that we buy it’s gonna have such a big impact. I think your, your Mag Seven type stocks probably have way more exposure to this sort of thing than Leslie’s Tony Kynaston AU: it, it tend to, tends to be internet stocks, and it was a thing [00:25:00] back in the dot-com boom when everyone was being paid in stock options. And that’s when I think the accounting diverged between Australia and the US, and there was much like the debate Australia’s having now around CGT changes and whether it will kill startups in Australia. There was all this debate around the accounting of stock options and, and stock-based compensation in the dot-com boom, and how Australia stuck by international standards when the US went the other way and, and wrote their own rules to try and, you know, um, keep the dot-com boom alive, I guess Cameron AU: Mm. Well, thank you, Glenn, for sending that through. Um, I just, before we get too far into my Pulled Pork, I wanted to just do a quick portfolio check. So I will open up the live portfolio, now fixed, actually live, updates every morning, uh, on the website. The, uh, QAV America main portfolio, inception date [00:26:00] September twenty twenty-three, currently up a hundred and seventeen point six eight percent, uh, versus the S&P 500 up sixty-eight percent over that same period of time. So it’s not quite double market, but not far off it. Hundred and tw– six hundred, yeah, it’d be a little bit more. What’s hundred and twenty? Yeah. Oh, yeah, yeah, yeah. A little bit less than double market. Um, year to date, QAV is up thirty-two and a half percent versus a little bit less than nine percent for the S&P. So doing better than three times market year to date. Um, the last one year we’re up forty point five percent versus twenty-four percent. So again, not quite double, but it’s been a really good year for our main portfolio. The light portfolio, QAV America Light, which I started twenty-second of December Is, uh, up 7.3% versus the S&P [00:27:00] up 8.6 over that same period of time. So it dipped a little bit, mostly because of the oil stocks that we needed to sell. But, uh, then as I said, some of the stocks have done really well. Pitney Bowes, which is in the light portfolio, is up 58%. Uh, Commercial Vehicle, CVGI, is up thirty-three. Kodak is up twenty-seven. Leslie’s is now up 20% since I added it a week ago. Um, Tony Kynaston AU: And it’s a pool business Cameron AU: Yeah, yeah, might be options going on with that too. Tony Kynaston AU: Might be gamma, it might be a gamma squeeze. Cameron AU: squeeze. Tony Kynaston AU: Yeah Cameron AU: we’re doing gamma in your pool. Um, Deutsche Bank is up 16%. Um, some of the ones that aren’t doing so well, BWLPG is down ten, Woori Financial is down eight, Ship Lease is down eight. Couple of the financials are down. Bread Financial Holdings. So couple of weeks ago, let’s see. Well, BFH, I did a [00:28:00] Pulled Pork on Bread Financial Holdings back in February. Didn’t add it to the portfolio at the time, though, but it is up 46% since then. But I did add it to the portfolio this week. I th– can’t remember why I didn’t at the time. I think it was a Josephine or something at the time. But, um, did add it, yesterday to replace one of the oil stocks that I had to sell last week. So, um, unfortunately, we didn’t get that first forty-six percent gain, but it was still at the top of the buy list this week, so I was like, “Okay.” You know, whatever you say, buy list. Um, Tony Kynaston AU: yeah Cameron AU: maybe. We’ll see how it goes. But the one I am gonna talk about this week is a juicy, juicy story, Tony. Not sure, n-not sure what you’re gonna make of it. Um, you know, the, the financials, we. I’ve been through this back and forth, um, as you know, [00:29:00] over the last few months with US stocks where there’s these one-off events that, that bolster their operating cash flow and I go backwards and forwards with Claude on, “Is this legit? Is this not legit?” It pushed back on this one. I argued it into the ground and then it said, “Okay, you do whatever the hell you want, but don’t blame me if, don’t blame me if Tony says you’re an idiot.” Um, so I’m gonna tell you the Tony Kynaston AU: Just so you have an idea Cameron AU: probably. Yeah. It’s pr- it’s a safe assumption. It’s, uh, but it’s, it’s a great story nonetheless. So the company is called Carter Bankshares. Ticker code is CARE because they care, Tony. If you go to their website, it’s all about how much they care about their local communities. Um, it’s, it’s a crazy story. So they’re a relatively tiny country bank based in Virginia, Martinsville, [00:30:00] Virginia. was chatting with my buddy Ray from Virginia this morning. I said, “How far is this from you?” He said, “Oh, it’s about two hours away.” Um, Tony Kynaston AU: with Ca- with Carter Bank? Cameron AU: didn’t ask him about the bank. I, no, I didn’t get into that. I don’t think Ray has enough money to put in a bank, so he, he just puts it, you know, under the mattress. Um, mattress rates he gets. Um, tiny bank that got itself wrapped up in a billionaire US senator story and then had to undo it all, and involves a luxury resort that has a bunker underneath it. It involves two billionaires fighting over that luxury resort and, uh, resulted in an eighty million dollar one-off gain for Carter, um, just recently, which has given their numbers a bump. Tony Kynaston AU: Yeah Cameron AU: or not that’s a bump scoring or not is the decision that we had to make or I had to make on this and I [00:31:00] decided, yeah, it’s fine. Anyway, listed on the Nasdaq. Market cap about six hundred and eighty-eight million, so relatively small. About four point eight billion dollars in assets. Sixty-three branches across Virginia and North Carolina. Pretty much nothing to see here on the surface. Plain vanilla community bank. It takes deposits, makes loans, pockets the spread. Trading around $31. Um, here’s the thing, it was $16 15 months ago. So it’s, it’s had a big run up as it’s unpicked this mess that it was in. And the mess goes back to the founder of it, guy called Worth Harris Carter Jr. Worth Carter. Man called Worth started a bank. Uh, Tony Kynaston AU: What was his nickname? Hi- High Net? Cameron AU: Hi, Ned. Yeah. Um, I read his obit. Uh, he died a few years [00:32:00] ago, um, 79 from cancer. But he was a grocery cashier who, uh, worked at Safeway grocery stores in Richmond and Charlottesville. Put himself through the University of Richmond, graduated in 1958, and then went to the University of Virginia Law School, classes until 1960. Then he worked as a bank examiner at the Federal Reserve Bank of Richmond from 1960 to 1964. Then as vice president and comptroller the Piedmont Trust Bank in Martinsville from 1964 to 1973. Then he founded the First National Bank in Rocky Mount, Virginia, in 1974 with eight employees and $1.2 million in assets, and then ran that for 42 years. Um, built, founded 10 more community banks, and then combined them all in 2006 into the Carter Bank and [00:33:00] Trust. So founded all 10 from scratch, grew them organically, and then rolled them all up into a, into a thing that floated. Ran it Tony Kynaston AU: Isn’t it. Cameron AU: personal kingdom. Hmm. Tony Kynaston AU: you know why, like, you started a bank in the Rocky Mountains and called it First National with six stars? Tends to be a thing in the US where everything’s the First National, isn’t it? Like, it’s like not national, it’s operating in Virginia. Cameron AU: It’s why they Tony Kynaston AU: Even 40 years later. Yeah. Or the World Series. Cameron AU: Yeah, Tony Kynaston AU: World Series. Well, it’s named after a newspaper. Yeah Cameron AU: Was it really? Tony Kynaston AU: Yeah, The World was a New York newspaper that used to sponsor it Cameron AU: Oh, I never knew that. Tony Kynaston AU: Yeah. Cameron AU: Oh, Tony Kynaston AU: Much as I like to think it’s American exceptionalism, it’s not. Cameron AU: Well, the Tony Kynaston AU: But naming your, but naming your six-person ba- yeah, naming your six-person bank First National is probably a little bit of, um, dreaming. Cameron AU: Yeah. [00:34:00] Well, he did well. He, he ran it Tony Kynaston AU: Yeah Cameron AU: kingdom until he died 2017. Um, and this, he was a pro- he was a proper old school conservative, knew every branch manager, knew all the Tony Kynaston AU: Mm-hmm. Mm-hmm. Cameron AU: drove himself to meetings in an old car, Warren Buffett style. did a lot of, um, direct business with people, including Jerry Falwell. He was, you know, fou- funded the Liberty University or, you know, got them out of a bad patch that they went through, all this kind of stuff. Um, old school banking guy and, uh, but the thing has a weird ownership structure. The, the it’s owned by retail investors, moms and dads who own fifty-three percent of it today. Um, small town Virginia families who have held the shares for a long [00:35:00] time. They had the community shares, and I guess it got rolled into the Tony Kynaston AU: Run Cameron AU: when it rolled it all up. Tony Kynaston AU: Mm-hmm. Cameron AU: BlackRock and Vanguard and those sorts of guys have less than ten percent, sort of six, seven percent from what I can see. Um, still based in Martinsville, Virginia, which I looked up. Um, it’s a fairly small town, Virginia furniture and textile country. NASCAR country. I think it’s where NASCAR starts every year is Tony Kynaston AU: Mm-hmm. Mm-hmm. Cameron AU: Um, it, this town used to be the, um, plug tobacco capital of the world and Tony Kynaston AU: I have no idea what that is Cameron AU: Uh, you put a plug of tobacco in your mouth and Tony Kynaston AU: Ah, chewing tobacco. Okay. Cameron AU: I think, that’s what it is. It was the chewing tobacco capital of the world. Uh, RJ, uh, um, Nabisco, who’s the tobacco company? Um, we Tony Kynaston AU: It was, Nabisco does, was, yeah. Cameron AU: Was it [00:36:00] Nabisco? Tony Kynaston AU: I don’t think so. No, I was there in. Cameron AU: with us in Carolina, North Tony Kynaston AU: Yeah, yeah. It was at, um, where, uh, Durham, wasn’t it? Cameron AU: Durham. Yeah. Tony Kynaston AU: Yeah. Cameron AU: the film in Durham, yeah. Wasn’t that Nabisc- RJR Nabisco? Was. What was the name of Tony Kynaston AU: But, mm, I can’t remember, sorry. Cameron AU: I can’t Tony Kynaston AU: It was a, was a local tobacco exec’s apartment, yeah Cameron AU: Yeah, yeah, it was crazy. Anyway, then at one point, Martinsville was the sweatshirt capital of the world Tony Kynaston AU: Before China? Cameron AU: yeah, before Tony Kynaston AU: Right. Cameron AU: Yeah, Tony Kynaston AU: But they outsourced? Yeah. Cameron AU: At one point in the 1980s, 1980s, they boasted of having more millionaires per capita than any city in America Tony Kynaston AU: They have one millionaire and one person? Cameron AU: I think their Tony Kynaston AU: Mr. Carl? Cameron AU: about 15,000 people. So, you know, you only gotta have a couple of millionaires and you’re Tony Kynaston AU: Mm-hmm. Cameron AU: Anyway, um, what the bank actually does today is pretty simple. Before we get into the dirty story, I’ll tell you about the bank. So they take in about $4.2 [00:37:00] billion of deposits. Most of it are in certificates of deposit, CDs, term deposits. They pay depositors a bit over two percent, lend it out at five and a half, keep the, keep the gap. Uh, net interest margin, uh, is about three point o, seven percent, and it’s climbing up from about two point six eight percent a year ago. And they, they are what’s called liability sensitive, which apparently means if the Fed cuts rates, their funding costs drop faster than their loan income. Tony Kynaston AU: Pr Cameron AU: their margin actually widens when rates cut. M-most banks hate rate cuts. These guys benefit from rate cuts. I drilled into this a bit ’cause I didn’t understand it at all. And, uh, for people out there who are like me, their deposits are dominated by certificates of deposit, term savings accounts, fixed rate, but short. They have a maturity of months to a couple of [00:38:00] years. So when the Fed cuts rates, those things keep maturing until the bank renews them at the new lower rate, but that can take months or years for them to do that, they keep the margin in the meantime. And the big chunk of what they lend is fixed rate and has longer terms. Eight hundred and fifteen million of residential mortgages that are locked in for years, plus fixed commercial real estate loans. So the Fed cuts rates, but people keep paying, customers keep paying the older higher rates. They don’t fall, they’re fixed term, so i-it’s a Tony Kynaston AU: they often refinance, don’t they, in, in US? Cameron AU: there are and penalties Tony Kynaston AU: Yeah, yeah Cameron AU: to get out of that. Yeah. Anyway, so that’s the good side of their business. But then they got wrapped