Preston Pysh 10:34
Yeah, well, and even the book, the Peter Thiel book that we did: the Zero to One, and he was giving the lecture at Stanford. That’s where the book all came from. So yeah, it definitely seems like there’s a lot of Stanford alumni out in the Silicon Valley, so. Alright, so let me continue. So when we’re talking about Google, a lot of people have the question: How in the world did they make any kind of money? You know, when they, when you show up on their homepage, you see that it’s just one input. There’s no advertisements. There’s no nothing. And for a lot of people, they’re like, “How is that a billion dollar company? How are they making billions of dollars?” And so, they have a couple different engines that produce their revenue. So I’m going to talk about the first one that was in the book, and that is AdWords. So the way AdWords work is, let’s say that you have a business, and you sell tennis rackets. I’m on a tennis kick today, so that’s why I keep referencing tennis. So let’s say you own a business, and you want to sell tennis rackets. What you could do is you could open an account with AdWords, which is owned by Google. And you could, say anybody who searches for “buy tennis racket,” or “tennis racket,” or you list all these different keywords, and you list them into your account. And you say, I’m willing to pay $1 for every person that clicks on my advertisement if Google places it; wherever Google places it. And so you’re in your bidding. So this isn’t just like you have this one agreement with, with Google. There’s other people that are bidding for those same keywords that are wanting to own the search result, which will populate as an advertisement after you initiate your search. It’ll populate there in the first position, or it could populate on page five, depending on where you’re willing to pay and where the bids fall. But it’s one big giant auction, and you’re competing with other people that are wanting that same keyword. And so, every time that somebody clicks on that link, or it depends on if you’re running advertisements per thousand, or million, or whatever. Then, those are the two different options. You can pay by click or you can pay per thousand advertisements. But every time that somebody clicks on that, Google makes money and the person who, you know, conducted the advertisement gets their benefits that you drove somebody to your, to your website. So AdWords was a major shift in search because as this started to develop, there was a lot of people that had concern over, “Well, is Google just providing me the, the search result based off of who’s paying me the most money? Or are they actually giving me the results that are showing me the best web page to land on?” And so, there was a lot of discussion in the book about that, and it obviously raises some concern over the conflict of interest that you might see by running something like that. So Hari, I saw you had a point that you wanted to add here.

Hari Ramachandra 13:13
You’re up, you brought up a good point, Preston. In fact, if you are wondering how Google makes money, you are not alone; you’re in good company. In fact, in the book, the author talks about a point in the early days of Google, when the founders, Larry and Sergey Brin, were not really interested in starting their own company, rather wanted to sell it off to mare (*inaudible*), and they approached many companies. In fact, most of them rejected their offer. And the–in the book he talks about how the CEO of Excite, George Bell, rejected their offer to sell their technology; the search engine for $700,000 because he didn’t know how they will make money. He thought it was clever project by two Stanford grads.

