TIP681: Mastermind Q4, 2024 w/ Stig Brodersen, Tobias Carlisle, and Hari Ramachandra
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You're listening to TIP. Welcome to the Q4 2024 Mastermind Discussion with my friends Tobias Carlyle and Hiram Matandra.

Stig Brodersen : I only have five stocks in my portfolio, and in this episode, I'll outline why evolution is one of them. Horace Pick is Occidental Petroleum, an oil and gas stock that Buffett has been buying since 2022, and is poised to get various tailwinds. Stig Brodersen : And speaking of tailwinds, you might be surprised to learn that in a world where renewables is on the rise, that Toby's pick, Alpha Metallurgical Resources, is riding the renewables wave. Because to go green, you need met coal, and you need a lot of met coal.

Now, before we start talking about individual stock picks, we open our discussion with Buffett's $300 billion plus massive cash pile. Let's go.

Celebrating 10 years and more than 150 million downloads. You are listening to the Investors Podcast Network. Since 2014, we studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now, for your host, Stig Brodersen. Stig Brodersen

Welcome to the MS-DOS podcast. I'm your host, Dick Brodersen. And today, as always, I'm here with Tobias Carlisle and Hari Ramachandra. How are you today, gents? Hey, Dick. Good to see you. Good to see you, Hari. Good to see you both. That's wonderful, Hari. And I want to throw it over to you because I asked you before we kicked this off, should we talk about something else or should we just go straight into the picks? And then you said, let's talk about something. Let me throw it to you. What do you want to chat about first before we talk about our picks?

Thank you, Stig. And this is something that I was waiting to hear from Toby and you. One thing I have been lately observing is that market is on a tear. Nobody's talking about any imminent recession. Everybody's saying economy is good. Inflation is on the higher side, but not too concerning. Fed is starting to cut interest rates. Now, in all this is happening,

I see Buffett building his cash position with Berkshire. And it's at historical highs right now, even in terms of percentage wise, not just in terms of absolute number, because that's very hard to compare as Buffett's, I mean, Berkshire's assets are growing. So I'm very curious to know, Toby, maybe you can start off and stick. I would love to know your thoughts as well. What's behind the

the reason for building up so much of cash in this current market condition? Yeah, I don't know. I can't speak for Buffett's mind, but there's two things that I look at. One of them is valuation. And the aggregate stock market valuation at the moment is expensive. If you measure it on a Shiller PE, it's at 38 last time I looked, which was Thursday last week, Friday last week, against the long run average of 17. The

The Shiller PE is an inflation-adjusted average of the last 10 years. And the reason you do that is because in a year like 2008, when bank earnings were negative, banks had losses, they wiped out all of the earnings of the S&P 500. So, the PE ratio was infinite in 2008 when all else being equal, that was a pretty good year to be buying. And the Shiller PE was the lowest it had been in any time in the preceding sort of decade or so at that point.

Now, it's back to its close to its all-time highs where as expensive now as we were in 2021, we're a little bit below where we were in 2000. 2000, it got to 44. There's nothing magic about 44. The stock markets have got more expensive than that. Japan got to 100 in the early 1990s and China got to 100 more recently before both. Japan has had a 30-year sideways stock market. So,

There's lots of problems with the Shiloh PE, but it's a rough proxy for the level of the market. It doesn't predict a crash. It just says that forward returns will be lower as we sort of go back to average valuations. If you assume over the next decade that we go back to the average valuation that we've seen over the preceding 200 years, which is about 16 or 17, then the total return of the stock market is in the order of 0.8%.

And that includes a dividend yield of 1.1% at the moment. So that's negative 0.3% on the index for 10 years, which I don't think anybody's really prepared for given that we've had pretty strong returns over the last 10 years. Valuations are very stretched. Large cap valuations are very stretched. The MAG7 looking pretty stretched to me. And then you have this economic backdrop where

There's been some profound private sector weakness in the States. GDP looks like it's grown, but all of that is government spending. And that government spending is not inexhaustible. It's at historic highs at the moment. And it'll likely, I mean, who really knows? We've had a change of administration, new administration system.

seems to spend just as much as the last administration did. The only thing that stops the spending is if markets get jittery about the size of the government debt. I don't know if that's ever happened before in the States or if they've ever really listened to it, but it's possible that they cut back on government spending, which would then have a pretty profound impact on GDP given where the private sector is at the moment. And the only other thing in there that's worth mentioning is the

The yield curve, which has been inverted for, the data doesn't go back that long. I think the data only goes back 50 years or something like that. And if you include the 1920s, there is another very long inversion in there. But this is the longest inversion in the modern data.

going well back into before the 1950s. But it's an extremely long inversion, which means that the front end of the curve, which is how most people, most businesses finance themselves, has been more expensive than the back end of the curve the 10-year. That's now un-inverting, very, very rapidly un-inverting. It's still slightly inverted, but I wouldn't be surprised if even before this comes out, if it's normalized completely. Normalization is ultimately a good thing and normalization is necessary and healthy.

and better for the markets. But what has happened after normalization pretty quickly, typically in the past, is only eight instances. So it's not a statistically significant number. And the very few number of instances means that you can dismiss it probably. But every time it has normalized, a recession has followed pretty quickly on its heels. And so if you combine those two things together, very, very expensive stock market with potentially imminent recession,

then that might explain why, you know, that's not why Buffett invests. Buffett looking at all these companies individually. But, you know, if you look at companies individually, the aggregate across the portfolio starts looking like the aggregate macro. And so it looks to me like the stock market's expensive and the economy's slowing, the business sector is slowing. So that's probably why he's selling some of his more expensive positions and loading up on cash.

I don't think that he necessarily predicts things that are going to happen. I think he just plays the environment that he sees. That would suggest selling. And maybe if we get lower prices and a business cycle that's a little bit closer to the bottom, then it becomes more of a buyer. If you look at what's the fair value of Berkshire right now and you make a sum of the parts valuation, we're probably roughly at fair value.

which you might say is okay considering where the stock market is just in general, to Toby's point. I mean, I have five stocks and one of them is Berkshire. Stig Brodersen :

And there's always a small part of me who wants to sell Berkshire, which is kind of terrible to say. I know you're supposed to, especially if you're raised at the church of Buffett and Munger, you're supposed to say that you would never sell. In a way, it's a bit enticing in the sense of it's probably not where you're going to get the best return. But on the other hand, you're also not going to lose your money. It would be highly unlikely if you did, even at this valuation, if your time horizon is long enough.

And so it sits there and it looks like it's one of those, I don't know, let's call it a 10-ish percent returns. But that kind of cash, and there are some smart people out there who've been looking at the investable universe for Berkshire Hathaway, whether it's private or public. There's only so many companies that you can invest in that moves the needle. Of them, there are, at any point in time, only so many that's for sale. And at any point in time,

only so many of them for sale at a XYZ price. And I would imagine not too many of them today at a good price. And so you're looking at more than what, 320 billion? And you're thinking,

wouldn't this be the right time to do a special dividend? And I know that I don't bring anything new to the table. People have been saying that for, I don't know how long, about Berkshire, and Buffett continues to reinvent himself. Stig Brodersen : I was speaking with Toby here before we hit record, and we were talking about some of the crazy valuations of Nvidia. And I said to Toby, whenever Nvidia was trading at

10% of what it's trading at today. I felt it was ridiculous. And here we are, it's the most valuable company in the world. And people don't even do forward PEs anymore on Nvidia. There's like two years forward earnings. And so whenever you see something like that, it's, I don't know, there's something in me that just wants to run away screaming. And so I don't know what to make of it. With the business model that Berkshire has, how much money

can really be deployed. Now, I've been reading up on renewables here recently and trying to figure out how much money that could be put into that and with how much return, which it would be definitely up the alley of Berkshire Hathaway. Then at the same time, what kind of returns can you expect to get? 8%, 10%, 12% if you're lucky, if you're good. So yeah, I think that's my non-answer for you, Hari, what I make out of it. Apparently, it took me, what, five minutes to say

I don't know.

