The S&P500 Hasn't Seen This Since 1999.

In my 40 years of investing, this

phenomenon is unprecedented and I feel

like I'm a little bit unmed like I'm I'm

in a big sea and the anchor broke. It's

not there anymore.

Hey everybody, how's it going? Uh

welcome to the Rule One podcast. This

week we have Phil Town with us. Uh the

Rule One investing guru and New York

Times bestselling author and all of our

boss uh Travis Parker, Austin Bowen, and

myself, Hunter Hoffler. all working uh

with Phil over here and between us we've

got a we've got a a few years of

experience. So this week we got a couple

interesting topics. Uh there's a couple

big names that are carrying the S&P 500

over the last roughly five or six years

now and some former compounders that

we're going to talk about that are kind

of struggling at the moment. So anyway,

yeah guys, let's just get started. Um

let's talk about what's going on in the

market. we have this kind of

unprecedented concentration of companies

that are driving all of these market

gains that we're seeing right now or at

the moment at least just propping the

market up. 10 stocks right now are

accounting for 60% of the market gains

this year. And uh that number in the

2010s was hovering at about 30% and

before that was a little closer to 20%

of the market being concentrated and

representing uh the top 10 companies

representing gains in the market. So,

I'll kick it off with Phil and we can

just uh we can just chat around the

table here about about what we think

about what's going on. And Phil, I'd

like to just ask you first. Um, you

know, have you ever seen such a

concentrated market like this? I mean,

you've got a lot more experience than us

and uh have have invested through

several cycles here. Is this something

novel to you or is there a is there a

time period where this type of thing was

happening and maybe some lessons that we

could pull from that?

I don't think I've ever seen it where

it's this concentrated. I mean it's

certainly you know the market goes on

its binges no question about it has the

internet binge just the same way you

know real estate it's its binge and

there's I guess a time and a place for

everything under heaven right but right

now it's just it seems to me so

concentrated in a way that I haven't

seen before and I think one of the one

of the really interesting phenomenon

from this and I'd love you guys to get

into the details about what you think

about individual companies in a minute

but I look at the Schiller PE ratio and

Wilshire GDP and I feel like I've been

launched to another planet where there's

a whole another set of rules going on

that haven't applied for oh 140 years

here and then the last 20 years it's

just these rules have blown up into a

situation where it's like you really

wonder if a guy like Warren Buffett

who's you know anchored on the idea that

the market's rational and always you

know ultimately prices things at their

value who's also sitting on 350400

billion dollars of cash. So, he's he's

not necessarily really buying into this

kind of valuation, but you kind of

wonder what he's thinking is like, is

there a new set of rules as a result of

AI that we didn't know about before and

that are permanent in some way that

result in a market average on the

Schiller PE of let's say 25 instead of

15. And if that's the case, then the

world has changed in an absolutely

unprecedented way. We've never seen this

before. Every time we see a cyclally

adjusted PE ratio that Robert Schiller

put together,

that's, you know, that's pushing over

into the 20s. You know, it the market

doesn't like it. And when it gets to 30,

there's always a market crash. 40, it's

a massive market crash. And we've been

we've been over 15 now for a long long

time. I don't know 15 years or something

where even the market crash didn't take

us below 15. So I honestly don't know in

my 40 years of investing

this phenomenon is unprecedented. And I

feel like I'm a little bit unmed like

I'm I'm in a big sea and the anchor

broke. It's not there anymore. And I,

you know, you just wonder, man, is this,

is this really permanent? And you've got

people out there who think it absolutely

is. The scary part is in 1999, I was

hearing the same thing. This is a

permanent change. Um, that the internet

has changed everything. And then, you

know, of course, we have the market drop

like a brick. So, honestly, I'm a little

out to see. And I've certainly been

investing like I've been out to see. am

sitting a lot of cash and just waiting

waiting waiting waiting for something

that hasn't happened. So, I'd love to

hear what you guys think. I mean, we're

going if if we're just looking at a

phenomenon that's not going to change

that from now on, you've got companies

that don't have they're really asset

light. They have very, you know, really

don't have to carry a lot of stuff or

replace it. And but at the same time,

they're dumping money into capex like

there's no tomorrow whatsoever. So, some

somebody explain that to me who's a

little smarter than I am.

Phil, you mentioned uh Buffett and

here's the question I think I'd like to

ask Buffett if I had an opportunity.

Okay. So, if you've got the S&P 500, you

know, he traditionally said if you don't

want to pick individual stocks, put your

money into the S&P 500 and let it ride,

right? But with what is it 41% of every

dollar sitting in 10 of 10 stocks, would

he still say that?

Yeah. Yeah. And you're at a you're at a

42 42 shiller.

42 shiller with a massive concentration.

230%

Wilshshire DDP. It's just like whoa.

Would you invest right now? Right.

Yeah. Because you're looking at 10 to 20

stocks that make up 50% of that index.

So it's not as if, you know, S&P 500 is

always sold as this. You're you're

automatically diversified into the 500

these 500 wonderful companies. I just

don't know if I wonder how you would

answer that question because if it was

me, I would I would tell people you need

to understand what you own. If you own

the S&P 500 index, you better understand

what companies are in there and you

better understand the top 20 because if

that's 50% of the index waiting, you

better be comfortable owning those

companies at massive valuations, uh

potentially massive valuations. So, that

would be the question I would love to

love to ask Warren and see what he would

respond now given the current

environment. I don't know what you guys

think about that, but

I mean I' I'd love to hear what you guys

think about what Lee Louu had to say,

right? You guys are really familiar with

him. And he pulled up, you know, the

chart from Jeremy Seagull that is

showing how if you invested in the stock

market over the last 200 years, you

would have made 2 million to one uh

relative to $1,800 in real terms, in

real buying power. Two two million to

one versus 2,000 to1 on bonds and like

4:1 on gold kind of things. So he took a

look at that chart and and he said that

yeah that's all true but who who's going

to be investing for 200 years? It's like

it it really depends on when you put

your money into this thing. And I mean

right to your point right he was showing

time periods where it's 10 years 15

years 20 years of absolutely sideways

after the market just explodes upward.

And you got to wonder is that where

we're headed for? And I mean, I've

[clears throat] got kids and they're

asking me what to do. And I'm like, God,

I I'll tell you, it's tough right now.

But I would just I would do bonds and

and cash and invest in options and I'd

do what we're doing and not chase this

market. I just don't believe that they

can keep going. But I don't know, man.

Maybe I'm wrong on this. I've tried to

do as much research as I can on this uh

particular topic, but I believe that

America is going through a first of its

kind in the entire history of investing

experiment right now. And this

experiment started in 1970 when Jack

Welsh created the index fund um and made

index fund and passive investing. And so

there's been a consistent growing creep

since it really took off 1978 when

Congress created the 401k. Um but is

then that has been growing to where in

1996

6% of the money in the stock market um

was was passive investing which mean

what and to just describe to people that

don't know what passive investing is. If

you have an IRA where automatically

every month you take let's say $500 out

of your paycheck and just put it into an

IRA and say invest it in the S&P 500.

That's passive investing. What you're

doing is doesn't matter. There's no

price discovery. You don't care about

price to value any of those things. It's

just money that's going into an index at

whatever the price is. Okay? versus

active investing is what we do where

we're basically looking at the price

versus the value of these these

companies out there, these businesses,

and we're saying, "Hey, this business is

overvalued. This business is

undervalued. This business is on sale."

