AMD just ripped 35% higher on a monster OpenAI deal, and the AI gold rush is officially in overdrive. Is this the start of a new trillion-dollar era, or are we staring down the barrel of another dot-com-style bubble? This week, we’re arming you with the tools to navigate the chaos.
🚀 Riding the AMD Rocket! We break down the massive 35% surge on the OpenAI deal and what it means for the Nvidia-dominated AI chip race. $AMD $NVDA
🫧 AI Bubble or Real Value? We debate if the trillions pouring into AI is justified, drawing parallels to the dot-com bust… and why this time might be different.
🧠 The Ultimate Valuation Shortcut! Luke reveals his secret “Reverse DCF” weapon to instantly spot overvalued stocks like Palantir and Google without complex models. $TMDX
🛡️ Bulletproof Your Portfolio! From simple cash hedges to advanced options strategies, we answer your questions on how to protect your gains from a market downturn.
✂️ Taking Profits on Palantir! Find out why Luke is trimming his PLTR position, even though he’s still a believer in the company’s future. $PLTR
🎲 Quantum Computing Reality Check! Is shorting quantum computing a genius move or a fool’s errand? We dive into the options chain to find out. $QUBT $RGTI
Segments:
00:00 AMD’s Monster Morning
07:46 AI Bubble vs Dot-Com: This Time Different?
20:21 Reverse DCF Tutorial and Tools
42:02 Portfolio Valuation Analysis
48:03 Patreon Q&A: Insurance and Hedging Strategies
53:58 Covered Calls vs Protective Puts
59:33 QUBT Options Chain Breakdown
01:10:10 How Much Research Time Is Enough?
01:17:00 PayPal Homework Assignment
01:24:53 Movie Talk: One Battle After Another
WSW – No Ads – EP101 –
[00:00:00] Luke: Anyone who thinks they can create like a spreadsheet or even like some giant AI model and plug in data and it will tell them just magically and accurately should you buy our sell a stock.
[00:00:10] Krys: Now speaking of inefficiencies in markets, this is kind of curious when I’m looking at this chart here. Uh, usually the inefficiencies exist in small. Companies because the market hasn’t really found out about them and they’re growing at rates that are unusual.
[00:00:25] Luke: That’s not work. That’s actually like hobby and passion. It’s interest, but I learned something about the company at the same time.
[00:00:31] Krys: still clouding people’s perceptions because it’s been a long time that this company has been in the dumps.
[00:00:42] Luke: Welcome to the Deep Investing Jungle with your hosts, Luke, the Badger Hallard, and Christophe the monkey Ky.
On this week’s show, we’ve got some thoughts on, we’ve got some thoughts on some hooten and hollering on our episode 100 fiscal AI contest. I want to chat about doing a reverse discounted cash flow model, and I’m gonna give you guys some tools to do it with. That’ll make it super easy. We’ve also got a bunch of Patreon questions, and two we wanna pick out are how much time should you spend researching stocks?
And also, maybe critically right now, how do you ensure your portfolio against a potential downturn? And then Christophe, we’re gonna get into some options shenanigans. I want your help picking out some more quantum computing puts.
[00:01:36] Krys: Oh my good goodness. Badge. So we’re fresh off episode 100, the livestream extravaganza, which was fantastic, right? We had, uh, a lot of fun. It was really kick ass getting to interact with our Patreons, but now we’re back in the saddle, back to business doing reverse DCFS and option analysis for you.
Beginners. Please don’t run away because it’s, I know it sounds awful
[00:02:03] Luke: something we’re gonna probably do a bit more of in future episodes. We’re actually gonna start showing you how we really use some of the investing tools that we have in our toolbox, like fiscal ai, one of our favorites.
[00:02:17] Krys: Yes, sir. You know what? Monkey woke up to this morning badge.
[00:02:22] Luke: Tell me.
[00:02:22] Krys: You know what, you know what my routine is now, actually, I’ve, uh, because there’s not enough hours in the day, uh, I’m just, I have no bandwidth as you’re always, uh, uh, clawing me about. So I’m now getting up at five in the morning and getting, getting my butt into the gym.
And while I’m at the gym, I’m doing stupid research for, for, you know, our pod and all investing stuff between sets. I’m that guy. I’m that guy now with the, you know, um, so anyway, there I am minding my own business, you know, putting up the, putting up the weights, and I see that a MD is up 35%. This is a what?
200? If you fi can you fiscal AI right now, as I’m, I’m, I’m talking, uh, a MD was on my potential 10 X stocks. It was my l latest edition. It, and I put that while it was a $250 billion market cap or something. So it was huge. So my expectation for it to 10 x would be that would get to, uh, what 2 trillion it would join, you know, the ranks of the Trillion Club.
And lo and behold, this morning it made a significant step in that direction.
[00:03:37] Luke: I spotted that, which is why I’m drinking from my monkey coffee cup today. Yeah, I knew this was gonna be a good day for you. It’s right now, like in a week you’ve done it yet again. Uh, it’s now a $334 billion company,
[00:03:52] Krys: it’s insane. So the high, high level overview of what happened is that OpenAI, OpenAI seems to have, its, its pause in every honeypot around, uh, committed to strategic partnership with a MD, and it already has one with Nvidia, right? But we all know that the mar, the general market is kind of terrified that Nvidia is sort of a one, you know, it’s the one one place you can go.
So the fears of Monopoly were, I think, legit. So this is the beginning of the kind of divergence to an equally huge partnership with a MD, uh, via open ai. And so the partnership was for them to, uh, OpenAI committed to deploying up to six gigawatts of power using a MD infrastructure. That’s part one. So that’s massive, right?
That’s just, that’s a lot of, lot of, uh, chips needed. But two, uh, it says, uh, my summary says that a MD has issued open AI warrants to acquire up to 600, 160 million shares of a MD stock at a nominal price of 1 cent per share, potentially given open ai, a roughly 10% stake in the chip maker valued at over 26 billion based on recent prices.
So, uh, the way I’m reading this is, well, there’s two, two important things. Yay. For a MD because this is huge money. Two, it seems like open AI with its. And I guess just all of this ai hyper scaling space has gone absolutely cuckoo bananas. And these, the, the, the CapEx being spent are, is preposterous. And some people are talking about like, where’s this money coming from?
Like, you, you, you know, you this, this guy like one hand feeding the other, you know, like, I’ll give you a hundred million in stock and now that my stock is higher, I’m gonna give you, right? And it’s this invisible flywheel kind of thing happening,
[00:05:59] Luke: Yeah, totally. It’s like that. I’ve seen that Three Stooges sketch, like surfacing on even before the a MD was an a MD deal was announced. ’cause something similar happened last week with like Intel and Nvidia and like the US government, like everyone’s kind of buying bits of each other and like the, the Three Stooges sketch is just like Larry Curlier Mo, like settling their debts by passing like the same $10 bill round around the circle a couple of times.
[00:06:25] Krys: right? So here’s what I, here’s the main thing. For me. Uh, cool. That monkey has a MD in portfolio. Hopefully our members and the other Wall Street Wildlifes due to this is, this is proof. So yay for thesis two open AI seems to be potentially another future trillion dollar company. I mean, th their, their, I don’t know.
The money is the, the money is speaking is how I’m taking it, and the money is flowing through AI via Nvidia and a MD. So, so it seems like yeah, they’re, they’re, they’re gonna be the AI guys in one way or another. Three. And this is what I want to talk to you about, kind of workshop. This idea, we talked about it before, the analogy between the, when the internet was being born and now this AI boom. Couple of things. It bears repeating the internet boom was a bubble. And when the bubble popped, it popped hugely. And I wanna say most of what was popping was garbage, meaning it was not substantiated by any real money.
Right
[00:07:46] Luke: Yeah.
[00:07:46] Krys: now, I would say we are also in the bubble because the asset prices are rising just so, so quickly. And, you know, the, the flywheels three stooges thing you were just talking about, so I’m, I, I don’t, yes, we are also in the bubble, but I, this is what I was thinking about this morning badge when I was at the gym, I was like, how many times in, in human civilization do you have all these things lining up between, you know, um.
Technologies and network network effects and, uh, GPUs coming to fruition and this alien intelligence landing and the rate of acceleration going, and now that’s backed being backed by what? Approaching trillions of dollars in capital expender expenditures by companies that have the money. Oracle has the money and Meta has the money, and Tesla has the money and like all these people have the money.
[00:08:50] Luke: right. Okay. I hear what you’re saying, but it could still be a bubble and the reason is,
[00:08:55] Krys: wait, wait. I did say it’s a bubble.
[00:08:57] Luke: Oh, no, but I could still be like a Yeah, I agree. Okay. Agree. We’re both agreeing. It’s, it’s a bubble.