The other thing worth mentioning, and somebody said this to me, this is not my idea, but Buffett might be selling down, he's got a huge chunk of Apple, which is a very big position in absolute terms and in relative terms, and he's sold quite a half or more of that position. And that it might be sort of for legacy purposes for estate planning inside Berkshire, so that the next CEO...

CEO who inherits that doesn't then confront the problem of do you sell this huge holding of the guy who's put the whole thing together and immediately earn the ire of every other shareholder there for like messing with the artwork or do you hold on to it in which case you know you've got a problem where it's like Coca-Cola and you've got this huge position where it's fully valued it's overvalued and then it spends a decade or two bumping sideways so maybe Buffett sort of made that decision that he'll cut it down and

leave more of a blank canvas for the next person. That was the suggestion that someone else had put to me. Thank you, Toby and Stig. I know it's very hard to guess, but these are interesting insights.

And it's always hard to read Buffett. But one thing I wanted to bring up that both of you pointed out is that the majority of the cash has been raised from two positions, Apple and Bank of America. Apple, obviously, it was becoming a huge part of his portfolio. And there are in the recent past, what we are seeing is the renewal cycles of Apple models is slowing down. There is not much of that excitement as before. So I think it's prudent. It's almost like

He is trying not to repeat the same mistake as Coca-Cola, as you said, Toby. In case of Bank of America, there are two parts there. One is probably he doesn't want it to be more than 10%, so he has to cut in case of banks. The other one is there were some concerns that Buffett had raised about Bank of America, even in the annual meeting. I don't know whether it's part of that concerns that he had about Bank of America. So, yeah, it's hard to make out, I guess,

None of us are giving answers, but it looks like it might be more tactical than strategic is what I am getting from what you guys are saying.

Thank you for raising that question, Hari. Let's go to the first pick here today. And I get to go first. We were drunk straws here before our call. Last quarter, I was pitching Betson. That's a gambling operator. And today, I'm pitching another gambling stock. So please forgive me. I thought about how I can best defend my pitch even before I make it.

And so this quote came to me, it's from Willie Sutton, who was once asked why he robbed banks. And he famously said, "Because that's where the money is." So with that being said, I am pitching Evolution AB today for the very same reason. The gambling sector is where the money is right now, or so I like to think. Now, they say that the house always wins. So whenever you're talking about the house, you're talking about the gambling operator, such as Betsson. If you

If you invest in Evolution AB, that's the supplier to the operator. So you can look at it as the house of the house if you want.

And full disclosure, I'm long evolution. I have a 6% allocation of my investable assets, and I build it up at an average price of 1,010 Swedish kronor. And I doubled down as recent as today. The day of recording is November 18th. So I have all the short-term biases that you can possibly think of right now as I'm going into this pitch here. Stig Brodersen : So let's talk a bit about the business. So if you place a bet on

FanDuel, Batsun, whatever you do, one of the many operators out there, there's a high probability that you're placing a bet indirectly on evolution.

So they provide live casino games such as blackjack, roulette, whatnot. And they also have online slot machines. 85% of the revenue comes from the live casino. Stig Brodersen : And Evolution's business model is simple, yet it's very powerful. Perhaps the best way I can simplify this is by talking about a player that would go into say FanDuel, they would put $100 on the roulette and they would lose.

So most of that loss is then revenue for the operator. Part of that is paid in taxes, and then a part of it is also paid to Evolution that supplies the game. And so you can think about it as Evolution getting 10% to 15% of whatever a player is losing in that online casino. So if we talk about competitive advantage and some of the competitors, Evolution has close to a 55% profit margin. And so you might rightly ask, is that sustainable? And

I like to say no. So I come into this by saying, no, they probably can't. And I do expect the margins to shrink from the call to 55-ish they are right now.

Part of it could be due to competition, even though they have been expanding their margins for quite a while. But I think that there's something else at play that we'll get to later. Evolution was found in 2006, IPO in 2015, and the margins were there for everyone to see. And still, you might be asking, well, you look at the margins from 2015, and they just continue to become better and better.

And when we all heard this, like your margin is my opportunity. So why isn't anyone taking that opportunity? Those fat margins must be there for the taking. And so creating casino games, and especially live casino games, it's very hard to execute on. And you don't see the same type of competition as you do on the operator level.

Also, another thing that's wonderful if you're a supplier of the game, is you can avoid a lot of the KYC pain, some of the marketing, all the commoditized market that you're dealing with as an operator. And then you have the whole payment processing and different countries, and it's absolutely painful. So you don't have a lot of those headaches, even though you are still regulated as a supplier and you still have to apply for a license in the countries where you operate. It's just a different license.

as you would as an operator. Stig Brodersen : So talking about some of the biggest competitors, Promatic Play, Playcheck, Light and Wonder, all different, not doing exactly the same as Evolution. I think the one to watch would be Promatic Play. Like so many of the competitors in this space, and that goes both operators, but also suppliers, it's very hard to find information on them because most of the companies are private.

Playtech is listed, but whenever you read their financial statements, you also realize that it's not a pure supplier play. So you can't really compare margins the same way. And then Playtech, I've talked about before, they're also a so-called aggregator. And so if you are an aggregator, let's say that you are a billion dollar company like Betzen. So for where you have the highest volume games, for example, for some of the live tables like Blackjack,

you will go directly to the evolutions of the world. But then you have other games where you don't have the same mass, and you would go then through an aggregator. And Prime Play is one of those aggregators. There are many aggregators out there who would then set up the deals with the supplier. So it's more like a middleman there if you don't have enough mass. Stig Brodersen : And so depending on the size of the operator, they would either deal directly with suppliers such as Evolution. It might be a hybrid model as is the case with Betson, or it might be

purely going through aggregators. And so whenever you read about the concentration from customers in the evolutions annual report, it looks somewhat concentrated, but at the same time, it's

They're all through aggregators that take a very small cut. So in a way, it's also very much spread out. And that takes me to basically back to the top where I talked about the margins. So the biggest market for evolution today is Asia. And there's also good reason why the margins are so good in Asia. Games like Baccarat are very popular and you can have unlimited number of players for a game of Baccarat, whereas you can't do that for a game like Blackjack, where you're

one player might hit, another player might stand. Evolution is making moves in the States. And obviously, because the United States is a wealthy country, you typically get more per bet, but the United States doesn't scale as well, partly due to regulatory reasons. You need to have a studio and need state, and you have a higher cost because the employment is just more expensive. So it's a different equation that you have to make. And so I would expect the margins overall to fall

Because margins fall doesn't mean it's a bad business. You can also look at it as, let's say that Asia is 80% margins. Why wouldn't you first set up the tables in Asia for 80% margins before you would go to the States and hope for 30% margins or whatever it is? They don't break up the margins per the geographical location, but my best guess is that it's north of 80% in Asia.

it could be quite close to zero right now in the States, but as they scale up, I will imagine that it would be significant even though it wouldn't be anywhere near what it would be in Asia. Stig Brodersen : And so I'm very excited about this pick, as I hope people can hear. It's also good to ask, why does this opportunity exist? And if you look at the stock price, it's just been moved sideways since 2021.

