The Truth Behind Trump's Massive 401(k) Changes

Cold open

Austin Bowen: [Clip from later in the episode] It's just this weird timing that you've got $3.8 trillion across 33,000 private businesses that can't find the exit and here is this wonderful EO that now allows retail investors to come to the rescue.

Welcome and introductions

Hunter Hoffler: Hello everyone and welcome to the Rule One Podcast. Today we're joined by our mentor, legendary investor and New York Times bestselling author Phil Town, as well as Austin Bowen, Travis Parker, and myself, Hunter Hoffler. Between us, we have over a century of investing experience. And on this podcast, we like to kind of share some of the conversations that we have in the office, those types of conversations with you all. This week we're discussing the repercussions of Executive Order 14330, which is seeking to democratize assets to or access to alternative assets with 401(k) investors. Per usual, the winners may not be the little guy in this case. So we're going to discuss that a little bit. And following that, we're going to discuss an amazing company we've all been following for a while called ASML Holdings.

Executive Order 14330 and private equity in 401(k)s

Hunter Hoffler: So with that, yeah, let's go ahead and kick it off and let's talk about this executive order. What's trying to be accomplished here, which I think is probably generally a good deed, trying to get retail investors access to some of these alternative investments that they haven't had access to in the past, but how that might benefit the big guys and hurt the little guys in the long run. Austin, you want to give us a little overview of what's going on there?

Austin Bowen: Yeah. So, with this executive order, what is happening is it's allowing the 401(k) industry, which is a $14 trillion on its own pool of money, to now be able to allocate 401(k) managers can start allocating some of those funds away from public markets and all the I would say the transparency that comes with public, you know, company reporting and the liquidity and things like that and start putting it into private equity funds. They can start allocating their portfolios into these private equity markets which typically are only not typically they're only reserved for high net worth individuals or institutions that are you know have a certain level of capital. Okay? So you have to qualify to get into this world. And this is rules that were adopted to protect the little guy from getting into a market that's pretty vague. There's not good accounting rules around it. You know, basically the logic is if you're smart enough to make a lot of money, you're smart enough to do your own risk management. And this has been a, you know, a big debate in the US for years. It's like we allow, you know, 18y olds to buy guns and 21 year olds to drink, but we won't allow, you know, anybody that doesn't have a million dollars or more to invest in a, you know, a startup company or a PE firm. And so I think this is one of the first steps towards doing that. And so there's obviously like Hunter said a positive this and that is that you could get into good companies early before they go public. You know now 401(k) investors could potentially be investing in the next SpaceX before it IPOs, the next Anthropic, the next, you know, Claude, all those big hyped names right now. But there's another side of this that people are po pointing out, lots of reporters and stuff are pointing out, but that I don't think it's getting enough due diligence, and it's the timing of this EO. And that is that right now the PE industry is in the toilet. It's like take away the three big names that I talked about. There's basically $3.8 trillion worth of private companies in this industry that are illiquid and are they can't find an exit path for them. They're either the last round of money these PE firms put into these companies is, you know, they'd have to sell at a lower valuation and take a loss. Okay, there's no IPO appetite or IPO market for them right now. And so, you know, to put these in numbers, the average deal right now that's going on in PE outside of AI, so just separate AI for a second. Everything else, this is a private equity a wealth newsletter, the average deal in 2025 is down 60% from where it was in 2021. Okay? And so that means that if you're trying to sell your private company that you bought in 2021 to somebody else and get an exit out of it, you're taking a 60% haircut on average of that. And so what this is causing is it's causing PE managers that don't want to take the mark or the loss to hold on to these companies for longer and longer, which has a problem because in PE industry, in the VC industry, what happens is you have a you're basically telling your investor, I'm going to take your money, I'm going to invest it, and for the next seven or eight years, you can't touch it. Okay? But when I get that exit and we get that money back, I'm going to give you the money back. So that's the deal. You don't get to touch this money. It's not liquid like a public market, but you'll get the money back in 8 years. And you know, theoretically, if we do well, it'll be a lot more. Okay. Well, here we are seven or eight years later, and it's not a lot more. And so these managers are just holding on past these seven and 8 year marks, hoping for the industry to turn around. And it's not. They're not getting the prices. And so it's just this weird timing that you've got $3.8 trillion across 33,000 private businesses that can't find the exit and here is this wonderful EO that now allows retail investors to come to the rescue. And so that's kind of what we're talking about. It's the timing of it that makes everybody suspicious. They would have done this earlier before the PE industry was in crisis. Maybe you could sell it on all this good stuff, but trust me, it's we're bringing in the retail investor right when everybody's hurting the most.