up in a guy called, and wait for this, if you thought Worth Carter was a good name, senator, the junior United States senator from West Virginia, Jim [00:39:00] Justice, James Justice, former Tony Kynaston AU: reading, I was reading in my notes about the Justice settlement by the Justice Department. I mean, I’m getting very confused about what was happening. Cameron AU: I know, right? Uh, this is, this, this is, uh. I mean, I could do a whole series on this guy. Oh, it’s Tony Kynaston AU: It was like, it was like who’s on first. Yeah Cameron AU: Yeah, let me drink some smoothie. Mm. Jim Justice, serving as the junior United States senator from West Virginia since twenty twenty five. He’s, like, seventy, but he’s the junior senator. Uh, member of the Republican Party, served as the thirty-sixth governor of West Virginia from two thousand and seventeen to two thousand and twenty-five. Was once a billionaire, but depending on who you [00:40:00] believe, his current net worth is either six hundred and sixty-four million or zero. Um, Forbes in January twenty twenty-five reported that his net worth had fallen below zero because he had over a billion dollars in debt. But if he, but somebody else calculated his net worth last year as six hundred and sixty-four million, which made him the richest US senator that year from West Virginia. Now, he inherited a coal mining business from his father that included ninety-four companies, Bluestone Industries and the Bluestone Coal Corporation. And then some years ago, he and his family bought a luxury resort and national historic landmark called the Greenbrier Hotel. It’s in a place called White Sulphur Springs. It’s been there since nineteen thirteen. And s-since the [00:41:00] seventeen hundreds, uh, people in the United States would go to White Sulphur Springs to take the waters. You ever heard them take, “I’m going to take the waters”? Tony Kynaston AU: Oh yeah, I’ve heard that Cameron AU: I’ve heard that. Never knew what it meant. Apparently, it’s to go and soak in a hot sulfur spring. That’s what taking the Tony Kynaston AU: Yeah. Yep Cameron AU: So this place was built, and you should look at some. Look at a photo. L-look up the Greenbrier. One word. It is. It kinda looks like your house, really. I mean, it’s a smaller version of your house. you know, if you moved into this, you’d, you’d be, like, uh, going backwards. But, um, it’s an eleven-thousand acre property. Dorothy Draper designed the interior, who was Don Draper’s great-grandmother, I think. Um, it features championship [00:42:00] courses that have hosted the Ryder Tony Kynaston AU: say, I’ve heard of the Greenbrier. It’s a classic. Yeah Cameron AU: the Solheim Cup. Yeah. So there you go. Uh, it’s hosted, uh, 28 presidents have stayed at the hotel, but the last I think was Dwight Eisenhower, so it’s been a while. Um, and it is or was the site of a massive underground bunker meant to serve as an emergency shelter for the United States Congress during the Cold War. Project Greek Island was what it was called. Its existence was not acknowledged until The Washington Post revealed it in a 1992 story, and after that, the government decommissioned the bunker ’cause there’s not much point having a secret bunker if everyone knows about it. And the Cold War was over, technically, uh, I guess Tony Kynaston AU: You want to go into a secret bunker and slam the door and not have to listen to people knocking. Cameron AU: Mm. Tony Kynaston AU: just, that’s just rude. Cameron AU: Mm. Tony Kynaston AU: Mm. Cameron AU: Now Trump’s trying to build one underneath [00:43:00] the, um, uh, White House, right? Under the. Is it the East Wing he’s redoing? The ballroom Tony Kynaston AU: I thought there already was one under there Cameron AU: Oh, maybe he’s making a bigger one under there. So anyway, um, Carter Bank, um, blahdy, blahdy, blah. Jim Justice. So at one point, Jim Justice, owner of Bluestone and The Greenbrier, owed Carter Bank at one point $775 million Tony Kynaston AU: Right. And you said before they had how much on the mortgage book? $700 million, was that it? Or $900 Cameron AU: Uh Tony Kynaston AU: million? Less than a billion Cameron AU: Yeah. Four, four. No, they had $4.2 billion of deposits. Tony Kynaston AU: Che Cameron AU: book was about 3.7 billion Tony Kynaston AU: Right. Still Cameron AU: at one, Tony Kynaston AU: a large chunk Cameron AU: Yeah. I mean, at one [00:44:00] point, uh, he paid it down to three hundred million by twenty twenty-three, but the bank had four hundred million dollars of equity at that stage, and three hundred million dollars of it was riding on one family. Um, so how all this came to be is it started in two thousand and one with a single four and a half million dollar real estate loan that Worth Carter personally made to Jim Justice. They were friends, kinda Tony Kynaston AU: Yeah Cameron AU: fellow larger than life, um, Tony Kynaston AU: Mm-hmm. Cameron AU: And then over fifteen years, he just kept le- lending to the Justice family until it got up to seven hundred and seventy-five million. the thing is, banks in the United States have a legal lending limit. There’s a regulatory cap on how much you can lend to any single borrower set at fifteen percent, roughly, of the bank’s capital. [00:45:00] So Carter’s legal lending limit was about $75 million, but Justice got up to $775 million because it wasn’t one loan to Jim Justice, it was dozens Tony Kynaston AU: thinking, yeah Cameron AU: to dozens of separate entities that he controlled: coal companies, agriculture businesses, The Greenbrier, its sporting club, hospitality arms. And each individual loan was about $75 million, all of them personally guaranteed by Jim Justice, his wife Kathy, their son Jay Justice, and all cross-collateralized. So on paper, lots of independent borrowers, in reality, one family. And so that went along. No one really, I guess, asked any questions about [00:46:00] it and until Worth Carter died 2017 professional managers took over, took one look at the $775 exposure that they had and went, “Well, that’s not good.” And so they basically stopped rolling it over. I think what they’ve been doing is rolling over the term, what Tony Kynaston AU: Pr/Op Cameron AU: Carter had been doing is rolling it over for years. They said, “No, no, no, no, no, no, no. You need to pay this, pay this down. This is, this is way too much exposure.” Um, and Justice ended up suing the bank for a billion dollars in late 2023. The Justices said that the new management team kept verbally promising more time, then went cold, stopped returning calls, and basically forced them into default. I love, I, I read a Forbes article on this. It had this great [00:47:00] line: “What does Justice, his family, and companies allege? That Carter Bank, over nearly 20 years, loaned them more than $700 million, then had the gall to expect to be paid back on time.” So, uh, enter three years of litigation and, uh, they ended up cutting it loose. So bank put $300 million on non-accrual in mid-2023, basically saying, “We’re not gonna get the money back.” By their own count, they’d lost $91 million of interest income on those dead loans. And there was also a side plot on this. Do you remember Greensill? Tony Kynaston AU: No, I don’t think so. Cameron AU: this years ago. Tony Kynaston AU: Everybody? Okay Cameron AU: Bundaberg boy, fellow Bundaberg boy, Tony Kynaston AU: Yeah. See, I. Okay. Is that Greensill? Yeah, yeah Cameron AU: Lex Greensill, sugarcane [00:48:00] boy. Surprisingly, he and I never crossed paths. He was born in ’76, so he’s only six years younger than me, but never heard of him before all of that went down. to the UK, started a financial services company called Greensill Capital, becomes a billionaire. Big scandal in 2021, a chunk of Credit Suisse down with it. Prime Minister of the UK, David Cameron, was a lobbyist and advisor to the bank. He got caught up in it. I think, um, Greensill had gotten an OBE or something like that. It was all very messy. Anyway, um, Bluestone, Justice’s coal company, was a Greensill borrower, so Carter Bank ended up getting involved in all of this downfall of Credit Suisse and Greensill. Anyway, a long story short, very, very messy. In March of this year, so three months ago, they sold their entire loan book, the, the Jim Justice loan book, [00:49:00] uh, $289 million in to a Dallas billionaire called Robert Rowling. Robert Rowling, no relation to JK, as far as I know, owns a chain of hotels called the Omni Hotels, Tony Kynaston AU: Mm-hmm. Cameron AU: and he set up an entity called White Sulphur Springs Holdings to buy the debt off of, uh, uh, Carter Bank. Now, at the moment, at the time, sorry, at the time he did this, they had written it down to 209 and a half million of defaulted judgment-backed debt. He paid 289 million in cash, basically 290 million for Tony Kynaston AU: Mm-hmm. Cameron AU: 210 million. Why? Um, get control over the Greenbrier Tony Kynaston AU: Right Cameron AU: So, [00:50:00] uh, he moved for control over the Greenbrier immediately. Basically said, um, “Yeah, this guy can’t pay the debt. We’re just gonna ta-” And the Greenbrier was col- collateralized with the Greenbrier. “We’re just gonna take the Green, Greenbrier and add it to Omni Hotels.” And, uh, just as Tony Kynaston AU: Yeah. So why didn’t, why didn’t Afterpay do that? Cameron AU: I don’t know, ’cause they didn’t know how to run a hotel maybe Tony Kynaston AU: Okay Cameron AU: Dunno. Anyway, bottom line is they sold, they sold all of Tony Kynaston AU: Yeah. Mm-hmm. Cameron AU: family sued over control of the Greenbrier. That’s still going through the courts. Basically, from a Carter perspective, their bad loans went down from 244 million to 24 million in one quarter, and they got ton of cash And that’s the magic trick in this one. So their operating cash flow jumped from 1.78 to 15.1 this year. Um, and all their numbers [00:51:00] suddenly look really, really good. It’s not gonna last, but they’ve got $80 million in cash that Tony Kynaston AU: Yeah Cameron AU: do something with. Tony Kynaston AU: Yeah Cameron AU: I looked at it and I went, “Okay, so it’s not a deep value cigar butt, Tony Kynaston AU: Mm-hmm. Cameron AU: but it’s a business, new management, got themselves out of a hole, sold off a, a problem asset, did a good deal by the sounds of it, um, made 80 million on it. They now have 80 million to do something with. What they do with that is up to them. Tony Kynaston AU: Yeah. We should say the, the net was 80 million because they got the heap of cash for the Greenbrier debt payment, but they’d already provided a lot of, um, losses, provided for a lot of losses on the loan. So the net was an $80 million cash infusion. Cameron AU: Exactly. Tony Kynaston AU: Yeah Cameron AU: And they’re paying their first dividend in 10 years, 10 Tony Kynaston AU: Mm-hmm. Cameron AU: Um, and so they, so, [00:52:00] you know, that’s it. The, Tony Kynaston AU: Yeah. Cameron AU: deal is they got out of this, they made a back, bunch of cash. Like, it’s a good little business in and of itself. Like, it’s not a, it’s not taking over the world, but it’s a profitable, healthy bank. Uh, the numbers look, you know, reasonable on it. It’s not Tony Kynaston AU: Mm-hmm. Cameron AU: win any awards. It wouldn’t be on our buy list without this, Tony Kynaston AU: Mm-hmm. Cameron AU: it did do this. And I thought, you know, this is a legitimate thing. They sold off a thing. They made money out of it. The money’s in the coffers. It’s cheap. So I was like, “Yeah, screw you, Tony Kynaston AU: Well, Cameron AU: this.” Tony Kynaston AU: um, yeah, look, I tend to agree with you. I, I don’t think it’s gonna shoot the lights out from here as, in terms of increasing stock price the way it has in the past. But, um, it’s not gonna. I don’t think it will go backwards in a hurry either, ’cause as you say, they’re, they’re flush with cash. The stock price is probably gonna be well-supported. But it really comes down to what they do with the cash and, you know, the [00:53:00] management’s good enough to be able to invest that eighty million dollars and earn a good return off it going forward. So, Cameron AU: Exactly Tony Kynaston AU: I see it. I don’t like the idea of putting cash windfalls through operating cash. I don’t know why that happens in the US with these stocks. But even if it didn’t, um, the business is gonna look good as an outcome of the settlement, and they wrote down their provisions or wrote off their provisions for bad debt. So it’s always gonna be a good set of numbers on the trailing basis anyway. So PE looks good anyway, all that kind of stuff. So, you know, not, not withstanding the fact that there’s been a cash injection that makes operating cash flow look good, it’s still a better business that we would have analyzed, um, in a similar