Preston Pysh 13:58
Yeah. Yeah, I thought that was hilarious at the beginning, when they were talking in the book, they were talking about how they came up with this search engine, but everyone was like, “I don’t understand how you’re ever gonna make any kind of money on this.” And now you look at their revenues, and they’re making 60 billion in revenue a year, or whatever it is, it’s just quite funny. So okay, so that was AdWords. So you’re basically advertising off of keywords that you would want for your business to drive traffic to your site. Now, this is where I think Google really had some genius in how they were going to raise money. So let’s say that you own a website. So Stig and I, we have a website. Hari, you have a website. And you want to run an advertisement on your website for maybe somebody else’s business. Well, that’s, that’s a lot of coordination for you, you know? If you had to first establish the coordination with the company that you would run the advertisement on, you have to get their permission. You gotta, you know, set up the code in order to lead them to their site; you have to–it’s really the code is quite complex because that person has to know that they actually came from your site. So there has to be code associated with that. And it’s a, it’s a very big process for a person to run an advertisement. Well, Google came out with this brilliant idea of, “Hey, let’s be that source. Let’s just give somebody a, a source of code. They take that little snippet of code; they drop it into their website; and we’ll do the advertising for you. We’ll know what that person is looking for. What it is that they want to buy; why they’re may be on your site; and will run relevant ads on your site. And every time somebody clicks on it, you as the owner of that website is gonna make money. And so this was called Google AdSense. And so, it’s just a amazing tool for anybody that owns a website, you can just go to Google, sign up for an account. They’ll give you a little snippet of code, you drop it into your website and boom, advertisements start showing up. And every time somebody clicks on that advertisement, you start making money. Something that I found really interesting in the book was they had a big debate on how much Google should actually make from AdSense. Sergey Brin had the opinion that they needed to not take too much money from the website owner because they didn’t want to introduce a lot of competition into this field. Instead, they wanted to own this field. They didn’t want anybody else out there to be able to do it. And this is a common theme that we’ve seen with people like Sam Walton, Jeff Bezos, where their opinion is: let’s not take too big of a margin here. Let’s own the space; let’s just dominate this space. And that way, we’ll never bring on competitors. Because if there’s large margins, competitors will flock to that type of line of business. And so, just something very interesting for, you know, as I was reading in the book and saw that. So as we progressed forward, and we kind of look at how Google grew, one of the things that I found just totally fascinating was the size of these data centers that they were building all around the world, in order to service all their different customers that were conducting searches. One of the things that Larry Page was just really big on, and they have some really quite funny examples in the book–is the speed at how fast he wanted these servers to–in order to produce results. And to load on the people’s computers. So much so that he’d have people come into his office, and like bring up certain topics. And he would be able to say, “Hey, that happened in half a second or .6 seconds,” or something like that, where he was timing people. The people would go back and say they, they reload the page that they were showing him in the office. And sure enough, like he was down to like the tenth of a second on the–on his estimation of how fast different pages were loading, and people were just like flabbergasted that he could predict and see that. That just showed people how important that aspect of the business was to him. And so, building these big data centers; building these, these computers that could capture all this information and harvest all that information was just quite fascinating and, and very interesting to know. So Hari, you had a point that you wanted to add here?

Hari Ramachandra 17:56
Yeah, Preston. So one of the things that a lot of us underestimate is how much of technology and infrastructure is needed to serve these search results. You just see a blank page with Google logo on it. And you think, “Hey, what’s so complicated about it?” In fact, it’s not just the algorithms, but the infrastructure that supports it is huge. In fact, in the book, the author talks about Google having about 24 data centers in 2009. I’m sure it will be much more now. And each one of them costing a billion dollars. He has also a vivid description of one of those data centers, which is the size of two football fields, and has about 200,000 square feet of space for servers and other infrastructure. And a four-storey, 18,000 probably square feet facility for a cooling tower. That’s humongous!

Preston Pysh 18:57
Yeah. Yeah, and I, I found a really interesting, too, all the different things that they were talking about, you know? To cool all these, all these computers, and all this processing power, they’ve got, you know, cool it. And so, they’re talking about putting them up in Alaska to Antarctica, and having them out on ships and running seawater over top of things, in order to constantly cool them and, and doing it at a really cheap price. I know that there’s a lot of data centers that are underground, in order to, you know, help dissipate the heat. It’s just, it’s just amazing–the technology and stuff that’s happening. Go ahead, Hari. You had a second point?

Hari Ramachandra 19:32
Yeah, and one of the things that most of us underestimate is the energy consumed by these data centers. When we talk about stuff going online–we not buying books anymore; we think we are doing good for the environment because we are consuming less energy. Our data shows that 1.2% of all the electricity consumed in the United States today is by the data centers. To put that into context, it’s more than 20 states in US in terms of, you know, energy consumption. So we have to really think hard about the impact of these data centers on environment. And that’s why energy efficiency for Google, not only from an economic, but even from an environment perspective is very important.