Mark to market vs. mark to myth

Phil Town: Well, what I'm thinking is that it's a lot like what happens with an IPO, right? Where you've got the insiders determining a price that's not marked to the market. It's marked to the sales pitch and how hot they can make this sales pitch around the country when they do the dog and pony shows with a new company that's going to go public and they just make up a price. It's like what's the most we can get for this thing and still make it look like there's more people that want in than are actually getting in. So it's a I don't know what you'd call it exactly. You know, you kind of got the mark tomarket, which is what happens in the public markets. You get marked every instant until the close of the market. So, that's called mark tomarket. And the PE companies of course have never had to deal with that. Like I did private equity early on in investing career and Warren Buffett has very famously said back in his early days that he thought that a fair price for a company would be the private market price. That there's you're paying a premium to have a company at a public market price. And the reason you're paying that premium is because you have transparency. You have all kinds of rules around what your accounting has to tell you. You have the CEO and the CFO signing off criminally that these numbers are true and they can go to jail if they're lying about it. And so you have a lot of support there plus a really enormous market. Awful lot of people voting on what the price of this thing should be. And you know it's not a perfect world by any means and it's dominated by big funds and all of that. But at the end of the day, people are willing to pay a premium to have all of that all of those qualities of a public stock. And that premium traditionally has been about 2x. So whereas a private company, I think I used to talk about this all the time in the workshops is my when my brother sold his company, he sold it for I think 7.5 times current earnings to [GFE, unclear], which is a public company. And [GFE, unclear] was priced in the market at 18 times earnings. So this company bought $12 million worth of earnings. They paid 7 plus X for it. And the moment those earnings hit their balance sheet or hit their income statement, they got priced at 2x that. So they basically doubled their money. Well, this is the magic of the PE world. It's just magic. You go out and you find a company and you buy it for seven, six, five times earnings and then you take it public and boom, it's 2x or 3x and it's just awesome. And of course, whenever there's these kind of magic numbers happening, whether it's in real estate or Bitcoin or gold mining or AI companies, whenever you have this magic happen where it's just like multiples of your original purchase price, people want in, man, they're like, "Hey, that's hot. I want some of that." And so, this has been the history of the PE market. When I was in it forever ago, it was not a particularly hot market. It was it this has been evolving over a long period of time to where more and more money has been chasing an x number of deals. And as more and more money chases a limited number of deals, you have all kinds of pressure on those market prices. And as a result, you know, back when this thing was hotter than a pistol back, you know, like six years ago or something, 5 years ago, people were paying exorbitant prices for private companies. And now those companies are being either they're not performing where they thought they were, which would justify the previous price, and now the price is being marked down, or they paid way too much, and now the price is being marked down. There's some evolution of reality kicking into these markets here. And now everything Austin just said is absolutely true. And it they're they don't mark to market. They mark to myth. They just make it up. Here's oh well we think the future earnings of this company are going to be X and they're growing at 20%. Therefore it's a 40 P/E and hey this thing is worth X billion. And they make they just make it up. There's nothing to stop them from making up numbers except their accounting firms and the accounting firms are in on the deal. So, let's just come up with some numbers here and put it out there. And they sold those companies, these private equity firms bought these companies at these kinds of prices and now those chickens are coming home to roost. You can't you got to have somebody else willing to be a bigger idiot than you. And so everything Austin thinks is totally true. It's like, well, look around. Well, shoot, man. We just used up all the idiots on Wall Street and all the idiots in the private equity markets and all the hedge funds. Damn it. We've spent all that money, but oh my god, we've got what how many trillion of Oh jeez. [laughter]

Austin Bowen: And they're the biggest idiots in the world. If you think about it's not even idiots. If you think about last week's conversation where we were talking about how the 401(k) industry doesn't focus on price to value, it's just a passive inflow. It's like they're tapping a market that does not care about price or price and value relationships, you know? It's just a 14 trillion dollar market that has money coming in and gets distributed wherever that 401(k) manager decides to distribute it. Dude, I would have loved to be a fly on the wall in Trump's office when these guys started rolling this out to him and he and they were like, "Dude, it's $14 trillion of idiot money. Come on." [laughter] Trump would be like, "I want some of that. That's awesome. Let's do it." I trust me, he does with Jared Kushner. Jared Kushner's PE. All right. So, it's like there's going to be some grease in the wheels in the Trump family for sure.

Phil Town: Oh my god. But you guys, it's so much like the IPO markets except probably worse. It a lot of IPOs are venture capitalists taking a company public to get the f out of it. They just they've pumped it as hard as they can pump it and now it's time for reality and they want out before reality sets in. And so they take it out and do the dog and pony show and get it out IPOed. And of course they're looking for the person that's going to pay more, right? That's and that's all the always in our market in our world. That's always the retail investor. The last one to know, the one that knows the very least, the one that isn't looking at value at all. They just look at price. Oh, and when retail investors are looking at price, what I mean by that is the price was $20 last year. Now it's $25. Look what a great investment this is. This is sort of the level of deep thinking going on there. You know, here's a Maserati that's got a sticker price of $120,000. We're selling it for 160 and if you buy it, you could probably sell it for 200. I mean, I know guys buying Porsches on that basis. It's like, yeah, hey, that sounds pretty good to me. I'm in. I'll pay 300 grand for that $140,000 Porsche, man. I'm in. So, yeah, this is a giant interesting opportunity for very morally challenged people to really. [laughter]

Hunter Hoffler: Yes. I was going to say when I remember when I was in when I was in business school, I was interviewing for a job with a big investment bank in their private equity wing. And you know, at the end of the interview, they always ask, "Hey, would you have any questions for us?" And I was like, "Yeah, I mean, why at the time private equity was the, you know, the industry to get into in finance, the category to get into in finance." And I said, "Why, you know, why is this such a hotly contested market to get into right now?" And what they told me is more arbitrage opportunities. They say, "We have asymmetric information. We have legal asymmetric information and we can pump up and produce higher returns because of that." And so it's just this whole conversation is pointing in the same direction. I mean, I think that's a little bit of a moral hazard probably, but it's not going to land you in jail for a white collar crime. Yeah. I mean, it's a wild west out there with PE. So,

Phil Town: Yeah. Well, so what should we be advising our clients about all this, right? What should we be advising our students? Because the it is an interesting market. I mean, let's not go completely negative on it here because there private equity covers a lot of range, right? I mean, private equity might include companies taking a company off the public markets and into private markets and then putting him back in the public market having rehabilitated it.