All right? So, there's there's a big

difference. So, 6% in 1996 was passive

investing. By 2010,

um 2010, it was 19%. By 2015, 30% of the

equity or the money that was invested in

the US stock market in the global stock

market was was pass investing. That's

accelerated to 2023, 48% and now by the

end of 2024, 60% of the money, the total

money that's in the stock market is

passive investing money. And so the the

passive investing, just the automatic

put money out of your paycheck into the

market at any price, doesn't matter what

it is, is 60% now. And you know, you

look at these funds, it's like something

like I've got some stats here to just go

over, but um the baby boomer generation

controls 30% of the money in the stock

market through pension funds, 401ks, and

IAS, which is just an insane amount of

concentration in this retiring class of

of individuals. And once again, the this

is something that Bur's talked about in

a couple posts going back, I think on

his Substack, it's titled Foundations,

Foundations, Market Structure, and

Value. if anybody's subscribed and they

want to go read this. But what he's

basically saying is that this is like a

known issue in Congress where the

Congress has actually made a series of

changes to to push off required minimum

distributions for retirement accounts

because they're essentially trying to

keep the what they call the bid going

into the markets. And so what that means

is that every month you put money in,

but if you hit a certain age, it used to

be 70 and a half years old, you had to

you were required to pull money out of

your retirement accounts. Okay? And so

that's an ask, that's a selling action

that takes place. It was 70 and a half.

And then in 2008, they did the first

time ever, they basically waved all

requirement dist required RMDs. I'm just

call them RMDs from now on. 2008 2009

they waved all of them entirely and then

in 2019 as this baby boomer generation

was really starting to get in and RMDs

were starting to pick up. They passed in

2019 the secure act congress did which

pushed the age from 70 and a half to 72

pushing this thing off. Then in 2020

they passed the car's act which pushed

it further from 72 to 73. And so they're

just pushing off the age um of of how

long those it's set to go to 75 in 2035.

So they just keep extending this RMD

because if they didn't extend it right

now, so so the amount of flows of

boomers today that are currently

experiencing RMDs is about $250 billion

a year comes out versus all the money

that's coming in every year. If they

hadn't have changed that age to 73,

there'd be over a trillion dollars this

year that would be required to come out

of the market. And so this is the

government. They're saying it's because

people are are living longer. But, you

know, there's this other side of it

where it's like they're pushing off this

time bomb and passive investing. And the

other thing with that is passive

investing has taken over from pension

funds in a big way. So pension funds

used to be heavily bond, you know, or I

shouldn't say heavily, but they were a

mixture of equity and bonds. And as

money has flowed out of pension funds,

401ks and IAS have taken over, there's

been a decadel long trend of money

moving out of bonds and out of fixed

income and just into equities at any

price there is. And so, you know, I I

think that is the biggest force that's

driving the market. And when you put a

$100 into the S&P 500, you're you're you

might as well just put half of that into

the top 10 companies, the the mag seven

really, if you want to get, you know,

serious about it, which is extreme

concentration, no price discovery, and

all it's going to take is some type of

event. You know, CO looked like it might

start being that event, and the

government came in and printed $9

trillion to basically get us out of that

really quickly. It was 103 days from

start of the fall 34 37% down to getting

back to even which is really one of the

quickest bare markets we've ever had in

history. The average bare market lasts

411 days. So 103 days is just you know

25% of that. But there just going to

come this moment where we do have some

type of event that causes this. And all

it's going to take is baby boomer

regeneration to get nervous about being

in equities and want to switch to bonds.

And I think you could completely reset

the entire mechanics of passive

investing in equities off of that single

event. And I do think it could be rather

extreme more than more than we've really

ever seen just because there's been no

stock market equity market in history of

the entire world that has 60% of the

money passively investing with no price

discovery.

Yeah, that's that's a point that I was I

was going to hit on is that, you know,

it's one one thing we should keep in

mind the way that we invest. We're

typically pretty happy to carry a good

amount of cash on on our balance sheet

because we're waiting for these

opportunities where we can jump into the

market, but the rest of the market,

especially institutional money, does not

feel the same way. And typically that

money, if it's rotating out of stocks,

is going into bonds. And in the last,

you know, 20 years, save for the past

two years, rotating into bonds has not

been a very lucrative venture for sure.

Um, and the fact that all of this

passive money is staying in the equity

markets, uh, I it probably is due to the

fact that the bond market looks pretty

unappealing, especially in an

inflationary environment. You know, one

thing that I think is worth worth

flagging with all this concentration

right now, you were talking about

postco, the fact that we should have had

a correction there and there probably

should have been additional corrections

beyond COVID due to the fact that that

inflation was running pretty high. And I

in my opinion, I think the Fed was

pretty late to to raise the interest

rates and try and get some of that money

off the streets. Uh but instead what's

happened is that we the these two things

have kind of intersected at the perfect

point where we had a bunch of money you

know trillions of dollars injected into

the market over COVID and in the in the

years following COVID along with this

inflationary environment creating this

inflationary environment I could I

should say and then we have this

revolutionary

technology that is creating

unprecedented value in the market with

AI and all of we started off the

conversation talking about how the S&P

500 is so concentrated in these few tin

stocks, right? And it is all uh

hyperscalers and AI adjacent companies

that that the market has concentrated in

right now. In the past, that could have

been different industries, but right now

that's where all the money is. Those

businesses are creating insane value and

the money, the capital exists out there

to fund equities instead of flowing into

the bond market. So I I think that we're

at a little bit of an interesting, you

know, nexus right there with that. We

were talking about the Schiller PE

earlier as well, and the only other time

that you're seeing levels close to where

we're at right now was in 1999,

uh, in the dotcom boom and then the the

bursting of the dot bubble. Um and we

interestingly have kind of an interest

rate environment that was almost exactly

the same at the time coming down off of

really high highs um in in the 1970s and

80s. Uh where now the rates are roughly

the same, but we're in more of a an

inflationary environment where we're

more concerned about inflation and we're

more concerned over the long term that

rates are going to rise. You know, the

30-year Treasury rate, for example,

right now is, I think, pretty close to

6%. And I think uh in 1999, it averaged

out at about 5.8%. So, we're in a pretty

similar environment there.

Well, shoot, man. I' I'd like to know,

Trav, what do you think? You're you're

the valuation guy for these for these

more than I am for sure for these

hyperscalers. And one of the arguments

that we're not in a bubble is that the

hyperscalers are nothing like the 1999

internet bubble companies. That they're

making billions and billions of dollars.

They have tons of cash flow. Um these

are real companies that own their

markets. They're they're damn near

monopolies in their own areas. And we

and they're priced not crazy given given

that kind of cash flow. Well, I think I

think the argument is legitimate. I

mean, you listen to the other side. The

reason they'll support that argument is

they'll say that the demand for AI is

insatiable, right? That it's it's so

it's such a unique technology that

you're never going to have this period

where we're going to over, you know,

overbuild demand. But the problem I have

with that is that is that when I look at

the AI sector, to me, it looks very much

like a traditional chip cycle, right?

And the traditional chip cycle is

subjected to supply and demand

mismatches for a number of reasons. The

biggest one being that there's a massive

there's a massive differentiation

between when you can start building

added capacity and when it actually

comes online. So you're talking two to

three years before you you break ground

on the data center. Let's say three

years that it comes online. So in and

everybody's doing this. You've got, you

know, Google, Amazon, Microsoft, and a

bunch of small players. You know, Meta

is in there as well. And a bunch of

small players doing it all at the same

time, chasing one single demand for AI.