And so you might be thinking, why is it that Stig has all of a sudden become so excited about evolution here? He's only smart enough to own five stocks. So why is that one of his five stocks? He should probably own 30 like Toby. That's going to be my disclaimer. But I can only fathom to own five apparently. And I think there are different reasons why this opportunity exists. One of the reasons that's most often being cited if you Google it is that

60% of the business comes from unregulated markets. I think this is one of those situations where the market confuses risk with uncertainty. But again, that might just be famous last words whenever I say that. There's probably also an element of the sin stock factor

for the attractive valuation that you see right now. But really, whenever you see such a high-quality company that's growing as fast as Evolution and your massive runway, high insider ownership, basically more or less everything you like to see in the stock, the most likely explanation why the opportunity exists is because

you're wrong. And the company is just not the quality that you think it is. So please just keep that in mind as I go on about how amazing of a pick this is. And at the end of the day, investing is like poker. Sometimes you have to let go of a much loved hand, even though you don't want to throw good money after bad. Stig Brodersen :

But I want to take one step back and sort of like put a different light on why I think this opportunity exists. And I might become very, very unpopular, even more unpopular in the value investing industry as I'm saying this, because I have this other theory. And it's not so much a specific evolution specific thing, but more a general observation. So that's going to be one disclaimer. So

Stig Brodersen : I used to be on Twitter back in the day, actually back in the day when it was even called Twitter. And one of the reasons why I stopped being on Twitter was because I felt that the Bitcoin community was absolutely toxic and really annoying, and I should probably just have unfollowed a ton of people. Stig Brodersen :

I really felt that the Bitcoin community took the concept of an echo chamber to a new level. And the nuance of the, or the lack of nuance in discussion could just drive me crazy. And so one of the ironies I found on Twitter and other places was that the Bitcoin community really felt that the value investing community were an echo chamber. So what gives? I mean, and that just drove me even more crazy.

And so, because I mean, here in the value investing community, we like to pride ourselves of being contrarians and independent thinkers. And here, all those big corners were saying the same thing and like, what gives? Stig Brodersen : And so, I recently had this experience that made me think a bit differently about the value investing community. So I was trying to do this Scott Bott research on evolution, and I was introduced to this

very, very knowledgeable person in the industry. And he started by asking me two questions about evolution. So he asked me, what is evolution's biggest market and what is the biggest game? And I found those two questions to be quite interesting.

So TAP have an office in the Philippines. And I think if I went to the Philippines and I asked our team, who are certainly not gamblers or stock investors, and they never heard about evolution at all, if I asked them those two questions, I think they would know the answers, both of them. They would probably, first of all, say,

evolution is a weird name. They supply games for casino, but then they would say the biggest market is Japan, and then they would say the biggest game is Baccarat. Now, if I had asked the same questions to investors and followers of evolution in the West, I think that 90 plus percent wouldn't know the answers to those two questions, which is ironic, right? Because they're supposed to be the so-called experts on evolution. Stig Brodersen :

And so I don't know if I've forgotten to offend anyone, but I'll continue to offend people here as I'm doing my rant. So what I think is at play here is that, and I've seen this more in the decade, being more in the decade in the value investing community, is that certain stocks tend to become very popular, specifically in the value investing community. Stig Brodersen :

Stig Brodersen : A lot of investors would pile into them, especially if they're not big stocks. The value investing community can really move a stock and then for whatever reason, they fall out of favor. Then the narrative term turned negative. Stig Brodersen :

And so if you look at a company like Evolution, and you read their annual reports, 75% of investors are from the US, Sweden, and the UK, and then the remaining 25%, there's undisclosed. And I will imagine of those 25%, the vast, vast majority of them would also be from the West. But really the bet on Evolution is very much a bet on Asia. So it might only be 4% of revenue, but the vast majority of that profit comes from Asia.

And so I have the disadvantage of only speaking two languages. So I speak Danish, which is my first language, and then speak English, which I had to learn because that's the world of business, at least where I live. Stig Brodersen : So I have this bias of blindsiding myself. So whenever I read up on Evolution or another stock, I only read what people write up in Danish or in English, typically English. And so the focus is really on the US, but that's not the story, but that's what everyone talks about. And it makes sense. And it's

People don't talk about the impact on the Filipino distillation. That's probably going to be pretty huge for evolution. And they probably also don't look at what's going on with this resource and gaming distillation in different places in Asia. Like there are a ton of things happening, but obviously no one talks about it because it's...

It reminds me of that story where they have two men looking under a lamp, searching for a key, and then one man asked the other, so where did you last have the key? And was told, oh, I didn't lose the key here. This is where the light is. And so I think that might be the case. Oh my God, I'm going to get a lot of hate emails after this. But anyways, so we go back to 2020 and COVID-19.

evolution was growing fast. You saw growth rates of 50%, whatnot. And those numbers were a reflection of us being at home, being super, super bored, wanting to be stimulated. And what you see now is 15% growth. And it certainly pales in comparison to COVID growth rates, but the narrative has really turned negative. Around it, there are some things about Georgia, the country, not the state, some of the cyber attacks. Then there are some prominent voices in the value investing community that have exited position.

I would make the claim that none of this has fundamentally changed the business. And in the meantime, while all of this has happened, evolution has doubled their profit and widened their margins, and they still have miles of runway to grow, and the stock just hasn't moved. And so what I think I'm seeing right now in evolution, again, famous last words, that it's the world that's gone crazy and not me. But what I think I've seen is

some of the same thing that I was subject to whenever it came to Alibaba. And I was on this very show screaming from the rooftop how contrarian I was because exactly at the same time as everyone else, because Charlie Munger entered Alibaba, I was contrarian. I know that's an oxymoron. I was contrarian just like everyone else in the value investing community. Let me be contrarian and do the same thing as Charlie Munger and all my friends and then buy Alibaba and then losing a shirt in the process. Stig Brodersen :

My best guess is that is what's at stake here for evolution. But again, remember my disclaimer at the very top whenever I said that whenever an opportunity like this exists, it's typically because you're crazy, not because the world is crazy. Perhaps this time is different. Also last famous words. So let's just briefly talk about the valuation, then I'm going to throw back over to Hari and Toby. So

I could say that this is a stock that's trading at 50 cents of the dollar, but I'm naive and I think it might even be better than that. So if you're just looking at the PE, it's 16 times earnings, but I think it would be too simple to just look at that. The story is much, much better. So you have a return on investor capital of 30%, and it's not just so much it's 30%, it's about how long can you have that type of return on investor capital?

