Krzysztof returns from a Hobbit house getaway while Luke gets ready to head to Paris for the Olympics; tales of travel spark some short-term trauma about lost luggage and Crowdstrike’s $CRWD hand in making lots of people maddeningly upset. If that’s not spicy enough, we briefly discuss historical revolutions and national identities sparked by the Olympics’ opening ceremony’s raw political themes – or is it just a ton of fun that’s really only supposed to make sense to the locals?
We discuss whether the US is facing a debt crisis worse than 2008, highlighting alarming insights from Balaji Srinivasan about the staggering $175 trillion debt level. Lots of scary charts and difficult decisions to make based on the data, which you can see in full at: https://balajis.com/p/americas-175-trillion-problem @balajis
We also consider the ethical fine line in short selling, focusing on the case against Andrew Left of Citron Capital for alleged securities fraud and the ethics of market manipulation and finance journalism.
We also address a viewer’s question on selling investments with outsized growth, discussing different approaches to this “nice-to-have” problem.
Badger has been hard at work in his burrow yet again, this time composing a Deep Dive on Axon Enterprise $AXON, one of his favorite companies; in this episode, he shares a short highlight about the company’s margins and financial strengths.
We conclude with an update on the King of the Jungle portfolio competition, emphasizing the importance of compound interest and consistent long-term investing, and how quickly adding $100 a month can add up — Badger even breaks out a trusty compound calculator quizzing Monkey on just how much money it’s possible to make if you get started early and just follow a consistent approach.
WSW E38
[00:00:00] Introduction
Luke: hi, today is July 29th, this is Wall Street Wildlife, and we’ve got a show for you today. On tap, is the U. S. on the verge of a debt crisis worse than 2008? And is there a fine line between being a short seller and committing securities fraud? We’re going to dive deep in both of those topics in today’s episode.
Listen tight.
Krzysztof: We’ll provide an update on the king of the jungle portfolio competition, which is informed by some of these other topics.
Luke: It’s getting close in the final two or three months of the contest. It’s getting a little bit squeaky bump. You’re catching me pretty fast. We’ll
Krzysztof: Closer, closer. You still have a nice cushion, but I hope I’m giving you nightmares. All right.
Luke: what’s happening in your world, my man? Did you catch the, uh, the Olympics opening ceremony the other day?
Krzysztof: Well, this weekend I was mostly away. I took my wife for her birthday to a little Hobbit house. out in East Texas, an actual treehouse designed to look like it was made by hobbits and was really, really wonderful and remarkable. So I was away from the internets and gizmos and just living like a hobbit does.
Luke: Nice to know your wife’s back in town. She’s managed to escape the car crash of airport security caused by a crowd strike last week.
Krzysztof: yes, though, to add to that point, uh, her bag only just made it Yesterday. And so, so it was miserable. CrowdStrike really, she was, she is no longer a fan of CrowdStrike. She’s like, how many shares do you own? If you
Luke: be the, uh, is she, is she going to be the lead plaintiff in the class action lawsuit?
Krzysztof: be, she was unhappy camper.
[00:01:45] The Paris Olympics Opening Ceremony
Krzysztof: but I did come back and I did watch some of the Olympic highlights in replay form, so not quite the same as watching them live, but I did have an interesting take. Uh, how about you?
Luke: Uh, yeah, well, I’ve been watching it voraciously because, uh, Katrina and I are heading out on Thursday. For a long weekend of Olympic, glory and fun.
Krzysztof: So cool. I can’t wait. I was, I thought you already were there. So I was, I was looking for you. Uh, and there was no badger to be found, although there were a lot of other weird things that we saw. So it’s just a, it’s an interesting moment for me because I’m, I’m digging deep into some political history and trying to understand during this election year, you know, what really do we mean when we say left?
And what really do we mean when we say, right, and what are the origins of some of these perspectives and I don’t want to default to, you know, superficial, antagonistic, uh, he said, she said stuff anyway. I’m reading my Twitter feed and I’m seeing in response to the Olympic ceremony opening a lot of.
Hemming and hawing and complaining from some of the people I follow that are more business centric meaning I think they tend to vote or think the way people on the right do And they were looking at the ceremony saying, what are all these politics messing with my athletes here? And they kind of, it was like, this is too much.
And this is, um, a disgrace even to friendly competition. And I kind of just got sidetracked a little bit badger, um, into responding by saying, You know, at the very least, what, what the French Revolution did, because the French Revolution was depicted in this opening ceremony, in fact, one of those key moments was, a woman, holding a guillotined head in, in the window where death metal was playing say what you will about what happened after the French Revolution, well, actually, let me slow down.
The French Revolution itself was in favor of legitimate equality, and it actually affected the change that it said it would. So the people who had nothing ended up taking over. and got equal standing or more of an equal standing. Then it went too far. And then that created Napoleon as a reaction against that.
However, an important point in all of this is that when the French people were revolting, they insisted that slaves In the colonies, including Haiti were released because it was a meant to be a legitimate universal revolution for all I noted that despite what happened afterwards, the American Revolution said kind of the same things, right?
And liberty for all, but the owners and the founders of the American documents and the country were still kept their slaves. So when I watched this, uh, Olympic performance, I was like, Hmm, is the discomfort that American people watching this? Is it because they’re seeing something truly radical that walk the walk and then hedge their bets, knowing that the US itself was sort of founded on hypocritical Like it was, it was not as radical, not as authentic.
And so there is some sort of like subconscious shame about what it means to really be radical and live the values. So what do you think about that as a. As a man who is part of the empire that lost the American revolution. Well,
Luke: rabbit hole, right? Those, uh, like the opening ceremony is supposed to be this cultural celebration. And it’s, I suppose it’s supposed to be like completely incomprehensible to anyone who’s not in your culture. Like I watched the French one. I thought it was hilarious. Great fun.
I love the fact that. You know, there was some tryst of a threesome happening in an attic, and beautiful people charging up and down a catwalk, and uh, interesting like transgender DJs, and fantastic, it was fabulous. Uh, it was very French, if you hadn’t told me that was the Seine, and that was the opening of the French games, I would have guessed.