That is a recipe, a huge recipe for a

massive supply and demand mismatch. As

we look at the cycle right now, AI is

being constrained by memory. And so

you're seeing people I I guarantee you

what's happening right now based on

experience from navigating the chip

cycle for years is that a lot of those

orders that these memory companies like

Micron are seeing are probably double

what they actually think they need. And

they're doing that because they know

that these companies are allocating

supply to them. They're they're trying

to spread a limited amount of supply

around. And if you're a buyer, you know

that if I'm getting a proportional

amount, I'm going to double my order so

I get what I actually need. And when the

music finally stops, when demand finally

starts to get satisfied, there's going

to be a whole bunch of what I believe

are going to be orders that were that

were phantom orders. And at the same

time, you'll start seeing all this

capacity from all these data centers

start to hit the market. And so I think

what we're going to see is at a minimum

at least a an orderly kind of a a

pullback in uh you know AI demand

because it'll be just a typical cycle.

We'll over supply the cycle the chips

will get cheap because inventory rise

once they bleed off the inventory of all

the chips and demand catches up the

cycle will start over. That's the best

case scenario. The worst case scenario

is that the demand comes in softer than

anybody imagined. And you see all the

hyperscalers, all they have to say is

one earnings call. All they have to say

is that, hey, we're pulling back on our

spending because we're worried about the

returns that we're going to get in the

future if we overbuild and everybody's

going to start selling instantly.

So I think that's the worst case

scenario. But at a minimum I see this

going into a typical two to threeyear

chip cycle kind of a trough and valley

with the trajectory will be up and to

the right. I think AI demand will

continue to grow. I just don't think the

dynamics of the AI chip and

infrastructure you know market is that

much different than a typical chip

cycle. So, I I think that there's a lot

of risk right here where we're at. And

more than ever, understanding price

versus value. What is what are those

chip companies actually worth long term

is critical. It's critical because

they're if you if you look back at the

was it the Nifty50 I think was uh was in

the 70s, right? Look at the Nifty50. All

the high growth stocks, you know, were

being bought up. And as soon as the

market crashed, I think in ' 74, all

those companies that were at the top of

the list that were I trading for like

200x earnings or something like that, it

took them 25 years. 25 years to catch

up. So this is this is why I think we

need to be really disciplined in terms

of understanding what you own. And yes,

these are great businesses with huge

cash flows, big moes,

but you can't pay an infinite price for

them, right? and and we're if we're

approaching even a top of cycle right

now, I think the best thing you can do

is just make sure you understand these

businesses and understand what the what

the value proposition is and and do a

proper valuation and be very patient

because if you buy them at the bottom of

a cycle, your returns could easily be

well over what we target at 26%. I think

you're you're looking at, you know,

stocks that will be able to compound

well into the next into the future for

the next 20 years, but you c you can't

buy them at the wrong time.

Yeah. I I mean, I just want to say that

um since Travis came on to the team with

Phil, I've I've watched and Phil Phil

and I, we've watched him correctly,

not call the absolute bottom, but

correctly call the bottoming of that

chip cycle back in 2018. again in 2022,

again in 2025. It's like, you know, in

2025, you were a little skeptical of it

just because of AI. You were like, "Hey,

there's a new factor in there that could

extend this." But, I mean, man, we that

turned out to be a a true, you know,

true bottom going forward. But, you

know, the fact that it's so predictable

for you, you know, really it's I put a

lot of faith that like you're you're

just seeing the number thing just so

people understand what Travis is saying.

Um, in in memory, so there's three big

memory makers in the world. You got

Micron, SKH, and Samsung. Um, in 2022,

2023, there was a bottoming of the

cycle. They pulled back on production.

They weren't spending and investing in

new fabs. Um, so there was a there's a

finite amount of memory in the world.

Well, fast forward to I think it was

August or September of 2025 when Oracle

and OpenAI inked the Stargate deal. Um,

OpenAI put in a letter of of commitment

to I think it was SKH Highix or Micron.

I I I I'm misremembering which one it

was, but it was for 9 900,000

memory wafers a month, which was at that

exact time 40%

of the world's memory supply in one one

commitment from a player that didn't

exist in the memory market, you know,

before that. And so that just created

this this huge, you know, all of a

sudden I think the biggest buyer of

memory in the world before that deal was

announced was Apple at 22% of the

market. You know, you've got the other

hyperscalers, Meta, Facebook, Google,

Amazon. They were all each around like

10 to 15% of the memory market. And so

here's one one purchase backed by

Oracle, backed by debt that previously

had never purchased any any memory that

says, "Hey, I want 40% of everything

that you can produce." And you can

imagine kind of what Travis was saying.

It's like now Google, Amazon, Facebook,

Meta, Microsoft, they all have to go,

well, I need I need some of that memory

for my own stuff. So they start

overordering on memory as well. And it

just creates this huge fight where

everybody's trying to get as much as

they can of a finite supply of memory

wafers in the world allocated to them on

their books and to do that like Travis

was saying they they over over orderer

and so I I don't Travis have you ever in

all your years and and have you ever

seen like such a supply demand mismatch

happen in the chip space because of of

one customer? No, I've I've never seen

it happen. In fact, memory, you know, 20

years ago, memory was such a commodity

that it it was cons, you know, we would

see supply and demand mismatches

happened, of course, but never at that

level of concentration. It was always

CPUs, right? CPUs were the where where

we would see these massive

concentrations where you had Intel, AMD

supplying almost every computer

manufacturer in the world. And so it

it's very different now. So, you know,

you mentioned that I did have, you know,

I did have some nervousness going into

this cycle because AI is very different.

So, what I want to acknowledge is that,

you know, the cycle could be different.

The the shape of the cycle, the duration

of the cycle, the magnitude of the

troughs and valleys could be very

different in the future because of AI. I

want to acknowledge that we may not see

the same amplitude at the top of a cycle

that we used to. It could be smoothed

out. And I think the reason that could

happen is that these long-term supply

agreements that you're talking about

actually guarantees some of these

companies at least some level of

predictability that I'm going to have

this at least minimum supply coming to

me and there's not going to be the

tendency to over orderer or to overbuild

um chips. So if if you're a fab if

you're a fab manager, okay? So if you um

are an Intel, say just pretend you're

Intel for a moment. You're talking about

a fab that costs billions of dollars.

And what you're measured on as a

production manager is you are measured

on cost per unit. And so as many units

as you can pump through that factory,

the better job you have just done,

right? because you'd spread all that

fixed cost over a number of units. So

these guys do not ever want to take

their foot off the gas. The moment they

take their foot off the gas and have to,

you know, reduce the number of wafer

starts, all of a sudden their cost just

went up. So not only do you have demand

games being played, you have supply, you

know, games being played. Um and and so

these guys I I used to push our

production lines to the limit. Like it

till the last possible moment I wasn't

going to turn off the spot, right?

So the the whole thing with these

long-term supply agreements is from a

fab manager's perspective now I have

some predictability and so the

likelihood that I'm going to overproduce

or produce more than I need to is great

greatly reduced. Right? It's a

significantly different picture.

But I don't hear anything in there that

stops the cycle from happening. I still

it whether the cycle is a softer cycle.

Um that's fine, but I still think you're

going to fall into that trap because I

don't believe AI demand I mean really

what you're talking about the demand is

information, right? Think of it like

from an oil and gas perspective. Um you

know it's rather than the flow of oil,

you're really managing the flow of

information. And so chips support that

either storage or transmission or

calculation of data. So

that that demand for data is continuing

to increase. But the dynamics of how the

market work I don't think have

fundamentally changed that much. So I

think that's where we could be wrong on

the cycle and that's what makes me

nervous about it. This cycle could last

a lot longer than we think. So it could

go into 2027 before we see it roll over.