Running private equity through the Four M's

Hunter Hoffler: Yeah. Well, just to build off of that, I think kind of an interesting conversation is just looking at it from the Rule One investing lens. And one of the first things that we look at is what we call meaning, which is just understanding a having a really deep understanding of the business that we're investing in. And I think based on the conversation we just had, that's really, really difficult to achieve in the private equity setting. So somebody that's using our same guidelines a is going to have a hard time figuring out exactly what these businesses stand for and what they do and second it's going to be really hard for them to assign a value to that company and maybe even more importantly for them to find an opportunity to purchase into a private equity fund. One because they do these fundraising rounds. It's not like it's just an open market that you can engage in. You can buy in and exit positions whenever you want. But second off, it seems to me just anecdotally, we've invested in several companies that make a habit out of serially purchasing private businesses. And a lot of times we'll see that, you know, the market's caught a cold over something, right? There's for example right now we're in the SaaS apocalypse era where it everybody's thinking that there's this possibility that AI is going to just completely eliminate the need for a lot of these software as a services especially kind of enterprise level software that all that's going to be eradicated and to some extent maybe it is but these companies that are purchasing private businesses in that ecosystem are saying yeah we're not seeing any sort of discount buying companies that are in the software space because they don't have to react immediately to what everybody's doing in the public market. They know what their cash flows are. They know the revenues they have contracted in the future. They know what their customers are saying. So, they're not going to sell it at a discount, right? So, that's another pricing problem that you have to really think about there. And what happens with these fundraising for PE firms a lot of times they're investing into a bucket of 20 30 40 even 100 businesses and you have one in there that's a 100 bagger or a 500 bag or you have a SpaceX or an anthropic and that makes up for 95% of the total return of that entire investment. Right? So it's almost something of a lottery ticket in these instances. And I think that figuring out exactly the meaning, figuring out exactly what all the businesses in this entire portfolio do and being really comfortable with that is something that probably would be a little difficult for a Rule One investor, but maybe is a little bit more palatable for somebody that's a, you know, quote unquote qualified investor that wants to take a little bit more risk.

Phil Town: Yeah, it's a lot like venture capital, man. Straight up. And then Travis, go ahead.

Travis Parker: But I was just thinking when you were saying that Hunter it sound it's so much like a venture capital fund that essentially taking money they'll take your X dollars let's say $100,000 and they'll lock it up as Austin was saying they'll lock that up for 8 to 10 years you have no access to it you're contractually obligated to leave it alone and then they'll begin investing that pool of capital into early stage companies hoping very much like what you just said, Hunter, that you get the big home run out of there that makes up for the vast majority of these investments not working out in any kind of great way. Often they'll look at maybe out of 10 companies, they'll see four of them completely fail and they'll lose all of their money on all four of those and then you'll have three that kind of you kind of get your money back maybe and they pray they get one or two homers in there.

Venture capital returns in context

Austin Bowen: Yeah. So, I actually I have some good stats on this. Chamath at one of the All-In events they did earlier this year like put up a slide showing this. 75% of VC investments do not make the original investment back. Okay. All right. Of the next 24% they make between a 1 and 5x return. Typically less than 1% of them become that 100x unicorn status. So of if you make a hundred VC investments, you're counting on one of them being that SpaceX 100x your return.

Phil Town: I can't back this up, but I think roughly speaking, a good venture capital company, you know, like the guys that put money into Apple or Google or whatever have continued to do well, they're making on I you have to look this up and we'll check it. If we don't get it in this podcast, we'll get it in another one. I'm thinking they're in the ballpark of 27% a year. Top of top level VCs. 27% a year. And you watch value investors nail that with none of this drama. It's really fascinating, you know, that if you can be patient, obviously invested capital is never patient. Almost by definition, it wants to h everything has to happen right now, right? And but if you can be patient personally, man, what an advantage.

Austin Bowen: So just so Sequoia in their performance Sequoia fund, which was the Google the big Google investor, they're probably the most famous out there. Their 10-year annualized return right now is running 12.5% versus the S&P 500 is 15.5%. Their since inception return is 13.3 versus the S&P 500 is 11.5 and they incepted in 1970. So they have done on average two the most famous VC firm out there in history okay has done 2% better you know which is actually a lot over a what is that 50 year a 50-year time frame that's a lot I mean nobody would be crying about being invested in Sequoia but it you know take that into perspective that it's you know [laughter] it's not a lot they're outperforming the public markets you know I'm sure there's some like Peter Thiels that probably, you know, doing better. He's had some really big home runs in the past 15 years.

Hunter Hoffler: So, so I mean, a lot of the concern about like about offering private equity to a 401(k) has just been the lawsuits for against fiduciaries for these plans. And a lot of that centers around P usually, you know, management of PE usually charging a really high fee and then just around performance in general. But there are still some 401(k) plans that had offered private equity investment. I think it's like two and a half percent or something in the US that had a segment of their assets under management that were in private equity. And I pulled a stat that I think from 2000 until 2005 those portfolios or the private equity portion of those portfolios returned about 6% which is exactly what you would have returned if you had a 6040 split in the S&P 500 and in T bills and the S&P 500 actually returned higher over that period. So, a little bit of additional information like you know, hey, there's not always these home runs in the PE space for sure.

What it means for 401(k) investors

Travis Parker: I just keep coming back to the practical side of this is if a 401(k) decides to step in to one of these assets, PE or otherwise. I mean, how do you price it? I mean, I think you mentioned it earlier, Phil. It's like we're talking about something that normally gets priced maybe on a quarterly basis by an insider versus, you know, a public asset that's marked to market every day. And they bring these in and if I'm a 401(k) investor and I'm talking to a student or a client, you know, one, can we understand the asset to Hunter's point? Two, can we do we even understand if it's a has a moat? And three, can you price it? Can you put a value on it to know what you actually own? And all those things get a lot more difficult. And then just pure practical standpoint, if I want to, you know, exit that 401(k), I mean, what is my pricing based on a quarter quarterly number? Is it are they going to try to mark this more frequently? Are they actually going to buy a bunch of these assets into a 401(k) given the valuations right now? I mean, I'm assuming they will. So, you're going to be sitting on a 401(k) with some really highriced private equity numbers sitting in there. And, you know, I my instinct would be to steer away from anybody that put these things into their 401(k) at this point in time. I think that's kind of the takeaway.