Mm-hmm. Yeah. Yeah. But you are saying this time is different perhaps because this is backed by real money, but
[00:09:09] Krys: Well, and and Wait, wait. Complete that. Complete that. It’s backed by,
[00:09:12] Krys: it’s backed by real money. And I’m also saying another, maybe, maybe brand new moment in human civilization, sort of like the internet, but this time more confluences beyond just like email and, you know, whatever was happening in 95.
[00:09:31] Luke: No, I get, I get that. Let me make here, let me make my, my bear case on this. I’m not, but I’m not a bear on this stuff. Like I’m an AI optimist, but it could still come really badly undone because you, you’re right, like this is real money, but these companies like Meta and Alphabet and Amazon, these guys are spending like committing to trillions of dollars of CapEx spend over like multiple years.
And, um, and that’s contingent on their valuations. And their valuations are contingent on AI being real. Like if ai, if AI shows, like, if, okay, so let’s say like the end users, like the bis B2C companies, they, if they can’t monetize AI in a meaningful way, they can’t get like efficiencies and like do more with less.
And so you can’t make, like, create commercial value with ai. That’s what’s gonna kill it. And if that happens, they’ll stop spending and then like the metas and the guys who are providing all the infrastructure will go shit. Like the money’s, the money’s actually not here. ’cause our customers are not spending anymore.
They’ve, they stopped growing their spending. So they’ll have to stop investing and then the, the tide is going out, like Buffet would’ve said. And these guys are all there with their pants down ’cause they’ve committed to these like multi-trillion dollar CapEx spends. And the whole thing just kind of cascades and like slips into the sea.
Um, so yeah, I agree. Like it’s this isn’t dot com where you’ve got business models that are just fantasy and there’s no ability to actually do e-commerce ’cause it’s so immature. This is real and we think people are generating value with it, but it’s like, how much value can you generate and does it justify the trillions of dollars of spend in this big circular economy?
[00:11:11] Krys: So, let me see if I could summarize what I think you’re saying in the end. Your question is, is the hype behind the AI in general translate? Does it translate to actual value produced in the real world Now. I’m gonna think through this, live with you during the internet. I mean, there was the pre-internet world and the post-internet world, and while it was kind of unfolding, nobody, but nobody could potentially imagine what the world would be like.
15 million, uh, five, 10 years later, right? All your banking done. I mean, it was just right. Okay. But value was created. Right now in this moment, the sort of, uh, rebuttal I would give to you is that a company like Tesla and Google, Waymo and robo taxis are solving what I would argue what the, the most complicated thing imaginable is like getting cars to drive themselves in complex situations that are just absolutely infinite. And that’s using all of these networks. And I think I.
[00:12:28] Luke: and sorry, and we’re not there yet. And that would be true, massive economic value. If you, if a company could actually deliver, you know, 99 point all the nines, you need to have a, like a reliable FSD. Autonomous driving system that didn’t like murder people and cause accidents, but we ain’t there yet and we may never get there.
That’s kind of the, that’s one of the questions, right?
[00:12:54] Krys: Right. Well see. This is what, why I think this particular moment today, October 6th, 2025, is so fascinating. On one hand, I agree with you. We’re not there yet. And, and every Saturday morning as I’m driving, after my run in Austin, I’m surrounded by 20 cars with nobody driving them now. And so my assumption is, and I think you and I share this, we’re optimists in general.
We acknowledge things take longer than most people expect. But if I had to bet right now in a binary way, will it or won’t it? I’m a hun. I’m, I’m taking the, it will, I’m taking, yes. This thing is going to, and the fact that these trillions of dollars are flowing behind it. I’m saying to go back to the original point, it’s a bubble, but it’s a bubble that has the most, I guess, uh, unusual or, uh, not unusual.
Most, um, God, what am I, I’m, I’m, uh, not unusual and not most, but the, the, the, the rate, the, the forces, the winds that are almost like willingness into existence are so massive that it feels to me when the bubble pops, because all bubbles do pop. There are going to be many, many more substantial companies left standing.
And the ones that basically powered, you know, the whole thing like an A MD will not be popping.
[00:14:38] Luke: Yeah. And like everything happens so much faster and it’s like faster and faster at an increasingly fast rate. So it, you’re right, it took like, how long did it take? Really the.com bubble to burst to go from like, you know, peak of overhyped to bursting to then actually realizing real value and like stocks kind of turning around.
That’s probably, what, six or seven years? Something like that? Ballpark.
[00:15:03] Krys: you think it was that long? I thought it was around two.
[00:15:06] Luke: Oh, well I mean, things
[00:15:07] Krys: oh, you’re talking the turnaround. Oh, the whole cycle.
[00:15:10] Luke: yeah, yeah, yeah, yeah. Till till like everyone was back in like, you know, growth on mode. Anyway, somewhere like that, you know that ballpark?
[00:15:16] Krys: Let’s call it five.
[00:15:17] Luke: Yeah. Yeah. Five. Yeah. Like that’s gonna happen so much quicker this time. Valu, like, we’re gonna look at some valuations with the tool of a reverse discounted cash flow model a bit later this episode.
And some stocks, AI fever stocks are just wildly overvalued. Um, and they’re gonna take a pounding when the bubble bursts, which it must do eventually. It may not be this year, it might not be next year, but they will eventually, like all things must end. Um, and we are here to like, hold your hands when your pants fall down.
Uh, ’cause our pants gonna fall down at the same time. Right. Um, so, um, but things are going to, things are, I think, I think I don’t, I no longer really fear, like a decade of stagnation that we may have had like back in the eighties. I’m not really a historian or, you know, we may have had back in the 1930s. I think we’re gonna, we’re gonna see, ’cause you’re right, like there’s, there’s real companies doing this stuff.
And if, if AI spend proves to be like a white elephant, companies like alphabet. Like they’re still just generating a crap ton of real money with their traditional business models and okay, if they overspent on AI CapEx and they have to wait for the world to kind of catch up with that spend again, that’s still gonna happen in like a couple of years as maybe, you know, model efficiencies and, you know, they’d be like a few more deep seek moments and suddenly, you know, we might need like, you know, 10 x or a hundred x or 10,000 x the compute at some point.
You know, we’re gonna, we’re just gonna rush into that point where we truly have created like a super intelligence.
[00:16:56] Krys: It’s, uh, what never been a more fascinating time to be investor, I would say. I mean, it’s what’s, it’s nuts to say that this stuff is making the internet boom, seem like, you know, kindergarten. I mean, it’s kind of wild. But, uh, my wish for our listeners and our Patreons is to keep the hype, uh, like don’t dismiss it just because it’s hype.
There’s a reason for it. And also just do your psychological prep work for the moments when there’s gonna be volatile, um, popping of bubbles and try, and this is, I think, what we’re good at or, or if, if I, if I may be. Maybe a little self-congratulatory. I’m always trying to think in that contrarian way and look for places where people are ignoring, uh, you know, why do I have a MD instead of Nvidia?
For example, my portfolio. It’s not that I don’t absolutely adore Nvidia, the company, but there was this period where a MD was being overlooked. And now, right, that’s how, that’s the investing piece. Like you, you wanna, you don’t wanna get caught up in the hype. You wanna, you wanna, um, position yourself, uh, intelligently.
So that’s what we’re here for anyway. So that’s the a MD story. Quite the morning, uh, quite the morning news.
[00:18:24] Luke: Yeah, well played. Well played. And I was saying in my investing WhatsApp with my close friends, like last week one of, one of the guys was asking, oh, you know what’s like gi, gimme some, gimme some tickers, Luke for some, you know, high risk, you know, I wanna have, I wanna have a couple of high risk bets in my portfolio.
And I’m like, well just go check out Christophe’s King of the Jungle. ’cause you’ve got a couple of high risk, high returns options in there. And many of them have paid out, but they’re still like great investments. And like my closing comment to that WhatsApp was like, I dunno what’s going on with Christophe, right?
He cannot miss at the moment or literally everything you touch is Tony is gold. So.
[00:19:01] Krys: And what, and, and my, just for the record, uh, y faithful listeners, monkey’s response being the wise sage at the, at the top of the mountain that he is, or the top of the branch is this Too shall pass. Because, because it will, it’s just that I hope to, you know, gather enough bananas before and then play the rebound or the down slope as intelligently as this rocket ship.
I do wanna, actually, I, I wanna add to that because, because I’m a hybrid kind of creature. I’m, I’m long-term investor like you as my base, but I’ve learned, uh, how to maneuver more things in in the, um, shorter term there is from the trading world. This saying that gets tricky and like, just, just be careful here folks, but, but there’s a way when bubbles appear where you can ride the momentum up and as long as you don’t deceive yourself, you could also ride the momentum down and profit in both ways.
We’ll probably start talking more about that when it’s time, but, um, it’s not, you don’t have to like, just, you know, commit yourself in one direction if you are already planning steps ahead, so.
[00:20:21] Luke: well let’s actually, let’s take the conversation in that direction then. ’cause today I think we’re gonna start talking about some actual tools and some actual practical things you can do as an indi individual investor to better understand the stocks in your portfolio. To like start to understand valuations in a bit more of a nuanced way.