What what I'm wondering is um about the

mismatch between the current chips which

are sitting in warehouses waiting for

data centers to be built that are in

turn waiting for environmental

um and social roadblocks to be taken

away. Um, I think Oracle just extended

its 2026

expected buildout to 2029

over a water issue and and this is going

on everywhere essentially. So, a a huge

percentage of the chips that have

already been built are from Nvidia are

sitting in warehouses right now and

they're not they're not installed

anywhere. And because they're not

installed anywhere, accounting rules say

that you don't depreciate those chips.

So no no no one at Google is writing

down uh the chips that are sitting in on

the warehouse floor. Okay. And now of

course Nvidia is coming out with this

new generation of chip which is I think

roughly five times faster than the

existing chips. And they are um about

oneten the energy usage which is

enormous change in in what you can do

with that chip or with that GPU. I guess

it's a GPU. So here's um here's a big

problem. If Nvidia is got a cycle of

about one one major

new chip per year and these guys are

building out data centers with a five

sixyear

expected life. Um first off I guess how

realistic is that sixyear life? Um and

and second, what happens if the

accountants finally can't stand it

anymore

that that they would be, you know,

actually criminally liable in some way

if they didn't write off chips that no

longer have the value that's being

carried on the books. So, I mean, if if

you've got a chip for $100 and it does

onetenth the energy and 5x the speed and

you bought a chip for $100 and says 10

times the energy and one the speed,

how is the accountant going to sit there

and say, "Oh, yeah, that's still worth

$100." It it just doesn't seem to me

it'd be possible. And at someday, I

would think that reckoning is going to

come. And but I don't I guess what I

don't know is how seriously will the

market take that? I mean it's a paper

write down. It comes against earnings,

right? For sure. I mean it comes against

earnings, but will the analysts just

talk around it? Will they just go blow

it off because it's not important and

yeah, you know, Google's earnings went

down by$50 billion that year, but who

cares? Or is this the straw that just

breaks the camel's back? Yeah, I think

there's a really interesting thing going

on right now in the market that a lot of

people are not willing to acknowledge,

but we've we've, you know, history

doesn't repeat, but it does rhyme. Um,

there's a really good book that anybody

that's interested in this stuff should

read called The Money Game, written in

1968. Um, and basically, it's a

non-fiction book, but the author, um,

Steve Olner, I think is his name. He um

he basically uses pseudonyms for people

on Wall Street that he was interacting

with at the time and um he one of the

characters in the book a Wall Street

person that he doesn't name he names him

Billy the kid in in the book he

basically says um there's this narrative

that the demand for computers so this is

1960s the demand for computers is

infinite right so it's like where have

we heard that demand is infinite it's

like that's just all the AI rage right

now. It was all the internet rage, you

know, and and we we do know factually

that there is not an infinite demand for

computers, you know, now that we're 60,

50, 60 years later. Um, but so demand

was infinite and so you could pay

whatever prices for computers back then

didn't matter and you could borrow

against them and everything because the

demand was just going to outpace and

they were going to have, you know, these

these useful lives. Back then they were

estimating that the useful life of a

computer was about 9 years give or take.

And I'm specifically referencing the the

IBM system 360 is is what's referenced

in the book. There was a really

interesting thing and that was that IBM

was constantly upping their next product

faster than every eight years because

they were trying to stay ahead. And so,

you know, even though a a 360 system

theoretically could last eight years

before it was basically non-functional

and chips do stop working over time, you

know, there there is a you know, the

heat that's in them and stuff like that,

pieces break, but if every one or two

years IBM was coming out with a new

system, it basically was obsoleting in a

much faster than eight years its

previous system. Okay. And the when the

370 came out two years later, um it

actually crashed the the average

computer stock crashed 80%.

Because most of these computer stocks

that were basically the equivalent today

is not, you know, Facebook Meta. It's

more of like your coreweave type

businesses where they're they're buying

GPUs and then renting them out. That's

what these companies are doing. So when

I say average computer stock, that's

what I mean is companies that were

buying IBM systems and then renting

those systems out. There was an 80%

correction in those those stocks because

they had bought these 8-year life

systems with debt and then there was a

two-year turnaround. What further

exasperated that is IBM had competition

and so they had huge margins because

they were kind of the first there. But

then on on one of their future systems,

they basically released a newer system

better than the 370, but dropped the

price of it 75% to compete with the

other big computer companies at the

time, you know, and and they had the

margin to do it. And so you look at

Nvidia today, they've got, I don't know,

80% gross margins, just absolutely

insane. People are saying demand for

GPUs is infinite. Okay, Nvidia is every

year now the the the cycles of them

releasing the next GPU are getting

shorter and shorter, but we do have this

one thing that's stopping kind of all of

the IBM piece from happening and that's

that Nvidia's newest systems that have

these leap the Vera Rubin that just have

these leapstep efficiency energy

efficiency gains um they can't be

installed yet because you can't install

a Vera Rubin in a yesterday's data

It's like yesterday's data centers are

entirely built up around air cooling.

And so the H100 chips, the B200 chips,

they can all go into those type of data

centers. But as soon as you get to these

latest and greatest Blackwell models and

the Vera Rubins, you need water cooling

installed. And so there's an entire just

gigantic industry like you were calling

out, Phil, of data centers that are

being up being built up right now that

need to be constructed before the new

chip that wipes out all the the value of

the previous chips comes out. And if we

overshoot demand even by a little bit,

you are going to see an unwinding of

these companies like Coreweave. Um

there's a couple others. There's a lot

of Bitcoin miners that became randomly

um AI data center companies. I think

that your your Metas, your Amazons, they

have such huge free cash flow from

exterior lines of business that they'll

get hit, but they're they're not going

to become worthless. It'll if if this

unwind does happen and it's because of a

supply demand mismatch as data center

capacity comes online with these newer

chips, they'll just be the unfortunate,

you know, we're taking earnings write

offs. They'll be the Cisco of of the

time where it was, you know, a couple

years of earnings write offs and, you

know, you just did a video on this

showing how Cisco was overpriced, but it

was a wonderful company. And so bad bad

investment at the peak didn't change the

fact that it was a cash flowing machine

for years and years after that. That's

those but your core weaves that took on

debt basically expecting these GPUs to

last and rent for a certain amount of

time. It's we were already seeing before

Opus dropped earlier this year. The

Bloomberg tracks these indexes of um the

the rental prices of these and the B200

which was released August of 2025

basically had a 20% drop in the rent by

January of 26. So the average rental

price of a B200 dropped 20% in 4 months

of being new and then Claude and Opus

took off. I mean Opus 4.6 6 Opus 4.7 all

this coding it took off. So that created

this huge demand surge for specifically

Anthropic but also codecs with OpenAI

and then you've got all these new chips

that cannot be installed yet waiting on

data centers. And so you know the B200s

are now renting at 150% of of what they

originally were. Not because the chips

last eight, not because the chips I

think in the long run are going to last

eight years, but because there's not a

newer chip. All the newer chips that are

being sold by Nvidia right now, Vera

Rubins and the latest and greatest of

Blackwells, they just can't be installed

and put into use yet. It's like 5% of

them have actually been installed in

data centers that have been sold.

Yeah. Uh, and I mean, I think you guys

have hit on on something interesting,

which is just the the social blowback

that you're getting from building new

data centers. Right now, I'm I'm living

in in kind of a uh a cultural epicenter

of this in Northern Virginia or one of

the main um one of the the main fiber

optic lines, transatlantic fiber optic

lines comes through Washington DC. So,

it's it's an area with a bunch of data

centers around us and always has been.

Um and there's a huge social backlash

because of a perceived increase in in

power. Uh there's more power outage.

There's a lot more priority in some

cases apparently being uh being given to

these data centers. Um so it might be

there might be a little bit more of a

barrier to entry to actually building

new data centers to use these new chips.