Austin Bowen: Here's a really interesting thought also on this is that you can't get out of private equity like you can public. And so in a 401(k) you have options. If you want to move out of stocks and into bonds, that's a switch. You sell to, you know, you tell your manager, "Sell the stocks, move me into bonds." But if everybody tried to get out of stocks and get into T bills in a market crash, what happens to if 10% of the 401(k) is invested in PE? You can't pull that money out. It's locked in PE, which I think creates another issue out there is that you're basically locking PE or you're not PE, you're locking 401(k) retirees into illiquid assets.

Travis Parker: That's actually a really interesting question. I'd like to hear from you guys. I mean, this is an executive order. All it's done is actually just created a set of actions for people to go investigate, right? You can't call it a bailout because you're not forcing anybody to buy these, right? Basically, you're setting up guidelines for these 401(k)s that have the ability to do it if they choose. Okay? So, clearly, you can't call it a bailout. Not by my definition of a bailout. But then the next question is, okay, now they have the opportunity to do it. One, what's the probability that this even happens in the next one to two years? I mean, is this highly probable that this is actually going to be a ability for a 401(k) to do? And if it is, how many of these guys are actually going to step into this asset class? I feel like this has got a really long runway, like two to three years before we see anything really happening here. But, I don't know, Phil, with your experience in this market, is that what's your thoughts there? Is this something that's actually going to take root in the next, you know, one to two years?

Phil Town: You know, you know, FOMO, right? You know, and the problem is the people who are managing the assets in 401(k)s are not rocket scientists. These are the same people who were getting in on the very tail end of the mortgage bond fiasco. I mean, these this is the same basic group of thinkers that Goldman Sachs was selling to completely liquidate before they had to pay off on the insurance. And so what's going to happen is you've got in my view anyway is you've got fear of missing out. You've got this PE market that people at the tail end of a long run up think is hot stuff and is oh it's a new way to get an asset in here that is going to make us look good. And I think there's a decent chance that they will all do it a little bit. They'll all just, oh hey, we got to have part of this thing, you know, it's got to have this private equity so we can talk about it. Wouldn't want to miss out on that. And that's going to be, you know, $2 trillion or something that'll come flying in there pretty quick.

Austin Bowen: I think the reason that this topic popped up for me was because there was the Supreme Court case that was just you know kind of I think it was decided where a former Intel employee filed a lawsuit against Intel saying that they breached their fiduciary duty because you know the Intel shares went down and it got all the way to Supreme Court and I believe I might have this wrong but the Supreme Court basically said no like you know your retirement fund you know is not breaching of fiduciary duty just because the price of something goes down. Which the way that was interpreted is that was the opening of the floodgates moment for 401(k). It's like if they lose money, it's now Supreme Court law that there's not a breach of fiduciary duty just because they made an investment that lost money. All right, that I think that's kind of like how people because the EO was actually signed last year. But it's just now back in the news really big off of this Supreme Court ruling.

Hunter Hoffler: I think that this is a good thing. I don't think that it's bad to be opening up markets to a more diversified group of retail investors. I think if anything from this conversation, you should take away if this is a practice that's going to go into effect. It's probably important just to have a little bit of transparency into what's going on in your 401(k) plan. And if you don't want to participate in what's a little bit more of a risky asset class, then change your plan. I mean, that's all that I would say here. I mean, I think more access for more investors is probably a good thing. In my opinion, the idea of qualified investors only getting access to you know, kind of worldchanging PE in startups is probably not a good thing.

Regulation, access and why great companies stay private

Phil Town: Well, man, to that point, one of my pet peeves forever has been that the attorney generals in most states have gradually tightened up the rules on what a fund manager can do. And I mean back when I started, one of the reasons I actually was able to start in as a fund manager was that the rules were lax enough back in those days 40 years ago that I could go out and get unqualified investors to put money into a fund and take a percentage of the profits. And today, like in a state like Georgia, they just don't let you do that. You just can't. They if you take a percentage of profits then you're the AG can come down on you if they ever figure out that you're doing it. And I grant you that if you're small enough they'll never know probably because you're probably dealing with friends and family and all that and they're just not nobody's going to complain so they're never going to know and you can take 20% of profits and no fee and be on the same side of the table as your investors. You only make money when they do. And that's how I started. And that's how Warren Buffett started. I mean, it wasn't a thing about, oh, you got to have a qualified investor, which is somebody with I think at least $2 million apart from their house and is assumed to be much more sophisticated. And what happened is that they've cut out the small investor from access to really good investors to really good professional investors who are not going to work for 1% or half a percent or some basis points or whatever. They're going to go out there and take 20 25% of the profits and they're going to only work with people that can give them that percentage. And I really it really is a pet peeve that they have gone the other way on this. I understand why they've done it, right? I mean, if you say, you know, give me your money and I'm going to go try to make money with it and I have no downside of losing your money. It's your money. I don't have any money in it. I could lose all your money. But if I hit a home run, I get 20% of that home run. That's a real attractive scam situation, right? I mean, I could really, really roll the dice. I could take all your money down to Las Vegas, put it on red, and if it hits red on a roulette wheel, I get 20% of the profit, and if it hits black, you get 100% of the losses. So, it's that problem that they're trying to avoid. But, as often happens, when you try to do one good thing, you have unintended consequences. And the unintended consequences are now they've made it much harder for a little guy to get access to a good investor. They just you can't even as a little investor, you can't even get access to a really good financial advisor. They're going to want half a million from you to even talk to you. And that's just baseline 30-year-old financial advisor in, you know, Des Moines, Iowa. It's nothing special. They're not going to talk to you unless you got about half a million bucks because they charge a fee.