So you have a business that's growing at 15%. It used to grow a lot faster. I do think that 50% is sustainable for a decent amount of time. And at the same time as this business is growing 50% top line, you have 3% in dividend and 2% in share buyback. And it's a company that has tailwind from GNCs, young millennials. It perhaps doesn't have as much money right now, but eventually will. You have tailwind from more friendly regulatory

environment just globally. And it's very capital light talking about 5%, 6% top line CapEx.

We still talk about a company that has so much demand that they can't deliver enough tables to the players. You have decent insider buying. Ironically, you have decent insider buying from North America, which is interesting itself. You have high insider ownership north of 20%, and the company has started to become more and more intelligent, I would say, about capital allocation. They have for a long time had a payout ratio of 50%. That's generally been perceived as a bit negative in the value investing community.

I don't necessarily think they can grow that much faster. So it's also a way to stay disciplined. But I expect, even though they don't have a current share buying program, they've just been completed. They had one for 400 million euros, which was roughly 2% of the outstanding shares. I expect a new one to be announced next year. So with all of that being said, that's my pick, Harry and Toby. I'm going to throw it back over to you.

I can go first, Toby. I had one follow-up on what Stig said, not about the pick, but about the group think among value investing. It's a very interesting observation. I think it's almost like a lot of us don't have the courage to say it, but I see it everywhere. Like, for example, when I used to attend meets in Omaha back in 2010, 2011, 2012, the time when we should have been investing in Amazon or Google or Microsoft,

We were talking about some company mining zinc, something else like that.

I remember some of the picks then we used to discuss. I'm not, I think you both were not in those groups. So not blaming you guys, but at least the ones that I, Markle, Markle was one of the biggest things that we were obsessed about at that time. So, yeah, so we do have a lot of group think I, I definitely agree, but about your pick, I think what fine, I find it very interesting is the healthy rate at which it is growing. The second thing is the market is really fragmented and it's,

I don't know whether the big guys like Microsoft and Google would even try to venture into it because it's a landmine for them in terms of litigations and lawsuits that can come at them. So they will be naturally wary. So there are no big fishes. Maybe this company can become one of the big fish in the absence of the big fish.

getting into it. And also I think in terms of regulations, it's a challenge as well as a moat because as Munger said about one of the, in one of the daily journal annual meeting, he was saying that the business he's entering into with their automation of their processes and everything, the amount of pain and suffering they had to go through in order to circumvent and work through all the regulations.

He said there will be very few who will compete with them because it takes a lot of work to really get through all the regulations. So that might be an advantage and a disadvantage for this company because

Because if the regulations change over a period of time, geopolitics change, you said they are operating a lot in Asia. If each country's specific regulations is they're exposed to those as well as cybersecurity. So I think these are some of the risks, but considering those risks, there will always be such risks. Alibaba was a great example, as you said, right? Like on paper, it really looked good, but we ignored geopolitics.

So that's the risk which you only stated. So interesting pick though, Stig. I'll definitely look into it, but I would love to hear what Toby has to say about the valuation though. Let's take a quick break and hear from today's sponsors.

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Vanta makes compliance easy. Join over 8,000 companies, including many Y Combinator and Techstars startups who trust Vanta. Simplify compliance and get $1,000 off at vanta.com slash billionaires. That's V-A-N-T-A dot com slash billionaires. All right, back to the show. What was your take on the valuation, Stig? What are you paying? What are the multiples that we're paying for it?

Stig Brodersen : You're paying 16 times earnings. I come at this from a few different angles, and then I think I want to turn back over to Hardy who asked about big tech before. That's certainly not an angle that I was thinking of in terms of competition. But yeah, so you're paying 16 times earnings. And so the question is not so much that it's very low. The question is,

How long can it continue to grow? How long can it sustain your return on invested capital of 30%? And I don't necessarily know the answers to that. I do think there's a lot of tailwinds, and I was mentioning some of them before. Stig Brodersen : And it's paying out about 100% of its earnings at the moment. Stig Brodersen : Yeah, it's very capital-like. So I think I mentioned here, 5% to 6% of the top line is CapEx, which is basically them setting up studios different places in the world. So it's very labor-intensive. Stig Brodersen :

what they do. And they have 20,000 employees, 14,000-ish full-time equivalents. I want to say 87% of them are either dealers or hosts. And so it's an intro level job. It doesn't take long to be

trained, and they had a strike going on. They still have issues in Georgia. And if you look at where the studios are typically being built, aside from the States, it's in low-income countries, they can typically stream out. So that means that if they have a studio in Georgia, they could still stream that to high-income countries. And so the margins are

very, very good because of that, especially for those games where you can have more players than you can, for example, in something like Blackjack.

the easiest way to think about it is the traditional games as blackjack, roulette, baccarat, and whatnot. But really where they excel is in their game shows. And they also have a lot of different nuance of roulette, for example. So there will still be a roulette wheel, but then it has a twist to it. So there will be certain numbers where you get extra bonus. And so everything is very much gamified. Stig Brodersen :

one of the problems that they have now where they haven't been able to deliver enough tables. So part of it has been the strike, but it's also just been there've been too much demand. Stig Brodersen : And so keep in mind that whenever we talk about tables that are quote unquote unlimited and tables that are not depending on the type of table, they would have many different tables because they would need to have a host or presenter that speaks the language. So if they have a studio in Georgia, they have one who speaks Japanese or

Spanish and Italian and so on and so forth. And so it doesn't require a lot of capital to run, which is one of the things. It takes 12 to 18 months to build a new studio. And so obviously there's a lead time to it and there's some training to it. So I think I painted myself into a corner, Toby. I think you asked about what's the return on assets and then I just continue, but I'm going to throw it back over to you. Yeah. I was just trying to think through the valuation.

So they have a lot of employees and they do it live and that's difficult to coordinate their entry-level employees. Yeah, I'm just trying to work through it. It doesn't seem like an unreasonable valuation and it's growing very quickly, but their opportunities are lower margin, but potentially bigger. And you have to have a studio in every...

So if you're in the States, in a state in the States, you need a studio in that state. Is that what they're saying? Yeah, that's true. And you need to have a small army of lawyers, which is another thing. There's a lot of regulation around it. And traditionally, the gambling sector that I used to be a part of doesn't attract the people who loves regulation the most. I think that's my very diplomatic way of saying that.

But at this scale, we're talking about a $20 billion company. At this scale, market cap, not revenue.