Uh I want to bring it back just to to

where where we started off here though

with with how the these this

concentration of of money in the indexes

uh with AI focused companies. I we've

talked about how we feel pretty

confident that there's a cycle here and

just want to bring it back to the fact

that because we feel like there's a chip

cycle and because there's such a high

concentration in companies that are

going to be directly affected by that. I

think that people should understand that

even even their their passive investment

accounts, their IAS and 401ks, you you

will see probably a larger effect on

those than a typical correction year in

in the chip cycle. So that's something

that we should we should pay attention

to. Uh if it's representing, you know,

close to 50% of these different index

funds um that that your passive

investments are going to be highly

concentrated in. if there's a correction

of 50%, you know, you should you should

feel like you're going to see a 20 to

25% correction in in your accounts. So,

that's something that uh that I just

wanted to highlight there. But, um

anything else on this, guys? I think we

should move on. Uh talk about some some

former compounders here that uh we've

taken a look at over our our careers and

and kind of how why they've fallen out

of favor. Phil, you got something? No,

just before you jump over, I I think you

were saying about a maybe a 25%

correction based on the math, but not I

don't think based on the emotion and on

the fact that these index funds have to

have to sell just like they have to buy.

They're passive and as the index goes

down,

they're liquidating to stay with it, I

believe. Wouldn't that be what happens?

Well, it would it would be baby boomers.

Think of think of 30% of the market

wanting to protect their what they need

in retirement. And so they sell just

passively. They say, "Hey, I want to go

to bonds instead of being in in

equities." And then there's a forced

selling that then probably gets

exacerbated by, you know, all these kind

of like computerbased algorithmic

tradings. the more it falls, the more

that baby boomer generation is going to

want to get to cash. People, people in,

you know, I would say like an average

millennial or gen Z, you know, you're

not going to have that same pressure of,

you know, this is what I have to live on

for the rest of my life. And so, you

know, they might react the same. they

might get pressured all the same, but

specifically remember 30% of all the

money in the market today is passively

invested by a retiring generation. All

right? And so it could get really really

violent.

I just want to add one more one more

thing to that point and that is that

there's this isn't a coincidence that

all of this has been generated since the

1970s. The baby boom generation is the

biggest generation in history of the

country and came into their adulthood in

the 1970s and begin and had started to

see that a defined benefit plan wasn't

um producing much of a of a good

retirement and that if you put your

money in the stock market in the 401k

plan which which didn't exist right um

that would have been better in other

words to control more your your future

future and to have a better return. And

so the 401k plans were pushed for it in

Congress and created in the late 1970s.

And then that started driving this

train. More and more and more money goes

into the stock market. And as it does,

the stock market goes up over time being

driven by more and more money being put

in it. And you you can just imagine

these the the baby boom generation now

in their late 60s, early 70s

not

um not wanting to be in a position of

having to go to work for Walmart in

their 70s or 80s and seeing bonds a

10-year bond at 6% and maybe higher.

Just historically, it wouldn't be crazy

at all to see a tenure at 7% 8%. So, if

you get bonds up into that range, which

is a pretty decent return,

you'll have annuities

screaming, "Come and buy me because I

can give you 10 or 12, right? The way

annuities work it out." And so you have

these options that baby boomers haven't

had for decade a couple of decades where

all of a sudden you can shift all of

that retirement capital to annuities and

bet the farm that you're going to live a

long time and if you do you're going to

make this great return or just go over

to bonds and be happy with a 6% return

rather than having a negative return in

the market and a flatline return for 10

years. You can really see people wanting

to shift and and doing so in large

numbers, which then means this whole

market goes down a lot more than 25%.

This market starts to tumble and first

the baby boomers make it tumble and then

Austin, to your point, then the rest of

the generations are like, "What am I

doing in here?" you know, and and bail

out. And that can take this thing into a

contagion that we've never seen before

because of of we've never seen this

level of passive investing. So, it it

could be really entertaining if if

you're sitting on the sidelines or if

you have uh some skill at making money

when the markets go down, um this could

be really really a great market for you.

Um, but if you're sitting there hoping

against all history that the stock

market continues to produce double-digit

returns

into the future without a major break,

uh, that would be, I think, a hope

overexperience.

Yeah, it's kind of I feel like it's the

illusion of safety, right? You've got

this massive concentration in 20 stocks

and the S&P 500 and the passive flows

that Awesome was talking about. To me,

this is this is the time now more than

ever you need to be able to understand

individual companies, right? Th this is

the time and you need to understand how

to pick a business that has a moat and

has long-term ability to um to compound

money into the future because you cannot

simply put your money in an index and

feel safe. That traditional wisdom I

think is is out the window right now

because to your guys's point when it

unwinds there's going to be a lot of

pain out there. So understanding

individual companies now I think is more

important than ever in my view.

Yeah. Just for the viewers, just just

for the viewers, we're not saying it's

going to unwind this year either. It's

like we don't know when it's going to

unwind. The longer it goes, the bigger

the unwind. That's what we do know.

I I will say Warren Buffett came out in

July in an interview with Becky Quick

and basically said, "Yeah, it will

happen. [laughter]

I mean, it's going to happen." That

I mean, it's, you know, you keep saying

it long enough, you're going to be

right. And uh I think that the odds are

getting higher and higher. And one of my

friends was like, "Yeah, yeah, and a

stopped watch is right twice a day,

buddy."

Yeah. Oh, God. Did not mean that as a

shot towards Warren Buffett.

I I I would I would just say though to

that point, if you're right once or

twice in your entire life, it can change

your entire financial future. So it's

like you can be wrong for a decade or

two and just getting in just being

patient and waiting for the right moment

in in a lifetime can be the difference

of having a little bit to retire on and

having you know more than you need to

retire on to the point where your kids

have enough to retire on just from you.

That's the beauty of what we're doing,

right? If you understand the difference

between price and value, you're you're

going to naturally be in a position

hopefully, right, where you're not

sitting on a bunch of overvalued

companies when if and when we're

ultimately right. Right? That's the key.

And that's all you have to worry about.

You don't have to know when it's going

to happen. All you have to do is make

sure your money is put into companies

that are long-term compounding machines

or just wonderful businesses at fair

prices, even fair prices. And that's all

you have to do. You don't have to figure

out when it's going to happen. I I I

laugh all the time. I I read Phil's book

in 2009. My dad gave it to me in 2009,

okay? Rule on investing. And I read it,

did a little paper trading, you know,

following the rule and invest stuff. And

my first stock purchase, me and my dad

were 2010. We just thought we were good

because we went like six years without a

single losing investment with just

skyrocketing investment returns. you

know, I was starting from a a low base,

but you know, I I didn't I didn't have a

loss in six years. I just thought I was

an amazing investor and I didn't

understand that that timing piece was

masking, you know, completely what was,

you know, my my amateur investing. You

know, it's I I think back to what I know

then versus what I know now. And if I

was coming in, if I was coming into the

world as a as a 19, no, as an

18-year-old today

trying to trying to have those kind, it

would be extremely hard to have that

that next six years clarity. It's I

would probably have a much different

look if I if id started in 2006 or 2007.

I probably wouldn't have been an

investor. I probably would have never,

you know, picked it up and done this.

And so, a little bit of timing was what

got me so hooked that I just couldn't

put it down. And that was just a a a

timing of of deciding to invest at

probably the best time to try in the

past 100 years of the stock market since

like 1933.

Well, it's and it's also puts you in

danger of a little bit of hubris, too,

right?

Oh, yeah. It it caught up with me.

I hear you. Uh Austin has there's none

of that in Austin. No humorus.

No, but I mean see ser see like we run

into this all the time, right? When when

we're when we're back testing trades,

right? It is so important that where you

start your back test can make or break

the the viability of of a trade, right?