sort of way if it was, uh, using an Australian accounting standard. And we see this, we’ve seen it from time to time in Australia too, and my rule of thumb is basically, if management were good enough to get that cash injection, then hopefully they’re good enough to spend it well Cameron AU: Yeah, that was my take on it too. Like, they, this new management, um, [00:54:00] have dug themselves out of a hole that the founder had got them in with this Tony Kynaston AU: Yeah Cameron AU: and, you know, come out of it on top. So I give them top marks for that. Um, anyway, so Tony Kynaston AU: Additionally though, Cam, I also, we, I think you did a pulled pork a couple of weeks ago on an Alaskan bank as well, a regional bank. Um, Cameron AU: Um, Tony Kynaston AU: and so I did a quick. Yeah, it was called Northrim, I think, from memory. Cameron AU: Oh, Northrim Bancorp, yeah Tony Kynaston AU: Yeah, so again, a regionally focused bank. A little bit different because they had a stronger business Cameron AU: Hmm, vampires. Tony Kynaston AU: loans than, than Carter Bank does. Cameron AU: Yeah. Hmm Tony Kynaston AU: So Carter Bank, Carter Bank’s kind of niche is that it has a big retail presence, lots of bank branches in an industry which is more and more consolidating and closing branches and going online. So it’s, it’s playing to its strength. Northrim was playing to its strength in terms of loaning local [00:55:00] businesses money. So, but you know, it’s kind of a thematic we’re starting to see on the buy list, and I compared them both, and there’s pluses and minus for both of them. But, um, you know, once, once this injection flows through, I think, you know, it’s a similar sort of situation. It’s a, a niche bank with a good base, and it’s not a bad investment Cameron AU: Well, let me just run quickly through the numbers. Um, I said, the share price is around about 31 bucks. Our IV1 is, uh, $24.62, our first intrinsic value, so it’s above that. But our second intrinsic value is about $50.81. below that, so I scored it for that. Um, price to book is 1.36, so they got a score for that. Um, uh, no, sorry, didn’t get a score for that. Um, they’re above that. They’re also Tony Kynaston AU: Hmm Cameron AU: book plus 30, so I couldn’t score them for that. Um, operating [00:56:00] cash flow ratio, price to operating cash flow is about two, 2.04. So again, it’s largely because of this big, uh, bump that they’ve Tony Kynaston AU: Yeah Cameron AU: them a score for that. Average daily trade is around about nine million, so pretty big. Um, earnings per share about $4.80 at the moment, again, because of the, the bump, but it is what it is. PE ratio of about $6.45. Forecast EPS of $4.90 for next fiscal year. Um, overall financial health and quality, Stockopedia stock rank of 87 and a quality rank of 55, so not great on those. Piotroski F-score at seven, so that is okay. Um, they’re cashed up. Pretty, pretty, pretty solid Tony Kynaston AU: Yeah Cameron AU: They have had positive equity over the [00:57:00] last few years. Don’t have a recent three-point upturn because they’ve been going up for a while now. Dividend yield is around about 0.32%, so that’s lower than the debt rate. Couldn’t score them for that. Bottom line is, um, ended up with a QAV quality score of 58%, so not massively high, but a QAV score of 0.286, which put them pretty high up on my buy list. I think they were second on my buy list this week after BFH. And I was like, “You know what? give these guys a go because I like the cut of their jib Don’t know what a jib is? Think it’s a, think it’s a sail. Is that a sailing Tony Kynaston AU: is. Cameron AU: Yeah? Tony Kynaston AU: yeah. Cameron AU: You would, you would know Tony Kynaston AU: Yeah. Well, I, I just, um, asked Gemini what they were gonna do with their, their bonus cash windfall and, um, they are gonna do, um, a buyback as a share repurchase with some [00:58:00] of the money. They are going to use it to support digital platforms, so IT upgrades, and then organic growth and expansion. So, you know, it’s. They’re not going out and buying themselves golf courses and US senators and things like that. So it’s, seems like a responsible use of the money, and it’s gonna improve the, the bank, you would think, going forward. So yeah, don’t mind buying them either Cameron AU: Yeah, we will see. Tony Kynaston AU: Mm-hmm. Cameron AU: We will see what happens. But, um, anyway, there you go. That is CARE, Carter Bankshares. Great Tony Kynaston AU: Oh, very colorful. Yeah. Cameron AU: colorful Tony Kynaston AU: story Cameron AU: Billionaires buy another billionaire’s debt so they can take over the Tony Kynaston AU: Yeah Cameron AU: It’s a crazy world, America, right? It’s like Succession, these stories. It’s just– Tony Kynaston AU: Yeah. Cameron AU: mad world Tony Kynaston AU: Yeah, and the lawyer in the [00:59:00] background going, “Hey, if we buy this bit for this, then we get control of the hotel over there for our Omni.” Like, you know, okay, and it’s just like all of the dominoes falling behind them Cameron AU: Yeah, yeah. And the lawyers making money on both ends, I’m Tony Kynaston AU: Mm-hmm. Cameron AU: Mm. Well, that’s it, Tony Tony Kynaston AU: All right, I’m gonna go out and plug some tobacco and watch some NASCAR and Cameron AU: Yeah Tony Kynaston AU: some T- buy some sweatshirts. Yeah. Tony Kynaston AU: Yeah. True. Uh, have, I’ve been, I’ve been seeing little clips of, um, Dave Grohl’s daughter and her music, which is interesting. Have you been Cameron AU: I listened to Tony Kynaston AU: that at all? Yeah, it’s good, isn’t it? Yeah. Violet Grohl, yeah. Cameron AU: yeah. Yeah, What’s her name? Tony Kynaston AU: Yeah. Violet. Cameron AU: Violet, yeah. Tony Kynaston AU: Yeah Cameron AU: came up, it came up after you mentioned Grohl or Foo Tony Kynaston AU: Pr/OpCaf Cameron AU: week. I s- I listened to their album, didn’t really dig it, but then she Tony Kynaston AU: Thanks, man Cameron AU: up in, um, Spotify, and I was like, “Oh, okay.” And I, I liked her album a lot more, yeah. It’s Tony Kynaston AU: Yeah. Yeah, it’s good. And there was a clip I saw of her fronting Dave Grohl on the drums ’cause they were [01:00:00] doing a Nirvana tribute when they were inducted into the Rock and Roll Hall of Fame a few years ago. That was pretty good too. Cameron AU: right. I think I’ve Tony Kynaston AU: Yeah. Yeah Cameron AU: Her and Alice Cooper’s daughter’s got a band too Tony Kynaston AU: Oh, Cameron AU: like. Tony Kynaston AU: okay Cameron AU: really the lead. It’s kind of like a g- it’s like a, um, sort of a weird, um, as you’d expect, kind of, um, horror-themed metal band. Can’t remember their Tony Kynaston AU: Run Cameron AU: like Beasts of Death or something like that or something. Um, it’s sort of, yeah, a bit, you know, heavier than Alice, but it’s sort of, you know, Rob Zombie-ish kind of, know, c- theatrical metal sort of stuff, and she does in it, but, like, backup. It’s a male lead singer. She does, like, backup vocals and different stuff, but it’s good. Yeah, I really like it too. So these guys with their daughters, the nepo-baby daughters that are Tony Kynaston AU: Yeah. exactly. Cameron AU: Yeah Tony Kynaston AU: Uh, yeah. Well, but it, but it, [01:01:00] yeah Cameron AU: sorry, j- just to close the loop on Alice and Sparks. So f- I was showing Fox the Sparks documentary last night ’cause he hadn’t seen it, and there was a bit, uh, early on they were talking about how their first album was produced by Todd Rundgren, and they were introduced to Todd Rundgren by Miss Christine from the GTOs ’cause Russell was dating Miss Christine from the GTOs. Christine from the GTOs, the GTOs were living in Zappa’s house when Alice and the band first went to Zappa’s Tony Kynaston AU: Mm-hmm. Mm-hmm Cameron AU: um, it was the GTOs that first put makeup on Alice Cooper, and had, they had a member called Pamela Des Barres who had, um, like spider lines coming out of her eyes, which was Alice’s first eye makeup I think he dated Miss Christine as well. And I had just seen yesterday, there’s a, there’s a Zappa album, can’t remember what it’s called, but it’s a [01:02:00] photo of her sticking her head up. She had like this big crazy perm, her head up Tony Kynaston AU: Mm-hmm. Cameron AU: a, a swimming pool, a dry swimming pool, which was his swimming pool. Um, Alice posted that and said that, you know, she died like in the mid-’70s, very young, OD I think. And he said, “I always loved seeing this photo remembering Miss Christine. She was immortalized in this record cover and blah, blah, blah, blah.” And then that night I was watching this documentary and saw that so Alice dated her, Todd Rundgren dated her, Russell dated her, and I think Zappa probably, I don’t know if Zappa dated her, but he was– So yeah, the connecting Sparks to Alice Cooper isn’t something that I would’ve imagined, but, Tony Kynaston AU: Yeah Cameron AU: go. Hmm. It’s the ’70s in LA, I guess. Tony Kynaston AU: Yeah, right. Cameron AU: Hmm Tony Kynaston AU: um, we watched a movie the other night, uh, called Song Sung Blue with, uh, Hugh Jackman in it. Cameron AU: Hugh Jackman Neil Diamond cover Tony Kynaston AU: Yeah. Yeah. Cameron AU: liked that. Did you like it? Tony Kynaston AU: um, so-so. Like, it, it’s really good except it’s got some pretty bleak drama in it, which I [01:03:00] didn’t like. But, um, I was just gonna say, like, speaking of all those connections that the thing I liked the most about it was it was just a little community of cover artists in Milwaukee, which I really liked. And Michael Imperioli plays the Buddy Holly impersonator who backs Hugh Jackman when he becomes big with his Neil Diamond show, and I thought that was really cool too. But it was really nice seeing this whole troupe of, you know, um. There was a James Brown impersonator they called the Sex God and, uh, you know, they were just all helping each other, and it was– They weren’t making any money, and it was just re- it was probably the nice side of the whole event. Um, yeah, look, it’s worth a watch, but it’s, um, it gets pretty dark in places, which I didn’t like. It didn’t, didn’t need to be that, um, overly dramatic, I thought. Melodramatic. Cameron AU: Did you know that Michael Imperioli was friends with Lou Reed? Have I told you that story? Tony Kynaston AU: No way, really? Cameron AU: They were– Michael Imperioli got interested in Buddhism, I think he and Lou ended [01:04:00] up, ’cause Lou was into Buddhism, they sort of spent a lot of time in Tibetan Bud- no, Zen Buddhist circles I think it was. Yeah. He was, uh, quite close with Lou. He wrote a book about it that I read, like just sort of his. No, he wrote– It was a novel actually, that was about a kid who a relationship with somebody like Lou Reed. But, um, Tony Kynaston AU: Wow. Cameron AU: Anyway. Hmm Tony Kynaston AU: Michael and Tori Imperioli. Okay. I haven’t Cameron AU: Yeah, yeah, Tony Kynaston AU: All right Cameron AU: So what else you got? Tony Kynaston AU: Well, speaking of music, I mean, does it hold a candle to some of the, the music I’m getting on my feeds from the World Cup at the moment? Um, have you caught any of that? Scotland and the Netherlands and Norway doing the row and all this kind of stuff. It’s just great to watch. So joyous Cameron AU: I watched a, a highlights clip of Verde playing Spain and the goalkeeper, ’cause my boys told me that this Tony Kynaston AU: yeah Cameron AU: was insane, and it was like a nil-all draw bec- [01:05:00] draw because this from this tiny island didn’t let anything through, and that was pretty Tony Kynaston AU: Right. Yeah. No, just the fans. It’s, it’s been, um, amazing. Like, just. Like, I used to go to a fair few sporting matches in the US, and they’re great but, um, the Europeans just do it to a much better level, it’s the soccer fans. And I think America, it’s been a bit of an eye-opener for US fans to see the chanting and the singing. Like the, the Tartan Army, apparently they’re based in Boston ’cause all the soccer teams are based, um, in different places in Canada or Mexico and the US. And Iran’s based in Mexico, so they have to keep flying straight in and flying straight out after their games. But, Cameron AU: I heard that To

26. Juni 202624 min

Tobias Carlisle, Soldier Of Fortune: QAV America #56