At this scale, of course, you can't say that your margin is my opportunity, as Jeff Bezos would say. And so it is also worth thinking about, you have a competitor like Pragmatic Play, and they're VC backed. So whenever you see something that doesn't need to make money short term, and you're looking at the margins that a company like Evolution have, say net profit margin of 55%,

You have to think about who is coming in, and at this scale, business is business. Does it really matter what the industry is? Stig Brodersen :

I've been thinking about that, and I want to answer that question a few different ways, because in this world, everything gets disrupted. But if I try to think about what can go wrong for a company like Evolution, there's obviously regulation that could go wrong. But then again, it's very fragmented. Regulation in all the markets they're in is very fragmented because it's so many different countries, and even in the States, it's a huge market. It's on a state-based level. That's one part of it. Another part of it is

if this was possible, why hasn't people done it before now? It has been there for everyone to see since 2015. Why haven't they ticked out their margin yet? And I think that there are different reasons for that. One is that it's difficult to execute on. And if I can talk generally about the sector, so the people who are really

pays for everything. So again, you have the operator that draws in the players. The people who pay the operators and in terms pay suppliers such as Evolution are really high rollers. So you have a very small number of players who account for the vast majority

of the revenue all the way through the value chain. And if you have a product that caters to that very specific niche group of people who bet thousands of euros on every bet, you generally don't skimp out on someone, you don't skimp out of the service that's best. So if someone says, hey, Evolution, you charge 12%, we would rather go with someone who charges 10 and a half.

you're very much thinking about, is this product truly better? So I think there was something about the execution. Then the way that Evolution are doing, and you can read the press release on what they are doing with FanDuel right now, but they would typically, if it's possible, and FanDuel is a massive, massive customer, they would take all the tables and make exclusive. That's their demand. And so

you could probably say there could be competition on the lower end of the table. So the $5...

blackjack tables and not the $1,000 blackjack tables because it will be easier to execute on that. But then you can't really attract the high rollers because if you do that and you run with a different supplier, then evolution would say, "Then we can't give you the high roller tables." Stig Brodersen : And so you do have some bargaining power, which I've been a bit surprised to learn about because whenever you go to a gambling website, it actually says who are providing it. And to me, that's been a bit weird. Why would I as a consumer

care if it's pragmatic play that's delivering the dealer, or why would I care if it's evolution?

but I can just see that that's the way it works, which to me was a bit surprising. So the more I learned the business, the more I realized that the supplier had the bargaining power, whereas you would think it's the buyer, which is the operator, but they work in a way more commoditized market, ironically. So I'm definitely not saying there's not any risk. There's always a lot of risk, but I've been surprised to see there were not more risk whenever it came to competition. Stig Brodersen :

What you brought up about the two things here, one is about big tech and why I mentioned big tech is I almost feel like this is very similar to a tobacco company because you are saying, hey, why is there no competition? Maybe there is not much competition in tobacco as well, like only a few players because there's so much of regulations. So that might be a deterrent.

The other thing I what perked up my interest when you're talking about having dealers in multiple languages in many studios, that's number one. Number two, they're having a big legal team to fight regulations or work with regulators. I'm just wondering how will this company's margin look like if they leverage AI for many of this?

brokers or dealers for multiple languages. If they use AI, they might reduce the reliance on humans there, so employees. And also for paralegal and legal services, if they leverage AI, they might also improve their margins over there as well. So I'm just curious, will that change their profile? Will that improve their profitability with the scale they have? They can implement those as well.

Stig Brodersen : It's a great question. I asked that question to someone in the industry, because they will obviously hide that in the income statement. Apparently, the answer is around 5%. Now we're talking about the operator level. I would imagine it would be quite similar for a company like Evolution. That's legal only. In terms of AI,

I think that there is something to be said about interacting with a real human where you can hear what they're saying. To me, that doesn't sound like good business. There is something, and it probably comes from my biases of visiting too many live casinos that I would care to admit, not live casino as an online, but actually being there. There is something about players, especially in Asia, but generally in players being superstitious whenever it comes to games.

There's something about this is my favorite dealer. This is the dealer that brings me luck. And you can also tip dealers. And so if you're evolution and you're smart, and if you're an operator and you're smart, and I'm pretty sure that both are, keep in mind, everything is online. Everything is data-driven.

you would know which players like which Steelers that has quote unquote brought them luck. And of course we can laugh at that, but it's a real thing. It makes the product more sticky than you will imagine. And if it doesn't make sense to you, I'm inclined to say you should go to a casino and try to spend a weekend there. And you'll be like, oh, so that's what Stig is talking about. It might not look good. It might be weird. It might not be logic, but I've just seen it on so many continents. Stig Brodersen

That's how high rollers think and that's how they act whenever it comes to gambling. I don't have anything else to add. Toby? Yeah, me either. Good job, Stig.

So continuing with our discussion about Berkshire, my pick today is Occidental Petroleum, which is inspired by Warren Buffett's pick. Buffett first disclosed a significant stake in Occidental Petroleum or OXY is the ticker symbol in 2019. It was the investment was around 10 billion, I believe. And it was a preferred share with a handsome 8% annual dividend.

and also warrants that allowed him to purchase 80 million more common shares at a strike price of $62.50.

And ever since promptly he has been increasing his stakes in Occidental Petroleum. For instance, in June of 2024, he bought 1.75 million shares, which now brings his total holdings to 252 plus million and representing around 28.4% of the total outstanding shares.

He has a pretty big stake in there. So it's a pretty big bet. Now, why am I bringing this up? Number one is the change in the political environment in the US now favors hydrocarbon producers or energy, the traditional energy sector and Occidental plays in that.

and it's a pretty big player there. It's a long-term energy bet with significant assets, especially in the Permian Basin. They have around 575,000 BOE that was stated as based on 2020. They also have stakes in Denver Basin.

They have presence in Middle East and Colombia. They even recently acquired Crown Rock, which is a Middle East-based oil and gas producer. And they also have good cash flows. Their debt-to-equity is pretty decent. The current ratios are not that great, but not worrisome. And more importantly, the Buffett-Berkshire's put that they have in terms of

The financial support they can draw from Berkshire, if Berkshire is a major player or major stakeholder, they might have an edge over other players. When it comes to acquisitions in the future, that might be a way for Berkshire to deploy their cash too.

So these things makes me bullish long term for Occidental. And considering the fact that it is trading at below Buffett's average purchase price is even more curious, even though when I played around with DCF fair value calculation, it ranges anywhere between 70 to 148.

dollars per share based on your assumptions so that I would defer to Toby on valuation. So I was just playing around. So I have no clue what should be the right number there. But for me, the floor is Buffett's purchase price. That's one thing I'm relying on as a floor for this particular pick. So with that, I think all of us know about Occidental. So I'm not going to talk more about it. I want to throw it open to you guys.

For your opinion on this pick, what do you think? Is this a good time, especially considering for the next four years they will have favorable regulations, regulatory environment? Will they have a tailwind? Will this be a good pick? I like Oxy. I like all of the energy and oil and gas producers.

There's been a long cycle of underinvestment in energy and coal, which will be my pick when it comes up in a little bit. And there's still a lot of political and regulatory resistance to bringing more production online. So supply is extremely constrained.

What the demand picture looks like is more difficult to sort of figure out other than historically for a very long time, we've been consuming more and more energy every single year. And it seems highly unlikely to me that we can avoid doing that. And there's no real appetite for nuclear, although there does seem to be some sort of discussion around the edges that nuclear might be becoming an increasingly viable option.

option and I think that we need it if we're going to go to the next stage. If AI consumes as much energy as it seems to, in addition to everything else, we're just going to need huge amounts of energy. Nuclear is going to be the answer, but in the interim, we're not bringing any nuclear online. We need to start bringing more energy online and the existing suppliers of energy are going to be macroeconomically advantaged for an extended period of time. It just takes so long to bring these things to

to fruition because the regulatory process is extremely long and then the construction process is extremely long too. So, from a macroeconomic perspective, I think that all of these are pretty good bets. Oxy is very, very well managed, which I think is what attracts Buffett to it. They've pinned their colors to the mast saying that they're not going to spend any money on exploration or acquisitions. They're spending it on returning capital to shareholders, which I think is why Buffett has bought into it.