So, I mean, it's something that you have

to keep in keep in mind, paying

attention to when you're in the market,

how you're performing, and uh and

building trades based on uh based on the

fundamental value of a business, not the

uh not the price at the time. So,

speaking of stock prices,

wait, wait, wait. I want to second the

hubris thing. The hubris thing is huge.

Thank you, Austin, for bringing that up.

I mean, it's so gigantic. it because

particularly if you're new to this that

for some reason if you're well not just

for some reason typically if you're new

to this you haven't suffered any losses

and you're going along maybe you're

doing paper trading or something and

things are going well so you're

continuing along and you sort of build

up this sense that you really can do

this really well and I had the exact

same experience I started investing in

1981

and the market was at like 700 or

something. It was at the bottom. I mean,

Bear Sterns in told me, "Oh, no. I mean,

you can't you can't raise money for

stock investing anymore. It's over." You

know, I mean, it had been since 1965,

the market was at a thousand. And here

we are at 1981. It's at 600. So, 18

years later, people are like, I'm done

with the stock market. It's stupid. And

that was the perfect time to start

investing, right? And I had the same

experience. year after year of

brilliant, brilliant investing. It was

just brilliant.

Everything just went straight up,

right? So, beware of hubris. It will

bite you in the butt for sure. And it's

really just that sense that you know

more than you really do. And uh and you

got to you just got to stay humble, man.

That's what you got to do. Stay humble.

Speaking speaking of hubris, uh we got a

couple companies here that have made

some some follyies and a couple of

companies here we're looking at that uh

are just caught up in kind of a bad

narrative uh in the market right now

that were former what we would call

compounders that as of late in the last

couple of years have uh not performed so

well or just have fallen out of favor uh

in the market. And those companies that

we'll discuss here real quick are

Chipotle, Nike, and Salesforce. Um, so

why don't we start with with Chipotle

that is down uh about 40% from its highs

in 2024. Um, and is uh has has had a

little bit of uh struggle with foot

traffic uh forecasting very little sales

growth. um in a company that we really

love that has a great product has

generally had good management and a

really good structure. So um I mean

let's just let's start there and talk a

little bit about where the consumers at

and uh and what is going on with

Chipotle and what we think they need to

do to get back on track.

Yeah, I thought this when I was looking

at this before the before the show here,

the the analogy that came to mind was

it's like you would drive by Chipotle

and there'd be a line out the door,

right?

And now you drive by Chipotle and

there's open tables at lunch and you're

like what what's going on? Is is the

question is are the customers short on

money and you know so the value wars

have started or have people found a new

favorite spot and Chipotle's moat is is

eroding right that's like the key

question to me I think I think the if I

remember right it was the first annual

same store sales decline since 2016 so

this is a huge slowdown right for them

it's I think it was like 4% comps are

down 4% Um but they you know they they

did grow their revenue slightly and then

the stock you know was down like 26%

over this last year and they just went

through a leadership change right uh

Brian Nicole left and uh I think it it's

uh Scott Boatright is that right Austin

I think Scott Boight's the guy um but

you know I look at I look at Chipotle

and I'm you know they still have like

21% ROIC

um they're still making like 1.5 billion

in free cash flow a here. They just

passed 4,000 locations, I think, um,

recently, and I think they've got a plan

to go to 7,000.

And I'm I'm and I think they're even

starting to think about some

international expansion. So, you know, I

I look at this on the surface and and it

to me it's still a great business

producing a lot of free cash flow. Sure,

they probably have some more competition

coming in, but I think this is actually

a sign of how much stress the consumer

is under and less about the long-term

prospects for the company. Um, I I don't

think that Chipotle is seeing an erosion

of their moat. I think they might be

dealing with competition and I think

they're dealing with pricing pressure

and a fickle consumer, but I don't

believe that that Chipotle is all of a

sudden uh just all of a sudden lost

their their moat and competitive

advantage at this stage. I really think

this is a very temporary um kind of a

slowdown in their business and we're

benefiting from Wall Street

looking at a very short term thinking,

oh their comp sales are down and traffic

is lower. Wow, this business is broken

and it's broken forever. Let's sell it.

Right? This is this is exactly the kind

of opportunity

that that gets us really interested.

Right? So the question is is the remote

intact? And I guess that's the question

I would pass back to you guys. Is the

moat broken or is it not broken? On the

surface, it still looks like it's intact

to me.

So, I think there's two big forces right

now. Well, let's let's go three big

forces right now that are affecting a

lot of stocks in Chipotle falls into

this bucket. But, um, you know, when we

look at events that are taking place

with a company, why it's down, you can

have an event where there's a um, let's

call it an industry specific, a company

specific, or a macro event. And so if we

look at an industry specific event

that's going on right now, we're uh

about 18 months into the GLP 1, 2, and 3

kind of craze that's been going across

America. People are just eating less

food. Uh and Chipotle has held up pretty

resilient to that because when you go to

your doctor and get on these drugs, they

basically tell you, hey, you need to

maintain your protein uptake. And it's

like I did an experiment with the GLP1s,

you know, just to find out what it was

like. I had a bunch of friends that were

doing it and, you know, I hated it. It

was it was you just basically withered

away because you didn't eat anything.

Um, the GLP3,

you know, look at me, guys. I'm hitting

my I'm almost to my midlife, you know,

putting on putting on the weight.

I'm I'm just experimenting with the

GLP1s. I don't need it, though. It was

completely for research purposes. I'll

just tell you guys, he's let himself go

a little bit since I since I first

started working with them. [laughter]

Travis and I haven't we have we have

ongoing workout competitions, which is

honestly it's it's pretty shameful for

me. The fact that I can't beat him in

every workout um there is. Anyway, so I

think that's one thing that's affecting

Let's get back to this. I think that's

one thing that's affecting the whole

restaurant industry is is and and really

the whole grocery industry. We're

seeing, you know, I'm seeing uh protein

pasta now because it's like everybody is

trying to evolve their product. Chipotle

obviously has these like really healthy

organic bowls, chicken, beef, pork, you

you name it. It's like they're they're

set up to to do well in this space

despite the fact that there's a a

slowdown in just how much calories

people in the US and across the world

are eating. But we'll just talk about

the US because Chipotle is a US company

and it's it's its locations are almost

exclusively in the US. Second thing that

you've got going on right now which

nobody wants to acknowledge um is that

there is a consumer slowdown happening

across every consumer discretionary and

non-discretionary category. It's like

it's not just Chipotle that's

experiencing their their you know first

same store sales quarter of of growth.

Walmart just had their first quarter in

I I don't even know how many years. It's

probably like over a decade of quarterly

same store sales growth. They just

experienced their first quarter of I I

don't know if it was a full-on um

negative growth, but I think it was a a

really heavy deceleration. And Walmart

is sitting at the the lowest price

point. They should theoretically be the

last ones to to feel that pressure. Um

Target, same thing. Kroger is reducing

prices, cutting into their margins,

trying to keep the basket items up. So,

this is this is not a Chipotle specific

thing. This is not a restaurant specific

thing. This spans Nike to Lulu, Aloe,

VRE, clothing. It spans all the way

into, you know, your your lowpriced

grocery items, your lowpriced, you know,

buying stuff from from Walmart Sprouts.

So, that's the second thing.

Yeah. Austin, let's let's fold Nike into

the conversation here because I think

that that this is a there's there's a a

connection here for sure.