Preston Pysh 20:23
Hey, one of the points I want to bring up was just this contrarianism that we’ve read about in so many of these other books. I mean, almost every book we read, it’s talking about how the billionaire has this–just drive to always question or counter whatever it is that the common knowledge is. And so, Larry Page really kind of struck me as that person for Google in that he’s just constantly trying to think beyond what most people would expect or think is normal. One of the funniest things I found in the book, they were talking about how Larry Page and Sergey Brin went over to the UK and we’re having dinner with the royal family. And they brought out this, and this is really, really off topic, but it was so funny. I, I can’t help but bring it up. And so, when they were there having dinner with the royal family, they brought out what looked like a little shot of a sauce that they would put on top of their souffle that they had made for them. And so, they were sitting there with the, the Queen of England, and they’re having this dinner, and so both Sergey Brin and Larry Page took this sauce, which they were supposed to pour over top of their souffle, and they just drank it, and they just pounded it like it was a shot of tequila or something like that. And I guess the royal family kind of looked over at them like they were crazy. And they were like, you know, as politely as they could say they were like, “You were supposed to pour that over your food, over the, over the souffle. You were not supposed to drink that.” You know? And their response; Larry Page’s response was, “Who says?” I found that absolutely hilarious to the point where it’s like, “Who are you to tell me what I’m gonna pour my stuff over? If I want to drink it, I can drink it!” You know? It just shows you that’s how these guys think. If somebody tells them, it can’t be done, they’re gonna do it. And they’re gonna do it without even question or thought. And I just found that story to be so funny.

Hari Ramachandra 22:20
Preston, that was a very interesting episode. In fact, I think throughout the book, the author has given a lot of instances, which shows a complete ignorance of popular culture among both these founders. And one of the things that the other points to is their background. And he talks about the Montessori education, and how that has shaped the thinking of these two founders; both Larry Page and Sergey Brin. And it’s interesting, because my son is now in a Montessori, and I’m getting to know firsthand the philosophy behind Montessori system, and how they encourage children to think for themselves.

Preston Pysh 23:07
You know, that’s a fantastic point. I think a lot of people might not even realize what that is. And so, in our show notes will have a good write up of what, what Hari is referring to, and something else that Sergey had gone through with his education as a, as a young kid. And just so everyone knows Sergey Brin was 19 years old, when he was at Stanford working on his doctorate; when he founded Google. So just to kind of give you an idea of what we’re dealing with here, as far as intellect with some of these people. Go ahead, Stig. You had something you want to say.

Stig Brodersen 23:32
Yeah, there was just another funny story, just to, to say something about the character: is he was asked by his dad like, “Shouldn’t you take any advanced courses, you know, to, to improve your knowledge?” And he was like, “Yeah, I’m considering advanced swimming.” The end.

Preston Pysh 23:51
Oh, that father-son relationship, it’s, it’s prevalent in every person’s family. All right, so let me just conclude this first segment. So the last thing that I wanted to talk about is just the analytics. So Google’s at the point where they have all of this information. They’ve basically mapped the brain of the world if you want to refer to it as that. And whenever you do something like that, you see the traffic patterns; you see where people are going; you know how long they sit on a site; you know how often they go to a site; you know exactly what they’re searching for. So the point where you go into Google today, and you start typing something, you might only have three letters typed into the search box, and it already knows what you’re looking for. And so that’s advantageous for a business because they can identify the next YouTube because they can see the traffic patterns. They can identify the next Google Earth because they can see the traffic patterns. And so, whenever you’re in that position of really knowing and, and having just information, is what it is; just the flow of information. You are a complete–you’re, you’re in a completely different realm than any other business out there. And so, if they’re able to continue to manage this, and to continue to grow this business and, and manage their finances because that’s where they could potentially get themselves in trouble if their margins ever started to dissipate. But as long as they continue to track that flow of information and the analytics, I find them to be a very dangerous business moving forward. And, and I mean dangerous in a, in a good way in their ability to grow and just be one of those top-tier businesses for decades to come.

Stig Brodersen 25:26
I was really impressed by how data-driven Google is. And, and clearly no one’s probably surprised, when I say they’re data-driven. But after reading this book, I’m just so, so impressed how they use it. So for instance, we’re talking about analytics. And one of the founders said, “The more people know, the more people will buy.” That was one that he was saying; his key argument to a, to actually establishing Google Analytics. And Google also, internally, they use this data to so many things. At one point of time in the book, it says that, “We don’t have to argue. No one has to argue in our meetings. You just need to look at the data. And I thought that was just a good a–analogy to see the business model that Google has put together. Oh, yeah.