Austin Bowen: I think another thing that ties really well into that is in the interest of protecting investors in public companies, they've also tightened the screws on public company reporting to the point where good companies that are private and cash flow positive don't want to IPO anymore. I've got some friends that, you know, are with they're pretty high up in Black Rifle that went public off this, you know, idea that they'd be worth X amount back in 2021. And they're like, it was the biggest mistake we ever could have made. It was like everybody went from being just endlessly happy every single day with more money than we knew what to do with to suddenly it's like the fund police are monitoring every penny of the company, you know, and it's like we get all these lawyers that we now have to follow and we say the wrong thing and we get sued, you know, to the end of our days. And you know the whole class action you know they class actions don't really exist in private markets but man your stock price goes down 20% and every class action from out there jumps on board trying to sue you for whatever reason wasn't disclosed in a financial statement. You've got companies like Stripe that are profitable, growing, wonderful, you know, huge, like deca-unicorn, if not more, private companies. And the founders are like, why would we do this to ourselves and go public? You know, it's like we're doing great, you know? Why bring on all that regulation and all that noise and all that pressure?

Hunter Hoffler: Another really amazing company that does this is Chick-fil-A. The founder of Chick-fil-A literally told his sons the only way they could take ownership of Chick-fil-A was to never take it public because he didn't want that public pressure and public regulation to affect the values of the company.

Travis Parker: And the other side is true as well, right? I mean, you saw the example I always think of is Dell, I think it was in 2013, went from public to private because they wanted to change their business model. They couldn't do it with the pressure that they were getting from Wall Street and all the regulations. So they, you know, Michael Dell was a genius, right? He probably saved the company, takes it private so he can transform his business model and then, you know, re-entered the market as a public company. And I think that's a really and there's at least two or three examples like that, but Dell's the one that come comes to mind because that was in my industry and we saw that happen. We you know we had our foot on their throat and they were dying and they changed their business model but they couldn't do it in the face of quarterly pressure and regulation and they stepped back went private. It was a genius move. Michael Dell saved that company hands down.

Phil Town: I mean it's so true. I honestly am dismayed at the numbers. You have to look it up and nail the right number, but I think we used to have eight to 10,000 public companies and we now have about 4,000. So the old Wilshire 5000, which is representative of most of the market, is no longer even 5,000 companies to represent the market. I might be wrong about that. I think I'm pretty close. Same thing has happened with banks with bank regulation. We've gone from eight or nine thousand banks in 2000 to about 4,000 banks now. As the regulations cost the little bank too much money and they just get sold off to a bigger regional bank, the regional bank gets sold off to a national bank. And so all this regulation which is all about making things more fair and avoiding any problems that happens has an unintended consequence of costing more and removing really good opportunities to build companies using public market money. And so I think it's just all really unfortunate. And I would honestly I think you could make the case that all of this regulation that started up in the late 1930s under FDR has caused more problems than it's ever solved. And when you look at the guys like Bernie Madoff who were front and center with scams running right smack in front of the SEC, you couldn't be more aware of Bernie Madoff than Bernie Madoff was. He was like up on the board of NASDAQ or something and yet he could run this scam. You look at David Einhorn's book, you know, Fooling Some of the People All of the Time. That book is about David Einhorn getting railed by the SEC when he shorted a public company that then went around him to the SEC and complained that this guy was hurting their stock price. And it turned out they were a fraud and they did fail, but not until Einhorn had gone through a massive SEC investigation and had to shut down his hedge fund. So, it's just like come on, let's we're overregulated and stupid. So I guess I love the idea like what Hunter just said that hey great 401(k)s can now do this. Just get off our necks completely. Let us do as human as adults whatever we want to do and let us take the responsibility for it.

Austin Bowen: Yeah. Instead of penalizing everybody make the consequences for those that break the rules so severe that nobody will ever think of breaking them again. You know it's like you do a Bernie maid off you get executed. You know, as an example, nobody's ever going to do a Bernie Madoff again. But if the penalty is you pay some fines to the SEC and you do 5 years in prison or whatever, you know, it's just like I mean, hey, you know, that might be worth being a billionaire to some people, you know, and [laughter] yeah, you know, get to spend 15 years as a wealthy billionaire and, you know, spend five years in prison. Not Yeah, I can see where people have the moral dilemma. You know, Jordan Belfort, you [laughter] know, the thing.

Phil Town: So, that's good to know that Austin can relate to this. [laughter]

Austin Bowen: I don't have that, but I'm I can put myself in Jordan Belfort's shoes, The Wolf of Wall Street, you know, and no, it's just make the conse do what Singapore does. It's like don't penalize the masses. Penalize the individual to the po to the example that nobody ever, you know, wants to do it again.

Hunter Hoffler: All right, Austin, all for execution of white collar crimes in summation.

Austin Bowen: I think a lot of people I think a lot of people would agree with me on that. I think there's an entire class of America that's just like it's about time, you know, we crack down on white collar crime.