Like this is a big complex topic and I think I’d like to start us off on it by talking about something called the reverse discounted cash flow model. ’cause it’s really easy, actually. It’s conceptually fairly easy to understand. And it’s trivially easy to do it at a, at a sort of simplistic level, but it gives you, and it gives, I use it as a kind of, you know, sort of finger in the air test.
And I’ve, I’ve created actually a template with my buddy Albert’s help created a template that will just run a, a reverse DCF for you for like hundreds of stocks at a time, if that’s what you want. And we’re gonna give that spreadsheet away to, um, wall Street Wildlife, Patreons. So there’ll be a link in the show note, but I’m gonna show you how to use this thing.
[00:21:23] Krys: sweet badge. So first of all, I know you’re, you’ve got a good thing prepped here. I know you’ll take us through the weeds, but just, uh, sorry to, uh, burst in. But first thing, when, when anybody hears the name or title, like reverse discount cashflow model, their eyes might go, you know, start rolling inside their head.
What does that mean in, in plain English?
[00:21:44] Luke: alright, so ca let’s break it down a bit. So cash cashflow is. Like the, if you are running a company, maybe you’re an alphabet or maybe you’re just selling hot dogs. Like your free cash flow is the money you have left that you, after you’ve like, you know, you bought like some star, like a new burner for your hotdog stand and you’ve paid like the salaries of the guys that are working with you and you’ve paid for a bit of marketing and you paid for like your pitch in the market and you’ve paid for like the raw materials, like the buns and the hotdogs.
Um, so when you’ve kind of, you’ve run the business and you’ve invested in the business to kind of grow it, the free cash flow is what’s left over and you can decide what you wanna do with that. You could either pay it out to shareholders as dividends, and if you’re a small you know, person, you maybe know you could pay that yourself as a dividend.
If you’re a solo printer, you could. Do a share buyback, which is kind of the same thing in a, in a slightly more arcane way. Like you’re sort of putting money back into shareholders. You could, um, yeah, it’s like a bunch of stuff and it’s your, you know, it’s free, so you know, it’s not free as in it’s free.
You earned it, but it’s, it’s free to do with as you see fit. So, and companies that are generating free cash flow kind of, it’s like, it’s a clean way, takes all the accounting shenanigans out. It’s a clean way of saying, is this a profitable company, frankly. And if your company is like young and immature, it won’t be generating free cash flow.
But that’s not a bad thing. It’s just where the company is in its life.
[00:23:18] Krys: now, tell us about this discounted thing, the D in the DCF. What?
[00:23:23] Luke: if you’re gonna do, if you’re doing this stuff the hard way and the kind of proper way, but if you’re not on the YouTube, I’m doing like air quotes there. Um, you do something called A DCF, which is a discounted cash flow model. And without getting into like really complex stuff, essentially it’s like a, it’s a complex way of modeling.
The free cash flow, you expect a company to generate over a sequence of years. So let’s say my hot dog stand, maybe it’s gonna generate like a thousand dollars this year in free cash flow. That’s like the money left at the end of the year. And I think next year it’s gonna generate like 2000 bucks. And then I think, oh, when I get to that stage, you know, I’m maybe gonna buy like another stand so maybe I’m actually gonna lose a bit of money.
’cause I’ve expanded my, you know, CapEx, I bought a load of AI data centers, whatever it is to run my hot dogs. And, but then in the fourth and fifth year, like that’s gonna pay off. And so I basically work out, I create like a big monster, perhaps spreadsheet, and I map out all the kind of strategy and the inflows and the spend and the growth and the profitability.
And I work out what I think my free cash flow will be every year. And typically it’s done for like the next 10 years, but you can do it for as many years as you’d like. And then. You know, the concept of like time value of money. So like if I earn a thousand dollars this year, that’s more valuable than earning a thousand dollars next year.
’cause obviously I could have earned that a thousand dollars. I could have invested it or put in the bank. It would’ve grown a bit by next year. So it’s like next year’s money is a bit less valuable, but this year’s money. So you have to do that down over.
[00:24:55] Krys: a banana in hand today
[00:24:59] Luke: Yeah,
[00:25:00] Krys: is worth way more than, than, than the bananas you promised you’re gonna give me in Las Vegas in, uh, right,
[00:25:07] Luke: Right. Exactly. Right
[00:25:08] Krys: because, because who knows? You, you may never, you, you might just tempt me to, to some, some sinful layer with, with a bunch of bananas. But then when it comes time to pay up, you know, oops.
You ate them all yourself,
[00:25:22] Luke: And even if you guaranteed, even if you took that risk out and you guaranteed I was gonna give you like 10 bananas next year, you’d still rather have 10 bananas now. ’cause you could invest those 10 bananas and you’d, you then have 11 bananas next year. And that has nothing to do with me. So,
[00:25:36] Krys: Right. Plus inflation, plus
[00:25:38] Luke: yeah, yeah.
Totally. Totally. So anyway, so now in our heads we’ve got like the discounted cash flow model. It’s like directionally, the next 10 years, the cash flows, we expect to get supported by this really big, complex model of all the different factors in the business environment. And then we just discount the future cash flows back to today.
And then we work out the, like the, the, the end result of doing this piece of work is we work out essentially what’s the fair value for the stock today
[00:26:11] Krys: Right. So badge. If I could just Right, I, uh, just to clarify, in case there’s a little. Yes, we’re, we’re projecting how much money the company will make, and then we’re taking a little bit off the table because those future bananas will be worth less. So we’re kind of adding a little, uh, that’s the discount, right?
That’s the, that’s the part where we’re saying, okay, even if we make this much, it’s not gonna be worth that much. So we’re penalizing those future cash flows a little bit, and at the end of all this stuff, we have numbers. We have a chart based on this bunch of assumptions.
[00:26:50] Luke: exactly. And it that, that allows us based on hundreds of assumptions we had to make to build our big monster model, um, that allows us to work out is the stock overvalued or undervalued to date. ’cause we might say, oh, you know, we did all this work, we think. A MD is worth $300 billion based on this new deal with OpenAI and the market’s currently valuing it at $340 billion.
So it’s overvalued. That might be a conclusion. But the trouble with these DCF models is they are so sensitive to the assumptions and there are so many assumptions. And so you could really, I mean, quite honestly, you could build, you could build a model that shows pretty much any company is undervalued and any company is overvalued.
And you could probably, you know, you just do some work to do it, but you could probably find a justification for that. Um, in most cases.
[00:27:45] Krys: Yeah, batch. This is so important ’cause, uh, in the investing world, some investors are known as spreadsheet warriors and there’s a, there’s an actual trap here because you could, you could study this stuff and get really, really good at it. And as soon as you start plugging in numbers into sophisticated formulas, there’s this feeling that, oh my God, I am so smart.
And these numbers all all make sense. And, and look, I have this, this 50 50 column model therefore must be true. And we forget the most basic point that most of it is based on assumptions. And in the early part of my investing career, I was one of these kinds of investors, and I got burned time and time again, and my lesson was, stop being too smart for your own good, so to speak.
And so just a big caveat that as long as you remember that, just put, ’cause you typed it into a spreadsheet, does not make it so,
[00:28:52] Luke: Totally, totally true. And look, I’m not dissing the incredible amount of work that some analysts do and that the big banks do. They have like armies of people to do this stuff. Quants, like figuring this stuff out and building these models, like it does work. But yeah, I mean it’s just so, um, you know, it comes down to your assumptions and so like, I, I like it’s a lot of work potentially just to reinforce your own, um, like initial expectations perhaps.
Like if you think, oh, I think a MD is overvalued, you’re probably gonna end up building a model and plugging in as your own assumptions that end up demonstrating that it’s overvalued. And I know some people go into it and they try and, you know, they try and ignore the stock price today. They try and build the model, but we’re only human.
Right? It’s hard to do that stuff Anyway, so these guys. I’m showing a book. If you’re not on the YouTube Expectations Investing by Michael Buin and Alfred Rappaport. These guys reversed that process and it’s, it’s not a deep book and it’s got like pretty pictures and it’s got, you know, big words. Yeah, that’s some pretty pictures.
Look at that. I, I’ve read it twice and I don’t fully understand it. Like I’m, I definitely feel like I’m like touching sides of this stuff still, but I’m trying to incorporate this more into my process because I think reversing that entire process. Let me explain what happens when you do that. It’s very quick and simple.
It’s kind of quick and dirty, but it does allow you to do, I think, I feel like a temperature check. Um, so what does it mean to do a reverse discounted cash flow? Reverse DCF, essentially you start at the other end because we know. We know the value of a MD today is whatever we just said, $340 billion. So we know the stock price today.
And the idea Magus in a rappaport’s idea was to go work back from today’s stock price and simply reverse it with a quite a somewhat complex calculation. I’ve built a spreadsheet that will just literally do it for you. Just plug in some numbers from fiscal ai, um, and from today’s stock price and the free cash flow being generated by the company today.