That was French. Um, and actually, okay. I went and watched the, uh, opening to the British, the British Olympics in 2012 as well. Uh, afterwards just to see, cause I was so baffled by the French games. I was like, is, was the English opening as confusing? And yeah, absolutely. There was a whole bunch of like weird industrial revolution and NHS things and kids sitting on some random hillside playing with his PlayStation and like non brits will have looked at it and gone, what, like, merde, who are these idiots?
Krzysztof: you know what? You raise a great point because I thought I didn’t do the research like you did, but immediately what came to mind was a memory of what the Chinese, ceremony was like, which Olympics was that, uh, ,
Luke: it was Beijing.
Krzysztof: maybe, um, And I remember, you know, the more military style, uh, everything in synchronicity and, you know, like a show of like, the difference basically between, between the French and the Chinese is so evident in the, what they showed us.
And, uh, yeah, to me, right. It was a rabbit hole, but it was an interesting mirror to see how the United States was reacting to it. along party lines, basically, like my mom said, Yeah, she loved it. How amazing how creative and she’s a person who votes left and people on the road. What is this stuff? Fascinating.
Luke: We have to go back and look at the, uh, Atlanta opening ceremony from 96, apparently, I had to Google it just now, see, uh, see what Atlanta had to say about US culture over the last millennia.
Krzysztof: Right? Yes. Well, the 90s were a decade of prosperity.
[00:08:06] The Singularity Is Nearer, When We Merge with AI – Ray Kurzweil
Luke: Okay. Hey, Christoph, before we get into our main topics, uh, you will be proud of me. I’ve read a book. I’m actually reading a book.
Krzysztof: You Oh, no, you are not.
Luke: I am,
Krzysztof: are you rereading the three musketeers?
Luke: no, I’ll, I’ll, I’ll say that for the 2030s. It’s like a once a decade tone, but I am reading when some ways I’m reading a bit of a trilogy. I suppose it’s Ray Kurzweil’s latest book. The singularity is nearer when we merge with AI about halfway through at the moment. And he had, he did write the singularity is near maybe 20 odd years ago.
So, um, this is a follow up to that, to bring us up to date with, uh, large language models and all the fantastic things that are happening right now and Ray’s take on it all.
Krzysztof: When did he publish that? Was that very
Luke: yes, in the last month or so, I think it’s a new release. Yeah, it’s good. So it’s worth a read. There is, there is one thing, uh, as a, I think I’ve already confessed on this podcast. I’m dyed in the wool atheist, right? So there is one thing that’s making me a little bit uncomfortable as I read the book and I haven’t quite come to terms with, maybe I haven’t fully understood what he’s saying.
He describes, Panprotopsychism. You familiar with that? It was a learned man.
Krzysztof: Can you say the term again?
Luke: Panprotopsychism.
Krzysztof: Can I take a guess? Pan, proto, psychism. I mean, the best guess I would have is that it has something to do with consciousness is in all things like spread sort of without distinction. In a
Luke: Yes. You’re spot on. Very good. Very good. Okay. I knew I could rely on you as a learned man. I, I didn’t try and think about breaking the word down, but he describes pan proto psychism. I’m just going to quote one might imagine a universal field that holds the potential of the universal. for consciousness.
And so his idea here, it’s not his idea, but he’s, he’s admitted to, um, believing in this idea because he’s talking about AI and consciousness in many ways throughout the book. he sees panprotopsychism as essentially consciousness being This almost this like quantum field, you know, there’s something that we, we don’t know about we can’t detect and our brains are sufficiently complex that they can tap into this field in some way.
I’m, you know, I’m sort of making these words up a little bit. And that is consciousness. Our brain is almost this complex interface to this thing. That’s like the ether. but he goes on to elaborate that idea in a way that is either science fiction or just complete garbage. I haven’t got my head around.
Um, he says, this has tantalizing implications. If we set a U2, essentially like an AI version of you, loose in the world, free to follow a different path from you, the original you, its information pattern identity would diverge.
But since this will be a gradual and continual process, there’s a chance that your subjective consciousness could span both continuously. So I think what he’s kind of skirting around there is when we create like AI Christoph, suddenly this thing that’s tapped into this consciousness ether internet, which is Christoph, suddenly you’ll have like two access points.
There’ll be the AI Christoph and the you Christoph, physical Christoph, and maybe you’ll both share as a common view of reality. That’s just like either I’ve misread it or that’s just absolute nonsense, right? Okay.
Krzysztof: uh, well, I just recently read a book about consciousness by a pretty sophisticated neuroscientist, Christoph Koch. and he makes a very strong argument, I think, against that view, mainly that it’s the structure of our, the difference between intelligence and consciousness. It’s why, according to this neuroscientist’s understanding, an AI computer that could say, you know, when it Go and do all these incredible tasks, it does not have the structure of our brains.
Therefore, it cannot be conscious in the same way we can, even though it could be far more intelligent and faster at a bunch of tasks. It’s still more linear. It’s still it’s inputs and outputs are kind of the way language models work one follows the next follows the next. That’s like brute force. Our brains are neurons have hundreds of thousands of millions connections to one another.
And the structure determines whether consciousness is possible. So I think the Pantheistic view according to some of our best science, is it’s in the realm of the godlike where you can’t prove it or disprove it. So it’s more about belief or not.
Luke: Right. Yeah. Yeah. Okay. All right. You’ve, you’ve successfully convinced me that this I am correctly uncomfortable with this aspect of the book, but anyway, it’s interesting and he has a lot of big ideas and I’ll park that little bit of weird religiosity that seems to be coming out of the text and try and focus on the ideas bit.
And I’ll, I’ll give you a more complete update once I finish it.
Krzysztof: Excellent. The one tie in to direct time to investing I think is as we continue to inch our way in this, the ear early innings of ai and everything is so exciting about it. are, you know, it’s the new frontier, right? I think it is important to understand that as far as many people who spend their life studying this, there are limits and we’re fast approaching some of those limits.
And it’s easy to, uh, get very fanciful the way I think the book you’re talking about is starting to do that breaks the actual laws of, of reality.