Preston Pysh 26:06
Oh, yeah. I think for marketing departments around the world, it’s flipped everything upside down because marketing used to just be so…qualitative. Well, I think that this advertisement’s gonna do well. And there was really no way to track the progress of how that actually worked. But with Google Analytics, and AdWords, and AdSense, and all these other things that they got, it pretty obvious what the truth is and how something actually works. So let’s quickly talk about the Google culture. And I want to bring Hari into the mix ’cause I know Hari works right in that area, when he’s there at LinkedIn. Their building surround the Google–the Google Plex, if you will, and he’s had lunch over there; eaten in some of their, their buildings. And just so everyone knows, Google is really well known for how they treat their employees. Unlike Amazon with the Jeff Bezos model, which they don’t really treat their employees all that well. Google is the exact opposite. So let me just give you an example, so Google will do their employees laundry for them. They will have cars there, so if people want to just drive around in company cars, they can drive around company cars. They have gourmet chefs that, that cook for people at no cost. You don’t have to pay for your lunch. You don’t have to pay for your dinner. There’s a bunch of Google perks. So Hari, can you give us some of the Google perks that you’ve actually seen firsthand?

Hari Ramachandra 27:28
Sure, Preston. You’re right. In fact, I feel Google’s employees are really spoiled. They probably will–they’ll find it hard to work anywhere else. I mean, the kind of perks they get is unheard of. And Google in a way is setting the bar for other companies in the Valley, whether it is Facebook, LinkedIn, or any other company because they how to compete for the top talent. And Google has been striving ever since the founding of the company to have a different, contrarian culture. In fact, in the book, the author talks about how both the founders never liked working, when they interned in any other company because they just didn’t like the culture. And they wanted to kind of, you know, maintain that university or college dorm kind of an atmosphere in the company, even when they got big. And now, they have been striving to do that. And when I read this book, it was very interesting because I have visited those cafes that the author talks about. And the auther Steven Levy has done a very good job in describing the culture, the facilities, as well as the vibe that you get, when you enter the Google campus. As the company has grown, however, the amount of bureaucracy has crept in. And a lot of talented engineers have left Google to either start their own companies or to other competitors like Facebook, as they have found challenges and interesting opportunities elsewhere. Having said that Google still is among the top destination for many smart engineers, not just engineers in the Valley, but around the United States and around the word.

Preston Pysh 29:19
So, you know, this is where I think we that we can transition into the second segment really well because as we talk about all these perks and all these cultural things that Google has for their employees, you really have to ask yourself: Is that adding real value, whenever you’re looking at the company? And I think one of the things that immediately strikes me is this culture and whether this culture is even sustainable. I think today it’s easily sustainable just because the company has such large margins, you know? Whenever you look at the fact that their–when you look at their top line to their bottom line, there’s a 21.5% margin there, which is absolutely huge, and this is on their income statement. So every dollar that they bring in, they’re effectively keeping 21 cents of it, which that’s very high. I think for most businesses around the United States, if you’re making 10%, you’re doing really well. So for them to be bringing in over 20% is a very high margin. And that’s how they can get away with sustaining this type of culture. But my concern would be as they move five, ten years into the future, as maybe more competition comes into this, into this marketplace, how are they going to sustain that competitive advantage? And how are they going to keep those margins in place in order to pay for the $70 million worth of perks that they give their employees every single year? So that’s a concern that I have if I was going to own this company moving forward. The one thing that I will tell you that I do like is the brand. I think that a lot of people inherently just go on the internet, and immediately search, or bring up Google without any second thought entering their mind. And I think that that’s a huge burden for any competitor to overcome. And I think that that’s going to be definitely a strength in owning this as their brand. I also think that their proprietary software is of enormous value. I think that their search results are better than other people. And that’s going to be something that’s going to be also very difficult to overcome. And I think that they’re only going to get better as time marches on, too. And as they continue to develop, and, and fine tune that software. I obviously like the margins, but I just don’t know how long we can sustain them. So this–the point that I have as a, as a negative is also kind of a positive in the fact that I definitely think that their margins–it’s going to allow them to continue to grow over time a lot faster than say, any other type of business. So the, the one concern that I have, and this is kind of a love-hate relationship that I have with the leadership. I think that Larry Page is absolutely brilliant. I think that Sergey Brin is brilliant. My only concern is that they’re kind of like this rich kid, who’s been spoiled from the start of their life or from the start of their business’ life. And that reality is never really set in for them to really go through some very difficult times with the, the amount of money that they bring in versus the profit that they make. And I’d be really interested to see how they’d be able to handle that. If they did come across hard times, and they weren’t as profitable as they are, and how they would manage that with their business in this culture that they’ve bred. I think that that’s going to be a very tough transition. If it ever occurs, which I think it will. So then the last thing is obviously the price for me. And so, whenever I look at this just generically without getting into discount cash flow models or anything like that. The P/E on this company’s close to 30. That’s very high. That’s, that’s definitely a premium to be paying for a company that–with 20% margins. I’m not owning it right now, and I’m not buying it anytime soon. But if the market would offer an opportunity, I’d be a buyer, so that’s kind of where I stand. Stig, let’s hear your thoughts.