They've been buying back stock on occasion, although their shares have blown out a little bit. Not blown out, but they've gone up a little bit recently. Below Buffett's purchase price, you're probably getting a good deal, although you can have a look at his. He's not always, he's not batting a thousand with oil and gas because it's a commodity. It's very difficult to predict. And I think in the interim, in the short term,

The economic factors that influence energy are business activity, which might be slowing. That's always my bias. I know I'm a little bit bearish, but we haven't seen a slowdown for a long time, largely because of government intervention. It might be that this new administration can pull another rabbit out of the hat, but I think it gets harder and harder. So in the interim, in the short term, I don't really know. Hard to predict, but in the longer term, I think energy is a good place to be. So I like Oxy as a pick.

Let's take a quick break and hear from today's sponsors.

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Vanta makes compliance easy. Join over 8,000 companies, including many Y Combinator and Techstars startups who trust Vanta. Simplify compliance and get $1,000 off at vanta.com slash billionaires. That's V-A-N-T-A dot com slash billionaires.

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This and other information can be found in the funds prospectus at fundrise.com slash flagship. This is a paid advertisement. All right, back to the show. I'm a bit uneasy about Oxy. And the reason why is that I thought I understood oil and I can't think of any other industry I lost as much money in as oil.

as a percentage of my portfolio. So I probably don't. I've been wrong about moats, about currencies, about what we're in the cycle. The number of mistakes I made in oil is just absolutely crazy. And so I should probably have paid attention whenever I

barely got a passing grade in school whenever it came to physics or chemistry. See, I don't really know anything about it. But I think what I do want to say though, is to Toby's point about oil and talking about energy. So depending on who you speak to, they very often talk about renewables and renewables isn't as prevalent as most people think.

and renewables are used for electricity. And electricity is a type of energy, but energy doesn't have to be electricity. And so depending on what kind of product you're looking at, you can do things with oil that you can't necessarily do with electricity. I'm not going to come across like I'm an expert in all the different properties. And so it's very important whenever you look at different statistics and you're looking at

what's the need for X, Y, Z? Yes, but not all types of energy can do the same thing.

Now, I can't tell you whether Auxie is doing better than CVX or Chevron or ExxonMobil. I've tried playing that game and I tried reading up on reserves and the marginal costs and I failed every time. So I don't think I want to do that. With most companies,

that has the type of debt that the AUXY has, you always want to pause and to Toby's point, it's very well managed. And they changed strategy, what was it, a decade ago, a decent amount of time ago, and they start paying off debt. And I'm going to link here to the annual report. It's on page 54. You can see a really good overview of how it's being financed and when you have to pay XYZ that they have to disclose in the annual report. But it's

it doesn't look as bad as whenever you just look it up and you look at the enterprise value and you think, "Hoof, there's too much debt there." I guess my concern here is just more like, I don't know if I want to make a bet on Oxy. Perhaps I want to make a bet on Oxy because Buffett made a bet on Oxy, but that goes to my point. With my own pick about, are we all sitting in the same value investing contrarian echo chamber doing exactly the same thing? I don't know if we are.

If I were based in the States, I might look at something like XLE, which is not available if you're based in Europe, but you have something equivalent in Europe. That could be a way to play, but then it's not so much an oxy play. I don't know if I feel comfortable enough with that specific company.

a lot of interesting optionality. They're one of the front runners on, or the front runner, I should say, on the direct air capture, like a massive market. They can't do that at a competitive price. I mean, they can do it at a competitive price in the sense of it's really expensive for everyone else also to do it, but they can't really do it compared to, I don't know, say, plant trees or whatnot. It would still be roughly what... So I think they can take out one metric ton for something like, I want to say...

They can probably bring it down to 100. At least that's what the rumors are. Plant a tree for like five bucks, just in terms of equivalent. So it's still not there, but then it's very scalable. It's easier to manage, less fraud, all of that stuff. Anyways, it's certainly a question of time before the price would drop for that. And I'm sure that there's a big market, but the optionality in something like direct air capture and who is going to win that race, even though they may or may not be the front runners right now, it looks like they are probably.

probably doesn't add a lot of value to the thesis, but it might just be me who are a bit negative there. All of that being said, whenever I look at the income statement or the financial statements, it's an industry that's priced very attractively. And it's an industry that typically doesn't, they don't get the cheapest financing, which is

important whenever you're looking at a company with a lot of debt, but I wouldn't be too concerned with a company like Oxy. Again, this is my long-winded way of saying, I don't really know. I like it, but I don't want to invest in it. Stig Brodersen I think Stig and Toby, thank you for your feedback on this. And Stig, you brought up an interesting point, which I think Toby also mentioned that buying XLE might be a safer play because then you're not

trying to pick a winner. But in general, one thing that to be brought out is really true is that there has been chronic underinvestment in this sector for many years now because of various reasons. That's number one. Number two, the energy demand is not going down. It's actually going up.

Number three, yes, financing is an issue as you mentioned, that's a very good point. And that was one of my reasons for being interested in Oxy because they have a backer in Buffett if they need finances. And Buffett has a place to put his money. So this might be a win-win for both of them, which can prove to be an advantage for them compared to

other majors. The other thing is in terms from a geopolitical risk perspective, their assets are mostly in the United States. They do have some presence in Middle East and Colombia, but that's not significant.

So if there is any disruption in the energy flow, they are well equipped to take advantage of that within the United States or at the same time export it outside as well. So yeah, there are two ways of playing it either just by XLE and don't worry about all these various nuances of a company. And thank you for bringing up the carbon capture that part I missed out in my opening. So that's another place where they make money.

But from a downside risk protection perspective, I see it's very close to what Pabrai says like heads I win, tails I don't lose much kind of a situation. That's why I'm curious. I'm interested in this.

I'm happy to go. So, if you guys like off the run, unusual picks that nobody else likes, you've come to the right guy. So, my pick is alpha metallurgical resources. The metallurgical refers to metallurgical coal, met coal, as opposed to thermal coal. Met coal is the more valuable of the two. Met coal is used in the construction of steel and the makeup of steel by construction is about

80 pounds of met coal to make 100 pounds of steel. So, steel is like, it's a big component in the manufacture of steel. So, a finite number of coal, met coal producing mines around the world. There are some in Australia, there are some in the US, in Australia,

These ones are all based in the US. This company is headquartered in Tennessee. Their mines are Tennessee, West Virginia. I think it's a very well-managed company. The things that I like about it are great cash generation, a low valuation, an excellent balance sheet, and they've shown a propensity for buybacks, which is one of the things that I love. It's a $3 billion market cap, so it's a very small company.

by the standards of what we talk about on this show. The stock price, because it's coal and because it's very small, the stock price is extremely volatile. So it was $400 a few years ago.

It's been below $200. I was very fortunate to rebalance into it in September 20, which was close to its all-time low or close to its low over the last few years. And it's run up a little bit. Today, it's in $240, $250. At that level, it's a $3 billion market cap. It's got about $500 million in cash sitting on its balance sheet. Trivial amounts of debt, like $7 million in debt, something like that.