[00:14:00] Should You Sell A Position If You Get Outsized Growth?
Luke: Right. Hey, before we get into our main topics for today, we did get a question on YouTube and I will just remind our listeners, if you’re listening on your podcast, do check us out on YouTube. We will have some fun visuals in today’s episode so you can see all those if you’re on the YouTube channel. But anyway, fire us a question anywhere on the YouTube, on the Twitters, wherever you like.
And we got this question from Jin Coyolo and he says, said, in reference to one of my posts about my investment returns, he asked, should we sell if we get outsized growth or unrealistic growth in an investment? And so I just wanted to fill that in the podcast because it’s a bit more of a nuanced answer because the answer is, uh, no, but maybe it’s a bit more complex.
So, uh, so here’s our, here’s our little owl’s nest segment for this week’s episode. So there are multiple reasons to sell something in your portfolio. And if the thesis, if the reason you own the stock has now fully played out and the stock is fully valued and there’s really no upside left in your mind, That’s a pretty good reason to exit that position to sell it, unless you believe there’s some long tail where it could continue to grow and continue to deliver outsized returns.
If the thesis breaks, like the company has committed securities fraud, or maybe the company has just taken down eight and a half million windows PCs around the world and you feel that they haven’t got a handle on that and they’re going to do that again. Um, because they’re, they’ve, they’ve got such a problem in their operational procedures.
That’s another good reason to sell a company. but if a company has just grown maybe realistically or unrealistically and it’s now a big position in your portfolio, you might trim it if it’s big in your portfolio and it poses you a diversification risk. Like if that’s stock. halved tomorrow.
, it will wipe you out. But otherwise, if the thesis is still intact and the stock has a long way to go, potentially still, no, you shouldn’t sell. And if you want to have a 10 bagger, a 50 bagger, a hundred bagger, I’m lucky enough to have had one 250 bagger in my investing career.
You can’t get a hundred bagger until you’ve had a two bagger along the way. And if you sold when it doubled on with that two bagger, we are never going to get to the 250.
Krzysztof: I’ve said this so many times. The biggest mistakes I’ve made as an investor across the decades is selling too early, but, but I think I also now have a more healthy respect for the, the saying that it’s in some ways easier to make money than to hold onto it. And the whole notion of profit taking, you know, you won’t go broke taking profit.
if you take that seriously, that even if the stock continues to go up after you sold it, if you sold it in order to protect what you made and Let’s remember what the point of money is and if and by taking that money You are now living in a way that you want then I think you are doing the right thing Regardless of what happens after afterwards, so it’s all personal right?
It’s all we can’t tell you Because we don’t know your age, we don’t know the size of your portfolio. We don’t know the nature of the company that happened to say, become 30 percent of your portfolio. We can’t generalize in that way, but if you combine what we both just said, I think there’s a way to, thread the needle and also.
You have to take into consideration taxes is the position in the Roth IRA, or is it in a capital gains, regular brokerage that also affects the numbers.
Luke: Like podcasts like ours. Our goal is to educate you and give you the tools, but we can’t tell you what to do. That’s why you have to be, if nothing else, you have to be, um, regulated and authorized to give individual personal advice because you have to understand so much about that individual person’s situation.
A trade that’s right for me might be completely wrong for you and it’s the same trade. Like, it’s not immediately intuitive that when someone buys a stock and someone else sells a stock at the same time, at the same price, they can both be right.
Krzysztof: And, you know, I’ll say one more thing. Let me use a somewhat arbitrary number of, Call it 15 percent that I, I don’t want my, any position to be higher than 15%. So a stock is doing great and it say becomes an 18 percent position. One, one of the things I’m confident in is that the market will continue to offer me, things to invest in that will do very well.
So if I take the, that 3%, that money is going to find its way to another position that I think has probably more upside or cash, which is itself a position. So it’s not like that money you take, you trim it, and then it just disappears. It’s going to go back to work in a way. Maybe that’s more efficient than you know, where it came from.
So, I think trimming, trimming at, at certain levels is wise.
Luke: Great. Well, Jim Coyolo, I hope we answered your question successfully. Right. Christophe, shall we talk about the debt crisis and whether what’s happening right now is potentially worse than 2008.
[00:19:34] Is The US On The Verge Of A Debt Crisis Bigger Than 2008?
Krzysztof: Yes. So I, uh, I’ve talked about Balaji Srinivasan before. This is a guy that I personally, when I listen to him talk, I trust him. He’s a PhD in electrical engineering from Stanford. He was the chief technology officer at Coinbase.
He was an early adopter of Bitcoin. And so I found my way to him some years ago on the Tim Ferriss podcast, and he, he’s had these, I’ve said this before, for multiple, really mega, uh, long conversations about really complex international geopolitical topics. And Tim Ferriss would, I think, introduce him as, this is the guy who you’ll often.
Say, oh shit, Balaji was right, and he has this track record of, in a sense, predicting major trends that, that seem sort of scary, and maybe even dystopian, and, lo and behold, the dude was right, because he’s really doing his work. He, by the way, is, totally on the not side, but he’s pushing hard.
The idea that India is going to be the next world global superpower, for what that’s worth. So anyway, this guy I think has, has really superb credentials and he came out with a post, two days ago on his site, balajis.com, you could find That is essentially, 10 charts in which each chart that he presents is another data point for why the amount of debt that the U.
S. is under is equivalent to approximately 175 trillion dollars. is so staggeringly high that historically it’s not only the most that it’s ever been relative to even 2008 and what happened during COVID, but that it is now so high that there is no way to get out from under this without some sort of major structural catastrophe that includes potentially the U.
S. bank, um, defaulting on its debt. And so before going to maybe, you know, some of these specific charts and getting your reaction, I just have to say, this is why nine months ago I decided to sell most of my positions. because of specifically the debt crisis. So I read this post by Balaji, and I’m legitimately thinking to myself, like, this is a smart dude who does his work.