Phil Town: I don't disagree either. I mean, you watch these CNBC weekend shows where they're going through all the scams. You guys ever watch that stuff? It's really entertaining. And honestly, you get these older people who have just been scammed by somebody they really trusted and it's like, "Yeah, take that guy out and shoot him right in front of that old couple." Just like they would cheer. They would be like, "Yes."

Hunter Hoffler: It's a really good way to put that, Phil, because I think everybody has had a grandparent or something that's happened to. And you're just like, "Oh, I'm going to find this person. I'm going to hunt him down." you know, [laughter] the moment he gets out of jail, he's going down, man. That guy.

ASML and how EUV lithography works

Hunter Hoffler: We'll move on to chatting about a business that we've followed for a really long time and in that Travis is really kind of the lead on here because of his background in the chip industry. And that is ASML Holdings who are the makers of a machine called an EUV machine that creates the wafer discs for the most advanced chips in the world and they are really incredibly vital part of the AI and GPU chip supply chain. So, I'll pass it on over here to Travis to chat about that a little bit and we can all kind of round table and give our thoughts on this company. That's just amazing. First, Travis, if you wouldn't mind just explaining to people in layman's terms what these EUV machines accomplish, what they do.

Travis Parker: Yeah. Well, I'll start by saying, you know, pay close attention because if you understand this, you're going to be a hit at dinner parties and if you're single, you'll probably get a lot more dates. So, I'm just saying right up front. So, guys, ASML, you know, I there's how do you explain this other than if you're looking at any chip that you commonly use today? So look at a Nvidia GPU, even the processor in your iPhone. The chip that's in those devices has had to pass through this one machine. Okay? So they're making these machines called lithography machines. They're one of the steps many steps in making a chip. And the easiest way for me to describe this, the way I've always tried to describe this is it's like a stencil. Okay? So if when you're a kid and you were you know using stencils and coloring them I at least you know some of us probably did that this is the equivalent right and so if you look at a common chip now when I was in the industry you know 20 layers was a pretty complex chip now it's common to have 50 plus layers meaning that they're you're building up circuits on top of each other and to build those circuits, you basically have what they call a photo mask, which is the stencil, and you're basically exposing the material underneath to the light so that it actually exposes it can be washed away and it leaves the circuit behind. Okay? And that's what that's at the most basic way that I can describe what this machine does. Okay? It's obviously much more complex than that, but that's the visual to sort of walk away from. And what makes ASML so unique is that about they own approximately 80% of the market. So there's this one machine is the only one if you want to make a chip that's five nanometers or below this is the only machine in the world that does it. There is no other competition period.

Phil Town: And so to give what is like a human hair like 60,000 nanometers thick or 100,000 something like that.

Travis Parker: Well as a baseline a nanometer is a billionth of a meter. Okay. So a nanometer is a billionth of a meter and I think the average human hair is about 80,000 nanometers wide in diameter. So in comparison a DNA strand is about 2 to three nanometers in diameter. So you know we're making chips that are five nanometers in diameter. So, you know, significantly smaller than a human hair and almost as small as a DNA molecule. Okay. So, that's the level of miniaturization that we're talking about of each little transistor.

Phil Town: Right. Of each little transistor and there's millions of them.

Travis Parker: Yeah. It So, just the science behind it is hard to wrap your head around. I always tell the story that in the fab when we would look, we would have electron scanning microscopes that would look at the chips underneath, you know, that we would inspect them. The most common thing even inside a class 1000 clean room would be a hair and the hair would look like it was covering the whole thing. So somebody's hair would come off and it would look like the circuit was gone. It just disappeared. And so that's why, you know, you see these guys in these clean rooms that have these bunny suits on. You go through a decontamination process before you get in. You know, every part of your body is covered because a simple hair or a dust particle will basically block the circuit and can cause it to fail. Okay? So that's kind of the geometries we're talking about. So that's what ASML is doing. They basically have a complete monopoly on this market for all intents and purposes. Now, are there other companies trying to figure this out? Absolutely. Will they figure it out? Maybe. I think eventually, but it could be a very long time before they do it. The other thing that makes this lithography machine that they build so important is that it's one of the few steps in the fabrication process of a chip that it has to go through multiple times. So every single time you have to go through the lithography machine, which means it's usually your bottleneck tool. Okay? So you have to have as many of these things as you can fit into your fab to balance your line. And you're talking about a machine that costs about 350 I think it's a going for about $350 million to $400 million per machine. Now, they're also the about the size of a bus of a city bus. And so, it's a massive machine. It takes seven airplanes to fly a machine to its location and assemble it in location.

Austin Bowen: Yep. Yep. And by the way, it takes Yeah. It's like 165 tons. So, it's about the weight of two Airbus 320s, I think, was this was what we heard, right? Takes 40 freight containers, 20 trucks, and three Boeing 747s to move it. So, just think about that, right? See how big this thing is.

Hunter Hoffler: I mean, I would just I'd like to point out that if there was ever proof that we have some alien technology, this is probably it. There's no way that somebody could just come up with this machine. I This is how Travis described how this thing works to me, so I'm probably going to butcher this. And you can come correct me drive, but this machine essentially shoots into a vacuum 50,000 tiny droplets of molten tin, the metal, and then it shoots each one of those, sorry, 50,000 droplets of tin every second. And then it shoots every one of those little droplets of tin with a carbon dioxide laser. And that creates extreme ultraviolet radiation. That radiation is concentrated by a system of incredibly complex mirrors into and onto the stencil that then etches the chip. And the mirrors, which I thought was crazy, are so incredibly flat. They're about the size of a dinner plate, maybe a little bit bigger. But if you expanded them out to be the size of the entire United States, that the highest point on that the highest abnormality on that mirror would be 1 cm tall. They're that incredibly flat to direct this radiation into one specific little tiny spot. So proof of aliens, I think. Who could come up with that?