A reverse DCF does a fancy calculation and it tells you how much free cash flow growth does the market expect. So I actually did this. I refreshed my, I’ve got a spreadsheet for this. As I say, I’m gonna release this spreadsheet to our Patreons for free.
Uh,
[00:31:30] Krys: which is@wallstreetewildlife.com.
[00:31:33] Luke: Or your wildlife.com. Absolutely. and it’s dead easy. Like this spreadsheet I’ve got, I’ve got instructions. It’s really easy to do this and you can either do it manually or you can just plug in data from fiscal ai. And if you go to fiscal.ai/wildlife fancy discount, um, you don’t even need to pay fiscal ai.
Like you can do this stuff with the free tier. Um, so if we look at this, I’ve updated my reverse DCF for, these are like my main stocks in my portfolio and a few that I’ve got my eye on, but I’m not buying, I don’t own today. Um, and I, I update, I refresh this every couple of months to do a bit of a temper check now, um, and then I’ve, it’s nice and pretty and I’ve just sort of ordered it.
So I’m just gonna pick out one or two rows from this because like this tool is no use at all. If a company is young and they’re not generating free cash flow. Because, so for example, rocket Lab, new Holdings, a STS like these companies don’t generate free cash flow. Um, um, and so you can’t do a a, you can’t do a reverse discount to cash flow model ’cause you’ve got nothing to reverse to.
Um, and then you’ve got some other companies. There is a weakness in this model because say finance companies, FinTech companies like wise, and actually it hasn’t come up in my model, but I’m just showing it for transparency, Mercado Libre and a few others. The way some like Financey companies account for their free cash flow in that because of like standard accounting rules, the model doesn’t really work either.
And it’s, in wisest case, it’s because they hold a crap ton of customer deposits on their books. And you have to understand the intricacies of how they manage their cash flows to realize that. Like the, the very, very big free cash flow number you see in the standard accounting statements isn’t a true reflection of their free cash flow.
So the model doesn’t work for those. It didn’t detect Mercado Libre, but it’s just like a, you know, like my spreadsheet is good, but it’s not absolutely perfect. Um, so you need some nuance, but directionally this, this allows me to do like a temperature check across the whole portfolio. So I can see like directionally, companies like Novo nor disk and C Limited, like down towards the bottom.
Let’s pick out C towards the bottom of the list. So if I do this Buin reverse DC, F, based on today’s valuation of C Limited, the market expects 11.2% growth in free cash flow over the next 10 years. So I can ask myself very simply, you the question, does that feel about right? Like, and I have to know about C and know their competitive position and where they are and they’ve done a turnaround and they’ve been on like a cost cutting.
Like regime for the last couple of years and now they’re starting to grow and expand again. And you know, knowing all of that, I use my investor knowledge and my instincts to say that seems pretty reasonable. In fact, that seems like it might be a little bit cheap. 11,
[00:34:36] Krys: Right,
so yeah. Yeah. To summarize, to summarize a bunch of stuff here, you find a company that’s already making money free, free money more than it needs. Okay? You then plug in the numbers into our fancy spreadsheet, and it’s going to give you a number, the growth rate number.
[00:34:59] Luke: yep.
[00:35:00] Krys: That number tells you, based on this current valuation, for that number to be justified, the market expects this company to be growing at the number that popped out of the spreadsheet.
In c Limited’s case here, it’s 11.7%
and Badger is saying, this is where more of the art, so to speak, comes into this. Does a company like C Limited that’s already yay big and has this and this going on in terms of their market and in terms of their tech is growing 12% a year for the next 10 years? Does that make sense? Does it feel like, oh. About right. Or, oh my God, there’s no way they’re gonna grow 10% a year for 10 years because they’re gonna start, stop, start losing subscribers or this, you know, or competitors coming aboard, whatever. And then you, but it’s a base, it’s a good base from which to gauge expectations.
[00:36:05] Luke: And let’s just, let’s go to the other end of the table because I’ve got two stocks I wanna pick on that are at the like extreme high end. In this reverse discounter cashflow model, and this is why it requires nuance as well. But I actually did a trade on the back of this analysis, um, end of last week, which I notified on our Patreon on the trades channel.
So Eds and Palant here, and actually editors, if we don’t have the graphic up, let’s put it back up like let’s keep it on for this segment. So, EDS, the market expects 46.5% free cash flow growth over the next 10 years. Palantir, the market expects 45% free cash flow growth over the next 10 years. So those are both very, very high numbers.
Like to grow free cash flow by, you know, nearly say 45% year over year over year is hard. Some might say impossible and. If they succeed in doing that, that meant it’s correctly valued today. That doesn’t mean it’s cheap, that just means it’s like correctly valued to be buying it as a bargain almost. You know, for it to be a good investment, they have to grow free cash flows faster than that or for a much longer period.
Um, so I’ve trimmed my Palantir stock yet again and I think I may have said like six months ago. I’ve trimmed it three or four times. I’m not gonna trim it again, but like I had 3% exposure in my main portfolio, my retirement portfolio. Sorry. I know I said I wouldn’t call it main. They’re all main portfolios.
I’ve, I trimmed it from 3% down to 2% because I just, at the scale that Palantir is at and all that stuff we talked about, about AI bubbles and risk, I don’t think Palantir can grow free cash flow at directionally 45% year over year for the next 10 years. ’cause I think we’re gonna see like a. Personally, I think we’re gonna see like a come to Jesus with these AI companies and a lot of valuations are gonna get reset and all the money that people are spending on ai, like a lot of that is flowing to Palantir on the software side.
Um, like that’s gonna slow down. And then their free cash flow growth is gonna slow down because, uh, well they, they’re inside the bubble Edix.
[00:38:32] Krys: Wait, wait, may I, may I, uh, before we switch over the eds, so yeah. The, the bulls regarding Palantir are saying, okay, this is gonna be the software layer kind of covering all ai.
[00:38:45] Luke: Yep.
[00:38:46] Krys: If AI is this new magical thing, then there ain’t no valuation high enough, right? Like we just, we, this is going to, it’s that the law of large numbers just stops applying here.
And when we say back to them, you’re telling me that 45% a year for the next 10 years, that’s, that seems reasonable to you. They’re like, yep, yep. That’s to totally reasonable. And we’re saying, uh, yeah, but, uh, that’ll be like, this time it’s really, really, really, really different. And it’s starting at what, 200, what’s its, uh, market cap now?
[00:39:22] Luke: and that’s key. $410 billion
[00:39:25] Krys: Exactly. So to keep, to keep that kind of compounding in one sense, they’re saying this might become the world’s most valuable company. That is one of the. Implications from the bull case and you as the bear in this case. By trimming, you’re saying, uh, I’m, I’m making a, I’m separating my confidence in the company from whether this is a smart investment and the numbers are telling me that for any of that to even come close, the company not only has to exceed, like, basically out like, it, it, it, it has to not make any mistakes one and that, yeah, it’ll just be a new unicorn kind of thing being born into existence.
And probability wise, if something has never happened before, you know, you should be very, very cautious.
[00:40:18] Luke: Exactly that. That’s exactly right. And just be clear, like I’m not a bear. I’ve still got 2% allocation to Palantir. I still want to be exposed to it. I just wanna manage my exposure and trim it because I feel like it’s just like too expensive right now.
[00:40:32] Krys: Right, and I’m saying, and monkey doesn’t have Palantir because he’s taking the more the, the full logical conclusion, which is, uh, it’s just, uh, uh, an in a not an insane that the risk reward ratio to allocate money here is skewed to the risk side. And I want no part of something like that.
[00:40:57] Luke: Yep. That’s fair. That’s fair. Yep. Now let’s just quickly look at eds. I don’t wanna go down a rabbit hole with it, but we did talk about it in episode 100 when we were like drinking cocktails. Um, because the market also expects trans medics free cash flow to grow at 47% a year, 46.5% per year. So you could say, well, obviously that’s overvalued as well, but you’ve gotta know the story and you’ve gotta know where it is.
Like EDS is a $4 billion company and it’s really only just pivoted to generating free cash flow. So it’s like really immature in its free cash flow journey, like almost. I, perhaps I should just be ignoring this line entirely because it’s not really a free cash flow story at something like Eds, and, and even if it was, I kind of do believe that they can grow at a much faster rate because look, they just started announce that they’re gonna like, penetrate Europe with like, having like airlines in, or planes in Italy.
And um, you know, so they’re, so, you know, they’re early in their story, whereas Palantir is a lot further along in their story.
[00:42:02] Krys: Exactly. Yeah. So it’s a little bit of nuance there to flesh out what you just said. Dodge is that, uh, edix might as well not be making any cashflow. The fact that it has some right now, that’s almost like arbitrary because it has simply too many investments yet to make in its own expansion. To be considered a more mature company.