I’m like, I really hope this isn’t true. Like, you know, when I go chart by chart by chart, I really hope you as or anybody else could say, oh, this is faulty because of this or all this is. Problematic because of that because if true if these charts do line up the way he’s he’s saying they look to be man, it’s it’s, it’s just, um, really, really fear inducing in me and this guy, I’ll, I’ll say once again, he’s a Bitcoiner, but I don’t think he’s a Bitcoin maxi in the kind of, I think he’s a Bitcoiner because of the data that he sees.
what’s your response to having had a cursory look at some of these charts?
Luke: Like, I don’t disagree with the idea that like a lot of much of the world, but particularly the US has a historically unsustainable level of debt. But what does that really mean? You’ve only just dropped these charts on me in the last half an hour, so I haven’t really peeled through them in a lot of detail.
And let’s pop this first one up on screen.
Like, I don’t know if you can break down what this chart is telling us, if I just think about this with a skeptical mind. Okay. 2008, at its peak, it looks like, I think this chart from Balaji is telling us that.
primary credit got as high as about 120 trillion and 120 trillion in 2008, 2009. If you inflate that up to today, it’s about 200 trillion today. But we’ve already come back below that peak of inflated 200 trillion dollars. So what’s this really telling us?
Krzysztof: I think it’s, uh, it’s a relative look. Um, even if so, I’m just looking at the size of these different, uh, crisis points and all what I’m seeing is even if you include inflation in your. accounting. What’s in a sense hidden from the current narrative is that in 2008, we knew everybody knew that there was a major banking crisis and they required bailout, right?
So you see that that crisis in this chart went up to under 120 , right? It’s a pretty big spike. Then COVID happened and we got another pretty big spike of necessary bank printing, right? More money in the system, right? But then what’s not been talked about is that This that program that you were wondering about the bank term funding program, that’s kind of been done in the sense behind the scenes where the government is infusing banks because of the major difference in their, uh, bonds that they have on the books versus what they’re worth because of the rate hikes.
I don’t need to understand, say the technicalities to see that on this chart peak of that is. What three times the peak of 2008. I mean, even now after the spike has fallen, it’s still. way higher than both COVID and 2008. And yet nobody is really like, it’s not public knowledge, right?
It’s not like a common you ask any even sophisticated, you know, people who keep their eye on the market, like what is the bank term funding program, they won’t tell you. Because that’s the that’s the scary thing. It’s kind of like hush hush money. And it’s not insignificant. So that’s worrisome.
Luke: But couldn’t the country not just inflate its way out of this problem? Like you said in, in the intro to this topic, like maybe the U S defaults on its debt and maybe it does. And that’s very serious, but can it not just inflate the debt away? Like already, 1 in 2008 is worth 1 46 today.
So You know, if you can inflate that up to two or three bucks today, then the problem’s gone away.
Krzysztof: Well, I think that takes us right to why economically, we have the crisis that we have in terms of inflation and why interest rates are such an important thing to understand for. Remember, we’re talking about how inflation affects different people in different ways. If you have assets and you’re wealthy, you will withstand inflation without much of a problem.
If you are call it the lower middle class or the lower class, which is the majority of people. Your cost of living cannot actually sustain indefinite inflation. So the, the fact that one way out is to continue inflating the money supply after it already has been inflated a significant amount puts. In the sense, the federal government in an impossible situation, it has to try to keep inflation down, but it can’t because of the massive debt size.
That is why actually, uh, some of these other graphs that Balaji posts have to do with, uh, what the other countries like China and India and the BRICS coalition are doing. Which is in this case, buying more gold and trying to wean themselves off the U. S. dollar. So his claim, basically, is that yes, if you are, if you happen to be lucky as the United States to be the world’s reserve currency, you basically get to, yeah, get your way out of this problem.
Because your money is the, the more you make, the richer you get, right? But all these other countries, Including China, the world’s second largest economy are saying, Oh, yeah, we know the game and we were and we’re deliberately getting ourselves off the dollar. Um, and so you can’t mess with us in this way for much longer.
The other graph I’ll add to that that the logic points out this is. I didn’t do a deep dive. I’m trusting that he’s not pulling data that’s nonsensical or wrong. there’s a chart that Russia has become the world’s fourth. largest economy, taking over Japan just barely. But this is in, in the time where we, the West has imposed all these sanctions during the Ukrainian war, but Russia still found a way basically to create an alliance between itself and China and India so that all of these say, uh, countries that use the dollar as a weapon against Russia were ineffective.
And so that’s kind of maybe a little bit of a canary in the coal mine.
Luke: That, that one caught my eye as well. That’s really interesting and counterintuitive. You would think the sanctions against Russia and the fact that Russians, Russia’s spending a ton of money to fight a war, uh, you would think that wouldn’t be a ripe scenario to grow your GDP. But yes, it’s just overtaken Japan.
I mean, the reason for that, as you said, is oil and gas and many parts of the world are still. haven’t got off of this heroin addiction, which is non renewable fuels. But if we looked at a whole separate set of charts around ever increasing solar efficiency, the cost of batteries, the cost of producing like a gigawatt of power and storing it, like those numbers are incredible.
And now solar is by far the cheapest source of power, far more so than pulling dead dinosaurs out of the ground. So, unfortunately, that, those innovations have come a little bit too late for the sanctions on Russia to have been effective, but the economics going to start biting soon as increasingly countries solarize and also just get back on nuclear power, get back on other renewable sources of power.
Krzysztof: And as a, as a slight tangent to that, I came across the fact that Russia was also able to smuggle in a whole bunch of powerful AI chips despite being sanctioned. So what that tells me is that that alliance, if you want to call it that, that is not, that wants to get off the U.
S. dollar is, and BRICS is the acronym standing for, um, Brazil, Russia, Uh, India, China, these are major world economies and they are finding ways to play their own game. And so that Balaji’s thesis here is essentially the U. S. is lucky because it has the U. S. dollar as the world’s currency. reserve currency, but not for much longer.
And therefore, if the U. S. were to default on its debt, the crisis that would ensue would be of historically, epic proportions. The one more bad data point is that the U. S. debt is worth approximately 175 trillion at this point. And unfortunately, if you add up all of the assets that the US has, has, that’s equal to about the same amount. So that, that’s basically telling you that, that were we to , that we’re at a, at a point where, uh, any more debt and we’re actually running, uh, net deficit, meaning a, we’re actually bankrupt. And the trend is what it, you know, it’s just really ugly. But the scary thing is what if the value of those assets actually drops, which it would in a crisis. So it’s worse than you think. The foot from the investing standpoint, this is what worries me. Balaji concludes by pointing out that AI to people like Kathy woods in arc, right?