Stig Brodersen 32:45
I don’t own Google, and, and i don’t intend to, and it’s really not because it’s a bad stock. Preston talked about the price, and it’s probably overvalued, but it’s clearly a very good company in terms of profitability and growth. One thing I do like about Google is that they have been able to apply all the…the profits that the company has made the last ten, fifteen years. And they have been able to do that, while sustaining their margins. And that’s actually very hard to do, when you’re growing as much as Google has. And if you take a closer look at the financial statements of Google, you also start to see that the company is slowing down. And I wouldn’t say I’m concerned about that. I would actually say it’s quite natural for most company at that size. They really can’t keep growing at that pace. Again, if you compare it to a company like Amazon, which we discussed a few episodes ago, they actually have less revenue than Amazon has. But again, they are making very decent margins. So it’s just to give you something to, to compare with in terms of…of size. I think that Google has a very wide moat, especially if you compare it to other companies in the sector. I think it’s very hard for all the intangible assets to go in and start making AdWords, or start making, you know, search that, that requires such heavy capital expenditure; that is very, very hard to enter. With that said, when you, when you think about how Google started, and then, there’s a lot in the book, there’s a lot of comparison to, to Microsoft. I’m sure you will have said the same thing to Google like fifteen or twenty years ago: “How can you ever compete with Microsoft? You don’t have the same amount of cash as they’re having; you don’t have the same engineers, how is that possible?” And I think that Preston had a good point before: if things start to turn sour, how will they respond to that? When the new competitor comes, is Google really fast enough to adapt to the new changes? As Hari was saying before, the company to be a critic (*inaudible*) at the moment, and will just continue to get worse as they grow. And that would probably be my main concern.

Preston Pysh 34:58
All right, Hari. Let’s hear your thoughts.