And when we talk about, you know, adding the kidneys and international expansion like you did, they should really be putting all of their, uh, money and profits into, uh, the expansion stuff. So yes, it’s a fluke that it’s on here and that that that cap size 4 billion is not 400 billion.
[00:42:49] Luke: exactly. Yeah, exactly.
[00:42:51] Krys: So I would ignore.
Yeah. So another nuance I would ignore Eds altogether.
[00:42:55] Luke: yeah, I wanted to draw a line to it and say, you know, don’t just say you can’t use any tools like this in an unthinking way. Anyone who thinks they can create like a spreadsheet or even like some giant AI model and plug in data and it will tell them just magically and accurately should you buy our sell a stock.
That’s a fantasy that that doesn’t exist. And if it did exist, it will get arbitraged away within hours because someone else will find it. Or, you know, they’ll notice some of, you know, some of these like hedge funds and are like sophisticated market players that have, you know, they’re paying their analysts like nine figure salaries.
Like these organizations will find that, or there’ll be a fast follower and if you found something, some inefficiency in the market, like it will be gone within, probably within seconds, let alone within days.
[00:43:45] Krys: Yeah. Now speaking of inefficiencies in markets, this is kind of curious when I’m looking at this chart here. Uh, usually the inefficiencies exist in small. Companies because the market hasn’t really found out about them and they’re growing at rates that are unusual. Those inefficiencies are rare when you’re talking about the mega caps.
Uh, some obvious examples recently, like there was the Nvidia and the meta story, right? Where there was this big divergence and then, you know, but that’s, that’s the exception. However, looking at this list badge, uh, to go back to our portfolio reviews that we did in episodes 1991, I see Alphabet is expecting based on share price, about 15% annual growth, whereas am whereas Amazon is expecting 30 and Axon is expecting 40, these are three of your companies.
And when we did those pitches, you convinced me to, I actually went out and bought some Google, uh. Not much, but you know, like for me, a little placeholder to, to say like, I buy, I buy the, the moment and right now I’d be hard pressed based on this ’cause I was tempted to add Amazon and I was a little tempted to put the same placeholder on Exxon.
I’m like, nope. Because why would I do that if my Google position is still small and it’s basically 50% off? If you wanna sort of think of it that way, it’s 50% cheaper than those other two. I mean, that’s not quite apples to apples, but
[00:45:20] Luke: No, you’re right. Like I, I did that same, you know, slightly more sophisticated version, that same thing. And I came to the conclusion a year ago, alphabet was just a complete, no brainer investment, which is why it’s the only thing stock I, in the last 20 years where I’ve added new money, when I already had more than a 6% allocation.
And it’s still cheap now. Like it’s up, you know, nicely. 50% or so from the last time I spoke about it maybe six months ago. Um, I think it’s still very reasonable value. Amazon has always been a funny one. I’ve owned it for decades, like coming out for 20 years. Like they still, like, as Bezos used to say, I know he is not on the helm anymore, it’s now Andy Jassy.
But they used to say it’s still day one. Um, like they’re still investing a crap ton of money in warehouses, logistics, airlines. So actually like the whole, you know, you think of Amazon as this, like e-commerce giant, the whole, the whole totality of the e-commerce thing, it doesn’t actually generate much in the way of profit or free cash flow ’cause they spend so much money in just continually growing and out competing anyone who could possibly come after them.
But like it’s impossible to chase Amazon on logistics now. Um, but they make some free cash flow ’cause AWS is such a cash cow. But Amazon is weird. Like it’s, it’s not really a free cash flow story in a similar way to Eds. Funnily enough, axon is just overvalued, like that’s in that category.
[00:46:45] Krys: Okay. So that, that was great. Uh, are we going to do, uh, a more, uh, uh, another kind of live tutorial with plugging in the numbers, maybe on a future episode?
[00:46:57] Luke: We can, I think, let’s take some questions on what I’ve just shared. Um, I will post in the show notes for today, the links to the spreadsheet, but you’ll be able to get them from Wall Street wildlife.com, which is our Patreon. Um, and uh, like how to play with it. And then hit me some questions and I’ll try and field those.
I think I would like to, we should both start using fiscal.ai in a, like a more interactive way. ’cause I use it every day and like I’ve adapted my spreadsheet so I can literally just cut and paste all the raw data you need outta fiscal. Do AI and I’ll show you how to build. Like the dashboard template you need in the template.
It’s that easy. Like in 20 minutes you can have this thing up and running.
[00:47:37] Krys: That’s what’s gonna be be so useful. Maybe that’s something we, we do for our Patreon only crowd. Uh, you know, like a, like a video, uh, us taking a ticker and you starting from beginning to end. Uh. Here’s, you know, the whole process and that, that I think will be extremely valuable for our community. Sweet.
We’ve, we’ve babbled on for what, 50 minutes already, shall we get to, uh, our Patreon questions?
[00:48:03] Luke: let’s do that. We had two really good ones. Um, do you wanna pick us up first of all with Barbara’s question?
[00:48:09] Krys: Sure. Barbara writes, dear Mammals, I would love to have an episode on insurance and hedging. I follow the IO fund and see their pattern of strategically hedging, but they do not have a diversified portfolio and following their hedge signal seems to make sense if you have a portfolio that does not diverge greatly from theirs. So, um, uh, should we read Steven’s reply?
[00:48:34] Luke: Let’s just, let’s just dive into our thoughts. Like, essentially Barbara is saying, how do I protect my portfolio? How do I take out insurance on my portfolio? If there was to be a downturn?
[00:48:45] Krys: Yeah. Um,
[00:48:47] Luke: Actually, let, lemme go first because I’ve got a really simple answer. The, but the real answer is your more complex one. Like the really simple answer is, I, I just have a bigger cash allocation that bi Barbara, that’s my insurance and I varied my cash. And if I think valuations as a whole are. Probably stretched, and I think we’re getting to that territory.
I’m gonna start increasing my cash allocation. I did that just by selling 1% of Palantir last week and I’m gonna start trimming some other things soon. Um, and by having more cash, if stuff goes down, well, the cash becomes more useful. I can redeploy it at cheaper valuations. So there’s a simple answer, but there is a more sophisticated answer which Christophe is gonna run you through.
[00:49:31] Krys: to your point, that does involve a little market timing.
[00:49:36] Luke: Yes.
[00:49:37] Krys: Uh, but it’s balanced out by the whole sleep well at night. Quotient if you think things are, or, or I’ll say it this way, if you’ve already made a good chunk of money, the whole point is to make the chunk of money. It’s not to make even more obscene amounts of money that you really didn’t think would happen or you would need.
Then it does make sense to market time and say, okay, I’ve accomplished what I was set to accomplish. You take some off the table, you sleep better at night, and now your cash is that insurance that when the market drops, you actually are, I’m not sure if excited, but you, you, you don’t feel that that upset because you’re like, oh, I get to reinvest this for much cheaper.
Right? That’s how that
cash as insurance, uh, I would, I would offer two alternating strategies that use options. Options as insurance, because I say this all the time. Uh, in the options market, there’s a buyer and there’s a seller. Just like when you buy literal insurance. So let me repeat that analogy.
When you have a car, you’re forced to buy insurance, right? Money leaves your account and goes into the account of, of the insurance company, and it pays out when things go bad. Otherwise, you don’t get that money back and you know you’re not getting it back. Hopefully you’re not getting it back, right?
Because hopefully you don’t get in a car accident. So it’s a deal you’re willing to make upfront for peace of mind. One of the ways you can have some insurance is to sell calls on your positions. So what that means is, and I’m not this, this does get complicated pretty quick, but once you think a position has reached fair valuation and you’re ready to sell it. An alternative could be that you sell call options, meaning you collect premium from somebody else, and that says you pick a, a price that you would be legitimately happy to sell those shares at. So let’s say it’s $20 for company X, right? Instead of going to the market makers today and just selling ’em out, right?
You sell a contract to somebody else, they pay you, you get money. So you’ve, you’ve basically collected, I’m calling that insurance. And then if that company then exceeds that price, you sell at that price, they get your shares, but you keep the premium. If the company does not exceed that price, then you keep your shares and you get to sell call options in the future. Now, in general. I’ve won and lost a lot using this. I’ve won when it’s a company that I legitimately want to get rid of, but I just got rid, you know, rid of it with a little extra in the pocket for a little higher. But I’ve also lost because I decide to sell shares, uh, called, uh, I’m sorry, covered calls on a company that had huge growth rate.
And then of course it kept going up and basically I didn’t really wanna sell that company. So this works more for the sort of, um, steady for the steady companies. Does that make sense?
[00:53:05] Luke: Yeah, and it’s almost, I, I know you’re gonna come onto another version, but this is a bit like the opposite of the thing you described at the past. ’cause in this way, kind of you are almost becoming a version of the insurer. You are getting paid, like you’re receiving dollars in your account and you’ll keep that money as long as stock prices stay kind of relatively flat depending on
kind of the usage Or go
down.