So Nike is experiencing this. Lulu's

experienced this. They are also both

experiencing the fallout of bad

management. So they Nike and Lulu unlike

Chipotle is experiencing a two uh you

know these same things I've talked about

that Chipotle is going through. They're

not experiencing the Ozmpic thing

obviously. Um, but then they're

experiencing a companyspecific bad

management event which is really

compounding the fall of of these

companies. I don't think Elliot Hill is

the guy that caused it. I think it was,

you know, the the guy before Elliot Hill

at Nike. Um, it's definitely Lulu's

current management minus Heidi O'Neal

who literally just started like uh like

three weeks ago. So, don't blame Heidi

um on that. But yeah, Phil, you really

we posted a short of you and Brandon

just talking about the the Lulu drum

incident, you know, and it's like these

companies cannot get out of their own

way, you know, that that short on

YouTube is so funny of of you and

Brandon going back and forth on Lulu.

You know, it's really unfortunate, but

Lulu

through all the bad management somehow

in the last quarter managed to screw up

the only segment in the entire world of

business that was still doing really

well by putting a Japanese drum on the

Great Wall of China during a a

nationwide streamed yoga event. You

know, it's just like so I I it's hard to

talk about those two. Nike, Lulu, and

group it in with Chipotle because

they've got the next level of of what

should be a value investor's best friend

is bad management as long as the right

management, you know, gets gets back in

there and fixes it. Okay. Um, so go back

to Chipotle really quick. And then the

the third thing is that there's a finite

amount of money. Let's let's remove our

like passive investing or active

investing. there's a finite amount of

money to put into equities and right

now, Phil, that YouTube video that you

posted two weeks ago on this, I think

really highlighted it that um where the

S&P 500 is right now, what was it? 79%

of the companies in the S&P 500, so

that's almost that's like 400 of the 500

companies, their year-to-ate stock

returns of those companies are lower,

less than the index. So 20% as we've

been talking about the index is driving

the return. You look at those 20 that

that 20% of companies that are driving

all the return it is only AI. If you are

not tied to AI in some way and you know

people will say oh well Caterpillar is

doing super well. No Caterpillar is

doing super well because they're buying

that equipment to build data centers.

They're directly tied to the AI

buildout. And so it's it's a tale of two

worlds in the indexes and money flows

out of anything that is even even having

the slightest hint of not doing stellar

into AI. So it's like I think that's the

also the big thing with Chipotle is it's

like hey if we didn't have this AI thing

going on I think Wall Street would look

at you know the other two things on

Chipotle that are happening it might be

down you know 10 15%. But here we start

to see a slowdown and they're like, I

could keep my money in Chipotle or I

could follow everybody else's money and

dump it into AI and that causes a much

bigger drop in the the the stocks that

just aren't, you know, having stellar

every single quarter amazing things. So,

the first two things I talked about are

leading to Chipotle not just continuing

to beat and have these incredible, you

know, same store sales growth numbers.

The the third piece is why the stock I

think is down 50% more than anything

else.

Yeah. I'm sitting here looking at what

Chip Wilson is doing over at Amir

Sports. And it just really ticks me off

as a as a Lulu shareholder that he has

been pounding this board for a decade

saying you're losing the edge. You're

losing the edge. You're going for mass

market. You're doing the wrong kind of

marketing. You're trying to be

politically correct. You're hiring the

wrong people. I mean, he's been pounding

that drum, pounding that drum. And

meanwhile, of course, over this decade,

Chipotle's just going bigger and bigger

and bigger and bigger as they expand

their market to every person on the

planet and try to make every person on

the planet the person Lulu. Who am I

saying? Chipotle. Yeah, Lulu. And so,

and so you end up with with uh you end

up with this company that in my opinion,

this is politically probably very

incorrect, so I apologize right up

front, but you don't have your

advertising. You don't you should have

aspirational advertising for a company

like Lulu. It should be aspirational. I

should want to be that. It's a Patagonia

kind of company. Show the person

climbing Denali. Okay. Okay. I'm not

gonna climb Denali, but boy, when I go

out in the rain in New York, I want that

Denali coat. It's just, you know, it's

that way that works. And here's Chipotle

putting I mean, I'm sorry, but they're

putting fat people out there on their

posters. They're putting them out in

their tights. They're showing old people

like younger than me, but old people

wearing Chipotle or Chipotle wearing

Lulu stuff. And it's like, why wouldn't

they just advertise me? I mean, hey, you

know, Phil Town is out there wearing

Chipotle wearing Lulu's stuff and you

should wear it. I'm probably wearing

Chipotle, too, if I'm my typical

Chipotle meal lands on my shirt. But

this is this is this is what I hope we

can put this up in the in the uh podcast

because this is Ammer Sports

advertising. Look what that thing says.

It's so smart. He's saying how

engineering creates athletic success.

Great. Wh Why isn't that a Lulu ad? Come

on. [laughter] Why the hell? You've got

You've got two beautiful people. Yeah,

you got two beautiful people there.

They're slender. They obviously are in

the gym. They're aspirational. Wake the

f up, Lulu. I mean, it's just so stupid

to put people up there just because

they're every man. It doesn't work. and

you you lost your market and but what's

really crazy is you lost it to Aloe.

Their product is not as good and it's

just like come on man wake up. So that's

that's my thing about Lulu is they've

also got a bit of a big marketing issue

that they just could fix and they're

going to I hope and bring that company

back with Chipotle. I think inflation

just smoked them. I think when you go to

a $21 burrito, you know, you've really

got a problem. And and here's the thing

I that I don't understand about Chipotle

at all. I go in there and I walk down

the line with my burrito and I come to

the checkout, go to try to eat it. That

burrito is bigger today. I swear it's

bigger today than it was 10 years ago.

It's like it used to fit o okay inside

the burrito inside inside the tortilla.

And now it doesn't it doesn't fit. So

I'm like, what are they telling their

line to do here?

I had a bowl just the other day. It took

me two meals to eat the bowl. It was

like I just got like a steak bowl and I

took the top off of it and it was so

jam-packed with food that like all the

guacamole and the salsa and the cheese

was caked completely compressed and

caked into the lid cuz they just mashed

it down onto there to like fit it in.

And it's like that makes me so happy

about Chipotle.

It's so stupid. I'm like, I'm buying a

$20 bowl, but it's really $10 a meal cuz

it takes me two meals to finish this

thing.

Then why in the world don't they put in

half the food and charge $10?

I don't know. Maybe they're just doing

the Costco hot dog thing, you know,

where they're like, "This is what we're

do. This is what we're known for. We're

not going to we're not going to go away

from from doing that." and you know they

got a 16-year-old kid back there trying

to you know fold your burrito up and all

you [laughter]

just absolute mess. It's it's part of

the charm of Chipotle, you know. So I I

agree. I you know say what you want. If

they change their serving size, I'm not

going to be super happy about it. So

yeah, I mean that was that was a thought

that I had with Chipotle as well. So

yeah, we're we'll wrap uh wrap

Salesforce in here as well. We've talked

a little bit about about Nike, Chipotle,

and Lululemon. Actually, uh Nike and

Lululemon being kind of in the same boat

here. Some major management missteps uh

that have led to to some unfavorable uh

unfavorable conditions for those

companies. So, Salesforce in a little

bit of a different boat, I think. Uh

it's been a a serial compounder. great

company that's compounded uh revenues at

uh double digits, compounded free cash

flow and earnings at over 20% for 15

years plus now and right in line with

this time period where we have uh AI and

Agentic AI coming online. The company's

kind of begun to mature a little bit uh

have saturated the market. has 92% of

S&P 500 companies that are using

Salesforce products um and getting to a

point now where they are just trying to

work on on improving earnings via uh

shrinking margins a little bit. Um but

at this point uh we have a really

dominant software company that there's

this fear out there that Agentic AI is

is there's kind of two main issues,

right? you're going to have AI uh

capabilities that they're going to help

to build a an application that replaces

what it what Salesforce does. And then

on the other hand, you have this idea

that the number of seats, you know,

remember that Salesforce is on a seat

model, meaning that if you have a 100

people in your organization that are

going to use Salesforce, they sell you

essentially 100 licenses. Um so the if

the number of people that have to use uh

the technology the software is is

decreasing then the the per seat model

is is not going to work. Um so two kind

of attacking fronts there but what we've

seen over the course of this AI buildout

is that Salesforce is continuing to be

dominant in their in their field.