QAV AM 56 [https://qavamerica.com/wp-content/uploads/2026/06/QAV-AU-923-art-optimised.jpg] EPISODE OVERVIEW This week we sit down with Tobias Carlisle to dig into his new book, “Soldier of Fortune: Warren Buffett, Sun Tzu, and the Ancient Art of Risk-Taking.” Tobias walks us through three of Berkshire Hathaway’s most misunderstood deals (General Re, Burlington Northern Santa Fe, and the Japanese Sogo Shosha trades), explaining why each looked wrong at the time and turned out to be masterstrokes of defensive strategy. We also get into ADRs, the K-shaped US market, small cap value, and why Tobias and Tony both landed on “Quality At Value” as the sweet spot. TIMESTAMPS & SUBJECTS * [00:00:00] Intro and guest welcome, Tobias Carlisle’s new book “Soldier of Fortune” * [00:03:00] The three misunderstood Berkshire deals, starting with General Re * [00:10:00] Unpacking the General Re scrip deal, Coke dilution, and defensive strategy * [00:13:00] Via negativa, inversion, and the Charlie Munger checklist mindset * [00:16:00] Burlington Northern Santa Fe, railways as capital traps, and the coup d’oeil * [00:20:00] Accelerated depreciation, the tax carry trade inside Burlington Northern * [00:24:00] Wu Wei, mental flexibility, and breaking your own rules when the price is right * [00:29:00] Apple as the greatest trade of all time and why scale matters * [00:33:00] No master plan, Berkshire’s structural freedom versus niche-constrained investors * [00:36:00] The Japanese Sogo Shosha carry trade and zero percent yen-denominated notes * [00:43:00] Japan’s shareholder reform, Tokyo Stock Exchange pressure, and cultural resistance * [00:50:00] ADRs, the DRAM ETF, and why Americans avoid foreign-listed names * [00:53:00] Operating cash flow manipulation, property developers, and IFRS versus US GAAP * [00:55:00] Buffett on survival, risk of ruin, and the million-chamber revolver quote * [00:58:00] Profitless tech at all-time highs, the K-shaped market, and small cap value * [01:02:00] Northrim BanCorp (NRIM) as a real-world cheap-as-chips example * [01:04:00] The Acquirer’s Multiple today, quality minus junk, and where Tobias actually invests * [01:06:00] Quality At Value as the shared investing philosophy, wrap-up and book plug Free Podcast Archives [/listen/] TRANSCRIPTION QAV AU 923 VIDEO [00:00:00] Cameron: Welcome back to QAV. welcoming back to the show our old friend Tobias Carlisle, who has a new book out, Soldier of Fortune: Warren Buffett, Sun Tzu, and the Ancient Art of Risk-Taking. And I’m just gonna start with this, and then I’m gonna throw to TK to ask some questions. But one of the blurbs, this is one of the blurbs. Check this out. “Soldier of Fortune is a brilliant synthesis decoding the genius of Warren Buffett through ancient eyes. The book reveals that Buffett’s unparalleled success comes not from following common Wall Street maxims, but rather from the profound, patient wisdom of a warrior philosopher. This book is a revelation, an indispensable guide to the timeless art of strategic risk-taking. Jim O’Shaughnessy, author of What Works on Wall Street.” How the hell did you get Jim to write a blurb for your book? We’re huge fans of Jim. Toby: blurbed a [00:01:00] few of my books. I, I, I, uh, have the good fortune to, uh, know him and have known him for, uh. He blurbed, I think he blurbed “Quantitative Value,” which came out in 2012. But I, I found him on, when he came on Twitter early on, he had, you know, like 100 followers, and I was, I was one of them. And I reached out to him, and I got to know him then, so I’ve stayed in good, I, I love Jim. He’s a good dude. Tony Kynaston: Wow. Can Cameron: We only discovered his book. Tony Kynaston: him on the show. Toby: Yeah, Cameron: Yeah. We’re Tony Kynaston: his chapters. Toby: I’m sure he’d do it. Cameron: We only discovered his book like four or five years ago, maybe less. And I, I think it was during COVID I read it and I was like, “Oh my God, this is just what we talk about to a T.” Like, he absolutely Toby: The Cameron: was way ahead. Yeah. Toby: Yeah. Cameron: Brilliant. Toby: I’ve re, I’ve got a few versions of it. So the. You know, in the original version, he said that the best value metric was price sales, and then in a later edition, he [00:02:00] said it’s EV/EBITDA, is where I get to too. there’s lots of reasons why price sales works well, and then he said not, not any one of them, use a combination is I think what he finally fell to. But that, that sound, like that’s pretty sensible advice, I think. There’s lots of reasons to use price sales. It’s not a bad metric. It’s just you can’t use anything in isolation, I think. Cameron: Well, Tony, I’ll throw it to you because you’ve got a list of questions that I don’t want you to miss out on. Why don’t you kick it off? Tony Kynaston: So congratulations on the book. It’s, it’s, I loved it. It’s fantastic. Love reading books on Warren Buffett and corporate strategy and strategy in general, so well done. Um, I Toby: you Tony Kynaston: wanna start uh, got. The book sort of focuses on three of Warren’s investments, excuse me, and they were large for Berkshire Hathaway and reasonably controversial in that they didn’t sort of fit the normal value investment mold, you know, cause I think when the [00:03:00] first one was probably done people were more used to Warren buying Coke or Amex and having a, you know, big moat around a consumer company that would go on forever throwing off cash. But there were some differences to these transactions. Um, but all the, all the three of them proved to be outstanding in hindsight. So maybe you could just uh take us through what the three transactions were first of all. Toby: These were, I was looking for a way to illustrate some of the ideas in the book, and I’ve written a lot about Buffett, so I didn’t wanna rehash all of the stuff that I had written previously. Uh, though I think that you could use a lot of that to illustrate those ideas. So I wanted to find, that I felt were misunderstood, certainly transactions that were misunderstood at the time that they were done. And I vividly remember all of these transactions. I was a Buffett watcher just in 1997, so I remember this transaction [00:04:00] coming through, and I remember being perplexed. Only, only perplexed in the sense that I knew that this was an insurance deal, and I knew that Berkshire was an insurer. And so it didn’t surprise me that he would do an insurance acquisition, but, uh, I didn’t really have the analytical experience at that time to understand the transaction. Particularly because there are a number of features of it that certainly seemed to go against the grain of what he had been preaching in his letters up to that point. You know, I’d just discovered him, but I’d gone and read all the, the letters and, um, tried to organize them. And I had the Lawrence Cunningham book where he’d sort of put them all into thematically rather than chronologically. So I, I felt like I had a pretty good handle on what he was doing, and then he did this General Re acquisition. So the features of the General Re acquisition that were a little bit unusual were, he did it in stock, and he’d been saying you never do it in stock. always prefers to pay cash. [00:05:00] The other thing that. It, it looked, it looked optically expensive as well. That was one of the other things that, that folks were talking about. And I think that they had anticipated that criticism somewhat by talking about the synergies that they were expecting from this acquisition. And you can go back and find Buffett pre-Gen Re talking about synergies, like never manifesting every single firm. Whoever does an acquisition and slightly overpays said, “Oh, it’s justified because there are gonna be synergies,” and they, they never manifest. And so here he was seeming to be contra, you know, going against what he had previously said that he would do. When you, with hindsight, the deal worked out really well. and I sort of have been investing for long enough now that I can sort of break it down and analyze it properly, which I couldn’t do at the time. But the things that really stand out. The reason he did the transaction, you have to [00:06:00] go back a little bit earlier. He’d, he’d done this deal with Coke very famously. With Coke, where similarly it looked like he’d, he’d overpaid. He was paying a lot for Coke. He’d never really paid up to that extent before. But it was a wild success. He put a third of the equity of the, of Berkshire into Coke, then it pretty quickly, it was like half the equity of Coke, and then it tripled. And by nine, by the late 1990. He so did it like the late 1980s, early 1990s. By the end of the 1990s, was, um, trading at like 60 times earnings. It was a giant part of Berkshire’s equity holdings. Berkshire on top of that, Buffett had been undiscovered, I think, up to that point, but he was well and truly well known by late 1990s. And uh, Berkshire itself was trading at three times what was probably already a pretty inflated valuation that included Coke. [00:07:00] So he can’t sell it because that incurs this huge capital gains tax. He’s also preached not selling, holding these things for the very long run. And he’s received a lot of criticism since then because Coke really hasn’t done much in the 26 years since they did this transaction. But I think that that’s because f, that criticism is, is a little bit unfair when you understand what happened with the, with the Gen Re transaction. And this was Christopher Bloomstran sort of alerted me to this. But in essence, what he did by using scrip, by using stock, he was able to dilute down the Berkshire holders their big holding in Coke, and he got probably a pretty good deal. He certainly paid less for Gen Re than he was giving up in, in the stock that he was to the Gen Re shareholders. So the transaction works like this. In a scrip for scrip transaction, Berkshire acquires Gen Re. The shareholders of Gen Re become shareholders in [00:08:00] Berkshire, and the combined entity ends up with a share of, the, the Berkshire shareholders remain, the Gen Re shareholders become Berkshire shareholders, diluted down a little bit. So the Gen Re shareholders certainly got the worse end of that deal. Berkshire ended up with the better end of that deal. But the essence of the transaction was that he diluted down the stock holding in Coke, he was then able to bring down the overall valuation of Berkshire Hathaway. And Gen Re had a, the synergies were real in the sense that Gen Re, most of its exposure was international or, and it was looking, and it was a little bit constrained by kind of quarterly earnings, so it fit well with, with Berkshire’s insurance book. So that gave him all of this, and their book was mostly bonds. So people who’ve followed Buffett will know that they tend to run with uh, insurance, uh, policies written to equity [00:09:00] holding or, or to, to underlying securities, those policies that they’ve written because they tend to run with equity, which can, which is more volatile but can perform a little better. Whereas Gen Re was running sort of more, in a more traditional sense. They were using bonds to back their policies, and the bonds don’t perform as well over the long run. But they do have this nice feature that when the market goes down, not always, this is, this is not, this is like a little bit of a, a received wisdom in the markets that bonds tend to rally when equity markets collapse, and that’s not true. If you go back far enough, you can see that they, sometimes they go to, sometimes they move together, sometimes they move differently. You can’t rely on it. It’s only in certain circumstances, and this was one of those because the equity market was so overvalued. Bonds were yielding pretty good, pretty well at that point. So the two thousand collapse actually happened, the bonds all rallied, which he was able to then sell down, and he was then able [00:10:00] to invest that long in really cheap equities at the beginning of t- the two thousand. That set them up for the sort of next decade plus, uh, for Berkshire to really outperform. So I thought it was a transformative deal. It was a little bit misunderstood at the time, and a good illustration of being more defensively minded and the power of being defensively minded and thinking about what happens next after the crash. Can you survive the crash? What happens after the crash? And I thought that was a pretty good illustration of one of the things at Sun Tzu, which is that you defend first, and then you think about, you secure yourself, and then you think about doing all the other things you’re gonna do. Tony Kynaston: Yeah. I mean I think from, from um your analysis what I took out of it was it was a, it was a masterstroke of strategy by Warren doing what he did for, for any number of reasons. I mean he realized the market was overvalued in the late nineties. He realized he had a large equity portfolio. He realized Berkshire Hathaway was trading on a to book [00:11:00] ratio which was way above what it normally did, so you know, quite rationally he could have said I’m gonna sell, I’m going to sell my equity portfolio, I’m going to diversify or whatever. But he had always said if I sell I pay taxes and that’s a friction on my earnings. So he didn’t want to do that. What else could he do? Well he could take that overvalued