Yeah.
Um. Yeah, and if things go up, then you’ll end up selling your shares a discount. Like you’ll lose a bit of money when those options get exercised. So you are kind of, you’re being given, you’re being paid money today, um, which you’ll only keep if stuff remains relatively steady or goes down. So that’s kind of like where the insurance bit comes in.
It’s almost like you are almost like the anti insurer for someone else.
[00:53:58] Krys: This is just, this isn’t, this is just uh, uh, up, I’ll rephrase this a little bit. Selling calls on companies you own that you’re happy to sell at, at the price, at the, call it overextended price. This is just a way to squeeze a little extra money on top of where you’re okay selling it anyway, because you’re collecting a premium above the price that you’d be happy to sell.
[00:54:23] Luke: Yep.
[00:54:24] Krys: So this is like insurance light, right? Um, no. You need to have at least a hundred shares of a company to sell a covered call. So for some people that this might not apply, but the real, what I would call full on insurance would be. Uh, almost the exact opposite you would buy. Puts, puts and calls are the two option vehicles, main option vehicles, and you could either buy or sell them.
We talked about selling calls where you get the premium when you’re buying puts, you are giving money to call it the market. So you’re paying for that insurance. But if things go down, then your puts increase in value. So if you have just, I’m gonna use in the arbitrary number here. If you have a portfolio of say, call it $100,000, you may decide that you are okay losing, say, 5% of that portfolio, meaning at it, it losing via insurance.
So you would then do some math. 5% of a hundred thousand would be $5,000. And you would say, okay, if I lose $5,000 relative to the other 95 that I own, no big deal. That’s how insurance works. And you would buy $5,000 worth of puts in some vehicle that will go, uh, that you expect to drop. And as that vehicle drops, your puts go up in value.
So your $5,000 would go up to 6,000, 7,000, 12,000, whatever it may be. And the common way of doing that is you pick an index. I would do right now, given where the AI bubble lives, it lives on the NASDAQ in index, right? So I would pick a NASDAQ index that kind of maps all of the Frothiest companies and by puts on that.
So a common way of doing that just to throw out one ticker is QQ Q. That kind of tracks the, the techie stuff. And then I would buy, I don’t know. Then you have to consider the date, right? The date of this because options lose value. So let’s say you buy the insurance for a full year, ’cause you don’t wanna get really cute, right?
Thinking it’s gonna be three weeks from now. ’cause you’re not gonna get that, right? So a year from now you buy $5,000 worth of those puts, market does drop. Those puts go up in value and you’ve therefore hedged or protected some of your portfolio. And obviously if the market continues going up, well you lose the 5,000 bucks essentially, but your portfolio, another 95% of it is now worth more.
And then you could repeat the process when the bubble’s even loftier, something like that.
[00:57:20] Luke: and that’s much more like the sort of traditional concepts of insurance. You spend a bit of money now in the hope that you don’t cash in, but if you know, if your house burns down, if your portfolio explodes, then you can cash in your insurance policy. And hopefully get back like a chunk of that money.
[00:57:38] Krys: And, uh, to go back in our time machine badge. Remember when I was, when poor humble monkey, all the moves he was making in the first year of our show backfired spectacularly. I won’t mention the Rocket Lab call that expired at zero again, uh, haunts me, but I also bought a bunch of puts in KRE.
[00:57:59] Luke: Yeah.
[00:58:00] Krys: And, uh, BAC.
And that was because I was fairly convinced that the commercial real estate bubble was going to gonna pop. And for a little while things were looking really, really, really dire. Um, but that did not happen. The banks printed more money and for whatever reason, that still, you know, the fates, uh, kept the commercial real estate titans afloat.
But that was a bet I was willing to make. You know, uh, I lost thousands of dollars, but that’s how insurance works. So right now, I would be thinking in that way, your task as a listener would be, yeah, find things that you think are likely to go down when the market flips.
[00:58:43] Luke: now I wonder if I can be a bit cheeky and show you a particular put I would like to buy and you can gimme some action advice on it because a bit like you said. Okay, you could be smart and you buy like this insurance policy and you buy puts on QQQ, like the whole market. You can still buy calls and puts on any individual company and I think quantum computing is total bs the asset is gonna fall out of it.
Whether or not AI succeeds, there is no business model here. And I know some people don’t agree with me and that’s their prerogative. I believe this stuff is all going to pretty much zero. So here is the actual, it’s called an option chain and I’ve taken a snapshot of Quantum Computing Inc.
Which is a company we talked about a while ago, and I think this is one of the most egregious like wastes of space in the whole stock market today. And here are, here’s a snapshot from about an hour ago. So on the 6th of October, and I can buy January 20, 28 puts. So IEA bit like an insurance policy or I’m betting the stock will go down sometime in the next 837 days.
So I’ve got like a really long insurance policy that in my mind that should be long enough for this thing to like collapse down to the steaming pilot Deus that it is. So, but I think this is terrible, terrible value, but I’m an options noob. So help me understand the options chain. Maybe you can start to, uh, explain what this picture’s showing us and tell me if there’s something worth buying on here.
[01:00:25] Krys: Sure. Badge. So I would say, let’s start from the back. I think it’s dangerous, uh, with, uh, this particular setup and the following, uh, following reason is when you’re dealing with a, uh, circus company like this, uh, um, we know it’s mostly momentum.
[01:00:49] Luke: Yep.
[01:00:51] Krys: Momentum can keep going for, for a very long time. And technically when you buy a put with each passing day, you’re losing money.
So the fact that you’re looking at the 28th of January is, is a thumbs up. But the main thing is, so, um, without, because we need a masterclass on the options really. ’cause there’s a lot of moving parts to keep track of. But let me call your attention to one thing specifically.
[01:01:19] Luke: Great.
[01:01:20] Krys: Uh, I see in that top row, the IV last number is close to 140%.
[01:01:31] Luke: Yeah.
[01:01:32] Krys: IV is a algorithmic number come up by like quant, quant funds. That basically tells you, uh, what the market expects. The implied volatility to be. And the higher this, uh, IV number, the higher the algos think the swings are gonna be both to the up and down. This number changes every minute or second. You could look at it and it’s gonna be changing. An IV of 140 is very, very high. What that means is that the people selling you these options are charging you a lot of money to buy them. They’re basically saying, we know this quantum, this qubit company is gonna have a lot of woo. And if you wanna, if you wanna benefit from the potential fall, oh, we ain’t gonna make it cheap for you.
So what many options market participants do is they either look at that and say, it’s too high. I am not gonna, I’m not gonna pay you that fee. Or they wait for something to happen and it’s called IV Crush and they wait for that number to drop often. To give you a clear example that you’ll see with, let’s not use a a bizarro company like Qubit for now, let’s use a normal company like say Amazon.
The closer it gets to an earnings call, the higher the IV gets, because we know things could shoot up massively in which you’d profit or drop, you know, and you’d lose money depending on which side of the trade you’re taking. So options, people who legitimately wanna buy an option and say Amazon, and let’s say they’re doing more of a short term, short term thing, so let’s say over three month period, right?
Then they will wait post earnings. Or maybe call it post earnings, but not the day before, not the day after, but let’s say sort of in the middle of the three month cycle, maybe a month after it, that iv, you always see dropping precipitously after an earnings call. That’s when your options are cheapest. So that’s kind of an, uh, just an important concept to understand all else things being equal.
Time, time, your purchase when it’s cheapest. Cubit’s a whole different beast, right? Because there’s no there, there. And so it seems like if you wanna take this bet, you have to swallow the fact that it might not get much cheaper until it kind of goes, you know, bankrupt. What, what will happen first? It either proves it’s legitimate and lo and behold, they do have a sophisticated fab that nobody knew about.
Or it’s going to, you know, plummet to close to zero because. What everything happens. So here I would say the numbers that what you are seeing is not gonna help us much. ’cause you either your thesis is true or it’s not, and you’re gonna pay one way or another, you’re gonna pay to partake and there’s no, no alternatives.
[01:04:51] Luke: Yeah. So like the, and if we just, uh, if we can edit this, you can keep this picture up the QUBT one, like if we look back at this option just to pick out some of like my simplistic view, like the stock is trading at $21, give or take. That’s like the little black number in the middle. Today if I wanted to buy the right to sell the stock at $20, so kind of directionally what it’s worth today in up to January, 2028, I gotta pay about $9 64.
That’s like the last, the last time a contract executed with that, those parameters. The deal closed at $9 64. So, and you buy in batches of a hundred when you buy, when you trade options. So I would pay, the minimum I could do here is I would say spend $964 to have the right to sell a hundred shares at 20 bucks over the next 800 days.