They're growing uh significantly.

They've had several significant earnings

beats. uh their backlog of work

continues to grow. Um and this is kind

of an instance of a little bit of a of a

casualty of the prevailing trade out

there, which is these AI companies. And

looking at um Salesforce's stock

performance compared to really any of

the big AI adjacent companies and they

are almost mirror images of each other.

Meaning that in these time periods when

these AI companies are doing really

well, Salesforce is always doing poorly,

their stock price that is is is moving

in the downward direction. And then when

those trends reverse, we see a reversal

there, meaning that people are pouring

out of this enterprise software and into

AI. And when that narrative changes a

little bit, there's a little bit of a

fear of a bubble. Then money comes

pouring back into software and out of

AI. So, uh, a little bit of a different

situation here when we're looking at a

company that has just fallen out of

favor with the market, but we think is

still a really dominant business.

Yeah, I think th this is, uh, this is

really interesting because when you when

you think about what AI is actually

enabling people to do, okay, you know,

we're we've spent a lot of time trying

to keep up with AI and AI capabilities

and we have a lot of contacts in

enterprise businesses throughout the

country, right? So we're we're talking

to people and at the end of the day, you

know, AI is very powerful, but the

thought that it could replace an

enterprise system like Salesforce,

it's it you have to really think about

what that means because AI, yes, I'm

seeing people with AI assisted coding

building really cool applications like

very, you know, interesting interfaces,

you know, uh nicel looking software.

But I think what people forget is that

coding was never the moat, right? So the

moat of Salesforce was not that you

could write code and and the faster you

wrote code, the better the product was

going to be. That was never the case,

right? I think I think the moat of

companies like Salesforce

are the fact that they understand the

business processes of their customers

and they're embedded deeply into their

system. So Salesforce is going to be

connected to, you know, multiple um

integrations in terms of data,

databases,

other systems are all feeding

information in there.

Um, and as a large company,

well, any company really, but a large

enterprise in particular, you're really

dependent on trust. You're trusting that

solution to give you a secure

environment where you can do business,

right? And so, you know, I think the

joke we made is that, you know, you're

it's you could just imagine your

resignation letter if you're a CFO at a

at a company that said, "Yeah, I decided

to go with a vibecoded um solution and I

tore out Salesforce, I I resign." Right?

I mean, that that's like the perfect

resignation letter. And I don't think

anybody ever gets fired for going with

Salesforce, right? And and there's

that's a huge piece for me is these that

moat is very deep. And what I love about

Salesforce in particular is they've

actually leaned in they've leaned into

AI. So they're not running from AI to to

your point that you were making earlier,

Hunter, these guys are leaning into um

switching. They know that their seat

model is at risk and so they're leaning

in using these agenic work units, I

think is what they're called. Is that is

that right? um AWUs agenic work units.

So So basically they're saying rather

than charging you per seat, I'm going to

I'm going to put in an agent force agent

that can do the job of a human and I'm

going to charge you by task that it

completes. And I think in their last

earnings call they reported um like a

57% increase in those units um quarter

over quarter. And that's a huge jump.

And I think it starts to show that these

guys have the ability to actually

replace their model um from a seatbased

model to a um you know a taskbased

model, right? So so the analogy there

would be since it's football season,

right? Um if if you have a football team

that uses Salesforce and Salesforce, you

know, used to get paid per roster spot.

Now, what they're saying is that every

player on the team is basically

charging a fee for every snap that they

play. So, every time they take a snap,

they're going to they're going to get

paid versus, you know, they're going to

pay Salesforce just because they've got

somebody on the roster. And so, now

Salesforce is going to be basically

incented to get in and help these

companies complete as many tasks as

possible.

and they're going to do it with their

solution integrated into their platform

and I think it actually makes their

switching mode potentially even even

stronger than it was before in my view.

So I know Hunter you've done a ton of

work on this um as well. I don't know

what what your thoughts are there but to

me that I think is a real key for the

for these guys long term.

Yeah I mean I think another thought here

um and Phil I'd love to hear your

opinion on this having run multiple

businesses. Another thought here is that

as uh as kind of AI solutions and AI

models become more and more affordable,

we see the gap between these frontier

models and and other uh open-source

models, their capabilities is shrinking

day by day. That gap is that it's

becoming less of a question of of either

or. Do you deploy a bunch of capital

towards an AI vibecoded solution or do

you deploy a bunch of capital towards

maintaining your Salesforce framework?

Now, it's becoming more of a question

of, hey, well, can I just have a a

cheaper but very highly effective

effective open-source AI model working

on top of my Salesforce ecosystem that

for a lot of these companies has been

curated over the course of 20 years that

is highly complex with a bunch of

different systems that are connected to

each other and kind of take most of the

risk off the table. So, I think that

that's another interesting uh

interesting component of this. Do you

have any thoughts there, Phil? Yeah, I

mean it it's really all about your cost

really because if if if you know you can

build out this this layer on top of

Salesforce's

really solid foundation

um and and get away with it, then you're

really going to make that I mean I think

Travis could probably answer this better

than me, but I for me you would make

that judgment based on how excited you

are about managing your own your own

processes. And I'm not sure that the

cost of Salesforce is worth the the

problems that you run into when you have

to layer up another layer of management,

got another team out there that's got to

do all this stuff. Why would you? I

mean, unless you're just unless you're

say, you know, you're going to increase

your earnings by 20% or something as a

result, but I don't think you are. Not

only that, but over the last three years

as as AI comes roaring in here and

Salesforce gets hammered in the stock

market,

their free cash flow and operating cash

have gone up like rocket ships. I mean,

the last three years, their growth rate

on net income, operating cash, free cash

flow are all way up in double digits, up

above 20%. The only thing that's

anywhere near a slowdown in their growth

rate is on their revenue. And you know

there there's a a an immediate slowdown

in revenue as all of these Fortune 500

companies take a deep breath and try to

see if they're going to go to AI. And I

mean one after another they're going

like ah no I don't think so. And I just

had the personal experience just a

little sense of this when I started to

try to use Agentic AI to be my executive

assistant. And it it took me about two

weeks before I was like, "Okay, I'm

hiring an executive assistant who's a

human. Just too much hassle. I was

spending so much time messing with it."

So I'd rather not mess with it. That's

the whole idea of an executive

assistant. So I think you know the whole

agentic thing may be a lot farther out

than anybody thinks if it ever gets

here. Um so I I think what we've got is

a really great case that uh Salesforce

is is a a very viable company at the

right price. I really do think so.

Yeah. I think I think your instincts are

right, Phil. I think you know that you

think about the effort to build your own

solution. I mean, not only is it, you

know, managing your own processes and

potentially building up your own team,

but think about the risk you're taking.

I mean, you're what's the point of

ripping out Salesforce or some kind of

ERP system for to save I mean, how much

money are you actually going to save for

that risk? I mean, I I can tell you

right now, CFOs,

uh, chief operating officers, these guys

are riskadverse creatures, right? You're

you're not gonna unless the the the

benefit is massive,

you don't want to step into the ring

with Mike Tyson unless you have to,

right? And ripping out a sales force is

like you're going to take a punch for