Berkshire scrip and he could use it to acquire Gen Re, even though he’s always said I don’t want to issue more scrip. Um, I don’t want to pay for things with scrip, I want to pay for them with cash. But he did, he broke that rule to I think a better outcome, which was he then diversified into bonds, that was the other interesting thing, is he’s you know always preached that um diversification is diversification but in that case he did diversify away from bonds. And then of course he um. And and Gen Re I think from memory was constrained, it could only invest in triple A securities or something like that to back up its insurance policy, so it it [00:12:00] had to own bonds. Uh so he got a lower price for Gen Re with the scrip bid than he would have otherwise gotten perhaps. And then of course he inherited the the um portfolio that Gen Re had and spent a lot of time unwinding those and coined the expression that derivatives are weapons of mass financial destruction, which was another interesting insight into it. So yeah. But but you raised a point there which I think brings us Toby: think Tony Kynaston: ahead. Toby: I was just gonna say, I think that he tipped his hand a little bit with that when he said that he discovered the, the. He gave the reasons for why he had done it, that it was this sort of defensive move, and then he, after the fact, discovered the, uh, the weapons of mass financial destruction. And he instructed them to unwind them really quickly, and I think they ended, it ended up costing them $400 million, and it sort of Tony Kynaston: Mmhmm. Toby: the them that even in a be, even in a benign market, two parties to the same transaction could both be carrying it in their books at a profit, which is, like, impossible because one [00:13:00] party has. is down and one party is up. And so unwinding it was quite difficult. He said it cost them $400 million, and he started warning about that. But that was well before all of those problems manifest for the other insurers in the great financial crisis, global financial crisis. Tony Kynaston: Exactly. And and that’s again I think a, an example of what you’re saying um about the defensive nature of the Sun Tzu strategy. It’s uh, it’s you know, to, to finish first, first you have to finish, type approach to it. And I think there was a a book written a couple of years ago which summed it up well which said that the art of winning is not losing. I think that was the title of it. It talked about you know if you’re a good tennis player you keep the ball in play. You don’t try and go for Toby: Right. Tony Kynaston: on every sort of stroke. So similar sort of approach. But um and I think that was summed up in your book by the term via negativa, or negativa, not sure how you pronounce that, but via negativa, which which uh Charlie talks about. So could you maybe [00:14:00] outline that and how it fits into these um acquisitions please. Toby: Via negativa is an idea that, it means by way of the negative. And y-y, the idea is that you, you go f, might not know what the right thing to do is, but you might have a pretty good idea what the wrong thing to do is. So you eliminate all of the things that are the wrong thing to do, and that might leave you with the solution to the problem. And that’s very much. it’s a Charlie Munger idea. And he, he says, “Invert, always invert,” which he gets from Carl Jacobi. But the idea is that just do exactly that. You don’t, you have a list of things that you don’t do, and so you could think of this as a checklist. Lots of investors do it this way. I, I like to do it this way. I like to exclude lots of things initially. takes a, takes the mental load down a little bit. You don’t waste time with things that you’re just never gonna do. And so that might be, for m- for me, it’s avoiding statistical earnings manipulation, statistical fraud, all these [00:15:00] sort of little things that have. it makes it very hard for you to fi, to, to be assured of the intrinsic value. So you just take away the donuts, take away the zeros, and invest in what remains and, that’s the, that’s the sort of simple application of it. Tony Kynaston: Yeah Um I think uh in your book you quote Charlie who says We try not to be stupid rather than try to be very intelligent I think was a good summation of it as well Yeah And um I remember hearing an interview with uh with Charlie um not long before he passed uh where he talked about came to him with an example of an investment he would always ask for the case where it didn’t work where it failed Under what circumstance does it fail And he’d start there and then work back into whether it was a good investment or not So the the their mindset is really around how do we avoid ruin um in what we do And you know that leads you to not taking on too much debt for example um you know and diversifying when you need to all that [00:16:00] kind of thing So that I thought that was very a very interesting mindset You also talk about another concept called Wu Wei Um can you tell me about that and how it applies Toby: Yeah, I think– let me, let me, let me talk about the next transaction Tony Kynaston: Mmhmm Toby: uh, Wu Wei into it. So the, the next one was the Burlington Northern Santa Fe, um, that happened in 2009. I remember it being announced. I remember people being absolutely perplexed because Buffett had been this advocate for capital light compounders that grow and throw off cash flow they grow. And here he is buying a railway, which is the exact opposite of that. It’s capital intensive, sucks up an enormous amount of capital. And for 100 years before he had done that deal, had just been where capital goes to die. the, the f- the very first, uh, security analysis is almost entirely about analyzing railway bonds because there [00:17:00] had been this mania for railways at one point where they were the tech stocks of the day that attracted a lot of capital. They’d overbuilt uh, there was no there there at the end of all of that. And so the next 20 or so years after that were people buying the bonds of bankrupt railways and getting control of the equity, through that method. And so, uh. And then they really hadn’t done much for most of the period after that they’re so capital intensive. And so when Buffett bought it, it was, uh, it was truly bizarre, uh, that he had, had bought this thing. But pretty quickly after that, in the few years after he had bought it, um, the, the price that he had paid up front was shown to be much, much lower than he actually had paid because it had a whole lot of excess capital on its balance sheet that he was able to pull out. And pretty quickly it was returning very substantial dividends. And [00:18:00] he li– I think he liked the fact, ’cause this was, this was during 2009, uh, interest rates were very low. Forward returns looked like they were very low too, and this was a way for them to get a regulated 10% the CapEx that they would require, which was very substantial. So it sort of committed them to these enormous capital expenditures inside Burlington Northern that gave them a regulated return on it, which was pretty substantial. And in addition to that, no one’s building new railways, no one’s overbuilding what they have. then I thought that there was this geographic distribution that the US was sort of shifting from primarily a relationship through the East Coast with Europe to relationship with Asia via the West Coast, and that was where Burlington Northern had, had its footprint. And so it gave them this, totally different, geographical distribution. Plus it had these pretty impressive tax, uh, tax [00:19:00] qualities that meant that they could write off a lot more tax than they would otherwise write off. So on a, a cash in, cash out basis and on a return on investment basis, it was, it was a, it was a great deal for Berkshire, even though initially it didn’t seem that way or optically it didn’t seem that way. So I use it as, it– I use it as primarily this, this idea of coup d’œil, which is, they say that the great generals have the coup d’œil, and Napoleon had the coup d’œil that you show up to. it means a stroke of the eye. And so w- uh, old Napoleon, he famously would show up at battlegrounds where one of his generals was doing something, and he would see something that the general hadn’t seen, and it might be the, uh, the enemy was all pushed up against the, lake with water behind them, and so couldn’t move, and they were all, uh, they were, they were, they were stopped. They weren’t doing anything. They were in a truce or something like that. And he would sort of immediately say, “You need to attack them right now,” because he had understood that they had this advantage that would– that could slip [00:20:00] away pretty quickly if they were allowed to get away. Buffett’s the same. He’s– He understands the tax, he understands the regulatory environment, understands the geographic location, and he understands that he can get this regulated return on this investment. And even though railways have been a terrible investment for so long, he sees all of these things, so he can just ignore the fact that railways have been a bad investment, and he can see that he can get this quite substantial return if they move quickly and, and buy Burlington Northern, which they end up doing. And since then, it’s been a, been a stunning success, and I track the sort of payments out of it in the book, which, um, have been extraordinary. Like, it seems to be the Buffett idea is that you make the investment and then the capital comes back. So even though it’s capital intensive, it’s had this great ROI for, Tony Kynaston: You fo you focused on the Toby: I, Tony Kynaston: okay we’ll come back to it But before you do um you focused on uh the tax It’s almost like a carry trade I guess um that [00:21:00] Burlington had for Buffett that he picked up on can you just explain that Cause I I found it a bit hard to follow in the book I don’t know if it’s a it’s a um a unique to US accounting standards but I can’t think of an example of it in Australia that uh matches it Toby: Yeah, sometimes in the States they have these, um, they allow you to write down 100% of an investment in the year that you make the investment. And so your tax in that year is reduced by the size of your investment. So an example for, uh, individuals in the States is if you buy a working– you buy a car that weighs more than 6,000 pounds, which is deemed to be like a truck or kind of working truck, you can depreciate 100% of it in the year that you buy it. it happens that like there’s a lot of luxury kind of SUVs that qualify because they’re very heavy, and so you can buy yourself a luxury SUV and write 100% of it off in the year that you buy it, and it comes off your tax. Just accelerated [00:22:00] depreciation Tony Kynaston: Right And how did that accelerated depreciation benefit Berkshire in this case Toby: Well, they’re, they’re able to write down. It– You, you’re able to make an investment and write down more of it initially the first year or so of, of making the investment, which just gives you more tax cover. So your, your earnings are reduced to the extent that you write down capital gains tax in a, in a, in any given year Tony Kynaston: the the I mean the hypothetically they could invest in Burlington and pay no tax It’s all going back to Burlington really Toby: I-internally in Burlington, they can, they can do that. I, I don’t think it would get. I don’t think they would ever get to the point where they were paying no tax, but you can reduce– You can make of dollars of investment in railway bridges and, and so on, and write them down. I forget the exact detail of, of it because I, uh, I wrote the book a little while ago now, but that the– You can, you can accelerate the depreciation, which is not uncommon for certain in certain industries, you’re allowed to accelerate your depre– [00:23:00] So oil and gas has a similar kind of idea. Tony Kynaston: Yep Toby: think that they’ve introduced something for some of the hyperscalers as well, where we’re able to write down what you have. And so you make a billion dollars of investment this year that has a useful life that might be five, 10, 15, 20 years, but you write it all down this year, and so it gives you some tax cover to the extent that you’ve written it down Tony Kynaston: Yeah right Because I I did wonder whether fact Berkshire may have underinvested in Burlington because they could they could hypothetically invest a lot get a tax benefit from it and I guess get a better offering for their customers and be more competitive have better margins longer term and and gain some kind of advantage which would allow them to scale the business quicker than if they couldn’t get that tax advantage Toby: I think that there’s some limit to how much scaling they can do because