So, if I’ve paid $9 for the right to sell the stock at $20, well the, and the stock is $21 today, well, the stock has gotta fall to like 11 bucks before I’m even touching a profit. So that’s like the stock has to get wiped. And even if the stock literally went to zero, which is probably improbable, you know, it might, it might get down to, you know, it might like get quarter, it’s like a $5 billion company today.
So let’s say it gets quartered, it goes down to like $4. See, um, even then, I’m still only making like 500 bucks on that option I bought. So it’s not much of an, it’s like expensive. I’m spending 900 bucks for one contract to potentially at the best case make $400. But probably just like execute exercise is worthless because it was so expensive.
And that’s like, you know, your IEV number is, is like the algo summation of like the cost of the thing versus the strike versus all the different dates. ’cause there’s lots of different things I could buy that’s like a summation of all those different things I could buy or sell.
[01:06:56] Krys: There’s a perfectly reasonable view to be had here that’s saying, to go back to what, uh, my original point, when you’re dealing with something that is based on pure market, uh, game theory, then that game is a game you might lose simply because the, the mathematicians will. So,
[01:07:19] Luke: Yeah.
[01:07:20] Krys: um, a thing to keep in mind though with options is that, uh, you don’t have to wait until the options value will change continuously.
Uh, it’s not like you have to wait until January 28th to either have won or lost the bet. And so the moment, uh, qubit turns out to be a fraud or whatever. Your options would, uh, gain value. But then let’s say it happens tomorrow, right? Uh, let’s say the stock drops to $15 a share. Your options actually would, they don’t need to hit 11.
Your options would really go up in value because there’d still be a lot of time value left on the contract. ’cause remember, options are the, what you pay is both the premium, the intrinsic value, and the time value. So it’s like time value, intrinsic value, and the multiplier of the iv. That’s a fancy way of saying, um, time is on your side in this case because it’s so far out, but you still have to be correct.
And I guess my net net takeaway from looking at this chart badge is you just have to be extremely confident. That this, this thing is, is not what it is. And then I think it’s not a bad play given you’re giving yourself what, uh, 28 it would be two years and over two years and quarter and right to bring us back as an insurance play.
We know that if there’s a, if there are gigantic red days coming and something’s popping, then the companies that will pop the most are ones that not only don’t have any revenue, but that are known to the market as potential. Nothings. So this, I would say is not a bad way to get some insurance. It’s kind of like, it’s kind of like exotic insurance,
[01:09:23] Luke: Hmm.
[01:09:24] Krys: but it would be still insurance.
I just bought two of these puts, but uh, for January 26th. So that’s more like gambling territory.
[01:09:33] Luke: Yeah. Cool. Alright, great. Good. Alright. I’m gonna take that away and think about it. But if we come back to, um, Barbara’s question, it doesn’t, it can be much simpler than, you know, where we just looked at QUBT, like Qq Q puts will be a way of doing that. If you, if you wanna get into more detail, Barbara, like message us in the Jungle Lounge community on the Patreon, we can, uh, go through a, like a live example maybe just as Christophe asked me to do like a live.
Uh, show and tell for our Patreons about how you use the reverse DCF spreadsheet. Maybe he will post a couple of QQQ puts and give you a bit of insight on those.
[01:10:10] Krys: Yeah. And uh, right, and there’s some good tools, good options, tools that show you pretty charts. And so yeah, we could do that in the future
[01:10:19] Luke: Cool.
Let’s, uh, I know we’ve, this has been a long episode, but let’s just, let’s touch on Sylvia’s question as well because I promised her on, um, the Patreon that I’d feel this one. So, um, Sylvia has asked us, so she said she’s a complete beginner and she wants to know how much time should she be spending researching stocks.
Uh, and I think it’s sort of a separate question. Like she wants to manage her anxiety, which we all have as an investor. Um, and like how much is too much. Of an exposure to in any one stock. And there’s a bit of context. She said, you know, she’s not, she’s not like early in her investing career. She might be a new investor, but this is money that she will need in the next 10 years.
So she, so therefore she has to be somewhat conservative. So let’s, um, let’s dive into that a little bit. Maybe the first part first, like, how much time should you spend researching stocks? Like, you don’t need to spend any time, right? You don’t have to do any of this stuff. You could literally buy an index, DCF, you could set it up in half an hour and that’s it.
You, you fix, you set your financial future. If you wanna know how to do that, go back to our episode where we talked about like how to get started as an investor or even listen to, like how to invest for your kids. ’cause we set out a roadmap that’s applicable to kids, but also applicable to grownups too.
It’s can be, can be like autopilot. But the stuff we talk about on this podcast is going a bit beyond the autopilot and actually. Analyzing companies and starting to understand the world through the lens of being an investor. How much time should you spend on that? How much time you got?
[01:11:56] Krys: Well, I, I got a better
[01:11:58] Luke: Go on.
[01:11:59] Krys: to take our, to take our, uh, doomsday scenario. Seriously assume the market’s going to puke. If you’re thinking like an investor and not a trader. Then you own the business, right? Whichever ticker you bought, you own that business. And this is a thing made by humans, let’s call it a thousand humans got together and dedicated their whole lives to building, and now it’s worth a hundred billion dollars, let’s say.
Or if it’s Nvidia, it’s worth $3 trillion, right? Meaning this is like a seismic accomplishment. When the market PS and you’re thinking of an owner, are you gonna just literally get rid of this thing that you’ve built and partake in for 25 years simply because the price drops? The only way you answer that is if you truly understand what you own, you wouldn’t sell your house, right?
Just just. Uh, tomorrow because, uh, you know, you got some, uh, raccoons in your attic making noise, right? It’d be obscene, right? The, the smallest sound that no, you understand your house, you understand its foundations. You understand that a little raccoon in the attic is a, you know, it’s not affecting the whole house.
If you have no idea about your house and you have no idea where it’s located and you have no idea, blah, right? Then maybe a, a raccoon is a harbinger of bad things to come and you’ll be like, okay, out with this thing. So my point is, if you understand what you own or the more you understand what you own, the more likely you will not make a bad decision to sell out of panic, out of fear, out of temporary market gyrations.
[01:14:00] Luke: Yeah, that’s fair. That’s very fair. But, and if we try and make it really specific, like what do we think is, okay, let’s put a finger in the air. Like if you are, if you’re a beginner investor. And this isn’t, you know, you have a job like you’re doing other stuff. This isn’t your like hobby and passion, but you’re interested ’cause you’re listening to this podcast and you’re starting to own a couple of companies.
It, like in this thread Sylvia tells us she owns Nvidia and she’s owned it since like 120 bucks. So she’s been in that for quite a some time. Um, what’s the minimum you could get away with doing and how much time will that take? I mean, I would say to be a, to be like your first baby steps as a proper investor.
I would say the minimum you should do is check out the quarterly reporting. Like just skim the deck, which might take you, I don’t know, two hours ev like four times a year ’cause it’s quarterly. Um, and if you really wanna understand it, it might take you a day or two. ’cause you have to go and under, you have to go and google some words you see in the deck and understand ’em a bit better.
And if you’ve got like an extra half day, listen to the earnings call again four times a year and you might have to go and Google, you know, some stuff that’s talked about. Why didn’t analyst ask a certain question? Um, yeah, so like maybe, yeah. And if that’s one company, by the way, it’s one company. If you own 10 companies, that’s that times 10.
I would say to be a proper investor, that’s, that should be your first step. You can do less than that, which is already, if you do just that bare minimum, quite honestly, you’re doing more than like 90% of of individual, of retail investors are in the market.
[01:15:36] Krys: Yeah. I could add a little bit of nuance there and say do things in little steps. So I have my one share watch list method. Step one is I go to the company website and I look at the investor presentation. Those are the shiny slides. This is the company selling itself. Once I go through, let’s say 25 slides, that’s taken me, what, an hour?
Two hours, right? Because I go on side quests, I look up, you know, LightBridge for example. I’ll weave this, I’ll weave this in as a good example. Uh, a recent purchase I made for the King of the Jungle portfolio. Uh. Never really heard of it, but I know ALO or nuclear energy is the, you know, the market’s going gangbusters over this, another bubble.
But LightBridge is going to be selling the, call it the nuclear fuel for all of these. And there are part partnerships and there’s lots of good stuff going on. Well, what did I do? I went to their website and I looked on their slide deck, and then that took me on the side quest to the CEO talking about a recent, uh, expedited stuff happening with the government.
And I didn’t want to outsmart myself. And I said, you know, then I, okay, let me pause there. That took me hour, 15 minutes.
[01:17:00] Luke: Yeah.
[01:17:00] Krys: so I bought a small little position in the king of the jungle. It’s like 0.3% I believe of my portfolio. That was enough for me. I liked what I saw to put it like into the portfolio. But that’s nothing, right? 0.3% if it goes to zero, nothing bad really happens as I, but now it’s in my portfolio. And as I get more serious, then as Badger is saying, I’m going to listen to the next earnings call, I’m going to go back, look at the finances more carefully, that’s gonna add several hours to the project that’s gonna determine whether I add to it.