Phil Town: Or magic. Or magic. You know, maybe this is just what they're telling us is going on in these things, you know? Who knows? [laughter]

Travis Parker: Now, my favorite story to tell is when we went to Well, my favorite story, but a favorite Austin story is we went to what year was it? We went to the San Francisco for SEMICON West 2019. So, we're going in and we're learning about this stuff.

Austin Bowen: I was there, too.

Travis Parker: You were there, too. You were there, too. But you but Austin was the one that was so troubled by all this stuff that as we were learning it that he kept telling me that it was BS. He goes, "This isn't real. This is BS." And I it he you know he just didn't believe it. No, wait. No, even to the point that on the flight home, he was sitting in a different row and aisle. He walked all the way back to me and goes he goes, "Is this real? Tell is it are you is this bullshit?" And I'm like, "No, no, it's real. Trust me." And he was that troubled that he was spinning in his head about it. And then he went back to his seat and he was over there reading about it.

Austin Bowen: Yeah. I we did like an analyst dinner or analyst breakfast with you know the lease Lisa Su from I forget you know she's not AMD she's one of the other big ones and Gary Dickerson with AMAT was there and Gary Dickerson gets up and he's talking about this new machine that applied materials making and they're stacking chips like Travis is saying he's like so how we do this is we spray a layer of chemical on this chip that's two nanometers thick just like the thickness of almost an atom. And then so the next layer doesn't mix with it. We superheat that layer to 3,000° C and then cool it to Kelvin, minus 275° in 1/100th of a second before we spray the next layer. And we do that a 100 times and that makes one layer of the chip. And I just looked at I was like, that's [laughter] Like no, like that doesn't make it, you know? Is for some people out there like that makes sense. Still to this day I'm like how is that even possible? Just the heating and cooling element, let alone spraying something that thin, you know, on a chip. Yeah, it just it doesn't make sense to me. But yeah, that's how my coffee pot gets Wi-Fi. So, you know, it's great. [laughter]

ASML's moat: Meaning, toll bridge and switching costs

Travis Parker: Yeah. I mean, it's an incredible company. So, I mean, we're, you know, all these interesting facts we're bringing up about ASML really leads us to the first part of this that you need to think about from a an analysis standpoint is one, are you capable of understanding it? So, I always try to tell people it's like, listen, these are not approachable companies. These are not [unclear]. Do not be tempted to invest in something that is so far outside your ability to understand. I mean, you can get there, but I have the advantage of working in the industry for 26 years. So, it's to me, I probably take it a little bit for granted, but that's the first thing. It's just to be able to get over that meaning hurdle is actually this is a big one. And so, you know, be really thoughtful about that. But, it is actually a really important industry for everybody to understand. I mean, looking at AI, looking at the future, I mean, everything is data. And we talked about this a little bit last week, right? Data drives the world now. Transmission of data, calculation of data, storage of data, all that stuff is driven by chips. So chips is really the new oil of the information economy. That's the way I would describe it. Understanding how these chips are made at a basic level, I think is going to be fundamental for the next generation. And I think already we're seeing, you know, I talked to people as we go to these investment conferences, we go to Berkshire, you know, just over the last five or six years, just the people I talked with casually have a much deeper understanding of how chips are made than when I was actually working in industry. And so that's I think really important. So, I would actually encourage people to try to get there, but don't let hubris get you into trouble because it is a very difficult one to understand. But these guys have a massive moat. I mean, just looking at it from a moat perspective, I mean, they're really a toll bridge moat in a lot of ways. They pretty much own the market. If you want to make a chip, a modern chip that's 5 nanometers or below, you have to go through ASML. There's just no other choice, right? And so they really do have kind of a toll bridge. These guys are spending four billion plus dollars a year on R&D alone to stay in the lead. Got a couple other companies out there that can do, you know, they can do lithography, they can't do it at the same level and they have a portion of the market, but in the upper end of the market, there's really no competitors at this point. The switching is huge. I mean the you know we had these machines in our fab and at the time they weren't even these most advanced machines we're describing now but you know you're talking about a 2 to threeyear design cycle. So you're let's say you have a new chip that you're coming out with right and it has certain specifications heat energy computation power number of transistors with a whole bunch of specs that you need to meet. Well, it's great that you can design a chip on paper, but you have to be able to manufacture it. So, you have to you're forced to partner with these chip equipment makers in advance during the design process. You need to be talking to ASML. You need to be talking to AMAT and LAM research and say, "Guys, here's the specifications. Here's my design. I need a tool that can achieve these tolerances to make the chip. And so you're locked in really early. If you decide to back out and go to a different vendor, if you have the choice, you're talking about setting your schedule back months or years, and that's usually not a decision you're willing to make unless there is an absolute roadblock. So there's this huge switching moat that's built in just from the amount of time you have to spend with these guys to make sure your chip is something that can be manufactured. And then on top of that once you get the thing installed into your factory I think we had I think we had eight engineers. I'm guessing this is like this has been a long time now, but it was eight to 10 engineers alone that supported that one tool and they could only solve certain number of problems. If we had a significant problem or we had something that we needed to adjust on the tool, we had a service contract with ASML with local engineers that would come in and solve it. And if you look at the revenue profile for these companies, what you're seeing is that the service and support contracts of these businesses are starting to get as a larger part of, you know, percentage revenue. I'm saying around 30 35% and growing. So, not only are they selling you the hardware, but they're selling you their expertise to maintain this tool. And as I talked about last week, the most important thing for a fab manager is uptime and cranking out as many units as possible. You're going to pay for the service contract, guys. I guarantee it. You're not going to take the risk that you don't have like 247 support from ASML to come in and help you get that tool back online. It just costs too much money, right? So, a huge switching moat. I just think it's gonna I think the really thing you have to think about is there anybody out there right that's going to make some kind of a jump and make a competing machine and most likely I think that's going to come from China where you know with these export controls that we have on China we are basically forcing their hand to try to come up with a solution for a tool that can compete because they don't they can't be cut off from this, right? They need it's you know ne necessity is the mother of invention right so these guys are working really hard to solve it but I don't think it's a guarantee that they will it can take them a long time to do it so you know from a meaning and moat standpoint I mean I think this is a pretty wonderful business if you're able to wrap your head around it