Hari Ramachandra 35:00
Yeah, Stig, you brought up a very good point about what people said about Microsoft back in the days, when Microsoft was at the top of its game. And out of nowhere came Google. And I was thinking about it. It’s already starting to happen to Google, when Facebook started gaining prominence in the social area. And as we all know, Google has been struggling to gain a footing in the social space. But it’s not in its DNA. In fact, in a interview, Larry Page described Google as a artificial intelligence company that collects massive amounts of data, and then uses that data through its algorithms to augment the collective brain of the humanity. That’s their core value or core competence. But when this trade out of their core competence and started chasing Facebook, which the author also talks about in Book, they were seen as an ugly duckling. And they came up with many products like Google Buzz, Aardvark, Wave. And now, Google Plus, which is known as the geekier version of Facebook. They never actually succeeded, or they never were seen as the top player in the social networking area. Having said that, after observing Google for many years, one of the things that I have understood is if I want to value Google, I should think like a venture capitalist, and not like a value investor. Let me explain. If you try to value Google, Amazon, or Facebook in a traditional sense; that is if you’re considering revenues, earnings, free cash flow, debt, margins, you’re missing the big picture. These are companies with innovation in their culture, and they have less regard for revenues and profits than most other mature companies that we see the market. In fact, in many ways Amazon and Google have a lot of similarities in their operating philosophies. Both companies have an obsessive focus on customers and user experience. They’re not afraid of risks and experimenting with new ideas, and are extremely data-driven, as you mentioned, Stig. They encourage innovation from bottom-up; that is from their employees or engineers. And at times, this might seem chaotic or this got–disorganized. Are you inefficient in terms of use of capital? And both how these visionary, highly ambitious leader, but if you look at these companies, they are more like a VC or a venture, venture capital firm with a strong operating business generating cash, which they invest in R&D and developing their own new products. Some of them will succeed; some of them will fail. And also by acquiring new companies, but they make risky bets. In fact, when they bought YouTube, Android, or the maker of AdSense. There was no revenue in some cases, and no profits at all. But after many years, they have made a huge impact on the bottom line for Google. So if I’m trying to value Google, it’s very hard because I don’t know what’s next. Will they lose money in their many bets and a lot of spending? Or will there’ll be a hidden black swan in a positive way? You know, like, there might be the next YouTube in, in their labs. So I’d, I do believe as Preston mentioned, the law of large numbers will eventually catch up with Google at some point, sooner or later. And there is also a risk that the founders can be overconfident. And there can be a different sort of a group think, you know? Like being con–contrarian is a group think at Google, and as, the author has, the author has captured that very well. You know, if you talk about profits; if you talk about earnings, you’re kind of you know, kicked out of the room. All you have to talk about is changing the world. And one of the things that is interesting about Google is you will know 90% or more of their revenue comes from their ads business, which is mostly search and their publisher network. None of their other initiatives has made a dent in their overall revenue or business model yet. So what I would like to say is if you’re valuing Google, you have to think like Peter Thiel. And more importantly for me, I don’t know whether it is in the circle of my competence, and I really understand how Google works; how it innovates; and what are the probabilities? If I don’t, I would stay away. And in fact, I’m going to stay away from Google for now. So I admire that company.

Preston Pysh 40:15
Wow, I was totally thinking that you were gonna say that you own some. Okay, go ahead, Stig.

Stig Brodersen 40:19
Yeah. Because, you know, I think the way to look at Google, especially if you’re a bit pessimistic, or if it’s outside of your circle of competence, which know, in my belief, the only one I, I, I know that would be within their circle of competence, this man would probably be Hari. But Google is definitely a subject (*inaudible*) of several competencies. And again, the way to look at that might be to way–to look at Microsoft like fifteen years ago. Because everybody was looking at Microsoft and saying, “It’s impossible to compete with Microsoft because they have the, the one and only operating system that everyone uses, and they have Microsoft Office. So how can you ever compete with that?” And what Google did was they were just looking, you know, at the, at the business completely different. So they started to think about web applications. And as you look something at Goo–Chrome today, you almost have an operating system within your browser. So there was just a totally different way of competing with Microsoft. Well, Microsoft couldn’t keep up. And then, Hari you said something about social media, where Google Plus is really, you say, it was like the geeky little brother or something to Facebook, but it’s definitely not working as good as Facebook, or LinkedIn, or some of those companies. And the thing is that, yes, it might be true that no one is able to compete with Google ever in terms of search and AdWords. But no one knows if that is where the war is to be fought in ten or fifteen years. In ten years, we will probably use something different than social media, at least in another form, and there’s a good chance that Google won’t be, be that’s pick it up, and they got lucky, and/or they were good at picking YouTube up. They didn’t pick up Facebook or LinkedIn. Who’s to know when the next wave is coming; if they can make money in that business?