You don’t have to buy everything at once is the point. You go little by little. So on the extreme end, of course, like when I went nuts over eos, that was, I imagine it was over certainly hundreds of hours, maybe 500 hours of research continuously for years. But, but that, that, yeah, you don’t need that, but, but you know, that’s how you gain conviction.
So between two hours and a thousand hours, the truth lies.
[01:18:10] Luke: Yeah. And if it feels like work, you know, I, maybe you need to invest in different companies because if you’re actually, if you’re passionate about being an investor. And you’re invested in companies, in sectors you are interested in, like We are, we’re both interested in tech. Christophe and I have got like between us three Teslas on our driveways.
Right. Um, we’re interested in what the company’s doing. So when I read about Tesla and I listen to an owner’s call, I catch like a musk, like shooting off on a podcast with Joe Rogan. That’s not work. That’s actually like hobby and passion. It’s interest, but I learned something about the company at the same time.
So yeah, Sylvie, like Sylvia, it feels like work and it feels arduous and boring. Maybe reassess, you know, maybe find a different set of companies to sink your time into or maybe decide like, I don’t have the bandwidth and I don’t have the interest to do this. Like, put the majority of your money in an index unlike, you know, DCA for the next 10 years and you could do just great.
[01:19:11] Krys: Okay, this is perfect. Perfect segue badge. ’cause we’re gonna end the episode with me giving you some homework. Yeah. You love this. You love this? Okay. Uh, because it speaks to this point. Um, I also bought a new company. I had a new company to Monkeys, king of the Jungle Portfolio, PayPal, ticker, PY. Pl. Exactly.
Now, why did I do this? This is a company I had studied before, so, and you know, when we were on seven investing with Matt Cochran, I heard all the spiels. So it’s not like this company was new to me, but in general, I don’t, uh, my area of expertise is not FinTech stuff. I don’t know the nuances of take rates and frigging, you know, like I’m just not a FinTech guy at heart.
That’s Badger’s area of expertise. However, however, Saturday morning I ended up spending, it was about, I would say loosely three hours because in the previous week, using all my fancy monitors and different sources of information, I kept getting pointed back to PayPal and I began. This is the intuitive thing.
You, you, you get it when you invest for a long time. After I looked at the charts and the technicals and the finances and looking through the presentation and looking at bear cases in bull cases, I got a deep whiff of this is the perfect moment to start getting serious about PayPal because there’s a lot of negativity, still clouding people’s perceptions because it’s been a long time that this company has been in the dumps.
But when I looked under the hood Badger, and this is your homework, uh, two weeks ago, I believe they announced a pretty big partnership with Google. See, you might, you, you see? See, and when I read some, um, well, I read both Bear and Bull cases. What I saw was a company that had made many strategic shifts, many of them under the hood, many of them not visible yet to.
To, uh, the market, but they’ve been doing them behind the scenes and that this smells to me like the exact moment when there’s the most, what’s it called? The most, uh, doubt that’s not yet visible and that, that, um, the whole you wanna buy when nobody else is buying kind of thing. And so I ended up buying one share for the king of the uh, uh, jungle portfolio.
Your homework badger is because you like FinTech, because you understand it because you’re invested in many of PayPal’s competitors Add y and Wise and, uh, is Nubank a competitor?
[01:22:15] Luke: Yeah, kind of.
[01:22:16] Krys: Okay. Uh, then I’m telling you, monkey to Badger that using your expertise that I don’t have. If you put PayPal on your two research list and you get rid of the, you know, the things you don’t like about it.
’cause there many of them are still true and many of those things are still relevant, you’ll be able to speak to them better than I can. But you look at some of the things that they have done, I’m guessing you’ll be pleasantly surprised at what you discover. And I wouldn’t, I wouldn’t be shocked that you might take PayPal more seriously going forward.
So that’s your homework. Research, PayPal, and tell us, tell us, uh, what, what you like and what you don’t like.
[01:23:03] Luke: Nah, I’m not gonna do it, uh, because I’m leaning on the advice we just gave Sylvia, which is if somebody doesn’t interest you, and if, if it doesn’t turn you on. It is gonna feel like work and I don’t wanna do work. I’ve got much more interesting things to research. I, so I’ll take a glance ’cause you said Google, which obviously I can’t, that’s like a red rag.
I’ve gotta understand what’s going on there. Um, I’ll look at that, but I ain’t researching the stock ’cause I don’t, I don’t wanna run it. I just, in principle, I do not like them and I don’t mind missing out. I don’t mind missing out on a good investment ’cause I wanna own companies that I like and have a mission and are making the world a better place through technology and innovation.
And I don’t reckon PayPal’s one of them.
And even if
[01:23:52] Krys: I’m gonna call you out here.
[01:23:54] Luke: there, any better options
[01:23:55] Krys: Okay. I, I, I, I buy that You have more interesting things, but you do have a bunch of fintechs that are their competitors. So you, you are doing this kind of work anyway
[01:24:05] Luke: sure. As a, As a, competitive, as a analysis of the competitive landscape for Wise and Nubank, I will look at it from that perspective.
[01:24:13] Krys: there you go. You could look at that. It’s now tied up with one of your top conviction holdings in Google. Uh, and Venmo is growing 20% a year now. So it’s like turning from the stodgy thing. Like there’s just, it’s fine, it’s fine. I go ahead, make monkey do the work in FinTech, which he doesn’t even understand, but that’s fine.
I’ll, I’ll do it and I’ll buy a whole bushel of bananas and then, uh, you’ll laugh when it all went wrong. Or I’ll, I’ll screech at you saying, told you so, but, uh, but this is good. This is good. You’re, you’re drawing a fine line. You’re just saying, you know, maybe not for me. I’m challenging you. I’m saying you’re gonna be surprised by what you find.
[01:24:53] Luke: Yeah. Alright. Very good. I I, I like the spirit. Okay.
[01:24:56] Krys: Okay. Uh, let’s end the show with just a little bit of the, uh, just nor chitchat. I got a pop quiz for you. I’m curious. I doubt you’ll get this right in my o in my other life as a, as a professor of English slash rhetoric. There are two literary authors that I am most knowledgeable about because I’ve published professionally on them. Can you name either of the two?
[01:25:23] Luke: Oh God. It’s the, the journalist guy, uh, who’s, uh, I can’t think of the name. The one who did your, um, the beauty of Roger Federer thing.
[01:25:36] Krys: Yeah, yeah. David Foster Wallace. Right. So I, yeah, I wrote my dissertation on titled The Buddhist Philosophy, Buddhist Philosophy in the work of David Foster Wallace. So he’s my number one guy. I got a tattoo of last line in that book on my shoulder. I got his initials on my wrist. So he’s my, uh, number one man.
But number two is Thomas Pinchin. And, um, I won’t say more here, but he’s, he’s maybe one of the most. Crazy cracked out brilliant, uh, minds of the last 50 years. I mentioned this because he’s, he’s secretive. Nobody’s has seen a photo of him since his high school yearbook in 19, whatever that was, sixties.
He’s appeared on The Simpsons once as a character with a brown bag over his head and a big question mark over it. Uh, so he holds his, his identity, very clo. He protects it very, very closely. Uh, he must have given the rights to Paul Thomas Anderson, I think one of the best filmmakers in the world today.
And PT Anderson made a new movie based off of Thomas Pin’s novel Vineland, which was released in 1990. I saw it yesterday. I think it’s one of the best movies I’ve seen in the last five years.
Now as a Ian, uh, maybe I’m completely biased, but run, see this thing, it’s just, uh, it captures our moment in time or in America at least.
But also for you, Brits too. You’re dealing with the same kind of stuff better than any artist, I think has captured it in, in a long time. So one battle after another in the theaters. Tell us what you think in our non-vet watering hole.
[01:27:28] Luke: Awesome. I will definitely check it out. And only not only because of that, it’s also got like DiCaprio in it who is a great actor. Um, but also my buddy Tom is seeing it tonight. He just WhatsApp me and he’s been incessantly talking about that movie for the last three or four days. So I gotta, I gotta see it ’cause I’m seeing Tom for dinner tomorrow night so we can chat about the movie.
[01:27:47] Krys: oh yeah, no, and let’s talk about it on our Paton, which is one of the things that we do. So if you’re watching us on YouTube. Right now. Uh, cool. Thank you. Uh, but if you wanna actually interact with real humans who have real conversations over on Wall Street wildlife.com, that’ll take you to Patreon, where we have a non investing channel where we could shoot the shit about things like what you thought of one battle after another monkey gives Its six stars out of six bananas, out of five bananas.
[01:28:18] Luke: Wow. Alright. Okay. Well if look this as hot as your stock picking has been in the last six months, then it’s a must see movie It.
[01:28:25] Krys: Cool. All right. Are you ready to be a beast of an investor?
[01:28:30] Luke: Your Journey starts right here.