It generated $750 million in cash over the last 12 months, but the coal price is currently sitting around $200 a ton, which is close to its low. So forward earnings, if it stays where it is, will be low. And so the thing that drives met coal prices are demand for steel,

Steel, of course, is used in a variety of things, but big infrastructure projects, like China's a big consumer of steel. India's a big consumer of steel. China has been consuming less steel. India has been consuming more steel. The rest of the world still consumes steel on a variable basis. It's up and it's down. It depends a little bit. If we're going to construct a whole lot of new green infrastructure, which was the push over the last few years, all of that is steel. You need met coal.

to produce steel, basically. And if we're going to have green infrastructure, we need met coal. So the demand picture for met coal is good,

out to 2050 and beyond, which is as far out as the projections go. The AMR, Alpha Metallurgical Resources, this coal company, will be producing at least out to 2050. So, the company's not going away. It doesn't have any balance sheet issues. It's well managed. The mines are there. They're currently shuttering one of their mines. They're going to put it into an idle status because there's just less demand, but I like seeing them managing their

their supply like that. I think that the issue for them presently is that there's just this general distaste for coal has been, but you can have a look at the stock price. The stock price has run a mile. You take your pick of any of these things, HCC, Warrior Met, Arch, they've all had a pretty good run as we can continue to consume met coal for the production of steel. The thing that I really like about these guys is that they have been very good at buying back stock

So in 2019, there were 19 million shares outstanding. They've consistently bought back. There are currently 13 million shares outstanding. So that's six out of 19, which is 30%. Very, very material reduction. And it's a hugely cash generative business when...

Even at these levels, they're going to produce cash at these levels. If the coal price goes up, met coal price goes up, they'll produce more cash. So asymmetric position, very, very limited downside, potentially huge and very volatile upside. Having said that, it is a commodity. Nobody knows where the price is going to go. If the world goes into a big slowdown, this thing will be very volatile to the downside.

I don't think that you should necessarily, I should be careful when I say this, but I'm currently a holder through Zig, through my large cap ETF.

It's a 3% position, a 3.3% position. I think it's grown a little bit, so it might be a little bit bigger than that. We rebalance. At the moment, it's still well and truly, it's one of the cheapest in my model. So if we rebalance, we're likely to continue to hold. We probably sell down to get back to the 3.3%. But I don't see it going anywhere anytime soon. It's not something that I would necessarily sell for the mere fact that it went down, other than there are other better opportunities out there. So

That's how I'm thinking about it at the moment. I think it's reasonably safe, good possibility for a run. If inflation picks back up, this thing will go with it. Yeah, so good balance sheet, pretty safe, well-managed, and lots of optionality.

Thank you, Toby. I think this is a very interesting pick and especially with the current environment where there might be more support for coal in terms of regulation. However, one of the things that I observed is that their revenue has not been going up or it might be declining as well. So that's number one. Number two, if steel industry is their major consumer of their products.

Our advancements in steel industry like the electric arc furnace, which is a replacement for coal, going to have an impact on this company is something that I'm curious to know. Is that, that is regardless of regulation, if that's where the industry is going, it's much cheaper, it's much more environmentally friendly.

So many producers of steel might be embracing EAF compared to actually using the coal. Or is it that in a certain stage, the coal that these guys produce is needed and there is no replacement? Yeah, the EAF electric arc furnace has been around for a while. There are a few companies that are listed that produce on that basis. They haven't replaced it yet.

I think that there's just too much demand around for all steel as it, however it's produced at the moment. Having said that, it's a little bit weaker this year. The coal price topped out in 2022, I think. So, the coal price is like it's followed every other commodity where it ran up wildly through COVID and then it's continued to normalize since then. It was over earning through a period of COVID. It's coal price is a little bit elevated

The stock price for this company is a little bit elevated relative to where it was, but they bought back so much stock and it was too undervalued for a period of time. So I think the opportunity is not as good now as it was pre-COVID. I don't see that electric arc furnace replacing met coal anytime soon. I think that's...

The outlook to 2050, that's only a 15-year outlook. I just don't think it's – I don't see it going away in a 15-year period and these – the mines will be functioning. So, they'll be able to supply the demand out to 2050. Beyond that, I don't know. And probably, the projections out to 2050 are probably pretty loose as well. But I think it's hard to see technology replacing met coal anytime soon. Revenues are down because the stock price – the coal price is – it's a commodity. It's volatile.

But they've been pretty, you know, they're pretty good at generating cash because they just dig up the coal and sell it at whatever price they can get. They idle some of the capacity when they need to, which they're doing right now.

I always think about these things on sort of three factors. Are they sort of safe from a balance sheet business model perspective? And I think it is on those two fronts. Is it well managed? Do they reduce capacity when they need to? Do they buy back stock when they can? Do they keep a pretty liquid balance sheet? All those sort of things, and they do. And then is there some sort of possibility for

upside, asymmetric return. And I think that that is true here as well. So on those three bases, I think it's a pretty good risk adjusted bet here.

I pitched it at 190 bucks. I pitched it sub 200. It's currently 240. I still think it's a pretty good bet. I think it's probably fair values around 400, something like that. So I think it's a, but you know, it's cold, it's a commodity. It's not like an Apple or one of those companies that compounds and grows over time and the business just gets better and better. So some of these factors are unknowable. And so for that reason, a bigger discount is appropriate, but

Bigger discounts do lead to bigger returns if you're able to take advantage of the volatility rather than sort of be subject to the volatility. So that's how I always think about it. That's why I like deep value. That's why I like these sort of more beaten up, under-followed names and these more cyclical industries because you can do very well if you're able to keep your head about you while others are losing theirs. And I think this is a good example of one of those instances where you can do that.

So, I appreciate the question. It's a very long-winded way of me saying I don't think that EAF is going to be affecting them anytime soon, and it's been around for a while. So, I think it's okay. Full disclaimer, I'm invested through Powered By Funds in this name.

AMR is probably not loved in wider stock market, but it's pretty loved in the value investing community right now because of PopRise investment. He has a 3.7% ownership of the total company, to the best of my knowledge, whenever I look it up here in Data Roma. And so one of the narratives that's going around is that you don't see more supply coming in, but you still see more demand. And I don't know why you don't see more supply

To your point before, Toby, the reasons why you see more demand makes a lot of sense. Coal gets a bad rep here in the time of we need more renewables. But if you really want the renewables, you really need met coal. That's the one thing you really, really need. For each megawatt of wind power, you need between 120 and 180 tons of steel. And for the wind turbine, 225 to 285 tons of steel. So you need met coal. Ironically, you really need met coal if you want to be green.

So I don't know what to make of it. And it comes from a few different angles, you know.

One of the things that highlight is the increase in demand in India. And I was a bit surprised to see that. I wasn't surprised to see that you have, I think they said a 4.1% CAGR in India until 2050. To me, what it really signaled was that they didn't talk about China. That was the one thing I took away from them focusing on India, because that's a big unknown, both in terms of consumption and production. Stig Brodersen : And then there's the other thing

about capital allocation. So one of the circles I've tried to square is this need or this focus on why share buybacks are presumably better than dividends. I think we all have a bias to say that's the case. And we probably have a bias to say that for a number of reasons. Partly, if you're based in the States, you get taxed on dividends. You don't get taxed on share buybacks the same way, even though you

do with 1% now, I think, indirectly. But also, if you invest in something, you typically have…

the idea that it's been undervalued, in which case you want them to buy back shares. You typically also speak with other people who are bullish. There's people who are not bullish or don't have it on the watch list, they don't want to talk about the stock. So you typically end up in the echo chamber where you agree that it's undervalued. So you typically have this bias towards preferring share buybacks. And then at the same time, we have this famous best-buyer study where only 4% of stocks outperform T-bills.