Phil Town: Yeah and there's the catch [laughter] and you wrap your head around it I remember when you guys came back from San Francisco with this and it was just like, oh man, this is too deep for me. I didn't even try really. It was way down the road. But since then, it's been like just appreciating that a company like this can have what essentially is a monopoly and then looking at what they're doing on R&D. I mean, there's a certain factor of whether or not it's possible to come out of nowhere and like out of a garage in China or something and blow these guys up. And it's just so unlikely from everything I've learned since then that can happen without literally years of publicity, you know? So, it feels like the kind of thing where it's technology, somebody someday could get something better. The industry could change and leave these guys behind. I mean, that's just the nature of technology. It could happen to anybody. But it's also such a complex tool that, you know, you should have plenty of time to exit the investment if things are starting to change if you're paying attention. So, I've really changed my mind on this one.

Travis Parker: Well, that's good to hear, Phil, because we I would like to say that I'd like to qualify that Phil did try because we had many conversations both in the office and on the phone and you were trying.

Phil Town: I was trying, but oh my god, man. This is like

Travis Parker: And I think this is actually this is the a really good lesson because this is one of the things that Phil has been really good as a mentor for is that is making sure that you are intellectually honest enough with yourself about if you're capable of understanding something right I mean it just going through the moat of this business you're so tempted

Phil Town: I've been humbled so many times

Travis Parker: As have we all now at this point we've all been humbled but I mean I think that's really a key lesson here right I mean we're talking about this thing is you know this all these cool you know scientific facts about the tool but at the end of the day you really have to ask yourself am I capable of understanding the business I would argue that most people this would be a go in the no pile or the too hard pile and so but that's what's great about having a team we have different levels of specialty so some of us can wrap our heads around certain things that the others can't. We have a lot of overlap. And so being able to get access, you know, to different people with different sets of skill sets, is really what's kind of helped us, I think, be successful.

Austin Bowen: If anybody wants something blown up, me and Phil, we got you. All right.

Phil Town: We feel good about that. Feels like that's probably something I can get my head around.

Hunter Hoffler: A good deal, guys. Well, hey. Yeah. I mean, I think great conversation about ASML. I mean, it definitely gosh, great business, but it's also, you know, we feel really comfortable about the fact that they are running essentially a monopoly, but gosh, that also means that they have got a huge target on their back. I mean, Travis started kick us off talking about how EUV is such a huge bottleneck in the industry. That is something that, you know, we try and come up with a list when we decide that there's a company that we like that we might want to invest in of like, hey, these are some things we got to really keep an eye on to see if the story changes here. And yeah, that's the big one. But geez, Phil, to your point, I don't know how anybody's going to challenge that in their garage. It's going to have to be a big competitor and I think you're going to definitely see it coming. But anyway, any other thoughts on ASML, guys, or we want to go ahead and wrap here?

Valuing ASML through the chip cycle

Travis Parker: I think the only other thing we should maybe touch on with ASML. The other thing just to keep in the back of your mind is that valuation is also a bit of a challenge on a company like this. And the reason why is that it's a cyclical industry, right? We talk about that a lot. And we actually mentioned it last week. You know what is the impact of some of these long-term purchasing agreements with AI? How is that going to affect the cycle? But if we just assume for a moment that the cycle remains pretty stable, it's a it's about a 2 to threeyear upcycle and then about a year contraction typically like if you just look historically and so what happens is if you try to value this thing in a traditional method, you could easily end up buying this company at the top of a cycle and having to sit on a contraction in a chip cycle. For over a year before it recovers. Now, even if you did buy it near the top, I think you're going to be fine long term. But really, what you need to understand is what is, you know, what is the actual value of this business at the middle of a cycle or a typical average cyclical period in the chip industry. And so we've done I think some pretty good work in building some models to help us figure out how to buy you know smooth out the free cash flow, net income, owner earnings to understand how to build or actually how to purchase these companies at a much more reasonable price relative to their intrinsic value because you understand the chip cycle. So that is an added complication with these businesses. And if you're going to go look at these companies, you really need to add the chip cycle into your repertoire of things that are in your circle of competence to make sure that you get a decent buy price. And so that's the other challenge here. And so just keep that in mind. Maybe it's a topic we can bring up, you know, in a future discussion, but I think it's one of the keys to really making sure that you get a margin of safety price on a company like this.

Wrap-up and next episode

Hunter Hoffler: Yeah, 100%. That's going to be on the docket for everybody. I think on the next recording of the podcast here, we are going to dive in to some of the hyperscalers that look like they are completely, if not mostly debt-free, but have some little things on the balance sheet that make us think otherwise, some offbalance sheet commitments. So, we're going to dive into that and see what that looks like. See if that changes anything since these businesses are so wrapped up in this chip cycle as largely buyers of AI chips. So, with that, we will go ahead and log off here for the Rule One Podcast. We've got Travis, Phil, Austin, and I'm Hunter, and we will talk to you guys next week. See you then.