there’s not a lot of y- you know, it’s hard to build more railway, but you can certainly fix the bridges, Tony Kynaston: Yeah Toby: it’s, you know, [00:24:00] in pristine condition Tony Kynaston: Right But you you did use that example to talk about Wu Wei so I’ll come back to that maybe explain what that is and how it applies to the Burlington acquisition Toby: Wu Wei is this idea that, um, it’s– it– there’s lots of different interpretations of, of what it means. It’s kind of a nice term. I like the idea. I think it’s good for value investors who are naturally contrarians. Sometimes if you look at a business, the business, has these great tailwinds that, mean that it’s probably worth more than you would pay for something that h-has a headwind or has a permanent headwind. And so the idea is that, like, that you, you allow something to go on winning. Wu Wei is this sort of quality that means that it’s just going to. it’s, it’s effortless success or they, they sort of use it in a, in a, in a social setting. It’s like [00:25:00] sprezzatura or– which is this Italian word for, you know, just like ease of conversation, ease of dressing, like just, just being loose and, um, flexible in social situations or in an investment sense, it would be sort of being a little bit more flexible about the way that you consider an idea and looking at ways that it can, can win over time. I think it is a little– it’s a little bit woo, you know, the, the Wu Wei, I think is a little bit woo, and I’m, I’m not a particularly woo guy, but I’ll– I do like the idea of, um, just having that like mental flexibility in certain situations, just being a little bit looser. And I think that, I think that that w– is what allowed him to sort of break away from this idea that were where money goes to die, and that this was a situation where it sort of met all of his other criteria, did throw off cash. It was going to be this sort of not capital-like compounder, but it was– it sort of behaves that way [00:26:00] because they can invest, uh, with the capital gains tax, accelerated depreciation. They get all these sort of benefits out of it, plus the durability, plus the, uh, the distribution. All of these things together, sort of sum up to something that is a little bit more than the sum of its parts Tony Kynaston: I Cameron: Sorry, I just have to, the, I, I just have to jump in with the kung fu analogy of wu wei, Tony. It’s just too much to give up. Bruce Lee, big fan of wu wei. Anyone who’s ever read any of Bruce Lee’s stuff on kung fu, you pour water into a cup, it becomes the cup. That’s You pour water into a bottle, it becomes the bottle. You put it in a teapot, it becomes the teapot. Now, water can flow or it can crash. Be water, my friend. I do Wing Chun kung fu, uh, Tobias, and we talk about action through no action all the time, you know? Using your opponent’s energy against them, using their force against them. [00:27:00] You know, moving with the force. Don’t fight the force. Flow around the force. Yeah. Toby: Yeah. It’s, it’s, it’s a real, it’s a, it’s a central idea in martial arts, right? And I mean martial arts like Sun Tzu is, is, is the, the head of philosophy of martial arts, and then you find out it’s repeated, that idea of be like water, like that comes from Sun Tzu. He talks about, he talks about that repeatedly throughout the, throughout the text, and then you find it in other things like The Book of Five Rings, and you find it in Bruce Lee’s sayings, and it’s, it’s often taught, this idea that you use the energy of your opponent or use the energy of the thing, or to augment your own. Don’t fight it, sort of move with it Cameron: The famous line from Napoleon is, “Never interrupt your enemy when he’s making a mistake,” right? Toby: That’s a good one Cameron: Yeah. Tony Kynaston: Yeah I Cameron: Yeah, no, it’s a good one. It’s, Tony Kynaston: water Yep that’s that’s Cameron: be water Tony Kynaston: it It’s the water flowing around the rock idea not trying to move the [00:28:00] rock not trying to crush the rock around the rock It’s the way of Cameron: Yeah. Tony Kynaston: I Cameron: Yeah Tony Kynaston: good friend in Canada whose nickname is Wu cause he just goes with the flow and uh you know if you’re g generally calm yep always always smiling and happy doesn’t matter what’s going on with the flow Yeah Cameron: うん。うん。 Tony Kynaston: you’ve taken that out of the transactions be and I think that’s a legitimate take out from these transactions oftentimes with these controversial transactions with um Berkshire Hathaway it’s almost like Warren said one thing for decades and then he’s just turned on a dime and done something different cause it suits him Yeah He’s flexible Exactly Toby: flexibility, like that’s, that is, that is part of it. You have to be mentally flexible, and I think it’s, it– there’s lots of different interpretations of it, but mental flexibility and also like looking at the thing. Some of these businesses have that tail– just have that natural tailwind to them. Some managers have that natural tailwind, and I think if you can [00:29:00] recognize it uh, you know, not fight it too much. Like fighting it might be insisting on too low a price before you do it, going with it might be just you can afford to pay up, and I think he did that with Coke. Um, certainly sort of paid up for it a little bit. Northern just being mentally flexible, and I think it also applies with the, uh, the Japanese conglomerates that I’m sure we’re gonna talk about shortly. Tony Kynaston: are yeah Cameron: we do that, you. Tony Kynaston: sorry go ahead Cameron: Sorry, before we do that, can we talk about Apple? You start the book talking about Apple, which you call the greatest trade of all time, and obviously that’s been one that I think for a lot of, uh, Buffett followers, they scratched their head when he bought into Apple after saying for decades that he didn’t understand technology stocks. Why is it the greatest trade of all time, in your opinion? Toby: Well, I also say that it’s a little bit in the eye of the beholder. It’s like modern art. You sort of– It speaks to you or it doesn’t. And I think that. But I, I, I have, I have– I think I have pretty good, pretty good reasoning. The– [00:30:00] When I say this, people often say, “Well, what about the, uh, Naspers doing the Tencent deal?” Like, that’s the one that everybody comes back to because they put in twenty million and it’s tens of billions of dollars and it’s. They’ve had to split it out from Naspers and it’s like totally misshapen the South African stock market. And then I say, “Well, this was the greatest trade ever because Buffett was a known quantity at the time. Apple was the most famous company in the world. Might’ve been the biggest company in the world at the time. could’ve done the deal. Anybody could’ve put that trade on. a few people did, even though we ha- we had, funnily enough, we’ve written about it a few times in Quantitative Value and other, in other books since as– ’cause it was the, the, the cheapest thing in the, in the screen at the time. It sort of– It used to have this, it doesn’t do this so much anymore, but it used to have this, uh, cycle where every time they issued a new iPhone, it’d run up and do really well, and then in the intervening period, it’d sort of fall back. So [00:31:00] in 2013, it got cheap and then it had a good run. 2016, got cheap and then had a good run. And same thing was happening in sort of the 2019, 2020. But I think it’s moved away from that a little bit. It doesn’t have that behavior so much anymore. I say he put in an enormous amount of money, I think it was forty billion dollars or something, in pretty short order. If you think about the entities that can do transactions on that scale, there aren’t very many of them. But I’m sure that, you know, maybe, uh, who’s the Japanese guy, uh, who. He’s the Japanese gunslinger. He w- he had a, he did a great– had a great run in 2000 and almost blew up, like went back ninety-nine percent, and then he’s had a great one more recently. Name’s just escaping me. He runs SoftBank. Cameron: Oh yeah Toby: Uh, Masa Son Cameron: Oh, Masa Son. Yeah, right. Toby: What’s this? Cameron: it’s n- Toby: Anyway, Masa. Masa– There aren’t very– Like, maybe big private [00:32:00] equity firms could have done that. Masa could have done that. aren’t very many folks who could have dropped a forty billion, but, like, they– I’m sure that they would all have loved to have had this insight and put the forty billion to work. Because pretty quickly, he’s three X’d, five X’d on an enormous sum of money, and then he’s sold that down enormously, and it’s given him a big part of that three hundred and seventy billion dollar war chest that they have now for a rainy day, if we ever see another rainy day, uh, for his– for Greg Abel, G- for Greg Abel to run. And he sold it down very significantly. It’s still one of their biggest holdings, but it’s not nowhere near as big as it could have been if they just in it and hold it. So I thought for all those reasons, he was a known quantity. It was a very big investment. It paid off very, very quickly, and it was a break from what he had done in the past. It just, again, it demonstrated that mental flexibility and, and it worked really well. And I’ve just thought in, in terms of the sheer scale of the return on the size of the investment, that distinguished [00:33:00] it from the Naspers investment, which was a smaller investment, and perhaps they got lucky. Like, if you, if you had to think about all of the made around the world on every stock market, and you had to go to the South African one and a Chinese, you know, to find something that was, like, equivalent, then I think it sort of illustrates the point that Buffett’s was a great investment. Tony Kynaston: yeah no just uh I guess talking about investments and what we were talking about before about opportunistic investments the link I think to the Japanese investment is is the quote you mentioned uh from Buffett that he talks about not having a master strategy or a corporate planning department and that acquisitions can seem haphazard So why do you think that’s an advantage for a company like Berkshire Toby: You could, you could compare it to. So Masa sort of is a technology investment, investor. So Masa is sort of constrained a little bit. Masa couldn’t go out and do Burlington Northern. That would just– people would say he’s lost his mind. That’s not a technology. He couldn’t do [00:34:00] Gen Re. Masa might have been able to do the Japanese conglomerates, but I don’t think so. Masa’s sort of constrained to tech. There are lots of other investors out there who are. They’re well known in their niche. They’re not really allowed to step outside their niche. By sort of saying at the outset, “We, we got, we got no plan. We, we.” You know, so what, what I think about the conglomerates like Constellation Software, they, they are– they may now step outside their niche, but they’ve historically been vertical VMS, vertical market software. you think about some of the conglomerates like Ropers or Danaher or those kind of. They’re allowed to do transactions in their niche, but they’re not allowed to step outside that. Berkshire has always said, “We’ll do whatever comes along that makes sense if it’s cheap enough.” And so they’ve given themselves that cover, that flexibility to do whatever they want. There’s no master plan. They’re not trying to build out the energy department necessarily. If something comes along, they would do it, but there’s no urgent need to, to take, you know, the, the cleanest dirty [00:35:00] shirt in any given industry, which is something that a lot of investors who are. I have friends who are healthcare investors or they’re constrained to. And so they’re trying to find the best thing, but the industry– if the industry is overvalued, then, um, uh, that’s sort of, that’s sort of bad luck. You have to do, you have to do the best deal that you can. So I, I, I think that it just gave him that. That mental flexibility is a big part of it. And I think that Sun Tzu says something similar where he’s, “Don’t, try and force it.” Again, this is like that Wu Wei idea. You’re looking for. They’re often trying to find the, the soft point or the weak point. So you test a little bit, you look at what’s cheap, you look at what’s moving away, moving down, and then that might be the place where, uh, that, that is the most interesting. So I, I didn’t, I didn’t use that necessarily for the Japanese, the Sogo Shoshas, but Sogo Shoshas, but we can, we can talk about that one Tony Kynaston: I think um before I leave the quote on the corporate planning department the other side of that coin is [00:36:00] that they don’t have the expense of a corporate department planning their strategies They don’t have all these