AI and technology can itself be the knight on the white horse. And to a large extent, I buy that technology does continue to innovate and produce value, and now it’s happening more and more rapidly. Right. But Balaji saying, if you add up the market caps of the top seven, right. The magnificent seven, they are Apple, Microsoft, Nvidia, Google, Amazon, meta Tesla, though, that number, all of them adds up to 15 trillion.
Dollars. only relative to 175. So let’s imagine a world where seven new mega caps are born, right? Which we know doesn’t happen overnight. It’s going to take two decades at least or 10 or whatever, right? Imagine the biggest, baddest, most amazing new AI company. All of a sudden it’s worth 20 trillion relative to the debt.
That’s still nothing. Right. So I think the pessimistic view here, the reason it’s scary for me is we can’t. even invent our way out of this amount of debt. We can’t even like create so much value that it makes enough of a difference. so if you’re investing thinking, let me, let me say it this way. If you choose to ignore this potential debt crisis by saying technology can save us, I think it’s worth investing.
thinking about the magnitude in difference between the sizes that will be required to really save us if this starts unfolding and unwinding
Luke: Yeah, like I don’t think AI is the only answer and clearly the U. S. has very substantial assets beyond these, the magnificent seven, like there is another 493 companies all doing incredibly innovative things. Plus there’s like just a whole shit ton of other assets and stuff. Like we said, a few episodes, right?
Just. I don’t sell Hawaii. How much you get for that? got to be a hundred trillion, right?
Krzysztof: Hawaii.
Luke: It’s Mark Zuckerberg basically owns it now. Anyway. I’m going to,
Krzysztof: realistically from the investing standpoint, this takes us maybe to our portfolios in king of the jungle. I can’t unsee these stats and this data. And I try to be honest with You know reality however uncomfortable may be the the the mistake is that fear mongering and the kind of like doomsday stuff is really seductive and really, it’s a dark force and it could make you see the world very bleakly. But in this particular moment, it’s why I sold all of the best companies that you continued to hold and you were right in not selling, and I was wrong in selling them when I did. But it’s also why I chose to invest in these podunk little Pre revenue companies or undervalued companies because I’m thinking to myself again When things start to unwind the companies that will get slashed massively first are the ones with the high valuations, the high premiums, the mega caps, the ones that are worth very little are already selling around cash value.
They’re not going to drop that much more. So that’s basically, you know, again, the frame. And I just, I wish I had a, easy answer advice for people, even though we don’t give investing advice, right?
Luke: I’m going to fight you on the podcast. If your advice to say a young person or just like our typical listener, if your advice to them is sell everything and hunker down, like doom is coming, I do not support that in any way.
Krzysztof: Yeah, and that, uh, that is not my, my advice. It is, I don’t know how to, this is a great question because it’s forcing me, you know, to say like, okay, so what do you do in this circumstance? I think it’s some version, like, I think I’m trying to answer, like, how do you thread this particular needle where, you know, there’s a bunch of these dangers on one side, but investing and staying invested is the way that.
Seems to have worked over the last 50 years more than any other, right? we never know what the future holds, right? So it’s like some version of caution, like some version of invest prudently, know that these dangers lurk, get scared, but don’t be foolhardy into thinking technology is going to solve these structural problems.
Luke: Yeah, like I buy all that and you know, just it’s the standard principles that have stood the test of time over the last 50, 100 years. Don’t invest money you’re going to need in the next five or 10 years. Like be able to run your life. I live from my portfolio. So I need to have a pretty healthy cash balance because I might have to weather, I don’t know, a five or a 10 year storm that maybe my portfolio just trade sideways or downwards for the next decade.
Right. It’s not, that’s certainly not unprecedented. but if you’re still earning money and you’re adding like a little bit of your paycheck, hopefully tax efficiently to your portfolio every month, just keep doing that, right. If you’re retiring and you’re not gonna need this money until the 2040s, like if you’re in your 30s or 40s now, this stuff’s irrelevant in the long term.
and if this stuff is relevant because we literally, like, the way the US decided to get out of this problem was to start World War III, well, like your portfolio ain’t gonna matter, right? You’ll be, you’ll be hunting around for like guns and tins of beans, that’ll be more important to you.
Krzysztof: Yeah. And, uh, that kind of dystopian fear mongering is out there. And, uh, unfortunately none of us know, uh, how this ends.
Luke: the problem is here, Christophe, because you’re, you’re just unwilling to say it, right? You know the good advice and we just talked it through and I think we had some commonality, but you have gone, you’ve taken a much more extreme view and it’s because you, you think you’re smarter than everybody else.
That’s why you, you don’t want to give this advice to our listeners, but you’re smart enough to do this successfully. Right?
Krzysztof: that’s been me in the ass in both directions. I, I think there’s a, the legitimate, uh, I think that that’s the, the coin is that on one hand, I believe it is possible with a lot of hard work to find places in the market. that are undervalued. Like to say it simply, right? Not because someone tells you, but because you’ve like, we’ve talked about last up many episodes, right?
You’ve done the work. In other words, being contrarian because the market hasn’t yet caught up to what you have Discovered is most likely the case. The flip side of that is more, more often than not, when you think you’re the one guy that knows something, the market doesn’t, you’re wrong. In other words, it’s to be contrarian is harder, you know, than following what everyone else is doing and to be right.
Luke: You know, what you’re describing here is the perfect segue to our next headline topic. Can I, uh, can we skip over like the mid episode like and subscribe if you’re still listening, you know, go click that like and subscribe.
[00:39:29] When is Short Selling Actually Market Manipulation?
Luke: I want to segue straight into our other topic because what you’re talking about.
is legitimate short selling. If you think you’ve done your research and you know, you figured something out using publicly available information and you think the rest of the market hasn’t caught onto that, then go for it, right? You’ve suddenly potentially created alpha if you’re right and trade that position or invest in that position.