And so whenever you sort of like try to put that together, it's like thinking, well, all of my stocks are undervalued and I really want them to buy back shares, but then at the same time, only 4% actually outperform T-Bells. How does that work? And it's more general observation. I think it's about my pay grade to know for AMR if it's truly undervalued or not. I have no reason not to believe that the management think that it is or POPRI for that matter think that it is.

But I think we have a bias to go that way, and especially for a commodity type product. I think if you do the math for most of them, you probably want them to pay out

that in dividends for you to employ other places than necessarily buybacks. Buybacks generally only work, like one way to look at it is that buybacks work if the company is getting better. So the question is, is it getting better? The way we think, and it also makes sense to think about it this way, but the way that most investors think is that if it's trading below intrinsic value, yes, they should buy back shares. But then it also comes with the point of what is the intrinsic value, especially what is the intrinsic value if the company is not getting better?

in which case you sometimes come up with the wrong capital allocation. So one example that comes to mind, and I'm only bringing this up because this was one of my picks long time ago, which was BethBeth and beyond. And they took on debt and they bought a bag of a ton of shares and they didn't pay out in dividend and the company went bankrupt. So if you followed my advice at the time, you will have lost all of your money. So keep in mind where this advice is coming from. But it is one of those things where I'm thinking, is that the best capital allocation?

So, yeah, let me throw it back over to you, Toby. I like buybacks. I like buybacks, not universally good. They have to be done at an undervaluation. So there's a lot of buybacks that are used to clean up option issuance. Don't like that necessarily, but I think it's better than just leaving that hanging out there. I like it when they do it with an undervalued company, which this company unequivocally was.

I think that buybacks are often used in businesses where the market is telling them that they need to shrink because they're giving them that undervaluation. What the management is indicating is that they are responsive to what the market is telling them and they are shrinking when they're doing that. And I think that you are rewarded over time.

for doing that because it concentrates the intrinsic value. Now, you're saying that with something like a mine, because they're digging it up, the opportunity is shrinking all the time. That's probably true, but it's going to take a very long time to dig all of that coal out of the ground. And the coal price, I think, will be higher just through inflation in 10 years than it is now.

And the cost to dig it out of the ground will be higher too. So the value of that mine will probably be more in 10 years time than it is now. So if they're buying back stock now, I think that's a good thing. If they do it intelligently, they're concentrating the value that is there in the remaining shareholders' hands. And I think that's a good thing. So I'm still in favor of a buyback here. I like most buybacks because of the behavior of the management, but also secondarily because it is a tax advantage way of doing it. If you get the dividend, pay tax.

There is a little 1% tax now, as you pointed out on the buyback, but it goes into your unrealized capital gains, which you can realize at a favorable time for you. So that also gives you some more flexibility there. So it's a good thing.

That Bessembinder study, I have never really dug into it. I don't want to get in a fight with him or anything like that, but it just, it doesn't sound right. It doesn't feel right to me. I've been doing this stuff for a long time. I've looked at lots and lots of studies. It just doesn't feel right. I think that, I don't know what the trick is in it and I'd have to go and have a deep look in and I don't have the time, but it just doesn't feel right to me. I've seen enough studies on the returns to stock.

stock market indexes. I mean, the S&P 500 is reconstituted every year with market capitalization waiting and it's gone up a lot faster than that. It may be the fact that by number, not very many of them perform, but by market capitalization, you certainly do very well. And most of us are exposed in some way or another through market capitalization, unless you're like we are investors and you're trying to actively get away from it. So I'm not too worried about that over the very long term. And I tend to focus on companies where I think they're doing smart buybacks rather than

just doing buybacks because they've got the money there or they're trying to goose the share price, which is a risk. If you see a company that's expensive doing a buyback to try and goose the share price, then which, you know, NVIDIA is doing a buyback, crazy. Insanity for NVIDIA to be doing that. That's to goose the share price. So I'm not a fan of that and I don't like that behavior. I don't like that promotional kind of behavior out of CEOs. I don't think that's the case here. I think that it's undervalued and they're buying it back in an opportune time.

I appreciate the comments, but I still like this pick. I wasn't aware that Pabrai owned it, by the way. I don't follow other investors in. I wouldn't follow Buffett into something and I'm probably going to fade Buffett on something in my next rebalance, which if I do that, I'll come back on this show and I'll talk about why I've done the opposite of what Buffett has done. And I say this is like Buffett is the investor that I respect the most, businessman I respect the most. But if...

I don't care what he does with his investments. I'll do the same thing or the opposite thing if I feel that it's the right thing to do. Yeah. Thank you so much, Toby, for your comments. It is kind of difficult to find people who you disagree with on a stock. To my point before about most people want to talk about with you at certain stocks because they're bullish. So I try to make myself my own bear now that I am invested. So I hope we didn't come across too rude, Toby. Hari?

Yeah, I think plus one to what Toby said, like, you know, it's very risky to follow someone because we don't know why they're investing or when they will get out. But I know that Pabra is putting a lot of his capital into coal companies in the recent past. So he might be seeing a trend. It might be a basket bet for him. Who knows? But this company does sound interesting, Toby, especially Pabra.

I do agree with you that EAF has been there for a while. It's not something new. And I don't think you are thinking of more than five year horizon for this company. So.

Well, that is true. I don't think you can think out more than five years, but all of the studies that I looked at, all of my own research, I have found that there's nothing that is predictive beyond five years. And the only thing that's predictive out to five years is valuation, which that doesn't really make any sense because it's not really an intrinsic factor of the company. It's sort of an extrinsic factor, but nothing's really predictable. It all breaks down over about five years.

All right, gents, any concluding remarks here before we end the episode? Please forgive us. Well said, Toby. Yeah, good one. All right. Before we let you go, gents, where can the audience learn more about you? Hari, why don't you go first? I'm always hanging out on X, formerly known as Twitter. Hari Rama, H-A-R-I-R-A-M-A is my handle. So looking forward to conversations over at Twitter.

I run two funds, two deep value funds, Acquirer's Fund, which is ticker is Z-I-G-Z and a smaller microcap version of that where the ticker is deep, D-E-E-P. Exactly the same strategy in both. It's just the two universes because people have looked at that and you'll see the stock price is

Diverge, Zig has gone up a lot and Deep has gone sideways and it's purely the universe. It's exactly the same strategy in the background. It just talks to what has happened in smaller micro-cap land. It's really been beaten up. I'm also on Twitter, Greenback, does my spelling G-R-E-E-N-B-A-C-K-D. It's a terrible spelling. I think I'm going to have to change that handle to my name or something, but it is what it is.

You said that for like 10 years now, Toby, all the time that I've known you. I listened to you on Guy's podcast the other day, and he was like, oh, why can't the audience know more about you? And I was just like, Toby's got to say greenback, and it's a terrible spelling. Yeah, sorry about that. It's wonderful. All right, Jens, thank you so much for your time. We'll see you again next quarter for the next Mastermind discussion. Thanks, Stig. See you, Harry. Thank you, Stig and Toby. See you, guys.

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