people running around who have to justify their existence by buying something that probably wouldn’t buy Cause these transactions the big ones we’ve been talking about they come along once a decade on average for Berkshire They’re not out in the market every day know trying to find something So I think that’s a big advantage for them as well and that brings us to the Japanese conglomerate which is kind of this decade’s big transaction And it also is again a head scratcher for Berkshire followers because Buffett’s always said I’m gonna back Team USA I’m gonna back the US economy And then suddenly he’s a major investor in Japan again is another bit of woowah I guess But um but it’s also an aboutface from what he’s always said Toby: I think he had done He’s done Iskar, which is, which is Israeli. I think he might have done it personally. He’d done some Korean. I think maybe that was his personal capital. I don’t know if he put Berkshire into it, but he, he had gone and got the Korean [00:37:00] version of whatever the, you know, the just the guide, and you go, go through A to Z, and he’d just gone through A to Z and found a few net nets and bought them for himself. I think, I think Buffett has about a billion dollars outside of Berkshire that he’s just run his own capital and run it up to that sort of scale. That’s, that’s what I have heard. That’s what I understand. But the– I really like the Japanese deal. Again, anybody could have put this– Tony Kynaston: Mmhmm Toby: could have put one part of this transaction on. But the thing that makes it so was the carry part of the, the transaction. So the Japanese have these trading conglomerates that were set up during the Meiji era. And because Japan is a small island and it’s resource-constrained, they got these conglomerates which were supposed to go out to the world and find natural resources and bring them back to Japan. And the way that they’ve developed over the years is that they have become vertically integrated. So they go and find the, the resource in the first instance, and [00:38:00] then they, process the resource, and then they build it into these higher order goods until they’re, they’re making technology at the other end, and they’re selling cars and, and so on. And so there are five of these, uh, trading houses that sort of do this thing, and they, they are dominant in Japan. If you go to Japan and you wanna do business in Japan, it’s highly likely that you’re, you’re doing business with these guys. And I was in Japan last year and I met with, with one of them. I, I think it might have been Marubeni. a private equity group that does, that does of every size from the smallest to the biggest, and they, they have the Marubeni kind of stamp on everything that they do. They have this process. Peop– It’s, it’s a common way for folks to leave leave university, start an apprenticeship, and sort of grow inside these organizations. So finds them trading very cheaply. They’re like single-digit PEs. all pretty good dividend payers. Uh, like might have been, [00:39:00] dividend yields of sort of seven to nine percent, which is, which is very fat. At the same time, they– you can borrow in Japanese yen at virtually nothing because the Japanese yen has been so crushed for so long, or the BOJ has intervened in that market for so long. So they– You can– You could– I think anybody could get, uh, debt for sort of like half a point, half a percent, to a few percent. And so if you put these transactions on, and that’s what, that’s what Berkshire did. Berkshire actually had some zero percent notes that they were able to issue. So they paid no interest at all on these notes, then they invested that into these five conglomerates. So they’re reasonably safe because there’s– each one is a conglomerate already. They’ve got very diversified income streams, highly likely to keep on earning the way that they had. Highly diversified income streams globally across industries. Like they’ve, they, they l- they’re big mach- they’re big sort of enterprises that are [00:40:00] very stable and, and throw off cash pretty, pretty well. so he’s getting carried in these positions where the dividends coming back in the order of six or seven hundred million dollars a year, and their cost to finance this was, was virtually nothing. So he was immediately carried on this position. So it’s another sort of Buffett deal where the cash goes in and it’s almost immediately cash flow positive back to Berkshire. And so I just thought it was a, a great transaction that, as you say, had sort of been– was a little perplexing to folks because they expected him to be primarily a US investor, and he had said that he understood the US, he understood the regulatory en- environment, understood the, the cultural environment, and here he was making a big departure. And so I thought it was another like i- illustration of how mentally flexible he was. Tony Kynaston: Yeah it’s interesting I mean it’s another example of what what I think is one of the secret sources of Berkshire Hathaway It’s it’s being able to find sources of funding without doing a capital raise or without taking [00:41:00] on debt as you say the carry trade has from a you know again from hindsight was a nobrainer in the way of getting money back into Berkshire for the investment But um you know I guess other people have done it but no one on the scale that he has So he’s always good at finding these other ways of getting capital that he can then redeploy Toby: I also used it as an illustration of, um, there’s this idea in Sun Tzu that, um, you, you do the right thing, you get a reputation for doing the right thing, you do it for the right reasons. And then when you go to invest in these Japanese companies and he bought up to sort of the limit that he was allowed to take as an outside shareholder. then he goes to meet with them and his reputation is sterling, and so they, they welcome him with open arms because they know that he deals fairly. know the terms on which he deals, and so they increase their shareholding limits to allow him to buy more. then that turns into other synergies where there, there’s going to be ways for Berkshire to work with them sort of behind the scenes rather than [00:42:00] just being an equity shareholder Tony Kynaston: Question Cameron: And he did these deals, if I. Sorry, if I remember correctly, he started doing these deals during COVID, right? When the share prices had bottomed out, interest rates were next to nothing. He was able to just, you know, swoop in, borrow a lot of money at, like, 0.5 or 1% interest rates and Yeah just swoop in. Like, it was perfect timing Toby: Again, I think that lots of people around the world could have done these deals, and it’s just– it was still sort of shocking when he did it on the scale that he had done it, just sort of showed what a great investor he was, what a sort of whole worldview he has Cameron: And, you know, for years before that everyone had quoted Warren as, you know, you know, “You make money when there’s blood in the streets,” or whatever it is he had said. And he was literally doing it during COVID, literally what he’d been preaching for decades. And again, but, [00:43:00] uh, only Warren, not only Warren, but he’s one of the few people who’s prepared to go and buy, uh, during periods like that. When everyone else is running for the hills, he’s swooping in and doing deals Toby: Yeah. I think to be fair, he did initially, uh, balk a little bit and sold out of all of the airlines, which they, they had that little basket of airlines, and they probably got the lo- hit the low on punching out of those. But I, I don’t know. I think maybe they were concerned that there was, that, that it was gonna be something more perhaps than it was. That, know, if it’s like a, it’s like a 1916 Spanish flu, then that’s not good for the equity markets. But as it turns out, it wasn’t that bad, and so they were prepared for that kind of outcome, particularly because they’re insurers. They might have been, uh, they might have needed some capital there. But, uh, pretty quickly after that, I think that they announced the Japanese deals and that they were, you know, amazing deals as they always are Cameron: Hmm. Tony Kynaston: I remember reading about these Japanese conglomerates I’m gonna show my age here after the 1987 [00:44:00] uh bubble burst in the stock market and there was uh a couple of writeups I read about how I think there was a similar sort of structure in some German companies but certainly the Japanese ones were conglomerates But they’re different to conglomerates as you and I know them They also had a lot of crossholdings and so when the market crash happened they supported each other and there was no large selldown in their stocks and they rode out the market troughs pretty easily and they survived So that’s that was an interesting I think take on those two But question for you is um in the last sort of five years the Japanese stock market’s kind of waking up to more Western ideas of being more shareholderfriendly unwinding crossshareholdings Did Buffett know that was coming or did he or did he help agitate for change or was it just simply happening anyway Toby: Yeah, I think that they had been, uh, you know, they– s- the Japanese stock market topped out in 1992 or something like that, and it’s fallen pretty consistently since then and might [00:45:00] have been close to the all-time lows in the late early 2020s. And I think that they had realized that they needed to do something to attract international capital again. So uh, Shinzo Abe had begun these reforms and the Tokyo Stock Exchange was sort of actively trying to find some way to cause them to become more shareholder-friendly. We met with the Tokyo Stock Exchange when we were there about this time last year, a little bit earlier than this last year. And, you know, they have lots of, uh, they have lots of reforms that they’re trying to implement, including this one that most folks know about, which is that you have to get your price to book. You know, you have to get your price to book over one. Otherwise, they publish this list of Tony Kynaston: Yes Toby: at a discount to book. Tony Kynaston: That’s right Toby: sort of trying to get them to get rid of the, the cross-shareholdings because, [00:46:00] uh, it sort of prevents them from being taken over. It insulates the, the management team from sort of external forces. When we went there, uh, when I first got there and we sort of met with some of the private equity firms and the activists and including Murabeni, like they were telling us the ratios that they were paying for these companies, and I was ready to write it all down here and move to Japan and start doing this ’cause it was like, I thought it was like the US in the 1980s and it was gonna be. And I think that to some extent that has happened. But we pretty quickly cooled down when we actually met with some of these companies. When you talk to them, you sort of understand how difficult it is culturally to shift them because their rationale for the cross-shareholdings and also they all have, you know, they might. Uh, these numbers are wrong, but you know, they have huge cash holdings that are just disproportionate to the size of the market capitalization. And so once you back out the cash, you’re paying virtually nothing and then they’re, they’re pretty well earning. [00:47:00] But they have this view that they won’t be good partners to their, or to their customers rather, and their suppliers, if they don’t have that big cash buffer, that they could go out of business ’cause they could have a bad year or decade or something like that, and that might send them out of business. And so they were very unwilling to consider paying that cash out to shareholders. And in their sort of, you know, like a Porter’s five forces or if you think about the stakeholders in a Japanese firm, like it’s customers and suppliers and employees, regulator and shareholder, and shareholder was right at the bottom and last, and they had their obligations to all the other ones superseded those. So it was gonna be a very difficult lift, a real difficult process to get them to shift. I think that you look at the, you know, the thing that they had had, they had no inflation for so [00:48:00] long that it was really difficult to put up prices and it was considered, you know, it was like, uh, it was socially unacceptable to put up prices. So over the, the last, even the last 12 months, maybe slightly longer than that, the, um, inflation has now started to pick up in Japan pretty significantly, and it’s meant that they’ve seen this quite significant rise in the yields on, uh, Japanese bonds, Japanese government debt. Inflation is sort of there. The yields are coming up. That means that, uh, the, the fire may have been lit and