If you think Let’s talk, we’re talking about shorting stocks. So if you think corporate real estate, maybe a particular regional bank you identified has on their public accounts, some serious debt that the market hasn’t spotted, and you think that they’re going to have to account for that very soon. And I know that’s kind of that underlies your short position in, in KRE.
Um, so I’m using that as my example. That’s great. And that’s, that’s the appropriate way to short sell. But a headline topic for the second half of today’s episode is the news about Andrew left of Citroen Capital, who is a famous slash infamous short seller.
Well, he has possibly allegedly crossed a line with his activities in the market, and he’s now been indicted for securities fraud. So let’s unpack What he’s done and how he’s crossed that line. And then I’ve got maybe a challenging question for you as a finance podcaster. So, the allegation is that, uh, Andrew and his firm Citroen Research, they have been acting for many years as a legitimate short seller.
They’ve been doing their research. They take, they think they figured something out that no one else has spotted. They take a short position. They publish their research, and then if the market agrees with them, the stock creators and their short positions make them a ton of cash. the Securities and Exchange Commission has identified what they believe is, , market fixing and trying to influence the price of a stock. And this is quite interesting. Subtlety perhaps, and maybe it comes down to intent. That’s probably what this legal case is gonna hinge on because the allegation is that Andrew and Citron have been using their very influential position to not just take short positions, publish their research, and then benefit from that.
They’ve been publishing information, knowing. That their, their own publication will move the market and then trading against that. And in many cases, allegedly with stocks like Tesla, Nvidia, Twitter, and Facebook, they’ve been saying they’ve been doing one thing, doing the direct opposite and benefiting.
So that’s where the behavior steps over from being a legitimate market participant, a short seller to actually becoming the source of news, driving the market, and then benefiting from your own actions in essence, you become a bit of an insider trader on yourself because you know your tweet is going to move the market and therefore you’re trading your tweet.
What do you think about that? And what’s your view of short sellers in general?
Krzysztof: Yeah, this stuff makes my skin crawl, uh, because you, because so many years in my investing life, I’ve had this horrible feeling that I’m being manipulated in a way that seems somehow beyond the greed rules of the game. And everything you said I agree with. I believe short selling done in some, this is weird to say, pure way where it’s transparent, right?
You don’t, you disagree with the other side, so you take a bet the other way. That seems like how a healthy market should work. But based on everything you said, when what you’re doing and what you’re saying and who sees what you’re doing and what you’re saying are at odds, and you have the power to move price whichever way you want.
That’s obviously manipulation. And obviously people lose money that way. And the worst thing about it is if you, if you’re a company like this, remember companies, all companies need their stock price to be as high as it can, because that equals. Capital for potential capital for funding the growth of their business.
So when the stock price drops, it’s not just a theoretical number. It actually affects the potential fate of the, of that company. Right. So,
Luke: Let me, let me just interject on that though, because, uh, I think sometimes CEOs legitimately signal to the market, like guys, you’re getting a bit ahead of yourselves. I think. I think it’s, it’s healthy for the company if the stock price broadly represents like an optimistic view of where the company is, but if the valuation gets so far ahead of reality, like the market is going to wake up to that some point and you end up with this horribly volatile stock, which is not what you want as a CEO or as a, uh, you know, even as this, the guy who works in investor relations, right.
You want like a nice, ideally like this nice steady ascent as you, as you Compound annual growth your way into becoming the world’s biggest company.
Krzysztof: right. The point I’m, I’m using here to, to illustrate why this is, I think, deeply problematic and unethical has more to do with the case of say, your little company. if you’re a little company.
You know, you’re going to need more capital. And along comes a villain like this who deliberately call it manipulates your stock to be worth much less than it fundamentally is so that you could profit off of that.
That could actually kill that company. That could actually. Force that company to then they can’t raise more equity because the stock’s now worth a little so they have to take on more debt at unfavorable rates and then they’re not making enough money yet. So that company goes kaput. Why? Because some greedy, uh, pardon my French motherfuckers working in the shadows wanted to get rich off of the game itself.
That is so, like, that’s the nasty part of this kind of capitalistic, um, underbelly, and if this is as you say it is, Operations like this should get as sued and wiped out as they possibly can because it’s it’s dirty game
Luke: and I do think there’s an interesting, uh, nuance here that the court has to navigate. All right. Let me, let me bring this into my question for you then. if we have been wildly successful as wall street wildlife and if our Twitter followings get to six figures and beyond, and suddenly we start moving markets with our opinions about maybe small companies, perhaps not giant companies.
Are we suddenly in the crosshairs of The SEC and other regulators, if we’re seen perhaps to have bad intent with the information we’re putting out, like, is that actually a sign of our success that we’re, that’s suddenly a material risk for us?
Krzysztof: May we have this problem?
Luke: when I say us, I don’t mean us specifically, but I kind of mean all finance journalists. yeah I mean. Yep.
Krzysztof: I think I’m gonna give a squishy answer to it’s a little bit of a squishy question because it goes back to this notion Of intent right you use that word Yep. Yep. which in most legal cases, the lawyers and judges decide on the ruling is like, in what is this a common sensical approach to this problem? And I think it becomes at some point, it’s like a felt It’s it’s it’s that’s what I mean by squishy. It’s of people feel whether the actors involved were, open and honest and forthright and calling it as they see it and talking about the risks and outlining the, you know, ups and downs, or whether it was obviously.
orchestrated in order to profit at the cost of other people’s expense. So if you and I say, you know, we really believe in Tesla, right? And we take a long position and our tweet goes out and the stock goes higher. Well, great. I mean, then the market agrees with what we’re saying, but if we’re lying, because we talked to Elon at the time.
You know, down at the horseshoe lounge the other night, and he’s like, Oh shit, you know, like I’m going to jail because I committed fraud and then, you know, uh, then that would be obviously, uh, deception and lying and we should be,
Luke: And insider trading, if you’d, uh, if you’d got that non material, non public information from your buddy Elon across a cocktail and then traded that, yep.
Krzysztof: yeah, you’d be surprised at, at how chatty Elon gets after a few.