Preston Pysh 42:06
This was really fun, guys. This is awesome! I definitely think very highly of Google. I think the business is just an amazing business to kind of look at. And it’s definitely different than, than almost everything else out there. I’m very curious to see the direction that it goes in the future. I’m also very interested to see how IBM competes with Google as they go into these big data analytics moving forward. IBM is a company that I have money in, and I’m assuming that Stig and Hari are the same, correct? Yeah, Hari is saying yes. Stig, how about you? Do you have anything on?

Stig Brodersen 42:38
No.

Preston Pysh 42:39
Stig does not have anything in IBM. But so, it’s kind of interested…I’m very interested to see how kind of things progress as we move forward. The book by Steven Levy was fantastic; a very good book, not as business-oriented as the…The Everything Store that we read about Jeff Bezos. But if you’re really kind of trying to understand how Google works, maybe you have an online business or something like that, I think it’d be a very useful tool for you to kind of do more research on. So we highly recommend the book. We have our show notes as usual. If you want to get the show notes, make sure that you sign up for those show notes on our mailing list, which is on our website. And before we sign off, we’re gonna go ahead and play our question from Derek Randell. He recorded his question on asktheinvestors.com, and if you want to get your question played, make sure you go there and record your question for us.

Unknown Speaker 43:26
Hi, Preston and Stig! How are you? This is Derek from Moncton, New Brunswick, Canada. Thank you so much for all your work on The Investor’s Podcast as well as your Buffet Books website. I’ve been learning a ton, so thank you very much. My question is in relation to opportunity cost. In Episode Nine, you reviewed the book by Charles Koch and introduced the term, opportunity cost. My question is, how do you actually calculate the opportunity cost between two stocks, when future returns are unknown. Anyway, thank you very much. And I hope you can answer this question.

Preston Pysh 44:04
So Derek, this is one of my favorite topics is opportunity cost. And one of the things that we did on the Buffett’s Books website is we built a sell calculator for whenever you want to sell stocks. We could actually call that an opportunity cost calculator if we wanted to do that as well. So we’ll have a link to that in our show notes to take you through the Buffet’s Book sell calculator, which I should probably rename that, and I think I will after I’m done recording this to sell slash opportunity cost calculator. But what you’re able to do with that is you’re coming up with an estimate of what the cash flows might look like for any particular stock. So let’s say that we have Stock A, and we think that the cash flows might be $100 over the next ten years. And then, we have another stock which will call Stock B, and let’s say that we think that the cash flows might be $200 over the next ten years, okay? And what we do is we discount both of those cash flows back to today’s present value, and we come up with what we think the market price should be, then we compare, and we look at what the market price actually is. And then, that’ll give you a return. So let’s say with Stock A, we thought the return might be 10%. And with Stock B it might be 12%, based off of the actual price that it’s trading for. And so, whenever you’re looking at those–that difference, or that delta between the two, it’s a 2% difference. So what you have to ask yourself is if you own Stock A or you already own Stock B, what is it gonna cost after you pay capital gains to get out of that particular pick, and move it into the other pick. And that’s opportunity cost at its best. So I would highly recommend that you go there. Learn how to use that calculator. It, it kind of works in conjunction with our intrinsic value calculator. So you’re going to really need to know how to use both. But if you have any other questions on this, feel free to send us another message, or we can maybe describe it better on another show, or even kind of build a page that describes how the two are work together, so it’s more clear for people. But this is the most important thing you can really understand in stock investing because stock investing is all relative. It is all relative. The value of one thing is relative to the value of another thing. So you’ve got to really thoroughly understand opportunity cost, and this calculator, I personally use it all the time. So you could say that I eat my own cooking. But this is something that I would definitely go check out, watch the video on it, and watch the video on the intrinsic value. And I think you’ll have a much better idea of what it is that we are talking about. All right, so that concludes our show. We really appreciate everybody joining us. We’d like everybody to go to Hari’s website bitsbusiness.com. We really appreciate him joining us. He’s pretty much a staple here on the show. Anytime we read a good book or need to have a great discussion, we always bring Hari on to the show, so thanks for joining us Hari. And we’ll see everybody next week! Thanks for joining us.

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Outro 48:46
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