they may have to start raising prices and, and moving and doing things. So Japan, uh, probably that, that difficulty in shifting it means that it’s going to take a decade or two decades to sort of resolve the issue, but they’re probably moving in that direction now. And it’s one of the great world’s great economies. They’ve got incredible, um, technology. So I think it’s, it’s probably gonna be a good place to invest for, [00:49:00] for the next few decades. Having said that, you know, folks had the same view about a decade ago, and a lot of people went and bought Japanese net nets, and so I think they worked out okay, but they didn’t sort of work out anywhere to the extent that people thought they were going to. But, you know, this time’s different. Tony Kynaston: Yeah. Um, interesting, interesting change in Japan. I think, don’t they have a concept now with a VIP club for shares trading above book value, where you get access to a special rate on debt and things like that, you get benefits from doing the right thing? Toby: Yeah, they were trying to shame for not going through with these things. And, uh, and we would say, you know, because they, they gave them like a two-year grace period to get themselves sorted out, and we would say, “What happens if, you know, they don’t do that?” And they’d say, “Oh, they’ll be shamed.” I’m like, “Oh, well then, and then what?” Tony Kynaston: Mmhmm Cameron: Have to commit harakiri. Toby: There’s, that’s it. There’s no enforcement mechanism. It’s just Cameron: I apologize to my ancestors. We talked about that about a year ago, [00:50:00] Tony, on the US show when we talked about Orix Corporation. I remember us talking about all these deals. By the way, Orix is up about 90% since we talked about it in June last year, so it’s been all right. Yeah. Tony Kynaston: Tobias Cameron: did well Tony Kynaston: um I’m gonna wrap up my discussion around the book. It’s a wonderful book and I recommend it to anyone who likes reading about Buffett like I do. But I had some questions about just generally investing in the US because in the last year Cam and I have been doing a value investing US show and there’s a couple of concepts which we’ve puzzled over and you might be able to help us out. Um, the first one is ADR. So a lot of the value we’re seeing in the US market comes from overseas companies who have a listing in the US. Is there a reason why as a class they might trade below what say a local competitor might trade at in the US? Toby: Yeah, it’s not, again, it’s cultural. It’s not no [00:51:00] tax reason that it would do that. And there’s, I can give you a, a funny story about the ADRs. So Americans can invest in the ADRs of these Korean chip makers. Um, but they have sort of resisted doing it because they’re ADRs. And so there’s an ETF run by some friends of mine, Roundhill, called DRAM, D-R-A-M. It’s the fastest-growing ETF launch in history. They’ve raised something like. Last time I checked, it was thirteen point eight billion dollars, and that was a few ago, so the number could easily be over that now because every time I check, it’s so much higher. The underlying stocks have done really well too because they’re really AI Tony Kynaston: Mmhmm Toby: kind of names. But the big innovation that that ETF had, were investing through the Korean ETF because it gave them access to these two chip makers. And DRAM just showed up and said, “We’ll give you a.” [00:52:00] You know, DRAM is the memory. “We’ll give you access to these two Korean names, pretty concentrated, and some other chip makers.” And the, the, money has flooded in because you can now invest through an ETF into these Korean names when they, previously, you could have done that through an ADR, but the aversion to ADRs seems to be so great that they wanted to do it through a dedicated ETF and now it’s been a great success for those guys. Tony Kynaston: Yeah. I find that strange. Is it, is it a bit of Peter Lynch that people wanna be able to walk up the street and see what they’re buying? Or is there like an extra commission in there cause it’s an ADR? You know it just seems really strange to me. Toby: I don’t think so. It might be a foreign exchange, it’s possible that it’s hard to invest through some brokerage accounts. If you have an Interactive Brokers account, I think it’s pretty easy. I think most brokerage accounts allow you to do it Tony Kynaston: Yeah Toby: simply. It might be that. I, I just think it’s a, I just think it’s an aversion to, to doing anything. It, they look, it just looks a little bit weird in your brokerage account, and [00:53:00] I think that that’s been the main reason they haven’t done it. Tony Kynaston: Well maybe Berkshire Hathaway will scoop them all up because they tend to try to discount to similar listings in the US. Yeah. Yeah. And the other question I’ve got for you is that um, you know we focus on operating cash flow when we’re looking at investments. Um, operating cash flow is my preferred metric rather than price to earnings because of the ability to manipulate earnings. But um, we are coming across companies that seem to be putting investing cash flows in the operating cash flows. We had a property development company we looked at and when they flipped a transaction the income went through the operating cash flow statement. Have you noticed any difference between US accounting standards and Australian ones that would cause that? Or know any other reason you can think of why it would happen? Toby: Well, I, I grew up in the IFRS system, and I did accounting at, at [00:54:00] university and, and learned IFRS when I did that. I think it was just being implemented at that time. Uh, IFRS has a, has a local implementation all around the world. So Canadian IFRS is slightly different to Tony Kynaston: Mmhmm Toby: but pretty, pretty similar. When I moved to the States, I had to get my head around that, and I, there are some subtle differences between the two, but they’re really not that significant. They’re, they’re pretty similar. What you’re talking about might be a specific thing to REITs, like a, but I don’t know why a sale of a building, is that what it was? Tony Kynaston: No. So this company in particular and we’ve seen other examples but this guy was a property developer. They go and buy, they go and have a land bank and then they develop it. They put a syndicate together um and use the last land bank sale to fund the next one. But that sale was going through operating cash flow rather than being an investment cash flow entry. Toby: Maybe that’s their business and so they have to do it that way. I don’t know. Off the top of my head, I don’t know. I don’t invest in REITs, so I don’t see, [00:55:00] don’t really have to think about that problem. Tony Kynaston: Yeah. Okay. All right, I think that’s my list. Cameron: Yeah, the suit Tony Kynaston: questions Cameron: Oh, not, well, not a question as such. Just a couple of quotes from the book that we’ve sort of touched on. We, you were talking before about, um, not doing anything stupid. It was in chapter five, you mentioned that Buffett’s fundamental goal is survival, and this really resonated with me. Um, a couple of quotes that you got that I just thought were worth reading out. “Buffett explained his view on the risk of ruin in these terms. ‘Even in 1965, perhaps we could have judged there to be a 99% probability that the higher leverage would lead to nothing but good. Correspondingly, we might have seen only a 1% chance that some shock factor, external or internal, would cause a conventional debt ratio to produce a result falling somewhere between temporary anguish and default. We wouldn’t have liked those 99 to one odds and never will. [00:56:00] A small chance of distress or disgrace cannot, in our view, be offset by a large chance of extreme returns.'” Then later on in the chapter you say, it’s got a quote for him, I think at a University of Florida School of Business in the late ’90s. “If you risk something that is important to you for something that is unimportant to you, it just does not make any sense. I don’t care whether the odds are 100 to one that you succeed or 1,000 to one that you succeed. If you hand me a gun with a million chambers in it, and there’s one bullet in the chamber, and you said, ‘Put it up to your temple. How much do you want to be paid to pull it once?’ I’m not gonna pull it. You can name any sum you want, but it doesn’t do anything for me on the upside, and I think the downside is fairly clear. I’m not interested in that kind of game.” And, you know, I think about that a lot, uh, whether it’s, you know, uh, uh, Bitcoin, people saying, “Yeah, buy Bitcoin,” or it’s Mag Seven stocks and all this [00:57:00] kind of stuff. And it’s just this, this idea that I’ve learned from Tony over the last six or seven years we’ve been doing this show. It’s about just the philosophy of investing, risk versus reward, not getting sucked into doing stupid shit. Um, you know, following a thesis that is rational and logical and is relatively risk averse, and just following it day in, day out, ignoring the hype, ignoring the noise. And with that, uh, can you get me into the SpaceX IPO? Because, uh, I’m super excited about Elon getting us all to Mars. Toby: Yeah. I, I, I think that’s, that’s, it’s a real shift that you have to make in your mind, and not, maybe not everybody’s built that way. Not everybody. I, I sort of think the more experience you get, the more you, the more times you get burned with something that doesn’t work, the less willing you are to do it. And [00:58:00] so you get used to, like, looking at the downside first and seeing why, of these. You can have a look at the, the US stock market right now. Like, just ignoring even the SpaceX IPO, the, the Goldman Sachs tracks this index called Profitless Tech, which is exactly what it sounds like. In ’21 it ran up to these all-time highs, and then they all collapsed, as you’d imagine, through ’22, ’23, ’24. But they’ve all run back up again to all-time highs. They’re almost where they were in 2021, probably get there before the whole thing’s said and done. I don’t really wanna play that game. I, I think that you could pick out some of these names, and they will probably be pretty good returners over the long term, but I don’t know which ones they are, and I think that there’s plenty of chances that there’s a lot of landmines in there. And I, I think that the more you do it, the more you get burned by the downside. When I started, I [00:59:00] started investing in 2000, walked into that recession, depression. Fortunately, value did really well through there, so I got entirely the wrong message about how you just be a value investor and never worry about drawdowns in your life. 2007, eight, nine came along, value got smoked along with everything else then. Um, so that taught me a lesson that even value gets smoked in most drawdowns. So I, I just, I don’t wanna, don’t wanna do things that don’t work, so I try to avoid stocks that have shitty business models, too much debt, crazy people running them. Unproven business models, there’s a lot of that around now. You look through the Russell 2000, the top names in the Russell 2000, they’re all things that they’ve got no revenue. They’ve got, they’re science experiments. They’ve got an idea to do something. They will perform really well ’cause the idea is really compelling. It’s a great idea. Like, one of these guys is gonna build nuclear reactors in the States. Great idea. I think the, the US needs nuclear reactors, but they don’t have one yet, and it’s hard to build a nuclear reactor, so probably [01:00:00] let that one go through to the keeper. Tony Kynaston: What’s your Cameron: we, Tony Kynaston: at the Cameron: yeah, that was gonna be my question. Yeah. Tony Kynaston: like it’s AI, the market, and then Main Street is tanking. Uh, does that worry you at all? What’s your feeling and prognostication for that situation? Toby: Yeah. So, so does it worry me? I mean, it’s irritating in the short term. I don’t like underperforming, and I’ve been doing that a lot recently. So I’ve been doing that a lot since I launched the funds, but I’ve been doing it particularly recently. But I think that the forward returns for small value are exceptionally good right now. There’s this K-shaped market you– that everybody talks about, and I posted this chart today on Twitter, where it shows that basically every industry except for tech thinks that it’s going through a pretty substantial drawdown. Like everything’s down thirty or forty percent except for tech, which is, which is off to the races and sort of covering over, uh, the gaps in the market. For everybody [01:01:00] else, it’s a, it’s

10. Juni 20261 h 9 min

Straw Mattress to Steel Bumper (MGA): QAV America #54

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