Luke: Alrighty, good chat. Good chat. So let’s, uh, let’s check in on that in five or six years time and see if we’re at risk of being sanctioned by the regulators.
Krzysztof: So I would like to encourage anyone that’s made it this far into our episode, uh, to, Think about what we’ve said, because we’ve covered some big topics, including the debt crisis, including the future of AI, I think there’s a lot of open endedness here and a lot of questions that I hope we inspired some, some thinking.
So go ahead and ask us in the comments on whatever platform you find us. Yeah,
Luke: our attempt at doing geopolitics and economics earlier. So tell us how we’re wrong about that Balaji. article.
[00:49:13] King Of The Jungle Portfolio Challenge Update
Luke: So shall we see how right or wrong we are with the King of the Jungle portfolio? And while you’re popping that up, a quick reminder, because we haven’t talked about this for a little while, Christophe and I have a bit of a friendly wager, uh, coming up for probably eight or nine months ago now.
And we’re both building a real money investment portfolio. Each. We had a hundred dollars each every month. Uh, we had a thousand dollars to start with. We’re seeing who can grow their portfolio the most after 12 months. And here we have it on screen.
Christophe, what can you tell us?
Krzysztof: well, I’ll, I’ll say a couple of things based on your introduction. When we started this, we wanted to come up with a amount of money that felt, uh, like it was accessible to everyone. Because you on Twitter on X, right? You see people posting like million dollar portfolios and sort of bragging about, you know, Oh, today I made 97, 000.
Right. And it’s kind of off putting. Right. But we thought you and I, that starting with a thousand dollars is reasonable for most people that are looking on X or podcast like this. Right. And then we limited ourselves to add only a hundred dollars each month. Right. So when I started this, that thousand initial thousand dollars, it was almost like I didn’t really know not, I didn’t really feel right.
It wasn’t a massive amount. And so I was like, yeah, there it goes. And it’s just in the side account, right? It’s not worth that much. And the hundred dollar automatic deduction every month. I don’t miss it. I don’t really see it. That might not be true for everyone, but I think the idea is even if you need to take a zero off of the end, start with 100 net 10 per month, the idea is the same.
It shouldn’t be majorly impactful. What I noticed, uh, just checking in on this, you know, a couple of days ago is now we’re both, uh, I’m at, what is it? 1700 about 1750. So I’ve made a net sum of 50 beyond what I put in. And you are at what? 2, 100 all of a sudden, this is that little bit by like little by little by little, the graph kind of goes steadily up into the right.
And all of a sudden I’m like, Oh, I got 1, 700 that are sort of written. Off completely as sort of a non existing . So I, I just want to comment on this, this notion that a little ends up turning into a lot. If you do it systematically and consistently. So that’s
Luke: absolutely. It does. And like, I’ve started this portfolio with deadly seriousness and I’ve applied the diligence I would apply is if this was a million dollar portfolio, I would manage it in the same way. And I’ve, for example, just a few days ago, just last week, I made another investment because the way I build a portfolio is slowly bit by bit drip feed a bit of money in by the greatest companies I know about at the time.
And I’ve just invested 200 in Amazon, the e commerce giant, because I think that is an incredible company. And I think it’s potentially undervalued where it is right now, untouchable as an e commerce powerhouse. And making a shit ton of cash out of AWS, the, uh, their cloud computing hyperscaler capability.
And if we were to continue this competition, just like Uh, you know, our portfolios, which have compounded for 20 plus years each. If we carried on a hundred bucks a month and we kept compounding this for 20 years, these would be very, very serious amounts of money. Though these would easily be in the hundreds of thousands, if not more.
In fact, while you’re chatting, I’ll do a quick compound growth calculation and I’ll tell you.
Krzysztof: Yeah. I, as you put up the, that number, I really look forward to the idea. I think we initially set this up to be just a one year, you know, one lap around the track, one year thing. And we quickly realized at the beginning, that’s just, we’re going to keep repeating this bet year after year, as long as we’re doing this show.
Which I hope to be forever. And at some point, not, I don’t know, like five years from now, uh, maybe, maybe sooner, you know, we’re going to be in the tens of thousands of dollars by just by virtue of say, even adding a hundred bucks a month. Um, and so. For those of you who are listening to this, it’s one, not too late for you to start something like this, and it’s not too late for you to commit to the consistency of it and the particular companies.
I think Luke and I, at this point are doing a really interesting job of sort of taking two very different approaches for different reasons. And I think there was merits to both. So Luke’s portfolio is made of. What I would say at this moment, the world’s best companies like, uh, Amazon, Mercado Libre, Google, Palantir, CrowdStrike, Zscaler, um, there’s an ETF, uh, that’s a collection of companies in India.
Axon, about which you’ll hear a lot more soon, he has a small cap in Rocket Lab, uh, Samsara, which is a sassy, software platform thingamabobber, um, Wise, and then, what’s the last one? BYDD?
Luke: BYD, the Chinese Tesla competitor.
Krzysztof: That’s right. Uh, whereas I, on my side, have still Essentially, the majority of my portfolio is made of, honestly, right now it’s two companies that I think are still undervalued and, uh, a short bet on the commercial regional banks in a tiny position in Tesla, which is pretty much immaterial to the portfolio, but it’s not, it’s in some ways symbolic.
I’m not opposed to owning great companies. It’s just that for me in this moment, As I continue looking at this, I have a hard time buying any of these great companies because I think they’re overvalued in this particular moment, and when I see such an obvious to me, um, this is what Luke’s saying, like, this is one of the problems when I say obvious, like, I think I’m the smartest guy in the room, but because I’ve done the work on Coherus and EOS, I really believe truly.
that these companies will sooner than later be worth a lot more. So I have a hard time justifying buying some of these other companies I also like. So that’s why there’s a big difference in our, our composition. And, the punchline here is that the gap between our two styles has The badger whooping monkey’s ass by about 400, right?
It’s about 400 at this point?
1, 700?
Luke: so far, it’s changing, it’s a change in.
Krzysztof: And the only thing I’ll say, the only nightmare, the only nightmare seed I want to plant in your mind is that this is still without my top position coherence doing what I think it will do, which will happen, I believe on the August call or maybe the November call. And all it would take is for the shares to rise 1 to levels not seen since, six months ago.
And I will Have regained the lead.
Luke: All it will take is for this random ass biotech to triple and I’ll be winning. Yeah. Fantastic. If all it would have taken for me was CrowdStrike not wiping the world out last week, that was a hundred percent gain in my portfolio. Last time I looked at the king of the jungle. So, uh,
Krzysztof: Well, you know, maybe, maybe I should do an episode, uh, on explaining why coherence is not a random mass biotech and why, uh, gaining a dollar is more probable than not. Cause that, that would be getting into some fundamentals. If that’s of any interest.
[00:57:23] The Magical Power of Compound Interest
Luke: sure thing. Well, Hey, before we close this out, let’s actually have a look at that compound interest. Cause I’ve got a little, uh, into the intuition about money question for you. Let’s see how you get on with this. so Christophe, here’s our compound interest calculator. And yes, I was pretty on the money. We started with a thousand dollars and if we added a hundred bucks every month, and if we got. Broadly 10 percent a year, which is kind of market return a nine to 10, maybe a little bit,
Krzysztof: we’re, we’re going to do better
Luke: there.
If we’ve got market return, and if we’d invested that. For the 21 years, I know you and I have been investors that a hundred bucks a month will have grown to 93, 000. So that’s pretty awesome. But we reckon if you’re diligent and you do your work, you can get more than a market return.
So if I plug in my compound growth rate, which is 20. 7 percent right now, how much do you reckon that turns into if I, uh, if I hit the calculate button on that?
Krzysztof: uh, over 21 years,
Luke: Yeah.
Krzysztof: starting with the thousand and the way you described it, uh, that would be, this is the magic of compounding, right? It’s going to be higher than I think. I would say, I don’t know. Uh, just not to be too wild. It will be what, like 170, 000.
Luke: Uh, it would be five hundred thousand and one hundred and forty eight dollars.
Just literally half a million dollars plus a couple of cups of coffee. Not bad, eh?
Krzysztof: So you’re good in 21 years. I’m going to be 66. Are you still going to be alive in 21
Luke: I hope so. I’ll be materially older than 66, but yeah, I’ll still be here, I hope. Yeah.
Krzysztof: Okay.
Luke: key in the jungle portfolios should be half a million dollars.
Krzysztof: Yeah. So one more time, I know, I know we’re maybe repeating ourselves. I’m repeating myself. You start small. You listen to us every week. You join us for the ride. You don’t overextend yourself and you will 10 years from now, be shocked at how much your portfolio is worth. This is not magic. Um, it’s consistency.
Luke: And we’ve done it. Like Christophe and I have done this for the last 20 years and we’re seeing these kind of returns. and there are many other people out there have done the same thing. the magical power of compound interest. You just got to get started. If, and if you’ve, okay, if you’ve listened to this episode, you’ve already given like an hour of your time, we’re going to ask for an extra few minutes and we’ll use it valuably because I’m going to use those extra few minutes to tell you in detail about one particular company that I think is an incredible market making investment.
Um, but if you’ve used like an hour of your day, like it’ll only take you another hour of your day to go get that brokerage account set up. fund it with a hundred bucks and just get your investing journey started.
[01:00:23] Why is Axon Becoming a Software Company
Luke: So I do want to close out today’s episode with a bit of a shameless plug and Christoph has been kind enough to allow me to tag a little extract from a deep dive I recorded over the weekend into one of my favorite companies, Axon Enterprise, the world’s, in my view, greatest public safety company.
Now I’ve recorded a full 30 minutes. Deep dive on this company explaining exactly what they do, why they, I think they’re making the world a better place. And I drill into. Every part of their financial report, their latest quarterly report, we’ll look at the income statement, the balance sheet, we’ll look at the cashflow statement.
So if nothing else, even if you don’t like Axon, like you’ll learn a little bit more about how to read a balance sheet, how to understand quarterly results. but if you get a chance, go check out that 30 minute deep dive. And if you enjoy it, this is something I’ll be repeating. Every month where I’ll be releasing a deep dive just like this.
But for today’s podcast, I just want to give you a little 60 second extract just on one particular aspect of Axon, which is its gross margin and how I think this is crucial to the investment thesis.
Speaker: Axon is increasingly becoming a software company. The cloud and services segment is growing much faster than the rest of the business with a 47 percent annual growth rate versus 32 percent growth for all revenue. And that cloud and services segment runs at a 73 percent gross margin versus a 61 percent gross margin for all revenue.
Now what does that gobbledygook mean? It means that for every 100 Axon earns as software revenue, it keeps 73 percent of that, which can then be used to pay for operational costs, like research and development and sales and marketing. So what have we got here? A really valuable set of capabilities that are highly profitable for the company and are increasingly becoming more and more of the revenue base.
So as Axon gains a new customer through its tasers or its cameras and it cross sells them onto its Axon Evidence software platform, it’s becoming an increasingly efficient, profitable company.
Krzysztof: and where can people find the 30 minute deep dive? Once you publish it,
Luke: So, uh, great question. Thank you. I’m going to, if you don’t mind, I’m going to publish it to this YouTube channel. I won’t stick it on the podcast because it’s highly visual. So if you’re listening to this on the podcast, go check it out on YouTube. But I’m also going to publish it to Twitter and LinkedIn.
If I can publish it more on those platforms, I will do. If not, I’ll drop a link to the YouTube. So I hope you enjoyed that little extract. I hope you got a bit of insight into Axon’s gross margin and why they’re increasingly becoming a software company. And if you want to understand my whole thesis, plus a whole ton of risks around this company and why it may not be right for your portfolio.
Do please drop into our YouTube and check out the full video and as ever, let me know on our Twitters if you disagree or if you’ve got questions or if you want to show your support for Axon as well and tell me why you think it’s an incredible company. You can find us both on Twitter and X. I am at seven Luke Hamad.
Krzysztof: I’m at seven flying platypus. Are you ready to become a beast of an investor? Your journey starts here.
